Young Couple - Advice for First-time Home Buyers

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Topic Author
noisyearth
Posts: 15
Joined: Sat Oct 12, 2019 1:45 pm

Young Couple - Advice for First-time Home Buyers

Post by noisyearth »

Family: Me 30, Wife 31
Salary: $300k/yr
total net worth = $500k
Typically save $60k per year in retirement and $60k in brokerage (EDITED)
Current housing is ~$30k/yr in rent and we are willing to pay more $/yr to upgrade our living conditions (rooms, land, etc.)

Cash - 60k
Investments:
- Brokerage: $165k
- Roth IRA's: $30k
- 401/ etc: $220k
- HSA: 19k

We are buying a house and closing in a couple weeks and I'm having doubts about the best way to structure the loan.
Current loan details:
- Sale price: $480k
- Loan amount: $420k
- Interest rate: 7.125%
- Length: 30 years
- Monthly payment: $3,574 - principal and interest ($2,829), PMI ($60) and escrow($684)

Questions/concerns:
- Should we pay PMI?
- Should we buy points?
- Since it's our first home, should we take advantage of penalty-free withdraw from 401 / IRA?
- Should we sell stock to put more down?
- Should we make double payments? The peace of mind of having a house paid off would be valuable to us.
Last edited by noisyearth on Mon Jun 05, 2023 9:52 am, edited 2 times in total.
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simplesimon
Posts: 4578
Joined: Mon Feb 25, 2008 7:53 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by simplesimon »

noisyearth wrote: Mon Jun 05, 2023 4:57 am Family: Me 30, Wife 31
Salary: $300k/yr
total net worth = $500k
Typically save $60k per year in retirement and brokerage
Current housing is ~$30k/yr in rent and we are willing to pay more $/yr to upgrade our living conditions (rooms, land, etc.)

Cash - 60k
Investments:
- Brokerage: $165k
- Roth IRA's: $30k
- 401/ etc: $220k
- HSA: 19k

We are buying a house and closing in a couple weeks and I'm having doubts about the best way to structure the loan.
Current loan details:
- Sale price: $480k
- Loan amount: $420k
- Interest rate: 7.125%
- Monthly payment: $3,574 - principal and interest ($2,829), PMI ($60) and escrow($684)

Questions/concerns:
- Should we pay PMI?
- Should we buy points?
- Since it's our first home, should we take advantage of penalty-free withdraw from 401 / IRA?
- Should we sell stock to put more down?
- Should we make double payments? The peace of mind of having a house paid off would be valuable to us.
Could you get a lower rate with 20% down?
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by KlangFool »

OP,

Is it a 30 years or 15 years loan?

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YeWill
Posts: 83
Joined: Sat May 20, 2023 1:21 am

Re: Young Couple - Advice for First-time Home Buyers

Post by YeWill »

noisyearth wrote: Mon Jun 05, 2023 4:57 am Family: Me 30, Wife 31
Salary: $300k/yr
total net worth = $500k
Typically save $60k per year in retirement and brokerage
Income: 300
Taxes: 100 (estimate)
Savings: 60
---
Spending: 140

This is not what you asked but I think 140 for two young couples is a bit too much.
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Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by Watty »

noisyearth wrote: Mon Jun 05, 2023 4:57 am - Should we pay PMI?
...
- Should we sell stock to put more down?
Sell enough stocks to get a 20% downpayment. PMI is a worthless to you since it only insures the lender and there is a chance that you can get a better rate with a 20 or 25 percent downpayment.

Shop around for a better rate, I just looked and your rate looks sort of average with a quick Google but there are better than average rates out there.
noisyearth wrote: Mon Jun 05, 2023 4:57 am - Should we buy points?
No, there is a fair chance that rates will dip an you will be able to refinance at a lower rate.
noisyearth wrote: Mon Jun 05, 2023 4:57 am - Since it's our first home, should we take advantage of penalty-free withdraw from 401 / IRA?
No, you would still need to pay taxes on the withdrawl. That would be a terrible choice.
noisyearth wrote: Mon Jun 05, 2023 4:57 am Should we make double payments? The peace of mind of having a house paid off would be valuable to us.
No, for your income your savings is not that high so it would be good to build your saving up before paying down the mortgage.

If you plan to pay off the loan quickly be sure to also look at the rates for an ARM loans of various lengths.

In a couple of years when you have more saved up if paying the mortgage down makes sense you can likely "recast your mortgage"(Google this). What this means is if you pay your mortgage balance down by something like 25% with a recast then your required monthly mortgage payment will be reduced by the same percentage. The length of the loan will stay the same. If you just send in additional payments then the only thing that will change will be the length of the loan. This can be important if something happens like you are laid off or disabled or interest rates go up a lot and you would want to keep a lower interest rate loan for as long as possible.

There are lot of opinions and endless threads about quickly paying off a house or not but my personal opinion is that you getting your house paid off in maybe 10 years would be a reasonable choice as long as you are also able to max out your other tax advantaged accounts and do things like pay cash for future cars.

You are also young and don't have kids yet and likely in good health. There are things you can do now like affordable travel that may be difficult or impossible to do in later phased of your life. Be sure to have a good balance on the "now vs later" choices.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by KlangFool »

Watty wrote: Mon Jun 05, 2023 7:53 am
If you plan to pay off the loan quickly be sure to also look at the rates for an ARM loans of various lengths.
Watty,

I disagreed.

1) How can OP pay off the loan quickly when OP is only saving 60K per year with 300K of income while renting?

2) And, how does paying off the loan matters when OP's non-housing expense is 100+K? Aka, several times more than the housing expense.

3) The ARM loan just make sure that with the wrong sequence of events, OP will lose the house.

4) The lowered interest of the ARM loan just make sure that OP will spend a lot more and save even less.

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Topic Author
noisyearth
Posts: 15
Joined: Sat Oct 12, 2019 1:45 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by noisyearth »

KlangFool wrote: Mon Jun 05, 2023 6:13 am OP,

Is it a 30 years or 15 years loan?

KlangFool
Sorry for forgetting to add this. I'll edit the original post. It's a 30 year loan.
Topic Author
noisyearth
Posts: 15
Joined: Sat Oct 12, 2019 1:45 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by noisyearth »

YeWill wrote: Mon Jun 05, 2023 6:30 am
noisyearth wrote: Mon Jun 05, 2023 4:57 am Family: Me 30, Wife 31
Salary: $300k/yr
total net worth = $500k
Typically save $60k per year in retirement and brokerage
Income: 300
Taxes: 100 (estimate)
Savings: 60
---
Spending: 140

This is not what you asked but I think 140 for two young couples is a bit too much.
Sorry I forgot to add $60k for brokerage. Our monthly expenses are more like $7-8k/mo due to health issues.
KlangFool
Posts: 31525
Joined: Sat Oct 11, 2008 12:35 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by KlangFool »

noisyearth wrote: Mon Jun 05, 2023 9:53 am
YeWill wrote: Mon Jun 05, 2023 6:30 am
noisyearth wrote: Mon Jun 05, 2023 4:57 am Family: Me 30, Wife 31
Salary: $300k/yr
total net worth = $500k
Typically save $60k per year in retirement and brokerage
Income: 300
Taxes: 100 (estimate)
Savings: 60
---
Spending: 140

This is not what you asked but I think 140 for two young couples is a bit too much.
Sorry I forgot to add $60k for brokerage. Our monthly expenses are more like $7-8k/mo due to health issues.
Then, the answer is obvious. Sell enough stock in the brokerage account for the 20% down payment and avoid PMI.

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CoastLawyer2030
Posts: 989
Joined: Wed Dec 30, 2020 7:44 am
Location: The Buckeye State

Re: Young Couple - Advice for First-time Home Buyers

Post by CoastLawyer2030 »

noisyearth wrote: Mon Jun 05, 2023 4:57 am Family: Me 30, Wife 31
Salary: $300k/yr
total net worth = $500k
Typically save $60k per year in retirement and $60k in brokerage (EDITED)
Current housing is ~$30k/yr in rent and we are willing to pay more $/yr to upgrade our living conditions (rooms, land, etc.)

Cash - 60k
Investments:
- Brokerage: $165k
- Roth IRA's: $30k
- 401/ etc: $220k
- HSA: 19k

We are buying a house and closing in a couple weeks and I'm having doubts about the best way to structure the loan.
Current loan details:
- Sale price: $480k
- Loan amount: $420k
- Interest rate: 7.125%
- Length: 30 years
- Monthly payment: $3,574 - principal and interest ($2,829), PMI ($60) and escrow($684)

Questions/concerns:
- Should we pay PMI?
- Should we buy points?
- Since it's our first home, should we take advantage of penalty-free withdraw from 401 / IRA?
- Should we sell stock to put more down?
- Should we make double payments? The peace of mind of having a house paid off would be valuable to us.
If you are willing to make double payments, why not look at a 15 year mortgage with a lower interest rate?
Glockenspiel
Posts: 2438
Joined: Thu Feb 08, 2018 12:20 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by Glockenspiel »

noisyearth wrote: Mon Jun 05, 2023 4:57 am
Questions/concerns:
- Should we pay PMI?
- Should we buy points?
- Since it's our first home, should we take advantage of penalty-free withdraw from 401 / IRA?
- Should we sell stock to put more down?
- Should we make double payments? The peace of mind of having a house paid off would be valuable to us.
I would sell some of the stock in the taxable brokerage to come up with a bigger down payment to avoid PMI. Typically, it doesn't really make much sense to buy points unless you're sure that you'll never refinance. But with interest rates already higher, the odds are that you will refinance your loan in the next 5 years, making it not worthwhile to buy points. I'd keep the money in the 401k and IRA and sell from taxable instead to get to 20% down. Don't make double payments. Your money will do more for you long-term, in the stock market, instead.
ArchibaldGraham
Posts: 53
Joined: Wed Dec 27, 2017 12:11 pm

Re: Young Couple - Advice for First-time Home Buyers

Post by ArchibaldGraham »

PMI isn't a boogeyman that everyone is making it out to be. However, I don't think you want to overextend yourself and a small downpayment with PMI could be indicative of overextending yourself. You need to assess your income stability and growth prospects, as well as other financial goals and make that call for yourself.

$60 per month for PMI is a rounding error. It's a rounding error relative to the interest you will be paying in the early years of the mortgage and also your overall expenses at that income.. If you scrutinize your monthly budget you could probably cut $60 with little pain (e.g. cut out a few streaming services or one meal out, etc).

When we bought our first house we put 10% down and paid PMI. We wanted to stay liquid for several reasons. About a year later we refinanced with >20% down and haven't looked back. Given high interest rates now there is a good chance you will also be refinancing (and you could set a goal to do that w/ a bigger downpayment) OR if rates dont drop you will probably be looking to pay back the mortgage early, which would also eliminate PMI before too long.
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