How the heck did mortgages become so OK??

[blankcheck]

Beppington, are you a homeowner? If so, did you also first earn the cost of the house before you bought? Did you rent while saving for the house? Live with home-owning family? It really would be such a rare example for someone to buy a house, never rent, and yet pay 100% cash upfront for the house. t I would like to hear how people might do it.

I agree with this. This is an exercise in philosophy/theory, but without practice (as in, more people chime in with direct examples with all of the criteria of it being done) it loses some bite.

I have a mortgage. I love the location I live. I enjoy my work. My wife enjoys her work. We are close to our friends and family (as in, 30 minutes or less from parents, siblings, best friends, etc). We save at least 15% gross for retirement. We save at least 5% more for shorter term goals/EF. I don't lose sleep at night because I knew how much I could afford to pay in the first place. I have neither the interest or the energy to build a home from scratch. I'd much rather spend that same amount of time enjoying time with those things I just mentioned and know that I have a plan in place to deal with everything that's coming our way.

[Beppington]

Beppington, are you a homeowner? If so, did you also first earn the cost of the house before you bought? Did you rent while saving for the house? Live with home-owning family? It really would be such a rare example for someone to buy a house, never rent, and yet pay 100% cash upfront for the house. t I would like to hear how people might do it.

I detailed my situation in another thread that I can't find now, but here it is. First, I admit I was lucky enough to have a dad willing, able & knowledgable enough to help me actually build most of my house ourselves. I can't provide my dad, but I can help anybody who's interested to know most if not all the steps involved in building your own house.

So ... at 18 I moved out from the parents & rented an apt for a while, until it dawned on me I could do better. First step of the plan: Move back in with parents; Ouch, but I had to do it. I've always been a decent earner & saver, so I was able to get started with construction with my savings & use most of my regular paycheck to continue paying for construction as we went along building for 26 months. Yes, it got old sometimes spending nearly every weekend & most weeknights hammering nails, cutting boards, screwing drywall on, stapling insulation in place, etc. but I firmly believe most able bodied people with a little drive/ initiative & stick-to-it can do most of the things I'll list below. After all, I'm no genius, I'm no pro contractor, & I'm no hercules (I'm 6' 155 lbs). I spent a total of $65K. I've lived here ever since & the house is worth between $200K-$250K now.

I think most able-bodied people should be able to do: Forming for the foundation; Rolling out the rolls of visqueen to cover the fill dirt under the foundation; Rolling out the wire mesh that goes in a foundation; Framing; Insulation; Drywall; Taping; Corner bead; Baseboards; Painting; Tiling, & prob other tasks I'm forgetting. Even if you don't do any of these but instead just act as your own contractor, who pretty much just organizes his sub-contractors, you'll save a mint. & for each additional task you can do yourself, you should save even more.

By the time you're done, you'll have probably saved yourself a small fortune, assuming you save some ahead of time you'll likely have a zero or tiny mortgage, you'll have some serious (additional) character!, you'll have some more skills you can use for many other things in life, you'll know how stuff works!, & you'll have a notch in your belt/ accomplishment probably nobody else you know does. Did I mention no mortgage? You'll get to keep your whole paycheck!

[irmanator]

mortgage or rent either way you pay somebody something to live somewhere

[jIM_Ohio]

Beppington

I have a positive and negative about your situation
Good:

you were fortunate to have a good head on your shoulders at a young age, blessed to have a father/family to support you (financially) while you built your house. Not only that you are quite fortunate that your family "business" of some sort was able to help build the house with you.

I do appreciate people which have family relationships with that.

My comment to the negative side is that forcing your experience on other people (to point where you suggest "everyone should be able to do this") is quite a tough pill to swallow. I assure you that you want me no where near a foundation being poured, and if you gave me a hammer, I could pound in a nail with the best of them, but I get distracted easily, and if I were to use a nail gun, there might be some dead birds caught between the walls.

I am not cut out for physical labor unless its shoveling snow or painting. Not everyone has the time to learn those skills- not everyone even has the time to be their own contractor. At time we built our second house I was working 14 hour weeks (2 jobs). One doing what paid the bills and one working for peanuts doing what I love to do. Because I choose to live my life that way should not mean I cannot either carry a mortgage or live my life by standards set by someone else.

I have family in construction business, but their policy is to not do any work for family (for pay or for free). And you don't want some of my siblings anywhere near a construction site with nails, if you think my dead birds were bad, one of my brothers might put a body in their, so asking family for help is not a good idea.

It is a good discussion, but I shake my head when I see a belief that everyone should be mortgage free- that is not a reasonable expectation IMO when you first acquire a house.

[Beppington]

Beppington

I have a positive and negative about your situation

We're hammer-only builders , no nail guns! I've never even tried one, although I'd like to

But ... Hey, that's my particular story. I think "no mortgage" can be done other ways, too, as I've said. Maybe I am giving people too much credit for been able to do some manual labor, but there's also the "buy small first, then move up when money permits" plan.

With a "short" 15-yr fixed $250K mortgage at "only" 5% you'll be paying $1,000 a month just in interest for the first year, & for most people that happens at the very beginning of their working lives ... where it hurts the most ... being that that $12K could grow to a pretty large sum over 30-40 years. Obviously I'm suggesting it would be very good to figure out whatever way you can to stay out of a mortgage.

I suppose we've beat this topic to death now

[jIM_Ohio]

We're hammer-only builders , no nail guns! I've never even tried one, although I'd like to

But ... Hey, that's my particular story. I think "no mortgage" can be done other ways, too, as I've said. Maybe I am giving people too much credit for been able to do some manual labor, but there's also the "buy small first, then move up when money permits" plan.

With a "short" 15-yr fixed $250K mortgage at "only" 5% you'll be paying $1,000 a month just in interest for the first year, & for most people that happens at the very beginning of their working lives ... where it hurts the most ... being that that $12K could grow to a pretty large sum over 30-40 years. Obviously I'm suggesting it would be very good to figure out whatever way you can to stay out of a mortgage.

I suppose we've beat this topic to death now

You make this sound like a bad thing (paying $1000/mo in interest). I pay more than that... so we are at opposite ends of the spectrum.


Here is the math which goes thru my mind...

I had rent of $690/mo in 1997 at the age of 24.
let's review my side of the story

it was a 2 BR apartment... I was single at the time, but I like having different places to watch TV, play on computer and sleep.

A brief history lesson- in 1997 I accepted a job with a small software company. I was offered 1 job in two locations- I could have stayed in Michigan (Detroit) or moved to Cincinnati. I foolishly thought Ohio taxes were lower, and decided moving away from Michigan (a change) would do me good, and moved to Cincinnati. I knew NO ONE in Ohio. My company referred me to woman which knew the area, so I went on vacation July 4, routed myself thru cincy to find an apartment (my company referred me to a woman which knew the area), then trekked up to Michigan to close out my lease on apartment and prepare to move to start work July 17. My moving decision (exact location) was made within 2-3 hours of finding an apartment which met my needs- I was staying at a hotel incurring costs until I made that decision. I incurred about $1000 of moving expenses which included that initial hotel stay, renting a uhaul, paying gas for 3 vehicles to move me (my car, Uhaul, gas for 3rd friend which was driving him and friend back to Michigan after the move).

So fast forward 1997-2000. In 2000 I decided I would stay in Ohio permanently (I had previous job offers during last 3 years to move to NY-NJ-Ohio or MI) but decided I liked status quo and this was a good place to be, not to mention my girlfriend lived with me when I was in town (I traveled 50% of the time to customer sites).

At that point my rent was $710/mo or so, and in 2000 I was looking at a condo. What price condo would a person paying $710 in rent want? The math was about a $1000/mo condo payment is the same as a $710 rent payment (factor in mortgage deduction at 25% tax rate). So I moved to a 2 BR condo with idea that the condo was big enough for a family if life changed in that regard.

Fast forward from 2000-2005
We moved to our current house, which was the "dream" house. It was a little more than I wanted to pay at the peak of the real estate bubble. My payment as a percent of my gross pay is about 25% per month. We clearly bought at top of bubble and its tough to undo that now.



Here is my point-
In my example, my job located me in a place where even if my family could help, renting in my situation was required. Could not build a house from accepting a job offer in April. to starting in July (college graduation prevented an immediate start). No funds available and was not even sure about the job in 1997- considering I had not held any job for more than 15 months before 1997, no reason to think this time would be different.

When choosing the condo we did a good job on price. It fit into same budget we had renting, and we could have gone smaller (we had an 1800 sq ft townhouse, there were smaller condos in same community for cheaper). What we had was the flexibility to stay longer and add houseguests (and at one point my FIL lived with us for 3 years).

When choosing the house, it was about 2 issues. The condo community was not condusive to little kids. There were not many people our age living there, maybe there was but the environment as a whole was not a social neighborhood. No way I could have known that (IMO) before moving to that community. It was 5 minutes from where I worked, and a co-worker lived in same community. Easy highway access for wife, which at the time worked 45 minutes south in Kentucky. Most signs pointed to good location, but environment for a family was not 100%. Second issue was 600 of the 1800 sq ft was in a finished basement. We had the space, but it was not the type of space which made raising a toddler easy- 2 BR on same floor, but playroom would be 2 floors away and there were some flaws with that. No way at 27 I could think like that, but at 32 I was much smarter...

My wife had also switched jobs so highway access (at the time) was not a factor (in 2004).

By time we moved in 2005 wife had a new job, much higher income than before and we moved into house. We rented for about 4 months while house was built (we did not sign contract to build until we sold condo), and here were lessons learned.

1) Real estate is about knowing what you like and what you dislike- to point you may more for avoiding a dislike (long commute) or pay less if you would rather deprive yourself of a like in exchange for cheaper rent. In my case this is space (I need my space).
2) what you like changes with time
3) If you know the location, you know what you can save on and what costs you
4) Moving has costs and trading up every 2-3 years or even every 5-7 years is expensive. if this is the intention, buy the next house bigger than what you think you need and save yourself a 6% realtor fee and about $2000 in moving expenses. Factor that into the price of the house you can afford (if current house sells for $200,000, and you want to upgrade to a bigger house worth $275,000, 6% of 275 is $17k, plus 2k to move is 19k. Might as well look at 300k houses to save the moving and selling expenses. If you can find what you want for 275k, good. Otherwise look for 300k and you might save yourself a move in 5-7 years.

When we rented in 2005 we paid half of what I paid in 1997. Part of this is we knew it was short term, part of this is we knew where to look on our own, and part of this is we had time to look over 2-3 months (and not 2 days) to make a decision.

No way I would have changed any of the purchase decisions. Obviously I wanted a better price in 2005, but it appears our area is recovering "well".

[Beppington]

Jim

Maybe the idea of "no mortgage" is best directed at people that don't yet have one, & the younger the better. Parents could start engraining in their kids: "No mortgage, there are other ways; It ain't gonna be easy, but there are other ways & you'll thank me later". (After all, was college easy?) At least this way younger folks will consider a mortgage a last resort rather than just assuming right off the bat that they need to jump into mortgage debt just like everybody else, including their parents.

Gosh darn it, I thought I wasn't gonna post any more about this

But there's just GOT to be a better way man!

[GREENBACK]

Jim



But there's just GOT to be a better way man!

I don't believe there is a better way. If I had the money way back when to buy my house outright I wouldn't have done it. Why give all that money away at once when it could be invested. You earn more off of smart investments than you lose to any interest bearing mortgage loan. The tax advantage makes this more so. I don't care much for the banks and playing into their greedy little hands doesn't suit me. I prefer to play their game to my advantage.

Buy a house with cash up front if you choose but don't fool yourself into thinking it's some great financial manuever.

[jIM_Ohio]

Jim

Maybe the idea of "no mortgage" is best directed at people that don't yet have one, & the younger the better. Parents could start engraining in their kids: "No mortgage, there are other ways; It ain't gonna be easy, but there are other ways & you'll thank me later". (After all, was college easy?) At least this way younger folks will consider a mortgage a last resort rather than just assuming right off the bat that they need to jump into mortgage debt just like everybody else, including their parents.

Gosh darn it, I thought I wasn't gonna post any more about this

But there's just GOT to be a better way man!

This is good discussion until some newbies post.

If you were able to convince a young person "no mortgage ever" and they did what you did, or followed a similar path and pretty much had their first house young, and had that house paid for you did a good thing.

My kids will learn more about manage your debt appropriately and weigh risk and reward (risk and reward both financially and in other aspects of life). My mortgage is an opportunity cost. I have been doing math and looking at how quickly I could come up with 300k to more or less pay it off (could be 15 years to have me generate that as excess cash flow in the budget). But that same 300k could be worth $ 1 M or more to my retirement accounts balance.

So the cost of the goal (no mortgage) is retiring much later in life, and that is not in the works for this worker bee.

The risk/reward is this
I know I need to retire
I know I need to pay off the debts I have

Both are goals, the risks are which one needs to be funded first- the one with the highest cost (which is retirement- will cost me about $1 .5 M). Once I am confident I have the highest cost funded, I shift a significant amount of resources to the next item on the list (a mortgage).

By the time the retirement accounts are known to be fully funded, I will be able to generate the 300k needed to pay it off in much less than 15 years (free cash flow should be higher later in life).



Here is another "life" question for you. If you believe in no mortgage- ever- and someone had say $3000/mo ($36k per year) free cash flow. House 1 is paid for. They vacation a lot in ski areas, and some of those ski areas also have lakes by them in summer. Would you advocate a mortgage for a vacation home?

To me the cost is expensive vacations. Meaning if you advocate saving the 36k until a person had 200k-300k amassed to buy the vacation home, they missed on 7-10 years of cheap vacations.

However if they took a mortgage out and could justify paying $2000/mo to mortgage on vacation house (with another $1000/mo budgeted to travel there to use it often) I would suggest this is a better way to use the money.

Thoughts?

[disneysteve]

I don't believe there is a better way. If I had the money way back when to buy my house outright I wouldn't have done it. Why give all that money away at once when it could be invested. You earn more off of smart investments than you lose to any interest bearing mortgage loan.

I agree and again, I think this is what you are missing, Beppington. A mortgage isn't a bad thing if you buy something affordable and are smart with your money overall. The problem, and on this point I agree with you, is that far too many people buy more house than they need and more than they can comfortably afford.

We did not have the cash to buy our house in 1994. We did put down 20% and financed 80%. We've refinanced a couple of times since then and dropped the interest rate and payment thanks to the equity we've built up along the way. We even borrowed against equity once to repay the last of my student loans and saved a bunch of interest in the process since the loans were costing us a lot more than the HEL did. The HEL is repaid now and we are left with just over 90K on the loan and we are making extra payments on that. We could pay it off at any moment as we now have more than enough money to do so and have had enough for years. It just doesn't make sense to do it.

[LivingAlmostLarge]

Can't be done without help. Beppington here lived with family. What happens if you are an immigrant all alone without credit history, without family, without money? You have your paycheck and that's it.

That's my DH (and many friends and family). Then you RENT. Then you save like we did, for a downpayment.

Now then we saved in 2 years $20k for a 1 bd condo down payment, a $50k combined salary in San Diego. That is not easy. We were living very cheaply in an apartment costing us $1k to rent!

So please tell me how do people buy homes for $65k without help at all? Don't forget, that as a foreigner, you'll have to pay more for deposits, buy a car (even used that's a couple thousand), then repairs, then save for retirement, then pay to process your visa or green card applications and fees (usually hire a lawyer, especially if there are problems! about $8-10k), etc.

Plus, usually if you emigrate or move away from family, you move where jobs are, usually not in rinky dinky towns. Usually in metro areas where you have contacted a company for a position. Usually expensive.

We're another couple who bought a townhouse for a ridiculous amount of money. We put down 20% and currently have around $200k in equity. Yep, we can afford a SFH in many areas, but we choose not to move because of our job situation.

So how do we save up money with no help? It's a little interesting that you immediately assume people are all in your situation. Not to mention many people do have student loans usually after college, I did, and I paid them off. So I rented, paid off student loans, and I'm expected to somehow save for a house 100% in full while saving for retirement?

I don't think I'm impractical at all, rather I think I've seen and experienced a very different life. I realize it's a nice thought a paid for house in cash, but reality is there are so many other issues at play that you probably have never experienced or imagined.

Many people don't have familial help or support to live for cheap. Or the opportunity to move freely.

So tell

[jIM_Ohio]

Can't be done without help. Beppington here lived with family. What happens if you are an immigrant all alone without credit history, without family, without money? You have your paycheck and that's it.

That's my DH (and many friends and family). Then you RENT. Then you save like we did, for a downpayment.

Now then we saved in 2 years $20k for a 1 bd condo down payment, a $50k combined salary in San Diego. That is not easy. We were living very cheaply in an apartment costing us $1k to rent!

So please tell me how do people buy homes for $65k without help at all? Don't forget, that as a foreigner, you'll have to pay more for deposits, buy a car (even used that's a couple thousand), then repairs, then save for retirement, then pay to process your visa or green card applications and fees (usually hire a lawyer, especially if there are problems! about $8-10k), etc.

Plus, usually if you emigrate or move away from family, you move where jobs are, usually not in rinky dinky towns. Usually in metro areas where you have contacted a company for a position. Usually expensive.

We're another couple who bought a townhouse for a ridiculous amount of money. We put down 20% and currently have around $200k in equity. Yep, we can afford a SFH in many areas, but we choose not to move because of our job situation.

So how do we save up money with no help? It's a little interesting that you immediately assume people are all in your situation. Not to mention many people do have student loans usually after college, I did, and I paid them off. So I rented, paid off student loans, and I'm expected to somehow save for a house 100% in full while saving for retirement?

I don't think I'm impractical at all, rather I think I've seen and experienced a very different life. I realize it's a nice thought a paid for house in cash, but reality is there are so many other issues at play that you probably have never experienced or imagined.

Many people don't have familial help or support to live for cheap. Or the opportunity to move freely.

So tell

good post

[Beppington]

Can't be done without help. Beppington here lived with family. What happens if you are an immigrant all alone without credit history, without family, without money? You have your paycheck and that's it.

You brought no money with you when you came? Why did you have no money?

That's my DH (and many friends and family). Then you RENT. Then you save like we did, for a downpayment.

Now then we saved in 2 years $20k for a 1 bd condo down payment, a $50k combined salary in San Diego. That is not easy. We were living very cheaply in an apartment costing us $1k to rent!

So please tell me how do people buy homes for $65k without help at all? Don't forget, that as a foreigner, you'll have to pay more for deposits, buy a car (even used that's a couple thousand), then repairs, then save for retirement, then pay to process your visa or green card applications and fees (usually hire a lawyer, especially if there are problems! about $8-10k), etc.

Plus, usually if you emigrate or move away from family, you move where jobs are, usually not in rinky dinky towns. Usually in metro areas where you have contacted a company for a position. Usually expensive.

We're another couple who bought a townhouse for a ridiculous amount of money. We put down 20% and currently have around $200k in equity. Yep, we can afford a SFH in many areas, but we choose not to move because of our job situation.

So how do we save up money with no help? It's a little interesting that you immediately assume people are all in your situation. Not to mention many people do have student loans usually after college, I did, and I paid them off. So I rented, paid off student loans, and I'm expected to somehow save for a house 100% in full while saving for retirement?

I'm well aware that not everybody's situation is the same as mine. Just trying to encourage people to avoid mortgages, however they can manage to do that.

I don't think I'm impractical at all, rather I think I've seen and experienced a very different life. I realize it's a nice thought a paid for house in cash, but reality is there are so many other issues at play that you probably have never experienced or imagined.

Many people don't have familial help or support to live for cheap. Or the opportunity to move freely.

So tell

I tried in my many posts here to use terms like "most", as in most people should be able to avoid a mortgage by making certain decisions, doing certain things, planning well, etc. "Most" means not all.

But, how do you think the various rich/ famous people that we've all heard stories of that were born into poverty, grew up poor, & tried & tried & perservered against all the various forces against them, in order to get themselves out of the slums, managed to do it? I'd bet most didn't do it by taking on a mortgage.

[jIM_Ohio]

But, how do you think the various rich/ famous people that we've all heard stories of that were born into poverty, grew up poor, & tried & tried & perservered against all the various forces against them, in order to get themselves out of the slums, managed to do it? I'd bet most didn't do it by taking on a mortgage.

Disagree unless you bring data to the table.

As I stated in a reply to DisneySteve, where you live has more to do with financial success than just about any other single factor, so people leaving the city to get a mortgage in a suburn would be a great way to break the economic cycle of past generations living in poor conditions.

[Beppington]

From What Rich People Do - A Study

"In a recent survey of the Forbes 400 (very rich people), the majority of them stated that the most important thing they have done on their way to millionaire status is to become and stay debt-free."

Also "Most millionaires also live in modest homes, and may be living next door to you and I. They do not overextend themselves by making outrageous mortgage payments, nor live in huge homes. Believe me, most of the huge homes you see have huge mortgages and expensive car payments parked out front to match."

Some of you may interpret that as, "See there, millionaires have modest homes with modest mortgages." I'd argue that zero mortgage is even better.

Poor people borrow money. Rich people lend money. Why not do what rich people do as soon as possible?