DH and I purchased our first house 7 years ago. We paid 5% down and had to increase the selling price of the house and have the sellers give us money back at closing to help finance our closing costs. However, we were well-able to pay the mortgage, PMI, and taxes on the 30 year fixed-rate loan. We saved up cash for all of the improvements we made to the house. That house was in MD, within commuting distance of D.C. and Virginia. We sold it two and half years later for a profit of 20%.
We rolled all of our profit from house #1 into house #2 when we moved across country to Utah. House #2 cost almost $100,000 more than house number two, but with lower interest rates and putting 20% down (no PMI), our payments on the 30 year mortgage and taxes cost us pretty much the same as we had been paying on house #2. Once again, we paid for any improvements with cash. We sold that house after two and a half years for 1% less than we had invested in it (in a market that had gone down 5% while every other market went up).
We rolled all of our equity from house #2 into house #3. By this time, including the profit we made on house #1 due to rising house values, sweat equity on both houses, and cash we'd paid on improvements (including paying $20,000 to have a daylight basement finished in house number two, increasing the house size by two more bedrooms and a bathroom), we had over $80,000 after the sale of house #2.
So, house #3 was back on the East Coast in CT, and due to the proximity to NYC, cost $100,000 more than house #2. Interest rates were super-low at this point and we were starting to think that since we moved so often a 30 year fixed rate might not be the best way to go. We managed to swing a 7/1 ARM with an interest rate of 4.5%. Our mortgage payment is almost the exact amount that we were paying for our mortgage, insurance, PMI, and taxes on our first house. Our insurance and taxes add another $400 each month.
Our housing costs run about 40% of our monthly expenses, which is higher than recommended by the Oprah Debt Diet folks, but, since we've been paying down debt while we've been doing all of this moving around, we can afford to spend the extra on housing to live in a better town (safe, good schools).
We still have the 4.5% interest rate on the house for the next 5 years and the payments aren't hurting us at all. But it also doesn't make too much sense to pay a lot extra toward the principal since it would only save us a little over 3% (4.5% minus the 25% tax rate). So, when I have extra money, I put in taxable mutual funds. I figure I could always take that money out in five years to pay toward the mortgage if it reamortizes to a higher interest rate or if we refinance. If we're still here in 5 years, I'd like to have a hefty amount of cash to put into refinancing for lower payments on a 15 year fixed-rate mortgage.
No, we didn't put 20% down on our first house, but we made several decisions that have helped us to do well with housing. We bought houses we could afford with conventional mortgages. We paid in cash for home improvements, landscaping, furniture, and home decorating items -- if we couldn't pay for it, we didn't buy it. We never used our house as a piggybank. We rolled all of our equity into each successive house instead of spending it.
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