Author Topic: Primary Residence Mortgage Question  (Read 7450 times)

kkbmustang

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Primary Residence Mortgage Question
« on: May 01, 2013, 07:36:40 AM »
The Hubs and I are on track to putting our current house on the market to sell in July. We plan on downsizing to a smaller townhome/condo in a more walkable area and closer to the Hubs' job (I work from home).  Here's what we're wrestling with - how much do we put down and how long of a mortgage do we get?

We anticipate (although won't have hard dollar amounts until we sell, of course) netting a sizable amount on the sale. Also, depending on the final sales price of the new property, we could put down up to 60% of the purchase price. But do we want to?

Two benefits to putting a lot down: 1. Lower monthly principal payments. 2. Debt free sooner.
10 year mortgage: house paid off by the time our youngest goes to college.

I also know that mortgages are cheap now, so would it be better to do a 20 or 30 year mortgage and invest the difference? And/or put down less for the same reason?

Thoughts?  Thanks!


Starstuff

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Re: Primary Residence Mortgage Question
« Reply #1 on: May 01, 2013, 08:39:18 AM »
Can you include some dollar amounts and general locations? I need to know at least what state you're in, and exactly how much money we're talking about, please.

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #2 on: May 01, 2013, 09:53:41 AM »
Can you include some dollar amounts and general locations? I need to know at least what state you're in, and exactly how much money we're talking about, please.

Sure. We live (and the Hubs works) in Dallas, Texas. (As in Dallas proper, not a suburb.) These are estimates, obviously:

Current House (4br/3ba, 2700sf):
Mortgage Balance - $296k
Property Taxes - $9k
Estimated Sales Price (Based on Comps in my neighborhood in the last 2 months): $520k (houses are selling around $220/sf, this price is just under $200/sf)

Proposed Townhome/Condo (3br/2ba, 1800-2000 sf):
Sales Price - $270k to $300k
Property Taxes - $5-6k

Need any other information?

Spork

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Re: Primary Residence Mortgage Question
« Reply #3 on: May 01, 2013, 10:03:53 AM »

I also know that mortgages are cheap now, so would it be better to do a 20 or 30 year mortgage and invest the difference? And/or put down less for the same reason?

Thoughts?  Thanks!

There are 2 definite sides to this, each with a real benefit.
a) the inflation/math side: if (investment amount + return) > (interest amount + inflation) ... you're coming out ahead
b) the "holy crap, how much is this costing me" side:  In an attempt to be debt free earlier, you make conscious decisions that make the cost of the house cheaper up front.  It's OMYGOSHSOEASY to get into the mindset of: "well, the Jacuzzi only adds $8 a month.  And the 3 car garage only adds $30 a month... and ...."    Pretty soon, you've sunk a big chunk extra into the house without thinking.

I went with B.  And I went with B because I am pretty close to ER.  Not having a house payment has been part of my plan from the start.  But that doesn't make A an invalid choice.

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #4 on: May 01, 2013, 10:48:56 AM »

I also know that mortgages are cheap now, so would it be better to do a 20 or 30 year mortgage and invest the difference? And/or put down less for the same reason?

Thoughts?  Thanks!

There are 2 definite sides to this, each with a real benefit.
a) the inflation/math side: if (investment amount + return) > (interest amount + inflation) ... you're coming out ahead
b) the "holy crap, how much is this costing me" side:  In an attempt to be debt free earlier, you make conscious decisions that make the cost of the house cheaper up front.  It's OMYGOSHSOEASY to get into the mindset of: "well, the Jacuzzi only adds $8 a month.  And the 3 car garage only adds $30 a month... and ...."    Pretty soon, you've sunk a big chunk extra into the house without thinking.

I went with B.  And I went with B because I am pretty close to ER.  Not having a house payment has been part of my plan from the start.  But that doesn't make A an invalid choice.

Yeah, that's where the Hubs is leaning. We both are sick of debt. All debt. It'd be nice to be free and clear sooner rather than later.

JasonK

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Re: Primary Residence Mortgage Question
« Reply #5 on: May 01, 2013, 11:42:00 AM »
I live in Dallas too (UP area off Lovers), small world. 

Here's my $0.02. 

First, put down enough to avoid PMI.  20% from what I understand
Second, don't go longer than a 15 year note.  Cuts about a half a point off of the interest rate and makes an immaterial difference on your payment.

OK, now for the bigger question, how much to put down.  I think it depends on what you would do with the extra cash and your comfort level / experience with investing.  If you plan on immediately putting the money to work for you (rent houses, Vanguard investments, dividend stocks, etc) then I would lean towards a 20% downpayment.

However, if you're going to stick it into a checking account until you figure out what to do with it, I'm afraid you'll be tempted (like almost everyone is) to spend that money on stuff - trips, improvements to the townhome, etc. 

So get it out of your hands pretty quickly, either through a big downpayment or investment(s).  Make sure you have an emergency fund of course, but I'm assuming if you're on MMM you already do~

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #6 on: May 01, 2013, 11:58:26 AM »
I live in Dallas too (UP area off Lovers), small world. 

Here's my $0.02. 

First, put down enough to avoid PMI.  20% from what I understand
Second, don't go longer than a 15 year note.  Cuts about a half a point off of the interest rate and makes an immaterial difference on your payment.

OK, now for the bigger question, how much to put down.  I think it depends on what you would do with the extra cash and your comfort level / experience with investing.  If you plan on immediately putting the money to work for you (rent houses, Vanguard investments, dividend stocks, etc) then I would lean towards a 20% downpayment.

However, if you're going to stick it into a checking account until you figure out what to do with it, I'm afraid you'll be tempted (like almost everyone is) to spend that money on stuff - trips, improvements to the townhome, etc. 

So get it out of your hands pretty quickly, either through a big downpayment or investment(s).  Make sure you have an emergency fund of course, but I'm assuming if you're on MMM you already do~

We're looking around Uptown. We went the private school route, so we can go anywhere without regard to school district. Thanks for your input. We're definitely leaning toward putting a lot down, 15 year note with a nice efund intact.

Another Reader

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Re: Primary Residence Mortgage Question
« Reply #7 on: May 01, 2013, 12:18:20 PM »
You could go anywhere without regard to schools, but that's foolish in your price range.  You limit your pool of buyers and your appreciation by ignoring schools.  Buyers don't ignore them, and they discount for the cost and availability of private schools.

MorningCoffee

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Re: Primary Residence Mortgage Question
« Reply #8 on: May 01, 2013, 12:44:44 PM »
Can you include some dollar amounts and general locations? I need to know at least what state you're in, and exactly how much money we're talking about, please.

Sure. We live (and the Hubs works) in Dallas, Texas. (As in Dallas proper, not a suburb.) These are estimates, obviously:

Current House (4br/3ba, 2700sf):
Mortgage Balance - $296k
Property Taxes - $9k
Estimated Sales Price (Based on Comps in my neighborhood in the last 2 months): $520k (houses are selling around $220/sf, this price is just under $200/sf)

Proposed Townhome/Condo (3br/2ba, 1800-2000 sf):
Sales Price - $270k to $300k
Property Taxes - $5-6k

Need any other information?

What jumped out at me was the property taxes. 9k per year? I'm now appreciating how low my property taxes are!

You may want to consider the 9k vs 5k-ish property tax difference in your decision. You pay that difference each year. Forever.
Let's meet half way at an extra 3.5k per year... 35k over the next 10 years... 87.5k if you stay for 25 years...

Johnny Aloha

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Re: Primary Residence Mortgage Question
« Reply #9 on: May 01, 2013, 12:50:13 PM »
You've got good options!  I think it comes down to personal preferrence and mentality on debt.  Sounds like you guys hate debt, so Spork's option B might work better.

Personally, we are pursuing Spork's option A.

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #10 on: May 01, 2013, 12:52:02 PM »
You could go anywhere without regard to schools, but that's foolish in your price range.  You limit your pool of buyers and your appreciation by ignoring schools.  Buyers don't ignore them, and they discount for the cost and availability of private schools.

Thanks for your comment and I agree with you to an extent. However, here are the realities of Dallas proper:
1. If you want a good public school, you're looking at a small bubble around SMU where the real estate prices are astronomical and out of our price range. (A 3/2 townhome or half of a duplex could easily run you $500k. In fact, I just did a search. The cheapest one is listed for $455k and is 1707 sf.)
2. If we want a "good" public school district that isn't in the SMU bubble, the Hubs is driving 15+ miles to work and I'm driving 10+ miles to the kids' school because we are now effectively living in the suburbs.
3. We will not live in the suburbs. Been there. Done that. Bought the t-shirt.
« Last Edit: May 01, 2013, 12:53:38 PM by kkbmustang »

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #11 on: May 01, 2013, 12:54:51 PM »
Can you include some dollar amounts and general locations? I need to know at least what state you're in, and exactly how much money we're talking about, please.

Sure. We live (and the Hubs works) in Dallas, Texas. (As in Dallas proper, not a suburb.) These are estimates, obviously:

Current House (4br/3ba, 2700sf):
Mortgage Balance - $296k
Property Taxes - $9k
Estimated Sales Price (Based on Comps in my neighborhood in the last 2 months): $520k (houses are selling around $220/sf, this price is just under $200/sf)

Proposed Townhome/Condo (3br/2ba, 1800-2000 sf):
Sales Price - $270k to $300k
Property Taxes - $5-6k

Need any other information?

What jumped out at me was the property taxes. 9k per year? I'm now appreciating how low my property taxes are!

You may want to consider the 9k vs 5k-ish property tax difference in your decision. You pay that difference each year. Forever.
Let's meet half way at an extra 3.5k per year... 35k over the next 10 years... 87.5k if you stay for 25 years...

We're selling the 9k property tax property. Yes, property taxes are very high.

Another Reader

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Re: Primary Residence Mortgage Question
« Reply #12 on: May 01, 2013, 12:58:02 PM »
Can't your kids walk to the good public schools in the suburbs?  You get rid of the private school costs and your drive that way...

My other question is about how long you plan to stay on Dallas.  Previously, you indicated you were looking at overseas assignments and other places to move within the US, especially if the right job came along.  If that's still on the table, why would you buy?  Wouldn't you be better off renting?

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #13 on: May 01, 2013, 01:08:01 PM »
Can't your kids walk to the good public schools in the suburbs?  You get rid of the private school costs and your drive that way...

My other question is about how long you plan to stay on Dallas.  Previously, you indicated you were looking at overseas assignments and other places to move within the US, especially if the right job came along.  If that's still on the table, why would you buy?  Wouldn't you be better off renting?

Impressive memory. The overseas thing is off the table. We are planning to stay. And yes, we could move to the suburbs and send our kids to public school. But we won't. We'd rather delay FI than do that. People value different things for different reasons. We don't want to switch schools. We'll sell our house and move somewhere smaller and less expensive, but the kids are staying where they are. And the Hubs would still have to drive to his job which is near downtown. Nobody in our household wants to live in the suburbs. We tried it once and HATED it. And, yes, we could rent. I've priced apartments. But it would be cheaper to buy a condo/townhouse.

Spork

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Re: Primary Residence Mortgage Question
« Reply #14 on: May 01, 2013, 01:14:07 PM »
Can't your kids walk to the good public schools in the suburbs?  You get rid of the private school costs and your drive that way...


This is a good point.  (I'm ex-DFW.)

Dallas proper is pricey.  And it has a reputation for stinky schools.  (I have no experience to tell me that is actually true, I've just heard it said.)  Even worse, it has a certain keeping-up-with-the-Joneses air.  You stare at Mercedes, BMWs, Astin-Martins (sigh) all day and pretty soon you sort of want to be part of that. On top of that, the city government is just retarded.  Then there's the property tax on vehicles.  (Do they still do that in Dallas county?)

Up north a bit, the houses can be half the cost and the schools are pretty good.  If you dial 9-1 ... the cops are at your front door before you punch the last '1' in there.  The streets are well kept up and they repair them with good old fashioned concrete instead of just a pile of oil sand shoved in a hole.

There's a lot to be said for Plano/Allen area.  There are lots of businesses to work for...  cost of living is low...  I'm not saying it's all butterflies, rainbows and lollipops, but it might be something to consider.

EDIT... well, I guess my point was rendered moot by your last post.   Ah well... nevermind.

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #15 on: May 01, 2013, 01:16:07 PM »
Can't your kids walk to the good public schools in the suburbs?  You get rid of the private school costs and your drive that way...


This is a good point.  (I'm ex-DFW.)

Dallas proper is pricey.  And it has a reputation for stinky schools.  (I have no experience to tell me that is actually true, I've just heard it said.)  Even worse, it has a certain keeping-up-with-the-Joneses air.  You stare at Mercedes, BMWs, Astin-Martins (sigh) all day and pretty soon you sort of want to be part of that. On top of that, the city government is just retarded.  Then there's the property tax on vehicles.  (Do they still do that in Dallas county?)

Up north a bit, the houses can be half the cost and the schools are pretty good.  If you dial 9-1 ... the cops are at your front door before you punch the last '1' in there.  The streets are well kept up and they repair them with good old fashioned concrete instead of just a pile of oil sand shoved in a hole.

There's a lot to be said for Plano/Allen area.  There are lots of businesses to work for...  cost of living is low...  I'm not saying it's all butterflies, rainbows and lollipops, but it might be something to consider.

EDIT... well, I guess my point was rendered moot by your last post.   Ah well... nevermind.

We tried Frisco for two and half years. We were miserable. For real. Miserable.

Another Reader

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Re: Primary Residence Mortgage Question
« Reply #16 on: May 01, 2013, 01:28:46 PM »
I notice you have not been really satisfied with anywhere you have lived.  Perhaps you should consider renting for 6 months or a year in the downtown location to see if that is what you really want.  If you love it, then go ahead with the purchase.  The buying and selling costs are awfully high if you decide after a year it's not for you.

SunshineGirl

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Re: Primary Residence Mortgage Question
« Reply #17 on: May 01, 2013, 01:32:33 PM »
Renting might not be cheaper, per se, on a monthly basis, but it gives you flexibility and keeps you out of debt. We're staying put until our kids are in college, but I SO look forward to renting again!

Spork

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Re: Primary Residence Mortgage Question
« Reply #18 on: May 01, 2013, 01:40:16 PM »


We tried Frisco for two and half years. We were miserable. For real. Miserable.

I certainly wouldn't suggest misery.

I can't say I know much about Frisco.  And you can have bad situations anywhere. 

I did about 11 years in an older Plano neighborhood.  I can't say it was an exciting, vibrant place to live.... but it was safe and friendly and the city was well run.  Your mileage might vary.

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #19 on: May 01, 2013, 01:56:29 PM »
I notice you have not been really satisfied with anywhere you have lived.  Perhaps you should consider renting for 6 months or a year in the downtown location to see if that is what you really want.  If you love it, then go ahead with the purchase.  The buying and selling costs are awfully high if you decide after a year it's not for you.

Really? I find that quite funny given that you know so very little about us. We love our neighborhood and we love Dallas. In fact, we lived in this neighborhood (in a different house) for five years, moved to the suburbs because we thought that was the smarter financial decision but hated it so much, we moved back to the very same neighborhood in Dallas in a different house (we've lived in this house for almost 5 years). The only reason we are contemplating selling our house is because it's so expensive to maintain and it's too big. Where in there are we "unsatisfied with anywhere [we] have lived?"

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #20 on: May 01, 2013, 01:59:23 PM »


We tried Frisco for two and half years. We were miserable. For real. Miserable.

I certainly wouldn't suggest misery.

I can't say I know much about Frisco.  And you can have bad situations anywhere. 

I did about 11 years in an older Plano neighborhood.  I can't say it was an exciting, vibrant place to live.... but it was safe and friendly and the city was well run.  Your mileage might vary.

I'm not suggesting it's a horrible place to live. We just didn't fit there.

Spork

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Re: Primary Residence Mortgage Question
« Reply #21 on: May 01, 2013, 02:09:57 PM »


We tried Frisco for two and half years. We were miserable. For real. Miserable.

I certainly wouldn't suggest misery.

I can't say I know much about Frisco.  And you can have bad situations anywhere. 

I did about 11 years in an older Plano neighborhood.  I can't say it was an exciting, vibrant place to live.... but it was safe and friendly and the city was well run.  Your mileage might vary.

I'm not suggesting it's a horrible place to live. We just didn't fit there.

hehe.  I found I pretty much don't fit in anywhere.  That's why I live out in the woods in the middle of no where now.  ;)

Starstuff

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Re: Primary Residence Mortgage Question
« Reply #22 on: May 02, 2013, 10:34:42 AM »
The advice I'd give a "normal" person: take a 30 year fixed-rate mortgage with 20% down for the lower payment. 3.5% isn't exactly a bone-crushing interest rate, so having a manageable payment is well worth the term.

For a Mustachian... it gets a little trickier. It's not all interest and math. I'd suggest not going shorter than a 15 year fixed. Shorter terms than 15 years generally don't have lower interest rates, just higher payments. Another idea would be to take an adjustable rate (ARM) with a 30 year term/due for the lower rate (depending on the lender, it'll probably be close to the 15 year rate, but with a 30 year term), then pay it off as fast as possible. Since you're on this forum, I'm guessing you could pay off a 5/1 ARM before the first adjustment, and a 7/1 ARM for sure. But this option depends on your risk tolerance more than math.

If you take a longer term, in the event of illness/other emergency,  you'll have a low payment to fall back on. I would suggest that, since you're not FI, you keep your payment low. Something you could pay with one salary, or off savings for six months, while still covering your other expenses. (Again, I don't know where you are financially- this is just general advice.) Life is what happens when you expect something else.

You probably know all of this... But I find that a lot of people get so excited about paying off mortgage debt, that they shorten their terms so much that they get stuck with a payment that leaves no breathing room. They forget that you're allowed to make double, triple, quadruple, etc payments without contractually shortening your term. Example:

$300K purchase, $240K loan. 30 year fixed, 3.5% = $1077.71 per month, $147,974 in interest with no extra payments.
Ew. But...
Pay $565.39 extra a month (equal to a 15 year minimum payment at 2.875%), and you're payed of in 16 years with $73,215.30 in interest.
Pay $1000 extra a month, pay off in 12 years with $53,094 in interest.
Pay $1500 extra a month, pay off in 9 years with $40,435.17 in interest.
Pay $2000 extra a month, pay off in 7 years with $32,694.07 in interest

$300K purchase, $240K loan, 15 year fixed, 2.875% = $1,643.01 per month, $55,741.03 in interest with no extra payments.
Pay $434.07 extra a month (same as adding $1000 to a 30 year payment), pay off in 11 years, $41,327.96 in interest.
Pay $934.70 extra a month (same as adding $1500 to a 30 year payment), pay off in 9 years, $31,886.79 in interest.
Pay $1434.07 extra a month (same as adding $2000 to a 30 year payment), pay off in 7 years, $25,997.33 in interest.

Basically, I'm suggesting that you assess your risk tolerance and financial situation. Is it worth paying slightly more interest to have a more manageable payment while still being able to pay off the loan as quickly as your financial situation allows, or do you prefer the lower interest amount while being contractually obligated to a shorter term/higher payment? I know Mustachians don't generally deal in risk, but I have a fairly low risk tolerance, so I prefer to insure myself against some kinds of risk. The idea that one of you could lose your job, get sick, get hurt, etc isn't far-fetched. Whether paying more interest is an appropriate form of insurance is your call. (Does this make sense?)

Other advice: work with a local savings and loan or credit union, especially if you go the ARM route. Not only are their rates and fees generally better, you've got a local lender who care more about you and is more likely to reinvest in the community rather than the CEO's bank account. You'll almost definitely have to pay title insurance on a condo (do not get owner's- just the required lender's), and some condo assessment fees. Make sure you account for HOA fees in this choice if you're looking in a development. That my be offset by the difference between renter's insurance and homeowner's though. Finally, you will probably pay a higher rate for a condo.

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #23 on: May 02, 2013, 10:41:56 AM »
Thanks, Starstuff. I appreciate the very helpful response.

spin

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Re: Primary Residence Mortgage Question
« Reply #24 on: May 02, 2013, 05:50:17 PM »
While I'm new to the community I'm surprised by the anti-mortgage sentiment here.  I understand not wanting a mortgage during retirement/FI as it increases the need for a larger stash (and the uncertainty), however pre-FI you can take on some additional risk for higher returns.

1) Pre-FI you'll probably be paying higher taxes which can be avoided via the mortgage interest deduction.  Since you're not paying income taxes in Texas this probably won't help you much unless you've got other deductions (charity or business expenses) as the interest + property taxes is roughly the same as the standard married deduction.

2) Opportunity cost.  The 240K mortgage not taken means 240K less to invest (and diversify).  At mortgage rates like they are now you probably can get a better return than 3.5% (effectively lower if you've got tax deductions from above).

I'm in San Francisco area and the big housing costs that come with it (fortunately the salaries are a bit higher) so helps a bunch with the taxes so that my effective borrowing rate drops to below 3%.  I believe I can get better returns in the market (over the ~10-15 yr time frame I'll have the mortgage).  If I can't then I can always pay back the mortgage faster.

Saving mom

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Re: Primary Residence Mortgage Question
« Reply #25 on: May 06, 2013, 08:40:49 PM »
We have a LIBOR-based interest only loan and its great. We use it to essentially rent our house and invest the difference. Our investments have grown much more and if LIBOR went through the roof, we can just sell some and pay down mortgage. Trick is you have to invest the difference. Also you have to feel ok that interest rates aren't going to spike up. I don't think they are going anywhere.
This product lets me be in charge of sending in extra payments and see immediate benefit (ie next month's interest payment goes down).

Saving mom

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Re: Primary Residence Mortgage Question
« Reply #26 on: May 06, 2013, 08:49:50 PM »
And grrrr on $9K in taxes and DISD schools. My kids are in DISD schools and I am  filling in the holes with camps and classes. Hopefully we will be at magnets for middle and high school. I hate the testing-driven curriculum but not enough to pay $15-22k per kid for a better private education. The ones near us at the lower price points don't seem to be much different from the public school two blocks away. Plus my older kid's special Ed file makes many private schools not even consider him. 

kkbmustang

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Re: Primary Residence Mortgage Question
« Reply #27 on: May 08, 2013, 11:02:51 AM »
And grrrr on $9K in taxes and DISD schools. My kids are in DISD schools and I am  filling in the holes with camps and classes. Hopefully we will be at magnets for middle and high school. I hate the testing-driven curriculum but not enough to pay $15-22k per kid for a better private education. The ones near us at the lower price points don't seem to be much different from the public school two blocks away. Plus my older kid's special Ed file makes many private schools not even consider him.

Yeah, the property taxes are high.  We're hoping our daughter will get into Booker T. for high school. As of right now, that's of great interest to her. I'd be a-okay with that. Our son - not the artistic type, although he may surprise us later.