Young Couple - Advice for First-time Home Buyers
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Young Couple - Advice for First-time Home Buyers
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.
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.
- simplesimon
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- Joined: Mon Feb 25, 2008 7:53 pm
Re: Young Couple - Advice for First-time Home Buyers
Could you get a lower rate with 20% down?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.
Re: Young Couple - Advice for First-time Home Buyers
OP,
Is it a 30 years or 15 years loan?
KlangFool
Is it a 30 years or 15 years loan?
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Young Couple - Advice for First-time Home Buyers
Income: 300noisyearth 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
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.
Re: Young Couple - Advice for First-time Home Buyers
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.noisyearth wrote: ↑Mon Jun 05, 2023 4:57 am - Should we pay PMI?
...
- Should we sell stock to put more down?
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.
No, there is a fair chance that rates will dip an you will be able to refinance at a lower rate.
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 - Since it's our first home, should we take advantage of penalty-free withdraw from 401 / IRA?
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.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.
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.
Re: Young Couple - Advice for First-time Home Buyers
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.
KlangFool
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Re: Young Couple - Advice for First-time Home Buyers
Sorry I forgot to add $60k for brokerage. Our monthly expenses are more like $7-8k/mo due to health issues.YeWill wrote: ↑Mon Jun 05, 2023 6:30 amIncome: 300noisyearth 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
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.
Re: Young Couple - Advice for First-time Home Buyers
Then, the answer is obvious. Sell enough stock in the brokerage account for the 20% down payment and avoid PMI.noisyearth wrote: ↑Mon Jun 05, 2023 9:53 amSorry I forgot to add $60k for brokerage. Our monthly expenses are more like $7-8k/mo due to health issues.YeWill wrote: ↑Mon Jun 05, 2023 6:30 amIncome: 300noisyearth 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
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.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
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Re: Young Couple - Advice for First-time Home Buyers
If you are willing to make double payments, why not look at a 15 year mortgage with a lower interest rate?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.
-
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- Joined: Thu Feb 08, 2018 12:20 pm
Re: Young Couple - Advice for First-time Home Buyers
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.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.
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- Joined: Wed Dec 27, 2017 12:11 pm
Re: Young Couple - Advice for First-time Home Buyers
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.
$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.