MW We've racked up a ton of debt and don't like the school district. Should we sell our house with a 2.5% interest rate?
By Aarthi Swaminathan
'We want to move to a better neighborhood'
Dear Big Move,
We have a house with a 2.5% mortgage rate. My husband was out of work for a year, so we racked up a ton of debt. We're both employed now, but the debt still hangs over us. We also want to move to a different neighborhood with better schools. Should we sell the house to pay off our debt and move?
New Beginnings
Related: Mortgage rates are dropping, but the housing market is still stuck. Here's why.
Dear New Beginnings,
Just because you have a pandemic-era financial prize that is an ultra-low mortgage rate doesn't mean you should hold on to it by any means necessary.
To be clear, a 2.5% mortgage rate is a gift. Low mortgage rates are also what is keeping the housing market frozen. And yet ultra-low rates like yours are extremely rare: The vast majority of homeowners (86%) with a mortgage had a rate below 6%, according to an analysis of federal data carried out by real-estate brokerage Redfin $(RDFN)$. So how many folks had a 30-year rate below 3%? Just 22%.
People in this position have little incentive to give their homes up, unless they have a strong reason to move. "Most people look at the 2.5% mortgage and would never advocate moving," said Patti Brennan, chief executive and president of Pennsylvania-based Key Financial.
But that doesn't mean you should not sell. It will depend on exactly how much debt hangs over you and whether you can eradicate that debt while paying a lower mortgage rate in a new home. Keep in mind how much you are spending on interest to service that debt, that you could be investing elsewhere.
Prioritize what is most important to you and your family in the long term. Is the school district a dealbreaker? Do you want the kids to attend a local public school? If you downsized, could you afford to send them to a private school in the current neighborhood, and bear the higher cost? From your letter, it sounds like you don't have the financial resources to buy a second home and hold onto this house as a rental.
Prioritize what is most important to you and your family in the long term. Is the school district a dealbreaker?
If you can afford to rent out your current home, be warned that rent growth is expected to remain sluggish. Single-family and apartment rents are expected to grow slower by the end of 2025, according to Zillow (Z), a real-estate platform. You will also have to deal with the ins and outs of being a landlord and managing two mortgages.
A word of caution: Selling isn't necessarily a clean break. A new house could mean a 30-year mortgage with a 7% rate, so you would have to buy a significantly cheaper property to lower your monthly costs and pay off your debts. In a better school district, you will likely have to contend with higher taxes, higher monthly and annual maintenance.
"It would be a bad decision if you made the move, increased your mortgage amount to pay off the other debt, only to rack it up all over again because you have a bigger mortgage at a higher rate and have to borrow again to make ends meet," Brennan said.
Harmon Kong, an Irvine, Calif.-based certified financial planner and co-founder of Apriem Advisors, a wealth-management firm, said you have three choices:
1. Stay where you are, and work to pay down your personal debt.
2. Sell the home and use the proceeds to pay off your high-interest personal loans and buy a smaller property. You could find a smaller, cheaper property in a desirable school district for the time being, and work on your savings now so you can buy a bigger house later when you have the financial firepower - and when interest rates are far lower.
3. Sell the home and pay off all your debt and rent until you can build up your savings.
The latter is an absolute last resort. Your home is your security and it will - all going well - continue to increase in value. If you can achieve sustained financial equilibrium by moving, great; if not, stay where you are and bide your time.
Don't make any hasty moves that you won't be able to undo, and may regret later.
Related: Will mortgage rates and home prices go down next year? Your 2025 real-estate road map.
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.
By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
-Aarthi Swaminathan
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(END) Dow Jones Newswires
November 23, 2024 07:57 ET (12:57 GMT)
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