Selling For What You Paid Nearly 10 Years Ago in Lincoln Park: A 2/2 at 600 W. Drummond

This 2-bedroom at 600 W. Drummond in Lincoln Park has been on the market since October 2013.

This complex was built in 2003.

At 1274 square feet, it has hardwood floors in the living/dining room.

The kitchen has maple cabinets, granite counter tops and stainless steel appliances.

It has the features buyers look for including washer/dryer in the unit, central air and garage parking.

The balcony faces east, over Clark.

Originally listed at $425,000 WITH the parking included, it recently stripped out the parking and “reduced” to $399,999 with the parking $25,000 (although the listing description hasn’t really been updated to reflect that.)

Unit #307, directly below it and with the same square footage, is also on the market listed at $425,000.

This unit was last purchased in March 2004, or over 9 years ago, for $399,500 with the parking.

It basically has seen NO appreciation in nearly 10 years.

As Roma said, you have to live somewhere.

But with incomes stagnant and mortgage rates off their all-time lows, is zero appreciation the new norm for 1 and 2-bedroom condos in Lincoln Park?

Juliana Yeager at @Properties has the listing. See the pictures here.

Unit #407: 2 bedrooms, 2 baths, 1247 square feet
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  • Sold in March 2004 for $399,500 (included the parking)
  • Originally listed in October 2013 for $425,000 (included the parking)
  • Reduced (sort of)
  • Currently listed at $399,999 (parking is now $25,000 extra)
  • Assessments of $423 a month (includes cable)
  • Taxes of $5918
  • Central Air
  • Washer/Dryer in the unit
  • Bedroom #1: 16×12
  • Bedroom #2: 15×10

[/unordered_list]

158 Responses to “Selling For What You Paid Nearly 10 Years Ago in Lincoln Park: A 2/2 at 600 W. Drummond”

  1. I think part of the reason for no appreciation on this place is that it looks like nothing has been done to it since the place was built 10 years ago. Why should a place be worth more 10 years later if you haven’t invested anything into the place to keep it updated? Most things that you use for 10 years are worth less afterwards unless you do something to make them better rather than just older and used….

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  2. “It basically has seen NO appreciation in nearly 10 years.”

    You appear to be confused about why people own homes.

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  3. I looked at these when they were first built and just couldn’t see what justified the price. Granted LP is a great area and a walker’s paradise, Clark St is a college sh** show Fri-Sun. Even if the sellers did upgrade the unit a bit, I think they paid too much to begin with, unfortunately. I would rather go with the quieter streets off Clark like Lehman Ct or something.

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  4. “Why should a place be worth more 10 years later if you haven’t invested anything into the place to keep it updated?”

    80% to 90% of condos have had nothing done to them in the last 10 years. Heck, there are condos that haven’t had updating since the mid-1990s (basically 20 years.)

    Look around at the listings. It’s very unusual to see ANY updating in condos. But maybe they should be doing it Benjamon. But they don’t.

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  5. If there is no updating in 10-20 years, I don’t think you can automatically expect appreciation then. Why would someone pay more for your outdated condo now than you paid 10 years ago for a new one.

    It doesn’t matter condo vs house, if a place is outdated it isn’t going to sell for a premium.

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  6. I don’t think there is really reason to rip everything out and update. It’s got nicer cabinets, granite in multiple rooms and stainless steel appliances. Seems wasteful to rip that all out because it’s used just to put a new cut slab of granite on particle board cabinets with a slightly differently stained veneer wood; only to install newer stainless steel appliances with more digital buttons on them.

    The real issue with this place is that the location kind of sucks. $400,000 at over $300 psf to live on Clark street is a stretch even in a hot market. I suppose after 20% down and HOA fees the monthly payment is pretty similar to rent in the area. but what do I know, I haven’t been in the market to rent a condo in LP ever. I never once considered living there, not during or after college and graduate school. i felt more like a pioneer – HEAD WEST !

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  7. “80% to 90% of condos have had nothing done to them in the last 10 years. Heck, there are condos that haven’t had updating since the mid-1990s (basically 20 years.)”

    Why should they? As your parents found out the hard way, it’s very hard to get much ROI on your improvements.

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  8. ““It basically has seen NO appreciation in nearly 10 years.”
    You appear to be confused about why people own homes.”

    You got it all wrong, LP always appreciate, as long as you buy smart. But buying in LP can only be viewed in retrospect, because if the property appreciates, it’s smart, but if it depreciates, it’s dumb.

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  9. FYI – Unit 307’s listing offers a floor plan…

    If I was the owner/agent of 307, I would be pretty upset about listing the parking separate because unit 407 appears 25,000 less than the unit below it. These are both pretty plain and boring. I dont know if they fetch much north of 400k with the parking.

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  10. HD, I don’t think everything here needs to be ripped out at all. The kitchen is actually quite fine, the master bath is ok even. The second bath’s green tile and Hollywood lights date it though and could be a cheap and quick fix. The living room/dining room need to be deblahed too.

    I was able to buy an out of date home for cheap because it looked so dated. Yes, it still needs a new kitchen and baths but the simple painting and light fixtures we replaced and modern furniture I think have greatly increased the value and have had a better ROI than the kitchen and baths will. Updating those will be more for my own enjoyment over our ownership rather than to make money. However if I don’t update them, I can’t expect someone else to pay top dollar for it, or even what I paid as if they are dated now, they will be even worse in 20 years when I go to sell.

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  11. If it’s selling for the same now that it sold 10 years ago, it’s done more than not appreciate, it’s declined in value.

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  12. “However if I don’t update them, I can’t expect someone else to pay top dollar for it, or even what I paid as if they are dated now, they will be even worse in 20 years when I go to sell.”

    People pay top dollar all the time for properties with no updates. I see estate sales all the time that are selling for 4-5 or more times what the house cost 20-30 years ago. They’re still making a killing even after inflation.

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  13. “If it’s selling for the same now that it sold 10 years ago, it’s done more than not appreciate, it’s declined in value.”

    And? I bought my car a decade ago. It has declined in value greatly. But I needed to get from place to place and it was cheaper than renting a car.

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  14. this location sucks. to generalize the East LP real estate mkt based this POS condo in prob the worst location in ELP is seriously disingenuous. it is loud, on a busy street, and above a Best Buy. there are plenty of 2BR condos a block or 2 west of here on side streets that are seeing appreciation.
    here is a unit that saw >10% appreciation in the past 2 years:
    http://www.redfin.com/IL/Chicago/2714-N-Lehmann-Ct-60614/unit-3S/home/18928992

    why arent you asking if 10% returns for holding for 24 months are the new norms for for 2BDs in LP?

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  15. agree this part of clark street totally blows. at least they shut down the golden nugget

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  16. Why did the shut down the Golden Nugget? I agree, that is an ugly part of ELP on Clark St around there. But just off the street is very nice.

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  17. ” I see estate sales all the time that are selling for 4-5 or more times what the house cost 20-30 years ago. ”

    Most of those come with a ‘right to use the land’ that *has* appreciated. The structure itself went from being an asset 20-30 years ago to a liability (cost of teardown) today.

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  18. In the spring of 2008, having spent two days all over Lake View, LP and the GC seeing a couple dozen two bedrooms, we found a unit in this building that was simply the best option out of everything we had seen in the price range of $2,000-2,300/mo (the unit was in perfect condition, had a garage space, just a few blocks to the park, etc.). We were somewhat apprehensive about the state of things right there on Clark, but we had to get a place. We were literally about to walk out the door to go and sign a lease on the unit, when I called about a listing on Craigslist for a unit a few blocks east, which we stopped to see on our way to the lease signing. That was one of the more fortunate phone calls I’ve ever made. In the 2+ years that we lived on Lakeview in a big, elegant two bed overlooking the park (same price as the unit above Best Buy, though without central a/c, w/d or parking), I thanked my lucky stars every time I’d walk/drive past the Best Buy area (the Best Buy itself is arguably the most redeeming quality of that entire couple block stretch).

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  19. “the Best Buy itself is arguably the most redeeming quality of that entire couple block stretch”

    I had my wife (then newish gf) wait in the car while I bought the last xbox in stock from that bbuy. She was fairly sure she was being set up or scammed. Must have been 2004. Not sure I’ve bought anything from any bbuy since.

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  20. ‘[DZ, with the subtle welcome back]’

    Second!

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  21. Yes Sabrina, 1 property in a very undesirable part of LP sets the benchmark for all future sales. The vast statistical data on this site truly is amazing.

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  22. Let me get this right. Were gonna sit back and take shots at one of the nicest multi unit buildings in LP. Forget the updates. That’s the owners responsibility. You don’t need to put 15k into a place to update light fixtures, faucets, paint, window treatments, ceiling fans, and fireplace.
    There’s a few smart people on here, so let’s consider the alternative. Rents are approaching $2/sqft. Some newer developments have hit $3/sqft. The PITI on a 400k mortgage with a 720 credit score, is $2100 including the assessment.
    The rent on that same place is 2500/mo.

    I can promise you rent will continue on this upward trend. The interest rate squeeze coupled with strict banking underwriting, and if you haven’t bought yet, it’s certainly because you can’t.
    So say what you may about the inventory, but unless you want to move to a borderline neighborhood, LP, lakeview, wrigley, GC, rivNorth and parts of Bucktown, are your safest bets.
    And more importantly, if you want to control costs, buying is much cheaper. And if you don’t understand why, you’ve never utilized a mortgage or property tax deduction….

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  23. “I can promise you rent will continue on this upward trend.”

    You promise? Really?

    So rents can keep going up 10% or more a year for all of time?

    Who’s going to pay these rents? The 22-year old Iowa grad with $30,000 in student loans or the Northwestern grad who is $70,000 in debt with his art history degree? Or what about that Booth grad who is making $100,000 a year but has $200,000 in undergrad and graduate school loans? Is she paying escalating rents?

    As I keep saying- you can’t get blood from a stone. That’s why the housing market slowed when mortgage rates went to 4.75% and prices were rising. There’s only so much people can pay.

    It’s called “affordability” and it’s back to multi-year lows.

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  24. “Yes Sabrina, 1 property in a very undesirable part of LP sets the benchmark for all future sales. The vast statistical data on this site truly is amazing.”

    I can find dozens every single day in LP and Lakeview that are similar to this. There is also a handful, probably about 15% or so where long term owners are making some money (or at least are back to breakeven.)

    Every weekend I’ll cover another one- just for fun!

    It’s still been a losing story to own a smaller condo in LP- especially when you add in all of the opportunity costs missed (could have had that down payment in the stock market!) and expenses. Similar to Lakeview. All those poor 20-somethings who bought in the last 5 years. Most are going to lose money when they sell. Mortgage rates are key. If they go to 6% all the recent purchasers will be screwed when they go to sell. That 2/2 is MUCH more expensive per month at 6%.

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  25. “here is a unit that saw >10% appreciation in the past 2 years:
    http://www.redfin.com/IL/Chicago/2714-N-Lehmann-Ct-60614/unit-3S/home/18928992

    why arent you asking if 10% returns for holding for 24 months are the new norms for for 2BDs in LP?”

    Yes- let’s talk about this property jfmiii. It’s a good example of what is going on out there. We’ve talked about this complex of buildings on Lehmann several times before on CribChatter. These were new construction at the height of the boom in 2006. Several Blackhawks players bought top floor units in these buildings (both took losses when they sold a few years ago.)

    This seller hasn’t seen “10% returns for holding 24 months”.

    This seller bought in 2006 for $573,000. He just sold for $500,000.

    Wow. That’s a pretty sizable LOSS. Wonder what you would have paid in rent during that time versus basically a $100,000+ loss (when you add in realtor fees, transfer costs, assessments etc.)

    Gosh- the more I look around the more I’m convinced that LP is actually one of the WORST of the GZ markets over the last 10 years. Bucktown, Lincoln Square, Andersonville and some other neighborhoods appear to have bounced back stronger and are a much better value for sellers.

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  26. ” if you haven’t bought yet, it’s certainly because you can’t”

    Hear that, all you renters? You haven’t remained renters for any reason other than you’re no-good, broke-ass, low-credit-score *losers*.

    If that ain’t a sign that we’re in a bubble, I dunno what is.

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  27. “This seller hasn’t seen “10% returns for holding 24 months”.

    This seller bought in 2006 for $573,000. He just sold for $500,000.”

    There appears to be a PIN snafu at the recorder. And some address confusion with the assessor.

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  28. “Hear that, all you renters? You haven’t remained renters for any reason other than you’re no-good, broke-ass, low-credit-score *losers*.
    If that ain’t a sign that we’re in a bubble, I dunno what is.”

    He might be right though. I think I am the last renter standing, subject to whatev bobbo is up to.

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  29. I actually live in a unit in this building. I completely agree the location being directly on Clark isn’t the nicest, most relaxing area. It actually kind of sucks. Lot’s of college students have puked by the entrance doors. So getting the Sunday Times downstairs is always a pleasant experience when there isn’t puke. Living above Best Buys isn’t bad. Building is very well insulated so hearing the neighbors isn’t much of an issue. A lot of young professionals live here. Some of the younger renters are getting help from parents. Some families. Nice mix of people and neighbors. The building has cracked down on the younger residents and the loud parties which was an issue as everyone was renting their unit cause it wouldn’t sell. It’s much better now. I think the best part of the building is the convenience. In unit washer/dryer, heated parking, well managed, close to the park, guest parking, and near restaurants/stores. For me, I prefer a different neighborhood and a quieter, prettier street. For convenience, amenities, in this part of Lincoln Park/Lakeview, it’s hard to beat this location.

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  30. for every story of some kid with student loans up the wazoo, I can find you just as many who’s parents paid for their college… the first kids are living with their parents, the second kids are buying or renting condos in RN and LP

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  31. I think this is a decent price for the unit (and I rarely think anything is priced appropriately). If I was looking for a 2/2, I would pay $400K for this (with parking).

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  32. “This seller bought in 2006 for $573,000. He just sold for $500,000. ”

    No. This seller bought for $450k in 2011 and just sold for $500k.

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  33. “I think I am the last renter standing”

    Where did Sabrina buy?

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  34. and yeah sabrina affordability is at 3 year lows… when nobody wanted to buy a home AT ALL and rates were the same as today… great comparison… why not compare it to say years prior to 2008, oh wait, because homes today are STILL MORE AFFORDABLE THAN ANY TIME BEFORE 2008 all the way back to 1980! look at the damn chart! http://research.stlouisfed.org/fred2/series/COMPHAI

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  35. “No. This seller bought for $450k in 2011 and just sold for $500k.”

    Really looks like RF has it incorrect, if one refers to the deed records.

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  36. I’d still rent but the rental market for SFHs is tight and expensive in UMC suburbs, and more often than not, they haven’t been updated in a while.
    Also, because I bought, I was able to rehab exact how I wanted to. Now I’ve got IKEA and Pottery Barn *EverywherE* and it’s awesome, so awesome.

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  37. “I’d still rent but the rental market for SFHs is tight and expensive in UMC suburbs, and more often than not, they haven’t been updated in a while.”

    $7k+ a month for a 4 bedroom that isn’t a damn shack in a decent (but still shit compared to the Sears School) attendance area, right?

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  38. Okay Sabrina –
    I will agree with you that purchasing a 1 or 2 bed with a short-term hold has never been a good idea. Sure some who purchased a distressed 1 or 2 bed over the past couple of years will just fine, but the vast majority will lose money after you factor in transaction costs. However, if you you you plan to stay in a property for over 5 years, you would be so wrong to advise someone to rent. Take this Clark property (which I hate by the way). If you were looking to live in this property for a period of 7 years and had to decide if you should rent or buy, what would a financially savvy person do? Let’s assume the following:
    Rental Price $2,500 per month fixed
    Sale Price $380,000 – with $10k in closing costs and $22,000 closing costs on the way out.
    Total rents paid – $210,000 over 7 years
    Total Housing Expense with 20% down and a 7/1 Arm at 3%
    – Interest $63,840
    – Assessments – $35,532
    – Taxes – $41,429
    – Transaction costs – $32,000
    Total Purchase Housing expense = $ 172,801

    Of course this is a simple “back of the napkin” approach as we are to factoring opportunity costs, tax savings, maintenance costs, rent and property appreciation / depreciation, ext, but how do you look at this and see how paying $210,000 in rents is a better option than paying $172,800 to own the property? Owning the property saves you $37,200; holding the property’s value constant and factoring in closing costs. I would love to hear your side of this as this is a very simple example of why the financially savvy have all the money and the financially flawed do not. Not to mention that this is on a property that has high assessments and really no utility. If you consider the same type of property with normal assessments (no elevator, ect), you can add another $25,000 to the savings for a total of over $60,000 with owning vs. renting.

    If you look at this same example and use a Lincoln Park townhome, the savings are 2 – 3 times what I listed above. Why do you think the townhome market was so insane in Lincoln Park over the past 2 years? Do you think the buyers of these townhomes are not smart and not well informed people? With interest rates as low as they are, renting long-term is a very bad decision.

    I would love to hear your rebuttal…

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  39. “how do you look at this and see how paying $210,000 in rents is a better option than paying $172,800 to own the property?”

    because she adds in the principal payments to make it fit her view of the world.

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  40. ““how do you look at this and see how paying $210,000 in rents is a better option than paying $172,800 to own the property?”
    because she adds in the principal payments to make it fit her view of the world. ”

    no chuk and chuckles, she won’t pretend mortgage interest will continually cost 3%/yr for 7 years and she won’t pretend RE taxes & assessments will be flat for 7 years.

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  41. “no chuk and chuckles, she won’t pretend mortgage interest will continually cost 3%/yr for 7 years”

    I’m guessing you don’t know how 7/1 ARMs work…

    “and she won’t pretend RE taxes & assessments will be flat for 7 years.”

    He pretended rent would be flat too. Sounds to me like a fair trade-off, no?

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  42. “I’m guessing you don’t know how 7/1 ARMs work…”

    Don’t EVEN go down that road girl. If I had a dollar for every time I heard “you can just refinance or sell when the ARM adjusts” I’d be a rich rich man

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  43. No one was talking about years 8+. He was under the incorrect belief that the rate would change during the first 7 years.

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  44. “I would love to hear your rebuttal…”

    I love it how you have to use a 7/1 ARM (ha! ha!) to make this work.

    What percentage of mortgage applicants are applying for ARMs right now? About 5-7%. Everyone else is getting MUCH more expensive money (which is only going to be rising over the next several years.)

    Why don’t you give me some realistic numbers?

    Because you can’t.

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  45. “why not compare it to say years prior to 2008, oh wait, because homes today are STILL MORE AFFORDABLE THAN ANY TIME BEFORE 2008 all the way back to 1980! look at the damn chart!”

    So you’re comparing it to the years when housing was a massive bubble and the most unaffordable EVER and saying because we’re not back to that it’s okay?

    The reason that housing sales have slowed Sonies is because it’s suddenly not affordable for about 80% of the population that has to buy middle class housing. A $400,000 house in Park Ridge is NOT middle class housing. A $250,000 house is. But a combination of price increases and mortgage rates rising is again pushing people to spend more than they wish on a depreciating asset. And they are balking at doing so. And it’s only going to get worse. Something will have to give. Either prices will fall again or mortgage rates will have to test the all time lows.

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  46. “No. This seller bought for $450k in 2011 and just sold for $500k.”

    So they made 2% to 3% after transaction costs? Wow. Better than losing money- that’s true.

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  47. “for every story of some kid with student loans up the wazoo, I can find you just as many who’s parents paid for their college”

    The colleges themselves can tell you how many kids actually pay it all in cash (thanks to mom and dad.) It’s not that big of a percentage. So, yeah, Sonies, if you live in certain neighborhoods with rich college kids you will see some more that don’t have the loans. But it’s not the norm. And certainly not for the thousands of condos in the downtown neighborhood.

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  48. “What percentage of mortgage applicants are applying for ARMs right now? About 5-7%. Everyone else is getting MUCH more expensive money (which is only going to be rising over the next several years.)”

    Why in the world would you get a loan with a fixed term longer than you plan to stay?

    “What percentage of mortgage applicants are applying for ARMs right now? About 5-7%.”

    As usual, wrong.

    “So they made 2% to 3% after transaction costs? Wow. Better than losing money- that’s true.”

    Yes, like renters do.

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  49. “So they made 2% to 3% after transaction costs? Wow. Better than losing money- that’s true.”

    Did he buy it for cash in 2011? If not, you might want to check your math on his ROI….

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  50. Sabrina, quick math quiz for you:

    Let’s say you have $100k in the bank. You use that $100k to buy a 500k house with 20% down. You sell the house the next day for $550k. You now have $150k in your bank. What % return did you get on your money?

    a) 10%
    b) 50%

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  51. chuk, you forgot to factor in transactions costs.

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  52. “chuk, you forgot to factor in transactions costs.”

    I was trying to keep it simple for Sabrina. Let’s say it was a FSBO and there were none. Or you can say they it sold for 570k with 20k transaction costs. Doesn’t matter. Basic math.

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  53. Sabrina,

    Why would someone not be approved for a 7/1 ARM? They are easy to get as a 30 year fixed, especially when you consider the qualification of most who are buying a property like this. And, why would anyone who planned to move in 7 years pay the interest rate premium (insurance as I call it) on a 30 year when a 7/1 ARM is available? A 30 year fixed would cost you an extra $27,000 in interest expense over the 7 year period (4.25% vs. 3%). What scenario in year 8 do you see that could possibly cost $$27k? I will reiterate what I said above, ” this is a very simple example of why the financially savvy have all the money and the financially flawed do not”. I also will reiterate that this is a property I would not buy (for many reasons), and it still makes more sense to buy it rather than rent.

    Learn from us Sabrina and you can create a blog that actually helps people. You would be so much more respected if you highlighted scenarios as I did above. Explain to people the cost of money and create examples where it makes more sense to buy vs rent, or where it makes more sense to rent vs. buy. There are 100’s of examples of each, and you could actually educate people rather than mislead them.

    I will come up with a town home example later today. Would love to hear your comments.

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  54. “So you’re comparing it to the years when housing was a massive bubble and the most unaffordable EVER and saying because we’re not back to that it’s okay? ”

    are you saying that we’ve been in a housing bubble since 1950?

    I can’t even argue with such stupidity

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  55. “So, yeah, Sonies, if you live in certain neighborhoods with rich college kids you will see some more that don’t have the loans. But it’s not the norm. And certainly not for the thousands of condos in the downtown neighborhood.”

    Is that not what we are arguing about? Most ‘rich college kids’ and urban professionals live in the urban core of this city… how many poors do you see living in RN and LP? Thats why smart people with lots of money are building things to rent out for $3 a sqft/month

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  56. ” this is a very simple example of why the financially savvy have all the money and the financially flawed do not”.

    This is correct.

    “Learn from us Sabrina and you can create a blog that actually helps people.”

    Not gonna happen.

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  57. Sabrina? No comments on the buy vs rent? Where did you go?

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  58. “Learn from us Sabrina and you can create a blog that actually helps people.”

    Ha! This blog has been around for 6 years helping thousands of people.

    Don’t even make me laugh.

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  59. “Why would someone not be approved for a 7/1 ARM?”

    Ask a mortgage broker Steve.

    All I know- as of this summer- the % of mortgage applications that were 7/1 ARMs were 5-7%. That is it. If someone else has some data that says otherwise, please link to it.

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  60. ““What percentage of mortgage applicants are applying for ARMs right now? About 5-7%.””
    “All I know- as of this summer- the % of mortgage applications that were 7/1 ARMs were 5-7%.”

    There is a big difference between “ARMS” and “7/1 ARMSs”. When you include 5/1 ARMs, the percentage is more than double that.

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  61. “Ask a mortgage broker Steve.”

    It’s not a question of getting approved for one. I guarantee that if you get approved for a 30 year, you will get approved for a 7/1 arm for the same amount. The problem is, many people get bad advice from people who have no idea what they are talking about, and don’t apply for the appropriate product.

    In general, if you are buying with a time horizon of 10 years or less, you are stupid not to get a 5/5 or 7/1. Note, I’m not talking about buying MORE house because of the lower rate. I’m talking about buying the SAME house as you would with a 15 or 30 year fixed.

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  62. btw, Jordan’s house going to auction:

    http://www.nydailynews.com/sports/basketball/photos-michael-jordan-jaw-dropping-mansion-sale-article-1.1508891

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  63. I got an invitation in the mail for the auction. If anyone wants to split the cost of buying the place with me I’ll put a bid together.

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  64. that mansion is 90’s tacky garbage and is overpriced by at least 100%

    needs millions in renovations just to get rid of some of the ugly useless shit like that circular pool

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  65. “that mansion is 90?s tacky garbage and is overpriced by at least 100%”

    Did I read that they lowered asking from 28mil to 7mil?

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  66. I thought the bidding was starting at 22mil

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  67. Just found what is was. They took 8mil off ask, they didn’t lower it to 8 mil.

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  68. Isn’t one of the problems for the Jordan house that the location is kinda meh?

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  69. I used to work at the best buy when it opened, back when i was working my way through grad school. I used to marvel at the people who could afford to live in that building.

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  70. “There is a big difference between “ARMS” and “7/1 ARMSs”. When you include 5/1 ARMs, the percentage is more than double that.”

    So 10% of the market is ARMs? (either a 5/1 or a 7/1?)

    Do you have a link for that? That’s not what I’ve found but I’m not a mortgage broker.

    Either way- it remains a very small part of the market. The average buyer isn’t using that product.

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  71. “So 10% of the market is ARMs? (either a 5/1 or a 7/1?)”

    It was 16% in June. But that is out of the whole pool or mortgages/refis. How many of those are “life” houses vs “temp” 2/2s? I don’t have stats on it, but I think you will find the % of 2/2s financed with ARM’s is much higher than the overall average.

    http://www.zerohedge.com/news/2013-07-24/arms-adjustable-rate-mortgage-applications-soar-2008-pre-lehman-mania-levels

    bottom line: If you plan to move in <10 years, you are FOOL not to get an ARM. Getting a 30 year mortgage would be like a 75year old person buying 100 year term life.

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  72. “Either way- it remains a very small part of the market. The average buyer isn’t using that product.”

    1) 16% is not “very small”
    2) We aren’t talking about the “average buyer”. We are talking about a 2 bedroom condo buyer. Believe it or not, that isn’t the entire real estate market.

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  73. 2) We aren’t talking about the “average buyer”. We are talking about a 2 bedroom condo buyer. Believe it or not, that isn’t the entire real estate market.

    In Chicago, that IS the average buyer. We’ve asked Gary and I’ve asked other real estate agents who work in the GZ. Their clients are NOT using ARMs in wide numbers. In fact, it’s still quite rare.

    But everyone is an idiot and only you, chuk, are a genius.

    Rates are going up again- on ALL products. Mortgage brokers expect them to be back at 5% for the 30-year fixed by the end of the year as the taper is back in play.

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  74. “bottom line: If you plan to move in <10 years, you are FOOL not to get an ARM. Getting a 30 year mortgage would be like a 75year old person buying 100 year term life."

    By the way- the number of people getting ARMS is up because, gasp, they cannot afford a 30-year mortgage! They can't afford 5% rate. So they will do whatever it takes to get the lower monthly payment and the only way to do that is to get an ARM (similar to what we saw in 2005-2006.)

    It's not about buyers being financial geniuses and going for the best product for them. No! It's about affordability.

    And all these people are getting adjustable rate mortgages at a time when rates are only going to move higher. Lol. What a nightmare in a couple of years.

    Even at 5% rates are near all-time lows.

    Our economy is f*cked.

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  75. Next spring should be interesting. Significantly higher mortgage rates plus higher prices. What will give?

    NAR thinks prices, nationally, will still go up another 6% next year even though they expect incomes to be flat. But here in Chicago, we’ve already seen a slowing in some markets.

    Although the upper end is still going gangbusters. But that is because the stock market keeps hitting new highs.

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  76. “In Chicago, that IS the average buyer.”

    Except the 16% is a NATIONAL average. You do know that Chicago isn’t the only real estate market in the world, right?

    “But everyone is an idiot and only you, chuk, are a genius.”

    Thanks.

    “Rates are going up again- on ALL products.”

    Wrong.

    “Mortgage brokers expect them to be back at 5% for the 30-year fixed by the end of the year as the taper is back in play.”

    Wrong again.

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  77. “It’s not about buyers being financial geniuses and going for the best product for them. No! It’s about affordability.”

    Not everyone is as ignorant as you when it comes to mortgages.

    “Significantly higher mortgage rates plus higher prices. What will give?”

    Significantly higher? You SURE about that….

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  78. Significantly higher? You SURE about that….

    No. Not if the Fed is psychotic and decides to NEVER taper (which is a distinct possibility after listening to what several of the Fed Presidents had to say in recent weeks.)

    But if they DO taper- then rates go up. And some of the Fed Presidents have said they’re looking for a consistent 200,000 a month job gains and we’re at 194,000 over the last 12 months. So it’s in their range.

    I don’t think they’ll do it in December, but stranger things have happened. The bond market is acting like it might be on the table after all. The bond market is going to push the 10-year yield back to 3% sooner, rather than later. That will push mortgage rates back up to 5%. And that means housing costs will be about 33% for that buyer versus a year ago. It’s a significant difference (as we saw over the summer when housing sales abruptly slowed nationally.)

    In fact, in October, the home builders reported the lowest foot traffic in 2 years (and rates weren’t even THAT high in October.)

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  79. And I meant significantly higher mortgage rates compared to last spring when they were at record lows. 5% is a huge difference from what we saw last year.

    Something will have to give. Incomes aren’t rising.

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  80. Affordability is back up to 40% of consumer income. http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2013/11/Mtg%20Payments%20as%20%25%20of%20consumer%20income.jpg

    We still have a bit of a ways to go to hit the 65% threshold of ’06, but it looks like we’re well on our way.

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  81. “And I meant significantly higher mortgage rates compared to last spring when they were at record lows”

    moving the goalposts again… what happened to your SKYROCKETING RATES call of a few months ago? Oh right, the rates are back to 4-4.25% on a 30 year again… just keep hoping that rates are all of a sudden skyrocket when of course they are not going to for decades, maybe sometime in your life you might be right, even a broken clock is right twice a day!

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  82. My only regret about getting a 5/1 three years ago was that I didn’t get an interest only instead. While the 5/1 gave us (slightly) greater principal reductions, an interest only would have given us (slightly) greater tax deductions, not to mention lower monthly housing costs.

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  83. I like how the average consumer as a $1,300 a month mortgage based upon an average new priced home. But they fail to account for taxes which can account for up to $700 a month like my case!

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  84. “My only regret about getting a 5/1 three years ago was that I didn’t get an interest only instead. While the 5/1 gave us (slightly) greater principal reductions, an interest only would have given us (slightly) greater tax deductions, not to mention lower monthly housing costs.”

    When used properly, ARM’s and IO loans are the best products on the market. The problem is, too many people don’t use them properly.

    If you can get a 30 year fixed mortgage for 2k a month, or a 5/5 ARM for 1700 a month on the same property, and you are going to be there less than 10 years, then the ARM is a smart choice. But too many people just spend that same 2k a month on an ARM and buy a bigger house.

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  85. gringozecarioca on November 11th, 2013 at 3:15 pm

    “My only regret about getting a 5/1 three years ago was that I didn’t get an interest only instead. While the 5/1 gave us (slightly) greater principal reductions, an interest only would have given us (slightly) greater tax deductions, not to mention lower monthly housing costs.”

    ROFLMAO… I always found it funny, how for years you never once responded to one of my comments… obviously you weren’t paying attention to me either.. I literally must have said it hundreds of times…

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  86. “I like how the average consumer as a $1,300 a month mortgage based upon an average new priced home. But they fail to account for taxes which can account for up to $700 a month like my case!”
    I think that just goes to further illustrate how much of income goes into housing. Taxes and assessments (in case of condos/townhomes) add to it even more.

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  87. “But too many people just spend that same 2k a month on an ARM and buy a bigger house.”

    AKA the american way.

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  88. “moving the goalposts again… what happened to your SKYROCKETING RATES call of a few months ago? Oh right, the rates are back to 4-4.25% on a 30 year again… just keep hoping that rates are all of a sudden skyrocket when of course they are not going to for decades, maybe sometime in your life you might be right, even a broken clock is right twice a day!”

    Yeah- I would say going from 3.25% to 5% is pretty much skyrocketing (in just a few months time.) That’s what it did this year. It was the fastest change on the bond yields in over 20 years. So then we’re back down to 4%-4.15% (or whatever the jump on Friday did to the rates- I didn’t check.) The rates didn’t fall low enough to make a difference to the housing market though (would have to be under 3.75% to do anything.)

    Do you think that the Fed will NEVER taper Sonies? The Fed has $4 trillion in debt at the end of this year. Another year would be about $5 trillion. I’m not saying either way. Some of the Fed Presidents have said that Japan has tons of debt and nothing bad had happened to their economy, so why not just keep adding it on? And others wanted to taper in September (a real opportunity lost.) They will regret not doing it in September but that’s water under the bridge.

    The taper (and NOT a rise in interest rates) will bring mortgage rates higher. It was QE that brought them to record lows (not the cut in the Fed fund rate.) They won’t raised the Fed fund rate for years and years. But that doesn’t mean we won’t see mortgage rates back above 5%. We’ve already seen that 5% caused the housing market to slow pretty dramatically in most cities (which is what spooked the Fed.) What will 6% do? Are you buying that 2/2 $400,000 at $3000 a month versus $2000 a month? I don’t know.

    None of us has lived through a rising rate environment. We only know falling rates (since they’ve been falling for over 20 years now.) I don’t think we have any idea what will result for housing, as an asset class, when it gets harder for the next generation to own it.

    But, if Sonies is right, then the rest of the economy is truly in trouble because that means the Fed will NEVER taper. Some people believe they won’t be able to (stimulus has never ended well for any nation.) In our economy, it’s a complete unknown.

    If the economy is making 200,000 jobs a month by next March, it would be shocking for the Fed NOT to start the taper. That means the bond market will have already priced it in. We’ll see over the next few weeks- if they start pricing it in now.

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  89. just keep hoping that rates are all of a sudden skyrocket when of course they are not going to for decades, maybe sometime in your life you might be right, even a broken clock is right twice a day!

    Sonies- do you honestly think that a 30-year bull market is just going to stay flat for decades?

    http://www.ritholtz.com/blog/wp-content/uploads/2013/05/perspectives.jpg

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  90. oh ze, I was paying attention.

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  91. “But too many people just spend that same 2k a month on an ARM and buy a bigger house.”

    Did anyone see the recent house hunters with the 20-something couple living in Manhattan Beach? They had been married for 2.5 years. She sold radio advertising. He was a “health care consultant” to government agencies and schools.

    Their budget?

    $1 million.

    I had several questions watching this episode:

    1. How’d they get the downpayment? Would need $100,000 to $200,000. Bank of Mommy and Daddy?
    2. How do they qualify for a million bucks? Can their salary be over $200,000? I don’t see how that’s possible with those job descriptions. But let’s say he somehow makes $150,000 and she makes $50,000. They want kids. Isn’t it a massive stretch to buy a $950,000 825 square foot property that needs work just because it’s a couple blocks from the beach?

    I just didn’t get it.

    But that’s California for you.

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  92. “I’m not saying either way.”

    Yes. You are.

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  93. http://money.cnn.com/2013/11/12/real_estate/jumbo-mortgages/index.html?hpt=hp_t2

    “While the fixed-rate jumbos are great deals, the really spectacular rates are being offered on jumbo adjustable-rate mortgages, according to Grabel. Wells Fargo, for example, is advertising jumbo five-year ARMs for 2.375%.”

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  94. “Sonies- do you honestly think that a 30-year bull market is just going to stay flat for decades? ”

    yes, typically during major corrections the market will stay flat or range bound in the lower range for an extremely long period of time. Look at an interest rate chart since the 1790’s and you’ll see that rates spike up (like they did in the 80’s) then go straight down for a long time, and then stay in that range for a while much longer than you would think they would.

    Political policy is especially in favor of this as it gives them an opportunity to spend money on useless shit to buy votes. Corporations also love the low rates and well they own the politicians who seemingly own the fed, so yeah… if wage growth doesn’t pick up (more than 200k jobs a month, which by the way SUCKS) we could see Mortgage rates like Ireland @ 1% because more people will be able to afford expensive homes without wage growth while the banks stay solvent.

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  95. my point would be much clearer if that ritholtz chart was stretched out a bit on both axises

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  96. ” the really spectacular rates”

    So by that logic.. help me.. I have a $1,000 cash lying around from a bar-mitzvah bond my grandma bought me… what should i do.. what should I do??? Which one is spectacular????

    5yr currently 1.44%
    10 yr currently 2.76%
    30 yr currently 3.86%

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  97. “what should I do??? Which one is spectacular????”

    Depends on your time frame.

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  98. Well I am expecting to live at least another 40 years so which is the best.???

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  99. “Well I am expecting to live at least another 40 years so which is the best.???”
    5yr currently 1.44%. I would expect higher rates between years 6-40. Crazy to lock in at low rate now.

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  100. Spo you are saying take the 5 yr?

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  101. “Spo you are saying take the 5 yr?”

    Can I choose “none of the above”?

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  102. What’s disappointing is not so much that chukdc is scared of answering ze’s Q, but that this is apparently the best entertainment ze can find for himself.

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  103. “Spo you are saying take the 5 yr?”

    Think you have two fundamental choices: laddered CDs or Evens.

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  104. “Did anyone see the recent house hunters with the 20-something couple living in Manhattan Beach?”

    I’ve moved on to watching only intl version of househunters.

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  105. “What’s disappointing is not so much that chukdc is scared of answering ze’s Q, but that this is apparently the best entertainment ze can find for himself.”

    I already answered. 5 year. Or less.

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  106. gringozecarioca on November 12th, 2013 at 2:53 pm

    “What’s disappointing is not so much that chukdc is scared of answering ze’s Q, but that this is apparently the best entertainment ze can find for himself.”

    DZ.. exacerbated by the fact I am in Rio completely by myself for 2 weeks… sad sad sad… but maybe it has something to do with the fact tht it has been cold here (relative to rio) since i got back and today it hit 118 degrees.. went outside once today and almost dropped dead (well exageration there about dying, but did get a bit overwhelmed from it).

    In fairness to Chuk I misread him quoting someone else… real answer is one is not better than the other and if someone has a preference to taking 5/1 as long they should have preference to taking 30 as their short. some silly law of inverses that i once heard about.

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  107. “and if someone has a preference to taking 5/1 as long they should have preference to taking 30 as their short. some silly law of inverses that i once heard about.”

    This is not true. You are not making an apple-to-apples comparison. If you could buy a “life mortgage” and take it with you, then you would have a point. The ENTIRE argument was based on the premise that you would be in a 2/2 for 10 years or less. If you told me I could buy a 30 year mortgage and take it with me from property to property, then I would do that in a heartbeat.

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  108. wow man thats deep

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  109. Also, 5/5’s are capped at 2% increase. If you get one at 2.75% for the first 5, you will pay no more than 4.75% for the next 5. If you are keeping the note for only 10 years, that is a FAR better deal than paying 4.25% from year 1. That would be a smart move even if you thought rates were going to “skyrocket” (except you have to live somewhere after the 10 years). Which is an argument itself for not buying a 2/2 at all.

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  110. It truly amazes me how financially illiterate most are on this board. I am going to start selling 100 year fixed mortgages, but only offer them on 2, 2’s. I am sure Sabrina will talk all her followers to pay the premiums on the longer term product even though we all know the buyer of a 2, 2 stays for an average of 6 years.

    I have a 7/1 jumbo at 2.625 percent. The highest it can go in year 8 is 4.625 percent, and the cap is 7.625 percent for the remainder of the 30 year amortization. The alternative would have been a jumbo 30 year at 4.625 percent. I started with a $700k loan and pay it down as if it were amortized over 15 years. I calculate a savings of over $100k in the first 7 years using a 7/1 compared with a 30 year fixed. Now please explain to me Sabrina what would have to happen in years 8 – 15 where I could possibly get hurt.

    I will give you a hint … I can’t!

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  111. According to Sabrina, we should all rent, and then use our money to short the 30 year bond. How’s that trade worked out over the past 10 years?

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  112. Hey Steve heitman–are the savings significant if you pay simply make the 7/1 payment? I noticed that you “started with a $700k loan and pay it down as if it were amortized over 15 years”, which makes it sound like you’re paying the mortgage down more aggressively. I just want to know how much, if at all, that impacts how much you save as well as the wider spread between the jumbo rates vs. the spread on between rates on non jumbos. I’m trying to see if the savings are worth it for a 30 year at 4.15%-4.3% vs an ARM at around 3% (which are just what I’m seeing on bankrate) on a non jumbo loan. I didn’t see too much difference, but i’m not well versed in the math

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  113. “I’m trying to see if the savings are worth it for a 30 year at 4.15%-4.3% vs an ARM at around 3% (which are just what I’m seeing on bankrate) on a non jumbo loan.”

    A few Qs:

    Are you *likely* to be in the place for more than 7 years? More than 10? More than 20?

    If more than 7, and you get the ARM, would you still make a payment equal to or greater than the Fixed every month?

    If not (on either the time frame or the payment), what would you be doing with the ~$200 a month?

    Any chance you’d be in a position to consider the place an ‘investment property’ when you’re ready to move and hold on to it as a rental?

    What’s the annual and lifetime cap on the ARM?

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  114. Redhouse –

    The interest you would save is simply the spread between the 7/1 ARM and the 30 year fixed. In this case it would be 1.25% of your loan amount for the duration of your holding period; adjusted for amortization over the period the product is held.

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  115. gringozecarioca on November 14th, 2013 at 2:15 pm

    “I will give you a hint … I can’t!”

    Interest rates spike.. bank takes your rate up to the max allowable and you are running negative relative to the 30yr fix for the back 23 years… illness, job problems, recession result in you not paying down the principal in 15 yrs (which again you could wind up sinking principal into an asset that under performs a higher rf i rate.. resulting in furthering the result being worse than 30 fix)
    There, YOU HAVE A can do worse scenario… so don’t speak in absolutes… oh yeah.. forgot it won’t happen because markets can’t do what they have already done before.. see Steve.. financial literacy is one thing, but financial astuteness doesn’t come from a book.. it comes from not prejudicing yourself into not accepting the possibility of non-desireable alternatives. (<—triple negative??)

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  116. ” illness, job problems, recession result in you not paying down the principal in 15 yrs ”

    Depending on the timing, that could also be a benefit of using an ARM. If you lose your job before the rate adjusts, you can pay the lower amount until you get back on your feet. You don’t have that flexibility with the 30 year.

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  117. gringozecarioca,

    So other than the earth ending, the ARM scenario is the correct financial instrument for my situation, right? We can all climb into a bubble because we are scared of getting hit by a bus, but for those that want to creep outside and experience the world, please do it financially responsible. Don’t pay higher rates because you fear the “worst case scenario”. Pay less and save more, so you are prepared if something bad was to develop.
    Not to mention I could pay off my mortgage today if I wanted to. I just happen to be enjoying my low interest rate, combined with the wonderful equity returns of the past few years.

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  118. ” Pay less and save more, so you are prepared if something bad was to develop.
    Not to mention I could pay off my mortgage today if I wanted to”

    Then Ze would ask ‘why are you amortizing your mortgage at all? Wouldn’t you be better off with a I/O, and holding a put?’

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  119. “Then Ze would ask ‘why are you amortizing your mortgage at all? Wouldn’t you be better off with a I/O, and holding a put?’”

    I would agree with that approach, but it is much harder to get an IO than it is to get an ARM. And generally more expensive.

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  120. “it is much harder to get an IO”

    Not for a baller like Stevo, who could easily pay off the mortgage *today*.

    ” And generally more expensive.”

    “Higher interest rate”, yes, “more expensive”, it depends.

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  121. I am not risk adverse… I am financially responsible. My interest rate risk will be at a minimum in 2019 when my ARM adjusts. That is the way I want it.

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  122. “That is the way I want it.”

    And other people want it other ways, but you insult them for being ‘fearful’. They, too, would claim to be ‘financially responsible’.

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  123. “Rates are going up again- on ALL products.”

    Penfed 5/5 ARM hit another all time low of 2.625% today.

    https://www.penfed.org/55-Adjustable-Rate-Mortgage/?WT.ac=1021

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  124. If you were to get a 5/5 ARM at 2.625% vs a 30 year fixed at 4.25%, your “breakeven” point would be at the end of year 14. If you assume the WORST case scenario with the ARM (2% every 5 years, 5% lifetime cap), anything after year 14 and you would have been better off with a 30 year fixed.

    If you’re pretty positive you will be gone within 14 years, the ARM is likely your best bet.

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  125. Why keep debating this stuff? I learned long ago, never to wrestle with a doctrinaire…

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  126. “If you were to get a 5/5 ARM at 2.625% vs a 30 year fixed at 4.25%, your “breakeven” point would be at the end of year 14”

    AND that assumes that you just sit on that extra money for that entire period. I’d have to build a model to do the math but over that time period the expected value of those savings invested with a prudent, diverse equities strategy probably ends up with your savings DOUBLING, even after taxes. Under reasonably likely conditions probably there is no breakeven, the ARM is always better.

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  127. “Under reasonably likely conditions probably there is no breakeven, the ARM is always better.”

    Well, over 30 years, I think the 30 year fixed at 4.25% would be better (depending on your return on your savings). Paying 7.625% for the last 15 years would be a killer. Give the return on savings, the “breakeven” point is arguably more than 14 years, but it is still likely less than 30.

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  128. ” I’d have to build a model to do the math but over that time period the expected value of those savings invested with a prudent, diverse equities strategy probably ends up with your savings DOUBLING, even after taxes.”

    Wait–so you’re saying that pre-paying the mortgage principal is ‘more expensive’ than not? Hmmmm.

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  129. gringozecarioca on November 15th, 2013 at 2:55 pm

    Funny, but I am, off the cuff, inclined to assume that the current expected value of rolling 6 – 5yr ARMS would be the equivalent of the 30 yr. Transaction costs notwithstanding.. OK.. time of evening that I usually go walk my dog, but since she is not here I am going to go poop in the park then pick it up in a plastic bag… makes me feel like she’s with me …. good weekend to all!

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  130. gringozecarioca on November 15th, 2013 at 3:00 pm

    JJJ.. If you are going to impress us with your French.. try “Va t’faire enculer chez les Grecs!”, and by try and impress.. I mean literally try.. :-)

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  131. “Va t’faire enculer chez les Grecs”

    Ah, the truth comes out!

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  132. gringozecarioca on November 17th, 2013 at 4:12 pm

    “Wait–so you’re saying that pre-paying the mortgage principal is ‘more expensive’ than not? Hmmmm.”

    Nah… that’s just contradicting himself.. What he is saying to me is just mind bogglingly ignorant.. Not that I would expect many people to understand it, but to be so incredibly wrong and arrogant about it at the same time… Guess it’s good to have daddy in laws funds and be able to lie to himself that he could have done it on his own… not a chance!!

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  133. “Nah… that’s just contradicting himself.”

    Just using it as a jumping off point …

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  134. “What he is saying to me is just mind bogglingly ignorant.. Not that I would expect many people to understand it, but to be so incredibly wrong and arrogant about it at the same time… Guess it’s good to have daddy in laws funds and be able to lie to himself that he could have done it on his own… not a chance!!”

    I think that you must be stupid, confusing me with someone else, or high, or all three. My father in law is only rich if you determine wealth by the number of cigarillos on one’s person at any time. Also doctrinaire has been a noun and an adjective in English for a long time. If you want to actually talk about what I said, try to be at least a little substantive.

    “Wait–so you’re saying that pre-paying the mortgage principal is ‘more expensive’ than not?”

    The question is when you are pre-paying the principal – do you do it immediately, every month, or only when it is optimal? I’m saying that, when comparing an ARM to a fixed rate loan, the optimal strategy with an ARM is to use the savings during the period when the ARM payment is lower to invest and to apply those savings and proceeds to principal only during a period that the expected post-tax value of additional appreciation on those savings is less than the expected post-tax cost of continuing to pay interest on that principal. This should be obvious to anyone with an intermediate basic understanding of math, interest and mortgages.

    The specific time at which the optimal strategy changes to principal repayment is highly dependent on expected appreciation, and somewhat dependent on the tax treatment. In practice, it’s also highly impacted by market fluctuations and is, of course, risk agnostic. Finally, it’s true that you have to consider transaction costs, but even if you have to put another 5/5 or other product in place in the future you should only have to do so once based on the current advantage of the 5/5 over a fixed loan.

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  135. “Finally, it’s true that you have to consider transaction costs, but even if you have to put another 5/5 or other product in place in the future you should only have to do so once based on the current advantage of the 5/5 over a fixed loan.”

    Also note that penfed covers the closing costs on the 5/5 ARM.

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  136. gringozecarioca on November 18th, 2013 at 2:09 pm

    nah.. I know it is used in English as well, as English is a language that loves taking words from other languages.. some of my favorite words end in aire.. legiaonaire, milionaire, testiculaire.. Just thought instead of taking the time to actually talk something through it was an incredibly dickheaded thing of you to say and thus warranted allowing me to use one of my favorite french expressions to tell you to go get fucked in the ass…

    Your principal payment conflict occurs because you said your saving would AT LEAST double, now I assume you meant over 14 years so that implies a 10 percent + annual compounding return post tax, thus at 2.625% you would NEVER pay it down. If you were implying over 5 years doubling.. well now we are at stratospheric returns so I doubt that is what you are implying.

    As for the other part.. I just don’t think you have a clue about how the yield curve, or for that matter any long term curve is created, or the concept of yields at various maturities being perfect substitutes, because if not, there is a giant arbitrage that exists (and they really are not allowed to exist for long). There is a reason for the shape of the curve otherwise I might just as well say to buy the 30 year at 3.77% and I benefit 1% vs the 10 yr at 2.67%, which I will reinvest as well in order to double my benefit…so it’s always better to buy the 30yr. and anyone who buys the 10 is a fucking moron. Basically you are giving yourself credit for cutting off the damn back end of the curve and mismatching terms as w/o prepayment you are still 90% exposed after year 5 and 80% exposed after 10 years. And the curve is telling you that the market EXPECTS you will be refinancing that higher. The market is even nice enough to tell you what it thinks spot will be if you do a lil work. and the market is saying that if you don’t prepay, you will give back later what you think you are gaining today. IT HAS TO BE PERFECT SUBSTITUTES!!!!!!
    So back to the dictionary… and your use of the word gonnoreahaire.. oops, I mean doctrinaire, I would love to know how intricate knowledge of the construction of something that Billions and Billions of dollars are transacted against every day lacks practicality??????????

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  137. gringozecarioca on November 18th, 2013 at 2:22 pm

    To me the easiest way to look at it is to build a 30 yr daily spot curve consisting of 10,950 individual coupons. The first 1,825 will equal the 5 yr, the first 3,650 will Have to equal the 10 yr and the 10,950 will equal the 30 yr. Then say well if I didn’t repay the market expects I will be buying the next 5 years at days 1,825-3,650 at X, and so on and so on… when you are done it will add up to the current 30 year.. why would someone who understands the yield curve give you a benefit anywhere along it??? Do you think he’s sitting there saying “oh please don’t take the 5, oh please don’t take the 5, damn he picked me off and took the 5”
    He doesn’t give a shit which you take… because he knows they are equivalents.. because once again the yield curve (and virtually any forward price curve that does not have seasonality are built based on a no-arbitrage model.

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  138. gringozecarioca on November 18th, 2013 at 2:43 pm

    …and if you want to keep your prepayment argument.. and you can specifically define the schedule.. someone can price you beforehand a lower rate as you will really be buying X+(X-p)+(X-p2)+…….. and i can guarantee that better rate will equal your savings… because if you know you are prepaying then you are really buying something else that cuts down your exposure to the higher rates on the back end of the contango.. but I will agree with you on one thing.. I definitely have never been accused of having an intermediate understanding of math.

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  139. I need a bong hit after reading that

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  140. What you are not factoring in is that your adjustment is capped at 2% every 5 years.

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  141. You weren’t the doctrinaire to whom I was referring – I actually don’t see any evidence of that in your views. Anyway….

    “Your principal payment conflict occurs because you said your saving would AT LEAST double, now I assume you meant over 14 years so that implies a 10 percent + annual compounding return post tax, thus at 2.625% you would NEVER pay it down. If you were implying over 5 years doubling.. well now we are at stratospheric returns so I doubt that is what you are implying.”

    Over 14 years you only need about 5% to double the principal, that’s pretty realistic after tax. Since you’re actually saving the total savings amount equally over the entire period, you would need significantly more than 5% after tax, probably at least 8% but I would need to do the math or have someone tell me. Anyway, 8% after tax is pretty hefty but certainly not impossible.

    You goingson about the yield curves aren’t really relevant to the practical discussion about an ARM vs. a fixed loan. You seem hung up on fighting the idea that an ARM is somehow a real arbitrage strategy, free lunch or a win over a perfectly efficient long term interest rate market participant. Great, but it’s not, no one is saying that it is, it’s just that compared to sitting on a 30 year fixed for thirty years it’s certainly better. Your whole yield curve analysis also ignores transaction costs (11k daily coupons!) and seems to assume that you can recast your existing mortgage for free whenever you want, which of course isn’t true. If you want to make the point that, based on the yield curve, you’re taking on a lot of risk if you actually want to stay for thirty years and you get an ARM, sure you are, no shit, but my point was that you can minimize this risk by if you’re actually using that savings to do something and that very few 30 year loans are held to maturity anyway. I surely would not hold one that long, so I don’t do a lot of thinking myself about what happens if rates spike in 10 or 15 years because, like Heitman, I have alternatives in that instance. There is no way that you are 80% exposed after ten years if you are not ignoring the savings over that first decade. I am sure that your understanding of the yield curve exceeds mine but it’s academic for the vast majority of individuals buying homes. Puff puff pass.

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  142. “What you are not factoring in is that your adjustment is capped at 2% every 5 years.”

    And max adjustment of 5% total (so 7.625% in this example) in the PenFed product.

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  143. i have to chime in regarding ARMs bc Sabrina is really misleading a ton of people. i had a 30yr fixed @ 5.375% from mid-2011 when I purchased my 2/2 E Lakeview condo. I just refinanced to a 2.875% 5/5 ARM with PenFed. I will save $500 a month in P&I and over the next 5 years (when I plan to sell), will have $20k more in equity than I wouldve had with the 30yr. Not only that, but PenFed paid ALL closing costs. My rate cannot get above my 5.375% until 2023. This was such a no brainer and is going to save me so much money it almost seems like a scam. If you are in a condo or house now that you plan on selling within 10 years, you are a FOOL not to take this penfed product. Even with the max 200bps increase in 5 years, you are still at where 30yr is NOW. So I basically am paying much less for the next 5 years and have a free option on my interest rate from year 5-10, at which point I will probably have sold anyway. Oh, and the appraisal came in 20% more than what I paid. And before you start saying that isnt accurate, I have had 2 realtors in my building asking if I wanted to sell for within $10k of that price; they claimed to have buyers lined up ready to buy if I wanted to sell. I am and will be so far ahead vs if I were renting it isnt funny. If I had listened to some of the financial wizards on this site, I’d be a lot poorer.

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  144. gringozecarioca on November 18th, 2013 at 7:08 pm

    “You weren’t the doctrinaire to whom I was referring – I actually don’t see any evidence of that in your views. ”

    Then I apologize for being so defensive. I thought you were commenting about a similar argument we had before I disappeared to parts unknown for a few months.. I don’t care what anyone calls me so long as it’s not an “academic” to me that is the lowest of the lowest of insults. Also had a homeless, living across the street from me, throw a damn rock at my head 2 days ago… Tonight I got even when he left his territory with all his crap bundled up to go looking for whatever it is homeless go looking for. 2 liters of gasoline mixed with a quart of motor oil… the flames were pretty.

    8.7% after tax… savings decrease over time as well. Assuming 30 yr amort on both.

    …and my whole argument has nothing to do with the ARM being an arb. It is just the argument that if you are amortizing off a 30 yr schedule… or a 15 yr schedule.. or whatever schedule… your expected costs will be equivalent to the rate for that term. i.e, if you are going to plan on amortizing over 15 years, doing a 5/1 has to have the same expected value as doing a 15yr fixed… that is all I have ever implied. I don’t have any loans, so it’s all completely theoretical and irrelevant to me.

    “Your whole yield curve analysis also ignores transaction costs (11k daily coupons!) ”
    I’ve done 30 years with hourly settlements, so 262,800 coupons..You learn to think of it, not as commissions, but as now being owed a weekend at a premium local with great golf, excellent food, obnoxiously expensive wines, and nights ending in the VIP room of a premium strip club. Ah Brianna..I still remember thee… if that was your real name…

    “Puff puff pass.”
    Unfortunately not once in the last 3 weeks… but in 2 days I somehow, despite my best efforts (cough…cough), couldn’t get a better flight plan and got stuck with the most unexpected and unfortunate 23.5 hour stopover in Amsterdam…

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  145. “i have to chime in regarding ARMs bc Sabrina is really misleading a ton of people.”

    I’m not misleading people. I could care less what loan people get. But they will take ARMs when they can’t afford the monthly payment. It has nothing to do with being the financial geniuses you all are. NOTHING! These are people who have no retirement savings. Cop a clue.

    The percentage who used ARMs went from 7.4% at the end of 2012 to 16.6% in September, the highest since the housing bubble when it reached about 33% of all loans (and more in some cities), because people could no longer afford the monthly payment with a 30 year fixed. The property became unaffordable to them as rates and housing prices both rose. The only way to buy it and have it fit within their monthly salary was with an ARM.

    There was no figuring out how much money they would “save” over 5 years, 10 years or 30 years. NOTHING of the sort is going on. They are simply being told: with a 30-year you will pay $2500 but with this 5/1 ARM you will pay $2000 and you can always refinance later.

    Which would you choose? Lol.

    It’s pretty obvious what is happening out there. The increase in ARM usage is a sign of unaffordability in the market.

    What that means for next spring, especially if rates continue to go up, is why next spring will be very, very interesting.

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  146. “Oh, and the appraisal came in 20% more than what I paid. And before you start saying that isnt accurate, I have had 2 realtors in my building asking if I wanted to sell for within $10k of that price; they claimed to have buyers lined up ready to buy if I wanted to sell. I am and will be so far ahead vs if I were renting it isnt funny. If I had listened to some of the financial wizards on this site, I’d be a lot poorer.”

    Good for you. I’m so happy it is working out. The same way thousands of people who were reading this blog decided NOT to buy in 2007/2008 and 2009 because of what they read from plenty of informed people here. Each person’s situation is different. Each person’s needs are different. Not everyone will live for a decade or even 5 years in a 2/2 condo in Lakeview (in fact, the average length of time in that condo is 3 years.) But each person’s situation is their own situation.

    Why do you feel the need to justify whatever financial moves you have made? Does Warren Buffett go around talking about how he has lived in the same house for 50 years? Hey- good for him. It worked out.

    I just don’t get the grandstanding that goes on here. It’s only men who do it. Not a single woman comes to this site and goes on and on about how much of a financial genius they are.

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  147. ” with a 30-year you will pay $2500 but with this 5/1 ARM you will pay $2000 and you can always refinance later. Which would you choose?”

    The ARM. We knew that our previous place would have a sub-5-year hold (which made getting an ARM a no brainer) and, unfortunately, it’s likely that our next place will too. We simply don’t have the down payment (and, to a lesser extent, current income) that we would need to buy the place in which we’d reside for the long haul (i.e., 18+ years). Trust me, I wish our next place would be for the long haul, as I’d rather our next purchase be a second home (or land on which we’d eventually place one), and moving really sucks. Oh well.

    p.s. Have any of you tried renting a nice place lately? Expensive and yuck.

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  148. ARM products are designed for purchasers with financial acumen just like tobacco vaporizers are made for cigarette smokers! Sure, there’s a ‘small’ savings over a few years with an ARM just like tobacco fits into a vaporizer, but most people are using ARMS for better buying power, and most vaporizers are used for marijuana.

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  149. It’s nearly impossible to rent something desiravle/useful for a family of four or more.

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  150. “It’s nearly impossible to rent something desiravle/useful for a family of four or more.”

    That’s what I hear but it depends on the area. Demand is pretty high. Moreover, the cost to rent is almost always more than the equiv purchase. Which is insane.

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  151. LOL nonny, sounds like your wife and kid are bankrupting you… time to strap your balls back on and stop committing consistent financial suicide, unless you hate them and want to work all the time forever, then more power to ya

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  152. “Trust me, I wish our next place would be for the long haul, as I’d rather our next purchase be a second home (or land on which we’d eventually place one), and moving really sucks. Oh well.”

    So why would you have chosen to move right now. Hell, just for the pain of moving I’d prob stay in a suboptimal place an extra couple years.

    “Have any of you tried renting a nice place lately? Expensive and yuck.”

    Easier if you rent a less nice place. Less expensive too.

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  153. “It’s nearly impossible to rent something desiravle/useful for a family of four or more.”

    I hear it’s totally doable for $7300.

    Also, even though we are family of 3, our place would be fine for four.

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  154. “you are still at [5.375] where 30yr is NOW”

    Wha??? When did the 30 jump a full point?

    “the cost to rent is almost always more than the equiv purchase. Which is insane.”

    When it isn’t, Landlords start selling.

    “I hear it’s totally doable for $7300.”

    Well, that isn’t even for a bona fide ‘nice’ place. Just a big-ish place in Lake View.

    “our place would be fine for four.”

    .. who don’t mind living under the ‘be’ in “Here be draggonz” on the map of Chicago.

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  155. I am not trying to rent a big place, so I don’t know how hard it is, but part of the deal is that you have very specific requirements, as we have long established. You’re basically looking at not even a square mile of the city, right?

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  156. “Well, that isn’t even for a bona fide ‘nice’ place. Just a big-ish place in Lake View.”

    I wasn’t looking for “nice”, just “something desiravle/useful for a family of four or more.”

    “.. who don’t mind living under the ‘be’ in “Here be draggonz” on the map of Chicago.”

    What’s icky doing? Besides going into credit card debt paying for financial advisors (won’t sonies give him a freebie? and what to do about aapl options)?

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  157. Thanks for the PenFed tip. I’m in the same situation as jfmiii was. I think I may be following his lead. It does look hard to get hurt on this product. Especially if they are paying a chuck of the closing costs.

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  158. Thanks for the PenFed tip. I’m in the same situation as jfmiii was. I think I may be following his lead. It does look hard to get hurt on this product. Especially if they are paying a chuck of the closing costs.

    it really is a great deal if you can get it. you will need 80 LTV and the underwriting process was really terrible. they got it done though…with A LOT of handholding from me. ask for alex garcia as your processor if you can.

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