Photo: Robert Trachtenberg
Q: My husband retired recently and received a \$113,000 separation package. He wants to use that money to pay off the \$100,000 we owe on our mortgage. But I think we should put it toward a house in an area with good public schools—our 8-year-old son attends private school, where the annual tuition is \$25,000. Realistically we'd sell our house for about \$500,000 and spend \$700,000 on one in a better district. Which option is smarter?

Suze: When you consider the cost over the next ten years—and play by my rules—your husband's strategy wins.

First let's carefully do the math. Severance packages are taxable income, so you don't have \$113,000 to spend; more like \$80,000. You will probably net around \$350,000 from the sale of your home, once you factor in the remaining \$100,000 on the mortgage and standard expenses of relocating, like agents' fees and closing costs. Together with the severance package, that gets us to \$430,000 to put toward a \$700,000 home in the good school district.

So we're looking at a mortgage of \$270,000. You must consider a ten-year mortgage here—a term equal to the amount of time you'd be paying private school tuition—in order to make an apples-to-apples comparison. That's where you can see your strategy fall apart. Assuming you're able to get a fixed-rate mortgage at 3.25 percent interest, a ten-year loan would cost \$2,638 a month, and nearly \$32,000 a year, which is already more than the school tuition bill. Plus, the better district surely has higher property taxes, too. (While the math looks more compelling with a 30-year mortgage, as I explain in this month's first question, extending your mortgage debt is not the answer.)

To make your plan work, you would need to find a home in the good school district for no more than \$600,000. Even then, moving involves more risk. In your husband's scenario, if your finances unexpectedly take a turn for the worse, you can always remove your son from private school and enroll him in public school. But if you have a mortgage, there's no way out of those payments.