Real Estate Matters: New construction or 10-year-old home?

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Q: My wife and I have saved about $225,000 and want to buy a bigger home with the cash. We owe about $120,000 on our current home. Our monthly mortgage payments are about $1,000. When we bought our new house, we paid $160,000 for it, and it is now appraised at around $126,000. We want to rent our current house and possibly get around $1,200 a month.

First, is this a good idea? Second, my wife wants to find a home that's about 10 to 20 years old. She feels those homes are bigger and have more land. I'd like to find a new home that is more energy efficient, without the worry about having to replace the roof or other mechanical systems. What would you recommend we do?

A: Whether to borrow money to buy your next home is a personal decision only you can make.
You've saved quite a bit of money, but putting it all into the purchase of a new home is probably not a wise idea. Interest rates are very low, which is a strong argument in favor of financing the purchase.

You would have a lot of leeway as to how large a loan to take out. On the other hand, if you can put aside enough money to cover expenses and potential emergencies and to make retirement contributions, putting a lot of that cash into buying the new home could also make sense.

We're not financial advisers, but a lot of advisers would tell you that putting all of your money into one asset — be it a stock, bond, mutual fund or piece of real estate — is not good planning. It's prudent to diversify. Perhaps some cash could go into the new home and some could be spread among different investments.

As for renting your home, you need to understand why you want to keep it. What investment return do you expect in the short term and in the long term? Will you like being a landlord?

In the short term, you might lose money on the home every month because of expenses. If the home does not increase in value and you keep it for several years, your decision to rent the home may prove to have been a poor one. Unless you're able to be in a cash positive position, keeping your home as a rental may not be a smart investment move.

Now let's address your question about whether to buy another new home or an existing one. We believe your primary consideration should be location. You might buy a large home, but you won't like it much if you don't like where it's located.

The recession has made existing homes even cheaper compared to newly built ones. This hasn't always been the case. Existing home prices in many areas were about the same as new construction, although buyers were often willing to pay a premium for new appliances and to have everything new.

You might find that your wife's idea is better than yours. After all, new construction homes aren't problem-free. In fact, you will sometimes have more problems with a new home than an older one. While it's true that you shouldn't have to worry about the roof of a newly built home, it might have been installed improperly. You, as the new buyer, will be the one to figure that out.

At the same time, we've found that appliances don't last as long as they used to, and this includes many major elements of a new home. If water heaters, furnaces, air-conditioning equipment, kitchen appliances, disposals, humidifiers, dehumidifiers, pumps and other equipment last less than 10 years, then your idea to buy new might be the better course. If you buy a 10-year-old home, you may find yourself replacing a whole lot more than you had planned.

Both new construction and existing homes have their relative advantages and disadvantages. You and your wife need to evaluate all issues and make a decision that's right for both of you.

To ask a question, call Ilyce Glink or Samuel Tamkin at or call Glink's radio show at 800-972-8255 from 10 a.m. to noon Sundays.