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Pay down after moving in OR Save and purchase later?

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  • Pay down after moving in OR Save and purchase later?

    Hi all,

    Here's the nuts and bolts. Wife and I have decided we wish to move in the next 2 years. Our 2 kids are young, but we want to get established in the "forever-home-until-kids-are-gone" sooner than later. The main emphasis for the move is to change public school districts before kids hit that age. It's a must.

    Current mortgage balance is 1.75x our income.
    After the sale and transaction fees we hope to leave with about $90k equity.

    Given the steady rise of home prices in our area, we are worried that waiting another few years is just going to cause further inflation of prices to the point that we may get "priced out" of the homes we want. (Mind you we are looking at homes currently in the mid 400's to low 500's.)

    In weighing our options: If we move now with our equity + available savings and put down at least 20%, that's going to leave us with a new mortgage ~ 2.5x our income on these homes. Higher than we want.

    BUT, we receive a family windfall gift of $50k yearly (long story I have posted about previously), of which we receive in 1/4's throughout the year.
    Initially we had planned to wait on the home purchase for another 2-3 years, which would give us time to stockpile a substantial cash balance to put down.

    A different option I have thought of, however, is that we could buy now with a 2.5x mortgage, and dedicate the next 2 years of our windfall to paying down the mortgage. With a future mortgage recast, this would then bring us to <2x income and monthly payments we are more comfortable with.

    I am having a hard time deciding what the best decision is.

    Assuming the windfall is a guarantee (it is), and that we have all other areas covered (>20% retirement savings rate, 529's funded, disability/life insurance, 6 month emergency fund).... should we go for this now to ensure the market appreciation doesn't outpace our ability to save the downpayment? With low mortgage rates, knowing that we have to get in a new area prior to the kids starting school, knowing that we will be in this new home for at least 15-20 years, and watching the ever increasing housing prices in my area, I am starting to think the more risky option is staying put where we are, instead of moving and just paying down the mortgage in big chunks over the next few years. Or, is it best to have all the cash in-hand ahead of time and take our chances on the inflation of housing prices in the coming years?

    Help!


  • #2
    Do not buy now. 2.5x leaves a big risk, primarily income loss.
    $90 + $100= $190 downpayment $310 mortgage
    That’s 1.6x on a $500 house.
    Make decisions on known data. Don’t forecast interest rates and housing prices. Recasting typically has costs.

    Comment


    • #3
      As home prices in your desired area increase, won't your current home appreciate as well?

      2.5x is on the higher side, for us here on WCI. Still low for most lenders.

      What is your household income + your yearly windfall? Since it's "guaranteed" you might as well count it as income. Then how much is your desired home of that? 2.0x?
      $1 saved = >$1 earned. ✓

      Comment


      • #4
        Originally posted by LabralTerror View Post
        Hi all,

        Here's the nuts and bolts. Wife and I have decided we wish to move in the next 2 years. Our 2 kids are young, but we want to get established in the "forever-home-until-kids-are-gone" sooner than later. The main emphasis for the move is to change public school districts before kids hit that age. It's a must.

        Current mortgage balance is 1.75x our income.
        After the sale and transaction fees we hope to leave with about $90k equity.

        Given the steady rise of home prices in our area, we are worried that waiting another few years is just going to cause further inflation of prices to the point that we may get "priced out" of the homes we want. (Mind you we are looking at homes currently in the mid 400's to low 500's.)

        In weighing our options: If we move now with our equity + available savings and put down at least 20%, that's going to leave us with a new mortgage ~ 2.5x our income on these homes. Higher than we want.

        BUT, we receive a family windfall gift of $50k yearly (long story I have posted about previously), of which we receive in 1/4's throughout the year.
        Initially we had planned to wait on the home purchase for another 2-3 years, which would give us time to stockpile a substantial cash balance to put down.

        A different option I have thought of, however, is that we could buy now with a 2.5x mortgage, and dedicate the next 2 years of our windfall to paying down the mortgage. With a future mortgage recast, this would then bring us to <2x income and monthly payments we are more comfortable with.

        I am having a hard time deciding what the best decision is.

        Assuming the windfall is a guarantee (it is), and that we have all other areas covered (>20% retirement savings rate, 529's funded, disability/life insurance, 6 month emergency fund).... should we go for this now to ensure the market appreciation doesn't outpace our ability to save the downpayment? With low mortgage rates, knowing that we have to get in a new area prior to the kids starting school, knowing that we will be in this new home for at least 15-20 years, and watching the ever increasing housing prices in my area, I am starting to think the more risky option is staying put where we are, instead of moving and just paying down the mortgage in big chunks over the next few years. Or, is it best to have all the cash in-hand ahead of time and take our chances on the inflation of housing prices in the coming years?

        Help!
        I usually tell people to wait, save, not go over 20%, but there are two reasons I think you should sell and move now. 1. You know you need to move for schools and therefore, keeping equity tied up in a house you can't stay in, makes zero sense to me. The markets could crash overnight like they have in the past and that equity could disappear. I'd sell now and try to cash in while you can.
        2. You have a very fortunate yearly windfall you could use to pay down your house each year without even dipping into your income. That's amazing and to me makes it a no brainer.

        Happy house hunting! Selling a home can be stressful and can take longer than anticipated, so I would get that listed BEFORE you start shopping for your new house.

        Comment


        • #5
          Thanks for the replies. I can see both viewpoints, which is why I am inquiring to make sure I have given thought to all scenarios.

          A part of me agrees with Tim to not make decisions on data that isn't concrete.

          Yet, to Cubicle's point- if I take into account our yearly windfall as "income" the new property would indeed be under the 2x income threshold.

          My mind is telling me to be cautious and not over-leverage too quickly before having the funds. But, my heart is in agreement with hightower that if we know we are needing to move, there is support for going now while the "going's good".

          In all likelihood, we may attempt to sell in the near future with the intention of moving into a rental instead of being dead-set on a contingent sale directly into a new property. Then, whether it takes 1 month or 1 year to find a place, we at least know we have the liquid equity ready to go + any of the windfall we have received up to that point, with the plan of paying down the rest later. Hmmmmm

          Comment

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