Home affordability

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yosef
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Home affordability

Post by yosef » Fri Sep 26, 2014 3:07 pm

Some background: We purchased our current home in late 2004. Almost 10 years later, we have 2 kids (3 and 9) and all the "stuff" that goes along with them. We love the area we live in. Unfortunately, outside of our neighborhood and one other near us, housing in our immediate area is generally much more expensive. We could likely sell our existing home for ~$230k. Ideally, I'd like to purchase a new place for around $350k. But there isn't much available around that price. A new development is going up near us with some very nice houses that would suit our needs well enough to be our - pardon the cliche - "forever home". Unfortunately, it would likely run us about $420k to get in there. I'm trying to determine if we can afford it. My salary is $125k and my wife is a SAHM. We can and would put 20% down on this home (without negatively affecting our EF). We have no other debt. By my calculations the payments would put us at 20% debt to income ratio. The payments would be about $1k more per month (1100 vs 2000-2100). That scares me a little but I think it's mostly because we've been living below our means for so long. Here are our options as I see them:

1) Tough it out where we are until...when? While we love the area and our house served us well until now, I can honestly say it is not the house I (nor my wife) want to live in for another 10 years. I'm almost 40 and if we are to have any hope of having our home paid for by retirement we need to get into a permenant residence soon.

2) Move to a moderately larger home at a moderately larger price. This doesn't really seem worth the hassle to me, I feel like we'd be in the same position we're in now in another few years. I really don't want to move into a home that I know will not meet our needs indefinitely (I've done that twice already).

3) Buy a home similar to the one mentioned above, but further out in the 'burbs where prices are more palatable. In truth this would likely be my first choice, but my wife is not having it ;) We are in an excellent school district and virtually everything we need shopping or entertainment wise is close.

4) Stretch just a bit for this home, with the assumption that a combination of future raises for me and my wife returning to work in a few years will make it a non-issue. Live in it until we retire.

There are so many rules of thumb around home affordability; I'm pretty sure ok under most but would be afoul of some. Thoughts?

drawpoker
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Re: Home affordability

Post by drawpoker » Fri Sep 26, 2014 3:22 pm

You mention your salary/income & that you have enough to cover a 20% downpayment.
But what about your retirement savings? If buying this new house and taking on higher mortgage payments means you won't be able to continue your contributions to retirement plans at the max, I would say stay where you are until your spouse is able to go out and bring in a paycheck.

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Meg77
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Re: Home affordability

Post by Meg77 » Fri Sep 26, 2014 3:26 pm

Based on the information you provided, I would buy the $420K home now. It sounds like you can afford, particularly because you have no other debt. If you are planning to move at some point anyway and you have the 20% down payment along with a fully funded EF and a 20% DTI, you have to ask yourself what else you'd be waiting for that you don't already have now. Even if you were to get in a bind your wife can always work at least part time with the youngest being nearly school aged. And if this is going to be your "forever" home then I endorse the decision even more, and it makes sense to buy now before interest rates and possibly home prices go up even more.

:beer
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dolphinsaremammals
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Re: Home affordability

Post by dolphinsaremammals » Fri Sep 26, 2014 3:36 pm

Buy the house only if DW agrees to go back to work when the youngest starts first grade.

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deanbrew
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Re: Home affordability

Post by deanbrew » Fri Sep 26, 2014 3:41 pm

You really are not "stretching" at all. A 20 percent PITI to gross income ratio is pretty low, and the payment is affordable given your income.

One thing to consider is that your youngest child is 3 and will be heading off to school in another couple of years. Are you having more kids? Will your wife still be a SAHM once both kids are in school? Could she get a part or full-time job when the youngest goes to school to generate more income?

As others mention, you don't indicate how much retirement savings you have. If you are OK in that area, buying a home such as you describe doesn't sound unwise.
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yosef
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Re: Home affordability

Post by yosef » Fri Sep 26, 2014 7:13 pm

drawpoker wrote:You mention your salary/income & that you have enough to cover a 20% downpayment.
But what about your retirement savings? If buying this new house and taking on higher mortgage payments means you won't be able to continue your contributions to retirement plans at the max, I would say stay where you are until your spouse is able to go out and bring in a paycheck.
We have maxed 2 Roths and my 401k for the past 4 years or so. Retirement wise we are pretty much on track, at least to the extent that I can determine such a thing. That said, it's possible we might have to temporarily cut back on Roth contributions, I really need to run the numbers more.
Meg77 wrote:Based on the information you provided, I would buy the $420K home now. It sounds like you can afford, particularly because you have no other debt. If you are planning to move at some point anyway and you have the 20% down payment along with a fully funded EF and a 20% DTI, you have to ask yourself what else you'd be waiting for that you don't already have now. Even if you were to get in a bind your wife can always work at least part time with the youngest being nearly school aged. And if this is going to be your "forever" home then I endorse the decision even more, and it makes sense to buy now before interest rates and possibly home prices go up even more.

:beer
Thanks for your comments. To your point about waiting, I suppose the only things we could potentially wait for would be for either my wife to resume work, or for us to somehow agree that we can get by with less than $420k worth of house. Her returning to work is a few years away and honestly I think we might burst out of our current place before then. I suppose we need to get serious about hitting the pavement to see whether spending less is realistic given our needs. Up until now the tension between running out of space here and the pain of moving has been roughly equal, so we've been procrastinating. But the opportunity this new development presents is making us get serious, which is probably a good thing even if we wind up elsewhere.
deanbrew wrote:You really are not "stretching" at all. A 20 percent PITI to gross income ratio is pretty low, and the payment is affordable given your income.

One thing to consider is that your youngest child is 3 and will be heading off to school in another couple of years. Are you having more kids? Will your wife still be a SAHM once both kids are in school? Could she get a part or full-time job when the youngest goes to school to generate more income?

As others mention, you don't indicate how much retirement savings you have. If you are OK in that area, buying a home such as you describe doesn't sound unwise.
It feels like a stretch because I don't feel like we have $1000/month worth of slack in our cash flow. But we pay ourselves first and don't really budget much after that anymore so I probably just need to look harder ;) We will not be having any more kids, and the plan is for my wife to go back to work sometime in the next few years (though her earning potential is fraction of mine). Retirement savings wise, as I said above I think we are mostly on track, having a little over 2x my annual salary in tax deferred accounts. Not fantastic particularly by boglehead standards, but decent IMO.

john94549
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Re: Home affordability

Post by john94549 » Fri Sep 26, 2014 8:04 pm

Buy the "forever" home. We bought ours in 1978 and (hint) we're still there. Fixed-rate 30 year are historically low. If you find a house you envision living in for 40+ years, and can swing it, eating beans and weenies for a few years matters little.

Leemiller
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Re: Home affordability

Post by Leemiller » Sat Sep 27, 2014 7:31 am

Part of this has to do with how stable your job is, and how tied to it you want to be. Part of our home affordability analysis was whether either of us could take a pay cut if a good opportunity came up. As for the burbs are the schools as good? If they are, the plus of having a cheaper house is you can afford more shopping/entertainment. Since you're earning the money, I think you need to consider if this will put too much pressure on you. Also, in terms of measures we looked at mortgage amount vs gross income & payment vs net income. Dave Ramsey says to keep payments + taxes at 25% of net (wish ours was that low!). I'm not saying don't (or do) buy, these are just some things we thought about.

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SC Hoosier
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Re: Home affordability

Post by SC Hoosier » Sat Sep 27, 2014 7:55 am

yosef wrote:
1) Tough it out where we are until...when? While we love the area and our house served us well until now, I can honestly say it is not the house I (nor my wife) want to live in for another 10 years. I'm almost 40 and if we are to have any hope of having our home paid for by retirement we need to get into a permenant residence soon.


How long did it take you to save $80k? How much do you still owe on your home? I can't speak on how bad your current home is, I don't live there, but you'd be much better off staying there until you pay it off and possibly until you have the cash to get you to $420k. If you put your $80k on your mortgage and pay a little extra every month, you'd have no mortgage probably before you're 45. Then save for 3 more years in a taxable account, you could pay cash for the home you really want. By then you'll find out if the extra money is worth it for more house. We tend to spend saved money more carefully than borrowed money.
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Ybsybs
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Re: Home affordability

Post by Ybsybs » Sat Sep 27, 2014 8:24 am

You could try change your household budget to set aside your current mortgage plus the extra $1,000 needed for the really expensive place... See how three months of that goes and whether you and your wife are comfortable living like that.

If you are, keep at it while you sell the current place and house hunt for the new place.

If you aren't, start talking with your wife about other options like buying when she restarts work or buying now but further out. (If you buy further out there will be non-house costs to consider as well: more time wasted commuting, more wear and tear on cars, higher fuel costs, more frequent maintenance costs, possibly higher car insurance, and all that times two when [or if] your wife resumes work.)

yosef
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Re: Home affordability

Post by yosef » Mon Sep 29, 2014 12:37 pm

Leemiller wrote:Part of this has to do with how stable your job is, and how tied to it you want to be. Part of our home affordability analysis was whether either of us could take a pay cut if a good opportunity came up. As for the burbs are the schools as good? If they are, the plus of having a cheaper house is you can afford more shopping/entertainment. Since you're earning the money, I think you need to consider if this will put too much pressure on you. Also, in terms of measures we looked at mortgage amount vs gross income & payment vs net income. Dave Ramsey says to keep payments + taxes at 25% of net (wish ours was that low!). I'm not saying don't (or do) buy, these are just some things we thought about.
Well I work in tech so I have yet to have a job that I consider truly stable; I've been laid off several times. That said, I've never been "unemployed" either. But it's true that upsizing my home would certainly make it much more difficult to accept a significant pay cut if need be. We are currently just under 25% of net but obviously looking to blow that out of the water ;)
SC Hoosier wrote: How long did it take you to save $80k? How much do you still owe on your home? I can't speak on how bad your current home is, I don't live there, but you'd be much better off staying there until you pay it off and possibly until you have the cash to get you to $420k. If you put your $80k on your mortgage and pay a little extra every month, you'd have no mortgage probably before you're 45. Then save for 3 more years in a taxable account, you could pay cash for the home you really want. By then you'll find out if the extra money is worth it for more house. We tend to spend saved money more carefully than borrowed money.
Well a fair portion of the down payment (more than half) would be equity in our existing home, though we would cover the rest from savings. Frankly I don't think paying cash for a home is a realistic option for us, even if we waited several years. And even if it were I'm not sure I'd be willing to tough it out in our current place until then.
Ybsybs wrote:You could try change your household budget to set aside your current mortgage plus the extra $1,000 needed for the really expensive place... See how three months of that goes and whether you and your wife are comfortable living like that.

If you are, keep at it while you sell the current place and house hunt for the new place.

If you aren't, start talking with your wife about other options like buying when she restarts work or buying now but further out. (If you buy further out there will be non-house costs to consider as well: more time wasted commuting, more wear and tear on cars, higher fuel costs, more frequent maintenance costs, possibly higher car insurance, and all that times two when [or if] your wife resumes work.)
Yeah, part of the budget issue is that I changed jobs a few months ago, and came into a bit of a windfall in the form of a severance package from my last job, which only finished paying out about a month ago. So I'm still trying to figure out what the "new normal" feels like. The more I think about it I really don't think moving further out is an option now. We really do value the schools and amenities in our area, and it is fairly central to the overall metro area we live in which bodes well for my commute possibilities.

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WallyBird
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Re: Home affordability

Post by WallyBird » Mon Sep 29, 2014 5:33 pm

yosef wrote: ....I'm almost 40 and if we are to have any hope of having our home paid for by retirement we need to get into a permanant residence soon.
Are you saying that in order to have a paid-off house in 2 decades or so, you need to hurry up and buy a more expensive house now? It doesn't quite work that way.
3) Buy a home similar to the one mentioned above, but further out in the 'burbs where prices are more palatable. In truth this would likely be my first choice, but my wife is not having it ;) We are in an excellent school district and virtually everything we need shopping or entertainment wise is close.
I'm with your wife on that one, but that's something for your household to negotiate internally. A good neighborhood is not something I'd toss aside lightly.
Thoughts?
Keep saving. If you can afford to pay another $1000 / month on a house payment, you can afford to put that same $1000 into savings. Or you can put some of it toward savings and some toward the principal on your current loan.
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yosef
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Re: Home affordability

Post by yosef » Mon Sep 29, 2014 7:37 pm

WallyBird wrote: Are you saying that in order to have a paid-off house in 2 decades or so, you need to hurry up and buy a more expensive house now? It doesn't quite work that way.
As I admitted to another poster via PM, this was not a well thought out point and I readily admit that.
WallyBird wrote: I'm with your wife on that one, but that's something for your household to negotiate internally. A good neighborhood is not something I'd toss aside lightly.
Agreed.
WallyBird wrote: Keep saving. If you can afford to pay another $1000 / month on a house payment, you can afford to put that same $1000 into savings. Or you can put some of it toward savings and some toward the principal on your current loan.
To echo Meg's point above, to what end? If I wanted to put more than 20% down, I could do that now. But I definitely do not have the means to pay cash now nor will I in the foreseeable future.

yosef
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Re: Home affordability

Post by yosef » Mon Sep 29, 2014 7:41 pm

To provide an update, I have a realtor coming by this week to discuss what I could sell my existing place for, and to get info on commissions, etc. Also got some detailed pricing info on the new community. No idea what we'll wind up doing, but we at least got up the nerve to get the ball rolling so we can make a conscious choice one way or the other instead of procrastinating.

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Re: Home affordability

Post by wilked » Mon Sep 29, 2014 8:07 pm

yosef wrote:We could likely sell our existing home for ~$230k. Ideally, I'd like to purchase a new place for around $350k. But there isn't much available around that price.
http://www.badgerflats.com/blog/wp-cont ... -head2.jpg

yosef
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Re: Home affordability

Post by yosef » Mon Sep 29, 2014 8:15 pm

wilked wrote:
yosef wrote:We could likely sell our existing home for ~$230k. Ideally, I'd like to purchase a new place for around $350k. But there isn't much available around that price.
http://www.badgerflats.com/blog/wp-cont ... -head2.jpg
Perhaps you missed this sentence, cleverly hidden before that one:

"Unfortunately, outside of our neighborhood and one other near us, housing in our immediate area is generally much more expensive." :D

wilked
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Re: Home affordability

Post by wilked » Mon Sep 29, 2014 8:43 pm

yosef wrote:
wilked wrote:
yosef wrote:We could likely sell our existing home for ~$230k. Ideally, I'd like to purchase a new place for around $350k. But there isn't much available around that price.
http://www.badgerflats.com/blog/wp-cont ... -head2.jpg
Perhaps you missed this sentence, cleverly hidden before that one:

"Unfortunately, outside of our neighborhood and one other near us, housing in our immediate area is generally much more expensive." :D
I would look into the immediate area then!

Home prices double outside of those two neighborhoods?

denovo
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Re: Home affordability

Post by denovo » Mon Sep 29, 2014 8:57 pm

I would buy it, but make it's your forever home. Don't buy so much stuff that in 5-10 years, you need a bigger place to fit all your stuff in. Perhaps wait till the young ones go to college to get the man cave.
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SC Hoosier
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Re: Home affordability

Post by SC Hoosier » Mon Sep 29, 2014 9:08 pm

It doesn't seem that financial advice is what the OP is looking for here.
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Re: Home affordability

Post by Valuethinker » Tue Sep 30, 2014 5:50 am

yosef wrote:S

1) Tough it out where we are until...when? While we love the area and our house served us well until now, I can honestly say it is not the house I (nor my wife) want to live in for another 10 years. I'm almost 40 and if we are to have any hope of having our home paid for by retirement we need to get into a permenant residence soon.
There is a lot of financial information we don't have so we can't really say whether you can 'afford' this. To be honest, this is more an emotional call than a financial one.

Your life and your needs will change. But it's important to grab life while you can (within reasonable limits).

I don't think a mortgage of say $250k is excessive against an income of $125k. A new house won't need much repair and maintenance spent on it in the first 5 years, say.
2) Move to a moderately larger home at a moderately larger price. This doesn't really seem worth the hassle to me, I feel like we'd be in the same position we're in now in another few years. I really don't want to move into a home that I know will not meet our needs indefinitely (I've done that twice already).
Given the costs and hassles of moving, this strategy only works if you do it in say 10 year chunks.
3) Buy a home similar to the one mentioned above, but further out in the 'burbs where prices are more palatable. In truth this would likely be my first choice, but my wife is not having it ;) We are in an excellent school district and virtually everything we need shopping or entertainment wise is close.
I think your wife has the right of it. You only live life once and where you live is an important part of that, not just the house you live in. Location, location, location in terms of value of real estate.
4) Stretch just a bit for this home, with the assumption that a combination of future raises for me and my wife returning to work in a few years will make it a non-issue. Live in it until we retire.

There are so many rules of thumb around home affordability; I'm pretty sure ok under most but would be afoul of some. Thoughts?
I would buy the home you want. If you think you can swing the monthly payments.

If you live in it for another 30 years, say, then it has been a good investment.

yosef
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Re: Home affordability

Post by yosef » Tue Sep 30, 2014 7:11 am

SC Hoosier wrote:It doesn't seem that financial advice is what the OP is looking for here.
Because I can't pay cash? That was more or less your suggestion right?
wilked wrote: I would look into the immediate area then!

Home prices double outside of those two neighborhoods?
Not quite double but get significantly more expensive yes. There are some homes for mid to high 300s here and there, and we'll certainly look at them. But I know I can afford those; I was kind of hoping to gauge whether folks thought I was out of my mind by perhaps considering homes in the $400s ;) As for staying in the same neighborhood, I think if we really were going to do that we'd just suck it up and stay in our house. My home is one of the smaller ones in our neighborhood, but even the larger homes are not larger and nicer enough to make moving worthwhile. I'd classify the other neighborhood as a marginal step up as well.
Valuethinker wrote: There is a lot of financial information we don't have so we can't really say whether you can 'afford' this. To be honest, this is more an emotional call than a financial one.

Your life and your needs will change. But it's important to grab life while you can (within reasonable limits).

I don't think a mortgage of say $250k is excessive against an income of $125k. A new house won't need much repair and maintenance spent on it in the first 5 years, say.
Unfortunately, this would be closer to $350k (Assuming a $420k sale price).

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SC Hoosier
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Re: Home affordability

Post by SC Hoosier » Tue Sep 30, 2014 10:07 am

yosef wrote:
SC Hoosier wrote:It doesn't seem that financial advice is what the OP is looking for here.
Because I can't pay cash? That was more or less your suggestion right?
No. That was not my suggestion. You could get this mortgage to be a LOT smaller if you'd focus on it for a while. 4% interest on $350k is &14,000 per year. That's YOUR money going to someone else! That sounds nuts to me.

Have you thought about adding onto your existing home?

Just trying to help.
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Re: Home affordability

Post by Johno » Tue Sep 30, 2014 10:38 am

SC Hoosier wrote:
yosef wrote:
SC Hoosier wrote:It doesn't seem that financial advice is what the OP is looking for here.
Because I can't pay cash? That was more or less your suggestion right?
No. That was not my suggestion. You could get this mortgage to be a LOT smaller if you'd focus on it for a while. 4% interest on $350k is &14,000 per year. That's YOUR money going to someone else! That sounds nuts to me.

Have you thought about adding onto your existing home?
It's a question without a certain and fixed answer of course. But my impression is that your approach is the 'house is strictly consumption not investment' variety which doesn't always comport with reality. The risk in 'focusing on it for awhile' if that means waiting, is that house prices rise in the meantime, which even in a neutral/pessimitic/Schiller type of view thinks they should at around inflation. That has to be counted against the '$14k/yr of YOUR money going to someone else' in the interim period, a lot of which is inflation compensation to the lender. Likewise the 'house is not investment' oversimplification might tend to view the future value of a major addition and a new house as the same: zero. But while it's possible a future purchaser of a smaller older house on a small lot with an addition would value the extra work at zero, and very probably for much less than what it cost to do, again in complicated reality whole house prices can rise a lot.

Nobody knows the future of asset prices (house or other) so it's understandable when people adopt oversimplified views of investing that tell them valuation/expected return doesn't matter and can be ignored. But it does matter. You can't predict it with any certainty, but you can't ignore it. That's the real world dilemma as I see it.

However that's not to ignore the consumption aspect of home buying. Buying the bigger house now is consuming more (imputed rent) now, v 'focusing on it' if that means waiting and saving more and consuming less imputed rent for now in the old house. It's just that counting the whole interest payment as a loss is an overstatement.

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Re: Home affordability

Post by cherijoh » Tue Sep 30, 2014 1:35 pm

yosef wrote:
drawpoker wrote:You mention your salary/income & that you have enough to cover a 20% downpayment.
But what about your retirement savings? If buying this new house and taking on higher mortgage payments means you won't be able to continue your contributions to retirement plans at the max, I would say stay where you are until your spouse is able to go out and bring in a paycheck.
We have maxed 2 Roths and my 401k for the past 4 years or so. Retirement wise we are pretty much on track, at least to the extent that I can determine such a thing. That said, it's possible we might have to temporarily cut back on Roth contributions, I really need to run the numbers more.
Meg77 wrote:Based on the information you provided, I would buy the $420K home now. It sounds like you can afford, particularly because you have no other debt. If you are planning to move at some point anyway and you have the 20% down payment along with a fully funded EF and a 20% DTI, you have to ask yourself what else you'd be waiting for that you don't already have now. Even if you were to get in a bind your wife can always work at least part time with the youngest being nearly school aged. And if this is going to be your "forever" home then I endorse the decision even more, and it makes sense to buy now before interest rates and possibly home prices go up even more.

:beer
Thanks for your comments. To your point about waiting, I suppose the only things we could potentially wait for would be for either my wife to resume work, or for us to somehow agree that we can get by with less than $420k worth of house. Her returning to work is a few years away and honestly I think we might burst out of our current place before then. I suppose we need to get serious about hitting the pavement to see whether spending less is realistic given our needs. Up until now the tension between running out of space here and the pain of moving has been roughly equal, so we've been procrastinating. But the opportunity this new development presents is making us get serious, which is probably a good thing even if we wind up elsewhere.
deanbrew wrote:You really are not "stretching" at all. A 20 percent PITI to gross income ratio is pretty low, and the payment is affordable given your income.

One thing to consider is that your youngest child is 3 and will be heading off to school in another couple of years. Are you having more kids? Will your wife still be a SAHM once both kids are in school? Could she get a part or full-time job when the youngest goes to school to generate more income?

As others mention, you don't indicate how much retirement savings you have. If you are OK in that area, buying a home such as you describe doesn't sound unwise.
It feels like a stretch because I don't feel like we have $1000/month worth of slack in our cash flow. But we pay ourselves first and don't really budget much after that anymore so I probably just need to look harder ;) We will not be having any more kids, and the plan is for my wife to go back to work sometime in the next few years (though her earning potential is fraction of mine). Retirement savings wise, as I said above I think we are mostly on track, having a little over 2x my annual salary in tax deferred accounts. Not fantastic particularly by boglehead standards, but decent IMO.
You need to determine whether or not you can swing another $1000/month before you "buy in" to your dream house any more than you already have. Almost doubling your largest single expense also means that your existing emergency fund won't cover the same number of months if you buy this new house, so saving the difference for several months would serve the dual purpose of seeing how much of a pinch it would be and beefing up your emergency fund. Also you say your "payments" - is this just P&I or PITI? You definitely need to factor in increase taxes and insurance. Also be aware that your first years taxes may be based on the land cost only since this is new construction. I moved into a brand new neighborhood and a lot of the my neighbors were caught flatfooted by the second year taxes - especially since we also went from unincorporated to incorporated.

It also sounds like part of your down payment will be coming from the sale of your existing home. What is your game plan for the transition period? Coordinating the sale of one house and the purchase of another is an inexact science. Are you prepared to move into temporary quarters after the sale of your current house? It doesn't sound like closing on the new house will work if you haven't sold the current one. Also keep in mind that you may be expected to pony up money for escrow for taxes and insurance at closing, but there will be a delay in getting back what you have in escrow on the current home.

Besides these cash flow issues, you need to prioritize your goals - the new house, your retirement and saving for your kids' education. Have you already put aside money for the latter? If you placed these three goals in priority order, where would the house fall? If it is your #1 priority, then you can probably afford the house - assuming you survive the test run. But if having your dream house is not your first priority, you need to think twice about stretching for a house, in my opinion. Remember, there are always opportunity costs with any financial decision!

yosef
Posts: 337
Joined: Tue May 24, 2011 2:10 pm

Re: Home affordability

Post by yosef » Wed Oct 01, 2014 7:16 am

cherijoh wrote: You need to determine whether or not you can swing another $1000/month before you "buy in" to your dream house any more than you already have. Almost doubling your largest single expense also means that your existing emergency fund won't cover the same number of months if you buy this new house, so saving the difference for several months would serve the dual purpose of seeing how much of a pinch it would be and beefing up your emergency fund. Also you say your "payments" - is this just P&I or PITI? You definitely need to factor in increase taxes and insurance. Also be aware that your first years taxes may be based on the land cost only since this is new construction. I moved into a brand new neighborhood and a lot of the my neighbors were caught flatfooted by the second year taxes - especially since we also went from unincorporated to incorporated.
The $1000 more figure definitely includes taxes and insurance. I'm familiar with the tax "break" on new construction also, we had that with our first home. My goal would be to pay taxes and insurance out of pocket rather than having them escrowed, though I'm not sure if all banks will allow that. I'm stable enough financially that I'd prefer to manage that myself rather than giving the bank an interest free loan.
cherijoh wrote: It also sounds like part of your down payment will be coming from the sale of your existing home. What is your game plan for the transition period? Coordinating the sale of one house and the purchase of another is an inexact science. Are you prepared to move into temporary quarters after the sale of your current house? It doesn't sound like closing on the new house will work if you haven't sold the current one. Also keep in mind that you may be expected to pony up money for escrow for taxes and insurance at closing, but there will be a delay in getting back what you have in escrow on the current home.
These are all questions that I have yet to answer. Houses in my neighborhood sell pretty fast, so I'd be comfortable waiting to list until we were almost ready to move. Part of the reason we ended up in our current home was that we were in a rush to find a place once ours finally sold, and I don't care to repeat that. Not sure how we would handle the float around needing our current equity to make a down payment. Food for thought
cherijoh wrote: Besides these cash flow issues, you need to prioritize your goals - the new house, your retirement and saving for your kids' education. Have you already put aside money for the latter? If you placed these three goals in priority order, where would the house fall? If it is your #1 priority, then you can probably afford the house - assuming you survive the test run. But if having your dream house is not your first priority, you need to think twice about stretching for a house, in my opinion. Remember, there are always opportunity costs with any financial decision!
As I said, retirement wise I feel generally ok. The house we are discussing here. Kids education is another story; we do not have any savings explicitly targeted for that purpose. We were prioritizing retirement contributions with the thought that if we do well we could tap Roths to help with college expenses. And when my wife returns to work our goal is to save the majority of whatever she brings in since we are already used to living on my income alone. So at this point I guess it is fair to say I'd prioritize a new house over future education expenses. If we don't get some breathing room we may not make it that long :D

Leemiller
Posts: 1049
Joined: Sat Jun 01, 2013 12:42 pm

Re: Home affordability

Post by Leemiller » Wed Oct 01, 2014 7:02 pm

You've been laid off several times, and you're in tech. Those facts would give me significant pause with a stay at home spouse.

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