Can I afford? Here is my plan

[gekkoplus]

This is kind of long post so please excuse me.

My $1600/month rent is killing me. I am looking to quickly save 10% (40K) for the down payment and buy a house. I have some incredible credit card offers for balance transfers which will help me in raising around $32K @ 2.5% for life. I already have a car loan of 20K @ 2% (3 years).

My annual income is $100K. (25% tax bracket, married filing jointly)

Here is my income and expense breakdown -

For 15 Days -

3908 Gross Income

-1113 Taxes

-138 Health Insurance

2657 Remainder

-384 401K (10%)

-384 ESPP (10%)

1889 Remainder

For 30 Days

3778 Remainder [1889 * 2]

-1600 Rent

-600 Car payments

-70 Estimated Credit card payments* (for BT offers I mentioned above)

1508 Remainder

-100 Electricity
-50 Cellphone
-100 Car Insurance
-50 Cable / Internet
-100 Gas
-300 Food

808 Remainder

At the end of the year, I will accumulate $6K from ESPP which I can add into $32K from credit cards to make overall cash reserve $38K. Remaining $2K will come from $808 remainder each month during next 3 months or so.

Now let's say I buy a house of $400K. My down payment is $40K. I will have a mortgage of around $360K @ ~6%. I understand there will be closing costs and there will be HOA / property tax expenses as well. I am hoping to have some tax relief which will help me pay for these expenses.

I wanted to do a sanity check with you guys to see if I am missing any piece here. Also with this breakdown and throwing home purchase into this situation, I want to know whether I will be able to afford a $400K home.

Thanks in advance.

[red92s]

You are going to take cash advances on a CC for a downpayment?

[jIM_Ohio]

Originally Posted by gekkoplus

At the end of the year, I will accumulate $6K from ESPP which I can add into $32K from credit cards to make overall cash reserve $38K. Remaining $2K will come from $808 remainder each month during next 3 months or so.

Now let's say I buy a house of $400K. My down payment is $40K. I will have a mortgage of around $360K @ ~6%. I understand there will be closing costs and there will be HOA / property tax expenses as well. I am hoping to have some tax relief which will help me pay for these expenses.

I wanted to do a sanity check with you guys to see if I am missing any piece here. Also with this breakdown and throwing home purchase into this situation, I want to know whether I will be able to afford a $400K home.

Thanks in advance.

What you are missing-

You are putting 10% down on house, no guarantee for approval these days. I have been approved twice for 10% or less down and closed both times, but that was 2 and 7 years ago. 2009 is a different year with different trends.

In addition, when closing, the 32k debt on credit cards will show up on credit report, and you will need a repayment plan for those. The financing company will calculate a front end and back end ratio. One is debt to income (prefer less than 41%) and one is mortgage payment to income (prefer less than 32% I think). Best for those ratios to be 38% back end and 28% front end for best approval.

Closing costs might be as high as 10k, that is not accounted for in any of above.

What I would do-
1) find a cheaper place to live
1a) get a roomate or two or three
1b) $1113 for taxes is expensive out of check- could you outline this (is it FICA+medicare+federal+state??).
1c) get a second job
2) cut the bills not needed or pay them off. That $600 of car payment is going to kill the front end ratio to begin with- when will the cars be paid off?
2a) plan to move into house about 2 years after cars are paid in full
2b) make sure all debt is paid off before cars are paid off
3) Look at your gross income
3a) set aside 20% for financial freedom (20% of gross)
3b) I would allocate 15% of this to 401k (save on taxes)
3c) I would stop the ESPP for now, or drop to 1% and put the 4-5% of this into a CASH account. Last thing you need is stock price driving when you can buy home in next 2-4 years.
You have the income to make this happen. The issue is you need to balance short, mid and long term goals.

My stance is long term goals (retirement) always get funded first, and should be 15% of gross income. If you think 15% of gross is too much, the reality is you could bump 401k up to 15% and the ESPP would not drop to 5%, it would probably only drop to 6 or 7% because of taxes (401k is pre tax, ESPP is post tax). Make more efficient choices and things will improve.

I would not rush into buying a house in this market. I would not wait, but I would not rush into that decision.

[gekkoplus]

Originally Posted by red92s

You are going to take cash advances on a CC for a downpayment?

Cash Advance or Balance Transfer - whatever you call it - bottom line is that it is money I can get pretty cheap.

Originally Posted by jIM_Ohio

What you are missing-

You are putting 10% down on house, no guarantee for approval these days.

I am already pre approved by a few lenders a couple of weeks ago. This was prior to I taking advantage of credit card offers though. Do you know if they can retract their pre approvals given my credit records have changed since then?

If you think 15% of gross is too much, the reality is you could bump 401k up to 15% and the ESPP would not drop to 5%, it would probably only drop to 6 or 7% because of taxes (401k is pre tax, ESPP is post tax). Make more efficient choices and things will improve.

ESPP is a no risk investment with a minimum 15% ROI if stocks are sold immediately.

I see ESPP and 401K to be control knobs which can be adjusted on or off or phased up or down to smoothen sudden financial shocks.

[JinCO]

Did the credit card company quote you $70 as a minimum payment on the $32K? In my experience, the minimum payment is about 2% or $200 per month for each $10K. I would expect that you would need to pay more than $600 per month for a $32K balance transfer. This will also lower your credit score which will impact the rate that you will be able to get on the mortgage.

[disneysteve]

Increasing your debt by 32K will certainly affect your ability to get a mortgage.

I believe a down payment should be 20%, not 10%.

I think 400K is too costly a house to be buying on an income of 100K. Max of three times income is the rule of thumb.

I'm confused by the way you listed your income and expenses, but it looks like your monthly take-home is $4,500 after taxes, insurance and 401k (not including ESPP). Is that right? If so, you can't possibly afford a 400K house with a 360K mortgage. Your payment would be about $2,250 plus taxes, insurance and PMI (if you only put down 10%). That makes your housing costs well over 50% of your income which is insane.

[gekkoplus]

Originally Posted by JinCO

Did the credit card company quote you $70 as a minimum payment on the $32K? In my experience, the minimum payment is about 2% or $200 per month for each $10K. I would expect that you would need to pay more than $600 per month for a $32K balance transfer. This will also lower your credit score which will impact the rate that you will be able to get on the mortgage.

How is monthly minimum payment calculated? I used a simplistic approach.

32000 * 0.025 / 12 = 66.666 (interest)
Not sure if I have to pay a part of principal too.

I think 2% is annual rate not monthly, but I will double check with CC company.

Edit: I got what you are saying. 2% monthly is the principal on top of interest. That makes it around $650 per month.

[red92s]

Originally Posted by gekkoplus

Cash Advance or Balance Transfer - whatever you call it - bottom line is that it is money I can get pretty cheap.

Maybe I'm missing something here, but how does using borrowed money (regardless of the interest rate) for a down payment make any sense? Isn't that effectively having negative equity right out of the gate?

[mrpaseo]

I will not beat you up on borrowing the down payment, let me help you understand your monthly mortgage:


Loan amount: $370,000 (360 + 10 for closing costs)
Percentage: 6%
Duration: 30 Years
Monthly payment: $2,218.34 (Per month for 30 years)
Months to payoff: 360
Total Interest paid: $428,601.30
Total cost of house: $798,601.30

I agree that it is best to pay off your debt and build your down payment first. If you round out your payment to 2,500 monthly here are your new numbers:

Loan amount: $370,000 (360 + 10 for closing costs)
Percentage: 6%
Duration: 30 Years
Monthly payment: $2,500 (Per month for 30 years)
Months to payoff: 271 (Dropping off 89 payments of over 2000)
Total Interest paid: $305,220.69
Total cost of house: $ 675,220.69

1600(Current rent)+800(Disposable money at the end of the month)=2400, this will leave you only about 200 dollars per month for the next 30 years in desposable money. Keep in mind you still need to find money to cover the cc payments, as was said above, you do not have interest only loans on the cc, they want some of their principle back as well, usually between 1-2% of your balance is requested monthly.

My opinion, it does not sound like a good idea. Have you thought about how you are going to furnish this 400,000 dollar home?

Ray

[mrpaseo]

BTW your cc payment will be about $960 per month at 2% Int and a requirement of paying 1% principle monthly (The lowest rate I have seen). Some require 2% of principle which would make your payments at: $1,280 per month.

Ray

[jIM_Ohio]

OP- I would run the debt numbers with the following scenario- I don't have my spreadsheets available, or I would post the details.

Scenario 1)
370k 30 yr fixed mortgage at 6% (posted earlier) payment of $2218.
with 32k of cc debt ($600 payment??)

along with all other bills.

scenario 2
400k 30 yr fixed mortgage (100% financing, no cc debt) at 6.5%. Payment of ??

scenario 2 will probably win out payment wise...

there is a tax deduction on the mortgage interest- you would get 25% on yearly interest paid back at tax time. Think around 10-15k per year.


--
I am NOT recomending putting 0% down, just trying to show the cc downpayment is a BAD idea. The mortgage interest deduction should be mentioned. I have a 320k mortgage (on a 352k house) and I have about 40k+ of interest payments and property taxes which kicks back 10k+ on my tax returns. That 10k is really an extra $800/month take home for wife and I- this changes numbers (budget) considerably.

[MonkeyMama]

The cc payment would be $600/month.

I thought ccs were moving to 4% payments. Am I crazy? That would be $1200/month, if that goes into effect. (Ir was it just changed from 1% to 2%? I don't know. Either way is a big monthly payment).

I can't imagine borrowing the money by cc would fare well for your mortgage application (negative to credit score and would affect how much you could borrow, etc.).

[disneysteve]

Don't forget that there are a lot more costs to owning vs. renting that people often forget. Suze Orman says to estimate your monthly costs at 40% above the mortgage payment to account for taxes, insurance, maintenance, utilities and such. So with a $2,250 mortgage payment, your true monthly costs may be closer to $3,150. I don't care how you get the down payment. I don't see how you can afford such an expensive house on your income.

[BCHGRL]

I'm confused. A payment of $1600 is killing you. You do realize that even with 10% down, a $400K home is going to be more per month than $1,600 right?

[shelbylovesmelby]

I don't see it working as described either.

I agree a CC debt will be2-3% of balance as your miniumum payment wich is alot more than $70/mo (try $640 to 950/mo) + most places charge you a credit card cash advance fee wich is a % of the money you want as "cash" and that can add up. Having all the credit cards maxed is no good. You will need some of that LOC for emergency repairs if say the furnace goes or c/a or whatever needs to be fixed.

I would suggest if possible move to a cheaper rental for the time being, work on paying off the vehicles or even go to cheaper vehicles as well, and look for a home more realistically priced. You could also look into taking a 401k loan for your down payment on your home as well. Wich I'm sure alot of people say it isn't a good idea but you pay the money + interest back to YOURSELF IMO.

GL!

[red92s]

Originally Posted by gekkoplus

My $1600/month rent is killing me. I am looking to quickly save 10% (40K) for the down payment and buy a house. I have some incredible credit card offers for balance transfers which will help me in raising around $32K @ 2.5% for life.

My big concern is that you equate "saving" the down payment with using credit cards to scrape one together. It's that mentality which I think would come back to bite you.

[Gailete]

Generally banks will not allow you to borrow money to use as the down payment on a mortgage so forget about borrowing on your credit cards for that.

You make an excellent income but seem to be burying yourself in debt and buying this house would lead you into even worse debt. You and your wife should try to find a cheaper apartment if the $1600 is killing you (a house payment would really knock you off your feet) and save up for a house that you can afford. I would also suggest that you find some good books on buying houses the old fashioned way (with a 20% down and payments no more than 1/4 your take home) and learn how to calculate the numbers as it seems you don't understand how to do it at this point.

What you are strying do is what many people have been doing which has lead to the house market problem that tax payers who didn't over extend themselves are probably going to have to help pick up the pieces for people who wanted a bigger house than they could afford.

Buy the traditional way of house purchasing (the kind where people could actually handle their mortage), you shouldn't be looking at anything more than about $300K if that. You will be much happier in the long run.

Gail

[rizzmo]

400,000 house is rediculous for someone who makes 100k a year.

My wife and I make a combined income of around 150k and have no debt aside from interest deffered student loans. Right now we are looking to buy a house between 100 -150k. We have a 40k in cash for down pay though we might decide to just go with 20%. Currently we pay about $1000/month in rent.

[JinCO]

I disagree that a $400K house is ridiculous for someone earning $100K per year. It depends on a number of factors including debt load, savings and how much of a down payment they can make. If the OP could put down 20% and finance $320K and had no other debt, I think this would be feasible. Also, housing prices differ dramatically in different parts of the country. Where I live you cannot buy anything for $100 - $150K.

[disneysteve]

Originally Posted by rizzmo

400,000 house is rediculous for someone who makes 100k a year.

My wife and I make a combined income of around 150k and have no debt aside from interest deffered student loans. Right now we are looking to buy a house between 100 -150k.

I agree that 400K is too much, but I think in most areas, you'd have a real tough time buying something for 100-150K. Around here, that might get you a condo - I'd have to check - but it certainly wouldn't get you a house (single or townhome) anywhere you'd actually want to live (without bars on the windows and drug deals going down and hookers doing business on the corner).