First time home buyer

[alpenglow]

Got approved for a mortgage loan today and I'm pleased with it. But before I actually commit to buying a house, I wanted to gather as much information about the process as possible, especially on the financial side of things. Better to put down a bigger down payment or smaller one, putting extra money toward paying off mortgage ASAP vs dumping into a 457 plan or investing in VTSAX, ways to save money during the process, lowering interest rates through "points," etc., things like that that I may be overlooking.

I like reading books but will be super glad with blog, forum, etc., suggestions as well. The recommendations I've seen here in this forum so far are more geared toward investment it seems, I'm really looking more for "beginner" type stuff.

[alpenglow]

Thanks for the reply!

We're definitely looking to buy a small house (600-800sqft would be ideal, I'm opposed to anything over 1,000sqft). However, we're also in California so home values are more than they are elsewhere in the country. And, we make less than the median income for the US. In order to buy a house for less than our annual income, we'd have to move at least a few hundred miles away, and the options look like a trailer on a dirt road dozens of miles from any town or store or houses in extreme disrepair, mold damage, been completely gutted, etc. For double our annual income we can get something like a nicer 380sqft place on a dirt road, you pay for snow removal in winter but it might still be tough getting out for work, and I'd be worried about fires in summer since it's not as well protected as in town. Still, we're considering something like that. We're in a rural area too, which is a double edged sword--home values are lower than they are for most of California, but they're also in demand because not that many of them go up for sale but a lot of people are looking for them, especially in the price range we can afford.

I balked at the monthly payment the mortgage broker gave us--it was like 47% of our income (we've spent ~70% of our income on rent before, obviously we were making very little money then, but it's really not something I want to do when I know there are cheaper options). I was kinda like, uhh maybe nevermind on the house, then... But then I realized that that was for the most expensive house we were approved for. The houses I've been looking at are about ~$100k below that value. I think we'll be able to get away with about 1/3 of our income on mortgage, which is less than we pay now for rent, so it still seems like a good idea.

[pecunia]

Get your tools ready.  All houses break.

The more I read about this FI stuff, the more I see that houses are a liability and not an asset.  Life is not constant - resale should be considered.  Someday when you sell if you do it yourself, you can avoid the realtor's fee.

Take s look st how much of the payment is interest and how much is principal.  You are borrowing a lot of money.  Give them the dirtiest look you can if they won't provide you with an amortization table.  You will, of course, see that they get their money up front.  If you can just pay a little extra each payment, you are knocking years from the back end of the loan.   It will not be like rent, money just gone every month.

The most you will be able to get back from your kitchen and bathroom upgrades will be 80 percent, but the 20 percent loss may be made up in satisfaction.

[englishteacheralex]

I've owned 5 houses as personal residences and have made some mistakes along the way that I wrote about here https://ainslies.org/index.php/2018/03/31/retire-early-with-a-smaller-house/

My best advice - buy far less house than your real estate agent, your mortgage broker and your friends will recommend.

For making it a great financial move, I recommend ideally the monthly payment including principal, taxes and insurance will be under 25% of your take home pay. The total purchase price would be less than your annual income.

I put some detailed explanation in my article.

Good luck.

Cool blog. I will be reading.

[alpenglow]

Thanks pecunia, good things to think about.

I was wanting to look into some of the numbers on what you mentioned, "homes are a liability not an asset." I'd love to look at some different scenarios, what will get me to FI fastest.

The biggest reason I want to own a home isn't that it's necessarily the wisest move financially (although it sounds like it definitely would be based on NYT's rent or buy calculator), but that I just hate being a renter. Even my nice landlords I've had resentment for. I've had one place sold while I was living there and couldn't renew, one place wouldn't renew a lease because they wanted to do something else with it, one threatened to evict me because I had a couple house plants on my porch (it's true it was a violation of the lease to have anything on your porch), one asked me to sell one of our cars after we'd been there a few years (even though I'd cleared that car with them before signing the lease), one used to just ~drop by~ all the time without warning... I just want to have a place no one can take away from me, where I'm allowed to garden, and don't have be constantly on guard. And, in the long run, I think it will save money because once the loan is paid off you're just paying taxes, insurance, repairs, etc. My mom is paying less in mortgage/insurance/tax for a home purchased during the 2006 peak than I am to rent a place where I can't even sit on the porch because I share it with neighbors who are out there smoking constantly. Of course, that said, I definitely want to get a house in the most financially wise way I can.

[thriftychemist]

As a mortgage broker (though only in Utah), I mostly agree with Steve Ainslie. Definitely be cautious about over-committing. However, like you mentioned, it can be a real challenge to find something that fits all of the criteria in each area.

With interest rates generally trending upward but still fairly low overall, you can look at a home as a decent place to park some money. However, the interest rates are catching up with the expected rate of return. As long as you're okay with volatility, I'd continue investing as much as you can while just making normal payments. Lots of people suggest investing the money and when you have enough to pay off the balance, make the decision whether you want to pay it off or continue to let your money work for you.

In order to save money, here's what I would suggest:
1. (most important) Shop around for mortgage rates: once your credit is pulled for a home loan, it opens a 45-day window when you can have it pulled as many more times as you like and it shows up only as one inquiry. That way, you don't have to worry about your credit being hurt. I recommend getting (free) quotes from each of the following categories: online lenders, banks, credit unions, large brokerages, and small brokerages. Depending on market conditions, one or the other may have a significant advantage. I work for a small brokerage with relatively low commission, so we usually have very low rates and fees, but sometimes a credit union may beat us if you meet whatever criteria they have (place of residence, student status, an account with them, autopay, etc.). In any case, it won't hurt to shop and it could save you lots.
2. Compare your quotes: the key here is the APR. Your interest rate dictates the payment you'll make, but the APR is calculated by adding in all of the interest plus the closing costs. If the interest rate is the same, the lower APR will save you money up front.
3. Consider different terms: 30-year and 15-year fixed are the most common terms. However, there are also 20- and 25-year products out there that may give you a nice middle ground. Again though, be wary of committing to a higher payment than you can really afford.
4. Mortgage insurance: less is better. If you have the money saved for a 20% down payment, you won't have to worry about it. If it's less than that, you'll have to have it one way or the other. If you have a conventional loan, it'll automatically drop off once you've paid off a certain percentage of the home's value. If you have an FHA loan, it's there for the life of the loan. If you have poor credit, the mortgage insurance for a conventional loan may increase a lot, but FHA won't.
5. "Buying" a better interest rate: This one varies a lot from lender to lender. I'd just look at the difference between the estimated monthly payments and see how long it'd take to pay back.

I'd say those are the biggest keys. Feel free to message me if you have any questions!

[Jon Bon]

I almost think we need to split out the real estate forums.

California/Toronto/Seattle
and
Everyone Else

I am in the latter column. Honestly with real estate being so local sometimes the advice does not translate really well when you get into some of the really hot, and expensive markets.

That being said sure don't overextend, but also don't buy a house that is good for a very short period of time.  By that I mean buying a 1-2 bedroom house then having kids right after. Plus 3 bedrooms feels to be the magic minimum number of bedrooms when it comes to resale.  Don't buy a house in an so-so area because its super close to your job that you end up leaving one year later.

I know it is hard to tell the future but it saves you a bunch of money. I know guys that bought 1 bedroom bachelor pads in the building that they worked in only to get married quit the job and have kids within a few years.

[REIgal]

Hi there.  Realtor who specializes in investments (and also invests) here.  A couple of things: what's going on in your part of the country?  What's the job market like?  Is it strong?  Are people moving there and will they continue to move there?  If prices are increasing you need to know WHY they're increasing and if that will continue.  I'm in Portland and we have strict urban growth boundaries, which makes for limited real estate.  Do some research on your city and check out the trends. 

If you decide this is a good time to buy look for these things:

1) If something happened would you be able to rent it out?  Is it in a location that is desirable for resale?  Don't buy the beautiful house that's adjacent to the freeway.  Think about who would buy the property in the future.  If you're the only one looking at it ask yourself why, ESPECIALLY if it's cheap.  Cheap does not always make it a deal.
2) If you're in a hot market: What is the area that's just outside the hot area of town?  Look for real estate that is adjacent to the fun stuff but not viewed as desirable yet.  As prices continue to increase in the hot area and people get priced out they will naturally start moving to the neighborhood that's close but not as expensive and you'll gain a lot of equity.
3) Look for a crappy looking house on a nice street.  Trees have always served me well.  Does the street have nice trees?  Even if the area is currently not "hot" anything that's aesthetically pleasing will generally appreciate eventually.
4) For a first time homebuyer that's not super handy you'll want to find something that you can cosmetically change through easier means (paint makes a HUGE difference for minimal cost).  If you buy a beautiful, finished house you're paying for someone else's sweat equity.  I'm often that someone.  I'll take it for sure but it's better if you recoup those benefits yourself.   
5) There is a lot of misguided advice regarding Realtors here.  They are definitely not all created equal.  Go talk to A LOT of them and find someone that will fight for you, knows their stuff, and doesn't need the money.  Ideally someone that's not going to pass you off on a team member either.  If they have contacts in the off market/auction worlds that's even better.  DO NOT write an offer with the list agent.  I don't care that you think you're going to save the seller commission and get a better deal.  The seller has already agreed to pay the list agent a commission and the list agent doesn't need to reduce despite what you try to negotiate.  They will also not be able to represent your interests fully.  Do you want to write on a 300k house and hope to write at $292,500 to save the seller the $7,500 BAC?  What's the harm in that, right?  The offer is the easiest part of the whole shebang.  What happens during inspections and the appraisal?  I've gotten prices reduced by 50k or more during escrow because of what we find.  Do you think the list agent is going to do that for you?  Highly unlikely.  Don't lose money by making a poor decision to try to save a few bucks.  Professionals are professionals for a reason and list agents that do dual agency have questionable ethics.

I'm sure I could say a lot more about this but I'm short on time.  Feel free to message me directly with questions if you'd like.

[alpenglow]

Thanks all for your replies!

We're not planning on having kids; it's not something I ever really wanted, husband would rather not as well. It snows here, some years from October to April, so there are high costs for heating and I really would rather keep the bedrooms to 2 or less. I don't mind that it won't resell for as much, 3 bedrooms is just way way too much house for us. We're in a 2 bedroom apartment right now and it's too big. We go months without setting foot into the second bedroom. And, right now, it seems the houses here under 1,000 sq ft are the ones selling within a few weeks, whereas the ones that are 1300+ stay on the market for months. Possibly this is because the area is popular with retirees. I guess that's kind of what Jon Bon meant about real estate being so local.

thriftychemist (or others): As far as getting a good mortgage rate--I'm wondering if there are any services that can aggregate the rates for you, or do you have to specifically ask each lender? If it's the latter, what are typically some of the best places to check? Or, are there places that can give you what the quote would be without doing the actual credit check?

I ask because both of us have our credit frozen (due to the whole Equifax debacle; we were both compromised) and I only really feel comfortable doing the single creditor lifts now. :\ Two of the bureaus haven't charged for this (yet), but one does ($10). We've only gotten a quote from one place so far--fixed mortgage rate of 4.625%--and it was the place that my family and friends have used and highly recommended. The rate seems good compared to what the internet says they're going at now, but of course I would like to take advantage of the 45 day window since it sounds like this is a really important and potentially a big cost-saving piece.

REIgal:
I thought the job market here was poor--it's my hometown in a rural area and I've been wanting to move back for years. I thought that I would need to come back with an advanced degree. However, I was hired several months ago without even completing my bachelors into a decently paying job (especially for the area) that has great benefits, pension, etc. I've been told since moving back that the housing market is tight here because this is the county seat and has all the big employers (college, hospital, federal agencies, social services, industry, etc) and a lot of people want to live here. I think renting out a place or reselling would be fairly easy. I've also been told that a lot of people can't afford this town so they live 20-40 miles away and commute. I'm not super willing to do that  but I guess I'm somewhat open to it, for the perfect house/deal. I really want to live here, though. Because it's rural, the area most adjacent to town that I've been seeing having lower housing prices is still about 12-15 miles out of town and I'm a little wary of buying there due to forest fires. I'm not super handy but my husband is (he does light construction and had a job where he was preparing houses for sale before). Thanks for your tip in #5.

Thanks again everyone, I really do appreciate all the input and all the questions and points everyone has raised so far are helping me define what I really want and giving me new things to consider.

[thriftychemist]

Hey, for some reason I didn't get notified, or I would have responded earlier. Sorry about that!

As far as shopping for rates goes, I would check with a mortgage broker, preferably a smallish shop that's been in business for a while. Their whole job is to check several lenders and tell you what the current rates are. A really good one should have an option to get a quick idea online without putting in your specific information. I'll admit that I'm a little biased toward brokers, but credit unions can also give excellent rates at times. There may be associated fees or requirements to open a checking account, but if you're saving money over the course of the loan, it can easily be worth it. I'd recommend plugging whatever quotes you get into a loan calculator (there are some good ones at bankrate.com) and seeing how much it will end up charging you over the life of the loan vs. the length of time you plan to stay there. That's the clearest way to see what you should invest up front and how it will affect you in the long term.