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Message
re: Advice for a First Time Home Buyer
Posted on 3/22/19 at 6:42 am to JohnDoe00
Posted on 3/22/19 at 6:42 am to JohnDoe00
quote:
Also, I get paying PMI is a pain in the arse and "throwing money away," but lets say its $100 dollars a month so $1200 a year. Apartment wise for my area its at least $1000-1400 depending on 1 or 2 bedroom and overall quality of the apartment or rental. All of that money is technically being thrown away instead of the $1200 dollar a year PMI cost (example from previous comments). So in my mind its better to pay that over throwing money away on rent. Am I thinking of that correctly?
There are lot of up front costs I do not have an idea of yet because i am just getting into the process. And of course its not going to be a cheaper monthly total cost, but in the long run spending the extra 300-500 bucks a month is worth the increase in equity, right?
A couple things OP:
It’s been mentioned here by a couple people, but I cannot stress enough how much the “renting is throwing money away” expression can be misleading and get people into trouble.
First, as mentioned, you have to factor in closing costs, PMI, taxes, insurance, etc on top of your mortgage. All of that is money essentially lit on fire. It’s also important that you have closing costs on both ends of the transaction, when you buy and when you sell.
So now your monthly note is more than your rent by the $500 per month example you listed below. Let’s say you stay in the house for 5 years. That’s $30K more you’ve paid over those 60 months. Also, as mentioned previously, when you pay your mortgage, that money is disproportionately applied to your principal vs the interest. If, for example, the note is $1000 a month, the principal you pay on the first month will be around $1 and the interest will be about $999. This proportionally scales until the last payment it will be essentially the inverse at $999 to principal and $1 to interest. Now this is just an example with madeup numbers, but that’s the general concept. You can AND SHOULD get your lender to map out the exact amortization schedule for your loan and you’ll be able to see all of these details.
So in the example above, you’ve bought your house and paid 5% in closing costs, then you’ve spent $30K extra in mortgage payments with only a fractional percentage of this being towards the principal, then you sell at the end of those 5 years and pay 5% in closing costs again. It’s almost impossible that then fractional equity you earned in those 5 years will outweigh the closing costs plus the lost $30K (and associates returns if you invested).
Look, I’m not saying home ownership is a bad thing. I own a home because of where I’m at in my life, because I like actually being able to work on it and modify it to my liking, and because (quite frankly) I can afford it. However, this myth that renting is throwing money away is such hot garbage. Unless you somehow luck into an area that explodes or willingly live in an area you expect/hope to transition soon, then you shouldn’t expect this gold mine or large windfall on your home that so many marketers pitch.
ESPECIALLY at your age. I have no clue what you do or how tied you are to your area, but your generation is expected to be the most mobile generation in history. People are moving now more than ever because of jobs or relationships or any number of factors. If you’re in a house for less than 5 years, it’s almost impossible not to come out seriously below what you would’ve been at while renting.
Again, everyone is different. If you’re someone who is unwilling to move and knows they’re attached to a place, maybe it makes sense. However, when I was your age, freedom was what I wanted more than anything. I ended up moving something like 5 times in my 20s, and that would’ve been impossible with a mortgage. Instead I invested all the money I saved from renting and had a significant amount of money saved up that I used to start a company once I settled down.
Not saying my story is the right approach, but always be wary when everyone is preaching the same narrative like “buying is better than renting”. There’s different scenarios for any discussion, and there are thousands of scenarios where renting is infinitely better than buying.
3
Posted on 3/22/19 at 9:04 am to FootballNostradamus
You are gaining equity in a home this entire time if you are in the home beyond 5 years. Compared to renting where you are gaining no equity. So yes renting is throwing money away since the cost of living may be close to the same but the equity going into your net worth is not the same.
Even if your in home less than 5 years put more to the principle so you’re not paying al interest. I am amazed that anyone would buy a house and plan to live in it for less than 5 years.
Even if your in home less than 5 years put more to the principle so you’re not paying al interest. I am amazed that anyone would buy a house and plan to live in it for less than 5 years.
This post was edited on 3/22/19 at 9:11 am
Posted on 3/22/19 at 9:06 am to FootballNostradamus
I appreciate all the responses, and the amount of detail and thought presented.
Luckily, where I am renting now is super cheap and I do plan to stay here as long as possible. It looks like I have about 8-12 months till I'd have to be ready to purchase a home or lease another place. Until then I plan to watch the different areas and decide exactly where I would like to purchase, as well as, save as much as possible to be prepared for any situation.
I will definitely be thinking and weighing my options if continuing to rent will be better in the long run. I like the idea of saving more and investing the extra cash.
Luckily, where I am renting now is super cheap and I do plan to stay here as long as possible. It looks like I have about 8-12 months till I'd have to be ready to purchase a home or lease another place. Until then I plan to watch the different areas and decide exactly where I would like to purchase, as well as, save as much as possible to be prepared for any situation.
I will definitely be thinking and weighing my options if continuing to rent will be better in the long run. I like the idea of saving more and investing the extra cash.
Posted on 3/22/19 at 9:33 am to FootballNostradamus
quote:
FootballNostradamus
Great post.
Housing is an primarily a required expense rather than an asset. Plenty of scenarios where owning a home is great and plenty where it sucks. There are many qualitative factors that aren't going to show up on your net worth line as well. Maybe you have a dog and you want it to have a yard? Maybe you enjoy the privacy of a home? Maybe you want to customize it? Maybe you need more space than apartments provide? Etc.
Homes are also money pits that require the owner to consistently fix and/or insure things. It can be a serious 'ball and chain'.
In short, a home should not be viewed as a primary way to wealth generation.
This post was edited on 3/22/19 at 9:38 am
Posted on 3/22/19 at 11:21 am to ScaryClown
quote:
You are gaining equity in a home this entire time if you are in the home beyond 5 years. Compared to renting where you are gaining no equity. So yes renting is throwing money away since the cost of living may be close to the same but the equity going into your net worth is not the same.
Again, you are gaining fractional equity in your home. Also, in many places, renting is much cheaper than owning so the costs (once you include PMI, insurance, maintenance, etc) aren't overly close on a monthly basis.
quote:
Even if your in home less than 5 years put more to the principle so you’re not paying al interest.
You're skewing the basis in that case. If he has extra money to spend, applying it to his principal doesn't make owning more advantageous. He could just as easily invest it and get a return, possibly even a better return.
quote:
I am amazed that anyone would buy a house and plan to live in it for less than 5 years.
I doubt anyone plans to own houses less than 5 years, but it happens all the time; it's called life. If I was in my 20s, the last thing I'd want when I get some call about a job in Denver or Chicago or wherever is to have to decline it because of the house I own. Again, that's more of a personal statement, but I would hate it.
Posted on 3/22/19 at 11:32 am to lynxcat
quote:
Housing is an primarily a required expense rather than an asset.
Exactly
! quote:
In short, a home should not be viewed as a primary way to wealth generation.
1000%.
No one is saying that it can't be part of your wealth plan, but too many people buy this nonsense about home ownership being the only way to long-term wealth. More importantly, too many people buy into it at a young age.
Some of my most successful financial adventures in life have come because I was young and had readily available money that I could put towards different opportunities. If all of your finances are tied up in an non-liquid asset, your options are nil.
My thought has always been that once I get older and have a family, that will essentially limit my financial options for me so when I'm young I want the opportunity to take some financial risks at a time when if I lose I still have decades to make it back. Just my opinion, and it's worked out well.
Best of luck to OP!
Posted on 3/22/19 at 5:19 pm to FootballNostradamus
Using and italicizing a term like fractional equity in your response essentially means you didn’t disagree with the assertion. The average home in America (NOT in the French Quarter, Chicago, Miami, etc...which are obviously not average RE markets) can be expected and typically do appreciate in value anywhere from between 3-5% per year.
This fractional equity equates in real world terms to-literally-thousands of dollars.
Taking pains to point out the lack of principal payoff at the outset of a mortgage term while ignoring the real world appreciation in terms of dollars of the single largest investment the vast majority of humans in this country make or possess is a little curious IMO.
Especially considering for many moons interest paid on loans-as well as significant portions of closing costs associated with the mortgage process-have been tax deductible. Meaning there are potentially significant tax advantages to the closing and the first few years of heavy interest payback on an amortization schedule.
Coupled with the real world appreciation of an asset worth well over six figures to start with over the timeframe discussed, there are huge advantages to home ownership over the short term which you seem to skim over if not conveniently leave out of the discussion of this equation.
To say nothing of the expected realization of the uniquely worded fractional equity. To put this part into perspective, a $150,000 home appreciating at 3%/Year would appreciate $4,500. Over a five year period, that’s over $20,000 while many being able to deduct mortgage interest annually in a major way.
I’m not saying this is some way to beat the market or tust it’s always the right answer. But you sure seemed to have glossed over the benefits of home ownership on the front end over the short term and upon potential liquidation of the asset at the end of that term.
Again, to each their own. But let’s make sure we give folks looking for information as much of a balanced perspective as we can here.
This fractional equity equates in real world terms to-literally-thousands of dollars.
Taking pains to point out the lack of principal payoff at the outset of a mortgage term while ignoring the real world appreciation in terms of dollars of the single largest investment the vast majority of humans in this country make or possess is a little curious IMO.
Especially considering for many moons interest paid on loans-as well as significant portions of closing costs associated with the mortgage process-have been tax deductible. Meaning there are potentially significant tax advantages to the closing and the first few years of heavy interest payback on an amortization schedule.
Coupled with the real world appreciation of an asset worth well over six figures to start with over the timeframe discussed, there are huge advantages to home ownership over the short term which you seem to skim over if not conveniently leave out of the discussion of this equation.
To say nothing of the expected realization of the uniquely worded fractional equity. To put this part into perspective, a $150,000 home appreciating at 3%/Year would appreciate $4,500. Over a five year period, that’s over $20,000 while many being able to deduct mortgage interest annually in a major way.
I’m not saying this is some way to beat the market or tust it’s always the right answer. But you sure seemed to have glossed over the benefits of home ownership on the front end over the short term and upon potential liquidation of the asset at the end of that term.
Again, to each their own. But let’s make sure we give folks looking for information as much of a balanced perspective as we can here.
Posted on 3/22/19 at 6:07 pm to bodask42
quote:
My advice is try and find a home that you really like that is reasonable for all phases of your life, and go into it planning on staying there. Combine with this definitely look into getting a 15 year mortgage. If you start buying a home in your early 20s then you’ll have it paid off before you’re 40, which would give so much financial freedom.
Can you name a single profession that could provide enough income to achieve this in your 20's? (And you even said early 20s!)
Buy your forever home on a 15 year mortgage in your 20's. Who is doing that? Doctors aren't, lawyers aren't, investment bankers aren't, engineers aren't. Who is doing it?
quote:
Of course life is long, you never know what changes might occur that will force a move one day or what have you, but I just think people should get away from the whole “starter home” mentality.
Well, you have to live somewhere. Your options are to buy a home, or rent.
Posted on 3/23/19 at 5:42 am to GFunk
quote:
Using and italicizing a term like fractional equity in your response essentially means you didn’t disagree with the assertion. The average home in America (NOT in the French Quarter, Chicago, Miami, etc...which are obviously not average RE markets) can be expected and typically do appreciate in value anywhere from between 3-5% per year.
This fractional equity equates in real world terms to-literally-thousands of dollars.
Taking pains to point out the lack of principal payoff at the outset of a mortgage term while ignoring the real world appreciation in terms of dollars of the single largest investment the vast majority of humans in this country make or possess is a little curious IMO.
Especially considering for many moons interest paid on loans-as well as significant portions of closing costs associated with the mortgage process-have been tax deductible. Meaning there are potentially significant tax advantages to the closing and the first few years of heavy interest payback on an amortization schedule.
Coupled with the real world appreciation of an asset worth well over six figures to start with over the timeframe discussed, there are huge advantages to home ownership over the short term which you seem to skim over if not conveniently leave out of the discussion of this equation.
To say nothing of the expected realization of the uniquely worded fractional equity. To put this part into perspective, a $150,000 home appreciating at 3%/Year would appreciate $4,500. Over a five year period, that’s over $20,000 while many being able to deduct mortgage interest annually in a major way.
I’m not saying this is some way to beat the market or tust it’s always the right answer. But you sure seemed to have glossed over the benefits of home ownership on the front end over the short term and upon potential liquidation of the asset at the end of that term.
Again, to each their own. But let’s make sure we give folks looking for information as much of a balanced perspective as we can here.
All very fair points, GFunk. As I mentioned, I am a home owner for many of the reasons you mentioned, along with other factors that aren't necessarily quantifiable. I was mainly attempting to provide a contrarian perspective to the seemingly universal idea that buying is always superior to renting.
I think it's very reasonable, especially in the OP's case to think renting could be superior for the reasons I stated. At his age, renting can be a very attractive option that provides both freedom and movement from a career and standpoint and still allows him to build wealth through saving the money he's not paying on a higher mortgage, insurance, taxes, maintenance, closing fees, etc.
All good, solid points by all.
Posted on 3/25/19 at 11:19 am to JohnDoe00
1. Put 20% down
2. Every fee in closing can be negotiated.
3. If they tell you a fee can't be negotiated, you may be trying to negotiate it with the wrong person.
2. Every fee in closing can be negotiated.
3. If they tell you a fee can't be negotiated, you may be trying to negotiate it with the wrong person.
Posted on 3/25/19 at 11:58 am to PhiTiger1764
quote:
Can you name a single profession that could provide enough income to achieve this in your 20's? (And you even said early 20s!) Buy your forever home on a 15 year mortgage in your 20's. Who is doing that? Doctors aren't, lawyers aren't, investment bankers aren't, engineers aren't. Who is doing it?
I said early 20s because that is literally what the OP said his age is right now while about to purchase a home. So if he is able to purchase a home, there is no reason not to consider trying to get a 15 year mortgage over a 30 year (the monthly isn’t double the cost, maybe 20-30% more).
Posted on 3/25/19 at 12:33 pm to bodask42
Well first off.. a 15 yr mortgage is going to be more like 40% more than a 30.
But just to throw an example scenario out there, let’s assume that a “forever home” costs $350k and a “starter home” costs $200k.
The OP has stated he wants to put 5% down. The forever home 15 year mortgage would be about $3000/month. He would also need to come up with a $17,500 down payment.
The starter home 30 year mortgage would be about $1250/month with a $10,000 down payment.
Only one of these scenarios is realistic for someone in their 20s.
But just to throw an example scenario out there, let’s assume that a “forever home” costs $350k and a “starter home” costs $200k.
The OP has stated he wants to put 5% down. The forever home 15 year mortgage would be about $3000/month. He would also need to come up with a $17,500 down payment.
The starter home 30 year mortgage would be about $1250/month with a $10,000 down payment.
Only one of these scenarios is realistic for someone in their 20s.
This post was edited on 3/25/19 at 12:35 pm
Posted on 3/25/19 at 12:48 pm to TheBoo
quote:
2. Every fee in closing can be negotiated.
umm...
Posted on 3/25/19 at 12:53 pm to JohnDoe00
quote:
Any financing advice for a first time home buyer in their early 20's? Just started looking into buying my first home instead of continuing to rent an apartment. I think a house note would be close to the price of renting an apartment, or a little more a month. Putting money into owning something seems like a better option.
What is your gross income? You may qualify for USDA loan which is 30 year term and zero down. You could also qualify for FHA loan which is 3.5% down up to 30 year term. Each have fees and origination fees included so compare those to your conventional 5% down loan.
Do you plan on being in the home long? It may behoove you to keep renting unless you plan on staying there several years. I'm a realtor and have witnessed people write 10-20k checks to put with their house to sell it because they had negative equity.
Posted on 3/25/19 at 1:01 pm to PhiTiger1764
quote:
Well first off.. a 15 yr mortgage is going to be more like 40% more than a 30.
Well first off, that’s just not true. The monthly payment on my 15 year mortgage is about 30% more than it would have been with a 30 year mortgage. With the lower interest rate going to a shorter term loan, and cutting the number of years to accrue interest in half, it worked out that way.
You compared a 350k home to a 200k starter home. For many of the reasons detailed through this thread (Footballnostradamus key among them) buying the 200k “starter home” knowing full we that you’ll be out of it in just a few short years, just seems like you are burning away money, and reducing your flexibility. Renting should be strongly considered before taking a 30 year loan on a starter home, moving in a short while and not really building any real equity in the home.
BUT if one is dead set on purchasing a home, they should probably try and go ahead and have an attitude of permanence. And if they are being responsible and not stretching themselves thin, then the additional monthly cost to go with a 15 year mortgage shouldn’t break the bank.
Posted on 3/25/19 at 1:43 pm to bodask42
I saw a few posts mentioning getting a home on a Rural Development loan. If you're interested in going that route, this site pretty much shows you what areas are eligible for an RD loan: LINK
Click Single Family Housing Guaranteed then you can type in an address or just zoom in on the map. There are income caps to be eligible though and I believe it varies by Parish/County. Your lender should be able to explain it all to you.
Click Single Family Housing Guaranteed then you can type in an address or just zoom in on the map. There are income caps to be eligible though and I believe it varies by Parish/County. Your lender should be able to explain it all to you.
Posted on 3/25/19 at 2:03 pm to bodask42
quote:
BUT if one is dead set on purchasing a home, they should probably try and go ahead and have an attitude of permanence. And if they are being responsible and not stretching themselves thin, then the additional monthly cost to go with a 15 year mortgage shouldn’t break the bank.
I really just don't see how the average 20 something year old can realistically do all of the below, much less the first two:
1. Buy forever home
2. 15 year mortgage
3. Put 20 percent down
All or even a combination of any of the above two is only doable for a small percentage. Seems a little short sighted to think a person can do this right out of the gate. Also becoming house broke is no way to live even if you can make the numbers work. Been there, done that. Financial freedom has a multitude of answers, not just paying off debt right away. Even if you get there a little sooner down the road, how rocky was the path to get there?
Posted on 3/25/19 at 2:18 pm to MrJimBeam
I’m mid 20s, planning on 20% down on a 30yr for something that’s starter home priced, forever home if I don’t have kids 
And it’s pushing it from a responsible financial decision standpoint
And it’s pushing it from a responsible financial decision standpoint
Posted on 3/25/19 at 2:39 pm to jimbeam
Keeping your monthly costs down is certainly a positive.
You can always call any time you need help, son.
You can always call any time you need help, son.
Posted on 3/25/19 at 2:53 pm to bodask42
quote:
Well first off, that’s just not true. The monthly payment on my 15 year mortgage is about 30% more than it would have been with a 30 year mortgage.
Your anecdote doesn’t matter.
You can easily google today’s 15 year and 30 year rates and plug the numbers into a mortgage calculator. I don’t know what to tell you. The monthly note on a 15 year is 48.5% higher than a 30 year. This is factual, not my opinion.
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