When my husband and I bought our first home seven years ago, we were clueless about the process of buying a home. We didn't know what to look for, what to buy, how to use our home as a forced savings plan or what we would need to do in order to sell it down the line and net a profit. Thankfully, age has brought wisdom and three straightforward steps that will help us move out, move up and move forward with a surplus of cash.
Step one: Paying off our mortgage.
I did the math 1,001 different ways, and no matter how I did it, the numbers always came out in favor of paying off our mortgage altogether before selling our house.
The details: We bought our house for $128,000 in 2004. We financed our home on a zero-down VA loan for 30 years, at 4.99 percent APR. Our principal and interest payment is $686.35. However, instead of paying the minimum payment, we paid $1,372.70 (two times the minimum) each month for the last seven years. As I write this, we will be mortgage free in July of 2014, meaning that we can walk away with 100 percent profit when we sell.
Step two: Over estimating our sale.
My experience in real estate taught me that no matter when we sell, we need to subtract at least 10 percent of our sales price off the top. This amount goes toward escrow fees, miscellaneous transaction expenses and realtor commissions. In truth, we can probably get away with less, but by over estimating our fees, I am preparing us for the worst, while hoping for the best, meaning that if we have excess, that excess is strictly profit.
The details: Today, our house is valued at $153,000, approximately. If I estimate a modest increase of 2.3 percent annually, we will be able to sell for around $160,000 in two years. However, I want to play it safe, so I estimate a sales price of $155,000 and fees of $15,500, bringing our net proceeds to $139,500.
Step three: Timing the market in our favor.
Today, our price range for a new home is $300,000. After we sell, our plan is to apply our $139,000 net proceeds as a hefty down payment on a new home, keeping our principal and interest payments almost identical to where they are today, when financed over 15-years on a conventional loan.
I believe having a "Plan B" is always a wise idea. If the market is still inconsistent in 2014, we are in a perfect spot to stay put, mortgage free for quite some time, sans penalty. We will make the market work for us, instead of conforming to the market.
What can you learn from this?
Most folks I see selling their houses in today's market are walking away with remarkably little cash. This happens because they made the same mistakes I did in the beginning: buying with little cash on hand, buying a house that maxed out their budget and financing that house for far too long. However, I quickly realized our mistakes and rectified them by finding creative solutions to pay off our mortgage sooner than later, putting us in a position to move out, move up and move on with a lovely surplus and substantial interest savings.
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