bostonbubble.com

[Renting in Mass]

I'm listening to a Planet Money podcast about strategic default, and it's got me thinking. When I do buy a house, would I be better off making a small down payment?

I've been planning on putting 20% down so I can avoid mortgage insurance and pay less interest over the life of the loan. But what about the idea of putting the minimum down, and leaving myself the option of strategic default? I've been putting off buying a house for fear of the worst case scenarios. Leaving the door open for strategic default would insure against losing my life's savings if some of the more dire scenarios occur.

I'm thinking the downside of the small down payment would be several thousand dollars in insurance and interest, while the downside of the big down payment could be many tens of thousands.

I know that one's ability to pull off a strategic default depends largely on state law, and whether the bank can sue you for walking away from the house. I know you aren't lawyers, but does anybody know (broadly speaking) if Mass is a state where it works?

Once the housing market and the US economy got on more secure footing, I would pay down the mortgage with the money I had saved for the 20% down.

I'm not interested in the morality of walking away right now. I'll cross that bridge once I decide if it makes sense financially.

[CL]

Not a good idea to put a small down payment. There are several reasons.

- As far as I understand, MA is a recourse state which means the banks can go after your assets other than your home if your mortgage is delinquent.

- Putting down a low downpayment makes it harder to refinance should deflation scenario plays out and mortgage rate remains low, or even drop further

- Low downpayment also means buying mortgage insurance, which is real monthly expense and can run up pretty quickly.

My advice is if 20% down payment represent all your life saving, then you should save a bit more, or consider buying a smaller house. Hopefully you can have 20% down payment and 1-3 year living expense when you buy. That will give you a better cushion to ride out the market cycle.

[Renting in Mass]

[Boston ITer]

[john p]

I wouldn't do it for strategic default, but loan remodification is something else.

We did a 5% down payment so that we could have more cash reserves for an emergency fund.

My wife got laid off so it was peace of mind that we had that cash available. Thankfully, we didn't need to draw from it, but it certainly gave us peace of mind. She's back to work with a better, higher paying job; so that is all good.

Best of luck and happy hunting.

[CL]

Renting in Mass - glad to hear about the cushion for living expenses. From my vantage point, there are enough well-respected economists arguing for the deflation case that I would not dismiss the possibility.

Boston ITer - 200K is indeed a lot of money. Doesn't mean you don't need it if you want to be financially prudent. Which is the reason why in a lot of countries other than US (especially countries that has been burnt by housing bubble before - Japan, Hong Kong, etc) young people live with the parents longer and save like hell for that downpayment.

[Boston ITer]

[Renting in Mass]

[balor123]

[balor123]

Mortgage rates could still go down. The government could just swoop in and replace the free market rather than driving it down and offer whatever interest they like. I think mortgage rates in Japan are something like 1 or 2% but they've had deflation for a long time. It looks like the US is determined to do whatever it takes to keep that from happening but it is still possible.

[GenXer]

Having $100k of emergency money is a start. You don't know whether it is 1-3 years expenses, or a 1 month of a very expensive lawyer, or a very expensive hospital stay. This is why it is called 'emergency' money. Having a downmpayment should be on top of that - otherwise, you are magnifying your risk in a multiplicative fashion (that is, risk doesn't add when SHTF - it multiplies). Having a house AND no savings is a recipe for disaster.

As far as having money for a business, this should be yet another bucket. Of course it would be better to start a business instead of buying a house. If your business is successful, you'll buy a house later. If not, well, back to the drawing board, but it is better to take risks while fully protected.

As far as 0% rates, this is peanuts. The payoff is much higher keeping the money in cash. If inflation is 10% in the future, AND the house prices are flat to down with high unemployemnt, you would be happy to have an opportunity to meet or beat inflation by investing at higher interest rates. So from that point of view, investing in a risky asset which can lose a lot of value vs. guanranteed small 'loss' due to inflation (which is 0 officially, though not really) is a no-brainer.

[CL]

GenXer has a point - having a home, on its own, means added risk for sudden cash need. Frozen pipes, busted boilers, etc. Who knows. For that reason, 3 yr living expense is not that extreme I think. Liquidity is something you remember only when you don't have it. Plus when making big investment decision, I typically love having more margin of error.

For buying a home vs. starting a small business, I don't think it's a apple to apple comparison. Just 2 different animals. And remember, the cash flow need for a small business is very unpredictable. It can range from being the next google to literally bankrupt you. Also, starting a small business is a lot of time committment. So personally I will stick to do the rent vs buy comparison, then do the salary job vs small business comparison.

[Boston ITer]