9 Month Retrospective and Future Plans

[zenath]

This is a follow-up post to my original http://forum.mrmoneymustache.com/ask-a-mustachian/become-more-mustachian-by-buying-a-house/

The ship is slowly steering to a better course. As a quick recap I used to have these debts in January:
Student loans ($12.5k a 5% - $250/mo.)
SUV loan ($27k at 3% - $490/mo.)
Mazda5 ($16k at 1.8% - $414/mo.)

and I now have these debts:
Sold the SUV and killed the loan (had to pay $5k for that privilege)
Student loans ($5k a 5% - set to be paid off in 3 months!!!)
Mazda5 ($13.5k at 1.8% - $414/mo.)

Also my rent increased from $1150 to $1575, but I am now 5 miles away from work (as opposed to 15 miles before) and bike or bus in depending on weather.

I am contemplating what to do once I finish paying off the student loans. Given my high rent compared to the price of homes (~$200k-$300k) and the fact that I plan on staying with my job for at least 10 years, I think I'd rather be paying for a mortgage than rent. The rental contract expires in July, so I am tethered to this for at least another 10 months.

I know keeping the Mazda5 debt is very frowned upon, but that is part of the compromise I made with my wife. She actually wants a larger vehicle for our 3 kids (age 8, 4, and 10 mo.), but is willing to wait if that means we can buy a house. With all of that said, here's a rough cut of our current financials:


Rent   1575
Food   800 (high, I know but about $100 in formula costs will disapear in 2 months, Still working on this)
Auto   650 (Include Mazda Loan)
Kids/Shopping   400
Utilites   300
Gym   100
Travel   100
Fun Money   250 (Again part of a compromise with my wife)
Gross Expenses   4175

Gross Monthly Income   9260.32
Taxes   1722.81
Insurance    616.7
401k    832.5

If you do the math, we're currently spending 63.5% of our take home income on expenses and saving the rest (36.5% saving rate). After paying off student loans, here are some of the plans I'm considering:

1. Save like crazy for a house down-payment over the next 10 months. Get an FHA loan for a $250k home. I think we should be able to save >$30k for it by the July time frame
2. Similar to the above, but renew my rental for another year. Without modifying my withholdings, we should be able to save >$60k for a conventional conforming loan.
3. Maximize tax deductions. Between IRAs and maxing the 401k I can save $1500 more in tax deferred accounts, but the would accrue down-payment money much slower. I would definitely need to wait another year before buying, and would definitely be a FHA loan. Saving rate would increase to 40% due to tax savings.
4. Similar to the above, but attack the Mazda loan, then max out retirement savings. (Saving rate of 45%)

Thoughts on these plans? I'm heavily considering 1-3 since we're not underwater on the mazda loan. Thank you for looking, I know this is a long post.

[Bucksandreds]

You can do an 80/10/10 loan without pmi and 10% down and 10% heloc. I would buy if you're staying because you would have a similar payment but $100s of that would be principle and you'd get better tax deductions. You have 3 kids so having a 50% savings rate is much harder than a lot of the kid less/1 kid mustachianism want to admit to even themselves. Don't worry about the concessions to your wife.  You are ahead of 99% of Americans and will retire very young but still have a family to be with when you're old unlike many who sacrifice children so they can fire 5 years earlier.

[Dicey]

Awesome progress so far! Not sure they even do 80/10/10's any longer. My vote is to save your asses off, and amass the 20% down payment as fast as you can. Pay the minimums on the SL and the car, don't up the retirement saving for now, funnel every penny you can into that account marked "Down Payment".

If you really can buy a suitable house for 275k-ish, your payment should be the same or slightly lower that your current rent. Save 20%, buy the house, and then pay off the SL and Mazda loans and continue stuffing the retirement accounts. The small amount of interest you're paying on the loans while you're paying the minimums will most likely be offset by rising mortgage interest rates, so don't waste time.

I'd challenge you to do in in one year or less. There's plenty of fat in your budget, plus you might be able to be a bit creative. Side gig is one option. Another might be if there's someone in the family you could borrow from. It wouldn't be mustachian to borrow all of it, but you could say "If we save X amount by such and such date, will you match it (or some of it) as a DP loan?". You can do it!

[Bucksandreds]

Awesome progress so far! Not sure they even do 80/10/10's any longer. My vote is to save your asses off, and amass the 20% down payment as fast as you can. Pay the minimums on the SL and the car, don't up the retirement saving for now, funnel every penny you can into that account marked "Down Payment".

If you really can buy a suitable house for 275k-ish, your payment should be the same or slightly lower that your current rent. Save 20%, buy the house, and then pay off the SL and Mazda loans and continue stuffing the retirement accounts. The small amount of interest you're paying on the loans while you're paying the minimums will most likely be offset by rising mortgage interest rates, so don't waste time.

I'd challenge you to do in in one year or less. There's plenty of fat in your budget, plus you might be able to be a bit creative. Side gig is one option. Another might be if there's someone in the family you could borrow from. It wouldn't be mustachian to borrow all of it, but you could say "If we save X amount by such and such date, will you match it (or some of it) as a DP loan?". You can do it!

I did one 18 months ago.

[zenath]

Thank you for the suggestions! We're highly considering option #1 now. I'm even considering suspending my 401k in the intervening months, but still making sure I save 6% over the course of the year (to get the maximum employer match). Basically I've put in almost 6% this year, suspend it until home purchase, then play catch-up the second half of next year. SoFi is a mortgage lender in Wisconsin and has a 90/10 loan with no PMI. I would rather choose that over 80/10/10 piggyback.

Pay the minimums on the SL and the car, don't up the retirement saving for now, funnel every penny you can into that account marked "Down Payment".

I still want to have the student loans paid off since that is my last toxic debt. Half of finance is math and the other half is psychology.

[Teacherstache]

Student loans ($5k a 5% - $250/mo set to be paid off in 3 months!!!)
Auto   650 (Includes $13.5K Mazda Loan @414/mo)
Rent   1575
Utilities 300
Food   800 ($100 in formula costs will disapear in 2 months)
Kids/Shopping 400
Gym   100
Travel 100
Fun Money   250

Gross Expenses   4175

Gross Monthly Income   9260.32
Taxes   1722.81
Insurance    616.7
401k    832.5

Great work! Right now, you're showing about a $2,000 surplus every month, which it appears you have been throwing at your student loans to get them paid off in 3 months. If it were me, I would reduce your 401K contributions down to 6% to get the match. This would add around $200/month to your take home.

If you combine your grocery category with your kids/shopping category and cut them to a combined $1,000 instead of the current $1,200, you come out with an additional $200/month. I would pay the minimum on your car payment. This leaves you with $2,400/month to work with.

Throw all of this at your student loan (can you find an extra $200 to put with this to get your loan paid off in 2 months?) to have your $5,000 GONE in 3 months. Then save your $2400/month for however long it takes to get your 10% down payment for the Sofi with no PMI option. 10 months would get you there for a $240,000 house. Is there a way you can negotiate a 6 month lease extension instead of a 12 month one?