Need advice from you home-buying experts

[NewEnglandLady]

The recent threads about the costs of buying a home really overlap with the converstations that DH and I have had recently and I would love to get some advice from you guys. I feel like when I discuss our buying options with realtors, I get very biased advice and I'm wondering if I should find a financial planner to discuss this with...

Anyway, this is the scenario:

DH and I hate debt. Hate it. We started saving what little we could when I was back in college with the long-term goal of being able to buy a house in cash. We've been saving for about 9 years now, but the bulk of our savings has come from the past few years. We live in a very modest, cheap (at least cheap for Boston) apartment and drive an old car that we paid cash for about seven years ago. We are able to save about 60% of our salaries after taxes and retirement investments. At times I feel drained from constantly living on a tight budget despite both of us making good money and watching colleagues and friends buy new cars, big houses and yes, even big diamonds, haha, but in the end I really think it will be worth it.

We've spent the past few years living in different towns to try to figure out where we want to buy and about 2 years ago we started looking at the housing market in our favorite oceanside town. The prices today are much softer than they were 2 years ago...they haven't softened as much as other towns because the homes are right on the ocean (that's something we won't compromise on--we've always wanted an oceanfront single family home), but the prices are enticing.

My question is at what point do you decide to buy? We do not have enough to pay cash right now, so I feel like I'm falling short of my goal, but these are our options:

1. Wait 2 more years to buy--at that point I think we will have reached our financial goal and we won't have to pay a dime in interest or be in any debt.
2. Put about 50% down now and take out a fairly small loan. What's appealing about this is that our loan would only be slighly more than our current rent, so in many ways I feel like this is our breaking point. Yes, we'd still be paying some interest on the loan, but we wouldn't be paying rent....
3. Only put 20% down and invest the rest of our money in an account that we hope would make more than 6% over time and thus we'd be making more than the interest on our loan.

No matter what we do, we would like to have the loan paid off within 5 years (before we have kids), so we can use our full income towards other investments and retire early. We both have retirement accounts now, but I'd like to pour even more into it and i feel like the whole "buying a house" thing is getting in the way. I want to retire when I can still enjoy travelling!

Does anybody have any advice? We're looking at our first house tonight and I have a feeling that once we get into the process we're going to start to want to buy.

ETA: I forgot to add option #4: Use our savings to travel around the world for as long as we can, then start from scratch when we return! I have to admit, part of me would LOVE that!

 

[CrookedRock]

I would certainly not call myself an expert in home buying, but we are in a similar spot right now. That being said I do read a lot about the housing market and what it is doing and expected to do. Goldman Sachs recently put out a report saying that they are expecting house prices to continue to fall 10-15% more in the next year or so. Many people are going to argue with me about this... Please don''t bother, bc I don''t want to make a huge discussion out of it.

People have to buy when they feel the time is right for them, and to me that means that you are personally ready for the responsibility, financially ready, and the market is right for you.
We have chosen to wait a minimum six months before seriously considering buying. We have started to look at areas and homes just to get an idea. Even in the area we are now, which is very affluent, there were 2 auctions right near us 2 months ago, and nothing sold. To me that says that people are getting desperate, not not quite desperate enough. But that time is coming.

My bf is very much like you guys, he hates debt. So we too have discussed how to pay for our dream home (bc nothing less would be ok by him...lol). We have decided that no matter what we will not take out more than a 400k loan, which will give us the best rate and the ability to pay for the rest in cash. I think mortgaging as little as you can is smart. But trust me, if I could convince him to take off and travel I would too!

Just my $.02

 

[ljmorgan]

First of all, from a financial perspective all of your options are great. If you are able to bank 60% of your pay, you are not going to have a problem with any route that you take. I am leaning towards option 2 or 3 right now. You''ve obviously been doing a lot of researching about where you want to live, and you''re noticing that right now the prices have gotten more attractive. I am always about getting more for my money, and with your saving ability, when you purchase can save you a good chunk of change.

I may be controversial when I say I like option 3 the most, and here''s why:

1. Your loan will be larger, meaning you can deduct more interest from your taxes, saving more money.
2. It is very easy to pull over 6% on an investment -- but this is assuming you might be going longer term with this. This will not be as guaranteed if you''re looking at a 5 year time frame.

But I just want to say that no matter what, I don''t think that you can go wrong here. I would recommend that with your saving ability, you definitely don''t need to buy a home in all cash. So I say pull the trigger with your 50% or 20% down payment. I know that sometimes it is hard to make great salaries and be frugal when your friends are blowing money... but years down the the road your situation will be completely reversed.

Dave Ramsey says "live like no one else so that later on you can live like no one else!" Congratulations, all of your hard work is just getting ready to pay off!

 

[applequeen]

My advice (and I may not be the best person to answer this since my husband and I had planned to wait several more months but will be closing on our house next week)... BUT....

If you will be paying a similar amount in your mortgage payment than you are currently paying in rent then I think you should consider buying. I think it''s better to be sending that payment to something that''s building your equity rather than padding a landlord''s pockets. There will be some extra expenses (property taxes and that sort of thing to consider) so you probably will want to take a hard look at how that could affect your savings. If buying a house now still allows you to save at a rate you''re happy with then I say go for it... you''re in great shape for it.

On the other hand... maybe something in the middle would work for you. You said that you would be ready in 2 years to buy... why not wait 6 months or a year instead? It sounds like you''re ready to buy something emotionally (or you wouldn''t be going to look at houses

) . If the market is still adjusting where you live and property values are still dropping then I think it would be better to buy when prices are as low (or close to it) as they are going to go. You don''t want to buy something that could decrease in value.

I understand what you said about how frugal living is starting to take its toll on you. My husband and I are savers too (I currently save 1/3 of my take home pay each month and now that my husband is working again we hope he''ll be able to do that much or more) and I know how hard it is to live that way when everyone around you is having such a fun life (or seems to be). My advice is to treat yourself occasionally. We went from never eating out anymore (I go to the grocery store every 2 weeks and cook every day) to eating out (something reasonable... $20 to $30 total) on Friday nights... it''s made a huge differance for us... keeps us motivated and we haven''t noticed a change in our savings. It''s OK to splurge occasionally as long as it''s an amount you''re comfortable with and you keep your focus on the big savings picture.

 

[Allison D.]

NEL, I''d choose #2 all day long - put down the 50% on the house.

I understand what you''re saying about debt, believe me....hubby and I are TOTALLY debt-averse. BUT.....you''re draining out money now in rent that does absolutely nothing for you. Having *manageable* debt to stop that kind of loss is not problematic.

If you''re paying that money to a mortgage instead of to rent, you''re putting it into an investment that will return to you in the future. At the same time, you''ll realize a break in taxes on the interest expense; this is the only way to get a break until you start your family.

I''m not a fan of option #3; it''s better than continuing to rent, but I don''t think it''s the right solution for you. If you get a 6% mortgage over the life of a 30-year loan, that doesn''t mean it''s 6% each year throughout the loan. The 6% is the AVERAGE over the life of the loan, but in the first 5-7 years, the rate is more like 21-21-20-19-18% (roughly). The heaviest interest burden is in the initial years of the loan. Since you''re planning on paying off your home in five years, you wouldn''t hold the loan long enough to realize the 6% average.

In today''s volatile market, it''s hard to imagine an investment would outpace the interest expense in taking a higher loan.

As far as timing when to buy to the lowest market price, you''re looking at buying oceanfront property. What applies to the rest of the market applies a bit less to highly desireable areas, including oceanfront property. If prices are much softer now than they were two years ago, you''re already ahead of the game. Again, delaying a purchase hoping to save another $20K on the house would likely be significantly offset by losing that money (or close to it) in renting for another year - it would be a wash at best, and it could be MORE expensive if that market recovers before you strike.

I''d look now, and I''d buy as soon as you find something that you love.

 

[cara]

Somewhere between 1 and 2. Ditto Allison above. 3 doesn't sound like it makes sense for you on many levels, and you are throwing away more rent money on option 1! Also, the real estate market is so local. Generally, prices are going to continue to decline in some areas over the next 1-2 years, but that doesn't mean your neighborhood will. Become an expert on the areas you might want to live, and watch the market. Then when the right opportunity opens up you'll know it.

I know this frugal discipline will be rewarded with peace of mind and happiness in years to come, but there is something to be said for living a bit now. It really makes me happy to have a bit more flexibility in my spending. The trick is to do it in a reasonable fashion, and to keep from adapting your "normal" level up. But really, a little more flexibility in spending can make life more enjoyable and less stressful.

ETA: Opps, I'm not an expert! Just an internet peanut.

 

[gailrmv]

I am by no means an expert, but my vote''s with option 2 or 3. I don''t think you need to wait til you can pay cash. You guys are doing great. I wish we were in your situation.

Also wanted to point out to factor in costs that might arise during your first years in the new house. For example, you may want to buy new furniture, or add landscaping, or a patio, or something like that. I was surprised at how much we''ve spent this year on those types of things for our new house. If you are buying an older home, be sure to get a comprehensive inspection and maybe even get some estimates so you know how much to budget for repairs likely to come up. Be sure to get an estimate of your home insurance and taxes so you can take that into account on top of the mortgage.

What an exciting time for you!

 

[Dancing Fire]

NEL
LOL...wish i had your problem !!!

here are some "non expert" advise

if you guys find a house that you like, buy it!! . since you guys are young and with mortgage rate still near historic low i would put 20-25% down and take out a 10 yr fix mortgage IF the bank offer you a lower rate compare to a 15 yr fix.remember, the number of yr doesn't really matter since you can payoff the mortgage whenever you like.

does your employer offer a matching 401K ? if yes, then max it out to the point where they match the percentage,then IF you guys qualify open up two ROTH IRA accounts where each of you can contribute $5000 per yr.

now you can come over and give my young daughthers some lessons on "how to save money"

wish i can save like you.

 

[NewEnglandLady]

CrookedRock, we really are in a very similar position--we do want to wait at least 6 months to buy. It's springtime and I feel that the prices for houses on the ocean are more negotiable in the winter, so for now the plan is to just look around at different types of houses and see what strikes our fancy. Our curent lease is month-to-month as of June, so I don't feel any pressure to buy anytime soon. Also, we don't want to take out a loan larger than $400K, either, even if we only decide to put down 20%. We want a mortgage that we could pay with either of our salaries in case one of us wants to quit our job or change careers (meaning pay cut). It's just what makes us more comfortable.

Oh, and I do know what you mean about people getting desperate--the house we are looking at tonight was just put back on the market after the buyers fell through.

Maybe we should just take our respective halves of the money and travel around the world

Lindsey, I used to think that option 3 was the least attractive of all the options because I felt like it took us away from the goal: to have no mortgage. But the more I think about it, the more appealing the option becomes. We would still be doubling or tripling the mortgage payments so that we wouldn't be paying as much in interest and we could have the house paid off, but in the meantime the money we currently have would be working for us. And we all know Dave Ramsey likes that, haha. I love your Dave Ramsey quote, I listen to him when I can and really like him a lot. My mom listens to him every day--my parents are great role models (have never made much money, but they are VERY smart with it).

Applequeen, I really do agree with you about the whole rent vs. mortgage thing. The fact that taking out a mortgage if we put 50% down wouldn't be more than our current rent is what made us really start thinking about this more seriously. We did want to reach our financial goal, but DH's opinion is that even if we pay some in interest, it's better than paying rent, which is just money down the tubes. We never mind paying rent because it always allowed us to save, but now we could have a house and still save the same amount (which would go back to the house, haha, but at least it's ours).

And I really agree with you about treating yourself occasionally. We basically took the things we love the most: food and travelling and said we would still enjoy both of those things. Basically, we agreed that what we didn't want to spend money on was "stuff". New TVs, a new car, gadgets, etc., but we still try to take many short, fairly inexpensive trips throughout the year and have at least one big vacation a year. I'm surprising him with a quick, cheap trip down to DC (where we met and lived for 5 years) this weekend!

Allison, you make excellent points. We'd really have to sit down with a loan officer to discuss our loan options. Though we would pay over the monthly amount to get rid of interest, I don't want to make a stupid financial mistake and end up paying tens of thousands in interest while the money we could have used sits in an account making 5 - 10%.

Cara, I do agree with your opinion--I think in some ways we got so focused on the financial goal that we sort of put any other option on the back burner. Then when the market started to soften we thought "hmmm, this might work to our advantage". We have definitely monitored housing prices in the town where we want to buy for about 2 years and even rented a house in the town (not right on the ocean, but a block away) for a little less than a year, so we're very familiar with the area and even have a relationship with some of our could-be neighbors.

TanDogMom, you bring up a great point about ADDITIONAL expenses. I already told DH that I want to sit down and go over things like insurance costs and annual maintenance costs. Because we did rent a home near the neighborhood, I know that this area can get hit pretty hard when a Nor'easter blows through. DH would really like to by right on the water, but I would like to weight the TOTAL cost of ownership of this house versus one that is off the water, but still close that has, say, a wooded lot. There are many things to consider.

Thanks to all of you!! We're still in the very, very beginning stages and both of us are overly analytical, so I imagine this will take us a long time!

ETA: DancingFire, I'm glad you chimed in!! It sounds like what we should do now is sort of go over our loan options. And yes, our companies do match up to a certain % of our 401Ks and we take advantage of it. We also have money invested in IRA's, but I think we need to rassess our plan--we don't want to be working when we are 60 or 65 and I want to make sure we have investments that we can use before then so we aren't penalized for taking money out.

We both come from very poor backgrounds, but our parents never lived beyond their means. We had very lean Christmases and I never had nice clothes (though back then kids didn't care about that stuff), but what our parents taught us is very valuable and I'm so thankful for them. DH and I have both just worked really hard and thankfully we have the same views financially (or I wouldn't have married him, haha!). Still, what's funny is that even though we are both intense savers, we have differing views about where to invest. Sometimes I think I might be a little too rigid--for instance the thought of continuing my education is appealing, but the cost is too overwhelming for me. As for your daughters, they'll just have to learn on their own. I remember when I graduated high school I took out a massive loan to go to a private college and the moment I graduated, I regretted it. I had half paid for in scholarships, but I didn't want my parents help and it was hard to pay back. It forced me to care about debt.

 

[Dancing Fire]

NEL
never hurts to keep some cash on hand,but you guys are young, should think more towards investing your money.

 

[NewEnglandLady]

We will need some cash on hand in case of any "emergency"-- especially with a new home. Plus I think we''d want to keep some aside for furniture or something. To be quite honest, the thought of forking over the money we''ve been working hard to save for nearly a decade makes me feel woozy, even if this is why we saved it.

 

[Tacori E-ring]

NEL, sounds like you are in a great position. Congrats to you and your DH! If I were you I would take advantage of this market and interest rate. You have to remember a mortgage is *good* debt. I agree you shouldn''t plunk ALL of your savings into your mortgage. Just put whatever you feel comfortable beyond 20%.