Financing your swimming pool

[South_Texas_Sun]

If you have your house paid for, financing might not be that bad, but if you are basing the loan amount for a second (or third) mortgage on the current price of housing, you might just consider what happens if real estate prices drop (or heaven forbid....plummet)

Having been through 4 housing drops now, I can tell you that it's no fun. People offering their houses for sale at "ridiculous" prices, and still no buyers. The market becomes awash with houses for sale and with the recent legislation making it much harder to discharge debt (bankruptcy) there's going to be a lot of long faces when the current mania stops in housing and everyone's looking for a chair at the same time in this global version of musical chairs.

No down payment loans, interest ONLY loans, mortgage loans to illegal aliens(!), first time buyers expressing relief at "getting in" to the market because it's "just going to go higher".........these are ALL red flags waving at the top of the largest housing bubble in history.

You can argue all you want. This is way it ALWAYS looks at the top, and if there wasn't disagreement about the future, there wouldn't be a "market." (so save your breath, I know all the contrary arguments.)

Not trying to be an alarmist, but arguing that financing is BETTER than paying off a debt is just another sign of mania, imo.

Some of the dumbest things I've ever done, were done on "credit". Your results may vary.

[adillenal]

I guess I am totally out of it but I didn't even know you could have a 3rd mortgage.
Anyway, I have a savings account but I also wanted a pool but knowing myself as well as I do, realized that if I used my cash for the pool I would probably NEVER build my savings up again. ( Mainly because I never saved it in the first place. It was a windfall from a relative) So, I borrowed against my own money. I make monthly payments, my savings account is my collateral and I will end up with a paid for pool and my savings intact. Bank was happpy to do this since it is a no lose situation for them. Add on automatic pay and we have our own little back yard oasis for us and our teenager and all of his friends.
Too much debt right now scares me and I have to agree with South Texas Sun. I remember the last time the housing bubble burst here in Texas. I had friends that owed way more than their house was worth.
But a pool is comparable in cost to a car. My Excursion and my pool cost the same thing. I sure hope the pool lasts a lot longer.
Just thought I would throw out another option.

[GTakacs]

If you have your house paid for, financing might not be that bad, but if you are basing the loan amount for a second (or third) mortgage on the current price of housing, you might just consider what happens if real estate prices drop (or heaven forbid....plummet)

I guess I still don't see what the houseing price and market value of my house has to do with the fact that I'd rather finance a pool for 15 years as a 3rd mortgage instead of saving up for 9 years before I could get one paid for with cash.

A Pool is NOT and investment! A house is NOT an investment! The best thing that could happen for me right now is a big ass inflation with my wage following it. A Pool does not add any value to the house (some parts of the country it's even a huge detriment) so you might as well write it all off. I figred if I pay $40k for something I might as well enjoy it as long as I can. As for a house not being an investment: if you live in a nice house now and it appreciates greatly in the next 10 years, guess what the rest of the houses will be doing, including your next dream house? They'll go up in price just as well. So if you sell yours then you'll have to shell out a lot more for your next one. Unless you're planning to downsize after the big price hike then upsize again after a downturn and love to move with all its associated fun and expense, I would not consider buying a house an investment. Anyone telling you that a house (primary residence) is an investment is lying!

I just bought a house that I plan to send my kids to college from (right now I only have one, he's 18 motnhs old) so I don't care about the market value of my house or where it's headed. I don't plan to borrow against its value any time soon (3 mortgages are enough) so who cares what the value is or if I'm upside down right now?

Both me and my wife are professionals so I really don't think we'll have to find a new job any time soon or if we do it'd be all that hard.......

I guess we got pretty off topic here, but as long as the price of borrowing money is as low as it is right now, I don't see any reason not to do it.

[Jeffski]

Disagree. Real estate is almost always a good investment. The increased equity in your first house is going to help you buy your second. True, the value of your second home has risen probably equal to your first, but would you be able to afford it without the equity from your first house? Most people wouldn't.

[GTakacs]

Disagree. Real estate is almost always a good investment.

OK, let's look at numbers:

You buy a house for $200k today and you have your eyes on a house that is $300k today. You put down 10% ($20k) on the current house. You locked in a 6% interest for 30 years in the remaining 90%. Your mortgage will be $1080/month.

Then the housing in the area goes crazy and everything appreciates 25%. So the house you live in now worth $250k and the house you wanted to live in now costs $375k. So you sell your house after 5 years od living in it. You would owe $168k and you could sell for $250k. You'd pay 6% for realtor fees ($15k) and another 3% for closing costs ($7.5k). So you would have a net profit of $59.5k ($250k-($15k+$7.5k+$186k)). So now you have $59.5k as a down payment on your new dream house that costs $375k. You tripled your down payment from $20k to close to $60.k in 5 years for an actual gain of $39.5k and it had an opportunity cost of $75k since that is how much your dream house appreciated too.

So now you put the $60k down on your $375k house and you end up financing $315k for a monthly payment of $1880 (assuming that interest staed 6% in the past 5 years). Had you bought the house 5 years earlier for $300k with the $20k down payment you'd had to finance only $280k. Your monthly payment would have been $1680 ($200 less than on the new finance) you would have 25 more years to go (instead of the 30 you would if you bought it 5 years later) and you'd owe $260k on a $375k house.

Now go and tell me that buying the $200k starter home in the first pace was a good investment!

Granted I didn't include the $600/month extra you would have had to pay for the past 5 years, so that's another $36k that we'd have to subtract from the equation making the scenario where you buy the $300k house right away less profitable than the math above makes it look like. Or we could just include it in the other scenario as an additional $36k down payment towards the $375k home making your total down payment $96k ($60k profit of sale + $36k savings from lower monthly payments) so you'd end up financing (gasp!) $279k for 30 years. That is the same as the original $280k had you bought the $300k house 5 years earlier.

However, what are the odds that someone who can't afford $1680/month for a house today would have $1880/month for a house 5 years down the road?

Again, a house is NOT an investment! It's a place to live with all its associated cost and benefits.

[South_Texas_Sun]

Both me and my wife are professionals so I really don't think we'll have to find a new job any time soon or if we do it'd be all that hard.......

Lol......famous last words. A house, yes, even the one you live in, is a commodity, no different than pork bellies (which you could, in theory, eat) but with one important difference. It's a LOT less liquid! (no pool pun intended )

I would imagine, since this is a pool forum, that most people here are professionals or at least self employed with enough net worth to own their own home. (otherwise, they'd be building a pool for the owner, right?)

So this cautionary thread applies to anyone who is cavalier enough to buy a pool, financed or not. The pool you build is a depreciating asset with monthly costs attached, not unlike an automobile which is also an investment, but a very poor one if you buy one with a bad resale value. (like say, a gas guzzler right now)

But this brings up an important point.

Projections of the future always assume that things will continue as they currently are. This is almost always a logical fallacy, and it's well worth your time to consider the opposite. For example, what happens if your professional job becomes worth less because of competition. And the housing market DROPS 25% instead of gaining, so you go to sell your house to move to a better location for work, and guess what? You're 25% in the hole, instead of in the black.

Instead of inflation, you get recession, deflation, or even depression. (not far fetched despite all the talk of "it's different this time".)

Please understand, I'm not wishing this for ANYONE, it's just that this current environment should raise some caution amongst borrowers. Don't EVER borrow money if you have the assets to pay in cash! It's the principal of the "magic of compounding interest", but working AGAINST you instead of FOR you!

I know, it sounds "fuddy-duddy-ish", but anyone who's ever gotten in financial trouble (or read enough history) has learned this lesson.

All that said, we're currently building a very nice pool, but paying cash and trying to pay off all debts, because I personally believe that the economy is going to be "off" for a period in the not-too-distant future and cash/hard money assets will be king.

With over 30 TRILLION dollars in dollar-denominated consumer debt in this country, do you really want to want to be a net-debtor? Have you heard the expression, "all in the same boat?"

Just something to think about.

[Jeffski]

I just wrote a long post and then deleted it because we're splitting hairs here. I agree with your advice to avoid debt, pay cash, and keep risk low. All good points. I just know I have personally benefited from the equity I've earned on more than one house so even though you should not treat it as an investment, it usually turns out to be a very good one.

Good debate.

[South_Texas_Sun]

I just wrote a long post and then deleted it because we're splitting hairs here. I agree with your advice to avoid debt, pay cash, and keep risk low. All good points. I just know I have personally benefited from the equity I've earned on more than one house so even though you should not treat it as an investment, it usually turns out to be a very good one.

Good debate.

Hi Jeff, Yes REI usually turns out very well. I bought my first property in Newport Beach, Calif. in the late '70's and all our properties have appreciated very well over the years.

However..... The people getting into "flipping" during the last couple of years are seeing massive returns in a very short time, so the temptation is to keep on buying and trying to flip. This is how the REI "boom" has driven up the prices so far, so fast.

People are quitting their day jobs to become "real estate investors", and that's the worrisome part. This is EXACTLY how the REI boom/bust cycle begins every time, except that THIS TIME, it's being enabled by the Fed raising the M2 money supply (originally to help prevent "Y2k" rifts) and resulting in the free money sloshing around in the form of easy-to-get, "no money down", qualify ANYONE,......CREDIT.

This is the game of "musical chairs" I was referring to, and I've thought seriously about liquidating all our REI assets in California, just for that reason.

Our basis cost is almost laughably low on some of these places, so I'm not afraid of getting hurt. But I do sense trouble in the making, and someone (just to get back on topic for the fun of it ) who's financing a pool with a second on their house BASED ON CURRENT HOUSING PRICES is underwater all ready, they just don't know it.

I usually don't have that much to say on these subjects, but there's several things about "this time around" that are very worrisome to me, and I hate to see people buying into the mania of everything going up all the time.

It doesn't. And one of the most notable examples of the "credit bubble" bursting was the 1929 crash and great depression.

Good discussion.....thanks

[GTakacs]

Both me and my wife are professionals so I really don't think we'll have to find a new job any time soon or if we do it'd be all that hard.......

Lol......famous last words.

Let me rephrase: Both me and my wife are professionals in the oil/gas/energy industry in TX so I don't think we'll have to find a new job any time soon.

BTW, when housing pricing goes down interest goes up so the average monthly payment for a house remains similar (it's probably the other way around, interest driving house prices not house pricing driving interest).

I figure if there is something similar to 1929 coming I'd be screwed either way 3rd mortgage or not so I try not o lose too much sleep over it.

Yes, good discussion BTW.

[South_Texas_Sun]

Let me rephrase: Both me and my wife are professionals in the oil/gas/energy industry in TX so I don't think we'll have to find a new job any time soon.

BTW, when housing pricing goes down interest goes up so the average monthly payment for a house remains similar (it's probably the other way around, interest driving house prices not house pricing driving interest).

I figure if there is something similar to 1929 coming I'd be screwed either way 3rd mortgage or not so I try not o lose too much sleep over it.

Yes, good discussion BTW.

Hi GT, yes, I agree with you. A global recession would sink all boats and Texas oil would be no exception. This is one of the things that worry me.... I constantly hear people talking about the "emerging markets" and how China and India are industrializing--> thus keeping the price of oil high.

We in the US don't suffer high oil prices because of low supply. There's actually a worldwide oil glut, but not enough refining capacity to process it.

If the US suffers an economic downturn (and I believe it's only a matter of time) then the rest of the world is going to "catch pneumonia", mixed metaphors not withstanding.

Who'll buy the output of industrializing China, when the western countries have economic problems? Hence my "global" concern.

Do you remember Texas oil miseries in the late '80's? Think it could happen again? Nobody seems to think so, and that usually means exactly the opposite will happen. This isn't my opinion. It's the way ALL traded markets work.

Give my regards to T. Boone!