I make 62K a year. Wife is in school, but will start part time work this fall. We have 2 kids - 4 and 5.
Three years ago we bought our house for 168k and made 20% down payment. House is 15 years old, 3 bedroom, 3 bath, and 2400 finished sq ft. We have refinanced twice to shorter terms with better interest and now have a 15 year mortgage (165 payments remain) at 2.75%. We have also spent 20K in home improvement projects, most notably a new deck and a large 2nd garage that I use for woodworking. With the exception of the foundation of the garage I did it by myself, so lots of sweat equity.
Other debts include 5K car loan at 2.49% and 7K on a 0% credit card. With our 2014 tax return and savings we can pay off the credit card before we pay any interest charges.
However, there is another smaller 2000 sq ft 3 bedroom house for sale in our neighborhood for 135k. It is similar in age, but fewer upgraded features (stuff we don't need) and smaller yard. Has a large enough garage to use for a shop space. It is no closer to my job (25 min/15 mile commute), but same schools that we moved here for. In order to buy this house I would have to borrow 40K from my 401K as a down payment on a 15 year mortgage at 3.375%. The new house will cost us $4900 less a year in payments and taxes.
Current home would be converted to a bridge loan and interest only 4.25% until it sells. After realtor fees of 6% we should net 57k from current house to pay back 401k. We have input 81k in down payments, refinance fees, principal and interest, and improvements. So it cost us 24k plus sweat equity to live here for 3 years.
During the transition of paying on two properties we will spend $2250 a month on debt and interest. That is more than 40% of my gross income, but the bank is OK with it. As a result I will not pay off the credit card until after the sale of our current house.
Should we proceed with purchasing this house? As long as our current house sells in under 6 months we should be fine financially. Based on our current local market conditions the sale should not be a problem. My other alternative is to make an offer on the new house contingent on the sale of our current house, but I think I can negotiate a better price without that stipulation.
Thanks
Huge mistake, you have a current mortgage with a balance that is well under asking price of the new house, you have already paid to refinance twice which if you sell those become sunk costs. If you sell you are adding realtor fees, taxes title etc. etc. additional sunk cost.
During the transition you will pay a bridge loan with an interest rate of 4.25% for as long as it takes to sell, you are going to borrow from your 401(k), all very risky and unneeded expenses.
And you are doing all of this to downsize into a house with a higher interest rate for 15 months longer than your current mortgage? You haven't stated you monthly payment, so there is no way to determine your breakeven, but since you only have 165 months left on your current mortgage and your new mortgage will be 180 months to make this work financially the difference in monthly payments divided by 15 has to cover the all of the cost, the 401(k) borrowing cost an additional 15 months of mortgage payments.
Since the interest rate is going to be higher and the new house is price so close to the old house it is extremely unlikely that the new mortgage payment is going to be that much smaller than your current payment to allow you to recoup your costs.
So this would be an extremely costly move, you will spend a lot of capital up front, have a longer loan, a 401(k) loan, put off paying back your 0% credit card and have a smaller house... I am looking for the incentive to move? If you think the better cash flow on a smaller mortgage payment is it, you are not looking all wrong.
You have not provided enough numbers to provide a true analysis, so this is really just back of the napkin math, but I can't see how this would work out even with all the numbers... Me I would just stay put.
-Mister FancyPants