Should we take the money??

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Submitted by lpjohnso on March 13, 2015 - 11:48am

We purchased our home in 2011 for $330,000. We have a 30 year fixed FHA at 3.375%. We upgraded and now local neighborhood comps support that we could get $500,000 for the home. We are practically living pay check to pay check and have nothing in savings. We have some debts we would love to pay off. Selling the house for the equity is SO tempting right now. We really love our neighborhood in San Marcos, and wouldn't consider selling the home if it wasn't for the large amount of equity we have accrued in such a short amount of time. We need some serious financial advice. We really want to do the right thing. And after years of reading what you Piggs have to say, we highly respect your opinions.

Soooo, my dear Piggs:

Option #1: Stay where we are. Keep slowing chipping away at our debts.

Option #2: Stay where we are. Take out a HELOC or cash out refinance to help pay some higher interest bills and do some maintenance on the house.

Option #3: Sell the home, take the money, pay off all debts, actually have some something in savings, and go buy something else.

Submitted by moneymaker on March 13, 2015 - 11:51am.

I would say #3, except don't buy but rent. Wait for the market to drop along with house prices then buy.

Submitted by Coronita on March 13, 2015 - 12:16pm.

The biggest problem with what I have you are proposing (using your equity to pay off other debt) is that it doesn't seem like you asked yourself (a) how you got into the other debt to begin with and (b) what are you going to do differently so that you don't repeat that again if you do decide to sell your home and use the money to pay off your debt.

Imho,

1) I would take option#1 and live as frugally as you can.
2) Option#2 would be something I think you should NEVER do. I would NOT turn your home into a piggie bank and take out a HELOC to pay off other debt that doesn't generate incoem. All you've done is just shift your debt elsewhere to something that a creditor can go after: your primary home.
3)Option#3: you'll still need a place to live, and you probably should figure out how much rent cost will be, versus how much your monthly mortgage+property tax+insurance/etc is less tax deduction.

Do not get excited about the equity in your primary home. Otherwise you run the risk of being exactly like the other americans during the earlier real estate meltdown when they decided to atm their home to death...That is, unless you don't mind selling your home to people like me looking to buy a distressed property going through short sales.

Pretend the equity doesn't exist, and make your financial plan accordingly.

Submitted by FlyerInHi on March 13, 2015 - 1:12pm.

flu wrote:

Pretend the equity doesn't exist, and make your financial plan accordingly.

Pretty good advice.

If you sell, you'll likely buy something just as expensive or more expensive.

Unless you move to a cheaper region, then selling is not very useful. Sell to rent is not a good idea because you bought "cheap" so renting now won't save you any money.

Submitted by spdrun on March 13, 2015 - 1:38pm.

Do you have kids? i.e. are you tied to schools and bedrooms?

If not, you have about $200k of equity, right? Buy a $200k condo with 50% down, use the other rest to pay off debts and as a financial cushion.

You should end up with $200 taxes + $250 hoa + $450 loan + $50 insurance. Under $1000/mo nut. Maybe pick up another rental property somewhere to further reduce that if you can put 25-30% down.

Submitted by dumbrenter on March 13, 2015 - 1:51pm.

The fact that you decided to post about it shows you care about your future. You are already 99% there with the admission that you have no savings. That is the hardest part.

Unless you are tied to that neighborhood or schools, selling the home, paying off all debts, save some and then rent for a while would be a great idea.

Submitted by FlyerInHi on March 13, 2015 - 1:55pm.

spd, how about some examples of $200k condos that would be suitable for this family?

Submitted by spdrun on March 13, 2015 - 2:02pm.

Is this a family or a couple? No mention of kids.

If it's a couple, anything with one bedroom or more in an area that's comfortable. Not exactly hard to come by.

Submitted by flyer on March 13, 2015 - 3:50pm.

Please do not construe this as advice, but, after reading your post, my thoughts are, as flu mentioned, that Option #2 is definitely a bad choice for many many reasons, and may end badly.

If you choose Option #3, and sell your home, you need to ask yourself where you are going to live, and how much that will cost you versus your current situation.

At your entry price point, you are going to have a difficult time finding something as reasonably priced--if you plan to stay in San Diego--and you may actually end up spending more for housing than you are now.

This brings us to Option #1. If you plan to stay in San Diego--and this is key--it seems your current housing expense is quite reasonable for the area. Unless you really want to downsize, imo, you're going to have a hard time finding a less expensive place to live--even if you rent. If you choose Option #1, perhaps you could consider a roomate, or taking on additional jobs, etc. until you pay off some of your bills.

Ultimately, the question is whether you can afford your lifestyle or not, and that is a question only you and your family can answer. I wish you the best.

Submitted by spdrun on March 13, 2015 - 4:04pm.

^^^

The renting out a room doesn't seem like a bad solution. Should net about $4800/yr ($600 * 12 * .67) extra after taxes, which would help with debts, depending on size.

Submitted by scaredyclassic on March 13, 2015 - 6:16pm.

Stay where you are.

Buy THE TIGHTWAD GAZETTE.

Cut expenses to the bone.

Submitted by joec on March 13, 2015 - 6:47pm.

Would repeat what has already been stated. Do you HAVE to live in the same area? If you have a spouse/kids, every decision is a ton harder since as a guy, i could live in a "poor" area and not feel much about my safety as long as my car is crap too.

Rent is tons more expensive I've noticed everywhere now compared to 2009. A 330k mortgage at such a low rate should be easy compared to what rent is now since my mortgage is less than what people pay in rents currently for me.

The problem with housing is we have to live somewhere vs. a nicer car, etc...Unless you can move to a lower cost of living area or change your housing type (apt/rent/don't care about schools, etc...), hard to rent for less in the same area.

Submitted by spdrun on March 13, 2015 - 7:14pm.

Assuming no kids (schools), living in a "poor" area isn't necessarily much worse. Most crime isn't random. As long as you don't involve yourself in things that you shouldn't be involved in anyway (hard drugs, gangs, hookers), the likelihood of being messed with is low.

I knew a nice lily-white Jewish girl who lived in Spanish Harlem in the early 2000s -- she said the only time she was robbed was after visiting a friend in a nice part of the West Side.

Submitted by Reality on March 13, 2015 - 9:02pm.

FlyerInHi wrote:
flu wrote:

Pretend the equity doesn't exist, and make your financial plan accordingly.

Pretty good advice.

If you sell, you'll likely buy something just as expensive or more expensive.

Unless you move to a cheaper region, then selling is not very useful. Sell to rent is not a good idea because you bought "cheap" so renting now won't save you any money.

You don't need to move to a cheaper region to benefit from a cheaper market. I know someone who sold in 2005 knowing prices were BS (anyone with half a brain did) and rented until 2009 and then bought again.

Submitted by EconProf on March 13, 2015 - 9:50pm.

The "transaction costs" of selling and then renting or buying a cheaper place are huge. Commissions, fixup costs of the house, searching for a replacement, the cost of moving & downsizing possessions, school changes if you have kids--the list goes on and on, and the costs are psychic as well as monetary.
And you would be throwing away a terrific 30-year loan. By owning this house for only four years, your net worth has increased by $170,000. Let it ride and it will probably keep growing.
Instead, attack your expenses with a vengeance. Live under a budget.

Submitted by spdrun on March 13, 2015 - 10:06pm.

Or just use a flat-fee listing broker ... if the market is as good as some people say, it should sell in no time, right?

Downsizing possessions? Hold a garage sale, take a rental truck load of stuff to the new place, end of story. My parents left the Communist bloc with a suitcase worth of stuff. Don't get too attached to things.

Treat a home as an investment asset, not something to get attached to. Be cold, heartless, and calculating. Stop feeling love for a wooden box of ticky tacky.

Sell the house, buy something else ... if you play it right, you might even be able to have a roof over your head for nearly free, even if it's just a 2/1 condo in a mediocre area.

Submitted by FlyerInHi on March 13, 2015 - 10:12pm.

spdrun wrote:
Assuming no kids (schools), living in a "poor" area isn't necessarily much worse. Most crime isn't random. As long as you don't involve yourself in things that you shouldn't be involved in anyway (hard drugs, gangs, hookers), the likelihood of being messed with is low.

I knew a nice lily-white Jewish girl who lived in Spanish Harlem in the early 2000s -- she said the only time she was robbed was after visiting a friend in a nice part of the West Side.

I agree about the "poor" area.

But the facts are most people don't feel the same way. They like stepford suburbia with fake town-centers. I've heard countless people tell me that certain areas are NOT safe. I've ignored them and went with my own instincts and it's worked out fine for me. My cap rates are better.

My brother's girlfriend lives in North Park. She says it's not safe. She runs home quickly.

People watch local news and they are paranoid about child abductions, rapes and the like, even though crime is going down.

Go ahead, post links to some $200k condos. The OP will stay put and not move anywhere, unless it's to Colorado!!

Submitted by Reality on March 13, 2015 - 10:16pm.

EconProf wrote:

And you would be throwing away a terrific 30-year loan. By owning this house for only four years, your net worth has increased by $170,000. Let it ride and it will probably keep growing.

Because prices don't go down, right?

The OP has been given a gift (and an out). Time to take the profit.

Submitted by scaredyclassic on March 13, 2015 - 10:48pm.

JohnAlt91941 wrote:
EconProf wrote:

And you would be throwing away a terrific 30-year loan. By owning this house for only four years, your net worth has increased by $170,000. Let it ride and it will probably keep growing.

Because prices don't go down, right?

The OP has been given a gift (and an out). Time to take the profit.

no. Prices go down, but wiser people know they have no ability to know when where why how or even if it'll happen in their lifetime.

to say prices go down is as useful as saying b the sun will burn out.

yeah...and...so...

Submitted by Reality on March 13, 2015 - 10:59pm.

scaredyclassic wrote:

no. Prices go down, but wiser people know they have no ability to know when where why how or even if it'll happen in their lifetime.

to say prices go down is as useful as saying b the sun will burn out.

yeah...and...so...

Perceptive people recognize bubbles, unlike sheep (who inflate bubbles).

Submitted by FlyerInHi on March 13, 2015 - 11:01pm.

I do like spd's suggestion of a condo, but realistically I doubt most people would go for that because they want to buy the nicest possible house they can afford. Realtors and loan officers encourage that also.

Buy a modest condo as a place to live. keep it as rental when you move up. Prices do go up and down and you can arbitrage and return to your low-cost/paid-off condo to live if necessary.

Generally, the problem is that when you sell high, you'll likely end up renting high after you sell, thereby obviating your savings.

Another alternative is to move in with relatives and save money while you wait out the market. It could be a very long wait!

Submitted by FlyerInHi on March 13, 2015 - 11:04pm.

JohnAlt91941 wrote:

Perceptive people recognize bubbles, unlike sheep (who inflate bubbles).

And where are they are going to live for less than their current mortgage payments? Remember, they bought at the bottom.

Submitted by Reality on March 13, 2015 - 11:29pm.

FlyerInHi wrote:
JohnAlt91941 wrote:

Perceptive people recognize bubbles, unlike sheep (who inflate bubbles).

And where are they are going to live for less than their current mortgage payments? Remember, they bought at the bottom.

Hence, $170k in gain. Do you really think that will be eaten up by the difference in their mortgage vs renting?

They may find something to rent CHEAPER than their current monthly nut depending on what they are comfortable with.

Myself, I haven't seen rents skyrocket the last few years.

Submitted by CA renter on March 14, 2015 - 1:30am.

Lots of good advice from the other Piggs here.

Personally, I think you should consider either option #1 or option #3. Agree with the others that #2 (HELOC and pay off debts/upgrade house) would not necessarily be the wisest decision **unless you are incredibly disciplined about your finances.** We don't know what caused your current debts (medical emergency, school debt, etc.), so we can't really judge how well you manage your money.

Your second option would be wise ONLY IF you pay off debt with much higher interest rates AND if you cut your expenses rather drastically...hopefully, you could increase earnings/income, as well. By paying off ~15-20%+ credit card debt with a HELOC that is capped at a very low rate, you can deduct the interest paid on this loan, which you can't do with credit card or most other consumer debt, and you can pay your debts faster, and dramatically lower your interest expenses.

See details for deductibility here:

http://www.irs.gov/publications/p936/ar0...

Additionally, the lower rate will enable you to pay off your debts more quickly, and pay less in interest IF you stick to a very disciplined payoff plan.

As flu noted above, you first need to think hard about why you're currently in debt, and be honest about your ability to get out of debt and stay out of debt. If you're in any way inclined to pay off some debt, but then spend any "extra," or if you think you're likely to go further into consumer debt because your habits or spending/income don't change, do not go with option #2.

Option #3 is tempting if you don't have a family and would be willing to downsize or move to another, less expensive location. That's certainly a viable option, IMHO.

If you had said that you don't like the house and want to move to a different location or type of house, etc., I'd tell you to go with option #3, but rent instead of buy something else, as things are very bubble-like right now. If you could stay with family for a very long time (rent-free or low rent), then it would make that option even more compelling. But since you've said that you wouldn't move if not for the equity, I'd have to agree with the other Piggs who say that you should stay put and work on clearing your debts and building up some more savings the hard way (increasing your income and/or cutting spending).

Final opinion: Go with Option #1.

Submitted by Coronita on March 14, 2015 - 8:13am.

JohnAlt91941 wrote:
FlyerInHi wrote:
JohnAlt91941 wrote:

Perceptive people recognize bubbles, unlike sheep (who inflate bubbles).

And where are they are going to live for less than their current mortgage payments? Remember, they bought at the bottom.

Hence, $170k in gain. Do you really think that will be eaten up by the difference in their mortgage vs renting?

They may find something to rent CHEAPER than their current monthly nut depending on what they are comfortable with.

Myself, I haven't seen rents skyrocket the last few years.

That $170 in gain really is closer to $120k in gain after selling costs.

Personally, I think it's a bad idea to play russian roulette with your primary residence, especially that the OP bought at such a ridiculously low price with probably a ridiculously low fixed rate mortgage, and without knowsing how OP will manage that $120k . What would be worse if is that $120k is tapped and used to pay off debt and then spent on other things, leaving the OP back to square one with no savings and now no house.

By not tapping the equity and continuing to pay down the house, the person is essentially "saving". Eventually, when the person owns the home free and clear, the person has minimized his living expenses, and if he/she want to retire in their sixties, sell and buy something smaller or move into a retirement home. I don't think we'll ever see mortgage interest rates as low as they were. And the OP also bought at a historically low price, it's unlikely we'll ever see both low rates and low price in the forseeable future. Very unlikely the OP's primary home will see $330k prices again. So for practical purposes, it is his savings account.

Submitted by spdrun on March 14, 2015 - 8:42am.

1. A primary residence isn't sacred. It's an investment like anything else. Nothing wrong with selling it and downgrading.
2. You save $30,000 right there if you don't use a broker. Go with a discount agent, let the title agency handle the sale. Done. I don't see why closing costs should exceed $10,000 without a broker involved.
3. Who says there's only $170k of equity? I'm assuming the OP has paid some principle and also had a down payment on the residence. He should get that back as well.
4. If he buys a 2/1 outright or nearly outright, he can live for $1000 per month. Maybe $500 per month if he's lucky. Then he'll have a whole lot of money to pay off debts and a condo that can be paid off in 10 years, if not immediately.
5. Paid off debts + small housing nut will mean that he'll be able to save to buy another investment soon. Or just work less and travel a lot. Living below one's means rocks.

Submitted by Coronita on March 14, 2015 - 9:44am.

spdrun wrote:
1. A primary residence isn't sacred. It's an investment like anything else. Nothing wrong with selling it and downgrading.

No it's not, it doesn't generate income And you're not even going to find something comparable ever so slightly less unless you sacrifice the area you live or if sacrifice significant square footage.

Quote:

2. You save $30,000 right there if you don't use a broker. Go with a discount agent, let the title agency handle the sale. Done. I don't see why closing costs should exceed $10,000 without a broker involved.

Oh please stop with this "if you don't use a broker nonsense". While you might be a genius when it comes to real estate, the average person does not or cannot deal with not using a broker.

Quote:

3. Who says there's only $170k of equity? I'm assuming the OP has paid some principle and also had a down payment on the residence. He should get that back as well.

Because the first few years of a 30 year mortgage goes mostly towards interest. Total principal pay down will be roughly $15k on a $300k borrowed at @ 3.5%. It will be less, if he/she borrowed more or borrowed at a higher rate.

Quote:

4. If he buys a 2/1 outright or nearly outright, he can live for $1000 per month. Maybe $500 per month if he's lucky. Then he'll have a whole lot of money to pay off debts and a condo that can be paid off in 10 years, if not immediately.

Good luck with that one....Unless you want to live an a crack area.
For reference a 1/1 in mira mesa, people are starting to ask $200k for it, and some have sold pretty close to that.

Quote:

5. Paid off debts + small housing nut will mean that he'll be able to save to buy another investment soon. Or just work less and travel a lot. Living below one's means rocks.

Person is saving by paying of their home's principal loan anyway.

Submitted by Coronita on March 14, 2015 - 9:53am.

.

Submitted by Coronita on March 14, 2015 - 9:56am.

JohnAlt91941 wrote:
scaredyclassic wrote:

no. Prices go down, but wiser people know they have no ability to know when where why how or even if it'll happen in their lifetime.

to say prices go down is as useful as saying b the sun will burn out.

yeah...and...so...

Perceptive people recognize bubbles, unlike sheep (who inflate bubbles).

People are good at believing what they believe, whether that really is what is happening or not. If they are correct, it tends to be a coincidence or just they were lucky.

Afterall, aren't there a lot of people perceptive people who jumped on the housing is going to crash bandwagon in 2004-2006 still on the sideline waiting for home prices to crash even further and hence still renting even after home prices have already corrected 30-50+% in some areas here...still holding out for the next real estate crash?

Submitted by spdrun on March 14, 2015 - 10:33am.

flu - brokers and salespeople aren't fucking geniuses. In fact, quite the opposite in 95% of cases. The standard forms are available online and are basically checklists. Most of the heavy lifting is done by the title firm anyway. The OP doesn't seem to be in a rush to sell, so the house can sit on the MLS for months, taking offers as they come in.

Secondly, one can EASILY find a 2-bedroom condo for the low $200k range in metro San Diego. Not in a "crack area". Exercise is left to the reader :)

You won't get much floor space, but keep in mind that the average new HOUSE in 1970 was under 1000 sf, and family size was larger. Who needs a palace as long as they have a dry roof over their head and a low monthly payment? I'd rather have a paid-off 2-bedroom condo (even in a "crack" area) for $500/month than a house that costs me $2500 per month.

Submitted by scaredyclassic on March 14, 2015 - 10:27am.

JohnAlt91941 wrote:
scaredyclassic wrote:

no. Prices go down, but wiser people know they have no ability to know when where why how or even if it'll happen in their lifetime.

to say prices go down is as useful as saying b the sun will burn out.

yeah...and...so...

Perceptive people recognize bubbles, unlike sheep (who inflate bubbles).

timing is everything. Without knowing when you know nothing. Without knowing how low is low you know nothing.

Indeed we all operate blind in the dark.

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