Question about saving for first home
08-17-2011, 05:30 AM
#1
Question about saving for first home
I am 23 years old, have been in my first post-college job since april and just recently got married. My wife has student loans, and I have a car loan on my s2000. I am not looking to buy a house right this minute, we are perfectly happy renting for the time being. My question is, since I need a down payment for a house in the next 1-2 years, but I also need to be paying down my debt, so I pay as little interest as possible, how much should I be saving and how much should I be paying towards my debt. Here are some numbers for those who care.
Our take home - $60k or $5k/month
Disposable income - $1500
Total debt - $50k
Houses in the area we will be buying - $170-225k
Our take home - $60k or $5k/month
Disposable income - $1500
Total debt - $50k
Houses in the area we will be buying - $170-225k
08-17-2011, 09:29 AM
#2
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Since you still have time to save up money for a down payment, I would suggest picking up Dave Ramsey's book, "The Total Money Makeover." He gives insight on how to save and tackle debt. I am 25 and am in the process of buying my first home. The process to get approved and qualified for a house took a total of 7 years since I graduated HS, so it'll take time, but since you are married and bringing home 2 incomes compared to my 1 makes things a bit easier for you. On the other hand, you also have 50k in total debt and I'm sure you included your vehicle loans in that equation.
Anyways, it is a bit difficult to save a substantial amount of money, "invest," and pay debt at the same time. If I were in your situation, I would make sure I have an ememergency fund saved up for any unexpected dues. If I am not mistaken, you stated you have $1500 to play with? It's a bit difficult to give you some insight because we don't know how your finances is broken down, but if you only have $1500 to spare after your take home pay, then I would:
1) Put away $1000 (this allows you to tackle your debt a bit harder. We'll get to the real emergency fund in step 3).
2) Debt snowball: Pay off your debt from smallest to largest. Mentally, this allows you to keep "quickly" pay off your debt: student loans, cars, etc..
- You may want to think about stopping any contributions to retirement as you probably won't have much to invest to begin with while trying to pay off any debt. Use what you would have invested to pay off debt. This tactic will help you out in the long run. Many might argue here, but it doesn't take a math genius to figure out the most logical solution.
3) Emergency Fund - It may take a while to pay off your debt depending on how aggressive you tackle your debt, but after paying off your loans, the next step would be to finish off your emergency fund. You should have at least 3-6 months worth of an emergency fund to cover unexpected expenses in case you or the wife gets laid off or whatever the case may be. You don't want to "invest" your emergency fund, just have it someplace safe and easy to get to.
4)Save and Invest- From here, you should be debt free. Once you are able to spend your monthly income on whatever you want, you should then pay yourself first by putting money away and saving for whatever big purchases and at the same time, you should be investing.
Like I noted, it is difficult to put solid numbers down as I don't have any specifics regarding your financial status, but that is a general breakdown to financial "stability" not "success" as I am not a financial advisor. It may not be as easy as it looks, but if it were that easy, americans wouldn't be as broke as they are now would they? Good luck!
Anyways, it is a bit difficult to save a substantial amount of money, "invest," and pay debt at the same time. If I were in your situation, I would make sure I have an ememergency fund saved up for any unexpected dues. If I am not mistaken, you stated you have $1500 to play with? It's a bit difficult to give you some insight because we don't know how your finances is broken down, but if you only have $1500 to spare after your take home pay, then I would:
1) Put away $1000 (this allows you to tackle your debt a bit harder. We'll get to the real emergency fund in step 3).
2) Debt snowball: Pay off your debt from smallest to largest. Mentally, this allows you to keep "quickly" pay off your debt: student loans, cars, etc..
- You may want to think about stopping any contributions to retirement as you probably won't have much to invest to begin with while trying to pay off any debt. Use what you would have invested to pay off debt. This tactic will help you out in the long run. Many might argue here, but it doesn't take a math genius to figure out the most logical solution.
3) Emergency Fund - It may take a while to pay off your debt depending on how aggressive you tackle your debt, but after paying off your loans, the next step would be to finish off your emergency fund. You should have at least 3-6 months worth of an emergency fund to cover unexpected expenses in case you or the wife gets laid off or whatever the case may be. You don't want to "invest" your emergency fund, just have it someplace safe and easy to get to.
4)Save and Invest- From here, you should be debt free. Once you are able to spend your monthly income on whatever you want, you should then pay yourself first by putting money away and saving for whatever big purchases and at the same time, you should be investing.
Like I noted, it is difficult to put solid numbers down as I don't have any specifics regarding your financial status, but that is a general breakdown to financial "stability" not "success" as I am not a financial advisor. It may not be as easy as it looks, but if it were that easy, americans wouldn't be as broke as they are now would they? Good luck!
08-17-2011, 12:00 PM
#3
Thanks for the reply. What I don't agree with is the paying off of smallest loans first. The logical solution would be to get rid of the loan with the largest interest rate. That's irrelevant in my situation though. My loans are relatively similar in amount, so I will paying down the student loan which has a higher interest rate. Also, you can't sell a college degree in a pinch. You can however sell a car.
I already have an emergency fund so that isn't a problem. As for your #4, I will not be waiting until I am completely debt free to start saving for a home down payment, so should I put half of my money away for down payment and pay the other half towards debt?
I already have an emergency fund so that isn't a problem. As for your #4, I will not be waiting until I am completely debt free to start saving for a home down payment, so should I put half of my money away for down payment and pay the other half towards debt?
08-17-2011, 01:14 PM
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The logic with paying down your smallest debt first is all about the mental approach of cutting out debt. For example, if I had 5 different debt and I was paying all of them at the same time, I would feel like I wasn't getting anywhere, BUT if I pay off the smallest amount first, then I would feel a bit of weight off my shoulders as I have eliminated 1 debt which brings me down to 4. It's a mental and motivational thing. I believed in cutting out the debt with the biggest % rate, but this approach keeps people on the track. It could go either way, but I'd rather pay off the smallest amount first, THEN when I do that, I can apply that previous debt's payment to the next biggest debt and pay it off faster. It's called the "debt snowball" effect. Either way still gets the job done, but splitting payments into many different debts only slows down the process, but focusing on ONE debt really slashes it away much quicker. I hope that makes sense.
In your case, since your loan amounts are similar, you are doing the right thing by paying down the loan with the highest interest rate.
By all means, if you have the cash to live comfortably, save for a down payment, and pay your debt off, then do so, BUT also, take into consideration your down payment on a house (3.5 w/ FHA home loan), mortgage insurance (If going with a FHA loan and not putting a 20% down payment), mortgage payment, rent, and your debt. My question is, will you have enough money to put money down on a house, pay your mortgage, and debt without emptying your liquid assets? That's why I say to make sure you are debt free before buying a house, because a down payment (depending on your cash flow) will eat up a good chunk of a bank account. Like I have stated in my previous post, it's difficult to get into specific details without knowing how much money you have in the bank, debt, and the down payment amount you WANT or NEED to put down.
I make about 60k a year on a single salary and the only debt I have is my car. I didn't mention this to you, but since interest rates are low, I got my auto % rate at 3.75, I elected to finance my car instead of paying cash because I would only owe the bank $1600 throughout the 5 year loan of the car, although I will be paying it off sooner. My point is, I'd rather have the liquid asset in case I need it rather then paying off the car and slimming down my bank account.
In your situation, it all depends on whether or not paying half of your debt along with putting half of that money will bust your bank account. If you have a fat savings account then why not? Just be sure you are financially stable after making those moves.
Don't forget, buying a house demands a lot of money: downpayment, earnest check, home inspection, home repairs, and closing costs.
If you are able to put down that much money along with tackling your debt, then you have no worries.
In your case, since your loan amounts are similar, you are doing the right thing by paying down the loan with the highest interest rate.
By all means, if you have the cash to live comfortably, save for a down payment, and pay your debt off, then do so, BUT also, take into consideration your down payment on a house (3.5 w/ FHA home loan), mortgage insurance (If going with a FHA loan and not putting a 20% down payment), mortgage payment, rent, and your debt. My question is, will you have enough money to put money down on a house, pay your mortgage, and debt without emptying your liquid assets? That's why I say to make sure you are debt free before buying a house, because a down payment (depending on your cash flow) will eat up a good chunk of a bank account. Like I have stated in my previous post, it's difficult to get into specific details without knowing how much money you have in the bank, debt, and the down payment amount you WANT or NEED to put down.
I make about 60k a year on a single salary and the only debt I have is my car. I didn't mention this to you, but since interest rates are low, I got my auto % rate at 3.75, I elected to finance my car instead of paying cash because I would only owe the bank $1600 throughout the 5 year loan of the car, although I will be paying it off sooner. My point is, I'd rather have the liquid asset in case I need it rather then paying off the car and slimming down my bank account.
In your situation, it all depends on whether or not paying half of your debt along with putting half of that money will bust your bank account. If you have a fat savings account then why not? Just be sure you are financially stable after making those moves.
Don't forget, buying a house demands a lot of money: downpayment, earnest check, home inspection, home repairs, and closing costs.
If you are able to put down that much money along with tackling your debt, then you have no worries.
08-17-2011, 01:55 PM
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Just to give you a few numbers, but I am sure you've figured this out already, but..
TOTAL COST to step into a house for your range of $170k-$225k
20% Down Payment - $34,000-$45,000
3% Down Payment - $5,100-$6,750
Closing cost (typically 3% of purchase price unless paid for by seller which is the norm right now) - $5,950-$7,875
Home Inspection - $300
Earnest Check - $2000
Home Repairs (not negotiated with seller) - $$$$$$
170k HOUSE @ 4% interest rate
Total Cost w/ 20% down = $47,350 (not including any repairs and ASSUMING you are paying for closing costs)
Total Cost w/ 3% down = $13350 (not including any repairs and ASSUMING you are paying for closing costs)
Mortgage payment: $811 + property taxes + mortgage insurance (1% of loan amount if down payment is less than 20%) + utilities
225K HOUSE @ 4% interest rate
Total Cost w/ 20% down = $55,175 (not including any repairs and ASSUMING you are paying for closing costs)
Total Cost w/ 3% down = $16,925 (not including any repairs and ASSUMING you are paying for closing costs)
Mortgage payment: $1074 + property taxes + mortgage insurance (1% of loan amount if down payment is less than 20%) + utilities
These are some rough numbers on what you should be expecting depending on the different factors of your deal.
TOTAL COST to step into a house for your range of $170k-$225k
20% Down Payment - $34,000-$45,000
3% Down Payment - $5,100-$6,750
Closing cost (typically 3% of purchase price unless paid for by seller which is the norm right now) - $5,950-$7,875
Home Inspection - $300
Earnest Check - $2000
Home Repairs (not negotiated with seller) - $$$$$$
170k HOUSE @ 4% interest rate
Total Cost w/ 20% down = $47,350 (not including any repairs and ASSUMING you are paying for closing costs)
Total Cost w/ 3% down = $13350 (not including any repairs and ASSUMING you are paying for closing costs)
Mortgage payment: $811 + property taxes + mortgage insurance (1% of loan amount if down payment is less than 20%) + utilities
225K HOUSE @ 4% interest rate
Total Cost w/ 20% down = $55,175 (not including any repairs and ASSUMING you are paying for closing costs)
Total Cost w/ 3% down = $16,925 (not including any repairs and ASSUMING you are paying for closing costs)
Mortgage payment: $1074 + property taxes + mortgage insurance (1% of loan amount if down payment is less than 20%) + utilities
These are some rough numbers on what you should be expecting depending on the different factors of your deal.
08-17-2011, 02:58 PM
#6
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There is a lot of data missing. Your take home pay is $5000/month, I"m guessing you're spending no more than $1500/month on rent given that house prices in the area are $170-225k, so where is the $2000/month going? What kind of interest are you paying on your debt?
You also don't list your savings, retirement funds, etc. Here is what you should be focusing on:
1. Pay off your debt. Pay off the highest interest debt first.
2. Emergency fund. 6 months worth of your take come pay, in this case, $30,000. Keep this liquid in a reward checking account. Until you have this money saved up, you really have no business even thinking about a house.
3. 401k up until your employer match. If your employer matches the first 3%, set that aside. If they match 6%, even better. If the employer is offering you a match and you're not taking it, then you're simply leaving money on the table.
4. ROTH IRA. Each of you can set $5000 aside (2011 rules, may go up next year). This is after-tax money that you set aside and invest. Once you retire and start using this money, you will no longer be taxed on it.
5. Max out your 401k. Each of you can put $16,500 (2011 rules, may go up next year) into your 401ks. Whatever your employer matches is in addition to the $16,5000.
Once you're done with 1-5, THEN you can worry about saving for a house. Save up 20% for your downpayment.
The whole idea of the seller paying the closing cost is not true at all. You either pay a higher price and roll the closing cost into your mortgage or you pay for it upfront. If I was selling my house, the buyer and I agreed on a price and then had the buy ask me to pay for their closing cost, I'd laugh in their face.
People's perceptions of the housing market has changed a lot over the past 3 years. People don't buy a house as an investment, you buy a house to live in it. There is nothing wrong with the idea of renting, you're not throwing money away.
You also don't list your savings, retirement funds, etc. Here is what you should be focusing on:
1. Pay off your debt. Pay off the highest interest debt first.
2. Emergency fund. 6 months worth of your take come pay, in this case, $30,000. Keep this liquid in a reward checking account. Until you have this money saved up, you really have no business even thinking about a house.
3. 401k up until your employer match. If your employer matches the first 3%, set that aside. If they match 6%, even better. If the employer is offering you a match and you're not taking it, then you're simply leaving money on the table.
4. ROTH IRA. Each of you can set $5000 aside (2011 rules, may go up next year). This is after-tax money that you set aside and invest. Once you retire and start using this money, you will no longer be taxed on it.
5. Max out your 401k. Each of you can put $16,500 (2011 rules, may go up next year) into your 401ks. Whatever your employer matches is in addition to the $16,5000.
Once you're done with 1-5, THEN you can worry about saving for a house. Save up 20% for your downpayment.
The whole idea of the seller paying the closing cost is not true at all. You either pay a higher price and roll the closing cost into your mortgage or you pay for it upfront. If I was selling my house, the buyer and I agreed on a price and then had the buy ask me to pay for their closing cost, I'd laugh in their face.
People's perceptions of the housing market has changed a lot over the past 3 years. People don't buy a house as an investment, you buy a house to live in it. There is nothing wrong with the idea of renting, you're not throwing money away.
08-17-2011, 03:42 PM
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There is a lot of data missing. Your take home pay is $5000/month, I"m guessing you're spending no more than $1500/month on rent given that house prices in the area are $170-225k, so where is the $2000/month going? What kind of interest are you paying on your debt?
You also don't list your savings, retirement funds, etc. Here is what you should be focusing on:
1. Pay off your debt. Pay off the highest interest debt first.
2. Emergency fund. 6 months worth of your take come pay, in this case, $30,000. Keep this liquid in a reward checking account. Until you have this money saved up, you really have no business even thinking about a house.
3. 401k up until your employer match. If your employer matches the first 3%, set that aside. If they match 6%, even better. If the employer is offering you a match and you're not taking it, then you're simply leaving money on the table.
4. ROTH IRA. Each of you can set $5000 aside (2011 rules, may go up next year). This is after-tax money that you set aside and invest. Once you retire and start using this money, you will no longer be taxed on it.
5. Max out your 401k. Each of you can put $16,500 (2011 rules, may go up next year) into your 401ks. Whatever your employer matches is in addition to the $16,5000.
Once you're done with 1-5, THEN you can worry about saving for a house. Save up 20% for your downpayment.
The whole idea of the seller paying the closing cost is not true at all. You either pay a higher price and roll the closing cost into your mortgage or you pay for it upfront. If I was selling my house, the buyer and I agreed on a price and then had the buy ask me to pay for their closing cost, I'd laugh in their face.
People's perceptions of the housing market has changed a lot over the past 3 years. People don't buy a house as an investment, you buy a house to live in it. There is nothing wrong with the idea of renting, you're not throwing money away.
You also don't list your savings, retirement funds, etc. Here is what you should be focusing on:
1. Pay off your debt. Pay off the highest interest debt first.
2. Emergency fund. 6 months worth of your take come pay, in this case, $30,000. Keep this liquid in a reward checking account. Until you have this money saved up, you really have no business even thinking about a house.
3. 401k up until your employer match. If your employer matches the first 3%, set that aside. If they match 6%, even better. If the employer is offering you a match and you're not taking it, then you're simply leaving money on the table.
4. ROTH IRA. Each of you can set $5000 aside (2011 rules, may go up next year). This is after-tax money that you set aside and invest. Once you retire and start using this money, you will no longer be taxed on it.
5. Max out your 401k. Each of you can put $16,500 (2011 rules, may go up next year) into your 401ks. Whatever your employer matches is in addition to the $16,5000.
Once you're done with 1-5, THEN you can worry about saving for a house. Save up 20% for your downpayment.
The whole idea of the seller paying the closing cost is not true at all. You either pay a higher price and roll the closing cost into your mortgage or you pay for it upfront. If I was selling my house, the buyer and I agreed on a price and then had the buy ask me to pay for their closing cost, I'd laugh in their face.
People's perceptions of the housing market has changed a lot over the past 3 years. People don't buy a house as an investment, you buy a house to live in it. There is nothing wrong with the idea of renting, you're not throwing money away.
That's another way of doing things AFTER paying out the debt. After taking to different lenders and realtors, sellers are indeed paying the buyers closing costs. It may be different from before the housing market dipped, but I wouldn't be surprised if more than half of sellers are eating up the costs in order to dump their house. For example, I got my closing costs paid for without putting in a full price offer. Heck, the seller even completed some repairs on the home inspection report.
You are indeed throwing away money ONLY if you can own a home cheaper than it costs to rent. Buying a home isn't an investment? So, you wouldn't buy houses that are practically being given away to rent? It's only obvious that homes will rebound. That's like saying, you wouldn't invest or buy stocks while they're low. People do buy houses and property as an investment. There's money to be made in real estate. Just look around and ask people who rent and sell property. Sorry to vent, but it simply blows my mind when people state that houses aren't an investment.
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08-18-2011, 05:44 AM
#8
I make about 60k a year on a single salary and the only debt I have is my car. I didn't mention this to you, but since interest rates are low, I got my auto % rate at 3.75, I elected to finance my car instead of paying cash because I would only owe the bank $1600 throughout the 5 year loan of the car, although I will be paying it off sooner. My point is, I'd rather have the liquid asset in case I need it rather then paying off the car and slimming down my bank account.
Thanks for all the advice guys. I think I am going to wait an extra year. I am going to pay off my wife's student loan in the next 12-15 months instead of saving for a home down payment. The interest rate on her student loan is like 7%. Once that is paid off, I am going to shift that loan payment to my car, so I will be paying double my monthly car payment, and I will be able to start saving $1500ish/month for a down payment. This will push my timeline out an extra year but I'm young so it's no big deal.
For the guy asking for more information. Here are the basics of my finances.
Rent - $800
Utilities - $150
Groceries - $400
Gas - $500 (wife drives a 98 explorer that is raping my wallet)
Car Insurance - $160
Student Loan - $400 (that's what I pay, I think the actual payment is like $325)
Car Loan - $450 (I believe the actual payment is around $400)
There is more, but that is the jist of it.
08-18-2011, 07:26 AM
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Originally Posted by 03silvS2K' timestamp='1313615696' post='20888006
I make about 60k a year on a single salary and the only debt I have is my car. I didn't mention this to you, but since interest rates are low, I got my auto % rate at 3.75, I elected to finance my car instead of paying cash because I would only owe the bank $1600 throughout the 5 year loan of the car, although I will be paying it off sooner. My point is, I'd rather have the liquid asset in case I need it rather then paying off the car and slimming down my bank account.
Thanks for all the advice guys. I think I am going to wait an extra year. I am going to pay off my wife's student loan in the next 12-15 months instead of saving for a home down payment. The interest rate on her student loan is like 7%. Once that is paid off, I am going to shift that loan payment to my car, so I will be paying double my monthly car payment, and I will be able to start saving $1500ish/month for a down payment. This will push my timeline out an extra year but I'm young so it's no big deal.
For the guy asking for more information. Here are the basics of my finances.
Rent - $800
Utilities - $150
Groceries - $400
Gas - $500 (wife drives a 98 explorer that is raping my wallet)
Car Insurance - $160
Student Loan - $400 (that's what I pay, I think the actual payment is like $325)
Car Loan - $450 (I believe the actual payment is around $400)
There is more, but that is the jist of it.
You gotten the right idea of the snowball effect that I was explaining. Always remember to pay yourself first and stash away a few bucks each month. Anyways, I was doing a bit of adding and you would seem pretty tight if indeed you did buy a house right now with your $850/month debt. Hopefully, my total cost worksheet gave you an insight on how much money you'd need at the least to come up with in order to becoming a first time home buyer. Good luck bud! You certainly have a great plan going.
"He who plans to fail, fails to plan."
Btw, if you are interested, I have an financial excel worksheet that helps tremendously. Also, check out mint.com to keep track of your finances online and on your smartphone. Handy app for sure.
08-18-2011, 07:31 AM
#10
Sure. The worksheets would be great. I will never use Mint.com since they were bought by Intuit. They sell your personal information as a profile to companies like Axiom (the largest database of personal info on the planet).
My monthly debt is actually $725 right now. It's $850 because I have been paying over the monthly for a while now. I will be decreasing my car payment from $450 to $400 so that I can pay as much as possible on my wife's student loan. If I plan right, I should be rid of my higher interest loan before xmas next year.
Anyways, I'm going to take your advice and wait an extra year to purchase a home.
My monthly debt is actually $725 right now. It's $850 because I have been paying over the monthly for a while now. I will be decreasing my car payment from $450 to $400 so that I can pay as much as possible on my wife's student loan. If I plan right, I should be rid of my higher interest loan before xmas next year.
Anyways, I'm going to take your advice and wait an extra year to purchase a home.