# Unrealistic Expectations



## momtwo4 (May 23, 2012)

So H and I are conflicted on whether or not to upgrade to a larger house. We have four little kids (3 boys and 1 girl) and live in a 1500 square foot ranch-style house. It also has a spacious full basement (700 feet finished with new carpet and trim). The problem is that it only has 3 beds and 2 baths. It doesn't have a master bedroom. In a few years, our 3 year-old little girl will need her own room. And we'd really like a master bath.

We live in the Midwest, and fortunately housing is not too expensive here. We bought our house five years ago and paid $150,000. We currently owe around $119,000. We also put about 10-15,000 in upgrades into the house. We pay about $1000 a month on our mortgage, and make about 75,000 a year. I work very part time and plan on working more in the future. 

Right now we have a FSBO sign out front. Not much is happening, obviously. And H wants to get top dollar for the house. We're asking $159,000. In this economy, I just don't think that is going to happen. 

To make a long story short, I'd love to get a realtor, take our losses, and move on with the process. We plan to stay in the area long-term, and I think we could find a house that could work for us for around $200,000. . 

I'm just feeling frustrated with the process. Now he is talking about adding on to the front of the house (it's a small lot in a neighborhood and we don't want to encroach on our backyard). He says he would rather stay here and add on than take a loss on the house. Every time we talk about this it seems to end up in an argument. I feel like he is being unrealistic with the whole process. I tried to point out that we would most likely lose money with an addition as well. But he is so stubborn on this whole issue.

I don't want to keep arguing about our house. Thoughts? Advice??


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## Gaia (Apr 27, 2012)

Why do you feel that you would lose money with add ons? One suggestion I can make is... with a full basement you could easily add on another room down there.. perhaps two. That would increase the value of your home.


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## Thor (Oct 31, 2011)

mom, are you handy with a calculator? The effect of low mortgage rates is far stronger than minor price differences. Which means that you are better off getting a killer low mortgage today than trying to time the market for the best price.

In your case, your hubby is trying to avoid losing about $5k on your current home. Let's assume you stay for 5 more years and the value goes up to $200k. You sell and buy something else, say for $250k. But mortgage rates are up to 8% at that time. What will your payments be on that new home? How much interest will you pay over the life of the mortgage?

Compare that to you selling today for $150k. After realtor fees and paying off your existing mortgage you walk away with $20k. You buy a new home for $200k, so you borrow $180k at 3.5%. What are your payments on this mortgage? _What is the total interest you pay over the life of the mortgage_?

If you build an addition onto your existing home, how much will it cost? Instead of spending it on the addition, how many payments on a new house would that money make?

Your home is not an investment, it is an expense. It is also your _home_ where your family lives and where your kids grow up. Being financially responsible is extremely important, but one has to look at the whole picture with a home. In the long run is small loss today worth it to get into a better home? (this is a judgment only you can make based on your situation).

I am very negative on the economy for the next 5 years. I think there can be no doubt that interest rates are going to skyrocket. At my age, 51, I remember when mortgages were running at 20%!!! Inflation is going to spike also. I think we will easily see 15% inflation.

What this means, if it happens, is that a mortgage at today's rates is like free money being given away. Even if I am wrong on the magnitude of the financial crisis ahead, everybody knows that interest rates are at an all time low and they must go back up in the fairly near future.

I would get a 30 year mortgage and make the minimum payment on it, but I would calculate the payments of a 10 or 15 year mortgage and bank the difference. Put it in a cross section of indexed funds which will grow with the stock market. As inflation and interest rates go up, the market will go up over time also. There will be down periods, too, but that is a great time to buy cheap. Over 10, 20, or 30 years the market will rise approximately with inflation. Your investments will thus grow much faster than the 3.5% interest rate on your mortgage.

Avoid bonds, though, because they will lose value when inflation and interest rates go up. In this case bonds are not safe, they are a loser.


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## momtwo4 (May 23, 2012)

Thor said:


> mom, are you handy with a calculator? The effect of low mortgage rates is far stronger than minor price differences. Which means that you are better off getting a killer low mortgage today than trying to time the market for the best price.
> 
> In your case, your hubby is trying to avoid losing about $5k on your current home. Let's assume you stay for 5 more years and the value goes up to $200k. You sell and buy something else, say for $250k. But mortgage rates are up to 8% at that time. What will your payments be on that new home? How much interest will you pay over the life of the mortgage?
> 
> ...


Can I pay you to talk to my husband? LOL I think a small loss is definitely worth it so that we can be comfortable in the long run. We do not plan on moving out of the area. We would be buying for the long term. I think we would certainly benefit from crunching some numbers. Neither of us are particularly good at math (I have my MA in English and my H is a psychologist) but we certainly need to see some hard numbers to help us make this decision.

I need to figure out a way to approach him on this so that he immediately does not go on the defensive.


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## momtwo4 (May 23, 2012)

Gaia said:


> Why do you feel that you would lose money with add ons? One suggestion I can make is... with a full basement you could easily add on another room down there.. perhaps two. That would increase the value of your home.


Well, we already gutted and renovated the main bathroom and it doesn't seem to be making much of a difference in the price we can get for the house. We've around $10K (maybe more) of renovations into the house. So far what I'm seeing is that the current market does not support those renovations. 

I'm also worried that it would look terrible. We have a tan brick house. How would we match that? 

As for the basement, there are no windows and I don't really want to put kids down there. I want more space for us to stretch out in above grade.


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## captainstormy (Jun 15, 2012)

IMO as long as you sell it for enough to clear the note in your case I would be happy. Its a buyers market, not a sellers market.

The real estate market is alot different everywhere you go, In my area you could get a whole lot more than your current house in a good area for what your asking.

Id suggest getting it appraised for todays market to see what you might realistically be able to get out of it.


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## Thor (Oct 31, 2011)

momtwo4 said:


> I think a small loss is definitely worth it so that we can be comfortable in the long run.
> .
> .
> .
> I think we would certainly benefit from crunching some numbers. Neither of us are particularly good at math (I have my MA in English and my H is a psychologist) but we certainly need to see some hard numbers to help us make this decision.


The way to start this is to gather some basic data.
1) How much would you spend on building an addition to your existing house? 
2) How will you pay for it, borrow or from existing cash?
3) What is a realistic selling price for your home via a real estate agent?
4) What is a realistic purchase price for the house you would want to buy
5) What is your current mortgage situation? (Interest rate, # years remaining, and total payment)
6) What is a realistic mortgage on a new home? This will depend on your credit score, how much cash you will put down, and how long of a mortgage you want.

Put your current and hoped-for mortgage data into a calculator like the one at www.mortgagecalculator.org to get your monthly payment and the total interest paid over the life of the loan.

I just ran some guesses through there. Today's interest rates are running around 3.9% for a 30 yr fixed rate loan, and around 3.2% for a 15 year fixed rate loan. I'll summarize it at the bottom.

Your current home:
Assuming you owe $110k on your existing home at 4.9% for a 30 year loan, you make a monthly payment of about $740, and the total interest you will pay over the life of the loan is $100,168.00! That's over $100k in interest money paid! If we assume you paid $150k for your home, plus you pay $100k in interest to the bank, you are in reality paying $250k for that house in the end. (We are ignoring property taxes for this). If you build a $20k addition to this existing home, your total cost of owning it will be $270k (ignoring any costs of borrowing the $20k to build the addition).

If you buy a bigger home:
Now let's assume you buy a $200k home and borrow $180k. I ran two scenarios, one is the 30 year and the other is a 15 year mortgage. Both are fixed rate.

A 30 yr fixed rate mortgage at 3.9% is a monthly payment of about $1057, and a total interest paid of $120,000. So the more expensive house will have higher payments than your current house, as expected. It will also cost about $20k in additional interest payments vs your current home. But, what will you spend on building an addition onto your current home? If you were going to spend $20k on it, you could look at it as the same cost as paying more interest on a bigger house instead. That $200k house plus the $120k in interest payments is a total of $320k over time to own that house.

A 15 yr fixed rate mortgage at 3.2% is a monthly payment of $1,469, and a total interest paid of just $45,078. So this "more expensive" house will cost you a total of $245,078. That is, add up the original total purchase price of $200k plus the interest you will pay to the bank. Yes your monthly payments are about 2x what you would be paying today using my made up numbers, but you make only half as many payments with the 15 yr loan compared to a 30 yr loan.

So let's summarize: You could spend $20k to upgrade your current home. Using my made up numbers it will cost you $270,000 to totally pay it off over 30 years. If you instead upgrade to a bigger house and get a 30 year mortgage at today's rates, it will cost you a total of $320,000 over 30 years to pay it off. Or to use the Dave Ramsey approved plan, get a 15 year fixed rate mortgage and your total cost of the home is $245,078.

It would be cheaper to buy the bigger home with a 15 year fixed rate mortgage than to keep your existing home! This assumes your current mortgage is about 1% higher than today's rates. The cheapest option would be to refinance your existing home with a 15 yr fixed mortgage and build the addition onto it. The downside is the higher monthly payments on a 15 yr mortgage vs the 30 year.


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## papa5280 (Oct 12, 2011)

momtwo4 said:


> We live in the Midwest, and fortunately housing is not too expensive here. We bought our house five years ago and paid $150,000. We currently owe around $119,000. We also put about 10-15,000 in upgrades into the house. We pay about $1000 a month on our mortgage, and make about 75,000 a year. I work very part time and plan on working more in the future.
> 
> Right now we have a FSBO sign out front. Not much is happening, obviously. And H wants to get top dollar for the house. We're asking $159,000. In this economy, I just don't think that is going to happen.


One thing that is missing from your description of your situation is what comparable homes in your area have done over the past five years. The way you describe it, you paid $150k for the home, added $10k in upgrades, so you priced it at $159k. Unfortunately, in most of the country now, that thought process will lead to a dramatic overpricing.

For example, five years ago, my house (in Colorado) was worth about $230k. Now, though, it's only work about $180k. Perhaps that's why you're not getting any lookers.

Two thoughts...it may be worth getting a pitch from a couple of real estate brokers. See if you can get a competitive analysis from them that will show what they think they can sell your home for. Just don't commit to any listing with any of them.

If your asking price of $159 is reasonable, then you can decide how to proceed to sell, if that's what you want to do.

If your price is too high, then you can decide whether to lower it or to put money into your home to make it more livable for you now, and to add value to the home for when you sell later.


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## momtwo4 (May 23, 2012)

Thank you all so much for your responses! It really helps to get some unbiased, outside opinions. We actually did just have a CMA done on the house. We met with a realtor last night.

It turns out that I'm right about the house being over-priced. The realtor did a CMA of about 40 houses in the area. Based on his analysis, we should list the house for 144,000 to 154,000. I thought the info on sold properties was especially telling. The high selling price was $162,500. Median: 145,000. The low was $130,000!

He also did an estimated seller's proceeds and calculated taxes, broker fee, etc... If we sell the house for 154,000 we would end up with about 143,000. If we sell for 144,000, we would have about 134,000. We owe 119,000 on the house. So obviously we wouldn't have that much of a down payment for the next house. We do have about $10,000 in the bank to up the down payment some and cover closing costs etc... But that's not a lot. 

I still think we should take a loss and sell. My husband doesn't like the size of this lot, and even with an add-on, I don't see us being content here long term. I'm wondering though how much of a down payment a bank would require. We're looking to buy in the 200-225,000 range. We have excellent credit and make about $75,000 a year.


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## Gaia (Apr 27, 2012)

momtwo4 said:


> Well, we already gutted and renovated the main bathroom and it doesn't seem to be making much of a difference in the price we can get for the house. We've around $10K (maybe more) of renovations into the house. So far what I'm seeing is that the current market does not support those renovations.


That sucks.


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## southbound (Oct 31, 2010)

Gaia said:


> Why do you feel that you would lose money with add ons? One suggestion I can make is... with a full basement you could easily add on another room down there.. perhaps two. That would increase the value of your home.


That would work. The trend around here now is that the basement is fixed up just like the main floor.


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## norajane (Feb 7, 2012)

Putting more money into adding onto a house that is already overpriced for the area will just mean losing more money in the end. You can over-improve for the area - if no one is paying $159k for a house in your area, then adding onto it and making the price higher to try and recover those costs will make your house even harder to sell.


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## Thor (Oct 31, 2011)

momtwo4 said:


> I still think we should take a loss and sell. My husband doesn't like the size of this lot, and even with an add-on, I don't see us being content here long term. I'm wondering though how much of a down payment a bank would require. We're looking to buy in the 200-225,000 range. We have excellent credit and make about $75,000 a year.


Your home's value moves in lockstep with the local market. So if your house has lost 10% of value over the past few years, so have all of the other houses in the area. Which means that any home you buy will be 10% cheaper than had you bought it a few years ago.

So the "loss" you take on this house will be offset by the "bargain" you get in another house.

In the stock market it is difficult sometimes to decide to bail out on a bad investment. Just like at the grocery store when you have stood in a line for 5 minutes going nowhere while the other lines are moving. You hate to switch lines because of the time you have invested already, even though you know you would be quicker to switch lines.

But if you walked up at that moment to the checkout area you would choose the other line in an instant.

So it is with investments. If you own an investment already, would you buy it again today? If not, you should be selling it today.

Would you buy your current home again today? It sounds like the answer is no. So why throw more money at it when most likely you would not recover the money and you would not be deeply satisfied living there?

Really, the gain or loss on your home is not a relevant factor. It is an emotional factor, but it is not a monetary factor because all the other homes in your area are similarly lower in price today.

I would make the decision on staying vs moving based on whether it would be financially responsible to take on a bigger mortgage and whether a different home would offer significant improvements to the family's quality of life.


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## momtwo4 (May 23, 2012)

Thor said:


> Your home's value moves in lockstep with the local market. So if your house has lost 10% of value over the past few years, so have all of the other houses in the area. Which means that any home you buy will be 10% cheaper than had you bought it a few years ago.
> 
> So the "loss" you take on this house will be offset by the "bargain" you get in another house.
> 
> ...


I completely agree. It's frustrating that my husband is so caught up in losing money that he can't bit the bullet, list with the realtor, and move on. I think I am just going to tell him that I'm not comfortable with an add-on for multiple reasons. I'm convinced that we'd be more stuck than ever if we did that.

If he doesn't want to list, I'll have to respect that. We'll probably just have to keep trying to do the FSBO thing until he becomes convinced that nothing is going to happen and he is on board with lowering the price and getting a realtor. I see us sitting here a year from now with the FSBO sign still up. I'll bet he'll be ready to move forward by next Spring for sure. I just hope interest rates don't skyrocket in a year when we are seriously ready to move forward. It's hard to be patient sometimes. sigh.


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## DTO (Dec 18, 2011)

momtwo4 said:


> I completely agree. It's frustrating that my husband is so caught up in losing money that he can't bit the bullet, list with the realtor, and move on. I think I am just going to tell him that I'm not comfortable with an add-on for multiple reasons. I'm convinced that we'd be more stuck than ever if we did that.
> 
> If he doesn't want to list, I'll have to respect that. We'll probably just have to keep trying to do the FSBO thing until he becomes convinced that nothing is going to happen and he is on board with lowering the price and getting a realtor. I see us sitting here a year from now with the FSBO sign still up. I'll bet he'll be ready to move forward by next Spring for sure. I just hope interest rates don't skyrocket in a year when we are seriously ready to move forward. It's hard to be patient sometimes. sigh.


Let me take a step back here and ask whether he really wants to sell, or if he is going through the motions because you really want a bigger place and he feels pressured.

Selling a home and buying a replacement is very expensive. I have heard 9% of the sales price is the norm (6% to the agents involved, your share of escrow costs, any inspections needed). Then, you have to pay for a new mortgage and actually move all your stuff over. In all, you could pay $15,000 in fees to move; that is a powerful incentive to stay and make do.

I don't see that you guys are ready to move into a more expensive home. You have only $10,000 in the bank and you might clear as little as another $10,000 from the sale of your current home. I know that banks have substantially tightened their lending requirements. Do you even meet the financial requirements for a new mortgage (banks want a certain percentage down, mortgage fees and costs, and want you to have cash in the bank besides that)?

Lastly, can you guys afford a larger mortgage? $75,000 is not that high an income when you have six people to support. If you borrow $210,000 at 4%, you will pay $1,000 on principal an interest, or more like $1,300 with taxes and insurance. How much do you pay now? Five years ago was near the start of our latest recession and interest rates were not that much higher than they are now; I would imagine that your mortgage is a fair bit less than that now. And, of course, your current house will be paid off in 25 years and not 30. 

Look, I get that you want that nice big house - lots of people do. But, your house with 2,200 of living space is plenty big for six people. A bigger home means a bigger mortgage, higher utility payments, and more money for upkeep and repairs. I have a fair suspicion that your husband is appropriately hesitant to take on more financial responsibility when there is a fair amount of it already and it falls squarely on his shoulders.

My advice is to wait until you get a decent job and then get that new house. The Fed has said that it intends to keep interest rates low until late 2014, so you don't have to worry about missing out on an affordable mortgage, With the ongoing stagnation in housing prices and the backlog in foreclosures, home prices are not likely to increase anytime soon either. There really is no reason to stretch yourselves financially now when you have time.


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## momtwo4 (May 23, 2012)

DTO said:


> Let me take a step back here and ask whether he really wants to sell, or if he is going through the motions because you really want a bigger place and he feels pressured.
> 
> Selling a home and buying a replacement is very expensive. I have heard 9% of the sales price is the norm (6% to the agents involved, your share of escrow costs, any inspections needed). Then, you have to pay for a new mortgage and actually move all your stuff over. In all, you could pay $15,000 in fees to move; that is a powerful incentive to stay and make do.
> 
> ...


I really appreciate your perspective, DTO. I hadn't really thought of it that way before. I am definitely the proactive one in the relationship--I always have been. It is SO hard to get him to tell me what he really thinks sometimes. I know he does get stressed about money though. 

We pay about $1050 (including taxes and insurance) for our mortgage now. We actually have around $20,000 total in the bank. I wouldn't want to put more than $10,000 of that toward the house though. We could afford to put more money toward a mortgage, but we'd definitely have to tighten our belts. We've talked with the bank a few times, but haven't officially gone through application process. The loan officer didn't seem to think it would be a problem, but you've made a good point about getting all of the specifics on down payment percentage, etc... When we bought this house four years ago, H made substantially less (only about $40,000) and we did not have a problem qualifying. BUT we also put about 18% down. Anyway, I'm rambling.

I think I'm going to stop mentioning the realtor and try to find out what H really thinks/wants. Thanks again for your reply.


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## Bobby5000 (Oct 19, 2011)

I'd tell him let the wife choose the house. If she's happy everyone is, if she's not, no one is. I'd tell him that if he lets you get a realtor and get the new house, you'll make it worth his while and do it.


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## SunnyT (Jun 22, 2011)

Check with mortgage calculators online... gives you an idea of where you stand and what amounts you might need upfront.


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## momtwo4 (May 23, 2012)

Well, we checked with the bank, and apparently we qualify for a mortgage payment of $2000 a month. I was surprised. I'm not sure how much house that would buy, but there is NO way I would want it to be that high. That is twice what we pay right now. We're both thinking about $1600 is our upward limit. So, we don't have problems qualifying, but we're still going back and forth on what we should do.

The problem I have with staying in this house longer is that we keep on having to put money into it. It is an older house. The windows need to be replaced, and the roof is 10-14 years old. We've put so much money into this house already (that we aren't getting back) and I hate to keep investing in something that we don't want to keep long term. 

We would be tighter financially for a while with a higher mortgage, and that is not necessarily what I want either. It's a hard decision.


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