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Building new house- am I making a mistake
Old 05-24-2006, 10:14 AM   #1
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Building new house- am I making a mistake

My wife and I are looking at building a house next year.* The total cost will be about 320k.* Of this we will be financing ~260k.* I am concerned about the cost of a $1700+ mortgage payment vs our current $650.* We have reasonably good incomes for 28 yr olds totaling 110k/yr and will increase at a fairly good pace of the next couple of years.* We currently save about 28k of that for retirement and 12k for future house.* Building will deplete our nonretirement savings to 0.

The logical part of me is screeming wait until you can finance <200k and still have some savings set aside.* Our rush to build is based on two things: My wife has a goal of moving by the time she is thirty and I agreed to it before we bought our first house and were married, second my FIL is semi retired now doing high end kitchen remodeling and absolutely loves building houses.* He has helped build one for three of my in-laws as well as his own.* We would end up doing our own cabinets, roof, driveway and patio, painting, electric, plumbing fixtures (not running the pipe), windows, and any finish carpentry. So for the 320k and a lot of weekend and evening labor we would end up with a house worth around 420k+ based on my inlaws' experiences.* As he is 68 now, he might not be up to helping as much by the time we saved up enought to finance only 200k.

So my rambling question is, how badly are we hurting our chances at FIRE by building a house and financing appr 2.5x our current yearly income?* Should I finance a larger portion to keep some savings?* Did anyone buy a house that felt like a stretch in the beginning and their income grew to make the payment easier to handle?* I feel like building now would be a high risk but if everything went according to plan* it would work out well in the end.* But if anything went wrong we would be screwed.* I keep imagining hurting myself in the process of building and not being work for a couple of months, and be faced with a new mortgage expense.* I like my current low risk lifestyle where either one of us could be out of work indefinitely and we could make due.
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Re: Building new house- am I making a mistake
Old 05-24-2006, 10:32 AM   #2
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Re: Building new house- am I making a mistake

I remember when I bought my place over 20 years ago. I was house- poor for a number of years but now after 20 years the mortgage isn't tough to pay.

Per how much it will cost ? Do a speardsheet on the extra costs (~1000 extra a month plus extra taxes) less the income tax break.

If you could get say 3 percent inflation adjusted after tax break return on your money over say 30 years on $1000 savings per month, Then you are giving up just over $570k in your RE portfolio.

Run your own numbers and make your own decision. The trick is to invest and not spend that extra money.
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Re: Building new house- am I making a mistake
Old 05-24-2006, 11:15 AM   #3
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Re: Building new house- am I making a mistake

Quote:
Originally Posted by boutros
I am concerned about the cost of a $1700+ mortgage payment vs our current $650.* We have reasonably good incomes for 28 yr olds totaling 110k/yr and will increase at a fairly good pace of the next couple of years.
It looks like you're spending 19% of your income [$1700/($110K/12)=18.55%] on your mortgage. Even if one of you was laid off you'd probably still be (barely) within the old financing guidelines. 10 years from now you'll be chuckling at how little you're spending on your mortgage.

It sounds as if you're using all the leverage you have available to avoid paying more interest on a larger mortgage, and financing more of the purchase may even raise the mortgage's interest rate or require PMI. So it looks like you're making a good choice on both the money and the "sleep at night" aspects.

Quote:
Originally Posted by boutros
Our rush to build is based on two things: My wife has a goal of moving by the time she is thirty and I agreed to it before we bought our first house and were married, second my FIL is semi retired now doing high end kitchen remodeling and absolutely loves building houses. As he is 68 now, he might not be up to helping as much by the time we saved up enought to finance only 200k.
Well, the good news is that you'll always know where your contractor is and what he's supposed to be doing. Maybe he'll even have your best interests at heart.

The bad news is that you're attempting to apply logic to a situation where it's irrelevant. You made your spouse a promise and you're making a big family decision to spend time with your Dad. Both of those decisions are priceless and can't be financially judged. But you could always raise the financial issue with your spouse and attempt to negotiate a delay-- good luck with that!
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Re: Building new house- am I making a mistake
Old 05-24-2006, 11:34 AM   #4
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Re: Building new house- am I making a mistake

I just wanted to repeat what someone else mentioned. It's not a 100% financial decision. Your situation sounds extremely (very very) similar to our own around 10 months ago (which is when we ordered our house). We've been living in the house around 4 months now, and it's working out pretty good financially (we're more careful with the money now that we're paying more).

What's important to remember is that your values aren't necessarily the same as your wife's. I would have been happy with our smaller house, and paying the smaller mortgage. She really wanted to move into a bigger / nicer before she got much older. It's that whole "nesting" instinct. It's just how many females are. So my wife is happy she has a nice big house, and I'm happy because my wife is happy. We were able to put down 20%, so our payments / interest aren't too horrible, and I figure in 10 years or so, it'll be much more manageable. As long as it's doable now, and our income continues to rise with inflation, we'll be all good.
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Re: Building new house- am I making a mistake
Old 05-24-2006, 12:02 PM   #5
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Re: Building new house- am I making a mistake

Would building a house that is a bit smaller, hopefully cheaper, help? It may appease both sides of your dilemma...
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Re: Building new house- am I making a mistake
Old 05-24-2006, 02:02 PM   #6
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Re: Building new house- am I making a mistake

Good grief. You guys are under 30 and socking lots of $ away. You are ahead of 99% of the country. The mere fact that you are worrying about this decision speaks volumes -- you will be fine. I agree with Nords that in a few years you will chuckle about how cheap the mortgage is. In fact, you will probably start second guessing whether you should have gone for that extra 500 sq ft. When that happens you can run the calculators to see how much your frugality paid off.
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Re: Building new house- am I making a mistake
Old 05-24-2006, 02:32 PM   #7
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Re: Building new house- am I making a mistake

My first commet would be that a house is NOT an investment... it is where you want to live.. and maybe forever!!! Once you get established in a home, for some it is hard to move out... if you can afford the home, furnish the home, and still do all the other things you want to do like vacations, recreation, kids... then go for it... just knowing you have been saving for this purchase is a lot better than most people..
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Re: Building new house- am I making a mistake
Old 05-24-2006, 09:06 PM   #8
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Re: Building new house- am I making a mistake

Quote:
Originally Posted by boutros
So my rambling question is, how badly are we hurting our chances at FIRE by building a house and financing appr 2.5x our current yearly income?* Should I finance a larger portion to keep some savings?*
Well to give you some of my families perspective. Our home is helping us FI. We plan on selling it though and moving to a cheaper area. Don't know if that will be a future possibility for you or not...

I would definately finance the bigger portion, you will already have $100,000 in equity in your new home. That means you are already ahead of where you are today. I would invest the remaining money where you could get at it, in case of emergency.

If you get a good return, that will also help make that payment. If you need the money later for instance, after you lose your job or some other financial dilema, It will be hard to get a refi from the bank because you won't have the income to substatiate the payment. Besides, who wants to pay interest on their own money? Thats essentially what your setting yourself up to do by giving the bank your money. You should always leave yourself a cash shelter of "just in case" money IMHO.
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Re: Building new house- am I making a mistake
Old 05-24-2006, 09:48 PM   #9
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Re: Building new house- am I making a mistake

Quote:
But if anything went wrong we would be screwed.
Hi!

I'm unclear on this part here (not uncommon for me!

If you're getting the house for roughly $100K less than it's worth in the marketplace, then couldn't you sell it if you had to and still come out ahead?

I have a friend who took on a BIG mortgage to build a house, but it was on one of the last open lots in a swanky neighborhood in the SF Bay Area. Once she was finished it was worth almost twice as much as she'd put into it.

Doesn't that $100K give you enough of a "cushion" or risk premium to go ahead?
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Re: Building new house- am I making a mistake
Old 05-24-2006, 10:17 PM   #10
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Re: Building new house- am I making a mistake

Quote:
Originally Posted by Caroline
Doesn't that $100K give you enough of a "cushion" or risk premium to go ahead?*
I completely agree...Go for it!!!
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Re: Building new house- am I making a mistake
Old 05-25-2006, 08:46 AM   #11
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Re: Building new house- am I making a mistake

If you're making 110K a year, I don't see 1700 as being high. If you're concerned about the extra money, then could you be too stretched on some other things?
Where I've lived in recent years, I've been paying about $1000 just to rent a place (one income/about half what you make) - and would be actually saving money with a mortgage that "high."
Unless that little voice is really screaming at you inside, you should be good. But - it's not worth it if you'll be miserable about it - I seriously don't think you will be though.
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Re: Building new house- am I making a mistake
Old 05-25-2006, 10:03 AM   #12
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Re: Building new house- am I making a mistake

Thanks for all the comments. I think that we will proceed next year, as if I had a choice to begin with. Nords is right I already promised my wife so no turning back now. I completely agree that a house is an expense. For my situation the first 1200/m is probably what is necessary and the additional 500/m is discretionary. And more promises to wife for at least half of the 500 (hardwood floors, brick exterior vs siding). But if I am going to live there for the next couple of decades it is probably worth it. Certainly more than a new car every 4 years which is a discretionary alternative.
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Re: Building new house- am I making a mistake
Old 05-25-2006, 10:31 AM   #13
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Re: Building new house- am I making a mistake

Heck, $250-500/month might be cheap! Some women can easily blow through that each month on spa/hair/nail appointments.
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Re: Building new house- am I making a mistake
Old 05-26-2006, 01:44 PM   #14
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Re: Building new house- am I making a mistake

Hi Boutros,

Sounds like a good plan to me! When I bought my townhouse 6 years ago, I was making a little less than $110K and I financed the whole thing at $240K. My monthly payment with taxes/insurance was/is about $1885 a month.

I manage to save quite a bit of money toward FIRE because I choose to LBMM, and the equity in the home (which is now quite a bit greater than the mortgage) is my safety cushion.

Sounds like a great way to spend time with your dad, and it's something you and your wife will enjoy for years. Good luck with it!
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Re: Building new house- am I making a mistake
Old 05-30-2006, 01:49 PM   #15
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Re: Building new house- am I making a mistake

I say go for it if you have the means...and I agreed that if the wife is happy, you will be happy*

Our situation is a bit different.* We heard of too many building house horror stories from differrent people, including a good friend of mine, so we opted in spending $500K+ on a new SFH in a newly developed community that is exactly 1 mile from the highway exit but at the same time, away from the main road.* We both work just 30 minutes or so from our new area and that's one of the main reason that we decided to buy instead of to build- we just didn't have time and resource to coordinate every little things that is required of building your own house.* Besides, we are planning to live at our current area for at least 10 years and we are already sitting on a $150K equity for settling in early while the neigborhood still develops as we speak.* It's a little stretch right now for us but we managed.* The important things is that we cut back some discretionary spending so that out FIRE planning doesn't get hit.* So far so good...just my .02 cents.

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Re: Building new house- am I making a mistake
Old 05-30-2006, 09:46 PM   #16
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Re: Building new house- am I making a mistake

I would say that a house is an expense and an investment. When we were building/remodeling ours last year, we always did everything in mind with resale value. It cost us $250K alltogether including expensive lot but we can turn around and sell it for $350K+ easily. I am not married to my house and I will sell when a good offer comes my way after my two year homestead period.

The only problem I see with your financing is that you are quite stretched financially. Now, if the house completes on time and within budget, then everything is ok. However, most of the time some unaccounted items or setbacks will pop up.

Building a house just in the weekends/nights will be quite a task. We were our own general contractors and just managing people, bids, contracts, material, permits and a lawsuit was already a very time consuming affair. Time is money too, you may not want to get burned out on doing everything yourself. Pick your battles, roofers and some other folks are cheap - get them to do it. On the other hand, laying hardwood floor and installing kitchen cabinets is supereasy and you save megabucks. By being your own GC and buying the material yourself, you can already save a lot.

Another thing is that a pro can often do a better quality job than you. Nowadays, I fix houses and rent them out for a living. It does not matter that much that I don't do it perfect since it is a rental anyway. However, I would not touch some stuff in my own house.

Good luck,

Vicky
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