Question About Buying A House

[WhatsHisNuts]

That certainly is food for thought Gary--but what amount will the guy actual pay for his house that back then probably had selling price of $20,000.

If you took out 30 year 7% mortgage today for $100,000 its going to cost you $239,400.

Of course there are tangents on what you make on investment of money- some could be great--or as the fellow I spoke of earlier they could be catastrophic.

Without going through complicated projections I like to break it down to its simplest form avoiding "possible" outcomes and going with guarantees.

Will anyone give me guarantee of higher interest rate on my money than what the bank will charge me for loan--Have yet to find that scenerio.

Wayne: The interest rate is only a part of the equation. The more important factor is inflation which averages (I believe) around 3% a year and COMPOUNDS....which makes your loan amount lose value.

The key is to see the big picture and stop thinking about interest as bad. Home loans are the cheapest money you can buy. I remember a professor talking about who carries the most debt, and surprisingly, it wasn't the poor or middle class. It is the rich.

I know you can't be guaranteed to make more WITH the money you don't pay up front for the house, but that opportunity is there. If we had a finance guy, I'd like to hear what numbers he could come up with. If you only paid 20% down, took the balance and continued investing it in something like CDs (and making your payments of course) what would the picture look like in 30 years?

Ric Edelman talks about this kind of stuff in The Truth About Money.

 

[bear]

Well,
My first mortgage in 1975 was for 40 thou and my payments were an astronomical (at the time) $300
KNOW THIS: $1 in 1976 would cost you $3.65 today. This is simple: Dollars are inflated...Prices are inflated and the more we print the less they are worth. That $50,000 house is now worth in excess of $400,000 and my down payment was 10,000. I sold that house long ago but if I held it that would represent a close to a 40 fold increase rather than an 8 fold increase had I payed cash.
Of course I must factor the interest cost over the 30 year period...........BUT I had the benefit of the reinvested tax savings and the reinvested 40 thousand that I kept instead of paying cash (WOW!)...thats the power of a leveraged investment........BOTTOM LINE: There are no guarantees....Pay Cash...give up your valuable 2008 dollars (they will most likely be lose value down the road) give up a big tax deduction (feds subsidize your interest) give up the idea of a leveraged RE investment. AND give up the opportunity to invest the $$$ you are about to put in your house.
OR....for now....give up your $$$ to fully invest in and own a depreciating property. ????

bear

 

[Snafu]

Buy two houses with 30% cash payment each, rent another and invest that left over 40% in stocks

:shrug:

 

[Glenn Quagmire]

Well,
My first mortgage in 1975 was for 40 thou and my payments were an astronomical (at the time) $300
KNOW THIS: $1 in 1976 would cost you $3.65 today. This is simple: Dollars are inflated...Prices are inflated and the more we print the less they are worth. That $50,000 house is now worth in excess of $400,000 and my down payment was 10,000. I sold that house long ago but if I held it that would represent a close to a 40 fold increase rather than an 8 fold increase had I payed cash.
Of course I must factor the interest cost over the 30 year period...........BUT I had the benefit of the reinvested tax savings and the reinvested 40 thousand that I kept instead of paying cash (WOW!)...thats the power of a leveraged investment........BOTTOM LINE: There are no guarantees....Pay Cash...give up your valuable 2008 dollars (they will most likely be lose value down the road) give up a big tax deduction (feds subsidize your interest) give up the idea of a leveraged RE investment. AND give up the opportunity to invest the $$$ you are about to put in your house.
OR....for now....give up your $$$ to fully invest in and own a depreciating property. ????

bear

Great post. I think one of the biggest reasons people don't become wealthy is because we, as a society, are taught that ALL debt is bad and we must get rid of it if possible. As you mentioned, mortgage debt is GOOD debt and it makes perfect sense to leverage the equity in your home by buying investment properties.

It never ceases to amaze me how many people sell their first house when they buy their second, and so on, and so on, and so on. Probably the biggest financial mistake they will make. IMO you can achieve great wealth if you just hold your previous homes and rent them out, rather than selling them outright. Having multiple homes appreciate in value is much better than one.

 

[DOGS THAT BARK]

Good points made but many make assumptions on what will happen in the future--and if we knew that!
Maybe old fashioned but I prefer guarantees and and no anxiety of what future holds.

Per your advice about above Glenn--

"I still think it makes more sense, in the long term, to take the extra money and invest it in stocks, or to use the equity from your home and buy investment properties."

I doubt anyone that would have followed this advice in past 5 years would be sleeping very well today.

 

[ageecee]

Good points made but many make assumptions on what will happen in the future--and if we knew that!
Maybe old fashioned but I prefer guarantees and and no anxiety of what future holds.

Per your advice about above Glenn--

"I still think it makes more sense, in the long term, to take the extra money and invest it in stocks, or to use the equity from your home and buy investment properties."

I doubt anyone that would have followed this advice in past 5 years would be sleeping very well today.

Some people do that Dogs but for me i just cant stand being in debt all my life. Thats why i would pay cash for a house and be done with it. We paid our house off early and i dont regret it at all. Now were taking that note payment and saving it to build our next house. I will have a mortgage on this next house but a very nice down payment will go with this house.

 

[Morris]

Some people do that Dogs but for me i just cant stand being in debt all my life. Thats why i would pay cash for a house and be done with it. We paid our house off early and i dont regret it at all. Now were taking that note payment and saving it to build our next house. I will have a mortgage on this next house but a very nice down payment will go with this house.

I agree with you. We paid our house off early and felt great about it. I don't know anyone that is happy with a mortgage payment.

If having a mortgage is so great why is everyone happy when they don't have that payment every month?

 

[bear]

DTB,
Past is prologue...There are, however no guarantees! I think the key to Glenn's ideas are found in the words "in the long term",and I would agree there. You are correct when you say that people are not sleeping well today........BUT...IF or WHEN the markets rebound .....as they did in 88 and in the early 90s and 2002 forward THEN people who continued to systematically invest found themselves with huge gains on the CHEAP shares accumulated while dollar cost averaging.
I guess that those who bought depreciated homes at low rates also smile..even today although recession is very tough on all.
There are many other factors to consider today however, and educated, savvy investors have a big advantage.
Important today are changing socio/polotical polocies, changing demographics, (some towns are thriving and many are close to being ghost towns and may never recover)
If I bought a home 5 years ago here in Fairfield and invested the 80% after the 20% down...lets say in safe CDs my returns including appreciation would still, be very positive (maybe not so in FL). If I had invested in quality, cash rich,low PE companies that pay nice dividends AND systematically wrote covered calls (especially in this volatile time) I might still be showing gains. In addition,
If I wrote puts instead of purchasing shares outright I would subsidize every share purchase.
It all helps in tough times and we have to have faith that the business cycle will bring us back to prosperous times....over the long haul.
Bottom line: noone has a crystal ball.....I have STRONG FAITH that America is STILL the beacon of light in the world and that in spite of our troubles people still line up to come here. We will lead and come back stronger than ever!!!
Right now I like stocks and RE although they will both probably decline for maybe another year..recessions historically are short lived.

bear

 

[Glenn Quagmire]

Good points made but many make assumptions on what will happen in the future--and if we knew that!
Maybe old fashioned but I prefer guarantees and and no anxiety of what future holds.

Per your advice about above Glenn--

"I still think it makes more sense, in the long term, to take the extra money and invest it in stocks, or to use the equity from your home and buy investment properties."

I doubt anyone that would have followed this advice in past 5 years would be sleeping very well today.

I wouldn't say the stock market, or the real estate market for that matter, have been down for 5 years. As for sleep apnea, I guess it all depends on your mindset, doesn't it? I can sleep very well because I know the decisions I'm making today will set me up very well later in life.

Generally speaking, if someone has been systematically putting money in the stock market on a continual basis, ESPECIALLY when it's down, they will realize great future returns. It's a very shortsighted view to panic and sell while you're in the midst of a downturn. A more sound, long-term view is to not only hold your current positions, but to buy new equities on the cheap while the market is down. If you do so, I think you will be handsomely rewarded in the future.

As for the real estate market, it has ebbs and flows as well. House prices will fluctuate. As long as you are smart and make decent down payments, you should be fine. And I don't think the current decline in real should sway anyone from owning investment properties. It's one of the best ways that I know of to build wealth.

Just my .02.

 

[BuffaloBill]

Thanks a lot for all of the opinions guys.

I have a lot of thinking to do.

I am still debating even buying the Condo right now.

My real estate attorney is advising me to wait another year or two to buy something, but my wife and I have been looking for a nice Condo for two years already and we finally have found something that we like and can live in for many years to come.

If we wait and try to get something in year or two, then we run the risk of losing this place, which would suck because we both really like it.

Another thing for me to consider is that I already do have a lot of money invested in stocks and I have taken a hit on those accounts. Just a paper loss though because I have not sold them.

So, if I take money out of my stocks to pay for the Condo, then I am sustaining my losses on my stocks. They no longer are paper losses. Now they would become REAL.

My attorney says that I should wait another 2-3 years for my stocks to recover and for the real estate market to go down, then go out and buy something.

But last time I checked, he doesn't have a crystal ball, so I don't know what to do now.

I really now have two things to debate.

Do I buy in cash? AND Do I buy now or wait?

Lot's of things for me to think about here.

 

[DOGS THAT BARK]

I wouldn't say the stock market, or the real estate market for that matter, have been down for 5 years. As for sleep apnea, I guess it all depends on your mindset, doesn't it? I can sleep very well because I know the decisions I'm making today will set me up very well later in life.

Generally speaking, if someone has been systematically putting money in the stock market on a continual basis, ESPECIALLY when it's down, they will realize great future returns. It's a very shortsighted view to panic and sell while you're in the midst of a downturn. A more sound, long-term view is to not only hold your current positions, but to buy new equities on the cheap while the market is down. If you do so, I think you will be handsomely rewarded in the future.

As for the real estate market, it has ebbs and flows as well. House prices will fluctuate. As long as you are smart and make decent down payments, you should be fine. And I don't think the current decline in real should sway anyone from owning investment properties. It's one of the best ways that I know of to build wealth.

Just my .02.

Ok Glenn we find some common ground here--and I think key is systematically reducing risk by averaging in good and bad times.

That is my premise for paying it off and putting what would be future monthly mortgage payments systematically to work in market or other investment each month.

I don't think you'd be sleeping to soundly had you had your house paid off and a year ago decided to take 50% equity loan out and dump it in market.
Granted things may have worked out in your favor but as it stands it would have been trendous loss--and why take risk when it can be averted--
I am certainly no investment guru and no doubt might miss a lot of opportunities--but have always thought if one can temper emotions of fear and greed they will rairly regret it.

 

[redsfann]

VERY timely topic for us as we just bought a new house and our current one is on the market. We have lived here 8 years and when we bought it we took out a 20 year mortgage then when we re-financed in 2003, we went to a 15 year note, so we have a lot of equity in this house. We bought a house way below our means in 2000 and our new one is also way below what we could comfortably afford. We will roll ALL of the equity in this house into the new one and we took a 15 year mortgage on it as well.
If I had the cash to buy outright, I would probably put down 50-75% and take the rest and spread it around--some in laddered CDs, some in the market, etc etc.--and take a 10 year mortgage if its available, otherwise I'd go with a 15 year and pay it off as quickly as possible. Everyone is different in what they think is the correct way to approach it, BuffaloBill, but you are certainly in a win-win situation in whatever you choose to do...

 

[Glenn Quagmire]

Ok Glenn we find some common ground here--and I think key is systematically reducing risk by averaging in good and bad times.

That is my premise for paying it off and putting what would be future monthly mortgage payments systematically to work in market or other investment each month.

I don't think you'd be sleeping to soundly had you had your house paid off and a year ago decided to take 50% equity loan out and dump it in market.
Granted things may have worked out in your favor but as it stands it would have been trendous loss--and why take risk when it can be averted--
I am certainly no investment guru and no doubt might miss a lot of opportunities--but have always thought if one can temper emotions of fear and greed they will rairly regret it.

DTB,

One of my many, many downfalls is that I often can't explain myself for shite. My apologies if it took me 3 months to get my point across. Where it may take someone else one post to get their thoughts out, it may take me 5. :142smilie

And you're absolutely right. If you recently took out a HELOC on a home that you had paid off and bought stocks with it, you're almost assuredly down right now. But this goes back to my point of looking at things long-term. You may be down right now, but will you still be down 5-10 years from now?

And this may be another topic altogether, but I've never been a big fan of HELOCs because of the higher interest rates. If I was fortunate enough to have my house paid off and wanted to put money in the market, I think I would just wait until I had the money saved up rather than take out a loan to do so. It may be a quirk of mine, but I have a much easier time accepting interest payments on a mortgage than I do paying interest on a loan for stocks (if that makes any sense).

I'm no investment guru either, not by a long shot. And I completely agree with you that you should limit risk as much as possible.

In case you couldn't tell, I could talk about this stuff all day. I really am that much of a dork.

 

[Glenn Quagmire]

Thanks a lot for all of the opinions guys.

I have a lot of thinking to do.

I am still debating even buying the Condo right now.

My real estate attorney is advising me to wait another year or two to buy something, but my wife and I have been looking for a nice Condo for two years already and we finally have found something that we like and can live in for many years to come.

If we wait and try to get something in year or two, then we run the risk of losing this place, which would suck because we both really like it.

Another thing for me to consider is that I already do have a lot of money invested in stocks and I have taken a hit on those accounts. Just a paper loss though because I have not sold them.

So, if I take money out of my stocks to pay for the Condo, then I am sustaining my losses on my stocks. They no longer are paper losses. Now they would become REAL.

My attorney says that I should wait another 2-3 years for my stocks to recover and for the real estate market to go down, then go out and buy something.

But last time I checked, he doesn't have a crystal ball, so I don't know what to do now.

I really now have two things to debate.

Do I buy in cash? AND Do I buy now or wait?

Lot's of things for me to think about here.

I just realized I never even told you CONGRATULATIONS! You're in a very enviable position! No matter what you decide you will be sitting pretty. Great job.

 

[BuffaloBill]

I just realized I never even told you CONGRATULATIONS! You're in a very enviable position! No matter what you decide you will be sitting pretty. Great job.

Thanks Glenn, I appreciate it.

I have a business that did REALLY well for a few years and I banked all of the money.

I honestly think I got a little lucky, because things have really slowed down now.

Yes, I am fortunate to have made this money, but I still don't want to make a bad decision from here.

I guess if I choose to pay it off in cash, or if I decide to take a mortgage, or at least a partial mortgage, then I will probably be okay either way. There are advantages to both.

I think more of what my concern is now, is do I buy now?

I am wondering if I should wait another year or two and see if this real estate market crashes even more.

Still contemplating what to do.

Thanks again Glenn, and to everyone else who has responded.

 

[DOGS THAT BARK]

DTB,

One of my many, many downfalls is that I often can't explain myself for shite. My apologies if it took me 3 months to get my point across. Where it may take someone else one post to get their thoughts out, it may take me 5. :142smilie

And you're absolutely right. If you recently took out a HELOC on a home that you had paid off and bought stocks with it, you're almost assuredly down right now. But this goes back to my point of looking at things long-term. You may be down right now, but will you still be down 5-10 years from now?

And this may be another topic altogether, but I've never been a big fan of HELOCs because of the higher interest rates. If I was fortunate enough to have my house paid off and wanted to put money in the market, I think I would just wait until I had the money saved up rather than take out a loan to do so. It may be a quirk of mine, but I have a much easier time accepting interest payments on a mortgage than I do paying interest on a loan for stocks (if that makes any sense).

I'm no investment guru either, not by a long shot. And I completely agree with you that you should limit risk as much as possible.

In case you couldn't tell, I could talk about this stuff all day. I really am that much of a dork.

I think you had some very good points Glen--
and 80% or more of time you would come out financialy better off--I'm just conservative by nature and all depends on individuals risk tolerance--and their priorities--is no right or wrong answer that would fit everyone.

 

[Glenn Quagmire]

Thanks Glenn, I appreciate it.

I have a business that did REALLY well for a few years and I banked all of the money.

I honestly think I got a little lucky, because things have really slowed down now.

Yes, I am fortunate to have made this money, but I still don't want to make a bad decision from here.

I guess if I choose to pay it off in cash, or if I decide to take a mortgage, or at least a partial mortgage, then I will probably be okay either way. There are advantages to both.

I think more of what my concern is now, is do I buy now?

I am wondering if I should wait another year or two and see if this real estate market crashes even more.

Still contemplating what to do.

Thanks again Glenn, and to everyone else who has responded.

Let me start by saying I'm certainly no expert when it comes to predicting the future of the real estate market, but if I had to guess I would say that home prices will stay at the same level or decrease for another year, if not more.

However, having said that, I think where you live plays a big role. A lot of people tend to focus on the national real estate market, but what matters most is where you live. A good example... I live in the Seattle area and home prices are only down roughly 4%. So far we have been fortunate and haven't felt it too much. On the other hand, I have a friend who just moved up from Florida, and she lost 30% on her house. So that's a totally different perspective.

Again, that's nothing more than my opinion. I could be way off. I believe you mentioned earlier that you have a real estate attorney? He would probably have some pretty good ideas about the future of the market.

GL

 

[Glenn Quagmire]

I think you had some very good points Glen--
and 80% or more of time you would come out financialy better off--I'm just conservative by nature and all depends on individuals risk tolerance--and their priorities--is no right or wrong answer that would fit everyone.

Completely agree. I know successful people who got that way by taking huge risks, and I also know others who have done quite well for themselves playing it conservatively.

 

[BuffaloBill]

Let me start by saying I'm certainly no expert when it comes to predicting the future of the real estate market, but if I had to guess I would say that home prices will stay at the same level or decrease for another year, if not more.

However, having said that, I think where you live plays a big role. A lot of people tend to focus on the national real estate market, but what matters most is where you live. A good example... I live in the Seattle area and home prices are only down roughly 4%. So far we have been fortunate and haven't felt it too much. On the other hand, I have a friend who just moved up from Florida, and she lost 30% on her house. So that's a totally different perspective.

Again, that's nothing more than my opinion. I could be way off. I believe you mentioned earlier that you have a real estate attorney? He would probably have some pretty good ideas about the future of the market.

GL

My real estate attorney is telling me to wait a few years to buy something.

I am located just outside of New York City, and he thinks things are going to crash here within a year ot two.

However, that is his opinion. He doesn't know much more than me and you. This is what he thinks will happen.

The problem I am having is this. My wife and I have found a Condo now that we really love. Up until now, prices on Condo's in NYC and just outside have not declined at all.

Also, if I buy now I am taking money out of the stock market and therefore I am taking a loss on a lot of those stocks I will be selling.

So, I can either leave my money in the stock market and continue to rent (which is what we do now), and then lose the apartment and wait a few years to see what happens.

Or, I can buy the Condo now and take my money out of the stock market to pay for it, and I will have to eat the loss on those stocks.

It seems like either way I am taking a chance.

Tough decision for me.

 

[maverick2112]

Great post. I think one of the biggest reasons people don't become wealthy is because we, as a society, are taught that ALL debt is bad and we must get rid of it if possible. As you mentioned, mortgage debt is GOOD debt and it makes perfect sense to leverage the equity in your home by buying investment properties.

It never ceases to amaze me how many people sell their first house when they buy their second, and so on, and so on, and so on. Probably the biggest financial mistake they will make. IMO you can achieve great wealth if you just hold your previous homes and rent them out, rather than selling them outright. Having multiple homes appreciate in value is much better than one.

Good Debt............Tell that to the people who bought 300,000 homes that have decreased in value 40%........

Now they owe 300,000 mortgage on a 180,000 home that is still decreasing by the day........

All this financing works great when things are appreciating but when the decline comes........WATCH OUT!!!


The best answer may be to not buy at all right now and just wait until the market bottoms out and buy the same house you are looking at now for a discounted price of 25% of todays value......