Saving for a house

[CLite]

I don't know get how the hell people pay for houses. They are all listed between 300 and 700k in my area and I honestly... don't get it. My GF and I make a combined ~130k right now and saving ~50k for a down payment seems hilariously farfetched. Between school loans, cars, rent, gas, food, vacations etc... I feel like we'd need to be 1%'ers to buy a decent home.
I guess you just eat ramen, do nothing and put in every extra cent you have into a savings account for 5 years and then maybe you can afford a 2 bedroom in the ghetto.

Maybe I'm just being discouraged by north jersey prices...

Yep unfortunately if you want to be a homeowner in a good town in North Jersey you have to be within spitting distance of a 1%'er.

Honestly with that income just rent and try be frugal where you can. When you factor in the high closing costs, the property taxes, the interest on the crazy big loans, your lost-equity per month is going to be damn close to renting.

My wife and I stayed in a shithole apartment for 5 years and I was a hardass on the budget to get us to be home owners in North Jersey. If it wasn't for appreciation we'd probably be losing money compared to renting when you factor in closing costs. However the happiness of the wife to be out of the shithole apartment and in a nice home is worth it.

 

[jaedaliu]

They match 100% up to 3% so by me putting in $100 a month I am maxing out the 100% portion. Then they match 50% up to 5% from there.

Consider putting in the 5%. Even if they match only 10%, it's still free money.

I don't know get how the hell people pay for houses. They are all listed between 300 and 700k in my area and I honestly... don't get it. My GF and I make a combined ~130k right now and saving ~50k for a down payment seems hilariously farfetched. Between school loans, cars, rent, gas, food, vacations etc... I feel like we'd need to be 1%'ers to buy a decent home.
I guess you just eat ramen, do nothing and put in every extra cent you have into a savings account for 5 years and then maybe you can afford a 2 bedroom in the ghetto.

Maybe I'm just being discouraged by north jersey prices...

Saving for a house is a complicated decision. You mentioned eating just ramen, there's also the question of where you live, what you drive, what else you save money on, and how long until you want to buy.

Also, buying with a girlfriend is risky. Some would argue that it's not any riskier than with a wife, but every case is different.

You have to decide how much you want to sacrifice. My wife and I make about what you and your girlfriend make. We have automated savings of $3k/month, and our budget allows for $700 of flex that we typically save up for vacations or buying big ticket items. We rent a 1 bedroom apartment, have no student loans nor car payments.

 

[nageov3t]

I don't know get how the hell people pay for houses. They are all listed between 300 and 700k in my area and I honestly... don't get it. My GF and I make a combined ~130k right now and saving ~50k for a down payment seems hilariously farfetched. Between school loans, cars, rent, gas, food, vacations etc... I feel like we'd need to be 1%'ers to buy a decent home.
I guess you just eat ramen, do nothing and put in every extra cent you have into a savings account for 5 years and then maybe you can afford a 2 bedroom in the ghetto.

Maybe I'm just being discouraged by north jersey prices...

leave, pretty much.

I'm hoping to buy in the next 3-4 years, but it'll probably be somewhere in Central Jersey (New Brunswick, Edison, etc)... although, even in North Jersey I see a lot of acceptable houses in the 250k range.

I can't imagine which town you're insisting on or what your requirements are if a starter home is 3-700k.

 

[Insomniator]

I haven't looked to closely, but currently renting in Morristown. 1 BR is $1700 a month. Closer to the train station 1 BR gets up to $2500 a month.

I'm sure there are nice starter homes in the morris county area... I just happen to drive by beautiful mansions every day.

 

[overst33r]

1. 401k. Do it at least up to the amount that your employer matches, otherwise you're giving up free money.
2. Emergency savings - get that up to 6 months' worth
3. Pay off car. You "earn" 4.2% which is 4-5 times what savings interest would pay. It also removes a monthly payment you don't want to have on top of any mortgage
4. After the above, save for the house.

Make sure to pay off any credit card debt too, and stop carrying a balance, Pay it off completely every month.

This.

 

[Scarpozzi]

Start with your car loan. Go talk to some local credit unions and find a better rate.

Right now, I can get 1.69% on a cars (2010-2014) up to 75 months.
I can get 2.69% interest on cars 2009 or older up to 75 months.

That won't free up a lot of money, but it costs nothing to refinance an auto loan. Don't throw money away if you don't have to.

While at the Credit Unions, search for one that does in-house mortgages and offers 15-20-25-30 year fixed rate mortgages with NO POINTS. You should really think about how long you intend to own the home and then decide if it's worth paying more up front and gaining equity or paying less up front and increasing the cost of the investment.

I recommend only buying what you can afford and sticking to a 10-15 year fixed rate mortgage. The advantage to sticking with a 10-15 year mortgage is that you get a much lower rate than the 30 year fixed and you actually make a dent in paying it off. I was able to score 2.49% APR last year on a 15 year....now you can expect around 3.5-3.8% for that same kind of loan, which is still pretty good.

Just remember that interest is compounded at that anything you can do to save a percentage without paying points (paying interest up front in closing costs), you're winning. For me, however, I believe my money is better spent by investing in stocks than paying off my house any faster since the standard returns on the market are greater than the low interest rate I'm paying on my house. It's really messed up.....even more so that my auto loans are 1.49% and it makes more sense to pay extra on my mortgage than my cars despite depreciation. (insurance makes that all possible)

 

[BergeLSU]

I don't know get how the hell people pay for houses. They are all listed between 300 and 700k in my area and I honestly... don't get it. My GF and I make a combined ~130k right now and saving ~50k for a down payment seems hilariously farfetched. Between school loans, cars, rent, gas, food, vacations etc... I feel like we'd need to be 1%'ers to buy a decent home.
I guess you just eat ramen, do nothing and put in every extra cent you have into a savings account for 5 years and then maybe you can afford a 2 bedroom in the ghetto.

Maybe I'm just being discouraged by north jersey prices...

I thought the same thing for a while. Then we just started looking into it. Now, the prices are as outrageous here.

We make less than you two do, and bought our house for $320k plus $10k in closing costs. It was listed at $340k, and we didn't have the cash for a big downpayment.

So in all, we ended up putting 5% down, and now pay $1500 for the mortgage, and about another $1000 in PMI, taxes, and homeowners/flood insurance.

But, we wanted in this area, and it has done nothing but increased in value for 8 years now. I didn't see the rates going down either, so we jumped in.

 

[Scarpozzi]

I need to add that, if your financial security is relatively high, it's getting more expensive to finance a home. The Fed is keeping rates artificially low in the name of economic recovery and this is causing real estate costs to shoot through the roof again.

There have been some months of slow-moving sales, but my guess is you can't buy a home fast enough unless we have a huge market correction hit. Historically speaking (stock market-wise), we have these corrections every 6-8 years and we're due another one. It's just a question on if we'll get it this year, next year, the year after??...then how will the Fed react?

If you find a home in the location you desire, within your budget, jump on it. Just be true to yourself and don't buy more than you can afford. My wife and I both have our finances stacked that either of us could walk away from our jobs any day and the other could pay ALL of our bills each month....that's without touching savings. We're not rich...we just live within our means and make wise investments.

 

[overst33r]

We're not rich...we just live within our means and make wise investments.

I wish more people had this philosophy in life. Unfortunately it goes against the culture. :\

 

[Golgatha]

Thanks Virge_ and notposting for your responses. Every little bit helps because I'm no financial expert. I have $3000 sitting in other savings right now that I just have for emergency funds. My car is fairly new, should be reliable (2010 Toyota Corolla) and I have the extended warranty so I don't plan on having to spend much on it other than tires and oil till 2017 or so.

I went from making $28k a year to $40k a year which is a significant jump for me, so I have been debating whether I should pay off the car or start saving.

Pay off the car and then save for 20-30% down on a house while continuing to get your employer's 100% match on your retirement fund.

 

[TwiceOver]

I'd knock that car out fast. A 6 year loan on an $11k car you're basically paying them $7k+ just because.

What I would do:

Don't bother contributing to your 401K for now. The interest and "free money" you get is nothing compared to the amount you are paying out for that car.

Is your job stable:
CASE YES
Bank $2000 emergency
pay off car
bank 6 months of expenses for emergency
resume 401k
save for house
CASE NO
Bank 6 months of emergency
pay off car
resume 401k
save for house
CASE ELSE
Hookers, blow, lose job, bankrupt.

 

[Golgatha]

I'd knock that car out fast. A 6 year loan on an $11k car you're basically paying them $7k+ just because.

What I would do:

Don't bother contributing to your 401K for now. The interest and "free money" you get is nothing compared to the amount you are paying out for that car.

I would definitely max out the free money. Even if he turns around and takes the hit for an early withdrawal from a retirement account, he's 100% gains on the first 3% and 50% gains on the next 2% from day 1. I know if no other investment that gives those kind of returns, even when you factor in a 10% hit for early withdrawal. Now, once you get the 5% going, yes, I too would pay off the car ASAP. That's a long ass loan for a quickly depreciating asset.

With $40k/year, unless there's a huge down payment, I would recommend a house in the $100-$140k range, and that's after the car payment is gone. Also, that's sound advice about not factoring in other renters into your budget. The only real estate you should have making income for you is real estate you've paid cash for up front.

 

[TwiceOver]

Except he's turning around and giving all that "free money" away in car interest. All of it. Unless it is paid off early.

So I think everyone here, except the first guy, can agree that you need to pay off that ridiculous car loan ASAP.

Again, just my pair of pennies from a guy that is done with debt.

 

[Golgatha]

Except he's turning around and giving all that "free money" away in car interest. All of it. Unless it is paid off early.

So I think everyone here, except the first guy, can agree that you need to pay off that ridiculous car loan ASAP.

Again, just my pair of pennies from a guy that is done with debt.

Cumulative interest on $11.5k at 4.2% is $1,529.80 over 6 years.

Immediate gains on free money for $7,200 ($1,200*6 years) is $4,320 on the first 3% and $1,440 on the next 2% of the total 5%. These numbers exclude any gains or losses over the next 6 years.

Even with 10% loss from early withdrawal and 25% in income taxes, he's still $2,214.20 ($5,760*0.65-$1529.80 interest paid) up over 6 years. Also, with proper budgeting, someone making $40k a year with no other debt other than his car should be able to knock that debt out within 1-2 years tops without ever touching the 5% he's putting into retirement with company matching.

That said, I'm done with debt and I hated (past tense, I'm currently debt free including my mortgage) being in debt with a passion. Sometimes the numbers can be sound, but peace of mind can be worth the opportunity cost to the individual.

 

[DaveSimmons]

I'd knock that car out fast. A 6 year loan on an $11k car you're basically paying them $7k+ just because.

Don't bother contributing to your 401K for now. The interest and "free money" you get is nothing compared to the amount you are paying out for that car.

Sorry, you fail at math.

Car loan = 4.2% gain in interest savings

401k = 100% gain for 3% then 50% for the 4-5% contribution. Plus it reduces taxable income, so you save based on your marginal rate (highest bracket).

In other words, the 401k pays off 12 - 24 times as much as the car loan.

The best option is of course "why not both?" -- raise the 401k up to 5% for all the free monies, and also work on paying down the car loan.

 

[Golgatha]

The best option is of course "why not both?" -- raise the 401k up to 5% for all the free monies, and also work on paying down the car loan.

True, forgot about the tax benefits on the retirement account (unless it's a Roth smartie pants)

Regardless, doing both is the best course of action and if I were in the OP's shoes, that's what I would do. Once you're debt free, begin saving up 20% down payment for a house, get a 15 year fixed rate mortgage, and make sure the total payment isn't more than 30% of your take home income. Do all that and you'll be a PAW (http://en.wikipedia.org/wiki/The_Millionaire_Next_Door#UAWs_versus_PAWs) in no time.

 

[soulcougher73]

I'd knock that car out fast. A 6 year loan on an $11k car you're basically paying them $7k+ just because.

What I would do:

Don't bother contributing to your 401K for now. The interest and "free money" you get is nothing compared to the amount you are paying out for that car.

Is your job stable:
CASE YES
Bank $2000 emergency
pay off car
bank 6 months of expenses for emergency
resume 401k
save for house
CASE NO
Bank 6 months of emergency
pay off car
resume 401k
save for house
CASE ELSE
Hookers, blow, lose job, bankrupt.

How do you figure $7k+ interest on an $11k car? That is one hell of a interest rate

 

[TwiceOver]

How do you figure $7k+ interest on an $11k car? That is one hell of a interest rate

$262/mo * 72 months = $18,864 - $11,500 (car) = $7,364 worth of interest over 6 years.

Ohhh. I missed the he has that much LEFT. That makes more sense, so he doesn't have 6 years left on the loan.

Then sure, take the "free money".

 

[CLite]

$262/mo * 72 months = $18,864 - $11,500 (car) = $7,364 worth of interest over 6 years.

Clearly the 11,500 is the remaining balance as he said in the OP not what the original loan amount was.

Please improve on your math before giving advice.

 

[TwiceOver]

Clearly the 11,500 is the remaining balance as he said in the OP not what the original loan amount was.

Please improve on your math before giving advice.

Well soooooorry. At least I'm not a dick.

Fuckstick.

 

[nboy22]

Clearly the 11,500 is the remaining balance as he said in the OP not what the original loan amount was.

Please improve on your math before giving advice.

The original loan amount was actually $17,252. It was my first car that I actually purchased by myself so I'm not sure if that has anything to do with higher interest rate. The original term was 75 months. I've made a decent dent in the payments but it would be nice to have the extra $262 a month freed up.

 

[CLite]

Well soooooorry. At least I'm not a dick.

Fuckstick.

You were telling someone to stop investing in a program that returned either 100% or 50% to pay off a 4.2% loan.

I'm not being a dick I'm just honestly saying it's best to mathematically evaluate your advice being giving it to others.