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rhatam
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Cash: $ 0.65
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Joined: 14 Oct 2012
Location: Los Angeles, CA
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| I need some financial advice |
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Hello, I need some financial advice. I have recently started a new career and I'm planning to buy my first house/condo now. Here are my basic finances:
INCOME:
Base salary of $200k yearly
I usually bring in about 5-6k/month in overtime
Escalating bonus structure that provides an additional 5% of my base my first year, 20% my second year and so on up to 65% my sixth year.
Benefits: medical,dental,disability provided, 80% of 401K matched, I have $17K in my 401K plan currently
Stock options (50k/yr) starting in 6 more months
DEBT:
Educational loans
#1 $47,000 2.875% fixed
#2 $57,000 6.8% fixed
#3 $107,000 4.75% fixed
#4 $2,400 2.98% variable
#5 $2,900 2.98% variable
#6 $2,300 4.2% variable
#7 $3,800 4.2% variable
TOTAL DEBT $222K
My plan is to purchase a condo in an area where the prices range from 500-700k with HOA fees ranging from $600-800 monthly. I have 25k in my bank account currently. My credit score is around 770. I'd like to purchase now instead of waiting until I have 20% down to avoid PMI. Id like to know what you guys think about what I could comfortably afford and whether there's any magical percent of a downpayment (5%, 10%, etc) short of 20% down which would give me favorable loan terms. How much does my salary, future potential salary, existing debt/type of debt and credit score factor into what interest rate I'm likely to be offered?
Thanks in advance
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Sun Oct 14, 2012 8:58 pm |
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Publius
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What you can comfortable afford and what you can be approved for may vary widely. There are still some programs that allow you to finance up to 100% down on your first purchase, but they are fewer than they were before the housing bubble popped. I know that a few national lenders still have a program for medical doctors that allow the borrower to finance 100% and avoid PMI, but it sounds like you aren't in the medical field. Certainly shop it around and see what you can get.
As far as what you can afford, that depends on the lifestyle you plan on living outside of the expense of your home. My personal philosophy has been to try to keep housing expenses less than 25% of our household net income each month. With the amounts you are quoting, you are above that even at the low end of your estimates. $500k at 4% will be >2300/month before you pay taxes, insurance and PMI if you have to. And then there is the HOA dues that you described. That is a BIG chunk of your take home.
It sounds like you have a bright future career wise, but you want to be very honest with yourself about the stability of your career before you take on debt at the level you are talking about.
If I were in your shoes, I would also be concerned about the educational debt that you are carrying. Most of those loans are at fairly low rates, but you have >$150k at rates that will likely exceed your mortgage rate. If something were to happen to your career, that student loan debt (the portion that is federally insured, anyway) is not even dischargeable in bankruptcy. I would probably feel more comfortable, personally, with renting for a year or two, making sure that my income is going to follow the path that you outlined above and getting some of the debt payed down while putting some cash in the bank. With that large of an expenditure on the house, I would want a pretty large war chest in case I had to spend some time on a job search in the coming years.
Home ownership can be a financial blessing with some planning, you just want to make sure it isn't an albatross if something doesn't go as planned career-wise.
Hope that helps.
Publius
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Mon Oct 15, 2012 12:43 pm |
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littleroc02us
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Wow, what a tremendous income. So were talking somewhere around 260k a year. Personally as hard as it is to wait to buy a home, I would take the next 2 years and eliminate your student loans. Buckle down and get disciplined and with your income if you used have of it you would rid of all student loans and free up your entire income for buying the home of your dreams and investing enough money to have millions at retirement. If you decide to keep these loans around forever like most people do, it reduces your biggest wealth building tool and that's your income, which you definetly have more then enough. Good luck.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Mon Oct 15, 2012 1:49 pm |
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rhatam
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Cash: $ 0.65
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Joined: 14 Oct 2012
Location: Los Angeles, CA
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Thanks for the advice so far. I'm keeping my fingers crossed that I do maintain my income or close to it. Fortunately, my field has great job security. My peers have recommended I try to aggressively pay off my higher interest loans (ie loans #2 and #3) while also paying mortgage on a new place as the interest rates are VERY low. The difference of just 1 interest point on a 500k loan over 30 years is 90-100k over the life of the loan. My take home has been steadily $14-15k/month after taxes including overtime pay and so forth.
Another colleague suggested I purchase with a 5/1 ARM loan and then refinance after a year when I have enough to cover the 20% down under a more traditional 30 yr loan. What do you guys think of that plan?
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Tue Oct 16, 2012 3:33 am |
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Publius
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To add to what coaster just said, buying with 100% down with the idea of refinancing is great as long as your property increases or even maintains its value, but a lot of people got caught in depreciating markets, are now under water and are stuck. If that happens with an ARM, you can be stuck watching your rate go up while you can neither sell nor refinance. You are talking about real estate in California -- you could see the value change (up or down) in the time it takes you to sign the paperwork. I would still be in favor of renting for a little while while lowering debt and building up a pile of cash.
You've got a great income (congratulations) and you have the opportunity to become very wealthy, but a little patience and planning will go a long way. Good luck.
By the way, I was the same way when my wife got out of residency and started her practice (I married up  ) and wanted to do too many things at once. I had a good professional get me to relax and now a few years later we are in great shape with most things on auto-pilot. You'll get where you want to be.
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Tue Oct 16, 2012 12:01 pm |
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littleroc02us
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Where else can rates go but up, definetely don't do an Arm even if it's just for a year. Again you make 3 times a month the average family does. You have the income and like Coaster stated the feds don't plan to raise rates for a couple of years which leaves you time to pay off your student loans. I always find it interesting that most people keep around student loans like it's a pet or something.  Another question, ask your friends how much debt they have? It would be interesting to know who your getting advice from, someone whose greatly in debt or someone who has a high networth.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Tue Oct 16, 2012 1:18 pm |
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oldguy
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I would prepay the 4 Var loans - about $12k - and keep the two low rate Fixed Rate loans for the full term. And prepay a bit of the 6.8% FR loan when convenient.
Buy the real estate with a minimum down payment and pay the PMI - it could expire in a few yrs when the equity builds. Use only a 30 yr, FR loan, no Var (they can jump very quickly, in the 1980's rates jumped and people had to refi at 13% and 15%.)
If you get a <4% 30 yr loan, that is the cheapest capital in the world (the US has longer loans that any other nation). So keep that <4% capital for the full 30 yrs and invest your income stream elsewhere at higher than 4%.
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Tue Oct 16, 2012 8:16 pm |
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rhatam
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Joined: 14 Oct 2012
Location: Los Angeles, CA
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Great advice so far guys! With respect to oldguy's comments, is there a use in paying off loans #4-7 now even though they are lower interest? It would reduce my total number of open accounts in repayment dramatically but not effect the overall debt that much. Would that benefit me at all?
If I take the route of saving for 1-2 years, should I focus more on saving money in a mutual fund or something of that sort to put towards a 20% down or focus more on paying off the highest interest debt I have? If I can, for example, completely pay off loan #2 while at the same time saving short of 20% of the price of a property (ie 10-15%), would that be more preferable than focusing more on reaching the 20% down mark and paying off the high interest loans more slowly over time?
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Wed Oct 17, 2012 3:12 am |
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Publius
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As far as what order to pay off the debt, it makes the most sense mathematically to pay those with the highest debt first because you realize the highest immediate rate of return on your money. i.e. In simplest terms, if you have 57k @ 6.8% that's 3876 in interest in a year that you are paying the lender. If you pay that off in one large chunk, you've immediately realized a 3876 savings annually. If you prefer the emotional gratification of seeing some of the debts reduced to 0 quickly, paying them off smallest to largest is a better way to go.
If your goal is to eliminate your debt so you are sending your income towards your wealth instead of towards interest payments to your lenders, either will work and you will be out of debt fast enough that the math doesn't matter as much. I, personally, would not be in favor of keeping any of the debt around for the full term regardless of how cheap it is. I just would rather see all of my income going towards wealth (or stuff I want ) rather than playing a numbers game on rate of return of investments vs interest rates.
And no, I wouldn't put money that you are saving for the house in mutual funds -- a two year horizon isn't long enough for me to feel comfortable weathering the ups and down of the market. Just put it in a money market fund or high yield savings account. The rates are crap right now, but for the same reason, mortgage rates will remain low for the foreseeable future.
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Wed Oct 17, 2012 11:48 am |
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