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Why in the world would you want to sink SO MUCH CASH into non-liquid asset?
While I applaud you on having $500k to consider putting toward a downpayment the potential for this CASH to better serve the longer term needs of you and your family is far better than locking it into a home.
I wonder if you might not be able to get a very similar home in the same area for perhaps $800k. That changes the multiplier for your income-to-housing from a rather scary 5::1 to a bit more tolerable 4::1, that is step in the right direction. It also shrinks the size of your ptential mortgage and/or leaves a MUCH healthier cushion in your savings...
Just because the numbers might come up "OK" on your debt to income the bigger issue is what does devoting so much of your savings and income do to your overall financial picture. To begin with, anyone with solid income and kids should absolutely consider 529 plans for college costs -- College Savings Versus Retirement Savings. Similarly it is foolish not to maintain a substantial stash of liquid savings for unexpected needs -- https://investor.vanguard.com/emergency-fund/amount
We live and work in the city of Irvine and the schooling system is top notch. For us, it just makes sens to buy a home in this area. Homes with a driveway here cost easily $1MM.
If I chose a cheaper house, where would you suggest I put the additional money? Stock market seems to volatile and investment properties seem overpriced as I'm seeing fixer upper in the 4%-3% capitalization rate.
I have a few rentals in OC and my current residence will also become a rental. If I were in OPs case I would rent a house. Throw that 500k in something that works for you. There is no way I would throw 500k down on a house in OC.
Renting doesn't work for us. We would get killed on income taxes without tax and interest write offs. Second OC has no rent control and renting long term doesn't make much financial sense. Real estate values in CA will keep rising along with rents.
Lastly where would you invest $500K? Definitely not the stock market due to volatility and run down investment properties are seeing cap rates of 3% to 4%.
Wow-- I'm selling a 2455 sq foot victorian w acre gorgeous wrap around front porch and 4 car garage w unfinished basement for 339,000. Bad news..it's in the far north suburbs of Illinois chicago area. Good news.... you could pay for it in cash and not have a house payment Mr. Millionaire.
I learned the hard way...housing does not always retain it's value much less gain value.
Sorry to hear. I guess when it comes to real estate location is important. My current house has appreciated 30% in 2.5 years. Seems crazy, but that's socal real estate for you.
I think you'll be fine. We just spent this in the Boston market. The key is that interest rates are low. We took out a much larger mortgage than we had before, but our payment did not increase the at the same rate as the mortgage. We didn't want to spend this much, but in this market, we didn't have much choice. (In our previous metro area, we would never have spent this much.)
Another important factor is how much it would cost to rent in the area where you want to live. If your mortgage payment is less than what a rental would be, it seems like a no brainer.
Here is my situation. Looking at a house in orange county,CA.
The house is about $1 million. We can put half down, which leaves us with a $500K mortgage.
Our gross annual household income is $200K. After 10% contribution to 401K, 40% of our net income will be taken by mortgage, property taxes, HOA, home owners insurance.
Other factors, we have no other debt and have 2 young children. We live within our means and live a comfortable life style. We don't over spend nor do we penny pinch everything.
So is 40% housing expense against net income too much?
Here is my situation. Looking at a house in orange county,CA.
The house is about $1 million. We can put half down, which leaves us with a $500K mortgage.
Our gross annual household income is $200K. After 10% contribution to 401K, 40% of our net income will be taken by mortgage, property taxes, HOA, home owners insurance.
Other factors, we have no other debt and have 2 young children. We live within our means and live a comfortable life style. We don't over spend nor do we penny pinch everything.
So is 40% housing expense against net income too much?
I personally would not have a problem with it, but I am quite comfortable living on a budget...I can stick to it easily. If you are that type of person (it certainly appears you are) then you will be fine.
I would caution that the $200K/yr jobs are becoming less common, so I would hope/expect you to have 12 months of cash savings after your $500K down payment to be truly worry free.
I am personally involved in oil/gas, which is way down...my income fluctuates due to the oil/gas market...right now I am living in a debt/income ratio I would not be comfortable in for the long term....While I don't think oil will improve in the short term, we can still get by b/c my wife is also an attorney who is able to work more when we need then income, and then work less, when we need less.
I do keep 18 months of expenses in cash....and I don't drive nice/new cars. So its about priorities...I love my house, I love where I live...so I am ok not having a new car and instead having a nicer home.
We are in Oxnard, California, up the coast from Orange County. We live about three miles from the beach. Our home is in a nice older part of the city. It is a 54 year old, 1,600+ square feet, 4 bedroom, 3 bath, 2 car attached garage home on a 6,000 square foot lot. Needs a new kitchen and new baths. Also need to replace the copper pipes. LOL.
On my street for a million you get two of these homes and you would still have $80,000 left over. That is based on our supposed current value of $460,000.
I am betting after we complete our home it will be in the $500,000+ range.
You can get some nice homes in a gated golf course community a few miles from our home, but with smaller lots. The homes are between 2,500 and 4,000 square feet. Prices for these homes are in the $750 to $1million.
I am bringing that up so others can see how crazy it is here on the coast in California from probably Santa Barbara on down to San Diego.
I think you'll be fine. We just spent this in the Boston market. The key is that interest rates are low. We took out a much larger mortgage than we had before, but our payment did not increase the at the same rate as the mortgage. We didn't want to spend this much, but in this market, we didn't have much choice. (In our previous metro area, we would never have spent this much.)
Another important factor is how much it would cost to rent in the area where you want to live. If your mortgage payment is less than what a rental would be, it seems like a no brainer.
Lets put it this way. A two bedroom townhouse rental would cost $2,800/mth.
I personally would not have a problem with it, but I am quite comfortable living on a budget...I can stick to it easily. If you are that type of person (it certainly appears you are) then you will be fine.
I would caution that the $200K/yr jobs are becoming less common, so I would hope/expect you to have 12 months of cash savings after your $500K down payment to be truly worry free.
I am personally involved in oil/gas, which is way down...my income fluctuates due to the oil/gas market...right now I am living in a debt/income ratio I would not be comfortable in for the long term....While I don't think oil will improve in the short term, we can still get by b/c my wife is also an attorney who is able to work more when we need then income, and then work less, when we need less.
I do keep 18 months of expenses in cash....and I don't drive nice/new cars. So its about priorities...I love my house, I love where I live...so I am ok not having a new car and instead having a nicer home.
Good points. It would take a little time to build that reserve up again, but it shouldn't take long. Like you I'm very budget oriented.
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