Maximize or Minimize a New House ??

[TCD0210]

1 couple, each with a different view of buying their first house:
#1 - Purchase most expensive house you can afford because equity is likely to grow fastest if/when housing market comes back.
#2 - Rent or buy smaller for first house; save money to eventually buy "big forever" home.

Notes on the couple:
$6200/month total net income for couple
$100,000 school loan 1 is paying off
They hope to have a child in next 1-2 years; so $800-$1200/month childcare
Each will need to replace car in next 1-3 years

Where do they begin if they want to figure out what is best direction to go for their first home (max-out, or keep to a minimum)? Should possible childcare and/or new car expenses be figured into their budget (though no children or new cars yet), etc. They went through pre-approval, but came through more confused because they were each approved pretty high (obviously, the 'extras' of childcare and likely new car expenses weren't factored in).

[photo]

(obviously, the 'extras' of childcare and likely new car expenses weren't factored in).

The pre-approval people have only their best interests at heart, not yours. Trust me, there will be plenty of "extras" that you don't even know exist.

Based on what little you've said, you aren't ready to buy a house. If you buy the minimum, then you'll have to move soon to accommodate the children. However, if you buy maximum, you've overextended yourself with little to no extra cash. Neither situation is good.

[jpg7n16]

Remember the story of Goldilocks? I think it applies here.

"This house is too small. This house is too big. But this house is just right!"


You should look for the level of house you truly need. If you plan on having a child early in the ownership stage, and you don't plan for that, your house will be too small. If you buy what the bank says you qualify for, your house will be too big.

Ideally, you would find a home that meets all of your expected needs (bedrooms, bathrooms, location, etc.), and then buy it as cheaply as possible.

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Problems with your two options:

1 - so does that mean that when the housing market bounces back, you will sell and move again? how far does it have to bounce? what is the impact if market continues to fall?

2 - how big does it need to be to be a 'forever' home? how would you save for this utopian house in the meantime? would that be at the expense of retirement savings?

[disneysteve]

#1 - Purchase most expensive house you can afford because equity is likely to grow fastest if/when housing market comes back.
#2 - Rent or buy smaller for first house; save money to eventually buy "big forever" home.

$100,000 school loan 1 is paying off
They hope to have a child in next 1-2 years; so $800-$1200/month childcare
Each will need to replace car in next 1-3 years

With option #1, what difference does it make what happens in the housing market unless you are planning to sell the house? If you plan to stay there long term, the value is irrelevant.

With option #2, why buy a house that you know you aren't going to keep for very long? It makes more sense to rent under those circumstances.

You have some major expenses to deal with: 100K in debt, all of the costs associated with having a child and buying 2 cars. I say keep renting as inexpensively as you can get away with, live lean and sock away money while also attacking the student loan debt. Don't buy until you have a 6-month emergency fund in place and have a 20% down payment for a house that you will both be happy with for the long term.

[YLTL_Dan]

You have some major expenses to deal with: 100K in debt, all of the costs associated with having a child and buying 2 cars. I say keep renting as inexpensively as you can get away with, live lean and sock away money while also attacking the student loan debt. Don't buy until you have a 6-month emergency fund in place and have a 20% down payment for a house that you will both be happy with for the long term.

I definitely agree with all of this. One other thought on buying a "bigger" house - your carrying costs will be much higher due to property taxes, insurance, furnishings, utilities, etc.

First time homeonwers rarely know how much a house will truly cost them to maintain. Maxing out is always a bad idea.

[disneysteve]

your carrying costs will be much higher due to property taxes, insurance, furnishings, utilities, etc.

First time homeonwers rarely know how much a house will truly cost them to maintain. Maxing out is always a bad idea.

Don't underestimate furnishings. When you buy a home, you spend a lot of money on stuff that isn't portable when you move again: window treatments, paint, carpet, plumbing fixtures (faucets, showerheads, etc.). You end up sinking a bunch of money into the house and leave it all behind when you upgrade.

My wife and I wanted to buy one time and be done. We bought our house in 1994, had our daughter in 1995 and are still here in 2011 with no plans to move. The whole "starter house" concept is perpetuated by the industry to get you to be chronically unsatisfied with what you have. My parents bought their house in 1955. My mom finally sold it and moved to a senior apartment in 2006, so 51 years in the "starter" house (also her only house).

[riverwed070707]

One thing to definitely recognize is that what you are preapproved for and what you can afford are usually very different numbers. Just because the bank will loan you all that money doesn't mean you should take it, nor does it mean you can afford it. This is how many people become house poor. You don't want to have to put all of your money into your house -- leave yourself breathing room so you can keep a balanaced budget and afford to DO things too, not just own things.

I agree with the pp -- pick something in the middle. Assuming you're ready to buy, go for a house you love, that's big enough to accommodate the kids you plan to have in the near future but don't spend all your money getting it. Decide what features are most important to you and focus on those, rather than the biggest, nicest house you can buy. Do you have a 20% dp? 6 months expenses in savings? Stable jobs?

[bjl584]

1 couple, each with a different view of buying their first house:
#1 - Purchase most expensive house you can afford because equity is likely to grow fastest if/when housing market comes back.
#2 - Rent or buy smaller for first house; save money to eventually buy "big forever" home.

Notes on the couple:
$6200/month total net income for couple
$100,000 school loan 1 is paying off
They hope to have a child in next 1-2 years; so $800-$1200/month childcare
Each will need to replace car in next 1-3 years

Where do they begin if they want to figure out what is best direction to go for their first home (max-out, or keep to a minimum)? Should possible childcare and/or new car expenses be figured into their budget (though no children or new cars yet), etc. They went through pre-approval, but came through more confused because they were each approved pretty high (obviously, the 'extras' of childcare and likely new car expenses weren't factored in).

I wouldn't pay too much attention to preapprovals. If I were to buy as much house as my lender approved me for I would be forced into stopping my retirement contributions ust to make the mortgage payments.

You need to buy what you can afford. Period. That means having a 20% downpayment, a 6 month emergency fund in place, and making sure that you don't take out a mortgage that is more than 3 times your annual income and doesn't represent more than 28% of your takehome pay.

There is nothing wrong with renting or with buying a smaller than ideal home to start. Buying a large home os where people often get into trouble. You run the risk of becoming house poor. A big house means high utility bills, high taxes, and high upkeep costs. I would keep renting until your finances are more in order.