The cost of houses in the US has been increasing over the years, and there’s no sign that this trend will relent soon. The average price of homes in the country in 2020 was USD 389 400. In the following year, it hit USD 408 800. Since this is an average, you can get a house worth USD 100,000, depending on the area you are targeting and the size of the home, if you work with an experienced real estate agent.
Bearing this in mind, how should you use the USD 100,000 proceeds from the sale of your house if you have a debt and are considering buying a new home? Keep reading for the essential factors that you should consider before making this big decision:
The Size of Your Mortgage Payment Vs. Your Earnings
The size of your mortgage can create a must-pay situation if your monthly income is low. If you sold the first house due to the inability to pay the mortgage in time, it means you need to clear this debt. Remember, you should not use more than 25% of your monthly income on mortgage payments.
So, if the USD 100,000 is enough to clear the debts, it might make psychological and economic sense. This way, you’ll stop the initial mortgage from stop clearing your limited resources.
If the money goes to a new house, you must be prepared to continue paying the large amount for years. It’s prudent to go back to renting despite that it’s not an attractive option. The sacrifice will allow you to regain your financial strength and buy another house later in life.
Planning to Relocate
Since homes hold a lot of emotional value, this is another point that might not necessarily appeal to some homeowners. You can pay off the debt. The first two are huge sacrifices to make.
You may need another house to replace the original one once you relocate. But it will likely take some time to find the right one. Let’s say you won’t like to retire in 5 years from now and then relocate to your new home. You can clear the debt and start saving for the new project.
Chances of Getting an Affordable Mortgage
You can clear your debts and secure a new mortgage immediately. Some debts can drain you emotionally, physically, and socially. So, you can use the money to pay them off and take advantage of the opportunity to secure a new mortgage.
Financial experts advise that people should take and repay loans to boost their credit score. A lack of debt is not a sure indicator of a healthy credit score.
Your debts could reduce your credit score and complicate financial matters for you in the future. You could reap more benefits by using the house sale to pay the debt monthly or as per the loan agreement. This way, you’ll be demonstrating your reliability and trustworthiness to the lender.
Here are other things that you can do to increase your odds with lenders:
- Use the USD 100,000 to reduce or eliminate your debt before applying for the next loan
- Secure a second job to increase your income
- Look for a cheaper house
Refinancing the Debt
If you are in a position to refinance your debts, do so. This will allow you to use the money to buy a new home at the current rates.
We’ve presented some of the common scenarios that can help you make the best decision on whether to use the USD 100 000 to pay the debts off or buy a new house. Every individual’s financial situation is different, so try to crunch your own figures before making this big decision.