20% down fixed-rate loan with a local bank, probably 30-year for most

[alcibiades_mystery]

That's the tried and true method, and hard to argue with.

20% down: You walk in the door with equity. You can withstand a fairly substantial drop in market value without having to bring money to a sale, if necessary. The requirement also teaches you about savings in your pre-ownership days, usually in your 20's, or precisely when you're best suited to develop lifelong economic habits. You learn the value of a dollar, and affordability. And you know how hard a slog it was to accumulate that 20%. It means something. It has meaning over and above its quantity.

Fixed-rate: You can budget. Various interest and principle schedules can be explained to a sixth-grader of average intellect. You have predictability.

Local bank: The institution holds your loan. It has an abiding stake in the community. The people know you and your property.

This system worked well for 40 years. It even worked well for people forced to buy in at exorbitant interest rates in the late 70's and early 80's. I've had various finance students pitch me rationales for all kinds of ARMs and other gimmicks: who they work for, formulas out the whazoo, sigmas, charts, mumbo jumbo. I've understood them all, and never found a one convincing.

20% down payment. Fixed-rate. Simpler is usually better.

[sinkingfeeling]

1. I agree.

[SheilaT]

2. That's what I did when I bought

my little place nearly two years ago. 20% down, 30 year fixed. Even if I had to sell tomorrow, I'm thinking the worst I would do is break even. But I have no intention of selling any time soon. I bought a place smaller than I would have liked, but I can afford it. That's what I keep on repeating.

Maybe, somewhere down the road I'll be able to move into a somewhat larger place, but if that never happens I'll be quite content with this little place.

[shireen]

3. it's hard on first time homeowners

Not all of us were/are in a position to save during our 20s or even 30s. For many reasons.

Not many first-time homeowners in over-inflated markets can afford to find a decent property for 20% down.

The only way 20% down will ever be practical for 1st time homeowners is if property values are restored to reasonable pre-bubble prices. Until that happens, people like me who did not buy pre-bubble are screwed.

[ParkieDem]

4. Exactly.

Even in Texas, which avoided the massive run-ups in prices like California, Florida, etc., the values of most homes have come close to doubling over the past decade. The 3-bedroom house that cost $120,000 is probably now close to the $250,000 range.

So, instead of a $24,000 down payment, you're looking at close to $50k.

I've always been told that a 10% down payment is pretty sufficient.

[alcibiades_mystery]

5. But that's precisely why it's a good system

"Not many first-time homeowners in over-inflated markets can afford to find a decent property for 20% down."

Exactly correct: that's how home prices become UNINFLATED. Why would you want to buy something in what you yourself call an "over-inflated" market. This is like saying, "There's no way I would pay that much for this commodity! Now make me a loan so I can pay that much for it!" It literally makes no sense.

If you don't have 20% down for the home, there are two conclusions to draw:

1) You can't afford to buy the home.
2) The home is over-valued.

This is why the 20% down system actually works. It prevents people from contributing to the inflation of housing values at the same time it sets limits of affordability for houses.

[Lance_Boyle]

6. This is the winning post.

"But I want it *NOW* Daddy!" only ever worked for Veruca Salt, and not even so well for her in the end. It is certainly no acceptable rationale for overborrowing and overbuying. The real answer is, "you know you don't really *have* to live/work in that place. Find a greener pasture." But nobody who is given the opportunity to overborrow/overspend ever listens.

[coalition_unwilling]

30. First-time homebuyer (condo) here in California. My wife and I waited to

buy until monthly rent was more than P&I + HOA dues. This happened in April 2009 and, by that time, prices in our building had declined by 50% from their bubble peaks. Even so, a 20% downpayment would have required us to bring roughly $50K to the table. $50K we did not have, even though by this point monthly mortgage + HOA were well below monthly rent for equivalent units. Fortunatly, the FHA has loans for first-time homebuyers that require only 5% down for a 30-year fixed. This meant we only had to put down $10K, a stretch for us but softened somewhat by the first-time homebuyer's credit.

If we had to amass a 20% down payment, my wife and I would still be renters. We love our condo and hope to never return to renting. We don't care if we make a profit off of our home and will be happy to live here for the rest of our lives. But we were sick of shitty landlords and of rents going up every year, even in supposedly rent-controlled buildings.

I say this because saving even $5K takes a monumental effort. Saving $50K to get a down payment would take an eternity. It can be done, I suppose, but no one ever showed me how to do it nor that it was possible for someone in my circumstances.

[shanti]

34. it's doable

even for a single parent with a secretarial job, which i was 15 years ago, buying my first (halfplex) home here in california. rent was more than the cost of my PITI mortgage, and it was a no-down payment loan, so it was a no-brainer. i made a few beginner mistakes in the purchase, but still happy that it's MINE and i can use it as a tax break (mortgage credit certificate). having a secure state job helped too.

[eleny]

9. It's not supposed to be easy

Easy helped to get us where we are today.

[BobbyBoring]

14. Yep, Bush got his ownership society!

Another mess he made. He wanted more Americans to own their homes, "It makes them better citizens".

I wish we could have a Mulligan for those 8 years~

[truedelphi]

19. And it is impossible for many first timers who live

In a vastly over priced area (Think Washington DC area, or San Francisco.)

You have to pay a huge amount for rent, and then you are paying taxes on those monies.

Then you end up locked out of the housing market for most of your life, or until in your middle age, when your parent s die, and if there is something for you when they die, you might be able to own a home then.

[formernaderite]

26. It's supposed to be

way back in the day, my wife and I were renter for many years. We didn't spend much on anything because we wanted to save to buy a house. At first we even sublet a room in our apartment. That's how you did it.... and thirty years later, we owned it free and clear.

[SoCalDem]

27. That's why FHA was put in place for truly qualified first timers

and why people used to be well into their 30's before they quit renting.. Oftentimes, they had had all the children they wanted by then, so they knew what size house they needed, and would not be having to sell every time they had a baby, and if their kids were well into adolescence by the time they bought that house, even if it was a bit tight for a few years, as the kids moved out in 5-10 years, the house "got bigger".:)

Home ownership used to be to have a place to raise your kids, launch them, and then have a paid off home for your golden years.. People who moved a lot, or who had shitty, transient jobs rented because they knew better than to take on a 30 year commitment.../. and loan committees at banks knew better than to loan that amount of money to someone who may not be able to pay them back.

[lumberjack_jeff]

7. With interest rates as low as they are, you're absolutely right. n/t

[MineralMan]

8. A good system. And right now, there are a bunch of houses

that are for sale at prices that haven't been seen for a very long time. With some sweat equity expended in fixing those houses up, they can be a great bargain. The house next door to me was bank-owned, and finally sold for just $70,000. Equivalent values in the neighborhood are between $150K and 200K. The person who bought it knew it's needs. It was livable, but needed a lot of work to bring it up to the standards of the neighborhood. The standards aren't perfection, either. It's a neighborhood built out in the 1950s.

The new owner and his wife are working hard fixing the house up. Painting, a new roof, that kind of thing. They're doing it themselves, and learning as they go. But, they had a 20% down payment for a $70,000 house, so they're doing very nicely. They'll put probably $10,000 into the fix-up, since they're redoing the kitchen and some other things, but the labor is pure equity.

There hasn't been as good a time for a first-time homebuyer for a long time. Sweat equity is the best equity, in the long run.

[devils chaplain]

10. K&R

Imagine all the pain and calamity that would not have occurred had we stuck to this system.

I think now is a good time to buy and I have that 20%... unfortunately we're not sure where we'll be settling down "for good" just yet. :(

[taught_me_patience]

11. What if you have a high income but not much saved?

Why not put less than 20% down? The 20% down payment requrement is difficult for first time homebuyers... especially because there are a bunch of other closing costs involved... hence FHA loans for first time home buyers. My wife and I put down 10% on our first condo and easily have enough to pay our mortgage. We just couldn't save the 20% necessary (100k) and still have enough cash for emergencies.

It also begs the question... why stop at 20% if you want to eliminate bubbles, why not require 50% down? After all, that how much many homes declined when the bubble burst.

[alcibiades_mystery]

12. 20% is a reasonable upper limit for downward corrections in non-bubble markets

The reason you saw 50% drops was precisely because so many were going with 0 down and similar inflationary nonsense.

You interpret me as saying that it is *all* about preventing bubbles. Clearly, I'm not saying that. It's about weighing affordability against value inflation. A 50% down requirement would certainly work on the latter, but not the former. It's a balance.

This isn't an attack on anybody who paid 10% down. It's not about you.

I think 10% down too low. Why? because 20% is a historically successful threshold for preventing bubbles while incentivizing reasonable behavior an assuring affordability. Tried and true. Perhaps 10% down has similar characteristics, but I think it's too low, and I don't see it as having proved itself as matter of population dynamics. Maybe it works in some cases, say, yours. Congratulations. Again, the OP isn't about you. Its track record in large numbers has not been great.

[dkf]

25. Because markets don't normally correct over 20%.

That means in a pinch you can sell at any time.

[taught_me_patience]

31. I've seen markets correct over 20% twice in the last 20 years...

Hawaii 1990 and California 2007. It took 12 years to get back to the 1990 prices in Hawaii.

[SoCalDem]

28. In Argentina you have to pay in full..in cash

and in other foreign countries you have to put 50% or MORE down..

We made it too easy here, and now we are all paying..

[Lars39]

13. And pay it off early, if you can.

You sure don't want a house payment if you're retired.

[taught_me_patience]

18. I think this is a bad idea

A 30 year mortgage is approx. 5% interest right now... very low because of the property collateral. Also, you get to write off the interest in taxes, making the effective rate 3.5% or so for 30 years. This is nearly the rate of inflation... you are essentially almost getting free money.

[Lars39]

21. But that "free" money can be freed up to be saved for retirement or meds,

or other things.

[nichomachus]

15. In truth

30-year mortgages were part of the problem. They carried the risk to the banks over too long a time period. Don't expect to see them around much longer.

[drmeow]

16. There were a lot of reasons

why we did not put 20% down on our house. In particular from a long term financial perspective putting down 20% (which we probably could have done if we had liquidated the vast majority of our other assets) would have been foolish and short-sighted. We also could have purchased a cheaper house if we had wanted to live further from work than we do but that also would have been less financially sound as the current location of our house enables us to walk to work thereby saving us gas money (what was that everyone was saying about $5/gallon gas - I wouldn't know as I only buy gas every 6 to 12 weeks!) and parking money.

Yes, a fixed rate is better as long as the option to refinance is there (can you imagine having to pay the ridiculous interest rates of the mid-late 70's for the whole 30 years!).

We put 10% down on a 30 year fixed rate and paid private mortgage insurance. We have since refinanced to a 15 year fixed rate, got rid of the mortgage insurance, and are on track to have the house paid off on time if not early.

And before you say 20% down has a track record and 10% doesn't, please provide the data showing that:

1) All those 10% down mortgages were NOT 80/10/10 and 80/15/5 piggy-back loan situations.
2) None of the 20% down was borrowed from family
3) 10% down with a fixed rate has been tested and failed

On the contrary:

Under the GI bill a loan-to-value ratio of 95 was allowed.
In 1968 the Housing and Urban Development act allowed down payments as low as $200 and all or part of that could be applied to closing costs.
Private mortgage insurance (to cover the amount less than 20% which Fannie Mae and Freddie Mac required) has been around since 1957.
In the 70's interest rates were so high that they were writing 1, 3, and 5 year mortgages ... you just rolled over the remaining balance into a new mortgage (hopefully at a lower interest rate) at the end of the loan.

In short - your 20% number is NOT the tried and true number. Given that when 30% down was the standard only 40% of people could buy a house I suspect that in the last 50 years at least 30% of homeowners started with an 80/10/10 or similar split.

The way the system worked was by examining the potential borrower's full financial picture including job stability and long-term financial plans and have tighter restrictions to prevent mortgage fraud. In that respect a couple who comes in and says they want to put 10% down but that they have own some stocks and have some money in a retirement IRA or 401K and have a stable job which will allow them to pay the full mortgage plus PMI with 1/3 or less of their gross pay is a better risk than someone who has liquidated everything they own to come up with that 20% down payment and doesn't seem to have any long term financial plan.

[hobbit709]

17. My parents bought their house in 1967 for $13K

$100 down, $100/mo on a VA loan. 4 br 1 bath ranch.

[Annata4Peace]

20. Remember 1999?

http://www.nytimes.com/1999/09/30/business/fannie-mae-eases-credit-to-aid-mortgage-lending.html


Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

[Commie Pinko Dirtbag]

32. Of course! It's all the fault of Democrats and poor people!

:eyes:

[EstimatedProphet]

36. All those damn poor people that forced the banks to give them huge mortgages!

Those poor, long-suffering banks, who were forced to loan poor people mortgages they could never afford to pay back, ever! Why, they're the real victims here!

[socialist_n_TN]

22. Well the problem is that most people won't be able to

buy a home then. 20% is a CHUNK for the average working class family. I prefer the government backed FHA loans at 3.5% DP. At least that's reachable for the average person. The change I would make is that I would START by putting together a national bank that makes DIRECT loans to citizens rather than insuring Wall Street bank mortgage loans.


Also, you do realize that the fixed rate you get with MOST local banks is a good bit HIGHER than the one you get with the bigger mortgage banks, right? Also, there's no guarantee that the local bank will KEEP your loan. Banks are banks, even if they're local ones. They can be bought and sold just like the big boyz. They can also sell off all or part of their loan portfolios at any time they wish.

In mortgages there are NO guarantees.

I totally agree with you about fixed rate loans though. For the VAST majority of average people buying a house, a fixed rate loan is the ONLY one that makes sense.

[JoePhilly]

23. I refinanced with a local bank recently.

They sold the note to Wachovia before I made the first payment.

[jtuck004]

24. Wow. What a good idea. For 1944.

Today, however, that would sentence tens of millions of people to being beholden to a landlord for their entire lives. Incomes are vastly lower across the board and are likely to stay that way for some time, especially since the wealthy who purchased the politicians necesary to insure a wealth disparity that works to their advantage see no incentive to change the system.

Since those halcyon, post-war years we have systematically sold the wealth-creating capacity of the vast majority of Americans, i.e. manufacturing, for short-term gains, replacing it with a housing industry that, as long as it kept growing, fooled us all with a notion that there was an economy sufficient to survive on.

The result has been tens of millions of jobs which no longer exist, in addition to at least as many that have replaced the well-paid skill of the machinist with the lower-paying ability to say "Do you want fries with that?".

As far as the local bank, there is little to no advantage to working with them. Over the past decade, with the advent of securitization, local banks no longer limit themselves to just loaning out the capital they have. They make a loan, then sell it to the nearest investment criminal bank, using the proceeds to make another loan, which is then sold, and the cycle continues. The only thing the local bank does is get you into a computer so your payments can be sold to someone else. (For that matter take a look at the books of the 6 major investment banks - they sold hundreds of millions of dollars worth of policies on loans that never, ever, existed - it was just a bet. They have almost single-handedly removed the need for the consumer in their huge Ponzi Scheme. But that's another post, eh?). Yes, there have been some efforts to make them keep some of the risk, but that has been watered down so thoroughly that it offers no protection.

Until we address income inequality any discussion about re-creating home loans that does not take into account the changes that have occurred over the past 40 years, or the role the purveyors of our current economic crisis, the investment banks and their politiccal puppets, played and are playing in the desctruction of the lives of millions of Americans, the only thing limiting loans to 20% down will do is cement and insure that inequality.

PEOPLE often remember the past with exaggerated fondness...During the three decades after World War II, for example, incomes in the United States rose rapidly and at about the same rate — almost 3 percent a year — for people at all income levels. America had an economically vibrant middle class. Roads and bridges were well maintained, and impressive new infrastructure was being built. People were optimistic.

By contrast, during the last three decades the economy has grown much more slowly, and our infrastructure has fallen into grave disrepair. Most troubling, all significant income growth has been concentrated at the top of the scale. The share of total income going to the top 1 percent of earners, which stood at 8.9 percent in 1976, rose to 23.5 percent by 2007, but during the same period, the average inflation-adjusted hourly wage declined by more than 7 percent."

If this were Utopialand, simple would make sense, and 20% down to a local bank would be attainable. But it's not, and the only thing that will do is put what little bits of income tens of millions of people manage to scrounge under the control of ruthless, greedy, and corrupt banks and politicians. And that's not simple, it's destructive.

IMHO

[leftstreet]

29. +1

Very nicely stated. It's the income inequality.

"They have almost single-handedly removed the need for the consumer in their huge Ponzi Scheme. But that's another post, eh?).

No kidding! Would be a good OP

[Cali_Democrat]

33. 20% down.....in Southern California?

Good luck with that if you haven't saved a good chunk of change.

BTW, the USA has a negative savings rate. Most people don't save and can't afford to save as they live, virtually, from paycheck to paycheck.

[Luciferous]

35. My local bank sold our mortgage a month after we got it. I was

pretty ticked because it was the main reason I went to them in the first place.