20% Down Payment Sub-optimal?

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Admiral
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Joined: Mon Oct 27, 2014 12:35 pm

Re: 20% Down Payment Sub-optimal?

Post by Admiral » Thu Sep 28, 2017 11:14 am

Slacker wrote:
Thu Sep 28, 2017 11:11 am
Admiral wrote:
Thu Sep 28, 2017 11:00 am
jadd806 wrote:
Wed Sep 27, 2017 2:58 pm
..
Yeah, that is what I was going for. I am in this situation. I am 24 years old and home ownership is not a high priority goal for me at the moment. I am maxing out my TSP and IRA. That only leaves a few hundred dollars of excess to divert to savings every month.

I don't particularly want to own a house, but I also don't want to get priced out of the area that I live in (495 corridor in Massachusetts). It's not as crazy as Boston, but home prices and rent seem to be climbing at astonishing rates here. We're paying nearly 20% more for rent than we were 2 years ago. Based on this, I find myself wondering if I should reduce my retirement contributions and start saving cash in order to hedge against the real estate market in my area.
And thus you are seeing one of the key benefits of ownership: cost control. Another one is inflation protection (and they are not the same, since rents can rise beyond inflation). A third is forced savings (the principal you pay down each month). A fourth is that ownership is subsidized by the gov't (mortgage interest deduction).

Owning is not for everyone, but provided your circumstances (job security) warrant it, and you can afford it, the first two benefits listed above ALONE are enough to tilt the scales in favor of owning over renting, IMO.

There are certainly some outliers who can afford to buy but would rather rent and invest the money, and hope they come out ahead. But in my view most people who can afford to buy--and whose circumstances warrant it--usually buy. I'd rather put my money (and it's a lot of money) toward something that I can eventually sell than in some landlord's pocket. For me, it's that simple.

I would def start saving for a home after you've contributed enough to get a match, if applicable.
You also have to consider how long you will be in the specific location where the house is purchased which I believe will likely be the controlling factor.

Just using some estimates of expectations and actual rent and house price numbers I determined that where we live requires a minimum stay of 38 months to come out ahead as purchasers on average once all costs are accounted. Since we won't be here that long, we rent even though a rent vs buy calculator would probably tell us to buy if it only goes off of home prices and rents collected. One factor that is in our favor is that we locked in our rental rate for 36 months so it would skew my estimates by probably one additional month since we don't have to worry about increasing rents.
Agreed, which is why I said "job security" i.e. not having to move based on employment (even if that's moving by choice).

Snezz1e
Posts: 26
Joined: Wed Mar 14, 2012 11:48 am

Re: 20% Down Payment Sub-optimal?

Post by Snezz1e » Thu Sep 28, 2017 11:56 am

Scenario 2 that was presented seems to be using some really bad math. Yes you can invest the money from lower down payment but you can also invest the annual savings from lower monthly payments (due to lower principal and no PMI) so the savings is actually more than just 37k he cites.

Using some hard numbers a $237.5k loan at 4% is $1251/month ($1,134 principal and $117 PMI) or $15012/year.
A $200k loan at 4% is $955/month or $11,460/year. The difference is $3,552 which is about 9.5% of $37.5k. At 4% the 37.5k would of made only $1500 which means your about $2k ahead.

When people think about PMI many see it this way, $117/month or $1404/year is only .6% of my mortgage so I'm only paying 4.6% because I'm not putting enough down. A better way to look at it is under the 20% down I'm paying 4% interest. For 5% down I'm paying 4% on the 237.5k and an additional 3.75% (1404/37500) on the 37.5k for a total interest rate of 7.75%. You would have to consistently beat this rate for PMI route to be better which is unlikely without taking huge risks.

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grabiner
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Re: 20% Down Payment Sub-optimal?

Post by grabiner » Thu Sep 28, 2017 10:45 pm

neophyte1 wrote:
Wed Sep 27, 2017 5:31 pm
neophyte1 wrote:
Wed Sep 27, 2017 10:58 am
Does anyone know if conventional mortgage interest rates are always better with the more you put down? As in, if you put down 5%, will your rate be worse than if you put down 20%? I believe so. What about 15% instead of 20%? Just curious if there's a percentage where it plateaus. Would be a helpful determinant.
Spoke with my loan officer, and he said the mortgage interest rate is identical no matter what you put down, assuming you have a 740+ credit score, which I do. So the only difference then is no PMI at 20% down, but 20% down does NOT have the benefit of a better interest rate.
PMI is not calculated as part of the interest rate, but it has the same effect as a higher rate. If you pay $955 monthly on a $200K mortgage because it was 20% down, and I pay $1043 monthly on a $200K mortgage because it was less than 20% down, the cost to me is the same whether this is because your rate is 4% and mine is 4.75%, or because both of our rates are 4% but I pay $88 monthly in PMI. (PMI is somewhat less costly if it goes away automatically, but many new loans with PMI require you to pay it for the entire loan unless you refinance.)
Snezz1e wrote:
Thu Sep 28, 2017 11:56 am
When people think about PMI many see it this way, $117/month or $1404/year is only .6% of my mortgage so I'm only paying 4.6% because I'm not putting enough down. A better way to look at it is under the 20% down I'm paying 4% interest. For 5% down I'm paying 4% on the 237.5k and an additional 3.75% (1404/37500) on the 37.5k for a total interest rate of 7.75%. You would have to consistently beat this rate for PMI route to be better which is unlikely without taking huge risks.
And this is why getting rid of removable PMI, or paying down a loan to 80% loan-to-value so that you can refinance, is one of the best investments you can make; it gets rid of the high-interest debt, while keeping the low-interest debt that you may want to keep. (It is usually a better deal to contribute more to your 401(k) and IRA rather than paying down a low-rate mortgage with deductible interest.)
Wiki David Grabiner

JGoneRiding
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Re: 20% Down Payment Sub-optimal?

Post by JGoneRiding » Sat Sep 30, 2017 11:58 am

LiterallyIronic wrote:
Wed Sep 27, 2017 11:03 am
Slacker wrote:
Wed Sep 27, 2017 10:49 am
Jags4186 wrote:
Wed Sep 27, 2017 6:18 am
The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?
What landlord pays for extermination? I'm ready to move to a new place and I'd gladly move into a home with such a magnanimous landlord.

I certainly don't pay for extermination at my rental properties.
I would always expect the landlord to take care of that. "Hey, we need someone to come spray around the property - we've got ants coming in somewhere." I'd call and say that every day, if necessary. As a renter, it's not my responsibility to pay someone to come spray the property. Heck, I'd argue that it's the landlord's responsibility to provide replacement lightbulbs - unless you want me taking them with me when I leave.
Well I would pay for the extermination (or most likely in the case of ants I would just come and spray myself) And I wouldn't even complain about you calling every day until I got it done (now if they turn out to be sugar ants that is on you and I am going to tell you to clean up better) BUT if you take those lightbulbs or the smoke detectors aren't working due to dead batteries I will charge you for every single one! I make sure all lightbulbs are in place and functioning and all detectors work when I turn a place. After that I expect to get it back in the same condition I gave it to you minus normal wear and tear. Therefore it is your responsibility to replace batteries and bulbs and Yes I will totally nickel and dime it. (for people turning at 1 year I give a lot more grace for 3 years) I clean all the carpets before a handover and I expect them all to be cleaned when I get it back and if they aren't I charge that too; I make sure the grass is freshly cut and if it isn't when I get it back...

But what actually gives me the biggest greave are screens! I have to put those back in and if you just gently pop them out I can put them back but so many people manage to screw that up then I have to get them fixed or buy new ones and that takes time that I can't charge for and is super annoying!!

MathWizard
Posts: 3083
Joined: Tue Jul 26, 2011 1:35 pm

Re: 20% Down Payment Sub-optimal?

Post by MathWizard » Sat Sep 30, 2017 9:58 pm

I put 20% down to avoid PMI and for peace of mind.

I still had a few years of payments on college loans, as well as wanting to save for my kids
college costs less than 10 years away. With the same amount, I could have paid the same amount
as a 10% down on twice the house, which is what the realtor wanted.

ArchibaldGraham
Posts: 17
Joined: Wed Dec 27, 2017 1:11 pm

Re: 20% Down Payment Sub-optimal?

Post by ArchibaldGraham » Thu Jun 28, 2018 10:37 am

JGoneRiding wrote:
Sat Sep 30, 2017 11:58 am
LiterallyIronic wrote:
Wed Sep 27, 2017 11:03 am
Slacker wrote:
Wed Sep 27, 2017 10:49 am
Jags4186 wrote:
Wed Sep 27, 2017 6:18 am
The OP doesn’t consider that by not saving up 20% you haven’t demonstrating your ability to live below your means which is usually a prerequisite for being able to afford a home.

If your rent is $1000/mo and the refrigerator goes, you still pay $1000 that month. If you get an invasion of ants and the exterminator needs to come, you still pay $1000 that month. It’s freezing outside and a pipe bursts? Inconvenient yes, but still $1000 for the month. And if all 3 of those happen at the same time? You still pay $1000 that month.

If you can’t save a measly $50k then maybe you can’t afford a $250k house?
What landlord pays for extermination? I'm ready to move to a new place and I'd gladly move into a home with such a magnanimous landlord.

I certainly don't pay for extermination at my rental properties.
I would always expect the landlord to take care of that. "Hey, we need someone to come spray around the property - we've got ants coming in somewhere." I'd call and say that every day, if necessary. As a renter, it's not my responsibility to pay someone to come spray the property. Heck, I'd argue that it's the landlord's responsibility to provide replacement lightbulbs - unless you want me taking them with me when I leave.
Well I would pay for the extermination (or most likely in the case of ants I would just come and spray myself) And I wouldn't even complain about you calling every day until I got it done (now if they turn out to be sugar ants that is on you and I am going to tell you to clean up better) BUT if you take those lightbulbs or the smoke detectors aren't working due to dead batteries I will charge you for every single one! I make sure all lightbulbs are in place and functioning and all detectors work when I turn a place. After that I expect to get it back in the same condition I gave it to you minus normal wear and tear. Therefore it is your responsibility to replace batteries and bulbs and Yes I will totally nickel and dime it. (for people turning at 1 year I give a lot more grace for 3 years) I clean all the carpets before a handover and I expect them all to be cleaned when I get it back and if they aren't I charge that too; I make sure the grass is freshly cut and if it isn't when I get it back...

But what actually gives me the biggest greave are screens! I have to put those back in and if you just gently pop them out I can put them back but so many people manage to screw that up then I have to get them fixed or buy new ones and that takes time that I can't charge for and is super annoying!!
Some cheap/bad landlords might drag their feet, but all landlords pay for this type of thing. If push comes to shove the conversation is very simple:

[Renter] The rental unit has a problem that is not acceptable. Please address ASAP. If not, we will move out and you will still have to address the issue and wont get rent.
[Landlord] Okay, we will take care of it

The only scenario that I can think of that is more complicated is if you rent a rent controlled unit at below market rate, in which case you will probably have to maintain the property since the landlord very much wants you to leave.

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