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Old 04-05-2015, 03:42 PM   #61
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Why is the total % burrowed so important?

If I am able to hypothetically scrape up 500K and put that towards a million dollar home, am i some how better off than someone who only put down 5% on a 250K home?

I think the only thing that matters is how the debt is structured vs. the income of the home owner. If you make 2 or 3 times your mortgage payment in a month (for a normal term mortgage of course) but for some reason can't currently save your suggested down payment, you shouldn't buy a home?

Genuinely interested in opinions here as this is the position I am in. I can comfortably afford the mortgage I'm looking to get in to but i dont have the luxury of time to save up a hefty down payment. Even if you ignore the ridiculously low interest rates, I don't feel like I'm some how making a poor financial decision.
The downpayment gives you breathing room to sell in the event of you losing your job a few weeks after the price drops by 10 or 15 percent.
It's insurance against bankruptcy, not losing the house.
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Old 04-05-2015, 03:53 PM   #62
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The downpayment gives you breathing room to sell in the event of you losing your job a few weeks after the price drops by 10 or 15 percent.
It's insurance against bankruptcy, not losing the house.
Yes I obviously understand that it's so you have more money to pay off loses.

I just think the importance of a big down payment is completely over stated in the price range I'm shopping in.

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Old 04-05-2015, 04:14 PM   #63
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Yes I obviously understand that it's so you have more money to pay off loses.

I just think the importance of a big down payment is completely over stated in the price range I'm shopping in.
I can't speak to your personal situation but for most people the ability to ride out the bubble bursting in an inflated housing market is utterly dependant on the down payment, regardless of the house price.

I suppose you should factor in whether you can afford the same purchase at 6% interest rate, which is not in the least abnormal or high historically, I've dealt with 15% myself. Again assume a 15 or 20 percent value loss of the property at some point that will happen, does it still make sense, and again what's the plan in the event of a job loss.
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Old 04-05-2015, 04:54 PM   #64
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But in my mind the risk/benefit in having 12,500 versus having 50,000 down on a 250K property is not worth the 31,200 I throw away in two years of rent for living in a comparable (or most likely worse for that price in the current market) property. Add to the fact that renting cuts extremely deep into the amount I can save (which in turn increases what I spend on rent) and that 37,500 of extra down payment doesn't seem like much of safety net.

ESPECIALLY if this prediction is wrong and the market keeps increasing in price mid to long term and I get priced out of the market by waiting.

Oh and that 31,200 is based on 1300 a month. Basically the price of getting out of a basement suite if you don't want to live on the wrong side of 8 mile.

Well to start, it's only a "HUGE" risk if you plan on either living in it short term or you take on more than you can comfortably afford.

Now, have you looked at rents in this city? Most rents are higher than the comparable mortgages and those that aren't, you'd only save maybe 100 or 200 bucks a month on rent. That $1200-$3000 (if we're being REALLY generous) a year is nothing.
I kind of see what you're saying, saving a higher down payment vs buying sooner with less down. And I'm sure you know this, but when you compare your mortgage payment with rent, you're missing a huge cost factor by not including other costs of ownership....condo fees, taxes, utilities, insurance, repair and maintenance. Also important in your calculation are costs associated with selling...commissions, legal fees. And finally, if you do have a larger down payment, the return you could achieve with that money must also be factored in. Money has been worth at least 6% for the last several years. Even a 12k down payment is worth $60 a month.

I think the old philosophy of "why pay somone else's mortgage" is almost dead and gone. You can do very well renting especially when the real state market isn't going up rapidly. I agree with you that for the buyer, less money down is better when rates are low.
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Old 04-05-2015, 11:01 PM   #65
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Originally Posted by polak View Post
I get that.

But in my mind the risk/benefit in having 12,500 versus having 50,000 down on a 250K property is not worth the 31,200 I throw away in two years of rent for living in a comparable (or most likely worse for that price in the current market) property. Add to the fact that renting cuts extremely deep into the amount I can save (which in turn increases what I spend on rent) and that 37,500 of extra down payment doesn't seem like much of safety net.

ESPECIALLY if this prediction is wrong and the market keeps increasing in price mid to long term and I get priced out of the market by waiting.

Oh and that 31,200 is based on 1300 a month. Basically the price of getting out of a basement suite if you don't want to live on the wrong side of 8 mile.



Well to start, it's only a "HUGE" risk if you plan on either living in it short term or you take on more than you can comfortably afford.

Now, have you looked at rents in this city? Most rents are higher than the comparable mortgages and those that aren't, you'd only save maybe 100 or 200 bucks a month on rent. That $1200-$3000 (if we're being REALLY generous) a year is nothing.

I see that. It makes sense. However, that is not why there is a problem with low down payment loans. It's not about your situation, its about the rest of the people involved.

If you do not have much of a down payment, it often says that you can't save much. Not always specifically, but often. This hypothetical purchaser will often have issues with saving, and paying off the debt they just acquired. These are people who are living on the edge of financial stability. One on one, this is not that big a problem. When there are a lot of high risk home purchasers, a change in the economy can mean that there are a lot of people who cannot or will not pay their mortgage. That's when the problems begin.

Because, now, not only are there more homeowners foreclosing on their mortgage, dropping the price of buying a new home, but there are a lot of people with new mortgages that cost more to upkeep than it is worth. Imagine you have a big mortgage, and the price of what you bought has dropped to a lot less than what you owe. In other words, you are paying more than what you own. If you do not have a large down payment, you have an option to drop your mortgage, because you don't have much invested in it.

And that is the big issue - you need to be invested in this investment. The bank needs to know that you aren't going to run away from the mortgage if prices drop. The bank needs to know before hand that you are a good saver to avoid getting in this position to begin with. And every other home buyer needs to feel confident in the market in general, because if there are people that will cause the housing market to drop, that is where the issues come up.

In short, it's not about you. You have listed really good reasons why you want to buy a house, and this isn't the problem. Just because the situation isn't completely fair to you, doesn't mean that there aren't good reasons for it. I was in the same situation you described 7 or 8 years ago. It was tough. Your task however is to find a way to get what you need, regardless of the hurdles put in front of you, and the banks need to make sure that the situation as a whole doesn't screw everyone else over.

Good luck with that. And I mean that.

I hope that made sense.
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Old 04-06-2015, 12:39 AM   #66
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In reference to some of the op's links, Shiller summarizes some of his work on housing prices in this lecture. Pretty interesting and I think it holds some truth.
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Old 04-06-2015, 05:35 AM   #67
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Originally Posted by polak View Post
Why is the total % burrowed so important?

If I am able to hypothetically scrape up 500K and put that towards a million dollar home, am i some how better off than someone who only put down 5% on a 250K home?

I think the only thing that matters is how the debt is structured vs. the income of the home owner. If you make 2 or 3 times your mortgage payment in a month (for a normal term mortgage of course) but for some reason can't currently save your suggested down payment, you shouldn't buy a home?

Genuinely interested in opinions here as this is the position I am in. I can comfortably afford the mortgage I'm looking to get in to but i dont have the luxury of time to save up a hefty down payment. Even if you ignore the ridiculously low interest rates, I don't feel like I'm some how making a poor financial decision.
Did you mean to write 50k, not 500k?

The bold text is the problematic assumption in your scenario. What do you suppose is the true probability that you will be able to retain that degree of income over the entire 30+ year duration of the mortgage?

People lose their jobs with such regularity that it doesn't even seem unusual to hear such news - yet the idea that I can lose my job feels like a statistical outlier to almost everyone. Well it's not true, you can wake up tomorrow and lose your job. And that 12k (in a zero down mortgage, which you can't even get anymore) might be able to see you through 3-4 months of unemployment because you have more than just a mortgage payment to take care of, especially if you have a family. In your case that 12k is consumed as a downpayment, maybe 5% down, so you pay more for your house via CMHC insurance and you now have zero savings to help carry you if you happen to lose your job.

So the question is, if you lose your job, can you replace it in that time to keep that equity engine running? Can you liquidate that house fast enough to not default on your obligation? This is the assumption that you must stress test in making this financial decision.

The second assumption to test is why are you seeking property ownership? Sounds like you want a quality of life upgrade by moving out of 8 mile. Why not pay a little more rent and get that? If your answer is "I don't want to miss out on potential equity gains" let me ask you this - if a bank offered you a 700,000 loan to go invest in Google stock at margin, would you do it because you believe that Google will be around and making money for the next 30 years? Because those are the two worlds that are being married - increase in perceived quality of life and highly leveraged investment in a single asset class - all of it hinging on you keeping your job.
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Old 04-06-2015, 09:24 AM   #68
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The US real estate market crashing contributed quite a bit to the overall economy crash the country felt. The reason was that the way the US runs the mortgage system. Fannie May and Freddie Mac have the mandate to encourage home ownership even among those that really can't afford it. A very large percentage of people had no down payment and interest only mortgages. Even those that didn't need to took out these mortgages. And you had numerous other mortgages with families that quite frankly would not be able to get a mortgage in any other industrialized country but are welcomed with open arms to the US home ownership group.

For example, the folks we bought our house from when we moved were stably employed making good money but had one of these mortgages. They took a significant loss on their house. I know this because they begged and pleaded for us to bring our offer up to help them out as they were moving to a higher real estate larket area (he was a TV anchor moving to be the anchor at his home town station in Florida I think). We didn't budge especially because they were willingly moving. There was no job loss or anything. We paid what the house was worth. In the end you had a lot of people with these loans that had not managed to pay down a cent of principal and when the prices crashed they couldn't get their heads above water. And that had a disastrous effect on the economy.

The US in "recent" times has had 16 bank crises...Canada 0. That doesn't mean there won't be a crash. There will be and there will be some pain associated with it, but it is not likely to be as severe as what you'd see in the states.

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Old 04-06-2015, 01:06 PM   #69
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Is there any history of the bank asking for more money if home prices drop.
ie. If someone has a $200k house with 5% down and the market drops 10% they are now underwater $10000. Can the bank require the extra $10000 at any time, when the mortgage is being renewed or ever?
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Old 04-06-2015, 01:10 PM   #70
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Is there any history of the bank asking for more money if home prices drop.
ie. If someone has a $200k house with 5% down and the market drops 10% they are now underwater $10000. Can the bank require the extra $10000 at any time, when the mortgage is being renewed or ever?
I don't think so. Of course that kind of margin call happens all the time in the stock market, but it would be a rarity (if ever) on residential mortgages.
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Old 04-06-2015, 01:28 PM   #71
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Am I going to need CMHC next fall if I have 20% equity in my house with respect to the purchase price from last fall, but house prices drop 10% at the time I'm renewing?

ie: Bought a house last year for $470k, have to renew my mortgage next year for $375k. Will the bank need an appraisal?
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Old 04-06-2015, 01:31 PM   #72
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Personally, I'm out on the housing market. I'd like to get an actual home instead of an apartment, but I'm just not willing to be pinned down by a massive mortgage. Housing is just way too expensive. Even buying a new condo at this point is insane. Condo fees on newer properties are often more than my currently bimonthly payments
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Old 04-06-2015, 04:23 PM   #73
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Am I going to need CMHC next fall if I have 20% equity in my house with respect to the purchase price from last fall, but house prices drop 10% at the time I'm renewing?

ie: Bought a house last year for $470k, have to renew my mortgage next year for $375k. Will the bank need an appraisal?
I don't think so. Usually banks just renew without any further appraisals as long as you have not missed any payments. I've never had to do anything other than choose a term and sign. You would have to get an appraisal if you switch lenders though and that would likely require cmhc insurance.

You likely paid some of the principal down in the last year so that helps. As well, appraisers are usually slow to adjust down. You may think your property is worth 20% less, and in reality it might be a tough sell for you even at that price. But appraisers have to look at recent sales and sometimes in a down market people are not selling so the recent sales might not be as bad as you think.
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Old 04-06-2015, 04:28 PM   #74
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Personally, I'm out on the housing market. I'd like to get an actual home instead of an apartment, but I'm just not willing to be pinned down by a massive mortgage. Housing is just way too expensive. Even buying a new condo at this point is insane. Condo fees on newer properties are often more than my currently bimonthly payments

nik, out of interest what are 1100 SF or so, starter homes going for these days?
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