Question: Three years ago -- fresh out of grad school, with new jobs and lots of optimism -- my husband and I bought a beautiful house that we love. Trouble is, we spent too much money. Now, our mortgage consumes nearly all of our monthly income, leaving us very little to save for retirement, our kids' college funds or do the things we love such as traveling. We both work for non-profits and like our jobs, so the prospect of increasing our incomes significantly isn't really there. We're quite frugal, so there aren't too many places to cut back. The good news is: We're not underwater (according to our tax assessment) and we can make our mortgage payments and pay our bills. That said, if we had an emergency, lost a job or had a big home repair, we'd be in trouble.
The question, then, is: Should we cut our losses, try to sell and buy something cheaper? In our accounting, after the realtor fees, etc., we'd probably end up netting about what we owe and lose the about 10 percent equity we have. Is that crazy? Over the long-term, we think about all we could do with the difference between our current mortgage payment and what we'd pay on a house that was, say, $100,000 cheaper, and it seems to make sense. We'd love to hear your advice. Thank you! Julia, St. Paul, MN
Answer: In reading your email, I think you've already answered your question: You're going to move into a cheaper place. It isn't a crazy move at all. It's a smart long-term move. House-poor is no way to live. A lesson of the turbulent economy of the past several years is everyone needs to create a margin of financial safety for their household. I applaud what you're doing, and if I were in your circumstances, I'd be thinking along the same lines.
When it comes to homes, small(er) is financially beautiful. The mortgage is less. So are insurance, taxes, heating, cooling bills and other costs of ownership. These cost savings compound over time.
To me, the real issue you face is timing. When do you make your move?
What I would do to concretely grapple with that question is to start a serious look for the kind of home you'd like in your new price range and in neighborhoods you want to live in. Go to open houses. Hire a real estate agent. Visit homes for sale. You want to see what you can really get in the current market for the amount of money you're thinking of investing. I would also see what you need to do to get your place ready for sale. What are homes like yours going for in the market?
You can then run actual numbers to see how you'll stack up financially moving from where you are and into a cheaper place. You can see whether you might lose your down payment. You can weigh short-term costs vs. the long-term gains. And so on.
At the end of this research and number-crunching exercise, you might decide to wait another year. Then again, you might find the right place at a great price and the trade-offs to get there are worth it. With research, you'll make an informed decision about the timing.