First house

[dantownehall]

Hi,

I'm moving to a new area in April, and am considering buying my first house.  I'm 26, have no debt, and have been renting.  I make $70,000/yr, and I have about $25,000 in my 401(k) and $62,500 in a separate investment account, in dividend growth stocks and REITs, yielding about 4-5% in dividends overall.

I'm was thinking I can probably safely afford a house in the $150,000-200,000 range.  All the mortgage calculators tell me to get more house, but I'd rather stay on the safe side.  I can get really more house than I need in my new location (western NC) for this price.

One question I had was how much money would a true Mustachian in my situation put down on a house?  Would he spend about what I'm thinking, or more or less?  Would he take some of the money out of the investment account to put towards the down payment, or rent a little longer and save up money from his salary to get to a 20% down payment?  15 or 30 year mortgage?

I'm leaning towards 15 because I plan to pay it off before I'm 30 anyway, so I might as well get a lower rate... right?

I'm new to this, I'd appreciate your help.

Thanks!

-Dan Hall

[jpo]

I am in about the exact same situation.

Planning on getting a 30 year for the flexibility. I would tap your investment account to get the ~40k down payment.

One other thing to consider, if you're moving to a new area you may want to rent for 6 months or so to get your bearings on where you really want to buy.

[Phoebe]

I am 28 and we have been having lots of home buying discussions lately (I just blogged about it today in fact).  We are going to buy our house in cash.  It's not for everyone, but that's our plan.  For us the biggest question is around timing, and with our jobs we feel that mobility is extremely valuable and I'd urge you to consider the same thing since you're still quite young.

Good luck!

[icefr]

I'm moving to a new area in April, and am considering buying my first house.  I'm 26, have no debt, and have been renting.  I make $70,000/yr, and I have about $25,000 in my 401(k) and $62,500 in a separate investment account, in dividend growth stocks and REITs, yielding about 4-5% in dividends overall.

Are you moving to a new city? I would question buying in a neighbourhood without renting in it first, to make sure you would actually want to live there and what commutes will look like. Have you played with the New York Times Buy vs Rent calculator? Are you aware of the maintenance (financially expensive and simply time consuming) that comes with owning a house?

I'm was thinking I can probably safely afford a house in the $150,000-200,000 range.  All the mortgage calculators tell me to get more house, but I'd rather stay on the safe side.  I can get really more house than I need in my new location (western NC) for this price.

Financially speaking, buy as little house as you can. Life speaking, buy a house that is flexible enough to allow you to live there for 5 years, no matter what life change is thrown at you (other than job relocation).

One question I had was how much money would a true Mustachian in my situation put down on a house?  Would he spend about what I'm thinking, or more or less?  Would he take some of the money out of the investment account to put towards the down payment, or rent a little longer and save up money from his salary to get to a 20% down payment?  15 or 30 year mortgage?

I'm leaning towards 15 because I plan to pay it off before I'm 30 anyway, so I might as well get a lower rate... right?

I bought a two bedroom condo last year at 23. I had been saving cash to put down a 20% down payment, plus my estimate of $10,000 for closing and moving costs. I ended up using Redfin to purchase my place, so I didn't pay any closing costs and moving ended up costing less than estimated. (Always estimate higher rather than lower because then you'll end up with leftover cash.) I debated between putting 20% or 25% down, but I stuck with 20%. Rates were slightly better at 25% down, but the extra cash on hand was good for my peace of mind while going through closing and moving. I made a bunch of extra principal payments on my loan a few weeks after closing with that extra cash. I went with a 5/1 ARM, but I make quite a bit more money than you and plan to pay it off in full before the rate resets. I refinanced into a new 5/1 ARM after I had 25% equity and shaved my interest rate down half a point from 3% to 2.5%.

My question on the 30 versus the 15 is can you afford the 15 payments and still save money for retirement? Putting 20% versus 25% down didn't change much on the payment and I could easily afford either, so I just went with 20%. Do you have a Roth IRA? Are you putting plenty of money into your 401(k)? Don't forget to calculate HOA dues (if applicable), property taxes, and increased insurance and utility costs versus renting into your estimates.

I looked into 15 year mortgages, but I found the rates were higher than with the 5/1 ARMs and I was okay with the risk of the 5/1 ARM.

[SunshineGirl]

I'd suggest that you rent instead of buy and keep saving at the rate you have been. Who knows what your life will look like in a year or two? You might hate your new job and want to move; you might have a significant other to consider; you might, you might....

I think people are too quick to buy real estate in today's market -- and that's from someone who owns a couple rentals and a main home. It serves lots of companies very well to push people into buying homes in their 20s -- the banks and Home Depots of the world will be appreciative -- but from my perspective, you've done SO WELL with your money thus far - why not keep it up for a few more years? At 30, you'll have a crapload of money saved and a better idea of what the next ten years of your life will look like. 

[tmac]

+1 on the renting for a little while first. I've seen too many horror stories of people buying as soon as they relocate, and then either: the job doesn't work out and they're unemployed with a mortgage, or they end up hating the neighborhood they chose because they rushed into it.

If you're set on buying, I'd certainly buy a place based on what you need, not what you can get. Within the next five years, if you do end up married with a kid or two, you can always rent out or add on to that smaller place, especially if you're near Asheville. Good rental market.

[DoubleDown]

If you do end up buying, I'm in the "put 20% down" camp (and not more), particularly for a first time home buyer that does not have a ton of extra cash sitting around that they don't know what to do with. The old "you don't want to be house rich and cash poor" maxim holds true. Putting down 20% will get you great loan terms and avoid PMI, while allowing you to stay flexible with your cash and better able to weather unexpected events (like job losses, illness, having a baby, etc.).

[dantownehall]

Thanks everyone for the advice!

I think I will definitely rent for a while first and continue saving for now, if for no other reason than that it makes sense to find out more about the area before committing myself to anything.

[dantownehall]

Icefr,

Fortunately in my situation my employer covers the cost of moving expenses, so no worries there.

I believe I could easily max out my 401(k) and Roth and still make the 15-year mortgage payments, and save more besides; my cost of living is pretty low (and I'm pretty happy nevertheless).  I hadn't really considered a 5/1 ARM, but if I were really committed to paying it off in 5 years or less maybe that would be a good way to go.

My plan as of now is to continue renting and saving for a 20-25% down payment for a purchase somewhere in the 6 - 18 months from now range.

-Dan