To Own a Home or Not

[mustachianit]

We currently own a home and the maintenance has been about 2000-4000 a year.  I have been maxing out my 401k and our two roths for two years now.  The issue is IL decided to raise our property taxes so now we are at about $600 a month in property taxes for a modest home.  :(  this change might start hurting our retirement accounts.

I did the math and for the next 4 years if I stopped contributing the max and did much lower amounts and throw all that cash at the house I could have it paid off.   But my stache is not that big right now we only have $120k.  I am 34 and found mmm 2 years ago.  I was a spender before.  I worry those 4 years will prolong us working.

Need help please.  We are considering selling but are confused and do not want to make a huge mistake.

[SunshineGirl]

Honestly, I see property tax as a big trap that might come to bite a lot of us over the next decade. Renting provides such flexibility. Rents might also increase as property taxes do, but if you have the ability to move to a different part of the country as job opportunties come and go, you wouldn't have the noose of a home/property taxes/need to sell around your neck.

[StarryC]

Paying off your home won't actually effect your property taxes, right?  So, I think this is the usual calculation:

What are the returns on your investment accounts?  7%?
What is the interest rate on your mortgage? 4%?
How likely are you to want to move between now and when you would otherwise pay off your mortgage?
Do you think your home would be difficult to sell if priced in a range where you would "break even" or better?

If you make more in the market than your interest rate, and you don't NEED to pay your mortgage down in order to sell the place, it makes the most sense to keep the mortgage.

[KingCoin]

While there are going to be tons of considerations based on the particulars of your situation, this is more or less a "rent vs buy" question. How much would it cost you to rent a comparable home?

Also, paying down the mortgage isn't delaying your retirement. You're building your net worth and, when the house is paid off, substantially decreasing your cost of living. You can always unlock your home equity later by selling and renting, downsizing, or using a HELOC.

[the fixer]

It's not necessarily correct to compare to rents of similarly-sized houses. In my experience you can rent much smaller spaces than you can cost-effectively buy. So just because one has a 1200 sqft house doesn't mean that's the amount of space needed, an 800 sqft apartment might be adequate.

Whether you should pay down the mortgage as quickly as possible or not really comes down to your risk tolerance. By keeping your percent equity in your home lower, it will free up cash for investing, as you are doing now with that $120k. This is a form of leverage and will increase your total rate of return on your assets, but it can be risky. On the other hand, you can pay off the house, but it ties up a lot of your net worth in an asset that's appreciating at only about the rate of inflation, and has relatively high expenses compared with the rate of appreciation. I personally feel that some leverage is a good way to make real estate make sense, but that many homeowners have been overdoing it.

If your goal is to pay off your house as quickly as possible, compare the net income you get from owning a house (a negative number since it's all expenses) to the returns you'd get by investing the house's value and taking a 4% SWR, then subtracting the rent (result could be positive or negative). e.g. a $300k house with $6k/year expenses, and $9k/year cost to rent would mean your net income from owning the house is -$6k/year whereas the net income from investing the amount the house is worth and renting would be $300k*4%-$9k = +$3k/year. Renting would be a better financial situation in that case. If the numbers are close, consider the effects of tax breaks that apply to those homeownership expenses, that may tip the balance toward owning.

If your goal is instead to use your mortgage as investment leverage, you'd want to make the decision as if you were a landlord and were renting the house to yourself. The easiest method there is to look at rental "income" per month and compare to the total value of the house. At the very least the monthly rent you'd have to pay elsewhere should be greater than 0.5% (1-2% is much better) of the total value of the house to justify owning it.