Buying a house with or without extra $100k down?

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thethinker
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Buying a house with or without extra $100k down?

Post by thethinker »

Current family income is from two sources:
Very stable career totaling $100,000 per year
Side business which has proven stable to date but self employed based on contract work which could dry up in the distant future: totaling $40,000 per year
We are married with kids and we are in our late 30s. Total retirement, not counting a partial future pension, is $385,000. We have $120k in the bank. Paying $400/month for student loans. No other debts.

We have a family member who’s late in life and we were very fortunate that she wanted to gift us $100,000 (part in 2020 and part in 2021). She knows we are relocating as the family is growing and with higher housing prices lately she was generous with her gift to help us.

The houses in our market and in the school district that we want are going around $500k. Using the 3x rule, that’s a bit out of our range (3 x $140k = $420k), though with the extra $100k gift, it brings the house back into our range.

We are a mostly frugal family, not winning any minimalist awards but we eat home most nights, drive cars into the ground, etc. We were quoted a 2.5% 30 year rate with 0 points, (that comes to about $2,160 monthly payments including taxes but not counting homeowners insurance), so rather than put the $100k towards the mortgage, what are the BH’s thoughts about putting 20% down from money we have in the bank, and trying to live frugal enough to pay the mortgage with our other incomes.

We would then put the $100k gift aside, either in CDs or taxable investment account....what do people suggest? If times are tight or if the side business comes to an end one day, we can draw from the $100k account to make up the mortgage difference each month. One final note, this is a one income household for a few more years but then will become a two income household, likely adding $40k/year.

I do realize there are many moving parts. I can offer more details per request. What say you?
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Watty
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Re: Buying a house with or without extra $100k down?

Post by Watty »

thethinker wrote: Tue Jan 12, 2021 10:12 pm We have a family member who’s late in life and we were very fortunate that she wanted to gift us $100,000 (part in 2020 and part in 2021). She knows we are relocating as the family is growing and with higher housing prices lately she was generous with her gift to help us.
It sounds like the money was sort of intended to help you make the move to get your kids in the better school district. If that was the case then I would be real cautious about not using it to purchase the home. Paying the student loans off might also be something that person would be OK with.

People are sometimes funny about money and just using it to invest might make things awkward even if they do not say anything. Depending on the relationship you may want to ask them what they would like you to do with the money if they have not already been clear.

You need to have an ample emergency fund but in if I was in your situation other than that I would use it for a larger house downpayment or to pay off the student loans. With the money being a gift it is a bit different than if you somehow got a $100K bonus on your own.
crinkles2
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Re: Buying a house with or without extra $100k down?

Post by crinkles2 »

Watty wrote: Wed Jan 13, 2021 12:19 am
thethinker wrote: Tue Jan 12, 2021 10:12 pm We have a family member who’s late in life and we were very fortunate that she wanted to gift us $100,000 (part in 2020 and part in 2021). She knows we are relocating as the family is growing and with higher housing prices lately she was generous with her gift to help us.
It sounds like the money was sort of intended to help you make the move to get your kids in the better school district. If that was the case then I would be real cautious about not using it to purchase the home.
Agree,

Use enough of the gift to ensure your relative understands that it was helpful (e.g. actually get into a better school district if you can, with as much as you need from the gift). Beyond that, investing to your required AA/financial plan would be reasonable, or simply using as you see fit. At some point, a gift is just that, a gift, unless she specifically stipulated to must use it for XYZ.
Reamus294
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Re: Buying a house with or without extra $100k down?

Post by Reamus294 »

Good job on that $385k.
Some may ask for a more complete picture (expenses, student loan balances/interest, more house information, more kiddo info, etc.) to see if the house makes sense. I’ll assume you know what you can afford.
With only one individual with income and the questionable side business I would want a large emergency fund and I would want that money to be there if needed, bad or good economy. I’d aim for a money market fund, CD or savings account.
I would also look at a mortgage calculator to see how much extra interest I am paying each month and total as a result of not putting the 100K towards the mortgage for a little perspective. I’d also come up with a plan to put that money towards the mortgage or student loans in the future when income is more stable so it doesn’t get spent on wants. Good luck on your decisions!
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Re: Buying a house with or without extra $100k down?

Post by thethinker »

Watty wrote: Wed Jan 13, 2021 12:19 am
thethinker wrote: Tue Jan 12, 2021 10:12 pm We have a family member who’s late in life and we were very fortunate that she wanted to gift us $100,000 (part in 2020 and part in 2021). She knows we are relocating as the family is growing and with higher housing prices lately she was generous with her gift to help us.
It sounds like the money was sort of intended to help you make the move to get your kids in the better school district. If that was the case then I would be real cautious about not using it to purchase the home. Paying the student loans off might also be something that person would be OK with.

People are sometimes funny about money and just using it to invest might make things awkward even if they do not say anything. Depending on the relationship you may want to ask them what they would like you to do with the money if they have not already been clear.

You need to have an ample emergency fund but in if I was in your situation other than that I would use it for a larger house downpayment or to pay off the student loans. With the money being a gift it is a bit different than if you somehow got a $100K bonus on your own.
How amble of an EF would you suggest? The idea to keep the $100k in a separate account to help with mortgage payments if needed could also offer help in an emergency. Thought I’d keep that $100k in a totally separate account, as I wouldn’t want that money spent on anything other than mortgage, outside of a catastrophic event. I do believe she would be ok with this choice as we wouldn’t feel comfortable buying a $500k house with current $140k income. Do you agree that’s way too much house for that income? Though the $100k changes that picture and while it wouldn’t turn this into a $400k purchase price house for us, the $100k does allow for the more comfortable purchase of this home....a home we wouldn’t likely entertain without this $100k.
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Re: Buying a house with or without extra $100k down?

Post by aristotelian »

Putting the CD aside earning less interest than the mortgage makes little sense to me. I would rather put it to the house, taking a smaller mortgage with lower payment, or throw it in the market and see what happens. If liquidity was ever needed you would have more equity to draw from in the form of HELOC.

Unless there is some string attached, the $100k should not factor greatly into the decision. The real question is whether it is worth having that much of your net worth tied up in your home. In other words, the $100k does not make the house $400k.
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Re: Buying a house with or without extra $100k down?

Post by Golf maniac »

Having 6 to 12 months in a liquid account for emergencies makes sense. Develop a detailed budget for the new house that includes maintenance, higher taxes, higher utilities, etc. I am assuming a bigger house. Then figure out how much to put down to be comfortable with the mortgage payment.
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Re: Buying a house with or without extra $100k down?

Post by onourway »

I think this seems fine. Realistically 20% down plus associated costs on a $500k place is going to run you $120k. Without the gift, you'd be spending all of your cash, so too expensive - however a $400k mortgage should be do-able on your income, and all the more so in a few years when you return to dual-income.

Personally, I am more comfortable with a larger mortgage and a consequently larger taxable account than vice-versa. Keeping $100k on hand will buy you a lot of time if things don't go as planned.
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Watty
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Re: Buying a house with or without extra $100k down?

Post by Watty »

thethinker wrote: Wed Jan 13, 2021 8:00 am How amble of an EF would you suggest?
How big an emergency fund you need depends a lot on how you define emergency.

I would assume that you have life insurance and at least some disability insurance that would cover at least part of your income.

You seem to be at the point here something like a large dental bill or house or car repair is more of an unplanned expense than a real emergency.

It would be good to think it through but I would suspect that your biggest risk of emergency would be the loss of a job and even with that you might get some severance pay and unemployment insurance.

It sounds like you have a stay at home parent that could go to work if you lost your job so you seem to have three sources of income. Your job, your side business, and the stay at home parent could go back to work. You also need to consider how long it would take you to find a new job if you needed to.

I would feel very comfortable with around six months expenses in an emergency fund with all those options. In a dire emergency you can also do things like take money out of a Roth or use a home equity line of credit that you had already set up. You can't depend on the home equity line of credit because the lender can freeze it and they did during the 2008 financial crisis but you might still want to get one set up if you buy the house since it could still be used as an additional safety net.

You might want to make a spreadsheet and do a "fire drill" as if you lost your job to see how long it would be until you actually ran out of money.

If your emergency fund is a bit low for your comfort on the day you buy the house then you can also likely save and build it up again fairly quickly after you are in the house.
thethinker wrote: Wed Jan 13, 2021 8:00 am I do believe she would be ok with this choice as we wouldn’t feel comfortable buying a $500k house with current $140k income. Do you agree that’s way too much house for that income? Though the $100k changes that picture and while it wouldn’t turn this into a $400k purchase price house for us, the $100k does allow for the more comfortable purchase of this home....a home we wouldn’t likely entertain without this $100k.
The old 3x income saying never worked since it did not take interest rates and property taxes into account. They were saying the same thing back when I bought my first house with a 9.75% mortgage. Forget that saying.

What would your monthly numbers look like if you made a $150K downpayment and were also able to pay the student loans down some? You would also need to budget for maintenance

As a wild guess I would think you might be talking about something like $2,500 a month which is not an outrageous percentage of your income.

The question then becomes what the rest of your budget looks like and where the rest of your money is going. It could be that you might need to cut back on your spending in some other area.
Last edited by Watty on Wed Jan 13, 2021 9:57 am, edited 2 times in total.
KlangFool
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Re: Buying a house with or without extra $100k down?

Post by KlangFool »

OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
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Watty
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Re: Buying a house with or without extra $100k down?

Post by Watty »

KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
With $220K in cash and an income of $140K a year how much house do you think they could afford?
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Re: Buying a house with or without extra $100k down?

Post by JoeRetire »

thethinker wrote: Tue Jan 12, 2021 10:12 pmWe were quoted a 2.5% 30 year rate with 0 points, (that comes to about $2,160 monthly payments including taxes but not counting homeowners insurance), so rather than put the $100k towards the mortgage, what are the BH’s thoughts about putting 20% down from money we have in the bank, and trying to live frugal enough to pay the mortgage with our other incomes.
You haven't indicated what your other expenses are.

Assuming the $2,160/no payments are doable without too much strain, at this mortgage rate it makes complete sense to just put 20% down and invest the remainder.
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Re: Buying a house with or without extra $100k down?

Post by exodusNH »

thethinker wrote: Tue Jan 12, 2021 10:12 pm Current family income is from two sources:
We have a family member who’s late in life and we were very fortunate that she wanted to gift us $100,000 (part in 2020 and part in 2021). She knows we are relocating as the family is growing and with higher housing prices lately she was generous with her gift to help us.
Your relative probably already thought about this, but they need to watch out for the gift tax. The IRS allows someone to gift $15,000 per year to someone. There's no limit on the amount of someones. Hopefully, they gifted this money as separate $15,000 tranches to you, your wife, and your children. (Or they're wealth enough to not care about the tax!)
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Re: Buying a house with or without extra $100k down?

Post by KlangFool »

Watty wrote: Wed Jan 13, 2021 10:00 am
KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
With $220K in cash and an income of $140K a year how much house do you think they could afford?

1) I will let OP tell you about his current annual expense, annual savings, and debts.

2) OP can tell you about the increased housing expense of buying the house too.


3) On top of that, OP will be living among the Jones that make a lot more money than he does. That is another increase in the cost of living.


Feed the family. Not the house.


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Re: Buying a house with or without extra $100k down?

Post by Frank the Tank »

How much more do you have on your student loans and what's the interest rate? If those loans carry a much higher interest rate than 2.5% (which I'm guessing is the case), then getting rid of those $400 per month loan payments more quickly could have a bigger impact on your cash flow than the reduction in your mortgage payment with a higher down payment.

One option to consider to allocate the $100,000 into 3 buckets (as opposed to all in one place): some towards a higher down payment, some towards your student loans, and some towards a home reserve fund. (If you don't have a sufficient emergency fund, then that might be a 4th bucket.) I definitely recommend setting aside enough of that $100,000 amount to cover home update/repair/maintenance expenses for the first couple of years as it's a rule of life that you will end up spending quite a bit on that no matter what condition the house is in when you buy it. (You don't want to be short on cash for home repairs and start having to put things on credit or selling investments on that front, which would defeat the purpose of the larger down payment.)
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Re: Buying a house with or without extra $100k down?

Post by KlangFool »

OP,

If you choose to buy this house, only put a 20% down payment on this house. You will be taking a student loan for your kids. It is cheaper to take less high-interest student loans by keeping less money in your 2.5% mortgage.


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Re: Buying a house with or without extra $100k down?

Post by Frank the Tank »

KlangFool wrote: Wed Jan 13, 2021 10:07 am
Watty wrote: Wed Jan 13, 2021 10:00 am
KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
With $220K in cash and an income of $140K a year how much house do you think they could afford?

1) I will let OP tell you about his current annual expense, annual savings, and debts.

2) OP can tell you about the increased housing expense of buying the house too.


3) On top of that, OP will be living among the Jones that make a lot more money than he does. That is another increase in the cost of living.


Feed the family. Not the house.


KlangFool
To be fair, I would consider the quality of the public school district to be a huge part of the "feed the family" part of the equation. That part of the equation only gets more expensive over time in most major metro areas and, at least for me, was the #1 consideration in buying a home. You generally get what you pay for on that front.

For the OP's situation, it might be tight in terms of expenses for the first couple of years in the house, but that's fairly typical for a young family. I don't think that this looks like a case of an overextension of buying too much house beyond their means (especially if they're living in a HCOL metro area and assuming that they can extinguish their student loans in short order).
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Re: Buying a house with or without extra $100k down?

Post by gr7070 »

Watty wrote: Wed Jan 13, 2021 12:19 am You need to have an ample emergency fund but if I was in your situation other than that I would use it for a larger house downpayment or to pay off the student loans. With the money being a gift it is a bit different than if you somehow got a $100K bonus on your own.
This.

Ample being 3-6 months.

Though I disagree with the money being different. Unless the money was given with explicit strings the money is yours to do whatever you wish.

I do understand givers can have expectations, but (again without explicit expectations stated) those givers are wrong and need boundaries drawn.

The money is exactly like a bonus - the employer isn't overstepping their boundaries and silently expecting you to do X with it.
Last edited by gr7070 on Wed Jan 13, 2021 10:45 am, edited 2 times in total.
KlangFool
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Re: Buying a house with or without extra $100k down?

Post by KlangFool »

Frank the Tank wrote: Wed Jan 13, 2021 10:18 am
KlangFool wrote: Wed Jan 13, 2021 10:07 am
Watty wrote: Wed Jan 13, 2021 10:00 am
KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
With $220K in cash and an income of $140K a year how much house do you think they could afford?

1) I will let OP tell you about his current annual expense, annual savings, and debts.

2) OP can tell you about the increased housing expense of buying the house too.


3) On top of that, OP will be living among the Jones that make a lot more money than he does. That is another increase in the cost of living.


Feed the family. Not the house.


KlangFool
To be fair, I would consider the quality of the public school district to be a huge part of the "feed the family" part of the equation.
Frank the Tank,

That argument does not fly. OP can rent in that school district if he chooses to.


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Re: Buying a house with or without extra $100k down?

Post by LittleMaggieMae »

Watty wrote: Wed Jan 13, 2021 10:00 am
KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
With $220K in cash and an income of $140K a year how much house do you think they could afford?
I know you asked Klang...
I think this is more of a "how house poor" question does the OP want to be?

I'm guessing they've got about $7500 per month (with the 140K income maybe just under 7K without it) after payroll taxes.
I'm guessing another 1500K will come out for health care, retirement accounts, FSA?
I'm guessing their vehicle(s) have about $300 to $500 a month (gas, insurance, maintenance, money for future car)
The OP said a $400 SL payment
With the lower - 7000 a month they've got about 5k per month for shelter, utilities, groceries (included personal care, cleaning stuff), vacation, gifts, clothes, maintaining the house, and whatever else people spend money on.

I'm guessing living in the 500K house will cost them about 3K (2200 for the PIT and say $100 for I and then 700 for utilitities (cell phones/cable/internet included) and house maintenance sinking fund) per month just to keep the lights on and the mortgage paid.

That leaves them 2K per month for living and other stuff. Which probably isn't a lot I hear the "grocery" line item is typically 1K or more per month for a household. And they haven't spent on clothes, vacation, gifts, dining out, entertainment, they haven't saved for the kid's college (or for private school or after school stuff) and whatever else people spend money on during the month.

I'm single - so maybe being married with kid gets you MORE of your income to spend... don't know.

If the OP thinks his income will steadily climb or he's got an awesome pension (health care + cola + replaces a large % of his income at retirement) it might work.

I think the OP needs to go thru the family's spending and decide if what they have to give up is worth living in the house/school district.
Last edited by LittleMaggieMae on Wed Jan 13, 2021 10:48 am, edited 1 time in total.
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thethinker
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Re: Buying a house with or without extra $100k down?

Post by thethinker »

Watty wrote: Wed Jan 13, 2021 9:51 am The old 3x income saying never worked since it did not take interest rates and property taxes into account. They were saying the same thing back when I bought my first house with a 9.75% mortgage. Forget that saying.
Thanks for pointing that out. I just did some quick calculations and the 30 year fixed with 20% down monthly mortgage payment on $400k home at 9.75% is almost identical to the monthly mortgage payment of $875k home at 2.5%. Which goes directly to your point about forgetting that saying.

Watty wrote: Wed Jan 13, 2021 9:51 am As a wild guess I would think you might be talking about something like $2,500 a month which is not an outrageous percentage of your income.
You offered many helpful parts in your earlier post but I wanted to focus on this a bit. I assume you’re saying $2,500 per month is not outrageous for $140k income. But what if the side contract ends unexpectedly and the annual income is $100k, is $2,500 per month outrageous for $100k gross family income? Or still not an outrageous percentage?
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Re: Buying a house with or without extra $100k down?

Post by thethinker »

JoeRetire wrote: Wed Jan 13, 2021 10:01 am
thethinker wrote: Tue Jan 12, 2021 10:12 pmWe were quoted a 2.5% 30 year rate with 0 points, (that comes to about $2,160 monthly payments including taxes but not counting homeowners insurance), so rather than put the $100k towards the mortgage, what are the BH’s thoughts about putting 20% down from money we have in the bank, and trying to live frugal enough to pay the mortgage with our other incomes.
You haven't indicated what your other expenses are.

Assuming the $2,160/no payments are doable without too much strain, at this mortgage rate it makes complete sense to just put 20% down and invest the remainder.
What would the suggested investment vehicle be for this? Stocks/bonds/CD?
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Re: Buying a house with or without extra $100k down?

Post by JoeRetire »

thethinker wrote: Wed Jan 13, 2021 10:46 am
JoeRetire wrote: Wed Jan 13, 2021 10:01 am
thethinker wrote: Tue Jan 12, 2021 10:12 pmWe were quoted a 2.5% 30 year rate with 0 points, (that comes to about $2,160 monthly payments including taxes but not counting homeowners insurance), so rather than put the $100k towards the mortgage, what are the BH’s thoughts about putting 20% down from money we have in the bank, and trying to live frugal enough to pay the mortgage with our other incomes.
You haven't indicated what your other expenses are.

Assuming the $2,160/no payments are doable without too much strain, at this mortgage rate it makes complete sense to just put 20% down and invest the remainder.
What would the suggested investment vehicle be for this? Stocks/bonds/CD?
Whatever your asset allocation plan calls for. Money is fungible. Don't treat this like "found money" and deal with it any differently than if you had earned it.
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Frank the Tank
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Re: Buying a house with or without extra $100k down?

Post by Frank the Tank »

KlangFool wrote: Wed Jan 13, 2021 10:35 am
Frank the Tank wrote: Wed Jan 13, 2021 10:18 am
KlangFool wrote: Wed Jan 13, 2021 10:07 am
Watty wrote: Wed Jan 13, 2021 10:00 am
KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
With $220K in cash and an income of $140K a year how much house do you think they could afford?

1) I will let OP tell you about his current annual expense, annual savings, and debts.

2) OP can tell you about the increased housing expense of buying the house too.


3) On top of that, OP will be living among the Jones that make a lot more money than he does. That is another increase in the cost of living.


Feed the family. Not the house.


KlangFool
To be fair, I would consider the quality of the public school district to be a huge part of the "feed the family" part of the equation.
Frank the Tank,

That argument does not fly. OP can rent in that school district if he chooses to.


KlangFool
Possibly, although top school districts across the country are very highly correlated with heavily single family home owner cities/neighborhoods with high incomes and property values - that's a large reason why they became top school districts in the first place. As a result, there are generally limited family rental supplies in those areas, which in turn means that the rent prices are also generally going to be significant in those areas (once again a function of top school districts being more desirable places to live as a general matter). So, it's not as if though they're necessarily saving on a month-to-month cash basis with renting in a top school district versus a 2.5% mortgage with a large down payment. To be sure, there are significant costs of homeownership beyond the mortgage payment, which is why I believe that they ought to reserve a portion of their $100k for home repair/maintenance reserves as opposed to putting it all towards the down payment.

In any event, if the OP actually decides to *buy* (as opposed to rent), then the biggest factor in the value of the house is often the school district (especially in suburban areas). I look at a "buy" decision as one that's for at least the next 5 years (and more optimally 10 to 20 years) at a minimum. Anything less than that time frame supports renting. Otherwise, I'm a large believer that you shouldn't be "penny wise, pound foolish" in buying a house because the location heavily impacts your flexibility in selling it (if necessary) down the road. Also remember that rent prices in desirable areas generally rise over time, whereas a mortgage is fixed (or can even become cheaper with refinancing). It would be a fallacy to believe that the rent prices in a desirable area will be the same 5 to 10 years from now.

To be very clear, that doesn't mean buying a house that you can't afford, but it also means cheaper housing in and of itself isn't necessarily a better long-term financial decision in buying.
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Re: Buying a house with or without extra $100k down?

Post by onourway »

thethinker wrote: Wed Jan 13, 2021 10:44 am I assume you’re saying $2,500 per month is not outrageous for $140k income. But what if the side contract ends unexpectedly and the annual income is $100k, is $2,500 per month outrageous for $100k gross family income? Or still not an outrageous percentage?
This is a serious risk. However that's what keeping the $100k as a reserve is for. Would you rather have a $300k mortgage, very little in the way of emergency funds, and lose your job, or a $400k mortgage, $100k in the bank, and lose your job? In the latter situation that is likely close to 2 years of time that buys you while you find another job/sell the house/whatever it takes. Once that money is put into the equity of the house, accessing it - especially during a true emergency - becomes much more difficult.

That said, this will likely be tight for you - especially if the side income goes away before your partner returns to the work force. I'd want to know my monthly expenditures quite closely before taking this on. In that case I'd know exactly how I was going to pay for it,
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Re: Buying a house with or without extra $100k down?

Post by KlangFool »

Frank the Tank wrote: Wed Jan 13, 2021 12:02 pm
KlangFool wrote: Wed Jan 13, 2021 10:35 am
Frank the Tank wrote: Wed Jan 13, 2021 10:18 am
KlangFool wrote: Wed Jan 13, 2021 10:07 am
Watty wrote: Wed Jan 13, 2021 10:00 am

With $220K in cash and an income of $140K a year how much house do you think they could afford?

1) I will let OP tell you about his current annual expense, annual savings, and debts.

2) OP can tell you about the increased housing expense of buying the house too.


3) On top of that, OP will be living among the Jones that make a lot more money than he does. That is another increase in the cost of living.


Feed the family. Not the house.


KlangFool
To be fair, I would consider the quality of the public school district to be a huge part of the "feed the family" part of the equation.
Frank the Tank,

That argument does not fly. OP can rent in that school district if he chooses to.


KlangFool
Possibly, although top school districts across the country are very highly correlated with heavily single family home owner cities/neighborhoods with high incomes and property values - that's a large reason why they became top school districts in the first place. As a result, there are generally limited family rental supplies in those areas, which in turn means that the rent prices are also generally going to be significant in those areas (once again a function of top school districts being more desirable places to live as a general matter). So, it's not as if though they're necessarily saving on a month-to-month cash basis with renting in a top school district versus a 2.5% mortgage with a large down payment. To be sure, there are significant costs of homeownership beyond the mortgage payment, which is why I believe that they ought to reserve a portion of their $100k for home repair/maintenance reserves as opposed to putting it all towards the down payment.
Frank the Tank,

If OP is in my neighborhood/area, aka Northern Virginia, family rental supplies are not a problem.

KlangFool
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Re: Buying a house with or without extra $100k down?

Post by Watty »

thethinker wrote: Wed Jan 13, 2021 10:44 am You offered many helpful parts in your earlier post but I wanted to focus on this a bit. I assume you’re saying $2,500 per month is not outrageous for $140k income. But what if the side contract ends unexpectedly and the annual income is $100k, is $2,500 per month outrageous for $100k gross family income? Or still not an outrageous percentage?
It depends on what the rest of your situation is with other debt like car loans and the student loan. Your property taxes are also critical since that varies so wildly. The property taxes on a $500K house could be anywhere from less than a thousand dollars a year to over $10K a year

Some more information would be needed to give a realistic estimate. What are;

1) Your student loan balances and interest rates.

2) What would the property tax, insurance, and HOA fees be on a $500K house?

3) Do you have any other debt like a car loan?

4) How much would you pay in state taxes if you have $100K income? $140K?

5) How many kids do you have, and are you likely to have more?

6) How much are you paying for rent now? That can help define just how big a change it would be to have a mortgage payment and related expenses.

A lot of figuring out how much you can spend on a house really depends on what tradeoffs you want to make. Money would be tighter if your income was reduced to $100K but lots of families live just fine on $75K so the tradeoff of buying the $500K house could be that you would need to live more like that for a while if the side business ends.
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Re: Buying a house with or without extra $100k down?

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KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
I do appreciate your direct answer. Is $400k house too much for a family with $140k/yr Income? Or should I not count the side job and only consider the family income of $100k since that’s quite secure?
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Re: Buying a house with or without extra $100k down?

Post by KlangFool »

thethinker wrote: Wed Jan 13, 2021 10:20 pm
KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
I do appreciate your direct answer. Is $400k house too much for a family with $140k/yr Income? Or should I not count the side job and only consider the family income of $100k since that’s quite secure?
thethinker,

A) Please note that you did not answer any of our questions:

<<1) I will let OP tell you about his current annual expense, annual savings, and debts.

2) OP can tell you about the increased housing expense of buying the house too.>>

Why do you think that you can afford this house?


B) How it costs to rent the same house? Why you must buy to live in this area?


KlangFool
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Re: Buying a house with or without extra $100k down?

Post by gr7070 »

thethinker wrote: Wed Jan 13, 2021 10:20 pm
KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,

You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.

KlangFool
I do appreciate your direct answer. Is $400k house too much for a family with $140k/yr Income? Or should I not count the side job and only consider the family income of $100k since that’s quite secure?
He doesn't know if you can afford this house. He gave you an initial answer without even knowing the answers to the questions he has since posed. Ignore that first statement.

You do need to answer for yourself though.

There are many unknowns, some mentioned upthread by Klangfool and others, that you need as knowns in order for you to confidently answer if this is a good purchased for you.
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Re: Buying a house with or without extra $100k down?

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exodusNH wrote: Wed Jan 13, 2021 10:03 am Your relative probably already thought about this, but they need to watch out for the gift tax. The IRS allows someone to gift $15,000 per year to someone. There's no limit on the amount of someones. Hopefully, they gifted this money as separate $15,000 tranches to you, your wife, and your children. (Or they're wealth enough to not care about the tax!)
Thank you for the thought. Yes this was given in a short period of time to multiple family members, partially in 2020 and the rest in 2021
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Re: Buying a house with or without extra $100k down?

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Watty wrote: Wed Jan 13, 2021 2:50 pm
thethinker wrote: Wed Jan 13, 2021 10:44 am You offered many helpful parts in your earlier post but I wanted to focus on this a bit. I assume you’re saying $2,500 per month is not outrageous for $140k income. But what if the side contract ends unexpectedly and the annual income is $100k, is $2,500 per month outrageous for $100k gross family income? Or still not an outrageous percentage?
It depends on what the rest of your situation is with other debt like car loans and the student loan. Your property taxes are also critical since that varies so wildly. The property taxes on a $500K house could be anywhere from less than a thousand dollars a year to over $10K a year

Some more information would be needed to give a realistic estimate. What are;

1) Your student loan balances and interest rates.
$68,000 at 3.25%

2) What would the property tax, insurance, and HOA fees be on a $500K house?
$6,500k taxes. Estimating $1k insurance. No HOA

3) Do you have any other debt like a car loan?
No, only student loan

4) How much would you pay in state taxes if you have $100K income? $140K?
take home pay would be about $66k based on $100k income and it’s about $93k take home with $140k

5) How many kids do you have, and are you likely to have more? there will be 3 this August and then a scheduled vasectomy

6) How much are you paying for rent now? That can help define just how big a change it would be to have a mortgage payment and related expenses.
$1,800

A lot of figuring out how much you can spend on a house really depends on what tradeoffs you want to make. Money would be tighter if your income was reduced to $100K but lots of families live just fine on $75K so the tradeoff of buying the $500K house could be that you would need to live more like that for a while if the side business ends.
Answers above in red.

We try to make those tradeoffs now, such as taking 1 small vacation, cooking most every meal at home, etc. but of course if we had no choice, we could cut deeper.
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Re: Buying a house with or without extra $100k down?

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KlangFool wrote: Wed Jan 13, 2021 10:26 pm
thethinker wrote: Wed Jan 13, 2021 10:20 pm
KlangFool wrote: Wed Jan 13, 2021 9:54 am OP,


You cannot afford to buy that house even with the 100K gift. It is a 400K house to you. You cannot afford it.


KlangFool
I do appreciate your direct answer. Is $400k house too much for a family with $140k/yr Income? Or should I not count the side job and only consider the family income of $100k since that’s quite secure?
thethinker,

A) Please note that you did not answer any of our questions:

<<1) I will let OP tell you about his current annual expense, annual savings, and debts.
annual expenses including student loan payments total $85k. Annual savings $14k. Only debt is $68k student loan at 3.25%

2) OP can tell you about the increased housing expense of buying the house too.>>
I don’t fully understand this question. Are you asking about expenses such as a new roof, HVAC maintenance, etc?

Why do you think that you can afford this house?


B) How it costs to rent the same house? Why you must buy to live in this area?

there aren’t many rental options in the area and those that are available cost hundreds more than a mortgage payment. I grant you that the rental property doesnt have other expenses that come with home ownership but the renal also doesn’t offer the equity of a home, in my opinion.

KlangFool
Answers above in red
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Re: Buying a house with or without extra $100k down?

Post by KlangFool »

OP,

1) Your annual saving is 14K.


2) Your current rent is $1,800 per month.


3) Your new mortgage is $2,160 per month. Insurance? Property Tax?


4) You increased housing expense is at least $2,160 - $1,800 = $360 per month. Aka, $360 X 12 = $4,320.

5) Your annual savings drop to (14K - 4K ) = 10K per year.


6) Property Tax, Insurance, house maintenance, and so on...


7) You cannot afford the house.


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Re: Buying a house with or without extra $100k down?

Post by thethinker »

KlangFool wrote: Thu Jan 14, 2021 9:41 pm OP,

1) Your annual saving is 14K.


2) Your current rent is $1,800 per month.


3) Your new mortgage is $2,160 per month. Insurance? Property Tax?


4) You increased housing expense is at least $2,160 - $1,800 = $360 per month. Aka, $360 X 12 = $4,320.

5) Your annual savings drop to (14K - 4K ) = 10K per year.


6) Property Tax, Insurance, house maintenance, and so on...


7) You cannot afford the house.


KlangFool
I believe I wasn’t clear with some information. Though your comment above might not change. The $14k per year is savings in retirement accounts. Expenses are $85k and take home pay is $93k (the 93k take home has a least subtracted $14k for retirement). As said, it may not change your answer but I wanted to correct my info anyway
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Re: Buying a house with or without extra $100k down?

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onourway wrote: Wed Jan 13, 2021 12:16 pm
thethinker wrote: Wed Jan 13, 2021 10:44 am I assume you’re saying $2,500 per month is not outrageous for $140k income. But what if the side contract ends unexpectedly and the annual income is $100k, is $2,500 per month outrageous for $100k gross family income? Or still not an outrageous percentage?
This is a serious risk. However that's what keeping the $100k as a reserve is for. Would you rather have a $300k mortgage, very little in the way of emergency funds, and lose your job, or a $400k mortgage, $100k in the bank, and lose your job? In the latter situation that is likely close to 2 years of time that buys you while you find another job/sell the house/whatever it takes. Once that money is put into the equity of the house, accessing it - especially during a true emergency - becomes much more difficult.

That said, this will likely be tight for you - especially if the side income goes away before your partner returns to the work force. I'd want to know my monthly expenditures quite closely before taking this on. In that case I'd know exactly how I was going to pay for it,
Thank you for sharing these great thoughts
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Re: Buying a house with or without extra $100k down?

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JoeRetire wrote: Wed Jan 13, 2021 11:27 am
thethinker wrote: Wed Jan 13, 2021 10:46 am
JoeRetire wrote: Wed Jan 13, 2021 10:01 am
thethinker wrote: Tue Jan 12, 2021 10:12 pmWe were quoted a 2.5% 30 year rate with 0 points, (that comes to about $2,160 monthly payments including taxes but not counting homeowners insurance), so rather than put the $100k towards the mortgage, what are the BH’s thoughts about putting 20% down from money we have in the bank, and trying to live frugal enough to pay the mortgage with our other incomes.
You haven't indicated what your other expenses are.

Assuming the $2,160/no payments are doable without too much strain, at this mortgage rate it makes complete sense to just put 20% down and invest the remainder.
What would the suggested investment vehicle be for this? Stocks/bonds/CD?
Whatever your asset allocation plan calls for. Money is fungible. Don't treat this like "found money" and deal with it any differently than if you had earned it.
This is good advice. Thank you
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Re: Buying a house with or without extra $100k down?

Post by thethinker »

Watty wrote: Wed Jan 13, 2021 9:51 am I would feel very comfortable with around six months expenses in an emergency fund with all those options. In a dire emergency you can also do things like take money out of a Roth
I’ve read references to this idea by other BH’s. Would you explain how a ROTH can be used as an emergency fund?

Simple example, over the course of 4 years, funding $5k each year, I have contributed $20k to my ROTH. All invested in some penny stocks, my ROTH account now has a total of $100k. Am I able to remove the $20k, penalty free, and use the cash to cover anything I’d want, even a non emergency? And this would mean the $80k would still remain inside the ROTH? Do I have this right? Or must I also remove any gains tied to my contribution? (Again, just an example)

How difficult of a process is it to get the contributions out of the ROTH? Can I ever put that money back into the Roth in addition to the annual contribution max?
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Re: Buying a house with or without extra $100k down?

Post by onourway »

thethinker wrote: Sat Jan 16, 2021 5:26 pm
Watty wrote: Wed Jan 13, 2021 9:51 am I would feel very comfortable with around six months expenses in an emergency fund with all those options. In a dire emergency you can also do things like take money out of a Roth
I’ve read references to this idea by other BH’s. Would you explain how a ROTH can be used as an emergency fund?

Simple example, over the course of 4 years, funding $5k each year, I have contributed $20k to my ROTH. All invested in some penny stocks, my ROTH account now has a total of $100k. Am I able to remove the $20k, penalty free, and use the cash to cover anything I’d want, even a non emergency? And this would mean the $80k would still remain inside the ROTH? Do I have this right? Or must I also remove any gains tied to my contribution? (Again, just an example)

How difficult of a process is it to get the contributions out of the ROTH? Can I ever put that money back into the Roth in addition to the annual contribution max?
Yes, original contributions can be withdrawn at any time for any reason. They can be returned within 60 days, or the withdrawal is permanent. I think a lot of us think of this as a second or third tier to our emergency fund - something we’d prefer to never have to tap, but it’s there if we really needed it. Keep good records of your contributions.
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Re: Buying a house with or without extra $100k down?

Post by Watty »

thethinker wrote: Sat Jan 16, 2021 5:26 pm I’ve read references to this idea by other BH’s. Would you explain how a ROTH can be used as an emergency fund?
There is a wiki on this.

https://www.bogleheads.org/wiki/Roth_IR ... gency_fund
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