7 ms·

You're not accounting for the higher interest rates of the 1980s. Which home would you prefer to buy: $150,000 at 15% over 30 years. $350,000 at 4% over 30 ye

You're not accounting for the higher interest rates of the 1980s. Which home would you prefer to buy: $150,000 at 15% over 30 years. $350,000 at 4% over 30 years. Hint: they both have approximately the same total loan cost and payment. You can do this calculation with your parents. My home cost $350k at 3.8%. My parents bought my childhood home for $88k at 8%. Adjust my parents' home price for inflation and run the result through a mortgage payment calculator. You find that I paid slightly more for my home but my home is much nicer (central heat and air, closer to town, larger, better schools, etc). My parents' home happens to be for sale currently (not by them). If I paid full asking I would pay MORE in raw dollars but LESS in inflation-adjusted-total-loan-cost (which is what actually matters).

api 7y ago
Down payments are the monkey wrench here. The requirement to have a down payment means high prices basically lock people out of homeownership, period. That in turn limits ability to build wealth at all, even at a crappy interest rate.
- LUmBULtERA 7y ago
  Owning a home is not the only way to build wealth, nor is it necessarily the best way to build wealth.
- tathougies 7y ago
  Having a mortgage is not a form of wealth.
- rukittenme 7y ago
  I put $15,000 down or 4.2% of the total loan amount.
- war1025 7y ago
  The main way that owning a home allows someone to build wealth is that it forces them to put money towards something productive rather than blowing it on stupid things. My experience from buying a house two years ago is that though I suspected it, I never truly realized how many amenities were covered by my rent. I went from paying $30/month in utilities, etc. to ~$400 /month. I also now live 10 miles further away from where I work / hang out. Granted, we live in a house that is ~2x as big as our apartment, plus two car garage. But if you factored out strictly the various recurring expenses I now pay from my previous rent, it is extremely close to breaking even. And that isn't including the increased cost of owning / operating two cars that now drive ~60 more miles a day between the two of them. Our net worth increased much faster while we were renting than now that we have a house.
will_brown 7y ago
A standard 30 year mortgage requires 20% down...what’s the percent of households that can put down $70k to purchase a home?
- eropple 7y ago
  I just posted similarly about down payments, but 20% seems to not generally be the case anymore. FHA loans are as low as 3.5%. I paid 5% down for a non-FHA loan. PMI is then a thing, of course, but you can get in the door. (This is not to say that down payments, as well as initial habilitability outlay, might not crushing. Our small, train-accessible single-family in the Boston area cost half a million dollars and we had to immediately gut the place for remodeling and for asbestos remediation, to the tune of $100K.)
- shemnon42 7y ago
  Not many first time home buyers do a standard mortgage now. Typically 3-5% is all that is needed. That and the lowest home mortgages rates anyone alive has seen have contributed to the home price increase. It's not the total value of the house but the amount of the monthly payment that is the driver, and 3% (today) vs 13% (early 80s) mortgage rates provide a huge swing.
  - JMTQp8lwXL 7y ago
    If the number of people that can afford to put down 20% has shrank significantly over time, won't the pool that can put 3-5% inevitably shrink as well? Will we return to 0-down homes? Where are down payments terminally headed?
  - spamizbad 7y ago
    OK, but now you hold less equity in your home and you're paying PMI on top of that until you reach ~22% equity. There's no free lunch here.
eropple 7y ago
The hitch in this whole thing is that down payments have gotten ridiculous, it's gotten harder to save in desirable areas because rents and many expenses have grown out of pace with income for normal folks. Even as the percentage necessary for down payments has dropped, house prices have gone into orbit so much that it hasn't kept parity. My girlfriend and I had to buy a house for $520k, at 5% down, just for the privilege of dumping $100K into it to make it livable. And we are the fortunate ones who can do that; we're both 31 and I'd say maybe a quarter of my friends are in the same boat.
- jdhn 7y ago
  Where do you live, the Bay area? At what point do you say that enough is enough, and you move to a location that even though you'll earn less, the COL adjustment will more than make up for it?
  - deleted 7y ago
    [deleted]
  - eropple 7y ago
    I live in the Boston area. I can't foresee ever leaving because of cost-of-living expenses. I'm not an import; I've lived in New England my entire life and the Greater Boston area--let's define it as "the Red and Orange Lines, and I guess the Green Line if I was desperate"--is effectively the only place I can be short of blowing off my family and my support network of friends and colleagues. The area is congruent with my politics--I mean that not just in the "who you vote for" sense of the word, but in the "how a society should operate" sense of it. And while I own one for errands I really profoundly don't like commuting and don't like driving a car much even outside of that, which rules out much of the surrounding area like New Hampshire or Maine, where I'm originally from. My parents live in northern Vermont. It's nice to visit, when I'm not white-knuckling across ice-floe roads in February. I couldn't live there. We're thankful that we bought what will eventually, after a big up-front whack, be a really nice house. And we did it somewhere where it's still kinda doable, rather than when it's not doable at all.
    - 7y ago
llsf 7y ago
If you bought a house for $150,000 at 15% in early 80's, you likely refinanced as the interest rate continuously dropped from there. In 90's interest rate was below 10%, and around 7% in early 00's. Nobody would keep the 15% over 30 years.
- rukittenme 7y ago
  Yes but refinancing is not a silver bullet. After 10 years you would have only paid off $7k in principal. So you'd re-fi at 10% at $143k and refi at 7% at $130k. Twenty years worth of payments for only $20k in principal. Your payments would total $375k over that period. $350k at 4% would total the same amount but with $200k in principal paid down. I'd much rather be in a situation with $200k in equity versus $20k in equity. And remember, both people have the same monthly payment amount!
tmh79 7y ago
a more accurate measure of housing costs is not "home prices" but "rent prices", and rents have gone up compared with inflation, causing housing to be absolutely more expensive. The generational warfare double whammy here is that the boomers are scooping up an insane unearned amount of value in both real estate appreciation and imputed rents.
mindslight 7y ago
The $150k loan at 15% is generally healthier, as you have increased ability to pay off the principle early by making more than the minimum payments during good times. The larger principle is only a benefit if you will actually see that money by selling the home. Given that everybody needs a place to live, this will only occur if you sell and retire to a low resource area. Everybody else can only look at the illiquid funny money and pretend. Never mind that the larger valuation provides a juicier target for eg real estate taxes.
imtringued 7y ago
I once did the math. Refinancing from high interest to low interest or refinancing low interest to high interest will cost you the same amount in interest over 30 years assuming identical house prices. However during times of low interest house prices are higher than during times of high interest and this means if you get a mortgage with high interest you end up paying less overall for the house but a bigger portion of your payments are used to service interest. Therefore the 15% house is the best deal. >closer to town, larger, better schools, You're shifting goal posts now. Buying a more expensive house doesn't get you any of that. Only buying more expensive land does.

api 7y ago

Down payments are the monkey wrench here. The requirement to have a down payment means high prices basically lock people out of homeownership, period. That in turn limits ability to build wealth at all, even at a crappy interest rate.

LUmBULtERA 7y ago
Owning a home is not the only way to build wealth, nor is it necessarily the best way to build wealth.
tathougies 7y ago
Having a mortgage is not a form of wealth.
rukittenme 7y ago
I put $15,000 down or 4.2% of the total loan amount.
war1025 7y ago
The main way that owning a home allows someone to build wealth is that it forces them to put money towards something productive rather than blowing it on stupid things. My experience from buying a house two years ago is that though I suspected it, I never truly realized how many amenities were covered by my rent. I went from paying $30/month in utilities, etc. to ~$400 /month. I also now live 10 miles further away from where I work / hang out. Granted, we live in a house that is ~2x as big as our apartment, plus two car garage. But if you factored out strictly the various recurring expenses I now pay from my previous rent, it is extremely close to breaking even. And that isn't including the increased cost of owning / operating two cars that now drive ~60 more miles a day between the two of them. Our net worth increased much faster while we were renting than now that we have a house.

will_brown 7y ago

A standard 30 year mortgage requires 20% down...what’s the percent of households that can put down $70k to purchase a home?

eropple 7y ago
I just posted similarly about down payments, but 20% seems to not generally be the case anymore. FHA loans are as low as 3.5%. I paid 5% down for a non-FHA loan. PMI is then a thing, of course, but you can get in the door. (This is not to say that down payments, as well as initial habilitability outlay, might not crushing. Our small, train-accessible single-family in the Boston area cost half a million dollars and we had to immediately gut the place for remodeling and for asbestos remediation, to the tune of $100K.)
shemnon42 7y ago
Not many first time home buyers do a standard mortgage now. Typically 3-5% is all that is needed. That and the lowest home mortgages rates anyone alive has seen have contributed to the home price increase. It's not the total value of the house but the amount of the monthly payment that is the driver, and 3% (today) vs 13% (early 80s) mortgage rates provide a huge swing.
- JMTQp8lwXL 7y ago
  If the number of people that can afford to put down 20% has shrank significantly over time, won't the pool that can put 3-5% inevitably shrink as well? Will we return to 0-down homes? Where are down payments terminally headed?
- spamizbad 7y ago
  OK, but now you hold less equity in your home and you're paying PMI on top of that until you reach ~22% equity. There's no free lunch here.

eropple 7y ago

The hitch in this whole thing is that down payments have gotten ridiculous, it's gotten harder to save in desirable areas because rents and many expenses have grown out of pace with income for normal folks. Even as the percentage necessary for down payments has dropped, house prices have gone into orbit so much that it hasn't kept parity. My girlfriend and I had to buy a house for $520k, at 5% down, just for the privilege of dumping $100K into it to make it livable. And we are the fortunate ones who can do that; we're both 31 and I'd say maybe a quarter of my friends are in the same boat.

jdhn 7y ago
Where do you live, the Bay area? At what point do you say that enough is enough, and you move to a location that even though you'll earn less, the COL adjustment will more than make up for it?
- deleted 7y ago
  [deleted]
- eropple 7y ago
  I live in the Boston area. I can't foresee ever leaving because of cost-of-living expenses. I'm not an import; I've lived in New England my entire life and the Greater Boston area--let's define it as "the Red and Orange Lines, and I guess the Green Line if I was desperate"--is effectively the only place I can be short of blowing off my family and my support network of friends and colleagues. The area is congruent with my politics--I mean that not just in the "who you vote for" sense of the word, but in the "how a society should operate" sense of it. And while I own one for errands I really profoundly don't like commuting and don't like driving a car much even outside of that, which rules out much of the surrounding area like New Hampshire or Maine, where I'm originally from. My parents live in northern Vermont. It's nice to visit, when I'm not white-knuckling across ice-floe roads in February. I couldn't live there. We're thankful that we bought what will eventually, after a big up-front whack, be a really nice house. And we did it somewhere where it's still kinda doable, rather than when it's not doable at all.
  - 7y ago

llsf 7y ago

If you bought a house for $150,000 at 15% in early 80's, you likely refinanced as the interest rate continuously dropped from there. In 90's interest rate was below 10%, and around 7% in early 00's. Nobody would keep the 15% over 30 years.

rukittenme 7y ago
Yes but refinancing is not a silver bullet. After 10 years you would have only paid off $7k in principal. So you'd re-fi at 10% at $143k and refi at 7% at $130k. Twenty years worth of payments for only $20k in principal. Your payments would total $375k over that period. $350k at 4% would total the same amount but with $200k in principal paid down. I'd much rather be in a situation with $200k in equity versus $20k in equity. And remember, both people have the same monthly payment amount!

tmh79 7y ago

a more accurate measure of housing costs is not "home prices" but "rent prices", and rents have gone up compared with inflation, causing housing to be absolutely more expensive. The generational warfare double whammy here is that the boomers are scooping up an insane unearned amount of value in both real estate appreciation and imputed rents.

mindslight 7y ago

The $150k loan at 15% is generally healthier, as you have increased ability to pay off the principle early by making more than the minimum payments during good times. The larger principle is only a benefit if you will actually see that money by selling the home. Given that everybody needs a place to live, this will only occur if you sell and retire to a low resource area. Everybody else can only look at the illiquid funny money and pretend. Never mind that the larger valuation provides a juicier target for eg real estate taxes.

imtringued 7y ago

I once did the math. Refinancing from high interest to low interest or refinancing low interest to high interest will cost you the same amount in interest over 30 years assuming identical house prices. However during times of low interest house prices are higher than during times of high interest and this means if you get a mortgage with high interest you end up paying less overall for the house but a bigger portion of your payments are used to service interest. Therefore the 15% house is the best deal. >closer to town, larger, better schools, You're shifting goal posts now. Buying a more expensive house doesn't get you any of that. Only buying more expensive land does.