Advice on buying a house

[Mazeroth]

My fiancee and I are starting to look at houses to purchase since I got a promotion at work and she's going to be getting a better teaching job in August. We're still pretty young (I'm 24, she's 25) and aren't looking for anything huge. Our goal is to buy a house, have it paid off in five years (seriously), sell it, and move out west to Arizona. Right now we're sick of throwing our money away in rent ($8400/year) and would rather put that toward some equity. With the job changes we should be making $25k more a year, so you figure we'll clear another $18k, conservatively, and add the $8400 in rent, so we'll have about $26,400 to put on a house yearly if we keep living how we've been living. My car payment will be done in a year so that's another $3k we'll have...so it just keeps getting better. After you figure in the interest and paying property taxes I don't think paying off a $100k house in 5 years is out of the question. Ok, now that that's over with!

I was wondering if any of you guys have some tips for first time homebuyers in our situation? Someone was telling us to look into an ARM 7 or whatever, which is a low % APR loan you get from a bank, promising to have it paid off in 7 years. Otherwise, the 7 year fixed interest rate turns into a variable and they jack it up.

Here's another slick idea I came up with. My company pays 100% tuition for my college via direct deposit into my checking account, does not ask for a receipt, and only wants to see my grades to make sure I'm getting a "C" or better. Seriously, it's an unreal program they let us take advantage of. My tuition is $18,200 a year, and my student loans "can" cover $14,000 a year, plus $2,500 in state grants. What I'm thinking of doing is using student loans to pay for my tuition and using the money my company gives me to put on the house! That way I'll be getting an interest free loan on the house for the next 2 years (until I finish school) and when I get out, I'll owe the gov't approx $28k in loans at roughly 2.5-3% APR. That should save us a few thousand dollars on interest doing it that way.

Yes, we are getting married soon so this will be purchased after we've tied the knot. I've been dating her for almost 8 years and couldn't be happier, so I know getting a house with her is going to be a great move.

Well, I think I've spilled enough information. Just curious if anyone out there has any solid tips for us? I'm also considering looking at forclosures so if anyone has any experience in that area please speak up.

THANKS! :D

[Dennis Gardner]

5% on $100k is $5k a year, so your not throwing the full $8k in rent away. Renting is really only costing you a couple hundred a month. You never recoupe insurance and taxes either. Your landlord is paying that portion now.

You could always save like crazy, while renting for 5 years, move to AZ. and pay cash for your first home, and plan to retire early.


Buying a home, usually makes sense as a quality of life decision for privacy,space for kiddos to play safely, security in getting ahead economically etc. If you aren't where you are going to live for quite awhile, it may make more sense to rent.

Do some searching over at


Dave Ramsey for some ideas on starting out in home ownership. He has some different thoughts on this subject.

[Skynut]

Buying a house was the best financial decision I have made.
I think an ARM is only good if it does not have any pre-payment penalties.
I believe you should allways buy as much house as you can afford comfortably. That means as much as you can afford and still have fun with life. If you set your goals too high you will be cash strapped and that will cause financial troubles betwine you and the lady. (Bad news)
If the market stays the same you can double your money in the 5 years you are talking about.
My current house, the one before it, as well as the one my fiance is selling have all more than doubled in the 5 years since we purchased them. This means if you buy a house for $150,000 you stand to have $150,000 cash after you sell in 5 years. (if the market stays the same) (Keep in mind I live in Cali.)

You are going to want to play after you buy so do not go too far with your goals but definitly GO FOR IT.

[avelanchefan]

Well, so far it's all good advise. But be warned, the houses in AZ are skyrocketing. I live in Tucson, bought my house last July, and have gained nearly 90 thousand in equity. When it's all said and done I will have nearly 100 thousand in equity in one year. I belive Phoenix housing is doing the same thing also. For me it's nearly a 60% increase in equity in one year.

So I am not sure where exactly you live, but if you expect the housing market to jump like whats happening on the west coast, I say go for it and buy.

[Mazeroth]

Not $5k/year in interest. We'll have $10k down payment so that takes us to $90k to start. After paying $18k on it in wages and $16k on it with money for tuition, that will be $34k on it in one year. That drops it to $56k, average interest on $73k @ 5% = $3850 interest year one. Year two would drop the interest down to $2150 if we made the same payments. Yes, this is based off if we put all the money extra into the house, which is the plan. I know there will be extra costs like property tax and maybe nickel dime stuff to the house, but that shouldn't affect it a whole lot.

Thanks for the reply and suggestion. I'll have to take a look into it.

[Mazeroth]

avelanchefan,

My parents purchased a house in Prescott Vally 2 years ago and paid $191,000 for it. It just got appraised at $310,000. Yes, the market out there is insane but I absolutely have to live out there. I love it!

If the market is still insane out there then we'll wait it out. Just not sure how long I can wait until the housing bubble bursts :D

[Dennis Gardner]

I like your payment plan. If you can truly stick with it, you can't go wrong buying.

My only other advice would be to keep your life so simple that the AZ dream is truly attainable. Keep kids on the back burner until you have really socked away a ton of $$$ in the next few years while both of you are able to work, then move closer to folks, settle down for the long haul, and have a great time of life since you carried out your plans carefully.

A family sooner than that will wreck or at minimum postpone your progress to financial freedom. You will be stuck wherever it happens at.

Now that I have sounded too much like the Dad that I am, I'm outta here. I only have 1 of 5 left at home. 4 years til' empty nest.

Good luck,

DG

[JDSMOKE]

I recommend buying. First you get a tax break on the interest and taxes. Second, if you buy in the right area, you will see a gain in value (equity). Lastly, when you go to retire (assuming you stay in one place and finance for 20-30 years) you will have a free place to live.

Only suggestion is if you can’t come up the standard 20% down get a second loan for 10%-15% vs. paying PMI (mortgage insurance) The taxes on the second loan will be tax deductible just like the first. PMI is not. It usually works out to be about the same payment also.

[shack]

For all of you guys looking to buy now....be very carefull and buy a home that you will be comfortable in for a while. Be aware of the "bubble" effect of R/E prices. We have seen an extraordinarily long period of time with VERY low mortgage interest rates which has played a large part of the rise in home values. For various reasons (many of them good) interest rates are rising. Rising interst rates will have an effect on how much the value of homes incresase in the future and can even cause the "bubble" to burst....causing values to drop for a period of time. It has happened before (ask anyone living in Houston in the mid 80s) and it will probably happen again.

For an example. Lets say you were able to buy your dream home and needed to borrow $300,000. Rates were below 5% and your P&I payment is $1,500± for a 30 year mortgage. You want to sell and like everybody has said the price of your house should be $100,000 more. The guy considering buying your house needs to borrow $400,000. If mortgage rates get back into the 8% range (not farfetched - Prime rate is 6% and rising) his P&I payment is $2,900±. Payments are pretty steep and there are no takers at that price. You have to move and you decide you'll sell for what you paid. Even at that the new guys payment is $2,200±. Right now, interest rates are rising faster than incomes, so every % increase in rates decreases the pool of potential buyers.

I'm not saying that buying a home isn't a good idea. Just don't think that home values can't decline. I've been around a lot longer than most of you and have seen the cycles. When I bought my first home, mortgage interest rates were 18%. Try selling a home in that environment. As some have said...as little debt as you can or NO DEBT is good if you can swing it.

And about your student loans. If your company gives you money for tuition BORROW LESS ON YOUR STUDENT LOANS! Those things can be an albatross. Don't even consider what the interest rate is...pay them off as quickly as you can. I would recommend that you finance your new home, make the required payment and then use your excess cash to payoff any balance of your student loans. When they are gone THEN pay more on your home. There are good financial and personal reasons to follow this plan.

[Skynut]

Originally posted by shack


And about your student loans. If your company gives you money for tuition BORROW LESS ON YOUR STUDENT LOANS! Those things can be an albatross. Don't even consider what the interest rate is...pay them off as quickly as you can. I would recommend that you finance your new home, make the required payment and then use your excess cash to payoff any balance of your student loans. When they are gone THEN pay more on your home. There are good financial and personal reasons to follow this plan.

The intrest on the house is tax deductable and I don't know if the student loans are.
I also agree that the market is going to stop going up soon and may even go down. It will not feel good to owe more on your house than it is worth. If you have a situation that forces you to sell you could have to come up with some pretty big money on your own to pay off the house.

[unc2701]

Why try to pay off the house? Basically you'd just be tying up all your cash into a form that's not very liquid. In other words, the only way you'll get you cash back is by selling the house, which can be difficult. Home loans are different from car loans- a lot of the time you're better off NOT paying them off in a hurry. Take all that money and put into a a fairly conservative investment (money market, CDs, etc) where you can get to it if need be.

Also, you should look for a break-even calculator for figuring whether or not you should buy- typically you have to plan to live in the house more than five years for it to make sense to buy once you figure in taxes, insurance, closing costs, selling costs, etc. Unless you expect for housing prices to spike in your area, it might not make sense to buy.

That said, getting a house is a great investment, and even if it you are a little better off renting, it'll boost your credit score in a big way, which will help down the road. +1 on the PMI thing- it's annoying having to write two checks every month, but it saves you a ton of money. Anyhow, good luck!

[bvette94]

Dont forget the tax advantage to owning a house. example i changed my exemptions on my paycheck from 0 to 3 that way i bring home more durring the year. the write off from the interest and taxes gives me an extra $300.00 a month and at tax times i still get a return probably about 1/2 of what it would be if i claimed single 0 all year. so if you were paying rent at 800.00 per month on rent if you owned a home that cost you $800.00 a month you could see an extra $300.00 or so (depending on your income) in your pocket to pay on principle or what ever you need. my advise would be to not get a 15 yr mortgage but to get a fixed mortgage for 30 yrs that dosent have a pre payment penelty and pay extra on the priciple each month.that way if you fall into tight times you arent strapped. fixed mortgage because rates are climbing. 30 yr so you will have the lowest minumum payment. hope this makes sense. Go for it sounds like you have a great plan.stay away from home equity loans especially being in home audio hobbie. i am speaking from experience on equity loans mistake.


Good luck

[madmax]

Personally I would buy something in the price range where I could almost double payments and pay off in maybe 7 years. Re-access your situation after that is done. Some believe you are better off not paying it off. I disagree UNLESS you pay off a lower percentage loan only to pay a higher one to purchase cars etc. As for the company tuition thing, that is your own moral decision. I can say that I am glad I made the plunge. Many friends have decided to keep renting and have experienced the reality that now they cannot afford anything now while still paying much more in rent than my long term mortgage.
madmax

[okiepolkie]

The intrest on the house is tax deductable and I don't know if the student loans are.

I know it doesn't change a whole lot, but student loan interest is tax deductable.

Okay, I'm done here.