Author Topic: Become more Mustachian by buying a house?  (Read 4243 times)

zenath

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Become more Mustachian by buying a house?
« on: January 25, 2015, 09:17:15 AM »
Hi all,

I found this MMM recently and have been trying to convert myself and my family to be more Mustachian. However we still have a couple of drags on my income including:

Student loans ($12.5k a 5% - $250/mo.)
SUV loan ($27k at 3% - $490/mo.)
Mazda5 ($16k at 1.8% - $414/mo.)
Rent ($1150/mo)

I am currently about 15 miles away from work. My current plan is to move within 5 miles of work and sell the SUV. We need a vehicle with at least the carrying capacity of the mazda since we have three children and visit the in-laws and my parents ever year. After discussing our budget and future plans with my wife I mostly have on board with my plan, but she doesn't want to move except to buy. We are currently saving about $1k/month for a down payment on a home. With our current savings and tax return, we should have enough for 5% down on up to a $240k house. In general houses within 5 miles of work are about $200k+. Obviously I will try to look for the smallest/cheapest house I can close to work. My question is thus:

Is it worth it to put such a small down-payment on a home to trade an auto loan for a home loan?

The advantage is that I trade a loan on a depreciating asset for an appreciating asset and save on auto maintenance/gas/being an drag on the environment. The disadvantage is draining most of our savings and emergency fund. I we don't buy, I'll probably need to keep commuting into work for another year (she doesn't want the kids to change schools halfway through the year).

Looking for advice!!!! I consider it a minor achievement to get this much buy in from my wife.

Thanks!

RichMoose

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Re: Become more Mustachian by buying a house?
« Reply #1 on: January 25, 2015, 07:20:06 PM »
I think its a good idea to can the SUV and pay off the associated loan. If you're concerned about depleting the savings, maybe look at rentals closer to work until you increase your downpayment? Don't forget when you buy a house, lots of times there are many associated costs beyond the downpayment so you need to be prepared for that as well.

Bob W

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Re: Become more Mustachian by buying a house?
« Reply #2 on: January 25, 2015, 07:32:47 PM »
Would like to see income and budget info before offering an opinion.

JLee

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Re: Become more Mustachian by buying a house?
« Reply #3 on: January 25, 2015, 07:54:48 PM »
I think its a good idea to can the SUV and pay off the associated loan. If you're concerned about depleting the savings, maybe look at rentals closer to work until you increase your downpayment? Don't forget when you buy a house, lots of times there are many associated costs beyond the downpayment so you need to be prepared for that as well.
Very true. A lot of stuff adds up when it may not have been expected.

thedayisbrave

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Re: Become more Mustachian by buying a house?
« Reply #4 on: January 25, 2015, 08:05:10 PM »
After discussing our budget and future plans with my wife I mostly have on board with my plan, but she doesn't want to move except to buy. We are currently saving about $1k/month for a down payment on a home. With our current savings and tax return, we should have enough for 5% down on up to a $240k house.


The disadvantage is draining most of our savings and emergency fund.

The fact that you are only able to scrape together a 5% down payment PLUS the fact that you'd be draining your savings and EF to potentally "afford" said house means you shouldn't buy.  Abso-freaking-lutely not. 

Moving and renting would be the second best option.  That way you can get rid of the SUV and reap all those savings and put them into a house downpayment fund so that when the time comes, you can afford to put more down without raiding any emergency funds.

zenath

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Re: Become more Mustachian by buying a house?
« Reply #5 on: January 25, 2015, 09:43:48 PM »
Would like to see income and budget info before offering an opinion.

Yeah, I probably should've started with that

Take-home pay per month: $5,800
Auto: $1250 (loans, maintenance, gas, insurance)
Rent: $1150
Food: $1000 (for now, we're trying to attack this by cutting eating out down to once a month, but we still need to buy formula for our youngest)
Bills & Utilities: $400 ( Internet 50, Water 50, Cell Phone 90, Gas+Electric 200 for the poorly insulated rental)
Kids: $325 (300 for college fund and 25 for activities, I'm going to stop contributing in the short term)
Student Loans: $250
Shopping: $200 (Clothes & necessities, will see if I can reduce further)
Gym: $200 (She has a short term training program ending in two months)
Entertainment: $75 (Netflix, Hulu, Misc)
Other: $75
Travel/Vacation: $50 (Mostly just to visit parents on holidays)
Monthly Saving: $1025 (+300 from kids fund)

Current Contingency Cash: $6k

My main problem has been increasing our expenditures whenever we had an increase in income. My take-home pay already deducted 401k saving and work-sponsored insurances. At the moment I am only contributing enough to the 401k to get the maximum employer match.

The fact that you are only able to scrape together a 5% down payment PLUS the fact that you'd be draining your savings and EF to potentally "afford" said house means you shouldn't buy.  Abso-freaking-lutely not. 

Moving and renting would be the second best option.  That way you can get rid of the SUV and reap all those savings and put them into a house downpayment fund so that when the time comes, you can afford to put more down without raiding any emergency funds.

For the exact reason I discussed in my first post, moving to a new rental isn't an option (my wife won't have it, but met me half-way with the budget reductions and becoming more frugal). The only other option is to keep the 25 min commute (one way) for another year. My first proposal was to just move to a new rental closer to work but the market near work favors buying. Rentals within biking distance of work are about $500+ more than what I'm paying right now so most of my auto savings would go straight back into the rental payment. Buying a $200k on a 15 yr. mortgage (even with only 5% down) costs the same or less than renting.

I figured I might get a variety of responses due to the mixed nature of the proposal. I felt more comfortable dipping into the emergency fund in the short term since I know my employment is stable: they love me at work and are hiring like crazy due to demand. Health benefits are also great with the company (the HMO policy has required nothing out-of-pocket for my last child's birth!).

I'm going to probably look around to see if we can find an area that fits within the >$200k. We will be able to recover the emergency fund quickly (save another $5k by June and have $2k in tax refund). I also know there are other opportunities to save more money once we start to flex our frugality muscles together (food, shopping, & gym).

dividendman

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Re: Become more Mustachian by buying a house?
« Reply #6 on: January 25, 2015, 10:18:46 PM »
We need a vehicle with at least the carrying capacity of the mazda since we have three children and visit the in-laws and my parents ever year. A

Well, I wouldn't buy a vehicle for a once or twice a year trip. Optimizing for the edge case usually doesn't turn out well for the finances. Get a small cheap car and rent a minivan when you want to do your yearly visits.

jmusic

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Re: Become more Mustachian by buying a house?
« Reply #7 on: January 26, 2015, 01:07:13 AM »

Well, I wouldn't buy a vehicle for a once or twice a year trip. Optimizing for the edge case usually doesn't turn out well for the finances. Get a small cheap car and rent a minivan when you want to do your yearly visits.

I agree.  OP: You're THROWING AWAY more money on depreciating cars than you're saving each month.  I'd say get rid of BOTH cars and get something in the $5-6K range.  Pay cash if possible.  Also, you're saving for kid's college (admirable, don't get me wrong) while you still have student loan debt???  Sell the cars, and throw everything you can at the student loan. Given what you've told us you should be able to knock it out in 6 months or so! 

subbs

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Re: Become more Mustachian by buying a house?
« Reply #8 on: January 26, 2015, 05:41:34 AM »
Sell the cars or keep one.
Pay off all other loans.
Get downpayment quite quickly because you don't owe anything.
Buy a smartly priced home.
Go MMM.

For example it will take 57 payments to pay off your student loan alone @ 5%.(FOR 5 YEARS)  =(
Get rid of the money owed sooner, watch wealth grow quicker.

Loan Calculator:
http://tcalc.timevalue.com/all-financial-calculators/personal-finance-calculators/loan-payoff-calculator.aspx?LOANAMOUNT=%2412%2C500.00&DOWNPAYMENT=%240.00&PAYMENTAMOUNT=%24250.00&INTERESTRATE=5.00+%25&SHOWAMORTIZATIONSCHEDULE=on&COMPUTE=COMPUTE&CALCULATORID=PC08&HIDEFORMTAG=TRUE&TEMPLATE_ID=www.timevaluecalculators.com_1&PostBack=true

pagoconcheques

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Re: Become more Mustachian by buying a house?
« Reply #9 on: January 26, 2015, 06:21:08 AM »
I'm going to say it: you have a hair on fire debt situation.

1. Get rid of the SUV ASAP, even if you are underwater on it.  If you can get rid of the Mazda and end up with more cash in hand, that might be a better immediate solution, though you'll still need a plan to switch the remaining vehicle to a cheaper one with no loan.

2. Pay off the student loan as fast as you can.

3. Adopt a mustachian life style, but work with your wife on this transition.  Tracking expenses will go a long way toward developing a collective understanding of your spending habits and savings potential.  You are already committed to each other over the long term, but the long-term commitment to a new lifestyle can take an adjustment.  You say she doesn't want to move except to buy, so don't move yet; with three little kids her maternal and nesting instincts are running high. Respect that and let her drive the decision to stay/move and rent/buy--she may have a different view once her buy-in is complete.   Have you even done the schools analysis for your kids yet?

Revisit when you have finished 1 and 2.  I suspect that frank calculations will reveal you are still not ready to buy a house, but you'll have a better understanding of when and where.  For 3, consider having your wife undertake the accounting and use/develop some calculating tools/methods.  Make sure each of you has a modest line item in the budget of money that requires no justification so that she continues to feel some autonomy.

zenath

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Re: Become more Mustachian by buying a house?
« Reply #10 on: January 26, 2015, 07:15:27 AM »
Thanks everyone. Intellectually I understood the issues with my plan, but my habits and psychology were pushing me the other way. I guess that why I posted this here. Enough people telling me the plan is bad may actually make me believe it.

New Plan:
1. Sell SUV and buy commuter car in cash ($3k underwater with the SUV and can get an old efficient subcompact for <$5k)
2. Pay off Student Loan
3. Reevaluate in a year.

With my current cash on hand and budget surplus I should be able to accomplish 1 & 2 this year. We'll see about selling the Mazda. I know she wants the vehicle with sliding doors for the kids. It took me about 3+ mo. of reading the blog and running the numbers to really start to turn the ship around. It'll take her longer given that she doesn't want to read the blog and isn't a numbers person. But I think we can get there with gradual adjustments.

Bob W

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Re: Become more Mustachian by buying a house?
« Reply #11 on: January 26, 2015, 09:00:19 AM »
Thanks everyone. Intellectually I understood the issues with my plan, but my habits and psychology were pushing me the other way. I guess that why I posted this here. Enough people telling me the plan is bad may actually make me believe it.

New Plan:
1. Sell SUV and buy commuter car in cash ($3k underwater with the SUV and can get an old efficient subcompact for <$5k)
2. Pay off Student Loan
3. Reevaluate in a year.


I'm glad you are self healing instead of adopting the SAL (Standard American Life).   You have several budget items that could be cut considerably.   Your food budget could be $500 while still going out twice a month and eating an uber healthy range of foods.  Phone could be $20.  Delay the kids college fund.  Rearrange the cars.  So you would be able to save around 2K a month with those suggestions. 

Make 40K your goal for a 20% down payment.   Start a thermometer in the kitchen measuring your progress.  You can save your 40K in 14 months.  It should be an enjoyable goal for you an your wife to work together on.

I would also say that your income is decent but relative to your COL area you may have room to grow it.   I bet in that same 14 months you can find a pleasant situation that pays 20% more.  You could also consider side work of any kind.   

Your hair is on fire to a degree (smoldering really)  So earning an additional $150 per week delivering pizzas or whatever isn't out of the question here in the short term. 

I'm assuming you both work?

zenath

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Re: Become more Mustachian by buying a house?
« Reply #12 on: January 26, 2015, 12:59:36 PM »
I would also say that your income is decent but relative to your COL area you may have room to grow it.   I bet in that same 14 months you can find a pleasant situation that pays 20% more.  You could also consider side work of any kind.   

Your hair is on fire to a degree (smoldering really)  So earning an additional $150 per week delivering pizzas or whatever isn't out of the question here in the short term. 

I'm assuming you both work?

Nope, I'm the sole earner. The job I have is the highest paying for software development in the area. To earn more, I need to find a job in another city which would almost certainly have a higher cost of living. My wife has worked in the past doing in-home daycare, but she wouldn't even consider it until our youngest (3 mo.) is at least a year old. Conventional jobs are out of the question for her since childcare cost would erode away any earnings she made. I'd need to check my employment agreement since salaried workers may have some rules regarding second jobs. I also struggle as it is to make time for the kids.

jmusic

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Re: Become more Mustachian by buying a house?
« Reply #13 on: January 26, 2015, 03:40:17 PM »
I would also say that your income is decent but relative to your COL area you may have room to grow it.   I bet in that same 14 months you can find a pleasant situation that pays 20% more.  You could also consider side work of any kind.   

Your hair is on fire to a degree (smoldering really)  So earning an additional $150 per week delivering pizzas or whatever isn't out of the question here in the short term. 

I'm assuming you both work?

Nope, I'm the sole earner. The job I have is the highest paying for software development in the area. To earn more, I need to find a job in another city which would almost certainly have a higher cost of living. My wife has worked in the past doing in-home daycare, but she wouldn't even consider it until our youngest (3 mo.) is at least a year old. Conventional jobs are out of the question for her since childcare cost would erode away any earnings she made. I'd need to check my employment agreement since salaried workers may have some rules regarding second jobs. I also struggle as it is to make time for the kids.

Given this info I think it makes more sense to attack the expenses rather than income (for now).  I like the idea about the thermometer for the house down payment, but definitely get rid of the student loan first. Out of curiosity, after the kids are a bit older, will the income picture change any? 

Also, once you do buy a house, shoot for a PITI payment of less than or at most equal to your current rent payments...