Where's My Trust Fund?

Ever since we put the purchase agreement in on our house, Mr. NTF and I have been discussing how much of a down payment to put on the house.  This is a topic that interests me on both a practical basis as well as theoretical.  Here are a few of our options and some of the questions that arise with each option:

Option 1: Standard 20%

Pros: With 30 year mortgage rates below 4%, this would be taking out the largest loan possible at this ‘low’ rate.  Taking our a larger loan also leaves us with more money in liquid savings.

Cons: Increases our monthly fixed costs.  It would be a huge stretch to afford these monthly costs on only one of our incomes.  While we could do it in an emergency, it would not be ideal on an ongoing basis.

Option 2: Put down more than 20%.  We’ve talked about putting down more than 20% but putting down more than 20% but less than 100% leaves a large range.  The amount we’ve been considering is an amount that would keep our overall housing costs similar to what they were in our condo.

Pros:  Keeps our monthly fixed rates low and at an amount easily affordable on one of our incomes.   With a smaller mortgage, we’ll pay less interest over time and have a smaller loan balance to pay off in the future.  With a smaller loan we would also pay lower loan origination fees as many of the fees are based on the size of the loan.

Cons: Ties up more cash.

Questions: What’s the optimal amount to have in liquid vs very illiquid assets?  In other words, not including retirement savings in non-taxable accounts, what percentage of your money do you need to keep liquid?

 Option 3: Pay cash

Pros: No mortgage!  No mortgage application fees, which I’m slowly finding out are surprisingly high.

Cons:  The biggest con is that this isn’t a viable option for us at this point.  But I’m hugely interested in the topic from a theoretical perspective.  Are there any cons to paying for a house in cash?  I’m expecting someone will say that with interest rates this low, you can make more money putting your money in the market.  But can you really?   This certainly has not been the case recently and then there is also the issue of expected return in the market vs a ‘guaranteed’ return’ of paying down your mortgage.

Questions:  This option brings up similar questions as Option 2.  How much of your net worth should you keep liquid?  Do you need to keep less money liquid if your paying cash since you would not have a mortgage and your fixed costs are lower?  Interest rates are low but I keep hearing in the news that there are cash buyers in the market, so it must be possible for some people and it also must make sense for the right buyer.

At this point we are leaning towards option 2 rather than option 1.  We were able to afford our condo on just one of our incomes and I like the idea of keeping our fixed costs low.  We would tie up more of our net worth in the house, but we would still have a strong emergency fund.

Very curious to hear your thoughts on this topic if you them!  How much of your liquid net worth would you tie up in your house?  With 30 year mortgage rates below 4%, would you even consider putting down more than 20% on a home?

Not only have we sold our condo, but we have also bought a house that we will close on in a couple of months.  While it may not be our dream house, it is an amazing family house and we are very excited.  Several big factors went into us deciding this was our house.

Price

Price was probably the biggest factor in our search.  There are two key things that were important to us when considering the price of our house.  The first is that we wanted to be able to afford at least a 20% down payment.  The second is that we wanted a mortgage we could afford on one income.  One key thing to note is that we cannot afford the mortgage payments on only one income if we only put 20% down, which is why I’ll have another post soon about how we’re thinking of our down payment.  However, our mortgage will be less than 2x both our incomes.

Size

We wanted a house that was not ‘too’ big, but that we could also see ourselves living in for at least 5-7 years.  I think we’ve hit a happy medium, although with our kids as small as they are, it is hard to say.  However, in the near term we will have plenty of room and I can also imagine this being our forever house.

Location Location Location

With two little kids one of the most important things for us when considering location was that it was in a neighborhood with a strong ‘neighborhood school’.  We live in a city with a lot of magnet school options, but you are only guaranteed admission to your neighborhood school.  It was hard to do a ton of research on schools because we do not know a lot of people with school aged children, we did the best we could and even went to a couple of information nights.

In addition to good schools, we also wanted a neighborhood that is walkable and without a terrible commute.  We have lots of family in the area so we also wanted an area that would be easily accessible to everyone.

Features

We did not want to put a lot of work into the house we bought.  This house has a great, updated, kitchen and has been well taken care of by the current owner.  While we plan to do a lot of painting, and perhaps some work on one of the bathrooms, this house does not have a lot of deferred maintenance.

I found it really overwhelming to think in terms of buying a house we could live in forever.  While I really hope we do not need to move again for a long time, thinking about this house only in terms of the foreseeable future helped to take a lot of pressure off the purchase.

As I mentioned in my last post, we have sold our condo and bought a house.  Since housing has been on my brain, there will be several posts on the topic in the near future.  There are a few things I want to tell you about, and I also have a few things I’m trying to work through and am interested in hearing your input- namely, how much of a down payment should we put on the house?  But before we get to that, a few other things:

We sold our condo in two weeks.  While this is approximately 5 months and two weeks faster than I thought it would take, there are a few things that we did that definitely helped us sell quickly so maybe I was being overly cautions in my initial estimates.

1) Price

The biggest factor in selling our condo quickly was that we were extremely realistic about price.  I originally bought our condo at the top the housing market and we knew from recent sales that prices in our building had dropped a lot.  We also have been looking at houses for years now and have seen so many houses come onto the market really overpriced and then just sit there.  Even after the sellers start to drop the price, it still seems like it takes houses that are initially overpriced longer to sell.  For this reason we really wanted to get our initial offering price right.

2) Staging

We used stagers to help our condo look great.  With a smaller space and two little kids, we wanted to make sure any potential buyer could see themselves living in the space.  That meant making every inch count and also de-kidding and de-cluttering the condo. The stagers cost about the amount of one month of mortgage payment + HOA so it seemed like a good decision.  If they could help us sell our condo even a month faster, the staging would pay for itself.

3) Spring!

We put our condo on the market in the spring.  This is a time of year where a lot of buyers come looking.  This wasn’t planned on our part but our timing ended up being great.

4) Realtor

We picked a realtor who was very familiar with our neighborhood and building.  We had one close offer before we got an actual offer and both times our realtor was extremely prepared to answer and all questions asked by potential buyers.

Lessons learned

So now things have come full circle, I have officially bought and sold my first piece of real estate.  My biggest take away?  I am so glad I put 20% down when I bought my condo initially and I’m thankful I bought a place I could see myself living in for at least 5 years.  When I moved into my two bedroom, two bath condo by myself it felt huge.  However, while I never imagined there would be FOUR people living in the condo, I didn’t want to have to move in a couple of years because the condo felt too small.  I figured, even if I only ever lived there by myself, a one bedroom, one bath might start to feel small after awhile.

The combination of putting a 20% downpayment, and then living in the condo for 7 years, meant we had a nice amount of equity built up in property.  This allowed us to price our condo to market price.  And even though we took a huge loss on the condo, we still walked away with a check rather than having to pay to get out of our condo.

In hindsight I definitely spent too much on my condo.  While I could afford the down payment and could technically afford the mortgage payment, I felt VERY house poor when I was living there by myself.  This was a terrible feeling and made me a lot more hesitant when looking at houses that stretched our budget.  It’s also why I am a strong believer in the rule of thumb of having a mortgage that is is no more than 2x your income.  While 2x your income is somewhat cautious, I thought I was being cautious when I bought my condo and used some home buying rules of thumb that left me with a larger mortgage and feeling very poor.

Finally, while overall I do not regret buying this condo as it was a space we loved with an amazing sense of community, I wish I had looked into renting more before buying.  When I bought in 2005 all anyone could talk about was home ownership and I jumped right on the band wagon.  Since we lived there for 7 years, the math ended out working out ok for us and overall I think it did make sense to buy.  It never even crossed my mind to rent and it’s something I really should have considered!