Author Topic: Down payment and mortgage strategy  (Read 1213 times)

homebuyer23

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Down payment and mortgage strategy
« on: January 24, 2023, 01:50:58 PM »
Backstory: I'm moving from my current job in OH to a new job in ID starting in August. I’m looking to buy a house in Boise, ID in walk/bike distance to downtown, the foothills, the river, and BSU campus, which is expensive (up to 600K for at least a 2 bed 1 bath plus yard, that doesn’t require a lot of work, and will either have good resale value or good AirBnB potential in the 5+ year time frame). I need advice on strategizing funding source and amount of my down payment and the mortgage structure to minimize negative tax implications, lost growth potential in retirement and/or brokerage accounts, and bad things like mortgage insurance and early withdrawal penalties, and also maintaining a good safety net.

Life Situation: IRS filing single, no dependents, age 34, living in OH moving to ID, excellent credit score
Annual Salary: ~107K in OH, will be 82K first 2 years then 91K after in ID (with summers off)
Pre-tax deductions per month: 1875 to 403b, 1875 to 457b, 1203 to ARP, and 85 to health/dental insurance. All these deductions keep my taxable income mostly in the 10% bracket
Taxes per month: 124 medicare, 234 federal, 77 state, 214 city
Monthly expenses: Rent+insurance: ~1500, Everything else: ~2500
Assets: No debts / mortgage / car payment / etc). Own a 2016 Toyota Prius.
Cash / Savings accounts:
•   5K in SoFi savings (3.75% APY)
•   6K in other low interest checking/savings
•   10,387 in Series I bond
•   13,860 life insurance cash value (yes, I know a horrible investment, gifted to me by my parents)
Retirement accounts:
•   89,624 in 403b
•   113,982 in 457b
•   120,783 in ARP
•   23,103 in 401a
•   78,166 in Roth IRA
•   686 in SEP IRA
Brokerage account:
•   124,495 in Vanguard

Down payment question: What combination of sources and in what amount should I use to get cash for the down payment while minimizing tax implications, paid interest / insurance fees, and missed investment growth opportunities?
•   Max out savings/ cash accounts over next several months (stop contributions to supplemental retirement accounts which increases taxable income)
•   Cash out series I bonds and lose last 3 months of interest
•   Loan up to 50K from my 403b and pay ‘myself’ back interest at 8.5% over 10 years (side note: can someone please explain this to me like I’m in 1st grade) (would need to more aggressively contribute to this over next few months to maximize loan)
•   Withdraw up to full account balance from the 457b with no early withdrawal penalty but taxed at 20%, only after I leave my OH employer (end of July) (could be used to increase equity in home to 20% and end PMI early)
•   Life insurance: withdraw dividends (8,123), cash out (net value of 12,598 after tax), or take loan (max 13,624 at 5.3%...term not specified…not sure if the interest goes to ‘me’ or the life insurance company)
•   Withdraw from roth, 401a, ARP with penalties and taxes (seems like a terrible idea)
•   Sell Vanguard stocks and pay capital gains (basis ~102K, primarily long term, feels like a bad idea to sell when the stock market is low)

Mortgage question: How much % down and what loan structure would optimize my mortgage, considering above how I would need to generate the cash? Potential lenders I've spoked to so far have mentioned a max 49% debt to income ratio, and interest rates have ranged from 5.875 - 6.125 %.
•   30 year fixed rate 20% down
•   30 year fixed rate 10% down with PMI monthly
•   30 year fixed rate 10% down with PMI upfront
•   30 year fixed rate with 10% down + piggyback 10% loan @ 8.5% interest
•   30 year fixed rate with 13% down + 15 year Idaho Hero 7% loan down payment assistance @ 7% interest
•   5 year ARM?

Thanks in advance for your consideration and advice! I have zero confidence in this large financial decision.
« Last Edit: January 25, 2023, 07:55:42 AM by homebuyer23 »

RWD

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Re: Down payment and mortgage strategy
« Reply #1 on: January 24, 2023, 03:15:10 PM »
A $600k house is probably not going to be feasible on $82k salary. From what I've read lenders want to see at most a 43% debt-to-income (gross income) ratio. That's $2,938/month. A $600k house with 20% down payment results in a mortgage payment of $3,034 (principal/interest only, 6.5% rate). With taxes/fees I'm seeing an estimate of $3,834/month total in Idaho. There's a good chance you'll be capped at around $450k for your house purchase.

For the down payment funds source I'd start with the life insurance, then probably the Vanguard brokerage. I Bonds if needed. Don't touch the retirement accounts. You have enough for a down payment already so you shouldn't need to stop maxing your pre-tax deductions.

I think all of the permutations you listed for the mortgage structure are worth considering. You'd need to get quotes from your lender(s) and figure out what works best for you. I suspect you'll need to make a 20% down payment if you're looking at the upper end of the price range though.

Laura33

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Re: Down payment and mortgage strategy
« Reply #2 on: January 25, 2023, 08:19:48 AM »
Why in the world are you looking at a $600K house on a sub-$100K salary?  That is very seriously going to hamper any efforts to both save for the future and enjoy yourself in the present.  And never, ever listen to a real estate broker's or lender's advice on what you can "afford"; they're the ones who benefit from that advice, not you.

Also, you cannot use a 401(k) loan for this, because when you leave your current job, all such loans must be paid back immediately, or they're counted as distributions.

Rent for a couple of years.  You think you can handle a 49% debt-to-income ratio?  Fine -- set your budget at the remaining 51% and see how that feels.  Put that 49% into a money market fund.  That way once you figure out how much you're truly comfortable paying for a house, you'll have a good 'stache built up for the downpayment.

gatortator

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Re: Down payment and mortgage strategy
« Reply #3 on: January 26, 2023, 09:03:07 AM »
Why do you want to buy a house in the North End* and not simply rent?

*Based on your prices and description, that seems to be the area you are interested in.

homebuyer23

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Re: Down payment and mortgage strategy
« Reply #4 on: January 26, 2023, 10:50:00 AM »
Thanks everyone for your advice so far! Great reality checks.

To answer your questions and provide more details:

Yes, I realize maxing out the DTI seems risky. And, I definitely would prefer to find a cheaper house within the target radius and not max it out. However, I've been living a mustachian lifestyle for years. So, my non-housing expenses are relatively low while I still enjoy life adventures and travel and save for retirement more than others in my age group.  At my new job, I'll be able to continue pre-tax retirement contributions to keep my effective tax rate low, which I think will allow me to remain comfortable with the mortgage and monthly expenses if I absolutely have to buy at the top of the price range.  And, my salary should increase to 91K after 2 years which should provide relief if I start to feel a pinch.  In the meantime, I have wiggle room to cut out luxuries like an expensive gym membership, etc from monthly expenses if needed.

I want to buy and not rent because I have a big dog that limits my rental options, and would like to build equity and have more freedom, control, stability, and privacy.

The 403b administrator stated that I would NOT have to pay back the loan after leaving my current job - there would be no distribution penalty. Even if there was, I could use the 457b to pay it off with no penalty after leaving my current job.

RWD

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Re: Down payment and mortgage strategy
« Reply #5 on: January 26, 2023, 10:59:39 AM »
Yes, I realize maxing out the DTI seems risky. And, I definitely would prefer to find a cheaper house within the target radius and not max it out.
As I mentioned in my earlier reply, the $600k number you quoted in your post is not maxing your DTI, it's blowing it out of the water. It's not a matter of whether you could make it work, no lender is going to entertain mortgages for a house that expensive on your income unless you have a 40%+ down payment. So are there sub-$450k houses available to buy that you would consider? Because at least then a lender will talk to you even if it is stretching your finances to the limit.

Must_ache

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Re: Down payment and mortgage strategy
« Reply #6 on: January 26, 2023, 11:24:16 AM »
I would be tempted to rent for a while first.  You can get something for $1,500-$2,000 per month, and take more time to find the right place later.  Zillow didn't exactly have a lot of properties for sale on the market, but if you toggle between for sale and for rent, there is a ton of stuff available to rent.  The world isn't going to end if you rent for a few years, maybe higher interest rates will lower house prices. 

Laura33

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Re: Down payment and mortgage strategy
« Reply #7 on: January 26, 2023, 11:42:42 AM »
I want to buy and not rent because I have a big dog that limits my rental options, and would like to build equity and have more freedom, control, stability, and privacy.

Have you looked at rental options that would allow your dog? 

I completely understand the desire to buy a home.  But you can accomplish all those things once you take a year to get settled in, see how you like the job, and really understand the various neighborhoods and the local real estate market.

I would recommend renting for a year to anyone moving to a new job in a new area.  But when you're looking to commit half your income to a home purchase, that raises the stakes dramatically. 

Also, take a close look at your language.  How do you have more "freedom" when you are talking about committing yourself to 30 years of debt that it takes half your salary to cover?  Isn't that the exact opposite of the Mustachian definition of "freedom"?*  And how stable will things feel if your job goes away, or things change so much that you no longer enjoy it, but you're stuck with it because of the same giant debt? 

At the very least, do full due diligence on what you can find if you rent for a year, and then get preapproved for this giant mortgage you want.  That way at least you know what you're working with and can decide based on the actual facts in front of you instead of rose-colored perceptions about how great it will feel to own your own home.


*In most of Mustache Land, a 50% DTI ratio is a hair-on-fire debt emergency.  The fact that your debt is paying for a house and not a car or vacation does not change that.  Owning a house is a luxury; it's just a better choice because it will likely pay you some of those costs back at the end of the day.  But that's still not a justification to borrow more than you can afford.

gatortator

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Re: Down payment and mortgage strategy
« Reply #8 on: January 26, 2023, 12:00:15 PM »
Boise is definitely a fun place to enjoy life’s adventures!

what is your target radius around BSU (based on your OP, I am assuming this will be the end point of your commute)?

Can you clarify what a house “that doesn’t require a lot of work” means to you? What level of maintenance are you ok with?
« Last Edit: January 26, 2023, 12:11:13 PM by gatortator »

homebuyer23

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Re: Down payment and mortgage strategy
« Reply #9 on: January 26, 2023, 01:24:01 PM »
Boise is definitely a fun place to enjoy life’s adventures!

what is your target radius around BSU (based on your OP, I am assuming this will be the end point of your commute)?

Can you clarify what a house “that doesn’t require a lot of work” means to you? What level of maintenance are you ok with?

Target radius is 30 min maximum bike ride to the BSU stadium, <15 min preferred so I could have a ~30 min walk instead most days.

I'm OK with basic home maintenance and very minor renovations (paint, faucets, refinish cabinets, etc), but don't want a house that needs updates of major systems (roof, HVAC, water heater, etc) and/or appliances.

homebuyer23

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Re: Down payment and mortgage strategy
« Reply #10 on: January 26, 2023, 01:39:11 PM »
So are there sub-$450k houses available to buy that you would consider? Because at least then a lender will talk to you even if it is stretching your finances to the limit.
Yes, there are!  Hopefully one can check all my boxes as the market continues to cool off this Spring. Just looking for advice here to try to strategize the down payment / mortgage for worst case scenario, and crowdsource blind spots and ideas from you all since the lenders and realtors have a different perspective than mustachians.  Thinking of selling stocks for the down payment when they're down after the past year is painful.  The lenders I've spoken to so far have been quoting better interest rates and are ok with that max price so maybe that's why they're not as concerned about the total monthly payment. Thanks for your input! 

homebuyer23

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Re: Down payment and mortgage strategy
« Reply #11 on: January 26, 2023, 01:59:37 PM »
Have you looked at rental options that would allow your dog? 

How do you have more "freedom" when you are talking about committing yourself to 30 years of debt that it takes half your salary to cover? 

*In most of Mustache Land, a 50% DTI ratio is a hair-on-fire debt emergency. 

Thanks Laura33!  Yeah, I've been hounding Zillow for over a year now on both the rental and purchasing side.  I was not happy with the rental options, but leaning toward it anyway because house prices were ridiculous.  However, house prices have been dropping and it seems like there might be a sweet spot of a dip in prices and time to catch interest rates before they further increase.

Good point about 'freedom'.  I was really thinking about freedom to plant things in the ground, ha! But I see your point. That's why I was hoping for a house that will have good resale value, just in case.  I think Boise will continue to be a place people want to move, so the 30 year commitment isn't binding unless I want it to be.

I agree about the 50% DTI!  Would like to avoid that max for sure, even if it is an investment and not just debt. What's typically recommended around here if someone has no other debts? Side note, I have a standing full time offer with another employer that would decrease the DTI a good bit, but want to try out the 9 month lower stress option for at least a year or two.

Finances_With_Purpose

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Re: Down payment and mortgage strategy
« Reply #12 on: January 26, 2023, 02:04:28 PM »
Boise is definitely a fun place to enjoy life’s adventures!

what is your target radius around BSU (based on your OP, I am assuming this will be the end point of your commute)?

Can you clarify what a house “that doesn’t require a lot of work” means to you? What level of maintenance are you ok with?

Target radius is 30 min maximum bike ride to the BSU stadium, <15 min preferred so I could have a ~30 min walk instead most days.

I'm OK with basic home maintenance and very minor renovations (paint, faucets, refinish cabinets, etc), but don't want a house that needs updates of major systems (roof, HVAC, water heater, etc) and/or appliances.

I second the above posters, and @Laura33 as usual.  And I say that as someone who lives in a house worth more than that. 

You don't want a 401(k) loan because they can become due instantly, and you don't even know yet how the job will go.  That would instantly crater you financially, which means you couldn't leave that job even if it were abusive or the company begins to collapse. 

ALL houses come with major system updates: it's just a question of when.  E.g.: Do I spend $2k to hobble the septic/HVAC/roof along this year, or pop for the $15k/$20k to replace now rather than risk future unexpected repairs/catastrophes?  It's a never-ending series of tradeoffs and expenses, even if you start off with a great house.  Things wear and tear over time. 

There's no way I would even consider what you're thinking about, again, as someone who made that kind of leap (on more income).  It can easily overcome you - you have no margin for error - and then you're in a hole financially and forced to sell or the like and eat a loss.  There's no reason: just rent longer and wait.  Plus, rates are up, so the market is moving your way as of now anyway. 

I'll also add that I'm familiar with the Airbnb market, and it's not doing that well in many such places (that also had a lot of people dump large amounts of cash into Airbnb during the boom).  That's one thing that inflation seems to have hit really hard in tourist-y areas. 

In short, I hate to throw more wet blankets on, but this is just a bad, bad idea. 

rpr

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Re: Down payment and mortgage strategy
« Reply #13 on: January 26, 2023, 02:25:48 PM »
You have done a great job saving thus far.

Since you want low stress, renting is best. I do agree that finding a rental that allows pets can be a pain. But it is doable. You have a job offer with what I guess is an above median income. I assume that you have a good (great) credit score. How good is your relationship with your current landlord? Will they provide a letter or reference.

Good luck.

Finances_With_Purpose

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Re: Down payment and mortgage strategy
« Reply #14 on: January 26, 2023, 02:46:24 PM »
Have you looked at rental options that would allow your dog? 

How do you have more "freedom" when you are talking about committing yourself to 30 years of debt that it takes half your salary to cover? 

*In most of Mustache Land, a 50% DTI ratio is a hair-on-fire debt emergency. 

Thanks Laura33!  Yeah, I've been hounding Zillow for over a year now on both the rental and purchasing side.  I was not happy with the rental options, but leaning toward it anyway because house prices were ridiculous.  However, house prices have been dropping and it seems like there might be a sweet spot of a dip in prices and time to catch interest rates before they further increase.

Good point about 'freedom'.  I was really thinking about freedom to plant things in the ground, ha! But I see your point. That's why I was hoping for a house that will have good resale value, just in case.  I think Boise will continue to be a place people want to move, so the 30 year commitment isn't binding unless I want it to be.

I agree about the 50% DTI!  Would like to avoid that max for sure, even if it is an investment and not just debt. What's typically recommended around here if someone has no other debts? Side note, I have a standing full time offer with another employer that would decrease the DTI a good bit, but want to try out the 9 month lower stress option for at least a year or two.

An observation about your comment: house prices go down when rates go up, so you're also proposing to buy a house that's far more likely to immediately be underwater, whereas, you could wait and, if you get rates right (which isn't as hard given how hard the Fed pushes them), you could actually land a house at a lower price. 

Once you buy, you can refi into a lower-rate loan whenever rates drop, but you cannot change to a lower price.  With that said, rates can rock you in the mean time since they're annual and you have to keep paying them. 

Boise is great, however, it's also one of the few markets on the leading edge of home values/excess, so it's FAR riskier than places that were a lot more boring and stable, like Ohio, during the recent run-up.  It's hard to know how things will play out with work-from-home for tech companies and other things that have really buoyed places like Boise over the next few yeasr, so I would be wary of buying in a place that just experienced a massive run-up in values (again, speaking from experience), especially since Boise is a relatively smaller place where the shifts could easily be more dramatic when they do happen.  E.g., it wouldn't be hard to imagine Boise making this list: https://www.msn.com/en-us/money/realestate/these-4-cities-will-suffer-a-2008-crash-in-home-values-goldman-sachs/ar-AA16HBi0?ocid=msedgntp&cvid=2973d13b981a40f0bd9246931b8e5ed0 

So I would raise more cash and hold your powder dry for the right time, while also getting to know the local area and new job.  (Personally, I would never suggest buying a house before a year or so into a new job in a new town unless you're at a point in your career where you can get a new similar job with a quick phone call / i.e. have a lot of other similar options nearby.)  A house really ties you down, financially and geographically. 

I wouldn't go more than 25% DTI on a house, and preferably less than that.  There may be exceptions, but those are exceptions for a reason.  You can always stay put and save more cash, but it's much harder to unwind a house purchase without large financial consequences. 

With all that said, I really do wish you the best in navigating housing despite a crazy housing market. 

Laura33

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Re: Down payment and mortgage strategy
« Reply #15 on: January 27, 2023, 08:48:13 AM »
Have you looked at rental options that would allow your dog? 

How do you have more "freedom" when you are talking about committing yourself to 30 years of debt that it takes half your salary to cover? 

*In most of Mustache Land, a 50% DTI ratio is a hair-on-fire debt emergency. 

Thanks Laura33!  Yeah, I've been hounding Zillow for over a year now on both the rental and purchasing side.  I was not happy with the rental options, but leaning toward it anyway because house prices were ridiculous.  However, house prices have been dropping and it seems like there might be a sweet spot of a dip in prices and time to catch interest rates before they further increase.

Good point about 'freedom'.  I was really thinking about freedom to plant things in the ground, ha! But I see your point. That's why I was hoping for a house that will have good resale value, just in case.  I think Boise will continue to be a place people want to move, so the 30 year commitment isn't binding unless I want it to be.

I agree about the 50% DTI!  Would like to avoid that max for sure, even if it is an investment and not just debt. What's typically recommended around here if someone has no other debts? Side note, I have a standing full time offer with another employer that would decrease the DTI a good bit, but want to try out the 9 month lower stress option for at least a year or two.

An observation about your comment: house prices go down when rates go up, so you're also proposing to buy a house that's far more likely to immediately be underwater, whereas, you could wait and, if you get rates right (which isn't as hard given how hard the Fed pushes them), you could actually land a house at a lower price. 

Once you buy, you can refi into a lower-rate loan whenever rates drop, but you cannot change to a lower price.  With that said, rates can rock you in the mean time since they're annual and you have to keep paying them. 

Boise is great, however, it's also one of the few markets on the leading edge of home values/excess, so it's FAR riskier than places that were a lot more boring and stable, like Ohio, during the recent run-up.  It's hard to know how things will play out with work-from-home for tech companies and other things that have really buoyed places like Boise over the next few yeasr, so I would be wary of buying in a place that just experienced a massive run-up in values (again, speaking from experience), especially since Boise is a relatively smaller place where the shifts could easily be more dramatic when they do happen.  E.g., it wouldn't be hard to imagine Boise making this list: https://www.msn.com/en-us/money/realestate/these-4-cities-will-suffer-a-2008-crash-in-home-values-goldman-sachs/ar-AA16HBi0?ocid=msedgntp&cvid=2973d13b981a40f0bd9246931b8e5ed0 

So I would raise more cash and hold your powder dry for the right time, while also getting to know the local area and new job.  (Personally, I would never suggest buying a house before a year or so into a new job in a new town unless you're at a point in your career where you can get a new similar job with a quick phone call / i.e. have a lot of other similar options nearby.)  A house really ties you down, financially and geographically. 

I wouldn't go more than 25% DTI on a house, and preferably less than that.  There may be exceptions, but those are exceptions for a reason.  You can always stay put and save more cash, but it's much harder to unwind a house purchase without large financial consequences. 

With all that said, I really do wish you the best in navigating housing despite a crazy housing market.

+1.

This brings to mind another thought:  one thing I have observed is that the housing market tends to react slowly to bad stuff.  Often people will try to hang on for as long as they can and hope to be able to wait out a problem, and then give up only a year or two later.  So if you are seeing prices leveling because of the rate hikes, that doesn't mean that right now is as good a buying opportunity as you're going to get -- things could be even better (from your perspective) in another year.

Anecdote:  we started looking for a potential vacation/retirement condo in a specific town around 2000 (with a few years' pause here and there for having kids).  I watched prices go higher and higher.  In 2008-2009, I got my hopes up again, given the giant crash.  And yet, there was nothing -- there were few houses on the market, but those that were were listed at the same price as before the crash!  2008, 2009, 2010, nothing.  We went back in 2011, and I swear, the entire real estate market had taken a 30% dive.  We ended up getting a condo that had sold for the high-$300s a few years before for under $200K in foreclosure.  And all that time searching meant that we knew our stuff and were ready to act quickly when the right deal did come up.

It's of course different when you actually need a place to live there now.  ;-)  But just something else to keep in mind when you're weighing current prices.

Finances_With_Purpose

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Re: Down payment and mortgage strategy
« Reply #16 on: January 27, 2023, 02:00:34 PM »
Have you looked at rental options that would allow your dog? 

How do you have more "freedom" when you are talking about committing yourself to 30 years of debt that it takes half your salary to cover? 

*In most of Mustache Land, a 50% DTI ratio is a hair-on-fire debt emergency. 

Thanks Laura33!  Yeah, I've been hounding Zillow for over a year now on both the rental and purchasing side.  I was not happy with the rental options, but leaning toward it anyway because house prices were ridiculous.  However, house prices have been dropping and it seems like there might be a sweet spot of a dip in prices and time to catch interest rates before they further increase.

Good point about 'freedom'.  I was really thinking about freedom to plant things in the ground, ha! But I see your point. That's why I was hoping for a house that will have good resale value, just in case.  I think Boise will continue to be a place people want to move, so the 30 year commitment isn't binding unless I want it to be.

I agree about the 50% DTI!  Would like to avoid that max for sure, even if it is an investment and not just debt. What's typically recommended around here if someone has no other debts? Side note, I have a standing full time offer with another employer that would decrease the DTI a good bit, but want to try out the 9 month lower stress option for at least a year or two.

An observation about your comment: house prices go down when rates go up, so you're also proposing to buy a house that's far more likely to immediately be underwater, whereas, you could wait and, if you get rates right (which isn't as hard given how hard the Fed pushes them), you could actually land a house at a lower price. 

Once you buy, you can refi into a lower-rate loan whenever rates drop, but you cannot change to a lower price.  With that said, rates can rock you in the mean time since they're annual and you have to keep paying them. 

Boise is great, however, it's also one of the few markets on the leading edge of home values/excess, so it's FAR riskier than places that were a lot more boring and stable, like Ohio, during the recent run-up.  It's hard to know how things will play out with work-from-home for tech companies and other things that have really buoyed places like Boise over the next few yeasr, so I would be wary of buying in a place that just experienced a massive run-up in values (again, speaking from experience), especially since Boise is a relatively smaller place where the shifts could easily be more dramatic when they do happen.  E.g., it wouldn't be hard to imagine Boise making this list: https://www.msn.com/en-us/money/realestate/these-4-cities-will-suffer-a-2008-crash-in-home-values-goldman-sachs/ar-AA16HBi0?ocid=msedgntp&cvid=2973d13b981a40f0bd9246931b8e5ed0 

So I would raise more cash and hold your powder dry for the right time, while also getting to know the local area and new job.  (Personally, I would never suggest buying a house before a year or so into a new job in a new town unless you're at a point in your career where you can get a new similar job with a quick phone call / i.e. have a lot of other similar options nearby.)  A house really ties you down, financially and geographically. 

I wouldn't go more than 25% DTI on a house, and preferably less than that.  There may be exceptions, but those are exceptions for a reason.  You can always stay put and save more cash, but it's much harder to unwind a house purchase without large financial consequences. 

With all that said, I really do wish you the best in navigating housing despite a crazy housing market.

+1.

This brings to mind another thought:  one thing I have observed is that the housing market tends to react slowly to bad stuff.  Often people will try to hang on for as long as they can and hope to be able to wait out a problem, and then give up only a year or two later.  So if you are seeing prices leveling because of the rate hikes, that doesn't mean that right now is as good a buying opportunity as you're going to get -- things could be even better (from your perspective) in another year.

Anecdote:  we started looking for a potential vacation/retirement condo in a specific town around 2000 (with a few years' pause here and there for having kids).  I watched prices go higher and higher.  In 2008-2009, I got my hopes up again, given the giant crash.  And yet, there was nothing -- there were few houses on the market, but those that were were listed at the same price as before the crash!  2008, 2009, 2010, nothing.  We went back in 2011, and I swear, the entire real estate market had taken a 30% dive.  We ended up getting a condo that had sold for the high-$300s a few years before for under $200K in foreclosure.  And all that time searching meant that we knew our stuff and were ready to act quickly when the right deal did come up.

It's of course different when you actually need a place to live there now.  ;-)  But just something else to keep in mind when you're weighing current prices.

I love real estate, but we may or may not need a larger house and be holding our powder dry waiting on the right moment right now, as I watch prices drop every month while sitting on my 2.5%-interest mortgage, so I'm watching it especially closely now. 

I think it's not 100% predictable, however, Goldman's guess is the same as my best guess: that rates are likely to continue increasing for a while (nothing pushes government officials more than getting egg on their face right after calling it exactly wrong) - ah, pride - which increases the chances of a larger crash (some bank goes under) and then a quick drop in rates, but with a climax sometime late this year rather than right now. 

I'm watching for a major market crash and/or institution failure, because that's probably the trigger signal that time is running short before they crank rates back down again - and that's the part that's hard to predict with any clarity whatsoever. 

It does all seem to lag what you would expect (I noticed the same thing in 2008-09), especially in hot markets, and I think that the answer may lie in the fact that most people don't time it/watch markets as closely, and it's more sentiment-driven (e.g. the bottom is when people all think the fad has died) but that's just a working theory.  I also agree with you that people tend to hold onto houses rather than cut their losses (sunk cost fallacy, right?), so they make the hard decisions a little later than one would expect. 

(I sometimes look at the quantity of pre-foreclosure listings in our market to give me a sense of exactly that.) 

If I saw Goldman Sachs or the like going under, I would be running to the bank to get my application wrapped, ha.  No time to buy like a panic. 

Must_ache

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Re: Down payment and mortgage strategy
« Reply #17 on: January 27, 2023, 06:45:46 PM »
Apartments.com
2br, <$2,000/mo
Dog-friendly
Dozens of apartments - have you done your homework bro?
Change to <$1,500/mo still lots of options, many closer to downtown less suburban
No chance would I pay $600K for a house - too risky
« Last Edit: January 27, 2023, 06:53:16 PM by Must_ache »

lhamo

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Re: Down payment and mortgage strategy
« Reply #18 on: January 27, 2023, 07:00:36 PM »
Paging @secondcor521  who might have input on this issue.

Personally I would not buy in a location like Boise right now.  It was one of the places in the US where home prices shot up the fastest/most during the lockdowns, and is poised to have a big drop.  I doubt that the current prices are sustainable with local salary rates. 

Rent for at least 6-12 months.  Learn the neighborhoods.  Develop a local network of FI-minded folks (look for a ChooseFI group if there are not sufficient MMMers around  -- maybe you can find somebody house hacking who you can share space with while you get your bearings).  Take your time making sure you like living there and want to stay, and look for a good deal.


secondcor521

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Re: Down payment and mortgage strategy
« Reply #19 on: January 27, 2023, 08:17:48 PM »
Paging @secondcor521  who might have input on this issue.

Thanks for the batsignal, @lhamo!

I read the whole thread.  The biggest point is for me to just echo what everyone else said:  rent instead of buy and $600K is way too much to pay with your numbers.  (My son is in the market for a 2/1 in Boise.  His numbers are better than yours in nearly every respect, and I'm feeling nervous about him going above $350K.)

The Boise market is softening and I think it will continue to do so over the next several months.  If any sort of recession hits the nation or the area, it will probably soften further.  My personal theory is that a lot of remote tech workers moved here during COVID, and their employers are mostly either expecting them to return to work or deciding to pay them Idaho rather than California wages.  I think those people are (reluctantly) selling.  In the long run, Boise will be fine, though; it's a nice place to live and people are migrating here consistently over time (much to the consternation of long-time locals who decry the growth / crowding / etc.).

I also think you're making a very very bad judgment call by setting the requirement to live that close to the BSU stadium.  Yes, downtown is lovely and there are homes and condos for sale there.  But they're at least twice as expensive as houses five or ten miles away.  And riding a bike or walking to work would be nice, but as a practical financial matter, I can leave my $500K 4/2 1800+ sqft house in a suburb and drive in my $2500 car to BSU in 20 minutes.  You're proposing paying double for a lifestyle choice.  (And if it's because of concern for the environment, I'll add that my son could drive his $15K Chevy Volt to BSU in 20 minutes also for a dollar or so of electricity.)

By the way, riding or biking to BSU from anywhere is moderately dangerous year round.  My son used to commute by electric bike and was hit by cars twice in about two years because Boise drivers don't respect cyclists much (unfortunate but true).  One of those accidents totaled his bicycle and could have seriously injured him because the other vehicle was a 3/4 ton pickup truck.  We also don't have very good bike lane networks.  Finally, there is enough snow and cold to make it miserable if not completely impractical for about three months of the year.  About a week ago we had about five inches of snow on the ground everywhere, about 20 degrees F for the daily high temp, and 15-20mph winds.

If you are going to work at BSU and still insist on biking, what I would do is look five or ten miles downstream on the Boise River.  There is a greenbelt which is a very nice bike / pedestrian system that avoids most traffic lights and traffic concerns, so you could get to/from BSU quickly and easily from either the north side of Garden City or around the Hawks baseball stadium / Fairgrounds area.  Houses in those areas would probably be much cheaper and still meet your commuting goal.

As far as funding sources, I'd cash out the life insurance policy first just because it's probably a bad investment anyway.  I'd stop all retirement savings now and build up a cash cushion.  I don't agree with putting your down payment money into investments, but since that ship has sailed, I'd use that third if I needed to.

As far as mortgage options, I wouldn't advise PMI in any scenario.  I'm not familiar with the Idaho Hero program you mention, but most assistance programs like that are bad deals for the homeowner, so I'd be skeptical.  I'd also stay away from ARMs.  So I'd personally only consider a 30 year (or better, a 15 year) fixed with 20% down.

The other thing I'd recommend is making sure you have zero debt and an emergency fund *beyond* all your down payment and closing costs.  That probably means you should have about 25% or even 30% of your house price saved up so that you have cushion after you do eventually buy.

If you can't make the numbers work, no amount of "strategizing" makes it a good idea.  "Strategizing" in those scenarios most of the time is just rationalizing a bad decision.  A bad decision which pretty much everyone replying to you so far (including me) seems to think that you will end up regretting.
« Last Edit: January 27, 2023, 08:27:52 PM by secondcor521 »

Dicey

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Re: Down payment and mortgage strategy
« Reply #20 on: January 27, 2023, 10:53:26 PM »
I'm not afraid of a high DTI ratio for a primary home, but I'm casting my vote with the wise folks who have suggested you rent.

Dicey

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Re: Down payment and mortgage strategy
« Reply #21 on: January 27, 2023, 11:04:00 PM »

Anecdote:  we started looking for a potential vacation/retirement condo in a specific town around 2000 (with a few years' pause here and there for having kids).  I watched prices go higher and higher.  In 2008-2009, I got my hopes up again, given the giant crash.  And yet, there was nothing -- there were few houses on the market, but those that were were listed at the same price as before the crash!  2008, 2009, 2010, nothing.  We went back in 2011, and I swear, the entire real estate market had taken a 30% dive.  We ended up getting a condo that had sold for the high-$300s a few years before for under $200K in foreclosure.  And all that time searching meant that we knew our stuff and were ready to act quickly when the right deal did come up.

It's of course different when you actually need a place to live there now.  ;-)  But just something else to keep in mind when you're weighing current prices.

Similar story for our rentals. They're in all in the same Senior community, where a lot of buyers pay cash, so no one was really hurting when the crash happened. Prices stayed stable/flat all through the crisis. Our home market (NorCal) started heating back up in 2011-2012, but the rental market (SoCal) stayed in the doldrums for years. We scooped up a couple of properties there in 2015-2016 for less per SF than the one I bought new there in 2003. The market finally got moving again just before the pandemic and now the prices are nuts. They will slow eventually, but not in sync with an average housing market with a lot of first-time buyers.

Wait.