Are you sitting on a “Gold Mine?

Are you sitting on a “gold mine”?  A typical home in a large high cost metro area can range in value from $500,000 to $1,200,000.  A typical house for this purpose is defined as a three bedroom, two or two and one half bath home on a 6,000 square foot lot.  This typical home was probably built twenty to thirty or more years ago and may have single pane windows located on a street with similar sized homes.  

Three options to extract money from your home

If your home seems to meet this description and you have lived in it for ten years or more, you are probably sitting on a “gold mine” of equity.  Problem is that there are only three ways to use that equity;

• Refinance and pull out money.
• Obtain a new first mortgage leaving in place 20% equity to qualify without mortgage insurance.
• Sell your home and buy a lower cost home or rent.

 

The first two choices will increase your mortgage payment which may leave you with more debt depending on what you did with the funds you pulled out of the home.  In any event, you will probably be paying a higher interest rate and thus more of the payment going to interest.

 

A key reason before 2018 to buy a home was the mortgage and property tax deduction.  For many the new tax laws have virtually gutted this deduction eliminating it as a tax and investment strategy.

 

So the third option.  This option will be explored in a way that will leave you with a new home (actually new or new to you), without a mortgage and with cash to invest.  

 

Option Three

 

To provide background and comparison, the following is a description of a home that as of this writing was offered for sale in Orange County, CA.  This area is known as a high cost of living area. Details about this home are included in the chart below.

	ORANGE COUNTY, CA	HARRISON COUNTY, MS	DIFFERENCE
LISTING PRICE	$799,000	$190,900	$608,100
PRICE P/SQ FT	$451.00	$104.00	$347.00
BEDROOMS	3	3	0
BATHS	2	2	0
SQUARE FEET	1,770	1,836	66
BUILT	1971	2018	47
TYPE	Single Family, detached	Single Family, detached
LOT SIZE	5,200	9,402	4,202
PROPERTY TAX	$8,200	$2,100	$6,100
POOL	No	No
LANDSCAPED	Yes	Yes
AVG TEMPERATURE	63.9 F	68.3 F

 

A comparison home was selected in Harrison County, MS which is located a few miles from beaches on the Gulf of Mexico.  This area known as the Mississippi Gulf Coast is known for it’s very low cost of living.

 

The homes selected for comparison are located in planned subdivisions.  They have garages attached to the home and landscaping is complete for both homes.  The primary difference is that the home in Harrison County is new.

 

What this means is that the new home will have all of the latest technology to reduce heating and air conditioning cost e.g. including dual pane low e windows, upgraded insulation and other improvements that have come along during the 47 years between the time the Orange County house was built and the new Harrison County home was constructed.

 

Both areas are near the beach on a large body of water, Pacific Ocean vs Gulf of Mexico.  Both see lots of sun and warm weather during the year. You can buy sushi in both areas. While fresh caught Gulf shrimp may be available in Orange County, it’s a staple in Harrison County.

 

The chart below details only the cost of the home and property taxes.  The cost of living after extracting housing is higher in Orange County than Harrison County.  

 

Comparison

 

The most glaring difference is the price of the home.  A tremendous difference. If the owner had purchased that home 15 years ago with a 20% down payment and a 6%, they would have several hundred thousand dollars in equity.

Is your our Orange County home 76% more expensive?

Someone will pay 76% higher for the Orange County house than the Harrison County home.  The property in Harrison County is 80% larger. The space between homes at the Harrison County home is far greater.

 

The ongoing property tax cost of $6,100 per year more to live in Orange County is something to seriously consider.  If the difference remained the same for a 30 year mortgage, an owner in Orange County would pay $183,000 more to live there just in property taxes alone.

 

The home in Harrison County is 66 square feet larger, not an important point except to mention that this comparison was on an apples to apples basis for size and the number of bedrooms and bathrooms.  

 

Other than locating in Orange County for a job or family, what other reason would someone want to live there when there is so much opportunity tied up in their home.  Here is the wrap up.

 

Your house payment is $3,200 which includes principal, interest, taxes and insurance, on your loan balance of $500,000.  You sell your home for $799,000 and pay about 8% of that amount for sales commission and selling costs.

 

The balance sent to your bank account is $235,000.  Pay $14,000 to ship your household goods to your new home in Harrison County.  Use $194,000 to buy your new home and cover escrow fees for taxes and insurance.  Use about $2,000 to cover vehicle registrations, vehicle insurance, drivers license and other getting settled costs.

Buy that boat with the savings!

Use the remaining $25,000 to buy that boat that you have always wanted.  Fishing on and around the Gulf Coast is among the best in the world.

 

To sum up your new situation.  Your old cost for housing was $3,200 per month.  Your new cost for housing will be about $260 per month for property taxes and homeowners insurance.  You will save $2,940 per month x 12 = $35,280.

 

What to do with the $35,280 you are saving every year.  Take about $500 out for boat fuel and bait. Use the remainder of the first year savings to buy that travel trailer that you hoped you could afford.  Use the annual savings thereafter to fund your retirement.

 

Don’t’ forget all of the other savings on food, fuel, medial etc.  Use some of those savings to fly out the children and grandchildren for a visit.

Come and visit the Mississippi Gulf Coast, see for yourself.  We used to call paying the much higher cost to stay in California the “weather tax”.  The Gulf Coast has no weather tax.