RG, as always, your knowledge and insight you offer on these matters is priceless. Same can be said for SC and B. This stuff is truly gold and I sincerely appreciate it more than my words could ever convey. It's all very, very informative!!
RG, as always, your knowledge and insight you offer on these matters is priceless. Same can be said for SC and B. This stuff is truly gold and I sincerely appreciate it more than my words could ever convey. It's all very, very informative!!
I quickly read through RG's post and have to say I think I agree with all of it. Solid advice. But I want to re-read it again to think about the finer points. The mortgage interest deduction is an often over emphasized benefit of buying a home.
What I would take away from the discussion is that you need to generate enough excess cash flow to get to your 20% downpayment. And 20% of $150K is going to be less than 20% of $180K, so you can get their quicker. Your ability to generate that excess cash flow also bodes well for your ability to pay down the loan quicker once you do buy the house.
Originally Posted by Partial
Renting is throwing money away. It's just less money than you'd be throwing away if your were under-capatized in your home.
Ok, here's a variation on the theme that RG threw out there. You buy a house that is somewhat discounted because the yard looks awful and it needs paint and other cheap repairs. But buy in a good location. You can't fix a crappy location.
You put 10% down, and pay your PMI for 3 or 4 months while you're fixing it up. Then you get it re-appraised making sure the appraisor knows exactly where he has to come in so that you meet your 20% threshold. With that appraisal showing 20% equity, you can ask (force) the mortgage company to then drop the PMI. So yeah, you pay the PMI for a few months, but not long enough to screw up the investment return from RG's example.
I bought my first house in a location where prices were going up 10% a year. So in less than 2 years we had our 20% equity and forced the mortgage company to drop the PMI charge. You can't count on being as lucky as I was with appreciation. But you can reduce the luck requirement by buying the right fixer upper.
Work for you RG? Or am I missing something?
$4K property taxes on a $180K house is highway robbery. Replace your entire state government immediately.
People in states like Wisconsin have been conditioned to pay these investment crippling property tax amounts. It's absurd. $4K is what you'd expect pay on a $600K home in Utah.
SC, my mom told me we pay 6k a year on our home in the 'burbs of Milwaukee. If there is truth to that I know not, though.
$4K property taxes on a $180K house is highway robbery. Replace your entire state government immediately.
People in states like Wisconsin have been conditioned to pay these investment crippling property tax amounts. It's absurd. $4K is what you'd expect pay on a $600K home in Utah.
I'm going into Patler mode and want to nitpic at a few thoughts. A good point, but not entirely accurate here
""I don't think a single guy making 40K has any need to buy a 180,000 house, and I'm also not sure that you could qualify for that big of a house without a substantial downpayment.""
I'd agree with the Need.
But let's say Partial has excellent credit and is making $3300 per month. Let's say he has a few reserves. A pretty good ballpark payment on a 180G home in our area on a no money down program with PMI is 1550-1650 per month with all of the escrow included.
At a monthly payment of 1650, housing debt to income is around 50%. If there are no other monthly payments, that also leaves total debt to income at around 50%.
Should that person buy the house ? Probably not.
Can that person get approved ? Absolutley.
B
B,
In the early 90's when I bought my first, the rule of thumb was you could afford a house equal to roughly 3 times annual earnings. And then in this thread someone said it's now 4 times earnings.Have the lending rules loosened up that much in 15 years?
ABSOLUTELY YES; I'll never forget the deal I got approved in year one of my employment at a bank. 135G house; I had suggested to the couple they should not go higher than 100-110G based on ratios, but that I could get them approved for higher.
Perfect Credit. A few reserves. The total Debt to income ratio was 69% and he was approved.
Wow, I thought. What a terrible decision; but I already advised them and they still wanted to go ahead and find a way.
The loan was approved. Was it a bad decision ? The numbers would say so. But they loved the house and figured they'd fine a way. To this day, and I don't know how, but they have never missed a payment.
Better the credit, the looser the rules.
B
It doesn't tell me much without knowing what the house is worth. I think Wauwatosa has some of the highest taxes in your metro area.
""In summary, I don't want to sound too negative related to the purchase of a home. I love owning a home. There are MANY MANY MANY reasons to do so that have NOTHING to do with money. It is a wonderful experience that I want EVERYONE to have the ability to do. BUT, and a big BUT, circumstances HAVE TO BE RIGHT.
Monetarily, appreciation cannot be ignored. It does work, and it does create wealth. But the home has to be in the right neighborhood, of the righs size, with the right amenities, and it takes TIME. """
A COUPLE MORE POINTS.
First off I would not disagree with a word you wrote regarding the tax analysis or your breakdown of how to get wealthy by paying those mortgages off.
That being said, I offer this.
1. I'm not convinced the solution is practical for a strong majority of people. Saving, or showing the ability to save 20% before the down payment, is a discipline a VERY very small % would have.
2. Again, I'm not arguing with your strategy, but if people would employ this a strong % of the realtors, and home loan officers would be flat out of business.
3. You have offered wonderful strategies for this; that being said there is also this thing called pride of home ownership and happiness. The happiness part plays off against the saving of 20%. It would have been a cold day in hell before my wife was going to live in apts for several several years when we could be happier owning a home and have that pride of ownership thing.
4. I just don't think this strategy is that practical for most people. I look at our own example. My wife and I would be considered, income wise, to be strong middle class. We both started off with good jobs, then had kids so she stayed home a few years, and now we have good jobs again. We're in our 30's. Both good credit and responsible.
We did put 10% down on that first home; but even though we wanted so dearly to save for the downpayment, having all of that disposable income while we were both single led us to piss away money like a guy on a ten minute ticker after drinking a case of beer in a day.
Home ownership, besides adding happiness, pride of ownership...ect...also helped us budget and watch our spending in a much more responsible way (as did kids) than we previously did. And then the kids hit and more expenses.
In reality we had a pretty good model for much of what you are preaching. We had lived in the home for about 7 years and at the pace I was making payments the home would have been paid off in another five. But it was not practical to stay in the home when we had our 2nd rugrat so we largely upgraded.
Ended up buying one of the larger houses in the neighborhood and used my tricks of the trade that could get us approved on a program where our housing debt to income was way too high, yet approvable.
We're not the model anymore for your strategy, but I do think equity wise we are much better than the average in their mid to last 30's.
My point ? We're better off than most and would not have been able to exucute that strategy. Most will not be disciplined enough to do so, or happiness will get in the way.
Truth be told finding a midpoint between your views and combining them with the happiness thing is what everybody faces.
B
""Greg, appreciation happens. But typically not very much in the first few years. Plus, you have to add on closing costs, and the various other expenses it takes to move into a home. Even at a 3% appreciation rate, you don't accumulate equity very quickly while making the minimum payment. ""
Apprecation over the last several years in WI has been closer to 5% per year with several areas being in the 7-12% range
""Example. - You purchase a 180,000 home with no down at 6.75% and capitalize the 4500 closing costs. Your loan (or loans) are 184500. You take out a 30 year mortgage (or mortgages, one here for simplicity) which costs you 1196.66 or 1200 in round numbers. Unless you live on the west coast, property taxes will probably run you in the area of 4000 per year. Insurance 1000 and the dreaded PMI about 80. a month. These three things tack on another 496 or 500 in round numbers. This puts your house payment including taxes and insurance at 1700 a month""
First off, if anybody in Wisconsin is charging $4500 for closing costs they are raking the borrower over the coals or the borrower has such horrific credit they should be fixing that up before buying a home through a Mortgage Broker.
Secondly, and I've noted this before, GOOD CREDIT borrowers have all kinds of options for loans WITHOUT PMI if they are speaking with the right banks.
I did a calculation shortly before I bought my last house that showed that if my house appreciated 4%/year, that the appreation would be equal to what I had to pay in interest net the mortgage interest deduction.
Those PMI payments, high property tax rates and inflated closing costs in RG's example really skew the ROI calculation downward. IMO
Well B, you might be the man when I get out of college. We will have to see how much debt I am in and if you can work the magic like I hope you can. I was talking to my dad about this stuff tonight and he maintains a condo won't sell so I should bust my balls and pay off a house. Unfortunately for him, I don't know that it will be very easy to get a house around here and one that I can sell when I want to start a family and stuff because they're just too darn expensive. I can't even imagine the hell of living in SoCal and getting out of college and trying to deal with housing.
edit - that'll be 2-3 years from now, so hopefully you come up with the way to make it affordable for those of us who don't have a big down payment at the start.
HOFer
Ok, you guys are missing my point.
I am not advocating the traditional means to buy a house. I am trying to show you ways that your house becomes an INVESTMENT. I know you think of the traditional manner to purchase a house as an investment, but I don't. Anything that costs you more money to pay for than what it cost you to purchase is NOT an investment from my perspective. If it is one from your perspective, great, keep doing what you're doing. What the "traditional" family does is NOT good enough for me.
So, is this easy? NO. absolutely not. Is it quick? NO, but quicker than trying to pay off that 30 year mortgage.
What I'm trying to do is PAY OFF THE MORTGAGE TO GENERATE CASH.
that cash can change your life. However you have to change your thinking to change the way you're living. Otherwise you get out of it, what you put into it, one month at a time. for 30 years. BofA gets richer, you get a little appreciation but NO CASH. I don't particularly care whether or not the "average" family can do this, I'm not talking about "average" things.
Do your 4% calculation and you'll find that you paid in interest and principal the vast majority if not the total amount of what you find your house worth when it is paid for.
Partial, I respect that your Dad feels that you "can't sell a condo". If that's true, then why do they keep building them? Bretsky says the avg family moves every 7 years, so is that only true of homeowners? Doesn't make sense to me. Are they harder to sell than a house? Yes, I suppose in certain areas, but think of it this way -
If you pay for this condo in 5 years and it takes you a year to sell it, you are living in a PAID FOR HOME. You can continue to save each month and you'll have a boatload of cash when it does sell. You aren't forced to take the first offer you get, because YOU ARE IN NO HURRY to sell.
You have no mortgage to pay off, and if you planned well, you live in a great neighborhood, so what is the rush?
If you insist on buying a house, just drive off 30 minutes into the countryside and find a small town. You keep talking about the Western Suburbs of Milwaukee. Head down the 43 to Mukwanago, its about 40 minutes I think. See the value of a dollar there. The principles will work there too. After you pay for that house, sell it, and move back to the city with your new mortgage. stretch it out for 10 years if you want, you've still paid for your dream home in 15 years and have 15 years OF CASH TO LIVE LIKE NO ONE ELSE DOES.
Night guys....
That's a really good point about taking the time to sell the condo. I guess I never really considered that.
Following your strategy to minimize the money you are paying (the pay home off in 5 years), is there a rule of thumb as to how much you make versus how expensive of a property you can afford? I don't care about going out to eat all the time and fancy stuff like that, I have a hunch I can live like a bum for a few years to be able to put a hefty down payment down on my eventual house. I also have a hunch, though, that I will have a car payment to make as my car is on its last leg right now
That's a really good point about taking the time to sell the condo. I guess I never really considered that.
Following your strategy to minimize the money you are paying (the pay home off in 5 years), is there a rule of thumb as to how much you make versus how expensive of a property you can afford? I don't care about going out to eat all the time and fancy stuff like that, I have a hunch I can live like a bum for a few years to be able to put a hefty down payment down on my eventual house. I also have a hunch, though, that I will have a car payment to make as my car is on its last leg right now
First off buy a used car and get a good deal with affordable payments if you want to buy a home soon.
Secondly, there is no sure fire proof ratio for the home you can afford. The better the credit the higher you can get approved for. Old banking rules use to try to keep you to a back end ratio (total debt to income ratio) of 36%.
If you make 50G, that would mean that you take 50G x .36 to get the traditional total of the monthly debts you can get approved for. That total would be around $1800. So your student loans plus credit cards plus total housing payment should equal about 1800. If your monthly obligations are about $400 that would give you about 1400 on a home payment ...roughly $150,000 on a 30 Yr Fixed if you do have PMI. Now if you go 15Yr, then you are talking about a much cheaper home since payment are spread over 15 years instead of 30.
But those rules are out the window now. Better credit will allow you to get approved for much higher ratios; but as RG would point out overextending yourself can be a very bad mistake to make as well.
B
bump, I want to learn more but don't have any questions to ask at the time being.
Yes, this was a monster of a thread and a fun read.
On the mortgage side the interest rates have moved up sharply the past month. The 30 Year Fixed Rate is currently at 6.875%, up about a full percentage point since times last year.
Foreclosures will continue to go up and home buyers will find more deals than in the past.
I feel bad for realtors; with rates going up and the struggling market many are looking for new professions.
LIFE IS ABOUT CHAMPIONSHIPS; I JUST REALIZED THIS. The MILWAUKEE BUCKS have won the same number of championships over the past 50 years as the Green Bay Packers. Ten years from now, who will have more championships, and who will be the fart in the wind ?
Even so, from a long-range historical perspective, 6.875% on a 30 year fixed rate mortgage is not a bad rate. I'm sure for first time buyers, or for those who entered the real estate market in the last 5 years it seems like a high rate, but from the perspective of 40 years it doesn't look so bad.
I remember being thrilled when a 20 year fixed dropped below 9%! Heck, I can remember when finding ANY rate for ANYy type of loan at less than 12% felt pretty good.
Even so, from a long-range historical perspective, 6.875% on a 30 year fixed rate mortgage is not a bad rate. I'm sure for first time buyers, or for those who entered the real estate market in the last 5 years it seems like a high rate, but from the perspective of 40 years it doesn't look so bad.
I remember being thrilled when a 20 year fixed dropped below 9%! Heck, I can remember when finding ANY rate for ANYy type of loan at less than 12% felt pretty good.
That is very true; much of this is perception. I started at 7.75%.
But the power of the media is the soft market is nothing short of amazing. I have a pretty good client following so it doesn't effect me as much.
But overall, at banks, the number of calls received is dramatically reduced when the media goes nuts hyping interest rate increases.
And if the pre-approvals dip hard, it hits the realtor's harder
LIFE IS ABOUT CHAMPIONSHIPS; I JUST REALIZED THIS. The MILWAUKEE BUCKS have won the same number of championships over the past 50 years as the Green Bay Packers. Ten years from now, who will have more championships, and who will be the fart in the wind ?
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