Profile picture for iam_intrigued

Am I compromising my retirement or enhancing my life?

I'm 50 and have lived in my current house for 16 years.  It will be paid off in another 7 years or so.  I would like to move to a nicer home but that would mean taking out a new 30-year mortgage and renting out my existing home.  I do have equity in this house and qualify for both mortgages but my funds would be tighter.  I'm wondering if this is a sound investment or should I suck it up and be content that I have a roof over my head?  I live in a split level and would be moving to a rambler with laundry on the same floor. I think this would be beneficial for me as I age.  It's also on a pond with walking trails which would be nice for walking with my dogs.  Is the grass always greener?  Here are the numbers.

1st mortgage - $50k left - $1050 mo
Home equity - $16K - $175 mo
Current value (sadly) - $150-160 (used to be $230)

New home - $245K
Net income - $4600 monthly

I also have $125K in 401(k) & IRAs and no other bills and a few thousand in savings.

Will I be house poor and regret this upgrade or be the cat who ate the canary? I live comfortably now and wonder if I'll regret having to cut back or will just enjoy the new living space and it will be worth some sacrifice. I would also like to see some tax benefits which right now are few. Any advice would be appreciated.  I'm too close to the situation - is it a smart move or just plain crazy?
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January 14 2011 - Farmington
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Answers (20)

Your question is very interesting.  If you could find a great foreclosure to buy you might be  able to get a great buy and find the home of your wishes at a very reduced price.  You might even be able to look at a 15 year fixed rate and still be affordable.  otherwise I think you should stay in your current property.   
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January 20 2011
If all you have is $125,000 in a 401K and the equity in your home, then I think it's going to be a tough retirement. I'd say that it would be a crazy move.
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January 18 2011
Profile picture for the_country_hick
If the floor plan of your house is not what you want you may be able to change it to better fit your wants and needs. It all depends on what is a structural wall that needs to stay in place compared to a wall that is just there.
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January 16 2011
Profile picture for the_country_hick
As far as house prices being down that is half true. It is true that house prices are down from the 2006 highs that likely will never (inflation adjusted) be repeated. However, it is not true compared to 1997 prices with inflation added at about 35% that house prices are low now (most places). House prices went past both historic norms and the ability of the average worker at average wages to afford the average house. It will take time for that to come into balance once more.

Below the federal reserve is saying that house prices should fall another 20% or so nationally.
The Fallacy of a Pain-Free Path to a Healthy Housing Market - Economic Letter, December 2010 - FRB Dallas

This show how house prices were inflation adjusted for a century. The small bump up at the end is what the $8,000 buyers credit did. It went down almost as soon as the credit went away. Expect a further price decline.
Case Shiller National Home Price Index, Inflation Adjusted Chart

Compare the chart above to this one.
Lifecycle of a bubble

Unless and until house prices have stopped going down for at least 1 year do not believe that the prices will not go lower.
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January 16 2011
iam_intrigued~ Your thank you is appreciated by all of us. You are welcome.

We respond to a lot of questions. Rarely does someone express their appreciation as well as you have. Thank you.

Happy funding, Rudi
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January 16 2011
Profile picture for wetdawgs
Glad to hear you are thinking about the consequences seriously.

"better income tax write off with new mortgage".   Income tax write off for mortgage interest is a bit exagerated.  In order to save more money on your taxes, you have to spend more money.  It isn't a direct write off, it is a deduction from your income.  If you are in the 30% tax bracket (and itemize deductions) and pay $10,000 interest you end up reducing your taxes by $3000 but that $7000 was stil spent.
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January 16 2011
Profile picture for iam_intrigued
Thank you so much for all of your advice.  I had been fixing up my existing home but realized the floor plan does not allow for some of the features I'd like.  I was wondering if purchasing a new home & renting mine out was too much like a house of cards. Based on your responses, it does seem like it would be more stressful to do that than to continue to work on my existing home even though it won't be perfect.

I don't have the insight to know what life will be like when I'm 60 or 70 to see the consequences of a move.  I just hear that there's a better income tax write off for having a new mortgage, and home prices are down so that you'd gain more equity in a more expensive home as prices go back up.

I needed a reality check and have listened to your advice. I sometimes wonder if we've just gotten so spoiled in what we want or we're just lucky to have it so good.  Based on your feedback, I'm going to work on paying off this house & building up my savings for now.  I appreciate your insight and advice on this major decision.  Thanks for taking the time to respond.
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January 16 2011
Profile picture for SoCal_Engr
Don't discount the additional hassle of being a landlord. It may all work on paper, but there are costs other than monetary with being a landlord.

Personally, I'm thankful my folks entered retirement with no bills other than the monthly living expenses. It made (makes) their life much more enjoyable and stress free.
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January 14 2011
My thought on your situation is stay put, and say amen. There are inexpensive improvements you can make to your home, should you encounter problems in the future with mobility in your split-level.

Happy funding, Rudi
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January 14 2011
Profile picture for sunnyview
Great website and advice sleepyz! I had not seen that site before, but I love it.
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January 14 2011
Profile picture for sleepyz
I think the real issue you must solve first is coming up with a retirement plan.  Once you have that in place, it will be easy for you to see if purchasing a new home would work or not.  In other words, don't be fooled by the monthly costs, but look at how the overall costs would fit into your plan (i.e: being debt free in 7 years or 15 to 30 years).  I would suggest doing some research at some financial sites, such as bogleheads.org.  Alternatively, you might consult a fee-based financial planner for help coming up with a retirement plan.  Based on the info you provided, it doesn't sound like it would be a wise move to buy the new house. 
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January 14 2011
Profile picture for sunnyview
If I chose quality of life, I would be more content moving into the Ritz Carlton with a full time butler and five star food, but if my financial security is compromised, I won't  be enjoying my new lifestyle very long.

Most agents seem to feel that you should choose lifestyle over security, but I think the finances should come first. It is hard to enjoy your lifestyle when you are feeling squeezed financially every month. That kind of stress makes it hard.
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January 14 2011
Profile picture for the_country_hick
Joanne, "So, it then becomes a quality of life question."

Exactly what was shown below. The quality of life in retirement is what is important. Spending extra money now only serves to take away from what can happen during retirement.
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January 14 2011
There are several good posts here regarding the financial picture, and it appears this move is doable if you are willing to have a little less discretionary income to spend.    

So, it then becomes a quality of life question.   Aging in place is always easier in a single level home opposed to one with stairs (for you and your dogs).  It is not to be distilled down to relocating a washer and dryer - there is much more to it than that.   Making the move sooner rather than later makes good sense in that it is better to be firmly established in your retirement home when you reach the point where you physically require a one story home as opposed to shopping for one when you may have poor or declining health in the future.  It is  not merely a matter of remodeling the laundry area to make it more accessible.

You mentioned enjoying nearby trails to walk the dogs on near the new home.  Again, a quality of life decisions.  It is so easy to minimize the significance of those small joys in life, but they are important.  

It sounds like you are ready for the move, there is a home better suited to your lifestyle now and physical needs in the future, and the financial piece is doable given you already know what your retirement income will be.   From what you have written, it sounds to me like you will be more content making the move now as opposed to waiting 7 years or indefinitely.   
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January 14 2011
Profile picture for wetdawgs

You are likely to be seriously compromising your retirement.

If you are deciding to move to your dream home now with significantly higher payments, make sure that it is a home that will cover all life stages as you mature.  Are the doors wide enough for wheel chairs & walkers?  Is there total living on one floor with no steps (and easy access from outside with ideally no steps).

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January 14 2011
Profile picture for the_country_hick
You have 7 years to pay off your mortgage. Amortization now works so you pay off much more principle than interest. A new mortgage would have you paying mostly interest.

Could you rent out your current house at a 30% premium above your mortgage, tax, and insurance? That is about what it needs to be to make renting worthwhile. Do you know that you could rent out your house? What is the vacancy rate? What about a tenant doing damage to the house you have to pay for? Do you want to be woken up at 2 in the morning hearing the furnace died and they want it fixed now?

You are looking at a house that will cost roughly $100k more than the one you are in now. You have $125k in retirement funds. The extra housing costs and interest costs would essentially wipe out your retirement funds. Not a good idea now.

You have no idea what the future will bring. You might lose your job. You might become unable to work. You might live past 100 and be in great shape still working hard every day. Why take this kind of risk when it is not needed?

My point above is simple. Do not think about how in 10 or 20 years this house may not work for you. Think about how it works now. A relative had a similar house problem. The laundry was downstairs. Finally in her 90's some remodeling was done to put them on the first floor. Still in her 90's she is finally considering going to a senior rental in a year or 2.

If it was me I would pay down my existing mortgage as fast as possible. Once it is paid off THEN is the time to consider a move. Maybe you can pay it off faster than 7 years with accelerated payments. There will always be a nice house for sale. There will always be a nice lot you could build a house on for sale.

Right now there is no reason for you to look elsewhere. When the time comes you can make that decision. But as long as you are building equity in the house and it works for you I see no reason to trade up. When you realize that this is becoming a problem (and no solution exists in your house) that is the time to trade houses.

Look at the site below.
Minnesota

Minnesota home sales are down as homeowners wait for spring time sales to pop back, while bankers slash housing prices on foreclosures to get them off the books. The Minnesota market, which has endured so much and appeared as though it may have been recovering, is in a second downturn.

Minneapolis average home prices are forecast to decline 4.8% in 2011, while St. Paul will take a larger hit forecast at 5.7% for the year.

I would rather lose 5% on a $100k cheaper house than a more expensive one.
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January 14 2011
Profile picture for sunnyview
You may be compromising your retirement. I hate to say that, but I think it's true. If you retire and do not have your house paid off, it will be harder to deal with that when you are on a fixed income in retirement. I think you ned to make a plan. If you want a different house then you might consider accelerating the payoff of your first house so that it is free and clear. That way you can sell it or rent it and use the proceeds to help support another house that might suit you better.

It might also be helpful to talk to a mortgage broker to see if you could refinance your house to lower your payment so that renting it out made better financial sense. Check on rents in your area. If you can run a positive, maybe taking out a 15 loan on your current house and renting it out might pencil out so that you could use the overage to support a 30 year mortgage on your primary house. That might only extend your payment timetable by about 7 years, but since you are 50 it would be totally paid off before you retired and you would be half way through your 30 year mortgage.

I know rates are low, but if you make the wrong choice yo may have a crappy retirement. You might also consider making upgrades to your current house to make it more retirement friendly like putting a stack washer/dryer in an upstairs closet. Often it is not too expensive and can make things a lot easier.
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January 14 2011

Some of the questions ask can ultimately be answered only by you.  As a professional with a fiduciary responsibility to look out for your best interest, I would only hope to educated and inform you of your options and help you quantify the risks and rewards of this course of action.   Once you have an accurate view of it from all sides, the right answer will usually bubble to the surface and be confirmed by your own gut feelings.  I can suggest that many of my clients are doing exactly what you propose and feeling like the proverbial "Cat Who Ate the Canary" because they have someone else making the mortgage payment on the vacated home yet they are not forced to realize the deep discount by selling now.  They also enjoy a deep discount on the new home and now have both homes in a portfolio poised to enjoy the coming real estate recovery (we hope).  No calculate the tax benefits and it is a win, win, win.  You run the risk of having a tenant fail to pay rent, destroy your house, or end up bringing some kind of lawsuit against you at some point.  There are ways to protect yourself from these risks as well with proper insurance, cash reserves, and well formed lease agreements.

 

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January 14 2011
Using the numbers you gave above, if you sell at $150k you should net around $75k after paying off the 2 loans and paying selling expenses.

If you apply that $75k against the $245k home it means you'd have a new loan of $170k.  I plugged that into a mortgage calculator and if you take out a new 15 year loan which is at 4% right now you would have a payment of $1,258/mo.  Now that doesn't include taxes or insurance which your other payments probably did but it isn't that much more and it is a 15 year loan.

So looking at it that way I don't think it would be a terrible move.

That said, you should be asking yourself whether you really envision yourself in this new place for a long time and if it really will enhance your quality of life.  Also, how secure are you in your current job.  Having your home paid off in 7 years vs. a new 15 year loan is certainly a difference.

Let me know if I can assist in any other way as I live in Rosemount and work in Apple Valley and am very familiar with clients in Farmington.
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January 14 2011
Profile picture for shasta_steve
If it were me I would give it a pass.  My biggest goal in life is to not have a house payment when I retire. I have known lots of people who buy late and most all of them regret it.  I know I bought my house last year, on a thirty year mortgage, at the age of 42.  I already pay more than I have to and will be able to get it paid off in about 10 years once my child support ends next year. 

I guess a lot depends on what you want to do in life and what you value.  For me I want to be able to travel and hopefully have enough money to do so.  If I were giving you advice I would pay off your current house as soon as possible, put as much money into your 401k as you can and set yourself up.  The only way I would even consider buying another house would be if I was sure I could pay it off and fully fund my retirement before I wanted to retire.   Its just me but I like to eliminate as much stress in my life as possible.  Good luck whatever you decide to do. 
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January 14 2011
 
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