Author Topic: CASE STUDY: Just married, buying a house--which debts to pay first?  (Read 3430 times)

john6221

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Hello! I've been reading MMM for about 4 months. I just got married last November and my wife and I are in the market for a home purchase. For us, this makes financial as well as emotional sense, since we are in a market where good housing is cheap, rent is high, and we want to have a house with a yard, garden, etc. We're not being stupid with the home search and only looking for houses that are much below what the banks will "pre-approve" us for.  We want to live simply but are also looking forward to the future when my wife will stay home to raise children, if we are able to have them. That's the goal, at least.

Without further adieu, here's the details:

Income:
$7600 (after taxes, deductions, 401K contributions)

Current Fixed Expenses:
Rent: $1300
Auto Payment 1: 336 (3%, $6k remaining)
Auto Payment 2: 245 (6.5%, $8k remaining)
Student Loans: $200 (2%, $19k remaining)

Current Monthly Variable Expenses (using Mint, averaged over last 6 months)
Auto Gas/Insurance/Maint: $363
Cell Phone: $150
Internet/TV: $120
Electric: $45
Home Supplies: $60 (cleaning supplies, T.P., etc.)
Personal Products: $45 (makeup, soap, etc.)
Doctor: $240 (wife has on-going medical needs for the time being)
Food: $370 (includes groceries and dining out)
Gym: $45
"Fun" Money: $150

Total Monthly (fixed + variable) Expenses: $3669

Comments: We both had purchased cars before we got married, and when we're done paying them off, they will last a long time and we will never again have two car payments at once. Also, my wife is starting a new job soon with better insurance, so her doctor visits will decrease significantly in cost.

Current Monthly Savings:
401k: $500
House Fund: $3900 (I recently capped my 401k contributions to 6% to get the match but to be able to increase the size of our cash fund for house downpayment. I want to be as close to 20% as I can so as to avoid PMI)
Total: $4400

Current Assets:
401k: $49k
Rollover 401k/IRA: $100k
Roth IRA: $45k
Emergency Fund: $17k
House Fund: $38k

Total: $249k

Specific Questions:
1. After we buy the house, what debts should we go after first? My thought we be the auto loans, in order of highest interest rate. The problem is that the one with the highest interest rate is my wife's, and she has a low credit score due to minimal credit history. (That's why the mortgage will be in my name.) 
2. After we buy the house, should I increase my 401K payments to max them out? Or go after the debt first and then max 401k?
3. I am in a relatively stable industry, but should my Efund be larger?


Thanks for your help!


Thegoblinchief

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Re: CASE STUDY: Just married, buying a house--which debts to pay first?
« Reply #1 on: March 07, 2014, 08:21:48 AM »
Rent: $1300

When looking at mortgages, make sure that P+I+taxes+insurance are at LEAST 10% lower than rent. Otherwise, repairs and improvements will erase the "advantage" of owning a house, at least from a financial perspective.

Quote
Auto Payment 1: 336 (3%, $6k remaining)
Auto Payment 2: 245 (6.5%, $8k remaining)

I would attack the 6.5% loan first, or sell the car if you have equity in it and get a cheaper but reliable used model.

Quote
Auto Gas/Insurance/Maint: $363

It's clear your number one priority in moving should be reducing your commute.

Quote
Cell Phone: $150 -->Very high. Look into an MVNO. You should be able to slash this in half easily.
Internet/TV: $120 -->Also high
Electric: $45 --> Keep in mind this will likely be higher, even in a small house.
Home Supplies: $60 (cleaning supplies, T.P., etc.)
Personal Products: $45 (makeup, soap, etc.)
Doctor: $240 (wife has on-going medical needs for the time being)
Food: $370 (includes groceries and dining out) -->Combine the home supplies and personal products into this budget line. A reasonable budget for two adults is $300 complete. Add, say, $50 a month for eating out.
Gym: $45
"Fun" Money: $150


Quote
Specific Questions:
1. After we buy the house, what debts should we go after first? My thought we be the auto loans, in order of highest interest rate. The problem is that the one with the highest interest rate is my wife's, and she has a low credit score due to minimal credit history. (That's why the mortgage will be in my name.) 
2. After we buy the house, should I increase my 401K payments to max them out? Or go after the debt first and then max 401k?
3. I am in a relatively stable industry, but should my Efund be larger?

1. As noted above, go after the 6.5% loan first. Depending on what rate you get for a mortgage, attack that next, as it will likely be over 3%.
2. I would max 401k, given your income bracket, then use the cost savings in reducing your spending to give you debt prepayment funds.
3. Efunds are a matter of choice/risk tolerance. High enough in my book.

horsepoor

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Re: CASE STUDY: Just married, buying a house--which debts to pay first?
« Reply #2 on: March 07, 2014, 08:45:34 AM »
I agree - kill that $8K car loan in 2 months.  That will reduce your interest payments and free up another $245/month towards your house fund.

In addition to Goblin's recommendations, you might be able to find a cheaper gym.  Not sure if that is for both of you or just one.  Might be worth looking into a Planet Fitness type place, or using employer-provided gym.  $45 isn't bad for two people, though.

If you haven't re-shopped your auto insurance lately, I'd do that.  Also re-visit your deductibles, and consider getting rid of collision as you pay your vehicles off.

Maybe cut the grocery bill and take eating out money out of your "fun" money, at least until you've got that 6.5% loan paid and your house down payment together.

Weedy Acres

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Re: CASE STUDY: Just married, buying a house--which debts to pay first?
« Reply #3 on: March 07, 2014, 09:02:22 AM »
How expensive a house are you looking to purchase?

plantingourpennies

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Re: CASE STUDY: Just married, buying a house--which debts to pay first?
« Reply #4 on: March 07, 2014, 09:18:07 AM »
The problem is that the one with the highest interest rate is my wife's, and she has a low credit score due to minimal credit history. (That's why the mortgage will be in my name.) 

Would it be possible to do a no/low cost refinance on your wife's car loan now that you are married?  Our credit union allows for these, but I'm not sure how common it is across the industry. 

Also, depending on your plans for the house, it might make sense to have the mortgage in both of your names and your deed listed as Joint tenants in common (or something similar).  If the only reason her score is low is the short history, your lender could probably be convinced to rate upon your score and use her income as part of what helps to set your rate. 

We put our house in my name initially since we bought right before we were legally married and Mr PoP was self employed at the time (this is 2009 when credit was really tight).  But then when we refinanced and put the house in both of our names we were hit with (*I think*) an extra $1K or so in doc stamp fees because we changed the deed at that point to reflect joint ownership. 


zarfus

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Re: CASE STUDY: Just married, buying a house--which debts to pay first?
« Reply #5 on: March 07, 2014, 11:32:47 AM »
When looking at mortgages, make sure that P+I+taxes+insurance are at LEAST 10% lower than rent. Otherwise, repairs and improvements will erase the "advantage" of owning a house, at least from a financial perspective.
Except you also have tax advantages for paying interest and property taxes.

Hello!
...
1. After we buy the house, what debts should we go after first? My thought we be the auto loans, in order of highest interest rate. The problem is that the one with the highest interest rate is my wife's, and she has a low credit score due to minimal credit history. (That's why the mortgage will be in my name.) 
2. After we buy the house, should I increase my 401K payments to max them out? Or go after the debt first and then max 401k?
3. I am in a relatively stable industry, but should my Efund be larger?

Your finances are/were similar to mine, so here's what I would recommend based on what I did/do:
1) Why is it a problem that it's your wife's loan?  Regardless, definitely pay off the car loans asap, that extra money in your monthly income will a lot of help immediately. 
2) Based on the idea that you will eventually have your wife be SAHM, I would say to increase 401k if you like your job and are planning to work past FI.  If you hate your job and want to "retire" early (aka, find a new career path that may or may not pay as well), look to reduce your monthly debts as quickly as possible.  To be honest, you don't have a lot of debt, so any decision you make here won't make a huge difference down the road (although I don't know your age)
3) 17k is plenty for a couple.  In fact, I'd say 20k is fine for one kid if you feel stable in your job.  I'd use that money to pay off the cars :)  We also use our roth ira contributions as a *true* e-fund (aka, never take this money out unless you can't live without it...not for things like car maintenance, new furnace, or anything like that).

other things...
4) Regarding phone bills, we switched to straight talk from att and have no diminished quality.
5) Regarding cable bill, I've never not found a show that we wanted to watch available for streaming.  I literally just google seach "anthony bordain stream" or something.  Wham, all the seasons available..sweet.
6) Expect electric/gas to go up with a house.

Good luck!

Weedy Acres

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Re: CASE STUDY: Just married, buying a house--which debts to pay first?
« Reply #6 on: March 07, 2014, 12:32:10 PM »
Ok, so you're 2 months away from having $42k for a down payment plus $4K for closing costs, meaning you could pull the trigger very soon.  So I assume you're actively looking?

To be honest, I'd knock out the two cars today.  That will free up another $600/mo towards your down payment.  Then I'd fix the following things in your budget to free up another $400:
Phones reduce to 50
Cable cut out 70?
Groceries reduce to 200.  You should not be eating out when you're in debt.
Household/toiletries:  this seems outrageous at a combined $104/mo.  We spend $25/mo.  I suspect there's some misc retail leakage here or else she's buying really expensive cosmetics.  Cut it out.

Now you've got $5K/mo that you're replenishing back into the house fund.  In three months you're back up to $46K.  If you find the perfect house before then, it'll likely still take 4-6 weeks to close, and worst case, you could borrow from your emergency fund and quickly replenish it after the close. 

Then four months after the house close you've paid off the student loans and on your way towards massively fast wealth accumulation.  No, I wouldn't keep the Sl around just because it's 2%.  I might bump up any non taxable accounts to their max, but toss everything else at the debt.