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Agree with MD1 above and have a different view than most others. Finding a house that could work for your family for a long time (possibly permanently) in a HCOL area is hard and can be worth the stretch, but you need to understand the risks. When I was about 32, my wife and I (pre-kids) did a similar stretch. Stopped 401-K match for over a year to quickly rebuild our liquidity, but got a great asset as a result. I am a big fan of liquidity, so might even consider the lower DP / higher rate until you build your savings back. Or maybe see if you can open a HELOC on the other property (probably after the main purchase) so that you could more easily tap that liquidity as a backup. Or do both. I you have a budget and some extra savings per month and think you can do this, I think you probably can, but spend the first year conserving as much as possible to rebuild liquidity.
Hope its helpful. I have been there, went aggressive and no regrets. Of course, every situation is different. Even with the kid, if you buckle down, you can probably rebuild liquidity to get safe again.
First time buyers do not need to put down 20% right now. There are programs that you could tap into and do less, but that would affect your monthly payment. I also do not think that rates will stay where they are for the next several years, so hopefully you could refi at a lower rate (but don't bet on that). Sometimes you have to roll the dice, and I prefer to do this with primary real estate rather than some other investment. I do not think the housing market will crash, but it may come down in the short term a bit. Just be prepared and don't think you can time it. Also remember that repairs and maintenance on a $1M home are expensive, so be prepared, especially if it is an older home. Is your wife going to keep working after the baby is born?
Chief
I don’t like the idea of wiping out all of your savings for the down payment. Spending your safety net when buying a house and pregnant sounds like just about the worst time.
Any way to put a little less down to keep your emergency fund? I’d say $1.25M is stretching your budget to the limit and is more than I’d be willing to, but if you can cut in other places so you can still actually save to retire it’s not unreasonable.
AD1, Thanh you very much for your thoughts. We’re appreciative that this is a risky approach (maxing out our savings) however the back up is the investment property in Canada which we could look to liquidate. We could also potentially put down a lower deposit - 15%, but that would increase the interest rates a bit. However that is certainly an option. We net about 15k/month after maxing out 401k. Our forecasted expense including mortgage payments will be a max of c$12k, so we will have about 3k/month in savings. That’s not much but our yearly bonus (c$30k) will be the key savings. We also contribute c$12k to our IRA accounts and plan to save a bit for the baby as well.
I personally wouldn’t do this but am risk averse. Agree with above comment about not wiping out emergency fund. Otherwise it really depends on what your other expenses look like and what you expect them to look like looking forward. Having a child is expensive. Who will be taking care of the baby after leave from work is used up? Will you be setting up college funds, getting life insurance, etc? Are you planning on additional children in the near term?
Also, will you have enough money set aside to furnish the house? Buy all the stuff baby needs etc? Where will your overall emergency fund be after all that spend?
I would agree with your thought on renting for another 12 months. Banking the 8k/month will increase your future down payment and will give the markets time to cool off. If we are truly going to see a prolonged recession that is the most wise move to make. Your investments will have time to recover and you will have more padding in your nest.
I know it might seem "easy" for us to give you advice since we are not emotionally connected to this potential purchase.
I have a Financial Coaching business where I help people get their personal finances in order and on the path to financial freedom. It sounds like you are past this point.
When I coach a client I recommend that they try to stay as close to 25% of their take home pay for the their monthly mortgage payment. The numbers you are providing would put the new mortgage payment at 57% of your take home. As a coach, I would advise against this and I would strongly recommend that you don't wipe out your saving for this. Ideally you would have a separate account designated for the down payment.
I wish you all the best!
Thanks SAM1, I appreciate the views and advise. I agree with C1 and KPMG1, those rules are hard to adhere to especially in a HCOL area but I fully get your point on being careful to not be house poor.
Agree with two views above. Don’t wipe out your savings. The beginning of each month comes very quickly and $8k is a lot especially if someone loses a job. No job is totally safe. Buy something modest and sleep well at night.
Since you’re in the Boston area I can give you insight regarding childcare. We’re in a Boston suburb and pay $2,905/month for 1 toddler in daycare full-time. I believe the infant class starts around $3,300 and rates decrease slightly as your child gets older (but then increase bc of inflation).
Wouldn’t ever buy a 1.25M property but that’s not knowing if you’re in a HCOL area. Buy near the median if you can from an investment standpoint. Better to have an average house on the block than the best one for home prices. Don’t love using 250k for a down payment either but you should be able to build that back quickly on 350k HHI so that’s not the biggest concern.
I understand having a dream home but the way the current market is and the trend is headed either it would devaluate or not have much equity growth. Also if you are going to use all of your savings on down and closing then it may not be the smartest move. Either you look for another dream home in another state where you can get more bang for your buck. Or buy smaller properties and put them to make money for you. I would recommend that when as a couple the HHI is about $500k no debt then a $1.25mil property is not that bad. This will allow you to safe wuicker for a rainy day and would also allow you to give more to the mortgage principle. Just my opinion
I would not be comfortable erasing my savings and taking on a debt that eats ~50% of my take home pay every month with a child on the way. If I were in your shoes I would continue with my current housing arrangements for another 6-12 months then reevaluate.
Thank you SA1, that is certainly an option we would consider if we feel this is stretching us too thin.
Yikes. You’re going to be very house poor. Even things like furnishing and minor repairs cost A LOT.
I moved into my house and I had minor repairs that added up to 20k the first year.
I agree to some extent with other comments. An alternative might be to buy a smaller house in the area you like. This way you get a feel of the neighborhood. As a mom of 2, i can tell you that you can get by with a townhouse at least until baby turns 5yo (then you most likely would want a bigger kitchen and backyard). This way you won’t wipe your savings, but you still get to be a homeowner and building your equity. Then, in 3-4 years, you can probably sell this house, have increased savings to use, and you can buy a bigger one in the same neighborhood if you still like it. Moving twice is not ideal, but you might need to in order to get your dream home. We did this in Seattle (almost as expensive as Boston) and were able to get our dream home in San Diego in 2 years, as we were able to sell our house for 50% more than what we bought it for. It might take less than you think!
A1, thank you for your considered response. All very valid points that I’m certainly going to consider. Very grateful for the inputs.
Chief
I’m going to disagree with most others. Yes, this is a stretch but in a year you will be making $30k more. I assume your $250k savings that you will liquidate does not include your 401k balance? If you are both maxing 401k, that’s your buffer. Reduce your 401k contribution to the min required to get any match. Do that for a year to rebuild some savings quickly. Then next year when you get your raise, increase 401k again.
We pretty much did what MD1 is saying. We stretched our budget and got the house we wanted ($1.1m, $220k down, HHI $250k at the time) instead of settling and are so glad we did. We love our home. Reduced 401k to match. Took about a year of aggressive saving to build back emergency fund. A year later, we have a solid emergency fund and both back to maxing 401k and HSAs. With a newborn, also contributing to 529 and have budgeted/earmarked day care. Helps that we got significant raises and bonuses along the way. Like yourself, we had some financial safety net from parents that we never had to use. Point is, you’ll find ways to cut other costs and flex to make it work.
I wouldn’t exhaust savings. Things happen - car trouble, emergency travel, new appliance needs, etc. Making that kind of money you should be able today save $3k a month with child expenses included. What happens if one of you have to take unexpected time off due to illness or other unforeseen reasons. Something to consider. A $1M home sounds like a sweet spot.
Thank you D2, we hope to save about $2k/month all things considered. This purchase is going to make things tight, but we have a plan and some back up savings from our investment property to fall back on. Thanks a lot for your views, they make a lot of sense.
Don’t buy, you’ll be saddled with debt for 30 years. No guarantee that real state will always keep going up as it has. Take that money invest it and enjoy your life without being tethered to an old house.
Thank you for your views SSA1. We’ve done well with our investments but we feel it is now time to buy our first home (and hopefully a new build!).
How is your take-home pay only $14K/mo?
$350K / 12 = $29K/mo gross
Assume 30% taxes = $20K/mo net
Then I’d say $8K/$20K = 40% is a stretch but doable
However from experience, house costs are a lot. For two years we haven’t saved any money into our individual brokerage accounts because we spent $60K on house renovations and who knows how much on general home maintenance / Amazon purchases for the house / furniture and decor / weekly Home Depot trips. I fear you won’t be able to replenish your cash savings because you’ll be bogged down by the house expenses. And our mortgage is less than 25% of our take home pay, including after retirement contributions (401k), no children.
Thank you D3, I totally understand - your views are much appreciated!
Depending on the type of lifestyle you like to have (beyond home ownership) , you would be spending around 60% of your income on payments, that is not counting bills and maintenance which on a 1.25M$ house are quite hefty and could make you housepoor. A general guideline (again depending on your lifestyle) should be to keep that spend between 30-40% of your income so you can maintain said lifestyle even after buying. Iam not familiar with your financials/expenses but being housepoor is something to think about!
IBM1, thank you for your views. I agree that when I did the maths, it gets very tight given our forecasted expenses. We have to reevaluate our circumstances and what we can afford. We also do not desperately need to move, so can remain renting for a while longer and try to save a bit more, then look at options next year.
8k a month seems high with a 14k take home. Don’t underestimate the other costs of home ownership. Landscaping can be an easy $600+ a month, utilities will be a lot higher if you are coming from a smaller space (I have been spending $1k a month on heating oil), also maintenance can be expensive.
Thank you PwC1. We are cognizant about other potential costs of home ownership. You’ve been spending a month on heating oil? This is a new build so I expect repairs to be less but yes maintenance costs is part of our budget. Our monthly net should be $15k net next year onwards and that doesn’t include our combined annual bonus ($40k). We usually save/invest our bonus cheques.
I live in boston as well. Keep in mind of the child care cost if you guys r thinking about kids. We make about the same with a ~3100 monthly mortgage, and we live pretty much paycheck to paycheck (3800/child/month)
Pro
4K per child…is a lot.
My guess is that they have to be attending BB&N, Milton, or some elite special education school.
MA’a childcare costs are out of hand in general.
Both my wife and I have good/stable jobs and think that our HHI is well positioned to remain stable at that $350k or even improve near term. This will be our first home and we have our first child on the way, thus keen to move before baby is due next summer to setup/welcome the babe. We are currently renting a 2 bed flat in central Boston - which is quite expensive ($4k/month on rent). We’ve consciously paid off all our student and other debt and thus debt free. We have an investment property in Canada worth $150k which we could potentially liquidate but don’t want to unless absolutely required.
Pro
Financial aspects aside, “1st home” and “dream home” are rarely going to be the same. It might take you a few years living in a home to truly recognize what you want in an ideal home (laundry upstairs, heated garage, larger kitchen, etc.)
Thank you AT&T1, that’s true and well said. I personally have been renting for 17 yrs (left home when I was 19), and my wife has been renting for about 10 yrs. Whilst we like to think what our dream home might be, it’s hard to know until we live a few years in one. We will reflect on this.
I agree with the above. You are strecthing yourself too much. With no reserves, if something goes wrong, you will have to sell your property in 6 months. Even if you can get the same price you paid, you will eat 6-8% transaction costs.
Also for your monthly costs, be sure to include maintenance and repairs, property insurance and also mortgage interest and SALT tax deduction.
Thank you M2, we will factor those costs as well. We are also contemplating liquidating our investment property in Canada which would net us around $125k. That would make our financial situation a lot less burdensome.
I wouldn’t, because your child hasn’t been born and you don’t know yet know their needs. Kids who may need special therapy or have unexpected medical costs will quickly kill your budget. In our case, our kid did not do well in daycare, and nanny care in a HCOL area is $5k/mo, which we’ve been paying for 5 years now. Will likely need to send our kid to a private school. But even a decent daycare in HCOL area will be $2500/mo min.
C1, thank you so much for your response. That is very true and simply put, we’ve failed to factor those circumstances. We will go back to the drawing board to reconsider our affordability. Thanks again!
I’m not sure which towns you’re focused on in Middlesex County but I grew up there and parents still live there. If you aren’t commuting daily then you could live a bit further from the city. I don’t think average home prices in towns like Wayland or Sudbury are quite that high. Good public schools, last I checked. Traffic in/out of Boston is getting ridiculous, maybe a town that has (or is very close to) a commuter train like in Concord or Lincoln.
Round up on all your cost estimates, including vacations.
As others have said, I would not deplete all savings, especially since you don’t know what housing prices will do. Your bonuses should be just that, and I personally wouldn’t consider that literally money in the bank.
Does your wife want to change her job in the next 5 years? It seems it’s the only reason you’re trying to stay close to Boston is bc she goes in daily. So if she thinks in the future she may want to change to a more flexible job that allows some wfh or relocation to other cities, maybe reconsider your home purchase?