A 200k Mortgage.

[ScrimpAndSave]

I know...I know...another housing/mortgage post.

But a girl can dream, right?

Now that I have a firm understanding of what our incomes will be after we are married, I have been trying to play with numbers to figure out what we can comfortably afford.

Our yearly income will be $110,000. His law student loan debt is around $120,000 (Half are private and half are gov't funded - 8% and 6.5%).

He has estimated that his student loan payment is going to be between $800-$900 a month.

I'm thinking that if we can get away with having PITI (the whole shabang) for a payment of $1500 a month, we would be comfy. I will be making $70,000 a year and would be able to cover this payment on my own salary alone. We could get a $200,000 mortgage for 30 years at an interest rate of 5.375% (paying points). Hopefully the rates won't skyrocket by then.

As many of you know, my father has offered to sell us his house in January 2011. There was talk of gift equity and gift money...but I would rather buy it for fair market value...and he said he would give me 6% off of that because we would not have to go through a realtor. He also said he would pitch in closing costs...and he doesn't want ANYthing in the house!

Now, when you walk into the house...it does look like circa 1995...but we can replace furniture over time. Either way - it is a huge savings to have a furnished house.

I think this is our best bet. It is a 2,500 sq. ft. (including finished basement) with 4 bedrooms and 2 1/2 baths. It's in a very favorable, mature neighborhood in a great school district.

The value of the house is probably a little over $300,000. By January 2011, we will have about $82,000 put away...so with a huge downpayment...we could make it with a mortgage of $200,000 - especially if we wait a few more months before buying it so we have a good emergency fund in place. I think this should be our plan of action...because this could be a long term home and will serve us well. My fiance likes the house too.

Here is a pic:

http://img.makeupalley.com/2/1/2/9/1080675.JPG

[jIM_Ohio]

I would not plan on getting house paying points. Meaning plan now for an interest rate of 7% or 8% and be pleasently surprised when rates are 6.5%. Buying an 8% rate down to 5.375% is wishful thinking (someone correct me if you disagree with me).

1 point is 1% of loan amount and .25% (for some it might be 1% and .125% or 2% and .25%). So if nominal rate is 8%, you would need 4 points to get 7%, another 4 for 6% and another 2 points for 5.5%. Those 10 points would be 10% of loan amount. If you are borrowing 200k, that is 20k in points. You may as well put 20k extra down, finance 180k and I bet the payments are lower or at minimum still reasonable.

200k at 5.5% vs 180k at 8% is the comparison to look for. There would be a break even point (where the 20k in points is cheaper than the 200k financed), you will want to know how long into mortgage you would break even. This would be measured in years most of the time (around 7-8 years is my guess).

If rates drop in first 7 years and you refinance, you lost the value of the points. So you are better off financing 180k at 8%, and if rates drop you refinance to that lower rate.

8% is a historically low interest rate. My first house was 8.25% in 2000/2001 timeframe. That was considered historically low.

My current house is on a 5.75% rate, so you can see rates do drop when the market allows. But I would not count on rates being that low forever. I think 8-10% rates are better (avoids this whole mess we are in now). And I think banks will probably want rates higher too.

[ScrimpAndSave]

Oh well. I was looking at rates right now...my credit union offers 5.375% for three points...6.125% without any points.

[jIM_Ohio]

This tells you each point is worth .25%. The cost of the point is probably 1% of loan amount. So 3% of 200k is 6k. Is the 6k better to use:

194k financed at 6.125%
or
200k financed at 5.375%

Where is the break even point (where you saved 6000 in PITI)? My advice is no points first time through. Rates will go up and down, when they go down, refinance.