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Home purchase budget advice

Posted: Tue Jun 06, 2017 9:58 pm
by sofla_diyer
Hi all,

My husband and I are planning on purchasing a home, but we're having trouble trying to figure out the best budget and plan for our situation.

Here's an overview of our finances for context:

Age: Me (34), husband (35)
Kids: 3 (5, 3, 1)
Income: $130K/yr (not including bonuses)
Tax Bracket: 25%

Assets:
Retirement (401K/ROTH): $609K
Savings:$326K
Taxable: $146K

Debt:
Car payment: $480/mo, $20K remaining on loan

Current monthly info:
Monthly gross: $11K
Withholdings: $2,560
401K/mo: $1,500
Employee stock purchase plan (15% discount): $558
Non-housing expenses: $~5,100 (car payment, groceries, insurance, entertainment, etc.)
Remainder after savings/expenses: $~1300

We're trying to figure out how much house we can comfortably afford and how best to use our assets to make the purchase. So far we've been maxing our ROTHs with bonuses as we get them, or out of savings. If we plan to incorporate ROTHs into our monthly budget (@ $917/mo to max both), we wouldn't be left with much money at all with which to make a mortgage payment. But we have a large amount in savings that we've set aside for purchasing a house/repairs/furniture, so we could put a larger downpayment and lower our monthly payment. Or maybe we need to cut back on some of our savings? We want to be able to retire comfortably as early as possible, but we also don't want to retire on a mountain of cash and not have a home that we would enjoy.

The houses we've been seeing that we are interested in are in the $430-450 range. If we put 20% down on a traditional 30 year loan the mortgage on a $450K house ($360K loan) would be around $2,400/mo.

To further complicate things, my husband currently works remotely and may potentially have to take a lower paying job locally if he were to decide to leave or if he were laid off. If that were to happen he believes his new salary would likely be around $100K/yr. We want to stay in a range where if that were to happen we wouldn't be forced to sell our home.

Are we way off base in the $430-450 price range? If so, what's a more realistic price?

Any advice would be greatly appreciated!

Re: Home purchase budget advice

Posted: Tue Jun 06, 2017 10:02 pm
by PFInterest
Yes. That is 4x your income. Seems a little much.

Re: Home purchase budget advice

Posted: Tue Jun 06, 2017 10:06 pm
by bigred77
You want to know if house you could pay cash for if you sold your taxable investments is reasonable?

If 450k gets you what you want in a house then go for it. Then it's just a financing decision. I would put 20% down and finance the rest but that's just my preference. Its a personal decision depending on how comfortable you are with a mortgage. You can always pay it off in the future if you decide holding a mortgage to term isn't your cup of tea.

Re: Home purchase budget advice

Posted: Tue Jun 06, 2017 10:55 pm
by Kit00
How do you have so much saved with an income of 140k? That's amazing.

Re: Home purchase budget advice

Posted: Tue Jun 06, 2017 11:54 pm
by Goal33
Your problem is that your non-housing expenses of $5100 are way too high.

Re: Home purchase budget advice

Posted: Tue Jun 06, 2017 11:58 pm
by mega317
I'm not clear about something.
sofla_diyer wrote: Current monthly info:
Monthly gross: $11K
Withholdings: $2,560
401K/mo: $1,500
Employee stock purchase plan (15% discount): $558
Non-housing expenses: $~5,100 (car payment, groceries, insurance, entertainment, etc.)
Remainder after savings/expenses: $~1300
What are you paying for housing now? It's not listed here, but you have 5k of non-housing expenses and $1300 left? Does your current housing payment come from that?

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 6:36 am
by sofla_diyer
Thanks for all the comments!

We're paying $1950/mo for rent currently.

Our income is supplemented by about $16K of bonuses, some stock grants through my husband's employer, and I earn a small income of $8K annually.

The $300K cash savings include the money from the sale of our previous home ($90K), and money from the sale of stock options and stock purchases through the ESPP program through my husband's work over several years. (We're not planning on selling any of the $146K in our taxable accounts.) Our last mortgage was low so we were able to save quite a bit over 10 years.

We didn't intend to spend so much on a house, but the area where we live has high house prices.

The monthly expenses does not include our rent, but covers everything else (medical, utilities, etc). I did estimate a little high to account for unforeseen expenses. I averaged our spending over 2 years, which does include several large expenses, but I want to be safe in case of other large expenses in the future.

I currently stay home with our kids but will go back to work at least part-time in the next 2-4 years. But when I go back we plan on using my income as savings.

Thanks again everyone. I truly appreciate the advice I get from this group.

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 6:50 am
by jharkin
I'm still scratching my head about on how the math work out with the 1950 rent, the 5100 "non housing" and the 1300 "left over"... can you clarify? Is the 1950 part of the 5100 or not?

(I am assuming it has to be part of the 5100 and the non housing is a typo... Unless you have some big auto loans and student debt or travel constantly I'm at a loss where you could come with 5k worth of spending beyond rent)

I think you partially answered your own question. If there is a chance your husband has to change jobs and income drops to 100k, I would calculate what you can afford on 100k and buy no more than that. Using the 2.5x income rule of thumb that says a mortgage of 250k. If I assume that your "326k savings" is money in a savings account or CD and is usable you can put down a big downpayment and be able to afford 450k still leaving you with a 100k emergency fund. This seems reasonable on paper.

Again, lots of assumptions here so if you can clarify some of those numbers we can be more specific.

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 7:08 am
by dcd72
jharkin wrote:I'm still scratching my head about on how the math work out with the 1950 rent, the 5100 "non housing" and the 1300 "left over"... can you clarify? Is the 1950 part of the 5100 or not?

(I am assuming it has to be part of the 5100 and the non housing is a typo... Unless you have some big auto loans and student debt or travel constantly I'm at a loss where you could come with 5k worth of spending beyond rent)

I think you partially answered your own question. If there is a chance your husband has to change jobs and income drops to 100k, I would calculate what you can afford on 100k and buy no more than that. Using the 2.5x income rule of thumb that says a mortgage of 250k. If I assume that your "326k savings" is money in a savings account or CD and is usable you can put down a big downpayment and be able to afford 450k still leaving you with a 100k emergency fund. This seems reasonable on paper.

Again, lots of assumptions here so if you can clarify some of those numbers we can be more specific.
Yes, the numbers don't add up. When taking into account monthly gross ($11,000), withholdings (-$2560), 401k (-$1500), ESP (-$558), non-housing expenses (-$5100), and housing (-$1950), you are at $-668. The numbers work if the $1950 rent is included in "non-housing expenses;" I assume that's what you meant?

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 8:54 am
by Gufomel
Maybe the $1950 rent is coming from the $16k bonuses and her extra $8k income?

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 9:10 am
by sofla_diyer
Sorry, that was definitely unclear. The $5100 + 1950 = $7,050. The $450 difference from the $6600 take-home pay comes from bonuses/additional income I make.

The $5100 non-housing is a high estimate, partially to account for unforeseen expenses. The average I gave included expenses like hospital bills for having a baby, moving expenses/security deposits, and a big vacation. But on the other hand, since the past year's expenses were high, we don't want to assume that every year later will be lower in case other expenses come up. When I look at a typical month's budget without the outliers it looks more like this:

Base take-home: $6600
Housing: $1950
Non-housing: $3550
Total expenses: $5500

We just want to be comfortable with the monthly payment and not have to change our other spending habits too much. We've talked about whether we should pay off the car with some of the cash to free up that $480/mo to put towards the mortgage, but aren't sure if we're just shuffling papers at that point.

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 9:22 am
by JGoneRiding
You have 460k sitting in non-retirement accts, I would pay off the car! I would also pay off any other loans you might have. Then I would make a real budget. You are massively padding your budget so it doesn't look like you can afford a house but you can. You can either spend 450k and put 350k down and have a very comfortable budget or put 20% down and have a tighter budget. (that doesn't allow for your husband taking a 50k pay cut) you have to decide priorities. I don't think you can afford more than 450k right now with life so up in the air.

DELETE

Posted: Wed Jun 07, 2017 10:45 am
by pdanet
DELETE

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 12:12 pm
by KATNYC
Assets:
Retirement (401K/ROTH): $609K
Savings:$326K
Taxable: $146K

Debt:
Car payment: $480/mo, $20K remaining on loan

Current monthly info:
Monthly gross: $11K
Withholdings: $2,560
401K/mo: $1,500
Employee stock purchase plan (15% discount): $558
Non-housing expenses: $~5,100 (car payment, groceries, insurance, entertainment, etc.)
Remainder after savings/expenses: $~1300

I'd take the $326K and pay off the car loan and put the balance ($306K) down on a house to keep the payment as low as possible just in case of job loss/reduction in salary. The payment on a $144K loan ($450k - $306k) is manageable and significantly lower than the $1,950 rent + $480 car payment you are making today.

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 1:25 pm
by Admiral
I say 30% down, the rest mortgage. Don't use ALL your savings, you still want to have money left to grow. Mort. rates are still pretty low.

But you say "if he were laid off." If there is uncertainty about job security, then buying is riskier--if you buy and then have to sell you will be out quite a bit in transaction costs. OTOH if you put 30% down, you'll have a BIG emergency fund to pay the mortgage while he looks for a new job.

With that level of non-retirement savings you'll likely be fine either way. That's a large cushion.

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 1:30 pm
by jharkin
+1 to the last few posts. Now that you clarified your expenses split this makes sense.

I agree with the idea to take that 326k savings, reserve maybe 50k for an EF (or treat the taxable investment account as EF and use all the 326k) and use the rest to payoff the car and make a mega downpayment. The result is a mortgage in the 150-200k range that should be manageable even if the income reduces to 100k, and the PITI may be lower than current rent.

Re: Home purchase budget advice

Posted: Wed Jun 07, 2017 1:32 pm
by wilked
KATNYC wrote:Assets:
Retirement (401K/ROTH): $609K
Savings:$326K
Taxable: $146K

Debt:
Car payment: $480/mo, $20K remaining on loan

Current monthly info:
Monthly gross: $11K
Withholdings: $2,560
401K/mo: $1,500
Employee stock purchase plan (15% discount): $558
Non-housing expenses: $~5,100 (car payment, groceries, insurance, entertainment, etc.)
Remainder after savings/expenses: $~1300

I'd take the $326K and pay off the car loan and put the balance ($306K) down on a house to keep the payment as low as possible just in case of job loss/reduction in salary. The payment on a $144K loan ($450k - $306k) is manageable and significantly lower than the $1,950 rent + $480 car payment you are making today.
Good advice here.

Re: Home purchase budget advice

Posted: Thu Jun 08, 2017 10:00 am
by bluebolt
I disagree with the folks who are recommending large down payments to minimize monthly payments in case of a job loss. I would much rather have the liquid funds that could pay my mortgage for months (or years), rather than having it locked up in illiquid home equity.

Re: Home purchase budget advice

Posted: Thu Jun 08, 2017 10:51 am
by Admiral
bluebolt wrote:I disagree with the folks who are recommending large down payments to minimize monthly payments in case of a job loss. I would much rather have the liquid funds that could pay my mortgage for months (or years), rather than having it locked up in illiquid home equity.
I recommended 30% down, or $135k on a $450k house. They have $460,000 in non retirement savings. They can EASILY afford that downpayment, which would leave them with a $315k mortgage ($1500/mo at 30YR/4%) AND $325k in the bank.

No brainer in my opinion. Hell, 325k earning 5% pays for the interest on the loan even at the front end.

Re: Home purchase budget advice

Posted: Thu Jun 08, 2017 12:00 pm
by bluebolt
Admiral wrote:
bluebolt wrote:I disagree with the folks who are recommending large down payments to minimize monthly payments in case of a job loss. I would much rather have the liquid funds that could pay my mortgage for months (or years), rather than having it locked up in illiquid home equity.
I recommended 30% down, or $135k on a $450k house. They have $460,000 in non retirement savings. They can EASILY afford that downpayment, which would leave them with a $315k mortgage ($1500/mo at 30YR/4%) AND $325k in the bank.

No brainer in my opinion. Hell, 325k earning 5% pays for the interest on the loan even at the front end.
I was referring to all the posts surrounding yours that recommended much bigger down payments. 30% in this case is perfectly reasonable.

Re: Home purchase budget advice

Posted: Thu Jun 08, 2017 12:02 pm
by doss
Kit00 wrote:How do you have so much saved with an income of 140k? That's amazing.
Yea, that is great! I dont make quite that income and don't even have half the amount you saved-- and I've been saving since I was 26 (though not fully maxing out since I was 33 (I'm 37 now)). Good job, you are obviously doing something right.