Mortgage Problems for First Year Biglaw? Forum

[Julio_El_Chavo]

The only reason to buy a house is if you want to live in a certain area for over 10-15 years. There's a high likelihood that you will have to find employment in a different area after a few years of biglaw, so I don't really know why you're set on buying.

This is a fair point, but renting is honestly a last resort. Having owned my own home for three years, I am not eager to move back into an apartment. This is a major metro area where rent is not any lower than a mortgage payment and houses come on and off the market with ease. If I do need to move, I'll have no issue selling (my current house, meh)

I rented for eight years before law school. That was enough. Shitty landlords, shitty roommates, shitty neighbors. I'm a hermit now, for better or worse.

Well, it's your life, man. Just think about the fact that the vast majority of your mortgage payments for the first five years on a 30-year go to paying interest only. Closing costs on your current home and on whatever home you buy for your first few years of biglaw will run you 20-80k depending on how expensive they are. I have a family too, but personally, I'd much rather rent an apartment, save the money and buy two new cars. Not to mention that you have to fix shit up or pay someone to fix it when it breaks. Also I'm sure you're familiar with the property taxes, insurance, etc. that you have to pay for. Seems like a lot of shit to worry about just so you can live far enough way from people that only LOUD stereo systems bug you at night.

[Anonymous User]

The only reason to buy a house is if you want to live in a certain area for over 10-15 years. There's a high likelihood that you will have to find employment in a different area after a few years of biglaw, so I don't really know why you're set on buying.

This is a fair point, but renting is honestly a last resort. Having owned my own home for three years, I am not eager to move back into an apartment. This is a major metro area where rent is not any lower than a mortgage payment and houses come on and off the market with ease. If I do need to move, I'll have no issue selling (my current house, meh)

I rented for eight years before law school. That was enough. Shitty landlords, shitty roommates, shitty neighbors. I'm a hermit now, for better or worse.

Well, it's your life, man. Just think about the fact that the vast majority of your mortgage payments for the first five years on a 30-year go to paying interest only. Closing costs on your current home and on whatever home you buy for your first few years of biglaw will run you 20-80k depending on how expensive they are. I have a family too, but personally, I'd much rather rent an apartment, save the money and buy two new cars. Not to mention that you have to fix shit up or pay someone to fix it when it breaks. Also I'm sure you're familiar with the property taxes, insurance, etc. that you have to pay for. Seems like a lot of shit to worry about just so you can live far enough way from people that only LOUD stereo systems bug you at night.

Closing costs on my current home will be 4k, and if the seller doesn't pay them for the new home, will be no more than 6-8k. So we should stay well south of 20k, let alone 80k.

Yea I won't build much equity right away, but that comes back to me in the tax deduction, which has been helpful to me for the last three years and will be more so with the new home. You're getting none of that renting. Sure, I'll have to fix things. I'm pretty good at that by now. I'd much rather live in a house than spend the money on cars, that's for certain.

As an update, the lender emailed me a few mins ago. The concerns over student debt and my current home are resolved, but they aren't budging on being on firm payroll before closing. I'll have to see if I can either get my start date changed, either officially or symbolically (not impossible) and/or see if bar stipend, which is pretty close to a months wages, can count as an extra month. If nothing else, it's been an adventure. Off to take more Prilosec for the ulcer this has ripped.

[daniel22]

.

[gulcregret]

The only reason to buy a house is if you want to live in a certain area for over 10-15 years. There's a high likelihood that you will have to find employment in a different area after a few years of biglaw, so I don't really know why you're set on buying.

This is a fair point, but renting is honestly a last resort. Having owned my own home for three years, I am not eager to move back into an apartment. This is a major metro area where rent is not any lower than a mortgage payment and houses come on and off the market with ease. If I do need to move, I'll have no issue selling (my current house, meh)

I rented for eight years before law school. That was enough. Shitty landlords, shitty roommates, shitty neighbors. I'm a hermit now, for better or worse.

Well, it's your life, man. Just think about the fact that the vast majority of your mortgage payments for the first five years on a 30-year go to paying interest only. Closing costs on your current home and on whatever home you buy for your first few years of biglaw will run you 20-80k depending on how expensive they are. I have a family too, but personally, I'd much rather rent an apartment, save the money and buy two new cars. Not to mention that you have to fix shit up or pay someone to fix it when it breaks. Also I'm sure you're familiar with the property taxes, insurance, etc. that you have to pay for. Seems like a lot of shit to worry about just so you can live far enough way from people that only LOUD stereo systems bug you at night.

Yeah the tax deduction for that interest paid will basically wipe out most, if not all, of the federal income tax due on that 160k salary the first few years. I have never heard of closing costs that high, unless you are talking about a down payment or something? Renting is cool and all but you are throwing money away and not decreasing your tax bill. So that 160k really will turn into 110k instead of like 140k. A 600k mortgage will allow about 20-30k in interest deductions over the first 2-3 years. That is significant. And then you build equity. Economically, renting is not good for someone who plans to be at the same job or in the same city for 3-5 years. And home prices are basically bottomed out so you're not going to get a place and then be upside down; maybe condos are the exception?

[dingbat]

The only reason to buy a house is if you want to live in a certain area for over 10-15 years. There's a high likelihood that you will have to find employment in a different area after a few years of biglaw, so I don't really know why you're set on buying.

This is a fair point, but renting is honestly a last resort. Having owned my own home for three years, I am not eager to move back into an apartment. This is a major metro area where rent is not any lower than a mortgage payment and houses come on and off the market with ease. If I do need to move, I'll have no issue selling (my current house, meh)

I rented for eight years before law school. That was enough. Shitty landlords, shitty roommates, shitty neighbors. I'm a hermit now, for better or worse.

Well, it's your life, man. Just think about the fact that the vast majority of your mortgage payments for the first five years on a 30-year go to paying interest only. Closing costs on your current home and on whatever home you buy for your first few years of biglaw will run you 20-80k depending on how expensive they are. I have a family too, but personally, I'd much rather rent an apartment, save the money and buy two new cars. Not to mention that you have to fix shit up or pay someone to fix it when it breaks. Also I'm sure you're familiar with the property taxes, insurance, etc. that you have to pay for. Seems like a lot of shit to worry about just so you can live far enough way from people that only LOUD stereo systems bug you at night.

Yeah the tax deduction for that interest paid will basically wipe out most, if not all, of the federal income tax due on that 160k salary the first few years. I have never heard of closing costs that high, unless you are talking about a down payment or something? Renting is cool and all but you are throwing money away and not decreasing your tax bill. So that 160k really will turn into 110k instead of like 140k. A 600k mortgage will allow about 20-30k in interest deductions over the first 2-3 years. That is significant. And then you build equity. Economically, renting is not good for someone who plans to be at the same job or in the same city for 3-5 years. And home prices are basically bottomed out so you're not going to get a place and then be upside down; maybe condos are the exception?

Erm, no. Your tax bill will be lowered by about $6-$7k, on a tax bill of over $40k (this does not take state taxes into consideration)
Basically, owning is not a good idea unless you plan on being in that home for at least 5 years.
(generally, the breakeven point is 4-6 years, depending on a variety of factors)

[dingbat]

Please keep in mind that closing will take a few months.
I closed at the height of the mortgage collapse, so every detail got scrutinized.
That makes me an extreme case, but for me closing took 4 months

[boiseman]

You really should shop around for lenders, instead of just accepting the realtor's lender just because he said so.

-First, there's a chance another lender will pre-approve you even though you'll have a month or so before you start work.

-Second, you are probably getting ripped off if you are just using the realtor's lender. Terms are almost always considerably worse than if you shop around.

I own a real estate brokerage, this is good advice. Hell, unless you have signed a representation agreement with the Realtor, I would be shopping Realtor's as well.

PM me if you have specific questions.

[dingbat]

You really should shop around for lenders, instead of just accepting the realtor's lender just because he said so.

-First, there's a chance another lender will pre-approve you even though you'll have a month or so before you start work.

-Second, you are probably getting ripped off if you are just using the realtor's lender. Terms are almost always considerably worse than if you shop around.

I own a real estate brokerage, this is good advice. Hell, unless you have signed a representation agreement with the Realtor, I would be shopping Realtor's as well.

PM me if you have specific questions.

I also forgot the games realtors can play to get you to spend more
Hint: if a realtor asks how much you want to spend per month, find another realtor

[swc65]

You really should shop around for lenders, instead of just accepting the realtor's lender just because he said so.

-First, there's a chance another lender will pre-approve you even though you'll have a month or so before you start work.

-Second, you are probably getting ripped off if you are just using the realtor's lender. Terms are almost always considerably worse than if you shop around.

I own a real estate brokerage, this is good advice. Hell, unless you have signed a representation agreement with the Realtor, I would be shopping Realtor's as well.

PM me if you have specific questions.

I also forgot the games realtors can play to get you to spend more
Hint: if a realtor asks how much you want to spend per month, find another realtor

Why is that question a red flag? Just curious. I am used to renting where that is always the first question

[dingbat]

I also forgot the games realtors can play to get you to spend more
Hint: if a realtor asks how much you want to spend per month, find another realtor

Why is that question a red flag? Just curious. I am used to renting where that is always the first question

in renting that's the only question that matters.
When it comes to owning, it means the realtor can get you to pay a higher purchase price (and earn more commission) by mucking with your loan.

When it existed, it was a great way to get someone to buy an interest only loan
For example, a $100,000 mortgage at 5% costs about $535 per month
A $128,400 mortgage at 5% but paying interest costs about $535 per month

10 years later, you would only have owed $81k in the first scenario, but instead you owe owe $128k. Spot the difference?


Edit: there's nothing wrong with having that conversation in a broader context (always ask for the current amount of property taxes on the place) but if the realtor leads you into that territory, be on guard

[gulcregret]

Erm, no. Your tax bill will be lowered by about $6-$7k, on a tax bill of over $40k (this does not take state taxes into consideration)
Basically, owning is not a good idea unless you plan on being in that home for at least 5 years.
(generally, the breakeven point is 4-6 years, depending on a variety of factors)

My bad, yeah, you just decrease your taxable income by 30-40k. As written it implies something different and not accurate. You will pay 7-9k less in taxes and could adjust withholdings accordingly, if bold enough. Honestly, you can get pretty close to paying no federal income tax if you have a big mortgage and max out your 401k, if available. Oh and by having multiple children.

[Julio_El_Chavo]

Erm, no. Your tax bill will be lowered by about $6-$7k, on a tax bill of over $40k (this does not take state taxes into consideration)
Basically, owning is not a good idea unless you plan on being in that home for at least 5 years.
(generally, the breakeven point is 4-6 years, depending on a variety of factors)

My bad, yeah, you just decrease your taxable income by 30-40k. As written it implies something different and not accurate. You will pay 7-9k less in taxes and could adjust withholdings accordingly, if bold enough. Honestly, you can get pretty close to paying no federal income tax if you have a big mortgage and max out your 401k, if available. Oh and by having multiple children.

You're forgetting about the Alternative Minimum Tax which doesn't take into account your exemptions for children.

[dingbat]

Erm, no. Your tax bill will be lowered by about $6-$7k, on a tax bill of over $40k (this does not take state taxes into consideration)
Basically, owning is not a good idea unless you plan on being in that home for at least 5 years.
(generally, the breakeven point is 4-6 years, depending on a variety of factors)

My bad, yeah, you just decrease your taxable income by 30-40k. As written it implies something different and not accurate. You will pay 7-9k less in taxes and could adjust withholdings accordingly, if bold enough. Honestly, you can get pretty close to paying no federal income tax if you have a big mortgage and max out your 401k, if available. Oh and by having multiple children.

You deduct $3700 per child. For a mortgage you only deduct interest.

You either need:
1) a ginormous mortgage (read: unaffordable and unattainable)
2) so many kids you're practically running an orphanage

Lets do some math.
Biglaw salary: $160k
10 kids: deduct $37k
Random deductions: $23k I'm being very generous here, although property tax could get you there)
You would need to pay $100k in interest in order to pay no tax.
Based on a 5% rate, you would need a $2m mortgage with interest only payments.
Based on a $160k salary, you won't qualify for such a high mortgage
Not only that, that $2m home will cost $20-$40k to maintain
So how are you going to feed and clothe your 10 children?

(note: if we include property tax, you just might get there, but seriously)

[dingbat]

You're forgetting about the Alternative Minimum Tax which doesn't take into account your exemptions for children.

that too

[Julio_El_Chavo]

The bottom line is that if you're planning on living in an area for 3-5 years, you're at least taking a risk the you might not break even by buying a home. You won't be able to build any equity of significance over 3-5 years because most of your payments will go to interest. Housing prices have *not* bottomed in some of the more affluent areas, where it's safe to assume that most biglaw associates would want to buy. In many of these areas, housing prices have rebounded up to levels comparable to where they were before the financial crisis. Closing costs have historically been around 6%. I don't really know where some of the people in this thread are getting their numbers from, but the 6% number is staring me right in the face from my Real Estate Transactions textbook. Assuming you get a low-rate, 30-year mortgage for around 4%, you're basically paying 20% interest on principal at most in the aggregate. Multiply this by your tax rate which is going to be around 30% worst case (unless you have a spouse raking it in) and you exactly break even at 6%. So even in the best-case scenario, you just break even over five years.

[ToTransferOrNot]

Also have to consider the "lost investment income" you suffer from not taking the down payment and applying it to your loans. The NYT calculator can account for that; it's a fairly significant issue.

[dingbat]

Also have to consider the "lost investment income" you suffer from not taking the down payment and applying it to your loans. The NYT calculator can account for that; it's a fairly significant issue.

As there was no mention of student loans, I didn't factor it in (full scholly & savings)
That should be a major consideration

[gulcregret]

Erm, no. Your tax bill will be lowered by about $6-$7k, on a tax bill of over $40k (this does not take state taxes into consideration)
Basically, owning is not a good idea unless you plan on being in that home for at least 5 years.
(generally, the breakeven point is 4-6 years, depending on a variety of factors)

My bad, yeah, you just decrease your taxable income by 30-40k. As written it implies something different and not accurate. You will pay 7-9k less in taxes and could adjust withholdings accordingly, if bold enough. Honestly, you can get pretty close to paying no federal income tax if you have a big mortgage and max out your 401k, if available. Oh and by having multiple children.

You deduct $3700 per child. For a mortgage you only deduct interest.

You either need:
1) a ginormous mortgage (read: unaffordable and unattainable)
2) so many kids you're practically running an orphanage

Lets do some math.
Biglaw salary: $160k
10 kids: deduct $37k
Random deductions: $23k I'm being very generous here, although property tax could get you there)
You would need to pay $100k in interest in order to pay no tax.
Based on a 5% rate, you would need a $2m mortgage with interest only payments.
Based on a $160k salary, you won't qualify for such a high mortgage
Not only that, that $2m home will cost $20-$40k to maintain
So how are you going to feed and clothe your 10 children?

(note: if we include property tax, you just might get there, but seriously)

I had posted a longer response but maybe I took too long or something because its now gone. The gist is that you did not account for 17k in 401k, 5k spousal IRA contribution, or 14k state and local deduction, then you have HSAs and child care credits. My point was, you can get your tax bill down to like only 3-5k (seriously) without having 10 kids. I was joking about that before. Even with 4 kids, not unusual, the deduction is 15,200 (it went up to 3,800 for 2012). I'm only half serious about this but I think a 600k home is affordable with that salary, if loans aren't maxed out, and that will come with like 36k in mortgage interest deductions. Your taxable income will be like 50k.

[dingbat]

Erm, no. Your tax bill will be lowered by about $6-$7k, on a tax bill of over $40k (this does not take state taxes into consideration)
Basically, owning is not a good idea unless you plan on being in that home for at least 5 years.
(generally, the breakeven point is 4-6 years, depending on a variety of factors)

My bad, yeah, you just decrease your taxable income by 30-40k. As written it implies something different and not accurate. You will pay 7-9k less in taxes and could adjust withholdings accordingly, if bold enough. Honestly, you can get pretty close to paying no federal income tax if you have a big mortgage and max out your 401k, if available. Oh and by having multiple children.

You deduct $3700 per child. For a mortgage you only deduct interest.

You either need:
1) a ginormous mortgage (read: unaffordable and unattainable)
2) so many kids you're practically running an orphanage

Lets do some math.
Biglaw salary: $160k
10 kids: deduct $37k
Random deductions: $23k I'm being very generous here, although property tax could get you there)
You would need to pay $100k in interest in order to pay no tax.
Based on a 5% rate, you would need a $2m mortgage with interest only payments.
Based on a $160k salary, you won't qualify for such a high mortgage
Not only that, that $2m home will cost $20-$40k to maintain
So how are you going to feed and clothe your 10 children?

(note: if we include property tax, you just might get there, but seriously)

I had posted a longer response but maybe I took too long or something because its now gone. The gist is that you did not account for 17k in 401k, 5k spousal IRA contribution, or 14k state and local deduction, then you have HSAs and child care credits. My point was, you can get your tax bill down to like only 3-5k (seriously) without having 10 kids. I was joking about that before. Even with 4 kids, not unusual, the deduction is 15,200 (it went up to 3,800 for 2012). I'm only half serious about this but I think a 600k home is affordable with that salary, if loans aren't maxed out, and that will come with like 36k in mortgage interest deductions. Your taxable income will be like 50k.

I know I was missing a chunk (I was purposefully obfuscating)
I will do the math momentarily.

[dingbat]

All the deduction you listed add up to $87k, which we can round up to $90k
That leaves you with $70k income and federal taxes of $10k if married.
Your principal will be another $7k or so, so your disposable income will be $53k after paying your mortgage (how much for property tax & insurance? How much for state income tax?)

You should budget 3% of the cost of your home for maintenance (not needed every year, but we're talking plumber, broken appliances, new roof, etc) do that's another $18k
What about gas/electric? $20k per year?
That leaves you with $15k per year. What about car payment & gas (or subway & taxi?)
Assuming you either drive an old car or live somewhere you don't need it, let's say $2k (this is very low)
$150/wk on food? (good luck) $8k
You're now down to about $400 of disposable income per month.
Deduct dry cleaning for about $50 and you're at about $350 per month

Doable, but I'd recommend a smaller home
(note that I haven't mentioned student loans. Then again, haven't mentioned spouse's income either)

[ToTransferOrNot]

All the deduction you listed add up to $87k, which we can round up to $90k
That leaves you with $70k income and federal taxes of $10k if married.
Your principal will be another $7k or so, so your disposable income will be $53k after paying your mortgage (how much for property tax & insurance? How much for state income tax?)

You should budget 3% of the cost of your home for maintenance (not needed every year, but we're talking plumber, broken appliances, new roof, etc) do that's another $18k
What about gas/electric? $20k per year?
That leaves you with $15k per year. What about car payment & gas (or subway & taxi?)
Assuming you either drive an old car or live somewhere you don't need it, let's say $2k (this is very low)
$150/wk on food? (good luck) $8k
You're now down to about $400 of disposable income per month.
Deduct dry cleaning for about $50 and you're at about $350 per month

Doable, but I'd recommend a smaller home
(note that I haven't mentioned student loans. Then again, haven't mentioned spouse's income either)

In what world is your gas and electric going to run $20k a year? Jesus, lol.

[dingbat]

All the deduction you listed add up to $87k, which we can round up to $90k
That leaves you with $70k income and federal taxes of $10k if married.
Your principal will be another $7k or so, so your disposable income will be $53k after paying your mortgage (how much for property tax & insurance? How much for state income tax?)

You should budget 3% of the cost of your home for maintenance (not needed every year, but we're talking plumber, broken appliances, new roof, etc) do that's another $18k
What about gas/electric? $20k per year?
That leaves you with $15k per year. What about car payment & gas (or subway & taxi?)
Assuming you either drive an old car or live somewhere you don't need it, let's say $2k (this is very low)
$150/wk on food? (good luck) $8k
You're now down to about $400 of disposable income per month.
Deduct dry cleaning for about $50 and you're at about $350 per month

Doable, but I'd recommend a smaller home
(note that I haven't mentioned student loans. Then again, haven't mentioned spouse's income either)

In what world is your gas and electric going to run $20k a year? Jesus, lol.

Sorry, that is a complete foul up on my side.
(although if I think about it, I'm sure I can make up some additional expenses to cover the difference)

Edit: Property taxes will go some way to making up the difference. What about state income taxes?
Basically, just off the $160k income, a $600k home is too expensive (although, with lock-step...)

[thelogicalconstruct]

Talk to your HR department. I come across this a lot. I had a few contractors (self employed staff) that had problems getting refinancing on their homes due to the fact they weren't our employees. Regardless if they have been on contract for 3 years with another 2 left with the likelihood of renewal. You may need to work something out with the lender where your new place of employment will write a letter on your behalf. It may also take someone making a call on your behalf to the person at the bank in charge of the decision. Which I have done as well.

Funny how things like are red flag but not too long ago loans were given out to people like candy. (Thus is why we have this housing marketing issue.)

[Anonymous User]

OP here. Some are stretching a bit in this thread to make points. 80k for closing costs? 15k for utilities? 18k for repairs? Per year? I own an old house and I have spent 11k total in the four years I've owned it.

[dingbat]

OP here. Some are stretching a bit in this thread to make points. 80k for closing costs? 15k for utilities? 18k for repairs? Per year? I own an old house and I have spent 11k total in the four years I've owned it.

Closing costs ate roughly 5% of the purchase price of the home, although it scales down, so $80k would be for a $1.6m+ home (not my estimate. I assume whoever said that included down payment)
I admit flubbing utilities, although my boss spends more than that (he told me his electric is $1k/month)
For repairs, a reasonable estimate is to put away 3% per year(conservative. Your actual costs should be lower). While you don't need it every year, big ticket items (siding, new roof) can cost a lot more, so by putting that much away and saving what you don't use, you'll be ok

$18k was based on an estimated $600k home. How much do you think a new roof would cost? How about a burst pipe, or a blown transformer? I personally haven't had to spend too much either, but I have been quoted for a new roof and I don't look forward to needing to replace that bad boy.