True Home Costs, Financial Margins & Stress Test

This thread is for people who are thinking of buying a home, but specifically Scuba Steve. Please don't feel like I'm picking on you Steve, but you seem to be a good sport about answering some questions before. I'm sure you sketch out some rough estimates of you much your new house is going to cost your family, but I just want to do some calculations myself and see how much it would take to buy a new home.

I'm just going to take a Monterey Plan 3 because it's one of the few plans that I have all the information.

Home Costs: $571,600
Down Payment (20%): $114,320
Interest Rate: 5%
30-Year Fix


Expenses

Mortgage Costs Alone: $2,451.56/month

Total interest deduction 1st year: $22,680.99

Tax/HOA/Maintenance/Insurance/: $1,329.13/month

True Total Housing Costs: $3,780.68 / month


Income

Income Required (True Home x3): $11,342.04 / month

Net Income Required: $136,104 / year

2007
Median household income: $98,923
Median income for a family is: $111,455

Gross Income Required (with tax deduction): $154,245


Cash Required at Purchase

Down Payment: $114,320
Six Months Living Expenses: $68,052
Landscaping: $20,000
Furniture: $20,000

Total Cash Needed: $222,372


There I hope I hit all the right numbers; you mention that you guys don't have kids yet; but your in-laws are willing to help. But here are some contingencies that might come up.

1) What if you wife has a difficult pregnancy like my wife and can't work?
2) What if your wife doesn't want to return to work and be a full time mom?
3) What if you require a nanny or child-care after-all?
4) What if your child requires special needs?
5) What if you like Panda end up having twins/triplets?
6) What if your wife's hours are cut because of recession or child care?
7) What if one of you guys gets laid-off?


Again I'm not trying to pick on you; these are questions that I ask myself and have to build margins for. I'm not being pessimistic or discouraging, I just want to be fiscally conservative and prepared.

How much stress can you take? Again you sound like a fairly balanced person with a good wife and friends. But what if:

1) You start having marital problems after the honeymoon wears off and require counseling?
2) What if your grad-program requires more than you can handle?
3) What if like most of us recent grads, you don't get the raise or promotion after you graduate?
4) What if you hit a rough season at work?

As always, you don't have to answer each question; you can answer generalities if you like. I'm sure as a person in b-school you've already done your own calculations, income projections & expenses. How far off am I? Or are you just hoping for the best?

Here's the info as it relates to me (I'm just going off memory and rounding at the top of my head).

Home Costs: $650,000 (w/ upgrades)
Down Payment (20%): $130,000
Interest Rate: 5.125%
30-Year Fix


Mortgage Costs Alone: $2,900/month

HOA: $134/month
Insurance: $80/month
Property Tax/MR: $800/month (2/3 of this will be paid from our tax kick-back!)

Total Costs: $3914/month

Our Income: $175K

Landscaping: I think 20K is extremely high considering the size of my back yard. I can get this done in less than 5K.


Furniture: I have connections in the furniture industry and get most of my stuff at cost, which is about 50% off from stores. I bought a lot of things I plan on using in my new house when I moved to my Condo in WB. I really just need a fridge/W/D at move-in.


1) What if you wife has a difficult pregnancy like my wife and can't work?

My wife can definitely work from home.

2) What if your wife doesn't want to return to work and be a full time mom?

We've already discussed this before buying our house. I know things may change, so we'll cross that bridge when we get there.

3) What if you require a nanny or child-care after-all?

If her parents cannot help out, we have other options as well. My grandma is local and can help out as well.


4) What if your child requires special needs?

We have not thought about this. I guess this is not really something one thinks of before they have kids- valid point. I guess we'll just hope for the best.

5) What if you like Panda end up having twins/triplets?

We also have not thought about this, but I think we are prepared for it.

6) What if your wife's hours are cut because of recession or child care?

We'll adjust as necessary. My wife works for UCI, so I think her job is relatively stable.


7) What if one of you guys gets laid-off?

We have about 4 months of reserves right now. I know it's not 6 months, but hopefully that should hold one of us over long enough to find another job. I also have about a 100K in our retirement that I can rely on as a last resort (I know it's not much, but I'm only 29!).

To finish off your list of questions....


1) You start having marital problems after the honeymoon wears off and require counseling?

We've been together for 9 years now. The honeymoon period has worn off a long time ago, but we know we love each other and we're in this for life. This is a question that a normal married couple should not think about- I never once 2nd guess our relationship. You just deal with problems when they happens.

2) What if your grad-program requires more than you can handle?

I don't think this is the case. "You have to try your hardest to get a C" is what I hear from most students that have been through the program. I can tell you that I'm not trying really hard and I have a 3.8 GPA right now.

3) What if like most of us recent grads, you don't get the raise or promotion after you graduate?

I didn't factor in any raise from my degree when I bought my house. Any raise will be a bonus.

4) What if you hit a rough season at work?

See answers for 6 and 7.

I'm pretty fiscally conservative, so this is the most radical thing I've ever done. I will admit that I did do this mainly for my wife- I know she's ready to "start our life" and there's definitely a lot of emotion built into our decision to purchase. Again, I've been saving money ever since college and have given up a lot to get to this point (Given up traveling with friends, buying a nice fancy car, etc.) and I ask myself, what the heck am I saving for? A house! I know no one can predict the future and there will always be risks associated with any large commitment/purchase, but I can't worry about things beyond my control.

Life itself is a risk balancing act. When we step into our cars and drive away each morning, a million possibilities occur - some good, some not so, yet we still drive away knowing our better life might be changed for the worse in an instant. You cannot avoid risk or plan for every contingency. A prudent buyer will examine every potential and if the scales tip towards buying they press on. There aren't that many prudent buyers as we've all seen lately, but it's pretty fair to say that anyone reading though Real Estate blogs (TI, Dr. Housing Bubble, Mish, CR, the blog that shall not be named...) has a clear grasp on what is risky behavior and what constitutes a reasonable decision to buy in this market.

[quote author="Soylent Green Is People"]Life itself is a risk balancing act. When we step into our cars and drive away each morning, a million possibilities occur - some good, some not so, yet we still drive away knowing our better life might be changed for the worse in an instant. You cannot avoid risk or plan for every contingency. A prudent buyer will examine every potential and if the scales tip towards buying they press on. There aren't that many prudent buyers as we've all seen lately, but it's pretty fair to say that anyone reading though Real Estate blogs (TI, Dr. Housing Bubble, Mish, CR, the blog that shall not be named...) has a clear grasp on what is risky behavior and what constitutes a reasonable decision to buy in this market.

[/quote]

I can appreciate this comment. Again, I feel that I did my part to be a responsible buyer and now I just hope for the best....

bravo... thanks again for sharing Steve!

You do sound like you have some emotional/financial/personal margins. Good for you!

I don't expect you to understand this; like how most married couples just wish you well before you take the plunge, they don't ever tell you the crap they go through in marriage; but it also looks like you married well. I always try to keep plenty of margin in life for our marriage, and sometime it doesn't seem to be enough.

But... just be prepare to life to change again when you have kid(s); I've been trying to tell Panda, that you can't really work from home; yeah, It's that hard! Well at least for us!

If anyone can multi-task, like driving, while making calls, taking notes, looking up stuff in catalogs, changing a CD & eating at the same time it would be me; but all that is a cake walk compared to what we've been through with a 1 year old!

Hey, brother... hook me up with the furniture... <!-- s --><!-- s --> j/k... again all I can say is an empty house is the best baby proof... well just baby toys all around...

good luck Steve, more TI peeps in Woodbury should hook up more often, for walks, coffee or something... but atlas, you have plenty of friends already huh?

Anyone else daring to come up to bat?

Wait... Coronado doesn't come with a Fridge, Washer/Dryer? Or are you opting out of the standard ones?

[quote author="roundcorners"]Wait... Coronado doesn't come with a Fridge, Washer/Dryer? Or are you opting out of the standard ones?[/quote]

Nope. They're not included. I don't think any of the developers are including these as standard options.

RC,

How old are you (if you don't mind me asking)? You mentioned that you are a recent grad and it seems like you've been married for awhile so, I was just curious.

To be fair, would u mind answering some of your questions? Thanks for the feedback.

[quote author="scubasteve"]
[quote author="roundcorners"]Wait... Coronado doesn't come with a Fridge, Washer/Dryer? Or are you opting out of the standard ones?[/quote]

Nope. They're not included. I don't think any of the developers are including these as standard options.

RC,

How old are you (if you don't mind me asking)? You mentioned that you are a recent grad and it seems like you've been married for awhile so, I was just curious.

To be fair, would u mind answering some of your questions? Thanks for the feedback.[/quote]

I was trying to write and short response, but it turned into a paragraph, and then it turned into several paragraphs, then it turned into a whole other thread...

http://www.talkirvine.com/index.cgi?board=general&action=display&thread=602&page=1

I always wanted my own thread, I guess now I can justify it...

Hook me up on the furniture connection, too! We've been doing the Fountain Valley cheap furniture stores shopping, Easy life, living spaces, etc., but man... furniture does add up.

RC
outside of our PM exchanges on this topic. I think the true total cost is basically the monthly outlay you have to put out.
But the you have to account for following to calculate true cost to own. As is done in excel spread sheet calculator in the other blog which I personally appreciate a lot.

1] tax benefit that you get. (valid only if primary residence)
{advantage}
In the calculation below if you deduct 22K interest then
you save about 500 a month. so true cost to own will be 3300/- instead of 3800/-.

2] Lost opportunity from investment of down payment.
{ disadvantage)

3] equity
( advantage )

In todays economy I think we can say the point 2 and 3 will pretty much offset. To be safe if you put your money in CD you don't get much. and whatever you get will be taxed again. Same way point 3 may actually go negative in the next few years.

Just wanted to put this in here outside of our PM's to see what other folks think.

Side note: I would be glad if someone can bring me up to date on why is the other blog called so instead of named directly around here.




[quote author="roundcorners"]This thread is for people who are thinking of buying a home, but specifically Scuba Steve. Please don't feel like I'm picking on you Steve, but you seem to be a good sport about answering some questions before. I'm sure you sketch out some rough estimates of you much your new house is going to cost your family, but I just want to do some calculations myself and see how much it would take to buy a new home.

I'm just going to take a Monterey Plan 3 because it's one of the few plans that I have all the information.

Home Costs: $571,600
Down Payment (20%): $114,320
Interest Rate: 5%
30-Year Fix


Expenses

Mortgage Costs Alone: $2,451.56/month

Total interest deduction 1st year: $22,680.99

Tax/HOA/Maintenance/Insurance/: $1,329.13/month

True Total Housing Costs: $3,780.68 / month


Income

Income Required (True Home x3): $11,342.04 / month

Net Income Required: $136,104 / year

2007
Median household income: $98,923
Median income for a family is: $111,455

Gross Income Required (with tax deduction): $154,245


Cash Required at Purchase

Down Payment: $114,320
Six Months Living Expenses: $68,052
Landscaping: $20,000
Furniture: $20,000

Total Cash Needed: $222,372


There I hope I hit all the right numbers; you mention that you guys don't have kids yet; but your in-laws are willing to help. But here are some contingencies that might come up.

1) What if you wife has a difficult pregnancy like my wife and can't work?
2) What if your wife doesn't want to return to work and be a full time mom?
3) What if you require a nanny or child-care after-all?
4) What if your child requires special needs?
5) What if you like Panda end up having twins/triplets?
6) What if your wife's hours are cut because of recession or child care?
7) What if one of you guys gets laid-off?


Again I'm not trying to pick on you; these are questions that I ask myself and have to build margins for. I'm not being pessimistic or discouraging, I just want to be fiscally conservative and prepared.

How much stress can you take? Again you sound like a fairly balanced person with a good wife and friends. But what if:

1) You start having marital problems after the honeymoon wears off and require counseling?
2) What if your grad-program requires more than you can handle?
3) What if like most of us recent grads, you don't get the raise or promotion after you graduate?
4) What if you hit a rough season at work?

As always, you don't have to answer each question; you can answer generalities if you like. I'm sure as a person in b-school you've already done your own calculations, income projections & expenses. How far off am I? Or are you just hoping for the best?[/quote]

[quote author="waitin4ever"]
1] tax benefit that you get. (valid only if primary residence)
{advantage}
In the calculation below if you deduct 22K interest then
you save about 500 a month. so true cost to own will be 3300/- instead of 3800/-.

2] Lost opportunity from investment of down payment.
{ disadvantage)

3] equity
( advantage )

In todays economy I think we can say the point 2 and 3 will pretty much offset. To be safe if you put your money in CD you don't get much. and whatever you get will be taxed again. Same way point 3 may actually go negative in the next few years.

Just wanted to put this in here outside of our PM's to see what other folks think.
[/quote]
Yes... I would discount both 2 and 3 as neither can be depended on at this point in time.

However, this is one of the reasons why I'm not too keen on the "20% down" model anymore. Considering how unstable home values still are, I would be hesitant to put that kind of money into a home, even in Irvine. This is probably why I am looking at a price range that is below what is currently available in Irvine because I'm not interested in putting down over $100k into real estate right now.

I also think the tax benefits are not talked about as much. Those who rent say this amount isn't very much and I have read other posters on other sites talking about how AMT defeats this benefit but I'm not a tax accountant so I don't exactly understand how. All I know is that I get a significant reduction in taxes due to my property tax and mortgage interest writes-offs that make owning favorable to renting. I also think some of these renters have never owned so they don't know the true savings they will get on their tax returns.

Side note: I would be glad if someone can bring me up to date on why is the other blog called so instead of named directly around here.

Click to expand...

Which other blog? IHB (Irvine Housing Blog) or OCR (Orange County Reader)?

I think most people do that to be humorous or out of habit from the early days when TI was just formed (as it seemed "forbidden" to talk about the IHB) but there is no tacit restriction on doing so. I mention them whenever it's relevant and I think everyone else should too.

It seems that ScubaSteve's household is doing well at such a young age (presumably), but doesn't that make a commentary on affordability in Irvine that an income that is in the upper percentiles has to have such a large down payment on a non-traditional SFR to create a reasonable housing expense? I use the 3x/4x multiplier for us and what I get just doesn't match what I think we should get.

That is a good point about down payment. Should one stop at exactly 20% as mandated by todays lenders for new collection 2010. Why do you think it is better to pay interest of 5% to a bank. You have to consistently get that kind of value elsewhere to break even.

I believe if one intends to own the home long for say 20+ years then it makes sense to payoff as fast as you can so net payment to own the house outright is the lowest. Infact i would even put more every year to pay off faster.





[quote author="irvinehomeowner"]
[quote author="waitin4ever"]
1] tax benefit that you get. (valid only if primary residence)
{advantage}
In the calculation below if you deduct 22K interest then
you save about 500 a month. so true cost to own will be 3300/- instead of 3800/-.

2] Lost opportunity from investment of down payment.
{ disadvantage)

3] equity
( advantage )

In todays economy I think we can say the point 2 and 3 will pretty much offset. To be safe if you put your money in CD you don't get much. and whatever you get will be taxed again. Same way point 3 may actually go negative in the next few years.

Just wanted to put this in here outside of our PM's to see what other folks think.
[/quote]
Yes... I would discount both 2 and 3 as neither can be depended on at this point in time.

However, this is one of the reasons why I'm not too keen on the "20% down" model anymore. Considering how unstable home values still are, I would be hesitant to put that kind of money into a home, even in Irvine. This is probably why I am looking at a price range that is below what is currently available in Irvine because I'm not interested in putting down over $100k into real estate right now.

I also think the tax benefits are not talked about as much. Those who rent say this amount isn't very much and I have read other posters on other sites talking about how AMT defeats this benefit but I'm not a tax accountant so I don't exactly understand how. All I know is that I get a significant reduction in taxes due to my property tax and mortgage interest writes-offs that make owning favorable to renting. I also think some of these renters have never owned so they don't know the true savings they will get on their tax returns.

Side note: I would be glad if someone can bring me up to date on why is the other blog called so instead of named directly around here.

Click to expand...

Which other blog? IHB (Irvine Housing Blog) or OCR (Orange County Reader)?

I think most people do that to be humorous or out of habit from the early days when TI was just formed (as it seemed "forbidden" to talk about the IHB) but there is no tacit restriction on doing so. I mention them whenever it's relevant and I think everyone else should too.

It seems that ScubaSteve's household is doing well at such a young age (presumably), but doesn't that make a commentary on affordability in Irvine that an income that is in the upper percentiles has to have such a large down payment on a non-traditional SFR to create a reasonable housing expense? I use the 3x/4x multiplier for us and what I get just doesn't match what I think we should get.[/quote]

I thought about doing an FHA loan and only putting down 5%, but I couldn't stomach paying an extra 1000 a month in extra mortgage, insurance, and fees...