Pay off debt with proceeds from sale of home?

[Farmer Jim]

I just came across MMM and have been devouring the blog.  Fully ready to commit to the Mustachian Way and need some advice / punch in the face / backbone support.

DW and I are looking to sell our money pit first home after wrapping up some major renovations.  We expect to net about $35-$50k after selling expenses.  DW would like to use these proceeds for a 10% down payment on next house.  I am inclined to pay off student and car loans ($34k total) and rent a cheap apartment while we start maxing out tax sheltered retirement savings and build up a full 20% DP on a $350 - $400k house.  More details:
Take home pay = $7,600 monthly;  we gross about $140k annually
Current mortgage = $1,550 monthly (PITI), balance of $215k
Car loan = $560 monthly (original $20k loan with 36 month amort)
Student loans = $320 monthly
Food = Not so mustachian $800-$1,000 monthly (will get this number down asap)
Child care = $500 monthly
All other expenses = $800 - $1,200 monthly (room for improvement here too)
We've been cash flowing renovations to the tune of $2,000 - $3,000 monthly. 
We save for retirement/financial independence but not nearly as aggressively as we could.  Have about $75k in 401k at age 29. 

Renovations will come to an end soon so I know we could save at least $3,000 monthly - maybe $4-4,500 if we really cranked it up and downsized to a cheap apartment for a while.  If we paid off all debt with home sale proceeds, timeline to full 20% DP for $400k home estimated at 16-20 months.  This is my preferred option right now. Negatives - concerned about interest rates taking off while we save.  Also would like to avoid two moves in two years with two little kids.

If we buy another home with 10% down, I think we could pay off debt in about 18 months (assuming slightly higher mortgage payment).  Negatives - we would incur PMI for at least two years while we build equity and in order to reach debt repayment goals we would have to delay saving aggressively for retirement. 

Third option – stay in home, refinance, stop the bleeding on renovations, start maxing out tax sheltered retirement plans, work like mad to pay off debt, pay off mortgage, save for next home DP, buy next home and then rent out current home.  Timeline – 5-6 years.  Negatives – smallish home for growing family, not great schools.  But we do like the neighborhood and location in general.

Sorry to ramble a bit.  Feel free to ask more questions.  All thoughtful opinions welcome. 

[Devils Advocate]

I say pay off your student debt and car loans and move into an apartment.  Then you can build your retirement portfolio and be "debt free".  I wonder why your second home is going to be 350 to 400k? Seems a bit high compared to your current digs.  Do you really need that much house?  Your home is NOT an investment, but really a LIABILITY...Therefore buy the least amount of home you can be comfortable in.

DA

[James]

What would you be paying for rent if you sold and rented?  Would it be substantially better or worse than what you have now?  If it isn't quite a bit less than $1550, then you might be better off staying where you are.  I would certainly stay where you are rather than buying a new place with 10% down.


I guess my gut suggestion is to become mustachian where you are now.  Let those changes sink in and percolate through the system.  Slash spending, start aggressively paying down debt.  Can you get rid of the car loan?  $560 monthly is killing you, not to mention the renovations...

At the same time you can start seriously looking at your options for housing.  Start putting numbers down on paper and get them as solid as possible.  What are actual rentals you could get and what are the features and costs.  What location would be best to be in.  It doesn't sound like you have enough of a handle on the details to be answering the question yet, you need to pull in more information first.

[Farmer Jim]

Renovations will stop next month so no more $2,500 to $3,000 out the window each month.  Rent for a place wife would be ok with would be $1,200.  Could go a bit cheaper but we'd be in the ghetto or the boondocks. 

Agree with the comment that a house is a liability ... at least it's not an income producing asset and it ties up a lot of capital.  That said, in our particular area of the west coast - $350-$400k is the going rate for a very modest three bed, two bath home around 2,000 sf and so-so schools.  Current home should sell for $270-$280k.  Could live in a less expensive area and get more home for the money or the same home for less but we would be much further from our jobs. Want to make sure we count the cost of the commute.

Car loan could go away in about two-three months if we were to save a bit for a cheap top ten car for smart people and dump the current one.  (Side note, never "browse" for a car in the heat of summer if you don't have AC but do have a very cranky baby. You will drive a new car home.)

[James]

Renovations will stop next month so no more $2,500 to $3,000 out the window each month.  Rent for a place wife would be ok with would be $1,200.  Could go a bit cheaper but we'd be in the ghetto or the boondocks. 

Agree with the comment that a house is a liability ... at least it's not an income producing asset and it ties up a lot of capital.  That said, in our particular area of the west coast - $350-$400k is the going rate for a very modest three bed, two bath home around 2,000 sf and so-so schools.  Current home should sell for $270-$280k.  Could live in a less expensive area and get more home for the money or the same home for less but we would be much further from our jobs. Want to make sure we count the cost of the commute.

Car loan could go away in about two-three months if we were to save a bit for a cheap top ten car for smart people and dump the current one.  (Side note, never "browse" for a car in the heat of summer if you don't have AC but do have a very cranky baby. You will drive a new car home.)

Reading between the lines, it doesn't sound like the $300 you would save every month by renting would be worth the change.  Trading out cars though would be huge, it's almost twice the monthly amount you would save by renting by simply getting rid of that car loan.  I've been there, I purchased a brand new T&C van 100% financed right out of school despite having $64,000 in student loans.  It's sunk costs, just make the changes you need to make and move on...  :)


I see absolutely nothing wrong with a $350-400k house, especially if it's in the right location.  When you can afford it!  We don't live mustachian lifestyles for nothing, we live them to honor our priorities.  A nice house in a great location isn't everyone's priority, but it's not a bad one to have.  Just balance that with your other obligations, and live frugally now so you can make the change when possible.

I think you had the right idea with this plan:
"Third option – stay in home, refinance, stop the bleeding on renovations, start maxing out tax sheltered retirement plans, work like mad to pay off debt, pay off mortgage, save for next home DP, buy next home and then rent out current home.  Timeline – 5-6 years.  Negatives – smallish home for growing family, not great schools.  But we do like the neighborhood and location in general."

[Devils Advocate]

I agree with James now.  Stay put and pay off the rest of your debts. 
DA

[twinge]

I third the vote to stay where you are, keep making positive changes and don't move until your debts are down and you have 20% dp.  With 140k income and your bills it really isn't that long a time.  Supplement not-so-great schools with more focused attention on what you think is needed for your kids: thoughtful conversations, encouragement to read or reading together, support for intellectual hobbies, on-line math instruction, teaching them some life skills etc.   The latter will likely pay off more in a life-time way than getting to a better school system 2 years earlier.  Moving often generates a lot of costs and chaos.

[smedleyb]

Farmer Jim,

You're very negative about your current home, the "money pit."  Of course, dumping 60% of the monthly net into a house would leave a bitter taste in my mouth too.  Now regardless if these renovations -- which consumed so much of your pay -- were necessary or cosmetic, the fact that they're finished is a major plus moving forward.

What I'm driving at is this:  stop looking at the negatives and refocus your energy on what James, the Devil's Advocate, and twinge are saying.  Selling the house now makes no sense given your student loan and car debt; pay that debt off, build up the IRA and your cash levels,  and reassess your situation in year.  Even if the schools are poor one year won't make that much of difference, but it will keep you from doing something impetuous because you're emotionally/financially exhausted by your house.  Also, realtor fees (buying and selling), closing costs, and moving expenses will see to it that much of the 35K you have in equity gets vaporized. 

   

[Dicey]

Hi Farmer Jim,
Without getting too specific, where are you in SoCal? Is your area likely to rebound? If it is, I'd go along with the others. Stay put and re-fi if possible. Much easier to get a great rate while the house is owner occupied. Moving twice will cost you a boatload of money in dozens of ways, large and small.
Another thought is that it would be a shame to put all that work into it and not enjoy it. Whenever I buy a house, I try do the reno work first. When I sell, I can say "newer this" and "updated that" even though I've enjoyed living on the fruits of my renovation labor. If you like what you've done to the house, stay and savor it for a few years. In the meantime, work on your mustaches. You're off to a great start!