Home Loan $ vs Early Retirement

[JoQsh]

Hey all,

My wife and I are looking at buying our first home soon, and our biggest point of contention is how much house to buy. I think housing is one area that big spending can be acceptable - after all, we're going to LIVE there. My wife thinks we should limit ourselves more. What we'd really like to see is how big of an impact our housing costs will have on our planned mustachian-style early retirement. So far we've been unable to work out the math to see how a bigger home loan would compare to years worked before retirement. Could you help us out? I don't want to spend a ton on housing if it means another ten years before retirement.

For the record, we're looking at spending $70,000 to $150,000 in the Missouri Ozarks. (very low housing costs compared to elsewhere in the nation) In our area, $100,000 can buy a 4 bed, 2 bath built in the 70s or 80s without much difficulty. (4 bed is what we're looking for) Below 100k gets a shoddier house with smaller rooms and above it gets a newer house with bigger rooms, less damage, and more polish. We can afford to save (or pay off a house with) about $2,000 per month under normal circumstances. (no medical emergencies, for example) If you need more info, let me know.

[catccc]

I've been a fan of the mustachecalc.com site for a week or so now...  I would plug in some numbers into the "Time to FI" calculator for a couple of scenarios and see how the results are affected.

Also, DH and I went to a party over the weekend, at a really nice house on a really expensive street.  DH noted that he couldn't believe the residents were "not well off" as they had once claimed to be, seeing the gourmet kitchen with a double-wide fridge and fancy finishings, the minature vineyard, etc.   He gets it, but I had to remind him that we, too, actually have the cash flow to live that life, but instead of looking at FI in 14 years, it would take 26 years, so 12 years longer.  That would put me at retiring at 62 instead of 48.  I already feel like 48 is so "late" compared to some.  So another 12 years, that's not cool.  FWIW, these stats for me are comparing a $300K home to a $600K home.  Obviously in a higher housing cost area.  But you get the idea.

Good luck!

[Frankies Girl]

One of the big questions to ask yourself is why you would buy more house than you need.

There used to be a concept of buying a "starter home" for your first house. You bought a smaller house, maybe one that needed a little work, and you fixed up and learned how to deal with all the jobs that houses require. As your family grew, then you started looking at the next house to accommodate the new larger family size.

As you don't say the size of your family currently, all I have to go off of is you and your wife mentioned. But I'm going to assume you have at least two children for you to be looking for a 4 bedroom.

I also live in a low housing cost area, and similar housing cutoff pricing.

That being said, you need to concentrate on the area - the neighborhood - more than the house. Find a neighborhood that has a good community feel, good schools, nice people out working in their yard or kids playing outside and is convenient to places you'll need to go. THEN focus on the houses - and find one that fits your family.

And while what you're saying is technically true about the above X amount gets you "bigger rooms, less damage, and more polish" is there some reason that you'd need really large rooms (do you have giants for children, or some that have special needs for huge pieces of furniture or lots of stuff?) and are you unable to "polish" or repair things yourself? Do you like paying lots more money to others to do things you'd be capable of doing yourself for much less money? Do you like the idea of throwing 10-20K more at something just so you don't have to do it or because it's newer?

Houses are money pits. They constantly need fixing, tweaking, patching and maintenance. You'll also be paying more taxes and insurance for a larger/newer house. 

So yeah, I think it's more mustaschian to get a house that might need some TLC at a cheaper rate in a nice neighborhood.

As far as how it will effect your ER deadline, that's purely how much you are planning to spend, and what you are saving, and what you could save... would need some more numbers to see. You'd have to run the numbers yourself, but I imagine buying a more expensive house will always impact ER somehow.

It is a definite worry that you mention you can save 2K a month barring any emergencies, which sounds like you don't have an emergency fund already - something to definitely take care of before you jump into a house purchase.

[JoQsh]

@catccc - Thanks! I'll take a look at the calculator and reply with any new information I learn from it.

@Frankies Girl - First of all, thank you for your very detailed response. :) It's actually just the two of us for now, but we plan on having our first kid within 5 years, and probably 2 more soon after. We'd also like room for an office, as I'm planning on converting to freelancing from home after I retire from my full time job.
    I'm familiar with the idea of a starter house; we've decided we'd like to skip over it, largely because of how good the market is for first-time buyers right now. We likely won't have an opportunity like this 10 or 20 years down the road. As far as the large/new vs small/old, it's mostly just a matter of personal preference. We both like larger rooms, (who doesn't?) and it seems that newer houses would have fewer problems. I'm more than willing to work on a house, but I've never done it before and I don't have all the necessary tools, so I'm a bit unconfident in my abilities at the moment. Polish, I can certainly live without or do myself. I'm a bit wary of problems that need fixing, though, and so far, every house we've seen has been one or the other - polish or problems. We're yet to find our first choice, which would be little or no polish and little or no problems. I also don't think I could handle any major issues, like a house with asbestos or bad electrical work throughout. You sound like you have some experience with DIY home improvements and repair. Do you think I'm being too wary of it? I don't know how much of it is expertise and how much is elbow grease. Elbow grease I can handle. :)
    We do have an emergency fund of sorts, it's just not tightly defined yet. In the process of buying a house, one of the things we'll have to do is tightly define it so that we know exactly how much of a down payment we can afford. When I was barring emergencies, I meant really huge things that would beat an emergency fund into a pulp, like terminal illness, or maybe a house fire. (depending on insurance)

I'll take a look at the calculator catccc recommended and I'll try to get some more exact numbers in order to share.

[RootofGood]

You say you have $2k per month to spend on a house.  That means you can pay down the principal on a mortgage big time, or service a much larger mortgage. 

I would focus on what you need and what you will be comfortable with for the medium to long term.  It doesn't have to be a perfect house, because your tastes may change over time anyway.  You can do work on the house over the years to get it to your liking (yourself, with friends, or get a reference for someone who does good work cheap). 

Things like neighborhood, location, and proximity to everything you do (schools, work, groceries, entertainment, etc) are as important as the physical structure you are buying. 

Whether you should spend $70k or double that is up to you. 

Frankie's girl nailed it here: "They constantly need fixing, tweaking, patching and maintenance. You'll also be paying more taxes and insurance for a larger/newer house. "

Taxes, insurance, and maintenance will probably be more than your mortgage payment.  Double the size or value of your house, and you double all those costs.  And those costs never go away. 

If you want to "fit in" and not spend much money, it is easier to be very frugal and find friends and neighbors with similar frugality in neighborhoods that aren't high end.  Maybe $150k isn't high end but rather middle of the road, so this frugality of neighbors issue may not come into play.  This factor is relevant if you have kids.  It's easier when your kids' friends live modestly as they do instead of having big spenders who always have new stuff. 

Good luck with the house purchase!  Those prices sound pretty awesome and even lower than the low low prices in my neighborhood.

[JoQsh]

Using the calculator catccc pointed out, I came up with a rough estimate for anyone who's curious. I'm not completely confident in these numbers, but it's a good place to start. It looks like, if you agree with MMM's ER strategy, (around 600k stache, between 20k and 30k annual expenses)$10,000 amounts to 3 month's extra work before retirement if you're saving at a rate of $25,000/yr. Based on that, 1 year's work can buy you $40,000 more worth of house. That's if you pay the 40,000 up front, though. Paying it through a loan is, in the current market, a better situation, because the interest rates on the loan can be beaten by a savvy investor. With a higher rate on the loan, though, or weaker investments, the real life picture could be a bit worse, not better. Also, this model does not account for the probable increase in taxes and maintenance that comes with a bigger house.

In my case, it's probably a bit worse than that, because we'll likely up our annual spending by having more kids in the picture. Still, I think I can deal with a year or two of extra work for that much of an increase in home-buying power. With the bargain housing in my area, $40,000 is worth a heck of a lot.

Still, I'll keep FG's advice in mind. A bit of DIY can go a long way, financially, and I'm probably being a bit of a wimp in looking at pricier houses just to avoid it. Thanks to FG and RootofGood for pointing out that maintenance and taxes will be a significant issue in any house. It sounds like I'm going to need to learn the Home care DIY skills in a new or old house, anyway, so maybe I shouldn't be avoiding the repairs so much. RoG, I completely agree with you about the frugality of the neighborhood. That's a very good point. Also, I'd like to stress for any future readers that my estimate above does NOT account for tax/maintenance increases.

[RootofGood]

JoQsh, I don't personally think you are foolish for potentially wanting to spend an extra $40,000 to get a newer, nicer house.  If it has features you want anyway, it  is often cheaper to buy them in an existing house than to try to remodel later to get those options (especially if you can't do much work yourself).  A recent thread here discussed a $50k+ kitchen remodel.  You might be able to get a nicer kitchen for a small fraction of that if you buy an existing house with a nice or remodeled kitchen. 

[catccc]

Using the calculator catccc pointed out, I came up with a rough estimate for anyone who's curious. I'm not completely confident in these numbers, but it's a good place to start. It looks like, if you agree with MMM's ER strategy, (around 600k stache, between 20k and 30k annual expenses)$10,000 amounts to 3 month's extra work before retirement if you're saving at a rate of $25,000/yr. Based on that, 1 year's work can buy you $40,000 more worth of house. That's if you pay the 40,000 up front, though. Paying it through a loan is, in the current market, a better situation, because the interest rates on the loan can be beaten by a savvy investor. With a higher rate on the loan, though, or weaker investments, the real life picture could be a bit worse, not better. Also, this model does not account for the probable increase in taxes and maintenance that comes with a bigger house.

Oh, yeah, this is totally a back of the envelope kind of calculation, but hopefully it helps you get your arms around a "more house to time worked" kind of ratio!

All these talks of houses being money pits that constantly need repair make me feel glad I'm still renting.  But we do eventually want to own and the pressure is definitely on with housing having made a bit of a comeback in recent months.  Also, I don't like how people assume that we rent because we lack financial means or sense.  So not the case with us.  But I guess part of this lifestyle is constantly throwing what other people think into the "who the f cares" part of your mind...

[JoQsh]

Thanks for the clarification RoG. We aren't looking to do any major remodeling, (at least not anytime soon) so I'm with you on that.

catccc, I know exactly what you mean. Conventional wisdom is extremely flawed sometimes, and getting it from friends and family makes it difficult. I wish I could get them to look at the numbers and seriously consider what their lives will be like more than 5 years down the road. Ah, well. You can lead a horse to water, but you can't make it drink. This is my first time on this forum, and I have to say, it's been a breath of fresh air. Thanks so much, guys! :)