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Jay
Bork! Bork! Bork!
+2,003|4442|London, England
So I'm kind of dipping my toes in the housing market now and because I'm me, I crunched the numbers first before I did anything else. Figured I'd share what I have and ask the lot of you with more experience than I possess to point out any holes in my thinking.

I started the process by first calculating various mortgage payments that I would feel comfortable with in order to find the range that fits my budget. That's the easy part.

https://static.bf2s.com/files/user/51395/Screen%20Shot%202012-08-07%20at%201.12.29%20PM.png

I chose a $600,000 mortgage as the baseline because property here is really fucking expensive, and it's at the very top end of my price range. From there I decided I wanted to see what the ideal monthly payment would be assuming I had $100k to put down. I went into this with the assumption that paying off the mortgage as quickly as possible was the ideal because it would mean I pay less money to the bank in interest.

https://static.bf2s.com/files/user/51395/Screen%20Shot%202012-08-07%20at%201.18.44%20PM.png

I took that down to $6900/mo which is outside of that screenshot, but not the point anyway. As you can see, the higher your monthly payment the less years you take to pay it down, and the less interest you end up paying. I thought to myself 'awesome', that's the way to go. Then I said 'wait, you're forgetting your project management course from college' and decided that the really important thing to look at was what I created on the last line of those iterations titled "Alt Invest %". That's the equivalent investment rate i.e. if you took that extra money you spend on a mortgage every month and invested it in a government bond paying ~2% you would make the same amount of money that you save on interest.

What's really interesting here is that on many websites, and in many conversations I've had, I've always been told that making an extra mortgage payment every year is ideal because it knocks 5-7 years off the mortgage. If you do that, you are actually near the bottom return possible, at 1.925% in this case. It's just about the worst thing you can do if the goal is to maximize your wealth generation over the long term. So much for that advice.

Ok, now what about down payments? Just like the extra monthly mortgage payment, everyone has always told me to put as much down as possible in order to decrease your monthly payments. That sounds like good advice, kind of (ignoring inflation), but of course I had to test it.

Given the same $600,000 price tag on the home and the $100,000 possible down payment, I decided to see what would maximize my return long term.

https://static.bf2s.com/files/user/51395/Screen%20Shot%202012-08-07%20at%201.28.51%20PM.png

I decided to see what the difference was between putting $25,000 down and investing the remaining $75,000 elsewhere, 50/50, 75,25, and 100/0. This one is a bit different, because it depends entirely on what your alternative investment rate is. The screenshot above has an expected yearly return of 6%, the screenshot below has an expected return of 3%.

https://static.bf2s.com/files/user/51395/Screen%20Shot%202012-08-07%20at%201.31.32%20PM.png

As you can see, if you have an expected yearly ROR higher than the interest rate on your mortgage, it is better to put as little money down as possible. If you are risk-averse and expect to see a lower annual ROR, you'd be better off maximizing your down payment.

In conclusion, you take a loss every time you put more money into your house rather than putting it in other investments (as long as the alternatives beat ~2%), and you maximize your long term investments if you minimize your down payment (assuming you can beat the interest rate paid to the bank). Personally, I will be putting the minimum down and pay the bare minimum payment on my mortgage. The emotional boost from paying down the house early just isn't worth it to me.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
Cheeky_Ninja06
Member
+52|5817|Cambridge, England
if you have an expected yearly ROR higher than the interest rate on your mortgage, it is better to put as little money down as possible. If you are risk-averse and expect to see a lower annual ROR, you'd be better off maximizing your down payment.
That basically sums it up for me, if your investment return is higher than mortgage interest rate then you are best off investing. If you can invest in a second home and rent that out then you are winning.
Jay
Bork! Bork! Bork!
+2,003|4442|London, England

Cheeky_Ninja06 wrote:

if you have an expected yearly ROR higher than the interest rate on your mortgage, it is better to put as little money down as possible. If you are risk-averse and expect to see a lower annual ROR, you'd be better off maximizing your down payment.
That basically sums it up for me, if your investment return is higher than mortgage interest rate then you are best off investing. If you can invest in a second home and rent that out then you are winning.
Yeah, because over the course of the loan, even if you can't get rent enough today to match the mortgage payment, you will beat it over time. Being a landlord sucks though. It's next to impossible to evict people that don't pay rent in my state It took my mom 1 1/2 years of non-payment before she got her tenant out.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
KEN-JENNINGS
I am all that is MOD!
+2,926|5716|949

Questions -

Why invest in a home at all if your ROR will be higher if you invested that money somewhere else?

What about potential of your $600k home to go up or down in value?  If you're looking at alternative investments vs. paying down your mortgage, wouldn't it make sense to run different scenarios of ROI on your home itself too?  Predicting both home value loss and increase across 5/10/15/20/30 years seems to be a good idea.
Jay
Bork! Bork! Bork!
+2,003|4442|London, England

KEN-JENNINGS wrote:

Questions -

Why invest in a home at all if your ROR will be higher if you invested that money somewhere else?

What about potential of your $600k home to go up or down in value?  If you're looking at alternative investments vs. paying down your mortgage, wouldn't it make sense to run different scenarios of ROI on your home itself too?  Predicting both home value loss and increase across 5/10/15/20/30 years seems to be a good idea.
To the first question, I have an HGTV addicted wife and you have to live somewhere.

To the second, I don't view owning a home to be an investment at all so I wouldn't treat it as such. If I break even after interest on resale I'd call it a win.

Last edited by Jay (2012-08-07 15:05:13)

"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
unnamednewbie13
Moderator
+1,927|5856|USA

I know I'm going to be crucified for this, but:

RTHKI
mmmf mmmf mmmf
+1,719|5821|Oxferd Ohire
this isnt helping you not being labelled a bronie
https://i.imgur.com/tMvdWFG.png
unnamednewbie13
Moderator
+1,927|5856|USA

Nice double-negative.
Dilbert_X
The X stands for
+1,753|5190|eXtreme to the maX

Jay wrote:

To the first question, I have an HGTV addicted wife and you have to live somewhere.
Well then your life is fucked and you're guilty of poor planning.

To the second, I don't view owning a home to be an investment at all so I wouldn't treat it as such. If I break even after interest on resale I'd call it a win.
I don't know how mortgages work in the Great Satan, in most places the bigger % deposit you can put down the lower rate you pay - You'd need to factor that in.

With the baby-boom crunch property may well be a poor investment for the next 5-10 years, maybe longer. After that there should be some nice properties coming available at a snip - if you have the money.

I don't know really, I don't see the value in working your ass off to die in a mansion. My parents did it and now they're too old to derive any enjoyment from their money.
If its an investment then great, I'm doubtful the property market is going to be so great in the future. If you have the flexibility to pick your moment, sometimes decades apart, then buying and selling property can be very lucrative. If not then it can be costly, more so than renting.
A property can be a colossal millstone compared with the freedom of renting. If its cheaper to buy than rent even counting the cost of flipping each time you change jobs or your wife decides she put up the wrong wallpaper then go for it.

Right now I could buy a median property for cash, a very nice property on a low rate mortgage with 50% down. My cash and share investments are giving me ~6% annual return with almost no effort - much less than the grief of dealing with a property, tenants etc.
I might buy something in the next ~5 years, dunno really. Probably I should blow it all on cocaine and hookers and see if I can earn it back again.

Last edited by Dilbert_X (2012-08-08 03:31:46)

#FreeBritney
Bertster7
Confused Pothead
+1,101|5666|SE London

Jay wrote:

To the second, I don't view owning a home to be an investment at all so I wouldn't treat it as such. If I break even after interest on resale I'd call it a win.
Aiming low...

I've already made half the value of my mortgage up in the amount the value of my house has risen in the past year.

Also, the interest is nothing. I pay 1.79% + base rate 0.5% (fixed rate mortgages are for morons - the term is too short for them to be meaningful as there is no way interest rates will rise by 2-3% in the next 3 years). It's minor compared to the capital repayment. So low in fact, that it's silly to try and pay off mortgages quickly. You can make a nice tidy profit investing at 3-4% money you've obtained from mortgages at less than 2.5%.

Last edited by Bertster7 (2012-08-08 05:18:21)

Jay
Bork! Bork! Bork!
+2,003|4442|London, England

Dilbert_X wrote:

I don't know really, I don't see the value in working your ass off to die in a mansion. My parents did it and now they're too old to derive any enjoyment from their money.
Long Island property. $600k gets you a modest 3br/2bath house on maybe 1/4 of an acre.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
Ilocano
buuuurrrrrrppppp.......
+341|5751

Add at least 25% to your monthly for Property Tax, Insurance, escrow account, utilities, repairs, upgrades, and incidentals.
Jay
Bork! Bork! Bork!
+2,003|4442|London, England

Ilocano wrote:

Add at least 25% to your monthly for Property Tax, Insurance, escrow account, utilities, repairs, upgrades, and incidentals.
Ya, I didn't include it because property tax rate is variable based on school district. The rest are constants.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
Dilbert_X
The X stands for
+1,753|5190|eXtreme to the maX

Jay wrote:

Dilbert_X wrote:

I don't know really, I don't see the value in working your ass off to die in a mansion. My parents did it and now they're too old to derive any enjoyment from their money.
Long Island property. $600k gets you a modest 3br/2bath house on maybe 1/4 of an acre.
I wasn't inferring $600k was a mansion.
#FreeBritney
Jay
Bork! Bork! Bork!
+2,003|4442|London, England

Dilbert_X wrote:

Jay wrote:

Dilbert_X wrote:

I don't know really, I don't see the value in working your ass off to die in a mansion. My parents did it and now they're too old to derive any enjoyment from their money.
Long Island property. $600k gets you a modest 3br/2bath house on maybe 1/4 of an acre.
I wasn't inferring $600k was a mansion.
Well, 650k gets you this right outside of Chicago

http://www.trulia.com/property/30779080 … e-IL-60564

Not my style or taste, but the square footage is impressive for the money.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
RTHKI
mmmf mmmf mmmf
+1,719|5821|Oxferd Ohire
for the location if anything
https://i.imgur.com/tMvdWFG.png
Jay
Bork! Bork! Bork!
+2,003|4442|London, England
Naperville is Gayperville.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
RTHKI
mmmf mmmf mmmf
+1,719|5821|Oxferd Ohire
i mean its cheaper here
https://i.imgur.com/tMvdWFG.png
Jay
Bork! Bork! Bork!
+2,003|4442|London, England

RTHKI wrote:

i mean its cheaper here
Cheap is relative. I wouldn't make the same wages.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
Dilbert_X
The X stands for
+1,753|5190|eXtreme to the maX
Stock market has gained a lot over the last year, where to now?
#FreeBritney
Jay
Bork! Bork! Bork!
+2,003|4442|London, England
It's going to keep going up. Fed is printing $85BN a month between QE3 & QE4 and that money has no where else to go besides the stock market since bonds are near zero. All the money is in futures and securities and the bubble my government has created dwarfs the one they created last time, which caused the mess in the first place. Ride it while you can I guess.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
Dilbert_X
The X stands for
+1,753|5190|eXtreme to the maX
I'm just wondering when people are going to realise its all just foam and the whole thing goes poof.

I think 2-3 months, a little positive blip after the debt ceiling increase and then its downhill.
Here people are chasing yield - I'm getting ~7% gross dividend yield - as would most people, but that could soon be overtaken by capital loss.

I've made some reasonable capital gains, just wondering when to sell, or stay on for the wild ride ahead.

Last edited by Dilbert_X (2013-01-02 17:44:12)

#FreeBritney
KEN-JENNINGS
I am all that is MOD!
+2,926|5716|949

Jay wrote:

It's going to keep going up. Fed is printing $85BN a month between QE3 & QE4 and that money has no where else to go besides the stock market since bonds are near zero. All the money is in futures and securities and the bubble my government has created dwarfs the one they created last time, which caused the mess in the first place. Ride it while you can I guess.
that's right, the government made the bubble.  Those damn government employees bundliing volatile securities and selling them to suckers!  That'll teach them!

For someone who pretends to know about the stock market you still have no clue.  It was the CRA right?  The CRA forced lenders to give loans to people who wouldn't otherwise get approved.  Then it forced the lenders to bundle the toxic debt and sell it to people who didn't know the risk.  It also forced the companies insuring those securities to fradulently rate them highly, and forced corporate insiders to knowingly trade in toxic securities.  You know, despite none of that being close to truth, that's what happened, right?
Jay
Bork! Bork! Bork!
+2,003|4442|London, England

KEN-JENNINGS wrote:

Jay wrote:

It's going to keep going up. Fed is printing $85BN a month between QE3 & QE4 and that money has no where else to go besides the stock market since bonds are near zero. All the money is in futures and securities and the bubble my government has created dwarfs the one they created last time, which caused the mess in the first place. Ride it while you can I guess.
that's right, the government made the bubble.  Those damn government employees bundliing volatile securities and selling them to suckers!  That'll teach them!

For someone who pretends to know about the stock market you still have no clue.  It was the CRA right?  The CRA forced lenders to give loans to people who wouldn't otherwise get approved.  Then it forced the lenders to bundle the toxic debt and sell it to people who didn't know the risk.  It also forced the companies insuring those securities to fradulently rate them highly, and forced corporate insiders to knowingly trade in toxic securities.  You know, despite none of that being close to truth, that's what happened, right?
Fannie and Freddie did the vast majority of the bundling. The Fed kept interest rates at unreasonably low levels which fueled speculation and inflated the bubble. The SEC turned a blind eye to garbage securities and rubber stamped then as AAA. I'm not saying that companies like Goldman are blameless, hardly the case, especially since former Goldman employees get jobs with virtually every government treasury department in the world (See Bank of England, The Fed, ECB). There was pressure from the CRA to get more people into homes, and companies like Countrywide were more than happy to make that happen when Fannie and Freddie were screaming for more and more loans because demand was so robust for the securities they were peddling. But believe what you want, you will anyway.
"Ah, you miserable creatures! You who think that you are so great! You who judge humanity to be so small! You who wish to reform everything! Why don't you reform yourselves? That task would be sufficient enough."
-Frederick Bastiat
KEN-JENNINGS
I am all that is MOD!
+2,926|5716|949

No they didn't.  The SEC turned a blind eye - isn't that government regulation (AKA something you're against)?  The CRA had such a minimal impact that to try to put the blame on it is laughable.  Countrywide made bad loans - it wasn't tied directly to the CRA, it was tied to bad business practices.  Dude you are the one blaming the government for something the finance industry should shoulder all the blame for.  But I'm the one believing what I want.  OK

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