Being a real estate newbie, I’ve been reading a lot of housing market articles lately. It seems like everyone has an opinion. Buy now. Buy next year. Sell now. It’s a bubble. It’s not a bubble. You know what it reminds me of? The stock market.
And therefore, just like the stock market, perhaps it is simply best to buy for the long-term and ride everything out. The median home price in June 1976 was $46,100. The median home price in June 2006 was $243,300. Did really matter if a person bought it for $42,000 (10% less) or $50,000 (10% more) back then? Not in my opinion, especially considering I see no proof that anyone can predict housing prices. At the very least, I’m certain that I can’t predict housing prices, and that’s what really matters. Just like the (good) investing books say, it’s time in the market, not timing the market that counts.
Even if I decide to move, I expect my new house’s price to move up or down with the value of my current house. On top of that, I’ll probably try to rent my first house out if at all possible. Finally, if the market does tank, perhaps that will provide a buying opportunity for an investment property.
So here’s my game plan: 1. Get 20% down, or at least 10% and no PMI. 2. Decide on an affordable mortgage amount. 3. Find a good house, regardless of future price predictions. So far I’m still working hard on #1…
Or am I all wrong?
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If you are buying a house for the “long term” then don’t sweat it. Even if the market tanks for the long term and you have to sell your house at a break even (not likely if we’re truly talking about “long term”) – it still beats paying rent where you get absolutely nothing back.
I’d throw another bullet in there – if at all possible, get a 15 year loan instead of a 30 year. You’ll be tempted to go 30 and save a small amount of money, but over the life of the loan you’ll be paying much more in interest (and for 30 years!) I went with a 15 year loan and it was the best decision I ever made.
Great site, BTW.
There’s credit unions that if you have at least 3% down they won’t charge you PMI. My credit union has free biweekly as well and no PMI if you put down 3%. So if you can’t come up with the 20% down to get rid of PMI take a look at alternative lenders.
Add to that a 30 year FIXED mortgage and I agree with your strategy.
Remember, you get one chance to negotiate the price of a house, but you can renegotiate the terms of your loan as often as you like (not that you should).
-Grant
A good starting list, but I think you may choose to refine your definition of “good” house as you move along in your process. As a recent homebuyer; neigborhood, school district, and over all subdivision appearance probably ending up having a significant factor in my decision.
That plan should work as long as collecting the 20% down payment takes at least 18 months. You are correct that you cannot time the market, but you can certainly mis-time it.
Home should be easy as the 1, 2, 3 you noted above. People are getting too swept up in the growth market that is behind us for a few years to come…
I would say you’re right. Go in it for the long run. There is always going to be a need for housing. And if you rent out a place that basically pays all of the bills for that place, then it’s worth keeping since you will gain equity.
One flaw I see in your argument is that I believe its impossible to buy for the long term. If you buy a stock with cash, there are very few scenarios where you would be absolutely forced to sell. A house on the other hand, you are heavily leveraged and not buying with cash.
Suppose you lost your job. You don’t have to make payments on a stock you bought with cash. If that stock is currently trading at 50% of what you bought it for you can hold tight and not worry, the bank will not be foreclosing on you. If that house was trading at 50% of what you bought it for, the bank is going to take the house and come after you for the 29% or so difference you still owe.
Suppose you died. Your wife might not be able to make the whole payments on her own. Again, she’ll be on the hook for the 29% or so that you still owe the bank. You could mitigate this risk by buying a life insurance policy on the both of you but that adds yet another PMI like cost to buying your house.
Suppose you were offered a great job on the other side of town or nearby city. A 2 hour commute each way… You are going to hate that house with a passion. You’re in the hole 29% or so, so you really can’t sell. The rent you would receive on the house would not come even close to covering the mortgage and taxes. You won’t lose money, but you can’t take the new job and you’ll just be a really unhappy camper.
What if the California housing market is like the dotcom bubble? The Nasdaq still has a long way to reach that historical high…
The most difficult part is finding #3 that meets your #2, even with prices down only ~5% from last year, depending on your region’s housing prices.
I have a lot of experience on the inside of real estate (ie not an agent) and as you mentioned the industry is full of “experts” and speculation. Remember first and foremost that a house is a home. That is, its primary function is provide shelter and a place to live for you and your family. Treating it primarily as an investment is likely to land you in trouble, particularly if you use “it’s an investment” as an excuse to over extend yourself financially. That said, I think balancing out your needs for a home with a little bit of thought toward long term value is a good idea. To that end, the old real estate adage about the three most importants things is definitely true. They are “location, location and location”. Location means location within the building/subdivision (if applicable), location within the area (ie is it a nice neighborhood), and location within the town (ie is it close/convenient to key things like jobs). Good luck!
PS – In the midwest area Third Federal has very good 30/fixed rates and an 85/15% PMI cutoff instead of the standard 80/20. Unlike some lenders, they don’t offset the decreased LTV cutoff for PMI with increased rates or fees.
I think you are on the right track. Don’t worry about future price predictions. Remember, there is the housing market as a whole, and then there your city, and then there is your neighborhood, etc. Only by researching and keeping an eye on your neighborhood (where you might want to buy) will you really know when prices are under or overvalued. I truly believe that if you put in the time to do the research you can find a good deal in your neighborhood (it just may take time and a certain level of aggressiveness in your looking). When you find that home (or property) that fits your criteria jump on it.
I wouldn’t sweat over the 20% down. You can still avoid PMI with up to 100% financing by giving a first mortgage for 80% and then a second at up to 20%. Granted, the terms on the subordinate loan will not be as good, but it is an option. With your investing style, I might look for a second loan that is a 30 year fixed with an acceptable APR for about 10 to 15% of the purchase price (avoid HELOCs). You could then take the cash that you would have put into a down payment and make some capital improvements on the house in areas that are likely to raise the value (ie, kitchen, bathroom).
Just remember, you are losing a lot of money in tax benefits by not buying. And yes, absolutely invest for the long term. You can play a shorter term game in real estate (I’m NOT talking about the recent histeria of flipping houses) but your research, knowledge, and pulse on the local and sublocal markets must be very acute.
Hope this helps.
David C.
one thing to think about is if you put money into your house, its hard to get it back out again. ( ie, home equity loans )
the more you put down on a house, the less interest you will pay, but thats less interest you can deduct on your taxes. ( possibly putting you in a lower tax bracket )
think about if you put 5% or 10% down, then invested the other 15% or 10% into a liquid side account that makes more than your mortgage rate. That way you have liquidity and you can pay off the house in the future with your lump sum that is growing at a rate higher than whatever your mortgage rate is.
if you want to avoid PMI, look into taking out 2 mortgage’s, or 1 mortgage and 1 home equity loan.
your own house is not an investment, its a liability.
( cash flow is negative )
Just a few hints Jonathan:
1) try link
or
link
to get some money back.
2) Make sure to ask them about all the fees…everything is negotiable.
3) I don’t know if this still work, but in the past, i heard people pay no fees or even get money back(and not by adding in the loan) by telling the lender you are willing to pay higher interest. Just make sure you can pay if off by refinance using HELOC with the same rate or better (make sure in the original loan that there is no fees for paying it off early). There is no fees with HELOC whatsoever, try find HELOC loans online cuz it’s better than your B&M.
Shop around for mortgages. And also tell the mortgages places where you have found better deals. I saved nearly $200 a month by shopping. Also, if you have to do to a shady mortgage guy, go, but just to get that low price to bargain with elsewhere.
I just bought my house with 0% down, but in shopping found a mortgage with no PMI. So you don’t need the 20%, but it is nice.
Me and my girlfriend just bought a 2BR condo in Boston after renting for a couple of years. The prices around here have been coming down but I’m in it for the long haul. We put no money down and took out 80/20 financing so we are 100% leveraged. The plan here would be to pay off the smaller mortgage and then rent it out in 5-10 years. Seems like a win-win situation considering the price should only go up in the long term.
Nope, you got it all right I think.
Buy a house when YOU are ready. Don’t let anyone tell you that you have to buy a house now or next year, or not. If you are going in with a long-term mindset you will be fine. I see way too many people buying houses, and in their minds they have already sold it again in 2 years for X amount of profit. Many of them are in for a surprise. As you said, it’s like a stock market, impossible to predict.
For a while this real estate thing got us hooked, thinking we have to act or anything. You know what, screw them. We are renting now, and we are happy. And in 2008 we are going to buy a lot in the woods, build a nice house, and raise our family there.
Cheers,
Greg
10% for the 1976 prices may have only been $4600, but it is almost $25,000 now…and I don’t know about you but with $2000 a month payments, that add’s more than an extra year until you own the house, I would say that it would most definatly make a difference to me!
I’ve owned a house for nearly 2 years now. It’s been an interesting experiance to say the least! When I bought the market was going crazy and houses were selling shortly after listed or even a little before if you had insider information. When I bought mine I could have probably quickly turned around and sold it for an additional 30 or 40 thousand dollars (I didn’t). All this brings us to todays market which is somewhat less exhilirating and even a bit scary for a home owner. I still haven’t figured out how to fairly value a home (zillow.com is neat) but it seems like most measures still say my investment is in the green by a reasonable amount still.
I think you are exactly right about timing the market. When you can afford a house you should find a home you think you can live in at a price you think is reasonable. After that only time will tell.
I would caution that owning a home is more expensive than renting; at least from a month to month analysis. It’s amazing all the little maintenance that goes into it. My expenses have been roughly .25%/annually of the value of the home. Most measures I have read recommend expecting ~1%/annually in maintenance costs.
All in all it has been a very rewarding experiance. I like my home and am very happy I went with a more conventional loan (30 year fixed). I don’t plan on living there forever (maybe 5 or 7 years) but I do plan on holding it for the long term by renting it out after I move.
I don’t agree with you about the “would a 10% price increase make a difference” comment. 10% may have only been $4600 in 1976, but if you apply that to today’s prices, thats almost $25,000 more, and if you have house payments of $2000/month, that would add more than year until you own the house, and I would say that would most definatly make a difference to me!
Nice analogy of the housing market compared to the stock market – a lot is based of people’s perceptions and predictions. I think you’re on the right track. A house is a good investment. You’ll live there and it most likely will appreciate in value. Definately get at least 15% down to avoid PMI. I’m in the process of selling my condo, moving and closing a deal on a house. Good luck!
Suggestion for point #3: Find a DECENT house in a GOOD neighborhood and keep an EXIT STRATEGY in mind during your house hunting.
I suggest this for several reasons:
A. Never be the best house in the neighborhood. Your neighbors will hold back your house value and affect your ability to sell.
B. It is better to find a good neighborhood as your good neighbors will lift your house value.
C. Keep in mind that in most areas, smart buyers buy for the neighborhood & school district. A house can always be remodeled or renovated. You can’t do much about your neighbors or the school district.
it is true…. long term housing price does trend up. but if I remember correctly, you live in San Jose area right? I was just up there and the medium home price no where near $243,300. 🙂 so if the housing value doesn’t go up(japan real estate market was stuck for 15 years) , you would end up paying lots and lots of interest for a long time.
I am not trying to discourage you from buying, but every investment comes with risk. as long as you understand the risk and you can stomach it, I say go for it 🙂
Believe you have it correct. Two things though. You are committed to the LONG term or if you are not then you have close to positive cash flow if you decide to rent it out and buy another. Also, l don’t believe in long distance land-lording. Been there done that. Not worth the hassle. Keep the property as a rental for a year and rent it out and at the end then sell and take the loss as a capital loss if that is the situation.
You’re taking a much more logical approach than I did when I bought my first house 3 yrs ago.
I did an FHA loan with 0% down and will be paying approx $50/mo in PMI for several more years. My only other option at the time was to rent, so it turned out to work out better to buy when I did. Interest rates were low, and prices really haven’t dropped that much where I’m at since the ‘bubble’ burst. I’d say buy asap and make extra payments when possible to build your equity and get out of the PMI. It’s much better than paying rent, in my opinion.
I think you want to be careful thinking about buying a house using the analogy of investing in securities. If you’re going to think of it that way, make sure you’re comparing apples to apples. This means, when you’re investing in a house, you’re effectively buying on margin. That’s a bit of a riskier proposition.
We recently bid on a house and had our offer refused. We got lucky, because we later determined it would be imprudent for us to accept the tax burden on this particular (much more expensive than our current) house. The seller, however is decidedly unlucky. They purchased this house in 2004 (about the peak of the housing market here in Rochester, NY) for n dollars. His job was transferred to another city last spring, and this house is still on the market, currently asking n-10,000. Not a situation I’d like to find myself in.
No, you can’t really time the market. But you really should be mindful of value when making such an “investment”.
Have you ever thought about an 80/20 loan instead of coming up with 20% as a down payment? You don’t have to shell out a boatload of money to get into a house and you also don’t pay PMI. Plus, there are literally hundreds of programs out there to look into (your loan officer should choose the best one for you), and being a first time home buyer, you’ll get even more perks. Look into it and maybe you can use that liquid cash in other areas.
Hi, Jonathan — great post! My wife and I are in exactly the same boat, and have already agreed to the same game plan that you posted. However, we live in the hyper-inflated San Francisco Bay Area market (but at least I can walk from my Berkeley office half a block to Gregoire for some potato puffs — woo!). We still can’t get around the belief that it’s simply cheaper to rent in this area than to own, so as much as we love living here we probably will have to move, which totally sucks. I’m simply not paying $650,000 for a dumpy little house. Nope, won’t do it. We know people who spend 50 – 65% of their income just on housing costs — it just ain’t worth it, no matter how many tax breaks Uncle Sam provides.
Anyway, If you’ve never come across this site: http://www.patrick.net/ it’s an interesting blog that talks about the housing “bubble” and has interesting charts and graphs. My question to you is — where do you think you and your wife might put down roots and buy a house? Last I recall, you’re living in Oregon. You like it there?
I am not expert in housing.
But, I think if you can afford the payment of the house now, even with only 10% down, you should still get in and buy a home. You can not lose with real estate in long term, like you said. You have to have to a place to sleep and children to grow anyway. Thus, the key here buy a house that you can “afford”.
Unlike stocks, what you buy as a first home relates to where you need to live because of work, family and lifestyle.
While I agree with the long term view, achieving 1, 2 and 3 is not possible for the majority of earners in the present market, within a reasonable time frame. If you want to wait, compare (higher) returns from investment vs. (leveraged) appreciations for that duration (while you rent). Think what you need in a first home, see what’s available to buy and run the numbers. Keep in mind that not all types of homes appreciate at the same rate. Condos and lofts will generally compete with new ones, etc. Take into account what the market around you would look like when you decide to capitalize on appreciation in the same market. Could you stay, or have to move to a cheaper area?
You will probably be disappointed with your findings in the present market.
I understand that flippers are impacted and sellers aren’t as happy (and if you are selling in under 2 years, you are a flipper, even if you didn’t fix up the place) as they once might have been with monthly growth in value. I don’t, however, see this as crushing for anyone who is going to live in their house for a long time. 5 years will cushion anything currently going on in the market.
The majority of houses built today are not made of the stronger materials used in houses of 1976 or earlier. If you are going long term on the investment make sure the house you choose is of a quality that it will last long term. Cheap wood and a cheap foundation will kill you. I like old houses that have been broken in, they are easier to inspect to make sure they will actually last.
I do think some markets are bubbles, but others are not (What did Greenspan say? Frothy?) While over the long haul +/- 10% didn’t matter, but it would matter if you hit a bubble and had to sell at a loss. No guarentee you stay in the same house for 30 years, what is the average? 5 years?
My advice buy big enough that you don’t have to move if/when you family expands.
For a primary residence that you plan to stay in for at least ten years, you’re not wrong. Not own for ten years, but live in. If prices do, in fact, decline, that “time in the market” stuff becomes really important. At current prices, the carrying costs are more, and sometimes much more, than the rent that it will fetch. This is where it is important that your time horizon is based on how long you will live in the house, not simply own it.
You are definitely not wrong. The most important thing I think is to buy what you can afford. As a side note I just finished transferring 3 0% BTs and am seeing a really good price on a home. My current credit score has gone down from when I did the balance transfers (from 770s to 710s). Is it a good idea to pay off all balance transfers and then apply for a mortgage or is 710s a good enough score to not make a difference in mortgage rates?
Do you have any recommendations on where to get the cheapest
lowest rate mortgage?
Just don’t get a “voodoo” loan (neg-am, teaser 1% rate for one month, large hidden pre-pay penalty, etc.)…
I would definitely agree with everything you said but add one more thing. You may trade up later but if you get a house in a good school district (your ideal one if possible), you will save yourself a lot of grief with “having to move” when you have kids and they are turn 5. That’s the problem I’m looking at now. I live in an okay school district but now I feel under pressue to move before my daughter turns 5. Back when I was looking I was sure I’d be trading up so I didn’t put much emphasis on the schools. But now it’s a very inconvenient fact of life that I have to fix. (and now I’m so exhausted!)
The problem isn’t really the fact that if you make it over the long term, that you will miss those extra % points. It’s what happens in the short term, expected or unexpected.
The problem comes to if and when the market tanks. If prices of homes go down drastically, rent also goes down (for landlords). If rent goes down – your mortgage *does not* go down. This is all well and fine if you can make your monthly payments (with or without a renter) and be set. However I have been with others when they lost their job and source of income. Then instead of being able to sell the house for what they had left on the mortgage, because it depreciated greatly, (One of the reasons I think PMI drops at 80% of house worth in equity) you may sell it for a loss and make payments on a house that you don’t own, while trying to rent for a living.
Timing is not always everything, but lets not discount it completely. If you bought right before everything started rallying, and just about everyone could get a job without a problem, then the timing was perfect and it would most likely be financial irresponsibility that would make you lose the house and lose money. If you buy right before the economy tanks, than timing has a bit of a play on why you lost your house and the reasons for the situation you are in.
I agree, we can’t time the market, or at least John and I can’t. But if you do know how to, please post it, I’m sure lots of readers would enjoy the insight!
Jonathan, I think you’ve got the right idea. You?re not flipping houses here. The primary motivation, as far as I can tell, is owning your own place with the added benefit of appreciation over time. The next thing you?ll be worrying about is how long to wait to lock in a good interest rate. There are already ramblings that the Fed could begin cutting interest rates early next year.
As someone that has already gone through the process I’d like to offer the following few bits of advice –
Do not purchase a house unless you can afford to put down the full 20% up front. You don’t want to deal with PMI or the extra expense of a piggyback loan.
Buying a home in an established neighborhood is a safer bet then buying in a new. There is a lot of initial turnover in new neighborhoods which will burden home values and could affect the overall culture in the area.
If you’re looking for an easy way to get into real estate investing, look into buying a duplex with a backyard for the dog. You and your wife could live in one half and you could rent out the other. Much easier being a landlord when you are there to monitor things. Once you outgrow the place you could then rent out both units and move to a bigger place. I keep thinking this is what I would have done differently if I had to do things over again.
Good luck.
I am in the same stage of home ownership as you are (or maybe 6 months to a year behind), so while I can’t speak from experience, I will say that your plan sounds wise and like it will save you a lot of stress and heartache. I hope that you will keep us posted on your path to home ownership so that we can learn from your experience.
30 year mortgage rates are low, and who knows where they will go. Why not go with 80% at the 30yr, whatever you have now as a down payment, and the rest in a balloon loan. You will get in a house now (time in the market), avoid PMI, and you can always pay off the balloon loan early with the money that you would have been saving to get to 20% down. The interest rate on the second loan will be slightly higher, but you’ll be better off owning now rather than a year or two from now.
It definitely sounds like you’re on the right track.
It stands to reason that if you are going to be in the house for any significant period of time, then you don’t have to worry too much about price.
An investment property might be a different story, but since you’re buying your primary residence, liking the location is really the most important thing.
Jonathan,
You’ve got a good game plan. IMHO, I’d suggest moving #3 (Find a good house) up to #1, though. The more houses you see, the more you’re educating yourself on what is a good value. With only 5% saved for a down payment (which I believe you already have), you can do an 80% first mortgage, 15% second mortgage, and put the 5% down which will still allow you to avoid paying PMI. When you see a great bargain on a house you’ll be in a position to make an offer, regardless of whether you have 5% or 20% saved.
I’d also add a #4: find a good mortgage broker or lender. When you do find one (either a broker or lender), refuse to pay a loan origination fee–it’s not deductable. Instead, be willing to pay points (which are deductable).
I hope you guys are right. I have trouble knowing how much it’s going to impact someone like me – who bought in a midwest city that didn’t seem to be in much of a bubble (certainly nothing like the coasts – I mean, I even had the option of buying on a graduate student stipend to begin with!) knowing that it would be for about 6-8 years. But, when I look at how much is lost in closing costs at each end and how little equity is really accumulated per year (and in fact, for people like me who were lucky enough to be able to use a large downpayment, the ratio of equity-built to closing-costs is likely to be even worse)… well, it sure makes me nervous!
Especially since I’m not going to have a huge amount of control over when I sell – I’ll have to move immediately when I finish (residencies aren’t very flexible, it turns out), I won’t be able to afford to float two places at once, and I’m scared of renting out a reasonably nice place with no experience from a different city (and while I’m an intern, to boot).
At the time I bought, I read all the advice at it all seemed to clearly agree that I was going to be in one place long enough that I should buy. We’ll see.
The key difference in buying a house and the stock market is that with a house, you have a roof over your head whether the value goes up or not. So don’t worry about the timing if you need to get out of leasing.
Ben Stein had a great article on this here:
http://finance.yahoo.com/columnist/article/yourlife/10255
Your priorities look like they’re correct though. Far too many people find the house they want, then figure out how to pay for it, and that doesn’t usually include having a 20% downpayment 🙂
Wow. I was really surprised to find so few comments on this post this morning… and then I checked my spam filter. They were ALL in there!! Akismet is either acting up or just doesn’t like real estate comments? My apologizes if I missed de-spamming something. I regularly wake up to 400 spam comments to go through every day.
Impressive idea there. But what kind of house is considered as “a good house” in step 3 of your plan? I also learn how to spot a house like this. Let’s work hard together 😉
Well I’m actually in a slightly different boat. Unlike the majority of you, I’m a single person who is considering the purchase of a home. When you are married and both of you working its I think a slightly easier proposition to purchasing a home. You have two incomes to toss at it but generally you tend to buy a home that if need be you can go for quite a few months to years on a single person’s income if absolutely needed.
As I’m single…its entirely on me and a very scary proposition. I have ~10% right now on what would be a 150-200k home, and I’ve figured I can manage a loan of about 130k with what I’m making now. So it gives me a part of the market to look at for a single family home (the low end of the market which is the older part of town but has some beautiful brick homes). I’m just not sure at this point what I’m going to do. I’m just nervous about it but continue to look at what is in the value range that I can afford, and add slowly to the account that I have in a 5% savings account, earning slowly but surely.
So in some ways I envy everyone above who has someone else to rely on when making a purchase of this large a scale, and carrying a large debt for 15+ years.
I live in Palm Beach county. Prices have dropped from 415k last year to 365k this year. That’s 50k!! It would take me 4 years of work to save that much!
And another thing is I refuse to finance somebody’s retirement. That 50k would be in somebody else’s pocket.
Also with all the ARMs resetting it’s going to be a rough couple of years for housing. I will keep saving and renting untill everybody on this blog is saying “Don’t buy a house, they only go down”. That’s the time to buy.
Lots of great and useful comment everyone – thanks!
Dave – based on a previous analysis, I’d rather get a 30-year and pre-pay principal if I decide to do so (depends on rates).
Re: a “good” house. Yes, I’m trying to put together a checklist for a house. Things like not near a busy street, good school district, etc.
Jon – Everything’s got a little risk – you can mitigate it with emergency funds, proper mortgage-to-income ratios, and life insurance though.
Re: shopping for mortgages. Oh, you can bet I’ll be working hard to get the best mortgage 😉
Brett – Yes, the 10% makes a difference, but the point was you can’t predict which way the 10% went. What if you gained that 10% instead? I remember “bubble” articles from 2 years ago. Initially you could gain or you could lose, but as long as you were in the game, overall you’d gain.
I’ll catch up on the rest of the comments tomorrow.
I bought a $375,000 house at the end of 2004. After appreciation (5.4% in my area per NAR) and tax savings — I ended up “paying” $723 to live in my house in 2005 (for the whole year). Now admittedly this does not count that there would be costs associated wtih selling the property (real estate fees and move costs) — but it gives a good snapshot. This is far less than I would have paid for rent even at ghetto apartment 🙂
In 2006 it looks like I will do almost as well, but housing will probably only appreciate around 5%.
Good luck
The comparison with being a long-term investor in the stock market is a good one, but it’s important to remember piece of advice that goes with it:
Don’t buy on margin.
The real estate equivalent to buying on margin is the interest-only loan. If you can’ afford to pay the principal on a monthly payment, then you can’t afford the house. If you would be crippled by a 1% increase on a variable-rate mortgage, then you can’t afford the house.
It’s better to own than not to, but people have to realize that if you can’t afford to make any payments on the principal, then you don’t really own the house.
Well, getting 20% down payment is an easy part. Finding the house you like at an affordable price is a tough thing. I think current housing “bubble” is not ended. If Fed cuts the interest rate next year, this crazy bubble would go on few more years.
Everyone talks about housing prices going down. It went down really bad in some areas (Las vegas, san diego) that were hyped up. Other areas experienced modest declines. If you live in an area, where the bubble was not really a bubble, this is the time to buy.
Getting at least 20% down should be a priority to save from the PMI.
But what I’ve been told as long as you’re buying a house to live in long term, you shouldn’t worry about if it’s a good buy or if you should wait for the market to come down more. And if it’s in a decent area you can always rent it out if it’s enough to cover the bills.
Some things to consider: First, there are good reasons to get higher rate loans and pay less in a down payment. For example, if you have money troubles in several years is is much better to have the money directly than to try to refinance and get money out of your house. Credit extended to you through a mortgage is based on your ability to pay. If you wait until you don’t have any ability to pay, you will not get credit when you most need it. The higher interest you pay due to less money down/less per month is not “wasted”, it is the cost of this credit extended to you. If you don’t need this credit, don’t pay for it (i.e. you already have significant liquid investments and emergency accounts). Most people DO need this credit.
Second, house price fluctuations are pretty much a non-issue if you plan on living in the same general area for a long time (you’ll be buying & selling at about the same time in the same market). The really important issue is if you pay a lot of money to live somewhere expensive, but then the area you live in becomes cheap because all the jobs have moved somewhere else. In this case you lose much of the value of your home, and in addition have to pay a lot of money to move to the new area with expensive homes and all the jobs. It’s more helpful to look at future job prospects in your industry than house prices over time.
Saving for your downpayment is definately easier than cleaning your credit report. You forgot the most important-Your FICO score! You might want to check your FICO score from your credit report since you have such a continuous high debt in credit cards. The higher the FICO score, the better. I believe the “perfect” score is 850. You may have to end up minimizing alot of the balances, otherwise, the lender might give you a higher interest rate unless you are willing to put in a higher down payment than you want.
As for the housing market-it depends on where you are concentrating to buy this house/townhouse/condo and if it’s for investment purposes or as your primary residence.
Disclosure: remember, dont buy a house with the impressions that the tax savings of itemizing taxes+interest is a big deal. Because, it may or may not be big at all (but, yes, alitte extra discount for homeowners who purchased a home.). You subtract the Yearly Interest of your mortgage (usually ~80%, based on the amortization schedule, (average for first 4years of loan) and subtract the Property Tax from your income [but, remember, if you were claiming the standard deduction of 5,000 or whatever it is this year, you can no longer do this as a homeowner.]
Hi there– stumbled on this late at night. I will give you another option; a home is a place to live, but can make you some serious money. And loan origination fees are tax deductible, just like points. OK, here is what I want to share- first off, saying a real estate i sno longer a good investment is just as rational as those that say they don’t trust the stock market after 2000. The cold, hard, facts say that 80% of all individuals with net worths over $2M did it at least in part with real estate. I know at least 100 people that made millions in the Portland market in the last five years from selling real estate they had purchased pre-boom that was paying for itself with renters money.
Sorry for the rambling- now I will get to the task at hand. Traditional thinking on mortgages is horribly flawed- take this investment test:
How much of the following investment would you want:
1. You pay monthly and can not get your money back
2. If you lose your job, you still have to pay
3. if you pay extra, they keep it
4. You earn no rate of return
5. If you want your money back, you have to qualify, and pay fees
The investment I am describing is home equity. Homes are not places to stash equity- banks, mutual funds, or even tin cans are better. If you can earn some rate of return on the equity taken out of your house, you can accomplish three things:
Keep it safe
Keep it liquid
Pay your home off sooner than with a traditional 30 yr loan, and cheaper than a 15.
Banks use arbitrage all the time- how many times have you seen signs at the bank advertising a 3% CD and a 6% car loan? Why don’t you do the same? Keep in mind, I am talking about conserving equity, not consuming it. As with any financial vehicle, you must be disciplined. Good luck, and never ask a renter if buying a house is a good idea.