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2009 Dec 16, 6:35am
Everyone should make a spreadsheet to model this decision, IMO.
The downpayment represents an opportunity cost for that money. You're saving interest expense (~3% over the life of the loan) but losing whatever you could get in a CD.
Plus let's be clear that the dp is *risk money*, so comparing that 3% return to a CD should tell you to put as little down on a house as you can.
Conveniently, if you buy through eg. zip realty, the 3.5% dp on $300,000 is just $8700 (deducting the cashback from the seller) and the tax credit is $8000, so the down payment on $300,000 is $700 cash if you buy now.
My spreadsheet has a loan amount of $289,500, $5000 in points to FHA, 5% interest payment of $1200/mo, plus $120 PMI, $310 prop tax, less $600 mortgage interest tax credit, plus another $350 in sundries for a nominal monthly cost of $1380, which will decline over time as principal is paid down.
The total, actual monthly cash expense is $1800, which includes amortization on the loan.
They key desideratum is simply that $1800/mo rent number. If rents hold, then buying now is a no-brainer. If not, then not.
Thanks for the comments! Some things to chew on. oh btw, I also have several spreadsheets I've been making on buy vs. not buying analysis so good to get another persons rationale as well.
I've enjoyed Patrick's website for a while. On his 3% 6% & 9% theory I've been holding off for that and other reasons. I still believe we should see lower prices with the shadow inventory and the recasts of the ALT-As next year if the banks don't hold back too much.
However, I was looking at some condos of rent vs. buying in the OC area as I saw some condos for 300K which in that area was going for around 1800/mo in rent which is 7.2% Or if you add in HOA it could be brought down to 6% (okay borderline per Patrick...). Looks like it could be a good time to buy though I still believe there could be a drop next year and of course that computation of buying (hypothetical of course!) is based on me putting 20% down. In this market sounds like a bad idea based on my previous assumptions here.
So when you think of the 3/6/9% do you base that on the lowest possible down of 3.5%? 20%?