Need advice on "moving up"

[keepinthefaith]

Background: DH and I bought a townhouse in October 2006. Price was 138k. We put 20% down, so the loan was about 111k. We've been payingthe minimum most of the time because we had other financial priorities, but started paying an extra $100/month about 6 months ago. Current balance is $103,671.

We've decided that next year we want to "move up" to a bigger house, which will probably be valued around $250k. So now we're trying to determine the best way to build up the 20% down payment between equity and savings. Right now, we have about $1000 per month that we can allocate between our ING account dedicated to down payment savings (1% interest: yuck) or paying extra to our mortgage. Our mortgage is at 6% (we didn't refinance when the rates were much lower because we knew we wouldn't be in this house long enough to recup the costs). Currently, the plan is to put an extra $200 to the mortgage each month and $800 to ING. At that rate, we can have ING to $15k by the end of the year (already have $6,400 there) and have the mortgage below 100k.

Question: Should we allocate more to the mortgage and less to ING? I do understand that saving on the 6% mortgage is better than making 1% in the savings account, but I also know that it's good to have liquid assets. DH wants to err more towards the savings account because the housing market is so bad and we don't know what we're going to get out of our house next year. My theory is that we're going to get what we're going to get for the house, but the more we pay down the mortgage, the better. I might need numbers to back that theory up, though. Or perhaps I need somebody to tell me that I'm wrong.

DH also has a bonus coming. We'll probalby have $1,500 after taxes and DH invests some. Should that go to mortgage or ING?

Please offer whatever advice you can. Oh, and in case you were going to ask: yes, we are contributing to retirement and have a comfortable EF.

Thanks in advance!

[keepinthefaith]

For clarity: we do plan to sell this house when moving up. That's why I'm debating about paying extra to the mortgage. Renting out our townhouse is not an option. Our association is terrible, which is one of the reasons we are anxious to get out of here.

[Gardening Grandma]

I would not pay additional on a mortgage if I were planning to sell soon (like in a year or two).
I'd put it all into saving for a good down payment. (I am assuming that you are not underwater on the townhouse, otherwise the advice would be different)

[constanz22]

What is the townhouse worth? Will you be able to pay off what you owe without paying extra on the current mortgage?

[DVM gone riding]

just some advice: I would sell the town house BEFORE you are locked into another house even if it means renting for a month or two, OR make sure you can back out of any housing deal if you don't sell the townhouse.

[keepinthefaith]

I would not pay additional on a mortgage if I were planning to sell soon (like in a year or two).

Could you elaborate on the reasoning for this? I'm not questioning it, I'd just like to know more. Thanks!

[keepinthefaith]

What is the townhouse worth? Will you be able to pay off what you owe without paying extra on the current mortgage?

Prices have remained somewhat stable where we are. We have also finished the basement and done some other minor improvements, so we are hoping to get at least the $138 out of it. We plan to list it for $145 but I'm not confident that we'll get that much. A couple years ago when the balance was $107 and we were considering selling, our realtor estimated that we might have gottn $25k out of it after the costs of selling. Either way, we won't have to pay to get out of the house.

[keepinthefaith]

I would sell the town house BEFORE you are locked into another house even if it means renting for a month or two, OR make sure you can back out of any housing deal if you don't sell the townhouse.

Yes, we do plan on being careful. We know of a couple who backed out of purchasing a house only a week before closing, so we know we can't count on a deal going through until it is officially closed. Thanks!

[Gardening Grandma]

Feb 6, 2011 14:34:58 GMT -5 keepinthefaith said:

I would not pay additional on a mortgage if I were planning to sell soon (like in a year or two).

Could you elaborate on the reasoning for this? I'm not questioning it, I'd just like to know more. Thanks!

Well, we do pay extra on our own mortgage, but this is our "forever" (we hope) house. Our goal is to have it paid off in full asap.
If we were planning to sell in the foreseable future, we'd save any extra money so as to be as liquid as possible. As long as we were confident of coming out of the sale in black. Liquidity gives you more options than equity. Both are assets, but equity is something you don't get until you sell. Also, it's possible to get a better rate of return in the short run. That's hard to estimate right now, but I do think it is possible.

And I second the advice about not getting locked into buying anything until the sale is complete; even if it means renting for a while.

[phil5185]

We have also finished the basement and done some other minor improvements,

Hmm - what was the logic? A finished basement adds almost nothing to the appraisal - it is a nice project if you are going to live there for many years to get the use out of it. But if it was a starter townhouse in your plan, it probably didn't make sense to spend money that won't come back to you? I'm a longtime landlord, you usually get about half of your money back on a kitchen upgrade or a bathrm upgrade, but way less on a basement - so I do upgrades only if I will own it for a decade or more.

I agree with the others - I would not lock extra cash into townhouse equity - when you sell you get a check for 'sell price minus loan" - why pay an extra (eg) $10k now, just to get the same $10k refunded when you sell next yr - easier to just put it all into savings and keep the cash liquid and your options open.

We don't like to move twice (way too much junk) so we buy a house before we sell. So keeping cash on hand gives the option to do that if we choose.

[Savoir Faire-Demogague in NJ]

We've decided that next year we want to "move up" to a bigger house,



You've done me wrong, your time is up
You took a sip (just a sip) from the devils cup.
You broke my heart, there's no way back.
Move right outta here baby. Go and pack your bags.
Just who do you think you are?
Stop acting like some kind of star.
Just who do you think you are?
Take it like a man baby if that's what you are.

[chorus]
'Cos I'm moving on up. You're moving on out.
Movin' on up. Nothing can stop me.
Moving on up. You're moving on out.
Time to break free. Nothing can stop me,
Yeah.

They brag a man has walked in space,
but you can't even find my place.
Mmm there ain't nothing (not a thing) you can do
'cos I've had enough of me baby being part of you.


Just who do you think you are?
This time you've gone too far.
Just who do you think you are?
Take it like a man baby if that's what you are.
[chorus]

[Deleted]

"Liquidity gives you more options than equity" Karma to GG!

[keepinthefaith]

Hmm - what was the logic?

We finished the basement about a year after we purchased the house. For us it was a lifestyle choice...we are very social people, but we don't want to spend a ton of money going out so we entertain company a lot. It's always byob or we'll grill out and people will bring their own meat and a side dish. It actually works out rather well for us because we can return all the empty cans for cash and people almost always leave food behind! I'm not arguing that this makes up for the cost of the basement finish, but I'm still happy that we did it and it's gotten a lot of use.

when you sell you get a check for 'sell price minus loan" - why pay an extra (eg) $10k now, just to get the same $10k refunded when you sell next yr

But would it not be more than 10k that we get refunded, since we are paying down the mortgage faster and thus decreasing the 'minus loan' part?

I'm not disagreeing, I am just hoping that someone can explain the numbers for me. I truly want to understand this better.

[keepinthefaith]

liquidity gives you more options than equity

This I can understand. It sounds like you're saying that's enough in itself to justify paying more in interest on my mortgage.

[Deleted]

I think so.

As an example we were in a similar situation 15 years ago (late 1996) when the market was coming out of the 1990 recession. We actually got into a competitive bid situation with our across the street neighbor to buy a house 4 doors up the street (funny and long story). We eventually won because we could go non contingent based on a 10% down payment. I rented the old house to my MIL for 10 months and sold the house the following summer and paid down more of the principle on the new loan.

Had we just paid down on the principle we probably couldn't have bought the "move up" house without selling the old.

The old house would have been ok as a longer term rental but 4 doors away meant we would be driving/walking by at least twice a day. Too close for renter or LL!

[phil5185]

But would it not be more than 10k that we get refunded, since we are paying down the mortgage faster and thus decreasing the 'minus loan' part?

Yes, it would be whatever you prepay - eg, if you prepay $0 you get $0 back, if you prepay $10k you get $10k back, if you prepay $20k you get $20k back. But I got the feeling that you thought that prepaying $20k and getting $20k back is better that $0 and $0? My point - it is the same money, ie $20k in a savings account or $20k in house equity is the same $20k - prepaying the $20k doesn't magnify the effect. Does that help?

[zibazinski]

I'm sorry but I missed what was wrong with the place you are living in right now.

[jeffreymo]

I agree with others and I would not pay extra towards the mortgage. The overall theory is the same basis you used for deciding not to refinance -i.e. if you planned on spending many more years there the interest savings would be beneficial, but since you're not it's better to have that money gaining 1% than tied up in a house you might not be able to sell. I'd also start looking at comps to make sure that your current home is valued = to what you paid in 2006. If your real estate market is like most, you have purchased at the peak and chances are your home is worth less, even with the updates. This leaves you with even further evidence on why you shouldn't put more towards the mortgage - you shouldn't put additional funds towards a depreciating asset.

How much are your neighbor's townhouses selling for?

[shanendoah]

I'm with the liquidity over equity folks. It gives you more options, and even at 6% interest rate, you're really not "saving" that much extra.
My mortgage is also at 6%, so I did the math on my spreadsheet, for every $200 extra you paytoward your principal, you get about $1 in savings on interest. That equals about $66 dollars in one year (actual number for me, $67.11)
Its just not a big enough ROI for the price you pay for being less liquid. As long as you won't be under water when you sell, put all the money in the savings account.

[keepinthefaith]

bonnap: I completely understand your logic about being more competitive by having the cash on hand. I would assume that would also make us more appealing to the bank by showing that we could save it up.

phil: What I was referring to is the "simple interest" factor that as I pay down the principle faster, less interest will accrue on the lower balance, therefore decreasing the principle even faster and increasing the equity.

zibazinski: The townhouse is only a two-bedroom and we use the second bedroom as the office/guest bedroom. We need (okay, you got me...we want) more space to start a family.

jeffreymo: I understand your logic that we wouldn't see a huge impact of paying down the mortgage in the short-term. I do have a fear in the back of my mind that we'll have a challenge to sell the house because our area is flooded with them. However, I do hope that our finished basement (and well finished, I might add) might be the wow-factor for us, even if it might not add to the monetary value. We are also willing to be patient if necessary. The listing prices for the townhouses near us have varied from upper 120s to mid 140s, based on whether they have additional bedrooms, finished basement or whether they are near the fountain. We are directly along the fountain so we hope that helps, too. I know that the listing price isn't the final price, but we still need to research that.

[keepinthefaith]

shanendoah: That's perfect! Thank you so much for the numbers and making the point that $66 really isn't enough to make up for being less liquid. Great, now I have to tell DH that he was right...

[phil5185]

We plan to list it for $145 but I'm not confident that we'll get that much.

I do have a fear in the back of my mind that we'll have a challenge to sell the house because our area is flooded with them. However, I do hope that our finished basement (and well finished, I might add) might be the wow-factor for us, even if it might not add to the monetary value. We are also willing to be patient if necessary. The listing prices for the townhouses near us have varied from upper 120s to mid 140s

Patient? As a longtime landlord (w/ a Realtor license), my experience is that houses stay on the market for a long time because of one issue - price. Sellers ask for the 2006 price in 2011, and then wait 6 months for a buyer - it doesn't work so then they need to accept the 2011 price. When I sell, I sell quickly, get the cash, and put it to work - capture the 6 months of income (about 8% in 2010). It is called the "time value of money".

Great, now I have to tell DH that he was right...

LOL - you can't have everything!

[thyme4change]

Need advice on "moving up"

Try the east side.

[keepinthefaith]

phil: Thanks. That's good advice, and something we will probably consider when the time comes. The more we save in the meantime, the more flexible we can be with the price.

thyme: Thanks for the humor

[keepinthefaith]

Just in case anyone is still reading, I thought I would post this followup question. Now I'm considering talking to DH about listing the house this spring, renting for a year, and then buying/building next year. Here are the pros/cons I have come up with. Any thoughts?

Pros
Pocket $$,$$$ from sale and allow interest to accrue for a year, helping down payment fund even more.
Less dependent on EF
Renting would likely be cheaper than owning (or we could make it so)
More patience, flexibility, less stress when it comes time to buy
Might have to move twice anyway, depending on timing of sale/purchase next year. This would spread it out 12 months apart.
Could begin the process of building a house while renting (alleviating uncertainty if we had started before sale or finding short term homelessness if we waited until after sale)
Win my WIRR race!!!

Cons
Having to move twice (cost, headache, utility change fees)
Might get a better price of sale next year
Specifications we would require (2-car att garage, storage) could get pricey
Possibility of either leaving behind the pool table or needing to move it twice (possibly store while renting, depending on what we rent)
Place must accommodate a dog and 2 cats. If allowed, it adds to the expense of renting.

[Deleted]

Under your list of cons you should add uncertainty of lease term due to building schedule.

And do some preliminary research on the pet acceptance on Craig's list. I don't think it's the issue some folks make it out to be. It will vary from state to state but you're more likely to run into a LL who wants a larger deposit.