Home buying thread

Khane · Dec 10, 2014

koljec_sl said:
Longer term loans with low interest rates can be a practical way of keeping money liquid in the short-term.

This is true, however in practical terms most normal people can't even come close to beating paying down their mortgage early by investing what they would pay towards principle instead. Even with interest rates as low as they are now. Especially if it's a newer loan (you have more than 20 years left on it).

Savvy investors probably plan on a 7-8% return on average, so even savvy investors aren't beating paying down their mortgage early. You have to get lucky or be warren buffett.

koljec_sl · Dec 10, 2014

Khane_sl said:
This is true, however in practical terms most normal people can't even come close to beating paying down their mortgage early by investing what they would pay towards principle instead. Even with interest rates as low as they are now. Especially if it's a newer loan (you have more than 20 years left on it).

Savvy investors probably plan on a 7-8% return on average, so even savvy investors aren't beating paying down their mortgage early. You have to get lucky or be warren buffett.

Yeah, early repayment of loan is not the highest priority for me. Meeting the equity threshold to remove PMI and early repayment/forgiveness of student loans will probably come first.

The tax deduction is also a bit of a mitigating factor.

Khane · Dec 10, 2014

koljec_sl said:
Yeah, early repayment of loan is not the highest priority for me. Meeting the equity threshold to remove PMI and early repayment/forgiveness of student loans will probably come first.

The tax deduction is also a bit of a mitigating factor.

Picking which debt to get rid of first is obviously prudent. But your goal isn't to invest it in the market rather than paying the mortgage off early because you think you can make more money that way. Your goal is getting rid of debt that is more costly to you before you get rid of your mortgage.

Tax deduction probably shouldn't be considered a mitigating factor though. It's literally pennies on the dollar.

fred sanford · Dec 10, 2014

Rant.... my wife and I had an inspection done on a house yesterday that we were really excited about. Turns out we won't be buying it. Keep in mind the sellers disclosure on this house listed everything as fully functional:

Downstairs furnace, cook top, garage door opener, garage door spring, and sprinklers were all broken
The A/C units had some mold on the coils
Their were a small amount of German cockroaches
The tile job in one bathroom was a bit wonky but did not appear to have any leaks

All of this could be negotiated and dealt with easily but what killed it was that one of the upstairs bathrooms had flooded at some point with no repairs. The owner appears to have just done a cover up to hide it. He painted the ceiling downstairs, cleaned the hell out of and painted the bathroom, and replaced the carpeting in the room next to the bathroom with wood flooring (but left the original foam padding from the carpet).

This guy was a bit of a pain from the get go, he doesn't speak any English and tried really hard to negotiate that he could rent the house for one week after closing to get a new house. He was going to pay cash for the new house but didn't have one picked out with our closing in 30 days (we refused). To top it all of he wants a copy of the inspection which I'm really ticked off about being that he didn't disclose anything and obviously tried to hide a potential major issue. I'm considering giving him the report so he can hide his issues better .... for the cost of my inspection.

Brando · Dec 10, 2014

Khane_sl said:
So in other words, that disclosure document he sent me with all the shit he had said would be waived is the document you're talking about?

The GFE has to disclose any and all cost whether your paying for it or not. Box A should show lenders discount and if that doesn't show a credit to cover all the costs and you have nothing else in writing then yeah, it's bullshit.

Tenks_sl said:
Are there any gotyas for buying a property that has water on it? I'm looking forward to what I may want out of my next house and I'd really like to live on the river in my town. But I don't know if there is some catch like your homeowners insurance skyrockets or anything like that. Or if there are any unexpected consequences of owning a bit of river.

Flood insurance is managed by the FEMA in that you're either in a flood plain or you aren't. If you are in a flood plain then you have to buy into the flood insurance program. Since this is really rare in SoCal I have no idea on costs for it.

Khane_sl said:
Harfle the only thing I'll say is based on my experiences and what I know now 5 years after I purchased my first home on a 30 year fixed I would never, ever again buy a home on 30 year loan.

My current belief is if you can't afford the payment on a 15 year loan you can't afford that house. In fact I'd argue if you can't afford the payment on a 10 year loan you can't afford that house.

Because of the amortization schedule on 30 year loans even if you get a low interest rate you'll still pay close to 100% of the actual loan price in interest. I bought my home at 4.5% with a $240K loan amount. I've already paid about $54k in interest in 5 years. If I just kept making normal payments every month for the entirety of those 30 years I'd end up paying around $250k in pure interest. It's throwing money away. On a 10 year fixed that total interest paid would be close to $70k at that interest rate. Which is still a ton of money, but much better than the 30 year amount.

Almost nobody keeps a loan for 30 years now, average life of a loan is almost over 4 years. I'd always recommend getting an ARM if possible but I don't think VA offers them anymore. Over a 30 year period an ARM rate and a Fixed rate end up being almost the same.

AladainAF · Dec 10, 2014

I would disagree (somewhat) on the 30 year note deal, depending on costs of course. YMMV but I have a 30 year fixed loan on my primary residence at 3.5%. I put 20% down to avoid PMI (a must IMO for a 30 year), and doing an amortization on it, 61.6% of the loan value is the interest amount. I could have easily afforded a 15yr at 2.5% (at the time) but doing the math I'd do better with the 30 over time (especially given my tax situation which is another matter). I also do make 1 additional pure principal payment per year, which if done consistently makes it a ~23 year mortgage.

I would agree that getting a 30 year note over a 15 when you're putting down 0-5% down is pretty stupid in most cases. A 30 year without PMI and managing your money properly can have its advantages over a 15.

Cad · Dec 11, 2014

Khane_sl said:
Harfle the only thing I'll say is based on my experiences and what I know now 5 years after I purchased my first home on a 30 year fixed I would never, ever again buy a home on 30 year loan.

My current belief is if you can't afford the payment on a 15 year loan you can't afford that house. In fact I'd argue if you can't afford the payment on a 10 year loan you can't afford that house.

Because of the amortization schedule on 30 year loans even if you get a low interest rate you'll still pay close to 100% of the actual loan price in interest. I bought my home at 4.5% with a $240K loan amount. I've already paid about $54k in interest in 5 years. If I just kept making normal payments every month for the entirety of those 30 years I'd end up paying around $250k in pure interest. It's throwing money away. On a 10 year fixed that total interest paid would be close to $70k at that interest rate. Which is still a ton of money, but much better than the 30 year amount.

This is completely ignoring what that money would/could be making for you if you didn't sock it into a fixed asset for those 30 years. If you can get a sub-4% loan fixed for 30 years, it is literally free money. You would be stupid not to take it.

Selix · Dec 11, 2014

Cad_sl said:
This is completely ignoring what that money would/could be making for you if you didn't sock it into a fixed asset for those 30 years. If you can get a sub-4% loan fixed for 30 years, it is literally free money. You would be stupid not to take it.

Well things kind of get tricky with this method. You sort of have to take the extra money you save from renting vs owning and use that to buy a fixed asset every x months or so right? And so long as your rent doesn't rise over 30 years and your cost to rent is cheaper then cost to own then we are potentially talking about making money.

Joeboo · Dec 11, 2014

Tenks_sl said:
Are there any gotyas for buying a property that has water on it? I'm looking forward to what I may want out of my next house and I'd really like to live on the river in my town. But I don't know if there is some catch like your homeowners insurance skyrockets or anything like that. Or if there are any unexpected consequences of owning a bit of river.

Yeah, find out what Flood plane the property is in(county assessor can usually tell you, the rating will generally be a letter of some sort. A, AA, G, F, etc) and get an estimate from your insurance company as to how much flood insurance would be. Depending on the severity of the flood plane rating, I've seen flood insurance that is anywhere from inconsequential(couple hundred bucks a year) to nearly financially crippling (4-5x the cost of homeowners insurance). It can vary WILDLY.

And if the flood plane rating that is on file with the county is fairly old and out of date, you might have to hire a surveyor to get a new rating on your property, and that isn't cheap either.

Khane · Dec 11, 2014

Cad_sl said:
This is completely ignoring what that money would/could be making for you if you didn't sock it into a fixed asset for those 30 years. If you can get a sub-4% loan fixed for 30 years, it is literally free money. You would be stupid not to take it.

Read my previous post about this. I explained why this isn't true. At all. Just because you made 30% this year on a healthcare index mutual fund that requires you to have invested at least 50k in to begin with doesn't mean that happens year in and year out. There are plenty of years where even Vanguard funds have been losers.

Paying down debt isalwaysa winner. Investing in the market isn't.

Cad · Dec 11, 2014

Selix_sl said:
Well things kind of get tricky with this method. You sort of have to take the extra money you save from renting vs owning and use that to buy a fixed asset every x months or so right? And so long as your rent doesn't rise over 30 years and your cost to rent is cheaper then cost to own then we are potentially talking about making money.

I'm not saying don't buy a home; I'm saying get a loan under 4%, and just let that shit ride and do not pay it off early. The interest is low enough thats its lost in the noise of inflation. Save your money by investing it (or buying more houses to rent out, or opening a business, etc).

Cad · Dec 11, 2014

Khane_sl said:
Read my previous post about this. I explained why this isn't true. At all. Just because you made 30% this year on a healthcare index mutual fund that requires you to have invested at least 50k in to begin with doesn't mean that happens year in and year out. There are plenty of years where even Vanguard funds have been losers.

Paying down debt isalwaysa winner. Investing in the market isn't.

30% doesn't happen year in and year out, but it does happen. I have an approximately 800k mortgage at 3.2% that I could pay off from my Vanguard account if I want to. Is that a winning idea? Fuck no. The only years that would be a good idea would have been 2008 and 2009 maybe, and even then, with real estate prices through the floor, would be a good idea to take that 800k and buy some rental properties. What good does it do me to have my capital locked up in a house I live in when I can be buying income producing assets with that money?

Khane · Dec 11, 2014

Cad_sl said:
30% doesn't happen year in and year out, but it does happen. I have an approximately 800k mortgage at 3.2% that I could pay off from my Vanguard account if I want to. Is that a winning idea? Fuck no. The only years that would be a good idea would have been 2008 and 2009 maybe, and even then, with real estate prices through the floor, would be a good idea to take that 800k and buy some rental properties. What good does it do me to have my capital locked up in a house I live in when I can be buying income producing assets with that money?

You seem to think that it's a 100% guarantee you'll do better in the market. It's not even close to that. And if you're doing that well it's because you're savvy. Most people aren't. My advice was for the layman. Not the seasoned financial investment guru.

Here's the problem I have with what you're saying. It's what almost every mortgage banker says. You know why they say that? Because that kind of attitude in consumers makes the mortgage bankers money. Joe shmoe hears that same story from every one. "Well interest rates are so low you're better off investing that money elsewhere". As if just buying stocks blindly will automatically make them money. It also ignores the fact that most joe shmoes buy shitty "starter" houses (a bad investment from the beginning almost certainly) and are fed this bullshit of "such low interest rates" without ever being told or realizing what amortization is and how much damn money it costs them. Sell someone a 3.5% loan and they probably think "so I'll be paying 3.5% of that 100k in interest, that's $3500 right? That ain't bad!". People are stupid, and you can't expect stupid people to make money in the market, yet every mortgage banker talks to people like their warren buffett. You have to realize most people don't even know what Vanguard is. My frigan mortgage banker asked me "what's Vanguard" when I told him I could liquidate some of my Vanguard funds if needed at closing.

I finally settled on a mortgage company yesterday, after 2 weeks of haggling, negotiating and shopping around. The entire process has me feeling exhausted and disgusted. Most people don't have the patience I do nor do they have the willpower to deal with people who are clearly trying to take advantage of them while shopping around. I hate mortgage bankers. And I hate how convoluted and confusing the entire mortgage buying process is.

Cad · Dec 11, 2014

If you just buy index funds, there is a virtually 100% guarantee that, over a certain wide enough time horizon, say 10-12 years, you will make significant money in the market.

Khane · Dec 11, 2014

Cad_sl said:
If you just buy index funds, there is a virtually 100% guarantee that, over a certain wide enough time horizon, say 10-12 years, you will make significant money in the market.

I completely agree with you over that length of time. Though instead of saying significant let's say 7-8% return rate on average (which is quite good). And at 7-8%, because of how amortization works, there's a good chance you're still paying more in interest in that time frame on a 30 year fixed rate mortgage than you're making in the market.

Deathwing · Dec 11, 2014

Please explain the math on that one, assuming longterm rate of return is greater than the interest rate of the loan.

Khane · Dec 11, 2014

This is actually a good exercise because maybe I'm a complete retard. But it's fairly involved so I'm going to work it up and post back here when I'm done and let the sharks swim around it for a while.

Deathwing · Dec 11, 2014

I'm curious, how would you do that comparison? X extra dollars in payments made yearly, either into the stock market at Y interest or into the loan at Z interest. When the early payments scenario pays off the loan early, put X into the stock market until the other scenario pays off the loan, then see who has more net dollars?

Khane · Dec 11, 2014

OK Here we go. I used this mortgage calculatorMortgage Calculator. As a reference and put 0% for taxes and 0% for PMI because we are only concerned in the difference of interest paid vs stock market gains.

Since I've been mortgage shopping I used my own mortgage as the example:

218,000 loan amount, no PMI (never get a mortgage with PMI, it's throwing money away for no good reason)

The following makes some assumptions:

1) You're in your "forever" house, meaning you don't plan on moving 5 years after you buy the place (that's an entirely different discussion)
2) You can actually afford the house, therefore you could afford to choose between a 30 year fixed and a 10 year fixed

4% was the lowest interest rate I was quoted in recent weeks for a 30 year fixed at my loan to mortgage value which is at roughly 75%.
3.25% is what I actually locked in at for the 10 year fixed I will be switching to at that loan to mortgage value

30 year fixed at 4% gives a monthly payment of $1040.77. This is just principle and interest.
10 year fixed at 3.25% gives a monthly payment of 2130.27. Again, just principle and interest.

That's a difference of 1089.50 a month or for simplicity sake $13074 a year.

Investing that difference of $13074 (instead of paying down your mortgage in 10 years) and getting 7% gains over the course of that 10 years gets you $62540.62 in investment profit. ($13074 the first year gains $915.18, add that together and add another $13074 for the next year and you gain 1894.42 in year 2, etc). Now that's at a VERY good 7% return rate year in and year out for 10 years. That is much better than your average investor.

According to the latest 2014 release of Dalbar's Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

Source:Why The Average Investor's Investment Return Is So Low - Forbes

Meanwhile, you've spent $78640.86 in interest over that same 10 year period on your 30 year loan. So you've spent $16100.24 more in interest than you've gained in investments had you invested that extra monthly income rather than paying down your mortgage. Not only that but you'll have to pay taxes on your investment gains (though if you're investing in index funds you'll be earning some dividends on those investments as well). And that's if you beat average rate of return on investments by almost 5% per year.

Khane · Dec 11, 2014

To answer your question Deathwing I completely ignored everything after the 10 year loan would have been paid off. Investing the extra 1040/mo you'll have after paying off the 10 year for the next 20 years you still have the 30 year fixed rate blows the 30 year option out of the goddamn water. It's not even close at that point.

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