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.
- My 401k: $16k
- Her 401k: $17k
- My Roth IRA: $22k
- 529 College savings plan for my son: $3k
- Brokerage account: $12k
- Joint savings account aka "Downpayment fund": $15k
- "Emergency fund" savings account: $15k
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.
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.
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?