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Buy a House or Save for Daycare?

  • poll: Buying a home and TTC
    Glad we bought : (55 votes)
    96 %
    Wish we hadn't : (2 votes)
    4 %
  1. looch

    wonderful pear / 26210 posts

    @babynumber1: that's a great point, another thing you can do is try one of those online "how much can you afford" calculators, to give you a better idea.

  2. honeybear

    nectarine / 2085 posts

    @babynumber1: I agree with your basic advice, but even then they would be under 33% of gross income on housing (assuming that insurance/taxes were low in her area--which is not a given!). I'm super conservative on these matters, but I recognize that not everyone has my very low tolerance for risk.

    My main concern is why is there only $15k (or $25k) available for downpayment? If rent is cheap, debt is low, and there aren't daycare costs yet, I feel like there should be lots of cash on hand (or at least highly liquid) at $90k/year. Maybe that income level is new? Or taxes/health insurance are really high?

  3. Freckles

    honeydew / 7444 posts

    @looch: @FoodNerd81: I agree with you guys. It's not even just taxes, but power and utilities which most of the time is included in rent (or a flat fee). Yes, people see renting as "wasting money" but why put yourself through financial stress in buying a house if you're going to end up in a foreclosure situation 10 years from now?

    A 350k house is manageable on a 90k salary, but not if you are only putting so little towards the down payment. You also mentioned that the plan is for your husband to work at home and look after your baby. It sounds great on paper, but you have to think about how it will affect your husband's business, and what will happen if he can't handle looking after the baby AND working from home at the same time.

  4. MsMamaBear

    pear / 1861 posts

    @pui: Agree.

    I'm glad I bought my house before we TTC. It's just me now, so thankful I'm in a house instead of an apartment.

    Oh, I'm in the south and my house wasn't NEAR $350k. So it was a lot more doable.

  5. ladybee

    grapefruit / 4079 posts

    Honestly, if I were you I'd wait. Maybe look for a bigger rental with in unit laundry? Maybe a townhouse where it felt less like and apartment and more like a house? We bought three years ago but we bought a house for 100K and our monthly payment is less that what we were paying in rent after taxes and PMI and everything (rooms were a lot bigger in rental). At times, it's still overwhelming since EVERYTHING breaks at the same time and I couldn't imagine starting home ownership with a baby.

  6. Freckles

    honeydew / 7444 posts

    @pui: I'm not sure if i agree with your assessment that your home is going to increase in value at 5% a year, and how it equates to a 79% increase in value in 10 years. Math aside, the forecast is that house prices will remain flat in the next 10 years. With interest rates most likely to increase, it will also make monthly payments more difficult for those home buyers who are already on a tight budget. Yes, i think it's better to invest in the house (hurry to pay off the mortgage) but only if you can afford to buy a house in the first place.

  7. pui

    bananas / 9899 posts

    @Freckles: My math is sound. I triple checked it before posting it.

    Whether or not housing prices will remain flat is a bit of a debate, but there is a lot more evidence that the value of land will continue to rise than the opposite (of course that depends on where you are, as I mentioned before). It's a much more sound investment than, say, stocks. Not to mention much easier to get in to and much more profitable when selling as I explained before.

    And if interest rates are going to increase, all the more reason to lock in to one now while they are lower.

    If you can't afford to buy a house now, the goal should be to be able to afford one as soon as you can.

  8. raintreebee

    pear / 1531 posts

    @Freckles: I agree with you. No one knows what the housing market will do, and it could just as easily go down rather than up. Didn't we learn anything in 2008? Investing 101 is that past performance does not guarantee future performance.

    People think that you are throwing money away by renting, but you are also throwing money away by owning via interest and taxes (although these are deductible which helps), and you are putting all of your money in one asset--a VERY risky thing. Think about what else you could do with your down payment. You can invest in diversified assets and earn a return that may very well surpass your house's increase in value less carrying costs, which means you are coming out on top by renting.

  9. pui

    bananas / 9899 posts

    @raintreebee: The more you pay off your mortgage, the less interest you pay. The longer you have your house, the easier it gets, while the longer you rent it will only get more and more expensive as the years go on and rent goes up. All that money goes to your landlord, not in to any sort of investment. In the long run, renting is not going to put you on top.

    The trouble with diversified assets is that you can't live in them as you are paying towards them. You still need a place to live and rent is still a black hole.

  10. plantains

    grapefruit / 4671 posts

    @hilsy85: in principle, I agree with a lot of what you are saying, but I think that there are too many other factors at play to say for sure that renting is a better choice than buying in big cities. e.g., using the NY Times calculator, it shows that in NYC after just two years in my neighbourhood, buying proves to be a better choice than renting.

    I think it depends on teh real estate market where one is located, but it also depends oon whether one has a high net worth or not. High net worth individuals don't need to worry about getting priced out of neighbourhoods of their choice down the road or missing out on lower interest rates which could preclude them from purchasing down the line.

    We all know that in New York, the rent is too damn high, I see no point in renting in NY at the moment when it is cheaper to own. But that is because I know that we are staying here with no intention of moving to the suburbs.

    OP, if I were in your position, I would wait until I had 20% and then some before buying. Maintenance on a house can get very expensive very quickly.

  11. raintreebee

    pear / 1531 posts

    @pui: A house can be thought of as two components--the rental component, and the investment component. Let's say that a house costs 5,000 to rent a month but 6,000 to buy. That 1,000 a month in the investment component while the 5,000 a month is the rental component. Essentially, when we buy the house, we are paying implicit rent at 5,000 a month. If I sell the house in ten years, I will maybe make up this implicit rent in the purchase price, but does this mean I have lived for free? No, because of the opportunity costs and the present value of money. So let’s say I buy the house for $100,000. I live in the house for 10 years. Then I sell the house. How much does it sell for? Let's say it again sells for $100,000 in year 10. Does this mean I’ve managed to “live for free” during these 10 years? No. We have to think about our opportunity costs and about present value.

    From the standpoint of today, looking only at the rental component, having the house is like having a payment of $5,000 a year forever, which is worth $100,000. By living in the house for ten years and then selling it for $100,000 in year 10, I have (in present value, i.e. year 0 dollars):

    100,000/(1+.05)^10 = (approx.) $60,000

    So I have foregone a present value of (about) $40,000 in rental payments by living in the house for 10 years. If living in the house for 10 years was worth more than $40,000 (in year 0 dollars) to me, I have made a good investment, if it was worth less than this amount, then it was not so good.

    But going back to the investment component--it may be that that extra 1,000 a month we paid for the chance on the housing market going up pays off (as compared to other investments). Then again, it may not.

    But of course there are other considerations--some people psychologically need to have a house to save anything at all. Some housing markets have quirky differences between renting and buying. Taxes also make home ownership somewhat more favorable although some of this savings is reflected in the costs of real estate (by driving prices upward as compared to other non real estate investments).

    Sorry for such a long response. Just trying to help the OP in seeing that renting isn't necessarily throwing money away (at least not more so than buying).

  12. pui

    bananas / 9899 posts

    @raintreebee: If you buy a house for 100k and then sell it 10 years later for 100k I'd say you made a very poor investment, not that you lived anywhere for "free". No one gets a free lunch. Yes, it's debatable that houses are definitely going to go up in value, but I'd still argue that it's a much more secure than any other investment.

    All $6k you spend a month is "investment" because it is going directly towards paying off your investment. You are not paying 6 grand a month just to live there, you are putting 6 grand a month in to an investment that is increasing in value AND living there.

    The alternative is paying $5k in to the black hole of rent and then $1k in to another less lucrative investment (because you are only putting $1k in, not $6k, and if you are putting more you are still losing that $5k of rent.).

    Also, like I explained, having a house is not like having a rent of $5k forever. As the years go on, the interest goes down because you have paid in more of your debt (less debt = less interest. Less interest = smaller mortgage payment). Also, you have the amazing opportunity with a mortgage to pay off more than your monthly payment! The faster you pay it off, the better position you are in. I'd be hard pressed to find another investment that does that.

    It's not just psychologically better to secure yourself in a home, it's financially better.

  13. yoursilverlining

    eggplant / 11824 posts

    I would wait to buy until you have 20% down and additional savings of at least 6+ months worth of living expenses, ideally much more. Do not deplete your savings in entirety to buy a home.

    I think housing is a great investment, but it absolutely is not always the answer and no one should rush into buying a home (or land, or any property) or buy if it means they will become "house-poor".

    That's a lot of house for 90k a year, especially if part of that 90k in in flux because your husband is self employed. How much are taxes in your area? What would your total mortgage amount be, relative to your take-home each month?

    As someone who works from home and has a baby, working from home at a job that requires several hours of devotion to projects is near impossible with a baby. Babies are a full time job by themselves. I would assume that you will need at least part time daycare, and then if your husband is able to swing both responsibilities, you've got some surprise savings. I would approach it that way, instead of approaching it with the assumption that you won't have a daycare expense.

    Are you adequately funding for retirement? For regular/emergency savings? What about LO's college fund?

  14. Freckles

    honeydew / 7444 posts

    @pui: 5% interest over 10 years is more like 63%, unless there are other factors you are taking into consideration? I agree with you that investing in a home is more sound than stocks or mutual funds, especially since the return is pretty shitty these days. But i think the buyer needs to make sure that they are in a situation where they can afford everything that comes with home ownership.

  15. pui

    bananas / 9899 posts

    @Freckles: Of course! I have said multiple times that you shouldn't be house poor, you should save up accordingly and then make that leap.

  16. raintreebee

    pear / 1531 posts

    @pui: Financially, part of the purchase price of a home (or any asset) represents its future stream of rental payments, so a lot of it does not represent the investment component. And my later caveat was that the house may go up in value or it may not. By initially capping it at the $100,000 figure, I was trying to show that even if you got your money back, you still lost out on those implicit rent payments because of the time value of money. I teach some finance at a graduate level, and this particular example came to me via a tenured professor of economics. I am not trying to argue with you about it. Just want to share the hypothetical to make sure people are well-informed.

  17. pui

    bananas / 9899 posts

    @raintreebee: How is not all that money going towards investment?. I'm sorry, that doesn't make any sense, please explain the "why" to me here. Just because rent is X and a mortgage is Y doesn't mean your investment is Y-X. ALL of X is going to your landlord so that he can buy a Ferrari while ALL of Y is going to your investment. Part of Y isn't going to "living" and the other part is going to your mortgage, it is ALL going to your mortgage!

    And I guess yes, buying a house is a bad idea if it's not going to increase in value at all (because like you explained, inflation). I never said otherwise.

  18. Freckles

    honeydew / 7444 posts

    @pui: Another thing to remember is that you're paying a lot more than $350k for a home, if you factor in interest and PMI fees. Interest alone by the end of the amortization period can be $175k, yikes!

  19. raintreebee

    pear / 1531 posts

    @pui: Assets are generally worth the present value of their future stream of income they generate (consumption component) + any fluctuations in market value (investment component). So if I buy a house, I am essentially paying for the opportunity to rent it out. In our example, I don't plan to rent it out--I plan to essentially rent it to myself. So I am paying upfront the rental payments over x years. This is in contrast to renting from the landlord because there I am spreading the payments over x years. When you sell the house, you should recoup the upfront payment you made to live in it when someone else pays for the future stream of rental payments. A large part of the value of the house is what people will pay to live in it--whether it is you or someone else. Houses would be worth a lot less if no one could live in them. It doesn't mean that that money you pay to "rent" your house doesn't go to your ownership of the house. But it does represent "rent", and because you are paying all the rent up front some goes in to your "black hole" because of the time value of money. If housing prices remained constant, then there should be no difference between renting and buying. BUT, as you mention, we know that housing prices are not constant, and part of what we pay for a house, in addition to its rental value, represents the gamble on whether housing prices are going down or up. And that component is really just a gamble. All I am trying to show is that part of your house represents rental value, some of which you are "throwing away" by paying all of that rent upfront.

  20. pui

    bananas / 9899 posts

    @raintreebee: I have 2 companies. One company is the one I work at, and the other just owns property. The way we're set up, my one employment company actually pays the land-owning company rent... but because I own both companies it's like I am paying rent to myself. Even though that is how it works on paper, all that money the one company spends on "rent" and all the money the other company spends on "mortgage" is going directly in to my investment of that industrial property.

    Sure, by buying a house you are "essentially paying for the opportunity to rent it out" because that is what determines the value of the house, but that isn't how most people use the house they buy. The average person is only really concerned about how much the house is worth (and that it increases). They are not concerned about how much rent they are going to charge for it (since most people only own one house and live in it)

    I think saying that most of your mortgage payment is going towards "rent" is a bit misleading, because it is all, still, going towards paying off your mortgage. Same as your down payment, it is also going towards your mortgage. Neither of those go to a black hole. That is not the case with renting. All the money you pay your landlord, no matter how spread out is, is being thrown away.

  21. pui

    bananas / 9899 posts

    @Freckles: That's why when you get your home, paying it off as fast as possible should be top priority! The faster you pay it off, the less interest you pay.

  22. Freckles

    honeydew / 7444 posts

    @pui: I totally agree, which is why we doubled up on our bi-weekly payments the first two years. But i know too many people who don't pay it down and feel that it's okay to take 25 years to pay off a home.

  23. Bao

    GOLD / wonderful apricot / 22276 posts

    We lived in an apartment for the first 7 months of LO's life, so we just bought a house in March. We were not in the right position financially to buy a house before that. I am so glad we have a house now, but sometimes it's not always realistic if you can't afford it.

  24. hilsy85

    squash / 13764 posts

    @plantains: oh for sure..I don't think the answer is black and white, and there are a lot of variables. I just don't agree with blanket statements like it's ALWAYS better to buy, since I don't think that's true either!

  25. plantains

    grapefruit / 4671 posts

    @hilsy85: yup, I agree with you. It is not black or white at all, and I know so many people who went from living in an apt to living in a house and they are stunned by how much it costs to heat/cool a 4bd house.

  26. hilsy85

    squash / 13764 posts

    @plantains: yup! We just bought a house upstate and it was a rude awakening not to be able to call the super when the A/C wasn't working!

  27. plantains

    grapefruit / 4671 posts

    @Freckles: I have to say too though that depending on your interest rate, you might prefer to invest your money elsewhere rather than pay down the mortgage sooner because the deduction on interest those first few years in fantastic.

  28. plantains

    grapefruit / 4671 posts

    @hilsy85: gah, what does one even do in that situation? I have no idea how to live life without a super. I am never leaving the cocoon of my condo.

  29. dc yoga bee

    grapefruit / 4770 posts

    Just want to randomly add not everyone can put down 20%, and there are other options. I know for us, homes cost $800,000 plus for single family homes in good neighborhoods. That's just the DC market. Now if all the people who only believe in 20% down can do that, good for them! For us, we are doing FHA 3.5% (oh the horror)on $800,000. $160,000 down is not in our cards, and we make well over six figures. So don't feel bad that you're "only" putting down $15K like a previous poster said.

  30. LovelyPlum

    eggplant / 11408 posts

    We are TTC now, almost 30, and not going to buy for a long, long time. In the long run, maybe it puts us at somewhat of a disadvantage, but it makes zero sense for us to buy now. For one, wr will likely be moving quite a bit in my early career. For another, we would like to concentrate on getting rid of student loan debt before assuming a mortgage. I also want to have more savings in hand before we buy.

    To be honest, when we do buy, it may not even be a house. Financial issues aside, the idea of a big house in suburbia has almost no appeal to me. Maybe it will later, but not right now.

  31. lokki

    pea / 22 posts

    Wow ladies, tons of good advice and things to think about!

    A few clarifications, just since people asked:

    We have 15k for the down, another 10k for the closing costs, and a cushion of $6 k cushion (or about two months living expenses). Obviously if we can get the sellers to cover closing that gives us up to 25k for the down.

    20% would be 60-80k, and it would likely take us several more years to save up that much and covering closing and having a cushion. I think having 20% down is very admirable, but also tends to happen in lower costs of living areas, with inheretances, or those making six figures. There are always exceptions, but they are generally exceptions for a reason.

    I have had my new job for seven months, so not a lot of time to save, but we are working hard to do so.

    Our current rent just jumped to $1825, and when I used the online calculators with a home in lower to mid 300s with a 30 yr fix depending on the down we were not far off (1900-2200/mo). I think the difference would be covered by the tax savings (and PMI is currently deductable as well as interest--though this might not last).

    I contribute to my retirement through work--hope to get DH doing the same this year

    My husband is self employed and earns a very high hourly wage on a limited number of hours a week. He literally only works like twenty hours a month or less some months, even though he brings in a paycheck every month (in really high earning months he might be gone for up to a week, but this is a few times a year at most and he is generally making 6-10 k those months). He is a consultant so project by project (but banks it to pay himself a steady salary every month with a bonus at year end). He would have to cut back on his hobbies to provide day care, but he is something of a night owl and could work at night while I or my parents watch the baby.

    I still don't know that I am comfortable yet with buying a house (I am pretty conservative with money), but this has definately given me a lot to think about. It also seemed to be a really generative topic so I hope it was helpful to others as well!

    And we will see how realistic daycare plans are. Of course, we have to get pregnant first....


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