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Author: Milligram46 Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127680  
Subject: Wow Have Things Changed - Seeking Advice Date: 3/17/2014 7:42 PM
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Recommendations: 4
I know I haven't posted much on the Fool.

I'm engaged!

For those who remember and followed my story, climbed up from the depths of debt and financial ruin post divorce 10 years ago and moved into my dream house that I had built about 20 months ago.

My SO and I are in the middle of consolidating households. Here is the situation:

HER:

Walk on water grade FICO mid-score (no seriously, think 800 land). She could be called the "primary buyer," here. Owns a 5 bedroom /3 bath/ 2 car garage in a white hot urban neighborhood in Seattle. Home was built in 1994, she bought it on a short sale in 2010. Prior owner didn't do a lot to the house. However, she did - house has new hardwood floors, newer roof, new exterior paint, completely new cabinets, granite counter tops, Wolf stove, massive fridge that the cabinets were custom built around, and is 1800 SQ Feet. Real Estate agent thinks its worth $530K to $550K. Selling time will be very short. About $360K equity in home. Mortgage is 15 year fixed, 3.50% with about $170K balance, no PMI. Income of $200K to $225K a year. Car payment of $380 a month. Other car is paid off (second car used by son)

HIM:

720 FICO mid-score (estimated - it could be +/- 20 points)
Owns a 4 bedroom / 2-3/4 bath / 2 car garage custom built in a rapidly growing suburb of Seattle and Bellevue. Home was built in 2012, home was under valued. House is turnkey with many extras. 2244 SQ Feet. Real Estate agent thinks its worth $430K to $440K. Selling time will be very short - BUT - due to capital gains and ACA penalty, can't close on sale prior to 8/25. About $90K equity in home. Mortgage is 30 year fixed, 3.75% with about $340K balance, there is PMI of about $325 a month. Income of $145K per year. Consolidation loan, five year term of $31.5K and $9K in credit card debt related to move in. Both cars are paid off. Oh, and $1,118 in child support each month for about 4 to 5 more years.

THE HOUSE:

We planned to build, but found a turnkey home in a dream neighborhood when we went out to look at floor plans to get some ideas. It is in a dream location, with basically all of our checklists met. We would not normally be able to afford this neighborhood - with comparable homes priced $300K to $500K higher. Our offer was accepted last week, we do inspection on Friday and we are in a mad scramble (think the TV shows when they flip a house) to get my SOs home market ready by this weekend. We figure this will cost around $5K to do. We have a contingency to sell her home - within 30 days of listing. YIKES! (comps in her neighborhood sell on average in 7 days for about $30K over list, 2005 again???)

The home we offered on is $1,040,000. Before the LBYM crowd in Milwaukee, Wisconsin sends coffee all over their computer screens - Seattle is an expensive market. We have a big challenge with commutes. I work at one end of the I-5/I-405 corridor, she works in the other. Anyone from Puget Sound will tell you, moving 3 to 5 miles can add 60 to 90 minutes to a commute. There are only a couple of locations we can live where one of us is not living in our cars. Additionally, we need a full mother-in-law suite lower, as my mother is 84, and would eventually come to live with us. We also have three college age adult children between us, of which any could boomerang back home to the nest. These ideal locations in Puget Sound that give you the best commute opportunities are generally close to the bridges and water. Anyone from here will tell you - expensive. Also, if you do the math on what our two homes are worth - well it adds up.

Last thing - when you look at comps, the house is under-priced easily by $200K. It's been on the market for 208 days - largely due to bad luck for the buyer (deals fell through, low ball offers, etc. etc.)

No, neither of our homes are big enough for our blended families and needs, if we moved to one or other, someone has a nightmare commute. Right now that is my SO, and its killing her.

THE MATH (roughly).

When SO's home is sold, we should have about $320K left in proceeds after the sale and fees. We put earnest money of $20K down already, and have about another $30K in liquid cash at the moment.

When my home is sold, we should have about $60K left in proceeds after the sale and fees.

If everything goes to "plan" we will have two mortgage payments for 3 to 4 months (ouch). Homes in my neighborhood are selling for less than a month and over list.

We are thinking $300K down from the proceeds of her house. The other $20K would go to moving costs and replenish some of the $20K cashed out for earnest money.

For me, after the sale, some of the $60K would go to replace money spent covering both mortgages while we had the two, we are going to add AC to the house (estimate is $5K to $8K - will know on Friday), hold $20K back for a wedding and a ring, and use remainder for principal paydown. We also have some adds to the house (furniture, etc. etc.) but these are very small. Between our two homes we have almost everything we need. There is also going to be moving cost out of my home - but when you do the math, this is a small chunk of the money.

For those following along that would be about a $700K JUMBO mortgage.

For 30 year - we could get 4.25% and a payment of about $4600 a month, principal, interest, tax, and insurance. There is no HOA and the sewer capacity charge (don't ask) was paid off in full by the prior owner.

For 15 year - we could get 3.50% and a payment of about $6650 a month, principal, interest, tax and insurance. Our monthly gross income is about $31.25K. So for those pulling out the calculators, 36% DTI is $11250 a month. We're not even close.

My SO is in a skilled profession - and I've cemented myself in my industry. Neither of us hold delusions we are immune from job loss - and there is additional near liquid assets for an emergency (hey, 6 month living expense 100% liquid at our income level bears craptastic interest)

THE QUESTIONS

Here is the rub. Neither of us want to be paying a mortgage when we're 70. So we would never carry a 30 year mortgage to term. This is also likely a part of our retirement plan. We would probably reach the point when we're done with work to want to live somewhere far sunnier than here. Ya I know, Milligram46 has posted here for years that when the last teen daughter is done with high school, Seattle could kiss his you know what. Never say never - my SO is amazeballs! I love her!!!

So this is what we wrestle with:

A) 15-year JUMBO. Pros. Pays it off and gets if over with. Far less interest spent than a 30 year, even when amortizing a faster payoff schedule. Build equity faster. Cons. That payment is over 1/2 of our available DTI to reaching the 36% cap. Far less interest to write off on our tax return (and we will need the tax breaks). OK, I get it, most Americans would probably dream of having a DTI of mortgage principal, interest, tax, and insurance of about 18% of their total income. It still is a big scary number to us.

B) 30-year JUMBO. Pros, enables us to manage cash flow better. Lower payment frees up more capital. GOD FORBID someone losses a job, it would hurt like Hell, but the payments could still be met without dipping deep into savings each month on one of our incomes. interest rate is competitive to a 30 year conforming, if not lower. We get more of a tax write off each year Cons. We pay more in interest - period. Because we pay more in interest, the 15 year payoff interest and principal becomes higher.

Well - now I turn it over to the rest of the class. What would you do?

A, B, or another option (and not spending a $1 million on a home is not the answer I'm looking for)
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