Home Buying Help Thread

[theJ]

6 hours ago, N4L said:

I have recommended interest only loans to people in the past. The math works out so if you pay the same exact amount on an interest only loan as you would on a regular, 30 year amortization, your payment schedule etc is exactly the same. So, by doing interest only, you have very flexible payments. You can pay a few hundred more every month and pay the principal down much faster while also having the option to pay much less if need be, because the interest portion of the loan will drop much faster, and by the end your monthly required payments will be very small

The most obvious problem being that most people aren't disciplined enough for that. 

[MWil23]

20 hours ago, holt_bruce81 said:

Is it wise to pay more than your monthly payment? I have a few people I have talked to about buying a house and most of them have said they pay $2-$300 dollars extra a month on their house payment. I take it this is pretty common?

 

16 hours ago, theJ said:

It's risk, but also cash flow.  Leaning toward investing grows net worth, but ties up your cash for 30 years.  Long term you might have more cash flow, but it's a slower growth curve on getting your present value cash up.

I'm paying off my house early.  Should have it done in the next 4 years or so.  The goal then being that i can use that cash flow to really focus in other things, one of them being investments.  But also stuff like upgrading cars, putting an addition on my garage, etc.  With additional cash flow, i can do those things quickly without loans.  There's power in that.

 

7 hours ago, N4L said:

The way the math works is that initially, the interest portion of your monthly payment is very high. Every month you make a payment, the % of that payment allocated towards the interest goes down. 

So, by paying more than your monthly payment, 100% of the extra money goes towards principal. 

This makes your outstanding loan balance drop, which in turn makes the amount of interest owed on that outstanding loan balance drop, which makes more of your next payment get allocated towards principal rather than interest. 

So essentially, this will help you pay down your loan much faster but it doesn't give you tons of flexibility. Your loan balance is lower but you still have to make the same minimum payment next month 

I have recommended interest only loans to people in the past. The math works out so if you pay the same exact amount on an interest only loan as you would on a regular, 30 year amortization, your payment schedule etc is exactly the same. So, by doing interest only, you have very flexible payments. You can pay a few hundred more every month and pay the principal down much faster while also having the option to pay much less if need be, because the interest portion of the loan will drop much faster, and by the end your monthly required payments will be very small 

@holt_bruce81 these are two of the best answers that you could ask for IMO. It depends on your long term financial goals/plan, cash flow, etc. Since I have a 15 year, I'm not paying any extra, because I'm using that extra for my retirement and secondary mutual funds. However, if I had a 30 year, I'd absolutely pay the extra to "make my own" 15 year. If something happened, then I could back off/stop doing that to give myself flexibility and that way you're not locked into a 15, but you still have that goal in mind.

For example, I will pay $50,000-$55,000 in JUST INTEREST over the life of my house loan (15 years). On a 30 year, I would be paying $200,000 IN JUST INTEREST.

I will finish with this, which is that if you don't need the extra $5-$99 a month, I'd allocate those funds to "round up" to the next hundred. I know that $60 a month extra on the principle doesn't seem like much, but odds are you won't "miss it" most of the time...and that is an extra $720 a year going onto your principle, which is the equivalent of an extra mortgage payment for the average house in the midwest (your area/finances may be WAY different), or 1/2 of a monthly mortgage payment for a $300,000 home. If you made 2 extra mortgage payments PER YEAR, you essentially have just created your own 15 year mortgage (with that extra money going directly to the principle), while having the peace of mind and flexibility if you had a layoff, paycut, major life circumstance, etc. NOT to do that.

JMHO

[TOUCAN]

We found a perfect house by pictures we are hoping to look at this weekend.

[LeotheLion]

38 minutes ago, MWil23 said:

For example, I will pay $50,000-$55,000 in JUST INTEREST over the life of my house loan (15 years). On a 30 year, I would be paying $200,000 IN JUST INTEREST.

It's important to understanding the flipside on why a 30 year because getting bogged down on interest ignores the great benefit of investing earlier.

For my home the difference in monthly payment would have been:

30 year: $999.25

15 year $1,477.73 (don't recall what rate I would have had for 15 year, assuming .8% less than 30 year rate)

The difference between a 30 year and 15 year mortgage at my borrowing amount was $5,741.76/year. $5,741.76/year growing at 6% for 30 years would have a future value of $481k and at that time I'd have a fully paid house. On the 15 year if you waited till the house was paid to start investing the $1,477.73/month principal payment, that would grow to $438k in 15 years. So the 30 year will be better off by 43k. This also assumes a conservative 6% growth rate. The higher that figure the bigger the disparity.

The 30 year pays $94k more in interest in this example but that piece isn't relevant. 

[theJ]

40 minutes ago, LeotheLion said:

The 30 year pays $94k more in interest in this example but that piece isn't relevant. 

I don't understand why that isn't relevant?  I'm going to re-run the numbers and to take the interest payments into account - though you didn't list all your assumptions, so my numbers won't match exactly.

222k loan
30 year loan - $996/mo (3.5%)
15 year loan - $1501/mo (2.7%)
Difference of $505/mo, $6k/year
Investments make 6%, as you stated

30 year loan
$468k made via the $6k difference, invested for 30 years
($136k) in interest payments
$332k net

15 year loan
Invest $1.5k/mo, $18k/year for 15 years
$400k made via stocks
($48k) in interest payments
$352k net

I think your inflection point actually hits somewhere closer 7-8%, but i'm not going to do any more math than i just did to figure that out.  At a high enough rate of return, you come ahead mathematically on the 30 year loan.  But it's not all about the math on where you'll be in 30 years.
 

[LeotheLion]

35 minutes ago, theJ said:

I don't understand why that isn't relevant?  I'm going to re-run the numbers and to take the interest payments into account - though you didn't list all your assumptions, so my numbers won't match exactly.

222k loan
30 year loan - $996/mo (3.5%)
15 year loan - $1501/mo (2.7%)
Difference of $505/mo, $6k/year
Investments make 6%, as you stated

30 year loan
$468k made via the $6k difference, invested for 30 years
($136k) in interest payments
$332k net

15 year loan
Invest $1.5k/mo, $18k/year for 15 years
$400k made via stocks
($48k) in interest payments
$352k net

I think your inflection point actually hits somewhere closer 7-8%, but i'm not going to do any more math than i just did to figure that out.  At a high enough rate of return, you come ahead mathematically on the 30 year loan.  But it's not all about the math on where you'll be in 30 years.
 

I don't understand why you would subtract interest? At the end of both mortgages you have a fully paid home. Look at it from a net worth perspective in year 30:

30 year loan
1 Fully Paid Home
468k stocks/retirement, etc in year 30

15 year loan
1 Fully Paid Home
$400k stocks/retirement, etc in year 30

It doesn't matter that the 30 year paid more interest. You come out ahead on a conservative 6% rate. 

And the bolded is true. But imo first time home buyers should have a long-term horizon. And while you cannot put a $ amount on being out of debt, putting a $ amount on interest expense is massively deceiving. It ignores the opportunity cost of investing the difference.

Edit: maybe a better way to look at it. Under the 15 year and 30 year mortgage example you are budgeting $1500/month on home/investments. The difference is the 15 year aggressively pays down the home exclusively in the first 15 years and then focuses on investing. The 30 year allocates some to home and some to investments from the beginning. So the total cash outflows will be the same.

 

Edited May 13, 2020 by LeotheLion

[JBURGE]

On 2/5/2020 at 12:35 PM, theJ said:

Real talk time: if you're concerned about having enough cash for the down payment and closing costs, you may be not be ready to buy.  IMO you should be able to pay closing costs and afford to plop down 20% before really considering to buy.  The reason is twofold: 1) you'll be paying PMI if you have less than 20% equity in a house and 2) you're taking a bloodbath on interest payments.

This is unfortunately becoming impossible where I am as a first time buyer (within an hour of Toronto) due to home prices. You can't save enough in a year to keep up with home price increases, let alone get to 20%. I'll be buying a condo this year with likely 5% down

Edited May 13, 2020 by JBURGE

[Shanedorf]

58 minutes ago, JBURGE said:

This is unfortunately becoming impossible where I am as a first time buyer (within an hour of Toronto) due to home prices. You can't save enough in a year to keep up with home price increases, let alone get to 20%

My Dad once told me that if it doesn't hurt, you're not buying enough house...
I told him that worked 50 years ago but in today's world its gonna hurt no matter what.

I'll add one comment about the mortgages - we've been talking about 15's and 30's and PMI and paying extra. My experience is that most people aren't going to stay in the same mortgage and/or same house for 30 years. For example: If you choose a neighborhood with really good schools, that matters a lot for K-12, but after that it doesn't matter quite as much.

You'll change, your needs will change, your home size will change throughout your life and so will your finances.
Find a home and a mortgage you can live with for 5 -7 years, who knows what happens after that. Look back 5-7 years ago and you were a completely different person with different finances and different needs. The same holds true going forward, especially for the demographic at FF.  Take it from an old guy -  the only thing that is certain about your future, is change.

Edited May 13, 2020 by Shanedorf

[MikeT14]

9 minutes ago, Shanedorf said:

You'll change, your needs will change, your home size will change throughout your life and so will your finances.
Find a home and a mortgage you can live with for 5 -7 years, who knows what happens after that. Look back 5-7 years ago and you were a completely different person with different finances and different needs. The same holds true going forward, especially for the demographic at FF.  Take it from an old guy -  the only thing that is certain about your future, is change.

I hold this same train of thought. I am in, what I believe, is my forever home. But things change and I can do a number of different things in 5 -7 years. Kids, move for jobs, refi, etc. 

[theJ]

2 hours ago, LeotheLion said:

Look at it from a net worth perspective in year 30:

Yeah you're right, i was double counting it.  Apparently i should drink coffee or something, wake up better in the morning.

[theJ]

2 hours ago, JBURGE said:

This is unfortunately becoming impossible where I am as a first time buyer (within an hour of Toronto) due to home prices. You can't save enough in a year to keep up with home price increases, let alone get to 20%. I'll be buying a condo this year with likely 5% down

I don't know your particular area.  But i will say i think too many people use this as an excuse where it is entirely possible.  Like i've heard people say that in my area.  You can buy a really nice place in a suburb around me for $150k.  Maybe 200-250 if you want to live in a 2000 sq ft place in the best school district.  

Yet people making 125k combined will say they can't get ahead enough to save up 20% for a downpayment.  To me, what i hear is that they'd rather have two brand new cars, the fanciest new phones, etc.

Yeah it might take more than a year.  I saved for 2 years to buy our first place, and put 20% down.

Again, don't know your area.  Just getting on my soapbox a little.

[TOUCAN]

36 minutes ago, theJ said:

I don't know your particular area.  But i will say i think too many people use this as an excuse where it is entirely possible.  Like i've heard people say that in my area.  You can buy a really nice place in a suburb around me for $150k.  Maybe 200-250 if you want to live in a 2000 sq ft place in the best school district.  

Yet people making 125k combined will say they can't get ahead enough to save up 20% for a downpayment.  To me, what i hear is that they'd rather have two brand new cars, the fanciest new phones, etc.

Yeah it might take more than a year.  I saved for 2 years to buy our first place, and put 20% down.

Again, don't know your area.  Just getting on my soapbox a little.

How does your opinion change when 2 people make a combined about... 80k? That's a pretty substantial drop off.

[LeotheLion]

16 minutes ago, JoshstraDaymus said:

How does your opinion change when 2 people make a combined about... 80k? That's a pretty substantial drop off.

When we first bought our house, our combined income was 90k. Took about 2.5 years of saving (with combined income between 75-90k) but owning a house was a goal. So we lived pretty frugally. Just took 1 vacation in that time that wasn't a car ride away, limited restaurants/bars, etc.

That type of sacrificing isn't for everyone but if owning a home is a goal then there are things you may have to give up to make it work. It also helps that $250k could buy a 4 bedroom home in my area.

[TOUCAN]

2 minutes ago, LeotheLion said:

When we first bought our house, our combined income was 90k. Took about 2.5 years of saving (with combined income between 75-90k) but owning a house was a goal. So we lived pretty frugally. Just took 1 vacation in that time that wasn't a car ride away, limited restaurants/bars, etc.

That type of sacrificing isn't for everyone but if owning a home is a goal then there are things you may have to give up to make it work. It also helps that $250k could buy a 4 bedroom home in my area.

See the thing is we do not live really outside of our means, but my god is rent expensive in our area and to make matters worse we have 3 dogs.

[scar988]

28 minutes ago, JoshstraDaymus said:

How does your opinion change when 2 people make a combined about... 80k? That's a pretty substantial drop off.

My wife and I were making around that when we bought our house. Saving up around 5K takes about 6 months if you're disciplined enough. stop eating out. always cook at home. Don't by garbage and pinch every penny.