Starting the home buying process here. Here are the basics:
Downpayment saved: 70k (potential to borrow a tad more from parents to reach 20%)
Gross income: 135k (wife and I work)
Debt: none, two newish cars with no car payments
Kids: none, but expect 2 in the next few years
Expected taxes: 5k/yr
When I plug in the basics into a basic “how much can I afford”, the results are 600-700k. However, when we have kids, my wife wants to take a few years off of work dropping our income down to 75k. Plugging an income of 75k into the same equation gives results of about 315k.
Would we be ok buying something 400k? I want to stay on the conservative side of things. What does the slowtwitch knowledge base think? Would 400k still be slightly on the conservative side? Purchase price of 350k would leave us wanting to renovate or upgrade as soon as possible (7 years down the road?). Going up to 400k would give us something we could really be happy in and live in a long time.
I have seen way too many people buy the biggest and most expensive house they “can afford” based on the banks assessment of income. They proceed to get into trouble if one of the spouses loses a job or other expenses come up. I would completely ignore what you can buy and be practical and try and get the smallest one you can that will meet your needs.
First, good job saving so much in a time when no one seems to save any more!
Do what you want, but I believe in a 15 year mortgage not that is not more than 1/4 of your take home pay after taxes.
So at 75k, you can afford a $1250 monthly payment (75k *.8 = 60k after taxes. 4% interest rate). This amounts to around a $170k loan. With your $70k down, you can afford a $240k house.
That’s just me though - you’ll probably get other opinions on here. I know we are 8 years and 8 months on the other side of making the same decision you are making, and it’s been nice to have the extra wiggle room when unexpected things like car repairs, health, and vacations come up. And it’s nice to be able to be just 6 or so years from having a paid off home.
600-700K is what it says you can “afford,” and you probably can, but you’ll be blowing a lot of money on bank interest and it will be tight when the kids come…and the wife will have to continue working. Also, you won’t qualify for a loan, unless the laws are significantly different where you are. Jumbo loans are anything over $420K and require 20% down…at least that’s how it was when we bought 2 1/2 years ago. We were in a similar situation except we made a tad more money. We got into a $495K house.
Just to put this in perspective, when I got laid off, I brought in $500/week on unemployment. My wife made $80K. We had a $625/mo car payment (FYI, its a 22K car, but we put nothing down and got a 3 year loan).
We were able to pay all of our bills and save $500/month. My unemployment benefits amounted to the same net income as $35K a year would, so we were the equivalent of $115K a year.
Given that you plan to have kids and have the wife stop working, and should plan to eventually have to buy another car, I would think that $495K would be too much of a stretch. $400K would probably be doable provided that you save a good nest egg before the wife takes off from work.
I have seen way too many people buy the biggest and most expensive house they “can afford” based on the banks assessment of income. They proceed to get into trouble if one of the spouses loses a job or other expenses come up. I would completely ignore what you can buy and be practical and try and get the smallest one you can that will meet your needs.
Just to point out, I don’t want to get anywhere near the 6-700k “recommendation”.
I think the max we would actually buy would be 400k. The goal is 350k, but after looking at houses a while, 350 buys something that needs updating. 375 and up buys something that leaves nothing to be desired.
Don’t forget to think about the details of the house.
A $400K house that is exactly how you want it and doesn’t need/want any work is very different than if you plan on dropping another $100K on ungrades/improvements/repairs. That stuff really hurts cash flow.
Me and my wife were in a similar situation a few years ago. We currently own with one child and another on the way. My wife works one day every other weekend at the moment so that she can maintain her skills and so she has some adult time. She won’t go back to more regular hours until the kids are both in school.
Anyway, what we did was live off my salary for a while and put all of her income straight into an account that we didn’t touch. This did two things for us, we could see what it was like to live off one income and we built a buffer that we are using now for extra expenses. Once we were virtually down to one income, we looked at how much of that money we were able to stash away at the end of the month, added out rent to this and figured that the sum was the most we could afford in housing payments after taxes are taken into account.
How much house to buy is up to you, but if you are like us and don’t plan on moving for 10+ years (or ever), then you really can buy more house than you think you can afford. First off, if you get a fixed mortgage, you payments will not go up while you income should. Thus what seems really tight in the first few years gets easier and easier to handle. Second, you aren’t falling into the trap of depending on the second income to keep the house. Third, do not under estimate the impact of the tax savings of mortgage interest, single income with kids. The whole U.S tax code is designed to make things as easy as possible for the nuclear family. We probably have a tax rate less than 1/4 of what we payed pre-house and kids.
Just to point out, I don’t want to get anywhere near the 6-700k “recommendation”.
I think the max we would actually buy would be 400k. The goal is 350k, but after looking at houses a while, 350 buys something that needs updating. 375 and up buys something that leaves nothing to be desired.
Since you’re asking for opinions, I think that you’re overreaching a bit. You want to have kids. You want your wife to leave the work force. You want a house that doesn’t need “updating,” but the reality is that every house needs some degree of updating to make it a home. That’s a lot of food to fit on a single plate. Additionally, a 400k house will still have 400k house problems, and house problems are cash flow killers. As recommended by atl_tony, I think that you should be looking for something of sound construction in the ~250k area or lower, and focus on making it yours.
I feel equipped to tell you this because I was in your boat 6-7 years ago. I went from purchasing a house with two incomes and no kids to owning a house with one income and two kids. You may not see it now, but that’s a financial quantum leap. At the time we bought, we could have “afforded” 80-100% more than what we purchased. Knowing what was to come (having kids and my wife leaving her job) we aimed lower and focused on adding to the house when the finances permit. I’m extremely fortunate that we made the decision we made because two kids and 6 years of home ownership are a combined expense that I couldn’t even begin to imagine back then.
Don’t forget the new house will need new furniture, window coverings, new dishes, new cookware, new electronics, new landscaping. Be sure to save money for all that fun stuff. And, when I say “need” I mean “want.”
Do what you want, but I believe in a 15 year mortgage not that is not more than 1/4 of your take home pay after taxes.
^^^
This.
You will thank your younger self in 15 years. 7 years ago, we did the 30 year note. I HATED the idea of all that interest over 30 years, but we did it anyway because we just didn’t really look at other options. Total interest was more than the loan. Recently, we closed on a 15 year re-fi. The total interest on the re-fi is 5 times less than the total interest on the 30 year not. I’m still pissed about all the money I spent on interest over the last 7 years (which is nearly twice the interest I’ll pay on the 15 year loan.)
Don’t forget to think about the details of the house.
A $400K house that is exactly how you want it and doesn’t need/want any work is very different than if you plan on dropping another $100K on ungrades/improvements/repairs. That stuff really hurts cash flow.
+1
Do you have all the furniture you want/need for the new house.
One rule of thumb I have heard is to not have a mortgage more than 2x you annual income.
If you are already planning on having the wife not work, the just plan for that. ie $75k x 2 + $70k = $220k (or less if you want to hold back some of the $70k for furniture/improvements).
Do you really need anything more than that? That would buy a lot of house depending on your market.
A 300K 15 year loan is going to be around $2600/mo (15 yr will save you over 100K in interest). Once you have kids you will have a ton of other costs from food to day care, to pre-school and everything else (gymnastics $400/mo, band, etc). It’s also going to cost $250,000 per kid for college, start saving for that.
Also if you are going to have kids, start looking at schools now so you will buy in an area that you are going to be ok with the schools (pre, elementary, and high). Schools are not equal.
If you know your wife is going to step out of the workforce for a while, I’d go with the one income calculation. Take it from someone who knows, the double hit from the loss of half your income along with the added costs of kids can be a shocker. Its not the kids are expensive per se, its that there is just a whole host of things you are going to really want to buy and do when they come along. Decisions you make now will impact how much fun you can down the road. Cash is fun. A bigger house, while nice, does not really give you much of day to day fun feeling if it is keeping you from doing stuff.
Also, If you have 2 kids in the next couple years, your college costs could rival the house so think about getting something that will let you have enough left over to save.
When it comes to buy a house, folks have a tendency to only look @ the mortgage.
While this is important there are some other factors that are important and come into picture and that like your mortgage impact your monthly expenses:
Utilities (hydro, outdoor stuff (i.e. lawn mowing, winter snow blowing (if you have snow where you live)Condition of the house: roof, windows, garage, etc…
While there is no doubt the utilities cost increase as you buy a bigger and therefore more expensive house.
However regarding #2, a more expensive house may be cheaper than a less expensive house depending on the needed “basic” renovation (and I am not talking about the enhancements such a re-doing the kitchen for example)
Going up to 400k would give us something we could really be happy in and live in a long time. Thanks
What ever you buy - expect the wife to want to upgrade especially once she stops working and is home with the kids. Houses, kids etc. are very expensive.
That being said, money is very cheap right now, so borrow all you can and try to keep some of your savings for a rainy day. 75k seems a little “light” to have a $320k mortgage, but if the rates are low enough - you might be ok.
Very good point about furniture and and all that stuff…
We live in an 800sqft apartment and the homes we are looking at are 1000-1200sqft, so that’s basically only the addition of a second bedroom. Furniture shouldn’t be an issue, but I’ll need a lawnmower and other yard maintenance stuff.
I would love to spend 220, but that basically buys a 1 bedroom condo in the area I’m looking. The main criteria are close to Boston (work), excellent schools, and a single family. You can easily shave off 100k on the purchase price by either moving to a town in the outer suburbs (long commute, less to do) or moving to a town with mediocre schools.
A very simple house meeting these requirements around here is really freaking expensive. We recently nearly bought a 1000sqft house for 368k, but I got cold feet when I realized that at $359/sqft, you are standing in $700 worth of house at any one time. That’s just nuts.
Thanks for the info, I do appreciate people saying I am looking to spend way too much. I need to know from people with experience.
Is your salary fixed, i.e., what are your expectations for raises, bonuses etc.
How stable is your job? What are the chances of being fired, or laid off, or salary decreasing
Where in the country are you looking
How long do you plan on living in your house
What interest rate and mortgage plan are you looking at
A lot of people get caught up in the absolute number, but depending on interest rate, from a cash flow perspective, that will change the monthly payment
How does monthly payment correlate to rents in the area
What is the expectation that housing prices in the area you are looking at, for the time frame you plan on owning the house will increase, decrease or stay the same.
do you itemize your deductions or take the standard deduction?
Remember to factor in the property taxes. They will be higher for the more expensive home and they are going to go up year over year. In our case, by choosing to be outside the major metropolitan area our property taxes are 1/4 of what they would be in the city for the same home.
Is your salary fixed, i.e., what are your expectations for raises, bonuses etc…As a school employee, my salary is set to go up about 4500 each year. No bonuses or other raises.
How stable is your job? What are the chances of being fired, or laid off, or salary decreasing…Job is pretty stable. I could get re-hired somewhere else in the rare event I get fired or laid off
Where in the country are you looking…Boston suburbs
How long do you plan on living in your house…7 years+ If it is the right fit, a very long time
What interest rate and mortgage plan are you looking at…mortgage rate is upper 3%.
A lot of people get caught up in the absolute number, but depending on interest rate, from a cash flow perspective, that will change the monthly payment
How does monthly payment correlate to rents in the area…Rents around here are pretty expensive. Looking at craigslist, the house would rent for 2500. (I found only one CL house for rent, 3br, 2800)
What is the expectation that housing prices in the area you are looking at, for the time frame you plan on owning the house will increase, decrease or stay the same…Houses did not decrease from 2007 prices. Market did better than most all of the country
do you itemize your deductions or take the standard deduction?.. Standard
do you have saving above the downpayment…Savings would be enough for 6 months living expenses
