Help me settle this 20 yr fixed vs 30 yr fixed mortgage debate - Page 4

scotchnrocks · #31 11-01-2006, 10:36 PM

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Desert is correct about appraisals. If I sell a house in Cali for 50k under market, the appraiser is gonna say its worth almost exactly what I'm selling it for.

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Have you ever seen an appraisal before? My appraisal had 4 comparables with 2 of them being the units directly above and below mine (same floorplan) and their purchase price. I don't see how the appraiser could have been doing me a favor for better or for worse.

DesertCat · #32 11-01-2006, 11:19 PM

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My appraisal had 4 comparables with 2 of them being the units directly above and below mine (same floorplan) and their purchase price. I don't see how the appraiser could have been doing me a favor for better or for worse.

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Those are very good comps, but how recent are they? The markets have changed a great deal in the last 6 months.

DesertCat · #33 11-01-2006, 11:26 PM

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Does this calculation take into account the extra money paid out over the life of the 30 year loan so that at the end of year 30 one would have paid more for the 30 year loan and still come out with more cash if returns after fees avg. 5.1%?

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Yes. If your investment after tax returns beat your mortgage after tax returns, your investment will be larger than the extra mortgage balance, which includes the extra interest you didn't pay in order to invest.

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Even if I may lose some value by not choosing the longer option and investing the difference, I'm more content with the safety/convenience of paying off the loan earlier than having to discipline myself and spend extra time to invest the difference each month. Somewhat results oriented thinking I guess, but it makes life simpler for me.

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This is a very valid approach. Also, to get good returns from investments requires accepting volatility risk, i.e. bad years. Paying down your mortgage faster has no volatility risk. You have some small risk of trapping equity in your loan that you might need in a emergency, but in todays world it's trivial to get a second mortgage to borrow that cash back again.

Unless it's a huge difference in profitability, being able to sleep well should be a very important factor.

scotchnrocks · #34 11-01-2006, 11:46 PM

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My appraisal had 4 comparables with 2 of them being the units directly above and below mine (same floorplan) and their purchase price. I don't see how the appraiser could have been doing me a favor for better or for worse.

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Those are very good comps, but how recent are they? The markets have changed a great deal in the last 6 months.

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My appraisal was $185k, the unit directly above mine sold for a purchase price of $189.9k on 8/18/06. The other unit is on the same floor as mine and not under, but is the same floorplan, it sold for $184.9k on 5/23/06. These units were purchased from the developer. Mine is one of the first resales in the building. The "investor" who previously owned mine never occupied the unit, and judging from his purchase price and his agent fees/transaction costs on the settlement statement he lost about $4-5k depending on his closing costs.

DesertCat · #35 11-02-2006, 02:01 AM

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The cheapest rental on the market in this particular high rise out of ~10 available rentals is $1200/month and over 93% of the units have been sold. Building opened to residents sometime early this year. I'm looking at $1680 w/HOA and power bill (HOA includes cable, internet, water, sewer, trash, insurance, etc.) and escrows before tax breaks. In the first few years I'm looking at about $1300/month with tax breaks. This is all putting ~16% down so my PMI is also $29. The loan is a 20 year fixed.

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This is not exactly the right way to figure your costs, your monthly loan payments are much more than your interest costs since you are paying down tons of principle with a 20 year loan (which isn't a cost, it goes back into your equity), and you are ignoring the cost of locking up your downpayment with no return. The way I like to look at it is to assume you are forgoing the same return on your downpayment as you pay on your loan, i.e. 6.1%. You could quibble with this, and use a slightly higher or lower rate, but this makes a simple rule of thumb.

The rule of thumb is you apply 6.1% to the entire loan ($150k, right?), to get costs of $9,200 per year. My guess is you'll get about $2400 in tax benefits. Let's assume you pay $2k per year in property taxes and HOA, plus $350 in PMI. I'm going to skip maintenance costs since it's brand new. So your effective cost of buying is about $9000 per year or about $750 per month. Since that's $450 per month less than the rental rate, buying is clearly the better option over renting.

I'm surprised that your rental rates are so high, I'd guess that a $1200 rental would be sell for closer to $250k in my neighborhood (I know one guy who rents a brand new $200k condo for $1000 per month). It sounds like you either got a great deal or there is a big shortage of rental properties in your area (or both).

Thremp · #36 11-02-2006, 02:29 AM

Depends on area. Where I'm at rents at ~1k a month and cost ~145k.

scotchnrocks · #37 11-02-2006, 11:57 AM

My guess is to why the rental may be kind of high is the $290 HOA which includes internet and cable, so a renter only needs to pay rent and a cheap electricity bill each month. Property taxes are also the highest in the state in Fulton Co. The high-rise option is the cheapest way to live kind of high on the hog around Buckhead and be in the middle of it IMO. The townhomes and houses around here are WAY more expensive.

DesertCat · #38 11-02-2006, 01:17 PM

I didn't realize HOA was so high. What are your property taxes? Here's how I'm calculating your ownership costs per year.

6.1% on $150k purchase price = $9150
Property taxes = $1,000 (?)
Tax break on $9k in interest & property taxes = -$3000
HOA = $3500
Maintenance = zero (for a few years)
Total = $10,600 or a little less than $900 per month.

Still way cheaper than renting. I'd usually be willing to pay a bit more than renting since owning allows you to keep appreciation. The only exception would be if you aren't going to stay long or otherwise regard appreciation as unlikely for a specific property.

scotchnrocks · #39 11-02-2006, 01:58 PM

Actually property taxes will be pretty high at ~$2500 for city and state. And $150k is loan amount, purchase price was $175k. Looks like that makes it roughly equal to renting or maybe a little more since the cheapest rental listed is 4 floors above mine.

Appreciation will probably be 3% or so average I'm thinking. From my balcony I can see the groundbreaking going on for the new St. Regis hotel and residences about 1000 feet over in the same plaza as my building and one other existing 20 story commercial building. It will be completed in 2008 and residences will start in the millions.

http://www.starwoodhotels.com/stregi...00c7b9804f58c8

DesertCat · #40 11-02-2006, 05:19 PM

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Actually property taxes will be pretty high at ~$2500 for city and state. And $150k is loan amount, purchase price was $175k.

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Sorry, you said that at the beginning, my bad.

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Looks like that makes it roughly equal to renting or maybe a little more since the cheapest rental listed is 4 floors above mine.

Appreciation will probably be 3% or so average I'm thinking.

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That would give you about a $5k per year (to start) edge owning, enough to overcome as much as a $400 per month disadvantage vs. renting. But beware, condo markets are tricky, it's easy to have large inflows of new units (conversions,etc) that can hold down appreciation. I would hope that the pullback by builders lately will be to your long term benefit.