Maybe a much cheaper house is a better idea...

[ScrimpAndSave]

Yup. I have house fever again...actually not house fever, because I am not looking to buy a house at the moment...more like house planning fever...which, if you ask me...isn't a bad idea.

In January 2011 (I know, eons away), I will have $80,000 saved. My (future) husband and I will be making a combined income of $110,000. My fiance will have $140,000 in student loans to pay from law school (yuckie). I figured we could put $60,000 down on a house that is $300,000...and that would be a long term house. But would it be smarter to buy a much more modest home for $200,000 and put 30% down on it?

My dad doesn't think it is a good idea. He thinks that we should buy the more expensive one because it will appreciate better and we would be more apt to stay in it for a longer time.

I'm just concerned because my fiance's student loan payments will be around $900 a month (beginning in Jan 2010). I am finding, after looking at loan calculators, that if we put an extra $500 a month toward the principal on the student loans each month, we will cut the loan down to 15 years from 30 years. The interest rate - after consolidation - will be around 7% (not great, so I think we should pay them off as fast as possible).

Thank you all for listening to my constant concerns.

[disneysteve]

I agree with buying the long-term house. I am very much not a fan of "trading up" though I realize lots of people do it. I think a lot of time, effort and money gets wasted in the process. Forget about the potential appreciation. Lots of folks have seen the fault in that line of thinking in recent years. Your home is not an investment. You aren't buying it in order to make a profit. You are buying it to have a place to live.

You guys are great savers and I'm sure you will continue to be after you are married and have a house. I don't think the mortgage and student loan payments are going to pose a problem for you at all.

[ScrimpAndSave]

Disneysteve...thank you for answering my post. I guess I am concerned because if our mortgage is larger, then we won't be able to throw as much money at the student loans as I would like to.

The gov't student loan is at $65,000 at 6.8%.
The private loan is $65,000 at 8.2%.

These will be consolidated separately over the summer. I have no idea what the interest rates will be like then.

[GrimJack]

I would suggest buying a more modest house that you like - you will enjoy ownership more if you are not constantly on the edge of your income. Buy the least expensive house on the block in a neighborhood you like and relax.

[disneysteve]

Originally Posted by ScrimpAndSave

I guess I am concerned because if our mortgage is larger, then we won't be able to throw as much money at the student loans as I would like to.

So it may take a couple of extra years to repay the student loans. Big deal. The end result will be paid off student loans and a house that you love and don't need to trade out of. I think the stability and peace of mind that brings is worth it taking a bit longer to repay the loans.

Also, odds are that your husband's income will rise significantly from it's initial level, giving you guys more disposable income over time. The mortgage payment stays fixed. The loan payments stay fixed. So they both become more affordable over time.

[ScrimpAndSave]

Between a more modest house and a long term house...we are talking about a $300-$400 difference in the monthly mortgage. I guess in the long run, that doesn't make as much of a difference.

[disneysteve]

Originally Posted by ScrimpAndSave

Between a more modest house and a long term house...we are talking about a $300-$400 difference in the monthly mortgage. I guess in the long run, that doesn't make as much of a difference.

So $3,600-$4,800/year. That's maybe $6,500 in income (before taxes). Don't you think the odds are pretty good that within a year or two, your combined incomes will rise by at least that much? So maybe things will be a little bit tighter than you'd like for that first year or so. After that, income will make up the difference.

[ScrimpAndSave]

With incomes...as for my fiance...it is hard to say. My income goes from 55k-85k in 4 years...and that has already been negotiated through my teacher's contract. My fiance is starting at $42k...and that will not budget very much for about 6-7 years if he stays with this medium sized firm.

[disneysteve]

Originally Posted by ScrimpAndSave

My fiance is starting at $42k...and that will not budget very much for about 6-7 years if he stays with this medium sized firm.

Why is he doing that exactly? What advantage is there for him to take such a low-paying position, especially with student loans that are more than 3 times that income? If it is a good stepping stone to a better position, that makes sense, but will that really take 6-7 years to accomplish? I know virtually nothing about how things work in his field so I don't mean to sound critical. I'm just curious if what he's doing is the norm.

[MonkeyMama]

I think I've said before, buying up makes sense when you can't afford the house you want (particularly uber expensive areas). BUT if you could afford either, I'd go for the bigger house. We bought a 5-bedroom house before we had kids. Everyone thought we were crazy. I can assure you we will never buy up, and it was nice not having to move. (The premium we paid over a smaller home - in the same neighborhood - was VERY small at the time though. Like $50k? It really doesn't make that much difference. You could argue it would cost $50k to move up eventually anyway).

Of course, if you aren't buying for 2011, it's hard to say. I don't think you can decide until you see where the market is when you are buying.

Back home the cheapest homes were in the $500k range so we started with a $250k condo. I wouldn't do that any differently - but you are talking $250k price difference there, which takes time to build up to.

The $100k price difference? Seems like you can wait until you can afford what you want for the long run.

[ScrimpAndSave]

Disneysteve...it is pretty much the only job he could get. He worked as a law clerk in the summer between his 2nd and 3rd year of law school...and they offered him a job there. He is graduating from a decent school...but not one in the top ten. Apparently lots of lawyers start out with pretty low wages. His friends are starting out at 100k plus...but they are sons and daughters of lawyers...he is coming from absolutely nothing.

He will be working for a medium sized firm that deals with many different types of law...which is very good. He is going to find his niche, but in the meantime he gains a lot of experience and the place is very well established.

We will see how it goes. I would love for him to make more...but I don't mind being the breadwinner for 5 years...I'm really not doing so bad myself.

[Gjowers]

Most lawyers start relatively modest. The first few years are for learning everything they didn't teach you in law school. If he works hard enough, his income will double in a few years and continue rising after that. The law is a tough business.

My advice is to buy a house you are in love with and plan to stay in forever. I've know many people who, years later, look back and wish they hadn't moved up or had bought a little more house initially. But the house in which you plan to stay and pay it off as quick as you can. Stay there and live mortgage free.

[KatieNK]

There is nothing wrong with at least looking at the cheaper houses. I do agree that you should buy a house you know you will stay in for awhile, since moving is a big expense and a big hassle. But no sense crossing all houses under 300K from your list, keep your options open. You never know, you may fall in love with a $250 or $200k house. And you will probable be much happier and with lower payments and the ability to pay down your debt faster.

[LivingAlmostLarge]

Buy the more expensive home. Like Monkeymama, we bought something a bit bigger than we needed 3/2.5 townhouse. People thought we were crazy but we lived in 1 bed condo 500 sq ft for 3+ years and rented studios/small apartments beforehand.

Now we're in our townhouse we aren't moving as long as we live in New England! We're saving huge, in the 3 years rents have gone up but not our mortgage. We haven't paid to move and it's comfortable. We'll be here another 1, more like 2-3 years. And we're having a baby, bye-bye BC 1/1/09. So we can easily use the space.

It's been tight starting out and it's been tighter for the past 2 years, getting easier and soon my DH is done with his MBA we're golden. We'll have a higher income, no more tuition, AND a house payment that is comfortable.

I'm looking forward to being able to afford everything and staying at home, and I'm sort of glad we didn't have kids until we could afford for me to completely stay at home.

So the tightness has been during our early years, from here on out I am pretty sure we'll be sitting pretty income wise.

[jIM_Ohio]

I once saw a tree and then another tree and then another
but I never saw the forest.

You are seeing the trees (the debt, the house, the income) but do not see the forest which is a sound financial plan.

Your father is right- waiting is not going to kill you.
Of course we have been through this many times- why put 20% down? You will find you may want the tax deduction earlier with such a high income.
Moving has around a 6-10% cost associated with it. 6% sellers fee (to realtor) plus closing on new house, plus storage, plus risk that old property won't sell before new one is ready to close. Moving is also a pain. A pain in my back when I was 31- I moved without issue around 6 times between ages of 20 and 28. NY-Maryland-Michigan-Ohio-Ohio-Ohio. My body was invincible until that last move (I was 31 then) and then I realized my body just didn't hold up the way it used to.

Go for the 400k home and get into it as soon as reasonable. Save yourself the moving costs and be patient.
Your 1st year interest will approach 20k on a 400k house. You will get 25% of this back on your tax return. You could take the 5k and pay down the mortgage by this amount each year and catch up on the less than 20% down in about 6 years (30k would reduce a 360k/10% down mortgage to close to 20% equity) and also be able to deduct the student loan interest as an adjustment to income if gross income stays under 130k (check me on the cap). Max $2500 per year in interest for the adjustment. Use the adjustment to further pay down the student loans (again not a fan of consolidating loans if you plan to pay them off early- it is much easier to pay off a smaller loan than a larger one).

You also have not mentioned retirement saving or similar.

You need to start at the top with two things- budget of expenses and then listing of income. The income plan needs to be to set aside 20% of gross for savings, then live off 80%. The budget is then built off the 80% (which includes taxes) and minimizes tax refunds by taking deductions into account on payroll income.

Because of income (110k is high for a newly married couple), you need to plan early for retirement because more than likely avenues like Roth IRAs and tax deductions will begin to get phased out within a few years (I believe you lose 3% of schedule A above 160k AGI- check me on the cap, but that is about where the cap is on schedule A).

If you buy the home in a vacuum (without looking at ALL factors), then you might lose a window of opportunity for something... even just weighing student loans vs house is not taking into account enough factors to make a good decision (IMO). The student loans are another example of a "inconsistency"- you want to pay them off early, but are also consolidating them. I think it will be easier to pay them off early by keeping them seperate, unless the interest rate is lowered by 25-50% from the rates you put above. You need a whole plan, not just deal with the 1-2 issues which seem most important 3 years away.

You are clearly debt averse. But the debt is NOT yours. If you are that debt averse my comment would be pay down this debt NOW and not wait until graduation or marriage. If there is a relationship issue preventing this from happening, that is issue #1 with the plan.

You need to make sure spouse and you are on same page with what debt is good.

Just because you are debt averse does not mean spouse will have same issues. The risk tolerance for the couple is not the "least risk" of the two, nor the most risk with the two, it is a compromise.

For example my wife and I have different views on money. I am the save 20% camp, I am the invest before pay off mortgage camp, and I am in the public schools are good camp. Wife prefers to save some, spend more, pay off mortgage before investing more and private schools are the only way to go in Ohio camp.

The medium ground is we save 20% for retirement, another 5% for short term savings (vacations) which will also pay down the mortgage 9 years early. Kids will go to private school through elementary school, then we decide for HS what is best (financially and for kids needs at that time).

[ScrimpAndSave]

Jim,

You certainly gave me a lot to think about. Thank you. The reason why I am focused on just a few parts of my future is because I am really not sure of HOW to see the whole picture yet...when it comes down to it, I am a newbie in the area. I just know enough to squirrel as much as I can away and to stay out of debt.

As far are retirement goes, I have about $4,000 in a annuity that I had with a previous job...I am not contributing to it. I have around $400 in a ROTH IRA, but I am not contributing to that either. My pension takes 7.5% of my salary each year (this is year 4), but I am not sure what the total is in there.

I figured that after I buy the house, my fiance and I can max out our ROTHs and he can max out his 401k as well (he doesn't start this job till Nov. 2009).

You mentioned a budget...well, my budget is only my pay at the moment since my fiance is living (frugally) off of student loans and doesn't have an income.

My monthly take home after taxes, union dues, insurance and pension contributions is about 2600.

Take home pay: $2600
ING Savings : $2000 (this goes towards the home downpayment)
Rent : $ 400 (this includes my cell and car insurance - thanks Daddy)
The rest goes to groceries and other miscellaneous things. It's a tight budget...but it isn't forever...



...oh...and for reference...we absolutely, 100%, do not want kids.

That's all.

[disneysteve]

Originally Posted by ScrimpAndSave

I have around $400 in a ROTH IRA, but I am not contributing to that either. My pension takes 7.5% of my salary each year

ING Savings : $2000 (this goes towards the home downpayment)

I'm not sure if this came up before in a previous thread. I think you should reconsider your single-track focus on a home downpayment. One thing that you can never get back is time. By not contributing to your Roth, especially now when you are younger and the market is at a low point, you are sacrificing a big chunk of your financial future. While it is great that 7.5% of your pay is going into your pension, that isn't a high enough savings rate for retirement. It would take $416.67/mo. to max your Roth. If you don't want to do that much, even a couple hundred per month would make a big difference in the long run.

I think Jim raised a good point about not seeing the forest for the trees. By only looking at the "house" tree, you may be missing the "long-term financial security" forest.

[ScrimpAndSave]

::sigh:: I guess you are right. I mean, I could absolutely start contributing $416.67 a month beginning in January and max out my roth...I guess I just hate to see so much of that come out of my house fund. I will be 28 at the end of this month...I'm not a spring chick, but I know that time is still on my side.

That is be being selfish though...I would ideally like to save up $80,000 to buy my dad's house. That would be $60,000 down (20%), leaving a $15,000 emergency fund and $5,000 to repaint and change some fixtures (we probably would not use all of this budgeted money immediately...it would become a repair/renovation account).

[ScrimpAndSave]

Also, can I save the $5,000 on my own and contribute it once a year? Or is it better to contribute the $416.67 monthly?

Thank you.

[disneysteve]

While I don't advise doing so, keep in mind that Roth contributions can be withdrawn at any time for any reason. If some dire emergency arose, you could always pull some money out of the Roth.