Can We Afford This Home?

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Topic Author
SlimJim44
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Joined: Mon Aug 08, 2022 3:40 pm

Can We Afford This Home?

Post by SlimJim44 »

Long time reader, but this is my first post.

My wife and I are currently renting and looking for a home before our second child is born. We are interested in a $570k home and I'm trying to determine if we can comfortably afford the purchase.

Age: Both in mid 30s
Combined Income: $180k

MCOL Area

Assets
Cash Savings: $300k (plan to use $240k for down payment)
Brokerage: $230k
Retirement: $500k between 401ks, IRAs, and Roth IRAs

Debt: $0

Net Income: $8642.38
(after taxes, benefits, maxing 401k (Just mine. She cannot currently contribute), maxing Roth IRAs, and maxing my HSA)


Potential PITI w/ 240k down payment on a $570k home
P&I: $1,797 with current 5.125% rate
Property Taxes: $1,022 after we're eventually reassessed.
Insurance: $150?
HOA: $80
Total: $3049

The insane property taxes make it difficult to pay down the monthly payment. I'm on the fence on if spending ~36% of our net income on PITI+HOA is stretching ourselves too far, especially with two kids. Please share your thoughts.

Thanks in advance
Last edited by SlimJim44 on Mon Aug 08, 2022 5:56 pm, edited 2 times in total.
DarkHelmetII
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Re: Can We Afford This Home?

Post by DarkHelmetII »

Financials don't seem crazy out of whack for your income and down payment . But that is only one piece of the equation. What is fair market rent for this type of property?
Jags4186
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Re: Can We Afford This Home?

Post by Jags4186 »

Is your take home pay of $8642 really $9642? You say $8642 after Roth IRA but that doesn’t come out of your paycheck.

Regardless, I’d consider a few things:

Do your kids go to daycare? I imagine that’s at least $2000/mo. If you have free daycare from grandparents, what happens if that option were to disappear?

Do you like doing outdoor/indoor work? I grew sour pretty quickly of mowing the lawn. We now hire out. We both work and got sour of getting annoyed at the other not cleaning. We now have a cleaning service. I’m too scared to go up on a ladder and clean the gutters—we have a gutter cleaning service. All this adds up to an extra $500/mo.
Topic Author
SlimJim44
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Re: Can We Afford This Home?

Post by SlimJim44 »

DarkHelmetII wrote: Mon Aug 08, 2022 5:21 pm Financials don't seem crazy out of whack for your income and down payment . But that is only one piece of the equation. What is fair market rent for this type of property?
There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month
Topic Author
SlimJim44
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Re: Can We Afford This Home?

Post by SlimJim44 »

Jags4186 wrote: Mon Aug 08, 2022 5:26 pm Is your take home pay of $8642 really $9642? You say $8642 after Roth IRA but that doesn’t come out of your paycheck.

Regardless, I’d consider a few things:

Do your kids go to daycare? I imagine that’s at least $2000/mo. If you have free daycare from grandparents, what happens if that option were to disappear?

Do you like doing outdoor/indoor work? I grew sour pretty quickly of mowing the lawn. We now hire out. We both work and got sour of getting annoyed at the other not cleaning. We now have a cleaning service. I’m too scared to go up on a ladder and clean the gutters—we have a gutter cleaning service. All this adds up to an extra $500/mo.
I modified "take home pay" to "net income" in the original post.

Both kids will eventually go to daycare

I plan on handling the lawn care. I don't mind the work, but will need to purchase the equipment
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Watty
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Re: Can We Afford This Home?

Post by Watty »

SlimJim44 wrote: Mon Aug 08, 2022 4:59 pm 240k down payment on a $570k home
So it is a $330K mortgage with an income of $180K. That is not excessive.
SlimJim44 wrote: Mon Aug 08, 2022 4:59 pm benefits, maxing 401k (Just mine. She cannot currently contribute), maxing Roth IRAs, and maxing my HSA
What does that add up to, something like $40K? Do you get a 401k match too?

That is excessive and not necessary unless you have something going on like you want to retire at a very young age.

You are in your mid 30s and already have $500K in retirement savings. Even if you do not contribute another dime by the time you are in your mid 50s 20 years from now you can expect it to have grown a lot by then.

I didn't try to crunch the numbers but I don't see that you need to keep up your high savings rate and cutting back is probably OK at least for the next few years.

Being an agressive saver has served you well but with kids you are getting into a different phase of your life where your priorities may be different.
SlimJim44 wrote: Mon Aug 08, 2022 4:59 pm Brokerage: $230k
The good news is that you don't need to give up the tax breaks even if you want to cut back on some of the retirement account contributions for the next few years. For example you could fund your Roths each year (2x$6000) by taking $12K out of your brokerage account and putting it into the Roth. That would free up $12,000 a year in cash flow, $2,000 a month, to fund your budget if you buy the house.

There is of course a bit of juggling and mental accounting but you have plenty of flexibility in your situation to do that.
SlimJim44 wrote: Mon Aug 08, 2022 4:59 pm Please share your thoughts.
You pretty clearly can afford to buy it.

The big questions is if you should buy it.

You said that you are in a medium cost of living area. I would think that for $570K you could be buying a heck of a nice house in a medium cost of living area. If your area matches what I am thinking of as a medium cost of living area then for $400K you could still get an above average really nice house in a good location with good schools.

If that is correct then I would take a hard look at buying a less expensive house where you could consider going down to once income for a while if one of you wants to be a stay at home parent for a while. You could also have a situation where you may need to go down to one income for a while if your next kid has even minor and temporary health issues which would make daycare not be a good option if it is even possible.

If your $180K income is not split equally and one of you makes something like $130K an the other makes $50K then be sure to crunch your numbers to see how much the person making $50K is actually clearing after paying for two kids in daycare. It might not be as much as you might think.

Being a stay at home parent is hard work and hard to do and it not right for everyone it could be financially possible especially if you buy a less expensive house.

You could then plan on buying a bigger house sometime before your oldest kid starts middle school since grade school kids can change schools easier.
Last edited by Watty on Mon Aug 08, 2022 7:18 pm, edited 3 times in total.
stoptothink
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Re: Can We Afford This Home?

Post by stoptothink »

Absolutely killing it for a mid-30's couple without super high income. Buy the house.
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SconnieBro
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Re: Can We Afford This Home?

Post by SconnieBro »

stoptothink wrote: Mon Aug 08, 2022 7:05 pm Absolutely killing it for a mid-30's couple without super high income. Buy the house.
+1
KlangFool
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Re: Can We Afford This Home?

Post by KlangFool »

OP,

1) What is your current annual expense?

2) What is your current rent?

3) What is your current annual savings/investment?

4) What is the size of the house?

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Re: Can We Afford This Home?

Post by KlangFool »

SlimJim44 wrote: Mon Aug 08, 2022 5:53 pm
DarkHelmetII wrote: Mon Aug 08, 2022 5:21 pm Financials don't seem crazy out of whack for your income and down payment . But that is only one piece of the equation. What is fair market rent for this type of property?
There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month
SlimJim44,

Considering the opportunity cost of the 240K down payment, it is still cheaper to rent. Why would you buy the house?

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DarkHelmetII
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Re: Can We Afford This Home?

Post by DarkHelmetII »

KlangFool beat me to it. I'd take a serious look at renting.
invest4
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Re: Can We Afford This Home?

Post by invest4 »

You can absolutely afford to do this and continue to max out your tax-advantaged savings in the short term. Over the mid-term, if your income continues to grow and can absorb increased expenses such as daycare, great. If not, you may need to reduce expenses or savings for a bit.

I also agree with some of Watty's comments in regard to thinking about your family situation (stay at home parent).

Best wishes.
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Metsfan91
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Re: Can We Afford This Home?

Post by Metsfan91 »

Yes, you can!!! Good luck!!! And congratulations!!!
"Know what you own, and know why you own it." — Peter Lynch
KlangFool
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Re: Can We Afford This Home?

Post by KlangFool »

invest4 wrote: Mon Aug 08, 2022 8:02 pm
You can absolutely afford to do this and continue to max out your tax-advantaged savings in the short term.
invest4,

How do you know this without knowing OP's current annual expense? For example, OP could be spending 100K per year now while renting.

KlangFool
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z06ray
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Re: Can We Afford This Home?

Post by z06ray »

I haven't read through all the replies so apologize if it's redundant. I think you can well afford it. You've done great so far. One thing I have noticed and didn't seem to believe until I went through it is how much daycare is for 2 and I don't see this ending for several more years and then more kids. Hindsight I probably would have bought a bigger house with a 4th bedroom but no complaints.
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SconnieBro
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Re: Can We Afford This Home?

Post by SconnieBro »

Watty wrote: Mon Aug 08, 2022 7:03 pm
You said that you are in a medium cost of living area. I would think that for $570K you could be buying a heck of a nice house in a medium cost of living area. If your area matches what I am thinking of as a medium cost of living area then for $400K you could still get an above average really nice house in a good location with good schools.
Just sharing a data point: we are in a MCOL suburb that checks all these boxes: good location with great public schools, 3BR/3BA 2500 sq ft. Not small but not huge. We bought five years ago for $395k and the house is now estimated to sell for around $540k.
invest4
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Re: Can We Afford This Home?

Post by invest4 »

KlangFool wrote: Mon Aug 08, 2022 8:24 pm
invest4 wrote: Mon Aug 08, 2022 8:02 pm
You can absolutely afford to do this and continue to max out your tax-advantaged savings in the short term.
invest4,

How do you know this without knowing OP's current annual expense? For example, OP could be spending 100K per year now while renting.

KlangFool
Tis a fair question...and positively one OP should be able to provide some guidance on.

However, given the information provided (age, income, maxing out all tax advantaged savings and possessing considerable retirement and liquid cash savings, no disclosed debt, etc.) as well as plan for significant down payment, I believe an expense surprise of significant magnitude is unlikely.

Of course, as noted in the remaining part of my response, OP should recognize their expenses and income will change over time and they may have to make adjustments (lower expenses and / or reduced savings) accordingly.
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Re: Can We Afford This Home?

Post by KlangFool »

invest4 wrote: Mon Aug 08, 2022 11:40 pm
KlangFool wrote: Mon Aug 08, 2022 8:24 pm
invest4 wrote: Mon Aug 08, 2022 8:02 pm
You can absolutely afford to do this and continue to max out your tax-advantaged savings in the short term.
invest4,

How do you know this without knowing OP's current annual expense? For example, OP could be spending 100K per year now while renting.

KlangFool
Tis a fair question...and positively one OP should be able to provide some guidance on.

However, given the information provided (age, income, maxing out all tax advantaged savings and possessing considerable retirement and liquid cash savings, no disclosed debt, etc.) as well as plan for significant down payment, I believe an expense surprise of significant magnitude is unlikely.

Of course, as noted in the remaining part of my response, OP should recognize their expenses and income will change over time and they may have to make adjustments (lower expenses and / or reduced savings) accordingly.
Or, OP's net worth could be from some wind fall.

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Watty
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Re: Can We Afford This Home?

Post by Watty »

SconnieBro wrote: Mon Aug 08, 2022 9:03 pm
Watty wrote: Mon Aug 08, 2022 7:03 pm
You said that you are in a medium cost of living area. I would think that for $570K you could be buying a heck of a nice house in a medium cost of living area. If your area matches what I am thinking of as a medium cost of living area then for $400K you could still get an above average really nice house in a good location with good schools.
Just sharing a data point: we are in a MCOL suburb that checks all these boxes: good location with great public schools, 3BR/3BA 2500 sq ft. Not small but not huge. We bought five years ago for $395k and the house is now estimated to sell for around $540k.
It really depends on the details of what is considered Medium Cost of Living. The median existing single family home price last quarter was $368K so your house is nearly 50% above the median national price.

https://www.nar.realtor/research-and-st ... ordability

https://cdn.nar.realtor/sites/default/f ... -05-03.pdf

Even if the OP is in your same city I would think that there are similar nice smaller 3br/2ba 2000 sq ft homes that they could get for $100K less that would be fine for a family with 2 very young kids. That would not be a stretch at all for them and give them a lot more flexibility.

Property taxes are also a big problem where they live so those would be lower too. The way property taxes are calculated varies a lot. Where I live going from a $540K house to a house that costs 20% less might reduce the property taxes by around 40% or so since everyone gets the same exemption in convoluted the property tax calculation.

The OP can clearly do whatever they want and it is not like they are looking at buying some million dollar fixer upper in the Bay Area like so many people post about which could be a huge mistake.
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Watty
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Re: Can We Afford This Home?

Post by Watty »

KlangFool wrote: Mon Aug 08, 2022 8:24 pm
invest4 wrote: Mon Aug 08, 2022 8:02 pm
You can absolutely afford to do this and continue to max out your tax-advantaged savings in the short term.
invest4,

How do you know this without knowing OP's current annual expense? For example, OP could be spending 100K per year now while renting.

KlangFool
In the original post the OP said,
SlimJim44 wrote: Mon Aug 08, 2022 4:59 pm Cash Savings: $300k (plan to use $240k for down payment)
Brokerage: $230k
They can almost pay cash for a $540K house.

There is no question that they can afford the house if they want to buy it.

One option that has not been mentioned is that if they are not comfortable with their numbers then they could use another $100K+ from the brokerage account to have a larger down payment and a smaller mortgage that they would feel comfortable with.

Where it gets tricky is deciding if they should buy it or not and that has pros and cons both ways especially if there are nice less expensive houses available.
SlimJim44 wrote: Mon Aug 08, 2022 4:59 pm Long time reader, but this is my first post.
Just FYI, KlangFool is known for being very conservative and has strong opinions about home affordability and it is very rare that they say "yes" to the "Can I afford this house?" posts. He or she also says that you should save a years expenses every year which is not realistic for most people.

This is not to say that the questions they asked are not good things to ask yourself but in part you might want to consider them like devil's advocate questions where the questions are being asked in part to make you think through and justify any assumptions that you may have.
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Re: Can We Afford This Home?

Post by KlangFool »

Watty wrote: Tue Aug 09, 2022 8:07 am
KlangFool wrote: Mon Aug 08, 2022 8:24 pm
invest4 wrote: Mon Aug 08, 2022 8:02 pm
You can absolutely afford to do this and continue to max out your tax-advantaged savings in the short term.
invest4,

How do you know this without knowing OP's current annual expense? For example, OP could be spending 100K per year now while renting.

KlangFool
In the original post the OP said,
SlimJim44 wrote: Mon Aug 08, 2022 4:59 pm Cash Savings: $300k (plan to use $240k for down payment)
Brokerage: $230k
They can almost pay cash for a $540K house.

There is no question that they can afford the house if they want to buy it.
Watty,

I disagreed.

For example, if OP inherited 2 millions and have been spending down the inheritance from 2 million to 1 million while renting, then, OP cannot afford to buy the house.

"They can almost pay cash for a $540K house. "

Your assumption is that the 1 million is from OP's aggressive savings. That may or may not be true.

It is very simple.

If OP live beyond his mean after buying the house and has to use his savings to support his lifestyle, he cannot afford the house.

Without knowing OP's annual expense and annual savings/investment, we could not know for sure whether OP can afford the house.

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Jags4186
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Re: Can We Afford This Home?

Post by Jags4186 »

SlimJim44 wrote: Mon Aug 08, 2022 5:56 pm
Jags4186 wrote: Mon Aug 08, 2022 5:26 pm Is your take home pay of $8642 really $9642? You say $8642 after Roth IRA but that doesn’t come out of your paycheck.

Regardless, I’d consider a few things:

Do your kids go to daycare? I imagine that’s at least $2000/mo. If you have free daycare from grandparents, what happens if that option were to disappear?

Do you like doing outdoor/indoor work? I grew sour pretty quickly of mowing the lawn. We now hire out. We both work and got sour of getting annoyed at the other not cleaning. We now have a cleaning service. I’m too scared to go up on a ladder and clean the gutters—we have a gutter cleaning service. All this adds up to an extra $500/mo.
I modified "take home pay" to "net income" in the original post.

Both kids will eventually go to daycare

I plan on handling the lawn care. I don't mind the work, but will need to purchase the equipment
Okay so you really have $9642 of monthly income. That means you’re spending 31% of your net pay. Do you expect increases in income or just regular 3%/4% raises going forward?

List your current detailed monthly budget and see if this new payment fits in along with maintenance and repairs. Does it fit in when your children go to day care and you pick up that expense? Are you able to meet your other goals with the payment? If so, you have my blessing to buy 😁
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SlimJim44
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Re: Can We Afford This Home?

Post by SlimJim44 »

Thank you, everyone for the great responses
Watty wrote: Mon Aug 08, 2022 7:03 pm
What does that add up to, something like $40K? Do you get a 401k match too?


You pretty clearly can afford to buy it.

The big questions is if you should buy it.

You said that you are in a medium cost of living area. I would think that for $570K you could be buying a heck of a nice house in a medium cost of living area. If your area matches what I am thinking of as a medium cost of living area then for $400K you could still get an above average really nice house in a good location with good schools.

If that is correct then I would take a hard look at buying a less expensive house where you could consider going down to once income for a while if one of you wants to be a stay at home parent for a while. You could also have a situation where you may need to go down to one income for a while if your next kid has even minor and temporary health issues which would make daycare not be a good option if it is even possible.

If your $180K income is not split equally and one of you makes something like $130K an the other makes $50K then be sure to crunch your numbers to see how much the person making $50K is actually clearing after paying for two kids in daycare. It might not be as much as you might think.

Being a stay at home parent is hard work and hard to do and it not right for everyone it could be financially possible especially if you buy a less expensive house.

You could then plan on buying a bigger house sometime before your oldest kid starts middle school since grade school kids can change schools easier.
Correct. Our total annual retirement savings is around $40k after the 7% company match.

The home we're looking at is a 2900 sqft 4 br/ 4 ba. Built in the early 90s with some kitchen and master bath updates. Very nice neighborhood with many amenities.

The housing inventory is still extremely low in our area which has kept the home prices high. Unfortunately, homes similar to what you are suggesting do not really exist around $400k unless they have not been updated since the 80s or are <2000 sqft. I'm probably being extreme but there is not a lot out there. The pricing @SconnieBro described is more in line with what we are seeing. Hopefully that changes as inventory increases, but very few homes are currently going onto the market

@KlangFool We did not receive the money through any sort of wind fall.

We currently rent a 2br apartment for $2200 but would prefer to move before the second child arrives. Our other large monthly expense is $1400 for daycare. Otherwise our expenses are fairly low in other areas.
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8foot7
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Re: Can We Afford This Home?

Post by 8foot7 »

Yes, of course you can afford the house.
Valuethinker
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Re: Can We Afford This Home?

Post by Valuethinker »

SlimJim44 wrote: Tue Aug 09, 2022 8:54 am

The home we're looking at is a 2900 sqft 4 br/ 4 ba. Built in the early 90s with some kitchen and master bath updates. Very nice neighborhood with many amenities.
Once you have found the minimum house that meets your needs, then the underlined is all that really matters. Location. Location. Location. 'hood over house (within reason). I don't live in North America, so it sounds like far too big a house - but conversely when you come to resell, too small a house relative to market demand is very hard to market & sell.

Such houses in great 'hoods are always much easier to sell in a difficult market - in fact in a bad market, they are the only houses that one can sell. It's the real estate equivalent of the Low Volatility stock.
The housing inventory is still extremely low in our area which has kept the home prices high. Unfortunately, homes similar to what you are suggesting do not really exist around $400k unless they have not been updated since the 80s or are <2000 sqft. I'm probably being extreme but there is not a lot out there. The pricing @SconnieBro described is more in line with what we are seeing. Hopefully that changes as inventory increases, but very few homes are currently going onto the market
Replacement costs of new homes are soaring. Every aspect of construction - materials, labor etc. That has to be taken into consideration. Even if inflation does fall (I believe it will) the cost of a new home is not likely to deflate a lot.
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Re: Can We Afford This Home?

Post by KlangFool »

SlimJim44 wrote: Tue Aug 09, 2022 8:54 am
Correct. Our total annual retirement savings is around $40k after the 7% company match.

@KlangFool We did not receive the money through any sort of wind fall.

We currently rent a 2br apartment for $2200 but would prefer to move before the second child arrives. Our other large monthly expense is $1400 for daycare. Otherwise our expenses are fairly low in other areas.
SlimJim44,

The numbers do not add up.

1) Gross income = 180K

2) Annual savings/investment = 40K

3) Let's assume taxes = 60K

4) Annual expense = 80K per year with monthly rent of $2,200.

5) You plan to increase the expense to 90K to 110K per year with the new house.

This is not a household with a low annual expense. Please correct me if I am wrong.

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Jags4186
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Re: Can We Afford This Home?

Post by Jags4186 »

KlangFool wrote: Tue Aug 09, 2022 9:11 am
SlimJim44 wrote: Tue Aug 09, 2022 8:54 am
Correct. Our total annual retirement savings is around $40k after the 7% company match.

@KlangFool We did not receive the money through any sort of wind fall.

We currently rent a 2br apartment for $2200 but would prefer to move before the second child arrives. Our other large monthly expense is $1400 for daycare. Otherwise our expenses are fairly low in other areas.
SlimJim44,

The numbers do not add up.

1) Gross income = 180K

2) Annual savings/investment = 40K

3) Let's assume taxes = 60K

4) Annual expense = 80K per year with monthly rent of $2,200.

5) You plan to increase the expense to 90K to 110K per year with the new house.

This is not a household with a low annual expense. Please correct me if I am wrong.

KlangFool
Annual *retirement* savings is $40k. They have saved $300k in cash and $240k in a taxable brokerage account. The poster is saving beyond just his 401k and IRAs. FWIW, the OP is probably paying closer to $30k in taxes, not $60k.
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Re: Can We Afford This Home?

Post by KlangFool »

Jags4186 wrote: Tue Aug 09, 2022 9:17 am
Annual *retirement* savings is $40k. They have saved $300k in cash and $240k in a taxable brokerage account. The poster is saving beyond just his 401k and IRAs. FWIW, the OP is probably paying closer to $30k in taxes, not $60k.
Jags4186,

Please note that by buying the house, the 240K out of the 300K would be spent as down payment. Hence, it is no longer savings.

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Re: Can We Afford This Home?

Post by Jags4186 »

KlangFool wrote: Tue Aug 09, 2022 9:20 am
Jags4186 wrote: Tue Aug 09, 2022 9:17 am
Annual *retirement* savings is $40k. They have saved $300k in cash and $240k in a taxable brokerage account. The poster is saving beyond just his 401k and IRAs. FWIW, the OP is probably paying closer to $30k in taxes, not $60k.
Jags4186,

Please note that by buying the house, the 240K out of the 300K would be spent as down payment. Hence, it is no longer savings.

KlangFool
Is he setting the money on fire or is it becoming home equity?
KlangFool
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Re: Can We Afford This Home?

Post by KlangFool »

Jags4186 wrote: Tue Aug 09, 2022 9:31 am
KlangFool wrote: Tue Aug 09, 2022 9:20 am
Jags4186 wrote: Tue Aug 09, 2022 9:17 am
Annual *retirement* savings is $40k. They have saved $300k in cash and $240k in a taxable brokerage account. The poster is saving beyond just his 401k and IRAs. FWIW, the OP is probably paying closer to $30k in taxes, not $60k.
Jags4186,

Please note that by buying the house, the 240K out of the 300K would be spent as down payment. Hence, it is no longer savings.

KlangFool
Is he setting the money on fire or is it becoming home equity?
It is earning nothing. Or, losing a few percents every year. Depending on your point of view.

KlangFool
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Re: Can We Afford This Home?

Post by Jags4186 »

KlangFool wrote: Tue Aug 09, 2022 9:36 am
Jags4186 wrote: Tue Aug 09, 2022 9:31 am
KlangFool wrote: Tue Aug 09, 2022 9:20 am
Jags4186 wrote: Tue Aug 09, 2022 9:17 am
Annual *retirement* savings is $40k. They have saved $300k in cash and $240k in a taxable brokerage account. The poster is saving beyond just his 401k and IRAs. FWIW, the OP is probably paying closer to $30k in taxes, not $60k.
Jags4186,

Please note that by buying the house, the 240K out of the 300K would be spent as down payment. Hence, it is no longer savings.

KlangFool
Is he setting the money on fire or is it becoming home equity?
It is earning nothing. Or, losing a few percents every year. Depending on your point of view.

KlangFool
So is cash in a 2% savings account.
KlangFool
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Re: Can We Afford This Home?

Post by KlangFool »

Jags4186 wrote: Tue Aug 09, 2022 9:37 am
KlangFool wrote: Tue Aug 09, 2022 9:36 am
Jags4186 wrote: Tue Aug 09, 2022 9:31 am
KlangFool wrote: Tue Aug 09, 2022 9:20 am
Jags4186 wrote: Tue Aug 09, 2022 9:17 am
Annual *retirement* savings is $40k. They have saved $300k in cash and $240k in a taxable brokerage account. The poster is saving beyond just his 401k and IRAs. FWIW, the OP is probably paying closer to $30k in taxes, not $60k.
Jags4186,

Please note that by buying the house, the 240K out of the 300K would be spent as down payment. Hence, it is no longer savings.

KlangFool
Is he setting the money on fire or is it becoming home equity?
It is earning nothing. Or, losing a few percents every year. Depending on your point of view.

KlangFool
So is cash in a 2% savings account.
It is OP's way to make sure that he/she spend the money. So, it is not savings.

KlangFool
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barnaby444
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Re: Can We Afford This Home?

Post by barnaby444 »

KlangFool wrote: Mon Aug 08, 2022 7:25 pm
SlimJim44 wrote: Mon Aug 08, 2022 5:53 pm
DarkHelmetII wrote: Mon Aug 08, 2022 5:21 pm Financials don't seem crazy out of whack for your income and down payment . But that is only one piece of the equation. What is fair market rent for this type of property?
There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month
SlimJim44,

Considering the opportunity cost of the 240K down payment, it is still cheaper to rent. Why would you buy the house?

KlangFool
For the first several years of the mortgage, OP would be paying about $2,600 in "rent" equivalents for the home (interest, taxes, insurance). The rest, including the down payment, is home equity. Home equity is not solely an opportunity cost. It also provides inflation protection and diversification (relative to stocks). Further, you could view any opportunity cost as the cost of locking in stable long-term housing (both in terms of cost stability and physical/neighborhood stability) and access to the single-family purchase inventory which, as OP pointed out, dwarfs the rental inventory (in both quantity and quality) in many areas. Those things have value. So I do not think it's clear at all that it's "cheaper to rent."
EddyB
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Re: Can We Afford This Home?

Post by EddyB »

KlangFool wrote: Tue Aug 09, 2022 9:36 am
Jags4186 wrote: Tue Aug 09, 2022 9:31 am
KlangFool wrote: Tue Aug 09, 2022 9:20 am
Jags4186 wrote: Tue Aug 09, 2022 9:17 am
Annual *retirement* savings is $40k. They have saved $300k in cash and $240k in a taxable brokerage account. The poster is saving beyond just his 401k and IRAs. FWIW, the OP is probably paying closer to $30k in taxes, not $60k.
Jags4186,

Please note that by buying the house, the 240K out of the 300K would be spent as down payment. Hence, it is no longer savings.

KlangFool
Is he setting the money on fire or is it becoming home equity?
It is earning nothing. Or, losing a few percents every year. Depending on your point of view.

KlangFool
Your confidence seems misplaced. I suspect that people that followed similarly pessimistic advice five years ago would challenge the assumption.
Jags4186
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Re: Can We Afford This Home?

Post by Jags4186 »

KlangFool wrote: Tue Aug 09, 2022 9:47 am
Jags4186 wrote: Tue Aug 09, 2022 9:37 am
KlangFool wrote: Tue Aug 09, 2022 9:36 am
Jags4186 wrote: Tue Aug 09, 2022 9:31 am
KlangFool wrote: Tue Aug 09, 2022 9:20 am

Jags4186,

Please note that by buying the house, the 240K out of the 300K would be spent as down payment. Hence, it is no longer savings.

KlangFool
Is he setting the money on fire or is it becoming home equity?
It is earning nothing. Or, losing a few percents every year. Depending on your point of view.

KlangFool
So is cash in a 2% savings account.
It is OP's way to make sure that he/she spend the money. So, it is not savings.

KlangFool
I guess you consider the purchase of stocks, bonds, and gold as spending as well.
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Re: Can We Afford This Home?

Post by KlangFool »

barnaby444 wrote: Tue Aug 09, 2022 10:01 am
KlangFool wrote: Mon Aug 08, 2022 7:25 pm
SlimJim44 wrote: Mon Aug 08, 2022 5:53 pm
DarkHelmetII wrote: Mon Aug 08, 2022 5:21 pm Financials don't seem crazy out of whack for your income and down payment . But that is only one piece of the equation. What is fair market rent for this type of property?
There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month
SlimJim44,

Considering the opportunity cost of the 240K down payment, it is still cheaper to rent. Why would you buy the house?

KlangFool
For the first several years of the mortgage, OP would be paying about $2,600 in "rent" equivalents for the home (interest, taxes, insurance). The rest, including the down payment, is home equity. Home equity is not solely an opportunity cost. It also provides inflation protection and diversification (relative to stocks).
barnaby444,

I disagreed.

OP has a 570K house. OP could buy the house with 20% down payment or 240K down payment. The difference is 100+K.

That 100+K could be in the house -> less diversification and save X% in mortgage interest

That 100+K could be invested in the portfolio and earn Y% with more diversification.

The opportunity cost is Y% - X%. Hence, it is cheaper to rent.

KlangFool
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8foot7
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Re: Can We Afford This Home?

Post by 8foot7 »

KlangFool wrote: Tue Aug 09, 2022 10:16 am

The opportunity cost is Y% - X%. Hence, it is cheaper to rent.

KlangFool
Around here you simply could not rent a house equivalent to the one I own. They are not available. "Cheaper to rent" implies one is comparing apples to apples, which is not possible in some (perhaps many, maybe even most) areas and segments of the market.
KlangFool
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Re: Can We Afford This Home?

Post by KlangFool »

8foot7 wrote: Tue Aug 09, 2022 10:18 am
KlangFool wrote: Tue Aug 09, 2022 10:16 am

The opportunity cost is Y% - X%. Hence, it is cheaper to rent.

KlangFool
Around here you simply could not rent a house equivalent to the one I own. They are not available. "Cheaper to rent" implies one is comparing apples to apples, which is not possible in some (perhaps many, maybe even most) areas and segments of the market.
8foot7,

Your local real estate circumstances has no relevance to OP's situation. Real estate is local.

From OP's answer

"There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month "

OP has the choice to rent in his case.

KlangFool
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8foot7
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Re: Can We Afford This Home?

Post by 8foot7 »

KlangFool wrote: Tue Aug 09, 2022 10:23 am
8foot7 wrote: Tue Aug 09, 2022 10:18 am
KlangFool wrote: Tue Aug 09, 2022 10:16 am

The opportunity cost is Y% - X%. Hence, it is cheaper to rent.

KlangFool
Around here you simply could not rent a house equivalent to the one I own. They are not available. "Cheaper to rent" implies one is comparing apples to apples, which is not possible in some (perhaps many, maybe even most) areas and segments of the market.
8foot7,

Your local real estate circumstances has no relevance to OP's situation. Real estate is local.

From OP's answer

"There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month "

OP has the choice to rent in his case.

KlangFool
"There are not many equivalent rentals..."
KlangFool
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Re: Can We Afford This Home?

Post by KlangFool »

8foot7 wrote: Tue Aug 09, 2022 10:28 am
KlangFool wrote: Tue Aug 09, 2022 10:23 am
8foot7 wrote: Tue Aug 09, 2022 10:18 am
KlangFool wrote: Tue Aug 09, 2022 10:16 am

The opportunity cost is Y% - X%. Hence, it is cheaper to rent.

KlangFool
Around here you simply could not rent a house equivalent to the one I own. They are not available. "Cheaper to rent" implies one is comparing apples to apples, which is not possible in some (perhaps many, maybe even most) areas and segments of the market.
8foot7,

Your local real estate circumstances has no relevance to OP's situation. Real estate is local.

From OP's answer

"There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month "

OP has the choice to rent in his case.

KlangFool
"There are not many equivalent rentals..."
Versus your post.

"They are not available."

OP only need to live in one house.

KlangFool
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Re: Can We Afford This Home?

Post by 8foot7 »

KlangFool wrote: Tue Aug 09, 2022 10:42 am
8foot7 wrote: Tue Aug 09, 2022 10:28 am
KlangFool wrote: Tue Aug 09, 2022 10:23 am
8foot7 wrote: Tue Aug 09, 2022 10:18 am
KlangFool wrote: Tue Aug 09, 2022 10:16 am

The opportunity cost is Y% - X%. Hence, it is cheaper to rent.

KlangFool
Around here you simply could not rent a house equivalent to the one I own. They are not available. "Cheaper to rent" implies one is comparing apples to apples, which is not possible in some (perhaps many, maybe even most) areas and segments of the market.
8foot7,

Your local real estate circumstances has no relevance to OP's situation. Real estate is local.

From OP's answer

"There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month "

OP has the choice to rent in his case.

KlangFool
"There are not many equivalent rentals..."
Versus your post.

"They are not available."

OP only need to live in one house.

KlangFool
...if he can find that one house, available at the right time, in an equivalent location/school district/distance to amenities...
You make it sound as if, by being cheaper to rent, he can just grab something off the Internet with a couple of clicks and move in. Your advice is not universally pertinent (nor is mine).
GotNoWisdom
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Re: Can We Afford This Home?

Post by GotNoWisdom »

I would consider your budget with $2k/month of childcare added in, or, conversely (because this often becomes reality) one spouse staying home with the kids. What if you had a third child, etc.?
barnaby444
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Re: Can We Afford This Home?

Post by barnaby444 »

KlangFool wrote: Tue Aug 09, 2022 10:16 am
barnaby444 wrote: Tue Aug 09, 2022 10:01 am
KlangFool wrote: Mon Aug 08, 2022 7:25 pm
SlimJim44 wrote: Mon Aug 08, 2022 5:53 pm
DarkHelmetII wrote: Mon Aug 08, 2022 5:21 pm Financials don't seem crazy out of whack for your income and down payment . But that is only one piece of the equation. What is fair market rent for this type of property?
There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month
SlimJim44,

Considering the opportunity cost of the 240K down payment, it is still cheaper to rent. Why would you buy the house?

KlangFool
For the first several years of the mortgage, OP would be paying about $2,600 in "rent" equivalents for the home (interest, taxes, insurance). The rest, including the down payment, is home equity. Home equity is not solely an opportunity cost. It also provides inflation protection and diversification (relative to stocks). Further, you could view any opportunity cost as the cost of locking in stable long-term housing (both in terms of cost stability and physical/neighborhood stability) and access to the single-family purchase inventory which, as OP pointed out, dwarfs the rental inventory (in both quantity and quality) in many areas. Those things have value. So I do not think it's clear at all that it's "cheaper to rent."
barnaby444,

I disagreed.

OP has a 570K house. OP could buy the house with 20% down payment or 240K down payment. The difference is 100+K.

That 100+K could be in the house -> less diversification and save X% in mortgage interest

That 100+K could be invested in the portfolio and earn Y% with more diversification.

The opportunity cost is Y% - X%. Hence, it is cheaper to rent.

KlangFool
This is confusing -- are we comparing two different down payments, or buying vs. renting? I was taking the 240k down payment as a given, and comparing buying vs. renting. Down payment amount is a separate decision that could be debated.

In any case, your response ignores my larger point, which was that even if you expect renting to have an edge in terms of pure ROI, that is not the whole story, as there are benefits of buying that have value and need to be factored in. Namely, stability and access to a better inventory (this latter one IMO is VERY undervalued by the "why not rent?" crowd).

Finally, even if you choose to focus solely on ROI and diversification, I believe you are ignoring asset class diversification. Many people (including me, although I'm currently a renter) would argue that a 100% stock/bond portfolio is inherently riskier than a portfolio that includes some real estate equity, despite what historical averages might tell you. Not saying OP's proposed concentration in real estate is optimal; perhaps it would be higher than optimal initially. But then, they get a house they like, in the neighborhood of their choosing, and fixed housing costs!
KlangFool
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Re: Can We Afford This Home?

Post by KlangFool »

barnaby444 wrote: Tue Aug 09, 2022 11:15 am
In any case, your response ignores my larger point, which was that even if you expect renting to have an edge in terms of pure ROI, that is not the whole story, as there are benefits of buying that have value and need to be factored in. Namely, stability and access to a better inventory (this latter one IMO is VERY undervalued by the "why not rent?" crowd).
barnaby444,

1) Is the benefit big enough to justify the cost of buying? That is the question.

2) And, the lack of financial flexibility from buying a house.

"Namely, stability and access to a better inventory (this latter one IMO is VERY undervalued by the "why not rent?" crowd)"

3) I bought my house when it was significantly cheaper than renting. The PITI was 20% to 30% lowered than renting.

4) Why should I compromise when I buy? I didn't have to.

It is very simple.

I want to be paid for the risk owning a house. Others choose to pay a lot more for buying. I am glad that they did so. This is how I get to buy the house at a good price.

KlangFool
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barnaby444
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Re: Can We Afford This Home?

Post by barnaby444 »

8foot7 wrote: Tue Aug 09, 2022 10:45 am
KlangFool wrote: Tue Aug 09, 2022 10:42 am
8foot7 wrote: Tue Aug 09, 2022 10:28 am
KlangFool wrote: Tue Aug 09, 2022 10:23 am
8foot7 wrote: Tue Aug 09, 2022 10:18 am

Around here you simply could not rent a house equivalent to the one I own. They are not available. "Cheaper to rent" implies one is comparing apples to apples, which is not possible in some (perhaps many, maybe even most) areas and segments of the market.
8foot7,

Your local real estate circumstances has no relevance to OP's situation. Real estate is local.

From OP's answer

"There are not many equivalent rentals in the area but Zillow has an estimate of $3480/month "

OP has the choice to rent in his case.

KlangFool
"There are not many equivalent rentals..."
Versus your post.

"They are not available."

OP only need to live in one house.

KlangFool
...if he can find that one house, available at the right time, in an equivalent location/school district/distance to amenities...
You make it sound as if, by being cheaper to rent, he can just grab something off the Internet with a couple of clicks and move in. Your advice is not universally pertinent (nor is mine).
Exactly. I do not believe the "why not rent" crowd has really thought through this. I may only need to live in one house, but I'd rather choose from 10 available for sale than accept the only rental available (not to mention the landlord relationship that comes with it).
chipperd
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Re: Can We Afford This Home?

Post by chipperd »

To the OP:
You guys are doing great and can definitely afford that house.
Best of luck!
:sharebeer
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tashnewbie
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Re: Can We Afford This Home?

Post by tashnewbie »

I think you can definitely afford the house. Whether you should buy it is a different question that I can't answer.

My question is why are you putting so much down instead of a more typical 20% ($114k)?
Jags4186
Posts: 8198
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Re: Can We Afford This Home?

Post by Jags4186 »

tashnewbie wrote: Tue Aug 09, 2022 12:35 pm I think you can definitely afford the house. Whether you should buy it is a different question that I can't answer.

My question is why are you putting so much down instead of a more typical 20% ($114k)?
That would increase his payment nearly $700/mo. A 5.125% guaranteed return isn't bad. IF rates go back into sub 3% land, he can always do a cash out refinance.
tashnewbie
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Re: Can We Afford This Home?

Post by tashnewbie »

Jags4186 wrote: Tue Aug 09, 2022 1:24 pm
tashnewbie wrote: Tue Aug 09, 2022 12:35 pm I think you can definitely afford the house. Whether you should buy it is a different question that I can't answer.

My question is why are you putting so much down instead of a more typical 20% ($114k)?
That would increase his payment nearly $700/mo. A 5.125% guaranteed return isn't bad. IF rates go back into sub 3% land, he can always do a cash out refinance.
Very true that a guaranteed 5.125% return isn't bad. However, I'd probably want to retain more liquidity with a new home and baby (not the full difference between 20% down payment and OP's proposed $240k). But OP knows his circumstance and risk tolerance better than I do.
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