Getting Down With Down Payment! And Other House Buying Wisdom.

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You want a house.

She wants a house.

They want a house.

I want a house.

We all want a house.

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It is true, that owning a house or a piece of property ranks way up high on the list of things that all working human bees aspire to. Why? The reasons are many:

  • Appreciating financial asset
  • Provides sense of achievement
  • Stability and Security
  • Biggest contributor to Net Worth
  • Always in demand
  • Satisfies a very basic need – shelter

But in this aspiration, some humans do end up making big mistakes, such as:

  • Buying a house for more than they can afford
  • Not having a solid contract if buying with a partner
  • Not doing proper research on location/pricing
  • Underestimating the total cost of owning a house

My husband and I bought our very first house pretty late compared to the normal standard time frame of buying a house (and we are totally okay with that). Neither of us owned one prior to getting married either, so our absolute true first purchase,  as a couple, was in 2011. Our criteria for search was simple: location (duh, ofcourse), ability to rent out in the future, close to public transportation and shopping, and under $350/sq ft. We got lucky when our broker showed us a short sale with all these criteria. I mean, we were amazed to find something so good, so quick and in such a great neighborhood.

As I mentioned in earlier post, we made this purchase when we were on a single income. So, making the financials work for us was the most important thing. We had a decently funded savings account, and initially thought we would put more money down so that our monthly payment would come out low. We then created spreadsheets, did some analysis and halted on that idea. Our decision was right.

Dear house-hunters, I am here to spew words of wisdom at you so please read carefully.

Don’t put more than 20% on down payment. 

This statement should have hurt your insides about 25+ years ago. But, it  shouldn’t be a shocker today. Why? Because of….

A low interest rate environment.

Smart real estate investing strategy (for primary residency or even for rental) understands that locking capital when interest rates are low is not a smart move. It is all about leveraging. Also, don’t forget, not only you have to make a down payment, but you have to factor in closing costs, which runs roughly 2-5% of purchase price of the house.

This scenario works when you are buying to live in the house (primary residence) or to hold it for the long haul and rent it out.  Here’s a quick table on how the math works:

Screen Shot 2017-08-18 at 10.07.22 PM

Things get interesting, if you instead opt for a 15 year fixed loan. First take a look at the how the numbers work out:

Screen Shot 2017-08-18 at 10.10.22 PM

Did you notice something? Your eyes should automatically focus on the total interest paid for both 15 years and 30 years scenarios. With down payment, your total interest paid on the loan for 30 years was $452,250 and for 15 years, it was $270,180. Whoa! That’s like a saving of $182,000. Did you catch that (if you didn’t faint yet)?

Yes, the monthly payments are higher than when you take a 15 year loan vs. 30 year, but the interest savings are much much higher over the life of loan when you go down the 15 year route. If you can afford the monthly payment, it would make sense to opt for 15 years, IMHO.

Ok, now, what about if you are planning to flip?

How should you think about down payments then?

:: Watch out for words of wisdom spewing out again::

Do not put any down payment.

Yes, and here are reasons why:

  • When you flip, you are essentially looking to make money on the property within 3-6  months time frame (end to end), so you plan to lock the capital for a very short period of time
  • Applying for mortgage means you not only have to delay the purchase and the subsequent sell due to loan processing, etc. but also give away closing costs and down payment. This cost you may or may not recover
  • You can instead use the money to invest in fixing the house, yielding a higher ROI

Yes, this all becomes all the more relevant based on the purchase price of the house, and how much cash you have in your savings to fund the purchase. But, wherever possible, if you can, flip on cash.

So, tell me, have you heard of any unconventional advice from your uncle, grandma, third cousin or even your boss?

[I say adios here, and quickly open up Trulia in another tab. Hehehe]

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