Can or should we afford this house

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cherijoh
Posts: 6357
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Can or should we afford this house

Post by cherijoh » Tue Mar 12, 2019 3:42 pm

gophermobile wrote:
Tue Mar 12, 2019 9:26 am
So given that I can't help but wonder if the difference between a nice ($1-1.1 mil) and this one is really that big a difference. It's hard to find property in SoCal that has much of a yard and this place has a good sized one, that means a lot for me. My wife loves the house style - it was built in 1929. I would think financially speaking the age is a bad thing as it means more stuff needs fixing / updating (electrical, plumbing etc). It seems to be in good condition though - would still need to get an inspection.
It sounds like you have fallen into the same mental accounting trap that causes new car buyers to add a bunch of upgrades without giving it a tenth of the thought that they would to a stand-alone purchase equal to that same cost. YES an extra $250 - $350K IS a whole lot of money! Compound that by the fact that it is borrowed money for which you will be charged interest!

Borrowing an extra $250K for 30 years (at the mortgage interest rate you specified) adds $1272.22/month to your mortgage (ignoring the impact of the larger amount on taxes and insurance) and results in the payment of $207,997.52 in interest over the course of the loan. If the extra amount borrowed is increased to $350K, those numbers jump to $1,781.10/month more on the mortgage and $291,196.53 in total interest. At least to my mind that is a lot of money!

UALflyer
Posts: 489
Joined: Thu Jan 17, 2013 10:42 am

Re: Can or should we afford this house

Post by UALflyer » Tue Mar 12, 2019 3:52 pm

majiaknight wrote:
Tue Mar 12, 2019 3:21 pm
However, as someone also pointed out that you might consider to get at least 20% down payment
This may not actually be a significant factor. The OP would be looking at a jumbo mortgage, which won't have mortgage insurance. The OP would still need to double check to see if the lower LTV would affect his rate, but depending on the lender and his wife's occupation, the interest rate may remain the same.
and a 5/1 or 7/1 ARM to qualify for the best mortgage rate (>4.5% @30Y Fixed Jumbo is quite high and you should get more quotes as I've heard 3.25% @5/1 ARM for Jumbo loan very recently), and you could always refinance to a new ARM or 15Y Fixed before the rate jump after 5/7 years.
Please don't do this. You can't "always refinance": it costs money to do so, the interest rates may not be attractive and, depending on what's going on with the market and your individual situation, you may not qualify (for instance, the house may not appraise, which killed a ton of refinances during the crisis). This is exactly how people ended up in deep trouble during the financial crisis.

On the other hand, something like a 5/5 ARM that I mentioned above is significantly safer and does not expose you to any of the above downsides, while still offering very similar interest rates.
Last edited by UALflyer on Tue Mar 12, 2019 4:02 pm, edited 1 time in total.

FoolMeOnce
Posts: 709
Joined: Mon Apr 24, 2017 11:16 am

Re: Can or should we afford this house

Post by FoolMeOnce » Tue Mar 12, 2019 3:56 pm

Sam1 wrote:
Tue Mar 12, 2019 12:08 pm
I’ll also add that you don’t need much space for babies. It’s normal to think you need more space when you’re about to have a baby but you really don’t. Most parents are told the baby should sleep in your room until 6 months of age. Kids start walking around one or so and then the toys come at that point. My point is that even if your wife got pregnant today, you would have close to 2 years before you even really need more space. I’d definitely stay put these next 2 years.
+1

We tried to buy a house when my wife was pregnant with our first. It didn't work out, and we ended up very glad to have stayed in our 2br condo during that first year. No traipsing up and down stairs for the items you inevitable forget, laundry right near to the nursery, everything close and easy. Another benefit was that visitors could not stay with us! We ended up buying the following year and moving when the kid was a little older than one (and now very much appreciate having room for grandparents to stay).

majiaknight
Posts: 114
Joined: Tue Jan 26, 2016 2:55 pm

Re: Can or should we afford this house

Post by majiaknight » Tue Mar 12, 2019 5:06 pm

UALflyer wrote:
Tue Mar 12, 2019 3:52 pm
majiaknight wrote:
Tue Mar 12, 2019 3:21 pm
However, as someone also pointed out that you might consider to get at least 20% down payment
This may not actually be a significant factor. The OP would be looking at a jumbo mortgage, which won't have mortgage insurance. The OP would still need to double check to see if the lower LTV would affect his rate, but depending on the lender and his wife's occupation, the interest rate may remain the same.
and a 5/1 or 7/1 ARM to qualify for the best mortgage rate (>4.5% @30Y Fixed Jumbo is quite high and you should get more quotes as I've heard 3.25% @5/1 ARM for Jumbo loan very recently), and you could always refinance to a new ARM or 15Y Fixed before the rate jump after 5/7 years.
Please don't do this. You can't "always refinance": it costs money to do so, the interest rates may not be attractive and, depending on what's going on with the market and your individual situation, you may not qualify (for instance, the house may not appraise, which killed a ton of refinances during the crisis). This is exactly how people ended up in deep trouble during the financial crisis.

On the other hand, something like a 5/5 ARM that I mentioned above is significantly safer and does not expose you to any of the above downsides, while still offering very similar interest rates.
OP said he may still have >$5K/m left after PMI, living expenses and max retirement accounts, and OP (36) and his wife (at 30) are far from their peak earning age. As my family (w/ 1 pre-schooler) has similar income level at late-30s living in CA, I think the risk of 5/1 or 7/1 ARM is relatively small. The OP could even choose 15 Fixed w/ better rate at the expense of liquidity. I did a so called "no cost no point" refinance two years ago from a 4% @30Y fixed to current 3% @ 5/1 ARM. At this income level w/ a not large mortgage it's very common to accelerate the principal payment to payoff in less than 10 years given little tax benefits at current mortgage interests rate. Or, almost half of my friends chose to upgrade or relocate less than 5 years after purchasing their 1st houses. I just want to share my personal experiences for OP's reference, and also want to point out it's always good to plan for the worst but sometimes you have to take some "calculated risk" as there is also an opportunity cost to wait and no one in the reply has mentioned that the CA house price appreciated 50%-100% probably in average in the last 5 years.

PS: I'd suggest OP use the following mortgage calculator to compare rates and extra principal payment options:
http://www.mtgprofessor.com/calculators ... tor2a.html
Last edited by majiaknight on Tue Mar 12, 2019 5:25 pm, edited 2 times in total.

HEDGEFUNDIE
Posts: 3640
Joined: Sun Oct 22, 2017 2:06 pm

Re: Can or should we afford this house

Post by HEDGEFUNDIE » Tue Mar 12, 2019 5:18 pm

UALflyer wrote:
Tue Mar 12, 2019 3:52 pm
On the other hand, something like a 5/5 ARM that I mentioned above is significantly safer and does not expose you to any of the above downsides, while still offering very similar interest rates.
My local credit union offers 5/1 ARM at 3.75%, and 5/5 ARM at 3.875%, which makes the 5/5 seem like a no brainer.

UALflyer
Posts: 489
Joined: Thu Jan 17, 2013 10:42 am

Re: Can or should we afford this house

Post by UALflyer » Tue Mar 12, 2019 7:03 pm

majiaknight wrote:
Tue Mar 12, 2019 5:06 pm
OP said he may still have >$5K/m left after PMI, living expenses and max retirement accounts, and OP (36) and his wife (at 30) are far from their peak earning age. As my family (w/ 1 pre-schooler) has similar income level at late-30s living in CA, I think the risk of 5/1 or 7/1 ARM is relatively small.
Interest rates are completely unpredictable, so you have absolutely no idea whether the risk is small or not.

Income level is just one of several factors that determines whether you qualify for a certain mortgage product. If your house doesn't appraise, which was happening a ton during the recession, and you need to be at a certain loan to value ratio, you wouldn't be able to refinance without paying down the mortgage balance. Likewise, although the mortgage rates are some 1.25% higher than their lows a year or so ago, by historical standards they're still quite low. If, by the time you decide to refinance, the mortgage rates are around 5.5%, which is exactly where they were a few years ago, what's the plan then?

In general, the difference between a 5/1 and 5/5 ARM is about .25%. At that interest rate differential, unless you're absolutely certain that you'll be paying off the mortgage or selling the house before the mortgage rate resets, you're taking a completely unjustified and uncompensated financial risk with a 5/1 ARM.
The OP could even choose 15 Fixed w/ better rate at the expense of liquidity.
That's not a viable option for the OP, as it would bump up the payment by about $3K/month and would virtually eliminate any monthly liquidity cushion that they would have, while exposing them to substantially greater risks associated with significantly higher monthly overhead payments.
I did a so called "no cost no point" refinance two years ago from a 4% @30Y fixed to current 3% @ 5/1 ARM.
With a "no cost" refi, you are still paying the same closing costs in the form of a higher mortgage rate. So, the exact same issues that I've mentioned above still apply.
At this income level w/ a not large mortgage it's very common to accelerate the principal payment to payoff in less than 10 years given little tax benefits at current mortgage interests rate.
The OP is looking at an approximately $1MM mortgage. They don't make nearly enough money to pay it off in 10 years. Besides, with a 5/1, the exact same downsides that I've already explained would still apply, and you could be paying tens of thousands of dollars in additional and unnecessary interest.

majiaknight
Posts: 114
Joined: Tue Jan 26, 2016 2:55 pm

Re: Can or should we afford this house

Post by majiaknight » Tue Mar 12, 2019 7:29 pm

UALflyer wrote:
Tue Mar 12, 2019 7:03 pm
Interest rates are completely unpredictable, so you have absolutely no idea whether the risk is small or not.
If you really believe what you are saying about the unpredictable mortgage rate, you should NOT believe 5/5 ARM is always better than 5/1 ARM and IMO it's not worth to pay the extra .25% now.

HEDGEFUNDIE
Posts: 3640
Joined: Sun Oct 22, 2017 2:06 pm

Re: Can or should we afford this house

Post by HEDGEFUNDIE » Tue Mar 12, 2019 7:31 pm

majiaknight wrote:
Tue Mar 12, 2019 7:29 pm
UALflyer wrote:
Tue Mar 12, 2019 7:03 pm
Interest rates are completely unpredictable, so you have absolutely no idea whether the risk is small or not.
If you really believe what you are saying about the unpredictable mortgage rate, you should NOT believe 5/5 ARM is always better than 5/1 ARM and IMO it's not worth to pay the extra .25% now.
True!

I take back what I posted earlier, man what an emotional roller coaster...

Oakwood42
Posts: 193
Joined: Thu Dec 08, 2016 10:48 pm
Location: Philadelphia

Re: Can or should we afford this house

Post by Oakwood42 » Tue Mar 12, 2019 7:48 pm

Cycle wrote:
Tue Mar 12, 2019 7:40 am
Never buy for future needs.

Wait until you have 20% down.

Understand housing is an expense and in the long run doesn't appreciate more than inflation, including where you are.

We just started a family, have a newborn. We downsized a few years ago to a 2br/1ba unit, rent out the other duplex unit, have no debt, and so our housing expenses are a profit.

Try out the minimalist thing and biking to work before plunging in an buying something, you may find your actual needs are different from today's perceived needs.

For us a top need is being able to walk to the daycare and park.

I'm also kind of into the fire thing and save $165k on $290k of income per year.
"I'm also kind of into the fire thing and save $165k on $290k of income per year."

Awesome!

UALflyer
Posts: 489
Joined: Thu Jan 17, 2013 10:42 am

Re: Can or should we afford this house

Post by UALflyer » Tue Mar 12, 2019 7:57 pm

majiaknight wrote:
Tue Mar 12, 2019 7:29 pm
UALflyer wrote:
Tue Mar 12, 2019 7:03 pm
Interest rates are completely unpredictable, so you have absolutely no idea whether the risk is small or not.
If you really believe what you are saying about the unpredictable mortgage rate, you should NOT believe 5/5 ARM is always better than 5/1 ARM and IMO it's not worth to pay the extra .25% now.
As I mentioned above, something like a 5/5 ARM is significantly safer and does not expose you to any of the above downsides, while still offering very similar interest rates to those found with a 5/1. Sure, there's a possibility that the mortgage rates could actually drop, thereby making the 5/1 ARM slightly cheaper, but my point is that a 5/5 buys you a whole lotta downside protection (vis a vis a 5/1) without causing you to pay much for it.

majiaknight
Posts: 114
Joined: Tue Jan 26, 2016 2:55 pm

Re: Can or should we afford this house

Post by majiaknight » Tue Mar 12, 2019 8:40 pm

UALflyer wrote:
Tue Mar 12, 2019 7:57 pm
majiaknight wrote:
Tue Mar 12, 2019 7:29 pm
UALflyer wrote:
Tue Mar 12, 2019 7:03 pm
Interest rates are completely unpredictable, so you have absolutely no idea whether the risk is small or not.
If you really believe what you are saying about the unpredictable mortgage rate, you should NOT believe 5/5 ARM is always better than 5/1 ARM and IMO it's not worth to pay the extra .25% now.
As I mentioned above, something like a 5/5 ARM is significantly safer and does not expose you to any of the above downsides, while still offering very similar interest rates to those found with a 5/1. Sure, there's a possibility that the mortgage rates could actually drop, thereby making the 5/1 ARM slightly cheaper, but my point is that a 5/5 buys you a whole lotta downside protection (vis a vis a 5/1) without causing you to pay much for it.
No, 5/5 doesn't buy you downside protection and in some cases it will do the opposite. E.g. assume due to Fed QT cycle the mortgage rate will be affected and increase from now 3.25% APR @5/1 ARM till the 6th year to 5.5% APR and then it's possible Fed may decide to end QT and restart QE, and the mortgage rate may start to gradually move lower from 5.5% every year until the QE cycle ends. In this case are you still believing 5/5 ARM provides any downside protection which actually lock at a higher rate? Even the rate will remain flat after the 6th year, 5/5 ARM still cost you more as you've paid .25% up front. IIUC, 5/5 ARM only works at a cost if you predict after 5 years the mortgage rate will go up year by year so you lock at the 6th year rate reset for another 5 year.

UALflyer
Posts: 489
Joined: Thu Jan 17, 2013 10:42 am

Re: Can or should we afford this house

Post by UALflyer » Tue Mar 12, 2019 9:29 pm

majiaknight wrote:
Tue Mar 12, 2019 8:40 pm
No, 5/5 doesn't buy you downside protection and in some cases it will do the opposite. E.g. assume due to Fed QT cycle the mortgage rate will be affected and increase from now 3.25% APR @5/1 ARM till the 6th year to 5.5% APR and then it's possible Fed may decide to end QT and restart QE, and the mortgage rate may start to gradually move lower from 5.5% every year until the QE cycle ends. In this case are you still believing 5/5 ARM provides any downside protection which actually lock at a higher rate? Even the rate will remain flat after the 6th year, 5/5 ARM still cost you more as you've paid .25% up front. IIUC, 5/5 ARM only works at a cost if you predict after 5 years the mortgage rate will go up year by year so you lock at the 6th year rate reset for another 5 year.
I realize that you're just creating theoretical arguments here, but I don't want anyone to be misled by them.

If you are interested in mortgage rate speculation and wish to do so with your own mortgage (as opposed to various interest rate investments out there), you don't take out a hybrid ARM like a 5/1 in the first place. Instead, you take out something like a 1/1 or a similar product, where the interest rate has virtually no fixed rate component. If you are, however, considering taking out a 5/1, you are paying a premium over mortgage products like a 1/1, a 3/1, etc..., which you would only do if the fixed rate portion of the product makes sense and has value in your situation. If so, and you anticipate remaining in the house longer than the fixed rate period without paying off the mortgage, then you view the annual adjustments as an undesirable risk rather than a benefit. If the interest rate differential between something like a 5/1 and a fixed rate product doesn't make sense in your situation, a 5/5 is a relatively low cost product that represents a very reasonable compromise for a lot of people. A ton of people out there just aren't aware that 5/5's exist, so they end up taking out 5/1's (or paying more for a 30 year fixed even though they don't need that much interest rate protection) instead.

Just like with any other type of insurance (and the fixed rate component of your mortgage is exactly that), of course there are situations where in hindsight you would've been better off without it, but you're still willing to pay for insurance because you'd rather not expose yourself and your finances to the risks that you're trying to protect against.

Sam1
Posts: 443
Joined: Mon Apr 09, 2018 7:24 am

Re: Can or should we afford this house

Post by Sam1 » Wed Mar 13, 2019 11:54 am

The question you need to ask yourself is:

Do I want to invest in the market (ie index funds)

OR

do I want to invest in a nicer house I can possibly stay in for quite some time?


I had to ask myself this same question. I decided I want to invest in index funds but after a certain point, splurge for the much nicer house. I consider this to be the happy medium.

Just because you pass on this house doesn’t mean you can’t ever live in a nice home like the one you found. Just not right now. Have you ever heard the phrase, “you can have it all but not all at the same time?” It applies here. You can’t significantly save, have kids and have a home like this on your income. Now there are plenty of people who do it on your income and limit savings to retirement. Maybe this is okay with you, but I’d assume if you’re on this forum, it is not.

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