First time home buyer - gut check

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runner23
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First time home buyer - gut check

Post by runner23 » Wed Oct 04, 2017 12:36 pm

Hello,

My wife and I are in the early stages of potentially buying our first home. We are both 27 (28 later in the year). The early stages include getting pre-approved for a loan, meeting with a realtor and looking at a few houses. I listed a few stats on us below and wanted to run by the boglehead community for us to see if we are ready to make a purchase.

We currently rent and live within 3 and 5 miles away from work. We value this lack of commute. We are pretty set on buying in the area even though the houses are more expensive than the surrounding suburbs. Looking at 3/2 bed / bath with 1200 - 1700 sq ft. We live in an overall LCOL area compared to other parts of the country, Atlanta.

We are looking for houses in the $500 - $575k range. We are thinking of putting down 10% and financing the rest through an 80-10 piggyback loan to avoid PMI, understanding that the APR may be a little higher.

Our household income was $240k gross last year. It is trending the same for the current year. We currently max our HSAs, ROTH IRAs and 401ks each. We do not have a taxable account on top of this. We have been saving additional funds at Ally to the tune of $80k for down payment. Building up another $5k each month. Monthly expenses including rent are currently around $5k. We have 1 car loan of $18k @ .9% and no other debt. Our net worth is $300k.

We currently rent for $1,500 a month. Some math shows a PITI of $2500 - $3000 on the upper end of our $575k range.

We have family thinking that we need to buy a house and that we are throwing money away renting. I do not see it as throwing away money because it is flexible and we have a roof over our heads, but that is neither here nor there.

Main reasons for getting into a house are yard (dog and I enjoy yardwork) and build equity. With those numbers above, do you think that we are there or are there any red flags of getting into a house in the next 6 months? Is continuing to rent the right answer from a value perspective?

Excited to hear your thoughts and happy to provide any other additional details.

Cheers,

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ray.james
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Re: First time home buyer - gut check

Post by ray.james » Wed Oct 04, 2017 1:02 pm

Not sure how long you have been making 240K but putting 10% down seems to be on low end. It might due to maxing everything. Take a breather for couple of years to save up to 20%/payoff 10% loan early if you chose to buy. 10% of 500K is 50K which should be easy to do in 1- 1.5 year at that income level.

Have 6 months of emergency fund at the new requirements. (3K mortgage + living expenses) * 6m before buying would be my strong recommendation.

Regarding renting as throwing away money, you know a bogleheads answer.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

asif408
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Re: First time home buyer - gut check

Post by asif408 » Wed Oct 04, 2017 1:04 pm

One thing you didn't mention that I think is a big factor is how long you plan to be in Atlanta, since you are both fairly young. I would continue to rent unless you see yourself staying in Atlanta for at least 5-10 years (or more). You won't build much equity if you're there for just a few years, and you might lose out after buying and selling costs. I wouldn't let you family influence your decision, as that argument is an old one and there really is no consensus on buying being better than renting in general. You could simply invest the difference you save by renting and continue renting if you so desire, since home ownership costs would be more than you currently pay for rent.

As far as homeownership goes, remember homeownership comes with maintenance, property taxes, etc. that you don't necessarily have with renting, and those costs aren't fixed. If you are looking at older homes expect your maintenance costs and utilities to be higher than a newer home. There are lots of conveniences that are nice when renting, especially if your jobs are demanding and you don't want to be doing maintenance on a regular basis. Just some food for thought.

You probably have a high enough income currently to buy, but you haven't indicated how stable that income is, either. So consider the stability of that income as well.

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Meg77
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Re: First time home buyer - gut check

Post by Meg77 » Wed Oct 04, 2017 1:07 pm

It sounds like you are doing great and can afford to buy, but we don't have enough info to know for sure. If your wife is the breadwinner and plans to stay home with kids at some point, then that's something to consider. If your income is super volatile, if you have 6 figures of student loan debt, or if you aren't sure you want to stay in the area long term - all are good reasons to keep renting happily.

There are other good reasons to rent, such as lifestyle and disposable income. Owning a home does give you some tax breaks and builds equity over time, but for most people it's more expensive than renting by a long shot (especially if you put a price on the time you'll spend maintaining it and wandering the aisles of Home Depot on the weekends). This is because people usually buy more of a home than they are willing to rent, for starters. Then there is the sudden need for "real" furniture and art for the walls and that bedding set you saw on Pinterest and holiday decorations and other things that as renters you may not care about. And you're paying for a nice home so you want to entertain more. Also you may have new neighbors to compare yourselves to, neighbors with newer SUVs and club memberships and housekeepers.

In general though, you are certainly on the right track with that income at your ages. Definitely save 10% down at least. It might pay to do an 80/10/10 mortgage which is what I'd planned when we bought a few years ago. But when I bought several years ago, it was actually cheaper to get a 90% first mortgage and pay PMI, which was only $97 a month on a $415K mortgage (this may have changed though). That was less than the interest on the second mortgage would have been, not to mention the second mortgage payments in total would have been several hundred bucks a month (they are usually on shorter amortizations). So we got the PMI but paid the loan down and got it removed after the first year.

My husband and I weren't ready to pick a suburb when we got married, so we bought a townhome close to our jobs and really love the short commutes we still have. Plus now we don't know if we want kids after all, so I'm really glad we aren't saddled with a 4 bedroom house and a 40 minute commute. But we've spent an insane amount on our home in just 3 years. I love it, but we could have saved a lot by renting instead. In general I think too many young couples buy the big home in the good school district YEARS before they even sort of "need" it (aka have multiple school aged kids). Don't be too quick to give up the carefree life of having your landlord on speed dial and weekends/income free to travel instead of deal with contractors, yard work, repairs, etc.
"An investment in knowledge pays the best interest." - Benjamin Franklin

cornellmoore
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Re: First time home buyer - gut check

Post by cornellmoore » Wed Oct 04, 2017 1:11 pm

20% better than 10% down if you can afford it, and from the #'s, you can.

I support buying close to work and reduce commute even if this means you pay more. The "cost" of commute over time on your/family's overall health/quality of life adds up and dare I say - compounds over time.

runner540
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Re: First time home buyer - gut check

Post by runner540 » Wed Oct 04, 2017 1:17 pm

Meg77 wrote:
Wed Oct 04, 2017 1:07 pm
It sounds like you are doing great and can afford to buy, but we don't have enough info to know for sure. If your wife is the breadwinner and plans to stay home with kids at some point, then that's something to consider. If your income is super volatile, if you have 6 figures of student loan debt, or if you aren't sure you want to stay in the area long term - all are good reasons to keep renting happily.

There are other good reasons to rent, such as lifestyle and disposable income. Owning a home does give you some tax breaks and builds equity over time, but for most people it's more expensive than renting by a long shot (especially if you put a price on the time you'll spend maintaining it and wandering the aisles of Home Depot on the weekends). This is because people usually buy more of a home than they are willing to rent, for starters. Then there is the sudden need for "real" furniture and art for the walls and that bedding set you saw on Pinterest and holiday decorations and other things that as renters you may not care about. And you're paying for a nice home so you want to entertain more. Also you may have new neighbors to compare yourselves to, neighbors with newer SUVs and club memberships and housekeepers.

In general though, you are certainly on the right track with that income at your ages. Definitely save 10% down at least. It might pay to do an 80/10/10 mortgage which is what I'd planned when we bought a few years ago. But when I bought several years ago, it was actually cheaper to get a 90% first mortgage and pay PMI, which was only $97 a month on a $415K mortgage (this may have changed though). That was less than the interest on the second mortgage would have been, not to mention the second mortgage payments in total would have been several hundred bucks a month (they are usually on shorter amortizations). So we got the PMI but paid the loan down and got it removed after the first year.

My husband and I weren't ready to pick a suburb when we got married, so we bought a townhome close to our jobs and really love the short commutes we still have. Plus now we don't know if we want kids after all, so I'm really glad we aren't saddled with a 4 bedroom house and a 40 minute commute. But we've spent an insane amount on our home in just 3 years. I love it, but we could have saved a lot by renting instead. In general I think too many young couples buy the big home in the good school district YEARS before they even sort of "need" it (aka have multiple school aged kids). Don't be too quick to give up the carefree life of having your landlord on speed dial and weekends/income free to travel instead of deal with contractors, yard work, repairs, etc.
Runner23, lots of wisdom here! (And based on her other posts, I believe Meg77 is a mortgage banker and landlord, so she knows what she's talking about).

JBTX
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Re: First time home buyer - gut check

Post by JBTX » Wed Oct 04, 2017 1:32 pm

Agree with everything Meg said. Excellent post.

Homeownership is a lifestyle choice, not so much as an investment. Based on your finances on the surface you can definitely afford what you are contemplating but is it the optimal financial play? That is less clear. I tend to think if you are at least content renting I'd do so a few years longer and continue to save. However if you are miserable renting and are longing for a house then go for it.

I will say I would not consider a $575k house with 1500 feet LCOL.

Totally agree with Meg and others that when you buy a house you will spend more money on things to fill up the house such as furniture and decor. Landscaping equipment. Maybe new appliances. General home maintenance. Frequent Weekend trips to Home Depot. Depending on the condition you may want to renovate or remodel. It all adds up.

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hand
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Re: First time home buyer - gut check

Post by hand » Wed Oct 04, 2017 1:53 pm

runner23 wrote:
Wed Oct 04, 2017 12:36 pm

We currently rent for $1,500 a month. Some math shows a PITI of $2500 - $3000 on the upper end of our $575k range.

We have family thinking that we need to buy a house and that we are throwing money away renting. I do not see it as throwing away money because it is flexible and we have a roof over our heads, but that is neither here nor there.

Main reasons for getting into a house are yard (dog and I enjoy yardwork) and build equity. With those numbers above, do you think that we are there or are there any red flags of getting into a house in the next 6 months? Is continuing to rent the right answer from a value perspective?
Your situation doesn't scream buy a house to me.

To simplify, you're thinking of putting down $50+k, committing to an additional ~$30k of transaction fees related to buying/selling a house and spending an extra $1,000 - $1,500 / month on PITI + maintenance and other expenses, so your dog can have more space, you can do yard work and you "build equity"?

Unless you're reasonably sure that your jobs / commutes will stay the same for the next ~5 years, and you've figured out the whole kids / school district thing and are certain this is a long term home for your family, the flexibility of renting has real value and building equity can be better done by renting and investing rather than paying interest.

Spending significantly more to live in a bigger house is a valid lifestyle choice, but don't kid yourself that it is anything other than discretionary expense with high transaction costs. Realtors and family members are great at spending your money and justifying a house as an "investment," but in many cases the numbers don't pencil out especially in the short term.

Personally, I'd rent and keep your costs low at least until you have 20% saved and possibly until the next housing crash or you want to make a long term commit to an area because of kids or other.

runner23
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Re: First time home buyer - gut check

Post by runner23 » Wed Oct 04, 2017 2:05 pm

All great pieces of information to chew on. Will respond back when off work later tonight. Thanks everyone.

mega317
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Re: First time home buyer - gut check

Post by mega317 » Wed Oct 04, 2017 2:05 pm

I always get nervous when a post has a separate paragraph on what the extended family wants. I'm sure their hearts are in the right place but who cares what they think.

Run the numbers of buying now vs. waiting and putting 20% down. If you're saving 5k a month it will only be a year. Then decide if the opportunity to do yard work for one year is worth the difference.

stoptothink
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Re: First time home buyer - gut check

Post by stoptothink » Wed Oct 04, 2017 2:07 pm

mega317 wrote:
Wed Oct 04, 2017 2:05 pm
I always get nervous when a post has a separate paragraph on what the extended family wants. I'm sure their hearts are in the right place but who cares what they think.
+1. Family, friends, real estate agents; do not listen to anybody when deciding what/when/where to purchase a home.

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Meg77
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Re: First time home buyer - gut check

Post by Meg77 » Wed Oct 04, 2017 2:30 pm

runner540 wrote:
Wed Oct 04, 2017 1:17 pm

Runner23, lots of wisdom here! (And based on her other posts, I believe Meg77 is a mortgage banker and landlord, so she knows what she's talking about).
JBTX wrote:
Wed Oct 04, 2017 1:32 pm
Agree with everything Meg said. Excellent post.
Aw, thanks guys. :)

Now I'm feeling like a sucker for being a homeowner myself! Haha. It has pros and cons for sure, but a lot depends on the type of property you want and also on your preferences and skills. Some people enjoy rescuing pitbulls or running a home business or other activity landlords don't allow. Many love DIY projects and gardening and the pride that comes from using something they built/repaired. I personally prefer to fork over wheelbarrows full of cash to the first repairperson or retailer who can make my problem go away and everything look pretty. Over the long term though, owning real estate certainly can be effective way to build wealth via use of cheap leverage and forced savings.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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rcjchicity
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Re: First time home buyer - gut check

Post by rcjchicity » Wed Oct 04, 2017 2:57 pm

In 2004, because I was tired of "throwing money away by renting", I bought a condo for $220,000. In 2011, I sold it for $172,000. If I had only known I was going to be throwing away money by buying.

Buying a primary residence because you think it's an "investment" isn't in itself a good reason if it's the primary reason for buying.

kjvmartin
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Re: First time home buyer - gut check

Post by kjvmartin » Wed Oct 04, 2017 3:04 pm

runner23 wrote:
Wed Oct 04, 2017 2:05 pm
All great pieces of information to chew on. Will respond back when off work later tonight. Thanks everyone.
I'd do whatever it takes to get that 20% down payment. It's an option for you, some will never afford, but you most certainly can.

Better APR, no PMI, and more equity if you need/want to move.

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Pajamas
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Re: First time home buyer - gut check

Post by Pajamas » Wed Oct 04, 2017 3:12 pm

Atlanta housing prices went from a median of $135k in 2007 to $85k in 2012 (yes, it took that long for them to bottom out) and only in 2017 have they recovered to the 2007 highs. So it is certainly not guaranteed that you will build equity any time soon if you buy now.

On the other hand, you certainly get a lot for your $500k in Atlanta compared to other areas with higher housing costs:

https://www.virgentrealty.com/blog/2017 ... hborhoods/

Have you compared the overall costs of renting vs. buying a house?

https://www.nytimes.com/2014/05/22/upsh ... nging.html

Seems like you have a good thing going now, stashing away $5k each month. If you buckle down and pay off your debt and keep renting and investing, you could be financially independent in a decade. Or you could buy a house. It just depends on what your priorities are.

bloom2708
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Re: First time home buyer - gut check

Post by bloom2708 » Wed Oct 04, 2017 4:06 pm

kjvmartin wrote:
Wed Oct 04, 2017 3:04 pm

I'd do whatever it takes to get that 20% down payment. It's an option for you, some will never afford, but you most certainly can.

Better APR, no PMI, and more equity if you need/want to move.
+1

If you have PMI, about 3 months after you buy, you will be posting a thread named "Help, how do I get rid of PMI".

Do some DETAILED budgeting. You could be really underestimating the total cost of the new house. It is well beyond rent going from $1,500 to $2,500. Property taxes, PMI, special assessments, homeowners insurance, furniture, painting, fixtures, higher electric, heat/cooling, garbage/sewer/water, mowing, etc.

You should have good estimates of all these and see the effect on your budget. Can you do all that and max 401k, Roth, HSA? I would highly doubt you will be able to do it all with a $550k+ house and only 10% down.

Go in with eyes open, budgets as good as possible and 20% down. Your first house doesn't have to be your "dream house". HGTV shows will skew reality.
"We are here not to please but to provoke thoughtfulness" Unknown Boglehead

ebrasmus21
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Re: First time home buyer - gut check

Post by ebrasmus21 » Wed Oct 04, 2017 4:08 pm

bloom2708 wrote:
Wed Oct 04, 2017 4:06 pm
kjvmartin wrote:
Wed Oct 04, 2017 3:04 pm

I'd do whatever it takes to get that 20% down payment. It's an option for you, some will never afford, but you most certainly can.

Better APR, no PMI, and more equity if you need/want to move.
+1

If you have PMI, about 3 months after you buy, you will be posting a thread named "Help, how do I get rid of PMI".

Do some DETAILED budgeting. You could be really underestimating the total cost of the new house. It is well beyond rent going from $1,500 to $2,500. Property taxes, PMI, special assessments, homeowners insurance, furniture, painting, fixtures, higher electric, heat/cooling, garbage/sewer/water, mowing, etc.

You should have good estimates of all these and see the effect on your budget. Can you do all that and max 401k, Roth, HSA? I would highly doubt you will be able to do it all with a $550k+ house and only 10% down.

Go in with eyes open, budgets as good as possible and 20% down. Your first house doesn't have to be your "dream house". HGTV shows will skew reality.
What's the dealio with those SoFi 10% down + No PMI mortgage loans? Are those any good?

runner23
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Re: First time home buyer - gut check

Post by runner23 » Thu Oct 05, 2017 5:08 am

OP here,

Thank you again for all of the replies. My wife and read them all together. This was helpful from my perspective, but more so for her as I am more of the boglehead and keep up with our finances. It is reassuring that we are in the drivers seat and not forced to do anything quickly. Buying a house is an emotional event, so it is nice to step back and get others opinions. I think we will at least rent for another year and reassess then.

Bacchus01
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Re: First time home buyer - gut check

Post by Bacchus01 » Thu Oct 05, 2017 6:42 am

Get an apartment near a park

I wouldn't buy based on your scenario

Olemiss540
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Re: First time home buyer - gut check

Post by Olemiss540 » Thu Oct 05, 2017 10:54 am

No way would I buy. Your rent is allowing you both extreme flexibility to setup your future finances.

I would save and invest as much as possible while splurging on travel in preperation to how much your lives could change in your 30s. This will allow you to get a supercharged head start and pull the reins back in your 30s in case one of you decides to stay at home, etc.

Keep in mind a majority of divorce is over finances, why not rule that possibility out for the rest of your lives by spending as much time enjoying eachother, and little time concerned over a stretched budget and little savings in case of a career/market downturn.

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