I recently had a reader email me and ask about buying a house.
I suggested he write something up, I’d post it, and we’d let the ESI Money community weigh in on the subject.
Here’s his background/questions:
I know home ownership is more than an investment but I am trying to ensure my first time purchase in the near future is not a money pit and something that can assist my path to financial independence.
My wife and I are early 30’s with 2 toddlers and bringing home ~80k after taxes/deductions (including 13% each into 403b accounts) We paid off about 40 grand in debt during 2016 (first full year of dual employment in decent paying jobs), including all credit card we built up since having kids, one of our cars and about 75% of the second car we purchased in 2015 so we both could work. We still have ~60K in student loans (each have MS degrees) mainly at 4.5%
We would love to buy the house we rent and the landlord mentioned interest in selling two years ago when he initially showed us the property. I think we could realistically buy the house for ~150K (assuming he would sell) based on the house two doors down price 2 months ago (we live in the sticks outside a 2 red light town so not much comparison)
I think as a first time buyer with good credit (around 750 last I checked) we could get a very low down payment loan that would keep mortgage around current rent ($975/month) but everything I’ve read lately says you need to do 20% down and have ~4-5 months of an emergency fund with some (I think boglehead forums) even suggesting you are maxing out all retirement accounts! While I would love to do that, it will take time and if we live here 3-4 more years while building those systems and funds I feel like we will have essentially paid for the house in rent.
I had the bug wanting to get a house as soon as we both transitioned to positions compensating for our degrees (previously I earned ~25k in athletics and my wife stayed at home with our sons for ~3 years) but have read some things changing my opinions about home ownership being a poor investment while my wife is in love with Dave Ramsey’s ideas. I’m not crazy about the idea of tying up a lot of money into a mortgage but also now know thanks to one of your episodes the mortgage is sort hedged against inflation (if fixed mortgage) but am almost overwhelmed with it all while trying to make sense of how a Trump presidency will influence rates/etc.
Being that we are both young I also do not want to tie up all of our income into a mortgage or saving for a down payment if the market has a severe sell off in the near future; I believe the potential to invest into assets at deep discounts is more appealing based on our timeline than owning a home. If the real estate market would be one to collapse again I guess it could be a win-win scenario for me…?!
Thank you in advance for any thoughts/suggestions/advice!
I usually weigh in on these questions but this time I’ll let you all jump in first. What thoughts do you have for him?
photo credit: Hunky Punk Three arches: Searsport, Maine, USA via photopin (license)
Erik @ The Mastermind Within says
Great questions from your friend. Here’s my 2 cents given my experience with my house:
If you can get to 20% equity via a down payment, you will not need to have private mortgage insurance (PMI). PMI essentially is insurance that your loan will be paid off if you default. I refinanced in August, and have a mortgage of ~270k and am at about 12%. My PMI each month is about $140… which is a decent chunk of change. Estimating to your mortgage amount, your PMI could be about $50-70. Just another thing to keep in mind…
Frankly, if you could buy your current house for a slight discount, I think it makes sense. Otherwise, keep paying off debt and saving for the future. I’m a little bit hesitant in our current economic environment given the screwball in the White House, but at the same time believe real estate is a fantastic way to build wealth. Each day I’m doing research on my current location to understand the market around me better.
Gen Y Finance Guy says
Erik – there are some credit unions like Navy Federal Credit Union that do no PMI loans for equity positions less than 20%.
Just something to consider and think about.
nsdavid says
Gen Y is right, some CU’s have no PMI. Interest rates are at all time lows so very cheap money. I bought my first house at age 20 at 9 3/4 % and my second at age 29 at, again 9 3/4%. I don’t agree with Dave Ramsey on everything , especially when interest rates are so low. If I followed all of Ramsey’s no debt philosophy, I would not have leveraged about $120,000 into 3.5 M net worth in real estate and stocks over 10 years. How are prospects for your income increasing ? I would guess in a town like yours, the rents and home prices are pretty stable with few renters or buyers coming and going. How long do you want to live in the area? if I were buying a house with the idea of living there only a few years- I would not buy unless I were to turn it into a rental and then I would price the house based on a rental not a house to live in. That means, I would not buy the house unless I could buy it cheap. AND I would only buy if I plan to settle in the area for good. The student loan would bother me the most. I have never paid a cent in rent in my life but, with the idea of only staying a few years in a town where rent and prices are stable I would rather pay off the student loans. THAT assumes that your are taking advantage of any savings or investing incentives ie. 401K FIRST because if your student loan is at 4.5% that is still fairly cheap and if the market takes a hit while you are dollar averaging you have lots of time to recover since you are so young.
Wealth Psychology says
Hello “Reader.” First I’ll say that there’s some speculating about the stock market and the housing market which I think we should ignore because, you know, it’s speculating and we don’t know.
Let’s see, if we break this down into pure numbers…
Income: ~80k after taxes/deductions (including 13% each into 403b accounts)
Recently paid off about 40k in debt during 2016
Remaining debt: at least 25% of the second car purchased in 2015
and ~60K in student loans at 4.5%
House price: ~150K (20% down is 30k)
… mortgage around current rent ($975/month)
… have ~4-5 months of an emergency fund
I think the questions we need to ask are 1) Is it safe? and 2) Does it help reach the goal of financial independence?
For #1, I think the emergency fund is important. Is there any saved up yet? If not then it may not be that safe of a purchase.
For #2, I think it depends on how long Reader plans on keeping the house. Is this where you want to raise your kids, for example? If you can envision holding on to it for 15 years then buying will probably work out in the long run. (I think usually 10 years is the time frame people say to use as a litmus test.) Later, if you want to move then keeping it as a rental is an option, but that can be an expensive choice that’s not worth it in the first few years after purchase.
I also want to note to be careful comparing a monthly rent of $975 to a mortgage of $975. The mortgage is much more expensive! There’s maintenance, taxes, appliances, etc.
It sounds like without buying the house you could be completely debt free in about 18 months! Then any type of financial goal you wanted to achieve would be that much easier.
Good luck to you!
-Aaron
Mrs. Mad Money Monster says
It sounds like you guys have really given a lot of thought to this question. I would say, avoid PMI at all costs, or at least try to reduce it as much as possible. I believe it is based on the % of equity you have in the home, so the closer you can get to 20%, the better. Or, it’s possible you could be creative with your financing. Having excellent credit, you might quality for a piggyback loan that would eliminate PMI, by breaking your mortgage into 2 loans. I know they stopped doing these after the housing crash, but I read recently that they’re making a comeback. That way, you don’t have all of your cash tied up in the mortgage. Overall, a $150k home with an income of $80k/yr is reasonable – IMO anyway, assuming you won’t get hit too heavily on taxes. This could easily cost you lots more each month, depending where you live. In sum, try to avoid PMI, one way or another. What I would NOT recommend is entering into a lease option with your current landlord. They rarely work out and almost always benefit the current owner.
Good luck!
Freedom 40 plan says
Interest rates are still low and it would seem reasonable that you could probably get a mortgage with a monthly payment comparable to what you’re paying in rent now. Just remember that once you own, you’ll need to pay the taxes as well, and have some cash stashed away for unforeseen repair needs. Broken hot water heaters and HVACs can really rip your finances up quickly!
Billy says
Are you sure you’ll be staying in the area? If not, you probably don’t want to buy yet.
See if the current owner is interested in selling. If so, see if they are willing to do a lease/option with you. It would work something like this:
1. You negotiate the sales price today and give the owner 1-3% of that for an “option” to buy the property anytime between now and some fixed future date (usually 12-36 months). Make sure that the language allows you to get a credit against your down payment at the final closing for your option fee. If you fail to exercise the option, the current owner gets to keep your option fee no questions asked.
2. Sign a new lease that includes your current payment plus $100-$300 extra. The extra funds will also be credited to your downpayment at the final close. If you do not exercise the option you don’t get a refund. The current owner keeps them. Your new lease should run until your option agreement is scheduled to expire.
Benefits for you: You get to lock in today’s price and get some additional time to get your finances in place. You also get in the habit of paying more per month that you’ll be doing (for repairs, upgrades, etc) once you’re the home owner. You also have some forced savings for your down payment.
Benefits to the landlord: He gets a longer term lease at above market rents. If you don’t exercise the option, he gets your option fee as bonus money.
Downsides to you: It’s not very flexible if your future life changes. You lose a good chunk if you don’t exercise the option.
Downsides to the landlord: He sells for today’s price paid for with tomorrow’s money (worth even less due to inflation).
Ray says
First, you need better information about what options are out there in terms of mortgages. Fifteen years ago when I bought we put ~$3000 down on a ~$90K loan using a program through the FHA. Of course, a lot has changed in fifteen years so you need to find out what is available now. Look for a mortgage broker in your area who can give you an idea of what is available.
When you talk to the mortgage broker, realize that they will likely be focused on the monthly payment and not on the total cost. Key your eye on the ball and focus on the total cost; you want to reduce the total cost of the mortgage as much as possible while staying within a monthly payment that is comfortable for you.
If you put less than 20% down you will have to pay PMI as others have noted. However, once you hit 20% you can refinance the mortgage or petition your current note holder to remove the PMI. You’ll need to spend some time with some spreadsheets to figure out which way works out best (buying the house early and paying the PMI or delaying until you have the 20%).
Don’t assume that a house is a good investment. My house has been mediocre at best as an investment. A few years a go I ran the numbers and realized that if I sold it I would just about recoup the money I had put into it (mortgage + taxes) and nothing else. I didn’t even add in improvements we had made. (A lot of this has to do with the local real estate market which is nothing like the market in the rest of the US.) Of course, I did get a place to live in the meantime which is important.
You said that you paid off $40K in debt last year. Does that mean you anticipate having $40K/yr of disposable income or was that due to some kind of one time event? If you will have $40K/yr of disposable income, I would advise you to take three years or so and pay off the student loans and save up the down payment and an emergency fund. I know you feel like you are throwing money away on rent but the first few years of a mortgage you are mostly throwing your money away on interest (and PMI in this case and don’t forget real estate taxes). After those three years you will be in a strong position to get a much better deal on your mortgage and I suspect you will come out ahead in the long run (especially if you consider the interest on the student loan debt).
Whatever you decide good luck and don’t forget to come back and tell us how it worked out.
RetireSoon says
Don’t assume that a house is a good investment. My house has been mediocre at best as an investment. A few years a go I ran the numbers and realized that if I sold it I would just about recoup the money I had put into it (mortgage + taxes) and nothing else. I didn’t even add in improvements we had made. (A lot of this has to do with the local real estate market which is nothing like the market in the rest of the US.) Of course, I did get a place to live in the meantime which is important.
… but if you rent, you wouldn’t get any of that money back, right? And, rent *should* always go up.
In a hot market, you you hope for appreciation on your house.
In a normal market, you have an asset after 15-30 years vs spent rent.
Ray says
I wasn’t making a comparison between renting and owning. I was addressing the idea that a house is a good investment.
Apex says
@RetireSoon
If you pay a mortgage with property tax / insurance / interest etc, you won’t get the vast majority of that money back either. You did mention 15-30 years and that is an ok time frame to justify the ownership benefits. But on a 5 year time horizon it is nearly impossible to make a case for owning beating renting without massive appreciation. There are other reasons to own instead of rent, but they are not investment based, they are consumption based. See my comments below for further details.
Gen Y Finance Guy says
I would say if you can get into the house for the equivalent of what you are paying for rent that you should do it without hesitation.
Your concern about a hefty down payment can be solved by checking out a credit union like Navy Federal Credit Union that offers no PMI loans and you can put very little down.
This would allow you to start building equity and save money on your taxes. From a cash flow perspective you should be in a better spot (i.e more cash flow due to tax savings). Looking at Navy Federal, and assuming you finance $150K at 4.25%, your monthly mortgage payment would be about $738/month (before property taxes and insurance), so probably really close to your $975/month you are paying in rent after you include taxes and insurance.
But of your $738 mortgage payment, about $210/month will be going to pay down principal and thus building equity for you into the asset. So, this is not really an expense, but instead a balance sheet transfer, the other $528 would be your interest expense.
Cheers
RD says
There are definitely unknowns here, but digging into the numbers … this looks questionable. If the mortgage is $738/mo, that leaves $237/mo for taxes and maintenance. Breaking those down:
Taxes are highly local, but where I live, more than half of that would be eaten up just by taxes, leaving only ~$1200/year for maintenance. Depending on the house, I’ve found maintenance to average closer to 3-4% of the home price – ie, in this case, $4500 – $6000 per year (some years much less, some years much more). Even if you halve those numbers, it still offsets the $210/month that’s going into equity, which means that in this case, the poster would be paying the same amount for throwaway housing costs, but would have an additional $210/month into forced savings in home equity, which in general, in most markets, is a worse investment than a simple index fund or, for this questioner, paying off student debt.
Another variable you’re leaving out is closing costs on buying a new house. Again, this can vary widely (transfer taxes), but it can add up to thousands of dollars that could, again, be invested in an index fund for a return, adding opportunity cost to making the purchase.
Finally, to get the equity out of the house, remember that you’ll probably end up paying a realtor a commission on the entire value of the house, so the $210/month that’s going into equity will be completely eaten up for the first couple of years of owning the house (unless the local real estate market really takes off), plus there will be legal fees for selling the place.
John Bennett says
Seller financing can avoid PMI. And I would not purchase a house without an emergency fund roughly equal to a years worth of mortgage payments. There are too many expenses that you become responsible for when buying a house not to have a good emergency fund.
Other than that, if your mortgage is even close to your rent, you will probably come out ahead buying.
David D says
I think you need to have an emergency fund first, even before you continue paying off any more debt. At least 3 months. With 2 kids, you never know what may come up. Also, you seem to live in an area that requires a car, so if something happened to one of your two cars, could you take care of the repair or replace it? Would you still be able to get to your job and keep the money coming in?
Once that is done, then buying the home with less than 20% is okay, if you feel secure in your current jobs. Like others said, you will pay PMI or do a 2-loan option (i.e. 1 conventional, 1 HELOC).
Bottom line: Wait until you have an emergency fund. Then, make a plan of how you will pay the loan off and your existing debt. I would plan to save at least $500/month for home repairs, as there will be something big (and probably unexpected) in the future (i.e. painting, roof, HVAC, etc…). If you can comfortably afford it, without too much stress, then move forward with the purchase if you will be there for many years to come.
Apex says
The first thing to get into your thinking … this is not an investment. People need to stop thinking about the house they live in as an investment. It is consumption. Investments give you returns. This thing consumes your money. Now rent is also consumption obviously. So the question is which one is better consumption. Ownership also brings other benefits such as being able to do what you want without asking the landlord. It also brings other downsides like being responsible for all problems and repair and other extra costs. So the entire calculation gets a little complicated but it is still a calculation about consumption not investment. Please try to come to that line of thinking. People make many mistakes about buying a house by thinking about it as an investment in ways that ignore all the consumption and costs associated with it.
I will give you an example of this thinking in a statement you made above: “if we live here 3-4 more years while building those systems and funds I feel like we will have essentially paid for the house in rent.”
Unfortunately this statement is a common way people think about buying a house and it is almost 100% incorrect. If you live there for 4 years you will have paid $46,800 in rent. All 100% gone right? So if you had paid that towards owning your own house then wow, think how much further ahead you would be right? Unfortunately no. You would be almost no further ahead, actually probably further behind. If you have a mortgage with a payment very similar to your rent (which you implied you would), and I will just assume you meant with PITI (principal, interest, taxes and insurance), then how much will you have paid into equity in your house. Based on a 30 year mortgage at 4.5% you will have paid about $8,000 into equity. That is certainly something but only about 15% of everything you have paid. That 15% will be mostly needed to cover costs associated with appliances, HVAC, repairs, maintenance, and replacement of major items such as roof, siding, driveway, windows, carpet, etc. Also when you buy you will have $2000-$4000 in closing fees on the title and the loan. When you go to sell you will give up 5-6% in realtor and closing fees so another $10,000. Based on those numbers you are about $4,000 negative after 4 years if you had zero other maintenance and repair fees and considered zero dollars to future capital expenses such as roof, siding, driveway, etc. Those numbers won’t be zero though so you will actually be behind by more than $4,000. Your only chance to come out ahead would be considerable appreciation. That is always possible, but that is the only real big benefit of owning the real estate, the potential for future appreciation. Over 20 years the appreciation potential, the increasing paydown of the mortgage with higher percentages going to principal, etc, usually make ownership come out ahead. But it takes a really long time for that to happen.
The only thing that changes that calculation is if the price of the house is considerably better than the rent. That is not the case here. Based on $150K price and $975 rent this house would be a poor investment for a real estate investor. That is a rent/house comparison of 0.65%. I would never buy it as an investment with those numbers unless I was in an area with extremely strong appreciation potential. Your description of the town doesn’t sound like that to me. When this ratio begins to approach 1% then you are getting into a stronger investment.
So all of that is to explain why these decisions are not about an investment. They are about consumption. As you get to more expensive houses these numbers usually get worse so if you try to justify them as an investment they will never make sense.
If your main goal is to solidify your financial and investment future for the next 5 years, this house will not help you at all. Probably won’t hurt you much, but it is not a key determinant of your financial future. The other things that you described doing is what will make your financial future strong or otherwise.
This decision is about consumption. Now that being said, we buy things all the time for consumption that make no investment sense. Your big screen TV is an extremely poor investment. But we all know that, and we buy it anyway because it is consumption that improves the quality of our lives, at least on super bowl Sunday it does. So from a consumption standpoint, do you really want to own this house? Does it change something for you and your family about how you live and the freedom in your lives to own it? If not, if you feel like you have the freedom to live in this house without over bearing restrictions currently from your landlord at this rent, then don’t buy this house. It is not going to strengthen your financial future to buy it and as things change in your lives over the next 5 years, having the ability to walk away from this house with no strings and no costs to get out and no contingencies on it selling before you can make the move or get into something else that you want is a powerful freedom.
Since you are already in the house you want and haven’t described any large burdens from the landlord I am guessing that “owning” this house vs “renting” it will not really change the quality of your life. If that is true then from a consumption standpoint there also appears to be little benefit to buying this house.
No investment benefit + Little to no consumption benefit = you do the math.
Good luck.
ThinkingAhead says
I felt this was a reasonable and logical approach. It can probably be applied to many other house purchases, not just this particular one.
JC says
I’ve been reading The Millionaire Next door recently (thank you for the list ESI!) and one line that I distinctly remember is “Don’t make expensive purchases with the anticipation of being wealthy, wait to make them until you are wealthy.” I’ve made that mistake a couple times and, although we’re ok financially, it would have been nice to have thought through the purchase a little more.
Wealthy, in your case, would mean (at the least) finishing off the 2nd car, having an emergency fund and a down payment. There will be out-of-pocket costs associated with the mortgage so your cash savings will have to account for that as well.
Laura Tokgozoglu says
I would recommend listening to Bigger Pockets for a great education in Real Estate Investing. Also read Rich Dad Poor Dad. I also just finished a very good book about home buying that had a lot of different thoughts that many first time buyers don’t think about called Real Estate Smart.
You need to figure out if the house you are renting is actually one that would be good to buy…go to some open houses, make sure you know what else is out there…is the market in your town strong…average…or very slow? Like someone said above, this house does not make sense as an investment…if you had to move you may have trouble if you could not sell it and renting it might not cover your costs.
Also consider that if you bought a house that you could put 20% down and get a 15 year mortgage you would build equity quite a bit faster.
Have you considered buying a duplex, renting out one side? Some people do this and the rent that they receive actually covers most of the mortgage. Or perhaps if you are handy with things you could buy a housre that needed some work, fix it up and that would add value.What about buying something that would allow for Airbnb rentals? We currently rent out our furnished attic on Airbnb and are doing well with that. But for this to work the house must be located in a town that would be popular for Airbnb. We live in a big horse town and there are always people coming in for shows…also we are near the Masters tournament and always get booked for a premium. You dont have to live in a place that you would think of for vacations but you do have to have something nearby that would bring out of town guest( a university, a medical center, musical or theatre venues, in Colorado people are even renting out their homes for people to smoke cannabis!!!)
Lots of good info in these forums. Most of all just because you like the place and the landlord is willing to sell, that does not mean it is a good deal…the fact that he wants to sell says to me that it is not a good investment…if it was and he had good tenants such as yourselves that seem to want to live there for a long time, why would he want to sell if he was making money? Of course maybe he has other personal reasons, who knows. I would join Bigger pockets, go on the forums and ask your question there too, you will get a lot of good insight. I wish I knew now what I knew when I made my first home purchase!
Amanda @ centsiblyrich says
Much of what I would recommend has already been said. I tend to be on the conservative side of things – so, if it were me, I would wait until you had an emergency fund in place and could avoid the PMI.
That said, I did exactly what you are considering 15 years ago. And I wouldn’t do it that way again. It did work out for us in the end – we refinanced a couple of years after buying and got the PMI removed, plus we saved like crazy to build our emergency savings at the same time. But, there were always unexpected expenses that slowed, or stopped our savings/debt repayment progress. If I were to do it over, I would have rented, and saved, saved, saved before buying. Just my two cents! Whatever you decide to do, I wish you the absolute best!
FullTimeFinance says
I’d say firstly if you can’t do 20 percent down and avoid pmi then don’t buy a house. The pmi is flushing money down the toilet. After that point the second question is how long do you think you’ll stay put? Anything less then ten years I’d also say pass. Usually if you think it’ll be ten it’ll send up being five. Less then five and your realtor fees will eat you alive. I would also not buy without at least six months of emergency fund, that way if you lost your job the day later you wouldn’t lose the house and your money. After all the bank won’t care what you’ve paid in to date if your not current. Finally, and this is the financial get ahead advice. I would only buy if your mortgage payment is at or below your rent of a similarly sized place. I view homes as essentially a hedge against inflation at best and at worst just another form of paying rent. The only thing your house guarantees you is a place to live. You could come out of this never seeing a dime of appreciation. So I would only buy where I believe I’d net out against rent over a similar holding period. Allocate one percent of the home price for repairs per year added in.
Brem says
Firstly I live in Australia so I wont comment on taxes, but as general advise buying your first home with the idea you can turn it into an investment and income stream at a later date is sound, your investing 13% in a 403b which is a tax sheltered annuity hopefully your able to put the money in a good low cost index fund like Vanguard, A good quality investment property adds some diversity.
You need to make sure it is a good investment grade property that will have good rental demand and rent return around 12%, this property does not fit the bill. Take Laura’s advice and spend some time listening to bigger pockets secondly if you know or can find someone who is a successful property investor in your area reach out to them and get some advice.
You say you don’t want to wait 3-4 years consider a compromise for the nest 12 months save as much as you can, you saved $40,000 last year so you proved you can do it then you will have a 20% deposit on a good invest grade property I’m guessing in your area around $100,000 – 120,000, potential rent $900-1000 per month. Now your on your way keep doing the basics, work on increasing your income live under your means investing the gap, build passive income that slowly replaces you work income and keep reading and learning about becoming a good money manager and investor. Don’t forget to put some time and effort into becoming a better husband and father buts that’s another story. best of luck
whiskey says
Lots of good stuff already stated…. Doesn’t look like you are ready though.
1-fully funded emergency fund. I prefer more than 6 mo’s but that’d be an excellent start
2-debts owed need to be paid off. I would not buy a home if I had that much debt over me
3-now start saving for your home. save 20%
4-no more than 25% of net income for home payment.
usmortgagecalculator.org will help you play with the numbers
Paul @ ABL says
So much already said, so I’ll try to add just a couple new angles.
First, at your income level and target house price, don’t get too excited about the tax benefits of deducting mortgage interest. It’s not that much for you. If you could provide which state you’re in that’d help clarify the tax situation (state income tax and property tax loads).
Second, I’d start the house hunt (rent or buy) from scratch. I imagine it’s very easy to drift from renting to buying your current place, but you should try to break any anchoring you have. Start with a list of what you need (today – not what you needed when you decided to rent this place) and then go take a hard look at the market. Only after you’re fully savvy and seen other alternatives (rent and buy) should you investigate your current place further. Your LL will definitely have a sense of the market and may (all else equal) prefer leasing to selling, so be very careful of anything he offers.
Good luck!
Scott says
Do not buy the house. Im sorry if this sounds harsh (I do not mean to), but the decision you’re making is purely an emotional one.
The only house you have even considered buying is the one you’re currently living in. Who doesn’t fall in love with their current house after living in it for a few years?
If you’re serious about buying a house, spend a season looking at the market and seriously running the numbers based on what you find. If you decide that home ownership is in fact for you, then pull the trigger only after the following:
1. All other debt has been paid off
2. You have at least an 8 month emergency fund
3. Income required to cover the mortgage is stable (i.e. Your jobs that you recently got in to)
No funny business, no buts or ifs. Taking on that much debt without the ability to pay it back will devastate your finances and credit. Raising a family is expensive and brings with it unexpected expenses. You are inherently putting yourself in a highly leveraged position counting on the ability to maintain your current income level for a long time, with high costs of selling the house in the short term if things don’t work out.
Once you have your ducks in a row, then you can worry about the nitty gritty things like interest rates, pmi, etc.
Renting may not *technically* be the better option long term, but it sounds like you’re in no position to be buying so quickly and quite frankly, based on little but the love of the house you currently live in. Pay off your debt, save aggressively, and re-evaluate in a couple years when you have met The above criteria.
Bad_Brad says
Is your landlord shopping the house around? Or did you approach him about the possibility of buying it and he was receptive? If you don’t buy, you run the risk of the landlord selling it and being forced to move out of the place.
In terms of inflation risk, I’d say given your description of the town (two-stoplight), it’s probably minimal. The bigger risk, based on what I know, would be your landlord needing or wanting to sell the house for whatever reason.
Others are right about PMI, it’s a big waste of money if you don’t have to pay it. One possible way around it would be to do an 80/10/10 (some lenders even used to do 80/15/5). You would pay a little bit higher rate on the second loan, but at least you’d be building equity on the second, not throwing money down a hole called PMI.
Another thing to consider – even if your mortgage is $900, your true cost of owning the home may be significantly more or less than that. It is less in the sense that part of that $900 goes on the principal, meaning it adds to your net worth. Also, some other part of it is interest and property tax, both of which will save you money on your federal and possibly state income taxes at your marginal tax rate. On the other hand, you will now be paying for maintenance of the home yourself, which could be significant depending on the age and condition of the house.
Last thing to consider is mobility. If you see yourself in that town for a long, long time, either for personal or professional reasons, then mobility is not an issue. However, if you think you might want to relocate for a job or other reason at some point in the future, you have more flexibility if you are renting, especially in a two-stoplight town where the real estate market may not be all that liquid and it could take you a while to sell the house if you needed to.
My gut tells me that you’re probably just as well off to rent the house as own it at this point, until you get that second car loan paid off and those student loans whittled down some more and get some emergency savings and/or a down payment saved up in cash.
Vivianne says
Okay, if you’re in negative net worth right now, “what the heck you got to lose”? I say, just go for it and buy the house. LOL 🙂
People may say debt is bad, but without leveraging, how do you get ahead?
Take my case on leveraging:
#1: Leverage Education:
I borrowed to get my doctoral degree. $100K. Yep! I was literally debt free when I was out of high school. but I was penniless. Without borrowing for an education, it would be hard for me to get a high paying job.
#2: Leverage for my first house:
Yep, with $100K in debt right after college, but I worked through out the school time, so I saved up $45K, the first year I worked, I paid of $15K, and $9K of student loan, and increase my savings to $72K by month 16 after graduation. I used it to buy a duplex (later convert to triplex). Tenant pay for some expenses, I paid the rest (interest rate was 6.5% in 2007). Crash! Boom! Whatever! But I did get myself $85K student loan + $255K mortgage. Negative net worth for sure, what I get out of this is stability. I have a home that I go back to, grew my own garden, enjoyment. 🙂 if I got sick I have shorterm disabily insurance, longterm disability through work.
#3. Leverage for my 2nd house:
Yep! I amassed $300K after a few years, as I turn my first house into a triplex, live in 1, rent out 2 other. My tenants were paying for the mortgage. Still only +$100 net worth (including my 401K)
I got myself in further debt with buying a 4-plex. Paying $115K downpayment, and $290K mortgage. Tenants pay for mortgate and I get to take home the money.
With these 3 leverages and debt, after 12 years from graduation, my net worth swollen up surpassing $1M after I paid cash for 2 upper fixer. One of them was from online auction. 🙂
Without borrowing money for school. If I were working for costco (my friend did), at the time she earned a big paycheck of $16/hr, now $22/hr, but she kept renting, and have about $50K in her 401k, no house, no debt. LOL 🙂 not a lot of net worth.
My thing is from the beginning, I was “hustling” as a landlord. I was investing my take home income. I didn’t need to be 65 to have $1K milestone, just leverage in several areas.
The point is we are still young, time is on our side, don’t be afraid of debt, just know what you get yourself into, and get ready for a lot of sweat equity.