I wrote a post some time ago about how I broke (nay, smashed!) the 20% Rule (you know, the one that tells you what % of your net worth you should have ‘invested’ – read: tied up – in your own home) when I bought my latest house – considering that we paid $4 mill., are about to renovate for at least $1 mill., and still own another $2 mill. house that we haven’t been able to sell due to the crash, I’d say that we need some major corrective action … which, I outlined in this post.
The next housing problem that I wrote about, doesn’t affect me (as we paid cash for our houses) but, was how to deal with the now-all-too-common situation where you are ‘upside down’ on your mortgage.
Now, thanks to Alexandria who commented on that post with a question, we can now assess the third major housing-related financial problem: what to do when you break the 25% Rule (the one that lets you know how much of your income to spend on rent/mortgage payments)?
Panic is always a good first option …
… before we do that, let’s hear Alexandria’s ‘problem’:
Ok… after reading the above I want some options on my situation. Married, three school aged kids. Currently own a home with a high mortgage that is worth just about $50K more then we owe. Not the home of our dreams. We are not in foreclosure. I am self emplyed and my husband is a Police Officer. We can make our monthly mortgage but it eats up about 60% of our monthly income. We have no savings, a mininal 401 plan, no large other debt. We are both in our mid thrities. We can rent a much nicer home in our area for about $1k less then our mortgage a month. If you were us, would you sell and rent or keep the house?
My first piece of financial advice would be to dump the copper and marry some rich bloke (I’ve seen your photo) who looks like me … but, marriage proposals aside, I can’t offer you any better advice than that, because I am NOT you …
… that’s why I struggle to answer specific “what would you do if …” questions on this blog, because I rarely have enough information to know how to deal with YOUR Life’s most difficult financial decisions.
BUT, it’s not all doom-and-gloom, because I can use wonderful readers’ questions, such as this one, to inspire some general points: just don’t construe it as direct personal advice, even though I may liberally intersperse “you” and “should” in my posts to make them more readable.
Disclaimer out of the way 🙂
Even though I can’t really give you the answer that you can ‘take to the bank’, I can ask why you would consider keeping a home that you don’t like, when you can sell it and rent a nicer one and save/invest an extra $12k a year?
Better yet, what would it do for you financially (balanced against family ‘needs’ … not keeping up with the Jones’ … hence, the image at the top of this post) if you sold this place and used the freed up equity as a deposit against a smaller/cheaper place that fits closer to the 25% income Rule, and then used the money saved on mortgage payments (100% of it!) to finally start to build your financial future?
Remember, given that this is effectively your first home (i.e. you have not built up any housing equity yet) the answer – for you – maybe somewhere between the two …
Nice house v fewer financial headaches … what a trade-off to have to make 🙂