I am purchasing a $480k home. After selling my old home, I have a net of $160k. I am putting $120k (25%) down. My mortgage payment will be around $3,200/month, and my income is $110k/year.
I have two main questions:
I have $40k in cash to furnish the house. Where should I park this money safely when I don’t need to spend it right away?
The home is a new build, and we’re locked into the deal. I had hoped to keep the mortgage payment closer to $2,500/month. Do you think we might be pushing it and end up house poor? Was this a mistake at first glance?
With those numbers, it seems like you might end up house poor.
Also, keep in mind that your taxes might not be based on the final value of your home and could initially be based on the land only. This could mean a significant tax increase next year once the home is complete.
Sam said: @Frances
We plan to add potential tax increases right into an escrow, so we aren’t caught off guard later on.
Is the $3200 mortgage payment including taxes and insurance?
If so, is it based on the projected home value or the current land value?
It’s hard to say without knowing more about your other debts, recurring expenses, or even things like childcare costs. For example, my wife and I make over $130k combined, and our mortgage is $2000/month (including escrow), but we live in a relatively low-cost area. We have no kids, and our only debt is a car loan. We feel comfortable but are definitely on the edge of being house poor.
I really don’t think we could manage your $3200 payment with a $20k drop in income.
@Frances
Yes, the $3200 payment includes both taxes and insurance. It’s based on an estimate of the home’s value once it’s on the lot. We have two kids, ages 8 and 6, and no other debt aside from the mortgage.
If your net income is 70% of your $110k, that’s about $6400/month.
Your mortgage payment is 50% of that, which is $3200, leaving you with $3200 for everything else.
If you estimate maintenance costs at about 3% of the home’s value per year, that’s another $1200/month. So, now you have about $2000/month left.
Does $2000/month cover all of your other expenses? This includes food, healthcare, childcare, car expenses, retirement, savings, emergency fund, and kids’ activities?
It might be a stretch for the long term, and even though you have a decent $40k in savings, with the mortgage payment, that might not be enough to last long in case of an emergency. It’s probably less than a 6-month emergency fund.
Sam said: @Frances
Thanks for the breakdown. So what would you do with the $40k?
If that’s your only savings, I’d put it into a high-yield savings account. You want to keep at least 6 months of expenses and your maintenance fund liquid with minimal risk.