Dear Big Move,
My spouse lost their job during the pandemic and now our mortgages are well over the percentage of income/repayment guidelines. We have young kids and it made more sense to go the stay-at-home parent route given the cost of daycare.
We still have our first home that we rent out. We bought it for $200,000, and we still owe $100,000 on the property. It’s now worth $400,000, thanks to the California real-estate boom, and the fact that we bought in an up-and-coming neighborhood.
I am so tempted to sell it and recast our current home loan so the payment will get us to the 25% income/repayment sweet spot, but we had planned on using the rental income as part of retirement.
Also, the capital gains stings a bit. I will get a pension and recently opened a 457 retirement plan through my work. I’m 40 years of age.
What would you do?
Stressed Mom
‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search 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 move should be? Email Aarthi Swaminathan at TheBigMove@marketwatch.com.
Dear Mom,
I am sorry you’re going through dealing with your spouse being laid off while juggling two young kids at home. The job market has been tough for certain sectors, and is no doubt affecting your finances and your decision-making. But before you take action, figure out whether you and your partner have extinguished all other options before turning to the idea of selling the rental property.
First, you both need to figure out your employment situation. Your opening line in the letter raises concern. If your spouse has been unable to find another job since the pandemic ended, which could be a year or more, they need to figure out what they want to do. Should they pursue a different kind of role? Should they look into a different industry? And how are you managing the expenses in the interim period?
Given this backdrop, the temptation to sell the rental and reduce your loan obligations and housing burden to less than 25% of your income is a financially prudent philosophy. A rule of thumb in personal finance to keep housing costs to just 30% of your gross income.
But also consider what you have to give up to get there, which is your retirement piggy bank.
Difficult time for the housing market
If you have sufficient emergency savings to weather a few more months, as well as the rental income from that house, why not take that hit to your budget while your spouse finds a new job — if you think it is possible in the near-term? It is short-term pain, but it will be your long-term gain.
As we advised in a separate column to someone in a similar position, selling now in the midst of a difficult period for the property market could potentially hurt you in the future. Prices are high — and so are interest rates. “This is a permanent solution to what’s probably a temporary problem,” Tania Brown, a certified financial planner and director of financial coaching at OfColor, told MarketWatch.
And it’s not just capital gains, which you would incur since you are selling a rental and did not live in that home for at least two out of the last five years. You also need to factor in the fact that real-estate agents take an average commission of 6%, which you need to figure into your calculations.
So here are a few things you could do instead: Call up your mortgage servicer and ask for assistance options, such as a forbearance or a deferment; or explore a loan-modification program, which would lower your monthly payment to make the mortgage more affordable.
The bottom line: Even if you’re not able to 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 the rental, and a steady form of income, for the sake of supposed stability and sanity. Your spouse will land on their feet, and this is a temporary upheaval which is making you undoubtedly feel uncertain and perhaps reach for overly dramatic solutions to steady the ship.
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