Save Money or get a Mortgage?

[Laggie]

Okay, not that we're anywhere near either one... we still have to pay of debts first. My goal is to be debt-free by the end of 2007.

But, after that, we do want to eventually work towards owning a home. I am thinking that we should save save save for a few years - that way, when we eventually get a mortgage, it will be cheaper. And plus if you're saving money in the bank you're making interest, instead of paying it...

I guess the drawback is that houses appreciate in value. So... I'm not sure. Save for 10 years? Or save for 5 and then buy?

The other part is that house prices here have really skyrocketed in the past few years. Some people think they will drop after they olympics in 2010, but who knows...

Thoughts? I admit to being bad with numbers... We probably can't afford a house in Vancouver anyway, and I hate apartments. So we might be looking at buying a house in a smaller town and renting it out until we retire to it. Something like that.

[mightymoo]

I personally would save until I had a 20% down payment and then buy.

[tamagotchi]

I like to experiment with various scenarios in excel when I'm thinking about decisions like this. There's also a calculator here that you can experiment with:
http://www.decisionaide.com/mpcalcul...PBuyVsRent.asp

[KnittingShaker]

Originally Posted by mightymoo

I personally would save until I had a 20% down payment and then buy.

Ideally, this would be the way to go.

[luvmy2boys]

I will tell you this: we bought a house in 1998 for ~$100K.

In 4 years (which is what it would have taken us to save up 20K), the house had gone up to over $200K in value. Granted, there was a huge boom in the housing market where I live (Phoenix metro area).

Add on to that the money we would have spent renting during that time, and I think we did well. I could not have even afforded the payments on the house if I had waited.

Note that I'm not one to advocate going into debt, and I would have qualified for the payments, I just would not have felt comfortable commiting to them at all.

[Laggie]

Well, a detached house of any sort in Vancouver right now STARTS at $450 K. And that is for an old fixer-upper in a mediocre neighbourhood. 2 bedrooms, unfinished low ceilinged basement hasn't been painted in 20 years kind of house. Anything under $500 K probably has a leaky roof or a basement that floods or some other horrible problem.

So, it's pretty much just a dream anyway!

It's just hard for me to fathom paying SO much interest on a mortgage!

[AngieB]

You also would be getting the tax deduction from the mortgage (unless it's different in BC) and the money you payout each month would be going toward equity, which is not happening when you rent.

[velochic]

Originally Posted by AngieB

You also would be getting the tax deduction from the mortgage (unless it's different in BC) and the money you payout each month would be going toward equity, which is not happening when you rent.

They don't have a tax deduction for mortgage interest in Canada.

OP- If you are renting, you are throwing away money. Yes, interest is throwing away money, too, but you are gaining ownership of the home at the same time, building some equity in it... and the house is appreciating in price. Owning is hands-down better financially than renting, unless you have circumstances that disallow you from staying put in one place for a long period of time.

[wednesday]

I think assuming you plan to stay in a house for at least a few years, you're better off buying a home as soon as you reasonably can, rather than waiting to save up 20% down. You may not get the best interest rate on a very low down payment mortgage, but you can typically re-finance in a few years when your equity and appreciation have gone up enough that you now own 10-20% of the house's value, or more. I bought my first home with 0% down--only paid closing costs--and re-financed it two years later through a special re-fi deal my credit untion was offering, where 5% equity (which I had at that point gained simply through appreciation) was enough to get a really good interest rate.

I'm not sure the 20% figure is even that relevant any more. When we were shopping for a mortgage a few years ago, we were offered the same rates for 15% down as 20% down. We had enough cash to put 20%, but decided to do 15% and conserve a little cash for any repairs or other issues that might come up.

[velochic]

Wednesday - it's not about the mortgage rate, it's about paying PMI. You need 20% to avoid paying PMI, which is SERIOUSLY throwing your money away.

OP - you really need to save 20% and avoid private mortgage insurance. Buying with less than 20% down is not a good idea unless it's dire circumstances.

[wednesday]

PMI was waived on both mortgages I've had. Even the first one which was a 0% down mortgage. We don't pay PMI on our current mortgage eiter, which was a 15% down. I thought that was common now but maybe it varies by region or something.

[KnittingShaker]

PMI can be waived, but you end up paying for it in your rate.

The same thing as no closing cost loans.

[lmonter]

Originally Posted by velochic

Wednesday - it's not about the mortgage rate, it's about paying PMI. You need 20% to avoid paying PMI, which is SERIOUSLY throwing your money away.

Unless you buy your house, pay the PMI for a year or so, your house almost doubles in value, you get it reappraised, and the PMI gets dropped (because if you default the bank would actually get more than the loan when they sold it).

Our appraisal more than paid for what we saved in PMI the following months.

I've heard other folks do something like an 80/20 loan to skirt the PMI thing as well. The one major home loan for 80% of the value, and a different one for the remaining 20%. We didn't do it that way, so I've got no real-life experience with that though.

[wednesday]

We were initially looking at doing something like that, where we would have a primary mortgage for 80%, and a second loan for 5%, so that we could put down just 15% and still have a good rate and not pay PMI. Ultimately we were offered a single loan for 85%, no PMI, at a rate which FWIW we are very satisfied with. Maybe you just have to shop around?

[PJJ]

NO mortgage deduction in Canada?

Wow, I think this is the first time I have seen something be better in the USA than in Canada.

Not bashing my home country or anything, I just think we Americans are so behind socially compared with Canada.

Take care.
PJJ

[AngieB]

Originally Posted by PJJ

Wow, I think this is the first time I have seen something be better in the USA than in Canada.

Not bashing my home country or anything, I just think we Americans are so behind socially compared with Canada.

Take care.
PJJ

No kidding, having that tax deduction is a big incentive for owning a home.

[TiredX2]

Given where you live, I would probably lend towards buying.

If you lived in an area where houses were going up 5% yearly and the average house was $100K and you could save $1K monthly it makes a lot of sense to save.
House Cost Savings
Year 1 100K 0K
Year 2 105K 12K
Year 3 110K 24K

and so on. You could actually "catch up" to the 20% eventually

If, instead, the market is going up faster or is starting WAY ahead it's going to be hard to save that 20% because it is so large and growing so fast.

For example, we live east of Seattle. The houses in our neighborhood started under $300K 5 years ago when we purchased. Now they are all selling for well over $500K.

Lets say 5 years ago you could only get 8% financing on a 30 year mortgage (8% on 300K)--- payment around $2200. If, insead you saved up $100K in only 5 years (pretty good savings!) and were able to get a 5.5% fixed 30 year mortgage (5.5% on 400K) you would still have a HIGHER payment. ANd you would have been paying rent for the last five years (and you'd have LESS equity than the people who bought 5 years before ) Because of that, IMO, it doesn't always make "sense" to save up that 20%

Truth in advice statement: We actually did save up 20% : But we bought more house than we could truly afford on a monthly basis and DON'T regret it given that if we hadn't purchased 5 years ago we would sure not have been able to afford it any better 5 years later.

[*andiflipping*]

Originally Posted by Laggie

Well, a detached house of any sort in Vancouver right now STARTS at $450 K. And that is for an old fixer-upper in a mediocre neighbourhood. 2 bedrooms, unfinished low ceilinged basement hasn't been painted in 20 years kind of house. Anything under $500 K probably has a leaky roof or a basement that floods or some other horrible problem.

So, it's pretty much just a dream anyway!

It's just hard for me to fathom paying SO much interest on a mortgage!

WOW....My area must have really low standard of living...I can't even fathom $450K for what you described.

We are purchasing a 4 bedroom home witg new roof, hardwood floors, fireplace that needs a little TLC in the kitchen for only $64K...

[tamagotchi]

Only $64k????!! Where we live, the two bedroom fixers start around $650-700k... right now we are looking at a *one-bedroom* fixer that's listed at $550k and it seems like such a great deal that we are wondering what the catch is! :

[*andiflipping*]

Originally Posted by tamagotchi

Only $64k????!! Where we live, the two bedroom fixers start around $650-700k... right now we are looking at a *one-bedroom* fixer that's listed at $550k and it seems like such a great deal that we are wondering what the catch is! :

you need to move to the boonies..