Buy a house now or in the next 3 years?

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Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Buy a house now or in the next 3 years?

Post by robocop » Wed Aug 14, 2019 4:14 pm

Hi everyone,

I'm hoping to gain some additional perspectives from the wise Bogleheads of this forum on our current potential home purchase.

Here are our stats:

Combined approximate annual income:
$270,000 base salary/self-employment income (ages 35 and 38)
$49,000 target bonus
$20,000 target RSU (at current stock price)
$9,000 pension contributed by employer
$9,000 401K contributions by employer

Tax bracket: 33% federal, 6.37% state (northern NJ)

Savings:
Cash: $125,000 (note: updated this after OP to reflect additional savings I forgot my partner has)
Taxable mutual funds: $315,000
Roth IRA: $178,000
Traditional IRA: $110,000
Roth 401k: $3,000
401k: $175,000
529 for our child (almost 2 years old): $75,000

Annual Savings:
Roth IRA: $12,000 (edit: we will now be putting this in taxable per the comments below)
401k: $56,000 (all tax-deferred)
529: $30,000
Pension: $9,000

Current expenses: $1,500-$3,000 (note: we've had a few months over this amount this year due to one-time expenses)
Currently renting at $4,300 per month

We are considering a home purchase between $800k-$1M in a town on the Raritan or Morris/Essex train lines into NYC. We would use our taxable mutual fund money to fund the 20% down payment, and are aiming to have our mortgage, taxes, and insurance costs at $5,500-6,000 per month. The home would likely be a post-2000 build, likely with 0.6 acres or less of property, and 2500-4000 sf.

We moved here last November, for a new job for me. My husband has been self-employed for over 9 years. If I were to lose my job, which I don't expect, I could fairly easily get a new job in the local area in my industry, or go back to former employers in NYC (I have been told that I'm welcome to my old jobs there anytime, and I was paid significantly more at both jobs--this recent job move was for lifestyle reasons).

If we move forward with this plan, a mortgage interest deduction calculator has told me that assuming tax law doesn't change, in the next couple of years this would increase our housing costs by about $200-$1,000 per month for the next handful of years, depending on the year and the exact house/tax costs.

We are hoping to have another child soon (we currently have one), and are hoping to upgrade our car soon. If we do one or both of these, then we can expect our costs to increase by $500-$2500 per month while we have 2 kids in daycare and are paying off our car (if we don't pay in cash). When our child enters kindergarten in 3-4 years, then our situation would presumably be similar to what it is today, as that new car would be paid off and we'd only have 1 in daycare.

My questions are:

1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses.

2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing.

3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy?

4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs.

5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?

6. Is there anything else you would consider that we haven't considered when making this purchase?
Last edited by robocop on Wed Sep 18, 2019 2:36 pm, edited 5 times in total.

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Watty
Posts: 17209
Joined: Wed Oct 10, 2007 3:55 pm

Re: Buy a house now or in the next 3 years?

Post by Watty » Wed Aug 14, 2019 6:03 pm

robocop wrote:
Wed Aug 14, 2019 4:14 pm
(ages 35 and 38)
.....
We are hoping to have another child soon (we currently have one),
I would wait a year or two to see if you might need expensive IVF treatments and preferably until you have a health baby.

megabad
Posts: 2391
Joined: Fri Jun 01, 2018 4:00 pm

Re: Buy a house now or in the next 3 years?

Post by megabad » Wed Aug 14, 2019 6:08 pm

robocop wrote:
Wed Aug 14, 2019 4:14 pm
1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses.
It definitely will impact your savings and this seems like a hectic time to add even more chaos (with another potential child coming along). By your numbers, you might need to cut back on $42k in savings per year. That is big chunk, but I would need to know what your future expenses will be. If kids are going to public school, the daycare expense dropping off will have a big impact. As it stands right now, I can't imagine you will be saving enough to cover expenses for retirement if they stay at current levels, but your true expenses without the expense for the children is probably a lot lower. In other words, you might be ok if you will need a lot less than your current $10-15k a month in retirement.

2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing.
I am in the wait until the last minute to buy camp normally. And that area I think is mostly regarded as a renter's market.

3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy?
What are "mutual funds"? Are we talking 100% Total Stock Market Index or are we talking 100% Total Bond Market index? I would probably start setting that money aside in fixed income assets pretty soon if you haven't already. If you need to sell, I would just try to stay in 15% bracket each year.

4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs.
Haven't used. I would assume a 10% down mortgage interest rate would not be competitive with a 20% but not sure.

5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?
140k seems like about a year's worth of expenses for you which I think makes sense for an emergency fund. How do you feel about it?

6. Is there anything else you would consider that we haven't considered when making this purchase?
Honestly, I wouldn't worry about easing off the 529 funding. 30k per year is a big number and if these funds are invested aggressively, you may end up overfunding.

You say you are contributing to 2 Roth IRAs. I assume you mean backdoor. If so, I think this is pretty tax inefficient for you so I would either stop or rollover your IRA into a qualified plan.

I would not overvalue the mortgage interest deduction. By my rough numbers, this might be worth $300 bucks for you in first year and decreases each year. To me, it is basically negligible for folks making $300k a year.

cherijoh
Posts: 6335
Joined: Tue Feb 20, 2007 4:49 pm
Location: Charlotte NC

Re: Buy a house now or in the next 3 years?

Post by cherijoh » Wed Aug 14, 2019 6:40 pm

robocop wrote:
Wed Aug 14, 2019 4:14 pm
Combined approximate annual income:
$270,000 base salaries (ages 35 and 38)
$45,000 target bonus
$20,000 target RSU (at current stock price)
$9,000 pension

Tax bracket: 33% federal, 6.37% state (northern NJ)

Savings:
Cash: $25,000
Taxable mutual funds: $315,000
Roth IRA: $178,000
Traditional IRA: $110,000
Roth 401k: $3,000
401k: $175,000
529 for our child (almost 2 years old): $75,000

Annual Savings:
Roth IRA: $12,000
401k: $56,000 (all tax-deferred)
529: $30,000

Current amount leftover each month after expenses: $500-$2500
Currently renting at $4,300 per month

We are considering a home purchase between $800k-$1M in a town on the Raritan or Morris/Essex train lines into NYC. We would use our taxable mutual fund money to fund the 20% down payment, and are aiming to have our mortgage, taxes, and insurance costs at $5,500-6,000 per month. The home would likely be a post-2000 build, likely with 0.6 acres or less of property, and 2500-4000 sf.

We moved here last November, for a new job for me. My husband has been self-employed for over 9 years. If I were to lose my job, which I don't expect, I could fairly easily get a new job in the local area in my industry, or go back to former employers in NYC (I have been told that I'm welcome to my old jobs there anytime, and I was paid significantly more at both jobs--this recent job move was for lifestyle reasons). <-- We are in a very low unemployment period, so I would take your former employers' offers of another job "anytime" with a grain of salt. Would they lay someone else off to create a position for you?

If we move forward with this plan, a mortgage interest deduction calculator has told me that assuming tax law doesn't change, in the next couple of years this would increase our housing costs by about $200-$1,000 per month for the next handful of years, depending on the year and the exact house/tax costs.

We are hoping to have another child soon (we currently have one), and are hoping to upgrade our car soon. If we do one or both of these, then we can expect our costs to increase by $500-$2500 per month while we have 2 kids in daycare and are paying off our car (if we don't pay in cash). When our child enters kindergarten in 3-4 years, then our situation would presumably be similar to what it is today, as that new car would be paid off and we'd only have 1 in daycare.

My questions are:

1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses. <-- Yes I think you'd be house poor at the upper end of your range.

2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing. <-- I'd wait on the house and reassess when you know whether you will have a second child and the accompanying added expenses.

3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy? <-- I wouldn't feel comfortable with only $25K in cash and my house down payment in stock mutal funds. A good time to buy a house is when the housing market is soft (i.e., buyers market), but this often occurs during an economic downturn so stock prices will also fall. I would also caution against buying more house than you need (which 4000 sq. ft. definitely is!)

4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs. <-- I'm sure the costs are built in and you get stiuck with that rate for the life of the loan which can be worse than PMI for a shorter period. I wouldn't buy a house unless you can make a full 20% downpayment and still have an adequate EF.

5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?

6. Is there anything else you would consider that we haven't considered when making this purchase?

Golf maniac
Posts: 311
Joined: Wed Dec 27, 2017 2:02 pm
Location: Florida

Re: Buy a house now or in the next 3 years?

Post by Golf maniac » Wed Aug 14, 2019 7:49 pm

I would suggest developing a detailed monthly budget (include maintenance and upkeep and increased utilities) and see how it compares to your current monthly budget. Don’t forget all the closing costs, moving expenses, etc. Another set of expenses to consider is wow I am in a new bigger home and I want new furniture, upgrades, and new paint on all the walls. Of course we need new window treatments and the landscaping needs to change. And since we have new landscaping we need a good sprinkler system to keep it alive.

Bottom line, go in with your eyes open and all your numbers in place.

Olemiss540
Posts: 1093
Joined: Fri Aug 18, 2017 8:46 pm

Re: Buy a house now or in the next 3 years?

Post by Olemiss540 » Wed Aug 14, 2019 8:21 pm

Planning on public schools for the kids? I think yall are behind in retirement savings based on your income, and thus would divert the 529 money into taxable. I would keep the mortgage around 650k or 675k. With a 200k downpayment you are feeling a little shy on taxable funds so maybe after you get those up a bit more?
I hold index funds because I do not overestimate my ability to pick stocks OR stock pickers.

harrychan
Posts: 1565
Joined: Sun Nov 14, 2010 9:37 pm
Location: Pasadena

Re: Buy a house now or in the next 3 years?

Post by harrychan » Wed Aug 14, 2019 8:42 pm

Olemiss540 wrote:
Wed Aug 14, 2019 8:21 pm
Planning on public schools for the kids? I think yall are behind in retirement savings based on your income, and thus would divert the 529 money into taxable. I would keep the mortgage around 650k or 675k. With a 200k downpayment you are feeling a little shy on taxable funds so maybe after you get those up a bit more?
Came here to say this. You are VERY behind in your retirement savings. I look at some FIRE forums and some laser-focused millennials even have $100k. With the house and young kids, you will won't be able to catch up much at all. Do you really need to buy a house at that price point? Can you buy a house that is not your dream home and catch up on retirement then move up later?
This is not legal or certified financial advice but you know that already.

BeneIRA
Posts: 661
Joined: Sat Nov 29, 2014 8:43 pm

Re: Buy a house now or in the next 3 years?

Post by BeneIRA » Wed Aug 14, 2019 8:56 pm

Just looking at the numbers, take out the bonuses since if the economy goes south, those will go the way of the dodo. The general rule is 3 times your base income is the amount of the mortgage you can actually afford. Base you make $270,000. Multiplied by three gets us to $810,000. Maybe you can get a house for that or maybe you can't. I expect you'll want something a bit more than that, which would mean you are house poor. Your income isn't high enough to justify a $1 million home and quite a bit can go wrong. Not to mention your taxes are extremely high, so you don't truly make close to $270,000 . If something goes wrong as it inevitably always seems to in the first year of home ownership, things could be looking tight for a while. You would also need to furnish the house, which costs a pretty penny.

If I was you, I am waiting. This would be too close for my comfort and I would have some trouble sleeping at night. Have the second child and see where you're at. That you have to move all of this around to make it seem safer is putting up alarm bells for me. You can always buy a house next year or the year after if you really want to, but if you pull the trigger today, it is much harder to go the other way. Sure, mortgage rates are low, but if they do go up, then the prices of houses should theoretically go down since a mortgage is more expensive.

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Thu Sep 05, 2019 6:29 am

Watty wrote:
Wed Aug 14, 2019 6:03 pm
robocop wrote:
Wed Aug 14, 2019 4:14 pm
(ages 35 and 38)
.....
We are hoping to have another child soon (we currently have one),
I would wait a year or two to see if you might need expensive IVF treatments and preferably until you have a health baby.
Thanks for the advice--the risk of not having a healthy baby is something we should definitely keep in mind.

That said, we've already decided we won't be doing IVF or other fertility treatments if we are unable to conceive. So we can exclude that potential cost, but should consider any possible medical/therapy costs that wouldn't be covered by our insurance if we have a child who is born with medical issues.

GeoffD
Posts: 89
Joined: Tue Mar 20, 2018 1:31 pm

Re: Buy a house now or in the next 3 years?

Post by GeoffD » Thu Sep 05, 2019 8:39 am

Personally, I wouldn’t be buying a $1 million 4,000 sf house in North Jersey carrying an $800k mortgage in 2019.

EnjoyIt
Posts: 2649
Joined: Sun Dec 29, 2013 8:06 pm

Re: Buy a house now or in the next 3 years?

Post by EnjoyIt » Thu Sep 05, 2019 8:42 am

robocop wrote:
Wed Aug 14, 2019 4:14 pm
.....

My questions are:

1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses.
Yes, at your current budget and plan of having kids things would be pretty tight and hinder your retirement savings.
2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing.
I agree with the wait and see. What's the rush? If and when you have your second child, you can re-evaluate your plan, your income, your expenses and make a much more educated decision on the home you want. Remember, one of you will be out of work for a few months when the second child comes cutting down on your income a little.
3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy?
Good question. I would start with diverting all dividends into a money market account. Since the plan is to wait until your second child, I would divert all potential taxable savings towards the house fund. You can keep it in the same money market account as well.
4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs.
If you can't afford a home with 20% down, then you can't afford the home. I don't like this idea at all.
5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?
Personally I think it is a bit too much, but it is you that has to sleep well at night. The point of the emergency fund is to help fund a big bulky expense quickly such as new roof, car replacement, large home repair, large medical bill, or you are out of work for a few months. The out of work is the big one. What do you think your expenses will be if both of you are out of work which would be the worst case scenario? How long do you believe it may take to find work again? I suspect that day care costs would almost disappear, you would spend less money eating out and cooking more, you would spend less money on commuting. Long story short, I think the $140k is a bit too much. I would consider some of that cash as a good start in building your home purchase 20% downpayment.
6. Is there anything else you would consider that we haven't considered when making this purchase?
1) I'm sure you are aware that NJ does not offer any state tax deduction on the 529. There is nothing better when saving for higher education, but in NJ it isn't the best compared to lets say Utah. In addition, as other have told you, at your age, your retirement savings are a bit on the skimpy side compared to your income and expenses. Maybe the high income came around only recently, but it does not change the fact that you are behind. As many have posted here, you can not take a loan for retirement, but you can always take on a loan for college education. Stop the 529 contributions for the moment and start building your mortgage fund. The $75k in the 529 will grow nicely over the next 3-5 years (ideally.) At that point as you said, daycare expenses will go away and you can divert 50% of that money towards the 529 and 50% into a taxable account. If you properly fund your retirement today then 16 years from now if your 529 is not large enough, you can easily cash flow what is left over. If you can't, well, you did not save enough for retirement and your children will either have to work a little or take out a small loan of which you can assist repaying once your own finances are in order.

2) I would try and avoid selling assets and paying capital gains tax if at all possible. At the very least try and keep it to a minimum which is why waiting will help.

3) Just because the mortgage lender is willing to give you a loan for 3x your income does not make it a financially wise decision. Instead of looking for the largest or most expensive home you can afford, instead try and find the least expensive home that you can live with and be happy in. Trust me, you will find very little difference in your happiness between a 4,000 sqft home and a 3500 sqft home. Actually, the higher cost, the higher upkeep, the increased maintenance may even decrease your happiness in the larger, more expensive home. In other words, don't let your stuff own you.
Last edited by EnjoyIt on Thu Sep 05, 2019 8:46 am, edited 1 time in total.

FrugalConservative
Posts: 118
Joined: Thu Aug 17, 2017 9:44 am

Re: Buy a house now or in the next 3 years?

Post by FrugalConservative » Thu Sep 05, 2019 8:45 am

1mm home on a 270K salary in HCOL area with a kid and maybe another. HELL NO

You are putting too much away into the 529 at the detriment to your own retirement. Those saying you are behind savings wise, aren't being fair. I think you are doing great job, but can always fine tune.

At the end of the day, your net worth doesnt equate to owning a 1mm home.
Last edited by FrugalConservative on Thu Sep 05, 2019 8:47 am, edited 2 times in total.

HEDGEFUNDIE
Posts: 3392
Joined: Sun Oct 22, 2017 2:06 pm

Re: Buy a house now or in the next 3 years?

Post by HEDGEFUNDIE » Thu Sep 05, 2019 8:46 am

harrychan wrote:
Wed Aug 14, 2019 8:42 pm
Olemiss540 wrote:
Wed Aug 14, 2019 8:21 pm
Planning on public schools for the kids? I think yall are behind in retirement savings based on your income, and thus would divert the 529 money into taxable. I would keep the mortgage around 650k or 675k. With a 200k downpayment you are feeling a little shy on taxable funds so maybe after you get those up a bit more?
Came here to say this. You are VERY behind in your retirement savings. I look at some FIRE forums and some laser-focused millennials even have $100k. With the house and young kids, you will won't be able to catch up much at all. Do you really need to buy a house at that price point? Can you buy a house that is not your dream home and catch up on retirement then move up later?
Huh? The OP has $850k in savings and is adding 100k/yr. How is that behind?

EnjoyIt
Posts: 2649
Joined: Sun Dec 29, 2013 8:06 pm

Re: Buy a house now or in the next 3 years?

Post by EnjoyIt » Thu Sep 05, 2019 8:55 am

FrugalConservative wrote:
Thu Sep 05, 2019 8:45 am
1mm home on a 270K salary in HCOL area with a kid and maybe another. HELL NO

You are putting too much away into the 529 at the detriment to your own retirement. Those saying you are behind savings wise, aren't being fair. I think you are doing great job, but can always fine tune.

At the end of the day, your net worth doesnt equate to owning a 1mm home.
OP is a behind on retirement savings by a little bit considering age, expenses, and figuring $200k of that cash in the OP example is for a mortgage down payment.

But, you are right, credit needs to be given as they are fairing far better than most Americans and only need a little fine tuning.

dsmil
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Joined: Tue Sep 08, 2009 10:51 am

Re: Buy a house now or in the next 3 years?

Post by dsmil » Thu Sep 05, 2019 9:14 am

From what I've seen, Sofi's rates aren't very competitive. I'd imagine that their no PMI offer comes with a higher rate, which might be ok if you're only in the home for a few years, but not in the long term. I think you're probably looking at $250 per month or so of PMI, plus you'll pay a slightly higher rate for a jumbo loan. I like the mortgage professor website for shopping loans (https://www.mtgprofessor.com/ext/partne ... rLoan.aspx). At the least, you'll get some good quotes that you can compare to other lenders.

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Thu Sep 05, 2019 6:36 pm

megabad wrote:
Wed Aug 14, 2019 6:08 pm
robocop wrote:
Wed Aug 14, 2019 4:14 pm
1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses.
It definitely will impact your savings and this seems like a hectic time to add even more chaos (with another potential child coming along). By your numbers, you might need to cut back on $42k in savings per year. That is big chunk, but I would need to know what your future expenses will be. If kids are going to public school, the daycare expense dropping off will have a big impact. As it stands right now, I can't imagine you will be saving enough to cover expenses for retirement if they stay at current levels, but your true expenses without the expense for the children is probably a lot lower. In other words, you might be ok if you will need a lot less than your current $10-15k a month in retirement.

Thanks. I get that it's hectic now, I guess we were just thinking that it will be even more hectic with two kids around. For example, our landlord might sell next summer, and if so, there's a chance we'll have a strong and resistant 3 year old and a newborn, instead of just a fairly easygoing 2 year old.

To be clear, when I reported how much we have "left over" each month, those numbers currently exclude the bonus and RSUs. I don't include those in our expenses calculations because they come once a year as opposed to monthly. But there are some safeguards that lead me to have a good deal of confidence in that I will get at least 90% of what I reported I get in future years (I already discounted what I expect to get, and there are safeguards that give me good confidence that it won't go much below 90% of that number, even in hard times for my employer).

Our current expenditure is usually $7500-9500 per month, but that doesn't include our savings and retirement contributions, estimated tax payments, or paycheck deductions. December is usually a $9,500 month because we have holiday and travel expenses, and medical costs from daycare (lots of winter illnesses). But July is usually a $7,000 month because we are healthy, not traveling, and spending all our time at the nearby park.

Note that these expenses are very heavily weighted towards housing and daycare costs--$4,300 and $2,050, respectively. We are considering switching daycares to other high-quality providers who are lower cost ($1500-1700/month), but don't want to do that too often to our child, and so have decided not to do this until we buy a home and know where we will be located permanently.


2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing.
I am in the wait until the last minute to buy camp normally. And that area I think is mostly regarded as a renter's market.

I have been told by several realtors that it is a buyer's market in the areas we are considering, and this seems supported by significant price reductions and houses sitting on the market. I know that a realtor is interested in making money from me, but are there other ways I could research this on my own?

3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy?
What are "mutual funds"? Are we talking 100% Total Stock Market Index or are we talking 100% Total Bond Market index? I would probably start setting that money aside in fixed income assets pretty soon if you haven't already. If you need to sell, I would just try to stay in 15% bracket each year.

Target Retirement funds from Vanguard. I think they are 2035 or 2045 funds. So pretty aggressive.

To stay in the 15% bracket, I just need to make sure all of our income (minus pre-tax retirement contributions) and whatever I withdraw from my mutual funds is under $488,850, right? I suppose I should also consider any AMT adjustments, right? Is there anything else I have to be aware of? (Sorry for the questions, I've just never pulled money out of mutual funds before and so this is all new to me).


4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs.
Haven't used. I would assume a 10% down mortgage interest rate would not be competitive with a 20% but not sure.

Thanks.

5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?
140k seems like about a year's worth of expenses for you which I think makes sense for an emergency fund. How do you feel about it?

I feel really good about it, because I think if one of us lost our jobs we could easily cut back expenses significantly to $5,000-6,000 per month, and we have a great family safety net, and our extended families have good nest eggs to protect themselves.

6. Is there anything else you would consider that we haven't considered when making this purchase?
Honestly, I wouldn't worry about easing off the 529 funding. 30k per year is a big number and if these funds are invested aggressively, you may end up overfunding.

You say you are contributing to 2 Roth IRAs. I assume you mean backdoor. If so, I think this is pretty tax inefficient for you so I would either stop or rollover your IRA into a qualified plan.

I would not overvalue the mortgage interest deduction. By my rough numbers, this might be worth $300 bucks for you in first year and decreases each year. To me, it is basically negligible for folks making $300k a year.

Can you help me figure out what this would be? I've used online mortgage deduction interest calculators, and it says that we'd save about $12-13k the first year, and about $5-6k per year on average (this assumes a $900k loan and 20% down). Where are these calculators going wrong?

EnjoyIt
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Re: Buy a house now or in the next 3 years?

Post by EnjoyIt » Thu Sep 05, 2019 6:51 pm

robocop wrote:
Thu Sep 05, 2019 6:36 pm
megabad wrote:
Wed Aug 14, 2019 6:08 pm
robocop wrote:
Wed Aug 14, 2019 4:14 pm
1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses.
It definitely will impact your savings and this seems like a hectic time to add even more chaos (with another potential child coming along). By your numbers, you might need to cut back on $42k in savings per year. That is big chunk, but I would need to know what your future expenses will be. If kids are going to public school, the daycare expense dropping off will have a big impact. As it stands right now, I can't imagine you will be saving enough to cover expenses for retirement if they stay at current levels, but your true expenses without the expense for the children is probably a lot lower. In other words, you might be ok if you will need a lot less than your current $10-15k a month in retirement.

Thanks. I get that it's hectic now, I guess we were just thinking that it will be even more hectic with two kids around. For example, our landlord might sell next summer, and if so, there's a chance we'll have a strong and resistant 3 year old and a newborn, instead of just a fairly easygoing 2 year old.

To be clear, when I reported how much we have "left over" each month, those numbers currently exclude the bonus and RSUs. I don't include those in our expenses calculations because they come once a year as opposed to monthly. But there are some safeguards that lead me to have a good deal of confidence in that I will get at least 90% of what I reported I get in future years (I already discounted what I expect to get, and there are safeguards that give me good confidence that it won't go much below 90% of that number, even in hard times for my employer).

Our current expenditure is usually $7500-9500 per month, but that doesn't include our savings and retirement contributions, estimated tax payments, or paycheck deductions. December is usually a $9,500 month because we have holiday and travel expenses, and medical costs from daycare (lots of winter illnesses). But July is usually a $7,000 month because we are healthy, not traveling, and spending all our time at the nearby park.

Note that these expenses are very heavily weighted towards housing and daycare costs--$4,300 and $2,050, respectively. We are considering switching daycares to other high-quality providers who are lower cost ($1500-1700/month), but don't want to do that too often to our child, and so have decided not to do this until we buy a home and know where we will be located permanently.


2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing.
I am in the wait until the last minute to buy camp normally. And that area I think is mostly regarded as a renter's market.

I have been told by several realtors that it is a buyer's market in the areas we are considering, and this seems supported by significant price reductions and houses sitting on the market. I know that a realtor is interested in making money from me, but are there other ways I could research this on my own?

3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy?
What are "mutual funds"? Are we talking 100% Total Stock Market Index or are we talking 100% Total Bond Market index? I would probably start setting that money aside in fixed income assets pretty soon if you haven't already. If you need to sell, I would just try to stay in 15% bracket each year.

Target Retirement funds from Vanguard. I think they are 2035 or 2045 funds. So pretty aggressive.

To stay in the 15% bracket, I just need to make sure all of our income (minus pre-tax retirement contributions) and whatever I withdraw from my mutual funds is under $488,850, right? I suppose I should also consider any AMT adjustments, right? Is there anything else I have to be aware of? (Sorry for the questions, I've just never pulled money out of mutual funds before and so this is all new to me).


4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs.
Haven't used. I would assume a 10% down mortgage interest rate would not be competitive with a 20% but not sure.

Thanks.

5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?
140k seems like about a year's worth of expenses for you which I think makes sense for an emergency fund. How do you feel about it?

I feel really good about it, because I think if one of us lost our jobs we could easily cut back expenses significantly to $5,000-6,000 per month, and we have a great family safety net, and our extended families have good nest eggs to protect themselves.

6. Is there anything else you would consider that we haven't considered when making this purchase?
Honestly, I wouldn't worry about easing off the 529 funding. 30k per year is a big number and if these funds are invested aggressively, you may end up overfunding.

You say you are contributing to 2 Roth IRAs. I assume you mean backdoor. If so, I think this is pretty tax inefficient for you so I would either stop or rollover your IRA into a qualified plan.

I would not overvalue the mortgage interest deduction. By my rough numbers, this might be worth $300 bucks for you in first year and decreases each year. To me, it is basically negligible for folks making $300k a year.

Can you help me figure out what this would be? I've used online mortgage deduction interest calculators, and it says that we'd save about $12-13k the first year, and about $5-6k per year on average (this assumes a $900k loan and 20% down). Where are these calculators going wrong?


There is a $24,400 standard deduction. Keep in mind your property tax and state tax which is capped at $20k and your mortgage interest will be $6k for a total itemized deduction of $26k. The difference between itemized and standard is ($26k - $24.4k = $1.6k) at 32% federal tax you will be saving ($1.6K * 32% = $512) as compared to taking the standard deduction.

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Thu Sep 05, 2019 10:22 pm

harrychan wrote:
Wed Aug 14, 2019 8:42 pm
Olemiss540 wrote:
Wed Aug 14, 2019 8:21 pm
Planning on public schools for the kids? I think yall are behind in retirement savings based on your income, and thus would divert the 529 money into taxable. I would keep the mortgage around 650k or 675k. With a 200k downpayment you are feeling a little shy on taxable funds so maybe after you get those up a bit more?
Came here to say this. You are VERY behind in your retirement savings. I look at some FIRE forums and some laser-focused millennials even have $100k. With the house and young kids, you will won't be able to catch up much at all. Do you really need to buy a house at that price point? Can you buy a house that is not your dream home and catch up on retirement then move up later?
This comment is SO depressing.

I started working full-time less than 10 years ago with over $210,000 in student loans, much of it being at a pretty high interest rate. I am a millennial.

I was always pretty proud of how far I've come, and proud of all the things we've gone without to get here. We weren't making the money we are now right out of school.

I always assumed that if we paid off a house in a HCOL area and kept our expenses low, we'd be very comfortable in retirement by downsizing and/or moving out of the HCOL area. (For now, we are limited to HCOL areas due to career, and limited to certain sized houses due to children/career/sanity). That's what all the retirement calculators are telling me, even before I factor in Social Security, which I hope will at least add something if not at the levels today. We only spend about $1-2k/month after housing costs, and we could probably trim some fat from that when we are retired. If we are able to pay off a house before we retire, and use that equity to fund retirement housing costs, you really think we won't be able to make it?

:(

themuse
Posts: 28
Joined: Thu Aug 08, 2019 10:45 pm

Re: Buy a house now or in the next 3 years?

Post by themuse » Thu Sep 05, 2019 10:40 pm

You are doing just fine retirement wise. Congrats on paying off the student loan...I can now see the reason you focussed on the 529.

Don't get pressured into buying...there will always be houses and the market will adjust. Don't let realtors drive you into hasty decisions. Also, kids will sense your worry and tension, so you don't want to buy a big home and stress out. Be conservative with the 'big rock" purchases.

You can afford it, but looks a bit tight. I would wait a year or so, build up a little more cushion.

Good luck!
--themuse-- | | Investing should be boring

NoFred
Posts: 40
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Re: Buy a house now or in the next 3 years?

Post by NoFred » Thu Sep 05, 2019 10:42 pm

^that comment you quoted is also way off, I’d just ignore it. The retirement numbers look fine and with continued future savings there’s no catch up needed, but I wouldn’t finance more than 80% of a home (less actually)
-NoFred

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Thu Sep 05, 2019 10:48 pm

Golf maniac wrote:
Wed Aug 14, 2019 7:49 pm
I would suggest developing a detailed monthly budget (include maintenance and upkeep and increased utilities) and see how it compares to your current monthly budget. Don’t forget all the closing costs, moving expenses, etc. Another set of expenses to consider is wow I am in a new bigger home and I want new furniture, upgrades, and new paint on all the walls. Of course we need new window treatments and the landscaping needs to change. And since we have new landscaping we need a good sprinkler system to keep it alive.

Bottom line, go in with your eyes open and all your numbers in place.
Thanks! This is good advice. I think a fair number of our expenses would remain the same, as we are already in charge of maintaining certain things like the lawn at our current rental, and we already have furnished a 3,000 sf home. (Our rental is spacious and beautiful, but the commute and traffic is sucking the soul right out of me).

Things I think might be different:

- Moving expenses: I think this would actually be higher if we keep renting. We usually pay ~$2,000 per move, and have historically moved once every 2-3 years. And there are issues at our current rental which drive us insane. So I'll estimate 2 moves in the next 3 years if we buy later (one to a new rental, and one after we purchase a home), and 1 move if we buy now.

- Furniture: keeping expenses the same, as we already rent a 3000 sf home and have furnished it.

- Lawn: is it fair to keep this expense the same or only slightly higher if we are already responsible for lawn maintenance and thus already have a "gardening/lawn" budget? I don't expect us to get all serious about how our lawn looks when we own (we could care less now as long as the grass isn't so tall it's embarrassing), but maybe I add $500/year for miscellaneous things in case we need a new hose or rocks or something which our landlord would normally provide?

- Closing costs: should I assume 2-5% of the purchase price, even if we purchase a higher cost home? Wasn't sure how accurate this the 2-5% number is if you're not buying an average-priced home. Should I include this in the comparison if we are committed to purchasing within 3 years, and so will have to pay it at some point in the near future anyway? We want to own by the time our child is in kindergarten, and it is something we are very serious about, as we want that stability for our child.

- When we do buy, we would like a newer build specifically to avoid upgrades and renovations. To that end, what do you think a fair "house maintenance" budget would be, for what we are looking for? $10,000-20,000/year?

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Thu Sep 05, 2019 10:54 pm

GeoffD wrote:
Thu Sep 05, 2019 8:39 am
Personally, I wouldn’t be buying a $1 million 4,000 sf house in North Jersey carrying an $800k mortgage in 2019.
Got it. The annoying thing is that it's hard to find newer builds in this area that aren't that big. We don't need 4,000 sf, but we really would like a newer build. And I don't think building ourselves is really a good option financially in this area.

If we are able to find something on the lower end, say a $800k 2500 sf house in North Jersey carrying a $600k mortgage, would you still recommend we don't do that?
Last edited by robocop on Fri Sep 06, 2019 12:08 am, edited 1 time in total.

Topic Author
robocop
Posts: 203
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Re: Buy a house now or in the next 3 years?

Post by robocop » Thu Sep 05, 2019 11:13 pm

themuse wrote:
Thu Sep 05, 2019 10:40 pm
You are doing just fine retirement wise. Congrats on paying off the student loan...I can now see the reason you focussed on the 529.

Don't get pressured into buying...there will always be houses and the market will adjust. Don't let realtors drive you into hasty decisions. Also, kids will sense your worry and tension, so you don't want to buy a big home and stress out. Be conservative with the 'big rock" purchases.

You can afford it, but looks a bit tight. I would wait a year or so, build up a little more cushion.

Good luck!
Thanks. Yes, we're trying to fund the 529 for both children early, so the plan is to max our $15k gift contribution as much as we can each year until we hit a certain number, and then let that money grow until our kid(s) is ready for school. Hoping to be done with the 529 savings by the time daycare costs are done, and then to ramp up house payments and retirement with the money that used to be used for daycare. And our current budget doesn't account for the bonus and RSU.

I don't think it's the realtors that are causing the pressure here. We are skeptics by nature and take everything they say with a grain of salt. The factors that are having us consider this now as opposed to in the next 1-3 years are:

- the prospect of buying a home and moving while pregnant sounds awful (pregnancy symptoms were awful the first time around)
- in their younger years, kids seem to handle transitions better when younger, and so moving will likely be more unpleasant in 1-3 years
- we are very committed to buying before our child enters kindergarten, and that restricts us to the next 3 years
- my commute sucks
- the roads/traffic near our home are horrendous
- we only want to move once from here to a home we buy, for our child's sake, and our landlord might want to sell next summer
- we are so sick of landlords who don't fix things promptly and are cheapskates (I know that it also sucks to pay for things outright, but my God, after renting for so many years, I just want to be able to take care of things myself and get them done right).
- we know rates are good now, and prices seem to be soft, and there is uncertainty about those factors in the future (could be worse or better, but we at least know that rates are near the bottom now)

Given that, would you buy at the lower end of our budget now? Or would you still wait?

Topic Author
robocop
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Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Fri Sep 06, 2019 12:06 am

EnjoyIt wrote:
Thu Sep 05, 2019 8:42 am
robocop wrote:
Wed Aug 14, 2019 4:14 pm
.....

My questions are:

1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses.
Yes, at your current budget and plan of having kids things would be pretty tight and hinder your retirement savings.
2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing.
I agree with the wait and see. What's the rush? If and when you have your second child, you can re-evaluate your plan, your income, your expenses and make a much more educated decision on the home you want. Remember, one of you will be out of work for a few months when the second child comes cutting down on your income a little.

I added a bit in a separate reply about why the rush now. The biggest factors that are causing us pressure now are (1) the prospect that we will have to move soon anyway, given that our landlord has foreshadowed that she will likely want to sell next summer, and if we don't do it now, we'll likely have to move either to a new rental or to a purchased home while heavily pregnant or with a newborn and a 3-year old, (2) the fact that our landlord is a cheapskate who drags out every repair over months and drives us insane (e.g., we didn't have hot showers for 6 months last winter), and we've had several landlords like this despite really trying to vet them properly, 3) the fact that we don't want to move again more than once for our child's sake (our child has already lived in 3 different homes at age 2, and (4) the fact that our current location sucks, especially for commute purposes. The biggest thing holding us back is that we'd like to find something we'll be happy with for the long haul, because we don't want to move again in the next 20-30 years once we purchase. And it seems likely that a recession is looming.
3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy?
Good question. I would start with diverting all dividends into a money market account. Since the plan is to wait until your second child, I would divert all potential taxable savings towards the house fund. You can keep it in the same money market account as well.
4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs.
If you can't afford a home with 20% down, then you can't afford the home. I don't like this idea at all.

Well, to be clear, we could easily get the mortgage with 20% down. I just thought it might be nice to have an extra cushion for the double daycare years, and then to dump it all into the house payments when our oldest is done with daycare. But it sounds like that is a bad idea.

5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?
Personally I think it is a bit too much, but it is you that has to sleep well at night. The point of the emergency fund is to help fund a big bulky expense quickly such as new roof, car replacement, large home repair, large medical bill, or you are out of work for a few months. The out of work is the big one. What do you think your expenses will be if both of you are out of work which would be the worst case scenario? How long do you believe it may take to find work again? I suspect that day care costs would almost disappear, you would spend less money eating out and cooking more, you would spend less money on commuting. Long story short, I think the $140k is a bit too much. I would consider some of that cash as a good start in building your home purchase 20% downpayment.

Ok, thanks. Maybe I'll cut that to $100,000, which I think could easily cover us for 1-1.5 years even if we both lost our jobs. I took almost a year off once to help a family member, and our expenses that year were extremely low.

6. Is there anything else you would consider that we haven't considered when making this purchase?
1) I'm sure you are aware that NJ does not offer any state tax deduction on the 529. There is nothing better when saving for higher education, but in NJ it isn't the best compared to lets say Utah. In addition, as other have told you, at your age, your retirement savings are a bit on the skimpy side compared to your income and expenses. Maybe the high income came around only recently, but it does not change the fact that you are behind. As many have posted here, you can not take a loan for retirement, but you can always take on a loan for college education. Stop the 529 contributions for the moment and start building your mortgage fund. The $75k in the 529 will grow nicely over the next 3-5 years (ideally.) At that point as you said, daycare expenses will go away and you can divert 50% of that money towards the 529 and 50% into a taxable account. If you properly fund your retirement today then 16 years from now if your 529 is not large enough, you can easily cash flow what is left over. If you can't, well, you did not save enough for retirement and your children will either have to work a little or take out a small loan of which you can assist repaying once your own finances are in order.

Ok. Just to clarify, our plan is to max out $15k gift contributions to the 529 as much as possible the next few years (maybe 3 years?), and then to stop those contributions, split the account into two if we have two kids, and let it grow until they need it. And our post-housing expenses are actually pretty low (usually $1-2k/month), and we plan to leave this HCOL area (or at least downsize significantly) upon retirement, and to have a paid-off home in a HCOL when we retire. We plan to fund any possible second kid's daycare with the excess we have now, and if necessary with some of the bonus and RSU money, which isn't factored into our monthly budget right now (any extra is currently thrown into our taxable retirement). Given that, would you still maintain your above advice?


2) I would try and avoid selling assets and paying capital gains tax if at all possible. At the very least try and keep it to a minimum which is why waiting will help.

At our income level, we will have to pay at least 15% capital gains tax no matter how much we withdraw, right? (Sorry this might be a stupid question, but we're buy-and-hold people, so we've never sold any mutual funds before).


3) Just because the mortgage lender is willing to give you a loan for 3x your income does not make it a financially wise decision. Instead of looking for the largest or most expensive home you can afford, instead try and find the least expensive home that you can live with and be happy in. Trust me, you will find very little difference in your happiness between a 4,000 sqft home and a 3500 sqft home. Actually, the higher cost, the higher upkeep, the increased maintenance may even decrease your happiness in the larger, more expensive home. In other words, don't let your stuff own you.

Thanks, that's what we have done. I unfortunately know from experience that buying a newer (post-2000) home with at least 2,500 sf is necessary for us. (And yes, I know that may sound ridiculous to some, but because of our extended family situation, career situation, and relationship history of agreeing to certain compromises for the other partner's happiness, these 2 things are essentially requirements for us). Unfortunately, once you tick these 2 boxes and get somewhere close enough to give me a reasonable commute, you're already at $800k, and that's only if we get a good bargain. A lot of the post-2000 builds in this area are McMansions. In fact, one of our favorite houses is >5,000 sf (!!!), and even though it appears to be a really good bargain, we won't buy it because the size is just ridiculous and unnecessary for our needs. I would love to split the house in half and pay only 50-75% for the top half, but unfortunately that isn't a possibility.

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Fri Sep 06, 2019 12:16 am

EnjoyIt wrote:
Thu Sep 05, 2019 6:51 pm
robocop wrote:
Thu Sep 05, 2019 6:36 pm
megabad wrote:
Wed Aug 14, 2019 6:08 pm
robocop wrote:
Wed Aug 14, 2019 4:14 pm
1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses.
It definitely will impact your savings and this seems like a hectic time to add even more chaos (with another potential child coming along). By your numbers, you might need to cut back on $42k in savings per year. That is big chunk, but I would need to know what your future expenses will be. If kids are going to public school, the daycare expense dropping off will have a big impact. As it stands right now, I can't imagine you will be saving enough to cover expenses for retirement if they stay at current levels, but your true expenses without the expense for the children is probably a lot lower. In other words, you might be ok if you will need a lot less than your current $10-15k a month in retirement.

Thanks. I get that it's hectic now, I guess we were just thinking that it will be even more hectic with two kids around. For example, our landlord might sell next summer, and if so, there's a chance we'll have a strong and resistant 3 year old and a newborn, instead of just a fairly easygoing 2 year old.

To be clear, when I reported how much we have "left over" each month, those numbers currently exclude the bonus and RSUs. I don't include those in our expenses calculations because they come once a year as opposed to monthly. But there are some safeguards that lead me to have a good deal of confidence in that I will get at least 90% of what I reported I get in future years (I already discounted what I expect to get, and there are safeguards that give me good confidence that it won't go much below 90% of that number, even in hard times for my employer).

Our current expenditure is usually $7500-9500 per month, but that doesn't include our savings and retirement contributions, estimated tax payments, or paycheck deductions. December is usually a $9,500 month because we have holiday and travel expenses, and medical costs from daycare (lots of winter illnesses). But July is usually a $7,000 month because we are healthy, not traveling, and spending all our time at the nearby park.

Note that these expenses are very heavily weighted towards housing and daycare costs--$4,300 and $2,050, respectively. We are considering switching daycares to other high-quality providers who are lower cost ($1500-1700/month), but don't want to do that too often to our child, and so have decided not to do this until we buy a home and know where we will be located permanently.


2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing.
I am in the wait until the last minute to buy camp normally. And that area I think is mostly regarded as a renter's market.

I have been told by several realtors that it is a buyer's market in the areas we are considering, and this seems supported by significant price reductions and houses sitting on the market. I know that a realtor is interested in making money from me, but are there other ways I could research this on my own?

3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy?
What are "mutual funds"? Are we talking 100% Total Stock Market Index or are we talking 100% Total Bond Market index? I would probably start setting that money aside in fixed income assets pretty soon if you haven't already. If you need to sell, I would just try to stay in 15% bracket each year.

Target Retirement funds from Vanguard. I think they are 2035 or 2045 funds. So pretty aggressive.

To stay in the 15% bracket, I just need to make sure all of our income (minus pre-tax retirement contributions) and whatever I withdraw from my mutual funds is under $488,850, right? I suppose I should also consider any AMT adjustments, right? Is there anything else I have to be aware of? (Sorry for the questions, I've just never pulled money out of mutual funds before and so this is all new to me).


4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs.
Haven't used. I would assume a 10% down mortgage interest rate would not be competitive with a 20% but not sure.

Thanks.

5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?
140k seems like about a year's worth of expenses for you which I think makes sense for an emergency fund. How do you feel about it?

I feel really good about it, because I think if one of us lost our jobs we could easily cut back expenses significantly to $5,000-6,000 per month, and we have a great family safety net, and our extended families have good nest eggs to protect themselves.

6. Is there anything else you would consider that we haven't considered when making this purchase?
Honestly, I wouldn't worry about easing off the 529 funding. 30k per year is a big number and if these funds are invested aggressively, you may end up overfunding.

You say you are contributing to 2 Roth IRAs. I assume you mean backdoor. If so, I think this is pretty tax inefficient for you so I would either stop or rollover your IRA into a qualified plan.

I would not overvalue the mortgage interest deduction. By my rough numbers, this might be worth $300 bucks for you in first year and decreases each year. To me, it is basically negligible for folks making $300k a year.

Can you help me figure out what this would be? I've used online mortgage deduction interest calculators, and it says that we'd save about $12-13k the first year, and about $5-6k per year on average (this assumes a $900k loan and 20% down). Where are these calculators going wrong?


There is a $24,400 standard deduction. Keep in mind your property tax and state tax which is capped at $20k and your mortgage interest will be $6k for a total itemized deduction of $26k. The difference between itemized and standard is ($26k - $24.4k = $1.6k) at 32% federal tax you will be saving ($1.6K * 32% = $512) as compared to taking the standard deduction.


Thanks.

So just to be clear, you are calculating the average savings over the life of the loan when you use $6k as the mortgage interest number, right? And it'd actually be higher in the early years of the mortgage, and lower in the later years of the mortgage, right? So if $12k were the first year's mortgage interest, it'd be $32k -24.4k = $7.6 at 32% = $2,432 for the first year, and go down from there each year until it hits zero?

BarbBrooklyn
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Location: NYC

Re: Buy a house now or in the next 3 years?

Post by BarbBrooklyn » Fri Sep 06, 2019 12:39 am

Have you looked in Maplewood?
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."

themuse
Posts: 28
Joined: Thu Aug 08, 2019 10:45 pm

Re: Buy a house now or in the next 3 years?

Post by themuse » Fri Sep 06, 2019 1:21 am

robocop wrote:
Thu Sep 05, 2019 11:13 pm
Thanks. Yes, we're trying to fund the 529 for both children early, so the plan is to max our $15k gift contribution as much as we can each year until we hit a certain number, and then let that money grow until our kid(s) is ready for school. Hoping to be done with the 529 savings by the time daycare costs are done, and then to ramp up house payments and retirement with the money that used to be used for daycare. And our current budget doesn't account for the bonus and RSU.

I don't think it's the realtors that are causing the pressure here. We are skeptics by nature and take everything they say with a grain of salt. The factors that are having us consider this now as opposed to in the next 1-3 years are:

- the prospect of buying a home and moving while pregnant sounds awful (pregnancy symptoms were awful the first time around)
- in their younger years, kids seem to handle transitions better when younger, and so moving will likely be more unpleasant in 1-3 years
- we are very committed to buying before our child enters kindergarten, and that restricts us to the next 3 years
- my commute sucks
- the roads/traffic near our home are horrendous
- we only want to move once from here to a home we buy, for our child's sake, and our landlord might want to sell next summer
- we are so sick of landlords who don't fix things promptly and are cheapskates (I know that it also sucks to pay for things outright, but my God, after renting for so many years, I just want to be able to take care of things myself and get them done right).
- we know rates are good now, and prices seem to be soft, and there is uncertainty about those factors in the future (could be worse or better, but we at least know that rates are near the bottom now)

Given that, would you buy at the lower end of our budget now? Or would you still wait?
-I would go for it, and aim for the lower end. You have thought through this, and are under stress renting, so makes sense. I think you are in range with $800K and on the border with a $1m home. So just be strict within those ranges and don't go over as you are then going to be pretty house poor.

-Your cash will slip to ~$100K ($200K for downpayment), so you should focus on building that right back up after your house purchase. I would also stop 529 for at least a year or two. You can always do $30K into the 529 or more the year you start again to catch up. You have Roth funds, and you will have taxable as well to help with college, so don't get too caught up with 529 targets.

-Again, I wouldn't read too much into soft prices, rates etc. Sure it is low, but don't let that turn into a voice in your head telling you to go for that larger $1.1m or $1.2m home as that would be the same in a higher interest scenario etc. That's how you allow things to creep up.

-I also feel that you have too many constraints and deadlines you are imposing on yourself - valid or otherwise. Life happens, so just prepare for the worst case scenario mentally (not really worst case, but you know - moving with kids, buying before KG etc), and then start dealing with things from a position of strength.
--themuse-- | | Investing should be boring

GeoffD
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Re: Buy a house now or in the next 3 years?

Post by GeoffD » Fri Sep 06, 2019 5:50 am

robocop wrote:
Thu Sep 05, 2019 10:54 pm
GeoffD wrote:
Thu Sep 05, 2019 8:39 am
Personally, I wouldn’t be buying a $1 million 4,000 sf house in North Jersey carrying an $800k mortgage in 2019.
Got it. The annoying thing is that it's hard to find newer builds in this area that aren't that big. We don't need 4,000 sf, but we really would like a newer build. And I don't think building ourselves is really a good option financially in this area.

If we are able to find something on the lower end, say a $800k 2500 sf house in North Jersey carrying a $600k mortgage, would you still recommend we don't do that?
So buy an older house and do the kitchen and master bathroom before you move in.

EnjoyIt
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Re: Buy a house now or in the next 3 years?

Post by EnjoyIt » Fri Sep 06, 2019 8:54 am

robocop wrote:
Fri Sep 06, 2019 12:16 am
EnjoyIt wrote:
Thu Sep 05, 2019 6:51 pm
robocop wrote:
Thu Sep 05, 2019 6:36 pm
megabad wrote:
Wed Aug 14, 2019 6:08 pm
robocop wrote:
Wed Aug 14, 2019 4:14 pm
1. Is this plan too risky? Will we be too house-poor? It seems like we could easily tighten our belts and, if necessary, reduce our 529 and Roth savings for a few years while 2 kids are in daycare, but I'd like some other perspectives on whether that's true, since we don't know anyone who we feel comfortable talking about finances with who is similarly situated to us in terms of location, income, and expenses.
It definitely will impact your savings and this seems like a hectic time to add even more chaos (with another potential child coming along). By your numbers, you might need to cut back on $42k in savings per year. That is big chunk, but I would need to know what your future expenses will be. If kids are going to public school, the daycare expense dropping off will have a big impact. As it stands right now, I can't imagine you will be saving enough to cover expenses for retirement if they stay at current levels, but your true expenses without the expense for the children is probably a lot lower. In other words, you might be ok if you will need a lot less than your current $10-15k a month in retirement.

Thanks. I get that it's hectic now, I guess we were just thinking that it will be even more hectic with two kids around. For example, our landlord might sell next summer, and if so, there's a chance we'll have a strong and resistant 3 year old and a newborn, instead of just a fairly easygoing 2 year old.

To be clear, when I reported how much we have "left over" each month, those numbers currently exclude the bonus and RSUs. I don't include those in our expenses calculations because they come once a year as opposed to monthly. But there are some safeguards that lead me to have a good deal of confidence in that I will get at least 90% of what I reported I get in future years (I already discounted what I expect to get, and there are safeguards that give me good confidence that it won't go much below 90% of that number, even in hard times for my employer).

Our current expenditure is usually $7500-9500 per month, but that doesn't include our savings and retirement contributions, estimated tax payments, or paycheck deductions. December is usually a $9,500 month because we have holiday and travel expenses, and medical costs from daycare (lots of winter illnesses). But July is usually a $7,000 month because we are healthy, not traveling, and spending all our time at the nearby park.

Note that these expenses are very heavily weighted towards housing and daycare costs--$4,300 and $2,050, respectively. We are considering switching daycares to other high-quality providers who are lower cost ($1500-1700/month), but don't want to do that too often to our child, and so have decided not to do this until we buy a home and know where we will be located permanently.


2. If you were to buy, would you do so today, or next year, or the year after that? We have some time before kindergarten (at least 3 years, maybe 4), but would like to buy a house by then. Mortgage rates are low today, and the market seems buyer-friendly in northern NJ, but a recession seems likely and boomers seem to be downsizing.
I am in the wait until the last minute to buy camp normally. And that area I think is mostly regarded as a renter's market.

I have been told by several realtors that it is a buyer's market in the areas we are considering, and this seems supported by significant price reductions and houses sitting on the market. I know that a realtor is interested in making money from me, but are there other ways I could research this on my own?

3. When should we convert our mutual fund money to down payment money? Now? Right before buying? Does that answer depend on when you suggest we buy?
What are "mutual funds"? Are we talking 100% Total Stock Market Index or are we talking 100% Total Bond Market index? I would probably start setting that money aside in fixed income assets pretty soon if you haven't already. If you need to sell, I would just try to stay in 15% bracket each year.

Target Retirement funds from Vanguard. I think they are 2035 or 2045 funds. So pretty aggressive.

To stay in the 15% bracket, I just need to make sure all of our income (minus pre-tax retirement contributions) and whatever I withdraw from my mutual funds is under $488,850, right? I suppose I should also consider any AMT adjustments, right? Is there anything else I have to be aware of? (Sorry for the questions, I've just never pulled money out of mutual funds before and so this is all new to me).


4. Has anyone here had a SoFi mortgage? If so, are there rates competitive with the lowest rates available? They offer 10% down mortgages without PMI, which could be attractive given our short-term daycare costs.
Haven't used. I would assume a 10% down mortgage interest rate would not be competitive with a 20% but not sure.

Thanks.

5. If we have $140,000 remaining in cash/mutual funds, is that enough for an emergency fund? Should we convert all of our mutual funds to cash at that time to be more conservative?
140k seems like about a year's worth of expenses for you which I think makes sense for an emergency fund. How do you feel about it?

I feel really good about it, because I think if one of us lost our jobs we could easily cut back expenses significantly to $5,000-6,000 per month, and we have a great family safety net, and our extended families have good nest eggs to protect themselves.

6. Is there anything else you would consider that we haven't considered when making this purchase?
Honestly, I wouldn't worry about easing off the 529 funding. 30k per year is a big number and if these funds are invested aggressively, you may end up overfunding.

You say you are contributing to 2 Roth IRAs. I assume you mean backdoor. If so, I think this is pretty tax inefficient for you so I would either stop or rollover your IRA into a qualified plan.

I would not overvalue the mortgage interest deduction. By my rough numbers, this might be worth $300 bucks for you in first year and decreases each year. To me, it is basically negligible for folks making $300k a year.

Can you help me figure out what this would be? I've used online mortgage deduction interest calculators, and it says that we'd save about $12-13k the first year, and about $5-6k per year on average (this assumes a $900k loan and 20% down). Where are these calculators going wrong?


There is a $24,400 standard deduction. Keep in mind your property tax and state tax which is capped at $20k and your mortgage interest will be $6k for a total itemized deduction of $26k. The difference between itemized and standard is ($26k - $24.4k = $1.6k) at 32% federal tax you will be saving ($1.6K * 32% = $512) as compared to taking the standard deduction.


Thanks.

So just to be clear, you are calculating the average savings over the life of the loan when you use $6k as the mortgage interest number, right? And it'd actually be higher in the early years of the mortgage, and lower in the later years of the mortgage, right? So if $12k were the first year's mortgage interest, it'd be $32k -24.4k = $7.6 at 32% = $2,432 for the first year, and go down from there each year until it hits zero?


Correct

Topic Author
robocop
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Re: Buy a house now or in the next 3 years?

Post by robocop » Tue Sep 10, 2019 12:22 pm

BarbBrooklyn wrote:
Fri Sep 06, 2019 12:39 am
Have you looked in Maplewood?
Yes. But the prices are just as high as other places that are a better commute for me, and those places reportedly have better schools too. And we are trying to avoid Essex County because the higher property taxes mean that a similarly priced house is actually much more expensive when taxes are considered. Additionally, they are supposedly starting bussing in Maplewood to address racial disparity in outcomes that, although I think is probably the right move ethically, is something we don’t want for our family. We really value the ability to walk to school with our kids.

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Tue Sep 10, 2019 12:23 pm

EnjoyIt wrote:
Fri Sep 06, 2019 8:54 am
robocop wrote:
Fri Sep 06, 2019 12:16 am
EnjoyIt wrote:
Thu Sep 05, 2019 6:51 pm
robocop wrote:
Thu Sep 05, 2019 6:36 pm
megabad wrote:
Wed Aug 14, 2019 6:08 pm
There is a $24,400 standard deduction. Keep in mind your property tax and state tax which is capped at $20k and your mortgage interest will be $6k for a total itemized deduction of $26k. The difference between itemized and standard is ($26k - $24.4k = $1.6k) at 32% federal tax you will be saving ($1.6K * 32% = $512) as compared to taking the standard deduction.
Thanks.

So just to be clear, you are calculating the average savings over the life of the loan when you use $6k as the mortgage interest number, right? And it'd actually be higher in the early years of the mortgage, and lower in the later years of the mortgage, right? So if $12k were the first year's mortgage interest, it'd be $32k -24.4k = $7.6 at 32% = $2,432 for the first year, and go down from there each year until it hits zero?
Correct
Thanks! That makes sense. Appreciate your help.

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Tue Sep 10, 2019 12:40 pm

GeoffD wrote:
Fri Sep 06, 2019 5:50 am
robocop wrote:
Thu Sep 05, 2019 10:54 pm
GeoffD wrote:
Thu Sep 05, 2019 8:39 am
Personally, I wouldn’t be buying a $1 million 4,000 sf house in North Jersey carrying an $800k mortgage in 2019.
Got it. The annoying thing is that it's hard to find newer builds in this area that aren't that big. We don't need 4,000 sf, but we really would like a newer build. And I don't think building ourselves is really a good option financially in this area.

If we are able to find something on the lower end, say a $800k 2500 sf house in North Jersey carrying a $600k mortgage, would you still recommend we don't do that?
So buy an older house and do the kitchen and master bathroom before you move in.
We’ve looked into renovating, but in the houses we’ve seen it either doesn’t appear feasible, or it seems to cost just as much as a newer build after renovations, and then you have an added risk with having an older home (e.g., things that are out of today’s code that you’ll have to fix as soon as you start renovating, potential asbestos, etc.).

This might have to do with the fact that we actually don’t mind an older kitchen. It’s the layout that is a stickler for us, and that seems to be a more difficult hurdle.

For example, there are tons of split level houses around here for $700-800k, but how do you turn a split level into something where you can walk into the first floor with an open concept living room and kitchen without having to climb stairs, and within our budget? We haven’t found a solution to this, but would love it if anyone has ideas.

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LilyFleur
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Re: Buy a house now or in the next 3 years?

Post by LilyFleur » Tue Sep 10, 2019 1:07 pm

GeoffD wrote:
Fri Sep 06, 2019 5:50 am
robocop wrote:
Thu Sep 05, 2019 10:54 pm
GeoffD wrote:
Thu Sep 05, 2019 8:39 am
Personally, I wouldn’t be buying a $1 million 4,000 sf house in North Jersey carrying an $800k mortgage in 2019.
Got it. The annoying thing is that it's hard to find newer builds in this area that aren't that big. We don't need 4,000 sf, but we really would like a newer build. And I don't think building ourselves is really a good option financially in this area.

If we are able to find something on the lower end, say a $800k 2500 sf house in North Jersey carrying a $600k mortgage, would you still recommend we don't do that?
So buy an older house and do the kitchen and master bathroom before you move in.
+1
When the builder-grade carpet and flooring in a 4000 sf house wears out, it's a lot more expensive to replace than carpet and flooring in a 2500 sf house. Landscaping, watering the lawn, paying the gardener, cleaning the inside of the house (whether you do it yourself or hire it out), paint, heating/cooling, taxes, a new roof, maintaining/repairing the plumbing--all of that is more expensive with more sf. And all of that maintaining of housing (whether you do it yourself or supervise contractors) takes away from time spent with your children. These years are fleeting, and both parents have full-time jobs so your time is limited. And two children require much more time than one. You will be tag-teaming like crazy to get them to their different activities in the elementary school years and on until they drive, most likely.

I think you have to decide if you want to live more house-poor, or not. You just can't have it all, even at your income level. You are becoming first-time home buyers in your 30s. That gives you less time than some to pay off a house before retiring, if that is something that you desire. I think not paying rent is a good idea (especially the high rent that you are paying), but you require a specific level of housing (big & new) that people who retire early may not be able to afford. When do you want to retire?

I don't like split-level houses, either. But I wasn't in love with the first two houses I owned. They were smaller and older.

hightower
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Re: Buy a house now or in the next 3 years?

Post by hightower » Tue Sep 10, 2019 1:29 pm

I personally wouldn't do it. I wouldn't want that much of my net worth going into a home. A combined salary and bonuses of that level technically could afford a $600+K mortgage with a big enough down payment, but again, it's personal choice if you actually want to do it. Your taxable account is your biggest account right now. That will change significantly if you burn that cash on a down payment. Are you ok with that? That's really all that matters. A 1 million dollar house is a lot of house financially speaking and you will be carrying a heavy load of debt associated with it.
I feel for you though because it sounds like the area you're in is just plain expensive. Not sure there's a right answer here.

Topic Author
robocop
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Re: Buy a house now or in the next 3 years?

Post by robocop » Wed Sep 18, 2019 2:43 pm

LilyFleur wrote:
Tue Sep 10, 2019 1:07 pm
GeoffD wrote:
Fri Sep 06, 2019 5:50 am
robocop wrote:
Thu Sep 05, 2019 10:54 pm
GeoffD wrote:
Thu Sep 05, 2019 8:39 am
Personally, I wouldn’t be buying a $1 million 4,000 sf house in North Jersey carrying an $800k mortgage in 2019.
Got it. The annoying thing is that it's hard to find newer builds in this area that aren't that big. We don't need 4,000 sf, but we really would like a newer build. And I don't think building ourselves is really a good option financially in this area.

If we are able to find something on the lower end, say a $800k 2500 sf house in North Jersey carrying a $600k mortgage, would you still recommend we don't do that?
So buy an older house and do the kitchen and master bathroom before you move in.
+1
When the builder-grade carpet and flooring in a 4000 sf house wears out, it's a lot more expensive to replace than carpet and flooring in a 2500 sf house. Landscaping, watering the lawn, paying the gardener, cleaning the inside of the house (whether you do it yourself or hire it out), paint, heating/cooling, taxes, a new roof, maintaining/repairing the plumbing--all of that is more expensive with more sf. And all of that maintaining of housing (whether you do it yourself or supervise contractors) takes away from time spent with your children. These years are fleeting, and both parents have full-time jobs so your time is limited. And two children require much more time than one. You will be tag-teaming like crazy to get them to their different activities in the elementary school years and on until they drive, most likely.

I think you have to decide if you want to live more house-poor, or not. You just can't have it all, even at your income level. You are becoming first-time home buyers in your 30s. That gives you less time than some to pay off a house before retiring, if that is something that you desire. I think not paying rent is a good idea (especially the high rent that you are paying), but you require a specific level of housing (big & new) that people who retire early may not be able to afford. When do you want to retire?

I don't like split-level houses, either. But I wasn't in love with the first two houses I owned. They were smaller and older.
I hear you on not liking your first house, but honestly, I think we'll just keep renting if we can't get a house that is 40 years or less old, and ideally 20 years or less old. Buying a house older than that will require significant renovations for it to meet our purposes, and we don't feel prepared to do that with 1 (potentially 2) young kids and our lack of renovation experience, coupled with the fact that there's not much "extra" built into the discount for an older home in our area if anything goes wrong. (I.e., the price to renovate assuming everything goes well is equivalent to buying the newer home that doesn't require renovations, so we wouldn't be saving anything financially if anything unexpected happens).

The current plan is to work for 25 more years; maybe less if we are doing really well financially before then.

Interestingly, I think the bigger houses actually have lower landscaping costs in our area, as the lot sizes remain the same, and so there's just less ground to cover. But I get your point on painting, cleaning, etc. I did think that builder-grade hardwood was just as durable as higher-priced hardwood (I thought it was just appearance that is different), but perhaps I have that wrong.

Thanks for your input! We are definitely hoping to find something on the smaller end but still a newer build (20 years or less old). Unfortunately, there don't seem to be a lot of those in our area.

Topic Author
robocop
Posts: 203
Joined: Fri Jan 27, 2012 9:44 pm

Re: Buy a house now or in the next 3 years?

Post by robocop » Wed Sep 18, 2019 2:55 pm

hightower wrote:
Tue Sep 10, 2019 1:29 pm
I personally wouldn't do it. I wouldn't want that much of my net worth going into a home. A combined salary and bonuses of that level technically could afford a $600+K mortgage with a big enough down payment, but again, it's personal choice if you actually want to do it. Your taxable account is your biggest account right now. That will change significantly if you burn that cash on a down payment. Are you ok with that? That's really all that matters. A 1 million dollar house is a lot of house financially speaking and you will be carrying a heavy load of debt associated with it.
I feel for you though because it sounds like the area you're in is just plain expensive. Not sure there's a right answer here.
Thanks to you and to everyone for their input.

We have renewed our lease for another 6 months and will reassess at that time whether to renew for another year.

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