Can I afford a $600-650k house?

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8355ajs
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Can I afford a $600-650k house?

Post by 8355ajs » Tue Dec 26, 2017 10:10 pm

First time poster

Me and Fiancé both 26, no kids… maybe in a few years. Looking to move from small condo to a single Family in HCOL area. Looking in the $600-650k price range…is this affordable/smart. DC area, house prices continue to increase and were not hit too hard in the last recession. This would be a 10+ year house. IMO I think this is a feasible purchase by most rules of thumb out there but it would reduce the financial flexibility/taxable savings we have right now considerably.

Income before taxes: Me $85K + $40k reliable bonus every year (stable, 10% raises for next few years, all W2). Her 60K all W2.

401k: Me $50k (6% deferral increasing to 9% next year, 6% match). Her $1k (just got started 3% deferral)

Emergency Fund: $15k (3 months of critical expenses if both of us lost job at same time)

Taxable investment: $150k (from) aggressive saving and a $6k inheritance, partly to be used to make 20% down payment) $10k in unrealized LT gains.

Condo: Market Value 300k, Equity 80k (will have up to 3% selling costs, equity rolled into next down payment)

I also have $6,000 earmarked for closing costs on a new house saved.

CC Debt: $15K aggressively paying it down. Should be done in 4-6months.

Cash value Life insurance: $50k cash value after surrender charges, ($1 million death benefit, on parents life) earmarked for retirement savings boost in the hopefully distant future. I use $16k of after tax bonus money to make the premiums (6 years left).

runner540
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Re: Can I afford a $600-650k house?

Post by runner540 » Tue Dec 26, 2017 10:37 pm

A bank would probably say yes. I am more conservative and would count only salaries: $145k/year. So your house would be 4.0x your salaries which sounds tight. Have you done a full budget with property taxes, etc? How much will your monthly housing expense increase, and where will that come from in your budget today?

Yellow flags to your overall financial picture:
Fiance should save more than 3%.
Why do you have cc debt and $150k in taxable??
Last edited by runner540 on Tue Dec 26, 2017 10:38 pm, edited 1 time in total.

Pacman
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Re: Can I afford a $600-650k house?

Post by Pacman » Tue Dec 26, 2017 10:37 pm

What's the big rush to buy a house? I'm honestly surprised you even bought a condo. It sounds like you are fearful of increasing housing prices or something, but in any case, you are not in the stage of life where you should be moving to a SFH. Wait until you actually have kids and when the school district becomes relevant. And stay flexible while you are building your career in your 20s.

surfstar
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Re: Can I afford a $600-650k house?

Post by surfstar » Tue Dec 26, 2017 10:44 pm

Agreed. Stay in the condo, continue saving, buy a house later if kids come into play.

Not necessary at this stage. It just requires so much money and work, IMO. Delay until required!

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sometimesinvestor
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Re: Can I afford a $600-650k house?

Post by sometimesinvestor » Tue Dec 26, 2017 10:47 pm

I would wait a year and see what the impact of the new tax law is on property values in the DC area. Obviously waiting could be good or bad but you can use the year to build up retirement accounts, research the housing market and have more money fora down payment.

freebeer
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Re: Can I afford a $600-650k house?

Post by freebeer » Tue Dec 26, 2017 10:49 pm

8355ajs wrote:
Tue Dec 26, 2017 10:10 pm
...a feasible purchase by most rules of thumb out there but it would reduce the financial flexibility/taxable savings we have right now considerably.
You already know the answer! Whether it's "smart" or not is the real question and none of us have a crystal ball. DC-area RE could keep climbing, or slump. Condos could do much worse than SFH's, or do better, depending on those key factors which you don't address in your post (location, location, location).

But, you say "Fiancé" which implies you haven't finalized your hopefully lifelong partnership yet. Is the condo both of yours? I would be inclined to wait until after the wedding to tie up both of your life savings and incomes quite that tightly. Even as it is there could already be "palimony" type considerations, aka "your" 6% 401K deferral could be considered "both of yours". At a minimum I would suggest a "cohabitation agreement" or something else that states what the ownership division will be on the home, and how other property and assets will be handled, pre-marriage (which could of course lead to pre-nup if you were so inclined).

PFInterest
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Re: Can I afford a $600-650k house?

Post by PFInterest » Tue Dec 26, 2017 10:58 pm

Nope.

bantam222
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Re: Can I afford a $600-650k house?

Post by bantam222 » Wed Dec 27, 2017 12:01 am

Why do you have 150k in taxable and 15k on cc

I would fix that first

Mudflaps
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Re: Can I afford a $600-650k house?

Post by Mudflaps » Wed Dec 27, 2017 8:33 am

Seems like a big bite. Keep saving.

snowox
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Re: Can I afford a $600-650k house?

Post by snowox » Wed Dec 27, 2017 8:37 am

No way... Wait and build up some more savings/Investments. Your stretching yourself way to thin.

3funder
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Re: Can I afford a $600-650k house?

Post by 3funder » Wed Dec 27, 2017 8:57 am

runner540 wrote:
Tue Dec 26, 2017 10:37 pm
A bank would probably say yes. I am more conservative and would count only salaries: $145k/year. So your house would be 4.0x your salaries which sounds tight. Have you done a full budget with property taxes, etc? How much will your monthly housing expense increase, and where will that come from in your budget today?

Yellow flags to your overall financial picture:
Fiance should save more than 3%.
Why do you have cc debt and $150k in taxable??
+1

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TxAg
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Re: Can I afford a $600-650k house?

Post by TxAg » Wed Dec 27, 2017 9:05 am

Nope.

Leemiller
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Re: Can I afford a $600-650k house?

Post by Leemiller » Wed Dec 27, 2017 9:13 am

Wait until you are married to purchase anything and relax, if anything prices may feel some downward pressure given the tax changes. I would say things were already slowing down in my close-in and expensive suburb before the law was passed.

Also, if you are planning on kids, I know some families who regret their homes in neighborhoods with lower rated schools. At that price point it doesn’t sound like a top ranked school system for this area. Then again you’re so young that a family might be further out in your future.

As for budgeting I’m not understanding how it will take so long to pay off 15k making almost 200k between the two of you? What are you spending that money on?? Also, time to consider bumping up your retirement savings as a budget priority - it doesn’t get easier with kids. In this area childcare is very expensive.

Lars_2013
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Re: Can I afford a $600-650k house?

Post by Lars_2013 » Wed Dec 27, 2017 9:14 am

8355ajs wrote:
Tue Dec 26, 2017 10:10 pm
DC area, house prices continue to increase and were not hit too hard in the last recession.
This is in large part because the big stimulus bill in 2009 (ARRA) helped prop up employment in the DC area, which in turn helped drive population growth in the area during the recession, buoying home prices. Also, controls on foreclosures on the Maryland side delayed the impact of predatory/subprime lending on home prices in PG County, which is why prices slumped earlier in Prince William County than PG County.

_If_ the next recession is driven by cuts in federal non-defense discretionary spending (a not unlikely scenario), the DC area could be hit harder than the rest of the country. (I think especially the Maryland side, since there's some truth to the adage that "Maryland is in the life business and Virginia is in the death business.")

This is not to say don't buy a house. But if you do buy a house, be prepared for a dip in value.

nickjoy
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Re: Can I afford a $600-650k house?

Post by nickjoy » Wed Dec 27, 2017 9:30 am

Hey there OP,

Congratulations on getting engaged!

I'm in a very similar situation as you, I live in VA on the yellow line. You have more saved up and a little higher combined salary than me so Kudos to you.

Have you thought about the school districts? I know that in DC you pretty much have to be in NW and west of Rock Creek for good schools. MoCo (west of 355) and Fairfax are pretty good too. But then you're running into commute issues. (especially with 66 now being HOV all the time). If you're not planning on kids, then nevermind.

You are very right, DC is usually protected from housing crashes because of the government employment there.

I would say have at least 150K saved up to do this, the more the better. Unless you want to cash out your taxable investment, this purchase would be a stretch. You could pay it off over time don't get me wrong, but if a couple of things compound over the years, you could put yourself in a risky situation. I also would wait until the marriage is finalized, not wishing any bad luck, but things get a lot easier when you're legally both in the same boat. I know several people who either bought a house with somebody and it turned a bit sour, or married somebody and discovered weird stuff on their credit score/unexpected debts. Not saying you will, but no need to rush.

I am going to watch this thread like a hawk.

bloom2708
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Re: Can I afford a $600-650k house?

Post by bloom2708 » Wed Dec 27, 2017 10:48 am

Sell $15k of the taxable and pay off the CC debt today (or after the transfer clears).

Keep saving. I would not buy at this point.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

2Birds1Stone
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Re: Can I afford a $600-650k house?

Post by 2Birds1Stone » Wed Dec 27, 2017 11:12 am

Nope, not even with a 20% downpayment.

Sure, you might be able to make it work, but you are likely to feel house poor and if anything happens to income you will be in deep water quick.

mortfree
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Re: Can I afford a $600-650k house?

Post by mortfree » Wed Dec 27, 2017 11:16 am

Is the cash value life insurance a good thing? I’m surprised no one has said anything about it.

If you are set on buying be sure to buy in a good school district.

Also do the math using your net income and not your gross income.

Increase the 401k contributions. Add a Roth if eligible.

Payoff the credit cards today (assuming a high interest rate)

sharukh
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Re: Can I afford a $600-650k house?

Post by sharukh » Wed Dec 27, 2017 11:17 am

I read on this forum, which i liked. (By KlangFool I guess) - many not be right for every one.

Buy a house only if cost of the house is 1/3 of the value of your portfolio.
Say you have a million in stocks and bonds. you can buy a house that costs around $350k


viewtopic.php?p=3594998#p3594998
Last edited by sharukh on Wed Dec 27, 2017 11:19 am, edited 1 time in total.

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greg24
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Re: Can I afford a $600-650k house?

Post by greg24 » Wed Dec 27, 2017 11:18 am

No, you cannot.

Fix your other financial affairs before you consider it.

Grt2bOutdoors
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Re: Can I afford a $600-650k house?

Post by Grt2bOutdoors » Wed Dec 27, 2017 1:29 pm

No, you can not afford a $600-$650K house. Stay in the condo and keep saving!
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

8355ajs
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Re: Can I afford a $600-650k house?

Post by 8355ajs » Wed Dec 27, 2017 2:08 pm

OP here...Wanted to answer a few questions. Thanks everyone for the feedback, i suspected this would be the general consensus especially on a forum like this.

Schools-We are looking to by somewhere in the Fairfax County system so decent schools for the most part. certainly a consideration when though we have no kids yet.

Life insurance - As far as I'm aware a mortgage company will only consider this for making sure we have a minimum number of mortgage payments in the bank.

Location: for those that know the are we are looking in the Reston/Vienna/Oakton/Herndon areas. Preference is Vienna and we are willing to go older/smaller to afford something that isn't a tear down :/....Its tough to get something half decent for much less.

Retirement savings - Will increase to 9% for me next year. She feels like the benefit of saving more to a 401k plan with no match vs saving taxably for down payment on a house (house is a retirement asset after all) is a smarter play RN. When she gets raises she will contribute more.

CC debt - Yes its odd we have this with the taxable savings that we have. TBH both of us are good at spending and not so good at saving. that said whenever a windfall comes our way through bonus or tax return etc we stash it away and invest before we have a chance to spend it. I find it very easy to purchase stuff i don't need when i have money in my account vs the added guilt of adding to the CC. This probably doesn't make any sense to most but it seems to work for us and allowed us to save i suspect quite a bit more than we might have otherwise. the good news is that the rate is 12% on the CC and my investments have done considerably better than that this year (pure luck). Planning to pay half off early next year.

Further comments:

Is there not a risk in delaying a house purchase too long in a HCOL area where traditionally condo values increase at a lesser rate than single family homes? I've owned my condo for close to 5 years (Reston for those that know the area) and according to Zillow has not changed in value at all vs the average single family increased by 13% over the same period.

I realize that this amount would be a stretch but i really don't want to be in a situation where i feel like I'm "outgrowing" a compromise (on size, location, schools etc) house in just a few years and want to move again or be feel like I'm falling behind the housing market because my condo isn't appreciating in this condo saturated area.

I'm taking everyone's POV seriously and i really appreciate everyone's input. However, the way i see things is i have 20% available for down payment with room to spare, in 4 years i will be likely be making $125k excluding bonuses, SO salary will presumably raise too but not sure how much. This brings the income to approx. $200k in 4 years which would be 2.5x the mortgage.

Isabelle77
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Re: Can I afford a $600-650k house?

Post by Isabelle77 » Wed Dec 27, 2017 2:17 pm

8355ajs wrote:
Wed Dec 27, 2017 2:08 pm
Is there not a risk in delaying a house purchase too long in a HCOL area where traditionally condo values increase at a lesser rate than single family homes? I've owned my condo for close to 5 years (Reston for those that know the area) and according to Zillow has not changed in value at all vs the average single family increased by 13% over the same period.

I realize that this amount would be a stretch but i really don't want to be in a situation where i feel like I'm "outgrowing" a compromise (on size, location, schools etc) house in just a few years and want to move again or be feel like I'm falling behind the housing market because my condo isn't appreciating in this condo saturated area.
There's always a risk. Ten years ago (when you were in high school!) the house we live in now had a contract on it for $569K. The deal fell through, the market collapsed and we bought it for $395K just three months later. Within 12 months it was worth about 100K less than that.

You can't predict what is going to happen with housing prices, but you need to be at a point where it doesn't really matter. You're only 26, wait until you're married, have had your first baby, know what your family situation with children will look like, and have saved a lot more.

KlangFool
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Re: Can I afford a $600-650k house?

Post by KlangFool » Wed Dec 27, 2017 2:29 pm

8355ajs wrote:
Wed Dec 27, 2017 2:08 pm

I'm taking everyone's POV seriously and i really appreciate everyone's input. However, the way i see things is i have 20% available for down payment with room to spare, in 4 years i will be likely be making $125k excluding bonuses, SO salary will presumably raise too but not sure how much. This brings the income to approx. $200k in 4 years which would be 2.5x the mortgage.
8355ajs,

1) Or, we are hit with a recession and you are forced to move to somewhere else to find a new job. You can only afford the house if and only if everything went well for 4 years.

2) In my NoVA area, the house price is still below the 2004/2005 level. This is considering that it is one of the best growth areas. Look at your Reston area and check out whether it had recovered to the 2004/2005 level.

<<This brings the income to approx. $200k in 4 years which would be 2.5x the mortgage.>>

3) Many of my peers with that income and house price have to pack lunch to work every day and they still cannot save money.

4) Annual median household income in my area is 150K. Median house price in my area is 500K to 600K

5) Please note that at 200K income level, if you cannot contribute a significant amount of your income to Trad. 401K, you will be heavily taxed. If you have a kid, one of the spouses has to stay home or pay child care expenses. Then, the second income (60K) disappear due to tax and child care expenses.

Do not buy the house.

KlangFool

surfstar
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Re: Can I afford a $600-650k house?

Post by surfstar » Wed Dec 27, 2017 2:34 pm

8355ajs wrote:
Wed Dec 27, 2017 2:08 pm
CC debt - Yes its odd we have this with the taxable savings that we have. TBH both of us are good at spending and not so good at saving. that said whenever a windfall comes our way through bonus or tax return etc we stash it away and invest before we have a chance to spend it. I find it very easy to purchase stuff i don't need when i have money in my account vs the added guilt of adding to the CC. This probably doesn't make any sense to most but it seems to work for us and allowed us to save i suspect quite a bit more than we might have otherwise. the good news is that the rate is 12% on the CC and my investments have done considerably better than that this year (pure luck). Planning to pay half off early next year.
This is beyond "odd". There is a disconnect [in how finances work] here.

8355ajs
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Re: Can I afford a $600-650k house?

Post by 8355ajs » Wed Dec 27, 2017 2:45 pm

Think of it this way. If i paid off the CC today and have a 0 balance next month it makes it mentally easier for me to overspend next month because adding $500 to a high balance that I'm trying to pay off with free cash flow is a lot harder mentally than adding "just a few hundred" to a balance with the mentality that it'll be easy to pay off next month...next month comes and its the same story and meanwhile the taxable account gets depleted.

I guess this is what someone might call behavioral/emotional finance...I know it doesn't make sense logically.

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DaftInvestor
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Re: Can I afford a $600-650k house?

Post by DaftInvestor » Wed Dec 27, 2017 2:48 pm

You can't afford the house.
You also shouldn't buy it until you can better handle the responsibilities you already have today - the fact you have Credit Card debt tells me you can't.

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greg24
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Re: Can I afford a $600-650k house?

Post by greg24 » Wed Dec 27, 2017 2:51 pm

A lot of people buy a house before they have kids, and realize their preferences have changed once they have kids.

KyleAAA
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Re: Can I afford a $600-650k house?

Post by KyleAAA » Wed Dec 27, 2017 3:07 pm

It’s risky. While there’s a good chance your income will go up as expected, funny things happen in recessions. I wouldn’t buy a house that expensive on your current income but you can probably make it work if you don’t mind being house poor for a decade. Your chances of retiring comfortably will take a significant hit.

And get rid of that CC debt ASAP. Just do it.

mortfree
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Re: Can I afford a $600-650k house?

Post by mortfree » Wed Dec 27, 2017 3:12 pm

8355ajs wrote:
Wed Dec 27, 2017 2:45 pm
Think of it this way. If i paid off the CC today and have a 0 balance next month it makes it mentally easier for me to overspend next month because adding $500 to a high balance that I'm trying to pay off with free cash flow is a lot harder mentally than adding "just a few hundred" to a balance with the mentality that it'll be easy to pay off next month...next month comes and its the same story and meanwhile the taxable account gets depleted.

I guess this is what someone might call behavioral/emotional finance...I know it doesn't make sense logically.
all that says is you don't have a firm grasp on your finances along with a firm budget. You did admit to being a spender so at least you recognize that. Hopefully one day you will grow out of that - spending money on things.

There is nothing wrong with overspending on occasion, but you shouldn't need a 15k credit card balance to persuade you from adding to it each month. Keeping it at $0 should be your goal then. I put just about every single expense on my credit card each month to get the rewards. We pay it off in full every time. That would be a good habit to get into now if your budget allows.

Dottie57
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Re: Can I afford a $600-650k house?

Post by Dottie57 » Wed Dec 27, 2017 3:26 pm

8355ajs wrote:
Wed Dec 27, 2017 2:45 pm
Think of it this way. If i paid off the CC today and have a 0 balance next month it makes it mentally easier for me to overspend next month because adding $500 to a high balance that I'm trying to pay off with free cash flow is a lot harder mentally than adding "just a few hundred" to a balance with the mentality that it'll be easy to pay off next month...next month comes and its the same story and meanwhile the taxable account gets depleted.

I guess this is what someone might call behavioral/emotional finance...I know it doesn't make sense logically.
The two of you should not buy a house until and unless you have spending and saving down pat. Set up automatic retirement deductions of 15% min for both of you. Live on what. remains., no credi card debt. None. Payit off now.

If you can't control spending and saving, I question wherher you are mature enough to buy a house. You have plenty of time before a house is more necessary.

Golf maniac
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Re: Can I afford a $600-650k house?

Post by Golf maniac » Wed Dec 27, 2017 3:29 pm

Hey, I just want to say Congrats on where you are at 26. You are in great financial shape overall. CC’s are all about discipline, in general people on here are right, you should pay them off. But you have found a way that works for you, and if you pay them off in 4 to 6 months as your post states you need to figure out a way to use the cards responsibly.

I would suggest a detailed budget for all your expenses. I have been using a simple spreadsheet for about 25 years, it started on paper. Me and my wife sit down once a week, go over what we spent and what is outstanding. We charge everything on a credit card for the cash back and we pay it off weekly. That is what works for us. I would suggest you and your fiancé sit down and find a budget that works for the two of you. Use the budget a few months then make adjustments together. What categories need more and which need less.

Then after credit card debt is paid and hopefully you are married, then look at a house. Take into consideration and discuss each comment on here with your fiancé. Think about how stable each of your incomes are, will you both work after kids and what impact child care costs will be, what extra costs will be after you buy the house (taxes, maintenance, new furniture, changes to house, etc). Plan a detailed budget for after you move in before you sign on the line.

I know it sounds like a bunch of old guys trying to hold you back from your dream, but it is really just experience trying to make sure you have everything thought out before you leap.

Whatever you do, I hope you and fiancé have a great and wonderful like for many years to come.

iasw
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Re: Can I afford a $600-650k house?

Post by iasw » Wed Dec 27, 2017 3:33 pm

You are not using credit cards responsibly. You should not use them. Exceptions: car rentals (extra insurance options), hotels ONLY if you can pay it off immediately. Cash or debit for everything else, especially while you are paying off your debt (which, to be honest, you should do right now. Today.)

And no, you cannot afford that house. Stay put in the condo, figure out how to live within your means, and grow your net worth. Once you have kids, then consider looking for a different place to live. Right now, there is no need and you can't afford it.

SundayMorning
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Re: Can I afford a $600-650k house?

Post by SundayMorning » Wed Dec 27, 2017 4:30 pm

OP, some thoughts from a middle aged dude on the innerwebs that lived through his 20's and made his share of ridiculous personal finance mistakes. I learned the hard way and can with experience recommend to you the following:
1, Determine your savings and retirement funding goals 1st.
2. Automate your savings and retirement funding to be deducted from each paycheck deposit, before you get your hands on it and spend anything.
3. From what is left of each paycheck, budget your monthly operating expenses. Develop an accurate written budget over time that you adjust and follow monthly. Hold yourself accountable to following your monthly budget. Kids do what feels good now; adulting requires discipline, planning, and delaying gratification (spending) until you can afford it (pay cash).
4. Use credit cards for convenience only and cash back rewards. Always pay full statement balance by the monthly due date. If you have to play mental games and/or pay 12% interest, while you have taxable investments and sufficient income - you may be a good candidate to cut up your cards and use cash only for a while.
5. You have house fever. Take a breather. Consider getting married first. Shop for a house after your 1st wedding anniversary. Your future self will be glad you did wait.
6. Make your eventual purchase price range an amount you are comfortable with based on 1 salary; not including bonuses and future raises. Do not count your chickens before they hatch. Should you follow this path, you will not be house poor.
Last edited by SundayMorning on Wed Dec 27, 2017 4:51 pm, edited 1 time in total.

keith6014
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Re: Can I afford a $600-650k house?

Post by keith6014 » Wed Dec 27, 2017 4:34 pm

you are 26.
take a deep breath.
live life. save. enjoy

wbrianwhite
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Re: Can I afford a $600-650k house?

Post by wbrianwhite » Wed Dec 27, 2017 11:42 pm

OT - don't move to the DC area, it's hell. Don't move to Nova, it's Satan's bunghole. The only compelling reason to live there is if you have a job you can only do there (forensic accountancy or similar). Too many people, not enough ways for them to get around.

Real estate market there is solid though. This is anecdotal - I made 100k on the first property I owned there, I made 100k on the second property I owned there. Then I moved to the pacific northwest and paid 700k for a house that would have cost 1.2 million there, and a higher quality of life.

That second property - I made 100k and my wife made 75k when we bought it for 450k. It was tight at times. I wouldn't think you can afford it. Can't imagine it's gotten easier to afford in the past 3 years

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randomizer
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Re: Can I afford a $600-650k house?

Post by randomizer » Wed Dec 27, 2017 11:57 pm

I'd feel overextended if I were to buy a $600k house in your position.
75:25 AA / Expected retirement: 2097

ImmigrantSaver
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Re: Can I afford a $600-650k house?

Post by ImmigrantSaver » Thu Dec 28, 2017 12:36 am

8355ajs wrote:
Wed Dec 27, 2017 2:45 pm
Think of it this way. If i paid off the CC today and have a 0 balance next month it makes it mentally easier for me to overspend next month because adding $500 to a high balance that I'm trying to pay off with free cash flow is a lot harder mentally than adding "just a few hundred" to a balance with the mentality that it'll be easy to pay off next month...next month comes and its the same story and meanwhile the taxable account gets depleted.

I guess this is what someone might call behavioral/emotional finance...I know it doesn't make sense logically.
This is a very expensive mental trick to prevent excessive spending. Find another one

Wakefield1
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Re: Can I afford a $600-650k house?

Post by Wakefield1 » Thu Dec 28, 2017 1:06 am

wbrianwhite wrote:
Wed Dec 27, 2017 11:42 pm
OT - don't move to the DC area, it's hell. Don't move to Nova, it's Satan's bunghole. The only compelling reason to live there is if you have a job you can only do there (forensic accountancy or similar). Too many people, not enough ways for them to get around.
Unfortunately as someone who has been here for most of my life it is hard to disagree,at least for the closer suburbs. And the anthill just keeps on expanding.
Noticed work on the new toll signs for "Rt. 66" a few weeks ago while running on the bike/foot path along there.What a mess. At least we have that (the Custis "trail"). On street (residential) running is getting harder and harder what with the cars that "own the road". Although there are a few good destinations around such as the C&O Towpath/Potomac River corridor,Great Falls,the Zoo and Smithsonian. Old Dominion Railroad Park and the associated Four Mile Run park corridor (the railroad had its last gasp in 1968).

BusterMcTaco
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Re: Can I afford a $600-650k house?

Post by BusterMcTaco » Thu Dec 28, 2017 3:14 am

When we bought we had 3 incomes and budgeted losing one. Five months later we lost one.

You leave no room for error, and the cost could be financial ruin.

If it helps, think of this as putting another $650k on your credit card.

Agggm
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Re: Can I afford a $600-650k house?

Post by Agggm » Thu Dec 28, 2017 3:28 am

8355ajs wrote:
Tue Dec 26, 2017 10:10 pm
First time poster

Me and Fiancé both 26, no kids… maybe in a few years. Looking to move from small condo to a single Family in HCOL area. Looking in the $600-650k price range…is this affordable/smart. DC area, house prices continue to increase and were not hit too hard in the last recession. This would be a 10+ year house. IMO I think this is a feasible purchase by most rules of thumb out there but it would reduce the financial flexibility/taxable savings we have right now considerably.

Income before taxes: Me $85K + $40k reliable bonus every year (stable, 10% raises for next few years, all W2). Her 60K all W2.

401k: Me $50k (6% deferral increasing to 9% next year, 6% match). Her $1k (just got started 3% deferral)

Emergency Fund: $15k (3 months of critical expenses if both of us lost job at same time)

Taxable investment: $150k (from) aggressive saving and a $6k inheritance, partly to be used to make 20% down payment) $10k in unrealized LT gains.

Condo: Market Value 300k, Equity 80k (will have up to 3% selling costs, equity rolled into next down payment)

I also have $6,000 earmarked for closing costs on a new house saved.

CC Debt: $15K aggressively paying it down. Should be done in 4-6months.

Cash value Life insurance: $50k cash value after surrender charges, ($1 million death benefit, on parents life) earmarked for retirement savings boost in the hopefully distant future. I use $16k of after tax bonus money to make the premiums (6 years left).
Not yet.

chicagoan23
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Re: Can I afford a $600-650k house?

Post by chicagoan23 » Thu Dec 28, 2017 11:15 am

I understand the instinct here...you are doing much better than your Millennial peers, many of whom can't come up with $400 in an emergency. You want to see something tangible from that; you're getting married, both you and your future wife want to get settled; you are afraid of missing out on a good house and then see it go up in price.

If you buy the house you'll probably be fine, but in my opinion it is a sub-optimal choice for many reasons.

First, as noted before you should retire the credit card debt. There is really no justification for paying 12% on consumer interest; it's like a 12% surcharge on everything you put on the card. It makes no sense unless you're desperate, which you're not given your taxable holdings. At a minimum transfer it to a new card and pay an intro rate.

Second, given your income levels, you shouldn't buy the house until you've maximized your tax-advantaged space first. You expect to be increasing your income in the next 10 years. Your fiance needs to understand that we're not really talking about "saving for retirement" as much as we're talking about "avoiding taxes." Right now taxes are probably your single biggest expense. Also, your greatest advantage is the advantage of time. If you both max out 401(k) plans, with the match you're getting about $45k. The after-tax cost of that (using a blended 33% marginal rate for state and federal) is $30k, meaning if you didn't contribute you'd lose 1/3 of that money to taxes. The $15k that you save each year will grow substantially over the course of your lifetime. Once the basics of life expenses are covered, there really is no better use of your money when you are young than investing to avoid high marginal taxes.

Third, the points made above about home ownership cannot be discounted. We bought much less house than we could afford at ages 31 (me) and 28 (wife) after selling our condo. That was in early 2006. A few years later after the housing bust, the house next door to us sold for 70% of what we paid. It's more than recovered now, but we're more than 10 years later. Not to mention the money that I've spent on new carpeting, a big landscape project, tuckpointing, water heater and other appliances, now new windows.....it is endless. Add in $10k annually in property taxes for some of the best schools in the State and it really adds up. What is the point of taking that on now? Are you afraid housing prices are going to go up 10% while you wait a year? If so, it is a classic sign of a bubble which means you definitely should wait, but even if you don't, it only means another $20k or so that you'll have to come up with for a down payment. You should be able to save that easily during the year. And you'll get the appreciation on your condo too. Don't buy a single family home if you don't have to; it's not really an investment.

Fourth, you need to address future working/child care plans. In the 10 years since I bought my house we've gone from a "double income, no kids yet" family to a single earner with a stay-at-home spouse and four kids. That changes the calculation for everything. Again, we bought less house than we could afford expecting that to be the case. Make sure you can swing the mortgage, property tax, upkeep and furnishings on a single income, because either (i) one of you will stop working or (ii) one of you will work to pay for child care / convenience (housekeeper, lawn service, etc.) and not much else.

evilityb
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Re: Can I afford a $600-650k house?

Post by evilityb » Thu Dec 28, 2017 12:01 pm

8355ajs wrote:
Wed Dec 27, 2017 2:45 pm
Think of it this way. If i paid off the CC today and have a 0 balance next month it makes it mentally easier for me to overspend next month because adding $500 to a high balance that I'm trying to pay off with free cash flow is a lot harder mentally than adding "just a few hundred" to a balance with the mentality that it'll be easy to pay off next month...next month comes and its the same story and meanwhile the taxable account gets depleted.

I guess this is what someone might call behavioral/emotional finance...I know it doesn't make sense logically.
It's really good that you are conscious of this behavior. There are lots of people out there who have spending habits like this and they are completely unaware that they do this or that there is a better way of handling their money.

You are the only person who can improve your habits. You might want to work with a psychologist to help you manipulate your own behavior. I say that because behavior is purely psychological and we often don't know why we do what we do or ways to change the habits. Physically, anyone can quit smoking; psychologically, people really struggle. Changing money behaviors are the same way. When you say, "If i paid off the CC today and have a 0 balance next month it makes it mentally easier for me to overspend next month..." I see room to improve your ability to set healthy and effective boundaries. Most of us do in one way or another. Focusing on self-growth and cultivating good habits this early in life will pay off for years to come.
8355ajs wrote:
Wed Dec 27, 2017 2:08 pm
I'm taking everyone's POV seriously and i really appreciate everyone's input. However, the way i see things is i have 20% available for down payment with room to spare, in 4 years i will be likely be making $125k excluding bonuses, SO salary will presumably raise too but not sure how much. This brings the income to approx. $200k in 4 years which would be 2.5x the mortgage.
You are correct that in 4 years, you will likely have what you need to buy the house you want. You are incorrect to believe you have it now. Wait. You have an entire board of people who understand finances and have been in your shoes telling you to wait. I bought a house a year and a half ago in the kind of condition that you are describing. It is more work than you know and monthly maintenance for the first year was $1,000. I also have a lawn to mow each weekend from April through October, unless I want to cough up another $100/month to pay someone else to mow it for me. I sure do love waking up at 6am on a Saturday in July to beat the heat.

That 20% you have available does not belong tied up in a house right now. The best approach I see is this:
1) Pay off the credit card debt immediately. 12% is a ridiculous rate to be paying to anyone. Put the card away and only use it when there is no other way to pay for something. Pay it off immediately when you do use it.
2) Pay off any other high-interest debt you have, like student loans.
3) Contribute to your retirement accounts up to the maximum, plus the IRA. You have the money to do this; I know you do because I also live in DC, make $20k less than you do, and I fund my TSP to the max, IRA to the max AND I save an additional $20k in cash each year. The fiancee might not be able to contribute all $18,500 + IRA, but she can do better than 3%. My friend only makes $40k a year and she contributes 10% to her 401(k), plus maxes out her Roth IRA. You have the power.
4) Keep the emergency fund at the right level and liquid. Life happens.
5) All extra money should go into risk-appropriate investments in a taxable account. Use this when you're ready to buy the right house.

Another thing I noticed that I can't avoid bringing up... The title of this post is "Can *I* afford a $600-$650k house?" Is this really "I" and not "we?" I hope you are considering your spouse-to-be in your financial decisions because when you're married, your finances are married. This should definitely be a joint discussion between the two of you.
Make sure the fortune that you seek is the fortune you need - Ben Harper

HopeToGolf
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Re: Can I afford a $600-650k house?

Post by HopeToGolf » Thu Dec 28, 2017 3:03 pm

8355ajs

I do not think you should buy the house. Read the replies above, they offer great advice and insight.

1) If you need to play mental tricks to control spending and saving, you are not in a position to buy a house at the price in question. Things will be too tight for a COUPLE who cannot control spending. I cannot imagine how much you might spend furnishing or renovating the home.

2) Bogleheads can be a bit extreme with respect to savings but if you ever envision being a Boglehead, there is no way you buy the house. You need to pay the debt, save more and earn more (maybe 4 years from now after the raises actually happen).

3) I’m sure you think you deserve the house but to be blunt but your earnings seem light for a HCOL area. In my case in a HCOL area, my first mortgage was ~1.9 total compensation (we earned more than you and bought a less expensive house). We had two Megacorp jobs and lost one during that time and could weather the storm until one earner found a new job. Despite feeling like we deserved more house and the bank was ready to loan us 50% more, being able to pay the mortgage with less income was comforting.

4) If you decide to have children, what is the plan for their care (spouse quits work, daycare)...either way it will cost money? What about college funding? How good are the schools in the area and how sure are you that they will stay that way? Said differently, kids and educational needs can introduce complexity with respect to housing decisions....take your time. We bought in a good neighborhood with great schools. The schools are still great but have changed in other ways and we are looking at other options including the local schools....the house is adding complexity.

In my opinion, get married, pay debt, save cash and enjoy a few years of independence. Even if housing prices increase a little, I would view it as an insurance policy on your tastes changing, the neighborhood changing, income changing, etc.

8355ajs
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Re: Can I afford a $600-650k house?

Post by 8355ajs » Thu Dec 28, 2017 4:39 pm

Thanks for all the replies folks. Guess I'll put this idea off for a few years.... The easy bit will be saving more, spending less and all the other ideas listed here... The hard bit will be telling the Fiancé this is what we should do :/ :| :|

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Meg77
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Re: Can I afford a $600-650k house?

Post by Meg77 » Thu Dec 28, 2017 4:52 pm

I get the urge to buy, and I think you can technically afford it, but I agree with others that it is better to wait.

For one, you are only 26 so presumably have a max of 4 years in the workforce, so I don't really think you can classify your bonuses as "reliable" or ongoing 10% raises as "stable." That's what should happen if everything goes as planned - no unexpected layoffs, disabilities, recessions, divorce, or accidentally getting pregnant with triplets. Things do not always go as planned, however.

Primarily though, you don't need a larger SF home yet! Don't make the classic lifestyle inflation mistake of buying the max house you can afford, ESPECIALLY based on a future lifestyle full of kids and pets that does not exist yet. I have lots of friends who bought 4 bedroom Mcmansions when they got married for the schools, to lock in low interest rates, to lock in lower home prices, etc. Some have had fertility problems; two got divorced before kid #2 arrived. They are all commuting 30+ minutes though and have been paying mortgage interest, taxes and utilities for years on a home more than twice as big as they actually need though. Even the ones whose vision worked out bought years before their kids required the school district (and often ppl move up in house again before that anyway!).

I'm 34 and bought a town home with my husband when we got engaged at age 30 (he was 35). I'm so glad I spent my 20s in my little condo down the street in which I could afford to max out retirement and travel the world. Ah the days when my weekends didn't involve restaining the deck or heading back to home depot for the 5th time to try to find some tool or item. When my condo HVAC went out it was $3500; when our townhome HVAC went out last year it was $12,000. We can afford it now and still have only 20% of our income going to all housing costs, but that wouldn't have been the case if we'd stretched into this home a few years earlier.
"An investment in knowledge pays the best interest." - Benjamin Franklin

chicagoan23
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Re: Can I afford a $600-650k house?

Post by chicagoan23 » Thu Dec 28, 2017 5:57 pm

8355ajs wrote:
Thu Dec 28, 2017 4:39 pm
Thanks for all the replies folks. Guess I'll put this idea off for a few years.... The easy bit will be saving more, spending less and all the other ideas listed here... The hard bit will be telling the Fiancé this is what we should do :/ :| :|
Marriage tip: Don't tell her; just ask her to read this thread and then ask what she thinks.

fabis
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Re: Can I afford a $600-650k house?

Post by fabis » Thu Dec 28, 2017 7:17 pm

not even close.

you can afford the house, just not everything involved with it if you want to keep living at the level you are. (maintenance, emergency fixes, property taxes, home owners insurance, garbage collection, HOA fees?, utilities , etc.)

how is housing looking like 150-200k cheaper?

an Air Conditioning unit needing replaced will wipe out half of your emergency funds dedicated to "critical services". That's not including the labor.

plasma800
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Re: Can I afford a $600-650k house?

Post by plasma800 » Thu Dec 28, 2017 7:24 pm

I agree. This is a stretch.

Yes, you can make the payments, but it's rough.

perspective matters.

My wife and I bring home around $298,000 per year.

We bought our house for $378k.

We rolled forward approx. $132,000 from the sale of our old house + savings , leaving a a balance of 24xxxxx

Our principle, interest, escrow on the 15 year loan is around $26xx per month. And even we feel like this is the highest payment either of us have ever had.....

I'm 43 now. I bought my first house at 32 for $176,000. I sold it for $245,000 a little over 2 years ago. I had some crappy financing at first, so I refinanced not once, but twice on that old house. That ate at least 18k in closing costs. I improved the old house to the tune of about 30k. And then of course paid property taxes every year of around $5600 per year of ownership. I figure i lost about $15k on the sale of that house overall, but it still acted like a savings account.

These days, I think renting has it's merits!

fabis
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Re: Can I afford a $600-650k house?

Post by fabis » Thu Dec 28, 2017 7:33 pm

My other comment would be to make a pie graph and visualize where your money will be going if you buy that house.

When you draw the circle and allocate the expenses and realize 1/3rd of your income is gone for the mortgage payment alone you may find out that a 600k-650k house doesn't seem all that it's cracked out to be.

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