Buy Vs. Rent

jennyd417 · October 2014

I'm new to the nest, but since I heard about it from friends, I'd like to keep this vague.

We're house hunting. We make about $11k a month take home (I say take home because *this* is what I personally care about when buying a house). We can put down 20% on a $200k house and still have an emergency fund, closing costs, money to set up house, etc. I was diagnosed with cancer last year and it chopped away a lot at our savings.

The area we want to move into runs around $400k-$600k. Given our income, which of these do you think is smarter:

A) Find another area to live in, even if it means paying for private education for our children (we homeschool now because the public schools AND private schools here are awful).

Rent another year or two and save up the additional downpayment to get into said area (I'm not sure if it's a waste or not at this point.. We do rent now since we moved cross country two years back).

C) Buy a house in a cheaper area now and move to new area in a few years hoping that between savings and equity we can get a good downpayment.

D) Another option.

Thanks.

Erikan73 · October 2014

Find another area to live in or private school your kids. Or find a house in your desired neighborhood at the price you can afford, even if it means having a smaller house/yard then what you want. I heard once, do what you have to do to get a good education for your kids, even if that means basically being at the "poor side" of town for a town with a fabulous school district. Your kids will get the same great education as the ones who parents have a bigger income & bigger house. Then down the road, you can always move into your dream house.

hoffse · October 2014

If it were me, I would do either B or D. I will elaborate on D in a moment.

I wouldn't personally do A because for me location is everything. H and I looked for about two years until we finally jumped at a house in the price range and location we wanted. We are within a 15 minute drive of virtually everything we do, and we ended up in a neighborhood that has sidewalks and is in a good school district. A lot of people commute, and there's nothing wrong with that. It's just not what we wanted. We work long hours, and we were willing to compromise on other things (size, primarily) to be closer to our jobs.

I wouldn't do C because there are a lot of transaction costs that come with buying/selling a house. You typically have to be in a house a minimum of 5-7 years to come out ahead after you calculate what you lose in closing costs, commissions, etc. You also surely want to make money on the sale of your house, and it just takes time for property to appreciate. I wouldn't want to tie myself into a house for 5-7 years that I didn't really like just to own vs. rent.

So I might rent for another year or two until you can afford to buy what you want. That's option B. At your income level I might also look at option D... which I would say is putting down less than 20%. I know the MM gods might strike me down for this, but depending on the interest rate you get, the difference between 20% down on a $200,000 house and 10% down on a $400,000 house is around $1,000/month more in mortgage payments. PMI might cost you another $100-$150/month. That seems like a lot, but you say you take home $11,000/month. You income can likely support it, and the mortgage itself would still around 15% of your take-home (give or take).

Let me be clear - obviously the 20% down rule is a good one, and it's something that a lot of people on these boards adhere to. You also want to be sure you have plenty of wiggle room in your budget before you take on that extra monthly obligation, and if there is a concern that future medical expenses might make that difficult, then you obviously need to keep that cash free. However, for most people a mortgage payment that's around than 15% of take-home pay ought to be entirely manageable, especially at that income level. I would at least run the numbers against your current budget and see what life would be like financially.

One final point is that high-income earners experience diminishing marginal returns with every extra dollar they make. H and I have student loan payments that are literally twice as much as our mortgage... but we are higher income earners (both lawyers) and can still afford a comfortable (though not lavish) lifestyle despite the high % of our take-home that's committed to various forms of debt. That's because groceries cost what they cost whether you earn $30,000/year or $100,000/year. And cell phones cost what they cost. And car insurance costs what it costs. And so on.

EDIT: One last point - the difference in monthly payments between putting down 10% on a $400K house and 20% on a $400K house is a whopping $200/month if you get a 30-year fixed @4.5%. We can even say it's a $350/month difference since we should probably include PMI. I personally would not want to wait 2 years to buy to save myself $350/month if I brought home $11,000/month. That's the whole diminishing marginal return thing.

Sisugal · October 2014

Buy in your desired neighborhood --- but keep your housing expenses no more than 30% of your TAKEHOME pay. That would include mortgage+insurance+taxes+PMI+HOA+utilities. (25-28% normally, but 30-35% in a HCOL area which it sounds you are looking at. I like 30% as it gives more room for other life expenses .)

Make sure you still have a good emergency fund in place after closing as well as money for your wanted/needed repairs/renovations/decorating of the house as well as all associated buying and start up costs.

I hope you are doing well with your health issues and find a great home to enjoy a future with your family.

jennyd417 · October 2014

I didn't want to do 10%, but perhaps it's something worth reconsidering. As for finding a "cheap" house in the area I want. There is one. It's $335,000 and is a foreclosure. It will need at least $50k to make it livable so $400,000 really is the bottom of the rung in this particular area.

Wulfgar · October 2014

For MW and I, we decided to buy in the City but spend the money to send our children to private school. We figured that it is cheaper to buy where we did versus paying almost twice as much for a smaller house that is really only 2 miles down the road. We would still end up sending our children to private school.

Since you really want to buy into the one area, I would save up as much as you can for a year while continuing to rent until you have the 20% down plus extra for misc. You might want to check out hoffse's and some others who just recently bought houses.

Xstatic3333 · October 2014

We ended up doing A), but it was because we found an area with so-so to poor schools that we love in every other way. We made sure private schools in our budget were accessible before choosing to buy here, and will also visit and research the public schools to make our own decision about them when the time comes. We also put less than 20% down, but adhered to the ratios that @Sisugal described, plus an e-fund and start up costs. I really think the ratios and a good reserve savings are more important than the down payment percentage, personally. That said, if you're more comfortable renting until you have 20% there's nothing wrong with that. I don't think of renting as a waste; it gives your family flexibility and a place to live.

C) would not have been an option for us. We don't like moving and didn't want to buy until it was a house we could see raising our family in. However, others feel differently and like to move every few years. Only you can answer that one. If you don't mind moving, C) is an option.

was something we considered doing. The reason we did not was fear of rising interest rates and property values. However, it's not "wrong" to do B if it makes you more comfortable.

Given your income, I would probably put 10% down to buy in your chosen area so you don't have to plan on moving quickly. But, as I said above, there are lots of other considerations. Either way, best wishes for your health and your home buying process!

hoffse · October 2014

jennyd417 said:

I didn't want to do 10%, but perhaps it's something worth reconsidering. As for finding a "cheap" house in the area I want. There is one. It's $335,000 and is a foreclosure. It will need at least $50k to make it livable so $400,000 really is the bottom of the rung in this particular area.

Well the difference in the mortgage between a $200K and $400K house is mostly due to the $200K difference between those numbers, not the amount you are putting down. There's nothing wrong to adhering to the 20% rule. That's a "rule" that was generated by banks based on how much skin they want you to have in the game before you don't have to pay PMI. Being able to avoid paying PMI is great.

But from a budgeting standpoint, I agree with Xstatic that the ratios are far more important than the percentage you put down. The ratios determine what your life could look like for the next 15-30 years. Those ratios also change the more you earn - higher income earners actually can support a higher percentage of debt. I think it's best for higher income earners to try to stick to the traditional ratios, but it's not as crucial. Sisugal mentioned that you want to stay within 30% of your take-home for housing expenses. For you, that's $3300/month. If you happened to go up to 35%, that's $3850/month... and you would still have $7150/month leftover for all your other expenses. That's significantly more than what many folks on this board take home to begin with.

At the end of the day you need to do what feels right. If 20% down feels right, then there is nothing at all wrong with waiting until that money is in place. I, personally, just focus more on the hypothetical budget that various price points give you - we spent a long time figuring out what our life would be like at $200K, $300K, $400K, and $500K. We determined our other ongoing expenses first and then worked backwards, while being sure to leave plenty of wiggle room for the unknowns. I finally insisted on leaving $3000/month open and uncommitted when we were house buying, and that decision knocked us out of the higher price points we were considering. But we don't have kids yet, and our expenses will go up a lot when we do because of daycare costs and health insurance. We didn't want our life to come grinding to a halt when that time comes. Our realtors thought we were nuts, but we haven't regretted doing what felt right. If 20% down feels right to you, then that's what you should do.

als1982 · October 2014

I think there are a lot of factors that you don't mention that need consideration:

You mention a cross country move. Is there any likelihood of that happening again in the next five years or less?
Since your kids are home-schooled, I'm assuming your that $11,000 income comes from a single spouse. If that partner loses their job, how quickly could they find a new one with a comparable income? Or how easily could the other spouse find a job, and for what level of pay?

I don't think it's terrible not to put 20% down. I didn't. But there's nothing I hate more than throwing away money, and seeing that $150 paid to PMI every month (and that's on a house with a purchase price of $170,000 BEFORE the bubble burst - PMI rates are even higher today) makes me a little sick.

Also now that H moved in the home I afforded as a single woman, we love knowing that we can easily afford our mortgage if one of decides to change jobs or something bad happens and we're left with a single income. In the future, I don't think if we were living on one income we would reach for the top of our price-range when buying a new home, but instead more towards the low to middle end of it, just for peace of mind.

formerlyGDaisy09 · October 2014

I think that all PPs here make good points, so I'm not going to repeat them, however I'll share that My H and I did choose to put less than 20% down on our house (got us into a home in a good school district in the neighborhood we wanted before we could save the 20%)

The PMI for us is about $150/month, the difference in our actual mortgage payment was minimal.

when we got our mortgage we figured it would take us about 5 years to pay-down the loan to the point where PMI would disappear. however, home values increase, inevitably you make improvements, we're expecting to have the house reappraised in the spring and should have enough equity in our home to drop the PMI.

Buy Vs. Rent

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