It’s a good time to buy, but not to get a big loan.
You have to accept the fact that every lender is pulling back, worried the Feds will restrict their ability to collect on over-big loans or negative equity or teaser rates.
So look for a modest place where you can put a lot down.
That is the main way to win anyway.
A big loan usually means you take the enormous risk of losing everything if you have to sell in a hurry. And almost all sales are in a hurry - either you have a new house you want, or else you are changing towns.
You’ll also want to look at the number of houses on the market as compared with past years. If more and more houses are for sale, that could put a strong downward pressure on prices in coming months, even if they haven’t yet fallen significantly. People are reluctant to sell for a loss unless they have to (or accept a smaller profit than they would have recently), so they’ll hold out for as long as they can, which can slow price drops.
In Excel, the payment size is given by:
=P*(I/12)*POWER(I/12 + 1,360)/(POWER(I/12 + 1,360) - 1)
where P is your principal (house price minus down payment) and I is your interest rate. (I know you said you knew how to do it, but since it’s non-trivial I’m adding it for completeness.) Thus, for a $200,000 30-year loan at 0.07 interest, your monthly payment will be $1,331.
To get the amount of principal paid off in any given year of the loan, use the Excel function PPmt:
PPMT(I,y,30,P)
where y is what year you are into the loan. For example, in year five of the above 30-year loan, $2,775 of your $15,972 will go to principal, the rest to interest.
The amount that goes to interest will change every year, so I find it useful to make a row for each year. Calculate the interest you’ll pay on the remaining principal (just that number times I), the expected tax deduction, the new principal after that year’s payments (subtracting above formula from current principal), and other costs like property tax, etc. Then compare your principal after X years to how much you would have if you had saved the difference between your rent and your monthly payment plus property tax (subtracting out the tax deduction on the interest).
[rant]Not for nothing, and I am certainly not “The Market,” but I’ll be damned to lower my price again. I’m not desperate, I just want to move. I know that whoever buys my house, in 5 years will be quite happy with the value. I get so sick and tired of people talking about how bad the market is and what a horrible time to buy. Maybe overall, but no one can convince me my house is worth less than I have it priced for now. I know what I own, I know the true value of it and I know as soon as everyone stops panicking and starts buying, that my house will STILL be considered a bargain. But fear-mongerers are NOT going to get all my equity. [/rant]
Please get a buyers agent. If this is your first time, do NOT work with the agent that is listing the house. By law, the agent is representing the seller. Make sure you have a professional on your side.
AuntBeast, I’m in a bubble area, just like you. I won’t buy now because, in 5 years, I’m not at all sure I’ll be happy with the value of anything I could purchase at current prices. Most of the listings that wind up in my in-box are vacant, many have sold several times since 2003 and, in my neighborhood, For Sale signs are as common as mailboxes. On my little street alone, the same half dozen homes have been on the market since we moved here over a year ago, with only minute downwards adjustments in price. Housing bears like to say that buying now is like catching a falling knife, here in bubbleland, it’s more like a falling plate glass door.
I feel for sellers, but man, if I didn’t have to sell right now, I’d stay put for a while. /fear-mongering
You’ve got the basic concept & sequence down, but permit me to elaborate just a bit on some of your steps.
You don’t have to “get” an agent right away if you don’t want to. You can use Internet sources if you wish to search on your own. But if you want to look at any properties that are listed for sale thru the MLS, you will have to be working thru an agent (you can’t walk up to the seller since the agent has an exclusive listing contract with the seller).
You can contact any agent to look at any property listed in the MLS. Most people initially contact the listing agent, as he is most likely to know the property best. But you can contact ANY agent to show you ANY property. If you have a working relationship with any agent (not necessarily a BA) that you like, continue working with him.
Yes. If you don’t have any personal recommendations, when you contact an agency, they will assign you to the agent “on the floor” at the time.
As above, unless you specifically mention an agent’s name, the floor agent will work with you. That agent should find out your desires and do a search for any properties that match.
It’s your option, but that’s what the agent is there for – to look and be aware of what’s on the market. If someone contacts me, I ask a few questions (geographic area, kind of property, price range, waterfront/inland, size of house or lot, etc.) then I do a search right away. It only takes a few minutes. Besides what I find in the computer, I might have personal knowledge of specific properties as well. I feed all this info to the requestor and we narrow the search. If we find nothing at first, we might expand the search, or I can set up an automatic search that will email us when something new comes on the market.
Yes. A good agent will keep you informed of anything that comes on the market that might be of interest, and he is likely to know about this before you do. It’s his specialty.
Right. But there’s nothing preventing you from hiring him as a Buyer’s Agent at any time earlier. If you do, as I said before, you will increase the number of properties available, since FSBOs and properties not yet on the market will be included in his search.
Why would you NOT want to sign him as a BA? If you didn’t want to limit yourself to a single agent (by all means, don’t sign up one you don’t get along with or have faith in). Once signed, any properties located by you or by him will generate a commission for him (but not necessarily your cost). Therefore, if you have a BA and another agent calls, soliciting your business, it would be proper for you to inform that agent that you already have a BA. Otherwise, he would be working for free, and you can’t imagine how pissed that makes some people when they find out too late!
Again, this is where an agent is most useful. The agent (BA or whatever) writing the offer should handle ALL of this. He should know or suggest what inspections are required and which ones are a good idea. He will know how to handle the title work and if there are any situations you need to be prepared for.
You may specify companies by name to do the inspections and title work if you have any preferences, or he can give you a list to pick from, or you can give him the legal right to make the choice for you.
As an example of special situations, in my area, for rural properties, we have a special Addendum Form that expands on the well and septic requirements, since the soils in our county are thin and great care needs to be taken by the buyer to avoid expensive and unforseen work later. If I know that the property was once an orchard or is near one, I will suggest some additional chemical tests, for example.
That’s right. Usually all parties meet at the closing table, but their presence is optional. If distance and/or time is a factor, you can close without being there. You can also have an attorney present if you wish, but if the title company is ready, it’s typically a short session with no problems. Any problems will have been ironed out earlier.
Usually the buyer will take a final walk-thru just before the closing.
I differ from Annie-Xmas’ posting a little on this. If your finances are clean and you have a good relationship with a bank, you can get pre-approved for a maximum dollar amount before starting to look. It doesn’t hurt and it may save time later. Talk to your bank about this.
If you wait for the offer to be accepted before approaching the bank, you aren’t getting "pre-"approved, just approved! And there will be a contingency in the offer so that if the loan cannot be obtained under the conditions you require, the offer is cancelled.
However, remember that all offer conditions must be agreed upon by all parties. Let’s consider what might happen if two offers come in at the same time for the same property. Offer A has a contingency that requires the buyer to obtain a loan for X years at Y interest, and offer B is for a pre-approved buyer or for cash. All other conditions being equal, which do you think the seller will accept? Not the one with the contingency.
Another word of caution to any buyer, as I feel many people just don’t understand how the game is played. If you call up an agent, request a search, he shows you a house that you like, up til then, he has been paid nothing, but he has been working to your benefit. Now if you turn around and go to another agent to write the offer, the first agent is out in the cold. Agent #1 can legitimately claim he was the “procuring cause”, which means he found the buyer for the property. If he gets wind of this, he may file a claim with the local Board of Realtors and thru arbitration, remove the commission from Agent #2. It happens.
Another tip: if you see a property you like from the street and call up the agency, ask for the agent by name if it was on the sign. If you do, your call will be referred to that specific agent and he will continue to work with you. If you do not specify the agent by name, you will be given to the floor agent. And if you have a Buyer Agency agreement in place, always let that agent do the contacting; he will be the one to earn the commission anyway and will make anyone he contacts aware of that.
Again, good luck!
First I want to thank everyone for their help again. This has really cleared things up for me. I finally think I understand the process one should go through.
I am trying determine if it’s in my best interests to continue to rent or buy financially. I have a gigantic Excel spreadsheet with all kinds of information on it. It’s been really interesting playing with all of the numbers, but to be frank I have never really had a formal Economics class (besides little discussions in my engineering courses) so I am having to problems making sense of the data I have. Here’s the spreadsheet if anyone is interested in looking at it:
http://rapidshare.com/files/75455750/cumipmt.xls.html
I guess there’s no doubt that I would eventually like to move into a house. But I am kind of numbers oriented so I am trying to look at this from a financial perspective to see how things pan out. For this hypothetical case I am assuming the following:
House costs: $120,000
Down Payment: $10,000
Interest: 6%
PMI : 1%
Insurance: 0.5%
Maintenance and Repairs: 1.5%
Property Tax: 1%
Length: 30 years
So a combined APR of 10%
My current rent is $550/month with a 3% per year increase (that’s what it would be from 2007 to 2008 at least). According to this site on average a home increases in value from 2 to 4% per year where I live.
Okay, so I ran this through my tool and came up with this:
Monthly payment (including PMI, taxes, repairs, etc): $965.33.
Total Interest Paid (for duration of loan): $237, 518.34
Total Principal: $110, 000
Total paid for the house: $347, 518.34
*Note that this assumes the PMI is paid at 1% per year for the entire duration of the loan. I really didn’t know how to do an IF check in Excel to check when I got 20 % invested in the home.
Now suppose I rented during these 30 years and saved the money I would have paid towards the mortgage:
Rent by this time: $741.32
Total rent paid: $229,771.60
Total saved by not paying mortgage+repairs+taxes: $117,746.74
By investing at 4% APR: $245,453.45
By investing at 10% APR in stock market: $790,545.93
The value of the home at this point assuming a 4% per year appreciation value: $356,773.73
Then I ran another scenario seeing how things would pan out if I waited a year to look for a house (larger down payment and thus reducing PMI).
This scenario assumes the following:
House costs: $150,000
Down Payment: $12,000
Interest: 6%
PMI : 1%
Insurance: 0.5%
Maintenance and Repairs: 1.5%
Property Tax: 1%
Length: 30 years
So a combined APR of 10%
Now (with PMI)
House Cost $150,000.00
Down Payment $12,000.00
Monthly Payment $1,211.05
Total Cost $435,977.56
Interest $297,977.56
Since PMI would go away at some point during this time I ran the scenario again with 0 PMI with the realization that the actual numbers would be somewhere in between these.
Now (without PMI)
House Cost $150,000.00
Down Payment $12,000.00
Monthly Payment $1,110.38
Total Cost $399,736.52
Interest $261,736.52
If I waited a year the PMI would go to 0% since I think I can save $18,000 next year to get to 20% so the effective APR would be like 9%.
In a Year
House Cost $150,000.00
Down Payment $30,480.00
Monthly Payment $965.55
Total Cost $347,596.97
Interest $227,596.97
Of course in a year my $150,000 would buy a slightly smaller house, but in the long run it seems like I would be better off. Even with the no PMI number with me getting a house now it would save me like $10,000 in interest ($261,736.52 (lower interest)- $227,596.97 (in a year with no PMI) - $18,000 (saved during the year) - $6,000 (rent). Of course none of this takes into account tax breaks that I would get for home ownership either.
So in summary I have so many numbers in my head I can barely think straight. There are so many possibilities and combinations that it’s really hard to figure out what’s best. I do think that it’s in my best interests to wait, since I really can and am not forced to buy right now, until I can get 20% to put down to get rid of the PMI. Now a lot of my friends have mentioned getting like 80/20 or 80/0/10 loans. How would that fit into all of this?
Good job running the numbers. It’s amazing how few people do that for the biggest purchase of their lives. One thing you’re leaving out is the tax advantage to buying. The interest on your mortgage and property taxes are tax deductable and, for the first tiem this year, PMI is too. The first few years of a mortgage, almost all of your payments are interest. It can make a decent difference, I’m getting back over $2000 for this year and normally I owe a couple hundred. Try the calculators at the Mortgage Professor’s site which also has some good articles. There’s a rent vs. own calculator on the site you linked as well.
You’re right, Huntsville was not a bubble market but I don’t think you need to worry about prices rising much in a year. Mortgage lending standards have tightened up a lot and that means that even in non-bubble markets, there are a lot fewer buyers and you won’t see the same appreciation you’ve seen in the past. I’d take a calculator that uses figures from 2006 with a huge grain o’salt. The calulcator says a low projection for San Diego is 7.9% and that market’s in freefall this year, with homes having lost 20-30% of thier value.
The 80/20 and 80/10 loans have pretty much disappeared due to the tightening lending standards so you’ll probably have to pay PMI unless you wait and save up 20%.
One last thing to consider, traditionally, experts advised that if you expected to move within five years, buying a house could cost you money due to realtor fees and closing costs. That wisdom went out the window when houses were appreciating at 20% a year in some markets. Think carefully about how long you want to be in this house, if you move early, it may cost you.
Anyway, good luck. For all my negativity and scepticsm about the housing market, I did take the risk and bought a house in the spring. I knew we were on the edge of a collapsing bubble but thought I had a decent deal on a house in the perfect location and it was within all the standard addordability guidelines. I’m happy I did and I love my house but I also plan to live here for at least 10 years and am fully prepared to be “underwater” (owe more than I could sell the house for) for a little while if things get really bad economy-wise.
This common statement - that the seller pays the commission, and thus the agent doesn’t cost the buyer anything - has always seemed misleading to me.
Sure, the seller is the one who writes the commission check - but the money to cover it comes from the buyer. If the commission were lower (or zero) the buyer could expect to pay less and the seller could expect to realize more from the sale. On average, each is paying half the commission.
The two parties negotiate on a price. Once the price is settled, the commission is paid by the seller. A buyer does not have to take into consideration the commission (althought the seller might). A buyer wants to know what it will cost him, not where the money will go.
Therefore, the seller pays the commission. As an analogy, if you negotiate for a salary, do you compute the fees paid by your prospective employer which are not deducted, but paid above and beyond your salary? One could argue that the employee generated the income to pay the fees, but they aren’t likely to enter into your calculations for an acceptable pay rate. It’s an expense the employer will bear just like the cost of electricity.
In any real estate transaction, each side receives a settlement sheet. Starting at the top of each is the sale price. Next are the charges and deductions; on the seller’s sheet are the ones paid by the seller; on the buyer’s, the ones paid by the buyer. In a typical transaction, the commission is deducted from the seller’s side.
To say otherwise is to argue semantics.
It doesn’t matter how you spin it, Musicat. . .whether the buyer and seller pay half, or the seller pays all, or the buyer pays all of it, it’s just an added cost to the transaction. That’s finance. You’re talking semantics.
If I’m a buyer looking at two identical houses, one that is FSBO for $94,000 and one that is listed with an agent for $100,000 (because the seller in each case needs $94,000), then that sure looks to me like the buyer is paying the commission. I don’t care who cuts the check when it is all said and done.
The commission forces the seller to ask more for the same amount of return to the seller.
And, your advice that you shouldn’t look at a home purchase as a 30 year purchase is partially right.
You should look at it as a one time purchase of X-hundred thousand that you’re borrowing to make.
To stay that what you really need to consider is the monthly payment is real-estate agent spin, and financially irresponsible.
[QUOTE=Trunk]
Also keep in mind that when you buy a house, you’re paying interest and taxes. That’s something that the people who cry “stop throwing your money away on rent” tend to leave out.
QUOTE]
Yes, they may tend to leave that out. IANAA, but property taxes and interest on your first (and 2nd) mortgages are generally tax-deductible. Your rent (unless running a home-based business) isn’t. So it’s an important point – now what you pay, some of it you can claim as deductions (generally, again IANAA).
Remember though, now you have to pay for repairs, upkeep, maintenance. You don’t have to do that when you rent (other than in the form of higher rent).
To answer your question about the interest/principle split, the simplest way to put it is “It’s complicated!” When you close on the house (and therefore the mortgage), the lender will give you a sheet that shows you when your payments are due, for how much, and what the split is. You could just hit up bankrate.com and use their amortization table to see for yourself.
Yes, they’re tax-deductible, but all that means is that instead of paying $12,000 this year on interest, I really only pay $9,000. You just don’t get taxed on the interest.
Also, as to “interest/principal”, a lot of mortgage calculators on the web will have a diagram that shows it.
Consider the letter X.
The line that starts lower left and goes to the upper right is your principal through time. The line that starts upper left and goes to the lower right is your interest through time. At the beginning you might pay $100 on the principal, $900 on the interest. At year 15, you’re paying $500 on each, in the last year, you’re paying $100 on the interest, $900 on the principal. (the lines are actually curved, but close enough)
No matter how you spin it, a purchase contract specifies who pays what. In a typical purchase contract that I write, nothing is mentioned about some charges like commissions because they are covered by the listing contract. A buyer isn’t even told that the commission is – it is a confidential matter between seller and agent.
In contrast, some charges ARE specified in a purchase contract. It may say that the buyer will pay for a survey and the seller will pay for a new roof. Unlike the commission (an agreement between seller and agent), these are agreements between buyer and seller.
If you insist that the source of all funds for the transaction is the buyer, you are right. But what if the seller used the proceeds from a sale to: (1) buy a new car, and (2) pay the commission. Would you then say that the buyer paid for the new car? It may well figure into the price the seller settles for, but it is of no concern to the buyer.
A common fallacy I hear from sellers goes like this: “I want $100,000 net, so I’ll have to set the asking price at $106,000 to cover the commission.” That simply doesn’t work, because the buyer is only looking at the bottom line and doesn’t care what you do with the money. If similar properties are selling for $100,000, this seller just priced his out of the market.
You might also consider going for a 15 or 20 year mortgage, instead of a 30. I figure you’d be able to save about $60,000 in interest moving from a 30 to a 20 in the price range you’re looking at. You’ll be paying about $150/month more, but I’d get a less expensive home and be gaining equity more quickly, if it were me.
Also remember - someone said with rent you’re also paying for freedom to be able to leave, but with a mortgage, you’re paying for privacy and freedom from neighbors.
Don’t forget to look at existing house, not just new construction. Although an older home may have some aging features, they often have bigger lots and more solid construction. And no new-home depreciation!
Good luck. I should think in Huntsville you’re be able to buy a lot of house for $150K. and I don’t know too much about Huntsville, but in the Middle Tennessee area there has been very little slowdown in the housing market.
StG
But the point is that the price the seller is willing to accept is of great concern to the buyer - since he’s the one that’s looking at paying that price.
In the long run, there is simply no comparison between renting and buying.
My parents bought a house in the London suburbs for £2,500 ($5,000) just over 60 years ago. They sold it recently for £250,000 ($500,000).
And of course they paid no rent. They did pay for house insurance (about £30/$60 a year).
I’ve just paid off my mortgage on my house (in the country), which I bought for £60,000 ($120,000) about 20 years ago. It’s now worth around £200,000 ($400,000). My only sizeable cost was repairing a flat roof (don’t have anything to do with flat roofs!) for £3,000 ($6,000).
Here’s a compromise. Get the 30 year mortgage, but pay as if it were a 20 or 25, specifying that the extra payment amount be credited to principal reduction. Even paying an extra $50 per month will be a significant benefit if continued for years.
That will give you the same advantage in the long run, but allow more flexibility if your finances get a bit tight sometime. It also looks great on paper if you ever refinance or buy something else.
I hope that you are right. I don’t have the same confidence that you have, however.
I’m far more inclined to believe this is the case.
The only caveat to this is that 15 year mortgage interest rates can run between 1/4% to 1/2% less than 30 year rates. However, in general, it’s worth considering. If you can only qualify for a 30 year mortgage, nothing is keeping you from paying it down as a 15 year loan and no harm done if you can only make the minimum payment that month. Just make sure that you don’t have a pre-payment penalty.
dgrdfd, it sounds like you are in big rush. That’s a great place to be. I think that a lot of problems we have are because buyers felt that they had to grab a chair before the music stopped, and the sellers adjusted prices up accordingly. I know that that’s where I was twenty years ago, buying almost at the peak of the market. The good thing to know is that it is pretty much academic right now. The market will eventually come back.
I can’t give any advice specific to Huntsville, but some general comments:
No one can give you good advice about what house prices are good unless they are involved with it on a day to day basis. Markets change, neighborhoods change, towns change. When I was looking, my parents gave me ludicrous advice as to what I should pay in a particular town. My advice would be equally ludicrous to someone looking for a home now. The best advice I could give would be to immerse yourself in the market, reading the ads and going to open houses. An open house is the quickest way to see what you can get for the money, and going to a number of them will familiarize you with different neighborhoods; decide which ones you like or dislike. You’ll get a feel for the type of house you want; architectural style, number of floors, heating systems, acreage, garage, etc. After awhile you’ll start to get the feel for whether house prices are moving up, moving down, or just stagnating. You’ll start to recognize homes that aren’t moving. You’ll probably be able to guess the price of a house just looking at the statistics. You’ll get a feel for a motivated seller vs. one who is just testing the market. You’ll get sick of seeing RE agents, and they will get sick of seeing you. But in the end you’ll feel a lot better, having done your homework.
The major caveat is that that if you have the discipline to pay $50 extra a month, you should be putting it in the market, not paying off a loan at 6% or 7% (effectively less because of the tax savings). It’s not your credit card.
If you’re going to blow the $50 each month on something stupid, then a 15 year mortgage makes sense because it forces you to put the extra into the house.
But, if you’re just going to be paying extra each month on a 30-year, put the money in the market.
Fire up the spreadsheets, and crunch the numbers. I have. I thought I was pretty slick with my 15 year, but I’m actually costing myself money in the long run. Not a ton, and only if I was disciplined enough to put that extra money every single month into the market.
(these are all under assumptions of a particular rate of return from the market, and a tax on those earnings, but you can use a pretty conservative return and still come out ahead with the 30 year + invest the rest plan).