Personal Finance - Home Ownership

Hope people don’t mind a thread about this!

My wife and I are looking to purchase our first home. Background. I’m 29 making $120-$140k a year. My employer has treated me very well the last 4 years and my job seems pretty solid. She is 27 making $50k as a teacher. Our only debt is $40k in low interest student loans, $2000 car loan (150 per month) and a $300 per month car lease. We will have $25k saved for a down payment / closing costs when our $1400 apartment lease runs out in June. The houses in the neighborhood we like are between $375k-$400k. Is it foolish to buy a $400k house on our income with only 5% down? I understand we will be paying PMI, but we have lived in a 1 bedroom apartment for too long and our rent keeps going up. It would be $2100 for a 2 bedroom. My thought was to pay more than my mortgage monthly to try and recoup equity quicker.

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Yup. With your combined income, job security and age, no better time than now!

Get an Amortization table. It’ll show you exactly how making additional periodic principal-only payments will save substantially over the life of the loan.

A few things:

  1. Paying $375-400k on your salary seems fine, but your down payment seems super low. Obviously you’ve got PMI to worry about, but that amount of savings suggests that you don’t have a lot of liquidity available for basic upkeep. It’s hard to know how much that’s going to run, and will obviously depend on the age/condition of the house and your own preferences. But I think it would be reasonable to expect annual maintenance costs of 2-4% of the house price. That’s not going to show up evenly every year, but will come in lumps like replacement appliances, new driveways, new HVAC, etc. So make sure you bake that into your financial projections.

  2. There’s absolutely nothing wrong with renting, and if it means paying $2,100 for a place that’s better suited for your life, that seems reasonable to me if the alternative is a $400k house. You’re not throwing away money by renting - you’re paying to consume housing the same way that you’d pay to consume food or pay to own a house (largely through interest payments). It’s not like you’re getting free housing if you buy.

  3. I don’t think you should try to build up equity by making more payments, unless it’s done with the goal of eliminating PMI. Interest rates are at historic lows right now and it’s hard to imagine that you wouldn’t be better off investing in the market for the next 15 years rather than paying off a 3-4% mortgage.

To Rivaldo’s point above, making additional payments will reduce the total interest paid over the life of the loan, but that doesn’t make it a smart financial decision if that money would have generated a higher return elsewhere.

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Once they have paid the equivalent in down payment and monthly payment(principal ldo) of 20% of the home’s value, does the PMI get nixed ?

From Bankrate.com (How To Ditch Mortgage PMI Payments | Bankrate):

For folks with PMI, you must have at least 20 percent equity in the home to eliminate it. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80 percent of the home’s original appraised value. When the balance drops to 78 percent, the mortgage servicer is required to drop the PMI.

You can also request a reappraisal if you think the home has increased substantially in value. No idea how successful those requests are.

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Buying a home is often a good decision and with your income and that price range it should be a good decision as long as you buy a decent home in a decent area.

Interest rates are low and you are buying a house that is only slightly more than 2x your combined annual income, so definitely affordable, especially combined with your low car payments.

You make enough money to figure out maintenance needs when they come up (tho saving is good idea) so you shouldn’t have issues there.

You have no debt so you are fine with how you spend your money so should be ok there.

The mortgage will be higher than apartment and utilities may be as well depending on how much house 400k gets you in your area, but the rates are low and prices should rise over time and you can afford it, so lock in that payment now if 400k gets you a home you want to be in for awhile.

I wouldn’t worry too much about only putting 5% down other than it means pmi for awhile

The neighborhood is directly outside of downtown proper and property values have risen continuously since we moved here 4 years ago. Tons of houses being built/remodeled. I don’t see any chance that they don’t continue to rise as the city is growing significantly.

I was against buying in so cal for jmakin because of the market and the fluidity of his situation.

Buying in the 500k range seems like a good move for OP. Probably best to buy a worse place in a good area where you can buy again in like 7-10 years and rent it out or at least get more appreciation.

FYI this does not apply to FHA loans, which carry MIP (their version of PMI) for the life of the loan unless you refinance.

How much of your income are you saving for retirement and in taxable accounts? Buying a house seems fine in your situation but I wouldn’t pay any extra on your mortgage unless you are doing great with your retirement savings rate.

I max an HSA and will start maxing my 401k within the next month. I have been putting enough in to get my company match. Haven’t maxed it previously as we were paying off high interest debt.

At your income you should be able to put 6k in a Roth for both you and your wife. I think the priority order most people agree on is

  1. 401k to get your match
  2. HSA
  3. Roth if your’e under the income limit ($203k for married couples filing jointly)
  4. 401k
  5. Taxable account

Only other thing I might add is that you might want to hold off buying a year or two until you decide how much you want to save, then get your retirement and other savings set up, on autopilot, and sort of internalize the amount of money that you have left over. You could save up more for a downpayment as well. And as spidercrab said, there’s nothing wrong with renting, it’s really nice actually. All the costs are up front and if your water heater explodes you just call up your landlord. Of course there’s nothing wrong with buying either and do that if you want to. You can certainly afford it. But I think there’s a benefit in renting an apartment or house that’s better suits your needs, getting your finances really solidified, and then buying.

edit: misread your earlier post, thought you said you WEREN’T getting your match. Oops! Fixed now.

Do you work in personal finance when you are not hurting people for money?

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good lord no, I work for a living. I just like talking about personal finance and retirement savings for some reason. I’d be homeless if I was like a financial adviser because I’d be all look guys just invest in low cost mutual funds, this is a scam, get out of my office.

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Why is Roth better than post-match 401k? I was generally under the impression that the reverse was true, because the tax rate you’d pay now on your Roth contributions is probably higher than the taxes you’d pay in the future when you withdraw from a 401k.

Its debatable and doesn’t matter much either way. I’m a fan of diversification of tax and other risk. You don’t know what your tax situation or even what the tax laws will be in 20-40 years. Roth money is also more flexible than 401k money as well so can be kind of a gateway savings vehicle to young people afraid to put their money in accounts that they won’t be able to access for 30 years. You can always withdraw contributions penalty free from a Roth. So it’s more accessible during emergencies. Of course you shouldn’t unless you absolutely have to, but sometimes you have to.

Outside of those considerations 401k is probably better, particularly if you think you might retire well short of 59 1/2. You can roll over 401k money to a Roth at your marginal income tax rate, which is very nice if you’re 50 years old and living off of your taxable accounts and don’t have any earned income. You can roll over big chunks each year paying 0 to 10%.

But if you’re saving enough to retire by 50 you should definitely be maxing out both your Roth and 401k (and you’ll have to contribute a substantial amount to your taxable accounts as well). But bottom line is that the order I posted above is pretty good for young people who aren’t saving enough to max out their tax advantaged accounts. It maximizes flexibility (HSA and Roth can help out in emergencies more than 401k), and if you can’t afford to max out your taxable accounts you probably aren’t in a high marginal tax bracket, which makes Roth better.

Not just early retirement but going back to school, taking a year off, or any other situation where your taxable income drops. I used to contribute to traditional IRA’s in one year then roll it over the next when I deployed and my pay became tax free. I got my girlfriend to roll over her entire traditional IRA into a Roth over 4 years while she was earning a doctorate degree.

Separately if you’re working in CA or another high tax state and think you might retire somewhere else that’s a good reason to prefer tax deferred plans.

General question:

I just signed up for earthquake insurance (in CA, home insurance does not cover earthquakes) so that I’m not financially fucked if the big one hits. It made me curious about the nature of banks, mortgages, and home insurance in general.

From going through the mortgage process, I know banks require you to carry home insurance. I assume the reason for that is to protect their financial interest in the home, since currently they own 80% of my home and they would very much like it to not burn down and be worth only what the land is worth.

If that’s correct - why do they not also require people to carry earthquake insurance, given that their financial interest is also at risk from earthquakes?

So I’m not an actuary but Im sure it has to do with the lack of frequency. Yes it would be catastrophic but the risk is very low. Similar to how most home insurance policies don’t cover damage due to volcanoes. While catastrophic, risk is low.

Versus requirements if you live in a flood zone because flood areas are well documented and folks much better at math than I am can figure it all out. Though flood insurance is heavily subsidized, which is a whole different discussion.

Just a little update: My wife and I decided to hold off a bit on purchasing a house. We are at the point where we are making good money and have little debt and no obligations, so we want to take advantage of the ability to travel easily. We decided to save more money for a down payment. Going to get a 2 bedroom in our apartment complex for less than what our mortgage would have been and just keep putting money back. I

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