Buying a home first time - need sanity check

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crazyrussian
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Buying a home first time - need sanity check

Post by crazyrussian » Sun Feb 09, 2020 9:14 pm

Hi bogleheads,

I'd like to get an opinion from this community on my plan to buy the very first house that I'd ever own. I've been reading this forum for a while (and for a last week almost non-stop) and I feel that people here are really smart about their finances. Here is my background:

Me and my wife are in mid 30th both, we have a 2 year old son and planning for a second kid next year.
We are recent immigrants. She came to US 5 years ago and I came 3 years ago. We came here with some money to get by before finding a job, but definitely nothing like a decent savings/retirement accounts many people in US would have by this age.
Currently we are both employed - I work in IT, my wife works in education. I feel like my job is pretty secure - I'm employed at large service provider and even if something goes wrong with current project I can be assigned to another one, or just change the job. My wife's job is less secure since she's working for a small company that is not doing very good and had some layoffs during last couple of years. However, since they kept her position, we are still feeling ok about her job.
I earn $94k/yr and she earns $53k/yr (pre-tax). There are no significant sources of income apart from our wages.

Assets:
Tax sheltered
  • My 401k: $16k
  • Her 401k: $17k
  • My Roth IRA: $22k
  • 529 College savings plan for my son: $3k
Taxable
  • Brokerage account: $12k
  • Joint savings account aka "Downpayment fund": $15k
  • "Emergency fund" savings account: $15k
Monthly expenses:
Average post-taxes spending is $7.7k, this includes $1.8k for rent.
Pre-tax expenses: $930 for health, dental, vision and life insurance, and contributions to Health and Dependent Care FSAs.
I max out Roth IRA ($500/mo pre-tax) and we contribute to our 401k accounts just enough to get full employer matching. We don't invest in 529 plan for now.

Debt
Our main debt is a car loan, with $360/mo payment and $12.5k balance remaining.
We've got also ~$1.7k balance on one credit card that I'm going to pay off next month.

So we've started considering to buy a house this year to make it home for next 5-10 years. We are looking to buy inexpensive house in $220-280k range, and the most important condition is that monthly payments should not exceed our current rent by more than $100.

Here are my reasons for that decision:
1. Rent payments are paying off someone else's mortgage
NYT rent vs buy calculator suggests to buy a house. In our area (central New Jersey) houses are appreciating steadily, but the rent cost is high and also growing. Even considering higher than national average property taxes, PMI, and current high investment returns (if we invest money not in house) - still the numbers are in favor of buying.
2. Sense of ownership
While this is not a utilitarian benefit, we feel this is important. Back in my original country, both me and my wife were living with parents for a pretty long time. While that property wasn't formally owned by us, it belonged to us, if you know what I mean. We were free to do whatever we wanted and could afford to do considering remodeling, updates, etc. In rental housing in US I cannot put a nail in the wall without written permission from a landlord. And I have a son growing up - I'd like to do some DIY projects together with him. My wife would enjoy doing something on the backyard, growing plants, landscaping, etc.
3. No need to relocate
Since I came here a bit more than 3 years ago I already went through 3 different rental places. Growing rent, growing requirements made those moves necessary. We were not forced to move out, but I realize this is also possible while renting because the landlord could have other plans. This instability is not something I'd like for my son.
4. Current mortgage rates are low
The rates are pretty low now, and the quotes I'm getting are even lower than current average. I believe historic average rates are about 6%, and now we are close to historical lows. However, I put this on 4th place since the rates were going down continuously since 80s and I don't see why it cannot go down further.

Cons and concerns of buying a house:
1. Low on cash
After downpayment and closing costs, we will be left with less cash than I'm comfortable with. With our target price range and requirements for a house, in our area we'll probably end up with something that needs money for some repairs/upgrades. So if I put 10% down I'll have only about $10k in liquid assets afterwards. We'll still have retirement accounts that can serve as an "extra emergency funds", though. Some repairs can be done with credit cards or financing.
2. Below average schools
In our area better school districts are unaffordable for us. You cannot find a decent house below $300k with a good school. This is actually one of the reasons to make a move ASAP since we'll have more time building equity till my kid will be old enough for those schools and hopefully we'll be able to afford better place then. But life can happen and he might have to spend a year or two in the school that is not that nice.
3. PMI
Not a big concern, but with our current savings I'm planning to put 5-10% downpayment maximum. This will leave us with PMI for a few years. I'd love to make bigger payments to reach 78% LTV faster, but who knows how it will go... The PMI rates I'm getting for 10% downpayment are $50-60/mo, which doesn't look too bad. And I'm happy till the total monthly payments are same as my current rent.

Not having enough savings for 20% downpayment was my greatest concern a year ago when we decided to move out from our previous rental place and were thinking of home buying. But this time I did more research and found this article: https://themortgagereports.com/18520/20 ... erest-rate, where the author gives 3 main reasons why lower downpayment is better than high downpayment. He says that lower downpayment gives you higher ROI (returns due to house appreciation doesn't rely on the downpayment size); lower downpayment leaves you with more liquid cash that can be invested and used for emergency or even for mortgage payments if something happens with the primary income source; and lower downpayment means less chances for foreclosure if it goes underwater in case of recession, because bank will more likely to foreclose mortgages with less balance remaining (they'll need to write off less money in this case).
While this idea of lower downpayment contradicts many opinions that I was reading on this site because of PMI, higher rates, higher total cost of loan, those arguments also make sense to me and makes me feel less concerned for settling on 5-10% downpayment.

I also plan to take ARM 7/1 loan instead of common 30 yr fixed to get lower rates. I don't intend to live in that house longer than 5-7 years, and if I have to then it should be easy to refinance.

I appreciate everyone who could read till this line, and I'd appreciate much if someone can leave a comment on this. Does it look like a good idea to buy a house for us now? Do my pros and cons make sense? Do I miss something in my thought process?

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Watty
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Re: Buying a home first time - need sanity check

Post by Watty » Sun Feb 09, 2020 10:02 pm

crazyrussian wrote:
Sun Feb 09, 2020 9:14 pm
Me and my wife are in mid 30th both, we have a 2 year old son and planning for a second kid next year.

........
2. Below average schools
In our area better school districts are unaffordable for us. You cannot find a decent house below $300k with a good school. This is actually one of the reasons to make a move ASAP since we'll have more time building equity till my kid will be old enough for those schools and hopefully we'll be able to afford better place then. But life can happen and he might have to spend a year or two in the school that is not that nice.
If I was in your position I would hold off on buying a home until after you have the second kid. If the kid has even minor and temporary health problems you might have extra expenses and not want or be able to use daycare so you might have to go down to one income for a while.

In the US selling and buying a home is very expensive and can cost up to 10% of what a home costs so it is generally recommended that you not buy a house unless you expect to be able to live in it for seven years.

I am not real familiar with New Jersey but most of the northeast has very expensive housing. If you do not have strong ties to the area you are in then you might consider relocating to a less expensive part of the country before you settle down and buy a house.

In probably 80% of the US you can get a decent house with decent schools for somewhere in the ballpark of $250K. I retired out of IT and my son works in IT now so I am fairly familiar with IT salaries and they are good in even lower cost of living areas.

Here is a PDF of housing prices in different metropolitan areas.

https://www.nar.realtor/sites/default/f ... -11-07.pdf

That I got from this web site.

https://www.nar.realtor/research-and-st ... ordability

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Sandtrap
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Re: Buying a home first time - need sanity check

Post by Sandtrap » Sun Feb 09, 2020 10:09 pm

"watty" pointed out some excellent things to consider.

. . . additionally. . . .
IMHO
Given the data that you have provided:
1
Wait until you have a more solid financial foundation. You have nothing to lose by waiting.
2
You are still in a transitional period in life, financially, career, etc, with unpredictable short term "black swan" expenses to weather. Reduce your debt, do not incur new debt, build up your emergency fund and short term savings for your home, and make efforts to increase your income streams.
3
When you are on a better financial footing, you will be able to move into an area with better schools, etc, etc.
4
You say you don't plan to live in the house for more than 5-7 years.
All the more reason for #1-3.

j :happy
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Sam1
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Re: Buying a home first time - need sanity check

Post by Sam1 » Sun Feb 09, 2020 10:12 pm

I’d try to hold off one more year. I understand the desire to own your own home as you’re now a family. It sounds like you’re doing all the right things financially. For now, I’d stay put and have the second kid. Does your wife have any paid parental leave? That’s something to consider.

I think having young kids and both parents working is stressful. Which is why I wouldn’t take the added stress of home ownership while having a second child.

I’d try to get the downpayment fund up to 20 percent and max any retirement accounts you can. Can you do this staying one more year in your current apartment?

Boglehobby
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Re: Buying a home first time - need sanity check

Post by Boglehobby » Sun Feb 09, 2020 10:24 pm

Definitely hold off buying for now to avoid the PMI. This is your hard earned money wasted.

Grt2bOutdoors
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Re: Buying a home first time - need sanity check

Post by Grt2bOutdoors » Sun Feb 09, 2020 10:26 pm

First off, you should forget that piece of "research" - banks will foreclose on their timetable, not yours, regardless of your principal balance. Do you see the contributor providing citations or backup to his ridiculous claims that banks are less likely to foreclose because you hold a high principal balance? It's GIGO - garbage in and garbage out!

Second, forget the ROI nonsense - there are high transaction costs for purchasing real assets such as houses - its likely the selling realtor will reap a 5-6% commission on the sale of home. Let's say you put down 3%, that leaves you renting your home not owning it, with a 97% debt load, your equity will essentially be wiped away if 5-7 years from now you are unable to sell it for much more than what you purchased it for on account of that 5-6% commission the realtor earns on selling price. A house is not an investment as much as it is a place for you to live in.

Third, your house fund is the $27K ($15K + $12K brokerage account assuming it isn't overly risky). Have you calculated closing costs? Attorney fees, title insurance, first months PITI + PMI. How about utilities? House furnishings, window treatments, paint. My advice is to forget using credit cards to make any sort of large repairs, pretty insane to be borrowing at 9-18% non deductible rates of interest while buying a house at tax deductible rates of 3-4%.

I liked fellow forum poster Watty's suggestion to hold off until your second child is born and some time has passed. There is nothing wrong with renting. Your risk is less with renting, a house can be a chain around your neck when you lack sufficient liquidity as a safety net. Instead of a house, have you considered a town home in a nicer school district in the same county? I would consider all options, most of all make no predictions on interest rates and mortgage products. People have made and lost fortunes making such bets.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Lee_WSP
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Re: Buying a home first time - need sanity check

Post by Lee_WSP » Mon Feb 10, 2020 7:29 pm

Your Pro's list is just a lifestyle wish list.

Your con's tell the true tale.

Ie, you should not buy.
crazyrussian wrote:
Sun Feb 09, 2020 9:14 pm
2. Below average schools
In our area better school districts are unaffordable for us. You cannot find a decent house below $300k with a good school. This is actually one of the reasons to make a move ASAP since we'll have more time building equity till my kid will be old enough for those schools and hopefully we'll be able to afford better place then. But life can happen and he might have to spend a year or two in the school that is not that nice.
What is more important? Having the "pride" of owning the home, or renting a home/apartment in a better school district?
crazyrussian wrote:
Sun Feb 09, 2020 9:14 pm
1. Low on cash
After downpayment and closing costs, we will be left with less cash than I'm comfortable with. With our target price range and requirements for a house, in our area we'll probably end up with something that needs money for some repairs/upgrades. So if I put 10% down I'll have only about $10k in liquid assets afterwards. We'll still have retirement accounts that can serve as an "extra emergency funds", though. Some repairs can be done with credit cards or financing.
What's more important, home ownership pride or financial security?

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cchrissyy
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Re: Buying a home first time - need sanity check

Post by cchrissyy » Mon Feb 10, 2020 8:16 pm

either one of you might change jobs in the next few years and that would change the best neighborhood/city/state for your needs. don't tie yourself down to a house in a fixed location and limit your ability to take a better job.

as9
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Re: Buying a home first time - need sanity check

Post by as9 » Mon Feb 10, 2020 9:02 pm

Any town in North/Central Jersey that seems like a bargain or even just affordable is almost always because of the quality of schools (or because the property taxes are so obscene). This sentence concerns me - "This is actually one of the reasons to make a move ASAP since we'll have more time building equity till my kid will be old enough for those schools and hopefully we'll be able to afford better place then." The town with below average schools is not going to appreciate at the same rate as the top districts, so you'd likely be digging more of a hole unless you have reason to believe the school district is improving.

That said, "below average" schools in NJ may still be better than a large majority of schools in the US. Are they legitimately subpar or do they just not compare well to Princeton or West Windsor?

Topic Author
crazyrussian
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Re: Buying a home first time - need sanity check

Post by crazyrussian » Mon Feb 10, 2020 10:30 pm

Hi!

Thank you all for those comments! I'm even a bit overwhelmed by the number of responses!
And what I like a lot is the different perspective which highlights things that I wasn't thinking about. Especially the advice from Watty and Sam1 regarding the impact that second child can have on my life, emotionally and financially. Also good point from as9 - indeed, a house in a below average school district might not appreciate well or drop in value more significantly in case of economy downturn. And a good suggestion from Grt2bOutdoors to look for a townhome in better school district - we actually do live in townhome now, and schools here are nice as we've been told by neighbors. So staying here to accumulate more savings and maybe later consider buying a townhome in the same development might be a great idea.

A couple of weeks ago we saw a nice house with our agent, it's not expensive and agent told us that we can probably get it for $20k less than asking price. We were really eager to make a move since we do have some money saved and with low downpayment could buy it. But then all the consequences started to sink in, plus we had some outstanding credit card debt and our lease was just renewed... So we were thinking to put this off till later this year. And then all complications started to sink in with more and more articles and forums been read. Your feedback is also very helpful to make the right decision!
It's probably really better to hold on and work on savings for next year or two. This way we can afford a house with better schools and get ourselves less debt and lower monthly payments.

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crazyrussian
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Re: Buying a home first time - need sanity check

Post by crazyrussian » Mon Feb 10, 2020 10:34 pm

as9 wrote:
Mon Feb 10, 2020 9:02 pm
That said, "below average" schools in NJ may still be better than a large majority of schools in the US. Are they legitimately subpar or do they just not compare well to Princeton or West Windsor?
How would I assess this? I'm comparing ratings from GoodSchools site and judging by the rating score. While West Windsor and Princeton schools get 9s and 10s, the schools here are 5s to 7s. I've heard than New Jersey schools are good comparing to many other states, but I thought it's reflected in GoodSchools ratings...

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Watty
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Re: Buying a home first time - need sanity check

Post by Watty » Tue Feb 11, 2020 5:21 am

crazyrussian wrote:
Mon Feb 10, 2020 10:34 pm
as9 wrote:
Mon Feb 10, 2020 9:02 pm
That said, "below average" schools in NJ may still be better than a large majority of schools in the US. Are they legitimately subpar or do they just not compare well to Princeton or West Windsor?
How would I assess this? I'm comparing ratings from GoodSchools site and judging by the rating score. While West Windsor and Princeton schools get 9s and 10s, the schools here are 5s to 7s. I've heard than New Jersey schools are good comparing to many other states, but I thought it's reflected in GoodSchools ratings...
Be very careful about using the Great Schools, or similar rankings.

It was almost 20 years ago but I was doing a corporate relocation to Atlanta when my kid was in middle school so finding a home quickly that had good schools was a priority. We were mainly looking at houses in a huge county wide school district that has around 15 very large high schools that today have Great school rankings that are mainly 5 to 10. The areas the schools were in ranged from pretty affluent to lower middle class but there not any really bad areas.

In talking with a high school counselor about this we found that all the high schools in that school district had basically the same resources and programs. The big difference was the demographics of the students and the schools in the more affluent areas had higher rankings than the lower income areas. It is complex but apparently one of the more important predictors in how a high school student will perform is the education level of their parents and in the more affluent areas the parents were generally better educated. In the lower income areas a lot more of the students also had more negative factors like unstable family situations.

If we had bought a house in a more affluent area we would not have really be getting a better school but mainly better classmates for our kid. Your kids classements are important since if they have friends that are not good students or using drugs that can be a big problem but it is complex and the schools with lots of "rich kids" can have their own problems. When we were visiting the high schools we happened to drive through the student parking lots in one of the affluent areas and there was a noticeable number of Mercedes and BMWs in the student parking lot and even one late model Corvette. Even if you can afford it who in their right mind buys a 17 year old a Corvette? Later on we did hear that high school had some problems with cliques of rich kids.

We ended up not worrying about getting the top ranking school and bought a house in a somewhat less expensive area where the high school would have been ranked maybe an 8 or 9.

One thing we found was that visiting the schools was critical since each of them had a different feel. One well ranked high school that we went to had dozens of temporary classroom, basically mobile homes, since it was so overcrowded. That would have been hard to figure out by just looking at the statistics.

I would not worry too much about schools that are within around three points or so on the Great Schools rankings since the difference between a 7 and a 10 , or 5 and 8, could just be the student demographics.

snowox
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Re: Buying a home first time - need sanity check

Post by snowox » Tue Feb 11, 2020 5:30 am

Like others said I would for sure wait and build a more financial cushion as well as have the other baby first. Alot of hidden expenses when buying a house and I feel your overall portfolio needs to be stronger

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JoeRetire
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Re: Buying a home first time - need sanity check

Post by JoeRetire » Tue Feb 11, 2020 7:01 am

crazyrussian wrote:
Sun Feb 09, 2020 9:14 pm
After downpayment and closing costs, we will be left with less cash than I'm comfortable with. With our target price range and requirements for a house, in our area we'll probably end up with something that needs money for some repairs/upgrades. So if I put 10% down I'll have only about $10k in liquid assets afterwards. We'll still have retirement accounts that can serve as an "extra emergency funds", though. Some repairs can be done with credit cards or financing.
This tells me that while you would like to afford a home, you aren't yet ready.
If you can't afford 20% down, you can't afford to own, IMHO.
I don't intend to live in that house longer than 5-7 years
It makes even less sense to buy a starter home when you really can't afford it.
Very Stable Genius

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Cubicle
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Re: Buying a home first time - need sanity check

Post by Cubicle » Tue Feb 11, 2020 10:33 pm

crazyrussian wrote:
Sun Feb 09, 2020 9:14 pm
We came here with some money to get by before finding a job, but definitely nothing like a decent savings/retirement accounts many people in US would have by this age.
You'd be surprised. Very surprised...

Welcome to the board. I too am in Central NJ. It's expensive here. The more north you go, the more pricey it is. South Jersey is cheaper. Pennsylvania is cheaper. Delaware is much cheaper. If you don't have reason to be in Jersey, you really should consider leaving. I stayed because my parents & siblings are here. I love this state, I was born here, its close to many attractions, its well developed. But for what I'm paying its a bad value. Now I have a house & career, I'm "stuck" here.

You'd be best served by waiting to buy. A lot of uncertainty in your life right now, including a lack of solid funds. Don't feel rushed, there will always be houses for sale.

School districts are hit & miss, even with the rankings. I know a client who's daughter got accepted to Harvard, Yale, & Princeton. The daughter came from a school district that is generally agreed by most to be "below average". Yes I'm pointing out an abbe ration. But what I am saying is there are many more variables than just online school rankings. My best advice is to web search for whatever school district you are looking at for news articles (like Google News), & on NJ.com, nj1015.com, & the other NJ local news sites. You'll see which districts are frequently devoid of funding, violence, awards, "funny business".

Leemiller
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Re: Buying a home first time - need sanity check

Post by Leemiller » Wed Feb 12, 2020 7:47 am

The issue that jumps out to me is do you really want to live in the area you currently live in. You’re in a high COL and making good money but can you make similar in a lower COL. Personally, I would take a hard look at that. The biggest problem with buying a house now is you don’t have liquidity to move if you had to. So basically the house will tie you to whatever part of NJ you live in for several years.

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peterinjapan
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Re: Buying a home first time - need sanity check

Post by peterinjapan » Thu Feb 13, 2020 10:58 am

My advice is to google a checklist of "things you wish you'd thought of before you bought your first house." In my case it was, check that the building across from your 6th floor condo doesn't allow office workers to see you while you're naked in your living room, and make sure you don't need to take two separate elevators to get to your car.

Also noise, if applicable. I don't care about downtown San Diego sirens and other noise, but my wife hates it.

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