How much house can we afford?

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wizwit55
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Joined: Thu Apr 22, 2021 3:32 pm

How much house can we afford?

Post by wizwit55 »

Hi. My wife and I are weighing whether or not to buy a new house. We've always been pretty conservative with our money and are adept at keeping a budget. Long-term planning is where we feel a bit out of our comfort zone. My career has gone much farther than I ever expected and we're considering trading out of our nice house into our dream house. We would wait at least a year or 2 for the current market to cool off or at least stabilize. But we're still trying to figure out what a reasonable budget is. Any thoughts are appreciated. We haven't seen a financial planner and I'm questioning whether we need that or not.

Our stats:
Ages 40/40 + 3 kids 2-6
Very high cost of living area

Income statement stuff (annual basis):
Gross HHI ~950k. Very bonus heavy.
Takehome HHI ~500k - net of taxes, 401k contributions, benefits, etc
Mortgage + Prop tax = 80k
Other spending = 225k
Liquid savings = 170k -> flows into our brokerage acct
Retirement savings = 130k (401k + HSA + NQ plan + pension contribution)
529 plan savings = 30k
So gross paycheck roughly breaks out: 1/3 taxes, 1/3 savings, 1/3 spending

Balance sheet stuff:
Current house = 1.15M (purchase price, 5 yrs ago)
Mortgage = 850k @ 3.5%
2 cars, 1 loan left < $15k (we should just pay this off)
Cash = 30k
Brokerage acct = 1.6M
Various retirement accounts = 1.5M (401ks, IRAs, HSA, lump sum pension balance)
529 plans x3 = 250k
Net worth ~3.75M

Financial goals:
Keep my job :)
Pay for our kids' college in full
Retire at 55, or at least have the option to do so
We won't feel comfortable retiring without a substantial cushion. But want to enjoy life while it's good and avoid hoarding our money.
stan1
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Re: How much house can we afford?

Post by stan1 »

Seems like a choice you can make if you want, but of course you didn't tell us what the target price would be for the new house? Maybe it is $2M (sure you can do it) or maybe it is $5M (probably not!)? What is the price of a house your family would need? I'd start with that rather than trying to figure out the max you could put into a home. You do have large investment accounts but in comparison to your income and expenses you are on your way but not there yet.

A financial advisor would just give you reassurance or someone to talk to if you need that (you can get it here for free).
Topic Author
wizwit55
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Joined: Thu Apr 22, 2021 3:32 pm

Re: How much house can we afford?

Post by wizwit55 »

We haven't identified a particular house yet. Homes here range from $1-10M. We'd probably be in the $2M-$3.5M range.

I guess I'm looking for guidance as to how to even approach this question. I've gone as far as building out a year by year planning spreadsheet. My goal is to stress test it a bit (drop in income, etc). And see what scenarios preserve the retirement plan. I don't even know how much we need to retire. I'm assuming we want to see assets at 25x expenses at age 65.

And yes, I think we'd essentially be paying for reassurance with a financial advisor.
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RickBoglehead
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Re: How much house can we afford?

Post by RickBoglehead »

Seems simple to me. You qualify to buy a house with a specific debt to income ratio. Total debt can't exceed 43% of income, many suggest 36% as a max. Debt would include all debt, plus mortgage, insurance on the home and taxes. Do the math. See what you qualify for.

Then, remove whatever portion of your bonus you don't feel comfortable locking in. Now do the math again.

If you qualify for a $3 million house, and would feel comfortable with the mortgage, and can pay all your bills for 18 months with your savings, buy whatever you want.

Clearly you've been saving for this, because your retirement savings are way below where they'd be for your income, and your liquid savings are very high.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
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Watty
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Re: How much house can we afford?

Post by Watty »

One big factor is how stable your jobs are.

One thing we see way too often is people posting about how they have some crazy income(good for them) working for a tech company in the Bay Area so they want to buy a house with a 30 year mortgage with the assumption that they will have that high income for a long time. There are obviously a lot of risks with assuming that.
wizwit55 wrote: Thu Apr 22, 2021 4:19 pm Any thoughts are appreciated. We haven't seen a financial planner and I'm questioning whether we need that or not.
Be sure to ask lots of questions here before you see a financial planner. That can be a valid choice but you need to be very careful since probably 99% of them are really just sales people in disguise who will be glad to put you into terrible investments to make an excessive amount of money from you.
KlangFool
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Joined: Sat Oct 11, 2008 12:35 pm

Re: How much house can we afford?

Post by KlangFool »

OP.

1) What spending are you willing to cut by upgrading the house?

2) Your current annual spending is 300K per year.

3) Why do you think you need to upgrade your house? What is the size of our current house?

4) What is your asset allocation?

5) How long do you plan/hope to work?

6) With your current spending of 300K per year, your minimum FI number is 25 X 300K = 7.5 million. Your portfolio is 3.1 million (exclude 529) and saving 300K per year.

With an average 5% annual return, you can reach your number in 8+ years
With an average 6% annual return, you can reach your number in 7+ years
With an average 7% annual return, you can reach your number in 7 years

Starting Net Worth $3,100,000
Annual Savings $300,000
Years
Annual Return Rate 5 6 7 8 9
5.00% $5,614,162 $6,194,870 $6,804,614 $7,444,845 $8,117,087
6.00% $5,839,627 $6,490,005 $7,179,405 $7,910,169 $8,684,780
7.00% $6,073,132 $6,798,251 $7,574,129 $8,404,318 $9,292,620

7) If you increase your housing expense, it will take longer. Is it reasonable for your career to last that long? Do you see anyone older than 50 years old work at your employer in your position?

KlangFool
40% VWENX | 12.5% VFWAX/VTIAX | 11.5% VTSAX | 16% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 40% Wellington 40% 3-funds 20% Mini-Larry
awval999
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Re: How much house can we afford?

Post by awval999 »

You never have to work another day in your life.
You have three young children.
You and your spouse are young, happy and healthy.

Why do you want to buy a multimillion dollar house in a VHCOL when you could just pull the plug and live the rest of your life at peace?

I will just never understand these questions.
60B4E24B
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Re: How much house can we afford?

Post by 60B4E24B »

awval999 wrote: Thu Apr 22, 2021 5:34 pm Why do you want to buy a multimillion dollar house in a VHCOL when you could just pull the plug and live the rest of your life at peace?

I will just never understand these questions.
Some people heavily value the amenities that come with living in VHCOL areas.

And it works both ways. I could never live in a cheap, rural area without culture.

OP: you can afford a $2-3MM house without breaking a sweat, assuming your jobs are stable.
Tingting1013
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Re: How much house can we afford?

Post by Tingting1013 »

I would look at $5M houses.
awval999
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Re: How much house can we afford?

Post by awval999 »

60B4E24B wrote: Thu Apr 22, 2021 5:56 pm
awval999 wrote: Thu Apr 22, 2021 5:34 pm Why do you want to buy a multimillion dollar house in a VHCOL when you could just pull the plug and live the rest of your life at peace?

I will just never understand these questions.
Some people heavily value the amenities that come with living in VHCOL areas.

And it works both ways. I could never live in a cheap, rural area without culture.

OP: you can afford a $2-3MM house without breaking a sweat, assuming your jobs are stable.
Lol.

Oh please. The OP could cash buy a new construction SFH in almost all US cities with plenty of culture for <$1M and still be set for life.
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Watty
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Re: How much house can we afford?

Post by Watty »

awval999 wrote: Thu Apr 22, 2021 5:34 pm Why do you want to buy a multimillion dollar house in a VHCOL when you could just pull the plug and live the rest of your life at peace?

I will just never understand these questions.
The OP makes almost a million dollars a year. :oops:

.
GT99
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Re: How much house can we afford?

Post by GT99 »

awval999 wrote: Thu Apr 22, 2021 7:02 pm
60B4E24B wrote: Thu Apr 22, 2021 5:56 pm
awval999 wrote: Thu Apr 22, 2021 5:34 pm Why do you want to buy a multimillion dollar house in a VHCOL when you could just pull the plug and live the rest of your life at peace?

I will just never understand these questions.
Some people heavily value the amenities that come with living in VHCOL areas.

And it works both ways. I could never live in a cheap, rural area without culture.

OP: you can afford a $2-3MM house without breaking a sweat, assuming your jobs are stable.
Lol.

Oh please. The OP could cash buy a new construction SFH in almost all US cities with plenty of culture for <$1M and still be set for life.
I don't live in a VHCOL or even HCOL area, and I'm 4 years older than the OP, and I "only" have 2 young kids, but I wouldn't retire with what the OP has. I'd only be a few years away, but not there yet. If they go buy a $1M house in a MCOL city for cash, they'd have <$1M in non-retirement, non-529 accounts. That may be enough to last you 19 years, the majority with 3 kids in the house, but it's not for many people.

OP, if you already have $250k in 529 plans and your oldest is 6...why are you still contributing $30k/year to 529 plans? If you don't add any more you'll probably have at least $400k in there before the first even starts college.

Ultimately, the question isn't about how much you can afford, the question is how much house do you want vs when you want to retire? If you're totally fine with working until you're 55 and your income is pretty solid, you could easily afford a $4M house and still retire by 55. Probably more.
KyleAAA
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Re: How much house can we afford?

Post by KyleAAA »

Something in the $3-4mm range would be comfortable with that income, although of course if it's bonus heavy you need to weigh the possibility of part of your income disappearing..
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Nate79
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Re: How much house can we afford?

Post by Nate79 »

I would have a mortgage no more than 3x your annual income for which you believe is solid and not at risk of fluctuating year to year. If that means discounting your bonus by some percentage or all of it so be it.
Topic Author
wizwit55
Posts: 9
Joined: Thu Apr 22, 2021 3:32 pm

Re: How much house can we afford?

Post by wizwit55 »

Thanks everyone. This is all good stuff to consider. Are there any good books on long term financial planning?
GT99 wrote: Thu Apr 22, 2021 9:05 pm OP, if you already have $250k in 529 plans and your oldest is 6...why are you still contributing $30k/year to 529 plans? If you don't add any more you'll probably have at least $400k in there before the first even starts college.
Good question. I've just been on autopilot with the 10k per kid per year contributions. I should probably evaluate that. I know there's a penalty for non-qualified withdrawals. College costs are just getting scary high so stashing money is my default.
RickBoglehead wrote: Thu Apr 22, 2021 5:17 pm Seems simple to me. You qualify to buy a house with a specific debt to income ratio. Total debt can't exceed 43% of income, many suggest 36% as a max. Debt would include all debt, plus mortgage, insurance on the home and taxes. Do the math. See what you qualify for.
I'll run the math on this over the weekend. Seems simplistic though if it doesn't take into account accrued savings? By that I mean, I could put down 50% on a $2M+ home. But I never would with interest rates this low.
Watty wrote: Thu Apr 22, 2021 5:19 pm One big factor is how stable your jobs are.
Yeah that and market volatility are clearly my biggest risks. My job *feels* really stable, but you never know... On the other hand, I've consistently underestimated my career trajectory at every step of the way.
KlangFool wrote: Thu Apr 22, 2021 5:33 pm 1) What spending are you willing to cut by upgrading the house?
3) Why do you think you need to upgrade your house? What is the size of our current house?
5) How long do you plan/hope to work?
7) If you increase your housing expense, it will take longer. Is it reasonable for your career to last that long? Do you see anyone older than 50 years old work at your employer in your position?
1) None. The goal is to maintain our current lifestyle otherwise. There may some additional expenses with a new house (pool maintenance, etc).
3) Current house is fine, just a bit dated. This is a want, not a need.
5) I'd like the option to retire at 55
7) Yeah I won't age out. I'm young for my position. The biggest risk is if our business falters or new management comes in and thinks I'm overpaid :)
awval999 wrote: Thu Apr 22, 2021 5:34 pm You never have to work another day in your life.
You have three young children.
You and your spouse are young, happy and healthy.

Why do you want to buy a multimillion dollar house in a VHCOL when you could just pull the plug and live the rest of your life at peace?

I will just never understand these questions.
That's fair. I didn't grow up in an area that was anything like this so I see the other perspective. A younger version of me would see it your way.
Many reasons to not pull the plug though: I actually enjoy my job (most days). I see no point in retiring while I have school age kids. It's not like I could travel the world yet. Also it would seem strange to me if my kids didn't see me working for a living. I also think I'd be really lonely and disconnected from my friends if they continued to work and I retired super early. The VHCOL allows me to keep my current income and the resulting savings. The family is pretty happy where we currently are, so no need to rock the boat, change schools etc. Also I figure I should keep getting this money as long as I can even if I don't know what I need it for yet.
av111
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Re: How much house can we afford?

Post by av111 »

wizwit55 wrote: Thu Apr 22, 2021 4:19 pm Hi. My wife and I are weighing whether or not to buy a new house. We've always been pretty conservative with our money and are adept at keeping a budget. Long-term planning is where we feel a bit out of our comfort zone. My career has gone much farther than I ever expected and we're considering trading out of our nice house into our dream house. We would wait at least a year or 2 for the current market to cool off or at least stabilize. But we're still trying to figure out what a reasonable budget is. Any thoughts are appreciated. We haven't seen a financial planner and I'm questioning whether we need that or not.

Our stats:
Ages 40/40 + 3 kids 2-6
Very high cost of living area

Income statement stuff (annual basis):
Gross HHI ~950k. Very bonus heavy.
Takehome HHI ~500k - net of taxes, 401k contributions, benefits, etc
Mortgage + Prop tax = 80k
Other spending = 225k
Liquid savings = 170k -> flows into our brokerage acct
Retirement savings = 130k (401k + HSA + NQ plan + pension contribution)
529 plan savings = 30k
So gross paycheck roughly breaks out: 1/3 taxes, 1/3 savings, 1/3 spending

Balance sheet stuff:
Current house = 1.15M (purchase price, 5 yrs ago)
Mortgage = 850k @ 3.5%
2 cars, 1 loan left < $15k (we should just pay this off)
Cash = 30k
Brokerage acct = 1.6M
Various retirement accounts = 1.5M (401ks, IRAs, HSA, lump sum pension balance)
529 plans x3 = 250k
Net worth ~3.75M

Financial goals:
Keep my job :)
Pay for our kids' college in full
Retire at 55, or at least have the option to do so
We won't feel comfortable retiring without a substantial cushion. But want to enjoy life while it's good and avoid hoarding our money.
This kind of question brings out opinions from people with different income , lifestyle, location, background, age etc. Good for brainstorming but terrible for actionable advice. What my father did with his money means nothing for you because he did not have your income, opportunity, lifestyle, desires etc.

You asked for a reasonable budget, you could easily qualify for 3m loan

Your current home should sell for 1.5M, freeing up 500k of tax free profit at the minimum. You can easily pay 1m down.

Carrying costs for a 4m home should be about
24% of your income.
AV111
rich126
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Re: How much house can we afford?

Post by rich126 »

awval999 wrote: Thu Apr 22, 2021 5:34 pm You never have to work another day in your life.
You have three young children.
You and your spouse are young, happy and healthy.

Why do you want to buy a multimillion dollar house in a VHCOL when you could just pull the plug and live the rest of your life at peace?

I will just never understand these questions.
Personally I don't care how people spend their money. I do my thing and others do different things. As to understanding these questions I think in the vast majority of situations the reason why is status and keeping up with coworkers.

I've seen married coworkers making less than me (single, no kids) buying a 7 series bmw to show friends that they have made it. Unfortunately in that example the guy lost his job. This poster is making a lot more and the biggest danger is job loss, health issue and divorce. Everyone values those items differently.
HereToLearn
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Re: How much house can we afford?

Post by HereToLearn »

Do you know if you will be able to use the public schools for K-12? If not, that could run you another $100K-$150K/year once all three are enrolled in school.
Topic Author
wizwit55
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Re: How much house can we afford?

Post by wizwit55 »

HereToLearn wrote: Thu Apr 22, 2021 10:03 pm Do you know if you will be able to use the public schools for K-12? If not, that could run you another $100K-$150K/year once all three are enrolled in school.
Yes the public schools here are really good. That is 100% the plan.
PowderDay9
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Re: How much house can we afford?

Post by PowderDay9 »

GT99 wrote: Thu Apr 22, 2021 9:05 pm Ultimately, the question isn't about how much you can afford, the question is how much house do you want vs when you want to retire? If you're totally fine with working until you're 55 and your income is pretty solid, you could easily afford a $4M house and still retire by 55. Probably more.
+1

The OP didn't specify the split of HHI between the two of them but it sounds like the job(s) appears stable and they have exceeded their income expectations. It sounds like their income might continue to grow and exceed expectations. I think anything between $2-4M is reasonable.
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RickBoglehead
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Re: How much house can we afford?

Post by RickBoglehead »

wizwit55 wrote: Thu Apr 22, 2021 9:46 pm
RickBoglehead wrote: Thu Apr 22, 2021 5:17 pm Seems simple to me. You qualify to buy a house with a specific debt to income ratio. Total debt can't exceed 43% of income, many suggest 36% as a max. Debt would include all debt, plus mortgage, insurance on the home and taxes. Do the math. See what you qualify for.
I'll run the math on this over the weekend. Seems simplistic though if it doesn't take into account accrued savings? By that I mean, I could put down 50% on a $2M+ home. But I never would with interest rates this low.
Savings are irrelevant to the bank. Bank is looking at Debt to Income ratio. YOU decide how much you want to put down, unless they have a minimum, or if they have an incentive for a larger downpayment. For example, if you put down 20%, you don't have to pay private mortgage insurance.

Don't put down more than you have to, assuming you want to leverage things. So you put down 20% on a 3.5% mortgage, then you put X months of payments into a safe haven (like a 11 month No Penalty CD at Ally), then you put the remainder of the 50% (50 - 20 - X months) into the market and get a return of say 6% or greater. You're now leveraging that money instead of giving it to the bank in return for lower payments at 3.5%.

Alternatively, not that you'll need it, some banks will qualify you for an "asset-based mortgage". That's a mortgage that uses your assets to qualify, turning them into "income". We'll be doing that for retirement, because we want to buy a home that we won't qualify for with no job income. The formula they will use is simple: Take all your assets, excluding annuity values. Divide by 120 (i.e. 120 months). That's your "income". Income x 43% is the max number for your debt to income ratio. So, in your case, with $3.75 million, your monthly "income" would be $31,250, and 43% of that would be $13,437. Assuming your sell your first house and pay off your car loan, you could get a house where the monthly payment, plus monthly taxes, plus monthly insurance doesn't exceed that number. Assuming taxes of $36,000 a year, and insurance of $12,000 a year, and 3.5% mortgage over 30 years, with 20% down... => you could buy a $2.6M home. No idea if the tax number is even close and the insurance is likely twice as much, but you get the idea.

I've contacted 1/2 dozen banks in a proposed retirement location, and 2 of them are eager to do an asset-based mortgage for us, and I've confirmed the numbers.
Avid user of forums on variety of interests-financial, home brewing, F-150, PHEV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
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Watty
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Re: How much house can we afford?

Post by Watty »

wizwit55 wrote: Thu Apr 22, 2021 9:46 pm Are there any good books on long term financial planning?
There is a wiki with a list of recommended books.

https://www.bogleheads.org/wiki/Books:_ ... nd_reviews

There is a section for financial planning books. I have not read them but I have seen posts that recommended the books by Jane Quinn
wizwit55 wrote: Thu Apr 22, 2021 9:46 pm .. On the other hand, I've consistently underestimated my career trajectory at every step of the way.
I have never worked at your level but one risk of some career paths is that you can end up in an "up or out" situation where if you do not get the next promotion then you may be forced out. You could of course find some other work but it might not have anywhere near your current total compensation.
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wizwit55
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Re: How much house can we afford?

Post by wizwit55 »

RickBoglehead wrote: Fri Apr 23, 2021 7:10 am Savings are irrelevant to the bank. Bank is looking at Debt to Income ratio.
I'm trying to not rely on what the bank will qualify me for as a way to decide how much I *should* spend. But I will run the math on debt to income just to have another data point. Thanks.
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wizwit55
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Re: How much house can we afford?

Post by wizwit55 »

PowderDay9 wrote: Thu Apr 22, 2021 10:21 pm The OP didn't specify the split of HHI between the two of them but it sounds like the job(s) appears stable and they have exceeded their income expectations. It sounds like their income might continue to grow and exceed expectations. I think anything between $2-4M is reasonable.
FYI my income is 75% of our HHI. Wife is 25%.
Tingting1013
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Re: How much house can we afford?

Post by Tingting1013 »

wizwit55 wrote: Fri Apr 23, 2021 8:38 am
PowderDay9 wrote: Thu Apr 22, 2021 10:21 pm The OP didn't specify the split of HHI between the two of them but it sounds like the job(s) appears stable and they have exceeded their income expectations. It sounds like their income might continue to grow and exceed expectations. I think anything between $2-4M is reasonable.
FYI my income is 75% of our HHI. Wife is 25%.
Just wanted to chime in and say my numbers fit yours pretty much exactly, down to the 75/25 split. I’m looking at houses in the $3.5 range right now but can flex up to $5 if necessary.
SethJane42
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Re: How much house can we afford?

Post by SethJane42 »

I don't need answers to these questions, but you might consider them.

How much "more" house do you really want and why? Is there any symbolism involved? (eg. "more house" = higher status)

Will paying for "more" house put more financial strain and stress on you?

Why do you need "more" house?

Will getting "more" house bring about your goals for your children and finances much sooner?

Will it really make you happier?
Bunty
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Re: How much house can we afford?

Post by Bunty »

I suggest working with emoney kind of tool that shows the cash flows and other details to help you look at multiple scenarios and then decide how much house can you afford.

This tool from Mark Zoril will help you look at your cashflows and assets over time to see if can really afford the house in an objective manner.
ralph124cf
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Re: How much house can we afford?

Post by ralph124cf »

You say that you bought your current home 5 years ago for 1.15M. Do you have a good handle on what it would bring today? I wouldn't trust Zillow, but it does give some idea. Check Zillow to see what it says for your value, discount 10% for inaccuracy, and another 10% for selling expenses. This should be ballpark. You may be surprised at the value of your current home. If you find your current home value is $2M, this may change your thinking about what you may be willing to pay to upgrade.

Property taxes make a huge difference in housing affordability. If you live in California, the property taxes will be fairly low compared to property value. Seattle or east coast VHCOL areas can easily be three times the California rates.

Many people say to budget 2% of the home value per year for maintenance. This does not mean that a $5M house is expected to cost you $100K per year in maintenance, because most of the value in a VHCOL area is in the land. The home construction may be only $700K-$1M, so maintenance would be much less.

Ralph
majiaknight
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Re: How much house can we afford?

Post by majiaknight »

wizwit55 wrote: Thu Apr 22, 2021 4:19 pm ...
Our stats:
Ages 40/40 + 3 kids 2-6
Very high cost of living area

Income statement stuff (annual basis):
Gross HHI ~950k. Very bonus heavy.
Takehome HHI ~500k - net of taxes, 401k contributions, benefits, etc
Mortgage + Prop tax = 80k
Other spending = 225k
Liquid savings = 170k -> flows into our brokerage acct
Retirement savings = 130k (401k + HSA + NQ plan + pension contribution)
529 plan savings = 30k
So gross paycheck roughly breaks out: 1/3 taxes, 1/3 savings, 1/3 spending

Current house = 1.15M (purchase price, 5 yrs ago)
Mortgage = 850k @ 3.5%
...
If I were you, I'd consider a 5 bedroom (4b+den/office) house in top public school district since you have 3 kids (2-6). If this is in the Bay Area, I'd budget $2.5-$3m which you may afford. Consider whether a single income (assuming you're dual-income family) could afford the mortgage payment if you're conservative by increasing your down payment. Personally I won't think about buying into my dream house at this stage of life as I have so many practical needs for the house: every family member has private space/room, daily commute to office for both, schools and neighborhood.
BTW: why you didn't refi your 15y mortgage (as low as ~2%) earlier this year?
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