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Old 03-26-2013, 05:32 PM   #41
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I would not and do not have such a large % of NW in my house.
Current house is less than 5% of NW.
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Old 03-26-2013, 06:16 PM   #42
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I understand wanting to improve quality of life... but that's a big jump ($400k to 800k)...
These predictions of how the house will effect your net worth and retirement plans only works out if you plan to sell the house at or before you retire. Otherwise it's an illiquid asset that you can't spend to fund your retirement.

Is there a compromise... a $500-600k house that would allow you to upgrade, take advantage of the $100k Grandmother deal, and improve your quality of life... but not hit your cash flow.

Also - not sure what area you're in - but if you can keep your mortgage below jumbo rates, it's usually worth 1/2 percent in loan rates.
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Old 03-26-2013, 06:42 PM   #43
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Sorry for not being clear.

The scenarios above excluded all of my other retirement investments that I contribute about 25% of my salary towards. At the current contribution rate and a 7% return my 401k (around 200k currently) will be something like 4-5 million. Taxable accounts will probably be well above 1 mil also. Inflation needs to be considered (in 30 years 8mil net worth wont be what it is today), but the 2.5 mil or so house paid off would only represent about 25-30% of total net worth.
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Old 03-26-2013, 06:58 PM   #44
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Keep your eyes on the prize.

(In other words, determine whether ER or a more expensive house is your highest priority. Then make sure your decision reflects your highest priority and makes that highest priority a certainty).
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Old 03-26-2013, 10:07 PM   #45
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I think you are on the right track. I would get my info into Quicken Lifetime Planner and then do a what-if keeping all assumptions the same other than the new house, new mortgage, higher housing costs, etc. and see how the lines differ. If the difference isn't much, go for it. You only live once.

Besides, if I understand your calcs correctly your PITI will be ~35% of your gross? While I would rather see it at 30%, within a couple years it will be closer to 30% and will go lower from there as your progress in your career.
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Old 03-27-2013, 07:02 AM   #46
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Keep your eyes on the prize.

(In other words, determine whether ER or a more expensive house is your highest priority. Then make sure your decision reflects your highest priority and makes that highest priority a certainty).
+1
It often is not a straight line up to FI and ER. Look at what happened during the housing bust. Many in the market had paper losses of 50%.

My percent house value to net worth is 11%. Less than that when my DH's assets are included. The percentage you state is your projected "house" percentage at the END of 30 years. What will that percentage be at the beginning of the 30 years and thru the first 15 years or so of that? Might be interesting to run this in Excel. At what point do your liquid assets exceed by 100%, 200% or more of your projected house value.

It comes down to how confident you are that your scenario is realistically doable with a high degree of being successful.
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Old 03-27-2013, 08:32 AM   #47
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You just spent 6 years digging out of a bad real estate deal. Why do you want to get into another one

I live in NoVA also and there are perfectly nice single families in my area of Centreville/South Riding from the $400 - $650k range. There are of course tradeoffs. My older house has a bigger lot than your "dream" house, but cannot match the amenities inside. We are walking distance to top rated schools, but the above ground SF is only 1,750, but the price is only $400k.

I think you are underestimating the impact of insurance, taxes, maintenance, utilities, commuting, etc. I would never plan for perfection and needing to keep my current income to make things work.

If you want a single family house take the gift and your equity and the low interest rates and upgrade into something nice but reasonable. If the future goes as rosy as you think your next house can be your dream house, or you might get tired of the lifestyle in the area, work, want to change your lifestyle/location, etc. and need some flexibility. I have found it is always good to have margin.
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Old 04-03-2013, 04:51 PM   #48
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I also think that it would not be sound for the OP to think that his salary would continue to increase at the rate that it has during his first ten years of working. Absent a move into ever increasing management responsibilities, that salary may be topping out. If inflation outpaces income gains, a real possiblity, then you can get into trouble pretty quickly.

Also, that $825 price is based on all of the builder's "standard" components. Rest assured that you will exceed the builder allowances and that you will need a lot of new furniture to fill a 4400 square foot house. You are probably really looking at $50-100k more than the stated price when you factor all of that in. I also find it hard to believe that you are buidling a house for well under $200 per square foot. What is the price of the land separate and apart from the house and what are they quoting the house construction price at? Also, does the 4400 square feet include the basement footage? I would expect the lot to be worth at least $100k. That means the house is being built for no more than $165/sq. foot. Seems awful low to me for a "dream" house. I was quoted about that price to build a house 23 years ago in a fairly HCOL area.
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Old 04-03-2013, 07:31 PM   #49
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Forget the $100k for a moment. Now, still thinking about building a new house?
Now you have your answer.
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Old 04-04-2013, 08:49 AM   #50
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Quote:
Originally Posted by ronocnikral View Post
With at least $30k in transaction costs just to sell the sell the home, another $5-$10k in transaction costs to buy the home, the cost of moving, the stress of moving etc...I'd personally say, "thanks, but no thanks."
Me too.

This whole scenario reads like an excerpt - i.e., a bad example - from The Millionaire Next Door. Personally, I prefer to make (and pay for) my own decisions, rather than being controlled by family members with their own agendas.

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I also think that it would not be sound for the OP to think that his salary would continue to increase at the rate that it has during his first ten years of working. Absent a move into ever increasing management responsibilities, that salary may be topping out.
+1.
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Old 04-04-2013, 09:13 AM   #51
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Another way to think of the $100k is it maybe the equivalent of 400-500 bucks a month. Is that tradeoff worth it to you (increased obligation to MIL).
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Old 04-04-2013, 07:04 PM   #52
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My house is only 15% of my net worth. It is far smaller than I could afford (gross income is 344,000 per year) , but I feel much more comfortable in my modest home that is paid off than I would strapped to a huge mortgage - I would tell grandma thanks for thinking of us, but no thanks.

I always remember my Dad's answer to my question, "why don't we have a bigger house?" His answer: "Son, you can't eat your house."
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Old 04-04-2013, 09:19 PM   #53
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OP:

In one breath you say you don't think there are strings attached to this "gift" and in the next you say that you would feel obligated to pay it back somehow, and that grandma would someday like to move into the basement. If she has the ability to apply this kind of pressure now, imagine your life choices being dictated by her when she is ensconced in the basement - in the house which she will never, ever let you forget she helped to pay for.

This is not a gift from the heart. If it were, grandma would be fine with you putting it into the college funds, or paying down the mortgage.

This "gift" has so many strings attached it is impossible to see them, let alone count them. Each string will be tugged tighter and tighter by grandma as the years go by.

My father often used to say "he who pays the piper calls the tune." Change the word "he" to "she" and I fear you will soon deeply understand the meaning of that expression.

I offer these words as someone who had a wealthy grandmother who kept several family members hopping to do her bidding thanks to the financial "gifts" she bestowed on one and all. I declined all her "gifts" and ended up very glad that I had done so.

If the dream home is so important, just be aware that you will likely be paying for it in ways you cannot imagine, and some of them won't have anything to do with money.
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Old 04-05-2013, 08:36 AM   #54
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This is not a gift from the heart. If it were, grandma would be fine with you putting it into the college funds, or paying down the mortgage.
Exactly.
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Old 04-08-2013, 01:28 PM   #55
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Seems like the "gift" is to sponsor you as you begin your race to keep up with the Joneses.
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Old 04-09-2013, 02:39 AM   #56
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I agree with W2R.

Quote:
Originally Posted by W2R View Post
Keep your eyes on the prize.

(In other words, determine whether ER or a more expensive house is your highest priority. Then make sure your decision reflects your highest priority and makes that highest priority a certainty).
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Old 04-09-2013, 02:59 AM   #57
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I dislike the inflation argument to justify house investment.
The inflation argument IMO assumes that your income increases at least with the inflation rate or even more and that the house value increases with or above inflation rate.
If not, each $ of debt will still have to be paid off with a $ equal to the same % of salary as today. So where is the benefit of inflation?
Today lots of people see their salary increase below inflation while cost of food, commuting and other necessities increase above inflation rate.

If my grandmother offered me such a gift I would say "Thank you so much for offering, but your gift is not for us. Our priority is not a more expensive house".
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Old 04-10-2013, 08:50 AM   #58
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I won't opine on what you should do - your priorities are probably different than mine. But, FWIW:


For me, that high of a mortgage would cause me to lose sleep at night, and I don't have kids. I make about the same as you. I live in NoVa in a townhouse, but I bought back in 1999, when R.E. was much more reasonable. I am not afraid of R.E. - I bought a cabin in WVA about 3 years ago - but even with that my two mortgages (PITI) are about $3K.

And, the only reason I felt I could do that is because I will get a FERS (fed gov't) pension when I retire, and have my health bennies covered if I don't retire until my MRA (56 years, 10 months). That, plus my savings, gives me comfort that I can afford what I have. Without that scenario, I probably wouldn't have been comfortable buying the cabin and adding that second mortgage.

We all have different levels of financial comfort zones, and goals. My cash/investments goal is a lot higher than what you project in your bigger house scenario.
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Old 04-10-2013, 09:25 AM   #59
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Thanks for all the continued advice and cautions. We've decided that if we cannot keep our current house and move it isn't worth it. We're going to hold off for a few more years. DC Metro is building a new line out to our area in the next 5 years, and our townhouse is within a mile of the stop. That makes our current home a good thing to hold onto. In theory. Great place to rent.

In regards to the inflation example...

Engineering average salary (Chemical, Electrical, Aerospace):
1960 - $15,500
1970 - $18,000
1980 - $36,000
1990 - $57,000
2000 - $76,000
2010 - $92,000

I'm in computer engineering with a masters in cyber defense... soon to be working on a PhD in Artificial Intelligence. Appears that those who are more senior than I am are making 30-40% more, so room to grow. No crystal ball here, but the profession has been growing for the last decade and projections have that trend accelerating through 2030.

I would think it to be highly unusual for anyone to start at $25,000 a year in 1960, and still expect to be making $25,000 in 1990 with 30 years experience doing the same work. If that person making $25,000 in 1960 bought a house and had a 30 year mortgage of $700 a month (34% of gross income)... its safe to assume things only got easier for them over the next 30 years. That is assuming they continued to remain employed.

I think the real key for us is when DW starts working again (2-5 years from now)... that will raise our household income by 50% or so. I do think that inflation is going to get a little out of hand in the next decade... real estate would be a good hedge against that. Still hoping to make a move in the next couple years.
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Old 04-10-2013, 11:47 AM   #60
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Quote:
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I dislike the inflation argument to justify house investment.
The inflation argument IMO assumes that your income increases at least with the inflation rate or even more and that the house value increases with or above inflation rate.
If not, each $ of debt will still have to be paid off with a $ equal to the same % of salary as today.
I cannot see your argument. No matter what the house value does, if your after tax salary is increasing, the burden of your mortgage loan will be decreasing. You can think of it as hours of work needed to pay one monthly installment.

All you need is that your salary keep up with taxes and costs on the home, and the house and neighborhood remain a good place to live.

OTOH, if your main interest is in turning a real profit on sale, the rate of home appreciation may matter.

To me the bigger problem with serial buying a home and selling and rebuying as a planned strategy is that the costs and disruption of selling, rebuying, moving, and making desired repairs/changes to the new place can be very large.

I am thinking back to 2006 when the house price implosion had not yet hit Seattle and realtors were suggesting that you not buy unless you planned to hold for 2 years. What a joke. Turning houses, and paying ~10% vigorish is likely not a good plan, except for skilled professional flippers, who are not trying to find a house to live in, but a house to sell.

Ha
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