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    House debt has to go

    I was very happy when all my debt went away last year. Been enjoying that a lot. But then I realized that not all the debt is gone and now the mortgage is starting to haunt my retirement plans. A lot. I have three retirement scenarios that I use for determining when I could retire:

    1. Base case = $1000 / mo rent for apartment (includes utilities, no repair costs) $12,000 / year
    2. Frugal = $1750 / mo mortgage or rent (includes utilities, no repairs) $21,000 / year
    3. Status quo = $3650 / mo mortgage (includes utilities, $3,000 / year repairs) $40,800 / year
    4. Desired = no mortgage or rent, $1,350 / mo for real estate taxes, utilities, repairs $16,200 / year

    Looking at all these, even #4 kindof sucks at $16,200 / year.

    So, how can I reduce my housing costs in retirement? Although we are willing to accept bare minimum and live in an apartment, that is a last resort. I would like to formulate a plan to accomplish something that I never thought possible: pay off a house. Might not be this house, but I would like to own a house free and clear and then dump all that money into retirement savings.

    Here's the facts:

    1. Current house is worth $500,000
    2. I owe $440,000
    3. There is a 50% chance I won't be living here next year due to a job change. And all the kids will be off to college. So just me and DW, 2 dogs and 2 cats. I see this as a possible opportunity to downsize and reduce my house debt load quickly.
    4. I am 49. Would like to retire before I am 69, which is my current forecast to achieve my desired income level.

    I need your help with this one. I have to manage my wife's expectations for standard of living, so that is a factor but not a show stopper. She has been awesome over the past year staying engaged with our austerity plan that got us non-house debt free. I am struggling with throwing a lot of money at the house vs. throwing that same amount at retirement. Seems like sacrificing retirement savings to pay off the house would be counterproductive.

    Tell me what info you need to make recommendations.

    Thanks,

    Tom
    Last edited by corn18; 05-25-2015, 04:07 PM.

    #2
    When will you know about the job change?
    Seems like it might make sense to wait it out until you know if you'll be moving to another area.

    Comment


      #3
      Originally posted by scfr View Post
      When will you know about the job change?
      Seems like it might make sense to wait it out until you know if you'll be moving to another area.
      I might know this week, but we would not move until next fall so our oldest can finish HS here.

      Comment


        #4
        Downsizing seems like a great idea, but not to the point where you or your wife would be unhappy. It just makes more sense to wait until you know how your job situation is going to shake out.

        In the meantime, where is the money that you were using to pay down debt now going? Any of those "extra" funds that aren't going to retirement savings could easily go to extra mortgage principal payments, couldn't they?

        FWIW, I'm probably not what anyone would consider a typical homeowner, and I know when it comes to homes I have less conventional views that many of the SA forum members. I've been mortgage free since age 41. There is a level of confidence and security that comes from being completely debt-free that is about more than just numbers. It's really empowering. DH & I have done some market timing when it comes to buying & selling our primary residences (buying low and selling high), feel that a home has an investment component in addition to being a place to live, are determined not to have our primary residence be a disproportionate part of our total net worth, and have even relocated to a lower cost part of the country not because of job but because we chose to. Now, we're contemplating moving to a much higher cost part of the country, but that's a whole other story.

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          #5
          This is one situation where I would think pretty hard about an ARM. Assuming you keep the same mortgage loan a one percent difference between 3.5% fixed and 2.5% ARM is over $350 in interest savings each month. Since your salary is on the higher side I'd recommend double payments with the arm which would pay off in about 11 years. My wife and I follow this plan and it's working so far. My worst case Scenario has a break even at 9 years assuming interest rates increase to their max of 7.5%.

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            #6
            If there is a reasonable opportunity to move due to employment I suggest making a start by decluttering . The criteria would be ...'is this item worth the cost and hassle of moving?' 2nd look at listing in your community to compare SQ, materials, features and realtors in the Million Dollar Club. Buyers seem to expect homes to be presented as 'move-in' ready. What projects are reasonable and cost effective for you to undertake?

            However, what is DW's viewpoint? With DSs ready to leave the nest we chose to buy a townhouse style condo which has worked out far better than we imagined. It's imperative to read the rules, understand restrictions, reserve funds and special assessments which are different for every complex. I'm so glad I didn't buy a smaller house as planned. It's too much work!

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              #7
              Originally posted by scfr View Post
              Downsizing seems like a great idea, but not to the point where you or your wife would be unhappy. It just makes more sense to wait until you know how your job situation is going to shake out.
              Agree.

              Originally posted by scfr View Post
              In the meantime, where is the money that you were using to pay down debt now going? Any of those "extra" funds that aren't going to retirement savings could easily go to extra mortgage principal payments, couldn't they?
              I put all of that into retirement and college savings and they will stay designated for that until I retire or the kids finish college in 2020. All other "funds" are full, so 100% of my savings right now is retirement (401k, IRA's and taxable) and college (I am way behind on this but catching up).

              Originally posted by snafu View Post
              However, what is DW's viewpoint?
              Not sure yet, but based on her past willingness to accept some change for the greater good, I think we can definitely look at all options. I know this next place will not be our forever home, so maybe we should rent. I think owning another house on a mortgage for 7 years with little or no appreciation is the definition of folly. I have spent $225,000 in house payments, taxes and insurance on this house and the mortgage has gone down only $75,000. That's a pretty crappy ROI. But renting does't get me any closer to no house payment in retirement.

              Comment


                #8
                What is the degree of correlation between a future house price and your wife's expectations for standard of living?

                Comment


                  #9
                  Originally posted by JoeP View Post
                  What is the degree of correlation between a future house price and your wife's expectations for standard of living?
                  That is the question. I think she will be on board with whatever we need to do to get on track, but within limits. She won't live in a one bedroom apartment. She won't live in a bad neighborhood. Other than that, I think all options are open. I think downsizing is a good thing as she hates cleaning 4,000 sq ft. ANd that seems to have the biggest impact on getting mortgage free the fastest.

                  Ran some numbers and found it interesting:

                  1. Raid all savings accounts (except 401k and IRA)
                  2. Stop feeding those accounts monthly
                  3. Put it all towards house fund
                  4. Sell current house and pocket $20,000 after closing costs on both ends

                  I could have $270,000 available by the end of next year to buy another house. Of course that means I have no EF, college money or anything else until I build it back up. At least I now know it's possible. Just need to find that DisneySteve something in the middle plan.
                  Last edited by corn18; 05-26-2015, 06:49 AM.

                  Comment


                    #10
                    Originally posted by tomhole View Post
                    That is the question. I think she will be on board with whatever we need to do to get on track, but within limits. She won't live in a one bedroom apartment. She won't live in a bad neighborhood. Other than that, I think all options are open. I think downsizing is a good thing as she hates cleaning 4,000 sq ft. ANd that seems to have the biggest impact on getting mortgage free the fastest.

                    Ran some numbers and found it interesting:

                    1. Raid all savings accounts (except 401k and IRA)
                    2. Stop feeding those accounts monthly
                    3. Put it all towards house fund
                    4. Sell current house and pocket $20,000 after closing costs on both ends

                    I could have $270,000 available by the end of next year to buy another house. Of course that means I have no EF, college money or anything else until I build it back up. At least I now know it's possible. Just need to find that DisneySteve something in the middle plan.
                    I asked the question because I wanted to get a better understanding of your wife's needs. I don't know too much about the real estate market in your current area, but is your house considered average or more high-end? Staying at the same "house level" in your new area means you'll be paying whatever the prices will be, which could be good or bad depending upon that market. But if you are high-end now, and are both ok relaxing that a bit, you could get away with spending less (provided the other requirements are met).

                    Personally, I would feel very uncomfortable raiding any accounts, especially with what transpired in your life the past month. Those accounts were set up for specific purposes, and pulling out money from them now for a house seems risky. May I suggest executing option #2, and then funneling that money into a safe place for the next year's downpayment?

                    Comment


                      #11
                      Originally posted by JoeP View Post
                      I asked the question because I wanted to get a better understanding of your wife's needs. I don't know too much about the real estate market in your current area, but is your house considered average or more high-end? Staying at the same "house level" in your new area means you'll be paying whatever the prices will be, which could be good or bad depending upon that market. But if you are high-end now, and are both ok relaxing that a bit, you could get away with spending less (provided the other requirements are met).
                      Current house is higher end. But mostly because of the size, not because of anything fancy inside (it's a spec house). I think downsizing and maybe even a townhouse/condo for the next few years would be fine with her. We could get a real nice one around here for $300,000, which is $200,000 less than this house cost. The possible new location is similar COL and housing prices.

                      Originally posted by JoeP View Post
                      Personally, I would feel very uncomfortable raiding any accounts, especially with what transpired in your life the past month. Those accounts were set up for specific purposes, and pulling out money from them now for a house seems risky. May I suggest executing option #2, and then funneling that money into a safe place for the next year's downpayment?
                      That's the middle I will probably opt for. If I change nothing, all that money will still be there. It's not like I'm spending it on anything unless I need the EF or a new car for some reason. And it's all going into taxable accounts anyway, so I will always have access to it.

                      Rudder amidships, steady as she goes.

                      Comment


                        #12
                        It sounds like downsizing is sensible in your case. Remember there is tons of middle ground, too. Beyond that, seek out value. We have a large-ish house, bought new, in high end neighborhood. Everyone always thinks we paid WAY more for our house than we did. Whenever home shopping we always seem to find some hidden gem that the herd seems to miss. It's not anything we have put much thought or effort to, but I think we tend to be more "outside the box" thinkers. The more open you are to possibilities, the more you will find.

                        OF course, if you can move somewhere to lower property taxes (lower tax rates) could help also. Is just something to keep in mind to keep down costs.

                        As to downsizing, what kind of downsize will give you most value? Where I live land is very expensive and so condos are appealing. You just ditch the land and you save hundreds of thousands of dollars. I would think in many other areas that condos would not be as much of a value. But maybe there is some tipping point where a huge premium is paid, for some other factors. I also mentioned above to remember there is lots of middle ground. We would like to probably downsize to a condo when our kids are grown but when I say "downsize" I may be thinking a 2000 square foot 4-bedroom condo so that we can decrease our housing costs by $300,000. Many other people seem to think I am talking about a 1-bedroom apartment. There's just a general negative or extreme perception. Honestly all we want to do it reduce our home by two bedrooms when our two kids are grown. That doesn't change our standard of living *at all*. It's just purging two rooms we will no longer be using.

                        Oh, the other thing that strikes me is that we would also be able to find a much better value when no longer considering school districts and having kids in public school.

                        Comment


                          #13
                          Depends on your wife. I would start decluttering and talking about what you two want to live in after the kids are gone. What is your "minimum"? Also where are you potentially relocating too? I would also let that influence my decision. But for the most part I'd stash cash so you can easily buy your way out of selling your house (I'm doing that) and you can have flexibility to buy without selling if you wanted to. I'm not saying do that but something to consider.
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