Thoughts on downsizing home to reach FI earlier

[SPlum]

Thank you, WCI for changing the way we approach our money and our lives. We bought a lovely home, but over the past few years our mentality towards FI has changed and we want to be more aggressive in reaching FI.  We are now considering downsizing in order to reach FI earlier, but would be interested in thoughts regarding doing so.

We bought our house 4 years ago. The mortgage is currently $640k at 4.5% 30 years.  We have no debt other than the mortgage.  The mortgage is less than 2x our salary and our monthly payments with escrow are 20% of our net monthly income. We had two bad partnership experiences (ugh) which cost us financially. Now we are in a new position, where we are trying to "catch up" and focus on saving as much as possible. We are not looking to retire early, as we have longevity potential in our careers.  We just want to hit financial independence sooner.

We like our home- it was a custom build (not by us) so the house is solidly built and relatively new.  It is not in need of renovation or any real repairs. We do not like home repairs and it is a relaxing place to come home to. We bought the home after a foreclosure so we could sell it for a profit which we could roll into a new home to keep a new mortgage low. We are considering if it is worth it to sell the home , and likely walk away with over 100K after realtor expenses, to put it towards a smaller mortgage. The area we would look to buy would be in the same district, but in an area where the property values are stronger and will hold value more than where we currently are. The downside is that any home we would look to buy would need a degree of renovation (think mid-60s ranchers). Our previous home was a money pit and we do not want to repeat that experience.  The area is closer to the office and schools by 10 minutes, so that would cut down on driving significantly, as there are no buses for school transportation.  We would want to keep the new mortgage under $450k and put it on a 15 year mortgage. It would feel good to be saving more. An older home may be stressful in the repairs and renovations needed.

We like the idea of spending less on housing and saving the difference, as well as having a smaller mortgage in the long run. But moving into an older home means that some of the potential financial savings would be consumed by home repairs and renovations.

Perhaps the wisest option is to stay put and just focus on our savings in other areas.

We are curious of any thoughts or inputs.

Thanks!

 

 

[jhwkr542]

The way you have described it, staying put seems to be the best path forward. You'd lose a bunch of money in transaction costs. If I were in your situation, I'd be miserable moving to a fixer upper for $100k that may get absorbed by home improvements.

[VagabondMD]

Rule #1 of home remodeling is that it ALWAYS cost more than you expect, usually significantly more. (Rule #2 is that it ALWAYS takes longer than you expect.)

Without knowing the rest of your financial picture, it sounds like you can afford to home where you live now and are happy in it. I would not be so inclined to move based solely on the information provided.

[StarTrekDoc]

Any lateral move will move you back 6-10% of the value of the home.  If it were to move into a better home that fits you, then that's a personal decision against the foil of FI.  It sounds like the opposite from you though.  You like your home and newness and had prior money pit experiences -- why give into that potential if you don't seek it?

Stay pat.   You'll get to FI with the sound income stream and through with the longevity.  Turtle wins the race.

[EJ at Dads Dollars and Debts]

We debate this too. I bought a home with a view. 3 miles from work. Relaxing every day I come home. Does it keep me further from FI? Yes. Does it make FI impossible? No. For me, staying put right now makes sense even though we could down size. I figure I can reassess where I am in 5 years. If it is where I think I will be then we can stay put. If not, then it is time to move.

 

Also, I have debated the idea of downsizing once I go part time. I am not sure if it will happen in 5 years or 10, but by downsizing I can keep are portion of costs/expenses similar even with a cut in pay.

 

 

[ENT Doc]

Since your overall goal is to reach FI earlier changing may be worthwhile.  How many years are you into your current mortgage?  What is the difference in taxes and insurance between the two places?  Moving costs?

[q-school]

will property appreciate?  how hard is it to sell?  how bad are the property taxes?

 

my wife would never let me sell our house, but I know the property taxes are killer.

it is incredibly expensive to move.   It does not sound like moving will dramatically improve your circumstances.  if you love the house, stay and enjoy it!

 

[Dr. Mom]

Put FI aside for a moment and really think about which house and lifestyle you prefer.  Either seems like it can work for you and allow FI.  You have the ability to live the life you want now and to reach FI.  It's not clear that the older house needing renovating will allow FI any faster. To me, this decision should be based on factors besides FI.

[jfoxcpacfp]

You made a 3 statements that leaped out at me:

• "We just want to hit financial independence sooner"


• "We do not like home repairs"


• "It would feel good to be saving more"

You should not base a financial decision on feelings - they will almost always lead you in the wrong direction. And such an upheaval into a home where you will be forced to do what you don't enjoy (home repairs) could easily trump the happy feeling of saving more. My gut is saying stay where you are. If you want to rest easier with your decision, get together with a financial planner and put some projections together. Yes, it will cost maybe a few thousand $ but it will give you the peace of knowing you are not making a mistake, whichever way you go.

[hightower]

If I had that big of a mortgage, I would want to downsize too.  You make enough to live there, but why spend that much if you don't have to?

My wife and I are in a similar situation.  We own a home that is currently worth around 600k and we have a 295k mortgage (though we are taking out a 25k home equity loan for some projects this summer).  The house is nice, but we feel like its too big.  We don't have any kids.  I would prefer to live somewhere smaller, cheaper, and quieter (its in the city).  However, the one thing preventing me from doing it is that the house is actually partially paying for itself right now via airbnb.  My wife set up a room in the back of the house that has its own entrance and it rents out most nights of the month.  We easily pull in over $1100 a month with minimal effort.  That's nearly half of our mortgage, taxes, insurance.  The house still costs more to heat and cool than I would prefer and it has frequent repairs that cost money (its a very old house) but for only 1200/month after the airbnb, its hard to leave.

The thing that makes me nuts though is that I feel like the housing market is at a high point and has the potential to come down significantly again.  We would walk away from closing with over 200k if we sold for 600k now.  That's why I'm so tempted to sell.  Problem is that we don't know exactly where else we'd want to be.  So, we're just kind of sitting here waiting.

We also want to reach FI sooner and a 200k boost to our savings would go a long way towards helping us get there.

[Kamban]

Based on your post, I would not move. It will make you unhappy. I doubt that you will be left with more than $50K after realtor costs and home repairs on the next house. Totally not worth it and will not lead to FI sooner.

[ENT Doc]

There is a lot to consider here, and I would never make a conclusion based on what you have said.  So far for the move decision we have:

Pros:
1. Lower monthly payment (mostly due to taxes) and overall payment
2. Faster achievement of FI by 11 years (4 years into 30 year and will change to 15 year)
3. Same school district
4. Closer for taking kids to school and work
5. Some repair costs will increase the value of the home (not completely wasted)
6. New home holds value better

Cons:
1. Repair/fix-up costs
2. Needing to make up for #1 by either paying lower down payment, increasing mortgage, plowing the $100k into it
3. Needing to move/moving costs
4. Possibly lower tax benefit (may be negated by #1 in the Pro list)
5. Impact of repairs on psyche

So I don't think this is a clear decision either way.  I would do the math on the above and see if the potential benefits (particularly the ability to reach FI earlier which is the whole idea here) outweighs the downsides (both monetarily and emotionally).  Personal decision.  But do the math.

[Fullhouse11]

The numbers almost always favor staying put because of the transaction costs.

It helped me when I stopped considering our house as an asset, it's more like a student or business loan.  It's something that we will always have (or put it's equity in another home) but it's not something that we draw upon for income (unless we are lucky enough to have Airbnb property like the homeowner above). I still count it on my net worth number, but not my FI number.

I would focus on investments first, then paying down the mortgage second.  A good year is when you can put money in your 401k, backdoor Roth, 529s, taxable investment account and pay down principal on your house.

To be FI, living on a lower % of your income is the goal.  So if your income is going toward investments and paying down the house, then in 2025 (maybe) when your house is paid off and your investments are full, you will feel FI because you are used to living on 50-70% of your take home.  Cut costs somewhere else.  Automobiles is my first choice.

[SPlum]

Thank you, everyone, as I really appreciate and value all of the thoughts and insights!

I think that the biggest issue is that we have a different mindset now compared to when we bought the home, as I don't think that I would buy our home today.  If it were a car payment, I would dump the car...it  is just not as easy to dump a house.  :? That being said, it is good to hear the perspectives and remember that there is a significant benefit to having a peaceful retreat to come home to, and not a fixer upper.  If we decide to move, it would need to be a move to better accommodate  our lifestyle, not in an effort to reach FI earlier. And I need to remember to not beat myself up for making a choice that was not a bad one, just not what I would choose today. I also have to catch myself from getting too intense (which can sometimes happen in reading about FI) about how much to cut back, remembering that we are in a good position with saving and the future plan if we continue the course. As mentioned, the turtle wins the race.

We are currently living on around 70% of our take home and we are maxing out our pretax options (401K 401K IRA IRA SEP). We have no other debt, which is a relief. With our extra income, we are considering a combination of investing in taxable accounts as well as paying down the house, and then for the longrun, we should be set.

 

[ENT Doc]

SPlum wrote:

Thank you, WCI for changing the way we approach our money and our lives. We bought a lovely home, but over the past few years our mentality towards FI has changed and we want to be more aggressive in reaching FI.  We are now considering downsizing in order to reach FI earlier, but would be interested in thoughts regarding doing so.

We bought our house 4 years ago. The mortgage is currently $640k at 4.5% 30 years.  We have no debt other than the mortgage.  The mortgage is less than 2x our salary and our monthly payments with escrow are 20% of our net monthly income. We had two bad partnership experiences (ugh) which cost us financially. Now we are in a new position, where we are trying to “catch up” and focus on saving as much as possible. We are not looking to retire early, as we have longevity potential in our careers.  We just want to hit financial independence sooner.

We like our home- it was a custom build (not by us) so the house is solidly built and relatively new.  It is not in need of renovation or any real repairs. We do not like home repairs and it is a relaxing place to come home to. We bought the home after a foreclosure so we could sell it for a profit which we could roll into a new home to keep a new mortgage low. We are considering if it is worth it to sell the home , and likely walk away with over 100K after realtor expenses, to put it towards a smaller mortgage. The area we would look to buy would be in the same district, but in an area where the property values are stronger and will hold value more than where we currently are. The downside is that any home we would look to buy would need a degree of renovation (think mid-60s ranchers). Our previous home was a money pit and we do not want to repeat that experience.  The area is closer to the office and schools by 10 minutes, so that would cut down on driving significantly, as there are no buses for school transportation.  We would want to keep the new mortgage under $450k and put it on a 15 year mortgage. It would feel good to be saving more. An older home may be stressful in the repairs and renovations needed.

We like the idea of spending less on housing and saving the difference, as well as having a smaller mortgage in the long run. But moving into an older home means that some of the potential financial savings would be consumed by home repairs and renovations.

Perhaps the wisest option is to stay put and just focus on our savings in other areas.

We are curious of any thoughts or inputs.

Thanks!

 

 

Click to expand...

See attached file.

I think the optimal decision, based on the assumptions made in the model I did, is to sell and get the 15 year mortgage.  Of course, this may change based on the assumptions made, of which there were many.  The big assumptions I made were that you had 0% down on the new home, aren't using any additional cash, seller pays closing costs, and that you plowed your entire $100k into remodeling the new home (finished in 1 year at which time it adds 60% of the invested value to the home).  You can play with the numbers highlighted in green to see how things change based on new assumptions.  I also didn't fiddle around with the mortgage interest deduction (assumed this is a non-factor) because I don't know your situation.  But you'll see that under these sets of assumptions your net worth actually increases by $1.5M 26 years from now, with a break-even for net worth at around 3 years, if you get the 15 year mortgage home.  You absolutely reach FI faster by selling and getting the new home, with a reduction of fixed costs of $3,400 in 15 years.

Curious to hear your all's thoughts.