Down payment strategy


H

HW \Skip\ Weldon

The following was cross-posted. With corrected headers, it is copied
below:
-----------------------------------------------

Begin copy................

From: (e-mail address removed) (revheck)
Newsgroups: misc.invest.financial-plan

We are planning to buy a house next spring. We have good income and
excellent credit rating to qualify for a mortgage, but we are
struggling to come up with the down payment.

Our only debt is $15000 on a credit card with a 0% teaser rate that
expires at the end of November. I've been setting aside the cash each
month (it's in a high-yield money market account), so we could just
pay it off.

However, I received this week a balance transfer offer from another
credit card (we have 4) with a permanent rate of 4.9%--until the debt
is paid off.

I am wondering if it makes sense to transfer the balance and keep the
cash to use for part of our down payment.

I know the trick with these long-term balance transfers is to NEVER be
late with a payment--else they quickly jack up the rate. I've solved
this problem by setting up automatic minimum payments directly from my
checking account, so I am never late with any of my credit cards. I
also will not use the balance transfer card for any other purchases.

More generally, if you initially have no or little consumer debt,
does it make sense to "save" for a down payment by transferring
normal expenses to low-rate credit offers (when you can find them)?
Standard underwriting allows for mortgage to income debt ratio of 28%,
and total debt ratio (mortgage + consumer) of 36%. In this situation,
one could finance much of a down payment by transferring normal
expenses to consumer debt, and still remain within normal underwriting
guidelines.

Of course, the trick is to find low-rate offers and never be late with
a CC payment. But, as I said above, I think I've solved this problem.

Does this make sense, or am I nuts?

revheck


End copy..............................................



-HW "Skip" Weldon
Columbia, SC
 
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J

John A. Weeks III

From: (e-mail address removed) (revheck)
We are planning to buy a house next spring. We have good income and
excellent credit rating to qualify for a mortgage, but we are
struggling to come up with the down payment.
This is an indicator that if you owned a house, you would be
struggling to make the payments and put food on the table.
A lack of a downpayment means that you are either jumping into
this too soon, or buying something too expensive. You don't
give the details on the home that you are looking for, so
I really cannot narrow it down any further. In general, your
first house should be a starter home. The price should be
no more than twice your annual income. If you pay any more
than that, you will never build up enough equity to move up.
Our only debt is $15000 on a credit card with a 0% teaser rate that
expires at the end of November. I've been setting aside the cash each
month (it's in a high-yield money market account), so we could just
pay it off.

However, I received this week a balance transfer offer from another
credit card (we have 4) with a permanent rate of 4.9%--until the debt
is paid off.
Call around to some of your other cards and see if anyone else
has any unadvertised deals. You might be able to do better. I
have been getting 1.9% until it is paid off offers in the mail.
I am wondering if it makes sense to transfer the balance and keep the
cash to use for part of our down payment.
In my opinion, it never makes sense to buy a house without at least
a 10% down payment. The reason is that if your life changes, which
it often does, you will not have enough equity to get out of the
house. If you have a job opportunity come up or you get transferred
half way across the country, you cannot take those options since you
are stuck in a home, and don't have the funds to get out of it.
I know the trick with these long-term balance transfers is to NEVER be
late with a payment--else they quickly jack up the rate. I've solved
this problem by setting up automatic minimum payments directly from my
checking account, so I am never late with any of my credit cards. I
also will not use the balance transfer card for any other purchases.
The real trick is to never build up credit card debt. This is a
long term killer, and it certainly is not a wealth-building
strategy. You never hear any rich people say that they got
rich by charging things on credit cards and doing balance transfers.
More generally, if you initially have no or little consumer debt,
does it make sense to "save" for a down payment by transferring
normal expenses to low-rate credit offers (when you can find them)?
Standard underwriting allows for mortgage to income debt ratio of 28%,
and total debt ratio (mortgage + consumer) of 36%. In this situation,
one could finance much of a down payment by transferring normal
expenses to consumer debt, and still remain within normal underwriting
guidelines.
No, don't do this. All you are doing is spending more than you
earn, and deferring expenses to credit cards. That is silly.
Of course, the trick is to find low-rate offers and never be late with
a CC payment. But, as I said above, I think I've solved this problem.
Actually, I think your problems are just starting. You are not ready
to live within your income, and you will end up eventually in over
your head. You are probably going to have to go broke before you
learn the lesson since you seem to want to learn it the hard way.

The right answer is to pay off the credit card debt right away.
Do whatever you have to in order to get rid of it. Then save up
10% for a new home. Once you have the 10% (plus closing costs),
then go house shopping. Sell the high price cars and cut down on
life style if you have to. Take a 2nd job for the holidays. That
is how the older folks in our society did it before there were
credit cards -- follow their examples since they seemed to have
done pretty well.

-john-
 
M

Michael Sullivan

John A. Weeks III said:
This is an indicator that if you owned a house, you would be
struggling to make the payments and put food on the table.
A lack of a downpayment means that you are either jumping into
this too soon, or buying something too expensive.
That's an indicator, but it isn't necessarily accurate. If the expected
cash-flow of the house is less than they are currently paying in rent
(not unlikely with the current interest rate environment), then this
might not be true.

If that is the situation, and purchasing a home looks like the right
idea for other reasons, why not try to reduce the spending on your house
*now*, rather than 2-3 years from now when they've built up the
necessary 20%. It's a slightly riskier move, but certainly less so than
things I've seen you advocate over the years (using stock funds and
credit as emergency money rather than keeping a stash in MMFs, frex).


Michael
 
J

John A. Weeks III

Michael Sullivan said:
If that is the situation, and purchasing a home looks like the right
idea for other reasons, why not try to reduce the spending on your house
*now*, rather than 2-3 years from now when they've built up the
necessary 20%.
It is too bad that the original poster did not give any info on
the type of houses that they were looking at. While you could
certainly be right, and they might be buying a home that costs
less per month than their current rent, I got the impression from
the tone of the message that they were trying to buy something
way over their head, and were looking for someone to help them
justify something that they knew in their heart was wrong.

BTW, this was a great example of someone who cannot afford to
have an "emergency fund" sitting around. They have $15K in
credit card debt that explodes at the end of the month, and
$15K sitting around earning just about zippo. They cannot
afford a luxury like that, rather, they have to maximize how
their money works. Once someone gets out of debt and has a
good chunk of equity in their home, then they can afford an
emergency fund. Until then, they would be better off paying
off the cards, trying to avoid emegencies, and if one happens,
borrow back from a credit card or get a short term loan from
an IRA or 401K. If worse comes to worse, and they use this
credit, they then have to work like the devil to pay it back
and not make this new debt permanent.

-john-
 
R

revheck

John A. Weeks III said:
This is an indicator that if you owned a house, you would be
struggling to make the payments and put food on the table.
A lack of a downpayment means that you are either jumping into
this too soon, or buying something too expensive. You don't
give the details on the home that you are looking for, so
I really cannot narrow it down any further. In general, your
first house should be a starter home. The price should be
no more than twice your annual income. If you pay any more
than that, you will never build up enough equity to move up.
As I said, we have no problem with income to qualify for a standard
28% mortgage payment to income ratio. So we will not be struggling to
put food on the table.
In my opinion, it never makes sense to buy a house without at least
a 10% down payment. The reason is that if your life changes, which
it often does, you will not have enough equity to get out of the
house. If you have a job opportunity come up or you get transferred
half way across the country, you cannot take those options since you
are stuck in a home, and don't have the funds to get out of it.
We have saved up about 5% of a down payment. We just need additional
funds to make it 10% plus closing costs. We have good reasons to
believe we will
be in this house for at least 10 years.
The real trick is to never build up credit card debt. This is a
long term killer, and it certainly is not a wealth-building
strategy. You never hear any rich people say that they got
rich by charging things on credit cards and doing balance transfers.
Exactly what is wrong with having credit card debt at 4.9%, rather
than mortgage debt at 6% or more? ... assuming you never miss a
payment.

....

The right answer is to pay off the credit card debt right away.
Do whatever you have to in order to get rid of it. Then save up
10% for a new home. Once you have the 10% (plus closing costs),
then go house shopping. Sell the high price cars and cut down on
life style if you have to. Take a 2nd job for the holidays. That
is how the older folks in our society did it before there were
credit cards -- follow their examples since they seemed to have
done pretty well.
We are very frugal. We have one 12-yr old car and no debt. We have
income to
easily carry a mortgage with 28% mortgage to income ratio. I agree
that a 10% down payment is good. We have 5% down payment saved up.

We are saving, but I'm concerned that interest rates--and related
carrying
costs--will rise faster than our ability to save.

I've described a scenario to come up with the other 5% (approx) at a
rate lower than current mortgage rates, while remaining within
standard
underwriting guidelines.

You haven't given any reasons why this is a bad idea other than a
knee-jerk aversion to credit card debt.

Please give a logical reason.

revheck
 
B

BMS

Credit card debt is amortized at about the same rate as a 40 year mortgage.

Basic rule of borrowing, never have the debt around longer than what you are
financing.
 
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J

John A. Weeks III

revheck said:
As I said, we have no problem with income to qualify for a standard
28% mortgage payment to income ratio. So we will not be struggling to
put food on the table.
The fact that you have credit card debt means that you have been
living on more money than what you have been earning. That is not
a long term strategy that will work. You are struggling to put
food on the table because you have to supplement your income with
credit card funds to juggle all the bills.
Exactly what is wrong with having credit card debt at 4.9%, rather
than mortgage debt at 6% or more? ... assuming you never miss a
payment.
Consider all the wealthy people that you know. Take Bill Gates,
A-Rod, Tiger Woods, John Kerry, George Soros, Mel Gibson, etc.
Now then, have you ever heard a wealthy person say that they
took credit cards, spent a lot of money, ran up thousands in
credit card debt, and then, poof, they were rich? No, it
doesn't work that way. Using credit cards is the way you get
into poverty and run up tons of debt, not the way you build
wealth or change your family tree.
We are saving, but I'm concerned that interest rates--and related
carrying
costs--will rise faster than our ability to save.
Don't worry, the free market will take care of that for you.
Housing prices are already starting to correct, and the bubble
is in full burst in some parts of the country. As winter
progresses, prices should continue to decline in many areas.

-john-
 
G

Guest

We are saving, but I'm concerned that interest rates--and related
carrying
costs--will rise faster than our ability to save.
Rising interest rates or not should have no bearing on your ability to
save up the remaining 5% of the downpayment.

You might not qualify for the same mortgage but housing prices should
be adversely affected by rising interest rates as well.
 
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B

BreadWithSpam

Exactly what is wrong with having credit card debt at 4.9%, rather
than mortgage debt at 6% or more? ... assuming you never miss a
payment.
Every credit card agreement has terms which allow the
credit card company to raise the rate. Even "fixed"
card rates. Miss one payment or even just have a
late payment and that rate can go up to 15 or even 20%.

Moreover, the credit card interest is not tax deductible.
The mortage debt may be deductible. For most middle
class folks, it is.

OTOH, CC debt is unsecured and if you go into bankruptcy,
it'll be treated very differently from your mortgage and
house.
 

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