Can I Afford This Mortgage?

[farmGirl14]

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[nereo]

well, providing you both keep your jobs and that your budget is accurate you certainly *could* afford this new payment.  Whether or not it's a good idea is anotehr matter.

A few numbers.

Based on your budget, your mortgage (PITA) will be 27% of your total budget.  That's about average.
Your monthly savings will be $480/mo, or $5,760/year.  That's pretty awful - barely half of your allotted IRA overhead. (No, I do not count car savings as "savings" - it is just a delayed expense).

OTOH, your renovation could increase your homes value. Whether it actualy does depends on your location, the renovations being done and whether you are doing the work yourselves or paying contractors.
Regardless, the value of your home won't help you unless you eventually sell it - are you planning on selling this later?  If so, when?  Also - where do you plan on moving.

Bottom line:  I'd be wary about this move.  You could pull it off but you won't be saving very much of your paycheck. One emergency could wipe our all of your savings for an entire year or more.  Personally, I think you need to focus on increasing your income, as you are earning ~$12k/year and your husband only ~$24k.  Both are well below average salaries.

[AMandM]

I don't see any medical expenses or income tax in your budget. Is your "net income" after those?  Do you have copays or deductibles, or do you owe money come April 15th?  Does your "net income" have retirement savings deducted?  If not, you are saving about $450 a month for retirement (assuming you take no vacation and spend $30 on maintenance).

I think you can afford it in this sense:  the higher payments are unlikely to make your spending higher than your income.  But they will definitely reduce your savings.  I would go for it if you'd rather work more years while living in the renovated house, or if you are renovating to sell and the house's value will increase significantly from the renovations and that increase will be invested when you sell.

[Dicey]

I think in ten years, you'll laugh that you were ever worried about this. Design your addition so it's seamless inside and out. Be sure you are not over building for your area. Secure an excellent contractor. Plan to add your own sweat equity if feasible. Plan for costs to exceed your estimates. Then do it and never look back.

[JustGettingStarted1980]

Hi FarmGirl,

What are your goals?

Are you going for FIRE? Do you want to maximize your quality of life and plan on retiring in 30 years? Do you want to show off your new renovated space to show that you've "made it"?  Do you NEED the renovation for In-Laws to move in or an extra bedroom or two for kids? Are you going to update the house and sell, or live there forever?

My personal opinion is that 50 K in Debt for a family that makes 36 K/year seems a bit reckless.  Why not refinance your 46 K Mortgage to 3%, and then SAVE LIKE HELL to be able to pay cash for renovation when you have the cash. This may focus you quite a bit.

[notactiveanymore]

That level of mortgage at your incomes would make me very nervous. I could see deciding on some necessary improvements and maybe one "want" improvement and then waiting until you're making more money before planning for major upgrades or additions.

You guys seem like you've got a great early start on budgeting and you've got a good amount of equity. But if you're currently being subsidized by your parents' insurances and your extra cashflow each month is only $600/month with children planned in the not too distant future, then you can't afford $850 a month in housing. Sure you can swing it right now, but you won't be able to swing it in another 3 or so years without salary growth.

I wouldn't bet my financial stability on hoped-for salary growth just for some desired house updates.

[JustGettingStarted1980]

Sounds like you've already made your decision. I wish you and your husband all the best.

[nereo]

We make about $45k a year gross from our stable jobs. That is an average salary in the area. We live in a very rural LCOL area. $500 for savings might not seem like much to you, but I think we are doing pretty well for our salaries. With my job and career I can make substantially more in the future, but it's variable and I'm leery to depend on it.

Sorry. But we are not in a position / or desire to max out out Roth's at this time. That would be 25% of our income. We are in our early 20's if that makes any difference. We do put money into our IRAs yearly, on average about 7.5% of our gross income. Room for improvement. I didn't count that in our budget because we funnel money there through other means such as tax return, bonuses, etc.

The renovation will increase our home value substantially. But we have no plans to sell, this may be our forever home. The renovation is some essential fixes, and some quality of life wants.

We have an emergency fund. We are both on our parents insurance because of our ages.

Those are all important considerations that were left out of your OP.  I'm relieved to hear that you have an e-fund, and that you are contributing some to your IRAs, and that you have both other sources of money not listed and opportunity to make more.

Given that information I'd say this is certainly do-able.  I will push back slightly and say that not trying to max out your IRAs is a mistake - and this is coming from someone who currently makes less than you do.  Be prepared for renovations to take longer and cost more than expected as Diane C suggested. It's no uncommon for something that seems like a straightforward $2k change to suddenly wind up costing $5-10k when (long list of unexpected things) happens.  If you can do some of hte manual labor yourself you will save a bundle - probably more than you make at your current jobs on a per-hour basis.

Also, be sure to budget that, as the value of your home increases your municipal taxes will also increase upon reassessment.

[Dicey]

I still say do it, with the caveats originally mentioned. Moving is expensive. If these renos turn this into your forever house, you should come out well ahead.  I hate to hear about the Roths, but here's a little life tale for you.

A long, long time ago, I was determined to buy real estate. I had cancer in my early twenties, so it represented an important kind of security to me. I saved for a down payment with fierce determination. Eventually, I amassed over a year's salary in the bank. Somewhere in there, IRAs, then Roths were introduced. I did neither, because house, house, house. I also left two jobs in my first decade of working just short of some kind of vesting, because, who knew? Employers literally never talked much about it back then. Hard to believe now, but true. ERISA changed a lot and for the better.

I finally bought my house and then started funding my retirement accounts. In the end, because I live in a high COLA, and bought smart, real estate has been very good to me and I am now FIRE. Thanks to blogs and forums such as this, which didn't exist then, I now know there are  more efficient ways to get to FIRE, but get there I did, and you will too. In the mean time, you will live in a comfortable, affordable house that suits your needs. Go for it!

[notactiveanymore]

What do you think would be a comfortable housing cost for our salaries?

Also, why would we not be able to afford it in 3 years? Because of the insurance? My husband has reasonably priced insurance offered through his work that we can go back on once we age out of our parents.

Going back to your old case study from June: http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-young-need-advice/msg1120950/#msg1120950

In there you say your husband's plan would be about $750 for a family. I'm saying when you turn 26 (or if that part of Obamacare gets taken away or if your parents decide not to cover you anymore) and have children, your budget will not cover your expenses with this higher mortgage.

Have you guys been able to pay off the LOC since your previous case study? How close are you to saving for a replacement vehicle for your husband? Do you still only have $2000 in your emergency fund?

If I were in your shoes, I probably wouldn't go over $600 in PITI.

[onlykelsey]

One additional thing I worry about with renovations is that they can sometimes spiral out of control, or reveal deeper structural issues that you/your contractor are now legally bound to remedy because you've found out about them.  It seems like the mortgage is borderline workable on your salaries, but only if nothing changes (i.e. no one gets super ill, you don't find hidden asbestos you have to remediate or accidentally strike a gas line).

Is there any rush to doing it now and not in 6 months or whatever period of time is necessary to beef up your savings a bit? 

Also, will putting sweat equity in to it cut in to your hours worked and thus income?  If so, have you taken that in to account?

[talltexan]

So I think I'm seeing a new mortgage payment of $830/month (after renovations) versus after-tax income of $3,000/month...what type of mortage product are you using to get that?

Would you consider something like a 5/1 ARM, where you might get a lower rate than the 30-year fixed? some people beat up the ARM, but if rates stay low, you could aggressively pay down the principal to the point where your payment would stay lower later.

[robartsd]

To be clear though, the $50k for the renovation would be on a HELOC for one year, during which we would pay down as much as we can. Then we will roll in into a new fixed mortgage.

So you are estimating based on the assumption that you can get today's low rates after completion of the renovation. How would it affect your plan if rates are higher in a year when you take out the new mortgage?

[With This Herring]

What do you think would be a comfortable housing cost for our salaries?

Also, why would we not be able to afford it in 3 years? Because of the insurance? My husband has reasonably priced insurance offered through his work that we can go back on once we age out of our parents.

Going back to your old case study from June: http://forum.mrmoneymustache.com/ask-a-mustachian/case-study-young-need-advice/msg1120950/#msg1120950

In there you say your husband's plan would be about $750 for a family. I'm saying when you turn 26 (or if that part of Obamacare gets taken away or if your parents decide not to cover you anymore) and have children, your budget will not cover your expenses with this higher mortgage.

Have you guys been able to pay off the LOC since your previous case study? How close are you to saving for a replacement vehicle for your husband? Do you still only have $2000 in your emergency fund?

If I were in your shoes, I probably wouldn't go over $600 in PITI.

Oh you are right! I forgot the cheap insurance was only for him. In my state kids can get very cheap insurance. Mine would be another matter, but I can do a job change if I need to, and there are several other positions I could take for insurance. Although I wouldn't enjoy the work as much.

The LOC is down, and what is left will be rolled into the new mortgage. Cars are going well. We've done some fixes and I think we will be fine a while, but we are still saving for it.

What are the plans for childcare when you have children?  Is one of you going to stop working outside the home, will you pay for daycare, or are your parents/in-laws going to provide childcare for free or cheaply?  I've heard a lot of people get surprised by the expense of daycare, so look into that when you are planning out your future budget.  Some people assume the new grandparents will provide care, only to find out that those grandparents (who were never consulted) have their own things to do.  You might have this all planned out, but I think you should include a line item in your future budget for childcare, whether it is a decrease in salary or a new expense.

[notactiveanymore]

From June:

Mortgage: $46.8k, 30 year fixed, 6%. Going to refinance asap! (Had to get higher rate because of age and lack of credit history)
LOC: $4,400, 7% (new furnace when ours died this winter) :(

Have you already refinanced your first mortgage? If not, would you be looking at a 6% mortgage of 46.8k AND a HELOC of ~52k at 7%? What are your minimum payments going to be on that until you refinance? I consider 7% debt to be hair on fire emergency. In fact we just got done paying off 55k at 6.8%.

I do not think you guys are prepared for an emergency if you get this extra debt. You have a couple grand in your emergency fund and you won't have the HELOC to fall back on if you've already put 50k on it. And unless your incomes really go up, you will not be able to afford health insurance and childcare in just a few years.