Buying too much house?

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Hi,

There's probably been a few threads on here with this title, but I was hoping to get some more detailed advice given my circumstances. My wife and I are looking to build a home that would cost $450k. Below I'll list some basic facts about us:

- Our combined gross income is around $132,000
- We have no debt other than our current house, of which we have around $33k in equity.
- We would do 20% down on the new house and have a little over $50k left liquid post-closing. This is NOT assuming we sell the current house, might rent it out. If not I'd expect that to bring another $20k or so.
- After all monthly expenses (including new mortgage/taxes/insurance and utilities inflated for the bigger home) we'd be saving $2,000/month.
- The above also includes the 15% pre-tax I put into my 401(k), my wife's 6% in her 403(b), and the $5k we each put into our Roth-IRAs each year.
- We both have excellent credit (800's)

I've read that your housing expenses should not exceed 28% of your monthly gross income, this house would be 20% at current incomes. So we'd seem to be pretty conservative there. But I've also read you should not buy a home costing more that 2.5x your annual income. That would only be around $330k for us. So there would seem to be a huge discrepancy between those two rules. The 28% rule would put us at a max home price of around $650k, about twice the 2.5x rule. So I'm a little concerned with that. Further, a couple years after this move we'll be thinking of having kids (at most 2). By my estimates to put 1 child in day care is around $1k/month, so that'll put a dent in the monthly savings, not to mention the other costs of raising a child and trying to fund a college savings account. Granted, each year of the 5 years I've been with my current company I've gotten around a 4-5k raise, but that's no guarantee. I could see down the road having to curtail retirement contributions unless incomes grow substantially. However, we are likely putting more than we need to in retirement accounts by my estimates.

Bottom line, do you think we're looking at too much house? If so, what would be a good number for us to stay within? Do I need to provide more information?

Thanks

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Looks good to me, enjoy the new house.

toddpublic said:   
There's probably been a few threads on here with this title,


I'm happy to inform you that yours is the one and only.

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From a non financial aspect, What is the square footage of the home and how many people in your family.

A few the we need to know. Where are you located at? What are your options for buying a equivalent lower price home? How secure is your job or your wife's job? Is your wife going to continue working at having kids because you can't make the house payments without her income? Childcare and education cost is a unpredictable wild-card. You may find that your wife might decide she would rather stay home and take care of the kids. This is all about mitigating risks. The higher price your home the fewer options you'll have in the future. Also, don't get hung on the 2.5x or 28% rule. Those rules were made when mortgages were 10%.

I believe the reason for the 2.5x discrepancy is the historically low interest rates, bump that rate up 2% and then see if you still meet the 28% rule.

Id guess you are fine @ 450k Only question i have is can you make it on 1 income if something tragic happens? If you cant, then dont buy. I dont mean like be comfortable, I mean can you make it 6 months on one income without getting behind on bills.

Thanks for all the great input! I'll answer all of the above questions here.

House size is 3300 sq feet with an unfinished basement. From the start it would just be my wife and I, but the plan would be a couple kids down the road. We are located in the RTP area of North Carolina. Options for buying an equivalent lower price home are few, if any. We've been looking into the existing/"used" market for several months and haven't found much to our liking. We came across this build opportunity that provided all the house features we wanted at around $50k more than we originally wanted to spend. We can afford the house on just my salary if we stop funding the IRAs (still maxing my 401(k)) and then saving ~$500/month. That would be the scenario if my wife became a stay at home mom. If I lost my job we'd be able to keep paying all monthly bills without changing our lifestyle for 2.5 years on my wife's salary and savings. Obviously, childcare costs would be minimal as I'd be doing that while unemployed. What has me a little concerned are the child care costs, that would mean a sizable cost each month or it would mean a single income. Either way it means we're saving less each month, just not sure at what point we've gone too far each month with the income we have. Oh and both jobs are very stable with no concern for unemployment.

Thanks again.

Do whatever feels comfortable to you. For my wife and I, a house is just a house. As long as it is in a good school district and decent shape and just enough space for us and our kid, it works. Our current payment is 13% of gross income and 17% of net income. Unfortunately, this isn't possible in all areas of the country.

You don't want to get to little of a house either forcing a premature move and the loss that comes from that. Perhaps if you can leave some other stuff like the garage unfinished and things that are scale-able later you can shave some off and do it when you have the cash. Also are you ready to become a landlord of your old property? Get furnace or toilet problem calls at 2am ect..., not see rent and make payments for 6 months while looking for a quality tenant? Just want to make sure you are ready and able to manage the old house all things considered. Not a problem for now but when you have kids you will no longer have much free time. Also will you be able to make it if you lose one income? If not you might be stretching it. To me 350-375k would be my upper limit in your scenario.

You may have mentioned this, but does your mortgage payment/cashflow numbers include insurance/taxes? I'm not familiar with North Carolina, so I don't know if property taxes are high there like some states.

Yes those are included in the the total calculation. Taxes would be $365/month and insurance would be around $60/month.

A couple of points of advice from someone in your region.

The Raleigh city data forum has knowledgeable posters in this space, I would recommend you read/post there as well if you are unsure of neighborhoods/etc. (although it sounds like you have that sorted).

Sort out which county you want to live in and accept that if you choose Wake county, your school options will change over the years - they have to move people around to accomodate the 150K students in the county.

Is this a custom home or are you just optioning a builder's plans in a track/semi-custom neighborhood. For that price, you are at the inflection point for being able to get true custom instead of just picking options off a list. It depends where this house is, if in Chapel Hill or certain neighborhoods of Wake county then the price would be higher, but you could find custom for that price range in parts of Wake, Durham and Chatham.

Are you sure you can afford to carry both the mortgage on your existing residence and new home with your salaries? Most mortgage brokers will require previous rental history in order to include rental income as income on the application for the new loan (whereas the mortgage payment on your existing house will count as a debt, even if you are selling and own both houses for only hours/days). That can impact your DTI. You can get more info on the mortgage rate thread here on FW.

Basements can be finished off rather inexpensively and are money-makers for builders (especially production ones), so unless you need the space now, I would recommend delaying finishing the basement.

When they build the house on the basement, ensure that as much of the mechanicals/wiring/plumbing are tucked into the floor joists, so you limit soffiting when you do finish the basement (I am suffering this now with my basement finish project).

PM me if you want more info.

It's in Cary, but in Chatham county, so we wouldn't be dealing with the Wake County school relocation issues. Parents in the neighborhood that have kids in the Chatham system seem to speak favorably about the schools. It's not a custom home, more of a track builder with some options generally found in higher-end houses. My need for the basement is for shop space, so I don't have any big plans to finish it off, there's plenty of house above grade. Although, I'd still have them stub in some drain plumbing for a possible bathroom. I hear what you're saying about the ceilings, although the basement has 11'+ ceilings, so height there isn't much of an issue.

I'm pre-approved with my lender to buy the next house and sell the current one after move out. The idea of permanently renting it out is relatively recent and wasn't discussed with the lender when I went through the approval process. I'll definitely discuss that more to determine the viability of that option. Ultimately, I'd rather sell it if I can do it without taking too much of a hit. So if we did this build we'd probably list it a couple of months before move-in on the new place and see what happens. If it looks like we'll take big loss I'll want to entertain the rental option.

You're buying a house you can afford, but it's not a great buy. My income is around your combined, and I know my ~$330k purchase is a little foolish, except I have 3 roommates. Putting 20% down is a great decision, but if you can buy a $350k house, put 20% down, and do a 15 year fixed...you will be in FANTASTIC shape in 3 years if you want to upgrade.

3300 sq ft is a LOT of house for 2 people. It's springtime too, so it's not the best time to buy for deals.

Use the 28% rule with a 15 year mortgage, not 30 year and see what it says.

toddpublic said:   ...Further, a couple years after this move we'll be thinking of having kids (at most 2).You can propably afford it, but a few points...

You won't have kids in schools for at least six or seven years, and you are already picking neighborhoods based on school districts? Why pay the premium for good schools years before you need them?

Bigger houses cost more money - furnishings, window coverings, heating and cooling, maintenance, landscaping, etc. Have you accounted for all that?

Make sure you can easily afford the house on one income - AND - keep up with all your savings goals. No matter what your wife says she will do once the first kid comes along, prepare for the possibility that she won't return to the workplace.

Al3xK said:   You're buying a house you can afford, but it's not a great buy. My income is around your combined, and I know my ~$330k purchase is a little foolish, except I have 3 roommates. Putting 20% down is a great decision, but if you can buy a $350k house, put 20% down, and do a 15 year fixed...you will be in FANTASTIC shape in 3 years if you want to upgrade.

3300 sq ft is a LOT of house for 2 people. It's springtime too, so it's not the best time to buy for deals.

Use the 28% rule with a 15 year mortgage, not 30 year and see what it says.


I hear what you're saying and that would undoubtedly be the safest and smartest move to make. The 28% rule on a 15 year, $450k mortgage with 20% down is right at 28.5% for us, assuming a rate of 3.75%

A 15 year loan should have a rate of 2.75%

Then that would be 27%.

dcwilbur,

The location was chosen for more reasons than just school districts - proximity to work, friends, etc. I don't really want to have to buy another place in a few years when kiddos come along so the plan was to buy a place that would support future growth. My current place I bought with your thinking in mind. I was single and didn't need that kind of square footage, so I bought a 1,600 sq foot townhouse. I knew from the beginning I'd be selling it in a few years. I don't want to enter into the next house with the same thinking. You're right about the increased maintenance and utility costs, that has all been projected to the best of my abilities in my monthly cost estimate if we decide to make this move.

Continued thanks for all the input.

I personally think $350-400k @ 15 yr fixed would be your best decision. The 28% rule is the MAX you should get...not what you should get.

Oh definitely, I would never even consider a situation that would have us up to 28%. If we decided to do this build a 30 year would be the only option.

Even at $350k and doing 25% down on a 15 year, that would be more expensive than what I originally proposed. There's just no way that would work with kids in the picture.

3300 sq ft is a lot of house for even a family of 4. With the AVG being about 2300 sq. Id question your actual need of the space, esp when you can get smaller, with a basement, that can be used for play area etc.... depends on your long term priorities.

toddpublic said:   It's in Cary, but in Chatham county, so we wouldn't be dealing with the Wake County school relocation issues. Parents in the neighborhood that have kids in the Chatham system seem to speak favorably about the schools. It's not a custom home, more of a track builder with some options generally found in higher-end houses. My need for the basement is for shop space, so I don't have any big plans to finish it off, there's plenty of house above grade. Although, I'd still have them stub in some drain plumbing for a possible bathroom. I hear what you're saying about the ceilings, although the basement has 11'+ ceilings, so height there isn't much of an issue.

I'm pre-approved with my lender to buy the next house and sell the current one after move out. The idea of permanently renting it out is relatively recent and wasn't discussed with the lender when I went through the approval process. I'll definitely discuss that more to determine the viability of that option. Ultimately, I'd rather sell it if I can do it without taking too much of a hit. So if we did this build we'd probably list it a couple of months before move-in on the new place and see what happens. If it looks like we'll take big loss I'll want to entertain the rental option.


One thing to consider is that if you are living in extreme West Cary (in Chatham County) is that the current Chatham county schools are a fair distance from your house (which could also happen in Wake county), but they are in the opposite direction from your jobs, so if you have to drive your future kids to school (or attend a school function), you will need to double back to get to work. Not sure if there will be sufficient growth in that part of Chatham county to build another nearer elementary school by the time your future children will need it.

3300 sq ft is a lot of house for even a family of 4. With the AVG being about 2300 sq. Id question your actual need of the space, esp when you can get smaller, with a basement, that can be used for play area etc.... depends on your long term priorities.

You're right it realistically is more than we need. The issue is finding a place with a basement, which is just a personal requirement for me (I'm a hobbyist woodworker and need some shop space). Basements are quite rare in NC, if I had to guess I would say only 5-10% of the market around here has a basement. And the ones that do are generally finished to maximize sq footage, which means I'm paying for value I don't want and will have to unfinish to some degree. So it really narrows down your options.


One thing to consider is that if you are living in extreme West Cary (in Chatham County) is that the current Chatham county schools are a fair distance from your house (which could also happen in Wake county), but they are in the opposite direction from your jobs, so if you have to drive your future kids to school (or attend a school function), you will need to double back to get to work. Not sure if there will be sufficient growth in that part of Chatham county to build another nearer elementary school by the time your future children will need it.


Definitely, that was a big concern of ours and almost had us passing on the community until we talked to some of the parents currently living in the neighborhood with kids going to school in Chatham, on the other side of Jordan lake. Bus times are apparently not bad getting in, about 30 minutes and a little longer coming home. Yes, it's not ideal, but we're learning much of this process is about compromise. It's also hard discounting this neighborhood entirely based on schools when it won't even be relevant for another 7 or so years.

Can you get away with a garage instead of a basement? I think a garage is better for hobbies and stuff. You can also build a good garage fairly cheaply ($7-20k). You can get them heated/cooled easily and the garage door is nice for large things.

Al3xK said:   Can you get away with a garage instead of a basement? I think a garage is better for hobbies and stuff. You can also build a good garage fairly cheaply ($7-20k). You can get them heated/cooled easily and the garage door is nice for large things.

If it's the neighborhood I think it is, there may be HOA issues with adding a detached garage (all the houses would already come with 2-3 car attached garages). Also, lot size could be an issue for a detached garage as well. It would certainly be cheaper than building the basement - especially one with an 11' ceiling (presumably a walkout on a severely sloped lot).

Do you really want/need to build your new house? Have you ever work with contractors and have some basic understanding about construction? Your 450K home might not be 450K(most likely more) and might come with a lot of headaches. If I were you, ask around who had built their home first. I would look for custom home first. Wish you good luck.

If I went the garage route the house would need to be a 3-car. I've considered that but I'd rather have a basement as they'll generally provide at least 1000 sq feet of space whereas a single garage bay is about 200. I also think it's easier/cheaper to heat/cool a basement as they generally stay a moderate temperature throughout the year whereas a garage will see both extremes. Now, all that being said, the proposed house is both a walkout basement AND a 3-car, we own 3 cars as it is. This is the ideal home for us and is why we're considering moving beyond our original budget of 400k, as long as we won't be "house poor" in the end! Up until now we've really just been looking at 2-car houses on basements and then this opportunity came along.

As for needing to build, not it isn't necessary but so far it's been the only option that's provided everything we've been looking for in a house. No I'm not a contractor and have never gone through a home build before, but I do have a basic understanding. But the point that we may go over budget is not really relevant. This isn't a custom home, it's a track builder in a large community, once we sign the contract the price is what it is and won't go up (or down, unfortunately!).

You say you plan to have kids in the future. Will your wife stay home with them? Would you still be OK making the mortgage payment without her income?

toddpublic said:   Hi,

There's probably been a few threads on here with this title, but I was hoping to get some more detailed advice given my circumstances. My wife and I are looking to build a home that would cost $450k. Below I'll list some basic facts about us:

- Our combined gross income is around $132,000


This income will fall once the wifey has kids or expenses will shoot up with $1K/month day care cost

Why not have an AWESOME QUALITY OF LIFE in a smaller home in the same (good school district) neighborhood.

Then, wifey can stay at home with kids AND you do not have to wipe out savings for down AND you can still contribute to 401K, etc.

Also, a childless couple (for the first few years) and with a few kids don't need 3300 SF and a unf bmst for their first 5-7 years. With a 15 year mtg, you can be sitting pretty.

Its wierd all these home buying stories ALWAYS start off the same - but once wifey starts popping out babies and job issues - its GENERALLY the same story - savings stop being added to, retirement, etc.

KIDS ARE VERY VERY EXPENSIVE.

BUT WHATEVER YOU DO ALWAYS BUY IN THE BEST SCHOOL DISTRICT as kids-school-home buying are DIRECTLY RELATED. MEN/WOMEN will stretch to buy a home in the right school district and its VERY IMPORTANT to NOT live in the WRONG SCHOOL DISTRICT.
KNOW THIS NOW - it does NOT matter whether YOU have kids or not.


- After all monthly expenses (including new mortgage/taxes/insurance and utilities inflated for the bigger home) we'd be saving $2,000/month.
- The above also includes the 15% pre-tax I put into my 401(k), my wife's 6% in her 403(b), and the $5k we each put into our Roth-IRAs each year.
- We both have excellent credit (800's)

I've read that your housing expenses should not exceed 28% of your monthly gross income, this house would be 20% at current incomes. So we'd seem to be pretty conservative there. But I've also read you should not buy a home costing more that 2.5x your annual income. That would only be around $330k for us. So there would seem to be a huge discrepancy between those two rules. The 28% rule would put us at a max home price of around $650k, about twice the 2.5x rule. So I'm a little concerned with that. Further, a couple years after this move we'll be thinking of having kids (at most 2). By my estimates to put 1 child in day care is around $1k/month, so that'll put a dent in the monthly savings, not to mention the other costs of raising a child and trying to fund a college savings account. Granted, each year of the 5 years I've been with my current company I've gotten around a 4-5k raise, but that's no guarantee. I could see down the road having to curtail retirement contributions unless incomes grow substantially. However, we are likely putting more than we need to in retirement accounts by my estimates.

Bottom line, do you think we're looking at too much house? If so, what would be a good number for us to stay within? Do I need to provide more information?

Thanks

ironfist99 said:   You say you plan to have kids in the future. Will your wife stay home with them? Would you still be OK making the mortgage payment without her income?

This was covered somewhere above. It's not decided if she'd stay home but if she did we could still afford it with some contingencies. At my current salary we'd have to curtail retirement contributions by a little bit, but I'd still be doing 15% in my 401(k). Or cut some other expenses out of the budget, but there aren't many.

With a basement, there is alwawy the risk of the wife moving in on your turf.
A garage is a true man cave.

Haha, I'll be sure to make the ground rules clear if we wind up doing this.

I say if you're building it, might as well build with a basement. I don't know how costly it is in NC, but here in the northeast, the delta in price basement vs no basement isn't huge and would be certianly less than a garage.

I think it comes down to what you want to do. Lets be honest here, none of us are paying your bills. you'd be more comfortable monthly paying for a 300K house, and less so paying for a 600K house. It is certianly doable. I currently have a bigger loan with more in taxes and a similar paycheck. On the other hand, If I was living in a lower cost area than I am, I would definitely be looking much cheaper than what I have, but my situation is for my own thread.

I don't think its a terrible decision, however is your wife definitely going to work once you have kids? should you be factoring that income in completely? If there were nice housing stock in the 300K range, I'd probably be more inclined to go with that, however, the reason why I would say you'd be OK, are taxes don't seem bad, and you have 20% down and cash reserves, with those, I'm thinking you can handle it, if that was what you wanted to do

toddpublic said:   If I went the garage route the house would need to be a 3-car. I've considered that but I'd rather have a basement as they'll generally provide at least 1000 sq feet of space whereas a single garage bay is about 200. I also think it's easier/cheaper to heat/cool a basement as they generally stay a moderate temperature throughout the year whereas a garage will see both extremes. Now, all that being said, the proposed house is both a walkout basement AND a 3-car, we own 3 cars as it is. This is the ideal home for us and is why we're considering moving beyond our original budget of 400k, as long as we won't be "house poor" in the end! Up until now we've really just been looking at 2-car houses on basements and then this opportunity came along.

As for needing to build, not it isn't necessary but so far it's been the only option that's provided everything we've been looking for in a house. No I'm not a contractor and have never gone through a home build before, but I do have a basic understanding. But the point that we may go over budget is not really relevant. This isn't a custom home, it's a track builder in a large community, once we sign the contract the price is what it is and won't go up (or down, unfortunately!).


How about having the builder build a slightly smaller house for you? Maybe one in the 2,400 square feet range. So long as it is not too far outside the range of the rest of the homes, it shouldn't piss off HOA people (if there is one).

This is a track builder, there's just a few plans to choose from and that's it. There's a smaller floor plan that is a possibility and would be around $25k less. My wife wasn't thrilled about the layout but this may have to be one of those "it's this or nothing" situations.

toddpublic said:   ironfist99 said:   You say you plan to have kids in the future. Will your wife stay home with them? Would you still be OK making the mortgage payment without her income?

This was covered somewhere above. It's not decided if she'd stay home but if she did we could still afford it with some contingencies. At my current salary we'd have to curtail retirement contributions by a little bit, but I'd still be doing 15% in my 401(k). Or cut some other expenses out of the budget, but there aren't many.


Then in my opinion this place is too much house. Personally, I wouldn't buy any house that I couldn't afford on a single income and which affected my ability to save for retirement.

The 28% rule is the maximum you can afford. That's why it allows you to buy more house when you have a big down payment. When you put more down, the maximum you can afford goes up. At the extreme, at 100% down all you would have to worry about are taxes and insurance.

The no more than 2.5 x income rules is about the maximum you should buy. It reflects what a reasonable trade off is between your home expenditures versus what else you'll want to enjoy in life. That's why it doesn't scale with the downpayment. Even if you had $450K cash, putting it all into getting a big house is probably not the wisest move to maximize your happiness.

Here's the advice I give my friends, FWIW: Try to buy a house at 2-2.5 x income. But if you really want to stretch for some reason, you can go up to 3x. After 3x your life will start revolving around working for your house. Even if it's nice, what's the point of that? There's more to life than the house you live in.

The short answer; yes, you can afford it. But, that is normal middle-class thinking.

You are on FatWallet, where a good portion of the people are more financially savvy and prefer not to settle for just a middle class existence.

Whether you get a house that is uber nice, or you max out your retirement accounts and pick up another property or two to rent out instead is up to you.

You know which most of us would(and do) choose to do.

Just dimensional analysis:
  • $650K is $$ (and 40% of it is still $$)
  • $132K/year is $$/time (and 28% of it is still $$/time)

So, it's not quite mathematically correct to compare the two. If you want to make a proper comparison, you need to make an assumption about how long you'll be on that $132K/year income, and many other things once you start making assumptions. If servicing the loan, insurance, taxes, etc on the new house fit within 28% -- it seems "safe".

Skipping 17 Messages...
Keep in mind I updated the thread a few days ago letting everyone know we decided to build with this developer only we're now doing a 2,625 sq ft house, which I think is very reasonable.

Thanks again for everyone's input.



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