Home affordability - Can I afford it?

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boston85
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Home affordability - Can I afford it?

Post by boston85 » Sat Apr 13, 2019 7:03 pm

DW and I have been in our house for 7 years but are pretty much hitting capacity with 2 kids. We have explored options of putting an addition on our house, but after looking at other new construction around town it seems like a better decision to sell and buy new.

Income - about $330k (180k for me and 150k for DW). Income and jobs are pretty stable and DW is probably close to a promotion that could bump her up by another $20k a year or so.

Retirement - 401ks have about $350k in them. We have both maxed our retirement accounts over the past 2 years.

Investing/Savings - Currently about $75k in savings account.

Monthly expenses - about $9k per month including everything, which should drop to under $8k in another year when both kids are out of daycare and in public schools. We have no debt other than mortgage.

Most new construction in town is around $1.2M, which is a little more than I want to spend, but financially we can make work. Even with that mortgage/insurance/taxes the monthly payment would be about $5,100 per month. Take home pay is around $13,500 after taxes, with another $40k or so in bonus throughout the year. With that mortgage, we still should be able to max out our 401ks and contribute about another $20k or so to mega-backdoor roth. After all of that we should still have about $40k or so left over each year. Our current town is great and has extremely low property taxes compared to surrounding towns. In the 7 years we have been in our house, it has appreciated about 4% YoY.

Are we crazy for considering something so high? I understand the whole option of trying to find a cheaper house, but there is just nothing that appealing in the $800k - $1M range that we like.

bluebolt
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Re: Home affordability - Can I afford it?

Post by bluebolt » Sat Apr 13, 2019 7:08 pm

How much equity do you have in the current home/how much of a down payment are you planning to make?

Topic Author
boston85
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Re: Home affordability - Can I afford it?

Post by boston85 » Sat Apr 13, 2019 7:11 pm

bluebolt wrote:
Sat Apr 13, 2019 7:08 pm
How much equity do you have in the current home/how much of a down payment are you planning to make?
Sorry, forgot to include that. About $300k in equity in our current home. We would be looking to put about 25% down on the new place, basically the equity in our current home.

bluebolt
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Re: Home affordability - Can I afford it?

Post by bluebolt » Sat Apr 13, 2019 7:31 pm

I would think you could afford it. I'm assuming your current salaries are a relatively recent thing or that you are pretty young (or both) based on your savings. If that's the case and you are confident in your jobs/salaries and generally live below your means, I don't see a huge problem with it.

If you are later in your career/life (i.e. 40s), I'd take a look at how this mortgage would affect your ability to retire when you want. Every additional $1000/mo. you are paying over your previous expenses adds about $300K to what you'd need in your retirement nest egg to support that. If retirement is 30 years away, no big deal. If it's 10-20 years away, you need to factor it in.

Unless you are in Cambridge (where new construction is more than $1.2MM), there aren't many towns in MA with tax rates below $10/$1000, which would be $12K/yr or $1K/mo. Add that to a 30 year, 4% fixed mortgage ($4300) and home insurance that will probably be $1000-$1500/yr, that's about $5400. Anyway, I don't need to know any more details, just make sure you are accounting for it correctly. And, budgeting for property tax to increase year to year. Also, make sure you are budgeting for college savings and that fits within your numbers.

SoonerD
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Re: Home affordability - Can I afford it?

Post by SoonerD » Sat Apr 13, 2019 11:33 pm

Your age is key info that's missing.

Paying nearly 4x gross with mortgage nearly 3x gross is unwise in my opinion.

Why is that people make plans based on a perpetual happy path? What happens if bad luck strikes your family - health, layoff, children develop issues that require a stay-home parent, etc.

I propose a path that coastal people don't want to hear - buy a house with no more than 15 year mortgage that can be easily covered on one salary! That's a wise path but I understand the Jones' set a standard that makes us feel like with just 2 children we're bursting at the seams. Are you in a 2-bedroom, less than say 900 square feet?

I'm sure you'll buy your big home and be fine (as long as your family stays on the happy path). Mine didn't and most I know deal with some major setbacks in health or employment at some point (during key accumulation years).

Be careful not to bite off too much and God Speed to you and yours!!!

Nissanzx1
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Re: Home affordability - Can I afford it?

Post by Nissanzx1 » Sun Apr 14, 2019 5:50 am

You are making good money. I’d say if you can do it on a 15 year fixed, go for it. Just keep a large emergency fund for payments that high. It does add an increased element of risk to your life, but as long as you can accept that...

Sam1
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Re: Home affordability - Can I afford it?

Post by Sam1 » Sun Apr 14, 2019 7:19 am

SoonerD wrote:
Sat Apr 13, 2019 11:33 pm
Your age is key info that's missing.

Paying nearly 4x gross with mortgage nearly 3x gross is unwise in my opinion.

Why is that people make plans based on a perpetual happy path? What happens if bad luck strikes your family - health, layoff, children develop issues that require a stay-home parent, etc.

I propose a path that coastal people don't want to hear - buy a house with no more than 15 year mortgage that can be easily covered on one salary! That's a wise path but I understand the Jones' set a standard that makes us feel like with just 2 children we're bursting at the seams. Are you in a 2-bedroom, less than say 900 square feet?

I'm sure you'll buy your big home and be fine (as long as your family stays on the happy path). Mine didn't and most I know deal with some major setbacks in health or employment at some point (during key accumulation years).

Be careful not to bite off too much and God Speed to you and yours!!!
You’re right that coastal people don’t want to hear that - because it isn’t sound advice. Real estate simply doesn’t exist that is possible with a 15 year mortgage and covered by one salary unless you’re talking about a family buying a studio or one bedroom or spending 3-4 hours a day commuting.

Besides the fact if you can afford a 15 year mortgage covered by one salary to almost just makes more sense to save until you can pay for a house in cash. This reminds me of when my elderly father told me we should spend no more than 200k on a house (we couldn’t even buy a studio with that!) when our incomes were close to 400k at the time. Would you tell someone in Kansas making 80k that they should try and find a 40k home?

By living in a coastal area, I can invest way more than if I lived in a lower COL city not on a coast. If I prescribed to your rule, I’d have my family crammed in a one bedroom condo. I calculate that instead of investing at least 7k each outside of retirement, I’d be able to invest closer to 11-12k. But having multiple kids in a one bedroom apartment is not worth it to me just to invest an extra 5k each month. If I’m really desperate for an extra 5k per month, I could find a new job bringing home at least another 2-3k per month and I could get rid of our cars and save another $500 there.

student
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Re: Home affordability - Can I afford it?

Post by student » Sun Apr 14, 2019 7:31 am

I think 4 times the salaries is doable but it will be tight. This is not something that I would do but only you know where your priorities are and how secure your jobs are.

wilked
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Re: Home affordability - Can I afford it?

Post by wilked » Sun Apr 14, 2019 7:47 am

OP has the word Boston in her name - I am going to assume greater Boston.

You don’t need to spend $1.2MM for a house. In fact I don’t think you need to do that anywhere other than California.

My worry is that you have a high salary, appear to be heading toward mid career (based off 2 kids assumption), and only have 1X gross in retirement assets.

I live within 10 miles of Boston, similar salaries, 2 young kids and wouldn’t consider a $1.2MM house. As another poster noted, that gives you no margin for error and you are very distinctly house poor / golden handcuffs dictionary definition

darrvao777
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Re: Home affordability - Can I afford it?

Post by darrvao777 » Sun Apr 14, 2019 8:23 am

Is mortgage 2x gross reasonable?

Maybe the OP can just save longer with a larger down payment and the smaller mortgage will result in smaller risk?

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SmallCityDave
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Re: Home affordability - Can I afford it?

Post by SmallCityDave » Sun Apr 14, 2019 8:38 am

The most basic way to answer the question is can you write a check for it?

cherijoh
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Re: Home affordability - Can I afford it?

Post by cherijoh » Sun Apr 14, 2019 8:57 am

boston85 wrote:
Sat Apr 13, 2019 7:11 pm
bluebolt wrote:
Sat Apr 13, 2019 7:08 pm
How much equity do you have in the current home/how much of a down payment are you planning to make?
Sorry, forgot to include that. About $300k in equity in our current home. We would be looking to put about 25% down on the new place, basically the equity in our current home.
How do you plan to free up the equity for the down payment while you are living in the house? Transitioning from one home to another when you need your HE for a downpayment isn't as easy as some people think.

I think you need to beef up your cash cushion significantly before attempting to move. Try banking the difference between your current and expected housing expenses for at least 6 months. Plus any other slippage you can find - most people (including me :wink:) don't really have a handle on exactly where the money is going when you aren't living in a cash crunch.

You may think that you will be able to still max tax-advantaged accounts and have left over after the move, but there are considerable expenses relating to moving into a new home - especially new construction homes - window treatments, furniture, landscaping. etc. And you may be expected to bring $$ to closing (including for escrow of taxes and insurance, while waiting for the return of escrow funds from your current house).

FYI, personally I would be concerned by the fact that your town's property taxes are below those of surrounding areas. Property taxes are subject to change in the future (unless there are regulatory restrictions).

Traveler
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Re: Home affordability - Can I afford it?

Post by Traveler » Sun Apr 14, 2019 9:05 am

The mortgage will only be 2.7x OP's income so yes, they can likely afford it. Sounds like a lot of money and I would question if new construction is necessary. Also don't quite understand OP's expenses. The $9000 includes the current home but doesn't split out the home vs other expenses so we can add that to the new home expense number.

cherijoh
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Re: Home affordability - Can I afford it?

Post by cherijoh » Sun Apr 14, 2019 10:43 am

SoonerD wrote:
Sat Apr 13, 2019 11:33 pm
Why is that people make plans based on a perpetual happy path? What happens if bad luck strikes your family - health, layoff, children develop issues that require a stay-home parent, etc.
:thumbsup

"Perpetual happy path" decribes the mindset of most posters of "can I afford it?" house threads perfectly!

Life happens. Whether you will be able to survive various adverse events will depend on prior major financial decisions like buying a house. And even if you aren't faced with a big medical crisis or a job loss, you are implicitly ruling out options when you opt to buy more house than you actually need - both spouses will need to continue to work, you may be stuck in a high stress job because you need the high salary, you won't be able to afford private school for your kids (or be able to afford to send them to their preferred university), you won't be able to retire early, and you will probably need to curtail spending on discretionary items like vacations, new cars, etc.

The scary thing is that many still try to do it all by postponing saving for retirement - at which point a job loss or a health issue in their 50s can prove devastating. But try telling that to someone that has successfully changed jobs several times and has always landed on their feet.

I live in Charlotte, NC and when the financial crisis hit, some of the most expensive neighborhoods had multiple houses on every street in foreclosure. Those owners had definitely been on the perpetual happy path. Especially hard hit were the lakefront properties on Lake Norman where the big banking executives lived. Here's a listing I pulled up at random that is currently listed for sale for $2.75M. Since it was built before the housing crisis, I checked the county property tax base to see how it had fared.
  • 5/97 - it sold for $751K
  • 11/09 - it sold for $1.35M
  • 2/11 - it sold for $710K -ouch!
  • 3/14 - it sold for $1.69M

quantAndHold
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Re: Home affordability - Can I afford it?

Post by quantAndHold » Sun Apr 14, 2019 10:52 am

cherijoh wrote:
Sun Apr 14, 2019 8:57 am
boston85 wrote:
Sat Apr 13, 2019 7:11 pm
bluebolt wrote:
Sat Apr 13, 2019 7:08 pm
How much equity do you have in the current home/how much of a down payment are you planning to make?
Sorry, forgot to include that. About $300k in equity in our current home. We would be looking to put about 25% down on the new place, basically the equity in our current home.
How do you plan to free up the equity for the down payment while you are living in the house? Transitioning from one home to another when you need your HE for a downpayment isn't as easy as some people think.
You sell one house, buy the other. Both houses close at the same time. People do this all the time.

delamer
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Re: Home affordability - Can I afford it?

Post by delamer » Sun Apr 14, 2019 12:08 pm

Your numbers are a little confusing.

Is take home pay of $13500 before or after maxing out the 401(k)s? Do the expenses include health insurance and 529/ college contributions?

What about paying for before/after school care and summer care once your kids are in school? And the extra costs of the larger home in terms of utilities and maintenance?

You have received some good advice as to not assuming a “perpetual happy path” that you should weigh in your decision.

But also you need to make sure you really have your numbers nailed down.

Good luck.

delamer
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Re: Home affordability - Can I afford it?

Post by delamer » Sun Apr 14, 2019 12:10 pm

cherijoh wrote:
Sun Apr 14, 2019 10:43 am
SoonerD wrote:
Sat Apr 13, 2019 11:33 pm
Why is that people make plans based on a perpetual happy path? What happens if bad luck strikes your family - health, layoff, children develop issues that require a stay-home parent, etc.
:thumbsup

"Perpetual happy path" decribes the mindset of most posters of "can I afford it?" house threads perfectly!

Life happens. Whether you will be able to survive various adverse events will depend on prior major financial decisions like buying a house. And even if you aren't faced with a big medical crisis or a job loss, you are implicitly ruling out options when you opt to buy more house than you actually need - both spouses will need to continue to work, you may be stuck in a high stress job because you need the high salary, you won't be able to afford private school for your kids (or be able to afford to send them to their preferred university), you won't be able to retire early, and you will probably need to curtail spending on discretionary items like vacations, new cars, etc.

The scary thing is that many still try to do it all by postponing saving for retirement - at which point a job loss or a health issue in their 50s can prove devastating. But try telling that to someone that has successfully changed jobs several times and has always landed on their feet.

I live in Charlotte, NC and when the financial crisis hit, some of the most expensive neighborhoods had multiple houses on every street in foreclosure. Those owners had definitely been on the perpetual happy path. Especially hard hit were the lakefront properties on Lake Norman where the big banking executives lived. Here's a listing I pulled up at random that is currently listed for sale for $2.75M. Since it was built before the housing crisis, I checked the county property tax base to see how it had fared.
  • 5/97 - it sold for $751K
  • 11/09 - it sold for $1.35M
  • 2/11 - it sold for $710K -ouch!
  • 3/14 - it sold for $1.69M
The sale price went from $710,000 to $1,690,000 in 3 years without any major improvements?

That’s extraordinary.

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scubadiver
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Re: Home affordability - Can I afford it?

Post by scubadiver » Sun Apr 14, 2019 12:41 pm

The OP and spouse have great incomes but I don't think they can afford this. Their savings rate relative to those incomes isn't too impressive and to be honest, unless they are claiming residency in San Francisco or some other ungodly realestate market, I'm not sure why they couldn't find a decent home in the $800-900K range. Just because you can swing the payments now doesn't mean it's a prudent life decision.

I would say lower your expectations a little or wait a couple of years to see if your savings rate and / or salary increases justify a $1.2M home.

cherijoh
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Re: Home affordability - Can I afford it?

Post by cherijoh » Sun Apr 14, 2019 4:17 pm

delamer wrote:
Sun Apr 14, 2019 12:10 pm
cherijoh wrote:
Sun Apr 14, 2019 10:43 am
SoonerD wrote:
Sat Apr 13, 2019 11:33 pm
Why is that people make plans based on a perpetual happy path? What happens if bad luck strikes your family - health, layoff, children develop issues that require a stay-home parent, etc.
:thumbsup

"Perpetual happy path" decribes the mindset of most posters of "can I afford it?" house threads perfectly!

Life happens. Whether you will be able to survive various adverse events will depend on prior major financial decisions like buying a house. And even if you aren't faced with a big medical crisis or a job loss, you are implicitly ruling out options when you opt to buy more house than you actually need - both spouses will need to continue to work, you may be stuck in a high stress job because you need the high salary, you won't be able to afford private school for your kids (or be able to afford to send them to their preferred university), you won't be able to retire early, and you will probably need to curtail spending on discretionary items like vacations, new cars, etc.

The scary thing is that many still try to do it all by postponing saving for retirement - at which point a job loss or a health issue in their 50s can prove devastating. But try telling that to someone that has successfully changed jobs several times and has always landed on their feet.

I live in Charlotte, NC and when the financial crisis hit, some of the most expensive neighborhoods had multiple houses on every street in foreclosure. Those owners had definitely been on the perpetual happy path. Especially hard hit were the lakefront properties on Lake Norman where the big banking executives lived. Here's a listing I pulled up at random that is currently listed for sale for $2.75M. Since it was built before the housing crisis, I checked the county property tax base to see how it had fared.
  • 5/97 - it sold for $751K
  • 11/09 - it sold for $1.35M
  • 2/11 - it sold for $710K -ouch!
  • 3/14 - it sold for $1.69M
The sale price went from $710,000 to $1,690,000 in 3 years without any major improvements?

That’s extraordinary.
I'm pretty sure it was a foreclosure in 2011. So I'd view it as increasing from $1.35M to $1.69M between 2009 and 2014 with a big dip :shock: in the middle. I don't know if there were improvements or not - the basement is listed as finished so they might have done that during that time period. It's a big house, but not outrageous for that neighborhood.

Trader Joe
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Re: Home affordability - Can I afford it?

Post by Trader Joe » Sun Apr 14, 2019 4:23 pm

boston85 wrote:
Sat Apr 13, 2019 7:03 pm
DW and I have been in our house for 7 years but are pretty much hitting capacity with 2 kids. We have explored options of putting an addition on our house, but after looking at other new construction around town it seems like a better decision to sell and buy new.

Income - about $330k (180k for me and 150k for DW). Income and jobs are pretty stable and DW is probably close to a promotion that could bump her up by another $20k a year or so.

Retirement - 401ks have about $350k in them. We have both maxed our retirement accounts over the past 2 years.

Investing/Savings - Currently about $75k in savings account.

Monthly expenses - about $9k per month including everything, which should drop to under $8k in another year when both kids are out of daycare and in public schools. We have no debt other than mortgage.

Most new construction in town is around $1.2M, which is a little more than I want to spend, but financially we can make work. Even with that mortgage/insurance/taxes the monthly payment would be about $5,100 per month. Take home pay is around $13,500 after taxes, with another $40k or so in bonus throughout the year. With that mortgage, we still should be able to max out our 401ks and contribute about another $20k or so to mega-backdoor roth. After all of that we should still have about $40k or so left over each year. Our current town is great and has extremely low property taxes compared to surrounding towns. In the 7 years we have been in our house, it has appreciated about 4% YoY.

Are we crazy for considering something so high? I understand the whole option of trying to find a cheaper house, but there is just nothing that appealing in the $800k - $1M range that we like.
If you have to ask, no, you cannot afford it.

teamDE
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Re: Home affordability - Can I afford it?

Post by teamDE » Sun Apr 14, 2019 7:06 pm

boston85 wrote:
Sat Apr 13, 2019 7:03 pm
Are we crazy for considering something so high? I understand the whole option of trying to find a cheaper house, but there is just nothing that appealing in the $800k - $1M range that we like.
Where are you looking? $1m can still buy a lot of house in the Boston metro area, even inside 95. Melrose is a hot town i like a lot. All our friends from Cambridge/Somerville are moving to Melrose and Wakefield where you can get a nice house for $650k and still access the T and commuter rail.

Leemiller
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Re: Home affordability - Can I afford it?

Post by Leemiller » Sun Apr 14, 2019 8:22 pm

Have you included 529s and kids summer camp/tutoring/ aftercare expenses? Moving in costs? Furniture / window treatments? Nonetheless, I think it will be tight on your income but doable so long as you keep both jobs and see steady increases. But now that I’m in my mid-40s, I’m even less inclined to assume 30 years of steady increases and continuous employment than I was even five years ago.

FWIW, my husband and I are dual-income in a home with a similar mortgage at a higher income, and it is really nice to know either of our salaries could cover our living expenses. It allowed me to take a career risk that has paid off extremely well.

majiaknight
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Re: Home affordability - Can I afford it?

Post by majiaknight » Mon Apr 15, 2019 2:16 pm

I think it's doable but wait for another year or two would be better.

Firstly, I don't think the bigger new house is something you really need as your two kids are still at pre-school ages. Unless the move will save you x2 private school tuition, then this will totally change the calculation.

Secondly, you may want to prioritize your savings. You bought your current house 7 years ago but only started to maximize retirement accounts for the last 2 years. You only have 8 months living expenses ($9K/m) in all taxable accounts (including EF) combined ($75K), and your retirement savings are also relatively low given your income. Personally I'd like to have a much bigger buffer in taxable investment after maxing 401K&IRA&HSA to handle the worst case scenario like a recession.

Finally, you may consider the timing for any big housing upgrade. RE market is quite local but CA Bay Area RE market has cooled down a little bit since 2nd half of 2018 and I've seen price dropped ~$100K for a $1.2-$1.4M townhouse in my neighborhood recently compared to a year ago. Several big new constructions already started to advertise promotions by lowering the price of ~$75K-$150K compared to the bidding war even for new constructions in the last several years.

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