patrick.net

We are not well off or anything, but just want to get a 2nd opinion if we are on track to support a newborn + a new house at the same time in our financial situation?

Dude. How old are you ? How did you made this kind of money?

I am 35 and wifey at 31. We just invest and lucky enough to sold our first condo in 2006. Been renting from 2006-2011 before we found this house we BOTH love and the price is reasonable enough to pull trigger. Our initial plan is to buy below $500k which is very difficult to find anything decent.

sounds like you are in good shape.

My mom is getting old and eventually we want her to move in with us, so we need to take care of that as well (which I am truly happy to do so)

You did really good. I think you are in very good shape. Smart move. Congrats.

Financially, I think you're doing great and it seems like you bought a fairly reasonable house given your market. Of course I don't really know the market you are in, so I can't say for sure, but given the rents it's a reasonable price. The house could lose some value just because prices are falling, but given those rents I don't think you are looking at a huge loss. You are outside of the 3x your salary metric, but your payment is well under the advised DTI ratios.

Also you have a lot of assets for your age. It sounds like you luckily sold your condo at the right time, but it also sounds like you are being smart with your money, contributing heavily to a 401k and driving cars that are paid for so that all your money isn't going to the bank every month.

Is your wife planning on staying home once the baby arrives? That would be the only potential change to this scenario.

I usually give the complete opposite advice, but that is because in most markets rents and mortgages are nowhere close to being equal. Where I am located housing is still vastly overpriced.

>My wife and I make about $160k annually.

>We are not well off or anything,

These two sentences directly contradict each other. You're only 35 -- same age as I am -- and making what must be in the 95th percentile for income.

Take your $150k in cash and knock your mortgage down to $250k right now. That's an instant 4.5% return!

You have a huge house, investments, automobiles, a wife and a kid whom you presumably love, and no debt. And you've got a mortgage that you can pay off very easily with your salary. Stop worrying and relax!

Michinaga says

These two sentences directly contradict each other. You’re only 35 — same age as I am — and making what must be in the 95th percentile for income.

Wealth and earning a lot isn't the same thing. Though, I'd say the OP is on the right path to wealth. On top of your 401k, I'd invest in a non deductible IRA. Then annually convert that non deductible IRA into a Roth IRA. If you get "lucky"in this vehicle, you should easily outperform the 4.5% interestthat you are prepaying.

I think you seem to know what you're doing... so far.
Looks like 8.5~9K/mo take home income, 2026/mo mortgage, about 500/mo tax, and 100/mo insurance. Assuming there's no mello-roos, HOA or any special tax requirement, it looks like about $2700/mo only for the home. With tax return, that will reduce your actual cost, I guess it will be about $2200 or so. Then, $500/mo rent from the relative (if he/she pays it) can cover utility. So, that's not bad at all.

So, what's your living expenses right now?
For me and my wife is spending 1000~1500/mo. We just don't buy much, don't eat much, don't go out much, never took vacation for years. Your expense can be quite more than ours, since you got different life style. So, I assume 2000~2500/mo here.

So, assuming 4500~5000/mo spending, out of 8500~9000/mo net, this sounds really doable.

Few questions.

No offence intended, but how stable are the jobs you guys have? Are you sure one of you won't get laid off, or you still can manage it even if it happened?

Will she staying home to take care of the Jr., or will she need a nanny or something... ah, the relative who's living w/ you. But seriously, you have an idea about the kid related costs, such as daycare, after school activities, and college fund for them, etc. right?

Good to have both car paid off. But in few years, you will need another car when one of them gets belly up on you. Another couple tens thousand bucks there.

I think you knew all those, and plan accordingly. So, good luck w/ your new home and enjoy.

"We stored foods, water and gasoline and medicines just in case"

Gasoline? Just in case of what? What are you preparing for? If the time comes when you are going to need to raid your stash of stored items then you've got bigger problems than your house value. Are you hoping to be running your generator to cook up all your canned food while the world around you is in shambles?

You mentioned earlier that you got lucky and made some money on the place you sold just in time in 2006. Maybe that is why you are coming here for assurance : Sybrib nailed it - you are hoping you timed it - again.

What happened to this site? Is this what Patrick's site has come down to? Yes, he did give sound financial advice. But don't miss one of his big points. Propping up inflated housing prices pits us against each other while supporting bankers and realtors. Think more about community, and less about how you are going to survive when the world is over.

sounds like you are financially all right. I think you could have waited a few more years and bought the same house cheaper, once interest rates go back up to normal these prices will not be able to stay around. But to each his own I suppose. You make more than enough.

it's really hard to answer this question without knowing what kind of food you've stored. Marshmallows and candy bars aren't going to cut if there is a real emergency situation.

what happened to that second house you were going to buy?

http://patrick.net/?p=531422#comment-719524
masayako6412 says

Price Rent Ratio. Big deal. I don’t think it’s worth replying anymore. You buy, you don’t.. who cares.

Just a waste of time.

You don’t get it; you don’t get it.

To the folks who listen to logic: Buy now IF it’s actually cheaper to own than rent. Don’t really make sense to wait for the bottom. Nobody can tell the exact bottom. There are good deals out there currently. Go do some house hunting. RE is always local, you can’t use macro view and look at graphs to determine when to buy. I’m done.

No point to argue. I know I’m right. :) I have cash to buy one more if the buying opportunity present itself again.

Sikit says

“We stored foods, water and gasoline and medicines just in case”

Gasoline? Just in case of what?

I store gasoline, too: never let below half tank in any of my vehicles.

People died in New Orleans because they ran out of gas.

You never know what can happen. Remember those awful fires in San Diego?

burritos says

Michinaga says

These two sentences directly contradict each other. You’re only 35 — same age as I am — and making what must be in the 95th percentile for income.

Wealth and earning a lot isn’t the same thing.

He didn't use the word "wealth". He used the words "well off".

Michael D says

Is your wife planning on staying home once the baby arrives? That would be the only potential change to this scenario.

Wife is taking 3 moths off to take care the baby. Paid time off. Thank God. She's in the medical field.

I am in the high tech field, managerial level, so layoff is always a fearful reality. Wife's job is very stable. I think we have enough savings to last a few years in case I get laid off... I hope.. Nanny is gong to cost $1000 per month. That's the mone we need to pay in order to allow both wifey & I to work full-time. Hopefully we don't have to buy new cars. Her car is 2 years old and mine is 9 years old.

seaside says

No offence intended, but how stable are the jobs you guys have? Are you sure one of you won’t get laid off, or you still can manage it even if it happened?

Will she staying home to take care of the Jr., or will she need a nanny or something… ah, the relative who’s living w/ you. But seriously, you have an idea about the kid related costs, such as daycare, after school activities, and college fund for them, etc. right?

Good to have both car paid off. But in few years, you will need another car when one of them gets belly up on you. Another couple tens thousand bucks there.

I think you knew all those, and plan accordingly. So, good luck w/ your new home and enjoy.

If the solar storm hit or earthwuake strike, especially in california.. and knock out all electricity, my hope is to be self-sustainable for 3-6 months with enough food, water, gasoline and medical supply. I learn that at very young age to build the ark before it rains. So, when time and resources allow, I just want to get a little bit prepared for my family, that's all. I think that's a very reasonable thing to do to secure the well beings of my family, don't you agree?

Sikit says

Gasoline? Just in case of what? What are you preparing for? If the time comes when you are going to need to raid your stash of stored items then you’ve got bigger problems than your house value. Are you hoping to be running your generator to cook up all your canned food while the world around you is in shambles?

rob8024 says

it’s really hard to answer this question without knowing what kind of food you’ve stored. Marshmallows and candy bars aren’t going to cut if there is a real emergency situation.

I am storing rice, grains, can foods, dried food mainly, liquid fuels for those Coleman style outdoor burners. All food stored in air tight vacuum bags. I am in the process of searching for a good generator. I feel no shame in sharing that because I think it's a good idea to pray for the best and plan for the worst.

MyPunanyIsBiggerThanYourPunany says

what happened to that second house you were going to buy?

Yes, forget to mention, I have purchased a condo with my side business partner, 1120sqft near college area just for rental income purchase. I am trying to get some of my money out and diverse away from stocks and bonds. It's been going up too much and I feel a need to take some profit away and invest in other asset class.

Amazing! Has anyone ever bothered to read Chapter One of
Waldon --- Economy? Or is freedom from debt out of style?

Michinaga says

Take your $150k in cash and knock your mortgage down to $250k right now. That’s an instant 4.5% return!

Do not do this. Also do not pay extra on your mortgage every month. You have a 4.5% tax advantaged loan -- use it.

Unless you think the long term environment is going to tend toward low interest rates / low investment returns / deflation, you should hang on to that insanely cheap money and invest it -- or for a rainy day. At a minimum pay off any loans (sounds like you probably don't have any) and stuff all of your tax deferred investment opportunities to the gills (college savings? 401K, IRA..) (sounds like you might already be doing this). At a minimum keep enough cash around to have 6 months (or a year) of living expenses on hand. Paying down your loan another 150k would not change your monthly payment, just your payoff date...and you would instantly lose a lot of your tax savings from interest payments (your interest portion would drop.)

Now, if you aren't going to put any extra money to work, and would just have it sit in a low interest savings account...and you think rates aren't going up any time soon, then maybe it's best to pay down your mortgage.

On average, someone your age (long term investment horizon), with even a moderate risk tolerance will come out ahead (probably way ahead) by investing the money instead of paying down the mortgage.

swebb says

Paying down your loan another 150k would not change your monthly payment, just your payoff date…and you would instantly lose a lot of your tax savings from interest payments (your interest portion would drop.)

But the flip side of losing the tax savings is that you would be paying less interest.

swebb says

Also do not pay extra on your mortgage every month. You have a 4.5% tax advantaged loan — use it.

Nada. Cash is the King in the current environment of declining home equity. Keep the cash in the pocket. The lesser the debt the better off you are.

Nanny is gong to cost $1000 per month.

What is Mom doing for $500 a month? What could she be doing rent free?

Capital that never leaves the family is good capital.

masayako2456 says

I am storing rice, grains, can foods, dried food mainly, liquid fuels for those Coleman style outdoor burners. All food stored in air tight vacuum bags. I am in the process of searching for a good generator. I feel no shame in sharing that because I think it’s a good idea to pray for the best and plan for the worst.

Heh I was just kidding about the marshmallows!

It sounds like you are well prepared and doing everything you can. You will be fine.

There are a lot of things to worry about when you have a new baby on the way, but you are doing everything and then some. It sounds like you and your wife are very capable, and with only about $3000 of expenses per month, you would do fine even if you were out of work for a long time.

I appreciate your radical self-reliance, but don't forget the value of your neighbors and community.

Generators are a great idea. Consider diesel. Or solar panels.

Beyond that, I suggest you visit the Burning Man festival after the baby is born.

DUDE,
is this a bragging post?

I think you are in very good shape financially. Lot of people would be lucky to be where you are.

so what was your question again? :-)

swebb says

You have a 4.5% tax advantaged loan — use it.

and you would instantly lose a lot of your tax savings from interest payments (your interest portion would drop.)

So? The tax deduction is merely a reduction/subsidy in the interest rate -- if you have a 4.5% rate, it's like paying perhaps 3% interest instead. The mortgage interest deduction doesn't do anything for taxes on its own. That's why you need a good reason to pay 4.5% to save 1.5%.

What you really need to do is compare a 3% loan (or whatever your effective rate is) to other opportunities.

Most people overestimate how the mortgage interest deduction works and just make some sort of vague statement of "tax benefit" without really understanding what the tax benefit is. The mortgage interest deduction is integrated into the purchase price of the house, which would be lower if there were no deduction.

Sikit says

We stored foods, water and gasoline and medicines just in case

Perhaps its for the torches and molotav coctails, which work well against the zombies. (though they do attract attention)

OP be sure to use a fuel stabilizer and try and rotate that stock every 6 months or so. Don't want to get caught with stale gasoline 5 or 10 years down the road when the apocalypse happens.

rob8024 says

Generators are a great idea. Consider diesel. Or solar panels.

I'd throw in learning how to grow food in the mix too. Long term growing your own vegetables is far superior to eating 3 year old canned food.

Schizlor says

Long term growing your own vegetables is far superior to eating 3 year old canned food.

You can get 30-year old shelf-stable canned food too, of course. I have some crazy libertarian survivalist friends who tell me about this stuff, along with the other preparations they make for their "compounds."

growing your own vegetable isn't going to save you much. My wife and I spend $10 a week on veggies, it would cost us a lot more time and headache to actually grow these ourselves.

And we eat a lot of veggies. Potatoes are 10lbs for a dollar, cucumbers are 59c/lb, tomatoes are usually around 80c/lb, corn is dirt cheap as well, apples often are 33c/lb .... you just have to know where to shop.

corntrollio says

You can get 30-year old shelf-stable canned food too, of course.

Oh sure. But wouldn't a nice, fresh, juicy tomato make a tastier dinner? You would of course want to supplement with long-term storable foods, but I see it as kind of a, "give a man to fish, teach a man to fish" situation. It's a lot easier to carry that agro knowledge around in your brain with you than it would be to travel any distance carrying all that food. (for example)

OP sorry to get off topic, but presenting the scenario above and worrying if you're "OK" or not is equivalent to Megan Fox asking a male between 15-85, "Do you think I'm pretty?".

Yeah. I'd say you're doin' alright.

I think you need to adjust priorities. Having a child is different than having a pet. Yes there are similarities and that is why many people are using pets as substitutes for children even unknowingly... It amazes me to see someone having a child (something of great value) and then give it in the care of someone making minimum wage. Children learn constantly from what they experience. They need Love and no one will love your child like you and its mother. Yes you will earn and save more money but can not buy what your child will miss now and can not get later. Your time with the child in the evening is valuable but will not be enough to compensate for 90% of its awake time. You can not come to this conclusion with a calculator but the implications are very real and and next to impossible to correct late in life if you get it wrong. This is intended as friendly advice.

ChrisLA says

growing your own vegetable isn’t going to save you much. My wife and I spend $10 a week on veggies, it would cost us a lot more time and headache to actually grow these ourselves.

Yeah, but you're talking about now. I'm talking APOCALYPSEFUCK style living. Collapse of Western civilization as we know it. (only because the OP mentioned as part of his reasoning for planning like that, "US go bankrupt') In the event of total societal collapse, knowing a good deal about agriculture would probably come in quite handy. (in addition to being armed to the teeth)

You need advice or are you giving one?

masayako2456 says

Our big worry is whether we did buy the house in the right time. Rent to own ratio make sense in our case. It’s cheaper to pay my mortgage than paying rent for the same house

If your first question means, "Did I time the bottom?" then I'd have to say no. But that doesn't mean it was the wrong time to buy (if you have other considerations for buying besides getting the bottom timed perfectly, which you obviously do) Your next two sentences should reinforce that. Rent vs. Own makes sense to own, and you are paying less than if you tried to rent that exact same house. You obviously have the cash reserves to cover any depreciation, should you ABSOLUTELY have to move for some reason in the next couple years (which will suck to spend, but you will have an option that doesn't involve default available to you) so you haven't painted yourselves into any corners, but that should be your primary concern now. (the possibility of you needing to relocate)

Long term you'd look fine. But if you plan or even thought there was a chance of you moving in the next 2-5 years, you'd have been well advised to wait I think. (just opinion based on the fact I believe, even in SF and D.C., prices will go lower before they trend higher for any significant length of time going-forward)

corntrollio says

What you really need to do is compare a 3% loan (or whatever your effective rate is) to other opportunities.

So you are agreeing with me? The key here is that you don't just compare it to other opportunities / needs in today's market -- you have to look to the future. That 4.5% (and subsidized) rate is *locked in*. So, as I said, unless you think the long term outlook is bleak, or your investment risk tolerance is low, it's probably best to hang on to your cheap money.

corntrollio says

Most people overestimate how the mortgage interest deduction works and just make some sort of vague statement of “tax benefit” without really understanding what the tax benefit is.

I think I have a pretty good handle on how it works (but if you think I'm missing something, do share). I have gone on record speaking out against it because typical income situations don't benefit much/at all from it. However, if you notice, the OP has a $160k joint income. Someone (SFace?) has pointed out numerous times that this salary range is in the "sweet spot" for the deduction.

corntrollio says

The mortgage interest deduction is integrated into the purchase price of the house, which would be lower if there were no deduction.

In the same way that the homebuyer tax credit artificially boosted prices, the mortgage interest tax deduction does too...yes. Would you advise someone to not claim the homebuyer tax credit because it is built into the price they paid? Why wouldn't someone take advantage of the MITD as well? It's some of the cheapest money they will ever get.

TimT says

I think you need to adjust priorities. Having a child is different than having a pet. Yes there are similarities and that is why many people are using pets as substitutes for children even unknowingly… It amazes me to see someone having a child (something of great value) and then give it in the care of someone making minimum wage. Children learn constantly from what they experience. They need Love and no one will love your child like you and its mother. Yes you will earn and save more money but can not buy what your child will miss now and can not get later. Your time with the child in the evening is valuable but will not be enough to compensate for 90% of its awake time. You can not come to this conclusion with a calculator but the implications are very real and and next to impossible to correct late in life if you get it wrong. This is intended as friendly advice.

This is so dippy.

It takes a village to raise a child, and its ok for kids to have more than one caretaker, not just have a social circle of one...their Mommy. It's OK to have a nanny watching your child part of the day. It's OK to go to work to provide for your children. They won't be irreversibly damaged by this.

To insinuate that the OP has his priorities mixed up because he is providing for his family is wrongheaded. You don't know what the situation is from the post.