Author Topic: Buying now with less down vs. waiting  (Read 8730 times)

BuckeyeFinance

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Buying now with less down vs. waiting
« on: May 08, 2015, 08:00:46 PM »
If I buy now, I can only put 5% down and I'll have to pay PMI. If I wait a year, I'll put 15-20% down and avoid PMI but I'll waste money on rent for another year. The excess interest paid would be deductible on my taxes. What else should I consider? Can someone simplify this calculation for me?

thedayisbrave

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Re: Buying now with less down vs. waiting
« Reply #1 on: May 08, 2015, 08:19:36 PM »
Just wait.  You're not wasting money by renting in the meantime.  PMI is what I call an actual waste of money so I'd try to avoid it all costs.  Also I've never understood why people have justified spending money by saying it's tax deductible... you're spending 100% to "save" 25%.  Kind of like going shopping with a coupon and being so happy you saved money when psychologically the coupon actually made you spend money you shouldn't have in the first place.

KungfuRabbit

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Re: Buying now with less down vs. waiting
« Reply #2 on: May 08, 2015, 09:34:33 PM »
Need more information.

If you are looking to buy a place comparable in price to your rent, you can start with 5% down and pay extra to get rid of pmi. 

Also are you going to stay in place like 10 years?  Houses aren't an amazing investment lately.

I'd say go for it. Interest rates can't possibly go down, and they could go up. Just make sure to buy a mustachian house.

BuckeyeFinance

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Re: Buying now with less down vs. waiting
« Reply #3 on: May 09, 2015, 05:48:55 AM »
Need more information.

If you are looking to buy a place comparable in price to your rent, you can start with 5% down and pay extra to get rid of pmi. 

Also are you going to stay in place like 10 years?  Houses aren't an amazing investment lately.

I'd say go for it. Interest rates can't possibly go down, and they could go up. Just make sure to buy a mustachian house.

My rent is especially low at the moment due to sharing a 1 br apartment with my gf. My portion is $400 which includes heat, water, trash, cable & internet. I only pay electric ~50/month avg tops. I'm saving well over half of my after-tax income each month.

If I bought a house, it would be in the 180-200k range which gets you a 3-4 br 2.5 bath place with a nice backyard in my area. Not comparable at all to my current living situation. The idea would be to own the home for a long time. I can't, with any real accuracy, be more specific than that. I love the city I live in and my career is going really well. On the super small chance I'd lose my job, I feel I could get a comparable (in pay) job quickly.

ShoulderThingThatGoesUp

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Re: Buying now with less down vs. waiting
« Reply #4 on: May 09, 2015, 07:06:09 AM »
Why do you need a 3-4 bedroom house? Are you getting married and having kids soon?

mungo

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Re: Buying now with less down vs. waiting
« Reply #5 on: May 09, 2015, 07:18:20 AM »
If you're spending that little on rent, presumably you should be in a good position to save up lots of money for a deposit in the next year. 

Also, don't be sure that you'll be able to get rid of PMI just by paying off 15-20%--when I did this, my mortgage company insisted on a reassessment of the value of my property (at my expense), then used houses that were nowhere near mine or similar to mine as comparables.  Don't go the PMI route unless you absolutely have to...

BuckeyeFinance

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Re: Buying now with less down vs. waiting
« Reply #6 on: May 10, 2015, 05:10:53 AM »
Why do you need a 3-4 bedroom house? Are you getting married and having kids soon?

I don't know for sure but I'd like to have the house for a significant amount of time and should I decide to get married and have kids, it seems like it makes more sense to buy a house that is equipped for that. In the meantime, a 3 br house would consist of a home gym, an office/guest bedroom, and a master.

BuckeyeFinance

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Re: Buying now with less down vs. waiting
« Reply #7 on: May 10, 2015, 05:17:29 AM »
If you're spending that little on rent, presumably you should be in a good position to save up lots of money for a deposit in the next year. 

Also, don't be sure that you'll be able to get rid of PMI just by paying off 15-20%--when I did this, my mortgage company insisted on a reassessment of the value of my property (at my expense), then used houses that were nowhere near mine or similar to mine as comparables.  Don't go the PMI route unless you absolutely have to...

This is a good point and I did discuss this with a loan specialist. I would have to pay 15% down up-front to avoid any PMI. Otherwise, I would have to pay for a reassessment (~$3-400) to get rid of the PMI after a couple of years.

BuckeyeFinance

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Re: Buying now with less down vs. waiting
« Reply #8 on: May 10, 2015, 06:26:59 AM »
Plot Twist: I spoke with my gf and she insisted on paying to live with me should I decide to buy a home. Let's assume she pays $600/month, and conservatively assume that $450 of this goes towards my mortgage with the other $150 going towards utilities. If I buy now, I would incur an extra $80/month of PMI in addition to extra interest expense vs waiting a year to buy. I'd plan to pay at least $1,000 extra down each month which would reduce the interest expense (right?). Let's also assume that my girlfriend decides to dump me after 1 year. Is it a no-brainer to buy now in this situation or does the added interest expense have a bigger impact than I think? I am having trouble calculating the added interest expense over the life of the loan assuming I pay $1,000 extra each month. Can anyone help me with this?

Thanks!

GoingConcern

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Re: Buying now with less down vs. waiting
« Reply #9 on: May 10, 2015, 08:00:55 AM »
Your living expenses are $400 a month?  That is extremely cheap and currently many places are going through another real estate bubble due to low interest rates which will surely rise within the next few years.  IMO real esate prices prices are high in many areas due to low interest rates and low inventory. 

As for wasting money on rent, another way to look at it is you are spending $4,800 a year on living expenses and if you bought a home only a fraction of that would go towards the principle.  Majority of it would go to interest, taxes and PMI.  As a homeowner you are responsible for repairs.  You might have to redo your HVAC or get a new roof and that alone will cost more than $4,800. 

Now if you plan to live in the place for 5-10 years then maybe it's worth to buy.  But your rent is so low its hard to justify buying a $200k home. 
« Last Edit: May 10, 2015, 08:08:15 AM by GoingConcern »

waltworks

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Re: Buying now with less down vs. waiting
« Reply #10 on: May 10, 2015, 08:44:32 AM »
Toodle over to the RE forum and do a search for "maintenance costs" or "50% rule". You aren't buying a rental but the numbers thrown around will still open your eyes.

Also, I get tired of saying this but: unless you are paying a LOT of mortgage interest or have a ton of other itemized deductions, you'll be taking the standard deduction anyway. The mortgage interest won't save you anything.

-W

alexgodden

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Re: Buying now with less down vs. waiting
« Reply #11 on: May 10, 2015, 10:36:44 AM »
Taking away how you finance it for a second, you're asking if you should trade up from a small apartment that you and your gf are (presumably) fine living in for now, to a 3-4 bedroom house that you don't need but think you will in the future.

Think about that for a minute - you're buying something you don't need yet, and don't know when you will need. Does that sound Mustachian to you?

The only time that makes sense if when the thing you are stocking up on a) is WAY cheaper now and b) costs nothing to maintain in the meantime. So, for example, when toilet paper is super-cheap at CostCo and you have free storage space, then by all means stock up.

Is housing so cheap right now and expected to rise so fast that you will miss out if you don't snap up a major bargain? Will the cost of maintaining the "extra" housing in the meantime be zero? Only in that situation would this make sense.

My advice - wait until you really need a 3-bed house before buying one.

JLee

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Re: Buying now with less down vs. waiting
« Reply #12 on: May 10, 2015, 11:58:45 AM »
I bought my first house just over two years ago. It's a lot more expensive than you think it'll be.

bacchi

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Re: Buying now with less down vs. waiting
« Reply #13 on: May 10, 2015, 12:26:08 PM »
Plot Twist: I spoke with my gf and she insisted on paying to live with me should I decide to buy a home. Let's assume she pays $600/month, and conservatively assume that $450 of this goes towards my mortgage with the other $150 going towards utilities. If I buy now, I would incur an extra $80/month of PMI in addition to extra interest expense vs waiting a year to buy. I'd plan to pay at least $1,000 extra down each month which would reduce the interest expense (right?). Let's also assume that my girlfriend decides to dump me after 1 year. Is it a no-brainer to buy now in this situation or does the added interest expense have a bigger impact than I think? I am having trouble calculating the added interest expense over the life of the loan assuming I pay $1,000 extra each month. Can anyone help me with this?

Thanks!

I'd ask an attorney before ever getting into that kind of arrangement. You don't want an ex- claiming that part of the house is hers because she paid part of the mortgage. Keep it simple and have her pay all of the utilities.

mlipps

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Re: Buying now with less down vs. waiting
« Reply #14 on: May 10, 2015, 04:13:20 PM »
Toodle over to the RE forum and do a search for "maintenance costs" or "50% rule". You aren't buying a rental but the numbers thrown around will still open your eyes.

Also, I get tired of saying this but: unless you are paying a LOT of mortgage interest or have a ton of other itemized deductions, you'll be taking the standard deduction anyway. The mortgage interest won't save you anything.

-W

I agree in general, but it's easier to beat the single standard deduction than the married one.

Bob W

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Re: Buying now with less down vs. waiting
« Reply #15 on: May 11, 2015, 01:12:54 PM »
I smell home buyer fever --- which generally comes just before let's get married and have a baby fever.

That said --- the reality is a house will bring no more happiness to your life and possibly become a magnet for "stuff."   I imagine those 2 unused bedrooms piling up with stuff. 

My vote,  continue living the happy lifestyle you have,  work on ways to save more than 50% of you income for now.   Start looking at house (on the net) in the more like 100K range.    Remember even if a baby comes along you don't need a home with a good school district for many years.   

It is very possible between you and the GF that within 3 years you could buy a home outright.  Or at least have an equal amount invested as the cost of the home.   

If it is that you are tired of having neighbors at your walls you could always rent a small house.   

Of course, I could be wrong.

waffle

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Re: Buying now with less down vs. waiting
« Reply #16 on: May 11, 2015, 02:24:52 PM »
It really depends on the market you are in. In my case I bit the bullet and got a mortgage with PMI. I'm in Denver and the rental market here is pretty insane. Buying even with PMI still saves me about $400/month over renting a comparable house. I do plan on getting rid of the PMI as soon as possible. If I leave it as is then it will take years to get rid of and cost me $10k.
For your case I would wait and build up the larger down payment. You are in an inexpensive situation now and it should be easy to save a large down payment. I have a family and got quickly relocated to Denver for work.

JLee

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Re: Buying now with less down vs. waiting
« Reply #17 on: May 11, 2015, 02:38:48 PM »
How I got out of PMI: I paid for my own independent assessment years ago to get out of PMI early. Housing prices were rising in my area, so that worked in my favor. The thing about property valuation is this: it has a bit of a system to it, but a lot of the valuation depends on the opinion of the person doing the assessment. Really, they can't seriously claim one house is worth exactly 1k less than one next door, unless they're cookie cutters, which was not the case in my neighborhood. If you look at assessments, you'll see that some people take certain things into account, while in other areas those things don't matter at all, or matter much less. It depends a LOT on the person doing the assessment.

So, what I did was to tell the dude that I really hoped the house was valued for at least x dollars or more, to get me out of my PMI, and that I really thought it would be, since I bought the house for y dollars z years ago. Guess what, the assessment came out to be EXACTLY what I needed it to be. The odds of that happening are pretty small since I had no training in real estate. But, I was footing the bill, and I believe that influenced him to make things go my way.
Did you have to get a full appraisal, or is there a less expensive alternative? I bought my house for $140k, owe $127k, and estimate that it's worth ~$155-160k (it appraised at $150k over two years ago and housing values here are on a slight incline).

RexualChocolate

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Re: Buying now with less down vs. waiting
« Reply #18 on: May 11, 2015, 03:32:34 PM »
How is a 3bdr house cheaper than splitting a 1bdr apt?

Buying a house is not a good financial decision unless you'll be there in excess of 7 years on average.

mlipps

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Re: Buying now with less down vs. waiting
« Reply #19 on: May 11, 2015, 06:07:22 PM »
Interest rates can't possibly go down, and they could go up.

This is what I was told when I bought in 2007 with a 6% interest rate. Up to that point, 6% was a steal of an interest rate, the market had fallen 10%, everything pointed to it being a great time to buy.

Only the market fell another 15-20% in my area, and interest rates fell below 3%.

You can't predict the future. You can't know that the house you pass up today won't be available for $50k less in 4-5 years when you actually need it. You can't know that interest rates won't go to 1.5%.

Buy what you need when you need it. Timing the market takes expert skill that most people don't have. It's much simpler to live cheap and not speculate.

Not to mention that if rates go up, appreciation will slow. Non-mustachians always make decisions of how much house they can afford based on the monthly payment, which will increase when rates go up, all else being equal.

JLee

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Re: Buying now with less down vs. waiting
« Reply #20 on: May 12, 2015, 10:14:29 AM »
Quote
How I got out of PMI: I paid for my own independent assessment years ago to get out of PMI early. Housing prices were rising in my area, so that worked in my favor. The thing about property valuation is this: it has a bit of a system to it, but a lot of the valuation depends on the opinion of the person doing the assessment. Really, they can't seriously claim one house is worth exactly 1k less than one next door, unless they're cookie cutters, which was not the case in my neighborhood. If you look at assessments, you'll see that some people take certain things into account, while in other areas those things don't matter at all, or matter much less. It depends a LOT on the person doing the assessment.

So, what I did was to tell the dude that I really hoped the house was valued for at least x dollars or more, to get me out of my PMI, and that I really thought it would be, since I bought the house for y dollars z years ago. Guess what, the assessment came out to be EXACTLY what I needed it to be. The odds of that happening are pretty small since I had no training in real estate. But, I was footing the bill, and I believe that influenced him to make things go my way.



Did you have to get a full appraisal, or is there a less expensive alternative? I bought my house for $140k, owe $127k, and estimate that it's worth ~$155-160k (it appraised at $150k over two years ago and housing values here are on a slight incline).


It's been about ten years, so my memory may be fuzzy, but I believe it was a full appraisal. I asked the bank what kind of appraisal they wanted first. That's what you should do to make sure you don't waste money. I seem to remember it cost about $400.

Why did you have it appraised two years ago? It's important to remember also that the appraisal you get is not at all the same one that the county does for tax purposes.

I bought it two years ago and had to get it appraised then. The appraisal came in $10k over the purchase price, so even if it hasn't changed I am less than $8k away from dropping PMI. However, the bank is using the purchase price ($140k) instead of the appraisal ($150k).

charis

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Re: Buying now with less down vs. waiting
« Reply #21 on: May 12, 2015, 11:49:15 AM »
We refinanced to get rid of the PMI, plus shorten the duration and get a better rate on the mortgage.  So it worked out well for us.  But we were married and had a baby on the way, found a house in a good neighborhood for a steal, and got the 8K home buyers credit.  I definitely don't regret paying PMI under those circumstances.

SomedayStache

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Re: Buying now with less down vs. waiting
« Reply #22 on: May 12, 2015, 12:02:57 PM »

I bought it two years ago and had to get it appraised then. The appraisal came in $10k over the purchase price, so even if it hasn't changed I am less than $8k away from dropping PMI. However, the bank is using the purchase price ($140k) instead of the appraisal ($150k).

Are you sure?  Did you call the bank and ask what you have to do to get rid of PMI?

It really doesn't make sense that they'd go off the initial loan value as opposed to the initial appraisal value when calculating loan to value ratio.

JLee

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Re: Buying now with less down vs. waiting
« Reply #23 on: May 12, 2015, 12:09:02 PM »

I bought it two years ago and had to get it appraised then. The appraisal came in $10k over the purchase price, so even if it hasn't changed I am less than $8k away from dropping PMI. However, the bank is using the purchase price ($140k) instead of the appraisal ($150k).

Are you sure?  Did you call the bank and ask what you have to do to get rid of PMI?

It really doesn't make sense that they'd go off the initial loan value as opposed to the initial appraisal value when calculating loan to value ratio.

I logged into my account on the Wells Fargo site and looked at it there, and that's what it said. I may be able to call them and get it adjusted if I submit my appraisal, though..hmm.

SomedayStache

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Re: Buying now with less down vs. waiting
« Reply #24 on: May 12, 2015, 12:23:07 PM »
I just (as in yesterday) sent in a check to get rid of PMI. 

All the data points on my mortgage website referenced the initial loan value only - and as I got closer to the 20% point I began to worry that the initial appraised value was all in my head.  Nope - I called up my bank and they confirmed that I had to get the value to 80% of the initial appraisal. 

JLee

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Re: Buying now with less down vs. waiting
« Reply #25 on: May 12, 2015, 12:30:01 PM »
I just (as in yesterday) sent in a check to get rid of PMI. 

All the data points on my mortgage website referenced the initial loan value only - and as I got closer to the 20% point I began to worry that the initial appraised value was all in my head.  Nope - I called up my bank and they confirmed that I had to get the value to 80% of the initial appraisal.

That's great to hear - I might be able to knock PMI out next year, then :D

I did find this, though..
Quote
To calculate your loan-to-value ratio (LTV)
Determine the current principal balance of your loan
Divide the current principal balance by the appraised value of the property at the time the loan was closed or by the contract sales price, whichever is lower
« Last Edit: May 12, 2015, 12:34:23 PM by JLee »

AJ

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Re: Buying now with less down vs. waiting
« Reply #26 on: May 12, 2015, 12:58:37 PM »
If you buy a house for $180k with 5% down at 4.5% interest, you will be paying each month:

Interest on mortgage: $640
PMI: $80
Taxes (guessing based on my area): $200
Insurance: $50
Maintenance: $180 (1% of value)
Total: $1150

That doesn't include the principal portion of your payment, and it assumes your utilities would stay the same.


Why do you need a 3-4 bedroom house? Are you getting married and having kids soon?

I don't know for sure but I'd like to have the house for a significant amount of time and should I decide to get married and have kids, it seems like it makes more sense to buy a house that is equipped for that. In the meantime, a 3 br house would consist of a home gym, an office/guest bedroom, and a master.

If you get married and have kids, you future wife may want a say in where she lives and raises her offspring. It is generally wiser to buy for your current circumstances unless there is a reasonably good chance they will change in the very near future (e.g. your SO is pregnant, you expect a layoff soon, etc.)

MarciaB

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Re: Buying now with less down vs. waiting
« Reply #27 on: May 12, 2015, 02:35:03 PM »
Just wait.  You're not wasting money by renting in the meantime. 

What gets lost in the conversation around rent vs. buy is that you have to live somewhere. No matter what route you take, you will incur housing costs of some kind. Even a person with a paid off house incurs costs (property taxes, insurance, repairs, replacements, etc.).

Renting isn't throwing away money, it's exchanging dollars for (buying) days/nights of shelter.

So, the rent vs buy decision starts with the fact that you need housing and it will cost you something. From there you start thinking about optimizing the dollars you have. What's the best use of those dollars over time?

Not only are there hard costs involved, but there's an opportunity cost on your money too.

And all of those moving parts go into the mixer with other particulars like the specific real estate market you're in, your personal plans and goals, career issues...you get the picture.

Don't start with the assumption that buying is better than renting. It may be, and it may not be.



Goldielocks

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Re: Buying now with less down vs. waiting
« Reply #28 on: May 12, 2015, 03:30:46 PM »
If you buy a house for $180k with 5% down at 4.5% interest, you will be paying each month:

Interest on mortgage: $640
PMI: $80
Taxes (guessing based on my area): $200
Insurance: $50
Maintenance: $180 (1% of value)**
Total: $1150

That doesn't include the principal portion of your payment, and it assumes your utilities would stay the same.


OP -- you are asking the wrong question. 
The question to ask is:

Can I afford to up-scale my living arrangements from a flexible $400/mo small apartment to a less flexible but nicer house?

Adding to AJ's excellent numbers...

Cash Flow Basis
AJ-- $1150/month
minus:
  Estimate Tax Rebate: -$70/month =  ($10,000 in itemized mortgage / ppty tax deductions - $6200 single person standard deduction 2014) x 22% marginal tax rate = $836/12 months
Plus:
  Added life expenses*: $150/month
  Principal payment: $325/ month

  New Total $1555/month (with another -$400 from GF, subject to instant reversal)
    v.s. $400 / month

Can you afford $1155/month in added cash flow?

     Assuming a 25% savings rate (including principal payments that's 37% savings rate),
       and you spend $2000/month on everything (ie. spend less than $850/month on EVERYTHING else -->food, transport, gifts, vacation, clothes, student loans, entertainment, phone, insurance, etc.):

   You are making $45,000 / year or more = YES --> Allows 37% total savings rate if that works for you...
   You are making $38,000/year or less = NO  -->This is a total savings rate of 25% including principal..Assuming you want to save least 10% cash, plus principal



*Added life expenses include a new shelf for pantry, screwdriver & hammer, yard maintenance tools / seeds / other, curtain for that too hot room, added fuel for driving?, new garbage can, kitchen folding chair for guests, new hand towel for bathroom, Christmas lights and the thousand other optional / non maintenance things that happen when you move into a bigger place that you also own -- with a girlfriend.     This is the hidden savings of renting, homeowners spend more on their home, even MMM homeowners than renters.

**AJ's $180/mo covers "Standard home maintenance" only -- broken windows, caulking, a bit towards fixing roofs or A/C and such.


BuckeyeFinance

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Re: Buying now with less down vs. waiting
« Reply #29 on: May 12, 2015, 06:56:23 PM »
Thanks everyone for the great replies. I am new here but I can already tell I'm going to spend a lot of time on this forum and it will be very productive. I definitely overlooked a lot of the expenses of owning a home/hidden savings of renting. I DID go into the situation assuming that buying is better than renting.

The reason I am looking at houses in the 180k range is because I intend to keep and live in the house for a long time so I want it to be suitable for my current and future needs. Yes, I can afford the mortgage payments with or without the girlfriend's contribution. But, perhaps I don't need the house yet. I'm living super cheap at the moment and saving nearly $2,500/month. After reading the replies, I am thinking I'd be best off to wait another year, avoid PMI, and reassess my living needs when that time comes.

I appreciate everyone's input!

MarciaB

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Re: Buying now with less down vs. waiting
« Reply #30 on: May 12, 2015, 06:58:04 PM »
I think you're doing the right thing!