quote:If two people get a home today, and one gets a small condo that he can afford to pay off in 7-10 years, and the other gets a bigger, full-sized, nice home, that they can afford to take a 30 year mortgage on, the first guy will own his home faster.
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What you're banking on to say that the mortgagee will definetely own the big one free and clear before the guy in the condo can afford a comprable home free and clear is that the cost of homes will go up faster than the interest condo-boy earns will allow.
Come on now: you even quoted what I said: "Given the same homes (in other words, not letting you casually change the comparison to a "bigger" house as you need to do to make your point), my plan will get you owning each one more quickly."
Given the same homes. That means starting with the same small condo.
If you want to show calculations that actually reflect what I said, I'll examine them. Otherwise, I'll just point out that your statement of the assumptions I've made is wrong, basically because you're examining something other than what I said.
I'll clarify:
Person A and person B each by the same small condo with a 30-year mortgage, 20% down.
Person A makes extra principal payments to pay off the house in 10 years. Then person A continues to live in the small condo until he saves enough to buy another house worth twice the condo for cash.
Person B makes extra principal payments at the same rate as person A. After 10 years, he sells his home, puts it all toward a down payment on the new bigger home (also worth twice the condo), and takes out a mortgage for the rest.
Person B will be ahead of person A. Instead of the savings person A is putting aside while living in the small condo, person B is making principal and interest payments on his big house. After 10 years, he will have the house paid off, just as Person A is buying the bigger house.
quote:There are no factual misstatements here. My friends who have done something similar to this did afford bigger houses faster than my friends who just plugged away at mortgages.
The person following my plan will plug away at his mortgages, too. What he will not do is wait to upgrade his house until he can pay cash. And that's the difference.
You have analyzed an entirely different plan to show yours as better. In doing so you have made faulty assumptions and those faulty assumptions have led you to an incorrect conclusion.
quote:And all condo boy's savings has to do is keep pace with the price of the housing market for him to be able to pay for the big home with cash faster by earning intrest than mortgage boy can afford to pay off the same home home while paying interest. Granted, the intrest on the mutual funds is a variable, too, but the 16-18% advantage his money has over morgage boy's on average will do him better in the long term.
Here is the real heart of your mistake. As the housing market increases by rate X, that rate is applied to the entire value of the house, not just the money that the person has in hand.
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quote:You can usually get a better price for a home you purchase when you're able to tell the buyer you can do the deal without having to wait for your bank. Many sellers--especially the ones commonly called "motivated sellers"--will take a lower price that's a done deal than wait for a higher price that's going to take a while.
That waiting period is necessary for a whole host of protections that mortgage companies insist on.
I would not buy a house without those protections. Because of the way pre-approval works, I would have saved about three business days had I been paying cash, because I wanted title search, title insurance, appraisal, survey, and inspection whether or not I was paying cash.
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quote:Instead of the savings person A is putting aside while living in the small condo, person B is making principal and interest payments on his big house. After 10 years, he will have the house paid off, just as Person A is buying the bigger house.
I actually consider this to be a perfectly valid statement and I'll go ahead and agree with it completely.
Both of these are actually compromises to the two extremes (someone who refuses to borrow any money until he has a home on one side, and someone who gets a 30 year mortgage for the big house straight out of the gate). Mostly I was (as you correctly point out) arguing against the straight-out-of-the-gate other extreme, not against a plan like the one you suggest.
Person B still utilized some of the principles I'm advocating to pay off the home faster than the person with a 30-year mortgage from the start, but that hardly makes me wrong--it just means he found a different level of compromise than the plan I made suggested. And "Degrees of compromise" is what I was talking about when I suggested the plan to begin with.
See, the core of where we disagree is in this statement:
quote:Person B will be ahead of person A.
Person B will only be ahead of person A if he considers the size of his house to be more important than the security of knowing he owns it.
Different people will be jealous of person A and different people will be jealous of person B during that second 10 year period.
Person A's plan will be a more appealing compromise for people looking for a greater degree of security.
Person B's plan will be a more appealing compromise for people willing to have a little bit more risk in exchange for a greater degree of comfort.
In other words, to really identify which plan is better, from an economic standpoint, first you have to quanitify the utility each person is gaining from their plan. And since each person is gaining the utility they wanted, each person is benifiting in the way that gives them the utility they value most.
This is basically the core of what I mean when I say that, at is core, this is a difference in values. Do you get more comfort from the size of your house or from the size of your mortgage?
To me, small mortgage is worth more than big house--I'm going to be person A.
To you, big house may be worth more than small mortgage--you're going to be person B.
Everybody finds their own balance, not just between person A and person B, but between the two extremes. They find the balance that's right for them and what they value.
So maybe that can be our common ground. We can both agree that everyone needs to find the balance between the two that's right for them, and that they should make the decison as informed as possible through solid understanding of financial principles mixed with their personal comfort levels. Knowing how money works, combined with knowing themselves enough to know what truly brings them peace and joy can allow them to start shaping their own future in the way that best meets their needs, rather than taking a more passive view of their finances and simply dealing with problems as they come.
posted
As a person who is STILL trying to get out of debt, let me tell you with no doubt in my mind that it all began when I got a credit card. That 'buy now, pay later' mentality is the worst thing a young person can acquire, because you have little money and so much you want. I reflected lately on how debt reduction, which leaves me no spare money, means that someone else is taking the holidays I want to take, buying the new car I want to buy, and paying off the house I haven't got the deposit for, all using my money to do it. Now that I'm older and earning better, I could save the price of a flight to Japan in about six weeks if I wanted to. But unfortunately that potential spending money is all going to pay off debt. I'll get there in the end, but it's a long, disheartening, and boring process.
Learn to wait for things, learn to save, learn to live within your means. Learn to shrug your shoulders at the latest new must-have item and say, 'I don't need it" or at least, "I don't need it right now." You will be so much happier for it, and that's a promise I make with no fear of ever being proven wrong.
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posted
I should emphasize that none of us are recommending or supporting an attitude of 'buy now, pay later'. We are recommending sometimes doing so when one specifically gains from the practice; that is, to live within your means from a long-term perspective.
Posts: 15770 | Registered: Dec 2001
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posted
In addition to what fugu said, many of us are recommending use of credit cards simply as a way to pay now and postulating two benefits for doing so: 1) saving money, whether through time value of money, rewards, or better credit ratings (which, for most people, will be necessary when buying a house), and 2) convenience and efficiency in managing one's finances.
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