Balancing debt, savings, mortgage

[reuscam]

I hope to get some advice with my financial situation. I appreciate your input. I recently got married, and inherited quite a bit of debt through it. Previously I was debt free, except for ~500$ on credit cards paid off monthly, and a $148k loan balance for my mortgage, at 4.375% over 15 years. I make ~ 85k annually.

My wife brought in approximately $65k of debt, in a combination of federal college loans, private loans, and no interest loans from her parents.

We both save to 401k and stock purchase plan. I think my company matches 401k up to 5%, at 37.5%. I contribute 5% to get the full benefit. I also contribute to stock purchase plan, where I get a 15% discount on the purchase price. My wife just started 401k as well.

I've always been taught "Pay yourself first" - meaning to save, no matter what. Currently I am 32, and she is 28, and we have around 60k saved up between 401k and espp.

So with the background down, my problem is buying a new house - we want to move to a different location, and upsize just a tad, to prepare for kids.

So my questions:
Should we try to pay off our loans first, then start looking for a house?
Should we postpone retirement savings for a few months to a year in order to pay off our loans, and save for a down payment?

Thanks, I appreciate the input.

[jIM_Ohio]

I hope to get some advice with my financial situation. I appreciate your input. I recently got married, and inherited quite a bit of debt through it. Previously I was debt free, except for ~500$ on credit cards paid off monthly, and a $148k loan balance for my mortgage, at 4.375% over 15 years. I make ~ 85k annually.

My wife brought in approximately $65k of debt, in a combination of federal college loans, private loans, and no interest loans from her parents.

We both save to 401k and stock purchase plan. I think my company matches 401k up to 5%, at 37.5%. I contribute 5% to get the full benefit. I also contribute to stock purchase plan, where I get a 15% discount on the purchase price. My wife just started 401k as well.

I've always been taught "Pay yourself first" - meaning to save, no matter what. Currently I am 32, and she is 28, and we have around 60k saved up between 401k and espp.

So with the background down, my problem is buying a new house - we want to move to a different location, and upsize just a tad, to prepare for kids.

So my questions:
Should we try to pay off our loans first, then start looking for a house?
Should we postpone retirement savings for a few months to a year in order to pay off our loans, and save for a down payment?

Thanks, I appreciate the input.

Should we try to pay off our loans first, then start looking for a house?
Wife's debt YES
mortgage PROBABLY NOT

Should we postpone retirement savings for a few months to a year in order to pay off our loans, and save for a down payment? NO


Here is my commentary now that you have your answers. Paying yourself first is a great strategy I use that too. My first advice is give yourself a BIG raise. You mentioned 5% going to 401k, think a 3X raise- like 15%- going to 401k. Unless you know something I don't, the 5% you are contributing now is not enough to retire on... you put more into FICA than your 401k (FICA is 6.2% tax).

The ESPP I might question... I did not include that in the savings calculation above, and if you need to bend something, that is first thing I would give up. Meaning 15% to 401k is better than 5% to 401k and some after tax money in ESPP. If you really feel strongly about your employer, put 1% into ESPP, my advice for you at present time is to up 401k and wipe out the debt of spouse as main priorities. Stock market is best with a long term time horizon (15 years or more). Because you have some immediate needs, I would suggest not putting short term money (for house) in something which might lost 50% of its value in 6 months.

You will be able to get a house without paying down debt. You will be able to get a house with 15% going to 401k as well. Other than you feeling comfortable about your finances, I saw nothing in your post which will prevent you from giving up the desire to relocate.

Have you considered remodeling your current house? Consider that you will pay realtor fees when you sell, closing costs when you purchase, and best guess is that is 30k or more out of your pocket (realtor fees are 6% of sales price and closing costs might be 5k-10k). If you instead were to take out a line of credit (HELOC) for 40-50k and add a room or two to current house, would that work?

Some of those costs might be tax deductible as well.

If moving is your only option, then focus on these issues-

1) keep credit clean. The debt is not bad, might even help your score if you make payments on them. Biggest issue would be spouse's credit.

2) Build up cash. Long term savings does not stop because you want a house this year, so keep retirement savings functioning, but find other ways (like stopping ESPP or cutting back on something else) to get enough cash to close on new house.

3) test market by selling current house. My realtor told my wife and I to sell house 1 before buying house 2. One way this helped with costs is we rented for 5 months and saved about $800/mo from mortgage to rent, plus utilities were much cheaper ($40 heating bills instead of $200). If you do this, it will be easy to create cash for new house without compromising retirement.

My general comment is do not compromise on retirement savings. You might decide the house is more important now, then a new car is more important later, then a vacation is more important 2 years from now... and eventually you rationalized your way out of retirement savings.

[reuscam]

Should we try to pay off our loans first, then start looking for a house?
Wife's debt YES
mortgage PROBABLY NOT

Should we postpone retirement savings for a few months to a year in order to pay off our loans, and save for a down payment? NO


Here is my commentary now that you have your answers. Paying yourself first is a great strategy I use that too. My first advice is give yourself a BIG raise. You mentioned 5% going to 401k, think a 3X raise- like 15%- going to 401k. Unless you know something I don't, the 5% you are contributing now is not enough to retire on... you put more into FICA than your 401k (FICA is 6.2% tax).

The ESPP I might question... I did not include that in the savings calculation above, and if you need to bend something, that is first thing I would give up. Meaning 15% to 401k is better than 5% to 401k and some after tax money in ESPP. If you really feel strongly about your employer, put 1% into ESPP, my advice for you at present time is to up 401k and wipe out the debt of spouse as main priorities. Stock market is best with a long term time horizon (15 years or more). Because you have some immediate needs, I would suggest not putting short term money (for house) in something which might lost 50% of its value in 6 months.

I guess my thought was that the espp, if sold immediately, was a guaranteed 15% profit - tax on that profit. Of course I can only touch it every 6 months because of the window. I'll look into cancelling this, and just move it into a savings account. And also upping 401k some.

You will be able to get a house without paying down debt. You will be able to get a house with 15% going to 401k as well. Other than you feeling comfortable about your finances, I saw nothing in your post which will prevent you from giving up the desire to relocate.
My real concern was PMI - sorry I didn't mention it. I would need approximately 50k in cash to avoid PMI, on a 250k house. I just can't see how I can save 50k, pay off 65k in debt, and raise 401k contributions in any reasonable amount of time.


Have you considered remodeling your current house? Consider that you will pay realtor fees when you sell, closing costs when you purchase, and best guess is that is 30k or more out of your pocket (realtor fees are 6% of sales price and closing costs might be 5k-10k). If you instead were to take out a line of credit (HELOC) for 40-50k and add a room or two to current house, would that work?
I would like to stay in our current house, but its no longer an option. The neighborhood is getting weirder and weirder, so my wife requires a move before kids Its also quite a long commute for her, and she wants to cut that down before we have kids as well.

Some of those costs might be tax deductible as well.

If moving is your only option, then focus on these issues-

1) keep credit clean. The debt is not bad, might even help your score if you make payments on them. Biggest issue would be spouse's credit. Our scores are good, 765 and 801 I think. Will continue to pay bills.

2) Build up cash. Long term savings does not stop because you want a house this year, so keep retirement savings functioning, but find other ways (like stopping ESPP or cutting back on something else) to get enough cash to close on new house.This is the difficult part. Not sure where that money is going to come from.

3) test market by selling current house. My realtor told my wife and I to sell house 1 before buying house 2. One way this helped with costs is we rented for 5 months and saved about $800/mo from mortgage to rent, plus utilities were much cheaper ($40 heating bills instead of $200). If you do this, it will be easy to create cash for new house without compromising retirement.This is a good idea, we hadn't considered renting. That will allow us to count on some additional savings, plus the equity pulled out of our current house.

My general comment is do not compromise on retirement savings. You might decide the house is more important now, then a new car is more important later, then a vacation is more important 2 years from now... and eventually you rationalized your way out of retirement savings.

Thanks for the input, I really appreciate it.

[am_vanquish]

The ESPP I might question... I did not include that in the savings calculation above, and if you need to bend something, that is first thing I would give up. Meaning 15% to 401k is better than 5% to 401k and some after tax money in ESPP. If you really feel strongly about your employer, put 1% into ESPP, my advice for you at present time is to up 401k and wipe out the debt of spouse as main priorities. Stock market is best with a long term time horizon (15 years or more). Because you have some immediate needs, I would suggest not putting short term money (for house) in something which might lost 50% of its value in 6 months.

Although I agree that Jim's stance on the ESPP is good under most circumstances, I'd want to hear more details about the program before telling you to stop/drop those contributions. I'd like to know the following (plus any other details of the plan you might want to add):
1. How much are you currently contributing & what's the maximum contribution?
2. What's the value of your current ESPP holdings? (Show this as $-amount and % of your total investment portfolio).
3. How long is the offering period?
4. How is the 15% discount applied? (e.g., 15% of price at beginning of period; 15% at end of period; 15% of low at beginning -or- end, etc.)
5. What is the holding requirement after purchase?

[reuscam]

Although I agree that Jim's stance on the ESPP is good under most circumstances, I'd want to hear more details about the program before telling you to stop/drop those contributions. I'd like to know the following (plus any other details of the plan you might want to add):
1. How much are you currently contributing & what's the maximum contribution? 1%-15%, I'm contributing 5%.
2. What's the value of your current ESPP holdings? (Show this as $-amount and % of your total investment portfolio). $5176 already in the form of stock, and somewhere around $650 already banked for this period. The $5176 is right around 8.4% of my total savings (401k, ira, espp). I actually plan to spend the $5176 on our current house before we move.
3. How long is the offering period? 6 months, Jan - June.
4. How is the 15% discount applied? (e.g., 15% of price at beginning of period; 15% at end of period; 15% of low at beginning -or- end, etc.) 15% Discount at end only.
5. What is the holding requirement after purchase?

I don't think there is one, beyond just short term / long term capital gains.

[jIM_Ohio]

You will be able to get a house without paying down debt. You will be able to get a house with 15% going to 401k as well. Other than you feeling comfortable about your finances, I saw nothing in your post which will prevent you from giving up the desire to relocate.
My real concern was PMI - sorry I didn't mention it. I would need approximately 50k in cash to avoid PMI, on a 250k house. I just can't see how I can save 50k, pay off 65k in debt, and raise 401k contributions in any reasonable amount of time

This changes my advice a little

I agree with other poster that explaining details of ESPP would be helpful... but at minimum I would drop contribution of ESPP to a low percentage of salary until other finances were cleaned up, even if the ESPP was a deal too good to be true.

The 50k cash is more important than the 65k of debt from a short term standpoint.

Here is how I would prioritize

1) Create a budget with you in a 250k house. Assuming 20% down (50k) and a 5% interest rate 15 year fixed, that payment is $1500/month (plus taxes and insurance). I have current payment at $1100/month.

Pay $1100/month to current mortgage and put $400/month to savings. This is $5000 per year being added to savings for house down payment.

2) Create a basic retirement strategy of putting 15% of gross pay into accounts marked for retirement. I would focus on 401k and Roth before including ESPP into the retirement contributions portion. You need to put 15% into retirement accounts while also saving $400/month above. This way when you move, retirement is already accounted for. 15% is 15% of combined gross- if you make 85k and wife makes 45k, you want 15% of (85+45)=15% of 130=$19,500 going into retirement accounts.

3) Look to sell current house and rent until you find a new house. Assuming you can still budget $1500/mo for rent, and find a place for $700/month, that is $800/month you can save to a new house (almost $10,000 per year). You will incur some storage costs (we paid about $40/month for a storage facility because apartment could not fit all our stuff).

4) If you sold current house, how much profit would be available? You owe $148k, can you get $198k for current house?

Use the equity in current house to add to down payment. If you know you do not want the current house, try selling it now. If you do not get a "fair" offer, rethink the plan (it is low cost to test market).


If you go to storage, pick a storage facility close to where you are moving TO (do not worry about location you are moving from). I did this and it was a huge timesaver. You generally move into storage once (it is a quick move) because of closing date, but you move OUT of storage over time, so having convenient access along daily commute is helpful from new house location.

If you use 401k and get about 100k into 401k account, a second (backup) plan is to use a 401k loan for house downpayment... because I will advise as I do... I took a 401k loan out for each house downpayment I made. If you do this, pay the loan back quickly and it will appear as though you never took it (I paid a 50k 401k loan back in 14 months for example). I took loan out right before we sold condo, we rented and saved more money, moved into house, and within 6-10 months of living in new house, the 401k loan was already paid off.

Most others on the board will shy away from this 401k loan technique, and I would not want this as my first option. I think you can get new house by selling current one and budgeting, but having 401k loan as a backup option is a decent second or third option.

[cptacek]

Before up-sizing to a house to accommodate potential kids, I would advise just waiting until you have at least a kid. They don't come out ready to explore the neighborhood...so you would have time to move before "the neighborhood" is a consideration. It may take longer to conceive and birth a baby than you think.

My DH and I live in a two bedroom house, and we use one of them as an office. When we first got married, I also wanted to find a bigger house and immediately move to prepare for kids. We have now been married two years. I've miscarried once and haven't conceived again. Living in a 4 bedroom house with a larger mortgage would be overkill right now, especially since I just paid off our current house two months ago. Instead, our money is going to debts and business expansion.

When I was pregnant, I was planning on putting the baby bed / other stuff in our bedroom anyway. I didn't want to have to get up and walk across the (albeit small) house to the other room if the baby was crying during the night. Although I don't know for sure, I was planning on having the baby in our room for at least 6 months, maybe a year, depending on how long I nursed him.

I am NOT advocating waiting before trying to get pregnant. I'm just saying you don't know what is coming, so paying more for a house you might not "need" for 5 years doesn't make sense when you can put a better financial foundation under your marriage (paying off debt and retirement savings)

[reuscam]

Jim - good advice, thanks. I have cancelled espp, and plan to dump it straight into a savings account for a down payment. I will look at upping my 401k contribution, I just don't see how that will be possible.

cptacek - good advice, and I've love to follow it, but my wife has drawn a line in the sand. No kids until we move. No thinking about it, no nothing. Shes not that harsh, but sometimes it feels like it Also, I don't want to want so long that the market turns around, houses go up, and interest rates go up.

Another question to throw in - are there any options that will a non-first time home buyer, non vet, to put a less than 20% down payment down, and still avoid PMI?

[jIM_Ohio]

Jim - good advice, thanks. I have cancelled espp, and plan to dump it straight into a savings account for a down payment. I will look at upping my 401k contribution, I just don't see how that will be possible.

I would advise your wife that it will never be a perfect time to have kids. Financially, personally, whatever- the probability that all stars align in your favor will be slim.

We moved because we wanted to start a family, and we thought our 2 BR condo was too small for kids. That was an expensive decision- moved at "peak" of bubble, had problems getting pregant (took us about 4 years to conceive). As I think of what we could have saved for those 4 years, that amount of money is considerable (probably cost us close to 10k per year in moving).

We love the house, and know we are not moving again until retirement, but there is more to where you live than being a in a good school district or decent part of town.

Make the decisions best for you, and I know married couples "pick their battles"... waiting to have kids until you move is going to be expensive.

a) you are cutting back on retirement contributions now to get in a house sooner- you will see this price much later in life based on what age you could consider retiring. $1000 now is $16,000 in 25 years. $10,000 now is $160,000- that is 4-6 years expenses for most people, meaning you could possibly retire 4 years sooner.
b) you are pressing a short term goal (house) and sacraficing other goals (savings or vacations or other) when the timing of the short term goal is arbitrary (why do you "need" a new house?)


I don't want to come across as passing judgement- you asked some questions and I gave you my input. You liked some of it, and did not like other portions, and that is within your right to be who you are. I just want to point out how some "arbitrary" constraints like when you conceive are impacting your financial and other parts of your life directly or indirectly. My wife does the same thing (set arbitrary contraints on various problems), and if given enough time we usually find middle ground because she starts to see the cost or flaws in whatever logic created the contraints.

[Mike75]

I would suggest that you postpone your retirement savings for few months. This will help you pay off the debt and save for the house.