Author Topic: Help Calculating Cost of Building New Home vs Paying Off Current and Staying  (Read 502 times)

pseudoyams

  • 5 O'Clock Shadow
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Hi Everyone!
  First time poster here, but LONG time MMM follower.   Hmm, where to start on this....

 The wife and I have been looking at moving for the last couple years. Never could really find what we want in a house without a large remodel so we decided to build and are in the process of such. "In process" as in we decided on a builder and are starting the design of the new home layout. We arent planning on breaking ground until April/May 2019 so we havent really committed to anything else besides time.  We've been in our current (and first) home for 10 years now and while the location is very ideal, theres a few irks with the home we have - low basement ceilings (6'8"), 1.5 baths with two kids (7 and 5yo), the house is coming up on needing new windows, roof, etc, etc as its just that time for the house.

Anyways,  I keep flip flopping on whether Id like to move or not so Im being very thorough on all the numbers.  Im more wishy washy than she is and she's the frugal one.  ;) The current location is what keeps swaying us to stay.  We currently save approx 75-80%++ of our income.  "++" meaning that my comp plan is 75% salary and 25% commission and Im only factoring in the base salary on that savings rate. The only other debt we have besides the current mortgage is a new to me car loan which with my mileage reimbursements it evens out in my favor plus some extra. We have already purchased the new 1.5 acre lot with cash a few months ago. ;)  Current lot is 2.7 acres, just for perspective.

So what Im trying to do here is calculate the cost difference of building a new home vs staying here and just paying off the whole deal and keep some of the other subjective stuff out of this exercise.  Im pretty good with math, and ran through the numbers real quick but Im not sure of their accuracy.  Complicating this a bit more, Im trying to calculate this based off estimated amounts for next year.  Ok, so heres what we have going on:

Current mortgage:

$119k remaining at 2.875% - about 9.5 years left.  Im calculating by May next year itll be around $108k remaining on the current mortgage
Current principal + interest payment is $1201.


New Home:

We set a budget of $450k for the house.
As mentioned before, we already purchased the land (not included in above budge number).  $30k - for 1.5 acres.
We'll have $100k+ of cash to put forth for a down payment
Plus estimated $100-120k from the sale of our current home
We'll probably hang on to a bit of that so lets say the new loan amount will be $275k after down payments - $100k from the house and $75k cash.
At 4.5% interest on a 30 yr note for $275k, P+I would be $1400ish, but we plan on adding on an extra $500 per payment so lets go with $1900 / month - essentially making this a 17yr loan. Technically, we could do a 15 year loan, but I like the idea of putting a set extra amount per month as we desire rather than committing to a shorter loan for a few points.

So reading through the sitch, you can see that we can outright payoff our house next year if we want to, and be done with any type of debt.  Totally 100%. FU money would accumulate fast. In doing so, we'd save $13k in interest, sell the land. So we'd be "up" +$43k.  Plus, I guess i need to factor in all the money saved by not building a new home to make it apples to apples?? I feel like Im missing something here though....

Now, if we build we'll be looking at the cash down payment ($75k) + loan amount ($275k) + load interest ($226k) and now that I think about, therell be interest only payments for the construction loan, during the construction period, before its rolled into a mortgage...lets say $5k total for that.  Grand total: -$581k.

Im sure Im missing stuff here.  Does this make sense what Im trying to calculate?  Can the mustachians help me out with the numbers on this?

waltworks

  • Magnum Stache
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Add 20% to your construction budget, then run the numbers.

I mean, really, you are going to pay way more money for a bigger/nicer house. There's no way around that. You will work a number of extra years for the privilege of having more bathrooms and whatever else you want in a house - especially one that's custom built (which also requires a ton of time/effort from you). 

That's fine. I worked a number of extra years to live where I live, and I'm ok with that. But don't try to kid yourself that the numbers "make sense" in any way.

I mean, if you want to make it simple:
-You have a $250k house (approximately)
-You are buying a $500k house (approximately)
-That $250k won't be working for you, instead you will be paying interest on it.

How many years will it take you to save $250k? Is the house worth that much work to you, or not?

It sounds like you already made the decision, though, and you're looking for support here? I doubt you're going to get much.

-W

pseudoyams

  • 5 O'Clock Shadow
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  • Posts: 18
You make a couple good points in a few statesment. ;) Im curious, though, if there is an accurate way to calculate this out?  Im thinking the equation would get far too long and not really be a good comparison.  Even then, may not be a good basis for judgement one way or the other.

Not really looking for support here other than help with the math and maybe the perspective of other like-minded people. Obviously, the the question I ask is loaded which is why Id like to keep to the numbers.  The number of spreadsheets and graphs and everything else Ive been calc'ing out numbers on is kinda crazy. There's many reasons to stay and only a few to move, but only due to some unknowns.  It comes down to some personal preference, but Id be interested to see how this could be calculated out as well.

waltworks

  • Magnum Stache
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  • Posts: 2727
You make a couple good points in a few statesment. ;) Im curious, though, if there is an accurate way to calculate this out?  Im thinking the equation would get far too long and not really be a good comparison.  Even then, may not be a good basis for judgement one way or the other.

Not really looking for support here other than help with the math and maybe the perspective of other like-minded people. Obviously, the the question I ask is loaded which is why Id like to keep to the numbers.  The number of spreadsheets and graphs and everything else Ive been calc'ing out numbers on is kinda crazy. There's many reasons to stay and only a few to move, but only due to some unknowns.  It comes down to some personal preference, but Id be interested to see how this could be calculated out as well.

I'd just figure you are out $250k that would otherwise be invested (assume what you want about the return), and that in addition you'll need to pay some amount of interest on that $250k.

There are too many unknowns here to do a calculation like you seem to want to. So keep it simple. You're spending an extra $250k on a house. If that money was invested in the stock market, it would be earning you something like $20k a year (albeit with a ton of variability year to year, and no guarantees). If you're doing a 4% rule SWR thing, that $250k is worth a totally safe $10k a year, forever.

So the most conservative (meaning, conservative about investment returns) possible take is that this is going to cost you $10k/year, for the rest of your life. You could fairly easily make the argument that it will actually cost you quite a bit more than that, too, but all of those numbers will depend on your assumptions about investment returns.

At a 75% savings rate, with a significant positive net worth and a VERY cheap mortgage (don't ever pay an extra dime on that!) you are probably closer to FI than you think. Building a half-million dollar house will set that back by a lot. Again, that could be worth it to you, but there's no question that for FI purposes, it's shooting yourself in the foot to spend extra money on anything. When it's a cool half million on a house, that's shooting your foot with a howitzer.

-W

pseudoyams

  • 5 O'Clock Shadow
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  • Posts: 18
So just wanted to send out an update on this (if anyone cares) ;) but we decided to nix the whole thing and stay where we are.  This exercise helped a lot so thank you for your insight and, ultimately, we decided the land we purchased just wasn't the right area for us.  We live out in the country now and the kids enjoy it too much in the summer months to give it up.

thanks again and take care!