I’ll show you a simple, conservative way to have someone else pay off your small house mortgage by using your home equity wisely.
It all began with a phone call from a dear friend in the real estate business. She called to update me on what she’s doing in our troubled economy and we got to talking about downsizing. My husband and I are currently selling our big fancy house to simplify our lives. She and her husband are considering downsizing from their big fancy house.
We got to talking about our different options and what downsizing to a smaller house could do for us financially.
I suggested an idea to her and she liked it so much, she encouraged me to share it with my readers. Of course!
Alright, here’s the great idea!
Take the equity from selling your big house and pay cash for a modest home. Well, what’s special about that? This home is not going to be the one you live in. You’re going to lease it out.
Now, find a small house that you want to call home and purchase it with a mortgage.
Your renters will pay off your mortgage. You might say.. well, if I just used the equity to pay cash for my own home, I wouldn’t need renters to pay it off. True. But look at the difference in the two scenarios.
BTW, we are using equity for cash but if you like this idea, you can use any funds available.
PLAN A – $160,000 Equity
157,000 pay cash for new home
3,000 closing cost
You now own your personal home free and clear.
Hurray!! Actually this is pretty darn cool and there is absolutely nothing wrong with doing it. We just believe there could be a better way.
PLAN B – $160,000 Equity
157,000 obtain mortgage for new home
4,000 closing costs are typically more when acquiring a loan
8,000 down payment
$1,211. monthly payment <<approximate only! I figured this at 4% interest, 30yrs. and with high Texas property taxes. Interest rates fluctuate, as do taxes, insurance and such.. These numbers are meant to give you an idea of how this can work.
$145,000 pay cash for new rent home
3,000 closing cost
$1200-1300 monthly rent <<have qualified real estate professional advice you on what this price home would rent for in your area.
Use the rent money from your tenants to pay your mortgage. Sweet.
Added Benefit: Once the mortgage is paid off, you also own an income producing property that can enhance your quality of life. Double sweet!
In a nutshell, here is the difference between Plan A & B:
Plan A, you own your own home without debt, and in thirty years you are in the same position financially.
Plan B, you own one home without debt and another one with a mortgage. In thirty years (or 15 or however long it takes to pay off the mortgage) you have an extra house that provides income.
Do you like this article? Get our Weekly Magazine
Early each Sunday morning (7:00a.m. CST .. that’s Texas time!) your personal copy of Small House Life magazine will be delivered to your email. You’ll get the the latest Small House posts at your fingertips, along with specials and highlights just for our subscribers. Won’t you join us?
You might wonder why we used the personal house with a mortgage and rent house free and clear. Generally you can get a better loan on a personal house as opposed to an investment property.
If you really want to be prudent when considering Plan B, you’ll set aside approximately 10% of the monthly rent each month for potential repairs and vacancy. Being a landlord is not for everyone, but it can open up some interesting financial possibilities.
I’ve owned rental property almost my entire adult life and I’ve found the key is to properly screen potential tenants. Also, so that I’m not chasing down rent checks, I use an auto debit company that takes the rent out of the tenants bank account and puts it into mine each month. Plus when you sign on thru this link, we both get two free months of service! Sweet.
Amortization Calculator to figure different priced houses, interest rates, etc.