Question: My husband and I own our home and we have close to $400k in equity. We are however staring down at least $75k in repairs coming in the next 5-10 years (roof, windows, driveway). Our mortgage is an extremely comfortable $2500/mo compared to our $250k/yr combined household income.
We are torn between staying and paying for the fixes as they come, probably $25k a year for a few years (which we are able to save easily enough with our debt to income ratio). Or moving to a newly built home, which in our area will cost 1 million – 1.5 million, this would raise our mortgage to $6500.
Our monthly net is $16,050 and monthly debt with utilities/groceries/nanny/car payment/mortgage is $7500. This doesn't include fun money or savings.
We already have $150k in a HYSA, makes us about $5k a year right now and growing. With either house I still plan to put around $12k a yr in there for our kids college and emergencies. We have $280k in 401k and an investment property worth $1 million my husband will inherit before retirement (he is beneficiary of a trust). So we have a decent nest egg we won't touch in either situation.
We do need more space. We have a 4 bedroom house with no office, 2 kids and both WFH.
So what would be the best decision for us financially? Is a small mortgage the safer bet? Or will it be simpler to have a new house with minimal to no repairs? When I think about both options, neither really comes out on top as the financially better decision, so that's why I'm making this post.
Answer:
Evaluating Whether to Stay in Your Current Home or Purchase a New One
Introduction
Making the decision to stay in your current home and invest in repairs or to purchase a new, larger home is significant and multifaceted. It involves considering not only the financial implications but also the impact on your family's comfort and lifestyle. Let's break down the key factors to help you assess which option might be more advantageous for you financially.
Your Current Financial Situation
- Home Equity: Approximately $400,000 in your current home.
- Current Mortgage Payment: $2,500 per month.
- Combined Annual Income: $250,000.
- Monthly Net Income: $16,050.
- Monthly Expenses: $7,500 (includes utilities, groceries, nanny, car payment, and mortgage; excludes fun money and savings).
- Savings:
- High-Yield Savings Account (HYSA): $150,000, earning about $5,000 per year.
- Annual Savings Goal: $12,000 to HYSA for kids' college and emergencies.
- Retirement Savings: $280,000 in 401(k).
- Future Inheritance: $1 million investment property (husband is the beneficiary of a trust).
- Family Needs: Require more space due to both parents working from home and having two children.
Option 1: Stay in Your Current Home and Pay for Repairs
Costs:
- Estimated Repairs: $75,000 over the next 5–10 years (approximately $7,500–$15,000 per year).
Financial Impact:
Lower Monthly Housing Costs:
- Mortgage Payment Remains at $2,500: This is 15% of your gross monthly income, which is well below the recommended maximum of 28% for housing expenses.
Affordability of Repairs:
- Savings Capacity: With a monthly surplus of over $8,500 (excluding fun money and savings), allocating $7,500–$15,000 per year for repairs is manageable.
- Cash Flow: Paying for repairs as they arise avoids taking on additional debt.
Equity Growth:
- Home Value Appreciation: Investing in repairs and maintenance can enhance your home's value over time.
- Maintaining Equity: By staying, you continue to build equity without incurring the costs associated with buying a new home.
Financial Flexibility:
- Savings and Investments: Lower monthly expenses allow you to continue saving for retirement, college funds, and emergencies.
- Risk Mitigation: Less debt reduces financial risk in case of income changes or unexpected expenses.
Considerations:
Space Constraints:
- Lack of Office Space: With both parents working from home, the absence of dedicated office space may impact productivity and comfort.
- Possible Solutions: Consider remodeling or adding an extension to create additional space. This could be part of the $75,000 in planned expenses or may require additional funds.
Lifestyle Impact:
- Ongoing Maintenance: Managing repairs over several years may be disruptive.
- Emotional Factors: Attachment to your current home and neighborhood.
Option 2: Purchase a New Home
Costs:
- Home Price Range: $1 million to $1.5 million.
- Estimated Mortgage Payment: $6,500 per month (assumed based on provided information).
Down Payment:
- Using Home Equity: Applying the $400,000 equity from selling your current home.
- Additional Funds Needed: For a 20% down payment on a $1 million home, you need $200,000; for a $1.5 million home, $300,000.
Closing Costs and Moving Expenses: Typically 2–5% of the purchase price ($20,000–$75,000).
Financial Impact:
Higher Monthly Housing Costs:
- Increased Mortgage Payment: An additional $4,000 per month, totaling $6,500.
- Percentage of Income: Housing expenses would be approximately 40% of your gross monthly income, which exceeds the recommended guideline of 28%.
Reduced Monthly Surplus:
- Monthly Expenses Increase to $11,500: Including the new mortgage payment.
- Remaining Monthly Net Income: Approximately $4,550 for fun money, savings, and unforeseen expenses.
Impact on Savings Goals:
- Ability to Save: You may need to adjust your annual savings of $12,000 to the HYSA.
- Cash Reserves: Utilizing savings for the down payment and closing costs reduces liquid assets.
Equity and Investment:
- Potential for Appreciation: A new home may appreciate over time, but higher property value also means higher property taxes and insurance costs.
- Opportunity Cost: Funds used for the down payment and higher mortgage payments are not available for other investments.
Considerations:
Additional Expenses:
- Property Taxes and Insurance: Likely to increase significantly with a more expensive home.
- Maintenance Costs: New homes typically have lower maintenance costs initially but are not maintenance-free.
Lifestyle Impact:
- More Space: Accommodates your need for additional office space and comfort.
- Modern Amenities: Newer homes may offer features that improve your quality of life.
Financial Risk:
- Increased Debt Load: Higher mortgage debt increases financial risk if your income decreases.
- Economic Uncertainty: Market fluctuations could affect home values and job stability.
Comparative Analysis
Total Cost Over 10 Years:
Staying in Current Home:
- Mortgage Payments: $2,500/month × 120 months = $300,000.
- Repairs: Approximately $75,000.
- Total: $375,000 (excluding utilities, taxes, insurance).
Purchasing New Home (at $1.25 million for mid-range estimate):
- Mortgage Payments: $6,500/month × 120 months = $780,000.
- Down Payment: Assuming $250,000 (using equity and savings).
- Closing Costs: Approximately $37,500 (3% of purchase price).
- Total: $1,067,500 over 10 years (excluding utilities, taxes, insurance).
Financial Impact on Net Worth:
Staying:
- Equity Growth: Continuing to build equity in your current home.
- Savings Maintained: Able to keep adding to savings and investments.
Buying New Home:
- Equity Reset: Starting with new mortgage debt; equity builds slowly unless the property appreciates significantly.
- Reduced Savings: Large down payment and increased monthly expenses may limit ability to save and invest elsewhere.
Cash Flow Considerations:
Staying:
- Higher Disposable Income: More flexibility for savings, investments, and discretionary spending.
- Ability to Handle Emergencies: Greater financial cushion for unexpected events.
Buying New Home:
- Tighter Budget: Less flexibility due to higher fixed expenses.
- Potential Need to Adjust Lifestyle: May need to reduce discretionary spending or delay other financial goals.
Additional Considerations
Alternative Options:
Renovate Current Home:
- Home Addition: Invest in an extension or conversion to create office space.
- Cost-Effectiveness: May be more affordable than purchasing a new home.
- Customization: Tailor the space to your specific needs.
Relocate Within Budget:
- Search for Homes in a Lower Price Range: Find a larger home that doesn't significantly increase your mortgage.
- Consider Nearby Areas: Expanding your search radius may yield more affordable options.
Hybrid Approach:
- Phased Repairs and Upgrades: Spread out the repair costs over a longer period.
- Temporary Solutions: Utilize co-working spaces or redesign existing rooms for office use.
Emotional and Lifestyle Factors:
- Community Ties: Consider your connection to your current neighborhood, schools, and social networks.
- Quality of Life: Weigh the importance of additional space against the potential stress of higher financial obligations.
Conclusion
From a strictly financial perspective, staying in your current home appears to be the more economical option. The lower mortgage payment allows for greater financial flexibility, continued savings growth, and reduced financial risk. The estimated $75,000 in repairs over 5–10 years is a manageable expense given your income and savings capacity.
Purchasing a new home would significantly increase your monthly expenses, potentially strain your cash flow, and reduce your ability to save and invest. While a new home offers more space and fewer immediate repairs, it also introduces higher financial risk due to the larger mortgage and associated costs.
Recommendations:
Evaluate Renovation Options:
- Consult with a contractor to assess the cost of adding the needed space to your current home.
- Compare this cost to the estimated repair expenses.
Financial Planning:
- Update your budget to reflect both scenarios, including all potential costs.
- Consider meeting with a financial advisor to model the long-term impacts on your net worth and retirement goals.
Assess Lifestyle Priorities:
- Discuss as a family what aspects are most important—financial security, space, location, or modern amenities.
- Consider the potential stress of higher financial obligations versus the benefits of a new home.
Explore the Housing Market:
- Research homes that might meet your needs without reaching the $1 million+ price point.
- Look into emerging neighborhoods or homes that may require minimal renovation but offer more space.
Final Thoughts
The decision ultimately balances financial prudence with your family's needs and preferences. By thoroughly evaluating both options and considering alternative solutions, you can make a choice that aligns with both your financial goals and your desired lifestyle.