Daycare costs and mortgage amount

[Anonymous]

We have just started thinking casually about buying a home. Combined salary is currently $125K; DH is working part-time while going to school so there is upside income potential. We pay $380/month in student loans with no other debt. Daycare costs $1150/month, down to $950/month in February 2012. Will a mortgage broker take the childcare costs into account in considering how much we can afford? Someone asked this question a couple years ago, and the responses were mixed, but I am wondering whether the landscape has changed. We are also looking at FHA, if that makes any difference.

Also, anyone have a view as to what we can afford? We have saved about $100K for downpayment and closing costs. We pay $2400 a month in rent, and our budget is tight but doable.

[Anonymous]

up to $500k- you should try to be 20% down. This would make your payment about $2000 on a fixed rate + property taxes and insurance, thus resembling your rent payment.

if you plan on being in your house 5-10 years only, then an ARM might make sense, in which case your monthly would be lower and you might be able to go slightly higher if you can muster the 20% DP.

[Anonymous]

I can't believe anyone would seriously consider and ARM after the last few years!

A good rule of thumb is that your monthly payment shouldn't be more than 25% of your take home pay. 20% down is good, 15 year fixed rate mortgage is even better.

[Anonymous]

OP here. We were thinking about $470-480K. Mortgage calcuators say we can afford slightly more, but I don't want to push it.

[Anonymous]

We've refinanced, bought and taken out a HELOC in the last year and no one ever asked about child care expenses. I thought that was odd since we have two children, but they never asked!

[Anonymous]

Our mortgage broker asked about childcare costs. He added it into our monthly "debt" - same place as student loans to come up with our percentage for mortgage plus monthly expenses. I don't think that's the only number a lender looks at or anything, but it was there for us.

I think $470-480,000 sounds about right given your downpayment. A $400,000 house with no downpayment including taxes, insurance, etc., is about $2500 at a 4.5% interest rate.

[Anonymous]

If you have 20% don't do FHA - you can likely get a better rate elsewhere. An ARM might be a good idea depending on your finances - because most have lifetime caps, plus yearly caps on the increase, it may be that even at the highest possible rate you would still be paying less than your current payment due to the decline in the amount of principal you owe between now and when your rate starts to float. We are in an ARM with an 8% lifetime cap, and a cap of 1% increase yearly. Our worst case scenario (which could not happen till year 10) would still have us paying an afforable payment. We are putting the cash we are saving now toward principal to pay the loan off faster.

[Anonymous]

Don't forget to account for home repairs, home maintenance, and probably higher utility costs. Make sure that you really run the numbers and make sure that you're comfortable with the amount you have left over after the mortgage for all other expenses and savings. Once you estimate how much you'll be paying a month in housing-related expenses, if it is higher than your monthly rent, put the difference into savings every month so you can see whether it's realistic to live on what you estimated will be left after housing expenses. This should also make you feel more confident that you'll be able to afford to pay the amount you're planning on. Best of luck--home buying is nerve-racking and exciting!

[Anonymous]

Anonymous wrote:I can't believe anyone would seriously consider and ARM after the last few years!

A good rule of thumb is that your monthly payment shouldn't be more than 25% of your take home pay. 20% down is good, 15 year fixed rate mortgage is even better.

Just offering a different perspective. We bought our first home about 8 years ago and were planning on staying in it for about 5-7 years. We opted for a 5/1 ARM with caps on rates resetting each year. The rate at the time was 4.625%, which was considerably lower than a 30-year fixed. We have been in our home for 8 years now, and our ARM has reset three times. Each time the new rate was lower than the old. Currently we are sitting at a whopping 3% and are able to pay off our principal much faster than we expected because we are maintaining the original payments. So even though our house has depreciated during the past three years, we have been able to stay above water because our low interest rate. Not sure if we would have been able to do the same with a 30-year fixed. Would I take out an ARM today? Probably not, since those rates are almost at prime level and can only go up, but it has certainly served us well in the past. So whether or not you should consider an ARM depends a bit on your long-term plans and other circumstances.

[Anonymous]

We just bought a home and have 2 kids in daycare. We shopped mortgages with 2 lenders and neither asked us about our daycare expenses.

[Anonymous]

Anonymous wrote:

Anonymous wrote:I can't believe anyone would seriously consider and ARM after the last few years!

A good rule of thumb is that your monthly payment shouldn't be more than 25% of your take home pay. 20% down is good, 15 year fixed rate mortgage is even better.

Just offering a different perspective. We bought our first home about 8 years ago and were planning on staying in it for about 5-7 years. We opted for a 5/1 ARM with caps on rates resetting each year. The rate at the time was 4.625%, which was considerably lower than a 30-year fixed. We have been in our home for 8 years now, and our ARM has reset three times. Each time the new rate was lower than the old. Currently we are sitting at a whopping 3% and are able to pay off our principal much faster than we expected because we are maintaining the original payments. So even though our house has depreciated during the past three years, we have been able to stay above water because our low interest rate. Not sure if we would have been able to do the same with a 30-year fixed. Would I take out an ARM today? Probably not, since those rates are almost at prime level and can only go up, but it has certainly served us well in the past. So whether or not you should consider an ARM depends a bit on your long-term plans and other circumstances.

When you decided between ARMs and fixed, work through the math and financial implications germane to your particular situation. Do not get swayed by knee-jerk reactions to the housing crisis. Both can be cost saving, and it really depends on your situation.

We are saving ~$90k in total interest charges through our 7/1 ARM, have rate caps that we know will always ensure that our mortgage is affordable, and know that we will likely move before the ARM resets, and almost certainly move by the 10 year mark at which point we would still have saved more from an ARM than with a fixed-rate.

[Anonymous]

What is your net income?

[Anonymous]

Yeah, ARMs can be really misunderstood. Some ARMs have a balloon repayment at the end, which will force you to refinance, and that could be problematic if you've lost a lot of equity in your house. Others are written in such a way that you can have huge increases in your payment even month to month after the locked-in period ends.

You CAN get a good ARM. Like PP said, just make sure you understand the terms - you understand when your rate will increase, how frequently it can increase, and how much it can increase each time. We got a 10 year ARM when we purchased, and the interset rate will be reset annually after the 10 year mark, but can never go up more than .5 percent in a given year and an never go above 9%.

[Anonymous]

OP, hats off to you for being able to save 100k and have such little debt while also contending with a spouse in school! I'd love to hear how you live and manage to save so much. How long did it take for you to build up that much in savings?

[Anonymous]

OP here. How did we save? DH worked full-time until this past fall, so the past couple years our gross income was more like $180K. I graduated from law school 6 years ago and worked at a big firm for a year and a half and saved a lot of money from that stint; I'm now a fed. DH and I paid off about $75K combined in private student loans in that time as well but still have our federal student loans left. He is paying relatively little for his schooling because of a fellowship, and we saved up for that and more by banking almost his entire salary the last year he worked full-time. I am just a crazy budgeter. Our rent was pretty low ($1800) before we had the baby and moved to a nicer place.

Our frugality is part of the reason I asked about daycare costs being taken into consideration. Our numbers look bad if you add in the daycare costs. But I know, based on our past history, that we can afford a housing cost that is on the high side relative to our income. In fact, our rent is pretty high now given our takehome, but it has been fine.