Saving for Next Home Options

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Topic Author
scgamecocks29466
Posts: 24
Joined: Fri Apr 07, 2023 5:17 pm

Saving for Next Home Options

Post by scgamecocks29466 »

Good afternoon. I'm 37 and she's 36 and we live in a paid-for townhouse worth around 500k. My wife and I are trying to decide how to best speed up saving for our next home and wanted to get the board's input. Neither of us wants to go back into debt to buy another house but are getting tired of townhouse living and want a freestanding home. We've come up with a way to speed up savings by diverting some of our current savings from our Roth 401k and HSA savings but I'd like to know if I'm overlooking anything major flaws with our proposed scenario.

Current situation:

His salary: 160k + possible 10k bonus
Her Salary:60k (part-time) - staying at home with 2 small children to avoid daycare cost

Retirement Savings:
His: $386k
Her: 232k

Current Savings for House Fund:
173k in mutual funds
9.5k in CDs

Other savings::
529 plans: 20k
TIP bond: 20k
Replacement Car fund: 2.5k (sinking fund - we just purchased a new car which is why this is low)
HSA account: 19.5k
Emergency Fund: 42.5k

We're currently saving 20-30k a year but at that rate, it will take 10+ years to buy a freestanding home in our area for cash. Current homes in our area are priced at 800k to 1 million. I'm suggesting that I drop my current retirement savings from 13% to 5% over the next 5 years along with not funding our HSA and using what's there to pay for any medical expenses. This would net around an additional 20k a year and put us in a place to pay cash for a home. Obviously doing so will reduce what I'm contributing to retirement but I plan to bump it back up in 5 years. Am I committing retirement suicide by doing so or missing anything major?
Carefreeap
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Re: Saving for Next Home Options

Post by Carefreeap »

How old are your kids?
Every day I can hike is a good day.
bloom2708
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Re: Saving for Next Home Options

Post by bloom2708 »

Sometimes I think it is a good thing that a lack of funds keeps us from doing things like upgrading living arrangements too often.

The easy answer is use a good chunk of your $173k and take a reasonable mortgage. Say you end up with a $250k mortgage.

If you want to stay debt free (Dave Ramsey thanks you), then find ways to save more like you laid out. I'm not a huge fan of large HSA. Yes, I know, triple tax, can use as retirement way down the road. It is still locked money.

Since your kids are small, schools are not yet in the picture. Maybe you have 3-4 years before school district becomes a decision point.

I like when interest rates (7%) and lack of cash, just keep me from doing something. Well, can't do that.

If you are sick of condo living, someday you will be sick of single family home living. Endless yard work and a yard that needs to be mowed again. :annoyed

Keep saving and something will trigger a move or a stay signal.
Topic Author
scgamecocks29466
Posts: 24
Joined: Fri Apr 07, 2023 5:17 pm

Re: Saving for Next Home Options

Post by scgamecocks29466 »

Carefreeap wrote: Thu Jun 01, 2023 2:29 pm How old are your kids?
2 and 1. Were currently in a good school zone and all the homes that were looking at our in good school zones as well.
Topic Author
scgamecocks29466
Posts: 24
Joined: Fri Apr 07, 2023 5:17 pm

Re: Saving for Next Home Options

Post by scgamecocks29466 »

bloom2708 wrote: Thu Jun 01, 2023 2:30 pm Sometimes I think it is a good thing that a lack of funds keeps us from doing things like upgrading living arrangements too often.

The easy answer is use a good chunk of your $173k and take a reasonable mortgage. Say you end up with a $250k mortgage.

If you want to stay debt free (Dave Ramsey thanks you), then find ways to save more like you laid out. I'm not a huge fan of large HSA. Yes, I know, triple tax, can use as retirement way down the road. It is still locked money.

Since your kids are small, schools are not yet in the picture. Maybe you have 3-4 years before school district becomes a decision point.

I like when interest rates (7%) and lack of cash, just keep me from doing something. Well, can't do that.

If you are sick of condo living, someday you will be sick of single family home living. Endless yard work and a yard that needs to be mowed again. :annoyed

Keep saving and something will trigger a move or a stay signal.
Thanks! You make good points. Thanks for the input.
delamer
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Re: Saving for Next Home Options

Post by delamer »

Odds are fairly high that house prices will increase over the next 5 years, so you could be chasing a moving target. Ten years even more so.

If you can get by your aversion to debt, you could buy a house now with a 10-year mortgage and own it free-and-clear by the time you’d saved enough to purchase it outright.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
Carefreeap
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Location: SF Bay Area

Re: Saving for Next Home Options

Post by Carefreeap »

With kids that young I think I would try for a 25% down and then pull the trigger. You're mostly there.

As mentioned upthread if you're in a $1Mish housing market you're likely are chasing a moving target. I'm a big fan of 30 year fixed rate mortgages. You can always pre-pay your mortgage if your goal is to be mortgage free in retirement.

Once you sell your townhouse I'd invest those proceeds in a taxable account. You'll probably need some of that money for house fix up costs. And who knows, in 10 years you might be moving again. Good to have flexibility.

Good luck!
Every day I can hike is a good day.
radiowave
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Re: Saving for Next Home Options

Post by radiowave »

Having recently bought a new home across country and currently selling our current home, be sure to estimate repairs, moving costs, other fees, costs, etc. We wound up paying just over $25K to get the move done and almost $15k of that in repairs and other costs for the new house (actually 20 years old) and current house. Also, even a local move can be a few thousand dollars. Just raising the issue to get that into your thinking about buying and selling opportunity costs.
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Topic Author
scgamecocks29466
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Joined: Fri Apr 07, 2023 5:17 pm

Re: Saving for Next Home Options

Post by scgamecocks29466 »

radiowave wrote: Thu Jun 01, 2023 3:54 pm Having recently bought a new home across country and currently selling our current home, be sure to estimate repairs, moving costs, other fees, costs, etc. We wound up paying just over $25K to get the move done and almost $15k of that in repairs and other costs for the new house (actually 20 years old) and current house. Also, even a local move can be a few thousand dollars. Just raising the issue to get that into your thinking about buying and selling opportunity costs.
I appreciate that info. It’s good to know. I hope you’ve been able to settle in since moving
radiowave
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Re: Saving for Next Home Options

Post by radiowave »

scgamecocks29466 wrote: Thu Jun 01, 2023 6:56 pm
radiowave wrote: Thu Jun 01, 2023 3:54 pm Having recently bought a new home across country and currently selling our current home, be sure to estimate repairs, moving costs, other fees, costs, etc. We wound up paying just over $25K to get the move done and almost $15k of that in repairs and other costs for the new house (actually 20 years old) and current house. Also, even a local move can be a few thousand dollars. Just raising the issue to get that into your thinking about buying and selling opportunity costs.
I appreciate that info. It’s good to know. I hope you’ve been able to settle in since moving
I could probably write a whole thread about retiring and moving across the country :) Some of the caveats getting back into the real estate have been sobering. We (DW and I) were very fortunate that we timed our two sales perfectly which was not planned, just worked out that way. Since the post is about next home options, I'll add a few lessons learned:

- pay someone to help with the packing. We did it mostly ourselves and I'll say it was an exhausting experience.
- get rid of as much stuff before your move
- as far as getting ready to purchase a house, we built into our IPS (investment policy statement) a 5 year lead in to bulk up cash to have enough for incidentals and unexpected items. That was about $150K and that worked out well. The important point was we were ready to pull the trigger and when we found our "perfect" home, we had the cash to put down what we needed.
- As above, we underestimated the amount of $ needed to fix items on both new and old house. We had the cash on hand and was within our "fudge factor" to complete in a timely manner.
- we held the cash in NWP CDs in different denominations, e.g. $10k, 20K, 50k, etc. so we had some flexibility to cash in the CDs when we needed it for cash flow.
- Don't skimp on the new house. E.g. we painted several key rooms in the house to our liking, and I had the garage painted flat white and hung some mount from the ceiling shelving which was a godsend when we moved into the new house. You'll never get another opportunity for a bare house again so anything you can do before moving in is money well spent. Key was to have the cash flow ready when needed.
- Don't forget the cost of normal things if moving into a new state. E.g. we wound up paying over $800 for titling, taxing, and registering both our cars.
- key issues is to consider long term taxable funds as the safety net, e.g. total stock fund, cash instruments to pay for all the things that go with buying/selling/moving with as much growth as possible to keep up with inflation if possible, and liquid enough to go to cash in 2-3 days. The multiple CDs mentioned above was a good strategy for us.

That's all I can think of.
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invest4
Posts: 1905
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Re: Saving for Next Home Options

Post by invest4 »

What is your target portfolio amount and desired timing (age) for financial independence?

How does your goal to purchase a house at ~800k to 1M impact your FI goal and does the potential trade-offs make sense to you?

Of course, I recognize that people may have different priorities.



* FI is important and time is not unlimited. I would think carefully about reducing investment and giving up tax advantaged space

* The home you now seek is ~4x-5x income. Yes, you can afford it because you already paid off the first house. However, you did so at the expense of other investments for FI. You can still do so…just be comfortable the potential impact on other needs and wants.

* A mortgage provides valuable benefits
- Hedge against inflation
- Liquidity
- Leverage for further investment toward FI

If you must have the house, I would take on a mortgage at an amount to avail yourself of its benefits while not reducing your contributions to FI.

No one knows the future…including what real estate will do. Just like the people who didn’t predict that Allstate and State Farm were going to stop writing any new homeowners insurance policies in California.

Best wishes.
bombcar
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Re: Saving for Next Home Options

Post by bombcar »

You cannot predict what house prices will do, nor can you predict interest rates.

You need to make decisions that you can live with, and usually that involves Excel.

Calculate the various options and decide what the "cost" is for each relative to the others.

At 2 and 1 the kids are young enough that they (probably) won't really remember or care that they're in a townhouse.

The 30 year fixed mortgage is an insane deal because it is subsidized by the government; you may want to seriously consider utilizing it.

A 300k mortgage is a monthly payment of $1,896 (or 22k a year), and even a 500k mortgage is only $3,160 (37k a year). That is potentially deductible, reducing the "after tax" cost even lower. First year tax savings could be $11,230 if you went with the 500k, bringing it down to 26,690 and you get the house NOW and not in ten years.
Topic Author
scgamecocks29466
Posts: 24
Joined: Fri Apr 07, 2023 5:17 pm

Re: Saving for Next Home Options

Post by scgamecocks29466 »

bombcar wrote: Thu Jun 01, 2023 11:20 pm You cannot predict what house prices will do, nor can you predict interest rates.

You need to make decisions that you can live with, and usually that involves Excel.

Calculate the various options and decide what the "cost" is for each relative to the others.

At 2 and 1 the kids are young enough that they (probably) won't really remember or care that they're in a townhouse.

The 30 year fixed mortgage is an insane deal because it is subsidized by the government; you may want to seriously consider utilizing it.

A 300k mortgage is a monthly payment of $1,896 (or 22k a year), and even a 500k mortgage is only $3,160 (37k a year). That is potentially deductible, reducing the "after tax" cost even lower. First year tax savings could be $11,230 if you went with the 500k, bringing it down to 26,690 and you get the house NOW and not in ten years.
I agree with you that I should plot out the options on a spreadsheet but I don’t think paying 37k in interest the first year so that I can deduct 12k off taxes is really a deal? The math doesn’t make sense to me.
Jags4186
Posts: 8198
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Re: Saving for Next Home Options

Post by Jags4186 »

scgamecocks29466 wrote: Fri Jun 02, 2023 5:20 am
bombcar wrote: Thu Jun 01, 2023 11:20 pm You cannot predict what house prices will do, nor can you predict interest rates.

You need to make decisions that you can live with, and usually that involves Excel.

Calculate the various options and decide what the "cost" is for each relative to the others.

At 2 and 1 the kids are young enough that they (probably) won't really remember or care that they're in a townhouse.

The 30 year fixed mortgage is an insane deal because it is subsidized by the government; you may want to seriously consider utilizing it.

A 300k mortgage is a monthly payment of $1,896 (or 22k a year), and even a 500k mortgage is only $3,160 (37k a year). That is potentially deductible, reducing the "after tax" cost even lower. First year tax savings could be $11,230 if you went with the 500k, bringing it down to 26,690 and you get the house NOW and not in ten years.
I agree with you that I should plot out the options on a spreadsheet but I don’t think paying 37k in interest the first year so that I can deduct 12k off taxes is really a deal? The math doesn’t make sense to me.
His math is wrong.

You already get a $27,700 standard deduction. Assuming you bought the house so that your first payment was in January 2024, a 500k 6.5% 30yr mortgage would have $32,335 interest in year 1. That means at a 22% federal rate you’d save in taxes $32,335 - $27,700 = $4,635 * 22% = $1,019 in tax savings vs. what you already get today.

Assuming of course you don’t have additional itemized deductions. You’d have probably $10k in SALT so that’s an additional $2,200 in tax savings. So the government will subsidize your loan to the tune of $268/mo. in year 1.

I’m not suggesting that taking out a $500k mortgage is the bad move, but the savings isn’t as big as the prior poster suggested.
TXDoc21
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Re: Saving for Next Home Options

Post by TXDoc21 »

It seems to me you aren’t wealthy enough to do what you want. It’s admirable to want to stay debt free, but once you figure out what you want then I’d buy with a mortgage. If you save and even cut into your retirement savings and when you reach your goal and realize you need 400K more because prices rose you’ll be kicking yourself. And your retirement accounts will be less. It seems like a mortgage will add minimal risk to your life and you’ll have a small amount of leverage to do what you want now. Life is short.
NS_Bane
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Re: Saving for Next Home Options

Post by NS_Bane »

radiowave wrote: Thu Jun 01, 2023 7:50 pm - we held the cash in NWP CDs in different denominations, e.g. $10k, 20K, 50k, etc. so we had some flexibility to cash in the CDs when we needed it for cash flow.
What is a "NWP" CD?
NS_Bane
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Re: Saving for Next Home Options

Post by NS_Bane »

People use mortgages so they can enjoy the use of a home before they have enough money to purchase it outright. It sounds like a mortgage would make sense for you.
radiowave
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Re: Saving for Next Home Options

Post by radiowave »

NS_Bane wrote: Sun Jun 04, 2023 6:43 am
radiowave wrote: Thu Jun 01, 2023 7:50 pm - we held the cash in NWP CDs in different denominations, e.g. $10k, 20K, 50k, etc. so we had some flexibility to cash in the CDs when we needed it for cash flow.
What is a "NWP" CD?
No Withdrawal Penalty. In Ally, you set up the CD, fund it, wait 6 days then anytime after that you can close it and move the money anywhere you want, e.g. into the Ally or external checking account without any early withdrawal penalty.
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jodhpur
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Re: Saving for Next Home Options

Post by jodhpur »

I think a mortgage is a no brainer. You could bump up your 401k and possibly do more creative things with hers to save more (like a SEP IRA or Solo 401k).
I wouldn't take money out of my HSA.
In short, I don't think the Dave Ramsey approach is applicable to you. You clearly know enough about budgeting, saving, debt management, etc.
In your case, a mortgage could help you accelerate your savings.
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