Author Topic: Should I buy a house?  (Read 6650 times)

Rekon

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Should I buy a house?
« on: August 10, 2014, 11:09:30 PM »
Here are the details:

Current rent for 2 bedroom, 1,000 sq ft. condo that is 10 miles away form work:  $1,500

In order to buy a house within biking distance (<10 miles) I would have to spend $375k - $400k.  For this discussion, let's say I find a house that's $400k and have a $80k down payment.  According to zillow, my PITI (principle, interest, taxes and insurance) payment would be  $2,087.  A house at $400k will get me 3-4 bedrooms and about 1,700 sq ft. 

We want to have 2 kids in the future and would like the bedrooms and backyard space.  We currently have a spare bedroom but no backyard.

Is a house worth the investment at this price? 


RMcNab

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Re: Should I buy a house?
« Reply #1 on: August 11, 2014, 12:21:16 AM »
In general buying is preferable to renting, especially because:

1. You get a tax deduction on the interest part of your mortgage
2. At the end, you own a house - instead of flushing your rent money down the toilet.

However:

1. There's a breakeven point (fees, realtor, etc) - you usually want to own the home for at least 3-4 years.
2. If the market has a downturn you're stuck selling at a loss or holding onto it for a while. But as long as the monthly payment works for you, that shouldn't be a problem.

PS- Although it'll raise payments, try for a 20-year loan not a 30 for savings in interest payments.

former player

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Re: Should I buy a house?
« Reply #2 on: August 11, 2014, 01:44:32 AM »
1700 square feet is probably too big for two people, for two people plus baby or two people plus toddler plus baby.  In other words, you do not need 1700 square feet for at least the next 4 years, and quite possibly not ever.

I'm a fan of buying your own home, but also of buying small and not stuffing it with unnecessary things.  It's amazing how much space there is in a small house which is empty of furniture - try walking around one.  So as long as you keep unnecessary furniture and belongings to a minimum (by practising good mustachianism!) and the house has a good layout, you can comfortably go considerably smaller than 1700 square feet.  And there is one further big advantage: if you don't oversize while you have kids at home, you don't need to go through the hassle of downsizing once the kids have left: you truly are buying a house for life.

Big backyards do take more maintenance than small ones.  But I like gardens and prefer space outside to space inside, so as long as you are prepared for the work involved, I think having a good space around a smaller house is a lovely way to do things.

soccerluvof4

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Re: Should I buy a house?
« Reply #3 on: August 11, 2014, 05:52:33 AM »
alot depend too on is the house a deal? did you look at comps? and is the house in an area that will appreciate?

gt7152b

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Re: Should I buy a house?
« Reply #4 on: August 11, 2014, 06:37:19 AM »
That's a big step up from a 2 bed condo. I understand wanting to move once and make it a stable home for many years but consider that your needs and wants could be drastically different than you imagine in a few years. Maybe you decide on just one kid or end up with 6 kids. Maybe you want to move to a different city or different area of town due to a job change, family situation, or just wanderlust. Buying a house is a good move since you can pay about the same in rent but be building equity. I would just make it a smaller step so you don't have such a big jump in monthly housing cost and utilities. I made the jump from a smaller house to a much bigger one and am now wanting to downsize. It wasn't a bad investment and it taught me that going bigger isn't better but it would be easier to deal with had I realized that from the beginning.

neo von retorch

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Re: Should I buy a house?
« Reply #5 on: August 11, 2014, 07:09:01 AM »
Personally I am in the "don't buy in most situations" camp.

Here are some rough numbers - after 7 years (87 months) I've spent over $125,000 not including principal payments. That's property tax, homeowner's insurance, maintenance. That's closing costs and some refinancing fees. That's buying a mower, and UV bulbs and salt for my water filtration system. That's trash, sewer. And also electric and TV/internet (which would also be spent in the case of renting.) If the calculations stopped there, I'd have spent $1450 / month "thrown away" because it's not coming back! Now fortunately in my case, as a single guy, I've been able to rent out the place so I brought $66,500 back in. Plus there is the aforementioned tax deduction for mortgage interest, but that doesn't add up to a whole lot. I think my case I got at most, $2000 in tax breaks, and I think it's safe to say $1000 / year. So $7000. Not a big chunk against that $125,000, is it? And keep in mind I'm currently at just 3.375% (I started at 6.375% seven years ago.) If you stick to a 30 year loan, higher interest, it's not going to improve the numbers.

So even ignoring utilities (about $280), we're talking about $1170 / month average. I could have definitely beat that with renting (in my area, that would have easily gotten me a very modern 3 bedroom, 2 bath townhouse). And if I was renting, I wouldn't currently be commuting 20-30 minutes to work in my car each day. I'd have much more mobility. (I'd also likely have bought less stuff.)

Jim Collins sums it up pretty well - http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

So while there are good reasons to buy a house, and if you do stay in one place long enough, it's financially superior, it's a very, very hard decision to undo. Selling a house takes a big chunk off the top of any equity you might build up. TL;DR Can you say with huge amounts of certainty that the house you find will be THE PLACE you want to be living for the next 5+ years, and that when you're ready to move, you are willing to go through the home selling process and costs?
« Last Edit: August 11, 2014, 07:47:01 AM by neogodless »

Emilyngh

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Re: Should I buy a house?
« Reply #6 on: August 11, 2014, 07:38:19 AM »
In general buying is preferable to renting, especially because:

1. You get a tax deduction on the interest part of your mortgage
2. At the end, you own a house - instead of flushing your rent money down the toilet.



As far as the tax deduction, this is only true if one pays enough in interest so that the mortgage deduction is greater than the standard deduction.    For your average american, buying a house this expensive probably isn't needed and they'd be better off paying less for a smaller home and taking the standard deduction.

As far as "flushing your rent money down the toilet:"   If one does buy a house that's expensive enough to qualify for mortgage deduction as you assume, as a married couple they're probably spending around  $12,400 a year on interest (unless they have other very large deductions).   Sounds to me like they're flushing close to as much down the toilet to interest as one would to rent.

Obviously, one needs to run the numbers for her specific sitch, but I don't think the assumptions you posted even "generally" hold true.   I recommend reading previous threads with links, such as: http://forum.mrmoneymustache.com/ask-a-mustachian/rent-or-buy/msg363230/#msg363230

slugline

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Re: Should I buy a house?
« Reply #7 on: August 11, 2014, 07:49:28 AM »
1700 square feet is probably too big for two people, for two people plus baby or two people plus toddler plus baby.  In other words, you do not need 1700 square feet for at least the next 4 years, and quite possibly not ever.

I'm generally sympathetic to that sentiment, except I'd add that all real estate issues are local. In some places, 1700 sq. ft. homes are the small ones. In my own neighborhood, for example, deed restrictions actually prohibit building anything smaller, believe it or not.

Rekon

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Re: Should I buy a house?
« Reply #8 on: August 11, 2014, 11:01:42 AM »
Generally, houses that are close to my job are in the 1500-1700 sq ft. range.  Any smaller it would be a condo or townhouse and I really don't want to pay an HOA. 

former player

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Re: Should I buy a house?
« Reply #9 on: August 11, 2014, 12:29:17 PM »
Generally, houses that are close to my job are in the 1500-1700 sq ft. range.  Any smaller it would be a condo or townhouse and I really don't want to pay an HOA. 
In some places, 1700 sq. ft. homes are the small ones. In my own neighborhood, for example, deed restrictions actually prohibit building anything smaller, believe it or not.

Wow.  I had heard about "you can't hang your washing out to dry", but not that it would often be the case that there were no small houses.  America, eh?

Cassie

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Re: Should I buy a house?
« Reply #10 on: August 11, 2014, 12:41:24 PM »
I would say that if you can afford the house even if one of you loses their job then it seems fine.  It is really nice to own your own home-decorate/landscape the way you want, etc but it does cost $.  Make sure you have enough savings in case the furnace dies, etc.

skunkfunk

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Re: Should I buy a house?
« Reply #11 on: August 11, 2014, 12:58:21 PM »
You are already within biking distance. You pay $500 less a month and have no maintenance costs. You have plenty of space.

As a recent home buyer, I say DON'T BUY. If you MUST buy later when you have kids, do it then. Also, get something you can afford on a 15 year loan for the much better interest rate than a 30, or better yet have a huge 'stache and pay cash by that point.

Seriously, there's little risk in renting, and huge risk in buying. If the house loses value, or gets destroyed in an earthquake (or one of the other VERY MANY things for which you won't be covered if you do happen to have earthquake insurance), you're screwed.

tyler1215

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Re: Should I buy a house?
« Reply #12 on: August 11, 2014, 03:47:28 PM »
It almost seems like the OP is reading far into the future. I made that mistake with my first home and it almost sunk me. I got very lucky with life.

I'm almost in the camp of ride out renting for as long as you can. Save up the difference in the mortgage and the rent prices. That way you're already use to living on the mortgage price but you're saving more towards your house. Then at the last minute, you thow everything down to get the house you need/want with a large down payment.

Why put yourself behind the eight-ball earlier than you have to.

Mr. Frugalwoods

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Re: Should I buy a house?
« Reply #13 on: August 11, 2014, 04:51:37 PM »
If you are:

  • Sure that you won't need to move in the next 7 years for job, family, or any other reasons
  • Certain that you won't outgrow this house in a similar timeframe.  Don't just think about the structure, also think about the neighborhood, the commute (current employer and prospective future employers), distance to schools and daycare.
  • Well capitalized and can put down 20% to avoid PMI
  • Comfortable with doing home improvement projects yourself rather than paying through the nose for a tradesperson
  • Knowledgeable enough about your local real estate market and the local economy to feel comfortable making a long term illiquid investment

Then I'd say go for it.  I love owning a house, but I think waaaaay too many people default to home ownership without running the numbers.  The numbers and circumstances work for us, but if they didn't we'd be happily renting.

Freedom2016

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Re: Should I buy a house?
« Reply #14 on: August 11, 2014, 06:15:05 PM »
Here are the details:

Current rent for 2 bedroom, 1,000 sq ft. condo that is 10 miles away form work:  $1,500

In order to buy a house within biking distance (<10 miles) I would have to spend $375k - $400k.  For this discussion, let's say I find a house that's $400k and have a $80k down payment.  According to zillow, my PITI (principle, interest, taxes and insurance) payment would be  $2,087.  A house at $400k will get me 3-4 bedrooms and about 1,700 sq ft. 

We want to have 2 kids in the future and would like the bedrooms and backyard space.  We currently have a spare bedroom but no backyard.

Is a house worth the investment at this price?

The bolded stood out to me: you don't actually have any children, you're not even pregnant, AND you're already living somewhere that would easily accommodate 1 (if not 2) kids.

Why do you want to buy now, as opposed to waiting until you actually need more space? (I'll leave the smaller-house arguments to others, as I'm not terribly mustachian in that regard...)

Rekon

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Re: Should I buy a house?
« Reply #15 on: August 11, 2014, 07:37:24 PM »
I just want a backyard so my wife and I can host parties - such as our 5 year anniversary.  Since we really never had an actual wedding. 

Also, we have a dog and I hate having to lock up my dog when we're at work.  Maybe I will just save until the kid is older then we can decide then.  Nevertheless,  I am putting no less than 20% down if I buy. 

neo von retorch

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Re: Should I buy a house?
« Reply #16 on: August 12, 2014, 07:52:41 AM »
Well you can rent single family homes and town homes that have yards, so I would not make the decision to purchase based on that alone.

Rekon

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Re: Should I buy a house?
« Reply #17 on: August 12, 2014, 12:30:25 PM »
Well you can rent single family homes and town homes that have yards, so I would not make the decision to purchase based on that alone.

Average rent for a house with a yard in this area is ~$2,800 a month.  So, buying would bring me to a cheaper monthly payment. 

Another option - I could buy and rent it out for a while.  I would probably be able to profit $800-$1,000 per month. 

Beric01

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Re: Should I buy a house?
« Reply #18 on: August 12, 2014, 12:37:20 PM »
Well you can rent single family homes and town homes that have yards, so I would not make the decision to purchase based on that alone.

Average rent for a house with a yard in this area is ~$2,800 a month.  So, buying would bring me to a cheaper monthly payment.

A classic misunderstanding.

Remember, mortgage is not the only cost of owning a home! You also have maintenance/repairs, property taxes, utilities, insurance, and time.

frugalnacho

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Re: Should I buy a house?
« Reply #19 on: August 12, 2014, 01:58:40 PM »
Well you can rent single family homes and town homes that have yards, so I would not make the decision to purchase based on that alone.

Average rent for a house with a yard in this area is ~$2,800 a month.  So, buying would bring me to a cheaper monthly payment.

A classic misunderstanding.

Remember, mortgage is not the only cost of owning a home! You also have maintenance/repairs, property taxes, utilities, insurance, and time.

property taxes and insurance are likely rolled into the "mortgage" payment he will be paying, and you have to pay utilities if you rent.  Any major repairs or renovations need to be anticipated and included in the budget.

And to the guy that "flushed" $1450/mo (not including principal payments) that is INSANE. I own 2 houses and my principal, interest, property taxes, insurance, and an additional $250 towards principal totals out to $1400/mo.   

I did get flooding in both of my basements last night during the great detroit flood of 2014 though.  So that's a huge pain in my ass and a draw back to owning a home.   

neo von retorch

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Re: Should I buy a house?
« Reply #20 on: August 12, 2014, 02:11:06 PM »
And to the guy that "flushed" $1450/mo (not including principal payments) that is INSANE. I own 2 houses and my principal, interest, property taxes, insurance, and an additional $250 towards principal totals out to $1400/mo.   

I did get flooding in both of my basements last night during the great detroit flood of 2014 though.  So that's a huge pain in my ass and a draw back to owning a home.

I did update that it's $1170 / month without utilities. But this does include closing costs, refinance costs, a new roof, a water heater, a new HVAC unit...

The house itself was $155,900 and I currently pay $1250 including $610 towards principal... but that is not looking at historical maintenance/repair/closing costs.

Rekon

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Re: Should I buy a house?
« Reply #21 on: August 12, 2014, 04:19:32 PM »
Well you can rent single family homes and town homes that have yards, so I would not make the decision to purchase based on that alone.

Average rent for a house with a yard in this area is ~$2,800 a month.  So, buying would bring me to a cheaper monthly payment.

A classic misunderstanding.

Remember, mortgage is not the only cost of owning a home! You also have maintenance/repairs, property taxes, utilities, insurance, and time.

property taxes and insurance are likely rolled into the "mortgage" payment he will be paying, and you have to pay utilities if you rent.  Any major repairs or renovations need to be anticipated and included in the budget.

And to the guy that "flushed" $1450/mo (not including principal payments) that is INSANE. I own 2 houses and my principal, interest, property taxes, insurance, and an additional $250 towards principal totals out to $1400/mo.   

I did get flooding in both of my basements last night during the great detroit flood of 2014 though.  So that's a huge pain in my ass and a draw back to owning a home.

Thanks!  Yes, the payment I mentioned included taxes and insurance.  I would have to budget for repairs and I do pay utilities  now and understand they will be more expensive with a house. With that said, I think it makes sense to buy.  Another option is to buy it and rent it out for a few months and collect the deviation as profit. :)  Like I said above, rent is ~$2,800 in this area.  If I am paying $2k mortgage I can profit the rest until I have a kid...