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June 25, 2012


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Although it sounds like your least favorite option, I recommend that you stay put! You're about to have a baby that is going to require all your time, attention, and funds. Yes, when the baby comes, things will be tighter, but you'll be so glad you stayed put in the long run. We bought a home at the peak of the market in 2006, like you, and sold it in 2010 for less than we owed on it, because my husband got a job in another state. EVEN THOUGH the company paid the difference in what we owed and what we sold the house for, we still haven't recovered financially. We rented for two years and then bought a house in March at an incredible deal, but moving is soooooooo expensive. There are so many expenses you don't factor in or think about, and the stress of moving is enormous. Stay put, be a little cramped for a couple more years, and sock away enough cash so that when the second child comes along and you're really out of room you'll be in a better position to move. You're better off refinancing your smaller house at a lower interest rate and saving money that way, if you can. That's my two cents having lived through your situation!!

As a father who has walked in your shoes and counseled others in similar situations, I would strongly urge you to go with option #3 - stay put. As LaurS pointed out above, your world is going to expand like never before with a new baby, and the last thing that you need is all the stress associated with options #1 and #2 in addition to the crying spells, messy diapers, sleepless nights, etc.

From the sounds of it, you're not in a great financial position to make a big move anyway. Here's some common-sense advice that you have probably heard before by a finance personality on the radio:

1) Pay off all your unsecured debt.

2) If you haven't already, save up 3-6 months in LIQUID (i.e. not tied up in stocks, bonds, preferreds, etc.) cash for an emergency. Put it in a money market or savings account - something easily accessible. Remember, the key here is NOT to make money on this investment, but to insure your new family of three against unplanned expenses. The opportunity cost of parking your money in a low-interest account here (vs. investing it in, say, a mutual fund) is essentially the "cost" of insuring your family against disasters.

3) Get yourself to a position where you can refinance to a 15 year, fixed rate mortgage where the monthly payment is no greater than 25% of your take-home pay.

4) Invest in retirement.

5) Save for the baby's college fund.

6) Pay off your house and become debt free.

7) Save, live, and give like never before. Pay it forward by counseling someone else with similar thoughts.

Trust me - even though things will get "much tighter very quickly" with a new baby, it will be tighter still if you choose to do anything other than put your family in a position to win following steps similar to those above.

For whatever it's worth, my wife and I were hosted on a nationally syndicated radio show and paid off $50,000 in unsecured debt in 3 years (on a $50,000 income) and are walking right alongside of you age-wise. You can do it. Let home ownership be a BLESSING and not a CURSE to you and your growing family.

Just my opinion, though... =)

Yep, option 3. I am not in your situation, but really believe in no debt. It took many years for me to figure this out, but now that I have, I wouldn't trade it for the world. We recently did a home remodel for $57k. paid cash. Take it from me. You will feel better. Solvency Rules...

Agree with the others - option 3! What they didn't point out is that you say you would like to "take advantage of" the current low prices and rates ...

The only way to take advantage of the current low rates is to refinance. And there is no way to take advantage of the current low prices, unless you want to get into real estate investing (as you said, rent out one of your properties), because you're always going to lose any money on the old place that you can save on the new place (ie, you won't come out much ahead, especially if you're under water). The upside is that if the market does improve, the money you gain on the old place can go towards the new place - ie, any money you plow into it now, will get you further ahead in that scenario too (so it's not wasted!).

Further, if you do want to get into real estate investing, it doesn't sound like your current property would be a great rental property, as it would barely cover its costs. So you could add option 4, buy a rental property elsewhere that can generate enough income to get you out of your current place and into a better one sooner, but with a child on the way, this may not be the best time to do that!

My 2 cents ... :)

There is no question.

1) - Refinance under HARP
2) - Stay put
3) - Enjoy the "coziness"

Your home won't get much tighter, actually. Babies don't really take up much space or need much "Stuff." They need you and time. A different house does't provide that. Moving doesn't provide that. Besides, little babies sleep in a bassinet next to your bed for the first several months anyway, so moving would't solve anything regarding space.

Regardless of where you live, your life will be cozy with a new baby. Take it from someone who lived in a little house when my first was born, who now lives in an extremely large home with more space than necessary.

Keep the little house.

With the information given, I'd vote #3 - stay put for now.

Renting has a lot of costs and liabilities. Maybe you could rent for $1300 and cover the mortgage... maybe not. But what about all the other costs involved in renting? What about when the tenant fails to pay rent? What about maintenance? How do you fix a broken roof? etc. It can add up to a large amount easily. Unless you were wanting to be a landlord anyway, I wouldn't recommend it.

IF you have cash and means and desire to upgrade your home then I'd sell your current house and pay the shortfall and then buy another home. But thats only if you can really afford that and wish to do so. You say youre in good shape financially and you've got money in stocks and bonds but don't want to use it. So maybe you can easily afford the out of pocket loss. Or maybe you can't. Hard to know without details. But I'd generally say if you can pay the out of pocket today, pay 20% down on a new house and have a large emergency fund left afterwards then doing that is your choice.

Everyone has varying opinions on how big of a house you need. Some people will insist you'll be just fine with 1000 sqft and 3 kids. Others will expect 2000 sqft. But those are just opinions and we don't know how big of a home you're in now.

I agree with option 3. The rest of this post is if you can't follow the advice of all the previous posts.

As an intentional landlord here is a very rough estimate of expenses and these obviously vary by home and location. Plan for 93% occupency over the long run. I read that stat in a book and it has proven to be our long run average as well.

Home expenses will be at least 1.5% of the total value a year over the long run. This depends a lot on the age of the house and could easily be more. Even if you had no repains there will still be remodeling rooms after 10-15 years, new roof, new appliances, new HVAC... If your home is worth around 130k then I would assume around 2k a year for monthly expenses.

In summary, at $1,300/month you will lose on average $1,000/year on rent and $2,000 a year on expenses. Keep these in mind, along with all the responsibilities of being a landlord.

#1> Renting – do you really want to become a land lord on top of your stable jobs and becoming new parents? I wouldn’t as a baby is a LOT of work. Do you have experience managing a rental property? Will you have enough emergency funds to cover added expenses of managing a rental after the down payment on the new home? Would you still be able to qualify for a new home loan with the current mortgage even if it is a rental?

#2> Don’t forget you will also have moving costs and the closing costs on the new house. Listing above market value is very unlikely to find you a buyer. Why would they buy your home when they can buy a similar home for $11K less?

#3> You never mentioned just how small the current home is… but if you at least have 2 bedrooms and feel safe in the neighborhood I wouldn’t be in a hurry to move. Babies don’t take up much space, and they won’t notice the neighborhood at all for a couple years.

If you decide to take the loss I would at least wait until a few months after the baby is born as there may be unexpected medical expenses for the child or in the delivery. You will also know how manageable option #3 is for you and it also gives you more time to save up to cover the loss.

Before using the HARP program consider other options, as I doubt you will get a great rate through HARP. If you can afford the payments and the rate isn’t too high then you may be better off with your current mortgage. If you have a down payment saved up in cash you could potentially pay off a big chunk of your current mortgage and then do a regular refinance to a lower rate.

-Rick Francis

Babies don't take up that much space. It's the older kids that do. :-)

Nothing new here but I would definitely go with #3. We were living in a two bedroom condo until a few months ago and we moved because of baby #2. I loved living in a smaller home with newborns, there's enough other stuff to worry about without a lot of home maintenance. Now that #2 is almost 1 we are ready for more space. However, waiting a few years to move allowed us to build more equity in our old house so it was 'easier' to sell for a loss, save more so we will be putting down a large down payment on our new house allowing to be well on our way to being mortgage free, and most importantly to us- spend more time with our babies and not worry about a lot of home maintenance and housework that comes with a larger house. Now with a toddler and slightly older baby I am very excited for more space.

Good luck!

Like many others, I'd suggest that you don't rush a decision and stay put for a few more years, even if cramped. The transaction costs of moving are very high, as noted by others, and you need to be certain of what you're going to.

In a few years, you and your spouse will know much better what you want (more kids?), schools you want to be in, and what's important to you as you get into parenthood (SAHM?). Use this time to reflect on what you really will need -- not what you think you'll want.

The worst thing would be to make a decision now, and find out that you'd need again. As the old carpenter saying goes -- "measure twice, cut once."

I would stay put but look at ways to maximize your income. Do you have any subscriptions you can cancel? Can you refi your mortgage? Can you switch jobs to work a night job while the wife works during the day? Can you come up with some sort of inexpensive daycare such as a retired family member? Can you pick up a 2nd job delivering pizza or something between now and when the baby is due to build up some savings?

Not because everybody is telling you that you stay put, I would also suggest the same. But believe me, it is the most practical thing to do right now. It would be better to pay off the rest of your mortgage and save for the down payment of your new house.

I wouldn't make a decision until after the new one is here. As long as you have a room to make theirs, you'll be fine for a few years.

You might find that you don't want to do the day-care thing, especially in the early years. That will probably change your financial picture.

He's not really that far underwater where he should consider walking away or taking a big hit. Simply paying down the mortgage would reduce the underwater exposure, and if prices were to recover even a few percent, he could find himself back at even ground within a year or so, which isn't that long a time. I'd say put and re-evaluate in 12 months.

Thank you all so much for your input. This is very helpful.

I definitely see the advantage of staying put and paying down the mortgage.

A couple of things to keep in mind. Not sure if this changes anyone's opinion or not.

1. We save very aggressively both in retirement accounts and low cost investments. I actually have enough saved in my 401(K) to pay off the note on my house.

2. My comments about the down payment are more about preserving capital. With interest rates being so low, doesn't it make sense to invest cash instead of putting it into a house?

2. The idea of moving at this point is more opportunistic than anything. Our house is only 1K SQF, and we live in a high tax city with a bad school system. We will definitely need to move eventually. The reason for moving the timeline up is because of low prices & low interest rates.

I just don't want to look back in a few years and have "missed the boat" on a super low interest rate.

Sounds like everyone feels that these opportunities will still be around in another couple of years?

Thanks again...

Under no circumstances taking $ out of your 401(K) to pay down the mortgage. With a small child and a baby, you have time before you need to think about a school system. Also, it won't hurt your children educationally if they attended kindergarten or 1st grade in the public school system. Don't worry about missed opportunity. In your case, it would cost you more than you would yield by selling at a loss (or renting out your home), then would you make with the "opportunity" of lower interest rates. I believe that lower interest rates will be around for the next several years; not necessarily 3-4 percent mortgage interest, but under 8 percent. In the early '80's the home interest rates were double digit. Don't be seduced by these record-low rates. An opportunity is only that if you're ready financially to jump on it. You're not. You and your spouse are plenty young; more opportunities abound. Prepare and be patient, and enjoy the coziness!

Thanks for the additional details, friend. Even so, I would stick with the advice I gave above.

Regarding #1 & #2 in your follow-up post - one thing that concerns me is that you have enough money in retirement to cover the ENTIRE note of your house, and yet your mortgage is higher than the value of your home. Most of the time, exceeding 80% LTV (loan balance compared to the value of your home) results in some sort of PMI or higher interest rate on your current mortgage. You are probably paying additional money (in one way or another) to have such little (actually, negative right now) equity in your home and yet you have tons of money in retirement savings. I would probably get right-side up on your mortgage before you invest any more in retirement.

To answer this question you posed:

"With interest rates being so low, doesn't it make sense to invest cash instead of putting it into a house?"

Let's say you were debt free and you owned your home free and clear, would you borrow money on your home in order to invest in the stock market? I personally wouldn't, and I don't think that you would find many who would.

Remember, as Carol posted above, you won't EVER want to take money out of your 401(K), and so getting the house paid down and saving up 3-6 months of cash in a simple savings account are important next steps - this puts you in a position of control NOW and then you can fill up your retirement accounts to your heart's content. You want to be adequately prepared to deal with life's unexpected hiccups, especially with a new addition to your family and the possibility of unplanned medical expenses associated with the pregnancy/birth.

Good luck! We are rooting for ya!

If you were to rent out existing property, how in the world would you finance a larger house without (financial) hardship? If you do decide to move, contrary to above, sell the bonds first as interest rates are headed up bringing prices of bonds down sometime soon. Like if Obama is dethroned and the Fed reacts against the new President, as it will.

OPTION #2 - As a Realtor in the North East myself, if you can really manage to get out of that house for only $10 - $15,000 loss, I would do it...even if you need to take some money from your current investments to make it work. Keep in mind that while you may lose money on your current home, you will save more than that on the purchase of your new home. If you wait to sell until you can walk away even, you will also pay more for the new home...which would cost you more in the form of a mortgage at that time. You can always step up savings to your stock fund to "reimburse" yourself for the money you needed to withdraw. It's a tough decision...good luck.

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