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Taking on more than I can handle?
Old 02-28-2013, 03:40 PM   #1
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Taking on more than I can handle?

I'm sure I am just by asking the question. I've had a tendency to overextend myself at various points in my life. After thinking more seriously about FIRE I'm wondering if this is a bit too much this time:

Job: I love what I do, and wouldn't mind continue doing it until I'm in my 50s (I'm turning 31 next week). There has always been a lot of stability and growth in my area of expertise (computers and engineering) and despite the down economy my salary has grown about 75% in the last 8 years. Never had a year without at least a 5% raise. I'm up about 30% in the last 2.

House: DW and I bought our current house in 2005 on stated paperwork. Actually had it built while we were in our final semester at school only putting down 5% that was gifted from a grandparent. My oh my how the lending rules have changed since then. I look back and wonder what the banks were doing giving us $490,000 without actual jobs at the time to build a house. Luckily because of my job, we were never at risk. We were severely underwater at one point (about $150K), watching everyone else walk away from their debt obligations, but we kept on paying. Accelerating payments just for the peace of mind knowing we didn't owe more on the house than it was worth. Fast forward to today and we're at a point now where our house is worth $450,000 and mortgage is $358,000 (yay equity!).

Situation: My grandmother in law has done very well for herself and is trying to tempt her grandchildren into becoming homeowners. We already own a home, but she doesn't think it fair to leave DW and I out in her quest to assist the family. She is offering us $100,000 if we upgrade in house (we asked if we could just use it to pay down our mortgage... nope). DW and I were getting a little cramped in our 2,000 sq ft townhouse with 2 kids and a 3rd planned soon, but we weren't seriously considering moving for another 2-3 years because we wanted 20% to put down on our next home that we planned to move into and keep for 30 years till retirement.

This gift allows us to make that move now. Rates are so low, that we can keep our DTI ratio under 40% and afford to build our dream home about 10 miles from where we currently live in a great community (really our dream set-up)... 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.

I remember feeling the pinch 5 years ago of my mortgage taking up half of my paycheck, and although my paychecks are substantially higher now... with kids in the mix it might feel about the same again. $3,800 going to mortgage/escrow leaving about $4,000 for everything else.

Through this all we've always set aside max to 401K, so that $4,000 will probably be more like $2,600 (the larger tax write-off will probably bring that back up to $3K). The 401K account is about $200K today.

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.

Is it smart to devote so much of our financial future into this house? Scarey to go from a $350K mortgage to about $625K, even if that payments are only going to go up about 50% a month (twice the house for just 50% more in payment). We would bring about $225,000 to closing on the house. $100K from GMa, about $75K from sale of house, the rest from our $80K in taxable savings/investments.

Any thoughts or advice from others who may have been faced with something like this in the past or present. Not sure I'd have given it a second thought a year ago before joining this board, I would have done this in a heartbeat. Now I'm wondering what ramifications it might potentially have on my ability to become FI.
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Old 02-28-2013, 04:03 PM   #2
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Another option includes moving up in house to get the extra room, but instead of going to our dream home instead picking one in the 550,000-650,000 range. The idea would be to stay there for the next 5-7 years and then make the move to our 'dream home' at a later point.
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Old 02-28-2013, 04:09 PM   #3
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This is a very unusual situation to be in but I fear that the gift may be a Trojan horse. It may lead you into a troubling level of debt unless you can negotiate a safer compromise. Generous Grandma wants to be able to say "I helped them buy that house". Is she open to other solutions? For example, having her name on a plaque in your present house, saying that she sponsored the family room? Or a kitchen reno? Would she be open to having one of the bedrooms labelled "Grandma's room"?
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Old 02-28-2013, 04:20 PM   #4
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I'm not sure you could qualify for such a large mortgage (over 4 times your annual income). But even if you could, I think it would be a tremendous mistake to buy that much house.
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Old 02-28-2013, 04:25 PM   #5
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What I would do is figure out what mortgage payment would be comfortable given your current income (30%?), then convert to a mortgage at today's favorable rates, then add $175 for GMa's and your equity contribution and see where you end up. You can also add any savings beyond 6 months of expenses if you want to stretch it.
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Old 02-28-2013, 04:30 PM   #6
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I'm not sure you could qualify for such a large mortgage (over 4 times your annual income). But even if you could, I think it would be a tremendous mistake to buy that much house.
+1

If I were already spending half my monthly paycheck on paying my current mortgage I would be loathe to take on more debt - even for a $100,000 gift. Talk about a gift that keeps on giving...
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Old 02-28-2013, 04:43 PM   #7
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It can be a difficult decision when "your dream home" is a possibility but it crimps the other side of the fence which is savings and investments.
The question you probably need to answer is "do you want to move now?"Do you really need more space or just want it? How much is that want worth to you?
.
The second question is "how much debt" is wise for you to take on?.
The third question is 'Do I (you)know the future"? Can I count on my job. Is it guaranteed, etc. What can happen to throw a kink into everything? Illness, loss of job...etc.
The fourth question is "does this dream home put my family in a potential financial risk if unforeseen things happen? i.e., What is the safest decision?

Nothing wrong with the middle decision if you and your wife feel you absolutely need more room. You didn't say how many square feet these options are or if the middle option has less room than the "dream home". Funny things happen as the children grow up and leave the nest. You may not need the extra room.

Some of us bought into the bigger house for lots of room for our children and are probably too busy to think about what happens when the children leave. Ours is 3,500 square feet. You will spend as much time in retirement as the years you spend raising your children. Since our children have "left the nest" we would have been better off with 2,000 to 2,500 square feet because that is about the space in our house that we actually use.

Just something to think about.

On the flip side, you are young and have time to react and respond to unforeseen circumstances.

It comes down to what you want and how much it is worth to you and your wife.

p.s. there is the saying, "you can't eat a house".

There is also the thought that a house is not a true asset as it requires money (i.e., eats money) rather than making you money. That comes down to your priorities. I would rather make more money with my money than stick it in a house. Real estate historically needs 20 plus years to perhaps see real appreciation. Who knows now after the housing bust.
My house is probably worth what I have in it at this point - but no more and has turned 20 years old this year.
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Old 02-28-2013, 08:06 PM   #8
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My opinion if is even worth anything, is skewed from my lifestyle and income. I am single and retired. My take home pay from my pension after paying my mortgage is right at $4000. The reason I say this is because that is what you state yours will be after mortgage. I don't live extravagantly, and do save some, but with a wife and soon to be 3 kids, that could crimp the ol budget, as I am sure your utilities on this house will chip away also at the $4k pretty fast. It's one thing to say it will work, but will it work when it has too? Will the "excitement" of owning the new house turn into a grind 10 years down the road, when you keep signing those checks month after month, knowing you still have 20 more to go? I have never overreached on a home, but I have on a car, and I did finally get to the point where I resented that payment.
I personally would be mortified to have half my take home absorbed by a mortgage payment. This forum probably isn't the most accommodating to seek encouragement in choosing to do this, as many reached the ER path by being frugal, and minimizing excess costs. Still, I commend you for your
good start in life financially, and successful career. Good luck in your decision as I know it must weigh heavy on you!
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Old 02-28-2013, 08:12 PM   #9
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You know, usually the answer to this would be"you're insane". However, at the current interest rates and your geographic location, a $650,000 mortgage isn't crazy. 4x income isn't crazy in northern va and you're probably going to end up wanting a bigger place/better school district.

Now, have you ever given any consideration to moving to a lower cost of long area, where that size house would only be 300k?
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Old 03-01-2013, 05:29 AM   #10
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The cost of the house isn't just the purchase price. It is also the ongoing cost of taxes, insurance, maintenance. Add to that the average standard of living of neighbors and classmate, how that might affect the family, and if it might put added pressure to live beyond one's means.
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Old 03-01-2013, 07:14 AM   #11
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I think that's a gift I'd have to walk away from. Helping with the down payment is one thing but that's not going to help with maintenance or taxes.

Perhaps grandma would be open to funding 529's for the grandkids?
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Old 03-01-2013, 08:55 AM   #12
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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 03-01-2013, 09:21 AM   #13
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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.
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Old 03-01-2013, 09:25 AM   #14
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After reading all the comments my conclusion is that you should say to Grandma, "thanks, but no thanks". If she is as nice and fiscally smart as you have indicated, she will understand. She may even respect you more.
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Old 03-01-2013, 09:28 AM   #15
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Perhaps grandma would be open to funding 529's for the grandkids?
That's actually a great idea. I'll ask DW about bringing that up with her.
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Old 03-01-2013, 09:37 AM   #16
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I am of the understanding that your "dream home" is always the next home you will purchase, and never the one you are living in.

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."
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Old 03-01-2013, 09:54 AM   #17
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I'm dubious of gifts with strings attached. A cash gift that you can use anyway you want is preferred. This may end up costing you more the 100K you'll get. In my 30s I had desires and visions of my dream home but now in my 50s I no longer have that desire. I would say "no thanks" to the generous offer.
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Old 03-01-2013, 10:11 AM   #18
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I'm dubious of gifts with strings attached. A cash gift that you can use anyway you want is preferred. This may end up costing you more the 100K you'll get. In my 30s I had desires and visions of my dream home but now in my 50s I no longer have that desire. I would say "no thanks" to the generous offer.
+1

Is this really a gift, or something that may be held over your head for the future?

The strings attached would be, for me, an unwise knowledge of the proper use of finances. A gift with would only serve to put you into greater debt (financially and/or emotionally) is, just in my opinion, not a gift.

My MIL offered us similar gifts when we were young, wanting to pay for our vacations, offering to give us money for a home, etc. We politely declined and suggested that if she wanted to gift us the best would be to our kids for their future college education, which she didn't. However, DW's siblings all happily took the gifts... and years later they are in worse trouble for it.

Now my MIL, who then resented me for turning down the gift, now wants DW and I to be executors of her estate due to the financial discipline she now realizes we were showing.
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Old 03-01-2013, 10:54 AM   #19
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If you are saving enough for retirement, early or otherwise and undoubtedly more than just maxing out the 401k, then yes, go ahead and buy the house if you want. Pay retirement first and you can spend the rest.

We have always bought more house than average, with no regrets. I enjoy our house every day, and we spend a lot of time here. I do the same with sports cars. However, we usually eat cheap frozen dinners and think KFC is eating out. Just not that important to us. Also be sure the schools look good for your kids.

You could buy a lot of other "stuff" (or retire earlier) with the extra you might spend on a nice house. It's a big, long commitment. Just a matter of what you want.

One good tactic would be to set aside the decision for a few months and see if it still seems as important then. This doesn't sound like something you've been heading towards for a few years. Sure it sounds nice, but is it really going to be worth it to you?
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Old 03-01-2013, 12:01 PM   #20
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The cost of the house isn't just the purchase price. It is also the ongoing cost of taxes, insurance, maintenance. Add to that the average standard of living of neighbors and classmate, how that might affect the family, and if it might put added pressure to live beyond one's means.
+1

I can't understand why she would not give you the money to pay down your present mortgage. That would help you out so much more IMO. We could have afforded to live in a much bigger, better house, when we were both working full-time. I am so glad that we did not buy the bigger house. I was able to take early retirement after working for almost 33 years, when the work atmosphere was getting stressful. Also, we had no idea that my DH would become disabled. It was so nice to be able to handle life's unexpected situations and not have to worry about finances on top of everything else.
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