Finance Question

Iamchris

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I am in the midst of buying another house. I thought I might be able to ask some of you money savvy folks an opinion.

Basically I can either do a conventional loan with 20% down, or a VA loan with anywhere from 0 to 20% down. I am weighing the benefit of the VA loan, if I take the money saved and invest it. For the purposes below, I said a 5% return. Obviously there are taxes and fees but I dont need the money and could mitigate that a lot using the right account. There is a VA funding fee for a VA loan, for the accounts below I used 1.5% and 3.3% which is relative to the money down, if any.
I think obviously an investment account IS a risk, but I think 5% is historically very conservative.


Stay with me... numbers.
If I put 20% down at 69600, I have 278,400 loan. 0% VA funding fee, 0 dollars initially invested, but I invest another 301$ per month(the difference between the payment of the 0 down loan monthly) into an account gaining 5%. After 30 years, my mortgage is paid and investment account is at 245,428.
On the other end of the spectrum, I put 0% down, finance 348K with a 3.3%($11484)VA funding fee(no PMI on VA). I have $58116 remaining that I saved from not doing a down payment and invest it into a 5% return, but dont contribute to this account monthly for the purposes of this comparison. After 30 years, the house is paid off, and the account is at $251174.
One more, if I put 5% down on the VA loan, 17,400 down. 330600 loan, with a 1.5% fee at $4959. The remaining 47,241 after down payment and fee is invested at 5%. After 30 years, house paid and investment at $265,326.

Am I thinking clearly here? It seems to me, that the investment is favorable, and that is if I dont see a higher rate of return.
 

sleek98

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Put it another way.

If you had a 100% paid off home would you mortgage it at 100% to put that money in the stock market?

If so do the 100% loan, if not then do the 20% loan.

The only thing I dont see in there is the cost for interest paid over the 30 years on the money that you have invested via having a higher mortgage.

The math works out in a perfect world, but its not a perfect world.
 
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KingBlack

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Are you disabled? If so there are further incentives for the veteran. Additionally what is the interest rate on the loan? I didn't really read the whole thing I just am through but those things make a difference. I would suggest doing a little more digging and research on rates and benefits before making any hard decisions
 

roadracer247

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I can't offer any advice other than we put an extra payment towards the principal every year. The math says we come out years ahead paying down our loan.
 

Sinister04L

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The only thing I dont see in there is the cost for interest paid over the 30 years on the money that you have invested via having a higher mortgage.

This. How much interest are you going to pay on each loan. You have to look at the total cost over the 30 years for each.
 

nxhappy

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most people move every 5-7 years

I would not put down a large chunk on the house, that money is better off in a 401k, stock market, roth , or rental property. Hell even gold. JMO as that's what I have done recently.
 

Iamchris

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Put it another way.

If you had a 100% paid off home would you mortgage it at 100% to put that money in the stock market?

If so do the 100% loan, if not then do the 20% loan.

The only thing I dont see in there is the cost for interest paid over the 30 years on the money that you have invested via having a higher mortgage.

The math works out in a perfect world, but its not a perfect world.
I'm not really sure to be honest. I do know though, that *some* financial advisors suggest that a mortgage is good debt for this reason. If there were gains to be made, and the math shows, then maybe, capitalize when you can, right?

As far as interest paid, the 0% down loan is 193k, the 20% down loan is 154K. But the payment being made compensates for that. For the 20% down loan, I calculated a lower payment and took the difference between that lower payment and the higher payment of the 0% down loan, and calculated it as a monthly deposit into the investment account. The end result is, either loan would be paid to 0 in 30 years. The same money overall was paid into the mortgage or investment account over the same 30 years. The 0% down home ends with a slightly larger account. And that is with a "safe" 5% return.
 

Iamchris

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most people move every 5-7 years

I would not put down a large chunk on the house, that money is better off in a 401k, stock market, roth , or rental property. Hell even gold. JMO as that's what I have done recently.
I'm with you here, which is what got me thinking down this path. I was originally thinking 20% down on conventional, but the VA loan is an option here. I crunched the numbers and it looks advantageous. I see larger returns AND put less skin in the game.
 

Iamchris

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This. How much interest are you going to pay on each loan. You have to look at the total cost over the 30 years for each.
I did, kind of. Because the account grows each month with the 20% down house, based on $301 being deposited (due to the smaller monthly payment from paying 20% down), the account balance is 245K. The interest paid is 154K.
On the 0% down house, I invest a larger initial chunk of cash and grow that cash without deposits to 251K. Meanwhile I pay a larger monthly payment (equal to the 20% down house + the investment deposit), resulting in 193K interest paid.
End result is still the same though... I pay the house to 0 in 30 years on either house, and the investment account is slightly higher on the 0% down home.
Actually, crunching the numbers in this way, a 5% down VA loan results in a lower fee. It drops from 3.3 to 1.5%, and a slightly lower monthly payment (than the 0% down house). 47K invested with $75 monthly deposits... end result is about 20K more in the investment account than the 20% down house.
But with that all figured out at 5% return, the 0% down house would pull ahead as rate of return increases. My current account has 13% average return over the last 10 years... I dont want to assume that would be the case, but it would make that a sweet deal for sure.
 

Iamchris

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No PMI with va loans?
No PMI on VA, there is a funding fee though. It ranges from 0% if you are disabled to 3.6% I believe. I would be at 3.3 because I used the benefit to buy my first house. If I put down 5% I would reduce it to 1.5%, so $4959, one time cost.
 

Iamchris

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I can't offer any advice other than we put an extra payment towards the principal every year. The math says we come out years ahead paying down our loan.
Its funny that you say this. I was talking to a financial adviser the other day, we also had a lady in the room who was a debt management counselor. The debt management lady said what you said... pay an extra payment, it will drastically reduce your loan length!
The financial adviser said, put that money in an account. It will grow and it has liquidity if you need it! You cant "easily" take money out of your house if you get in a jam. If you lose your job, despite owing less on your mortgage, the bank still will not lend to you. Also, he said, the last dollars you pay on your house are worth the least, those dollars have depreciated significantly over 30 years. The time value of money on the other hand, works in your favor. Thus... invest. I'm still young enough (barely) to be able to capitalize on long term investments.

Now, there is truth somewhere in there, but I'll tell you personally... if you dont build a house of cards, I think the financial adviser is correct. And this is a 180 from the way I used to think. If you have the wealth, make it work. If you have debt, reduce it... but I believe mortgages are the exception to that rule.
I am debt free, I do currently have a loan on my 1st house, but the house has a lot of equity in it, and my bank account is much larger than my mortgage.
I'm not a financial adviser, I would have thought about going 20% down and getting the house paid off ASAP, but I'm really looking at the numbers and having a hard time justifying it. I suppose one hand is full security with a half full glass. The other is a full glass with some risk associated. I cant see the stock market tanking for 30 years, but you never know.
 

PhoenixM3

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Are you disabled? If so there are further incentives for the veteran. Additionally what is the interest rate on the loan? I didn't really read the whole thing I just am through but those things make a difference. I would suggest doing a little more digging and research on rates and benefits before making any hard decisions
Exactly. VA funding fee is waived at a certain disability rating.
 

ON D BIT

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No PMI on VA, there is a funding fee though. It ranges from 0% if you are disabled to 3.6% I believe. I would be at 3.3 because I used the benefit to buy my first house. If I put down 5% I would reduce it to 1.5%, so $4959, one time cost.
Thanks.
What Is a VA Loan and How Does It Work?
looks to be $24k saving to go with traditional loans. You might be able to make that up in investment income. But you might not. I’d go with the sure thing.
 

Iamchris

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Why not a nice chunk down and 15 years instead of 30? You’d save a ton on interests.
This post is in the same lane as what I am talking about. The question is, with interest rates being so low, why would you do that? Yes you pay it off sooner, but that same money could be invested. 3.2% rate or investments returning historically over 10%(not saying 10% is guarenteed, but 5% is probably safe even if the market dumps for the long term). Also, the last dollar you pay on your house is worth the least. If you agree today to pay them 50K in 2040, 50K in 2040 will have depreciated significantly.
I'm not saying Im right, after all... I am asking as many questions. But it is a change of thought. My financial adviser has been making me think a lot more. BTW, he says 30 year loan... I was planning 15yr with 20% down.
 

PIPO

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I just bought a property down in FL. I went conventional with 25% down and a 15 year loan at 3%. Its 2 apartments and I’m converting a detached garage into another apartment. One is already rented and my wife is living the other one. I’ll buy a house using a VA loan before retirement in 6 months and use those 3 apartments as passive income. I’m planning on paying them off a lot sooner than 15. Considering how high property insurance is in FL, I’ll have the option to drop it.
 

nxhappy

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if you can afford the higher payments get a 15 year. Especially if they let you get away with 5% down (most banks do nowadays). And no PMI is just frosting on the cake. Then buy 10 shares of amazon and watch that shit grow to the moon =)
 

Blk91stang

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I'm 34 now and bought my house at 23. I've re-mortgaged 3 times now. 30 year to a 20 year to a 15 year and now back to a 30 year. What changed? Investments. I'm using the equity I've built into the house to buy into rental properties. If you have at least 30 years until retirement, there is no reason to get a loan less than 30. Use the savings to invest into your 401K, rental, or another investment. Those will yield higher than your mortgage interest and be way more liquid than your mortgage when you want to change things up. You don't know what your plans will be 10 years from now. Don't lock into anything less than 30. If you wish, pay a 30 at the 15 year payments which only adds a couple years onto a 15 due to the slightly lower interest of the 15.

I wanted to pay off my house as fast as possible in order to prepare to have more money available if I had kids with my (now ex) wife. Well we got divorced and my plans changed. Back to a 30, pulled the max equity from my house, lowered my monthly payments at the same time, and looking for the next investment(s) that interest me.

Just remember if you lock into a 15 year and you can't or don't want to make the higher payments say 10 years down the road and you wished you had the extra $300 a month for a new car or something else, you'd wish you didn't do the 15...
 

ford fanatic

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It's hard to build wealth having debt...

I would put down as much as I could on the conventional loan at a 15-20 year note and then bang out the mortgage as fast as possible, all while investing 15% of my income.
 
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