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A lot have said they would not put a $500K down payment and others have said buy a cheaper house and go private school.
A big reason for a large down payment is due to a couple reasons. First if one of us lost our jobs we can still pay the mortgage and other fixed home expenses. Second, putting a large down allows us to save about 15% of take home pay on top of 10% for 401K. Being able to save 15% of take home pay will allow us to build reserves within a year or two. After that we should have more disposable income for other investments.
A big reason why we don't want to buy a cheaper house is because we want to stay in Irvine. Irvine schools really are top notch. Lastly Irvine is one of the safest cites you can live in. Can you really put a price on education and safety of your family?
After reviewing my budget, I'm really feeling comfortable moving forward with the purchase despite housing expense being 40% of take home pay.
Do both of you work or just you? If both of you, you can both max your 401K to help with tax relief. 10% of 200K is just over the max contribution for one person ($18k), but if your salaries are 100K and 100K, you can each contribute the $18k ($36K) to help drive down taxable income and increase retirement savings. Also, you should look into Roth IRA for college savings but you are close to the limit to making too much money so may have to use a backdoor Roth to get the money in.
With that amount of liquid assets to put down I think you will be fine. Personally I wouldn't do 50%. I would go 30%. Payment will only be an extra ~$1000 per month and now you have $200k of additional assets, which some of it you could invest. Also depends on your career/career growth/how your pay compares to average salary in your location/advancement opportunities/job security.
$200k total can mean a lot of things. I know a couple that husband does trade work and breaks $100k per year and the other is working as a bartender bringing home over $100k per year. Then there's another couple I know that one just finished PA school and the other just finished pharmacy school. Both could conservatively make $100k each starting, but easily within 5 years can get jobs that make $150k each in great healthcare professions. My point is we don't know the details of your situation/careers.
I also agree with others regarding putting more into retirement as well as considering 529s for your children.
I see a lot of post with the advice of putting less down payment and invest money. I understand you should have your money work for you, but what would you invest in? The stock market is very volatile and many experts believe markets are over valued. I happen to agree with them.
Some will say invest in the market for the long term, but isn't that the same for housing? The house we will buy is likely the home we will retire in. And although many say housing in Irvine is in a bubble as well, I believe over the next 20-30 years housing will continue to rise in price.
Another reason for large down payment is being able to afford housing expenses if one of us loses our jobs. This allows me to sleep better at night.
If you don't want to get killed on taxes you need to lower your taxable income. I'm sure you probably know this but maximize everything you're contributing to. There are some smart investment guys on here and if you have a tax/CPA/investment guy or gal he or she can get you a lot more squared away.
I hope the OP doesn't get hit by the AMT. California is one of those high-property-tax (for those not grandfathered into Prop 13)/ high-income-tax states. Find out what your property tax bill will be on this million-dollar house and include that in the AMT calculator.
The new mortgage interest remains deductible, but many other items are not deductible under AMT, including schedule A home office and property and state income taxes.
I would look at it differently. With a job loss, the best thing to tide you over is cash. I would buy a $750K house, put down 20% and invest the rest in something relatively liquid. If the housing market tanks, the government steps in and bails borrowers out. The ones with a substantial equity position in their house lose out. Also, the difference in expenses between a $300K mortgage and $500k mortgage is only ~$1000 month @4%, so it doesn't help that much in a job loss expense situation.
Please note this will be the house we will likely retire in. I'm not too concerned with dips in the housing market. 20-30 years from now should I decide to sell I highly doubt I will be upside down on the house.
I see a lot of post with the advice of putting less down payment and invest money. I understand you should have your money work for you, but what would you invest in? The stock market is very volatile and many experts believe markets are over valued. I happen to agree with them.
Some will say invest in the market for the long term, but isn't that the same for housing? The house we will buy is likely the home we will retire in. And although many say housing in Irvine is in a bubble as well, I believe over the next 20-30 years housing will continue to rise in price.
Another reason for large down payment is being able to afford housing expenses if one of us loses our jobs. This allows me to sleep better at night.
Were you alive in 2008? You may recall there was a rather dramatic implosion of price. That implosion would NOT have happened if FEWER people thought "housing will continue to rise in price". THAT is a fundamental problem!!
It may be helpful to consider the research from one the people that has devoted his academic career to housing prices, along with his colleage Dr. Case and Dr. Schiller created the Case-Shiller Index that tracks housing prices and they sold what they created to Standard & Poors so others could use it as a hedge. Dr. Shiller's data is clear -- Robert Shiller: Don’t Invest in Housing | Pragmatic Capitalism
They are not alone is failing to realize it is foolish to look at real estate as an investment -- researchers from Harvard Business School came to a sobering conclusion The REAL Long-Term Return On Owning A Home: 0%
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.
There is no additional money. Your question should be, "Where would you suggest I put the additional debt?" Do you really plan to borrow money to speculate?
The house we will buy is likely the home we will retire in. And although many say housing in Irvine is in a bubble as well, I believe over the next 20-30 years housing will continue to rise in price.
Another reason for large down payment is being able to afford housing expenses if one of us loses our jobs. This allows me to sleep better at night.
I know it sounds like insanity for those not living in hot property markets to do what you are describing buying 5x annual income but it's Irvine so... yeah I get it. We recently also opted to put down close to 50% cash on a $1 million house. Like you we really wanted the peace of mind knowing even with just one of us working we could afford the mortgage and have a roof over our heads for our family. This is a house we plan to live in also for 20-30 years so will ride out any roller coasters in home prices. Our plan is if we wanted to pull the money back out say for investing into something else we have good enough credit to open a HELOC. Ran the whole thing by our financial person and it's not like she had any better ideas what to do with $ other than oh maybe purchase an annuity. We're maxed out on all 401ks, IRAs, Roth IRAs, college savings accounts anyway.
If the house in Irvine is in a good location and has no huge negatives then I think you're fine. Do you believe the house will "age well" as in stay reasonably attractive to buyers in 20-30 years? The market here in Seattle is so hot that some properties with serious drawbacks such as power line/tower by the house, on busy road, awkward tiny lot etc are all selling but I wouldn't be comfortable putting down $1 million on $200k income if you're buying something like that.
I hope the OP doesn't get hit by the AMT. California is one of those high-property-tax (for those not grandfathered into Prop 13)/ high-income-tax states. Find out what your property tax bill will be on this million-dollar house and include that in the AMT calculator.
The new mortgage interest remains deductible, but many other items are not deductible under AMT, including schedule A home office and property and state income taxes.
What do you mean grandfathered? Prop 13 doesn't just end. It's stil in effect. Your property tax is based the purchase price.
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Are you really this out of touch?
but it's Irvine so... yeah I get it. We recently also opted to put down close to 50% cash on a $1 million house. Like you we really wanted the peace of mind knowing even with just one of us working we could afford the mortgage and have a roof over our heads for our family. This is a house we plan to live in also for 20-30 years so will ride out any roller coasters in home prices. Our plan is if we wanted to pull the money back out say for investing into something else we have good enough credit to open a HELOC. Ran the whole thing by our financial person and it's not like she had any better ideas what to do with $ other than oh maybe purchase an annuity. We're maxed out on all 401ks, IRAs, Roth IRAs, college savings accounts anyway.
