Need Perspectives on Potential Home Buying Decision

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ZeroByte
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Joined: Sat Jul 06, 2019 6:22 am
Location: MD / DC / VA Area

Need Perspectives on Potential Home Buying Decision

Post by ZeroByte »

Hi Bogleheads - Long time reader, first time poster. I need some perspectives on a home purchase I am considering.

A little about me first:
  • I am 33, no kids and not married. Kids are not in the plans.
  • I have no debt.
  • I max out my 401K and have maxed out my Roth IRA for this year. I will make sure that with whatever home I buy, I will continue to max out my retirement as much as I can.
  • I make about $120K a year.
  • I have a little over $300K in savings in a money market. Up until this year, I had not really thought about investing it because I am really risk averse. Maybe that is why I am in the predicament I am in. Through reading posts on this forum, I realize that I need to be less risk averse if I am ever going to reach my long term goals. Once I figure out what is going on with the house, I am going to invest the remainder. Part of that $300K is $30K for a new car at some point in the next few years. My current car is 15 years old with almost 200K on it and rust is starting to eat through it.
  • I have $30K in a separate high yield savings account. That is my emergency fund.
I live in a relatively high cost of living area (median house price is $566K). I found a house I really like that is really unique, and I think I would be happy in it. It ticks almost all of my boxes. It was built in the late 1970s and was always maintained, but never updated. All of the systems and roof are relatively new, it just needs some updates. I figure I could live in the house and do those over time. The "problem" is the price. It is listed at $530K, and I made an offer below asking. The seller countered with $515K, and from the wording they used, I think that is their bottom line.

I want to keep my monthly payment below 50% of my take home (50% is about $2,500 a month). I know conventional wisdom is to keep it at 25%, but I am not sure how feasible that is in this area. If I put down $155K, my monthly payment (including taxes and insurance) will be about $2,150 a month. I know taxes and insurance go up, so I figure I need to put down more to give myself a cushion (that is how I arrived at $155K down). Eventually, my significant other will move in and will contribute to the monthly expenses. Even if that does not happen for whatever reason, I can still afford the mortgage and other living expenses (food, utilities, car repairs, whatever). I do not spend a lot of money. Whatever I do not spend at the end of the month goes directly to savings.

So here is my question. Given how much I have saved, would it be an unwise decision to put $155K down on this house (probably $175K after closing costs)? Should I look down market even if it means fewer of my boxes will be ticked? I guess the crux of the question is should I sacrifice cash to get into a house I really like or should I cast my emotions aside and strictly look at the numbers? I could really use your advice and perspectives. Thanks for reading!
Thegame14
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Re: Need Perspectives on Potential Home Buying Decision

Post by Thegame14 »

where are you living now? Can and how long can you continue staying there?
Archimedes
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Re: Need Perspectives on Potential Home Buying Decision

Post by Archimedes »

A 515k house on a 120k annual salary is a pretty high ratio of house cost to income. However, it sounds like you are otherwise frugal and have plenty of money for a downpayment with significant extra savings left over. If this house is your long term dream house, it sounds like you have saved enough that you could afford it.

I would ask myself the following before going ahead:

Can you afford to make the upgrades in the home or live with what is currently there? Upgrading bathrooms and kitchens is very expensive.

Are you going to stay in this home for a long time? If you do not project living there for many years (say at least 5 to 7 years at a minimum) then it is better not to buy in most markets.

Is your job extremely stable that the likelihood of a loss of income is very low? With a high home cost to income ratio, you will be in trouble if you experience a loss of income. Make sure good disability insurance is in place.

Are you at all concerned about being house poor? The funds that you have available for other things like vehicles and travel will be limited given the high house cost to income ration that you are proposing.
stan1
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Re: Need Perspectives on Potential Home Buying Decision

Post by stan1 »

Sounds to me this is more of a lifecycle choice for you given down payment and income. Do you want to be a homeowner not a renter? Also keep commute in mind especially in DC area where it can be a huge quality of life factor. Adding an extra 60 plus minutes of commute each day for a house you really don't enjoy in the first place does not make for a happy life.

I'd also be careful about "unique". Why isn't the house selling now in a strong market? A house that is too "unique" can be difficult to sell. Are there any location defects (commute time, close to businesses, close to major roads, under flight corridor)? Is the floor plan bizarre or not suited to families? You don't want to buy someone else's problems.
chevca
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Re: Need Perspectives on Potential Home Buying Decision

Post by chevca »

You think you would be happy in this house? Would you or wouldn't you? If you're not sure buying a house would make you happy, I wouldn't be buying a house if I were you. If you're unsure, wait until you start spending on maintenance and upgrades or whatever. You probably will not like the house then if you don't love in now and want to be a homeowner.

No offense and we only know what you posted in the first post, but the problem seems to be more that you don't like spending money. You have a 15 year old car that's rusting through and $330k in total cash. Why are you holding onto a rust bucket, possibly for a few more years, when you could buy a decent car not rusting out tomorrow?! That's pretty silly, IMO.

Get rid of the rust bucket and get a better car, decide if you really want to be a homeowner or not, and then we can talk how much to put down on the house.
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Sandtrap
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Re: Need Perspectives on Potential Home Buying Decision

Post by Sandtrap »

Some things to consider:

How long do you plan on living in that area?
Is your job stable such that you will be there for a long time?
What are the odds of losing your job? and/or a "pay cut"?
Once you move in, there will be other costs, so prepare for spending more of that 300k. Do you have a limit?
Is your income expected to increase over the next 5 years?
Let's say you buy the home. Is there a chance that your company will give you an offer to relocate for higher pay down the road?
Once purchasing the home, would you be able to sell it in 3-5 years and recover all of your money? (exit plan)

j
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Broken Man 1999
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Re: Need Perspectives on Potential Home Buying Decision

Post by Broken Man 1999 »

Sounds like you need a car, and want a house. Since you have a car now, I assume you will continue to need a car.

I would address the car first. After you purchase the house you will be house-poor, and will still need to replace your car, but your budget will already be stretched thin.

How are you considering the possibility you might need a different car now, or in a short time?

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go. " -Mark Twain
mortfree
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Re: Need Perspectives on Potential Home Buying Decision

Post by mortfree »

To answer your question as posed and not delve into the other factors related to home buying.

Given your 300k+ in savings, I would earmark 200k towards the home purchase (downpayment, closing costs, inspections, etc).

The one thing you do need to know is if you are in a non-recourse state. I don’t fully understand the ins and outs but I have read enough on here to know that it is something to take into consideration.

Also, the general rules on home buying as percent of take home and overall cost of home compared to salary doesn’t quite apply in a HCOLA.

Make sure your significant other likes the home too.

Good luck.
KlangFool
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Re: Need Perspectives on Potential Home Buying Decision

Post by KlangFool »

OP,

1) There is absolutely no reason for you to buy a 525K house. Rent one if you want to live in a house. It is a lot cheaper.

2) You are risk averse. So, why do you think it is safe to buy a 525K house?

KlangFool
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McGilicutty
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Re: Need Perspectives on Potential Home Buying Decision

Post by McGilicutty »

Buying this house sounds like a really bad idea. The thought of putting over half your savings down and having that high of a payment on a $120K salary makes me feel queasy and I'm not even the one contemplating it.

What are similar rentals in the area going for? Why do you need to buy a house right now? Are you getting pressure from your significant other?

Plus, you say it needs some updating? How much is that going to cost?
somekevinguy
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Re: Need Perspectives on Potential Home Buying Decision

Post by somekevinguy »

As someone who is similarly frugal and similarly contemplated buying a house that would be near 50% take home pay (ended up closer to 40%)-more because we are in a VHCOL area and are buying for the long term-I think given your history of savings and frugality, I think you'd be fine going forward with the house. We all have different priorities and it sounds like you value the place you live a little more than things like fancy transportation, clothing, etc. Pretty sure you can run the numbers and see if living on 50% of your take home still allows you to meet your needs/wants and goals.

My only hesitations would be:
1) Is this where you see yourself long term?

2) How stable is your job?

3) Does your significant other seem like your partner for the next 30+ years and if so, do they similarly like the home? If not, you have to take into account whether a "unique" house might appeal to your future significant other.

After considering the above carefully, if it still made sense, I would go buy a car and be ok putting down the 150K on this home that ticks all the boxes for you.
KATNYC
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Re: Need Perspectives on Potential Home Buying Decision

Post by KATNYC »

Being in the DC area is expensive and if a home checks all your boxes and you can afford a $200K downpayment, I'd buy it. The only caveat is will your significant other also love the house and be okay with renovating over the next few years. Renovating is messy and expensive. We did a gut renovation and had to move out for months.

We are in NYC so a $515K home is a 1 bedroom apartment that needs renovations in our neighborhood.

This is a reminder that we are definitely in a two income world. There are so many cities now where you need two incomes to own a home and if one person loses their job, everything could end in chaos.
HomeStretch
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Re: Need Perspectives on Potential Home Buying Decision

Post by HomeStretch »

50% of gross pay is high. Are you open to having roommates to help pay the mortgage until your SO moves in?
WS1
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Re: Need Perspectives on Potential Home Buying Decision

Post by WS1 »

Is that take home pay adjusted for the tax implications of the proposed home? I don’t really want to know. I’m just being a jerk because I find take home pay too squishy a number.
fru-gal
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Re: Need Perspectives on Potential Home Buying Decision

Post by fru-gal »

chevca wrote: Sat Jul 06, 2019 12:41 pm You have a 15 year old car that's rusting through and $330k in total cash. Why are you holding onto a rust bucket, possibly for a few more years, when you could buy a decent car not rusting out tomorrow?! That's pretty silly, IMO.

Get rid of the rust bucket and get a better car, decide if you really want to be a homeowner or not, and then we can talk how much to put down on the house.
I held onto two cars with rust, and saved myself a bundle of money. The OP is obviously more interested in a house than a new car. Financially, I think a house is a better investment. Cars eventually go to negative value when they start to be money pits.

It seems to me that updating the house can wait. That will cost a lot of money and hassle, Older kitchens and bathrooms are perfectly acceptable if they work.
chevca
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Re: Need Perspectives on Potential Home Buying Decision

Post by chevca »

fru-gal wrote: Sat Jul 06, 2019 5:24 pm
chevca wrote: Sat Jul 06, 2019 12:41 pm You have a 15 year old car that's rusting through and $330k in total cash. Why are you holding onto a rust bucket, possibly for a few more years, when you could buy a decent car not rusting out tomorrow?! That's pretty silly, IMO.

Get rid of the rust bucket and get a better car, decide if you really want to be a homeowner or not, and then we can talk how much to put down on the house.
I held onto two cars with rust, and saved myself a bundle of money. The OP is obviously more interested in a house than a new car. Financially, I think a house is a better investment. Cars eventually go to negative value when they start to be money pits.
Neither is a good "investment". There is NO reason to hang onto a car rusting through if one has the money to replace it. That's beyond frugal.
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Watty
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Re: Need Perspectives on Potential Home Buying Decision

Post by Watty »

Broken Man 1999 wrote: Sat Jul 06, 2019 12:42 pm Sounds like you need a car, and want a house. Since you have a car now, I assume you will continue to need a car.

I would address the car first. After you purchase the house you will be house-poor, and will still need to replace your car, but your budget will already be stretched thin.

How are you considering the possibility you might need a different car now, or in a short time?


+1

At 15 years and 200K miles you cannot count on getting a few more years of service out of it.

$30K for a car is a lot especially at that the same time you are buying a pretty expensive house.

You can get the stereotypical Boglehead new Corolla for less than $20K or a used car for even less. Part of buying the house is the opportunity cost of the other things you will need to give up.
ZeroByte wrote: Sat Jul 06, 2019 7:40 am So here is my question. Given how much I have saved, would it be an unwise decision to put $155K down on this house (probably $175K after closing costs)?
That would leave you with a killer monthly mortage payment.

You have $330K in your taxable accounts so I would look at it this way;

1) $50K emergency funds(an increase form $30K)
2) $20K for a replacement car, either new or used.

That would leave you with $260K that you could use for the home purchase with a $20k closing costs(sounds real high!) and a $240K downpayment. That would leave you with a $275K mortage. That would have around $1,300 a month mortage payment not including property taxes or insurance.

That should not be too hard to pay on your income and you could then save up and pay for the remodeling out of your future income.

It does require;
1) A more modest car purchase
2) Dipping farther into your taxable savings.

It could be that the house is not worth it to you to give up those, if so then don't buy the house.
student
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Re: Need Perspectives on Potential Home Buying Decision

Post by student »

For most people in this country, $120k salary cannot support a $500k house. However, you are clearly frugal and you mentioned that your SO will eventually move in and help out. How secure is your job? If it is secure, then I think it is doable but you have to be very frugal until your SO moves in and contributes.
cskollmann
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Re: Need Perspectives on Potential Home Buying Decision

Post by cskollmann »

ZeroByte wrote: Sat Jul 06, 2019 7:40 am
[*] I am 33, no kids and not married. Kids are not in the plans.
[*] I have no debt.
[*] I max out my 401K and have maxed out my Roth IRA for this year. I will make sure that with whatever home I buy, I will continue to max out my retirement as much as I can.
[*] I make about $120K a year.
[*] I have a little over $300K in savings in a money market. Up until this year, I had not really thought about investing it because I am really risk averse. Maybe that is why I am in the predicament I am in. Through reading posts on this forum, I realize that I need to be less risk averse if I am ever going to reach my long term goals. Once I figure out what is going on with the house, I am going to invest the remainder. Part of that $300K is $30K for a new car at some point in the next few years. My current car is 15 years old with almost 200K on it and rust is starting to eat through it.
[*] I have $30K in a separate high yield savings account. That is my emergency fund.
[/list]


So here is my question. Given how much I have saved, would it be an unwise decision to put $155K down on this house (probably $175K after closing costs)? Should I look down market even if it means fewer of my boxes will be ticked? I guess the crux of the question is should I sacrifice cash to get into a house I really like or should I cast my emotions aside and strictly look at the numbers? I could really use your advice and perspectives. Thanks for reading!
Way more details needed to give good advice (unless I missed something?). What are the 401k and Roth balances? Have you been maxing them for years, or just recently? What percentage of your net worth would be in this house? Even more importantly, what are your goals? Retire early? How early? Where does owning a house fit in with those goals?

If I was you and were committed to no kids I'd probably be renting so as to maintain flexibility. But I have kids so the calculus changes...
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JoeRetire
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Re: Need Perspectives on Potential Home Buying Decision

Post by JoeRetire »

ZeroByte wrote: Sat Jul 06, 2019 7:40 amI am 33, no kids and not married. Kids are not in the plans.
No plans to ever get married?
I have a little over $300K in savings in a money market. Up until this year, I had not really thought about investing it because I am really risk averse. Maybe that is why I am in the predicament I am in. Through reading posts on this forum, I realize that I need to be less risk averse if I am ever going to reach my long term goals.
What are your long term goals? How much will it take to reach them? When do you hope to reach them?

Have you determined the effect on your long term goals when you take this much money out of your savings? Are you okay with that?
All of the systems and roof are relatively new, it just needs some updates. I figure I could live in the house and do those over time.
So how much is this updating going to cost?
So here is my question. Given how much I have saved, would it be an unwise decision to put $155K down on this house (probably $175K after closing costs)?
Not to mention the costs to update the house.

It seems like a lot of money for a house given your salary, and a big chunk of your savings. I wouldn't be comfortable doing that, but I don't know your long term goals.
Should I look down market even if it means fewer of my boxes will be ticked?
Perhaps. It's not clear why a 33 year old single wants a house now, rather than continuing to rent. But assuming you feel the need, I do think it would be better to purchase less house.

Your decision. Your money. Your long term goals.
It's the end of the world as we know it. | It's the end of the world as we know it. | It's the end of the world as we know it. | And I feel fine.
Topic Author
ZeroByte
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Location: MD / DC / VA Area

Re: Need Perspectives on Potential Home Buying Decision

Post by ZeroByte »

Thank you everyone for your objective opinions. This is exactly why I posted here. I think I was letting emotions carry me away a bit, and after some reflection, I think the house at 515K is too much money. Perhaps I will need to save some more before buying a house. You guys have given me a lot to think about in general. Thanks again.
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