Since my condo deal fell through, I need to re-evaluate whether I still want to buy a condo, the area, etc., but this also gives me time to re-adjust my savings goal and to save more cash.
For the first condo deal, I funded my down payment with money from the following savings buckets:
- My down payment savings account (~$55,000)
- My vehicle replacement savings account (~$3,000)
- My taxable investments (~$5,400)
- My emergency reserves for the remainder
In borrowing from these savings buckets, I decided that:
- I was willing to let my emergency reserves go down to $10,000 to be able to buy a condo at that time.
- Since my car is not even 2 years old, I was willing to borrow from the vehicle replacement savings bucket.
- It was the right time to cash in some stocks I had and to switch from the ETF version to the index fund version, so I was willing to lend myself some of my taxable investments for the two months until a bonus came in.
So basically, I was saying that I was willing to have only $10,000 in easily accessible savings after purchasing a condo with 20% down. Thinking back, maybe I was a little crazy and overeager.
Looking forward, I am setting four requirements for being financially ready to purchase a property:
- My down payment savings account must have the full 20% or more down payment AND $10,000 to cover closing and moving costs, so that I still have more than adequate cash savings around if something goes sour.
- The proposed starting equity in the condo (purchase price minus loan amount) must work out to no more than 40% of my net worth, so that my net worth is somewhat diversified.
- I must continue to max out my 401(k) at $17,000 per year and invest at least $5,000 elsewhere. This means that I am allowed to use money I would have otherwise invested in a taxable account to sweeten the down payment, so long as that doesn’t mean the equity I would have would violate rule #2.
- The monthly housing costs must be no more than $2,000 including mortgage payment (principal and interest), HOA dues, property taxes, and proposed ongoing maintenance such as replacing appliances, ignoring any tax breaks. Ideally, the HOA dues and the property taxes would add up to less than $800 per month.
If you work backwards from rule #4, you can come up with the maximum loan amount and thus the maximum purchase price if I’m putting 20% down and the minimum down payment amount (since I could go for a higher valued property by putting more down to keep the same loan amount). If the HOA dues and the property taxes add up to less than $800, that also gives some more budge room on the maximum loan amount calculation.
With these variables, this puts the maximum mortgage payment between $1,100 and $1,200 and at a rate of 3.5% amortized over 30 years, the maximum loan amount between $244,000 and $267,200, with the minimum down payment being between $61,000 and $66,800 and at 20% down, the high end of the purchase price range is $305,000 to $334,000.
Thus, my new down payment savings goal is $66,800 plus $10,000 to cover closing and moving costs for a total of $76,800. From my February net worth update, you saw that I currently have $62,600 in my down payment savings account, which means that I need to save $14,200 more. Assuming no raises, no extra bonuses, no increases in my company’s stock price, and no further funds from my parents, it would take me until January 2013 to reach this goal. A stretch deadline on this goal would be July to August of this year. That also assumes that I don’t increase my travel budget at all, which I am also working on revising…
I’ve made a pretty specific list of my requirements for inside the condo. I’ve also done some thinking about the neighborhood that I would want to live in. Based on my research, a realistic cost estimate of what I’m looking for is between $340,000 and $450,00. Right now, the upper-bound on my range with my current savings level is $263,000. If I want to buy something on the higher end of that range, I need to save for another FOUR YEARS to be able to keep the monthly housing costs under $2,000. I would probably be able to afford the lower end of that range by early next year, which means that I will need to do another decision matrix for how long of a lease to sign when this one is up.
All things considered, I learned a lot with the condo deal falling through and I think I’m much better prepared for my next condo buying experience, whenever that may be in the future. I’m also going to be in a far better financial situation by the time I do actually decide to buy a place again.
I also think that, emotionally, I should sit tight for 4-6 months before starting to look again after the hassle and stress of the deal falling through and needing to move anyway. I’ve even turned off my Redfin emails! Also: my new landlord even replaces light bulbs! So little maintenance to do! So I’m going to keep saving money with the $76,800 goal in the back of my head, but not fret about the amount until, emotionally, I feel like buying a place is the right decision again. I have a feeling that when my current rental lease comes up for renewal, I will be re-signing a lease for some amount of time, but I will make the length decision at that point (around late May, so another 2 months from now).
Readers, do you think that my new requirements are too conservative or my original ones too lax?