Rebejay from Vancouver, Washington asks:
Is it better to sell the fancy house, pay off all debt and rent until we can purchase a more affordable modest home? We may have enough equity to accomplish it all and not rent. We are tired of the rat race and want to send our kids to a Christian School. We both work and can make the debt payments – just tired of being a slave to them. I want to simplify. We want to pay it all off and have the burden lifted. Also worried about housing market crashing…
Tawra: I would say go for a modest house and get out of debt. Even though our culture tells us we should have everything, there is no reason that we need all of the "stuff" that the popular culture says we should have. The reason they says we need the "stuff" is supposed to be to make us happier. Clearly, it doesn’t sound like the fancy house is making you happier, so sell it, and the sooner the better. I would do everything possible to sell it and buy the modest one right away. We have not had good experiences renting and unless you plan to live in the rental for a number of years, renting would mean that you would have to deal with moving twice in a short time period which is exhausting and costly. Once you sell the fancy house, you shouldn’t have a problem getting a mortgage on a more modest one unless you lose big money selling the fancy one or unless your credit has been negatively impacted since you got the mortgage on the first one.
Once you get the more modest home, try to pay the same amount you’re currently paying for your house, allocating the difference in your old payment and your new payment to the principal. If your fancy house costs $1500 per month and your new house costs $1000 per month, pay the extra $500 to principal on the modest house. Make sure you indicate on your mortgage payment coupon that you want the balance to go to principal so that you pay it off faster. You be surprised how quickly you can pay it off over-paying the principal and since you can make your current payments, you can keep paying the same amount and eliminate your debt completely.
I would do everything possible to get TOTALLY out of debt. Most people don’t consider a mortgage a debt, but it is. Once it is paid off, you will be able to use all of the money that you currently use for housing for something else, like the Christian School you mentioned. Not only that, one day, you will want to work less. Hopefully, you will not become disabled, but it does happen and it would be easier to have the flexibility of having no debt.
Regarding the housing market, it is a reasonable concern, but in most (but not all) areas the values will increase eventually even if they go down for a few years. Still, if you pay off your house completely, you won’t have to devote time to thinking about it. Go with your instinct!
photo by: taberandrew’s