Should we take the risk and buy a bigger house now or should we save up a safety net before we buy another house?

November 18, 2009 2:57 PM

Should we take the risk and buy a bigger house now or should we save up a safety net before we buy another house? I am in my early 30s. I live in St. Paul, MN. I have two young boys (4 & 2 yrs - neither is in school yet). I have a good job. However, I am worried that if I lose my job I won't be able to get another at anywhere near the same salary level. Also, We don't have a financial safety net.

The wrinkle is the kids are starting to get ready for school and we have decided we are moving in the next couple of years. So if we didn't buy a house we would be moving into an apartment.

One thing to note. I don't care about timing the housing market or interest rates for mortgages.

Throwaway email address is here: [e-mail]

Our Current House:
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Purchased 5 years ago. Our monthly payment is around $1400. Our house is a small 2 bedroom (~800 sq feet). Our house is in a BAD school district. We ARE moving sometime in the next year.

Income/Careers:
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My wife previously made in the < 30,000 range as a secretary. She is now a full-time mom. Realistically though she won't be back in the workforce for another 4 years. She also has a side job (3 hrs a day from home) that pays around 700 a month.
I work in "technology/internet". I am making $84,000 and have a cap in my current job at around $120,000. My biggest worry is I am the primary breadwinner. Also we don't have savings to cover mortgage if anything happens. However, my job is fairly steady and with a reliable medium sized company. I have had my job (with diff titles obviously) at the same employer for the last 12 years.

Current Financial Situation:
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- We have around $10,000 in debt (credit cards, bank line of credit - stupid stuff)
- Each month we have around $1,000 extra income that we can apply to debt or savings.
- $0 - our current savings (I have around 50K in a retirement account but I don't want to touch that)
- we own one of our two cars
- our net (combined) salaries are around $5000 a month

Option 1 - Buy a new house now:
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To make this happen we would have to save like mad for a down payment (before the $6,500 credit expires) and forgo the savings. The one thing that helps is we usually get a substantial tax refund (near $10,000 last year). So we could use that to wipe out our debts.

pro - $6,500 tax credit for second time home buyers
pro - we would have enough space
pro - good school district
con - cost.. we are looking at houses in the $250,000 range - monthly payments would be $1,700 +
con - because of the increased mortgage - we will be in a worse position to build up our savings and pay off our debts
con - we are in a much less flexible situation if I lose my job

Option 2 - Move to an apartment and save until we have enough cash for 20% down payment & have an emergency fund:
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pro - cost savings - we could rent an apartment/duplex/house for less than or mortage (probably $1,200) so thats around $500 in monthly savings
pro - good school district
con - we would have to move 2x (assuming we eventually buy another house)
con - we have a ton of house shit that we would have to store or sell (snowblower, mower, lawn stuff, etc.)
con - we would probably have less space than if we bought a house
con - we would miss out on a year of the tax rebate, right? or do renters get money back too?

posted by anonymous to work & money (12 comments total)

I'm not positive about this so check it out, but I believe the tax credit is actually 10% of the purchase price up to $6,500, so for you it might be more in the $2,500 range.
posted by lalex at 3:09 PM on November 18, 2009

Honestly I think you'd have more peace of mind with a safety net...as to reasons for moving, school districts are a good one-but I have one thought: Would you two consider home schooling the older one for a year or two while saving for a home? It would keep you from having to move twice. Obviously if this is something you would never consider doing then never mind, but it is worth at least investigating if you've never thought of it one way or the other.
posted by St. Alia of the Bunnies at 3:27 PM on November 18, 2009

10% of $250,000 is $25,000, not $2,500. So you should qualify for the max.

Unless your tax situation changes a lot for a given year, you should never get $10k back when you file. That means way too much is being withheld (or you're paying in estimated payments if you're making those). Don't see that as a good thing. You probably should look at your W-4 and refile as needed with your HR department. I mean, even having *paid* $10,000 in taxes for a $85,000 salary sounds like that's a W-4 filed when you were single with no kids, basically.

Since you'll need at least $10k in cash to close on a $250,000 house, probably. So getting that much cash by April, which you have to close by, seems like a stretch. But you probably could save more if you wanted to. Make sure you really will have lived in your home for 5 years by the time you're getting the new house, since that's a requirement.

I have to say, unless you can get a terrific price on your current house, selling it and moving to an apartment is a bad idea. I mean, you have to spend cash to sell a house. Are you even sure you can get enough over what owe on it to make it worth while? All of that you need to figure out. It does look like, however, that you can live in an apartment and still qualify as long as you lived at and owned a house for at least 5 years for the last 8 years (see Home buyer tax credit for some discussion).
posted by skynxnex at 3:29 PM on November 18, 2009

10% of $250,000 is $25,000, not $2,500. So you should qualify for the max.

Oy. quite right, very sorry.

Anyway, if I were you I would likely rent and build up my savings, both for a downpayment but as a safety net for emergencies and illnesses. Even if the monthly mortgage and rent costs were identical, renting minimizes the possibility that you might face an unexpected and costly home repair.

Also keep in mind that if you buy a bigger house, you're going to spend money to furnish and maintain that extra space.
posted by lalex at 3:35 PM on November 18, 2009

I would not be in such a hurry to buy if I were you. Let's take some of the cons you listed first:

con - we would have to move 2x (assuming we eventually buy another house)

---> That is a big assumption. Maybe you will not buy another house for awhile. Maybe you will. Who knows? You could stay in a rental for a few years and then get a great job offer somewhere else. You could rent a house and find you are happy there for some time. My dad is renting a house now and has been for three years, he was SO SURE he was going to buy one, but now he has two kids in university so a) he wants to save some money short-term and b) if he waits two more years, they will be done and he will need a smaller house than he would have if he had been in such a rush to buy a few years ago.

con - we have a ton of house shit that we would have to store or sell (snowblower, mower, lawn stuff, etc.)

-----> I paid $100 a month to store my stuff for a year when I went to grad school overseas. That's $1200. For the YEAR. Is what is would cost you in extra monthly payments if you buy a house going to be more or less than that? I am guessing a lot less, even if you rent a house instead of an apartment. Or if you sell it off, how much would it cost to re-buy it later? More or less than buying a house? More or less than what it would cost to store it? Don't be swayed by the emotion of wanting to buy a house. Look at the cold, hard numbers.
con - we would probably have less space than if we bought a house

con - we would miss out on a year of the tax rebate, right? or do renters get money back too?

-----> This I have no idea about.

Now, some stuff you did not mention.

1) Home maintenance costs. As a renter, you do not have to worry about any of this. When something breaks, you call someone and they fix it.

2) Sinking less money into decorating, renovating, improving etc. It's not your problem to make the rental place keep up with the neighbours so it will later sell, right? So make it comfortable but don't worry about upgrades to things that are fine. You will save a ton of money.

3) Quality of life. Say you rent and it gives you an extra $1000 a month. Say you put half of that toward debt and savings. That's $500 a month to play with. Extra family vacation? Would your kids like that better than a bigger home? What would you do with that money?

People always say oh, you should buy, but if there is no need to, what is the hurry? My parents really want me to buy a condo, but I don't need a bigger place yet. So I rent, and even with my modest salary, I put 10% a month in savings, 10% into a retirement fund and am on track to pay off my entire student loan within two years. If you rent and then blow your extra money on junk that is one thing, but if you really do save or invest the money, you can come out way ahead.
posted by JoannaC at 3:38 PM on November 18, 2009

One thing you haven't mentioned is the current value of your house compared to the amount owed, this could have huge implications.
posted by bitdamaged at 5:44 PM on November 18, 2009 [1 favorite]

For some unexpected and contrary to expectation insight, check out the Wall Street Journal Complete Homeowner's Guidebook. Burns a bunch of common assumptions and is recent enough to factor current conditions.

Also - how bad is bad for kindergarten and first grade? Shivs in the Elmo doll or just lame? I agree you want to get the best district for the money, but at that age is it really that much of an issue? (Easy for me to say, I know, but in general I would worry more about middle and high school.)

If yes, then look into magnet schools. (French Immersion? How cool is that?!?!) This was our answer to living in a not great town when the Child Jones needed a kindergarten. By definition, the parents have to be involved and so you tend to get more interest and oversight. We still moved eventually, but it was a decent cover for that year, and would have remained so had we not left town entirely.
posted by IndigoJones at 5:48 PM on November 18, 2009

Don't forget we have statewide open enrollment here. If there's a public school you like outside your district, it has room, and you're willing to arrange transportation, your kid can go there.

Also, I have a coworker who LOVES L'Etoile du Nord (the French immersion program mentioned above), but it hasn't been housed at Highland Park Elementary in nearly a decade. Make sure you're looking at the most up-to-date information, especially on magnet/charter schools, as they can and do move facilities.
posted by Flannery Culp at 7:44 PM on November 18, 2009 [1 favorite]

L'Etoile du Nord is on the East Side of St. Paul (near Johnson Parkway and Minnehaha) now. I have friends with two kids there and they love it too. Just another data point, the main thought being that there are other options than your crappy school district.

The other thing I wanted to say was not to underestimate the monthly payment on the $250k house you might want to buy. With a house at $250,000 and PMI and maybe a middling interest rate, your payment might end up closer to $2k than $1700.
posted by cabingirl at 8:32 PM on November 18, 2009

I encourage you to find out just how bad the school in your area is. I'm in a catchment with an inner city school. Everybody told me it was horrible -- and it's considered one of the "worst" 12 schools in our province. But when I actually talked to parents who sent their kids there, it sounds like a pretty good place, so I'm going to try it for a couple of years anyway. You might want to find out -- from parents and teachers there -- just what the kindergarten environment is like. Even one year at that school might help you get on your feet. And a magnet school might be another option. Or could you go out of catchment for a year or two and apply cross boundary?

I suggest not moving till you have an emergency fund. If you could pay off your debt and get even 3 months of expenses into a savings account, you'd be in a much better position. Then you could look at upgrading or moving. (You didn't mention how much equity you have in your current place, which would affect the downpayment.)
posted by acoutu at 9:22 PM on November 18, 2009

Does St. Paul have open enrollment? You could try to get the kids into a different school, maybe something convenient to your jobs. What about magnet schools?

(I know Minneapolis has these possibilities from some research I've been conducting lately, and I'm assuming St. Paul is similar)

Also, if you are working on assumptions based on test scores, take time to research what parents and teachers think of the schools in your home district. A lot of really good schools get the shaft on test scores right now because of NCLB standards requirements and the curriculum changes those have engendered over the past few years, and those test scores do not tell the whole story. The school my children go to now looks terrible on paper, we're in what California calls "Program Improvement" status, and that doesn't speak at all to the actual quality of day to day education my kids are receiving. Looking at some parent reviews of Minneapolis schools at Greatschools.net, I noticed that a lot of low scoring schools had some really enthusiastic parents reviewing them. A lot of schools in less-ritzy neighborhoods are "pulled down" (snort!) by English language learners, and I would say that's more of a feature than a bug, myself. Your school may very well be shitty, but do your due diligence before you pull the trigger.
posted by padraigin at 9:58 PM on November 18, 2009

I would strongly advise you to stay where you are and find an alternate schooling arrangement (you've gotten a ton of good ideas above) for a while until you can (1) pay off all your debt and (2) build up your savings.

Once you have built up an emergency fund that is enough for your living expenses for 6 months or 3 months or whatever you decide makes sense for you, THEN make that automatic transfer go into the "down payment" savings account.

Also, in my experience, the more gymnastics you have to do to squeeze into that house, the more troubles you will have further on down the line.
posted by oblique red at 9:46 AM on November 19, 2009