Deciding when to buy home (instead of rent) in current market

[hal4x]

High level premise:

What factors do you consider when to buy a home vs continuing to rent and save money/equity in other savings vehicles? How did you know when to switch from one to the other in current market conditions?

Current situation:

My wife and I (28F and 31M) have wrapped up our grad school programs (while working) and are expecting our second kid in August. Short-term, we will be moving in August to a larger rental home (3BR, 1.5B) to accommodate the expanding family. Long-term, now that we are done with school in the city we currently live in, we will be looking to move back towards a part of southeast U.S. that is closer to family (currently live 12+ hours drive from relatives, live in Northeast). We both want this, but I am a bit hesitant to making the jump into home ownership, whereas my wife would like to have something we can own and feel more comfortable staying more than a few years.

Most stuff I am seeing for our needs in some of the cities/suburbs we would consider is in the $250k-$400k range. With just a 20% down payment, monthly mortgage is going to be greater than our current housing costs, not including taxes, insurance, and general homeownership costs.

Summary of where we are at financially:

Annual income - $130k

No student debt (anymore)

Retirement savings - $275k

Down payment savings (brokerage) - ~$50k

Bank accounts (less CC) - $25k-30k

HSA - $30k

We currently max HSA, two IRAS, and do 10% for employer match for for 401k. After all taxes, medical and other deductions, we have about $5.3k monthly to budget. Our next rental is going to be $1900/month including all utilities and internet. With rent and our other current budget needs, we are saving about $800/month to the side for general savings goals (house down payment, second car, and possibly 529s).

Summary and original premise:

Personally, I would just as well keep renting and pushing our retirement accounts hard (and adding in some 529s) as well as save more for a down payment in a brokerage account, but my wife's point of view is that we have saved enough to scale back on retirement and that we are at the "next step" of our life in needing to invest in a home for our family.

How did you and your SO (if applicable) know when you make the switch in this current market climate from renting to ownership? What was it that made you know that you are ready to take on mortgage vs continuing to rent?

 

[kjv5738]

@hal4x In your situation I would work it backwards. Find out how much a house in the area you want to move to costs. Then add 10%-15% to the purchase price because of potential price wars. From that get a 15% downpayment number plus around at least 5k for closing costs. Then at least another 10k for repairs and moving costs. This would be a close estimate of how much it will cost to move into the house. The rest should just be plugging in numbers to see if it’s doable

 

[tracieplaxton]

@hal4x It sounds like you would be an ideal candidate who saves for a larger downpayment as renters for a few more years (2, but 3 is max).

This will allow you the flexibility to have a similar PITI to what you are renting for.

 

[kyeshamblin]

@hal4x It’s not just about money, it’s about lifestyle too. With a few kids you need to consider where they are going to school/daycare and whether you want to risk moving at least once a year with a family. But if you’re finding a home for rent with utilities included that cheaply, you’ve found a steal so I can see why it’s hard to pass up.

 

[hal4x]

@kyeshamblin Still a couple of years away from school age, but yeah, managing daycare locations would be a big factor.

The lifestyle question I think is what is hard to wrap my brain around still. Mathematically, our current renting situation will make the most sense, but...living life isn't just math problem.

 

[oldwoodie]

@hal4x The first and most obvious one is being able to afford the mortgage. It will usually start out more expensive than renting in terms of absolute cost.

However, the truly important one is the difference between the unrecoverable costs. With a house, a large portion of your expenses are recoverable. When renting, all of your expenses are unrecoverable.

When you pay a mortgage, a portion is principal. This is a fully recoverable cost in the form of equity. So if you have $2000 rent vs $2500 mortgage, but $500 is actually the principal, then the difference is the cash flow burden of the mortgage - the costs are effectively equal. And that is just to start out, as the portion going into principal increases over time.

Except it doesn't end there, because houses have additional cost recovery. For example the interest paid is tax deductible. So a portion of that is also a recoverable cost.

Home improvements and repairs can even be considered partially recoverable, as they increase/restore the value of the house.

Buying becomes worth it when the total annual unrecoverable cost of ownership is lower that the total unrecoverable cost of renting. However, there are some large up front unrecoverable costs of buying (closing fees, inspections, etc). So you need to be sure you will live in the house long enough that the difference will offset them.

And of course, even though the unrecoverable costs may be immediately lower, the cash flow demand is likely higher at first. So going back to point one, you have to be able to handle it comfortably.

 

[knarf11]

@hal4x We are in a similar financial situation - $120k income, went from renting at $1850/month to buying a house for $315k which puts monthly payments at $2080/month. So yes, it’s more than renting (especially if you factor in necessary upkeep and repairs). But IMO it was sensible for a few reasons. One, we can pay the mortgage. If you can’t do that - don’t buy. Two, our monthly payments will not increase much year to year. Yes, property taxes and insurance can go up but our rent was going up like $100-200+/month every year. It just was not sustainable. Three, we are hoping to be able to refinance and that would likely put our monthly payment down closer to what we were paying in rent. Four, all the typical pros of owning - equity, landlord can’t kick you out because they decided to sell, freedom to do renovations

 

[resjudicata]

@hal4x the truth is the only people who make it work renting are those who have accumulated millions and compounding faster with an unlevered portfolio than they spend

that isn’t going to be you. buying a home is cheap leverage and gets you off the hamster wheel of throwing thousands every month on rent on a tight income. i would try to buy sooner rather than later.

 

[ladysparkle]

@hal4x The best time to buy is whenever you can do it.

 

[newenglandpeter]

@hal4x I would do it asap. A ton of people are waiting for mortgage rates to change but as soon as they do the competition is going to be outrageous. So just do it now. Refinance when rates go down.