My wife and I moved into our townhouse in 2006. It is about 1075 sq ft. We LOVE our neighborhood- we can walk to everything one could need, a rarity in our part of the country. (walkscore.com = 82!)
However…we hope to expand our family in the next year or two, and will need more space. A 3 BR/2.5 BA place just came on the market, in the same neighborhood, at 1600 sq ft. This is a rather rare opportunity in our neighborhood, where most home are older, smaller, more historic, and more expensive.
Until this place came on the market, we had been planning to refinance our townhome this summer to lower our monthly payment, saving up for a year or two, with the longer view of moving to a bigger place and renting the current one out. Suddenly, we have a chance we did not expect to see for some time.
Our ideal outcome would be to buy the new place and rent the old. Here is my current strategy:
IS THERE A BETTER WAY TO DO THIS?
Other info that may help:
Thanks for any ideas you have! Let me know if you need more information.
Here’s the response from Patrick at Cash Money Life
It sounds like the two of you are doing fairly well right now — homeowners, saving for retirement, excellent credit scores, low debt, etc. Good job! Your plan to refinance your current home is a great idea. You should be able to beat 6.875%, which will save you a lot of money every month.
As you already plan on doing the home refinance, the question now is — should you buy the second home this summer or not? You’ve already stated some of the reasons to go ahead and do it — fewer homes of that size in that neighborhood, perfect for your future plans, etc. But have you considered the reasons not to do it?
What if you can’t rent out your current home? How long can you maintain two mortgage payments? Does your wife plan on working after you have children? If so, will the cost of child care considerably reduce your take home pay? Do you have a fallback plan if someone else buys your dream home? Is there anything else that could derail your plans?
As long as you take those factors into consideration, I don’t see why you can’t do it. Just be careful that you don’t over extend yourself. (and I don’t know how to avoid PMI on the second home).
Here’s the response from Plonkee at Plonkee Money
I’m not sure that you can avoid PMI as your total equity will be less than 20% of the value of both houses. I think you need to do the sums very carefully to be sure that you can release enough equity from your townhouse for the down payment and at the same time lower your monthly payments.
When you’re considering renting out, don’t forget to allow for vacancy periods in your calculations. (probably about 10%?) and of course there are likely to be tax issues at some point — you may end up not paying more tax but filling in your return is likely to be more complicated.
Overall, I’d say that this is a reasonable strategy to pursue, it’s essentially the one pursued by most buy-to-let landlords in the UK although that’s not necessarily a great advert. The biggest risk is that you will end up carrying both mortgages for an extended period of time. I’d personally feel more secure if this was possible (if unpleasant) on earned income alone.
Here’s my response
PJ, thank you for reading our blogs and sending in your question.
Here’s the short version of my answer: I would either refinance the current house and stay in it, or buy the new house and sell the old one.
Now for the long answer. I was in a similar situation as you about two years ago. My wife and I wanted a bigger house and went through a house hunting process. As part of that, we discussed what we wanted to do with the “current” house, and of course, the idea of renting it out came up as well. Anyway, we are still in our original house and didn’t go through with the upgrade, but if we did, we would have sold our current house. Here’s why.
So my question to you is why do you want to keep your current house? Have you considered all the implications of owning two homes and being a rental property owner? Also, I’d like to second Patrick’s concern about your cash flow and what would happen when your wife gets pregnant. Would you be able to pay for both mortgages and the extra medical bills without her income? If she’s planning to go back to work, then consider the added expense of day care.
If you can answer all of these questions and have plan in place to deal with them, then go for it — buy the new house and rent out the old one. If not, I think you would be better off to either refinance the current house and stay in it, or buy the new house and sell the old one.
I hope you found our answers helpful.
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