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Additional financial consideration is if you are currently renting, continue to rent over the next 2 years, estimate rent $2K/month x 24 months = $48K. Nothing to deduct on taxes.
Where do you live that a house that sells for $300K rents for 2000 a month?
The post you replied to was talking about payments on a $250K-$300K house. You're using the rent on a $550K house to show that it's better to buy. Don't you think the quarter of a million price difference changes the rent-vs-buy calculation a bit?
So, it costs an additional $1674 per month to purchase this house than it does to rent it! This doesn't even account for the fact that you had to put down $50k that was invested and earning you interest. Even if you only had that $50k in a CD at 5% it was still bringing in over $200 per month of income.
Thus, if one chooses to rent, in this scenario, they would still have $50k in the bank and would have a net savings of $1874 per month that they could reinvest.
So, which method will help you accumulate wealth faster? Having an extra $1874 per month to invest or sinking it into a house that is currently falling in value?
I haven't rented in a really long time, but something seems off if you can rent a house for 50% of what the mortgage payment would be. In my price range, a typical mortgage payment is $1200/month - looking at Craigslist, I'd be hard-pressed to find a similarly sized house for the same monthly amount, let alone $600/month.
In your scenario you talk about having $30M down payment. I believe you should also increase that $30M by $1M to $31M to account for interest you can earn on that money for 1 year. Though not much, that difference should be taken into account.
The biggest savings, however, will occur when you can get to 20% down to avoid PMI. That will be your biggest savings.
In my scenarios I will assume you can earn 3% in the bank on your down payment money per year. I will also assume RE values decreasing 10% per year for the next 2 years, which is pretty consistent with many analyst predictions.
$211M loan @ 7% =$1,404/mth +PMI (I think this scenario is more likely than 8%)
If you are able to get to 20% down, you will save $100-150/month in PMI, which is huge.
I think rates will remain around 6-7% but have gone up to 7 and 8 percent to be conservative. Basically, you are better off if you can get more down to get to 20% down.
Location: central, between Pepe's Tacos and Roberto's
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Quote:
Originally Posted by Humboldt1
Daddys/M3,
In your scenario you talk about having $30M down payment. I believe you should also increase that $30M by $1M to $31M to account for interest you can earn on that money for 1 year. Though not much, that difference should be taken into account.
The biggest savings, however, will occur when you can get to 20% down to avoid PMI. That will be your biggest savings.
In my scenarios I will assume you can earn 3% in the bank on your down payment money per year. I will also assume RE values decreasing 10% per year for the next 2 years, which is pretty consistent with many analyst predictions.
$211M loan @ 7% =$1,404/mth +PMI (I think this scenario is more likely than 8%)
If you are able to get to 20% down, you will save $100-150/month in PMI, which is huge.
I think rates will remain around 6-7% but have gone up to 7 and 8 percent to be conservative. Basically, you are better off if you can get more down to get to 20% down.
I certainly agree with your points. The problem with my numbers as well as yours is that they are based on assumption. As we cannot know what the future holds then we can only assume. However, consider the fact that the spread between mortgage rates and the fed funds and discount rates is growing larger every day, presumably to recapture some of the loss from the writedowns. If the fed continues to drop the rates then although the mortgage rates will stay the same (banks gotta recoup, right?), return on investments will shrink and the dollar that was invested will weaken even further.
On the other hand, if the fed starts to raise rates to fight inflation, the spread will need to remain the same for these banks to generate revenue. If the spread is currently 3.25% (fed funds is 2.25%) then I would expect to see an average of 9.5-10% mortgage rates if rates are raised to where they were in 2001.
That being said, there is no single correct answer. Everyones situation is different and calls for different action and response. A thread like this is good though. I think it offers great discussion from both sides of the fence, allowing readers to actually educate themselves on all possible outcomes as opposed to listening to someone who really doesn't know or has an agenda.
My husband and I are waiting to buy. One year ago we could not afford a house in our area (central CA). Now we can afford a house, but not in the area we would like to live. We figure if we wait a few months to a year longer the area we want to live in will be affordable. Real estate prices in our area went up 167 % from 2001-2007. In no way can those prices be sustained. Not if you consider the median income. We expect another 20-40 % decrease in prices. So we will wait.
I should say we can afford a house in our area, but not in the NEIGHBORHOOD we'd like to live in.
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Daddys/M3
