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Buying a first home

Started by Jsmith, September 14, 2018, 09:29:24 AM

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Jsmith

If I'm planning on purchasing my first home within the next 2-5 years, is there a certain threshold for a down payment where enough is enough or should you just put as much money into a down payment as possible right off the bat if it's not financially constricting to you going forward?

I'm beginning to allocate money into a money market account that I plan on using in the next 2-5 years for big expenses (wedding, house, etc...), so I definitely don't want stock market exposure with that money. I guess I'm trying to internally debate how much of my after-tax earnings should go towards the money market account for an eventual down payment on a house or if I should also be contributing more after-tax money towards riskier investments for longer horizon use (retirement, future kids college, etc...). Also, I currently put 17% of gross earnings into a 401k and have already maxed my roth IRA for this year, so I have a lot of money going towards retirement as is. I'm just stuck on what to do with the leftover money even after all of those savings. Any input is appreciated!

Hayden

I am no expert on this, but I save money for real estate into an S&P500 Index (if longer than three years). A money market is just fine for saving that sort of thing as well. Make sure you're at least getting around the 2% return on that money. I would say that 20% down payment is a good threshold so you can avoid Private Mortgage Insurance.

I am of the group that thinks of putting down the largest down payment possible, but then again I see how freeing up cash flow could be beneficial too. I would look more at what the payment is going to be with your various down payments to see how much cash flow your new house will tie up. I wouldn't want to tie up half of my cash flow with a mortgage.
Very Respectfully,
Hayden

Sam

I'd definitely put at least 20% down so you don't have to pay for the mortgage insurance extra fee.

It's worth investing 90% of your down payment and very conservative investments, and shooting for the fence for the remaining 10% if you're buying within 2 years.

Do you know that you are buying a record high prices and most of the country. So if you are not planning on owning the house for at least 10 years, I would really take my time. There is a lot of softness going on now in some big cities due to greater supply.

See: https://www.financialsamurai.com/time-to-start-worrying-about-the-housing-market-again/
Regards,

Sam

Jsmith

Quote from: Sam on September 14, 2018, 12:21:32 PM
I'd definitely put at least 20% down so you don't have to pay for the mortgage insurance extra fee.

It's worth investing 90% of your down payment and very conservative investments, and shooting for the fence for the remaining 10% if you're buying within 2 years.

Do you know that you are buying a record high prices and most of the country. So if you are not planning on owning the house for at least 10 years, I would really take my time. There is a lot of softness going on now in some big cities due to greater supply.

See: https://www.financialsamurai.com/time-to-start-worrying-about-the-housing-market-again/

Thanks for the input Sam. I'll definitely be putting money away to try and hit that 20% down payment threshold. I'll be buying most likely in the Midwest and will definitely start tracking prices here soon to make sure I'm not buying at an absolute peak time.

defomcduff

Quote from: Jsmith on September 14, 2018, 09:29:24 AM
If I'm planning on purchasing my first home within the next 2-5 years, is there a certain threshold for a down payment where enough is enough or should you just put as much money into a down payment as possible right off the bat if it's not financially constricting to you going forward?

I'm beginning to allocate money into a money market account that I plan on using in the next 2-5 years for big expenses (wedding, house, etc...), so I definitely don't want stock market exposure with that money. I guess I'm trying to internally debate how much of my after-tax earnings should go towards the money market account for an eventual down payment on a house or if I should also be contributing more after-tax money towards riskier investments for longer horizon use (retirement, future kids college, etc...). Also, I currently put 17% of gross earnings into a 401k and have already maxed my roth IRA for this year, so I have a lot of money going towards retirement as is. I'm just stuck on what to do with the leftover money even after all of those savings. Any input is appreciated!

I think some good rules of thumb are:
1. Put down 20%, to avoid mortgage insurance and also to prove that you're capable of affording it.
2. Borrow no more than 2x (or possibly 3x if you're stretching) gross income.
DeForest
Boston, Massachusetts

Leigh

Also, spend this time making sure your credit is as golden as possible. Pay off any debt if you can and clear up any financial data that is incorrect. Stay on top of all three credit reports to make sure you're good.

Also, about three months before you apply for a mortgage, begin paying your credit card balance before the bill is cut. This will lower your debt to credit ratio, also don't buy a new car which would increase your debt to earnings ratio and doooon't apply for new credit cards. You don't want to see a bunch of new credit inquiries, which make up 10% of your FICO score.


Money Ronin

20% is the magic number--no more, no less.  Any less and you may end up paying a higher interest rate and PMI.

No one's explicitly mentioned this, but I'll also never put down more than 20%.  At today's historically low rates, you want to maximize your leverage.  There is no other type of asset where someone will end you money at such a low fixed rate for 30 years.

The first few minutes, days and months of home ownership will be harrowing because you will have just saddled yourself with the biggest debt and asset you've ever had.  But try to think in the long-term.  Hopefully, your home value and your income will appreciate over time.  Your mortgage will remain fixed.  Things will get easier.

I've been lucky enough to have my home value double in the last 15 years.  With 20% down payment, the gross profit is 9x.  Had I paid in cash, the gross profit would have been 1x.  That's the beauty of leverage.  As it turned out, I've done cash out refi's several times and re-invest in other assets with reasonable confidence that I could beat my 3.5% mortgage interest rate.  That's the beauty of arbitrage.

bf312

Late to the discussion here...  I am all for home-ownership, but please JSmith, don't buy a starter home just to get into the market with the expectation of trading-up in a few years!!

Plan to stay in your first home for 7-10 years to at least "break-even". Short of that you're likely to loose money once you account for carrying/maintenance costs, realtor fees, and the slow pay-down of principal in the beginning years of an amortizing loan.

There are countless examples of cities in the Midwest where houses today sell for less than they did 5, 10, 15 years ago. And property taxes in certain areas of the Midwest can still be quite onerous, acting as an anchor on any future appreciation. Some suburban Cleveland and Chicago property tax rates, for example, can approach 5.0% of assessed value.

Also, don't buy more house than you need!