Home Mortgage - 30 year, 15 year, none

[NC-firstTimeHomeOwner]

Hi Folks,

First time posting.

My soon to be wife and I are about to purchase our first home. I was fortunate enough to save up a bunch of money already - so for this home purchase I have a lot of options for how to proceed. I'm looking for some advice about which way may be best - or places to point me to do more research. I've been running some numbers myself, but not sure if I am covering all of my bases.

So, some numbers:

$150k savings in Traditional IRA and Roth IRA (I assume I should not touch those).
$400k other savings (mutual funds, bonds, cash, etc)

Debt:
My soon to be wife brings $30k of student loan to the relationship Which is another question - perhaps a separate question of how soon to pay that off.

Home:
We are looking at homes in the $325k-$350k range - which I could pay outright out of my "other" savings. The question is, should I? My rationale is that with mortgage rates at 3.5-5.0%, I would come out ahead by keeping that 400k in mutual funds and so forth and letting that money grow at hopefully a rate larger than 3.5-5.0%. Am I way off base? I was thinking of putting down something like $100k down payment on the loan, and then paying off the remaining $225 over 15 or 30 years.

Other factors - we plan on having kids somewhat soon.

So, some options:
- Pay it all out of my savings
- 15 year loan of $225k
- 30 year loan of $225k
- or really any other combination of years and amounts.

Ideas? Thoughts? Suggestions?

Thanks all!

[disneysteve]

Welcome. What is your household income? What percentage of income are you currently investing for retirement? What are your monthly expenses now, and what do you anticipate them being once you are in the house? What is the interest rate on the student loans?

Your home purchase should represent no more than 2.5-3 times your annual income. Your mortgage payment should be no more than 28% of your monthly income. You should maintain an emergency fund of at least 6 months worth of expenses.

Without knowing the answers to these questions, I would agree that you will likely do better to keep your money invested than to sink it all into the house. A large downpayment and reasonable mortgage at a low rate is certainly not a bad way to go. You always have the option to prepay if you choose to.

[NC-firstTimeHomeOwner]

Hi DisneySteve,

Thanks for the response!

Household income: 100k
Retirement: Try for 5-10% For a while was putting away a lot more. Currently less. But aim for 5-10%
Monthly expenses: Hard to tell. I've been using Mint.com for a while now to track things, but our monthly expenses seem to fluctuate so much for some reason. Somewhere about $5-6k including our $1,500 for rent.
Future expenses: Also hard to tell. Day to day expenses should be the same for a year or so until a kid arrives, and then it will go up a bit. Obviously mortgage costs will vary depending on what loan we go for.
Student loan: 5.3-6.8%

The "no more than 28% of monthly income" rule of thumb - is that pre or post income tax? We take in about $8,300 before taxes. 28% of that would be $2,300 - which I think we could get a 15 year loan for 250,000 for under 2,300 per month.

[cschin4]

Buy what you can comfortably afford on one income. Then, if you or your wife want to stay home with the kids for a period of time, you will be able to do so. You really have your act together at this point so tough for me to give advice. I would say go ahead with a mortgage just because it gives you flexibiitiy and you don't have to fork over all that cash. Then, i would systematically work at paying it down and off over a period of years. But, you could pull out a good chunk and have a small mortgage. Or, what the heck, just buy it free and clear. That would be awesome.

[disneysteve]

Originally Posted by NC-firstTimeHomeOwner

Retirement: Try for 5-10%

"Try" isn't good enough. This should be a set, systematic, automatic plan. You shouldn't have to think about it or manually do anything if at all possible. If there is an employer plan like a 401k, you can set up to have it auto-deducted from your pay. If it is an outside plan like a Roth, you can set up an automatic withdrawal each month. Your goal here should be a total of 15% going to retirement, not counting any company match.

Monthly expenses: Hard to tell. Somewhere about $5-6k

You need to get a tighter handle on this.Why do your expenses fluctuate so much? $1,000/month is a big swing (more than 15% of your take home pay).

So you need about 36K as an EF and probably more if your expenses will be higher in the house.
You need to hold out another 30K to repay the student loans which I would make a higher priority than prepaying the mortgage. That still leaves enough to pretty much buy a house outright. I'm just not sure that's the best way to go. I do like the idea of taking a mortgage that only needs one of your incomes to support, though.

[feh]

Seeing a budget would help. What are you spending $5-6K per month on?

Without further information, I'd recommend the 15 year option. You can always pay it off sooner.

[Hector]

Great job in saving. When are you planning to retire? After how many years?

[NC-firstTimeHomeOwner]

Originally Posted by Hector

Great job in saving. When are you planning to retire? After how many years?

No plans to retire any time soon. I'm currently 30. Probably when I'm 60 or so? My wife may go to part time (or no time?) though. If that happens, I think I could pretty much cover the salary gap if I wanted. I am currently making 60k, and she is making 40k - but I think I could move to a more lucrative (100k) job if need be. Currently I'm doing the "startup" thing, but I could take a more stable higher paying position if the need came up.

Originally Posted by feh

Seeing a budget would help. What are you spending $5-6K per month on?

Hm - looking at just the last four months, things actually seem to be more in the 4,500 per month range which is pretty cool. So, for the past 4 months, my actual monthly spends have averaged out to:
Home (rent) - $1,600
Travel - $625
Food - $500
Retirement (HSA + IRA) - $500
Shopping/Gifts - $400
Auto - $125
Health/Fitness - $125
Entertainment - $125
Utilities - $100
Financial - $200 (tax season)
Other - $200



Anyhow - just wanted to say how cool it is to have so many helpful people lending a hand. I have been thinking the 15 year is probably the way to go, but wasn't sure if I was off my rocker - so it is really good to hear that this may be reasonable.

[papa_squat]

It sounds like you have a good start, but if you're monthly expenses are already near $5K each month, you'll be amazed how much more you'll spend after buying your first home. I am 27 and my husband is 31 and we bought our home in summer 2009. We had a similar combined income ($105k then) and less house ($265K with $65K down, 30yr fixed) and while our home and lifestyle are still affordable, furnishing and home improvements took a toll and we have to reign in the budget more than we thought we would originally.

If this is your first home, try to budget for furnishings. We bought every stick of furniture used from Craigslist and our den still has our old sofa, chair and coffee table from our college days, but we still spent about $3,000 on furniture that first year we moved in because we had an extra bedroom, bathroom, living room and an actual dinning room to furnish.

Do you plan on making improvements to any home you buy? We DIY our projects and save a decent amount doing so, but tools, paint and lumber still aren't cheap. This was also the first time we ever had our own yard to take over, so we got a mower, weedeater, and we have to budget for our gardening supplies as well. Craigslist and good neighbors are a godsend for these, too, but many of the things we planned to do the first year we moved in have been spread out now for the next three years so we don't feel the hurt as much. Even if you don't plan of improving or personalizing your home, it can still be expensive just to maintain a home.

I'm just adding this as food for though. You are actually doing really well on your retirement and savings for your age. We have less than half of your retirement and a little over half your savings, but we had a lot more savings until we became homeowners . We do have the occasion to prepay our mortgage and we're considering refinancing to a 15-year fixed, partly because we hate our 5.75% interest rate and mostly because we plan to stay in this house a long time.

[Hector]

Depending on your confidence and risk tolerance from investing, I would choose something between these two extremes.

I would get 30 yr loan if I am confident that I am able to make more by investing the rest.

If I am not confident that I wont able to make more than interest rate by investing than I would go with cash.