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Old 07-02-2018, 12:54 PM
 
37,855 posts, read 14,739,896 times
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Homes in estate can be often be great buys.

With fond memories of growing up in the neighborhood and after looking at comps with updated kitchens and maintenance that hasn't been deferred, heirs often overprice.

After paying the utilities, taxes, and insurance for 6 months or so, they are often in a mood to be more reasonable.

However, by this time, the listing is stale and sometimes there is even damage from the house being empty.

A dear friend has brought several homes this way. Any major repairs such as the roof, furnace, foundation, plumbing, or electrical issues are worked out before the sale. Afterwards, she is painting, redoing floors, replacing kitchen/bathroom cabinets.

But you are perfectly free to live in an outdated house.

Whereas buying and living in a dilapidated home can get depressing, can be hard to rent, and could result in some major unexpected repair costs.
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Old 07-06-2018, 07:21 AM
 
3,460 posts, read 2,179,101 times
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Nothing wrong with having a mortgage. It is stupid to tie up your own money in real estate these days, get a mortgage and enjoy the tax benefits. Remember, simply having no mortgage doesn't mean you don't have a monthly payment for property taxes and if you are smart include home owner's insurance in that too.

I don't know why people get these self-created obstacles in life in their brain by creating rules like they don't want to have a mortgage.

Get a mortgage and take whatever money you were going to use to pay for the entire home and invest in long-term with the help of a good financial advisor.

I've had numerous conversations over the years about this with accountants and they all agree to get a mortgage. Especially now with low interest rates.
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Old 07-06-2018, 07:54 AM
 
Location: Up North
3,614 posts, read 969,263 times
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Quote:
Originally Posted by eastcoastguyz View Post
Nothing wrong with having a mortgage. It is stupid to tie up your own money in real estate these days, get a mortgage and enjoy the tax benefits. Remember, simply having no mortgage doesn't mean you don't have a monthly payment for property taxes and if you are smart include home owner's insurance in that too.

I don't know why people get these self-created obstacles in life in their brain by creating rules like they don't want to have a mortgage.

Get a mortgage and take whatever money you were going to use to pay for the entire home and invest in long-term with the help of a good financial advisor.

I've had numerous conversations over the years about this with accountants and they all agree to get a mortgage. Especially now with low interest rates.
It's good advice.


So for example, even if I have $80K at my disposal, you would advise to pay half (or slightly more) on the down payment, and then build up my credit with the rest mortgaged?
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Old 07-06-2018, 10:49 AM
 
1,664 posts, read 793,691 times
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Quote:
Originally Posted by Kavalier View Post
It's good advice.


So for example, even if I have $80K at my disposal, you would advise to pay half (or slightly more) on the down payment, and then build up my credit with the rest mortgaged?
OK - I'm glad you're finally starting to see the light a little here.

Putting 40K down on a 100K property will get you a functioning home that you can possibly do some slight improvements to easily and have a decent place to live with a mortgage payment of around $500/mo with taxes and insurance rolled in. Assuming you have Full-time employment and half-decent credit, you're set.

Renting a room out will also help defray those costs, heck, you might be able to cover the mortgage and just pay utilities - although I have no idea what the local market there is like for this. If you've got a college nearby, those grad students are great tenants.

You'll have to maintain the property though, so decide if owning is really something for you.
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Old 07-06-2018, 04:00 PM
 
3,460 posts, read 2,179,101 times
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Quote:
Originally Posted by Kavalier View Post
It's good advice.


So for example, even if I have $80K at my disposal, you would advise to pay half (or slightly more) on the down payment, and then build up my credit with the rest mortgaged?
In 2018 for someone buying a home as a primary residence, this is what I recommend. You have to adjust this according to your other financial obligations and such. But in general, you should only need 20% down for a mortgage. The mortgage companies require it, and you want that to avoid paying PMI (Private Mortgage Insurance) which is an added cost if your equity in the home is less than 80%. Assuming you could find a 5% or 10% loan, you'd have to pay PMI. Or they might require it even with 20% if you don't have great credit.

Let's keep the math simple. You want to buy a home for $100K. You put down 20%, which is $20K. Get a 15 or 30 year fixed mortgage loan. The monthly payment is going to be higher with a 15 year, but if you think you can afford to do it. If not, don't sweat it, get a 30 year fixed mortgage. Avoid those adjustable rate mortgages or anything where the terms of the loan can change, you don't want that.

Now you have money in the bank, a long-term fixed mortgage at a low interest rate and a house. Each month you pay into a mortgage, more goes towards the principal balance and less of it is interest. The interest is tax-deductible and so is the property-tax. There might be limits for this, but there is a tax advantage to having a mortgage still. That's the problem with renting, you are still being "charged" for the property taxes from the landlord, but you can't take a deduction for it because you don't own it.

Hope this was helpful.
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Old 07-06-2018, 04:11 PM
 
Location: Up North
3,614 posts, read 969,263 times
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Quote:
Originally Posted by eastcoastguyz View Post
In 2018 for someone buying a home as a primary residence, this is what I recommend. You have to adjust this according to your other financial obligations and such. But in general, you should only need 20% down for a mortgage. The mortgage companies require it, and you want that to avoid paying PMI (Private Mortgage Insurance) which is an added cost if your equity in the home is less than 80%. Assuming you could find a 5% or 10% loan, you'd have to pay PMI. Or they might require it even with 20% if you don't have great credit.

Let's keep the math simple. You want to buy a home for $100K. You put down 20%, which is $20K. Get a 15 or 30 year fixed mortgage loan. The monthly payment is going to be higher with a 15 year, but if you think you can afford to do it. If not, don't sweat it, get a 30 year fixed mortgage. Avoid those adjustable rate mortgages or anything where the terms of the loan can change, you don't want that.

Now you have money in the bank, a long-term fixed mortgage at a low interest rate and a house. Each month you pay into a mortgage, more goes towards the principal balance and less of it is interest. The interest is tax-deductible and so is the property-tax. There might be limits for this, but there is a tax advantage to having a mortgage still. That's the problem with renting, you are still being "charged" for the property taxes from the landlord, but you can't take a deduction for it because you don't own it.

Hope this was helpful.
My "middle" credit score was 790.
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Old 07-07-2018, 02:42 PM
 
Location: North Idaho
22,505 posts, read 28,404,027 times
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Quote:
Originally Posted by eastcoastguyz View Post
......hope this was helpful.

You are aware that the OP is very unlikely to hold a job that pays enough to make a mortgage payment? You aren't doing him any favors by trying to talk him into taking out a big mortgage.

Horses for courses. You need to be aware of whom you are making financial recomendation to. That might be good advice for someone else but not for the person you are currently trying to persuade to take on a large debt.
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Old 07-07-2018, 03:33 PM
 
Location: Up North
3,614 posts, read 969,263 times
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Quote:
Originally Posted by oregonwoodsmoke View Post
You are aware that the OP is very unlikely to hold a job that pays enough to make a mortgage payment? You aren't doing him any favors by trying to talk him into taking out a big mortgage.

Horses for courses. You need to be aware of whom you are making financial recomendation to. That might be good advice for someone else but not for the person you are currently trying to persuade to take on a large debt.
Right this second? Yes.

But I can get put on full time by my supervisor probably @ around $16-17/hr by the end of the month, if I follow through on his offer.

Would that be enough for a penny pincher who already has over $100k in assets?

I think I can make things work, especially with a couple renters waiting in the wings.

The question is IF I want to make that work.
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Old 07-07-2018, 04:13 PM
 
Location: Western Washington
8,848 posts, read 8,328,137 times
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Quote:
Originally Posted by Kavalier View Post
Right this second? Yes.

But I can get put on full time by my supervisor probably @ around $16-17/hr by the end of the month, if I follow through on his offer.

Would that be enough for a penny pincher who already has over $100k in assets?

I think I can make things work, especially with a couple renters waiting in the wings.

The question is IF I want to make that work.
Then wait to purchase until you get that FT position. Mortgage banks are going to want to see a few months of documented income as well, plus a couple of years of tax returns.

The mortgage interest deduction is a mixed blessing. People look at it as if they are simply saving money on taxes, but that is only half the story. In reality, you are spending money on interest in order to save on taxes, and you are spending about 3x as much on interest as you save on taxes. At best. In your case you will save much less.

It’s a tricky bit of math. Let’s look at a $100k house, you put down 20%, leaving you with an $80,000 mortgage.

In one year you will pay about $4,000 in interest, which will save you $480 in taxes based on the tax rate for an income of $34,000. That is if, and only if, you itemize taxes, which is only worthwhile for you if the itemized deductions are greater than $12,000. To realize the full savings of $480, you would need to have deductions of $16,000 (standard plus the delta allowing you to deduct mortgage interest).

It is really unlikely that you will be able to come up with $16,000 in deductions on a $34,000 income.

One nice thing about having a mortgage is that you have a leveraged asset. You only own 20% of it, but if you sell you get to claim 100% of the profit. Or the loss, going back to the negative equity days of 2008.

Again, the math:

If you are in a typical area, your house will appreciate at about the rate of inflation. Let’s assume that is 3%. That means that after a year, your house is worth $103,000.

So you have paid:

$20,0000 (down payment)
$4,000 (interest)
$1,200 (principle reduction)
$2,000 (wild guess at real estate taxes)
————
$27,200 (this drops to $26,800 if you can deduct interest).

So your equity is now

$24,200 (down payment, plus principle paid, plus increase in house cost).

In other words, it cost you $7,200 to make $4,200. If you sell after one year, remember to take off 6% of the gross for realtor fees.

I am ignoring a few things. I am ingnoring homeowners insurance, assuming you have renters insurance. I am ignoring utilities, assuming you have to pay them now. I am ignoring any rent payments you make, which makes the financial calculation a bit better. I am also ignoring the opportunity cost on your donpayment money. Could you have earned more if you kept it in the stock market?

Bottom line, my point is that for the numbers you are discussing, with your modest, yet to be realized income, the mortgage interest deduction isn’t going to help you. It becomes significant for higher income earners with larger mortgages and higher marginal tax rates. It doesn’t really help people at the low end of the market with incomes less than the median.

Last edited by fishbrains; 07-07-2018 at 04:39 PM..
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Old 07-07-2018, 04:38 PM
 
Location: Western Washington
8,848 posts, read 8,328,137 times
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Here is an attempt to include rent and opportunity costs.

Quote:
Originally Posted by fishbrains View Post

It’s a tricky bit of math. Let’s look at a $100k house, you put down 20%, leaving you with an $80,000 mortgage.

If you are in a typical area, your house will appreciate at about the rate of inflation. Let’s assume that is 3%. That means that after a year, your house is worth $103,000.

So you have paid:

$20,0000 (down payment)
$4,000 (interest)
$1,200 (principle reduction)
$2,000 (wild guess at real estate taxes)
-$7,800 (rent you don’t have to pay at $650/ month. Again, a guess).
$1,600 (money you could have made by investing in the stock market at historical average return of 8%).
————
$21,000 (this drops to $20,600 if you can deduct interest).

So your equity is now

$24,200 (down payment, plus principle paid, plus increase in house cost).
Under this more complete scenario, you spent $1,000 to gain $4,200 in equity. Not bad return on investment. Hold onto that house for a few years and it starts to look better, because your mortgage is fixed, while your hypothetical rent would have increased.

Year 2 looks like this:

$3,900 (interest)
$1,200 (principle reduction)
$2,050 (real estate taxes go up a bit)
-$8,200 (your rent would have gone up a bit too)
$1,700 (opportunity cost compounded)
————
$650

But your house is now worth $106,100

Your equity is:

$24,200 (carryover from year 1)
$3100 (inflationary increase on house cost)
$1,200 (paydown of mortgage)

—————
$28,500

Once again, you spend a small amount $650, to realize a larger amount of equity increase. $4,300

It is important to note that this assumes you keep the house in decent repair. You are going to have to spend money on paint, occasional carpets, and replacing water heaters and roof. If you simply live in the house and let it fall down around you, you will wing up losing everything.

The other important thing is that in the scenario I have laid out, the benefit is from housing prices rising, not from mortgage interest deduction, which I don’t think you qualify for. If you purchase in a stagnant area, it probably isn’t worth it to buy.

Last edited by fishbrains; 07-07-2018 at 04:50 PM..
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