Buy a house?

**Epaphras** · 03-16-2011, 08:57 PM

Here's our situation, tell us what you would do in our shoes:

- We rent currently but now both work on the other side of town and have a 330 miles per month combined commute (both ways). With gas prices as they are, that's pretty significant.
- Rents are higher if we move closer to work, about $150-$200 more.
- We are working on paying off a student loan, and then the plan was to start saving for a house down-payment.
- In looking for a new apartment, we came across some small homes for sale.
- We found a perfect one that was purchased last fall by an investment company for $26k from the bank (foreclosure), was fixed up really nice (everything is new), and it is offered for $50k.
- The neighborhood is pretty good, it has some sporadic crime. The schools are no good but we have no kids and would have at least 6 years to figure that out before the first one went into Kindergarten.
- The house has some pretty favorable mortgage options available - HUD financing with a low down payment (at least 3% down and 5.5% interest over 30 years), or conventional 30 year with 10% down. Either way we're looking at a $45-47k mortgage which, taxes and insurance included, is about $440 a month, which is $200 less than we pay now in rent.
- The idea would be that we could sock away $400-$500 in the bank over 6 years, and when it's time for our first kid to go to school, we'd have about $30k saved up that can be added to equity from the home sale for a big down-payment on something else in a better school district.
- If we rent now, our ability to sock away that kind of money would be really limited, and at the end of 6 years we'd be basically exactly where we are now.
- I know there are additional costs to home-ownership, but when we unlock our income as cash flow (instead of it all being tied up in rent), we can easily have $2-$3k saved up for the water heater breaking down or whatever comes up, in only a few months time.

I know it sounds like I'm talking myself into this, but I am also a confessed Dave Ramsey-ite, and we don't have the last remaining student loan paid off (only $8k to go!) and we don't have a 3-6 month emergency fund before the home down-payment. But my logic is: with rent being high (or higher), it will take so long to go in that order, doesn't it make more sense to put the home first and then tackle the emergency fund and then double-down on the student loan debt in less time than by going in the Baby Steps order?

What would you do in our shoes?

***Art*** · 03-16-2011, 09:06 PM

A "perfect" house at $50k? Seriously?

Buy buy buy buy buy.

I would definitely buy. Now is a good time to buy.

But that's just me.

And yes, there are additional costs with home ownership, but not like the additional costs of renting for the rest of your life. The sooner you buy, the sooner your payments end.

SecretAgentRat · 03-16-2011, 09:07 PM

Wow...I have no advice for you, but I wish we could purchase a house for what you're paying in rent. Heck, I wish we could rent a house for what you're paying in rent.

I know many who have purchased HUD homes...it's really an amazing deal.

My dad is a realtor and he says only buy if you're fairly confident that you won't move before 5 years.

**Epaphras** · 03-16-2011, 09:11 PM

This is the house in case it changes anyone's mind

929 Merritt St SE For Sale, Grand Rapids MI Real Estate

***Art*** · 03-16-2011, 09:17 PM

Not bad. Especially for the price. Sheesh. Makes me want to transfer to Michigan and buy a house.

Napoleon17 · 03-16-2011, 09:24 PM

How much would rent be if you moved closer to your workplaces? How stable are your careers?

EDIT: Never mind I read your post more closely, and did the math.

If your careers are stable I would go for it.

**Rach** · 03-16-2011, 09:24 PM

A "pretty good" location is not too convincing. There is a reason that they say the most important thing in real estate is Location Location Location. Is the neighborhood on the upswing? Was once a sketchy neighborhood, but is starting to get better? Is it on a downswing? Once really nice, but is slowly getting worse and worse? What is the condition/curb appeal of the other houses on the block? Are they well kept, and appear that the owners take pride in their home? Are they run down, not kept up well, and appear that they don't care as much? What does a knowledgeable and respected Realtor (preferably someone you know) say about the neighborhood. Your potential kids may be 6 years away from kindergarten, but will you feel comfortable with them playing outside? Will your wife feel comfortable taking them for a walk around the neighborhood? What does that Realtor say about projected equity in 5 years?

The concept of a "starter home" has changed alot since the downturn in the real estate market and economy in general. If something were to happen, and you weren't able to move in 5 - 6 years, would you regret your decision? If you weren't able to sell it, would you be able to rent this home out and use savings for a down payment on your "dream home"?

We have been considering moving across the river from Oregon to Washington since Chris is working in Washington now and Oregon state income taxes are killing us. We recently looked at a great home that was semi-updated, had plenty of bedrooms and was a GREAT price. But, the location was "okay". It wasn't in a particularly nice neighborhood, and it wasn't a neighborhood that was necessarily on the upswing. It was just pretty stagnant. I wasn't sure about it, and felt a bit of unease about the whole area. We ended up not pursuing the house for that reason.

I personally think it is much more important to find an okay, and perfectly liveable house that might not have the latest and greatest updates in a GREAT neighborhood, then a great house in an okay neighborhood. You can always improve upon your home, and build equity in that manner, but you never can improve a neighborhood or area. If it isn't great, then it will always have a negative impact on your equity, no matter how updated and beautiful your home is.

Napoleon17 · 03-16-2011, 09:29 PM

Great point, Rach. I just got finished calling the cops on some drunk redneck idiots at 11 at night who thought it would be a good idea to keep the whole neighborhood awake the whole freaking week by playing loud music and going off roading with their crappy little broken down 1999 Jeeps. They are sooooooooo annoying. I drove by slowly to get their location to give to the cops and as I did, they all turned their music and lights off and parked their cars on the street as if they weren't doing anything. Bunch of babies. I cannot imagine raising my child (coming in May!) in a place like this - good thing we're moving soon. And I never would have guessed, even after a couple of weeks of living here, that this neighborhood would be full of so many dumb people. But I guess that's why it's cheap.

***Art*** · 03-16-2011, 09:38 PM

Yeah, I didn't really think of that. Haha. Good neighborhood is a must.

**Rach** · 03-16-2011, 09:41 PM

I do have to say that if you are able to purchase a home, and especially if you are able to purchase one and pay less than you are paying in rent, then it is almost always a good investment. You sign that rent check and never will see that money again. But as for a mortgage, you write that check, and hopefully will see that money returned in equity when you sell your home. But, that is only dependent on whether you have purchased a home in an area where that will continue to increase in equity, and if you put money into your home to keep it up and add equity in that way as well. In a home that is already fully updated, then the majority of the equity you will be counting on is even more dependent on the area.

**Epaphras** · 03-17-2011, 03:57 AM

Thanks for the perspective Rach!

My co-worker just bought in the neighborhood about 6 months ago, I'll pick her brain and get in touch with her realtor and continue to ask questions, i.e. is it "stroller-friendly"? Would we feel safe having our toddlers play in the front yard (with supervision of course)?

My perception is that the neighborhood is on the upswing, it's getting to be "cool and hip to buy" there. But "getting cool and hip" can also be another word for "gentrification" and that can cause problems "with the locals" and make it unappealing for that reason. In other words it may look nice on the outside but inside each home you have people who greatly distrust the "other" group, and that can boil over (usually into property crimes like vandalism, or other forms of harassment).

All food for thought, thanks. This all is a lesson in patience and wisdom. It's so easy to get impulsive.

bobthecockroach · 03-17-2011, 06:24 AM

First, you're still "throwing away" money when you buy a house. All money that goes to interest, insurance (especially PMI if you have to get it) and property taxes is gone, never to be seen again. Also if the inflation rate is higher than the housing price increase rate, you're throwing away money into, essentially, a negative yield savings account.

The 330 miles per month combined for commuting doesn't sound significant at all. That's 5.5 miles per person per day, round trip. Combined, 11 miles per day. Even with terribly inefficient vehicles, that's only a gallon of gas per day, so at most $4 per day. That's $120 a month. In better vehicles, only $60 a month. If you have fuel efficient vehicles, even cutting that in half will only save you $30 a month. It is going to take a very long time to earn back your closing costs and moving expenses at a rate of $30 a month.

A 30 year mortgage at 5.5 percent will have you paying as much interest as you do principle, if not more. Run the calculation ( Mortgage Calculator - Bloomberg ), look at "Total Payments." Do you have a statement from a bank showing your exact costs with the house? Don't forget closing costs, a house inspection, stuff like that. Also don't forget that there are expenses in selling a house, so you won't get back all the equity.

I'm not trying to dissuade you. Just make sure you include all the costs when running your calculations. If the numbers show you'd be saving money, and you want to move, then go for it.

Also, look at crime maps:

MyLocalCrime

tlj009 · 03-17-2011, 07:00 AM

I would recommend buying, but I would also like to point out that Bob is right. You pay a lot of interest on a 30 year loan. However, you do come out better if you can pay it off early. The interest that you pay on a 30 year loan that is paid off in 15 years is less than the interest on a 15 year loan paid off in 15 years. At least it was when I looked into it. Also, don't assume that HUD will give you the best interest rate. You should be able to get 5.5% or better from other mortgage companies.

bobthecockroach · 03-17-2011, 07:11 AM

Quote:

Originally Posted by tlj009

I would recommend buying, but I would also like to point out that Bob is right. You pay a lot of interest on a 30 year loan. However, you do come out better if you can pay it off early. The interest that you pay on a 30 year loan that is paid off in 15 years is less than the interest on a 15 year loan paid off in 15 years. At least it was when I looked into it. Also, don't assume that HUD will give you the best interest rate. You should be able to get 5.5% or better from other mortgage companies.

This brings up a good idea.

See what your payment would be for a 15 year mortgage. It may be you save more money on interest by getting a 15 year mortgage and taking longer to pay off student loans than getting the 30 year mortgage and paying off student loans quickly. Student loans are usually low interest. Better to carry low interest debt than high interest debt.

The mortgage calculator app I use shows you may only pay another $100 a month more for the 15 year mortgage, but you'd be paying $25k less over the length of the mortgage.

**Epaphras** · 03-17-2011, 07:37 AM

Thanks bob, those are good things to consider.

Undoubtedly an FHA loan would have a higher interest rate. That's why I'm interested in having a larger relative down-payment. $5-6k doesn't seem like a big down-payment, but on a $50k house that's over 10%.

At 5.5%, a 15 year mortgage is $367, plus taxes (which were $1,400 last year or $115 a month), so total payment of $483 if we put enough down to avoid PMI. Adding utilities and homeowners insurance (and saving for the inevitable "things breaking"), that does come up to what we're paying in rent now, maybe a little more.

The student loan is a 7.5% fixed rate and has 10 years left on it, but we've been paying double the minimum for a while now, and put our entire tax refund on it too.