23yr old wannabe mustachian

[ryanht13]

Facts about me:
I'm single, but soon to be engaged. I live in Birmingham, AL (not a bike friendly city). I have about a 20 mile commute to work in my 4-cyl Honda civic. I currently make about 60k a year before any bonuses. My salary is continuing to trend up. My future wife will likely not make much money- maybe 30k. I am very comfortable with the strategies of investing in low cost index funds and ETFs, and I am above average at cash flow management. I have a competent and trustworthy friend who I am wanting to do high quality rentals with soon.

I have ZERO debt
My 401(k) balance is around 8,000
My Roth IRA balance is around 11,500
My Taxable balance is around 30,000
My Cash savings balance is around 11,000

My dilemma:
I need to buy a personal residence (rent vs housing prices heavily favor purchasing in my local market). My budget is set for around 180k for a newer, low maintenance, efficient home. I travel overnight a lot which why I want low maintenance and in a safe area.

Here are my 2 questions:
-Should I participate in a 0% down mortgage (don't freak out) for 30yrs @3.75% with no PMI?
-I have reached the conclusion that there are no commutes less than 10 miles from where I work @ my relatively high paying job. It is in a very industrial, unsafe part of town. So how do I best manage a longer, non-bike commute to work to still pursue financial independence?

Here is why I'm considering the 0% down 30yr mortgage. I can earn a huge spread over the long-term through investing against my 3.75% interest payment. I stay extremely liquid as opposed to dumping all of my cash and most of my investments into the walls of my home. Covering a 15 yr mortgage will leave me much less money to invest obviously. I've found through research that home prices barely outpace inflation, and HNW people usually don't consider their primary residence as an investment. I'm using other people's money to live, while I keep and contribute big dollars to mutual funds and rental houses. Inflation will also heavily eat at that interest rate over time. As long as I continue to invest and save heavily, the numbers simply justify that I will earn tens of thousands more over the life of the loan, not to mention the safety in liquidity. I realize this strategy would require heavy discipline, as it only works if I invest the difference in monthly payments vs 15yr loan with a >10% down payment. If I used extra money to buy bass boats, golf clubs, and fancy vacations, then I will likely get burned. Am I missing something?

You guys are the experts, what strategy would you employ to my two questions?

 

[JLee]

IMO the only reason to put money down on a house is to get conventional financing / no PMI. If you can do 0% down at a competitive rate, I don't see why not (assuming housing prices are stable and you won't end up upside down in a house you can't unload if you need to).

[ShoulderThingThatGoesUp]

If somebody will loan you an entire house at under 4% with no crazy fees, I'm not sure why you wouldn't let them.

Is your job such that you can WFH one day a week? Instant 20% drop in commuting costs.

[TexasStash]

How would the loan be structured? From your inquiry, I assume it's truly a fixed 3.75% over the entire 30 years. Is it truly one single mortgage or is it more like 1 loan for 80% and 1 loan for the other 20%? I've seen mortgages structured like that usually to avoid PMI costs. Overall my biggest concern with a 0% down loan... sounds too good to not have any gotchas. Just make sure you actually read the contracts you sign.

My personal approach is to meet it half way (or part of the way). We got the mortgage at 3.75% 2 years ago (though it wasn't 0% down), but we pay a little extra on our mortgage every month while also contributing to 401k, Roth and taxable accounts. I like that approach because you get guaranteed 3.75% return on paying down the mortgage, and you get the (likely but a little more risky) higher returns of the market too. I personally like that bit of diversification. YMMV.

[ryanht13]

ShoulderThingThatGoesUp:
WFH is a viable option for the future. I have only been with this employer for 6 months. I am in an sales/management role and many of the folks in my same position at other divisions work 100% from their homes. However, this employer really favors people who operate and conduct business on-site because they are exposed to and learn many different management skills and operational issues. One promotion would essentially triple my salary, so at this point I am trying to set myself up early.

TexasStash:
What's great about this is it's fixed, lumped into one loan. The only downside is a 1% non-negotiable origination and about 1,100 in other fees. This loan also allows the seller to pay up to 3% of these closing costs too, and many of the homes I've been looking at advertise that they'll help with closing since many are new developments/builders.

[James]

I find no fault with your thinking, you have the liquidity so it's just a matter of where to place that money to keep those dollars earning the most they can.


I would do more math before making a decision. Find an actual house you would want to buy, find out the actual closing costs and cost of the loan, find out cost of PMI and make sure you can drop PMI when you owe less than 80% of house value. Figure out all those costs, origination, interest cost on that 20%, etc and add them up to the date where you will have paid down the mortgage by 20%. Then take that same 20% and determine what you can expect that value to be in the market at the same point in time.


If the extra spending to avoid the 20% down is substantially less than the earning you would expect to make in the market during that period of time, then you are probably on the right track. But if the extra spending in closing costs, origination of loan, PMI, interest, etc is similar to what you would expect to make in the market with that 20%, then go with the sure bet of down payment. You know what savings the 20% down will give you, but you can't know for sure what income it will produce in the market.