Can we afford $500k house? (mortgage, finance, real estate) (rental house, more expensive, cash)

[ACWhite]

With a house that size and age, you must factor in MUCH higher repair and upgrade costs even if it is in great shape now. I agree that you are way behind on retirement savings. I understand that you have only recently begun making your current level of income, but it makes me wonder if you are actually spending a lot more than you realize and that it would be hard to cut back.

My advice would be not to move right now; wait until you find another wonderful but smaller and less expensive house. You have more options than a 3 bedroom you don't particularly like vs a house that will cost much more than average for your area and gives you more space than you really want (not just more than you need).

On the insurance question, reputable companies will require you to pay for rebuilding (not market value) cost coverage and may deny a claim later if you underinsure. Some will also inspect the house themselves or require you to go through a time-consuming detailed exercise to set the rebuilding value. (I just went through the process of shopping for homeowners' insurance.)

[SOON2BNSURPRISE]

As stated you own a two unit place and already rent one of those units. You plan on keeping that place as a rental. Since you have owned it you already know the pitfalls of being an land lord. Since you seem fine with that then continue to keep the rental units. Realize in the future that this becomes part of your retirement income.

With both units rented how much additional income will you have? You mention that the current renter pays everything up to $300 of the current cost of the rentals. After you rent the unit you are living in how much additional income will you generate?

As far as replacement cost. You mention that the home will cost you about $500,000 to purchase. Why is the replacement cost well over that number? Part of the purchase price is the land the house sits on. You don't need to replace the land. My wife and I own a $500,000 home. It is only about 1,700 square feet on a 6,000 square foot lot. Our home is modest as it is almost the same as it was in 1962 when it was built. We have replaced the windows, doors, and many other things on the home during the past 6 years we have lived there. We could probably rebuild the entire home for less than $300,000. I have not checked but I am positive with the cost per square foot that it is something we could replace. That is why I am wondering on your replacement cost.

[Pooks1976]

I wouldn't buy this house. Mostly because of the ongoing costs of a house this large and this old. What kind of plumbing, electrical, and insulation does it have? I think you can afford the mortgage, but the ongoing costs of ownership are going to take all the money you should be putting away for retirement.

[riaelise]

Meh its not a great investment. Unless it's in a gentrifying area poor schools can be a kiss of death. 3900 sq ft for two people is nuts. Considering the home is higher than average and has so so appreciation I'd expect the neighborhood to be more than just "stable".

[elliedeee]

Originally Posted by SOON2BNSURPRISE

As stated you own a two unit place and already rent one of those units. You plan on keeping that place as a rental. Since you have owned it you already know the pitfalls of being an land lord. Since you seem fine with that then continue to keep the rental units. Realize in the future that this becomes part of your retirement income.

With both units rented how much additional income will you have? You mention that the current renter pays everything up to $300 of the current cost of the rentals. After you rent the unit you are living in how much additional income will you generate?

As far as replacement cost. You mention that the home will cost you about $500,000 to purchase. Why is the replacement cost well over that number? Part of the purchase price is the land the house sits on. You don't need to replace the land. My wife and I own a $500,000 home. It is only about 1,700 square feet on a 6,000 square foot lot. Our home is modest as it is almost the same as it was in 1962 when it was built. We have replaced the windows, doors, and many other things on the home during the past 6 years we have lived there. We could probably rebuild the entire home for less than $300,000. I have not checked but I am positive with the cost per square foot that it is something we could replace. That is why I am wondering on your replacement cost.

Because the insurance company is taking into account all the older architectural details and workmanship that you don't find in newer homes that would need replacing if something were to happen to the house. I think the OP said the home was built in the late 1800s?

[vision33r]

I would go against it because I think having a $500k house is like a heavy burden imo. You should never have a house payment or rent that is more than 20% of your month pay and that rules been in place for a long time and many folks are going with rents/mortgage that drains 40-60% of their paychecks. That's gonna have some major ramifications if there is a life changing event. My rule of thumb is get what I can afford and not try to keep up with the Jones. I rather live with more financial freedom than constantly trying to baby my property or fight with towns for tax assessments.

[emm74]

I can't imagine taking on the work for upkeep, cleaning, maintaining, heating, cooling, etc. a 3900 sq ft 5 bedroom house for a family of two. Sure, you can afford to buy it but do you want to spend all of your free time caring for your home?

I'm also curious how long it's been on the market? As others mentioned, that size house in an area with not great schools seems like it would be tough to sell, and I wouldn't be surprised to hear it's been sitting for a while.

[CGab]

I used to have a home that was 5,000 sq ft. The main two levels were 3400 sq ft and the finished basement was 1600. There are 4 of us and I felt the home was way too big and I hated cleaning all that space! We are now in a home with 2300 sq ft on two levels and 800 finished sq ft in the basement totaling 3100 sq ft. It's perfect!

[tipsywicket]

Originally Posted by heresjohnnee

We've always been financially conservative people who live well within our means. We've lived in a 2-family flat, which we own, for 8 years where our tenant has been paying all but $300/mo of our mortgage. So taking on any size mortgage feels unfamiliar to us. We've worked hard to make sure we're in a good position for our next move and don't want to make a bad choice. When we move out of the 2-family, we'll keep it and it will provide positive cash flow.

We're in our late 30's, no kids (or plans for them) and very little debt. The house we want is bigger than we need but we can really see ourselves living there for many years to come. It doesn't have good schools working in favor of resale value, but it's in a stable area. I know we don't NEED the number of bedrooms or square footage. I know taxes and insurance will cost us more. It's definitely a WANT situation for us and we're ok with that as long as we're not taking on unmanageable debt.

Combined income is $175K and mine is expected to continue to rise (by at least $30k next year).
The house is $500k and we'd put 20% down.
Financed amount would be $400k.
Taxes $5200/yr, Insurance 1900/yr.

TOTAL DEBT
PITI would be $2550/mo (4.25% 30yr conventional fixed)
Cars total $500/mo
Credit cards $100/mo (paid to zero each month)
2-family PITI $1069/mo, income $19,000/yr (after we rent out our unit)

We are preapproved with our lender already.

We have about $160k in savings, and $85k in retirement.

Do we take the plunge before rates go up higher? Buy less house and focus on retirement savings? It seems that we can afford the house, it's just hard to tell whether we're being reasonable since we're coming from the perspective of living dirt cheap in our investment property! We could certainly buy less and save more but aren't sure whether it's critical to do so.

Thoughts?

I took the Dave Ramsey Course "Financial Peace" and he stated that a good rule of thumb is that your housing costs should never be more than 25% of your overall budget. If you are bringing home approximately $14,500.00, then your mortgage payment (pmi, insurance, etc.) should not be more than $3625. Since you already have a mortgage on your rental property of $1069 and your new mortgage would be $2550, you a cutting it really close, but it does seem doable if those are accurate figures. BUT, you are saying the house is bigger than you need, so why would you want to spend money on something that you know is too much house and doesn't sound like it is a good investment because it is not in a good school district, etc. THAT is the reason people buy big houses. They have kids and they want to put them into good schools!!


If you and your spouse are each saving at least 15% of your income in a 401K or an IRA, then go for it, but you are going to be better off down the road if you have more money in savings instead of a too big house in a location with school issues.


JMO.

[cheapdad00]

Originally Posted by tipsywicket

I took the Dave Ramsey Course "Financial Peace" and he stated that a good rule of thumb is that your housing costs should never be more than 25% of your overall budget. If you are bringing home approximately $14,500.00, then your mortgage payment (pmi, insurance, etc.) should not be more than $3625. Since you already have a mortgage on your rental property of $1069 and your new mortgage would be $2550, you a cutting it really close, but it does seem doable if those are accurate figures. BUT, you are saying the house is bigger than you need, so why would you want to spend money on something that you know is too much house and doesn't sound like it is a good investment because it is not in a good school district, etc. THAT is the reason people buy big houses. They have kids and they want to put them into good schools!!


If you and your spouse are each saving at least 15% of your income in a 401K or an IRA, then go for it, but you are going to be better off down the road if you have more money in savings instead of a too big house in a location with school issues.


JMO.

You need to include the income from the rental of the home with the 1069 mortgage when doing the analysis. Using the 25% formula, that puts them at ~$4k for PITI expenses.