Parting with House Down Payment

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Hello All,

We are in market for a SFR in Phoenix. The RE market has gotten insane. Sellers were begging buyers in Jan 2013, now they show so much attitude!
We have about total 100k in savings (non-retirement) of which $30k is an emergency fund. We have about $150k in retirement savings (401ks, IRA, Roths etc) which I do not want to touch now.
We have saved every penny as much as possible in the last 1.5 years to make up this $70k as a couple.
We already own a small home with a very small mortgage and are very happy about it. We want to take advantage of this low interest environment before Fed tapering and get a mortgage for a second, bugger home (not sure how it will impact interest rate)

We are only liking/able get into contracts on houses that are worth 5 times our down payment (about ~$340k+..) (~20% down)... which are nice looking ones. Lower than that price houses are crappy 

Whenever we think of parting with the $70k down payment, we feel terrible!That's all our savings (outside of retirement) we have. We do have a $20k student loan debt and a $16k car debt and no other debts.
With this 2nd house' mortgage and other debts our debt ratio will be 50% of income.

1. Should we wait to save more? Prices and interest rates are going up.. day by day.. (we have been doing this for about 6 months, but as the savings get bigger, its harder to part with it!)
2. Any suggestions to change the way we think that makes us feel comfortable in putting/parting away with that much cash down?
3. We always feel we will have a buyers remorse.. not sure how to overcome that.. any suggestions? - this is possibly because sellers are asking outrageous prices lately here..(we always have to waive appraisal and cover the difference, if not - no chance to get accepted)

I always appreciate the people in this forum..for their valuable comments and help.


 

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I think this fear of remorse should not be ignored.  To me, it sounds like you know that you are trying to convince your... (more)

dougan778 (Sep. 07, 2013 @ 1:13p) |

I think people know that rates are going to continue to rise, so they see this increase as a fire being lit under their ... (more)

dougan778 (Sep. 07, 2013 @ 1:20p) |

Agreed. If the OP wants to speculate on interest rates there are financial products for that he can use without doubling... (more)

TravelerMSY (Sep. 07, 2013 @ 2:14p) |

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it's not 'parting' but 'trading'

lots of words, no information

You are considering 5 different markets for this purchase?

What is the purpose of the new property? Investment property, new residence? What will you be doing with the existing property? Continuing to live in it, rent it out, sell it?

Sitting on $100k cash, why do you have a car loan? Why do you have student debt?

- Buying for upgrading and taking advantage of low interest rate/cheapER prices (not cheap anymore!)
- Will be renting the existing home. I expect at least a $350 net profit , once rented out 
- Considering only 1 market which is home town.  Phoenix AZ.

Whenever we think of parting with the $70k down payment, we feel terrible!That's all our savings (outside of retirement) we have.

No it isn't you'd still have 30k.  Savings is savings.

What is savings for?  Just to have it the bank?  You aren't parting with it, you're simply moving it from your bank account into home equity.  It isn't gone.
We always feel we will have a buyers remorse..

You probably will.  It's normal.

 

Prices always go up when you're buying.  They're deflated when you're selling. 

When I bought my first home, I had the same feeling - that I was going from being 'rich' to 'poor' overnight. But, I had more than adequate cash flow & enough savings so everything was fine. It seems like you're in the same boat if you can save $70K in a 1.5 years. I now find it kind of amusing how stressed out I was. It's a little hard to give good advice without more details (income, other expenses, likelihood of increased income/expenses).

70k is like a 5% down payment in the bay area.

I was in the exact same situation. I too wanted a house but didn't want to pay for it. Unfortunately, I couldn't find one of those so I eventually settled on a house that I did have to pay for.

Could always look into the 80/10/10 rider mortgages. That way you only lose half of your cash and can quickly pay down the secondary mortgage at your own pace.

Ultimately, it probably makes more sense to just put 20% down. It's going to save you money in the long run. Plus it sounds like you have adequate cash flow, so you could save another 30-50k next year while increasing your standard of living.

Buying house you don't need just to gamble on direction of interest rates does not sound like a good financial decision.

If it only took you 1.5 years to save up $70k, you will save it up again soon. If you are too hesitant, then buy something cheaper. I'm sure Phoenix of all places has nice houses for <$350k.

Luniz97 said:   70k is like a 5% down payment in the bay area.
  It's a neighborhood in Detroit.

What were you waiting for? Should have bought 12 months ago. You would have gotten the same house 70k less. You screwed up big time. Now it really doesn't matter. Damage is done. If the rates go up, prices will come down. Don't rush now.

regor1000k said:   - Will be renting the existing home. I expect at least a $350 net profit , once rented out 

 

  
Ever been a landlord before?  Do you figure $350 profit by taking expected rental amount minus mortgage payment?  Or are you also considering vacancy loss, turnover expenses, tenant damages not collectible, maintenance, landscaping, property management fees (if you decide to go this route), advertising costs, your time dealing with tenant/property issues, insurance & property tax?

BTW, unless your interest rates are super low, I'd suggest paying off your car loan and student loan.  What's the interest rate on your existing home?  Is it worth it to keep that mortgage active at the current rate, or perhaps you should consider refinancing that one too?  If you plan to refinance, you'll want to complete that before looking at a new home.

king0fSpades said:   What were you waiting for? Should have bought 12 months ago. You would have gotten the same house 70k less. You screwed up big time. Now it really doesn't matter. Damage is done. If the rates go up, prices will come down. Don't rush now.
  
are you serious or just intimidating OP?  Don't you there is still room to grow in housing prices? Esp in PHX

MarkVittaker said:   
king0fSpades said:   What were you waiting for? Should have bought 12 months ago. You would have gotten the same house 70k less. You screwed up big time. Now it really doesn't matter. Damage is done. If the rates go up, prices will come down. Don't rush now.
  
are you serious or just intimidating OP?  Don't you there is still room to grow in housing prices? Esp in PHX

  No one knows the future.  If the interest rate goes higher, the price usually drop.  However, in the beginning of rising interest rate, people will chase and like to lock up the rate as quick as possible which would also driving the housing price goes higher.  So in other word, no one knows.

gremlins718 said:   
MarkVittaker said:   
king0fSpades said:   What were you waiting for? Should have bought 12 months ago. You would have gotten the same house 70k less. You screwed up big time. Now it really doesn't matter. Damage is done. If the rates go up, prices will come down. Don't rush now.
  
are you serious or just intimidating OP?  Don't you there is still room to grow in housing prices? Esp in PHX

  No one knows the future.  If the interest rate goes higher, the price usually drop.  However, in the beginning of rising interest rate, people will chase and like to lock up the rate as quick as possible which would also driving the housing price goes higher.  So in other word, no one knows.

  Almost 50% houses in phoenix area are bought in cash, mostly by financial institutions. Once they start dumping the houses, prices will go nowhere but only down. Real consumers still don't have that much buying power. 

MarkVittaker said:   
king0fSpades said:   What were you waiting for? Should have bought 12 months ago. You would have gotten the same house 70k less. You screwed up big time. Now it really doesn't matter. Damage is done. If the rates go up, prices will come down. Don't rush now.
  
are you serious or just intimidating OP?  Don't you there is still room to grow in housing prices? Esp in PHX

  I am in phoenix and own a multiple properties.  Prices are at a 5 year high.  Actually they are already down from last month.  
Like you check fatwallet, I monitor single family house prices.  
 

gremlins718 said:   
MarkVittaker said:   
king0fSpades said:   What were you waiting for? Should have bought 12 months ago. You would have gotten the same house 70k less. You screwed up big time. Now it really doesn't matter. Damage is done. If the rates go up, prices will come down. Don't rush now.
  
are you serious or just intimidating OP?  Don't you there is still room to grow in housing prices? Esp in PHX

  No one knows the future.  If the interest rate goes higher, the price usually drop.  However, in the beginning of rising interest rate, people will chase and like to lock up the rate as quick as possible which would also driving the housing price goes higher.  So in other word, no one knows.

  That can be said about any investment, however in Phoenix they are going no where but down. 

Wait, you're stressed about spending savings on a house, but it would be a second house?

Just don't buy it, dummy.

Dummy is a bit harsh, but I get the sentiment.

Sounds like you have a pretty good housing situation now - and with your savings you are off to a good start on future financial independence. Do you really NEED a bigger house?

I don't claim to be an expert on anything, but here's what I'd do: use the $70k to pay down as much debt as possible (starting with highest rates) -- mortgage, auto, student loans, whatever... and keep saving! Don't buy a second home because of what you perceive the market to be doing (P.S. being a landlord is not fun). To save $70k in 18 months is great, keep up the good work!

regor1000k said:   - Buying for upgrading and taking advantage of low interest rate/cheapER prices (not cheap anymore!)
- Will be renting the existing home. I expect at least a $350 net profit , once rented out 
- Considering only 1 market which is home town.  Phoenix AZ.

  
What do you think would happen to purchase prices if interest rates go up another 1 %?

tolamapS said:   
regor1000k said:   - Buying for upgrading and taking advantage of low interest rate/cheapER prices (not cheap anymore!)
- Will be renting the existing home. I expect at least a $350 net profit , once rented out 
- Considering only 1 market which is home town.  Phoenix AZ.

  
What do you think would happen to purchase prices if interest rates go up another 1 %?

  That's what happened in the last 2 months.... interest rates went up by 1 % and the prices also went up by 5% ! I am still confused as to how and why this is happening.. especially in the sun belt states! I believe there is no logic going in the housing market at present. The full-time/well paid employment rate is still consideably down and other economic factors are just doing ok, 40% of homes in sun belt are still underwater but the housing market is in super upswing... wonder who is buying? AZ,NV are at 25% more compared to last year!

MarkVittaker said:   
tolamapS said:   
regor1000k said:   - Buying for upgrading and taking advantage of low interest rate/cheapER prices (not cheap anymore!)
- Will be renting the existing home. I expect at least a $350 net profit , once rented out 
- Considering only 1 market which is home town.  Phoenix AZ.

  
What do you think would happen to purchase prices if interest rates go up another 1 %?

  That's what happened in the last 2 months.... interest rates went up by 1 % and the prices also went up by 5% ! I am still confused as to how and why this is happening.. especially in the sun belt states! I believe there is no logic going in the housing market at present. The full-time/well paid employment rate is still consideably down and other economic factors are just doing ok, 40% of homes in sun belt are still underwater but the housing market is in super upswing... wonder who is buying? AZ,NV are at 25% more compared to last year!

  I agree that's what we have seen here too..

regor1000k said:   
3. We always feel we will have a buyers remorse.. not sure how to overcome that.. any suggestions? - this is possibly because sellers are asking outrageous prices lately here..

 

  I think this fear of remorse should not be ignored.  To me, it sounds like you know that you are trying to convince yourself to "buy high".  Whenever you see reports of real estate sales declining in your area, you will always remember that you knew you bought in when the market was high.   If you think the housing market is inflated now, maybe it will correct itself in the near future.  Say that happens in 1.5 years, and your local housing market settles at about 20% less than it's at now, making that house worth about $275K.  If you put  $70K down, that money is now basically gone because you still owe $275K.  I'm not trying to convince you against this purchase, just pointing out that you should take this fear seriously.

You could compare that negative scenario above with saving another $70K in the next 1.5 years and having $140K to put towards a comparable house, now valued at $275K (~50% equity). 

Of course that's just one possibility, the market could continue to rise, along with interest rates, etc.

IMO if you are able to save $70K every 1.5 years, you should be able to pay that house off very quickly.  If you can get a 5% mortgage now and are worried that you will get stuck with an 8.5% mortgage in the future, the impact of that extra 3.5% might not be as significant as you think if you plan to pay the mortgage off in, say,  6 years. 

I guess what I'm getting at-- If your plan is to pay the house off quickly, I think the fluctuation in home prices in the next couple years will probably have a greater impact than the fluctuation in interest rates.  If this is true, a jump in interest rates might actually *help* you, if it causes sales to slump and prices to go down.

Just one perspective, but something to think about.

MarkVittaker said:   
tolamapS said:   
regor1000k said:   - Buying for upgrading and taking advantage of low interest rate/cheapER prices (not cheap anymore!)
- Will be renting the existing home. I expect at least a $350 net profit , once rented out 
- Considering only 1 market which is home town.  Phoenix AZ.

  
What do you think would happen to purchase prices if interest rates go up another 1 %?

  That's what happened in the last 2 months.... interest rates went up by 1 % and the prices also went up by 5% ! I am still confused as to how and why this is happening.. especially in the sun belt states! I believe there is no logic going in the housing market at present. The full-time/well paid employment rate is still consideably down and other economic factors are just doing ok, 40% of homes in sun belt are still underwater but the housing market is in super upswing... wonder who is buying? AZ,NV are at 25% more compared to last year!

  I think people know that rates are going to continue to rise, so they see this increase as a fire being lit under their ***.  After awhile, probably only a few months, we'll see the rates continue to grow as expected, and all these people will have their homes purchased, and then the natural market balance will take over and I think we'll see prices drop in areas affected like this.

If you want evidence of this, see this thread: http://www.fatwallet.com/forums/finance/1296401/

The recent surge in real estate demand is scattered across different urban areas, with the severity varying greatly from area to area.  This makes me think that the current real estate market level is just a speculative bubble versus a natural market balance.

Matr0skin said:   Buying house you don't need just to gamble on direction of interest rates does not sound like a good financial decision.
  
Agreed. If the OP wants to speculate on interest rates there are financial products for that he can use without doubling down on real estate.

And getting a low rate now isn't that valuable if it's on a loan to buy an overpriced house at the peak of the market.

And whether this house is a good investment or not, the interest rate is just one piece of the puzzle. Calculate your cap rate on the investment as a whole and then decide. See the thousand page real estate thread here for details.



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