Should we jump into a large mortgage when we have no debt right now

My partner and I currently own our home outright, a fortunate purchase we made in cash a few years back. We’re now considering upsizing and have gone under contract for a home priced at $1.475M, planning to make a $400k down payment. This leaves us with a $1.075M jumbo loan. At an interest rate of around 6.625%, our monthly payment would be approximately $7650, including insurance, taxes, and principal & interest. Our combined household income is $385k, not counting an annual bonus that usually totals around $40k. Moving from no debt to a substantial mortgage amount is quite daunting, but we’re thinking of renting out our current home for about $3500/month. The new property also has a small ADU, which could generate some extra income through Airbnb. If things get tight, we could sell the old home, valued at around $850k, to significantly reduce the loan amount. Are we overlooking anything? Is our down payment too hefty, or is the entire idea too risky?

You’re looking at an annual mortgage cost of about $133k for the next 30 years. Remember, insurance and taxes will likely increase over time.

You can afford this, but it sounds more like you’re dealing with the shock of taking on debt rather than an actual financial barrier. While I personally would avoid such a high mortgage on a similar income, the numbers do add up in your case.

Many would envy your situation; it’s a good problem to have.

It doesn’t sound like you have a financial problem. My situation is somewhat similar, though I’m not looking at such a large mortgage. My spouse and I plan to sell our current home and use all the proceeds, plus some additional savings, for our next purchase. Renting out property can be a hassle, as I’ve learned from my parents’ experience. We plan to pay off the new home quickly, though not as fast as we did with our first home. We’re also saving for potential children and more for retirement. I’ve started a high-yield savings account for our next home purchase, hoping we can pay in full once we sell our current home.

My husband, who’s an executive, would probably ask about the consistency of your income. Is it salary plus a variable bonus? What happens if you face large home repair expenses? Do you have room in your budget to handle that? He’d also advise against renting due to the potential difficulties in dealing with tenants, especially if they stop paying rent and you have to go through the process of evicting them, which can be costly and time-consuming.

The level of debt you’re considering would definitely make my family uneasy. Our household income was slightly higher, and we were nervous about buying our dream house for around $1 million.

I don’t see any major concerns here. You seem to be managing your finances well.

Consider the net cash flow after all expenses of your current home as a rental compared to the mortgage interest rate of the new loan. At a $3,500 rental price, that seems quite low, not even reaching 0.5% of the home’s value. Here’s a rough calculation: Annual rent of $42k minus expenses like property tax, insurance, and maintenance, about $20k, leaves you with $22k, which is a 2.3% return on an $850k investment. If you’re serious about building a rental portfolio, that might be an okay start, but managing just one rental can be more trouble than it’s worth. If it were me, I’d either aim for a higher rental income or sell the property while you can still benefit from the capital gains exclusion.

@Ash
Thanks for the detailed insight! $3,500 was a conservative estimate. Zillow suggests $4,100, and it might be higher given recent upgrades. We’re leaning towards renting to see how it goes, at least initially.

@Aris
Rental income typically should range between 0.7% and 1.2% of the property value monthly. For an $850k home, that’s around $5,950 to $10,200. If renting, you should aim for at least the lower end of this range to make it worthwhile.

Go for it and don’t overthink. As long as you want the new house and it feels right, moving forward can be a good step. We did something similar and are hoping for a rate drop to ease our payments.

Consider the long-term cost of the loan. It might be more financially wise to sell the old home, reduce your new loan amount, and save on both monthly payments and the total interest paid over time. Being a landlord comes with its own set of challenges and expenses.

Given your income, the nearly $8k monthly payment doesn’t leave much room for unexpected expenses. Selling the old house could give you more breathing room and reduce financial stress.

You’re not jumping into debt; you’re choosing to take on this mortgage. Most people can only afford one house at a time. If you’re concerned about the debt, consider selling your current house. That way, your loan for the new house would be much smaller, making the financial impact minimal.

The main issues would be tenant problems or unexpected repairs. Do you have enough savings to cover these potential costs? How much disposable income will you have each month after all your expenses?

Charlie said:
The main issues would be tenant problems or unexpected repairs. Do you have enough savings to cover these potential costs? How much disposable income will you have each month after all your expenses?

We have an emergency fund set aside for unexpected expenses. The big question is whether to sell or rent our current home. There are tax advantages to selling within a few years of moving out, which we’re considering.

@Aris
Renting out your current home could be beneficial, especially if you’re prepared for the responsibilities that come with being a landlord. Consulting with an accountant might give you a clearer picture of the financial impacts.

What percentage of your monthly income will go towards the new house? Are there any other significant expenses that could affect your budget?

Emerson said:
What percentage of your monthly income will go towards the new house? Are there any other significant expenses that could affect your budget?

After taxes and other deductions, we take home about $20k per month, so the new house payments would account for approximately 38.25% of our net income. This calculation doesn’t include potential rental income from our current home or the ADU.