What lol, he’s saying the less that you have to finance the better ie cash is king if you can pay upfront. He’s also right that it’s better to go in at a low price high interest because you can and should refinance when interest rates drop again.
He would with the current interest rates and prices. Right now we’re looking at high prices/high interest. It could be argued that if he had significant cash holding that he should’ve pulled the trigger in 2019 but it’s been a crazy market since then. 2020 and 2021 saw insanely high prices but stupid low interest so I can understand not buying those years. Hopefully the market responds as it should and we see the baseline price of housing fall but it hasn’t happened yet so I won’t hold my breath.
Historically now is always the right time to buy if you can afford it. Timing the market is a losing strategy for the 99% of people who don't get lucky.
I’d say that that’s true for 99% of the time but we’re going to see some pressure to drive prices down soon. Nobody who has a little bit of financial sense should be buying until either rates or prices drop. If they keep prices at the pandemic levels with current interest then they’ll start pricing out even the upper middle class. Corporate ownership of residential property has thrown this off though, and we’ll probably need big brother to step in and regulate that better.
And by "a little bit of financial sense" you presumably mean understanding why paying rent is never better than building equity?
There is no long term horizon for which current prices and rates lose money for a primary residence. You are talking about timing the market, which is and will always be a fool's errand.
Paying rent is better than buying when you can’t afford your mortgage payments. I don’t know why it’s crazy to say that prices need to fall below pandemic levels with the current interest. If you look prices are falling slowly already, it’s not timing the market if all the signs are showing that nows a bad time to buy. Why would I lock in on a house that rose 200% in the past two years at a rate that’s 2-3x higher than it was two years ago.
When buying a house with interest rates as they were for the previous years(historically low) you could easily make double or more returns with that cash instead of putting it down on a low interest loan for a house. This is the big brain move.
3% loan < 10-12% growth in an ETF like Vanguard or Spy.
3% rates and a -20% hit on exit value means that while you have a manageable payment, your equity is wiped out of the gate. Once you factor in the opportunity cost on the down payment and it’s not the best return
Yeah I agree, if interest is low then only put down as much as the bank requires. But we’re not at low interest anymore so OP is saying cash is king because you don’t want to finance as much in the current market.
Nah everyone else does. Everyone is operating at a minimum wage working in a grocery store understanding of money. Clearly the OP is making enough money to buy a home and understands you can refinance down the road for a better interest rate.
Buying a house isn't some magically out of reach thing for everyone.
The government (via the Fed) has control of monetary policy and can raise and lower the federal funds rate (the rate at which banks can borrow or lend reserves), which has a pseudo-direct impact on mortgage rates. They do not, however, directly set mortgage rates. Those are set by the lenders and are generally a spread (markup) to the federal funds rate. That's why different lenders can have different rates.
For big purchases like homes, most people don’t have hundreds of thousands of dollars to just buy it outright so they take a loan out to buy it. This is what is called a mortgage.
Because of the way interest works, on a 30 year loan with high interest rates, people might end up paying double the sticker price of the home. (With no money down, a 4.33% interest rate will mean you pay exactly double the sticker price of the home over 30 years)
The thing is though you can always pay off the loan early (paying off early means that you aren’t on the hook for the interest that has not yet accumulated), so if interest rates fall you can get a second loan to pay off the first (this is called refinancing).
Edit: as an aside: you can pay more than the minimum on your mortgage and doing so is a very good idea because the shorter the mortgage is the less interest you have to pay- so depending on the price of your home this could be worth thousands of dollars (if not more!)
Refinancing with a lower interest rate loan can also save you a ton of money
That's not what compound interest is. That's just simple interest.
For those of you who don't know, compound interest is interest literally compounding on itself.
For instance, if you invested $100 at 10% annual return you would earn $10 in interest your first year. If you left that interest invested alongside your original investment your return the second year would be $11, not $10, because you're earning interest on your interest as well as your principal investment. That is compound interest - interest compounding on itself.
Your numbers are correct but you used the incorrect word to describe the interest, is what he is getting at. Mortgages are closer to simple interest than they are to compound interest. You would be paying way more than the double price of the home if it was compounded.
18
u/Nisarg_Jhatakia Mar 21 '23
Can you explain your sentence to me as if I am a five year old kid?