MM Hypothetical Dilemma

cbee817 · June 2015

This is a little long:

DH and I are trying to figure out how to plan the next 4 years or so with the girls. Currently, we live in a 4 bedroom (2 upstairs, 2 downstairs- we're all upstairs and the girls are sharing a large bedroom. The bottom 2 are an office and guest room/sewing space which we could technically let them use when they get older, but we don't feel comfortable having them downstairs when they're little), 2 full bath (1 up, 1 down) house. It's older- built in 1926, bungalow style, about 1600 sq ft. We've done a ton of work to it and it's in really good shape. Houses in our current neighborhood move quick- most are sold within the first week of being listed and I think ours would get multiple offers if we price it right.

DH's new district/job is 25 minutes away with about 15 minutes of that on the highway. I'm about 17 minutes from my work and it's all city streets. The girls' elementary school is great- rated really well, in a nice neighborhood. Their middle school and high school are fine, but don't even make the top 20 in our area, but either is the middle/high school I went to and I did just fine.

I started looking online at some homes in 2 districts (one very close to my work- #7 in the area and the other in DH's district - #2 in the area). Houses are 2500-3000 sq ft and at least $300K but would need significant updates. Most are all carpeted (some without hardwood floors underneath), kitchens/baths need gutting, etc. The homes close to my work are part of an older neighborhood (homes built in the 1920-30's) so who knows what we could be getting into (basement problems, sewer lines, roof, electrical, etc)

Right now, we owe $97,000 on our mortgage and it will be paid off in 2025 (we refinanced in 2010 to a 15 year mortgage at 4%) if we stay here. Based on all of the renovations that seem to be consistent with the houses in the other school districts, is it a good idea to pay off this house fast, have no mortgage, buy a new house, and live in the old one while we work on the new house? I figured if we add $1500/month to the principal (which would mean DH and I would not be getting new cars until DD#2 is out of day care- mine is 2003, DH's is 2006), we can knock it out by February 2019. DD#1 would be in 4th grade, DD#2 would be in 2nd grade and DD#1 would be leaving her elementary school that June (only goes up to 4th grade due to consolidation/redistricting for the 2016-2017 school year). If we buy a house in spring 2019, DH can work on it the bulk of the summer (he's a teacher) and put our house up for sale when we're closer to being able to move into the other house. We have significant savings plus a $30K CD that just sits there and could be used for a DP (10% or so) initially for the new house. Once we get the $ from our current house (I'm thinking $200K), we could add more to the principal, refinance, lump sum to drop PMI, whatever.

Any thoughts? Other ideas? Trying to figure out some options without disrupting the girls' lives too much and leaving us house poor.

short+sassy · June 2015

At that point in time, it sounds like your current house would be fine for your family. The two oldest girls would be 7ish/9ish, which seems old enough to me to have bedrooms on a different floor from you all. Or the middle one could still stay with her younger sister in the other upstairs bedroom, if 7 still feels too young for you.

But now I'll go to your hypothetical situation. Your current plan sounds good, though I'd be a little concerned about the older cars. What if one (or both) of them breakdown and the repair is more than the car is worth? You all might end up having to replace a car and/or face large repair bills.

Also, you are looking at the housing prices, availability, demand as to what it is at this point in time. It could be a very different picture 3-4 years from now. Not necessarily worse, but different.

I'm not making any recommendations one way or the other, but here are some other options to mull over:

--You could buy another house sooner before you sell your current house (with the mortgage still on it). Fix up the new house, move in, and sell your current house. Of course, the bad side is you would need to carry two mortgage payments for 2-3 months and your debt to income would need to be in good enough shape for a bank to allow that. Ooohhh...just thought of another downer. The bank might require a 20% down payment for a second home loan.

--This would require a bit more disruption than you might want, but you could find a house to buy. Buy it with a contingency of selling yours. Sell yours. Than either live in the house while it is being fixed up or move into a month-to-month rental house . You could get a construction loan included with the house purchase and that might allow you to fix up the new house in a fast time frame.

With your current plan, you might have to wait 6-12 months after the purchase to refinance and drop PMI, even if you do pay a lot of the principal down. I'm not totally sure about that for an owner occupied home purchase, but non-owner occupied home purchases definitely need 6-12 months of "seasoning" before they can be refinanced. Plus, refinancing does come with fees and costs.

simplyelise · June 2015

Is there any kind of middle ground in your two prospective move locations? Any 2500 sq ft homes that need updating? or $300,000 homes that don't need updating? By "need significantupdates" do you mean to be liveable for a couple years or to be useable at all?

Have you guys ever done a home renovation while living in the home? Growing up, my parents were frequently redoing something, so we'd be down to 1 bathroom or without a true kitchen or something for a couple months. It worked just fine for us, but for some families, especially if both parents are working long hours and kids are precocious, it wouldn't work.

My personal inclination would be to save for the new home and not worry about paying the current mortgage down overly much. You already have a ton of equity in the home, so it's either pay it now on this house or pay it when you buy the other. Personally, even with only one mortgage, I wouldn't want two homes - it's still two homes worth of liability. If you end up in a home that's 3000 sq ft with 4 people, you should have plenty of room to make home improvements as you go without crazy disruption (assuming the gutting/improvements are for updating and making more to current standards and your tastes, not just making it useable).

I definitely wouldn't love the idea of buying a house, selling a house, and then refinancing the first house. That's too many closing cost opportunities for me!

hoffse · June 2015

Yeah for me, the biggest issue that jumps out is that you are projecting out 4-5 years from now, and who knows what the market will look like then.

I hate to say it, but sometimes it's best to move while a neighborhood is hot, even if it's not your ideal time. Some good friends of ours just did this - they bought a little 3/2 teeny tiny bungalow about 5 years ago. They paid $240K for it. The neighborhood got hot, and they sold it last fall for nearly $300K. They weren't exactly itching to move, but they decided to cash in on the bubble... and really, that is a massive increase for 5 years, so they played it pretty well. They bought a much bigger house that needs work, and they have a 15 month old. They've just decided to take it one project at a time.

I wouldn't pay down the mortgage super fast, TBH. 4% is a cheap loan. I would be inclined to buy with a selling contingency written in and then take it from there regarding the house projects. If the hosues are really that big, it sounds like they are probably 80's and newer, is that right? If so, would they be livable (if dated) so that you could worry about one project at a time?

cbee817 · July 2015

Im going to try to answer all of the questions at once: Our cars are pretty babied- mine is a 2003 Honda Civic with only 65,000 miles on it. DH's only has 71,000 and is our main family car- 2006 Subaru Outback. We follow the maintenance plans with the dealerships and they're both up for inspection next month so we'll see if there is anything big to repair.

Our city never had a bubble/burst and I don't think we ever will. Our neighborhood is a little different because we're a first ring suburb out of the city- centrally located, well maintained homes, decent schools, you can walk a lot of places and it's affordable to young couples, first time home buyers. We're in the NE but part of the rust belt- kind of a slow and steady city, no booms to speak of. The houses near my work are all old, big Tudors, Dutch colonials, and Spanish style homes from the 1920's and 1930's. Every kitchen and bathroom I've seen are from the 1970's but they have great hardwood floors, trim, detail throughout (DH and I both love older homes but know how much work they can bring). The houses in DH's new district are from the 1980's with new builds in that area in the $450K+ range. The older ones are outdated but I can't move into a house without hardwood floors throughout so that would at least need to happen before we moved in. We did a lot of renovation prior to the girls being born- I was 20 weeks pregnant with DD#1 when we gutted our kitchen and didn't have access to it for 8 weeks. I know we can't do that with the girls- DH and I both work full time and I food prep a lot for the week for all of us. Bathrooms can totally wait- we can live with just 1 at a time for a bit.

Obviously lots to think about- our home right now is fine, but I feel like 1600 sq ft for 4 people is going to get tight as the girls get older especially if they stay at home for college. I'm hesitant to move now because we still have DD#2's day care payment for 2 years- that will average at least $900/month. I would like to wait until she's in school before moving into a house with double the mortgage and taxes.

brij2006 · July 2015

If it were me personally, I would stay in your current home and still put the extra money toward the principal to get it paid off. Without having a timelline of moving. That way, if things change and that neighborhood or school district changes, then you have a lot more options. But with a paid for home, it also gives you even more cash flow to be able to buy and renovate something else.

Or maybe you will get the current home paid off and enjoy not having a mortgage so much, that you will do some renovations there to make it more suitable for your needs.

KAdams767 · July 2015

For me, this depends more on your actual income and expenses than the current situation with your house and savings. If you're looking at double the mortgage and taxes, even after selling your current place and putting down a large DP on the new place, it totally depends on your cash flow. That's a huge increase, IMO.

As a general rule though, I am absolutely not in favor of paying off a house early that you don't intend to stay living in. I'd much rather save that extra money every month and then it's yours at your disposal when the time comes to move or do renovations, whatever. Your mortgage is so low, unless you were worried about not covering the payoff when you sell, which it sounds like you aren't, I wouldn't bother paying it early. But I much prefer having my money to use as I choose when the time comes rather than tying it up into pre-paying a mortgage.

abrewer5 · July 2015

If you cannot live in your house as your kids age and you want to relocate, I would consider starting to look now and if you find a house you like use the contingency for selling your home. Like others have mentioned the market can change, and I've heard that interest rates on mortgages are expected to start increasing in the next few years. I would start putting the extra $1500 towards a down payment versus putting towards your current mortgage.

If it were me I would want to start looking before the size of my home became a problem for my family. Another thing to consider is whether or not your kids will be in the same school district, it can be difficult on kids to move schools, so you may want to consider that in your timeline. I know you mentioned above that DD 1 will be going to middle school at the same time as moving if you go with your current plan that is a big change for any kid (new school) and on top of that she might not be with any of her friends. Good luck on your decision!

cbee817 · July 2015

@KAdams767 - Our expenses will change significantly in the next 2 years. Right now, 17% of our take home income goes to the mortgage and 20% goes to day care (based on 2 kids going full time). DD#1 starts school this September and DD#2 starts school in September 2017, so in 2 years, we can easily afford 2 houses in our neighborhood or 1 in the new neighborhood (either the older one near my work or the 1980's one near DH's work). We purchased our current home in 2007- since then, my income has doubled and DH is now in a new school district where his income will double in 10 years based on the current step salaries in the teacher's contract. We have no other debt- SL are done, cars are paid in full although we would like newer cars in the next 3-5 years (nothing fancy- just newer). We have 10 months of expenses saved (which includes full time day care for 2 kids- again DD#1 starts kindergarten in September), we both have pensions (DH's is huge- he's a state employee and the teacher's union has a massive, stable pension plan), I have a 401K that is more than on track, we have 2 Roth IRA accounts that are fully funded each year, DH has a small 403b, and the girls have 529 plans and savings accounts. We also have a vacation fund with about $8K in it with our big trip planned for maybe February break in 2017 (Disney world).

@brij2006- the house is not applicable for remodels or additions. Our backyard is so tiny (the neighborhoods are city like- very close to each other with driveways in between) and the structure of the house does not facilitate building up because the roof lines are so extreme (bungalow style). The only option we really have is to blow out the walls between the 2 downstairs bedrooms (both are about 12X13) to make a large master for me and DH and let the girls have separate rooms upstairs with their own bathroom. That has us losing a bedroom, office and the basement is not viable to move these spaces- it's an old, cold, low ceiling cement basement with all of the mechanics (HWT, furnace) in the center, and while it's very dry, it makes no sense to finish it. Our kitchen is also not eat in and we have a formal dining room where we eat. You'll soon see with toddlers/pre-k/kids, an eat in kitchen is clutch- you can watch them while you're cooking, they can have spaces to draw, do homework without being in a different room. My girls don't even have that many toys and we keep the house very organized/clutter free but I just picture them as 2 adults (I was my adult size when I was 12) and I can't see how we can all fit together comfortably for the next 13- 19 years (and that's hoping DD#2 will be out of the house at 22).

brij2006 · July 2015

It sounds like, no matter what, you don't want to stay in your current home. Then I would put it on the market and look into moving now, before DD1 starts elementary school.

The only thing would be whether or not the price of a home in the other neighborhood is doable on your budget. While still being able to save up for newer vehicles, investments, etc. Going from a $100k to $300k mortgage is a significant difference.

KAdams767 · July 2015

cbee817 said:

@KAdams767 - Our expenses will change significantly in the next 2 years. Right now, 17% of our take home income goes to the mortgage

Does this mean that the mortgage on the new house would be roughly 34% of your take home, then?

cbee817 · July 2015

@KAdams767 - Our current mortgage is 15 year for $128K (we're at $97K now) so the payments are more than they technically need to be and it includes our taxes and insurance (escrow account is about $400/month). That 34% figure would also include $0 DP- which we plan to put 30% down since we should be getting about $100K for our house if we sell (if we make no changes to paying it off early). So if the new house is $300K, we put $100K down, mortgage $200K at 30 years. The taxes in the new districts are also more than double - $8-$10K a year. I haven't looked at the specifics yet of what term mortgage we could go with, but in 2 years, the house in a different district is much more affordable than today given that both girls will be out of day care and we'll only be paying for after school programs ($20,000/year vs $5,000/year for 2 kids).

@abrewer5 - I fully understand the concern in moving the girls out of their school district. I was at 4 different elementary schools by the time I started 4th grade so I'm well aware of how terrible it can make a kid feel. This would be one move- I'm sure it will be a big deal to them, but at 9 and 7 (or maybe best case scenario, 7 and 5), they'll probably be so excited for their own bedroom, they'll work it out quickly. DD#1 would only be starting middle school because of the way our school district is structured- typically, 5th graders are still in elementary here but our district has had to consolidate/restructure due to enrollment declining. The districts we're looking at has elementary school at K-5 with positive enrollment numbers for the last 20-30 years so she should be in the same school/bus/after school program as her sister for 1 year (at the minimum) as they transition.

cbee817 · July 2015

Quick update - DH's car completely died on Sunday (of course). Power steering, brakes, battery, and exhaust.. it was like it had a core meltdown date or something. We ended up buying a 2015 subaru forester with 0.9% financing for 48 months, a decent trade in amount, and $1,500 off the online price.

We're moving forward with some exterior work to our house (re-landscape from the sewer line repair, trex on the porch floor, new railings, and reside the front around the door) and are going to check out a few open houses this summer to get an idea of neighborhoods (especially near DH's new work because we aren't as familiar with that area as the neighborhoods near my work).

The plan is to move once DD#2 is out of day care in the summer 2017- DD#1 will be heading to 2nd grade, DD#2 approaching kindergarten and we'll only have after school payments (should be about $5,000/year for 2 kids). Our current mortgage will be down to $81,000 (which means we can probably clear $100,000 after realtor's commission), DH will have 2 years in with his new school district, and we should be able to save about $2,000/month starting this September on top of our 10 months of expenses in savings/CD that we already have. The car will be about 50% paid off at this point but I'm sure I'll need one by then too. I get my inspection on Friday so we'll see how it goes.

So that's the plan for now- we're staying put and also starting to go through rooms and get rid of more things. DD#1 already has her room color picked out and seems excited- hopefully they'll still be on board when the time is right. DD#2 won't really be too affected- the day care we go to is in the city and since we're in the first ring suburb, the vast majority of the kids do not live in our village. (For example, DD#1 only has 1 kid from day care that will be at her elementary school).

short+sassy · July 2015

Doh! I hope I my above post didn't jinx you on the car! Sorry to hear about that, but at least it is a shorter loan than the typical 60 month and the interest rate is low.

Sounds like a good plan for getting into a bigger house sooner, but without putting on too much financial strain.

cbee817 · July 2015

@short+sassy - I felt like such an idiot for saying that our cars should be fine- should have known better! It's a good time to buy- they're desperate to get rid of the 2015 models as the 2016 ones start rolling in... I was tempted to get myself one too! DH will only be paying like $400 in interest over the 4 years of the loan. I'm usually someone that adds to the principal to get rid of the loan in like 2 years, but with 0.9%, we decided to start monthly withdrawls for the girls' 529 plans instead- the $350/month extra we would have put on the car will do much better in their plans (currently getting 10.5% return on those).

hoffse · July 2015

cbee817 said:

@short+sassy - I felt like such an idiot for saying that our cars should be fine- should have known better! It's a good time to buy- they're desperate to get rid of the 2015 models as the 2016 ones start rolling in... I was tempted to get myself one too! DH will only be paying like $400 in interest over the 4 years of the loan. I'm usually someone that adds to the principal to get rid of the loan in like 2 years, but with 0.9%, we decided to start monthly withdrawls for the girls' 529 plans instead- the $350/month extra we would have put on the car will do much better in their plans (currently getting 10.5% return on those).

You know I love some good debt leveraging

MM Hypothetical Dilemma

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