[briannakae]

Hi everyone! What an awesome resource. I'm so happy to have found this forum.

My name is Brianna and I am a newlywed. Before my dad would give my husband his blessing to propose, we had to attend Financial Peace University once and volunteer to help with the program a second time. I rolled my eyes at the time, but I think it has been incredibly useful for our communication about money as a couple!

Here are the basics about our financial situation:

We are 24 years old. He is an entry-level engineer who makes 65k/year. I am a first-year teacher who makes 33k/year, making our annual income pre-tax just under 100k. We contribute to our retirement plans the max that is matched by our employers (I think it's 3% for each of us). We can very comfortably put away 2k/month in savings. We have no debt - no credit cards, no student loans, no car payments, etc. We live in a small-ish town that is very inexpensive - our rent is $750 a month for a house with a yard. We are happy in this neighborhood and the house is quite nice, it just isn't ours. We would like to live in our own home for a bit before we start a family.

We are currently using our 2k/month savings to build an emergency fund and also gazelle-style saving for a truck (which we will pay for in cash of course). After we purchase the truck, we will be saving for a down payment on a home. We have decided we are comfortable in the 200-250k range for a home (I know that's a big range, but we're a ways from buying and we'll narrow it down more as we get closer). If we can shave a bit of our budget and save $2500/month, we can save around 30k in a year.

If our house is at the top of the range we are looking at, that 30k downpayment is only 12% and even at 200k, the down payment is only 15%. For our schedules (as I am also in grad school), it is almost imperative that we move in the summer.

Do you think it's worth living in our rental an extra year to save more than 20% for a down payment? I feel like Dave's answer would be "you're 24, what's your hurry??" but we're ready, we're stable, and we don't want to wait a whole extra year - we would like to have a baby in the next two or three years. By renting an extra year, we could save another ~25k for a down payment, but also, we literally throw 9k at someone else's mortgage. We have looked at some calculators that total up monthly payments and the interest we'd pay over the term of the loan and aren't really swayed dramatically either way but I'm sure there are many things we are not considering.

I know 20% is ideal, but is it absolutely necessary if everything else is in order?

 

[momoffiveboys]

You do have to remember that the $9000 in rent each year is not straight gravy. There is upkeep, property taxes and the like. Does your rent include utilities? There is a lot to consider.

 

[SallyC]

Do you think it's worth living in our rental an extra year to save more than 20% for a down payment?

Yes, absolutely.

 

[Ayanka]

First of all, is there a medical reason to have kids soon? Because that does put things in another light. If you only have a 2-3 years and otherwise might not have the ability to have kids, for all means, don't postpone on that. However I would in that case keep renting this place if you are able to sizewise. The reason, kids are a lot of work, they tend to cause lack of sleep etc and Im pretty sure you don't want to combine that with moving.

If you would just like to have kids in the next 2-3 years, but there is no medical imperative, stay in the rental another year. I grew up in a family that was always short on cash. Even when my parents did the best they could, they had to say no a lot. Some of those No's left scars, meaning both me, my bro and sis tend to be savers, badly.

 

[Spirit Deer]

I always go against the flow on this topic and here's why: If you're renting, you will have nothing to show for that money later on. If you are paying that same amount into payments on a house of your own, you will be building equity, although at the beginning of a loan it's a very small amount. I also think leasing a car vs. owning one is a bad idea because you end up with nothing to show for that money either. I don't see buying a house vs. renting one as any different than buying a car vs. leasing, but I seem to be alone in that outlook and that's okay. I can see renting though if you don't plan to stay in your current town more than a few years, but it sounds like you're ready to settle down.

Can you put off buying the truck and save the truck money towards your down payment instead? Because a home loan runs for so many years, the interest ends up being huge, so the more money you can put down, the more you will save in the long run and the lower your payments will be. There will also be closing costs, points, and other expenses to consider which you may have to be able to cover and can run into a few thousand dollars at the time of closing.

You may want to run your thoughts past a mortgage lender. There are usually guidelines about what percentage they want you to put down. You may need at least 20% down.

If you've never owned a house before, check on what federally funded programs are available. We got an FHA loan for our first house, but that was back in the early eighties so things may have changed. I don't know if there even are FHA loans anymore, but there are probably some programs for first time buyers.

Mortgage rates are going to go up. The only question is, when? They are very low right now, so IMO it would be a good idea to get locked into a low rate instead of waiting. A low rate allows you to pay more for the house you want. When we got our first loan, the rate was 12% and that was a low interest loan. :yikes: It was a lot tougher buying a house back then, IMO.

 

[brenda67]

I always go against the flow on this topic and here's why: If you're renting, you will have nothing to show for that money later on. If you are paying that same amount into payments on a house of your own, you will be building equity, although at the beginning of a loan it's a very small amount. I also think leasing a car vs. owning one is a bad idea because you end up with nothing to show for that money either. I don't see buying a house vs. renting one as any different than buying a car vs. leasing, but I seem to be alone in that outlook and that's okay. I can see renting though if you don't plan to stay in your current town more than a few years, but it sounds like you're ready to settle down.

Can you put off buying the truck and save the truck money towards your down payment instead? Because a home loan runs for so many years, the interest ends up being huge, so the more money you can put down, the more you will save in the long run and the lower your payments will be. There will also be closing costs, points, and other expenses to consider which you may have to be able to cover and can run into a few thousand dollars at the time of closing.

You may want to run your thoughts past a mortgage lender. There are usually guidelines about what percentage they want you to put down. You may need at least 20% down.

If you've never owned a house before, check on what federally funded programs are available. We got an FHA loan for our first house, but that was back in the early eighties so things may have changed. I don't know if there even are FHA loans anymore, but there are probably some programs for first time buyers.

Mortgage rates are going to go up. The only question is, when? They are very low right now, so IMO it would be a good idea to get locked into a low rate instead of waiting. A low rate allows you to pay more for the house you want. When we got our first loan, the rate was 12% and that was a low interest loan. :yikes: It was a lot tougher buying a house back then, IMO.

I totally agree with you.

 

[shp1055]

I would hold off on the truck and put 20% down on the house to get out of the PMI insurance that mortgagors tack on to your payments.

 

[CookieLee]

I think you should wait to buy a house. While you THINK you're stable right now, you really might not be. Pay cash for the truck. Keep saving. Get out of grad school and let's see where your husband's career takes him. Make sure you have no other debts (like student loans) and if you do, look to paying them down. While the budget says you can sock away $2000 a month, reality might be different.

There are stress scales that talk about a lot of big changes in a short period of time causing a lot of problems. Getting married is big. Graduating school and maybe changing jobs is big. Moving - again - and buying a house is huge. Then on top of it you want to have a baby which is another huge change. Not only do you want at least 20% saved for your down payment, you want a big emergency fund and you want to be able to live solely on one income just in case.

Settle into the life you have now. Your set-up is pretty sweet and it doesn't look like it will be bad anytime soon. There are lots of people who begin their families while still renting. And you might think this is radical but, to me, the ideal situation would be for you to save up so much you buy something FOR CASH. It'll be small and not the ideal house but you could always trade up after you save more money.

Lastly, my experience has shown me that living in a small town often means you have to wait a while before the perfect house comes on the market. Enjoy looking but don't jump until you've got a couple of married years under your belt.

 

[Braje]

Have you figure the TOTAL monthly cost of owing a home is? If you buy a 200,000 house w/ 15% down that a P&I payment of about 1,174 PLUS PMI, Home owners insurance, Property tax. Not to mention probably higher Utilities bills.

 

[khaski]

Rent. Really, it's only a year. Having at least 20% down to avoid PMI is important. Don't pay more on your mortgage for 15-30 years because you were too impatient to hold out one more year. Having kids is a great goal if it's your dream, but the more financially secure you can be before that, the better, and that includes having a smaller mortgage, even if it means renting for one year.

 

[mndtrp]

There is a lot that goes into paying for a house other than just the monthly payment. Insurance, taxes, upkeep/maintenance (landscaping, appliances, plumbing, etc.). Moving into my house, I realized that I was going to need a lot of tools and equipment that I didn't have when renting. Renter's insurance was insanely cheap, less than $200/yr. Home insurance was much, much higher. The money that you are "throwing away" when renting is actually being used to alleviate a lot of other hidden costs. It's not a 1:1 tradeoff rentwning.

Make certain the pickup is the best choice, especially since you have a child coming. After that, figure out what the costs of the PMI is, and how long you will have it using the down payment you are planning on having. You can then determine if you want to truly "throw away" money on PMI, or wait another year to get the house.

Myself? I chose to wait until I had the full down payment. I didn't want to pay PMI, as I didn't think it was worth it just to move in a year or two earlier.

 

[briannakae]

Thank you everyone for your insightful comments. My husband and I looked through all the comments, which we really appreciate by the way, and here is what we came up with:

1. About the truck - his car is actually falling apart (we have to start it with a screwdriver, the trunk hatch doesn't work, etc - my husband had to buy a $30 part for it a few weeks ago and the guy at the shop told him the car was basically totaled haha!) so we certainly need a new vehicle. We live in the woods and a truck is valuable for our favorite recreational activities. It will be a full cab with full second row seating and he won't be the one primarily transporting upcoming babies anyway - that will be me and my trusty family sedan I've had since I was 16 I hope we won't have to replace that for several more years, but we'll see. The truck will be used and we will pay in cash for sure. We are trying to save up to 15k but hoping something nice comes along for 10-12 over the summer.

2. About the baby - no medical rush at all, I just feel like 26-28 is the right age range to have our first baby. A baby certainly won't fit in our current home and I'd hate to be pregnant and suddenly needing to hurry up and move - I want to be settled into a home first.

3. About grad school - I am in grad school to make significantly more money as a teacher, not to get a new career. The only major new career that would open for me with a master's degree is teaching my current subject at a college rather than a high school. There are a few community colleges in the area that would not require moving. No student loans. I was a National Merit Scholar and a scholarship I received in undergrad also has an allowance for graduate school, so I'll be using that. It even covers my housing as the school I attended through undergrad is a few hours away (so I'll be there Monday-Thursday during the summer). My only cost is for food, woo hoo!

4. About the house - we have decided to not buy our dream house out of the gate. Instead, we will buy about a $150,000 - $175,000 house that is nice and not too big. Three bedrooms, two bathrooms or so (versus the four bedroom, three bathroom houses with land we were drooling over for $250k). This means that our 30k will be more like 17-20% depending on what we end up buying and it makes our mortgage payments comparable to rent, so even with the additional costs of owning a home, we are certain we will be able to afford it and still save. We will live in this house for several years and save slowly for the actual forever home instead. Then we'll rent out the first home to finish paying off that mortgage.

Any feedback is welcome but I think we have come to a good place. I feel better about paying less PMI and having smaller mortgage payments that are comparable to our current rent so we know we won't be in over our heads suddenly.

 

[mndtrp]

Seems wise.

 

[carfree]

You've gotten a lot of good advice. I bought the smallest house on the street, and that really saved me money. I paid $89,500. back in 1998. I also paid cash. It really saved me during the recession and now. What I've done is to have less, so that I can fit into a smaller space. If I were married I'd probably be a one car couple. I'm retired, so it's easier now than when I commuted all over for work. Taking public transportation and riding my bike has saved me a ton of money. Now it's easy for me to pay my property taxes and home repairs. I struggled with those when I first had my home. I also didn't have a lot of the equipment I needed (or wanted...a lawn mower, weed whacker, saws, hedge trimmers, Christmas lights, etc...)
People used to tell me I could afford a home because I would be paying the same as I did in rent, but it was so different! I had to paint the inside and outside, fix the plumbing, replace the water heater, the gas heater, and buy a fridge and washer/dryer. I didn't anticipate any of this at the time. I did not have the extra money. I also landscaped the property myself. It was just a bunch of weeds surrounded by chainlink when I bought it. It looks great now, but it took several years to pay for everything. I had a lot of neighbors give me starter plants, which was nice.

I don't mean to be negative, you sound very smart and responsible. I just learned all of this stuff the hard way!

 

[old guy]

1. About the truck - The truck will be used and we will pay in cash for sure.
2. About the baby -A baby certainly won't fit in our current home and I'd hate to be pregnant and suddenly needing to hurry up and move
4. About the house - we have decided to not buy our dream house out of the gate. Instead, we will buy about a $150,000 - $175,000 This means that our 30k will be more like 17-20% depending on what we end up buying

Congratulations, you guys have a super start, $100k income stream at age 24, two very good jobs in non-related industries (you're no likely to lose your jobs simultaneously).
Great that DH is an engineer, he knows the math. I've often said that my engineering served me twice, once to make a good income, and again to give me the math skills to invest that income wisely.
Re cars I never pay cash, I finance the car 100% including tax/lic. I leave our own money in the SP500 Index at 11%/yr (if you have an average of $15k invested for the next 40 yrs, that is an extra $1.1M when you're age 54.)
Re: Baby. A baby takes almost zero extra space for the first year or more, you're over-thinking it, lol. During the War, my parents and 3 kids were in a single room bungalow for 7 yrs (I don't recommend it, but I don't recall feeling crowded - kids don't care about that stuff).
Re: Houses. We save up for the down payment but then DON'T use the money for it, retain that money for safety, and make the smallest DP that you can. We've done that with our home and with our rental houses. Furthermore, we refi the rentals houses and invest the equity elsewhere. (Anytime that you can borrow money at 4% (fixed rate, longterm) and invest it at 11%/yr you'll see that the power of compounding is awesome.

One exercise that I do - list your annual expenses, all of them including taxes, SS, you expenses should sum to 'gross' (ie, $98,000). Then do a 'descending sort'. This separates the "significant few from the insignificant many". Your $9000 rent, $7600 SS, maybe $12,000 Fed Tax, will be at the top. Your $1500 Starbucks cost will be near the bottom. You'll see that cutting the latte factor is NOT the way to build wealth. (Your DH will recognize this as Pareto Analysis, ie 80/20)

You mentioned that you fund the 401k's to the match, either $3000/yr or $6000/yr. My 401k (they started in 1983) had no match - but I maxed it anyway - it was almost a million when I retired in 1998. So don't fall for "conventional wisdom", in fact, much of my wealth comes from taking the 'path less traveled'.

 

[Thunderlilies]

I haven't taken the time to read all the previous replies, so hopefully this isn't redundant.

First off, you guys have a great start - being debt free is the best place to be! My husband and I bought our house when we were in our early 20's, paid half down, the last half we paid within a year. Our income was not as good as yours, but neither was the house as expensive. Since then we tore the old house down and built a whole new house on our land (while staying debt free). We also added 5 children to our family and it has been wonderful! Bottom line, you got to do what you feel is right for you guys. For us, that has always meant putting down as much as we can on a property and paying it off as fast as we can to get back to being debt-free. Since that first house purchase we've purchased two more rental house properties using the same concept. It has worked incredibly well for us.

I am curious about one thing... why purchase a house for that amount? Why not something around the $100,000 range? You could always add on to your house later... and it would change a lot of your calculations around and make your goals that much more attainable in the not too distant future. Just a thought

 

[CPA-Kim]

I think you are making a wise choice and you'll do great. Best wishes.