Author Topic: Terrified. Gearing up for first home purchase - when to really get serious?  (Read 4228 times)

Rockhound

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Hi Mustache community. First post here. Been reading MMM for a long time and have a specific question about our financial situation.

Wife and I are young, no kids, never owned a home (renting now, $950/mo). We are currently 8-12 months (best and worst case scenarios) from being 100% debt free. Since graduating college and getting real jobs, we have had one car payment and our student loans. Car has been done for a while, loans are ALMOST DONE!!!!

We have a small nest egg, 5mo living expenses. Both of our jobs are very secure. We typically have $2500/mo left over after living expenses (roughly 1/3 of our gross income). For the past couple years, this has gone directly into our loans, even though minimum loans payments total to something like $700/mo. These figures include maxing out 401k and HSA.

Current plan is to pay down all student loans, spend 2 years or so saving a downpayment for a house (gunning for about $40-50k), then going for it. Houses in our area that we want would push $250-300k. Some friends (albeit over NYE drinks...) would not let up that we're making a mistake and should buy now to start building home equity and that interest rates and home prices are all rising. Buy sooner than later. Throttle back a bit on student loans and focus on getting into a house. What are your thoughts?

Thanks.


EDIT: Additional details. We hope to move into our new home and live there forever. We are looking to settle and are in the area we hope to stay forever.
« Last Edit: January 02, 2016, 09:47:26 AM by Rockhound »

maizeman

  • Magnum Stache
  • ******
  • Posts: 3891
Some friends (albeit over NYE drinks...) would not let up that we're making a mistake and should buy now to start building home equity and that interest rates and home prices are all rising. Buy sooner than later.

If it helps for arguing with friends over drinks, the conventional wisdom is that home prices and interest rates tend to move in opposite directions. For most home buyers, the maximum amount they can afford to pay for a house is determined by the monthly mortgage payment. So if interest rates go up, home prices will fall or at least rise more slowly than they would have otherwise.

superkookyburra

  • 5 O'Clock Shadow
  • *
  • Posts: 10
I would suggest talking with a lender.  A few years ago we wanted to know what it would take financially to buy a home so we could prepare for it (save up a down, etc), so we spoke with a Realtor and a lender.  It turned out we were able to purchase something with an FHA loan and only 3.5% down.  It worked for us because in our area rent was high and home prices were low.  Our monthly payment including all taxes and insurance on a 3 bed/2 bath ended up being $300 less than renting a small 2 bedroom in the area.  (Of course, we've had the costs of homeownership, but the numbers have worked in our favor.)

BeanCounter

  • Handlebar Stache
  • *****
  • Posts: 1459
We just sold our first home and bought our second. Our first house was a true starter home, 1200 sq feet, no garage on a small urban lot in a safe, but not really desirable (read not kept up, lower middle class) neighborhood. It was cheap to live there, BUT if I had it to do all over again I would have waited and bought something more expensive. We were overly conservative when we bought it. Buying much less than we could afford. The house didn't appreciate at all, and it costs a lot to sell a home. We would have been better off if we had bought a more expensive fixer upper, something that had everything we wanted but was ugly and just slowly made changes over 10 years. So that's my advice, wait and by something that you're pretty sure you will want to be in for a very, very long time. No "starter house"
« Last Edit: January 02, 2016, 05:49:08 PM by BeanCounter »

rachael talcott

  • Bristles
  • ***
  • Posts: 286
  • Age: 45
  • Location: TN

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 6003
  • Location: Fayetteville, NC
If you are in the USA, before you apply for a loan, make sure that the money you will use for your downpayment has been sitting in your bank account, all ready to go, for the last two bank statements.

It will make your life much easier when it comes to the paperwork.

bennion.r

  • 5 O'Clock Shadow
  • *
  • Posts: 8
I don't think the interest rates will move up very quickly. In another couple over years they might only be a percent higher. Just my personal guess :) Even so, if what you pay in interest, mortgage insurance, property taxes and expected repairs is less or comparable to what you pay in rent, for a house you'd like to be in for several years, then I think you should really consider buying, even if you're delaying paying off some debt.

Rockhound

  • 5 O'Clock Shadow
  • *
  • Posts: 3
Wow some great info. Thanks all.

Krolik

  • Stubble
  • **
  • Posts: 103
  • Age: 42
  • Location: S.Florida
We just bought a house in your price range (345K). It is a cosmetic fixer upper in a very good neighborhood and great schools. School was important for us because our daughter starts this year. We put 70K down, mortgage is $1200/month, HOA-$179, insurance + taxes = $8K/year.
Closing cost - 9K (we pre-paid insurance and don't escrow).

House was was very dirty and neglected when we saw it and I am sure deterred many potential buyers.
It has a very good layout, new roof and no structural problems but requires updates and cosmetic work. My husband is very handy and we will be able to do most of the work ourselves. Otherwise we would not go the fixer-upper route. We will do the work over the years.

We were shopping for 6 months and made offers on 4 houses before but were outbid every time by cash buyers. We leave in a competitive market with lots of wealthy people (S.FL).
It can be very frustrating and long process (depending on your market) so be patient and flexible. Be prepared to walk away if the price gets too high. Know your limits and have more cash on hand that $ saved for down payment.





clarkfan1979

  • Handlebar Stache
  • *****
  • Posts: 1919
  • Age: 40
  • Location: Pueblo, CO
We just sold our first home and bought our second. Our first house was a true starter home, 1200 sq feet, no garage on a small urban lot in a safe, but not really desirable (read not kept up, lower middle class) neighborhood. It was cheap to live there, BUT if I had it to do all over again I would have waited and bought something more expensive. We were overly conservative when we bought it. Buying much less than we could afford. The house didn't appreciate at all, and it costs a lot to sell a home. We would have been better off if we had bought a more expensive fixer upper, something that had everything we wanted but was ugly and just slowly made changes over 10 years. So that's my advice, wait and by something that you're pretty sure you will want to be in for a very, very long time. No "starter house"

I agree with the "no starter house" unless you plan to rent it out after you move.

chops

  • Stubble
  • **
  • Posts: 164
  • Location: Mustachian Midwest
Take your time.  There is no hurry. 

Many experienced FIRE bloggers (Go Curry Cracker, J Collins, Dr. Doom@livingafi) folks that have actually walked the walk, bought their house, sold their house, and retired early, believe that renting always beats owning, on a financial basis.  Check out their websites and search for their rent vs. buy stories. 

However, MMM does own a home, and not every decision is only a financial one.  Just make sure you know what it will cost you and that you recognize how it will affect your other goals.

Best of luck.

 - Chops


okobrien

  • Stubble
  • **
  • Posts: 107
    • Up From Wage Slavery
We just sold our first home and bought our second. Our first house was a true starter home, 1200 sq feet, no garage on a small urban lot in a safe, but not really desirable (read not kept up, lower middle class) neighborhood. It was cheap to live there, BUT if I had it to do all over again I would have waited and bought something more expensive. We were overly conservative when we bought it. Buying much less than we could afford. The house didn't appreciate at all, and it costs a lot to sell a home. We would have been better off if we had bought a more expensive fixer upper, something that had everything we wanted but was ugly and just slowly made changes over 10 years. So that's my advice, wait and by something that you're pretty sure you will want to be in for a very, very long time. No "starter house"

I agree with the "no starter house" unless you plan to rent it out after you move.
I actually disagree about buying a bigger house early. Years of higher utilities, insurance, tax, and maintenance really add up- much more than transaction costs in my opinion. Also, appreciation rates should not generally be related to house size. The popularity of the neighborhood and city is what matters there.

BeanCounter

  • Handlebar Stache
  • *****
  • Posts: 1459
We just sold our first home and bought our second. Our first house was a true starter home, 1200 sq feet, no garage on a small urban lot in a safe, but not really desirable (read not kept up, lower middle class) neighborhood. It was cheap to live there, BUT if I had it to do all over again I would have waited and bought something more expensive. We were overly conservative when we bought it. Buying much less than we could afford. The house didn't appreciate at all, and it costs a lot to sell a home. We would have been better off if we had bought a more expensive fixer upper, something that had everything we wanted but was ugly and just slowly made changes over 10 years. So that's my advice, wait and by something that you're pretty sure you will want to be in for a very, very long time. No "starter house"

I agree with the "no starter house" unless you plan to rent it out after you move.
I actually disagree about buying a bigger house early. Years of higher utilities, insurance, tax, and maintenance really add up- much more than transaction costs in my opinion. Also, appreciation rates should not generally be related to house size. The popularity of the neighborhood and city is what matters there.
You know, I didn't think about it this way. You might be right on the difference of property taxes in the little house-ok neighborhood vs larger house-nice neighborhood. I'm not sure on the utilities. New house is double the size, but construction and insulation is better.
I really wish there were more little houses in the nicer neighborhoods.

EAL

  • 5 O'Clock Shadow
  • *
  • Posts: 92
    • Mindful Money
Take it for what it's worth: We just closed on a home in December of 2015. Our mortgage broker told us that he foresees rates going up to 5 and 6 percent in the next few years due to the current state of the economy, stock market, federal lending rate etc.