Buying a house! [Archive] - Quarter To Three Forums

Rywill

05-20-2004, 11:27 PM

I disagree with Chet about online comparison sites. You do need to be sure to nail down the fees, which usually requires a call to the actual creditor. But I found it a good way to get the phone numbers and initial terms of five places that I could compare. And all of them were better than USAA and my own bank (I did this for my refi--for my initial mortgage, I went with someone recommended by my real estate agent, which I think was a not-very-good idea in retrospect). But he's right that they will stack in hidden fees to try and keep their rate+points down. Always ask them what it will cost to close the loan and what things you will have to pay for other than the closing (like an inspection).

For loan type, I'd recommend you check out decent ARMs (like a 5/1), unless you plan on keeping your house a long time. If this is going to be a starter house that you'll vacate in 6-8 years (like most peoples' first house), an ARM is probably better. You're probably going to end up making a spreadsheet to compare different loans (5 lenders x 5 loan options from each = you need a spreadsheet).

For actual house-hunting, I'd recommend buying a book. I bought "Home Buying for Dummies" and it was pretty decent for getting a total newbie up to speed. See if you can get a referral for an agent. If not, don't be afraid to switch agents if you don't like the first one you try.

Biggest tip #1: buy a house that is a stretch for you, assuming you have a normal job that involves raises and/or promotions on a regular basis. Something you have to stretch for now is going to be nice and a lot easier to afford in two years. Something you can afford without sweating right now is going to be uncomfortably small / bad area / something else you don't like in two years. Either way, you've got 4-5 more years before you move.

Biggest tip #2 (hmm): don't trust your real estate agent in the home stretch. They're technically required to fight for your best interests all the time. In reality, they want to guarantee a sale goes through because otherwise they get no commission. Once you're bidding on a house, they don't want you to potentially fuck it up. They'll tell you to bid more, and not to insist that problems with the house get fixed. "Just claim it on your home warranty," they'll tell you. Don't listen to them. In the final stretch, you're pretty much on your own. It's pretty stressful, or at least it was for me.

Anyway, congratulations! I found house-hunting pretty stressful and a big pain in the ass, but it was also kind of fun and I really like having my own place. Judging by your posts, I think you'll get really into it.

Peter Frazier

05-20-2004, 11:34 PM

Just don't back it into a concrete pylon the way you did with your last purchase...

Jason McCullough

05-21-2004, 01:02 AM

Don't trust your real estate agent in the home stretch. They're technically required to fight for your best interests all the time.

I've been wondering about this. Even if I get one that's explicitly, legally, looking out for my interests, the incentive model is all wrong - why the hell would I want to give them a fixed percentage of the proceeds? It only gives them an incentive for a quick, expensive sale.

WTF is wrong with the housing market, along these lines? It seems ludicrously uncompetitive at the agent level; I imagine I'd get yelled at if I called a bunch of them asking for rates up front.

Maybe I should try to negotiate a flat rate with incentive clauses based on the delta from the assessed value or something.

As to ARMs: unless the Fed intentionally creates inflation, it's literally impossible for interest rates to go any lower. I've done some reading, and it does make sense that 90% of the time buyers would be better off getting an ARM, as they're not going to be living there that long.

But:

Interest rates have nowhere to go but up.
I'm worried there's significant risk that the financial markets are going to wake up one of these days, look at the trade deficit, look at the budget deficit, and shit themselves. I actually don't think I'm making a bet on my personal political views here; I just think we're headed for a fiscal trainwreck. Will high productivity mask it? Not sure......

Bullhajj

05-21-2004, 01:27 AM

Good for you!

Most of the tips I can think of have already been discussed. The thing about being on your own in the final stretch is right on. We had a gal who insisted we go with her inspector, who she described as, "the kind of guy who won't blow a deal up." I found my own guy. It was always like that with her, though. Be very selective who you work with. Don't feel bad about working with a couple of people at the same time, just to see who you click with.

PMI is typically a bad deal, but if you can get a 3% down loan, you'll have a lot more house options. Where are you planning on looking? How much house do you need? Any must haves? Any must not haves?

The problem with buying a house is that there are just dozens upon dozens of decions you have to make and lots to research, from all the systems in the homes to locations to financing.. the list goes on and on. Good luck!

Bullhajj

05-21-2004, 01:28 AM

Also, I am with you on the interest rates. We've been in our place for 5 years and probably need to move or remodel soon, but I don't want to give up my low fixed rate. Maybe I'll win the lotto and be able to afford an add-on.

Jason McCullough

05-21-2004, 01:39 AM

Looking for something as close to Microsoft as possible; I can't fucking stand commuting. Kirkland or closer.

Bullhajj

05-21-2004, 01:50 AM

I know what you mean. I am about 3 miles away from Microsoft campus. It's a quick bike ride and and even quicker car ride.

Kirkland means using the 405. Bleah. Look in Redmond or Bellevue.

Midnight Son

05-21-2004, 04:52 AM

Best place to get a mortgage: a not for profit credit union you belong to. You don't still use banks, do you?

Ben Sones

05-21-2004, 06:24 AM

PMI is typically a bad deal, but if you can get a 3% down loan, you'll have a lot more house options. Where are you planning on looking? How much house do you need? Any must haves? Any must not haves?

PMI is definitely a bad deal, and though sometimes you can't avoid it (not a lot of people have 20% down these days, given the current costs of real estate), it's worth getting rid of it as soon as possible. I think that FHA loans also come with higher than normal PMI, since they are essentially high-risk loans. My brother-in-law has an FHA loan, and pays a lot more than we do in PMI each month, even though his monthly mortgage payment is lower. Look carefully at the terms that you have to meet in order to get rid of your PMI payments, then try to fulfill those terms as soon as you can. With a regular loan, once you have 20% equity, you no longer need PMI. FHA loans may have additional terms, though.

Also, remember that you can always pay extra on your mortgage each month, and you can specify that any extra amount goes entirely towards the principle (make sure that you DO specify that, because some lenders will only do that if you tell them). That's better than buying stock. You'd be hard-pressed to find an investment with a better return.

Jason Levine

05-21-2004, 07:21 AM

And the number one thing of home ownership at least for me - learn to hate water.

Assuming Chet's experience is the same as mine: Check the flood plain maps for any prospective purchase carefully. If there's any suggestion that flood insurance might be required by your lender, run away.

Rywill

05-21-2004, 07:25 AM

I've been wondering about this. Even if I get one that's explicitly, legally, looking out for my interests, the incentive model is all wrong - why the hell would I want to give them a fixed percentage of the proceeds?
I think it's not actually you who gives them the percentage, it's the seller. But I agree with you about the incentive model, and I don't get it either. The two countervailing influences are: 1) an obligation to act in the buyer's interest, with the risk of losing your license if you don't; and 2) need for referrals. But I just don't see that stuff competing effectively with the money an agent makes on the sale. I very much doubt you'll be able to negotiate your own terms, though. Especially because the seller usually pays the sales commission, so you'd have to get them (and their agent) to agree to your fee structure, which is impossible before you get an agent because you (obviously) don't know who the seller is yet. I guess you could negotiate with the agent that they'll get such-and-such amount, with any shortfall between that and their commission being paid by you and any excess being refunded to you. Let me know if you manage to get anyone to go for that, and I'll hire you to renegotiate my salary at work.

Also, I think the percentage is fixed (six percent, split between the agents if there's one for each party), so you're right that there's no competition in that respect. But there's a lot of competition over who has the best listings, who is the best agent, etc. I was reasonably happy with my first choice, but most of my friends went through two or three agents before finding the one who sold them their place. That competition helps keep agents honest in the initial goings--if they're showing you places way out of your price range, you'll just switch agents. But once you're far into a deal, they can pressure you more because you've got more invested in the process. That's why I said you'll be all alone in the home stretch--my agent really put on the pressure when we were in final negotiations (over the inspection) on my condo.

As to ARMs: unless the Fed intentionally creates inflation, it's literally impossible for interest rates to go any lower.
Do a spreadsheet for your loan offers, and make sure you compare the relative costs after seven years, plugging in different assumptions about interest rates. Remember that your rate will be locked for a 5 years or so, usually quite a bit lower than the 30-year rate (I knocked 3/4% off the 30 year when I got my 5/1 refi IIRC). And the adjustments after that are capped, so you can only lose so much extra money in years 6 and 7.

Conceptually, remember that a bank has to make reasonable money on a 30 year loan even if you keep it for 30 years, so that's priced into the rate. If you know for sure you're not going to keep the loan 30 years, or even 10 years, you're paying for a lot of long-term security that you will never use. Of course, an ARM is more risky, which is why it's cheaper. Theoretically if rates go through the ceiling, you're stuck with your ARM for more than 7 years because you can't afford to move or refi in the new, superexpensive market, and you end up paying more than you would have paid with a fixed mortgage. But the chances of that sort of superinflation are pretty remote, in my estimation, and the cost of insuring against it is too high. And remember that net present value, and the decreasing marginal utility of wealth, both act in your favor. A dollar you save today is worth a lot more than a dollar you have to spend in seven years.

Still, it all depends on how risk-averse you are, and how you see the risks (for example, unlike you, I don't think the financial markets are going to go berzerk in the next 6 or 7 years, so I bet accordingly).

beecubed

05-21-2004, 07:36 AM

i assume that chet hates water because it is typically included in rent, but becomes annoyingly expensive when you own a home and have to buy it on your own.

or perhaps it is all the damage water can do to a house... leaky roof, flooded basement, etc...

Biggest tip #1: buy a house that is a stretch for you, assuming you have a normal job that involves raises and/or promotions on a regular basis. Something you have to stretch for now is going to be nice and a lot easier to afford in two years. Something you can afford without sweating right now is going to be uncomfortably small / bad area / something else you don't like in two years. Either way, you've got 4-5 more years before you move.

i totally disagree with that. there is nothing nicer than walking into a conversation of people complaining about bills and being able to brag about how your mortgage is only 70% of theirs.

obviously, there are tradeoffs you have to make to get a cheaper house. i live in a decent area, but it is close to slummier areas. and my local taxes are significantly higher (i pay 3% vs other nearby that pay 1%), but i figure it will take something like 20-30 years of taxes to make up for the amount i saved, vs living in a lower tax area.

unless you are planning on starting a family in your current house, something you are comfortable with now you will probably be comfortable with in 5 years. and just think of all that extra money you will have available to spend on games. or your 401k, if you are responsible like that...

totally agree on the real estate agent thing. they are way more interested in getting the deal to go through than they are interested in getting you a good deal.

dannimal

05-21-2004, 08:32 AM

- You can indeed negotiate terms with your realtor. My brother did this very thing on the house he's moving out of in a few weeks. Obviously, it depends more on the housing market, but it can be done. If you're not selling a house you're moving out of, it's less of an issue (because the seller pays the commission for both sides).

- There are plenty of good realtors out there if you look. Get referrals. Talk to friends/co-workers who've fairly recently bought/sold houses. When I last moved (4 years ago), my realtor was great. She got one buyer's realtor pulled from the deal because he was a cock and I complained to her. She never pressured me to use a particular inspector, and didn't push me to ignore things (I insisted on a price cut to replace the roof, and on the sell side refused to include the same because I'd just replaced the roof two years before).

Gav

05-21-2004, 09:02 AM

We used a buyer's broker, and they had a good way of working the commission. They took a survey of prices in the neighborhoods where you were looking, and worked out a comission ahead of time (that is, if you buy in neighborhood X, the comission will be $Y). Anything over, you make up the comission, anything less and they refund you.

We ended up getting a refund.

Also, shop around for agents. We had a really strict requirement to be within 1 1/2 miles walking distance from synagogue, and the first agent didn't seem to get that that's not the same thing as 2 1/2 miles as the crow flies :x

Gav

chet

05-21-2004, 09:07 AM

Water- it leaks from pipes or the roof, it overflows gutters, it seeps into old basements, it will find any flaw in your house. Almost everyone i know who has home problems has some kind of issue with water. We have a leaky sky light and a shower that leaked. Also had to replace the hotwater heater. Almost nothing goes wrong with houses, the walls don't cave in, electrical doesn't blow up - but something water, clogged toilets/sinks, backed up sewer in the basement etc - it just seems like it is always something.

And don't forget when pricing a home, there are alot of things you need to buy once you get one. From appliances and furniture to stupid things like curtains, a hose and garden/lawn stuff etc.

Chet

Jason McCullough

05-21-2004, 09:15 AM

Kraaze

05-21-2004, 12:31 PM

Another good thing to do depending on how much of a moving hurry you are in.

Tip 1. Find a house that is for sale and has been vacant for more than 60 days. This means the owner has already moved and is probably desperately trying to move his/her old property. You can drive some deliciously hard bargains in such a situation. Be careful to do the homework and find out *why* it's been on the market for over 2 months tho.

Tip 2. Find out if your local area property assesor is tech savvy. The county property assesors office in my county has a searchable online database of every residiential property in the county including photos, assessed values, sale history (with prices), schematics, the whole 9 yards really. Makes it very easy to figure out what the average price of a home in a neighborhood should be.

Old Man Gravy

05-21-2004, 01:08 PM

Congrats on the big step!

Let me offer a piece of advice: if you want a great house at a ridiculously low price, move to Spokane. Commute would be a bitch, though.

Just remember, a when you buy a starter home, there's nothing wrong with going with something a little smaller or more affordable than you think you need. You won't know a lot of the things you want from a house as a homeowner until you've actually been just that for a while.
No sense in getting yourself locked into a higher-than-necessary payment schedule right out of the gate, for something you thought you really wanted but turned out not to.

Jason McCullough

05-21-2004, 01:33 PM

Kraaze

05-21-2004, 01:38 PM

Oh, I should give more details. I'm looking for a 2 bedroom townhouse - I can't afford regular houses, and condos kind of suck.

A quick scan through the MLS showed them starting at 80k or so, with a bunch clustered around 120k, so I'm fine on affordability; it'll be virtually the same as my current rent.

Thanks for the assessment pointer.

:shock:

I hadn't realized property values were that much higher on the coasts vs the midwest. I bought my 5 bedroom house in the price range you listed for your rent.

Rywill

05-21-2004, 02:02 PM

A 2-bedroom, 2-bath condo in LA will run you over $300,000 if it's in a decent area.

Ben Sones

05-21-2004, 02:10 PM

Bullhajj

05-21-2004, 03:33 PM

What's the diff between a condo and a townhouse? I always thought they were pretty much the same.

Rywill

05-21-2004, 03:35 PM

A townhouse, IIRC, has nobody above or below you, just to the sides (or just one side if you have an end unit). A condo is like an apartment except that you own it.

Rywill

05-21-2004, 03:37 PM

And don't forget when pricing a home, there are alot of things you need to buy once you get one. From appliances and furniture to stupid things like curtains, a hose and garden/lawn stuff etc.

Chet

This is a really good point. Bear in mind that you will spend a LOT of money on things that you hadn't even thought about in the process of setting up in your new house. For us, it was over $5k (though we needed new living room furniture, which bumped it up a lot). It's good to have that money set aside, before you move in.
OTOH, a lot of stuff you can do without if you're willing. I spent over a year in my place before I painted it and replaced the crappy plastic window blinds with curtains, for example. Furniture is another thing you can upgrade slowly or hold off on for a bit. Obviously some things--like a lawnmower--can't really wait, though.

Aleck

05-21-2004, 04:00 PM

A 2-bedroom, 2-bath condo in LA will run you over $300,000 if it's in a decent area.

We just got an unsolicited offer on my 2 bedroom, 1 bath condo in Alexandria, VA (not a great neighborhood, but nice enough). Strangely enough, it's right in that price range -- approx. 2x what we paid 4 years ago.

$120k for a townhouse sounds like a steal! I thought everything was expensive in the Seattle area!

Jason McCullough

05-21-2004, 04:04 PM

Dunno. I'm still poking around, but it looks like there's 20 or so in my price range.

http://www.northwestrealtors.com/Remax_NWRealtors/modules/agent/agent.asp?p=findahome.asp&page=search&search=zip&selected=zip&listing=true&ptd=2&mlsnumber=24055317&mlsid=100

Ben

05-21-2004, 04:05 PM

Salt the earth, Rywill. Salt the earth.

Anyway, if you decide to go on the cheaper end, look for something with an unfinished basement or attic or something, so that you have a step to make before buying a whole new house. If you buy a house that is just right for you but is maxed out, you have to level up instead of just putting some stat points into "additional bedroom".

Also, Jason provides quite the useful vicarious living experience. Car buying, house buying... I wonder what's next? Marriage, kids, and retirement are really all that's left.

Ben Sones

05-21-2004, 05:01 PM

OTOH, a lot of stuff you can do without if you're willing. I spent over a year in my place before I painted it and replaced the crappy plastic window blinds with curtains, for example. Furniture is another thing you can upgrade slowly or hold off on for a bit. Obviously some things--like a lawnmower--can't really wait, though.

Ry, you were rooming with your brother when you moved into your place. I would have waited to fix the place up, too. In fact, I would have covered every surface in the condo with thick plastic tarps until he moved out.

;)

Rywill

05-21-2004, 05:18 PM

If only I had had that amount of foresight :roll:

Jason McCullough

05-21-2004, 05:33 PM

Do I want to know the explanation of that story?

Yeah, EE is kind of becoming like the Sims.

Kalle

05-21-2004, 05:44 PM

Do I want to know the explanation of that story?

Yeah, EE is kind of becoming like the Sims.

*waits for someone to pee on the floor* :roll:

chet

05-21-2004, 06:13 PM

Another suggestion - look, look, look, look. We looked everywhere in our target area, for around a year, it was getting depressing on how much people wanted for so little, then on a total fluke I checked online for a neighborhood i thought we could never afford.

Found one listing at the top of our price range, looked at the house. The guy was selling it himself and we also didnt have a broker. Thought he wanted too much, slept on it - came up with a price we were willing to offer ($20,000 less). He called us that morning and said, we were his last hope before getting a broker, since that would cost him money, and my girlfriend had known all the influence (he had gutted the house and redone it over 7 years) , he had a price in mind to sway us. It was exactly the same figure we had. And then I actually got him to knock off another $2,500 over repairs to the garage.

So look everywhere, and I would look first on your own so there is less pressure while you get used to what to expect. And when you finally find it - don't be scared to lowball it.

Chet

Rywill

05-21-2004, 07:21 PM

Do I want to know the explanation of that story?
It's nothing amazing. My brother is just a slob of the highest order. I basically took to his room with a flamethrower after he moved out.

pms

05-22-2004, 10:48 AM

Not to veer the thread, but I am moving to Seattle this fall. Any recommendations on neighborhoods? (I will be renting to start)

Bullhajj

05-22-2004, 11:17 AM

Not to veer the thread, but I am moving to Seattle this fall. Any recommendations on neighborhoods? (I will be renting to start)

Live close to where you need to work or go to school. Public transportation is mostly bus and it takes a long time and is unreliable in the winter.

Bullhajj

05-22-2004, 11:19 AM

A townhouse, IIRC, has nobody above or below you, just to the sides (or just one side if you have an end unit). A condo is like an apartment except that you own it.

How do people in a townhosue deal with repairs or maintinence issues? It seems like it is pretty similar to a condo, except conventions about the layout of the building.

Jason McCullough

05-22-2004, 11:30 AM

Everything to do with the townhouse itself is your problem. All the common exterior areas are everyone's.

Bullhajj

05-22-2004, 11:42 AM

So the only advantage over a condo is how they design the building?

Jason McCullough

05-22-2004, 11:44 AM

You're only liable for your roof and walls, not everyone elses. And yeah, you only have people on the sides.

Midnight Son

05-22-2004, 12:04 PM

Not much resale value to townhouses. Get the cheapest 3 bedroom house you can....

Jason McCullough

05-22-2004, 12:12 PM

That's like $250k around here. No way I can afford that.

Midnight Son

05-22-2004, 12:51 PM

Wow, insane prices!

Jason McCullough

05-22-2004, 06:18 PM

Considering how much money people make around here, not really. It is increasing income segmentation, though; the lower middle class has to buy homes down in Renton. No idea what the people with bad paying jobs here in the city do.

Midnight Son

05-22-2004, 06:54 PM

Down here in southeastern VA, you can get a real nice house for $150,000 - $200,000. Of course, there's $1 Million mansions too.

chet

05-22-2004, 07:13 PM

Cleveland prices have really gotten out of wack, urban renewal has led to stupidity.

http://pure.progressiveurban.com/propview.php?view=595
$243,000 for this. Does the outside look ghettoish? It should, when we lived in our crappy $425/month one bedroom apartment, this was in the neighborhood nearby we were scared to walk through (on the bad side of the tracks). That was 4 years ago and the neighborhood has gotten progressively worse. Even the pager store and unknown video store closed.

Developers in Cleveland just stick down these condos or rehabs without any rhyme or reason and charge out the ass, not even in one community, anywhere they can fit them in the ghetto. And people buy them. The asking price for this is more than for our house - which is one of the nicest neighborhoods in Cleveland, has a private beach on lake Erie. People are stupid. Which is why i really urge you to look, look, look.

Chet

Bullhajj

05-22-2004, 08:12 PM

I'd say it looks run down on the outside. My god it was built in 99. How did it get so fugly in 5 years? They must have designed it that way.

chet

05-22-2004, 08:49 PM

That is the year rehabed, i would guess the buildings which used to be 2 ghetto units per 1 fancy unit, are about 50-60 years old. They actually looked better pre-rehab.

Chet

pms

05-22-2004, 09:31 PM

Desslock

05-23-2004, 07:18 PM

That's like $250k around here. No way I can afford that.

Heh, decent 3 bedroom homes are at least $600k in Toronto, and we pay about 50% more in taxes and don't get to deduct our mortgage interest. The world is your oyster!

Supertanker

05-23-2004, 07:35 PM

Not much resale value to townhouses. Get the cheapest 3 bedroom house you can....

As home prices have skyrocketed around here ($700,000 and up now), the condo market is actually hotter than the detached home market because first-time buyers still have a slight chance of paying for one. We're seeing $15,000 to $20,000 price increases per month so I'm not sure how long that can last. Our place was appraised in March for about $365,000, and a smaller unit nearby is now in escrow at $407,000.

Mark Asher

05-23-2004, 08:07 PM

Here in St. Louis you can buy a spacious house (2500 sq. feet) in the suburbs within 20-30 minutes of most businesses in the $200-300k price range.

Desslock

05-23-2004, 09:06 PM

Here in St. Louis you can buy a spacious house (2500 sq. feet) in the suburbs within 20-30 minutes of most businesses in the $200-300k price range.

In fairness, that's probably the case in Toronto (and pretty much any city, other than NY), but that's not living in the city. If you're willing to use public transit trains (and the coverage is decent), it's almost the only viable option if you want to own a house, unless you're really rich or inherit one.

Now isn't a great time to buy a house, if you can hold off a bit, Jason -- interest rates are going to start rising in the immediate future, and the market is going to crash the year -- probably significantly in overheated geographical markets (like the comparably affordable condo markets in some major cities, since there's been so much construction).

Jason McCullough

05-24-2004, 01:53 AM

Why would rising interest rates in the future make it bad to buy now? I was planning on a fixed rate.

Yeah, the crash might be an issue. Apparently it's restricted to the ludicriously expensive upper end around here.

Desslock

05-24-2004, 03:06 AM

Ben Sones

05-24-2004, 05:29 AM

Now isn't a great time to buy a house, if you can hold off a bit, Jason

That really depends on his intentions, though. If he plans to stay put for a good while, then now might be a good time to buy anyway, so he can lock in a good interest rate. Especially if he doesn't have a large downpayment (which I assume is the case, since he was considering an FHA loan), since that's just that much more interest he's going to end up paying. He only loses money if he sells, after all. Housing prices will go up again, even if this bubble bursts. My parents' house dropped in value some not long after they bought it, during the 80s, but since then it's gone up again and is currently worth nearly three times what they paid for it.

If he doesn't think he'll be there for very long, well, that's another story.

noun

05-24-2004, 08:48 AM

Stay the fuck away from anything offered by Windermere. That company made it big in Seattle by hiring pretty women to sell the expensive homes to incoming Californians, and not by actually doing any work. Most of the homes they offer are priced at least 15% too high, and they never deal with properties offered by competing realtors.

One thing you absolutely must splurge for: a quality home inspector. When interviewing prospective inspectors, ask to see an example of an estimate they've provided in the past. Ideally, this sucker should be 30+ pages with hundreds of lines. You want someone thorough. The first home I purchased I went with a cheaper inspector who failed to find a couple of major defects. Don't make that mistake.

Check the neighborhood. Are there a ton of other homes for sale near the one you're looking at? Best to find out why. Could be there's some unpleasant construction about to occur, or worse, maybe they all found out one of their neighbors is running a meth lab...

Remember, it's better to buy the worst looking house in the best neighborhood than the best looking house in the worst neighborhood.

One thing to remember - your first home purchase will not be perfect. It will be a learning experience. Invariably, you'll forget to ask for something important you'll have to deal with later.

Jason McCullough

05-24-2004, 08:53 AM

Why would rising interest rates in the future make it bad to buy now?

Two reasons:

1. Because the cost of borrowing will increase, so people will only be able to carry smaller mortgages, which will put downward pressure on pricing. Once fewer people can afford to pay as much, it'll crash the housing market, since prices are currently absurdly based upon cash essentially costing nothing to borrow.

2. Coupled with the first reason, unless you're paying a big chuck as a downpaymet and are not carrying a mortgage larger than 75% of what you paid, if you buy now and have a 5 year term (not amortization period) on your mortgage, at the time of its renewal, your outstanding mortgage principal may be greater than the fair market value of the house -- requiring you to put up additional security or sell your house for a loss. That happened to a lot of people in the crash after the late 80s, and we're overripe for something similar to happen.

5 year term??? I was looking at either 30 or 15. The interest on a 30 is still a lot cheaper than the credit cards I need to pay, so it's dead last on the "pay off" list.

The interest rate rise would take out the housing market and make it cheaper to buy, yeah, but I'm not looking to sell for the foreseeable future. Probably going to stay at Microsoft and not going to get married for quite a while.

Midnight Son

05-24-2004, 10:38 AM

Get the largest, cheapest and longest mortgage you can. Several reasons for this:

1) A mortgage is the cheapest money you can buy. And you get the tax break on the interest.

2) Mortgages don't affect home value. Keep your money out of the house.

3) Your mortgage payment is fixed but your income should rise with inflation allowing you to pay the house off with cheaper, future dollars.

Desslock

05-24-2004, 12:30 PM

Why would rising interest rates in the future make it bad to buy now?

Two reasons:

1. Because the cost of borrowing will increase, so people will only be able to carry smaller mortgages, which will put downward pressure on pricing. Once fewer people can afford to pay as much, it'll crash the housing market, since prices are currently absurdly based upon cash essentially costing nothing to borrow.

2. Coupled with the first reason, unless you're paying a big chuck as a downpaymet and are not carrying a mortgage larger than 75% of what you paid, if you buy now and have a 5 year term (not amortization period) on your mortgage, at the time of its renewal, your outstanding mortgage principal may be greater than the fair market value of the house -- requiring you to put up additional security or sell your house for a loss. That happened to a lot of people in the crash after the late 80s, and we're overripe for something similar to happen.

5 year term??? I was looking at either 30 or 15.

I'm not talking about amortization period - generally sizeable mortgages are amortized over 25 years or so, but you have to renew the terms at briefer intervals (and you may not be able to get the same financial terms). Like I said, this happened a lot in the 80s crash.

But this also may be another U.S./Canadian difference -- in Canada, at least until recently, the maxium term you could "lock in" for was 5 years, even if the amortization was 25-30 years, you'd have to renew every 5. You're probably not subject to that restriction, since everything about buying a house is apparently better in the U.S.

Anyway, just something to consider. If you need/want a house now, go for it - there's always reasons to not buy, but at some point you have to jump in.

Jason McCullough

05-24-2004, 12:50 PM

Yeah, that's a Canadian thing. The worst that happens in the US is you keep paying mortgage insurance until you've paid off 20% of the house.

Supertanker

05-24-2004, 01:00 PM

If you plan on moving in a few years, a short term mortgage will save you a lot of money, though it sort of presumes a rising housing market. They don't amortize the entire amount of the loan, you basically just pay the interest and then there is a balloon payment at the end. That's your signal to move or refi again. If the market has risen, you have a bunch of equity built in the house to pay for a new (presumably larger) place, but your mortgage amount doesn't have to change.

We will need to move to a larger place in a few years, so we have a five-year note now. The payments are several hundred dollars less per month than the 30-year note we had originally. If needed, I can convert it to a longer term very quickly.

The benefits of owning a house in a rising market are very great. I had to sacrifice a lot to get into this place (our first), even paying penalties & taxes to withdraw retirement savings, but I've gained far more than I've spent. Even if my home value drops 25%, my equity gain still far exceeds the total of my downpayment, property taxes, penalties, financing costs, and all of the payments I have made. Throw in the mortgage interest deduction, and I'm making out like a bandit.

Midnight Son

05-24-2004, 01:03 PM

One of the problems with short term loans is that you build alot of equity that is then tied up in the house unless you sell or get a second mortgage. The taxable interest can also be so low as to only allow you to take the standard deduction. Anyway, lots of number crunching and long term planning needs to be done....

Rywill

05-24-2004, 02:07 PM

The taxable interest can also be so low as to only allow you to take the standard deduction.
It's nonsensical to pay more mortgage interest so that you can take a larger tax deduction.

Desslock

05-24-2004, 02:58 PM

Yeah, that's a Canadian thing. The worst that happens in the US is you keep paying mortgage insurance until you've paid off 20% of the house.

Oh, we have that too, except it's 25%. How much does the insurance cost in the U.S.?

Man, we suck:
- no interest deductibility;
- mandatory short-term mortgages (that may be provincial)
- 3-4% mandatory insurance charge if you don't put 25% of the purchase price down as a downpayment;
- income tax 50-30% higher than in the US on similar income.

One benefit we have, which I don't know if you guys can do, is withdraw up to $20k from our RRSPs (like a 401k) to use for the downpayment, without incurring tax penalties on the withdrawal. You have to pay it back into your retirement fund, but not for 15 years. You can only do it once, however, and it has to be your first home.

Rywill

05-24-2004, 03:08 PM

No, we get basically the same thing. You guys just suck all around.

Midnight Son

05-24-2004, 03:24 PM

The taxable interest can also be so low as to only allow you to take the standard deduction.
It's nonsensical to pay more mortgage interest so that you can take a larger tax deduction.

Have you crunched the numbers? Besides my own house, I own five rental properties. Common sense can fail you if you apply it to tax laws. Itemizing is the way to go.

Rywill

05-24-2004, 03:33 PM

Have you? Paying money to a bank so that you can get 28% of it back from the federal government is never a winning strategy. I'm not saying it's dumb to itemize; if you get more money back that way, it's smarter. But your criticism of a given mortgage because the interest is so low that you shouldn't deduct it is just loony.

Midnight Son

05-24-2004, 03:39 PM

I keep forgetting that you know everything. When will I learn? My point is that for some people the interest can be so low that they can't deduct it. Also, it makes no sense to pay $200 more equity per month to the bank for a short term loan and getting nothing in return when you could be investing that money. I didn't get to be somewhat wealthy by being a doofus. I just act that way.

Bullhajj

05-24-2004, 04:05 PM

How wealthy is somewhat wealthy? Is there a list of the most somewhat wealthy men in America? Just wondering. :)

As for mortgage insurance, if you can get a VA loan you can avoid this expense. We got our house with basically zero down payment and the Feds guarantee the loan because I was in the service. I thought the there was a similar program for non-vet, first time home buyers (FHA?).

How does an 5/1 ARM work? Surely the risk Desslock describes where the housing market crashes and you have to sell at a loss is applicable in the US, too? You have to renew your terms in 5 years, right?

Rywill

05-24-2004, 04:16 PM

I keep forgetting that you know everything. When will I learn? My point is that for some people the interest can be so low that they can't deduct it.
How is that a disadvantage of the loan? Are you saying they'd be smarter to take a loan with a higher interest rate so that they can deduct the mortgage interest? Your first point (that you end up buying a bunch of illiquid equity) was a good one, but your follow up (plus you pay so little interest that you get no worthwhile deduction!) made no sense.

How does an 5/1 ARM work? Surely the risk Desslock describes where the housing market crashes and you have to sell at a loss is applicable in the US, too? You have to renew your terms in 5 years, right?
No, your terms are set from the beginning and never change, although the interest rate changes based on a pre-set formula that you agreed to when you got the loan. I'm not sure whether there are provisions for re-evaluating your equity level, but I don't think there are (obviously each contract could be different; I'm just talking about typical industry practice). If you're "upside down" on the mortgage, that just means you can't sell your house unless you're willing to take the loss. I've certainly never had a bank tell me they want my house appraised out of the blue, nor have I ever heard of anyone having that done.

Bullhajj

05-24-2004, 04:31 PM

Good point Ryan. I see it now. I am just glad I don't live in Canada.

Jason McCullough

06-03-2004, 09:25 PM

So I've done some more reading and got some quotes. After some thinking, I'm probably not going to live there more than 10 years, so I'm really only need to look at what the loan will cost me in that timeframe. Maybe I should look into an long-period ARM variety with adjustment caps rather than a fixed. I sure as hell dont' want a balloon payment; those things are just terrifying.

Possibility one: get a 80% mortgage followed up by a 15% mortgage from a local credit union; interest rate split is 6.25/5. The effective rate is is a half-point lower than anything else I can find, but there's no fucking way I can get the cash together at the moment for this one. It'd take me until december, possibly later, to scrape enough together.

Possibility two: 80% mortgage followed by a 20%. A friend's mortgage broker (or whatever the hell she is) found me this, with a 6.4% and 9% rate split. Surprisingly, the effective interest rate is only 5.5% for the first ten years - the mortgage deduction gives you some hilariously counterintuitive results. I can afford this right now.

I've still got to look into the FHA/PMI thing, and get another broker for quote competition, but it's looking good.

Jason McCullough

07-12-2004, 10:44 PM

After a bit more reflection: fuck this shit.

For chrissakes, random strangers have started telling me the housing market is about to crash. Considering all I can afford is 100% financing, it'd be fucking nuts to buy right now.

Depressing. Oh well.

Anaxagoras

07-12-2004, 10:46 PM

So no move to the Eastside for you?

chet

07-12-2004, 11:12 PM

I just refinanced my house, locked the rates in right before the increase. Saving $400 a month in payments (also got around to dumping pmi which makes up $75 of that). Yowza.

While I understand the long term savings in refinancing (we aren't going anywhere, or at least i am not selling), it killed me to essentially throw away 3 years of payments. At least I will have plenty of interest to write off this year.

But the point, i bought at the height of the good economy and it cost me. If you buy now, your rates will be low enough, that the savings across 15-30 years (if you buy a house you want to stay in), will more than pay for itself.

Of course, in your area, maybe the market is super wack and needs adjustement, but how much loss of value will there be? 10%?

Chet

Jason McCullough

07-12-2004, 11:53 PM

Mostly, a friend's wife today was all like "it's going to crash" and the losers at the Seattle Weekly say it's "out of control," so it's probably going to crash. It'll be horribly magnified with 100% financing, too, so I guess I'll wait a year or two paying down CCs.

JeffL

07-13-2004, 02:54 PM

Jason, FWIW, a good property in a good location is one of the best investments you can make. I've moved around a bit in my life and the worst I've seen a good property in a good location do is stay about the same value or only go up a slight amount. And that is really the exception - good properties in good locations almost always go up a significant amount. Just remember the old cliche about real estate and location.

And when comparing real estate as an investment - remember that if a stock you buy at $10 goes up ten percent, you make ten percent on each dollar of stock you've invested. If you only have, say, 10% in a property that's $200,000 (i.e., 20K ) and the property goes up only 5% you've made $5000 on your $20,000, or 25%.

Plus you get the inherent value of a nice home to live in.

One tip - I ALWAYS pay a professional home inspector to check out the home before buying. You learn a LOT about the house as you follow him/her around inpecting every nook and cranny, and you get the strength of the inspector's recommendations for what needs to be addressed or repaired as you negotiate the deal (typically I've had agreements that anything under a certain amount I'll cover, anything found over that amount the seller will cover.) I usually pay an attorney a couple of hundred bucks or so also to represent me in the paperwork. Maybe not neccessary, but I don't buy do a lot of multi-hundred thousand dollar transactions so it is worth it to me to have a lawyer help.

Jason McCullough

07-13-2004, 04:14 PM

Yeah, but the best I can afford is some two bed condo I only kind of want, and it'd be with 100% financing and the value of the place would collapse immediately after I want it.

I figure I can spend the next couple years paying down $23000 in credit cards (9% or so, so hard to beat the after-tax ROI) first.

DennyA

07-13-2004, 05:25 PM

Except that every penny of interest you pay on a house is tax deductable. As opposed to rent, which just goes off into the ether...

But with that level of credit card debt, yep, attacking that would probably be best.

Every damn time I pay off my credit cards completely I move across the country and have to run 'em up again during the transition. This'll be the fourth time. I'm leaving $100 on a card next time, dammit.

shift6

07-13-2004, 07:17 PM

I figure I can spend the next couple years paying down $23000 in credit cards (9% or so, so hard to beat the after-tax ROI) first.
Word. I've got about $27000 on the cards right now averaging about 8-9% also. As good of an investment as a home is, it is just going to "feel better" to get out from under this shite first. Besides, by then the housing market will have crashed and I'll get a huge place on the cheap! :wink:

Jason McCullough

07-13-2004, 08:05 PM

That's my theory! Suckers, I'm coming for your property!

JeffL

07-14-2004, 09:38 AM

Without a doubt - get rid of the credit cards. The interest rate on those is going to go up big-time when rates start climbing later in the year.

Of course, another approach - go ahead and purchase the real estate while rates are so low, then get a home equity loan at 5% or so and use that to pay off the credit cards. You then not only have converted that debt to a lower interest rate debt, but THAT debt is also tax deductible.

Midnight Son

07-14-2004, 09:42 AM

How's he going to get a home equity loan on a new property without building equity first? He may have to wait awhile and hope his property assessment goes up next year or something.

Nick Walter

07-14-2004, 09:58 AM

How's he going to get a home equity loan on a new property without building equity first? He may have to wait awhile and hope his property assessment goes up next year or something.

Nope. You can get a home equity loan right out of the gate. Just have to convince a bank that the value of your home exceeds the mortgage amount. You can start as a homeowner with equity by either having a less than 100% mortgage or by buying a house for less than the bank appraisal value.

Midnight Son

07-14-2004, 10:00 AM

Well, then I wish him good luck in the Seattle area. (Hey, can he also use a "Proven Way to Make Money in Real Estate with No Money Down!!!!?) :lol:

DennyA

07-14-2004, 10:13 AM

Have you? Paying money to a bank so that you can get 28% of it back from the federal government is never a winning strategy. .
It is if the alternative is paying a similar amount in rent.

DennyA

07-14-2004, 10:21 AM

How's he going to get a home equity loan on a new property without building equity first? He may have to wait awhile and hope his property assessment goes up next year or something.
It doesn't seem to make any sense to me either, but if you can't afford a 20% down payment due to the inflated price of homes in some areas, you can put down a bit less than that and get a home equity loan for the rest of the $$$ needed to up the down payment to 20%.

The advantage of doing this is that you can then avoid Private Mortage Insurance. In the case above, PMI would have been about $175/month. The loan interest was about $180/month. But the PMI money just goes into a hole; the loan interest is all deductable.

Of course, it makes no sense to me that driving yourself further into debt by taking an equity loan out makes underwriters want to let you out of mortgage insurance... But it does.

Rywill

07-14-2004, 10:22 AM

That discussion was about two mortgages (one with lower interest, one with higher), not about the difference between buying and renting. We were discussing whether it made sense to take a higher-interest mortgage because the interest is deductible.

Midnight Son

07-14-2004, 11:02 AM

Rywill, let me ask you something.... When you buy a house, do you fully expect to stay in the house until you pay it off, taking a 15 or 30 year fixed mortgage? Or do you expect to move several times, like most Americans? Let's crunch some numbers.

$150,000 financed

15 years: 4.75% = $60,015 interest
30 years: 5.75% = $165,129 interest

Man that looks bad! Let's see the payments.

15 year: Monthly payment = $1166.75
30 year: Monthly payment = $875.36
Difference is $291.39 per month more to invest.

What if you move after 8 years, selling the house?

15 year: Total paid in 8 years: $112008.00
30 year: Total paid in 8 years: $84034.56

Difference of: $27973.44 over 8 years. That's what you gave the bank for nothing that could have been used for investing or many other purposes. What you are doing is looking at the interest rate as if it exists in isolation. I say look at the total you are spending. (The house you plan to keep to retire in... pay it off quickly. Ten year mortgages are great for this.)

Jason McCullough

07-14-2004, 11:07 AM

Aggregate "interest paid" numbers are kind of useless, dude. All that matters is after-tax interest rates vs. investment foregone.

"That's what you gave the bank for nothing that could have been used for investing or many other purposes."

No, that's what you give the bank for having less of a monthly payment, and you can afford more house on a 30 year.

Actual after tax interest rates, assuming a 28% marginal federal rate, are 3.42% on the 15 year and 4.14 on the 30 year. The difference will actually be less than that due to personal exemptions and all that.

That being the case, you'd probably come out ahead long-run by taking the 30 year and investing the rest elsewhere; 4% after-tax ROI isn't that hard.

Houses are strange, because they're a combination of "investment," "tax shelter," and "required expenditure to stay alive."

Midnight Son

07-14-2004, 11:39 AM

I love those blanket "all that matters" statements. Have you crunched the numbers? Let's do some more for fun!

Take a measly $20,000 out of Home Equity at 3.99% with a 20 year payment term.

Invest it all in a High Yield Corporate Bond fund currently earning 6.85%

Monthly loan payment: $121.09 Total loan repayment: $29,061.60 (20 years.)

Investment: Total after 20 years: $75,252.43

Profit of: $46190.83.

noun

07-14-2004, 11:43 AM

Profit of: $46190.83.

What about capital gains taxes?

Midnight Son

07-14-2004, 11:48 AM

Sure, 15%. What about the tax deductions on the measly interest paid? Interest rates could rise, but that will also raise the interest earned on the bonds as the average duration of the bonds is only 4.5 years. Keep in mind that no one (right?) actually takes money out of investment accounts to pay taxes. They use savings or money market.

Jason McCullough

07-14-2004, 12:09 PM

MS, what does that equity thing have to do with anything?

Midnight Son

07-14-2004, 12:18 PM

Just crunching some numbers. Say you didn't pay the bank the extra money every month and invested it instead, that's the kind of money you could end up with. Look, I'm trying to be helpful by giving you examples that worked and continue to work for me every day. In the end, you've got to make your own decisions. Just do your homework first. Sit down and do some what ifs. (I understand your company even makes a spreadsheet!) :)

Bullhajj

07-14-2004, 12:41 PM

I think his point is that he doesn't have 20k in home equity to invest. It's kind of like advising a crying 4-year old to stop acting like such a baby. :)

shift6

07-14-2004, 06:55 PM

You forgot "all the interest is tax deductible". Thus the entirety of your interest calculations are worthless. Someone making six figs a year would write all of it off in both scenarios, every year, and could count it in the aggregate of his entire personal worth as "paid". The only difference is who the check was made out to. Then as was pointed out by noun, you have cap gains. You also have cap gains on your municipal bonds if they increase their worth, or income tax if they only pay divvies.

So the question is would you rather tha bank got your money or the government? Since you owe taxes to the government anyways, I think the answer is clear.

Note that most investment advisors will tell you that, over time, a well-considered purchase of a house is the single best financial investment a person can ever make in his life because you gain equity, deduct all of the interest (in most cases), and have a rent-free place to live. Period.