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Reinvest or Pay Off Debt?

-- Posted: June 25,2007 | Brad Levinton

Should you re-invest all the equity from the sale of your current home? Maybe not!

Life has a funny way of sometimes increasing ones debt; it could be due to unexpected issues or simply increased living expenses. Now may be the best time to get creative with the equity (proceeds) from the sale of your current home!

We all tend to think that putting down 20% on the purchase of a home is the only way to get rid of mortgage insurance. The fact is, there are many ways but for example's sake, let's keep this simple:

You can put down as little as 10% and have no mortgage insurance. What we create is a purchase money second loan to equal the 20% difference depending on your down payment. Yes, your payment will increase the difference of the second; however if you had debt to pay off it may put you in a much better cash flow and/or better tax position, or both.

As an example, Bill is buying a home for $200,000 with 20% down. That gives Bill a 30 year mortgage of $160,000 with monthly payments of approximately $1,011. In addition, Bill has roughly $20,000 worth of credit card debt and is paying 5% of the balance for an additional monthly expense of $1,000. Bill's monthly expense is now $2,011 with no mortgage insurance.

If we get creative and pay off the credit card debt thereby releasing the $1,000 non taxable payment and create an 80% first loan and 10% purchase money second with a 10% down payment, you would add approximately $160 per month to your house payment. Add that $160 to your monthly payment for the first loan and you get a total monthly expense of $1,171. Also known as an 80/10/10, this results in a cash flow savings of $840 per month. Now, that is smart financing and to add icing on top of that, apply the $840 saved to pay off the second quicker.

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