Author Topic: Debt Free - Now Buy a House!  (Read 7257 times)

ladycygnus

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Debt Free - Now Buy a House!
« on: August 06, 2013, 10:08:54 AM »
So, just this past spring I paid the last off my student loans off and officially made it to debt free. At this point my parents began pointing out how much money I could potentially save on taxes by taking out a loan on a house. At which point I cringed, but figured it was worth looking into (if I'm going to pay 900/month for rent in a decent place I might as well pay 1200/mo and own it).

I currently live in a 3 bedroom rented house where I know the owner well and she is eager to sell it to me, but it's in a prime location (near a university) and is thus a pretty penny for what you get (~300K). I like it because I can bike to just about anywhere in the town and I am comfortable living here. Two of the rooms have been rented out and the combined rent of both rooms would nearly meet the mortgage payments. But I'm picky about who I live with -- well mostly it's that I have the downstairs room and I don't want bow-chicka-wow-wow going on above me O_O.

The house is a sturdy one and well kept up, the only real concern is the front wall (gutter overflows and the siding near that point is bulging out - but a home inspection would verify if this was water damage). There are things I would love to improve in it, like upgrading the kitchen counters, putting in wood floors and regrading the yard, but these are all cosmetics.

The main thing that gets me is that I don't really have a down payment yet and won't for another two years (everything went to the student loans and since my car is on the fritz I'm saving for a "new" used car - hopefully before October so I don't have to get this one inspected). Everyone mentions that there are no-down-payment loans out there, but I've seen people get burned by second mortgages with 20% interest. Not for me. Has anyone ever done a rent-to-own? Should I just wait a bit longer?

Rebecca Stapler

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Re: Debt Free - Now Buy a House!
« Reply #1 on: August 06, 2013, 10:26:24 AM »
I don't think that 80/20 mortgages are common these days, but there are still mortgages that will finance the entire home. When the mortgage exceeds 80% of the home's equity, however, you are assessed "PMI," which is insurance against your default and can really add up. Ideally, you should have 20% or more as a down payment, in order to avoid PMI.

It's great that you love where you live now, but I wouldn't pay a premium for a rent-to-own option unless the agreement were iron-clad on all the "what ifs" -- taking into account who does the repairs, when the ownership changes over, what the firm price is, whether there are additional fees, etc. Even then, I'm not sure I would get into a rent-to-own situation.

olivia

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Re: Debt Free - Now Buy a House!
« Reply #2 on: August 06, 2013, 11:10:46 AM »
If you can bike most place, why not put the money towards a down payment instead of a new car?  If you can get your car to limp along for a while, you don't need a new car.

How quickly does the owner want to sell?  Will she sell to someone else if you won't buy it?  Do you qualify for an FHA loan?  You have to put down 5% now, I think, so $15k.  You will have to pay PMI though, and I've read here that you'll have to refinance one you get 20% equity because FHA loans won't remove PMI until it's been 5 years.  (This is hearsay so definitely look into this further!) 

OR if your parents are pushing the idea so much, would they be willing to help you buy the house?  You can still get gifted down payments, and you could always pay them back later.  Or you could go in on it together as an investment and give some of the rental income to them?  (This may make no sense at all, just throwing out ideas!)


gecko10x

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Re: Debt Free - Now Buy a House!
« Reply #3 on: August 06, 2013, 11:22:30 AM »
My understanding is that FHA loans are basically PMI-for-life.

However, there are other ways to do low down payment. We got a traditional mortgage last year with less than 20% down (they would have let us go as low as 3.5% I think)- it was through a regional bank. We have decent steady income, excellent credit, and had a fair amount of cash in the bank ($20k?), so YMMV.
You will have to pay PMI, but again, there are ways to limit it: you can actually do upfront PMI instead of monthly, and pay significantly less total money. If you go this route, be sure to have your mortgage broker shop around for the best rate, because the company with the best monthly PMI rate probably won't be the same one as the best upfront PMI rate.

Mr.Macinstache

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Re: Debt Free - Now Buy a House!
« Reply #4 on: August 06, 2013, 11:27:00 AM »
You are not ready to buy a house. If you don't have 20% down, you have no business taking on a mortgage. Save your money, get your car situation figured out first and work toward saving 20%.

Trust me on this, owning a home is a huge responsibility and costs a lot of money, not to mention you pay a ton of interest. It's best to go in with 20% down and buy a house you can afford that does not need a ton of work.

gecko10x

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Re: Debt Free - Now Buy a House!
« Reply #5 on: August 06, 2013, 11:31:46 AM »
You are not ready to buy a house. If you don't have 20% down, you have no business taking on a mortgage. Save your money, get your car situation figured out first and work toward saving 20%.

Trust me on this, owning a home is a huge responsibility and costs a lot of money, not to mention you pay a ton of interest. It's best to go in with 20% down and buy a house you can afford that does not need a ton of work.

Harsh advice for someone that is debt free.

However, I will add that it's probably better NOT to own if you have ANY interest in moving in the next 10 yrs.

Mr.Macinstache

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Re: Debt Free - Now Buy a House!
« Reply #6 on: August 06, 2013, 11:37:55 AM »
You are not ready to buy a house. If you don't have 20% down, you have no business taking on a mortgage. Save your money, get your car situation figured out first and work toward saving 20%.

Trust me on this, owning a home is a huge responsibility and costs a lot of money, not to mention you pay a ton of interest. It's best to go in with 20% down and buy a house you can afford that does not need a ton of work.

Harsh advice for someone that is debt free.

However, I will add that it's probably better NOT to own if you have ANY interest in moving in the next 10 yrs.

He wont be debt free after a 300k mortgage and extra PMI per month. He simply can not afford it if he does not have the down payment. He will also risk being upsidedown without a good down payment too. Not worth it IMO.

ladycygnus

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Re: Debt Free - Now Buy a House!
« Reply #7 on: August 06, 2013, 11:43:18 AM »
From the sound of it she is looking to sell within the next year (and I'd need at least that, if not two, to even consider having enough). I'm not sure I like the idea of paying a premium for this (there are much better uses for that money) and I'm quite certain my parents do not have that money. However, I do NOT want to go through the huge hassle of finding another home - I'm allergic to mold and thus cheap basements are out. Pretty much any place I rent will cost upwards of 900/month without utilities...this one costs just 650 (utilities included) when all the rooms are rented.

I'm not thinking about moving within the next 10 years (I rather love my job, community, church, etc). I have excellent credit, decent steady income, no expenses except charities (single with no kids). The only thing I lack is cash because every penny I had went to removing the debt. Well, OK, I could have spent less over the years, but I'm generally cheap by nature and my gifts to myself involve buying off the discount rack and eating out a bit too much.

ladycygnus

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Re: Debt Free - Now Buy a House!
« Reply #8 on: August 06, 2013, 11:49:57 AM »
He wont be debt free after a 300k mortgage and extra PMI per month. He simply can not afford it if he does not have the down payment. He will also risk being upsidedown without a good down payment too. Not worth it IMO.

*She* appreciates that point about being upside-down - I hadn't thought about that. This housing market is being propped up by the local university, should the education bubble collapse (as some have rumored that it will) this could drop in price dramatically. This is a big U so it probably wouldn't go Detroit, but the idea of potentially going under water is something to consider.

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Re: Debt Free - Now Buy a House!
« Reply #9 on: August 06, 2013, 12:03:26 PM »
Sounds like you don't have enough cash for a conventional loan and you love this house. So put together a written contract drafted by your real estate attorney where you get owner financing from your current landlord while the landlord sells you the property. After a certain amount of years you can qualify for a conventional mortgage or just sell the property and move on to another property.

For example, you pay zero down and agree to pay a higher interest rate than market or maybe add some bucks on top of the normal "Mortgage" that you will be paying the former landlord to knock down principle. You guys need to talk out the specifics of your deal, but start by getting advice from a real estate attorney.

cko

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Re: Debt Free - Now Buy a House!
« Reply #10 on: August 06, 2013, 12:10:51 PM »
It is my opinion that you should analyze the purchase of anything, including your own residence, as an investment.

So 300k seems to be a lot, but what is the context? How is the economy of the city that the property is located? And what are the rents?

If you look at it from a landlord's point of view, you'd want at least $3000 a month in rent assuming you purchased it to rent it out. And that's also assuming the property is in a good, safe location surrounded by high-paying employers and households with high median salaries. Or if it's near a university, make sure at least you can collect a good rent.

As soon as I graduated I was nearly debt-free, and my parents told me to buy a house. Am I glad I didn't - I now rent a room in their house for a low monthly rate, and am going to purchase my 4th and 5th rental properties soon.

So it truly depends on the numbers. If the monthly mortgage payment is $1200, and you're saying that two of the rooms "nearly meet" the mortgage payments, then I'll assume it's $600 per room. If you rent out your own room, then the total monthly rent you can collect is $1800, which is certainly not enough to justify a $300k purchase price - especially when your description of the house illustrates one that is at least 30 years old. A 200k purchase price, maybe, if that's going to be your primary residence. But if the rent is $600 per room, why don't you rent that instead of buying, especially when it's so well-located?

Deano

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Re: Debt Free - Now Buy a House!
« Reply #11 on: August 06, 2013, 12:10:58 PM »
The bulging wall thing should scare you...it's 99% likely that it's water damage by the sounds of it and I would guess that it's not likely just the siding that's damaged. Really have a good look at that.

cko

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Re: Debt Free - Now Buy a House!
« Reply #12 on: August 06, 2013, 12:16:16 PM »
Also, the mortgage payment itself might be $1200-$1400/month, but that's before you consider escrow (for HOA fees, property taxes, and insurance) which could add $300+ a month and utilities. And maintenance, since it doesn't seem like a new house, and if there are $650 renters there probably won't be "pride of ownership" from those tenants. Meaning your maintenance will likely be high.

Mr.Macinstache

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Re: Debt Free - Now Buy a House!
« Reply #13 on: August 06, 2013, 12:20:57 PM »
He wont be debt free after a 300k mortgage and extra PMI per month. He simply can not afford it if he does not have the down payment. He will also risk being upsidedown without a good down payment too. Not worth it IMO.

*She* appreciates that point about being upside-down - I hadn't thought about that. This housing market is being propped up by the local university, should the education bubble collapse (as some have rumored that it will) this could drop in price dramatically. This is a big U so it probably wouldn't go Detroit, but the idea of potentially going under water is something to consider.

Pardon me! :). I think you're wise to consider the local housing economy too. There has been chatter of an education bubble. Something to keep in mind when you're counting on rental income.

Also I will echo concerns about the water damage situation. That has the potential to be a huge cost. I would also question why someone is so eager to sell... they might know something you don't about the property.

ladycygnus

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Re: Debt Free - Now Buy a House!
« Reply #14 on: August 06, 2013, 12:24:12 PM »
The bulging wall thing should scare you...it's 99% likely that it's water damage by the sounds of it and I would guess that it's not likely just the siding that's damaged. Really have a good look at that.

The spot is about 6 ft away from the overflow spot (it only overflows in heavy rains - more like the pipe can't handle the flow). My suspicion is that it's warped due to heat. That side of the house gets direct sunlight for half the day (SW facing). If they put in the siding in wrong to begin with (not leaving space to expand in the heat) it could buckle like that.

However, I'm not 100% sure and this is certainly something I'd have looked into by a home inspector as I've seen the damage caused by a clogged gutter (that house had baby trees growing in the gutter!). For this house they've kept the gutters mostly clear and have netting over them to prevent major clogging.

ladycygnus

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Re: Debt Free - Now Buy a House!
« Reply #15 on: August 06, 2013, 12:31:41 PM »
Quote
*She* appreciates that point about being upside-down - I hadn't thought about that. This housing market is being propped up by the local university, should the education bubble collapse (as some have rumored that it will) this could drop in price dramatically. This is a big U so it probably wouldn't go Detroit, but the idea of potentially going under water is something to consider.

Pardon me! :). I think you're wise to consider the local housing economy too. There has been chatter of an education bubble. Something to keep in mind when you're counting on rental income.


S'ok, I know "Lady Cygnus" isn't exactly gender specific. Hehehe - just playing with ya! ;-)

Quote
Also I will echo concerns about the water damage situation. That has the potential to be a huge cost. I would also question why someone is so eager to sell... they might know something you don't about the property.

Nothing bad that I know of. She went out of state to finish her education and was hoping to come back, but now will be away much longer and has added expenses. Not being in-state it's been hard for her to keep up with landlord duties so the house is becoming more of a liability than a benefit. If I were in her shoes I'd be eager to sell as well.
« Last Edit: August 06, 2013, 01:50:08 PM by ladycygnus »

Rebecca Stapler

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Re: Debt Free - Now Buy a House!
« Reply #16 on: August 06, 2013, 01:18:28 PM »
I'm assuming that she hasn't yet put it on the market, so it's not urgent that you make an offer. How about trimming the fat from your expenses for a few months, including trying to ride your bike instead of use your car, see how far it gets you towards a down payment, and re-assess at that point?

Mr.Macinstache

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Re: Debt Free - Now Buy a House!
« Reply #17 on: August 06, 2013, 01:46:03 PM »
*She* appreciates that point about being upside-down - I hadn't thought about that. This housing market is being propped up by the local university, should the education bubble collapse (as some have rumored that it will) this could drop in price dramatically. This is a big U so it probably wouldn't go Detroit, but the idea of potentially going under water is something to consider.

Pardon me! :). I think you're wise to consider the local housing economy too. There has been chatter of an education bubble. Something to keep in mind when you're counting on rental income.


S'ok, I know "Lady Cygnus" isn't exactly gender specific. Hehehe - just playing with ya! ;-)

Quote
Also I will echo concerns about the water damage situation. That has the potential to be a huge cost. I would also question why someone is so eager to sell... they might know something you don't about the property.

Nothing bad that I know of. She went out of state to finish her education and was hoping to come back, but now will be away much longer and has added expenses. Not being in-state it's been hard for her to keep up with landlord duties so the house is becoming more of a liability than a benefit. If I were in her shoes I'd be eager to sell as well.
[/quote]

Ha! Ok I deserve that ribbing. :P I would certainly run some comps, if she is eager to sell, maybe you two can work it out without paying a broker and use a title company to save a lot of money. I would still position yourself with a good down payment. 300k is a huge mortgage plus you're dependent on renters so better shore up your savings a little more for that.

aj_yooper

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Re: Debt Free - Now Buy a House!
« Reply #18 on: August 07, 2013, 06:07:25 AM »
It is my opinion that you should analyze the purchase of anything, including your own residence, as an investment.

So 300k seems to be a lot, but what is the context? How is the economy of the city that the property is located? And what are the rents?

If you look at it from a landlord's point of view, you'd want at least $3000 a month in rent assuming you purchased it to rent it out. And that's also assuming the property is in a good, safe location surrounded by high-paying employers and households with high median salaries. Or if it's near a university, make sure at least you can collect a good rent.

As soon as I graduated I was nearly debt-free, and my parents told me to buy a house. Am I glad I didn't - I now rent a room in their house for a low monthly rate, and am going to purchase my 4th and 5th rental properties soon.

So it truly depends on the numbers. If the monthly mortgage payment is $1200, and you're saying that two of the rooms "nearly meet" the mortgage payments, then I'll assume it's $600 per room. If you rent out your own room, then the total monthly rent you can collect is $1800, which is certainly not enough to justify a $300k purchase price - especially when your description of the house illustrates one that is at least 30 years old. A 200k purchase price, maybe, if that's going to be your primary residence. But if the rent is $600 per room, why don't you rent that instead of buying, especially when it's so well-located?

These are very good points!  The owner has a rental property that is not producing rent at its market value so she wants to sell; she probably obtained it at a lot less than current price.   So why would you buy it to rent to others?


Mr.Macinstache

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Re: Debt Free - Now Buy a House!
« Reply #19 on: August 07, 2013, 08:48:36 AM »
I read something today on zerohedge, that 60% of people are NOT paying anything on their student loans and good portion are delinquent. Take that for what its worth, but I don't know if that says bubble or not since the Fed govt is too big to fail it will always get bailed out and keep lending as far as student loans go.

jfer_rose

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Re: Debt Free - Now Buy a House!
« Reply #20 on: August 07, 2013, 09:25:54 AM »
I just finished reading "The Millionaire Next Door." The book said that most millionaires only spend twice their annual salary on their home. Might be something to think about in getting an idea whether this home is really the right one for you.

Edit to add:
I pulled what I typed above from memory but I double checked and the exact quote from the book is quite a bit stronger:
"Here is another one of our rules. If you're not yet wealthy but want to be someday, never purchase a home that requires a mortgage that is more than twice your household's total annual realized income."
« Last Edit: August 07, 2013, 01:29:20 PM by jfer_rose »

Mark B

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Re: Debt Free - Now Buy a House!
« Reply #21 on: September 01, 2013, 02:12:20 PM »
wazzup ladycygnus!  Or should I say, hey dude! (just kidding)

You know, I've seen this a lot, and I've experienced it myself a number of times.  A "deal" or "opportunity" comes up, or someone in your life suggests you consider some sort of financial deal, and suddenly something that was not even in your consciousness becomes a major life decision.  And more than most younger people can even guess, this sort of thing also can become a major life turning point--in a good or bad way.

I have something that the majority of this forum's members don't (since most seem to be in their 20's and 30's)--some lessons learned painfully from making just about every stupid financial move possible over a period of decades.  From this perspective, I have a few points/questions for you to ponder:

-Was buying a house right away a top priority for you before your parents lovingly butted into your life to suggest this purchase?  It's an important point.  Home ownership shouldn't be entered into casually, because someone else thinks it's a good idea.  It takes money, time, work, knowledge, and it doesn't necessarily always pay off.  A highly motivated person will do their homework in order to be able to run the numbers for a property in order to decide if it's a good deal or not, and they'll pass on it if it's not the best deal they can get.  The casual buyer buys and takes his/her chances.

-Are your parents real estate experts?  I'm probably around their age, and if I am, we came from a time when it was hard to lose money buying a house.  You just buy any old house and wait, and voila, you have a boatload of equity.  That's much less true now, but a lot of us cling to that mindset.  It's still very possible but you have to be pickier and more knowledgeable.  You have to buy the right properties.  If your parents aren't active real estate investors they might not understand what it is to buy real estate these days.

-Is this house where you want to live for some time?  Is this the type of house you want to live in?  Do you have a good job, a career job that you're going to stay in long term (or until you reach FI)?

It seems to me that you're considering buying this house because it's for sale and you live there.  The fact that you live there is just random happenstance and has nothing to do with whether or not the house is a.) a good deal, or b.) right for you.  So, it's very much like putting a map of your area on the wall and throwing a dart at the map to decide what house you'll buy.  Right now, in other parts of your city, other home owners are also deciding to sell their homes.  The fact that you don't live in any of those homes should have no bearing on whether you should buy one of them over the one you currently live in.  You have a bit of an emotional attachment to this one because you live there and you know the onwer.  Very understandable.  I'm typing this email IN THE LIVING ROOM OF THE HOUSE I BOUGHT FOR THE VERY SAME REASON.  This house is definitely not my idea of my ideal home, and I would have been so much better off buying something else, but that decision has already been made (13 years ago).

Knowing what I know now, what I would do is this:  Take a couple of months to really learn about real estate investing.  On a dollar per hour basis, this learning will probably end up being some of the most lucrative work you'll ever do.  Then, look around your area, identifying homes for sale that meet your "must have" criteria.  From there, focus on the *best* deals.  Maybe the place you're living in right now will end up being a great deal, but if not, you need to pass.  Never let anyone, even your parents, persuade you to do what is not in your best interest financially.

PLEASE READ THIS PART, EVEN IF YOU'RE BORED WITH THIS LONG RANT:  A huge mistake I made three decades ago is to think that I was young and had all the time in the world to make money.  Like most young people, I didn't realize how CRITICAL it is to make really really good decisions when you're young, because over time the money you make by making juuuust the right decision grows exponentially while the money you lost or failed to make dies on the vine right there or becomes an anchor that also grows exponentially. 

I like to look at it this way--consider yourself to be a rocket going on a 40 year journey to a far off planet at nearly the speed of light.  In the beginning, the tiniest course miscalculation, left uncorrected, will mean that you'll be millions of miles off course by the time you start getting close to the destination, requiring huge, wasteful corrections later.  You might even run out of fuel before you reach your destination. If you've been vigilant the whole time, making the proper small corrections the whole way, by the time you're close to your destination you can make 90 degree turns or go in circles or go sightseeing to other nearby planets without any serious consequences.  It's the same with your money. Make the very best choices early on, and they'll pay off massively later. 

BTW, you mentioned saving money on taxes.  A mortgage owner "saves" money on taxes by spending much more in mortgage interest.  For example, I paid about $1360 in interest last month, and that affords me a monthly tax break of about $400.  Yes, my equity increases as well.  All I'm saying is that this is yet another thing you have to throw into the pot to see if your specific situation favors buying a particular property.

Oh, rereading your post, one last little thing:  why is the owner so anxious to sell to you?  That would totally raise a red flag for me.