House Buying
Long boring post ahead... just a stream of thought...
Well, I have been working slowly to see about buying a house this August. My lease for my apartment is up then, and I had seriously contemplated whether I would buy now or wait til I have a good down-payment.
Let me tell you, buying a house is complicated. :) My credit isn't stellar (a couple things from 2000 are still hurting me) but it is fairly decent. There are a few things right now I can do to improve my credit score by up to 30 points before June (when I would need to have my loan ready if I want to get into a house by August).
The thing is, I've debated and still currently am debating about whether it would be bad to put little to no down payment or wait another 6 months to a year and put a bigger down payment down. Since I won't be putting a full 20% down on a house, my rates won't change that much between 0% down and 5%/10% down. Obviously, if I put something down I have more initial principal equity and if I look at the full 30 year mortgage, I pay a lot more on the interest for every percent I don't put down. But at the same time, I can pay towards principal over the next year with any extra money I have, and I'm pretty much in the same situation as well as any benefits of owning the house (taxes, appreciation, etc).
I did see a lender and she sat down and talked about all my options. The only thing that annoyed me about her though is she was trying to push a interest-only loan (which I know in certain cases can be ok if you are very disciplined). She already pre-approved me for a loan, but I want to get my credit up a bit if I can to see if I can break the next threshold for better interest rates and such. I'm looking at a 80/20 fixed rate loan. I have contemplated some of the 5:1 ARM loan because I do want to sell my house in 4-5 years. I don't know quite yet.
The hardest thing about this all is there is no clear cut answer. I have people telling me that I should wait a year and get a big down-payment ready. I have people telling me that I should buy as soon as possible because of the tax breaks I get and the equity I'd probably get from house appreciation (as well as now is supposedly a good time to buy in Portland). I even have some people telling me that the housing market will crash and now is a bad time to buy. Blah!
My own research hasn't made it much easier either. I'm trying to be honest with myself in the sense I want to make sure I don't do something stupid with my money. Buy now (meaning August) versus buy later. Both have advantages and disadvantages. And without know the house appreciation values... what the market will be like... there is no clear cut answer I can get from my numbers. Both have risk. If I waited and got a good 5%-10% down-payment down, the houses could appreciate pretty strongly between August and the time it takes... and I could have ended up with something better as well as saved money. But it could go the other way.
And while I have a chunk of change and will be saving as much as I can between now and August, I need money for an emergency fund as well as initial move-in costs, etc. If my house doesn't have a dryer, washer, refrigerator, etc... I need those things. I might need a couch set depending on the setup of my place. All sorts of closing costs to be worried about. So that is why I don't know if I can put anything down or not yet. Obviously, I will do whatever I can though.
I just bought a book to really make sure I understand all the little gotcha's with mortgages, what to look for, any financing tips, and then the actual house buying. The other thing is whatever place I get, I'll probably end up getting roommates to help pay off my mortgage. Ideally I want a 3 bedroom townhouse somewhere in the Hillsboro/Beaverton area.
I think the whole process is kind of fun and exciting, but also scary at the same time. I know what I can very comfortably afford and I'm not worried about getting into financial difficulties. What I'm more worried about is whether I will be making the best decision with my money. I'm not a very disciplined investor. A house forces me to make a commitment. And I definitely make enough that I should be investing more.
I haven't even started looking at the houses yet, because I don't want to get my mind set on anything until I've figured out the financial part. My mind is constantly on the subject right now. I can't help but keep looking at websites about it. I want to talk about it all the time with people to get everyone's point of view. I'm completely obsessed.
Whatever I end up doing though, I'm sure it will work out for the best. In any case, there's my long ass stream of thought. :)
Comments
I am really busy at work here, so I will have to call you and chat about my thoughts on this matter (because I have been obsessively researching getting a house for close to a year now), but there is one thing that I think is important to bring up now:
Houses are generally not the optimal investment tool. Over the long term, houses generally only increase in value proportional to inflation. You can get MUCH higher returns simply investing in index funds on the stock market. Not that getting a house is always a BAD investment, but just don't consider it the best way to get a return for your dollar (appreciation). The housing bubble is over.
Here is a great article by Ben Stein on this topic. It's a good read.
Also, if you haven't already, when you are searching for available houses the most fun way is to use searches that map where the house is. I don't know of any in the Portland area off hand (if you want to know of some that cover Boston and Atlanta, let me know), but you can google for it. The key words MLS listing tend to help narrow down the options.
Finally, don't get an ARM. ARMs are only ever useful in times of REALLY high interest rate. Right now, interest rates are SUPER SUPER low, so you should be looking at 30-year fixed.
closing costs
Also, it is pretty common in todays real estate market for the buyer to have the seller pay for half or all of the closing costs. My Uncle just sold a house and paid for half of the closing cost. I've also read countless articles about this as well.
It truly is a buyers market right now in most of the country!
At this point, I've decided
At this point, I've decided I'm probably going to wait until end of next winter or beginning of spring to get a house. It allows me to get a good down payment together as well as make sure my credit is much better by that point (get it above that 700 point... still have a bit to go).
I'm pretty sure I'm going to do a fixed rate loan... I was just looking at the ARM loans. Overall, I think in Portland it is still a seller's market, but it looks to be moving to a buyer's market possibly within in the next several months. I'm going to make sure I got everything set financially and go for it next year around this time.
Plus, housing prices are highest at the end of spring and during the summer, so I would probably be best waiting a bit.
Now the question is what do I do between August and the time I buy a house. :\
Sounds like a good idea
I think it is better for you to start saving your money and make a bigger down payment. Maybe while you are saving money for the down payment, it would also be smart to start putting some away in an investment account (maybe in a RothIRA).
But you are absolutely right about winter being the best time to buy a house.
Between August and the time you buy your house, just look on craigslist for someone offering a cheap room, or a cheap month-to-month place. If you get a room, you can always find an inexpensive storage facility to keep all your stuff (couch, etc) until you find a house. Or you could, uh, move back onto your parents sofa...
month to month
I've never been a huge fan of 12 month leases cause I barely know what I'm doing tomorrow, let alone 12 months from now! I'm in an awesome apt complex (new building, great location, parking, etc) and it's month to month. So just look around and you shouldn't have any problem finding a decent month to month place.
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Also on the yahoo finance, Suze Orman's take on mortgages.
Best idea besides saving up a nice fat downpayment? Knowing what you can afford, knowing your saving habits, and buying a less expensive house.
because
She's stupid. She is labeled as an 'expert,' but her advice is never expertly. After reading her articles, I always feel like I could have written one that is ten times more useful, because she just spouts common sense. Many of the other experts actually share expert knowledge that is not "common sense" in their articles, so I come away feeling like I've learned something.
Plus, she is one of those "buy my book!" types. She has books like "Women learning financing!," and then spouts advice like: If you want to try to save some extra money, try looking in the pockets of clothes in your closet for money you've forgotten about!
I die a little inside whenever I think of that piece of advice.
there are others
The other female experts on yahoo finance are fine. Orman just grates me the wrong way.
Trade off
How big a jump in your credit score will you see between July 2007 and July 2008? The reason is what you will be trading is 1 year of rent payments that get you no long-term equity versus a potentially significantly lower payment in the future.
Imagine it this way, if you pay $1,000 a month for rent you're going to be shelling out $12,000 dollars for the extra year... What would that buy you? Would you see a larger drop in total payment of loan cost?
If you would 'save' more than $12,000 dollars with a larger downpayment (due to fewer and lower interest accurations), then you are coming out ahead. This is a dollar-for-dollar comparison as you aren't losing any investment opportunity on the money you pay for rent. Also, your downpayment in a year might even be large enough to put you ahead of where you would have been if you bought today because there is less principal for interest to accrue on.
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Things to avoid:
*Variable interest loans (especially if your credit score would still hamper you - they'll put in more fees and premimums to protect themselves)
*Sub-prime loans
*Interest-only loans.
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Also, look to see if the loan includes an early-repayment penalty. Paying a little extra helps tremendously, as your first several years of payments, something like 80% of what you pay goes to interest only. The earlier you pay off principal, the less there is to accrue interest.
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***CAVEAT**** I am not a real estate export...
But based on indicators, it seems the housing market will at best level off, if not fall. The economy still isn't out of recession, forclosures are on the increase which means there will be more cheap properties available which will drive down the asking price for non-forclosures.
Do you know any realtor friends? I'd ask their advice, but just looking around... I dunno that the market has room to make sellers happy in the next 1.5 years. There's going to be a lot of property banks and the like are going to be trying to move on the cheap due to forclosures.