Is selling our house as good of an idea as we think it is?

[Mickijune]

We have made the decision to sell our house.  We bought for 235k in 2012 and currently owe 225k. We are listing at 340k and hope to get at least 320k. We will not sell if we can’t get more than $310k. We bought this house with the intention of selling in 5 years or so, but now seems like a good time as other townhomes in our complex have recently sold very quickly.

We will use the profit to pay off $46k in private student loans (30 year term at 8.25% yikes!) and if there is anything left we will put it towards my unsubsidized gov’t student loan @ $20k. If we get enough to pay it off completely, even better.  If not, at least we got rid of the private one. I have been paying the minimums for 10 years now and haven’t paid one penny towards the principle amount because I have $6700 in back interest (had a short break in school). That measly $6700 will take me 17 YEARS!!!!!!! (yes, 17 years) to pay off if I only pay the minimums for that long. When I found this out I wanted to beat someone’s ass so bad when in reality it would be my own ass I would beat.

After those two loans, that leaves one sub. Gov’t student loan @$17k (mine) and another combined sub and unsub gov’t student loan @$14k (husband’s).

We plan to live in an apartment for a year, give or take and pay off some more of my student loans. Then we plan on purchasing a home that we will live in for a long time…something that will be “big enough” for at least one more kid, maybe two, and the dog.

What do you all think? Is there anything that I might not be considering that I should? As much as I want to get rid of the private loan, I want to make the best decision possible. 

[Prairie Stash]

Talk to 3 realtors. Get appraisals done.  After that then reevaluate the plan.  Also track down rent payments on a suitable place, lets get customized data for you.  I assume you can compare utilities, taxes insurance to the rent.  Please post with an update here, there's too few details to give an honest opinion. While you're at it, how would you feel about a total budget appraisal? If you can withstand the criticism they're pretty useful.

You sound like you're trapped in debt.  With a net worth less than $0, that's tough spot. Let's use the collective wisdom here to help you.

Also, any loan without an interest rate beside it deserves a punch ;)  (that's my direct answer to "what do you all think?")

[LynnM]

I think your goal of selling to pay your debt off is sound if you've lived in the home 2 full years and can take the profit tax-free as allowed after 2 years, but then maybe rethink the apartment unless it is less expensive and will save you living expenses.  After selling your primary residence, you could look into purchasing another for a low down payment, 3% FHA or Homepath financing, buying right, fixing it up and repeat the gains in another 2 years, or buy a duplex, tri or 4-plex (FHA allows 1-4 unit financing for owner-occupied) and rent out the other units to reduce your own living expenses until all your debt is paid in full, then save for the home you really want and have the rental as extra income for the future.   We did rent for a while after having to move for work, but found buying our own townhouse-style condo in our new area saves us over $300/month off apartment prices (plus no pet rent or pet fees) and we'll have a rental when we're ready to move into a nicer home again.   

[Villanelle]

Will you have lived in the home for 2 years before you sell?  I am only vaguely aware of this and I'm sure someone here is more familiar with it, but if you haven't lived in the house long enough, capital gains on the profit from the sale might be an issue.  I think you have to have lived in the home for 2 of the last 5 years (someone will correct me if I'm wrong, I'm sure) in order to avoid capital gains, so depending on when in 2012 you bought, it might be be issue. 

(Again, I will say I am only vaguely aware of this issue so I could be wrong on many or most of the details.  I'm bring it up and hoping someone who knows more can advise you.)

[waltworks]

I think the basic plan is sound but keep in mind that you will need to save up for a while to get into another house - not just a year. I'd expect it to take 2-5 years to get yourselves back in position for owning a place if you go through with this. That's not to say it's a bad idea - it's just going to require apartment living (the horror!) for a while.

You could consider (again, we'd need more numbers to really flesh things out) doing a HELOC on the place you're in now and paying off the high rate loans that way. Typically if you have good credit you can get a loan for about 80% of the equity you have in the house (you'll probably have to pay for an appraisal, though you might be able to get a no-fee loan from a local small bank or credit union). It's quite possible to get a ~4% HELOC for, say, $80k and then kill all those loans with the money. Of course, you will still be paying on that debt - but the rate will be much lower. And you will have killed almost all the equity in the home, which has risks of its own. Still, could be an option if you don't want to move just yet and like where you are right now, especially if you think your townhome will continue to appreciate.

-W

[Mickijune]

Thank you all for the replies! The current home loan has a balance of $225k @ 3.75% (30 year fixed VA loan)

A little more info. We have lived in the house for 2 years as of this month. We purchased new and after researching online won't have to pay taxes on the profits. I just hate that so much would be taken out for commission and all that for the real estate agents. It basically cuts our profit in half :(

To rent an okay 2 bedroom, we are looking at $1000-$1200. 3 bedroom would run $1400-$1500. We pay now $1450 total for mortgage, insurance and taxes on the house so we would not rent for anything more than that. It's tough to find a place that will take our dog also. Even though she is the laziest bum ever! We talked yesterday about possibly looking into a foreclosure in the area as well. If we can get a decent one for $225 or less, I would be all for it.

My husband was a Marine for 4 years, so we got a VA loan for the house with $0 down. We would most definitely go that route again when purchasing a new house.

[LynnM]

I think Washington State has a fairly hefty transfer/grantor/excise tax (not sure what they call it), but I believe it's like 2% or more of the sales price once the state, county, local ones are all calculated.  I could be wrong, but check on your closing costs as they could be much more than you are expecting and you'll need to factor that into your decision and sales price.  Washington might also be one of those states where it's customary for seller to pay buyer's title insurance, so ask about that as well.  I would think a local title company would have online calculators or would provide a free estimate of potential costs to sell.  You may already be aware of it, but just in case.   We were shocked by the high seller closing costs when we lived there.   

[DoubleDown]

YMMV, but please pay attention to the figures below. I'd stay and continue to enjoy the appreciation on your purchase, particularly since it sounds like renting is not considerably cheaper than staying (or maybe not cheaper at all). Probably the only thing that would change my opinion of this is if you believed your area is in decline.

Here's the deal: Even at a very modest appreciation, you will be getting wealthier at an astounding rate. Here are some examples of how much more wealth you'd build based on your low-end estimated value of $320k, using some modest appreciation rates. I give an example for only 4 years, the money would continue to snowball in later years:

At 2% annual increase: +6400 in 1 year, $6528 Year 2, $6658 Year 3, $6791 Year 4 (Total = $26,378)
At 4% annual increase: +12,800 Year 1, $13,312 Year 2, $13,844 Year 3, $14,398 Year 4 (Total = $54,354)
At 6% annual increase: $19,200 Year 1, $20,352 Year 2, $21,573 Year 3, $22,867 Year 4 (Total = $83,992)

All of that increase in value/wealth is in addition to the equity you're building by paying down the principal. So unless you have another way to use the money already invested in your house to earn $26,000 - $84,000 in 4 years, it pays to stay put (or if your interest on your loans exceeds that amount).

You have an awesome fixed rate at 3.75% -- what an excellent hedge against inflation as you continue to build equity. As mentioned, you could consider tapping your current equity to pay off the higher interest student loans.

Of course betting on future appreciation is speculative, so again YMMV. But a lot of people get wealthy pretty easily just by owning a nice home in a good area, all while enjoying a roof over your head that you can suit to your own needs. You're one of the fortunate people who have been able to get in on this boondoggle (many people never earn enough or save enough to buy a house), I would not give up on that now unless you think your area is headed to the crapper.

[FrugalZony]

Whereas your plan sounds great, I would definitely look into all the cost associated with selling (commission, fees etc.)
and consider all other options, like renting out a room in your house, taking a Heloc to pay off the loan etc, etc. like othes have suggested!

If you cannot rent much, much cheaper it may not be worth it!!

Good luck on getting out of the red!!! You have started to acknowledge you made mistakes and are actively working on solutions.
That in itself, is great!

[Thegoblinchief]

Hmm, if rentals are that expensive, I'd probably go the HELOC route. Are their cheaper rentals which wouldn't affect your quality of life too much?

Is the ONLY reason you're selling is to accelerate debt payback? If so, analyze the numbers, but I'd expect them to be about even either way.

Hmmm, to have a house with equity...

[Daleth]

LynnM has offered you much wisdom. I can't improve on her post, but wanted to emphasize it.

[waltworks]

+1. HELOCs have a bad rep these days but in your situation it's a perfect solution assuming you are ok living in a house with very little equity. You'll save the 8-10% overhead costs of selling, save the cost and hassle of moving, and knock out the high rate loans at the same time. IMO, it's a no-brainer.

If you think the real estate market is about to tank or something, that might be a reason to sell. But given the rental prices around you, not much point in selling now if you can just tap the equity to get rid of the other loans.

-W

Hmm, if rentals are that expensive, I'd probably go the HELOC route. Are their cheaper rentals which wouldn't affect your quality of life too much?

Is the ONLY reason you're selling is to accelerate debt payback? If so, analyze the numbers, but I'd expect them to be about even either way.

Hmmm, to have a house with equity...