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Financial rules for buying property

 
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I know there are various rule of the thumb out there for buying property.  ...in terms of what we can afford.  In a perfect world, we would always be paying cash. But, that does not always reflect reality. I am wondering what rules for the purchase of property we have encountered that we consider to be viable.

One of the best pieces of advice I got was that the property should never exceed 2 1/2 times your annual income, always pay at least 20% down, and never exceed a 10 year fixed rate mortgage.  I added two more conditions to this; in addition to the 20% down, I would pay the first 3 payments on the day of the purchase ...  for an added safety net. Of course, I would maintain that margin until the property was paid off.  In terms of making payments, I payed 1/2 the monthly payment every 2 weeks.  This significantly reduces accumulated interest.
 
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And be sure that any extra payments are being applied to the principle.  The bank will happily put it against the interest.
 
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Shoot, I'd say if you are in the position I was in (owned home for less than 3 years) refinance now especially if you have the ability to go with an IRRRL on your VA loan. I did the math and counting everything I've paid on my home and figuring that I am starting over, I just saved $124,000 if I don't pay any extra. Which now that I am paying almost $300 less per month I suppose I will! And yes, I verified that it will go against the principle, very important.

My idea is to make one extra payment per year, which is less than half of the reduction in my mortgage. So win-win, more "walking around money", home paid off quicker. What's not to like?

 
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What is

IRRRL

please?

If you get a longer loan term, the compulsory payments are lower, and yes you will pay more money over time.
But those payments are in future dollars, not now dollars.
If you have any inflation that helps.
If you make sure you can pay the loan down faster without penalty its a great idea.

There is nothing wrong with GOOD debt.

I think a lot of people loose opportunities by waiting to save, while the world rolls past.
IE If you are paying rent while you save to pay cash for a modest place, a loan would enable you to save rent
and have a place of you own at todays dollar cost.
Think about it.
 
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We changed our mortgage to a current account mortgage: all your wages offset the loan, which reduces the interest paid on a daily basis.  No penalty for overpaying, we paid off the loan in half the time.  You have to trust your partner though, since we could write a cheque for the full loan amount.  I used to call it his Aston Martin account!😁  
Only trouble is now the term is mature we need to open a new current account since the mortgage account is due to close.
 
Dan Fish
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IRRRL, "Earl", is a VA loan specific refinance deal. Interest Rate Reduction Refinance Loan, I believe. Basically if the original terms and the new terms equal out within 36 months you can refinance with limited paperwork. No credit checks, inspections or appraisal required and on the lender side they have to keep fees down low enough to meet the 36 month break even standard.
 
John C Daley
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And VA?
 
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What about those 0% down 30yr USDA loans?
 
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VA loan - special loan available to military veterans and current military members in the US.
 
John F Dean
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Hi T,

The zero down 30 Year may work for you. I crunched the numbers and ran as far and fast as I could.
 
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Financially,  have been both winner and loser in the real estate market.  Big "win" in 2005 on a townhouse that increased some 50% in price during the 14 months we owned.  Winnings bought a condo at top of the market with enough extra for a comfortable lifestyle avoiding loans through law school.  Then luck changed and in 2008 after the crash we lost $10,000 trying to offload the condo our family has outgrown. Then bought a house that seemed affordable until taxes went up and we had to replace the roof and line the chimney all at once, so we were counting pennies each month.

So what does that mean?  Realize all the best plans can't predict the outcome.  I think don't look at property as a money investment.  Just a place to live.  Decide how much you are willing to pay as part of your income now to live there now.  No telling what the future brings.  Even a paid-off property can be lost to liens, fraud, force, or nature.

 
John F Dean
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Hi MK

You approach a good point.  I have encountered a number of people who see their home as a retirement investment.  Now I admit, this is a real fine line to dance on. On one hand, of course the home is for retirement. But My llogic is that unless I am dead certain that I plan on selling the property at a substantial profit and make enough money to buy another place and have substantial additional funds, then I run the risk of fooling myself.  I choose to see my home as something different than saving for retirement.
 
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T Simpson wrote:What about those 0% down 30yr USDA loans?



This is the type of mortgage I went for because I had no money for either a down payment or closing costs. The USDA loan rolled the closing costs into the mortgage. What I ended up paying monthly for the mortgage, home insurance, and property taxes was less than what I would have paid in rent for a home. Now, 6 years later, I paid the mortgage principle down by about 16%, and the house also went up in value by about 60%. If I were to sell this week, I would walk away with close to 100k in my pocket. Not bad for something that I put no money into 6 years ago.
 
John C Daley
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I look apon houses as an asset.
If I live in it I save rent but have outgoings and some maintenance.
If I rent it, I have income, outgoings and some maintenance.
If I borrow and rent, I have some money tied up, I have income, outgoings, some maintenance and mortgage repayments, and I have a growing share of the house with the bank until the mortgage is paid out.

In all cases I believe its better owning than renting and doing nothing with my cash or time.
In fact if you can improve any property with your own time and effort you may have an asset that increases in value.

I know some may say, ' I dont want to improve my own house the taxes will rise'!!!
A couple of my own thoughts on the matter.
- tax is the price of a civilised society.
- I am not convinced letting a house fall into ruin to save tax is a good idea
- If you have maintained it and need a quick sale,{ to purchase a motorcycle or something else important] the maintained house will sell faster and maybe at a better price.
- Well maintained rental houses seem to be kept in better condition by the tenants.
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