I am thinking about buying a home in the next couple years and have been trying to figure out what makes sense to do so for a down payment and interest paid over the term of the mortgage. Obviously the more you can put up front the better, but paying for a house in cash is a little out of reach for most people.Secondly, I will be spending money on rent for the next 5+ years which is money that I will never see again. I am wondering where the tipping point for rent paid vs interest paid or if you have any advice for how I should go about thinking about this. Most blogs I've read recommend saving 20%, but still that's paying interest on a 15-30 year mortgage which still adds up to a ton of money. To me its a question of math. I'm just not sure what the equation is.
1. Don't buy a home unless you plan on living in it for FIVE YEARS. That is the time it takes to break-even on the transaction costs of buying the house and selling it. I detailed this in a posting. The house may appreciate at 2% a year, and the transaction costs (at both ends) total about 10%.
2. Put down 20% if possible, to avoid Mortgage insurance (PMI) and to avoid ending up "upside down" on a home. My first house I bought in the bubble of 1989. I put down 20%, and was never "upside down". Others, who were not so lucky (or smart) did funny-money deals with little down, and ended up being stuck with houses, going bankrupt, or having to pay cash at closing when they sold. Put as much down as you can afford, if you can't save up 20%. Don't be suckered into low-money-down deals if you can - they usually have higher interest rates.
3. Buy as much house as you NEED, not as much as you WANT. If you are starting a family and plan on having two kids, a one-bedroom condo is not a smart choice. But a six-bedroom mini-mansion with a four-car garage, that you can barely afford, is not a smart choice either. The first choice means you will end up selling in short order (see #1 above) and the second choice means you will be house-poor and more likely to be upside-down (See #2 above). If a Real Estate agent tells you to "buy as much house as you can afford" then find a new agent.
4. Avoid Condos - they swing wildly in price and are very expensive for what you get. Also, if you are starting a family, you may outgrow them in a short period of time. Condos may work in a few specific situations. But read my blog posting on this, and when the bad shit happens, don't act surprised.
5. Do the math - if it is cheaper to rent, then may you should rent. In today's market, there are bargains out there. But just a few years ago, in places like Florida, people were paying four times as much per month to own, than to rent. Pretty dumb, in retrospect.
Granted, not everyone can put down 20%, particularly when buying that first home. But the more you can put down, the lower your overall costs will be and the less chance of being "upside down" if housing prices tank. And traditionally, that is why banks required large down payments in the past.
Buying more house than you need (but you think you can afford) is generally a bad move. Giant houses cost a lot of money, cost a lot to heat, cool, and maintain, and the property taxes can be staggering. A house is not an "investement" but a place to live - it is an expense, not a savings plan. So ignore real estate agents who suggest becoming house poor.