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Started By
Message
How much to put down on a home? (more than 20%?)
Posted on 8/24/13 at 11:50 pm
Posted on 8/24/13 at 11:50 pm
I'm 27 and recently married. I make about 70k/yr and my wife makes around 35k. After taxes and retirement contributions, we take home about 6k/month (4k for me, 2k for her) We are looking to buy our first home. We currently have about 180k in savings, plus another 100k to definitely put down on a home. ($280k total)
This is NJ, so homes are expensive. We are looking in the 450-500k range. From some basic mortgage calculations, putting 20% down would result in a $2500 payment/month with property taxes and insurance. Our other expenses equal ~1000 a month. (Car payment, insurance, utilities). Right now that seems ok, but once we have kids the plan is for my wife to stop working. That would mean of my ~$4k/month, $3500 is going towards fixed payments.
Does it make more sense to put more of our savings in to a down payment? Say 40% down which would lower the payment to around $2,000/month and therefor give us more breathing room once my wife stops working? We would still have ~80k in savings.
Any advice?
This is NJ, so homes are expensive. We are looking in the 450-500k range. From some basic mortgage calculations, putting 20% down would result in a $2500 payment/month with property taxes and insurance. Our other expenses equal ~1000 a month. (Car payment, insurance, utilities). Right now that seems ok, but once we have kids the plan is for my wife to stop working. That would mean of my ~$4k/month, $3500 is going towards fixed payments.
Does it make more sense to put more of our savings in to a down payment? Say 40% down which would lower the payment to around $2,000/month and therefor give us more breathing room once my wife stops working? We would still have ~80k in savings.
Any advice?
This post was edited on 8/25/13 at 12:18 am
8
Posted on 8/25/13 at 12:09 am to Joe
You're in a good position.
The other money talk geniuses will probably give you better advice, but I wouldn't recommend putting down more than 20%.
Mortgage rates are too good right now to justify putting down more than 20%, IMO.
You say an additional 20% would save $500 per month. Well 20% more is ~$95K. $95K would take almost 16 years to make up the $500 difference. And that's if you had it buried in your backyard. "money now is worth than money later"
When you have your kids, is your wife going to stop working for ever, or just a few years?
The other money talk geniuses will probably give you better advice, but I wouldn't recommend putting down more than 20%.
Mortgage rates are too good right now to justify putting down more than 20%, IMO.
You say an additional 20% would save $500 per month. Well 20% more is ~$95K. $95K would take almost 16 years to make up the $500 difference. And that's if you had it buried in your backyard. "money now is worth than money later"
When you have your kids, is your wife going to stop working for ever, or just a few years?
Posted on 8/25/13 at 12:33 am to Joe
stick with the 20% down, but I would honestly suggest you look for a cheaper home. Where in Jersey are you looking? You don't want to get in a situation where you're house poor.
The goal should be that your monthly expenses + some amount of excess is less than what you will bring in. Don't get into a situation where you'll have to pull out of savings for any extraordinary expenses. Kids in Jersey are expensive, even with your wife watching them full time.
The goal should be that your monthly expenses + some amount of excess is less than what you will bring in. Don't get into a situation where you'll have to pull out of savings for any extraordinary expenses. Kids in Jersey are expensive, even with your wife watching them full time.
Posted on 8/25/13 at 9:12 am to Joe
with interest rates as low as they are, I would put as little down as possible
but that is just me
but that is just me
This post was edited on 8/25/13 at 9:13 am
Posted on 8/25/13 at 10:06 am to BostonAdam
10% is feasible.
Posted on 8/25/13 at 10:23 am to Joe
At such low mortgage interest rates and at your age, if I were you...I would put down as little as possible (but no lower than the 20% to avoid PMI)--and where your budget can comfortably handle the monthly note.
Why? Your savings most likely will earn more than your mortgage will cost you. And, when you factor in taxes -- writing off mortgage interest, that spread between your earnings and your cost is even greater.
At those home prices, every 10% down is 50k. Each 50k has potential to earn you $3-4k per year at 6-8% return.
After taxes, each 50k mortgage will cost you ~4%.
Use the mortgage to earn yourself 2 - 4% incremental.
Don't ignore your earning potential of your savings and your salary will likely increase over time...in your planning.
Good luck.
Why? Your savings most likely will earn more than your mortgage will cost you. And, when you factor in taxes -- writing off mortgage interest, that spread between your earnings and your cost is even greater.
At those home prices, every 10% down is 50k. Each 50k has potential to earn you $3-4k per year at 6-8% return.
After taxes, each 50k mortgage will cost you ~4%.
Use the mortgage to earn yourself 2 - 4% incremental.
Don't ignore your earning potential of your savings and your salary will likely increase over time...in your planning.
Good luck.
Posted on 8/25/13 at 11:12 am to Joe
If you borrow over 417k, your looking at a first and second, the second being tied to prime + 1.5-2. If not youre going jumbo over 417k looking at interest rate at 5.25%, whereas 30 year under 417k was 4.75-4.875% as of Friday.
My advice would be get under that 417k with what you put down. I'm also a big fan of 10/1 ARM's if you're confident you wont be there in a decade, but also under that 417k amount. Around 4.125%-4.25%.
I'm 37, currently in my 3rd house since I was 27. I can think of two friends who have not upgraded homes, everyone else has. Know thy self always applies in real estate. Good luck.
My advice would be get under that 417k with what you put down. I'm also a big fan of 10/1 ARM's if you're confident you wont be there in a decade, but also under that 417k amount. Around 4.125%-4.25%.
I'm 37, currently in my 3rd house since I was 27. I can think of two friends who have not upgraded homes, everyone else has. Know thy self always applies in real estate. Good luck.
This post was edited on 8/25/13 at 11:14 am
Posted on 8/25/13 at 11:31 am to Joe
quote:
Does it make more sense to put more of our savings in to a down payment?
Yes.
quote:
Say 40% down which would lower the payment to around $2,000/month and therefor give us more breathing room once my wife stops working?
But not to do this - I would pay more to shorten the term, like to 15 years and pay biweekly (if you're paid that way) or an extra P&I every year to retire it in 12.
30-year mortgages, even at ridiculously low interest rates are a form of slavery, IMHO - 15 years is a compromise I can live with.
Posted on 8/25/13 at 11:42 am to Salmon
quote:
with interest rates as low as they are, I would put as little down as possible
but that is just me
As long as you are going to invest that money and don't blow it on other shite. If you can make more than the interest then invest it and pay the minimum down. Don't forget to factor in tax savings. Interest rates are sooo low, I'm investing my extra cash v. paying off my house and business loans.
Posted on 8/25/13 at 11:53 am to Joe
quote:Not to be a naysayer, but that is a big chunk of your money.
This is NJ, so homes are expensive. We are looking in the 450-500k range
Obviously, we all hope homes will retain value or escalate in price, but will they?
Question you need to ask is, if you had to move, "what would be your tolerance of a 10%, 20%, or 30% decline in real estate value?" Consider too, transaction costs of sale.
Posted on 8/25/13 at 11:54 am to Ace Midnight
quote:
30-year mortgages, even at ridiculously low interest rates are a form of slavery, IMHO - 15 years is a compromise I can live with.
Yes, every evening when I walk out my front door, cross the street, and onto my clubs 156 yard par 3, I think about how enslaved I am for the next 30 years at 3.625% no less. Kunta Kinta would surely feel my strife.
This guy saved 180k by 27k, save the Dave Ramsey sermon for the morons who need it.
This post was edited on 8/25/13 at 11:58 am
Posted on 8/25/13 at 12:23 pm to ItNeverRains
quote:
Yes, every evening when I walk out my front door, cross the street, and onto my clubs 156 yard par 3, I think about how enslaved I am for the next 30 years at 3.625% no less.
I'm sure that fits your expectations now, but in 10 years, my house will be paid off - and the current mortage payment will be staying in my bank account. After those same 10 years, I don't think you'll even be to the point where you're paying more principal than interest every month.
A/B analysis of 2 $400,000 loans tells me that, even at 3.5% APR for both of them, the 15-year I pay $132k less interest than I would on the 30-year.
Sure, most people don't hold the 30-year loans to term - and that cheaper payment now means more money in my pocket now.
However, plans change and it's just tough for me to pay, in extra interest, enough money to buy an okay home where I live.
This post was edited on 8/25/13 at 12:23 pm
Posted on 8/25/13 at 12:24 pm to ItNeverRains
quote:Yep, I'm not a fan of one-size-fits-all templates for this kind of thing. Basically it comes down to individual opportunity and circumstance.
Yes, every time I walk out my front door, cross the street, and onto my clubs 156 yard par 3, I think about how enslaved I am for the next 30 years. Knute Kinta would surely feel my strife
Confidence in ROI: real estate vs the markets vs other.
Available lending rates vs anticipated rate of inflation.
Risk of overexposure in one area.
Tax strategy.
Need for liquidity.
etc.
Posted on 8/25/13 at 12:29 pm to NC_Tigah
quote:
Yep, I'm not a fan of one-size-fits-all templates for this kind of thing.
I agree as well, but even at low rates, a 30-year mortgage enriches the bank to a greater degree.
Assuming no inflation or increase in the value of the home, I walk in and buy a $500k house, with $100k down - The seller makes $500k (minus whatever he owed, but I don't care - he gets $500k) regardless of my financing. Ditto for me if no inflation/appreciation - at the end I have a house worth $500k free and clear.
But, the banker only gets $115k if paid back in 15 years, while he gets $250K (HALF what I made, and I paid for every single thing.) When you look at it on paper, that's hard to swallow - even the $115k is 20ish percent, but it is 15 years holding their money.
Posted on 8/25/13 at 12:40 pm to Ace Midnight
quote:If you run those numbers as tax deductible, in the face of 7% inflation, with 10% market returns and increases of 2% real estate Y2Y, the landscape changes.
A/B analysis of 2 $400,000 loans tells me that, even at 3.5% APR for both of them, the 15-year I pay $132k less interest than I would on the 30-year.
Posted on 8/25/13 at 12:41 pm to NC_Tigah
quote:
Yep, I'm not a fan of one-size-fits-all templates for this kind of thing. Basically it comes down to individual opportunity and circumstance.
Of course. I wouldn't have bought my home if a 30 year wasn't an option. I'm up 100k in equity since purchase in Dec 2011. So that 132k you'll save in 15 years in interest, I'm 32k from that being a wash in less than 2 years, and about a year away from trumping that. There are maybe two other neighborhoods this was possible in, in my area. All this was made possible by greedy banks enslaving me.
quote:
If you run those numbers as tax deductible, in the face of 7% inflation, with 10% market returns and increases of 2% real estate Y2Y, the landscape changes.
This will be the subject of Dave Ramsey show on Tuesday I believe
This post was edited on 8/25/13 at 12:45 pm
Posted on 8/25/13 at 12:52 pm to ItNeverRains
quote:
There are maybe two other neighborhoods this was possible in, in my area.
So you're saying your return is atypical?
quote:
All this was made possible by greedy banks enslaving me.
And I don't mean to say it's wrong for every situation - but real estate investments do not offer the predictable returns they once did.
quote:
All this was made possible by greedy banks enslaving me.
Okay, you win. Most people with 30s don't.
quote:
If you run those numbers as tax deductible, in the face of 7% inflation, with 10% market returns and increases of 2% real estate Y2Y, the landscape changes.
Yes, it does compress the benefit of not taking the longer term.
However, 95% of people in 30s do not invest the difference between their 30 year P&I and the 15 - they spend it on other stuff, waste it whatever. The 5% that do save/invest/grow the difference win the game, that's true. But for most people, it is a budget assistant. They build equity much faster, and can, therefore, access some of that money through HELOCs, etc., if needed, but otherwise the discipline afforded by the 15-year is a net positive for 95% of homeowners.
This post was edited on 8/25/13 at 12:53 pm
Posted on 8/25/13 at 1:11 pm to Ace Midnight
quote:
I'm sure that fits your expectations now, but in 10 years, my house will be paid off
If you pay the minimum and invest the difference, you will have more money. Never borrow when the rate is below inflation - and keep in mind that you deduct interest on a mortgage loan so a 3.5% rate before tax is closer to 2.6% after tax.
Prepaying your mortgage, therefore, is like investing in a CD for 10 years or more that doesn't even beat inflation.
Posted on 8/25/13 at 1:23 pm to foshizzle
quote:Exactly.
If you pay the minimum and invest the difference, you will have more money. Never borrow when the rate is below inflation - and keep in mind that you deduct interest on a mortgage loan so a 3.5% rate before tax is closer to 2.6% after tax.
But I guess that premise gets this response too . . .
quote:
However, 95% of people in 30s do not invest the difference between their 30 year P&I and the 15 - they spend it on other stuff, waste it whatever.
This post was edited on 8/25/13 at 1:25 pm
Posted on 8/25/13 at 1:39 pm to NC_Tigah
quote:
But I guess that premise gets this response too . . .
Of course. I conceded as much - the 5% that don't need Ramsey, don't need Baby Step 6, either.
However, avoiding interest is money in the bank - money you neither have to invest nor yield a return on - just to break even.
I don't think disciplined people are hurt by a 30-year - probably some benefit to it - but it requires much more active management.
I don't even see my mortgage. I'm on biweekly payments, timed to my paycheck, and it is wonderful. Back in the day, that was literally the most agonizing thing to deal with - of course I wasn't making very much money back then either.
Sorry. You guys can go back to bashing Ramsey, now. Hell, it's my fault for even bringing it up. When someone asks for money advice, I'll just keep my trap shut from now on.
This post was edited on 8/25/13 at 1:40 pm
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