Can we afford a more expensive home? And is it wise?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Dynasty90
Posts: 44
Joined: Thu Jan 23, 2014 12:34 pm

Can we afford a more expensive home? And is it wise?

Post by Dynasty90 » Mon Mar 04, 2019 10:33 pm

My wife and I would to to move into a new home in a new area.

We are seeking advice regarding if this is a wise decision or not? We do not want this home to make us house poor or to hinder us long term. We do consider this home our long term home.

Reason for move: bigger yard, more privacy, good schools, new construction home

No kids, but plan on them in the next few years.

We realize we are cash heavy. We have been considering a move for the past 2 years and have been saving accordingly.

In the past few years, we have paid down 30k in student loans, cashflowed a 15k wedding, cashflowed a 5k honeymoon, purchased a 15k car cash.

We do not like debt and tend to avoid it. A mortgage like this makes us really think about this decision over and over. However, we feel our quality of life will greatly increase. We both have envisioned a home/property like this, but not this early in our lives. So we view it as a "do we act now or later" decision.

Ages: Upper 20's
Income: 130k/year (combined) with projected income increase of 10k per year for next few years
401k total: 33k (combined)
IRA total: 15k (combined)
Current saving rate: 10% of gross income
Savings: 75k
Checking: 5k
Proceeds from sale of current home: 40-50k (after all closing costs, fees, commission, taxes, etc)


Current home value: 225k (approximate)
Current home mortgage: 163k @ 4.14% (30 yr fixed)
Current home monthly mortgage payment: $1,350 (PIT)
Current expenses leaves us with: approximately $2,500 surplus per month (after all living expenses and retirement contributions)

No other debt (cars are paid for, no student loans, no credit card balances)

New home value: 400k (approximate)
New home downpayment: 15% or 60k
New home mortgage: 340k @ 4.19% (30 yr fixed) - we both are a bit uneasy with owing the bank this much money
New home monthly mortgage payment: approximately $2,150 (PIT)
New home expenses leaves us with: approximately $1,250 surplus per month (after all living expenses and retirement contributions)


Feel free to share your thoughts.
Last edited by Dynasty90 on Mon Mar 04, 2019 11:21 pm, edited 1 time in total.

User avatar
simplesimon
Posts: 3336
Joined: Mon Feb 25, 2008 8:53 pm
Location: Boston, MA

Re: Can we afford a more expensive home? And is it wise?

Post by simplesimon » Mon Mar 04, 2019 10:43 pm

Is $1,250/month going to be enough to support your other expenses? What about when kids enter the picture? How confident are you about those $10k/year raises?

Why not put 20% down to avoid PMI or to lower the interest?

User avatar
ResearchMed
Posts: 9087
Joined: Fri Dec 26, 2008 11:25 pm

Re: Can we afford a more expensive home? And is it wise?

Post by ResearchMed » Mon Mar 04, 2019 10:55 pm

You are "cash heavy"?

It seems you'll be using almost all of your cash on the down payment, and still won't have the 20% that's recommended.

You'll have almost nothing for the various "things" that come up, even with a new construction home (although sure, hopefully less than with a very old home!).

It seems you'd be better off to wait. Save a lot more.
You don't need all the room - or the school district - right now, correct?

Good luck!

RM
This signature is a placebo. You are in the control group.

helloeveryone
Posts: 326
Joined: Sun Sep 04, 2016 5:16 pm

Re: Can we afford a more expensive home? And is it wise?

Post by helloeveryone » Mon Mar 04, 2019 11:02 pm

Dynasty90 wrote:
Mon Mar 04, 2019 10:33 pm

Income: 130k/year (combined) with projected income increase of 10k per year for next few years
401k total: 33k (combined)
IRA total: 15k (combined)
Current saving rate: 10% of gross income
Savings: 75k
Checking: 5k
Proceeds from sale of current home: 40-50k (after all closing costs, fees, commission, taxes, etc)

Current home value: 225k (approximate)
Current home mortgage: 163k @ 4.14% (30 yr fixed)
Current home monthly mortgage payment: $1,350 (PIT)
Current expenses leaves us with: approximately $2,500 surplus per month

No other debt (cars are paid for, no student loans, no credit card balances)

New home value: 400k (approximate)
New home downpayment: 15% or 60k
New home mortgage: 340k @ 4.19% (30 yr fixed) - we both are a bit uneasy with owing the bank this much money
New home monthly mortgage payment: approximately $2,150 (PIT)
New home expenses leaves us with: approximately $1,250 surplus per month
A 400k home is a lot of home for a 130k/year combined. The smarter folks will come along and give better explanation but I worry that price point will make you house poor. I'm assuming the 400k home has more sq. footage - that's more furnishings, utilities, lawn care, property tax, homeowner's tax.

Then as kids come along - perhaps a car upgrade to suv/minivan. All the costs that come with having children etc....

Stay in your current home - build up a more robust retirement plan, then as your $ compounds and works for itself at that point make a decision. Or even wait until you have children to upsize rather than upsizing right now.

Just my 2cents.

stoptothink
Posts: 5931
Joined: Fri Dec 31, 2010 9:53 am

Re: Can we afford a more expensive home? And is it wise?

Post by stoptothink » Mon Mar 04, 2019 11:09 pm

I know your peers and your mortgage broker will say you can afford it, but IMO that is quite a stretch, especially with your current level of savings and when the current home seems to meet your needs (this is a definite want). That's more home than I'd be comfortable with with a HHI 50% more and 10x the net worth.
Last edited by stoptothink on Mon Mar 04, 2019 11:12 pm, edited 1 time in total.

Regattamom
Posts: 197
Joined: Sat Jan 06, 2018 3:40 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Regattamom » Mon Mar 04, 2019 11:11 pm

You say you'll have $1,250 left over at the end of the month and you also say you want kids. Once you have kids, you can say goodbye to the extra $1,250 per month. Seriously, look at the cost of daycare. Or, if one of you decides to stay home, your income will be reduced.

I would stay where you are for now and keep putting money away and make a financial plan for your future with the added expense of having children.

Good luck to you.

BTW, you're doing great for a couple in your twenties. Good job.

User avatar
Watty
Posts: 16899
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Watty » Mon Mar 04, 2019 11:18 pm

ResearchMed wrote:
Mon Mar 04, 2019 10:55 pm
It seems you'd be better off to wait. Save a lot more.
You don't need all the room - or the school district - right now, correct?
+1

Even if you had a kid tomorrow the kid would not start school for at least five years.

quantAndHold
Posts: 3438
Joined: Thu Sep 17, 2015 10:39 pm

Re: Can we afford a more expensive home? And is it wise?

Post by quantAndHold » Mon Mar 04, 2019 11:23 pm

That’s a lot of house on your salary. I would do 2 things with the money.

1) increase your savings rate to 15%. This is not house savings, this is in retirement accounts. There are going to be times in the future after you have kids that you won’t be able to save as well. In the future, you’ll be glad you saved more when you had chance.

2) take the extra $800 you would be putting into the larger house payment every month, and dump it into a savings account. Do that for a year. At the end of a year, then decide if you can afford the house. If you then decide to buy, you have an extra $10k saved up for the down payment.

Since you don’t have kids yet, the big house and the school district isn’t necessary yet. Frankly, a big yard is probably never necessary, it’s just something to take care of. Keep in mind that the more house you have, the more stuff you need to fill it, the more time and money you spend maintaining and cleaning it, etc. Keep things simple for as long as possible.

Topic Author
Dynasty90
Posts: 44
Joined: Thu Jan 23, 2014 12:34 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Dynasty90 » Mon Mar 04, 2019 11:28 pm

simplesimon wrote:
Mon Mar 04, 2019 10:43 pm
Is $1,250/month going to be enough to support your other expenses? What about when kids enter the picture? How confident are you about those $10k/year raises?

Why not put 20% down to avoid PMI or to lower the interest?
I edited the original post, but the $1,250 left over is after all living expenses and retirement contributions.

I agree that when kids enter the picture, our expenses will increase. By the time kids are present, we assume our income will be closer to 150k per year. But we are aware it could be less. Raises are not guaranteed, but using past data show this trend will continue.

Our lender is offering 15% down with no PMI. We were offered 4.19% for roughly $3,500 more in closing costs compared to 4.44%
Last edited by Dynasty90 on Mon Mar 04, 2019 11:35 pm, edited 1 time in total.

Topic Author
Dynasty90
Posts: 44
Joined: Thu Jan 23, 2014 12:34 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Dynasty90 » Mon Mar 04, 2019 11:29 pm

Watty wrote:
Mon Mar 04, 2019 11:18 pm
ResearchMed wrote:
Mon Mar 04, 2019 10:55 pm
It seems you'd be better off to wait. Save a lot more.
You don't need all the room - or the school district - right now, correct?
+1

Even if you had a kid tomorrow the kid would not start school for at least five years.
This is 100% correct.

Topic Author
Dynasty90
Posts: 44
Joined: Thu Jan 23, 2014 12:34 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Dynasty90 » Mon Mar 04, 2019 11:35 pm

stoptothink wrote:
Mon Mar 04, 2019 11:09 pm
I know your peers and your mortgage broker will say you can afford it, but IMO that is quite a stretch, especially with your current level of savings and when the current home seems to meet your needs (this is a definite want). That's more home than I'd be comfortable with with a HHI 50% more and 10x the net worth.
You are correct. Our peers and most certainly our lender says we can afford it. We were always hesitant, especially when looking at the numbers broken down. Our home does meet our current needs. It's just not in the location we desire. We always say if we could pick up our current home and move it to our ideal location, we would be set.

Topic Author
Dynasty90
Posts: 44
Joined: Thu Jan 23, 2014 12:34 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Dynasty90 » Mon Mar 04, 2019 11:37 pm

quantAndHold wrote:
Mon Mar 04, 2019 11:23 pm
That’s a lot of house on your salary. I would do 2 things with the money.

1) increase your savings rate to 15%. This is not house savings, this is in retirement accounts. There are going to be times in the future after you have kids that you won’t be able to save as well. In the future, you’ll be glad you saved more when you had chance.

2) take the extra $800 you would be putting into the larger house payment every month, and dump it into a savings account. Do that for a year. At the end of a year, then decide if you can afford the house. If you then decide to buy, you have an extra $10k saved up for the down payment.

Since you don’t have kids yet, the big house and the school district isn’t necessary yet. Frankly, a big yard is probably never necessary, it’s just something to take care of. Keep in mind that the more house you have, the more stuff you need to fill it, the more time and money you spend maintaining and cleaning it, etc. Keep things simple for as long as possible.
Thanks for the post. I agree we should strive to hit the 15% retirement contribution rate. The extra $800 into a savings account to "pretend pay" the increased mortgage payment is a great idea.

harrychan
Posts: 1543
Joined: Sun Nov 14, 2010 9:37 pm
Location: Pasadena

Re: Can we afford a more expensive home? And is it wise?

Post by harrychan » Mon Mar 04, 2019 11:41 pm

Can you afford it. Probably. But it doesn't leave you much for any wiggle room. I wouldn't do it. I would work towards saving more down payment, earning more and spending less.
This is not legal or certified financial advice but you know that already.

Topic Author
Dynasty90
Posts: 44
Joined: Thu Jan 23, 2014 12:34 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Dynasty90 » Mon Mar 04, 2019 11:44 pm

helloeveryone wrote:
Mon Mar 04, 2019 11:02 pm

A 400k home is a lot of home for a 130k/year combined. The smarter folks will come along and give better explanation but I worry that price point will make you house poor. I'm assuming the 400k home has more sq. footage - that's more furnishings, utilities, lawn care, property tax, homeowner's tax.

Then as kids come along - perhaps a car upgrade to suv/minivan. All the costs that come with having children etc....

Stay in your current home - build up a more robust retirement plan, then as your $ compounds and works for itself at that point make a decision. Or even wait until you have children to upsize rather than upsizing right now.

Just my 2cents.
Your post makes a lot of sense. The bolded text above is correct. We would have significantly more yard.

msk
Posts: 1301
Joined: Mon Aug 15, 2016 10:40 am

Re: Can we afford a more expensive home? And is it wise?

Post by msk » Tue Mar 05, 2019 1:05 am

My sensible affordability rule for a home: 3x single income or 2.5x combined income
A 400k home seems to be entering splurge or hobby territory and beyond sensible affordability. My advice to those wishing to stay within "sensible" territory is to stay put in the initial home purchased until mortgage is fully paid off. Upgrade by paying all-cash thereafter. As for splurging or hobby territory, this is how I evaluate whether the extra is worth it to me: A home's value, with average luck, ought to keep up with inflation but ALL it's income/rental value is being consumed by the owner. A very diversified stock ETF ought to be able to support a 5% withdrawal rate forever, with adjustment for inflation. $400k of stocks can support a withdrawal of 5% (=$20k annually auto adjusting with inflation). With your current income, are you willing to spend $20k annually, less reasonable rent, on this splurge/hobby? In brief, your upgrading sounds way premature. But people also do buy Ferraris waaaay before they can afford them using any sensible criteria. Just a matter of what they are willing to sacrifice to feed their hobby splurge...

Rus In Urbe
Posts: 473
Joined: Sat Dec 09, 2017 2:12 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Rus In Urbe » Tue Mar 05, 2019 5:41 am

Dynasty90
You are correct. Our peers and most certainly our lender says we can afford it. We were always hesitant, especially when looking at the numbers broken down. Our home does meet our current needs. It's just not in the location we desire. We always say if we could pick up our current home and move it to our ideal location, we would be set.
"You can afford it" are words that salespeople use----about a house, a car, whatever it is they are selling.

I've thought about this phrase a lot-----"You can afford it" are words that try to get under your skin, or perhaps titillate the ego! "You can afford it" can also mean, hey, you deserve this, look at what others have, you can have this too. All these ideas are anathema to the BH-way of frugality and rationality when it comes to saving and investing. In truth, if you can get a loan, you can afford almost anything; but what you CHOOSE is another matter altogether.

As a young couple, you two are on a good path. What you do during the next few years will have a huge impact on your financial future. Like others, upthread, I think you are getting out ahead of your skis to purchase a home this expensive, given your resources. There are enormous expenses in getting a new house, and particularly if you are financially stressed, those first years are hell when the inevitable Buyer's Remorse kicks in. Before making such a decision, you also need to play out all the downside scenarios: What would happen if one of you lost a job, or both of you? Etc. All those things that could happen and would have a serious impact on you ability to keep up a large mortgage payment.

Definitely wait until you start a family (although the nesting instinct will make you want to jump on a new house, so beware of that)-----get through the first years of babyhood and toddler hood and really think about where you need to be once they start school; location will be everything for you then.

In the meantime, keep saving, keep your eyes on the ultimate goal, and make a move when you can absolutely do it without stress, and with a lot of extra fudge factor built in. By then you will be in a far better situation financially with a lot more resources and choices. Don't buy the house "you can afford" but buy the house that fits your long term goals financially and that you can easily afford without stress. By then, also you will have a much clearer idea of where you want to be and what you will need in a home.

Good luck to you! :happy
I'd like to live as a poor man with lots of money. ~Pablo Picasso

Deblog
Posts: 36
Joined: Mon Nov 05, 2018 6:16 am

Re: Can we afford a more expensive home? And is it wise?

Post by Deblog » Tue Mar 05, 2019 6:27 am

I agree with above posts. Save more money and wait awhile to buy. Bank what would be the extra house payment amount and get retirement to 15%. This will give you time to get more cash for downpayment for a lower monthly payment, see if the raises are truly coming in or not. I am not sure if you have checked on cost of daycare in your area or not? In low cost Ohio my son was finding $1000/mo. With that and cost of baby items and diapers, that $1250 extra per month will not go far.

Valuethinker
Posts: 38440
Joined: Fri May 11, 2007 11:07 am

Re: Can we afford a more expensive home? And is it wise?

Post by Valuethinker » Tue Mar 05, 2019 6:33 am

Dynasty90 wrote:
Mon Mar 04, 2019 10:33 pm
My wife and I would to to move into a new home in a new area.

We are seeking advice regarding if this is a wise decision or not? We do not want this home to make us house poor or to hinder us long term. We do consider this home our long term home.

Reason for move: bigger yard, more privacy, good schools, new construction home

No kids, but plan on them in the next few years.

We realize we are cash heavy. We have been considering a move for the past 2 years and have been saving accordingly.

In the past few years, we have paid down 30k in student loans, cashflowed a 15k wedding, cashflowed a 5k honeymoon, purchased a 15k car cash.

We do not like debt and tend to avoid it. A mortgage like this makes us really think about this decision over and over. However, we feel our quality of life will greatly increase. We both have envisioned a home/property like this, but not this early in our lives. So we view it as a "do we act now or later" decision.

Ages: Upper 20's
Income: 130k/year (combined) with projected income increase of 10k per year for next few years
401k total: 33k (combined)
IRA total: 15k (combined)
Current saving rate: 10% of gross income
Savings: 75k
Checking: 5k
Proceeds from sale of current home: 40-50k (after all closing costs, fees, commission, taxes, etc)


Current home value: 225k (approximate)
Current home mortgage: 163k @ 4.14% (30 yr fixed)
Current home monthly mortgage payment: $1,350 (PIT)
Current expenses leaves us with: approximately $2,500 surplus per month (after all living expenses and retirement contributions)

No other debt (cars are paid for, no student loans, no credit card balances)

New home value: 400k (approximate)
New home downpayment: 15% or 60k
New home mortgage: 340k @ 4.19% (30 yr fixed) - we both are a bit uneasy with owing the bank this much money
New home monthly mortgage payment: approximately $2,150 (PIT)
New home expenses leaves us with: approximately $1,250 surplus per month (after all living expenses and retirement contributions)


Feel free to share your thoughts.
You should be putting at least 15% of your income towards retirement saving. 10% is just not enough.

You can phase into that, adding 1-1.5% each time you get a pay rise.

But you really need to be doing that.

thx1138
Posts: 989
Joined: Fri Jul 12, 2013 2:14 pm

Re: Can we afford a more expensive home? And is it wise?

Post by thx1138 » Tue Mar 05, 2019 7:05 am

I'd sort of discourage buying a new house in anticipation of having a kid unless your current situation is really untenable. Having a kid just changes things so drastically it is very hard for the childless to predict what will actually be important to them post child. We put an offer in on a house pre-kid but were, as it turns out fortunately, out bid. We now know that location really wasn't right for us post-kid.

As to picking a school district remember those can change under you - sometimes surprisingly quickly. It is 5+ years until that kiddo would enter school - is the "good" district still going to be "good" five years from now? Our school district went from top notch to "not sending the kid there" in less than five years and at the end of that five years the county superintendent of schools was literally in prison. Growing up years go on the other side of the country in the 7 years between me and my brother I never entered the same school my brother did because of how much those schools had degraded. I have had coworkers that watched their award-winning schools become horribly overcrowded while they watched their kids grow to school age.

House transactions are very expensive so I'd wait until both you have to move and most importantly you know what you will want.

Grt2bOutdoors
Posts: 20989
Joined: Thu Apr 05, 2007 8:20 pm
Location: New York

Re: Can we afford a more expensive home? And is it wise?

Post by Grt2bOutdoors » Tue Mar 05, 2019 7:16 am

No, you can not afford this house. You should be saving 15% of salary for retirement, you are at 10%. You will have much less disposable income if you buy it today, start a family and your disposable income will be zero. You can not count on assumptions when making a purchase. No bank lends out money based on projected earnings, they lend based on current income and in your case, the collateral - the house.

This contemplated purchase is a “want”, not a “need”. Don’t listen to salespeople (real estate agent, mortgage company, sellers) - their own self interest guarantees they will say “you can afford it”. You can not. Are your incomes secure? If one of you lost your job or ability to work, would you have enough money each month to pay mortgage and rest of bills?, what about if you had a family as well?

When you’ve saved up twice as much as you have now, revisit the home buying question, but not before.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Jack FFR1846
Posts: 9747
Joined: Tue Dec 31, 2013 7:05 am

Re: Can we afford a more expensive home? And is it wise?

Post by Jack FFR1846 » Tue Mar 05, 2019 7:27 am

Too expensive.

You already have a house. Put more into retirement saving and if you have extra cash, pay down the mortgage.

The biggest cost that people seem to always gloss over has much more impact than just buying a mini van. What if you decide that one of you is going to stay home with a child. Now your income is greatly reduced just as your cost have greatly increased. Feel trapped much? The longer you wait and save, the better off you're going to be.
Bogle: Smart Beta is stupid

MJD
Posts: 25
Joined: Sat Aug 04, 2018 6:17 pm

Re: Can we afford a more expensive home? And is it wise?

Post by MJD » Tue Mar 05, 2019 8:28 am

I was in a similar scenario not too long ago.

It's natural that those advising it's "affordability" aren't going to be around when it's time to start writing checks. From my vantage point, you're buying too much house for your current and future financial situation. Even with 10 years of good raises, you're going to be slaves to the mortgage payment. That's not a pleasant feeling, especially when the economy inevitably gets troubled again and job security is in jeopardy.

If you want to buy this house despite it being a bit of a stretch, then that's a lifestyle decision and it's not for anyone on this board to tell you that's wrong. However, you and your spouse must acknowledge the reality that you are trading retirement savings, spare cash, and financial flexibility for what you perceive is a better housing situation.

There's only one life to live - you have to decide if this house is your priority for your dollars.

cherijoh
Posts: 6073
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Can we afford a more expensive home? And is it wise?

Post by cherijoh » Tue Mar 05, 2019 8:29 am

Dynasty90 wrote:
Mon Mar 04, 2019 11:37 pm
quantAndHold wrote:
Mon Mar 04, 2019 11:23 pm
That’s a lot of house on your salary. I would do 2 things with the money.

1) increase your savings rate to 15%. This is not house savings, this is in retirement accounts. There are going to be times in the future after you have kids that you won’t be able to save as well. In the future, you’ll be glad you saved more when you had chance.

2) take the extra $800 you would be putting into the larger house payment every month, and dump it into a savings account. Do that for a year. At the end of a year, then decide if you can afford the house. If you then decide to buy, you have an extra $10k saved up for the down payment.

Since you don’t have kids yet, the big house and the school district isn’t necessary yet. Frankly, a big yard is probably never necessary, it’s just something to take care of. Keep in mind that the more house you have, the more stuff you need to fill it, the more time and money you spend maintaining and cleaning it, etc. Keep things simple for as long as possible.
Thanks for the post. I agree we should strive to hit the 15% retirement contribution rate. The extra $800 into a savings account to "pretend pay" the increased mortgage payment is a great idea.
I agree with previous posters who question the advisablity of this new home purchase. It is easy to get caught up in the new home fever - especially with new construction where you get to "pick out just what you want". I'll try not to repeat their arguments, but I'll point out a few other considerations.

Your post implicitly assumes that you are able to sell your current house for the price you assume in the time frame you want. It doesn't always work that way.

Two of my former coworkers announced that they were each buying a new home the same weekend (both new construction). One assumed that their house would sell easily, while the other needed to sell their house to get the downpayment for the new house. So the first coworker waited to get their house on the market (until construction on the new house was actually started), while the other put their house on the market the week after putting a contract on the new one. To make a long story short, the first coworker was stuck with 2 mortgages for about a year after they moved - and they had to drop the price several times. The second coworker ended up moving twice (first into a short-term apartment while storing all their fiurniture), because their house sold immediately to someone who needed to move quickly and the construction on the new home was delayed.

Your plan would implode if you were stuck with 2 mortgages for even a month or two. You would be wiping out your cash savings for a downpayment. Plus, I think you are grossly underestimating the costs of a "brand new" home - upgrades to the new construction (from builder grade options), moving costs, cash up front to fund your mortgage escrow acct, window treatments to cover all those bare windows, appliances (my builder provided dishwasher & oven but not a fridge or washer/dryer), etc., etc., etc....

FYI, respected Boglehead author Bill Bernstein suggests that a 15% retirement contribution rate is the minimum savings level to be able to have a comfortable retirement at a normal retirement age of 65. Retiring early requires more. Fifteen percent is clearly doable with your current home and no children, but the new house and/or a child or two would put pressure on that plan. Especially since your assumption of continued 10% raises is wildly optimistic IMO. As you advance and age, raises tend to peter out to cost of living increases with the potential of a bonus (which isn't guaranteed and doesn't impact base pay). The best way to continue to advance your salary is to switch companies - but who is to say that your proposed new home would be convenient to any new job?

User avatar
FlyAF
Posts: 409
Joined: Tue Jan 23, 2018 11:14 am

Re: Can we afford a more expensive home? And is it wise?

Post by FlyAF » Tue Mar 05, 2019 8:34 am

No way. You were smart to post this and seek advice from people that may have done something similar at your age.

Again, run, don't walk, away.

Jags4186
Posts: 3599
Joined: Wed Jun 18, 2014 7:12 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Jags4186 » Tue Mar 05, 2019 8:47 am

Can you post a complete budget breakdown.

Gross income: $130k
Total retirement savings annually:
Monthly after tax income:
Budgeted expenses:
Left over:

One thing I find is that most people’s budgeted expenses are not their real expenses. In addition many times you budget for things but they don’t happene evenly.

For example we budget $200/mo for car maintenance, $250/mo for vacations, and $250/mo for miscellaneous shopping.

From January 1-through today we’ve spent $2000 on a few big car repairs, $1500 on vacation, and had to replace an iPhone to the tune of $800. Sure, if the past is like the future these will all even out over the next 10 months (I don’t expect to have $2000 more if car repairs this year) but you need to be prepared for lumpiness.

bluebolt
Posts: 899
Joined: Sat Jan 14, 2017 9:01 am

Re: Can we afford a more expensive home? And is it wise?

Post by bluebolt » Tue Mar 05, 2019 8:47 am

My wife & I lived in a well-below-our-means place for many years when we didn't have kids. We saved aggressively and years later bought a place that was 3.5x income, but because we had "over-saved" for years we were able to put enough down that our loan was less than 2x income. That gave us a lot of peace of mind.

There's very little downside to waiting since you already own and have a partial hedge against increasing real estate prices. Also, you are counting on two things that haven't happened yet - raises & kids. Also, very little downside to waiting until those things come before making your move.

corysold
Posts: 771
Joined: Mon Mar 24, 2014 12:58 pm

Re: Can we afford a more expensive home? And is it wise?

Post by corysold » Tue Mar 05, 2019 9:23 am

From experience, I'd wait. We did the "count on raises in the future as kids come" thing and while it sort of worked, it wasn't the best way to do it looking back.

Kids don't have to cost a lot, but they do cost something. Daycare for one, ancillary things for a second. We made it work for 12 years now, just barely being ahead and having a pretty small surplus every month. Looking back now, it's more sheer luck than anything that it hasn't come back to bite us hard. I also left the workforce to stay home and while that saved us money in daycare, and I worked odd hours to bring in some income, I'm now having a terrible time finding a full time job after 12 years. Something else to consider long term if one of you decides to stay home. I think it's just too much to ask to not expect the unexpected over the next 10+ years as your kid/s are young.

It wasn't clear if you counted day care in that $1250 surplus, but I'd check prices around you. That likely won't even cover monthly care for a newborn, depending on your location.

User avatar
SmallCityDave
Posts: 141
Joined: Thu Feb 21, 2019 10:04 am

Re: Can we afford a more expensive home? And is it wise?

Post by SmallCityDave » Tue Mar 05, 2019 9:25 am

Dynasty90 wrote:
Mon Mar 04, 2019 10:33 pm

We do not want this home to make us house poor or to hinder us long term. We do consider this home our long term home.

We do not like debt and tend to avoid it. A mortgage like this makes us really think about this decision over and over. However, we feel our quality of life will greatly increase. We both have envisioned a home/property like this, but not this early in our lives. So we view it as a "do we act now or later" decision.

Ages: Upper 20's
Income: 130k/year (combined) with projected income increase of 10k per year for next few years
401k total: 33k (combined)
IRA total: 15k (combined)
Current saving rate: 10% of gross income
Savings: 75k
Checking: 5k

Current home value: 225k (approximate)
Current home mortgage: 163k @ 4.14% (30 yr fixed)
Current home monthly mortgage payment: $1,350 (PIT)
Current expenses leaves us with: approximately $2,500 surplus per month (after all living expenses and retirement contributions)

No other debt (cars are paid for, no student loans, no credit card balances)

Feel free to share your thoughts.
First and foremost you are doing great keep up the good work!! I wish I was in your shoes in my late 20's.

I doubt your quality of life will greatly increase, if you don't like debt it may greatly decrease.

By traditional standards you can afford it meaning you can qualify for more debt in reality if you don't have the cash you can't afford it.

I would pay down the mortgage to $100k today and work my tail off to pay it off in the next 2 years or less.

basspond
Posts: 1221
Joined: Wed Nov 27, 2013 4:01 am

Re: Can we afford a more expensive home? And is it wise?

Post by basspond » Tue Mar 05, 2019 9:43 am

We were about your age when we upgraded our starter home. At the time the house we moved up to was less then 2 times our salary and we were in our new house under 5 years before our first bundle of joy came. People underestimate the power of DINKs (Dual Income No Kids) vs SICKs (Single Income Couple Kids). The best thing we did was to refinance to a 15 year note after one year. The big advantage was that we had all this money available to us when the children got into the really expensive years including college. It was nerve racking signing and the first couple of years but our salary increases more then made up for any budget uneasiness. Be aware of lifestyle creep.

In your math the PIT goes up $800 but your after expenses amount goes down $1250. Is there anything besides additional utilities for a bigger house you are calculating in? Are you saving 15% for retirement? Good luck in your forever home.

John Laurens
Posts: 431
Joined: Mon Nov 14, 2016 7:31 pm

Re: Can we afford a more expensive home? And is it wise?

Post by John Laurens » Tue Mar 05, 2019 9:46 am

A lot depends on the salary breakdown between your wife and you. Buying this house locks her into working outside the home. Having a child changes priorities. This house severely limits your options. Women can have health problems during and after pregnancy that could force her out of workforce. Children can be born with or acquire health problems. Many unknown variables can cause this house to own you rather than you own the house.

I would at a minimum wait until your first child is born and until you can afford the house on your salary alone.

Regards,
John

sschoe2
Posts: 403
Joined: Fri Feb 24, 2017 4:42 pm

Re: Can we afford a more expensive home? And is it wise?

Post by sschoe2 » Tue Mar 05, 2019 9:58 am

I would buy only the amount of house you need. More house means more expensive utilities, more expensive maintenance, more expensive property taxes, and more expensive insurance. Especially in places like Illinois or New Jersey more house is just an invitation for the govt to rip you off more.

ddurrett896
Posts: 1063
Joined: Wed Nov 05, 2014 3:23 pm

Re: Can we afford a more expensive home? And is it wise?

Post by ddurrett896 » Tue Mar 05, 2019 10:27 am

I wouldn't make the move yet. Have the kids, then make a decision down the road. You could want 2 kids, have 1 then on the second try have triplets and disrupt the new housing situation you thought was perfect and end up moving again.

The most I would spend on a house is 1.5-2x our yearly combined gross income.

KlangFool
Posts: 13310
Joined: Sat Oct 11, 2008 12:35 pm

Re: Can we afford a more expensive home? And is it wise?

Post by KlangFool » Tue Mar 05, 2019 10:31 am

OP,

In 5 years, when your kid goes to school, the school system at your new house may no longer be good. Then, what are you going to do then? Sell the house and move elsewhere again?

KlangFool

User avatar
Watty
Posts: 16899
Joined: Wed Oct 10, 2007 3:55 pm

Re: Can we afford a more expensive home? And is it wise?

Post by Watty » Tue Mar 05, 2019 10:50 am

One other thing that has not been mentioned is that having a kid is not always easy and you might need expensive fertility treatments or to go through an an expensive adoption process.

If the kid has even moderate and temporary health problems then daycare may not be practicable or even possible so you may need to do down to one income for a while.

Once they have a baby more than one couple has changed their plans decided that having a stay at home parent is worth going down to one income for a while.

It would be good to wait until you have a healthy baby to buy the expensive house.

BradJ
Posts: 314
Joined: Sun Jan 21, 2018 6:06 pm

Re: Can we afford a more expensive home? And is it wise?

Post by BradJ » Tue Mar 05, 2019 11:12 am

I actually have no opinion on the purchase. I will echo what everyone else is saying, which is if you are wanting to have kids, wait until you have them to make a decision on a home. When my first was one years old, my wife tells me in on breath "Is it possible I stay home, go back to school for a teaching degree and as a family be debt free in 10 years" while I am holding the mortgage to our fancy-dancy new home. While the note was affordable (200k), we ended up downsizing to a house that cost 100k so all of those dreams could be a reality. I know it is hard to fathom, but having kids changes how you look at......well everything. So my advice, wait to make the choice, those 400k homes aren't going anywhere.

feh
Posts: 1322
Joined: Sat Dec 15, 2012 11:39 am

Re: Can we afford a more expensive home? And is it wise?

Post by feh » Tue Mar 05, 2019 1:40 pm

I suggest you base your decision on 1 income, not two. That way, if one of you decides to stay home w/ the kids, or if somebody loses their job, you aren't in a world of hurt.

Post Reply