Planning for future home - overextending?

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nokoast
Posts: 6
Joined: Mon Jan 28, 2019 8:53 am

Planning for future home - overextending?

Post by nokoast »

Hello everyone, been watching/reading from the sidelines for a little over a year and finally wanted to dip my toe in for some advice.

Little Info:
DW and I are just shy of 30.
We live in a LCOL area in the upper midwest.
Fully save Roth IRAs annually.
I contribute to company 401k to match.

Income
His: ~$75k
Hers: SAHM

Assets:
EF: $23k
401k: 30k
His Roth: 25k
Her Roth: 24k
Her tIRA: 10k
house fund: 50k
529: 2k

Debt
$195k mortgage @ 3.5%, nothing else.

I work for a small company and feel very secure with my job - both because management has been vocal about my future and knowing that I have at least one other company interested in my employment (not looking, they've reached out to me several times). Obviously, things could change drastically during a dramatic market event - but I view this as a remote chance for my particular field. I have experienced raises of ~6+% since I started.

DW is a SAHM with 2 year old, 2nd on the way, and has been for the past two years. We do not plan on her bringing home a check for 7+ years - if ever. Her not being a SAHM for the near term is non-negotiable for both of us, just our personal choice.

We are currently saving and hope to move to our "forever" home in about 3-5 years, depending on the housing market and my income. Viewing what is on the market currently, I anticipate that this home will be in the 350k-400k range. The main wants we have in the next house are better school district, more yard/acreage for family, and newer (current was built in early 1980s, minimal remodels to date). If we need to live in the house a little longer that 5 years, we obviously can but would prefer to find our home within that time frame.

My concern is not as much with scratching together the down payment as much as the mortgage and the % of my take-home this will require. We are saving ~$700/mo for the down payment and have already put away about $50k. I hope that by the time we are looking to purchase a new house, that my income will be close to or above 6 figures. All future raises/bonuses/tax returns will go towards the down payment fund as well; I have been told 6 figures is in my future.

Ideally, I want to have ~$125k in cash at time of purchase to cover down payment, purchases/improvements for new home, handling 2nd mortgage while trying to sell, and EF. This does not include the equity that we have in our current home - I don't want to do a contingent offer. I project that in 5 years, we should have around $40k in equity.

My Concerns:
1) Future mortgage to income ratio. Is this setting ourselves up for difficulties and undo stress? Is it feasible?
2) Currently saving for down payment in CDs ($30k) and VTI ($23k). All monthly savings are currently being fed into VTI. I understand we are taking some risk with the market, but I feel like since we already have a decent cash cushion and a longish time frame this is acceptable?
3) Another issue that keeps me up is that we are currently paying PMI (was young & dumb - well I'm probably still both of those). I would like to refi into another loan, but in order to get under 80% we would need to drop another $20k into the house to save ~$150/mo. I know in the long run, this would save us money, but dropping that much of our down payment fund would lengthen our timeframe to save for the next home - unless we did a contingent offer which I would like to avoid.

We live pretty frugal and a home that we enjoy in a school district we are more comfortable in is something that we believe is worth spending money on. I have no goals of FIRE, being stupid wealthy, or driving fancy vehicles; just want to live comfortably and be able to provide for my family and give the kids a better life and better start than I had. Sorry for the rambling. I appreciate any and all feedback.
"What will it profit a man if he gains the whole world, yet forfeits his soul?" MW 16:26
bloom2708
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Re: Planning for future home - overextending?

Post by bloom2708 »

If you put down the equity from your current home + new cash and don't get a mortgage past 2.5x to 3.0x income, you should be OK.

Keep saving for the bigger down payment. There is only so much you can save on $75k. It is a choice to have only one income.

I would prefer you were putting more away pre-tax in the 401k. Just getting the match is good, but it is leaving a lot of tax-advantaged space unused each year.

See how raises go. Stash bonuses away. Bump up 401k pre-tax by 1% with each raise. See what happens. Most people stay in their forever home for 5-7 years. I'm not sold on the concept. Jobs change, kids change, people change, neighborhoods change, priorities change, etc.

I can't recommend stretching too far and being house poor. You have less room for error with one salary. We went to one salary after the mortgage was paid off and were well ahead of the game. Three kids. I still miss my wife's income. We could do so much more saving. But is is about trade-offs.

Hopefully others give yous some good advice.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
daheld
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Re: Planning for future home - overextending?

Post by daheld »

My personal opinion is that a $350-$400k house will be too much of a stretch for your single income family. I am relatively risk averse, but this is not a decision I would make. You have way less than half a year's income saved for retirement at 30 years old with two kids.

If you're looking for encouragement to do it, you might find some people who say it's fine. One popular rule of thumb is to spend no more than 28% your pretax monthly income. Assuming you're making $100k when you're ready to buy (which might be a big stretch), the 28% rule would mean that, at absolute max, you could/should spend $2,333/month on a mortgage. That is WAY, WAY, WAY more than I would spend on a mortgage, and our family income is more than twice yours.

Now, assuming you can spend $2,333/month, let's figure out how much your "forever home" will cost. If you buy a $350k home (the very low end of your wish list) at 3.5% and put down 20% down payment, you'll have a mortgage of $280,000 with P&I payment of around $1300. Over a 30 year mortgage, you'll spend nearly a half million dollars on the house when including interest.

I don't know what your profession is or what your long term earnings potential is, but unless it's way more than you're making now OR your wife is able to get a job earning a decent salary, I would not buy a $350-$400k home.

We've not yet discussed college tuition, but if you're thinking of paying for college in 20 years or so, you'll probably need a couple hundred thousand to even put a dent in your two kids' college costs.

None of this is meant to be mean. You're saving like crazy and living frugally. That's great, and something we do too. I just don't see the math working.
Last edited by daheld on Thu Jun 18, 2020 1:21 pm, edited 1 time in total.
wilked
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Re: Planning for future home - overextending?

Post by wilked »

bloom2708 wrote: Thu Jun 18, 2020 12:54 pm If you put down the equity from your current home + new cash and don't get a mortgage past 2.5x to 3.0x income, you should be OK.

Keep saving for the bigger down payment. There is only so much you can save on $75k. It is a choice to have only one income.

I would prefer you were putting more away pre-tax in the 401k. Just getting the match is good, but it is leaving a lot of tax-advantaged space unused each year.

See how raises go. Stash bonuses away. Bump up 401k pre-tax by 1% with each raise. See what happens. Most people stay in their forever home for 5-7 years. I'm not sold on the concept. Jobs change, kids change, people change, neighborhoods change, priorities change, etc.

I can't recommend stretching too far and being house poor. You have less room for error with one salary. We went to one salary after the mortgage was paid off and were well ahead of the game. Three kids. I still miss my wife's income. We could do so much more saving. But is is about trade-offs.

Hopefully others give yous some good advice.
To offer a counterpoint, there is no way I would take on a 3X mortgage at $75K salary. People use multipliers on salary but it's not a linear equation. The first $50K or any salary is used for basic needs. It's above that that your disposable income increases and you can more easily apply that to wants (vs needs) such as increased acreage and top schools.

To the OP, I would not take on a mortgage above your current mortgage ($200K). I'd consider that a ceiling unless your income grows significantly. Based on that I'd say consider a new house if you'd like, but look to bring $150K in cash to put down on it. At your numbers that means saving $100K over X years. You say you're saving $8K/year, and that's a long time (12 years).

Add it all up, I'd say your eyes are bigger than your stomach, to give some frank feedback. What attracted you to this home a couple years ago? Why has that changed so quickly?

-New house: Why not spend some money to remodel? Maintenance (and I include planned remodel as maintenance) is part of every homeownership. It will eat into your $750/month but you should be putting money aside for this.
-How is your school district now? Bad, or middle of the road? I think school districts get oversold...
-How much acreage are you seeking? What do you have now? Do you have nearby parks? Again, I would ask why did you buy this house and why have your needs changed so quickly?
bloom2708
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Re: Planning for future home - overextending?

Post by bloom2708 »

wilked wrote: Thu Jun 18, 2020 1:19 pm To offer a counterpoint, there is no way I would take on a 3X mortgage at $75K salary. People use multipliers on salary but it's not a linear equation. The first $50K or any salary is used for basic needs. It's above that that your disposable income increases and you can more easily apply that to wants (vs needs) such as increased acreage and top schools.
I think we agree and maybe just saying it in different ways.

3 times $75k is $225k. They already have a $195k mortgage. Closer to 3x.

It will require (for me at least) big salary increases, current house appreciation and a large cash infusion to move up in house.

Since the OP already has ~2.5x and is making it, I think that is why I think they would be OK, with the right set of things happening. 5 years is a long time. Much can change.

We had $200k income when both my wife and I were working. Our biggest mortgage was $130k. I hated it. I can't imagine having $300k, $500k mortgages on similar salaries. But then, people do things differently.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
wilked
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Re: Planning for future home - overextending?

Post by wilked »

bloom2708 wrote: Thu Jun 18, 2020 1:28 pm
wilked wrote: Thu Jun 18, 2020 1:19 pm To offer a counterpoint, there is no way I would take on a 3X mortgage at $75K salary. People use multipliers on salary but it's not a linear equation. The first $50K or any salary is used for basic needs. It's above that that your disposable income increases and you can more easily apply that to wants (vs needs) such as increased acreage and top schools.
I think we agree and maybe just saying it in different ways.

3 times $75k is $225k. They already have a $195k mortgage. Closer to 3x.

It will require (for me at least) big salary increases, current house appreciation and a large cash infusion to move up in house.

Since the OP already has ~2.5x and is making it, I think that is why I think they would be OK, with the right set of things happening. 5 years is a long time. Much can change.

We had $200k income when both my wife and I were working. Our biggest mortgage was $130k. I hated it. I can't imagine having $300k, $500k mortgages on similar salaries. But then, people do things differently.
I see what you mean, and agree.

I do worry that the OP is putting away decent savings of $750/month but also allowing his home to become outdated / not kept up, with part of the solution to purchase a different new house. My recommendation is to redirect some of that savings to updating the house to make it work for the foreseeable future.
Topic Author
nokoast
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Joined: Mon Jan 28, 2019 8:53 am

Re: Planning for future home - overextending?

Post by nokoast »

Thanks for the replies so far all. Bit of a gut punch, but it highlights concerns that I am trying to reason away.

When DW left her job to SAHM, we were living on my income of $66k and making ends meet - this is what led me to believe stretching my future income to cover a future house would be plausible.

We do like our home and feel like it was a good buy, but we bought it as more or a "starter" home. I did not mean to give off the impression that we are not updating/maintaining our home, as we have completed several projects every year as the budget allows. The two main factors for a new home are bigger lot (currently .25 acres) and the school district we want to be in. I'm also concerned with the trend in our neighborhood that numerous homes appear to be slipping physically and some neighbors are not maintaining their homes which will obviously hurt the value of our home. We were hoping to move before this became even more pronounced.

In response to the 401k; it's been more important to me to fund the roth iras first and save for our near term goals. I put in enough to get the match but after that I would rather save for our near term goals because a) the ER on the funds are much higher than our IRAs and b) with the IRAs, 401k and employer match we are already shoving 25% of salary into retirement.

The good news, to me, is that we have time and are not looking to move immediately. It's been made clear that we need to reassess what we can realistically afford for the future home - sounds like we should be trying to limit this to under $300k and might have to live in our current home longer than anticipated. Additionally, this might spur me to probe the job market to see how competitively I am being compensated - although I would have to think on this more as I am happy with the current company/position.

We will just keep on saving and re-evaluate our standing as we get closer. I'm just trying to plan and best "guess" future situations and what I need to do now to better position myself. I don't intend to decrease my savings rate, so we will continue on situation normal.
"What will it profit a man if he gains the whole world, yet forfeits his soul?" MW 16:26
bloom2708
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Re: Planning for future home - overextending?

Post by bloom2708 »

OP, how long have you been in your current house? How much did you put down as a percentage?

Living too far out in the future isn't fun. The always wanting to move up wears on you. I'm also not a fan of "starter homes" because of the high costs of selling. Hindsight, you may have been better off saving for more years and building a bigger down payment. Oh well. Try to live in the present and just enjoy every day.

Try to make your current house be what you want. Maybe your wife decides to go back to work. Maybe a promotion comes in or a new job comes along.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
Katietsu
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Re: Planning for future home - overextending?

Post by Katietsu »

I would be surprised if $350k was needed in a LCOL in the Upper MidWest to be in a good school district with a well kept neighborhood. I can understand wanting those things as your income gets near $100k. I think you might be stretching for other upgrades though that might not mean as much. I know how easy it is to get caught up when you are “shopping” but, from someone a generation ahead of you, a lot of those niceties have a reduced impact once you are living your day to day life.

I would suggest that you do not carry two mortgages. This is a horrible idea for someone without a huge cash cushion. Make a contingent offer or go through the hassle of a short term rental. Stay in your parents’ basement. Having two mortgages can turn a dream into a nightmare quickly.
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Watty
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Re: Planning for future home - overextending?

Post by Watty »

nokoast wrote: Thu Jun 18, 2020 11:12 am we are currently paying PMI (was young & dumb - well I'm probably still both of those). I would like to refi into another loan, but in order to get under 80% we would need to drop another $20k into the house to save ~$150/mo. I know in the long run, this would save us money, but dropping that much of our down payment fund would lengthen our timeframe to save for the next home - unless we did a contingent offer which I would like to avoid.
Get rid of the PMI ASAP. That is costing you $1,800 a year and there are lots of ways to juggle the sale of your house and the purchase of your next house, people do this all the time. In the worst case you would need to find a place to live for a month or two between houses and the savings on the PMI would more than pay for that. Your mortgage payment is probably in the ballpark of $1,000 a month so if there is a month gap between houses you would also have an extra $1,000 since you would not have a mortgage payment that month. That be used to pay to a place to live until you can move into your next house.

You very likely would also not qualify for two mortgages at once so owning them both at the same time is likely not even possible.
nokoast wrote: Thu Jun 18, 2020 11:12 am I anticipate that this home will be in the 350k-400k range.
It sounds like your current house is worth around $200K so there is a lot of space between what you have now and what you want. A $300K house would still be a big step up so when you get to point where you are ready to move you can look to see what you can afford then.

It sounds like you want three things in your next house.
1) Better schools
2) acreage
3) Better house, either newer or well updated.

Just for brainstorming could you find something that had better schools and acreage that is in good condition but not updated for about $300K now? If so you might consider if it would make sense to go on and buy it after the 2nd baby is born and things settle down.

With 20% down that would be a a $240K mortgage which would not be much different than what you are paying now for the $195K mortgage with the PMI.

I would not buy a dumpy fixer upper that needs immediate remodeling but a solid older house that needs updating might be worth considering. My first house had an avocado green kitchen long after that was fashionable, but it was functional so I was able to live with it for about five years until I had the time and money to update it. The price of the house was lower because of the dated kitchen but that is why I could afford that house.

That way you could lock in the current low interest rates and in a few years you could save up and remodel or add on to the house when you have the money. If you are able to do some of the remodeling yourself that would help your money go farther. I remodeled that kitchen by myself and while it takes time and it is work it is not rocket science especially if you are not doing things like moving walls. You can learn most of it as you go along and you can hire people to do things like electric work and plumbing that take more skills.

If you decide to do this I would wait until the baby is born just to make sure that everything goes well.
Last edited by Watty on Thu Jun 18, 2020 5:15 pm, edited 1 time in total.
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MrBobcat
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Re: Planning for future home - overextending?

Post by MrBobcat »

Watty wrote: Thu Jun 18, 2020 4:44 pm
I would not buy a dumpy fixer upper that needs immediate remodeling but a solid older house that needs updating might be worth considering. My first house had an avocado green kitchen long after that was fashionable, but it was functional so I was able to live with it for about five years until I had the time and money to update it. The price of the house was lower because of the dated kitchen but that is why I could afford that house.

That way you could lock in the current low interest rates and in a few years you could save up and remodel or add on to the house when you have the money. If you are able to do some of the remodeling yourself that would help your money go farther. I remodeled that kitchen by myself and while it takes time and it is work it is not rocket science especially if you are not doing things like moving walls. You can learn most of it as you go along and you can hire people to do things like electric work and plumbing that take more skills.

If you decide to do this I would wait until the baby is born just to make sure that everything goes well.
That's the route I've taken with the 3 houses I've owned over the years and it's worked well and I lived with very dated but functional houses for a lotta years. Been in my current one for 22 years (built in 1961). Only thing I have left to do is get rid of the orange shag carpet and paneling in the basement family room. Would have done it earlier but they built a big rock wall and hearth to put a gas stove on (never used) and I never got around to getting it out of there. I did rip out the rock chimney they built a few months ago so it won't be too much longer.

Anywho, long story short, it may be quite a while before one gets the house exactly they way they want it but IMO it's worth it.
Golf maniac
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Re: Planning for future home - overextending?

Post by Golf maniac »

+1 Get rid of the PMI ASAP.

If you don’t get anything else out Of this thread get the above point. There is no reason for you to hold money for a future down payment when your paying PMI. I would be throwing all my extra money at principal reduction on your current mortgage. You will reduce the interest paid and build your equity.

When you think your ready to buy a new home sell your home first. You will have 30 days or more to find a new home after you sell and you will have a nice amount of equity for down payment on your new home. Also, some people are not in a hurry to move in and may allow you to lease back the home until you find your new home.

On the 401k, the money you put in today is so much more valuable then what you put in later for a simple reason, time. Your young and the money has years to grow for you. I like the suggestion of taking 1% of your raise and putting it into your 401k each year. That is what I did beginning when I was in my late 20’s. I never missed the money because I never saw it in the check.

Finally, at least think about college expenses for the kids, discuss it with your spouse and decide if you want to do anything. Life is all about choices and the ones you make now can have a big impact on your life in 20 to 30 years. Good luck!
ajg189
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Re: Planning for future home - overextending?

Post by ajg189 »

A lot will change in 3-5 years. Keep putting money away (this never hurts) and reevaluate as it gets closer. By then, your situation may completely change, hopefully for the better. At this early stage in life, things move and change quickly because you’re still in the phase of accelerating your career.
System1
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Re: Planning for future home - overextending?

Post by System1 »

+1 on getting rid of PMI

In 5 years you might have 2 more kids, who knows :shock:

Don't get too worried about the price of the new home, your budget will work out as you get closer to purchase time. Also, don't expect it to be a forever home (whatever that means), however, don't buy anything that couldn't be in case you end up having to stay due to unforeseen circumstances. From my observations, house needs change every 10 years or less. Some people move to accommodate, others make do. Not all of those changes are to increase size and value, at some point you won't need as big of a house.
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nokoast
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Re: Planning for future home - overextending?

Post by nokoast »

Thanks all.

The PMI has been bothering me and this just reinforces that voice in my head. We will look into refinancing into another loan to drop the PMI (FHA loan current) and hopefully into a lower rate and lower term.

Whenever down the line when we do look at a new house, we will look to sell first.
"What will it profit a man if he gains the whole world, yet forfeits his soul?" MW 16:26
Olemiss540
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Re: Planning for future home - overextending?

Post by Olemiss540 »

You are doing great! I would also get rid of PMI. Then would go on autopilot for a few years and focus on your work and the little ones. Keep saving so aggressively and a 400k house isnt too far off as long as your income growth continues to expedite as you enter your early to mid 30s.

Please dont get to over focused on this need for a new house and miss out on the beautiful things going on around you with the little kiddos. Having a SAH spouse hurt your abilities for "things" but it sounds important to you. Live for today!
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.
il0kin
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Re: Planning for future home - overextending?

Post by il0kin »

I think you’re overextending. Could you find a 225-250k house in the school district you like if you made some compromises?

The worst feeling in the would would be getting laid off, coming home and telling your wife and kids the fancy, new house they love may have to go up for sale because the mortgage is too much.

You also need to think long term. Your wife may never return to work, so her SS will be a pittance at 65. You are a good saver so you’ll probably be fine, but you need to consider all of the carrying costs of a 350-400k house. The property taxes grow exponentially, the neighborhood is nicer so you have to do constant updates to fit in, probably an HOA fee, etc. and all of that could be directed to retirement savings.

We bought less house on over twice your income, but we got a barely updated 80s house in the best school district in the state. Each year we chip away at remodels. I sleep well at night. I’m only a year older than you. I don’t want to sound like I’m casting stones, but you need to have a serious conversation about keeping up with the Jones’s. I’m not saying don’t enjoy life and find a house you enjoy, but 350-400 is flat out too much in a LCOL.
Flyer24
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Re: Planning for future home - overextending?

Post by Flyer24 »

I wouldn’t stretch that much. One thing to keep in mind is expenses go up as kids get older. Mine are both teens now and it is nothing compared to the toddler years. Keep up the good savings rate but avoid the expensive house. You don’t need it in a LCOL area.
1130Super
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Re: Planning for future home - overextending?

Post by 1130Super »

I’m in a similar situation, 2 year old and another on the way congrats.

Was the 350k based on today’s price or 5 years from now? In 5 years that $350k house might cost $450k. Im concerned that your $700 a month is actually only keeping pace or even falling further behind with the difference in potential appreciation your current home and future home. I would try to put your house on the market sooner and using your equity plus down payment money on a house that you can afford now, especially with low rates. I think 350k is out of the question. If you put 20% down 300k could be workable at today’s rates.
il0kin
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Re: Planning for future home - overextending?

Post by il0kin »

One thing I forgot to mention above is that if you refinance to get rid of the PMI, look at a 20 year. I did that recently (you can search my posts) and with interest rate arbitrage and dropping PMI, we only increased our mortgage about $75 (ballpark) monthly yet we build equity MUCH faster compared to the 30 year.
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