For those thinking of buying a home...

Thread Starter

WBahn

Joined Mar 31, 2012
26,398
We will (hopefully) be closing on our new home next Friday. Maybe you can benefit from our experiences.

It is very hard to image mortgage interest rates being this low again any time soon, very possibly in our lifetimes. The bottom was on 03 Aug and now, thanks to a surprise new fee announced by Fannie Mae and Freddie Mac, they are up off the bottoms -- but still in truly record low territory. You can get 30-year par rates right at 2.5% (with 20% down and excellent credit) and 15-year rates around 2.25% at par. You can even buy down the 30-year loan to 1.99% and the 15- and 10-year loans to 1.75%. Even if something else happens that brings them even lower, there just isn't much lower for them to go. My first home had a mortgage at 7.875% and I remember the days of 18% mortgage rates.

Having said that, it is very much a seller's market, at least in our area, right now. That might soften as we move into the winter and with school now back in session, but there's actually little sign of it. The house we are finally closing on is the third we've had under contract and the sixth or seventh we've made an offer on. Most of the houses that were very attractive to us were on the market for only two or three days and in many cases it was two or three hours. So you want to be in a position to move quickly. Get your documentation all ready to go and have a pre-approval in place.

Don't forego the inspections. In addition to the usual home inspection, we paid for sewer and radon inspections and it paid off. Two of the houses we had under contract had broken sewer lines. One would have cost over $20k to repair and the other was quoted at $10k. In both cases we got the seller to either agree to do the repairs before closing or to lower the price by the bid amount (once it's discovered, they have to disclose it to future buyers, so they don't have much incentive to let the sale fall through and hope the next buyer doesn't do the inspection). One place had high radon and the seller agreed to pay for a mitigation system.

So what, you may wonder, killed those two sales? In the first case, the Flood Cert came back as being in the flood plain and flood insurance is outrageous at $13,000/yr (or $8,000/yr with a $10,000 deductible). The seller wouldn't lower the price further in compensation and so we terminated -- and ironically the next day my side efforts paid off and FEMA allowed the mortgage company to waive the flood insurance requirement). In the second case we got into a bit of a bidding war and our agent, without us asking, pulled comps and raised concerns that we had agreed to a price that was too high for the area. So even though we had been approved for an appraisal waiver we went ahead and paid for the appraisal and, sure enough, it came in $10k below the contract price. The seller was unwilling to reduce the price further (in addition to the sewer bid) and we weren't willing to bring additional money to closing to buy a house at above-appraised value, so that fell through.

Normally I am a huge proponent of shorter-term mortgages and, even then, aggressively paying them off ahead of schedule. I've paid off my last two homes and there really is something almost euphoric about being 100% debt free. But after running the numbers for the new house we opted to take the 30-year, 2.5% note and our daughter will likely have to settle the note when she inherits the house because we're not planning on paying it a cent ahead or a day early. What we will do instead is take the thousand dollars a month difference in the loan payment and invest that in the market and rental real estate. If we make just 8% average over the first 15 years we would have enough to pay off the mortgage (were we inclined to) with $115k left over and at 30 years the difference is over $1.5 million. Being debt free has value, but all things have a price and these numbers found mine.

If you are looking for a mortgage, shop rates and fees carefully. Just in looking at a few lenders the costs for the same rate varied as much as $20k. Also, run the numbers out carefully -- it's easy to get fooled by back-of-the-envelope calculations that don't take the opportunity costs of the points into account. Set up a spreadsheet simulation that makes an apples-to-apples comparison. We found that it made clear sense to go with the 30-year and spend a little to buy it down to the 2.5% (since rates had gone up slightly) but that it didn't make sense to buy it down any further.

Finally, most people don't pay much attention to the closing disclosures, assuming that the mortgage and title companies know what they are doing. They just sign them and bring the indicated funds to closing. Well, this is a very bad assumption. This is now the seventh real estate mortgage loan (purchase or refinance) I've closed and not one of them has been correct. This one had seven primary errors (and several derivative errors) totaling several thousand dollars to our detriment. It really does amaze me; this is what these "professionals" do for a living, yet they spend weeks putting the financials together and I can count on being able to find numerous errors in less than ten minutes. So you will need to assume that they will mess things up -- because they will -- and verify every single number on the document. It's actually not that hard (though obviously too hard for the "professionals").
 

schmitt trigger

Joined Jul 12, 2010
440
Very interesting and valuable information. Thanks for taking the time to write it all up.

Related to the sewer: my son’s first house had a problem with a tree’s root having perforated the sewer line.

Nothing is more disgusting than flushing the top floor toilet and having sewer water flowing from the bottom floor toilet.

Cost him dearly to correct the problem, too.
Lesson learned!
 

dl324

Joined Mar 30, 2015
12,871
One thing to consider is loan origination fees (points) vs buying down the interest rate (points). The realtor for my last house mislead me in points that I was told were buying down the interest rate. When I questioned her on my interest rate, she just said 'you must be mistaken' and acted like I didn't know anything.

I think the interest rate on my first house was almost 16%. It took the incomes of 3 single men to qualify for the loan (in the San Jose, CA area in the early 80's).

Conventional wisdom is to have your mortgage paid off before you retire. Seeing that some people are on the work until you die retirement plan, paying off a mortgage may no longer be a consideration. Just die with debt and let everyone else figure out how to deal with it.

My Wife and I were disappointed that there wasn't some fuss made about paying off our mortgage.

<off topic>
A peeve of mine...

Conventional wisdom from so called financial experts was to put all of your retirement money in to a 401(k)/IRA because you're deferring taxes to a time when your tax rate would likely be lower. I wish to heck I had a Roth IRA now. It would let me adjust my taxable income and be able to increase health insurance subsidies and reduce taxes on Social Security benefit.
</off topic>
 

nsaspook

Joined Aug 27, 2009
8,384
I had a 13% zero down VA loan in the early 80's on a house in San Diego. A very good long term investment but I busted my butt for the first few years on the payments. I don't plan to retire in Oregon so the current house will be sold for a tidy profit too. The current plan is to move overseas (wife's family owns property) but the pandemic has put a crimp on that for at least a few years.
 

Thread Starter

WBahn

Joined Mar 31, 2012
26,398
One thing to consider is loan origination fees (points) vs buying down the interest rate (points).
Not sure why it matters. The laws on this stuff change all the time, so maybe it does now, but the last time this was an issue for me there was long litany of tests that, if met, they were fully deductible and no distinction was made regarding whether they were for loan origination or for interest buy-down. While all of the tests had to be met, main ones were that the loan had to be to purchase, build, or improve your primary residence, they had to be shown as points on the HUD-1, and they had to be as a percentage of the loan amount. That last one was the one I had to be careful about on one loan because some places charged a fixed origination fee (often called "processing fee") while others charged a percentage fee. The fixed fee was not deductible while the percentage one was.

Other than the tax implications, I figure that all of the various costs associated with the purchase go into one of three columns:

1) Costs associated with the purchase of the house unrelated to the loan and that would be paid even if the purchase was for cash -- title fees, inspection, appraisal, and often a host of other junk fees.
2) Costs associated with the fact that a loan is being made -- processing fees, origination fees, discount points, and often a host of other junk fees.
3) Prepaid expenses and credits for things I would have had to pay for anyway, like property taxes, insurance, and interest for the remainder of the month of closing.

Many lenders only want to talk about what you have to bring to closing. Many of these will try to fold every cost they can into the loan balance, often without making that clear (though it is clearly stated in the documents that most people just sign without even glancing at). It can be really hard to get them to break them out into those three categories and I have found that in many cases the loan officer doesn't grasp the concept that it is relevant.

Most of the lenders I checked out for this recent purchase were actually pretty good, so things seem to have changed, about having the loan costs at hand provided you asked specifically. They had some combination of a fixed origination fee, a percentage origination fee, discount points for the quoted rate, and "other loan costs", which are the junk fees that they used to never tell you about until three days before closing. You really have to get all of those numbers because they varied so much you just can't assume that you can ignore any of them. For instance, the fixed origination fee varied from $199 to $2500, the loan origination points varied from 0% to 2% (I didn't talk to them very long), and the other costs varied from $0 to $1500. Not surprisingly, most of the ones that had really attractive advertised rates had the more outrageous costs. Even when everything but the discount points were comparable, the discount points could be significantly different.

While I called at least a dozen companies and got quotes from six (or seven), my focus was on two -- the one that I used for the refinance on the current house about nine years ago and our local bank. I was very pleased with the company I went with before -- their rates and fees are posted on their site without you having to register or provide any personal information at all and what they quote is extremely close to what you end up at, including all of the third-party fees that many lenders won't even give you more than a large range for. They have a $199 processing fee, discount points covering a span of rates (usually 6 to 8 different rates in 1/8 % increments), and that's it. I really wanted to use our local bank because they've always treated us very well -- even suggested we go to their competitor for the HELOC we took out to pull some equity for the down payment and to get the current home ready to sell because their HELOC terms were nowhere near as good ($1500 closing costs and 4% rate compared to $123 closing costs and 2.75% rate). At first it seemed like they might be competitive, but it wasn't even close. The total cost for the same terms with them were about $12,000 higher.

Conventional wisdom is to have your mortgage paid off before you retire. Seeing that some people are on the work until you die retirement plan, paying off a mortgage may no longer be a consideration. Just die with debt and let everyone else figure out how to deal with it.
I always pushed super hard to be out of debt ever since the night after I closed on my first home (a townhome) after getting my first job. At first I just got myself free of all non-mortgage debt and then made the scheduled payments. But after I bought my first true house I got the bug to be completely debt free and so lived like a pauper for 33 months. Boy, was that liberating. After I bought this place I pushed hard most of the time, but we had some economic ups and downs that resulted in it taking about seven years to get it paid off. Once again, hugely satisfying and great peace of mind. Our initial plan, a couple years ago when we started talking seriously about moving off the mountain, was to keep this house as a rental and eventual retirement home, so that meant taking out a mortgage for the new home. The plan was to never have a mortgage, not even on day one, that was so large that selling this house wouldn't pay of the new house and to push hard to be debt free again in five to seven years. But we've realized that retiring on the mountain isn't very realistic because of aging-related concerns, such as proximity to health care and access by emergency medical personnel in the winter. That being the case, this is not the best rental property, so we've decided, with more than a little heartache because we both love it here, to sell and use the proceeds to invest in rental properties that have much higher potential returns on investment. Even so, we have decided that the first two properties (probably condos) will be purchased for cash and nothing after that will be purchased for less than 50% down. We feel that that will give us a sufficient margin so that even in a 2008 style melt down we will always be in a position to liquidate and walk away with our primary residence (which could end up being one of the condos!) free and clear without touching our retirement savings.

Having said all that, I can understand the allure of borrowing every dime you can and living life to the fullest and let your creditors eat it when you're gone. It's not for me -- I wouldn't enjoy it at all emotionally -- but I can understand the rationale behind it.

My Wife and I were disappointed that there wasn't some fuss made about paying off our mortgage.
Do you mean a fuss made by those around you? Because they didn't recognize it for the achievement it was?

I was lucky on that point. I worked for a company that was all engineers except the office manager and they could all do math. Shortly after I paid of the first house we were sitting around the lunch table and two of our young engineers had just bought their first home and were, quite reasonably, excited to talk about them. So they got into a good-natured back and forth trying to top each other about the features their house had -- oversized garage, walkout basement, hot tub, that kind of thing. One of the guys next to them piped up with some ridiculous thing like, "Yeah, well might has an Olympic swimming pool in the attic." That started a chain going around the table with each person seeing if they could outdo the outlandish claim of the person before them. So we had houses that had helipads on the roof and eighteen hole golf courses in the bathrooms. The guy before me had a Stargate in the basement. When it was my turn I just said, "My house has a clear title in the filing cabinet," and the guy after me, who never took anything seriously, just looked at me for several seconds and said, "You know, I can't top that." Everyone else agreed.

<off topic>
A peeve of mine...

Conventional wisdom from so called financial experts was to put all of your retirement money in to a 401(k)/IRA because you're deferring taxes to a time when your tax rate would likely be lower. I wish to heck I had a Roth IRA now. It would let me adjust my taxable income and be able to increase health insurance subsidies and reduce taxes on Social Security benefit.
</off topic>
Which strategy is better (traditional/Roth) comes down to just a couple factors -- unfortunately they are factors that very few of the so-called experts ever consider. Unless you are one of the very few for whom one or more of the various fine-print provisions apply, it all comes down to which is lower, the effective tax rate on the money put into the Roth or on the withdrawal from the traditional. For most people, the tax rate on the Roth is pretty easy to pin down and it is their marginal federal plus state income tax rate. Nailing down the rate at the other end is a lot more speculative, even leaving aside what changes to the tax code might happen between now and then. If you don't have a significant taxable pension, then your effective tax rate on the traditional withdrawals will almost certainly be considerably lower than your marginal tax rate on the Roth contributions during your peak earning years, so the decision is pretty easy. But if you do have significant taxable income, then it gets quite a bit murkier. Complicating things is how the taxability of Social Security is treated, but unless you've got that taxable pension setting a pretty good floor, the effective tax rate, even including the SS taxes, is still often lower with the traditional -- but it still sticks in your craw.

For instance, let's say someone makes $120k/yr now and they are married filing jointly. If they allocate 10% of their gross income ($12k) to retirement (assuming they have the vehicles available to contribute that much), then they can put all of it into a traditional or, if they live in a state with a 5% income tax, they can put $8.8k into a Roth. Let's say that both grow 10x (in real dollars) before retirement. So they have $120k in the traditional and $88k in the Roth. Now they draw it out. IF they don't have any other income, including SS, clearly they would walk away with $88k from the Roth, but they would walk away with over $107k from the traditional because their effective tax rate is barely 10%. Now, of course, this is assuming that the tax brackets don't change (in real terms) over the intervening years. It's hard to say what is likely to happen, especially to the upper brackets, but the lower brackets tend to be pretty hot potatoes politically so they are far less likely to increase significantly. So that extra ~$20k covers a lot of social security taxes. Even if you get $45k in SS benefits and 85% of it becomes taxable, that's only about $10k in extra taxes.

The ideal situation, not surprisingly, is to have pots of both, especially if you can contribute to the Roth in low-earning years (like when you're young) and traditional accounts from high earning years. Then you can draw from the traditional until the SS tax reaches a break-even point and draw from Roth after that. That's one of the reasons I'm pushing our daughter to put as much into a Roth now as she can -- but it's hard to convince a twelve year old of the wisdom of doing so.

EDIT: Fix typos
 
Last edited:
Top