What do you think about our situation?

[A-Aron1]

Hello,

My wife and I 34 and 33 have been married for 7 months and are expecting our first baby in sept. We just purchased a 4B 2B 2,000 sq ft (built in 1965) home on 2.5 acres for 278k with 20% down and at a 6.85% rate here in south TX. Mortgage payment with taxes and insurance will be $2k/month. It was tough leaving my 1300 sq ft home at a 4% rate but with 3 big dogs and a small backyard it was going to be tight. I’m putting about 30k into the new home (fence, paint, floors etc.)

Anyway this has great potential to be our forever home. It was a little sooner than I had anticipated but we got a good deal on the house and it’s across the street from my wife’s grandmother so there is sentimental value and very close to my parents as well.

I tend to be overly conservative so going from a 1k/month mortgage to a 2k/month mortgage kinda freaks me out. I’ve been making around 125-150k the last few years and made 220k last year. I may have a down year this year due to factors outside of my control probably around 75k on low end (my wife makes about 55k but will stay home with the baby for at least the first 6 months or so (she is an ICU nurse). When she goes back to work it will probably only be one or 2 days a week.

We have about 180k in taxable brokerage accounts. 430k in retirement accounts, 45k in Bitcoin, and will have about 30k in savings after all the repairs are done. Then when my old house sells we should get another 50-70k in equity.

My wife has a 2021 Chevy Duramax with a $961/month payment with 35k left owed(our only debt other than mortgage). I drive an old rusted 2010 Ford with 215k miles on it.

I want to take the home equity when the old house sells and pay off her truck. I love being debt free.

-Is paying off the truck an ok idea knowing we are going to have a down year income wise?

-At what interest rate would y’all recommend waiting for before we refinance the house?

-overall, I feel like buying this home is a good long term move but what are your thoughts?

-what are some things I should be thinking about moving forward? Kids college, replacing my vehicle when it craps out etc.

I don’t really have anyone to talk finances with other that y’all so any thoughts or feedback is much appreciated!

[kork13]

Wow, so many thoughts. You've got fantastic, smart questions, and you're doing very well overall.

First & foremost, congratulations on the upcoming baby, and the new house!

You're facing a stormy patch with the big hit to your income, but you can be just fine if you focus on the essentials. Biggest thing I'd recommend is to build a detailed budget (spending plan) based on your worst-case scenario ($75k, or whatever you expect for the year). It just needs to cover all of your baseline, essential expenses (food, lodging, utilities, transportation, insurance, taxes). If you've still got excess capacity, you can plan for some light savings, or add in some planned entertainment spending. From there, build a prioritized list of what/how you'll use any income that you get above that baseline budget. That should mostly include increased savings/investments, entertainment, charity, or anything else that currently exists in your spending today -- just prioritize all of it. That budget & your follow-on priorities will guide everything else you do financially, and will really help you to make decisions & alleviate any concerns.

I hate debt too, so I'm totally on board with paying off the truck -- get rid of the debt, unless it's got a 0-2% interest rate (because you can easily beat that in your money market fund, likely for the foreseeable future). Yes, you reduce your readily-accessible cash, but you already have a good cash backstop (I assume the $30k post-repair cash is mostly your emergency fund), and plenty of other assets that can be accessed if required (taxable investments). Meanwhile, you reduce your monthly bills by nearly $1k/mo! That will provide you alot of flexibility in your monthly budget, especially given that you're expecting a lower income this year. Use the rest of the residual home equity to beef up your emergency fund, since you do know that you're facing a storm. Having the extra cash on hand will prove valuable -- protecting your other investments, as well as your peace of mind. I know I'm kinda speaking out of both sides of my mouth here ... but I think having the lower debt load with your decreased income will pay dividends.

For the refinance decision, it mostly depends on 2 factors: refi fees & new rate -- how soon after the refi will your lower interest rate make you come out ahead? I forget the normal recommendation, but I expect that a 1-2yr break-even should be the goal. Often, that becomes possible once you're looking at rates roughly 1-1.5% below your current rate. I'd say start looking at it maybe after rates have dropped to 5.5% or lower. Also, whenever the refi happens, consider moving to a lower-term mortgage. If you have a 30yr mortgage now & refi in 5 years, maybe consider a 20yr mortgage instead of a new 30yr. Shorter-term loans give you a lower rate, and it'll keep you from stretching out the duration of your mortgage to infinity (by constantly moving from one 30yr note to a new 30yr note with each successive refi).

You sound generally optimistic (if not enthusiastic) about the house, and it seems like it'll fit the needs of your growing family fairly well for the foreseeable future, so don't second-guess your decision. Once your income gets back up to normal, it'll be easily affordable, and you can likely put some emphasis on getting it paid off at an accelerated pace.

Other thoughts:
- Starting a college fund for the baby is never a bad idea, but it's not a pressing one. We started a 529 for each of our children at birth (they need a SSN to open the account). Then you can slowly add money to it throughout their lives, and it's ready when they need it. Smart planning! Just keep in mind that most investment companies require $1k-$3k (or more) to initially open the account ... after that, you can add money in almost any amount... I think Vanguard requires a $25 minimum per contribution (other companies are probably similar), but that's likely easy to manage. But I'd probably wait to do this until after your income gets back to normal, or at least delay until your wife starts working again.
- As you have funds available, it's definitely smart to start building up your car-replacement fund. Personally, I just pay myself a car payment (or some TBD amount) into the savings account each month until I've got enough cash to buy the next car debt-free. That way it's ready & available whenever your old car decides that it's time to be replaced. But again, as long as your dear old rust-bucket is in good enough shape to last you through this next year until your income recovers, this isn't an emergency & I'd probably delay it for now (or maybe just start it very slowly, like $50-$100/mo).
- Given your taxable & retirement account balances, I'm assuming that you've already got a healthy saving/investment/retirement habit. But in general, I'll just state that you should have at least 10-15% of your gross income going toward retirement ... though during the next year with reduced income, you can reduce this to merely capture the full employer match (if any) to preserve income flexibility. If you do that, just make sure that you bump it back up afterward.
- I mentioned it before, but another thought to consider in the more-distant future is how you want to handle paying off your home. Because let me tell you, having a paid-off house is truly life-changing, and gives you SO MUCH flexibility with your finances. Once your income gets back up into the upper 100s/200s, you'll find yourself living on the bare minimum with lots of free cash. Feel free get your family back to a more comfortable standard of living, but try to set aside a healthy chunk toward paying off your home early. Or, if you want to go big (some might say extreme), you've got a fat, chunky taxable investment account that could wipe out alot of your mortgage. That's what we decided to do .... twice! For both our rental home's mortgage (~$80k in 2014) & our primary home upon purchase ($300k in 2020), we decided to empty out the coffers to ultimately become totally debt free. It's a tough decision to make (both times), but we've not regretted those decisions for an instant. Regardless of how you go about it, just make paying off your mortgage a priority that you work toward very intentionally.

Final thought -- always feel free to come here anytime to chat finances. We love to help, and these forums are a great sounding board for financial thoughts or concerns. It's a somewhat small group of regulars, but they're diverse, well-informed, and always happy to help.

[bjl584]

I don't have time to fully absorb all this, but the thing that sticks out is that your wife is driving a diesel truck to commute to a hospital for work. Nothing against that, as I have a powerstroke, but I'm guessing that is a want and that she doesn't really need a truck like that?

[Jluke]

Random thoughts, no particular order.

when the baby arrives (congrats!) you will see your vehicle in a different light. Are you comfortable driving a newborn in the 2010? Is your wife going to be able to easily get the baby in the car seat of her truck? New parents always seem to find a reason to purchase a new vehicle. I did.

Bitcoin- is that currently a gain or a loss? If you sold that would it incur a big tax bill or would you claim a loss? I don’t even know if that falls into same category of stock sale where you have gains and losses. Anyways I would consider using that to pay off the truck.

When you sell your house I would hold on to that 50-75k in a savings account until baby arrives and your wife goes back to work. And you get through at least the first year in the new house. Especially given your forecasted decrease in income.

Usually I would say to take the 50-75k and pay down your new mortgage IF the lender would let you recast the mortgage after the lump sum payment. That would reduce your monthly mortgage payment until you can hopefully refinance at a lower rate and perhaps shorter term.

for the 2k mortgage payment, what is the breakdown of PI vs TI, assuming you are not handling the tax and insurance on your own and are using an escrow account with the lender?

in all I would be conservative and not make big money moves at this time.

[Fishindude77]

-Is paying off the truck an ok idea knowing we are going to have a down year income wise?
Yes, was pretty silly to borrow that much for a vehicle to start with. Buy what you can afford with cash in the future.

-At what interest rate would y'all recommend waiting for before we refinance the house?
Rates need to go down 1-1.5% before it will likely make sense, be cautious of the refinance fees.

-overall, I feel like buying this home is a good long term move but what are your thoughts?
Agreed, but be careful about remodeling expenditures, pay cash as you go.

-what are some things I should be thinking about moving forward? Kids college, replacing my vehicle when it craps out etc.
Budget to replace vehicles.
I'd focus first on your own retirement and savings before kids college. Who know what they will do? If you're in good shape you'll be able to deal with that issue and college is a different ballgame these days. Kids need to really think this through before committing, be very intentional with their plans and take responsibility for a large share of their own education expenses

Overall, sounds like you are in pretty good shape.
Best of luck !

[MonkeyMama]

-Is paying off the truck an ok idea knowing we are going to have a down year income wise?

-At what interest rate would y’all recommend waiting for before we refinance the house?

I agree that it sounds like you are in good shape.

Down years are much easier to navigate with less debt. & you would still have an extra $30K cash from the sale of the house? I'd pay it off but I've never had a car payment.

Having the same mortgage on my house during a long period of falling interest rates (2001 - 2020)... We generally found it made financial sense to refinance every 1% down. It will depend on the math but that might be a good measure of when to start doing the math.

[MonkeyMama]

Random thoughts, no particular order.

when the baby arrives (congrats!) you will see your vehicle in a different light. Are you comfortable driving a newborn in the 2010? Is your wife going to be able to easily get the baby in the car seat of her truck? New parents always seem to find a reason to purchase a new vehicle. I did.

A car note from someone very conservative also. I had an old sports car when my first child was born. I was extremely stubborn about not needing *2* cars that could fit a carseat. I caved when he was about 6 months old and bought a more practical car. The more practical car was a one year newer model that I paid $500 for. I just wanted to say that you can always trade out for a more practical buy or buy another used car if you find you need something more practical. It doesn't have to be new (or a lot newer) and it doesn't have to be right away.

[A-Aron1]

I’ve read each of your messages several times and am absorbing all the information. I very much appreciate all your opinions. Hope to be able to sit down and respond in more detail over the next couple days!

[VanessaKruze]

Using some of that home equity to pay off the truck sounds like a solid move, especially with the income dip you're expecting. Keep tabs on refinancing rates you might snag a better deal. Keep stashing away for retirement and maybe start squirreling some cash for college down the road.

[A-Aron1]

Hello all,


A little update after posting 6 months ago. I appreciated everyone’s feedback. We are settled in the new home. We ended up putting about $40k in renovations into it. We are enjoying the space and living out in the country. Still looking to refinance within the next couple years or pay it off.

My daughter was born on the 24th of last month. I’m watching her sleep now letting my wife get some rest…my wife has been a rockstar! I actually just set up my daughter’s 529 plan today with an initial 3k and will be contributing $250/month.

My old house sold within 24 hours of putting it on the market. The buyer was using an FHA loan which looked like it was going to cause problems right before closing but it ended up working out and we came away with an $85k check in equity.

We paid off my wife’s truck and put the additional money in a vanguard money market account completing our emergency fund (50k). My old truck is still chugging along and I hope to be able to drive it for a couple more years before it craps out on me.

Work was incredibly stressful for about the last 6 months but I had a few deals close so we are ending the year strong and I should end the year at about 140k. That has been a major blessing. We are still planning on my wife staying home with our baby for a good while until she goes back to work in the ICU. If she wants to.

Anyway in the last year we got married, purchased and renovated a new home (my wife was basically our general contractor and did a fantastic job getting good deals and keeping the trades in line), sold a home, and had a baby. All good things but it was stressful. I may have gained a few pounds and was close to a mental breakdown there for a while.

I did our net worth statement the other night and it was $865k not including home equity. Anyway, we are settling into life and i'm constantly thinking of what else i can do to set my family up for a better life. I appreciate all your feedback since this is the only place i discuss finances! love this place!

[LivingAlmostLarge]

Congratulations on the new addition! It sounds like a super successful, busy, wonderful year.

[BarbaraAlvares]

Thanks for the info.