Should I remodel or buy a bigger house?
After a 6% commission to sell, you have $80K in equity. 20% down on a $400K house.  5% down will likely cost you PMI, and I don't know that you'll ever see a 3.14% rate.  The realtor may very well have knowledge of the cost to finish a basement, but I don't ask my doctor for tax advice, and I'd not ask a realtor for construction advice. My basement flooring was $20/sqft for a gym quality rubber tile. You can also get $2/sqft carpet. I'd take the $15K number with a grain of salt until I got real bids. What's there now? Poured cement? Is there clearance to put in a proper subfloor and still have adequate ceiling height? There are a lot of details that you need to research to do it right.  That said, the move to a bigger house impacts your ability to save to the extent that you are taking too large a risk. The basement finish, even if $20K, is just a bit more than the commission on your home. I like the idea of sticking it out. Once the nanny is gone, enjoy the extra income, and use the money to boost your savings and emergency funds.  As I read your question again, I suggest you cut the college funding in favor of the emergency fund. What good is a funded college account if you have no funds to sustain you through a period of unemployment?  There's a lot to be gained in holding tight for these 3 years. It seems that what's too small for 5 would be spacious once the nanny is gone and the basement added. The cost of a too-big house is enormous over the long run. It's going to rise in value with inflation, but no more, and has all the added costs that you've mentioned. On a personal note, I'm in a large house, with a dining room that's used 2 or 3 times a year, and a living room (different from family room) that is my dog's refuge, but we never go in there. In hindsight, a house 2/3 the size would have been ideal.   Finishing the basement doesn't just buy you time, it eliminates the need for the larger house. I am quite sure you can set up an office in your basement for a lot less than $15,000. Don't build any walls, install any flooring, or upgrade the ceiling. Just install more lights and plugs. Set up your desks, bookshelves and what not in whatever corner is furthest from noises like the laundry room or the furnace. The kids and the nanny get the main floor - just let the whole living room be a giant playroom, for example. This gives you the separation you need to work at home, but you can hear if something really needs your attention.  When the kids go off to school, you can refinish the basement into a playroom for kids who don't always need supervision, using the money you are no longer spending on the nanny to install carpeting, real walls, a drop ceiling and so on. Your office stuff can move up to the main floor or to a spare room upstairs if you had one but it wasn't usable during the baby years when upstairs generally has to be quiet. As the kids get older the basement can get tailored to what preteens and teens like. This is essentially what we did, and our square footages and child counts match yours almost precisely. We did eventually convert our garage to carpeted and finished space, and it spent time as an office with staff coming in each day, then some time as a teen playroom (think video games and loud music) after the business rented office space outside the house, but if you don't intend to hire staff for your business you don't need to do this part. We did the majority of the basement wiring ourselves and got an electrician to hook it into the panel and check our work. The budget would probably be less than 10% of the guess from your real estate agent.
Unless the taxes are above 3000 per year it looks like a good deal to buy (the 30 year mtg) You could also consider getting the 30 year loan and add additional principal to your payments.   It looks like your PMI might be about $50 per month.   You will get to deduct over $3000 in interest payments the first year as well as the real estate taxes. Depending on your tax rate that might be something like $100 per month or so of incentive to chose buying over renting.   The big issue to consider is the risk of big ticket items to repair. You should keep a fund for this kind of thing... water heater, roof, fridge, cesspool, etc. good luck "I would strongly try to influence circumstances so that buying is feasible. That means: Buy something where it is likely that you can resell it at the same price or even higher - or, at the least for significantly more than ""total cost of ownership - rent payed elsewhere"". For example, if it is in an area where you have good reasons to assume that prices will go up in the future. Or if the object needs refurbishing and you are sure that you can do it yourself. You will, no doubt, sell it later. You will near certainly not live in such a small house for all time. So the question of ""whether"" you will sell it is moot. So, when you have a potential house to buy, you will have to calculate everything very carefully, with an estimate of how long you will stay. You need to make your calculation as optimistic/pessimistic as you like (this is more a question of your character). Whatever calculation comes out better, wins. It goes without saying that if you miscalculate (for example, overestimating your ability or time to refurbish; forgetting to calculate non-obvious costs of refurbishing; being surprised by hidden damage to the object; misjudging the price development in the area) you run a considerable risk. So, the question of whether you are able to calculate the risks correctly will need to influence the calculation itself (add 20% or whatever risk buffer if you are not sure, etc.). But the potential is for you to have a very good start in the whole financial game of your life. Your house will likely be for a considerable time the biggest single part of costs in your life, and getting that under control from the get-go is a huge benefit." "Trying to determine what the best investment option is when buying a home is like predicting the stock market. Not likely to work out. Forget about the ""investment"" part of buying a home and look at the quality of life, monthly/annual financial burden, and what your goals are. Buy a home that you'll be happy living in and in an area you like. Buy a home with the plan being to remain in that home for at least 6 years. If you're planning on having kids, then buy a home that will accommodate that. If you're not planning on living in the same place at least 6 years, then buying might not be the best idea, and certainly might not be the best ""investment"". You're buying a home that will end up having emotional value to you. This isn't like buying a rental property or commercial real estate. Chances are you won't lose money in the long run, unless the market crashes again, but in that case everyone pretty much gets screwed so don't worry about it.  We're not in a housing market like what existed in decades past. The idea of buying a home so that you'll make money off it when you sell it isn't really as reliable a practice as it once was. Take advantage of the ridiculously low interest rates, but note that if you wait, they're not likely to go up by an amount that will make a huge difference in the grand scheme of things.  My family and I went through the exact same thought process you're going through right now. We close on our new house tomorrow. We battled over renting somewhere - we don't have a good rental market compared to buying here, buying something older for less money and fixing it up - we're HGTV junkies but we realized we just don't have the time or emotional capacity to deal with that scenario, or buying new/like new. There are benefits and drawbacks to all 3 options, and we spent a long time weighing them and eventually came to a conclusion that was best for us.  Go talk to a realtor in your area. You're under no obligation to use them, but you can get a better feel for your options and what might best suit you by talking to a professional. For what it's worth, our realtor is a big fan of Pulte Homes in our area because of their home designs and quality. We know some people who have bought in that neighborhood and they're very happy. There are horror stories too, same as with any product you might buy." First of all, congratulations on your home purchase.  The more equity you build in your house, the more of the sale price you get out of it when you move to your next house.  This will enable you to consume more house in the future.  Think of it as making early payments towards your next down payment. Another option is to save up a chunk of money and recast your mortgage, paying down the principal and having the resulting amount re-amortized to provide you with a lower monthly payment.  You may be able to do this at least once during your time in the house, and if you do it early enough it can potentially help your savings in other areas. On the other hand, it is possible given today's low interest rates for mortgages that in other forms of investments (such as index funds) you could make more on the money you'd be putting towards your extra payments.  Then you would have more money in savings when you go to sell this house and buy the next one that you would in equity if you didn't go that route.  This is riskier than building equity in your home, but potentially has a bigger pay-off. You do the trade-offs. "As others have said, congratulations on saving up 75K in cash while seemingly not neglecting other areas of personal finance.  Considering that only 15% of Americans have more than 10K saved this is quite a feat.  source If you sell your old house, and buy the new one you will still be in really good financial shape.  No need to comment further. Renting your current home and buying a new home introduces a great amount of risk into your life.  The risk in this case is mitigated by cash.  As others have pointed out, you will need to save a lot more to remove an acceptable amount of risk. Here is what I see: So without paying off your existing house I would see a minimum savings account balance of about double of what you have now.  Once you purchase the new house, the amount would be reduced by the down payment, so you will only have about 50K sitting around. The rental emergency fund may be a little light depending on how friendly your state is to landlords.  Water heaters break, renters don't pay, and properties can sit vacant.  Also anytime you move into a new business there will be mistakes made that are solved by writing checks.  Do you have experience running rentals?   You might be better off to sell your existing home, and move into a more expensive home than what you are suggesting. You can continue to win at money without introducing a new factor into your life. Alternatively, if you are ""bitten by the real estate bug"" you could mitigate a lot risk by buying a property that is of similar value to your current home or even less expensive.  You can then choose which home to live in that makes the most financial sense.  For example some choose to live in the more dilapidated home so they can do repairs as time permits. To me upgrading the home you live in, and renting an expensivish home for a rental is too much to do in such a short time frame.  It is assuming far too much risk far to quickly for a person with your discipline.  You will get there." I'm confused why you think you need a $450k house. That seems extremely high in today's market except perhaps in certain major urban locations. If you're going to live in suburbia or a smaller town/city, you should be able to find a nice 3br house for well under $300k. Before you rule out buying a house, I'd spend some time researching the real estate listings in your area, foreclosures, properties owned by bankruptcy court, etc. - you might be surprised to find a great home for as low as $150-200k. Of course if you live in a place where what I'm saying is completely off-base, please disregard my answer. "Forget the math's specifics for a moment: here's some principles. Additional housing for a renter gives you returns in the form of money. Additional housing for yourself pays its returns in the form of ""here is a nice house, live in it"". Which do you need more of?  If you don't need the money, get a nicer house for yourself. If you need (or want) the money, get a modest house for yourself and either use the other house as a rental property, or invest the proceeds of its sale in the stock market. But under normal circumstances (++) don't expect that buying more house for yourself is a good way to increase how much money you have. It's not. (++ the exception being during situations where land/housing value rises quickly, and when that rise is not part of a housing bubble which later collapses. Generally long-term housing values tend to be relatively stable; the real returns are from the rent, or what economists call imputed rent when you're occupying it yourself.)" If your father is still able to make financial decisions and sign contracts, I see a better option. Have your father borrow against his equity to finance the renovation.  Example: the house is worth 400 now. He can borrow 100 against that. He spends it on the addition, making the house worth 500, with the same 400 of equity as before. (In some cases, spending 100 might add 150 to the house value, but let's assume here the increase is just what was spent.) When he dies, the mortgage has to be repaid. If he has no other money (that the two of you would otherwise split) then the mortgage has to be repaid by the two of you putting in cash. So you pay your brother 250 (half the new total value of the house) but he gives 50 of that to the bank for the mortgage. You also give 50 of your own money to the bank for the mortgage. Net result: your brother has 200 (the same as if he had inherited half the unimproved house), and you have a 500 house after paying out 300. Your gain is also the same as if the house was unimproved. Now if the house went up 150 by spending 100, or went up 60 by spending 100, you and your brother would also be sharing this profit or loss. If you don't want that to happen, you will need a different agreement. The advantage of the approach I'm suggesting is you just need one appraisal after your father dies.  Not accounted for in this is that you lived (without paying rent) in your father's house for some time, and that you worked (without being paid) as a caregiver to your father for that time. Some families might think those two things balanced, others might feel you need to be compensated for caring for him, and others that you need to compensate the others for your benefit of living in the large house. Be sure to discuss this with your brother so that you agree in advance whether a plan is fair or not. "Unless you are investing an insignificant amount of money for the home and renovations, you need title insurance.  Without it multiple other parties can claim ownership in this property you are purchasing and investing in.  Also you can know if there are any liens against the property which can cost you a significant amount in addition to the costs you are budgeting.   For example liens against a property I bought a while back amounted to 26% of the price I paid.  In my case the seller (a bank) paid those, while in your case you may need to pay any liens as I suspect the seller has little money. That ""bone"" in your body that has you worried about this transaction is really good.  Pay attention to it." I just wanted to add one factor to the other answers. The cost of maintenance etc. is not a fraction of the cost of financing - it is more likely a fraction of the value of the house, and a function of its age. If you say you need to replace a roof every 25 years, and that costs $10,000 (depends on the size of the house, obviously), then you need to set aside $400 a year for roof repair. Other costs (painting, flooring, kitchen, bathrooms, water heaters, heating, AC, yard upkeep etc) can be roughly estimated in the same way. A rule of thumb is 1% of the value of the house per year to cover all big-ticket maintenance. If you pay 4% mortgage, that would increase the reserve by 25%; but if interest rates rise, the fraction may be smaller (I remember paying over 10% mortgage...). In general, whether keeping a property for long term rental income (with the potential for appreciation - but prices can go up and down) is a good idea will largely depend on your ability to predict future costs and value. If you have a variable mortgage, that will be harder to do. It may be possible to get more cash than you currently have. For example, If you have $200,000, you could buy a distressed property for $150,000, spend $50,000 on renovations, get it appraised for $300,000 and then cash out refi $240,000 (keeping 20% equity to avoid MIPs) to invest. This would be analogous to flipping a house for yourself. Normally flippers buy a house for cheap, then sell it to someone else for way more than their total outlay in purchase + improvements. The only difference here is there's no 3rd party - you stay in the house and essentially buy it from yourself with the mortgage. Others have already made good points, so I'll just add a few more: You say that if you bought it, your mortgage, insurance, and taxes minus the rental income from the bottom floor would leave you with costs of 1/4 of your current rent. That means you're getting a fantastic deal on the purchase price. I suspect you may be underestimating some of those costs. So, get exact figures on the mortgage, insurance and taxes and do the math. If it is that good, go for it, just make sure to get that home inspection (in case there's major problems and they're trying to get out while the gettin's good) Also, some advice: Be prepared to cover that entire monthly cost for a few months. Units can stand empty for a while. Also, you may want to rent out slowly - a good tenent found after a couple months is much better than a bad tenent found quickly. Also, have some money set aside for maintenence. As a renter, you've never really had to think about that before, but as a homeowner you do. As a landlord, it's even more important - you can not fix something in your own home for a while if you needed to wait, but in a tenent unit, you have to fix it immediately.  Finally, taxes: You do get to deduct interest, and so on, but it'll work a little differently than you think. You'll have to split it in half (if the units are the same size) and deduct half the interest as a normal homeowner deduction, the other half as a business expense. Same for PMI, insurance, and property taxes. If you do maintenance that effects both units, like fixing the roof, half will be deductible, the other half not. However, maintenance that only affects the tenant unit is fully deductible.  You can claim depreciation, but only for half. So, your starting amount you can depreciate would be (purchase price - land value)/2. Same thing here - half is your home, the other half is a business.  Note that some things you'd think of as maintenance costs actually can't be deducted, only depreciated over time. Take that leaky roof, for example. If you replaced it instead of repairing it, you could not deduct your replacement costs. It counts as an improvement, and gets added to your cost-basis, where you depreciate it along with (half!) the house.  If your tenant's refrigerator went out, and you replaced it, you couldn't deduct that either. However you can depreciate all of it on another schedule (seperate from home depreciation). If you repaired it instead, you can deduct all of it immediately.  Taxes suck. "Whether or not you choose to buy is a complicated question.  I will answer as ""what you should consider/think about"" as I don't think ""What should I do"" is on topic. First off, renting tends to look expensive compared to mortgages until you factor in the other costs that are included in your rent. Property taxes.  These are a few grand a year even in the worst areas, and tend to be more.  Find out what the taxes are ahead of time.  Even though you can often deduct them (and your interest), you're giving up your standard deduction to do so - and with the low interest regime currently, unless your taxes are high you may not end up being better off deducting them. Home insurance. This depends on home and area, but is at least hundreds of dollars per year, and could easily run a thousand.  So another hundred a month on your bill (and it's more than renter's insurance by quite a lot). Upkeep costs for the property.  You've got a lot of up-front costs (buy a lawnmower, etc. types of things) plus a lot of ongoing costs (general repair, plumbing breaks, electrical breaks, whatnot).   Sales commission, as Scott notes in comments.  When you sell, you're paying about 6% commission; so you won't be above water, if housing prices stay flat, until you've paid off 6% of your loan value (plus closing costs, another couple of percent).  You hit the 90% point on a 15 year about year 2, but on a 30 year you don't hit it until about year 5, so you might not be above water when you want to sell. Risk of decrease in value. Whenever you buy property, you take on the risk of losing value as well as the potential of gaining value.  Don't assume that because prices are going up they will continue to; remember that a lot of investors are well aware of possible profits from rising prices and will be buying (and driving prices up) themselves.  2008 was a shock to a lot of people, even in areas where it seemed like prices should've still gone up; you never know what's going to happen.  If you buy a house for 20% or so down, you have a bit of a safety net (if it drops 10-20% in value, you're still above water, though you do of course lose money), while if you buy it for 0% down and it drops 20% in value, you won't be able to sell (at all) for years. All that together means you should really take a hard look at the costs and benefits, make a realistic calculation including all actual costs, and then make a decision. I would not buy simply because it seems like a good idea to not pay rent.  If you're unable to make any down payment, then you're also unable to deal with the risks in home ownership - not just decrease in value, but when your pipe bursts and ruins your basement, or when the roof needs a replacement because a tree falls on it.  Yes, home insurance helps, but not always, and the deductible will still get you. Just to have some numbers: For my area, we pay about $8000 a year in property taxes on a $280k house ($200k mortgage), $1k a year in home insurance, so our escrow payment is about $750 a month.  A 15 year for $200k is about $1400 a month, so $2200 or so total cost.  We do live in a high property tax area, so someone in lower tax regimes would pay less - say 1800-1900 - but not that cheap.  A 30 year would save you 500 or so a month, but you're still not all that much lower than rent." I agree with MrChrister about first considering how necessary the renovations are (is it a nice-to-have, or a need-to-have?), as well as the importance of consulting a Realtor, if you are selling your home, as they will advise you wisely.  For instance, they might advise you to replace the linoleum with a neutral beige ceramic tile, as you would be assured a better resale value on your dollar spent, than if you were to replace the old linoleum with new linoleum (or laminate). There are many types of renovations that simply don't pay off, and others that do provide good return-on-investment (like intelligent kitchen and bathroom updates).  I found this ROI grid at lendingmax.ca (which is pretty consistent with what I remember reading in the Toronto Star this spring): Top 10 Renovations ~ Average return   on investment Painting and interior decorating = 73% Kitchen renovations = 72% Bathroom renovations = 68% Exterior painting = 65% Flooring upgrades = 62% Window/door replacement = 57% Family room addition = 51% Fireplace addition = 50% Basement renovation = 49% Furnace/heating updating = 48% If you are selling your home, and your Realtor has suggested improvements, they are probably necessary, and not doing them might serve as an impediment to quickly selling your home - so factor in the (potential) costs of carrying your home for additional weeks/months, or worse, overlapping mortage costs, if it takes your home longer to sell, and you end up owning two homes simultaneously for a bit. As far as your question (should you pay cash for renos or take out a loan), one factor to consider if you live in Canada is the Home Renovation Tax Credit, which applies to renos that take place until Feb 1, 2010, and can deduct up to $1,350.  So if you have to do a reno and yours qualifies for this tax credit, and you won't have the cash before that deadline, factor in the cost of borrowing vs. the $1,350. Good luck! "If I buy property when the market is in a downtrend the property loses   value, but I would lose money on rent anyway. So, as long I'm viewing   the property as housing expense I would be ok. This is a bit too rough an analysis.  It all depends on the numbers you plug in.  Let's say you live in the Boston area, and you buy a house during a downtrend at $550k.  Two years later, you need to sell it, and the best you can get is $480k.  You are down $70k and you are also out two years' of property taxes, maintenance, insurance, mortgage interest maybe, etc.  Say that's another $10k a year, so you are down $70k + $20k = $90k.  It's probably more than that, but let's go with it... In those same two years, you could have been living in a fairly nice apartment for $2,000/mo.  In that scenario, you are out $2k * 24 months = $48k--and that's it.  It's a difference of $90k - $48k = $42k in two years.  That's sizable. If I wanted to sell and upgrade to a larger property, the larger   property would also be cheaper in the downtrend. Yes, the general rule is:  if you have to spend your money on a purchase, it's best to buy when things are low, so you maximize your value.   However, if the market is in an uptrend, selling the property would   gain me more than what I paid, but larger houses would also have   increased in price. But it may not scale.  When you jump to a much larger (more expensive) house, you can think of it as buying 1.5 houses.  That extra 0.5 of a house is a new purchase, and if you buy when prices are high (relative to other economic indicators, like salaries and rents), you are not doing as well as when you buy when they are low.   Do both of these scenarios negate the pro/cons of buying in either   market? I don't think so.  I think, in general, buying ""more house"" (either going from an apartment to a house or from a small house to a bigger house) when housing is cheaper is favorable.  Houses are goods like anything else, and when supply is high (after overproduction of them) and demand is low (during bad economic times), deals can be found relative to other times when the opposite applies, or during housing bubbles.   The other point is, as with any trend, you only know the future of the trend...after it passes.  You don't know if you are buying at anything close to the bottom of a trend, though you can certainly see it is lower than it once was.   In terms of practical matters, if you are going to buy when it's up, you hope you sell when it's up, too. This graph of historical inflation-adjusted housing prices is helpful to that point:  let me just say that if I bought in the latest boom, I sure hope I sold during that boom, too!"