Personal Finance

buying a house - bad idea?

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  • Nov 24th, 2010 7:02 pm
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Newbie
Apr 24, 2008
10 posts

buying a house - bad idea?

My wife and I are thinking of building a new house. We have one in mind, but after I look at the numbers I don't think its a good idea to pursue it. Here are the details. I'm 33, wife 31. We have 2 boys, aged 6 and 4, no more planned. Combined income is approx $92k/year. Current house valued at 217k, 165k left owing, approx 30k in outstanding debt. Current house should be paid off in about 12 years. The new house will cost roughly 305k to build. Approx property taxes are $2800/year. Any money left from the sale of our current house will be used to pay down existing debt. We were preapproved for the mortgage, at 5yr fixed at 3.44%, but the term is over 35 years. I'm not sure I am comfortable with going for a 35 year mortgage. The payments on this house we can afford at that rate, but I am worried it will leave us "house poor". Also, I am concerned that in 5 years, the rates will probably rise to a more traditional rate range of 5~6%, which will push the payments into a range that I am really not comfortable with. Any advice?
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Aug 21, 2008
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West Side GTA
I can only comment on one part of the above and that's regarding the 35 yr amtz. I wouldn't be too concerned about it as long as you can discipline yourself to pay it off faster with your prepayment options. I know most of my friends have 35 yr ammort. but they pay it off as if it were a 20-25 yr with their aggressive prepayment strategies/options. THe reason they went for a 35 yr over a 25 is simply for cash flow purposes.
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Dec 19, 2001
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Fernando Poo
Yes.
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Dec 10, 2008
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What is wrong with the house you live in? You seem to be doing well paying it off. Why go for another one which will add all sorts of transaction costs?
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Mar 23, 2009
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Nothing wrong with a 35 year amortization per se, but I personally wouldn't go into it if I could only afford a 35 year amortization.

If you can easily afford a 25 year but choose a 35 year instead, that's different. Just be disciplined and try to pay off with a 25 year amortization schedule.

I personally am a bit "house poor", but that is my choice. I am paying it off much, much faster than my original mortgage requires, but it seems I'm more willing to do this than many others. OTOH, I know lots of people who find various excuses not to make extra payments. "I definitely need that new SUV." or "A new $1000 TV isn't that big of a deal compared to the $300000 I owe on the house."

It really comes down to what you realistically think about the whole situation. If being house poor is an issue for you, and this bigger house is going to put a strain on your finances, then perhaps it's not a good idea.

BTW, new houses always cost more than what you think they will.

P.S. If interest rates do go up a couple of percent by the time you renew, just remember that if you're having trouble paying it now, you'll have even more trouble in 5 years. It won't be a disaster, but you will have to get another 35 year amortization at that time just to keep it relatively affordable. That's the drawback with 35 year amortizations. The amount of principal you pay off is quite low.
Newbie
Apr 24, 2008
10 posts
In terms of what we could afford, I could swing the payments on a 30 yr term, but I believe it would put us at a point where we would be working for the house and have little left over for other interests or the kids. By needing a 35 year term, I tend to think the house is more than we can afford.

Our current house isn't laid out well for a family with young children. We also have a very small back yard (30ft wide x 95 long). The new house a traditional 2 storey house, which is what we want, plus the yard is 60ftx140ft, more then enough room. I should also mention that if we buy this home, we intend to stay in it for a long period of time, over 20+ years, perhaps longer.
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Mar 23, 2009
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kevinvan6000 wrote: In terms of what we could afford, I could swing the payments on a 30 yr term, but I believe it would put us at a point where we would be working for the house and have little left over for other interests or the kids. By needing a 35 year term, I tend to think the house is more than we can afford.

Our current house isn't laid out well for a family with young children. We also have a very small back yard (30ft wide x 95 long). The new house a traditional 2 storey house, which is what we want, plus the yard is 60ftx140ft, more then enough room. I should also mention that if we buy this home, we intend to stay in it for a long period of time, over 20+ years, perhaps longer.
Heh... It's all relative I guess. I do have a big house with a big yard so I shouldn't talk... but in Toronto, 30x95 for backyard is actually pretty decent. It's quite common for houses here with 30x150 lot sizes to go for $800000 in the nicer areas.
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Dec 19, 2001
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mrbeachman wrote: What is wrong with the house you live in? You seem to be doing well paying it off. Why go for another one which will add all sorts of transaction costs?

If you don't mind overpaying by about 20% right off, nothing.
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Jun 8, 2005
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This really sounds like a case of "I want" rather than "I need"

Just think about that before you commit to anything for the next half century or so.
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Sr. Member
May 29, 2006
691 posts
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Do you have alot of money in savings that you can use as a down payment? Is that 30k in debt over and above your mortgage? If so I dont think you should not move up in home....after your fees and stuff you will be lucky to walk away from your current house with 40k.....If you wipe out your debt with that (which you should) where are you gonna get your 20% downpayment on 305k to avoid CMHC? Sounds like something I would not do as recommend you save up until you can put 20% down on a new home with NO other debt before making a jump...
Deal Addict
Feb 5, 2009
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Newmarket
No.

If I understand correctly you have $30,000 in consumer loans other than mortgage, pay it off first.
If you are building a house you will probably go over budget.

Financially very bad idea based on the info you provided.
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Jan 24, 2005
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Homerhomer wrote: No.

If I understand correctly you have $30,000 in consumer loans other than mortgage, pay it off first.
If you are building a house you will probably go over budget.

Financially very bad idea based on the info you provided.

agreed
Sr. Member
Mar 26, 2009
682 posts
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Vancouver, BC
kevinvan6000 wrote: My wife and I are thinking of building a new house. We have one in mind, but after I look at the numbers I don't think its a good idea to pursue it. Here are the details. I'm 33, wife 31. We have 2 boys, aged 6 and 4, no more planned. Combined income is approx $92k/year. Current house valued at 217k, 165k left owing, approx 30k in outstanding debt. Current house should be paid off in about 12 years. The new house will cost roughly 305k to build. Approx property taxes are $2800/year. Any money left from the sale of our current house will be used to pay down existing debt. We were preapproved for the mortgage, at 5yr fixed at 3.44%, but the term is over 35 years. I'm not sure I am comfortable with going for a 35 year mortgage. The payments on this house we can afford at that rate, but I am worried it will leave us "house poor". Also, I am concerned that in 5 years, the rates will probably rise to a more traditional rate range of 5~6%, which will push the payments into a range that I am really not comfortable with. Any advice?
So let get get this correct first:
You have ~$50K equity in your current home
You have ~$30K in debt
You make ~$92K which would be ~$72K/yr after tax in BC (assuming 2 incomes, equally split) or ~$6K/mn after tax.
You want to buy a place ~$300K at 3.5% for 35yrs for a mortgage of $1250 plus ~$250 tax for a total of $1500. Even at 25yrs and 5% you mortgage is $1750 for a total of $2000.

$1500 is 25% of your after tax income, or 20% of pre-tax
$2000 is 33% of your after tax income, or 26% of pre-tax

Other than the hit you'll take selling then buying (commission, lawyers, moving, CMHC), I don't see the problem financially. Not the smartest move financially, yet affordable for your growing family.

I would pay down the $30K debt before taking on a larger mortgage. Prove you can handle saving more now.
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Jun 29, 2009
2307 posts
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Toronto
Homerhomer wrote: No.

If I understand correctly you have $30,000 in consumer loans other than mortgage, pay it off first.
If you are building a house you will probably go over budget.

Financially very bad idea based on the info you provided.

Was about to point to the same thing homerhomer did ... You have $30k debt, what are those? what are their interest rates? and in any case, from that perspective, it's a bad idea for you to take even more debt (ie. bigger house). Also, you dont have much equity in your current house - what other assets do you have?

What are your plan for your kids? Helping them with their tuition later on or leave them to OSAP?
Seems to me even at your current debt level, you need a lot of work if you want to help out your kids with their education ... Also, remember a new place comes with even more costs such as buying furnitures, may be doing some paintings, etc etc - so you are looking at an even larger debt.
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Sep 23, 2009
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Brampton
I made this choice 5 years and 3 months ago. I had a house that I bought with upgrades it was 340k. I was looking at another house for about 530K. Mortgage on the first home was about 200k and I sold that home for 430k after commissions and everything. Took my new mortgage up to about 300k plus upgrades to about 350k. House now worth about (based on same homes with like upgrades homes) 800k after commissions, and mortgage below 200k.

Here's the opportunity both ways imho, I stayed in the first house. Its value based on the homes in the area (identical) is about 500k. My mortgage would have been at 50k, my net 450k. I am in my new home with a little more then 650k equity. For me the second option makes sense based on size and equity. But I put 3600 dollars into my mortgage per month. (my choice) Had I been at a 50k mortgage, I would have been done in 2 years and that's 3600 dollars in my pocket per month starting April 2013. VS now it will be April 2021. I recently quit my job at TD but my income didn't factor into the mortgage and we have enough left as a family that it made no difference to our lifestyle. As I carry no debt. And will be working again shortly.


Long story short, IF I could do it all over, I would have stayed at my previous house. Equity is useless as this house is given to me by my father as I shall do for my child. So its all his to keep or throw away. (child is not born yet) Knock on wood. So I could have started living the REALLY good life with a fully paid off home by the time I was 33 vs 41. But I was looking at the same things like OP. We had so much extra income and still do, so we made the right choice. But I can't help but think that I could go on a all inclusive trip every month starting in April 2013. That hurts. But square footage does those kinds of things...

And thats going from 3500 to 4700.
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Feb 5, 2009
2808 posts
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Newmarket
taylor192 wrote: I don't see the problem financially. Not the smartest move financially, yet affordable for your growing family.

.
These bankers numbers look ok on paper but in reality I don't think it's affordible, and OP knows it since he posted the question in a certain manner.

For a family of 4 with 2 growing children which will cost more and more as they grow, bigger mortgage, bigger house expenses (tax, maintenance, utilities), transportation (hopefully they don't need 2 cars) and on top of that servicing other debts, I don't think the OP can continue his current lifestyle and not get into serious financial problems unless the income grows significantly.

What will happen if interest rates go up down the road or god forbid one looses a job even for few months?
Deal Addict
Feb 5, 2009
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Newmarket
Vednar wrote: We had so much extra income and still do,
I believe there lays a difference between you and OP ;-).

Either way I hope they are happy with whatever decision they make. :)
Member
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Nov 30, 2009
458 posts
17 upvotes
If you're planning to buy the house to live in it and call it home for the next 20 or so years than it's a good idea. Just remember that it will lose a lot of value in the next year or 2 and you will be able to find houses much cheaper next year if you're willing to be patient for a bit.

Of course if you think you'll live in it for a bit and sell it to get a bigger home in the next few years it's a bad idea.

Also it is quite possible to rent a house.

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