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Old 01-01-2013, 09:28 AM
 
12 posts, read 31,145 times
Reputation: 16

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Hi All,

I was curious to see if I could gather some opinions about our situation. My wife and I are in the very introductory stages of looking at new homes in the area. We are looking for a home in Durham, and in the Jordan high school district. Here is some basic information about us:

1. 130k combined salary
2. 20k emergency fund
3. 60k to put towards a down payment
4. No debt (other than current mortgage, 100k left on loan)
5. We have been living in our current home for 3 years now, it was a foreclosure - ready to upgrade to a larger, nicer home.
6. 2 young children


We are looking at homes that are between 275 - 300k.

We are aware that the "conservative mortgage calculators" suggest that you can go to a front end housing expense income ratio of 28%, which sounds high to us. We would likely want it to be closer to 25% (Dave Ramsey suggests 25%).

We would likely start with a 30 year mortgage, make extra payments, and convert to a 15 year as soon as we felt comfortable.

Obviously a lot of this comes down to our own personal risk tolerance - but we are trying to find the right balance of caution and risk and would be interested in similar situations or the opinions of others. We appreciate and welcome any comments, thank you!

Last edited by jtb1987; 01-01-2013 at 10:35 AM..
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Old 01-01-2013, 11:56 AM
 
Location: Berkeley Neighborhood, Denver, CO USA
17,715 posts, read 29,859,001 times
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I think you are in excellent shape.
With 20% down, you won't have mortgage insurance.
Taxes look like they will be $5K.
When you start looking, tell your buyer's agent not to even (ever) show you a house that is listed over $300K. Do not let him/her do the "but, you could get it for $300K" or soon you will be looking at houses at $350K.
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Old 01-01-2013, 12:53 PM
 
11,113 posts, read 19,562,063 times
Reputation: 10175
Quote:
Originally Posted by jtb1987 View Post
Hi All,

I was curious to see if I could gather some opinions about our situation. My wife and I are in the very introductory stages of looking at new homes in the area. We are looking for a home in Durham, and in the Jordan high school district. Here is some basic information about us:

1. 130k combined salary
2. 20k emergency fund
3. 60k to put towards a down payment
4. No debt (other than current mortgage, 100k left on loan)
5. We have been living in our current home for 3 years now, it was a foreclosure - ready to upgrade to a larger, nicer home.
6. 2 young children


We are looking at homes that are between 275 - 300k.

We are aware that the "conservative mortgage calculators" suggest that you can go to a front end housing expense income ratio of 28%, which sounds high to us. We would likely want it to be closer to 25% (Dave Ramsey suggests 25%).

We would likely start with a 30 year mortgage, make extra payments, and convert to a 15 year as soon as we felt comfortable.

Obviously a lot of this comes down to our own personal risk tolerance - but we are trying to find the right balance of caution and risk and would be interested in similar situations or the opinions of others. We appreciate and welcome any comments, thank you!

Based on your info list, you don't have enough in an emergency fund. $20K can be eaten up in a heartbeat if one of you loses your job. Where is the $60K d/p coming from? current equity? Car payments? Does the $60K include closing and moving costs? Do you have a retirement fund? Check with a financial advisor (which we are not). Not saying you are not qualified, you would be; it's a matter of how much are you willing to give up for increasing your debt while not having much liquidity. While interest rates are the lowest they may ever be, stick with the 30 yr. mtg. and pay extra on the principal. Don't plan on re-fi-ing, you will have closing costs of a new mtg. plus interest rates will be higher in the future. WWDR say? What Would Dave Ramsey Say?
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Old 01-01-2013, 01:15 PM
 
505 posts, read 765,752 times
Reputation: 512
You'll be well under 25% of income with those numbers

I'm guessing your mortgage, taxes, and insurance will be under $1600/mo for a $240k loan.

Based on your income that comes out to a little under 15%. This is a very conservative % of income to spend on housing

It's good to live in a low cost housing area
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Old 01-01-2013, 01:21 PM
 
12 posts, read 31,145 times
Reputation: 16
Quote:
Originally Posted by QuilterChick View Post
Based on your info list, you don't have enough in an emergency fund. $20K can be eaten up in a heartbeat if one of you loses your job. Where is the $60K d/p coming from? current equity? Car payments? Does the $60K include closing and moving costs? Do you have a retirement fund? Check with a financial advisor (which we are not). Not saying you are not qualified, you would be; it's a matter of how much are you willing to give up for increasing your debt while not having much liquidity. While interest rates are the lowest they may ever be, stick with the 30 yr. mtg. and pay extra on the principal. Don't plan on re-fi-ing, you will have closing costs of a new mtg. plus interest rates will be higher in the future. WWDR say? What Would Dave Ramsey Say?
Thank you for the response,

We are planning on speaking with a financial advisor -

That is interesting that it doesn't sound like to you we have enough in our emergency fund. That amount was calculated, based on our current living expenses, for 6 months of one of us being unemployed. My understanding is that you are suggesting that the emergency fund needs to be increased to equivalent of what 6 months expenses would like in our new home if one of lost our job - but this needs to be done prior to getting a new home.

We have no car payment (no other debt other than our current mortgage). Our home was appraised at 128k, and has 100k left on the principal to date.

The 60k is just what we have saved to put towards this goal. We do not have a separate savings for closing/moving costs. We both have 401k accounts with our employers but only put in enough annually to get the full matching benefits.
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Old 01-01-2013, 02:55 PM
 
11,113 posts, read 19,562,063 times
Reputation: 10175
Quote:
Originally Posted by jtb1987 View Post
Thank you for the response,

We are planning on speaking with a financial advisor -

That is interesting that it doesn't sound like to you we have enough in our emergency fund. That amount was calculated, based on our current living expenses, for 6 months of one of us being unemployed. My understanding is that you are suggesting that the emergency fund needs to be increased to equivalent of what 6 months expenses would like in our new home if one of lost our job - but this needs to be done prior to getting a new home.

We have no car payment (no other debt other than our current mortgage). Our home was appraised at 128k, and has 100k left on the principal to date.

The 60k is just what we have saved to put towards this goal. We do not have a separate savings for closing/moving costs. We both have 401k accounts with our employers but only put in enough annually to get the full matching benefits.

That is right, you will need a minimum of 6 mos. expenses in a new situation; higher expenses etc. I would put the absolute minimum down payment that you can get approved for, and keep more cash on hand. Forget the 401k plans, make like you don't have them and keep on funding. Also you may want to look into Roth IRAs, you are young enough. Your $128K appraisal on the house is not what your net proceeds will be when you sell it, even if it does sell at $128K. Let's say it sells fr $124K, then deduct all your closing costs, Realtor commission if you use a Realtor, unpaid taxes etc. Then figure closing costs on the purchase. I would not go over $300K as a purchase price, you will have normal expenses on the purchase, plus additional expenses on another house. Furniture, repairs, etc. etc. which always happens because you will make it "your own". Figure another $3K to $5K for extras.

Cash on hand is important ... even though we aren't getting interest on it right now. Go to a 20% or 22% ratio because your mtg. interest is low. No advantage to a big d/payment in this market. (I like to err on the side of great caution in this economy.)

Last edited by QuilterChick; 01-01-2013 at 03:07 PM..
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Old 01-01-2013, 03:23 PM
 
12 posts, read 31,145 times
Reputation: 16
Quote:
Originally Posted by QuilterChick View Post
That is right, you will need a minimum of 6 mos. expenses in a new situation; higher expenses etc. I would put the absolute minimum down payment that you can get approved for, and keep more cash on hand. Forget the 401k plans, make like you don't have them and keep on funding. Also you may want to look into Roth IRAs, you are young enough. Your $128K appraisal on the house is not what your net proceeds will be when you sell it, even if it does sell at $128K. Let's say it sells fr $124K, then deduct all your closing costs, Realtor commission if you use a Realtor, unpaid taxes etc. Then figure closing costs on the purchase. I would not go over $300K as a purchase price, you will have normal expenses on the purchase, plus additional expenses on another house. Furniture, repairs, etc. etc. which always happens because you will make it "your own". Figure another $3K to $5K for extras.

Cash on hand is important ... even though we aren't getting interest on it right now. Go to a 20% or 22% ratio because your mtg. interest is low. No advantage to a big d/payment in this market. (I like to err on the side of great caution in this economy.)
Thanks again for the detailed response -

Just a little bit of clarification though,

Can you elaborate on why there is not an advantage to a large down payment? My understanding was that the larger the down payment, the lower the monthly mortgage payment was - meaning that the lower your income to mortgage ratio would be (for example, we are aiming for 25%).

And if we were to not put down such a large down payment, would that not mean it would "free up" a portion of our 60k to handle closing costs, unpaid taxes, etc.? What is the "recommended" calculation/formula to come up with an amount we should have liquid?

Also, are you saying to stop putting money into our 401k to get the company match? Can you elaborate on why you advise this?

We do have aspirations to start Roth IRAs, and we do realize that time is a critical component of their success. Are you suggesting to get this established before embarking on the expense of a new home?

Finally, I didn't quite catch your last statement -

"Go to a 20% or 22% ratio because your mtg. interest is low."

Could you elaborate on what this is?

Thanks again for your interest and input!!
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Old 01-01-2013, 03:23 PM
 
Location: Raleigh
43 posts, read 85,918 times
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sit down with a mortgage broker or 2 and see what they qualify you for and then decide what you are comfortable with.
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Old 01-01-2013, 04:38 PM
 
11,113 posts, read 19,562,063 times
Reputation: 10175
Quote:
Originally Posted by jtb1987 View Post
Thanks again for the detailed response -

Just a little bit of clarification though,

Can you elaborate on why there is not an advantage to a large down payment? My understanding was that the larger the down payment, the lower the monthly mortgage payment was - meaning that the lower your income to mortgage ratio would be (for example, we are aiming for 25%).

* Because the interest rates are so low, you should keep your cash on the sidelines and take as much mortgage as you are comfortable with. (Not what you can "afford", because you can afford more doesn't mean you take more of a mortgage. Fit your mtg. to your circumstances. You do not have a lot of cash.)

And if we were to not put down such a large down payment, would that not mean it would "free up" a portion of our 60k to handle closing costs, unpaid taxes, etc.? What is the "recommended" calculation/formula to come up with an amount we should have liquid?

* Right, in your situation you want to keep as much cash on hand as possible. If you had a big emergency fund and a lot of liquid reserves, that would be different. You have $20K emergency fund for 6 mos. only (that is now), You will not have $60K after you get done selling and buying from how I read your posts). A 22% ratio is fine for your comfort level from what I can tell. But you need a mtg. broker or a financial advisor to decide.) Remember, the bank will always try to sell you a larger mortgage, but it is your decision. Some people take as high as a 35% ratio; it's only my personal opinion from experience, but that can be much too high for some people, especially in this economy. It is best to sleep well and have savings.

Also, are you saying to stop putting money into our 401k to get the company match? Can you elaborate on why you advise this?

* NO, not at all. Just keep funding it, I meant to not even think about tapping into it. Worded that wrong I guess. That is your future, but you should keep an eye on yields; probably your company does that anyhow. I suggest in addition to your 401k to get a Roth IRA, they are tax free, you only pay the tax upfront, and as it grows there is no tax when you need the money years from now.


We do have aspirations to start Roth IRAs, and we do realize that time is a critical component of their success. Are you suggesting to get this established before embarking on the expense of a new home?

* No. Start a Roth if you have enough cash reserves when you are ready. Get a new home you can afford now while you are young and don't have kids to put through college yet. Your timing is very good. After awhile you will get raises, need new car(s) and college etc. Again, a financial advisor is best.


Finally, I didn't quite catch your last statement -

"Go to a 20% or 22% ratio because your mtg. interest is low." Answered above.

Could you elaborate on what this is?

Thanks again for your interest and input!!
You are welcome, hope this helps. I am neither a banker or an advisor ... just a tad frugal when it comes to big mortgages. The goal is to have your home mortgage free so you can retire comfortably. Not easy to do these days.
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Old 01-01-2013, 09:24 PM
 
505 posts, read 765,752 times
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I agree with what has been said about cash on hand being very important, but I wouldn't ask a mortgage broker to advise you on how much to spend. A mortgage broker is trying to sell you a mortgage. You will qualify for a lot more than you say you want to spend.

Here are a few questions to think about to help decide how much of an emergency fund do you need after you pay for the downpayment, closing costs, move, updates to the house, new furniture/fixtures etc:

How stable are your jobs? Is your income based on 2 incomes or one? How easy would it be to get another job with the same income in your area if you lost one?

Do you have any other major expenses anticipated in the next few years like a new car, medical bills, elder care etc? How would you be able to manage if say you needed a new car or had an unexpected medical bill or a major home repair?

What other access to funds do you have in an emergency? Assets you could borrow against? 401k? Wealthy relatives willing to help out?

In general, I'd personally go with a larger mortgage and keep more liquid cash around "just in case" but it really depends on your circumstances and how much more you'd be paying in fees and interest to do that.
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