Quote:
Originally Posted by jeebuss31
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Take home= $6875.00
Mortgage (plus real estate tax) = (-) ~$2500.00
Debt (loans) = (-) $600 Car loan falls off in 12/2009, will not consider a debt.
Gas (for car), credit card bills (we pay off every month), groceries, car insurance (estimated at a high range)= (-) $1500.00
Mad Money savings ($200.00 per person for our own personal spending or savings)= (-) $400.00
Utilities, cable, phone= (-) $600.00
Nest Egg savings (to put away into our nest egg savings, rainy day fund, etc.) (-) $700.00
This leaves us $575.00 extra money to fund around accounts or use it for the house.
What do you guys think? I understand the ratio of 28% front end and 36% back end. But is this the best formula to figure out what we can really afford?(because it's based on our gross income) Or do others prefer the take home method I used above?
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I think you need to reanalyze the situation with what you have presently. I would not worry about the budget of a house you will purchase in 5-15 years.
I would emphasize the "how to get into house with least investment but most financial stability".
You do not have a $2500 house payment now do you? what is that payment on current residence now?
If renting and cost is $1100/month, you should be setting aside the other $1400 for the house.
5% to retirement accounts is not enough, think 10 or 15% long term. The more money put in earlier the better.
$575/month added to the house fund makes sense.
When you pay off the student loan in 6 years, add that $600 into mortgage savings too.
You should put a timeline on things, create a spreadsheet to track "if thens".
Price out a house you want, maybe 300k. Go new house hunting in places where you may want to live and see what houses cost new. 300k would mean a $75,000 down payment.
For example, have one example where you put 15% to retirement starting now. 15% of gross pay, then figure out how much is left for house savings and list how long it takes to get to $75000 with deposits only. If 15% to retirement allows only $500/month towards house savings, then $75,000/$500=150 months=12.5 years. Remember to factor in another $600 in 6 years when student loans are paid off, that would make (6 years*12 months)72*500=36000; 39000 left. 39000/1100=36 months (3 years)=9 years to get money in cash.
Then use the timeframe with no interest to find an investment timeframe. More than 7 years suggest stocks are an option. Run the $500 deposits into a mutual fund which returns 10%. The see that $500 compounded each month gives $85,000 in 9 years. So that situation would have a 9 year window depending on risks taken, with a $7200/year cushion coming from student loans in cash. Take the 15% retirement contribution and compound this out for 15 years as well.
Then repeat same analysis with retirement at 10%. Then again with 5%.
Then repeat all of above with tax implications of a mortgage post move. Because the mortgage interest is deductable, make sure you factor more take home pay into calculations once you get the house.
Then repeat the above analysis with a mortgage at less than 20% down. Maybe 15%, maybe 10%.
The results will show the following-
saving 5% for retirement gets you house sooner, but you will need to work longer to get a similar retirement account balance and it will also take significantly more investment (in dollars) from you.
saving 15% more for retirement delays getting into house maybe 2-3 years, but the overall investment you put forward (in dollars you earn) is much less. Because
- By investing early for retirement, compounding kicks in over a larger amount of time on a larger initial amount of money
- By delaying house purchase around 2 years, you gain some investment options (equities) which will also compound and provide more down payment for you with less money actually set aside.
- By lowering down payment you get tax advantages sooner and could use these tax advantages to pay down mortgage to 20% if needed.