Author Topic: Considering buying a house - need advice  (Read 1996 times)

Zummbot

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Considering buying a house - need advice
« on: November 12, 2014, 09:27:46 AM »
Hello Mustachians,

My wife and I are considering buying our first house and could use some advice. First, let me explain our long-term plan to give you some context.

My wife is Brazilian, I am American and we are here living in the US. We are here building our stash with the eventual goal of retiring early in Brazil. I estimate it will take us 7 to 8 years for us to reach FI. So obviously any house we buy now we would want to be able to sell easily once FI is reached. The average rent for a house in the area within biking distance of my job is about $1400, and there are a handful of older, partially refurbished properties in the area for sale in the $185k range (which I think we would shoot for) but the majority of properties in the area sell for around $250k.

My question is about mortgages. We can put down 20% for a $185k property no problem. Based on a tip from another mustachian we are going to use capcenter.com to avoid closing costs. With 20% down on a $185k property we could get a rate of about 4% for a 30 year mortgage, or about $3.25 with a 10 year. 30 year monthly mortgage payment would be about $702, while for 10 year it would be about $1,033. My inclination would be to go for the 30 year so that we have a lower monthly payment and can throw more money into Vanguard each month. This should in theory result in a better return for us when we go to sell the house in 7 - 8 years once FI is reached, right? Or is it a better idea to paying off our mortgage debt as quickly as possible? Hopefully the housing market doesn't tank in that time and we can sell the house and make a small gain after paying off the lender. But I know that housing is generally a poor investment. I've never bought (or owned) a house before so I would appreciate any advice/input. Feel free to ask any questions if I left out any crucial information. Thanks in advance!

nereo

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Re: Considering buying a house - need advice
« Reply #1 on: November 12, 2014, 09:55:55 AM »
Quote
My question is about mortgages. We can put down 20% for a $185k property no problem. ... With 20% down on a $185k property we could get a rate of about 4% for a 30 year mortgage, or about $3.25 with a 10 year. 30 year monthly mortgage payment would be about $702, while for 10 year it would be about $1,033. My inclination would be to go for the 30 year so that we have a lower monthly payment and can throw more money into Vanguard each month. This should in theory result in a better return for us when we go to sell the house in 7 - 8 years once FI is reached, right?

Yes, using history as a guide, the odds are that in 7-8 years you will see an annualized return above 4% - 'real returns' have been positive about 84% of the time after 8 years. Factoring in inflation, the stock market beats a 4% mortgage over an 8 year period ~75% of the time.
Of course, this also means the market doesn't beat a 4% mortgage about 25% of the time.

My suggestion would be to go with the odds and pay the minimum while investing everything you can in Vanguard each month.  The caveat is that you must make sure that you don't accidentally spend that money instead.

Quote
...We are here building our stash with the eventual goal of retiring early in Brazil. I estimate it will take us 7 to 8 years for us to reach FI. So obviously any house we buy now we would want to be able to sell easily once FI is reached. T

I do not know why this would be "obvious".  Plenty of people use their first home as a rental as a FIRE strategy, even while living abroad.  It might not be for you, but I wouldn't ignore the possibility either - in many cases being a landlord will offer better and more consistent returns than the stockmarket, with lots of tax advantages.

Zummbot

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Re: Considering buying a house - need advice
« Reply #2 on: November 12, 2014, 10:10:00 AM »
Quote
My question is about mortgages. We can put down 20% for a $185k property no problem. ... With 20% down on a $185k property we could get a rate of about 4% for a 30 year mortgage, or about $3.25 with a 10 year. 30 year monthly mortgage payment would be about $702, while for 10 year it would be about $1,033. My inclination would be to go for the 30 year so that we have a lower monthly payment and can throw more money into Vanguard each month. This should in theory result in a better return for us when we go to sell the house in 7 - 8 years once FI is reached, right?

Yes, using history as a guide, the odds are that in 7-8 years you will see an annualized return above 4% - 'real returns' have been positive about 84% of the time after 8 years. Factoring in inflation, the stock market beats a 4% mortgage over an 8 year period ~75% of the time.
Of course, this also means the market doesn't beat a 4% mortgage about 25% of the time.

My suggestion would be to go with the odds and pay the minimum while investing everything you can in Vanguard each month.  The caveat is that you must make sure that you don't accidentally spend that money instead.

Quote
...We are here building our stash with the eventual goal of retiring early in Brazil. I estimate it will take us 7 to 8 years for us to reach FI. So obviously any house we buy now we would want to be able to sell easily once FI is reached. T

I do not know why this would be "obvious".  Plenty of people use their first home as a rental as a FIRE strategy, even while living abroad.  It might not be for you, but I wouldn't ignore the possibility either - in many cases being a landlord will offer better and more consistent returns than the stockmarket, with lots of tax advantages.

Thank you! We have our expenses under control and will definitely be investing the difference instead of spending it. 30 year mortgage it is then.

Regarding renting out the house while living abroad, that's an interesting idea I hadn't even really considered, but will definitely explore. We had planned on selling the house in the US and using those funds to buy a house and car in Brazil. I have never owned rental property, so my knowledge in this area is currently nil. Brazil is far enough away that it would not be feasible to just hop on a plane to come and deal with every problem a tenant has. Perhaps there are rental management companies that can care for the property and deal with the tenant in exchange for a portion of the rent? Do you (or any other mustachians) have any reading on this topic you could recommend?