Which scenario makes the most sense?

**riverwed070707** · 06-24-2013, 06:27 AM

Originally posted by Perd View Post

Current details:

Me - 30 years old
Wife - 29 years old

Income - $120k

Debt:
Property 1 (rental) - Owe $95k. Selling in Sept for $125k to current renter
Property 2 (current residence) Owe $52k. Paying off in Sept

Cash:
$73k

Investments:
$54k

Scenario 1:
Pay off property 2 and continue living in there for another year or so. Will have ~$50k in bank once selling property 1 and paying off property 2.

Scenario 2:
Sell both property 1 and 2 which results in ~$130k cash. Purchase a larger house to plan for family. I'm in AZ and the prices are currently on the rise. New home purchase would be ~$200k to ~$250k

Scenario 3:
Pay off property 2 and rent it for a net monthly rent of ~$610. Will have ~$50k in bank to put down on new home purchase of ~$200k to ~$250k.

I'm a bit adverse to debt and the thought of have zero debt is pretty appealing but our current property is small (1200 sq ft) and will not work in the next year when we plan to have a child. My fear is that house costs will continue to rise essentially meaning I lose $ if I know I'll be purchasing within a year anyway. Any suggestions on what makes the most financial sense?

I'd pay off property two and continue to live there as long as you can stay comfortably. Unless you have a really high interest rate on teh home, paying it off and staying a year is not going to reap substantial savings. Contrary to societal belief, 1200 square feet is *not* too small for a family of 3. We lived in 625 sq feet until DD was 4 -- not because we had to, but because we chose to. We didn't have a walk in closet, a corridor to get to our master bedroom and we spent more time outside when the weather was nice, but we had a dining table in our kitchen, a couch big enough for the 3 of us and it was manageable. The finacial freedom it allowed us to achieve was priceless.

**TBH** · 06-24-2013, 06:56 AM

I would NOT pay off Property 2 unless your interest rate is high. Since interest rates seem to be on the rise, you probably can't borrow money at this low rate a year from now. I'd sell Property 1, use the cash as a downpayment on a new home, and rent out Property 2 for enough to cover the mortgage.

**snafu** · 06-24-2013, 04:16 PM

Unfamiliar with rates down payment rules and tax consequences of decisions in NZ. What downpayment percentage is required for new construction home? What are property/municipal taxes and anticipated expenses of potential new house? What are mortgage interest rates? Do your mortgage rates lock down for 30 years? Are you allowed to easily add payment directly to principal? What results do you get working on a mortgage calculator? Typically the first several years, very little of payment goes to principal. What do you anticipate income increases for the next 5 years that could go directly to principal? The security of home ownership that will meet your family needs 5 yrs forward is justification for mortgage debt that is affordable based on your income.

What tax will you be required to pay for capital gains on your rental house? In our area we consider it reasonable to buy a home whose expenses all in [mortgage payments, property tax, utilities, insurance, maintenance] does not exceed 30% net income. A rule of thumb suggest costs not exceed 2.5 x annual income.

Very much appreciate learning about different requirements in different countries.

**karenjcarlson** · 07-01-2013, 11:03 AM

hmmm

If prop 2 is a low interest rate and you see another mortgage in your future, I wouldn't rush to pay off prop 2, to then just go out and borrow more. Keep prop 2 at the low interest rate, install a renter to pay it off over time. Keep your windfall from the sale of prop 1 and invest in a new home for you.

Which scenario makes the most sense?