Downsize Mortgage Advice

[logicchallenged]

It is only out of desperation I am asking for advice. Looks like some pretty good advice here from everyone. Let me say first off that all I am going to describe is completely my fault. A little background:

Three years ago in 2005, at the height of the housing boom, neighbors on our street were trading up. We bought our home in 2001 for 215K and just four years later they were going for 500K. We had a nice small (small for us) mortgage of 1500 at 5.375. For reasons way to complex to get into here,( lets just say I brooded over the small size of our house, the neighbors I didn't like, etc. etc.), I obsessed over moving up and on and capitalizing on our good equity fortune. My wife was a little hesitant, but with my complete obsession she finally gave in. We ended up buying something that was twice the size of our old house, we thought it a good deal at 569 K when ours sold for 509 K. Our mortgage went to 2300/month. This was a significant chunk increase but with a few raises etc, extra mortgage deductions etc., it looked like a no brainer.

Fast forward to today. My 2300 mortgage (fixed at 5.675%) has turned into 2500 dollars because of increased property taxes. The heating and cooling bill for this 3000 square foot monster has also substantially increased. Lets just say I have had a huge change of heart, delayed buyers remorse, etc. and wish we had never moved. I am a changed person and am now obsessed with saving for college, retirement, etc. and this large house is the last thing that I want. The wife and kids are happy, the schools are good, etc. and my wife says no way to moving again. When we moved in 2005, the kids were actually cheaper. Now they have activities and get allowances and all. Things I never never considered.

Now to some financial background:

Age 41: Annual Salary 130 K with about 7800 K take home after 401 K and health insurance) Wife is stay at home with three kids (9,7, and 6).

Retirement savings at 180 K contributing 10% per year.
No other debt or payments, (cars are payed off ) and little college savings (around 6K). I am with the government and also am blessed with a small but life saving pension plan.

I feel I make a good salary but with commuting, energy, food prices. etc. it seems we are spending every penny. The only place to cut back is the mortgage. My burning obsession is to downsize. Yikes. Market is lousy, the kids would be uprooted, etc. But, the extra money would really be a boon for college savings. Plus I would like to get closer to my job cutting commuting costs. I feel guilty in that I feel I contributed to the housing run up and the whole American delusion of bigger must be better. Now I want to live simply but feel trapped in this large cage of a house in suburbia.

I need a financial makeover and is downsizing the home and mortgage part of the plan or am I still logically challenged? I feel that if we could knock about 600/month off the mortgage then it would be a good move, although very painful. My wife says its crazy. Stay put and don't waste money on realtors, closing, etc. Her quote, and she is absolutely right is " you moved us three years ago, now suck it up and live with it". I want to save every penny I can for the kids and retirement and starting with the house seems to be a good move, although difficult. Or is 600/month not worth it? I am a reformed saver and long for our old mortgage and modest 1900 square foot house. With the kids all in school now, DW hints at working part time etc. She says this money can help with savings. I say yea it would help but 600/month is almost like a 12K/year part time job.


Any thoughts, questions, and advise would be most appreciated. Help!
The housing slump hasn't hit us too bad, but I do know I would never get 569K for our house. I figure about 539 K and any further decreases would be offset by the decreases in whatever we would buy. There are tons on the market. We owe 328 K on the mortgage.

Thanks again,

Logically challenged!

[jIM_Ohio]

Here is how I am thinking about this. You have 9-13 years before child #1 hit college.

Can you do any of the following
1) pay off mortgage sooner
2) sell house and not lose money
3) have wife go back to work once 5 year old starts school. Even 5k-10k per year helps

I see your need as planning for kids education- that is the question you are asking indirectly.

I think your retirement plan is sound
I think your budget (outside of home price) is sound

My initial reaction is do not chase bad money after bad money. Just because things are tight budget wise does not mean you should (or should not) move.

If you can downsize without losing money, do it and that will work.
If you keep house and it holds it's value long term over 10-15 years, you will have a HUGE retirement benefit come your way at the time you need the most capital.
If wife's earnings if she returned to work could do the following:
$3,600/year to a general fund for kids education (in 9 years this would be $53,000)
$24,000/year to pay off mortgage before retirement (in 9 years this would be $355,000)

It's possible you keep all $27,000 (each year) I am suggesting in an investment which grows faster than 5.675%, you will come out way ahead. I am suggesting second income sent around $270,000 into an investment which is centered around kids education and financial independance). If you need a suggestion or two, look at PRPFX or RPSIX as a conservative mutual fund for this purpose. Meaning in 9 years you have a mutual fund with $400,000 in it and a mortgage balance of around $150k. You could cash out mutual fund some to pay off the $150k, and RPSIX would be shooting off 4% dividend payments of close to $10,000 per year which could subsidize some education payments too (and still leave $250,000 in account for emergencies, other kids education 3-7 years later, retirement or other). $10,000 in interest each year is quite a bit, IMO.

The goal I am suggesting is to pay off mortgage around time first kid starts college, then use mortgage payment to allocate to paying a portion of kids education.

Around time youngest starts college you could sell house and retire.

The situation is NOT bad. Yo are correct that you could do better (by downsizing). I think this only makes sense if you do not lose money when selling the house now. The longer you wait (to sell), I think the better off you will do overall (financially) if you cannot sell the house for what you owe.

Do you owe more than the house would sell for?

[logicchallenged]

Thanks for the thoughtful reply

Wow and thanks for that informative reply. From a pure financial sense, no emotion at all, selling the house is the answer as we would not loose money.
However, a house is a place to live and up and moving is a tough thing to do. I am not sure how buying and selling, in this market would work. It could take quite a bit of time and effort. Lots of homes to choose from, but selling our could take some time. In additional to downsizing the mortgage though, we would be looking to reduce our commuting costs also. Just moving 10 miles closer to work (25 versus 36) and being closer to shopping and etc. I figure would save and additional 150 in gas and wear and tear on the cars. Also, after calling the power company, more reasonably sized houses around 2000 square feet would typically save about 100 or more a month in utilities.

Either way, I think the best thing right now is to set tight and to continue to study the options. Maybe I am getting older or wiser or something, but the most important thing to me is time and money (saving it , etc.) and moving would probably provide both. With a wife and three young children involved it does get a little complicated.

Thanks again for your advice. I will continue to look over it and keep this link updated.

[zetta]

The most important thing here is that your wife is not on-board with the idea of downsizing. Unless you can convince her that some of the other benefits (such as a smaller commute) are worth it, you need to find other ways to meet your goals. So the challenge should be, what can we do to come up with an extra $600/mo to fund retirement, college funds, etc.

Also, you've said you paid 569k for the house and now it's worth 539k. By definition you are losing 30k (plus commissions) by selling the house. Just because your loan isn't underwater doesn't mean you aren't losing money.

[tripods68]

I agree with Zetta. It takes a lot more convincing my wife to change her mind. You need to find other ways to cut back instead (cut back on take out meals/vacation etc..) As you said, you're making good money so why ruin it for the rest of them. You can try to convince your wife further, but why strain your marriage because you made a bad decision in the first place. That's the place you don't want to be.

[logicchallenged]

Awsome advice.....thanks

Its great getting an outside totally detached view of things, and I thank you all. I will post our budget for some scrutiny. I do want to iterate that I am extremely blessed and have nothing to complain about as far as money goes. Its just that it is not how much money you have, it is how you handle it. I haven't handled it well and thus the regret and guilt.

I will post a budget. I would love to get some insight onto that.

Thanks again!