Help with Home Decision!

[ehendu13]

So, my wife and I have been thinking about buying a home and we have been saving for a long time. However, we are having a really hard time coming up with a budget for how much we should spend. We live in a fairly high COLA, so that is not helping matters much. Another issue - we would like to start a family in about 2 years. Ideally, we would my wife to stop working altogether when the baby comes along. However, we are starting to realize that this may not be in the cards.

Currently we gross 97,500. 62,500 for me and 35,000 for her. We have 58,000 saved up for a downpayment. A starter home in a nice area where we live goes for about 300,000. Taxes are high too - they are currently about 5800, but there is the possibility that they could be adjusted based on a reassessment. What it boils down to is a PITI of about 2000/month.

My question - is there any way that we could afford this house on one income? We have made some preliminary budgets based on some assumptions about the future, but they are not very encouraging...

Thank you very much for any help that you can provide!

[MonkeyMama]

It depends.

What are you willing to sacrifice so your spouse can stay home?

How old are you, how secure is your job, and what are your future prospects?

I kind of fall in the middle. We moved somewhere cheaper so we could afford a home and do the one-income thing. (Which would of course be my first recommendation). I am strongly of the camp that a house is not worth being a slave too.

BUT as we were very young and early into a profitable career, we were comfortable to take on what you are, on a $50k income. We wanted to be home with the kids a couple of years, so on a temporary basis, with decent cash savings, it wasn't a biggie. Fast forward 5 years later I now make 50% more income. Out PITI is more like $1700. (Are you sure yours would be $2000? Our taxes are not much lower than yours). Today that's only 30% of my income, and my spouse is a completely untapped income source. We're only 30, and I am still rather young in my career (expect many more raises).

It's a good time to buy while interest rates are low. On the flip side, if prices are coming down, and you have been able to save that much, you may want to consider waiting longer and saving more. It just depends how much you can save vs. how much prices are sliding vs. how much interest rates are rising.

Anyway, considering all these factors, the answer is, it depends. I think your age will be one of the biggest factors. & even with that, "what's the hurry?" will be another factor. Seems like you were able to save much, and if you can have the patience to save more, should put you in a pretty good spot.

(P.S. Keep in mind that your tax situation would improve very favorably. On one income, with 1-2 kids I was able to keep over 85% - 92% of my gross pay with the same tax situation you will face. Don't get caught up in your take home pay. If your spouse quit her job, you had a $230k mortgage and a child, you could probably take home another $500/month easy - reduced taxes. Maybe up to $800/month with a mortgage/kid double whammy. Keep that in mind - it may make your situation very doable. This is current tax law. Can't say where it will head with the new presidency. Bush tax cuts were VERY favorable to families with bigger mortgages).

[stressedmama]

MonkeyMama made some really good points. I would ask are you currently contributing around 10% to a retirement account too? Please do not overextend yourself and buy a house without also being able to save for retirement.

All that being said, if you want to buy a house and live off just your income of $62K things would be incredibly tight. If you get a $250K mortgage ($300K house - $50K saved already) at a 6.5% 30 year fixed loan, your monthly payments would be $1264. Add $483 (taxes $5800/12) and then add about maybe $70 for insurance (total guestimate). Your up to $1814 a month strictly for your mortgage/escrow. If you are bringing home $62K gross - factor 10% for retirement accounts (down to $52K a year) and taxes (I'll use 20%) and your monthly take home will be close to $3466.

Monthly

Pay $3466
House $1814

That only leaves you with $1652 to spend on EVERYTHING else per month (car, food, gas, diapers (if you have kids), clothing, utilities. I know my numbers are estimates but I really think you would be pushing it, especially since you mentioned that you lived in a HCOLA.

Perhaps you can wait on the house until you have a little more saved up.

[cschin4]

Don't get caught up in your take home pay.

I couldn't disagree more. Your take home pay is the actual REAL money you have in your hands to pay for all the things you need to pay for. Don't get caught up in the "mortgage deduction" Yes, you can deduct the privilege of paying $1 in REAL money and then have 20 cents taken off your taxes. Gee, what a bargin! And, remember all the other things that go with a home from heating/cooling costs, home repair furniture and a zillion other things are NOT deductible.
My advice, if you are planning to have children, do NOT buy a home until after you have your first child and then see how you are really living and how you really want to live. Many young couples buy based on their current double incomes, get in too deep, and then have a change of heart when baby arrives and find out that having 2 people working FT is very stressful. However, at that point, they have a large mortgage and therefore NO options. Also, if a starter home is $300K have you considered relocating to a less expensive COL area?

[jIM_Ohio]

There are tax advantages to owning- have you factored that into your take home?

You would get about 15% of all interest payments back. $2000 PITI would be about $1900*12*15%=$3420 back at tax time year 1.

If you make more money (25% tax bracket, above $66100) then you would get 25% back and not 15%. That $3420 would increase. We are talking $200+/month.

Even though paying $100 in interest to get $25 or $15 back is not a great deal, it is better than paying $1000 in rent and getting nothing back. Use the deduction while it works.

I would also suggest low balling offers right now on homes. If you think house is 300k, offer 225 and see what bites. Then you would need to finance only $175k and the PITI on that is $1100/month @ 6.5%.

You need to find a motivated buyer and that should save you another 25k or so.