Advice on Buying a House

[RedEye]

Any resources anyone would offer? I feel like good advice on buying a house is hard to find. Everyone wants a piece of the pie, and I don't know who to trust to be disinterested. I've read about the 28/36 rule, but people seem to be all over the place about what is a responsible amount of debt to carry. Anyone I do know doesn't know enough about where I live to be of help.

[westofyou]

Find the best mortgage broker in your area, choose what you want over the realtor's wants

Be prepared to live there long enough to be able to care for it

[WrongVerb]

I've bought two houses in my life.

Price range: 3x your household yearly salary is reasonable.

Get approved for your loan amount before you go shopping. That will narrow things down further.

Be sure to price any HOA fees into your overall affordability.

Both my homes were new construction, and I definitely prefer that over something with age. But that's personal preference. It was nice getting exactly what I wanted without having to worry about significant repairs or alterations.

Don't do something crazy like a teaser rate or adjustable rate. I figure if you have to do financial tricks to buy a home, then you're buying too much home.

Understand the neighborhood you're buying into. That includes traffic patterns, proximity to schools, shopping, and recreation.

Understand any HOA restrictions if there is an association.

Finally, be certain you're in it for the long haul. It's hard to get out from under a home if things go south in your life regarding job, marriage, finances, etc.

[RedEye]

Thanks, guys. We've actually got a contract on a house now, but are getting sticker shock and cold feet. The house is just five years old, so almost like new construction. The mortgage will be a 30-year fixed and we took a loan from my wife's 403b retirement account to put 10% down. Even so, paying back that loan + the PMI of not reaching 20% is going to add about $600 to our monthly payment. That's hard to stomach with all of our other expenses, so we are thinking of pulling out. I'm just wondering -- is this kind of stress what others went through?

[Sea Ray]

Thanks, guys. We've actually got a contract on a house now, but are getting sticker shock and cold feet. The house is just five years old, so almost like new construction. The mortgage will be a 30-year fixed and we took a loan from my wife's 403b retirement account to put 10% down. Even so, paying back that loan + the PMI of not reaching 20% is going to add about $600 to our monthly payment. That's hard to stomach with all of our other expenses, so we are thinking of pulling out. I'm just wondering -- is this kind of stress what others went through.

You're seeing how much that PMI sucks. I'd talk to your realtor about options to get out from under that. I had a neighbor who sold to a young couple that couldn't afford the down payment so they worked out a deal where they raised the price of the house high enough to cover what was needed and then money was transferred back to the buyer at closing to cover the 20% down payment.

[Griffey012]

Thanks, guys. We've actually got a contract on a house now, but are getting sticker shock and cold feet. The house is just five years old, so almost like new construction. The mortgage will be a 30-year fixed and we took a loan from my wife's 403b retirement account to put 10% down. Even so, paying back that loan + the PMI of not reaching 20% is going to add about $600 to our monthly payment. That's hard to stomach with all of our other expenses, so we are thinking of pulling out. I'm just wondering -- is this kind of stress what others went through?

I purchased my first home 5 years ago, I was struggling to save money (thanks student loans) and was only about to muster a 5% down payment, and was stuck with PMI. However, I looked for a cheap house (1X-1.5X salary) in what I was confident would be an upcoming neighborhood. As a result I was able to comfortably afford a 15 year mortgage and within a bit over 3 years I was able to refinance and get rid of the PMI because I was at an 80% LTV.

My thinking was that in 5-7 years when my student loans would be paid off I could reassess and purchased a nicer home and will have built some equity. If I am happy there, then I can stay and put some money into upgrading the house. I also looked at it if I wasn't happy with the area or house, I could never get too far underwater since it was cheaper and wasn't stretching me thin, and also it would be able to be a quality rental property if need be. Turns out the area has started taken off, property values are rising, and it is in a good location. I'll be sticking around for the foreseeable future and am currently starting to do some upgrading.

I would suggest picking a home that won't stretch you thin financially, the bells and whistles are nice, but they won't be so nice when the new wears off and they offer less financial comfort.

I'd also only buy a house if the ultimate goal is debt free home ownership (I'll never touch a 30 year mortgage). I wouldn't recommend owning because you are looking for home value appreciation, to me it is an added bonus.

Just my two cents.

[Boston Red]

My only advice is to never make only your minimum mortgage payment unless you have other higher rate debt that you're trying to pay off at the same time or if you absolutely cannot afford it. $15, $20, anything, but the more the better. Particularly early in the mortgage, because you're paying so little principal in the minimum payment in the early years of your mortgage that even a little bit of extra principal makes a huge difference. I will save well over $100k in interest on my mortgage by making additional principal payments. Now, given the way the stock market has gone in the last decade, I'd actually be far ahead if I'd have taken that money and invested it, but I like the guaranteed return of paying off interest-bearing debt. I'm a bit risk-averse like that.

Also, if you're committed to the strategy above, I also disagree with the advice to avoid ARMs. I've had ARMs on both my homes, and they've worked out great. You generally get a substantially lower rate locked in for the first five years, and if you're able to (and committed to) aggressively paying down principal those first five years, the interest savings can be enormous, and it severely reduces the risk of your rate going up (because there will be less principal to charge that higher interest rate on). In the recent rate environment, we've had our rate adjust down a number of times (and will again next March), but you certainly shouldn't count on that.

Also, the new tax law isn't "bad" for homeowners (at least not in relatively low tax states like Georgia). It's just not advantageous for homeowners. Everyone gets the benefit of the higher standard deduction, so you get to take the deduction whether you actually pay mortgage interest or not. You're not going to be worse off because of it. You just (likely) won't see a mortgage interest deduction on a Schedule A.

[Sea Ray]

Also, the new tax law isn't "bad" for homeowners (at least not in relatively low tax states like Georgia). It's just not advantageous for homeowners. Everyone gets the benefit of the higher standard deduction, so you get to take the deduction whether you actually pay mortgage interest or not. You're not going to be worse off because of it. You just (likely) won't see a mortgage interest deduction on a Schedule A.

Good point. Everyone gets the benefit so only in the sense that you don't have to have a mortgage in order to enjoy the benefits do homeowners get screwed. I think the idea is to lower the number of people who have to itemize 'cause that's a hassle and often an expense of hiring an accountant. For example when I was itemizing I was deducting $18K. Since now every married couple gets $24K, I'm no longer deducting my interest but I've benefited to the tune of $6K in deductions.

[BuckeyeRed27]

Thanks, guys. We've actually got a contract on a house now, but are getting sticker shock and cold feet. The house is just five years old, so almost like new construction. The mortgage will be a 30-year fixed and we took a loan from my wife's 403b retirement account to put 10% down. Even so, paying back that loan + the PMI of not reaching 20% is going to add about $600 to our monthly payment. That's hard to stomach with all of our other expenses, so we are thinking of pulling out. I'm just wondering -- is this kind of stress what others went through?

I think you should wait. Taking retirement account loans for anything that isn’t a total emergency (this isn’t) is a bad idea and as others have said PMI is a rip off. Unless you just know you are getting a large amount of cash to do a quick refi and the housing market is going to explode in the area you are looking, but otherwise that PMI is an anchor.

Renting offers a lot of flexibility. I think you should really budget your expenses and plan on spending a year or two really saving and get a bigger down payment.

[RedEye]

Renting offers a lot of flexibility. I think you should really budget your expenses and plan on spending a year or two really saving and get a bigger down payment.

Yeah, this is a large part of my thinking as well.

The counter argument, which we've been bouncing around in our conversations, is that a house is also a home, and our kids will have a better quality of life if we are in one for the next ten years or so (they are boys, ages 10 and 5).

We have two decent paying jobs, but we lost our nest egg on our first house in the recession and haven't been able to muster much savings since then due to various other circumstances out of our control (medical bills, etc.) We now qualify as first time buyers again since we have been renting since 2013, but the market for Atlanta area, at least inside the perimeter in decent school districts, is a glut of way overpriced rentals and single family houses and townhouses beyond our reach.

So we realize that taking a hit on the 403b isn't the ideal way to do this, but it does give us the opportunity to own a home now, when it counts most for our family's experience of these years.

And so we go round and round and round...

[BuckeyeRed27]

Yeah, this is a large part of my thinking as well.

The counter argument, which we've been bouncing around in our conversations, is that a house is also a home, and our kids will have a better quality of life if we are in one for the next ten years or so (they are boys, ages 10 and 5).

We have two decent paying jobs, but we lost our nest egg on our first house in the recession and haven't been able to muster much savings since then due to various other circumstances out of our control (medical bills, etc.) We now qualify as first time buyers again since we have been renting since 2013, but the market for Atlanta area, at least inside the perimeter in decent school districts, is a glut of way overpriced rentals and single family houses and townhouses beyond our reach.

So we realize that taking a hit on the 403b isn't the ideal way to do this, but it does give us the opportunity to own a home now, when it counts most for our family's experience of these years.

And so we go round and round and round...

I can’t tell you what makes emotional sense for you and your family. If you believe that you will get some perceived value out of home ownership that renting doesn’t provide that’s fine. But home is wherever you make it no matter what type of arrangement you have to get the keys and I don’t think what you laid out makes good financial sense. You also already bought a home at the top of a market and I’m a little afraid you are about to do it again.

[Sea Ray]

Any resources anyone would offer? I feel like good advice on buying a house is hard to find. Everyone wants a piece of the pie, and I don't know who to trust to be disinterested. I've read about the 28/36 rule, but people seem to be all over the place about what is a responsible amount of debt to carry. Anyone I do know doesn't know enough about where I live to be of help.

It's hard to give much advice without knowing your situation, such as what are your reasons for wanting to be a homeowner at this point in life? Do you have a family? how long do you think you'll be in the house? Do you want the privacy and control of a house?

Those questions aside, let me start with a couple lessons I learned on house #1...Make sure you put enough down to avoid mortgage insurance. I think that's 20%. Private Mortgage Insurance (PMI) is a huge ripoff. It's a fantastic deal for the insurance co and you get nothing for it.

When you close on the house, be firm that you get the house the minute you sign the papers. My first realtor told us that it was customary to put in the deal that you (the buyer) would not take occupancy until 30 days later. Well that's a great deal for the seller. He has his money and he can stay another 30 days but you're out your down payment and closing costs yet you've got to spend another month renting wherever you are.

Since the last Trump tax cut, very few people benefit from deducting mortgage interest. That incentive to buy a house is pretty well gone. Remember that you're looking at putting at least 1% of the house value into maintenance on an annual basis.

Finally my advice is not to buy a new house. You pay a healthy premium for brand new and I don't think it's worth it. There is a new street in my neighborhood and they're priced at least $100K over what the "used" houses cost and the brand new ones don't have the improvements that people might have done in owning a house for 20 yrs or so, such as built-in cabinetry, shelves etc.

[RedEye]

Since the last Trump tax cut, very few people benefit from deducting mortgage interest. That incentive to buy a house is pretty well gone. Remember that you're looking at putting at least 1% of the house value into maintenance on an annual basis.

We just realized this today, actually. It was like punch to the gut. I knew I didn't like the Trump tax cuts for other reasons, but this really hurts.

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You're seeing how much that PMI sucks. I'd talk to your realtor about options to get out from under that. I had a neighbor who sold to a young couple that couldn't afford the down payment so they worked out a deal where they raised the price of the house high enough to cover what was needed and then money was transferred back to the buyer at closing to cover the 20% down payment.

Whoa. Now THAT'S creative. Is it legal?

[Sea Ray]

We just realized this today, actually. It was like punch to the gut. I knew I didn't like the Trump tax cuts for other reasons, but this really hurts.

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Whoa. Now THAT'S creative. Is it legal?

Sure it's legal. There's no harm to anyone. You're just a little more in debt but that's your choice. No one's putting a gun to your head. It doesn't change a thing for the seller provided the realtor's commission is figured into the calculus.

[Kinsm]

Whoa. Now THAT'S creative. Is it legal?

As long as the seller is willing to deal and the final sale price is below the mortgage lender's appraisal you can ask them to do pretty much anything.

If it's an older home, I find that cash allowances for new appliances or even a riding mower if it's a large lot are big perks to ask for. If you see a piece of furniture in the home you can always ask for it too.

I once asked a seller who was unwilling to come down an additional 5K$ on an already reduced counter price, to throw in his almost new 6K$ john deere gator and a 4K$ montezuma toolbox that I saw in his garage as a condition to buy, they agreed.