Quote:
Originally Posted by Schneed10
That's true, your plan pretty much eliminates all risk. But it also means nobody would buy a home until they were like 40 years old.
Unless you come from old money, it takes time to build up enough cash to cover a 6-month emergency fund plus enough to put down a 20% down payment. While you're taking years to save all that money, you're missing out on the appreciation of home prices. Granted home price appreciation has been nonexistent for five years, but going forward it will come back around.
The practical analysis goes like so: if you build an emergency fund and buy a home with 5% down, you can probably accomplish that by age 28 or so. If you build an emergency fund and buy a home with 20% down, most can't accomplish that until 35. That's a seven year difference.
A $200,000 home will appreciate in value by $46,000 over 7 years, assuming 3% appreciation in home prices (about the historical rate).
If you buy that home with only 5% down instead of 20% down, you're paying:
PMI - $16,800 ($200 per month times 12 months times 7 years)
Interest on the 15% you didn't put down - $10,500 ($30K times 5% interest rate times 7 years)
Maintenance Expense for those 7 additional years: I dunno, call it $2000 per year to be generous - $14,000
Total - $41,300
That's less than the appreciation you missed out on. And then you get money back on your taxes on the PMI and interest you paid.
You're better off paying 5% down and not waiting to build up the 20%. At least most people are.
I agree there's some risk there, but the risk/reward pays off as long as you have an emergency fund and keep your monthly mortgage payment to less than ~33% of your net income.
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Well, I think it depends upon the property. Is this a $150,000 home or is it $300,000k or more? I think it's entirely possible to save 20% down for a home that's around $150k. I'm assuming a couple brings in collectively $80k a year. It certainly takes being frugal and the willingness to pick up an extra income somewhere to help supplement. However, practicality? Most people don't want to do that. They would much rather continue going on vacation every year, spending money eating out every week, buying new cars, so forth and so on. It's human nature. I'm the same way. But, regardless of the amount that's put down, I'd not have that mortgage payment greater than around 30% of my monthly expenses. Think you mentioned that earlier as well.