Thinking about new home - but scared to take the plunge

[BoilerEngr]

Warning - This is kind of a long post, but I want to layout the details as best I can, so anyone who is interested can give an insightful response.

Ok, so I have reviewed this scenario with my family and a trusted friend, but I wanted to see what sort of feedback I would get here. Here is some background on my situation and a summary of the decision I am facing. I would really appreciate any insight:

Wife and I are 31, no kids. We have been contributing fully to our 401ks for the last 8 years. We paid off our first house about 2 years ago and have really enjoyed the security of living mortgage free. It's a small 2-bedroom house, but in a nice neighborhood and overall a great place to live. However, we are thinking about having kids and will certainly need a bigger boat if we do. I work at home and use our 2nd bedroom as an office, so we really have no extra room.

We want to stay in the same area, but the larger houses in the neighborhood cost more than double what ours is worth. Since this is anonymous (somewhat), I will throw out some ballpark numbers. Our house is worth around $150k and owned free and clear. We have a found a couple of perfect houses in the $350 to 420k range, but have not put ours up for sale yet. We have about $80k in cash savings that we could use for a down payment (prefer to put at min 20% down so we can get a traditional loan with no PMI), so wouldn't need to sell our house first before buying the new one.

So, I'm thinking we can swing the move, even if we have to sit on our current house for a while as it sells. What I am really scared of is cleaning out our savings and going into mortgage debt again. We would really be walking the line, as far as emergency funds for a year or so, or until our current house sells. I am not very confident in the economy over the next year, so I'm not sure this is a smart move. As we are now, we could both lose our jobs and be fine for quite a while since we have no debt, low expenses and plenty of cash saved. Taking a $300k mortgage loan and cleaning out our savings would obviously change that picture.

I have thought it through a million times, but just looking for an outside perspective on the scenario, from anyone who may have faced a similar choice.

 

[golfnut]

Since you like the hood, is an addition to your home feasible?

 

[Meadbh]

Since you like the hood, is an addition to your home feasible?

I second that suggestion. It may be worth getting the opinion of a good architect. Location, location, location!

 

[rbmrtn]

I think I would look at an addition as well. Most of the reno shows say it's cheaper to build up than out. Add a second floor for kid bedrooms, convert the lower to master/office suite.

 

[FIREd]

I think that you can probably wait several years before making the move. Even if your wife is already expecting, you guys could probably put the crib in a corner of your bedroom for a couple of years. I know, not ideal, but you can make do. That should give you enough time to save more money for a downpayment on a larger home without depleting your emergency fund.

 

[rescueme]

You have the same situation that I/DW had a couple of decades ago.

We also had a nice 2-BR in a desirable part of town, and also paid for.

While it would have suited us well (it was built as the retirement home by the woman - husband had passed, whom we bought it from) in retirement, the addition to the household of our adult (disabled) son meant upgrading the home, both in features and size.

We initially went the route of getting in several architects to see what would be most feasible to do (it was a "U" shaped ranch) and would it make sense to built out or built up.

When the estimates came in, we added them to the then current value of the home and started looking into buying (or building) another home, based upon the specifics that we desired.

In our case, we were able to build a new home with the features we wanted for the then current time, along with consideration of design that we could use it as a retirement home - or at least for our early retirement years, for less money than doing a major upgrade to the old home. The better construction materials resulted in lower utility bills for a home that was larger (2400 sq ft vs. 1600 sq ft) and moving to a lower taxed area (5 miles away) reduced our overall cost of living.

With the sale of the old home (putting in 100% of the proceeds into the new home), and along with an aggressive pay down (we did not want to retire with a mortgage), it was paid off in 5.5 years.

Lifestyle and financial wise, it was the best move we could have done, in our situation.

Just our story...

 

[W2R]

Different families handle this dilemma in different ways, I suppose.

When we had our daughter we were living in a rented duplex that was about 500 square feet, I suppose. That was fine. She was just a baby, after all, and took no room at all, really. Actually I really really liked having her close by.

Then when she was about 14 months, we bought our first house, a whole 968 square feet, and had plenty of room. We didn't even use one bedroom. We stayed there until she was four, and eventually as time passed we moved to larger homes.

We never had problems fitting our daughter into our lifestyle! We would have moved to larger homes anyway, as time passed, even if had we had no child.

 

[BoilerEngr]

Thank you all for the suggestions and responses.

An addition is not very practical in our case. The house is a bungalow on a small lot, surrounded by similar homes, so a second story would probably look out of place. And building out would leave us with no yard.

Also, really appreciate those who shared their similar experiences. I know some of this stuff is pretty personal and involves major life decisions. It's helpful to hear from those who have been there.

 

[MichaelB]

How you feel about your neighborhood may change when you have children that are soon to start school. For many, priorities shift heavily toward school systems and driving logistics, and you may find yourselves wishing you had closed differently. What you don't want to do is move twice.

An addition is not a bad idea if you have enough land. Because your house is so far below the neighborhood average you are more likely to recover the cost when you sell it.

 

[Animorph]

Sounds like you'll have $150k left over after you sell the old house. So that will boost your savings from $80k in a round about way. That would pay for a lot of mortgage payments if you had to. I might still wait a year or two, since you don't need to move yet. You might take your time and wait for a good deal to come around.

Also, make sure the new mortgage lender is OK with two houses worth of expenses if the new mortgage is going to be tight. They're getting pretty picky right now.

 

[BoilerEngr]

Waiting is definitely the sensible option. As others have said, we could swing it for a few years with a small child and likely end up in a stronger financial position, when we do move.

On the other hand, we have lived here almost 10 years and are getting a little restless. Also like the idea of dealing with the headache of selling and moving before we have any little ones. (Although, I see how this could lead to the problem that MichaelB pointed out about possibly having to move twice).

 

[Buckeye]

What if you never got pregnant? Would you move to another house even if you weren't going to have kids?

 

[kyounge1956]

Thank you all for the suggestions and responses.

An addition is not very practical in our case. The house is a bungalow on a small lot, surrounded by similar homes, so a second story would probably look out of place. And building out would leave us with no yard. (snip)

You might want to consult an architect before you completely rule out an addition. Depending on your existing floor plan, a dormer addition might make it possible to add a master suite or a couple of kids' bedrooms in what is now the attic, without raising the roof line, so the house would still look like a one-story from the street.

 

[haha]

Plenty low income immigrants have 3 generation families in a 2 bedroom section 8 apartment. Not ideal but their families seen at least as close as ours.

No need to jump the gun. A premature move might put pressure on the couple to achieve pregnancy.

Ha

 

[Katsmeow]

Why do you need to buy a new house before selling your current house? Yes, I realize you could do it...but is there some compelling reason to do so?

Whenever you sell a house there is always risk that it takes longer to sell than you expect or that it sells for less than you expect.

FWIW, most of the time if a house has to sit a long time before selling it is because it is overpriced. We have been there (we didn't intend to be overpriced but we took advice from our real estate agent on pricing that wasn't correct). In the meantime we did buy another house (we had a mortgage on the existing house and bought the new house for cash). It was no fun at all when our house took much longer to sell than we anticipated and ended up selling for quite a bit less than we had expected. In retrospect, buying -- even for cash -- before we sold was not a good decision.

Of course, we did it because we didn't like the idea of having to quickly find some place after selling. I totally understand that. But I sure do wish we had waited.

In your situation, I would sell my existing house first and keep an eye on the market but would only buy either have closing on the sale (you can do a short term rental if need be) or make the purchase contingent on closing on the sale of your house.

All of this, of course, assumes that your income is sufficient so that your budget can support the mortgage and higher expenses of the new house.

 

[lhamo]

Would you be able to rent a small office space somewhere in your neighborhood to use for your work? The cost for that would be considerably less than upgrading your house, and might give you some useful work/life separation (useful for when there are kids in the house -- don't count on being able to work in peace when you have an infant/toddler underfoot, even if you have someone else doing full-time childcare.

I would NOT buy a new house before you sell the current one -- too much risk for very little benefit. While moving is a pain, you could always move into a rental with a month-to-month or six-month lease if you hadn't found dream house by the time yours closed. Personally, I would stay where you are until child #1 is born and at least 6-months old. You or your spouse may find that you don't want to continue working full time, and not having a bigger house/mortgage will give you a lot more financial freedom to consider other options.

I'm a house junkie myself, so understand the attraction of the hunt for the perfect place, but why not direct your restlessness into TTC instead -- more fun and much cheaper than a mortgage!

 

[obgyn65]

+1

What if you never got pregnant? Would you move to another house even if you weren't going to have kids?

 

[RISP]

I would NOT buy a new house before you sell the current one -- too much risk for very little benefit.

That's interesting - I would NEVER EVER consider to sell my current home without already owning the new one. Just thinking about having to move TWICE makes my skin crawl.
We are just in the process of moving into our first (and, hopefully, last) house and will soon put our apartment up for sale. My advice for the OP is, you are in no hurry. Small children really do not need much space.

 

[rescueme]

That's interesting - I would NEVER EVER consider to sell my current home without already owning the new one. Just thinking about having to move TWICE makes my skin crawl.

That's what contract contingencies are made for.

We had a contingencies on both contracts for both the existing home sale and new construction contracts. The sale of the land and start of construction of the new home was depending on the sale of the existing home, within a three month period.

On the other side, we had a contingency to allow us to do a leaseback of our old home for a period of time until our new home was completed.

It worked out well. The young couple that bought our existing home were living in an apartment. Our monthly rent (paid to them) covered the mortgage/taxes while we continued to live there until our new home was finished.

I'm sure it helped that the same real estate company (different offices) handled both sides of the sale. They were well aware of our requirements and tailored the sale of the existing property, along with the land for our new home in a seamless manner.

I'm with you. I would not want to move into a temporary place and have to put all my "excess stuff" into storage and basically move twice in the same year.

 

[Midpack]

So, I'm thinking we can swing the move, even if we have to sit on our current house for a while as it sells. What I am really scared of is cleaning out our savings and going into mortgage debt again. We would really be walking the line, as far as emergency funds for a year or so, or until our current house sells. I am not very confident in the economy over the next year, so I'm not sure this is a smart move. As we are now, we could both lose our jobs and be fine for quite a while since we have no debt, low expenses and plenty of cash saved. Taking a $300k mortgage loan and cleaning out our savings would obviously change that picture.

Greetings from 150 miles north of you, I take it you're a Purdue grad.

I thought remodel/addition first too, but it sounds like that might not work for you.

There is no "right" answer, only you can decide if it's worth it to you. Not having a mortgage is a wonderful feeling, but you've got a lot of years and family ahead of you. So if you think it's worth it, maybe you should consider a new home. However, you should wait until you can definitely afford a down payment AND still have a solid emergency fund left**, especially if you really think you could both lose your jobs. Interest rates are not going to jump in the next few years, and home prices aren't going to jump substantially in most areas either, so the window of opportunity for you is several years.

Best of luck Boiler...

**Many people consider 6 months a good rule of thumb, but that depends on your professions, and how hard it would be to find work again. In some professions, a 1-2 year emergency fund isn't out of the question.

 

[pb4uski]

I agree that I would not buy another home until the first one is sold. If you decide to buy another home you can make your closing contingent on the sale of your current home at a price of $x or more and protect yourself from having two homes.

I think I would wait until you have a need since you seem to like your current home and location. There is no reason that you can't browse and go ahead if you find something perfect, but it seems that there is no need to rush.

If you sell your house for $150k you'll probably net $135-140k which would get you a 30-35% down on a $400k home with a $260-265k low interest rate mortgage. IMO, there is no sense in putting more down if you both work with interest rates so low.

If you're ambitious, you could also bide your time to see if you can find a dog/fixer-upper in a desireable neighborhood that you can buy at a good price and then renovate and move into and then sell you home. That's the only scenario I can see where it would make sense to temporarily own two homes.

(Or so says the guy who has owned two homes twice during his life).

 

[RISP]

We had a contingencies on both contracts for both the existing home sale and new construction contracts.

OK, that's not common in Germany. In fact, I had never heard about such a clause before.

 

[hakuna matata]

We were in this situation 2 years ago and bought our new house without the old one being sold, and had to wait 14 months for it to sell. But it was fine as we owed very little on the old house, and you own your house outright so I am not seeing why the hesitation to wait for your current house to sell. So although it sounds scary to have two houses, you still only have one house payment right-the new one? You can always just sit on the old one until it sells or rent it out right?

I am an Architect (always looking for work!) and depending on a bunch of factors you may find it MORE expensive to build than buy. Take my current situation as an example. I own 5 acres of land and designed a nice home for the lot--the numbers came in way more than I was willing to part with, so on a whim we decided to look at houses and that is how we ended up with this house. I had the same GC who bid on my designed home do one of the inspections (and he did some minor remodel work before we moved in) and one day he told me outright that he couldn't have built this home for what I paid for it. I agree with him--construction costs and labor haven't come down yet to match real estate prices. It indeed may be cheaper to buy than build depending upon the local conditions.

Now saying all that, it was stressful having a house sit vacant for 14 months (we opted to not rent it out during that time) but eventually the right buyer came along and we got a decent amount for the house so it all worked out fine. But it is a risk no doubt about it. But also during that time I went out on my own and that is a risk too--life has a lot of them, and sometimes you profit and sometimes you don't. Good luck and give me a call if you need an Architect

 

[pb4uski]

While if you have a paid for home it is easier to hold and wait, there are still costs to owning a paid off home. Between insurance, property taxes, electricity, heating/cooling, pool maintenance, snow plowing, etc. the house that I sold probably would have cost me $800 - $1,000 a month just to stay vacant. Not to mention the opportunity cost.

 

[meekie]

If you're in that good of a neighborhood, have you seen what kind of rents your current house would get if you rented it out?

We had a different situation, but decided to rent out our first house and buy a new one. Someday, when both houses are paid off, the rent from it will cover property taxes and upkeep on both. We found a great property manager, and the property tax laws in CA are such that holding onto a house makes a LOT of sense.

Oh, and no matter what you do, try to be patient. House prices aren't moving up fast right now, and it looks like interest rates will be low for a while as well. It sounds like saving for another year to build up your emergency fund might help quite a bit.