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Looking at a big mortgage payment, and a radically changed budget. Advice sought.

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  • Looking at a big mortgage payment, and a radically changed budget. Advice sought.

    TLDR version- how should I structure my mortgage, and my saving budget, since the two seem very inter-related

    My wife and I are buying a house and exiting our live like a resident period. I'm realizing I can no longer do it all in terms of saving rate with the added expense of an expensive mortgage. I have a lot of questions about how to structure the mortgage and how to direct the excess. We have an offer accepted, but haven't decided on financing yet.

    My main question is that paying down our mortgage quickly and saving 20% for retirement seem mutually exclusive. I'm not sure which to prioritize. My inclination is to put more towards retirement since until now, retirement savings have been under funded (too much going to student loans, cash build up).

    Our situation
    2 doctor couple, I'm 4 years out of training, wife is 1
    Student Loans are paid off
    no car loans
    stable job, stable marriage, (toddler unstable but appropriate for age)

    house hold income around 730
    net worth about 550, with 180 in cash, 370 in tax deferred retirement accounts and backdoor roths.

    We are in a high cost of living area and are closing on a house for 1.3m. We are leaning towards (but definitely not married to) doing 10% down, mortgaging 1.17m with a doc loan 30 yr fixed (3.25%).

    Looking at our budget, as far as I can tell we are going to have about 6-8k extra a month, that if added to our current retirement savings (put into a taxable account) would get us to 20% of gross income saved for retirement. Would you?

    1. Do the 30 yr loan, and direct the difference in monthly payments to retirement accounts bringing our gross saved for retirement to around 21% (essentially leveraging retirement savings at our low interest mortgage rate)
    2. Do a 15 yr loan at 2.8% , direct whats left to retirement and have a retirement saving rate of around 15%. This comes with added stress of having a high monthly payment were someone to lose a job, less flexibility.
    3. Do the 30 yr loan and direct some to extra mortgage payments and some to retirement (split the difference)

    I’m a bit wary of how much our cashflow is changing with our big purchase, but it’s what we want in the area we live, and we are definitely under the mortgage < 2x income rule. Thanks for your replies in advance.

  • #2
    1

    ​​​​​​RIght now money is cheap and dollars are being devalued. Go with it.

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    • #3
      I also vote 1 and then later you can do 3. I’m a big fan of saving for retirement and with interest rates so low it makes sense to put little down on a house. We only started paying extra on our mortgage 7 years into a 30 year because we needed to get retirement balances to a certain point. Flexibility is key

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      • #4
        #1 . Don't ever go below the 20%. That 1% is your cushion.

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        • #5
          20% to retirement, do whatever you want with the rest.

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          • #6
            Assuming "buy a less expensive house" is not an option, take the 30 year mortgage.

            Rates are low. Then save as much as possible for retirement. Those early career saving have decades to accumulate.

            Even at that relatively high rate, I would be in no hurry to pay off the loan.

            Put away money for your kid's education.

            If you can buy a house with 20% down, then you can get a better rate.

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            • #7
              Another vote for option 1 then save at least 20% and do whatever else that suits your risk tolerance.

              If household income is $730k and you’re having trouble saving 20% without other debts, take a look at your budget and cash flow.

              Random calculators say you should be bringing home $35-40k a month. $1M mortgage should be around $5k a month. 20% towards retirement is around $12k a month. Without other debts, you should still have a surplus of $18-23k a month.

              Things don’t seem to be adding up or you’re *really* not living like a resident anymore.

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              • #8
                I would choose option 1.

                What do your other expenses look like? I don't know where you live, but putting your income in a payroll calculator gets me something like 36-40k / mo post-tax. Proposed mortgage is about 5k/mo. Expensive sure, but seems like there should be plenty left over to meet multiple goals.

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                • #9
                  Definitely option #1. That is what we did and it worked out quite well. The mortgage was simply paid on the 30 year schedule in the early years. The retirement accounts were fully funded each year on autopilot. What was left was for vacations or home improvements.

                  We did the frugal thing as much as we could after buying the HCOL doctor house in a top school district. For the first couple of years, I personally fixed everything in the house that needed repair. I cut the grass myself in between moonlighting shifts. It was a nice change of pace to work outdoors rather than in the hospital.

                  It was not until much later, after the mortgage payments stayed static and the income went up, that we starting prepaying the mortgage. We still maxed out the tax deferred, and we split the excess dollars between the taxable account and paying down the mortgage. The split varied over time. When the market was down, we put more of a tilt towards taxable investments. When the market was pricy, we tilted a bit more towards mortgage pay down. But it was always a good chunk of the extra money going to both of those areas on autopilot each month.

                  Bottom line, in the early years, just pay the mortgage and max the tax deferred. You will likely be just fine.

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                  • #10
                    Also #1 but agree with Nysoz regarding your budget. Seems like you won't have a lot of cushion and there may be temptation to reduce retirement savings if/when expenses increase. Generally a large house results in increased other expenses beyond the mortgage. Hopefully the house is the last step in exiting live like a resident as your budget would suggest that period is well in the past.

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                    • #11
                      If you're this early in your career, incomes will likely rise.

                      So I would do #1 with the plan of maybe refinancing into a 15 year, if income goes up and you can still find rates in the mid 2s or better. But there is nothing wrong with just sticking with the 30year (and arguably it might be better to just do that).

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                      • #12
                        Originally posted by Nysoz View Post
                        Another vote for option 1 then save at least 20% and do whatever else that suits your risk tolerance.

                        If household income is $730k and you’re having trouble saving 20% without other debts, take a look at your budget and cash flow.

                        Random calculators say you should be bringing home $35-40k a month. $1M mortgage should be around $5k a month. 20% towards retirement is around $12k a month. Without other debts, you should still have a surplus of $18-23k a month.

                        Things don’t seem to be adding up or you’re *really* not living like a resident anymore.
                        I agree. These numbers aren’t adding up.

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                        • #13
                          I really appreciate the thoughtful responses, and this definitely got me looking at our budget .Our number 1 after tax expense is child care. 2 doctors, 2 kids mean we pay for a lot of it (nanny for infant, day care for toddler).

                          I'm linking a very stripped down budget for our pre-bonus income which is 650, and dropping our 20% savings target to 130 from the 145 based off the 730. The bonuses are pretty assured, but I think this makes the most sense for simplicity sake. That said, there will be some added flexibility with the extra 80k of income (albiet with a higher retirement target). Our house hold expenses are linked below, we are spending around 80k a year on house hold expenses including everything and a paying a lot in insurance, which is not living like a resident, but probably not insane?

                          Your thoughts are appreciated.

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                          • #14
                            your numbers dont seem to add up , I got $19866 a month, but I was wondering if you were planning to eat at all?

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                            • #15
                              Originally posted by Random1 View Post
                              your numbers dont seem to add up , I got $19866 a month, but I was wondering if you were planning to eat at all?
                              I did kinda the same thing once by adding 766 instead of 7666. Food budget is probably in the household expenses.

                              Coming from a LCOL childless couple, your taxes and household expenses seem more than normal but not extraordinary for a HCOL area. But you end up with a little wiggle room with your proposed budget then when you get you bonus, you can invest that lump sum or pay off your mortgage depending on your risk tolerance.

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