Why did I buy a house in 2006? Am I a complete and total idiot?

Ernest T. Bass wrote:

As a general rule, an interest-only loan is a bad bad idea.

There you go again calling the TYPE of loan INTEREST ONLY. INTEREST ONLY is just an OPTION of a fixed or adjustable loan.

Anything is a bad bad idea if you don't know how to use it properly. Buying a gun is a bad idea if you are going to shoot someone in the head with it. Not such a bad idea if you are going to use it to hunt rabbit.

Interest only was just ONE option used to qualify underqualified people for mortgages. The fact that it was misused doesn't mean it is a bad option for a lot of people.[/quote]

Dude, it's still a type of loan. I don't have the option to pay interest-only on my loan, and the interest only loans eventually adjust WAY up. Not sure what bug you've got about not calling it a type of loan, but it is a type of loan.

Don't you think qualifying "under qualified" people for loans makes it a bad idea? If they are under qualified, there's a thing they can do -- rent. Not everyone gets to buy a home, and with interest only you aren't buying one anyway. Sure they CAN put money toward the principle, but the VAST majority of them don't. It's to get a bigger house than they can really afford, and with the piper comes calling, they usually can't pay him, so they either sell (if they are lucky enough to find a buyer), or they foreclose.

To show you how flexible I am, I'll give you this -- IF you've got enough liquid money to pay for the house outright and you want to take an interest-only loan out on the house with a super low rate (often they are below 4% for the first 5 years) so that you can invest the money and try to do better, then fine. If though you are borrowing the money in hopes of making more with the savings each month, then that is foolish and it should not be done. Even in that case though, personally I wouldn't do it, because if the market tanks (as it has the last 13 months) then the money you had sitting there to pay for the house is now invested and potentially lessened by about 40%. It's really just a bad idea to tak an interest-only loan.

He would NOT be in a worse position, because he would not have bought THAT house if he took my advice -- a FIXED rate mortgage that is not more than 25% of your take home pay. If he couldn't find a house in his area that fits that bill then he has two choices -- find a way to make more money, OR move to where houses are cheaper. Or he could save money for a few years and plop down a large down payment so that he could afford the monthly payment. IF he took my advice then he would NOT need to refinance! He simply needs to get another job. One reason why you get a house that costs only 25% of your take home pay is so that if you need to have a job for a while that pays less that you can make it. People can probably make it on a payment that is 40% of their take home pay, but you've got to figure in bad times. Does this guy also have an emergency fund of 6 months set up? That's what I recommend for people to have in place BEFORE they buy a home. AND, is he debt free except for the house? That is also part of my recommendation. Sorry brother, but if the guy followed my advice he would NOT be in trouble.

You are also wrong about lending. I could go get a home loan today if I wanted to. People who did the right things with their money can go get loans -- VERY decent rates right now too!

He goes into all of that in his book.

Blowing Rock Master wrote:

Do Shiller's indexes take into account that the average house has grown in size over the years, has to meet increasingly stricter codes, and has more features?

Flagpole:

Your advice is spot on. Not only that, that advice used to be the standard because lenders wouldn't allow people to borrow more than they had a good chance of paying back.

20% down, cash reserves, good credit, etc...

We are back to that now which is a good thing.

Flagpole wrote:

Does this guy also have an emergency fund of 6 months set up? That's what I recommend for people to have in place BEFORE they buy a home. AND, is he debt free except for the house? That is also part of my recommendation. Sorry brother, but if the guy followed my advice he would NOT be in trouble.

I have an emergency fund of 3 months. Both my car and wife's are paid for and we don't have any other debts. We pay my kid's college as part of a pre-paid program on a monthly basis.

I wouldn't say I'm in trouble financially, but I'm worried about selling that extra house. I don't even care about the down payment I lost anymore. I'm just worried about the negative cash flow and even worse, what if my good tenant leaves and I accidentally replace him with a deadbeat? The house is both a financial handicap as well as a risk going forward.

Flagpole wrote:

I've made financial decisions based on market conditions and my stage in life. Didn't buy a house until age 33 as a result. I waited for the right time. It's NOT luck brother.

So you have had to contend with a mortgage for about 8-9 years? This speaks volumes. I guess you would have a lot of investment and loan down payment funds at your disposal while living with your in-laws for 10 years and not having to pay for rent or child care. Bravo.

Flagpole,

Your preaching to the Choir about the "proper" way to buy a house. I have had my house paid off for 20 years. I pay cash for all of my rental properties.

What you don't understand is that you can get a "fixed rate" loan with an "interest only" option. All "interest only" loans are not "adjustable rate" loans.

You are making a big assumption that Why O Why would not have bought THAT house if he had to get a fixed rate mortgage. He did put 20% down and might have easily qualified for a fixed rate 15 year mortgage depending on his income. His problem is that he now has two houses and doesn't need one of them. While you could get a loan and I could get a loan, too many people cannot get loans and that has drastically lowered the price he can get for his house.

Put in this situation, I would rather have to come up with 780 a month than 1400 a month.

Why Oh Why? wrote:

I have an emergency fund of 3 months. Both my car and wife's are paid for and we don't have any other debts. We pay my kid's college as part of a pre-paid program on a monthly basis.

I wouldn't say I'm in trouble financially, but I'm worried about selling that extra house. I don't even care about the down payment I lost anymore. I'm just worried about the negative cash flow and even worse, what if my good tenant leaves and I accidentally replace him with a deadbeat? The house is both a financial handicap as well as a risk going forward.

Dude, you have a lot of your ducks in a row, but you're in a bit of a pickle with regard to having two houses.

Some things to consider:

Did your now wife already own that house before you married her? If so, was she not paying mortgage then? If that's the case and you were paying the mortgage on the other house, can't you just continue to do that until the housing market turns around and then sell...ESPECIALLY if you have a renter in the one house helping to defray the cost? If she didn't already own that house and the two of you bought it together then I say that's a bad idea. Doesn't appear that's the case though. It just all boils down to the fact that you made a bad decision to go with a mortgage on a house that you really couldn't afford -- if you can't afford a minor increase in fees and you are only paying the interest on it, then you couldn't afford it. I feel sorry for you brother, but I won't lie to you -- it was a bad decision. Anytime you are in a house where if the value drops you are completely screwed, then it's a bad situation and a bad loan. If my house dropped down to be worth just $100, my monthly payment would stay the same, and I could just opt to stay in it or pay it off and leave. I didn't want any risk with ARMs or interest-only loans that change after a few years. As you've seen first hand, it's too risky.

I'll pray for you brother. My advice is to drop the price to so super low that someone would be a fool not to buy it, and then get the hell out and rebuild your financial situation with the dual income you now have with your wife -- be DONE with that headache. If you can swing it until the middle of 2009 (when some people say the market will head north again) then perhaps do that, but you lower that price and with the super low housing rates now, you'll get a buyer. As Dave Ramsey says, "the heck with the cheese, let me out of the trap!" Sometimes you have to do that. Should do fixed rate mortgages from now on. If your wife's house is anything but, you should refinance.

Ren Hoek wrote:

So you have had to contend with a mortgage for about 8-9 years? This speaks volumes. I guess you would have a lot of investment and loan down payment funds at your disposal while living with your in-laws for 10 years and not having to pay for rent or child care. Bravo.

1) Never lived with inlaws or have EVER had free child care. My wife has been a stay at home mom for almost 11 years now. We did child care for our first kid from 3 months old to one year and then decided it wasn't for us. We PAID for that care too.

2) We rented the first 10 years of our marriage because we were nomadic; Ohio to California to Michigan to Maryland and then back to Ohio...chasing graduate degrees and then some jobs. Finally had our first kid and settled back in Ohio to be close to family.

3) We did have a lot of investment money because we invested HALF our income for the first 7 years of our marriage. That is ALL still in retirement accounts. We bought our house with a down payment that WE SAVED. Got not money from rich relatives. Just all us brother.

So sorry brother, your attempted painting of me doesn't work. Deep down you know my advice is correct. It's not coming from a guy with a HUGE income or access to free money either.

You're still wrong.

1) The VAST majority of interest-only loans adjust upward (this guy's will too -- he said so), and the reason people get them is so they can pay less initially (often LOTS less). This gets them into a house. When the piper comes 5 years down the road though, they can't pay, and if the property value has dropped a lot, they are in big trouble.

2) This guy has two houses, but his now wife OWNED THE OTHER ONE BEFORE THEY GOT MARRIED. So, he should be able to handle the mortgage on his house until he sells it while she handles the mortgage on her house. They did it before they were married. Hell, he's even in a better situation now because he has renters in that house. It is CLEAR that he could NOT afford that house.

3) Had he done what I ALWAYS suggest, he would NOT be in this position -- he COULD NOT BE.

Take your medicine brother. I'm right.

Surprise! wrote:

Flagpole:

Your advice is spot on. Not only that, that advice used to be the standard because lenders wouldn't allow people to borrow more than they had a good chance of paying back.

20% down, cash reserves, good credit, etc...

We are back to that now which is a good thing.

Thanks brother. Your assessment of my advice is also "spot on". I agree that it is a good thing we are going back to this. Not everyone gets to be a home owner.

So when EXACTLY and HOW was it that your father-in-law helped you correct your poor spending habits and credit card debt then taught you financial responsibility?

Flagpole wrote:

I'm right.

Why O Why has never said this was an adjustable mortgage.

"You guys pegged me wrong here. I wasn't an investor, and this was my primary residence. I got the interest-only because it featured lower monthly payments for 10 years - not a lower interest rate"

Are you saying that if Why O Why got a 15 year fixed Rate mortgage and put 20% down and had a one year buffer, he wouldn't be in a bad situation?

250k for house

188k mortgage

6% interest fixed rate 15 year mortgage

2 years payments 1586/month

1 extra year payments from reserve fund

mortgage balance after 3 years 157,000

Value of house 140,000 currently

He still couldn't get another loan or sell it being under water 17k.

Now you can make up some other crap about how you would have just known that this was a bad buy even though every house in the area was priced accordingly, 20% was put down, and a fixed rate 15 year mortgage was used where the borrower could easily make the payments.

This isn't about whether he can make the payment, it is about whether he would be better off in the future letting the bank have it or continuing to own it.

Mr Why

Look on the bright side of life.

You are now living with an income earning spouse (my presumption) who owns a home you live in. 2 people obviously can live cheaper than 2x1. So you have to be saving money there.

What you are losing on the condo, you may be gaining on the spousal side.

Please, please don't tell me you bought the condo after you had met this woman.

Ren Hoek wrote:

So when EXACTLY and HOW was it that your father-in-law helped you correct your poor spending habits and credit card debt then taught you financial responsibility?

My father-in-law is just one of my financial mentors (the other was a 50ish former co-worker). When I was in my early 20s, before I even married his daughter, he talked to both of us about the importance of not borrowing money, spending only 90% or less of what you take home, and investing everything you can for the future. This was a departure from the discussion about money with my own father. My parents before they retired spent more than they made, didn't often find the best deals on things they bought, bought more than they needed, etc. My father told me that when I retired the money would be there. That's fine if you have a pension like he does, but I don't have a pension. So, when my Father-in-law began talking differently about money, I was very open. I had been concerned about being in debt even as a teenager, and my father said it was a way of life. My father-in-law made me realize that it isn't. Do realize that I've never really had poor spending habits. I've never been very far into debt and even all through college never spent more than I made. Took us a while to pay off about $25,000 total in student loans, and then we had some car loans, but since then we've been debt free but for the house, and I plan to knock that off within 3 years of my wife going back to work.

Not sure why you thought I had to be in dire straits or need financial help (getting money from them) from my inlaws in order to benefit from their advice. They are great role models for financial responsibility. They both drive Hondas that they've had for 14 years, they live in what many consider to be a starter home that they paid off in 7 years, they are both professionals (college educated) who make decent money (now both down to part time), and they are set. They could stop working if they wanted to, but they both enjoy working so they do. That's one thing I don't see myself doing past age 60, but to each his own.

Sorry but you're still wrong. Interest-only loans are way too risky -- when the value drops AND the payment you need to make goes up in 5 or 10 years (and it WILL) then you are really stuck. FIXED rate, and being able to afford that rate initially is the only way to go. Otherwise you are fooling yourself and end up with a house that is more expensive than you can afford.

I know you probably already know this, but I just want to go over it. A mutual fund is a collection of stocks that is selected and managed by a company who charge a fee to invest in it. There are mutual funds that follow indexes and there are some that do their own thing. There are more mutual funds then there are stocks that are listed.An Exchange Traded Fund(ETF) is a fund that is electronically managed as a single stock that can be purchased as any other stock, but it exactly follows the index it is pointed at since it auto acquires the stocks that make up the index it tracks in the proper ratio of the stocks in the fund.With a mutual that follows the S&P 500, and an S&P 500 tracking ETF, their performance should be the same, but you will do better with the ETF since all you have is the intial brokerage commission when you buy it, that would go with any stock trade. The mutual can have a fee to initially invest as well as an annual maintenance fee, and potentially a load fee placed on profits. The ETF only has the commission when you buy it since it is traded like a stock, thus over the long haul it will do better than the mutual.Ed

Ed, I see you know more than I thought you did. You are correct that you could perhaps avoid fees if you do the ETF as you suggest. Do realize though that with index funds that aren't actively managed, you can pay VERY small fees so that it is pretty much not even a big deal. I would use Vanguard for this. The thing about ETFs is that they can be traded like stocks, and you can day trade or short and so on. That's just not a game I want to get involved in, so I don't, but I'm not against it as a strategy -- just not for me. If you wanted to be a more passive investor, you could open a mutual fund, fill it with index funds and just contribute until you are ready to take the money out -- lots of people do that, and it's not a bad strategy. My advice is to always do 15% toward 401k and Roth IRA first, and those are managed accounts. Beyond that, if you want to buy a mutual fund and fill it with index funds or an ETF then I'm all for either way -- as long as you (not YOU, meaning anyone who does this) are debt free but for a house and you have a manageable mortgage and continue giving 15% toward retirement accounts.

Flagpole wrote:

[2) We rented the first 10 years of our marriage because we were nomadic; Ohio to California to Michigan to Maryland and then back to Ohio...chasing graduate degrees and then some jobs.

Well it's good to see you are grounded now. Just think of the money you would have now if you did not do all that moving around and did not spend the money on undergrad and graduate degrees that are not even utilized. I guess the Lovely Flagpolette went to college to get her MRS. degree?

But living and learning is a never ending process. A fine wife, family close by, children, robust ales, and SRV make life better.

Happy and Blessed Holidays to you, Steve.

Ren