Pay off Mortgage, or use equity to upgrade??

Question

Hello, I need some advice from "smart" money people on what to do in my situation... It's a good option that I have I just want to do the right thing.. I am currently 34 yr old live in Fort Myers FL and bought a house in '10 for $72k lol... The house is now worth $165k My current mortgage is $612/mo including taxes/insurance.. it is only myself and my fiance living here, is 1080sq ft, totally remodeled, 2br/2ba.  I can have it paid off in full in about 8.5 years. It will need a new ac in 3-5 years.

My second option is to sell my home and use the equity I make down I am looking at 3/2 homes in the $250k range. The mortgage on this place would go up to $1400-$1500 including taxes/insurance/hoa and it would b a 30yr mortgage.

So my question is, what is the financially correct thing to do in this situation? Should I just stay in my current place with the low mortgage or cash in on the equity and buy a brand new place? I cannot rent out my home as I don't make enough $ to qualify for 2 loans, I am a teacher. My last option would be to pay it off in the next 8 years and THEN be able to rent. current rent is around $1300 for my house.

Some additional info- I am a teacher currently making about $50k/yr plus bouncer on the weekends making $600 cash/mo.  fiance makes about $25k/yr.  i am currently putting $12k/yr into 403b

Please give me your advice and opinions on what the smart decision would be in this case. Thank you!

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Jonathan Makovsky · Answer

@Robert Czek nice first post!

Did you ever think about what the best sport out there is, or maybe what is the best color? Well there is no best sport or color- there might be more popular ones - but everyone likes something different.

So while I can try to give some guidance to your question, there is no right or wrong answer to your question either - it's a matter of personal preference and what works best for your family. Remember some people will take serious risks in life, and others prefer a more conservative and balanced approach to avoid risk; and since you are different and your needs/situation is different than everyone else here, there is no one way or definitive answers (unless it's one of the scam artists trying to sell a get rich quick program - there is only one right way with them.)  :)

Getting back to your question, which I am probably not qualified to answer since I am not a "smart" money person:

1) Your assumption was that you cannot get a second mortgage with your current salaries. Can I kindly challenge you to see if you spoke to MULTIPLE mortgage lenders and brokers to verify that? (I stress multiple, because some people see the world in black and white, and if you only go to them then they may have told you no, but...) I wouldn't be surprised if you can get a second loan with the income you stated. However, let's assume you cannot...

2) What about a Home Equity Line of Credit (HELOC) on your current home to pull out money to put more money down to buy the second house and rent out home #1? Is that an option? (Again, I would recommend talking to a local lender - ask around on BP for someone, it's amazing what some of these lenders can do.)

3) Let's say  neither option 1 or 2 work, then it goes back to your comfort level. Do you like blue, pink or green, i.e. what is your risk tolerance for having a bigger mortgage? Do you feel comfortable covering that loan? If yes, and you want to move to bigger house then maybe that's the play. However, if you are you going to be up every night thinking "What if the roof blows off or what if the AC goes (that just cannot happen in Ft Myers!), or what if...?", well then maybe a bigger house isn't for you.

Again, it's a decision for you and your family to make and what your financial situation and comfort level is.

If it were me - not knowing anything else about you - I would try my best buy home #2 and see if renting home #1 makes financial sense and get into the real estate investing game. But again, do you have the tolerance for that? And you may think very differently than me.

I guess there actually is a best and worst color when it comes to net profit: staying in the black is the best and dipping to the red is the worst.

Best of luck!

Elena Sweeney · Answer

Congratulations! You have already made a very smart decision, buying a house when the prices were low. Now, just ask yourself a question, what is your next goal? Do you want to be a landlord? then you can  rent your first house out and buy the second home. Do you want to be a passive investor who fixes the home while living in it? then you can sell your current home and use the equity as downpayment for another underpriced home. Or may be you just want to pay off your current home off and live mortgage free? Only you can answer these questions . No matter what option you choose, it will be another step to financial freedom. Good luck to you

JD Martin · Answer

Financially the correct thing to do, assuming you want to be a landlord, assuming you can buy something cash or close to it, would be to cash out some of the equity in the house and invest it in something with a greater rate of return than the HELOC you would be taking on the current place. Cashing in to buy a bigger place to live in yourself is not an investment unless you get lucky enough to get into something with a crazy rate of appreciation. Financially speaking, the place you live should always cost you the least money - and cost includes opportunity loss. If one could stand it, living in a van by the river and putting all your money towards rental or appreciation property is the financially smart move. Since most people don't want to live like that, pick something inexpensive and stay in it. Once you are loaded, you can buy a property in a high appreciation area and have the best of both worlds - a nice house and a high rate of appreciation.

Brit Foshee · Answer

@Robert Czek

I'm from the camp that as long as you're willing to move you should always capitalize on the tax free gains.

As you may know, you must live in the home for 2 of the last 5 years.There is no better tax break.

Go find a home that could use a little love and do it again.

Take the extra cash and buy a rental property.

My two cents. =)

Best of luck!

Pay off Mortgage, or use equity to upgrade??

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