Closing Costs/Down Payments/ Month-to-Month renting

[alwayslearning]

Thank you in advance for all of your help!

Background: My husband and I are in our mid/late twenties and looking to purchase our first home. We've been thinking about buying a house for 2 years now and feel that we are finally getting close! We got married earlier this year, paid off our student loans (150k at 6.8%) in June and have been saving for a down payment ever since. We have 25k so far and should have 45-50k by the end of December.

Here's the dilemma: We live in one of the hottest markets in the US -tons of cash offers and our lease is up in February (savings balance at the end of Feb expected to be 58k-61k) . (From what I understand, rates are supposed to go up early next year due to the government no longer subsidizing the low rates, so we'd like to purchase before then). We are looking to purchase a home in the 250k range and would ideally like to have 20% down to avoid pmi.


1. Being our first home, how much should we have saved for unexpected repairs?
2. What is a reasonable expectation for closing costs? Since it's a sellers market, should we assume that the sellers will not pay closing costs?
3. Should we extend our lease month-to-month past February to save more money?


Am I letting the "want" of a house jeopardize the financial responsibility of purchasing a home? Do I need a facepunch back to reality? If so, please facepunch!

[Cheddar Stacker]

Just in case you haven't read this yet:
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Don't let it scare you off completely. Buying and owning can be far superior to renting, just know if you are planning to grow your net worth substantially, purchasing a home is usually not what's going to drive that. You have to run the rent/buy analysis to see which is cheaper.

Repairs - It depends on the age of the home, the systems in place, DIY skills, etc. It's not really one size fits all. General big things though are Furnace ($2-4K) Roof ($5-10K) A/C (?unsure?) and miscellaneous appliances at various cost levels. You likely won't have to do all of this stuff, but make sure you pay attention to what the inspector says in these areas. It will give you a good idea of future expenses.

Closing costs - Likely ~$2-3K to establish escrow accounts (Taxes and Insurance) plus a few other fees like title and appraisal that might be another $1K. If you are quoted anything higher than that you should find another lender.

Month-to-month - I don't know. I wouldn't buy before you're ready simply because of interest rates. Hell, at that savings rate if you wait 2-3 more years you will be able to pay all cash eliminating the dependency on interest rates. I would still get a mortgage at that point, but that's just me. More reading on that here:
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
http://forum.mrmoneymustache.com/ask-a-mustachian/let's-settle-this-with-a-vote-invest-or-payoff-debts/

[alwayslearning]

Just in case you haven't read this yet:
http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

Don't let it scare you off completely. Buying and owning can be far superior to renting, just know if you are planning to grow your net worth substantially, purchasing a home is usually not what's going to drive that. You have to run the rent/buy analysis to see which is cheaper.

Repairs - It depends on the age of the home, the systems in place, DIY skills, etc. It's not really one size fits all. General big things though are Furnace ($2-4K) Roof ($5-10K) A/C (?unsure?) and miscellaneous appliances at various cost levels. You likely won't have to do all of this stuff, but make sure you pay attention to what the inspector says in these areas. It will give you a good idea of future expenses.

Closing costs - Likely ~$2-3K to establish escrow accounts (Taxes and Insurance) plus a few other fees like title and appraisal that might be another $1K. If you are quoted anything higher than that you should find another lender.

Month-to-month - I don't know. I wouldn't buy before you're ready simply because of interest rates. Hell, at that savings rate if you wait 2-3 more years you will be able to pay all cash eliminating the dependency on interest rates. I would still get a mortgage at that point, but that's just me. More reading on that here:
http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/
http://forum.mrmoneymustache.com/ask-a-mustachian/let's-settle-this-with-a-vote-invest-or-payoff-debts/

Cheddar Stacker- Thank you for your reply! I've seen your posts on other topics and respect your advice. 

I think you are right, we shouldn't be in a rush, simply due to interest rates. I think the excitement of finally owning a home is taking over! However, I want to feel comfortable with purchasing the home and having some spending money to make simple updates. We both agree that the home is not an investment, but rather a means of stability with the potential of having a space for children and a garden.

Also, thanks for the estimates on costs. I honestly had no idea how much to estimate for closing costs! Some of the articles I was reading said anywhere from 3k-9k. It's good to know that 4k is a little more accurate.

Do sellers ever pay closing costs in a hot sellers market?

[Cheddar Stacker]

We've purchased 2 homes.

The first one (2002) we financed 100% of the purchase price, plus about $3,500 in closing costs. So as the buyer we paid the closing costs.

The second one (2007) we financed about 90% with an 80% mortgage and 10% HELOC to avoid PMI. Again, we paid all closing costs in order to get the house we wanted. I think we overpaid for both houses and I will make sure that doesn't happen next time.

So I have no personal experience in sellers paying closing costs. Obviously it can happen and it wouldn't hurt to ask, but it's really just 6 of one or half a dozen of the other. The seller has a bottom/floor and you're trying to find it. Whether it's a sale price of $200,000 and you pay closing costs of $2K, or a sale price of $202,000 and the seller pays the closing costs, either way the seller is only willing to sell for $200,000, nothing less.

[usmarine1975]

Seller paying the closing cost used to be referred to as Seller Help.  Granted that get's to be a sticky term as it was used widely to get people into homes that normally wouldn't have been able to purchase.  You can always request the seller pay their share of the closing cost but as Cheddar mentioned the biggest factor is what you are paying for the home.  If you pay the right price it doesn't matter.  Your big real estate guys will tell you that you make your money in Real Estate when you buy not when you sell.  My pointers below.

Use your current bank for a mortgage

Make a list of what you want/don't want and stick to it

hire a property inspector when purchasing (do not waive it)

Make a lower offer (YOU DO NOT HAVE TO PAY ASKING PRICE) even when the realtor tells you that you do.

Get referrals for a good realtor and interview more then one.  (DO NOT just go with the listing agent)

You should also know to READ everything you sign in full. (IF YOU DO NOT UNDERSTAND it consult an attorney)

Research, research, research, and more importantly Location, location, location.

Have fun and do not stress about the interest rates going up, going down etc...  Buy when it makes sense for you.

Hopefully those are helpful.  Good luck.

[Cheddar Stacker]

... you make your money in Real Estate when you buy not when you sell...
... and more importantly Location, location, location...

+1 to both of these.

You can't change the location. It's hard and expensive to change the exterior, but it's possible. Anything inside can be changed to fit your needs/desires.

We like our current house, but we dislike the noise and traffic from a nearby street. Nothing we can do about it except move, which we plan to do sometime in the next 5 years.

[alwayslearning]

We've purchased 2 homes.

The first one (2002) we financed 100% of the purchase price, plus about $3,500 in closing costs. So as the buyer we paid the closing costs.

The second one (2007) we financed about 90% with an 80% mortgage and 10% HELOC to avoid PMI. Again, we paid all closing costs in order to get the house we wanted. I think we overpaid for both houses and I will make sure that doesn't happen next time.

So I have no personal experience in sellers paying closing costs. Obviously it can happen and it wouldn't hurt to ask, but it's really just 6 of one or half a dozen of the other. The seller has a bottom/floor and you're trying to find it. Whether it's a sale price of $200,000 and you pay closing costs of $2K, or a sale price of $202,000 and the seller pays the closing costs, either way the seller is only willing to sell for $200,000, nothing less.

That's a great point. We will keep this in the back of our heads when negotiating.

Seller paying the closing cost used to be referred to as Seller Help.  Granted that get's to be a sticky term as it was used widely to get people into homes that normally wouldn't have been able to purchase.  You can always request the seller pay their share of the closing cost but as Cheddar mentioned the biggest factor is what you are paying for the home.  If you pay the right price it doesn't matter.  Your big real estate guys will tell you that you make your money in Real Estate when you buy not when you sell.  My pointers below.

Use your current bank for a mortgage

Make a list of what you want/don't want and stick to it

hire a property inspector when purchasing (do not waive it)

Make a lower offer (YOU DO NOT HAVE TO PAY ASKING PRICE) even when the realtor tells you that you do.

Get referrals for a good realtor and interview more then one.  (DO NOT just go with the listing agent)

You should also know to READ everything you sign in full. (IF YOU DO NOT UNDERSTAND it consult an attorney)

Research, research, research, and more importantly Location, location, location.

Have fun and do not stress about the interest rates going up, going down etc...  Buy when it makes sense for you.

Hopefully those are helpful.  Good luck.

usmarine1975- Those points are very helpful. We are going to consult with an attorney for the paperwork side of things (We have legal insurance). We are going to be interviewing realtors through the USAA Movers Advantage program. Have you ever used this service? Thoughts?  Location is our biggest "want" right now. With the market being to tough, we know we are going to have to make some improvements to the home, but we will not negotiate with the location.

I have a location question (open to all to answer)- What school ratings are acceptable for you when picking a location? Ideally we'd like all "10" schools, however, we are considering a location that has a "9" for elementary, "8" for middle school and "9" for high school. Any thoughts on these two choices for resale purposes later?

[usmarine1975]

USAA worked great for me in locating a Car.  I can't speak for finding a realtor.  Personally if I can I will not use a realtor moving forward.  Basically you want a realtor that will work for you.  IMHO pre approvals for loans are crap but most realtors want one.  I don't sign paperwork to look at property.  The paperwork they want you to sign locks you to using them as a realtor even if you buy private sale you end up having to pay them a fee to a degree.  Not always enforced and may vary by state.

USAA has been a great resource for me in what I have been able to utilize their services.  Great place to start.

I wouldn't be the best to answer the school question I moved into a City with a HORRIBLE school system.  But I knew this, and also knew that my children would not go to public school anyway so it wasn't an issue for me.


Disclosure: I have bought 6 properties and made multiple offers that didn't come to fruition.  I am very familiar with the process and comfortable using Zillow to locate a property.  (not saying a new home buyer is ready to go without)  A lawyer can do all the paperwork for me and save me the one end of the fee. 

[Chranstronaut]

I have a location question (open to all to answer)- What school ratings are acceptable for you when picking a location? Ideally we'd like all "10" schools, however, we are considering a location that has a "9" for elementary, "8" for middle school and "9" for high school. Any thoughts on these two choices for resale purposes later?

I don't have kids, but am looking to buy a house in a year or two.  When I look at school rankings all I see is a reflection of how much money the parents in the area make.  My personal experience dictates that parental involvement, reading at home, extra curricular sports and arts were far more critical in elementary school and middle school than a rating value on the school.  Honestly, what could the difference between an 8 and a 10 school REALLY be?  I think you're stressing out a little too much here and going into parent-over-protection mode for your munchkins.  Did you forget what middle school was like when you were there?  My experience was a joke.  It was more about puberty, authority and personal development than education.

Here's an anecdote to consider: My elementary school (K-3) was a Title I school and is currently ranked "3" on Zillow.  We had a huge English Second Language population and free and reduced lunch population.  We were better off than a lot of families there, but struggled financially a lot.  That school had an enthusiastic and friendly principle.  I had passionate and effective teachers and some stressed out and angry teachers.  I was bored in most classes.  I learned computers and singing and reading and did drama after school.  My parents came to parent teacher nights, helped me with homework and came to every play and basketball game I had.  I made some good friends and some bad ones.

Then we moved across town and I spent (4-6) and (7-8) at two schools ranked 9.  I had both passionate and crappy teachers.  I was still bored in class.  I still learned computers and singing and reading and did drama after school.  My parents still came to parent teacher nights, helped me with homework and came to every play and basketball game I had.  I made some good friends and some bad ones.  My sister spend (7-8) at the middle school in the old neighborhood.  She got equally good grades and activities as I did in high school and college.

It might be harder to get ahead in a poorly ranked neighborhood or school, but an 8 year old that knows basically morality lessons, reads at home, can do basic arithmetic and does their homework will probably be fine at any school.  I know first hand how easy it is for poverty and malaise to trap young ambitions in a rough area.  But I also know people going to medical school, dealing pot, joining the military and becoming lawyers from both the "3" and "9" backgrounds.  Be there for your kids, help them at home and encourage them to be who they are as a person.  It'll all be fine.

Edit to further answer your question: when will you move?  Some neighborhoods gentrify and others decay further.  Half the neighborhood going to my old "3" elementary is pretty re-sellable; the street I grew up on is pretty rough and scarier these days.

[neo von retorch]

I read the comments and might not have much to add in wisdom, but here's been my experience, in relation to your questions:

1. Being our first home, how much should we have saved for unexpected repairs?
 - As mentioned, it is hard to say. I got a good inspection, and he said "you'll probably need a roof in about 5 years" and pretty much exactly that much later, I needed on. ~$5k. He didn't know that the heat pump would go... but since it was ~17 years old, it went. They can last a lot longer than this, but I wasn't so lucky. Age of the home and age of these items may help you to guess how long they'll last. My water heater also went... may have been the original. So it makes sense that it'd die after this much time.

2. What is a reasonable expectation for closing costs? Since it's a sellers market, should we assume that the sellers will not pay closing costs?
 - As others have said... for my $156k home I "paid" $7500 in closing costs, but about half went into escrow for prepaid taxes/insurance. Looking at the comments below, maybe I paid too much? I do know mine included $500 which was a one-time fee that let me not have PMI payments despite a 5% down payment. 1% title fee was $1600. I'd have to dig to see what else I ended up paying for...

3. Should we extend our lease month-to-month past February to save more money?
 - Broken record here, as others have said, buy the house at the right time for you. That is to say, when you found a house that you're sure you want to stay anchored to for the next ~7+ years. You wouldn't change cars if it meant you'd lose $5-15k and end up with the same car in a different place. With a home, this is a reality! You pay a lot up front, and more interest up front. For me, it was a mixed bag. I've been renting out bedrooms for income, but also had higher than expected repair costs. I'm past the 7 year mark, and I'm starting to feel OK about the house financially... compared to renting. But up until this point, it was the more expensive option!

I hope my anecdotes add a touch of humanity to your wisdom pool!

[Northerly]

I really think of a single family home as a luxury item suitable only for someone who is financially independent. Since my wife and I are not, we bought a triplex. It took a lot of looking, but we found what was essentially a large high-end single family home with a second kitchen in the basement, and full apartment above the garage. Bam! Beautiful live-in triplex with $2150 gross rents from the two other units. Our personal housing and utility expenses are now less than when living in a small apartment.

I cannot recommend this route highly enough. You can buy a multi-family building that is architecturally pleasing and not in the ghetto, so why not!

[usmarine1975]

We did the same bought a 3 unit in our city close to down town. Lived in the first floor for 7 years. Worked great and now is a full rental. We bought a single family in another section of town has more room for kids. We also purchased a 2nd single family as a rental. Going quite well.

[alwayslearning]

USAA worked great for me in locating a Car.  I can't speak for finding a realtor.  Personally if I can I will not use a realtor moving forward.  Basically you want a realtor that will work for you.  IMHO pre approvals for loans are crap but most realtors want one.  I don't sign paperwork to look at property.  The paperwork they want you to sign locks you to using them as a realtor even if you buy private sale you end up having to pay them a fee to a degree.  Not always enforced and may vary by state.

USAA has been a great resource for me in what I have been able to utilize their services.  Great place to start.

I wouldn't be the best to answer the school question I moved into a City with a HORRIBLE school system.  But I knew this, and also knew that my children would not go to public school anyway so it wasn't an issue for me.


Thanks! I am looking forward to using their Realtor service (all of the reviews look incredibly positive and they give you roughly $1k for using it).

Disclosure: I have bought 6 properties and made multiple offers that didn't come to fruition.  I am very familiar with the process and comfortable using Zillow to locate a property.  (not saying a new home buyer is ready to go without)  A lawyer can do all the paperwork for me and save me the one end of the fee.

[alwayslearning]

I have a location question (open to all to answer)- What school ratings are acceptable for you when picking a location? Ideally we'd like all "10" schools, however, we are considering a location that has a "9" for elementary, "8" for middle school and "9" for high school. Any thoughts on these two choices for resale purposes later?

I don't have kids, but am looking to buy a house in a year or two.  When I look at school rankings all I see is a reflection of how much money the parents in the area make.  My personal experience dictates that parental involvement, reading at home, extra curricular sports and arts were far more critical in elementary school and middle school than a rating value on the school.  Honestly, what could the difference between an 8 and a 10 school REALLY be?  I think you're stressing out a little too much here and going into parent-over-protection mode for your munchkins.  Did you forget what middle school was like when you were there?  My experience was a joke.  It was more about puberty, authority and personal development than education.

Here's an anecdote to consider: My elementary school (K-3) was a Title I school and is currently ranked "3" on Zillow.  We had a huge English Second Language population and free and reduced lunch population.  We were better off than a lot of families there, but struggled financially a lot.  That school had an enthusiastic and friendly principle.  I had passionate and effective teachers and some stressed out and angry teachers.  I was bored in most classes.  I learned computers and singing and reading and did drama after school.  My parents came to parent teacher nights, helped me with homework and came to every play and basketball game I had.  I made some good friends and some bad ones.

Then we moved across town and I spent (4-6) and (7-8) at two schools ranked 9.  I had both passionate and crappy teachers.  I was still bored in class.  I still learned computers and singing and reading and did drama after school.  My parents still came to parent teacher nights, helped me with homework and came to every play and basketball game I had.  I made some good friends and some bad ones.  My sister spend (7-8) at the middle school in the old neighborhood.  She got equally good grades and activities as I did in high school and college.

It might be harder to get ahead in a poorly ranked neighborhood or school, but an 8 year old that knows basically morality lessons, reads at home, can do basic arithmetic and does their homework will probably be fine at any school.  I know first hand how easy it is for poverty and malaise to trap young ambitions in a rough area.  But I also know people going to medical school, dealing pot, joining the military and becoming lawyers from both the "3" and "9" backgrounds.  Be there for your kids, help them at home and encourage them to be who they are as a person.  It'll all be fine.

Edit to further answer your question: when will you move?  Some neighborhoods gentrify and others decay further.  Half the neighborhood going to my old "3" elementary is pretty re-sellable; the street I grew up on is pretty rough and scarier these days.

These are all great points. There is probably no real difference between an 8 and 10. I just wasn't sure if an "8" school was a no-go for buyers. 

Personally, we are trying to decide between homeschooling and public school for our kids, but have a little time to decide. I'd love to do half and half like Mrs. Money Mustache. We are mostly interested in the schools for resale later (We don't have kids yet, so school is another 5-6 years away).

[alwayslearning]

I read the comments and might not have much to add in wisdom, but here's been my experience, in relation to your questions:

1. Being our first home, how much should we have saved for unexpected repairs?
 - As mentioned, it is hard to say. I got a good inspection, and he said "you'll probably need a roof in about 5 years" and pretty much exactly that much later, I needed on. ~$5k. He didn't know that the heat pump would go... but since it was ~17 years old, it went. They can last a lot longer than this, but I wasn't so lucky. Age of the home and age of these items may help you to guess how long they'll last. My water heater also went... may have been the original. So it makes sense that it'd die after this much time.

2. What is a reasonable expectation for closing costs? Since it's a sellers market, should we assume that the sellers will not pay closing costs?
 - As others have said... for my $156k home I "paid" $7500 in closing costs, but about half went into escrow for prepaid taxes/insurance. Looking at the comments below, maybe I paid too much? I do know mine included $500 which was a one-time fee that let me not have PMI payments despite a 5% down payment. 1% title fee was $1600. I'd have to dig to see what else I ended up paying for...

3. Should we extend our lease month-to-month past February to save more money?
 - Broken record here, as others have said, buy the house at the right time for you. That is to say, when you found a house that you're sure you want to stay anchored to for the next ~7+ years. You wouldn't change cars if it meant you'd lose $5-15k and end up with the same car in a different place. With a home, this is a reality! You pay a lot up front, and more interest up front. For me, it was a mixed bag. I've been renting out bedrooms for income, but also had higher than expected repair costs. I'm past the 7 year mark, and I'm starting to feel OK about the house financially... compared to renting. But up until this point, it was the more expensive option!

I hope my anecdotes add a touch of humanity to your wisdom pool!

Neogodless - Thank you for your comments and your honesty! I love seeing the actual costs, so I know what to expect. Sadly, I didn't even think about the cost of the title! Ah, it's looking like we should wait a little while longer to purchase. I'm thinking at least another 6 months to have some financial cushion. We looked at houses this weekend (for fun) and saw a lot of what we didn't want!

[alwayslearning]

I really think of a single family home as a luxury item suitable only for someone who is financially independent. Since my wife and I are not, we bought a triplex. It took a lot of looking, but we found what was essentially a large high-end single family home with a second kitchen in the basement, and full apartment above the garage. Bam! Beautiful live-in triplex with $2150 gross rents from the two other units. Our personal housing and utility expenses are now less than when living in a small apartment.

I cannot recommend this route highly enough. You can buy a multi-family building that is architecturally pleasing and not in the ghetto, so why not!

Northerly- Thank you for your advice! I will take this back home to the hubs tonight. That's a great option that we haven't considered yet!

[alwayslearning]

We did the same bought a 3 unit in our city close to down town. Lived in the first floor for 7 years. Worked great and now is a full rental. We bought a single family in another section of town has more room for kids. We also purchased a 2nd single family as a rental. Going quite well.

That's awesome! I'm definitely going to look into that here. It's a great market for rentals in our area!