10% down or wait for 20%

[Anonymous]

It will buy you a 1200 sq foot house in Oakland with active shooters around

[Anonymous]

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@Anonymous wrote:

disdreamin made this observation-

" $450K is a paltry amount for a home in some areas, but would buy a relatively high-end home in others.  Which would that amount accomplish for the area you live in?"

In Alabama it will build ANY kind of house you want.  Like 6 a bedroom mansion, 6000 sq ft on a 5 acre lot LOL.

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In my neighborhood, 450K buys a remodeled 3-4 bed/2 bath ranch on a 1/4 acre.

[disdreamin]

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@Anonymous wrote:

Thanks for all the responses they are very helpful.  We are in Denver so 450k is more middle of the road I would say.  Denver's affordability for middle class is slowly becoming out of reach.  I didn't come up with the 450k figure because it is what we can afford, frankly every calculator I use online suggests we can afford quite a bit more.  People (father-in-law) have urged us to increase our budget but I have no interest in doing that.  I want to own my own home but I am more interested in building wealth through other means with left over income.

We are looking at getting one of the more modest homes in a nice neighborhood.  Also 450k is our absolute max if we see something that fits our requirements for something like 350k that would be great.  I have given thought to a 15 year mortgage as well.  We currently pay rent of $1,600 and still have an extra 7k a month to sock away so I feel confident we could handle this higher monthly payment.

I would have to think about the clause you suggest.  My guess is our landlord wouldn't go for it.  We could also see if it would be possible to go month to month once our lease is up.

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Totally understand your budgeted amount now, given where you live!  As far as the landlord, I'd see if he/she would bite - it's certainly easier with apartment complexes where they expect this sort of thing.  I can see, though, given the area you live in, where having it open up in summer is better.  Especially if you're near schools, the last thing they want are places opening up at odd times (or the dead of winter!).

[Conrad1]

Tarkovsky--Your statistical analysis is very thorough.  Good to see mention of the opportunity costs as well as the real costs of renting.  I would like to complicate your otherwise fine anaylsis by mentioning the federal and state tax implications of purchasing a home, paying interest on outstanding school loans, using schedule A, and so forth.  There are a number of potential scenarios that might have substantial tax implications.  Paying attention to these details is especially critical in the current scenario given that the combined (gross?) income is above 150k, but not substantially above it.  I would assume this is their gross income, rather than their adjusted gross income or modified adjusted gross income.  I am not sure what their line seven income is.  I would assume that it is substantially lower than 180k, especially if they are paying for health and dental insurance through a company plan.  If they have elected for other tax advantaged savings, it could of course be significantly lower.  This is important for federal tax purposes, as the deductions for student interest are phased out from 120k up to 150k.  The maximum is $2,500.  With earnings above 150k, however, no deduction is allowed.  On the other hand, mortgage interest on loans of up to 1 million dollars are deductible in full.  Given their marginal tax bracket, this could represent a potential tax reduction of either 25% or 28% on the interest paid each year.  Of course, one would also have to calculate any of these savings in comparison to just claiming the standard deduction.  With respect to PMI, it has been deductible since 2007, but is reverting to its previoius status of being non-deductible.  In any case, there is an income phase out limit that would put the current couple far above the deduction limit.  Also, it is unclear what type of instrument is being used to save the money for a downpayment.  All of these additional considerations should be considered in making a decision.  I always recall having heard that Jack Welch, yes the Jack Welch of GE fame, rented throughout much of his professional career.  He crunched all of the numbers, including upkeep, taxes, and so forth and came to the conclusion that home ownsership was unprofitable!  This is something to consider, especially if you are putting off or do not plan to have children.  In closing, I should mention that if they are planning to have children and one of the parents will stay-at-home for an extended period of time, this too has profound tax implications.   

[Anonymous]

I don't know the urgency of the situation, but if you and your wife are willing wait 18 months you guys would be in a better financial position. By signing another 12 month lease, you all would have enough money saved by the end to do everything you want. Saving $7000 a month for 18 months gives you an extra $126,000. Add that to the $42,000 you already have saved and you would have $168,000. Now, in 18 months your car will be paid off. You can also pay off your student loans and have your 20% down payment so that you can avoid PMI. You will still have an extra $48,000 left which I would suggest adding to your emergency fund. I don't know what your expenses are but I do know they are sure to rise after buying your home. So better safe than sorry. I hope this helps and good luck to you and your wife. Happy house hunting!

[Revelate]

While I don't think interest rates are going to rise soon (money is flooding into the US seemingly from Europe, people looking for calm amid the storm which is already going strong and may get really messy if Greece exits but I digress) but there's no guaruntee that they will stay flat or decline.

Waiting 18 months in this case only improves things marginally given the criteria the OP posted, and S10's excellent suggestion of 80/10/10 works to avoid the MI.  He's way cash flow positive on that income and can pay off that secondary mortgage in near similar time to saving up the additional 10% downpayment.

Not certain I agree with a 15 year mortgage though: we're likely never going to get cheaper money in our lifetime, so personally I'm going to be taking a 30 year and stockpiling the savings towards the next downpayment 4-5 years in the future if I need a house with a yard on my own similar budgetary numbers for a somewhat similarly priced condo.

Jack Welch example; depends when and where he did the calculation as mortgage vs. rental prices aren't always in lockstep - they aren't right now in S. Cali where rents have risen markedly higher than mortgages in the last few years.  I was just going to rent a 2 bd apartment if I get this new gig which were running for 2K+, then for giggles looked at the mortgage for a 2 bd condo right down the street, and the mortgage only penciled out to 1400/month which adding in taxes / insurance / HOA jumps to that same 2K / month... and I get some money back on the taxes.  A mortgaging I will go as a result... and that is with my non-gold-plated status, and from Chase even which can be beaten rate wise fairly easily.

[Anonymous]

I may be seriously missing something (entirely possible  ) but I only put 5% down on my house and I don't have any PMI...

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@StartingOver10 wrote:

You don't necessarily have to pay PMI with less than 20% down. As I stated earlier, investigate the 80%/10%/10% option with no PMI. You have an 80% first, 10% 2nd and 10% down payment. The second is slightly higher interest rate, but it removes the MI from the loan and you can acclerate the payoff on your own schedule. It is one more avenue to purchase now without the PMI expense.

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[Anonymous]

The only part of the statistical analysis that was missing is investing the money in the stock market. It is a riskier move, but the market tends to return 9% a year, on average. This extra return overcomes the deficits accrued by doing the 10% early. 

Basically, what you're already doing is called interest rate arbitrage. You're paying off the highest rates first. Once you get below 5% rates (I like to give a buffer on the market rate due to the volitility), you can just make minimum payments and let the stock market do its thing. By going the 10% route, you're paying a slightly higher rate now in order to get right of the rent and into your home, as well as keeping your investments intact and saving for the future. Yes, the rate will probably be higher, because you're putting less down. Lenders like to see that 20-25% down payment, since it provides security for them in the event that home values decline again. 

Ultimately, a lot will depend on your situation. It may make more sense to go for a 7/1, rather than a 15 or 30 year mortgage, depending on how long you think you'll be in the house. There is a reason why a 7/1 has a lower interest rate than a 15 year or 30 year mortgage: the bank isn't locked in for as long. However, if you think you might only be in the house for 5-10 years, and you get a 30 year mortgage, you're paying for rate security that you won't use. 

[StartingOver10]

Indy80, there is also a 80%/15%/5% mortgage where the 80% is the first, 15% second and 5% down payment on a conventional loan without PMI.

Or you could have a VA loan or maybe a Fannie Mae homepath type loan (they didn't have MI when they were available).

There are other options too....