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I see your logic here but there is a cost associated with dealing with a shortsale/foreclosure if that ends up happening. Sure it may save some of your cash savings for downpayment but ends up costing you in "higher interest rate, higher closing costs, and the foreclosure will cost you for a few years down the road in higher rates, etc..."
If you are that uneasy about job, life changes, etc... Then I would suggest not buying.
"They make no long term financial sense"?
$300k home purchase
Loan 1 - 4.875% with 20% down. total cost 464857.20 (1291 monthly)
Loan 2 - 5.5% FHA with 3.5% down. total cost 582552.00 (1618 monthly)
$118000 difference over 30 years. Not peanuts...
You cheated in your calculation...
What's the return on the 16.5% he didn't put as a downpayment and instead invested?
Invest $49,500 for 30 years in the stock market... we'll be a bit conservative and assume an 8% annual return... His money would be worth $498,101... compared to the $120k extra he paid in your calculations, he's looking pretty good.
Trust me, I have the degrees and logical skills to back this up... big downpayments are a bad idea.
There are definitely costs of a shortsale or foreclosure sure... but those costs are there regardless of if you make a large downpayment or not... in the end, your credit is still hosed... your credit report doesn't care if you were short $20k or $300k... the account will be marked "settled for less than amount owed" or similar language. I can only imagine if I'd purchased my home 2 years ago... I could've put 40% down and I'd still be in a short sale position right now. It makes no sense to accept the risk... to tie up your funds... to lower probably the best debt you can possible have with a mortgage. It is super low, tax deductible, fixed rate interest! Get as much of it as you can afford!
OP, don't listen to those who recommended you to get a below average house in a below average neighborhood and go to below average school. For Christ sake, they are your children, and your job is to provide the best of everything for them. If you put yourself in below average category, your children will be below average too. Their friends will be below average. If you follow their advice, I would advice you just dig a hole or find a cave for your family to settle.
You have to aim high to give yourself the motivation to do better.
All being said, I am by no mean to tell you to go to the max out your limit. Go out to see enough houses you will have an idea on which home styles you and your family like. Then just search these styles until you find one that is good and fit your budget.
When you find something you like, go home and bring out the calculator and see if the math work out. If not, move to another property. If it is, then go make an offer.
* Another thing you need to consider is that hyper inflation that could be hit us any day now. Your 100k savings in the bank will buy you less and less. With interest rate at all the time, it is the best time to buy while your money is still good. Housing is one thing that keep up with inflation.
I see your logic here but there is a cost associated with dealing with a shortsale/foreclosure if that ends up happening. Sure it may save some of your cash savings for downpayment but ends up costing you in "higher interest rate, higher closing costs, and the foreclosure will cost you for a few years down the road in higher rates, etc..."
If you are that uneasy about job, life changes, etc... Then I would suggest not buying.
"They make no long term financial sense"?
$300k home purchase
Loan 1 - 4.875% with 20% down. total cost 464857.20 (1291 monthly)
Loan 2 - 5.5% FHA with 3.5% down. total cost 582552.00 (1618 monthly)
$118000 difference over 30 years. Not peanuts...
Your calculation is incorrect because you don't take into account opportunity costs, you don't properly present-value the future payments, and you assume that the loan is held to maturity.
Trust me, I have the degrees and logical skills to back this up... big downpayments are a bad idea.
There are definitely costs of a shortsale or foreclosure sure... but those costs are there regardless of if you make a large downpayment or not... in the end, your credit is still hosed... your credit report doesn't care if you were short $20k or $300k... the account will be marked "settled for less than amount owed" or similar language. I can only imagine if I'd purchased my home 2 years ago... I could've put 40% down and I'd still be in a short sale position right now. It makes no sense to accept the risk... to tie up your funds... to lower probably the best debt you can possible have with a mortgage. It is super low, tax deductible, fixed rate interest! Get as much of it as you can afford!
The mortgage professor website has a good analysis of whether it's better to pay down your mortgage in 15 years or 30. It turns out that if you can pay it down quickly, you should (you need a substantial return to make up the difference).
It would be interesting to carefully run the numbers with a large down payment, but my guess is that unless you take into account the value of a strategic default, you're probably better paying more.
The mortgage professor doesn't attempt to value the strategic default (which increases in value if you take the 30 year)
What's the return on the 16.5% he didn't put as a downpayment and instead invested?
Invest $49,500 for 30 years in the stock market... we'll be a bit conservative and assume an 8% annual return... His money would be worth $498,101... compared to the $120k extra he paid in your calculations, he's looking pretty good.
Trust me, I have the degrees and logical skills to back this up... big downpayments are a bad idea.
Didn't cheat at all. But when you say 8% annual return as conservative then I know you are in la la land. Where do you factor in risk? Cause you could also lose money if investing like that.
I would give AT best 4-5% average rate of return if you want to be realistic for the average person.
Oh and you are cheating in your calculation. What about that extra $330 monthly savings that could have been invested if you want to be on equal footing. Oh and what about any potential appreciation on the house over those 30 years? If inflation is a pending issue won't houses eventually be worth a lot more and hence a decent hedge against inflation?
Impossible to know which is better move.
I agree the FHA is a no brainer if you don't have the cash savings to buy. And I don't think they are a bad move but they are not a slam dunk like you make them out to be.
OP, don't listen to those who recommended you to get a below average house in a below average neighborhood and go to below average school. For Christ sake, they are your children, and your job is to provide the best of everything for them. If you put yourself in below average category, your children will be below average too. Their friends will be below average. If you follow their advice, I would advice you just dig a hole or find a cave for your family to settle.
You have to aim high to give yourself the motivation to do better.
Your calculation is incorrect because you don't take into account opportunity costs, you don't properly present-value the future payments, and you assume that the loan is held to maturity.
The other poster said LONG TERM financial sense. Hence why I made the point of holding the loan to full term.
You need to be more detailed for me to understand your exact points on the other two topics.
OP, don't listen to those who recommended you to get a below average house in a below average neighborhood and go to below average school. For Christ sake, they are your children, and your job is to provide the best of everything for them. If you put yourself in below average category, your children will be below average too. Their friends will be below average. If you follow their advice, I would advice you just dig a hole or find a cave for your family to settle.
You have to aim high to give yourself the motivation to do better.
All being said, I am by no mean to tell you to go to the max out your limit. Go out to see enough houses you will have an idea on which home styles you and your family like. Then just search these styles until you find one that is good and fit your budget.
When you find something you like, go home and bring out the calculator and see if the math work out. If not, move to another property. If it is, then go make an offer.
* Another thing you need to consider is that hyper inflation that could be hit us any day now. Your 100k savings in the bank will buy you less and less. With interest rate at all the time, it is the best time to buy while your money is still good. Housing is one thing that keep up with inflation.
What world do you live in if you think that going out to spend $300K on a house is cheating yourself? It's all about spending what you can afford. I think most of the responses so far is that it's wise to spend up to $350K house and that's pushing it with a single $100K income and children to care for. I don't think there was an absolute location that OP wanted to move to in NJ but here in SJ, $300K will get you in good neighborhoods. Are you going to be able to get one of those 3500+ sqft home? No cause they are twice as much along with the taxes.
A house depreciates. What does that mean? You have to spend money to up keep it and if you are not handy, you will spend lots of money every year on top of your mortgage payments.
I've give you a very simple example. Let's say you are in NJ and have a $100K job. Someone give you a $1 million home and it's mortgage free. Do you say to yourself..hmm. "I am not cheating my self so I'll live in it". It won't be long before you realize that you can't afford to live in that house or neighborhood.
The other poster said LONG TERM financial sense. Hence why I made the point of holding the loan to full term.
But that's not realistic. In the long term, you won't be holding the same loan.
Quote:
You need to be more detailed for me to understand your exact points on the other two topics.
(1) the value of a dollar today isn't the same as the value of a dollar in 5 years, so it's not valid to just add them. You need to apply an appropriate "discount" to future amounts to get the difference in today's dollars.
(2) you need to take into account that you could invest the money that isn't tied up in a down payment (opportunity cost)
I'm not going to spend a lot of time arguing about this, I don't have a substantial dispute with your conclusion, but your math is completely wrong here.
btw, realtors use exactly the same kind of analysis you do above to "prove" that it's much cheaper to buy today than at any other time -- that's the real reason I have a big problem with your analysis (higher rates look much worse if you ignore the fact that (a) you can invest at better rate in a high rate environment, (b) inflation means you need a steeper discounting of future payments, and (c) high rates reduce the chance that the loan is held to maturity)
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Why people are Leaving Northern NJ?
