How much house can we afford (unusual situation)

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Regressor
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How much house can we afford (unusual situation)

Post by Regressor »

My wife is a physician and her job is offering up to 600k of 0% interest 30 year Non-Amortizing loan for a house (meaning, we take the money now and return 600k in 30 years, when it's worth way less). We just need to provide at least 10% downpayment for the house.
If she stops working there or we sell the house we need to return the money. Her salary is below market by about 100k (hence the 0% interest loan - they pay 600k now but save 100k each year for 30 years potentially) but the workload is low and enjoyable so she can work there indefinitely (and she thinks she will want to).

I am not sure how to think about this 600k that they are offering.
We live in a HCOL area, high tax state and have a kid, second one on the way and already thinking about a third one. We are renting an apartment and have been saving for a long time but will need a lot more space soon. We will get a house with an ADU so that the parents can move in close by and help with the kids as they grow up.
Can you guys do your magic and help me figure out what's the maximum value of the house we can afford if we try hard and what is the maximum value that we can easily afford? We are in our early-mid thirties.

My income (software engineer): 350k. I assume that I can get to 450k in the medium term.
My wife's income: 270-300k

after tax savings/investments: 500k
retirement savings: 400k
mc126
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Re: How much house can we afford (unusual situation)

Post by mc126 »

Simplest way I can think to decide would be to consider the saved interest. Estimate a mortgage at 7% on $600,000 would be $42,000. You said she is underpaid $100,000.

The hospital is coming out way ahead here and you are basically tied to that job unless you can get a mortgage. Unless you have $600,000 available in savings or the ability to get a mortgage quickly, she would not be able to leave that job.

I'd pass and ask for the $100,000 in salary they are underpaying her. Or at least a large portion of that amount and then go get your own mortgage and use her raise to pay the interest.
BrownEyedGirl_27
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Re: How much house can we afford (unusual situation)

Post by BrownEyedGirl_27 »

Sounds too risky to take their offer.

You said your wife enjoys her job, but since she’s being significantly underpaid by her employer she should either negotiate for $100k more or leave and find a higher-paid job elsewhere.

Since she is expecting it might be easier to start a job search after the second baby arrives and your family has time to adjust. Congratulations on your new arrival. 😊
"Your mind has a mind of its own. At the very moment when you are most convinced of your own rationality, you may be feeling rather than thinking your way toward a decision.” | Jason Zweig
Harmanic
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Re: How much house can we afford (unusual situation)

Post by Harmanic »

If it were me. I would live on $50,000 for the next two or three years and then pay cash. Or wait a year and put a higher down-payment on a conventional 15 year mortgage.
CletusCaddy
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Re: How much house can we afford (unusual situation)

Post by CletusCaddy »

mc126 wrote: Fri Jan 27, 2023 8:07 am Simplest way I can think to decide would be to consider the saved interest. Estimate a mortgage at 7% on $600,000 would be $42,000. You said she is underpaid $100,000.
At least half of that implied $42k interest would be tax deductible so the value is even less than that. Not to mention the strong possibility of interest rates dropping sometime over the 30 years presenting a refinancing opportunity.

I agree that the employer is winning here.
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Watty
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Re: How much house can we afford (unusual situation)

Post by Watty »

Keep in mind that the no interest loan will result in you having to pay taxes each year on the interest you did not pay. It is not as good a deal as it sounds like especially since you would be giving up income to get that.
Regressor wrote: Fri Jan 27, 2023 1:49 am My income (software engineer): 350k. I assume that I can get to 450k in the medium term.
My wife's income: 270-300k
Retired software developer here.

You are getting paid as much as some executives at good size companies. You are also getting paid more than a doctor who likely has more than three times the expensive advanced training that you have.

That is great for you since you are in the right place at the right time but it would be a big mistake to assume that the high income that software engineers get in places like Silicon Valley and a few other places will last for the rest of your career.

For reference I worked in Silicon Valley as a software developer back in the 1980s at a FAANG company back when there was only one of them. :D The pay was always good but it was not anything like what people are being paid now and the stock options for most workers was maybe enough to buy a modest car if you were lucky. A few people at startups would hit a stock option jackpot but that was not all that common. At a large company there were also a few software developers superstars that were very well paid but that was maybe 1 or 2 percent of the software engineers and I was not one of those people.

During the Dot Com bust in the early 2000s even in Silicon Valley companies were laying off software engineers in large numbers and people with new Computer Science degree had a hard time finding any computer related job.

As I recall the job market for software developers did not really get strong again until around 2010 and that is when the salaries for software engineers in places like Silicon Valley really started taking off. That was exaggerated by them being granted RSUs that unexpectedly soared in value before they vested which made the total compensation even higher.

As best I can tell the really high salaries for software engineers has mainly been for around the last 12 year or so which would have been at around the time you started working. You got really lucky with the timing of your career but be real cautious about thinking that it could not change.

Even if the high pay for software engineers continues there is also a risk that different skills will be required in 10 or 15 year so that you will not be the sweet spot for the high pay. For example if you are in a hot area like Cybersecurity there is no telling how hot that will be in 10 years or if you will be able to keep up with the new skills for it that will be required in ten years.

An additional risk for you is that much of your work can be done remotely so pay in places like Silicon Valley will be under pressure if companies adopt a remote work employment model. There is less reason to pay a local software engineer $350K+ when they can hire someone in a lower cost of living area in the US for $150K or get two software engineers for what they are paying you.

In the last couple of weeks a lot of major tech companies have had major layoffs. For the people who were laid off that is a double whammy since they not only lost their jobs, but fewer companies are hiring right now. The companies that are hiring also have little reason make high job offers when they have lots of job applicants.

In the meantime the colleges are also still cranking out new Computer Science graduates that are looking for entry level jobs.

That is a long way of saying that you need to realize that your high income may not be secure so I would not get a 30 year mortgage based on it. I don't want to sound too "doom and gloom" since things could still work out fantastic for your career and likely will but it is far from a sure thing.
Regressor wrote: Fri Jan 27, 2023 1:49 am My income (software engineer): 350k. I assume that I can get to 450k in the medium term.
My wife's income: 270-300k

after tax savings/investments: 500k
retirement savings: 400k


Can you guys do your magic and help me figure out what's the maximum value of the house we can afford if we try hard and what is the maximum value that we can easily afford? We are in our early-mid thirties.
Your net worth is not real high for your income but I would assume that is because something was going on like you were paying off a lot of student loans for your wife's medical school.

The problem with this is that you do not have a lot for a huge down payment since with two kids and a large mortgage you would also need to keep a large emergency fund just in case something happens like you are laid off or your wife needs to take some unpaid time off work before or after the birth.

You also have a lot of unknowns with a second kid on the way and maybe even a third one after that. Not only do you need to figure out childcare but there is also a risk that one of the kids could have even moderate and temporary health issues that make conventional child care difficult. You might also have expensive fertility costs or adoption costs for the third kid.

You have a lot of income but you also have pay a LOT to taxes so you are not as rich as you might feel. It is sort of an arbitrary number for for "easy" like you asked a house in the ballpark of $1.5 million might be doable with a $300K 20% downpayment and a $1.2 million dollar mortgage.

If you are in a high cost of living area that might not be enough to get you a nice house with an ADU like you want.

I think a better alternative would be to rent a nice house for a few years and save like crazy then buy a house when you have a lot more saved up for a large down payment.
Regressor wrote: Fri Jan 27, 2023 1:49 am We will get a house with an ADU so that the parents can move in close by and help with the kids as they grow up.
Be cautious with planning for the grandparents to do a lot of childcare. We have two preschool age grandkids that we love watching for the day but at the end of the day we are bushed. A lot of times we will just watch them for half a day because that is easier to do. There is no way that we could do that five days a week unless there was some sort of emergency situation. If they are taking care of an infant now that is a lot different than an active toddler or preschooler.

We also have our own activities and we like to travel which would be impacted by doing full time daycare and we would not want to give those up if it was mainly to save high income kids from hiring a nanny.

Also keep in mind that your parents will be getting older so in another five year they may not be able to do as much as they can now. For example my wife has some back issues so she cannot pick up a toddler anymore.

If you do have three kids it will likely make sense to hire a full time nanny.
123
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Re: How much house can we afford (unusual situation)

Post by 123 »

It's too early in her career to sell herself short for a set of golden handcuffs. If she takes a large loan through her employer they have less incentive to provide salary increases as time go on because of the potential high cost for her to exit the situation and work elsewhere.
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celia
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Re: How much house can we afford (unusual situation)

Post by celia »

Regressor wrote: Fri Jan 27, 2023 1:49 am My wife is a physician and her job is offering up to 600k of 0% interest 30 year Non-Amortizing loan for a house (meaning, we take the money now and return 600k in 30 years, when it's worth way less).
And what happens if the employer is bought out or closes? (We have been with a medical group that is now owned by the 3rd or 4th company. The current owner has laid off some of our doctors.)

And how much would a house cost in your area that would fit your needs? You won’t get much house for only $600K in a HCOL area.
FoolMeOnce
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Re: How much house can we afford (unusual situation)

Post by FoolMeOnce »

123 wrote: Fri Jan 27, 2023 10:50 am It's too early in her career to sell herself short for a set of golden handcuffs. If she takes a large loan through her employer they have less incentive to provide salary increases as time go on because of the potential high cost for her to exit the situation and work elsewhere.
Agreed.

OP, does your wife know anybody who has taken this loan offer? Did their work conditions or job satisfaction decrease after it? Taking the loan gives the employer a ton of leverage.
humblecoder
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Re: How much house can we afford (unusual situation)

Post by humblecoder »

Regressor wrote: Fri Jan 27, 2023 1:49 am My wife is a physician and her job is offering up to 600k of 0% interest 30 year Non-Amortizing loan for a house (meaning, we take the money now and return 600k in 30 years, when it's worth way less). We just need to provide at least 10% downpayment for the house.
If she stops working there or we sell the house we need to return the money. Her salary is below market by about 100k (hence the 0% interest loan - they pay 600k now but save 100k each year for 30 years potentially) but the workload is low and enjoyable so she can work there indefinitely (and she thinks she will want to).

I am not sure how to think about this 600k that they are offering.

...
You're right. This is an unusual situation :-)

Honestly, I don't know how I would feel about this offer. In particular, I don't know how I would feel about this requirement to immediately pay back the $600K if I were to no longer work there. If I were to quit, I'd have a couple of options:

1. Sell the home so that I could pay back the $600K.
2. Do some sort of a mortgage refinance to convert the $600K into a conventional loan.
3. Pay back the $600K out of savings (but then again, who has $600K lying around :-))

And even if you don't intend on leaving this job for 30 years, you still need to accumulate money over that 30 year period to pay back that $600K when it comes due. I would think of that as a mortgage payment of sorts, but to some sort of sinking fund,

I guess the upshot is that I would not consider this as an extra $600K when I am looking at my home buying budget, since there is a chance that I might have to replace this $600K early with my own money (either with cash on hand or conventional loan) or would need to set aside some money every month to accumulate $600K after 30 years.

The other thing to consider is what happens if the home value goes down. You might end up not having enough equity in the home to repay the $600K under options 1 and 2 above. So you might have to supplement this out of your own savings.

[PS: While bankruptcy/foreclosure is an option, having that as a Plan A doesn't align with my moral compass. I know that stuff happens, so I might not have any other options, but my value system is such that I would to do everything in my power to make good on my promises before considering that. Others might have different views. That's fine for them. I don't judge... much! :-)]
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quantAndHold
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Re: How much house can we afford (unusual situation)

Post by quantAndHold »

Watty wrote: Fri Jan 27, 2023 10:37 am Retired software developer here.

You are getting paid as much as some executives at good size companies. You are also getting paid more than a doctor who likely has more than three times the expensive advanced training that you have.

That is great for you since you are in the right place at the right time but it would be a big mistake to assume that the high income that software engineers get in places like Silicon Valley and a few other places will last for the rest of your career.
This.

Tech has always been cyclical, with boom and bust cycles, and it’s only been the last few years that tech jobs have paid anywhere close to what you’re currently making. And even today, in most of the country outside of the few tech hot spots, you’re already making what the CTO would make. Tech has always been a good comfortable living with good working conditions, but I wouldn’t assume that the gravy train we’ve been experiencing over the last decade is going to continue unabated. I certainly wouldn’t set up my life so that it depended on continuing to make $350k indefinitely.
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Regressor
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Re: How much house can we afford (unusual situation)

Post by Regressor »

Thank you so much to everyone for your thoughtful comments. I really appreciate it.

I noticed that I received a lot of advice related to my wife changing the job but that is not an option.
Let me elaborate: she is very happy at her job, she works less than 26 weeks per year which is extremely good even for her profession and even when she works, she gets help from residents in the hospital and she has more of a advisory role, so her job is very easy and convenient. This allows her to spend the time with family and I decided that I should sacrifice some of my free time and well being for better pay since as a software engineer I will never be able to get the kind of job that she has - I will always have to work 40 hour weeks even if I were to slack at work.
So I would say that I work 40-50 hours per week on average and she works 15-20. so as a family, we work up to 70 hours weekly and get paid around 650k.

And if she had a better paying job and worked 40 hours per week for 350-400k and I had an easier job and got paid 200k for around 30-40 hours per week, we'd have 600k for 70-80 hours so we'd both be working full time(more hours) and got paid a bit less. If I ever lose my job, she can very easily get another job that pays more and compensate a bit for my loss of income while I find another job.

So we decided that this is a good situation to be in and are trying to evaluate the benefits/disadvantages of this 600k 0% interest mortgage.


Does anyone have some advice about how much house can we afford based on these numbers?
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Regressor
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Re: How much house can we afford (unusual situation)

Post by Regressor »

CletusCaddy wrote: Fri Jan 27, 2023 9:03 am
mc126 wrote: Fri Jan 27, 2023 8:07 am Simplest way I can think to decide would be to consider the saved interest. Estimate a mortgage at 7% on $600,000 would be $42,000. You said she is underpaid $100,000.
At least half of that implied $42k interest would be tax deductible so the value is even less than that. Not to mention the strong possibility of interest rates dropping sometime over the 30 years presenting a refinancing opportunity.

I agree that the employer is winning here.
Thank you for this comment. I also think that the 0% interest has some tax implications as well. I think that the difference between 0% and some market rate has to be reported as income, which further diminishes the value of the 0% interest loan.

However, I have been thinking about it from another perspective:
1. Come next spring (in a bit more than a year) I will have around 800k in savings. if I buy a $2.500.000 house and pay 100k in closing costs, 20% downpayment is 500k, I am left with 200k which would be my emergency fund and I would have no money for investments.
Housing costs would be 16.8k monthly here.

2. but if I take their 600k and put it towards the house and put just 10% down payment (250k of my own money) and put their (additional) 600k as down payment, then I am left with 550k for my investments, while down payment becomes 250k of my money + 600k from the company - 100k closing costs = 750k down payment so the monthly mortgage payment is smaller. That enables me to put 200k for emergency fund and the remaining 350k would go into the stock market.
If I left that 350 in stocks for 30 years and I get 7% average return, that is:
350*1.07^30 = 2664. so $2.66 million. At that point i can return the 600k to the company and am left with 2 million dollars.

furthermore, in the second scenario, since the down payment would be 750k vs 500k in the first one, the monthly mortgage payment would be lower, about $1500 per month which would go into savings/investment.
Housing costs would be 15.2k monthly here.

Our after tax income is around 30-35k monthly, depending on pretax deductions so I think that we can cover expenses in both cases (but I may be wrong?).

I wonder what is wrong with this approach. I think that the same situation can be looked at from very different angles and we can draw vastly different conclusions. I am wondering which one is the correct one :)
BrendanP
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Re: How much house can we afford (unusual situation)

Post by BrendanP »

This is an interesting scenario and you seem to really want to do it and also want people to encourage you.

People brought up the question of will you owe taxes on the 0% loan, which Is important.

Also you're comparing no loan vs the 600K loan over 30 years.

How confident are you that you'll live in this place that long? Don't forget that these are taxable accounts and you'll likely pay a high tax rate on those earnings.
randomguy
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Re: How much house can we afford (unusual situation)

Post by randomguy »

Watty wrote: Fri Jan 27, 2023 10:37 am

You have a lot of income but you also have pay a LOT to taxes so you are not as rich as you might feel. It is sort of an arbitrary number for for "easy" like you asked a house in the ballpark of $1.5 million might be doable with a $300K 20% downpayment and a $1.2 million dollar mortgage.

If you are in a high cost of living area that might not be enough to get you a nice house with an ADU like you want.

1.5m buys like a 1000 sq ft house on a 5000 sq ft lot:). 1.5m the low side for a 600k income. The upper side is probably something like 3.0m. Go ask the bank and see what they will approve you for. That is the max. The question then is are you comfortable with that? You would need to look through your spending to see what you can do and how you feel about putting say 10k/month into a house instead of your savings. And as was pointed out the big risk is that right now we are in a tech crunch phase. A lot of companies have done round 1 of layoffs. Odds are there will be another couple ones. And finding a new job can be tough when there are 10ks of people looking...

I am not sure how a bank will factor in that 600k loan (or as pointed out the tax implications of a below market loan), but I would almost just add it to the house price. Take away a few bucks for taxes and the like. In 30 years, either you will be living there and 600k will probably be noise, or you will have long since sold the house.

In the end you are going to end up having to make a pretty risk choice. That is pretty much unavoidable when talking about multimillion dollar choices. Not buying can very expensive (compare rents now versus 5 years ago). But so can buying (see house prices from 2007-10).
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Regressor
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Re: How much house can we afford (unusual situation)

Post by Regressor »

BrendanP wrote: Sat Jan 28, 2023 2:22 pm This is an interesting scenario and you seem to really want to do it and also want people to encourage you.

People brought up the question of will you owe taxes on the 0% loan, which Is important.

Also you're comparing no loan vs the 600K loan over 30 years.

How confident are you that you'll live in this place that long? Don't forget that these are taxable accounts and you'll likely pay a high tax rate on those earnings.
Well I do want to buy a house. I sort of want to see the worst possible scenario if I do it. I am presenting the most optimistic scenario just to play the devils advocate, not because I think it will happen. I sort of think that thinking of the benefit only as a 40k per year value is too conservative but if I think of it as 2 million dollars over 30 years, that's definitely too optimistic. So I think the reality is somewhere in between but that in between area is just too wide and paralyzing.

The houses that we are looking for are in great neighborhoods that have had great schools for more than half a century, almost a century. It is big enough to house my family and the grandparents in the ADU, so I could imagine living there 30 years, but it would be more realistic to move out when our third child that we are planning to have in a few years moves to college, so in about 20 years. so I'd say that 10 years is possible, but 20 years is realistic and 30 years as possible as 10.
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Regressor
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Re: How much house can we afford (unusual situation)

Post by Regressor »

randomguy wrote: Sat Jan 28, 2023 2:24 pm
Watty wrote: Fri Jan 27, 2023 10:37 am

You have a lot of income but you also have pay a LOT to taxes so you are not as rich as you might feel. It is sort of an arbitrary number for for "easy" like you asked a house in the ballpark of $1.5 million might be doable with a $300K 20% downpayment and a $1.2 million dollar mortgage.

If you are in a high cost of living area that might not be enough to get you a nice house with an ADU like you want.

1.5m buys like a 1000 sq ft house on a 5000 sq ft lot:). 1.5m the low side for a 600k income. The upper side is probably something like 3.0m. Go ask the bank and see what they will approve you for. That is the max. The question then is are you comfortable with that? You would need to look through your spending to see what you can do and how you feel about putting say 10k/month into a house instead of your savings. And as was pointed out the big risk is that right now we are in a tech crunch phase. A lot of companies have done round 1 of layoffs. Odds are there will be another couple ones. And finding a new job can be tough when there are 10ks of people looking...

I am not sure how a bank will factor in that 600k loan (or as pointed out the tax implications of a below market loan), but I would almost just add it to the house price. Take away a few bucks for taxes and the like. In 30 years, either you will be living there and 600k will probably be noise, or you will have long since sold the house.

In the end you are going to end up having to make a pretty risk choice. That is pretty much unavoidable when talking about multimillion dollar choices. Not buying can very expensive (compare rents now versus 5 years ago). But so can buying (see house prices from 2007-10).
Yes my problem is also personal in nature. I cannot find the type of house I need to rent on the market - one with a yard, a large unit and a small unit(ADU).
I want my parents to be close to me while I raise my kids. I come from a poor country, my parents sold an apartment to finance my education in the USA, they cannot afford to rent here on their own, I have a good relationship with them and I want them to be close by. I could rent a one bedroom for them close to us (5-10 min drive since areas with apartments aren't right next to areas with houses), but that doesn't seem ideal since they are getting older.
So even if I found that type of house, I cannot rely on being able to rent it for a long time or for a reasonable price etc. These types of houses are houses where people live in or sell them, they don't rent them.
somekevinguy
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Re: How much house can we afford (unusual situation)

Post by somekevinguy »

As someone who has a similar housing program supplement (maybe even the same institution), a few thoughts:

1) if you’re reasonably sure you want to commit to living there long term, this is basically part of the salary and generally worth taking advantage of even though they are golden handcuffs- just be as sure as you can about willingly wearing them.

2) in terms of how much house you can afford- one way is to basically do the same calculation you would do without the loan, and add about 600k to it since you won’t have those carrying costs until 30years out or your wife leaves that employer. (May have some small adjustment for additional property tax). Yes, you will have to save 600k to pay that back but you’re likely to have pay increases, home appreciation, and should be able to save that easily on the salaries you have even without pay increases or home appreciation.

3) in such hcol areas and with high income, the how much can I afford question isn’t answered easily with rules of thumb (ie multiples of income) because most of the time, the housing cost in the area is disproportionately high compared to other costs (yes transportation , food etc is more too but just not the same order or magnitude). Hence, do the math on what your monthly take home and expenses are (including savings to meet goals), build in some buffer which will vary by person- we like a lot of buffer, and the rest is what you can spend on a mortgage/property tax each month. Extrapolate based on current interest rates to get your total price (then add about 600k).

My quick 2 cents at least
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