Buying a house vs investing?

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Topic Author
YoungBoglehead
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Buying a house vs investing?

Post by YoungBoglehead »

So... I'm not at this point in my life right now. However I wanted to learn...

Lets say hypothetically, a person is able to save up 100k in various investments (I'm thinking indexed stocks with Vanguard, outside of retirement accounts)

This person wants to buy a 250k house.

Lets assume he has decent credit and gets a realistic interest rate with the house (whatever that is)

Would this person be better off removing most of his stock investments and using that money as a down payment on his house?

Or, is he smarter just taking some out and making payments on his mortgage?

Obviously the interest growth on stocks is (hoped) to be around 7% or so on average, which is probably a higher interest rate than the mortgage will have, so my knowledge tells me keeping the money invested will return more to you than you will spend on mortgage interest. However stocks are no guarantee and the mortgage interest is mostly a guarantee. I know how anti-debt everyone is.

What would you do and why?

Thanks!
Started investing around 21, joined Bogleheads at 23.
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og15F1
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Re: Buying a house vs investing?

Post by og15F1 »

Well obviously there's more that goes into the decision and it isn't purely financial

A couple years ago our family relocated for work (my job). We have been renting since and are prioritizing investing over purchasing a home. Part of the reason is that I'm rolling the dice and expecting the investments to outperform a home purchase over some medium to long term time horizon. Another part of the reason is that we do not want to stay in this area indefinitely. Another part of the reason is that the company I work for is basically a startup and we don't know what the company might look like in 3-5 years; or if it will even exist. So, instead of getting anchored to a place we don't want to be anchored to, we are living below our means and renting a place much smaller than we could afford - and saving the difference :moneybag

We probably won't know for 10 years what "the right decision" would have been...
Investing is boring
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Re: Buying a house vs investing?

Post by Investing is boring »

OP - its a very interesting question you ask and one that we have been thinking a lot about. One factor you are missing is the tax consequences of taking capital gains. Let me run you through my situation and you can derive whatever lessons you can from it.

My wife and I have ~$150k in taxable accounts and live in an area (Hoboken NJ) that is HCOL and has poor schools. We are starting a family and we recognize that we do not want to send our kids to school here. Therefore our timeline for staying put is ~4-6 years. We have chosen to rent for that period of time. By the time we do move we anticipate having between ~$300k - $600k in taxable accounts due to high savings rate that far exceeds the available tax advantaged space (2x 401k, Roth IRA's, iBonds.) - we do not do EEBonds because the behavioral aspects of waiting 20 years to see any real movement in account value is something I dont think I am capable of doing (know thyself). Our first step in determining the down payment is to prioritize where the funds would come from. Here is our current list:

- 0% iBonds - which after taxes have a negative real return
- equities with a loss (for TLH)
- short term fixed income
- equities with long term gains, starting with the smallest gain to largest

The next step for us will be to determine how much to put down. We are thinking we will likely spend about $600k on the house and will put between 20% and 75% down. This decision will be made closer to the time of purchase, and will be heavily influenced by:

- interest rates
- desired monthly payment
- minimizing capital gains

Once we have the home & mortgage, and depending on interest rates, we will likely aggressively pay down the mortgage. Our current thinking is to hold the mortgage for 5-7 years before it is paid off.

Of course all of this requires assumptions about the future to pan out at, or near, expectations. My age is 34, my wife is 32. I hope this helps in your thinking.
Topic Author
YoungBoglehead
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Re: Buying a house vs investing?

Post by YoungBoglehead »

og15F1 wrote:Well obviously there's more that goes into the decision and it isn't purely financial

A couple years ago our family relocated for work (my job). We have been renting since and are prioritizing investing over purchasing a home. Part of the reason is that I'm rolling the dice and expecting the investments to outperform a home purchase over some medium to long term time horizon. Another part of the reason is that we do not want to stay in this area indefinitely. Another part of the reason is that the company I work for is basically a startup and we don't know what the company might look like in 3-5 years; or if it will even exist. So, instead of getting anchored to a place we don't want to be anchored to, we are living below our means and renting a place much smaller than we could afford - and saving the difference :moneybag

We probably won't know for 10 years what "the right decision" would have been...

I guess I should have said hypothetically you know where you want to live and you're ready to purchase a home. Good luck!
Started investing around 21, joined Bogleheads at 23.
Topic Author
YoungBoglehead
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Re: Buying a house vs investing?

Post by YoungBoglehead »

In reply to Investing is boring


Yeah, I did forget to include the withdraw tax. I so much wish that tax didn't exist. I'm sure it does for a smart reason, but we already paid taxes on earning that money so I wonder why it DOES exist? I'll assume there are smart and fair reasons for it and that is another topic...


Anyway good luck man. I think history would tell us that you can expect a higher return from invested money (and avoid the withdraw tax) than you can from paying down a mortgage quickly to avoid that interest.

Wait... is there a factor I didn't think of? The value of the home increasing? That may be another factor I missed, I'm not sure if it plays into the math though because the value of the home increasing doesn't reflect your purchase price or mortgage payment

Let me know what else you come up with. I'm really curious.
Started investing around 21, joined Bogleheads at 23.
Topic Author
YoungBoglehead
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Re: Buying a house vs investing?

Post by YoungBoglehead »

456 views (about 5 are me)

and 2 replies.


I'm guessing that means there are no easy answers to this one and that is why so few replied?
Started investing around 21, joined Bogleheads at 23.
gks
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Re: Buying a house vs investing?

Post by gks »

Or, there is parallel thread discussing whether or not a home is an investment with a variety of opinions.

Greg

http://www.bogleheads.org/forum/viewtop ... 0&t=120669
Topic Author
YoungBoglehead
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Re: Buying a house vs investing?

Post by YoungBoglehead »

gks wrote:Or, there is parallel thread discussing whether or not a home is an investment with a variety of opinions.

Greg

http://www.bogleheads.org/forum/viewtop ... 0&t=120669

I actually read that thread a few days ago. It doesn't exactly discuss what I'm asking here... (at least the parts I read)


I am not asking if a home is an investment. That thread is talking about people buying homes assuming bigger is better and it's an investment, and associated costs. Not the same thread.
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HornedToad
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Re: Buying a house vs investing?

Post by HornedToad »

At current interest rates, I'd put down 20% down. Exception would be to make sure I was under federal conforming limits.
zmcpherson
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Re: Buying a house vs investing?

Post by zmcpherson »

Im actually trying to purchase a home at the end of my lease (3rd quarter 2014), so I have been dealing with these same questions. Next year Ill be 29, first time home buyer, with 100k in salary, and here is what I am leaning towards.

Im not sure if you have looked into 203b loans yet from the FHA, but they are pretty sweet (especially because you can combine them with 203k and the energy efficient mortgages, I would recommend the research on all 3 of these). They do have an insurance payment on them, but if you have 100k in investments, your investments return should far outweigh the low mortgage rate + the insurance. Also you only have to carry the insurance until the principal is less than 70-75% after 5-6 years(Im a little fuzzy on the details).

The best part about these loans is that they only require 3% down (9k on 300K which is nuts), meaning you dont have to tap into all your investments to put a down payment on a house. Mortgage Rates are still low enough that after the tax deduction you make on your salary, it should still be a lower then what you *should* be making on your investments. If i could get a loan at 4.35% (what the rate is today), I would carry the loan for the life of the loan and not pay it off early because with the tax deduction, the low interest rate, and the rate of inflation, my investments should always be doing better.

Money is always worth more today then it is tomorrow. The 203b loan allows you to put next to no money down today and keep that nice nest egg invested which will currently earn more than what the mortgage rates will cost you.

My two cents of course
Twins Fan
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Re: Buying a house vs investing?

Post by Twins Fan »

YoungBoglehead wrote:Yeah, I did forget to include the withdraw tax. I so much wish that tax didn't exist. I'm sure it does for a smart reason, but we already paid taxes on earning that money so I wonder why it DOES exist? I'll assume there are smart and fair reasons for it and that is another topic...
Because you haven't paid any taxes on the gains from your invested money yet. Just as you get a tax break if you lose some of your invested money. You only have control of the already taxed money you put into the account, not whether that money gains or loses anything. The tax part comes from what direction your money goes after it's invested.

As to your thread topic and post, I'm a debt averse type of guy. So, I'd be more likely to take more or all of that invested money and put it toward the new house. And, then still pay it down aggressively like Investing is boring's plan that was mentioned. But that's just me.

Many others would say leave it invested.

As mentioned, there are some "depends on" things here. Depends on mortgage interest rates at the time compared to expected returns. Depends on if the buyer wants a lower monthly payment. Etc....

Something to thing about... I refinanced a mortgage in 2008 from an ARM to a fixed rate mortgage, got a 6.3875% rate, and that was a decent interest rate at the time. Don't trick yourself into thinking 3-4% interest rates will be here forever (although we don't know the won't be either). What would your decision be then... A guaranteed 6.3875% return putting a bunch down on the house, or hoping for 7% returns going forward?

I'd take the guarantee. But again, just me.
Topic Author
YoungBoglehead
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Re: Buying a house vs investing?

Post by YoungBoglehead »

zmcpherson - If I had the same setup you do, with that same low interest rate, I'd probably be thinking the exact same thing as you. The cool part about buying a home is you get the mortgage, and the mortgage doesn't follow inflation. So you'll be buying a 300k home now with a 20 year payoff (or whatever the period is) and if inflation averages 3% over that 20 years, your home won't have really cost 300k. Your income should (hopefully) follow inflation. Investments should follow inflation. The value of your home might go up because of inflation, but the cost of your home mortgage doesn't, so that is a bonus :)
Twins Fan wrote:
YoungBoglehead wrote:Yeah, I did forget to include the withdraw tax. I so much wish that tax didn't exist. I'm sure it does for a smart reason, but we already paid taxes on earning that money so I wonder why it DOES exist? I'll assume there are smart and fair reasons for it and that is another topic...
Because you haven't paid any taxes on the gains from your invested money yet. Just as you get a tax break if you lose some of your invested money. You only have control of the already taxed money you put into the account, not whether that money gains or loses anything. The tax part comes from what direction your money goes after it's invested.

As to your thread topic and post, I'm a debt averse type of guy. So, I'd be more likely to take more or all of that invested money and put it toward the new house. And, then still pay it down aggressively like Investing is boring's plan that was mentioned. But that's just me.

Many others would say leave it invested.

As mentioned, there are some "depends on" things here. Depends on mortgage interest rates at the time compared to expected returns. Depends on if the buyer wants a lower monthly payment. Etc....

Something to thing about... I refinanced a mortgage in 2008 from an ARM to a fixed rate mortgage, got a 6.3875% rate, and that was a decent interest rate at the time. Don't trick yourself into thinking 3-4% interest rates will be here forever (although we don't know the won't be either). What would your decision be then... A guaranteed 6.3875% return putting a bunch down on the house, or hoping for 7% returns going forward?

I'd take the guarantee. But again, just me.
I'm with you. I have that guy feeling that today's low interest rates will be short lived. If I was quoted at the 6.3% interest rate, I'd probably think very similar. At a minimum, i'd withdraw half of my investments and put it down. Maybe more depending on how I felt I guess
Started investing around 21, joined Bogleheads at 23.
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Kosmo
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Re: Buying a house vs investing?

Post by Kosmo »

I think I'm a little more risk-tolerant and pro-debt (under the right circumstances) than most people here. So in the situation described in the OP, I'd withdraw from savings enough money to cover taxes, 20% down payment, plus closing costs, plus any money needed for repairs & furnishings. Leave the rest invested as is. Based on the numbers in the OP, I'd guess that would be withdrawing about $70k and leaving $30k. Given today's comparatively low interest rates, I'd borrow as much as I could on the house. Clearly I'm not an expert, but I expect interest rates to up if they go anywhere.

Earlier this year, I did almost exactly that. We spent a significant chunk of our non-retirement savings to purchase a house and I have no intention of paying the mortgage down faster. Our former primary residence was recently refinanced and has since been converted to a rental property and we have no intention of paying that down faster either.
MKP
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Re: Buying a house vs investing?

Post by MKP »

zmcpherson wrote:Im actually trying to purchase a home at the end of my lease (3rd quarter 2014), so I have been dealing with these same questions. Next year Ill be 29, first time home buyer, with 100k in salary, and here is what I am leaning towards.

Im not sure if you have looked into 203b loans yet from the FHA, but they are pretty sweet (especially because you can combine them with 203k and the energy efficient mortgages, I would recommend the research on all 3 of these). They do have an insurance payment on them, but if you have 100k in investments, your investments return should far outweigh the low mortgage rate + the insurance. Also you only have to carry the insurance until the principal is less than 70-75% after 5-6 years(Im a little fuzzy on the details).

The best part about these loans is that they only require 3% down (9k on 300K which is nuts), meaning you dont have to tap into all your investments to put a down payment on a house. Mortgage Rates are still low enough that after the tax deduction you make on your salary, it should still be a lower then what you *should* be making on your investments. If i could get a loan at 4.35% (what the rate is today), I would carry the loan for the life of the loan and not pay it off early because with the tax deduction, the low interest rate, and the rate of inflation, my investments should always be doing better.

Money is always worth more today then it is tomorrow. The 203b loan allows you to put next to no money down today and keep that nice nest egg invested which will currently earn more than what the mortgage rates will cost you.

My two cents of course
hate to break it to you, but if you are only putting 3% down on a $300K mortgage, you probably shouldn't be buying a house. FHA basically ensures everyone should buy a home-even if they shouldn't.
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stratton
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Re: Buying a house vs investing?

Post by stratton »

April 16, 2007 article by Geoff Considine. Several charts showing real estate volatility based on home equity percentages compared to REITs.

Investing in Real Estate: REITs and Your Home
My summary on this issue, given the types of results shown here and in light of the tax benefits of home ownership is the following:

1) Buying and owning your home generally makes sense
2) Buying substantially more house than you need is, in general, less than ideal as an investment—this is a consumption decision
3) Buying more house rather than fully taking advantage of tax-deferred retirement accounts is likely to be an expensive choice in the long-term
4) It may make more sense to invest in REITs than to accelerate the pay-off on your mortgage if you want to invest in real estate
5) Investing in real estate via REITs is likely to generate higher returns over the long-haul than buying a more expensive home
6) Real estate is not a ‘special’ asset class—it abides by the long-term balance in risk and return that capital markets provide
7) The historical rate of return on residential real estate is substantially less than has been achieved by stocks over long historical periods
Paul
...and then Buffy staked Edward. The end.
winglessangel31
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Re: Buying a house vs investing?

Post by winglessangel31 »

YoungBoglehead wrote:456 views (about 5 are me)

and 2 replies.


I'm guessing that means there are no easy answers to this one and that is why so few replied?
For me, it is "this is an interesting question that might be applicable to me in a few years, but I can't add anything to this discussion right now and there doesn't seem to be any strong opinion on the matter, so I'm just gonna wait around"...
zmcpherson
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Re: Buying a house vs investing?

Post by zmcpherson »

MKP wrote:
zmcpherson wrote:Im actually trying to purchase a home at the end of my lease (3rd quarter 2014), so I have been dealing with these same questions. Next year Ill be 29, first time home buyer, with 100k in salary, and here is what I am leaning towards.

Im not sure if you have looked into 203b loans yet from the FHA, but they are pretty sweet (especially because you can combine them with 203k and the energy efficient mortgages, I would recommend the research on all 3 of these). They do have an insurance payment on them, but if you have 100k in investments, your investments return should far outweigh the low mortgage rate + the insurance. Also you only have to carry the insurance until the principal is less than 70-75% after 5-6 years(Im a little fuzzy on the details).

The best part about these loans is that they only require 3% down (9k on 300K which is nuts), meaning you dont have to tap into all your investments to put a down payment on a house. Mortgage Rates are still low enough that after the tax deduction you make on your salary, it should still be a lower then what you *should* be making on your investments. If i could get a loan at 4.35% (what the rate is today), I would carry the loan for the life of the loan and not pay it off early because with the tax deduction, the low interest rate, and the rate of inflation, my investments should always be doing better.

Money is always worth more today then it is tomorrow. The 203b loan allows you to put next to no money down today and keep that nice nest egg invested which will currently earn more than what the mortgage rates will cost you.

My two cents of course
hate to break it to you, but if you are only putting 3% down on a $300K mortgage, you probably shouldn't be buying a house. FHA basically ensures everyone should buy a home-even if they shouldn't.
lol I could easily put 20% down on a house, but why the heck would you when interest rates are so low? You are actually losing money by putting more down on a house then what you have to. Find the largest loan (you can afford), put the least amount down, and carry the loan for the life of the loan.

4.3%, minus your tax deductions, minus the rate of inflation, you are left with a loan at a negative interest rate. So why on earth would you put 20% down when you can put 17% in ANYTHING ELSE.

Read what Kosmo posted right before you posted. Being pro-debt is not always a bad thing, sometimes you can come out far better by carrying loans for the entire life of the loan because the bank is essentially paying for the inflation. The last 4 years has been a perfect example of this.
MKP
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Re: Buying a house vs investing?

Post by MKP »

zmcpherson wrote:
MKP wrote:
zmcpherson wrote:Im actually trying to purchase a home at the end of my lease (3rd quarter 2014), so I have been dealing with these same questions. Next year Ill be 29, first time home buyer, with 100k in salary, and here is what I am leaning towards.

Im not sure if you have looked into 203b loans yet from the FHA, but they are pretty sweet (especially because you can combine them with 203k and the energy efficient mortgages, I would recommend the research on all 3 of these). They do have an insurance payment on them, but if you have 100k in investments, your investments return should far outweigh the low mortgage rate + the insurance. Also you only have to carry the insurance until the principal is less than 70-75% after 5-6 years(Im a little fuzzy on the details).

The best part about these loans is that they only require 3% down (9k on 300K which is nuts), meaning you dont have to tap into all your investments to put a down payment on a house. Mortgage Rates are still low enough that after the tax deduction you make on your salary, it should still be a lower then what you *should* be making on your investments. If i could get a loan at 4.35% (what the rate is today), I would carry the loan for the life of the loan and not pay it off early because with the tax deduction, the low interest rate, and the rate of inflation, my investments should always be doing better.

Money is always worth more today then it is tomorrow. The 203b loan allows you to put next to no money down today and keep that nice nest egg invested which will currently earn more than what the mortgage rates will cost you.

My two cents of course
hate to break it to you, but if you are only putting 3% down on a $300K mortgage, you probably shouldn't be buying a house. FHA basically ensures everyone should buy a home-even if they shouldn't.
lol I could easily put 20% down on a house, but why the heck would you when interest rates are so low? You are actually losing money by putting more down on a house then what you have to. Find the largest loan (you can afford), put the least amount down, and carry the loan for the life of the loan.

4.3%, minus your tax deductions, minus the rate of inflation, you are left with a loan at a negative interest rate. So why on earth would you put 20% down when you can put 17% in ANYTHING ELSE.

Read what Kosmo posted right before you posted. Being pro-debt is not always a bad thing, sometimes you can come out far better by carrying loans for the entire life of the loan because the bank is essentially paying for the inflation. The last 4 years has been a perfect example of this.
With FHA you still have to pay PMI with a 3% down payment. That will increase your effective interest rate quite a bit (apprximately $300/month on 300K).

You will pay this until you have paid off at least another 17% of the balance of your mortgage, which would be in month 100 assuming no large home price appreciation. This will mean you have made 100 payments of $300 extra per month because you didn't want to put an additional $51K down. In other words over 8.5 years of the loan, you have paid $30K in useless PMI (that cant be deducted if you make more than $108K married), which will create a serious drag on your returns.

It doesnt matter if you can afford it or not, but going the FHA route is not a free lunch, in fact it is quite costly relative to conventional. Finally, if we assuming a new CAGR of stocks at around 5%, in 8 years your $51K is only worth $75K, less the $30K in PMI and you are at a $6K loss.

This is all very abstract, but I just want to illustrate what a bad idea FHA and 3.5% is. You can go conventional with 5% down with up front PMI of $6K-$8K and it is a much better deal.
Dandy
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Re: Buying a house vs investing?

Post by Dandy »

Even modest house prices today seem high. The usual 20% down payment often leaves an almost unworkable monthly burden.

I would focus on having affordable monthly payments going forward. i.e. I would put enough down so that I could pay mortgage, taxes and other monthly expenses without being under a lot of pressure. Hopefully, that would leave a nice emergency fund and a decent, but smaller nest egg. I would then focus on building the nest egg for retirement and other long term needs. If you can't swing this approach maybe you need to look for a less expensive house or rent for awhile longer.
Investing is boring
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Re: Buying a house vs investing?

Post by Investing is boring »

MKP wrote:With FHA you still have to pay PMI with a 3% down payment. That will increase your effective interest rate quite a bit (apprximately $300/month on 300K).

You will pay this until you have paid off at least another 17% of the balance of your mortgage, which would be in month 100 assuming no large home price appreciation. This will mean you have made 100 payments of $300 extra per month because you didn't want to put an additional $51K down. In other words over 8.5 years of the loan, you have paid $30K in useless PMI (that cant be deducted if you make more than $108K married), which will create a serious drag on your returns.

It doesnt matter if you can afford it or not, but going the FHA route is not a free lunch, in fact it is quite costly relative to conventional. Finally, if we assuming a new CAGR of stocks at around 5%, in 8 years your $51K is only worth $75K, less the $30K in PMI and you are at a $6K loss.

This is all very abstract, but I just want to illustrate what a bad idea FHA and 3.5% is. You can go conventional with 5% down with up front PMI of $6K-$8K and it is a much better deal.
FHA is actually FAR worse then you are sharing here since the rule change: http://www.fha.com/fha_requirements_mortgage_insurance

You absolutely WILL have to pay PMI regardless of downpayment. And with a 3% downpayment your PMI will be 135 basis points. That is ASTRONOMICAL.

"On or after 4/1/2013 on terms > 15 years and loan amounts <=$625,500 - If the loan to value is <= 95%, the new Annual Premium is 130 basis points (bps). If the loan to value is >95%, the new Annual Premium is 135 basis points (bps)."

In addition you pay upfront PMI:

"Current Up-Front Mortgage Insurance Premium
The UPMIP is currently at 1.75% of the base loan amount. This applies regardless of the amortization term or LTV ratio."


And you need to have 22% equity and a minimum of 5 years to cancel PMI:

"For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years."

OP - frankly, if you can afford not to do an FHA loan you should not be taking an FHA loan.
MKP
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Re: Buying a house vs investing?

Post by MKP »

Investing is boring wrote:
MKP wrote:With FHA you still have to pay PMI with a 3% down payment. That will increase your effective interest rate quite a bit (apprximately $300/month on 300K).

You will pay this until you have paid off at least another 17% of the balance of your mortgage, which would be in month 100 assuming no large home price appreciation. This will mean you have made 100 payments of $300 extra per month because you didn't want to put an additional $51K down. In other words over 8.5 years of the loan, you have paid $30K in useless PMI (that cant be deducted if you make more than $108K married), which will create a serious drag on your returns.

It doesnt matter if you can afford it or not, but going the FHA route is not a free lunch, in fact it is quite costly relative to conventional. Finally, if we assuming a new CAGR of stocks at around 5%, in 8 years your $51K is only worth $75K, less the $30K in PMI and you are at a $6K loss.

This is all very abstract, but I just want to illustrate what a bad idea FHA and 3.5% is. You can go conventional with 5% down with up front PMI of $6K-$8K and it is a much better deal.
FHA is actually FAR worse then you are sharing here since the rule change: http://www.fha.com/fha_requirements_mortgage_insurance

You absolutely WILL have to pay PMI regardless of downpayment. And with a 3% downpayment your PMI will be 135 basis points. That is ASTRONOMICAL.

"On or after 4/1/2013 on terms > 15 years and loan amounts <=$625,500 - If the loan to value is <= 95%, the new Annual Premium is 130 basis points (bps). If the loan to value is >95%, the new Annual Premium is 135 basis points (bps)."

In addition you pay upfront PMI:

"Current Up-Front Mortgage Insurance Premium
The UPMIP is currently at 1.75% of the base loan amount. This applies regardless of the amortization term or LTV ratio."


And you need to have 22% equity and a minimum of 5 years to cancel PMI:

"For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years."

OP - frankly, if you can afford not to do an FHA loan you should not be taking an FHA loan.
I think we can agree that we agree. :sharebeer

FHA is for people who should not have mortgages so the mortgagee is being compensated for that excess risk. Even if OP is not an excess risk, he will be paying for it no matter what.

OP is better off saving for the house and retirement at a pace that meets his needs and then going conventional.
Topic Author
YoungBoglehead
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Re: Buying a house vs investing?

Post by YoungBoglehead »

Oh man. All these acronyms. I have a lot to learn.

Luckily I'm years away (I think..) from purchasing a home. Thanks for the info guys. Was just curious and wanted to learn.
Started investing around 21, joined Bogleheads at 23.
MKP
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Re: Buying a house vs investing?

Post by MKP »

YoungBoglehead wrote:Oh man. All these acronyms. I have a lot to learn.

Luckily I'm years away (I think..) from purchasing a home. Thanks for the info guys. Was just curious and wanted to learn.
Just look into PMI and UPMIP for FHA.
zmcpherson
Posts: 58
Joined: Tue Apr 17, 2012 8:20 pm

Re: Buying a house vs investing?

Post by zmcpherson »

MKP wrote:With FHA you still have to pay PMI with a 3% down payment. That will increase your effective interest rate quite a bit (apprximately $300/month on 300K).

You will pay this until you have paid off at least another 17% of the balance of your mortgage, which would be in month 100 assuming no large home price appreciation. This will mean you have made 100 payments of $300 extra per month because you didn't want to put an additional $51K down. In other words over 8.5 years of the loan, you have paid $30K in useless PMI (that cant be deducted if you make more than $108K married), which will create a serious drag on your returns.

It doesnt matter if you can afford it or not, but going the FHA route is not a free lunch, in fact it is quite costly relative to conventional. Finally, if we assuming a new CAGR of stocks at around 5%, in 8 years your $51K is only worth $75K, less the $30K in PMI and you are at a $6K loss.

This is all very abstract, but I just want to illustrate what a bad idea FHA and 3.5% is. You can go conventional with 5% down with up front PMI of $6K-$8K and it is a much better deal.
You are fairly off base in your arguments. Actually all of them.

Instead of throwing out a random numbers like $300 a month for 100 payments, it would be much easier to look it at at the actual APR and the actual rules so it is universal and can be applied to everyone.

The actual PMI rules states .55% APR for 22% loan to value and after 5 years. So if you wanted to, you can get rid of the PMI after 60 months not 100 months - And even if you live in a high demand area (I currently live Seattle proper) you might be able to achieve this without having to put down extra payments.

And then, if you look at the current mortgage rates at 4.3% add another .55% on top of that you and are still below your 5%. So still assuming an absurdly low 5% return, you are still doing better by using an FHA loan.

Finally, if you look at my post and the ops post, both of us are below the 108k threshold, so the PMI payments are a deduction.

So in this particular circumstance (and for the last 3 years really), the FHA loan is better in every way. The only time that putting down more up front would be better than only putting 3.5% down is when the interest rates start getting closer to 5.5-6% APR.
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kenyan
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Re: Buying a house vs investing?

Post by kenyan »

zmcpherson wrote:
4.3%, minus your tax deductions, minus the rate of inflation, you are left with a loan at a negative interest rate. So why on earth would you put 20% down when you can put 17% in ANYTHING ELSE.

Read what Kosmo posted right before you posted. Being pro-debt is not always a bad thing, sometimes you can come out far better by carrying loans for the entire life of the loan because the bank is essentially paying for the inflation. The last 4 years has been a perfect example of this.
One good reason that you would put 20% down...in today's competitive market (at least where I live), you stand a very poor chance at getting your offer accepted with 3% down and an FHA loan. Conventional mortgages and large down payments are what sellers are accepting.

Also, your assumed tax benefit may be much lower than you think. Income below 108k, with zero state income tax, should mean that you are far away from itemizing deductions currently. You don't get any benefit from the first $12,200 in deductions.
Retirement investing is a marathon.
zmcpherson
Posts: 58
Joined: Tue Apr 17, 2012 8:20 pm

Re: Buying a house vs investing?

Post by zmcpherson »

Investing is boring wrote:
FHA is actually FAR worse then you are sharing here since the rule change: http://www.fha.com/fha_requirements_mortgage_insurance

You absolutely WILL have to pay PMI regardless of downpayment. And with a 3% downpayment your PMI will be 135 basis points. That is ASTRONOMICAL.

"On or after 4/1/2013 on terms > 15 years and loan amounts <=$625,500 - If the loan to value is <= 95%, the new Annual Premium is 130 basis points (bps). If the loan to value is >95%, the new Annual Premium is 135 basis points (bps)."

In addition you pay upfront PMI:

"Current Up-Front Mortgage Insurance Premium
The UPMIP is currently at 1.75% of the base loan amount. This applies regardless of the amortization term or LTV ratio."


And you need to have 22% equity and a minimum of 5 years to cancel PMI:

"For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years."

OP - frankly, if you can afford not to do an FHA loan you should not be taking an FHA loan.
wow, I didnt see these new rule changes in April.... S&%# ... They really did a number on the FHA loan, .55% to 1.35% seems like a ridiculous jump.

Im still holding that with the old rules, an FHA loan is better than a traditional loan, but these new rules are awful. I dont know why anyone would agree to these new rules (well, before I can officially say that I would need to build a few models). My bad for having out dated information though.
MKP
Posts: 228
Joined: Sun Jun 26, 2011 7:56 pm

Re: Buying a house vs investing?

Post by MKP »

zmcpherson wrote:
Investing is boring wrote:
FHA is actually FAR worse then you are sharing here since the rule change: http://www.fha.com/fha_requirements_mortgage_insurance

You absolutely WILL have to pay PMI regardless of downpayment. And with a 3% downpayment your PMI will be 135 basis points. That is ASTRONOMICAL.

"On or after 4/1/2013 on terms > 15 years and loan amounts <=$625,500 - If the loan to value is <= 95%, the new Annual Premium is 130 basis points (bps). If the loan to value is >95%, the new Annual Premium is 135 basis points (bps)."

In addition you pay upfront PMI:

"Current Up-Front Mortgage Insurance Premium
The UPMIP is currently at 1.75% of the base loan amount. This applies regardless of the amortization term or LTV ratio."


And you need to have 22% equity and a minimum of 5 years to cancel PMI:

"For mortgages with terms more than 15 years, the annual mortgage insurance premiums will be canceled when the Loan to Value ratio reaches 78 percent, provided the mortgagor has paid the annual premium for at least 5 years."

OP - frankly, if you can afford not to do an FHA loan you should not be taking an FHA loan.
wow, I didnt see these new rule changes in April.... S&%# ... They really did a number on the FHA loan, .55% to 1.35% seems like a ridiculous jump.

Im still holding that with the old rules, an FHA loan is better than a traditional loan, but these new rules are awful. I dont know why anyone would agree to these new rules (well, before I can officially say that I would need to build a few models). My bad for having out dated information though.

The calc isnt as simple is .55 or 1.35 either. Look up how to calc PMI. My $300 a month was based on his mortgage estimates.
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