Strategy for Purchasing a House

[john2016]

I am considering purchasing a house in the Seattle area. Since I have been following the Boglehead philosophy, purchasing a house is something that is not my top priority but I decided to go forward anyways primarily because it is very important to my spouse. With the (potential) housing bubble that is going on, I'd like to be better prepared in being able to handle our mortgage. I am hoping I could get some advice for my situation.

Financial Situation: My wife and I are both working, have no outstanding debts. Our only monthly recurring expense is our living expenses and the rent we are currently paying - overall we lead an average lifestyle. I did some basic math and it looks like we will be able to make the monthly mortgage payments with some minor adjustments in our lifestyle (nothing significant though). For the sake of this discussion, I'd like to assume some numbers:

• House Cost: $1 million
  Monthly payments we can afford after 401k pre-tax, 401k after-tax and Roth IRA maximization: $5000/month (this excludes the variable income such as annual bonuses)
  Downpayment we can make: 21%
  Monthly Rent: $2,200 for a 850 sqft 1 bedroom
  Potential APR: 4.0% - 4.5% fixed 30 year
  Monthly Expenses: Roughly $1,500 - $2,000
  Expecting to start a family soon

This puts us in a situation where we need to take a 30 year fixed-rate mortgage. I will be paying a double my rent towards something we can call our own (and make my spouse happy).

I have always read the philosophy: Money today is worth more than money tomorrow. However, I also read conflicting advice that it is beneficial in paying the mortgage off earlier than the 30 year time period. Therefore, in my mind, there are a few strategies I'd like to get some opinion on:

• #1. Pay as slowly as you can, Save the rest: In this strategy, I'll take the mortgage for 30 years, repay as little as possible (which is around $4000). Whatever bonus money we are going to get, I will start investing it in index funds (80/20 stock/bond split) and call it a day.
  #2. Pay as aggressvely as you can: In this strategy, I'll take te mortgage for 15 years, repay as much as I can and potentially even refinance if possible to finish the loan repayment in 10 years. For this, I'd have to exhaust all the bonus money and forgo all investing.

(Is there any other strategy?)

My personal goal: Maximize my wealth + Prepare for recession (if and when it happens). To maximize my wealth, I a bit hesistant in purchasing a house but the happiness of my spouse is more important to me so I'd like to discount the money I am putting into the house and stop looking at it but still be prepared.

Any advice on how to best approach this situation?

[Wellfleet]

There is a rigorous debate on Bogleheads over a 30 versus 15 year mortgage. I'd go for the 15 year mortgage if you can afford it while also maxing out other accounts, maintaining an emergency fund, prepare for new family (hopefully).

[bigred77]

I would go with the 30 yr mortgage since you are just about to start a family soon and your expenses will be increasing. You are also a dual income household now but how sure are you of that continuing in the future?

You don't have to make a decision now but you could always split any bonus/windfalls between paying down the mortgage and taxable investing. It doesn't have to be all or nothing. Also, how long to you anticipate being in the property (hopefully a decade+) and have you looked into the current commute, potential future commutes if you change jobs (basically to the major employment centers in your city) school system, etc?

What your savings rate after buying the house? Are you including PITI + HOA + a little set aside for maintenance?
Are your non-housing monthly expenses expected to rise? Mine did and I bet others will tell you the same.
Make sure you budget for childcare after you start your family. That will be a big number.

[eog]

I am confused with your numbers. If the maximum you say you can afford is 5000 a month and you are going to put down 20% on a million dollar house, you cant afford a 15 year mortgage. I ran your numbers and 15 year mortgage on 800K comes out to $5900/month. For a 30 year mortgage you guys are looking at $3700/month. Neither of these include taxes, insurance or maintenance which I assume will be substantial on a million dollar house.

I think you will either need to be OK with paying significantly more per month or get a cheaper place.

[Mlm]

The numbers just don't work unless you suspend retirement contributions.

[WhiteMaxima]

Why not rent a one million dollar house for less $4000? In some cases, you can rent for $3000. In that case, you can save more while waiting for another recession to come. Then you could buy at discount. Don't forget you have to pay maintance cost, property taxs, insuarnce. Also, you might change your job and relocate. Owning a real estate make it more costly.

[DVMResident]

(Is there any other strategy?)

+1 vote in the Boglehead echo chamber to not buy. I think it's a stretch in the face of numerous unknown like if your spouse will continue to work. But if you're going to do this anyways...here's an idea that potentially lowers costs in the short-term and provides good liquidity in the face of unknown future: take a 5/1 ARM. As of today, the spread of ARM vs fixed is 0.625%, or about $450/month less. Put that $450/month into I Bonds, which currently have a composite yield of 2.76%. Spend 5 years of the fixed portion of the ARM building up a 5 year ladder of I Bonds.

Now you have assets generating yield offsetting adjustments in the mortgage (not in perfect lock-steps as the ARM adjusting off LIBOR and I Bond off CPI; but probably directionally similar). Simultaneously minimize net costs and maintain liquidity.

When the ARM adjusts, you have the option every month to either cash the I Bond to pay for the higher costs or keep them generating interest. If you don't cash them, the I Bonds become the kid's college fund (with a nice tax advantage to boot).

[snowshoes]

Million dollar homes crack me up, their primarily purchased to impress other people.(imo)
My thinking has always had me buy the cheapest accommodating R.E in the zip code I was researching R.E, everything else has worked out well if you're a capable handy man. A friends x-wife kept each of her 4 other husbands, he was #5, as long as state laws allowed for an economic split in her favor. Sounds like you do not even want R.E's maintenance & costs. Good luck!

[Nate79]

What do you get for $1m in Seattle these days?

[Pajamas]

Million dollar homes crack me up, their primarily purchased to impress other people.(imo)

Depends on where you live. A two bedroom apartment that cost $1,000,000 around here would only impress anyone because of how cheap it is.

john2016, you are not providing any information about your financial reserves and existing investments but buying and living in a house costs a lot more than the down payment and the monthly mortgage. If you are basing affordability on your current income but are planning to have children soon, you should consider how you would manage on your income only (without your wife's salary) and with the increased expenses of having children. Be very cautious about buying an expensive house right now.

[jimb_fromATL]

I am considering purchasing a house in the Seattle area. Since I have been following the Boglehead philosophy, purchasing a house is something that is not my top priority but I decided to go forward anyways primarily because it is very important to my spouse. With the (potential) housing bubble that is going on, I'd like to be better prepared in being able to handle our mortgage. I am hoping I could get some advice for my situation.

Financial Situation: My wife and I are both working, have no outstanding debts. Our only monthly recurring expense is our living expenses and the rent we are currently paying - overall we lead an average lifestyle. I did some basic math and it looks like we will be able to make the monthly mortgage payments with some minor adjustments in our lifestyle (nothing significant though). For the sake of this discussion, I'd like to assume some numbers:

• House Cost: $1 million
  Monthly payments we can afford after 401k pre-tax, 401k after-tax and Roth IRA maximization: $5000/month (this excludes the variable income such as annual bonuses)
  Downpayment we can make: 21%
  Monthly Rent: $2,200 for a 850 sqft 1 bedroom
  Potential APR: 4.0% - 4.5% fixed 30 year
  Monthly Expenses: Roughly $1,500 - $2,000
  Expecting to start a family soon

This puts us in a situation where we need to take a 30 year fixed-rate mortgage. I will be paying a double my rent towards something we can call our own (and make my spouse happy).

I have always read the philosophy: Money today is worth more than money tomorrow. However, I also read conflicting advice that it is beneficial in paying the mortgage off earlier than the 30 year time period. Therefore, in my mind, there are a few strategies I'd like to get some opinion on:

• #1. Pay as slowly as you can, Save the rest: In this strategy, I'll take the mortgage for 30 years, repay as little as possible (which is around $4000). Whatever bonus money we are going to get, I will start investing it in index funds (80/20 stock/bond split) and call it a day.
  #2. Pay as aggressvely as you can: In this strategy, I'll take te mortgage for 15 years, repay as much as I can and potentially even refinance if possible to finish the loan repayment in 10 years. For this, I'd have to exhaust all the bonus money and forgo all investing.

(Is there any other strategy?)

My personal goal: Maximize my wealth + Prepare for recession (if and when it happens). To maximize my wealth, I a bit hesistant in purchasing a house but the happiness of my spouse is more important to me so I'd like to discount the money I am putting into the house and stop looking at it but still be prepared.

Any advice on how to best approach this situation?

You say you live an "average" life style, but a quick search shows the median house price in Seattle is about $610K. So a million dollar house is a lot more than the median and incredibly higher than a 1 bedroom apartment.

Is your wife in touch with reality about how much a million dollar home will really cost? By the time you add taxes and insurance you'll have an obligation of probably $5600 per month just for PITI (Principal and Interest on the loan plus Taxes and Insurance.) Add any homeowner' association fee, and an allowance for maintenance and repairs, and you'll be spending need about 3 times what you're paying for rent -- and that's before you heat it and cool it and furnish it.

Would you be able to contribute enough to retirement, have at least 6 months of expenses including the mortgage, taxes, insurance, utilities, HOA fees, etc. even if one of you were not working?

To illustrate:

• For a home selling for $1,000,000 with 20% down ($200,000) the balance would be $800,000. Adding perhaps 1.5% closing costs ($12,000 makes a total of $212,000 due at closing.
  
  At the current bankrate.com reported average rate for jumbo mortgages of 4.25% for 30 years the payment for P&I would be $3936 per month.
  
  Adding perhaps 1.5% of the home's value for taxes and insurance ($1250 escrow per month) would give you a total payment of $5,602 per month.
  
  Allowing perhaps 1.% of the home's value for annual maintenance and repair expenses, would add another $833 per month you'd need to be able to set aside.
  
  That's a total of about $6,436 per month to a At about 28% debt to income ratio for the home, and if the lender does not count the maintenance allowance, that would require an income of about $20,008 per month, $240,094 per year to qualify for the loan.
  
  At a more conservative suggested 25% of income for shelter, you'd need to have about $269,000 income per year income even if only one person was working.

A 15 year loan could be quite a stretch. Probably not practical at all, since investing for retirement should be a higher priority than an expensive home.

• At perhaps 3.75% for 15 years the payment for P&I would be $5818 per month. PITI would be a total payment of around $7,484 per month. With the maintenance allowance set-aside, that's a total of about $8,318 per month to own the home -- again, before you heat it cool it and furnish it.
  
  At about 28% debt to income ratio for the home, and if the lender does not count the maintenance allowance, that would require an income of about $26,730 per month, $320,762 per year to qualify for the loan.

WIth a home that expensive, and in the 28% bracket that you'd be in to even qualify for the home, you would save some money in taxes for the property taxes and mortgage interest. But it's still going to be a hekkuvva lot of money to own a house that expensive.

jimb

[friedhelmwinter]

house prices in seattle are insane! but get a little cheaper once you move a little outside (at which point commute becomes a major hassle)

I'm in the same boat as you and decided to rent for another year

[e5116]

My housing costs doubled when we went from renting a 2BR apartment to owning a house in Chicago a year or so ago (not quite Seattle prices, but very low inventory and high demand in the "hot" areas --- finally got a place on the fifth offer). It was also important to the wife and we were starting a family. Don't regret it one bit. Put 20% down and could have possibly stretched and gotten a 15-year fixed, but wanted the flexibility and cushion a 30-year fixed would give especially with interest rates this low (and I still considered the monthly cost high, but significantly less than a 15- year). I vote for NOT aggressively paying off your mortgage if you get a rare <4.5%. for some of my reasons, read this article:
http://www.edelmanfinancial.com/educati ... g-mortgage
In particular, read reason #10.

[anoop]

Million dollar homes crack me up, their primarily purchased to impress other people.(imo)

Depends on where you live. A two bedroom apartment that cost $1,000,000 around here would only impress anyone because of how cheap it is.

That one cracked me up.

[inbox788]

My housing costs doubled when we went from renting a 2BR apartment to owning a house in Chicago a year or so ago (not quite Seattle prices, but very low inventory and high demand in the "hot" areas --- finally got a place on the fifth offer). It was also important to the wife and we were starting a family. Don't regret it one bit. Put 20% down and could have possibly stretched and gotten a 15-year fixed, but wanted the flexibility and cushion a 30-year fixed would give especially with interest rates this low (and I still considered the monthly cost high, but significantly less than a 15- year). I vote for NOT aggressively paying off your mortgage if you get a rare <4.5%. for some of my reasons, read this article:
http://www.edelmanfinancial.com/educati ... g-mortgage
In particular, read reason #10.

A decent case for investing vs. paying off mortgage, but the assumption is higher investment return (7%) vs. lower mortgage (4%). If investment returns are higher (10% or more), the case is even stronger. However, if the returns is low (2%) or negative, you could wind up doing worse. (they do use same 5% for showing mortgage interest deduction against ordinary income vs. capital gains)

As far as losing job or other financial need, BH have a strong emergency fund to rely on and other measure before taking on the eliminate mortgage cause. I like to look at mortgages as negative bonds and avoid too much bond allocation if carrying a mortgage that costs more than the bond returns.

[snowshoes]

Million dollar homes crack me up, their primarily purchased to impress other people.(imo)

Depends on where you live. A two bedroom apartment that cost $1,000,000 around here would only impress anyone because of how cheap it is.
You too eeh? Thats what the market might dictate "today", might not be like that tomorrow, might be more, might be less. It's a lifestyles 'costs' the OPs considering.

john2016, you are not providing any information about your financial reserves and existing investments but buying and living in a house costs a lot more than the down payment and the monthly mortgage. If you are basing affordability on your current income but are planning to have children soon, you should consider how you would manage on your income only (without your wife's salary) and with the increased expenses of having children. Be very cautious about buying an expensive house right now.

With current R.E at or near 07 peaks everyones asking premiums these days, 20mi outside many major states capitals 1M in R.E usually translates into under 500k in R.E. both residentially and commercially. I'd ask you R.E. is what? Location, and whatever a building is built with. Yesteryear, conventionally, it was tar, wood, glass & stone, these days its concrete, aluminum, particle board, plastics, and glass. For 1M in location w/ todays building products, I'd also keep my funds liquid, and look for values in foreclosed or condemned property FS value options, one with a planned income of sorts. Otherwise all you're doing is paying ever rising housing lifestyle creep costs. I do not like arbitrary R.E taxes, do you?

As mentioned location is a #1 consideration, and who's willing to take on that R.E's illiquid rolling debts carry costs, for a lifestyle, or profit, or both. You also mentioned you prefer liquidity, not how much can you afford monthly? There are other studies that support the notion that after 3-6mo. all humans re-adjust and become accustomed to any lifestyle, be it in a commune, in jail, or alone on an island.

The more you buy, usually the higher the taxes & fees involved, w/funds redirected toward your current lifestyle, not savings instruments. I'd also suggest your wife is angling to become a SAHM, w/children w/in 5yrs and your supported lifestyles accommodations. This supports a economically strengthened positioning in your marriage via your housings income redistribution. Not my business, thats yours, this is just an observation of your OP without rainbows and unicorns.
Good luck moving forward.

[cherijoh]

You say you live an "average" life style, but a quick search shows the median house price in Seattle is about $610K. So a million dollar house is a lot more than the median and incredibly higher than a 1 bedroom apartment.

Is your wife in touch with reality about how much a million dollar home will really cost? By the time you add taxes and insurance you'll have an obligation of probably $5600 per month just for PITI (Principal and Interest on the loan plus Taxes and Insurance.) Add any homeowner' association fee, and an allowance for maintenance and repairs, and you'll be spending need about 3 times what you're paying for rent -- and that's before you heat it and cool it and furnish it.

Would you be able to contribute enough to retirement, have at least 6 months of expenses including the mortgage, taxes, insurance, utilities, HOA fees, etc. even if one of you were not working?

+ 1

People always underestimate how expensive their first house will be.

I moved into a brand new neighborhood when I bought my current house 25 years ago. I bought a lot less house that the bank said I could afford, but that clearly wasn't the case for many of my neighbors. At the time the neighborhood was outside city limits, so the first year's real estate taxes were based on county taxes only and the appraisal didn't cover the full value of the house. The city quickly gobbled up the area and came in and did a reassessment. So both the tax rate per $1K value and the property value itself jumped resulting in the taxes more than doubling. This apparently came as a great shock to many of my neighbors when their mortgage company upped their escrow payment. I was floored by how many people had cut it so close that they literally couldn't handle an extra $100 - $150/month in their budget.

Which reminds me - OP are you aware that your lender will expect you to pay a lump sum into the escrow account at closing for taxes and insurance? This won't be counted against the down payment necessary as it cannot be rolled into the mortgage.

[taguscove]

OP, a bunch of people are raising red flags and I'm inclined to agree.
- Buying vs renting: Seattle currently is one of the most favorable US cities to rent compared to buying.
- As a recent new condo owner (Boston), the taxes + hoa + repairs adds 35% above our 30 year monthly payment.

Advice if you still want to buy:
- I favor looking at a 15 year fixed or 7/1 ARM. A 30 year fixed gives substantially more interest rate risk for the lender, and they charge appropriately for that.
- Ask friends and acquaintances if there's anyone who is considering to sell. We bought through acquaintances and it was a wonderful experience avoiding realtor fees and working with people we trusted.

[NorCalDad]

I would go with the 30 yr mortgage since you are just about to start a family soon and your expenses will be increasing. You are also a dual income household now but how sure are you of that continuing in the future?

...

Make sure you budget for childcare after you start your family. That will be a big number.

I cannot emphasize this enough. Especially in an expensive city like Seattle within the social/educational circle your income level implies. Unless one of you stays home or you have retired parents down the street, you could be spending $15,000 to $20,000 a year on child care just for one child. Many parents describe it as equivalent to having another mortgage.

Given that, I would at least wait on a 15-year mortgage and go with a 30-year. Kids bring additional, unexpected demands on your time and money. If you can comfortably afford all of the new costs, including 529 funding if that's a priority, you can always refi into a 15-year.

[Bogel0048]

Million dollar homes crack me up, they're primarily purchased to impress other people.

Generally I would agree, but if you ever need to live in a decent house within a reasonable commute of downtown Boston you better be prepared to spend at least $600K to $1M. This would get you a nice family home in someplace like Winchester, but definitely not a McMansion.

I know Seattle, but not the detailed real estate situation. It is possible the OPs have a commuting priority that is focusing them on homes that could cost up to $1M.

[bluejello]

Sounds like your wife wants to "nest" and get a place that she can put her own touches on. Speaking as a woman, I definitely understand that desire, especially when children are in the near future. My husband and I also recently had this debate over whether to buy vs rent. However, in our city mortgage + taxes + HOA fees = rent for a comparable home, and a good chunk of the mortgage goes to principal, so in our case it made financial sense to buy. If renting was significantly more economical than buying by a large margin, I would've agreed to keep renting.

A couple of suggestions for you:

1) Do a calculation with your wife to model out the costs of renting vs. buying. Be sure to include taxes, HOA, repairs, renovations, etc. I don't know what this math looks like for Seattle but if it turns out you would save a huge amount by renting, she may well agree with you to rent and put that money towards another life goal you share: vacations, having one parent stay home with the kids in the future, education for the kids, early retirement, lots of ridiculously good wine, whatever.

2) If her desire to buy is mostly about wanting to make a home "ours" and renovating or decorating to her taste, try seeing if you can find a rental situation that would accommodate that. I know people who have signed long-term rental agreements for multiple years at significantly below-market rates, with the agreement that they would also put in money and sweat equity towards making the place nicer (renovating the kitchen, repainting, etc.) For a landlord this can be a good deal as you get a reliable long-term tenant and a fixed-up home that will sell well in the future, and for the tenant this can be a way of getting some of the benefits of home ownership without the costs.

[NotWhoYouThink]

Post by john2016 » Mon Jan 30, 2017 2:44 pm
I am considering purchasing a house in the Seattle area. Since I have been following the Boglehead philosophy, purchasing a house is something that is not my top priority but I decided to go forward anyways primarily because it is very important to my spouse. With the (potential) housing bubble that is going on, I'd like to be better prepared in being able to handle our mortgage. I am hoping I could get some advice for my situation.

Financial Situation: My wife and I are both working, have no outstanding debts. Our only monthly recurring expense is our living expenses and the rent we are currently paying - overall we lead an average lifestyle. I did some basic math and it looks like we will be able to make the monthly mortgage payments with some minor adjustments in our lifestyle (nothing significant though). For the sake of this discussion, I'd like to assume some numbers:

House Cost: $1 million
Monthly payments we can afford after 401k pre-tax, 401k after-tax and Roth IRA maximization: $5000/month (this excludes the variable income such as annual bonuses)
Downpayment we can make: 21%
Monthly Rent: $2,200 for a 850 sqft 1 bedroom
Potential APR: 4.0% - 4.5% fixed 30 year
Monthly Expenses: Roughly $1,500 - $2,000
Expecting to start a family soon


This puts us in a situation where we need to take a 30 year fixed-rate mortgage. I will be paying a double my rent towards something we can call our own (and make my spouse happy).

I have always read the philosophy: Money today is worth more than money tomorrow. However, I also read conflicting advice that it is beneficial in paying the mortgage off earlier than the 30 year time period. Therefore, in my mind, there are a few strategies I'd like to get some opinion on:

#1. Pay as slowly as you can, Save the rest: In this strategy, I'll take the mortgage for 30 years, repay as little as possible (which is around $4000). Whatever bonus money we are going to get, I will start investing it in index funds (80/20 stock/bond split) and call it a day.
#2. Pay as aggressvely as you can: In this strategy, I'll take te mortgage for 15 years, repay as much as I can and potentially even refinance if possible to finish the loan repayment in 10 years. For this, I'd have to exhaust all the bonus money and forgo all investing.


(Is there any other strategy?)

My personal goal: Maximize my wealth + Prepare for recession (if and when it happens). To maximize my wealth, I a bit hesistant in purchasing a house but the happiness of my spouse is more important to me so I'd like to discount the money I am putting into the house and stop looking at it but still be prepared.

Any advice on how to best approach this situation?

Many if not most bogleheads own houses, I have no idea why you think otherwise. Also, I doubt your ability to predict a bubble.

Normal lifestyle? That sounds to me like you have plenty of money to buy what you want and don't really budget. You may need to start budgeting.

If you are planning to start a family, don't consider the rent for a one bedroom apartment as your baseline. Consider what you would be paying for a place big enough for a couple of kids. You'll need to start spending more on housing with a bigger family whether you buy a house or not.

"I" will be paying double my rent? You and your wife both work, right? And will continue to? "We" will be paying double the rent on a family sized place as "we" paid for a one bedroom apartment.

Another strategy is always to get a 30 year mortgage and pay extra, as many here do.

You give the impression of someone who wants to buy a house and blame any problems that might come up on your wife for talking you into it. That may not be how you feel, but it is the impression you give. So decide whether this is a decision you and your wife can jointly own. If not, figure out what decision you can jointly own. But for the sake of your marriage and financial future, don't keep pretending you are only doing this to make her happy.