Buy home with cash? vs. Loan options.

[BogleBogleBogle]

Long time listener, first time caller. I appreciate the collective wisdom as my family and I relocate and look to purchase a home.

Please note: homes in California are pricey and income is comparatively low. Home Price Range $800k-950k in neighborhoods with solid schools.

Thanks in advance!

Summary

$915k Cash

$588k Retirement-403b & Roth IRA

$26k Education-529s for 2 kids

Annual Income- $75k.

Monthly Gross Income: $6250 (spread over 12 months)

Monthly Net Income: $4245 (spread over 12 months)


Background Data

House Fund: $800k in online savings accounts
Emergency funds: $115k in online savings account ($15k in checking)
Debt: none
Tax Filing Status- MFJ

Tax Rate: 24% Federal, 9.3% State
Age: Him 38 / Her 35
Income: $75k annual income (currently one income, will increase yearly to roughly match CPI)

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 25% of stocks

Current retirement assets- $588k

Him 401b at Fidelity- $303k
60% Fidelity Total Market Index (FSKAX)
20% Fidelity Global Ex US Index (FSGGX)
20% Fidelity US Bond Index (FXNAX)

Him Roth IRA at Vanguard- $16k
Target 2050 Fund (VFIFX)

Her 403b at Fidelity- $263k
60% Fidelity Total Market Index (FSKAX)
20% Fidelity Global Ex US Index (FSGGX)
20% Fidelity US Bond Index (FXNAX)

Her Roth IRA at Vanguard- $6k
Target 2050 Fund (VFIFX)

Current Education Assets- $26k
529- Six-year-old Child at Vanguard- $19k
Moderate Age-Based Glide Path Currently 70/30

529- Four-year-old Child at Vanguard- $7k
Moderate Age-Based Glide Path Currently 80/20

New annual contributions to new 403b Account- $7.5k (Includes employer 5% match)

Questions

1. Advantages/Disadvantages of paying for house in cash?
2. Loan options? How much down payment? How much loan? Cash first/ then refinance?
3. Max home price we can afford?
4. Other advice or recommendations?

Short-term Goals:
Buy house Jan-June 2020
Flexibility to have wife stay at home for 1-2 more years

Mid-term Goals
Wife return to work part-time/full-time
Replace wife’s car in 5 years
Increase/Max 403b

Long-term Goals
Retirement at 65
Help kids as much as possible with college

[anoop]

With a 75K annual income, I doubt you would qualify for a conventional 20% down loan for a $900K house. So it's going to involve a massive down payment.

Normal rule of thumb for affordability is house should not exceed 2.5x - 3.5x annual income (lower the better).

Have you looked at the impact of taxes and maintenance costs if you pay cash and how it impacts your cash flow?

What is your current housing situation?

[Lalamimi]

Wife needs to get to work immediately unless she can't make more than child care would cost. Are you now living in CA? Why are incomes so low in CA??
That is way too much debt for your age. Just saying.

[mortfree]

How’d you get all that cash??

Asking for a friend.

[runner540]

Your tax rate is way off. MFJ 24% bracket starts at $171k after all deductions. You're probably in the 12% bracket. https://taxfoundation.org/2020-tax-brackets/

1. Advantages/Disadvantages of paying for house in cash?
2. Loan options? How much down payment? How much loan? Cash first/ then refinance? I would be shocked if you can get a mortgage for more than half the cost.
3. Max home price we can afford? Depends on your carrying costs on the home, if you paid for it in cash. What is monthly or annual taxes, insurance and maintenance?
4. Other advice or recommendations? Be careful - trying to carry the costs of an $800-950k house (more than 10-12x your income) and live in that neighborhood is a huge stretch with no room for errors or life happening. I would wait to buy until wife gets back to work.

[Gill]

Hate to be so blunt, but you'd never get a loan for a house in that price range and you can't afford it even if you pay cash.
Gill

[awval999]

Would you consider moving out of California?
If so you are golden.

[awval999]

How’d you get all that cash??

Asking for a friend.

Clearly it’s inherited.

[DesertDiva]

4. Other advice or recommendations?

Nevada or Arizona.

[Gill]

How’d you get all that cash??

Asking for a friend.

Clearly it’s inherited.

...but he has $599K in retirement assets on a $75K salary. How did that happen?
Gill

[awval999]

Inherited IRA?

Clearly the OP could not have earned his current wealth on $75k gross.

[Trader Joe]

Long time listener, first time caller. I appreciate the collective wisdom as my family and I relocate and look to purchase a home.

Please note: homes in California are pricey and income is comparatively low. Home Price Range $800k-950k in neighborhoods with solid schools.

Thanks in advance!

Summary

$915k Cash

$588k Retirement-403b & Roth IRA

$26k Education-529s for 2 kids

Annual Income- $75k.

Monthly Gross Income: $6250 (spread over 12 months)

Monthly Net Income: $4245 (spread over 12 months)


Background Data

House Fund: $800k in online savings accounts
Emergency funds: $115k in online savings account ($15k in checking)
Debt: none
Tax Filing Status- MFJ

Tax Rate: 24% Federal, 9.3% State
Age: Him 38 / Her 35
Income: $75k annual income (currently one income, will increase yearly to roughly match CPI)

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 25% of stocks

Current retirement assets- $588k

Him 401b at Fidelity- $303k
60% Fidelity Total Market Index (FSKAX)
20% Fidelity Global Ex US Index (FSGGX)
20% Fidelity US Bond Index (FXNAX)

Him Roth IRA at Vanguard- $16k
Target 2050 Fund (VFIFX)

Her 403b at Fidelity- $263k
60% Fidelity Total Market Index (FSKAX)
20% Fidelity Global Ex US Index (FSGGX)
20% Fidelity US Bond Index (FXNAX)

Her Roth IRA at Vanguard- $6k
Target 2050 Fund (VFIFX)

Current Education Assets- $26k
529- Six-year-old Child at Vanguard- $19k
Moderate Age-Based Glide Path Currently 70/30

529- Four-year-old Child at Vanguard- $7k
Moderate Age-Based Glide Path Currently 80/20

New annual contributions to new 403b Account- $7.5k (Includes employer 5% match)

Questions

1. Advantages/Disadvantages of paying for house in cash?
2. Loan options? How much down payment? How much loan? Cash first/ then refinance?
3. Max home price we can afford?
4. Other advice or recommendations?

Short-term Goals:
Buy house Jan-June 2020
Flexibility to have wife stay at home for 1-2 more years

Mid-term Goals
Wife return to work part-time/full-time
Replace wife’s car in 5 years
Increase/Max 403b

Long-term Goals
Retirement at 65
Help kids as much as possible with college

I always purchase everything with cash. No loans. This includes real estate.

It is such a great feeling when you own everything 100% and you are debt free. So liberating.

[Lee_WSP]

Rent. Rent vs buy in Cali hardly ever comes out in favor of buying. Put the rest into equities.

[mathwhiz]

I'm not familiar with California law but some states such as Florida have very aggressive homestead protections where you can shield wealth in your homestead if you face a lawsuit or judgment, e.g. an at fault car accident with fatalities. It's an added consideration if you have the means to pay for a home in cash.

[JoeRetire]

Long time listener, first time caller.

LOL!

Home Price Range $800k-950k in neighborhoods with solid schools.

$915k Cash

Annual Income- $75k.

House Fund: $800k in online savings accounts
Emergency funds: $115k in online savings account ($15k in checking)

So presumably, this is how you come up with "$915 Cash"?

1. Advantages/Disadvantages of paying for house in cash?

Advantage: You still have no mortgage payment to make.

Disadvantage: You consume all of your cash (including all of your emergency fund) in the process.

[BogleBogleBogle]

@Trader Joe, thanks, paying cash is the way I will probably go.

@mathwhiz, thanks for the tip on homestead protections. I will check out CA law.

@runner540, we will be in the 24% bracket this year since my wife and I were both working until July this year. Next year we will be in the 12% bracket if my wife continues to stay at home.

@anoop, great question about taxes and maintenance costs. Estimating $940/mo. for property taxes & insurance on a $800k home. Will need to ask around about comparative home maintenance costs.


Cash comes from home sale proceeds. I bought a distressed property at the bottom of the market in a VHCOL area which was our primary residence. Retirement savings are reflective of Boglehead principles and two salaries.

Low income is reflective of the educational non-profit I work for.

Not looking to FIRE. I just want a good neighborhood for kids to go to school.

The primary reason for our relocation is to be near family as our kids grow up. Yes, my wife will eventually go back to work. Very hard to live off one salary in our part of CA.

Thanks again for your responses.

[Startingover2019]

4. Other advice or recommendations?

Nevada or Arizona.

Please follow this advice. Why oh why must you be stuck in a place you can’t afford a house?

[Startingover2019]

The sad thing is that the OP considers 75k a low salary.
Only in CA and NYC probably. 75k is a good salary for a family. That will take you a long way in TX where you can get a nice, big house for 400k or so in any of the big cities.

You just have to get away from the Coasts.

[runner540]

The sad thing is that the OP considers 75k a low salary.
Only in CA and NYC probably. 75k is a good salary for a family. That will take you a long way in TX where you can get a nice, big house for 400k or so in any of the big cities.

You just have to get away from the Coasts.

$75k is the median 2018 household income in California. (https://www.census.gov/content/dam/Cens ... r18-01.pdf)
Probably below median in the metro areas where OP is shopping for a $900k house.

[Lee_WSP]

The price to rent ratio in my city is 19.41. Which makes renting vs buying right on the bubble. Some houses are good buys, some are not.

But OP's state's price to rent ratio is astronomical!

San Francisco, California 50.11
Oakland, California 41.05
Honolulu, Hawaii 39.50
Los Angeles, California 38.59

https://smartasset.com/mortgage/price-t ... -us-cities

For $2,000 a month, you can rent a 1.2 million dollar home in San Fran; a 900k home in LA, and a 720k home in Irvine.

It just makes no sense. The PI on a 720k loan is $3,300. The only reason to buy is if you truly believe the market is sustainable there and prices will keep going up faster than 5%/yr.

[Startingover2019]

The sad thing is that the OP considers 75k a low salary.
Only in CA and NYC probably. 75k is a good salary for a family. That will take you a long way in TX where you can get a nice, big house for 400k or so in any of the big cities.

You just have to get away from the Coasts.

$75k is the median 2018 household income in California. (https://www.census.gov/content/dam/Cens ... r18-01.pdf)
Probably below median in the metro areas where OP is shopping for a $900k house.

Yeah, that’s why I mentioned this is only considered low on either cost. Not in >75% of the rest of the US.
When I get called or emailed about jobs in LA, i very quickly say NO!

[yummeemunnkee]

Long time listener, first time caller. I appreciate the collective wisdom as my family and I relocate and look to purchase a home.

Please note: homes in California are pricey and income is comparatively low. Home Price Range $800k-950k in neighborhoods with solid schools.

Thanks in advance!

Summary

$915k Cash

$588k Retirement-403b & Roth IRA

$26k Education-529s for 2 kids

Annual Income- $75k.

Monthly Gross Income: $6250 (spread over 12 months)

Monthly Net Income: $4245 (spread over 12 months)


Background Data

House Fund: $800k in online savings accounts
Emergency funds: $115k in online savings account ($15k in checking)
Debt: none
Tax Filing Status- MFJ

Tax Rate: 24% Federal, 9.3% State
Age: Him 38 / Her 35
Income: $75k annual income (currently one income, will increase yearly to roughly match CPI)

Desired Asset allocation: 80% stocks / 20% bonds
Desired International allocation: 25% of stocks

Current retirement assets- $588k

Him 401b at Fidelity- $303k
60% Fidelity Total Market Index (FSKAX)
20% Fidelity Global Ex US Index (FSGGX)
20% Fidelity US Bond Index (FXNAX)

Him Roth IRA at Vanguard- $16k
Target 2050 Fund (VFIFX)

Her 403b at Fidelity- $263k
60% Fidelity Total Market Index (FSKAX)
20% Fidelity Global Ex US Index (FSGGX)
20% Fidelity US Bond Index (FXNAX)

Her Roth IRA at Vanguard- $6k
Target 2050 Fund (VFIFX)

Current Education Assets- $26k
529- Six-year-old Child at Vanguard- $19k
Moderate Age-Based Glide Path Currently 70/30

529- Four-year-old Child at Vanguard- $7k
Moderate Age-Based Glide Path Currently 80/20

New annual contributions to new 403b Account- $7.5k (Includes employer 5% match)

Questions

1. Advantages/Disadvantages of paying for house in cash?
2. Loan options? How much down payment? How much loan? Cash first/ then refinance?
3. Max home price we can afford?
4. Other advice or recommendations?

Short-term Goals:
Buy house Jan-June 2020
Flexibility to have wife stay at home for 1-2 more years

Mid-term Goals
Wife return to work part-time/full-time
Replace wife’s car in 5 years
Increase/Max 403b

Long-term Goals
Retirement at 65
Help kids as much as possible with college

I always purchase everything with cash. No loans. This includes real estate.

It is such a great feeling when you own everything 100% and you are debt free. So liberating.

+1