Downsized everything. Now, should we sell the house?

[Mint Chip]

Hello again. Thanks to the great info/advice/support that we've received on this board, we have made MAJOR changes and are on our way to paying off all of our debts. We sold the minivan and SUV and replaced them with cheaper vehicles that get better gas mileage and put the cash we got toward the debt, are selling all the crap we've accumulated, and have paid off almost $20k in credit card debt in just a few months. We have around $68k in student loan debt remaining, so we tossed around the idea of selling our house and using the cash from the sale to wipe the slate clean. If all goes well, we would walk away with $70k, and could pay off our remaining debt. We are in our early 40s, have 3 kids, but no savings, except for a $1k emergency fund, and no retirement. We have been clueless and stupid, but thankfully the light did finally go on, and we feel an extreme sense of urgency to clean up our mess and get on track toward some fiscal sanity, and eventually, FI.

If you we're in our shoes, would you sell the house and pay everything off, or stay put and slog it out? If we stay put, we are looking at around 5 years before that $68k is paid off. We do like our house, but we were considering moving in order to be in a more walkable town and closer to everything we do. DH works from home 1 day a week right now, and his commute on the other days would be around the same or, he might be able to take public trans. We are a bit concerned that there aren't many rentals currently available in the town we'd like to live in (but there are a few), but maybe this isn't prime rental season.

So, should we stay or should we go, if we can walk away with $70k?

Thanks again.

[zachd]

Well, can't say for sure, but I'm in a similar situation I would be curious what people think.

I would say though you should factor what your home might be worth in the future.  If you don't think it's going to keep going up then it's more a matter how much you like living there.
You could also consider renting if you would make money.  It is tempting as you say to wipe the slate clean.  I'm leaning more towards renting our home and moving to a cheaper place.
If we don't like it we'll move back.

[Mint Chip]

Thanks for your reply. We're really torn. We want to do what's best given our age and the fact that we have no savings. We're not sure if it's more important to get rid of the debt and start fresh or hang onto the house until we can pay everything off. We'd really appreciate some unbiased opinions. Thank you!

[happy]

We need more information:
What is your take home pay?
What is the interest rate and term of the student loan(s)?
What is the interest rate and term of your mortgage?
How much interest per month are you paying for the mortgage? And do you have other monthly expenses with the house eg taxes or PMI? This amount in one sense  is your "rent" for living in your house.

If you rented close to work/services how much per month?
How much per month would you save on commuting?
How much are selling and relocating costs?

You can then do a rent v stay in house calculation.

If the interest rate of the loans is low (<4%) and renting  is more expensive then I would stay put. If selling, moving and renting brings you out ahead then move.

Also your loans are not huge if the interest rates are not high and if your take home income is  not low. If your take home is low it might be better to focus effort on earning more in that case.

[Roses]

Are you in a town where it makes sense to own?  As in, is it a good investment & good use of your money?  Or are real estate prices in your area very high compared to rents?  As MMM has said a few times, there are some places where it's better to rent no matter what your situation is (mathematically speaking).  That factor might make your decision easier.  You could post this in the real estate thread and see what the RE investors think from that perspective.

[Michread]

It doesn't hurt to look around and SEE if it's worth it.  Look at the homes available and do the math. 

You have 3 kids - would they have to change schools?  How would the move impact them?  A good school system is worth it to consider staying or moving too.

[Mint Chip]

Thanks, guys. Here's some info:

- take home pay per month (after taxes and health insurance taken out) $4400
- mortgage is $576 plus $400 in property taxes = $976 per month; balance is $114k, 30 yr fixed at 3.75%. We paid $165k 5 years ago and can probably get 200k now.
- student loans: 9400 at 6.75%; 32,000 @ 4.25%; 27,000 @ 4.25 %
-commute would be around the same but we'd be able to walk/bike to many errands and activities
-we live in a so we hat desirable rural area with a rep for good schools and decent commute to Boston
- in general, most people own around here and owning is competive with if not cheaper than renting, barring major home improvement expenses. As of today, there are not many rentals on the market at all. Rentals are around $1100 and up or a 2 br.
-we did a short sale 2 years ago on a property that we bought in 2005 (ouch!) so we likely wouldn't be able to get another mortgage right now , but, given that w are essentially broke, we have no business getting another one anyway (at least that's what we're thinking)

If we were 10 years younger, I wouldn't feel the need to do something so drastic, but given that we are in our 40s and are looking at another 5 years before we pay all this off, we are seriously considering selling and starting from scratch. Not sure if this is rational, or if it's the best thing to o, long-term.

Any thoughts/advice SO VERY appreciated!

[tct]

Based on the fact that rent is $1100 and up for 2br, I would stay put. Don't forget that the portion of your mortgage that you pay towards principle each month is money saved. That is why you are able to clear $70k on a house that you paid $165 for and is worth $200k today. So you have saved more money than you thought.

[SunshineGirl]

Given what you've said, I would also stay put. Your housing is less than a quarter of your take-home pay - that's good. Moving can be hard on kids - although, how old are they? School age? Moving can also be expensive. (Although it can also be freeing!)

You should//can now focus on savings. Don't forget, the 200K in eventual equity you'll have will be there for you at some point if you DO sell, so that IS savings, just not liquid savings.

Do you plan your finances via YNAB? If not, I recommend it.

In your situation, I think I'd take a good, long, hard look at your careers. How can you either make more money, work somewhere with better benefits, or start training for a new career? Often, benefits can help tremendously in building savings and safety nets. Google the hundred best companies to work for and see if any are near you.

Alternatively, if your kids are young, would a cross-country move be in order? There might even be places where the equity in your home could be used to pay cash for your next house.

[nereo]

- take home pay per month (after taxes and health insurance taken out) $4400
- mortgage is $576 plus $400 in property taxes = $976 per month; balance is $114k, 30 yr fixed at 3.75%. We paid $165k 5 years ago and can probably get 200k now.
- student loans: 9400 at 6.75%; 32,000 @ 4.25%; 27,000 @ 4.25 %
-commute would be around the same but we'd be able to walk/bike to many errands and activities

Any thoughts/advice SO VERY appreciated!

I agree - given what you are paying and what you say the rental market looks like it makes more sense to stay where you are.  3.75% is a pretty good rate, and it's fixed.  You're paying $576/month towards principle, which is a form of savings.
I'd put my energy towards paying down that $9,400 loan at 6.75%.  The other two loans aren't that bad in terms of interest rates.  Do whatever you can to get rid of the 6.75% though, and quickly. 

Is taking on a renter an option (even if only for 6 months or a year)?  It sounds like you could get $600-800/month, which could be used to quickly erase some of that debt.
Look for cost-cutting wherever you can.  Try to find $25 or $50 chunks every month that you can put towards debt reduction.  you might want to forgo contributing to your IRA in 2014 and instead plow that entirely into that 6.75% loan.  It's a toss-up.  Over the long-long term you'll probably do better with your IRA but right now that's eating up an unfair amount of your budget which you can use later to save and pay down your mortgage.

Revisit the whole "stay or move" equation in two years or so.  It would be great to move someplace where you could walk/bike more, but until you can find something cheaper than your living situation it doesn't make financial sense.

[Mint Chip]

Ok, great. Thank you all! We are also going to find out if we can buy again now, but will only consider it if it would mean a lower mortgage payment, which might be possible if we get a cheaper house that has cheaper property taxes, energy costs, etc., and especially if it means that we can downsize further to just 1 car.

Ynab has been so key in getting us on track.

 The new job brought us 20k more, and now we are actually able to afford to pay our health ins premium without falling behind. Our "affordable" plan was cancelled, and the employer sponsored plan is actually a better deal than what we can get on our own up here. Health ins costs, like electricity costs, are crazy here. Dh is 7 months into the new job which will open up many doors and many options for him/us, so we are glad for that. We will reassess that as the 1-year anniversary approaches and see what else is out there. We aren't afraid to relocate for the right opportunity.  Our kids are homeschooled and are on board for a new adventure, and all that that entails.

So, the consensus is that the 4.25% student loans aren't a hair-on-fire emergency? These were what prompted us to consider selling in the first place. We have zero retirement savings, so I was concerned that the time we'd take to pay these off would be time taken away from saving for retirement.

But, I had forgotten about the idea of counting our mortgage payment as savings.  It definitely makes me feel better about staying put. And boy, does our house look great now that we've cleared it out and gussied it up for prospective buyers!

I am starting to look for part-time things that I can do to increase income, and dh is all for getting a second job, asking for a review at work, and searching for something else full-time. Is it still conventional wisdom that you need to stay at a job for at least a year before jumping ship?

I'd love to get the kids into this other town b/c most of what they do happens there, and they offer tons and tons of activities for homeschoolers.. I don't mind driving there, and if the numbers favor staying put, then that is what we'll do.

You are all awesome. Thank you for your help

[nereo]

So, the consensus is that the 4.25% student loans aren't a hair-on-fire emergency? These were what prompted us to consider selling in the first place. We have zero retirement savings, so I was concerned that the time we'd take to pay these off would be time taken away from saving for retirement.

I am starting to look for part-time things that I can do to increase income, and dh is all for getting a second job, asking for a review at work, and searching for something else full-time. Is it still conventional wisdom that you need to stay at a job for at least a year before jumping ship?

I'd love to get the kids into this other town b/c most of what they do happens there, and they offer tons and tons of activities for homeschoolers.. I don't mind driving there, and if the numbers favor staying put, then that is what we'll do.

I'd say that 4.25% isn't a "hair on fire" emergency, because that's very close to the 4% that's the safe, conservative withdraw rate for infinite retirement.  In other words, if you invested that same amount and used the interest rate you earn to pay down the interest you own on the loan, it would be a wash (again, averaged over a long time scale).  Still pay it down, but just don't become overly stressed about that one.

As for the "conventional wisdom" about staying in a job, I'd say it depends entirely on his field.  In IT or software it's not uncommon to for people to change in less than a year. In other fields there is an expectation that employees stay longer, and multiple jumps in a short time frame can raise red flags, BUT if he gets an offer he should do what is best for your personal situation.

Your kids are precious, so what's best for them should be a very large factor in your decisions.  Just remember that your time is the best thing you can give them.

[steveo]

I would stay put for sure however I'd like to see what people think when they are closer to retiring.

I'm personally not sure what we will do (the wife and myself) when we are ready to retire. Do we leave the city and get a cheaper house in the country and maybe closer to the beach ? Will this provide us the same or a different level of facilities to utilise ? We have 3 kids and one will probably be only 12-13 years old - how do we handle this situation ?

For now we are about 10 odd years from getting to that state and for us though staying put is definitely the best option.

[ShortInSeattle]

I concur that staying put makes sense. Your housing costs are reasonable, and rents in your area could be unpredictable.

You are likely to get a better return through investing compared to paying off the student loans, but I do understand that being debt free is a worthy goal.

In your shoes I would probably do the following.

1. Accumulate an Emergency Fund of 3-6mo expenses.

Then once that is done...
2. Invest in 401(k) enough to get the full employer match.
3. Then take remaining dollars and do some combination of investing and paying off the student loans. Investing may make more mathematical sense, but I hate to have debt sitting around, so I might allocate 75% of surplus dollars to investments, and 25% to whittle down the student loan balance.

Just one more opinion to consider...

[Mint Chip]

LOVE these suggestions and the much-needed perspective. Thank you!

Yes, giving our kids our time is our priority, hence the juggling/struggling - but it's 100% worth it.  We are doing ALL of this for them - paying off our debts, thinking of moving to a more kid-friendly town, etc.; it's 100% for them. And, getting ourselves set up for "retirement" is also so that we won't be a burden to them. Regardless,  they are learning not to make the same stupid mistakes mom & dad did, and are light-years ahead of us in terms of personal finance.:)

Thanks again for helping us see the light, get a clue, make a plan, make progress, and for helping us be optimistic about the future, and the understanding that so much of it is within our on troll and very, very doable.

[happy]

I also agree with staying put.

Of the mortgage payment some is interest and some pays off the principle amount. The interest part (which you didn't tell us) is your rent equivalent plus the taxes/costs of maintaining the house. The part you pay off the principle (the original sum you borrowed) is savings, because you increase the your equity in your house that way.

The only loan I would scurry on is the 6.75% student loan. Its not hair on fire level, but you essentially get a 6.75% guaranteed return on your money by paying it off (which is pretty good).

I can see the appeal of wiping it all clean, but don't forget a paid off house is really useful in retirement (unless you want to gypsy travel). Its a form of freedom in itself, since you don't have to worry about housing expenses and account for that in your stash calculations. You're nearly halfway to owning the house.

[Mint Chip]

That makes perfect sense. Thank you!

So, in order to make a change now, it would only make sense if we can snag a cheaper house with a smaller mortgage and property taxes, and also have a good chunk of change to toss at the debt.

Thank you!!!

[happy]

Correct. But don't forget to add in buying/selling costs when you do the math...that might eat up quite a bit of your equity, making it not worthwhile.

[Mint Chip]

Great point. Thank you o much!