Author Topic: First house -- couple questions  (Read 5642 times)

MrD

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First house -- couple questions
« on: June 19, 2012, 02:40:14 PM »
Sorry for posting this in two areas, I did not see a real estate section. If a mod could remove from the area that would be great!

Here  is my situation:

Saving - $462

401k - 10k
60% Company Stock
40% fidelity 2050 retirement plan


Savings - $1000

Goes towards:
Emergency fund - total at 10k
100% checking account at .75% APY

ROTH IRA (first year) - 5k
100% Vangaurd 2050 retirement plan

No debt.

Regular Checking Balance:
1.6k

I am some times have extra money coming in from a side business so that is why it is not currently saved.

Spending ~1400 (includes everything)


I was thinking of getting in hyper savings mode for a down payment on a house since my current lease is up in November. I could put all of my 1000/month savings towards it and have 7.6k ready to go.

My gf could probably also contribute 2k by this time.

I am looking for a house in the range of 150k-200k.

Reasons for wanting to buy a new house:
-Where I currently live I have higher taxes, my rent is (60%)535/month with my gf paying the other 40%.
-Interest rates are low
-Moving to the state I would be moving to would dramatically drop taxes, gas, food, everything essentially

Other ideas:

I could potentially take money from my emergency fund to help with the down payment. My job is 99% secure, the only way I could lose my job is if my company some how was taken down like ENRON or something.



Questions:
-Should I move this November or stick it out a year and have a larger down payment and risk the interest rates and housing prices to jump.

-Unless I get some crazy suggestions I may likely wait even 2 years before buying a house because I really think having 20% is a requirement. Where should I store my downpayment money while I build it up?


JohnGalt

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Re: First house -- couple questions
« Reply #1 on: June 19, 2012, 03:39:42 PM »
Some more information would be useful - such as your income, expenses, long term financial goals, etc.

That said... It sounds like you are just getting as far as savings goes.  You may be young, in which case I would recommend that you not lock yourself down by purchasing a house (especially not with a low down payment) or you may be older but just just now getting to the point of saving, in which case I would recommend that you make sure you have the saving part down before making such a big financial commitment.  In either case - I think waiting until you have at least a 20% down payment (on top of whatever emergency fund you feel comfortable with) would be prudent.  I would not forgo the 401k and IRA contributions to increase savings for the down payment.

As an aside - 60% of your 401k in company stock + that company being your primary source of income would make me very nervous from a diversification standpoint... if the company tanks, you could lose both your job and your savings. 

Ben

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Re: First house -- couple questions
« Reply #2 on: June 19, 2012, 05:31:35 PM »
Would like to emphatically echo John's comment re: company stock. This is a needlessly risky position and I would encourage you to get out of it ASAP.

johnnylighthouse

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Re: First house -- couple questions
« Reply #3 on: June 19, 2012, 06:33:40 PM »
Do you mean that gas prices would be lower at your new location or that you would use less gas in your new location?  How would the move affect your commute?  Could you rent in this new location to reap the benefits while saving up and scoping out the area?

MrD

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Re: First house -- couple questions
« Reply #4 on: June 20, 2012, 10:47:01 AM »
Some added info:

I am 23, my salary is 62k+7.5k bonus. I also have a side business that flucuates greatly so I do not count that as income in terms of these figures.

My girlfriend brings in 39k but is 34k debt.

I will diversify my 401k as I realize how stupid it is do have so much stock (lame pun) in one company.

Does anyone see the below situation working out.

I make a 10k down payment on a 150k house. My PMI would only be about $84 a month until I hit 20% equity. The payments would be far better than my current as I live in a very rich area to avoid crime (I live in the south so 830-850 for rent is pretty high). I want to move to this new location for the lower crime, lower taxes, cheaper gas, easier commute for my girlfriend (I fly so it doesn't really matter to me).

I want this house to be an investment more than I want to actually live in a house. If it doesn't make 100% financial sense there is no point in doing this. I just know that this could be the best possible time for us to buy with the lowest rate. Keep in mind I have a "great" credit score with absolutely no debt.

AJ

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Re: First house -- couple questions
« Reply #5 on: June 20, 2012, 10:55:04 AM »
The payments would be far better than my current as I live in a very rich area to avoid crime (I live in the south so 830-850 for rent is pretty high).

You are comparing a rental in your current neighborhood to a purchase in a new one. That's kind of apple/oranges. How does a rental in your *new* neighborhood compare to the purchase of a similar property in the same neighborhood. One issue is moving, which it sounds like is obviously a good idea. The other issue is whether to buy or rent in the new location.

MrD

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Re: First house -- couple questions
« Reply #6 on: June 20, 2012, 11:22:14 AM »
The payments would be far better than my current as I live in a very rich area to avoid crime (I live in the south so 830-850 for rent is pretty high).

You are comparing a rental in your current neighborhood to a purchase in a new one. That's kind of apple/oranges. How does a rental in your *new* neighborhood compare to the purchase of a similar property in the same neighborhood. One issue is moving, which it sounds like is obviously a good idea. The other issue is whether to buy or rent in the new location.

My current area is safe, I do not need to move now. I meant that the area I currently live in is the rich area.

A rental in the new neighborhood would be hard to pull off since there are very good propertieis there, I originally tried to move their last year and all the property managers were absolutely terrible. There is almost nowhere to move that people had positive experiences.

Maybe I should hold off on buying.

JohnGalt

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Re: First house -- couple questions
« Reply #7 on: June 20, 2012, 11:25:34 AM »
Some added info:

I am 23, my salary is 62k+7.5k bonus. I also have a side business that flucuates greatly so I do not count that as income in terms of these figures.

My girlfriend brings in 39k but is 34k debt.

I will diversify my 401k as I realize how stupid it is do have so much stock (lame pun) in one company.

Does anyone see the below situation working out.

I make a 10k down payment on a 150k house. My PMI would only be about $84 a month until I hit 20% equity. The payments would be far better than my current as I live in a very rich area to avoid crime (I live in the south so 830-850 for rent is pretty high). I want to move to this new location for the lower crime, lower taxes, cheaper gas, easier commute for my girlfriend (I fly so it doesn't really matter to me).

I want this house to be an investment more than I want to actually live in a house. If it doesn't make 100% financial sense there is no point in doing this. I just know that this could be the best possible time for us to buy with the lowest rate. Keep in mind I have a "great" credit score with absolutely no debt.

If you are looking to do this for purely financial reasons - you'll need to factor in the length of time you plan on owning, all of the costs associated with purchasing, maintenance, insurance, etc.  I was in a very similar situation 2 years ago (without the benefit of an MMM philosophy) and bought a house based almost entirely on the conventional wisdom that it's financially better to own than to rent and interest rates and prices were so low that I couldn't turn it down.  I was making almost exactly what you are then and bought a $150k house with 3% down that needed $20k in improvements.  It has turned out to be much more expensive than I initially expected it would be and has really limited my flexibility.  The location made sense because of my job when I bought it, but I have since changed jobs and the location is now a problem.
If you do a full comparison - I think you'll find that buying a house to live in will only make sense if you plan on staying there for a significant amount of time unless you can get a great deal.  Even then, I would caution you against buying in a location that works for your girlfriend at your age.  Life changes quickly at that age, flexibility has value. 

MrD

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Re: First house -- couple questions
« Reply #8 on: June 20, 2012, 11:34:04 AM »
Some added info:

I am 23, my salary is 62k+7.5k bonus. I also have a side business that flucuates greatly so I do not count that as income in terms of these figures.

My girlfriend brings in 39k but is 34k debt.

I will diversify my 401k as I realize how stupid it is do have so much stock (lame pun) in one company.

Does anyone see the below situation working out.

I make a 10k down payment on a 150k house. My PMI would only be about $84 a month until I hit 20% equity. The payments would be far better than my current as I live in a very rich area to avoid crime (I live in the south so 830-850 for rent is pretty high). I want to move to this new location for the lower crime, lower taxes, cheaper gas, easier commute for my girlfriend (I fly so it doesn't really matter to me).

I want this house to be an investment more than I want to actually live in a house. If it doesn't make 100% financial sense there is no point in doing this. I just know that this could be the best possible time for us to buy with the lowest rate. Keep in mind I have a "great" credit score with absolutely no debt.

If you are looking to do this for purely financial reasons - you'll need to factor in the length of time you plan on owning, all of the costs associated with purchasing, maintenance, insurance, etc.  I was in a very similar situation 2 years ago (without the benefit of an MMM philosophy) and bought a house based almost entirely on the conventional wisdom that it's financially better to own than to rent and interest rates and prices were so low that I couldn't turn it down.  I was making almost exactly what you are then and bought a $150k house with 3% down that needed $20k in improvements.  It has turned out to be much more expensive than I initially expected it would be and has really limited my flexibility.  The location made sense because of my job when I bought it, but I have since changed jobs and the location is now a problem.
If you do a full comparison - I think you'll find that buying a house to live in will only make sense if you plan on staying there for a significant amount of time unless you can get a great deal.  Even then, I would caution you against buying in a location that works for your girlfriend at your age.  Life changes quickly at that age, flexibility has value.

Thanks for the detailed response. Moving for my girlfriend won't be a problem she will always have work in the major city that is close to us, she also has a 2 year contract with her current employer. We plan on living in this house at least 7-10 years. I am just really trying to decide if it will be an investment or if it would possibly just limit my funding of other invesments such as future ROTH IRAs or mutual funds / indexes.

JohnGalt

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Re: First house -- couple questions
« Reply #9 on: June 20, 2012, 12:08:22 PM »
Some added info:

I am 23, my salary is 62k+7.5k bonus. I also have a side business that flucuates greatly so I do not count that as income in terms of these figures.

My girlfriend brings in 39k but is 34k debt.

I will diversify my 401k as I realize how stupid it is do have so much stock (lame pun) in one company.

Does anyone see the below situation working out.

I make a 10k down payment on a 150k house. My PMI would only be about $84 a month until I hit 20% equity. The payments would be far better than my current as I live in a very rich area to avoid crime (I live in the south so 830-850 for rent is pretty high). I want to move to this new location for the lower crime, lower taxes, cheaper gas, easier commute for my girlfriend (I fly so it doesn't really matter to me).

I want this house to be an investment more than I want to actually live in a house. If it doesn't make 100% financial sense there is no point in doing this. I just know that this could be the best possible time for us to buy with the lowest rate. Keep in mind I have a "great" credit score with absolutely no debt.

If you are looking to do this for purely financial reasons - you'll need to factor in the length of time you plan on owning, all of the costs associated with purchasing, maintenance, insurance, etc.  I was in a very similar situation 2 years ago (without the benefit of an MMM philosophy) and bought a house based almost entirely on the conventional wisdom that it's financially better to own than to rent and interest rates and prices were so low that I couldn't turn it down.  I was making almost exactly what you are then and bought a $150k house with 3% down that needed $20k in improvements.  It has turned out to be much more expensive than I initially expected it would be and has really limited my flexibility.  The location made sense because of my job when I bought it, but I have since changed jobs and the location is now a problem.
If you do a full comparison - I think you'll find that buying a house to live in will only make sense if you plan on staying there for a significant amount of time unless you can get a great deal.  Even then, I would caution you against buying in a location that works for your girlfriend at your age.  Life changes quickly at that age, flexibility has value.

Thanks for the detailed response. Moving for my girlfriend won't be a problem she will always have work in the major city that is close to us, she also has a 2 year contract with her current employer. We plan on living in this house at least 7-10 years. I am just really trying to decide if it will be an investment or if it would possibly just limit my funding of other invesments such as future ROTH IRAs or mutual funds / indexes.

In that case - I think it will come down to what specific real estate deals you can find vs your expected return on alternative investments, taking into account the leverage of the mortgage, all associated costs (financing, PMI, taxes, maintenance, insurance, etc), tax benefits, and everything else.  If you're not already - I would also make sure to consider the advantages of contributing the max to 401K and IRA from a tax/investment return perspective.  The tax advantages for me are tough to beat so I max out my 401k before I invest anywhere else. 

MrD

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Re: First house -- couple questions
« Reply #10 on: June 20, 2012, 12:24:28 PM »
Fair point on the 401k. Although I am not sure if maxing it out would be great for me as I plan on retiring a good bit before 60, although I may have other options to spend until that time with IRAs and other funds.

AJ

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Re: First house -- couple questions
« Reply #11 on: June 20, 2012, 12:50:15 PM »
Fair point on the 401k. Although I am not sure if maxing it out would be great for me as I plan on retiring a good bit before 60, although I may have other options to spend until that time with IRAs and other funds.

You don't have to wait till 60 to access 401k funds. Google "72t".

grantmeaname

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Re: First house -- couple questions
« Reply #12 on: June 20, 2012, 12:56:14 PM »
You can also put the 401k into a Roth IRA and then use the money after a 5 year wait, or take Rule 72t withdrawals... it's not like you just can't use the money at all until 59.5.

MrD

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Re: First house -- couple questions
« Reply #13 on: June 20, 2012, 12:58:18 PM »
Fair point on the 401k. Although I am not sure if maxing it out would be great for me as I plan on retiring a good bit before 60, although I may have other options to spend until that time with IRAs and other funds.

You don't have to wait till 60 to access 401k funds. Google "72t".

I should have clarefied, I meant that I could not touch the 401k before 60 because I did not want the 10% hit associated with the 72t.

JohnGalt

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Re: First house -- couple questions
« Reply #14 on: June 20, 2012, 01:07:34 PM »
72t gets you out of the 10% hit, so does rolling over to a Roth IRA and waiting 5 years before withdrawing.

arebelspy

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Re: First house -- couple questions
« Reply #15 on: June 20, 2012, 02:21:00 PM »

I should have clarefied, I meant that I could not touch the 401k before 60 because I did not want the 10% hit associated with the 72t.

The point of the SEPP (72t) is to access the money penalty free.  (You will, of course, have to pay taxes, the same as you would if you accessed it after 60.)
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MrD

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Re: First house -- couple questions
« Reply #16 on: June 21, 2012, 06:50:38 AM »
I also found that if done correctly I will have enough for a 15000 down payment while still have my safety net. I just have to crazy save :)