Things learned while sick [finances, transportation]

[rebeccmeister]

It has been on my agenda for a while to sit down and read through Michael BlueJay's How to Buy a House guide. Over the years, I've found various resources on his website to be tremendously helpful, and so far this case is no different. In any case, being trapped in the Quarantine Room yet again, with insufficient brainpower to do more substantive things, turns out to be a good time to tackle this project.

Interesting things learned so far:

-The "how much house can you afford?" calculators inform me that, unsurprisingly, even with a decently large down payment saved up, at the moment with my current income, I can't really afford all that much house. This calculation may start to change once I'm through the tenure and promotion process, but it's not going to change dramatically. My colleagues and I are advocating for cost of living increases, but our college is reluctant to provide them because of the squeeze that tuition increases put on students. (I'm not even going to get into the tuition "discount rate" games here, ugh). The reality is that it's pretty unusual in this day and age for any single-income person or household to be able to afford much of a house, even with all of the existing "First time homebuyer" resources that are out there.

-I'd be much more inclined towards a 15-year mortgage compared to a 30-year mortgage. If you do the math, I'd be in my 70's before I'd be finished paying off a 30-year mortgage if I only made the minimum payments. In general I just HATE the idea of giving away money for free, anyway.

-It looks to me like current mortgage interest rates are maybe about as good as one could ever expect, moving forward. This graph of long-term trends for 30-year rates is interesting, although I'm not sure why it cuts off at 2016, and from what I understand, 2016 is as astronomically low as one could ever expect: https://www.hsh.com/mortgage-rates/30-Year-FRM/

Collectively, this all has me thinking that my best short-term financial strategy is to focus on continuing to stockpile funds. At the same time, I'm thinking I should do at least a little work to scout out rental opportunities that are closer to campus. My current total daily commute time is at least 20 minutes over Marchetti's Constant, and the effects of the extended commute time have been cumulative over the years I've been living here. And that's on non-snow days. On snow days, it can easily take me an hour and 15 minutes each way. Ugh.

I am still very much committed to bike commuting. I would not trade this longer bike commute for a shorter auto commute. That just sounds terrible, and expensive.

Anyway, time to try and work on other things now.

Comments

[rainswolf]

We don't get COLA either...

I think it would be difficult to afford a house on one income. However, I am glad we did a 15 year mortgage. Another option is to do 20 or 30 but set it up so that an extra payment a year comes out of your bank account which will reduce it by a fair number of years.

[rebeccmeister]

Yeah, there's kind of a funny history for pay raises at our institution. Our contract with the institution is through a faculty handbook, so we don't have the opportunity to negotiate salaries individually. Certain departments do get deltas to go along with the standard base pay out of a recognition that there's no other way to recruit and retain faculty for those disciplines. Biology will never get a delta. Anyway, long story short, we have some processes in place to advocate for at least COLA, but there's some give-and-take just because of the general financial squeeze: with inflation, the cost to do everything has gone up.

For the time being, thankfully we're still in far better financial shape than many other small liberal arts colleges. We just have to continue to be really savvy about student recruitment. Name of the game.

I do also wish this country would get its head out of its butt when it comes to the value of higher ed for an informed citizenry. Unfortunately a lot of the people who make mega-bucks see opportunity in an ignorant/confused populace.

[twoeleven]

I'd say it's more the people either in power or who lust for power who want an ignorant/confused populace.

On the one hand, part of the need is due to the collapse of primary and secondary education. "Civics" -- the structure and function of the parts of the governments of the US -- is no longer taught, as far as I can tell. I got it as part of a high school history class. I'm not sure how many students get a decent treatment of US history either. APUSH¹ seems way more popular now than when I was in high school, so clearly some kids are getting a solid education in it, but it's not part of the standardized tests otherwise.

1: Advanced Placement United States History

On the other hand, higher ed seems pretty broad these days. A net.friend, much younger than either of us, was taking a two-year degree program for what amounted to a factory equipment repairman job. Despite the program being vocational, it required a semester of history and a semester of the humanities: art, music, literature, etc. I was surprised, especially since this was at a community college in Wyoming, a state not necessarily known for valuing liberal arts and high culture.

[annikusrex]

I'm glad I had a 30 year mortgage when suddenly half my family's income went away, but I guess if you're buying on just one salary and you have tenure that's not as much of a risk. I'm going to be refinancing into a new 30 year pretty soon so I will be paying into my 70s in theory, though I imagine at some point I'll have sufficient savings and/or a windfall such that I can just pay it off before that. I'm not literally going to be paying into my 70s I don't think; it just gives you flexibility.

At this point my interest payments are way under what I would be paying for rent so I don't mind too much. Interest can be tax deductible and at these rates probably would be for you.

I don't think it's a terrible idea to wait for interest rates to come down some. Every previous rate-hiking cycle has ended in drastic cuts. But if the higher rates are doable, you can always refinance.

[annikusrex]

I do NOT think mortgage rates are as good as they're going to get right now. Mortgage rates closely track the 10-year treasury yield. Here's that chart: https://fred.stlouisfed.org/series/DGS10. We've had a drastic runup recently in the last year and it could very well go back to its previous downward trend. The last spike was during another (worse) inflationary episode.

[rebeccmeister]

These are all fair points, including your point about current interest rates. And regardless, it looks like I should wait for a little while longer, anyway. Homebuying is not the sort of thing I want to get into in a big hurry!

[twoeleven]

I'll second the "30-year mortgage paid off quickly" approach. We paid ours off in 23 years, which saved a small fortune in interest.

In general I just HATE the idea of giving away money for free, anyway.
It's not really giving money away; it's a bet, like all financial speculations. A shorter mortgage is a bet on the overall economy, which sets interest rates -- a bet that they're not going down by much -- and that one will be able to pay off the debt quickly. A longer mortgage is the contrary bet.

It should be noted that refinancing a mortgage isn't free, so both sorts of bets need to be thought about carefully. "I'll refinance when interest rates come down" requires a substantial drop in interest rates to pay off, which should be figured into the initial bet, if that's one's plan.

As to not being able to afford much house: thank your local NIMBYs for that. :(

[moodyduck]

I am also doing the 30 year but pay extra method. Though I had the extreme fortune to randomly decide to buy a house in 2016, so there is the "pay off mortgage vs invest" question.

I'd be a lot more reluctant to buy right now.

[myka]

When my dad died I was astonished to find out he must have taken out something like a 30-year mortgage when he was 65 :-o

I took out a 20-year mortgage as I was worried and not particularly financially secure. I'm on track to have it paid off in 2 years.

Never heard of Marchetti's constant! I'm about 10 minutes under when I cycle, and 30 minutes over when I walk.

[bluepapercup]

We looked at buying a house as effectively being rent control, and I am risk-averse financially, so a 30 fixed-rate year mortgage was the best choice for us. Like Annikusrex we also needed to be able to pay the mortgage entirely on a single salary if one of us ended up out of work, which as it happened, one of us (me) did.

I don't see it as throwing money away at all, rather I was paying (interest) for the security of my rent (mortgage payment) being the same for as long we lived in the house. We made a lot of compromises on where we lived and what we bought, as it was all driven by what we could afford. But at the end of the day, owning our condo has brought financial security during a time when rent in our region is beyond out of control and into the territory of obscenity.

The downside is that you take on the responsibility for all upkeep and have to figure out how to pay for that. We're about to do probably $30-40,000 of mold remediation, including replacing the entire air conditioning system including vents. But that's what a home equity loan is for.

I also want to be clear that we bought at a time when multifamily housing prices were much, much, MUCH lower than they are now. We paid $260,000 at 4.25% interest for our condo in 2014 and now the same unit in our neighborhood is $560,000. We couldn't afford to move into our own neighborhood now. So of course the changes in prices and interest rates are going to affect your decision!!

[altamira16]

I am asking my husband what we did, and both of us are a little foggy here. I think we started out with a thirty-year mortgage and made extra payments towards the principal to reduce the length, but then interest rates were declining, so we refinanced into a 15-year mortgage. I think we have always had a 15-year mortgage on our current house. We don't owe that much, and we are not making extra payments because our interest rate is from when rates were low (<3%), so it doesn't necessarily make any sense to aggressively pay off that last little bit, even though we could.

We bought our first house at the peak of the housing bubble. We sold it when we could sell for less than what we owed. That house is still worth less than what we bought it for in 2006.

We bought our current house in 2014, and it is worth about twice what we bought it for. But so is everything around us.

It feels like housing should be a place to live, and it is very weird that prices fluctuate in what feels like such extreme ways.

[ditursi]

+1 for the "get the 30-year mortgage anyway" crowd - there's generally no penalty for paying it down early. (As our mortgage broker pointed out way back when: If you simply make one extra payment a year, you pay it off in 23 years instead of 30.) Unless the interest rate on the 15-year loan is DRAMATICALLY better, just get the 30 - it gives you an out if there are problems and you suddenly can't afford the larger payment.

[ranunculus]

Hi,
I was perusing the "network" and saw your journal. I love people who are actually doing things, even if projects don't always get finished.
I wanted to put my .02 cents in on the "purchase a house" question. 24 or 25 years ago my partner and I purchased a home in San Francisco at the last possible second that we could possibly afforded one. The house we got was at the upper limit of our budget even though it was undervalued. It was in a terrible part of town. But it was solidly built and it had great freeway access. We had a ferocious argument with our banker who pushed a "balloon" loan. We steadfastly insisted on a 30 year fixed and I am so glad we did. Two years later the Tech Crash happened and we would have lost the house and our savings if we had taken the more "creative" financing.
Fast forward 5 years and we sold the house for almost 3 times what we paid for it. That gave us a down payment on place in a far better part of town; a fixer-upper. Our second home was financed with a 30 year mortgage which we did pre-pay a little. After about 7 years interest rates dropped enough for it to be reasonable to refinance, at which point we crunched a bunch of numbers and got a 15 year mortgage. We have 2.5 years left!
On both houses I factored in a "repair" budget. It was an extra $100 to $200 per month that we added to our mortgage payment and put in the same account. Occasionally we would move surplus funds to a separate account with a better interest rate. The money we have set aside has been extremely useful in repairing things, and it may ultimately help pay off our mortgage early. Whatever the case it has reduced stress and given us options when the house needed repair, painting, roof and so on.
I'm very thankful that we had the chance to own a home and not just rent, Even though we started our house owning life a little later than some I think it was still a good financial move.
Ok, that was a very long comment for an introductory reply!

[rebeccmeister]

Hello, and it's great to meet more active DW users!

Also, wow, yeah, that was a very prudent move for your first house, and kind of remarkable to me that you wound up being able to purchase a second place. From what I understand, Prop 13 has meant that the vast majority of Californians wind up staying in whatever house they originally bought.

Michael Bluejay also definitely advocates for setting aside funds for house maintenance and repair, so I definitely have that in the back of my mind while considering the options.

Pretty much everyone here has been advocating for a 30-year mortgage, so I can now see things both ways. I think one of my next major steps will be just seeing what kinds of loans I can get pre-qualified for. My credit union also has a seminar for first-time homebuyers that I'll probably do as well, because they then offer a couple hundred bucks off some of the initial costs.

It's all quite a production, but as someone else pointed out, while renting I'm basically kissing goodbye to all the money I fork over to a landlord, so I'll keep working on the project.

[ranunculus]

I don't think Prop 13 had any influence on our decisions at all. In fact I don't think we ever even thought about it. In our first purchase we were in a market where, over about 2 years, the average home increased in value from around 100K to around 500K. That is an INSANE market. Over the next 5 years the average cruised sharply upward to the average price being closer to a million. In those circumstances money doesn't seem to mean anything. Our only calculation was whether we could (or could not) afford the taxes on the home, not what they would stay at. What we were looking at was: our old home was adjacent to the entry for a high school for kids who had been kicked out of all the other high schools in the system, so we had angry teens on our doorstep all the time. The house was about 2.5 blocks away from drug ridden, gang controlled low income housing. We heard automatic weapon fire several times a week. (To be fair, the city did replace that housing while we lived there and that did improve things. I hasten to add that I never felt threatened in the 10 years that I lived near the low income housing, the gangs pretty much didn't mess with anyone that wasn't involved in their world.) The house was on sand in an earthquake prone city. The house was a cold one, with a shaded back yard due to a tall building to our south. I'm a gardener so this was vexing and I hated having to turn the heat on just to get warm.
The "new" house is on rock, high above any sea level rise, with a grammar school next to it. It is on a quiet block that ends in a stairway which leads up toward not one but two large hilltop parks. It has 70 feet of sunny garden behind it, gets lots of solar gain through south facing windows, which is very useful in a cold city. Oh, and one more thing: the garage is on the side of the house that is regularly cleaned out by the wind. Our old house had a slightly sunken garage and the wind blew leaves and trash in next to the garage door. It was impossible to keep clean for more than a few minutes.
As for the money end of it. I think the economics of buying a home really vary. A good financial advisor can help you analyze what would be best for you. Sometimes credit unions have financial analysts available to help, or your tax person might be able to point you to someone. In a market where housing is relatively cheap it absolutely makes sense to buy; especially if the home payment is a reasonable portion of your income. In a really expensive market it might make financial sense to rent. That is to say that overall you might spend more money buying and maintaining a home in a very expensive market (even very long term), than you would by just renting. Every situation is different and there is no "one size fits all" solution.
I wouldn't start my investigations with home buying seminars, I'd start with a financial advisor.