My First House

[adameepoo]

With inflation and commodities at all time highs, interest rates and the USD at rock bottom lows, and the stock market stagnant, there there are very few places I feel comfortable putting my savings in. Correct me if I'm wrong, but Houston's real estate market seems pretty stable.

I am finally in a position in my life to afford a house and have enough of a downpayment saved up since I started working about 3 years ago. Would it be wise to use my savings towards a downpayment and use the equity as a bank for my savings? The homes I've been looking at probably take about 50% of my take home income for the piti and I could probably pay up to 80%% of my take home towards it without effecting my life style. I would also plan to use my ira's as my rainy day fund.

Anyways, just wondering if anybody had thoughts or experience with using your home equity as your savings account. Thanks!

[RedScare]

Yes, investing in a home is a good idea, especially if you purchase in an area with potential for big increases in value, such as neighborhoods closer to town. However, 50% of take home seems like a risk, even if you can afford it. I suggest keeping closer to the recommended percentages...28% of income for mortgage, 36% of income for mortgage plus debt payments. Invest the extra savings in something you are comfortable with, and of course, max out IRA investment.

[missmsry]

Wait.

[cottonmather0]

Although I am not generally of the popular mindset that the economy is all that bad right now, I would wait at least until early next year. No matter who wins, after the election the media will start prattling about "recovering" from the Bush Administration and eventually the good economy meme will start getting repeated over and over again, just like the constant copycat drumbeats of dread that we're hearing right now. That said, that's a long way away and the next 9-12 months have a lot more room for doom and gloom. Houston's housing market will likely feel some of it between now and then, so I would wait.

[adameepoo]

Thanks for the responses. I also believe there will be a sigh of relief no matter what happens in November, but without going too deep into politics, I cant imagine any real benefits coming from any candidate's economic proposals. I would like to wait, but my lease is up in about 3 months time and I'd rather not commit to another year while my savings are sitting on cash.

I cant foresee any safe place to park my money at even 6% for the next year or two so I'm thinking a mortgage would be the best bet at this point in time. I'd try to pay off as much of the prinicple as possible within these first few years, by paying up 50-80% of my income into it. And hopefully by then the economy would have turned around enough to make other investments lucrative again.

I didn't know that the recommended percentages were so low. I imagine thats the average for a typical nuclear family though, where as I'm single with little financial responsibility. I dont know if that justiifies the added risk or not, but I'd still plan to keep about 3 months of expenses on hand just in case and have enough in my IRAs to borrow against up to a year for that worst case scenario.

I'd really like to put as much money as possible into this and really looking at it as a "savings account" and not just a mortgage payment. I have a bit of a gambling problem when it comes to investing, so anything that keeps me illiquid will probably do me good in the long run.

Edited April 24, 2008 by adameepoo

[jm1fd]

If you're forced to sell in the near term, it could end up being a bad bed. If you can wait 5-10 years before selling, then you're almost assuredly making a sound investment.

[RedScare]

Thanks for the responses. I also believe there will be a sigh of relief no matter what happens in November, but without going too deep into politics, I cant imagine any real benefits coming from any candidate's economic proposals. I would like to wait, but my lease is up in about 3 months time and I'd rather not commit to another year while my savings are sitting on cash.

I cant foresee any safe place to park my money at even 6% for the next year or two so I'm thinking a mortgage would be the best bet at this point in time. I'd try to pay off as much of the prinicple as possible within these first few years, by paying up 50-80% of my income into it. And hopefully by then the economy would have turned around enough to make other investments lucrative again.

I didn't know that the recommended percentages were so low. I imagine thats the average for a typical nuclear family though, where as I'm single with little financial responsibility. I dont know if that justiifies the added risk or not, but I'd still plan to keep about 3 months of expenses on hand just in case and have enough in my IRAs to borrow against up to a year for that worst case scenario.

I'd really like to put as much money as possible into this and really looking at it as a "savings account" and not just a mortgage payment. I have a bit of a gambling problem when it comes to investing, so anything that keeps me illiquid will probably do me good in the long run.

Well, it sounds like you are looking to put a big down payment, have a normal mortgage, but pay extra toward principal each month until the markets calm down. There is nothing wrong with paying extra. I do that now. However, the base mortgage payment should not be too big a percentage of income. If something happens and you have a big mortgage and little or no income, you could be in trouble.

What I did is get a 30 year mortgage that fits comfortably within my income. However, each month I pay several hundred dollars extra. If I keep that schedule, the note is paid in only 15 years. However, if money gets tight, I can just pay the smaller mortgage payment for a few months.

[MidtownCoog]

Nothing wrong with paying extra but don't waste your time.

You can make more money with that "extra" in a mutual fund.

[TheNiche]

If you're forced to sell in the near term, it could end up being a bad bed. If you can wait 5-10 years before selling, then you're almost assuredly making a sound investment.

I absolutely concur. Just stay out of newer subdividions built to be crappy upon completion, and give it at least 4 years, and you'll have done far better than renting.

Nothing wrong with paying extra but don't waste your time.

You can make more money with that "extra" in a mutual fund.

YES, YES, YES! Paying extra on a mortgage payment doesn't reduce the amount of interest that you'll pay in suceeding months and only affects the back end of amortization, after you've paid off almost all of the interest.

Invest in short-term treasuries before paying extra on your mortgage. Mutual funds and ETFs are better, though.

[adameepoo]

I absolutely concur. Just stay out of newer subdividions built to be crappy upon completion, and give it at least 4 years, and you'll have done far better than renting.

YES, YES, YES! Paying extra on a mortgage payment doesn't reduce the amount of interest that you'll pay in suceeding months and only affects the back end of amortization, after you've paid off almost all of the interest.

Invest in short-term treasuries before paying extra on your mortgage. Mutual funds and ETFs are better, though.

Thanks for the advice on location. I was leaning towards something in midtown, preferably north of 59, but maybe some of those new constructions a few streets south. Otherwise probably near Houston @ Washington. How do you think those areas will fare in the near future (5-10 years)?

After your comment about the amortization, I did some calculations and no matter how I looked at it, to my surprise, paying off the premium would only have saved me about 4.3-4.5% on the extra payments with a 6% apr loan. So you're absolutely right, and although I dont think a short term treasury is paying quite that much, maybe a short term CD or high yield savings account. So again, great advice! I'm glad I joined this forum.

[RedScare]

I'm not sure what calculations you did, but the mortgage calculators I use show a reduction in the amount of interest paid over the mortgage by paying extra toward principal. Since the interest accrues only on the outstanding principal, paying down the principal reduces the interest owed.

That being said, I concede that there are better investments than mortgage interest. And, your statement that you have lots of extra income to devote to eith a mortgage or other investments suggests that you are not like most people, who would not invest the extra payment, but would spend it. Human nature being what it is, most people are better off paying on the mortgage. Finally, you are not my age. I am trying to have my mortgage paid off before retirement age, allowing me to live on a lower income. Paying extra makes sense in my case.

[TheNiche]

I'm not sure what calculations you did, but the mortgage calculators I use show a reduction in the amount of interest paid over the mortgage by paying extra toward principal. Since the interest accrues only on the outstanding principal, paying down the principal reduces the interest owed.

That being said, I concede that there are better investments than mortgage interest. And, your statement that you have lots of extra income to devote to eith a mortgage or other investments suggests that you are not like most people, who would not invest the extra payment, but would spend it. Human nature being what it is, most people are better off paying on the mortgage. Finally, you are not my age. I am trying to have my mortgage paid off before retirement age, allowing me to live on a lower income. Paying extra makes sense in my case.

Come to think of it, that's only how my home mortgage is set up. The terms on my commercial mortgage as well as for my car note each get treated slightly differently as well. So perhaps the devil is in the details.

In any event, MidtownCoog's advice is still sound, probably compounded by income tax deductions on the interest. There are definitely better places to put that money.

[adameepoo]

Come to think of it, that's only how my home mortgage is set up. The terms on my commercial mortgage as well as for my car note each get treated slightly differently as well. So perhaps the devil is in the details.

In any event, MidtownCoog's advice is still sound, probably compounded by income tax deductions on the interest. There are definitely better places to put that money.

Well I woke up this morning thinking that there was no way my calculations were right. I re-did everything to the detail, and included future value calculations for the amortization payments. And though its been a few years since my last finance class, it seems paying it off early definitely enjoys the full 6% savings on interest (assuming a 6% apr mortgage). I dont know why or how I could have found otherwise, but I'll chalk it up to 1am drowsiness.

That being said, there aren't may investment intstruments out there that offer better returns than that at the moment, and paying it off early would definitely be worth it in my opinion. Hell, inflation alone was over 6% last year not including the increase in money supply. So any kind of bond is already starting at a huge negative. Still, if interest rates start to rise dramatically (as i think they'd have to eventually) or the stock markets start doing better, I'd probably reassess the situation.

[BryanS]

My two cents....

Either put 5% down (w/ a 15% second)... or 20% down (with no second mort), if you have it. Putting down more than 5%, less than 20% really makes no sense in terms of brining down your monthly payments. All you'll end up doing is tying up thousands and thousands of dollars of your cash, you could use else where.

Get a 30 year first... and if you need.... a 15 year second.

In terms of "extra payments" - make the equivalent of one extra payment per year, on your 30 year note. If you do this, you will save thousands and thousands on interest payments on the loan, over the life of the loan. It will effectively reduce your 30 year mortgage to a 23 year mortgage or there abouts.

When you have up to about ~30% equity in your home - pull a HELOC, and use that for a rainy fund. DO NOT spend home equity on perishable expenses (cc debt, car payments, vacations, etc.). I say 30% because, in TX, you can only borrow against 80% of the market value of your prime residence, less any and all mortgages against it.

...if you should move out of this place... and turn it into an investment property... then you can borrow up to 100% of the equity (I think). This gives you access to (more of) your cash - without having to sell your house.

[gwilson]

Buying a home is only a safe place to put your money if you plan on staying in it for better than 10 years.

Otherwise, any gains from appreciation will be mitigated by taxes, interest, maintenance. Your best bet in that sub 10 year mark is to break even, but if you include closing costs, you will likely lose money, even if the property appreciates.

[memebag]

Buying a home is only a safe place to put your money if you plan on staying in it for better than 10 years.

Otherwise, any gains from appreciation will be mitigated by taxes, interest, maintenance. Your best bet in that sub 10 year mark is to break even, but if you include closing costs, you will likely lose money, even if the property appreciates.

I think that depends on what you would be paying in rent. I've read that rents are on the increase in Houston as apartments are being replaced with townhouses and such.

[gwilson]

Well, it certainly depends on that. That is pretty common sense, lol.

[RedScare]

Buying a home is only a safe place to put your money if you plan on staying in it for better than 10 years.

Otherwise, any gains from appreciation will be mitigated by taxes, interest, maintenance. Your best bet in that sub 10 year mark is to break even, but if you include closing costs, you will likely lose money, even if the property appreciates.

That is not necessarily true. If you buy in a slowly appreciating area, it may take several years to overcome closing costs and moving expenses, but if you buy in a rapidly appreciating area those costs are overcome much more quickly. I bought my first house inside the loop in 1999. I used the equity gained from the sale of that condo to buy my current house in 2004. The equity on this one equals roughly 15 times my original 10% down payment from 1999....less than 9 years. I was making money in year 2. But, like I said, I got lucky with where I bought.

[RWB]

Thanks for the responses. I also believe there will be a sigh of relief no matter what happens in November, but without going too deep into politics, I cant imagine any real benefits coming from any candidate's economic proposals. I would like to wait, but my lease is up in about 3 months time and I'd rather not commit to another year while my savings are sitting on cash.

I cant foresee any safe place to park my money at even 6% for the next year or two so I'm thinking a mortgage would be the best bet at this point in time. I'd try to pay off as much of the prinicple as possible within these first few years, by paying up 50-80% of my income into it. And hopefully by then the economy would have turned around enough to make other investments lucrative again.

Without knowing what you do for a living, I have to say this seems quite reckless. The U.S. economy is in a recession now, but Houston most assuredly is not. Houston's economic cycles are at least somewhat negatively correlated with the rest of the country, because we benefit from high oil prices.

If your job is in the energy industry, I would be worried about a regression to mean prices for oil and natural gas, as happened after the last big boom in prices of the early 80s. The regression won't be as extreme as it was then, as demand will continue to be strong elsewhere in the world. But a recession in the U.S. will pull oil prices down after a while (there could be a lag of a year or more), as also will new production coming on line, new conservation-oriented laws starting to work (like increasing the CAFE standards), etc.

The larger your monthly house payments, the less shielded you are if you end up in a period of financial distress. 3 months cushion seems very light. And if your job is either directly or indirectly related to the energy industry, I would be cautious and park your money in places that are, at the very least, more liquid than a house. Baring that, I would go for a smaller monthly payment with a bigger cash cushion in case of distress.

[TheNiche]

I think that depends on what you would be paying in rent. I've read that rents are on the increase in Houston as apartments are being replaced with townhouses and such.

Average rents are increasing, but if you look at rents on a 'same-store' basis, factoring out new construction, they're pretty close to level...possibly even falling if you factor out inflation.

[adameepoo]

Anybody know where I could find historical home appreciation values in houston? I'd like to see what would happen if i invested my downpayment instead vs appreciation in a home after 30 years.

Assuming a 250k home with 50k down and 6% apr, I'd have about $1200 p&i and $1800 piti

Assuming my rent is equal to my p&i at $1200/mo and the difference of $600/mo goes towards my "investment fund"

I came up with these numbers at different rates of return (sorry about the dots, couldn't figure out tables or spaces)

year.....@3%.apy........@4%.apy........@6%.apy........@12%.apy

0........50,000.00......50,000.00......50,000.00......50,000.00

1........58,700.00......59,200.00......60,200.00......63,200.00

2........67,661.00......68,768.00......71,012.00......77,984.00

3........76,890.83......78,718.72......82,472.72......94,542.08

4........86,397.55......89,067.47......94,621.08......113,087.13

5........96,189.48......99,830.17......107,498.35.....133,857.59

6........106,275.17.....111,023.37.....121,148.25.....157,120.50

7........116,663.42.....122,664.31.....135,617.14.....183,174.95

8........127,363.32.....134,770.88.....150,954.17.....212,355.95

9........138,384.22.....147,361.72.....167,211.42.....245,038.66

10.......149,735.75.....160,456.19.....184,444.11.....281,643.30

20.......283,772.26.....323,958.32.....425,213.03.....1,001,092.24

30.......463,906.12.....565,981.43.....856,393.50.....3,235,591.43

.........2.08%..........2.76%..........4.19%..........8.91%

So my home would have to appreciate ~2% a year to break even with my investment at 3% apy, 2.76% @ 4% apy, 4.19% @ 6% apy and 8.91% @ 12% apy, the historical average stock market return rate. This is also ignoring closing costs and maintenence fees as well as the tax deduction incurred for buying a home. Can anybody shed some light on the likelihood of any of these appreciation rates and anything I should add to my model when doing my calculations?

I'm beginning to question the financial responsiblility for me buying espeically since its very unlikely I'll be staying in it for over 10 years as somebody pointed out earlier. Thanks again for all the input

[20thStDad]

Buying a home can be a great investment, and hopefully is in the long term, but there is more to it than that. I had done similar calculations about it being more profitable for me and my wife to continue renting. In the end we bought, and I love it because it's a place that is ours, a place we enjoy being in. Also I get a lot more out of putting those personal touches on it than I thought I would. And also I was gettin very tired of sharing walls, parking, and other general spaces with people. We lived in an apartment, duplex, and then garage apartment, and though that progressed to more and more privacy it still doesn't compare to having our own space.

I expect we'll stay in this place for 5-7 years (been here a year), and I figure the value will go up a decent amount in that time, but not crazy (we're in the Heights). But in the end we feel that we've been getting great value and enjoyment for what we pay anyway, so if it's only a modest appreciation I can deal with it. Read: I am happy to pay to be here. We're getting savings/earnings from other things. Honestly I don't want the value to go up too much, because that means when we are ready to move we basically can't afford to stay in the same area and get something bigger. Of course the posters of this forum are working on convincing me we won't need something bigger even as our family grows, I'm starting to buy into that. Anyway, if we do decide to move I don't want the market to out-grow us.

One final note - in doing the math definitely take into account the tax deductible interest. I didn't factor this in, but an extra $10-13k in deductions that first few years (30 yr note, ~$200k principle) is definitely nice.

[RedScare]

So, you're going to invest your $600 savings by renting into a taxable "investment fund", but ignore the tax deduction on the interest and taxes paid on a mortgage? Even at 25-28% tax rates, the numbers are substantial. To begin with, that $600 you are investing is not $600. It is $432 (28% tax) to $450 (25%). The math may still work in your favor, but you have to be honest about it. How likely are you to invest the $600 every month? How much will rent increase over the 30 years? Where would you be buying (or renting)?

These questions drastically affect your math. I rented for 16 years before buying my first house. It was a smart move, since I moved 8 times during that period, plus I never spent more than $325 per month on rent, by renting old duplexes or having roommates. However, my initial down payment on my 2 homes since then is now worth 15 times that in a span of 9 years. Given the state of real estate during the years I rented, plus the number of times I moved, I never would have realized those gains then, but I am now.

You are making a simple chart, and ignoring the most important equations of tax savings, location and how long you plan to live in one location. As a long time renter, and an apparently successful home owner, I suggest 2 things. If you are going to rent, don't fall for the stainless steel appliances. Find as cheap a place as you can stand. Otherwise, you are not saving any money. Secondly, if you buy, buy in an area in the beginning stages of gentrification. The big gains are at the beginning, not the end. The third option, which does not apply to those who look at their home as a bank account, is to buy in an area you like and stay there, and quit watching late night investment shows.

Edited April 27, 2008 by RedScare

[adameepoo]

So, you're going to invest your $600 savings by renting into a taxable "investment fund", but ignore the tax deduction on the interest and taxes paid on a mortgage? Even at 25-28% tax rates, the numbers are substantial. To begin with, that $600 you are investing is not $600. It is $432 (28% tax) to $450 (25%). The math may still work in your favor, but you have to be honest about it. How likely are you to invest the $600 every month? How much will rent increase over the 30 years? Where would you be buying (or renting)?

Thanks for the suggestion. Believe me, I didn't add the deduction to the interest to skew my result, but because I was too lazy to figure out how to combine apr mortgage amortization vs apy interest payments in excel. I didn't factor in the rent increase, which I think I should. So with some new factors, I get the follow numbers

Including 25% opportunity cost vs interest tax deduction with buying

Including 6% annual increase in rent - a fairly high assumption I feel

Using apr instead of apy for interest payments

Including 25% capital gains tax for investment gains

year.....@3%.apr........@4%.apr........@6%.apr........@12%.apr

30.......$335,283.05....$389,575.16....$534,063.66 ....$1,524,845.25

.........0.98%..........1.49%..........2.56% ..........6.21%

I get these numbers which seems a lot more inline with some of the rent vs buy calculators I see online. It does once again seem prudent to buy instead of rent, but its still hard to compare without knowing historical appreication from different houston areas

[RedScare]

The capital gains tax is only 15%, but you get the point. The bigger "problem" is that it is impossible to predict housing trends or your own personal goals 30 years out. And why should you? Let's assume that you would be $100,000 ahead by renting and investing for 30 years. Also suppose that living in your own home is more enjoyable. Is it really worth $100,000 to be miserable for 30 years? How about $200,000? $500,000?

Now suppose that in 30 years, the home is paid off, and...given your attention to investment goals...you also have a smaller, but substantial sum invested. Are you really worse off, if you enjoyed living in your home for 30 years, it is now paid off, AND you have money in the bank? This is not a sporting event. The goal should not be the absolute highest yield. If it were, my suggestion would be to sell your car, take public transit, and live in an efficiency apartment in a poor area of town. THAT will yield you the highest return. Oh, and shop at Salvation Army.

To be sure, renting is not bad, if you do not go for the glitter, or if you plan to move within a few years. The costs of buying and selling, especially if not timed correctly, can wipe out any equity gains. But, there is no set answer for buying versus renting. It must be narrowed down to buying in THIS neighborhood versus renting THAT kind of apartment, and for THIS long. Only then can you get a reasonable approximation. And don't forget to factor in whether you would rather own than rent.

Hope that helped. Good luck.

[jm1fd]

Buying vs Renting is not strictly a numbers proposition, espescially in our market where there's typically no overwhelming cost advantage to renting versus buying comparable properties. Buying real estate can be a bad investment. On the other hand, buying equities, bonds, treasuries, etc. can be a bad investment. It all boils down to how long you're going to stay in the house, and WHAT YOU WANT. If you want to own a home, and you're going to stay in it for several years, then GO BUY. Simple as that.

Edited April 27, 2008 by jm1fd

[TAK]

your home is really only an investment if you're going to downsize or move to a cheaper neighborhood when you sell your home...

think about it. if your home is $300k now and $750k in 10 years, what are you going to do? Are you going to sell your house and move into one just like it? No return on that.

i don't look at my primary residence as an investment. it's my home. for investments, i buy investment property, not a "home".

Edited April 28, 2008 by TAK

[TheNiche]

your home is really only an investment if you're going to downsize or move to a cheaper neighborhood when you sell your home...

think about it. if your home is $300k now and $750k in 10 years, what are you going to do? Are you going to sell your house and move into one just like it? No return on that.

i don't look at my primary residence as an investment. it's my home. for investments, i buy investment property, not a "home".

Market value of a home does not equate to the individual owner's value of that home.

Also, not all homes priced at $750k are alike.

Also, the principal and capital gains from the sale of a $750k home need not be re-invested in a different $750k home if that is the individual's preference, and can in fact be used for other consumption items...or they can be used as a down payment on a much more expensive home with a new house note.

[millennica]

The current law allows up to $250,000 of profit from the sale of a primary personal residence per person ($500,000 per couple) to be excluded from taxation. The full amount is available if the seller(s) used the home as their primary residence for at least two (2) years out of the five (5) years prior to the sale. This does no mean that the property had to be owned for a full five years, as some believe.

[TAK]

Market value of a home does not equate to the individual owner's value of that home.

Also, not all homes priced at $750k are alike.

Also, the principal and capital gains from the sale of a $750k home need not be re-invested in a different $750k home if that is the individual's preference, and can in fact be used for other consumption items...or they can be used as a down payment on a much more expensive home with a new house note.

i think we said the same thing, but from a different viewpoint.