I am a single man in Florida, living in my parent's house and want to buy my first home soon to avoid being priced completely off the market, as prices continue to rise.
I found a four-bedroom house for $517,000, and the builder will cover the closing costs, so I have about $6,000 left in incentives to buy at a discounted rate.
I make about $120,000 a year, have $180,000 in cash and $290,000 in my investment accounts. I have a car loan that costs me $670 a month.
I have already given the builder $1,000 to enter into a contract to build the house, and I am expected to give him $24,000 next week for a total of 5% of the house's value. I would put down 20% down and get a 30-year mortgage with an interest rate of 6.125%.
My monthly payment will be about $3,300, including homeowners association fees, home insurance, mortgage payments, and property taxes.
It seems affordable, but I'm still stretching my budget. I feel cold. If I don't back out now, I won't get the money back.
What should I do?
Aspiring homeowner
'Big move” is a MarketWatch column examining the ins and outs of real estate, from searching for a new home to applying for a mortgage.
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Dear ambition,
Decide whether you are buying the home because you want to make the investment, or if you are afraid of missing out?
With a steady salary in the six figures and enough money to draw from not only for the down payment on the house, but also to cover any other unexpected expenses — housing-related, or otherwise — your plan to buy that new home sounds logical on paper.
But if you do the math, you could end up with too much home and an expensive mortgage.
If FOMO is dominating your decision-making process, stop and think. You don't want to be left with buyers remorse. (You're not alone. As many as 93% reported buyer's remorse in the past year, compared to 72% the year before, according to this latest survey.)
You say you want to avoid rising prices, but ask yourself if you really need to buy a home now? Is this house something you've been planning for months or years because you want to get your foot on the property ladder, or because you feel the market is changing and prices are rising?
At 6.125% for 30 years with a 20% discount, and assuming a tax and insurance rate of about 1.7%, you could reasonably buy a home worth $475,000, estimates Hannah Jones, chief economic analyst at Realtor.com.
This recommendation comes with keeping your monthly payment at 30% of your income.
Jones added that to be able to more comfortably afford $517,000, you would need an annual salary of $130,000 to stay within the 30% rule of thumb. But you are close.
If you paid 20% of the $517,000, which equates to roughly $103,000, that would wipe out a significant amount of your cash savings, leaving only $73,000 as a buffer for any unexpected housing expenses. These can vary, from home repairs to home-related fees such as closing costs and more.
Since you make about $120,000 a year, your monthly housing payment of $3,300 would eat up about 40% of that. Factoring in your car payment, that would leave you with only half of your salary.
You have to decide if this is enough to cover your other expenses. Do you have to financially support your parents, in whose house you live?
Home insurance premiums
Additionally, consider how your home insurance premiums will rise during the time you own the home. Home insurance rates rose 21% between May 2022 and May 2023, according to online insurance marketplace Policygenius. You don't get to decide where you will buy in Florida, but flood insurance premiums may also rise significantly.
Your taxes won't increase significantly after you buy the home and get your first bill if you get the Homestead Exemption, as the state caps the maximum increase in a home's assessed value at 3%.
You can allocate half of your salary to cover your debts (house and car), and rent out other bedrooms. But you'll also be adding a full-time job as a landlord to your daily duties. Are you emotionally prepared to live with strangers as housemates, if it makes financial sense?
It's also likely that the value of that home will rise over time, and since the U.S. still has a 2 million home shortage and with Millennials continuing to “drive demand in many areas” causing home prices to rise, according to Fannie Mae FNMA,
You can achieve this if you plan to sell in the medium and long term.
Could you put this money into other investment accounts, high-yield funds, or buy a cheaper home, to grow your stock further?
Or are you ready to take the leap and get your foot on the property ladder? Your home will likely increase in value over time, and we all need a place to live. Plus, you'll finally be independent and won't have to live with your parents.
Nerves at this stage are normal. When you read between the lines in your letter, you may regret not buying in five years if his home price is out of reach.
There are no guarantees, but if you're in your 30s now, it's very likely that your wages will rise over the next two decades.
Some details have been modified to protect the author's privacy.
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