Author Topic: Need help w/ a home buying decision!  (Read 6586 times)

Frugal D

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Need help w/ a home buying decision!
« on: July 10, 2014, 08:08:24 PM »
Fellow Mustachians - please help!

I'm currently 28 years old, originally from Seattle, but living in San Francisco. Dying to get back to Seattle very soon and considering buying a home up there if the right deal were to come along. Full disclosure on my finances below:

Salary: $120,000
Cash: $121,000
Taxable Brokerage Account: $175,000
401k: $125,000
Taxable Company Options and RSUs: $150,000 (fully vested in 3 years)
Debt: $0
Net Worth: $571,000

The house in question is listed for $575,000 in a very nice neighborhood where the median price is closer to $800,000-$1,000,000. I would put down 20% for a monthly payment of $2,365 at 4.625%. My current rent in SF is $1,050 so I could handle the debt burden with a little extra left over until I make the move which could happen as soon as September.

My question for ya'll is...am I over-extending myself and should I be using that down payment in my brokerage account instead? Is it generally unwise to purchase a home from 2 states away?

Really appreciate the collective brain power on this!

-D     

kallinan

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Re: Need help w/ a home buying decision!
« Reply #1 on: July 10, 2014, 08:26:10 PM »
Hey, I'm in the process of buying a house two states away!  It kind of sucks, though.  Especially for us, since we found Dear Wife & I weren't on the same page we thought we were for the first 2-3 trips.  Hrumph.  But, uh, it's totally possible.  People do it all the time.  But especially since you already know the city you're going back to.

Now as to your question - gosh, that's a lot of money on a house.  I live in the Great Lakes Region, where you could buy a half a block of homes for $575k.   I know things work differently out on the coasts, but that doesn't change the fact that it's nearly 5x your salary.  Ouch!  Holy shit!

First of all, your monthly payment is not $2,365.  That number is for suckers, because only suckers would buy a 30-year mortgage.   Seriously.  A 30-year mortgage is just paying the bank less principal each month so you can have a higher interest rate.  It is the worst invention of all time for personal finance, and the single biggest obstacle to FIRE.  It is going to take you forever to pay that thing off.  So to summarize,

DO NOT GET A THIRTY YEAR MORTGAGE.

If you can't afford the 15-year mortgage, you can't afford the house.   It's really that simple.

And should you use the taxable brokerage money?  Hell, no!  That's the nest egg of your Freedom Ticket.   If you put that money in a house, you'll never see it again.  Instead, leave it in investments where it will get bigger & bigger - so one day you can choose not to work.

But lastly, consider the house you're buying.  Houses you live in are not investments.  It's a money sucking sinkhole.  Taxes.  Repairs.  Utilities.  Even the home equity is your hard earned money that refuses to generate more money.  Because there's absolutely no guarantee you'll ever sell it for more than you buy it for.  When in my 20s, an older co-worker once advised me that "a rich person has a big house and a small car."  No.  The rich person (or at least the person getting rich) has a small house and a small car.  Because then all of their extra money goes into investments.  And *that's* how you get rich.
« Last Edit: July 10, 2014, 08:29:39 PM by kallinan »

Frugal D

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Re: Need help w/ a home buying decision!
« Reply #2 on: July 10, 2014, 08:29:45 PM »
Very helpful re: 15-year mortgage. Much appreciated.

The idea of dumping so much money into a non-income-generating asset does seem pretty careless. 

Breck

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Re: Need help w/ a home buying decision!
« Reply #3 on: July 11, 2014, 12:39:49 AM »
Gotta go with kallinan on this one. I also happen to be in the market for a house. And I started by searching for ones I could easily make the 30yr payment on.

My thought was the more they are worth the better appreciation I could get (plan to sell in ~5 years). But when you look at the extra interest, taxes, insurance, heating/cooling, and repair costs of a larger home it becomes clear the risk is not worth the return. The only thing guaranteed with a more expensive house is more expenses.

Now I'm looking for an easy 15 yr payment. Also considering the 7/1 arm since I plan to move in 5 years anyway. But that's a whole nother topic.

cchrissyy

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Re: Need help w/ a home buying decision!
« Reply #4 on: July 11, 2014, 01:27:48 AM »
Is this house for you to live in? or to rent out?  if it is for you, do you mean alone, or with family or with roommates or what?

I am asking because it is such a big price tag for a single person's housing needs.

The fact that it's a bargain compares to other houses in that area is interesting but that's only going to benefit you when you sell it someday, it sure won't help you now when you are paying that big mortgage, taxes and etc on home ownership.

rpr

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Re: Need help w/ a home buying decision!
« Reply #5 on: July 11, 2014, 01:29:21 AM »
Frugal D -- do not buy the house. Wait till you have actually moved.

In our case, we bought with a 30 year instead of the 15 even though we could afford the 15. One reason was that we figured, that if one of us could not work, then the 30 year was affordable on one salary while the 15 year would have been tight. Plus, the 30 year rate was 3.5%.

SDREMNGR

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Re: Need help w/ a home buying decision!
« Reply #6 on: July 11, 2014, 04:21:22 AM »
Whether your house purchase is a good one depends.on how good of a purchase you will make.  I just bought a house for about 10% under market from a divorce situation. They had it on market for $420k with no bites for about a month. She was moved out, he was in escrow to buy something else already and needed to sell fast.  I made an offer for $385k and got approved.  3.25% 15 year loan but planning on paying down 2 pts for 2.75% rate.  20% down.  At these numbers, it's a no brainer for me.  I bought it to raise my family there for the long 18 year haul.  It's a 4 bed / 2 bath right now but I'm building out the family room above the garage into a sweet master bedroom to turn it into a 5/3. A lot of house for sure.  We plan on getting 3 roommates and keeping 1 bedroom open for a little while.  The roomies should keep our part of the PITI down to around $800 per month. While roommates are not for everyone, it does allow for a cheap living situation.  We could rent out the house today and cover the 15 year mortgage plus about $100 cash flow so it's an easy decision for me personally.  I think you should think about how good of a deal you can find.  Buying a house is not a homogenous thing.  You can find a good deal or pay too much.  The deal makes all the difference, especially when it comes time to sell.  Don't make it a consumer decision and you should do ok.  Don't buy a house that is beyond your ability to pay for it and you won't get hurt.  And also, pay below market and don't buy until you can find a below market deal.
« Last Edit: July 11, 2014, 04:36:43 AM by SDREMNGR »

begood

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Re: Need help w/ a home buying decision!
« Reply #7 on: July 11, 2014, 06:40:22 AM »
Now as to your question - gosh, that's a lot of money on a house.  I live in the Great Lakes Region, where you could buy a half a block of homes for $575k.   I know things work differently out on the coasts, but that doesn't change the fact that it's nearly 5x your salary.  Ouch!  Holy shit!

First of all, your monthly payment is not $2,365.  That number is for suckers, because only suckers would buy a 30-year mortgage.   Seriously.  A 30-year mortgage is just paying the bank less principal each month so you can have a higher interest rate.  It is the worst invention of all time for personal finance, and the single biggest obstacle to FIRE.  It is going to take you forever to pay that thing off.  So to summarize,

DO NOT GET A THIRTY YEAR MORTGAGE.

If you can't afford the 15-year mortgage, you can't afford the house.   It's really that simple.

kallinan makes a lot of good points, but the bit above is what I'm bookmarking so I can read it every time I have a house attack.

JGB

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Re: Need help w/ a home buying decision!
« Reply #8 on: July 11, 2014, 08:07:44 AM »
First of all, your monthly payment is not $2,365.  That number is for suckers, because only suckers would buy a 30-year mortgage.   Seriously.  A 30-year mortgage is just paying the bank less principal each month so you can have a higher interest rate.  It is the worst invention of all time for personal finance, and the single biggest obstacle to FIRE.  It is going to take you forever to pay that thing off.  So to summarize,

DO NOT GET A THIRTY YEAR MORTGAGE.

I'm going to throw a wrench in the works and disagree about the 30-year mortgage. It depends on the difference in rates IMO. If you are able, run the numbers and do the math.

We did a 30-year because after mapping it out, we will be $100k ahead in 30 years if we invested the difference in payments along the 30-year timeframe than if we paid more faster through a 15-year schedule and then invested the full payment for the fulling 15 years.

boarder42

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Re: Need help w/ a home buying decision!
« Reply #9 on: July 11, 2014, 09:33:34 AM »
its all in what the buy down at a faster rate gets you.   when i Refi'd from a 20 to a 15% the lower rate and ROI on my higher payments was much better than the market would do.  meaning i gained 600 more equity and only increased my payment 200 a month.  i couldnt take that 200 and turn it into 600 in the market in a month.

Daleth

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Re: Need help w/ a home buying decision!
« Reply #10 on: July 11, 2014, 09:43:42 AM »
Very helpful re: 15-year mortgage. Much appreciated.

The idea of dumping so much money into a non-income-generating asset does seem pretty careless.

It's only non-income generating if you so choose. You could buy a duplex, or look at Craigslist and see how much you could rent out a room in your home for, or go on Air BnB to see what you could get. Presumably the house you're looking at has more bedrooms than you would personally need?

I'm going to throw a wrench in the works and disagree about the 30-year mortgage. It depends on the difference in rates IMO. If you are able, run the numbers and do the math.

We did a 30-year because after mapping it out, we will be $100k ahead in 30 years if we invested the difference in payments along the 30-year timeframe than if we paid more faster through a 15-year schedule and then invested the full payment for the fulling 15 years.

That is a really good point. I also sometimes look at 30y mortgages as insurance--i.e. buy the place, make payments as if you had a 15-yr mortgage (set it up so every extra dollar beyond the 30y mortgage cost goes toward principal), and know that if you hit a lean patch such as being laid off or having health issues, or if you just want the freedom to take some time off (e.g. when you have a new baby or just to have time for an important hobby, or to start a new business), you can fall back to the lower 30y mortgage payments without, of course, losing your house to the bank.
« Last Edit: July 11, 2014, 09:46:40 AM by Daleth »

Baron235

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Re: Need help w/ a home buying decision!
« Reply #11 on: July 11, 2014, 09:57:09 AM »
I would not buy unless you think that it would make investment property later on.  I would not buy if you wanted to live there for a long time.  Too high of a price for you salary.

Also, I would never count unvested RSUs in my net worth, especially 3 years out.  Too much can happen in that time.   I treat it the same as salary since it shows my earning potential.

brandino29

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Re: Need help w/ a home buying decision!
« Reply #12 on: July 11, 2014, 10:23:55 AM »
I agree with the mantra that if you can't afford a 15 year mortgage then you can't afford a house but you should/could still take it over a 30 year term.  There are a number of folks on this forum who would defend taking the longest term mortgage possible, assuming you can get a good rate as long as you take the 'extra' money and put it to good work for you rather than spending it. 

Jack

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Re: Need help w/ a home buying decision!
« Reply #13 on: July 11, 2014, 10:38:15 AM »
First of all, your monthly payment is not $2,365.  That number is for suckers, because only suckers would buy a 30-year mortgage.   Seriously.  A 30-year mortgage is just paying the bank less principal each month so you can have a higher interest rate.  It is the worst invention of all time for personal finance, and the single biggest obstacle to FIRE.  It is going to take you forever to pay that thing off.  So to summarize,

DO NOT GET A THIRTY YEAR MORTGAGE.

I'm going to throw a wrench in the works and disagree about the 30-year mortgage. It depends on the difference in rates IMO. If you are able, run the numbers and do the math.

We did a 30-year because after mapping it out, we will be $100k ahead in 30 years if we invested the difference in payments along the 30-year timeframe than if we paid more faster through a 15-year schedule and then invested the full payment for the fulling 15 years.

Exactly: kallinan is right that you should be able to afford a 15-year mortgage, but you shouldn't actually pick the 15-year mortgage because at today's rates you'd come out ahead by going for a 30-year, not paying extra on the principal, and investing the difference.

That is a really good point. I also sometimes look at 30y mortgages as insurance--i.e. buy the place, make payments as if you had a 15-yr mortgage (set it up so every extra dollar beyond the 30y mortgage cost goes toward principal), and know that if you hit a lean patch such as being laid off or having health issues, or if you just want the freedom to take some time off (e.g. when you have a new baby or just to have time for an important hobby, or to start a new business), you can fall back to the lower 30y mortgage payments without, of course, losing your house to the bank.

You just have to remember that that "insurance" isn't free. Its cost is equal to the spread between the 15-year interest rate and the 30-year interest rate. For example, on a $100,000 mortgage, the cost of paying a 4.5% 30-year as if it were a 15-year would be $765/month while an actual 3.5% 15-year would be $717/month, which means your "insurance" is costing you $48/month.

Frugal D

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Re: Need help w/ a home buying decision!
« Reply #14 on: July 11, 2014, 11:46:46 AM »
Thanks everyone - very helpful.

One thing I didn't mention and for the forum to think on...I put an offer on a similar house last week and although I had the highest offer (per an escalation clause) contingent upon inspection, the seller went with the lower offer who did a pre-inspection the week before. The seller asked me to waive the inspection if I truly wanted the house.

The selling agent of the $575k house in question told me at least 1 buyer has done a pre-inspection and it would probably be necessary if I was serious. All offers are being taken by Saturday at noon at which point a decision will be made.

An agent friend of mine said the last time he saw escalation clauses, pre-inspections, or outright waiving of inspections was in '04-'05 and '98-'99. If that's not a clear indication of another bubble I don't know what is. I'm going to be sitting on the sidelines for a bit and see what happens.

How do markets look in your home towns?


rpr

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Re: Need help w/ a home buying decision!
« Reply #15 on: July 11, 2014, 12:02:06 PM »

That is a really good point. I also sometimes look at 30y mortgages as insurance--i.e. buy the place, make payments as if you had a 15-yr mortgage (set it up so every extra dollar beyond the 30y mortgage cost goes toward principal), and know that if you hit a lean patch such as being laid off or having health issues, or if you just want the freedom to take some time off (e.g. when you have a new baby or just to have time for an important hobby, or to start a new business), you can fall back to the lower 30y mortgage payments without, of course, losing your house to the bank.

You just have to remember that that "insurance" isn't free. Its cost is equal to the spread between the 15-year interest rate and the 30-year interest rate. For example, on a $100,000 mortgage, the cost of paying a 4.5% 30-year as if it were a 15-year would be $765/month while an actual 3.5% 15-year would be $717/month, which means your "insurance" is costing you $48/month.

Jack,
You are correct, this insurance isn't free.  And this is a very important point: The rewards indeed go to those who take the risk of the 15 year commitment. Though I suppose that in the longer term, if people did invest the extra payment into the risky stock market rather than in the safe mortgage, they may come out ahead. But there are no guarantees. The smaller the spread between the 15 year and 30 year, the better the outcome of this gamble begins. Ultimately, one should do what allows one to sleep soundly at night.

DoubleDown

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Re: Need help w/ a home buying decision!
« Reply #16 on: July 11, 2014, 12:32:52 PM »
Thanks everyone - very helpful.

One thing I didn't mention and for the forum to think on...I put an offer on a similar house last week and although I had the highest offer (per an escalation clause) contingent upon inspection, the seller went with the lower offer who did a pre-inspection the week before. The seller asked me to waive the inspection if I truly wanted the house.

The selling agent of the $575k house in question told me at least 1 buyer has done a pre-inspection and it would probably be necessary if I was serious. All offers are being taken by Saturday at noon at which point a decision will be made.

An agent friend of mine said the last time he saw escalation clauses, pre-inspections, or outright waiving of inspections was in '04-'05 and '98-'99. If that's not a clear indication of another bubble I don't know what is. I'm going to be sitting on the sidelines for a bit and see what happens.

How do markets look in your home towns?

You are very wise to insist upon a professional inspection that allows you to back the contract, no matter what. And a seller who takes a lower offer in return for waiving the inspection clause seems to be screaming, "I am hiding a major problem!" Then the buyers will probably be all shocked and indignant when they discover the issue.

It boggles me when markets become so overheated that people are willing to forego inspections, and yes I agree it's probably a sign of a "bubble." But who can say for sure -- your market could just keep going up for the foreseeable future, despite all the inanity with escalation clauses and waiving inspections.

So yeah, don't waive the inspection, it's not worth it. If you can't buy a house without getting an inspection, then don't get a house right now. The only way you should waive an inspection is if you really don't give a damn about the condition of the house, such as if you intend to raze it and rebuild anyhow. Or maybe if the house was valued so low (like, $10,000 - 50,000) that you wouldn't care if you had to sink another $25,000 into it to fix some major problem that is discovered.

Daleth

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Re: Need help w/ a home buying decision!
« Reply #17 on: July 11, 2014, 01:57:42 PM »
You just have to remember that that "insurance" isn't free. Its cost is equal to the spread between the 15-year interest rate and the 30-year interest rate. For example, on a $100,000 mortgage, the cost of paying a 4.5% 30-year as if it were a 15-year would be $765/month while an actual 3.5% 15-year would be $717/month, which means your "insurance" is costing you $48/month.

Yep. That said, I'm not aware of any other way that I can protect myself against losing my house, and thus spare myself the stress of worrying about that while also dealing with whatever job or health crisis comes up, for less than $600/year, nor can I think of ways to turn such a small amount (the less than $600/year) into big money through investments. Obviously there may be creative solutions like renting out a room in the house, but that may not be desirable at the time it's needed--for instance, many would hesitate to do that while they have small kids in the house, and most people would not want to deal with being a landlord to a stranger in the house while they were, for instance, going through chemo and fighting for their lives.
« Last Edit: July 11, 2014, 01:59:45 PM by Daleth »

kallinan

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Re: Need help w/ a home buying decision!
« Reply #18 on: July 11, 2014, 03:15:39 PM »
I'm going to throw a wrench in the works and disagree about the 30-year mortgage. It depends on the difference in rates IMO. If you are able, run the numbers and do the math.

We did a 30-year because after mapping it out, we will be $100k ahead in 30 years if we invested the difference in payments along the 30-year timeframe than if we paid more faster through a 15-year schedule and then invested the full payment for the fulling 15 years.

I totally understand where you're coming from, and you're right about the math.  But something like 98% of average Americans do not overpay on their 30-year mortgages.  That's behavior - not math.  Now, Mustachians are *much* more likely to be in that 2%, but one should take a very long, hard look at oneself before singing up for a 30-year mortgage.  Because if you're not overpaying on it like a 15-yr or 10-yr mortgage, you've just screwed yourself.

I personally sleep better knowing I have a 15-yr fixed.

okashira

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Re: Need help w/ a home buying decision!
« Reply #19 on: July 11, 2014, 03:22:52 PM »
Mustachians don't get a 15 year to pay the house off faster. They get it because of the lower interest.

4.6% is just too high. A 15 year will very much be worth it at that level.

You should question the house purchase as well. How much is insurance? HOA? Property taxes?
All of the above should be extremely low to justify such an expensive home.

Jack

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Re: Need help w/ a home buying decision!
« Reply #20 on: July 11, 2014, 07:23:01 PM »
Because if you're not overpaying on it like a 15-yr or 10-yr mortgage, you've just screwed yourself.

I don't overpay my 30-year mortgage; I put that extra money in index funds instead. I'm not at all screwed, thank you very much!

kallinan

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Re: Need help w/ a home buying decision!
« Reply #21 on: July 11, 2014, 07:28:12 PM »
Because if you're not overpaying on it like a 15-yr or 10-yr mortgage, you've just screwed yourself.

I don't overpay my 30-year mortgage; I put that extra money in index funds instead. I'm not at all screwed, thank you very much!

Same difference.  You're banking it in some way or another - you're not spending it.  And that's all that matters.