Saving for a house

[nboy22]

Hey everyone, I am looking for some advice on saving up for a house. I recently switched jobs and I'm now making roughly $800 more per month. I have a car loan that I have $11,500 left on at 4.2% interest. It is a 6 year loan because that's all I could afford at the time and I end up paying $262 per month to that loan. Other than that I have no debt on credit cards and no student loan debt.

I will also be starting a 401k at my workplace and plan on putting in $1200 a year and my employer will match that 100%.

After all that, I have calculated I can put in around $1000 a month into savings, and should have another ~$1500-$2000 when I get my federal taxes back at the beginning of next year.

My question is what is the best place to put the money so that I can save up for a house? The homes I'm looking at are around $175,000 - $200,000 range (Gilbert/Phoenix area) and I want to save up the proper 20% down payment plus maybe some extra for emergency fund and closing costs.

Thanks in advance for any advice you're able to throw my way!

 

[Virge_]

Go for your 12-month safety net, then pay down and/or off the car, then worry about saving for the house down payment. Security is significantly more important than asset risk. Thing long-term intelligent, not short-term impulse.

To avoid PMI on a new loan you'll need to pay down 22%, so that's 44k you'll need banked for a 200k house. +$5k or so in closing costs (for 200k it'll be closer to 6k, usually, but you can often get a seller to pay that anyway.. still hit or miss). 1k a month + 2k tax return (you really should fix that, by the way, you're obviously over-paying in taxes and need to adjust your withholding to stop giving the government an interest-free loan, but that's another matter entirely) means that you'll be banking 14k a year.

Take maybe 15% off the top as an expected emergency expense for misc needs and lets just say you're left with $12k banked a year. That's four years of saving to reach your current goal of 49k, not including your 12 month safety net and paying off the car (both of which most people tend to just ignore bothering with anyway so for the sake of the argument I excluded them).

When all that is said and done and the dust settles, the odds are high you will not be buying a "move in ready" home, due to the fact that statistically since the crash the houses on the market which are actually maintained to market value vs. those not has basically juxtaposed meaning you not only pay above market value but invariably finding yourself upgrading miscellaneous things that the previous home-owner didn't bother to do - and if you're a tech guy you probably end up blowing a ton more on electronics.. so the base price of the home itself isn't even truly an accurate representation of the monetary investment required.

I think you've got quite some time to give this some thought. I'd suggest you're not quite ready to be looking.

 

[notposting]

Personally, screw the 20%. Yeah, it would be nice, but if you want to wait 4-5 years for 20% + extra funds, all while interest rates rise...

You can pay ahead on a mortgage if you so desire. There are different theories on this which I have just started looking at (idea being you may as well not go for this magical debt-free place, but build savings, do home equity, etc etc because if you lose your job you still need to make payments).

Do you have any qualifiers that can help as well? Veteran? Anyway, I would say just save up for a year, start researching local agents, neighborhoods (drive them if you need to), and figure out what you might need for closing/emergency/move-in costs.

(all home projects will take twice as long and cost twice as much as you estimate, btw)

 

[notposting]

Pay down the car first, then go for your 12-month safety net, then worry about saving for the house down payment. Security is significantly more important than asset risk. Thing long-term intelligent, not short-term impulse.

To avoid PMI on a new loan you'll need to pay down 22%, so that's 44k you'll need banked. +$5k or so in closing costs (for 200k it'll be closer to 6k, usually, but you can often get a seller to pay that anyway.. still hit or miss).

I disagree on this. (note, don't know if he has any savings at the moment anyway)

Two examples for his situation:

1) he spends the next 6 months paying $1262/mo towards his car trying to pay it off. Total spent is $7562. Then he loses his job and has nothing for the next months car payment (or rent).

2) he spends the next 6 months saving the extra $1000. He has the extra $6000 when he loses his job which is good for 22+ months of car payments, or more likely, a much smaller number of rent + car payments while he gets a new job.

 

[Virge_]

I disagree on this. (note, don't know if he has any savings at the moment anyway)

Two examples for his situation:

1) he spends the next 6 months paying $1262/mo towards his car trying to pay it off. Total spent is $7562. Then he loses his job and has nothing for the next months car payment (or rent).

2) he spends the next 6 months saving the extra $1000. He has the extra $6000 when he loses his job which is good for 22+ months of car payments, or more likely, a much smaller number of rent + car payments while he gets a new job.

This is valid. I mixed up the order. I've adjusted my reply. Thanks!

 

[Virge_]

Personally, screw the 20%. Yeah, it would be nice, but if you want to wait 4-5 years for 20% + extra funds, all while interest rates rise...

This depends entirely on the person! There are two general trains of thought, new-age, and old-age!

New-age: Statistically both younger people and established professionals will stay in a house about 3-5 years, max. In this case, just pay the 3-5% for a CONV/FHA and spray and pray that your appreciation bumps you enough that you break even when you move. You're basically leasing.

Old-age: You intend to live in this house until you die. Your objective should be to pay it off as fast as possible to get rid of the mortgage. Go for 20%+.

 

[nboy22]

Thanks Virge_ and notposting for your responses. Every little bit helps because I'm no financial expert. I have $3000 sitting in other savings right now that I just have for emergency funds. My car is fairly new, should be reliable (2010 Toyota Corolla) and I have the extended warranty so I don't plan on having to spend much on it other than tires and oil till 2017 or so.

I went from making $28k a year to $40k a year which is a significant jump for me, so I have been debating whether I should pay off the car or start saving.

 

[Virge_]

Thanks Virge_ and notposting for your responses. Every little bit helps because I'm no financial expert. I have $3000 sitting in other savings right now that I just have for emergency funds. My car is fairly new, should be reliable (2010 Toyota Corolla) and I have the extended warranty so I don't plan on having to spend much on it other than tires and oil till 2017 or so.

I went from making $28k a year to $40k a year which is a significant jump for me, so I have been debating whether I should pay off the car or start saving.

A typical buffer is 6-12 months salary in case you lose your job. Personally this is my biggest priority.

After that, the car becomes really variable. Everyone is different - personally, I will ALWAYS have a car payment (and, sometimes, two) for the foreseeable 20+ years of my life, so I don't value paying it down and/or owning it the same as others.. to me, a car payment is an expected monthly bill in all of my financial spreadsheets, and this is a choice based on my love for travel, road-trips, and driving nice vehicles. I would suggest deciding if you value paying the car off early or if you are comfortable with the payment, and then proceeding from that decision to the saving for the down payment.

Just my two cents. I'd seriously fix your tax withholding, though - you're basically giving away money!

 

[Wonderful Pork]

It depends on what your plans for the next 3-5 years are.

If you are definitely going to STAY in a spot, then I'd advocate purchasing. If you're not sure, then keep renting.

If you're going to buy a single family home and stay there for 5+ years I'd say get the 20% if its feasible (i.e., not a $600k house like in the Boston area)

If you're going to buy a "starter home" or condo and move in a couple years then do the minimum...I'd try and get an interest only or ARM to be honest and hope it appreciates. You'll likely be out 6% when you sell just on realtors fees anyway.

In any case, I'd make sure that the total home cost isn't more than 3x total gross income as a ballpark figure - realize sometimes this isn't possible (like in the Northeast or NYC)

 

[Jeff7]

Once you're able, put more into the 401k. That's a $17.5k window of tax-deferred space you're allotted each year, and if you don't use it, the annual window goes away forever.

A typical buffer is 6-12 months salary in case you lose your job. Personally this is my biggest priority.
...

6-12 months salary, or 6-12 months expenses?

 

[olds]

..
I will also be starting a 401k at my workplace and plan on putting in $1200 a year and my employer will match that 100%...

You should be putting the max you can into that account. It's free money.

 

[DaveSimmons]

1. 401k. Do it at least up to the amount that your employer matches, otherwise you're giving up free money.
2. Emergency savings - get that up to 6 months' worth
3. Pay off car. You "earn" 4.2% which is 4-5 times what savings interest would pay. It also removes a monthly payment you don't want to have on top of any mortgage
4. After the above, save for the house.

Make sure to pay off any credit card debt too, and stop carrying a balance, Pay it off completely every month.

 

[Vdubchaos]

You are on the right track OP. You have a great plan, stick to it (having 20% is smart).

Just put your money into savings or IRA if you want little interest (IMO, not worth the hassle but it's your call).

 

[notposting]

Also -- it could be worth finding a financial advisor in the area to talk to.

Same for taxes.

No expert here, just went through a lot over the last couple years and tbh, still really don't even know. DO KNOW that my wife and I totally missed the boat on buying a house around here (Detroit area), we started looking last spring just in time for the market to start heating up, and interest rates to jump over the last year.

Finally got a place this spring, it's a fixxer-upper in some ways but solid enough for us and our boys to move into. You have the luxury of time to start looking at houses and figuring out what you want and what you can bend on. We ended up falling back to price, general location (specific isn't ideal), and a good yard for the kids. Otherwise it's on a slab, has a septic tank, is off a highway service drive (thankfully, inside you can't hear the highway), has a carport vs garage, etc etc. But it's ours, damnit!



Also, $40K salary and a $175-200K house could be pretty tough. Don't forget you will have homeowner's insurance and property taxes on top of the mortgage, paying all utilities, paying for all repairs, both short term and long term (roof, water heater, furnace).

We make more than that, granted with two small kids and two adults to feed/clothe/etc and went about half with our house. Don't know the market in Phoenix though. A quick look at Zillow makes me think Gilbert is probably a better suburb than the ones next to it?

We would like to move on most likely in 7-10 years, but depending on the market and our own finances we made sure that the home we ended up in was something we could settle with if need be for 30 years. A lot of people assume they can sell (being here at ground zero of the recession is rather instructive in that regard) and get hosed later on.

Good luck.

 

[nboy22]

Also -- it could be worth finding a financial advisor in the area to talk to.

Same for taxes.

No expert here, just went through a lot over the last couple years and tbh, still really don't even know. DO KNOW that my wife and I totally missed the boat on buying a house around here (Detroit area), we started looking last spring just in time for the market to start heating up, and interest rates to jump over the last year.

Finally got a place this spring, it's a fixxer-upper in some ways but solid enough for us and our boys to move into. You have the luxury of time to start looking at houses and figuring out what you want and what you can bend on. We ended up falling back to price, general location (specific isn't ideal), and a good yard for the kids. Otherwise it's on a slab, has a septic tank, is off a highway service drive (thankfully, inside you can't hear the highway), has a carport vs garage, etc etc. But it's ours, damnit!



Also, $40K salary and a $175-200K house could be pretty tough. Don't forget you will have homeowner's insurance and property taxes on top of the mortgage, paying all utilities, paying for all repairs, both short term and long term (roof, water heater, furnace).

We make more than that, granted with two small kids and two adults to feed/clothe/etc and went about half with our house. Don't know the market in Phoenix though. A quick look at Zillow makes me think Gilbert is probably a better suburb than the ones next to it?

We would like to move on most likely in 7-10 years, but depending on the market and our own finances we made sure that the home we ended up in was something we could settle with if need be for 30 years. A lot of people assume they can sell (being here at ground zero of the recession is rather instructive in that regard) and get hosed later on.

Good luck.

Oh don't let me forget.. I plan on renting out 1-2 of the rooms in the house at $400-$500 per month. I know I won't always have a renter, but it should be pretty easy to find one. I have been renting rooms on craigslist for the past 5 years or so. My girlfriend would also contribute around $300 a month for rent and utilities. So I'm planning on having at least $700-$800/month at least to help me out. It will make it much more affordable and I don't mind sharing space. Gilbert is a cheaper area with nicer homes.. the sacrifice is that I would have a longer commute but that's not really a big deal if I have my own place.

 

[CLite]

Get a realistic picture of property taxes, estimate maintenance and run amortization schedules for different levels of initial downpayment. Then run tax simulations to figure out the benefit from interest & property tax deductions (likely very minimal based on your income bracket). Compare the net lost-equity cost (closing costs, interest sans tax benefit, maintenance, PMI if <20%) versus renting. Be sure to fairly compare utilities.

Do all of the above if you are deciding between renting and owning from a financial perspective. When you factor in closing costs which are essentially blown equity then it's probably not wise to buy if you are looking to move anytime soon (5'ish years).

If you simply want to buy for the purposes of having more control in your life then you can just put together a monthly budget and decide if you can afford the payment.

edit: regarding the 401k - do it up to the company match point once you've achieved your short term goals (presumably saving for a house), anything beyond that should go to roth ira given your tax bracket.

edit2: on second thought I doubt you would exceed the standard deduction from interest on a 160k'ish loan - so probably you can skip all the tax calculations and assume you get no benefit.

 

[nboy22]

Get a realistic picture of property taxes, estimate maintenance and run amortization schedules for different levels of initial downpayment. Then run tax simulations to figure out the benefit from interest & property tax deductions (likely very minimal based on your income bracket). Compare the net lost-equity cost (closing costs, interest sans tax benefit, maintenance, PMI if <20%) versus renting. Be sure to fairly compare utilities.

Do all of the above if you are deciding between renting and owning from a financial perspective. When you factor in closing costs which are essentially blown equity then it's probably not wise to buy if you are looking to move anytime soon (5'ish years).

If you simply want to buy for the purposes of having more control in your life then you can just put together a monthly budget and decide if you can afford the payment.

edit: regarding the 401k - do it up to the company match point once you've achieved your short term goals (presumably saving for a house), anything beyond that should go to roth ira given your tax bracket.

They match 100% up to 3% so by me putting in $100 a month I am maxing out the 100% portion. Then they match 50% up to 5% from there.

 

[Virge_]

Yikes. I totally missed the 40k figure. That's a big factor. It's generally advised not to pay more than 30% of your take home in a mortgage payment. A 200k house with 5% down including PMI and taxes would run you in the $1400-1500/m range. A 200k house with 20% down would run you in the $1000-1100/m range.

40k puts you in the new 25% + 25% over $36,000 range.. so thats $6,000 a year in federal taxes alone. Not factoring in state taxes and your 401k, that's an estimated take-home of roughly $33,000, or $2,750/m ($1,375 a pay period if bi-monthly). That would put your monthly payment in extreme danger zones. You can realistically not afford a $200,000 home..

 

[Insomniator]

I don't know get how the hell people pay for houses. They are all listed between 300 and 700k in my area and I honestly... don't get it. My GF and I make a combined ~130k right now and saving ~50k for a down payment seems hilariously farfetched. Between school loans, cars, rent, gas, food, vacations etc... I feel like we'd need to be 1%'ers to buy a decent home.
I guess you just eat ramen, do nothing and put in every extra cent you have into a savings account for 5 years and then maybe you can afford a 2 bedroom in the ghetto.

Maybe I'm just being discouraged by north jersey prices...

 

[nboy22]

Yikes. I totally missed the 40k figure. That's a big factor. It's generally advised not to pay more than 30% of your take home in a mortgage payment. A 200k house with 5% down including PMI and taxes would run you in the $1400-1500/m range. A 200k house with 20% down would run you in the $1000-1100/m range.

40k puts you in the new 25% + 25% over $36,000 range.. so thats $6,000 a year in federal taxes alone. Not factoring in state taxes and your 401k, that's an estimated take-home of roughly $33,000, or $2,750/m ($1,375 a pay period if bi-monthly). That would put your monthly payment in extreme danger zones. You can realistically not afford a $200,000 home..

Good to know.. In an ideal world I would get something around $160,000-$175,000. The payments would be tight, but with renters and things of that sort it should make it much more manageable. I am a pretty frugal person and sometimes I can get crap from my girlfriend for it, but I am who I am and I don't spend my money in stupid places like buying starbucks every day, etc...

 

[nboy22]

I don't know get how the hell people pay for houses. They are all listed between 300 and 700k in my area and I honestly... don't get it. My GF and I make a combined ~130k right now and saving ~50k for a down payment seems hilariously farfetched. Between school loans, cars, rent, gas, food, vacations etc... I feel like we'd need to be 1%'ers to buy a decent home.
I guess you just eat ramen, do nothing and put in every extra cent you have into a savings account for 5 years and then maybe you can afford a 2 bedroom in the ghetto.

Maybe I'm just being discouraged by north jersey prices...

Same here.. I am glad I don't live in the big condensed cities that have ridiculous home prices. Phoenix is at least spread out enough that there is no shortage of land which drives home prices down a lot.

 

[Virge_]

Good to know.. In an ideal world I would get something around $160,000-$175,000. The payments would be tight, but with renters and things of that sort it should make it much more manageable. I am a pretty frugal person and sometimes I can get crap from my girlfriend for it, but I am who I am and I don't spend my money in stupid places like buying starbucks every day, etc...

I appreciate your intentions, but I'm cautioning you to be realistic based on my own experiences. I've owned a lot of property, and have quite a few rentals (I tend to move, buy a house, work a few years, and take a job elsewhere and leave the old property with a property management company and collect passive income). I've even rented out rooms recently, so I have similar experiences to your intentions.

Trust me when I say that you simply cannot factor in an expected rental income on a spreadsheet when doing your bills - it's just unrealistic. Not only can you sometimes go through periods where renting isn't viable, but you're also opening yourself up to a lot of legal problems. In one instance I had a renter that was served a 30-day notice and a sheriff was actually on-site when this person was hysterically fighting with their boyfriend in the rented room which involved throwing all sorts of things, breaking a window, etc. (part of the reason this person was being evicted, you can't always vet people and while 9/10 you get a great renter, that 1/10 will haunt you).

The $1800 in damage that was done to the property by this person was just taken at a loss, because the cost to sue them and win would have exceeded the damage and there was no guarantee that you'd actually A) win the case, and B) receive any payment from someone.

There are dozens of other horror stories, so I won't bore you - but the plain reality is that you should never use rental income to supplement your bills.. if you are, you can't afford the bills you have and need to rectify that ASAP.

I'm simply trying to make sure you don't make common mistakes. You appear to have a really good head on your shoulders, but you really don't want to be just another statistic when it comes to home ownership. I definitely don't want to shit on your dreams, I just think that you should be smart about a starter home and not bite off more than you can chew. You can always get your feet wet on a smaller property and a few years down the line once you have a real appreciation for what all it entails you can buy-up.. it's a lot harder to recover in life if you do it the other way around, and history is simply littered with people who've done so and suffered years of their life for the choice.

On your single income, I'd hesitate to recommend you purchase anything over 130k without a very high down payment.

 

[CLite]

They match 100% up to 3% so by me putting in $100 a month I am maxing out the 100% portion. Then they match 50% up to 5% from there.

I would continue up to 5%, free money is free money. Beyond that if you want to save additionally for retirement I would go with Roth IRA, although you may not have much budget for additional savings beyond the 5%.

 

[nboy22]

I appreciate your intentions, but I'm cautioning you to be realistic based on my own experiences. I've owned a lot of property, and have quite a few rentals (I tend to move, buy a house, work a few years, and take a job elsewhere and leave the old property with a property management company and collect passive income). I've even rented out rooms recently, so I have similar experiences to your intentions.

Trust me when I say that you simply cannot factor in an expected rental income on a spreadsheet when doing your bills - it's just unrealistic. Not only can you sometimes go through periods where renting isn't viable, but you're also opening yourself up to a lot of legal problems. In one instance I had a renter that was served a 30-day notice and a sheriff was actually on-site when this person was hysterically fighting with their boyfriend in the rented room which involved throwing all sorts of things, breaking a window, etc. (part of the reason this person was being evicted, you can't always vet people and while 9/10 you get a great renter, that 1/10 will haunt you).

The $1800 in damage that was done to the property by this person was just taken at a loss, because the cost to sue them and win would have exceeded the damage and there was no guarantee that you'd actually A) win the case, and B) receive any payment from someone.

There are dozens of other horror stories, so I won't bore you - but the plain reality is that you should never use rental income to supplement your bills.. if you are, you can't afford the bills you have and need to rectify that ASAP.

I'm simply trying to make sure you don't make common mistakes. You appear to have a really good head on your shoulders, but you really don't want to be just another statistic when it comes to home ownership. I definitely don't want to shit on your dreams, I just think that you should be smart about a starter home and not bite off more than you can chew. You can always get your feet wet on a smaller property and a few years down the line once you have a real appreciation for what all it entails you can buy-up.. it's a lot harder to recover in life if you do it the other way around, and history is simply littered with people who've done so and suffered years of their life for the choice.

On your single income, I'd hesitate to recommend you purchase anything over 130k without a very high down payment.

Thanks for the advice. It really helps to see what is realistic. I get where you're coming from. I will make sure to take this into consideration a few years down the line when I have the ability to purchase my first home.

 

[Virge_]

Thanks for the advice. It really helps to see what is realistic. I get where you're coming from. I will make sure to take this into consideration a few years down the line when I have the ability to purchase my first home.

Most importantly - bankers are not your friend. You might realistically be able to afford xyz and they're going to try and approve you for the highest loan value possible because they get the most money from the interest payments, closing costs, and commission on a higher priced home.

You've gotta do the legwork and look out for yourself. Everyone else, including most real-estate agents, are just trying to make the most off you they possibly can. It's the real estate agent that comes back with a house that's 20% less than the max they know I can buy but meets all the requirements you've given them that are worth working with.. and they're VERY few and far in between.