Home Purchase Checkup

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Topic Author
Paradise
Posts: 206
Joined: Mon Dec 18, 2017 6:15 am

Home Purchase Checkup

Post by Paradise »

Hi there,

We recently moved to a HCOL and are renting. We had previously thought that we would rent for several years and buy once we’ve gotten some more data about where to live or if we even like the new city. 4 months in and we’re pretty convinced now that we want to own and where.

I had the down payment invested in my AA in July as it was a non specific timeframe, but now with a concrete 8 month timeframe, I didn’t see the point of any added risk of leaving it there as any potential upside will be short term capital gains — :annoyed . This morning I sold (luckily made a few bucks). I’m moving that portion to it looks like Affirm HYSA for .65%. Anything better that doesn’t involve a bunch of hoops?

For the house, we’re seeing that homes in the area we want and fit our lifestyle are in the 1.3 mil range.

Our income by the time of purchase will be roughly $400k (currently $375k). After non housing expenses, max 401k, and taxes, leaves us with $14k a month. I estimate that the mortgage payment payment plus taxes/insurance would be about $6,000 a month, leaving us with 8k a month for some fun and further investment towards early retirement.

Other considerations:
We’re in 30s with 2 small kids… probably having more.
Jobs are pretty stable… both high performers in well known large caps. Could find work elsewhere pretty easily.
260k in cash by lease end
680k in taxable
280k in pretax
148k in post tax (60k of which is 529)
No debt at all (cars paid off, credit cards paid off every month)
I don’t do emergency funds… I use credit cards and if needed pull from taxable.
All together including other assets, net worth is about 1.5M right now.

Targeting 2029 for soft early retirement (Ditch corporate jobs for optional lesser paying jobs, spend more time with family and enjoying life), which if things go about average (8%) gets us to 3.6M in investments and 1M in home equity. Probably outright pay off the house or roll this equity into an upgrade. If things don’t go so well, we’ll keep working if we have to..

On paper the numbers look good, but it’s all terrifying. Wanted to run it by this group as I’ve learned so much here and can count on your opinions on the risks here. Feel free to not hold back and tell me that these plans are idiotic :sharebeer
50% VTI | 20% VXUS | 20% BND | 10% QQQ
Jaymover
Posts: 140
Joined: Wed May 12, 2021 8:19 pm

Re: Home Purchase Checkup

Post by Jaymover »

As an Australian in Sydney, my two cents worth is that $1.3million would not get you a two bedroom apartment in a nice spot in this city. Us Austalians sell our kidneys to buy housing so, for you Americans comparatively the housing in the area you want to live is cheap compared to your high incomes. It looks like you have so many contingencies if things go pear shaped like being frugal for a while or not putting as much in your retirement fund. I enjoyed getting a house when I had kids, feels really nesting and secure and becomes a hub for developing the family community.
stan1
Posts: 10679
Joined: Mon Oct 08, 2007 4:35 pm

Re: Home Purchase Checkup

Post by stan1 »

Good to go with $400K income on a $1.3M house with $260K down payment. I hope you find something you like quickly and the transaction is easy. Of course KlangFool should be along shortly and will tell you it is too much or that you should keep renting. Opinions vary, but you know what will work for your family.

0.65% with FDIC protection is about as good as it gets for short term liquidity right now. You don't want to find a house and then jump through hoops to get the money back to the escrow company either. Keep it simple.
Topic Author
Paradise
Posts: 206
Joined: Mon Dec 18, 2017 6:15 am

Re: Home Purchase Checkup

Post by Paradise »

Thank you!
50% VTI | 20% VXUS | 20% BND | 10% QQQ
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willthrill81
Posts: 26167
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Location: USA

Re: Home Purchase Checkup

Post by willthrill81 »

Buying a home for just over 3x your gross annual income is, IMHO, on the side of plausible but still doable. You seem likely to have more than adequate cash flow after accounting for your other expenses, and you have enough liquid assets to help you cover at least one of you being unemployed for some time.

However, this statement below concerns me.
Paradise wrote: Mon Oct 11, 2021 6:25 pm On paper the numbers look good, but it’s all terrifying.
Why is it terrifying? Is it the commitment of 30 years of payments? Is it the large amount of debt? Is it home ownership? Is it that you're concerned about what you would do if something went wrong (e.g., one of you loses your job and has to take another paying half as much)?

Buying your first home can certainly be emotionally tough. If, as you say, the numbers look good, that's something you can work through. However, if your gut instinct is telling you 'this is a terrible idea', you should pay very close attention to it and determine why.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
econalex
Posts: 55
Joined: Fri Aug 31, 2018 9:44 am

Re: Home Purchase Checkup

Post by econalex »

Sounds like you guys are also in Boston. Or maybe Seattle. GF and I are making half as much but still looking to buy at $1mil. So you guys are definitely fine.

Side note: T-Mobile Money is giving 1.00% APY savings for anyone (4% on up to $3,000 for T-Mobile customers), FDIC Insured. Also consider using margin at IBKR (or short box spread) with taxable, to be used in combination with CC for EF purpose.

And congrats on your life achievements of course :beer
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Watty
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Re: Home Purchase Checkup

Post by Watty »

Paradise wrote: Mon Oct 11, 2021 6:25 pm 4 months in and we’re pretty convinced now that we want to own and where.

I had the down payment invested in my AA in July as it was a non specific timeframe, but now with a concrete 8 month timeframe
It sounds like you are planning on waiting to buy until your lease is up.

There are a couple of problems with that;

1) There is no telling what mortgage interest rates will be then and the world is unpredictable now. You can likely get a 30 year fixed mortgage at about 3%, or even less now, but that could go up quickly and I am hearing lots of rumblings about inflation.

2) If your lease ends at the end of June then you will be under a lot of pressure to buy a house right then so you may need to compromise with your house choice just so you can buy one around the of your lease.

It was a different situation but I once had to find and buy a house during a limited timeframe during a corporate relocation and we did OK but I am sure that we could have found a better house, or gotten a better price, if we were in no hurry to buy right then.

If I was in your situation I would read through the details of your lease and maybe talk to the landlord about what your options would be if you wanted to buy a house sooner and end the lease early. Even if that costs you several months rent that might not be a big deal in the long term. Most likely even if you started house hunting today you would not be able to move out of the rental until January anyway.

Having a few months overlap between the purchase and moving out of the rental may also allow you to do any repairs or remodeling of the new house while you are not living in it.

Buying sooner could allow you to house hunt now when you are not under pressure to quickly buy and then if you find a great house you could buy it now to lock in the current mortgage interest rates.
DS1986
Posts: 37
Joined: Thu Aug 17, 2017 3:20 pm

Re: Home Purchase Checkup

Post by DS1986 »

With an 8 month time frame there isn’t much of a difference with your down payment cash as long as it’s in any HYSA. You’re looking good.
mikejuss
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Joined: Tue Jun 23, 2020 1:36 pm

Re: Home Purchase Checkup

Post by mikejuss »

I wouldn't go above a purchase price of $1 million, OP. I'm more comfortable with a number 2.5 times my household income. Give yourself a little cushion.
bloom2708
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Location: Fargo, ND

Re: Home Purchase Checkup

Post by bloom2708 »

How does buying a $1.3 million house conflict with the 2029 downshift?

Those two things seem to be opposing forces. Something will have to give with a $6,000 monthly mortgage payment. That is more than my take home pay (single income family).

I would re-think spending that much on a home or re-think downshifting.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead
Topic Author
Paradise
Posts: 206
Joined: Mon Dec 18, 2017 6:15 am

Re: Home Purchase Checkup

Post by Paradise »

mikejuss wrote: Wed Oct 13, 2021 11:18 am I wouldn't go above a purchase price of $1 million, OP. I'm more comfortable with a number 2.5 times my household income. Give yourself a little cushion.
I wish… $1 mil here is unacceptable for our living standards.. the interesting thing with home values at least here is that it doesn’t scale linearly. An extra 30% price buys you way more than +30% in house. The alternative to purchasing this would be renting for 1 more year until the down payment is larger — but then prices could continue to rise.
bloom2708 wrote: Wed Oct 13, 2021 11:22 am How does buying a $1.3 million house conflict with the 2029 downshift?

Those two things seem to be opposing forces. Something will have to give with a $6,000 monthly mortgage payment. That is more than my take home pay (single income family).

I would re-think spending that much on a home or re-think downshifting.
I would be retiring with 4.6M net worth. You don’t think it’s enough to retire ?
DS1986 wrote: Wed Oct 13, 2021 11:13 am With an 8 month time frame there isn’t much of a difference with your down payment cash as long as it’s in any HYSA. You’re looking good.
My thoughts exactly! Thanks !
Watty wrote: Tue Oct 12, 2021 10:39 am
Paradise wrote: Mon Oct 11, 2021 6:25 pm 4 months in and we’re pretty convinced now that we want to own and where.

I had the down payment invested in my AA in July as it was a non specific timeframe, but now with a concrete 8 month timeframe
It sounds like you are planning on waiting to buy until your lease is up.

There are a couple of problems with that;

1) There is no telling what mortgage interest rates will be then and the world is unpredictable now. You can likely get a 30 year fixed mortgage at about 3%, or even less now, but that could go up quickly and I am hearing lots of rumblings about inflation.

2) If your lease ends at the end of June then you will be under a lot of pressure to buy a house right then so you may need to compromise with your house choice just so you can buy one around the of your lease.

It was a different situation but I once had to find and buy a house during a limited timeframe during a corporate relocation and we did OK but I am sure that we could have found a better house, or gotten a better price, if we were in no hurry to buy right then.

If I was in your situation I would read through the details of your lease and maybe talk to the landlord about what your options would be if you wanted to buy a house sooner and end the lease early. Even if that costs you several months rent that might not be a big deal in the long term. Most likely even if you started house hunting today you would not be able to move out of the rental until January anyway.

Having a few months overlap between the purchase and moving out of the rental may also allow you to do any repairs or remodeling of the new house while you are not living in it.

Buying sooner could allow you to house hunt now when you are not under pressure to quickly buy and then if you find a great house you could buy it now to lock in the current mortgage interest rates.
Definitely a big problem — thank you. I’m planning on seeing if I can go month to month after termination. If not most likely going to have to start house hunting seriously 2-3 months early and I may have to eat 1-2 months of rent. Worst case I have family nearby I can stay with if it takes longer.
econalex wrote: Tue Oct 12, 2021 10:08 am Sounds like you guys are also in Boston. Or maybe Seattle. GF and I are making half as much but still looking to buy at $1mil. So you guys are definitely fine.

Side note: T-Mobile Money is giving 1.00% APY savings for anyone (4% on up to $3,000 for T-Mobile customers), FDIC Insured. Also consider using margin at IBKR (or short box spread) with taxable, to be used in combination with CC for EF purpose.

And congrats on your life achievements of course :beer
LA. The struggle is real. Thanks for the encouragement 😊 Does that line of credit from IBKR need to be used for investments in their platform ?
willthrill81 wrote: Tue Oct 12, 2021 10:07 am However, this statement below concerns me.
Paradise wrote: Mon Oct 11, 2021 6:25 pm On paper the numbers look good, but it’s all terrifying.
Why is it terrifying? Is it the commitment of 30 years of payments? Is it the large amount of debt? Is it home ownership? Is it that you're concerned about what you would do if something went wrong (e.g., one of you loses your job and has to take another paying half as much)?

Buying your first home can certainly be emotionally tough. If, as you say, the numbers look good, that's something you can work through. However, if your gut instinct is telling you 'this is a terrible idea', you should pay very close attention to it and determine why.
Terrifying in the sense that it’s a lot of money but still not something we’d consider a forever home— we’re definitely sacrificing luxuries we’re used to. Where I come from originally, $1.3 million is a huge mansion. The mortgage to networth ratio is a bit uncomfortable for me. With my old home I could sell stocks and pay it off immediately any time I wanted. Not the case here. I am worried I’ll get stuck here if there is a downturn like what happened in 08.
50% VTI | 20% VXUS | 20% BND | 10% QQQ
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willthrill81
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Location: USA

Re: Home Purchase Checkup

Post by willthrill81 »

Paradise wrote: Wed Oct 13, 2021 8:29 pm
willthrill81 wrote: Tue Oct 12, 2021 10:07 am However, this statement below concerns me.
Paradise wrote: Mon Oct 11, 2021 6:25 pm On paper the numbers look good, but it’s all terrifying.
Why is it terrifying? Is it the commitment of 30 years of payments? Is it the large amount of debt? Is it home ownership? Is it that you're concerned about what you would do if something went wrong (e.g., one of you loses your job and has to take another paying half as much)?

Buying your first home can certainly be emotionally tough. If, as you say, the numbers look good, that's something you can work through. However, if your gut instinct is telling you 'this is a terrible idea', you should pay very close attention to it and determine why.
Terrifying in the sense that it’s a lot of money but still not something we’d consider a forever home— we’re definitely sacrificing luxuries we’re used to. Where I come from originally, $1.3 million is a huge mansion. The mortgage to networth ratio is a bit uncomfortable for me. With my old home I could sell stocks and pay it off immediately any time I wanted. Not the case here. I am worried I’ll get stuck here if there is a downturn like what happened in 08.
On a national level, literally none of the data I've seen (probably a dozen metrics at least) indicates that the housing market is 'ripe' for a big downturn. Things are not at all like they were in 2008. But at a local level, I would be really concerned about buying a 'not forever home' in the Bay area right now. Emigration from the state as a whole is continuing to increase. More people are working from home, especially in the tech sector that has largely responsible for the Bay area's real estate having increased so much.

From a purely financial standpoint, unless you believe that real estate prices will continue to rise so quickly, it absolutely makes more sense to rent than to own. But having done both, I fully understand that renting is not the same from a lifestyle perspective. Clearly, not very decision we make involving money is made because it's a good financial decision. We didn't buy a motor home this year because it will help our finances; we did it to make incredible family memories.

Ultimately, you're the one who has to determine whether the risk to reward is worth it.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
mikejuss
Posts: 1313
Joined: Tue Jun 23, 2020 1:36 pm

Re: Home Purchase Checkup

Post by mikejuss »

Paradise wrote: Wed Oct 13, 2021 8:29 pm
mikejuss wrote: Wed Oct 13, 2021 11:18 am I wouldn't go above a purchase price of $1 million, OP. I'm more comfortable with a number 2.5 times my household income. Give yourself a little cushion.
I wish… $1 mil here is unacceptable for our living standards.. the interesting thing with home values at least here is that it doesn’t scale linearly. An extra 30% price buys you way more than +30% in house. The alternative to purchasing this would be renting for 1 more year until the down payment is larger — but then prices could continue to rise.
You'll do what you want ultimately, but in my opinion your living standards and your income are not aligned. Maybe you do need to spend a little more time saving for something like a 30% or a 40% downpayment. This may be the source of the unease you express in your original post.
econalex
Posts: 55
Joined: Fri Aug 31, 2018 9:44 am

Re: Home Purchase Checkup

Post by econalex »

Paradise wrote: Wed Oct 13, 2021 8:29 pm
LA. The struggle is real. Thanks for the encouragement 😊 Does that line of credit from IBKR need to be used for investments in their platform ?
IBKR margin can be withdrawn out to do anything. The rate is low (first $100k at 1.58% aka BM + 1.5%) but make sure you have portfolio margin and understand the maintenance margin calculations. They also auto-liquidate so no actual margin "call". For an even lower rate, read the thread in this forum on box spread viewtopic.php?t=344667&start=50. Folks (including myself) are getting 0.7x% apr that is due Dec 2023.
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