Cost of home ownership calculations

[gekkoplus]

I have been thinking of buying a condo in Bay area because prices seem to be down by 25-30% where I live. They can go down further (all speculation) but I am not going to buy it tomorrow. It may take 3-6 months before actual purchase and also I will be looking for mostly REO properties to make most out of current economic downturn.

I currently pay $1400 for a 1 bed apartment that does not have dryer and washer. (Could go between $1300 - $1500 depending upon specific time of year)

I am breaking down this post into two questions.

Question 1:

I appreciate if you guys can break down the calculations for me.

Current gross pay = 108K
Tax status = married filing jointly with unemployed spouse.

Target home price = 300K (1 or 2 bed condo depending upon location)
Downpayment = 60K
Loan Amount = 240K
Mortgage Rate = 4.8% (based on today's mortgage rate on bank rate)
My credit score is 700+.

(I heard that government is giving $8K credit for first time home buyers? I am first time home buyer so am I eligible?)

My existing credit card + car monthly payment = $1000 for next 3 years.

Question 2:

I am sure to own and live in the property for next 3 years. After that depending upon job, I might have to relocate. In this case can you please breakdown the calculations for the following two cases for me -

1. Selling the property assuming 2-4% annual appreciation (speculation again)
2. Renting out the property using property management assuming rental market is strong as usual. (speculation but depending upon property location. My understanding is that property management could cost 15-20% of total annual rent, I could be wrong.

Thanks in advance for your help folks.

[zetta]

A general rule of thumb is that you don't want to buy unless you think it's pretty likely you'll stay in the same place for 5+ years. You can't assume anything about appreciation over a shorter time frame. For you it will be extrememly important to pick a condo that is attractive as a rental -- run the numbers as if you are buying a rental property in the first place.

I don't think you can count on rates staying at 4.8% for the next 3-6 months. This is a historically low rate and is more likely to move up than to stay the same or go down. To be more realistic, I would use 5.5% for your planning purposes.

[swanson719]

4.8% assumes a 15 year mortgage, and is reasonable if so. Zetta is correct for a 30 year that you're realistically looking at 5.5% unless you're willing to pay points, which would cost you $2,400 to lower the rate by 0.5%. Probably not worth it.

If you are talking about a 15 year at 4.8%, you're paying $1,872.99 before taxes and insurance, which in the Bay area, you're easily looking at an additional $400+ per month. That's putting you in the $2,300 a month range, which makes me certain you're going with a 30 year.

If you can come up with the extra money, it's worth it to go with a 15 year over a 30 year because of the interest difference. You end up making money by going with a 15 year if you're going to be there short-term.

I also don't advise buying a house short term. It would be better for you financially to pay off the credit card debt and cards and continue to rent than to use a $60K down payment to get into a house that's going to cost you money in the long run. Renting may be an option for you, though you're correct that you will spend 15 to 20% in maintenance of the property. The flip to this is that rentals are a huge tax deduction. If you keep a detailed log of all maintenance including receipts, you can write off the gas to go to Home Depot to get a new door knob to put on the house, as well as the door knob, and the labor it took to put the door knob on. It's all on the level to do that, which in the end means you make a little extra if you do your taxes the right way on a rental. They are a lot of work, and when selling the house to someone who's interested in it as a primary residence, it having been a past rental can scare buyers away unless it's been extremely well maintained.

From a 30 year standpoint, assuming 4.8%, you're looking at a $1,259.20 payment before taxes and insurance, which again, is going to add at least $400, putting you in the $1660 range, if not higher. You're interest payments with the 4.8% over the first three years are going to total $31,021.18, and principle will total $10,532.32. You will pay a total of $41,553.50 to the bank, over three years, not counting whatever your taxes and insurance is. Realistically you're looking at around $60,000 minimum over three years. That's assuming you can get the 4.8%.

Add another $100 a month in mortgage with a 5.5%, which is more realistic. Your interest would be around $36,000 and your principle would be $9,400 roughly. Costs more.

It's going to cost you at least $10,000 more to live in a condo that you're going to have to sell in another 3 years, and then pay closing costs and commission on - which between the two takes about 10% off the top. Not to mention tax on whatever income you walk away with, if any, and whatever profit you make is gone.

Consider the maximum 4% appreciation over the next 3 years, so 12%. The house would be valued at $336,000. With a commission of 4% for each agent, you're looking at $26,880 gone to the real estate agents. You're also looking at at least $5,000 in closing costs. So there goes $31,880 off the top, or just under 10%. Now consider that your original loan amount was $240,000. Your current balance remaining is $229,467.68. So you're profit according to the government is $106,532.32, but you paid $31,880 in costs as the seller, and a $60,000 down payment, so you're really only making $14,652.32.

But wait, the tax man hasn't had his share yet. You can write off the commission, so you're being taxed on $79,652.32. You can file this as a Section 121 exclusion (see http://www.irs.gov/pub/irs-pdf/p523.pdf). You do qualify for the $8,000 first time home-buyers credit, which is basically $8,000 you don't have to pay back last time I checked, but you might want to look further into this. Even so, you're looking at a net gain of $22,652.32 assuming a 12% increase over the next 3 years.

You're rental costs would have been $50,400. Your ownership costs will be around $60,000 on the very low end. On the high end, you're looking at around $75K to $80K as an estimate. So over 3 years, if taxes don't change, and you do see a 12% increase over that time, you might be able to walk away with $12,000 that you didn't have yesterday, but more realistically you're looking at breaking even.

I highly doubt you'll take a loss, but you'd still be far better off paying off the debt you have now and investing the extra $1,000 a month because you'll see a better return on that than you ever will if you buy a condo. Paying off debt gives you an immediate return of whatever the interest rate on the debt is. Then investing what was going to pay the debt, and you're making what should be around 11.5% averaged over 40 years, not counting compound interest. If I were in your shoes, I'd pay off your debt with the down-payment money and find myself a good investment guy and get into some no load mutual funds. That extra bedroom isn't going to make you any money, and you don't have kids yet - mutual funds over the long term will pay for your retirement.

[globetraveler]

I was able to get a 30yr fixed mortgage for 4.875% 3 weeks ago with no points. I am actually scheduled to sign the mortgage for my new house this coming Thursday.

And for reference my credit score was 731 (I was told that the magic number was 720) at the time they ran my credit for the app.

So I wouldnt figure they are all that hard to get, my banker actually told me that a person can't always go by bankrate.com

The actual rates can and usually are lower than bankrate.com states. I checked with 3 different banks when I was looking for mortgage and all three of them were below 5%.

So good luck to the OP on getting a great rate, they are out there to be had!

[unsecuredmoneygroup]

Originally Posted by globetraveler

So good luck to the OP on getting a great rate, they are out there to be had!

Trueness. Research, long hours of research! Phone calls, speaking to lenders face to face are invaluable. Great rates are out there.

[Phenomenal Woman]

I just purchased a REO townhouse in Bay Area and got it for half of what the original owner got a loan for 4 years ago. I am looking forward to moving in next month. If you’re looking for a condo or townhouse, don't forget to include the HOA monthly fees. Average from the listings I saw were around $250/per month. They are subject to change anytime after you move in.

This was not my first home purchase so I cannot give any advice on the first time buyer credit.

Knowing the SF Bay Area, You would not have a problem with finding renters in the event you need to relocate. It would be a personal choice if you want to be a landlord or pay management services to keep the condo as a rental. I do think if you purchase the condo at a reasonable price, you will not have as much of a problem selling it later on, even if it is just a couple of years. A lot of houses and condos that are for sale now were homes that were purchased during the high market peak time, thus foreclosure due to owners being upside down on their mortgage loan. Also people took on bigger risk on the inflated price of the homes and had not enough income to save for an emergency fund because the handlebar for owing a home was much higher in this area.

[Phenomenal Woman]

I forgot to add... we did get 4.7 fixed interest rate

[Phenomenal Woman]

Another thing... if you purchase a REO - you are likely to pay taxes on the amount the loan for the condo was at before your purchase on the first year(If you are buying from a banker). Then the second yeear, your taxes will be lowered to what you paid.

[LivingAlmostLarge]

Globertraveler, I think it's higher the rates for a refinance versus getting a new mortgage.

[swanson719]

Rates are identical for a refinance or a new home purchase. There is no different in the eyes of a bank. The credit score and an extremely low DTI ratio is a key element in your rate.

[globetraveler]

Originally Posted by LivingAlmostLarge

Globertraveler, I think it's higher the rates for a refinance versus getting a new mortgage.

Am I confused? I thought the OP was asking about rate of BUYING a new home.

[kyrie]

Good point about what the OP is asking.

If I may hijack the thread for a moment...can you good folks who have secured these low rate 30 year mtgs share what companies you got them from? I've started looking.....
Thanks!

[tripods68]

Originally Posted by gekkoplus

I am sure to own and live in the property for next 3 years. After that depending upon job, I might have to relocate.

I didn't have to go further reading with this comment.

I wouldn't even think about buying a home without knowing when you will be in the next 3 years because of your job status.

My advice is continue renting and save as much $$ you can until job situation become stable. I wouldn't flush any more $$ with today's housing market.

The fact that you still have credit card and car payment for the next couple of years makes it more difficult to justify buying a house.

[globetraveler]

Originally Posted by kyrie

Good point about what the OP is asking.

If I may hijack the thread for a moment...can you good folks who have secured these low rate 30 year mtgs share what companies you got them from? I've started looking.....
Thanks!

I was offered 4.75% 30yr conventional mortgage loans from both Bank of America and Arvest Bank in January.

I ended up taking the Arvest Bank offer since it was a regional / local bank that I have been hearing good things about.

I currently bank with BoA but there customer service that I have dealt with since I have been with them has been terrible. The only reason I have stayed with then is that they have the best online banking product availabel IMO.

I ended up a 4.875% rate since I waited a few months before locking in and it the rates climbed a bit in the mean time. But I am happy with what i got.

[globetraveler]

Originally Posted by tripods68

I didn't have to go further reading with this comment.

I wouldn't even think about buying a home without knowing when you will be in the next 3 years because of your job status.

My advice is continue renting and save as much $$ you can until job situation become stable. I wouldn't flush any more $$ with today's housing market.

The fact that you still have credit card and car payment for the next couple of years makes it more difficult to justify buying a house.

I also have cc debt, car payment, and student loans. But I could not resist building a new home with the current available rates. Not to mention I kept my same monthly house payment as I was paying for rent in my apartment.

I am scheduled to have my cc paid off in 24 months, then I will pay off my car. But at least now I have a place of my own, and I am not spending anymore on the mortgage payment than rent has cost me for the last several years.

So I know I am going about this a little backwards, but I think it will work out better for my and my family in the long run.