Author Topic: Force a down payment now while rates are low?  (Read 5044 times)

nawhite

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Force a down payment now while rates are low?
« on: December 07, 2012, 07:18:50 PM »
So for the whole picture. Hopefully I can answer all of your preliminary questions

My wife an I (no kids) are 25.

Income:
Me: 90k
Wife: 25k (likely to go up to 35k starting in January)

Spending habits:
About 2000/month plus about 5k/year in vacations ~= 29k (slowly but surely getting better!)
Rent~= $850/month
401k @ 8% (max company match)

Debts:
No CC thank God!
~30k student loan at 6.8% fixed
~90k student loan at 3% variable

about 5k in the bank
34k in 401k

2 paid off used cars (one efficient, one not)

We each have about a 15 min commute (see below).

We have been fairly steadily putting 3k/month towards the expensive student loans while the minimum payment is around $1100/month for all of them.

We want to move to within walking distance of my wife's work. The problem is there are 0 rental opportunities there. There are a number of homes around 200k that we would love to buy but we obviously don't have a down payment ready. We could probably get some help on the down payment from parents but certainly not the whole amount. The new neighborhood would be walking distance to one work, is closer to just about everything we want to get to (friends, outdoor activities, downtown, light rail station), it even only adds about 2 min to my commute so it really would improve things for us in many ways.

So the question is, with our lease ending in August, do we take all of our extra money and save up for as much of a down payment as we can afford but take the hit on the 6.8% student loans, or continue paying the student loans and not move?

Let me know if I missed anything you need to know.

Jamesqf

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Re: Force a down payment now while rates are low?
« Reply #1 on: December 07, 2012, 08:23:31 PM »
How much would your house payment be?  How certain is the length of your stay?

Then there are the intangibles: would you be able to do stuff like auto repair & gardening in a house you own, that you couldn't do in a rental?  Would you add enjoyment and/or save money by doing these things?

twinge

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Re: Force a down payment now while rates are low?
« Reply #2 on: December 08, 2012, 03:54:38 AM »
I agree with Jamesqf that more details are needed.  These are some analytic steps I would do in your situation:

1.Decide if you are likely to stay in that house for at least 5 years after you save up the dp, preferably more.  If not, stop and keep renting.
2. Do a rent vs. buy calculation --the nytimes has a decent calculator.  See the difference in expected cost of renting vs. buying
3.  Tweak those findings to see how other anticipated factors not built into the calculator make a difference--e.g., to add to the value of having a house add in the value of selling one of the cars if you plan to do that, reducing car use, savings due to gardening, auto repair, anticipated enjoyment, etc. To add to the value of renting, add e.g., lost opportunity of paying down student loans, anticipated costs of home maintenance if they are not built into the calculator or you expect they will exceed average, closing costs, moving costs, furniture purchases if you plan them etc.
4.  If home purchase is still "winning" then make sure you could survive on a bare bones budget on just your salary alone and keep paying off student loans.
5. If home purchase is still winning, then start saving up a downpayment and periodically reconsider/recalculate whether it still makes sense. Make sure when you save your downpayment you still have an adequate cash cushion and/or other no or low interest emergency fund sources for for unexpected expenses. 

arebelspy

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Re: Force a down payment now while rates are low?
« Reply #3 on: December 08, 2012, 07:55:37 AM »
What would one of the houses cost to rent?

If similar, a 200k home versus 850/mo rent means renting is much better in that scenario, IMO, and unless you're planning on living there for a long, long time, I'd rent and then move to a cheaper location after a few years.
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chucklesmcgee

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Re: Force a down payment now while rates are low?
« Reply #4 on: December 08, 2012, 04:42:29 PM »
If having a home isn't especially beneficial to you (maybe it would be if you currently lived in a studio apartment and had three kids) I'd really lean towards waiting and paying off your loans.

Interest rates are projected by the fed to remain pretty low for at least the next 18 months or so, so I wouldn't be too excited about rushing into a down payment.

The really important calculation in the NY times calculator when choosing to rent or buy the opportunity cost of the down payment. It's one thing to take on a mortgage that's nearly equal to your rent, it's another thing when you realize interest from the down payment might be enough to cover a substantial portion or perhaps all of your rent!

nawhite

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Re: Force a down payment now while rates are low?
« Reply #5 on: December 11, 2012, 06:48:59 AM »
Thanks for all the support. After playing around with that NYT calculator, you guys are very very right. Renting is WAY better for us (like not breaking even for 18+ years if the house appreciates slowly). So I promise I wont be like the people referenced in the "Can I have a pony thread." I got the best advise available and I'm going to listen to it.

Thanks again.

arebelspy

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Re: Force a down payment now while rates are low?
« Reply #6 on: December 11, 2012, 07:19:01 AM »
Cool.  Sounds like a place to purchase when you know you'll be settled for 20 years raising kids or something.  For now, the opportunity cost is too much, IMO.

Best of luck!
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.