How Much to Stretch for "Forever Home"

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
35andcounting
Posts: 14
Joined: Tue Nov 10, 2015 4:07 pm

How Much to Stretch for "Forever Home"

Post by 35andcounting » Wed Mar 01, 2017 2:27 pm

I am looking for either some reassurance or someone to let us know that this is too much of a stretch.

My husband and I are looking to purchase our, hopefully, forever home. We are 36 years old and have 4 kids (infant, 2 year old, 4 year old and 6 year old). We live in a high cost of living area. We are considering taking a 1.3M mortgage on a home with taxes around 18K a year(excellent public schools).

My husband makes a base of 185K, with a yearly bonus that has been around 100K (never lower -- been at his job for 10 years), along with stock options. I currently work part time (3 days a week by choice)and make 70K a year as a government lawyer (also been there 10 years).

We have about 210K in liquid savings
575K in an inherited IRA with a RMD of about 12K
A home worth 800K with a 375K mortgage
A HELOC of 161K that we haven't used
I am vested in my government pension which I contributed 10% to and have about 75K in a 457 account
My husband has about 300K in his 401K
40K currently in our kids 529s

In terms of debt we have a $600 car loan and $300 student loan payment.
Childcare/preschool around $2500 a month.

Is $6000 a month for principle and interest going to be too much for us based on the above?

Wellfleet
Posts: 391
Joined: Sun Jan 26, 2014 8:18 pm

Re: How Much to Stretch for "Forever Home"

Post by Wellfleet » Wed Mar 01, 2017 2:47 pm

25% of your income devoted to principal, interest, taxes, and insurance (PITI) is higher than most on this Forum will recommend, especially since you have a pretty high income.

MP123
Posts: 174
Joined: Thu Feb 16, 2017 3:32 pm

Re: How Much to Stretch for "Forever Home"

Post by MP123 » Wed Mar 01, 2017 3:00 pm

How much is the home?

You mention a $1.3m mortgage but whether that's on a $1.3m house or a $3.5m one makes a difference to your overall picture.

It sounds a bit tight to me esp. with 4 young kids whose expenses will surely grow. But not completely crazy or anything.

TreeBeard
Posts: 8
Joined: Mon Feb 13, 2017 10:28 am

Re: How Much to Stretch for "Forever Home"

Post by TreeBeard » Wed Mar 01, 2017 3:50 pm

Congratulations on an exciting time of life. A things to keep in mind:

There is no such thing as a "forever home." A home that suits your needs now with young children will likely not suit your needs when they leave the nest. A home that you can navigate safely (stairs/bathrooms/shower) and maintain (yard upkeep/snow removal if applicable/etc) at your relatively young age may be a burden or downright unsafe as you age. Geography that you value with young children (proximity to park, neighbors with young kids, quiet street, library, etc) may change as the kids age, and then again when you are empty nesters. A "forever house" will likely end up having a lot of empty space (in other words wasted space, wasted money) a different times in your life.

I think if you are asking if it's too much of a stretch, it probably is, and a tiny voice inside of you probably knows it.

Personally, I would not want to make the "stretch" that you are proposing. I would scale back on the house considerably, pay off your car loan and student debt, and then increase saving for retirement and college. Then, when the kids are gone, you won't be still paying off your forever home, and you can buy a beautiful retirement home (or pre-retirement home that suits empty nesters).

Happy Wednesday, and good luck.
TB

PS Several good threads about this in the forum already. A few to get you started:

viewtopic.php?t=209759

viewtopic.php?t=141865

viewtopic.php?t=83408

User avatar
lthenderson
Posts: 2407
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: How Much to Stretch for "Forever Home"

Post by lthenderson » Wed Mar 01, 2017 3:55 pm

35andcounting wrote:My husband and I are looking to purchase our, hopefully, forever home.


36 years old is way too young to assume you are going to spend the next 40 or 50 years in the home. A lot can change in that amount of time. I would go into any house purchase with the assumption that you might need to sell it sometime in your future.

User avatar
Pajamas
Posts: 2780
Joined: Sun Jun 03, 2012 6:32 pm

Re: How Much to Stretch for "Forever Home"

Post by Pajamas » Wed Mar 01, 2017 3:57 pm

Agree that what you think is a forever home now will not turn out to be. No need to make a decision of that magnitude right now, anyway.

You are right to focus on excellent schools. Perhaps a better goal than a forever home would be to look for a home to live in for the next twenty years or so, while your kids are in school. That would take some of the pressure off you to find the perfect forever home.

Once they go off to college would be an excellent time to move again. You might even want to downsize or move to another city/state/region in twenty years, when you are in your mid-fifties and are approaching retirement.

You might want to think about how your finances would work in a much more expensive home if only one of you were working for at least a year. You might want a bigger cushion or a less expensive home.

Jags4186
Posts: 1388
Joined: Wed Jun 18, 2014 7:12 pm

Re: How Much to Stretch for "Forever Home"

Post by Jags4186 » Wed Mar 01, 2017 4:03 pm

I always say work backwards from your income.

Monthly Income - monthly savings - monthly expenses = X. X is how much you can afford to spend on PITI + Maintenance. Do you have $7,500 + home owners insurance + maintenance costs left after doing that formula? If so, happy buying. If not, pass.

Ron
Posts: 6115
Joined: Fri Feb 23, 2007 7:46 pm

Re: How Much to Stretch for "Forever Home"

Post by Ron » Wed Mar 01, 2017 4:05 pm

lthenderson wrote:
35andcounting wrote:My husband and I are looking to purchase our, hopefully, forever home.


36 years old is way too young to assume you are going to spend the next 40 or 50 years in the home. A lot can change in that amount of time. I would go into any house purchase with the assumption that you might need to sell it sometime in your future.

I would agree.

In 1984, both my wife/me were 36 and already had two homes "under our belts". Some 33 years later (we're now 69), we have an additional two homes that we have bought/built.

All four homes were/are in the same 10 mile radius we started out in, back in 1969.

Will we now stay in our home that we had built in 1994 with retirement in mind? Maybe - maybe not. Nobody can tell what the future may bring as long as you're still alive.

FWIW,

- Ron

letsgobobby
Posts: 10624
Joined: Fri Sep 18, 2009 1:10 am

Re: How Much to Stretch for "Forever Home"

Post by letsgobobby » Wed Mar 01, 2017 4:22 pm

lthenderson wrote:
35andcounting wrote:My husband and I are looking to purchase our, hopefully, forever home.


36 years old is way too young to assume you are going to spend the next 40 or 50 years in the home. A lot can change in that amount of time. I would go into any house purchase with the assumption that you might need to sell it sometime in your future.

this is a really important point.

How much is the house? $1.6 million or so?

in essence, you have enough to buy the house outright in cash if you liquidated all your other investments. If, in theory, you did that (and ignoring taxes) you'd have:

zero in retirement, zero in college savings
$350k in annual income
vested in a government pension
a paid off house
at 36 years old

Put this way, it's not completely crazy. You could afford to save a ton of money at that point because your monthly expenses would be low. In this situation a lot would depend on how secure your jobs are. If you are in DC, I assume both of your jobs are directly/indirectly tied to government (yours directly, husband's more or less). I probably wouldn't pick this time to take such a risk, given the political environment (off topic to discuss why, other than to say, read the paper).

btenny
Posts: 4163
Joined: Sun Oct 07, 2007 6:47 pm

Re: How Much to Stretch for "Forever Home"

Post by btenny » Wed Mar 01, 2017 4:23 pm

This is not a good Idea IMO. You do not have enough cash or retirement savings yet. There is no such thing as a forever home. There is just a right now home. You will not need this kind of home in 20 years. The kids will be in college and you will want something smaller so you can spend the money helping them with school costs. Plus there is a high likely hood that you will suffer some market or employment losses in the future that will change your needs. Life is never that smooth a ride. Yes you need a big home now to hold and raise those kids. So look for one that is less expensive. That giant price and giant mortgage is just too big. You will spend $8K or more per month that you will not get back. Plus you will have big upkeep ($2K guess ??) for such a big house and big yard and big utilities and so forth. Do the math and look at the expenses. Can you really afford $10K a month for a home? That is just huge!!! Plus I am not even sure you can qualify for that big a jumbo mortgage with that small a down payment. Have you talked with a mortgage broker?

Now if you had $1M in the bank for retirement and $800K to put down so the payments were maybe $4K (plus $2K upkeep) on this house then maybe. But not yet.

Sorry. Keep looking and Good Luck.

PandaBear
Posts: 254
Joined: Sat Mar 19, 2016 2:31 pm

Re: How Much to Stretch for "Forever Home"

Post by PandaBear » Wed Mar 01, 2017 4:48 pm

My gut says no. The logical side of my mind says hell no.

Traveller
Posts: 616
Joined: Sat Jun 25, 2011 10:47 am

Re: How Much to Stretch for "Forever Home"

Post by Traveller » Wed Mar 01, 2017 4:52 pm

Ron wrote:
lthenderson wrote:
35andcounting wrote:My husband and I are looking to purchase our, hopefully, forever home.


36 years old is way too young to assume you are going to spend the next 40 or 50 years in the home. A lot can change in that amount of time. I would go into any house purchase with the assumption that you might need to sell it sometime in your future.

I would agree.


Another "+1" from me. We are currently on our 4th "forever home".

You could swing it based on what you've shared, but it will be tight. Also, think about what level of excess cash flow you may want to have in the future (e.g. college x 4 - could you still contribute to the 529s at the same pace with this mortgage?).

35andcounting
Posts: 14
Joined: Tue Nov 10, 2015 4:07 pm

Re: How Much to Stretch for "Forever Home"

Post by 35andcounting » Wed Mar 01, 2017 5:01 pm

Yeah, I guess not forever home, but where we intend to raise our children so plan to be there for probably more like 20 years or so.

The house is $1.7 million dollars. What do people recommend as an affordability rule of thumb on this forum (online tools are unhelpful), but that takes into account that housing costs are extraordinary in the part of the country where we live? Essentially, we want topnotch public schools, a short commute and a home large enough for our family (who doesn't)?

Also, wanted to add that we have student loan debt because the rate is .6 (consolidated in 2005) and a no APR car loan.

Another thing that we were thinking about that taking money from the inherited IRA now would probably be less expensive than anytime in the future, aside from retirement on account of the amount of mortgage interest that can be deducted and making an assumption that our incomes would rise. So, say taking $ out to pay for taxes now wouldn't really be too much more than we make on interest. Maybe a silly thing to do, but this suburb (and a few others with similar priced homes) and kind of the cut off for family dinners to really work.
Last edited by 35andcounting on Wed Mar 01, 2017 5:25 pm, edited 2 times in total.

User avatar
whodidntante
Posts: 2204
Joined: Thu Jan 21, 2016 11:11 pm

Re: How Much to Stretch for "Forever Home"

Post by whodidntante » Wed Mar 01, 2017 5:09 pm

I don't recommend stretching on housing because it's a poor investment.

bluebolt
Posts: 553
Joined: Sat Jan 14, 2017 9:01 am

Re: How Much to Stretch for "Forever Home"

Post by bluebolt » Wed Mar 01, 2017 5:21 pm

I don't have a problem with stretching for a home you're going to live in and enjoy for the (hopefully) next 20+ years, but a 1.3MM loan on $355K income seems like a little bit too far of a stretch.

Without your detailed budget, it's too hard to make a judgement. When my wife & I were in a similar situation, we ran the numbers including scenarios where one of us stopped working or with an extended period with on of us out of work. We bought a place at the high end of our comfort level assuming one of those not-so-good scenarios played out.

ERISA Stone
Posts: 1344
Joined: Tue Jun 24, 2014 8:54 am

Re: How Much to Stretch for "Forever Home"

Post by ERISA Stone » Wed Mar 01, 2017 5:22 pm

Does the $300k down payment come from the assets mentioned above? Also, what do you plan to do with the existing home? If you are able to get approximately $400k from the sale that you can use to make payments in the future, I think you are ok. If not, I think you're stretching it a little bit. It's still certainly doable, but a little too risky for my blood.

I don't get a $6k payment with a $1.3 million home. I get about $6500 for P/I, and another $1500 for your taxes.

MP123
Posts: 174
Joined: Thu Feb 16, 2017 3:32 pm

Re: How Much to Stretch for "Forever Home"

Post by MP123 » Wed Mar 01, 2017 5:23 pm

35andcounting wrote:Yeah, I guess not forever home, but where we intend to raise our children so plan to be there for probably more like 20 years or so.

The house is $1.7 million dollars. What do people recommend as an affordable amount on this forum (online tools are unhelpful).


Frankly I like the numbers on your current home ($800k with $375k mortgage) A LOT better. :happy

A $1.7m home might turn out to be a $1.3m home if you have to sell in a downturn because of job loss or something.

That would make me nervous...

User avatar
blaugranamd
Posts: 403
Joined: Wed Apr 11, 2012 1:57 pm
Location: D-lux apt in the sky

Re: How Much to Stretch for "Forever Home"

Post by blaugranamd » Wed Mar 01, 2017 5:37 pm

35andcounting wrote:Yeah, I guess not forever home, but where we intend to raise our children so plan to be there for probably more like 20 years or so.

The house is $1.7 million dollars. What do people recommend as an affordable amount on this forum (online tools are unhelpful).


Calculators and everything are only good at getting you to expand your budget, IMO. Most of them have told me my wife and I can afford a $500k+ home on our $140k/year combined income. I can hardly fathom shelling that out right now, not with my other savings goals and we, thankfully, live in a low cost-of-living area where a modest, renovated, but older cheap home in a good school district costs $180-200k. I think you will find most here are a bit stingier than the general population and prefer to spend or save money on/for things other than locking it up in a home, particularly due to the risk of having $6000/mo in expenses you can't slim down if your economic situation changes. If DH's company falls on hard times and that $100k bonus disappears (there's a reason it's probably not part of guaranteed annual compensation), could you still afford to make payments? Personally I'm a bit more risk-averse in the world of taking on financial obligations (much less so in investing) and like a lot of wiggle room.

Also, don't forget to plug that mortgage into an amortization calculator to see what it will REALLY cost you over your life. Given you said $1.3M mortgage = $6k/month that's a 30-year mortgage at about 3.75% fixed (humor me if it's not exactly correct). That will accrue almost $870k in interest payments, totaling nearly $2 million of your lifetime earnings (assuming you "forever" it) to pay off this debt. In the end though, it's all about individual priorities, but I can think of a lot of things I'd rather do with $870k than borrow money. Maybe my priorities will change in 6 years when our income is in your range, though. My recommendation is to move beyond "what can we afford" to "what do we hope to accomplish" over the next 10-30 years and what would you have to sacrifice to accomplish that? It's tempting to see the luxury and beauty of "what you can afford" and lose sight of what you really care about. Would you be happier in a house that is half as expensive with an extra $3000/mo. to spend doing things with all those kids? Or retire sooner?

Personally, I like the philosophy of finding out what you can afford to pay off on a 15 year mortgage, take out a 30 year, and commit to paying it like it's a 15 year so you can peel back your monthly payment if your financial situation changes.

:sharebeer
-- Don't mistake more funds for more diversity: Total Int'l + Total Market = 7k to 10k stocks -- | -- Market return does NOT = average nor 50th percentile, rather 80-90th percentile long term ---

DurangoWino
Posts: 8
Joined: Wed Feb 08, 2017 5:15 pm

Re: How Much to Stretch for "Forever Home"

Post by DurangoWino » Wed Mar 01, 2017 6:00 pm

For a young couple you guys are really doing well. Just my thought would be to stay where you are, raise the kids and get them through college and during this time get debt free and start saving every bit that you can. Make sure your savings plans at work are getting maxed out. If you guys just save your husband's bonuses you will have nearly $2 million in 20 years. What a great nest egg to begin retirement with.

The payoff for this is freedom to retire early and enjoy the fruits of your labor. Right now the bigger, better house is a big draw but in 20 years you will be much more focused on your savings and 401Ks. To set yourselves up for a stress free retirement will be much more important to you than the big house. Maybe you do well enough with your investments that you can have two nice places in retirement.

With what ya'll are making you are the envy of many on this forum!! Best of luck.

Traveller
Posts: 616
Joined: Sat Jun 25, 2011 10:47 am

Re: How Much to Stretch for "Forever Home"

Post by Traveller » Wed Mar 01, 2017 6:06 pm

MP123 wrote:Frankly I like the numbers on your current home ($800k with $375k mortgage) A LOT better. :happy


Me too.
OP - does your lot and home have room for an addition? What would a $300-400k addition / remodel do for you?

bigred77
Posts: 1916
Joined: Sat Jun 11, 2011 4:53 pm

Re: How Much to Stretch for "Forever Home"

Post by bigred77 » Wed Mar 01, 2017 6:18 pm

HCOL area and 4 kids is always going to be challenging.

How are the schools you're currently zoned too? Can you at least wait until all the kids are in school and you free up some of that $2500 a month in childcare costs (and hopefully you can go back to work full time at that point instead of 3 days a week)?

I think you will be able to get into a house like that eventually, but it would be really risky to pull the trigger on something like that now. I would try to keep saving and see if you can get the car loan and student loans paid off by the time your childcare/preschool costs go down. Even at low interest rates, that's $3,400 a month in cashflow!

Leemiller
Posts: 872
Joined: Sat Jun 01, 2013 12:42 pm

Re: How Much to Stretch for "Forever Home"

Post by Leemiller » Wed Mar 01, 2017 6:32 pm

Your payment assumptions look off to me. We have a mortgage of about 900k at 3.5% and similar property taxes that ends up being about 5,600 a month. We are also in a HCOL and make about 500k, we bought our home assuming our income might drop to 350k or so in the future or one income could cover things if needed. 1.3m as a portion of your net take home is likely significant- maybe 7-8k a month? Then you need to budget for ongoing repairs/ upkeep. I wouldn't be comfortable with that level of mortgage at your income. You could use your inherited IRA to bring it down but then you have a lot of net worth in your home.

You also have 4 kids to put through college and that also would give me pause. I am surprised at how low your childcare costs are in a HCOL for 4 kids. I wouldn't assume much savings later since you will still need after or before care when they go to school & summer camps are very pricy where we live.

User avatar
unclescrooge
Posts: 1604
Joined: Thu Jun 07, 2012 7:00 pm

Re: How Much to Stretch for "Forever Home"

Post by unclescrooge » Wed Mar 01, 2017 6:45 pm

We were in a similar situation.

My wife announced that our "forever" home was too far from her work (30-60 mins) and her parents (about an hour away) and that we needed to move.

The area she wanted to move to was more expensive.

We ended up buy a house that we are currently remodeling. We demolished it down to the studs and rebuilding the insides, along with doors, windows, ducting, HVAC etc. Only the footprint of the house will be the same.

While we'll end up spending $250k on the remodel, we save $300k vs buying a comparable new home.

That might be something to consider.

cherijoh
Posts: 4055
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: How Much to Stretch for "Forever Home"

Post by cherijoh » Wed Mar 01, 2017 7:10 pm

35andcounting wrote:I am looking for either some reassurance or someone to let us know that this is too much of a stretch.

My husband and I are looking to purchase our, hopefully, forever home. We are 36 years old and have 4 kids (infant, 2 year old, 4 year old and 6 year old). We live in a high cost of living area. We are considering taking a 1.3M mortgage on a home with taxes around 18K a year(excellent public schools).

My husband makes a base of 185K, with a yearly bonus that has been around 100K (never lower -- been at his job for 10 years), along with stock options. I currently work part time (3 days a week by choice)and make 70K a year as a government lawyer (also been there 10 years).

We have about 210K in liquid savings
575K in an inherited IRA with a RMD of about 12K
A home worth 800K with a 375K mortgage
A HELOC of 161K that we haven't used
I am vested in my government pension which I contributed 10% to and have about 75K in a 457 account
My husband has about 300K in his 401K
40K currently in our kids 529s

In terms of debt we have a $600 car loan and $300 student loan payment.
Childcare/preschool around $2500 a month.

Is $6000 a month for principle and interest going to be too much for us based on the above?


So what are the specific deficiencies in your current house? My immediate reaction when I hear someone use the term "forever home" is that the speaker has been watching too much HGTV. :wink:


35andcounting wrote:Another thing that we were thinking about that taking money from the inherited IRA now would probably be less expensive than anytime in the future, aside from retirement on account of the amount of mortgage interest that can be deducted and making an assumption that our incomes would rise. So, say taking $ out to pay for taxes now wouldn't really be too much more than we make on interest. Maybe a silly thing to do, but this suburb (and a few others with similar priced homes) and kind of the cut off for family dinners to really work.


Whoa! Before doing this, I think you need run a dummy tax return and see how much (or rather how LITTLE) you will net from draining your inherited IRA. Are you currently in the 25 or 28% marginal tax bracket? Add 575K to your income in one year and you will get bumped up to the 39.6% marginal tax bracket. You would also lose the 6 personal exemptions you can currently claim for your family and most of the itemized deductions. Also don't forget about AMT. (This may apply whether or not you raid the inherited IRA).

See this article:

PEP and Pease are two provisions in the tax code that increase taxable income for high-income earners. PEP is the phase-out of the personal exemption and Pease (named after former Senator Donald Pease) phases out the value of most itemized deductions once a taxpayer’s adjusted gross income reaches a certain amount.

The income threshold for both PEP and Pease will increase from last year to $261,500 for single filers and $318,800 for married couples filing jointly (Tables 5 and 6).

PEP will end at $384,000 for singles and $436,300 for married couples filing jointly (both will increase from 2016), meaning that taxpayers with AGI above these limits will no longer benefit from personal exemptions.

Table 5. 2017 Pease Limitations on Itemized Deductions

Filing Status-----------------Income
Single-------------------------$261,500
Married Filing Jointly-------$313,800
Head of Household----------$287,650
Married Filing Separately---$156,900

35andcounting
Posts: 14
Joined: Tue Nov 10, 2015 4:07 pm

Re: How Much to Stretch for "Forever Home"

Post by 35andcounting » Wed Mar 01, 2017 7:23 pm

Thanks everyone for your feedback. The reason we need more than just space and we can't add on is that we are in the city where an addition is literally impossible and the schools in our neighborhood don't really work for our kids for a number of reasons.

The 6K figure has just P/I, not taxes and insurance included. The reason that our childcare is just $2500 a month is that I only work 3 days a week, my mom helps with the older kids and we are planning on getting an au pair for next year. After next year we, we will only have 1 in preschool at a time. This year we were up near 4K in childcare, so looking forward to that decreasing!

We decided to pass on the 1.7 home. I think we are going to shoot for an 800-900K mortgage.

35andcounting
Posts: 14
Joined: Tue Nov 10, 2015 4:07 pm

Re: How Much to Stretch for "Forever Home"

Post by 35andcounting » Wed Mar 01, 2017 7:25 pm

And just to clarify, we wouldn't consider liquidating the inherited IRA. Just taking out like 30K a year instead of the required distribution which is a around 12K for our age. And we are unfortunately already in AMT territory.

Frisco Kid
Posts: 277
Joined: Sun Nov 16, 2014 6:18 pm
Location: San Francisco Peninsula

Re: How Much to Stretch for "Forever Home"

Post by Frisco Kid » Wed Mar 01, 2017 7:56 pm

You are doing quite well financially as others have said for your age. The deal breaker for me is the cost of raising four kids, especially in a HCOL area.
Would be waaaaay too big of a stretch for me. Respectfully, I don't think it is possible to know what your forever home may be at your age. Like others, we are in home #3 in our early 60's and ponder if this home is where we will stay all the time......................

HIinvestor
Posts: 1228
Joined: Tue Apr 08, 2014 3:23 am

Re: How Much to Stretch for "Forever Home"

Post by HIinvestor » Wed Mar 01, 2017 8:24 pm

To me, it's a stretch to think that both you and your spouse will continue to have your same or higher salaries, especially with so many young kids underfoot. Among my friends, many have had to switch jobs for reasons other than personal choice -- re-organizations, mergers, etc. I'd be very nervous to take on that much debt. When we bought our house, we made sure to buy what we could afford on one income, just in case it ended up that only one of us was working (which turned out to be the case for about a decade of our marriage). Even so, it was a stretch for us, especially in the early years before H got some raises. When the kids started having more expenses, including private school, that increased expenses as well. Just more food for thought.

Bacchus01
Posts: 1107
Joined: Mon Dec 24, 2012 9:35 pm

Re: How Much to Stretch for "Forever Home"

Post by Bacchus01 » Wed Mar 01, 2017 10:42 pm

I make significantly more than you do, and would never consider that amount. In fact, we own three homes and total mortgages are under $600K.

User avatar
9-5 Suited
Posts: 144
Joined: Thu Jun 23, 2016 12:14 pm

Re: How Much to Stretch for "Forever Home"

Post by 9-5 Suited » Wed Mar 01, 2017 11:05 pm

Since you can absolutely afford it by any reasonable definition of that term, I think there are two primary considerations to make:

Risk: How secure is your husband's job and how long would it take him to find similar employment if something happened? You have a good amount of savings but it will be eaten away surprisingly fast with $72K annually going to the house along with all your other life expenses.

Opportunity Cost: What would you do with dollars you are saving if you opt for a cheaper home, and is that more or less valuable to you than the benefits of this more expensive home?

It really does come down to these two things - it's your money and you can prioritize what will give you the most happiness to spend it on. If you are OK with the risk and OK giving up the foregone uses of the money, then go for it. Just recognize both of those two things in full honesty.

User avatar
lthenderson
Posts: 2407
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: How Much to Stretch for "Forever Home"

Post by lthenderson » Thu Mar 02, 2017 9:29 am

HIinvestor wrote:To me, it's a stretch to think that both you and your spouse will continue to have your same or higher salaries, especially with so many young kids underfoot. Among my friends, many have had to switch jobs for reasons other than personal choice -- re-organizations, mergers, etc. I'd be very nervous to take on that much debt. When we bought our house, we made sure to buy what we could afford on one income, just in case it ended up that only one of us was working (which turned out to be the case for about a decade of our marriage). Even so, it was a stretch for us, especially in the early years before H got some raises. When the kids started having more expenses, including private school, that increased expenses as well. Just more food for thought.


I agree with this which is why my rule of thumb for how much house I can afford has always been take the lesser amount of what I think I can afford and what the bank says I can afford and divided by two. I don't spend more than that amount.

an_asker
Posts: 1866
Joined: Thu Jun 27, 2013 2:15 pm

Re: How Much to Stretch for "Forever Home"

Post by an_asker » Thu Mar 02, 2017 9:45 am

35andcounting wrote:Thanks everyone for your feedback. The reason we need more than just space and we can't add on is that we are in the city where an addition is literally impossible and the schools in our neighborhood don't really work for our kids for a number of reasons.

The 6K figure has just P/I, not taxes and insurance included. The reason that our childcare is just $2500 a month is that I only work 3 days a week, my mom helps with the older kids and we are planning on getting an au pair for next year. After next year we, we will only have 1 in preschool at a time. This year we were up near 4K in childcare, so looking forward to that decreasing!

We decided to pass on the 1.7 home. I think we are going to shoot for an 800-900K mortgage.

4k in childcare is not bad at all - helps with the parent helping out I guess. When we had two pre-pre-schoolers, we were paying nearly 12k per year, and that was in low COL Florida!! [Whoaa!! Didn't realize that was per MONTH! :oops: ]

Just curious about your house sizes - the current home (800k) and the "forever (no more) home" (1.7M)? Though you've already made your decision, I do have a question - what is the rent like on a house similar to your "forever home", in the same locality, etc?

Wellfleet
Posts: 391
Joined: Sun Jan 26, 2014 8:18 pm

Re: How Much to Stretch for "Forever Home"

Post by Wellfleet » Thu Mar 02, 2017 10:13 am

lthenderson wrote:
I agree with this which is why my rule of thumb for how much house I can afford has always been take the lesser amount of what I think I can afford and what the bank says I can afford and divided by two. I don't spend more than that amount.


When I was looking for a mortgage, I didn't ask the bank how much I could afford, I didn't want to even know!

User avatar
lthenderson
Posts: 2407
Joined: Tue Feb 21, 2012 12:43 pm
Location: Iowa

Re: How Much to Stretch for "Forever Home"

Post by lthenderson » Thu Mar 02, 2017 10:21 am

Wellfleet wrote:
lthenderson wrote:
I agree with this which is why my rule of thumb for how much house I can afford has always been take the lesser amount of what I think I can afford and what the bank says I can afford and divided by two. I don't spend more than that amount.


When I was looking for a mortgage, I didn't ask the bank how much I could afford, I didn't want to even know!


I did ask and it was twice as much as I thought I could afford!

fourkids
Posts: 96
Joined: Mon Mar 23, 2015 9:40 am

Re: How Much to Stretch for "Forever Home"

Post by fourkids » Thu Mar 02, 2017 11:05 am

Your situation reminds me of my good friend who moved to CA in 2005. They were at about the same income level, had 3 young kids. Bought a home about $1M with an $850k mortgage. In 2009, her husband lost his tech job in the recession and was out of work for 2 years. Their home price dropped by 50%. Unfortunately, they lost their house to foreclosure in 2011-2. They then rented for a few years, and eventually moved to a LCOL area.
They were generally fiscally responsible people, but never saw this coming.

I would do the math and make sure you could afford a couple years of mortgage payments in the event your DH became unemployed for a year or 2. I have 4 kids, and we bought a big "forever" house, and really it's overrated- more space is just more to clean.

35andcounting
Posts: 14
Joined: Tue Nov 10, 2015 4:07 pm

Re: How Much to Stretch for "Forever Home"

Post by 35andcounting » Thu Mar 02, 2017 11:13 am

an_asker wrote:
35andcounting wrote:Thanks everyone for your feedback. The reason we need more than just space and we can't add on is that we are in the city where an addition is literally impossible and the schools in our neighborhood don't really work for our kids for a number of reasons.

The 6K figure has just P/I, not taxes and insurance included. The reason that our childcare is just $2500 a month is that I only work 3 days a week, my mom helps with the older kids and we are planning on getting an au pair for next year. After next year we, we will only have 1 in preschool at a time. This year we were up near 4K in childcare, so looking forward to that decreasing!

We decided to pass on the 1.7 home. I think we are going to shoot for an 800-900K mortgage.

4k in childcare is not bad at all - helps with the parent helping out I guess. When we had two pre-pre-schoolers, we were paying nearly 12k per year, and that was in low COL Florida!! [Whoaa!! Didn't realize that was per MONTH! :oops: ]

Just curious about your house sizes - the current home (800k) and the "forever (no more) home" (1.7M)? Though you've already made your decision, I do have a question - what is the rent like on a house similar to your "forever home", in the same locality, etc?


The childcare is crazy. Since we are moving from the city to the suburbs, childcare actually decreases. And as our children age into elementary age, hopefully those amount decrease (though camps are expensive too). I could also see adding a day to my schedule in the future, but who knows. My husband and I luckily both like our jobs, are each out of the office by 5 and have as good as you can get in terms of job security but you never know (but our job security probably comes more from being out going, well liked people than being essential...not sure if that makes sense). We also probably live in the moment more than others on this forum as my husbands parents became very ill at 60 and mine divorced at that age. We have both turned down job offers for much more $ a couple of times in the last 5 years in favor of our current jobs that enable us to spend time with our family which truly does bring us great joy. We both are from small towns where the homes we grew up probably cost $100K and just sort of struggling with where and how we want to raise our kids.

I think out plan is take our savings and our HELOC and use that for a down payment and then have the excess money when our house sells to replace our savings. Our current home is 3 bed/1.5 bath 2K sq ft. Looking at 4-5 bed/2.5 bath 3K square foot homes (Edited to add that most homes 4-5 bed homes are larger than we actually want/need). There are very few rentals in the towns we are looking. To give you an idea, our neighbor rented her house in our current neighborhood for 4500 a month. Our home is 1 bedroom less, but we have updated our kitchen and baths...in all likelihood our home will sell for more (maybe much more based on the updates) than 800K.

an_asker
Posts: 1866
Joined: Thu Jun 27, 2013 2:15 pm

Re: How Much to Stretch for "Forever Home"

Post by an_asker » Thu Mar 02, 2017 1:25 pm

35andcounting wrote:[...]The childcare is crazy. Since we are moving from the city to the suburbs, childcare actually decreases. And as our children age into elementary age, hopefully those amount decrease (though camps are expensive too). I could also see adding a day to my schedule in the future, but who knows. My husband and I luckily both like our jobs, are each out of the office by 5 and have as good as you can get in terms of job security but you never know (but our job security probably comes more from being out going, well liked people than being essential...not sure if that makes sense). We also probably live in the moment more than others on this forum as my husbands parents became very ill at 60 and mine divorced at that age. We have both turned down job offers for much more $ a couple of times in the last 5 years in favor of our current jobs that enable us to spend time with our family which truly does bring us great joy. We both are from small towns where the homes we grew up probably cost $100K and just sort of struggling with where and how we want to raise our kids.

I think out plan is take our savings and our HELOC and use that for a down payment and then have the excess money when our house sells to replace our savings. Our current home is 3 bed/1.5 bath 2K sq ft. Looking at 4-5 bed/2.5 bath 3K square foot homes (Edited to add that most homes 4-5 bed homes are larger than we actually want/need). There are very few rentals in the towns we are looking. To give you an idea, our neighbor rented her house in our current neighborhood for 4500 a month. Our home is 1 bedroom less, but we have updated our kitchen and baths...in all likelihood our home will sell for more (maybe much more based on the updates) than 800K.

I was thinking that renting would be less expensive than that! But it sure appears a high COL - aren't there no suburbs close by where you could move to for a much lower house price? This appears like Bay Area for sure! It does appear frustrating that with that kind of income, you cannot even get a 4-5 bedroom house that is reasonably priced/affordable.

I don't know about you, but from my limited experience (not in number of years but in number of companies worked for), it does appear that as long as you've got a boss who bats for you and a company that is earning (good) money, one's job is not only secure but one can expect decent to great raises year over year! If one of those conditions is not met (boss not batting for you or company earning good money), better to start to look out or be satisfied with what you have!

User avatar
White Coat Investor
Posts: 12853
Joined: Fri Mar 02, 2007 9:11 pm
Location: Greatest Snow On Earth

Re: How Much to Stretch for "Forever Home"

Post by White Coat Investor » Thu Mar 02, 2017 3:51 pm

35andcounting wrote:I am looking for either some reassurance or someone to let us know that this is too much of a stretch.

My husband and I are looking to purchase our, hopefully, forever home. We are 36 years old and have 4 kids (infant, 2 year old, 4 year old and 6 year old). We live in a high cost of living area. We are considering taking a 1.3M mortgage on a home with taxes around 18K a year(excellent public schools).

My husband makes a base of 185K, with a yearly bonus that has been around 100K (never lower -- been at his job for 10 years), along with stock options. I currently work part time (3 days a week by choice)and make 70K a year as a government lawyer (also been there 10 years).

We have about 210K in liquid savings
575K in an inherited IRA with a RMD of about 12K
A home worth 800K with a 375K mortgage
A HELOC of 161K that we haven't used
I am vested in my government pension which I contributed 10% to and have about 75K in a 457 account
My husband has about 300K in his 401K
40K currently in our kids 529s

In terms of debt we have a $600 car loan and $300 student loan payment.
Childcare/preschool around $2500 a month.

Is $6000 a month for principle and interest going to be too much for us based on the above?


$18K a year? That's terrible.

I don't think it's time to stretch for a home when you don't own the car you're driving and haven't yet paid for your education and have less than 1X your income toward retirement. In many ways, an $800K home is a bit of a stretch, but given that you only owe $375 you're probably okay there.

What I tell people in expensive areas is you can go beyond the mortgage < 2X Gross income rule to 3-4X, but realize there are real sacrifices associated with it- crummier cars, crummier vacations, working longer etc.

I can't imagine having to save up a half million bucks just to cover my property taxes in retirement at a 4% withdrawal rate. I'm still trying to get over that.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

Grt2bOutdoors
Posts: 17145
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: How Much to Stretch for "Forever Home"

Post by Grt2bOutdoors » Thu Mar 02, 2017 8:45 pm

PandaBear wrote:My gut says no. The logical side of my mind says hell no.


+1.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Incendiary
Posts: 449
Joined: Sun Jun 19, 2016 9:42 am

Re: How Much to Stretch for "Forever Home"

Post by Incendiary » Thu Mar 02, 2017 9:08 pm

Are you in the DC area?

35andcounting
Posts: 14
Joined: Tue Nov 10, 2015 4:07 pm

Re: How Much to Stretch for "Forever Home"

Post by 35andcounting » Mon Mar 06, 2017 2:05 pm

Just wanted to come back to add that my husband and I did our taxes this weekend for the 2nd year in a row are paying an extraordinary amount in AMT (high state taxes, lots of dependents). We were playing around and with the mortgage interest deduction and by taking on this higher mortgage (used 850K) we are going to be savings about $850 a month in AMT. Totally infuriating to me in terms of paying AMT this year, but was something we had never considered in our budget.

WhiteMaxima
Posts: 516
Joined: Thu May 19, 2016 5:04 pm

Re: How Much to Stretch for "Forever Home"

Post by WhiteMaxima » Mon Mar 06, 2017 2:08 pm

Nothing is forever. Purchase based on your needs and financial situation.

jebmke
Posts: 6885
Joined: Thu Apr 05, 2007 2:44 pm

Re: How Much to Stretch for "Forever Home"

Post by jebmke » Mon Mar 06, 2017 3:01 pm

WhiteMaxima wrote:Nothing is forever. Purchase based on your needs and financial situation.

Except the urn for my ashes. That will be my forever home -- unless someone decides to sprinkle them somewhere.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Post Reply