Author Topic: Friend bought a $300k home  (Read 7516 times)

EconDiva

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Friend bought a $300k home
« on: September 02, 2015, 06:06:15 AM »
And put 10K down from her 401k.  In the mustachian world, how non-mustachian of a move would this be?

My friend is single with 2 kids and 40 years old.  I know she wanted to provide a very nice home for her children and she works extremely hard.  She's the most stable person I know, meaning she's been with her company for 20 years.  But when I heard the price I was slightly shocked.  We both make around the same amount ~80K, and if I were looking at homes right now I'd consider more around the $150k range.

It really made me think about how many of us are willing to work longer to pay to have certain things. Not a new concept, I know.  But it also made me think about how I wouldn't want to have to work longer to pay for a mortgage that amount.  Then again, she said her plan was to move out in 8-9 years once the kids are gone, so as long as the monthly payment works out to be close to what she was already paying in rent, does it really matter if the home was over 3 times her income?
« Last Edit: September 02, 2015, 06:58:16 AM by EconDiva »

chasesfish

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Re: Friend bought a $300k home
« Reply #1 on: September 02, 2015, 06:08:51 AM »
I would have to know what a comparable house/lot would cost to rent and how close it is to work.  That would be a deal where I'm looking

MishMash

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Re: Friend bought a $300k home
« Reply #2 on: September 02, 2015, 06:21:33 AM »
around here 300k would get you a 1 bedroom condo...if you're lucky.  Salaries are generally around 80k in our area and go up if you work in the city.  For a house, 300k buys you a knock down house on a piece of land.  Rents on townhomes are between 2500-4000/month depending on city so I don't really see this as unreasonable.

ShoulderThingThatGoesUp

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Re: Friend bought a $300k home
« Reply #3 on: September 02, 2015, 06:33:32 AM »
High prices don't make a purchase that's hard to afford any more reasonable.

Fishindude

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Re: Friend bought a $300k home
« Reply #4 on: September 02, 2015, 06:46:41 AM »
Insane !   
Probably  a 30 year loan too?   It will be sweet when she's 70 and gets it paid off :(
Have watched a couple of my young relatives do very similar stuff.


Gin1984

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Re: Friend bought a $300k home
« Reply #5 on: September 02, 2015, 06:51:57 AM »
Depends on property taxes if that is reasonable to me.  In California the monthly payment would be fine, in NY, not so much.

justajane

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Re: Friend bought a $300k home
« Reply #6 on: September 02, 2015, 06:53:30 AM »
We just had some good friends, who really are good with money, go from a 130K home to a 500K home! And we live in a LCOL area. Granted he's a physician and I think they'll be fine, but you can see the stress that the decision has brought to them and even their marriage. I don't think they wanted to spend that much, but they were being more inflexible IMO than they should have been on the quality of the neighborhood and schools. And I think, even though he probably wouldn't admit it, that he was swayed by being a physician and the type of homes his peers have.

Like I said, they will be fine financially, but I think of how awesome it could have been for them if they had decided to buy a 300K home instead - how much more wealth they could have accumulated. They really needed to move, since they had six people in a house that was 1,100 sq feet. Once the younger kids had grown out of their toddler beds, I literally think the twin beds wouldn't have fit into their bedroom.  But they didn't have to buy a 500K home. That was a choice.

James

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Re: Friend bought a $300k home
« Reply #7 on: September 02, 2015, 06:54:01 AM »
A lot depends on location obviously. We simply don't have enough information to judge, depends on her taxes, spending, child support, alternative rent costs, school district issues, commute, etc, etc.  It certainly doesn't sound mustachian, but that is about all we can say at this point.

EconDiva

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Re: Friend bought a $300k home
« Reply #8 on: September 02, 2015, 07:01:35 AM »
I made a mistake in my original posting and corrected it. I meant to say she put 10K down from 401k. Not 10%

EconDiva

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Re: Friend bought a $300k home
« Reply #9 on: September 02, 2015, 07:06:47 AM »
I would have to know what a comparable house/lot would cost to rent and how close it is to work.  That would be a deal where I'm looking

To rent it would probably be around $2300. 40 minute commute to work roughly.

I'm a red panda

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Re: Friend bought a $300k home
« Reply #10 on: September 02, 2015, 07:15:34 AM »
The mistake to me is taking the loan from the 401k to do it.

But that doesn't sound like that unreasonable of a house price on that salary.

Gin1984

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Re: Friend bought a $300k home
« Reply #11 on: September 02, 2015, 07:17:50 AM »
The mistake to me is taking the loan from the 401k to do it.

But that doesn't sound like that unreasonable of a house price on that salary.
Eh, depends on how they are doing their savings.  I could take a lower rate loan from my DH's 403b than PMI and still invest my "normal" amount in my 403b and have a very decent savings rate.

Katsplaying

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Re: Friend bought a $300k home
« Reply #12 on: September 02, 2015, 07:41:41 AM »
It depends on her intent.

I moved around a LOT as a Navy brat and hated it. Once I was out on my own, even though I was renting, I tended to stay in one apt/condo/house as long as possible, until I managed to buy my current house. Having a stable residence was paramount for me while raising the Unholy Spawn. My place was $130k in 1997 (I was making about $50k/yr) and I had the tiniest of down payments available to me but having a mortgage vs a lease was what made it the best strategy for me.

The Spawn moved back in June but I'll be empty-nesting it again in just a couple more weeks (YAY!!!!). Still considering if downsizing is the next move as I love my place and it's 97% perfect for me. The 3%? Cosmetic/functional improvements I'd like to make to be able to age in place but aren't required right now. Part of my FIRE projects when I have the time to do them.


I'm a red panda

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Re: Friend bought a $300k home
« Reply #13 on: September 02, 2015, 07:42:41 AM »

Eh, depends on how they are doing their savings.  I could take a lower rate loan from my DH's 403b than PMI and still invest my "normal" amount in my 403b and have a very decent savings rate.

I'd argue that it is a mistake to buy a house if you have to pay PMI too.

Is the rate on that loan lower when you look at the opportunity cost of not having that money growing in the market?

Bearded Man

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Re: Friend bought a $300k home
« Reply #14 on: September 02, 2015, 07:48:38 AM »
Based on the info in the thread, I'd say between PMI and higher mortgage payment due to low down payment, she could have rented the place for about the same or less. Frankly, I am of the opinion that if you don't HAVE 20% to put down, you can't afford it.

I bought a 300K house a year ago, but I also own much cheaper houses and houses just under 300K. Knowing what I know now, I wouldn't buy such an expensive house again. Just on the count of the HOA alone...

alsoknownasDean

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Re: Friend bought a $300k home
« Reply #15 on: September 02, 2015, 07:54:18 AM »
It doesn't seem that bad really.

Besides, maybe it'll go up in value by the time she sells?

mschaus

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Re: Friend bought a $300k home
« Reply #16 on: September 02, 2015, 07:57:25 AM »
To rent it would probably be around $2300. 40 minute commute to work roughly.

A $290k mortgage would be ~~$1700/mo, so it's a win from a cash flow perspective, but perhaps not wealth (would have to do more math or NYT calculator). Most people only see cash flow, not wealth, so this seems totally normal.

FLBiker

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Re: Friend bought a $300k home
« Reply #17 on: September 02, 2015, 08:07:15 AM »
It's interesting to see how not-against this folks are.  My wife and I (total salary ~ $110K) bought a $143K house a few years ago.  I agree that it totally depends on prices in the area, but 300K for a house in an area that doesn't demand spending that much is not a decision I would make.

On a related note, I was recently in Hungary and some folks asked me how easy it was to save money in the US.  I said that I found it to be easier than I'd expected, but that most people didn't.  When they asked why, I asked them how big of a house you would need for two adults and two kids.  The consensus was ~1100 sqft.  I said that most people in the US would say double that (or even more) and that living that way made it difficult to save money.

Gin1984

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Re: Friend bought a $300k home
« Reply #18 on: September 02, 2015, 08:11:25 AM »

Eh, depends on how they are doing their savings.  I could take a lower rate loan from my DH's 403b than PMI and still invest my "normal" amount in my 403b and have a very decent savings rate.

I'd argue that it is a mistake to buy a house if you have to pay PMI too.

Is the rate on that loan lower when you look at the opportunity cost of not having that money growing in the market?
When I move to Buffalo, buying a duplex gave me a mortgage of less than equal apartments plus I was able to get a roommate and make it even cheaper.  Then we also got renters and paid near nothing.  I took some money from my Roth IRA and paid it back.  I completely think it was the right idea, but that was because it worked for me.  So, I look at the cost of renting vs buying in my decision, where I get the down payment is largely irrelevant.
« Last Edit: September 02, 2015, 08:13:10 AM by Gin1984 »

Matt_D

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Re: Friend bought a $300k home
« Reply #19 on: September 02, 2015, 08:20:21 AM »
Based on the info in the thread, I'd say between PMI and higher mortgage payment due to low down payment, she could have rented the place for about the same or less. Frankly, I am of the opinion that if you don't HAVE 20% to put down, you can't afford it.


I'd say this is generally true, but there are possible exceptions. We bought our current house (~1400ft2) for around $250k in 2009 (basically at the bottom of the housing crash) and paid PMI for about two years. We then refinanced to a lower rate and the house had appreciated enough that we didn't have to pay PMI anymore. It's worth in the vicinity of $400k right now, so while we're paying more in taxes on it we at least would have a significant down payment available if we needed to move.

If we'd waited until we had 20% down, we'd probably still be trying to save up (as housing prices have increased dramatically) and also paying significantly more in rent for a smaller space than we have now. HOWEVER, all that said - I wouldn't buy a house with 3% down and PMI at this point, given where the market is.

Not gonna say I've made great financial decisions all the time, but our house is one I haven't regretted.

JLee

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Re: Friend bought a $300k home
« Reply #20 on: September 02, 2015, 08:20:58 AM »

Eh, depends on how they are doing their savings.  I could take a lower rate loan from my DH's 403b than PMI and still invest my "normal" amount in my 403b and have a very decent savings rate.

I'd argue that it is a mistake to buy a house if you have to pay PMI too.

Is the rate on that loan lower when you look at the opportunity cost of not having that money growing in the market?

I disagree. I didn't have 20% down when I bought my house 2.5 years ago and even then it was $300-400/mo cheaper than renting.  The housing market in Phoenix had crashed and it's slowly recovering now, so I'm likely at ~20% higher value now.  If I had waited, I'd be buying into a higher market (tens of thousands), making my $65/mo PMI payment (which will likely be dropped after an appraisal this year) largely irrelevant.

I've also done the math for my PMI amount and what I'd have to put down to get the loan to 78% - the numbers said I'm better off paying $65/mo PMI and investing the lump sum instead. Since values have jumped, I'll just get an appraisal to adjust the home value to drop PMI. I'd rather put $24k in tax-advantaged retirement accounts than on a 3.75% mortgage.
« Last Edit: September 02, 2015, 08:24:21 AM by JLee »

justajane

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Re: Friend bought a $300k home
« Reply #21 on: September 02, 2015, 08:21:39 AM »
It's interesting to see how not-against this folks are.  My wife and I (total salary ~ $110K) bought a $143K house a few years ago.  I agree that it totally depends on prices in the area, but 300K for a house in an area that doesn't demand spending that much is not a decision I would make.

Me neither. I said this in another thread, but the main reason why we have been able to save as much as we have is because we have a 125K mortgage. Mind you, our house is worth over 200K, but that's because we paid cash for an addition on it a few years back. But we have no intention of moving and now have a 1K mortgage payment, which includes taxes.

Sure, if you live on one of the coasts or DC or Chicago or insert expensive city hereand have to pay this much, it makes sense. But there are many parts of the country in which there are cheaper options.

I think our perception of what we can afford on a certain salary is skewed. I personally wouldn't think that a 300K home on an 80K salary is really that great. That sounds like being house poor to me.

Fishindude

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Re: Friend bought a $300k home
« Reply #22 on: September 02, 2015, 10:32:30 AM »
I think our perception of what we can afford on a certain salary is skewed. I personally wouldn't think that a 300K home on an 80K salary is really that great. That sounds like being house poor to me.

I agree, "house poor".   

After taxes, $80,000 isn't that much.
In my view, someone at that income level should stick to something in the $150,000 range, or less.
Also should have more down payment, and shouldn't rob the retirement fund to get it.

slugsworth

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Re: Friend bought a $300k home
« Reply #23 on: September 02, 2015, 10:56:40 AM »
Quote
The consensus was ~1100 sqft.

I live in a very blue collar neighborhood and a recently renovated 1940's single story house of ~850sqft on a ~4,000sqft lot sold for $400k a block away from me. Housing prices vary pretty dramatically nationally, as does what you get for your money.

If I could find a single family house in a walkable area, in the Seattle metro for under $200k, I would sell my house immediately and jump on it. I think the median housing price is close to $500k.



StarBright

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Re: Friend bought a $300k home
« Reply #24 on: September 02, 2015, 11:11:07 AM »
Hubs and I were just talking about this (non-mustachian housing purchases)! My recent thoughts are that a more expensive house could potentially lead to a more mustachian lifestyle.

In our case that is the debate we're having. If we end up in our current city long term we could buy a nice sized house in the nice school district for around 200k. Those neighborhoods require driving or busy street biking to get to anywhere. But starting for 300k we could live in the historic town center which is in the same school district and has sidewalks everywhere.

While all still hypothetical my husband is leaning towards cheaper house while I'm leaning towards the more expensive house that would let us walk to the library and multiple parks and stores. I also work from my house while he has to commute to work so he is going to be in a car no matter what whereas I am intrigued by the idea of walking out my front door and taking a walk along a river :)

I'm a red panda

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Re: Friend bought a $300k home
« Reply #25 on: September 02, 2015, 11:26:55 AM »

I disagree. I didn't have 20% down when I bought my house 2.5 years ago and even then it was $300-400/mo cheaper than renting.  The housing market in Phoenix had crashed and it's slowly recovering now, so I'm likely at ~20% higher value now.  If I had waited, I'd be buying into a higher market (tens of thousands), making my $65/mo PMI payment (which will likely be dropped after an appraisal this year) largely irrelevant.

I've also done the math for my PMI amount and what I'd have to put down to get the loan to 78% - the numbers said I'm better off paying $65/mo PMI and investing the lump sum instead. Since values have jumped, I'll just get an appraisal to adjust the home value to drop PMI. I'd rather put $24k in tax-advantaged retirement accounts than on a 3.75% mortgage.

As with any market timing, it may work in your favor, it may not.  The housing market might crash again before you sell.

JLee

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Re: Friend bought a $300k home
« Reply #26 on: September 02, 2015, 11:39:58 AM »

I disagree. I didn't have 20% down when I bought my house 2.5 years ago and even then it was $300-400/mo cheaper than renting.  The housing market in Phoenix had crashed and it's slowly recovering now, so I'm likely at ~20% higher value now.  If I had waited, I'd be buying into a higher market (tens of thousands), making my $65/mo PMI payment (which will likely be dropped after an appraisal this year) largely irrelevant.

I've also done the math for my PMI amount and what I'd have to put down to get the loan to 78% - the numbers said I'm better off paying $65/mo PMI and investing the lump sum instead. Since values have jumped, I'll just get an appraisal to adjust the home value to drop PMI. I'd rather put $24k in tax-advantaged retirement accounts than on a 3.75% mortgage.

As with any market timing, it may work in your favor, it may not.  The housing market might crash again before you sell.

And? The mortgage is still (substantially) cheaper than rent.  I didn't buy it to sell. I bought it to live in.

I'm a red panda

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Re: Friend bought a $300k home
« Reply #27 on: September 02, 2015, 11:49:02 AM »

I disagree. I didn't have 20% down when I bought my house 2.5 years ago and even then it was $300-400/mo cheaper than renting.  The housing market in Phoenix had crashed and it's slowly recovering now, so I'm likely at ~20% higher value now.  If I had waited, I'd be buying into a higher market (tens of thousands), making my $65/mo PMI payment (which will likely be dropped after an appraisal this year) largely irrelevant.

I've also done the math for my PMI amount and what I'd have to put down to get the loan to 78% - the numbers said I'm better off paying $65/mo PMI and investing the lump sum instead. Since values have jumped, I'll just get an appraisal to adjust the home value to drop PMI. I'd rather put $24k in tax-advantaged retirement accounts than on a 3.75% mortgage.

As with any market timing, it may work in your favor, it may not.  The housing market might crash again before you sell.

And? The mortgage is still (substantially) cheaper than rent.  I didn't buy it to sell. I bought it to live in.

Sure- if the mortgage with PMI (and taxes and upkeep) is a lot cheaper than rent it can make sense. There are only a very small number of locations where that is true.

You were the one who mentioned a 20% increase in value, which is why I mentioned selling.  For me, that increase in value really only correlates with an increase in taxes... but it is nice you can get your PMI removed!

JLee

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Re: Friend bought a $300k home
« Reply #28 on: September 02, 2015, 11:52:01 AM »

I disagree. I didn't have 20% down when I bought my house 2.5 years ago and even then it was $300-400/mo cheaper than renting.  The housing market in Phoenix had crashed and it's slowly recovering now, so I'm likely at ~20% higher value now.  If I had waited, I'd be buying into a higher market (tens of thousands), making my $65/mo PMI payment (which will likely be dropped after an appraisal this year) largely irrelevant.

I've also done the math for my PMI amount and what I'd have to put down to get the loan to 78% - the numbers said I'm better off paying $65/mo PMI and investing the lump sum instead. Since values have jumped, I'll just get an appraisal to adjust the home value to drop PMI. I'd rather put $24k in tax-advantaged retirement accounts than on a 3.75% mortgage.

As with any market timing, it may work in your favor, it may not.  The housing market might crash again before you sell.

And? The mortgage is still (substantially) cheaper than rent.  I didn't buy it to sell. I bought it to live in.

Sure- if the mortgage with PMI (and taxes and upkeep) is a lot cheaper than rent it can make sense. There are only a very small number of locations where that is true.

You were the one who mentioned a 20% increase in value, which is why I mentioned selling.  For me, that increase in value really only correlates with an increase in taxes... but it is nice you can get your PMI removed!

I am fortunate to be in a cheap housing / low tax market. @ 140k, my property taxes were $670/year. :)  The increase in value is relevant to get out of PMI...otherwise I wouldn't bother with an appraisal.  If the house were to double in value, I'd seriously consider selling and finding a new cheap market. :P

justajane

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Re: Friend bought a $300k home
« Reply #29 on: September 02, 2015, 11:53:37 AM »

I disagree. I didn't have 20% down when I bought my house 2.5 years ago and even then it was $300-400/mo cheaper than renting.  The housing market in Phoenix had crashed and it's slowly recovering now, so I'm likely at ~20% higher value now.  If I had waited, I'd be buying into a higher market (tens of thousands), making my $65/mo PMI payment (which will likely be dropped after an appraisal this year) largely irrelevant.

I've also done the math for my PMI amount and what I'd have to put down to get the loan to 78% - the numbers said I'm better off paying $65/mo PMI and investing the lump sum instead. Since values have jumped, I'll just get an appraisal to adjust the home value to drop PMI. I'd rather put $24k in tax-advantaged retirement accounts than on a 3.75% mortgage.

As with any market timing, it may work in your favor, it may not.  The housing market might crash again before you sell.

And? The mortgage is still (substantially) cheaper than rent.  I didn't buy it to sell. I bought it to live in.

The mortgage might be, but is it once you factor in maintenance and taxes? It might be, but too many people think that if a mortgage is lower than rent that it is thus a good deal.

For instance, this is a cheap year in terms of maintenance for us, but next week we're spending $1,500 on much needed tuck pointing. Last year we spent $500 on a leaking pipe. There's always something to repair or fix, and even if you do it yourself, you still have to pay for materials and take up your valuable time.

I'm all for buying, but we would likely be farther ahead financially if we had rented for the past 8 years. And we live in a cheap area with cheap homes.
« Last Edit: September 02, 2015, 11:59:50 AM by justajane »

abiteveryday

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Re: Friend bought a $300k home
« Reply #30 on: September 02, 2015, 11:53:50 AM »
I think our perception of what we can afford on a certain salary is skewed. I personally wouldn't think that a 300K home on an 80K salary is really that great. That sounds like being house poor to me.

I agree, "house poor".   

After taxes, $80,000 isn't that much.
In my view, someone at that income level should stick to something in the $150,000 range, or less.
Also should have more down payment, and shouldn't rob the retirement fund to get it.

You aren't wrong per se, but in a lot of markets what you are saying is "if you don't make 2-3x median income, you should move or live in a van."    Without getting too deep into numbers, I'm a family of 4 with total income under the $80k you mention, and a few years ago bought a house for $355k (now worth about $500k).     My payment on that is about $1600 all told.   At present, average rent for a 1BR apartment in my city is over $1600, a place big enough for my family would easily be $2500.    Am I foolish for being house poor?  Should I commute an two hours every day each way, to get to that $150k price?     Or should I accept that I pay a good chunk of money for housing, but in exchange I live in a nice neighborhood with good amenities, and have a 5 minute commute?
« Last Edit: September 02, 2015, 11:59:16 AM by abiteveryday »

justajane

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Re: Friend bought a $300k home
« Reply #31 on: September 02, 2015, 11:58:01 AM »
abiteveryday - I made the comment about being house poor. In your case, I would say it is a good trade off. Most of us are talking about places all over this country where cheaper houses abound. For instance, my friends who bought a 500K house, they could have bought a comparable house a district over that would have been closer to his work and more walkable for 150K or more less. The school district on paper is just slightly better where they bought. That's seriously it.

But, no, in HCOL areas in which you have to live an hour away to get cheaper housing, it doesn't make sense. But most of the country isn't like this.

JLee

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Re: Friend bought a $300k home
« Reply #32 on: September 02, 2015, 12:32:26 PM »

I disagree. I didn't have 20% down when I bought my house 2.5 years ago and even then it was $300-400/mo cheaper than renting.  The housing market in Phoenix had crashed and it's slowly recovering now, so I'm likely at ~20% higher value now.  If I had waited, I'd be buying into a higher market (tens of thousands), making my $65/mo PMI payment (which will likely be dropped after an appraisal this year) largely irrelevant.

I've also done the math for my PMI amount and what I'd have to put down to get the loan to 78% - the numbers said I'm better off paying $65/mo PMI and investing the lump sum instead. Since values have jumped, I'll just get an appraisal to adjust the home value to drop PMI. I'd rather put $24k in tax-advantaged retirement accounts than on a 3.75% mortgage.

As with any market timing, it may work in your favor, it may not.  The housing market might crash again before you sell.

And? The mortgage is still (substantially) cheaper than rent.  I didn't buy it to sell. I bought it to live in.

The mortgage might be, but is it once you factor in maintenance and taxes? It might be, but too many people think that if a mortgage is lower than rent that it is thus a good deal.

For instance, this is a cheap year in terms of maintenance for us, but next week we're spending $1,500 on much needed tuck pointing. Last year we spent $500 on a leaking pipe. There's always something to repair or fix, and even if you do it yourself, you still have to pay for materials.

I'm all for buying, but we would likely be farther ahead finally if we had rented for the past 8 years. And we live in a cheap area with cheap homes.

My mortgage number includes taxes, insurance, and PMI.  Looking in my general area I'm seeing $1400-1500/mo (vs $850).  Then consider the two extra bedrooms I'm renting out and the tax advantages of doing so...it's pretty clear in my mind what my best option was, but I absolutely agree that it was more expensive than I thought it would be. By the time I built shelves in the garage (and bought another tool for that), etc etc, it added up.

Repairs haven't hit me too bad. The only thing I've had to pay someone else to fix (since purchased in February 2013) was the AC condenser fan motor...and that was because it was too hot to wait and I'm also in another country right now. My house was remodeled two years before I bought it, so there's not a whole lot on the edge of failing.

Oh, I also paid the pool maintenance company 50 bucks to fix a leaking pipe (again, because I'm out of the country).

All in all, I'm highly satisfied with my decision and I love my house..but I caution friends who are shopping that there's going to be a lot more involved than they initially expect.