Dear Big Move,
My wife lost her job during the pandemic and now our mortgages are well above the percentage income/repayment guidelines. We have young children and it made sense to go the stay-at-home parent route given the cost of daycare.
We still have our first house that we rented out. We bought it for $200,000 and still owe $100,000 on the property. It's now worth $400,000, thanks to the real estate boom in California, and the fact that we bought in an up-and-coming neighborhood.
I'm very tempted to sell it and recast our current home loan until the payment gets us to the 25% income/repayment point, but we plan to use the rental income as part of retirement.
Capital gains also hurt a little. I will be taking a pension and recently opened a 457 retirement plan through my business. I am 40 years old.
what would you do?
Stressed out mom
'Big move” is a MarketWatch column examining the ins and outs of real estate, from searching for a new home to applying for a mortgage.
Do you have a question about buying or selling a home? Do you want to know where your next step should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear mom,
I'm sorry you are dealing with your spouse being laid off from work while dealing with two young children at home. The job market has been tough for certain sectors, and it's no doubt affecting your finances and decisions. But before taking action, find out if you and your partner have exhausted all other options before turning to the idea of selling your rental property.
First, you both need to know your employment status. Your opening line in the letter raises concern. If your husband can't find another job since the pandemic is over, which could take a year or more, he should figure out what he wants to do. Should they pursue a different type of role? Should they look at a different industry? How do you manage expenses during the transitional period?
Given this background, the temptation to sell your rental and reduce your loan obligations and housing burden to less than 25% of your income is a financially wise philosophy. The rule of thumb in personal finance is to keep housing costs to only 30% of your gross income.
But also consider what you'll have to give up to get there: your retirement bank.
A difficult time for the housing market
If you have enough emergency savings to get by a few more months, plus rental income from that house, why not take that hit on your budget while your spouse finds a new job — if you think that's possible in the near term? It's a short-term pain, but it will be a gain for you in the long run.
As we advised in a separate column for someone in a similar situation, selling now in the midst of a difficult period for the real estate market could hurt you in the future. Prices are high – and so are interest rates. “This is a permanent solution to a problem that may be temporary,” Tanya Brown, certified financial planner and director of financial training at OfColor, told MarketWatch.
And it's not just capital gains, which you may incur because you're selling a rental and haven't lived in that home for at least two years in the past five years. You also need to take into account the fact that real estate agents earn an average commission of 6%, which is what you need to factor into your calculations.
So here are some things you can do instead: Call your mortgage servicer and ask for assistance options, such as forbearance or deferment; Or explore a loan modification program, which can lower your monthly payment to make your mortgage more affordable.
Bottom line: Even if you can't make the payments, you can ask your lender and the federal government (if applicable) for repayment plans or other options.
Think carefully before giving up rent, and a steady form of income, for the sake of supposed stability and sanity. Your husband will stand on his feet, and this is a temporary disruption that will undoubtedly leave you feeling uncertain and perhaps coming up with very dramatic solutions to steady the ship.
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