Mortgage too Risky
February 22, 2007 1:56 PM   Subscribe

I am about to buy a house which I can afford to make the mortgage payments on, but it will wipe out all of my cash. Is this a bad idea? My wife and I both ave stable jobs, but we also have three kids.
posted by gogomickey to Work & Money (34 answers total) 1 user marked this as a favorite
I did this, more or less. I wasn't totally broke afterwards, but I basically was left with no savings and all my money for a couple months was going towards house stuff. I'm alive still. I have no children mind you.
posted by chunking express at 2:00 PM on February 22, 2007

How long will it take you to rebuild up a comfortable buffer of savings? Children and houses both occasionally have unexpected expensive needs.
posted by aubilenon at 2:05 PM on February 22, 2007

Ditto chunking express. As long as by "afford to make the mortgage payments," you don't mean you'll have to feed the kids dog food the first two weeks of every month.

You can start saving again once you've gotten the obligatory new couch/washer/dryer/curtains out of the way.
posted by M.C. Lo-Carb! at 2:06 PM on February 22, 2007

Personally I wouldn't, either of you could lose that job tomorrow, but I'm fairly conservative with cash ... Are you on top of what the utilities & taxes will cost? Also, don't forget to factor in maintenance and (if you're moving from an apartment) furniture and things like lawnmowers etc ...
posted by jamesonandwater at 2:06 PM on February 22, 2007

Buy as much as you can afford.

That said, I don't think your two sentences give enough for most people to give a good recommendation. Does the statement "it will wipe out all of my cash" mean all of your current savings? or that you won't be able to save month to month going forward? How old are the kids? Do you anticipate any expenses for the kids in the near future? Do you like your jobs? Do you have emergency funds? How much has the house value changed (up/down) in the past 6-12 months? Is it turnkey?

I would be thinking about all of these things and more to determine if it is a "bad idea".

Good luck! Buying for the first time is very exciting!
posted by tdischino at 2:09 PM on February 22, 2007

I did the same as chunking express. I do not have kids either. I did have an empty credit card at the ready in case the furnace blew the first week.

That said, we bought what we could afford, too, so after a few months things stabilized nicely.
posted by cabingirl at 2:14 PM on February 22, 2007

The situation is often referred to as 'house-rich' ... but it's the kind of situation you get into BEFORE you have kids.

The problem is that both houses and kids tend to have unexpected and very expensive needs... especially if you've never owned a house before. It's tough to budget for a water heater going bad and flooding your garage or basement at 2am on christmas day, and you can only imagine what that costs to get a plumber out there on christmas. And kids get sick, or have to buy a uniform for school or need money for whatever suddenly, and that's another couple thousand dollars that goes on the credit cards -- and then you're stuck paying that off + interest, with no chance to save some money in between.

The time to buy a house is when you can afford it, or when you can reel your lifestyle in enough to afford it AND have some surplus. You don't want to be without cash or with debt going into a house purchase.

You might look at a smaller house (Shouldn't be a problem if your kids are used to rental living), a cheaper suburb, or finding a way to reel your expenses in for a year and practice living as cheaply as possible while you build your cash kitty up.
posted by SpecialK at 2:16 PM on February 22, 2007

I agree with tdischino that you haven't given us enough info to go on, particularly regarding exactly what you mean by "wiping out all your cash."

Nevertheless, you might want to consider how you might weather a bad-to-worst-case-scenario. For example, if you lost your job and had to sell the house at a 10% loss within the next 5 years, could you handle it? Or if a member of your family faced a major medical catastrophe in the next 5 years, would you be able to afford it without going severly into debt? If the answer to either of these questions is "no," then you might indeed be too house-poor.

The fact that some very nice internet strangers survived sinking all of their net worth into a house unscathed shouldn't form the basis of how much you are willing to risk your family's financial future.
posted by googly at 2:19 PM on February 22, 2007

This is a really bad idea. A house is not an investment, it's a place to live. If you want a house so that you'll never have to pay rent again, fine. It's a good place to park your money for the long haul, but not as a short to medium term investment

One of the cardinal rules of house buying is your debt to income ratio. The banks will tell you that you should spend no more (morgage wise) than 35% of your gross income. I take that rule a bit further. I say it has to be of your net income. Afterall you still need to live.

Try to go with an open mortgage. You'll save more money over the life of the mortgage.

Also the mortgage insurance is a bit of a rip off. Get a term life plan in the sum that you will need to pay off at least 65% of the remaining mortgage in case you pass away.
posted by pezdacanuck at 2:21 PM on February 22, 2007

You didn't mention what kind of mortgage you're getting. If it's one of those Option ARM /minimum payment types, you'd be walking on very thin ice.

I just refinanced out of mine after 2 years. The rate started in the low 5% range and ended in the high 7% range. I had a cheap mortage bill each month, but was digging myself in a financial hole. If you have to move unexpectantly, and can't sell the house for more than what you owe, you're screwed.
posted by tfmm at 2:31 PM on February 22, 2007

Isn't this the way most people buy their first house? As long as you will have sufficient cash coming in to keep saving afterwards I wouldn't let the simple fact of using all your cash stop you. I would work like hell to keep a few grand as a buffer though; there are always unexepected expenses in the first few months. It's nice not to have to finance all of them on credit cards.
posted by caddis at 2:33 PM on February 22, 2007

OK More info:

The payment will be about 40% of our net income. We will have no cash-savings or emergency after the purchase, but we will have no credit card debt. Also this will be a place to live, we do not plan on leaving for at least 5-10 years. This is also a house in an expensive metropolitan area where buying a smaller, cheaper house is not so easily done. Thanks for all of the replies so far.
posted by gogomickey at 2:43 PM on February 22, 2007

I think it's a mistake. You've got to have a cash cushion when you own real property. Suppose you move in and the roof develops a leak and you discover the roof needs to be redone completely. You don't get an option; if you don't repair it, the house and everything in it will be ruined by water.

You could wreck a car, someone could fall ill, etc. You need that cushion. You're looking at more house than you can afford. Keep looking.
posted by ikkyu2 at 2:49 PM on February 22, 2007

I don't see this as a huge risk if you have credit cards to fall back on for the time being - but save, save, save to get that savings buffer back up after the purchase!
posted by agregoli at 2:54 PM on February 22, 2007 [1 favorite]

How long will it take you to accrue emergency funds?

Trust me dude, we bought a lot of house (I insisted on a 30-year-fixed, though), and then our entire first floor flooded.

Even with the insurance payout, it cost us money for all the little stuff. And the little stuff adds up, and our house is only 4 years old.

I would definitely say that if you did plan on spending a lot on a mortgage payment, make sure you don't have any outstanding credit card debt or other high amounts of debt, and that you're able to stick to a budget that will allow you to save up at least 3 months' income within the next year for emergencies.
posted by mckenney at 2:58 PM on February 22, 2007

IANAFP (financial planner), but... I did the same thing a couple of times, with homes bought to live in, but have never had kids. FWIW, immediately after buying a home I found that my credit improved and I was offered more credit for home improvements, etc.

I also adjusted my tax withholdings and ended up with noticeably more take-home pay. Your profile doesn't indicate your location, but if you are in the US, you will probably have a nice big mortgage interest deduction. Take advantage of that to build up your cash again, rather than wait for a tax refund.

Ultimately, though, we can't answer the question for you, only provide insight. The "answer" is going to depend on how much risk you and your wife can tolerate.
posted by Robert Angelo at 3:05 PM on February 22, 2007

Wrecking a car and someone falling ill are what insurance is for. If you both have good jobs, presumably both of you have employment / disability insurance. You should be able to get mortgage insurance (*not* from your lending institution, but at a better rate somewhere else) to cover payments in the case of disaster.

I just cleaned myself out buying property, and all things considered paying down my mortgage seems to be the best possible savings plan (better than an RRSP). However, the property I bought has rental units which will generate some income for me after I retire. When you retire, your house will not generate income. It will be a place to live — after taxes and utilities are paid — and will have a resale value of some kind.

One of the reasons houses are good investments even though maintaining a house is more expensive than renting is that it’s a forced savings plan. If your kid needs to go on a trip with friends, you can’t sell one of your closets to cover it. You need to keep paying the mortgage. Your kid might need to find a way to pay for the trip themselves, which probably isn’t a bad thing.

If you don’t buy a house, but continue to rent, will all your extra income go into savings and stay there? Or will it go on nice-to-haves? (Will you pay for your kid’s trip?)

How important are the nice-to-haves in the present relative to security in the future?

How positive are you that you will be able to sell the house for the price you need in the future, when baby boomers are moving to smaller homes and even dying?

I don’t know the answers to any of these questions, and you probably don’t either. I’m still struggling with deciding how to spend the little money we have left.
posted by kika at 3:13 PM on February 22, 2007

You'd be making yourself really vulnerable, which is bad, but that risk would be short lived and would have a meaningful payoff if you make it through.

Do you have significant credit card capacity to handle a hiccup? Do you have family that could provide short term assistance like a family loan, an offer of housing for you or the kids for a couple weeks, or a loaner? These are alternate cushions that I know I would loathe depending on, but are real and should be considered in your decision.

I'd still be concerned about that 40% number. Have you really crunched the numbers to make sure you'll have a positive cash flow that let's you build up breathing room in a few months?

As for my experiences, twice now I've basically tapped out my entire non-retirement savings to buy homes for myself, and made it through unscathed, with the caveat that there's always some bullshit at the closing that costs, oh, let's say $200 to $1200 more than what you expect. If it's that tight that you can't walk into closing expecting to clear the hurdles by $1,500, you're not really prepared.
posted by NortonDC at 3:13 PM on February 22, 2007

"...housing for a couple of weeks, or a loaner car?" is how that should read.
posted by NortonDC at 3:16 PM on February 22, 2007

It will probably be okay, though it depends on so many things...

And by "probably" I mean better than 50%. But not a lot more.

40% of your income just paying base rent is a lot.

How is your insurance? What would you do if you totaled your car and your three kids got the flu in the same week? How much does homeowners insurance add to that 40%?

Realistically how long will it take you to get your savings back? Now double that amount of time. What are the chances that you'll have to have a significant expense in that time? Need a new car, emergency travel to care for a family member, theft, acts of nature, sickness, loss of job, 4th child, etc.
posted by Ookseer at 3:17 PM on February 22, 2007

You should not do this if you are buying a home as an investment. You should only do this if both you and your wife are in complete agreement that your most important and meaningful project for the near future is home ownership. You both must be willing to make sacrifices for this project: no more Starbucks, no more restaurants, no vacations, brown bag lunches, etc. You don't mention auto loans, but with a 40% mortgage load you can't afford them. If necessary, sell them and buy used.

Most importantly, do either of you have reasonable expectations of promotion or significant salary increases in the future? And not just 3% cost of living increases or you will always be living on the edge. The idea is that it is initially a stretch but you gradually grow into a more comfortable position as your income increases.
posted by JackFlash at 3:39 PM on February 22, 2007

I would bet most of the people recommending against it are not home owners. Although it is not something to be entered into lightly, you cannot account for everything that could go wrong, and there is no way to know what will go wrong or right. All you can do is manage it. If you can afford it, extend the home warranty, this will cover things like leaky roof, or other major components failing within the first few years of ownership.

I would disagree with pezdacanuck, buying a home is an investment. Luckily, it is an investment that will keep the weather off of you for the duration of the investment holding, whether you lose or win on it.

That said, this market is still nuts, thats why I asked about the historical value of the house. if you are buying into this house at the peak of its value, then it might not be wise, but there is never a way to know for sure. Mortgage insurance is a joke, avoid if possible. As mentioned, the tax break for paying interest on a mortgage can sometimes have a postive impact on your take home pay at the end of the year. Also, what is your homeowners/local tax like?

Based on your follow up response, I would say do it. 40% of your income is reasonable as long as it is a good mortgage (i.e., fixed). Keep in mind everyone's caveats, but don't let these things scare you away from owning your own home. It is a life changing event, and not all of those bad things do happen.
posted by tdischino at 3:50 PM on February 22, 2007

You have three potential sources of pain to explore:

1. Living in a small home or apartment

2. Living with a spouse who is angry she is not in the home of her choosing

3. The stress of being financially tight each month because of your mortgage, and feeling anxious every time you spend three bucks for a hot chocolate

Good luck. I chose #3.
posted by craniac at 3:54 PM on February 22, 2007

I think it depends entirely on your cash flow after the purchase. If you still have a relatively strong positive cash flow, then you can replenish your saving quickly, yes? I think it's an okay move (not a great move, mind you), to purchase the house you want with all your money and then to replenish your savings. It's a calculated risk, of course, but I think it's a good one.

If, on the other hand, this would force you into a break-even situation, I'd say don't do it. Or do it, but economize in other areas so that you can rebuild your savings.

Also: I don't agree with the advice to "buy as much as you can afford". It's better to buy less than you can afford. This may sound obvious, but many people don't do this.
posted by jdroth at 4:03 PM on February 22, 2007

When I bought my first house 15 years ago, I had no idea how much it cost to own a house on top of the mortgage. I was shocked by all the unexpected maintenance costs, especially on older homes. For awhile I owned a really beautiful 90-year-old Dutch Colonial, and at that place even a clogged bathtub drain always ended up costing at least $5000 to fix--there was never an inexpensive repair! It was always, "I can't get the clog out of the drain by snaking, and I can't use pressure because the pipes are so old, so we're going to have to cut a big hole in the floor here and a big hole in the wall there and replace all the pipes."

The house I own now is "only" 50 years old and I can get out of some minor problems for a hundred bucks or less, which is a big relief. But you should think about this kind of thing, and how prepared you are for it.

People are right that you and your wife need to decide how much risk you're willing to take. Keep in mind, too, that your mortgage payment gets "smaller" with time--your income goes up, inflation happens, and you're still paying that same payment. So one question to consider is how long things will be tight.

I wouldn't personally spend 40% of my net on a house payment, because I don't like living cheap day-to-day. I like being able to order dinner out when I don't feel like cooking, or being able to pick up new shoes for the kids without having to plan for weeks in advance for it, or being able to go to an evening movie just because I need the break. Currently my partner and I spend 26% of our net on the mortgage. But I'm not you.
posted by not that girl at 4:11 PM on February 22, 2007

Does the "40%" of your income as a payment include property taxes and fire insurance?

If you carry a mortgage, the bank/mortage company will insist (generally) that you make monthly payments to them for property taxes and insurance which they will hold in escrow and then THEY will make the payments to the taxing authority and insurance company.

If 40% INCLUDES these payments you just over the line of it being a bad idea.

If 40% DOES NOT include these payments its a really bad idea.

Good luck!

Also: How long would it take you to build back your savings? Because if a disaster hits, and you cant make payments, you wont just be thrown out of an apartment, but you will lose a house AND any equity (your down payment for example).

Sorry to be gloomy :-(

(In reference to an above comment, I am a homeowner)
posted by sandra_s at 4:15 PM on February 22, 2007

I won't go into my situation, as I am fairly financially aggressive when it comes to these issues and I wouldn't necessarily recommend what I have done to others.

I will point out, however, that the Federal government wants you to own a home and not rent, and it makes that very clear by one huge piece of policy: the mortgage interest tax credit. You don't get to write off your rent. You do get to write off your mortgage interest payments (assuming you don't have AMT or other issues). Though this is an oversimplification, it's an incredibly important thing to think about when considering what your "net" income really is. IANAAccountant, but talk to yours.
posted by The Bellman at 4:23 PM on February 22, 2007

Is the 40% the total house payment, or just the mortgage? I ask because in many places insurance and property taxes are not minor expenses. If it is 40% all inclusive, that's not so bad, but 40% plus lots of other expenses starts being a really bad idea.

When you've done your budget numbers, have you included accurate figures for utilities, lawn care, etc? If you are in a small apartment now, be prepared for utility and other bills much higher than what you are now paying. (And don't forget all the start-up costs with a house, like buying a fridge, or needing to get the upstairs breaker box rewired unexpectedly. Some of these costs are pretty large, and even the small ones add up, and a lot (like the fridge, in our case) can't be put off until they are convenient).

Honestly, I think what you are proposing is a bad idea. It puts you closer to the edge, financially, than I personally am comfortable with. But then I'm pretty financially risk-averse, so take that for what it's worth. People lose jobs pretty regularly in our modern economy, and a big mortgage plus no cash reserves plus one partner losing their job spells trouble, at least in my mind.

When we bought our house, it reduced our savings to almost zero, but it was a much smaller percent of our income than what you are considering (we bought a small house in a less hot market). So within a few months we were back in the black, at least enough for house expenses. But it was definitely a shock at how expensive those first few months were, what with having to buy tools (not for a rehab, just for routine everyday maintenance), buy lawn and garden stuff, pay for a few visits by tradesmen, pay deposits at all the utilities, and on and on and on. If I ever buy another house, I will budget far more money for those start up costs --- this is not an area where I would rely on credit cards as your financial plan.
posted by Forktine at 4:24 PM on February 22, 2007

I think you should wait and see if the real estate market is going to dip even farther. I believe last month saw new home purchases drop in 40 states which is a good indicator of a future dip. There is a lot of speculation about the course of the market, so waiting a little longer may help you save for a larger down payment and also get a better deal on your first home.
posted by jasondigitized at 5:29 PM on February 22, 2007

THe only issue that would prevent me from making this purchase if I were you (IANY), is if I had no emergency source of funds. In the event your child needs expensive medical care or the house blows its furnace, can you go to a parent, friend, relative, boss on your knees and suck it up and ask for an emergency loan and will they give it? If the answer is yes, then buy the house.
posted by JohnnyGunn at 7:58 PM on February 22, 2007

Call me a cynic, but I believe that there is no such thing as a "stable job" in 2007.

Do you have 6 months of living expenses saved? If so, you can probably swing it. But it puts you awfully close to the edge and it would be an incredibly risky decision.
posted by Ostara at 9:13 PM on February 22, 2007

Wow. None of you people who think 40% sounds high live in the San Francisco Bay Area, do you? I bet half my friends pay more than 40% of their net income on rent. If this person is in a major metro area and paying 40% of their net income on a mortgage, that's amazing and totally reasonable. (I'm assuming the 40% includes principal, interest, taxes, insurance, condo dues, whatever.)
posted by salvia at 12:48 AM on February 23, 2007

Actually I live in the San Francisco Bay Area (Nob hill). And no matter where you live 40% is a lot. Bay Areans just enjoy being foolish with money.

Only in Sf have I seen so many people loose their houses when anything unexpected happened. No one is making a killing in the SF real estate market like the banks, and about 5 real estate agents.

(Not to say being foolish with money is such a bad thing. It's also what fuels the entrepreneurial spirit here. And often pays my rent.)
posted by Ookseer at 11:09 AM on February 24, 2007

I wouldn't say my friends "enjoy" it, Ookseer, nor that they did it "foolishly." They made hard choices deliberately. Especially the ones that bought places -- they saw few choices but to spend a large portion of their money on housing if they wanted to stay in the area. (But if you know of super-cheap housing around here, drop me a line!)

I still don't think 40% (if it really does already include taxes & insurance) is that foolish. (If it doesn't include taxes and insurance, then it may be too much.) The federal recommendation for a realistic amount to spend on housing is < 30%. but that measure is referring to gross income, not net income like the op. so depending the tax bracket, 40% of net income can actually be less than 30% of gross income. and even if it is more, it's not em>much more. So, yeah, the OP should try to get a cushion of savings in case of job loss or something, but I still don't think 40% qualifies as "foolish."
posted by salvia at 2:42 PM on February 25, 2007

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