What am I doing wrong?

[thedreamer]

I am currently beating myself up on my financial situation and would appreciate some candid perspectives. My apologies in advance to this long email.

About us: My wife (33 yrs) and I (38 yrs) together make about $194k/yr and live in Wash DC area with our 2 kids. Our salary went up in the past few years (despite recession and we THANK GOD!) - in 2008, our joint income was $130k;

Our savings: retirement: $170k; non-retirement (cash/stocks): $45k; home-equity: $50k; overseas investment (native country, real-estate): $150k

our debt: mortgage on our home ($183k); the cars are paid off, and we don't carry any balance on credit card

We are considering moving to a better school district/bigger home (and they cost around $600k) and we are nowhere near making the 20% down payment.

We thought ourselves to be prudent, conservative couple and I am now beating myself up for not having enough to make 20% down payment, despite a reasonable salary.

While I realize (and am very grateful) that peace-of-mind and family health is most important, I can't help but criticize myself.

What are we doing wrong? Or am I just being too harsh on myself? Some perspectives would be helpful

[esb3357]

My husband and I are in the low to mid 20's. We really want to buy our first house but didn't want to wait 3 or 4 years till we had the 20% down with the low house prices and mortgage rates. So we used our VA loan with no pmi and our mortgage with insurance and tax is cheaper than our rent. So we didn't follow the 20% rule, and from what I can see. It makes sense for us.

I too was beating myself up tonight about not saving enough. But as my husband showed me tonight, we saved 1/3 of our salary this past year. From what I can tell you have saved a lot of money. You have assets plus you have 45k you can roll into your next house.

Crazy question to think about. If you don't buy a new house, what are you going to about schools? If you send them to private school that is 800 per child at $8,000 a kid. Money that could be put towards your mortgage.

[kork13]

So basically, you're upset that you can't afford the 20% DP on the $600k house you're looking at?

Simplest answer I can give you: the house is too expensive for you.

A general rule of thumb is that you should not purchase homes more than 2.5 times your annual income (which for you would be about $485k. I completely understand that DC has one of the highest cost-of-living averages in the nation, but if you can't afford the 20% DP on a place that (at least by the ROT) is too expensive for you, the house you're looking at may really just be out of your price range right now.

Have you looked at lower-cost homes, in the $400k-$500k range in the same area? That would reduce your DP amount down to $80k-$100k. If that isn't amiable to you, the only other thing I could say is to wait. Especially on a home that expensive, I wouldn't even consider buying until you have at least the 20% DP, perhaps more.

[jpg7n16]

To evaluate your situation, we'd need a few pieces of information:

Income - check
Expenses - ????
Savings rate - ????
Assets accumulated - check
Retirement savings options - ????

[thedreamer]

Originally Posted by jpg7n16

To evaluate your situation, we'd need a few pieces of information:

Income - check
Expenses - ????
Savings rate - ????
Assets accumulated - check
Retirement savings options - ????

Thanks guys for your responses. As for other details:

Expenses: the biggest expense for us (other than mortgage) is our younger one's daycare and this will continue till Sep, 2013 (when she will be eligible for public school); Our monthly expense ranges around $5k to $5.5k (inclusive of mortgage and daycare). We consider ourselves to be a conservative family when it comes to spending (BTW, is this spending too much?)

Savings rate: My wife and I put 10% each in 401k; for the past few years we have been putting $4k each in Roth-IRA; in a good month, we save about $3k to $3.5k (of course there is always that month when the car needs work or we go for a small vacation).

Retirement savings option: currently, 401k and Roth IRA. In addition, the overseas real-estate investment is meant to be long term option for retirement. Currently we have invested about $150k into that and is not very liquid in the short term.

Hope this answers

[MonkeyMama]

Well, you don't save a $125,000 down payment overnight. It takes time. How much do you have to save for the down payment and how long will that take? (Okay, at $3000 per month, that is 3-4 years to save up the cash). If you sell your current home first, you could maybe save up the money in 2 years. This is assuming you don't touch the cash you already have saved.

What you need is a plan. You need a goal, a plan, and it sounds like you can easily get there. With your savings rate and lack of debt, should be fine. I just think you need to adjust your expectations. (I come from a very high cost area and it amazes me sometimes how few people have the patience to save up for a down payment. Like $150k for a starter home just happens the minute you graduate college, you know? You are not that extreme, but I see the people who think it should fall form the sky the minute they dream it, and the successful people for whom it takes YEARS to save up for that kind of purchase. & you are blessed that you can probably get there in just a couple of years, if you make that your priority).

[jpg7n16]

Well that home is pretty much at the limit of where you should be. Like others have said, what options are closeby where you're looking that are selling for less than $600k? Where did you research to find that figure?

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Given everything you told us, I'd guess you're only about 2 years away from being able to have the cash available to buy this home.

How do I figure? Well, you'll need $120k for downpayment, and more for closing costs - say $20k. (per Closing Cost Calculator - Zillow) Right now, a 6 month EF needs about $30k. So you have $15k available in cash/stocks. You also have $50k equity in your home that will be freed up when you sell the current home, so you're at $65k - about 1/2 way there.

$140k - $65k = $75k left to go.

Using some info from Retirement Living - Taxes by Ste: Alabama - Iowa OF COLUMBIA , I figure after SSI taxes, income taxes, and state taxes - you guys were probably making about $85-95k after tax, and are now making about $120-130k after tax. Using upper end expenses of about $65k/year and when putting about $25-30k away each year for retirement, that means your home savings can grow about $35-40k this year.

At that savings rate, you should get your needed $75k somewhere around 2 years.

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And I wouldn't beat yourself up over the past. Primarily, you are in a high tax area. Your after tax income is much lower than your pretax. (about $45k to taxes in 2008 dropping you from $130k to $85k)

[thedreamer]

Thanks guys! your analysis is spot on. Our net salary now is around $120k (after tax and 401k) and our monthly expense (including mortgage and daycare) is around $4.5 - $5k. We are a conservative couple, but try not to cut corners for kids' activities (soccer, tennis, music .. the list goes on ) and that probably explains the higher monthly expense.

The advice from you all is very helpful; gives a very good perspective!

Thanks

[MonkeyMama]

Originally Posted by thedreamer

Thanks guys! your analysis is spot on. Our net salary now is around $120k (after tax and 401k) and our monthly expense (including mortgage and daycare) is around $4.5 - $5k. We are a conservative couple, but try not to cut corners for kids' activities (soccer, tennis, music .. the list goes on ) and that probably explains the higher monthly expense.


Thanks

I don't think your monthly expenses are high, at all. (& knowing what I know about housing around DC - $600k doesn't sound half bad).

Anyway, Good Luck!

[disneysteve]

Originally Posted by thedreamer

overseas investment (native country, real-estate): $150k

I'd like to know more about this. You say it is an investment? How much did you pay for it? How much are you earning from it each year? Do you owe any money on it or do you own it outright? What are your plans for the property?

Depending on the answers to those questions, I might suggest selling it and using the money toward your primary residence but it really depends on how good of an investment it is.

I do think that a 600K house is too much for your income. I agree with the 2.5 times income rule which puts you more in the 485K range. Could you make 600K work? Yeah, probably, but you'd be stretching things kind of thin in my opinion. Being house poor isn't a great idea. It puts too much strain on every other area of your budget. Plus, you're locked in to that cost even if something happens to your income. What if you have to change jobs and the next job doesn't pay quite as well? Or what if one of you loses a job and it takes a little while to find another?

[cschin4]

I can't fathom or understand why anyone would think they need to buy a $600k house unless they were making $400K a year or more. Really?

[tripods68]

Don't beat yourself too much! You gotta a plan to save for DP first and foremost. Like other mentioned already it does take time to save.

[Like2Plan]

It is possible to live in a nice area in a good school district in a nice single family home in the DC area for 400K.