House Savings Account?

[Zaphod]

Frenchy1011 wrote:

I do currently own a house, and we are definitely happy in this house. I am 30yrs old, and essentially don’t plan on moving until closer to 40. Now if that’s 37 or 40, it doesn’t really matter, but definitely not moving now. When I start saving for the house, it will not affect my 35% savings rate, it will definitely be above and beyond that. My current mortgage is $1500 monthly on a 225k mortgage. I currently have a physician mortgage with a 3ish% rate. Just trying to plan out the next 10ish years as much as possible.

Still sounds like maybe delaying my start for housing savings and putting all I can into retirement until maybe 3-5yrs before I think of moving, and then not saving much more than 5% downpayment?

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Unless you plan on keeping that house, you should have about the right amount of equity to put right into the next opportunity anyway. Even assuming a 0% loan and no appreciation you'd be about 66k equity.

[beagler]

I agree with your conservative notion. There is no rush to buy a huge forever house immediately. Your expenses will go up. It's more property taxes, more upkeep and richer neighbors to keep up with. Lesson from last 10 years is don't count on making money on your house.

Your income stream is relatively secure and you're saving extra anyway. I'd put it in whatever long term allocation you favor (high equity%) If the market tanks, house prices will too. Then take out a bigger mortgage at the bottom. If market was great then you grew your savings, likely at higher rate than real estate appreciation. Equity and housing market are highly correlated. You are not asset poor nor uncertain income stream - no need to maturity match.

If you want more risk and more expense now (and a bigger house) then take the 5% down mortgage. You'll just shift your down payment savings into market exposure. It is leverage even if at a low interest rate cost - there is more risk. In case of a severe downturn, your (bigger) house loses value along with your leveraged investment. Your mortgage debt, of coursel does not change - voila underwater because you put 5% down.

 

[Zaphod]

beagler wrote:

I agree with your conservative notion. There is no rush to buy a huge forever house immediately. Your expenses will go up. It’s more property taxes, more upkeep and richer neighbors to keep up with. Lesson from last 10 years is don’t count on making money on your house.

Your income stream is relatively secure and you’re saving extra anyway. I’d put it in whatever long term allocation you favor (high equity%) If the market tanks, house prices will too. Then take out a bigger mortgage at the bottom. If market was great then you grew your savings, likely at higher rate than real estate appreciation.

If you want more risk and more expense now (and a bigger house) then take the 5% down mortgage. You’ll just shift your down payment savings into market exposure. It is leverage even if at a low interest rate cost – there is more risk. In case of a severe downturn, your (bigger) house loses value along with your leveraged investment. Your mortgage debt, of coursel does not change – voila underwater because you put 5% down.

 

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You have a lot more time and ability to pay down a mortgage during a downturn than the similar analogy in the market however. No one is going to foreclose on a house that is getting on time payments, and a simple over payment here and there will take whatever underwater position closer to safe pretty quickly (a 500k house is not a dangerously expensive one for the poster). You are simply not at risk of getting pulled out of your house in the middle of the night because of a spurious tick that cuts your Zestimate in half, which most certainly can occur in your brokerage account. These risks are not an apples to apples comparison.

We should remember that is it highly unlikely the next crisis hits the housing market like last time, that is the last battle and will not be either the primary source of nor the most affected sector of the economy in the next recession. Will it get hit? Sure, but will be much more normal. That is normal disaster imprinting/myopia that leads everyone (I mean everyone!) fighting the last battle and totally missing what shakes up the economy next.

All that said, and is really just for the being grounded and rational, I agree there is no rush to buy a home. I often have a hard time being convinced its necessary at all, it is extremely expensive from a maintenance and opportunity cost perspective and very very good arguments can be made against it.

[Donnie]

Zaphod wrote:

I’d say this is where you should do the math. What is the actual difference between a down payment and a higher mortgage? How much will you be losing to inflation over this time, how much will this 500k house cost then?

You can save up for 7 years and put the large down payment up, or you can buy much sooner and accumulate that down payment while living in the house and benefit from any appreciation, tax write offs and inflation in your favor. I really dont see much benefit to waiting so long when the realities of the cash are really straight forward.

500k home, 20% down.

PITI: 2184

500k home, 5% down (20k).

PITI: 2934

Difference is 750/month and to not have 80k (222/mo/360 months) up front. 300ish is pmi which will go away in 7-8 years (68 months @0.9% appreciation). You are essentially accumulating your down payment while living in the house and obtaining the tax/any appreciation/inflation/life benefits while being there.

You can see that your 1000/mo savings is made up for by the cost of being in the house at the same time earlier in the payment. Its just where it goes and fringe benefits. Its possible but far from guaranteed to end up ahead due to taxes/inflation/appreciation going in your favor by being earlier.

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I agree that the 0.9% PMI is lower than the expected inflation in housing prices over this time period, so if the choice is between either buying the house now or buying the house later after accumulating the down payment, buying the house now is probably best.

That said, buying a house when you can't afford the normal down payment is almost the definition of lifestyle creep and living beyond your means. Personally, I wouldn't feel comfortable having a $3k mortgage payment on $175k salary, but I am pretty conservative and awfully cheap.

 

 

[Frenchy1011]

What about only saving a 5% down payment a few years before I intend to buy, but then using whatever we make from selling our current house and applying that towards the mortgage as well? Seems that this way we don't need to save tons of money before we buy the house, thus allowing us to put more money toward retirement. And hopefully we can put the 6 figures we make from the current house and apply that to the new house to lower our monthly mortgage payments. And in the off chance that we don't make any money when we sell our current house, we'll still have that 5% saved down payment. Seems reasonable to me but not sure if I'm missing something.

[StarTrekDoc]

One other thing to consider -- property taxes vary from state to state.   We live in Cali and the property tax is fixed at 1% of property value and valuations appreciate quite a lot.

eg:  after ten years in a house, it appreciated from 450k to 950k (with an addition to it to boot) with taxes 4500/yr.  We moved to a home 1200k with $12000/yr taxes with only a 250k cost step up, but the YEARLY taxes were 7500 MORE.

So it's actually an argument to get into your 'forever home' early in California vs other places where property taxes vary annually with taxes approved.

[Dr. Financial Freedom]

Your plan for aggressive saving in retirement and delaying a nicer house is right on.

I am in a similar situation as you, early into attendinghood.  My plan to save for our forever home after maxing out all retirement accounts is to aggressive pay off all debt, including our current mortgage.  If you applied this extra $1200 a month towards your current mortgage you would have paid down over $100,000 extra on your mortgage over that 7 years, effectively "saving" at the mortgage interest rate (3.5% or so), rather than in a savings account at 1%.  This better protects your money from you using it on other items as well.  When you sell your home, you should have $120,000 or more once you sell it that you can apply towards your next home.

Another option is to use a Betterment or other stock market account hoping to earn a better yearly interest rate.  This keep the money liquid, but it is much more risky not knowing when the next big market downturn will be.  Buying a new house earlier is enticing, but this comes with larger property taxes, utilities, new furniture, keeping up with the neighbors, etc.