Feature

Personality Profiles

Illustrations by James Taylor.

The Expecters
A couple with a 3-year-old child—he’s in marketing, she’s a lawyer—has a small two-bedroom co-op in midtown worth about $750,000. But the wife is pregnant and they need more space. She plans to go back to work two years after the baby is born. They have about $200,000 in equity in their apartment and have saved up another $100,000.

Peters: They should plan to spend at least $500,000 for that third bedroom. But they shouldn’t rush. Getting past a co-op board with one income is going to be more complicated, and the baby does okay in the dining area for a few years.

Vessa: Even if prices come down, this isn’t the best time to be adding extra costs. Kids are expensive! They should budget for such items as private schools, camp, college savings, and child care. They may think they can afford the bigger apartment given their current expense level. But if they can’t afford it down the road without breathing room, they should consider staying where they are and making do.

Orman: They might be a good candidate for trading up. Sell the apartment, take the equity and the gain, and buy the most reasonable three-bedroom apartment you can find. Then take an option mortgage, which lets you change payments as your situation changes. For the next few years, they might go for the interest-only payment and switch to an interest-plus-principal or refinance when the second income kicks back in.

The Deeply Rooted
The last of the three kids just split for college, and the couple has a fabulous townhouse in Harlem all to themselves. They’ve lived there since the early eighties, have little debt on the house, and have no desire to move. But their home represents 95 percent of their net worth, and they’re worried that if it collapses in value, they’ll lose everything. Plus, with two kids in college and the third in graduate school, they’re strapped for cash. Peters: They might not need the space anymore. But attachment matters, too. Harlem is a great investment. And if they sell, they’re going to pay a kick-ass capital gain. They should refinance and use some of the money from the mortgage to pay some college costs. Then use some to turn the ground floor into a rental apartment.

Vessa: The most reasonable course of action: Sell the townhouse, and downsize to a less fabulous place, perhaps in the same neighborhood. If they’re adamant about staying, they can still free up some capital by refinancing or taking a second mortgage.

Orman: They shouldn’t worry that their home represents 95 percent of their net worth, because it also represents 100 percent of where they go to every single night. Who cares what happens to the value of the home as long as it is paid for in full? Pay off whatever remains of the mortgage, since they’re not getting a tax break. Then they should tell their kids to take out student loans—rates are very low, and the payments can be tax-deductible—and redirect cash they’d spend on the kids’ education into diversifying.

The Discontented Renter
A single woman can barely afford the $4,000 a month she pays for a prime West Village one-bedroom. It’s where she’s been dreaming of living since she was a teenager in Dix Hills. She has about $100,000 in cash that she wants to use as a down payment. Brooklyn is out of the question. She’s been waiting for several years for the market to take a breather so she can jump in.

Peters: There’s always a problem with waiting around for prices to get better. We’re not always smart enough to know when it’s happening. People who wait for prices to improve often end up waiting for them to get even lower—and then they miss the bottom. So buy the best apartment you can comfortably afford now. Neighborhood snobs are getting more rare. We’ve seen people who would have been happy to live by Columbia wind up on 65th Street and First Avenue, and vice versa.

Vessa: The calculation isn’t just looking at the difference between monthly rent and a mortgage payment—there are closing costs and the carrying costs of ownership. If she really wants to own a piece of the rock, the rock may need to be either smaller, or outside Manhattan.

Orman: She should buy now. Find a place for $700,000 and put the $100,000 down—even if she thinks the market might fall further. As it is, she’s throwing away close to $50,000 a year in rent. That’s about 6 percent of the value of the home she can afford. So the worst she can do in the short term by owning is break even. And the housing market won’t drop 6 percent a year for several years in a row.