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Frequent Contributor
Posts: 425
Registered: ‎07-08-2016

Budgeting for a home

For those who have read many of my posts, you may recall we've been somewhat passively looking for a new place to call home. We're starting to get a little more serious with this and have started down the pre-approval route, though to be honest we may end up waiting another year or two because there's just not much on the market that's in our budget.

 

When we do the numbers (and I have made a post on this some time ago) we came out that we can realistically afford to borrow about $200,000 to $300,000 for a home. This effectively puts our budget at $500,000-$600,000 as we have around $300,000 we're willing to put up as a down payment. This amount doesn't include points and closing costs, which we're more than happy to pay separately at closing. Anything over 1000 sq. ft. in the neighborhoods we're looking at is going to cost at least $800,000 and likely include an HOA fee of $400 to $1100 a month (whereas we pay about $150 a month now for HOA). Needless to say, that means we need to shift our budget upwards.

 

The part that's a bit troubling is we're aware of several people who make less than we do affording more house than we can. What we don't know (and are a bit too polite to ask) is how people in that situation are making it work. They must be doing something we aren't or aren't doing something we are, and that's what we're trying to figure out.

 

To help, I get you'll need to see a few numbers, so here goes:

 

1. Married, no children (yet). Gross income varies from a base of  about $180,000/year to around $240,000/year depending on dividends/bonuses/etc.

2. Fixed debt: mortgage payment $1200, car payment $550, student loan payment $350. All except car payment are in excess of the minimum to pay down principal faster.(so can be reduced a bit if necessary).

3. Fixed expenses: HOA $150, electricity $50-100, cable/internet $75, phone $70, gym $70, insurances (car/home) $350

4. Fixed retirement: ESPP $1200, 401(k) $2100, savings/investments/other $1900, HSA $150. Retirement is important and even if it's 30 years away, I don't want to touch this unless it's necessary. I'm already behind on my goals as it is.

5. Remaining funds: about $1800 for food/gas/clothing/etc. We can shrink this down a bit.

 

The numbers I'm getting so far:

1. Today we pay about $1,500/month for total housing - 900 mortgage P&I, 300 taxes, 150 HOA, and 150 insurance

2. To make a $500,000 mortgage work, we'd need about $4,000/month - 2400 mortgage P&I, 600 taxes, 700 HOA, 300 insurance. Also estimating about $12,000 for closing costs.

 

The options I see that are possible:

 

Option 1: Pay off student loan to free up $350 a month. This would cut into the savings that would be used for closing costs, meaning that we may have to shift some of them into the down payment. Gets us nowhere near 4000.

 

Option 2: Pay off the car and free up $550 a month. Same as above except it's a somewhat larger cut (about $6000 more) so it would cut into both closing costs and down payment. Also gets us nowhere near 4000. If I could do it all over again, I would not have bought the car to begin with and just taken the subway or rented a zipcar for the days I need one.

 

Option 3: Adjust tax withholdings. Last year (filed single) got about $9000 redund and this year (joint) we're looking at around $14,000 refund. There seems a bit of wiggle room for taxes here, but I will not allow for a situation where we've allocated this to mortgage and something changes where we owe money the next year. This means I won't be comfortable with much more than about $300/month pulled from here. Result: even if we withheld $1000 less, we're still nowhere near 4000.

 

Option 4: Cut gym and dining out. This would free up about $800 a month, but we'd be on the ramen noodle diet and I feel like we're past that point. However, if that's what everyone else does to afford a home, then I guess we do it. Cable/internet is already trimmed to bare minimum (we get a few channels, no HD, and internet), but we could cut Netflix to save $10. We have no other subscriptions to cut and have already made entertainment (such as going out to the movies) a few times a year thing so no significant savings can be cut from that. I use the gym about 4 times a week, but I will drop it if necessary.

 

Even combining the 4 options, we don't make it to 4000, and we reduce our closing costs/down payment in the process, which means we also effectively reduce our ability to buy a home by about $50,000. Our approach so far has been to sit tight where we are and wait until we see the right place at the right price, but if prices go up as fast as we can save, we'll never hit that point.

 

This leads me to the following conclusions:

 

1. My numbers are wrong, and/or

2. Others aren't saving enough for retirement so they could buy a home, and/or

3. I'm saving too much for retirement to afford a home, and/or

3. They're trimming expenses in ways I haven't thought of.

 

How are others managing this? Any other opinions on what can be done to make the numbers work for us? 

Valued Member
Posts: 49
Registered: ‎09-01-2009
0

Re: Budgeting for a home

Looking at your numbers there, are you seriously putting  $5,200 towards retirement/investments a month? Based on your 180k a year, that would put you saving around 35% towards retirement. I would say that there is about nobody saving that much.

Frequent Contributor
Posts: 315
Registered: ‎09-15-2016

Re: Budgeting for a home

Iced - you state you are looking at a $500-600k mortgage with $300k down payment.  Assuming you get a $300k loan, your P&I payment would be $1450-ish - not $2400. This puts at what you are paying now.

 

I also strongly urge you to lower the amount you are giving Uncle Sam for free every year.  $9k back in a year is $750/month you shouldnt be handing over.  There is no penalty for having to pay every April.   Also, with the higher taxes and perhaps interest you can deduct, you may owe even less.  I would adjust your withholdings to shoot for $2000 back.  This would put $580 back in your pocket each month..

 

You are also putting far more into retirement and investing that average.  This is likely where others are seeming to make less but get more.  I am sure if you looked at their net worth vs yours, it would be radically different.

 

My 2 cents.

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Frequent Contributor
Posts: 425
Registered: ‎07-08-2016
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Re: Budgeting for a home

 

Yes, we put a fair bit into retirement.

 

I have been pushing to get that even higher by absorbing more of the expenses and allowing the wife to sock away even more into 401(k). She's withholding 22% and I was at 17 but dropped to 14 as I was consistently hitting the 18k cap midway through the summer. She should push up to 25-30% by the end of this year (pay raises get offset by higher contributions by both of us so we keep budget flat while excess and bonus funnels into more retirement). I moved the excess toward additional investments as my ESPP is also capped.

 

Taxes get complicated. I'm shifting more and more of my contributions toward a Roth 401(k), which will eat into the tax refund. The idea behind the large refunds is that we plan to funnel them into our Roth IRAs. We will try to keep enough contributions going to traditional 401ks to keep our AGI under the limit to contribute to Roth. If we pull back a lot of the taxes, we not only run the risk of paying in April but we also lose that easy funding source for Roth. On a good year, that's another $11000 to add to the retirement pool but it's not a given (was nigh impossible for me until we married). And since we don't know we if we qualify until we see our AGI, it's the best time to contribute without risk of penalty.

 

I have been working under the Financial Samurai goals of striving for 50% savings. To be honest, I figured most people did about 30%, but if you're both saying that's high then maybe that's where some others are pulling it off where we can't. The question I would then have to sort is how much can we reduce and still make our goals before we die of old age. It's not an easy question to answer as either one of us could lose our job tomorrow and lose out on contributions until re-established, putting us at further risk of retiring (or being retired) without enough to live on.

 

I'm also pretty sure the wife thinks I worry too much about it.

Valued Member
Posts: 49
Registered: ‎09-01-2009
0

Re: Budgeting for a home


iced wrote:

 

Yes, we put a fair bit into retirement.

 

I have been pushing to get that even higher by absorbing more of the expenses and allowing the wife to sock away even more into 401(k). She's withholding 22% and I was at 17 but dropped to 14 as I was consistently hitting the 18k cap midway through the summer. She should push up to 25-30% by the end of this year (pay raises get offset by higher contributions by both of us so we keep budget flat while excess and bonus funnels into more retirement). I moved the excess toward additional investments as my ESPP is also capped.

 

Taxes get complicated. I'm shifting more and more of my contributions toward a Roth 401(k), which will eat into the tax refund. The idea behind the large refunds is that we plan to funnel them into our Roth IRAs. We will try to keep enough contributions going to traditional 401ks to keep our AGI under the limit to contribute to Roth. If we pull back a lot of the taxes, we not only run the risk of paying in April but we also lose that easy funding source for Roth. On a good year, that's another $11000 to add to the retirement pool but it's not a given (was nigh impossible for me until we married). And since we don't know we if we qualify until we see our AGI, it's the best time to contribute without risk of penalty.

 

I have been working under the Financial Samurai goals of striving for 50% savings. To be honest, I figured most people did about 30%, but if you're both saying that's high then maybe that's where some others are pulling it off where we can't. The question I would then have to sort is how much can we reduce and still make our goals before we die of old age. It's not an easy question to answer as either one of us could lose our job tomorrow and lose out on contributions until re-established, putting us at further risk of retiring (or being retired) without enough to live on.

 

I'm also pretty sure the wife thinks I worry too much about it.


I would almost agree slightly with the other posters who said adjust your deductions slightly, so you can get a little more a month but don't overdo it so you wildly swing your taxes for april. According to my fidelity account I should be on track for a decent retirement Balance at my current giving level and I only put in 6% with my company matching 10%.

Anyways, also based on your housing numbers there I would assume you live in either new York, California, or Chicago. I would say that if you really want a house that would carry that large of a payment, I would probably cut back a little on the retirement contributions and maybe use some of your tax refund to pay off your loans. 

Frequent Contributor
Posts: 425
Registered: ‎07-08-2016
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Re: Budgeting for a home


gardini51 wrote:

I would almost agree slightly with the other posters who said adjust your deductions slightly, so you can get a little more a month but don't overdo it so you wildly swing your taxes for april. According to my fidelity account I should be on track for a decent retirement Balance at my current giving level and I only put in 6% with my company matching 10%.

Anyways, also based on your housing numbers there I would assume you live in either new York, California, or Chicago. I would say that if you really want a house that would carry that large of a payment, I would probably cut back a little on the retirement contributions and maybe use some of your tax refund to pay off your loans. 


I can't trust that the S&P500 (or stocks in general) will perform much better than 3% year after year, that protections like Medicare will still exist, or that Social Security will even be solvent by the time I retire, so my numbers have to take into account $0 for SS, paying 100% out of pocket for health care (minue my accrued HSA savings), and a market that grows 3% YOY (plus dividends). My company is also cheap and only matches 3%.

 

One thought I had in response to the last reply was that I'm not factoring in mortgage interest, but it adds up. If I'm paying another $1000 a month in interest, that's another $12,000 deduction on top of my current mortgage interest, which will offset the payment a bit (but not enough to make this comfortable on its own).

 

I live in Boston, actually. The housing market here is pretty crazy too.

Established Contributor
Posts: 687
Registered: ‎09-28-2016
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Re: Budgeting for a home

It's great that you're trying to prepare for the future.  $5200/month preparation...may be a bit much, especially when $1200 of that is going to ESPP (which makes me cringe as ENRON always comes to mind). You may be too young to remember that debacle. Not only do most people NOT invest 30% - most do waaaay less - you're lucky if you find someone investing 10% on a regular basis.  

 

I agree with other posters, consider cutting back some on your tax refund and on your retirement investment (just a little Smiley Wink ). Doing that as well as trimming in those areas you've already examined should get you there. Personally, I would rather owe Uncle Sam and send the check when I file my taxes than give the gov't a $9,000 interest free loan.  You could just as easily sock that money away in some interest bearing account and use it to pay the tax bill if you owe.  If you don't owe- you'll have it to throw into your 401k or whatever.  But as it stands, you're essentially giving Uncle Sam a 9K interest-free loan or more every single year.

 

My eyes bugged out when I saw that you could be paying $700/month in HOA fees- which is $100/month more than your property taxes.  Is this considered average or on the high end of HOA fees?  Guess I won't be living in Boston anytime soon.  LOL!

 

You'll have to loosen your grip on your perfect plan just a little bit if you intend to reach all of your goals.  I wish you the best of luck in having everything work out. 

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Registered: ‎08-04-2014
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Re: Budgeting for a home

Good thread iced. Keep it coming!Smiley Happy

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Frequent Contributor
Posts: 425
Registered: ‎07-08-2016
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Re: Budgeting for a home


LOTR wrote:

It's great that you're trying to prepare for the future.  $5200/month preparation...may be a bit much, especially when $1200 of that is going to ESPP (which makes me cringe as ENRON always comes to mind). You may be too young to remember that debacle. Not only do most people NOT invest 30% - most do waaaay less - you're lucky if you find someone investing 10% on a regular basis.  

 

I agree with other posters, consider cutting back some on your tax refund and on your retirement investment (just a little Smiley Wink ). Doing that as well as trimming in those areas you've already examined should get you there. Personally, I would rather owe Uncle Sam and send the check when I file my taxes than give the gov't a $9,000 interest free loan.  You could just as easily sock that money away in some interest bearing account and use it to pay the tax bill if you owe.  If you don't owe- you'll have it to throw into your 401k or whatever.  But as it stands, you're essentially giving Uncle Sam a 9K interest-free loan or more every single year.

 

My eyes bugged out when I saw that you could be paying $700/month in HOA fees- which is $100/month more than your property taxes.  Is this considered average or on the high end of HOA fees?  Guess I won't be living in Boston anytime soon.  LOL!

 

You'll have to loosen your grip on your perfect plan just a little bit if you intend to reach all of your goals.  I wish you the best of luck in having everything work out. 


I do remember Enron, and rest assured I don't keep the entirety of my ESPP parked in my company's stock. I diversify it, but I do not withdraw it. Since I get to buy at anywhere from 40% to 85% of the stock's value, it makes sense to me to max ESPP then sell some of the stock and roll the proceeds into another company's stock.

 

I get the whole free loan thing, I really do. I'm just a bit OCD about ever, ever owing again (as I did many years ago) so now I'm erroring on the conservative side. And I'm alone on this one - even my wife thinks my tax withholdings are a tad excessive. This year may be the straw that breaks that camel's back since the loan to the IRS just went up another couple of thousand dollars. Perhaps I'm the example of what happens when someone got financially bit in the past and swings to the other extreme.

 

I would guess the average HOA we've seen is around $700 for 1000 sq. ft., though I've seen some as low as $100 (not counting single family homes which of course are $0) and as high as $1500 (but included on-site gym, pool, doorman, snow removal, landscaping, etc). A lot of neighborhoods are doing between .50 and $1 per square foot per month. About half of the properties we've looked at also don't include parking, so depending on neighborhood, you may also be forced to purchase off-street parking.

 

Community Leader
Senior Contributor
Posts: 4,235
Registered: ‎07-17-2014

Re: Budgeting for a home

I am in the same boat as the OP in two key respects:

     (1)  I contribute a huge portion of my monthly paycheck toward retirement

     (2)  I want to buy a house in 6-7 months.

 

#1 makes a lot of sense for me, since I got started much later than I should have preparing for retirement.  Still, we are talking about me putting away a LOT.  Basically 30k a year into a Roth, which means I also pay taxes on it up front too.

 

The way I plan to get a pre-approval for a big loan is to cut way back on my monthly contributions to retirement in the three months before I apply.  Remember that they don't look at your paychecks for the last two years.  They base their projections for how much available cash you will have each month (and therefore how big of a loan you can afford) to a big extent on this 2-3 months of paychecks -- basically what was your take home pay. 

 

If I do that, I will appear to have a lot more "take home" money each month and therefore I'll get approved for a much bigger loan.

 

Now of course there's still the issue of making sure one does not buy a house that is too expensive for one's means, given that AFTER he owns the house he'd like to resume saving for retirement at close to his previous level. 

 

But what seems to me is an unnecessary obstacle is "the bank won't approve me for a big enough loan."  Our OP should be able to control that by sharply reducing his retirement contributions for maybe 4-5 months.

 

I admit to not being an expert in this area -- happy to hear if others think that this strategy would be useless.

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