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Old 03-01-2013, 12:02 PM   #21
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I know how tempting this is for you, and owning your dream home seems to be an affliction of the young. However, once you experience all the costs associated with this "dream home" and it's maintenance, insurance, and upkeep (not to mention the mortgage) you will begin to wish you had your more modest house and the freedom associated with it. A dream home can easily turn into an albatross around your neck. I speak from experience.

I'm sure you could find a suitable house that could give you some added room for an additional $100,000 sales price. (or an addition, as someone else mentioned) There is nothing worse than being house poor.

If it is a gift to enable you to have a bigger place, then she should leave it to your discretion how much is wise for you to spend. I am sure she also wants you to be able to save for retirement as well.
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Old 03-01-2013, 12:54 PM   #22
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Thanks for the advice, I think we're going to slow things down and contact a realtor to start looking at the local market. See if something catches our eye. There doesn't appear to be a deadline on the gift, also every month that goes by we're building up a lot more cash and equity. I'd prefer to keep a mortgage to under $500K, and given the cash to close that still provides us a lot to search with.

Sequestration hitting our area might also send house prices down significantly... if Congress doesn't work out a solution in the short term. Luckily this doesn't directly affect my job and salary, but indirectly it'll hit the DC metro area hard if it isn't resolved.
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Old 03-01-2013, 12:57 PM   #23
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- Qualifying for the loan isn't a problem, but choosing to take it is another story. Both the builders lender and one other we called for comparison use the same formula to qualify which is DTI ratio under 49% on gross income. At $150,000 a year ($12,500 a month) that means keeping all debt obligations under $6,125 a month to qualify. We currently have a $750 car payment on a loan we took for a minivan (paid off in 2.5 years) and $165 in student loans. This means according to their equations we qualify for a Mortgage (PITI) amount of $5,210. Currently at rates in the 3.75% range on jumbo conforming, a mortgage of $625,500 would give us a PITI of about $3,800 - according to them that is 'very easy' for the underwriters to pass with 20% down . Again, seems getting the money from banks isn't a problem...
Wow! I thought we had learned something from the housing bubble.

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- Yes, in our area houses are really just insanely expensive and that probably skews the view of this from anyone outside the DC metro area. The smallest house you can find within a reasonable commute to work here is maybe $400,000 if you're willing to go with something really old and small that needs a lot of work.
I live in the Bay Area and still think it's a bad idea. Recently some of DW's employees with an income similar to yours bought houses in the $700-$800K price range. Seems crazy to me. If they lost their jobs, they would not be able to sustain the mortgage payments for very long.
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Old 03-01-2013, 08:30 PM   #24
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Wow! I thought we had learned something from the housing bubble.

I live in the Bay Area and still think it's a bad idea. Recently some of DW's employees with an income similar to yours bought houses in the $700-$800K price range. Seems crazy to me. If they lost their jobs, they would not be able to sustain the mortgage payments for very long.
I agree. Living in a small town in the Midwest, these numbers are out of my comprehension. My modest $150000 or so home is probably in the top 5% in value in town. You would probably have half my town willing to pay $10 to tour an $800k home in my town as there would be nothing else like it in the area. A general rule of thumb for our area was never have a mortgage twice your annual income, and I wouldn't even ever stretch to that. I am sure that isn't practical at all in most big cities.
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Old 03-01-2013, 09:19 PM   #25
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How does the tax situation work if she gifts you the 100k?
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Old 03-01-2013, 09:33 PM   #26
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Thanks for all of the responses. To clear up some of the questions or comments:

- Qualifying for the loan isn't a problem, but choosing to take it is another story. Both the builders lender and one other we called for comparison use the same formula to qualify which is DTI ratio under 49% on gross income. At $150,000 a year ($12,500 a month) that means keeping all debt obligations under $6,125 a month to qualify. We currently have a $750 car payment on a loan we took for a minivan (paid off in 2.5 years) and $165 in student loans. This means according to their equations we qualify for a Mortgage (PITI) amount of $5,210. Currently at rates in the 3.75% range on jumbo conforming, a mortgage of $625,500 would give us a PITI of about $3,800 - according to them that is 'very easy' for the underwriters to pass with 20% down . Again, seems getting the money from banks isn't a problem... its agreeing to pay $3,800 a year in principle, interest, taxes, hoa for the next 30 years.

- Yes, in our area houses are really just insanely expensive and that probably skews the view of this from anyone outside the DC metro area. The smallest house you can find within a reasonable commute to work here is maybe $400,000 if you're willing to go with something really old and small that needs a lot of work.

- We've looked into moving, and that would be difficult. We both have family in the area and the job market is specific to what I do and love. Moving would require me to take a substantial pay-cut as well.

For comparison on the houses:

Currently we live in a townhouse that is 1,932 square feet and is valued at $450,000. The mortgage is $358,000 and our PITI +HOA is $2,600 a month. The new house we're looking at building is 4,400 square feet with an unfinished basement on a third of an acre (lots of land for this area!) that would be built for about $825,000 on a mortgage of $625,500. PITI +HOA would be about $3,975. Factoring in the mortgage tax write off this means our total house payments would go up approximately $1,000 a month to move from what we're currently in to this new house. Looking at it like that makes it seem very reasonable... so much more house, better community, yard, easier commute all for just $1,000 more a month.

The red flag for me is the total debt on home going from $358,000 to $625,000.

(my guess is that grandma wants to move into the basement at some point in the future - she'll probably pay to finish it... which DW and I both think wouldn't be a problem. We both really like her and her husband passed recently.)

From all the books I've read, we have to be careful allowing family to start dictating our financial direction. I don't get the impression strings are attached here, but when someone hands over $100,000 its hard not to feel obligated to pay them back in some way.

One other thing to consider is that the neighborhood is just starting to be developed. Most of the homes that are slated to go into the community are a lot more expensive lots... 1-3 acres putting 1.5-3 million houses. We want to avoid getting into a situation where we feel like we need to keep up with the neighbors. Our outlook now is that we're getting in early and the new construction for the next 5-10 years will drive our house up in value... if we ever needed to move I'm pretty confident our house will be selling for well over 1 million 5+ years from now. Unless the housing market collapses again. Seems like a great community to raise a family in, in our sub-development everyone else looks about our age and also with small kids. Public school systems it feeds into are top in the country.
Let me guess. If you use the builders lender you get an incentive. And the lender who will probably charge you a small percentage above other banks has an attorney you can conveniently use for closure whose partners just happen to own the title company for the title insurance. Forgive me if I am wrong...but...I'm jaded. My daughter got into a deal like this in Virginia Beach and I gritted my teeth the whole way.
Just remember they have a vested interest and that interest is selling you the house. They don't care if you can make the payment 15 years from now...as they are gone as soon as closing and the money is moved into their accounts.

I'd also check into the HOA. I'll risk a bet that the HOA is still under the builder/lender if the development is not built up 80% to 90%...meaning it technically has not been turned over to the Homeowners Association. That's fairly standard procedure and just nice to know that it could be a while before their is a functioning HOA. Also you might want to make sure there are not multiple HOA's for different areas of the community or if there are how all that will work. HOA fees could go up if there is a master HOA (i.e., the homes in the 3million range) such that your HOA dues actually pay for something the owners living in the 3million dollar houses want.

You seem like a smart guy so perhaps you have thought of some of this.
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Old 03-01-2013, 09:37 PM   #27
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How does the tax situation work if she gifts you the 100k?
Answering for the OP.
That is the grandmother's problem. My guess is she will use part of her Unified Tax Credit and file a gift tax return = no tax due. Either that or she will pay the gift tax outside of this credit on the amount given less the yearly allowable amount ($13,000 right now if it hasn't changed.)

Most would do the former.
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Old 03-02-2013, 10:08 AM   #28
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Is a house a good investment right now?
Even Robert Shiller says he does not know. Listening to him, he seems to imply that with population growth slowing down, houses may be able to do only slightly more than inflation.

Will you be stretched? For sure.

Is it a good idea? Only the Shadow knows.

But I own timber stocks, so I am always in favor of someone building a big new house.

Ha
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Old 03-04-2013, 07:48 AM   #29
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Looks to me like your total debt service (auto loan, home PITI, etc) would be 38% of your gross - a little on the high side for my taste but not outrageously so. I'd prefer to try to keep it 30% or less but it sounds like the home you were considering might have a good opportunity to appreciate and you would enjoy it while you lived in it. All in all, I'm not as negative to the idea as others are.
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Old 03-04-2013, 10:56 AM   #30
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I'd have to give it some hard consideration. But I think my conclusion would be a very polite, "Thanks, but no." My two reasons:
1. Moving into the more expensive neighborhood will raise a lot of your other costs. Alot.
2. (Bear with me for a moment-I promise this is apropos).About five years ago my father-in-law called me up and said "Keim, I want to give you my extra $4k fishing boat." Shocked, I asked why. "I want my grandkids to have a chance to enjoy the boating life I've had. You have some great rivers and lakes nearby. And, admittedly, I'd like to use it when I come to visit." This made sense to me, so I talked it over with my wife. Foolishly decided "why not?" What could it hurt. Drove 6 hours to his house and picked up the boat. On the way to "boat orientation:" "Oh, by the way, we'll keep the boat in my name, Keim. I have a lifetime license on it. That'll save you some money." Crap. I see whats coming...

I take the boat home and enjoy the loyal fraternity of my boating brethren for the summer: secret handshakes, nods, winks, waves and all. The family has fun.

FIL comes in September for his annual visit. First thing he does is checks out "his" boat, and criticizes how I've maintained it. I overlook that in the name of family. We have a nice weekend. Even went for a cruise in my classic Chevy-The Muscle Boat. A car I've owned for almost 30 years.

The day he leaves he says "Over the winter you'll need to park the Chevy outside and store the boat in the garage." The boat went with him. A small string can quickly turn into a heavy anchor. How much will your $100k string weigh?
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Old 03-04-2013, 11:35 AM   #31
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It's hard to know what the right decision would be for somebody else.

For me, well, I don't think I would ever consider spending over $300K for any house, even though I suppose I could easily afford to do so. I don't need to spend that much to be happy. Also, around here most $300K+ houses are tremendous, and I am just not physically capable enough to enjoy (and maintain) such a huge place.

But then, I am retired so I have no interest in impressing anybody. Also I live alone and don't need the space for a family.

Getting back to you, instead of me, is the new house a house that you can envision living in through your retirement and old age? Easy care? Few stairs if any? Within your expected retirement budget? It doesn't sound to me like it meets any of these requirements. If not, then I would give it quite a bit of thought. Who knows what the housing market might be like when you are ready to retire. I think it is dreadfully sad when someone must delay their retirement because they must sell their house for a certain amount and can't.

Quote:
Yes, in our area houses are really just insanely expensive and that probably skews the view of this from anyone outside the DC metro area.
I know what you mean about the cost of houses in your area. At one point I was offered a promotion to move to D.C. and work at my agency's headquarters there. The housing costs there, among other reasons is why I didn't take the promotion.

Your present townhouse sounds really nice to me, actually. Affordable, a nice size, livable.
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Old 03-04-2013, 03:39 PM   #32
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The other side of this is a topic that might be a little Taboo here: Inflation. Most in or at retirement have a strong desire for inflation not to be an issue moving forward, but most indicators that I'm working with suggest that at some point in the next 10 years we're bound to see elevated inflation to make up for all the market manipulation we're currently dealing with.

Assuming inflation will rise, taking on debt becomes a little more attractive. (ok taking on debt is never attractive, so maybe its better to say "taking on debt feels a little less foolish")

This is a worst case scenario, but for demonstrative purposes, lets assume that another decade like the 70's appears. If so, we're looking at inflation cutting the dollar in half over the next 10 years.

If you have $600,000 in cash, it feels more like $300,000.
If you have $600,000 in debt, it feels more like $300,000.
(plus the housing will tend to ride the inflation, potentially creating $600,000 or so in equity)

Prices and salary lag inflation, but they do eventually catch up. That is, the sting of the $3,800 payment each month would go down drastically, as earning potential went up.

This is just one of many factors to consider.
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Old 03-04-2013, 03:51 PM   #33
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Why is grandma adamant about a new and bigger house? A gift is a gift and you should be able to allocate the monies as you see fit. If she does not agree, then walk away from it....you will end up paying more that gift in the end!
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Old 03-04-2013, 05:11 PM   #34
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Is a house a good investment right now? Rates are extremely low... prices are still down and starting to rise. I know you pay a premium to build, but we're ok with that in order to get into this community that we've fallen in love with. I struggle with the trade-off between feeling pressured that this is the time to move (part grandma, part the markets, part fear rates are going to go up in 2-3 years)... vs us being in a situation today where we can really bank A LOT of money if we stayed in our current house. We make way more than we spend at the moment, moving to this house will bring us back down to spending most of what we make.
It sounds to me like you should wait. Rates are low, but they'll be low or low-ish for a while longer. Prices are starting to rise in some areas, but they may not rise fast, or they may fall again for a while. If grandma's offer will still stand a year or two from now, it seems to me like a good idea to wait, at least for a bit.

Of course I bought my "dream house" last year, which had a pretty big impact on our short term possibilities of FIRE, but since we kept the old house as a rental, it does give us some diversity in the future. I think sometimes you have to go with your heart and enjoy life rather than looking at all the numbers.
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Old 03-04-2013, 11:23 PM   #35
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The grandmother having some attraction for upgrades isn't doing you and your wife a favor. The grandmother saying … upgrade with the money she'd give, or no deal; that is not a deal. In fact, it's encouraging more debt. And that's your wife's grandmother. Your wife and you should kindly say "nope" to her offer.
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Old 03-05-2013, 12:05 AM   #36
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I just can't believe I'd be spending $850,000 on a house when I make about $150,000 a year. DW stays at home, and we plan on her to start working again when our youngest is in school 6 or so years from now.
.
Good questions and good advice. As others have said, it's a personal decision and it is great that you are thinking through the angles.

Since you asked for opinions though.....

I think that buying an 850K home on your salary runs contrary to your goal of retiring early. It's a crap-ton of money, a diamond crusted indulgence (custom built dream home?), and fairly risky given the fact that your wife doesn't work and you are one layoff away from a cash flow crisis.

You're doing great at work, and hopefully you get to stay as long as you want. Life is uncertain though. Stuff happens, to misquote the bumper sticker.

As one more datapoint for comparison, we live in a fairly expensive area (downtown Seattle), our income is about 50% higher than yours, and we felt like the Rockefellers when we spent 450K for our place. The thought of spending the kind of money you are talking about would give me hives.

I think the Grandma aspect is less important than the other piece: this purchase will likely hurt your ability to retire early. Pick one or the other.

Just one chick's opinion. Take what is helpful and discard the rest.

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Old 03-12-2013, 11:24 PM   #37
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4400 square feet? I wonder if that would be the biggest house on the ER-Forum? Probably not. I just cannot get my head around a discussion about buying that much house. I would have to say no thanks to Grandma.
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Old 03-26-2013, 03:31 PM   #38
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I'll preface this by mentioning this is not a way of justifying the move, but rather how my analytical mind works. I'm trying to estimate (approximate) the overall cost of staying put vs. moving in the long run.

There are a lot of variables at play in this, but Excel is fun to play with.

Currently we have a $440,000 house and a 30 year fixed mortgage at 4.5%. The loan is $357,500 and payments (P&I) are $1828.95. There are 29.6 years left on the mortgage.

The move would be to a $825,000 house and a 30 year fixed mortgage of 3.75%. A gift of $100,000 would occur from Grandma, plus we'd bring $40,000 from savings and cash after Realtor fees on sale of current home to close. The loan would be $625,500 and payments (P&I) would be $2923.56. It would take 30 years to pay off.

I created a spreadsheet with the following assumptions:
Inflation: 3.23%
Real Estate: 4% growth
Market: 7% (assumption of return on investments not put into house but saved elsewhere)

Assumption is that the money difference between the two mortgage payments (about 13K a year) is invested and gets a market return of 7%. Also I've assumed that the tax write-off on the interest is invested in the same way for both. Also assume that the $40,000 that needs to be brought to closing to move would be invested in the staying example from the start.

Here are the end results:
Keeping current house produces a paid off home worth $1,428,717 and all savings set aside (tax break + $13K less in mortgage + $40,000 cash not brought to closing to move) produce $1,994,818 in investments 30 years from now. Buying the new house produces a paid off home worth $2,675,803 and all savings set aside (tax break) produce $500,396.

The total net worth comparison:
Staying: $3,423,534
Moving: $3,176,199
(ignoring all retirement and savings accounts outside of this scenario)

It shocked me that the two came out to about the same net value in the end. Keep in mind that I'm spending the same under both (about $2923 a month). To be fair this is based on some assumptions that may or may not end up being exactly as predicted.
- 7% return in the market could be significantly higher or lower
- 4% return on real estate could be slightly higher or lower

Property taxes being higher is not considered (cost of about $3,500 more a year for moving), as well as the fact that although both scenarios account for the same monthly cost... the staying model allows for hardship situations where access to a larger pot of money on the side is accessible, where the majority of the net worth in the moving scenario is tied up in home equity. That said, this is again about 35-40% of current income. There is a lot of other money that can be invested outside of this bubble - in both scenarios.

Figured I'd post this just because typing it up gave me a reason to review it in my own head. Also, I am curious if anyone who's read this far into it can find fault in any of my assumptions or things I may have missed.

I also found it interesting, that when account for inflation... the true cost of the two mortgages are the following in today's dollars:
staying: costs $680,369 real ($439,613 inflation adjusted) to pay down a $357,500 mortgage
moving: costs $1,087,564 real ($702,718 inflation adjusted) to pay down a $625,500 mortgage

That is, although I'd end up paying close to $425,000 in real interest, because future dollars are cheaper to come by inflation adjusted, the mortgage is really costing about $77K in interest when factoring out inflation.

My own conclusions are that clearly staying in a smaller house makes ER easier, but the hit to my overall ability to build wealth is not as substantial as I first though. Factoring in property taxes, and it looks like moving might bring my net worth down about 10-15% in 30 years. Is that worth twice the house... guess that's the real question.

(as others have pointed out there are other hidden costs to each... staying put requires more discipline investing. Truthfully, since I already set aside 25% a year to retirement,, more disposable income could very well just get spent on something else, like vacations or cars. Will I really build that $2million dollar investment staying put? Moving locks in a plan to have a sizable asset in 30 years paid off... but comes with some additional hidden costs not calculated here: such as utilities, more wealthy neighbors and the pressures to spend more that come with having them, etc...)
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Old 03-26-2013, 05:07 PM   #39
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Here are the end results:
Keeping current house produces a paid off home worth $1,428,717 and all savings set aside (tax break + $13K less in mortgage + $40,000 cash not brought to closing to move) produce $1,994,818 in investments 30 years from now. Buying the new house produces a paid off home worth $2,675,803 and all savings set aside (tax break) produce $500,396.

The total net worth comparison:
Staying: $3,423,534
Moving: $3,176,199
(ignoring all retirement and savings accounts outside of this scenario)

I also found it interesting, that when account for inflation... the true cost of the two mortgages are the following in today's dollars:
staying: costs $680,369 real ($439,613 inflation adjusted) to pay down a $357,500 mortgage
moving: costs $1,087,564 real ($702,718 inflation adjusted) to pay down a $625,500 mortgage

That is, although I'd end up paying close to $425,000 in real interest, because future dollars are cheaper to come by inflation adjusted, the mortgage is really costing about $77K in interest when factoring out inflation.

My own conclusions are that clearly staying in a smaller house makes ER easier, but the hit to my overall ability to build wealth is not as substantial as I first though. Factoring in property taxes, and it looks like moving might bring my net worth down about 10-15% in 30 years. Is that worth twice the house... guess that's the real question.
(
One very real question to ask yourself is: "What percent of your net worth should be tied up in your home"? I believe there are some discussions regarding this topic. A quick internet search states 20% to 30%.

It would worry me (if I am understanding you correctly) to have a 2.6 million dollar home and only $500,000 liquid investments socked away. You can not eat a house. And you might at some point be what is called "asset rich but cash poor", again if I am understanding you correctly and within the confines of your assumptions.

Some (me) are more concentrated on financial "liquid" net worth and/or rental properties (for those that have them) and the income that can throw off to help support an ER lifestyle.

One additional thing to think about is this. Do you really want to have that much money tied up in just ONE property? There is some inflexibility that may come with that.

Analysis such as this is good to do as long as you(we) all understand the assumptions we make are just that - assumptions.
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Old 03-26-2013, 05:25 PM   #40
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It seems like you will end up concentrating all your wealth into a single asset by moving. Assuming your 7% / 4% returns are nominal, even your "staying" scenario seems iffy if you don't have a decent pension ($1.9M in 30 years would only be worth about $770K in today's dollars, hardly a fortune to fund even a non-early retirement).
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