Poke holes in my new financial plan

[Zoocat]

I am sick of being held hostage to a $1500 PITI on a 30 yr $230K mortgage and $133 extra to my worthless HOA, so I am considering selling and downsizing to a smaller unit in a well managed complex. I have lived in my current place 2 years, so no tax consquences.

I will likely come away from the sale with about $2000 profit. But I am talking with my realtor tomorrow to check my assumptions.

In my analysis, my next mortgage (15 yr $100K) will cost me around $966/mo plus $150 to a much better run HOA. That will save me about $550 a month which I will use for more travel.

My current place is about 1200 sq ft, 2 bed 2 ba. The new one would be about 800 sq ft. 2 bed, 1 ba. The new one is in the same town but on the perimeter in an attractive location, still close to all ameneties. The only possible downside is that it is a large complex with lots of people moving in and out.

I can't see a downside to this plan, since I live by myself and the new place will have the extra bedroom for guests/and or my home office. And the most important quality, it's dog friendly. Any comments appreciated.

 

[Empty Pockets]

I'd do it.

 

[MasterBlaster]

Lets do some "back of the envelope" calculations and see what we get. You can redo them later with the real numbers and a more sophisticated approach if you like.

You will save around $550 a month but after your tax break that $550 may only cost you $366 or so depending on your federal and state tax rate(s) cause' the house payment is usually deductable.

Also keep in mind that roundtrip cost to buy and sell houses isn't free. I ballpark your transaction costs at 8-10 percent of the sales price (guessed at maybe $250k) depending on the real estate deal your realtor gives you. At 10 percent that trade will cost you as much as $25k or so depending on the sales prices of the old and new house. That cost will go up if the old house sells for much more than your mortgage ie. - you've got lots of equity.

so to break even you'll need to stay in the new place at least 62 months.
(68 months = ($25k/$366/month))

If we factor in lost appreciation (over the long haul) at inflation rate of say 3%. If the new house is worth maybe $130k less then you will forego (extra) appreciation of around $3900/year or 325 a month. If we discount this amount for income taxes by the same rate we forego maybe $216 a month (after taxes). It's actuall more than that due to the long term compounding effect.

So just maybe you will really only save $366-216 = $150 over the long haul.

If it costs you $25k to trade then you'll have to keep the smaller house ~166 months (~14 years) to break even.
(166 months = ($25k/$216/month))

The net is that there is no long term improvement in your financial condition.

If you spend the extra $550 a month on travel or whatever (cash flow difference) you are buying memories but not getting ahead financially. In fact you are going backward. By spending more than the $150 (i calculated above) your financial picture is getting worse.

I suspect also that the new house will have a less favorable interest rate since rates have gone up somewhat over the last couple of years. That needs to be factored in.

Those memories of travel and other stuff are great but don't delude yourself about your true financial picture in the process.

Anyway - That's how I look at it. Use your own numbers and make your own decision

 

[Zoocat]

I included the sales fee when I said I'd probably come out with about $2K profit. Here's the details.

Purchased at 295K Sell: 315K, less 5.6% realtor fee, less $230K mortgage. Leftover= $67360, less the downpayment of 60K = $7360 profit. (I won't do the sale if I lose money on it.)

Buying a less expensive condo for $160K with $60K down for 15 years @ around 5.8%. Use some of the profit for mortgage fees and moving costs.

My effective tax rate last year was about 7.5% so the interest deduction is not a big factor.

Aside from appreciation, which is speculative and would not factor into my useable income anyway, how could I not come out ahead with a cheaper mortgage paid off in 15 years?

 

[MasterBlaster]

OldBabe:

Well maybe I went a bit overboard.

Where I live though the cost to trade houses is maybe 40-50% more than just the realtor costs. to buy 1 house and sell the old one we pay:

1) realtor fees in the ballpark of what you posted
2) Closing costs and other junk fees
3) The seller needs to buy the buyer title insurance
4) points on the new loan and other associated loan fees
5) closing costs on the new home
6) lots of junk fees to everyone marginally associated with the deal.

with a ~6% realtor fee on the old house I would ballpark your (buy one sell one) roundtrip transaction costs if the house were in my vicinity at 9-10 % of the selling house price or maybe $31k.

So if my trusty calculator works I estimate that you'll have maybe $35.5k ($295k*0.9 - $230k) to put down on the new house.

It's not the average tax rate that's important. It's the marginal tax rate here that matters. Is that what you posted ?

To be fair, the smaller house should cost less to maintain. That is worth considering. Also there would be less influence to "keep up with the Jones" in a smaller house if that's a factor.

 

[Zoocat]

Thanks, MasterBlaster. I will go back and look at all the closing costs, etc from the purchase. This is a more complicated analysis than I thought it would be. I was just looking at how much money I could free up, not my eventual net worth.

The effective tax rate is the one quoted by TurboTx for 2005. "Marginal tax"? how do you figure that?

 

[SecondCor521]

Marginal tax is the tax you pay on your last dollar of taxable income.

The way to figure your marginal rates is to look at what your income tax bracket is for federal and also state and then add the two together.

To figure your federal tax bracket, look up your taxable income on your tax return. This is the amount on line 43 of your 2006 form 1040 (or similar line from other years or other forms). Then also look up your filing status on line 4 (or similar). Take those two pieces of data and look yourself up at the following URL:

http://www.irs.gov/formspubs/article/0,,id=150856,00.html

For example, a person filing single with a taxable income of $40,000 would be in the 25% marginal bracket.

Repeat the same sort of exercise with your state forms and state tax tables if you pay state income tax. State marginal income taxes are lower -- maybe 5-8%. Let's say you're at 8%.

Then you would add your 25% federal marginal bracket and your 8% state marginal bracket and you'd have a 33% marginal rate. This means that if you had earned $1 more, you would have paid 33 cents more in taxes.

The effective tax rate that Turbotax gives you is simply your total taxes divided by your total taxable income, so it's really an average. Your effective tax rate will always be lower than your marginal rate (at least assuming a progressive income tax system such as we have now).

2Cor521

 

[Zoocat]

Thanks 2Cor for the very understandable explanation.

 

[JohnDoe]

OldBabe:

Where I live though the cost to trade houses is maybe 40-50% more than just the realtor costs. to buy 1 house and sell the old one we pay:

1) realtor fees in the ballpark of what you posted
2) Closing costs and other junk fees
3) The seller needs to buy the buyer title insurance
4) points on the new loan and other associated loan fees
5) closing costs on the new home
6) lots of junk fees to everyone marginally associated with the deal.

with a ~6% realtor fee on the old house I would ballpark your (buy one sell one) roundtrip transaction costs if the house were in my vicinity at 9-10 % of the selling house price or maybe $31k.

All of those fees are negotiable. There is no way I'd pay 6% to someone to sell my home if I'm buying a new one. You find someone to give you the deal you want or you walk. You are in control of the transaction.

 

[MasterBlaster]

JohnDoe:

That only works when houses are in short supply.

When everyone and their brother is suddenly trying to unload their overpriced house you need to motivate the agents and dollars do that.

There are all sorts of stories about people who got a great deal on their listing but then it just sat there for 9 months. Meanwhile house prices dropped 20 percent.

penny wise ?

 

[Rich_by_the_Bay]

JohnDoe:

That only works when houses are in short supply.

When everyone and their brother is suddenly trying to unload their overpriced house you need to motivate the agents and dollars do that.

There are all sorts of stories about people who got a great deal on their listing but then it just sat there for 9 months. Meanwhile house prices dropped 20 percent.

penny wise ?

I think there is some truth to that. The trick is that if you are going to go with a 6% listing agreement (only a third or so of which goes to the realtor, by the way) find someone who adds value: successful track records, respectful of your wishes, seasoned, and fair but tough.

Then do what the heck they tell you to and don't get emotionally attached to some arbitrary number. The house will be worth whatever it sells for. Take the money and move on.

 

[shtg42012]

What about property taxes? If new place is "downsized" relative to exisiting place, this might be a push but property taxes are not a one time cost. In our part of the world (SoCal), this is a big consideration if you are moving within the same general area because taxes are based upon the valuation of the new place vs the former. If you have been in the former place for quite awhile, chances are the increase in prop tax can be significant due to the % appreciation in the last few years.

 

[d]

cash flow asside, there's a big savings in swithcing from a 30 to a 15 yr mortgage!

 

[Zoocat]

After meeting with my realtor today, who is very realistic and is in my corner, I have decided that the downsides are too many and too great right now. It's true that a 15 yr mortgage would be a great advantage but the costs of selling plus the slow market make my plan a difficult one right now. Avoiding stress is another issue. I will sit tight for another year and maybe revisit the issue then.

Thanks to all who responded.

 

[W2R]

After meeting with my realtor today, who is very realistic and is in my corner, I have decided that the downsides are too many and too great right now. It's true that a 15 yr mortgage would be a great advantage but the costs of selling plus the slow market make my plan a difficult one right now. Avoiding stress is another issue. I will sit tight for another year and maybe revisit the issue then.

Thanks to all who responded.

Sounds like you have a well thought out plan. You are so right - - in many areas, this is not a very good time to sell.

Also, weren't you considering moving to another state soon? Maybe you will downsize when you do that, and manage to save yourself a move (and the related expenses and stress). At any rate, good luck to you and "hang tight". The year will pass in a flash.

 

[Zoocat]

Thanks, Want2Retire. Good point. In the future I may want to move to a warmer area, that's true. Right now though my kids are here so I don't know when that would possibly be. But as I've learned the hard way, you can't count on things remaining the way you want them to be.

 

[Zoocat]

Decided to let this issue die.