I know this is probably not a worthy question, but I would like to ask anyway. My wife and I do fairly well professionally. Combined, our income is roughly $180,000 on an adjusted gross income basis.
We are both 41 and have more than $150,000 in our 401(k) plans and more than $70,000 cash in savings. We currently have 17 years left on the mortgage for our primary home, at a pretty low interest rate.
Here’s the situation I’m curious about: Three years ago we purchased for cash some mountain property at one of those liquidation sales in North Carolina, and a year later purchased an adjoining 2 acres (for a total of 5.2 acres).
Our dream is to build a log home on this property, and we are getting close to pulling the trigger. We have had no credit card debt for 12 years (we pay our cards off each month) and owe only our current mortgage. While the bank has stated there is no issue with our credit (we’re both above a 780 FICO score), and we are approved for a $300,000 loan, should I be worried about other issues when going through this process?
Or am I just repeating the mistakes of my generation by buying more than we should before we should? Being debt free for 12 years has me being extra cautious in returning to the days when we owed too much.
Every question is a worthy one. Let’s start at the top.
You and your spouse are doing well financially. That’s the good news. We can tell from your e-mail that you’re earning a significant amount of income (particularly since you’re both in your early 40s). You don’t mention children, so we’ll assume you don’t have them. Having them would, at least in the near term, change the picture somewhat.
You bought land with cash and now have accumulated more than 5 acres of mountain property. The question you seem to be asking is if you can afford, given your income and expenses, to build a log home on the property.
The real question you should ask is what you want to do with the log cabin once you build it.
We never recommend building a home unless you plan to use it within six months. So, if you’re thinking that your log cabin will be a weekend and vacation property, that’s great. You can design something that will allow you to use it regularly but not be overwhelmed by maintenance. Be sure to think through how you’d use a weekend or vacation property, who might join you (so that you plan for the appropriate number of bedrooms and bathrooms) and what it looks like to age there, if you intend to keep it for the rest of your lives.
If you want to make it a greener or off-the-grid home, be sure to think about water, sewer or septic, and whether your location will provide enough direct sunlight to make solar power a realistic choice.
We think that you should be able to build a substantial home for $300,000, but take your time to find the right architect and contractor, since you won’t be living in or near the property while it’s under construction. You want to build a team that will help make this dream a reality.
As for being debt-free, only you know the answer to the sleep-test question: Will you be able to sleep at night if you take on another $300,000 in debt? It’s hard to say. You should look at the monthly payments, aim to build a home that costs only $250,000 (to give you fudge room and cash for furnishing the property after it’s built), and then look carefully at what you spend each month.
We don’t recommend mortgaging your future to pay for a home, nor do we think you should forego enjoying today so that you only save for tomorrow. But if building this log cabin house means you’ll be unable to continue to save for retirement, that’s not a good bet.
It is a good bet that over the next few years, provided that both of you continue working in your careers, your income will rise and it will become easier to make the payments each month. You can even begin paying down the loan faster — if you want to. The truth is that today’s interest rates are historically low, and if you can snag one, we’re pretty sure you’ll be glad you did five or 10 years down the line.
As Ilyce says in her show each week, be an intentional investor. Think it through carefully. Look at all the numbers. Talk to developers and architects to find the right people for your home-building team. And take your time. It may take you as long as a year to find the right team members, and to design and cost out the perfect home — and that’s before you start building.
Good luck, and let us know what you decide to do.
Ilyce R. Glink’s latest book is “Buy, Close, Move In!” If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11 a.m. to 1 p.m. EST. Contact Ilyce through her Web site, www.thinkglink.com.