Buying a house later this year (hopefully)
 

As the title suggests my fiance and i will hopefully get approved for a FHA loan to buy a starter home. Now my question is what would you have done if you were buying a house again, what would you not do? I want to know what im walking into. Anything i should look for in a house?

Buy a house with someone who I wasn't married to.

Good point, good thing we are getting married before the house.

If you are buying a fixer-upper, realize that all your little projects around the house will take 5 to 10 times longer to accomplish in reality than you think they will when you're all optimistic and shit while house-shopping with a new wife. "We'll just strip off the wallpaper and put on a new coat of paint." Simple, right? No. It's a pain in the ass. And for crying out loud, get as many of those projects done as possible before you get her knocked up, because then you will have no time for anything.

lol @ procreators

Though that's about as honest as it gets. I'd shop in a neighborhood on the up, or next door to one that is. I'd shop for a house that won't haunt you, but needs work to keep the price down. Look for one that needs work you're capable of doing. IF that works out for you, you will have some equity down the road when you do knock her up. :D Or want to upgrade. Or when you want to build a big-ass garage.

Buy way less than you can afford. big bills suck, and its just not the morgatge, its the damn taxes, utilities, repairs and god damn taxes, and insurance.

if you get a good deal on a starter house, and pay the thing down, you can be a baller like me and rent the thing out when you move on to a real house. That way you can still make money when the market takes a dump.

Buy as new as possible. We bought brand-spankin'-new sooooo...

However, we did rent an older house for a couple of years before buying a house. Living in that cute older home that would be called a "fixer-upper" taught me a lot of what to look for. It had a GREAT location, large corner lot, big 2-car garage with laundry, counter with sink in the garage...overall it was nice. BUT it was built in 1964...and was mostly original...down to all the wiring and the fuse box...like...looked like this-

http://cristalelectric.com/ESW/Images/FuseBox.jpg

and took these-

http://www.bakersfieldads.net/Greena...e-box-of-5.jpg

Now, if I were the kinda person that knew what I was doing, we could have fixed it up and had a nice inventment, but I'm not one of those kinda people. If you know home repair, have done quality home repair and have the money to get things done...go for it. I remember trying to take down some wallpaper in the bathroom...on the original drywall...it took DAYS to get it all down and was a total PITA...steam, chemicals, scrapers...tried all of it. There were cracks in some of the floors and walls indicating a possible foundation/support issue. Ask/check things like when the roof was last replaced and what the building code requires/allows for roof replacement. I know in GA that a roof is allowed to have a second layer of shingles added to it and can be called a "new" roof. This is a VERY costly repair/replacement. I mean, I can go on and on with all the stuff I learned to look out for when looking at preowned homes, but you'll learn what to look for and what to question as you start to look around. You'll learn a TON more when you start getting home inspections and following the inspector around.

Stealth and M2 are also VERY right.

Look at surrounding home sales, property taxes in the area (moving 1/4 mile doen the road can change property tax by 2%...and that's a lot. Seriously, start watching HGTV and all the home buying shows and the home improvemtn shows...esp Holmes on Homes.

I see that you are 20 years old. This is a FANTASTIC chance to do something the right way that will positively affect you for the rest of your life.

What we did:
1) Bought a very cheap house ($40,000 - 900 sq/ft) at 22 years old.
2) Paid it off in 8 years.
3) Used the extra money that we did not spend on house payments to put 22% of my income in a 401K.
4) Became debt free
5) Set ourselves up to retire at 55.

Our friends did the opposite:
1) Bought too much house
2) Bought too much car
3) Bought too much everything
4) At 50 years old realize that they are in horrible debt, have no retirement savings, and will pretty much work the rest of their lives paying off things like $200 (after interest) for a Blu Ray DVD of Caddy Shack 2.

Don't screw up. This is a very pivotal time in your life and you only get one shot at this. FWIW, I would have a very deep discussion with your wife to be and see if she is on the same page as you are (if you follow my advice). Don't marry a woman who is going to put you in debt for life.

The woman helped me pull myself out of debt and helped me stay that way. I do appreciate all the advice you guys have, and let it be known its not falling on deaf ears.

This is a big point in my life and rmcelwee is right, do shit the right way and retire at 55(most likely 60 for me).

That's about the best advice a man can have, no shit. If she needs goochy this and prada that, kick her straight to the curb.

My wife cooks diner and washes my stanky clothes, and all she wants is a nice dinner out every now and then and her car washed. She's a keeper.

Part of this is knowing that banks will "pre-qualify" you for much more house than you should be comfortable buying. They don't care if you're house poor, in fact until about 3-4 years ago they barely cared if you defaulted because in the bubble market they still wouldn't lose if they had to foreclose.

We bought in 2008. Even though the full extent of crappiness in the housing market hadn't been played out yet, it was still pretty bad and the banks knew it then. I ran the numbers on how much house we were prequalified to buy and the monthly note would have been about 50% of our income, which is an absurdly high figure. You want it closer to 30% to have some breathing room and not be house poor. I did my own analysis to figure out what we could afford, then told the mortgage broker the number they came up with was borderline insanity and I wouldn't be spending anywhere near that much.

So we wound up with a fixer-upper we got in short sale (a long process wherein banks drag their heels excessively before selling at a huge loss) when the rate on that enticing 3/1 ARM readjusted and the dozen or so illegal El Salvadorans couldn't afford the payments anymore, despite the fact that they were getting good money from renting out the basement to a single white mom and her kid and letting them stay in a "bedroom" that isn't legally a bedroom because it lacks a window and there is no fire escape down there. We're in a good neighborhood though, couldn't have afforded a house here that wasn't somewhat "distressed" so to speak, it has a garage, and the improvement projects are coming along. Hell, we might not even lose money if we had to sell it tomorrow- market went lower after we bought but is back up to about even or slightly better.

Don't put down too much tile (loud), walk away from foundation work (shoty work pops up years later), pay off higher interest debt before putting down a larger down payment, check out the neighbors closely (bad neighbors suck), double up your payments and pay it off in 7y, no 2 story houses (bad utility hores).

put 20% down. PMI rates are ridiculous right now.

PMI sucks. On my first house I could not put that much down, so I did an 80/20. I don't know if banks will do that anymore

Listen to rmcelwee.

And now.

1) Buying a house to live in is NOT an investment. If you were to buy it to rent it out, THEN it IS one. The house you live in is a "durable consumer good". It costs money. It does not produce positive cash flow. Get this concept into your head. The idea that "it's an investment" and "it can't go down in value", is part of why we had this massive housing bubble.

Therefore, when you buy, look at your mortgage payments, plus insurance, plus maintenance, and compare against RENTING. But you must consider that rent goes up with inflation. You can make a spreadsheet to calculate how much rent might cost, if we have say, 4 years of 10% inflation. It's not a question of if, it's a question of when. If you don't know this, then you are like 95% of the American public that do not know the fiscal train wreck and the USD collapse on the horizon.

2) You MUST get a 30 year FIXED rate mortgage. The reason for this is we WILL get mass inflation in the years to come, and it will make fixed mortgages cheap in a few years. DO NOT, DO NOT, get a floating interest rate because you "can't afford the mortgage otherwise" or so "you can buy a bigger house".

3) Do not buy a big house you can barely afford - get a smaller house you can easily afford. In the future if you think you can then afford a bigger house, don't sell the smaller one, rent it out. THEN it's an "investment".

4) Because of the shitty economy, DO NOT PAY RETAIL. Look for bargains. Look for distressed sellers. They are out there. Do your research on this one. Hints: do not just go to the usual real estate broker, that's how 99% of the public do it, and get screwed. You don't get your miata fixed at the Mazda dealer, do you? The general public clips newspaper coupons to save a dollar on Campbell soup, yet pay retail when they make the biggest purchase of their life. Idiotic. Hint 2: Read up on John Schaub's method.

Why don't you put your money where your heads are then and get a vasectomy. I got mine 13 years ago and it cost me $15 (insurance copay), took half an hour, and I walked out.

I would not have bought any houses. A house is a liability and there is no glory in $xxx,xxx leash around your neck. Also, don't expect any type of "investment" appreciation because the market is probably only halfway through it's big shit.

There are other ways than mortgage interest to shelter income.

What ever the bank approves you for spend half that...lol

I've got an FHA loan and PMI does suck. I'm paying as much against the principle every month as I can afford so we can hit our 20% equity sooner.

I'm a little excited though...we bought a house next to an empty lot (house had burned down to the foundation). They were building a new house over the last few months. It went up for sale the other day for $20k more than we paid for our house (which, granted, isn't brand new, but is brick instead of wood siding, and is in great condition).

EDIT: Yes to all the people who say to ignore what the bank says you can afford, and do your own math.

Ask your lender to run a sample mortgage application so you can see the TOTAL monthly payment (mortgage, PMI, escrow for property taxes/homeowner's insurance, etc.), then work backward from that figure.

While there is truth to faeflyper's post, the main thing about buying a home is that it is the ONLY way available to the PROLES like us, to leverage your money into an income-producing asset that is (for now) tax free when it appreciates. IOW you put up 20%, then you can rent it out, then if you sell at a profit later, the gains are tax free.

However, when you do your spreadsheet:
- look at what happens to your cashflow if the mortgage interest income tax reduction is gone (the gov't may take it back when the financial shit hits the fan)
- the capital gains tax exemption may also be removed

If it looks like renting is much cheaper than buying, DO NOT BUY. It makes no financial sense. You will be better off buying and renting out in another area, then renting where you are. Note that rentals do not give you the mortgage interest reduction.

If you can buy and the mortgage + insurance + maintenance is cheaper than renting, absolutetly go for it. Even if home prices tank some more, it doesn't matter because a renter would pay for the FIXED mortgage. Did I mention you must get a fixed 30 year mortgage?

If all this seems complicated, then DO NOT BUY. You are financially unsophisticated and the real estate agent, and the Banksters, will take you to the cleaners, you will be a debt slave the rest of your life, and you will suffer during the financial armageddon.

I disagree with Jason on the 30 year fixed. On my first home, I got a 5 year intrest only ARM at a nice rate, knowing the minimum payment was only intrest, so I paid 30-40% additional per month to the principal. After 5 years, deep int the recession the rate "reset" to 3%, now, the place is generating 40% profit and I can afford to pay the morgatge down much faster.. The rate resets every six months but can only go up 1 point per adjustment maximum, so if morgatge rates go up tomorrow, I have got plenty o time to refinance.

Intrest only loans can work great if your not a dumbass about it and fully understand what you are getting into, but you MUST be diligent about paying it down.

Proles. Haha! Good word :)

When considering your awesome potential-income-producing-asset though, recognize that even if your house appreciates ONE HUNDRED PERCENT in say five years while inflation is only up 1%, you are ONLY looking at a potential income of what, $200,000? $300,000? Yes, that sounds like a lot of money, but unless you live in a trailer, it won't be enough to retire on. The reality is that while you might might make some money on a future sale, you are still accepting a large amount of risk at the present time, and also, facing risk until that sale occurs. The risk that faces you is bankruptcy, shit credit, being evicted, paying all your money for repairs, increased property taxes...



Oh LOL.

Seriously, come on. If our little 'ol bassmachine was not the epitome of a financial neophyte, he would not have posted this thread. I seriously doubt that he has a spreadsheet. Or knows what the cap gains tax exemption is, or what it pertains to and how it affects him.

I know what you are saying, but are you aware of this:

http://www.swifteconomics.com/2010/0...oing-bankrupt/
http://useconomy.about.com/od/critic...r_collapse.htm

The USD *will* erode. We *will* get mass inflation. We *will* get very high interest rates in the future, just like the 70s' stagflation. The USD will cease to be the reserve currency of the world. The Fed Gov *will* go insolvent. It's a question of when. Niall Ferguson, a CFR bigwig and economic historian, thinks it's less than 6 years away.

If the US debt ceiling is raised yet again in March, our fate is sealed. It means spending cuts are politically impossible, and the only way for this to end is DEFAULT/INSOLVENCY. Anyone who claims otherwise does not understand the numbers.

Don't buy a house. Renting is underrating.

Underwriting?

Underrated?

Underrajioafweting?

Can't stress that enough. Also, put as much money as you can toward the down payment. Obviously, make sure you hold some back to fix anything that might crap the bed in that first year. And make sure there's no penalty for paying ahead on your note - some of those fuckers are sneaky.

Don't forget to shop that mortgage around. I take it you've just about got it lined up, but it never hurts to keep shopping. I talked to several banks (including mine) before I ended up with an independent broker. Since it was my first time, I appreciated the hand-holding and spoon-feeding, and I got a better deal than the banks were trotting out for me.

Not necessarily. My house was built in 1956 and it's in great shape. Plus, it was ready to move into. I didn't have to do one damn thing to it except clean up the crap the sellers left behind. The wiring is probably original, but it has a proper breaker box instead of fuses. Almost a year and a half into ownership, things have gone very smoothly (knock furiously on wood). Only the ancient Monkey Wards water heater has let me down, and that was a pretty cheap thing to have replaced.

Ask around and get a GOOD inspector who's willing to go under the house and up in the attic. My inspector took about 5-6 hours to give the house a thorough once-over. His 30-page report listed every last little thing that might need attention, and included big color pictures. The sellers fixed everything I asked for except the water heater that pissed in the closet a few months ago (it wasn't leaking at the time).

Not to sound like a crotchety old man with good-old-days syndrome, but you'll probably find that houses built in the 50s and 60s are more solid than some of the newer houses. Plus, an older neighborhood usually means nicer lots, more trees, wood floors, etc etc etc. Also, FWIW, pier-and-beam foundations make it real easy to fix plumbing, rewire, and remodel. And depending on the soil in your area, they're a lot more stable than slab homes.

Home warranty? In my experience, these are pure junk. I paid for one and it was a complete cluster monkey fuck when I had them come out to fix a toilet leaking at the base. I coulda/shoulda done it myself but I was lazy and thought "hey, they'll just take care of it." Even with the warranty, they charged me $200 to replace a fucking wax seal. Fuck me for being lazy. When the water heater popped, I went through a lot of back and forth before getting them to pay for the cost of the heater while letting me use my own guy to install it. Saved myself about a grand over using the crooked warranty fuckers. YMMV, of course.

If I had to do it all over again, I wouldn't change one thing except that fucking home warranty...

That's my $0.02. :2cents:

As I was reading all the replies I was thinking about mentioning the home warranty as well. They are complete pieces of shit. The only time I used mine was to fix a leaky toilet above my garage. Same thing, big bucks for a wax seal. The warranty didn't even cover fixing the hole that the water put in my garage ceiling. I talked to the repair guy about it and he said all of them have tons of loopholes which mean they do not pay hardly anything.

And don't get a house with an HOA. They are the spawn of Satan.

indeed. Sometimes they can work for you, but for the most part they are expensive and a PITA.

The only thing we can't do in my neighborhood is raise livestock, put up a chain link fence, and build a cinder block building (at least according to something we signed when we bought the house). We don't have an HOA or any dues. There is a 6,000 sq/ft house in the neighborhood so you can live in "nice" places without HOAs. My friends I mentioned earlier just got dish network. They have the dish mounted on a pole in the ground because they are not allowed to put it on the house. Strange...

Unless you sit on the board of directors of one. LIKE ME HAHAHAHA

My roof cost me 1 million hoas are faill

^^^ THIS.

My little 'hood doesn't have an HOA, but a lot of newer areas have them. Not sure what rules (if any) govern them in your neck of the woods, but there are plenty of horror stories out there about HOA Nazis in TX. And you get to pay money for the privilege. Yay.

I have never understood peoples stance on paying your house off early. If you look at loan amortization you are stil paying most of the interest and letting them out on loaning you cheap money. If you pay your house off in 15 years rather than 30, then at that point you will have turned a liquid asset loaned to you at an effective 2% into a illiquid asset. Also, if you are paying extra on your loan and you don't end up living there past you paying it off, you have just given the bank a 0% loan for all those years.

To me it doesn't make sense. I understand finance very well, but there is a fair amount of subjectivity to this. You guys may be right and I may be the nuts one, but I just wanted to bring up another side for the OP. BTW, you should never get a ARM loan unless you know exactly what you are doing and have a plan to be rid of the property before the adjustment period.

Not having an HOA is awesome as well. I have a lift in my side driveway and sometimes as much as 7 miatas parked in my back yard. Given I'm on 3/4 of a acre, but still.

Robert, I know you are very well schooled in finance but how can paying a 30y loan at double payments and a 30y loan at the full 30y be even close in interest fees?

We bought in 2008 and got the 8k tax credit. All I would suggest is to not buy a house that's very old. Fixing shit sucks and adds up quick.

sucker, you have to pay it back!

I'm on my 2nd house. My wife and I purchased our first home when we were 23.

I still regret the decision to buy our first house.

We should have rented a house. Renting gives you the experience to learn what it is in a house that you want and don't want. That 1 acre lawn sounds nice on paper. The time spent keeping it sucks, and is expensive. Renting gives the maintenance responsibility to someone else. The downside is that you will not be able to upgrade it the way you want. This isn't necessarily a bad thing, because upgrades are expensive. i.e. My current home; Windows 6k, doors 1.5k, fence for dogs 3k, New Hvac system 8k.

Must haves in a house in your situation (I'm gathering that you do not have tons of expendable income). Energy efficient windows, doors, and a HVAC unit that is less than 5 yrs old. Attic insulation is cheap to blow in.


RENT RENT RENT

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.

Depends on the neighborhood.

It sounds like you got in a rush and settled on what was there instead of waiting for the right house to pop up. Renting might have been better in your case. Granted, I've had a good experience with my house and I had a pretty good idea of what I wanted when I started looking. Yes, a lot of shit could've gone wrong. But that's the risk you take.

Perhaps, but I got tired of pissing money away into my landlord's bank account without building any equity. Plus, I got tired of dealing with weirdo neighbors along with not having a garage and a yard. When I got tired of the condo, I looked at rent houses. I decided I didn't like the idea of renting a POS house for more money than I was paying at the condo, so I ran the numbers and decided it was better just buy the house I wanted.

Starter home <> 1 acre lawn. I've got a pretty good-sized lot and it's not much trouble to keep. I bought a decent used lawn mower for $50 and a really nice used edger/weed-eater for $125. Craigslist is your friend.

This is true. My house came a nearly-new HVAC system, a new roof, a new deck out back, a fence for the dog, and fresh paint on all the walls. Eventually I do want new windows, but at this point my utility bills are very, very reasonable.

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.

Agree completely. These should be must-haves in any home. Don't get suckered in by a low purchase price. Take stock of all the crap the house needs for you to move into it. I thought about buying the house next door to mine until I tallied up all the shit it needed to be truly livable. It was going to need all of the above, plus a redo on the kitchen. So I spent $15K more on a house that was ready to go, and it didn't make a huge difference in my payments. It's kinda like spending a little more to get a used car with new tires, new timing belt, and a good service history. It always costs more when you get stuck with doing it.

Rent cheap and save your money for a down payment. I stuck it out, saved my money, paid off all my debt, saved more money, and bought my house. Now my entire house payment (including taxes and insurance) is less than rent on the condo. Just sayin.

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...

It all has to do with the amortiuzation schedule of the loan. The bulk of all interest is in the begining of the loan and not spread evenly through the loan. In doing so your effective rate at the begining is much higher than at the end. If you were to pay double the payments on say a 5.5% loan, then you would pay it off in roughly 11 years. Assuming the loan amount is $150,000 then you will have saved a little over $100,000 in interest.

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.

Finance noob asking for more specific info:

My 30 yr fixed rate mortgage is locked in a 5.25%...what sort of (relatively) accessible investments would yield an after-tax return of more than that 5.25%? How much risk would I be taking on?

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 :facepalm:) 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 shit 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! :bigtu:

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.

BZZZZZTTT!!!

Study this:
http://www.nytimes.com/interactive/2...s-graphic.html

The real answer is NONE. There is no way to get a guaranteed 5.25% return on any investment. However, I can guarantee that any money you pay off on the principle will save you 5.25% (if that was your rate). As far as taking the interest off on your taxes, we have never been able to do that (not entirely true but true enough without going into a lot of detail). Our first house was so cheap that the interest didn't add up to enough to overcome the benefit of taking the standard deduction. We put a big chunk of cash down on the second house so same thing there. If you think borrowing money from a bank to get a tax break is the same as investing the max in your 401K to get a tax break you need to look at it again.

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!

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.

I spent over 6 figures to sell my house last month!

I opened a roth ira just for fun this year. it may only end up with a few thousand dollars of initial cash in it, but whatever it earns is MINE until someone says otherwise.

Have your wife open her own as well. We've been each contributing 5000 a year to ours for 4-5 years now.

plus we have roll over iras converted into roths, and our 401ks.

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

I am confused by some of your points:

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.

I'm guessing he means if you take the tax deduction on the interest.

The last couple years I tried itemizing and the standard deduction was still better.

I never did get that. It is a really weak argument against paying off your house early. Personally, I can't wait until the gov't closes that tax loophole. I get taxed more because I have a paid off house, I am married, and I don't have any kids. Why does the gov't hate me <G>?

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.

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.

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.

You mean like an Executive Order that says "the nation is in an extreme financial emergency and thus it is everyone's patriotic duty to convert half of all their retirement accounts into government bonds". :giggle:

Depends where you look and how you look at it. The real unemployment rate is probably close to 15%, which means that 85% have jobs.
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#