How Do People Afford Mortages? (home loan, fixed rate, score, 30 year)

[DanielChang]

It's easy to blame society and the rich for inflating home prices, but the fact is, homeownership has always been just barely within reach for the middle class.

For most, saving up a downpayment requires YEARS of disciplined savings, wise investing, and catching some lucky breaks. It is neither naive nor disingenuous to say that for the vast majority, saving toward a purchase of a house requires making considerable sacrifice in other areas. One is not simply able to save for 1 year and save up 40k. It is not a sprint, it is akin to a marathon.

An extra $400 a month, is $4800 a year. If you were to continue investing a $400 a month in a moderate-risk investment vehicle (perhaps 8% returns), at the end of 8 years, that extra $400 a month would grow to a whopping $50,358 (figuring paying 25% in income taxes on the growth).

Obviously there are cases on the fringes (the extreme poor, disabled and indigent) I agree that many are not able to come up with a significant down payment--but I would challenge that for the average person, it is not lack of sufficient income, but lack of sustained financial discipline.

[DasNootz]

If saving up 20% only required one year, why wouldn't people wait five years and pay cash?

I'm a firm believer in priorties and goals. I'm under 30 years old, so I can't say what it was like the 70's and before, and perhaps the middle class is stretched now more than ever. However, if your job can't afford your desired lifestyle it's either time to work on getting a new job or changing your lifestyle and/or location. I realize that many people are strapped, and that "cutting back on Starbucks" seems like non-sympathetic advice destined for other people. When easy tips like these aren't an option it's time to make a choice.

The choices aren't always easy but you do have choices.

Do you stay where you are, where your occupation can't support the lifestyle you want because of high taxes and housing prices?

Do you move to an area where the housing prices are less, but you may earn less too?

If you stay, do you take a second job?

Why do you "need" to own in the first place? If housing prices are so far out of whack with local wages, does it make more fiscal sense to rent? If rental rates are lower, it may be better to rent and invest in an alternative investment. Afterall... homeownership is an investment.

Homeownership is great, but aside from the warm and fuzzy feeling of knowing you can paint what you want when you want to, it can also be a pain the butt and the wallet.

[GeminiGal]

Originally Posted by hindsight2020

The reality is that you either have to make six figures (5% percentile of the population) or get into the mortgaging of relationships scheme we call "two-income household America".

A couple of years back there was alot of talk about the "double income trap". It seemed to have been swept under the rug, and those two income families said that's the only way they could "survive".

In light of what has gone on recently with the enormous amount of debt American consumers seem to be taking on, there is no way that many of these families could now survive on one income.

I stopped working many years ago. I look at my family finances and feel comfortable with the way I am spending and saving for present day and future. For the life of me, I am scared that our economy is going to implode if we don't get a grip on consumer spending. I admit I constantly compare myself to others in a financial sense, but it is solely for a "reality check" on my part and that I am doing all that I can to prevent failure.

I believe that the "trap" is real and families have gotten hooked into a lifestyle that they can't get out of.

[eggalegga]

I didn't buy my first home until I was 31. I graduated with a bachelors degree then worked and tried to save money while renting. Yeah, right. That didn't work. The only debt I had was credit card debt, no student loans. I got an FHA mortgage since I was a first time home buyer and only needed to come up with 3% down. I live in a twin home which is somewhat like a duplex but I have my own yard, driveway and garage. I only have one common wall and I really like my neighbors. My neighborhood was developed as condominiums so I have lower property taxes (about $850 year) and luckily, I have no HOA dues/fees. I have a 1500 sq foot home with a good sized fenced, back yard. I have found that typically, the most expensive part of a house is the dirt it sits on. So buy a home with a small amount of dirt if you want to save money.

I do like that you've budgeted money for your 401k. A lot of twenty somethings don't do that. They want the money now.

[b75]

Honestly? Most people I know had parents that gave them a sizable down payment for their first home. And these are people who are lawyers, Drs. etc; not exactly lazy kids working dead end jobs. It was the only way they could afford to buy. Those that didn't have family in that situation either accrued massive debt/poor credit, live hand to mouth or just don't get to buy a house when, if they lived in a previous generation they would have been more than capable.

My parents are probably going to do the same for me and it actually upsets me a lot. I tried to save enough, but despite all my years of hard work, lack of vacations and avoidance of debt, it isn't going to happen. I feel horrible about that, but many others accept it as a way of life.

[WestCobb]

Originally Posted by jaindow

My concern with the current American economy and the current real estate market in my local area is that home appreciation will not compare to what it did in past years or the past decade, etc. So I am not convinced yet that first time buyers today will have as much luck trading up in the future as other had in the past.

My sister bought her house in the early 90s in southern California. She had the same concern. It's hard not to project the present into the future. During that housing bust / recession, she had very real concerns about her $80,000 purchase. During the heighth of the boom, houses in her neighborhood was just touching $400,000. I'm sure when this market hits rock bottom, she'll still be way ahead. You should buy when it makes sense for you to buy rather than trying to time the market.

[hindsight2020]

Originally Posted by b75

Honestly? Most people I know had parents that gave them a sizable down payment for their first home. And these are people who are lawyers, Drs. etc; not exactly lazy kids working dead end jobs. It was the only way they could afford to buy. Those that didn't have family in that situation either accrued massive debt/poor credit, live hand to mouth or just don't get to buy a house when, if they lived in a previous generation they would have been more than capable.

My parents are probably going to do the same for me and it actually upsets me a lot. I tried to save enough, but despite all my years of hard work, lack of vacations and avoidance of debt, it isn't going to happen. I feel horrible about that, but many others accept it as a way of life.

Bingo! That has been our observations as well. We are college graduates and both work full-time jobs, yet our respective families do not have the kind of wealth to hand us down payments and wedding cost funds. My fiancé is going to attend one of her girlfriend's wedding (wedding is all expenses paid by the family, including Sands Jamaica honeymoon package paid for) and the story is exactly as you describe it. A semester from graduation of college, already landing a house. We do the math at home and quickly realize that for the payments these folks are saying they'll make on said house, there is a HUGE downpayment they don't speak about that's been provided by the parents. It wouldn't burn me if it wasn't for the fact that she tells my fiance "WE are buying a house" as if she actually had gone through the sacrificies of coming up with that money on top of her free 40K wedding, while we are currently going through no help just to afford our own modest wedding (<10K budget), let alone effectively pospone any kind of home ownership for a good decade. The more our co-workers and friends get into the marriage train the more we've found out it's almost a commonality to get a house down payment as some sort of wedding present, not to mention everybody I ask at work tells me they had their weddings paid for by their folks. So we are certainly turning into quite a European society, with children living at home almost into the 30s (who blames them with our cost of living and currency devaluation) and wealth building based on inheritance and family subsidy rather than one's individual income ability. And like the poster said, it's not just trust fund babies and lazy brats, it's college educated folks with professional jobs and otherwise good work ethic. My personal experience at least tells me these folks are the majority among young working professionals. Woe is me aside, it'd be a fairly good position to find oneself in.

[DasNootz]

I know what you're going through. My wife and I paid for the vast majority of our wedding and saved for our first home downpayment. I was fortunate to buy an under valued investment property right out of college (in 2002), where I could live virtually rent free while my tenant paid the mortgage (and I paid the taxes and insurance). After finishing grad school, my wife lived at home for two years while we both saved and saved and saved.

In hindsight I think it made us both more fiscally responsible.. but it was an annoyance seeing friends live it up, thus proving that life isn't always fair.

Some advice for the wedding (not to hijack this post)... don't worry about anything but having an open bar. That will make up for "subpar" food, flowers, decorations etc. People remember the good time they had at your wedding, not what the meal was. We also used a website for our honeymoon that allowed people to give us cash, but it represented activities that we would do on our honeymoon... IE someone would give us $50 that was the price of snorkeling. It really cut down on our honeymoon expense, and people felt like they were giving something more thoughtful than money.

[islandFever]

[quote=orrmobl;2949004]...we paid $71,500 for that house... I stay home with the kids and we sold the place last year for $144,500! And we essentially doubled our money...we surely put less than $10k into the place over the years... that money we paid off my new/used $21K car and walked away with $40 sum thousand dollars to put on the next place...

Now had we bought a little better of a house we could've made more in appreciation...QUOTE]

Be careful here. Financially, on a net basis, did you really make money on the first house?

Let's say there is a Ferrari and a Lexus for sale today; and they both are for sale at $1000. I bought the Ferrari. The next day, the Ferrari and Lexus are now valued at $2000 each. I'm tired of the Ferrari, I sell it at $2000 for a $1000 profit ($2000 selling price - $1000 purchase price = $1000 profit). However, I turn around and buy the Lexus at its current market value of $2000. Do you see that I really didn't make money?

So, if you bought a house that appreciated 100%, sold it, then bought another home in the local area that also went up 100% in the same time frame, you really didn't make a gain.

[orrmobl]

Originally Posted by jaindow

My concern with the current American economy and the current real estate market in my local area is that home appreciation will not compare to what it did in past years or the past decade, etc. So I am not convinced yet that first time buyers today will have as much luck trading up in the future as other had in the past.

Once prices drop back to 2003-4 levels, homes will begin their approx 2% yearly increase once again.

But you buy because you need a place to live and want a house, not as an investment vehicle, as the current mortgage meltdown shows.