What do you use for house down payments?

[bpobst]

Everyone always talks about maxing 401(k) and Roth, which I understand, but I am just curious if people use those for their down payments? We just finished our debt in July (hooray!) and increased both 401(k) and Roth payments to match. We are still not maxing 401(k) because we do not earn/save enough. We have an emergency fund that we are comfortable with but obviously would not use that for a house. We are also still years away from even thinking of purchasing a house so keep that in mind. I just wanted an idea of what people use for their first down payment.

[Calvawt]

I used one (401k) from my first job after I had switched companies for a down payment, just under $10k.  I wish I would have not used it, but at least I rolled the equity in to my new house.  The housing crisis did not affect my house in KC, but allowed me to purchase a larger foreclosure in central California.  I guess I moved at the right time (early 2010).

[Cassie]

WE just put the $ into a savings account while we saved up enough for the down payment.

[Roots&Wings]

Savings account + taxable brokerage.  Once I reached $50k in savings (which should be a decent down payment for my price-range), I started using my Vanguard brokerage account to hopefully get potential better return.  I would never tap retirement accounts for this.

[Rage]

Saving for that first down payment is a really tough nut to crack.  It's usually early in your career when you don't make as much as you (hopefully) will later, everyone is telling you to max out your 401k, pay off your debt, save an emergency fund and do other smart things, and if you don't save the full 20% down payment you have to pay PMI - always a tough decision.

My advice:
1) while you are saving for the down payment only put enough into your 401k to get the company match. 
2) Save the money in a savings account - stocks and bonds are too risky for this near term of a purchase
3) Though I'm generally not a big fan of emergency funds, you will have unexpected expenses when you first buy a home - and even as part of the purchase process - and you will have just cleaned yourself out for the down payment - so yeah, be ready to weather a few storms.

[Bob W]

IMHO

You use the money you have saved for a down payment. 

My standard answer is -- One should never buy a home unless they have the cash to pay for it fully.  At today's interest rates one can then comfortably put 20% down and invest the other 80% in stocks or real estate. 

One should never leverage their hard earned money to gamble in the housing market.   You probably didn't live through the down market of recent times?

People put down 40K and took out 500K mortgages.   The homes then went down in value some 200K.  Effectively they lost 200K on a 40K bet.   And many of the homes are still on the market today. 

So my answer is rent.  If you must buy be sure you have the full amount.   The shorter the timeframe till you buy the lower the cost of the home will be.   

I'm don't know what housing market you live in but here is an interesting possibility.   I just read a link from here.   The man explained he bought a home for 30K and then put 20K into it.   The bank then valued the home at 80K.   

Depending on your market, this could be a reality for you.  Effectively in this scenario,  when you save like hell to have 50K, you could have your home fully paid off.      If you then decide the 80K home is not swanky enough for you,   rinse and repeat the process on the next home bracket up.   Buy 80k home put 40K in value at 185K.   

The whole process might take 3-5 years.   

Rinse and repeat if you want the next level home.   

You will always have a paid off home with 100% equity.  These homes will always earn you money and none of your money going to interest.  You will be super proud of yourself and your spouse and you will sleep well at night. 

[catccc]

Bob Werner, so do you advocate paying cash for the house, or investing the other 80% and getting a mortgage?

To answer the OP, when we do buy, our down payment will be coming out of non-retirement savings.

[Gerard]

I'm a Canadian, so I bought my first place with a down payment from an RRSP.

My second place, I got part of the down payment as a credit card advance. No, wait, don't hit me! That extra money let me avoid mortgage insurance, and because I got balance transfer teaser rates, I paid low interest on it (3% instead of my mortgage's 2.25%) for the two years it took me to pay off. Net out of pocket cost about $500, to save about $2500.

I am not a financial advisor and your situation may be different.

[mpbaker22]

cash

Sorry, the joke was too easy.  I actually wasn't actively looking for houses when I bought mine.  I was just casually perusing listings, and I saw a house I really liked, so I sold some stock and paid cash.

[mpbaker22]

IMHO

You use the money you have saved for a down payment. 

My standard answer is -- One should never buy a home unless they have the cash to pay for it fully.  At today's interest rates one can then comfortably put 20% down and invest the other 80% in stocks or real estate. 

My only other advice is don't listen to this guy ... and I bought my house with cash!

[Dicey]

Lots of good answers here. I will specifically call out Bob Werner's as being the least so. Please don't think that his answer is based on much that's practical in most parts of the country. Good for him that he was able to do this (one assumes), but this theory is rather unrealistic in a mid- or high-COLA.

If a mortgage payment is about the same as rent in your area, it would take even more time to achieve home ownership via BW's plan than it would to buy with 20% down (yeah, save it up fast by being mustachian). At least you are paying toward home ownership rather than renting and trying to save towards an ever-receding goal. You can still be "super proud of yourself", even if you chose a different route to home ownership. Good luck to you!

[mpbaker22]

Lots of good answers here. I will specifically call out Bob Werner's as being the least so. Please don't think that his answer is based on much that's practical in most parts of the country. Good for him that he was able to do this (one assumes), but this theory is rather unrealistic in a mid- or high-COLA.

If a mortgage payment is about the same as rent in your area, it would take even more time to achieve home ownership via BW's plan than it would to buy with 20% down (yeah, save it up fast by being mustachian). At least you are paying toward home ownership rather than renting and trying to save towards an ever-receding goal. You can still be "super proud of yourself", even if you chose a different route to home ownership. Good luck to you!

Exactly my thought.  As long as you avoid the temptation to go bigger because it can be added to a loan.  Hell,  I'm all for putting less than 20% down as long as you make larger than minimum payments.  Except I've heard that PMI now sticks around for the life of the loan; not just until you hit 20% principle.

[Bob W]

Lots of good answers here. I will specifically call out Bob Werner's as being the least so. Please don't think that his answer is based on much that's practical in most parts of the country. Good for him that he was able to do this (one assumes), but this theory is rather unrealistic in a mid- or high-COLA.

If a mortgage payment is about the same as rent in your area, it would take even more time to achieve home ownership via BW's plan than it would to buy with 20% down (yeah, save it up fast by being mustachian). At least you are paying toward home ownership rather than renting and trying to save towards an ever-receding goal. You can still be "super proud of yourself", even if you chose a different route to home ownership. Good luck to you!

I say all the following from a humble opinion of my own.  I'm sure asking people to actually have the money to buy the things they want may rain on their parade.  Everyone giving suggestions is welcome to share.

Of course MMM paid cash, so I guess I'm following his thinking.   He also sold his house for just about what he paid for it after 7 or 8 years after riding out a significant downturn for a few years. 

Would you borrow 80%  to buy one single stock?   I didn't think so.  In fact, it is even illegal for brokerage firms to lend you money to do so.   Would anyone here suggest borrowing 80% to buy a car because you wanted it and didn't have the money to buy it?   I'm pretty sure the answer is no.   But I see plenty of folks suggesting to borrow 80% to buy houses because people want them but don't have the money.     

This site promotes stoicism in my opinion.  Which is a nice way of saying -- "be a badass and if you "want" a house, actually have the cash to pay for it" 

The reason that homes are expensive in high cost of living (COLA) areas is that they are overpriced.   They weren't as expensive 4 or 5 years ago.   If at that time you had suggested buying with 20% down it might have made sense.    It may even make sense in the micro market where I live as home prices haven't moved much in the last several years and there are still plenty of foreclosures on the market. 

The person who asked this question is probably renting a place now.   If they want to upgrade they can simply rent a nicer house.   They probably have it in their emotional heart that if they buy a house that somehow their life will be magically better than if they rent a similar home.  I'm pretty sure it won't be.  Driving a borrowed money 40,000 SUV doesn't significantly improve your life over a paid for 10K Honda Accord.  Buying a house is not a "need."   It is not a prerequisite for having a great and full life.

 Oddly the more expensive the house the better the rent to own ratio tends to be.   If you're looking at the top 20% of homes (which I actually do on a regular basis) the rent is often below what you would pay in interest, taxes, insurance and maintenance.    (not in all cases or all markets)  This appears true in Longmont,  MMMs hometown. 

Also, remember that in typical real estate cycles that the average house buyer  only stays in the house for 7 years on average.   (that's what MMM did).   Your house is not a lifetime marriage by any means. 

By the way,   I have been dealing with houses, homes, real estate, renting and remodeling in one manner or another for over 30 years.   I have seen many people lose all their assets on a house.  I was a home builder when the real estate bubble bursts so perhaps I'm a bit skeptical.    Sure for 90% of people it will probably work out buying a home they don't have the money to purchase.    The hard part is knowing 5 years in advance if you're one of the 10% that it goes terribly wrong with.  If you very confident you will always be in the 90% then by all means, save the 20% down and jump!

Regarding CATCCC's  question about paying cash for a home or putting 20% down and investing the difference.   

At these interest rates I would lean towards 20 down and invest the diff.    The spread would be 5-6% over the long haul (30 Years).  That would be a 5 million dollar difference on a 500K home.   You're still gambling a little but the perfect storm risk of houses being way down,  stocks being way down and you having to sell the house all at the same time is pretty low. (this did happen 5-6 years ago by the way) With each passing year as you save more the risk of the perfect storm diminishes to close to zero.   So the gamble in this case is would you be willing to take on a very low risk for an additional 5 million dollars?  And how good are you at evaluating risk and tolerating market swings?

But hey,  don't listen to me!   

[rocksinmyhead]

Savings account + taxable brokerage.  Once I reached $50k in savings (which should be a decent down payment for my price-range), I started using my Vanguard brokerage account to hopefully get potential better return.  I would never tap retirement accounts for this.

this pretty much sounds like my plan.

The person who asked this question is probably renting a place now.   If they want to upgrade they can simply rent a nicer house.   They probably have it in their emotional heart that if they buy a house that somehow their life will be magically better than if they rent a similar home.  I'm pretty sure it won't be.  Driving a borrowed money 40,000 SUV doesn't significantly improve your life over a paid for 10K Honda Accord.  Buying a house is not a "need."   It is not a prerequisite for having a great and full life.

dude, it must have been a long time since you've rented (or you must be lucky and only have had positive rental experiences). for me, it's not about a nicer house, it's that I'm sick of being treated like fucking shit by landlords and having limited rental options because I have two dogs (no, I'm not getting rid of them, they are living creatures and I committed to taking care of them). sure, I still have a "great and full life," but oh man I can't wait until we are certain we'll be living somewhere for a while AND can comfortably afford a 20% downpayment. I'm pretty risk-averse, but escaping the negative quality of life issues attached to renting are worth the risk of home ownership for me.

[k-vette]

This may not be the typical answer, but I didnt have a down payment.  I used a USDA "rural" loan to buy our house.  No money down, cheaper than using the common FHA loan.  If done right, even closing costs can be rolled into the loan.

The USDA definition of rural may surprise you.  I live in a suburb street and can walk to downtown.

[Angie55]

dude, it must have been a long time since you've rented (or you must be lucky and only have had positive rental experiences). for me, it's not about a nicer house, it's that I'm sick of being treated like fucking shit by landlords and having limited rental options because I have two dogs (no, I'm not getting rid of them, they are living creatures and I committed to taking care of them). sure, I still have a "great and full life," but oh man I can't wait until we are certain we'll be living somewhere for a while AND can comfortably afford a 20% downpayment. I'm pretty risk-averse, but escaping the negative quality of life issues attached to renting are worth the risk of home ownership for me.

I think I'm in your boat. I've been renting since 2003. I want to buy for several reasons but mostly the hassle of not having to live based off someone else's demands and problems. I've lived in 8 apartments in 11 years. It costs money to move every year, rent the truck, pay the overlap days, lose your security deposit (or parts) due to issues they made up that aren't worth fighting, sell/replace furniture that doesn't fit or gets broken in the move, etc. My past costs have been 1000-2000 every time I move. So people who say renting has no additional costs are very much overlooking this issue.

Raised rents every year are another problem. Place is in worse shape but I have to pay more? You're raising the rent if I re-sign but if I leave you will offer lower rent AND lose a month of income? So backwards.

Maintenance is the bane of my existence, so many times I could have fixed the issue myself way cheaper and quicker but instead you have to go through 3rd parties to try to get simple crap done. Also, thanks for not telling me my house was broken into 2 months before I moved in and you haven't fixed any of the locks or door jambs.

Ah oh, and credit checks. How come you can do one on me but I can't do one on you the landlord? I'm paying you rent and you aren't paying your mortgage! I'm the one going through all the hassle not you.

There are so many poor landlords and management companies out there. Its impossible to weed them out.

Sorry for the giant rant but Rent vs. own is not strictly a numbers game. There are a TON of other factors that apply. The above is just a small sampling of the issues I've had. I would venture to say the majority of the people who say this are people that own themselves or have miraculously found a good landlord that will rent to them for 8+ years without increasing the rent (oh and actually take care of the property!). Any landlords like that willing to rent a place to me? A responsible tenant that is sick of dealing with all the bull in the rental game?


--> Oh and to actually answer the original question... I'm sort of at a loss with how I can come up with the money for a downpayment. I'm on the fence of pushing to buy any way possible at the end of my lease even if it means a piddly downpayment of 5-10%. If I max out my retirement accounts for the tax savings it would take 10 years to save 20% on a cheap property without major sacrifices. If I do not buy in the 1-2 year timeline I plan to raid my Roth IRA for a portion of the downpayment. Right now I'm considered my Roth IRA my 6-month emergency fund. The way I see it, if I were saving full bore for a downpayment I wouldn't be able to contribute to my Roth anyway. So in a way the money in there isn't earmarked for retirement its earmarked for a downpayment. If I don't end up touching it it is a bonus!

Yes, I realize I will get major backlash for this. But I only started the Roth this year and that was my primary purpose. A vehicle where I can stash some cash and potentially gain some earnings. If it bombs I'll just let it be and continue on with life. It wouldn't be the first curve ball thrown my way.

[SisterX]

The person who asked this question is probably renting a place now.   If they want to upgrade they can simply rent a nicer house.   They probably have it in their emotional heart that if they buy a house that somehow their life will be magically better than if they rent a similar home.  I'm pretty sure it won't be.  Driving a borrowed money 40,000 SUV doesn't significantly improve your life over a paid for 10K Honda Accord.  Buying a house is not a "need."   It is not a prerequisite for having a great and full life.

dude, it must have been a long time since you've rented (or you must be lucky and only have had positive rental experiences). for me, it's not about a nicer house, it's that I'm sick of being treated like fucking shit by landlords and having limited rental options because I have two dogs (no, I'm not getting rid of them, they are living creatures and I committed to taking care of them). sure, I still have a "great and full life," but oh man I can't wait until we are certain we'll be living somewhere for a while AND can comfortably afford a 20% downpayment. I'm pretty risk-averse, but escaping the negative quality of life issues attached to renting are worth the risk of home ownership for me.
[/quote]

+1 to this.  Renting with pets (who otherwise make my life so much better and happier) is a PITA.  Plus, if I own my own place I can do what I want with the property (like build the giant garden I want, including fruit trees and perennial plants!) and change the house to suit myself, rather than taking the least bad option.
My landlords have been pretty decent but even so, I've had to put up with annoyances and I'm tired of it.

[Bob W]

The person who asked this question is probably renting a place now.   If they want to upgrade they can simply rent a nicer house.   They probably have it in their emotional heart that if they buy a house that somehow their life will be magically better than if they rent a similar home.  I'm pretty sure it won't be.  Driving a borrowed money 40,000 SUV doesn't significantly improve your life over a paid for 10K Honda Accord.  Buying a house is not a "need."   It is not a prerequisite for having a great and full life.

dude, it must have been a long time since you've rented (or you must be lucky and only have had positive rental experiences). for me, it's not about a nicer house, it's that I'm sick of being treated like fucking shit by landlords and having limited rental options because I have two dogs (no, I'm not getting rid of them, they are living creatures and I committed to taking care of them). sure, I still have a "great and full life," but oh man I can't wait until we are certain we'll be living somewhere for a while AND can comfortably afford a 20% downpayment. I'm pretty risk-averse, but escaping the negative quality of life issues attached to renting are worth the risk of home ownership for me.

+1 to this.  Renting with pets (who otherwise make my life so much better and happier) is a PITA.  Plus, if I own my own place I can do what I want with the property (like build the giant garden I want, including fruit trees and perennial plants!) and change the house to suit myself, rather than taking the least bad option.
My landlords have been pretty decent but even so, I've had to put up with annoyances and I'm tired of it.
[/quote]

Oh, I agree with you.  Owning a house has many of the advantages as you noted.   I am very familiar with the issues with both renting and owning.   This topic is such a lighting rod and really seems to irritate some people. 


We have rented 4 places out of the last 10 years.  Each one successively nicer until we bought our current home at an extreme discount.   So, "dudes,"  I know all about renting.

3 of my children now rent their homes.   One has roommates in a big old house.   One lives with a roommate in an apartment.   One lives in a nice 3 bed ranch with wife and 2 kids.   None are allowed pets. 

Every financial pundit always says debt is bad,  except of course for the house debt.   I don't disagree on that.  But where I disagree is that you should have the assets to pay for your house,  even if you choose to leverage the easy money low interest rates now available. 

I'm sorry but I'm right on this and they are wrong.  I just have the guts to say it.   The tens of millions of people who lost their home and the tens of millions more who are trapped in their homes because they are upside down on their mortgage are my testament to this.   It isn't a theory.  It is reality.   It is a reality that I have seen family and friends go through.   Hell I have one neighbor who has had his house for sale for 7 years.    Now you tell me  --- does he own the house or does it own him.   And he is a "financial planner."   

There were close to 3 million home foreclosures in the US in 2010 alone.    You're probably better at math than me, but I'm thinking that equates to about 10 percent of all home buyers were foreclosed on in the last   7 years.   I'm sure all those folks enjoyed their gardens, pets and choosing the color of their wall paint.   

http://www.worldpropertychannel.com/north-america-residential-news/number-of-home-foreclosures-in-2012-realtytrac-year-end-2012-us-foreclosure-market-report-total-foreclosure-filings-in-2012-default-notices-scheduled-auctions-6456.php

I stick to my guns -- "In general,  one should not buy a home unless they can afford to pay cash for it."

You may be the exception of course.  I am saying "in general."   

Here is what a prudent father might say to his son as I did recently.   

Son -- "Dad, we are saving money for a down payment on a house."  Me -- "Son,  this is a nice house you live in.  I think it is more prudent to save enough money to buy a starter home for cash."   Son  -- "But Dad,  that would take years and we really don't have a lot of extra money."    Dad -- "Son,  Here is a link to the MMM site that will teach you how to save more money than you imagined.   And yes,  it will be hard work to save enough money to pay cash,  so let's get started today."

You know,  I don't think he liked hearing that very much.  Go figure?


 

[mpbaker22]

The person who asked this question is probably renting a place now.   If they want to upgrade they can simply rent a nicer house.   They probably have it in their emotional heart that if they buy a house that somehow their life will be magically better than if they rent a similar home.  I'm pretty sure it won't be.  Driving a borrowed money 40,000 SUV doesn't significantly improve your life over a paid for 10K Honda Accord.  Buying a house is not a "need."   It is not a prerequisite for having a great and full life.

dude, it must have been a long time since you've rented (or you must be lucky and only have had positive rental experiences). for me, it's not about a nicer house, it's that I'm sick of being treated like fucking shit by landlords and having limited rental options because I have two dogs (no, I'm not getting rid of them, they are living creatures and I committed to taking care of them). sure, I still have a "great and full life," but oh man I can't wait until we are certain we'll be living somewhere for a while AND can comfortably afford a 20% downpayment. I'm pretty risk-averse, but escaping the negative quality of life issues attached to renting are worth the risk of home ownership for me.

+1 to this.  Renting with pets (who otherwise make my life so much better and happier) is a PITA.  Plus, if I own my own place I can do what I want with the property (like build the giant garden I want, including fruit trees and perennial plants!) and change the house to suit myself, rather than taking the least bad option.
My landlords have been pretty decent but even so, I've had to put up with annoyances and I'm tired of it.

Oh, I agree with you.  Owning a house has many of the advantages as you noted.   I am very familiar with the issues with both renting and owning.   This topic is such a lighting rod and really seems to irritate some people. 


We have rented 4 places out of the last 10 years.  Each one successively nicer until we bought our current home at an extreme discount.   So, "dudes,"  I know all about renting.

3 of my children now rent their homes.   One has roommates in a big old house.   One lives with a roommate in an apartment.   One lives in a nice 3 bed ranch with wife and 2 kids.   None are allowed pets. 

Every financial pundit always says debt is bad,  except of course for the house debt.   I don't disagree on that.  But where I disagree is that you should have the assets to pay for your house,  even if you choose to leverage the easy money low interest rates now available. 

I'm sorry but I'm right on this and they are wrong.  I just have the guts to say it.   The tens of millions of people who lost their home and the tens of millions more who are trapped in their homes because they are upside down on their mortgage are my testament to this.   It isn't a theory.  It is reality.   It is a reality that I have seen family and friends go through.   Hell I have one neighbor who has had his house for sale for 7 years.    Now you tell me  --- does he own the house or does it own him.   And he is a "financial planner."   

Umm no, you are wrong.

This is a pretty typical scenario that would lean towards buying even without full cash:
When I first moved to the St. Louis area I was renting for $640/month.  This was a one bed/one bath place that was pretty decent but definitely not luxurious.  In the same area, a 3 bed 1.5 bath home sells for 130K.  Total monthly payment would be about $750 (max of $850).  For comparison, a 3 bed 2 bath house rents for $1100/month.  Also for comparison, a 2 bedroom apartment would rent for about $800.  So, I can continue renting because I don't have assets to cover the entire house.  This involves $640 a month out the window.  Or, I can buy a house, and throw $750-$850 a month to various payments.  In the meantime, I deduct the interest, I gain principle, and I can rent out bedrooms.  Even at $200/month (a huge steal) for only one bedroom, I'm spending less than I did on the apartment.

Now, I took a totally different route where I moved and lived with a roommate and paid $320/month after my first year.  This was more because I didn't know what I was doing long term than a result of it being optimal over buying a house.  Then, I moved to a different area in St. Louis city proper, and I bought a house for $37,200, totally destroying any of the numbers listed above.  The point is that in the above example it makes much more sense to buy, even when leveraged, than to rent.  On the other hand, I see those same arguments skewed to justify buying a $250,000 house in the same area.  Some people will always do stupid things.

[Bob W]

The person who asked this question is probably renting a place now.   If they want to upgrade they can simply rent a nicer house.   They probably have it in their emotional heart that if they buy a house that somehow their life will be magically better than if they rent a similar home.  I'm pretty sure it won't be.  Driving a borrowed money 40,000 SUV doesn't significantly improve your life over a paid for 10K Honda Accord.  Buying a house is not a "need."   It is not a prerequisite for having a great and full life.

dude, it must have been a long time since you've rented (or you must be lucky and only have had positive rental experiences). for me, it's not about a nicer house, it's that I'm sick of being treated like fucking shit by landlords and having limited rental options because I have two dogs (no, I'm not getting rid of them, they are living creatures and I committed to taking care of them). sure, I still have a "great and full life," but oh man I can't wait until we are certain we'll be living somewhere for a while AND can comfortably afford a 20% downpayment. I'm pretty risk-averse, but escaping the negative quality of life issues attached to renting are worth the risk of home ownership for me.

+1 to this.  Renting with pets (who otherwise make my life so much better and happier) is a PITA.  Plus, if I own my own place I can do what I want with the property (like build the giant garden I want, including fruit trees and perennial plants!) and change the house to suit myself, rather than taking the least bad option.
My landlords have been pretty decent but even so, I've had to put up with annoyances and I'm tired of it.

Oh, I agree with you.  Owning a house has many of the advantages as you noted.   I am very familiar with the issues with both renting and owning.   This topic is such a lighting rod and really seems to irritate some people. 


We have rented 4 places out of the last 10 years.  Each one successively nicer until we bought our current home at an extreme discount.   So, "dudes,"  I know all about renting.

3 of my children now rent their homes.   One has roommates in a big old house.   One lives with a roommate in an apartment.   One lives in a nice 3 bed ranch with wife and 2 kids.   None are allowed pets. 

Every financial pundit always says debt is bad,  except of course for the house debt.   I don't disagree on that.  But where I disagree is that you should have the assets to pay for your house,  even if you choose to leverage the easy money low interest rates now available. 

I'm sorry but I'm right on this and they are wrong.  I just have the guts to say it.   The tens of millions of people who lost their home and the tens of millions more who are trapped in their homes because they are upside down on their mortgage are my testament to this.   It isn't a theory.  It is reality.   It is a reality that I have seen family and friends go through.   Hell I have one neighbor who has had his house for sale for 7 years.    Now you tell me  --- does he own the house or does it own him.   And he is a "financial planner."   

Umm no, you are wrong.

This is a pretty typical scenario that would lean towards buying even without full cash:
When I first moved to the St. Louis area I was renting for $640/month.  This was a one bed/one bath place that was pretty decent but definitely not luxurious.  In the same area, a 3 bed 1.5 bath home sells for 130K.  Total monthly payment would be about $750 (max of $850).  For comparison, a 3 bed 2 bath house rents for $1100/month.  Also for comparison, a 2 bedroom apartment would rent for about $800.  So, I can continue renting because I don't have assets to cover the entire house.  This involves $640 a month out the window.  Or, I can buy a house, and throw $750-$850 a month to various payments.  In the meantime, I deduct the interest, I gain principle, and I can rent out bedrooms.  Even at $200/month (a huge steal) for only one bedroom, I'm spending less than I did on the apartment.

Now, I took a totally different route where I moved and lived with a roommate and paid $320/month after my first year.  This was more because I didn't know what I was doing long term than a result of it being optimal over buying a house.  Then, I moved to a different area in St. Louis city proper, and I bought a house for $37,200, totally destroying any of the numbers listed above.  The point is that in the above example it makes much more sense to buy, even when leveraged, than to rent.  On the other hand, I see those same arguments skewed to justify buying a $250,000 house in the same area.  Some people will always do stupid things.

$37,000 house.  See now that is great!  You actually bought something you could actually afford!   Good for you. I totally agree with you that people will rationalize buying clown houses 95% of the time.   (most folks here could save 37K in one year)

In one post on this forum a person wished to use 200K for a down payment.  I guarantee (with the exception of NY City perhaps)  That I could find a home for 200K somewhere near public transit in most US cities.

Rationalize away folks.   But for the record, I am not wrong.   Just because rent is higher than a monthly payment does not make me wrong.   

On the lower ends of the market rent is almost always more than a mortgage payment.  On the upper end in most market it is the opposite.   Don't believe this?   Check out Truila or Zillow for MMMs market.  He has 400K into a 1,700 sq ft house.   You are hard pressed to find rentals in his market that are over 2K.   The rentals I saw a few months ago in the 1,800 per month range were pretty swanky and larger than his home.   He choose to go the more expensive route apparently because he loves parks.  Now we could argue all day about whether his home is too big or too expensive.   Since he has the cash he do as he please.

But please don't tell me you're working towards FIRE by buying a 400K house, hoping it will go up in value.    MMM's house sold for just about what he paid for it 7-8 years later.   He gained no equity and lost a shit load of imaginary alternative use of capitol money. 

My favorite is the young couples without children rationalizing the "good school district" (code for no poor people allowed)   concept.  Come on,  you are 7 years from needing a school. 

I have found that people will stop at no end to rationalize buying a home.   

I'm not arguing here just pointing out the most reliable and justified path.

I feel  I may have inadvertently hijacked this thread.  My sincere apologies.  I will refrain from encouraging people to actually have the money to buy things they want in the future. 

[rocksinmyhead]

I think the reason it's a lightning rod is because renters who long to be homeowners often feel condescended to by homeowners who tell them not to buy. As an example, I feel you are veering dangerously close to condescension in your last post.

I also think there is a middle ground between idiots who buy way too much house (or, another of your examples, young couples who fret about "school districts") and people who pay cash for their house. I think for some people, you can dramatically reduce stress and improve quality of life by buying, and yet not make a totally stupid financial decision. Re. your stats about people being foreclosed on in 2010, how many of those people do you think had a 20% downpayment?

PS. Angie55, I feel your angst... your post really hit home for me!

[Angie55]

For the record, I think it is impossible to say anyone is flat out wrong. I was about to say Bob was misled yesterday but I deleted my hasty thoughts and stewed on it for a little longer. I thank you Bob for bringing out a different perspective. Even though I read into it wrong the first time around and may choose not to follow that path myself.

This is a matter of risk tolerance. Bob is clearly on the very low risk end of the spectrum - Have full cash for a house. When there's low risk it can be very hard to fail or have negative consequences. Its still possible its just more unlikely.

The majority of people who take out loans beyond their means are on the very high risk end (whether they were aware of it or not!). They have a high risk of failing but they also have some probability that they could succeed with great rewards (earning tons of equity and selling for a profit).

There's always middle ground nothing is black and white and its really hard to predict. Additional factors that we are debating such as backup savings, dual incomes, the specific market, etc. can increase or decrease the overall likelihood and/or consequence of the various scenarios. I mean, having a house in cash can't protect you from everything it just lowers the probability and consequence of the majority of negative  events. Your house could still be the victim or something like a natural disaster and being underinsured.

[mm1970]

Savings.

We bought our house when we were 34 and 36.  We had maxed our 401k and IRAs for years at that point. 

About 1/2 of the down payment came from selling start-up company stock options.  The other half came from 12-14 years of savings.

[Chranstronaut]

I keep what I consider a "rolling down payment/e-fund". 

I'm keeping it in cash in my savings account, but also considering it my e-fund because I lack job security.  Since my job security must be sorted out before I buy a house, this works for me. Any emergency requiring cash from that account would be VERY SERIOUS and will logically push out my house timeline.  Worst case scenario, I have 2 years or more of living expenses in cash while I look for a new job.  In addition: my 401(k) and Roth IRA are maxed, additional monthly savings are split between Vanguard and the down payment/e-fund account.  As I approach my down payment goal, I'll change the ratio in favor of adding more to Vanguard.

[mm1970]

IMHO

You use the money you have saved for a down payment. 

My standard answer is -- One should never buy a home unless they have the cash to pay for it fully.  At today's interest rates one can then comfortably put 20% down and invest the other 80% in stocks or real estate. 

One should never leverage their hard earned money to gamble in the housing market.   You probably didn't live through the down market of recent times?

People put down 40K and took out 500K mortgages.   The homes then went down in value some 200K.  Effectively they lost 200K on a 40K bet.   And many of the homes are still on the market today. 

So my answer is rent.  If you must buy be sure you have the full amount.   The shorter the timeframe till you buy the lower the cost of the home will be.   

I'm don't know what housing market you live in but here is an interesting possibility.   I just read a link from here.   The man explained he bought a home for 30K and then put 20K into it.   The bank then valued the home at 80K.   

Depending on your market, this could be a reality for you.  Effectively in this scenario,  when you save like hell to have 50K, you could have your home fully paid off.      If you then decide the 80K home is not swanky enough for you,   rinse and repeat the process on the next home bracket up.   Buy 80k home put 40K in value at 185K.   

The whole process might take 3-5 years.   

Rinse and repeat if you want the next level home.   

You will always have a paid off home with 100% equity.  These homes will always earn you money and none of your money going to interest.  You will be super proud of yourself and your spouse and you will sleep well at night.

I can see your point, but I guess I disagree a bit. 

Sure the down markets can be really hard.  We bought on the way up (2004), and now our house is worth about $50k less than we paid for it.  At the bottom of the market, it was $300k less than we paid for it.

I am not opposed to renting - I just never considered my house as in investment, more of a place to live.  A home.  Sure, it would be great if it wasn't a money-loser.  Long term, we might break even.  Who knows.  We opted to stop renting because of the tight rental market in town.  In the 9 years we were here before buying the house, we had several times when the rental was sold, or the rent was increased by hundreds a month, and we ended up moving.  Even when you think you have a long-term rental, the honeymoon ends.  Now that my son is in school (and soon to follow, his younger brother), I'd prefer to stay put so that moving doesn't involve endlessly changing schools.

However, we bought a house that we could afford the payments on.  For the first few years, it required 1.5 jobs (meaning, husband full time, me part time, or vice versa).  Now it is down to one job required.  Our mortgage payment is officially a few hundred less than the rent on an equivalent house (note: it took 3 refinances and 10 years to get to this place.)  Hindsight is 20/20, I would have waited to buy.  In a better rental market, I would have continued renting (our old rental was actually a decent size and seemed to have a decent landlord.  Then again, I guess I just saw that she sold it a couple of months ago.)

[mpbaker22]

For the record, I think it is impossible to say anyone is flat out wrong. I was about to say Bob was misled yesterday but I deleted my hasty thoughts and stewed on it for a little longer. I thank you Bob for bringing out a different perspective. Even though I read into it wrong the first time around and may choose not to follow that path myself.

This is a matter of risk tolerance. Bob is clearly on the very low risk end of the spectrum - Have full cash for a house. When there's low risk it can be very hard to fail or have negative consequences. Its still possible its just more unlikely.

The majority of people who take out loans beyond their means are on the very high risk end (whether they were aware of it or not!). They have a high risk of failing but they also have some probability that they could succeed with great rewards (earning tons of equity and selling for a profit).

There's always middle ground nothing is black and white and its really hard to predict. Additional factors that we are debating such as backup savings, dual incomes, the specific market, etc. can increase or decrease the overall likelihood and/or consequence of the various scenarios. I mean, having a house in cash can't protect you from everything it just lowers the probability and consequence of the majority of negative  events. Your house could still be the victim or something like a natural disaster and being underinsured.

I would also say that everyone should buy a house with <20% down if it will SAVE them money (sometimes hundreds) on their monthly payment.  That is extra money that can go towards savings or paying down the mortgage quicker.  Like I alluded to in my post, people take this to the extreme and try to justify spending $50K ... $100K ... $500K more on a  house than they should.  But the basic principle stands that a ton of renters could benefit by buying a house, and a ton of house-owners could have benefited by buying a cheaper house.

There is ABSOLUTELY NO REASON to wait till you have full cash on a house before buying it if it reduces your monthly payment (after calculating repairs).

[Thegoblinchief]

To answer the OP's actual question, if time horizon is 10+ years, an investment account is the sole good way to do it. Some people recommend Roths, but if you can fill a Roth AND save additional I would put the house $ in a taxable investment account. Yes, you can withdraw money from a a Roth penalty free, but you can ONLY put 5,500 per year in unless you're converting from a 401(k).

With a time horizon between 5-10 years, it gets murkier, but I would still lean towards investing as long as you have the patience to wait a couple years if the markets tank partway into your home search.

Under 5 years I would use an online savings account, money market, or CD ladder - whatever gives you the highest (albeit terrible) interest rate. Favorites around here include Ally, Smarty Pig, and Capital One 360.

[Bob W]

OK,  so some of you have convinced me.   So let's have some guidelines.   

Have at least 20% cash for a down payment.  Then you decide if you will put 0,5, or 10 % down and invest the cash.   So let's say a house payment is 2,000 on a 350K home.   Lets say your able to put zero down.  Then your 20% would be around 70K.   

Let's say that you put that 75K in the stock market and the market tanked in half leaving you 35.5K.   Lets say there are two of you and one splits or looses their income due to disability, death, unemployment, jail or just a bad year selling widgets.   Since your mustachian you could easily cover the flexible expenses but the mortgage on your home (now worth 175K) would require 1K per month to be drawn down from your investments.

So that works.  You would have 3 years of time to figure it out.  I could go with that.

The math works a lot better on a 75K home though.   With that house you still have the 75K you have saved for a down payment but you put 15K down. 

Then you have 60K generating 5K per year in income on average.  Your monthly payment with taxes and insurance is   around $425.  So your house payment is covered by your investment income.   When the market goes in half you still have 30 k which will cover 6 years of house payments. 


 The $2,000 per month you would have been putting into a mortgage payment now is added to the other 40K per year you invest.   So your saving about 60K per year.   In two years you would have about 200K in savings.  (markets willing)  That would be enough to move up to a 300K home comfortably.   

A low end house is a starter home and I highly encourage them.   

[rugorak]

I think the under 5 years mantra comes down to if you have a fixed time you want to buy a house you could get caught in a market downturn. If you are flexible I say go with the market until you decide it is time to pull the trigger. We talk about doing that for retirement all the time yet when it comes to buying a house people revert back to fixed timelines.

I am saving for a house myself and have been actively saving for the past 3 1/2 years. And I am going with the investment account. I am currently thinking next spring will be the time that I will migrate my money out of the market and into savings so that I can just plop it down if/when I find something I want to buy. But if the market crashes between now and then I'll just wait a bit longer. Not a big deal for me.

[mm1970]

OK,  so some of you have convinced me.   So let's have some guidelines.   

Have at least 20% cash for a down payment.  Then you decide if you will put 0,5, or 10 % down and invest the cash.   So let's say a house payment is 2,000 on a 350K home.   Lets say your able to put zero down.  Then your 20% would be around 70K.   

Let's say that you put that 75K in the stock market and the market tanked in half leaving you 35.5K.   Lets say there are two of you and one splits or looses their income due to disability, death, unemployment, jail or just a bad year selling widgets.   Since your mustachian you could easily cover the flexible expenses but the mortgage on your home (now worth 175K) would require 1K per month to be drawn down from your investments.

So that works.  You would have 3 years of time to figure it out.  I could go with that.

The math works a lot better on a 75K home though.   With that house you still have the 75K you have saved for a down payment but you put 15K down. 

Then you have 60K generating 5K per year in income on average.  Your monthly payment with taxes and insurance is   around $425.  So your house payment is covered by your investment income.   When the market goes in half you still have 30 k which will cover 6 years of house payments. 


 The $2,000 per month you would have been putting into a mortgage payment now is added to the other 40K per year you invest.   So your saving about 60K per year.   In two years you would have about 200K in savings.  (markets willing)  That would be enough to move up to a 300K home comfortably.   

A low end house is a starter home and I highly encourage them.

We bought a low end starter home in coastal Southern California.

I joke that "I bought my retirement home.  You know how people buy a starter home, then trade up, then trade down when the kids are grown?  We are just skipping that middle step."

[JayGatsby]

I'll give the example of someone who went the other way, and didn't quite think it through.

I bought a 420k house with about 5% down. With PMI, my monthly mortgage payment is about $2700. Fortunately, I have two roommates living with me, so my portion of the bill is about 1300 (cheaper than renting a one bedroom).

I justified in my head by saying that I'll be able to get two roommates to live with me and then it'll be cheaper than what it would cost to rent.  That was accurate. I also assumed that I would be buying at the low end of the market. That is debatable, as there's no way to truly know. I only truly thought about this second point after the fact. The third point I made to rationalize my buying decision was that "interest rates are at all time lows!" That was true too. But I confused that with thinking I should get more house, rather than getting the amount of house I should, and being grateful for the lower monthly payments.

The downside is, I'm very dependent on having two roommates in order to justify the cost. It's not an end of the world situation, since my job is stable. If needed, I can afford the mortgage on my own, and still have plenty of extra income (but little to put to savings. Only about the 10% that the rest of the world thinks is good!). But looking back on my decision, I've realized that I've exposed myself to wipeout risk. If I lost my job, my roommates moved out, and the market tanked (so my savings were severely depleted), and the housing market tanked, I could, for all intensive purposes, be back to square one.

Now those are slim odds.  That's A LOT that would have to break wrong for me (and that would all have to break wrong for me within a two year window where I'm most vulnerable as I'm currently rapidly building back up my reserves).  But it's still there.  As Bob Werner said, for most people that won't happen. But for the 7 million it happened to in 2009, none of them went into thinking they would be the ones it would happen to.

If I could do it again, I wouldve taken the extra time to build up 20% downpayment, plus 10%-15% that would be kept in an investment account, to give an additional cushion. I didn't touch my 401k for the downpayment, and am still happy that I did not. But I wish I had taken another year to do it the proper way.

Now, I have to sit here and hope that my (unintentional) super-aggressive strategy pays off, with the housing price going up, my income going up, and no major catastrophes. If it does, I'll feel very grateful and have a larger net worth than I would've otherwise. Had I known what I know now though, I would not have exposed myself to wipeout risk.

Extra 50k net worth or so, is not worth starting from zero, since starting out is the hardest (power of compounding).

Just some perspective from someone who did it wrong!

[SisterX]

I'll give the example of someone who went the other way, and didn't quite think it through.

I bought a 420k house with about 5% down. With PMI, my monthly mortgage payment is about $2700. Fortunately, I have two roommates living with me, so my portion of the bill is about 1300 (cheaper than renting a one bedroom).

I justified in my head by saying that I'll be able to get two roommates to live with me and then it'll be cheaper than what it would cost to rent.  That was accurate. I also assumed that I would be buying at the low end of the market. That is debatable, as there's no way to truly know. I only truly thought about this second point after the fact. The third point I made to rationalize my buying decision was that "interest rates are at all time lows!" That was true too. But I confused that with thinking I should get more house, rather than getting the amount of house I should, and being grateful for the lower monthly payments.

The downside is, I'm very dependent on having two roommates in order to justify the cost. It's not an end of the world situation, since my job is stable. If needed, I can afford the mortgage on my own, and still have plenty of extra income (but little to put to savings. Only about the 10% that the rest of the world thinks is good!). But looking back on my decision, I've realized that I've exposed myself to wipeout risk. If I lost my job, my roommates moved out, and the market tanked (so my savings were severely depleted), and the housing market tanked, I could, for all intensive purposes, be back to square one.

Now those are slim odds.  That's A LOT that would have to break wrong for me (and that would all have to break wrong for me within a two year window where I'm most vulnerable as I'm currently rapidly building back up my reserves).  But it's still there.  As Bob Werner said, for most people that won't happen. But for the 7 million it happened to in 2009, none of them went into thinking they would be the ones it would happen to.

If I could do it again, I wouldve taken the extra time to build up 20% downpayment, plus 10%-15% that would be kept in an investment account, to give an additional cushion. I didn't touch my 401k for the downpayment, and am still happy that I did not. But I wish I had taken another year to do it the proper way.

Now, I have to sit here and hope that my (unintentional) super-aggressive strategy pays off, with the housing price going up, my income going up, and no major catastrophes. If it does, I'll feel very grateful and have a larger net worth than I would've otherwise. Had I known what I know now though, I would not have exposed myself to wipeout risk.

Extra 50k net worth or so, is not worth starting from zero, since starting out is the hardest (power of compounding).

Just some perspective from someone who did it wrong!

That was really helpful!  As someone else who wants to buy a house in the next few years, it really is nice to get the "I did it wrong" perspective.  Thanks!