Help with home decision

[MackTH]

Hi All,

Spouse and I are currently in our early 30s with a toddler and new baby in the way. We are running out of space in our current home and have our eye on another. It is more home than we need right now (or ever) at 4500 sq ft, but we would eventually grow into it in the coming years as we hope to have 3-4 kids total. Real estate is booming in the area, and this house is near the city center where we want to live and raise our family. We currently live a mile or so away and would likely rent our current home as it is appreciating in value considerably. Great schools and lots of revitalization going on. My job is 100% secure barring catastrophe. Wherever we move next, we will undoubtedly stay until retirement (again barring catastrophe for which I've maxed out disability insurance and have a few term life insurance policies to cover such an event).

Income: $600k
Debt: Business loan $10k/month for 3.5 more years. Cars are paid off.
Savings: $100k
Investments: $80k in mutual funds that we would likely use as down payment
Retirement: Both maxing 401k. Also just started investing 20% of income now that student loans are gone.

I recently aggressively paid off student loans so don't have cash for 20% down while keeping emergency fund, which I would obviously prefer. My primary reason for wanting this house is that its size and location is exceedingly rare and we want to stay in this area long term.

The home is valued at and will probably sell for $900-950,000 and with 10% down the mortgage would be ~$850,000 at 4.35-4.5% based on the proposal from my lender. Taxes and insurance would be ~$800/month. The home is also older/historic and utility/maintenance costs will be greater than average. The kitchen is fully functional but could use a facelift. Otherwise it is move-in ready and in good condition.

I've done the math and from a cash flow perspective, we could afford it and maintain our lifestyle (we’re both pretty conservative/frugal...this home would be our “splurge”) while still saving 20% of our income. Once the business loan is paid off, we will certainly be more comfortable. My biggest concern is the opportunity cost of putting $$ towards the home with the increased mortgage versus investing that money over the next few years. I don’t want the home to be a financial albatross, but am worried that if we miss on this one then in a few years there may not be another like it that checks all of our boxes. We are only somewhat emotionally invested " /> It would also be nice to lock in a mortgage with a relatively low interest rate for the long haul, but appreciate that we will be paying for that in the short term.

Many thanks in advance for any and all wisdom/opinions.

[CordMcNally]

MackTH wrote:

It is more home than we need right now (or ever) at 4500 sq ft, but we would eventually grow into it in the coming years as we hope to have 3-4 kids total.

Click to expand...

There's a lot to sift through but these two statements are a little contradictory. Do you need a 4500 square foot house for a family of 5 or 6? No. Do you want one? Probably. Plus, the setup of a house can make all the difference instead of square feet.

It's going to come down to what is most important to you. The house is 1.5x your income which is in the realm of affordability although you do have a large debt each month with the business loan. You said your job is very secure but is the income? Feeling pressure from a "booming" real estate market is not a reason to buy. You could be buying at the peak and find that your house is worth a lot less in 5 years. Not to mention, being an older house, an inspection may reveal $100k or more that would need to be invested for repairs.

I'm not familiar with your current home or your local rental market but if you buy a new home there will be one constant: you're going to have two mortgages and two houses to maintain and repair. The variable will be that you may or may not have a renter at certain times to provide some extra income.

Could you find a house that would meet your needs for $600-700k? A savings of $300k invested over a 20 year period (granted you won't be putting it in all at once but you could easily have $300k to invest total in 2 years by getting a cheaper house) at 5% is $800K and at 7% is $1.16MM. Is this house worth that much extra to you? Maybe, maybe not, it's a very personal question but splurging on a house may be very pennywise and pound foolish.

Reading through my response, most of it gives off a tone that I'm against the decision but my intention is to try to have yourself look at your entire picture and where you want to be (financially, professionally, etc.) in 20 years. Are you a retire early kind of person or do you expect/want to have to work into your 60s?

 

PS: I think you're likely going to be far ahead of your peers with either decision you make.

[The White Coat Investor]

I agree you don't need that big of a house. I've got 4400 sq ft with 4 kids. We don't even use one of the three floors unless we have company (aside from some storage.)

Good job getting rid of the student loan early. The longer you can delay upgrading your lifestyle, the better off you will be financially. Drag your feet with this one as much as you can. But there's a balance in life. You don't need to be the richest guy in the graveyard either.

Don't get suckered into the "there's only one perfect house for us" bit. It's just a stack of bricks. There's another one just like it down the street. That attitude is what gets people to buy earlier than they should and pay $100K too much for it.

[MichaelB]

On the surface, this scenario makes me a little nervous. Great job paying off the student loans, but you still have the $420k left on the business loan. Is your current house paid for? If not, that adds another level of risk if you keep it and rent it- it sounds great in theory if it stays rented with good tenants, but that's a big if, and a big hassle either way.

Try to tame the house fever, but if you really want it, strongly consider selling your current house to lower your risk level. Also, if you decide to move forward, get that down payment money out of mutual funds and into a money market ASAP.

Finally, don't forget about the extra costs that come with a bigger house- higher utilities, taxes, etc. not to mention you have to furnish it! Good luck with your decision.

[jhwkr542]

Can you afford it? Yes, but that shouldn't be the question to ask. The biggest worries would be what happens if the economy takes a nosedive. Does that income go with it? Are you stuck with two homes? It would make you vulnerable, which sounds crazy with that salary. Agree that I'd sell the other home. Sell in a market that's going up because you never know when it will turn down. If you can't find renters, that's a lot of dead money. Also, that's a huge business loan to be paying monthly. My sense is that you've fallen in love with this house, which shouldn't be reason to buy. If you're a salaried position in a very stable job, then it wouldn't be so risky.

[abds]

I'm not the norm on this forum. I would do it, if the house really is that great to you. I'm not one for a lot of material stuff but man do I love coming home to a nice house (honestly nicer than I need). It makes me happier even day.

I would also sell your current house. I think you'd be crazy to hold onto the house; I could never deal with renters or paying two mortgages if you can't get someone in there, or being stuck with it if the market dives again.

 

[Kamban]

You would either sell your current house and use the gains as a down payment or delay the buying of a house for another 4 years when you would have paid off the business loans, improved your savings and also built a larger down payment for a new home.

Don't get suckered in the argument that "this is the one and if you miss it you won't find another one like this". That is what salesmen use to make you buy it right away.

I am concerned that this is a larger house and a older house. Your costs are going to be substantially more than a newer smaller house. Do you want to save more than you have and also provide for your children's future with 529 plan or you want the bigger home.

If you don't mind my asking, how much sq foot home do you have and how many rooms are there? I have lived in a 2300-2400 sq foot home for 14 years with me, my wife and child and having my in laws stay with us 6 months of the year. You can always justify running out of space and a bigger home if you let your emotions rule you rather than a financial head take charge.

Good luck.

[VagabondMD]

My minimalist sensibilities say "No" to the 4500 sq. foot house. Don't buy something that you do not need now for an anticipated need in the uncertain future, especially when it is something that you can always buy if/when you need it.

[Zaphod]

My 2500 sq ft house feels huge, in addition to the toddler and teenage nephew that are here all the time, we have had four other guests at a time so far and it still didnt feel cramped or like you couldnt get any privacy.

I do agree that coming home to a nice house feels good, but it doesnt need to be massive for that to still be true. Sure, I could think of things to do with the space, but not at all a necessity.

Idk if someone has mentioned but all costs go up with sq footage, heating/cooling will drastically increase as will other utilities. This will also be true of paint, flooring, furniture, etc...etc...the costs never end.

[wideopenspaces]

I think everyone here has given you pretty solid advice. I'll just add that I had 5 siblings growing up and our home was only 3000 Sq ft but still plenty of space. I can't imagine what 4500sq ft would feel like! You don't want so much space that you never see your kids again (especially as they become teenagers!) I would hold off for now and then reassess when the business loan is paid off.

[Dr. Mom]

We bought an older, bigger than we needed at the time (5000ish square feet) house about 15 years ago because it was the location we wanted and a great deal. We did sell the house we were living in at the time though.  If this is the house you really see yourself living in for years then I would do it.  But to decrease risk I would sell the house you are currently in.  If your housing market is so hot, better not to have two homes near the top of the market.  After your business loan is paid off, you can always go back and buy another house for a rental if you want.  Don't become an accidental landlord just because you are getting swept up in your market and your house fever.  And, don't make your portfolio too heavy with illiquid investments when you are carrying so much debt.

[StarTrekDoc]

You did the responsible thing in debt payments while securing a stable job, paying down that debt on autopilot and already have the house.

This is splurge time and only you can make that decision.  If you like the house and know that it fits for your circumstance and strategic plans, then go for it.

The question more so is about the 2nd home (current home).  Look back to the great recession of 2008-2010 if that impacted your local situation and use that as your stress test for ability to float the second mortgage at a bad time.

As WCI mentioned, make sure your salary would be a stable source as that's the key to ability to float

3-4 kids funding:  250k per at the very least for their lifetime -- 529 plans;  150k for public university; 300k for private should be factored into your plans too.

 

[MackTH]

Sincere thanks for all of your responses. We are currently in 1450 sq ft with 4 bed/2.5 bath. When I type that it seems ridiculous to want to move, but the layout is such that there's not much space for hobbies or storage, it always feels cramped, and we can't have more than one family/friends over at a time. There's also certainly a bit of wanting to let loose after years of delayed gratification. I appreciate your honest opinions keeping the devil on my shoulder in check.

[Dr. In Debt]

My first instinct is to sit tight for a year or two more and build your cash cushion.  You currently own a home so you are benefitting from appreciation currently and not missing out on anything.   No one knows what is going to happen with interest rates in a few years so no use predicting the future.  Cars break, people get sick, bad things happen more often than any of us would like to admit.  You have positioned yourself well,  have patience,  I wish I had waited an extra year or two.

I would be cautious with the Older/Historic home and "minor" facelifts.   Our "minor" facelift on our 1880's home went well over $100,000 over budget on things you just don't know until you open the walls.  When renovating older homes you can reach a point of no return,  you have to press on or you will be left with nothing. The finances likely work out in the end but it has left us with way more debt than I feel comfortable carrying and temporarily tighter with our cash flow than I would like.

The good news is if you are truly in the house for the long term you will be ok.

If you pull the trigger I would recommend to sell the current home and roll your profits into your new home.  This will allow you to capitalize on the appreciation you may have seen.  It would be risky to keep two homes within a mile of each other.  You would not be very well diversified considering your job and two homes are all tied to the same area/city.    Stranger things have happened http://www.marketwatch.com/story/lead-poisoning-crisis-sends-flint-real-estate-market-tumbling-2016-02-17

[FIREshrink]

no way. too much, too soon.

Yes you have paid off student loans. yes you have a high income.

But you are undersaved for retirement and don't have even a 10% down payment.

Spend even 2-3 more years socking away cash and you'll be in fine shape.

My opinion.