Buying a house later this year (hopefully)
#41
OH, one more thing I did before I closed the deal on my house... I asked the sellers for copies of all their utility bills from the previous year. That way I was able to really pin down my budget for Year One.
When you get tired of the first house you rent, then try to find one that is closer to what you want, and then rent that house for a little while. Owning a home can be a money pit. You save a lot of money renting.
RENT until you know exactly what you want, and save money for a down payment while renting. DON'T rent a slum while trying to save. That defeats the point.
RENT until you know exactly what you want, and save money for a down payment while renting. DON'T rent a slum while trying to save. That defeats the point.
Yes, a house can be a money pit, but if you do your due diligence it doesn't have to be. Sorry for rambling again...
#42
That sounds really good, but your money is now sunk into that house and is no longer liquid. the subjective oportunity cost now comes into play with it as well. You could pull out a home equity line if you are in dire need of it, but that defeats the purpose. Assuming you took the extra $10,000 a year that you are paying in to the mortgage and got even a below market average return of 8%, you would yield $166,000 from that. It would also still be (for the most part) completely liquid. You are now able to cover other expenses that may come up.
I am not saying that at if you pay off your house early, you won't save any money. What I am saying is that the vast majority is front loaded and at 10 years you will be left with an effective loan rate of 2-3% for the remander of the loan. I know that I wouldn't want to tie up my money in something illiquid like that for that kind of rate.
If I could borrow money for 2-3% for 20 years, I would do it in a heartbeat. That is the loan that you are giving up by paying it off early.
Again, this is not for everyone, but it is a decision you can't take back. Make sure you really examine all consequences of payin it off early. If it makes sense for you, then defeinately go for it. I spend A LOT of time undertsanding researching finance, but by no means do I know it all.
#44
TrickyRix: Yes I would definitly say we rushed into buying a house when we shouldn't have. It was during the "give money to anyone with a pulse" days. My wife and I both workign part time, going to school, and taking out student loans (some of which ended up paying the mortgage for a little while ) The bank should have never given us a loan, but a friend of the company we worked for "pulled some strings" to get us approved. We should have been told to take a hike.
I bought the house I am in now with a different goal. I bought well within my means at a point when my means were significantly less than they would be within 3yrs. I'm glad I did. Now I would be shopping houses that are 2 - 2.5 times the price. We love our area, plan on renovating this house for a fraction of the cost to buy an equivalent house that we liked, and staying in it for the long term.
rharris19
This debate is a tough one. On paper it makes sense, but people have to have the discipline to save that extra money. If you don't have the discipline, then it's better to put the extra money on the house. Personally, I don't like having debt. I have no CC debt, car payments, and I'm paying off my student loans with vegence. Once that is complete I will start paying my house off early. I like to think about how little money I actually need if I don't have bills.
OP:
Sorry for the tangent. I think there is a lot of good advice here on how to do it right, and in my case, things to avoid. Now is the time to take control of your future. Be smart with your choices. Soem times the smart choices don't feel al that awesome.
My wife has a theory about relationships. You have to go through the **** together,and come out the other side together in order to appreciate all of the good things you have. Then you know what you have together is solid. Our cockroach infested trailer that we rented in undergrad was one of those trying times. It was so bad that the cockroaches shorted out small appliances by trying to keep wam on the circuit boards in winter. Good times! Seventy feet of paradise!
I bought the house I am in now with a different goal. I bought well within my means at a point when my means were significantly less than they would be within 3yrs. I'm glad I did. Now I would be shopping houses that are 2 - 2.5 times the price. We love our area, plan on renovating this house for a fraction of the cost to buy an equivalent house that we liked, and staying in it for the long term.
rharris19
This debate is a tough one. On paper it makes sense, but people have to have the discipline to save that extra money. If you don't have the discipline, then it's better to put the extra money on the house. Personally, I don't like having debt. I have no CC debt, car payments, and I'm paying off my student loans with vegence. Once that is complete I will start paying my house off early. I like to think about how little money I actually need if I don't have bills.
OP:
Sorry for the tangent. I think there is a lot of good advice here on how to do it right, and in my case, things to avoid. Now is the time to take control of your future. Be smart with your choices. Soem times the smart choices don't feel al that awesome.
My wife has a theory about relationships. You have to go through the **** together,and come out the other side together in order to appreciate all of the good things you have. Then you know what you have together is solid. Our cockroach infested trailer that we rented in undergrad was one of those trying times. It was so bad that the cockroaches shorted out small appliances by trying to keep wam on the circuit boards in winter. Good times! Seventy feet of paradise!
#45
An iShares ETF that follows the S&P (Ticker: IVV) held long term should yield 10-11%. The average return in the market is in the 11-12% range. If you hold long term and tax rates stay the same you will loose 15% of your gains. If you hold short term then it will be taxed at your tax bracket, so say 25-28%. Either way you look to have a 7-9% return after taxes and fees.
#47
Don't get hung up on the $$$ amounts. The biggest thing about paying off a house early is emotional vs financial, especially if you are married. If you want your wife to be happy get out of debt including the house. Women love that security and there are no more fights about money. We went through layoff's a few years back at work. Everyone with a $1,000 mortgage was sweating bullets but I knew that even if I just got a job at McDonalds we would be ok because we had no debt. It is hard to explain how having that burden lifted off your shoulders feels but trust me, it is VERY nice. I own everything I have and no one can take it from me.
A cool little benefit of no debt is being able to drive around, see a Miata sitting on the side of the road and buy it without thinking about how you are going to get the money. Even though they were all cheap (most of them) I have purchased seven cars in the past two years. Financial freedom is sweet!
#48
If you want to go the route of "investing" back into your home, then max out everything else first. Roth IRA, Roth 401K, 401K, 503B, 457, etc. Whatever is available for you. I can imagine the peace of mind to be pretty great to pay off your home, but I personally can't justify it.
Above all esle make sure you are going to be living in that house past the point you expect to pay it off early. If you don't, then you have just give then bank an interest free loan for that time.
#52
On a similar note to some of the links posted, are things really this bad down there?
http://www.businessinsider.com/auste...-2011-1?slop=1
http://www.businessinsider.com/auste...-2011-1?slop=1
#53
But that's just it. At the time you are paying off your home, your rate on paper is still 5.25%, but your effective rate is lower than that at about 3%.
If you want to go the route of "investing" back into your home, then max out everything else first. Roth IRA, Roth 401K, 401K, 503B, 457, etc. Whatever is available for you. I can imagine the peace of mind to be pretty great to pay off your home, but I personally can't justify it.
Above all esle make sure you are going to be living in that house past the point you expect to pay it off early. If you don't, then you have just give then bank an interest free loan for that time.
If you want to go the route of "investing" back into your home, then max out everything else first. Roth IRA, Roth 401K, 401K, 503B, 457, etc. Whatever is available for you. I can imagine the peace of mind to be pretty great to pay off your home, but I personally can't justify it.
Above all esle make sure you are going to be living in that house past the point you expect to pay it off early. If you don't, then you have just give then bank an interest free loan for that time.
What is an effective rate and why is it 3%?
How do you give a bank an interest free loan? What money did you loan them?
Side note on your comment - Yes, it is very hard for some people to justify paying off your house. We stopped investing in our 401K for several years and paid HUGE tax "penalties" for doing it. I am still very happy I did it. As I said before, it is more of an emotional thing than a financial thing.
#56
No. If you look at an amortization schedule for a loan, the first payment is 90% paid toward interest and 10% toward principle. At the end of the loan the inverse is true. The average over the time of the loan comes out to be your loan rate. This is the only way that banks would make money off loaning money that much money for that long of a time. They a good chunk of the interest upfront to be able to reinvest into other things.
The reason why I say your effective rate, is because the money you have paid into as interest is a sunk cost. You will have a set amount of interest you will have to pay on your loan and during the first 10-15 years you will pay a good chunk of it, leaving the remaining payments to flip to a majority principle. Since you are now paying less in interest than before, your effective rate is lower than before. Obviously the longer you wait the lower your effective rate will be, thus less incentive to pay it off.
I don't really count the tax break on interest into the rate of the loan, because that is a variable cost that doesn't even apply to some people. If it does apply to you, then I guess that is another incentive.
I agree with Robert M that there is no need to take away possible tax benefits because you own your house outright. That's another issue though.
The reason why I say your effective rate, is because the money you have paid into as interest is a sunk cost. You will have a set amount of interest you will have to pay on your loan and during the first 10-15 years you will pay a good chunk of it, leaving the remaining payments to flip to a majority principle. Since you are now paying less in interest than before, your effective rate is lower than before. Obviously the longer you wait the lower your effective rate will be, thus less incentive to pay it off.
I don't really count the tax break on interest into the rate of the loan, because that is a variable cost that doesn't even apply to some people. If it does apply to you, then I guess that is another incentive.
I agree with Robert M that there is no need to take away possible tax benefits because you own your house outright. That's another issue though.
#57
There is no set amount of interest that you pay on a loan (unless you pay the standard payments). The interest rate does not change during the lifetime of the loan. However, the principle does so of course the amount of interest will be less. Because you sign up for equal payments there is a higher interest payment in the beginning (but the rate is still the same). The first payment on a 30 year loan is more like 81% INT and 19% PRI. The even out when about 40% of the house has been paid off. So, make a $40,000 payment #1 on a $100,000 house and you are on the downside. Of course, you will pay less than $500 INT that first month (not sure what that means with your "effective rate" thing) and will probably keep you from itemizing since you just knocked off the majority of your INT.
#58
I am not saying that you have to pay a certain amount of interest before the bank will let you out of the loan. What I am saying is that there is a set schedule of interest payments until the house is paid for. Regardless of what you put towards the principle at any given time, your schedule will be the same until paid off. You can't just pay $40,000 on a $100,000 loan and jump to where those payments would be. I don't know for sure if that's what you were saying.
Example:
If you have a loan and your payments are $1000 and according to the amortization schedule, you will be paying $810 of that in interest and $190 in principle for the first year, $790/$210 for the second, and $770/$230 for the third, etc. If you pay an extra $40,000 into the loan toward principle after the loan is created, then you have just shortened the length of the loan, but not modified the terms while active. You will still pay the $810 in interest the first year, $790 the second, and $770 the third regardless of whatever extra you have put toward principle. The only thing extra principle does is shorten the loan.
I am not saying that the actual interest rate changes throughout the course of the loan. What I am saying is that when you are toward the end of the loan, where you are paying closer to the $190 in interest and $810 in principle, your loan becomes effectively cheaper at that point. I used the very end of the loan as an extreme example, but it illustrates what I am talking about with your loan becoming cheaper and more sensible for you to hold long term rather than pay off.
Example:
If you have a loan and your payments are $1000 and according to the amortization schedule, you will be paying $810 of that in interest and $190 in principle for the first year, $790/$210 for the second, and $770/$230 for the third, etc. If you pay an extra $40,000 into the loan toward principle after the loan is created, then you have just shortened the length of the loan, but not modified the terms while active. You will still pay the $810 in interest the first year, $790 the second, and $770 the third regardless of whatever extra you have put toward principle. The only thing extra principle does is shorten the loan.
I am not saying that the actual interest rate changes throughout the course of the loan. What I am saying is that when you are toward the end of the loan, where you are paying closer to the $190 in interest and $810 in principle, your loan becomes effectively cheaper at that point. I used the very end of the loan as an extreme example, but it illustrates what I am talking about with your loan becoming cheaper and more sensible for you to hold long term rather than pay off.
#60
On a similar note to some of the links posted, are things really this bad down there?
http://www.businessinsider.com/auste...-2011-1?slop=1
http://www.businessinsider.com/auste...-2011-1?slop=1
The worst thing about the economy is indeed the unemployment rate and the fact that small businesses are closing at a very high rate.
This link at the bottom is the real deal:
http://www.businessinsider.com/niall...n-debt-2010-5#