First-time homebuying

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Topic Author
B4Xt3r
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First-time homebuying

Post by B4Xt3r »

Hi All,

The newyork times rent vs buy calculator strongly suggests buying in my locality -- break even point is 2-3 years with current rent, so my wife and I are considering buying a home with value roughly 3x income. Is this budget "roughly" accurate (I'm unsure, this is my first time)?
  • 2.5ish% for all closing costs
  • 10ish% for down payment
My issue is that directly after purchasing the home, we likely would have little emergency funds leftover outside of the Roth 401ks. There are a few mitigating factors to consider: my wife and I both currently work full time (the above 3x was on one of those salaries, so either of us could likely support the house on our own), at the time of purchase we won't have any other debt, and if needed we could use the Roth 401(k) contributions as a regular "emergency fund."

My thinking is that it feels just a hair early, but perhaps OK since we have two sources of income during the period where we will be getting out of PMI and rebuilding a proper emergency fund.

What say the bogleheads?

-B4xt3r
Last edited by B4Xt3r on Tue Jan 08, 2019 7:35 am, edited 1 time in total.
Jags4186
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Re: First-time homebuying

Post by Jags4186 »

It seems to me that if the house is 3x either of your incomes that means the house is 1.5x your total income. To me it makes no sense why you wouldn’t be able to come up with 20% to avoid PMI. You should be able to save that in a few months. You should have more money than you need when you buy a house, not less.

I don’t know what type of house you’re looking to buy, but unless you’re buying a new build house it likely will need some sort of deferred maintenance done. You’ll also need to furnish it. And depending on what you are coming from you will be shocked how much stuff you don’t have. It’ll cost $1000 just to get a full set of outdoor stuff—lawnmower, leaf blower, weed whacked, snow shovels, shears, hoses, etc. etc. etc.
Last edited by Jags4186 on Tue Jan 08, 2019 7:10 am, edited 1 time in total.
Leemiller
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Re: First-time homebuying

Post by Leemiller »

Why not drop the 401ks to any matching amount and save the extra towards your emergency fund? You can then move it to a Roth later, up to April of next year. The problem with your emergency fund being your 401k is that it would require you to be able to continue to work and in an emergency that would not be the case. I would suggest a HELOC but at 10% down, I don’t think you can get one. The big question is how long will it take to replenish your emergency fund?

Also, depending on where you live, you may wish to wait to see the impact of the tax law changes. NYC is already softening, and I’m guessing other markets will too.
Topic Author
B4Xt3r
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Re: First-time homebuying

Post by B4Xt3r »

Jags4186 wrote: Tue Jan 08, 2019 7:07 am It seems to me that if the house is 3x either of your incomes that means the house is 1.5x your total income. To me it makes no sense why you wouldn’t be able to come up with 20% to avoid PMI. You should be able to save that in a few months. You should have more money than you need when you buy a house, not less...
The cost of saving up 20% downpayment is renting another year (we both started our jobs about half a year ago). I'm just not sure if its worth it. The newyork times calculator says that even if I only stay in house for 2 years, that it will basically be even.
Last edited by B4Xt3r on Tue Jan 08, 2019 7:34 am, edited 1 time in total.
Topic Author
B4Xt3r
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Re: First-time homebuying

Post by B4Xt3r »

Leemiller wrote: Tue Jan 08, 2019 7:07 am The problem with your emergency fund being your 401k is that it would require you to be able to continue to work and in an emergency that would not be the case.
This isn't true for Roth 401(k) contributions, right? The roth 401(k) could be rolled over to a Roth IRA, and then the contributions to the Roth 401(k) are available to withdraw without penalty.
Leemiller wrote: Tue Jan 08, 2019 7:07 am Also, depending on where you live, you may wish to wait to see the impact of the tax law changes. NYC is already softening, and I’m guessing other markets will too.
I don't live in a HCOL area, so my guess is the impact of the tax law changes will be relatively minimal.
Topic Author
B4Xt3r
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Re: First-time homebuying

Post by B4Xt3r »

duplicate
Jags4186
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Re: First-time homebuying

Post by Jags4186 »

B4Xt3r wrote: Tue Jan 08, 2019 7:29 am
Jags4186 wrote: Tue Jan 08, 2019 7:07 am It seems to me that if the house is 3x either of your incomes that means the house is 1.5x your total income. To me it makes no sense why you wouldn’t be able to come up with 20% to avoid PMI. You should be able to save that in a few months. You should have more money than you need when you buy a house, not less...
The cost of saving up 20% downpayment is renting another year (we both started our jobs about half a year ago).
You have to spend money to live whether its renting or owning. It’s not sunk money. The NY Times calculator doesn’t take into account the fact that you don’t generally rent what you would buy. If it is just the two of you you’re likely living in a 1 or 2 bedroom apartment. You’ll likely buy a house that is larger with more bedrooms/bathrooms/square feet. So you’re saving money by renting an additional year.

Compare actual costs, not theoretical.
Topic Author
B4Xt3r
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Re: First-time homebuying

Post by B4Xt3r »

Jags4186 wrote: Tue Jan 08, 2019 7:37 am You have to spend money to live whether its renting or owning. It’s not sunk money. The NY Times calculator doesn’t take into account the fact that you don’t generally rent what you would buy. If it is just the two of you you’re likely living in a 1 or 2 bedroom apartment. You’ll likely buy a house that is larger with more bedrooms/bathrooms/square feet. So you’re saving money by renting an additional year.

Compare actual costs, not theoretical.
This is an important consideration, and I’m open to buying a house more similar to where we rent. However, this would actually push the consideration *more* towards buying sooner than later.
Topic Author
B4Xt3r
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Re: First-time homebuying

Post by B4Xt3r »

I guess what I'm a little nervous about is that we can only really put down 10%, and then have to count our 401(k) as our "emergency fund" for the 1-2 years while we recover. Is that an acceptable risk for the reward of not renting given that for those 1-2 years, we should have two income sources?
Golf maniac
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Re: First-time homebuying

Post by Golf maniac »

You have been in your jobs 6 months and don’t have 20% down. You will deplete emergency funds to get 10% down. I would suggest slowing down. Get 20% down, build emergency fund, and take your time. Make sure you have a budget that is funded not only for closing costs but everything you will want to buy. It will shock you if you put this in writing. There are a ton of expenses with a home (new or resale). Things such as furniture, rugs, window treatments, lawn maintenance, painting, general upkeep, taxes, etc.

If you believe this home will be a great investment you will probably be disappointed. A home is a lifestyle, nothing wrong with that, but if you add up all the costs the return on investment isn’t usually great. Over 30 years of home ownership for me and due to work related moves and hitting the real estate markets at the wrong time due to work moves I have made very little. Where I have made all my money is consistently maxing out my 401k. That allowed me to retire early, not buying houses.
Jags4186
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Re: First-time homebuying

Post by Jags4186 »

B4Xt3r wrote: Tue Jan 08, 2019 7:44 pm I guess what I'm a little nervous about is that we can only really put down 10%, and then have to count our 401(k) as our "emergency fund" for the 1-2 years while we recover. Is that an acceptable risk for the reward of not renting given that for those 1-2 years, we should have two income sources?
The fact you are concerned with these numbers tells me you are not ready. Definitely hit the brakes. Rent for a year or two. When my wife and I got married we continued to live in our 600 sqft 1 br/1ba apartment for another 2 years before buying. First year of marriage should be fun and (hopefully) stress free. Enjoy it!
ddurrett896
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Re: First-time homebuying

Post by ddurrett896 »

B4Xt3r wrote: Tue Jan 08, 2019 6:58 am My thinking is that it feels just a hair early, but perhaps OK since we have two sources of income during the period where we will be getting out of PMI and rebuilding a proper emergency fund.
Have you checked a credit union for a mortgage? When I purchased my fist home 6 years ago I used NFCU and all they required was 5% to avoid PMI.
Jefferson
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Re: First-time homebuying

Post by Jefferson »

B4Xt3r wrote: Tue Jan 08, 2019 7:44 pm I guess what I'm a little nervous about is that we can only really put down 10%, and then have to count our 401(k) as our "emergency fund" for the 1-2 years while we recover. Is that an acceptable risk for the reward of not renting given that for those 1-2 years, we should have two income sources?

I think that’s too risky. You don’t want your 401k to be your emergency fund.

But the big reason I would save and put 20% down is that you might be forced to sell your home and housing prices go up and down. The last thing you want to do is write a check to sell your house.
JuniorBH
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Re: First-time homebuying

Post by JuniorBH »

Agree with the other folks who have pointed to the downpayment as a pain point. It's great that your mortgage payment will be a relatively small portion of income, but that doesn't help you if the HVAC fails in the first month or two.

Without running the math, I would imagine renting can't "cost you" more than $1-2K for a year compared to buying, and I would view that as cheap insurance to compile a larger downpayment/emergency fund.
jharkin
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Re: First-time homebuying

Post by jharkin »

B4Xt3r wrote: Tue Jan 08, 2019 7:29 am
Jags4186 wrote: Tue Jan 08, 2019 7:07 am It seems to me that if the house is 3x either of your incomes that means the house is 1.5x your total income. To me it makes no sense why you wouldn’t be able to come up with 20% to avoid PMI. You should be able to save that in a few months. You should have more money than you need when you buy a house, not less...
The cost of saving up 20% downpayment is renting another year (we both started our jobs about half a year ago). I'm just not sure if its worth it. The newyork times calculator says that even if I only stay in house for 2 years, that it will basically be even.


Wait the year. With 10% down you are going to be paying PMI or higher interest]on an 80/10/10 and as jags mentioned all kinds of expenses will come up early on. In addition to all the yard tools (and $1k is low/ optimistic if you need a riding mower or a snowblower as well) you will also need appliances and probably want to buy a lot of furniture. You might want to paint or find things that need fixing.

When we bought our first home 10 years ago we spent well into the 5 figures the first two years on appliances, furniture, window treatments, painting and light renovating alone... for a tiny 1400sq ft house.

And we haven't even discussed what happens if you have a stroke of bad luck and the furnace dies or your roof springs a leak the first winter. You could face a sudden 5 figure repair bill.
barnaclebob
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Re: First-time homebuying

Post by barnaclebob »

B4Xt3r wrote: Tue Jan 08, 2019 7:44 pm I guess what I'm a little nervous about is that we can only really put down 10%, and then have to count our 401(k) as our "emergency fund" for the 1-2 years while we recover. Is that an acceptable risk for the reward of not renting given that for those 1-2 years, we should have two income sources?
How long would it take you to save about 20k for an emergency fund? How secure are your jobs? How much would you be saving each month if you buy a house?
jharkin
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Re: First-time homebuying

Post by jharkin »

B4Xt3r wrote: Tue Jan 08, 2019 7:32 am This isn't true for Roth 401(k) contributions, right? The roth 401(k) could be rolled over to a Roth IRA, and then the contributions to the Roth 401(k) are available to withdraw without penalty.
Its not so simple.

#1 - Depending on your employers rules, this may only be an option if the "emergency" is loosing your job, so you are even allowed to rollover. If the emergency is medical, or a tree falling on your roof... those funds are untouchable.

#2 Even in the prior case, you have to rollover, and then the 5 year seasoning rules apply to taking the money without without early withdrawal penalties. I admit I am not an expert on this, but everything I've read seems to indicate its not trivial and involves a fair amount of detailed record keeping and tax paperwork.

*IF* you want to use Roth funds as an emergency fund, the BH approved way is to use a personal Roth IRA:
https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
B4Xt3r wrote: Tue Jan 08, 2019 7:32 am I don't live in a HCOL area, so my guess is the impact of the tax law changes will be relatively minimal.
The new tax law means that you probably already are benefiting from the larger standard deduction so buying the house wont likely help your cashflow from itemizing.
260chrisb
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Re: First-time homebuying

Post by 260chrisb »

I've never used a "rent versus buy" calculator to buy a home (only bought one!) so I'm not sure how this suddenly influences the decision but having less than 20% down throws up a red flag (and gives the mortgage company more money) as does your lack of a fully funded emergency fund thereafter. Using ANY 401K or Roth as an emergency fund throws up another one. Tap the brakes; leave your Roth and 401K alone, save up 20% for a down payment, keep your emergency fund fully funded at 6-9 months, and have additional savings for everything else that will go along with buying a house. I rented for a LOT of years before buying, you'll be fine. Never heard anyone ever say they saved too much money to buy a home. Owning a home is great but being prepared financially makes it even better.
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