Author Topic: How much down?  (Read 3438 times)

theOrnithologist

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How much down?
« on: May 02, 2016, 09:10:30 AM »
Since I'm fairly new to this site, I'll apologize for my ignorance upfront. :)

I've just turned 30 and recently inherited 140k (after taxes) have 20k in a roth 401k and make about 40k/year with excellent credit and no debt. I am single. I am looking to purchase a new home in the 175k range. From what I've read on here, once you've made the decision to buy, it's best if you pay it off ASAP, avoiding as much interest payments as possible. My problem is that somewhere in the next 5 years I'm hoping to attend graduate school out of state and won't be returning afterwards so a) does it even make sense to buy and b) If so, does it make sense to put the entire 140k down or say 100k down and invest the rest? I know I'm asking a difficult question with a lot of 'what ifs' which kinda points me towards renting until after I finish school but the idea of paying money to a landlord when I could be investing is hard to swallow.

Any insight or advice or recommended reading would be greatly appreciated!

nereo

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Re: How much down?
« Reply #1 on: May 02, 2016, 09:37:12 AM »
Since I'm fairly new to this site, I'll apologize for my ignorance upfront. :)

I've just turned 30 and recently inherited 140k (after taxes) have 20k in a roth 401k and make about 40k/year with excellent credit and no debt. I am single. I am looking to purchase a new home in the 175k range. From what I've read on here, once you've made the decision to buy, it's best if you pay it off ASAP, avoiding as much interest payments as possible. My problem is that somewhere in the next 5 years I'm hoping to attend graduate school out of state and won't be returning afterwards so a) does it even make sense to buy and b) If so, does it make sense to put the entire 140k down or say 100k down and invest the rest? I know I'm asking a difficult question with a lot of 'what ifs' which kinda points me towards renting until after I finish school but the idea of paying money to a landlord when I could be investing is hard to swallow.

Any insight or advice or recommended reading would be greatly appreciated!

The bolded portion are fightin' words around here.  Many of us (myself included) believe that at today's ridiculously low interest rates you should pay off your mortgage as slowly as possible, and instead invest as much as you can in tax-advantaged and taxable accounts.  Holding a fixed mortgage is a fantastic inflation hedge, among other things.
Others will argue passionately about paying off debt, freeing up cash-flow and the 'feeling' of being debt free. They aren't wrong either - but are just coming at it from a different angle.

In response to your question: 20% down in order to avoid PMI.  After that... decide which camp you want to be in; the "more-money with a mortgage" or the "less money with no mortgage".


Drifterrider

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Re: How much down?
« Reply #2 on: May 02, 2016, 10:36:19 AM »
My opinion.

If I thought I might leave the area in five years, I wouldn't buy a house unless I was buying an intended rental, that I could live in for a while.  I would not buy a "home".

How are you going to pay for grad school?

ketchup

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Re: How much down?
« Reply #3 on: May 02, 2016, 11:59:30 AM »
From what I've read on here, once you've made the decision to buy, it's best if you pay it off ASAP, avoiding as much interest payments as possible.
I agree with nereo's thoughts on this part.  In general it makes the most sense to put down 20% to avoid PMI and hold the mortgage with today's low rates barely being above inflation.  My mortgage is 3.625% and you'd probably get something similar.  Another option would be to pay all-cash for a fixer-upper that banks would refuse to finance if that's your thing.

My problem is that somewhere in the next 5 years I'm hoping to attend graduate school out of state and won't be returning afterwards so a) does it even make sense to buy and b) If so, does it make sense to put the entire 140k down or say 100k down and invest the rest? I know I'm asking a difficult question with a lot of 'what ifs' which kinda points me towards renting until after I finish school but the idea of paying money to a landlord when I could be investing is hard to swallow.
This is where things get really gray.  It depends on the market in your area, your goals, risk tolerance, and abilities.

People love to preach renting as "throwing your money away."  Usually those people are homeowners (or aspiring to be).  That's not always the case.

I'm going to make up some numbers, but you can plug in your own to paint the whole picture.  I'm also going to assume you'd be renting something comparable to a house you'd buy.

If you leave for grad school in five years and chose to rent until then, you'd pay 60 months of rent and then leave.  At rent of $1500/mo, that's a total of $75,000.

Now let's say you buy the $175,000 house.  You put 20% down ($35,000) so you have a loan of $140,000.  Closing costs of about $5,000.  $638/month principle and interest.  Insurance and taxes vary a LOT, but I'll pretend it's my house and put in $3000/year taxes and $700/year insurance, so that's another $308/month.  Add in some for maintenance/repairs, you said new house so I'll lowball that at $1,000/year.

$1029/month so far.  Five years from now you've paid $61,740 of that.  Plus the $40,000 of down payment and closing costs so $101,740.

Then move and go to sell.  By now you owe about $125,000.

Depending on what the market looks like in five years in your area, it could take anywhere from one to twelve months to sell.  That's an additional $1029-$12,348 just in holding costs.

Your house that's worth $175,000 today could theoretically be worth (hand-wavy crystal ball here) $150,000 to $200,000 in five years.

You'll have to pay 6% for a realtor, and probably a few other misc fees/repairs/etc when selling.  Call it 6% plus another $1,000.  So you end up selling for $150,000-$200,000 and getting $140,000-187,000 after those costs.  Subtract your $125,000 loan and you've netted $15,000 to $62,000.

So you spent $101,740 on down payment, closing costs, mortgage payments, taxes, insurance, and maintenance.  Then you spent $1,029-$12,348 on holding costs while selling.  Total of $102,769-$114,088.

So owning means you spend $102,769-114,088 over five years and then getting $15,000-62,000 back for a net total cost of $40,769-$99,088.

There's also opportunity cost on the down payment and closing costs.  If you invested that $40,000 at 5%, that'd be $2000/year, so $10,000-$12,000 (taking into account the case where you take a year to sell).  Brings your cost up to $50,769-111,088.

So somewhere between $50,769-111,088, or $75,000 to live somewhere for five years.

Plug in your own numbers to get numbers that are more true-to-life, but unless the rent/purchase ratio, taxes, or other things in your area are very out of whack, this is probably pretty close.

You might come out ahead buying, you might come out ahead renting.  Renting is far more predictable, and the high transnational costs make buying more expensive on a five-year scale.  It's hardly "throwing money away."  Owning is more risky, as you're on the hook if anything really stupid happens to the house, but there's more *potential* upside. 

Also, you might want to not sell the house and turn it into a rental, which changes the equation a lot but that comes down to if you want to be a landlord.

It really comes down to your own personal risk tolerance and your local market.

Jack

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Re: How much down?
« Reply #4 on: May 02, 2016, 12:16:45 PM »
First of all, I'm also in the "interest rates are low, so pay 20% down, maximum" camp.

Second, since you're planning to leave I would either keep renting or buy a house with the intention of keeping it as a rental later.

In fact, I suggest skipping the "house" part and looking for a multifamily property (house with auxiliary dwelling unit, duplex, triplex, or quad) instead. If you do it right, you should be able to simultaneously leverage your $140K at a 5:1 ratio and take your housing costs negative (i.e., the rental income from the N-1 other units is enough to cover the entire mortgage, or more).

zephyr911

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Re: How much down?
« Reply #5 on: May 02, 2016, 12:26:07 PM »
I bought my last place with 10% down after a series of quotes comparing different loan programs from 3 different lenders. If we'd had easy access to 20% in cash, we'd have considered it, but our money was all invested, the marginal cost of credit was fairly low, and we'll be out of PMI very soon. In general, anything past 20% equity is a waste during your accumulation years as long as the APR is well below typical investing returns, which has been the norm in recent history.

I like Jack's idea. Up to 4 units, you can get the preferential financing given to owner occupants while still getting the higher cap rates on the rental portion (and eventually the whole thing). I'm in real estate and I am helping a friend look for a deal along those lines.

rockstache

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Re: How much down?
« Reply #6 on: May 02, 2016, 12:38:39 PM »
I like this article a lot. It's a good read whether or not you decide in the end that buying is the right move for you.

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

catccc

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Re: How much down?
« Reply #7 on: May 02, 2016, 12:41:52 PM »
If you consider multi-family, be sure to work in expenses of operating those rental units, including property management.  I don't think it is unreasonable for your net income to be 50% of your gross rents after all these expenses.  I was looking at a 4 unit property, and the rent from 3 units would more than cover the mortgage (so I could live in the 4th unit for "free"), but after considering expenses and opportunity costs, it turned out to be a bum deal.

Dee18

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Re: How much down?
« Reply #8 on: May 02, 2016, 02:51:06 PM »
Keep in mind that owning a house costs a lot more than the sale price...taxes, insurance, maintenance and time to take care of everything.  I wouldn't buy when planning to go away to grad school.

smoghat

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Re: How much down?
« Reply #9 on: May 06, 2016, 06:39:17 AM »
I don't get this.

Avoid a mortgage like the plague. If you think that the rates are ludicrously low and the market is doing great, then you think you are smarter than the banks. Really?

So you are going to be attending graduate school. In what? Do you have a guarantee of full tuition remission? Are you really sure you will get that? Is it a state school? If so, then why the heck aren't you buying property and moving to that state now to save tuition? If you don't have full tuition remission and all your living expenses paid for by your parents or whomever, how will you cover that? If you have an out of state rental how will you deal with things going wrong the day before your final exams? If you want someone to take care of your property for you kiss your profits goodbye.

monarda

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Re: How much down?
« Reply #10 on: May 06, 2016, 09:11:59 AM »
What to do depends entirely on the market in your location now. If you plan to sell the house when you leave, there are costs to that.
ketchup makes many valuable points above. Run your own numbers and report back.
Simple answer to your question. 20% down.

Two years before I finished up grad school, I bought a condo. I sold it two years later (a few months after I graduated) for a $20K profit, but in that city (Boulder) at the time (early 90's), the market was in my favor.

I'm guessing,... grad school in ornithology? You'll probably have to TA every semester, but won't have a lot of expenses. How long is the grad program? a Ph.D.? You probably don't know what school you'll be attending at this point.   Different guess, grad school in business? You'll be paying tuition, but earning it back pretty quickly after you finish.

Too many unknowns to comment.

2buttons

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Re: How much down?
« Reply #11 on: May 06, 2016, 09:33:02 AM »
Since I'm fairly new to this site, I'll apologize for my ignorance upfront. :)

I've just turned 30 and recently inherited 140k (after taxes) have 20k in a roth 401k and make about 40k/year with excellent credit and no debt. I am single. I am looking to purchase a new home in the 175k range. From what I've read on here, once you've made the decision to buy, it's best if you pay it off ASAP, avoiding as much interest payments as possible. My problem is that somewhere in the next 5 years I'm hoping to attend graduate school out of state and won't be returning afterwards so a) does it even make sense to buy and b) If so, does it make sense to put the entire 140k down or say 100k down and invest the rest? I know I'm asking a difficult question with a lot of 'what ifs' which kinda points me towards renting until after I finish school but the idea of paying money to a landlord when I could be investing is hard to swallow.

Any insight or advice or recommended reading would be greatly appreciated!

If I were you, I wouldn't buy. I would:

1. Make sure you have an emergency fund of 3-6 months - (also a contentious issue here).
2. Set aside enough cash to pay for school if you have to
3. Park the rest of the money in the highest interest bearing account you can, that is not invested in the market. 
4. Go to grad school as soon as possible, and find a way for someone else to pay for it.
5. Get out of grad school with a large pile of cash and then decide where you are going to live, what you think is best after reading extensively and deciding where you come down in personal finance side of mortgages vs. investing.
6. Buy a house on where ever you land.

I see both sides of the coin on paid for mortgage vs investing.  There are really three schools I see on here. 
1. Pay off the mortgage as quick as possible, because you hate debt and want to free up your biggest monthly expense, and the emotional feeling of owning property out right, so you can invest aggressively.
2. Take out a mortgage, with or without PMI, and keep it as long as humanly possible to maximize your ability to invest the difference. 
3. Take out a mortgage and invest the difference to invest to eventually pay off the house with those investments.

As long as you do any of the above, you will be better off than 99% of the country.  I will caution though, if you do take out a long mortgage and don't actually invest or let lifestyle creep happen or you don't think you can be responsible enough to move through the plan, I would suggest you force yourself to pay off the house. 

Personally, I would put down as much as humanly possible once you are out of school and take out a 15 year mortgage. Then I would build up investments that equate to 1 year's worth of mortgage payments, then split your extra cashflow between investments and paying down the mortgage.