Author Topic: 40k inheritance + expensive property tax = Should I stay or should I go now  (Read 3415 times)

StashOnTheInside

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Financial overview:
Gross income is ~$85k, excellent credit. Just received $40k inheritance, now have ~ $50k total in bank. 401k's contributions set to employer 5% match. ~$50k in 401k's. No other investments. 2 cars, 1 in good shape, 1 on it's way out. (worth ~$10k and $4k).

$10k on 0% interest credit cards (I play the rewards game, but never pay interest). No other debt.
We are both 29 years old with a 2 year old daughter who does not currently have a college fund set up.

The issue:
My property taxes and interest rates are f*cking ridiculous for my 1600 sqft $160k home, built in 1969. It needs a new driveway and back deck, but is OK otherwise. We have $138k left on the 30yr, 4.88% mortgage (we had average credit back then). Taxes were $5900 at purchase but are now $6,500 annually. Similar house in the area just sold for $235k, but it was a little smaller and needed updating.   

My town has been rapidly increasing the property tax rate for the last few years. The rate is now @ 9.9%. They've been lowering the "fair market value" so the actual tax paid did not increase for a year or two. But this year it shot up, and now I'm worried that once they max out the rate (I think it can only be raised X % per Y years) that they will begin raising the FMV to increase the taxes paid.

Other towns in the area have tax rates between 4% and 9%, depending on how wealthy the town is, with the richest towns having the lowest rate (of course). The towns we were looking at moving to have a 6.5 - 8% tax rate, but the average houses in those areas are 1940's era and start at $250k. Some of these have been updated, and the property taxes are typically around $5000.

I live in the Chicago suburbs, and it's expensive around here. I'd like to stay in the area because all of my family and friends live here, and I like my job. However, it feels like just living in this area is anti-mustachian.

What should we do in our situation? Now that we have the inheritance, we have some options. Some we've considered are:
1. Refinance to get a lower rate (and maybe a 15 year term), then invest the inheritance in a college fund, Roth IRA's, emergency fund. Maybe fix the place up if there's anything left over.

2. Sell our house (optionally fix up to sell faster) and move to wealthier town. This will fix our crappy interest rate, and our outrageous tax rate. But the house itself will be costly (forget the 15 year term) and won't leave much for investing otherwise. I'm not much of a handyman, but can fix minor leaks, paint, etc., so major fixer-uppers are out.

Any thoughts or suggestions?

Daleth

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What are the public schools like in your town, vs. richer areas you're considering? What are the private school options?

Unless the school question points in the other direction, I'm inclined to vote for option (1), refi and invest.

StashOnTheInside

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I went to the schools here, and they weren't bad. They've got a reputation for being a bit rougher than the other schools in the area though.

I've heard that some of the schools in the other towns were  "among the top in the nation", but I'm not sure how reputable the source is there.

nereo

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With current mortgage rates it's a no brainer that you should get a new mortgage and get out from under that 4.88%
Then question then becomes "do I refinance my existing mortgage or do I sell and buy a new place".

So the question really becomes as simple as "should I move".

Best to do a cost-benefit analysis here.  You've mentioned that moving to a new place would cost a lot more money, but how much would moving improve your quality of life and save you on commuting costs?  Can you move closer to work and reduce or eliminate your commuting costs?  By one estimate you can save $15k for every mile closer to work you move: http://lifehacker.com/5855550/the-true-cost-of-commuting-you-could-buy-a-house-priced-15900-more-for-each-mile-you-move-closer-to-work
How much in property taxes will a new place in a new town save you? Currently you are paying $6500 ($541/month).
How much in energy efficiency (vs your 1969 home)?  A well-insulated, energy efficient home could cut your energy bills in half.
Can you find a smaller home that's better designed to your lifestyle?  A well-designed 1200sqft home can be more useful than a poorly designed 1600sqft home.

Add up all these costs and then have a look to see what various properties are selling for.  You might find that savings from cutting commuting costs, energy efficiency and property taxes could easily allow you to pay $1,000+/month in a place that makes you happier.

G'luck.
« Last Edit: March 30, 2015, 12:44:47 PM by nereo »

Allen

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If you stay, there will be trouble.  But, if you GO it will be double.

I'd ask your darlin' to let you know.

couponvan

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Don't forget to take into account the tax effect of your property taxes, closing costs and seller's agents fees to sell your house if you decide to move.  You may decide to pay down the mortgage quickly and then rent out the house you have now as a future income stream, depreciating the house and collecting rent.

I personally would vote you stay and aggressively pay down the mortgage (refi to a 15 year). 

I agree the taxes in IL are ridiculous, and wish I'd looked more into those before moving to the IL home we chose (our are $10K/yr).  However, we do have some of the "best schools in the nation" where we live. ;-)

We are probably 15 years ahead of where you are now, and wish I'd had the hindsight to keep our first house and make it a rental.

We itemize on our income tax return, and the high property bump our allowable deductions right up to the AMT limit. I wish I had a way around AMT to do even more deductions, but since we are blessed with high income, I won't complain and will pay my fair share.  FWIW we do the AMT dance every year trying to regulate our income to be right at the AMT amount that matches our deductions.  We're usually within $1K.

With 3 kids in public school the higher taxes are worth it to me.  (Where we lived before, private schools would have run $12K+/kid and the schools were horrible.)  The day Child #3 graduates from high school you can bet a for sale sign is going up in our yard....

tlars699

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http://www.zillow.com/homes/for_sale/Chicago-IL/17426_rid/0-100000_price/0-364_mp/days_sort/42.038074,-87.426796,41.629301,-88.03791_rect/10_zm/

http://www.zillow.com/homes/for_sale/Chicago-IL/17426_rid/3-_beds/0-100000_price/0-364_mp/days_sort/42.038074,-87.426796,41.629301,-88.03791_rect/10_zm/

http://www.zillow.com/homes/for_sale/Chicago-IL/17426_rid/3-_beds/0-100000_price/0-364_mp/zesta_sort/42.038074,-87.426796,41.629301,-88.03791_rect/10_zm/

I would say refinance your first house, do your appropriate investing, and then maybe see if you can snag one of the houses in the above links.
You'd be more likely to pay cash, and then remodel those over time to be able to move into your dream house in the area- rather than get a comprably priced mortgage for a new place.
Then all you'd have to do is worry about the property taxes, which would reduce your federal obligations. *shrug*

cbr shadow

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I say refinance and stay.
We're in Schaumburg and did this 2 years ago.  I find our area pretty easy to be mustachian, and I imagine you're talking about somewhere around the Schaumburg area based on what you said above.
Sounds like we have enough people in the Chicagoland areas to have a pretty good MMM meetup sometime!

Drifterrider

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Financial overview:
Gross income is ~$85k, excellent credit. Just received $40k inheritance, now have ~ $50k total in bank. 401k's contributions set to employer 5% match. ~$50k in 401k's. No other investments. 2 cars, 1 in good shape, 1 on it's way out. (worth ~$10k and $4k).

Does this mean you are NOT contributing the maximum amount allowed by the IRS?