Rally has a point... BUT, the problems with his thoughts are this:

1 - given an average loan amount, say 200,000 and a mediocre rate of 6.25 and staying in the home 4 years (typical time).

30 year:
prin and int = 1231
pay down your principal balance just over 10k
total paid in those 4 years = 59K (49k to interest only).

15 year:
prin and int = 1714
pay down your prin 36k (which when you sell leaves you with a sweet profit = 26k more than the 30)
total paid over the 4 yrs would be close to 82k

I realize you are paying 23k more and only getting about 26k more out of it by paying down the principal but I would need a tax advisor to tell me that its better to do a 30 year term, get less equity in my home just so I can deduct more on my taxes by paying more interest. If you can handle the extra monthly payment why would you NOT want to have equity in your home??

O, and unfortunately a lot of appraisals I see coming in have actually went down in value from previous appraisals done just a few years ago in certain cities... all the more reason to me to want to get more equity in my home.

[Edited on November 6, 2007 at 2:04 AM. Reason : added to this page]

11/6/2007 2:03:32 AM

I should point out that my 30 year fixed did not include pmi which would obviously make a huge difference... most 15 year fixed rates I know of do not charge pmi. (pmi is now able to be deducted if I am not mistaken with the new law change)

[Edited on November 6, 2007 at 2:07 AM. Reason : pmi]

11/6/2007 2:06:24 AM

^^The way you are comparing the situations is wrong. You need to compare the present value of two cash flow streams, taking in to account opportunity cost. Use this calculator to compare the two situations correctly.

http://www.tkcs-collins.com/truman/cashflow/cashflow.shtml

11/6/2007 2:40:37 AM

Opportunity cost is one of the biggest things that so many people just can't seem to wrap their minds around. It seems like such a simple concept to me, but so many people completely neglect it.

11/6/2007 3:31:10 AM

So what's the deal with modular/prefab homes? Seem like a good deal on paper--I can see why they could be produced more economically and at higher quality.

I'm concerned about appreciation/resale, though.




and as a footnote, i think i'd really like a prow-front (or maybe end) house.

11/6/2007 4:17:31 AM

Quote :

" O, and unfortunately a lot of appraisals I see coming in have actually went down in value from previous appraisals done just a few years ago in certain cities... all the more reason to me to want to get more equity in my home."

The value of the home is going to fluctuate regardless of whether you have equity or not. Equity will not save you from a depreciating asset. Equity earns 0%, period.

Quote :

" If you can handle the extra monthly payment why would you NOT want to have equity in your home??"

Because equity earns 0%.

If your mortgage is ~6% and you get a tax break then you are actually paying ~4.5-5% (depending on your tax bracket).

Who in the hell can't find a long term investment that beats 5%? You'd have to get suckered by an insurance company to do worse than that long term.

11/6/2007 7:41:32 AM

FURTHERMORE, who in the hell hasn't heard of diversification?

Putting 50+% of your net worth into equity is absolutely ignoring diversification.

Acknowledging that a home can depreciate is even more reason NOT to pay down a mortgage fast.


Not to mention homes are illiquid. When you get strapped for cash in a financial emergency you have much less flexibility than a smart person who had their money stashed away in liquid investments.

It's easier to pay medical bills, mortgage payments, etc with money than with equity.


Simple concepts guys. If you're in the real world you might as well start learning them. It's time to grow up.

11/6/2007 7:47:56 AM

Quote :

"Opportunity cost is one of the biggest things that so many people just can't seem to wrap their minds around. It seems like such a simple concept to me, but so many people completely neglect it."

11/6/2007 9:02:22 AM

^^ everybody's case is different

Quote :

"Simple concepts guys. If you're in the real world you might as well start learning them. It's time to grow up."

11/6/2007 11:08:22 AM

Even if you can't write off the interest on your taxes it still doesn't make sense to pay it off. Maybe you can make a case for a 60 year old with a huge portfolio who is about to retire, but I can't think of many other scenarios other than that one.

11/6/2007 11:15:19 AM

Rally - interesting points but I dont think you are thinking like the "average" american (aka, poor or middle class).

If a person finances 100% and the value of their home depreciates where does that leave them if the need to move... the idea of being upside down on a mortgage is.. well.. wow. i know its not what you mean but you almost make it sound like having a higher interest rate is a good thing in some regards... again... wow.

I realize equity does not appreciate but you can get a hoeq at no costs in 3 days from most lenders should a person become strapped.... and its secured debt they can possibly deduct on their taxes.. looks better on their credit than taking out an unsecured loan... and if they did not have the ability to tuck funds away in liquid accounts like you mentioned it would be their only resolve.

who cant get 5% on a long term investment? Probabaly everyone.. problem is how much are people going to tuck away, if they can... the amount people save has been going down every year, I want to say it was negative last year (could be wrong - but I dont think so).

not saying you are wrong by any means, just a different opinion on what is best for EVERYONE - you make it sound like if someone thinks different from you they are pissing money away.

11/6/2007 1:09:25 PM

Well, getting into a home they have to finance 100% is a problem to begin with. You eliminate this issue, and the rest of your post has no legs to stand on.

11/6/2007 1:27:16 PM

why is it wrong to finance a home 100%?? I could invest the money that I would put down (at a higher rate than the mortgage) and make money.

11/6/2007 2:03:01 PM

Quote :

"So what's the deal with modular/prefab homes? Seem like a good deal on paper--I can see why they could be produced more economically and at higher quality. I'm concerned about appreciation/resale, though. "

Best thing you can do is go take a look at some. I'd strongly consider buying a modern modular. There are a lot of companies that offer modulars that are just as nice as a stick built house. They use sturdier materials to survive the moving process (2x6's instead of 2x4's in most cases.) There is a lot of quality control in the fact that you have factory workers who do the same task on a daily basis instead of random drunk construction workers. Also, the materials are all installed in a relatively controlled climate so you don't end up with variations from materials being at different humidity/temperatures during the build.

I've been in modulars from the 70's/80's and early 90's that were junk. Everything was built almost identically to a mobile home. The walls were paper thin (definitely not sheetrock), the fixtures were the cheapest particle board and linoleum, etc. They've definitely come a long way since then.

11/6/2007 2:05:23 PM

Quote :

"why is it wrong to finance a home 100%??"

You have to pay pmi. Not everyone can quality for a 100% loan. Also, you may pay a higher rate as a result of 0 down.

11/6/2007 2:28:10 PM

Quote :

"why is it wrong to finance a home 100%?? I could invest the money that I would put down (at a higher rate than the mortgage) and make money."

Are you subtracting the PMI you'll need at 100% financing from your calculations? How about the higher interest rate you're subjected to with 100% financing? Did you even do any calculations, or do you just...know?

Most people that are financing at 100% aren't doing it so they can "invest" like you just suggested. They typically don't have the downpayment saved up because they haven't historically saved. They bought new cars, iPhones, and HDTVs.

My statement was less from a pure economic point of view, and more from a reality point of view. If you remove the 100% part from Phishies statement, there is nothing else left to talk about, because the average home buyer that put 20% down (or even 10%) is probably smart, and barring a major catastrophe (gets injured with huge doctor bills, major recession, etc) won't be upside down.

11/6/2007 2:30:43 PM

PMI and such isn't really that much, and once you pay off 20%, you don't have to pay it any way.

and there are a LOT of first time home buyer loans out there with good interest rates with 0 down.


no,i haven't done any calculations, i'm just saying that a blanket statement like you said about 0 down may be untrue.

11/6/2007 2:48:06 PM

With such a small amount going towards principle each month, it will take a long time to pay down 20% on a 0 down loan. If you put 0 down you could easily get upside down. If you blew any additional cash you had, then you're screwed. If you were smart and put it in the market, if the market happens to be down when you want to sell, it could end up costing you a lot of money.

11/6/2007 2:52:26 PM

What it comes down to is a mix of personal priority and risk.

Think about it this way...

If you put your 20% down, and your house appreciates at 10%, then you are looking at a 50% equity return on investment.

However, if you only put down 10%, then you are looking at a 100% equity return on investment.

Saying that equity returns 0% is misleading and not completely accurate.

If you cant make the payment on the 100% amount, but can on the 80% amount (longer term perspective) then its better to put down the 20%, and give yourself a little more breathing room each month.

If you are INVESTING for money only, then of course a 0% down would possibly give you a better investment. But it might not make the most sense for you personally when you take into account different peoples ability to save and invest wisely.

In general, making real payments on a home is a good, wise way to buy a home.

In this market (Raleigh/Cary, NC specifically) though, you are probably pretty safe to just put down as little as possible with a monthly payment you are comfortable with.

11/6/2007 3:20:32 PM

Marcus Martin got me a 5.825 rate on a 7/1 arm, no orig/fees.

I think Im going to go with it, as we will probably move by that time.

11/6/2007 3:21:51 PM

Quote :

"I could invest the money that I would put down (at a higher rate than the mortgage) and make money."

That's never a guarantee, and why hundreds of thousands of people are facing foreclosure on their negative amortization mortgages.

11/6/2007 3:37:32 PM

Quote :

"With such a small amount going towards principle each month, it will take a long time to pay down 20% on a 0 down loan."

You're forgetting appreciation. In a lot of areas in the triangle people have seen over 10% per year. Buy the right house with 0% down and there is a chance you can get PMI taken off after a couple of years anyway.

[Edited on November 6, 2007 at 4:09 PM. Reason : s]

11/6/2007 4:08:59 PM

What areas?

11/6/2007 4:10:48 PM

I just noticed that PMI is deductible starting with this year.

11/6/2007 4:25:25 PM

^^ ITBL fool!

It's tough to say where the next hot spot will be. Ten years ago Five Points, Boylan Heights, Mordecai, and Oakwood were all really run down and relatively cheap. Plenty of people bought houses in those areas and flipped them for twice as much in less than a year around 2000-2004. The property values have continued to rise at a tremendous rate even after doubling in some areas.

About a year and a half ago when I was looking for a house I looked at quite a few in the Lion's Park area (ITBL, 27604.) I've noticed that most of those homes have gone up $40k+ since I was looking at them. I think you'll see less aggressive growth in the future, but there will certainly be neighborhoods that rise rapidly. You just have to keep your eyes open and do your research.

[Edited on November 6, 2007 at 4:32 PM. Reason : s]

11/6/2007 4:31:07 PM

So property values have risen +10% so you think this trend will continue indefinitely?

11/6/2007 4:33:42 PM

I just bought a house with 100% financing. I wanted to put a down payment... I could have put about 10%, but I decided not to rob my savings and just go 100%. I wanted to own something instead of just renting, and I'm a single person... so 100% was my best option.

30 year, 5.5% fixed.

Do you all think that's stupid? (As in a single guy going ahead and buying at 100% financing as opposed to paying rent)

11/6/2007 4:51:18 PM

no, especially at that rate

11/6/2007 4:53:24 PM

Quote :

"So property values have risen +10% so you think this trend will continue indefinitely?"

Yes, that's exactly what I was saying and I thank you for putting words in my mouth.

11/6/2007 5:06:55 PM

Are you having to pay PMI?

11/6/2007 5:13:08 PM

^ If you're asking me, then yes

11/6/2007 5:22:32 PM

did you pay points, or get that rate through FHA
?

11/7/2007 9:53:53 AM

Quote :

"Yes, that's exactly what I was saying and I thank you for putting words in my mouth."

Well then, what did you mean when you said

Quote :

"You're forgetting appreciation. In a lot of areas in the triangle people have seen over 10% per year. Buy the right house with 0% down and there is a chance you can get PMI taken off after a couple of years anyway."

11/7/2007 10:04:29 AM

Some first time homebuyer program (I'm assuming that's what FHA means?)

11/7/2007 10:04:42 AM

Federal Housing Administration

11/7/2007 10:05:43 AM

Quote :

"Well then, what did you mean when you said..."

There are two ways to get PMI removed.
1. Pay down 20% of the loan.
2. Have house appraise for 1.25 x what you currently owe.

Your statement was counting on option 1 as the only option. Yes it will take years of mortgage payments for you to pay down 20% of the loan and get PMI removed.

A wise investor can get the benefits of putting next to nothing down and still remove PMI in a very short period.
1. Buy a house for less than it appraises. Instant equity.
2. Put a little sweat equity in it for additional equity.
3. Buy a house in an area that will appreciate well.

You really should be trying to do #3 regardless. While we can't predict the future I think you'd be foolish to buy something as huge as a home without doing a lot of research and trying to pick a good area.

I think it is feasible to put 0-5% down and get rid of PMI in less than two years as long as you have a good combination of all three factors.

11/7/2007 12:44:29 PM

i'm hoping for #2...i bought the house for less than what it appraised for and hopefully i can knock off a big chunk with a great appraisal.

11/7/2007 12:59:17 PM

^ don't forget about the property tax knock that comes with that 'great' apprasial

11/7/2007 9:12:25 PM

Hey guys, gotta a quick question

I have a friend that is just starting out in the flipping business and bought his first home in South Carolina, where he lives. He's been looking for investors and I'm considering lending him $$ to help cover some of his business costs.

His first home, from the pictures i've seen, looks like a pretty dumpy place. but it has potential

2k sq ft, 3BR/2BA on 2 floors and he acquired it for $30k. He plans on putting ~23k into it, and then looking to sell it for 80k

He is in teh Greenville SC market, and a house on the same street that is comparable to his sold for 85k very recently

He's offering me 10% for 6 months. The rate is pretty good, I think, and apparently to get hard money loans it can cost a lot of money.


So, with the housing market on a slowdown and this being his first job in a new business, do you think he has a realistic chance on this? He's a good friend, and very motivated, but I don't want to just dump my money in a risky venture like this, despite the fact i could be getting a 10% return on my money in just 6 months.

if you need more info just ask

11/8/2007 12:24:41 PM

Quote :

"but I don't want to just dump my money in a risky venture like this"

I think you answered your own question. 10% for 6 months isn't shit when you think about the possibility of losing a significant amount. How are you/he sure it would only be for 6 months? There is no guarantee he can flip the house in that amount of time..

11/8/2007 12:57:03 PM

If you do it, I'd get it in writing.

I'd also be concerned that he couldn't get a 20% annualized loan through some other source.

11/8/2007 12:58:26 PM

I agree, he should be able to get the money somewhere else...

11/8/2007 1:22:38 PM

he has a mark on his credit from he owes money to his old college, its not much but he's fighting it. Makes things harder for him to get decent loans. And for hard money loans like what he wants, ur looking at similar rates for his area, at least that's what he tells me.

and this loan would also be covered by contract, so it is definitely more secure than just giving him a check outright, but at the same time I'm asking for a fixed percentage return, I won't be pulling anything from profits. That reduces my risk a bit more

11/8/2007 1:31:38 PM

Will he pay you back in increments or one lump sum?
Does he have another job he gets paid from in case this thing falls through?
If he refused to pay a student loan or something I wouldn't be too quick to loan him money.

11/8/2007 1:37:24 PM

ScHpEnXeL

yea, i get what you are saying. I said it like that because i hear more horror stories from house flipping than success stories, adn if you look at the percentage of flippers, its extremely tiny compared to developers and commercial real estate people. I'm just worried he'll piddle or his contractors fuck up/pull out early or some bullshit like that, you know. I haven't invested anything yet, I just want to make sure even if i don't invest, he's still making good choices. He's a close friend.

I've encouraged him to go into new home buying/selling or development, and also into commercial real estate, but that takes considerable more money than he or I have at the moment.

He tells me that he got the house at an extremely undervalued price, which I agree with him on. His repair estimates of 23k are a bit high IMO, but I haven't seen the house in person so I don't know exactly what needs to be done to fix it up. His big thing is doing it quickly, he wants it bought, fixed, and sold in no time. And I really believe he's done his homework in rehabbing to make a serious effort in it.

Also, if I do invest and it works well, he and I have been talking about partnering up in the future. Raleigh home market is pretty nice around here, I would like to jump in at some point

11/8/2007 1:37:39 PM

david it wasn't a student loan, they charged him for a class he never took, or dropped apparently. Not certain on all the details. like i said, he's a friend, I trust him.


Details on the loan haven't been worked out for certain yet.


I imagine he will make monthly interest payments and then lump sum at the end of the term, but like i said, we'll work that out together.

11/8/2007 1:39:57 PM

Does he have another source of income in case he can't flip the house in six months?

11/8/2007 1:56:18 PM

nope this is his life. He used to play poker professionally (successfully) and now he does this. I asked him if he'd go back to poker if this didn't work out, he said no.

11/8/2007 2:01:49 PM

So basically if this doesn't work out your are sol?

11/8/2007 2:03:54 PM

and at the same time being his only job it will allow him to focus and dedicate himself more

11/8/2007 2:06:58 PM