Dave Ramsey fans: sell or rent our house?

[proudmamanow]

Hi everyone,
So, I have been offered a job in a big city 5 hours from where we live now. It is a dream job for me, and we are all excited about being much closer to aunts, uncles, grandparents etc. Here's our dilemma:

-We are 2.5 years into a 5 year mortgage. The mortgage is not portable. If we sell now, we pay roughly $8000 in penalty.
-Our house has gained about $20,000 in value in the 2 years we've lived in it. So, respectable but not fantastic. This amount will cover the mortgage penalty though.

-We have found a nice house to rent in the new city, as a temporary accommodation (we knew that we wouldn't have time to sell here before buying there due to the tight timelines). New rental house is a great price, good neighbourhood, we could be happy there for a while, which is great.


-As a complicating factor, I made a big mistake in 2009 and failed to change the address on a credit card bill, resulting in us not receiving & not paying it for 6 months. Though we have now paid it off, it is a HUGE black mark on my credit report and this combined with the fact that I have not used credit in 6+ months has crashed my credit rating.

Oh and for Dave Ramsey fans, we are on BS2, we have paid off most of our cc debt, but still have a number of other debts (line of credit, car loan, a loan for new windows from 2006).

So...here's our dilemma, should we:
A) Sell our current house, accept the mortgage penalty, pay off the rest of our outstanding debts, and use the remaining capital as a downpayment for a new house, probably in about 6 months or so. We will have to deal as best we can with my credit rating, but we will be better off financially as we will not be making payments on our debts. We can use the extra money to save towards the new house.

B) Keep our current house, rent it out using a property management company, and live in the rental property in the new city until our mortgage term comes up, in 2.5 years. At this time we could sell

C) I suppose we could also sell our current house and not buy again right away, but wait a while, while we keep the equity from our house invested and rebuild credit.

But I'm wondering, will my credit be negatively affected if we sell and don't buy again right away?

Also, the real estate market where I live now is stable. The real estate market where we are moving to appears to be slowing down, which might be a huge help to us in being able to buy.


As I see it, A is better for us financially in the short term, but not as good for my credit rating, and maybe not as good in the long term. Plus we take a hit with the mortgage penalty.

B would let us rebuild my credit rating before applying for a mortgage, but would leave us with our other debts and also on the hook for moving expenses etc, while we wait out the mortgage period. Plus I'm not sure how much of a hassle it will be to become a landlord, or how much money we can get by renting our house.


So....what would Dave do? What do you suggest? Any input welcome!

Thanks

[texmati]

Dave would say.... Sell the house. You don't want to be a long distance landlord. And never, ever, ever get a mortgage with a prepayment penalty again. Rent in the new location for cheap until you are done with Big EF. (BS3, I think). Use the equity in the home to go through the baby steps. Then save up money for a downpayment on a new home.



I don't see A as a hit to your cc rating at all. B), when you have debt sound way, way, way too risky to take on right now. C) while not fun, is the way to go. Pretty soon you'll be living like no one else!

I have never had an issue with debt thank god, and I have v. good credit rating, without really borrowing money on a day to day basis. Pretty soon, you'll be in the same spot.

[proudmamanow]

Thanks texmati. I certainly want to sell the house...it would give us financial breathing room for the big move & put us in better shape overall. And we have a great deal on rent with the new house.

I guess my biggest concern with that scenario is that we have built up a LOT of equity in the house and I would feel like I was wasting it if we didn't roll it over into another house....hmm

[texmati]

Originally Posted by proudmamanow

I guess my biggest concern with that scenario is that we have built up a LOT of equity in the house and I would feel like I was wasting it if we didn't roll it over into another house....hmm

Why do you feel that way? My understanding (please check me on this!), is that on your personal residence you have up to 250k profit that you can take tax free. You won't be loosing anything by not rolling over the money.

If you look at your net worth (this is overly simplistic, but should give you a rought idea of the concept) as

what your house is worth - what you owe on the house
+savings
- debt

you will still come out the same as if you use your equity to pay off debts. Except, you will have less debt, no mortgage, and will be better able to focus on your debt snowball and big emergency fund! When you buy your new home you'll be debt free, and have an EF to use when the AC breaks... again.

[proudmamanow]

I like your perspective, Texmati It does make sense to me that way. And if I do your calculation:

199,500-90,000 (+8,000 for breaking mortgage)
= 101, 500 + savings which are $1000 EF right now
-debt ($25,000)

= $76,500 which will give us enough for a 3-6 month EF and then a downpayment for the house, when we get there.

It feels like a big relief to think of it this way

But I am still vaguely concerned about my credit report.

[sunnysandiegan]

I don't follow Dave Ramsey.

I do prepare a financial statement every quarter for our family, which is very similar to Texmati's net worth calculations above. It's a one-page synopsis of our family finances at a glance. One of us can apply for any "financial event" with this one sheet of paper. (I keep certain details off of it for identity protection.) It is very motivating and makes it easy to share where we stand financially with DH since I manage the family finances.

I worked in banking for many years, but it was awhile ago. You'd need to check on the current practices. When I was in that biz, you would do your credit rating the biggest favor by putting your home sale proceeds into a deposit account earning interest and pay off your debts over a period of time. You need to show consistency and reliability. Plus, showing responsibility with that lump sum payment goes a long way. In other words, don't go spending it to buy "stuff". Some might even say, paying off your debts and having lower assets can hurt your credit rating. I think there is a fine balance between assets and liabilities (debt). We use debt wisely and maintain healthy savings. Each of us has credit scores over 800.

Renting your current house out with a professional property management company can be a good long-term strategy. It depends on so many other factors you haven't shared, though, so it is hard to recommend that approach.

I personally wouldn't purchase a new home in the new city right away for many reasons and finances aren't really up that high on that list. I wouldn't wait a long time, either, though. I'd probably buy 3-9 months after arriving there, unless I had to sign a one-year lease on the rental property.

Have you obtained your annual free copy of your credit report within the last 12 months? You might want to consider spacing out requests to each of the three main credit bureaus over the next year. Keep in mind everything takes time to show up, so plan for that when you go to apply for a new mortgage.

[proudmamanow]

Thanks so much for your input, sunny.

Quoting you: 'I worked in banking for many years, but it was awhile ago. You'd need to check on the current practices. When I was in that biz, you would do your credit rating the biggest favor by putting your home sale proceeds into a deposit account earning interest and pay off your debts over a period of time. '

So do I understand correctly that you say it would be better for my credit rating to pay off the debts slowly rather than all at once? I think this is my understanding as well. It's more about slowly paying them off than quickly paying them off. But my concern is that if we don't pay them off right away, we have to live with the hit to our budget from our car payment etc. But if I do pay them off, my credit rating will take a hit that might take longer to dig out of.

I agree about waiting a number of months to buy, we want to do that so we have time to see how the market is, get to know the area etc.

I do have my free credit report from February, from Equifax, but I can also get it from Transunion, so maybe I should do that now (I'm in Canada so I think there are only the two). It's a great idea to space out the request so I can see how it is going.

A cc company told me that I should get a secured card, use it for small amounts & pay it off to rebuild my rating. Is this good advice, would you say?

Thanks for all the input!

[mnnice]

Originally Posted by proudmamanow

I like your perspective, Texmati It does make sense to me that way. And if I do your calculation:

199,500-90,000 (+8,000 for breaking mortgage)
= 101, 500 + savings which are $1000 EF right now
-debt ($25,000)

= $76,500 which will give us enough for a 3-6 month EF and then a downpayment for the house, when we get there.

It feels like a big relief to think of it this way

But I am still vaguely concerned about my credit report.

I most place in the U.S (I don't know if Canada is the same) if you use a regular real estate broker you will pay about $12,000 in real estate commisions leaving you with just $54.,500.

I wouldn't buy in a new place for reasons that don't have to do with finances. I often think people buy to quickly and don't get what they really would work best for them. DH and I bought very quickly and we ended up not making any glaring mistakes, but I see that we could have pretty easily.

[texmati]

Originally Posted by mnnice

I most place in the U.S (I don't know if Canada is the same) if you use a regular real estate broker you will pay about $12,000 in real estate commisions leaving you with just $54.,500.

I wouldn't buy in a new place for reasons that don't have to do with finances. I often think people buy to quickly and don't get what they really would work best for them. DH and I bought very quickly and we ended up not making any glaring mistakes, but I see that we could have pretty easily.

Sorry for quoting info about us taxes at you without checking to see where you were! I would check into the tax implications of profiting from the sale of your home. However-- I still stand by what I think DR would say-- don't buy unless you debt free.

[texmati]

Originally Posted by proudmamanow

I like your perspective, Texmati It does make sense to me that way. And if I do your calculation:

199,500-90,000 (+8,000 for breaking mortgage)
= 101, 500 + savings which are $1000 EF right now
-debt ($25,000)

= $76,500 which will give us enough for a 3-6 month EF and then a downpayment for the house, when we get there.

It feels like a big relief to think of it this way

But I am still vaguely concerned about my credit report.

are you making 100k profit on the sale of your home? congrats!

[Tjej]

I guess you should figure out what difference it would really make for your credit rating if you paid the debt at once or spread it out, and then decide if the thousands in interest are worth those points.

I remember my brother sharing that having a lot of available potential debt hurts a credit rating. Do you have credit cards you could close out? Maybe if you paid off the debt? That could help you.

Sorry, I probably shouldn't butt in because I haven't read Dave Ramsey. I've heard enough about him to get his gist, and we do well financially (I have never understood how or why people carry debt for things like cars), so I hope my advice isn't all moot.

Tjej

[sunnysandiegan]

So do I understand correctly that you say it would be better for my credit rating to pay off the debts slowly rather than all at once? I think this is my understanding as well. It's more about slowly paying them off than quickly paying them off. But my concern is that if we don't pay them off right away, we have to live with the hit to our budget from our car payment etc. But if I do pay them off, my credit rating will take a hit that might take longer to dig out of.

Your first sentence is what I was saying. However, I don't know the details of your debts and complete financial picture. If you are behind on anything, catch those up right away. Also, it won't hurt your credit to pay off one complete debt right away. You have to balance out certain issues. Paying a ridiculously high interest rate just to *hopefully* improve your credit score is crazy to me.

I'm concerned with your statement in the middle of the above paragraph. Is your currently monthly budget on par, below, or above your current monthly expenses? I was guessing that your budget and expenses are very close, but that you are living within your means now. (I understand you were six months behind on a credit card and it is paid current now.) If my assumption was off, then my advice would change.

If you immediately pay off all of your debts with the proceeds from the sale of your house, you could run in several challenges. I'm not current on credit practices AND you are in Canada, which I have never been specifically current on. However, yes, your credit could take a hit for several reasons (too much available credit, not enough credit history, etc). More importantly, though, is the very valuable lesson in all this. Many, many people who pay off all their debt with some kind of windfall (house sale, inheritance, gift, whatever) often end up right back in debt at some point. There is something to the "slow and steady wins the race" mentality that creates a more long-term success rate. Learning how to deal with money on a regular basis through all the wackiness of life is so incredibly valuable.

Take your time in deciding. Do some more research beyond this forum. Call up a mortgage lender and ask questions regarding the credit questions and preparing for a new mortgage in x number of months. Check into the real estate issues in your current area regarding selling your home. Are homes selling in your immediate neighborhood right now? What was the actual sale price (not the asking price) for the last 6-10 homes? Do you have a broker/agent? What are the fees?

I'd also call up and verify the $8K penalty. Is that absolutely everything you would pay to end the mortgage early? Are there any other fees associated with this? Are there any other ways to avoid the penalty (besides keeping the house and mortgage as is)?

As for your last question regarding a secured credit card, that would depend on factors not discussed in this thread. When I was in this field, the answer for no credit was to get a store credit card and charge something affordable each month and pay it off on time when the bill arrived. Bad credit involved more work, which basically led to the discussion of living within one's means, which led to discussions of inflows and outflows and tracking every single expense and every source of income for several months, which inevitably led to discussions of the need to reduce expenses and/or raise income... all of which requires time and patience and a healthy relationship with money...

All the details discussed thus far aside, I would strongly encourage you to examine your relationship with money. Some questions to ponder for yourself and discuss with your DH (separately): What is the first word that comes to mind when I see or hear the word 'money'? How do I feel about money? Am I comfortable with just a few bucks in my pocket? Am I comfortable with thousands of dollars in our account? Do I expect to be poor, rich, or in-between all my life? Does money make me nervous? What are my short-term financial goals? What are my long-term financial goals? Be honest with yourself and your partner. I have a degree in finance and worked in banking and securities and other related fields for years. Without a doubt, I can easily say most people's challenges with money are mostly due to their relationship with money and not the actual dollars and cents.

[proudmamanow]

not a lot of time to post...we do have a workable budget right now that comfortably covers our bills & have been slowly repaying debt for 9 months. But in moving, we are going to a higher COL area & I will be earning a lower salary--I should have mentioned this before. So this is a big reason why selling & paying off would be helpful in the short term.
We did call to verify the penalty.
We can sell quickly, we have an agent who will charge 3% commission.
We are talking to a financial planner on Thurs.
But ultimately I think we will sell, because it is the only way to make this move & take the drop in income without going further into debt. But we can still decide if we are going to pay off debt quickly or slowly (at least the low interest debt).

Good suggestion re: calling mortgage broker with credit questions. I will do that next week.

thanks all!

[phathui5]

C) I suppose we could also sell our current house and not buy again right away, but wait a while, while we keep the equity from our house invested and rebuild credit

I think that waiting is a good choice here.

I would not keep the house you're moving form as a rental property if there is any way that you can sell it. Dave says that will end up costing you more than you would potentially make.