HCOL - Can I afford 1.75M House?

[FireSauce66]

Need a sanity check. Here's the rundown - it's not ideal, but hopefully it's not completely crazy. Breaking the 2x rule to about 3x or so.

W2: 460k yearly
Cash: 450k
Taxable Brokerage: 160k (hoping to not use this)
Retirement Accounts: 370k (def. not touching these)

Expenses: approx. $9k/month (excluding rent)

Background:
*Married 4 years, both mid-30s (spouse stays home)
*1yo child - starting to need space. Procrastinated on buying a home earlier because wanted to save cash, the market was "not very good" etc etc. smh...
*Attending for the last 3 years
*med school loans paid off
*HCOL city - both sets of grandparents nearby.
*neighborhood, location/commute, and public schools are all excellent.
*All kids will go to public schools
*Renting for $3800/mo for the last 4 years

The Numbers
1.75M - 20% down = 350k + approx. 60k closing = 410k. Could swing slightly more than 20%, maybe 23-24% to keep monthly payment down and still not touch retirement/taxable accounts.
Mortgage: 1.4M
Mortgage Rate/Payment: @4.5% comes out to appprox. $8,300/month (PIMI)


My Calculations:
460k gross - 138k taxes (30%) = 322k.
322k - 96k (1yr mortgage payment) = 226K
226k - 92k (20% savings) = 134K
134k - 108K (living expenses @ 9K/mo) = 26K leftover

How house poor is this going to make me? I've already factored in 20% of gross for savings. An extra 26K leftover means monthly budget can increase about 2K per month if necessary, or be saved. I also get a bonus of approx. 60k per year. I've left it out of these numbers intentionally because it's not always guaranteed but its pretty reliable.

I'd love to save 40-50% and retire early but that's not an option in this area - housing and living expenses are too high. Thankfully I enjoy the day to day of my job. Moving further out would put my commute over 30 minutes. This is a ballpark price for what we've been looking at and want, and is already definitely in the "suburbs."

Just have sticker shock and want to make sure I'm not missing anything major. Between rising interest rates, and housing prices up 10-15% (approx 200k) from the Fall, it seems we have really, somehow, ended up at, just above, or just below our max budget for a house. Not sure which of those 3 it is.....

Help and guidance is much appreciated!!

[Larry Ragman]

vhcol areas cause some of the normal thumb rules to be set aside. While I am more conservative and might have trouble pulling this particular trigger, I would say the numbers work. Well, as best I can tell since you just provided summaries of your tax bill and expenses. Plus side, you might get more benefit than you calculated out of the mortgage interest deduction. Minus side, not clear your expenses include college savings for kid(s?), saving for vacations, etc. Maybe the $60k bonus makes all that moot. Anyway, you have thought it out pretty well. I’d say yes.

[MPMD]

pretty tight but probably won't sink you.

curious what city this is, esp w/ the anonymous name. i def live in a place like this, that said $1M still gets you plenty for 1 kid.

keep in mind this decision basically takes you off any reasonable planning for the RE part of FIRE.

[AR]

I don't hate it.

I think the No 1 factor is stability of job. Do you like your job? If you like it and leaving is unlikely and compensation is likely to be stable, that all points to buying. Maybe throw in the ease of getting a similar job in the area if you are unexpectedly forced to leave. Given that you have worked there for a few years you should have a decent idea of these things.

[jacoavlu]

9k spending per month excluding rent and loans paid off seems like a lot.

[SocietyofHospitalMemecine]

Good, not great. You won’t be totally house poor but vacations, private school, cars, country club, any of the excesses will be limited. You may not think any of those interest you, but your kid is young and wait and see.

Perhaps see if your mortgage lender will let you do a recast modification if you ever need to lower your monthly mortgage expense

[StarTrekDoc]

If this is home for future schooling; make sure you're comfortable with the public schools since you're ability to float private x18years maybe a bit hampered.

5% gross for incidentals makes it tight; but such is life in HCOL these days.

[CordMcNally]

It's certainly doable but like others have said retiring early will likely be tough.

[FireSauce66]

pretty tight but probably won't sink you.

curious what city this is, esp w/ the anonymous name. i def live in a place like this, that said $1M still gets you plenty for 1 kid.

keep in mind this decision basically takes you off any reasonable planning for the RE part of FIRE.

We're on the east coast. Probably 2-3 kids

Sorry I can't figure out how to embed multiple quotes to respond approrpiately.

I don't hate it.

I think the No 1 factor is stability of job. Do you like your job? If you like it and leaving is unlikely and compensation is likely to be stable, that all points to buying. Maybe throw in the ease of getting a similar job in the area if you are unexpectedly forced to leave. Given that you have worked there for a few years you should have a decent idea of these things.

Job is great, don't see myself leaving. City is big enough that there are other, what I assume are comparable pay/vacation jobs nearby

9k spending per month excluding rent and loans paid off seems like a lot.

I intentionally put this a little high.

Good, not great. You won’t be totally house poor but vacations, private school, cars, country club, any of the excesses will be limited. You may not think any of those interest you, but your kid is young and wait and see.

Perhaps see if your mortgage lender will let you do a recast modification if you ever need to lower your monthly mortgage expense

Thanks! Probably figured no fancy cars country clubs or crazy euro vacations (at least for awhile). Don't know anything about recast modifications, will have to look into this. thanks for mentioning.

If this is home for future schooling; make sure you're comfortable with the public schools since you're ability to float private x18years maybe a bit hampered.

5% gross for incidentals makes it tight; but such is life in HCOL these days.

Public schools are excellent so this will have to be the route. What exactly do you mean by 5% gross for incidentals? Do you mean like new roof, HVAC, water leak etc?

[Tim]

•My concern would be if it is a 30 yr mortgage.
• Also, I think you need to calculate your total costs, not just PIMI. Everything from property taxes, insurance, HOA, maintenance and a repairs amount. (you will have repairs) etc.
• Got money for moving, furniture drapes, decorating and a new EFund?
• Got your cars lined up for long term?

I wouldn’t want more than 28% of income for fully burdened housing. Especially for 30 years.
I would rerun your numbers to estimate exactly what your all inclusive housing will cost you. $1,400,000 could cramp you. But it will certainly increase your housing costs. Your EFund is going to be light.

[bovie]

I’m definitely not as dogmatic as some about the <2x income rule, and tend to say go for it in these sorts of situations and want to here, but I’m actually leaning away from this one.

And not even because of the income to mortgage. In a HCOLA, the rule has to budge if you want to buy. Totally get that.

But $26k per year leftover seems tight, and that’s if nothing else creeps in and no further “needs” manifest (which they will). Not to mention “wants.” And early retirement?

My main question would be how reliable is that bonus. Would definitely provide some breathing room. But it need to be really solid.

[sandy]

Need a sanity check. Here's the rundown - it's not ideal, but hopefully it's not completely crazy. Breaking the 2x rule to about 3x or so.

W2: 460k yearly
Cash: 450k
Taxable Brokerage: 160k (hoping to not use this)
Retirement Accounts: 370k (def. not touching these)

Expenses: approx. $9k/month (excluding rent)

Background:
*Married 4 years, both mid-30s (spouse stays home)
*1yo child - starting to need space. Procrastinated on buying a home earlier because wanted to save cash, the market was "not very good" etc etc. smh...
*Attending for the last 3 years
*med school loans paid off
*HCOL city - both sets of grandparents nearby.
*neighborhood, location/commute, and public schools are all excellent.
*All kids will go to public schools
*Renting for $3800/mo for the last 4 years

The Numbers
1.75M - 20% down = 350k + approx. 60k closing = 410k. Could swing slightly more than 20%, maybe 23-24% to keep monthly payment down and still not touch retirement/taxable accounts.
Mortgage: 1.4M
Mortgage Rate/Payment: @4.5% comes out to appprox. $8,300/month (PIMI)


My Calculations:
460k gross - 138k taxes (30%) = 322k.
322k - 96k (1yr mortgage payment) = 226K
226k - 92k (20% savings) = 134K
134k - 108K (living expenses @ 9K/mo) = 26K leftover

How house poor is this going to make me? I've already factored in 20% of gross for savings. An extra 26K leftover means monthly budget can increase about 2K per month if necessary, or be saved. I also get a bonus of approx. 60k per year. I've left it out of these numbers intentionally because it's not always guaranteed but its pretty reliable.

I'd love to save 40-50% and retire early but that's not an option in this area - housing and living expenses are too high. Thankfully I enjoy the day to day of my job. Moving further out would put my commute over 30 minutes. This is a ballpark price for what we've been looking at and want, and is already definitely in the "suburbs."

Just have sticker shock and want to make sure I'm not missing anything major. Between rising interest rates, and housing prices up 10-15% (approx 200k) from the Fall, it seems we have really, somehow, ended up at, just above, or just below our max budget for a house. Not sure which of those 3 it is.....

Help and guidance is much appreciated!!

I would be the "bad guy" here. I think it's always tempting to buy a "nicer home" than u can afford. to me, 8600 is just the basic mortgage and property taxes, and home insurance. But what about the overheads like monthly maintenance like lawn, trash, home cleaning services along with your expenses like eating out, groceries, gas, etc.

You are not me, but if I was you, I would either wait for a couple of years till my kids is a little closer to school age and accumulate wealth or if you can't delay the gratification of buying a home then I would buy something cheaper.
I would like to reiterate what Einstein said: "Compound effect is the eighth wonder of the world". Build wealth first and then go for the bigger house a little later, given your spouse is stay at home parent.
No hard feelings, but just wanted to say what I would do.

all the best with your decision.

[bovie]

You are not me, but if I was you, I would either wait for a couple of years till my kids is a little closer to school age and accumulate wealth or if you can't delay the gratification of buying a home then I would buy something cheaper.
I would like to reiterate what Einstein said: "Compound effect is the eighth wonder of the world". Build wealth first and then go for the bigger house a little later, given your spouse is stay at home parent.

Agree with all.

Except the Einstein bit—the sentiment is true, but he never said it. Perhaps the most often cited falsely attributed quote of all time.

Do think that wealth building should come first here though. And it will be hard(er) to do with that big ball and chain dragging for 30 years.

[VentAlarm]

You’re going to be tight. What about new cars, college savings, vacations, etc? Do you have a budget for giving?

[VentAlarm]

9k spending per month excluding rent and loans paid off seems like a lot.

Eh, not really - especially when you factor in kids. That’s 100k spending per year not counting rent, tax and saving. That’s probably what most people who make half of what he makes spend a year.

I mean, we give about 1800/mo, spend about 2k on food, 1500 on fixed expenses (utilities, insurance, subscriptions, cell phone, etc) 500 at target/Amazon on household stuff, diapers, etc, 750 on kids (preschool, activities, clothes), 500 on entertainment/stuff we forgot to budget and a couple hundred on clothes. I mean, that’s 7k right there without being crazy lavish (we do eat out a lot) and doesn’t include annual one-off expenses (car registration, Christmas, vacations, flood insurance, termite bond).