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Need advice for buying home in the future

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  • Need advice for buying home in the future

    Hi Everyone,
    I have been reading this great forum for a while and it has been extremely helpful. I wanted to seek your opinion on my situation and see if I am ready to plung into the home buying market. Here is a summary of my situation:

    26yrs old
    live alone in apartment - $1200/m.o
    CC (Visa) - $1500 at 0% (I have been wiping this off religiously for the last 6 months by paying $750 every month so goal is to be at $0 on July 30 )
    Discover Gas card - $330 at 0% (I use this for gas purchases to get cashback and some purchases for travel. Should be able to get to $0 in couple of months)
    Car - $250/month on remaining $4500 at 4.49% (planning to pay $1000/month for the last 4 months of the year after my CC Visa is done so that I wipe it clean by end of the year)
    Savings - $1500/month
    Travel Saving - $250/month (I use this as a pool to save money for vacations. My family lives in another country so I do visit them every yr or so)
    Misc. Saving - $90/month (I use this for any misc. expenses that may arise like car tires, lCD plasma tv one day maybe )
    Food - $300/month ( I have tried to reduce it and am on my way)
    Gas - $100/month
    Cable + Electricity - $100/month
    CellPhone - $50/month
    Misc Expenses - $300/month (Usually stuff like going out with friends, 1 day road trips etc. whatever is left gets put into CCs or savings)
    I maintain an excel sheet for every month so that i follow my budget which has got me so far after having thousands in CCs and paying interest to these big corporations which was my wake up call!

    My Savings are not much since I did this above plan for the last 8 months only and put down about $2000 to wipe out my student loan.
    HSBC at 5.18% - $6500
    Travel saving at ING - $600
    Wamu saving for Misc exp - $250

    I dont have any 401k or retirement since I work at a startup and they dont have a plan yet. I do however plan to start something by next year.
    My aim is to have financial freedom by end of this year (which was my goal last sept; so much so that I dont use the word D**T and use financial freedom instead) and thats why I want to pay off car, CCs etc and have about $16k in liquid savings by end of the year. Goal is to then save $2500/month for first 6 months of 2008 to have a total of about $31k in savings on June 30, 2008.

    Now here is my dilemma. I live in southern california where house prices have dipped but still are expensive. I would like to buy a condo somewhere around July, 2008. Plan is to put $15k down, $10k for closing costs and get another loan so that I can take it for 15% to avoid PMI. After researching on bankrate, i would probably be able to afford around $350k for a 2br condo which would translate to ($2150 for mortgage + $250 HOA + $300 for property taxes = $2700 on a 5/1 ARM!!). I would live in the condo for atleast 5yrs to recoup my investment. This would however dent into my ability to save after i purchase since I would only be able to save around $1300/month. But I hear you get tax breaks which makes it worthwhile. What is your suggestion? Do you think the above is a good strategy?

  • #2
    I guess I don't understand what the hurry is. I usually look at housing a little different than most people on this board because I live in Cali too. But let me tell you we did not buy a home until we had 20% down and avoided those ARMs like the plague. I know they have worked for many people I know, but VERY risky.

    For the most part if you can save $2500/month, I do not see what the hurry is. We probably saved at about that rate for a condo in 1999, but we waited to put 20% down. Even though housing was going up like 30% year and it often felt futile like we couldn't save fast enough. It did work out and I can not imagine buying so much with so little down. It seems to me if you waited just one or 2 more years you could get awfully close to putting 20% down. Or at least a much bigger chunk than $15k. Plus I know in some areas of the country housing is still going strong, but the subprime loan dominos have barely started to fall. I would really wait it out and take some time in this market. I know up in No Ca most of these high prices are supported by ARMs, which will not last forever.

    Anyway, yes you could see some good tax breaks on a condo. All of the mortgage interest and property taxes would be tax-deductible (in addition to the hefty state income taxes you probably pay) and so the $2450 in payments could really save you around $700/month in taxes in round figures. So in the grand scheme of things I don't think the entire payments are as much of a stretch as they appear at face value. I've seen many cases where buying is a better deal than renting even, because of the tax breaks. But the thing that worries me in this case is the idea of a risky ARM. I think home values in Cali for the long haul will stay rather high, but this whole subprime loan mess has a way to go to straighten out and can really affect property values in the interim. Be careful!

    Good Luck though whatever you decide. I Can sympathize with the insane housing prices - yeesh. & frankly, if you do the ARM thing you may flip a lot of equity and do quite well. But you have to be willing to accept the risk that you may face financial ruin if housing prices drop after you buy. That is a pretty big downside.

    Comment


    • #3
      I've got a question about one point. I didn't think that you could finance HOA (same thing as condo fees, right?), that they can vary (in other words, increase), and that they are not deductible from inc. tax. True or false?

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      • #4
        Thanks Monkeymama. It makes a lot of sense on what you say in your post. My hurry was mainly my thought of not draining money in rent and instead put it towards building some equity. But as you said, a dip in home prices is all it takes for my investment to be at risk. Thats why it has been such a dilemma for me since I like planning ahead and am not able to come to a conclusion.

        VSjhoc, I was not planning to finance the HOA (same as condo fees). I was estimating my monthly payments and included it in addition to my mortgage payments. I dont think they are deductible from inc. tax but the experts can chime in to confirm it.

        Comment


        • #5
          I think the debt reduction side of your plan is excellent, I'm just not sure you should think about your primary residence as an investment.
          Originally posted by ajknox View Post
          I would live in the condo for atleast 5yrs to recoup my investment.
          So, how do you recoup the investment? Sell it and move into an apartment? Sell it & move into a bigger house? What if it doesn't appreciate with the same rate that it has over the past few years? What if the condo's value drops, the ARM adjust higher & you owe more than the condo is worth?

          You may be able to avoid PMI, by having two loans, but the second loan will have a higher interest rate, so you are still paying for it, it's just in a different form. The best way to avoid PMI is to save up 20% for a downpayment.

          The tax breaks will certainly help, but you shouldn't let them convince you to buy before you are ready.

          Comment


          • #6
            Thanks, it's the "$2700 on a 5/1 ARM" that confused me because it looks like you added the prop taxes and HOA to the principal/interest amount. And then there's that pesky insurance ...

            Comment


            • #7
              Originally posted by autoxer View Post
              So, how do you recoup the investment? Sell it and move into an apartment? Sell it & move into a bigger house?
              Yes, my plan was to sell the condo in 5yrs and move to a bigger house. But you raise valid points on what if it does not appreciate or interest rates go higher.
              My main reason to think of this first time purchase as an investment was because I do not intend to stay there for the entire term and know that i will be moving to a bigger house maybe in 8-10 yrs. So is it worth putting down $70k of my liquid savings into a downpayment if i know i will be selling the condo after 5-8yrs?

              Also, Monkeymama, you mentioned that I would get a credit back on interest, property taxes and the state taxes? Did i misinterpret you or after purchase of home, it reduces the state inc tax too?

              Comment


              • #8
                Originally posted by ajknox View Post
                Also, Monkeymama, you mentioned that I would get a credit back on interest, property taxes and the state taxes? Did i misinterpret you or after purchase of home, it reduces the state inc tax too?
                Yes, the mortgage interest will reduce both the federal and the state income taxes. In addition, since you will be itemizing your deductions, you will be able to deduct the state taxes from your federal income, hereby reducing the federal taxes even further. Since you live in California, you will also be able to deduct the California disability insurance (CA SDI) from your federal income.

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                • #9
                  If you don't plan to stay there, and you have the ability to rent for far less than the cost of "ownership" (really the bank owns it) then why buy? The housing market (especially where you are) is really due for a severe beating. Here is what I would do (and you are so young and have TONS of time before you need to worry about buying). Take the amount that you figure owning would cost you (and it's always way more than you think too - there's no landlord to replace the screwy fridge or fix the plumbing, etc) and subtract the amount you pay in rent. Say $2700 (and I think ownership would be more than that as I said above) minus your rent $1200 = $1500. Keep renting and every month take that $1500 that you are saving by not buying (never think of renting as throwing away money when it costs half of what "owning" does) and put it in something earning you money. After a few years, or however long you figured you would have stayed in the condo you might buy, you will have an excellent down payment put aside for when you are really in a position to think about buying something that you actually want to live in long term. Nothing worse than being house poor and stuck in something that you can't unload for what you paid for it. I don't think there is much worse of a feeling than having to bring a big check to the closing when you sell your "investment". Save your money - renting makes sense for you right now.

                  Comment


                  • #10
                    Here is an interesting calculator that compares buying now vs. saving up more for a downpayment.
                    Buying Now Versus Buying Later

                    Comment


                    • #11
                      I am in southern CA as well, and did something similar at your age, with the exception that I had 20% to put down. Back then you could get a 2br townhouse for $189! I stayed in it 4 years, then used part of the equity to trade up, and moved the rest into mutual funds. The difference that I see was that I bought just as the market was starting to move up, while you are thinking of buying closer to the beginning or middle of the downturn. I once heard that CA real estate generally moves through a dramatic boom and bust cycle about every 10 years, but our latest boom lasted longer than usual -- so the next downturn may be longer than usual as well. Hopefully housing will be seriously down by the time you are ready to buy. Waiting until you have close to 20% down may coincide with the prices falling. Also, I've noticed prices tend to be lower during Nov-Feb, and higher in the summer, and would suggest that you wait until winter of 2008 just to catch the seasonal dip.

                      How much of wanting to have a house is the emotional satisfaction of owning something and being free to decorate as you please, etc.? For me this was a very big deal, and would be worth taking on the extra expense.

                      Since your housing cost will about double, I'd suggest you seriously consider taking on a roommate, whose rent will help pay the mortgage.

                      I would second the notion that if you are going to go for an ARM, make it a 7/1 or even better a 10/1 -- having the rate locked in longer gives you more protection against swings in the market.

                      I'd also like to see you get your emergency fund up to about $7k now and $12k after you buy a house, and to start contributing to a ROTH IRA. You can do this in parallel with buying a house.

                      I calculate that your total debt is $6330, and your expenses once you are out of debt (but still renting) run about $2400/mo (I include your saving for travel and misc.). Is your take-home income about $4100? I'm concerned that your plan basically moves all your savings into housing expenses -- you may be buying too much house for your income, in which case I'd suggest either a roommate or looking for a less expensive condo.

                      Comment


                      • #12
                        My take home income is $5100 so my idea after buying the home was to still save about $1300/month with around $2700 for mortgage, condo fees, property tax and remaining $1100 for food, gas, car ins, travel & misc saving since before I buy a house, I would have my car paid off and no CC balances to deal with. Thats the calculation i came up with to think i can afford a $350k condo but lesser the better

                        I have heard about the 10yr cycle too about the fluctuations in california. My other question is whether the interest rates will stay as low as they are now.

                        Thank you every one for your input so far. its been great advice since I see things from a different perspective now.

                        Comment


                        • #13
                          Personally, I think you should keep renting for 2-3 years and invest the $1500 difference between your projected mortgage payment and your rent. The only reason I say this is because you are young and expenses will creep higher as you get older. I'd hate for you to not properly save for retirement due to: condo....then engagement ring, wedding and honeymoon...then new house, then child expenses, etc, etc.


                          I suggest doing one thing before you make your final decision: After you pay off all your debt, figure out how much your house related expenses will be (don't forget insurance and maintenance!!) and then pay your savings account that monthly payment for 3-4 months. Then assess your situation again. If you are comfortable paying those expenses, go ahead and buy!

                          Comment


                          • #14
                            Your question on interest rates is valid, I thought about that briefly when replying (interest rates could rise). But in general, housing prices kind of go in the opposite direction of interest rates. Meaning, when interest rates go up, prices start to fall, and vice versa, because it affects affordability for most buyers. We were just having this discussion the other day because housing is just so insane in the Bay Area right now, but in the 70s my parents had a 13% loan that ate about 75% of their income. So it seems really not much has changed in the last 3 decades. You live in parts of California, it's the norm to put a big chunk of change in a house, and for people like my parents it has most certainly paid off though it was insanely risky at the time. Just my 2 cents.

                            On the other hand, interest rates are really good. But then again if you can't lock them in for 30 years, eh, what difference does it really make.

                            & of course there are the concerns if you are biting off more than you can chew either way. (We relocated out of the nonsense, just couldn't stomach it).

                            YEs, by the time you save the down, prices may be falling, but it may be easier for you to hold off then and wait out the dip a bit.

                            Good Luck whatever you decide!

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