45% Down Payment vs. High Mortgage (Massachuestts)

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amd7239
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45% Down Payment vs. High Mortgage (Massachuestts)

Post by amd7239 » Thu Oct 05, 2017 12:51 pm

Gross income: $75k/year
401k contribution: $30k/year [43% savings rate]
Annual Realized income = $75k - $30k = $35k
Location: Northern MA (suburbs). Will also be looking at Southern NH.
Savings for house: $90k
(Total savings of $100k, but I would like to invest at least $10k into an index fund)
Take home pay: $1700/month
Age: 27
Job stability: high
Time Horizon: Looking to buy in 3 years.


1)
I am hoping to buy a $200k 3 bedroom home in 3 years (whether I can actually find that price is another question) - do bogleheads think this price point is feasible in northern MA/southern NH?



2) Options I'm considering:

Option A:
If I put 45% down ($90k): At 6% interest (a conservative estimate), the mortgage ALONE would be $660/month (about 40% of my take home pay). Then add taxes and insurance...

Pros:
Lower down payment
Lower mortgage payment (but still high)
Cons:
Opportunity cost: If I had chosen to put 20% down instead, I could have invested $50k extra.

Option B:
If I put the traditional 20% down ($40k), my mortgage will be $160k. At 6% interest, the mortgage ALONE would be would be $960/month (57% of my take home pay). Then add taxes and insurance...

Pros:
No opportunity cost with investing
Cons:
Even bigger mortgage payment

Option C: Rent
I don't see how this would make sense unless I can find a similar place where the rent is drastically cheaper than the houses PITI.

Option D:
Find a cheaper house (if that's possible in my area). Honestly I think $200k is the lowest it can go for liveable 3 bedrooms.

Option E:
Or do I have to sacrifice my 43% savings rate to continue living here? Last resort!

3) - Bonus Question
Side Note: According to The Millionaire Next Door, I keep my mortgage loan below 2x my annual realized income ($35k*2 = $70k) - but that would mean I can only afford a $160,000 house(not even that, because I have to factor in taxes and insurance too) if I put down my $90k savings. But I don't think I can find that here in MA anyway.

Just curious what bogleheads think of this "2x rule" - is this also bogleheads consensus?
Last edited by amd7239 on Thu Oct 05, 2017 1:40 pm, edited 1 time in total.

raamakoti
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by raamakoti » Thu Oct 05, 2017 12:58 pm

We put 20% down and took loan for 2.76 of our take home pay.
We have zero student loan and any other forms of debt. But it was in suburbs of Cleveland,OH.
Play with affordability calculators online to see how much the software says you can afford and pick 50 to 60% of that number and it will be a conservative start.
The key would be to keep emotions at bay, we have a big empty house with old furniture and we are not in a rush to fill it up with new one. Just wait and follow the budget and stay at zero debt and add things slowly.

Jack FFR1846
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by Jack FFR1846 » Thu Oct 05, 2017 1:48 pm

Are you talking Haverhill or up the coast to someplace like Salisbury? Look up house prices on Zillow. You can very quickly get a sense of what's possible and what's not. There are towns up there where $160k would be tough to even find a building lot.
Bogle: Smart Beta is stupid

fittan
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by fittan » Thu Oct 05, 2017 3:35 pm

why are you saving so much into 401k? Isn't the limit $18K/year?

amd7239
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by amd7239 » Thu Oct 05, 2017 3:38 pm

fittan wrote:
Thu Oct 05, 2017 3:35 pm
why are you saving so much into 401k? Isn't the limit $18K/year?
My employer has a 54k max (employee contribution + employer contribution must not exceed 54k)

but yeah the deductible limit is 18k. However I want to pay myself first as much as possible, and a 401k as a good way to hide money from myself. Especially early in my life, if I am able to get used to a low cost of living, it will pay off.

amd7239
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by amd7239 » Thu Oct 05, 2017 3:41 pm

Jack FFR1846 wrote:
Thu Oct 05, 2017 1:48 pm
Are you talking Haverhill or up the coast to someplace like Salisbury? Look up house prices on Zillow. You can very quickly get a sense of what's possible and what's not. There are towns up there where $160k would be tough to even find a building lot.
More like Harverhill (I'd take it, but preferably further south). I work near Boston (Woburn). The general radius I'm looking at is Lowell / Andover / Wilmington / Reading / Woburn / Burlington / Peabody and then southern NH.

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grabiner
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by grabiner » Thu Oct 05, 2017 9:08 pm

Why is your mortgage rate 6%? Do you have poor credit?

If you would have to take a 6% mortgage, then putting extra money down gives you a risk-free 6% return, which is a good deal, so putting a lot down is a good idea.

If you can get a 3% mortgage, a more typical rate for 15 years, that is a risk-free 2.25% after tax and there is no reason to put more down than you need. I would still advise against making non-deductible 401(k) contributions, as these have little benefit; if you have extra money to invest after maxing out your 401(k) and Roth IRA, you'll likely do about as well in a taxable stock index fund.
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by BeneIRA » Thu Oct 05, 2017 10:05 pm

amd7239 wrote:
Thu Oct 05, 2017 12:51 pm
Gross income: $75k/year
401k contribution: $30k/year [43% savings rate]
Annual Realized income = $75k - $30k = $35k
Location: Northern MA (suburbs). Will also be looking at Southern NH.
Savings for house: $90k
(Total savings of $100k, but I would like to invest at least $10k into an index fund)
Take home pay: $1700/month
Age: 27
Job stability: high
Time Horizon: Looking to buy in 3 years.


1)
I am hoping to buy a $200k 3 bedroom home in 3 years (whether I can actually find that price is another question) - do bogleheads think this price point is feasible in northern MA/southern NH?



2) Options I'm considering:

Option A:
If I put 45% down ($90k): At 6% interest (a conservative estimate), the mortgage ALONE would be $660/month (about 40% of my take home pay). Then add taxes and insurance...

Pros:
Lower down payment
Lower mortgage payment (but still high)
Cons:
Opportunity cost: If I had chosen to put 20% down instead, I could have invested $50k extra.

Option B:
If I put the traditional 20% down ($40k), my mortgage will be $160k. At 6% interest, the mortgage ALONE would be would be $960/month (57% of my take home pay). Then add taxes and insurance...

Pros:
No opportunity cost with investing
Cons:
Even bigger mortgage payment

Option C: Rent
I don't see how this would make sense unless I can find a similar place where the rent is drastically cheaper than the houses PITI.

Option D:
Find a cheaper house (if that's possible in my area). Honestly I think $200k is the lowest it can go for liveable 3 bedrooms.

Option E:
Or do I have to sacrifice my 43% savings rate to continue living here? Last resort!

3) - Bonus Question
Side Note: According to The Millionaire Next Door, I keep my mortgage loan below 2x my annual realized income ($35k*2 = $70k) - but that would mean I can only afford a $160,000 house(not even that, because I have to factor in taxes and insurance too) if I put down my $90k savings. But I don't think I can find that here in MA anyway.

Just curious what bogleheads think of this "2x rule" - is this also bogleheads consensus?
Unless you have some access to houses that I don't, I don't know where you are seeing $200,000 houses in that part of MA. In Western Mass? Sure. In Reading and Burlington? That's less likely. I did a Zillow search for the heck of it and at that price point it was all foreclosures and auctions, which is about what I expected. Now, the housing market could shift. 10 years ago, people were not paying these insane prices for real estate, but who knows if/when those days will return. You are going to need to save more than that for a house in this area, unfortunately, unless you truly do know something that I don't.

Are you expecting raises? Promotions? Etc? If so, since it is your first house, you may want to go a bit higher on that projected range to buy a house you will want to stay in. At 27, I would rather pay 40% of my income toward a house I would stay in long-term as opposed to 30% of my income to keep costs down just to have to move in four years when you want to start a family and realize the house no longer supports your needs. A fixer upper would be a good route to take if you are up for it.

The amount down depends on your comfort level. I wouldn't go lower than 20%, but I think if you have good credit, you don't necessarily need to do 40% until you know what the house will bring. If you put a ton down, will you be house rich but money poor? I also agree with the other comment that you should go for a taxable account aside from the non-deductible 401k. If the money is for a house, though, the investments should be extremely conservative. Best of luck.

learning_head
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by learning_head » Thu Oct 05, 2017 10:22 pm

grabiner wrote:
Thu Oct 05, 2017 9:08 pm
I would still advise against making non-deductible 401(k) contributions, as these have little benefit
Megabackdoor roth? Tax-free growth?

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grabiner
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by grabiner » Thu Oct 05, 2017 11:05 pm

learning_head wrote:
Thu Oct 05, 2017 10:22 pm
grabiner wrote:
Thu Oct 05, 2017 9:08 pm
I would still advise against making non-deductible 401(k) contributions, as these have little benefit
Megabackdoor roth? Tax-free growth?
He didn't mention a mega backdoor Roth, so I assume it isn't possible for him (it only applies if your employer lets you roll the 401(k) to an IRA while you are still employed, or if you plan to leave the employer soon). And the benefit of tax-deferred growth in a non-deductible 401(k) is often canceled out by the lower tax rate on the mostly tax-deferred growth on stocks outside the 401(k).
Wiki David Grabiner

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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by saj » Fri Oct 06, 2017 6:31 am

Do you need a house? You don't mention whether you're married and/or have kids, so I'll assume you're single. Having a house can bring all kinds of other unexpected costs, particularly in that price range.

As far as areas, I don't think you'll find a house in any of those areas for $200k. In many, you could be looking at twice your budget (or more). You'll likely have to go out a ways from your search to find something in your budget. I know I-93 and the surrounding areas the best. You'd be looking at Manchester, NH and north to find a solid 3/1 house that was built in the last 50 years. Haverhill is a little bit off of I-93 and you'd still be hard pressed to find anything that isn't old, or in a bad neighborhood, at that price.

Renting is often the way to go unless you need the bedrooms. For instance, we bought a 4-bedroom house, but had we continued to rent, we would have rented a 2-bedroom apartment. We bought more than we needed thinking that we'll have kids in the future, but we'll have overpaid for housing for ~5 years before we actually need all of those bedrooms.

If it were me, and the house is necessary, then I'd compromise on the 401k contributions. Cut down the contributions to the max deductible. With any luck there is salary growth in your career and you can increase your contributions again with time. You're essentially locking in your housing costs to some degree. Insurance and taxes will continue to increase, but your principal/interest will be locked in. So, at some point in the future, you'll be presumably paying considerably less per month than someone who just purchased a home (could be 5, 10, 20 years, who knows).

I would suggest Salem, NH as a relatively nice place to live. The prices are substantially lower (half) than many of the areas you've listed. The commute isn't all that bad unless you're going to Boston. There are also buses that go down to Boston if you absolutely must, or there are commuter T stations that are fairly close (Lawrence, Haverhill, Andover). Winter is generally a good time to find a deal. You might find something in that price range in Salem if it needs a bit of work and it isn't the busy season.

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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by jadd806 » Fri Oct 06, 2017 7:08 am

amd7239 wrote:
Thu Oct 05, 2017 3:41 pm
More like Harverhill (I'd take it, but preferably further south). I work near Boston (Woburn). The general radius I'm looking at is Lowell / Andover / Wilmington / Reading / Woburn / Burlington / Peabody and then southern NH.
$200k for a house in this area is not realistic, as the other commenters have pointed out. Realistically, you're looking at ~$350k for a decent 3 bedroom house in most of the area that you've selected. That's just the listing price - it wouldn't be uncommon to see such a house sell for $380k within hours of being listed in many of these towns (especially along the 495 corridor). I live in this area and have relatives who are real estate agents here. The real estate market is completely irrational here and home prices have totally detached from median incomes.

For what it's worth, my SO and I are around your age with a combined household income of over $150k. We do not "feel" like we can afford a house here in the current market. I think the 2x rule is prudent. That gives us a $300k budget, which gets us little more than a foreclosed dump.
amd7239 wrote:
Thu Oct 05, 2017 12:51 pm
Option C: Rent
I don't see how this would make sense unless I can find a similar place where the rent is drastically cheaper than the houses PITI.
It makes plenty of sense. Your comparison (like ours) is between renting a 1 bedroom apartment versus buying a 3 bedroom house. You're probably willing to rent a less-nice place than you'd buy. When we actually started looking into buying, we realized that we wouldn't want to "settle" on a house like we would for an apartment where we are a temporary resident. You'll find that this causes your budget to creep higher and higher. Right now we can't justify paying $400k for a house when we can continue renting our cozy little 1 bedroom apartment for $1500/month. We are making huge progress in building net worth (primarily through savings and investments) so we don't feel like we are "wasting money" on rent like many of our peers who live paycheck to paycheck and only have the hope of building net worth through home equity.

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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by FIBoston » Fri Oct 06, 2017 9:18 am

Good friends of mine just bought a home North of Boston in November '16. 3 bedrooms, 1.5 baths, 1400 sq ft. They paid $430k and were only able to get to that price because a.) the seller was in a hurry and b.) the inspection brought up a few issues. Seller was looking for $450k and their original offer was $440k.

Moral of the story, $200k wouldn't even get you a 1 bedroom in most areas North of Boston/Southern NH, and those places you could get for $200k would probably need $100k - $200k of work just to be livable, not to mention bad schools and poor public amenities.

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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by Jack FFR1846 » Fri Oct 06, 2017 9:39 am

Lowell / Andover / Wilmington / Reading / Woburn / Burlington / Peabody and then southern NH
Use the zillow map finder. Check houses, uncheck all the condo, foreclosure, about to be foreclosed, rental. Use the price limit of $200k and then zoom out. Use the hand to move the map to get your area. There are houses at the $200k mark but you'll want to take a look at the pictures and sizes to determine if they're the type....and in the neighborhoods that you'd be interested in. If you're considering southern NH, include Haverhill and Methuen and maybe Dracut. These are less desirable towns than Andover or Salem, NH, Wilmington and such because they are close enough to the border that many people cross over to NH to avoid sales and income tax. This works great if you work in NH but not if you work in MA. I used to work in NH and was always amused by some of my coworkers talking about Taxachusetts. I'd ask them how big their house was and what their property taxes were. Most were much higher than mine (I'm in Mass).

If you're working in Woburn, that's probably a good town to be looking as surrounding towns tend to be more expensive. Commutes from Salem, NH to Woburn down 93 in the morning is no picnic and going home, the jams start around 3:30.
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fittan
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by fittan » Fri Oct 06, 2017 11:41 am

I think the consensus so far is 1) lower your 401K to just the $18K limit and 2) $200K is not a realistic budget to buy a house in greater boston.

here's what I suggest:
1) lower your 401K to $18k max.
2) contribute to a traditional IRA using the extra.
3) keep saving up cash
4) build up your credit score so that when you buy in 3 years your score would be in upper tiered (i.e. 800+).
5) Wait and hope MA market softten or move to a LCOL area in a few years.

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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by Da5id » Fri Oct 06, 2017 12:02 pm

I live in an expensive town in metrowest Boston. 3 bedroom here is generally 700K and up, with not lots of land to boot. But even in cheaper towns between here and NH, as said in thread, 200K likely won't cut it.

Given that your horizon is 3 years, why push it? Rent with a short commute to work. Commuting from far away to Woburn could be miserable, roads are not good during rush hour. Buying should generally have a long time horizon. If you are single, do you have any plan (however loose) to marry and have kids? If so, a town with OK schools is also a priority, and you may end up moving anyway.

As to your other question, folks can crunch the numbers for various scenarios. We had a ~50% down payment, which was based on our desire to have less than 25% of income be mortgage. Mortgage is now paid off entirely, so moot at this point :)

Chuck
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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by Chuck » Fri Oct 06, 2017 12:16 pm

grabiner wrote:
Thu Oct 05, 2017 9:08 pm
Why is your mortgage rate 6%? Do you have poor credit?
Seconded. This question is important. Rates should be around 4%. I did a PenFed 5/5 when it was 2.15%. It is now 3%.

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Re: 45% Down Payment vs. High Mortgage (Massachuestts)

Post by FIBoston » Fri Oct 06, 2017 12:49 pm

Additionally, $90k saved isn't really enough to be buying a house for a higher down payment

If you invest that other $10k you leave yourself with no emergency fund, no home up keep fund, and no money to use to furnish the house. Assuming $800 in required expenses (gas, car insurance, utilities, groceries), and $1000 per month in Mortgage+Insurance+Taxes, you would need anywhere between $5400 and $10,800 on top of your $90k down payment, 1% of the house value for upkeep ($3000) and then anywhere from a few hundred to a few thousand depending on your taste for furnishings.

So, assuming a $90k down payment, plus at most 5% for closing costs - $10k - ef, upkeep, and furnishing, you would need at least $125,000 ($135,000 if you still want to invest that $10k).

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