Q: Can you please help me. I am 32 years old and earn $63,000 a year and invest 8 percent of my salary into my company’s 401(k) plan. I have $90,000 in cash in the bank. I also have a $45,000 certificate of deposit earning 4.5 percent that matures in 2 years.
I have a mortgage on my home with a balance of about $133,000 with a 6.6 percent interest rate. If I were to refinance, I would have to put in probably $40,000 to qualify due to my home’s value declining. The problem now is that this home was my first home and I do not like it. I don’t like the layout or the size but I can’t sell it because I would have to take a huge loss.
Should I refinance the home and wait out the market to get the house I really want. Or, should I wait until my CD matures in 2 years and just pay off the entire mortgage with savings and then buy the house I really want. I could rent the home at that time. Or, should I refinance this home, rent it out and buy a home with interest rates as low as they are today.
I’m just not sure what I should do. I really want to take advantage of the low interest rates and buy a house where I’d really want to spend the next 15 to 20 years. My credit is excellent.
A: You’ve done well financially to have purchased your own home and saved so much money at your age. While we’re not financial advisors and you might benefit from talking to a fee only financial advisor about your overall portfolio, from the real estate side, you might not be in such a big bind as you might think.
While you may be correct that you might take a huge loss on the sale of your current home, if you are looking at a home in your area and that area has decreased in value by the same amount as your home, you would be selling your home at a great loss but buying your next home for that much less.
People tend to see the real estate market one way when the market was going up. They would buy a home, see it appreciate in value and then move up to another home. As long as they didn’t lose money on the sale of their current residence, they would take money out from their current home and move it to the next one.
The same principal might apply if you sell and buy in the same community even if you lose money. If you purchased a home for $150,000 when more desirable homes were selling for $250,000 and now your home is selling for $100,000 and those same more desirable homes are selling for $165,000, you might be better off buying today even if you lose money on the sale of your current residence.
If you wait for the market to recover – and I’m not sure when that will be – you might be able to sell your current home for $150,000 and buy the more desirable home for $250,000. I don’t think you’d be better off waiting, especially if you can obtain a mortgage today at historically low interest rates.
While renting your current home may be an option, you might not have that flexibility if you refinance your home with the intent to rent the home. Most residential home loans require you to tell the lender that you intend on living in the home as your primary residence and maintain the home as your primary residence for at least one year.
Another thing you need to consider is whether you want to keep your current home and become a landlord. You might find that keeping the home might be a good investment for you and can manage the investment along with your other holdings.
But if you don’t feel up to dealing with tenants, their issues, maintaining multiple properties and all the issues that surround real estate investments, your best bet might be to sell your current home at its current market value and buy a home you love that you can live in for years to come.
Keep in mind that the $90,000 you have in the bank may be making you almost no money. If you use that money for a down payment on your new home and take out a new mortgage at around four percent, you may have a lower monthly mortgage expense in the new home, but you might find that a new and larger home may have higher utility, insurance and real estate tax costs.
Again, you might find it useful to sit down with a financial advisor and walk through each scenario and how it will affect the amount you have saved, where you have your savings invested and where you might want to put your money for the long term.