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No, it gets rid of a silly, inefficient and dangerous incentive to buy more house than one can afford.
Hey, here's a concept. Some people can afford only a teeny tiny house. Instead of facilitating ownership of tiny homes people can afford, government prodded lenders to finance big houses borrowers couldn't afford.
Typically in high-cost areas it makes more financial sense to rent than to buy. In this case, buying becomes a lifestyle luxury that should really wait until one can afford it.
I am having a hard time believing that the non-mortgage ownership costs in a high-cost area would not total more than $400/month in your friend's case. Plus, you should include what he is paying back to his folks.
Except in many high COL areas rents are more than mortgages. In some areas, rentals are extremely difficult to come by. Supply vs demand. There were years when rents were low and you had your pick of apartments. Now, it's cheaper and easier to buy a house in some areas. It's different everywhere. There isn't a one size fits all answer. A shoebox in Manhattan goes for 2 grand a month. Roaches are free! A 3 bedroom apartment in a decent neighborhood there can set you back 3 or 4 mill....yeah know pocket change.
Low down-payment mortgages worked well for young, first-time borrowers with a strong work record and excellent credit. I was one (I bought my first house in 1985). I paid off my subprime mortgage with a prime mortgage and then paid that off too.
When low down payment is combined with low-doc, no-doc, bad credit, heavy non-mortgage debt, low-income, NINJA, etc. that is a recipe for disaster.
In case nobody has noticed, it's hard to save $100,000 when you're just starting in your career, you have young kids, and your spouse has quit her job to take care of them. (Where I live, $500,000 is a nice starter home, and $300,000 is absolutely rock bottom.) If you can't buy a house until you're in your 40s, you will be forever behind in equity building.
Our economy is not exactly family-friendly, fertility rates are WAY down, below 1930s levels, and low down-payment mortgages might help.
Why does anyone need a 3 bedroom home when they are 20 years old and single?
They don't, but when they're 30, with one child and soon to have another they do, and it'll take them at least ten years to save for it if 20% is required.
Point taken. However repairs are going to be necessary multiple times, the down payment only once on each home purchase.
But repairs totalling 20% would be ridiculous. That would be damage on the order of something insurance would cover (like a tree through part of the house, a fire or a badly burst pipe), and so unlikely that if you allowed yourself to be paralysed by it you'd never buy at all.
Quote:
Originally Posted by boxus
No one still has addressed; why 20%?
Stating a "line needs to be drawn somewhere" is not a reason, let alone a reason based on a a risk analysis or some other financial analysis.
My opinion is the amount of down payment that should be requested depends on several factors, like who is getting the loan, location of the home, historic market prices for the home/area, etc.
At least one person has already posted the reason, it's the breaking point where people are less likely to walk away and they don't need to insure against it any more.
Quote:
Originally Posted by rruff
The interest deduction is only for "rich" people. Don't you think it is weird that the cost of buying the same house is less for a wealthy person than a poor one?
I think the deduction is stupid. But, as an aside, it doesn't benefit certain rich people - if you pay a small enough amount of interest then it doesn't exceed the standard deduction so there's no overall benefit.
That's because home prices had a pretty consistent appreciation except in isolated areas and periods. It makes no sense to default if the house is worth more than you owe. In addition we haven't experienced an economic downturn nearly as severe as this since the great depression.
It also does not make sense to default if you can make the payments and need a roof over your head. People did not walk away from houses during the last recession because they were "underwater". They walked away because they couldn't make the payments, and because of the economic situation, couldn't sell their houses, either.
Quote:
Originally Posted by rruff
But... all of this low down, zero down baloney, does get paid for one way or another. It *is* a greater risk, and it's inflationary. Either the borrower pays for that or the public pays. 20% shouldn't be that hard to come up with.
Since zero down/low down payment mortgages have been around since the end of WW II, or 70+ years, and were never a problem before 2008, it seems likely that they were not the cause of the recession in 2008. Several other posters and I have explained the other factors that actually were causes of real estate collapse.
Now, why is 20% the magic number for a down payment? Why not 50%? Why allow mortgages at all if you're worried about inflation?
They don't, but when they're 30, with one child and soon to have another they do, and it'll take them at least ten years to save for it if 20% is required.
Why will it take them 10 years beginning at 30 if they could have started at 20 (or 22, or 24 since 20 year olds are often in college and not earning well yet)?
I am a single woman who raised my kids on my own while working full-time at lower wage jobs. However, I have a credit score in the low 800's because I am very conscientious about paying my bills and obligations and sticking to a tight budget (this is one reason for my divorce, our ideas about living within our means did not mesh).
My children are now grown and I own my 6th home. Had it not been for programs that DID NOT require a large down payment, I would never have been a homeowner. It is very hard for people to save in this economy with wages at the middle to lower level workforce being so stagnant, and the cost of basic living expenses ever increasing. However, I never received any or my loans without my credit history being verified and the lender in each case checked my income, employment, and debt ratio extensively. The idea of just giving mortgage to anyone with a pulse is asinine. But the reality is, the economy has NOT recovered for large numbers of lower to middle class working people; that is why the rates have not gone up, and why they are starting to loosen some restrictions. Otherwise, they leave out a large group of possible home purchasers for small to very modest homes.
Wow. This one really "tugs the heart strings" if you will. Being a single parent has always been tough (as has being a child with only one parent).
I'm curious to know, then, how you think it should be approached to avoid the problem of negative equity? I do think there is a huge problem with the broken child support system in America and no one decent wants to hurt disadvantaged single parents.
I'm open to suggestions. If it were up to me, I'd think a better idea would be a flexible mortgage that would allow 20% of the balance to remain unpaid when selling the house.
The interest deduction is only for "rich" people. Don't you think it is weird that the cost of buying the same house is less for a wealthy person than a poor one?
That's the myth but it's not true. I've taken the mortgage interest deduction every year since I purchased my house. Between interest, real estate taxes, state taxes, and charitable contributions, my itemized deductions are always more than the standard deduction -- and my original mortgage was well under $100k. It's likely that people who have uninsured medical bills and/or who have to buy private medical insurance have exceed the standard deduction as well.
Stating a "line needs to be drawn somewhere" is not a reason, let alone a reason based on a a risk analysis or some other financial analysis.
My opinion is the amount of down payment that should be requested depends on several factors, like who is getting the loan, location of the home, historic market prices for the home/area, etc.
I would agree, however, this would make the mortgage underwriting process even more complicated than it already is. The advantage of a general rule is that it limits the number of documents and assessments involved in getting the loan.
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