Advice to my Son: high mortgage rates vs rent

[Revelate]

Harris  County is where my now rental property is  2.12%.  This is higher than elsewhere but Texas doesn't have a state income tax.

I'm firmly in the camp of buying vs mortgage.  Over the long term in any reasonable area to buy housing does appreciate (though I expect prices will be dropping in a lot of areas soon I don't think Houston is one of them).

Also the amount you pay that goes to interest decreases over time.

Mortgage right now, an ARM isn't a bad idea because I think medium term this inflation and therefore interest rates aren't sticking around short of a nuclear war or the Chinese economy imploding.  

[Kforce]

Not trying to do any math.

I purchased a house when rates were above 12%

Refinanced a couple of times as rates fell over the years.

Made a lot of money on the house.

A fan of purchasing, have never lost on any of my houses comparied to renting.

Current rates really are not that bad.

[disdreamin]

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@2b2rich wrote:
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Granted they would have Home Owners insurance in addition and normal upkeep (though he wants new or to build new so that he doesn't need to start putting money into it right off the bat).  He is also a first time home buy if that makes any difference. 

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For what it's worth, there are a lot of hidden costs with new builds that you don't run into when buying an existing property. I'd read up on it and was aware of it as we were designing our home, but the amount we shelled out the first 2-3 years or so for things that would already have been taken care of with an existing new-ish home were still a bit shocking. Just something to make sure your son is aware of if he's doing a new build to save money on repairs/upgrades.

As someone who bought just prior to the fun times of ~2008, it sounds like your sons approach is a reasonable one. We had mortgage professionals saying we were approved for 2x the mortgage we eventually decided we were comfortable with. I'd always recommend erring on the conservative side if that's what makes you comfortable. The only thing I would advise when building is to go for square footage over all else, every time. I don't regret a single expansion we did to the original design, but I DO regret skipping some of them to save a few dollars a month on the mortgage.

[2b2rich]

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@Anonymalous wrote:

@2b2rich, it doesn't sound like there are any real financial issues. That makes this more a lifestyle choice than anything else. And when it comes down to it, interest rates aren't really that high right now. It just feels high because we're coming out of a period with the lowest interest rates in all of recorded history. (Not exaggerating -- see the graph in the article below.)

https://www.businessinsider.com/chart-5000-years-of-interest-rates-2015-9

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I believe you nailed it.  I know that he feels like the money he is paying for rent each month is every month he could be paying toward a mortgage principal and I understand him there.  On the other hand, I believe they are more motive driven by the fact that they've just had their 2nd child and have really outgrown their apartment and are thinking 'if we have to move again, it might as well be into our OWN home.  Who can blame them?

[2b2rich]

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@1t2b wrote:

I think it feels that way more b/c the prices have spiked 50 to 100% in many areas in the last couple of years, no? I'd happily take the double digit interest rates of the 80s if I could have a fraction of the savings in prices from the 80s

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i don't know how our housing economy became such a monopoly.  My jaw dropped at the bidding wars I read about.   I couldn't understand why Investors were wanting to grab everything they could as rental property at a time when so many people were not paying rent or struggling to.  Then it dawned on me that they may have seen a golden opportunity where landlords were sinking because of it and willing to unload it   People who had 2nd and 3rd homes or a couple extra homes they used as rental property were selling because they couldn't afford to pay the mortgage when they weren't receiving rent to do it with.  I get that, both sides I understand.  Investors knew if they didn't, someone else would take advantage.  I'm guessing it was this behavior that drove the prices up?  I have a bachelors in Accounting, but struggled through my year of the Econmonic Curve, Supply & Demand.

[2b2rich]

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@MortgageMama wrote:

I think you pretty much put it in a nutshell with your comment here, "Their apartment is a small 2 bedroom and the kids have no where to play, inside or outside.  With their own home, they will have a yard and another 600sq ft living space than they do at the apartment..."

Just to prove out your theory: Assuming a 250K purchase with 20% down, over a time period of 5 years, the total principal and interest payments could be around 83K vs. 120K in 2,000 monthly rent. That's a 37,000 savings over 5 years. Plus, rents have been marching up year after year: iProperty Management 

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EXACTLY!!! 100% spot on!

We would both love to have a new house somewhere.  I live in the middle of a town that has grown by leaps and bounds (my home's value has doubled in the 7 years I've owned),  and the street is busy, now more than ever.  I have began to notice the smell of exhaust fumes more and more and I just want a little further out.  I want to sell and move, but currently I have a 3.5% on a 30 year fixed.  Going from a 3.5% to even a 6.5% WOULD cost ME.  I've explained this because I would never want him to think that I would give him advice that I wouldn't take myself.

[2b2rich]

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@VetMom wrote:

First I was shocked how much my mortgage dropped, refunds rolled in after closing in 2019. 

My financial advisor begged me to buy. Mortgage way lower than my rent BUT my child (buckeye in sports media)is listening to my advice. Please build 401k/ investments and "emergency fund" before home purchase. I paid off SUV as a b day gift. So many naive buyers fall for the "if you pay rent you can afford a mortgage" myth. Get in over their heads.

I completed a gorgeous renovation and my kids see the upkeep is still a killer! Can't call the maintenance man and I refuse to cut corners(I call professionals). Good luck to your son. One of my children regrets not listening to my financial advice. Haha

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This is true.  Like you I am 100% and do not pay property taxes.  My house was built in 1960 and had been taken very good care of, but there have been a lot of thing that needed replaced that were expensive because those things had been grandfathered in when I bought the house.  An example was a rusted bolt in the meter box ($1.50 item) ended up costing almost $4K because the electrician had to get a permit.  (The bolt had become loose and was causing a Reverse Neutral in the current through my home.  It could have burned my house down at any time.  The power company removed the meter and also removed their power line from the riser on top of my house. That is how dangerous it was).  Well, because the City Inspector was going to have to come out and sign off after the work was done,  we had to get a new meter box (because someone had installed a central heat and air without a permit and ran it into the box in a way that was out of code), and before the power company could reconnect the line to the riser on top of my house, they rise had to be replaced to bring IT code too.    He saw me stress for the 3 days we lived with a generator and the cost to correct all of this and he is just determined he's going to have either new, or fairly recently built.  I can't blame him.  

[2b2rich]

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@disdreamin wrote:

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@2b2rich wrote:
<snip>

Granted they would have Home Owners insurance in addition and normal upkeep (though he wants new or to build new so that he doesn't need to start putting money into it right off the bat).  He is also a first time home buy if that makes any difference. 

---

For what it's worth, there are a lot of hidden costs with new builds that you don't run into when buying an existing property. I'd read up on it and was aware of it as we were designing our home, but the amount we shelled out the first 2-3 years or so for things that would already have been taken care of with an existing new-ish home were still a bit shocking. Just something to make sure your son is aware of if he's doing a new build to save money on repairs/upgrades.

As someone who bought just prior to the fun times of ~2008, it sounds like your sons approach is a reasonable one. We had mortgage professionals saying we were approved for 2x the mortgage we eventually decided we were comfortable with. I'd always recommend erring on the conservative side if that's what makes you comfortable. The only thing I would advise when building is to go for square footage over all else, every time. I don't regret a single expansion we did to the original design, but I DO regret skipping some of them to save a few dollars a month on the mortgage.

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That makes sense.  It's usually way less expensive and everything else to replace things like formica counter tops with natural type stone etc later than it is to build on to the structure of your home.  This is something that I have been pondering also while I'm considering buying a new place. Thank you!

[1t2b]

My understanding is ibuyers 

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@2b2rich wrote:

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@1t2b wrote:

I think it feels that way more b/c the prices have spiked 50 to 100% in many areas in the last couple of years, no? I'd happily take the double digit interest rates of the 80s if I could have a fraction of the savings in prices from the 80s

---

i don't know how our housing economy became such a monopoly.  My jaw dropped at the bidding wars I read about.   I couldn't understand why Investors were wanting to grab everything they could as rental property at a time when so many people were not paying rent or struggling to.  Then it dawned on me that they may have seen a golden opportunity where landlords were sinking because of it and willing to unload it   People who had 2nd and 3rd homes or a couple extra homes they used as rental property were selling because they couldn't afford to pay the mortgage when they weren't receiving rent to do it with.  I get that, both sides I understand.  Investors knew if they didn't, someone else would take advantage.  I'm guessing it was this behavior that drove the prices up?  I have a bachelors in Accounting, but struggled through my year of the Econmonic Curve, Supply & Demand.

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My understanding is ibuyers took up like 25-30% of the market so supply went even lower than we'd have expected after the fallout of the last crash and the major slowdown on new builds for awhile. Of course now those ibuyers are making up a large chunk of active listings and they're sitting for long periods or being sharply discounted. It appears many ibuyers (hello opendoor, zillow) have lost money b/c of it, and serves them right. Unfortuantely it won't correct the market as much as it should. In 2019 we were offered our neighbors house for 465, which we thought was a bit overpriced and declined (stupid in hindsight). It ended up selling for 485 a couple mos later. One year after that (covid times/bidding wars) it was listed for 585k and went for 690k! Insane. If things had been normal, it would've been like 150k less had it sold this year. That's nuts. Then you add in the interest rate spikes and...it's ugly, even w/ recent pricing stability or decreases.

[Rottweilerlvr]

I really want to buy a home but being a single Momma, it's very difficult to save. Even as a Veteran and using a VA loan, I still have to pay closing cost, which the last time I looked was going to be about 8k. I've been paying someone's mortgage and lifestyle my whole adult life. It doesn't help that when my income goes up so do houses so I keep getting priced out of houses that I like.