[mindwaves]

I'm in the market to buy a house within the next 6 months, but I have one question regarding equity.

Say I buy a house for 100k and sell it after 2 years for 150k. And assume that in those 2 years, I made 10k in mortgage payments. How much equity would I have? I am assuming 150k.

Also, I located the city which I would like to live in so how would I go about finding which house to live? I have been using zillow and various real estate agent websites, but I think I'm missing out on some other properties. And since I will be a first time home buyer, what discounts/incentives are there for me?

TIA.

[MarkLT1]

No. Your equity after 2 years, would be right around $50k. The first 5 years of a mortgage, you are paying 90+% of that towards interest, and paying off very little principle.

Lets say you buy the house for $100k, and mortgage the entire thing. Over the first 2 years, you pay $10k against your mortgage, of which 90% goes to paying off interest. That means you only gained $1k in principle on the house. You turn around and sell the house for $50k. Well, you still need to pay the other $99k you owe the bank on the house, so you walk away with $51k.

These numbers probably aren't exact, but the point is- for the first 3-5 years of a mortgage (Depending on the terms) you are paying off almost none of the house, but are instead paying off lots of interest.

[turtle777]

Your equity in the house is the value of house - outstanding mortgage.

With the information given, MarkLT1's equity calculation of about $51k seems right, if you didn't plan to make any down payments.

Btw, what market are you in ?

-t

[MacosNerd]

There's a number of amortization programs and spreadsheets around. You can do a lot of what if scenarios but MarkLT1 is correct the first few years of a mortgage the bulk of your payments go towards interest.

Besides you're assuming right now that the house will appreciate. At this moment, for the most part the opposite is true. I have a neighbor who purchased his house at 350k, its worth only 315k as he just had it appraised. This is on top of the fact that he's made improvements.

Trying to pin down equity worth in this market is like trying to nail jello to a tree

[turtle777]

Have a look at this thread:

http://forums.macnn.com/89/macnn-lou...0/rent-or-buy/

It contains an excellent modeling tool of comparing Rent vs. Buy.

-t

[Art Vandelay]

Don't forget real estate agent fees when you sell. The seller generally pays both the buyer's and seller's agent fees.

Also, don't forget capital gains tax if you sell it before you've lived in it for two years.

[turtle777]

I don't see how buying a house can pay off these days when not planning to hold it for a significant number of years.

-t

[MacosNerd]

Originally Posted by turtle777 

I don't see how buying a house can pay off these days when not planning to hold it for a significant number of years.

If you're looking at it as an investment yes, it doesn't make sense, but most people don't look at the house as an investment as much owning the place they live in. With that in mind, there's other intangibles that cannot make it into the modeling too. For instance, if you the house, you have complete freedom you own the property. Being an asset you can draw money out of it via an equity loan. Various tax write offs that you don't get as a renter. Of course not having the rent increased willy nilly or needing to move because of that is a very good reason to own.

[turtle777]

Yes, but people are more than willing to take those advantages into consideration, w/o planning for extra expenses like property taxes, insurance, garbage fees, homeowner's association fees, yard care, repairs and maintenance.

What should you budget annually for such repairs and maintenance? At least 1% of the homes purchase price, says finance expert Eric Tyson, co-author of Home Buying for Dummies.

The hidden costs of homeownership - MSN Money

-t

[MacosNerd]

Originally Posted by turtle777 

Yes, but people are more than willing to take those advantages into consideration, w/o planning for extra expenses like property taxes, insurance, garbage fees, homeowner's association fees, yard care, repairs and maintenance.

True, I suppose that's probably the difference between when I bought a house and the current crop of prospective home buyers. All that stuff was laid out before me showing me what I can expect to pay or the house, what my taxes will be and what I can expect to pay for utilities and such.

Outside of first owning a condo, I have no association fees to worry about and to be honest, if we ever move, we'll do so to a house that doesn't belong to an association. I'm not a fan of them

[mindwaves]

Wow, ok. Many thanks to Mark and others in this thread. I had misunderstood the entire equity thing. So I guess regardless if I had planned on staying in a house for 2 years or 10 years, I should try to pay off the house as much as possible (if allowed and if possible).

I was looking to buy a condo in northern Orange County in CA. However, I am trying to find a newish place without (or low) association fees. I'm looking to pay a max of 425k. Ideally, I would like to buy a house, but home prices are still too expensive at this moment.

[Uncle Skeleton]

Originally Posted by mindwaves 

Wow, ok. Many thanks to Mark and others in this thread. I had misunderstood the entire equity thing. So I guess regardless if I had planned on staying in a house for 2 years or 10 years, I should try to pay off the house as much as possible (if allowed and if possible).

General wisdom says no, not really. Paying extra shortens the life of the loan, but doesn't lessen what you have to pay each month. So any extra you pay is money that you won't get to invest for the next 30 years (that's a rather large opportunity cost), and you won't see any benefit from it until the end of your loan, and that's if you live there longer than 30 years. If you sell before then (paying off the whole mortgage from the proceeds of selling), you don't see any benefit from paying extra on the loan. Meanwhile, the interest you do pay on the mortgage is tax deductible. So if your marginal income tax rate is higher than the tax rate you'd pay on investment income (cap gains tax probably), then you're better off letting that mortgage debt stay as high as possible, all things being equal. In general, mortgage debt is considered "good debt," as long as you have a decently low interest rate and you're responsible enough not to miss payments. Obviously there are exceptions, if your mortgage interest rate is significantly higher than the rate you expect to make on any investments and you intend to live there for the foreseeable future, it might be smarter to pay down the mortgage. But keep in mind that even if you make 0% return on investments, at least that money is still available. Once you throw it down the mortgage, you can't get it back if it turns out you need it later.

I was looking to buy a condo in CA.

Danger, Will Robinson!

[mindwaves]

Thanks Uncle Skeleton. It makes perfect sense. I'm a lot more knowledgeable now.

I'm trying to buy a house, but home prices, especially in OC have not come down to affordable standards. A decent home is about 600k still.

[peeb]

Very often local community colleges or others will put on cheap or free courses on first time home ownership - it might not be a bad idea to check that out.

[Eug]

Rent vs. buy?*

*Complete with very useful calculator.

[Uncle Skeleton]

Originally Posted by mindwaves 

I'm trying to buy a house, but home prices, especially in OC have not come down to affordable standards. A decent home is about 600k still.

I understand, but that doesn't mean it's a smart idea to buy something smaller just because of that. Not only will it still be waaay overpriced (meaning there's a very real probability you will lose money, and I mean a lot of money), but you'll be doing all this work for something you didn't really want in the first place, which is a situation that will hang over your head in a bad way. Buying your first home is a big commitment/risk, in both time and money. It often takes several months to close the deal and actually get moved in, and even after that you have more maintenance headaches to deal with than you would renting, in perpetuity. It's fine to go through all of that work for a condo if it's one that will really make you happy (I did it 3 years ago, and I'm still happy in mine). But if it's not what you really wanted, and you're settling just to satisfy that need to buy something, then don't do it, it will make you miserable and feel like a weight around your neck.

Have you considered a different location, or just continuing to rent? Renting is not "throwing your money away" any more than buying is, what with HOA dues, property taxes, mortgage interest, repair costs, and insurance ( <-- all this is "thrown away" when you buy), not to mention the transactional costs (real estate agent fees etc) are HUGE. The only thing that makes owning better financially is appreciation; all the other (financial) advantages like mortgage deductions basically level the playing field due to all the DISadvantages. If it doesn't appreciate (more than inflation), you're no better off (financially) than renting. If it DEpreciates, you're absolutely screwed by buying. And in this market, it's far more likely to depreciate than appreciate (if you're talking less than 10 years; in the real long term it's a safe enough investment), especially in one of the country's most over-valued real estate locations, of which the whole state of California is pretty much the poster child. Seriously, I would try to find a different state to start in if I were you, and if I was really determined to buy. Just curious, why do you live where you live? Family, school, job, nice weather? I used to live in CA after graduating just from inertia. I'm very glad I ended up making my purchase someplace else.

Edit: the above paragraph could be summarized by simply saying that a good deal on a home purchase is better than a so-so deal on a rental, and a good deal on a rental is better than a so-so deal on a home purchase. Neither is "better" in the abstract. And you may have noticed that CA home prices are waaaay high. That means they're not good deals. Keep your eye out for a good deal on a rental, and jump on it with no reservations. If you want to stay in that location. That's my advice, YMMV.

[Uncle Skeleton]

Originally Posted by Eug 

Rent vs. buy?*

*Complete with very useful calculator.

Yes, absolutely go in that calculator, put in some reasonable numbers, and then see what changing the appreciation on the property does to the output. It's a real eye-opener.

[turtle777]

Originally Posted by Uncle Skeleton 

Renting is not "throwing your money away" any more than buying is, what with HOA dues, property taxes, mortgage interest, repair costs, and insurance ( <-- all this is "thrown away" when you buy), not to mention the transactional costs (real estate agent fees etc) are HUGE. The only thing that makes owning better financially is appreciation; all the other (financial) advantages like mortgage deductions basically level the playing field due to all the DISadvantages. If it doesn't appreciate (more than inflation), you're no better off (financially) than renting. If it DEpreciates, you're absolutely screwed by buying. And in this market, it's far more likely to depreciate than appreciate (if you're talking less than 10 years; in the real long term it's a safe enough investment), especially in one of the country's most over-valued real estate locations, of which the whole state of California is pretty much the poster child. Seriously, I would try to find a different state to start in if I were you, and if I was really determined to buy. Just curious, why do you live where you live? Family, school, job, nice weather? I used to live in CA after graduating just from inertia. I'm very glad I ended up making my purchase someplace else.

Quoted for absolute truth.

In the current market situation, don't buy unless you absolutely have to.

Your ONLY real upside potential is appreciation of your home value. NOT very likely right now.

-t

[mindwaves]

Originally Posted by Uncle Skeleton 

Have you considered a different location, or just continuing to rent?
....
Just curious, why do you live where you live? Family, school, job, nice weather? I used to live in CA after graduating just from inertia. I'm very glad I ended up making my purchase someplace else.

I am in an interesting situation. I live at home rent free and I want to live close to my work which is about an hour away with no traffic. Living close to work would save me some serious money (gas is currently $4.64/gallon for the cheap stuff). My job pays me pretty well also and I think that I will be there for quite some time.

[turtle777]

I'm with you on savings yourself the daily commute.

However, financially, your situation is going to be far worse than now.
Even if the price of gas goes up, I can not imagine you paying MORE for gas than you would for rent if you had to pay rent.

To be honest, you don't seem to be in a situation where you would HAVE to make a move. In the current housing market situation, it is better to wait it out.

-t

[Uncle Skeleton]

Originally Posted by mindwaves 

I am in an interesting situation. I live at home rent free and I want to live close to my work which is about an hour away with no traffic. Living close to work would save me some serious money (gas is currently $4.64/gallon for the cheap stuff). My job pays me pretty well also and I think that I will be there for quite some time.

Free is the best deal on living costs you'll ever have. Even if you owned a place outright, you'd have to pay property taxes and incidentals (repairs, insurance, utilities, etc). It would make sense to move out if you overstayed your welcome, or you don't get along, or you just can't stand it anymore (commuting time?). But gas prices are no reason to ditch a sweet deal like that, not until gas hits about $25/gallon.