# Mortgage insurance



## Capt Worley PE (Feb 24, 2009)

Riddle me this:

Many in trouble now may have started out paying mortgage insuurance because they put less than 20% down on their homes.. Is that not insurance to protect the borrower?? if if its to protect the Lender, should not all these homes then be considered paid off allowing the families to remain in them???

What was mortgage insurance for?

BIG ripoff, or are we being lied to?


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## Flyer_PE (Feb 24, 2009)

^It's insurance for the lender in case they can't recover their costs _after_ foreclosure. In practice, I don't see it as anything more than a penalty imposed for not having an 80% LTV on your home.


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## roadwreck (Feb 24, 2009)

Many of the people who are in trouble now avoided paying mortgage insurance b/c they financed their purchase in a nontraditional fashion. Private Mortgage Insurance (PMI) is usually only imposed on people who do not have 20% to put down, and it is to protect the bank in the event that to borrower defaults on the loan and the house can't bring enough proceeds in foreclosure to cover the loan balance. The 'trick' to avoiding PMI was to take out multiple loans. one for 80% and another for the rest of the balance. This way the borrower could avoid paying PMI, which at the time was not tax deductible, in favor of paying interest on the second loan which was tax deductible.


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## Road Guy (Feb 24, 2009)

IMO its a crock, extra money for the banks.

were going through a home refin right now, were just under the 80% mark and I could tell the lender was really really hoping to get their PMI


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## Chucktown PE (Feb 24, 2009)

RW hit the nail on the head with that. Another caveat to what RW noted is that, in a foreclosure situation the 1st lien holder (the mortgage company) gets paid first, and if there's any left, the 2nd lien holder (the company that holds the HELOC or 2nd mortgage) gets paid, and on and on until anyone who holds a lien on the property get's paid. In a lot of these cases there isn't enough money after the foreclosure to even cover the 1st lien holder, the 2nd gets nothing, etc. Additionally, and I've seen this a lot down here, people that bought houses before the real estate boom and only took out 1 mortgage soon saw that their property was worth a lot more than the balance of their mortgage, so they took out HELOCs and did cash out refinances, also avoiding PMI.

One thing that I haven't been able to ascertain is where all the money went. The economy just didn't seem all that great to me but if you do the math, there were trillions of extra dollars floating around. Did people buy cars with that money, boats, vacations, etc. Where did it all go? I've seen a lot of foreclosures down here where people took $200k out of their house and then go into foreclosure and have no assets left.


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## MGX (Feb 24, 2009)

I know of people who took out helocs to surf credit card and car loan debt to, usually racking up more credit card debt and or buying new cars with bigger payments.

Talk about tightening the noose around your own neck.


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## tymr (Feb 24, 2009)

Road Guy said:


> IMO its a crock, extra money for the banks.
> were going through a home refin right now, were just under the 80% mark and I could tell the lender was really really hoping to get their PMI


I agree. We went through a refinance in 2005, and our property appraised for twice the loan value so we weren't required to pay PMI. Our lender worked really hard to try and get us to refinance the maximum amount of the appraised value (80%, I think). I am so glad we still have equity, though not much, instead of being under water.


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## Road Guy (Feb 24, 2009)

^-- yes they still bug us about taking out additional money (the equity) when all I want to do is lower my long term interst money paid by going to a 15 year and I want to keep the loan amount the actual payoff and not add a few grand for ....... crap... of course I would love a new boat, but I wont put myself in that position.


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## RIP - VTEnviro (Feb 24, 2009)

How the hell can anyone afford to put 20% down on a house in the first place. Based on the current assessment of the house I'm renting, I'd need to find a spare $68k between the cushions. I want to buy something when my wife finishes her post-doc work in about a year and a half, and can see no way in hell I could possibly do so until I am in my mid-30s at the earliest. And I'm a total penny pincher!

When did you folks buy your first place?


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## chaosiscash (Feb 24, 2009)

VTEnviro said:


> How the hell can anyone afford to put 20% down on a house in the first place. Based on the current assessment of the house I'm renting, I'd need to find a spare $68k between the cushions. I want to buy something when my wife finishes her post-doc work in about a year and a half, and can see no way in hell I could possibly do so until I am in my mid-30s at the earliest. And I'm a total penny pincher!
> When did you folks buy your first place?


You also live in Boston (right?). Its one thing to buy a "small, starter home" for around 100k and have the 20k to put down. I could save that up in a year or two if I was renting. Its completely something different to buy a "small, starter home" for 300+k and have the 20%. I bought my first home (in Knoxville, TN) when I was 24, but it only cost around 120k and I lived in an RV for a year and a half saving money for the down payment.


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## roadwreck (Feb 24, 2009)

VTEnviro said:


> How the hell can anyone afford to put 20% down on a house in the first place. Based on the current assessment of the house I'm renting, I'd need to find a spare $68k between the cushions. I want to buy something when my wife finishes her post-doc work in about a year and a half, and can see no way in hell I could possibly do so until I am in my mid-30s at the earliest. And I'm a total penny pincher!
> When did you folks buy your first place?


you find a cheaper place to live.


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## Flyer_PE (Feb 24, 2009)

chaosiscash said:


> You also live in Boston (right?). Its one thing to buy a "small, starter home" for around 100k and have the 20k to put down. I could save that up in a year or two if I was renting. Its completely something different to buy a "small, starter home" for 300+k and have the 20%. I bought my first home (in Knoxville, TN) when I was 24, but it only cost around 120k and I lived in an RV for a year and a half saving money for the down payment.



Same here. My first was half of a duplex for 105k. It's the only one I could pull a 15 year loan on though. Another couple of years and I should be able to pull this one under control though.


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## snickerd3 (Feb 24, 2009)

Location location location 68K is almost half the price of my house.

when we bought out first house in 2003 we put a 15K downpayment and the rest was two loans to avoid the PMI. Had the second one paid in a yr and half.

For the new house in 2008 between the money from the first house and 6 months of saving, we were able to put over 30% down so again no PMI

but we live in central IL and the property values aren't as high as on the east coast.


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## DVINNY (Feb 24, 2009)

VTEnviro said:


> How the hell can anyone afford to put 20% down on a house in the first place.
> When did you folks buy your first place?


I bought my first house when I was 23, I only paid $85,000 for it. But it was a 4 bedroom cape cod style. Not bad for the $$. I bought the house I'm in now, 6+ yrs ago.



roadwreck said:


> you find a cheaper place to live.


^^ Exactly.


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## Chucktown PE (Feb 24, 2009)

Our first house which was in Atlanta was $250k and we put down 10%. My company bought it from us last year and we ended up making around $40k. Now we have a good chunk of change to plunk down on the next house.

Don't get discouraged VT. I think saving 20% for a down payment while living in Boston would be nearly impossible. Plus, as a grad student I'm guessing your wife doesn't make a whole lot of money.


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## wilheldp_PE (Feb 24, 2009)

I'm about to start building my 2nd house. I bought the first one with an 80/20, 0% down loan(s). Both of them were traditional loans (no ARMs for me), and the 1st was a 30 year and the 2nd was a 20 year. I was looking to refinance into 1 mortgage with no PMI since I have some equity built up, but a local builder caught my eye first. He's building Energy Star homes that are in my price range in a much nicer neighborhood than my current one. I am going to have to get 2 mortgages again, but as long as I'm not pissing money away on PMI, I'm fine with that.


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## Road Guy (Feb 24, 2009)

I bought a town house when I was 24, cost was $65,000. We paid PMI but it was only $75 bucks a month

second house we still had to pay PMI, we only put down 10%, but I hated paying the PM

third &amp; current house we put down 5%, and then got a home equity loan to make up the other 15% so we didnt have to pay PMI

in the last 5 years we have paid off the "second loan" so when we refinance to a 15 its really like a 20 year loan, but long term it will still save a ton of money.

But I dont think you have to have 20% to put down, its just that the banks want there PMI when you dont.


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## Chucktown PE (Feb 24, 2009)

I have been mortgage shopping down here as well as house shopping and most banks are requiring 20% down now. The minimum they'll take is 10%, with or without PMI. There is no such thing as 100% financing any more. I'm also looking at contracting a house my self. Financing is a little trickier but I can get a much nicer house for the money.


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## Road Guy (Feb 24, 2009)

you know I dont necessarily think that making people put something down is a bad idea though, 100% financing is probably what got a lot of people into trouble.

Used to be banks wouldnt even talk to you unless you had 20% (or so thats what my dad and father in law say)

Our lender, Chase, said there is a FHA 15 year loan that will do no PMI if you have 10% down. (I am sure credit score impacts this though)


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## RIP - VTEnviro (Feb 24, 2009)

Yeah the market price on my place was $340k when we moved in last Memorial Day. And that number was devaluled based on what the owner expected to sell it for.

We've got 1600 SF on 0.25 acres. It was built in the 50s but has been modernized over time (kitchen, bathrooms, fixtures, etc.) and shows pride of ownership. For $2000 a month, I'm getting a pretty fair deal I think given what else we looked at.

The owner bought the place a few years back and then deciced to move into a bigger place on a quieter street. He didn't want to sell it for a loss, but the rent was high enough where most people that could afford that would just buy something. We didn't want to buy anything here because my wife's post-doc appointment is ~2-3 years and it didn't make sense to buy anything anyway.

We make decent money and since we moved here we've bought a lot of nice hardwood furniture, two new computers, and are pre-paying a big vacation this summer all in cash. So I haven't spent any money but haven't saved any either. The furniture was just stuff we need that will last 20 years, and the vacation is the honeymoon we never took. Once that's all set I'm sure we will be saving a good chunk each month. And once Dr. Mrs. graduates her salary will basically double again. So I can see myself being in that boat at some point. And our credit is good and we have no CC bills so that helps too.

It's just frustrating because that's basically that one 'adult' thing that I haven't accomplished that I would like to do, and it bums me out a little when I see friends and coworkers younger and who are making less buying stuff. I'm happy for them, but it makes me feel like I screwed up somewhere I guess.



> I have been mortgage shopping down here as well as house shopping and most banks are requiring 20% down now. The minimum they'll take is 10%, with or without PMI. There is no such thing as 100% financing any more.


I think that is a good thing because there are a lot of people who bought something they can't afford when mortgages were just handed out and are way over stretched with their financial resources at this point.


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## IlPadrino (Feb 24, 2009)

Road Guy said:


> you know I dont necessarily think that making people put something down is a bad idea though, 100% financing is probably what got a lot of people into trouble.


Except on a $500k house, there's not much real down payment you can make people reasonably pay... I couldn't have afforded much more than 2% at the time. Granted, I could have continued to rent and try and save for a down payment (not sure how much progress I would have made), but hey, isn't home ownership the American Dream?!?


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## DVINNY (Feb 24, 2009)

VTEnviro said:


> We've got 1600 SF on 0.25 acres. It was built in the 50s but has been modernized over time (kitchen, bathrooms, fixtures, etc.) and shows pride of ownership. For $2000 a month, I'm getting a pretty fair deal I think given what else we looked at.


That's smaller and less land than the one I mentioned above for $85k. Sometimes its nice to be a redneck. 

Mortgage with insurance and taxes escrowed in was $608 / mo. &lt;- I remember it worrying me.


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## IlPadrino (Feb 24, 2009)

Chucktown PE said:


> RW hit the nail on the head with that. Another caveat to what RW noted is that, in a foreclosure situation the 1st lien holder (the mortgage company) gets paid first, and if there's any left, the 2nd lien holder (the company that holds the HELOC or 2nd mortgage) gets paid, and on and on until anyone who holds a lien on the property get's paid. In a lot of these cases there isn't enough money after the foreclosure to even cover the 1st lien holder, the 2nd gets nothing, etc. Additionally, and I've seen this a lot down here, people that bought houses before the real estate boom and only took out 1 mortgage soon saw that their property was worth a lot more than the balance of their mortgage, so they took out HELOCs and did cash out refinances, also avoiding PMI.


Though with Short Sales this doesn't exactly hold. As I understand it, all lienholders need to agree to the terms of the shortsale, so there's a fair amount of room for negotiation. I haven't seen any numbers, but I wonder what the ratio of Short Sales to Foreclosures is doing...


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## Chucktown PE (Feb 24, 2009)

IlPadrino said:


> Though with Short Sales this doesn't exactly hold. As I understand it, all lienholders need to agree to the terms of the shortsale, so there's a fair amount of room for negotiation. I haven't seen any numbers, but I wonder what the ratio of Short Sales to Foreclosures is doing...



Both have to agree to the sale but the 1st won't take less at the expense of the 2nd because if they wait for foreclosure then the 1st will get a better deal. Sometimes the 2nd will realize they aren't getting anything regardless and write down the entire loan and consider it a total loss, other times they'll sue the owner for the debt.


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## Capt Worley PE (Feb 24, 2009)

VTEnviro said:


> How the hell can anyone afford to put 20% down on a house in the first place.
> When did you folks buy your first place?


Easy where we live. We put 20% down and the payments are less than 450/month. Of course that was eleven years ago, but prices are still very reasonable.

I couldn't loive in Boston. I'd freak over how costly stuff is.


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## RIP - VTEnviro (Feb 24, 2009)

^ It was a bit of a shock because of how cheap VT was, but where I grew up is noticably more expensive than here.

Housing and auto insurance are the big things that are really expensive here. Dining out is too but we basically never do that.

Cost of living will definitely factor into where we ultimately end up.



> That's smaller and less land than the one I mentioned above for $85k. Sometimes its nice to be a redneck.


If I picked up a supermarket real estate flyer in your neck of the woods if would probably excite me more than a good porno mag.


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## OSUguy98 (Feb 25, 2009)

DVINNY said:


> That's smaller and less land than the one I mentioned above for $85k. Sometimes its nice to be a redneck.  Mortgage with insurance and taxes escrowed in was $608 / mo. &lt;- I remember it worrying me.


I paid $86k for my 1300 sq ft house with a full, unfinished basement (appraised for $95k)... through WVHDF's first-time home buyer program... they gave me 2 loans... one for "closing costs", and one for the house... 100% financing... the 1st mortgage is for a hair over $83k... and the other is for $3.5k loan with a 3-year interest free grace period... So I ended up with a $500/mo mortgage, and the other loan will be roughly $50/mo come this Nov. if I don't pay it off before then (which is the plan)... Add in some escrow for Taxes and Insurance and of course the $50/mo for PMI and I'm looking at a $600-650/mo house payment...

Sometimes it's nice to live in a place where housing costs/insurance/taxes are "cheap" and reasonable...


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## DVINNY (Feb 25, 2009)

^^ I agree.

Then I bought my house in BPort, and now pay $2100/mo. 

It's a 15 yr. loan and I only have 10 years left, so I'll be happy then


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## Capt Worley PE (Feb 25, 2009)

DVINNY said:


> Then I bought my house in BPort, and now pay $2100/mo.


HFS!!!

I could not handle that emotionally.


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## Chucktown PE (Feb 25, 2009)

Here's a question for anyone out there. I am thinking about possibly building a house myself (me as the GC). I have a couple of friends who have done this who have very little knowledge of construction. I consider myself to be an advanced do-it-yourselfer and know a good bit about residential construction.

Right now I'm thinking I can buy a decent lot (around 0.25 acre) for $100k and then build a 2200-2400 square foot house for $200k. I think it would probably appraise for between $450k and $500k when I'm done. My questions are 1) are builders making that great a profit on houses 2) does $90 to $100 per square foot sound like a reasonable estimate for construction cost?


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## RIP - VTEnviro (Feb 25, 2009)

^A former manager of mine built his own house over the course of a year and a half. He was an experienced civil engineer and pretty handy, but had never built a house. He read up on it and hired a buddy who knew what he was doing and the house turned out nicely.

As for your specific questions, I don't have an answer.


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## Road Guy (Feb 25, 2009)

my mother in law has "built" the last three houses they lived in, all in the $500K range. She basically acted as the GC and hired out all the subs for the work. I think she would paid a contractor to help her through the bigger decisions, but they shaved a lot of money off their house cost because she would nag the crap out of the subs and such.

So I figure if she can do it almost anyone can, but she doesnt work and really enjoys nagging... so I think that helps, but having to do it while working full time might be more of a challenge.

And they have built some really nice houses doing it this way....


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## snickerd3 (Feb 25, 2009)

Chucktown PE said:


> Here's a question for anyone out there. I am thinking about possibly building a house myself (me as the GC). I have a couple of friends who have done this who have very little knowledge of construction. I consider myself to be an advanced do-it-yourselfer and know a good bit about residential construction.
> Right now I'm thinking I can buy a decent lot (around 0.25 acre) for $100k and then build a 2200-2400 square foot house for $200k. I think it would probably appraise for between $450k and $500k when I'm done. My questions are 1) are builders making that great a profit on houses 2) does $90 to $100 per square foot sound like a reasonable estimate for construction cost?


Wow 100k for only a 1/4 acre...land prices are high by you. When we looked into building .25-.5 acre plots were 20k-45K. The prices we were getting for construction were within that range, if not slightly more. rural small town so everything would have to be brought in.

My FIL did exactly what you are thinking about doing i believe about the same size too. They live in the Chicago burbs. they spilt the lot they already owned to build their "retirement" home. He had no construction knowledge but like yourself an advanced do-it-yourselfer.

The county required him to have an architect draw up the plans. If you are not on city water/sewer the local county may have size limit on the house for proper sizing of septic system. (FIL could only have 3 bedrooms due to the size of the lot). He hired contractors to do the foundation, the roof, and eventually the drywall as time on his permit was running out. (took almost 3 yrs) Everything else he did himself, literally. He built a wooden crane, to lift the LDLs to the second story and to hoist up the walls. he occassionally brought in day laborers through a local job placement office because he needed the extra hands. He just finished the fireplace this past fall.

I think he said he spent a little over $250K. Insurance value is closer to 375K I believe. He has said he will never do it again. He'll pay someone next time.


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## dastuff (Feb 25, 2009)

You guys are all lucky.... If you look under 300k$ in socal you're likely to end up in a very sketchy neighborhood... Which is sad for all those people buying starter homes...

That's why, as horrible as it sounds, I am hoping that CA real estate becomes more reasonable with this crash. I just can't feel all that guilty for the guy making half what me and the gf make thinking he can afford double what we're looking at. Right now we're looking at the 350k$ range and hoping that we can find something decent and have about 10% down for it.


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## Supe (Feb 25, 2009)

dastuff said:


> You guys are all lucky.... If you look under 300k$ in socal you're likely to end up in a very sketchy neighborhood... Which is sad for all those people buying starter homes...
> That's why, as horrible as it sounds, I am hoping that CA real estate becomes more reasonable with this crash. I just can't feel all that guilty for the guy making half what me and the gf make thinking he can afford double what we're looking at. Right now we're looking at the 350k$ range and hoping that we can find something decent and have about 10% down for it.


The northeast isn't much better. Down the street from where I used to live in Southwestern CT (Fairfield County), the prices were absolutely outrageous. A small, hideous turquoise colored ranch with a one car detached garage and a narrow backyard went for $475k I believe. This is on the outskirts of a suburb that borders a horrendous section of Bridgeport, CT. My old next door neighbor sold his house about 3 months ago for $375k, almost the same style as the one described above. These are homes which wouldn't even touch $200k just about anywhere else. My parents' home is nothing spectacular, has no garage but does have an in-ground pool, and that was appraised in the $450k range.

But what amazes me though, and a perfect example of the crisis we're in today, is that ALL of the people moving into the neighborhood are young couples with 2-3 kids who both work either low paying jobs, or only one person in the house has a job. I'm talking prison security guards, guys who work for a landscaping company, etc, not even middle of the road admin or office jobs. I have no clue how the hell they can pay the mortgages on these things.


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## Chucktown PE (Feb 25, 2009)

snickerd3 said:


> Wow 100k for only a 1/4 acre...land prices are high by you. When we looked into building .25-.5 acre plots were 20k-45K. The prices we were getting for construction were within that range, if not slightly more. rural small town so everything would have to be brought in.
> My FIL did exactly what you are thinking about doing i believe about the same size too. They live in the Chicago burbs. they spilt the lot they already owned to build their "retirement" home. He had no construction knowledge but like yourself an advanced do-it-yourselfer.
> 
> The county required him to have an architect draw up the plans. If you are not on city water/sewer the local county may have size limit on the house for proper sizing of septic system. (FIL could only have 3 bedrooms due to the size of the lot). He hired contractors to do the foundation, the roof, and eventually the drywall as time on his permit was running out. (took almost 3 yrs) Everything else he did himself, literally. He built a wooden crane, to lift the LDLs to the second story and to hoist up the walls. he occassionally brought in day laborers through a local job placement office because he needed the extra hands. He just finished the fireplace this past fall.
> ...



It's definitely expensive down on the coast. The community does have a nice boat landing, pool, tennis courts, etc. so that is a nice perk.

I'm not planning on doing the hammering and nailing myself. I'm going to sub everything out.

I'll be on public water/sewer but the community we are looking into has $12000 in impact fees.


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## chaosiscash (Feb 25, 2009)

Does the community have requirements for the house you want to build (min square footage, plans to be approved by committee, etc)? If you're going to be the GC, you might want to check it out, I know a lot of neighborhoods around here do.

If you don't mind me asking, where around C-town are you looking. Mt. Pleasant, West Ashley, etc? Just curious.


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## snickerd3 (Feb 25, 2009)

chaosiscash said:


> Does the community have requirements for the house you want to build (min square footage, plans to be approved by committee, etc)? If you're going to be the GC, you might want to check it out, I know a lot of neighborhoods around here do.
> If you don't mind me asking, where around C-town are you looking. Mt. Pleasant, West Ashley, etc? Just curious.


Got to love the community covanents...the reasons we didn't build.

don't forget about things like some % of the house fascade has to be brick or you can't build a fence or plant hedges no commerical class vehicles can be parked overnight, no boats on driveway/yard. no sheds...the list can go one forever.


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## Chucktown PE (Feb 25, 2009)

We're looking in Mount P. and yes the list goes on and on. There are some very stringent requirements and everything (down to the types of shrubbery) have to be approved by the architectural review board. One of the big problems I'm having is that a lot of communities require a contractor's license. In SC you don't need a contractor's license if you're building your own home. And it's pretty hard for anyone off the street to get a contractor's license.


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## dastuff (Feb 25, 2009)

Supe said:


> But what amazes me though, and a perfect example of the crisis we're in today, is that ALL of the people moving into the neighborhood are young couples with 2-3 kids who both work either low paying jobs, or only one person in the house has a job. I'm talking prison security guards, guys who work for a landscaping company, etc, not even middle of the road admin or office jobs. I have no clue how the hell they can pay the mortgages on these things.


I agree completely, it's hard to feel bad for all the people out here right now who can't afford their mortgages when they planned on making a quick buck at the economies expense.

Whatever happened to buying @ three times the household income? There are articles in the paper out here now showing people having bought at 10 times their income levels. I understand that it isn't completely their fault but people should be held responsible for their actions.


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## snickerd3 (Feb 25, 2009)

dastuff said:


> Whatever happened to buying @ three times the household income? There are articles in the paper out here now showing people having bought at 10 times their income levels. I understand that it isn't completely their fault but people should be held responsible for their actions.


greedy, predatory lenders who were more interested in making $ than doing what was right. If they didn't do it, the person would just go down the street to the next bank and the next bank until they found someone that would.

There's no way I'd even buy a house 3 times the household income. we bought a house we could still make payments on AND have a life if either of us lost our job.


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## Flyer_PE (Feb 25, 2009)

^I will grant that there were misdeeds on the part of lenders. However, I think this column deserves a read.


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## wilheldp_PE (Feb 25, 2009)

snickerd3 said:


> greedy, predatory lenders who were more interested in making $ than doing what was right. If they didn't do it, the person would just go down the street to the next bank and the next bank until they found someone that would.
> There's no way I'd even buy a house 3 times the household income. we bought a house we could still make payments on AND have a life if either of us lost our job.


So, predatory lenders forced these people to buy houses that were WAY out of their price range? I don't know about you, but I have never been approached out of the blue by a bank asking me to buy any house, much less one I couldn't afford. When I wanted a house, I sought out the bank. They pre-approved me for more house than I could comfortably afford, but it was still my responsibility to make sure I didn't get into a mortgage that would break me. All this shit of looking for somebody to blame is really pissing me off. The fact of the matter is these people probably had no business owning any house, much less the one they ended up buying. But now their complete lack of fiscal or personal responsibility is being rewarded by the government.


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## mudpuppy (Feb 25, 2009)

^ When I went in for a pre-approval, I was pressured to borrow more than I did. I could easily see someone without my financial acuity being mislead into thinking they could afford a lot more than they really could.


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## wilheldp_PE (Feb 25, 2009)

mudpuppy said:


> ^ When I went in for a pre-approval, I was pressured to borrow more than I did. I could easily see someone without my financial acuity being mislead into thinking they could afford a lot more than they really could.


That is the definition of fiscal and personal responsibility. If you are making a decision to buy a house, YOU have to do the investigation into what you can and cannot afford. There are thousands of car salesmen trying to talk people into paying sticker price, and people who pay it deserve what they get. It is not my responsibility, nor that of the government/taxpayers, to bail these people out because they didn't have the foresight to do some research before going into a high pressure sales situation.


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## mudpuppy (Feb 25, 2009)

I get what you are saying, but I think you are overburdening the consumer. Not everyone is capable of making those calls on their own. Just because you are smart enough to do it doesn't mean everyone else is. By your logic, everyone should also be able to determine whether it is safe to take a drug on their own and thus we can do away with the FDA. Should all people also have to figure out on their own if a bridge is safe to cross by using their own engineering analysis? No need for licensed engineers then.

Without any protection from the government, you end up with Rockefellers and Vanderbilts (or Banks of America and Countrywide Financials). But that's ok, because people were stupid enough to buy stuff from them and let them get away with what they did. So no skin off our noses. Right.


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## wilheldp_PE (Feb 25, 2009)

mudpuppy said:


> I get what you are saying, but I think you are overburdening the consumer. Not everyone is capable of making those calls on their own. Just because you are smart enough to do it doesn't mean everyone else is. By your logic, everyone should also be able to determine whether it is safe to take a drug on their own and thus we can do away with the FDA. Should all people also have to figure out on their own if a bridge is safe to cross by using their own engineering analysis? No need for licensed engineers then.


Everybody should know their own personal finances (i.e. how much money they make and how many fixed bills they have). If that requires special knowledge that Joe Six Pack doesn't have, then the American populace is dumber than I give them credit for...and that's pretty effin' dumb. I don't expect every person to do the level of research that I do before making a purchase, but simply looking at a payment plan (which I believe is required by the bank/mortgage broker) should indicate to Joe "Hey, I won't be able to afford this place in 5 years when my ARM resets or the balloon payment comes due". That is my first point...basic financial knowledge is required in order to buy a house. If you do not possess this knowledge, you have no business buying.

My 2nd point is that if Joe does lack common financial sense, then he deserves to pay for his own ignorance. There is no right mandated by the Constitution that "the right to own ones home shall not be infringed". Joe made a mistake. Joe should lose his house and go back to renting. How is he any worse off (other than a tarnished credit rating)? Why should billions of taxpayer dollars be flushed down the toilet so that Joe can afford to keep the house that he can't afford?

Rewarding ignorance leads directly to more ignorance.


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## Flyer_PE (Feb 25, 2009)

Without government intervention, there would have been no incentive for the banks to make the bad loans in the first place. Think it through, why would I, as a lending institution, make loans that I know are likely to go into foreclosure? I'm a lending institution, not a real estate institution. I don't want the house, I want the interest. The reason they were writing loans to people who couldn't afford them was because they would then turn around and sell the steaming pile to the US government through Fanny and Fredie. When the loan went into default, the tax payer, not the lender, would be on the hook for the debt. On top of that, the federal government was encouraging this behavior through the Community Reinvestment Act of 1977.


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## benbo (Feb 25, 2009)

Flyer_PE said:


> Without government intervention, there would have been no incentive for the banks to make the bad loans in the first place. Think it through, why would I, as a lending institution, make loans that I know are likely to go into foreclosure? I'm a lending institution, not a real estate institution. I don't want the house, I want the interest. The reason they were writing loans to people who couldn't afford them was because they would then turn around and sell the steaming pile to the US government through Fanny and Fredie. When the loan went into default, the tax payer, not the lender, would be on the hook for the debt. On top of that, the federal government was encouraging this behavior through the Community Reinvestment Act of 1977.


Obviously the consumers are responsible for their own behaviors vis a vis their mortgage and payment. You are responsible for your own finances and the banks should be as well.

But the banks are also at fault, especially for their own demise. I do not believe it was entirely clear that the government was going to scoop up every stinking pile. Otherwise places like Wachovia and WM wouldn't have gone out of business if it was that easy. Granted, the government is doing that now, which is not good.

But also, it isn't as though these people were going into their neighborhood bank and getting a loan from Mr. Smith who knew their grandpa, and the same bank held the loan for 30 years. A lot of these loans were done through mortgage brokers, and financial institutions took and bundled these loans, and anything else you could possibly imagine, into CDOs and started trading them like baseball cards. With mark to market accounting rules, and a tanking housing market the ponsy scheme had to come down.

At least that's how I see it from my limited knowledge.


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## dastuff (Feb 26, 2009)

^ A+ for that limited knowledge.


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## Capt Worley PE (Feb 26, 2009)

snickerd3 said:


> There's no way I'd even buy a house 3 times the household income. we bought a house we could still make payments on AND have a life if either of us lost our job.


Same here. we bought at &lt;three times the lowest of our two incomes. Which was wise considering I was downsized three years later...


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## jeb6294 (Feb 26, 2009)

wilheldp_PE said:


> There are thousands of car salesmen trying to talk people into paying sticker price, and people who pay it deserve what they get.


You're crazy...when I got my car the dealer told me that was the price they only gave to their "special" customers. He wanted me to go home and think about it and come back the next day but I jumped at the deal right then so he couldn't change his mind. The only thing it didn't have was one of those cool license plate frames with the name of the dealer on it so I asked him if they could throw one in. I was a little worried that I had blown the deal because he said he'd have to check with his sales manger, but he said it was okay...phewww. He even set me up with someone right at the dealer who could get me financing instead of going to my stupid credit union.


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## snickerd3 (Feb 26, 2009)

^^ you rock :th_rockon:

Anytime my hubby gets a car, he specifically asks them to remove all stickers/plate frames that advertise the dealer. They aren't paying him to advertise for them.


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## wilheldp_PE (Feb 26, 2009)

snickerd3 said:


> ^^ you rock :th_rockon:
> Anytime my hubby gets a car, he specifically asks them to remove all stickers/plate frames that advertise the dealer. They aren't paying him to advertise for them.


No, but you are paying them to advertise if you don't pay attention. In the "tax, title, license and fees" portion of the final tally, there is usually an advertising fee. I have seen it everywhere I have bought a car, and I have refused to pay it every single time. I even had a "sales manager" tell me that "it's the cost of doing business". I responded "Exactly! It's YOUR cost of running YOUR business. It's not my responsibility to pay for that, it's your responsibility to take that out of your profit margin on the vehicle."


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## DVINNY (Feb 26, 2009)

dastuff said:


> I agree completely, it's hard to feel bad for all the people out here right now who can't afford their mortgages when they planned on making a quick buck at the economies expense.
> Whatever happened to buying @ three times the household income? There are articles in the paper out here now showing people having bought at 10 times their income levels. I understand that it isn't completely their fault but people should be held responsible for their actions.


^^ HOLY CRAP.

I bought at about 1.5 times our annual income, but financed for 15 years, hence the $2,100 /mo.

I couldn't imagine 3 times, let alone 10 times the income.


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## MGX (Feb 26, 2009)

"The bank approved me, so I figured I could afford it". I hear this and marvel at the cop-out mentality.

Of course methods of loaning debt today has nothing to do with your actual ability to pay it back, so what do we expect?


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## RIP - VTEnviro (Mar 1, 2009)

^I've always been amazed at the people who are 'house poor'. I worked in an outer suburb of NY right after college. This was 2002-03 when there was a housing boom and a lot of people were moving away from the city post-9/11. You'd get these semi-high end McMansions. 3000-3500 SF going for $650k and up from there to some that listed closer to $1M.

I did a lot of inspection work on these subdivisions so I spent a lot of time there. You'd have a family with 3 small kids, a mom that might work part time, and a dad with a mid-level but not executive job somewhere. 2 big SUVs in the driveway as well, and a big fancy riding mower for a half acre lot. I never figured how they could afford these places. I gotta imagine they were up to their ears in debt.


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## IlPadrino (Mar 1, 2009)

dastuff said:


> Whatever happened to buying @ three times the household income? There are articles in the paper out here now showing people having bought at 10 times their income levels. I understand that it isn't completely their fault but people should be held responsible for their actions.


When bought our house in Ventura County, CA in 2004 for $450,000. We're a single-income family and there is NO WAY I come close to $150,000/year income on Uncle Sam's salary. You can't really apply such a simple parametric guideline across the entire US - you've GOT to take into account locality and comparable rental rates.

Monthly debt-to-income ratios are a much more realistic guideline to "debt health", anyway... For example, FHA requires the front-end mortgage (PITI) to be no more than 31% of your gross monthly income and the back-end total monthly debt obligation (including the mortgage and all other debt payments) to be no more than 43% of your monthly income. For energy efficient homes, the ratios can be up to 33%/45%. I think the FHA ratios are higher than most others.

The problem arises when the interest rate grows unexpectedly and the debt-to-income ratio goes up drastically... that's why I think the solution to this mess should be simple:

Allow for low interest rates with no refinance necessary. If you can't afford a 4.5% interest rate, you're either A) an idiot for buying the house in the first place or B) a speculator who warrants no help. In both cases, you should get what you deserve... foreclosure.

It kills me to think the government will buy down debt (which is nothing more than a subsidy!).


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## DVINNY (Mar 1, 2009)

^^ Going by that number of 31%, and an income of $12,500/mo. My mortgage would be $3,875. That is INSANE.

If I were to do that, I'd expect to be in the handout line as well.

I thought having mine on a 15 yr. loan and a payment of $2,100 was high. I can't believe that's what the bank would allow. If so, no wonder the dumbass banks are going broke.


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## IlPadrino (Mar 1, 2009)

DVINNY said:


> I can't believe that's what the bank would allow. If so, no wonder the dumbass banks are going broke.


I wouldn't presume to tell anyone how they should spend their money... but at about $9,000/month before taxes (which, in my case are lower than most) and a $2,500 mortgage (which is about $500 more than a lease would cost), we're not in a handout line and I'd like to think we're not dumbasses.

What am I missing in life?


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## DVINNY (Mar 2, 2009)

IlPadrino,

I was calling the bank dumbasses. They are the ones going broke looking for welfare.

I do have to fault the banks, because 31% to me seems way too high, and if that's what they say is OK, many will take that loan.

I don't know of you're situation. Sorry if my post reads wrong. Which I think it does, my comments were geared at the bank.


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## IlPadrino (Mar 2, 2009)

DVINNY said:


> Sorry if my post reads wrong. Which I think it does, my comments were geared at the bank.


And I apologize for jumping to conclusions... I'm a little sensitive these days because though we continue to do the right thing (we're leasing the house at a monthly loss of about $1000), I think others are going to be rewarded for being irresponsible borrowers.

I do fault the banks, but only because I think they caused a large part of the problem by resetting interest rates after the 3/1 or 5/1 period. And where they did that on 1.5% interest rates, they get ALL they deserve with a foreclosure. I borrowed at 5.5% and refinanced to 6.375%... I really need to get down to 5% to make this more comfortable.


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## DVINNY (Mar 2, 2009)

I should just keep quiet too, since I'm not an expert on the situations out there by any means. I can only comment on what seems insane to my comfort level.

My little Sis lives in L.A. and she tells me that my house would be $1Mil+ out there, so obviously, I wouldn't be able to afford to live in the same type of house if I were out there.

I have no idea how I would handle the situation out there, so I can only speculate from my seat on the mountain.


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## Chucktown PE (Mar 2, 2009)

I have a question about all of the affordability guidelines and I don't know if any of you have an opinion. Dave Ramsey says you should buy a house where the payment on a 15-yr fixed rate mortgage is no more than 1/4 of your take home pay. In my mind there are two big variables here:

1. Take home pay is highly variable for a lot of people. This affects the ratios on the income side. Most of us probably have our health insurance premiums, dental insurance, all payroll taxes, etc. deducted from our paychecks, thus our takehome pay is much smaller than someone who owns a small business and pays for health insurance after taxes.

2. If you don't escrow then your "house payment" is a lot lower. For some of the houses I'm looking at taxes and insurance run about $4500 per year. This affects the ratios on the debt side.

So I think I'm being conservative when I consider my income what I bring home after all payroll deductions and my house payment includes my taxes and insurance to escrow. When I do this my house payment will be roughly 1/3 of my take home pay. I also don't have any other debt. How does everyone else view this?


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## udpolo15 (Mar 2, 2009)

Chucktown PE said:


> I have a question about all of the affordability guidelines and I don't know if any of you have an opinion. Dave Ramsey says you should buy a house where the payment on a 15-yr fixed rate mortgage is no more than 1/4 of your take home pay. In my mind there are two big variables here:
> 1. Take home pay is highly variable for a lot of people. This affects the ratios on the income side. Most of us probably have our health insurance premiums, dental insurance, all payroll taxes, etc. deducted from our paychecks, thus our takehome pay is much smaller than someone who owns a small business and pays for health insurance after taxes.
> 
> 2. If you don't escrow then your "house payment" is a lot lower. For some of the houses I'm looking at taxes and insurance run about $4500 per year. This affects the ratios on the debt side.
> ...


I don't know specifically for Dave Ramsey, but a lot of those ratios are for house costs, typically mortgage, taxes, insurance. As for any of the ratios in general, I think they should be used at most as a reality check, but at the end of the day everyone's situation is different. Spending 40% of your take home pay on housing might be the right decision for you. Using the ratios might at least force you to think about why it is appropriate for you to take on more.

If I followed the 25% rule I wouldn't be able to afford much in Chicago, even if I didn't include the taxes. I am buying for the long-term (at most I want to move once more) so I willing to make sacrifices early on. Over the life of the loan, I expect my housing/income to be much less than 25%.


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## Chucktown PE (Mar 2, 2009)

udpolo15 said:


> I don't know specifically for Dave Ramsey, but a lot of those ratios are for house costs, typically mortgage, taxes, insurance. As for any of the ratios in general, I think they should be used at most as a reality check, but at the end of the day everyone's situation is different. Spending 40% of your take home pay on housing might be the right decision for you. Using the ratios might at least force you to think about why it is appropriate for you to take on more.
> If I followed the 25% rule I wouldn't be able to afford much in Chicago, even if I didn't include the taxes. I am buying for the long-term (at most I want to move once more) so I willing to make sacrifices early on. Over the life of the loan, I expect my housing/income to be much less than 25%.



That's the other thing. With raises and such, I think the Dave Ramsey formula forces you to go way low on the house, and you might end up living in two or three houses, but it may be more cost effective to go with the 30 year note, and never move. Affordability is a problem down here as well if I don't want to move in 3 more years if we have another baby, or spend 2 hours a day in the car commuting to work.


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## udpolo15 (Mar 2, 2009)

I just ran a quick spreadsheet. If you start at 40% housing/income and get a 3% raise per year, your 30 year average is 26%. At 4% raises, you are 24%.

This is where the value in home buying is. It is not in the increase in net worth (which might be a side benefit), but the opportunity to fix your housing costs. The longer you stay in one place, the more you see this benefit. I look at my parents and my in-laws and they both have lower mortage payments than I do because they have both been at the same place for 20+ years.


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## benbo (Mar 2, 2009)

IlPadrino said:


> And I apologize for jumping to conclusions... I'm a little sensitive these days because though we continue to do the right thing (we're leasing the house at a monthly loss of about $1000), I think others are going to be rewarded for being irresponsible borrowers.
> I do fault the banks, but only because I think they caused a large part of the problem by resetting interest rates after the 3/1 or 5/1 period. And where they did that on 1.5% interest rates, they get ALL they deserve with a foreclosure. I borrowed at 5.5% and refinanced to 6.375%... I really need to get down to 5% to make this more comfortable.


I salute your responsibility. In your case it really is screwed because I gather you would still be living in the house if you didn't have to transfer for work (military).

That monthly loss would be a lot easier to stomach if the housing values were going up.


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## jeb6294 (Mar 2, 2009)

snickerd3 said:


> ^^ you rock :th_rockon:
> Anytime my hubby gets a car, he specifically asks them to remove all stickers/plate frames that advertise the dealer. They aren't paying him to advertise for them.


Several years ago I bought a new '97 Mustang Cobra. After everything was signed and I went to take it home, a "Duval Ford" tag (one of those plastic things that looked horrible) had showed up on the back. It wasn't there when I test drove it so I know they had just put it on there when they were "cleaning it up" for me. I pointed it out to the salesman and told him that I would be happy to tell people about my experience bacause I had gotter a really goog deal, but that they were not putting that on my car. He told me that they couldn't take it off so I would just have to live with it...I walked over, peeled it off (it's just on there with a piece of double-sided tape), handed it to the sales guy and told him that he wouldn't be seeing me in the future.


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## IlPadrino (Mar 2, 2009)

benbo said:


> I salute your responsibility. In your case it really is screwed because I gather you would still be living in the house if you didn't have to transfer for work (military).
> That monthly loss would be a lot easier to stomach if the housing values were going up.



Ain't that the truth! I didn't choose to move and we still hope to go back, so it's a little easier to swallow.


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## What!! (Jun 2, 2009)

I am thinking about buying a house but am reluctant to put 20% down in this current economy. The PMI would be about $150 a month extra. I am thinking about waiting for an year and then pay the balance to get under 80% of Principal to get rid of PMI. Can i do this or do i have to refi later to get an appraisal to get rid of PMI?


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## Flyer_PE (Jun 3, 2009)

^On my first house, the PMI went away automatically when I reached 20% equity of the purchase price. No refinance or appraisal required.


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## roadwreck (Jun 3, 2009)

ran a quick google search here's what I found on canceling PMI



> How Do You Cancel or Terminate PMI?
> Cancellation
> 
> Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.
> ...


http://www.frbsf.org/publications/consumer/pmi.html


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## MonteBiker (Jun 3, 2009)

Have you thought about going with an 80-10-10 or 80-15-5 loan if they still exist. This is where you would either put down 5 or 10%, take out your typical 80% fixed and would then take out a second loan, usually even through the same lender and with maybe a percentage point higher interest rate, to cover the remaining balance. This was considered to be one of the least risky non-typical loans. This bypasses the whole PMI thing by not having a loan for more than 80% of the homes current value. The interest paid on the second loan is still tax deductible and you are putting equity in your new home as opposed to paying for insurance in case you ever default on your loan. The monthly payment on the second loan is usually about the same as the PMI payment and you get no benefit from the PMI. In my opinion, paying PMI is just throwing money away on a situation that you should not be letting yourself get into.

If you feel that you cannot afford to put down enough money and still have enough to live appropriately then maybe think about holding off another year or look at a smaller or less expensive house. Remember that it may be harder to sell a house in this market if you were ever in a jam. You do not want to default on your loan as that would cause you to have a harder time buying another house/car/etc in the future. Keep in mind that renting in this market is not terribly bad. In the case that you were to lose a job or need to transfer to another town, you have much less at stake and fewer limitations in finding something new.


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## roadwreck (Jun 3, 2009)

MonteBiker said:


> Have you thought about going with an 80-10-10 or 80-15-5 loan if they still exist. This is where you would either put down 5 or 10%, take out your typical 80% fixed and would then take out a second loan, usually even through the same lender and with maybe a percentage point higher interest rate, to cover the remaining balance. This was considered to be one of the least risky non-typical loans. This bypasses the whole PMI thing by not having a loan for more than 80% of the homes current value. The interest paid on the second loan is still tax deductible and you are putting equity in your new home as opposed to paying for insurance in case you ever default on your loan. The monthly payment on the second loan is usually about the same as the PMI payment and you get no benefit from the PMI. In my opinion, paying PMI is just throwing money away on a situation that you should not be letting yourself get into.


I think they've changed the rules on PMI, it's now tax deductible. Previously the major advantage to doing an 80-20 or other similar loan was that the interest on the second mortgage was tax deductible and PMI wasn't. So it made sense to avoid PMI. That may not be the case now. I think that loans like an 80-10 or 80-20 may be much harder to get these days, it's loans like that which helped contribute to the mess the banking industry found itself in.



MonteBiker said:


> If you feel that you cannot afford to put down enough money and still have enough to live appropriately then maybe think about holding off another year or look at a smaller or less expensive house. Remember that it may be harder to sell a house in this market if you were ever in a jam. You do not want to default on your loan as that would cause you to have a harder time buying another house/car/etc in the future. Keep in mind that renting in this market is not terribly bad. In the case that you were to lose a job or need to transfer to another town, you have much less at stake and fewer limitations in finding something new.


I do agree with that statement. If you feel like you are cutting things to close and can't put the 20% down then you may be looking at buying to much house.


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## Chucktown PE (Jun 3, 2009)

For the record, PMI is tax deductible. In addition, piggyback loans (80/10/10 and 80/15/5) are almost impossible to find now. Lastly, I am renting right now (my company bought my house in Atlanta as part of my relocation one year ago) because I think there is another 20 - 30% price correction left to come, at least in my area.

edit: RW beat me to it.


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## MA_PE (Jun 3, 2009)

someone correct me if I 'm wrong but financing 90 to 100% of the purchase price is what caused the crash in the first place. If you start off with no equity value and the market goes down you are then upside down on the mortgage with no guarantee you will recovcer in the forseeable future. People in this situation tend to bail out of the loan and then the lender has to absorb the difference.... the walls come tumbling down.

Ergo, i believe lenders are likely not to approve such loan configurations.


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## Capt Worley PE (Jun 3, 2009)

MA_PE said:


> someone correct me if I 'm wrong but financing 90 to 100% of the purchase price is what caused the crash in the first place.


You're not wrong.


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## MonteBiker (Jun 3, 2009)

MA_PE said:


> someone correct me if I 'm wrong but financing 90 to 100% of the purchase price is what caused the crash in the first place. If you start off with no equity value and the market goes down you are then upside down on the mortgage with no guarantee you will recovcer in the forseeable future. People in this situation tend to bail out of the loan and then the lender has to absorb the difference.... the walls come tumbling down.
> Ergo, i believe lenders are likely not to approve such loan configurations.



Added to that, they were using non-fixed arm loans for 90-105% of the house value based upon the fact that they could afford the current payment with the beginning interest rate. My suggestion, although it had not been explicitly said, was based upon an piggyback loan with a fixed rate. I apologize for not being explicit. Piggy-back loans are not necessarily any risky than a 95% fixed rate 30yr loan. The payment is what it is for the course of the loan term.

That is interesting that PMI is now tax deductible... I still wouldn't pay it as it doesn't do anything for the equity in your home. You are paying a fee for something you should already know that you will never going to have to use. Don't take the money from your emergency fund for the down payment. Wait until you have a down payment saved... Bottom line, if you cannot afford the costs of buying a home, now and in the future, then it is probably not in your best interests to buy until you feel that you can.


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## udpolo15 (Jun 3, 2009)

Capt Worley PE said:


> You're not wrong.


I would say this mess was not caused by people who took 90% to 100% LTV loans, but by people who took loans they could not afford. Once all the resets happened on the exotic mortgages, too many people flooded the market and prices start to fall, screwing the people with little equity.


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## Capt Worley PE (Jun 3, 2009)

udpolo15 said:


> I would say this mess was not caused by people who took 90% to 100% LTV loans, but by people who took loans they could not afford.


I think if you can't save up for a down payment of decent size, you probably can't afford the house.


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## udpolo15 (Jun 3, 2009)

Capt Worley PE said:


> I think if you can't save up for a down payment of decent size, you probably can't afford the house.


True to some extent, but there are definitely areas were due to the price of housing, it is difficult to save enough money to cover a down payment, especially for 1st time buyers.

I would agree with you for 100% loans from a financial discipline perspective, but I wouldn't blame someone for only putting 10% (or maybe even 5% down) in some markets. Also, my views only apply to owner occupied homes. Any speculators and/or flippers should have been required to put more than 20% down.


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## What!! (Jun 3, 2009)

I can afford the 20% down but that will wipe out my emergency cash reserve. I was thinking of building up my emergency cash reserve (about 6months of expenses including mortgage payment) and then pay up the 20% so that i am not left in limbo in case i lose my job. The other way around would be to wait until i have enough money for 20% down and emergency reserve and then look for house. From what i have observed is that it takes at least 3-4 months to find a home you like. Thats why i wanted to start looking for houses now.

I will also talk to bank to see if there is still any alternative to avoid PMI.


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## roadwreck (Jun 3, 2009)

What!! said:


> I can afford the 20% down but that will wipe out my emergency cash reserve


Then you don't have enough money to buy the house.


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## Capt Worley PE (Jun 3, 2009)

^Second.


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## IlPadrino (Jun 4, 2009)

I think those that say "if you don't have $x, then you can't AFFORD the house" are being too simplistic. If you're financially stable and the cost of the mortgage is about the cost of rent, you can probably AFFORD the house. The mortgage crisis was exacerbated by 100% LTV ratios, but I think they were caused by speculators (even if they didn't recognize they were speculating) who assumed home values would go up sufficiently to make required refinancing (because the interest rate on the variable loan was going to go WAY up) easy.

If you're getting a 30yr loan with a fixed interest rate, I really don't see the problem with high LTV ratios (even 100%, but those seem hard to come by these days!) if you're willing to stay for the long run.

It always seems a shame that when you can finally AFFORD a large house in a nice neighborhood, the kids aren't living at home any more, and there's really no need.


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## Supe (Jun 4, 2009)

I'm with IlPadrino on this one. Quite a few of the people I graduated with who were not going to be traveling for their respective jobs had bought homes with a minimal down payment. The key being that these were reasonably priced homes that met their needs. For a few of them, the mortgage was actually cheaper than the rent in the area. They have no problem meeting the monthly payment and then some, they simply hadn't had the time to sit and accumulate the money for the down payment. These are all single guys, no kids/family to be concerned with, so to say if you don't have $x you can't afford the house is greatly oversimplifying things.


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## Capt Worley PE (Jun 4, 2009)

Supe said:


> I guess I don't see the logic behind moving somewhere, sitting and paying rent until you can save up $x for a down payment, and then going and buying the home when you could have been paying it off all along.


Because if you are frugal enough to save the 20% down payment while making rent payments about what your house payments will be, you know you will be able to pay for the house and set money aside for savings/repairs/etc. If you just buy the house without knowing your real world spending habits, you are likely to get yourself into trouble.

Homeownership shouldn't be just jumped into. I lived in an apartment for nine years or so before I bought house. of course the first five years I moved every year, so really I was stable for about four years, which enabled me to save up a down payment.

Different strokes for different folks, I guess.


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## IlPadrino (Jun 4, 2009)

Capt Worley PE said:


> Because if you are frugal enough to save the 20% down payment while making rent payments about what your house payments will be, you know you will be able to pay for the house and set money aside for savings/repairs/etc. If you just buy the house without knowing your real world spending habits, you are likely to get yourself into trouble.


How long would it take the average person to save over $100,000? It can be very hard (beyond frugal!) to save 20% in areas having moderate houses going for more than $500,000.

I'd think everyone agrees you have to look at the total cost of ownership on a house and figure in repair expenses in addition to PITI - and then balance against your other spending and income.


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## Road Guy (Jun 4, 2009)

when we refinanced recently the mortgage companies were very very strict about PMI, we were getting a 15 year loan and we barely hit the 80 / 20 rule to avoid PMI .,Actually I had to send in an overpayment to my existing loan for a few thousand to kick me over the 20% mark, we were that close and they still wouldnt budge away from it

I remember that a few years ago 15 year loans didnt have PMI...

But the mortgage companies we talked to even said that they were discouraging getting the second loan to put down the 20% so you wouldnt have PMI (I dont know if thats the rule now or if its just something they told us)

but it did seem that now more than ever they mortgage companies want their PMI.....


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## MA_PE (Jun 4, 2009)

IlPadrino said:


> How long would it take the average person to save over $100,000? It can be very hard (beyond frugal!) to save 20% in areas having moderate houses going for more than $500,000.
> I'd think everyone agrees you have to look at the total cost of ownership on a house and figure in repair expenses in addition to PITI - and then balance against your other spending and income.


I live in the Boston area and entry level houses are ~$300-350. It used to follow that one would buy an entry level house (with a reasonable down payment), build up some equity and then roll the equity (with the original down payment) as a down payment on something better.

To just dive into the "moderate" level might be overly optimistic. Also I agree with the difficulty raising the down payment in some areas but you can't blame the lender for mandating PMI if the down payment is not sufficient.

Lastly, I think we're in agreement that the concept of - small/no down payment = can't afford the house is overly simplistic.


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## IlPadrino (Jun 4, 2009)

MA_PE said:


> Also I agree with the difficulty raising the down payment in some areas but you can't blame the lender for mandating PMI if the down payment is not sufficient.


Which brings us back to the original question about PMI. And, I wonder, is the "collusion" to avoid PMI really part of the mortgage meltdown? If I understand right, with a first and second load, the 80% mortgage is well protected (after all, they get their money first in a foreclosure, so it's as if there's been 20% put down) and the 20% charges a higher interest rate (which should account for their increased risk of default with no PMI)? I read something a while ago that part of the problem with the crisis was having all these "unqualified" people enter into the market which inflated the prices of homes artificially (those unqualified home owners were also buying in the high end). Maybe requiring them to pay PMI would have kept them out of the market?

Anyway, I still think PMI is a scam... but it does make sense that those putting 20% down should pay less for their mortgage because there's less risk (similar probability maybe, but much less severity). I say either give them a lower interest rate or make the others pay PMI - it's certainly fair. BUT... those with good credit should not pay the same for PMI as those with poor credit.


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## Chucktown PE (Jun 4, 2009)

PMI is not a scam. The lender is simply buying an insurance policy in case you default such that they can recover their losses. Their risk is huge if you default. On a $300,000 house this could mean a $60,000 hit for them. So the $200 or $300 a month is simply covering that loss in case it happens.

IlPadrino, I think people are being overly simplistic by saying you can't afford the house. I would guess an entry level house in DC is probably in the $300k range and saving up $60k on an $80 engineer's salary could end up taking a long, long time. Possibly long enough that the houses are more expensive by then. At least when you're paying a mortgage you're building equity in something.

Like I posted above, I'm still renting because I think the market has a lot farther to fall. But if I had waited for the 20% down while I was in ATL I would still be trying to save. If you're not getting some exotic mortgage and you're comfortable with the payment you can judge whether it's a good move for you.


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## IlPadrino (Jun 4, 2009)

Chucktown PE said:


> PMI is not a scam. The lender is simply buying an insurance policy in case you default such that they can recover their losses. Their risk is huge if you default. On a $300,000 house this could mean a $60,000 hit for them. So the $200 or $300 a month is simply covering that loss in case it happens.


My confusion is that PMI or 80/20 loans haven't allowed many lenders to recover their losses. And I believe insurance should be only about catastrophic loss (like health and home insurance). Lenders should be able to pay out there losses with sufficient interest rates on the loans. Increase the rates a percent and cut out the middle man (PMI).


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## Chucktown PE (Jun 4, 2009)

IlPadrino said:


> My confusion is that PMI or 80/20 loans haven't allowed many lenders to recover their losses. And I believe insurance should be only about catastrophic loss (like health and home insurance). Lenders should be able to pay out there losses with sufficient interest rates on the loans. Increase the rates a percent and cut out the middle man (PMI).



In some markets you can do this. You can get a 90/10 loan, however the interest rate is much higher. But it takes time for that higher interest rate to build up enough to cover losses. PMI has allowed some lenders to cover their losses, but one of the big suppliers of this insurance was AIG, and look what happened to them.

The bottom line is that we are going through a process of deleveraging. It is going to be painful, and everyone is going to have to pay more as a consequence.


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## MA_PE (Jun 4, 2009)

PMI is also buying the risk that fluctuations in housing prices will stay below 20% of the purchase price for the life of the primary loan, which "stable" lenders with fixed rates are not willing to do.


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## squishles10 (Jun 4, 2009)

we just got 100% financing on our house, nothing down, no pmi, no second loans, etc. we could have put the 20% down but since they didnt require it we felt we'd rather keep it in the bank just in case. we can always put it in later.


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## MA_PE (Jun 4, 2009)

squishles10 said:


> we just got 100% financing on our house, nothing down, no pmi, no second loans, etc. we could have put the 20% down but since they didnt require it we felt we'd rather keep it in the bank just in case. we can always put it in later.


They let you borrow 100% appraised value? Interesting.

Good luck with the new house.


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## squishles10 (Jun 4, 2009)

MA_PE said:


> They let you borrow 100% appraised value? Interesting.
> Good luck with the new house.


Yeah- it's a physicians loan through BoA. I doubt it's going to be around much longer, though who knows.

Thanks- we just ripped a bathroom wall apart and spent $3k on the AC. Oh and accidentally painted the dining room lavender. Sweet. It's an adventure


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## MA_PE (Jun 4, 2009)

> accidentally painted the dining room lavender


I'll bet the swatch looked beautiful. It's when it gets extrapolated over the whole room that it gets overwhelming. Two words "Atrium White". I painted virtually the whole house this color. Want a different look? change the drapes.


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## squishles10 (Jun 4, 2009)

MA_PE said:


> I'll bet the swatch looked beautiful. It's when it gets extrapolated over the whole room that it gets overwhelming. Two words "Atrium White". I painted virtually the whole house this color. Want a different look? change the drapes.


yup thats exactly what happened! every other color turned out fine. we havent figured out how we want to fix it yet so its still there. we just didnt want red but we wanted a dark color so we ended up w this plum color. the bottom looks great.


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## Slugger926 (Jun 5, 2009)

DVINNY said:


> ^^ HOLY CRAP.
> I bought at about 1.5 times our annual income, but financed for 15 years, hence the $2,100 /mo.
> 
> I couldn't imagine 3 times, let alone 10 times the income.


We went at 1 times annual income. WOW, at 3 times we could have an McMansion on 2 acres around here, but of course that is probably what the rest of the country spends on a normal home. OK is great as far as the cost of living.


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## Katiebug (Jun 6, 2009)

Slugger926 said:


> We went at 1 times annual income. WOW, at 3 times we could have an McMansion on 2 acres around here, but of course that is probably what the rest of the country spends on a normal home. OK is great as far as the cost of living.


I wish we could have purchased a home in Connecticut for 1X annual income. At the time we bought, we spent about 2.5X our annual income (purchase price/gross annual income) - and we bought a "cheap" house compared to many of our peer group (our income is also lower than those folks due to Mr. Bug earning less than me). Even with Mr. Bug out of work for 8 months now, we can comfortably afford our house - but the mortgage and my student loans are our ONLY debt. We own our cars outright and don't use credit cards. A full half of our monthly expenses is the mortgage payment.

We do have PMI due to the fact that when we bought (30 year fixed @ 5.125%) we didn't have the money to put 20% down PLUS pay all closing costs (we bought in early '06). We still put $10K down, but that only amounted to approx. 5%. Then we paid another several thousand in closing costs. 20% down on a $190K starter home is still close to $40K. I don't know of many couples in their 20s who can rustle up $40K in cash - and had we bought in a more desirable town/location our $190K starter house would have been $300Kish at the peak.

Part of the problem is that young, college-educated couples today have a societal expectation that they get married, buy a house, then have kids. I was born when my parents were living in a 2 bedroom rental apartment, and they didn't buy a house until their 30s. My in-laws rented throughout their 20s and built their house shortly after my husband's older sibling was born. Today, when friends of ours got unexpectedly pregnant a few months after their wedding, there was a mad rush to buy a house so that they weren't bringing baby home to a rental (as if it was some horrible thing! They bought a condo which they promptly sold for a serious profit only 2 years later when baby #2 was on the way. They maxed out their buying power on a house at the peak of the market and are now struggling to refinance). Buying a home is THE thing to do to demonstrate that you're (in theory) a responsible, self-sufficient adult. 30 years ago, it was starting a family and taking responsibility for children. Now you buy a house first. Our friends were horrified that Mr. Bug and I made do in a 1 bedroom apartment for a year after we got married...everyone expected that we HAD to buy a house right away because it's what everyone else does.

In a different part of the country, for the $190K that we spent on our little 3 bed/2 bath Cape Cod with no garage on 0.25 acre, we could have had a new construction McMansion. Sort of depressing, in a way. Oh well - we made the decision to buy when we did and our house is primarily a place to live, not an investment.


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## IlPadrino (Jun 6, 2009)

Slugger926 said:


> We went at 1 times annual income. WOW, at 3 times we could have an McMansion on 2 acres around here, but of course that is probably what the rest of the country spends on a normal home. OK is great as far as the cost of living.


Holy Shite! I bought at six times annual income... and it's just a 1200 SF zero-lot line in a thirty year old PUD. Go California!


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## MGX (Jun 6, 2009)

Slugger926 said:


> We went at 1 times annual income. WOW, at 3 times we could have an McMansion on 2 acres around here, but of course that is probably what the rest of the country spends on a normal home. OK is great as far as the cost of living.


I have one for you; I spoke to a mining engineer north of Watonga who bought his home and paid it off in six months! Of course mining engineers make something like 70K-80K and houses around that area costs about 25K for a nice one.


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## SuperAlpha (Jun 6, 2009)

PMI only covers a percentage of the loan. For example, if you pay 10% down, a lender typically wants 20%. With PMI, the policy would be for 25%. Your PMI premium is for a 25% insurance policy for the lender. It can be reduced by how much you put down.


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## benbo (Jun 7, 2009)

MGX said:


> I have one for you; I spoke to a mining engineer north of Watonga who bought his home and paid it off in six months! Of course mining engineers make something like 70K-80K and houses around that area costs about 25K for a nice one.


There is actually a place in the USA where you can get a nice house for 25K? IS this a safe place? What's wrong with it? Tell me where it is and I'll write out a check for a handful.


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## MGX (Jun 7, 2009)

benbo said:


> There is actually a place in the USA where you can get a nice house for 25K? IS this a safe place? What's wrong with it? Tell me where it is and I'll write out a check for a handful.



Its a 2-3 hour drive to any place of significance or importance. There's a huge gypsum deposit in eastern Oklahoma, where the mine is and little else. Most of the nation's gypsum wall board is made there.

The machine making the board has been doing so since the 1920's and updated with electronic controls sometimes in the '80s. It has an equally archaic fire sprinkler system back when hydraulic analysis was still primitive so designers simply went overboard with everything.


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## squishles10 (Jun 7, 2009)

thats funny- my first college internship had me on a run to watonga. its actually on my resume. i did the final nspection of the hospital there (dont trust it!). housing in OK is cheap in general, and suffers from the same problem that texas does- theres so much land that youre not gonna make money off your house cuz you can always build more. and in watonga, there is a LOT of extra land. talk about BFE... good solid place if youre not into socializing, shopping, stop lights, etc.


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## Capt Worley PE (Jun 8, 2009)

IlPadrino said:


> Holy Shite! I bought at six times annual income... and it's just a 1200 SF zero-lot line in a thirty year old PUD. Go California!


Wow. We went about .9 slary for the same thing in sunny SC in 98. Of couse itw worth twice that now.



MGX said:


> It has an equally archaic fire sprinkler system back when hydraulic analysis was still primitive so designers simply went overboard with everything.


It is probably a pipe scedule system. The funny thing about them is they look like overkill, but a good many of them won't flow right.


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## Chucktown PE (Jun 8, 2009)

We bought our house in ATL at 2x both of our incomes. Of course, after our son was born my wife quit working and by that time it ended up being 3x my income. This next house will probably be 3x as well. At 4.5 - 5.5% interest and 20% down, that's still not that much of my take home pay.


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