Planning to buy a house

[autoxer]

When I bought my first house, I stretched, with 5% down, only a month or two in reserves, 30 year term and 28% of gross pay going towards the mortgage. A lot has changed since I bought my first house, got married, had two kids, doubled my income, and refinanced to a shorter term. I regret jumping in like I did, so I'm going to be more patient this time around. I'm planning to move into a different school district within the next three years, before my daughter starts school and I'm trying to decide when I will be ready to buy a house. I'm having trouble figuring out how much money I am comfortable spending, because I'm sure the banks will lend me far more than I want to borrow, so I've come up with these metrics to help me figure it out:

• Save up enough to put 20% down and retain a 6 month emergency fund
• Limit the amount financed to a 15 year term
• Monthly mortgage payment (PITI), no more than 21% of gross pay

I think I am okay with a 30 year term, if I keep the total monthly mortgage payment to no more than 14% of gross pay, so that I can invest the difference. I feel like this is fairly conservative, but I'm still nervous, because housing is the biggest line item on my budget and I'm considering making it a lot bigger. If my dream home doesn't fit within those constraints after saving for a couple more years, than I'll start looking for compromises, but until then I'm shooting for the moon. I don't have any specific questions, just looking to calm my nerves about this whole process.

[JoeP]

I like the idea of a 15 year fixed, especially now when interest rates are likely to go up sometime in the future. We did a 30 year fixed in early 2001, and refinanced to a 15 year fixed in 2003. We could not afford a 15 year at the beginning, mostly due to interest, but were able to only after the recession hit and interest rates went way down. We've been at 4.375% since 2003.

If your daughter is starting school soon, wouldn't it be nice to have your house paid off around the time she graduates high school?

[Fishindude77]

Figure out what you can afford, then buy something cheaper.

An old guy I used to work with was pretty financially savvy. We'd drive by a fancy neighborhood admiring the nice homes and he would say .... "Anything they can do in those houses I can do in mine, and it's paid for".

[TBH]

I did it the opposite way, going very conservative with our first house and then feeling dissatisfied the entire time we lived there. With the second house, we stretched more, mostly because I had realized that being comfortable where I live is more important than saving a ton of money. I know that won't be a popular opinion here, but it got old telling myself "but the mortgage payments are so low!" every single time I came home and felt my heart sink as I pulled up in front of my house. (The house was too small, too dark, in a neighborhood with lots of drug activity, had no back yard, never stopped smelling like the previous owner's cigarette smoke, and was asymmetrical and ugly.)

But I will say our current house, which we stretched to buy, has really limited my career options. In the old house, I could afford to take jobs based on what I wanted to do and not how much they paid. Now I have to sell my labor to the highest bidder. Right now I am able to afford living in this house AND save adequately, but that means working a full time job, a part time job, and picking up freelance work.

I probably should have tried harder to find something in the middle--maybe not as expensive as this house but nicer than the last one.

But here I am, and I don't want to move again. We've been here 6 years, refinanced once to a lower rate and actually did a cash-in refi to bring our monthly payments down. I do still love the house.

Anyway, not to derail the OP's thread, but that's another perspective--don't be so conservative that you'll immediately be unhappy in the place you buy.

As for your question, I think the list of goals you've set for yourself is good. 20% down, 6mo EF, 15 year fixed, PITI of 21% of your pay. If you can afford all that in the neighborhood you want, then you can feel confident you can afford the house.

[snafu]

I agree you need 20% DP and I wouldn't go beyond 28% Net Income parameters but you will need to balance factors like desired school district, sf, and 'dream house' wishes with 3 years in the future interest rates and 'value for money factors'. Personally, I wouldn't sign a15 year mortgage because I like control. Instead, you are sufficiently disciplined to make extra payments directly to principal, paying off your mortgage in 15 years. If something ghastly happens you can temporarily cease accelerated payments. Buying an older home in an established neighbourhood suggests a 1% house maintenance allowance over and above an EF.

...just another point of view

[HappySaver]

20-year mortgages are often overlooked. That's what we did for our second (current) home and that was a great compromise between the traditional 15/30 year options.

Our first home was also a 30-year refi'd to 15-year after a few years.

[ReallyBoredMan]

20% down is a great place to start.

As far as the 15-year mortgage, that is fine, but there is always the option of sticking with a 30 year and making the additional payments to bring down the 15 or 20 year.

The main benefit of this is that if you/your spouse loses their job, you can fall back on the lower 30-year payment if needed. This is compared to the 15 year you would still be obligated to make the payments.

[Singuy]

Couldn't the OP refinance into a 30 year if trouble hits (which usually takes 30 days)? In the mean time, the op can take advantage of the interest saved from the 15 year mortgage.

Actually scratch that idea...if trouble hits, I don't think banks will allow you to refinance if you can't prove employment.

[autoxer]

Thanks for all of the input! Part of me wants to save for a few more years, put down a lot more than 20% and keep my payments even lower, but I don't think that's really necessary.

I like the 15 year mortgage, because the interest rate is about .75 points lower than a 30 year mortgage. If I finance $280k, then that lower interest rate will save me over $100/month. The 20 year term mortgages only seem to lower the interest rate by about .25 points, so there isn't as much benefit.

$280k loan, 30 year term, 4% interest, PI would cost $1,337
$280k loan, 15 year term, 3.25% interest, PI would cost $1,967

If I took the 30 year loan, and invested the difference ($630), I would need to average 5.8% gains in order to have a large enough balance to pay off the remaining principal at the 15 year mark. That's not impossible, but it would need to be in something more risky and volatile. If I lost my income, it would probably coincide with a drop in the stock market, so I'm not sure that I would be any better off stretching out the term and investing the difference.

[Jluke]

Thanks for all of the input! Part of me wants to save for a few more years, put down a lot more than 20% and keep my payments even lower, but I don't think that's really necessary.

A lot can change in 3 years... home values and interest rates could go up/down... saving for more of a down payment might decrease your PI by only a small amount; depending on your savings rate (run the numbers with a higher downpayment(s) if you haven't already to see the impact on monthly PI).

Buy in 2015, pay mortgage through 2030
Buy in 2018, pay mortgage through 2033

Lots of variables to consider.

[LivingAlmostLarge]

Too many to consider. When we bought it was too much house both financially and space for us. Now we've really filled it space wise and financially it's really not a problem. We started at 28% PITI and are at 12% now. I will admit that I really like where we are financially. But at the same time I am ready to bite off a bit more again to buy a SFH. we'll see what the future holds.

[Randomsaver]

Wouldn't you have saved equity already from your house enough to pay for the 20%?

[autoxer]

Wouldn't you have saved equity already from your house enough to pay for the 20%?

I do have some equity, but I didn't want to count on it, in case I have to lower the price to get it to sell.