This is a long post, but it’s not an off-the cuff response. You didn’t say how much non-housing debs you have, but I think you have 2 decent options:
1. If you really like your home and neighborhood, and don’t want to move, look into refinancing out of that FHA loan. You are probably paying about $1430 principle and interest, and $350 in FHA mortgage insurance, $1780/mo. If you have decent credit and your home will appraise for around $500,000, you should be able to find a 30 year fixed conventional loan in the high 3% range. At 3.875%, the PI on a $375,000 loan is $1764/mo. This should pay the refi closing costs and net you about $20K to pay off debts. And, it will relieve you of $500 (fill in the correct number) in monthly debt payments.
You have lowered your monthly nut and increased your mortgage balance. Depending on your discipline and financial/market outlook, you could take some or all of the monthly savings and pay extra towards you principle balance. For some people, investing and compounding your monthly savings will work out even better than principle reduction in the long run.
2. Sell the house and buy a smaller, less expensive one. Use a discount broker – get recommendations and check them. If the market in SD is hot (new bubble?), it will sell if priced right. Then, pay off your other debts.
You could rent, but if rents are really high, think about buying either smaller, less expensive home, or a home with a rental unit or a garage which could be converted into one.
The smaller home: Get a mortgage with a payment of, say $1200/mo plus tax and ins. Live here, save ALL the difference between your old house and paid debt payment. When you have another down payment saved, buy another home, move in, and rent out your previous home. Try to have housing debt (PITI) well below what you can afford. This will work well when prices go down again, and they will. You can repeat this process as it suits you. Some will say that this sounds like a damn fool scheme. However, I have done it, and am heading into retirement with more than a couple of paid-off rentals to augment Social Security.
The home with the rental unit or garage granny: Basically the same plan, except you have rent coming in right away. This means your first rental will be a 2-unit. My wife started with a dumpy house in Sonoma County, traded to decent place with 2 rental units, and then a larger 2-unit property. Her tenants paid more than half her housing debt, and she lived simply. We were a perfect match!
We sold it late in 2005, moved to the East Coast, and bought 3 rentals, including a real nice place in Asheville with no loan.
Last year we sold a rental SFR in Sonoma county for about what we could have gotten in 2006, and exchanged into 2 other newer rentals, increasing our net rent by about $900/mo.
We made it work thru the ups and downs. I am telling you this not to toot my horn, but to inspire you to look for the opportunities around you, and make the most of what your situation offers. Can YOU do the same thing? That’s up to you.
