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Are We Ready?
We went to meet with a financial adviser recently to discuss investment opportunities and he said we should start looking for real estate NOW. I am not sure if he is being a little too aggressive with his plan for us and I would love some opinions with others that have gone through the rent vs. buy debate. Here is our situation:
Our only debt is student loan debt and we pay 380/mo. We have no credit card debt and both of our cars ( a 2004 and a 2011) are paid off.
We have $16,000 in cash in the bank. Our "emergency" money is included in that number. We gross around $4900 a month and we put $1400 in our savings each month. Saving is our top priority and we have agreed we will cut back on any expense we have to to maintain our rate of savings. If we keep up our savings we will have $23,000 cash by 12/31/12.
What does everyone think? I really value feedback.
Re: Are We Ready?
It sounds like you are financially responsible which is the first step. So congrats on that
Home purchase is not for everyone. This is a great time to buy if you are ready to deal with it. This means you take care of repairs, have the mortgage, have roots, etc. But you also have a place to call your own and do as you please.
Trying to save up 20% is your best bet. It is hard to say if it's right for you without knowing how much you are looking to spend. So my words of wisdom are...
1. You know how to save. Continue this after you get a house. Save for a ER repair fund, no job fund, and retirement.
2. Don't become house poor. Listen to the mortgage person and see what you are qualified for but really look at what you are comfortable at paying also.
3. Start looking at houses in this price range (online is fine for now) to see if you even like what you could buy.
It's encouraging to see you thinking it through and doing it right!
If you gross $4900 and save $1400, I conclude that your current monthly expenses are $3500. 3500 x 6 month emergency fund = $21k. So before you can even start thinking about saving for a house, you should focus on having $21k in the bank for your emergency fund. Your calculations show that you should have your emergency fund done by mid-November, which is great.
At that point I'd open a new account just for your house fund, and aggressively save for that goal. Is therte any way that you can increase your savings rate to help you get there faster? Typically I would suggest saving for a 20% downpayment, but if you are cool with paying PMI, it may make more sense to go FHA for the 3.5% downpayment option so that you can get into the market while interest rates are still low.
So say you save in that house account for 9 months. You would have $12,600 in the house account. A $175,000 house would need a $6,125 down payment (3.5%), leaving you $6,475 for closing costs. I would consider this a bare minimum amount. You should really have another $3k or so in the house account for the random things you'll need for the house. So you are really looking at saving until october or november of 2013 before being ready to buy.
And that is assuming that $175k gets you the kind of house that you want to own, and that the $1200ish/month mortgage payment is in line with your budget. Do you have a sense of what kind of house you would want (# of bedrooms and bathrooms? age of construction? lot size? location? etc.). If so, take a look at the houses that have recently sold in your desired area that meet your criteria (redfin.com is great), and see if the house you want sells for a price you can afford. If it does, you now know your time frame. If the houses you want are more than your budget, you can either save longer to make a bigger downpayment that will lower your monthly payments, or you can start hunting for jobs that pay more so you can afford more.
Sorry I should have been more clear. We bring home $3800 after taxes. We then put $1400 into our savings account and we also put $300 into a separate account to help build up a fund for the next time we need to purchase a car. We know a car purchase is years away but we wanted to possibly avoid having to ever finance a car again. So all in all, our actual expense are $2100 and it includes everything from health insurance to cell phones and rent.
Thanks for the advice and I can't wait to hear more!