Can I afford this house?

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Topic Author
DLAKE
Posts: 63
Joined: Mon May 10, 2021 1:48 pm

Re: Can I afford this house?

Post by DLAKE »

Thanks all for your reply.

I'm considering purchasing the option 1 house that I believe I can get for $425,000 with an interest rate of about 6.25%. I think PITI would be about $2,660/mo or so. This amount still leaves me nervous as I'd like to probably be closer to $2,300 or less. I feel more comfortable here because if I were to lose my job or reduce pay (say to 100k/yr), my mortgage payment would be about 28% of my gross earnings and allow for more monthly cash flow. May or not be rational.

In order to do this, I'm considering to put down >20%. In order to achieve <$2,300 PITI, I think I'll need to put down about 34% ($144,500). I do have about 106k liquid cash currently, as well as about another 8k or so coming from a sale of vehicle (have been planning to sell this for some time, this isn't to specific to the house). I will receive a decent chunk from tax refund (likely $6,500+) -- I'll confirm when I do my taxes next week. The remaining liquidity could come from either temporarily reducing my 401k/ESPP or selling from taxable (which would create a small tax hit). Emergency fund would be my taxable account until cash was saved back up.

What're the thoughts on the above plan?
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: Can I afford this house?

Post by KlangFool »

DLAKE wrote: Thu Feb 08, 2024 9:12 am Thanks all for your reply.

I'm considering purchasing the option 1 house that I believe I can get for $425,000 with an interest rate of about 6.25%. I think PITI would be about $2,660/mo or so. This amount still leaves me nervous as I'd like to probably be closer to $2,300 or less. I feel more comfortable here because if I were to lose my job or reduce pay (say to 100k/yr), my mortgage payment would be about 28% of my gross earnings and allow for more monthly cash flow. May or not be rational.

In order to do this, I'm considering to put down >20%. In order to achieve <$2,300 PITI, I think I'll need to put down about 34% ($144,500). I do have about 106k liquid cash currently, as well as about another 8k or so coming from a sale of vehicle (have been planning to sell this for some time, this isn't to specific to the house). I will receive a decent chunk from tax refund (likely $6,500+) -- I'll confirm when I do my taxes next week. The remaining liquidity could come from either temporarily reducing my 401k/ESPP or selling from taxable (which would create a small tax hit). Emergency fund would be my taxable account until cash was saved back up.

What're the thoughts on the above plan?
You cannot afford the house. Putting a bigger down payment does not help. In fact, it is more risky if you are unemployed in the coming recession. Feeding your family should be more important that buying a house.

KlangFool
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KlangFool
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Re: Can I afford this house?

Post by KlangFool »

Johnnie wrote: Wed Feb 07, 2024 2:11 pm
You appear to be stating a general formula:

"If it's cheaper to rent than buy, then you should rent until a recession makes it cheaper to buy."

Other things being equal, is that correct? You seem to be saying that when (not if) a recession strikes, home prices will (generally) fall to where it's cheaper to buy than rent, or at least is about the same.

I may have overstated that, and of course it's just a generalization. But if it approximately applies that would be useful.


Thanks
Johnnie,

Even if the house's price does not drop, you save money by renting and investing your savings. And, why is that a bad thing?

KlangFool
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cchrissyy
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Re: Can I afford this house?

Post by cchrissyy »

i disagree - you can afford it - but don't overdo it on the down payment leaving you without sufficient cash reserves for everything else. you're making your situation more risky than it needs to be by locking up that money into the house. it's a false sense of security to have a slightly lower mortgage payment instead of a bigger cash or investment account.
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Topic Author
DLAKE
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Joined: Mon May 10, 2021 1:48 pm

Re: Can I afford this house?

Post by DLAKE »

cchrissyy wrote: Thu Feb 08, 2024 9:55 am i disagree - you can afford it - but don't overdo it on the down payment leaving you without sufficient cash reserves for everything else. you're making your situation more risky than it needs to be by locking up that money into the house. it's a false sense of security to have a slightly lower mortgage payment instead of a bigger cash or investment account.
I understand not wanting to be without sufficient cash reserves. I'm also confident I can replenish quickly and if not, I still have over 100k in a taxable acct that is accessible should something seriously unexpected occur.

With it being a false sense of security, if I do have a change of job/income, and then could afford a $2,300 PITI comfortably but not a $2,700 (from a monthly cash flow perspective), is it still a false sense? (by afford, I mean to still be able to adequately save20%+ income, expenses, etc.).

I understand the general thought on not locking up more than 20%, but in this situation, with a 6.25% guarantee return and a sizable taxable account, is there much risk?
Topic Author
DLAKE
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Re: Can I afford this house?

Post by DLAKE »

KlangFool wrote: Thu Feb 08, 2024 9:50 am
DLAKE wrote: Thu Feb 08, 2024 9:12 am Thanks all for your reply.

I'm considering purchasing the option 1 house that I believe I can get for $425,000 with an interest rate of about 6.25%. I think PITI would be about $2,660/mo or so. This amount still leaves me nervous as I'd like to probably be closer to $2,300 or less. I feel more comfortable here because if I were to lose my job or reduce pay (say to 100k/yr), my mortgage payment would be about 28% of my gross earnings and allow for more monthly cash flow. May or not be rational.

In order to do this, I'm considering to put down >20%. In order to achieve <$2,300 PITI, I think I'll need to put down about 34% ($144,500). I do have about 106k liquid cash currently, as well as about another 8k or so coming from a sale of vehicle (have been planning to sell this for some time, this isn't to specific to the house). I will receive a decent chunk from tax refund (likely $6,500+) -- I'll confirm when I do my taxes next week. The remaining liquidity could come from either temporarily reducing my 401k/ESPP or selling from taxable (which would create a small tax hit). Emergency fund would be my taxable account until cash was saved back up.

What're the thoughts on the above plan?
You cannot afford the house. Putting a bigger down payment does not help. In fact, it is more risky if you are unemployed in the coming recession. Feeding your family should be more important that buying a house.

KlangFool
I have an income of $190,000 and a savings rate of 30% of gross. A $2,700 PITI on a 190k income is about 17% of my income. Why do you say that I cannot afford?
z91
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Re: Can I afford this house?

Post by z91 »

He is saying if/when a recession hits. If you are out a job how are you going to pay the mortgage without being foreclosed on? At least if you rent, the amount of cash you have locked up is safe and sound in a savings account.

I live in an area where houses are 2.5M+. We rent. I can't afford buying and rent is 4k/month. Even if I put down 500k my monthly payment would be 14k a month, which is absurd.

That said, buying a home is a very personal decision. I think your question initially read as "would it be responsible to buy either of these houses" which Klangfool answered, but its now transformed to "would I qualify to buy either of these houses" which are two different questions.
Topic Author
DLAKE
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Re: Can I afford this house?

Post by DLAKE »

z91 wrote: Thu Feb 08, 2024 11:06 am He is saying if/when a recession hits. If you are out a job how are you going to pay the mortgage without being foreclosed on? At least if you rent, the amount of cash you have locked up is safe and sound in a savings account.

I live in an area where houses are 2.5M+. We rent. I can't afford buying and rent is 4k/month. Even if I put down 500k my monthly payment would be 14k a month, which is absurd.

That said, buying a home is a very personal decision. I think your question initially read as "would it be responsible to buy either of these houses" which Klangfool answered, but its now transformed to "would I qualify to buy either of these houses" which are two different questions.
Thanks for taking the time to chime in! Yikes 14K a month :shock:

I understand the qualify vs responsible decision and am well aware the banks would approve me for well more than the 425k home I'm considering. It's no wonder so many Americans have no savings....likely going to too high of mortgages, lifestyles, etc. but with that being said what criteria would you use to determine it to be a responsible decision?
KlangFool
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Re: Can I afford this house?

Post by KlangFool »

DLAKE wrote: Thu Feb 08, 2024 10:51 am
KlangFool wrote: Thu Feb 08, 2024 9:50 am
DLAKE wrote: Thu Feb 08, 2024 9:12 am Thanks all for your reply.

I'm considering purchasing the option 1 house that I believe I can get for $425,000 with an interest rate of about 6.25%. I think PITI would be about $2,660/mo or so. This amount still leaves me nervous as I'd like to probably be closer to $2,300 or less. I feel more comfortable here because if I were to lose my job or reduce pay (say to 100k/yr), my mortgage payment would be about 28% of my gross earnings and allow for more monthly cash flow. May or not be rational.

In order to do this, I'm considering to put down >20%. In order to achieve <$2,300 PITI, I think I'll need to put down about 34% ($144,500). I do have about 106k liquid cash currently, as well as about another 8k or so coming from a sale of vehicle (have been planning to sell this for some time, this isn't to specific to the house). I will receive a decent chunk from tax refund (likely $6,500+) -- I'll confirm when I do my taxes next week. The remaining liquidity could come from either temporarily reducing my 401k/ESPP or selling from taxable (which would create a small tax hit). Emergency fund would be my taxable account until cash was saved back up.

What're the thoughts on the above plan?
You cannot afford the house. Putting a bigger down payment does not help. In fact, it is more risky if you are unemployed in the coming recession. Feeding your family should be more important that buying a house.

KlangFool
I have an income of $190,000 and a savings rate of 30% of gross. A $2,700 PITI on a 190k income is about 17% of my income. Why do you say that I cannot afford?
Your current annual expense while renting is about 60K per year. If you buy the house with the PITI, it is at least 10K more. Let's throw in another 10K for misc house maintenance stuff. So, we are looking at 80K per year.

If you are unemployed in the coming recession and you just used up most of your emergency fund for the down payment, how long can you last?

Is the 400K in the your tax advantaged accounts = 100% stock?

The stock market and housing market may drop 50% at the same time too.

"I have an income of $190,000 and a savings rate of 30% of gross. "

And, why would you want to sacrifice all that for a house? From a financially secured position with sizable emergency fund to may not be able to "Sleep Well At Night" (SWAN) if you are unemployed in the coming recession? Is the house worth it?

KlangFool
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z91
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Re: Can I afford this house?

Post by z91 »

DLAKE wrote: Thu Feb 08, 2024 11:18 am
z91 wrote: Thu Feb 08, 2024 11:06 am He is saying if/when a recession hits. If you are out a job how are you going to pay the mortgage without being foreclosed on? At least if you rent, the amount of cash you have locked up is safe and sound in a savings account.

I live in an area where houses are 2.5M+. We rent. I can't afford buying and rent is 4k/month. Even if I put down 500k my monthly payment would be 14k a month, which is absurd.

That said, buying a home is a very personal decision. I think your question initially read as "would it be responsible to buy either of these houses" which Klangfool answered, but its now transformed to "would I qualify to buy either of these houses" which are two different questions.
Thanks for taking the time to chime in! Yikes 14K a month :shock:

I understand the qualify vs responsible decision and am well aware the banks would approve me for well more than the 425k home I'm considering. It's no wonder so many Americans have no savings....likely going to too high of mortgages, lifestyles, etc. but with that being said what criteria would you use to determine it to be a responsible decision?
As I mentioned I think it's a personal decision. In our case the numbers are wild and we not only can't make it work, but even if we could, I'd rather lock up the down payment in a HYSA/tax advantaged account/brokerage. If I were a single parent with two kids, my first priority would be their health and well being. Would owning a property help with that? I don't know your scenario, but it certainly wouldn't help me. There's a lot of maintenance and such that you will need to deal with as a homeowner. What if your roof leaks? What if the foundation is cracked? We have earthquakes out where I live, and while you can buy insurance for that, it's bloody expensive and most people don't own it.

If you rent, at least you are currently in a grand position to make sure you and your kids can live somewhere.

I started work in 2008 and the recession hit. My colleagues struggled for years, and sales+marketing are usually the first to go. How long would you be comfortable without a job if you did buy one of those houses? What if you lost your job and had to replace a roof?

I am very conservative nowadays, so if it were me I wouldn't be buying.
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cchrissyy
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Re: Can I afford this house?

Post by cchrissyy »

DLAKE wrote: Thu Feb 08, 2024 10:48 am
cchrissyy wrote: Thu Feb 08, 2024 9:55 am i disagree - you can afford it - but don't overdo it on the down payment leaving you without sufficient cash reserves for everything else. you're making your situation more risky than it needs to be by locking up that money into the house. it's a false sense of security to have a slightly lower mortgage payment instead of a bigger cash or investment account.
I understand not wanting to be without sufficient cash reserves. I'm also confident I can replenish quickly and if not, I still have over 100k in a taxable acct that is accessible should something seriously unexpected occur.

With it being a false sense of security, if I do have a change of job/income, and then could afford a $2,300 PITI comfortably but not a $2,700 (from a monthly cash flow perspective), is it still a false sense? (by afford, I mean to still be able to adequately save20%+ income, expenses, etc.).

I understand the general thought on not locking up more than 20%, but in this situation, with a 6.25% guarantee return and a sizable taxable account, is there much risk?

the extra 10% down payment you are talking about making will reduce your cash or investment balance by $48k

in return you get a housing payment that is only $400 lower. that's not a big difference.

that same $48k if you hold on to it is equal to 17.8 months of $2700 mortgage payments. that is a lot of runway to outlast a layoff or reduced income!
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Glockenspiel
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Re: Can I afford this house?

Post by Glockenspiel »

KlangFool wrote: Thu Feb 08, 2024 9:50 am
You cannot afford the house. Putting a bigger down payment does not help. In fact, it is more risky if you are unemployed in the coming recession. Feeding your family should be more important that buying a house.

KlangFool
Coming recession? When do you think this recession is coming? It feels like you've been predicting a recession that hasn't happened, for the past three years.
KlangFool
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Re: Can I afford this house?

Post by KlangFool »

Glockenspiel wrote: Thu Feb 08, 2024 12:01 pm
KlangFool wrote: Thu Feb 08, 2024 9:50 am
You cannot afford the house. Putting a bigger down payment does not help. In fact, it is more risky if you are unemployed in the coming recession. Feeding your family should be more important that buying a house.

KlangFool
Coming recession? When do you think this recession is coming? It feels like you've been predicting a recession that hasn't happened, for the past three years.
Unless a person can predict when the recession will happen or the recession is never going to happen, someone should always prepared for the coming recession.

Are you assuming that

A) Recession will never happen

Or

B) You can predict when the recession will happen

(A) or (B)?

KlangFool
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z91
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Re: Can I afford this house?

Post by z91 »

KlangFool wrote: Thu Feb 08, 2024 1:11 pm
Glockenspiel wrote: Thu Feb 08, 2024 12:01 pm
KlangFool wrote: Thu Feb 08, 2024 9:50 am
You cannot afford the house. Putting a bigger down payment does not help. In fact, it is more risky if you are unemployed in the coming recession. Feeding your family should be more important that buying a house.

KlangFool
Coming recession? When do you think this recession is coming? It feels like you've been predicting a recession that hasn't happened, for the past three years.
Unless a person can predict when the recession will happen or the recession is never going to happen, someone should always prepared for the coming recession.

Are you assuming that

A) Recession will never happen

Or

B) You can predict when the recession will happen

(A) or (B)?

KlangFool
Splitting hairs, but I think what Glockenspiel pointed out is that you said "coming recession" which implies to me that it's "coming soon." Perhaps better phrasing would be "whenever the next recession hits."
FatefulTanker
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Re: Can I afford this house?

Post by FatefulTanker »

It seems to me that you can afford either house. You will be building home equity. Home equity has been part of my plan and now that I have a paid off house, I am happy with my decision.

I'm not sure if you have said how much you have available in your taxable accounts. Perhaps using some of this money would be appropriate for the down payment. The stock market is close to an all time high. Rebalance your taxable assets appropriately. I imagine you IRA assets will be almost all stocks.

You have 600K net worth. You aren't going to starve during a recession. But you do of course need a plan. And maybe a budget so you know where you money is disappearing with the new house and kids.
angelescrest
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Re: Can I afford this house?

Post by angelescrest »

FWIW, did you read about the recent survey that showed over 93% of homebuyers in ‘22 and ‘23 have regrets, with some experiencing very high remorse? If this is your first home purchase, chances are you’ll find there are a lot of additional expenses that come from being a homeowner, and of course there’s the underappreciated fact that you’ll want to spend a lot more on consumer items and durable goods to furnish it appropriately. I remember the feeling of buying my first place. Pretty much nobody could have changed my mind, being stubborn that I was, feeling certain it was a good decision. It ended up being my worst financial move. Doesn’t mean that will be the case for you, but I think it’s wise to always consider the worst and have a backup plan.

So my primary concern for you is how much emergency funds you have left after purchasing. Why not wait until you have a bigger cushion, to put you, your family, and your new property at less risk? One year might be all it takes. I would not sleep well, personally, owning a home on one income, with kids, in an economy that is still figuring itself out, and an emergency fund that wouldn’t hold me over for a year. I’d hate to lose my job, but being a renter means we could pivot more quickly if we needed to without losing additional money, let alone lose my home. For us, we are more financially secure by not buying for now, we are able to do more by paying less for housing, and we have a lot less stress that comes with owning. The kids get a less permanent home, but we buy them more extracurricular experiences and learning that outweigh ownership. But we do miss out on having a stronger sense of emotional security around that complex idea of home, including missing out on a huge dose of meaningful conveniences related to having our home setup the way we really want to.

Enough people here will tell you it’s okay because your situation is pretty strong. It wouldn’t be a terrible choice to buy a home. But there are some good contrarian perspectives you should take into consideration and plan carefully around—particularly having enough in an EF to account for worse case scenarios. Good luck!

Btw, there’s a great NYTimes Daily podcast about renting vs buying from a month or two ago, I highly recommend listening to it.
runswithscissors
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Re: Can I afford this house?

Post by runswithscissors »

angelescrest wrote: Fri Feb 09, 2024 10:01 pm FWIW, did you read about the recent survey that showed over 93% of homebuyers in ‘22 and ‘23 have regrets, with some experiencing very high remorse?
That same survey by Clever Real Estate also stated that 95% of home sellers had regrets. So more people actually regreted selling than buying.
thedaybeforetoday
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Re: Can I afford this house?

Post by thedaybeforetoday »

runswithscissors wrote: Sat Feb 10, 2024 2:05 am
angelescrest wrote: Fri Feb 09, 2024 10:01 pm FWIW, did you read about the recent survey that showed over 93% of homebuyers in ‘22 and ‘23 have regrets, with some experiencing very high remorse?
That same survey by Clever Real Estate also stated that 95% of home sellers had regrets. So more people actually regreted selling than buying.
Here are the seller regrets broken down so as to point out the regret wasn't actually around the sale of the home, but rather it seems about decisions sellers made during the sales process. At least for vast majority of the 1,000 sellers surveyed a couple years ago:

"Clever polled 1,000 Americans who sold a home in 2021 or 2022 and found that the No. 1 regret among sellers was wishing they made more repairs prior to listing their home (25%).

Other common regrets included selling too quickly (22%), not waiting longer to list their home (24%), waiting too long to list their home (20%), not using an agent (21%), and not selling for enough money (20%). Meanwhile, 25% say they simply miss their previous home."

https://www.prnewswire.com/news-release ... 67294.html
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