Major home-buying headache.

[JoyMonkey]

I've got one of those big life-changing decisions to make soon. We were going to try and buy a house in the suburbs later this year, but from out of nowhere an amazing affordable housing opportunity has fallen into our lap. We're renting in the city right now, so it's hard to imagine life in the suburbs. I don't know a whole lot about buying a home, but I'm starting a first-time-buyer class next week. It's a big step and I'd like to see what others might do in the same situation.

Option 1: Buy the city condo
We just about qualify to buy this 1 bedroom 800 sq.ft loft condo for $230,000. It's a little small, and the condo fee would be $280 a month (includes central air, building maintenance, etc.). Because it's part of an affordable housing/first time buyer program, we don't need a huge downpayment and closing costs would be minimal. Mortgage payments would be much the same as the rent we're paying now.
I don't have a car, but if need be the building is attached to a mutli-level parking garage. It's right in downtown Boston- my wife could walk to work in 5 minutes, I can take the subway like I have been no problem.
This condo would normally sell for $360,000+ (we can't turn around and sell it like that though, since it's intended for people in our income bracket it appreciates at 5% per year).

Option 2: Wait and buy a house in the 'burbs
This was our original plan. We could wait a few more months, and save more money to buy a house. We'd probably go for something around the $320,000 mark. No doubt, a house would need a lot more initial work than the brand new condo, but there's more bang for my buck. My wife could use the slow commuter-rail to get to work and I'd have to buy a car.
It's close to her parents, so if we have a kid (in 2-3 years time) there'll be someone close by to provide day-care.

Option 3: Keep renting like an idiot
Or we could just keep pissing our money away on rent.

[Bones]

Option 2:

When the kid comes along you will then have all the headaches behind you. Wouldn't be fun with a newborn in a single room house and then trying to pack up and move again.

Arrghhh!! The very thought just makes me go arrrgghhhh!!

If there is the chance of no kids then option 1.

[SirPeale]

Option 3.

The rates have fallen dramatically for loans, which is a good thing.  The problem is everyone is trying to cash in on this, and so the 'value' of property has gone SKYROCKETING.  What once might have been a moderate price of ~$100,000 is suddenly ~$300,000!  So while you 'save' money on the interest, you're getting robbed on the price!

My wife and I would *love* to get our own place.  I have so many plans which require owning a house (power station to suppliment our electrical needs, bio converter for waste bio-mass, vegetable oil diesel engine conversion) but with the prices the way they are, we will *never* be able to afford one.

[walls83]

2

it sucks having to wait I know my wife and I had to move into my parents house for a year so we could buy our first house. but it was well worth it.

[mr.Curmudgeon]

It's a little small, and the condo fee would be $280 a month...

Just a tip, mortgage payments are tax-deductible, condo fees are not. So that $280 is still like paying rent, on top of a mortgage. My advice would be to wait and save for a home. That's what me and my girl are in the process of doing. I can no longer stand living the "renter" life. Apartment living had it's perks, but I'm ready to start knocking down walls and paint like a mutha' fucka'....


mrC

[RetroJames]

Condo - 5min commutes rock.  We live in downtown Atl, 5 - 10 min commutes to work.  Well worth the added expense as opposed to the burbs IMHO.

Typical commutes to the burbs in Atl are at least 1 hour.  More on "bad" traffic days.  Nearly every day in Atl is a bad traffic day.

[danny_galaga]

just as an aside- mr c, is that avatar of you 'back in the day'?

[ChadTower]

Where in the burbs are you looking?  That's where I live.

[JoyMonkey]

We're thinking of Salem, it seems to be a pretty cool city as far as Boston's north shore goes.

One thing that's killing me is; we can afford the condo right now. So if we were to go that route, we'd be building equity instead of paying rent, so when the time comes to move to a bigger house in the suburbs (say in 2 years) we'd have a little more money to play with.

The commute from Salem would be a 30 minute drive for me in the morning and an hour in the evening. The wife's rail commute would take about 40 minutes.

[TOK]

My pick was to wait and get a house. I could never live in a condo because I'd be butting heads with the neighbors and homeowners association within a week.
You always hear what other people are up to (and it's always annoying), and I have a bunch of trucks, guns and motorcycles around, so I'd be the nieghbor from hell.

Hey, I'm considerate enough to know I'm an idiot, that should count for something. 

[ChadTower]

We're thinking of Salem, it seems to be a pretty cool city as far as Boston's north shore goes.

One thing that's killing me is; we can afford the condo right now. So if we were to go that route, we'd be building equity instead of paying rent, so when the time comes to move to a bigger house in the suburbs (say in 2 years) we'd have a little more money to play with.

The commute from Salem would be a 30 minute drive for me in the morning and an hour in the evening. The wife's rail commute would take about 40 minutes.

I know Salem VERY WELL.  I went to high school there, my wife and brother both lived their from birth to 20.  I know Salem like only a kid knows a town.

BTW, that 'building equity' thing is ---That which is odiferous and causeth plants to grow--- until about year 10.  Until then, almost all of your monthly payment is interest.  Say you have a $1400/month payment... in the first year, you'd probably be paying like $80/month principal.

[iwillfearnoevil]

being close to parents is such a huge plus! long commutes reduce your quality of life though. what's the chance of your $320,000 house increasing even more?

if you go the route of condo first, house in two years ... i'm not sure how much equity you'll have built up. due to your payments will mostly being going toward interest and not principal. run it through a mortgage calculator. i know you get some back come tax time - give the bank lots of money to get a little bit of that back from uncle sam. there's also the lots of new stuff you end up buying when you actually own versus rent. plus you'll need to make sure you keep that condo 2 years to avoid paying taxes on profit i believe. if there is some sort of condo/home owners association, that can be a source of problems. these groups can sue you and take your house or less severly force you to pay their legal/ court fees.

[iwillfearnoevil]

BTW, that 'building equity' thing is <auto-censored> until about year 10.

[ChadTower]

The commute from Salem would be a 30 minute drive for me in the morning and an hour in the evening. The wife's rail commute would take about 40 minutes.

Uhm... commuting to where?  Beverly?  In the morning it takes 30 minutes just to get to the Salem border.  There is no efficient way in or out of Salem.

Feel free to ask me Salem questions.  I can fill you in on pretty much anything, history, what places literally stink in the summer, where is good and where your car is just a B+E menu item.

[ChadTower]

if you go the route of condo first, house in two years ... i'm not sure how much equity you'll have built up.

None.  The condos in Salem are designed for doctors and lawyers who like to take the train.  Their closing costs/condo fees/etc would  make it a huge loss to go condo 2 years/house after that.

[GGKoul]

It's a little small, and the condo fee would be $280 a month...

Just a tip, mortgage payments are tax-deductible

I wish they had this in Canada...

Is the whole payment tax-deductible or just the interest??

Save and buy a house.

[SirPeale]

BTW, that 'building equity' thing is <auto-censored> until about year 10.  Until then, almost all of your monthly payment is interest.

the bank loves pushing the long-term mortgages. i think for a 30-year loan, it takes 23 years until your principal payment exceeds your interest payment, versus 7 years for a 15-year loan. at least that was my case. the mortgage person at my bank didn't think that was a big deal (obviously for them it was a great deal!) but something that gets overlooked.

Which is good, IF you can afford double the payment. 

Whenever you can, if you already have a mortgage (or any other loan) pay more than the minimum, and you'll pay it off faster, and pay less interest.

We're paying off a new car loan. I've been paying $15 extra a month.  It's not much, but it'll still save in the end.

[ChadTower]

Just a tip, mortgage payments are tax-deductible

Is the whole payment tax-deductible or just the interest??

Mortgage payments are NOT tax deductible. 

Mortgage INTEREST is tax deductible.  That is a substantial difference when compared to mortgage payments.  When you file your taxes you are allowed to, with proper documentation, deduct the amount of the previous year's mortgage interest paid from your federally taxable income.

And Peale... the 15 year loan isn't twice the payment, it's like an additional third, since there's so much less interest.

[RayB]

If you go for the condo, are you saving money or losing money compared to renting? If saving, then go for it. Sounds like that's what you want to do. But you seem to forget there are condo fees.

[mr.Curmudgeon]

Mortgage INTEREST is tax deductible.

Good catch. Although the first years payments are heavily weighted with interest. So out of a $1000/month payment, 90% might be interest. Again from what I understand...I am not a finance guy by any means, I'm an Artist and we're horrible with money.

[Dartful Dodger]

If you sell it in 2 years:
+ 10% appreciation
- the association fees
- up keep
- real estate fees
- moving
- inflation

Also your first few years the mortgage you're paying is mostly interest, so when you sell you wont own as much of the condo as you paid.

You are going to buy a house, so all the fees and headaches you get from a move/sell are doubled if you buy the condo first.

A house gets you land you own everything above and bellow it. You can also work on your car without any hassles from the association.

360,000+ is a lot of money, with the economy and interest rates going back up, do you really think someone is going to pay 380,000+ for it in two years?

I bought a town home two years ago, I like the not shoveling snow or cutting grass, but I would have bought a house if I had to do it over again.

[ChadTower]

360,000+ is a lot of money, with the economy and interest rates going back up, do you really think someone is going to pay 380,000+ for it in two years?

In Salem, it is possible.  Certainly not a guarantee, but it is possible.

[GGKoul]

If you go for the condo, are you saving money or losing money compared to renting? If saving, then go for it. Sounds like that's what you want to do. But you seem to forget there are condo fees.

Buying a condo would be like buying a house.  You have to pay all the legal and transfer fees.  And then pay MORE fees when you sell the condo.  As you'll have to pay for the realter for list and sell the property.  Which is usually 3-6% of the selling price. 

But if you rent, you just pay 1st, last and security deposit.

[JoyMonkey]

360,000+ is a lot of money, with the economy and interest rates going back up, do you really think someone is going to pay 380,000+ for it in two years?

That's not the way this works, this is an affordable housing program run by the city, it appreciates at 5% per year, so after 1 year I could sell it for $241,500, after 2 years it'd sell for $253,575. The same units which aren't part of the program are selling for $360,000 but I can get it for $230,000. The 5% limit is there to make sure this unit will always be with reach of people in my income bracket.

Also, with a 15 year mortgage, which we can afford with the condo but not the house, I'd have paid about $22,000 in premium after 2 years, which I don't think is so bad.

[ChadTower]

An affordable housing program in Salem?  Where?

That's not the way this works, this is an affordable housing program run by the city, it appreciates at 5% per year, so after 1 year I could sell it for $241,500, after 2 years it'd sell for $253,575. The same units which aren't part of the program are selling for $360,000 but I can get it for $230,000. The 5% limit is there to make sure this unit will always be with reach of people in my income bracket.

Also, with a 15 year mortgage, which we can afford with the condo but not the house, I'd have paid about $22,000 in premium after 2 years, which I don't think is so bad.

[JoyMonkey]

Sorry, the condo is in downtown Boston. If we were to buy a house it would be in Salem.

[ChadTower]

Ah.  Hit me up via AIM, we can talk Salem.   

[missioncontrol]

option 2

the condo is a one bedroom and your allready talking about kids in the future....so once they arrive you'll end up selling option 1 and going for option 2 and with the maintenance cost selling fees and such you really won't come out ahead....


plus untill you do have kids the spare bedroom can be used as a game room

[Daniel270]

It's always been my impresssion that owning a condo is like owning the apt you're trying so hard to get out of.....

my advice.... option 2.

[Ed ONeill]

Option 4 move north ...on average 45 minute commute to downtown.

4a. 2bedroom condo  800 sq feet  $150K ...condo fee $125 month
4b. a house around $250K

[ChadTower]

Salem IS north of Boston, those commute figures are not correct for Salem, and neither are the prices.

[Ed ONeill]

Salem is not North enough I am talking about where I am in Methuen or a surrounding town

The figure I gave are for Metheun straight up 93 without traffic it's 20 minute ride to Boston

[ChadTower]

Salem is not North enough I am talking about where I am in Methuen or a surrounding town

The figure I gave are for Metheun straight up 93 without traffic it's 20 minute ride to Boston

20 minutes being a pie in the sky best case, not an average or even likely 90% of the time.  One traffic stop, one fender bender, hell one flat tire on a car and you're looking at over an hour.

[abrannan]

360,000+ is a lot of money, with the economy and interest rates going back up, do you really think someone is going to pay 380,000+ for it in two years?

Really depends on the area, I bought my house 2.5 years ago, paid $300K.  I thought I was a fool buying at that price since the previous owners had bought two years before that for $200K.  Interest rates have risen since then, and non-upgraded houses in our neighborhood are now selling for $425K.  These aren't huge houses either, but the location is very nice.

20Yr mortgage, the best of both the 30 and 15 year worlds.  You hit principal earlier, and you don't increase your monthly payment as much as going from 30 to 15.

[mr.Curmudgeon]

just as an aside- mr c, is that avatar of you 'back in the day'?

Yeah..I was in Blue Oyster Cult.

[Dartful Dodger]

Really depends on the area, I bought my house 2.5 years ago, paid $300K.

A house is a solid investment.

[ChadTower]

[Yeah..I was in Blue Oyster Cult.

Really... I was in the Pink Clam Gang.

[HaRuMaN]

Really depends on the area, I bought my house 2.5 years ago, paid $300K.

A house is a solid investment.

No...  a house is a liability.  Buying a property to rent it out is an investment.

[DrewKaree]

Just a tip, mortgage payments are tax-deductible

I wish they had this in Canada...

They do have this in Canada, only instead of giving you the money, they keep it in their coffers and offer you free health insurance instead.

It's a wonder, with all the tax deduction items we have in the U.S. tax code, that you haven't stumbled across this sooner, GG.



JoyMonkey, go to www.clarkhoward.com and post this question in their forums.  You'll get the complete rundown of a group of the cheapest/looking-to-save people on the planet who will be either knowledgeable on this subject or know where better to point you to, and you'll have (IIRC) a few different "calculators" on there to help you with your decision.

BTW, this guy's a multi-millionaire who lives in ATL, and drives the hybrid Honda because he got a stupendous deal on it and because he saves money on gas....bought his wife's wedding ring from Costco/Sam's because it saved him several thousand dollars.....dollar store sunglasses....etc.  Clark Howard is the BOMB when it comes to his show's motto.  "We're here to help you save more, spend less, and avoid getting RIPPED OFF".

And I can vouch for 1hooked's ATROCIOUS traffic....and it doesn't even have to be rush hour!

[ChadTower]

They do have this in Canada, only instead of giving you the money, they keep it in their coffers and offer you free health insurance instead.

Myth myth myth myth myth myth myth myth myth myth myth!

Ever been to a hospital in Canada?  That's not health care, it's a central place the injured go to sit and die.  Horrible, horrible care, 6-8 month waits to see specialists when you have a 2 week problem.  That's IF you don't have to travel 1500km to find one.

The Canadian health care system is a FAILURE.  It's far from free, it costs you an assload of money every year, and it provides a care standard far far far far far inferior to most first world countries.

[DrewKaree]

Chad, I just meant that's where his "free health care" comes from....pointing out the benefits he sees and wishes for, but can't see where he's paying for it.

There IS no such thing as "free" from the government, but he's under that assumption because he doesn't know of mythical things such as "lower taxes".

That's all.


Oh, and to tell JoyMonkey to go to www.clarkhoward.com

[JoyMonkey]

After some discussion we've agreed not to go for the condo and buy a cheap place in Salem later this year. We'll more than likely get a 15 or 20 year mortgage on something priced about the same as the condo in Boston, pay as much as possible and then buy a decent house after about 5 years. Hopefully I won't be kicking myself about rejecting the condo (this is the third time we've been offered one of these- we should have taken one years ago  )

Thanks for all the opinions, it's givin my brain a little more to stew.

[danny_galaga]

If you sell it in 2 years:
+ 10% appreciation
- the association fees
- up keep
- real estate fees
- moving
- inflation

Also your first few years the mortgage you're paying is mostly interest, so when you sell you wont own as much of the condo as you paid.

You are going to buy a house, so all the fees and headaches you get from a move/sell are doubled if you buy the condo first.

A house gets you land you own everything above and bellow it. You can also work on your car without any hassles from the association.

360,000+ is a lot of money, with the economy and interest rates going back up, do you really think someone is going to pay 380,000+ for it in two years?

I bought a town home two years ago, I like the not shoveling snow or cutting grass, but I would have bought a house if I had to do it over again.

[danny_galaga]

just as an aside- mr c, is that avatar of you 'back in the day'?

Yeah..I was in Blue Oyster Cult.

pure gold!! that was funny. is that will ferrell? hard to tell behind the beard...

[Setabs]

Damn how much do houses cost in new england? and other parts of the U.S.

I live in Texas and even homes in Dallas aren't that expensive.  My house cost $58,000 and its 1100sq. ft about an 1 1/2 hours outside of the metroplex.   My brother had a house in Hollywood that was smaller than mine and was on a smaller lot of land, like about 10ft. parimeter around the house was his land.  Bought it about 250,000 and sold last year for 500,000.  My sister in law bought a brand new home built inside the d/fw metroplex for $150,000.  The house is cheaper than a new home where I live.  Just wondering what others had to pay for their area.

I say go with house you can claim property taxes on your income taxes also.

[ChadTower]

In Salem, if he gets a house under $300k that's not a falling down POS or in a lousy block, he's very very lucky.

[Buddabing]

Damn how much do houses cost in new england? and other parts of the U.S.

I live in Texas and even homes in Dallas aren't that expensive.

[ChadTower]

And your kids would grow up in Louisiana.

[Crazy Cooter]

After some discussion we've agreed not to go for the condo and buy a cheap place in Salem later this year. We'll more than likely get a 15 or 20 year mortgage on something priced about the same as the condo in Boston, pay as much as possible and then buy a decent house after about 5 years. Hopefully I won't be kicking myself about rejecting the condo (this is the third time we've been offered one of these- we should have taken one years ago

[GGKoul]

Just a tip, mortgage payments are tax-deductible

I wish they had this in Canada...

They do have this in Canada, only instead of giving you the money, they keep it in their coffers and offer you free health insurance instead.

It's a wonder, with all the tax deduction items we have in the U.S. tax code, that you haven't stumbled across this sooner, GG.

I knew the US had mortgage interest tax deductiion for a while now.  As I was going to move to the US for work during the Y2K days.

There was talk about during this system to Ontario during the election.  But the newly elected Ontario Government backed out of that program.

[Paul Olson]

I think you made a good choice passing on the condo.  With the cap on appreciation, it would not have been worth it.  My condo has nearly doubled in 4 years, so if it wasn't for the cap, I would say it would be a good investment. 

Paul

[abrannan]

Really depends on the area, I bought my house 2.5 years ago, paid $300K.

A house is a solid investment.

No...  a house is a liability.  Buying a property to rent it out is an investment.

Robert Kiyosaki oversimplifies a great many things, like trying to get a mortgage for a pure rental property when you haven't had a mortgage at all.  Rental properties can be big liabilities, particularly over the last three years when interest rates have hit major lows.  People are buying right now, and fewer people are renting, which means you have a harder time finding renters for your properties.  Try eating a few month's mortgage on a rental property, while you yourself are paying rent, or even your own mortgage.  Or tell me what happens to your property insurance when the insurance company finds out there isn't anyone residing at the property. 

Don't get me wrong, R.K. can be a great introduction to the big picture concepts of money management, but as they say, the devil is in the details.

[jbox]

A house is a solid investment.

No...  a house is a liability.  Buying a property to rent it out is an investment.

That's a pretty bold thing to say, since you're essentially saying that everyone else is stupider than you are (ie. willing to pay you more rent then you pay someone else). Of course, statistically they are, but you're not being a "shrewd investor" rather than just taking advantage of them. Why not just rent a bunch of houses from other people, then sublet them at a higher rate to your chumps. That's pure profit since you don't have to fix anything when it breaks.

My partner and I have talked about buying a house, especially since several of our friends are now doing it. We live in a 1.5B house (the other one is really a sunroom), about 20mins (max) from the heart of the city on a single bus trip (one every 15mins). If we were to buy a house better than that we would need to be spending $300K+ given the current market (and paper work). We pay $160 rent per week.

Let's do some math:
$160/week = $8,320 "wasted" per year
5% loan = $15,000 "wasted" in first year
6% loan = $18,000 "wasted" in first year
7% loan = $21,000 "wasted" in first year
etc...
+ $15,000 per year of "non-wasted" money.

Lets say we rent for three years and use 6% ($33,000 p.a.) as a comparison:
rental - $24,960 "wasted", $74,040 principle
property - $51,246 "wasted", $47,754 principle

1) Obviously those numbers will be affected by how much money we can borrow "interest free" from parents, or the first home-owners grant for example. This may be offset by the land-lord paying council rates, upkeep costs, etc...

2) Buying in the 'city' is a completely different ball game, since you are paying for convienience, not value. This makes the city market more volatile over the short term as people continue to breed. If you have to live in the fast lane, then get a better job.

3) And of course, if anything goes tragically wrong, having your assests in a non-liquid form can be problematic.

Basically we worked out that while the rental market is good then we will get a better "return" just saving all our excess money for reducing the principle on our future home purchase. In fact, low interest rates are a *BAD* thing for people with low wages, as when people start rushing into the market they push the price up so high that not only will they "waste" the same amount overall, they will probably "waste" *MORE* in the long run since their deposit is a lower percentage of their principle and eventually interest rates *will* cycle again.

The best way to play this "game" is to try to aim for the route which reduces the amount of money you borrow from the bank. Buying rental property is *NOT* a short term investment, as you will never recoup the loan cost from rent. Rather, provided you cover as much as possible of the interest than you are getting the capital appreciation of the house "for free" when you eventually sell the property off. In response to the poster about "liabilities", the difference between a home and a rental property is that the rental property attempts to nuetralise the yearly cost through tenants, while a home provides a *HOME* in return for the yearly costs. In both cases you will still pay the exact same amount of gratitude to your chosen money lender based on how much of that property you could afford to buy yourself.

Of course, we know we *can* save that money instead of spending it. This is incrediably important, since you need to be investing that $74K to make sure it stays ahead of the rate property prices rise. Lots of people don't have that kind of budgeting discipline, in which case the numbers I presented start to swing the other way. If you need a debt to be able to budget then buy the house now. If you can budget without needing "motivation", then every year you wait can knock 2 years off your final loan. Well, until you start having kids...

[jbox]

In case that post was a little long and boring for some people, here is the executive summary:

- remember that most house loans go for about 15 - 20 years (at least)
- go to a few auctions and get a *real* price on the property you want
- add all the government, agent and bank fees
- go to a few banks and get a *real* interest rate for that amount
- now compare the first 5 years interest to the amount you currently pay on rent

If the difference is several multiples of your current inflation rate, stay where you are and save like Scrooge McDuck. You will either:
a) buy that house and pay it off faster
b) buy a better house in the same amount of time

If the difference is only a little bit (below double is time to start thinking hard) then start shopping for curtains.

[mrhowell]

Some of these prices I'm seeing make me feel lucky.  My wife and I just bought a 2600 sqf home (4 bedrooms and 2 baths) for $205,000.  That's with 1.17 acres and a 700 sqf shop (heated and A/C) .  Since we live outside the city limits we only pay parish taxes and that runs about $2050 a year.  Without the $75,000 homestead exemption are taxes would be about $2800.  Good luck with whatever you decide on your home purchase.

[missioncontrol]

i read somewhere that if you get a 30 year loan and make one extra payment a year towards the principal you will wind up paying your loan off in 13 years.............

[HaRuMaN]

You can split your payment and pay twice a month and cut some time off your loan as well.  For example, if your mortgage is $800 a month, you pay $400 twice a month.  Not quite sure how that works, but it does.

[abrannan]

i read somewhere that if you get a 30 year loan and make one extra payment a year towards the principal you will wind up paying your loan off in 13 years.............

I believe it's actually 23 years, 13 seems too short for what additional principal you're reducing.

You can split your payment and pay twice a month and cut some time off your loan as well. For example, if your mortgage is $800 a month, you pay $400 twice a month. Not quite sure how that works, but it does.

In theory, on a twice a month plan, you're saving two weeks of interest payments on the principal that you pay off in the first half of the month. 

Now, you combine the two plans like so, take your monthly payment and multiply it by 13 (adding an extra month), then divide by 24 (two payments a month for 24 months) and pay that twice a month.
So for a $1000/month mortgage you'd pay ~$541 every two weeks


Most importantly, learn how to do compound interest calculations, even if you have to brute-force it with an excel spreadsheet, and always check the math before you take any step, particularly with ARM re-financing.