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Hi Gary,
We're wondering if we should sell our house. My husband recently returned to school to get his degree, which will take two years of full time school. He's working part time while he's in school and I work full time as a social worker.

Our mortgage payment is $1,030 a month--no problem when we were both working full time. Now that his income has been drastically reduced, the mortgage feels very steep. What about selling the house, using the equity to pay off our $20,000 second mortgage, and moving into a place that costs less per month? Rental costs in Denver are high, at $750+ for a two bedroom apartment. Is it smart to use your big asset to pay off debt and "slim down" for a few years, or is it stupid to give up a chance to continue earning equity? 
Thanks, Erin K.

Erin has actually asked a two part question. Can she save money by moving to a smaller place for a few years. And, if she sells, will she regret not building equity during that time. The first question is easier than the second so let's start there.

The difference between her mortgage ($1,030) and rent (we'll assume $750) is only $280. So that's about what she'd save each month. If her monthly payment doesn't escrow for insurance and property taxes she'll be able to add that to her monthly savings.

A moving cost calculator at realtor.com estimates that it would cost $1,395 to move a two bedroom home. So the first five months worth of savings would go to the moving company.

Erin shouldn't forget that there are a lot of small costs to moving that get overlooked. Things like shelf paper for the kitchen cabinets and picture hangers aren't terribly expensive, but they do add up.

And, it's not just the money involved. She'll spend hours notifying everyone of the new address. It doesn't take much for a credit card bill to get lost in the moving shuffle. A tardy payment can cost you a late fee plus a black mark on your credit history.

There are other costs to selling and buying a home. Erin could end up paying a commission to the real estate agent. Rates vary, but it's not uncommon for them to be 6% of the selling price. On a $150,000 home that's $9,000. That works out to 32 months of the rental savings.

So it doesn't look like Erin is going to save much by selling and moving. But what about her equity?

There are two ways to building home equity. The first - paying down principal on your mortgage - happens every time you make a mortgage payment. Erin can look at her mortgage amortization table and add up how much equity she'd build during the two year period.

The second aspect to home equity is housing appreciation. She can't predict housing prices accurately but it is possible make a guess as to what will happen. Not owning a home for two years could be very expensive. To illustrate, if a $150,000 home appreciated 10% over two years, Erin's home would be worth an additional $15,000. That's about $625 in lost equity per month.

So, if they don't sell, what should Erin do? First, recognize that the amount of debt they carry limits their options. It's admirable that her husband went back to school. But he might have to work full-time and go to school part-time. And that could be a good strategy. Many employers will pay for college classes that are related to an employee's work.

Another option would be to try to reduce their expenses in other areas. Chopping out $280 a month won't be easy. Start by eliminating any extravagant spending. Then Erin should study their spending in major areas like food and autos for potential savings.

A final option would be move into an apartment, but not sell her home. Presumably rental income on their home would be sufficient to pay the mortgage. Erin would still face the moving expenses, but wouldn't have to pay the costs of selling her home. And she'd still be building equity. Before taking this step, however, Erin needs to check out how it would affect her mortgage, insurance and tax situations.

It might be tough for Erin and her husband for awhile. But the good news is that his earning potential will increase dramatically once he's completed his degree. According to the 2001 U.S. Statistical Abstract, mean income for a person with a college degree is $25,000 higher than for someone with a high school diploma.

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