Money Saving Mindset- Group Journal

Budgeting
1285

@noodle have you played with the rent vs buy calculator?

Basically what this taught me is that whether it’s a good investment REALLY hinges on whether housing prices go up or down, and how long you stay in the house. I am very conservative so we did all our planning with this calculator assuming housing prices were flat or slightly declining. If we were for sure planning to move in a 5-7 year timeframe then I wouldn’t have bought at all because I personally see too much risk and know too many people who were underwater in 2009-2015. But, we’re planning to stay in this metro area for the long haul and decided that as long as it fit into our budget we were willing to buy.

Funny story, the condo we bought was also available to rent so I know exactly how much the tradeoff was based on this calculator. It was slightly better financially to rent but the. I would have had to live with their terrible landscaping choices :stuck_out_tongue_winking_eye:

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1286

Something that really helped me was finding a trustworthy mortgage broker. When I finished grad school I was paying $1380 per month in rent for a studio apartment and I decided I wanted to buy a house or condo to decrease my living expenses. I remembered an old landlord in college did *something with mortgages so I sent him an email and asked if he could sit down with me. It turns out he is a mortgage broker. We talked over the phone and he went through all of my savings accounts and such with me and helped explain the difference between an FHA loan, a conventional loan, PMI, etc. He actually convinced me to wait a year and save a certain $ per month to have a stronger mortgage file and then when it was time he helped me pick the best mortgage. He even had me lock a few different ones when the interest rates dropped. A good mortgage broker can really help you understand the whole process and find the best mortgage for your situation.

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1287

Yes, this! I was prequalified before I bought my house for a conventional mortgage with 3% down. I ended up going with a local credit union and they required 5% down. My PMI is $29 a month…I was dreading it and thought it would be this huge chunk of my monthly payment but it is barely anything. Obviously this varies by home value and probably location in the US/credit score? But I’d be surprised if the numbers are as high as you’re planning for @AllHat .

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1288

So, the PMI is calculated as a % of the purchase price of the home, and the % drops when you have a lower loan to value ratio, until you get to 0% at 80% ltv. Much higher priced houses will therefore have higher PMI.

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1289

I see. For us: insurance for all local risks. 6 months flush e fund, 9-12 months lean. Careers (although I’m not working, presently) in two radically different, recession proof and high demand industries. (Well, I’m recession proof, SirB’s is counter cyclical). Plus a large metro area, so little pressure to move. Rent vs buy was firmly pro buy, and buy now vs save calculators were firmly pro buy. Our PMI is $96. Also, we could afford the house even if my husbands salary was 50% what it is now :woman_shrugging:

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1290

As someone in the same housing market, I think these fears all make sense. It’s not like there are really ‘up and coming’ neighborhoods left at this point, especially you want to stay reasonably close to your job. The geography of the area plus the sheer number of people living here makes it a different problem than most other places in the country (other than NYC maybe?)

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1291

Ahhhhh! I appreciate you all so much! You are all part of my research process :slight_smile: I think one of the best things I do is surround myself with people who are a lot smarter/more educated than I am!

@mountainmustache29 That’s great to hear! That PMI is so manageable. I hope it’s true for me as well!
@Economista Yes, that is part of my plan! I have a friend who can introduce me to someone she trusts (she has lived here for 30+ years and I trust her) so I hope they can help me, I just don’t want to do it too prematurely. It’s also good to hear that you’ve done this successfully multiple times.
@galliver I definitely agree it’s preferable to put 20% down, like that’s for sure the ideal in my mind, but sometimes it’s necessary to take more risks when you have fewer options or resources. I think that’s why you often see risk aversion/fear increase the safer people are!

I’ve learned so much from all of this already! My word doc is bursting! :laughing: I have a lot of reading to do now.

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1292

I think PMI is calculated on your loan amount, so it obviously varies widely. I bought a cheap house in a cheap area so I didn’t have PMI but I bet it would have been super low.

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1293

Yes! I meant the conventional loan part!

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1294

My PMI was something like $50 a month and we got it removed because the house appraised high enough a couple years into owning to make our loan to value under 80%. With the way the market has been appreciating (a house smaller than mine and with less than half the yard just sold for 100k more than I paid), that could be your sneaky way to 20% equity.

You got this!

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1295

Yeah, based on appreciation alone we would qualify to have PMI removed, but we have to wait until our loan is two years old, so we will do that this summer assuming the market hasn’t gone down substantially.

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1296

Thank you!!! I needed to hear that :slight_smile: and that’s awesome about your appreciation. I didn’t think about that in relation to PMI!

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1297

I love this, and this entire conversation, honestly!

I am feeling the urgency too, due to age and also just being so sick of instability of renting. Another friend just lost her apartment to a building sale. This is the… {counts on fingers} oh, I don’t even know how many there have been. A lot. A LOT. And, like… we’re going to keep putting up with this in our 50s/60s/70s? Really?

This happened to us when 2008 crash hit, and I feel the same way as galliver. We put 5% down. Cue job loss, both our mortgages getting sold to new lenders, one of which was literally shut down by the feds, payment jumped over $300/month overnight because new lender had different escrow “cushion” requirements. Also, the units above and below us foreclosed and sold for way way less than we paid and still owed, so we couldn’t refi or sell because we were so upside down and didn’t have cash to make up the difference.

That being said, I do fear that we’re not going to be able to save up a big enough down payment to buy before we’re retirement age (if not actually retired). I’ve got a good 15-20 years on a lot of you :rofl: and sort of feel sometimes that I missed my window, screwed up my changes by losing our condo to a short sale, and that this is now impossible, so I found your money/emotions rambling very relatable and helpful, @allhat!

The other thing that’s really screwing with my head is, to quote BSG: “All of this has happened before. All of this will happen again.” We largely bought our condo in 2007 because prices were spiraling upward and I thought, ok, better pounce NOW before we’re completely unable to get anything. If we’d waited a year or 2, the crash would’ve happened and we would’ve been able to buy something a lot nicer for less money and a better rate. So, hindsight.

But what’s happening with housing now feels the same as it did in 2007 for me… so I keep thinking, I don’t want to do that again, maybe just sit tight and wait for the bubble to pop and not make the same mistake twice? I mean, I guess if I aggressively save a down payment that’s more than we end up needing, that falls into the category of “good problem to have.” And of course who knows if there’ll be a crash this time. It just FEELS the same, which I realize is not logical or based on any sort of economic theory!

Anyway, I had totally forgotten that FHA loans were a thing that exists. When we were buying, there was some issue with them not wanting you to use it for a condo? Or maybe it was just OUR condo, I don’t remember. I’ll look into that, and, thanks for mentioning it!

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1298

Yep, I agree completely. And if the prices are still going up when our lease is up I will 100% rent for another year. No way am I overpaying. That’s my plan b essentially, wait it out if I have to.

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1299

Yeah FWIW I personally wouldn’t buy now :grimacing: but I’m very happy I bought 1.5 yesr

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1300

Really enjoying this conversation!

Question for my friends who are thinking it’s starting to feel like 2007: what indicators are you using, besides price? To me it feels like the higher ed market, where things just go up a lot bc of structural forces and stay up. But could be missing other indicators you all are picking up on!

There are just so many of us millennials, we’re in a deep housing deficit, and so many millennial and younger couples are double high earners.

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1301

I benefitted from being an economics major during the housing crisis, and then doing a master’s in economics afterward when all of the really good analysis of what caused it came out. Basically, the crash didn’t come because houses were going up in value too much. There were 2 things happening:

  1. REALLY shady lending. Like, the lender knows you only make $45k per year and to qualify for a mortgage you need to make $90k per year to have the right debt to income ratio, so they edit your paystubs to make it look like $90k. Or giving people mortgages with $1 down. Or not even checking that people have stable jobs before giving them loans where the monthly mortgage payment is 75% of their paycheck. The lenders didn’t care if 2 months down the road the people were going to start defaulting on their mortgages, because they were just going to sell the mortgages into securities, which leads us to…

  2. Mortgage -backed securities. Pretty much everyone who has gotten a mortgage, unless it’s from a credit union (maybe), has gone through the process of your mortgage being sold. One time for me I got a letter that said it was sold to a new company but I would still pay the old company and all of my auto-draft payments would be the same. This time before we even moved into the new house the loan had already been sold and I had a new company that I had to set up an account with, etc. However, the regulations that went into effect after the housing crisis say that’s where the selling stops. Like, one company can buy one loan from another, but before the crisis what they would do is sell mortgages in big packages linked together and people/companies could buy them kind of like stocks - those were the mortgage backed securities. They would lump all of these mortgages together and then you would speculate on how many people would actually make their mortgage payments and it was ok if some people didn’t because the others would still make it a good investment. However, because of the shady practices used in #1, more and more people couldn’t make their payments and those securities were suddenly not good investments anymore. So, they would package together the failing ones into other mortgage backed securities and people and companies could speculate on those and how much money could still be recovered and basically it became a big house of cards. So many companies were invested in those mortgage backed securities that when they really started to fail bigtime it caused the stock market to drop a bit, some people got laid off so even more people couldn’t pay their mortgages, more of the securities failed, and it turned into a giant economic crash. The property values fell because the demand for houses fell because so many people couldn’t qualify for a mortgage. That caused more people to be underwater, and it was just a downward spiral.

In essence, the housing costs played a part in the crash because it was leading people and lenders to do really dishonest things, but it was the dishonest lending plus the really, really risky securities that led to the crash. Thankfully regulations have been put in place to outlaw a lot of the stuff that happened and I know lenders complain about Fanny and Freddie oversight, but it is preventing the shady lending from happening again.

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1302

Thanks, this is a great summary. I’d love to hear your thoughts on the things that worry me we’re heading for another house price crash:

  • Zillow/redfin/etc. algorithmic buyers and flippers artificially driving up prices in a lot of areas. Zillow had already admitted this was a flop and is planning to sell off a bunch of houses at a loss
  • Many pandemic related protections are ending soon (at least in my state?) like eviction protections for commercial locations. I don’t think we’ve seen the full economic impact of the pandemic play out yet. Will more people loose jobs/take paycuts/etc? Will those be the same people who stretched their budgets to buy a house and now they can’t make payments? This isn’t a given but something that I see as a risk

That being said: I personally feel secure enough in my job that I was wiito take on a big mortgage. The city I live in has some flippers but a lot of real people who are actually trying to buy and there’s not enough housing stock to go around so at least some of the price inflation is real.

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1303

Not a housing economist, but everything I’ve seen on bullet #1 contextualizes it as a teeny tiny part of the market. And, when they tried it, it failed! So obviously not a great trend that’s helpful to the average person, But it’s not shaking up our lives any time soon.

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1304

This is such a concise summary, thank you!

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