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Started By
Message
Percentage of net worth "invested" as equity in your primary residence?
Posted on 1/15/14 at 9:58 am
Posted on 1/15/14 at 9:58 am
Hey guys,
First time poster on this board.
I've inherited a little bit of money from the passing of a relative. It's not life changing money, and most of it isn't cash, it's in various investment vehicles.
We are thinking about moving into a larger house soon, and would use a portion of this money as a down payment. I know what monthly payment will fit into my budget, so I can back calculate how much of the house I want to finance. That means I can take the financed amount, add a down payment amount, and voila, I know how much house I want to afford.
My question is, what percentage of my total net worth do I want to lay down as a down payment on the house? I think it makes the most sense to talk in terms of percentages so that we don't have to talk real dollars.
When I say net worth, I'm including all investments, including 401(k) etc. and debt but not my current mortgage debt. I think my current mortgage debt is irrelevant to this discussion since I'm not upside down in my current house.
I'm 31.
Stable job as an engineer.
Wife is a stay at home mom until kids are in school. (Only one kid so far, 14months old so no college to pay for anytime soon)
Only debt is current mortgage and one car note.
Putting a down payment of 25% of my net worth would get us the house that we want. Is that too high of a down payment? Is that average? Below average?
First time poster on this board.
I've inherited a little bit of money from the passing of a relative. It's not life changing money, and most of it isn't cash, it's in various investment vehicles.
We are thinking about moving into a larger house soon, and would use a portion of this money as a down payment. I know what monthly payment will fit into my budget, so I can back calculate how much of the house I want to finance. That means I can take the financed amount, add a down payment amount, and voila, I know how much house I want to afford.
My question is, what percentage of my total net worth do I want to lay down as a down payment on the house? I think it makes the most sense to talk in terms of percentages so that we don't have to talk real dollars.
When I say net worth, I'm including all investments, including 401(k) etc. and debt but not my current mortgage debt. I think my current mortgage debt is irrelevant to this discussion since I'm not upside down in my current house.
I'm 31.
Stable job as an engineer.
Wife is a stay at home mom until kids are in school. (Only one kid so far, 14months old so no college to pay for anytime soon)
Only debt is current mortgage and one car note.
Putting a down payment of 25% of my net worth would get us the house that we want. Is that too high of a down payment? Is that average? Below average?
4
Posted on 1/15/14 at 10:12 am to LSU Jonno
quote:
I've inherited a little bit of money from the passing of a relative. It's not life changing money, and most of it isn't cash, it's in various investment vehicles.
I would strongly recommend that you use it to permanently increase your income, vice immediately leveraging into a higher tier lifestyle.
:stepsoffsoapbox:
I think most people aren't "invested" enough in their primary residence - many on the Money Talk board run the min/max game where they demonstrate how stupid it is to prepay your housing costs, when the money can make X% more in the market. I cannot refute the raw dollars and cents portion of their argument.
However, I also subscribe to the debt theory that I cannot lose money on finance charges I do not incur - that is an automatic yield that I have to do nothing to get/manage/profit from. The higher the rate of inflation, the more I incur in opportunity costs, but we've been at historic lows for some time.
Therefore, I think 20% down versus the value of the home is your starting point - a floor, IF that's what you ultimately decide to do with this windfall. I don't see a problem with as much as 50% of one's net worth being equity in the home - you can get access to this using HELOCs, at reasonable rates, and still make reasonable progress towards paying the loan off.
I also advocate 15 year mortgages. Again the min/max people will scoff at this ("you're turning down free money") - maybe I am, in theory. But, in reality, I am paying more towards my principal than I pay in finance charges to the bank - almost from the very beginning. With a 30-year, you're paying mostly interest for several years.
But, if you're contributing the max to your IRA/401K, and have a 6-month emergency fund - I think you could dump all the remaining liquid assets into a down payment on this new house - again - can't lose money on finance charges you don't incur.
This post was edited on 1/15/14 at 10:15 am
Posted on 1/15/14 at 10:29 am to Ace Midnight
Thanks for the advice.
More notes that may help since you brought it up...
I haven't yet maxed out my 401(k) contribution, but I'm on pace to max it out prior to this house purchase. In fact that is a personal requirement.
Putting 20-25% of my net worth into this house would equal 50% of the purchase price of the house.
More notes that may help since you brought it up...
I haven't yet maxed out my 401(k) contribution, but I'm on pace to max it out prior to this house purchase. In fact that is a personal requirement.
Putting 20-25% of my net worth into this house would equal 50% of the purchase price of the house.
quote:I don't disagree with this at all. I've got the majority of the money invested in low risk dividend producing funds, to do exactly this. But my thought process is this. A "higher tier lifestyle", right now, while my kid(s) are babies and infants basically means a nicer house since I'm grounded for the next few years. Once the kids are school age and we are taking vacations every year, the wife will be working again which will pay for all of those vacations and eating out more often.
I would strongly recommend that you use it to permanently increase your income, vice immediately leveraging into a higher tier lifestyle.
Posted on 1/15/14 at 10:38 am to LSU Jonno
quote:
A "higher tier lifestyle", right now, while my kid(s) are babies and infants basically means a nicer house since I'm grounded for the next few years.
I understand and I'm not completely dismissive of these concerns - however, as you are still young - when you buy a higher class house (just as with a higher class car) EVERYTHING is more expensive - it can wreak havoc with a budget because you've done all the planning and have the means to pay the higher monthly note - THEN the cumulative effect of the higher costs start to kick in.
But, you seem to be in pretty good shape on the budget side, so good luck with it.
This post was edited on 1/15/14 at 10:39 am
Posted on 1/15/14 at 10:49 am to LSU Jonno
Can you post more specific numbers?
As a portion of my net worth, my primary residence represents 10%.
However, I'm not sure what that has to do with anything.
Why not continue to live your current lifestyle and let that money grow in investments? I'm not trying to jump on you here but your mindset is very financially immature.
As a portion of my net worth, my primary residence represents 10%.
However, I'm not sure what that has to do with anything.
Why not continue to live your current lifestyle and let that money grow in investments? I'm not trying to jump on you here but your mindset is very financially immature.
This post was edited on 1/15/14 at 10:50 am
Posted on 1/15/14 at 10:58 am to I Love Bama
quote:
I'm not trying to jump on you here but your mindset is very financially immature.
ILB, let's not do the typical money board thing. He's not talking about buying depreciating assets or whatever.
I led with the "invest" - delayed instant gratification - however, if you're going to overspend on anything, it should be the home - that part I do agree with, although the amount of overspending should be slight.
Going with 15-year mortgages builds in a conservative bias against overspending - which is why I recommend those for most people. It is a built-in conservative bias, with built-in discipline. In an extreme bind, one can always take equity out, and extend the loan terms - from a 15 - in a 30, there will be little equity (beyond the downpayment) for years and years, and if you cannot afford the 30-year note - you cannot afford the house - so you're selling at a loss (which you can't afford) or in foreclosure (which is worse).
However, he seems to be fairly financially stable - I would still invest it and increase his income - permanently - as you would - but we should also answer his underlying question.
I don't see a cap as to how much liquidity you should give up in equity in your home - with HELOC and other vehicles, I feel this is a false distinction. If you own the house outright, you can be investing your house note every month, DCA. A person who does that is wealthy, regardless of what the min/maxers tell me about free money.
Posted on 1/15/14 at 11:07 am to Ace Midnight
quote:
if you're going to overspend on anything, it should be the home
I couldn't disagree more.
quote:
Going with 15-year mortgages builds in a conservative bias against overspending - which is why I recommend those for most people.
I disagree again. EVERYONE should get a 30 year mortgage and then treat it how they want to treat it as far as mortgage payments go. Who knows what will happen in 5 years and this guy will be stuck with a much higher payment that he is forced to make.
I understand some people have an emotional connection to where they are living and that is what led to my "financially immature" comment. A house is a liability, not an asset.
More food for thought OP - You live in Huntsville, Alabama which is basically subsidized by the government in terms of what is growing the local economy. If the national government cuts defense spending, your $500,000 house just went to $250,000.
Posted on 1/15/14 at 11:25 am to I Love Bama
quote:
A house is a liability, not an asset.
While I understand this mindset - a house does appreciate (under normal circumstances) and usually holds its own against inflation - sometimes outperforming it. As you pointed out, there are risks associated with housing market downturns, etc.
However, to assess a home as a liability is extremely shortsighted - you cannot "make a living" from your house, - that's true. However, let's take an example:
Let's say housing costs - for rentals average about $650 per month for an area, and includes only the basic, sewer, water and garbage.
Buy a $150,000 house - once it is paid for, that is akin to an investment producing $450+ per month (because as the homeowner, I am deducting ~$200 for taxes and regular maintenance), it increases in value over time and you can get your money back out of it.
If that's not an asset, it will do until an asset comes along - I agree that a financed home - particularly one with very little equity, is a liability and most people under 35 would be better - financially - in a rental situation.
This post was edited on 1/15/14 at 11:28 am
Posted on 1/15/14 at 11:56 am to Ace Midnight
The way the OP worded his post indicated to me that he was going to buy a place MUCH more expensive than $150,000. I'm all for buying a home that you could be turned into a rental if he lost his job.
There isn't a right or wrong answer as different people have different paths in life and much different financial goals. I was probably a little harder on him in my post than I should have been.
There isn't a right or wrong answer as different people have different paths in life and much different financial goals. I was probably a little harder on him in my post than I should have been.
Posted on 1/15/14 at 12:09 pm to Ace Midnight
So far I have lived in areas with two massive RE declines. One in LA when farming and O&G imploded, the other here in GA more recently. A house, especially if someone needs to move, can be a weight of massive proportions. A house is somewhere to live, if you ultimately make a "profit" on it good for you. Most people do not track all the long term carrying costs of home ownership and if they did would come to the conclusion they lost money or broke even at best, especially if they love to renovate. Investing in public/liquid markets ensures someone can sell if/when they need to although it may be at a loss but then one gains tax benefits from losses in taxable accounts. RE is not like that unless someone is lucky, has well above RE knowledge or got a "family" deal reducing the purchase price of the house. If someone bought in a good area in ATL in 2010-2012 they would have to screw up royally to lose money, but that is an artifice of a massively depressed market making LT ownership much more appealing than in a normalized purchase environment.
I'm not against owning a personal residence, mine is worth less than 10% of my NW and it is nice and updated but far from palatial. Sometimes I really wish I had stayed in a condo that I was perfectly happy with that we acquired at 40% below market value from an estate, but the wife and dogs wouldn't have been happy. I have been pretty lucky with investment RE, but that could always change.
The 15 yr mortgage argument doesn't really hold water as a financially responsible buyer isn't going to overleverage themselves going in, and rates and HELOC/MTG qualification can change significantly in a short period of time with a negative impact on home prices. If a 15 yr mtg significantly impacts what one can save in tax advantaged accounts it would not be worth undertaking, either.
I'm not against owning a personal residence, mine is worth less than 10% of my NW and it is nice and updated but far from palatial. Sometimes I really wish I had stayed in a condo that I was perfectly happy with that we acquired at 40% below market value from an estate, but the wife and dogs wouldn't have been happy. I have been pretty lucky with investment RE, but that could always change.
The 15 yr mortgage argument doesn't really hold water as a financially responsible buyer isn't going to overleverage themselves going in, and rates and HELOC/MTG qualification can change significantly in a short period of time with a negative impact on home prices. If a 15 yr mtg significantly impacts what one can save in tax advantaged accounts it would not be worth undertaking, either.
Posted on 1/15/14 at 12:47 pm to I Love Bama
All of this is good stuff.
Exactly the kind of debate I was hoping for.
Some replies:
I'm phrasing the question this way because I have more assets than someone my age and in my salary range would normally have. My thought is I can "afford" a higher priced house than my salary allows by putting a larger down payment down than I normally would, thereby reducing my mortgage payment down to a level that fits into my budget.
Let me give you an example. Let's say I had $50k of equity in my current house, and my net worth was $2mil. That would mean that I only had 2.5% of my net worth in my current house. If most people live comfortably with 10% as equity that means I could purchase a much nicer/larger house and retain my same, small mortgage payment.
My deadline to move is about 3.5 years. Part of the reason to move is to get into a better school system.
I haven't decided yet if I want to sell or rent my current house. It's 1900 sqft, 4 bedroom. Could probably generate $1200/mo rent. Rental market is great in my location.
Exactly the kind of debate I was hoping for.
Some replies:
quote:
As a portion of my net worth, my primary residence represents 10%.
However, I'm not sure what that has to do with anything.
I'm phrasing the question this way because I have more assets than someone my age and in my salary range would normally have. My thought is I can "afford" a higher priced house than my salary allows by putting a larger down payment down than I normally would, thereby reducing my mortgage payment down to a level that fits into my budget.
Let me give you an example. Let's say I had $50k of equity in my current house, and my net worth was $2mil. That would mean that I only had 2.5% of my net worth in my current house. If most people live comfortably with 10% as equity that means I could purchase a much nicer/larger house and retain my same, small mortgage payment.
quote:Well aware of this. In fact, defense has been cut...7% by sequestration for almost a year now...As has NASA's budget another large part of the economy here. Having said that, I might wait to see what the 2016 administration looks like, and by then we'll know more about NASA's Space Launch System's long term outlook as well.
You live in Huntsville, Alabama which is basically subsidized by the government in terms of what is growing the local economy. If the national government cuts defense spending, your $500,000 house just went to $250,000.
My deadline to move is about 3.5 years. Part of the reason to move is to get into a better school system.
quote:I work for the government. If I lose my job, there will be no market for rentals because if I'm out of work lots of others will be as well. Plus, my current house would be perfect to turn into a rental, my next potential house would probably be too expensive to turn into a rental.
I'm all for buying a home that you could be turned into a rental if he lost his job.
I haven't decided yet if I want to sell or rent my current house. It's 1900 sqft, 4 bedroom. Could probably generate $1200/mo rent. Rental market is great in my location.
This post was edited on 1/15/14 at 12:49 pm
Posted on 1/15/14 at 2:02 pm to I Love Bama
quote:
I understand some people have an emotional connection to where they are living and that is what led to my "financially immature" comment. A house is a liability, not an asset.
A house can also have economic value far exceeding financial value and you are being a little dismissive with the "emotional connection" piece. I would rather splurge a little on a house that I love than I would on something with 4 wheels that gets me from point a to point b for example.
IMO,there should always be a balance between enjoying it now and saving for later. I used to take it to the extreme with saving and frugality, but I've found greater balance and enjoyment over the last few years in spending a little money.
(I don't post much, but lurk often and enjoy your posts, by the way)
Posted on 1/15/14 at 2:51 pm to LSU Jonno
Does the inheritance and equity in your current house cover your future down payment? If you could put down 50% with just that money, I would do it.
Just make sure you (and the wife) understand all of the expenses in owning a larger/nicer home in a fancy neighborhood. Not just increased property taxes/utilities, but funiture expenses, maintenance/upkeep of nice landscaping/sprinkler systems/other stuff like that, and most importantly, not trying to keep up with the neighbors regarding cars/material things.
Just make sure you (and the wife) understand all of the expenses in owning a larger/nicer home in a fancy neighborhood. Not just increased property taxes/utilities, but funiture expenses, maintenance/upkeep of nice landscaping/sprinkler systems/other stuff like that, and most importantly, not trying to keep up with the neighbors regarding cars/material things.
Posted on 1/15/14 at 4:41 pm to LSU Jonno
A house is a place to live.
Nothing wrong with buying a house, but I do not advise counting on it an an "investment".
Of course, people do make money buying and selling houses, but the big money is made from timing. If you have to move, you could lose big.
All that being said, I own my house. I paid 20% down and have refinanced twice in 8 years.
If you buy a house, pay 20% down so you do not have PMI.
Nothing wrong with buying a house, but I do not advise counting on it an an "investment".
Of course, people do make money buying and selling houses, but the big money is made from timing. If you have to move, you could lose big.
All that being said, I own my house. I paid 20% down and have refinanced twice in 8 years.
If you buy a house, pay 20% down so you do not have PMI.
Posted on 1/15/14 at 7:48 pm to Ric Flair
quote:Yes. I'm talking about putting a down payment down on a house that is 50% of the house price and about 25% of my inheritance or 15% of my total net worth.
Does the inheritance and equity in your current house cover your future down payment? If you could put down 50% with just that money, I would do it.
I haven't factored in what little equity I have in my current house. I know I'm not upside down, but past that, I could walk away with a $5k check or a $25k check depending on the market, how fast I want the house to sell, and if I sell it myself or hire an agent.
Expenses understood and already budgeted in.
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