Use home sale proceeds for new home first, debt later

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question Dear Sally,
My husband and I received an offer on our house. After we pay closing costs, commissions, fees and our existing mortgage, we expect to receive about $40,000 to $45,000 at closing that we can play with.

My husband just finished graduate school, so his loans will no longer be deferred. His loan payments will begin again at an increased amount. In addition, we obviously will be purchasing a new house.

Would it be best to use all of our net proceeds from flipping the home to pay down his student debt, or should we use as a down payment on the new home? Should we pay down higher interest debts with some and use the rest for a down payment?   – Alexis


Dear Alexis,
In many U.S. markets recently, a bulk of the gain flippers have made has been on the general market heating up, not just on the improvements investors made on the house. This matters because if your gain was solely as a result of your astute purchase and remodeling decisions, you could always do it again – and again.

On the other hand, if much of the gain was because of the market, you’ll have to pay more for the next house you buy, too. It’s great to have a gain on the sale of a home, but when all the home prices have increased, a person may not be quite as far ahead as they thought.

I am all for paying down debts, and paying off student loans as quickly as possible. I wouldn’t do so in your case, however, at least until after you get back into a house. Unless you have other sources of cash, $40,000 to $45,000 is barely a minimum 20 percent down payment on a house in a good neighborhood in many parts of the country. You could put less down, but then you could pay more in fees and private mortgage insurance (PMI). That could quickly cost you more than you are paying in student loan interest.

You did so well on your current investment that perhaps you already know this, but I’ll say it anyway. Your best real estate investments are not usually at the bottom of the market. With the current flipping craze, that’s even more true. Too many people are searching for the cheapest of the cheap to fix and flip. With all that competition in the low end of the market, it’s easy to pay too much for something that costs too much to fix, and won’t have enough potential upside. Your best investment will probably be a mid-sized home in a good location. It may take all your cash from your current house to qualify, but you’ll be far better off in the long run.

In addition to needing money for a down payment, you should put some in an emergency fund if you don’t have one already. I consider three months’ minimum expenses to be the least amount you should have in an emergency account. It’s even better to have six months’ cash available. Once you get used to always having a cash backup account, you’ll wonder how you ever slept at night without it.

Many people have tried flipping in recent years, but not all have succeeded as well as you have. Congratulations on flipping a house at a profit, and best of luck on your next endeavors.

See related: Tough choice: Sell home to pay off debt

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Updated: 11-23-2017