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 QUESTIONSHere 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)
Congrats!A, B, or another option (and not spending a $1 million on a home is not the answer I'm looking for)Another option......Depending on how long you think you will actually be in the home, I would suggest looking at either the PenFed 5/5 ARM (jumbo rate currently 2.875%, adjusts up to 2% once every 5 years, with a lifetime cap of 5%) or the PenFed 15/15 ARM (jumbo rate of 3.875% with 1 adjustment of up to 6% in 15 years) https://www.penfed.org/mortgage-rates-all/For the 5/5 ARM, if you are pretty sure you will be out in 10 years or less, you would have a rate of 2.875% for the first 5 and a max of 4.875% for the next 5 years. You get a lower payment than the 15 year fixed due to the 30 year amortization, but because it's adjustable, the rate starts lower than the 30 year fixed.If you think there is a significant likelihood you will be in the house for between 10 and 15 years, then the 15/15 ARM might be more palatable to you - although you have to be sure that you will either be out of the house in 15 years, or you are willing/able to deal with a potentially very large payment increase at the 15 year mark.And might I suggest the blue hole area on the Olympic Peninsula for a sunnier and drier (although not warmer) retirement? AJ- already has a home on the Peninsula, but stays at/works from Joel's house on the Eastside a lot
B. Next question?Not for the tax break -- that's nonsensical.That you pay more interest than a 15 year -- who cares? That's another nonsensical issue.Mostly because: 1) lower payment gives you more options than a higher payment, 2) lower payments gives you a better cash flow, 3) a low-rate non-callable mortgage is the cheapest money there is.You can easily earn more than the interest you are paying on the mortgage. 4.25%? phhft.The long-term (and when you are talking about a 15 yr or 30 yr mortage, you *are* talking long-term) average stock market gain (S&P500) is about 10.5%. Don't like the volatility of stocks? Fine -- a well-diversified portfolio of investment-grade preferred stocks will have a yield between 6.5% and 7.5%.
One other point of information.Our combined mortgage payments for our separate homes is about $4380 a month today, principal, interest, tax, insurance (and for me PMI). In addition I pay about $55 a month for sewer capacity charge and $37 a month for HOA.So the 30-year fixed JUMBO would be darn close to what we pay today - just it means paying it for - gulp - 30 years.
"Before the LBYM crowd in Milwaukee, Wisconsin sends coffee all over their computer screens.."Too late.Isewquilts
Here's some thoughts. You have a great income and if you really really don't want to lose this house, and if you can come up with a down payment, you could afford to carry the other house(s) for while if your 30 day sale runs into snags (that's a tight timeline IMO, not just for offers but not sure if you'd need to close by that time or whatever).We are also looking for a home that will be an upgrade and more expensive, but we do not want to have to sell our house before we find the perfect house, and we do not want to risk losing the house we want by having to sell ours on contingency. This is basically what our banker suggested for us - so we do not have to sell our house first, and we do not have to have a jumbo loan, and we will be able to dramatically reduce our monthly payments once our old home sold.The highest price we're looking at for us is around $700,000 (surprise, we are in Wisconsin!). We're prepared to make a 20% downpayment, leaving a max of $560,000 to finance. We'd take out a conforming mortgage for up to $417,000 (15 or 30 year conventional), and we'd take out a second mortgage (15 year) for the remaining balance of up to $143,000. When our home sells, we should realize more than $143,000 in equity, so we could immediately pay off the second mortgage, leaving only the first to pay, thus reducing our monthly payments and increasing our cash flow dramatically. Depending on how much you would be able to put down (which maybe you can't do without your home sales, but if you could) you might be able to clear a second with your home sales, or else come close to it. With your high incomes you could probably wipe out any remainder pretty quickly.Obviously this is a risk of having to carry a house longer than you would if you have the sale contingency. But that contingency risks you losing the house. If you can't afford to do it without the sale, then you can't afford that risk.
This topic has been hashed out many many times. Go back 2 or 3 years and look for the threads and read what everybody has posted on the topic.So the 30-year fixed JUMBO would be darn close to what we pay today - just it means paying it for - gulp - 30 years. So what?You go **gulp** at the thought of paying the mortgage for 30 years -- well guess what? You'll be paying property taxes forEVER. Insurance, too.Financially, you are better off having a long mortgage and paying it off as slowly as possible.Taking your numbers...700K mortgage, 15 yr payment is $6650, 30 yr payment is $4600.Alternative A: you take the 15yr, make the $6650 payments. In 15 years you have a paid off house.Alternative B: you take the 30yr, make the $4600 payments and put $2050 into an investment portfolio of a well-diversified set of bonds and preferreds.In 15 years you still owe $457,600 on the mortgage. Your investment portfolio is valued at $597,600.[*]You can then withdraw $457,600 to pay off the mortgage, and you'll have a paid off house PLUS $140,000 in the investment portfolio.[**]In what sense is A better than B?--------------------------[*] That figure is based on 6% earning. FWIW, my preferred stock portfolio is actually earning about 7%. At 7%, the balance after 15 years would be $653,600.[**] You wouldn't do this, of course. You'd say, "Why would I give up 6% in order to save 4.25%?" and let it ride.Calculators: http://www.dinkytown.net/java/CompoundSavings.html and http://www.dinkytown.net/java/MortgageLoan.html
Hi Milli,A, B, or another optionCritical assumption;Global demographics (massive bubble of non-income generating seniors, globally, seeking passive yield from massive stores of sideline cash) leave zero room for interest rate climbs, in pretty much any circumstance. Every uptick in interest rates sucks buying power away from governments, so until the baby-boomers die off, rates are at ZIRP or NIRP.THUS... a more optimized option;C) 1.75% I/O LIBOR ARM.1. Save $17,500 in interest year #1, $146,832 over 10 years2. Save $143,897 in forced principal capture,3. Save $2,422/month combined intr & principal, $290,640 over 10 years,4. @6% safe yield, accumulate $397,038 over 10 years ($106,308 MORE than merely the interest savings, and cashflow safety acquired by avoiding surrendering principal unnecessarily.)Safety Financial Parachute;Keep your working capital liquid and protected against market drops, and in any worst-case scenario where rates go to the moon, you can stroke a check and slap your accumulated principal & interest savings against the remaining mortgage balance, and lock in a fixed rate on whatever the lower balance remains.That's what I'd do (in fact, it IS what I actually do.)Luck,Dave DonhoffLeverage Planner
mg, looks like you hit the jackpot. I have nothing to add that hasn't already been said but, congrats!
Since I really like stocks for long-term investments, and since I have a spreadsheet with monthly historical prices & dividends of the S&P500 going back to 1950, and since this spreadsheet can easily show you the outcomes of investing a certain amount of money each month for any number of years.... here's a few interesting figures.Now, I know that lots of people are uncomfortable with the volatility of stocks, but when we're looking at a 15 year period all that matters is the final account value. The ups and downs along the way are immaterial.Anyway .. starting at $0 and investing $2050 a month, and paying 15% tax on the dividends, here are the final values after 15 years, for a few various start dates.1/1/70 $1,024,0341/1/95 $464,0781/1/98 $508,1469/1/87 $769,991 -- market top just before a bear market.1/1/98 $508,146 -- just before the peak before the dot-com crash.1/1/73 $1,052,121 -- this was the median 15-year return. Half the 15 yr periods were worse and half were better.6/1/65 $555,051 -- this was the 5th percentile. 5% of the 15-yr periods were worse and 95% were better.5/1/82 $1,364,742 -- this was the 95th percentile. 95% of the 15-yr periods were worse and 5% were better.
1/1/70 $1,024,0341/1/95 $464,0781/1/98 $508,1469/1/87 $769,991 -- market top just before a bear market.1/1/98 $508,146 -- just before the peak before the dot-com crash.1/1/73 $1,052,121 -- this was the median 15-year return. Half the 15 yr periods were worse and half were better.6/1/65 $555,051 -- this was the 5th percentile. 5% of the 15-yr periods were worse and 95% were better.5/1/82 $1,364,742 -- this was the 95th percentile. 95% of the 15-yr periods were worse and 5% were better.
Since I really like stocks for long-term investments, and since I have a spreadsheet with monthly historical prices & dividends of the S&P500 going back to 1950, and since this spreadsheet can easily show you the outcomes of investing a certain amount of money each month for any number of years.... here's a few interesting figures.Now, I know that lots of people are uncomfortable with the volatility of stocks, but when we're looking at a 15 year period all that matters is the final account value. The ups and downs along the way are immaterial.Anyway .. starting at $0 and investing $2050 a month, and paying 15% tax on the dividends, here are the final values after 15 years, for a few various start dates.1/1/70 $1,024,0341/1/95 $464,0781/1/98 $508,1469/1/87 $769,991 -- market top just before a bear market.1/1/98 $508,146 -- just before the peak before the dot-com crash.1/1/73 $1,052,121 -- this was the median 15-year return. Half the 15 yr periods were worse and half were better.6/1/65 $555,051 -- this was the 5th percentile. 5% of the 15-yr periods were worse and 95% were better.5/1/82 $1,364,742 -- this was the 95th percentile. 95% of the 15-yr periods were worse and 5% were better.This is why I love the fool. THIS makes sense. A lot of sense.
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. I live in Seattle and I spit coffee. I certainly understand it costs a lot to live here and your location options are limited. But it sounds like need something for the two of you, plus the MIL, plus a guest bedroom (or two). You should be able to find something that fits that bill for waaaaay less than $1 MM. I know you aren't asking for this, but a soul searching review of what you really need might open up your options. Reason why I say that is you mentioned a "big scary number." I'm convinced one of the keys to happiness in this life is not being scared of your mortgage, or any financial obligation). If they payments are comfortable, you will be comfortable. Also, you can save hundreds, maybe thousands each month which you could use for something else. Like retiring early, seeing the kids, vacations, what have you.Also why I mentioned it...we are going to add AC to the house (estimate is $5K to $8K - will know on Friday)AC is unneeded in the Seattle area for 50 weeks a year.* You can buy a portable AC unit that will cool the bedroom for a couple hundred bucks. If one of the kids comes boomeranging back you can use the difference to help them rent an apartment for a few months. If not, you can use the savings and take a nice trip to Europe. Again, I realize you are not asking for it, but it sounds like you are buying more stuff than you need. Maybe not, but you asked. And get the 30-year mortgage, you'll be glad you did. *In my case, unneeded 52 weeks a year. On the rare hot days, I use a fan.
Sigh.Have AC in my current house, ran it for about three months last summer and damn glad I had it. Certified Green constructed house, triple pane vinyl windows, pressure tested to confirm sealed and R-53 in the attic.Operation cost less than $20 a month.Perfect night sleep - priceless.My SO 1800 sq ft Ballard home is worth conservatively at $550KSorry - I'm past the fan stage of my life. The first word in LBYM is LIVE.Laying awake at night to the roar of fans in my own sweat listening to traffic? Not living.I'm getting AC. Thanks for judging.
When do you plan to get married ? If not before all of this, how are each of you protecting your own interests ?
My SO 1800 sq ft Ballard home is worth conservatively at $550KI'm glad I don't live in Seattle. My 3500 sq.ft. home is worth less than that.PSU
Operation cost less than $20 a month......Sorry - I'm past the fan stage of my life. The first word in LBYM is LIVE.I'm getting AC. Thanks for judging.Please don't be offended. I wasn't judging. A couple times in your post you expressed anxiety about "scary" numbers and I suggested a way to make them less scary. The reason why I did is up in bold. Less than $60 dollars per year for AC is barely any cooling at all. Note I never said "don't get AC." I suggested getting a portable unit. Why? Because you use very little cooling. And note, I also didn't say "don't LIVE." I said you could use the money to take a trip to Europe or ease some of the financial pressures you expressed concern about. It gives you another month of emergency fund, or allows you to pay additional principal on the mortgage which you expressed interest in doing, etc. Those are all certainly part of living. Again not judging. You asked for options and I gave you one.
Actually we used a lot of cooling. My point was the house is extremely energy efficient.If I follow your logic, I don't need a heater either.It costs about $25 a month to run the tankless hot water heater, the stove, and run the gas fireplace from time to time. In that $25 a month is about $13 extortion to just have gas running to the house (e.g. if we didn't use one therm of gas, the valve was turned off outside, I would still pay about $13 a month).We had a cold winter here in Seattle. December was one of the coldest on records. February was one of the wettest (7th place) and coolest on record also.Our biggest gas bill? $89So for 5 to 7 months out of the year, I spend nothing on heat. For record cold I spend - $60???Again, following your logic, I don't need a heater either. Sweaters and a couple of stray dogs will provide plenty of warmth.The cooling bill is so low not due to a lack of use (I can hear the AC compressor running, I know when it ran, it ran A LOT) because the house is well built and I paid extra for energy efficient features.Those features pay dividends, but drive up the cost of the house.By the way, not giving up heat either.And it's not that I'm stingy with the warmth/cold. My old house was about 1/2 the size of my current house, and I only heated about 800 square feet. That house was built in 1958, single pane metal frame windows, minimal wall insulation, and a 30 year furnace. In similar cold months - $185 to $200 to heat.You missed my point.The only insane bill at my current house is water and sewer - try $125 to $150 - A MONTH. Ouch.
If I follow your logic, I don't need a heater either.You aren't following my logic. I never said you don't need cooling. You've made that same mistake twice now. Roll the tape if you don't believe me. By the way, not giving up heat either.Bully for you. Here's a money saving option: If you can point out where I said you should give up AC entirely I'll pay your mortgage.
C) 1.75% I/O LIBOR ARM.1. Save $17,500 in interest year #1, $146,832 over 10 years2. Save $143,897 in forced principal capture,3. Save $2,422/month combined intr & principal, $290,640 over 10 years,4. @6% safe yield, accumulate $397,038 over 10 years ($106,308 MORE than merely the interest savings, and cashflow safety acquired by avoiding surrendering principal unnecessarily.)Love this strategy! Love this loan! BTW, the "interest only" is a feature, not a mandate. You can make the payment as if it was a fixed rate and shovel more money toward principal paydown. Or follow Dave's Step #4--an equally good strategy, IMO.
This is very interesting -
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