How to use proceeds of old house sale shortly after buying new house?
"I've heard that the bank may agree to a ""one time adjustment"" to lower the payments on Mortgage #2 because of paying a very large payment. Is this something that really happens? It's to the banks advantage to reduce the payments in that situation.  If they were willing to loan you money previously, they should still be willing.  If they keep the payments the same, then you'll pay off the loan faster.  Just playing with a spreadsheet, paying off a third of the mortgage amount would eliminate the back half of the payments or reduces payments by around two fifths (leaving off any escrow or insurance).   If you can afford the payments, I'd lean towards leaving them at the current level and paying off the loan early.  But you know your circumstances better than we do.   If you are underfunded elsewhere, shore things up.  Fully fund your 401k and IRA.  Fill out your emergency fund.  Buy that new appliance that you don't quite need yet but will soon.  If you are paying PMI, you should reduce the principal down to the point where you no longer have to do so.  That's usually more than 20% equity (or less than an 80% loan).   There is an argument for investing the remainder in securities (stocks and bonds).  If you itemize, you can deduct the interest on your mortgage.  And then you can deduct other things, like local and state taxes.  If you're getting a higher return from securities than you'd pay on the mortgage, it can be a good investment.  Five or ten years from now, when your interest drops closer to the itemization threshold, you can cash out and pay off more of the mortgage than you could now.   The problem is that this might not be the best time for that.  The Buffett Indicator is currently higher than it was before the 2007-9 market crash.  That suggests that stocks aren't the best place for a medium term investment right now.   I'd pay down the mortgage.  You know the return on that.  No matter what happens with the market, it will save you on interest.  I'd keep the payments where they are now unless they are straining your budget unduly.  Pay off your thirty year mortgage in fifteen years." "Really this is no different from any kind of large lump sum and having a mortgage.  There are probably many questions and answers on this subject.  It really doesn't matter that the proceeds were the result of a sale, an inheritance would not change the answer. I think it is important to note that the proceeds will not eliminate the house 2 mortgage. A high level choice of investment one makes is between equity (such as stock) and debt investments (such as bonds and mortgages).  You are in a unique case of being able to invest in your own mortgage with no investment fee.  This may tip the scales in favor of paying down the mortgage.   It is difficult to answer in your specific case as we don't know the rest of your finances.  Do you have a sizable 401K that is heavily invested in stocks?  Do you have the need for a college fund?  Do you have an emergency fund?  Do you have a desire to own several homes generating income property? If it was me I'd do the following in order, skipping steps I may have already completed: I've heard that the bank may agree to a ""one time adjustment"" to lower the payments on Mortgage #2 because of paying a very large payment. Is this something that really happens? I really kind of hate this attitude.  Your goal is to get rid of the mortgage in a timely manner.  Doing such makes paying for kids college a snap, reduces the income one might need in retirement, basically eliminates the need for life insurance, and gives one a whole lot of money to have fun with."
Foreclosure is at a high level the bank declaring that the debtor cannot pay their promissory note (their debt).  This is shortly followed by default, which is the removal of debtors rights to the property.  After the debtor has defaulted, he either chooses to voluntarily remove himself and his belongings from the property, or is forcibly evicted.  In the US eviction is carried out by local law enforcement, such as the sheriff's office.   The bank is now the sole owner of the property, and proceeds to sell it, in an attempt to recoup their investment.  If the bank cannot recoup their investment by selling the house, the rest may be converted to unsecured debt against the debtor.  If the bank chooses to forgive the remaining debt, the debtor may have a tax liability for cancellation of debt.  Also the debtor may also be liable for any appreciation the house did before it was sold, but this likely to be nontaxable if the house in question is the debtor's primary residence.  They also send the credit bureaus the notice of foreclosure, which is how your credit score is hurt. Private Mortgage Insurance or Lenders Mortgage Insurance will pay the lender some amount back to cover their losses. See Also: "Sadly, most jurisdictions don't think this way when they assign property taxes.  ""You have X acres, our standard for this county is $Y per acre, so you owe $XY property taxes.""    And if you tax by dwelling size and features, you are saying a poor person cannot live in a nice house.  Lets say Joe Millionaire buys a fancy $2M house with a fancy pool and all the trimmings.  Sure, Joe Millionaire can afford the high taxes of, say, $20K/year.  But what if Jim Garbageman, who makes only $35K/year spends 10 years and about $100k building a similar nice house out of scrap materials he finds, purchases on sale or on craigslist, etc.  He rents a backhoe and  a gunite gun and builds himself a fancy pool, landscapes it really nice...and the county comes in and says ""Well Jim, that's a $2M house, you owe us $20K/year in taxes for it.""  Jim can't afford it, and the county takes his house for unpaid taxes.  Screw you and your efforts, poor person!  And before you say ""he can just sell it for $2M"" Well, what if he made it unique to his tastes, and no one wants to buy it?  Or the market is bad right now?    And yes, this has happened to someone I know, though the house was valued at $500K, he still couldn't afford the taxes.  And since it was not yet fully finished, he had to sell it for only about $100k, after working on it for several years.  So yes, as long as you want to make sure poor people cannot live in nice places, property tax is the way to go." "There's no objective definition of what your house is worth between sales.  If you sell it for $107K, then that's the current functional definition of its worth.  There is not ""extra"" money to be had because you sold it for less than it was worth.  If the buyer is able to flip it for more, then the value of the house effectively went up and he will pocket the difference when he sells it. EDIT This turned out to be unexpectedly controversial, so let me be more precise in my answer.  I think this is important because it seems like many people misunderstand equity and how it figures (or doesn't) into the value of their home, which then leads to significant confusion and errors in what's many people's largest single investment. At any given time there are several possible ways to put a dollar value on your home.  A non-exclusive list that includes: Some of these obviously are more ""official"" than others. It would not be strange for these different values to vary by quite a bit at any given time. (This is what I meant in my original answer when I said there's ""no objective definition of what your house is worth between sales."") The interesting thing - and what I meant in my original answer when I wrote ""current functional definition of its worth"" - is that none of these factor directly into the transaction that the OP described of selling his house except for the last.  Using the numbers from the OP's example, that means the $107K.  Wherever the OP got the number $155K (either from one of the options on my list above or somewhere else), it won't be directly part of the sale between him and his friend. (For completeness, with a nod to Eric's comments on my original answer, some of these numbers may indirectly influence the sale.  For example, the buyer typically won't be able to get a mortgage for a value greater than the appraised value of the house, and so that might influence what he's willing and able to bid.  There may also be tax consequences if the price is artificially low, like, say, a gift.  As further expounded below, however, that's not directly relevant to answering the OP's stated question.) Now, the OP seemed to believe that there is an ""extra"" $48K in cash up for grabs in this scenario.  That comes from the $155K value that the OP claims his house has and the $107K price of the actual proposed sale.  This is a complete misconception.  When the buyer and seller sit down at closing and the title agent sums up who owes and who receives cash in this transaction, the $155K ""theoretical"" value will not enter into the calculation and therefore no one will pocket it. Subsequently, however, after the buyer takes possession, he may sell it.  If it's true that he ""got a deal"" on the transaction at $107K, then he maybe able to flip it and turn a profit.  But if that happens, it will be in a completely separate, subsequent transaction. Even if you look to this hypothetical second sale, however, the $155K doesn't really figure.  The new owner will have to find his own buyer, and they will have to agree on a price.  That might happen to be $155K, but there's no real reason to believe that it will or it won't." "As others have said, congratulations on saving up 75K in cash while seemingly not neglecting other areas of personal finance.  Considering that only 15% of Americans have more than 10K saved this is quite a feat.  source If you sell your old house, and buy the new one you will still be in really good financial shape.  No need to comment further. Renting your current home and buying a new home introduces a great amount of risk into your life.  The risk in this case is mitigated by cash.  As others have pointed out, you will need to save a lot more to remove an acceptable amount of risk. Here is what I see: So without paying off your existing house I would see a minimum savings account balance of about double of what you have now.  Once you purchase the new house, the amount would be reduced by the down payment, so you will only have about 50K sitting around. The rental emergency fund may be a little light depending on how friendly your state is to landlords.  Water heaters break, renters don't pay, and properties can sit vacant.  Also anytime you move into a new business there will be mistakes made that are solved by writing checks.  Do you have experience running rentals?   You might be better off to sell your existing home, and move into a more expensive home than what you are suggesting. You can continue to win at money without introducing a new factor into your life. Alternatively, if you are ""bitten by the real estate bug"" you could mitigate a lot risk by buying a property that is of similar value to your current home or even less expensive.  You can then choose which home to live in that makes the most financial sense.  For example some choose to live in the more dilapidated home so they can do repairs as time permits. To me upgrading the home you live in, and renting an expensivish home for a rental is too much to do in such a short time frame.  It is assuming far too much risk far to quickly for a person with your discipline.  You will get there." In the United States taxes on the sale of a principal residence are based on the difference between the sale price and the cost of the home. Assuming you meet the requirements you can shelter 250,000 or 500,000 of gains from the sale of your principal residence.  This calculation is not related to the loan balance. The basic equation is sales price minus purchase price. It get a little more complex because some costs to purchase and sell the home are included in the calculation, or if you made renovations to the house that will increase your costs and decrease your gains. Trying to decrease the loan balance just before selling the house would just be paying yourself that money at the settlement table. It could save you some money on interest between now and settlement but emptying your bank account to save a few bucks doesn't seem worth it. I would also prefer to have the money in the bank to pay for some expenses that will popup getting the house sold, you moving, and the settlement date. "Since you did not treat the house as a QBU, you have to use USD as your functional currency.  To calculate capital gains, you need to calculate the USD value at the time of purchase using the exchange rate at the time of purchase and the USD value at the time of sale using the exchange rate at the time of sale.  The capital gain / loss is then the difference between the two.  This link describes it in more detail and provides some references: http://www.maximadvisors.com/2013/06/foreign-residence/ That link also discusses additional potential complications if you have a mortgage on the house. This link gives more detail on the court case referenced in the above link: http://www.uniset.ca/other/cs5/93F3d26.html The court cases references Rev. Rul 54-105.  This link from the IRS has some details from that (https://www.irs.gov/pub/irs-wd/0303021.pdf): Rev. Rul. 54-105, 1954-1 C.B. 12, states that for purposes of determining   gain, the basis and selling price of property acquired by a U.S. citizen living in a foreign country should be expressed in United States dollars at the rates of exchange prevailing as of the dates of purchase and sale of the property,   respectively. The text of this implies it is for U.S. citizen is living in a foreign country, but the court case makes it clear that it also applies in your scenario (house purchased while living abroad but now residing in the US): Appellants agree that the 453,374 pounds received for their residence should be translated into U.S. dollars at the $1.82 exchange rate prevailing at the date of sale. They argue, however, that the 343,147 pound adjusted cost basis of the residence, consisting of the 297,500 pound purchase price and the 45,647 pounds paid for capital improvements, likewise should be expressed in U.S. dollar terms as of the date of the sale. Appellants correctly state that, viewed “in the foreign currency in which it was transacted,” the purchase generated a 110,227 pound gain as of the date of the sale, which translates to approximately $200,000 at the $1.82 per pound exchange rate. ... However fair and reasonable their argument may be, it amounts to an untenable attempt to convert their “functional currency” from the U.S. dollar to the pound sterling. ... Under I.R.C. § 985(b)(1), use of a functional currency other than the U.S. dollar is restricted to qualified business units (""QBU""s). ... appellants correctly assert that their residence was purchased “for a pound-denominated value” while they were “living and working in a pound-denominated economy,” ... And since appellants concede that the purchase and sale of their residence was not carried out by a QBU, the district court properly rejected their plea to treat the pound as their functional currency." 1) You parents will have to pay tax on the gain as it wasn't their primary home.  You don’t pay Capital Gains Tax when you sell (or ‘dispose of’) your home if all of the following apply: As I look at it, it is your parents are the ones who own the property and they will have to pay on £60000. But as you say you pay part of the mortgage, I would go to a tax advisor/accountant to confirm if they will only pay on the £15000. I couldn't find any guidance on that matter on gov.uk 2) Inheritance tax will not be levied on it as it is below £325000, but tax will be levied on £325000, less £3000 annual gift allowance. Two articles for further information -  GOV.UK's Tax when you sell your home   Money.co.UK's Gifting money to your children: FAQs "There are basically two ways to get value out of an appreciating asset such as a home: (a) Sell it and take the profit. In the case of a home, you presumably still have to live somewhere, so unless you buy a cheaper home to replace it, this doesn't get you anywhere. If you can get another house that is just as nice and in just as nice a location -- whatever you consider ""nice"" to be -- than this sounds like a winning option. If it means moving to a less desirable home, then you are getting the cash but losing the nice home. You'll have to decide if it's worth it. (b) Use it as collateral for a loan. In this case, that means a second mortgage, home equity loan, or a home equity line of credit. But this can be dangerous. House prices are very volatile these days. If the value of the house falls, you could be stuck with debts greater than your assets. In my humble opinion, you should be very careful about doing this. Borrowing against your house to send the kids to college or pay for your spouse's life-saving operation may be reasonable. Borrowing against your house to go on a fancy vacation is almost surely a bad idea. The vacation will be over within a couple of weeks, but you could be paying off the debt for decades."