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Old 05-02-2015, 12:30 PM
 
304 posts, read 285,927 times
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Quote:
Originally Posted by math_p View Post
Hi,

I wanted to make sure that I have my bases covered before purchasing a home. I was considering buying a 8 yr old 420K home in Cary with 8k/month gross salary. My thp is 4500/month. I have enough money to make 20% down payment and enough savings after downpayment to cover for 2 years of mortgage. My monthly debt is a car loan of 500$. My question is will I be able to afford this home with just my income, assuming we have my wife's savings/monthly earnings to fall back on?

I am planning to take a 7/1 ARM or a 5/5 ARM to lower my monthly mortgage payments considering I do not wish to stay in this house for more than 10 years.

Any recommendations on mortgage lenders ?

Thanks

First, I'm not sure why your take home pay is only 56% of your total pay, unless maybe you're putting sizeable amounts into 401k (a good thing), or getting fleeced by employer benefit cost scams (a not so good thing), but using $4500/month as a starting point I would probably strive for a total mortgage+insurance+property tax+HOA dues etc. payment of $1500 or under if you are going to be the only breadwinner responsible for the mortgage. I think you're saying you've got $40-50k in savings to fall back on which is a good thing, but it wouldn't last long if you were completely out of work, trying to feed kids on it, etc.

It really depends on your situation (things only you know) and your own ability to manage risk. Do you need a $400k+ house? If the thought process is higher price = more equity later, I can tell you that is NOT usually how it works.

As far as the simple answer -- I think the bank would probably approve your loan based on what you've said, but I wouldn't accept the max prequalification number from a bank as how much I should spend on a home.

Buy only what you need -- any excess over and above some growing room for things like newborn kids or "acquisition of stuff" will just become a cleaning/maintenance burden later.
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Old 05-02-2015, 12:34 PM
 
Location: under the beautiful Carolina blue
15,780 posts, read 24,060,294 times
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Quote:
Originally Posted by pdocstr View Post
This can be a serious problem for folks who have said "we're going to sell in 10 years", but find that their timing coincides with some unfortunate market condition like a strong buyers market. .
Right - there are any number of reasons why "selling in X number of years" might not work out. First of all time has a way of speeding up as we get older Ten years go by in a flash. Second, you may just fall in love with your neighborhood, your location, your kids' schools, etc etc etc. You may not be making as much money in "X" number of years as you thought, and so on and so forth.
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Old 05-02-2015, 01:30 PM
 
Location: Near Falls Lake
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Can you afford it---probably, but keep in mind, "The best laid plans of mice and men often go arwy!" I have a financial rule:Live well below your means. At my advanced age, I can tell you with certainty, that circumstances will always change and generally at the most inopportune times. Can you do this mortgage and still save 15%-20% for retirement? I know plenty of people that have really nice houses but are in reality "house poor."
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Old 05-02-2015, 02:13 PM
 
2,401 posts, read 2,126,737 times
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Quote:
Originally Posted by carcrazy67 View Post
Can you afford it---probably, but keep in mind, "The best laid plans of mice and men often go arwy!" I have a financial rule:Live well below your means. At my advanced age, I can tell you with certainty, that circumstances will always change and generally at the most inopportune times. Can you do this mortgage and still save 15%-20% for retirement? I know plenty of people that have really nice houses but are in reality "house poor."
I'm certainly not saying it is unwise to live above your means, but I've always thought that if there was one place it was good to overspend, it would be on real estate leaving you house poor for a couple reasons.

1) You do tend to make more money later in your career than early in your career. Of course this is not always the case and you shouldn't count your chickens before the eggs hatch, but it is still a reality for many people in their career.

2) Real Estate tends to appreciate in value. For most middle-class Americans, a house is the investment where much of their net worth is being built through equity. Sure $2000 may be going out of your account every month, but even in the early stages of a mortgage, a decent percentage of it... maybe $400... is going right back to your bottom-line in home equity.

3) (Just for simplicity sake, let's assume we are dealing with a $400k mortgage vs a $200k mortgage with no down payment) Because real estate tends to appreciate in value, a $400,000 house is going to gain value more rapidly than a $200,000 house. If after 10 years, you have paid off 25% of the principal and the real estate has increased in value by 50% then on the $400k house, you'd owe $300k on a property now worth $600k. On the $200k house, you'd owe $150k on a house now worth $300k. The money doesn't just vanish into thin air. Of course your mortgage would be less on the cheaper house which might allow you to do other things like travel more, invest more somewhere else, etc. so it is impossible to say which would come out ahead but:

- The more expensive house probably means you are in a better neighborhood with better schools. Your neighbors are less likely to be unsavory. You will tend to encounter wealthier people on a day to day basis. etc. etc. This is all in addition to just having nicer finishes in your house or more square footage. It is impossible to measure all these benefits.

If at the end of the day my home investment was yielding me an 8% return, I would rather be house poor than be getting a 9 or 10% return in the stock market and not being house poor because my day to day life of where I live would be superior. To me, that counts for a lot.

Different strokes for different folks.
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Old 05-02-2015, 02:41 PM
 
304 posts, read 285,927 times
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Quote:
Originally Posted by steveklein View Post
I'm certainly not saying it is unwise to live above your means, but I've always thought that if there was one place it was good to overspend, it would be on real estate leaving you house poor for a couple reasons.

1) You do tend to make more money later in your career than early in your career. Of course this is not always the case and you shouldn't count your chickens before the eggs hatch, but it is still a reality for many people in their career.
This much is true for most people, so as an overall strategy I do think that buying a home at the upper end of what you can afford makes a lot more sense for someone just starting their career rather than later in life.

Quote:
Originally Posted by steveklein View Post
2) Real Estate tends to appreciate in value. For most middle-class Americans, a house is the investment where much of their net worth is being built through equity. Sure $2000 may be going out of your account every month, but even in the early stages of a mortgage, a decent percentage of it... maybe $400... is going right back to your bottom-line in home equity.
In general and over the very long term real estate tends to appreciate in value, but it is a highly illiquid investment! Liquidity of an investment is everything, and is why anyone informed about investing will tell you real estate is a horrible investment for most people, and if that is your goal or reasoning for buying a particular property, you are most likely making a huge mistake. Equity in a home does you very little good unless you can sell the home when you need to. Because none of us can control what happens to the economy or real estate market in a given area, buying property with some sort of plan that involves being confident you'll be able to sell it and recapture a certain level of appreciation is investment suicide.

Quote:
Originally Posted by steveklein View Post
3) (Just for simplicity sake, let's assume we are dealing with a $400k mortgage vs a $200k mortgage with no down payment) Because real estate tends to appreciate in value, a $400,000 house is going to gain value more rapidly than a $200,000 house.
One of the biggest myths out there. People think that homes appreciate at a flat rate. They rarely do, and I've observed this even more in this area.

I know folks who bought homes in the $500-600k range at the bottom of the market around 2009-2010, and those homes not only have not appreciated, in one case my friend had to take a $55k loss over what he paid six years ago to get the home sold. Meanwhile homes in the $300k range seem to have enjoyed 2-3% yearly appreciation during the same time period.

I can only speculate about the reasons for this. One possibility is that gigantic mcmansion type homes cost a lot more to change things/remodel, so that by the time someone has decided to spend $600k on a home, in their mind it better be perfect. Since they are buying into someone else's preferences, they might look at the kitchens or bathrooms and want to change this or that, and they know they are going to get higher quotes in a big house and upscale neighborhood, not to mention the larger spaces they need to renovate. So, they realize how much they would have to put into the home over and above the selling price, and the pinch has to occur somewhere so the selling price has to come down to move it. Smaller more modest homes are cheaper/easier to modify, generally cheaper to maintain, heat and cool etc, and people tend to be willing to live with things that aren't just perfect at the $200-300k level. Smart buyers will see that more square footage than they really need is just an ongoing cost liability.
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Old 05-02-2015, 03:10 PM
 
Location: My House
33,185 posts, read 26,975,804 times
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Quote:
Originally Posted by pdocstr View Post
This much is true for most people, so as an overall strategy I do think that buying a home at the upper end of what you can afford makes a lot more sense for someone just starting their career rather than later in life.



In general and over the very long term real estate tends to appreciate in value, but it is a highly illiquid investment! Liquidity of an investment is everything, and is why anyone informed about investing will tell you real estate is a horrible investment for most people, and if that is your goal or reasoning for buying a particular property, you are most likely making a huge mistake. Equity in a home does you very little good unless you can sell the home when you need to. Because none of us can control what happens to the economy or real estate market in a given area, buying property with some sort of plan that involves being confident you'll be able to sell it and recapture a certain level of appreciation is investment suicide.



One of the biggest myths out there. People think that homes appreciate at a flat rate. They rarely do, and I've observed this even more in this area.

I know folks who bought homes in the $500-600k range at the bottom of the market around 2009-2010, and those homes not only have not appreciated, in one case my friend had to take a $55k loss over what he paid six years ago to get the home sold. Meanwhile homes in the $300k range seem to have enjoyed 2-3% yearly appreciation during the same time period.

I can only speculate about the reasons for this. One possibility is that gigantic mcmansion type homes cost a lot more to change things/remodel, so that by the time someone has decided to spend $600k on a home, in their mind it better be perfect. Since they are buying into someone else's preferences, they might look at the kitchens or bathrooms and want to change this or that, and they know they are going to get higher quotes in a big house and upscale neighborhood, not to mention the larger spaces they need to renovate. So, they realize how much they would have to put into the home over and above the selling price, and the pinch has to occur somewhere so the selling price has to come down to move it. Smaller more modest homes are cheaper/easier to modify, generally cheaper to maintain, heat and cool etc, and people tend to be willing to live with things that aren't just perfect at the $200-300k level. Smart buyers will see that more square footage than they really need is just an ongoing cost liability.
In your example with the 600k home around here my guess is that there are still too many places to buy a new/practically new one, so people do expect perfection from a resale.

You can also buy a new home in a lower price bracket, but those aren't quite so easy to score in desirable areas and the trim levels aren't so high as to make reselling a lower-priced home harder. It's much easier as long as it's clean and reasonably maintained.

Once the area is fully built out, those higher-priced homes will rise at a more predictable rate.

Again, just a guess.
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Old 05-02-2015, 03:11 PM
 
Location: Oxxford Hunt, Cary NC
4,188 posts, read 9,828,153 times
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Quote:
Originally Posted by mjohnson185 View Post
Nope, you need to be looking at about $250,000 for a house.
My thoughts exactly!
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Old 05-02-2015, 05:55 PM
 
Location: Durham NC
1,126 posts, read 1,182,535 times
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Quote:
Originally Posted by Jkgourmet View Post
I agree with Under PSI. That said, don't do the ARM. Rates are at nearly historic lows on a fixed 30 year mortgage. Taking a risk to save so little is simply not worth it. One never knows what the future will bring. (PS When interest rates were higher, I had ARM's, so it's not like I hate them on principle.)

Lock in the 30.
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Old 05-02-2015, 05:58 PM
 
304 posts, read 285,927 times
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Quote:
Originally Posted by RedZin View Post
In your example with the 600k home around here my guess is that there are still too many places to buy a new/practically new one, so people do expect perfection from a resale.

You can also buy a new home in a lower price bracket, but those aren't quite so easy to score in desirable areas and the trim levels aren't so high as to make reselling a lower-priced home harder. It's much easier as long as it's clean and reasonably maintained.

Once the area is fully built out, those higher-priced homes will rise at a more predictable rate.

Again, just a guess.
In the particular case of the guy who lost $55k, it was not a new subdivision where homes were still being built, it was an older established area, so I'm not sure that an area being built out will necessarily solve this particular dilemma.

I suspect that what you've pointed out about being able to buy new may have something to do with it all.

For instance, someone who is moving from another area where $600k homes are the norm might have already decided they want to stay at that price point. This is potentially a mistake right off the bat, because they are assuming they will get the same kind of appreciation that they did in an area where $600k is the average home price. However, for that $600k they have A LOT of options around here. One of those options is to spend only $300k to have the same space and niceties that they had wherever they came from.

But, let's say they feel their money is best placed in property for whatever reason (and there can be "strategic reasons" for putting a lot of cash into a home, I know someone who did this as sort of a "prenuptual tactic"). For $600k they might be looking at larger place in a more established neighborhood with a good lot in a location they really want but they might feel compelled to put some money into changing some things, versus a new $400k for a smaller place with not as good lot or location, where they could select some of the features up front, and put the extra money elsewhere.

It's the economic principle of diminishing returns at work. There is tremendous value in something up to the point where it is a need (for example the need in this case is simply to have a home with enough space for the family in a safe neighborhood). Then there is a certain amount of value as the good enters "want" territory, but the value diminishes on a downward curve as the price goes up and the degree of "want" becomes more elastic (less of an actual need, more or less "let's do it for a feel good, keep up with the joneses thing"). Now, throw even a MINOR economic downturn into the picture, and that extra price that sits on the "want" part of the curve takes a massive nosedive. When the economy turns back around, the curve doesn't just snap back to where it was before the downturn.

Yes, the curve can do the exact opposite during run-away economic prosperity, the price premium in the "want" category can go nuts. But that is almost always "bubble" behavior, it usually crashes quickly after it starts, and causes the most devastation at the high end. The bubble effect can burst/end overnight, whereas recovering from bad economic events usually takes years or decades.

This is why a high end home is a terribly risky investment.

It happens with goods/services of all types, not just homes.
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Old 05-02-2015, 05:59 PM
 
304 posts, read 285,927 times
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Quote:
Originally Posted by lancers View Post
Lock in the 30.

Indeed! ARMs are for chumps right now.
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