Is It Feasible For Us To Put Down 20% For A Home?
Posted on September 19, 2006 by Him and tagged housing, mortgage, savings
The home ownership bug has hit me as of late. This is a dangerous thing, apparently, as many hours of my day are spent looking at housing calculators, reading up about different types of mortgages, and most procastinating-ly, looking at various properties in Chicago (those virtual tours devour my lunch hour).
I know I know - we are SO not in a position to buy a home. But hear me out.
We'll be credit card debt free in less than two years, freeing up about $1,000 a month for us. By that time we'll be married, and we will have a nice chunk of wedding money and other money saved up - by my estimates around $20,000. (EDIT: Please note that the $20,000 is coming from wedding gifts and OTHER SAVINGS. My parents have comitted to giving us a $10,000 gift for our wedding, so there's where half of it comes from.) Because we're faithfully paying off the credit card debt, we'll have excellent credit scores by then as well.
A decent 2 bedroom condo in Chicago runs about $300,000, so a 20% down payment on that home would be $60,000. That is a considerable chunk of change, especially when we already have a mortgage worth of student debt to pay off.
Is it feasible to drop 20% down considering our financial situation? What alternatives would you recommend?
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Young Finance Guy | Sep 19, 2006
You can also have 2 mortgagaes, one which will "piggy back" your first, thus avoiding PMI. That way I think you will only need 5% down.
Theresa | Sep 19, 2006
Sarah had some very good advice. I work for a mortgaage banker in Minnesota and we are a member of lenderswhocare.org. which is a group of lenders dedicated to affordable and sustainable housing.
check them out for a good lender and get educated on all the great programs.
good luck!
Becca | Sep 19, 2006
You might be interested in this: http://takecover.movingavg.com/
It's an online book and calculator comparing renting costs and home ownership costs.
For me and my partner, it's feasible to save up the money for a downpayment and we have no debt, but it's still dicey as to whether buying a home would be smart - we'd be in a worse neighborhood and have a lot of fixing-up to do probably. Then there are lots of costs for homeowners' insurance, property taxes, real estate agents etc. We don't know how long we'll be staying in this area either (mostly because it's a really expensive place to raise kids), and renting gives us a lot more flexibility.
Autologic | Sep 19, 2006
You say you expect $20K from the wedding. Out of curiosity how much are you planning to spend on the wedding? If you opted for a cheap/simple wedding how much additional (if any at all) could you put towards a house? If you will only save $1K a month and take two more years to pay off debt you are still 5+ years away from a house.
jmunnie | Sep 19, 2006
You are looking to buy at the tail end of the biggest housing boom ever. In fact, according to David Lereah, chief economist at the National Association of Realtors, "The housing boom ended more than a year ago, but sellers are having a tough time accepting that fact," said Lereah. "The result has been tumbling sales as buyers stay on the sidelines.”
You don't want to buy while prices are going flat or starting to fall, interest rates are rising, a flood of inventory is coming to market, and sales are sinking. It is, without question, the worst time to buy.
Please check out thehousingbubbleblog.com for lots of (bear-ish) advice on buying right now.
Check out the suburbs in Chicago and not necessarily the Loop or the near North Side. We all like the Lincoln Park and Bucktown area but it may not be feasible the first time around. You are probably not a South Side couple like myself. I live in the south suburbs and have a 3 bedroom condo where there are Blue Ribbon schools. There are pros and cons to everything. For me, it's the commute but I get way more for my money. I did an 80/20 and did not have to pay PMI. I am cranking away at the 20% HELOC but Countrywide is an excellent lender. Good luck!!!
The question that I would have is whether or not you could comfortably afford the mortgage. I guess it depends on how much you currently pay for rent. But a $240k mortgage at 6%, 30yr fixed would be mortgage payments of $1,439. Add in HOA fees and insurance (property taxes and mortgage tax deduction often roughly cancel each other out), and you may be getting close to $2k/mo.
Are you comfortable with this amount? Is it a reasonable amount based on your current and expected income?
sharon | Sep 19, 2006
My husband and I bought our first condo with only 6% down and we had tons of credit card debt and more than $200K in student loan debt (which we still have). We borrowed the 6% from my father-in-law. We ourselves only managed to save up closing costs. After a year we refinanced and paid my father-in-law back. After 3 years we sold it for a $48K profit and bought a 3-bedroom townhouse. My advice is, why wait? Call a good mortgage broker now and find out how much you qualify for and just buy it. Just keep your housing costs to what you can afford, which should be a little more than what you pay for rent now because of the income tax break you will get. Good luck. Great blog, by the way.
Doug | Sep 19, 2006
To me, I say you do whatever is reasonable financially to get into a home. I'm in California and bought just before the housing boom five/six years ago with 3% down, an interest rate at 7.5%, and rolled the closing costs into the loan to reduce the initial money needed up front. The 1st year of ownership is always rough adjusting to the mortgage, property taxes, and PMI. We (me and my wife) current have about 300K in equity, no PMI, and an interest rate at 5.5% fixed. It can be done if you make all of your payments on time.
To me, your 1st home is a bridge to the home that you really want to be in down the road. With student loans and no children I'd recommend buying less now until you establish enough solid equity to move into the 2nd home which may be the pre-dream home. It's not ideal but considering your financial situation now and going forward it will not tap you out and give you some option in the future.
Jmunnie might be right about this not being the best time to buy, but you said that you would want to buy in two years which will probably be fine. It is easy to get the RE bug. I always look at craig's list and such for housing even though I can't afford anything within 30 min communte of DC. I'm still saving for my down payment though even if it will be a long slow process!! Perhaps a little dip in prices will also help me out.
liz | Sep 20, 2006
Two years past a wedding is primo time for having babies, if you are planning to have any and barring infertility. Just make sure you don't buy too small. We bought the cutest little house about a year after we were married and had to move less than 3 years later because we needed the space. Lost a little money on the deal because we had done a fair amount of work on the house. We lasted three years because we did have some infertility; if things had gone as planned, we would have had to move sooner.
Christiana | Sep 20, 2006
You think you're going to get $20,000 in wedding presents? You must have some rich friends. We thought we were going to get way more cash for presents than we did, so don't count your chickens... If you're not talking about buying for another 2 years, I'd say you're on track, but if you're talking about buying now... I'd reconsider.
Starseer | Sep 20, 2006
I have to agree with Christiana - When I got married, the wedding cost about $7,500, which we paid by ourselves and is definately on the cheap side. Wedding gifts (when liquified into cash form) added up to about $10k. But things such as Persian rugs and Dinner sets really aren't liquifyable. We even specified "No Gifts Please" on the invitations. We received about $3k in cash.
Personally, as a financial professional, I beleive that you can do better with investments then you could with buying a home, if you manage your stock portfolio correctly - you could make on average of 17% gain on investment, which in these current Real Estate markets would be beating the game. Real Estate on average from what i've been told gains about 10%-12% a year. If you took that $20-60k and with the magic of compound interest, it would blossom exponentially - unlike Real Estate which varys with time. Heck, you could get a nice house and then over the course of 5 years, the neighborhood can go to hell and you're stuck with a house that has only increased in value by a small margin since you bought it.
I'm not totally against buying a home - but the recent years have over-inflated the prices and if your neighborhood is anything like mine, people are struggling to try to sell thier places because it's driving them into the ground with rising energy rates, lowering home values, and increased property taxes. Maybe the situation will change in 2 years, maybe not..
Unfortunately, I have to agree with Starseer and Christina. Our wedding cost a whalloping $50k - which, truth be told, I would have rather have taken the cash for, but this was my parents dream. We had 180 people attend our wedding and we received about $3K in cash.
A lot of people are not comfortable giving cash, even if you've told them that's what you want.
i honestly don't know how anyone can afford NOT to be a homeowner. paying rent is like throwing away money. if you are paying a mortgage you are adding to your equity, and you get tax benefits. talk to a lender you trust and s/he will help you figure it out.
Oh my, so many comments to make. Jeez, Him and Her, you guys always get some really interesting commenters!
Starseer, if you were to quote that second paragraph of yours to a potential client, you would probably be in violation of SEC rules. Stocks don't average 17%, even if managed "correctly" and real estate doesn't average 10-12%. Real Estate varies with time, but stocks do not?
Lin, paying rent is not throwing money away. You are paying for a place to live. Currently, the cost of mortgages is often 2-3 times the cost of rent. The tax benefits do not make up the difference. Not even close. Especially not after HOA fees, insurance and prop taxes. Will appreciation make up the difference? Maybe, maybe not. But then to buy based on this belief is simply speculating.
Autologic | Sep 20, 2006
Wait your parents are giving you $10K but Her parents are the ones that recinded the $10K offer?
http://www.makelovenotdebt.com/2006/04/what_i_meant_to_say_the_first.php Does your +$20K estimate include the cost of the wedding? How much do you plan to spend on the wedding?
Matt | Sep 21, 2006
It isn't just the mortgage.... there is also the property taxes (which are usually a lot higher than you think). Also, Condo Association dues. What utilities are included in your apartment that won't be included in the condo? What will the difference be in commuting costs? What about furnishing the Condo? Don't forget all the home improvement costs. And believe me - most importantly the emergency late night repairs. Those are the hidden costs of home ownership, and they can be significant.
BC | Sep 21, 2006
Any smart financial planner will tell you never to look at your home as an investment. That should not be the reason to buy a home. So many people view a home as a guaranteed investment, but property values can rise or sink. That said, my fiance and I just bought a condo, and we're getting married in October. But our only debt is in student loans (only his), we're paying for the wedding in cash (mainly out of our own pockets) and we were lucky enough to put 20% down. We wanted to buy 2 years ago, and we're glad we waited, because now we've saved enough money not to be "house poor."
I agree with Chitowngirl. Go for the burbs. I was able to buy twice the square footage and a garage for $30,000 less than in the city. Also there's nothing like a taking a refreshing nap on the Metra. When we go into the city for nightlife, traffic is usually non-existent.
I don't work your area of the country, but check out www.themortgageinfosite.com and www.ctmortgageco.net for some good information. If you go to www.themortgageinfosite.com you can request a 24 page homebuyers guide that you should find useful. If you want, I can also refer you the name of someone out in that area who can assist you with answering the questions you have. Putting 20% down may not be the best option, but the only way you will know is to speak with someone who does this for a living- and not just anyone, but a real professional.
Also, in regards to the "housing bubble" you read about all over the place, this really only matters if you plan on buying and selling soon. IF you are buying and plan on keeping the property you buy, it really doesn't matter. Also, all the Nay sayers out there who make this bubble out to be some horrific event about to happen have no clue about what is really going on. The prices are already falling, but really all it is doing is bringing the prices down to where they should be, stopping the crazy growth we have had over the last few years in the housing market. Unless you are buying in an area that is WAAAAYYYYY overinflated, the total drop will probably end up around 10-15% of values, but even this is market dependent- some areas barely increased over the last few years. Your best bet is to talk to someone LOCAL to you.
Teri Pittman | Oct 2, 2006
The housing bubble is very real. And it will not be a soft landing. Prices will continue to drop. You may get a real deal if you hold off a few more years and keep building up for your down payment. Please don't forget about how much it will cost for things like property taxes and repairs. We sold off our house because the taxes were getting beyond what we could afford.
And don't be afraid to be weird and try to pay off your loan. If you sell later on, you'll want to have some equity built up. Don't plan on buying a house to use it as a piggy bank.
Sarah | Sep 19, 2006
There are first time homebuyers programs available in many states that don't require a 20% down payment and don't require PMI. I found one that only required a 3% down payment... and NO PMI! PMI really adds up over time if you don't put 20% down. I am not recommending that you not put down as much money as you can, but there are programs that will help you get into the market.
Make sure that you have sufficient savings for those random house repairs, and then be realistic about how much you want your mortgage to be. Some people think that putting 50% of their income toward their mortgage is necessary, but complain about not being able to go out and enjoy life.
The bottom line? Save as much as you can. Meet with a mortgage person to go over what is available for you in your state for options. I did about a year before I started looking, and he really helped clear up any confusion I had. Don't pay any attention to the people that tell you what you CAN afford, go into mortgage hunting knowing WHAT you can afford. There is a big difference.
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