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Thinking of purchasing new home

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Money Talk > Real Estate

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lmbebo
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Thinking of purchasing new home  Reply with quote  

Hello,

My wife and daughter are moving from a small town (35k) to a small city (800k).
I will be starting a new job as well. We are both new to this city, but know we will are going to want to live on the west side of the city to be closer to our religious centers.

Income/savings:
Monthly net income: 15k
Savings: 70k
Savings #2: 14k (pegged for fertility issues, with target savings of 50-60k)
Checking: 7k
Retirement: down to 50k (losing part of employer match because I left current job before 401k fully vested).

Debts:
Family loan at 67k, no interest. Paying off 2170/month
Car 1- 25k at 585/mnth, 1.9% interest
Car 2 - 13k at 355/mnth, 0.9% interest
No credit card debt (paid off her cc loans last year)
The above debts should be cleared by March 2017 or so.

My thoughts:
Continue to rent while we pay off loans and continue to save up for a nicer house in a better established neighborhood. This would probably happen in 2-4 years.

My wife:

Get into a starter home, build up equity and stop renting.

She wants us to purchase a new house build in this new planned community. Cost of the houses are less (250-300k). She wants to get into a smaller 3 bed / 2 bath + office nook home (new build at 255k) as a starter home with plans to switch homes in 7-10 years (I think a 4th bedroom would be needed).

The target neighborhood is a new development with many small lots (2-3 years old, still being developed). Planned community with some stuff near by (dry cleaners, gas station, a few food establishments). A new teaching hospital is being built 10 mins away as well as a new shopping center to include a Target. It has some walking paths in the area for walking/running.

I know enough about which 2 high schools I want our daughter to attend and this new housing development doesn't feed into either of them.

I grew up in a single home that my parents have owned for the past 35 years. Her parents changed homes at least 3 times while she was growing up. So we grew up with different philosophies about home ownership.

Question is, is it wise to consider purchasing a "starter" home. Our child will attend private religious school through middle school, so our financial situation could be very different from now and in the next 10-15 years.

Is it financially wise to do so at this point? Or am I just scared to make a financial purchase of this size ?

I think we could swing 20-25k from our savings without seriously hurting our financial situation. I expect I'd be able to qualify for a professional mortgage with no PMI if need be.

When I created our budget, I estimated rent at about $1500/month. We could be a bit flexible with that if need be.

Thanks
Post Sat Oct 18, 2014 9:59 pm
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Publius
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How old are you two? How stable is your current job?

My first thoughts are that you have a lot of debt and not a lot of retirement savings for your income. That might not be true if you are young and haven't been making that amount long, but it is my first impression. Home ownership is great in a lot of ways, but I would be making sure that you are saving heavily for retirement before taking any of your saving and putting it towards a home. Getting a "starter home" can cost you a lot too if you are going to move up in house in a relatively short period of time. My thoughts would be to put more towards retirement and perhaps rent a little longer until you are ready to buy a home that you will be in for a longer period.
Post Tue Oct 21, 2014 4:39 am
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Wino
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You have way too much debt to be buying a house. It is also not "smart debt" that oldguy and I constantly argue about. It is car loans! For crying out loud! That's the worst debt to have, because you owe money on an asset that is depreciating. You're getting a double-whammy of interest owed and depreciating value.

But that's where you are. Were I in your shoes, I'd rent a house and pay off the car and family loans as soon as I could reasonably afford to. Cut back your lifestyle to $3K per month and assuming taxes of $3K per month, you have $9K to use to pay back the loans. At that rate, you could be debt free inside of a year. Then you could save for the down payment (another year, maximum) and move into your permanent residence at that time.

As things sit, you're in trouble if anything happens to your job. Since no job is permanent, you need to get your finances in order, and you need to do this quickly. Your income is high for the US, but it isn't unusually high. You're making about $180K per year, with probably $35K-$45K going to taxes, you should have nearly $140K per year to use for payments and living expenses. Cut back your lifestyle and live well below your means for a short period of time, then when it is over, you can look back at this time as the moment you decided to tell your money what to do rather than having your bills tell you what to do with your money.

You should be able to move into a permanent house within 3 years, barring Murphy's Law. Renting is NOT cheaper than buying. For three years, there won't be enough movement in house prices to justify the increased value argument. The only reasonable argument is that interest rates have nowhere to go but up, so locking in a loan at today's low rate might be best, overall, but your finances aren't really in a position to take advantage.

If you really MUST have a new house now, then sell the cars and buy cheap replacements. I drove a 14 year old jeep from new to discard (gave it to my brother in law), so driving an old car does not hurt. That would eliminate nearly $40K, which makes your payoff goal easily accomplished within a year. Also, that $67K is not reportable, so you should qualify for the house as soon as you sell the cars. You'll need a bigger down payment, but PMI never killed anyone. Expect to pay just short of $100 for every $100K borrowed (each month). That's a bit steep just to get a lower interest rate that may or may not still be available in a year.

In short, you need to cut back your lifestyle. Wait until you have some cash, then buy things you need. I'm guessing you have a lot of "wants" you've paid for, figuring you could afford the payments. If you got it on credit, you couldn't afford it. Until you stop spending money until you have it, you're never going to have any money to buy things that you want or need. You're going to be in debt forever, with pretty much nothing to show for it expect possibly the house. The cars, horses, ATV's, RV's, boats, landscaping, and tuition are all gone as soon as you get them, value-wise.

Think how easy this decision would be if you had zero debt. That alone should get you thinking about eliminating some of your wasteful spending.
Post Tue Oct 21, 2014 10:02 am
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oldguy
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The rent/buy decision is largely market driven. If you bought a $20k house in 2005 it was worth only $150 5 yrs later. Conversely, if you bought in 2000 the value went up by $100 - ie, you were being paid to live there. But markets cannot be predicted.

BTW, "starter" houses were invented in the.1950s, before that families just bought a home. At the time they were 1 or 2 bdrm, 1 bath houses, about 800 sq ft. Your 3/2 plus a nook is way beyond the starter category.
Post Wed Oct 22, 2014 2:40 am
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littleroc02us
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quote:
Originally posted by oldguy

BTW, "starter" houses were invented in the.1950s, before that families just bought a home. At the time they were 1 or 2 bdrm, 1 bath houses, about 800 sq ft. Your 3/2 plus a nook is way beyond the starter category.


I've never heard that description before. Us GenXer's must be throwing that word around not truly knowing the meaning. It's funny you say that. I live in a blue collar neigborhood with couples that are all in their late 70's. One is a plumber, one was a fork lift driver and another was a concrete guy. They all raised very large family's in a 1500 sq foot home that is a story and a half. They made do with what they had and survived quite successfully. Again, it's our generation that want's a bigger house.

As for the OP's problem, I agree with Wino that the user is heavily in debt and should rent and pay off all their debts before moving. If you make 15k a month, it will take no time at all. Why not sacrifice lifestyle for one year, so that you can clean up the mess you've made. Who here, wouldn't love to net 15k a month. Great income you've made for yourself.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Oct 22, 2014 2:41 pm
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