Author Topic: Reader Case Study - How much house should we buy?  (Read 4667 times)

OnwardToFIRE

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Reader Case Study - How much house should we buy?
« on: June 27, 2016, 09:39:43 AM »
Life Situation: We are a two-female, unmarried couple filing taxes as single. Weíve been together 6 years. She is 53 and I am 48. We have no dependents, save those with fur and paws, and have no plans to leave money to our nieces and nephews. We live on the west coast in a high cost of living area, renting a modest apartment. I have never owned a home before; she has. I drive a 2005 Mini Cooper with 65,000 miles. She owns a 2004 Jeep Liberty with 170,000 miles.

As for history, I have always been frugal and invested as much as possible. I have lived a ďrice and beansĒ existence with the constant goal of FIRE in my mid-40s (long before I knew the term FIRE.) She, on the other hand, has had an up and down life of earning much or earning little, and often living in some very nice homes and spending freely. When we met, she had just bankrupted due to a business deal gone bad (not her fault) and she had no money. She has bounced back tremendously. She is on board the Mustache Train.


Gross Salary/Wages: Her: $95k Me: $0 (I quit work a year and a half ago.)

Pre-tax deductions: Her: 401k - $24,000

Qualified Dividends & Long Term Capital Gains: Everything is reinvested.

Adjusted Gross Income: $71,000

Taxes: Iím in the lowest tax bracket. Sheís probably at 20%?


Current expenses:

ITEM               TOTAL/MO      TOTAL/ANNUAL
Rent               ($1,795.00)   ($21,540.00)
Water Gas Trash         ($55.00)      ($660.00)
Electricity - SCE         ($55.00)      ($660.00)
Car Insurance/AAA      ($195.00)      ($2,340.00)
Rental Insurance      ($11.00)      ($132.00)
Umbrella insurance      $16.00)      ($192.00)
Car  Tags            ($25.00)      ($300.00)
Car Maintenance         ($100.00)      ($1,200.00)
Car Fuel            ($180.00)      ($2,160.00)
Car Payment         $0.00      $0.00
Food               ($300.00)      ($3,600.00)
Internet (No cable)      ($36.00)      ($432.00)
Cell Phone Plan + Phones   ($48.00)      ($576.00)
Pets               ($100.00)      ($1,200.00)
Healthcare            ($130.00)      ($1,560.00)
Discretionary*         ($450.00)      ($5,400.00)
Christmas            ($33.33)      ($399.96)
Large purchases/vacations   ($200.00)      ($2,400.00)
TOTAL EXPENSES      ($3,729.33)   ($44,751.96)

* Discretionary is for clothes, gifts, eating out, cleaning supplies, toilet paper, etc.

Expected ER expenses: The cost of rent will become the cost of the house. We anticipate needing to replace both cars eventually, but will probably space that out as much as possible. We canít go down to one car because we treat our cars differently. Sheís messy and it makes me crazy.


Assets: We have roughly $1.1M in equities and cash. About half in tax deferred accounts (401ks, IRAs), maybe 15% in tax free (ROTH IRA) and the rest in standard taxable accounts. Allocation is about 5% cash, 95% equity (stock) index funds. Yes, we sleep fine at night and donít need a more conservative allocation.

Pensions/SS: She has a state pension that will pay out about $20k a year when she turns 62. She has a federal pension that will be worth about $5k when she turns 62. We both are eligible for SS, though hers will be truncated by the Windfall Elimination Provision.

Liabilities: We have zero debt. Nothing.

 
Specific Question: HOW MUCH SHOULD WE SPEND ON THE HOUSE?

In two years we will be moving from our high cost of living city to a slightly lower cost of living city in a different state, still on the west coast. At that point we will buy a home. For me this is a first, as mentioned above, and the thought of such a purchase is intimidating, though I know it is the best plan for stabilizing our expenses for the remainder of our lives.

She is more accustomed to the nicer things in life and thinks we should be looking at homes in the low $400s. These are nice homes but hardly extravagant. However, I was thinking more in the $275k - $325k range. This comes with sacrificing better windows, and quality kitchen and bathrooms. I donít mind the idea of redoing these later in our lives. Sheís open to that, but thinks we should start from a higher quality position.

FICO: Iím 805, she is 750. (After her bankruptcy, we nursed her credit back by putting her on all my credit cards. The BK will fall off her credit record in five more years.)

Mortgage Payment Calculator         
Purchase price   $400,000.00       $325,000.00       $275,000.00
Down payment   $80,000.00       $65,000.00       $55,000.00
Interest      4.00%         4.00%         4.00%
Payments      360                360                360
Loan Amount   $320,000.00       $260,000.00       $220,000.00
Payment      ($1,527.73)      ($1,241.28)      ($1,050.31)      
Property Tax (1.5%)   ($500.00)      ($406.25)              ($343.75)
HOA         $0.00          $0.00          $0.00
Maintenance (2%)   ($666.67)      ($541.67)              ($458.33)
Electricity      ($100.00)      ($100.00)      ($100.00)
Water      ($75.00)      ($75.00)      ($75.00)
Gas         ($25.00)      ($25.00)      ($25.00)
Trash         ($50.00)      ($50.00)      ($50.00)
Insurance      ($55.00)      ($55.00)      ($55.00)
         
TOTAL MONTH   ($2,999.40)      ($2,494.20)      ($2,157.40)
TOTAL ANNUAL   ($35,992.75)      ($29,930.36)      ($25,888.76)

Jobs: She canít sit still, so I anticipate her getting a job after we move, though at times she thinks the retired life wouldnít be half bad. I never want to work another day. If I can sit in the garden with the dog and strum my guitar, Iíd be happy as a clam.

Inheritances: I know this is blasphemy in the MMM world, as nothing is certain, but it is at least possible she will inherit half a home that would be worth about $400k in the next five years. (Her sister gets the other half. The house will be sold.) It is also extremely likely I will inherit >$500k in equities within the next 10 years. My inheritance is far more likely, but feel free to ignore both if it goes against your philosophy.

Conflict: I certainly donít mind her having the nice home she envisions for herself, but I donít want to lose sleep over it, nor do I want to go back into the nine to five grind to pay for it. It seems foolish to buy something fancy only so no one can ever be home to enjoy it. Plus Iíve got some medical issues, and Iíd rather be put out to pasture at this point in my life. Moo.

Extra bits:
   ⁃   We arenít interested in a lower cost of living area.
   ⁃   We are two women in their 50s, which means high-earning employment is questionable despite our education and experience. She makes good money now as a professor, but Iím not sure a lucrative option will be available for her through to retirement.
   ⁃   We buy new cars and drive the wheels off of them. We donít do cheap clunkers.


So Mustachians, how much would you spend on the house if you were us?

lhamo

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Re: Reader Case Study - How much house should we buy?
« Reply #1 on: June 27, 2016, 11:09:57 AM »
Disclaimer:  I have a frenemy I call my Inner Bag Lady who follows me around everywhere, so I tend to be ultra conservative when it comes to such decisions.  So, with that caveat, I would suggest spending more on the lower end of your stated range when you first move.  Wait and see what happens with both your expenses (budgets change over time, especially as you are adapting to a new stage in life (retirement) and a new location), and with your potential inheritances.  If/when the latter come through, or if you look at your overall financial picture and everything seems great, you can consider an upgrade in house.  Maybe hang on to the first place as a rental for awhile, if you are interested in that.

Mother Fussbudget

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Re: Reader Case Study - How much house should we buy?
« Reply #2 on: June 27, 2016, 11:21:38 AM »
Disclaimer:  I have a frenemy I call my Inner Bag Lady who follows me around everywhere, so I tend to be ultra conservative when it comes to such decisions.  So, with that caveat, I would suggest spending more on the lower end of your stated range when you first move.  Wait and see what happens with both your expenses (budgets change over time, especially as you are adapting to a new stage in life (retirement) and a new location), and with your potential inheritances.  If/when the latter come through, or if you look at your overall financial picture and everything seems great, you can consider an upgrade in house.  Maybe hang on to the first place as a rental for awhile, if you are interested in that.
+1 - completely agree. 

When buying your LOWER END place, buy with an eye toward what upgrades could be made to improve it's usability, rentability, and/or resale value (think open floor plan + re-do kitchen & bathrooms). 

Doing a quick back-of-the-spreadsheet calculation, adding your housing expenses to other expenses, you're close to your FIRE goal today.  If one of those inheritances becomes a reality, you're absolutely there.  If you buy at the low end, you're within $120K of your FIRE number.  At the upper end, you're within ~$373K.  And keep in mind your expenses will probably be lower in FIRE - no 'work wardrobe', etc.

The one thing I don't see, but seems implied (guitar, garden...) is what are the intangibles you need from a house? 
Do you want to garden?  Do you want to knock down walls and put in a home theater/hot-tub room (or freedom to 'paint walls')? 
Also... what do you want to *do* in FIRE?  Volunteer?  Travel?  Will you rent the house via AirBnB when traveling?  Do you want the overhead of lawn mowing?  Would a rental make more sense?   All questions that no one can answer for you.

Bottom line:  your finances look good.  You can 'retire' (or as I say "go on that long sabbatical") whenever you want to pull the trigger.
Best of luck!


OnwardToFIRE

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Re: Reader Case Study - How much house should we buy?
« Reply #3 on: June 27, 2016, 11:42:08 AM »
Disclaimer:  I have a frenemy I call my Inner Bag Lady who follows me around everywhere, so I tend to be ultra conservative when it comes to such decisions.  So, with that caveat, I would suggest spending more on the lower end of your stated range when you first move.  Wait and see what happens with both your expenses (budgets change over time, especially as you are adapting to a new stage in life (retirement) and a new location), and with your potential inheritances.  If/when the latter come through, or if you look at your overall financial picture and everything seems great, you can consider an upgrade in house.  Maybe hang on to the first place as a rental for awhile, if you are interested in that.

Thank you for the response, and I'm totally stealing that "Inner Bag Lady" concept. This is good advice, though I cringe at the thought of buying only to sell and buy again years down the road. Maybe that's silly, but I was just so hopeful about putting down roots after being an apartment dweller my whole life.

Mongoose

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Re: Reader Case Study - How much house should we buy?
« Reply #4 on: June 27, 2016, 11:43:34 AM »
We bought at the lower end of our price range and I would definitely suggest that. Our life situations are not similar (young kids; not interested in living in this location long term) but I think the lower stress of low housing costs probably applies to most people.

Are either of you handy or interested in becoming so? I ask because we bought a house that would've been at the upper end of our price range if it had been remodeled. The biggest "problem" was no dishwasher and we remodeled our kitchen to add one for around $3500. We also total redid a bathroom for about $1500. I was surprised at how easy things were to do (had never done any building/remodeling before...it's actually kinda fun!). Our house was $40,000 less than a more "modern" comparable one.
« Last Edit: June 27, 2016, 11:45:55 AM by Mongoose »

OnwardToFIRE

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Re: Reader Case Study - How much house should we buy?
« Reply #5 on: June 27, 2016, 11:48:45 AM »

The one thing I don't see, but seems implied (guitar, garden...) is what are the intangibles you need from a house? 
Do you want to garden?  Do you want to knock down walls and put in a home theater/hot-tub room (or freedom to 'paint walls')? 
Also... what do you want to *do* in FIRE?  Volunteer?  Travel?  Will you rent the house via AirBnB when traveling?  Do you want the overhead of lawn mowing?  Would a rental make more sense?   All questions that no one can answer for you...

Thank you for your input. Just to answer your (most likely rhetorical) questions, I'd say the garden is important, more for her than me, but having space outdoors seems like a luxury we would both enjoy. Other than that, I don't think our list is too crazy for the house. A fireplace. Perhaps a built-in cat. Who knows.

As for what to do in retirement, I can't help but think how lovely it would be to sit and read without one eye on the clock. :)

Thanks again. Take care.



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Re: Reader Case Study - How much house should we buy?
« Reply #6 on: June 27, 2016, 11:52:22 AM »
We bought at the lower end of our price range and I would definitely suggest that. Our life situations are not similar (young kids; not interested in living in this location long term) but I think the lower stress of low housing costs probably applies to most people.

Are either of you handy or interested in becoming so? I ask because we bought a house that would've been at the upper end of our price range if it had been remodeled. The biggest "problem" was no dishwasher and we remodeled our kitchen to add one for around $3500. We also total redid a bathroom for about $1500. I was surprised at how easy things were to do (had never done any building/remodeling before...it's actually kinda fun!). Our house was $40,000 less than a more "modern" comparable one.

Actually we are both pretty handy, always willing to go to Home Depot for tools and take on a new project. I would happily take on a "fixer-upper" to challenge our skills and do things our way. I'll just have to convince her of that path. Luckily she has flipped property in the past and isn't afraid of getting dirty. And hey, if it saves us big money...

Sailor Sam

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Re: Reader Case Study - How much house should we buy?
« Reply #7 on: June 27, 2016, 11:55:22 AM »
I'm also fiscially conservative regarding debt. If your situation was mine, I would buy on the lower end of affordability, then save and pay cash for any updates I might desire.

Full frontal honesty, I also wouldn't buy a house with someone I wasn't married to. This isn't a value judgement towards you, it's simply a headache I don't want to worry about. If non-married house ownership is what you want, then by god, go forth and buy! Just make sure you have a concrete plan in place to split the cost, and the equity. There are lots agruments against 50/50, especially for the higher earner. It could circumvent a lot of deep unpleasantness to have a solid framework in place.

OnwardToFIRE

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Re: Reader Case Study - How much house should we buy?
« Reply #8 on: June 27, 2016, 12:39:03 PM »
I'm also fiscially conservative regarding debt. If your situation was mine, I would buy on the lower end of affordability, then save and pay cash for any updates I might desire.

Full frontal honesty, I also wouldn't buy a house with someone I wasn't married to. This isn't a value judgement towards you, it's simply a headache I don't want to worry about. If non-married house ownership is what you want, then by god, go forth and buy! Just make sure you have a concrete plan in place to split the cost, and the equity. There are lots agruments against 50/50, especially for the higher earner. It could circumvent a lot of deep unpleasantness to have a solid framework in place.

I totally hear you and I would be saying the exact same thing to a young couple, no matter how certain they are about their relationship. I'm not going to pretend we're all kinds of special and not prone to the same issues as everyone else. We're a little older and hopefully a little wiser, but there are no guarantees.

So now that we can marry (thank you Supreme Court), we'll certainly talk about it. There are clearly pluses and minuses, but thankfully we're pretty logical and will make a decision on that soon. Thanks for your feedback.

mozar

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Re: Reader Case Study - How much house should we buy?
« Reply #9 on: June 27, 2016, 01:20:08 PM »
I would get married.  Your going to want to have access to her pension if anything happens to her, and if you buy a house and sell you get to exclude more capital gains. It's a no brainer imo. There's no reason to give up those delicious tax benefits :-)

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Re: Reader Case Study - How much house should we buy?
« Reply #10 on: June 27, 2016, 11:13:52 PM »
1. Getting married should never be a financial decision... but if you do, and you have zero income, then together you'll pay less in income tax. I also agree that buying a house with someone other than a spouse is asking for a messy headache.

2. Getting a 30 year mortgage when you don't plan to work for 30 years doesn't make a lot of sense to me. If you can have it paid off by the time she retires, then your monthly expenses will plummet and given you much more flexibility. Plus, interest will be lower on a 10 or 15-year loan.

3. #2 might mean getting a smaller house, but as someone who bought too much house I'm now a little remorseful when it's time to clean or when I see each utility bill.

pbkmaine

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Re: Reader Case Study - How much house should we buy?
« Reply #11 on: June 27, 2016, 11:49:29 PM »
Why buy right away? Wouldn't you want to rent in the area for a year or two and get to know the neighborhoods? If she can't sit still, are you sure you will even stay in one place?

As far as marriage goes, it gives you both many rights, access to her pension being only one of them. I agree with others that this needs discussing.

I hear you on the separate cars. I was so freaking tired of cleaning food wrappers and granola bar crumbs out of his Ford Escape that I bought a used Smart car.

LAL

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Re: Reader Case Study - How much house should we buy?
« Reply #12 on: June 28, 2016, 12:58:20 AM »
Get married.  And rent when you first move. What happens if you hate it and want to move back to High cost of living area? It happens all the time to retirees.

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Re: Reader Case Study - How much house should we buy?
« Reply #13 on: June 28, 2016, 07:15:12 AM »
1. Getting married should never be a financial decision... but if you do, and you have zero income, then together you'll pay less in income tax. I also agree that buying a house with someone other than a spouse is asking for a messy headache.

2. Getting a 30 year mortgage when you don't plan to work for 30 years doesn't make a lot of sense to me. If you can have it paid off by the time she retires, then your monthly expenses will plummet and given you much more flexibility. Plus, interest will be lower on a 10 or 15-year loan.

3. #2 might mean getting a smaller house, but as someone who bought too much house I'm now a little remorseful when it's time to clean or when I see each utility bill.

You know, it's funny you mention cleaning (and general upkeep, maintenance, heating, cooling, etc.) I adore the idea of a little house for pure simplicity. We are two little women. How much space do we really need?

As far as paying the house off in 10 or 15 years, I like the option. I've always been of the mind, however, that money tied up in a primary residence is not working for me like it would if it is in the stock market. I think it may come down to how well I can sleep at night with a mortgage above my head. Thank you for replying.

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Re: Reader Case Study - How much house should we buy?
« Reply #14 on: June 28, 2016, 07:31:14 AM »
I agree about getting married before buying a home together.   Then you will both have some protection if the relationship does not work, and you have some protection if anything happens to the other person.

Otherwise, one person should buy a home that they can afford independently.   

If you are not married, your partner has the job and the income so I think she should buy the house, and then she has more of the say in the budget.  I would encourage her to spend less, because getting an affordable home gives you much more ability to have a stable and easy life than to stress over payments.

Take your time looking for a home.  How much does she available for a down payment right now?  Consider what she has on hand to put down, while still maintaining an emergency fund.

Hope that helps. Good luck with it!

I agree about renting at first if you are changing cities to get a feel for what you're getting into. 
« Last Edit: June 28, 2016, 07:34:27 AM by KBecks »

boarder42

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Re: Reader Case Study - How much house should we buy?
« Reply #15 on: June 28, 2016, 07:48:12 AM »
1. Getting married should never be a financial decision... but if you do, and you have zero income, then together you'll pay less in income tax. I also agree that buying a house with someone other than a spouse is asking for a messy headache.

2. Getting a 30 year mortgage when you don't plan to work for 30 years doesn't make a lot of sense to me. If you can have it paid off by the time she retires, then your monthly expenses will plummet and given you much more flexibility. Plus, interest will be lower on a 10 or 15-year loan.

3. #2 might mean getting a smaller house, but as someone who bought too much house I'm now a little remorseful when it's time to clean or when I see each utility bill.

You know, it's funny you mention cleaning (and general upkeep, maintenance, heating, cooling, etc.) I adore the idea of a little house for pure simplicity. We are two little women. How much space do we really need?

As far as paying the house off in 10 or 15 years, I like the option. I've always been of the mind, however, that money tied up in a primary residence is not working for me like it would if it is in the stock market. I think it may come down to how well I can sleep at night with a mortgage above my head. Thank you for replying.

you are very correct in not wanting to pay down your mortgage faster.  its safer to not do this for many reasons.

1. its an inflation hedge
2. if your income stream ever stops you have cash on hand to pay down

its financially safer historically to carry low interest fixed debt in FIRE vs having paid it down. 

a person with 1.2MM in the bank and a 200k mortgage spending 40k per year is 2% more likely to be successful historically when making your money last forever. carrying a 350k mortgage in retirement while having 1.35MM in the bank makes you 5% more likley to be successful than the person who has 1MM and a paid off house spending the same annually.

so your gut to keep it in the market is right .. .there are many here who make the emotional decision to pay down low interest debt but if your gut says go the other way the math says you're right.

OnwardToFIRE

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Re: Reader Case Study - How much house should we buy?
« Reply #16 on: June 28, 2016, 09:51:24 AM »
Some folks have mentioned renting a place rather than buying, and I hear you. It's certainly an option. However, I don't think it will work for us.

1) We know the city well and have traveled there many times. We also have friends in the area. Though it's not the same as living there, I think we know the good and bad, and can make a logical decision.

2) I've lived in rentals for the past 27 years. The thought of living with institutional yellow walls and a permanently running toilet for another year makes me want to slit my wrists. And I'm not being hyperbolic.

3) The good lending rates can't last forever. I know they are being used to falsely prop up this recession, but they will eventually change. Borrowing at a higher interest rate when I could have locked in unprecedented lows seems unwise.

4) We just aren't "kick the can down the road" people. We don't mind making a decision and assessing it later, correcting the course as necessary. We don't believe there is a right decision, only making your decisions right. If you want that cross stitched on a pillow, let me know.


LAL

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Re: Reader Case Study - How much house should we buy?
« Reply #17 on: June 29, 2016, 09:10:05 AM »
Have you decided on an area in the city to buy?  Will you be completely retired or working still?  Who cares about a mortgage rates if you are going to pay cash?  How do you know where prices will be in 2 years?

frugaliknowit

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Re: Reader Case Study - How much house should we buy?
« Reply #18 on: June 29, 2016, 10:19:34 AM »
No disrespect at all to your relationship (I happen to be gay):

You keep saying "we".

You either need to marry, become legal domestic partners (assuming you are not already) and or have an attorney draft a partnership agreement, even if you don't buy a house.  Don't just go with "unsaid".  Best of luck to you and your partner. 
« Last Edit: June 29, 2016, 10:21:36 AM by frugaliknowit »

FIKristen

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Re: Reader Case Study - How much house should we buy?
« Reply #19 on: June 29, 2016, 10:35:01 AM »
The initial price of the house is not the only factor.   You might actually get a better overall deal paying slightly more, if the ongoing expenses are lower. You seem super on top of your finances: In addition to the mortgage principal and interest, I'm sure you'll add up the expected costs of property taxes, insurance, water, sewer, electricity/gas, trash & recycling, maintenance, landscaping, and commuting based on the home's location.   You may find that that $300k "deal" of a house costs more than the 350k house projected out over the entire time you live in it.   

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Re: Reader Case Study - How much house should we buy?
« Reply #20 on: June 29, 2016, 01:49:22 PM »
Have you decided on an area in the city to buy?  Will you be completely retired or working still?  Who cares about a mortgage rates if you are going to pay cash?  How do you know where prices will be in 2 years?

1) Yes, we have decided on a general area to buy in.

2) We will still be working, or at least she will. I would like to maintain some cash coming in as long as we can with everyone being happy and healthy.

3) We won't be paying cash. We will have a 20% down payment. I believe in keeping our money working for us.

4) We don't know where prices will be in two years, but the past three years in this area have seen increases. I don't anticipate another housing bubble.

OnwardToFIRE

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Re: Reader Case Study - How much house should we buy?
« Reply #21 on: June 29, 2016, 01:51:07 PM »
No disrespect at all to your relationship (I happen to be gay):

You keep saying "we".

You either need to marry, become legal domestic partners (assuming you are not already) and or have an attorney draft a partnership agreement, even if you don't buy a house.  Don't just go with "unsaid".  Best of luck to you and your partner.

I'm sensing the urgency on this matter. I'm waiting for someone with a shotgun and a preacher to show up at my doorstep.

OnwardToFIRE

  • 5 O'Clock Shadow
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  • In the end, only kindness matters.
Re: Reader Case Study - How much house should we buy?
« Reply #22 on: June 29, 2016, 01:52:28 PM »
The initial price of the house is not the only factor.   You might actually get a better overall deal paying slightly more, if the ongoing expenses are lower. You seem super on top of your finances: In addition to the mortgage principal and interest, I'm sure you'll add up the expected costs of property taxes, insurance, water, sewer, electricity/gas, trash & recycling, maintenance, landscaping, and commuting based on the home's location.   You may find that that $300k "deal" of a house costs more than the 350k house projected out over the entire time you live in it.

Good advice. Thank you for the reminder to get all the details down.