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Thread: House buying guardrails.

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    God/dess Zofia's Avatar
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    Default House buying guardrails.

    House Buying - Sooner or later you will want to buy a house. Itís generally a good investment when you consider that it also provides much needed shelter and possibly some tax advantages. How much house should you buy? Some guardrails are needed here. For a first house, assuming you are under 35, making a small down payment of less than 20% of the purchase price is acceptable. Not optimal, but acceptable. Given that you must continue to save and keep your credit score up, or increase your credit score until you reach a point where you can refinance the house with at least 20% equity. Keep in mind that no matter how low your interest rate is, if you donít have 20% down you will be paying private mortgage insurance, or PMI. Lenders now are not really willing to ďtake offĒ PMI when you get to 80% equity, they usually make you refinance so they can get another round of origination fees. Thus, your first house ends up being a starter that people tend to sell. Thatís fine, just know what is happening and plan accordingly. Better, is being able to save and pay 20% down. But, for lots of 20somethings and younger 30somethings, saving that downpayment is difficult to impossible.

    How much should the payment be? A general guardrail, no matter how much you put down is a limit of 25% of your gross monthly pay. Thus, if you gross $48,000 per year, your mortgage, including PMI, principal, interest, taxes and insurance should not be more than $1,000 per month. Anything over that, and you will be struggling financially. The goal is to not struggle.

    What about if you are over 35? Or, this is going to be a sebsequent house? Then, the twenty percent rule applies. You must have 20% of the purchase price saved up as a down payment. The 25% rule still applies, but without PMI, you will have room for a bigger house. Also by having your 20% down payment you will be able to afford a nicer house. Still, limit your principal, interest, taxes and insurance to 25% of your gross monthly income.

    How long a mortgage term? Here things get a little murky. Easy guardrail, the house must be paid off by your expected retirement date. Also, age discrimination is real, so donít plan on getting a new job at age 60 to replace income from a job you have at age 59. I like to plan on being house debt free before age 60. Clearly, a shorter mortgage term will result in less interest being paid, but at the expense of a higher principal payment, much higher. You cannot eat a paid for house. So, donít violate the 25% rule just to get a shorter mortgage term. Also, as you get farther along in your career, your mortgage will not increase, but your earnings hopefully will. Use the difference between your old mortgage and the newer higher income to invest. The evidence shows that paying your house off on time, not early, gives you more money to invest at higher rates of return than a house and your mortgage interest rate.


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    Default Re: House buying guardrails.

    I always wondered how easy it would be to get rid of the PMI once you had 20% equity, seems it is a whole refinancing process.

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    Default Re: House buying guardrails.

    Quote Originally Posted by Zofia View Post

    How much should the payment be? A general guardrail, no matter how much you put down is a limit of 25% of your gross monthly pay. Thus, if you gross $48,000 per year, your mortgage, including PMI, principal, interest, taxes and insurance should not be more than $1,000 per month. Anything over that, and you will be struggling financially. The goal is to not struggle.

    This is very important. Being financially secure is a lot more important than having a gigantic sized home. Besides saving up for a down payment, it's a good idea to also save up enough money to cover your house payments and expenses for six months, in case a catastrophe or loss of job, especially if you're working in a job where your income can vary from one week to the next.

    According to the book, "The Millionaire Next Door", there are a lot of millionaires living in middle class neighborhoods, and a lot of people who are living in big mansions and driving expensive cars, are barely getting by.

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    Default Re: House buying guardrails.

    Quote Originally Posted by Zofia View Post
    House Buying - Sooner or later you will want to buy a house. Itís generally a good investment when you consider that it also provides much needed shelter and possibly some tax advantages. How much house should you buy? Some guardrails are needed here. For a first house, assuming you are under 35, making a small down payment of less than 20% of the purchase price is acceptable. Not optimal, but acceptable. Given that you must continue to save and keep your credit score up, or increase your credit score until you reach a point where you can refinance the house with at least 20% equity. Keep in mind that no matter how low your interest rate is, if you donít have 20% down you will be paying private mortgage insurance, or PMI. Lenders now are not really willing to ďtake offĒ PMI when you get to 80% equity, they usually make you refinance so they can get another round of origination fees. Thus, your first house ends up being a starter that people tend to sell. Thatís fine, just know what is happening and plan accordingly. Better, is being able to save and pay 20% down. But, for lots of 20somethings and younger 30somethings, saving that downpayment is difficult to impossible.

    How much should the payment be? A general guardrail, no matter how much you put down is a limit of 25% of your gross monthly pay. Thus, if you gross $48,000 per year, your mortgage, including PMI, principal, interest, taxes and insurance should not be more than $1,000 per month. Anything over that, and you will be struggling financially. The goal is to not struggle.

    What about if you are over 35? Or, this is going to be a sebsequent house? Then, the twenty percent rule applies. You must have 20% of the purchase price saved up as a down payment. The 25% rule still applies, but without PMI, you will have room for a bigger house. Also by having your 20% down payment you will be able to afford a nicer house. Still, limit your principal, interest, taxes and insurance to 25% of your gross monthly income.

    How long a mortgage term? Here things get a little murky. Easy guardrail, the house must be paid off by your expected retirement date. Also, age discrimination is real, so donít plan on getting a new job at age 60 to replace income from a job you have at age 59. I like to plan on being house debt free before age 60. Clearly, a shorter mortgage term will result in less interest being paid, but at the expense of a higher principal payment, much higher. You cannot eat a paid for house. So, donít violate the 25% rule just to get a shorter mortgage term. Also, as you get farther along in your career, your mortgage will not increase, but your earnings hopefully will. Use the difference between your old mortgage and the newer higher income to invest. The evidence shows that paying your house off on time, not early, gives you more money to invest at higher rates of return than a house and your mortgage interest rate.

    The ratios on debt to income is 36% to be approved for a mortgage so if your take your monthly credit card debt, car payment, etc from the 36% and the rest is what your payment can be including mortgage, taxes, and insurance. A good mortgage broker will help you get your ratios in line and advise you what you need to do.

    How long a mortgage term is up to you. It is against the law to discriminate on the basis of age. No loan will be disapproved because of your age even if you are 99. We just bought a second home on the gulf and I retired so the mortgage payoff date will be after I die. Just a point but you are all probably young people. If you are 45 or 55 or 65 you can still qualify for a 30 year mortgage.

    You should finance the most you can on a house and keep as much money liquid as you can. If you put all of your savings into a house and then something happens you are brick rich and cash poor. If you miss your mortgage payments you may be in a short sale of foreclosure situation.But if you have that cash banked you can still make your mortgage payments. Of if you do have a lot of equity in the house like I do then you make sure you have a home equity line of credit so you can get cash out. Once you are approved for a Home equity loan if is basically a line of credit ready to be used regardless of your current situation. A home equity loan will not give you any income tax consequences but if you had to pull money out of an IRA or 401k you will create taxable income or penalties (some exceptions apply here).

    If you can't put 20% down then do FHA or conventional with 5% or 10% down. Yes, you will have escrow and a little for the Mortgage insurance but given how low interest rates are PMI doesn't have a real impact on your total payment. Remember though that because you put less down your payment is bigger so your house price will be lower on what you can be approved to purchase. It is worth it. Owning a home will be cheaper than renting by and large.

    If you own a house for 2 years and sell it the capital gains are tax free. House prices are going up 15-20% in some areas. If you buy a $200,000 house that could appreciate 30k-40k. If you put 10% down $20k you got a 50% to 100% return. That is called leverage. If you wait until you save 20% for a down payment you are chasing a moving target. That 20% down is chasing a house that goes from $200k to $300k in a few years. Your down payment is $40k then next year $48k then $58k.

    My 2 cents.
    I am a realtor. The house next to me was purchased for $225k 2 years ago. I sold if for $400 in Nov. in a very hot market. The house across the street sold for $424k in Nov. The people just flipped it for $470. Don't ask me to explain that one. I put a bid in for clients on a condo listing for $140k we went $50k over list and did not get it. I don't think we will get the blow up like in 2008 because there is so much money out there and too little to purchase. But you never know.I would not advise anyone to wait until they had 20% down.

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