Need Advice Urgently - Are we in over our heads?

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Rainsurf
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Need Advice Urgently - Are we in over our heads?

Post by Rainsurf »

I will keep a very long story short and the bottom line is we put an offer in on a house and it was accepted and I am terrified we are in over our heads.

Situation:
- In the process of closing a house for $645K
- House ~117 years old - recently remodeled - not flipped - but currently has 2 beds and 1.5 baths in a very high potential location
- Mortgage down payment 10%
- Combined gross income is $185K
- No other debt (paying off $81K additional in student loans to make this happen)
- We live in a very expensive area that is only getting more expensive.
- We highlight value location and this is the best location we can get without making compromises.

I've redone the math and it scares the **** out of me. My wife is a dreamer and believes we can do it.
- Net income after savings ($1K a month to savings, max out 401K): $7.9K
- Monthly mortgage payment - $3.267K
- High estimated other expenses recurring including maintenance, food, all bills, and utilities: $3.12K
- Left over per month: $1.554K
- Mortgage to net income is (including retirement): 41.3%
- Mortgage to gross income ratio is : 21.3%

All our friends and family say we are fine and they are happy for us.

I haven't been sleeping well for 2 weeks. I feel like we made the biggest mistake of my life most of the time and feel optimistic some of the time.

I don't even know if we can get out of the close at this point if we absolutely had to. I'm sure we'd lose a significant chunk of money.

From my perspective it's a big bet on ourselves and the city we live in.

I believe in both but I haven't been able to get around the corner.

Really would appreciate any advice or perspective.

Thank you in advance!
Detroittl
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Re: Need Advice Urgently - Are we in over our heads?

Post by Detroittl »

How many years until retirement?

30 year mortgage I assume?

How much would it cost to rent a comparable house in the same area?

Are you going to stay in the house "forever"? What's the state income tax rate?
anonenigma
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Re: Need Advice Urgently - Are we in over our heads?

Post by anonenigma »

What do you currently pay for housing?

You may not be able to pay as much into your 401(k), but you'll be developing equity in the house and have a much lower housing cost in 30 years when you've paid off the mortgage.

I just wish houses could be had for so little here in Los Angeles.
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Rainsurf
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Re: Need Advice Urgently - Are we in over our heads?

Post by Rainsurf »

Hi Detroitt! Good questions.
Detroittl wrote:How many years until retirement?
- I am 31 and my wife is 33.

30 year mortgage I assume?
- Yes, 30 year, 10% down, 4% interest rate.

How much would it cost to rent a comparable house in the same area?
- Probably $2.7 - $3K a month. An apartment maybe $2.5K

Are you going to stay in the house "forever"? What's the state income tax rate?
- I don't know if it's forever, but we see 10 years as realistic. No state income tax. Federal only.
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Rainsurf
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Re: Need Advice Urgently - Are we in over our heads?

Post by Rainsurf »

anonenigma wrote:What do you currently pay for housing?
- We have a ridiculously good deal ($1250 a month all utilities) it is unheard of.. Wasn't going to last forever.

You may not be able to pay as much into your 401(k), but you'll be developing equity in the house and have a much lower housing cost in 30 years when you've paid off the mortgage.
- True. Decreasing 401K contribution could help although that would be our primary investment outside of savings with the new budget.

I just wish houses could be had for so little here in Los Angeles.
- :( I hear ya. Housing is really crazy...
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Re: Need Advice Urgently - Are we in over our heads?

Post by AlohaJoe »

After maxing your 401(k), paying for this huge mortgage, paying food, utilities, and all other monthly bills....you still have $1,500 a month left over.

What exactly are you going to be spending $1,500 a month on that you're worried about?

You're going from $1,250 a month in housing costs to $3,200 a month in housing costs? What were you doing with that extra $24,000 a year before?
Detroittl
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Re: Need Advice Urgently - Are we in over our heads?

Post by Detroittl »

I would go for it.

You'll get a decent income tax refund moving forward. Don't spend it. Put it in your "house bucket" and use it for maintence, repairs, improvements and the inevitable property tax increases. For example, I've been in mine 3 years and have had two special assessments (condo shared repairs) and have painted and was hit with a $2000 increase in annual taxes. Some expected expenses some unexpected. You'll need the extra cash and will sleep better at night.
Detroittl
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Re: Need Advice Urgently - Are we in over our heads?

Post by Detroittl »

PS assuming you have 6 months of living expenses saved and fill it up with furniture I would aggressively pay it down as fast as you can over the next two years to get out of PMI.

PPS If you can get a lower rate (25 basis points or more) switch to a 25 or new 30 year on a refi. Hard to imagine rates going down but you never know. I went from a 30 year at 4.375 to a new 30 year at 3.875 10 months after closing. Breakeven after fees was 10 months and it saved me 200 in interest and pmi reduction. Very glad I did it. With a higher appraisal and more equity I knocked 60 bucks a month in pmi and now I'm almost out of it.
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Rainsurf
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Re: Need Advice Urgently - Are we in over our heads?

Post by Rainsurf »

Detroittl wrote:PS assuming you have 6 months of living expenses saved and full it up with furniture I would aggressively pay it down as fast as you can over the next two years to get out of PMI.

PPS If you can get a lower rate (25 basis points or more) switch to a 25 or new 30 year on a refi. Hard to imagine rates going down but you never know. I went from a 30 year at 4.375 to a new 30 year at 3.875 10 months after closing. Breakeven after fees was 10 months and it saved me 200 in interest and pmi reduction. Very glad I did it. With a higher appraisal and more equity I knocked 60 bucks a month in pmi and now I'm almost out of it.
Thanks! Really appreciate it.

We are optimistic about the home itself appreciating and will try to put savings towards more equity to bridge that same gap.
Detroittl
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Re: Need Advice Urgently - Are we in over our heads?

Post by Detroittl »

Count on appreciation as a bonus. Historically I've read 1 - 3 percent appreciation on average. Could be nothing or go down. Get out of PMI (145 dollars a month on a mortgage that size) by throwing extra money at it. That's the only guaranteed return. Because you can't itemize pmi (your income is too high) it's even more important.

The great thing about homeownership is once it's paid off your biggest expense (housing) goes down dramatically. FIRE comes a whole lot faster with a paid off principal residence. You may think retirement is a long way off but with a paid for house your options increase dramatically.
Last edited by Detroittl on Mon Jun 12, 2017 2:46 am, edited 1 time in total.
jbranx
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Re: Need Advice Urgently - Are we in over our heads?

Post by jbranx »

I've only mentally calculated, but it looks to me like your parents and kin are right: you can do it. In addition, you're going to be one very motivated person going forward!

Speaking as a long-term married guy with somewhat frugal wife who likes nice places to live, view it as an investment in a good marriage going forward.

The two of you have a nice level of income for your age. I'd quit worrying. If something dire happens, you have what sounds like a solid investment in a good neighborhood. As Benjamin Graham observed, "most people will have more trouble managing their emotions than their investments." The federal tax benefits from the mortgage will be considerable, as well. So, do your head a favor, and decide to be very grateful you have a great home and a happy spouse. Taking the best possible attitude in difficult circumstances is a good way to do the journey.

Good luck
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celia
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Re: Need Advice Urgently - Are we in over our heads?

Post by celia »

I assume the house was inspected and you can live with/fix the deficiencies.

This must be your first house! Your feelings are normal. It probably feels like everything you own is being put into the house and then you will be cash poor. This is normal. (If you didn't feel uneasy, I would be worried for you! :oops: ) Almost everyone goes through this since it is likely the biggest financial transaction of your life. In addition, paying off the student debt recently also changes your finances, so there is a lot of money "sloshing" around at the moment because of moving it.

As a backup, you can temporarily cut back on your 401K contributions as has already been suggested. You will likely do that anyway if you need remodeling money in the future. Don't worry about furnishings for a little while--use your current stuff. Basically, as long as you have a bed and some clothes, you are ok. (We owned our first house for only two years and never furnished a few rooms during that time, but sold it anyway--hey, there was less furniture to move. :D )

As long as you have a working kitchen and bathroom and can get dressed for work every day, you are good to go! I'm happy to see you make the big move.
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Re: Need Advice Urgently - Are we in over our heads?

Post by onourway »

I'm a little surprised at the lack of questions posed so far.

How is your income split? What is the plan if one of you loses their job or is under-employed for a period of time?

Any plans to have kids? This budget may work today, but if kids enter the picture there isn't really any wiggle room.

Also would like to know where the excess money has been going to prior to this that will now be re-directed to mortgage.

Are you maxing one 401k plan or two?

Without knowing a more precise breakdown of the monthly expenses the only other thing I'd mention is that $1.5k excess per month seems a lot on paper, but if it has been being absorbed up to this point through regular spending, it may be a big cut back in lifestyle if that amount is intended to cover all excess spending for a couple in a HCOL area who are used to having a lot of excess income.
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Re: Need Advice Urgently - Are we in over our heads?

Post by hamiltop »

3 years ago we did the same thing, except tighter. We bought a $655k home with 10% down on a $145k single income (and 2 kids). Shortly after buying, I got a raise to $160k, then to $170k a year later.

We got by fine. We had to be mindful of what we spent, but at 170k I was maxing out my 401k and paying a 10% tithe. We also had a 3rd kid. Still fine.
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Re: Need Advice Urgently - Are we in over our heads?

Post by oldcomputerguy »

I feel your pain. When we bought the house we're in now, we already had a mortgage on the home we were living in at the time. It needed quite a bit of repair and remodelling before we could put it on the market, so we had to move, then do six months of work on the house before we could put it on the market. For that six months, we carried both mortgages plus a home equity loan we took out to finance the repairs. Scared the pee out of me. But it worked out. That was twenty years ago this fall, our current house is now paid for and we're very happy.

Good luck. Yep, it's scary. But try to keep in mind that it's a step up.
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BL
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Re: Need Advice Urgently - Are we in over our heads?

Post by BL »

Sounds like typical buyer's remorse. Yes, it may be tough, but you can make it if ---

You don't go all out to furnish the place. Slowly look around for cheap/free sources for the things you really want. I don't mean junk, but it doesn't have to be new and some rooms can be empty for a while, too.

You don't fix things that aren't perfect, but still serviceable. Some folks get the urge to spend, spend, spend, when they get that new house.

You are willing to give up something else: cable, eating out, booze, shopping, vacations, new cars. There are always trade-offs and you have both traded something for this great house. You can have this but you can't have everything.
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Re: Need Advice Urgently - Are we in over our heads?

Post by neilpilot »

Rainsurf wrote: I've redone the math and it scares the **** out of me. My wife is a dreamer and believes we can do it.
- Net income after savings ($1K a month to savings, max out 401K): $7.9K
I think you will not be over your heads, and should be able to better control expenses to build an appropriate emergency fund. Maybe I missed this in another post, but when you quote a net income of $7.9k/month are you taking into account the increased itemized deduction based on mortgage interest? You should be able to estimate Fed taxes and will likely be able to reduce your current withholding, resulting in an increase in monthly take home.

I'd guess your effective monthly net take home should increase by a minimum of $500, and likely more, when you calculate the effect of mortgage interest & property tax.
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Re: Need Advice Urgently - Are we in over our heads?

Post by Rainsurf »

onourway wrote:I'm a little surprised at the lack of questions posed so far.

How is your income split? What is the plan if one of you loses their job or is under-employed for a period of time?

Any plans to have kids? This budget may work today, but if kids enter the picture there isn't really any wiggle room.

Also would like to know where the excess money has been going to prior to this that will now be re-directed to mortgage.

Are you maxing one 401k plan or two?

Without knowing a more precise breakdown of the monthly expenses the only other thing I'd mention is that $1.5k excess per month seems a lot on paper, but if it has been being absorbed up to this point through regular spending, it may be a big cut back in lifestyle if that amount is intended to cover all excess spending for a couple in a HCOL area who are used to having a lot of excess income.
Hi onourway, great questions.

- Income is split $70K and $115K for base salary. It will be extremely challenging if one loses our job. We would have to really hustle in the short term.
- Yes, at least 1 kid is on the radar is a few years and we know we'll have to be making more to make that work.
- Maxing out my 401K which matches generously. Wife is not yet maxing hers out.
- I agree $1.5K can seem like a lot but can buy really fast. We are prepared to make the necessary lifestyle changes.
- Tried to be as conservative as possible on monthly expenses. There is room to cut back further but I tried to make sure we were looking at close to the most we thought we would spend in each category.
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goingup
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Re: Need Advice Urgently - Are we in over our heads?

Post by goingup »

Rainsurf-
You did your homework and due diligence. You made your choice and the offer was accepted. Now come to terms with that and let the process unfold. It's all good and soon you will be delighted to own and occupy that home. :beer
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Re: Need Advice Urgently - Are we in over our heads?

Post by Frisco Kid »

While you should be fine now if you are willing to watch your overall spending and make adjustments when necessary, once you have a child and add childcare expenses (unless family will provide help) your budget will change radically. Is income growth by then likely?
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Re: Need Advice Urgently - Are we in over our heads?

Post by Nekrotok »

Rainsurf wrote: How much would it cost to rent a comparable house in the same area?
- Probably $2.7 - $3K a month. An apartment maybe $2.5K
These numbers would favor renting. I've seen guidelines for landlords to target purchasing properties at 100x monthly rent. For owner-occupants, you might justify paying a bit more, but you are paying over 200x monthly rent. For a more thorough calcuation, run the new york times rent vs buy calculator. Also, make you you are really up for the work/cost involved in maintaining a house. You going to be spending a lot more money and time on your house - make sure you really want it enough to justify the cost. Renting and investing is a great alternative.

I'm pretty sure you can afford to buy the house, but I'm not sure it's the best financial decision. I know that's not what you want to hear, but you need to be careful. Beware that every else around you is incentivized to pressure you towards buying, including "your" RE agent. If you do want out, you can probably count on something to come up in the inspection and use that to get your earnest money back.

Edit:
Here's the most compelling critique of home buying that I've seen. Before you buy, you should read this and seriously consider what he's saying to make sure you have fully thought it through.
http://jlcollinsnh.com/2013/05/29/why-y ... nvestment/

Good luck.
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Re: Need Advice Urgently - Are we in over our heads?

Post by Carefreeap »

BL wrote:Sounds like typical buyer's remorse. Yes, it may be tough, but you can make it if ---

You don't go all out to furnish the place. Slowly look around for cheap/free sources for the things you really want. I don't mean junk, but it doesn't have to be new and some rooms can be empty for a while, too.

You don't fix things that aren't perfect, but still serviceable. Some folks get the urge to spend, spend, spend, when they get that new house.

You are willing to give up something else: cable, eating out, booze, shopping, vacations, new cars. There are always trade-offs and you have both traded something for this great house. You can have this but you can't have everything.
:thumbsup

Yes, I agree this is buyer's remorse. We've bought/acquired 7 homes over the years and there's always that nagging "what did we do?" emotion.

Your numbers look good. You appear to be a worrier (I am too) and you'll always have a plan B in the back of your mind. You'll be o.k.

Enjoy the adventure!
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Hug401k
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Re: Need Advice Urgently - Are we in over our heads?

Post by Hug401k »

I think you are okay but things will be tight for a while. How are the town taxes on real estate? Mine are brutal so pay attention. Get used to cooking at home and make sure you have an emergency fund, even at the expense of paying off student loans.

I do want to say every time I have put an offer on a house, I get that 2 weeks of up all night angst/panic attack so I think it may be normal. :moneybag
delamer
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Re: Need Advice Urgently - Are we in over our heads?

Post by delamer »

Rainsurf wrote:
onourway wrote:I'm a little surprised at the lack of questions posed so far.

How is your income split? What is the plan if one of you loses their job or is under-employed for a period of time?

Any plans to have kids? This budget may work today, but if kids enter the picture there isn't really any wiggle room.

Also would like to know where the excess money has been going to prior to this that will now be re-directed to mortgage.

Are you maxing one 401k plan or two?

Without knowing a more precise breakdown of the monthly expenses the only other thing I'd mention is that $1.5k excess per month seems a lot on paper, but if it has been being absorbed up to this point through regular spending, it may be a big cut back in lifestyle if that amount is intended to cover all excess spending for a couple in a HCOL area who are used to having a lot of excess income.
Hi onourway, great questions.

- Income is split $70K and $115K for base salary. It will be extremely challenging if one loses our job. We would have to really hustle in the short term.
- Yes, at least 1 kid is on the radar is a few years and we know we'll have to be making more to make that work.
- Maxing out my 401K which matches generously. Wife is not yet maxing hers out.
- I agree $1.5K can seem like a lot but can buy really fast. We are prepared to make the necessary lifestyle changes.
- Tried to be as conservative as possible on monthly expenses. There is room to cut back further but I tried to make sure we were looking at close to the most we thought we would spend in each category.
It isn't just a question of how challenging it would be if you one of you was unemployed, but also how likely it is that that would happen. If you both work for the local public schools you are much more likely to stay continually employed than if you both work for a tech start-up, for example. And then there is the issue of how quickly you could find work after a layoff.

A lot of what you are feeling is typical first-time buyer jitters, but make sure you are assessing your job situation realistically. And consider a goal of putting several months worth of mortgage payments in a savings account to ease your concerns.
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boomer
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Re: Need Advice Urgently - Are we in over our heads?

Post by boomer »

I'd like to say it is just first-time buyer jitters. However, it may also be that something in your gut is telling you that it is a mistake. I tend to pay attention to my gut feelings. Maybe because it is rare that I lose sleep after a decision has been made. Sorry to be a Debbie Downer. :(

As someone else mentioned, if something comes up in the inspection that would enable you to drop the deal, maybe it wouldn't be the worst thing? I'm not sure how easy it is to get out of it at this point, though, or what the cost would be.
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Meg77
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Re: Need Advice Urgently - Are we in over our heads?

Post by Meg77 »

Have you already paid off the student loan? If not, and if the interest rate on it is good, then I would vote for putting 20% down on the house instead and delaying paying down the student loan to avoid PMI and lock in a lower monthly mortgage payment. Unless they are requiring the student loan payoff to get your income ratios in line (could be possible if you have car loans or they aren't counting all your income or the student loan is on a short amortization).

In any event, with a mortgage of less than 22% of your gross income, you are arguably FINE from an affordability perspective, particularly because you are young and your incomes are likely to rise. Even if the lower earner lost his or her job, you'd likely not miss a beat by simply cutting out all savings and discretionary spending for a few months (and if that didn't work, remember there is unemployment insurance and family assistance and 0% credit cards and 401k loans and part time side hustles as back up back up back up plans).

Of course you may need to re-evaluate things when/if you have kids, but in an absolute worst case scenario you also have the option of selling this home (or renting it out) and moving somewhere cheaper.

My point is, you have a lot of "outs." I was 30 when I got married and bought my first home with my fiancé. He wanted to stretch into a more expensive house that I thought we needed, but my stress wore off after a few months and has decreased permanently in light of a few raises for each of us over the past few years too. We even refinanced to a 15 year fixed mortgage last year because we felt so confident about our excess cash flow. Incomes don't always rise of course, but my point is that you will likely be in an increasingly positive financial situation over the coming decades.
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celia
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Re: Need Advice Urgently - Are we in over our heads?

Post by celia »

delamer wrote:If you both work for the local public schools you are much more likely to stay continually employed than if you both work for a tech start-up, for example.
Not true at all. School districts often have to tighten their belts if/when the state has cut their budget. This invariably leads to layoffs. Layoffs don't happen each year, but when they do, they can be massive.
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Re: Need Advice Urgently - Are we in over our heads?

Post by delamer »

celia wrote:
delamer wrote:If you both work for the local public schools you are much more likely to stay continually employed than if you both work for a tech start-up, for example.
Not true at all. School districts often have to tighten their belts if/when the state has cut their budget. This invariably leads to layoffs. Layoffs don't happen each year, but when they do, they can be massive.
So your argument is that public school systems are just as -- or more -- likely to layoff staff as tech start-ups? So a 30-year old teacher is not more likely to be working in the same district at age 45 than a 30-year old programmer at a new tech firm is to be at the same firm at 45?

And if you were counseling someone on finding a secure job, you'd tell them to go work for a tech start-up rather than a public school?

In any case, my point was not that public schools never layoff staff but that certain types of jobs are more relatively more secure than others.
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Re: Need Advice Urgently - Are we in over our heads?

Post by Texanbybirth »

Home price >3x your gross income, you're only able to put 10% down, and it's a 2/1.5 over a century old: I'd be nervous as all get out. I wouldn't go through with it, but that's only my opinion. (I'm a very financially conservative person.)

Sounds like you're saving over 15% towards retirement (max 401k and $1k/mo extra to savings), so that's a good start. You'll probably feel house poor for a few years, especially if you have a baby (though they're awesome any way), but as your incomes increase, and with a fixed P&I pmt, you'll feel richer. If one of you lost your job, you'd be in a world of hurt, so make sure you've got a nice emergency fund stashed safely away. (I'd say 1 year, with mortgage payments factored into that.)

Have you ALREADY cut your lifestyle while house shopping for homes in this range, so you know what it feels like? There are numerous threads on this message board about spouses not agreeing about what "cutting back" means once it's too late.

That feeling of not sleeping at night probably won't go away after you buy the house, but the older you get it will at least diminish if y'all stay on track with your goals. If a house was keeping me from sleeping at night before I bought it, I'd take that as a sign to walk away. If things start to go south, this house could be a giant financial strain.
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gunn_show
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Re: Need Advice Urgently - Are we in over our heads?

Post by gunn_show »

delamer wrote:
celia wrote:
delamer wrote:If you both work for the local public schools you are much more likely to stay continually employed than if you both work for a tech start-up, for example.
Not true at all. School districts often have to tighten their belts if/when the state has cut their budget. This invariably leads to layoffs. Layoffs don't happen each year, but when they do, they can be massive.
So your argument is that public school systems are just as -- or more -- likely to layoff staff as tech start-ups? So a 30-year old teacher is not more likely to be working in the same district at age 45 than a 30-year old programmer at a new tech firm is to be at the same firm at 45?

And if you were counseling someone on finding a secure job, you'd tell them to go work for a tech start-up rather than a public school?

In any case, my point was not that public schools never layoff staff but that certain types of jobs are more relatively more secure than others.
I am in tech, never laid off. My brother is a teacher, has been pink-slipped a handful of times, and took this year off a bit to go ski and hope he gets back into the system for the fall with a job. Generalizations are great but not always true. In CA, I would absolutely rather be in tech than a teacher and take your bet all day long. A 30 year old programmer is far more likely -to change jobs voluntarily to increase pay / role- than to be laid off. Teacher not so much. Never mind who is making far more $$ during those years...
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gunn_show
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Re: Need Advice Urgently - Are we in over our heads?

Post by gunn_show »

Rainsurf wrote: Situation:
- In the process of closing a house for $645K
- House ~117 years old - recently remodeled - not flipped - but currently has 2 beds and 1.5 baths in a very high potential location
- Mortgage down payment 10%
- Combined gross income is $185K
- No other debt (paying off $81K additional in student loans to make this happen)
- We live in a very expensive area that is only getting more expensive.
- We highlight value location and this is the best location we can get without making compromises.

I've redone the math and it scares the **** out of me. My wife is a dreamer and believes we can do it.
- Net income after savings ($1K a month to savings, max out 401K): $7.9K
- Monthly mortgage payment - $3.267K
- High estimated other expenses recurring including maintenance, food, all bills, and utilities: $3.12K
- Left over per month: $1.554K
- Mortgage to net income is (including retirement): 41.3%
- Mortgage to gross income ratio is : 21.3%
Anyways, to the OP, this is a tough one. You can afford it. You are saving $12k savings and $18k 401k for $30k per year before your $7.9k bucket gets used. That alone is great, even if you spent every dollar after that. Also $37,000 for "other expenses" seems pretty darn high with no kids today, but perhaps you eat steak every night and guzzle gas and who knows what. But that is a large margin for expenses. Plus the $1500/mo left over. Plus let's assume you work your tail off and each get raises/promos in next couple years. You have the funds.

Sounds to me like Seattle? (old homes, small but refurb, no income tax, two high earners in area where home will appreciate in a blink thanks to Amazon hiring 10k workers a year, high cost vs small house)(sounds exactly like 2 homes my buddy bought near Amazon, makes a killing renting them out). Certainly wish you had more down payment and cash cushion, and it was a larger home, but I would buy this versus renting. It will pay off in the long run. Guess the one last question - is this home big enough once you have a kid(s)? Yes you can flip into the next one, but that will cost more money again (RE fees, larger home larger cost). Only concern would be to wait till you had a kid and determined if you needed more than a 2/1.5.

Lot of great responses here, this is really "your call" since the math does work. You live in a high COL area, a lot of standard principals don't apply. Buy when you are ready. If this is the house, go for it. Enjoy it. We did it 3 yrs ago and couldn't be happier, and many of the same concerns folks replied with above applied to us at the time. I haven't worried since.
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delamer
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Re: Need Advice Urgently - Are we in over our heads?

Post by delamer »

gunn_show wrote:
delamer wrote:
celia wrote:
delamer wrote:If you both work for the local public schools you are much more likely to stay continually employed than if you both work for a tech start-up, for example.
Not true at all. School districts often have to tighten their belts if/when the state has cut their budget. This invariably leads to layoffs. Layoffs don't happen each year, but when they do, they can be massive.
So your argument is that public school systems are just as -- or more -- likely to layoff staff as tech start-ups? So a 30-year old teacher is not more likely to be working in the same district at age 45 than a 30-year old programmer at a new tech firm is to be at the same firm at 45?

And if you were counseling someone on finding a secure job, you'd tell them to go work for a tech start-up rather than a public school?

In any case, my point was not that public schools never layoff staff but that certain types of jobs are more relatively more secure than others.
I am in tech, never laid off. My brother is a teacher, has been pink-slipped a handful of times, and took this year off a bit to go ski and hope he gets back into the system for the fall with a job. Generalizations are great but not always true. In CA, I would absolutely rather be in tech than a teacher and take your bet all day long. A 30 year old programmer is far more likely -to change jobs voluntarily to increase pay / role- than to be laid off. Teacher not so much. Never mind who is making far more $$ during those years...
Again, my point is that the OP needs to assess his family's employment security.

Of course generalizations aren't always true. Nor are they always wrong. And it is also true that what is happening California is not necessarily reflective of the whole US.
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Rainsurf
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Re: Need Advice Urgently - Are we in over our heads?

Post by Rainsurf »

gunn_show wrote:
Rainsurf wrote: Situation:
- In the process of closing a house for $645K
- House ~117 years old - recently remodeled - not flipped - but currently has 2 beds and 1.5 baths in a very high potential location
- Mortgage down payment 10%
- Combined gross income is $185K
- No other debt (paying off $81K additional in student loans to make this happen)
- We live in a very expensive area that is only getting more expensive.
- We highlight value location and this is the best location we can get without making compromises.

I've redone the math and it scares the **** out of me. My wife is a dreamer and believes we can do it.
- Net income after savings ($1K a month to savings, max out 401K): $7.9K
- Monthly mortgage payment - $3.267K
- High estimated other expenses recurring including maintenance, food, all bills, and utilities: $3.12K
- Left over per month: $1.554K
- Mortgage to net income is (including retirement): 41.3%
- Mortgage to gross income ratio is : 21.3%
Anyways, to the OP, this is a tough one. You can afford it. You are saving $12k savings and $18k 401k for $30k per year before your $7.9k bucket gets used. That alone is great, even if you spent every dollar after that. Also $37,000 for "other expenses" seems pretty darn high with no kids today, but perhaps you eat steak every night and guzzle gas and who knows what. But that is a large margin for expenses. Plus the $1500/mo left over. Plus let's assume you work your tail off and each get raises/promos in next couple years. You have the funds.

Sounds to me like Seattle? (old homes, small but refurb, no income tax, two high earners in area where home will appreciate in a blink thanks to Amazon hiring 10k workers a year, high cost vs small house)(sounds exactly like 2 homes my buddy bought near Amazon, makes a killing renting them out). Certainly wish you had more down payment and cash cushion, and it was a larger home, but I would buy this versus renting. It will pay off in the long run. Guess the one last question - is this home big enough once you have a kid(s)? Yes you can flip into the next one, but that will cost more money again (RE fees, larger home larger cost). Only concern would be to wait till you had a kid and determined if you needed more than a 2/1.5.

Lot of great responses here, this is really "your call" since the math does work. You live in a high COL area, a lot of standard principals don't apply. Buy when you are ready. If this is the house, go for it. Enjoy it. We did it 3 yrs ago and couldn't be happier, and many of the same concerns folks replied with above applied to us at the time. I haven't worried since.
Hi everyone, thanks for all the advice from all the different sides.

- We chose 10% down to tackle the student loans and still leave enough left over in case of emergency. One of our primary goals will be to increase equity to eliminate PMI although it's small.
- With more income refi to 15 year would be ideal. That's a good goal to set.
- We could definitely have 1 kid very comfortably up to middle school and 2 would require some work in the basement but still doable. I think we can make it a 10 year home and that was our goal.
- Obviously bigger is better and 3 bedrooms and 2 full baths would be amazing but we prioritized location over size.

I'm trying to get myself to the point where I can enjoy the adventure.

Best case it appreciates at least a bit and we form some solid equity.

Worst case for some reason it doesn't work or we have to sell it for a loss or maybe even break even. That would be a major roadbump in life but we would persevere.

Thank you everyone!
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Re: Need Advice Urgently - Are we in over our heads?

Post by Nearly A Moose »

Don't forget that the mortgage payment is fixed (it's fixed right? Or did I miss something?). Give yourself a coupke years of cost of living raises, real raises, or bonuses (if you're lucky enough to get those three), and it will become much more affordable as a percentage of your budget over time.

But be prepared for those kiddos to be expensive...
Pardon typos, I'm probably using my fat thumbs on a tiny phone.
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Re: Need Advice Urgently - Are we in over our heads?

Post by Vanguard Fan 1367 »

I know those feelings about being scared. Another poster said that you may find something in the inspection that will enable you to get out of the deal. My realtor likes to write "as is" contracts subject to inspection, so pretty much anything that comes up during the inspection means that you can back out of the deal if you want to and get your deposit back. Your contract may be written differently. I sold my house built in 1924 over a year ago and know that it is pretty common for an inspection to come up with issues on a house that old or older. The buyer went ahead with the deal even though the house wasn't perfect and in brand new shape but he had the right to back out of the deal for a couple of weeks.
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Re: Need Advice Urgently - Are we in over our heads?

Post by itstoomuch »

Seattle?
Comment: cut back a bit on the 401k. You got some time and human capital to catch it up on lost 401 contributions. Stocks are now relatively high and having a bigger reserve may be a proper move rather than be in a 401k at whatever allocation.

Our son then 29, went 3 years without 401k contributions, inorder to build the down payment. AND didn't make a 4th year contribution other than the match inorder to rebuild his reserves. He also had a headstart in his assuming remaining college funds. The 3th anniversary of ownership is coming up and based on his neighbor's sale, his abode is worth 45% more than his purchase. He has gained far more in his taxable stocks and company options to exceed what he lost in 401k contributions+gains. He is a host Airbnb which pays for all of his extracurriculars.
YMMV.
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Re: Need Advice Urgently - Are we in over our heads?

Post by Vanguard Fan 1367 »

I know you feel stressed. The maintenance on an old home can be overwhelming. I finally talked my wife into a 10 year old home and letting someone else deal with all the issues that show up on an older house by selling mine. Hopefully the remodeling is great and your house is like new. But it is not unlikely that maintenance will be required.
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Re: Need Advice Urgently - Are we in over our heads?

Post by pkcrafter »

Rainsurf:
- We chose 10% down to tackle the student loans and still leave enough left over in case of emergency.
You weren't specific on the emergency fund, but you probably need at least 4 months of household expenses in the EF.


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jlgrandam
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Re: Need Advice Urgently - Are we in over our heads?

Post by jlgrandam »

I've recently gone through a very similar situation as OP (numbers-wise) and it's turned out ok for now. We have had ~$12K in unexpected house costs this year (old HVAC went out sooner than we hoped), so OP should plan for these types of future expenses.
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Re: Need Advice Urgently - Are we in over our heads?

Post by celia »

Rainsurf wrote:Worst case for some reason it doesn't work or we have to sell it for a loss or maybe even break even. That would be a major roadbump in life but we would persevere.
If you should break even when you sell or even have a small loss, think of all the years you didn't have to pay rent!
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Re: Need Advice Urgently - Are we in over our heads?

Post by jumppilot »

OP,

Worse comes to worse, and you realize this mortgage is too much for you, you can turn the property into a rental and move to a lower cost place.

Even if you're taking a modest loss on the property (rent is less than mortgage), if you're able to get anything like your current apartment you'll still dramatically reduce your expenses.
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Re: Need Advice Urgently - Are we in over our heads?

Post by Vanguard Fan 1367 »

celia wrote:
Rainsurf wrote:Worst case for some reason it doesn't work or we have to sell it for a loss or maybe even break even. That would be a major roadbump in life but we would persevere.
If you should break even when you sell or even have a small loss, think of all the years you didn't have to pay rent!
I bought a house for 315k and sold it 12 years later for 295k. You are right that maybe 2k a month I saved on not having to rent for 12 years adds up to something.
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Re: Need Advice Urgently - Are we in over our heads?

Post by Pajamas »

jumppilot wrote:OP,

Worse comes to worse, and you realize this mortgage is too much for you, you can turn the property into a rental and move to a lower cost place.

Even if you're taking a modest loss on the property (rent is less than mortgage), if you're able to get anything like your current apartment you'll still dramatically reduce your expenses.
Becoming an accidental landlord because you bought a house you couldn't afford is a doubly terrible idea. If it turns out to be that you can't afford it, don't compound your mistake by turning it into a rental, especially one with negative cashflow, which would make it a triple mistake. (I don't think you made a mistake.)
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Re: Need Advice Urgently - Are we in over our heads?

Post by boomer »

Pajamas wrote:
jumppilot wrote:OP,

Worse comes to worse, and you realize this mortgage is too much for you, you can turn the property into a rental and move to a lower cost place.

Even if you're taking a modest loss on the property (rent is less than mortgage), if you're able to get anything like your current apartment you'll still dramatically reduce your expenses.
Becoming an accidental landlord because you bought a house you couldn't afford is a doubly terrible idea. If it turns out to be that you can't afford it, don't compound your mistake by turning it into a rental, especially one with negative cashflow, which would make it a triple mistake. (I don't think you made a mistake.)
I am a landlord by choice, and I second this. Being a landlord should be a conscious decision. It is only for those who have extra time and energy (even if you have it managed), a fund for repairs on the rental, and really want to be a landlord. Also, there are also tax consequences to be considered.
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Re: Need Advice Urgently - Are we in over our heads?

Post by jumppilot »

boomer wrote:
Pajamas wrote:
jumppilot wrote:OP,

Worse comes to worse, and you realize this mortgage is too much for you, you can turn the property into a rental and move to a lower cost place.

Even if you're taking a modest loss on the property (rent is less than mortgage), if you're able to get anything like your current apartment you'll still dramatically reduce your expenses.
Becoming an accidental landlord because you bought a house you couldn't afford is a doubly terrible idea. If it turns out to be that you can't afford it, don't compound your mistake by turning it into a rental, especially one with negative cashflow, which would make it a triple mistake. (I don't think you made a mistake.)
I am a landlord by choice, and I second this. Being a landlord should be a conscious decision. It is only for those who have extra time and energy (even if you have it managed), a fund for repairs on the rental, and really want to be a landlord. Also, there are also tax consequences to be considered.

I became a landlord not by choice. But that was 15 years and 3 rental properties ago. Best mistake I ever made, really. The "mistake" rental is almost paid off, which is awesome.

I'm just pointing this out in case the OP can't get out of the property purchase and realizes he can't afford the mortgage. There are options other than foreclosure.
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Pajamas
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Re: Need Advice Urgently - Are we in over our heads?

Post by Pajamas »

jumppilot wrote:
I became a landlord not by choice. But that was 15 years and 3 rental properties ago. Best mistake I ever made, really. The "mistake" rental is almost paid off, which is awesome.

I'm just pointing this out in case the OP can't get out of the property purchase and realizes he can't afford the mortgage. There are options other than foreclosure.
Sounds like you got lucky and became the exception that proves the rule. Someone who buys a house and then finds out that they can't really afford it should not then become a landlord and subsidize someone else's housing expenses with their own negative cash flow. That is a terrible idea.
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