Mortgage Down Payments

[TexasHusker]

Maybe I'm just misinterpreting your use of the word protection. First you say a larger down payment doesn't protect you. Then you say that larger down payment is protection. Which is it?

If you are buying the 200K house and you HAVE the money to make a 20% down payment but choose not to use it, that's entirely different than if you buy the 200K house and only have 6K to put down. Your risk in those two situations is very different.

That's correct. I've done both actually.

I bought a house in 1991 for $78,000. I had to dig through the sofa cushions to come up with 3% for that house. I paid PMI. The housing market could have crashed. Instead, it boomed: In 1995, I sold that house for $111,000.

Risk/reward/consequences

[disneysteve]

I bought a house in 1991 for $78,000. I had to dig through the sofa cushions to come up with 3% for that house. I paid PMI. The housing market could have crashed. Instead, it boomed: In 1995, I sold that house for $111,000.

And that's great, but that's not what happened in 2008, as you well know. Millions of people bought homes they were only able to "afford" because of inane loans with as little as 0% down. As soon as values started to drop, they were screwed and there was an unprecedented flood of foreclosures. I seem to recall that at the worst point, something like 1 in 4 loans in the country was underwater. If every buyer had put down 20%, how different would that crash have been?

[TexasHusker]

And that's great, but that's not what happened in 2008, as you well know. Millions of people bought homes they were only able to "afford" because of inane loans with as little as 0% down. As soon as values started to drop, they were screwed and there was an unprecedented flood of foreclosures. I seem to recall that at the worst point, something like 1 in 4 loans in the country was underwater. If every buyer had put down 20%, how different would that crash have been?

Risk/reward/consequences.

If you bought $50K in Amazon in 2000 you're filthy rich.

If you bought $50K in Blockbuster in 2000 you lost it all.

[disneysteve]

Risk/reward/consequences.

If you bought $50K in Amazon in 2000 you're filthy rich.

If you bought $50K in Blockbuster in 2000 you lost it all.

Sure, but if you bought a house you couldn't afford because you were convinced that values can only go up and then 2008 happened, you lost your home and trashed your credit. That's a little more serious than losing money in the stock market.

[TexasHusker]

Sure, but if you bought a house you couldn't afford because you were convinced that values can only go up and then 2008 happened, you lost your home and trashed your credit. That's a little more serious than losing money in the stock market.

True.

It's all a matter of risk/reward/consequence.

[disneysteve]

True.

It's all a matter of risk/reward/consequence.

Agreed. The problem is that I'm sure very few of the people buying homes or lenders making the ridiculous loans looked at it that way. They were purely focused on the reward, not the risk or consequences.

[greenskeeper]

Let's say you buy a $200,000 house and put down 3% or $6,000 because that's all you've got. The market crashes and the home's value drops to $160,000. Because the economy sucks, you get laid off. You can't afford the home anymore but you can't sell it either because you're upside down on the loan so you're screwed. The bank forecloses and your credit is trashed.

Had you put down 40K, you could sell for 160K and walk away even (minus closing costs). You'd be out 40K but at least your credit would be intact and you could start over.

So I'd say that 20% down did protect you quite a bit.

In that scenario the bank is going to go after the person with equity first, and leave the person that's "up-side down" for later.

[amastewa93]

They were purely focused on the reward, not the risk or consequences.

I agree. This is why I want to be sure I have all the cash I need for a down payment. My parents lost our family home because of this. The lender took a 6% down payment in 2002. My parents lost their jobs (both of them within months of each other and stayed unemployed for a while). By 2012, we were losing our home.

[disneysteve]

In that scenario the bank is going to go after the person with equity first, and leave the person that's "up-side down" for later.

Why would the bank be going after the person with equity? That person would put the house up for sale and be able to get about what they owed. They'd be out their down payment but otherwise be okay. The bank wouldn't be involved.

It's the person who is forced to sell but is 40K underwater that is going to be in trouble.

[TexasHusker]

Agreed. The problem is that I'm sure very few of the people buying homes or lenders making the ridiculous loans looked at it that way. They were purely focused on the reward, not the risk or consequences.

I've fallen for that trap myself !

[snafu]

amastewa, what has tweaked your interest in buying a home? It's far more involved than renting with management looking after the property, taxes, repairs and refurbishment. You have settled on a area based on experience that is a huge step forward. You might learn about cost per square foot and accoutrements that add or subtract from asking price by following electronic listings. Housing is truly capitalistic, since sellers set any price they want and buyers offer perceived value, there is a lot of movement.

What do you need in a house? What do you want in a house? How many bedrms? what size kitchen? back split? two story? garage? Do you want it 'move in ready,' or are you willing to do home maintenance? What style? ranch? Landscaping and curb appeal are both issues. location, location, location is always an issue, what negatives cannot be overcome?

[scfr]

What about you guys, what kind of down payment did you provide for your home?

DH & I have owned 3 homes (1 at a time, with renting in between):
1 - Condo purchased with 10% down
2 - House purchased with around 37% down
3 - House purchased with cash

[amastewa93]

amastewa, what has tweaked your interest in buying a home?

What do you need in a house? What do you want in a house? How many bedrms? what size kitchen? back split? two story? garage? Do you want it 'move in ready,' or are you willing to do home maintenance? What style? ranch? Landscaping and curb appeal are both issues. location, location, location is always an issue, what negatives cannot be overcome?

Awesome questions. I've been looking into buying a home more because I am settling down in life, have a great relationship, bettering my finances, etc. I'm also paying about $1,217 a month in rent and would much prefer that cash be going into an investment, like a home.

As far as the home goes, I'm willing to move into a home in need of repairs... I'd like three bedrooms/two bath (or two bedrooms with a den) and a decent sized kitchen (I cook a lot). No preference as far as ranch/two story. However, I'd like a detached garage.

[disneysteve]

prefer that cash be going into an investment, like a home.

You've used the term "investment" a couple of times. I would encourage you to not view your primary home as an investment. An investment is something you put money into for the intended purpose of making money. You might make money on your home. You might not. You are most likely not going to sell it if the value rises (or falls) because it's your home.

Buy a home because you like it, you can afford it, and it fits your needs. Don't buy a home as an investment.

[amarowsky]

I don't see the harm in buying a "starter home".

Most people want more than they need for a place, and I'm sure a starter home can fully satisfy need and nearly satisfy wants.

Assuming the starter home is probably a significant lower % price and moderately lower % as far as (sq foot and level of luxury).

Buying a 1300 sq. ft. home for $130k would seem like a good way to manage risk and still move into a nice home to start building equity in.

If you buy a 2000 sq. ft. home for $230k, you are taking more much risk, especially if in the earlier part of a career.

As long as you believe the location of the starter home is still a place you would like to live, I think it is a perfectly acceptable way to make a first life purchase without nearly as much commitment as a larger home in comparable/nicer area.

As long as you maintain the home, and it was bought at a good value in a nice area, it should see similar % gains in market value + you have the equity to move up when you choose to be ready. You will also have the flexibility of living below your means (likely) and be better positioned in the future to move into something you WANT more instead of need more.

Just my opinion though. I frequently think of moving out of my 1400 sq foot house, but I really don't see the reason right now (except for having more spare bedrooms for storage). Only thing I would immediately like to increase with a new home purchase, would be a much larger kitchen area, and I just don't think it is justified right now.
(FYI, I'm 30, married w/ out kids, you situation may be much different. I'm sure my strategy for wants/needs will shift after I become a dad).