What are you sacrificing to pay off your mortgage?
If it sounds good to you, do it. According to the MacArthur Foundation, you are not alone. The latest survey of Housing Matters found that 40% of homeowners and 72% of renters have made at least one sacrifice in the past three years to cover housing costs. With each compensation, you give up something important. It can be time and energy, or even your physical health.
But you often sacrifice your financial future, and it can be expensive in the long run. The accumulation of credit card debt to make ends meet only complicates the payment of bills. And remove retirement provisions from your budget? Well, it’s a deep cut.
Let’s see how a family trapped between a rock and a difficult place can continue. In this example, we will guide Tom and Kathrine in their decision-making process.
Tom and Kathrine are 35 years old and live in a four-bedroom house they bought for a family 12 years ago. They paid $235,000 for their home and paid 3% on a 30-year mortgage with 6.5% interest. With taxes and insurance, their mortgage costs $1,860 per month. They knew it would cost a lot of their income, but they thought they could change it because they had no children and no debts at the time. Despite income growth, his mortgage payment still represents almost a third of his monthly salary of $7,000. And a lot of life has happened over the past decade.
Tom returned to graduate school a few years ago. They now pay $260 for their student loan each month. Tom and Katherine welcomed two children into their home. Katherine’s mother offered to keep the kids at work to save them a lot of money on child care costs.
The fishermen bought a minivan for their growing family and added a car payment of $450 to their monthly debt. Somehow, in the midst of all these changes, Tom and Kate never realized how close they were to the financial benefit. Kathrine’s mother had major health problems and could no longer provide child care. They gave up their savings for retirement and used their emergency savings to survive in the past three months. But both know that something has to change. Let’s take a look at your options.
Option 1: Refinance your home
Tom and Kathrine know that all you have to do is refinance your mortgage to lower your interest rate, not your payment. Fortunately, mortgage rates have dropped about 2.5% since you bought your home in 2007. Of course, they expect this to mean a lower payment. Fishermen also know that a refi is not a good thing if it means adding another decade of debt to your mortgage. This is why they choose a duration of 15 years instead of 30 years.
The good news is that a 15-year mortgage could cut five years and interest rates on your long-term mortgage costs by almost $80,000. They also built up enough capital to remove private mortgage insurance (PMI) monthly for their refinanced payments.
Option 2: Sell your house
Since refinancing will not solve your problem, Fishers works with a trusted real estate agent to sell your home. Your agent performs a comparative market analysis (RMR) to determine how your home is compared to similar sales in your area. Thanks to a few cosmetic updates over the years and a recent renaissance in the neighborhood, the fisherman’s house could bring in around $275,000 in the current market. With a mortgage balance of only $186,000, you get $100,000 in principal!
With that kind of extra money, it doesn’t make sense to rent your next home. You are considering buying a cheaper home in a new neighborhood with a substantial down payment.