Housing Crisis or Dilemma

[Penny6]

Hello all, this is my first post (sorry so long). I am a 30 y/o nurse of 7 years who has just recently resigned to become a domestic engineer. My husband is a 34 y/o chemical engineer supervisor. We have our eyes on the prize for early retirement. Goal retirement date is 2034 to seal in a pension from my husbands job. Goal financial indepence date 2029. He works for a major oil company and started out as a young intern 19yo in college(all years count toward pension!). Our current NW is about 770k including company stock, Roth IRA's, Traditional IRAs, 401k, kids 529s, equity in home and 2 vehicles. We currently max out all retirement options 401k (company contributes 10% of salary automatically), roth IRAs, and contribute to other retirement vehicles as well as to our kids college funds. Our plan is to be completely debt free by the end of 2019 by paying off our home aggressively as it is our last debt. We have started doing some work on it over the last couple of years and this year an additional expenses of aircon replacement on top of planned reno projects. I really want to buy land and build a home we will be in long term. We bought our cookie cutter home 10yrs ago. I am really torn at this point because I know once the house is paid off we will be swiftly on our way to our financial independence goal date. We may have about 75k equity with 120k mortgage left- It should be more but the actual importance of debt freedom in reaching our other goals took a little while to sink in. We had 3 debt snowball cycles, on baby step 6 now! I have made many list and have been reading about your home being one of the major expenses in retirement. I do not see future family Christmas partys here, or grandchildren running free here.
opt1: We could pay this home off by 2019 and save for the "forever home" 3 more years of saving 2023. Then use this home as a rental to generate income to quickly pay off the forever home. (This is my current inclination because at the end of the long process we would have the "forever home" and another income generating asset. Hubby is not keen on becoming a landlord.
opt2: Sell this home and use the equity as down payment on the forever home.(This may be what my broke friend next door would do.)
opt3: Payoff current home then bank all the future money into savings for future.-(This is what the millionaire next door would do.)
Option 4: Pay off current home save for "forever home" sell current home add to savings and buy forever home outright.
We project a savings rate of about 45k/yr after this home is paid off. I need some seasoned advice on this. TIA to all who respond.

[Whisper66]

You live in a medium size town with two world scale petrochemical plants being built that took thousands of workers to build. Those plants should complete construction in late 2017/2018 and most of those workers will be gone headed for new jobs. I suspect the housing market will get pretty weak then despite what optimistic city management says. If interest rates are still reasonably low, it may be a good time to buy new property. For that reason, in your position, I personally would target paying down my current home as quickly as possible and be ready to buy if land / home prices fall 2018 or soon thereafter. Might even consider renting existing house for awhile until the market rebounds if I could afford it.

[Blue Collar Guy]

Dont rent your house, sell it. Many headaches being a landlord. Rent the move Pacific Heights if you want a worst case scenario. I've seen similar situations.

[ERD50]

Seems like your options are centered around paying off the mortgage on your house. Why? Interest rates are low, this is a great time to get a low rate mortgage (15 years are currently the lowest rate).

Am I detecting some "Dave Ramsey speak" in your post? That guy hates ALL debt, and that just isn't reasonable. Everything is a tool, use it to your advantage if you can.

You said "I am really torn at this point because I know once the house is paid off we will be swiftly on our way to our financial independence goal date."

But that's not true. Having a low rate mortgage or not isn't really a big deal one way or the other in "achieving financial independence". Odds are, at these historic low rates, you will do better with your money invested. But maybe not, no guarantee. But it is likely a small difference either way.

I have a low rate mortgage, and I could pay it off tomorrow if I chose. I consider myself as "financially independent" with the mortgage as without. (edit) Actually, I'm more "financially independent" with the mortgage - I have more liquidity, and more money working for me, rather than tied up as equity in my house.

I suggest you keep your mind open to other options. BTW, I'm with your hubby, I would NOT want to be a landlord, it's just another job. But some people are OK with it.

-ERD50

[Bamaman]

We had a house go on the market down the road from us--in foreclosure. It was about 6600 square feet, a 20x40 pool, 2 huge double car garages and 5.5 acres. Very impressive structure that needed repainting and a new kitchen. While I could have bought it for $317K but the upkeep, buying a tractor and utility bills would have been more than i wanted to pay. And it'd have taken $100K to get it into tip top shape.

My wife found another foreclosure in a very exclusive neighborhood--houses going up to 10,500 square feet. Since we were a cash buyer, the financial institution could make a quick sale, and we walked away $100K under the worth of the house. 5200 square feet with two oversized double car garages is enough space for two ER's.

I have built one on the lake, and really got my money's worth. But have you priced a 2 x 8 piece of wood? And many contractors are taking reservations to build 1 year from now--with labor prices high. I'd rather not take on the frustration and extreme hard work of building another home from scratch.

Take your time, and be on the lookout for a foreclosure. It usually takes a year for them to get new owners, and it's a great way to save a buck.

[Penny6]

Quote:

Originally Posted by Bamaman We had a house go on the market down the road from us--in foreclosure. It was about 6600 square feet, a 20x40 pool, 2 huge double car garages and 5.5 acres. Very impressive structure that needed repainting and a new kitchen. While I could have bought it for $317K but the upkeep, buying a tractor and utility bills would have been more than i wanted to pay. And it'd have taken $100K to get it into tip top shape. My wife found another foreclosure in a very exclusive neighborhood--houses going up to 10,500 square feet. Since we were a cash buyer, the financial institution could make a quick sale, and we walked away $100K under the worth of the house. 5200 square feet with two oversized double car garages is enough space for two ER's. I have built one on the lake, and really got my money's worth. But have you priced a 2 x 8 piece of wood? And many contractors are taking reservations to build 1 year from now--with labor prices high. I'd rather not take on the frustration and extreme hard work of building another home from scratch. Take your time, and be on the lookout for a foreclosure. It usually takes a year for them to get new owners, and it's a great way to save a buck.

Build cash, watch for forclosure deal- Great option here!

[Penny6]

Quote:

Originally Posted by ERD50 Seems like your options are centered around paying off the mortgage on your house. Why? Interest rates are low, this is a great time to get a low rate mortgage (15 years are currently the lowest rate). Am I detecting some "Dave Ramsey speak" in your post? That guy hates ALL debt, and that just isn't reasonable. Everything is a tool, use it to your advantage if you can. You said "I am really torn at this point because I know once the house is paid off we will be swiftly on our way to our financial independence goal date." But that's not true. Having a low rate mortgage or not isn't really a big deal one way or the other in "achieving financial independence". Odds are, at these historic low rates, you will do better with your money invested. But maybe not, no guarantee. But it is likely a small difference either way. I have a low rate mortgage, and I could pay it off tomorrow if I chose. I consider myself as "financially independent" with the mortgage as without. (edit) Actually, I'm more "financially independent" with the mortgage - I have more liquidity, and more money working for me, rather than tied up as equity in my house. I suggest you keep your mind open to other options. BTW, I'm with your hubby, I would NOT want to be a landlord, it's just another job. But some people are OK with it. -ERD50

Yes we did drink the Dave Ramsey Koolaid. Its mainly about the secure feeling of no debt and freedom to invest more. We refinanced last year to a lower intrest rate. We have run the numbers with our finanvial advisor we end up roughly in the same place.

[Texas Proud]

Quote:

Originally Posted by Penny6 Yes we did drink the Dave Ramsey Koolaid. Its mainly about the secure feeling of no debt and freedom to invest more. We refinanced last year to a lower intrest rate. We have run the numbers with our finanvial advisor we end up roughly in the same place.

I am with ERD50.... there is bad debt and what I would say is 'good' debt...

Say you go to buy a new car... you have the cash to buy it right now... but they offer you a 5 year loan with 0 (that is ZERO) interest rate... would you take it? I would think so... you get to keep your money invested, even if it is only interest you earn.... BUT, you are still 'in debt'...

To me this is the same as a low rate home loan... 3 to 4%.... sure, it is debt, but even if you do not call it good, it is not bad...


Now, putting a vacation on a CC or some other event like that is bad debt.... that is what you need to not do....

[Blue Collar Guy]

Quote:

Originally Posted by Penny6 Yes we did drink the Dave Ramsey Koolaid. Its mainly about the secure feeling of no debt and freedom to invest more. We refinanced last year to a lower intrest rate. We have run the numbers with our finanvial advisor we end up roughly in the same place.

i love Ramsey too.

[evilanne]

I agree with most of what Dave Ramsey promotes. I use credit cards but all mine are paid off automatically on a monthly basis. The relief of having mortgage paid off is wonderful but having investments equal to or greater than the balance on your mortgage where you could pay it off might be the same. If you plan on renting it out, interest is a deductible expense and someone else if paying off the mortgage and building wealth for you. I have a rental in a different state, so property management company takes care of any issue & gets 10% of the rent and deposits the balance into my checking account each month (I don't think I would like to manage it myself). In any case, you have many options and are well on your way to FI & RE based on your savings rate. Best wishes!

[DrRoy]

You are in very good condition overall, especially for your age. Well done. On the house, I have some overlap with your situation. We paid off our house early a few years ago, and the added cash flow is nice. DW and I would like to build a house some day; we RE'd 2 months ago but we are not in a hurry. I would go (and pretty much did) for option 3. Landlording is only as good as your tenant. If you get a bad one you are in trouble.

[exnavynuke]

I'm a big fan of Dave Ramsey for people who are only willing to be "marginally responsible". For those willing to be responsible with their money moving forward, much of his advice is contrary towards maximizing your financial gains (such as paying more interest by keeping higher interest debt so that you can "snowball" it to feel good getting rid of a debt instead of feeling good you avoiding paying more interest than was necessary). Similarly, paying off a 2.5% loan (using my current mortgage rate here, I don't know what yours is) aggressively when you could be investing it for ~7% gains is throwing away 4.5% gains on that money, and all the future compounding of those gains... yet that would be DR's advice. 7% compounded gains far outperform 2.5% static interest rates.

If you want to pay off a mortgage because you're unwilling to accept the risk of investing the money, that's a decent reason.
If you want to pay off a mortgage because you want the estate protection of having that paid off asset, that's a decent reason.
If you want to pay off the mortgage instead of investing because you think it's time for the market to tank, that's a pretty speculative reason and equivocal to market timing, i.e. not generally a great idea.
If you want to pay off the mortgage because DR says debt is bad, then that's just blind obedience to a method that makes FIRE further away than it needs to be imo.

[ivinsfan]

Quote:

Originally Posted by Bamaman We had a house go on the market down the road from us--in foreclosure. It was about 6600 square feet, a 20x40 pool, 2 huge double car garages and 5.5 acres. Very impressive structure that needed repainting and a new kitchen. While I could have bought it for $317K but the upkeep, buying a tractor and utility bills would have been more than i wanted to pay. And it'd have taken $100K to get it into tip top shape. My wife found another foreclosure in a very exclusive neighborhood--houses going up to 10,500 square feet. Since we were a cash buyer, the financial institution could make a quick sale, and we walked away $100K under the worth of the house. 5200 square feet with two oversized double car garages is enough space for two ER's. I have built one on the lake, and really got my money's worth. But have you priced a 2 x 8 piece of wood? And many contractors are taking reservations to build 1 year from now--with labor prices high. I'd rather not take on the frustration and extreme hard work of building another home from scratch. Take your time, and be on the lookout for a foreclosure. It usually takes a year for them to get new owners, and it's a great way to save a buck.

Hate to quibble, but the house was actually worth what you paid for it at the time.....or are you saying the bank sold you the house at 100K under the appraised value? Even a quick sale won't get you a 100K discount.