Author Topic: Twenty Percent House Downpayment Question  (Read 6379 times)

cabeasle

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Twenty Percent House Downpayment Question
« on: November 08, 2014, 08:18:50 AM »
Good morning everyone.  There is a wealth of information being thrown around on these forums, and I'm hoping someone would be so kind as to help me out with a home-buying/investment question.  I am a fairly limited-experience invester (Vanguard low-maintenance funds only).

I am looking in to buying a house.  I don't think I want to live in the area I am in forever, but I can't foresee myself leaving any time soon (<5 yrs) as my family is in the area, and I do not have any job prospects elsewhere at the moment.  I have been renting for about seven years now, and I feel like it may be time to start building up some equity, as a fully paid for house will significantly improve my chances to FIRE.

My question is: I do not have enough cash on hand to pay the 20% recommended downpayment.  If I fully shifted my savings to this goal (forsaking 401k, etc), I could probably get there in a year or two.  However, I "do" have enough to cover that amount currently in a taxable account through Vanguard (started before I knew how to take advantage of non-taxable accounts).  Since the market has been doing so well lately, would it be a good idea to sell the needed shares for the house downpayment (and pay the subsequent tax bill) to take advantage of the recent market gains?  Or would it be better to let the money ride, and just start saving aggressively for the next year or so, stopping investments to the 401k and IRA until I have enough for the downpayment?

I'm leaning towards pulling the money out of Vanguard, but I've never sold shares before and am, frankly, a bit intimidated by it.  I'd appreciate any thoughts you guys have.

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1643
Re: Twenty Percent House Downpayment Question
« Reply #1 on: November 08, 2014, 08:41:55 AM »
Before we get to whether you should liquidate your taxable (I take it you mean "non-IRA, non-401k, non-retirement" account, right?), I have a concern:

"I don't think I want to live in the area I am in forever, but I can't foresee myself leaving any time soon (<5 yrs) as my family is in the area, and I do not have any job prospects elsewhere at the moment.  I have been renting for about seven".

I would not buy real estate to live in unless I were pretty sure I was staying at least 10 years. 

If you are convinced you should buy a home now, I think liquidating non-retirement mutual fund shares is better than paying PMI.
There's nothing intimidating about it.  Just liquidate the shares on-line, then be prepared to pay capital gains in April.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: Twenty Percent House Downpayment Question
« Reply #2 on: November 08, 2014, 12:27:30 PM »
In your shoes, I would definitely not consider giving up 401k or IRA contributions. There's too much free money there in the way of tax savings and likely employer matching contributions. So, max those out or continue to do so, and do not reduce them to save up for a down payment.

I would only consider buying a house if you think you'll stay put at least 5-7 years. Short of that, there's a high chance you'll end up losing money in transaction (commissions and closing) costs. If you'll meet at least that timeline, THEN look at rent vs. buy calculations in your area to see if it makes sense financially where you live.

Big +1 on getting roommates to offset costs if you decide to buy! That's a great way to get others to subsidize your home ownership and building equity.

I'm not a big fan of jumping into home buying without a healthy stash to do so, but if it turns out that buying is much better financially for you than renting, then you can look into getting a small second mortgage to get around putting 20% down and paying PMI (for example, a "80/10/10" loan). This is pretty common where we live due to the very high housing costs. If you have a good, stable income, but it takes a long time to save up 20%, it can make sense. Usually, though, it's best to wait until you've saved up the 20%.

cabeasle

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: Twenty Percent House Downpayment Question
« Reply #3 on: November 08, 2014, 01:55:10 PM »
Thanks for the thoughts so far.

The main reason I haven't purchased a home yet is because I kept thinking I would end up leaving this area eventually.  But, seven years later, still here and would have been better off buying at this point.  I figure I can keep playing that game indefinitely ("but maybe I will leave in..."), but reality looks like I would be here at least five more years.  And if a major financial loss would be incurred from moving, I can probably just put off the move, since it would likely be from personal preference, not necessity.  But I totally agree... I wish I had a more solidly predictable future timeline.

I checked some rent vs. own calculators.  A modest home where I live is around 120k (homes that are 20 or so years old, in sub-divisions).  The calculator suggests it is worth buying if I can't find a place to rent for (max) 650.  Well, 650 for rent around here gets you a tiny apartment in a pretty run-down, unappealing complex.  Just a reasonable place (700 sq ft, one bedroom, not "as" rundown complex) will run about $750/mo. 

I think I would be willing to get a roommate, but I think it would be a hard sell for my girlfriend.  Still, it is totally worth considering.

I guess I just don't want to put off buying, find myself still living here five years from now, and kicking myself for not making the right financial choice.  Of course, who can predict?  No telling what's going to happen in the future. 

Gimesalot

  • Pencil Stache
  • ****
  • Posts: 666
Re: Twenty Percent House Downpayment Question
« Reply #4 on: November 08, 2014, 05:41:09 PM »
You should look in to Home Possible from Freddie Mac.  We only had 10% down but through Home Possible we only pay $65 a month of PMI.  It would have taken us two to three years to save the extra $25k.

There is an income limit unless you buy in an "under served" area.  Under served means mostly minority or mid to low income areas.

We used our loan to buy a 3-apartment building.  We rent out two apartments and live in one.  It's like having roommates but a little bit better.

Spondulix

  • Pencil Stache
  • ****
  • Posts: 638
  • Age: 39
  • Location: Los Angeles, CA
Re: Twenty Percent House Downpayment Question
« Reply #5 on: November 09, 2014, 12:17:07 AM »
One thing to keep in mind is the scrutiny that goes into getting the loan. Lenders get really nitpicky when money is taken out of accounts to fund a mortgage. So you may want to get in touch with a mortgage broker or lender and ask how long the money needs to be out of your brokerage account in order for them to not flag it.

frugaliknowit

  • Handlebar Stache
  • *****
  • Posts: 1643
Re: Twenty Percent House Downpayment Question
« Reply #6 on: November 09, 2014, 09:28:12 AM »
I checked some rent vs. own calculators.  A modest home where I live is around 120k (homes that are 20 or so years old, in sub-divisions).  The calculator suggests it is worth buying if I can't find a place to rent for (max) 650.  Well, 650 for rent around here gets you a tiny apartment in a pretty run-down, unappealing complex.  Just a reasonable place (700 sq ft, one bedroom, not "as" rundown complex) will run about $750/mo. 

Does that rent/buy analysis take into account maintenance costs of the property?  $650 sounds awfully low.

Gimesalot

  • Pencil Stache
  • ****
  • Posts: 666
Re: Twenty Percent House Downpayment Question
« Reply #7 on: November 09, 2014, 10:16:01 AM »
Try the NY Times calculator:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html?_r=0

I think the old version was better, but this one seems to have all the same features. 

cabeasle

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: Twenty Percent House Downpayment Question
« Reply #8 on: November 09, 2014, 10:21:15 AM »
From what I saw on the calculator, it factored in 1% total cost/year for maintenance.


cabeasle

  • 5 O'Clock Shadow
  • *
  • Posts: 19
Re: Twenty Percent House Downpayment Question
« Reply #9 on: November 09, 2014, 10:27:51 AM »
Hmm... just went through the NYT calculator again (it was the same one I used the first time), but I adjusted several of the numbers, and it is giving me a different result.  Looks like it is suggesting more like 850 a month as the break even point.  That is certainly higher than 650, though it would still leave me renting a small-ish one-bedroom.  So, to come ahead financially, I will need to accept a fairly meager housing situation...  I guess one of the issues is really just a psychological one.  Part of me wants the backyard space to grill, let the dog run around, and start small fires.  Of course, I also enjoy not having to mow said backyard space...

To Act01: Good call on the way mortgage brokers approach loans.  I will certainly keep that in mind if I decide to liquidate.

chuckaluck

  • 5 O'Clock Shadow
  • *
  • Posts: 65
Re: Twenty Percent House Downpayment Question
« Reply #10 on: November 09, 2014, 10:30:55 AM »
It seems like most the analyses that have been done so far have been looking only at the mortgage payment vs the rent.  That is fine. But have you fully considered all the other costs associated with not only buying a house (RE commissions, mortgage fees, inspection, funding escrows, etc) but also monthly maintenance costs and emergency funds for inevitable repairs/replacement (roof, water heater, etc)? Also, the urge to make the house "pretty" (buying furniture, curtains, etc) is powerful and will of course dig into savings. Will you then be able to replenish the accounts after your purchase?   I.m not saying don't buy a house, but I am saying that you really need to make sure that you fully understand the true costs of home ownership before you jump in. 

mozar

  • Magnum Stache
  • ******
  • Posts: 2903
Re: Twenty Percent House Downpayment Question
« Reply #11 on: November 09, 2014, 05:23:39 PM »
What does your girlfriend want?

Jacana

  • Stubble
  • **
  • Posts: 188
  • Location: Back in the DMV :(
Re: Twenty Percent House Downpayment Question
« Reply #12 on: November 09, 2014, 10:29:25 PM »
FYI you also pay a lot of money in fees and whatnot when you sell. Surprise! So on both buying and selling ends, you will be paying other people lots of money. If you do buy, might want to make sure it would also be a viable rental property should your situation change in 5 years or less. That way you can at least delay selling until you have significant equity.

randommadness

  • Stubble
  • **
  • Posts: 131
  • Location: Denver
Re: Twenty Percent House Downpayment Question
« Reply #13 on: November 10, 2014, 08:33:40 AM »
Don't forget to factor in the potential gains on the money you're no longer investing (while saving for DP).

If you do buy though - ensure you go at least 5% down. At 5% down you may still quality for a conventional mortgage, which has a MUCH (like 50%) lower PMI than FHA PMI.

May be worth paying the $50/mo PMI in order to keep investing elsewhere while you pay down to 20+%.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: Twenty Percent House Downpayment Question
« Reply #14 on: November 10, 2014, 09:04:01 AM »
I guess one of the issues is really just a psychological one.  Part of me wants the backyard space to grill, let the dog run around, and start small fires.  Of course, I also enjoy not having to mow said backyard space...

Those are legitimate reasons to buy a home, don't feel like you need to discount them. A lot of people don't consider a home an "investment" at all, although that position is controversial. A home is definitely a place to live, though, and you should like where you live, particularly if you spend a lot of time there. I think the trick is just not getting yourself roped into too much housing. If it's close to a break-even proposition on renting, and you know you'll be staying put for quite a while, it could make sense to buy a house that you can make your own and enjoy how you want to. Especially if you buy a house with an eye towards buying it as a potential rental one day (e.g., make sure it meets the criteria for purchasing it strictly as a rental), you will likely be pleased with your purchase over the long haul.

Remember, if you hang onto a house for 20-30 years (even as a rental even if you don't live there that long) and pay off the mortgage, you will now have a sizable asset that's almost certainly kept pace with inflation or perhaps even better. It can provide some significant tax benefits, benefits of leverage, and bring you some very good, stable rental income for the rest of your life that also continually increases. This isn't necessarily an argument for buying (investing the money in paper assets might be better from a strictly financial point of view), but owning a house does have some good benefits and is a good diversification for your overall assets.

DoubleDown

  • Handlebar Stache
  • *****
  • Posts: 1989
Re: Twenty Percent House Downpayment Question
« Reply #15 on: November 10, 2014, 09:11:04 AM »
Of course, I also enjoy not having to mow said backyard space...

And yeah, mowing can be a pain in the ass. I'm a proponent of "paving it" (tastefully)-- nice stone or brick patios, plant shrubs and trees, gravel or stone walkways, fountains, plant and flower gardens, mulch, rock gardens, fire pit/bbq, vegetable gardens, fruit trees -- whatever will take away grass you have to mow! Plus it looks nice and increases the value of your home.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10156
  • Age: 61
  • Location: NorCal
Re: Twenty Percent House Downpayment Question
« Reply #16 on: November 10, 2014, 03:43:13 PM »
Good morning everyone.  There is a wealth of information being thrown around on these forums, and I'm hoping someone would be so kind as to help me out with a home-buying/investment question.  I am a fairly limited-experience invester (Vanguard low-maintenance funds only).

I am looking in to buying a house.  I don't think I want to live in the area I am in forever, but I can't foresee myself leaving any time soon (<5 yrs) as my family is in the area, and I do not have any job prospects elsewhere at the moment.  I have been renting for about seven years now, and I feel like it may be time to start building up some equity, as a fully paid for house will significantly improve my chances to FIRE.

My question is: I do not have enough cash on hand to pay the 20% recommended downpayment.  If I fully shifted my savings to this goal (forsaking 401k, etc), I could probably get there in a year or two.  However, I "do" have enough to cover that amount currently in a taxable account through Vanguard (started before I knew how to take advantage of non-taxable accounts).  Since the market has been doing so well lately, would it be a good idea to sell the needed shares for the house downpayment (and pay the subsequent tax bill) to take advantage of the recent market gains?  Or would it be better to let the money ride, and just start saving aggressively for the next year or so, stopping investments to the 401k and IRA until I have enough for the downpayment?

I'm leaning towards pulling the money out of Vanguard, but I've never sold shares before and am, frankly, a bit intimidated by it.  I'd appreciate any thoughts you guys have.
Another option is to start looking into first time home buyer's programs and low down payment options. There is a surprising amount of help out there, especially for public sector first-timers. There are even programs that limit PMI premiums. If you live in a strong real estate market, buying sooner, even with PMI, can make sense. I'd probably do a combination of things. Just don't put down so much money that you leave yourself short.

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8514
  • Registered member
Re: Twenty Percent House Downpayment Question
« Reply #17 on: November 10, 2014, 10:10:04 PM »
Of course, I also enjoy not having to mow said backyard space...

And yeah, mowing can be a pain in the ass. I'm a proponent of "paving it" (tastefully)-- nice stone or brick patios, plant shrubs and trees, gravel or stone walkways, fountains, plant and flower gardens, mulch, rock gardens, fire pit/bbq, vegetable gardens, fruit trees -- whatever will take away grass you have to mow! Plus it looks nice and increases the value of your home.

Am I the only one who likes mowing?  I don't do it often, because I don't want thirsty grass.  But it's fun.