Sanity check on home purchase

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Topic Author
cloudyhead
Posts: 2
Joined: Tue Jan 28, 2020 8:45 pm

Sanity check on home purchase

Post by cloudyhead » Tue Jan 28, 2020 10:25 pm

Appreciate sage boglehead advice on this decision

The background
Family: Us, mid thirties, plus two kids not yet in school
Plus in-laws ~6-mo. at a time every other year or so.

Financial
Net worth (equity, retirement, cash): $680k
Retirement (401k, IRAs): $535k (90/10 stock/bond, low cost index funds, etc.)
Zero debt except mortgage: $125k on $180k property (24 yrs @ 4.25%)
Cash accounts: $55k
529s: $5k
Two paid-off ~5 yr old reliable cars

Relevant yearly cash flows
Household income: $140k/year (+20k bonus) single income household though fairly stable prospects (in demand field)
401K +$19000 +$6,500 employer
Roth IRA +$12000 (total his & hers)
529 +$2000

The change
Looking to move from a $180k to $460k home.

Code: Select all

from:	1,200 sq.ft. 3BR 1.5 BA 0.15 Acre
to:	3,200 sq.ft. 4BR 3.5 BA 0.46 Acre
Why? Want great schools for kids, ability to have company, accommodate aging in-laws
Why now? Before kids enter school in fall, aging in-law need is far more long term (5-10 yrs)

From
+$55K home equity, $125K remaining on mortgage
24 yrs @ 4.25% monthly PITI $980
12% gross monthly home expense (inc util., etc.)

To:
+$92K home equity, -$368K remaining on mortgage
30 yrs @ 3.375%) monthly PITI $2,400
26% gross monthly home expense (inc util., etc.)

The Impact
So yeah, that's a good jump in monthly home expense and purchase price is around 3X income. Plan is to reduce 401k to minimum for matching, and eliminate Roth IRA/529 for a few years to reduce principle so PITI is around $2000/mo. Then return to usual tax advantaged maxing. Plan to pay for kids college via 529 best effort and cash flow the difference. Wife has advanced degree and itching to return to work which could accelerate plans.

In terms of retirement, we have the 3 legged stool of SS, tax-advantaged funds, and my pension. Understand this decision impacts the monthly amount in retirement and/or years worked but thinking its worth it as we only raise kids once.

Seems we should be fine ‘prioritizing’ a larger dwelling & schools during the school years then can re-evaluate as needed. One risk I see is low efund during the dwelling switch which would go from 18 mo. equiv to 3 mo. before back to 9mo. by year end and growing.

Thoughts?

P.s. would be honored by a Klangfool reply though I'm not following his rules

bloom2708
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Location: Fargo, ND

Re: Sanity check on home purchase

Post by bloom2708 » Wed Jan 29, 2020 11:56 am

This sentence

"Plan is to reduce 401k to minimum for matching, and eliminate Roth IRA/529 for a few years to reduce principle so PITI is around $2000/mo."

I think you can do it, but you are sacrificing retirement if you have to do the above.

~350k would be a better place if it keeps you from reducing 401k/Roth.

Max pre-tax 401k + Roths for each is a good floor for retirement savings. 529 depends on excess.

I'd hold off and save more. But, I tend to stay on the conservative side of these home purchase threads.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

manatee2005
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Re: Sanity check on home purchase

Post by manatee2005 » Wed Jan 29, 2020 12:09 pm

Just to give a different opinion, I am living in a small house just so there’s no room for in-laws or my parents.

I would say, tell your wife you can’t afford it and keep living in the small house.

chevca
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Joined: Wed Jul 26, 2017 11:22 am

Re: Sanity check on home purchase

Post by chevca » Wed Jan 29, 2020 12:25 pm

cloudyhead wrote:
Tue Jan 28, 2020 10:25 pm
The Impact
So yeah, that's a good jump in monthly home expense and purchase price is around 3X income. Plan is to reduce 401k to minimum for matching, and eliminate Roth IRA/529 for a few years to reduce principle so PITI is around $2000/mo. Then return to usual tax advantaged maxing. Plan to pay for kids college via 529 best effort and cash flow the difference. Wife has advanced degree and itching to return to work which could accelerate plans.
I also find this paragraph to be key. If you need to drop retirement savings that much, it's probably not a good idea. But, when would your wife go back to work... would her income really boost the family numbers? If it's a temporary thing, it may be worth the move and lower savings for a brief time. But, the plan you have to lower PITI there is only a $400/month difference. That doesn't even max out one Roth, let alone return to your usual tax advantaged maxing.

We moved from a nice house, but with the tiny yards, just to be in a nice house with a 1/2 acre even though it costs us more. So, just the upgrade in space and yard is worth it to me. Let alone better schools and room for in-laws for you guys. We all have different wants those ways.

One other thing to keep in mind, you list $55k current home equity. That won't be $55k after selling costs/fees and moving and all. Just something to factor into all this.

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jakehefty17
Posts: 199
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Location: New York

Re: Sanity check on home purchase

Post by jakehefty17 » Wed Jan 29, 2020 12:36 pm

cloudyhead wrote:
Tue Jan 28, 2020 10:25 pm
Plan is to reduce 401k to minimum for matching, and eliminate Roth IRA/529 for a few years to reduce principle so PITI is around $2000/mo. Then return to usual tax advantaged maxing. Plan to pay for kids college via 529 best effort and cash flow the difference. Wife has advanced degree and itching to return to work which could accelerate plans.

In terms of retirement, we have the 3 legged stool of SS, tax-advantaged funds, and my pension. Understand this decision impacts the monthly amount in retirement and/or years worked but thinking its worth it as we only raise kids once.

Seems we should be fine ‘prioritizing’ a larger dwelling & schools during the school years then can re-evaluate as needed. One risk I see is low efund during the dwelling switch which would go from 18 mo. equiv to 3 mo. before back to 9mo. by year end and growing.

Thoughts?
You have the right reasons for wanting to move/expand your household. Sounds like your family needs the space.

However, I recommend thoroughly planning out your budget for this scenario. The house is clearly a stretch for your family when you consider the immediate impact on your annual savings and emergency fund. At least reflect on whether your current plan is the best course of action.

Paying down the PITI when your interest rate is so low doesn't make sense to me. That money would be better off growing in a tax-deferred account, and you can just pay the mortgage interest at 3.375%. Chances are the long-term benefits of filling that tax-advantaged space is more valuable than cutting down your principle. So I'd still prioritize filling tax-advantaged accounts - if you buy the house.

If your wife plans to return to work you could rework your budget and (most likely) easily afford this change. Until then I'd consider waiting to make the move. Currently, it will take some serious budgeting to meet all your financial goals with this change.

All the best moving forward!
"The problem with the world is that the intelligent people are full of doubts, while the stupid ones are full of confidence." -Charles Bukowski

Katietsu
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Re: Sanity check on home purchase

Post by Katietsu » Wed Jan 29, 2020 1:12 pm

Generally speaking, you should be able to afford a 480k house on $160k income. You have good reasons for moving and you have the potential for a big increase of income in the future. And very few people max out there retirement when they in the earlier stages of ramping up their life.

I wonder about your current and future spending though. Right now you have no debt and no daycare expenses. I do not see why you can not handle the larger mortgage without such a cut in spending. Have you tracked your spending? Do you have unusual costs you have not mentioned? Are there other changes you could make in order to move and keep up a higher level of saving? Or is the whole cut in savings just a result of some arbitrary plan to lower the principal on the loan?

An unrelated issue concerns your wife’s future employment. What is the chance that you move now and it turns out that the location is not the best after your wife gets a job? You do not want a commitment to a house to limit your job options or result in an untenable commute.

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Watty
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Re: Sanity check on home purchase

Post by Watty » Wed Jan 29, 2020 3:51 pm

One thing that has not been mentioned is that if you have any more kids that could change your finances and delay your wife from being able to go back to work.

With your income of $160K you should be able to handle a $368K mortage espceially since interest rates have dipped.

The big question is what you will have to give up to make it work. In your likely tax bracket giving up the 401k contributions would be one of the last things I would give up. You can likely do Roth conversions later on so giving up the Roth contributions would not be something I would be concerned about.

Your new $2,400 mortage payment would be $28,800 a year. Maxing out the 401k for $19K would bring the total to $47,800.

You would pay a lot of taxes out of your $160K in income but that would still leave a lot of money unaccounted for.

There are several variations on a saying, "You can do anything you want, but not everything you want."

I think you can afford the house if you are willing to cut back on some other spending and not the 401k,

SimonJester
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Joined: Tue Aug 16, 2011 12:39 pm

Re: Sanity check on home purchase

Post by SimonJester » Wed Jan 29, 2020 5:37 pm

cloudyhead wrote:
Tue Jan 28, 2020 10:25 pm
Plan is to reduce 401k to minimum for matching, and eliminate Roth IRA/529 for a few years to reduce principle so PITI is around $2000/mo. Then return to usual tax advantaged maxing. Plan to pay for kids college via 529 best effort and cash flow the difference.

One risk I see is low efund during the dwelling switch which would go from 18 mo. equiv to 3 mo. before back to 9mo. by year end and growing.
Nope, I dont think you should do this.. Sounds like you are setting yourself up to be house poor...

Its a big jump in Sq ft and house price. Is there something in between the current house SQ FT / Price and the new one you are looking at?
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

KlangFool
Posts: 16673
Joined: Sat Oct 11, 2008 12:35 pm

Re: Sanity check on home purchase

Post by KlangFool » Wed Jan 29, 2020 5:51 pm

cloudyhead wrote:
Tue Jan 28, 2020 10:25 pm

Relevant yearly cash flows
Household income: $140k/year (+20k bonus) single income household though fairly stable prospects (in demand field)
401K +$19000 +$6,500 employer
Roth IRA +$12000 (total his & hers)
529 +$2000


P.s. would be honored by a Klangfool reply though I'm not following his rules
cloudyhead,

You are making 160K per year and saving 33K per year now.

<<From
+$55K home equity, $125K remaining on mortgage
24 yrs @ 4.25% monthly PITI $980
12% gross monthly home expense (inc util., etc.)

To:
+$92K home equity, -$368K remaining on mortgage
30 yrs @ 3.375%) monthly PITI $2,400
26% gross monthly home expense (inc util., etc.)>>

You are spending $1,500 X 12 = 18K extra per year for the new house.

In summary,

You will be making 160K per year and saving 15K per year.

<<In terms of retirement, we have the 3 legged stool of SS, tax-advantaged funds, and my pension. Understand this decision impacts the monthly amount in retirement and/or years worked but thinking its worth it as we only raise kids once.>>

Is your goal is to buy/feed the house and send the kids to college on a student loan? That happened to many of my peers.

You cannot have everything. If you want to buy the house, keep saving the 33K per year and cut your expense elsewhere. Your annual expense level is incredible even with the cheaper house. You could afford the house if you cut 18K of expense elsewhere.

<<Plan is to reduce 401k to minimum for matching,>>

And, you will be paying 20+% to 30% taxes for that 10K to 15K reduction to 401K contribution.

How much is your annual expense now? It is probably 80K to 100K per year.

KlangFool

Lalamimi
Posts: 445
Joined: Mon Jun 24, 2019 4:22 pm
Location: Texas

Re: Sanity check on home purchase

Post by Lalamimi » Wed Jan 29, 2020 6:21 pm

Have you determined taxes on a larger house? We went from a $200K house with $2K a yr taxes to a $450K house with $11K taxes. And I was laid off 2 months later. Wife should return to work and help save for larger home. But if IL comes, will they need assistance? We moved from our first home when kids were 8 and 12, (due to downward spiral of the schools) and it did not affect them to start new schools. No offense but in my opinion, it is 2020 - Why are so many wives not working when they could be contributing to income for betterment of the family situation down the road.

Regattamom
Posts: 259
Joined: Sat Jan 06, 2018 3:40 pm

Re: Sanity check on home purchase

Post by Regattamom » Wed Jan 29, 2020 7:17 pm

Lalamimi wrote:
Wed Jan 29, 2020 6:21 pm
No offense but in my opinion, it is 2020 - Why are so many wives not working when they could be contributing to income for betterment of the family situation down the road.
Betterment of the family situation means different things to different people. It's not always about the :moneybag . Surely, you understand this?

Dottie57
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Location: Earth Northern Hemisphere

Re: Sanity check on home purchase

Post by Dottie57 » Wed Jan 29, 2020 7:40 pm

KlangFool wrote:
Wed Jan 29, 2020 5:51 pm
cloudyhead wrote:
Tue Jan 28, 2020 10:25 pm

Relevant yearly cash flows
Household income: $140k/year (+20k bonus) single income household though fairly stable prospects (in demand field)
401K +$19000 +$6,500 employer
Roth IRA +$12000 (total his & hers)
529 +$2000


P.s. would be honored by a Klangfool reply though I'm not following his rules
cloudyhead,

You are making 160K per year and saving 33K per year now.

<<From
+$55K home equity, $125K remaining on mortgage
24 yrs @ 4.25% monthly PITI $980
12% gross monthly home expense (inc util., etc.)

To:
+$92K home equity, -$368K remaining on mortgage
30 yrs @ 3.375%) monthly PITI $2,400
26% gross monthly home expense (inc util., etc.)>>

You are spending $1,500 X 12 = 18K extra per year for the new house.

In summary,

You will be making 160K per year and saving 15K per year.

<<In terms of retirement, we have the 3 legged stool of SS, tax-advantaged funds, and my pension. Understand this decision impacts the monthly amount in retirement and/or years worked but thinking its worth it as we only raise kids once.>>

Is your goal is to buy/feed the house and send the kids to college on a student loan? That happened to many of my peers.

You cannot have everything. If you want to buy the house, keep saving the 33K per year and cut your expense elsewhere. Your annual expense level is incredible even with the cheaper house. You could afford the house if you cut 18K of expense elsewhere.

<<Plan is to reduce 401k to minimum for matching,>>

And, you will be paying 20+% to 30% taxes for that 10K to 15K reduction to 401K contribution.

How much is your annual expense now? It is probably 80K to 100K per year.

KlangFool
All great points.

Topic Author
cloudyhead
Posts: 2
Joined: Tue Jan 28, 2020 8:45 pm

Re: Sanity check on home purchase

Post by cloudyhead » Thu Jan 30, 2020 10:00 pm

Thank you everyone for your thoughtful replies! I've answered the questions below along with my action plan.

Take Aways
$460 is at high end of possible now due to not wanting to cut expense, saving, and giving goals.
We can try to negotiate the sale price down to $440 to put the ratio more into the comfort zone.

Our expenses appear higher than actual outflows due to counting funds to replace depreciating assets as expenses. But net/gross outflows (inc.tax,etc.) are around $100k with $40-60k going to various savings each year (efund,retirement,goals,etc.).
Also, we don’t include bonus in monthly budget. Typically put the bonus balance in savings after % reductions for tax, 401k for matching, and giving.

I can continue to max 401k by simply “paying” into my depreciating asset maintenance fund from the bonus instead of monthly. Seems ‘riskier’ as I try not to rely on the bonus for budgeting… but I’ve never not gotten it or had the value change much, so….

If we can’t get the house for $440k, we can work on both sides of the housing expense ratio. E.g. dedicate more savings to down payment & efund and increase income.

HOME
Is there something in between the current house SQ FT / Price and the new one you are looking at?
  • Checked sold in last 1 yr in desired are. Few in sweet spot of commute and best school
~350k would be a better place if it keeps you from reducing 401k/Roth.
  • have not seen any $350 that meet size, layout, and location needs
    lowest seen was $400k for much older and a bit smaller
That won't be $55k after selling
  • Understood.
Have you determined taxes on a larger house?
  • Yes, factored into calculations already.
WIFE
tell your wife you can’t afford it and keep living in the small house.
  • Understood
Wife should return to work and help save for larger home.
  • Understood
If wife plans to return to work you could rework your budget and (most likely) easily afford this change. Until then I'd consider waiting to make the move. Currently, it will take some serious budgeting to meet all your financial goals with this change.
  • Understood
What is the chance that you move now and it turns out that the location is not the best after your wife gets a job?
  • very low due to location only a few miles from current and dense job opportunities for wife’s specialty
if you have any more kids that could change your finances and delay your wife from being able to go back to work.
  • not planned
Why are so many wives not working when they could be contributing to income for betterment of the family situation down the road.
  • When choosing between continued full time work, completing a terminal degree, and precious experience early years with kids before school - chose latter two
RETIREMENT
the plan you have to lower PITI there is only a $400/month difference. That doesn't even max out one Roth, let alone return to your usual tax advantaged maxing
Paying down the PITI when your interest rate is so low doesn't make sense to me. That money would be better off growing in a tax-deferred account,
  • Understood. In order to improve the housing expense ratio, recommendation is to increase income before lowering cutting retirement to reduce PITI expenses further.
EXPENSE MGMT
Or is the whole cut in savings just a result of some arbitrary plan to lower the principal on the loan?
  • Absolutely. Wasn’t comfortable with the change in living expenses as a percent of gross cash flows (see chart)
    what you will have to give up to make it work.
  • College savings targets, Retirement savings targets and misc. savings.
"You can do anything you want, but not everything you want."
  • Understood
I think you can afford the house if you are willing to cut back on some other spending and not the 401k
In your likely tax bracket giving up the 401k contributions would be one of the last things I would give up. You can likely do Roth conversions later on so giving up the Roth contributions would not be something I would be concerned about.
  • Good Point. We could accept risk of moving maintenance fund cash flows to be funded from bonus only, which frees up monthly cash to max 401k
If you want to buy the house, keep saving the 33K per year and cut your expense elsewhere. Your annual expense level is incredible even with the cheaper house. You could afford the house if you cut 18K of expense elsewhere
  • Yes can keep most retirement savings if bonus funds maintenance fund, $2k/12k IRA, and $2k savings
How much is your annual expense now? It is probably 80K to 100K per year.
  • yes, 100k+ of gross (e.g. inc. all tax etc)
FUTURE PLANS
Is your goal is to buy/feed the house and send the kids to college on a student loan? That happened to many of my peers.
  • No.
But if IL comes, will they need assistance?
  • Now no. Potentially in 5-10 yrs?

Katietsu
Posts: 3514
Joined: Sun Sep 22, 2013 1:48 am

Re: Sanity check on home purchase

Post by Katietsu » Thu Jan 30, 2020 10:52 pm

Thank you for your thoughtful response. I tend to be very conservative. But, based on your new responses, I think that it is unnecessary to make a big deal between a $460k house and $440k. You have built in a whole lot of different safety factors that made the home purchase seem like more of a stretch than it is.

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