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Q: That's still money that I wouldn't see otherwise. Even getting just some of my money back is better than getting none.
A: But there's another kicker. You haven't gotten any money back yet. All you have is a house that's 30 years older than when you moved in. In order to realize your windfall, you'll have to borrow against it or sell it.
If you borrow against a house you've paid off, then you will start mortgage payments all over again.
If you sell it, what are you going to do with that big check in your pocket after you've walked around for a couple of hours feeling richer than you've ever been? You'll probably spend most of it in just a day or so buying another house.
Q: So I'll downsize, find a smaller, cheaper house, buy it and then invest the rest of the money.
A: Prices tend to rise or fall across an entire market. So if you want to stay in the same metropolitan region and save a big chunk of your rebated nest egg, you should be prepared to go significantly downscale -- move to a much less desirable neighborhood.
Consider a hypothetical Washington-area couple who bought their home for $55,000 in 1977.
With improvements and market appreciation they appear to have done quite well. If they sell their house today, they could expect to get something in the neighborhood of $860,000. And they would walk out of the closing meeting with a rebate check of about $550,000, of which about $175,000 would be profit.
But they're facing a tough market where the median price of a condo is two-thirds the cost of a single-family home. They don't have enough money to make the most obvious move down -- from their house to a comparable apartment that would cost around $575,000.
Q: Then I'll move to someplace cheaper, like Houston.
A: You still face borrowing or spending all or most of your cash on your new house -- and you will still have maintenance, property taxes, insurance and other "I have to pay something" costs.
If our Washington couple chooses to leave and move to a cheaper housing market, they will still have costs greater than they think. Popular retirement communities are usually cheaper than big metropolitan areas, but they are not so cheap that sale proceeds will plant them on a country-club fairway and pay for the lifestyle that goes with it.
According to Coldwell Banker's often-cited home-comparison calculator, a house comparable to the place in Washington would cost $439,000 in Fort Myers, Fla., or $407,000 in Orlando. The couple would do a little better moving to Tucson, Ariz., where the comparable house costs $281,000 -- leaving the sellers with less than half of their rebate windfall.
So yes, cashing out in Washington -- or San Francisco or New York -- will give you enough money to buy a nice place on a golf course somewhere in the Sun Belt. And you might have $200,000 or $300,000 left over.
Q: So what can I do if I've planned too much of my retirement around my investment in my home?
A: If you already own your home, you can still rein in your expenses, and diversify your investments. Unfortunately, there's not a lot you can do about reducing many of the costs of home owning, such as property taxes or replacing a roof.
But you do have control over two of the biggest home-owning costs: interest and renovations. Both are big money losers. Even with the tax deduction, most of your mortgage interest is still just wasted rent money. So accelerating your principal payment will result in huge savings down the line. Add $300 a month to the payment on a 6.25%, $300,000 loan, and you'll save 10 years of payments and $83,000 of after-tax money -- enough to put a kid through a public university.
Few, if any, renovations make a profit. A new kitchen or family room might raise the resale value of a house, but rarely as much as they cost to build. And if the homeowner borrows the money, the renovation work could end up costing two or three times what the contractor charged.
If you don't already own your own home, do the math. Don't buy if you think you'll be moving in just a few years. Don't buy a house that's too big for your needs or so expensive that you will strain to pay for it simply because "it's a good investment." It's not.
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