The only thing I'll add to Hess and B3esq(which you really need to listen to on this), is....aww never mind, you're gonna do what you want to anyways. Good luck. Whatever mortgage you decide, make at least one extra payment annually directly on the principle. It's not hard to do(use tax refund). It will build equity faster than anything you can do.
Go ahead and say it!
Yes, we are going to do what we want to do, but good, poignant advice may change (is beginning to change my mind) what we want to do. 
biggest advice I can give you is.
Don't fall in love with the house. This is a business deal first. You need to make sure you can afford it. Do not let anyone tell you that this house is only, "x" above your budget so it's ok.
Also... LOCATION! You need to like where you live, but in some areas only a few blocks makes a big difference in price. Understand those differences. Example, My buddy had a home in Charleston County and I had one in Dorchester. His house was the same size as mine but had much more fine detail, molding, nicer windows, nicer doors.. Just everything was nicer, but His house was worth way less and the neighborhood was harder on home sales. Charleston county schools are crap while Dorchester are must better. So.. I sold my home in less than a month in April, He still hasnt.
Last point. Position yourself to either be in the home forever or buy so that you can have an easy sale in the future. This is important to me because I believe the job market in the future will require moves every 3-4 years to make sure you're on your game with a company. Make sure you can sell the home. Meaning no homes on Double yellow lines or crazy lay outs.
As a final thought, I like the idea of a 15 year mortgage, but man I've never lived in an area that has allowed me to afford that. A 30 year was all I could afford, unless I lived in the ghetto or over 1.5 hours from work. Gotta love the northeast.. Good luck.
15 year mortgages are nifty sounding things. You get your house quicker, and that must be a good thing (it's not, more on that later).
The problem is the payments are high. You have less safety margin. I've watched people lose their houses just because they had a 15 year mortgage. If it would have been a 30 year mortgage, with that 200-400 dollar lower monthly payment, they could have kept it during the tough times.
I'm very conservative financially, so I go with the 30 year mortgage and make higher payments.
But don't forget, when you finish paying it off, you lose the tax break. And what are you doing with it once you've paid it off? Are you really going to stay there until you die, or are you going to move? And at that, are you likely to move before you pay it off anyways? In which case, the equity building from making payments doesn't really do you anything. So don't blindly focus on paying it off. Focus with your eyes open, scanning the tax codes and several other things.
Same with maximizing a down payment.
I agree with FT on the 15 v. 30 year thing. I always try to set up a mortgage to have the minimal "Absolutely Must Pay" amount. Then, worst case, The Borg (who I work for, their motto is "You will be assimilated") fire me and I can drop down to the minimum, otherwise, I pay more towards the principal. I've never had a house that is paid off, so I can't answer the question about what I'll do once it is paid off, but near as I can tell, that means I'll be shelling out one large a month less money, or more accurately, putting one large a month towards student loans. As for the tax break, if you pay 10K/yr in mortgage interest and are in a 25% bracket, then the Feds are subsidizing you for $2500 and you are out (you lose) a net $7500. If you are paying 0 in morgtage interest and have a 25% tax bracket, then you get nothing off your taxes and you are out a net $0.
foxtrapper wrote: But don't forget, when you finish paying it off, you lose the tax break. And what are you doing with it once you've paid it off? Are you really going to stay there until you die, or are you going to move? And at that, are you likely to move before you pay it off anyways? In which case, the equity building from making payments doesn't really do you anything. So don't blindly focus on paying it off. Focus with your eyes open, scanning the tax codes and several other things. Same with maximizing a down payment.
Thank you! (thank you, thank you, thank you)
This blind allegiance to the mantra of big downpayment and paying off as quickly as possible - while not a bad strategy - is not the only way.
I'm half way through a 15 year mortgage. It barely made sense for me to itemize deductions this year, and next year I'll probably end up taking the standard deduction. So much for the tax benefits of home ownership!
I also have a boatload of equity. Don't get me wrong, that's not a bad thing. But it isn't doing anything for me. It isn't earning any interest and not making me any money. It is like having money stuffed under the mattress.
Again, I'm not complaining. In fact I consider myself very fortunate. However, I'm coming to the realization that the rush to pay the mortgage off has given me a security blanket, but that's all. Taking a 30 year loan and investing the difference might have, for me, been a better option.
All I'm saying is that there isn't a 'one size fits all' way of going about this.
As Doc noted above, keeping a mortgage for the tax deduction is spending a dollar to save twenty-five to thirty cents. If you really want a tax deduction, pay off the mortgage and give what you were paying in interest to your favorite charity. The tax result is the same, and I'd rather help a worthy cause than help a banker make his BMW payment.
Second, equity in a paid for house is doing something for you. The free cash flow generated by not having a mortgage payment is just like dividend income from a stock (although at a higher rate), and the price appreciation of the house is just like the price appreciation of a stock (although at a lower rate). Scott Burns (nationally syndicated financial columnist) has written extensively on this topic.
Third, if having a lower 30yr mortgage payment is better than a slightly higher 15 yr mortgage payment, having no mortgage payment is even better still. If you do it by employing the discipline to pay off a 30 in 15 or less, fine, but many people start out with that intention and never make the extra payments.
Finally, while it all sounds well and good to take out a big mortgage and invest the difference, I'm perfectly happy with the return I've gotten paying extra on my mortgage over the last eight years, especially when compared to what my other investments have earned over the same period. A guaranteed 5-6% annual return (from paying off a mortgage) is better than virtually any other investment you'll find.
I want to preface this with the fact that you guys are obviously more financially savvy than I am:
billy, your argument on the last page for big downpayment was to get equity in case of the need for a quick sale or if the market dropped more, yet on this page you insinuate that houses are GUARANTEED 5-6% appreciation per year.
Seems a bit contradictory, or am I missing your point?
He means that you are getting a "return" equal to your mortgage rate whenever you pay ahead on it. The savings in interest charges for every dollar you pay ahead can be more than you would earn than investing that money somewhere else, and of course there is zero risk in paying ahead.
He's not actually saying the house is an investment, or anything about its value.
Dr. Hess wrote: I agree with FT on the 15 v. 30 year thing. I always try to set up a mortgage to have the minimal "Absolutely Must Pay" amount. Then, worst case, The Borg (who I work for, their motto is "You will be assimilated") fire me and I can drop down to the minimum, otherwise, I pay more towards the principal. I've never had a house that is paid off, so I can't answer the question about what I'll do once it is paid off, but near as I can tell, that means I'll be shelling out one large a month less money, or more accurately, putting one large a month towards student loans. As for the tax break, if you pay 10K/yr in mortgage interest and are in a 25% bracket, then the Feds are subsidizing you for $2500 and you are out (you lose) a net $7500. If you are paying 0 in morgtage interest and have a 25% tax bracket, then you get nothing off your taxes and you are out a net $0.
yes but if you're in the 35% tax bracket and then the interest deduction drops you into the 25% tax bracket, it just saved you 10% on your whole year's income.
Strizzo wrote: yes but if you're in the 35% tax bracket and then the interest deduction drops you into the 25% tax bracket, it just saved you 10% on your whole year's income.
That's not how marginal tax rates work. The first $x is taxed at 10%; then your next $y is taxed at 15%; then your next $z is taxed at 25%; and so on. You get your full run up the brackets no matter how much you make. The whole thing isn't taxed at your marginal rate.
It takes something like $350k in taxable income to get to the 35% bracket. We're not talking about anything in that range here. It takes more than $125k taxable to get out of the 25% bracket, so based on Z31's income he's looking at spending a dollar in interest to save $0.25 on his taxes.
This is not to say that the tax deduction is bad if you're going to have a mortgage anyhow, but rather that having a mortgage for the sake of the tax deduction is not a sound financial decision.
Josh wrote: He means that you are getting a "return" equal to your mortgage rate whenever you pay ahead on it. The savings in interest charges for every dollar you pay ahead can be more than you would earn than investing that money somewhere else, and of course there is zero risk in paying ahead. He's not actually saying the house is an investment, or anything about its value.
You're right as to the 5-6% return. Paying off a mortgage (or any other debt) nets you a guaranteed return of whatever the interest rate is on the debt.
I did make a couple of statements about a house as an investment, though. Namely, a paid off house will create imputed income (from not having a payment) that, from a cash flow perspective, is just the same as or better than a dividend paying stock.
Example: suppose you have a $200k house. A 15 yr 80% mortgage ($160k) would have a principal and interest payment of about $1200/mo. Thus, if you had a lump sum of $160k to invest, you can effectively create $14.5k/yr in positive cash flow by paying off the mortgage. This is roughly equivalent to a dividend yield of about 9%. It's more equivalent to an 15 yr bond with zero credit risk, a 9% annual coupon, and final principal inflation adjustment. I challenge you to find an alternative investment anywhere near that good.
(I realize those numbers aren't exact, but they're close enough for our discussion.)
This doesn't address the appreciation of the house, which I (and some financial authors) believe should not be considered part of the "investment" in your primary residence. Reason being: on average across the country real estate appreciates at approximately the rate of inflation. Obviously, some goes up a lot more than that (e.g., the SF Bay area), some stays relatively constant (e.g., most rural areas), while some depreciates dramatically (e.g., Detroit). It is all subject to various fluctuations that are difficult if not impossible to predict.
Thus the appreciation of our primary residence is largely a function of where you live, which is likely determined by where you work, not where you would choose to invest. Some authors have called this the "zip code lottery."
Hey Billy, you're pretty smart... for a lawyer.
billy, thanks again for the insight!
Great explanation of everything you were talking about.
Dr. Hess wrote: Hey Billy, you're pretty smart... for a lawyer.
Don't forget that I was an engineer before I turned to a life of crime. 
z31maniac wrote: billy, thanks again for the insight! Great explanation of everything you were talking about.
My pleasure. Personal finance is a subject near and dear to my heart. If your curious, my own financial philosophy is a mixture of Scott Burns (particularly as regards investing and and expense management) and Dave Ramsey (particularly as regards credit and the emotional/spiritual aspects of personal finance).
Incidentally, it'd be worth your time to read a bunch of Scott Burns' columns on home ownership, which are archived at scottburns.com. (Note, this redirects to assetbuilder.com, which is the website of an investment company he co-founded about the time he retired from the Dallas Morning News.) His views are a little less extreme than Dave Ramsey's.
There is a lot of good advice here. The one thing I will add from personal experience is if you have two incomes, buy a place that you can afford with just one of you working. My wife and I bought a place a few years that was easy enough to afford with both of us working. My wife got injured and was out of the workforce for a while. We managed to keep all the bills paid, but boy was it tough. We sold that place and moved into a rental that cost half as much each month. Life got a lot easier.
One or both of you WILL have an income disruption at some point. Be prepared for it.
we've just bought our first house, first time buyers. do not let any one tell you what you can afford(you know when they look at your income and tell you how much you can spend) figure out yourself and stay in your budget, thats all i can say i know its not much, hope it helps
Type Q wrote: One or both of you WILL have an income disruption at some point. Be prepared for it.
This is a good point, I had gotten talked into an Aflac policy many moons ago. It is fairly cheap, and comes right out of my check, so I don't really miss the money. When i missed three months of work after my car accident it was abig help knowing that the duck would take care of some of my bills.
She is self-employed so has no such benefit.
I have Short term and Long term disability provided through work that both cover 60% of my salary. About what I made when I got my first job out of college in May '06.
z31maniac wrote: She is self-employed so has no such benefit. I have Short term and Long term disability provided through work that both cover 60% of my salary. About what I made when I got my first job out of college in May '06.
Check around, I got my Aflac policy through an insurance broker, not through an employer. I've had it through three jobs now.
Rather than making a new topics, I decided I'd add to this one.
How does all of this advice change for young people who want to rent houses?
I've always thought the first house I would own might be in the city or near an urban area (close to a college?) and that I would rent out to college kids who were using loans or parents money to pay for rent. I go to school with some many people who are paying outrageous amounts for rent, but because its close, or cool (ie large) place, they are more than willing to pay $200-300 over what they should be.
I know some other people who rent properties and they really like having their investments in something that people need...like rental units.
Any advice on this for someone who is starting a career?
All good advice. I'm going to toss out one other consideration: don't buy the most expensive house in the neighborhood. If you do, this means that if you do have to sell you are competing with much cheaper houses. You'll need to do some research to find the average.
JM has a valid point. I bought two houses that turned out to be two car garages in predominantly one car garage neighborhoods. Had I bought a 2 car garage in a predominantly 3 car garage neighborhood, I would have done better. Now I have a shop in the woods, which is a bit different.
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