We’re getting ready to go to the bank in a couple weeks and ask about mortgages. My husband and I are really up in the air about what whether we should buy right now or not and I thought I’d solicit your opinions.
This is our situation:
We rent right now. We have zero debt (no car payment, no credit card debt, etc.) and excellent credit. We have a very modest down payment (it would be about 10%). I’m a stay at home mother, so we have one income. My husband’s job is very secure.
These are our options:
Continue to rent for the next three years, at which point we’d have a much more substantial down payment. Also, I’ll be heading back to work at that point, so our income would increase.
Buy a condo or townhouse with a payment the same as what our rent is now. We would continue to save the same amount, but we’d start to build our equity. In 3-5 years, we’d buy a house.
What we’re concerned about:
It seems like option two is the obvious choice, but we’re concerned about the way the economy is going, possible cost of living increases, and the future real estate market (are we going to take a loss? should we wait just a little bit more?). My instinct is to stay maneuverable in case the shit hits the fan. The city we live in (Raleigh) isn’t really taking the same real estate hits as other areas in the country. It’s still a seller’s market in the under $200k range, but you never know what it’s going to be like in the next year or two.
I don’t know…what would you do? What other factors should we consider??
My personal opinion is that you should wait until you have a larger down payment. Not that 10% is bad in this day and age, but people not having enough cash to put down is part of the reason the market is in the state that it is right now.
What is “enough cash to put down”? We’re judging how much mortgage to get based on what we know we can pay back each month (including taxes, PMI, etc.). Does it matter what we put down if we are capable of paying the monthly bill?
I say wait, but then I live in Bubbleopolis, Arizona. Don’t know too about Raleigh, but here, the air’s just slowly leaking out of the bubble and has a long way to go yet.
C3, IMO, if you were in the position to buy a long-term house now, I’d say absolutely do it. But, I don’t know if it’s so wise to buy a temporary townhouse/condo with plans to sell in a few years. I’m almost always in favor of buying over renting for the tax, equity and credit benefits, but in this market (I’m in Charlotte, btw) the resale potential in a few years would make me a little nervous.
Consider the real estate commission and financing costs of this purchase and sale compared to the equity you’d build in 3 years, keeping in mind that your early mortgage payments go mainly toward interest, not principal. I have heard a rule of thumb that you shouldn’t buy unless you plan to stay in a place for at least 5-7 years.
The rule I’ve always heard is 20%. With such a down payment, you shouldn’t have to pay PMI, which will save you a few bucks per month. The big down payment also shows you’re capable of saving & managing your money, which may impress someone trying to decide if you should get one of their precious mortgages. Note that prices in some parts of country may still be going down, so you may get more house for the money if you wait a bit to save up more $$$.
It’s a good time to get a house you can afford, with a old style down payment, where the main incentive is to put rent money to better use, but not bet heavily on appreciation.
It’s a bad time to try for a house that only works as an investment and is leveraged with a low down payment or a second mortgage.
If you sell in five years, it would have been a terrible investment, and you’ll be lucky to make your money back. If you sell in twenty years, meh. The market is dropping right now because it was at an unnatural high. The market is correcting itself. If you look at the chart above, it sure looks like there is a ways to go before this bottoms out though. So any waiting on your part is likely to save you money. But you have the luxury to be picky. If you find that dream home, you have no fears of losing your current jobs in a recession, and you don’t mind seeing the value drop safe in the knowledge that it is a long term investment, go for it.
One thing about the chart above is I that I think it will be harder for it to drop below 100 anytime soon, due to the prices of construction materials.
Thanks for the advice…I’m leaning heavily in favor of what you all have said. My husband wants us to go talk to his friend who’s a mortgage broker (but who, as a friend, should be pretty objective). We’ll probably go do that, but I’m arguing in favor of waiting this out.
Another factor that’s huge on my radar is that my son starts school in the fall and I don’t want to move him twice in the space of a few years.
Last I checked even the National Association of Realtors (who never say prices will go down) say prices should decline over the next year. Why buy a house that is almost guaranteed to go down in value over the next year? Wait the year, get the 20% down payment so you don’t have to pay PMI, and pick up an even better deal. In many markets prices haven’t even started to bottom out (if you look at the Case-Schiller Index) and in some place prices are still accelerating downward.
My uneducated is don’t buy unless you plan to stay in the same place a LONG time. This dive isn’t over yet, so home prices will continue to go down, and when they eventually do go back, it will take time just to get back to square one, where you won’t take a loss if you sell.
I bought about 3 years ago. My sister is encouraging me to refinance, but do do that I’ll have to get a new appraisal, and I just don’t want to know.
I will say that in our market, in our price range, prices are not dropping, but rising. There wasn’t the same boom in the Raleigh market that there was in other parts of the country, so the housing crisis has not been as severe here as in other areas. I spoke with a friend who is a real estate agent and she said the buyer’s market here is really for houses over the $250k (and much higher) price range. Factoring into this is the huge amount of construction with these higher price tags and also the fact that the market for these houses consists of people who are often trying to sell houses in other parts of the country, where that is extremely difficult. She said houses in the $150-250k range are pretty flat right now. Houses under $150k (which is what we’re looking at) are continuing to rise and sell very quickly. Now, I don’t know how long that will last and neither does she. As the general economy starts to hit people harder - rising gas prices, rising food prices, etc. - this would likely change, IMO. I personally don’t think it’s a very smart gamble.
I like the advice that says don’t buy a place you will want to sell in just a few years.
You should also figure that buying and selling eats something like 10% of the value. Giving that money away in commissions and fees takes it out of your own wealth picture.
That being said, house prices are low now. I guess they’ll keep going down for a while, but you never know. For one thing, they could start to go up and this change will tell everybody to grab their bargain while they still can, which would accelerate the rise. It is unstable, that is - a positive change would also drive positive feedback. For another thing, some politician might create some real change that will stop the fall suddenly, or might say something that will influence the market similarly without a real change. These are all reasons to go get somewhat of a bargain while that is certainly an option.
That market is weird. A few years ago a co-worker moved away and put her house on the market. She had three offers that were above her asking price in the first 45 minutes. She asked her realtor if they shouldn’t be saying yes to one of them, and the realtor told her that she should let her listing mature a while. A good length of time to keep a house on the market, the realtor said, is 3 hours. Sure enough, within the next couple hours she got quite a few more offers, going well above her asking price.
Of course, on the other hand, I looked at a few houses that had been on the market 2 or 3 years or more when I bought this one 25 years ago, and got a mortgage at 13.75% interest.
Jeez, it’s crazy. There are no sane options.
Look, politicians have been selling their programs with “American Dream” allusions for so many decades that the effective Federal subsidy of mortgages through interest deductions is about the biggest free lunch a typical American can get. You know what? Post another thread asking if you should keep paying income tax on the money you earn to keep a roof over your head. Those answers will be clear and unambiguous.
Heh, exactly. I bought 3 and a half years ago, and while I’ve got a fixed rate, with all the rate cuts I idly wonder if I should refinance. I too am not really excited to find out what my place is worth at the moment. Ignorance is sort of bliss.
I really don’t think the typical American gets that free lunch: for people that live in the “sane” parts of the real estate market, where a three bedroom house is under 150K (which is a lot of America), the potential tax breaks are under the standard deduction–even the first year we owned our house, which we borrowed 115K to buy, when we didn’t get a homestead deduction on the taxes and we were paying almost all interest, it still didn’t come to more than the standard deduction for a married couple. Now, we got a good rate (5% fixed, only time I ever got the timing right in my whole life) but even if someone was paying somewhat more, the tax benefits have to be calculated as the difference between the housing deduction and the standard deduction, unless you already itemize for other stuff. But IME people that buy 150K homes don’t usually have just tons of things to itemize.
So as far as buying now goes, don’t count on deductions as being meaningful savings, not for a house in that range.
It depends on so many factors that are specific to your area. Here in WI property taxes are so high it takes a lot of the advantages of buying away.
This is what I would do in your situation (if I could go back in time). I would buy a duplex, which around here is less than the cost of two equivalent homes. Live in one side, rent out the other. When more financially secure I would buy a house and continue to rent both sides of the duplex.
Look into first time homebuyer programs in your area. It can really open up your choices. You might be able to get into a house, not a condo, for the same price.
