posted
Let me tell you my situation. I'd really love honest advice, like I'm your kid sister and you want me to succeed. You can even talk to me like I'm you're little sister and you think I'm insane. I'm ok with any of that.
In September I start work. Annual income =$35,000 give or take a few hundred. I'm assuming that my monthly income will be around $3000 after taxes. (does that sound right?)
I'm moving to be much closer to my job and this will be the first time for me to be living alone. I originally planned to rent, but the thought got to be more and more painful as I realized that I can't rent for less than $650/month (mais ou menos). That sounds like a mortgage payment, doesn't it? It did to me.
Other info: I'll begin paying my student loans in August too. I imagine the payment will land at around $200/month, but I'd love to pay more than that if I could. Even if I up my loan payment to $500/month, I could still feasibly shell out $800-1000/month for a mortgage right? (This is where you can say that I'm insane.) If it came down to lowering my loan payment, I would do that if it meant that I could afford a mortgage.
I don't have a car payment, just insurance. I'll be paying utilities and cell phone bills, along with food etc.
Possibly a huge problem: I can't handle a down payment of anything more than a pittance.
So* I ask you, what would you do in this situation? What could you do in this situation and what do you think is best? Do you have any advice, tricks of the trade or helpful hints?
[edit to add: I know NOTHING. I've just started asking around and learning about how all of it works, so feel free to tell me that you think it's impossible.]
posted
See, I've heard that I can, but that's also a great question. My question now is should I even try? I'm in the stage right now where I'm still trying to figure out what all my options are.
Posts: 6415 | Registered: Jul 2000
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My suggestion would be to wait. First, you are starting this job, and you don;t know if you will want to stick with it as long as you would have to stick with a house.
Second, home ownership has so very many hidden expenses.
Third, if you buy, you might want to look into a condo at first, so many details could be taken care of by someone else.
On the other hand, my younger sister owns a home, helped by my parents. In her case, she was paying as much in rent as she was for a mortgage.
I would give it a year, just to see how firmly you will plant your roots.
Posts: 10890 | Registered: May 2003
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posted
At 35k, you're monthly gross is about 2916. Your take home can't be more than that..
With social security and medicare tax, you're down to 32375. Then you have federal, state, and local income tax.
You need to figure out what your take home would be. Could you go ahead and fill out the 2004 returns based on that income to get an idea of your total tax liability?
Beyond that, retirement and medical often come out.
posted
$3,000 a month x 12 months is $36,000 a year. Before taxes. You're probably looking at closer to, what, $2,500. And the mortgage is only part of the "rent" payment. There is also the interest and PMI and the home owners insurance. For $650, you could only get about an $80,000 loan. Plus, you'll need to add a thousand or so a year at least in upkeep. Air-conditioner, refrigerator, new flooring in the bathroom, exterior painting/landscaping, new carpeting, repairs, etc. Unexpected things that the landlord won't be paying for anymore.
Of course, you also get to deduct the interest on your taxes, but you also might be buying at the top of a housing bubble, so while property values have been going up, you could get stuck with a house that you couldn't sell for what you owe on it. Or, if the property in your area continues to grow at such a fast rate, you could find yourself unable to pay the new property taxes without having to refinance, as I believe happened recently to another hatracker.
Are you going to be in the house long? It's your first job, are you sure you'll be staying in the same town for more than 3 years? If not, you probably won't reap any of the benefits of buying a house, because you won't have accumulated more value than the expenses of the loan.
Of course, your mileage may vary.
Posts: 9871 | Registered: Aug 2001
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posted
Rent. Make sure your rent is less than a quarter of your take home pay. Assuming you have no other debt (otherwise you'd want to work like mad to pay that off, probably including the student loans) and your 401k or roth IRA total at least 10-15% of your income (depending on how old you are), then you're ready to start saving for a house.
And if you're looking to learn sensible stuff on these subjects, I reccomend Dave Ramsey I also reccomend his radio show.
While you're renting, you'll save money on plumbing costs, fix-er-up costs, various utilites (like water and trash, at least) and interest.
Don't buy the line they're feeding you about the great tax break on the intrest on home loans. It's nonsense. Think about it--if I told you you hurried and spent $10,000, I'd give you $3,000, would you do it? Only if you had things you needed to spend $10,000 on anyway, right? Otherwise, it wouldn't make sense--you'd be out $7,000.
So get the house when you're ready for it, not just because somebody's pushing it at you.
How do you know when you're ready?
Not until you have enough saved that a 15 year fixed rate mortgage for the rest would still be less that 25% of your take-home pay.
Don't go for interest only, and don't go for ajustable rates, and don't go for more than 15 years. Your goal is to get the house paid off, and get it paid off as fast as you can, and interest only and long-term loans, while cheap, don't do that for you.
These aren't traditional ideas--lots of people on this forum might disagree with me--but they're extremely conservative and, best of all, extremely low-risk.
Posts: 1894 | Registered: Aug 2000
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posted
Your monthly income can't be ~$3000, or that would be $36k annual, AFTER taxes... Expect your tak-home, after taxes, Social Security, Medicare, any state taxes (if applicable), health insurance, 401k/IRA (if you decide to do this, HIGHLY recommended), let's say maybe 2500 or so?
Also, concerning $650/month = mortgage. In some places that's a mortgage, in others, that's your share of the rent with a roommate or two The only way you can tell is by checking the prices in the area you are living. A rule of thumb (and really a rough estimate) is to consider every $100k of a mortgage equals about $800/month in mortgage payment.
If you can room with someone, that would probably be the cheapest (though perhaps not for your sanity). Do that a couple years, build up a house down-payment (remember, unless you get fancy, a standard mortgage requires about 20% down, if you want to avoid other costs).
That said, if you find a great deal, or live in a fairly inexpensive part of the US, buying a house would be the winner.
posted
(Oh, and kayla--by "they" I did not mean you. I handn't read your post before I posted. Your post is quite sensible. )
Posts: 1894 | Registered: Aug 2000
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posted
docmagik, I didn't take it personally. "They" kept telling me I'd get a tax break. It's kind of hard to give a break to someone who doesn't pay taxes to begin with. Posts: 9871 | Registered: Aug 2001
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quote:I'm assuming that my monthly income will be around $3000 after taxes. (does that sound right?)
No, this does not. This sounds high to me.
-o-
Mortgage payments are typically less than rent payments. In a sense, whoever you're paying rent to has to pay their mortgage, and so your rent must be at least enough to cover this. There is really only one downside to buying. When you buy, moving out becomes much harder. You have to coordinate selling the old place, and time it just right, unless you happen to have enough lying around to make multiple payments for a month or three.
The upsides of buying are that your interest is tax-deductible, you build equity, and you build equity. The reason I said it twice is that you will be bringing down the amount you owe ever so slightly (maybe a hundred a month or so at first), but you're property's value will also increase. (That's assuming there isn't a drastic burst in the current real-estate bubble. While I don't think the current growth rate us sustainable, I see a leveling off in real-estate prices as being more realistic than some sort of cataclismic drop.) For these reasons alone, the best answer to that question for the vast majority of people, whether they know it or now, is buy.
Some other considerations: When you say it "sounds like a mortgage payment," is that about the extent of your research? It sounds like a payment on an $80,000 mortgage, perhaps. Is that a realistic price around where you live? (I assume you're looking at a condo?) If you use excel to calculate a monthly payment based on a mortgage amount, then there are a few other things you need to know about, that you might not have taken into account. First of all, you will be paying property taxes. Second, you will need insurance. Make sure that your total monthly payment is in your affordable range; don't just look at the principle + interest. Bear in mind that, depending on your circumstances, you might not be able to take a homestead exemption on your property taxes your first year. You might also have a community association to pay. Condos have a host of other issues. Their fees include association and structural insurance (you still need to get your own insurance on your personal belongings) but they can have all kinds of assessments to do things like paint the building or refinish the driveway. And it seems fairly common for there to be accusations of improprieties in handing out the contract to do these jobs, so you might be paying, as a community, more than the going rate for a job. Condo politics can also be quite unpleasant--or is that only in Florida?
Here's another consideration: say the real-estate situation does not level off. I mean, it's just possible we are reaching a turning point in our history, with the gap between the haves and have-nots becoming larger than it's been for a while. If that is the case, it may be that you can afford to buy now, but in a few years, you might not be able to. Waiting might conceivably cost you the ability to buy a house at all. (I don't know what job you have or what your long-term income potential is, so this may or may not apply.)
I wouldn't worry about whether or not you can get financing. I wouldn't think you could get a mortgage without a parent cosigning or something before starting your first full-time job, but I've been pretty stunned in recent years, with the low interest rates, to see just how easy it is to qualify for a mortgage these days. It wouldn't surprise me at all if you got one. So in any case, I say don't worry about it because that part, at least is out of your hands. You make your decision assuming it will work, and if it doesn't, then that settles it, neh?
I'll add a personal anecdote, but I suspect you'll have a dozen replies by the time I finish typing just this part, so I'll post and add the rest in another post.
Posts: 1001 | Registered: Dec 2002
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posted
Assuming you have the currently really low student loan rates (or will consolidate into them), It's can often be better to just pay them off over time. The money that you therefore have can be used (in IRAs/401ks/403bs/erc) to realize a higher rate of return.
Credit cards, pay off. Cars (not applicable in your case), payoff.
Tax-writeoffs. While the tax write-off for property tax xan be nice (from experience), some states allow a deduction up to a certain point on rent. The state of Massachusetts does this, for instance.
posted
"it may be that you can afford to buy now, but in a few years, you might not be able to."
Really good point!
Our house doubled in value in ten years, and there is no way we would have been able to but it now. It isn't such a huge house, either.
The other thing people have not mentioned, Narnia, is your single status right now. Many of us paying mortgages have partners to share the expense with.
Posts: 10890 | Registered: May 2003
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quote:Or, if the property in your area continues to grow at such a fast rate, you could find yourself unable to pay the new property taxes without having to refinance, as I believe happened recently to another hatracker.
quote:The other thing people have not mentioned, Narnia, is your single status right now. Many of us paying mortgages have partners to share the expense with.
Another good point. I can't imagine trying to get by without Cor's income.
Posts: 1001 | Registered: Dec 2002
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posted
When we bought our first house, it was a humble starter home (for a family, not a single person!) type of deal for about $86k. We sold it two years later before this real-estate bubble really got going, but still in a local sellers' market, for $144k. This profit was a big chunk of our down-payment on a much nicer home, which has more than doubled in value in the almost four years we've owned it. (Okay, I'll get tacky and specific, because it seems to be called for here: We paid $250k for this house, and comparable houses are selling for about $560k now.)
We jumped to buy this house even though everything wasn't in place. It was certainly not a conservative decision! (We didn't have jobs for the next year at all when we put our first deposit down!) But we did it because we knew from a reliable source that the price was going to go up at the end of the month, and when we did the math, we figured that (assuming we got jobs, which was a safe assumption for us) we could afford this house at the current price, but when it went up it would price itself out of our reach. Living in this town was very important to us. It was the right place for us to raise our kids.
If we had waited, we wouldn't have been able to do it, or we would have been moving into a house smaller than our starter home back in Miami.
And yeah, with the inreases in our property taxes (and a few other peculiar situations, like a doubling of our insurance thanks to incompetence on the part of our escrow account) we found ourselves in some scary times about seven months ago. But we refinanced and fixed our insurance situation and everything seems to be going great right now. But even with the scary times we went through, I feel that this was the only way it all could have come together.
Our community is a pretty pricey one, and we tend to hear a lot of people make comments about how only rich people can afford to live here. Then they find out that I'm a school teacher (Florida, by the way, ranks 47th, I believe, in what they pay their teachers. My county ranks in the lower half of the counties in my state. I make less than the median starting salary for a teacher in the US, and I've been doing this for over ten years.) As soon as they hear that, they say, yeah, but your wife must do something else. Nope. She's a teacher too. Then they always want to know how we managed to move here.
It all comes back to that very first starter home. Because of my experience, I have come to believe that home ownership is the route to financial well-being in this country, in this day and age. I view renting as throwing away money. Now, there are a LOT of good reasons to rent instead of buy. Flexibility. The likelihood that your income may change drastically in a short time. Not feeling like you're ready yet. Not having anything saved up. I'm not trying to get you all gung-ho, or to contradict the advice of any of the people who have advised you to wait.
Most of all, I would say make sure you account for every hidden expense that you're not accounting for now.
But my take on this is not a conservative one. As soon as homeownership is right for you, I say jump on it. (And if you wait until the payment on a 15 year loan is 25% of your monthly net, I don't think that day will ever come, but that's just me.)
(It's also possible to get a 30-year loan, and refinance it after five years or so, based on the assumption that your income will increase during the intervening time.)
Posts: 1001 | Registered: Dec 2002
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At 6.5%, a 30 year mortgage of 140,000 will run you $885 for principle and interest only. Property taxes on a house of that price will be about $205 per month, according to this site at p.3. In addition to tax, you have insurance. Figure $30 a month or so for that.
Your first year in the house, you will pay about 9,053 in interest total. That is deductible. If your marginal fed tax rate is 10%, you will save 905, or about $75 per month. (This isn't quite accurate, since you have a standard deduction if you don't itemize. But it's a good estimate.)
Adding it together, you have 885+205+30-75=1045 per month for a $140,000 30 year mortgage at 6.5%. There are limited money down options, but they usually have PMI which I am not familiar with. If rent is truly 650, then your additional costs are 395. Big however: utilities will be higher, repairs exist, etc. These aren't accounted for.
With take home at most $2,400 per month, it seems doable. But I think it would be a stretch.
However, with the way I made rough estimates, it might be possible to reduce the monthly amount. You'll need to investigate.
Here's why houses are a good idea: Suppose you buy a house for $140,000 with a 100% mortgage and 5% closing costs ($7,000). Over five years, you will pay 60 payments of 1045 (again, I haven't added PMI). If you subtract the 650 it would cost you to live in a rental, you will be putting $23,700 extra into the house that you wouldn't have had to spend renting. You will have also paid off about $8,944 of the mortgage.
If your house appreciates 5% per year, it will sell for $178,679. If it costs 7% to sell, you will spend $12,508, leaving $166,172 in proceeds. Your mortgage will be $131,055, leaving you with $35,116.
Recall you spent $30,700 on the house that you wouldn't have spent renting. Your gain is $4,416, ~14%. However, $23,000 of that was spent not 5 years ago, but spread out over time. So the average rate of return works out to be very nice.
A higher rate of return will magnify this effect: At 6% annual appreciation, you would gain $12,482, or 40% - more than double. Time is on your side, too - adding one extra year adds about $11,000 to your gain and only $4,740 to your expenses.
I know this is a bit of a jumbled mess, but it's an illustration of the effects of leverage - your investment appreciates based on it's value, but you only put up a small percentage.
There are some missing expenses (PMI is the big one), so PLEASE don't rely on these numbers to make a decision. But the principle is sound. But you could also rent out a room to offset costs. You would need to get better numbers and make a spreadsheet to see if it actually works for you.
posted
Now, we just need a story about how home ownership ruined someone's life and we'll have a fair and balanced discussion.
Ever seen The Money Pit?
Icky, I mainly agree with you, but you have to admit, your's is a story of luck and fate. Could your fellow teachers afford to live where you do? If one of you hadn't gotten a job, or gotten sick, would you have lost everything?
My husband wanted to buy a house. Any house. And when I was really sick, he did just that. And man, do I hate it. Rather than waiting for 6 months or a year to find a home we'd be happy in, we're here.
So, my advice Narina, is if you find the "right" situation, jump on it. If it doesn't feel right, in any way, wait.
Posts: 9871 | Registered: Aug 2001
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posted
Thanks, Dag. That was a great breakdown of what I had only sensed intuitively through experience. I should copy your post for the next time this topic comes up in conversation! Posts: 1001 | Registered: Dec 2002
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posted
I didn't think you messed up the numbers. I thought the $30 was the home owners insurance, which is separate from the PMI. Our home owners insurance is $52 a month and our house is only worth $92,000. With our PMI and every thing, our mortgage is $755 a month. (And our mortgage is only $88,500.)
I don't know how it all breaks down. My brother was our loan officer and I told him what we spent on rent and he got us a loan. Our credit wasn't perfect (I had a 0 credit rating. He said, "Basically, we know you have a social security number and that's it.") So, I don't think we got the "lowest mortgage rate in 30 years" but I think 6.5 is pretty close to what we got.
Posts: 9871 | Registered: Aug 2001
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posted
Cool. I'm not redoing the numbers, but that PMI would be enough to flip the $140k estimate to unprofitable.
About year 2.5/3 the equity would get to 20%, but not all loans let you drop PMI automatically when that happens. If it did, it would be about break even at 5% appreciation. At 6% it's still a good deal, and at 7% a great one. I would still do it, but not if I absolutely had to be profitable in 5 years.
Edit: 6.5% would be easy to beat now, although maybe not for someone with a short credit history. It should still be available in a year or so.
BTW, when moving to a new town, it's good to rent while you get to know the area to figure out where you want to live.
Posts: 26071 | Registered: Oct 2003
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posted
That is absolutely true, Dags. We lived here for a year before buying a house, but part of that reason was to make sure the school system would work for our son, since we pulled him out of school in the last town we lived in. But getting to know the area and what "part of town" you want to live in is very important. Especially if you have a commute or anything.
Posts: 9871 | Registered: Aug 2001
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posted
Sorry, Kayla, I didn't see your post there.
Yeah, I think we mainly agree. In both cases, we bought houses we were happy to call home, so it was right for us. Even that first starter home . . . I wouldn't change what I have, but I do miss it. I absolutely loved that house, and I was happy there. I wouldn't push anybody to buy a house that didn't feel right just for the sake of buying a house, and I've tried to mitigate what I've said with that message. But when everything falls into place, I just can't emphasize enough how much I believe that buying a house is the right way to go--hence my enthusiasm.
This might not be the right time for Narnia. I don't believe in "buy now at all costs." But I would say I do believe in "buy sooner rather than later."
-o-
Actually, it's surprising how many of us teachers (including two teacher couples) do live in town. It would be impossible to do now (other than in a condo) but it wasn't impossible four to six years ago. But yeah, we have been lucky. I don't deny that. But there is an element of luck that you make yourself--do I make sense?
Posts: 1001 | Registered: Dec 2002
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quote:Now, we just need a story about how home ownership ruined someone's life and we'll have a fair and balanced discussion.
What it comes down to is that, unless you jump in insanely over you're head--like you can't ever make the monthly payments, let alone worrying about stuff breaking or taxes going up--or you buy a house that is falling apart and unsellable, I'm just not sure that the worst case scenario can be all that bad.
If I had followed docmnagik's advice, I never would have been able to live here. Fine, many would say. It wasn't meant to be. Now, you alluded to the trouble I had gotten into last year. Say it had not worked out and everything had fallen apart. Where would I be? I wouldn't live here, just like in docmagik's scenario. But I would have been able to sell the house and make about $200k over what I bought it for at the time. And I would have bought a house in some more affordable neighborhood, and it would have saddened me greatly, perhaps, to not have been able to make this dream work out. But I don't know that I would have been any worse off. So even the "worst" case scenario wouldn't have been that bad.
(Now, if the market goes seriously south and housing prices decline substantially, all that goes out the window. I just don't see that as the most likely outcome.)
Posts: 1001 | Registered: Dec 2002
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posted
I sell mortgages part time, and will probably be switching to doing it full time in a few months.
Dag and Icky (Mega) are completely right. As long as you can find a house that is REASONABLE for your income, even if it is less then ideal, owning is FAR better than renting.
PMI can also be goteen around my getting into an 80/20 loan tha comvers the whole explnce (with two mortages) including the downpayment, which allows you to avoid paying PMI....you pay the second motgage instead, which means you can deduct the ENTIRE amount of interest from you taxes. This can save tou a ton of money every year.
The downside of 80/20's is that they are an adjustable rate mortgage (ARM) usually with a ballon payment in ten or fifteen years for the 20%.
Basically, if you can get a FHA or standard bank loan, at a fixed rate, you should. If not, go with an 80/20, and refinance in a year. If you can pay all your bills, including your mortgage, without being late for a full 12 months, banks will fall all over themselves to give you a fixed rate mortgage for a refinance...and that gets you the best rate, long term.
Keep in mind that you should NOT buy a house for the full amount you are aproved for, unless you HAVE to. At AFM, where I work, I see that a lot. People getting a ARM for a $220,000 house...when if they could have bought a smaller one they could have gotten a bank loan with a fixed rate, somewhere below 6%.
The amount they approve you for is the MOST you can get, not what you can afford...they are two different things sometimes.
Let me know through email if you need any more specific advice.
posted
Huh. It is ridiculous to me to think of trying to find an apartment that's 25% or less of take-home pay. But then, that's probably why we're in such financial trouble.
Maybe it works places other than large cities, for people with college degrees who can get a decent job.
Or, I suppose, people who can live in a studio in a bad part of town without going insane. (That just doesn't work with a kid.)
Posts: 21182 | Registered: Sep 2004
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posted
There are other options. My brother and his wife and their baby are renting a basement from a family in a very nice neighborhood for only about $500 a month. It has two bedrooms, a bathroom, paid cable, and paid utilities. The family has always rented it out to couples just starting out.
I don't know what prices are like where everybody else is at, but here in So. Cal, that's a real-live miracle.
They'd never have found $500 rent looking in the apartment guide or making a couple of phone calls. But they found this place by spending all their time looking and talking to everybody they could for several months.
Honestly, there are more options than just "Pay through the nose to feel safe" and "Live in squalor and be woken up by sirens." They aren't all quick and easy, but they do exist.
Posts: 1894 | Registered: Aug 2000
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posted
I don't mean any of that disrepectfully, btw. I'm not suggesting that if anybody's in conditions they don't like it's simply because they haven't looked hard enough.
I guess I'm just saying to have hope and keep looking.
Posts: 1894 | Registered: Aug 2000
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posted
Yes. Although sometimes there are other complications, and finding things like that are very much who you know.
For instance, we're hoping Jeff will get a decent job in SoCal and we'll move out there. Luckily, my dad's fiance's mother owns an apartment building and is willing to rent it out to "family" for basically the cost of her taxes and maintainance and stuff on it. Also, my aunt's friend, whose daughter I tutored, also owns apartments, similar situation. So we'd actually have a choice of where to live, no hassle, just pick which one we like better and be able to afford it. *crosses fingers for hubby getting job*
Posts: 21182 | Registered: Sep 2004
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posted
I'm going to side with the "buy a home as soon as it's feasible" camp. Definitely find a home you like, but definitely don't not consider buying. It is riskier and scarier, I guess, but you learn a lot in the process, it's definitely not impossible, and the rewards of home ownership far outweigh putting rent into someone else's pocket, IMO, never to see it again. Pick people you trust to work with, don't sign anything until you've done your homework, but definitely consider buying. Chances are you'll find ways to make the finances work if you don't make any outrageous choices.
Posts: 5957 | Registered: Oct 2001
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posted
Wow, thanks you guys. I was telling my mother about this thread and said "Hatrack is the source of all knowledge." I was right. Thanks for all the info and research.
quote:Adding it together, you have 885+205+30-75=1045 per month for a $140,000 30 year mortgage at 6.5%. There are limited money down options, but they usually have PMI which I am not familiar with. If rent is truly 650, then your additional costs are 395. Big however: utilities will be higher, repairs exist, etc. These aren't accounted for.
With take home at most $2,400 per month, it seems doable. But I think it would be a stretch.
Dag, your google fu is impressive. I read through that post 4 times and I get it. My instincts are correct: buying is better. All of you have attested to that. But one of you did mention that I need to be aware of all the hidden costs, and I have to admit that before I started this thread, I was oblivious to many of them. They're sobering.
I hear people say all the time that you can own a home if you make at least $30k/year. After looking at these numbers, it seems impossible to me. Even Dag's rough estimates put my payment at almost half of my monthly income. Is that normal for a mortgage payment?
Sounds terrifying to me. But I do believe that you're all right and that buying is the right thing to do in the long run. I worry about 'missing my chance'. When I hear Icky's and Elizabeth's stories about how their houses have doubled in value, I worry about something like that slipping through my fingers because I'm afraid to take a risk.
*sigh* I think that I'm still too uneducated about all of this to make a decision that I would feel good about.
-o-
quote:BTW, when moving to a new town, it's good to rent while you get to know the area to figure out where you want to live.
Yeah, that was a thought that passed through my mind when Elizabeth suggested waiting for a year.
quote: Pick people you trust to work with, don't sign anything until you've done your homework
I also think I'd rather find these people in the area where I'm going to live. It'll take me some time to find the experts I need that know the area where I live etc.
-o-
quote:Heh. You'll be starting at about what I make now. I should move to Oregon. :-p
I know. Oregon teachers whine about how they're getting shafted, but it's really crazy how much they get paid (I'm starting with a Master's degree which helps a bit.) The cost of living is higher, but I know we're in the higher income bracket compared to the rest of the country.
Posts: 6415 | Registered: Jul 2000
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Just a couple things. One: Do NOT rush to pay off your student loans. Generally speaking, the interest rate on those is far below that of anything else. Paying them off will have primarily a psychological benefit (in most cases). Certainly don't let paying more than the minimum on them be the difference between buying and not buying.
Find out about "special" circumstances. For instance, if you find a condo for rent by its owner, find out if they might be interested in a rent-to-buy arrangement. (Do NOT actually agree to one without consulting a real estate lawyer!)
My understanding is that finding such an arrangement is often difficult -- but beneficial to both buyer/renter and seller/landlord. (Anyone know of anything like that available around here? )
[Aside: As someone who has resigned herself to paying 1/3-1/2 of after-tax income for housing, the whole 25% thing is amusing. But that's what comes of living in SoCal, I guess. Especially right now. That bubble they keep talking about? Popping six months from now would work for me. ]
Posts: 32919 | Registered: Mar 2003
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I agree with most of what has been said. I have just a bit to add, including an ownership horror story.
Practical stuff first: If you decide to buy now (or at least look into it), you should check to see if there are first-time homebuyer programs that you qualify for. Sadly, in this country, we pay teachers so little that they actually qualify for some of the programs intended for poverty-level incomes. So, you might check. There are places that are doing things like urban homesteading programs for low-income folks that might make it possible to buy.
Also remember that condo does not mean "no maintenance." I have a friend who lived in a building that needed a new roof and other major stuff about a year after he moved in. He learned the meaning of "special assessment." The condo board can, under extraordinary circumstances, vote to make every owner pay thousands of dollars to do necessary work on the building...or be sued and have a lien on the place, etc.
Another thing to consider is quality of life. In most areas of the country, an $80,000 house is going to be old, in need of much repair, or in such an economically depressed area that you are unlikely to be able to get your money back out of it through a "rising" real-estate market. Suppose you move every 5 years. If house prices are rising 2-3% on average (true in much of Iowa, for example), then you will have a hard time making back your down payment or the closing costs.
Of course, economically depressed area = not so easy to sell a place. If you found yourself in financial difficulties and wanted to sell the house to avoid bankruptcy, or just sell fast because you needed to move to a new job, etc., you might find that you don't even get people coming through to look at your house. For months!
And that brings us to the personal horror story:
I lived in NYC. Could not afford a house in any of the truly "desirable" areas, and so bought a place on Staten Island's North Shore. This is traditionally a black middle class area. Lower middle class. What that meant is that there were a lot of city workers, like us, living there. It was what we could afford. And it was a great neighborhood by any standard except the ones that might heat up a real estate market. Prices were not rising there as they were in the rest of the city. So, buying there was okay if you were going to stay a long time, but if you needed to leave (as we did), getting out from under the house meant being able to sell in a depressed market.
We tried to sell the place for 5-6 months. NYC was having trouble at that point anyway (the Dinkins years...shudder ) but we literally had NO lookers in all that time. A neighborhood with mostly city workers during a city fiscal crisis...go figure.
Because this place was purchased as part of a first time homebuyer's program, we got a special loan. One of the peculiarities of that loan was that they were barred from renegotiating if things went bad. They had two options: you pay or they foreclose. Most regular loans there's at least some leeway, not much, but some.
In this case, we'd already moved, we rented the house (to a woman who made great money at Time Warner) so we counted ourselves lucky.
Time Warner was bought out by Sony (I think, I know it was a Japanese firm) about the time that our renter's son was having major problems with juvenile diabetes forcing her to take a lot of time off. So...they fired her. And she stopped paying.
And we couldn't afford that mortgage plus the new one.
When the bank foreclosed on behalf of the state-backed mortgage agency, she had been living in the house rent-free for about 6 months. New York is like that. Try to evict someone...
Of course, evicting a woman with a sick child and no job is kind of bad too. So I didn't. It was clear by then that I was losing the house anyway.
It eventually did sell. After foreclosure. About a year after. And the amount just covered the price, but not all the interest accrued during the days of non-payment.
So...
Years later, the blot (and its aftermath) are still affecting my credit score. The problems are almost over now, but it's been a LONG time.
And I get the heebie jeebies every time I buy anything larger or more permanent than a stick of gum.
Posts: 22497 | Registered: Sep 2000
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Yes, Narnia, whatever you do, do not get into a credit crunch! We are just starting to get our heads above water after about fifteen years. It was our fault entirely, but caused us great strain in our lives.
Posts: 10890 | Registered: May 2003
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Most fanny mae and freddie mac lenders will approve you to up to a 42-44% DTI (Debt to Income ratio), and most secondary lenders will go to 50-55%. While I don't tell my clients this, because it is really none of my business, a lot of people go over what they can afford just because they HAVE to have the perfect house the first time out, and so they max out the mortgage amount they are approved at.
Not a good idea, usually.
If I were you I would look into getting preapproved for a loan though either a local bank of a mortgage lender, and find out what you can get a loan, and if so for how much. That gives you a ballpark figure so that you can shop around without setting your sights too high, price-wise.
If a bank turns you away, try looking at a mortgage broker. Brokers have a little more flexibility as far as loan amounts and rates because they don't have a single underwriter, they have a number of them, particularly in this housing market.
Also, here is a cool site, the web site of American Family Mortgage, the place I work for part time. It has a payment calculator, and a few other tools to help you see what the actual cost of these loans are, and help you make a decision. Anyone can use these tools, without obligation of course.
I can't get any more specific here, it is a public forum, and anything more specific requires the type of information you DON'T want to post anywhere like this, or any other forum....
So if you have any questions, please email me and I will answer privately...unless it is a general question.
Remember, avoid PMI if you can, even if it means you finance two loans...one for the 80%, and one for the down payment of 20%...hence the name 80/20 loan. You avoid PMI, but your payments stay about the same, usually, and ALL the interest from BOTH loans is tax deductible. That is a MUCH better solution than paying PMI.
(PMI, Private Mortgage Insurance, is required by ALL banks if you put less than 20% down on a house, at least until you own 20% equity in it. I sucks!)
posted
Rent. I mean it. Yeah, it's great to own a house. I've done it twice now.
But it's a hell of a lot of work, and I couldn't imagine doing it on a single income or by myself -- especially not when I was just starting my career.
At the very least, you want to rent for a year to get a feel for your job and a feel for the area.
Posts: 37449 | Registered: May 1999
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So glad you started this thread - I was looking for similar information a while back.
You can definitely plan on about a net of 24-2500 a month. I gross just under 40K, take all the exemptions associated with being a single parent, and net 3K.
I have pretty good credit (the median was just under 750) and can be approved for up to $200K which = $~1300 a month in mortgage. I currently pay $650 in rent.
There is certainly a bubble in our respective corner of the woods - that all hope will pop soon - but who knows.
All I know is that any attempt to save a 20% down fails for me, mostly because of health issues with family members I am responsible for. So, I will buy this year - most likely this summer - but I am going to look into a couple of other options as a "starter" - which I don't know the pros/cons of, so chime in folks:
Buy a duplex or triplex. (You can meet a big portion of the mortgage through your rent income, but then you also have to manage the property - which can be lots of work)
orrrrr . . . .
Mobile home (in a safe park that can be paid off in 2-3 years and later moved to land for development and eventual real home.)
But I agree that there are many costs, and much work, to home ownership - and one of the things that scares me is that I would not have someone else to chip in . . .
You are starting on a new career. That will take lots of (if not all) your time and energy. And this new career will be in a new community - with new friends, new church, new colleagues . . . these things all take time and energy, too.
Renting for a year might really be wiser -
I know you will make the right decision for you, Cecily! Good luck!
Posts: 5609 | Registered: Jan 2003
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posted
As long as people continue to be willing to put over half of their income into interest only loans for thirty years, the housing bubble will not pop.
Since I doubt human nature is going to change, I do not anticipate a pop.
The difference between real estate and, say, stocks, is that people don't sell if their house has gone below it's original value. They just refinane it out again at something that's a affordable using whatever tactic they can.
If anybody is holding their breath for a "pop," I would suggest maybe just crossing your fingers instead. Unless you plan to use your hands, ever, and then maybe you should just hope against hope.
Posts: 1894 | Registered: Aug 2000
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Narnia, last Sunday I woke up to the sound of dripping in the kitchen. I rent, so I called the maintenence guy to come out and look at it. One of the pipes on the hot water heater had cracked a bit. He'd have to get the part and take the whole thing apart, so he showed me where the valve was to turn the water off and came back Monday to replace everything. Personally, I like renting for that reason alone.
Over here at www.envisioncu.com we have a calculator in the mortgage section that tells you which is cheaper depending on lots of variables. For me and Chet, it came out cheaper to buy if we could find something for less than $115,000. Here in Tally, not going to happen. It also has a calculator for how much you can afford to borrow. Chet and I will need a cosigner when we're ready to buy since we don't come close to qualifying for a big enough loan on our own.
Just thought you might like to play with the buttons. I love the loan calculator and savings calculator when I'm bored at work.
Posts: 2283 | Registered: Dec 2003
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docmagik, I'm not counting on the bubble popping. As you say, people being willing to put large chunks of their money in interest-only loans (something I have considered and decided to be a Really Bad Idea) makes it difficult.
However. Interest rates are rising. And last time (11 years ago) what it took was a big earthquake to break the bubble. I would never hope for an earthquake . . . but if one happens anyway . . .
Posts: 32919 | Registered: Mar 2003
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) but we literally had NO lookers in all that time. A neighborhood with mostly city workers during a city fiscal crisis...go figure.
