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Am I being TOO conservative (mortgage related)

Old 07-03-06, 09:20 PM
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Am I being TOO conservative (mortgage related)

I am known to be very conservative with money. My wife and I will be buying our first home in the next few months. We plan on getting together with a real estate agent within a week.

I will give you some facts to help determine things

we have no kids.
my wife has a car payment of 313/month (plan on selling and getting a <10k car)
no other debt
I make 58k
she makes 32k
I bring in another 22k (not guarenteed, could end at any time)
We saved 45+K in the past 3 years and it is available for downpayment

the area we are looking is Raleigh, NC 27616. I am thinking along the lines of a 200K (max) house, 40 down and borrow 160. Is that being too conservative? I would hate to be TOO conservative where it could hurt us (could it?) Being young and not have gone through this before can anyone offer some advise for our circumstances?

Thanks

I have
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Old 07-03-06, 09:26 PM
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The question is -- what is your risk tolerance, and how much money do you want to keep for other things (investing, just having money, etc...).

We have it set up where one income pays our mortgage and bills indefinitely. We could have more house, and there are benefits to that, but this buys us peace of mind. Not to mention that we invest the liquid money elsewhere and have a good return.

Check out www.zillow.com for some measure of home prices in the area you are looking

and I strongly recommend these calculators to give you some idea of what you can afford.

http://www.dollarbank.com/dollarbank...O/howmuch.html
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Old 07-03-06, 09:52 PM
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The other thing to consider is that while you could buy a bigger house, do you really need to?

If you borrow $160K, you're probably looking at repayments of around $900 per month. If you can afford more, then rather than buying a bigger/more expensive home, why not aim to pay this one down as quickly as possible, and later (when you've built up equity in the house) sell or rent and purchase another one?

It also mean you have a buffer should things go wrong. You don't have kids now, but that could change; that 22k variable income would mean a huge change in lifestyle should it suddenly go away; etc.

As Bushy says - a lot of what you "should" do really depends on your risk tolerance and how much "liquid" money you want to keep around.
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Old 07-03-06, 10:47 PM
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Go with that house, and plan on investing the additional money "saved" from not buying a bigger house. Max out your 401k, ROTH, etc. Then look to other investment avenues...which will be determined based on your risk tolerance. With this avenue, if your $22,000 variable dries up, you won't be in a crunch to meet a mortgage payment.

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Old 07-03-06, 10:55 PM
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Your best bet is to start a cocaine habit. Screw the house!
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Old 07-03-06, 11:29 PM
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cocaine > meth.....don't make that mistake!!

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Old 07-03-06, 11:29 PM
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Why use any of your money? I would rather have the 40k you plan on putting down on the house Working for me somewhere else. It's only a savings of $250 a month. Where as you could invest some the 40k in a retirement account, fund, etc..

$1,215.22

Monthly Payment

$200,000
6.125%
30 years (fixed)


$972.18


$160,000
6.125%
30 years (fixed)'

These figures did not take into account taxes and other BS.
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Old 07-03-06, 11:42 PM
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You make plenty. Go find a house you like, then see what the price tag is. Then reevaluate. I don't know that market, but it would suck to have a crap house when you make decent money and could affort more.
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Old 07-04-06, 12:35 AM
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A general rule of thumb is that you want to be spending 25-33% of your monthly (after tax) income on housing. If you want to be conservative, take 25% of the 90k you're "guaranteed" to bring in -- figure that's about 70k after taxes, which means you want your monthly mortgage payment to be somewhere in the neighborhood of 70k * 1/12 * 1/4 = about 1,400-$1,500. Depending on how much you put down and what kind of mortgage you get, that should buy you $250,000 worth of house, give or take.
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Old 07-04-06, 01:15 AM
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If you were in an area that have fairly consistent home price appreciation I'd say buy the maximum you could possibly afford without making the rest of your life miserable. That could amount to 40+% of your take-home pay or essentially the most a lender would allow you to borrow based on your income.

However the price appreciation doesn't appear to have been that great around Raleigh (http://triangle.bizjournals.com/tria...l?surround=lfn) so unless you know some good reason that would help that mediocre performance you probably shouldn't sink all your money into a home.

But do remember that you are getting very high leverage on your down payment. When you put $40K down on a $200K home and the home goes up in value even only by 4% a year ($8K), the average for your area over the last 5 years, you are making 20% on that down payment. Not to mention your house payments are deductible and any profit you make on the house will be tax free. Of course you have to weigh that against what it's costing you to borrow the principal and what alternative housing would cost.
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Old 07-04-06, 01:20 AM
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Originally Posted by JasonF
A general rule of thumb is that you want to be spending 25-33% of your monthly (after tax) income on housing.
Interesting "rule of thumb". I'd never heard of it before. How do you think the rule of thumb would handle things that I can adjust like retirement savings (I max out right now, but I would not mind tuning it back to 6%)?
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Old 07-04-06, 01:48 AM
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Originally Posted by kvrdave
You make plenty. Go find a house you like, then see what the price tag is. Then reevaluate. I don't know that market, but it would suck to have a crap house when you make decent money and could affort more.
True - but if you can pay the loan down quickly, then you don't have to live in that crap house for too long.

At 6% over 30 years, you're looking at around $959/month repayments. If you're pulling in 112K before tax per year (optimum solution), you can easily afford to pay $3,000 per month on your loan (or save $2,000 into your IRA, etc which effectively builds up an equivalent savings bank).

Two years later, you have $100K in equity (assuming prices remain stable and the house is worth $200K at the end of it). Five years from now, you have a house and no mortgage.

If, after a year or two you do decide you want a bigger house, you can simply draw back some of that equity for your new house and rent the old one out (the rent will increase your income).

Now true, you can buy a bigger and better house from day one and you might get better capital appreciation, but that does expose you to a little more risk. Of that $112K, only $58K is really guaranteed (wife gets pregnant and the bonus dries up).

As has been commented, it really all depends on your risk strategy. Will one million dollars, I might be able to afford a million dollar house, but that doesn't mean I feel the need to buy one. Personally, I'd prefer to borrow extra money and buy 10 x $200,000 (with me living in one and the other 9 rented).
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Old 07-04-06, 05:05 AM
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Screw the down, use it as a safety net. My wife and I bought our house in 1998 for 207k in the Los Angeles area, we had the same down you have but with the rates so low we decided it would be better to have more money in the bank for rainy days and for investments vs. being tied up in the house.

I'm glad we did cause I lost my job this year and not only has the nest egg grown our house has more than tripled in value (in the past 8 years) so if things really get bad we can take a equity line out but I don't see unemployment lasting too much longer.

Oh and BTW houses are freaking EXPENSIVE! maintenance, utilities, TAXES, etc. all these unseen costs can drive you nuts so if you don't have some money set aside in the bank this can and probably will have you sleeping a lot less soundly at night.
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Old 07-04-06, 11:59 AM
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Originally Posted by ChiTownAbs, Inc
Interesting "rule of thumb". I'd never heard of it before. How do you think the rule of thumb would handle things that I can adjust like retirement savings (I max out right now, but I would not mind tuning it back to 6%)?

I never have either. I've heard of a 25% of gross rule.

I think few people would own property in the DC area if they followed a 25-33% net rule.
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Old 07-04-06, 12:26 PM
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While there is a general guideline as to the percentage of gross income that should be spent on housing, it has increased considerably over the last decade or so due to the reality of housing costing a higher percentage of a person's income.

Net income has to be considered since a person's gross income can be completely sucked up by car payments, credit card debt, etc.
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Old 07-04-06, 12:33 PM
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The government has made 'owning' a house less useful given the Schedule A deduction.

Get what you both like and can afford - you have to weigh the tradeoffs between those two - but with your income, you can probably get something you like.

Also - do you plan to have kids or not? If not, then don't worry about anything bigger than you need, if yes, it's the old 'when' vs. 'how long in the house' bit.

But overall, put down 10-20% (whatever gets you the best loan), buy in an area that is either stable or appreciating, and then enjoy the house.

You only live once!
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Old 07-04-06, 01:50 PM
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The average return on a home is an astounding 0% when you factor all the money you sink into a home. I would find something that you like and that would hold a few youngins so you don't have to move and something you can afford in case you lose your job and aren't working for a few months.

The most important factors in selecting a home is of course a good neighborhood, good school district which usually means civilized people, and good floor plan. A home with a poor floor plan will stay on the market longer and a lot of people will pass on it even if it's cheaper than homes with good floor plans.

A home is historically a very illiquid investment and selecting a good one and paying a little more for it can mean the difference between having it sit for months on the market or a few weeks in a market downturn when you may HAVE TO SELL.
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Old 07-04-06, 01:51 PM
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Originally Posted by X
Net income has to be considered since a person's gross income can be completely sucked up by car payments, credit card debt, etc.

Sure. I just don't know how well a rule of thumb can apply because people can have far different levels of cc and other debt, may or may not have a car payment, etc. Obviously, the less debt/obligations you have, the higher house payment one can afford.
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Old 07-04-06, 01:53 PM
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Originally Posted by al_bundy
The average return on a home is an astounding 0% when you factor all the money you sink into a home.
What is the average return on the alternative, renting?
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Old 07-04-06, 02:04 PM
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owning is better than renting since you build equity, but all the people who are so proud of their gains in the last few years usually don't mention how much things cost. Few months ago on Fatwallet someone said I was wrong since his $250,000 home he bought in 2001 is now around $470,000 and he was in NJ.

When you break it down it's:

6.5% average interest - $80,000 interest paid in 5 years
$6000 property taxes per year - $30,000 in property taxes
$500 per month for utilities, maintenance, etc - $30,000 (may not be spent every month but includes periodic big things like roof)

After 5 years this guy is still ahead, but the market isn't going to rise at double digit rates anymore and most economists are saying the market is going to be flat until 2009 at the earliest so he will be cash flow negative and when accounting for inflation it's a money loser.

But owning is still better than renting since this guy will have a lot of equity built up that he can take to his next home where with renting you build equity for the landlord.
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Old 07-04-06, 02:17 PM
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I disagree with your assessment

Cost so far
50K for the house (let's guess 20% down)
I think your interest rate is too high, as we refied like 3 years ago for 5.125 (no points) on a 15 year. But let's say 80K
30K for the roof and other random stuff
30K for property taxes

I count 50+80+30+30=190K spent for an asset worth 470K, less what? 170K of outstanding loan. That's a net gain of 100K.

Let's add a little bit back, too. What about a mortgage deduction? That gives back 25 to 33% of the taxes and interest. So -- another $27,500 to $36,300 giving back a total of $127K to $136K because of the home purchase.

So I see 190K spent in 5 years returning $326,000 (offsetting the debt position on the house on both sides of the calculation).
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Old 07-04-06, 02:24 PM
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Some approximate numbers for my last 5 years:

$200,000 interest (fully tax deductible, so say $134,000 after tax)
$33,000 property tax (fully tax deductible, $22,000 after tax)
$60,000 utilities, insurance, maintenance (~$1000/mo high estimate)

Increase in net equity factoring in selling costs: $1 million ($500,000 tax free, $500,000 taxable at 15% rate)

($925,000/$216,000) / 5 years = 85% per year after tax return

It appears to make a difference where you buy a home.
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Old 07-04-06, 02:24 PM
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rates back in 2001 were around 8 and the lowest point was around 5.5% in July of 2003 so 6.5% average is not a big stretch. and once you refi you go back to paying all interest again.

For the future, NJ taxes would be around $10,000 for a home like that so that is a big jump. Prices will probably be stagnant until 2010 or 2012 as a lot of economists are saying. Say $20,000 per year for all housing costs for this guy gives you another $120,000 he will spend by 2012 for an asset that isn't going to increase in price. Even if it's not cash flow negative I doubt he will be thinking of himself as a genius like a lot of people are thinking of themselves and their home investments now.
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Old 07-04-06, 02:25 PM
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Not to mention, every penny I put into the debt position of my mortgage gets an automatic better return than another investment because of the tax exempt status.

So, with a 5.125 mortgage, as I dump extra money into principal I have an effective return of 6.83% compared to something that would count against me as straight income and 6.15% against something yielding a LT capital gains payout. Now, I target 10-20% returns a year for my investments but there's no guarantee up that high. Home investing appears to be a sound strategy for part of a portfolio, imo. Guaranteed rate of return, building equity and the potential for greater appreciation with the real estate market.
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Old 07-04-06, 02:25 PM
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Originally Posted by X
Some approximate numbers for my last 5 years:

$200,000 interest (fully tax deductible, so say $134,000 after tax)
$33,000 property tax (fully tax deductible, $22,000 after tax)
$60,000 utilities, insurance, maintenance (~$1000/mo high estimate)

Increase in net equity factoring in selling costs: $1 million ($500,000 tax free, $500,000 taxable at 15% rate)

($925,000/$216,000) / 5 years = 85% per year after tax return

It appears to make a difference where you buy a home.
you have prop 13 on your side, as long as you don't sell and buy another home in california
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