Home Buying Help Thread

[theJ]

@MKnight82

What's interesting is that some would look at the numbers you posted and use those for justification to jump to the purchase early.

Others will look at the numbers and use them as justification to wait because the security is worth more than a minor mathematical benefit. 

It's an interesting debate of personal finance that I've talked about on this board probably a dozen times now in various personal finance threads. 

[MKnight82]

26 minutes ago, theJ said:

@MKnight82

What's interesting is that some would look at the numbers you posted and use those for justification to jump to the purchase early.

Others will look at the numbers and use them as justification to wait because the security is worth more than a minor mathematical benefit. 

It's an interesting debate of personal finance that I've talked about on this board probably a dozen times now in various personal finance threads. 

I mean 5% guy in the example can take that money he didn’t put in the house and invest it elsewhere.  

[Forge]

1 hour ago, theJ said:

If you can party the PMI upfront, why not put more down and avoid the PMI? Am I missing something?

Because it may not change much with regards to you payment, mi coverage requirement, etc. 

The PMI up front isn't like 30k. Depending on coverage requirements and all that jazz, you may get a 300k house with 3.5k pmi up front at 95% (no mi then added to your monthly). That 3.5k doesn't remove your PMI if you put it down up front, and it's not even enough to get you down to a lower block of mi coverage requirements (would have to get to 90% to get to a lower coverage requirement, but would still have pmi). Going from 95% to 80% on 300k is an additional 45k. So it's not really the same thing. 

Let's say you do a home ready loan, 25% coverage for a 285k loan at 95% (300k PP).  That's 15k down + costs. If you take the 3.5k you'd need for up front mi and put it on your down payment, your ltv is still 93% and you still need 25% coverage, and it only decreases your monthly mi a nominal amount. At 285k / 95%, your monthly is $81. Put that 3.5k on your down payment, your mi is still 79.75 / month

It takes about 3.5 years to make up the monthly before you come out ahead if you pay it up front.  So lis, you only do it if you're going to be there a while and aren't going to refinance

(Those figures are for excellent borrowers, should be mentioned)

[theJ]

9 hours ago, MKnight82 said:

I mean 5% guy in the example can take that money he didn’t put in the house and invest it elsewhere.  

Yeah he can.  That's the argument i always hear.  Minimize the downpayment, don't pay ahead on the mortgage, invest what you could put in the mortgage, because the mortgage only makes you ~4%.

I ran the math years ago when i first bought my house.  The 5% guy gets ahead on the short run, and the 20% guy catches back up some later because his payments are lower.  20% guy can really catch up if he pays the house off early.  In the end the 5% guy does end up ahead, if the returns are consistent.  But extrapolated out to retirement he's only a few percent ahead total, which falls within the noise of the market.  In other words, market timing could flip the script the other way.

It's again a discussion about risk management.  5% guy is more likely to end up with some amount of money more than 20% guy.  He's also more likely to run into a major financial hiccup because he's running closer to the edge.

[MWil23]

@Forge @theJ

My wife and I are currently building a house, and for a Construction Loan, you just need 10% down to avoid PMI. It's funny, because I had them run the number if I plunked down 20% (vs. the 12% I put down), and it only changed my monthly payment by $103 less per month. So, I decided to sit on the extra $20-$29K and save it/invest it/use it on house projects and furnishings.

We also locked into a 5-1 ARM, which I'm not a huge fan of, but we got a 3.3% interest rate, compared to a 4+% rate on a conventional 30 year, saving us a LOT of money over the next 5 years. My plan is to refinance the loan to a 15 year mortgage in the next 5 years when:

A. My wife goes back to work full time (she's currently 20 hours a week while our 3 kids are at home, oldest heads to Kingergarten next year)

B. Assuming interest rates stay this low or even go lower

I know that in the "long run" over the next 20-30 years, with the % return on my investments being more than my house, I'll likely "lose" in the long run, I'd rather have the "guaranteed return" on my own house investment (which no one can take from me) and peace of mind with less balls in the air. I can then roll the money I'd spend on a mortgage into more investments, while I'm currently paying into my STRS (State Teachers Retirement System) pension and my secondary Mutual Fund investments.

Granted, while some see this as being overly conservative, I'd rather not risk the market/my house, especially since I have a retirement (government) and a secondary retirement (private).

JMHO

[holt_bruce81]

The 20% is a very interesting debate and I love reading both sides of it. 

A question I was kind of asking around, If you can't meet your 20% is it worth putting down more than 5% or would you rather have that money for other expenses? 

[MWil23]

1 hour ago, holt_bruce81 said:

The 20% is a very interesting debate and I love reading both sides of it. 

A question I was kind of asking around, If you can't meet your 20% is it worth putting down more than 5% or would you rather have that money for other expenses? 

IMO, if you put down 5%, I'd hold onto that money for various other things, whether that's saving up until you can get the 20% on refinancing (I'd personally recommend this per my rationale above) so that you can get rid of PMI or refinance to a 15 year mortgage/conventional 30, etc. Your monthly payments won't really go up "that much", but the PMI is what will hurt on the "monthly end" of things IMO.

For the sake of argument, if you took 20% of $278K and put it down vs. 12% of $278K, your monthly bill would be approximately $103 a month less (depending on your interest rate and credit score), whereas the extra 8% is $22,240 of cash to have/use at your discretion. 

Also, if you like your interest rate, what I've done in the past is "make my own" 15 or 20 year mortgage by making extra payments on the principal. So, if something comes up and I need the cash, I stop making these payments as I'm not locked into an aggressive rate (as a fail safe), but that's usually one of the last things I cut/stop.

Does that help?

[skywindO2]

8 minutes ago, MWil23 said:

Also, if you like your interest rate, what I've done in the past is "make my own" 15 or 20 year mortgage by making extra payments on the principal. So, if something comes up and I need the cash, I stop making these payments as I'm not locked into an aggressive rate (as a fail safe), but that's usually one of the last things I cut/stop.

This is basically what everyone should do, at least if they didn't start with a 15 year mortgage. From my minimal research on the topic, refinancing from a 30 to 15 year mortgage is not worth it. It'll take years for the money "saved" on the new mortgage to pass the upfront costs of switching. If you overpay your 30 year at 15 year rate, you'll probably end up saving more money than going through the formaly refinance process anyway. Plus like you said, you have that added security blanket of being able to effectively lower your mortgage payments on your own if you need to. 

[MWil23]

6 minutes ago, skywindO2 said:

This is basically what everyone should do, at least if they didn't start with a 15 year mortgage. 

Agreed

6 minutes ago, skywindO2 said:

From my minimal research on the topic, refinancing from a 30 to 15 year mortgage is not worth it. It'll take years for the money "saved" on the new mortgage to pass the upfront costs of switching.

TBH that completely depends on the interest rate. For example, if you can get 1/2 to 1 point less on that rate, you'll see pretty immediate cost/benefit of switching.

6 minutes ago, skywindO2 said:

If you overpay your 30 year at 15 year rate, you'll probably end up saving more money than going through the formaly refinance process anyway. Plus like you said, you have that added security blanket of being able to effectively lower your mortgage payments on your own if you need to. 

It also depends. Some lenders will waive some of those "closing cost" fees if you refinance with them, whereas others will not do this. However, for many, that extra security of knowing that you could hold off when circumstances/expenses happen may be very beneficial.

[theJ]

9 minutes ago, skywindO2 said:

This is basically what everyone should do, at least if they didn't start with a 15 year mortgage. From my minimal research on the topic, refinancing from a 30 to 15 year mortgage is not worth it. It'll take years for the money "saved" on the new mortgage to pass the upfront costs of switching. If you overpay your 30 year at 15 year rate, you'll probably end up saving more money than going through the formaly refinance process anyway. Plus like you said, you have that added security blanket of being able to effectively lower your mortgage payments on your own if you need to. 

Yep - you can run the math to verify, but the interest rates have been low enough for long enough that there probably aren't too many people out there sitting with a 7% mortgage looking to refi to a 3.5% on a 15 year.

There's no need to refinance if you can't beat your interest rate.  Just pay extra and it does the same thing.

@MWil23 i want to come back to your posts later, but don't have time at the moment.

[skywindO2]

22 hours ago, The_Romen said:

Just bought my first place. Close next month... What should I do in the mean time to prepare, besides all the packing and things like that?

Are you planning to do any light work like painting? It's cheap and easy but even easier if you do it before you get all your stuff moved in.

Plan on at least a day of deep cleaning too. Clean out and vacuum airducts, carpet clean, wipe down all surfaces with a strong cleaner. Unless it's a brand new construction, kitchen cupboards will likely have some grime and grease on them(especially above the stovetop). Clean the interior of the fridge too. This is kind of optional(but if you don't do it you're digusting pig) but I wouldn't trust previous owners to do anything above bare minimum cleaning(if at all) and I'm not moving into someone elses filth. 

Hopefully you close on like a Wednesday and take off the rest of the week to do any pre-move-in work since if you're a normal person, you'll recruit friends and family to help you move on a Saturday morning.

I guess most of that is for after close but it's still things you can prepare for ahead of time, start buying and gathering supplies if needed, and if you are painting, you should definitely be looking for the color you want now. 

Edited February 12, 2020 by skywindO2

[TOUCAN]

Is there anyone clever enough to delve into the realm of loan types for houses that need work done?

[MWil23]

15 hours ago, JoshstraDaymus said:

Is there anyone clever enough to delve into the realm of loan types for houses that need work done?

@theJ @Forge probably would. My brother in law got a specific type of construction loan for his house where he did this. The catch was that he had to hire out the work to an approved contractor and couldn't do a bunch of it himself.

[theJ]

2 hours ago, MWil23 said:

@theJ @Forge probably would. My brother in law got a specific type of construction loan for his house where he did this. The catch was that he had to hire out the work to an approved contractor and couldn't do a bunch of it himself.

I don't have any experience in that realm.  Most of what i know comes from experience buying and selling a few homes, plus some independent internet research.  I have never even thought about getting a construction loan, so i'm not really sure what the options are.

[theJ]

On 2/12/2020 at 8:33 AM, MWil23 said:

@Forge @theJ

My wife and I are currently building a house, and for a Construction Loan, you just need 10% down to avoid PMI. It's funny, because I had them run the number if I plunked down 20% (vs. the 12% I put down), and it only changed my monthly payment by $103 less per month. So, I decided to sit on the extra $20-$29K and save it/invest it/use it on house projects and furnishings.

We also locked into a 5-1 ARM, which I'm not a huge fan of, but we got a 3.3% interest rate, compared to a 4+% rate on a conventional 30 year, saving us a LOT of money over the next 5 years. My plan is to refinance the loan to a 15 year mortgage in the next 5 years when:

A. My wife goes back to work full time (she's currently 20 hours a week while our 3 kids are at home, oldest heads to Kingergarten next year)

B. Assuming interest rates stay this low or even go lower

I know that in the "long run" over the next 20-30 years, with the % return on my investments being more than my house, I'll likely "lose" in the long run, I'd rather have the "guaranteed return" on my own house investment (which no one can take from me) and peace of mind with less balls in the air. I can then roll the money I'd spend on a mortgage into more investments, while I'm currently paying into my STRS (State Teachers Retirement System) pension and my secondary Mutual Fund investments.

Granted, while some see this as being overly conservative, I'd rather not risk the market/my house, especially since I have a retirement (government) and a secondary retirement (private).

JMHO

Here's what i didn't have time to type yesterday.

First off, congrats on the brand new home!  Wasn't it you that was having trouble finding something last summer, and also having trouble selling your current home?

Secondly, i'm assuming you know the dangers of the 5-1 ARM.  Especially with how bottomed out interest rates have been for the last 10 years, those things feel like bombs at the moment.  If interest rates do rocket up anytime in the next 5 years, you may wish you had that 4% conventional.  I'm hoping you at least have some caps on it, so it can't explode on you down the line.  I do hope you can get into a 15 year though.  IMO it's the second best way to buying a house short of straight up cash.

Lastly, it was probably wise to sit on some cash when building.  I'm sure there will be some changes as you go, or things you want to buy later that haven't crossed your mind yet.  I wouldn't invest it just yet.  Keeping the cash liquid through construction and afterward for a few months is smart in case there are changes (and there always are in construction).