Explain the excitement over mortgage interest rates

[Chew Toy McCoy]

I have never attempted to buy a house. Never had the down payment and in the Bay Area house prices move more out of my reach by the second. Closest I’ve come to dropping that kind of money was buying a car. Figured out what monthly payment I thought I could reasonably pull off, signed the paper, paid that monthly payment for 6 years until it was paid off. Done.

I realize you are talking some serious interest on a loan of $500k+, but I fail to see how a slight variance in that rate would make me go from “I can’t afford a $500k+ house” to “Now I can afford a $500k+ house”. I’m asking because we are still in a housing shortage crisis (which I blame more on rental properties than anything else) and one of the causes being sighted is record low interest rates. Give what I’ve just said what am I missing? Either you can afford the monthly payment or you can’t. What does interest rate have to do with it?

 

[thekev]

They don't matter at all once you're past the point where you could afford the monthly payments at 0% interest. Prior to that, note that interest works on an exponential model. If you paid nothing for ten years, the amount owed after that time would be principal * (1 + percentage)^9, where percentage is in decimal form, so one would hope 0 <= percentage <= 1.0. Loan payments are typically fixed dollar amounts though, so they must be computed so that the principal balance decreases monotonically and the loan is paid off at the end of its term. Anything exponential increases pretty rapidly, so a small change in exponent can be a pretty big swing. If interest rates are temporarily low and they qualify for a fixed rate, they will pay less interest overall than they might buying the same thing later, assuming fixed property values in their market.

What Is Compound Interest?

Compound interest is the interest on a loan or deposit that accrues on both the initial principal and the accumulated interest from previous periods.

www.investopedia.com

 

[SuperMatt]

You should play with an online mortgage calculator. On a 500K house, the difference between 4% and 6% interest rate is over $500 a month, and $200,000 over the life of a 30-year mortgage. So yeah, if you can buy while rates are low, it is truly to your benefit.

 

[Gutwrench]

Low rates boosts buying power in any market not to mention families in homes can refi saving tens of thousands of dollars.

I’m familiar with SF. You live in an extraordinary market like people in NYC.

If mortgages were 10% your buying power might be $75k house. At 1.8% you might afford a $500k home. That’s quite a difference. However if a person’s income doesn’t support buying in that location then a 0% loan is out of reach. One either needs more income or to buy in a location reflective of it.

Over the years I commuted from Santa Rosa, Petaluma, Vacaville, and finally Mill Valley.

 

[Apple fanboy]

Generally in the U.K. it’s not having the 10% deposit that stops people buying rather than the repayments.
When I bought my first house in London we went from renting for about £500 a month, to paying a mortgage at £450 a month (I’m going back quite a few decades!). But the rental was a pokey one bed place where as the purchase was a much bigger two bedroom place.
So the only issue we had was saving the deposit. The repayments were lower than rent.

 

[Chew Toy McCoy]

Thanks for the answers and it makes more sense to me now. I was picturing it more like a credit card where there isn't a payment end date. You just pay more over a longer period of time.

 

[Eric]

Low rates boosts buying power in any market not to mention families in homes can refi saving tens of thousands of dollars.

I’m familiar with SF. You live in an extraordinary market like people in NYC.

If mortgages were 10% your buying power might be $75k house. At 1.8% you might afford a $500k home. That’s quite a difference. However if a person’s income doesn’t support buying in that location then a 0% loan is out of reach. One either needs more income or to buy in a location reflective of it.

Over the years I commuted from Santa Rosa, Petaluma, Vacaville, and finally Mill Valley.

It's insane, the median income needed to buy there is $350K a year and if you're not hooked up with a huge amount of capital for a down payment forget it. Great for those in big tech with stock options (which if can be used for a down payment if you can show it on your W2) but regular people are out of luck.

This is one of the reasons so many people live in a single home there, some have 3 generations of families under one roof. I also rented a house there for a year and spent in excess of $50K which was not sustainable so we left for the central valley, it's a good compromise because I'm close enough to travel to the city if/when I need to and I can afford to buy a home.

 

[Edd]

My wife and I are a bit unconventional in that we’ve never tried to buy. We have one car payment between us and no other debt, with decent incomes. Anyone else in our financial position around here would have bought years ago.

We look from time to time but never get inspired. The financial argument for it is not compelling to us. We manage to save >30% of our income in various retirement accounts and still travel/ski/eat out whenever.

If our financial advisor is right, I’m within a decade of retirement. With more time on my hands, maybe we’d get something we really want. All of my close friends own, but to us it just seems like a PITA and a money pit.

 

[Alli]

If our financial advisor is right, I’m within a decade of retirement. With more time on my hands, maybe we’d get something we really want. All of my close friends own, but to us it just seems like a PITA and a money pit.

And that is not the time to become a homeowner anyway. This is the stage where we are looking to get out of the house and the upkeep that goes with it and find a condo or apartment somewhere. I love my house, but I don’t think we’ll be able to manage it in another ten years.

 

[Chew Toy McCoy]

Sort of related. I feel if there is a housing shortage crisis then there should be a restriction % put on properties that are allowed to be rental properties in that area. There’s a lot of people buying houses just to flip into rentals for spare cash or their retirement plan which greatly increases house prices in a limited market.

The big winners in the last recession were property equity firms who bought up foreclosed houses and then rented them back out at a handsome profit, but they were so piss poor at managing the properties, you know, anything beyond just collecting the rent, that several were on the brink of bankruptcy until Obama bailed them out on his way out the door. To me that even outweighs Trump’s pardons of actual criminals. You have corporations profiting off the misery of millions and when they prove to be just as irresponsible as some feel the original mortgage signers were they get a nice big bailout.

 

[Edd]

And that is not the time to become a homeowner anyway. This is the stage where we are looking to get out of the house and the upkeep that goes with it and find a condo or apartment somewhere. I love my house, but I don’t think we’ll be able to manage it in another ten years.

Yeah, I totally get that. Yard work is a non-starter for me. She‘d like a garden and a private outdoor hang. We’ll get it somehow.

House prices in our area aren’t Bay Area bad but I find them outrageous. I look at the listings and laugh. It’s gotten worse with COVID because it’s desirable and northeast city folks are buying it up and working remotely. I get why they’re doing it but fuck ‘em all anyway.

 

[Yoused]

When I bought my first house in London we went from renting for about £500 a month, to paying a mortgage at £450 a month (I’m going back quite a few decades!). But the rental was a pokey one bed place where as the purchase was a much bigger two bedroom place.

Of course, at least in the US, rent includes property taxes, but a mortgage does not, so numbers like that would break even.

My mom learned about amortization schedules, and that was pretty interesting. The first payment is almost all interest and a very tiny bit of principle. The second payment is a tiny bit less interest, based on the change in principle, so the principle fraction goes up a tiny bit. The first couple decades go on like that, then you turn the corner and the principle fraction increases more rapidly.

The contract said that she was allowed to make extra principle payments, but they had to be on the schedule. So she started adding two principle payments to each mortgage payment, which amounted to easily leap-frogging two steps on the mortgage (I say easily because the scheduled principle payments were such a small fraction of the overall payment). She turned a 30-year mortgage into something she was able to pay off in a dozen (when you get past a certain point, adding principle on schedule becomes burdensome).

 

[Chew Toy McCoy]

And that is not the time to become a homeowner anyway. This is the stage where we are looking to get out of the house and the upkeep that goes with it and find a condo or apartment somewhere. I love my house, but I don’t think we’ll be able to manage it in another ten years.

My current roommate moved into my apartment as a result of him and his wife divorcing. They bought a house and he says it’s not all its cracked up to be when you also consider the cost of maintenance and repairs. I don’t think a lot of home buyers take that into consideration. I’ve lived in my apartment for over a decade and in that time they’ve replaced every major appliance in the kitchen including the kitchen sink (Ha!) and both bathroom toilets and it cost me nothing. The need for replacement doesn’t mean I live in a shithole. It’s a nice place but shit happens and stuff breaks down. In fact some of the issues I reported I thought could have just been repaired but instead they replaced.


I think for a lot of home owners they look at the cheapest possible option which could be repair but then they end up racking up costs with these band aids. Reminds me of a former employer who built his own PC because it was cheaper but over the years between failing parts and upgrades he probably spent more than if he just bought a Mac in the first place which wouldn’t have failed.

 

[SuperMatt]

Of course, at least in the US, rent includes property taxes, but a mortgage does not, so numbers like that would break even.

My mom learned about amortization schedules, and that was pretty interesting. The first payment is almost all interest and a very tiny bit of principle. The second payment is a tiny bit less interest, based on the change in principle, so the principle fraction goes up a tiny bit. The first couple decades go on like that, then you turn the corner and the principle fraction increases more rapidly.

The contract said that she was allowed to make extra principle payments, but they had to be on the schedule. So she started adding two principle payments to each mortgage payment, which amounted to easily leap-frogging two steps on the mortgage (I say easily because the scheduled principle payments were such a small fraction of the overall payment). She turned a 30-year mortgage into something she was able to pay off in a dozen (when you get past a certain point, adding principle on schedule becomes burdensome).

Most times on a mortgage the property tax is withheld on each monthly payment. Once the place is paid off, the bank no longer takes care of that for you and you have to pay the tax (usually 2x a year) to your local jurisdiction.

 

[Edd]

My current roommate moved into my apartment as a result of him and his wife divorcing. They bought a house and he says it’s not all its cracked up to be when you also consider the cost of maintenance and repairs. I don’t think a lot of home buyers take that into consideration. I’ve lived in my apartment for over a decade and in that time they’ve replaced every major appliance in the kitchen including the kitchen sink (Ha!) and both bathroom toilets and it cost me nothing. The need for replacement doesn’t mean I live in a shithole. It’s a nice place but shit happens and stuff breaks down. In fact some of the issues I reported I thought could have just been repaired but instead they replaced.


I think for a lot of home owners they look at the cheapest possible option which could be repair but then they end up racking up costs with these band aids. Reminds me of a former employer who built his own PC because it was cheaper but over the years between failing parts and upgrades he probably spent more than if he just bought a Mac in the first place which wouldn’t have failed.

If someone is the type to buy/improve/flip a property, then the $ argument makes sense. Most aren’t doing that.

But, the US culture pounds it into our heads that rent is “throwing $ away”. That can be true, but it ain’t always the case. You’ve gotta have a roof over your head and that comes with monthly costs, regardless of owning or renting.

I think many buy homes because they think they’re failures on some level if they don’t. The same thinking goes into having kids for some. “You’re supposed to do that, right?”

I say if having a house is something you truly want and will enjoy, then absolutely get a house if you can afford it. But some do it and resent their own decision. It’s nuts to me.

 

[Apple fanboy]

Of course, at least in the US, rent includes property taxes, but a mortgage does not, so numbers like that would break even.

My mom learned about amortization schedules, and that was pretty interesting. The first payment is almost all interest and a very tiny bit of principle. The second payment is a tiny bit less interest, based on the change in principle, so the principle fraction goes up a tiny bit. The first couple decades go on like that, then you turn the corner and the principle fraction increases more rapidly.

The contract said that she was allowed to make extra principle payments, but they had to be on the schedule. So she started adding two principle payments to each mortgage payment, which amounted to easily leap-frogging two steps on the mortgage (I say easily because the scheduled principle payments were such a small fraction of the overall payment). She turned a 30-year mortgage into something she was able to pay off in a dozen (when you get past a certain point, adding principle on schedule becomes burdensome).

We don't have property tax. Bills like council tax, heating and electric were all on top of both situations so no difference. But if we had bought a property similar to the one we were renting our mortgage would have been more like £350-£400 verses the £500 rent, so even better. And of course as property prices (nearly) always rise over time, you are building up equity. After 25 years you are rent free. We managed it a lot sooner than that as we moved out of London to a cheaper part of the UK. But have just taken out a 10 year mortgage on our place in the country.

 

[Chew Toy McCoy]

If someone is the type to buy/improve/flip a property, then the $ argument makes sense. Most aren’t doing that.

But, the US culture pounds it into our heads that rent is “throwing $ away”. That can be true, but it ain’t always the case. You’ve gotta have a roof over your head and that comes with monthly costs, regardless of owning or renting.

I think many buy homes because they think they’re failures on some level if they don’t. The same thinking goes into having kids for some. “You’re supposed to do that, right?”

I say if having a house is something you truly want and will enjoy, then absolutely get a house if you can afford it. But some do it and resent their own decision. It’s nuts to me.

I know a lot of people with rental properties from houses to small apartment complexes. For only one of those people it's their main income. They live like a king and love to complain about taxes and poor people. For the rest of the people I know with rental properties, it's extra income. I have a cousin whose wife is a large property manager and their apartment is part of her pay. Several months ago they bought a house about 2 hours away and instantly flipped to a rental and within a week had a tenant paying their mortgage indirectly.

I agree about the perception in the US that you are throwing away money by renting. In China buying a house is an even bigger priority, often a minimum requirement for a male to find a partner, and we have a huge Chinese population in the Bay Area. Often they'll buy a house with pooled money from their extended family.

As a lifetime renter so far, I'd say the biggest issue is rent increases that in the Bay Area happen like clockwork every year to the maximum that is legal with rent control. This is the first year I haven't gotten a rent increase. I guess in this case covid isn't all bad results and news. Earlier in the week I even got an email from the property management offering a $1,000 finders fee for any tenant referrals who move in.

 

[DT]

We considered a re-fi, but we're already in outstanding shape, and the offset for the closing, etc., would be about 5 years out, and we're starting to think we won't even be here in another 2. The value of our house (i.e., original purchase price vs. current, reasonable eval) has increased ~125% in ~ 20 years which is pretty insane, so we're way ahead of the curve.

@Chew Toy McCoy How old are you if you don't mind me asking[?] You can tell me to FO if you'd rather not disclose

My wife and I are a bit unconventional in that we’ve never tried to buy. We have one car payment between us and no other debt, with decent incomes. Anyone else in our financial position around here would have bought years ago.

We look from time to time but never get inspired. The financial argument for it is not compelling to us. We manage to save >30% of our income in various retirement accounts and still travel/ski/eat out whenever.

If our financial advisor is right, I’m within a decade of retirement. With more time on my hands, maybe we’d get something we really want. All of my close friends own, but to us it just seems like a PITA and a money pit.

Yeah, I totally get that. Yard work is a non-starter for me. She‘d like a garden and a private outdoor hang. We’ll get it somehow.

I can totally relate, the whole notion of equity is overblown in many cases, plus the related costs over every decade - and we're not really "yard people", we love our deck, but that could easily be a balcony at a condo.

 

[Chew Toy McCoy]

We considered a re-fi, but we're already in outstanding shape, and the offset for the closing, etc., would be about 5 years out, and we're starting to think we won't even be here in another 2. The value of our house (i.e., original purchase price vs. current, reasonable eval) has increased ~125% in ~ 20 years which is pretty insane, so we're way ahead of the curve.

@Chew Toy McCoy How old are you if you don't mind me asking[?] You can tell me to FO if you'd rather not disclose





I can totally relate, the whole notion of equity is overblown in many cases, plus the related costs over every decade - and we're not really "yard people", we love our deck, but that could easily be a balcony at a condo.

I’m 48. Might be choice of friends but I have a lot of them in the same situation. In the 90’s in the Bay Area, our 20’s age wise, you could still live fairly comfortably with a decent job and no college degree, and there really was no historical data showing things were going to change. My uncle bought a house as a paper route manager (guy who drops bundles of papers on corners for the kids to deliver) and his wife was a stay at home wife. My cousin bought a house as a warehouse supervisor at a small hair product distributor. There was a feeling we still had plenty of time we could wait before anchoring ourselves to decades long loans, didn’t even seem appealing. Then the dot coms hit and house ownership quickly became out of reach for everybody who isn’t highly career driven.

It looks like I fit the typical Trump voter demographic. I just don't blame everybody and everything except myself for my current situation. I had different priorities and enjoyed my time not being strapped to a mortgage or soul-crushing career paths and hours. I take responsibility for my actions or lack of. But that still doesn't give our corrupt government and hyper-capitalism a free pass.

 

[thekev]

It looks like I fit the typical Trump voter demographic. I just don't blame everybody and everything except myself for my current situation. I had different priorities and enjoyed my time not being strapped to a mortgage or soul-crushing career paths and hours. I take responsibility for my actions or lack of. But that still doesn't give our corrupt government and hyper-capitalism a free pass.

The issue there isn't just tech. It's that real estate is treated as a commodity, so pricing may not reflect actual demand. If the market was solely determined by people who want to live there, it would look different, particularly if local governments required residential construction at a rate proportionate to new office suites.