Author Topic: Finally paid off student loans, time for a mortgage?  (Read 2172 times)

livrocentral

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Finally paid off student loans, time for a mortgage?
« on: December 16, 2017, 09:44:28 AM »
As of December 15th my student loans are 100% paid off.

Edit: Thanks to some initial constructive feedback, I am revising my post somewhat and want to narrow down the question to what would you consider the minimum cash reserves and other financial goals to be in place before someone is "ready" to buy a house.


Over the past 5 years we have paid off $52,000 in student loans, but also lived in 4 homes (see note 2), relocated across the country, increased our household size to 7, and transitioned from two part-time home-based incomes to one very full-time job and one very part-time freelance gig.

So here are some approximate numbers we are looking at for 2018:

Household size: 7 (2 adults, 5 kids)

Fixed monthly income:
$4500  (see note 1)

Average monthly fixed expenses:
$1250 Rent
$ 600 Tithing
$  50 Heating oil
$ 100 Water/sewer/trash
$ 150 Electric
$  85 Internet (Comcast)
$  50 Cell phones (TPO & Puretalk)
$ 135 Auto & renter's insurance (USAA)
$  18 Life insurance

$2400 Total fixed

Other expenses (I have less data on these categories; just taking a rough stab at monthly averages)
$ 200 Gas  (see note 5)
$ 500 Groceries & household supplies
$ 200 Kids/extracurricular (see note 3)
$ 500 Everything else (see note 4)

$1600 Total discretionary

So in summary:

$4500 monthly income
$4000 monthly expenses
$ 500 monthly savings (see note 6)

Assets:  about $28k in a Traditional IRA and $9k in a Roth 401(k), and $2000 cash
Liabilities: none

My math says that at our current rate of savings ($500/month), the very soonest we should even consider buying a house is in 3 or 4 years ($18,000-$24,000). This assumes a purchase price around $250k with at least 5% down and another $10k in closing costs. We are not considering tapping our retirement funds but are open to it if there is a reasonable way to do so without hurting ourselves in the long term.

Notes
1. Net income after deductions for taxes (approx. $600) and health insurance (approx. $700). This does not include my wife's freelance work, maybe another $500-$1000 for the year, but this is basically just enough to pay for work-related expenses like child care and equipment, so is not included in the budget.

2. Multiple moves due to moving for 1st job after graduating, then being forced to move (twice) when the houses we were renting were sold by the landlords.

3. Includes a bunch of different types of sports and music lessons/rentals, after-school STEM and nature classes, and monthly preschool expenses which ended in May.

4. Includes purchase of a second car ($3500), clutch replacement ($1300), and a summer road trip ($1200). Most of this will not likely reoccur in 2018.

5. I drive 240 miles per week between home and two main job sites. I drive a 2003 Corolla which gets about 35 MPG. We also have a 2004 Sienna as the family vehicle which averages 20 MPG. Part of our reason for moving is to get closer to work.

6. We paid $500 towards our student loan each month in 2017, but now that it is fully paid off, we will put this towards savings. 
« Last Edit: December 17, 2017, 04:29:09 PM by livrocentral »

MMbergmann

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Re: Finally paid off student loans, time for a mortgage?!?!
« Reply #1 on: December 16, 2017, 02:36:40 PM »
What types of retirement accounts do you have? Some 401(k)s you can get loans. With traditional IRAs and Roth IRAs you can take out 10k and not pay the 10% early distribution penalty.

You have too few categories, not enough detail for me to comment on anything. However, you are quick with the excuses, so if that's how you want to live more power to you.

ysette9

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Re: Finally paid off student loans, time for a mortgage?!?!
« Reply #2 on: December 16, 2017, 02:47:58 PM »
Can you talk about why you have moved so many times recently and why you think that you are now permanently settled in one place? If there is any risk of you moving again in the next 5-10 years then buying is not the right thing to do; the transactional costs are just too high.


livrocentral

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Re: Finally paid off student loans, time for a mortgage?!?!
« Reply #3 on: December 17, 2017, 04:22:18 PM »
Thank you both for your feedback. Regarding withdrawing from IRAs, I didn't realize that; I will look into this as a possibility. I have updated the post to include more detailed information on these accounts. I also reframed the question as noted in my edit.

Regarding the multiple moves, I added some information about this as well. The frequent moves are part of the reason why we want to buy; we have been forced out of rentals twice in as many years, and both times were because the landlord decided to sell the house. You can see our thinking, right? If we buy a house, then no one can force us to move again. (At least not for the same reason!)
« Last Edit: December 17, 2017, 04:24:55 PM by livrocentral »

Ben Kurtz

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Re: Finally paid off student loans, time for a mortgage?
« Reply #4 on: December 21, 2017, 06:03:27 AM »
More power to you, raising 5 kids on a very middle-of-the-road income!

You need to run the numbers carefully, but the rent-vs-buy calculation is pretty marginal given that a 5% down mortgage puts you in PMI territory, which can add a solid point to your mortgage rates.

From a prudence point of view, I would not recommend buying until you had the down payment, plus closing costs, plus an additional $5,000 to $7,000 contingency saved up. That's moving costs, repairs and refurbishments to the new home (when the roof leaks it's now your responsibility -- no landlord), etc. Talk to some bankers about closing costs -- $10,000 for that line item may be a bit too high. But I still think you'll want $24,000+ in your house fund before you pull the trigger. I wouldn't set any loftier goals than that.

You could Roth-convert the traditional IRA, but then you need to wait 5 years before you can pull the principal amount out tax and penalty free. And given that your retirement accounts are not very large, I wouldn't recommend raiding them -- you want something put away to grow for old age, plus they are additional emergency funds, given that a $2,000 cash emergency fund for a family of seven is not at all large.

With respect to your budget, you have a bunch of things under "discretionary" which aren't very discretionary. You need to get to work one way or another. You need to buy groceries. There may be some variability or some luxury in those categories, but I'm not seeing thousand-dollar line items for "designer handbags" and "European vacations," so I don't see that much discretionary spending there.

A budget of $36,000 (including rent) for a family of 3 is a frugal but comfortable one if spent wisely. Scaling up to a family of 7 and a budget of $48,000 is a great accomplishment. I don't see much to criticize on the spending side, apart from the 240 mile per week commute. You're using the right car for the job (I'd expect your expenses to average $0.25 per mile rather than the U.S. average of around $0.50), but that's still basically $60 per week. If you could reduce that (change houses again; change job), you could likely save $1,000 or $2,000 per year on commuting costs (gas, clutch replacements), which would make a difference.

To make your dreams of homeownership come true reasonably quickly you really need to think about the income side. Can you upgrade your job? How old is your youngest -- can your wife starting accepting more projects once all the kids are in school? You've said very little about that in your post, but that's really the key.
« Last Edit: December 21, 2017, 06:15:50 AM by Ben Kurtz »

Money Badger

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Re: Finally paid off student loans, time for a mortgage?
« Reply #5 on: December 21, 2017, 09:14:36 PM »
@livrocentral,  You deserve applause for managing the family finances and paying off your student loans and for placing tithing so highly!   You're getting good input from several other board members.   I grew up in a home that had "average income" but "extraordinary demands on the income" and have grown a sizeable net worth.   So here are heartfelt recommendations...  It's almost cliche to recommend, but first 2 words for you are "Dave Ramsey"!   Look at his website and listen to his youtube channel for his "baby step" plan that really is sustainable.   With this in mind, you need a better cash emergency fund (besides retirement accounts) of 3 to 6 months living expenses (3 x $4500) especially for older car expenses and inevitable medical needs for kids.   The question is where to find the $.   First thought is $600 a month on tithing is over 10% and you have 7 souls to nurture (including you especially as bread winner!).   God and your pastor will understand some reductions now to raise better stewards from your family that give back later.    Next, consider that you're not saving at a reasonable 15% goal for your and spouse's retirement.   Next is to find room for children's education in any of the numbers.  On $4500 a month, shifting just $175 from tithe plus the $500 you used to put towards loans gets you to 15% ($675) monthly for Roth IRAs for both you and your spouse.   Making $125 a priority for education 529 accounts for kids is next priority (you can just have 1 account for now and later distribute amongst as financial aid situation dictates).   Until these baseline stpes are covered and/or your family income can grow, saving for a home down payment is 4th priority.   Or if your spouse can find some way to bring in some income (home day care? other cottage business?) then responsible options open up to allocate down payment funds to buy a home sooner.   I would not buy a home until you can get to 20% down payment to avoid PMI.   And never use retirement money to fund a home purchase either (a trail of tears begins with being leveraged to the hilt like that)!   As soon as a banker looks at the family size and income on your tax returns, mysteriously loan underwriting will likely come back with "issues " and you'll end up paying a higher rate than others with fewer obligations & a lower risk level.   Be patient, you've got a great start and you are disciplined to succeed.   Just hug those kids and build a stronger financial foundation for that home.

livrocentral

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Re: Finally paid off student loans, time for a mortgage?
« Reply #6 on: December 29, 2017, 07:40:10 AM »
Thank you all; I appreciate the input very much.

newgirl

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Re: Finally paid off student loans, time for a mortgage?
« Reply #7 on: January 17, 2018, 07:38:17 PM »
How large is your current house, and how many bedrooms? Are there apartment rentals large enough to accommodate your family that are closer to work? If so, how do the rents compare?

It sounds like the main driver of wanting to buy is that you want the security of knowing a landlord won't sell out from under you - far less likely to happen in an apartment or other multi-unit dwelling as opposed to a single family home owned by someone who isn't a rental investor. We have a 3 bedroom, 2 bath, 1350 square foot apartment - wasn't easy to find, but we could stay here 20 years if we wanted/needed to.

With your family size, an apartment might not be a realistic possibility, which I totally get. Probably your next best course of action is that next time you're thinking of applying for a place, ask the landlord a LOT of questions about their financial situation and intentions. Do they intend to hold the property as a long term rental? Or are they just waiting out a market downturn and then plan to sell? Do they own/manage any other rental properties? If so, how long have they done so? We rented a small house for 4 years prior to moving to our current apartment, and we asked very pointed questions of the landlord(s) that reassured us of their intentions.

Another possibility that has positives and negatives is to ask for a multi-year lease. Upsides are that it gives you some protection against being forced out should the landlords sell, forces them to put their money where their mouth is and not blow smoke up your ass about wanting long term tenants when they don't mean it, and gives you an extra year where your rent is locked in. Downside obviously is that you're locked in longer term as well, and if your situation changes or you just decide you don't like the place, you're likely stuck. We did 24 month leases when we rented our house and it worked out well for us.

I feel you on wanting to buy with a small down payment, I really do - every day it's a battle to stay off the real estate searches, we just don't have the down payment yet... and with prices being so high in our target area, it will be a long time until we do. But I've decided that I just staunchly refuse to pay PMI... unlike "throwing your money away on rent" (which is patently false), PMI is 100% absolutely throwing your money away. You might as well set it on fire.


kwarden13

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Re: Finally paid off student loans, time for a mortgage?
« Reply #8 on: January 18, 2018, 11:30:14 AM »
Another way to think of PMI is allowing you to build equity sooner. I am not a fan of PMI but bought a house last year with 3.5% down and it was conventional loan (20 year, 3.5%). We, too, paid off student loans so did not have much savings, however, was paying $2000 in rent. So we bought a house and are paying PMI. However, we are now refinancing to drop PMI. So we paid $193*12=$2316 for the privilege of owning our house, however, now have equity in an asset. If we waited 3-4 years this same house would be more expensive. No crystal ball, but if our house continues to go up, then our equity would be in the 30-40% range in 3-4 years vs waiting and putting down 20% and having 20% equity. So by buying early, our equity in the house is more and we have fewer years to pay off. The longer you wait, the longer to pay off and your rent essentially goes towards nothing.

Now in our situation, the rent was $2000 and the house including taxes, insurance, etc. is $2400. Many on here will lean towards waiting, but I strongly believe in not throwing money away on rent.
« Last Edit: January 18, 2018, 11:32:26 AM by kwarden13 »

Finances_With_Purpose

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Re: Finally paid off student loans, time for a mortgage?
« Reply #9 on: January 20, 2018, 05:41:25 AM »
I'm also no fan of PMI.  But Op, I commend you on your progress amidst all those pressures.  You're headed the right way. 

I posted, though, to point out that a house isn't an asset.  Op doesn't say he's renting it out.  He's not receiving any cash flow from it. 

It is an expense.  Moreover, it's a liability.  It will cause you to spend more cash, not less cash (unless rents are truly atrocious), and especially over the short term. 

It's like owning a hammer.  But worse: you'll spend more money maintaining it and adding things to it, etc.  It's speculation in one single asset (no diversification) in one single market. 

You're building equity, but you're building it in a liability.  The only way a house will be worth more is through appreciation (unless you rent it out, which op doesn't mention - and with seven people, it would have to be a huge place to rent out some).  That's akin to buying gold or whatever to hold it and hope it goes up: it produces nothing.  At best, you can hope it eventually reduces your expenses.  But that depends on rents, taxes, etc. 

You can say what you will about Kiyosaki, but that's one core thing his Rich Dad book nails.