Advice for home purchase and our finances in general

[junkstuff1]

Hi there,

My wife and I are looking to buy a house around or before next August (when our apartment lease will expire - we are really itching for our own place), and I'm trying to figure out exactly how much it will cost. While we're at it, I'd love your advice on our financial situation overall.

I am 24, my wife is 26, and we were married last summer. We spent too much on the wedding (though nowhere near the ridiculous numbers I see thrown out for the "average" wedding), but since then we've rebounded pretty well financially and I'm glad to say that despite our overspending we're up about $20k in net worth over the past year. We finally got all of our finances integrated at the beginning of this year. Here is a breakdown of our monthly finances for this year (some are annual that I split up over the year). Saving priorities will shift next year.

Gross income:
Me - 4580 (55k annual; potentially a $6k bonus at end of year)
Her - 3160 (38k annual)
(7750 total - 93k annual)


Taxes - 1600 (18.2k annual)


Living expenses (we could cut a bit in some areas but we already live fairly frugally):
Rent - 1000
Utilities - 220
Groceries - 400
Pets - 80
Health/life insurance - 22
Healthcare - 80
Car fuel - 250
Home supplies (some of this is groceries, unfortunately) - 400
Car insurance - 75
Phone - 40
Student loan payment (~36k left @ 5.2% avg) - 453
Union dues - 62
Tuition (finishing up MS degrees) - 30

Discretionary:
Personal spending money (individual accounts, "no questions asked") - 500
Gift to my parents (some financial issues - they say they will pay us back when they get some liquidity but we're treating it as a gift) - 170

Total spending: 3782 (45.4k annual)


Savings:
IRA - 417 (traditional for this year - splitting roth/trad 50/50)
HSA - 250
FSA - 22
Pension pay-in - 175 (will be matched starting in 2012)
E-fund - 830 (will be finished in June - this spreads it over the year)
Vacation savings - 160 (my wife insists)
House savings - 520

Total savings: $2374 (28.5k annual)

We are ending the FSA - my wife enrolled in this without knowing what it was and we don't need it (she's getting laser eye surgery just to use up the funds...).

The IRA and HSA are not flexible for me, though I do intend to defer my 2011 contributions until early 2012 and put everything toward house savings until we buy.

I'm predicting that by August next year we'll have $30-34k saved up for a down payment. We'll also have $10k in our e-fund, of which I'd be willing to put maybe $5k if it helps us avoid PMI.

We are looking at houses in the $150-200k range. I am considering either 30- or 15-year mortgage, but I would prefer the 15. The mortgage calculation is easy - I'm assuming 5% for the 15 year and 6% for the 30-year. The rest is where I'm not sure I'm doing it right. I'm assuming 2% annual property tax (the listings I've seen are between 2500 and 4000 tax annually), 1% homeowners insurance, 1.5% maintenance savings, and $100/mo additional utility costs (beyond rent). For a $128k mortgage ($160k purchase price), 15-year at 5%, this breaks down to (monthly):

Mortgage - 1012
Property tax - 267
Homeowners insurance - 133
Maintenance - 200
Utilities - 100

Total, as compared to our current $990 rent - 1712 /mo

At our current spending, this reduces our remaining cash flow (for savings, not including HSA, IRA, and pension) from $1530 to $810. I am ok with this, but in addition we also would like to have our first child within the next 4 years (wife has a strict age-30 limit for first kid, and I'll admit I'm getting the itch for parenting too). She says she wants to take at least one year off work for each child, and has suggested taking up to five years off. Obviously this would make a huge dent in our finances. I'm estimating $1k/month additional expenses for the kid if she remains working, and $2-3k if she stops, including lost income (we would want to offer daycare to the neighborhood for a price if she stays at home).

I am underpaid right now, but I really like my job and the company I'm at has a lot of potential (there could be a fairly big payday eventually...or not). I believe I could earn 65-75k if I needed to switch jobs, and potentially more after I finish my MS degree.

So please, give me your opinion. Am I estimating home ownership costs accurately? Are we over-extending ourselves, with the house, kids, or both? Any advice for how we can improve?

EDIT: Forgot to mention, our cars are paid off, but both from 2000 and I'm not expecting them to last beyond 2015 (if they do, great! We'll keep driving them). So that is another additional expense we may run into in the next few years.

EDIT 2: Personal spending money includes all meals out of the home. If we're going out for dinner we have to agree before hand who's going to pay .

[TheMom]

Another expense might be Association fees if you buy in a HOA area. Also, the first year or so in a house can have a lot of expenses for things like shovels, garbage cans, garden hoses, rakes, lawn mower, etc. It's easy to be tempted to do cosmetic changes in the beginning as well - paint, carpet, landscaping. None of these have to be very expensive, but it can really add up quickly.

If your wife stays home for a year or two, your tax situation might change to offset the loss in income. You'll have an additional personal exemption and the $1000 child credit for each child. I stay home with the kids and part of my 'job' is minimizing expenses. I have 3 kids, aged 3, 5, and 7, and spend about $300 a year on clothes total, including shoes and boots. I shop the big resale events, garage sales, etc and buy most things for about $1/item. I clip coupons and shop sales to minimize our food costs. I spend $600/month on food for 5 of us. We rarely go to restaurants because it's just too expensive for 5 people to eat out and the kids tend to order mac n cheese and that's just a waste, IMO.

Will you add college savings to your savings plan?

I am not an expert on looking at numbers for people, but it seems like you are doing well with the savings and that adding a mortgage won't be too difficult for you. I am sure others will be able to comment in more detail.

[junkstuff1]

Thanks for the perspective TheMom. We both detest the idea of an HOA so we're doing our best to avoid them. We both can be pretty deliberate (i.e. no need to rush) on cosmetic changes so I think we'll be able to work that kind of stuff explicitly into our budget rather than sneaking it in on the side.

Taxes are something I had considered only briefly. I'm trying to predict what'll happen after 2-3 "major life events" and it just gets tricker the more changes happen, so I'll have to evaluate that in more detail once we get our housing plan more refined. But upfront it looks like our tax burden may be reduced at least $2k annually, in addition to the reduction from the wages my wife wouldn't be making.

College savings is on my radar but I didn't mention it in my post. That's another thing that I don't really have a benchmark for. I'm almost tempted to say "let the kids pay for it" since I was extremely fortunate in college to have scholarships far in excess of tuition costs, but I know that would be just setting us up for difficulty down the road. That's how my parents handled it, but that was because they were foolish with their money; I don't want to do that.

[MonkeyMama]

I think you have thought this through far more than the average first time homeowner. So had to give you kudos to that. I think your estimates are probably fair - and are impossible to nail down. For example, our utilities are lower in our home than they ever were when we owned an apartment. So you can't really assume anything. (On the flip side, I know several people who pay a small fortune for gas/electricity - it can run the gammit. Ours is so cheap because we went new/energy efficient).

Most people will tell you that a new home will come with tons of expenses. I think a lot of that is avoidable. It's good to be prepared, but we never felt the need to buy a ton of new stuff even though we bought a home twice the size of what we were used to. We simply had empty rooms until our kids were born. I remember buying a lawn mower, but that is about it as far as higher dollar items. (We have borrowed many items from debt laden neighbors - for sure). We just took our time and bought what we could afford over the years. It just doesn't have to be done the day you move in - the fully furnished/equipped home. & seriously, I think we borrowed different neighbor's ladders 2-3 times in 10 years. I don't see the point to buy one. We have a couple of smaller ladders, but not the ones that go 20 feet high.

I'd strongly recommend a 30-year-mortgage. I think the mortgage/expenses you are looking at are fine for your income, but not only are you relying on two incomes to pay that, BUT you are talking about doing that on one income for a time. We absolutely had a 15-year mortgage before kids (on two incomes), but I would never go back to that. We can always pay extra, but the lower mortgage amount is so much easier to deal with when it comes any hardships or lost wages. That is my opinion with a little age and wisdom. In the end, we will probably pay it off in 20 years time, but I am glad I am not "required" to pay that extra $500/month. Especially with a spouse not working.

Taxes - taxes are very favorable to one-income families. Depends on all the details, but I take home more net income on $80k these days than I ever did last we both worked (pre-kids; $100k-ish income). I've often said around here that my friends are trying to figure out how we took a $50k pay cut. When you consider taxes, daycare, etc., it was more like a $10k pay cut. It wasn't that hard.

Anyway, good luck!

[Like2Plan]

When we first purchased our house, I was surprised at how much money it took to furnish it, even though we already had some furniture. We had an empty living room for quite some time until we could afford to buy the furniture we wanted for it. We did a lot of work on the house, even though it was in good condition overall. We decided to initially purchase a home with a mortgage we could afford on one salary and then add on the features we felt we needed. We held some money in reserve so we could convert a 1 car carport to a 2 car garage, replace the roof (we knew we would have to replace it when we bought it) and upgrade the electrical service and so on.

We also replaced just about every appliance within the first year--this we didn't see coming but, things wear out.