Should we have bought this house?

[NattyAnn]

Just passed on buying a house, and I'm curious what folks here think.

We were anxious to buy because we've started to get the impression that the Denver real estate "bubble" is not a bubble. Its just the new reality. So many people are moving here now from the Bay Area (with TONS of money), and its just getting outrageous. For example, we lost out on two houses before we found this one, to people with higher offers than us.... oh, and they were ALL CASH OFFERS! On houses >$700k! These houses were only on the market for 2 days! We feel worried that if we don't buy now, we'll be priced out forever. :(

The house we wanted to buy (aka big house) was $740k, and we could rent out the basement for $1k a month. It was in our ideal neighborhood; practically downtown Denver, walking distance to everything, on frequent bus lines, near bike lanes & paths, great schools. It was double the size of our current house (aka small house), but not crazy big. (Small house is 900 sqft, big house was 2000 sqft.) Monthly obligation would have been about $3,400 (including taxes and insurance), with mortgage rate of 4.5%, and a starting mortgage balance of $572k.

We'd planned on buying the big house, and renting out both the basement and the small house. Small house is on a 15 yr mortgage, w/ a $1k/month obligation. We could easily rent it at $1.5k/month. There is a ton of new redevelopment going on in our area, so we wanted to hang onto the house for a few more years, because we anticipate we'd get a better return once more of the new infrastructure is already built.

A couple notes about our finances:

• $10k/month after tax take home pay
• Small house mortgage is $1k/month
• Daycare bill is $1,785/month
• All other expenses are $500-$1k/month
• 401ks/Roth IRAs are maxed, and everything else goes into mutual funds
• We have no debt other than our small house $107k mortgage
• We have about $200k in equity on the small house
• We have enough to cover 20% down on the big house, earnest money, closing costs, etc without having to sell the small house (but it would nearly wipe us out of our taxable investments

We did the math multiple times, and felt we had several backup plans if things went south. We could always move back to the small house after a year, if the big house was too much. We could sell the small house and roll the profit into the massive big house mortgage. We could cover the cost of both mortgages if we had no renters.

However, as soon as we went under contract, we started regretting it. We felt sick and were sleepless at night, thinking about being obligated to pay $3,400 for the next 30 YEARS. The thought of being IN DEBT for OVER HALF A MILLION dollars felt completely insane and reckless, not to mention holding 2 mortgages. And, as the higher salaried partner, I felt for the first time the pressure of being a "breadwinner". We can support our current lifestyle on either one of our salaries, but if we bought the big house, we couldn't support ourselves for long if I lost my job (and we had no renters). (This exact thing actually happened to my parents, so I've always been afraid of that kind of leverage.)

After a few days we terminated the contract. A huge weight was lifted off our shoulders.  Sheer terror and dread are gone (yay!), but have now been placed with a melancholy sadness. The house was great in so many ways!

So I'm wondering if it wasn't really *that* bad of a financial leverage... Maybe it just felt that way because we've been living so frugally for the past 10+ years? Maybe I'm hyper sensitive because my parents never quite recovered when things went south for them in a similar situation?

Or perhaps buying the house really would have been an awful idea? Cashing out almost all of our taxable investments and putting them into the house, and being over half a million in debt felt pretty darn dumb.  Also maybe we are suffering from Tiny Details Exaggeration Syndrome? Our current house is still in Denver proper, 25 minute bike ride into city center, and we only use our car on the weekends. We've got a double lot so we can build an addition if we want more space.

On the other hand, the schools are pretty bad in our current neighborhood, and I'd love to have a long term home that's in an extremely walkable area in Denver.

Anyway, is it face-punchy to have a mortgage over half a million? Is it face-punchy to have terminated the contract?

[affordablehousing]

Preparing to make the same sort of decisions myself. It is scary but you just have to go for it. The situation did sound ideal. But don't beat yourself up over it. When you get into whatever you buy, you'll make it work because it's YOUR house.

That said, you should trust your gut, and do what lets you sleep well at night.

[jlcnuke]

34% of your monthly income for just PITI? I'd say NOPE, that's pushing being house-poor.

[MyCircus, MyMonkeys]

We are sort-of in the same situation. Except, we bought the big house and kept our small one as a rental. We've been lucky that there has been very little vacancy (usually 2-3 weeks in between tenants). As the primary breadwinner, I feel the same pressure every day. I've regretted buying our big house since about a year after we bought it. Sleepless nights are no fun. Like you, all our scenarios say we can afford both. Unless I lose my job. I'm not planning on losing my job; but I have no control over corporate decisions. 

Now, we are selling our big house because the market is so good- and because I need to relieve my incessant worrying over finances (and we doing better than 90% of the population. But not as good as dedicated mustachians). We are taking our profits from selling and investing them. We are also moving back into our small house.

So, I agree with Affordable Housing. Do what lets you sleep at night, regardless of the crazy housing market right now.

[NattyAnn]

Thanks for the responses, everyone!

Yeah, jlcnuke, that's what I was kind of feeling... There wouldn't be much wiggle room at all.

Thanks for the kind words, affordablehousing. You are totally right, we need to do what helps us sleep well at night. If anything, at least this has demonstrated to us what keeps us up at night, so we can avoid that in the future 😆

Oh wow, MyCircus,MyMonkeys, congrats! Yeah, the pressure I felt over the past view days was a good taste of what ordinary people must feel everyday. Its been a very long time since I've felt that daily financial panic of "needing" to have a job to cover my explicit commitments. It was a great reminder of how amazing it is to have financial peace of mind.

The more time goes on, the less sad I feel about the situation. I'm at peace with our decision, but it is kind of sad to think I might not ever end up buying a house like that, even if I could "afford" it. I've spent so long living frugally and marveling at the rapid pace of my networth, that I feel totally loaded. Relative to most people I know, I'm like "damn we are rich!" It was definitely a humble experience, to realize that maybe I'm not as loaded as I thought I was. We are doing amazing compared to most, for sure, but I'm not able to comfortably drop that much on a house.

[englishteacheralex]

We are in a crazy real estate market--Honolulu--and we have resisted buying a 900k+ house (that's about how much a decent house in our neighborhood costs) because we're conservative with our money and we know ourselves well. Our social circle includes many couples who have enormous mortgages, and they probably have salaries that are commensurate with our own.

We bought a 3/2/2, 850 square foot condo for 364k in 2015. The HOA fee is $633/month. It's not a fancy condo (Honolulu is pricey!) but it meets our needs (we're a family of four; two adults and two toddlers). We go to house parties almost every weekend and frequently feel a little out of step with our peers.

But...our 30 year mortgage + HOA fees comes to a monthly expense that is right around 25% of our take home pay. It's low enough that if I wanted to stay home with our kids, we could swing it. We are able to bank almost my entire salary. That is an enormous weight off our shoulders. Most of our friends are in mortgage territory where a job loss for more than a few months would equate losing their homes.  They cannot afford to not work.

In the end, we value our freedom over having a larger home. It's a trade off. We figure if we ever get to the point where we can't stand the condo anymore, we could always rent it out to stay diversified and then go and rent a SFH for a few years while the kids are bigger. The rents on a $900k+ property in our neighborhood look to be around 2800-3300/month. That's a lot less than the mortgage would be on that property.

[robartsd]

Anyway, is it face-punchy to have a mortgage over half a million?

I wouldn't have face-punched you for buying the big house - it does sound like you could afford it.

Is it face-punchy to have terminated the contract?

Absolutely not.

[Kathryn K.]

... It was in our ideal neighborhood; practically downtown Denver, walking distance to everything, on frequent bus lines, near bike lanes & paths, great schools. ...
On the other hand, the schools are pretty bad in our current neighborhood, and I'd love to have a long term home that's in an extremely walkable area in Denver.

My only concern about you giving up the "big house" is what are your long-term plans for school for your kid(s)? It's sounds like they are preschool age now but it will be coming up quickly that they are in school. When you say the schools are pretty bad in your current neighborhood, would you be comfortable in sending your child there? If not, what are your plans for their schooling and how does that compare to the cost of the house?  Being in a downtown walkable area AND having good public schools will likely be $$$$.

[Easye418]

Just curious, how old are you?

Housing is a touchy topic on this board, I think it is one of the most subjective thing that nobody agrees on "How much house?", it just varies so much based on so many different things.

Go with your gut.

Personally, I would dump the small house, roll the $200K equity into the $572K.  This essentially is your down payment.  Even if you didn't terminate your contract, you could have just sold the place and had your lender recast your mortgage, which is essentially starting your loan over at 30 years, same % rate.

[AMandM]

If I'm reading you right, your housing obligations would have increased by $3400, but your income would have increased by $2500 of rent.  Hmmm. I think I might have gone for it, if I didn't mind being a landlord.  But it's definitely in the flinch zone, and being able to sleep at night counts for a lot, so no face punches from me for passing.

[lizzzi]

I think you made the right decision. Being sick and unable to sleep at night was a huge signpost flashing in neon, "Don't buy this big house." Could you "afford" it financially?  Yeah, it sounds like you could if you wanted to--based on what a loan officer would tell you.  But you know what? You held onto your freedom--your flexibility--your ability to say FU to the world and do whatever you want to--because you own yourself--the bank doesn't own you. You did not leverage your finances to the hilt and turn yourself into a wage slave.

You can figure out the kids' school issues later. Probably you have the money to send them to good, private schools. (Just a thought.)

[NattyAnn]

Whoa, englishteacheralex, that is a high cost of living area. I would definitely want financial peace of mind in an environment like that.

Thanks, robartsd! :D

[NattyAnn]

My only concern about you giving up the "big house" is what are your long-term plans for school for your kid(s)? It's sounds like they are preschool age now but it will be coming up quickly that they are in school. When you say the schools are pretty bad in your current neighborhood, would you be comfortable in sending your child there? If not, what are your plans for their schooling and how does that compare to the cost of the house?  Being in a downtown walkable area AND having good public schools will likely be $$$$.

Good point, Kathryn K.!  Currently we have just 1 kiddo (and want 1 or 2 more as well). He just turned 1 year old, so we've got a few years before he goes into school.  I think I might be comfortable sending him to our neighborhood school, but I'm not sure. From the research I've done, the school performs pretty low on testing, but the teachers get great reviews from the parents & community. Most of the students are learning English as a second language, so that could be part of the low test scores.

If we decide to not send him there, we still have some public school options. We can "open enroll", which means, we pick our top 5 public schools in Denver, and he can get picked to go to one of them via a lottery system.  Most people who do this get into at least one of the schools on their list. So its a gamble, but at least there is an option. One downside to this is that we might end up at a school that's a bit far from our house.

[NattyAnn]

Just curious, how old are you?

Housing is a touchy topic on this board, I think it is one of the most subjective thing that nobody agrees on "How much house?", it just varies so much based on so many different things.

Go with your gut.

Personally, I would dump the small house, roll the $200K equity into the $572K.  This essentially is your down payment.  Even if you didn't terminate your contract, you could have just sold the place and had your lender recast your mortgage, which is essentially starting your loan over at 30 years, same % rate.

I'm 31.

I'd never heard of recasting a mortgage, so I just looked it up. That sounds really neat, thanks for the tip!

The more I think about this, the more I think I'd probably be ready to do all of this in a year or two...  Its a great plan, but we might have just been jumping in on it a little early.

[NattyAnn]

If I'm reading you right, your housing obligations would have increased by $3400, but your income would have increased by $2500 of rent.  Hmmm. I think I might have gone for it, if I didn't mind being a landlord.  But it's definitely in the flinch zone, and being able to sleep at night counts for a lot, so no face punches from me for passing.

Thanks for no face punches! :D

...if I didn't mind being a landlord...

This is is a great comment, and another reason I was nervous.... we've never been landlords! And with this plan, we'd suddenly be landlords to two separate parties. Not sure how I'd feel about that. My partner and I are already so busy w/ our full time jobs (that we love) and baby.  We weren't sure where the extra time was going to come from.  We ultimately agreed to initially hire a property manager.  Of course, that has the tradeoff of not getting as much money from the renters into my bank account...

[NattyAnn]

I think you made the right decision. Being sick and unable to sleep at night was a huge signpost flashing in neon, "Don't buy this big house." Could you "afford" it financially?  Yeah, it sounds like you could if you wanted to--based on what a loan officer would tell you.  But you know what? You held onto your freedom--your flexibility--your ability to say FU to the world and do whatever you want to--because you own yourself--the bank doesn't own you. You did not leverage your finances to the hilt and turn yourself into a wage slave.

You can figure out the kids' school issues later. Probably you have the money to send them to good, private schools. (Just a thought.)

Thanks lizzzi!  YES, exactly! It has been so long since I haven't had that "ability to say FU".  Once you get a taste of that kind of freedom, its not easy or desirable to give it up!

Totally... he just turned 1 so I think we have time to figure it out. :D

[frugaliknowit]

I think keeping the smaller house while buying the bigger one is very aggressive and for me personally in your situation, not worth the risk and stress.  The equity in the smaller house could have either been used toward the new house or invested in your portfolio.

[Dicey]

I think keeping the smaller house while buying the bigger one is very aggressive and for me personally in your situation, not worth the risk and stress.  The equity in the smaller house could have either been used toward the new house or invested in your portfolio.

Though this is a classic strategy for getting a foothold in the rental business, if one is so inclined. And many people on the path to FIRE are. Many already FIRE people, too.

[ChpBstrd]

Good gawd why do people in HCOL areas narrow their options so much? If your city offers you a choice between living in a walk-in closet in a rough neighborhood or carrying a half-million in wealth-crushing debt on speculative real estate, just do what you'd do if you saw a bad deal in a store. Shop elsewhere. Unless you shop/live elsewhere, you get the bad deal. Expand your options. HCOL lifestyles are a luxury, not a necessity.

Yes, your salary would drop dramatically if you lived in Colorado Springs, or Kansas City, but your housing costs would make up for the difference and allow for a higher savings rate. Plug your info into Salary.com and swap locations, then look up the housing cost difference. Result: better deals, less risk, earlier FIRE, still no mega-commute. Plus you can sleep better knowing you won't lose a quarter million in equity when mortgage rates get back up to 6-7% or the economy goes into recession.

Your situation sounds untenable to me, but I want it all and don't give up :). There's no need for you to accept a bad deal either. Good luck shopping!

[NattyAnn]

Good gawd why do people in HCOL areas narrow their options so much? If your city offers you a choice between living in a walk-in closet in a rough neighborhood or carrying a half-million in wealth-crushing debt on speculative real estate, just do what you'd do if you saw a bad deal in a store. Shop elsewhere. Unless you shop/live elsewhere, you get the bad deal. Expand your options. HCOL lifestyles are a luxury, not a necessity.

Yes, your salary would drop dramatically if you lived in Colorado Springs, or Kansas City, but your housing costs would make up for the difference and allow for a higher savings rate. Plug your info into Salary.com and swap locations, then look up the housing cost difference. Result: better deals, less risk, earlier FIRE, still no mega-commute. Plus you can sleep better knowing you won't lose a quarter million in equity when mortgage rates get back up to 6-7% or the economy goes into recession.

Your situation sounds untenable to me, but I want it all and don't give up :). There's no need for you to accept a bad deal either. Good luck shopping!

For what its worth, I don't think our current house classifies as "a walk-in closet"; 900 sqft is pretty spacious to me.  I also may have misrepresented our neighborhood; its definitely not dangerous (which is the connotation I get from "rough"). Its just on the poor side.

You've got valid points about how to shop around for lower cost of living areas. Life certainly is a trade-off between wants and needs. All I really need is food and a roof over my and my baby's heads. There are plenty of places outside of Denver I could get that for way cheaper. 

But I'm 100% not interested in leaving Denver right now.

We have lots of solid professional connections here (for jobs we love), and both our industries have strong representation. We love being so close to the mountains, and take super low-cost day trips / hikes. Most importantly to me, we are a few minutes from tons of family on both sides (we grew up here). Grandparents, great grandparents, aunts, uncles, siblings, cousins... its awesome to get to see everyone so often, and not have to travel with the rest of America over the holidays.

I personally would never trade proximity to family for more money.

The great news is, I already have all these things ^^ with our current small house, and still can manage a very high savings rate. :D

I'm the first to recognize that the big house would have basically been pure wants. Slight upgrades in our lifestyle because we could.

[Easye418]

Just curious, how old are you?

Housing is a touchy topic on this board, I think it is one of the most subjective thing that nobody agrees on "How much house?", it just varies so much based on so many different things.

Go with your gut.

Personally, I would dump the small house, roll the $200K equity into the $572K.  This essentially is your down payment.  Even if you didn't terminate your contract, you could have just sold the place and had your lender recast your mortgage, which is essentially starting your loan over at 30 years, same % rate.

I'm 31.

I'd never heard of recasting a mortgage, so I just looked it up. That sounds really neat, thanks for the tip!

The more I think about this, the more I think I'd probably be ready to do all of this in a year or two...  Its a great plan, but we might have just been jumping in on it a little early.

Yeah, not many people really know about it, not many lenders advertise it (not sure if all of them allow it),  I think it could be used it good ways though ie putting down lump sums to bring mortgage payments to more reasonable. 

[Finallyunderstand]

I didn't read through all the comments but wanted to add my thoughts.

My wife and I live way under our budget in a paid off house.  I'm a realtor so basically make my own schedule which can contribute to my flexibility obviously but my story can hold true for anyone else if it can mean working part time.

  Today was an absolutely gorgeous weather day so I decided to skip some office work in the morning and go to the park with my wife and kids.  While there I noticed zero other dads.  It was all moms and grandparents.  That moment gave me affirmation we are continually making the right choices in regards to how much we save and how little we spend.  I spent the morning going down slides and crawling through tunnels with my sons instead of worrying about how I'm going to make my next monster mortgage payment.  Other dads may be stuck behind a desk, traveling for work, etc while I was able to be a kid with my kids. Those memories are worth more than another couple thousand square feet of living space.

[robartsd]

Personally, I would dump the small house, roll the $200K equity into the $572K.  This essentially is your down payment.  Even if you didn't terminate your contract, you could have just sold the place and had your lender recast your mortgage, which is essentially starting your loan over at 30 years, same % rate.

Recasting isn't quite starting over at 30 years as it doesn't alter the original term of the loan. It simply adjusts the required payments lower to a account for principle that was paid off early so that the required payments no longer result in the loan being paid in full before the full term of the loan.

[Easye418]

Personally, I would dump the small house, roll the $200K equity into the $572K.  This essentially is your down payment.  Even if you didn't terminate your contract, you could have just sold the place and had your lender recast your mortgage, which is essentially starting your loan over at 30 years, same % rate.

Recasting isn't quite starting over at 30 years as it doesn't alter the original term of the loan. It simply adjusts the required payments lower to a account for principle that was paid off early so that the required payments no longer result in the loan being paid in full before the full term of the loan.

Hm, you are right.  Learn something new everyday. 

[ontheway2]

5) Education (I live in Massachusetts and feel I would be doing my kids a disservice if I moved to a LCOL area with poor schools https://www.usnews.com/news/best-states/rankings/education/prek-12)

You can't really rank something as narrow as a specific school by a state score. My state is #39, yet all of the high schools in my district rank in the top 7% nationally according the U.S. News. Yes, we could pay an extra 500k for our house somewhere else, but a 95th percentile ranking (for our zoned school) is not poor

[GregO]

we've started to get the impression that the Denver real estate "bubble" is not a bubble. Its just the new reality.

I know nothing of the Denver market.  I live in Los Angeles and know real estate markets can be crazy high.  BUT, that sentence LEAPED off the page at me.  That's the exact type of reasoning used to justify bubbles. 

The economy has been really good for a while now and interest rates are still really low.  Once again I have no idea what the future holds for Denver real estate, but there are always negative narratives to any economic prediction too.  I'd recommend doing A LOT of research (and maybe you have) before coming to a conclusion like that with so much money on the line.

[NattyAnn]

Oh wow haven't been on in awhile! Lots of good conversation here. The update is that we did some soul searching, and uncovered the real reasons we felt bad about going through with that house deal. Ultimately we realized we really did want to move into that neighborhood, but with something that has a higher income potential, and a little further north. We set some tight parameters for our search, and just waited, promising ourselves to not budge until we found something that checked all the boxes.

We found what we were looking for, and I haven't lost a single night of sleep on it from the day we went under contract! I feel a huge sense of peace and excitement for this next adventure. I also love that we planned out about a million exit strategies, in case we end up not being happy after awhile.

This new place was $795k with 3 units. The rent from the other 2 units will almost cover the entire monthly mortgage payment. One of the two units needs some investment before it can be rented out though. We still are keeping the small house as a rental, and will be getting rent from that soon.

We've been here a month, and it has been pretty awesome so far. Being so close to work and school has really improved our quality of life so much. I'm also really in love with the public schools here. The only "downside" so far is getting used to living in a slightly bigger space haha. Can't leave my keys lying around anywhere now haha

Sent from my Pixel using Tapatalk

[martyconlonontherun]

Maybe you could provide some more information.

1. How tied are you to Denver? Sounds like for awhile but is this a 10-year dream house or a 40yr house?
2. How imperative is it for you to move now? Are you over flowing or just a little cramped?


If you can hold out, there may be a dip in the market or you find out you want to move. Yeah the market may go up again, but you also had more time at a lower cost of living address so you are financially the same but you exchanged the burden of a too high mortgage for the burden of a small home for 2 more years.

[Dicey]

@martyconlonontherun, looks like you missed the update just above your comment. The deed is done. Congratulations, NattyAnn!

[Fi365]

Just seeing your original post for the first time...

We were in a very similar situation in the DC area. We could "technically" afford the Big House, and backed out of the contract at the 11th hour.

We have NO REGRETS about continuing to live below our means.

In fact, we're about to downsize into our paid-off rental home.

I hope you're feeling more comfortable about your decision as time passes.

Good luck!

[Cassie]

Sounds like you made a good decision. Enjoy the new house. We have lived all over the country and have lived in MCOL area on the West coast and no way would we leave. Mild 4 seasons, low humidity, tons of stuff to do, etc.  Cheap areas are cheaper for a reason. Having family around when you have small kids is priceless.

[COEE]

Congrats on the new crib!  If you can't sleep at night before you buy the house then it's NOT the house for you.  I'm glad you listened to your gut and found the house you really wanted.

I live in Boulder County - I also think the house prices here are the new reality.  It's a highly desirable area with good weather, jobs, schools, and amenities.  The cat is out of the bag.  The entire US is flocking here both corporations and individuals.  It's a different city from when I moved here 12 years ago.  Californians have brought their traffic with them and the Texans have brought their trucks.  It's a melting pot for sure.

[patchyfacialhair]

Congrats on the new crib!  If you can't sleep at night before you buy the house then it's NOT the house for you.  I'm glad you listened to your gut and found the house you really wanted.

I live in Boulder County - I also think the house prices here are the new reality.  It's a highly desirable area with good weather, jobs, schools, and amenities.  The cat is out of the bag.  The entire US is flocking here both corporations and individuals.  It's a different city from when I moved here 12 years ago.  Californians have brought their traffic with them and the Texans have brought their trucks.  It's a melting pot for sure.

They can't build them quick enough out here in Southern Colorado. We bought at what we thought was a high price almost 2 years ago and yet the prices keep going up. I'd expect it to contract at some point but people keep moving here, and vacancy is still low despite tons of new construction and new apartments springing up all around.

[NattyAnn]

Hi friends! Just thought I'd drop in for an update. Hard to believe its been almost 2 years... Overall we are super happy we ended up buying the big house! (And also SO HAPPY we passed on that first big house. It really was not the right fit for us.)

The house has appreciated ~$100k since we bought it, so at least we didn't buy at the top of the bubble haha! However, things have definitely slowed down a bit in the Denver real estate market, to a more normal pace. (Well.... I guess they've REALLY slowed down the last few weeks, too.)

We are still living in the big house, and renting out the little house and the basement of the big house. We fixed up the 2nd unit in the big house, and now also rent that to our nanny! We got extremely lucky, because having a sort-of live-in nanny has been a life saver with the shelter in place orders for COVID. 

We've built out a strong emergency account, which would cover 6months of all living expenses, even if my husband and I both lost our jobs and we lost all our tenants. It seemed like that would be a pretty unlikely doomsday scenario even 2 months ago, but now with coronavirus... I guess its not that far-fetched. 

I still hate the feeling of having such a big mortgage. Sometimes it makes me sad knowing how close we are to paying off the little house, and how FAAAAAAAAR AWAAAAAAAAAY we are to paying off the big house.

[GoCubsGo]

Congrats! Sounds like a success story.. the nanny situation is amazing.  Any thoughts to selling the little rental and putting a big chunk into equities now that they've dropped?  You have quite a bit of Denver specific real estate exposure.  Something to consider.

[Cassie]

Sounds like you guys are in a great position. Congrats!