Is a mortgage really a good idea?

Factual Questions
21

If he is who I think he is, then my impression is that he takes a certain amount of sadistic glee in imposing punitive financial restrictions on the people who turn to him for advice.

I heard one show in which he suggested that a caller would have to work two or three jobs for several years and never go out to eat or spend any money on entertainment – when the caller balked at the suggestion that she would have to work more than one full-time job, he immediately said - “well, I’m sorry, then; I can’t help you” and ended the call.

22

You’ve almost certainly got the right guy.
Actually, though, I would note that there are people who are so screwed that their only hope is two jobs. If you’re past 45 with no retirement savings, and an income under $24,000 per year and your goal is “not being completely impoverished after retirement” then more than one job may be your answer.
Sucks to be those people though.

23

And what if you do that three times?

Heh.

Online amortization calculator. Just plug in the known amounts and hit “Calculate”. I’ve no doubt there are dozens if not hundreds of these things online, all with varying bells and whistles, but this simple one does the job.

24

You’d probably be better off getting a home and investing the extra money into principal payments. If you are paying $600/month in rent and saving $500/month, you’d be better off getting a 30 year mortgage with a $600/month payment and giving an extra $500/month in principal. It’ll probably pay for the house alot faster than if you are paying both rent and saving for a home.

if its a 100k home and you are paying $600 in rent and saving $500/month (inflation adjusted) it’ll take at least 16 years to save enough to buy the 100k home. If you get a 30 year mortgage on a 100k home and in addition to the $600/month mortgage you make $500/month in extra payments you’ll pay off the mortgage in about 10 years. Plus you’ll have tax deductions from interest on the loan. So you’ll own a home in about half the time for the same price.

Mr. Slant - the book retire on less than you think is pretty interesting on the subject of retirement income. If you relocate, maybe work part time and own your own home and get a reverse mortgage retirement should be feasable for most people.

25

See, it’s depends on the market, doesn’t it?

Irishfella and I pay 950euro (£660, $1,140) a month rent for our 1 bed apartment in Dublin.

I graduate in a year and we’re planning to move to Belfast. Part of the reason for this is that property is cheaper, and we’re looking to buy. A cheap dwelling in Dublin is about 220,000euro (£150,000, $265,000)

As a doctor, I’ll get a 100% morgage, which will be calculated at 3 times my annual earnings, plus once my spouses, meaning we’ll have about £115,000 (166,000euro, $200,000) which should easily buy us a 3 bed house in a nice area.

Our monthly repayments on this vast mortgage will STILL be less than the monthly rent on our flat.

Bear in mind that 25 years ago my parents bought a house in Belfast for £13,000 which is now worth about £130,000, while my father’s house in Dublin that he bought 30 years ago for £7,000 (and sold 27 years ago) is now worth several million.

Tell me it doesn’t make sense for us to buy.

26

The hampsters and my employer’s proxy server made me do it. I promise!
And, if you pay $750 each month instead of the $600 you’re supposed to, you’ll annoy your mortgage-holder, and also get out of the mortgage at 221 months, or right around 18 years and 5 months.
That’s what happens if you pay three times an additional $50/mo.

27

I don’t want to offer an opinion on David Ramsey’s premise. He’s dead set against debt (and says so when offering financial advice on World Net Daily. I’d love to hear his opinion on the 50 and 100 year mortgages they have in Japan & Hong Kong.

28

Dave Ramsey teaches that debt is bad, period. He teaches a very specific plan. His method has people getting rid of all their debt first by any means - selling cars, taking an extra job, etc. starting with the smallest debt and working toward the largest. Then when your debt is all gone you put the same amount you were making in payments toward building an emergency fund of 3-6 months income, (which sounds like a lot but if you have no debt and no payments to make on that debt it is really not that much), then toward saving for a house. You are ready to buy a house when you have 20% to put down and the payment is no more than 1/4 of your income on a 15 year mortgage. It is actually a very simple (not easy) plan and the kind of slap in the face some people need. I see people overspending on houses all the time ‘because a mortgage is good debt.’ Well, the interest is tax-deductable but you are not making money off your mortgage. You are still paying a lot more in interest to the bank than you are saving in taxes and it is still in your best interest to get that mortgage paid off. He wouldn’t tell you to sell your house if you already have a 30 year mortgage though, just pay it off faster (this would be his last debt priority. He would say pay off all other debt and have a saving and retirement account first.)
He admits that he is more interested in getting you out of debt and the psychological effects of that than ‘what would I pay in rent vs. save in taxes vs. PMI’ kind of scenarios. He claims that people don’t get rich because they are deducting their interest, they get rich when they aren’t making payments to other people. This frees up your whole income to do things like invest. This is the key to understanding his theory. He believes that debt is just seen by too many people as a fact of life that they will never overcome, but it was not always this way. He advocates an extreme position because there are so many other voices on the other end of the spectrum saying get into debt. His business won’t even take credit cards :).

The average American that he is trying to help is not a real estate investor, (although he does do a lot of business in real estate) they are average people trying to get out of debt. He can be quite strict but I have also heard him be very compassionate. He will definitely tell you to sell your stuff or get a second job if that’s what it takes though. BUt honestly, sometimes that needs to be done. If you can’t spend less, you have to make more somehow.

I admire his theory but it does take an extreme view that many people cannot, or will not adhere to. We are currently following a ‘Ramsey Lite’ type plan as I like to call it. I admit I rolled my eyes at him for a long time but after listening to his program (I listen at work sometimes - I like call in shows of any kind :slight_smile: and that’s how I know his theory)I can see why it does work for people. It is kind of like an extreme diet - you need a lot of discipline but you see fast and clear results. It is not for everyone.

(** Irishgirl**, on preview, he usually will not give advice on foreign countries. I have heard him admit he does not have knowledge in that area.)

29

When SpouseO and I were looking to buy, we asked a realtor at a house showing whether it made more sense to buy now (or then, as it were) or wait and try to save up for a more substantial down payment. The realtor told us that we should definitely buy now, as the housing market would quickly outpace what we would be able to save, meaning that that $150,000 starter home we were looking then at would be $175K or $200K in the next year. So buy we did.

And I’m glad - he was right. That was 2002, and 2004 brought hugely low interest rates and hugely inflated prices (obviously, in the U.S.). Heard on the news last week that new home prices average $227K in Minneapolis. Some of the prices around here are unbelieveable. There’s no way we’d be able to save up enough (and pay rent!) to make it worthwhile. And we’ve both got good jobs.

30

And there are 80/20 options also. But they’re not “programs.” It’s simply going to Mortgager #1, asking for 80% of the money, and letting them know that the 20% down is going to come from a second lienholder. Mortgager #1 may or may not increase costs. Next, go to Mortgager #2, let them know you want a second mortgage or a HELOC (your choice). Being a second mortgager, they already know they’re second in line. They may increase costs, too. There’s no rule that this is variable – it’s just a second mortgage. You can get them in 5, 10, 15 year – whatever – increments that you want. Or interest only. Or balloon.

In our case, we took a 30 on the first at the going rate, interest-only infinite-time HELOC on the second (though I amortorize it for 10). No PMI. No massive cash outlays.

As per the OP, there’s a LOT of good information here already. What’s not mentioned is the quality of life that you can’t put a value on. I’m currently in a rented house for work purposes (my house in Michigan is waiting for me, though), and there’s always the nagging feeling of not being free to do what you want with the place, 'cos it’s just not my house. If something irritates me about it, I can’t fix it. If something breaks, I’ve got to wait for the property management company to take care of it instead of just calling the appropriate person myself.

31

Wow! Do they really do such a thing? And is there a reason for it? Here are some sample P&I’s at various prices and interest:



		20		30		50		100
1%	100000	$459.89 	$321.64 	$211.86 	$131.86 
1%	200000	$919.79 	$643.28 	$423.72 	$263.73 
1%	300000	$1,379.68 	$964.92 	$635.58 	$395.59 
1%	400000	$1,839.58 	$1,286.56 	$847.44 	$527.45 
1%	1000000	$4,598.94 	$3,216.40 	$2,118.59 	$1,318.63 
6%	100000	$716.43 	$599.55 	$526.40 	$501.26 
6%	200000	$1,432.86 	$1,199.10 	$1,052.81 	$1,002.52 
6%	300000	$2,149.29 	$1,798.65 	$1,579.21 	$1,503.78 
6%	400000	$2,865.72 	$2,398.20 	$2,105.62 	$2,005.04 
6%	1000000	$7,164.31 	$5,995.51 	$5,264.05 	$5,012.61 
16%	100000	$1,391.26 	$1,344.76 	$1,333.81 	$1,333.33 
16%	200000	$2,782.51 	$2,689.51 	$2,667.61 	$2,666.67 
16%	300000	$4,173.77 	$4,034.27 	$4,001.42 	$4,000.00 
16%	400000	$5,565.02 	$5,379.03 	$5,335.22 	$5,333.33 
16%	1000000	$13,912.56 	$13,447.57 	$13,338.05 	$13,333.34

It doesn’t appear that there’s much benefit to extending a mortgage for so much time, unless interest is very, very low (I think we have it good in the 'States – a 20 year with 20% down is advertised at Bancomer [a Mex. bank] at almost 13%!!!)

32

I’m not sure what makes rent so preferable to a mortgage. That’s like saying leasing a car is better than buying through a loan. Should you lease a car and try to save up enough cash to buy the car when the lease runs out? Why would such a plan be better than just doing a 3-4 year loan?

33

IMHO the buy vs. rent decision isn’t so clear cut. Buying involves a lot of additional costs, such as real estate taxes and property insurance, that renting doesn’t have. Taxes and insurance are the landlord’s costs, not the renter’s. Further, the buyer doesn’t have to spend time cutting the grass or fixing the windows. Time is money, as they say, and the tenant has time to pursue other pursuits rather than keeping up his property’s value.

Renter’s cost = rent = landlord’s costs (mortgage, maintenance, taxes and insurance) + landlord’s profit
Buyer’s cost = mortgage + taxes + insurance + maintenance + time

Monthly rent is usually less than the cost of a mortgage for a similar property, so if the tenant invests the difference wisely as a result he therefore has more money and more free time than the homeowner has.

34

Rent may be lower than the mortgage payments plus taxes for a few years. Rents seem to just keep going up while your mortgage payment wont if you have a fixed interest mortgage.

35

Calculator for determining the benefits of buying over renting

Calculators for every other mortgage-related problem

36

I don’t know this guy from Adam, but apparently he does not argue that nobody should get a mortgage.

http://wnd.com/news/article.asp?ARTICLE_ID=43884

37

This is another area where, for similarly sized and aged properties with similar amenities, the rent would way outweigh the mortgage payment, even with 100% down and a fairly hihg interest rate. I’m paying barely more in mortgage than I was in rent, but now I have a 3/2 1100 sq ft with a small yard and off-sreet parking instead of an 800 square foot 2/2 with my cars a half a block away. Of course, I have to pay for my own repairs now (and in three short months I’ve already had a few, including a biggie) but I also will be paying much less in taxes. Much less. And now I have a modest “estate” to leave to my son. If I had kept renting the only thing left to him would have been a bill for accelerated rent due to my “breaking” my lease. Don’t roll your eyes - my parents got one a few months after my sister died and it was perfectly legal.

Incidentally, it’s an incorrect assumption that if you rent, you have no yardwork. It’s usually only the multi-family units that you don’t have to do the yardwork. And that’s mainly because there are no yards! Every sf house I even rented I was responsible for yard maintenance.

38

The only thing I haven’t seen mentioned is the “b” word … Bubble. In that case, saving, lowering debt and not buying (the Ramsey method, as I understand it, will not allow a house to be bought for all practical purposes in most East-West Coast areas unless the savers income is very, very high) makes sense. This is not what Ramsey is saying - but even if the theory why is unsound the practical results may in fact be sound : Don’t buy now.

Certainly Ramsey would have a conniption about what so many are doing: many of the mortgage options variable rate, Interest Only ARMS that are shoehorning folks into what may be (or may not be) wildly zenithed property - is bad financial practice. He is likely right - unless Property rates keep soaring apace.

Having said all that (you can read between the lines that I am nervous where the market is) Property has outperformed all traditional Investments over the last decade - property in almost every U.S. market… It has traditionally been a mistake to write it off … It will be again … whether it is in July-Aug '05 I am not positive

39

Well, I’m definitely going to buy as soon as I can. The government has a $7,000 first home buyers’ grant, which will help with the deposit.

A nice little related anecdote:

My brother is 22. He bought a house (borrowed a bit of money from Mum) for around $78,000. The housing market skyrocketed; his house is now worth around $200,000. He used the collateral from the first house to buy another house, and rented out the first house. So now he has renters paying for his first mortage, and he is living much closer to town now in a nicer house. And he’s only 22!

40

I happened to hear a talk about 2 weeks ago by a financial planner who took the opposite tack: Her premise was that you take out the LARGEST mortgage you can manage and NEVER pay it off. Instead, you take the money you would have put into the payoff and use it in other investments where the yield is greater than the mortgage rate. The idea was that between the lower payment out, plus the fact that most of what you’re paying is income tax-deductible interest, you come out ahead. Supposedly this is what really, really wealthy people do.

I found a few problems with this. One, while mortgages can be obtained relatively cheaply now, this was not always true, and will not be true in the future. Second, she assumed that you could afford to both pay the mortage AND have something left over to invest. Third, it is not as easy as she posited to get an investment that pays more than the mortgage without entailing a certain amount of risk. You COULD end up with nada.

Just thought I’d throw that in there for further consideration.