My wife and I live in a 3 bedroom, 1400 square foot home. We just had our fourth child. Woohoo. While the home just fits us right now, we want to move into a larger, 4 bedroom, approximately 2000 square foot in 5 years to give our kids more room as they get older. We are both pretty set on the move and I not looking to argue on this thread about the right size home for our family. Instead I want to understand how to best make the upgrade.
A little about us. I work as a lawyer for the state and she stays at home with our kids. The kids are young enough it makes sense for my wife to stay home. I make approximately $70,000. We own our cars and have no debt. I like my job (shockingly) and have an amazing pension available. I plan to work until I qualify for full retirement from my job, about 17 more years, when I will receive approximately 60% of my highest salary from the last few years before I retire for the rest of my life (that would be a higher percentage of my salary than we spend right now). I am already deferring some income into a 457(b) plan through my work. We want to own our home outright before I retire. All of this is a little off topic, but I wanted to say I think we will be OK and feel the move is a good idea, that won't significantly alter any of our plans.
We live in a pretty low cost of living area. We currently own a home that is worth about $190,000. We have a mortgage on it for approximately $130,000 fixed at 3.75%. Our current monthly mortgage payment (including insurance and property taxes) is about $850. We want to move into a home valued at approximately $300,000. That means we will need about $60,000 as a down payment.
I am currently putting about $1,000 a month in a 457(b) plan that could be used instead to make the move happen. We have a few very low cost Vanguard options in this plan, and I like to put money here, but am flexible.
I can see a few options for how to make the upgrade to a new home, but am not sure which is the best way.
1. The first option is pretty straight forward. Keep paying $1,000 a month toward the 457(b). Pay no extra on the mortgage on the current home. When we want to move, we can sell the home we live in, and use the proceeds as a down payment on the new house. If the timing on buying the new house is delayed, we would find somewhere to live for a little while until we buy the new house. I like this because all the money we might be saving for a new house is invested. I don't like it because we won't own a second home when we retire, but the move could come whenever we are ready.
2. Stop saving in the 457(b). Instead, stash $1,000 cash in a bank account and use it all for a down payment on a second house while living in our first house. Once we make the move we could rent out the first home and become landlords. While I like the idea of owning two homes, I don't like this option because it would be several years of money lazing about, not even making 3.75% that it could by putting the extra money toward the mortgage. It does keep a pretty nice mortgage rate on the home that is most likely to turn it into a profitable rental property. However, it puts the certainty of the move out about 5 years because it would take that long to save the cash for a down payment.
3. Do something in between. Put $500 a month extra toward the mortgage on our first home for a few years and the other $500 into my 457(b) plan. When the time to move comes, we could refinance the first home and pull out $60,000 from the first home's equity to make a down payment on a second home. We would be able to keep the first home and to rent it out but with higher mortgage. It would make it harder for the rental to be as profitable, but we would have more money in my 457(b). And we would have a little more flexibility on timing the move because we would not have to save up the entire down payment for the second home first.
Which option seems best? What options am I missing within this framework? While I may get raises in the future, but I don't make my plans assuming them. I use them to accelerate our plans. And making significantly more money isn't likely. Thanks.