Can I afford this much house? Home purchase question

**Petunia 100** · 12-13-2012, 08:39 PM

Can you afford it? It's hard to tell, since you didn't mention the purchase price.

**humandraydel** · 12-14-2012, 04:13 AM

Originally posted by Petunia 100 View Post

Can you afford it? It's hard to tell, since you didn't mention the purchase price.

Is it hard to tell? He's asking if for 3 years he should sell $300-500 per month of his investments and use it to pay (interest on) the mortgage. To me, that says he can't afford it. However, if the planning and budget was executed flawlessly, the plan could work ($500 per month = $6k per year...$150k/6k = 25 years of having to do that).

Personally, it would make me a little nervous. How well planned is your budget? Is saving $600 a month for retirement enough? Do you have other "savings" budgeted such as house maintenance? Or are you going to be dipping into your brokerage for other expenses? What % raise are you counting on? How much are you putting down? Are you really comfortable with 3 (or 5?) years of slow bleeding?

**bjl584** · 12-14-2012, 04:25 AM

Did you inherit money? I'm wondering how you ended up with over a quarter million dollars at 23 on a salary of $52K a year.

That aside, rule of thumb for a house is to have a 20% down payment plus a 6 month Emergency fund in place when you buy. Also, the cost of the house should not exceed more than 3 times your annual income. In your case, you are in the $150K range for a house purchase.

**recentcollegegrad** · 12-14-2012, 05:37 AM

Yes, I did inherit money. I am very thankful and am a good steward to my money, thus my inquiring on here.

The condo I am looking at purchasing would likely be around $240-245,000.

My monthly expenses (CURRENTLY) are as follows:

Net pay: $3,250
Rent: $675
My share of utilities: $150
Cash (ATM): $300
Groceries: $300
Lunch: $200
Retirement Accounts: $675
Car insurance: $65 (will disappear soon, selling my car in Jan)
Entertainment (eating out/going out on weekends/various entertainment things): $250
Subway transit card (monthly unlimited): $90

So you can see I'm already saving substantially and the remaining money left in my budget I usually contribute to a savings account or a new mutual fund every few months. I'm already maxing out my Roth IRA and will be receiving 401K soon from my employer, to which I'll contribute 15-17% (net of employer contribution) and put any extra money into my Roth.

Depending on the month and my spending, I may not even need to roll over money from my brokerage account.

The monthly payment I am looking at on $240,000 is about $1,600 (to which I used liberal calculations for budgeting's sake), which includes principal, interest, tax, insurance, HOA fees, and utilities. Note that I haven't taken into consideration the mortgage interest deduction, which will be a savings.

**bjl584** · 12-14-2012, 05:48 AM

Originally posted by recentcollegegrad View Post

Yes, I did inherit money. I am very thankful and am a good steward to my money, thus my inquiring on here.

The condo I am looking at purchasing would likely be around $240-245,000.

My monthly expenses (CURRENTLY) are as follows:

Net pay: $3,250
Rent: $675
My share of utilities: $150
Cash (ATM): $300
Groceries: $300
Lunch: $200
Retirement Accounts: $675
Car insurance: $65 (will disappear soon, selling my car in Jan)
Entertainment (eating out/going out on weekends/various entertainment things): $250
Subway transit card (monthly unlimited): $90

So you can see I'm already saving substantially and the remaining money left in my budget I usually contribute to a savings account or a new mutual fund every few months. I'm already maxing out my Roth IRA and will be receiving 401K soon from my employer, to which I'll contribute 15-17% (net of employer contribution) and put any extra money into my Roth.

Depending on the month and my spending, I may not even need to roll over money from my brokerage account.

The monthly payment I am looking at on $240,000 is about $1,600 (to which I used liberal calculations for budgeting's sake), which includes principal, interest, tax, insurance, HOA fees, and utilities. Note that I haven't taken into consideration the mortgage interest deduction, which will be a savings.

You are doing a good job saving, but the amount that you want to spend on a house is out of your price range given your income. I'd caution against buying too much house because you expect a salary increase in the future. Unless it's in writing that you will be making more soon, then I would base a house purchase decision on my current financial situation.

**kork13** · 12-14-2012, 07:52 AM

I have to (conditionally) disagree with some of the others... My question is this: You say that your downpayment will come out of your investments -- you've currently got (outside of retirement) $216k of investments, so how much are you planning to use for your downpayment? Also, how much are you WILLING to use for your downpayment? My thinking is this... If you're okay with doing a large downpayment (which IMO is a good use of an inheritance), then your mortgage would be entirely doable.

As a baseline for comparison, take a standard 30-yr mortgage at 3.5% (reasonable estimate right now) with a standard 20% downpayment ($48k in this case), you'd be borrowing $192k, with a mortgage payment (P&I) of $880/mo. Assuming taxes/insurance are approximately 2% of your condo's value per year, your total payment (PITI) would be about $1280/mo, or about 29.5% of your gross income. Yes, this is a little high -- typically, most of us will recommend total housing payments to be <25% of gross, but definitely no higher than 28%.

Now let's consider a higher downpayment... Say you did a 30% downpayment ($72k), which in this case is probably the MINIMUM you should consider. Borrowing $168k, you get a mortgage payment of $754, with a total payment (PITI) of $1154, which is a more reasonable 26.5%. If you go even further with a larger downpayment (35-40%) to reduce your monthly payment even further. By the numbers alone, you do have the money to do so easily. Emotionally, you may or may not be comfortable with selling that much of your investments all at once.

But my point is simply this: you have the cash (invested) that you can afford pretty much as large of a downpayment as you like. But I will give you this caution: if you aren't willing to invest enough of a DP in your home, you're asking for trouble. If the $72k+ downpayment bothers you, then you need to look for a less expensive home. But if you are willing to use your cash on hand to manage the size of your mortgage, then you can do it just fine. Some will argue that putting $72k (or more) as a downpayment isn't smart, because you're over-weighting your assets in your home. Valid point, but even if you went all out with a 40% ($96k) DP, you would still have over half of your assets invested in stocks/bonds/MFs, not including your retirement accounts.

side note btw, if you do go through with it, I'd recommend keeping the $20k from the car sale in cash in order to boost whatever EF you have in place... I bought my house ~3 months ago, and believe me, there are alot of unexpected little expenses that come up when you buy a home. Especially with the added expense of your mortgage and home maintenance, you definitely want a solid EF in place for yourself.

**bjl584** · 12-14-2012, 07:57 AM

Originally posted by kork13 View Post

I have to (conditionally) disagree with some of the others... My question is this: You say that your downpayment will come out of your investments -- you've currently got (outside of retirement) $216k of investments, so how much are you planning to use for your downpayment? Also, how much are you WILLING to use for your downpayment? My thinking is this... If you're okay with doing a large downpayment (which IMO is a good use of an inheritance), then your mortgage would be entirely doable.

As a baseline for comparison, take a standard 30-yr mortgage at 3.5% (reasonable estimate right now) with a standard 20% downpayment ($48k in this case), you'd be borrowing $192k, with a mortgage payment (P&I) of $880/mo. Assuming taxes/insurance are approximately 2% of your condo's value per year, your total payment (PITI) would be about $1280/mo, or about 29.5% of your gross income. Yes, this is a little high -- typically, most of us will recommend total housing payments to be <25% of gross, but definitely no higher than 28%.

Now let's consider a higher downpayment... Say you did a 30% downpayment ($72k). Borrowing $168k, you get a mortgage payment of $754, with a total payment (PITI) of $1154, which is a more reasonable 26.5%. If you go even further with a larger downpayment (35-40%) to reduce your monthly payment even further. By the numbers alone, you do have the money to do so easily. Emotionally, you may or may not be comfortable with selling that much of your investments all at once.

But my point is simply this: you have the cash (invested) that you can afford pretty much as large of a downpayment as you like. But I will give you this caution: if you aren't willing to invest enough of a DP in your home, you're asking for trouble. If the $72k+ downpayment bothers you, then you need to look for a less expensive home. But if you are willing to use your cash on hand to manage the size of your mortgage, then you can do it just fine. Some will argue that putting $72k (or more) as a downpayment isn't smart, because you're over-weighting your assets in your home. Valid point, but even if you went all out with a 40% ($96k) DP, you would still have over half of your assets invested in stocks/bonds/MFs, not including your retirement accounts.

side note btw, if you do go through with it, I'd recommend keeping the $20k from the car sale in cash in order to boost whatever EF you have in place... I bought my house ~3 months ago, and believe me, there are alot of unexpected little expenses that come up when you buy a home. Especially with the added expense of your mortgage and home maintenance, you definitely want a solid EF in place for yourself.

My recommendation is from the point of view that a more expensive house will have more expenses asociated with it. OP could in theory put down 75% and have a super low mortgage. But a $250K house is going to have high taxes, high utilities, high insurance rates,and high upkeep costs. On a salary of $52K, those costs could become overwhelming even without a mortgage to worry about. Especially if OP is going to continue to try to fully fund retirement as he is presently.

**kork13** · 12-14-2012, 08:04 AM

Originally posted by bjl584 View Post

My recommendation is from the point of view that a more expensive house will have more expenses asociated with it. OP could in theory put down 75% and have a super low mortgage. But a $250K house is going to have high taxes, high utilities, high insurance rates,and high upkeep costs. On a salary of $52K, those costs could become overwhelming even without a mortgage to worry about. Especially if OP is going to continue to try to fully fund retirement as he is presently.

It's a condo, not a country manor. Size of the home (and thus utility cost) don't follow in lock-step with the cost. Further, many of the maintenance costs involved with most SFH's are covered by the HOA fees. With that "super-low mortgage," one could easily cover marginally higher ongoing costs. Personally, if I were in OP's shoes and this condo really is a perfect fit, I'd drop a 50% DP without hesitation and be perfectly comfortable.

**bjl584** · 12-14-2012, 08:14 AM

Originally posted by kork13 View Post

It's a condo, not a country manor. Size of the home (and thus utility cost) don't follow in lock-step with the cost. Further, many of the maintenance costs involved with most SFH's are covered by the HOA fees. With that "super-low mortgage," one could easily cover marginally higher ongoing costs. Personally, if I were in OP's shoes and this condo really is a perfect fit, I'd drop a 50% DP without hesitation and be perfectly comfortable.

Maybe. Maybe not. Utilities probably won't follow in lockstep with cost. They are more a function of square footage and how efficient and modern the appliances are, but I would be careful with taxes. OP will have to research it. But another thing I'd consider is how long OP is going to plan on living there. I may not put such a large down payment on something I wasn't going to stay in very long.

**phantom** · 12-14-2012, 10:00 AM

Originally posted by kork13 View Post

But my point is simply this: you have the cash (invested) that you can afford pretty much as large of a downpayment as you like. But I will give you this caution: if you aren't willing to invest enough of a DP in your home, you're asking for trouble. If the $72k+ downpayment bothers you, then you need to look for a less expensive home. But if you are willing to use your cash on hand to manage the size of your mortgage, then you can do it just fine. Some will argue that putting $72k (or more) as a downpayment isn't smart, because you're over-weighting your assets in your home. Valid point, but even if you went all out with a 40% ($96k) DP, you would still have over half of your assets invested in stocks/bonds/MFs, not including your retirement accounts.

I agree with the bold statement above. I would not buy the condo unless you are willing to make a large withdrawal from your investments to do it. If a little alarm goes off in your head a the thought of withdrawing enough to make a large downpayment, you should listen to it. I'm not saying that you necessarily should make such a large downpayment. I'm just saying that as long as you're using that money as a safety net to buy a home that is beyond the means of your income, you should be fully prepared to withdraw that money at some point in time.

I also advise against planning for a significant salary increase. Sure, your salary is likely to go up, but there's also a reasonable chance you'll hit a bump. Around the time I was buying my first house, I had every reason to think I'd be getting a raise in a few months. But, I planned on my current salary and left myself some buffer room just to be safe. I was really glad I had when my employer instituted a pay freeze followed by across the board pay cuts. Is the same likely to happen to you? Probably not. But, I think it's wise to be prepared all the same.

**humandraydel** · 12-14-2012, 10:02 AM

Originally posted by kork13 View Post

I have to (conditionally) disagree with some of the others...

Well, I did say the plan could work if well thought out, just that I personally wouldn't do it. But, at such low interest rates, it's really a wash between putting 50% down or supplementing the monthly payment with money from the brokerage.

**bjl584** · 12-14-2012, 10:16 AM

Originally posted by humandraydel View Post

Well, I did say the plan could work if well thought out, just that I personally wouldn't do it. But, at such low interest rates, it's really a wash between putting 50% down or supplementing the monthly payment with money from the brokerage.

I agree that this could work out just fine for OP if he is very disciplined about his finances. Still, buying a home that costs 5 times your annual income doesn't leave much wiggle room if a problem arises. It's just not something that I would be comfortable with. Life's "what ifs" and innevitable stumbling blocks would become that much more pronounced if one was to put themself in this situation.

**kork13** · 12-14-2012, 03:34 PM

Originally posted by bjl584 View Post

I agree that this could work out just fine for OP if he is very disciplined about his finances. Still, buying a home that costs 5 times your annual income doesn't leave much wiggle room if a problem arises. It's just not something that I would be comfortable with. Life's "what ifs" and innevitable stumbling blocks would become that much more pronounced if one was to put themself in this situation.

I'm not trying to be argumentative (hopefully I'm not coming off like that), but what's the difference between borrowing $120k on a $150k home (with a 20% DP) or borrowing $120k on a $240k home (50% DP)? Taxes, Insurance, and potentially utilities will be higher, but even that difference is probably less than $4000/yr. Taking on up to $350/mo in extra expenses is certainly nothing to scoff at, but I think it would be manageable. OP's plans to sell his car will free up some more cash flow as well, though that obviously shouldn't be a make/break factor.

But in any case, OP, you just need to work up as realistic of a budget as you can. Get some good estimates, crunch the numbers, and decide if you're comfortable with what your finances would look like with buying a condo like this. This is definitely something you want to go into with a full view of what you can expect. And as stated, I wouldn't plan for the raise unless it's guaranteed in your job contract. Plan with the income you have now. If you can't make it work with your current income, it's probably not a great idea.

**MonkeyMama** · 12-14-2012, 08:41 PM

I mostly agree with kork.

Standard rules of thumb (like don't buy more than 3 times income) are completely useless in some areas of the country. In higher cost regions, you compensate for high housing costs by cutting down other areas. Dropping the car is a perfect example. Large down payments are another strategy. The income tax breaks from home ownership (in a higher cost area) are substantial, so is not as bad as it sounds. (I've totally been there).

My response would be totally different if you didn't have substantial assets. But with the assets, I think it is prudent to buy longer-term, buy a home you really want, etc. (Alternative is to buy more basic and move up in a couple of years, but that can get pricey with moving and realtors, etc. Not the best option if you have the means to just get more what you want).

Anyway, I think the responses in this thread are tending towards "basic finance" (i.e. focusing on monthly payments) and should be more focused on big picture. You have enough assets to pay for this home outright. You are only 23? Of course you can afford it. I'd think more about your long-term goals. With the plan you have laid out, you are committing to continue to save x% amount for retirement. The rest you essentially want to shift from your taxable accounts to your retirement accounts. If this makes sense for the long run, then that is fine. Keep in mind that you don't probably have to save as much for retirement (or long-term) as the average person, as you have a great start. Not as an excuse to save less, but is sound reason not to panic about savings pace.

Reality check: Think seriously about what you would do and how you would feel about this purchase if you did not receive a raise any time soon (beyond likely in this economy), if you were laid off, if home values went down significantly, etc. Red flag = thoughts like, "That will never happen." Are you truly willing to take on the risks of home ownership? As long as you are being realistic and prepared for all scenarios. Again, you have the assets to deal with all of the above, but as someone else commented, are you prepared to utilize your assets if need be? If you find yourself underwater?

How much to put down? Depends on your long-term plans. I think it doesn't make a huge difference either way. Just depends if you'd rather keep that money invested or tie up more in real estate.

Can I afford this much house? Home purchase question