Author Topic: Should I even consider this?  (Read 5117 times)

imaprogrammer

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Should I even consider this?
« on: October 13, 2015, 09:28:37 AM »
My wife and I looking at buying a new house, we really don't like the house we are in right now.

Our annual salary is 133k and we are looking at a house that is 400k. We have about 50k in equity in our house right now. We have no other debt at all. In the past year we paid off 30k in student loans. We both really like the house, and it meets all of our needs. We are very frugal, but we do wan't to live in a nice house where we can have family over. The house we are looking at is also less that 4 miles from both of our jobs.

Am I crazy for even thinking about buying this? I got pre-approved for the loan no problem but that doesn't really mean a whole lot.
« Last Edit: October 13, 2015, 09:30:27 AM by imaprogrammer »

Fishindude

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Re: Should I even consider this?
« Reply #1 on: October 13, 2015, 09:33:24 AM »
I think you would be a bit overextended, but many folks do it?

HipGnosis

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Re: Should I even consider this?
« Reply #2 on: October 13, 2015, 09:38:26 AM »
Not unless you have 20K in savings or liquid assets.
Moving and setting up a new house is costly in many ways.

Bracken_Joy

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Re: Should I even consider this?
« Reply #3 on: October 13, 2015, 09:44:20 AM »
I think this is too small a picture to say. I feel like a case study would be more holistic. Ie, what is the cash buffer, what are your long-term plans, what are the alternatives, what's it mean for commute, is it larger (that's a lot more cost in heating, furniture, taxes), etc.

imaprogrammer

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Re: Should I even consider this?
« Reply #4 on: October 13, 2015, 09:50:11 AM »
I think this is too small a picture to say. I feel like a case study would be more holistic. Ie, what is the cash buffer, what are your long-term plans, what are the alternatives, what's it mean for commute, is it larger (that's a lot more cost in heating, furniture, taxes), etc.

Our commute would be about the same. We have 10k in liquid assets right now. As far as long-term plans having a house that we both really like is at the top of our list. We don't mind being slightly house poor, but we still want to be able to save, and don't want to overextend ourselves. It's also a new house, so the initial costs wouldn't be as high.

Bracken_Joy

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Re: Should I even consider this?
« Reply #5 on: October 13, 2015, 09:53:00 AM »
I think this is too small a picture to say. I feel like a case study would be more holistic. Ie, what is the cash buffer, what are your long-term plans, what are the alternatives, what's it mean for commute, is it larger (that's a lot more cost in heating, furniture, taxes), etc.

Our commute would be about the same. We have 10k in liquid assets right now. As far as long-term plans having a house that we both really like is at the top of our list. We don't mind being slightly house poor, but we still want to be able to save, and don't want to overextend ourselves. It's also a new house, so the initial costs wouldn't be as high.

10k is pushing it I think, that's potentially walking a bit of a tightrope. And If you need to sell your last home to buy this one, I'm not sure the timing works out either? Personally, I would feel too insecure with this approach. But many people buy houses entirely on credit with negative net worths, and that always works out for them ;)

I still think a full case study would give you a more complete answer.

AlwaysLearningToSave

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Re: Should I even consider this?
« Reply #6 on: October 13, 2015, 09:56:06 AM »
In my opinion, not yet.  Assuming you use the equity in your home as your down payment without more, you only have a 12.5% down payment, meaning you will have to pay for mortgage insurance.  You paid off $30k in student loans in the past year.  Save that much again this year and you will have 20% to put down (assuming you don't lose equity in your home).  Let this house go.  There will be other beautiful houses that suit your needs available when you are more ready to buy.

The payment on a 30-year loan for 320,000 at 4.5% is about $1,620.00, or approximately 15% of your income.  Initially, $1,200 per month of that is interest.  Factor in real estate taxes and insurance and you are easily throwing away at least $1,500 per month of money you will  never see again and spending closer to 20% of your income on housing.  Keep in mind that is a conservative estimate and ignores things like maintenance, utilities, etc.

Without more information we don't know how a $400,000 home compares to other homes in your area or the cost of renting, so it is hard to determine whether this would be a reasonably necessary expense.  But assuming there are less costly options out there, you would likely be better served to look at less expensive housing options.

One thing I think people should always consider is whether you would be able to live on the home if one of the two of you were to stop earning money.  I'm thinking you would be hard pressed to afford the house on one income unless one of you significantly out earns the other.  And in that case you can only afford it if it is the lower-earning spouse who quits contributing income. 

Of course it is ultimately your decision to make based on your values, preferences, and risk tolerances.


KCM5

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Re: Should I even consider this?
« Reply #7 on: October 13, 2015, 10:01:53 AM »
How much nicer is this house than a normal house in the area? Does it cost $50k more than your current house or $200k? What does renting cost?

I'd look at it as the difference in housing cost from your current situation. And are you currently optimized in the housing front? There's nothing wrong with valuing a nice place to live, but with a similar income, there's no way I would think buying a $400k house was a good idea. But I live in a relatively low cost of living area and for $400k I could get a really sweet historic 3000 sq foot place. And pay $10k a year in property taxes...

AlwaysLearningToSave

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Re: Should I even consider this?
« Reply #8 on: October 13, 2015, 10:10:46 AM »
It's also a new house, so the initial costs wouldn't be as high.

I wouldn't be so sure about that. The friends I have known who have bought new homes have been surprised by the initial maintenance costs. Sure you are not replacing the roof or buying new appliances, but there are other expenses for a new home that you may not incur buying an existing home. Window treatments, landscaping, any finishing work that the builder does not do, etc., can all add up quickly.

thd7t

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Re: Should I even consider this?
« Reply #9 on: October 13, 2015, 10:26:29 AM »
How quickly can you save the balance to get to a 20% downpayment?  You say you have $50k in equity in your house, now, but you'll spend some of that to sell your current house.  Saving the 20% downpayment quickly is a good way to see how reduced cashflow will impact you.

bobechs

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Re: Should I even consider this?
« Reply #10 on: October 13, 2015, 11:09:05 AM »
It's also a new house, so the initial costs wouldn't be as high.

I wouldn't be so sure about that. The friends I have known who have bought new homes have been surprised by the initial maintenance costs.

I'll second this.  My long term observation is that regardless of the exact items, homeowners of new houses wind up incurring expenses roughly comparable to keeping up a used house.  Plus there is a huge multi-hundreds-of-billion-dollars industry dedicated to selling you all the stuff that those extra expenses represent.  It's not an even match.

And by positing that having a 'nice house' to show others is a primary value for you you have already admitted that you are overmatched in this area of life.

I'm not saying don't buy the house.  I have no opinion about that.  I'm saying don't imagine that the purchase is the end of the bigger spending.

imaprogrammer

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Re: Should I even consider this?
« Reply #11 on: October 15, 2015, 06:10:29 AM »
After thinking about it over the past few days I have decided that I need a reality check! I'm living in a perfectly fine house right now. I do think I want to move some day, but not until I have a mega down payment, and can get a 15 year conventional mortgage which is what I currently have right now. I would just be blowing tons of money on interest.

zephyr911

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Re: Should I even consider this?
« Reply #12 on: October 15, 2015, 08:10:14 AM »
The tyranny of urgency! It is really easy to fall in love with a house, or to become convinced that you need to make a move now. We are programmed to be afraid of missed opportunities. But (and this is central to the MMM approach, IMHO) if you make good money and keep a high SR, your options will always increase as time passes, not the other way around.

I called a few months ago to talk to a Realtor in our likely retirement city. In addition to trying to slide me from low-end fixers to fourth-quintile luxury pads, she did her best to fill me with a fear of price increases. BUY NOW! ALL THE CHEAP HOMES ARE DISAPPEARING! THE SKY IS FALLING! How do I explain that we're saving money so fast that only a Bay Area-style explosion could keep ahead of our financial freight train? That even if costs explode by 50% per year, we will still find it easier to buy the same house later on? None of this computes in the popular wisdom. But most of us here get it. We make our own path through strategic decision-making and we don't jump without thinking things through.

After thinking about it over the past few days I have decided that I need a reality check! I'm living in a perfectly fine house right now. I do think I want to move some day, but not until I have a mega down payment, and can get a 15 year conventional mortgage which is what I currently have right now. I would just be blowing tons of money on interest.
Yesss. Just take deep breaths and find happiness in both your current place and your rapid progress toward future wealth.
« Last Edit: October 15, 2015, 08:15:27 AM by zephyr911 »

Bracken_Joy

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Re: Should I even consider this?
« Reply #13 on: October 15, 2015, 09:32:05 AM »
After thinking about it over the past few days I have decided that I need a reality check! I'm living in a perfectly fine house right now. I do think I want to move some day, but not until I have a mega down payment, and can get a 15 year conventional mortgage which is what I currently have right now. I would just be blowing tons of money on interest.

Hard choice, but I think in the long run it will be a good idea.

elaine amj

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Re: Should I even consider this?
« Reply #14 on: October 15, 2015, 09:44:37 AM »

I'll second this.  My long term observation is that regardless of the exact items, homeowners of new houses wind up incurring expenses roughly comparable to keeping up a used house.  Plus there is a huge multi-hundreds-of-billion-dollars industry dedicated to selling you all the stuff that those extra expenses represent.  It's not an even match.

And by positing that having a 'nice house' to show others is a primary value for you you have already admitted that you are overmatched in this area of life.

I'm not saying don't buy the house.  I have no opinion about that.  I'm saying don't imagine that the purchase is the end of the bigger spending.

True. All my friends buying new houses seem to go through a TON of money. Way more than I did buying a "used" home (since I could take several years to do the updates I wanted). Theirs was stuff that pretty much had to be done right away - putting fresh sod down, putting up fencing, buying light fixtures, kitchen appliances, washers/dryers, window treatments, flooring, custom add-ons, etc etc etc.

 

Wow, a phone plan for fifteen bucks!