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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: bokonon on May 23, 2015, 10:55:38 AM

Title: Am I ready to buy a home? (long)
Post by: bokonon on May 23, 2015, 10:55:38 AM
I have been living in a 1 bedroom apartment which is very affordable but my wife has wanted a home for years.  We have been working hard and paid off her student loans and saved up $20k cash so far for a down payment.

My apartment lease is up August 1st and I thought this summer might be a good time to buy a home.  Originally I planned to wait another year for a larger down payment and avoid PMI, but it seems that interest rates may actually finally start rising later this year.  I figure any benefit we get from saving up a higher down payment may well be cancelled out by increased interest rates.  So my new plan is to get a house now with a smaller down payment and low rate and pay extra on principal to get to 20% equity ASAP to get rid of PMI.

Iím looking for feedback from this forum filled with intelligent frugal people to make sure Iím not making a mistake or missing something.
So here's our situation:
Gross annual income:  145k
Monthly debt payments: $280 (my student loans)
Houses my wife likes in our area cost $350-$400k.
Down payment:  $20k.  We are adding $1-2k to it every month depending on variable overtime and expenses.
Also available for down payment:  $20k of Roth IRA contributions (I would prefer not to use but could).
Other assets: approximately $100k in 401k

So far I have looked at penfed credit union for mortgages.  They have some interesting offers.  I am considering their 15/15 ARM where the rate is fixed at 3.0 for 15 years and then adjusts once with a max increase of 6%.  If you use this program they refund closing costs up to $10,000 and I figure I would like to pay off the loan in 15 years so this could work out for us.  I am also considering their 30 year fixed and I could qualify for 15 year fixed but not sure I want to be locked into the higher payment.

Looking at the limited cash we have available, am I making a smart move or would you wait another year to build cash and hope rates continue to stay low?  One last thing I could do to increase cash in the next few months for down payment and closing costs is  drop our 401k contributions to 0 temporarily  to build cash more quickly.  They are currently set to max the 401k this year for both my wife and myself and I would have to dramatically increase contributions in September or October so we could still hit 18k each by end of the year.

We would plan on living in this home at least until we achieved early retirement in approximately 15 years, probably longer if we have kids in school at that point.

Any thoughts?  Thank you if you made it this far!
Title: Re: Am I ready to buy a home? (long)
Post by: matchewed on May 23, 2015, 11:06:12 AM
This is basically a math question. You can see how much a year worth of savings would affect your down payment and would know how that would affect your mortgage given current interest rates. Then you can run the same numbers with varying interest rates within reason. Compare these scenarios with your proposed current scenario. The math should give you an answer. And stay the hell away from variable rate mortgages IMO. 30 fixed is just fine when you have lower interest rates.
Title: Re: Am I ready to buy a home? (long)
Post by: forummm on May 23, 2015, 11:14:38 AM
Make sure you don't get an FHA loan if you want to avoid PMI after the first year. Those loans have changed a lot, and you can't get rid of PMI for a long time.

I think a 15 year fixed rate is plenty of time if that is the deal that works for you. You may not be in the house in 15 years. I have a 7 year fixed. Some people prefer to invest excess funds instead of paying off a mortgage. Others prefer to pay it off early.

It's your money, but I think those housing prices sound really high. I know it varies by area. But I could have spent 2-3 times that much where I live. Instead I chose to spend 20% of your price range, which is less than my annual salary. We still got a great house and it's convenient for work. I have to tell you it feels great every month when my mortgage is so small. And property taxes and insurance are low too.
Title: Re: Am I ready to buy a home? (long)
Post by: Another Reader on May 23, 2015, 01:10:53 PM
These are conventional loans, and you will have to pay PMI because of your minimal down payment.  $20k on a $400k house is 5 percent, and you will have to pay a lot in closing costs, including a $3,800 origination fee per the PenFed web site.  The rate may be higher as well - have you actually talked to a loan person at PenFed? 

I think possible higher rates are a rationalization for doing something that might not make good financial sense.  You are taking on a lot of debt with very little room if something goes wrong.  If rates go up another percentage point, house values will likely stagnate or even drop, as a lot of buyers will be forced out of the market.  Housing is largely priced by the monthly payment, with little consideration of the cost of the house.  Payments can't go up a lot before something has to give.

Just because your wife likes expensive houses does not mean you need or can afford one.  A $250k home may not be her dream home, but it makes much more sense than maxing out your leverage.
Title: Re: Am I ready to buy a home? (long)
Post by: forummm on May 23, 2015, 01:22:13 PM
Financial decisions should be made with your head and not your heart. When we were looking at homes, it was certainly more comfortable to find a place in a pricey area. But through some effort (not a ton, but some) we were able to find a place and see the good in it, and the price tag was exceptional. And now we've been here for years and even this morning my wife said that she loves the house and that it's perfect for us. She wasn't so sold on the idea originally, but once we did the looking around and found it, it started to make more sense to us.
Title: Re: Am I ready to buy a home? (long)
Post by: asiljoy on May 23, 2015, 02:11:00 PM
Just remember putting only 5% doesn't leave you with a lot of equity should you need/want to get out of the house in the short term and we've all seen, housing markets can turn and you can get stuck.

Honestly, it sounds like you've got the same kind of itchy feet we did a few years back when we were a bit younger/more in-experienced/stupid. Do you reeeeeeeally need to get a house now? If you do have some driving need like rent is higher than buying or whatever, do you realllllly need that expensive of a house? Have you closely examined what your needs/wants are?

For us, we bought a 3 bedroom townhome in an area that's considered 'nice' (an equivalent home in the outer burbs would have saved us 40/50,000) and ended up renting out two of the bedrooms when it occurred to us that we didn't need that much space for a married couple without kids. So far we've paid 5,760 in PMI and our house is worth about the same as when we bought it 6 six years ago if we compare to recent sales; so, super solid from an investment standpoint*sarcasm

Title: Re: Am I ready to buy a home? (long)
Post by: iluvzbeach on May 23, 2015, 05:27:54 PM
Please don't buy a house for that much money now when you have so little for a down payment or other savings. It sounds like a very risky proposition that could cause you financial pain for years. I also believe that as you continue to save and come up with a minimum 20% down you will likely find you really don't want to spend that much. It will add years to your overall time at work and delay FI. Have you considered what will happen if you have children and one of you wants to stay home? This will impact your financial situation greatly. Please, please, please give it more serious thought before you put yourself in that situation.
Title: Re: Am I ready to buy a home? (long)
Post by: bokonon on May 24, 2015, 04:19:39 AM
Gotta love the MMM forums :).  Thank you all for the gut check.  Somehow this year I went from we are definitely not ready to buy a house for at least another year to, "oh no rates are going up," to maybe we can buy a house less than $300k, to we are buying a $400k house.  Psychology is a crazy thing.  Especially when the online calculators tell you that you would qualify for a gigantic loan (like 800k), it makes borrowing huge sums of money seem reasonable. 

I have to do something different.  Stay in the apartment longer, consider a different area or style home (we have been looking only for single family homes with 2 bathrooms in the very wealthy suburbia that lies between our workplaces which are unfortunately 20 very congested miles apart).  Previously we have been looking for best school district, nice kitchen, the works. 

You all helped me realize that we are going way overkill.  My theoretical children wouldn't benefit from a great school district for at the earliest 5 or 10 years, maybe a town home is a good starter home to get into with more equity / less time on PMI and move bigger later if I have to, maybe I need to wait another year or two if I can't find something where the numbers are way better.

Thank you for your help!
Title: Re: Am I ready to buy a home? (long)
Post by: justajane on May 24, 2015, 06:53:17 AM
Glad to hear that you've had a slight change of heart.

While I was reading your first post, I was thinking, "Nooooooo!"

You really need more of a down payment for houses that cost that much. I regret buying a home with 10% instead of 20%, and we bought in the days when they still offered "piggyback" secondary loans. This made it easy peasy to correct our original mistake. We just paid off the second loan. My understanding is that it can be a royal pain in the ass to get rid of PMI.

Interest rates might go up, but haven't they been saying that for a few years now?

Also, buying your house solely based on it being equidistance between two places of employment seems shortsighted. Are these jobs you plan to be at for the duration? What about buying near the person who has the most stable, long term employment? I know it sucks for the other person, but if one person drops out of the workforce or switches jobs, then you are farther away from both places.
Title: Re: Am I ready to buy a home? (long)
Post by: Rpesek6904 on May 24, 2015, 07:02:22 AM
Psychology is a crazy thing. Just don't forget the MMM goal is freedom through financial independence. When I bought my current home, some of my office pals (who knew how much I made) were shocked at my "modest" choice. But I tell you, the joy of having a home that puts absolutely no pressure on us financially is priceless and everlasting.

To the point - don't forget the joy and peace of a financially sound decision that stays with you every day after you buy less than you "need."
Title: Re: Am I ready to buy a home? (long)
Post by: forummm on May 24, 2015, 07:37:42 AM
We bought a house that was farther away from both of our work places, but not by much, and still a reasonable low-mile commute. And since then, DW's workplace changed twice. So you never know what's going to happen. But the tiny mortgage is great, so I profit from it every month. And since I bought it for much less than it was really worth, I had an instant profit in the unrealized capital gain once I fixed it up just a little. Then I got a refi to pull out that extra money and invested it while the market was still low. The gains on that amount I pulled out are more than half what I paid for the house in the first place. If you add in the amount I'm not paying on the mortgage each month (and instead am investing, which has also gained), the house is free relative to buying a McMansion.

That's a smart way to buy a house. Buying more than what you can really afford (even if they will lend you more) and being stuck dedicating your paycheck to it for 30 years is slavery.