My income was cut in half. Do I sell my $600K home and kiss my 2.9% mortgage rate goodbye?
“Selling our home was in our five-year plan, but it could happen as early as June, after my son graduates.” (Photo subject is a model.) – Getty Images/iStockphoto
I’m in a financial mess and I need advice. We are very overextended due to my income being cut nearly in half. I have been trying to manage while I look for another job, but our credit has taken a significant hit. We have a lot of equity in our home — we owe $330,000 on a property valued at $600,000.
I have looked at home-equity investments, home-equity lines of credit, second mortgages, etc., all of which we don’t qualify for for one reason or another. Our current mortgage rate is 2.9%. It is looking like a cash-out refinance may be our only option. That’s a last resort, because I don’t want to lose our current interest rate.
We have one car, which is significantly upside-down. Selling our home was in our five-year plan, but it could happen as early as June, after my son graduates. This school district is pretty expensive, but we can move 10 miles south, where property is much cheaper and where we can more than afford our mortgage, insurance, utilities and food.
You can’t keep downsizing, and you would be signing up for another 30-year mortgage at a higher rate. – MarketWatch illustration
It may be that you can do both: Get another job that pays you what you need and also downsize.
Let’s say you have a 2.9% rate on a $500,000 mortgage. Your monthly payment would be around $2,000 over 30 years, not including homeowners insurance, mortgage insurance and property taxes. If you purchased a home in a cheaper area for, say, $400,000 at a 6.2% rate and put $100,000 down, you would have $200,000 left over from the sale of your home, but you would also have monthly payments of $1,830 per month. Brace for closing costs of between 2% and 5% ($8,000 to $20,000).
There are two big caveats, in addition to a mortgage payment that would be almost unchanged: You can’t keep downsizing, so this may be your one chance to do so. You don’t say how many years you have left on your current mortgage, but you would be signing up for a 30-year mortgage at a higher rate. (For a 15-year loan at 5.7%, you would pay around $2,490 a month.) Also, you should think carefully about whether you will be happy in your new neighborhood and home.
As you point out, sometimes the cure can be worse than the ailment. A cash-out refinance, at a 6.5% rate, would add another $700 to $800 per month to your mortgage. You would not have to sell your home. But you’d be robbing Peter to pay Paul. And here’s the bad news: You are both Peter and Paul in this scenario. (You are also correct: A HELOC would add a similar amount to your monthly payments.)
You have a job, even if your salary has been significantly cut. This gives you a bit of momentum, and it gives you time to find another role. The rise of artificial intelligence and a slowdown in consumer spending, in large part due to the ongoing rise in the cost of living, has contributed to many sectors cutting back on hiring. Amazon, UPS and Target have all announced thousands of layoffs in recent weeks.
It’s also a good time for you to look at what you have, rather than what you don’t. You own your home, with a large amount of equity. You don’t mention credit-card debt — the average American carries more than $6,000 in such debt — or any serious health issues. Your son is about to graduate and start his adult life. You have a lot to be grateful for. This difficult period won’t last forever.
Before you pull the trigger on selling your home, please know that you are not the only person who is suffering financially. The government shutdown aside, a recent Goldman Sachs survey found that 42% of younger workers, including Generation Z, millennials, and Generation X, are living paycheck to paycheck, and nearly three-quarters of these respondents said they’re struggling to save for retirement.
You don’t give your age, but given that you don’t mention imminent retirement, I assume you’re midcareer — perhaps in your 40s or early 50s. Losing your job is traumatic, and you may feel like you’re in a bottomless pit, but try to view this as a transitional period, not a permanent sentence.
Despite a lack of federal economic data due to the government shutdown, there are signs of strength in the labor market. On Wednesday, the payroll-processing company ADP said that private-sector businesses likely added a net 42,000 jobs last month, more than the 22,000 jobs predicted by most economists. The jump in jobs was not felt across the labor market, however. Trade, transportation and utilities added 47,000 jobs, education and health services added 26,000 jobs, while financial activities added 11,000 jobs.
There are no easy solutions. Don’t ever give up. Keep looking for a new job, and downsize as a last resort.
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