Naaahhhh! I figure if i'm not well enough to make a few bucks, i'm probably not well enough to enjoy them. and besides.... After the revolution, we won't need to have saved money. You are hoarding yours, aren't you? Because i'm sort of counting on it...
I think that the 2.5x rule seems low too. My wife and I paid about 2.5x our yearly income for our house and put 20% down. We very easily made our payments. We knew that we could have afforded a much more expensive house but chose to be conservative. I also agree in theory with TJ regarding the housing bubble. I think everyone knows that the housing market is not as volatile as the stock market. I don't think that TJ was making a literal comparison. However, you also have to keep in mind that if you buy when the market is high like it is now and sell when the market is lower then then you will be buying your next house when the market is low. If you buy when the market is low and sell when the market is high then you will be buying your next house when the market is high. Finally, during the course of your 30 year loan, most likely your salary will rise.
I assume he can qualify for the best rates. With 20% down and "good credit" he should not have a problem. He should have good enough credit as long as he paid his cards and car loan on time and doesn't have much revolving (e.g., credit card) debts--which it doesn't sound like he does. Having great credit (FICO 750+) makes very modest difference from "good credit" in rates for mortgage, but bad credit punishes you severly. Except for hyperinflated markets (East and W coast primarily) most experts don't think there will be a "huge" drop in real estate. It may stagnate, but you are probably not going to lose a lot. Interest rates are at historical lows. Yes the houses may to grow or fall a little, but to assume interest rates will return to where they are in 2, 5 or 10 years is a big assumption. What he would pay on a 140K loan at todays rates is $800 a month. If say rates move to 7.5-8% (not bad historical averages) by the time houses drop, if in fact they do drop, the house would have to reduce in value like 15-20% to equal the same money payment you pay now. Also consider the 30 year rates barely blipped under 10% from 1979 to 1991--the housing market would have to fall a whopping 40% to compensate in a climate like that. That is like his 175K house falling to like 105K. I don't think that is happening (more people will just pay cash for great buys on houses instead of financing). The safet move, assuming you are fairly confident you are going to be in the house a long time, is the 30 year fixed right now--the interest rate is going to increase a lot faster than most markets decrease IMO. So you can't just look at that a 165K house in 2 years is a better deal than a 175K house now. You have to consider the 140K mortgaged at like 5.5 versus the say 130K mortgaged at whatever rate it is in 2 years. And none of us have that crystal ball, but I'd certainly hedge my bets the difference in interest rates will more than make up the difference in falling real estate vales and make it harder for 1st time buyers to break in down the line. Granted I am not in the finance business, but if I had an adult child right right I would tell them to buy now and lock in the 30 year rate if they find a house that fits them. (Assuming those others things were true: the job is very stable, he plans to stay in the house for the long term, his view/valuation on the house jives with experienced friend/families, etc). Unless you have a lot money to play with to take on more risk--wait to buy once interest rates have risen (big assumption the housing market in that area falls majorly) can wait for interests rates to fall again (big assumption this will happen anytime soon)--I'd move forward now. I assumed he could get the house for 175K, and put down 20% for simplicity. He has the cash and I think in his situation he should just move to the conventional, so the loan would be for 140K. Like I said before with that amount of cash and OK-good credit he should get close to the best loan offers. I don't think it is. By my quick reading of Illinois web site the rate is 6.8% of the assessed value. That assessed value is 33% of market value outside of Cook county, 16.5% in Cook county. I would guess he is far enough out of Chicago where he is not in Cook country but not sure. So basically he has the equivalent of about a 2.3% rate on 175K (1.2% within Cook country). Thus his monthly property taxes look to be about $333, I would guess his insurance would be about $500 year (low risk area I would think), or $42 a month. So he has P&I of around $800, taxes and insurance about $375. To give us a margin for error we will say an even $1200 a month. I was calculating that above the standard deduction. He would have a deduction of around $13500 based on interest and property tax taxes. I think he has another $1200 or so in state income tax--for a total around $14,700, around 10K more than the single standard deduction ($4750?) he would use w/o the mortgage. Thus his deduction is going to yield him an extra 25% (his upper tax braket) on 10K (amount above SD for individual filers under 65), or an extra $2500 per year. Thus he gets an extra $200 off per month by owning versus renting. Thus it is the equivalent of a $1000 rent versus $1200 payment on his house. Of course maintanence is a big issue as people have said and not factored in the above. But if it is a new house as he says (usually less maintence), and his parents can help out in emergencies until he gets his savings back to say a $5000 cushion from the $2000 after putting 20% down and closing costs, he could be OK there too. I would agree if he is not inclined to have a roomate/significant other at some point to move in it probably is too much of a loan for him to take on. But then he probably should consider a smaller, less expensive, house anyway if he plays to be there all by himself. Still, his income is fine where if there are brief to moderate times where he is the only one financially contributing he can make the $1000 net payments for the house with his income IMO. It may mean fewer/cheaper vacations or eating out, but he should be able to make it on his high 30s salary with reasonable discipline. The fact he has 40K in savings leads me to think he is more disciplined than he thinks. Now I did run these numbers quickley and w/o double checking, so if anyone sees obvious mistakes please let us know, for noize's sake
Most lenders look at total debt to income ratio. Total debt payments should not be more than 29% of you gross monthly income before taxes. I know property tax in the chicago area is not nearly as much as texas since they have a income to cover education. So you should afford a more expensive house in Chicago than you would in Texas. You can avoid mortgage insurance by doing a 80-10-10 loan. 80 percent loan to avoid PMI and a second mortgage at a slightly higher rate to cover the other 10 percent, therefor you only have to put down 10 percent. Remember you also have to pay closing cost which will run between 2 and 4 grand depending on the state you live in and your mortgage company. In texas, they require you to get title insurance which runs about .75 percent of your loan. What I should suggest to you is to talk with a reputable mortgage company and ask them for a good faith estimate on your loan. They will advise on what you can afford and what your total bill will be.
There are 2 groups, 1) Those who spend beyond their mean thinks noize can afford a $177K house with 36K income. 2) Those who worry that the bottom will drop out of the housing market, that say no way, no how should anyone buy now. and both of yours are arguing with me! Isn't this crazy or what?!!
What is more important than the housing price is the loan amount, since he has a lot of cash for a 1st time buyer. If the seller even accepted $170 and he puts 20% down that loan is what, 136K. Then you have to consider it is 136K at 5.x%. You are talking about a ballpark of 1200 month of which he gets 200 in tax relief--a net of 1000 month. You want to show me how 1000 month is so out of the ball park for a guy making 36K with few to no debts? I agree with you here. Unless it is a condo, or a WC/EC hyperinflated market (both factors one poster discussed), it would take an economic collapase not seen since the 20s to result in "major" (25%+) depreciation in most normal markets IMO. That would effect everything else too--so unless you put your money in gold we are all screwed if that happens. I agree with your advice except given as much cash he has I think he is better off just going with 20% down rather than taking on a 2nd.
Is this board sweet or what! We always get the John Kerry "all points considered" treatment. Scar, the average american mortgage is only paid on about 7 years so I don't think a young single male will see the long term benefits of locking up a 30 year loan. Could you give us a risk/return anaysis on a ten year basis comparing the house investment with a balanced portfolio and a 10 year treasury? I think if I were a single guy I would mooch off my parents and just check in to a hotel when I needed, uh , privacy. That would give you a lot more money to invest and more liquidity than a house. These low interest rates are sort of an hysteria thats not really justified by the high costs. If for what it cost me, if I didn't learn a little about mass hysteria in March of 2000 then I wasted a bunch of cash.
I showed you his p&I plus escrow - tax benefits (versus renting) = about $1000 a month. Now you have to argue that is going to break the bank for a single person with little to no debt making 36K. And that just in times he doesn't have a roomate or SO. The average isn't the most relevant in this case. Over the past few years almost everyone with any kind of sizable mortage has refinanced. Now if rates starting going up like what happened in the 80s, even even just do a historically low rate like 8%--few people will refinance and many are going to be thanking their lucky starts they locked into todays rates, or cursing if they went with an ARM. Also, with rising interest rates it is going to be harder for 1st time buyers like this guy to compete with bargain shoppers who can pay cash and don't have to worry about the rates much. That is why I don't think we are going to see a drammatic drop of with just a 2% raise in mortage rates--unless perhaps you are in hyperinflated markets--but that 2% raise is sure going to make a lot of home out range for 1st time buyers ranges. What you have to remember is in addition to owning a home (which usually is a decent relatively conservative investment along with the freedom, control and pride it gives you) he is locking down like 140K for an awesume long term rate (5.x) made even better by tax advantages. No need to pay off the loan early because you can almost surely make more even in other conservatice investments (though mix of mostly aggressive and few conservative is probably best) As for other uses of the 40K other than for a down payment? Honestly I think you have a real hard case it is better spent elsewhere balancing growth and safety. You can't ignore the tax advantages. I think the "mass hysteria" thing is a great analogy. This investment is probably not going to sky rocket, but should be solid. Unless of course he wants to live with his parents until he is 40--they maybe he can play around more aggressively and not have to worry about rent. While I have refuted the house overall price being out of his range, that doesn't answer the more important question. Whether this house is right for him is a much more difficult to answer. However it did sound to me like given family and the job connections he was fairly settled. I'd I still get a lot of opinions from family and friends on the particular house. But with 40K sitting in the bank and living with my parents and rates so low I think it is a premo time to get his 1st home whether it is this one or not. But that is just me.
Off topic, but Gene I wanted to say thanks for Kauai tip. We stayed at a condo slightly facing Hanalei Bay and a direct line toward the Na Pali coast (condo was right next to the Princeville Hotel). Incredible views and atmosphere--right what I was looking for. Luau (sp?) at the Hotel was nice.
LISTEN PINHEAD, I hate to repeat myself but you were flat wrong. You incorrectly estimated what he would pay in taxes because you did not account for the "assessed tax" value-what he would really pay in property tax Illinios, as well as his personal tax advantages (about $2400 yearly tax savings OVER the standard deduction he otherwise would surely take). I hate to be rude but your arrogance (plus not getting your facts strait) needs a response.
Scar, did you take the Zodiac out to the spires? Your thanks made me start the coolest place thread. Aside from the investment analysis, our buyer's decision should really be based on his life choice. If what he really wants out of life includes a house in the burbs then do it. But once you make that commitmant your giving up a lot of other choices like, being able to quit your job if you really want to, or being able to take another job in another city that you might really want.
That's one of the catamaran's right? Didn't take it, have a 8 month old baby which precluded such excusions that time. I certainly agree with this, and it gets to the decision about whether the individual house (not the price) is right for him. But if it is close to the job and close to the fam--and things he wants and well fits his lifestyle--then it is time to get all the unbiased advice from experienced friends and family on the individual houses the fit most of his criteria.
Someone who makes $35,000 a year in a single-income situation and is "not good at managing money" should not spend the entirety of his liquid assets to buy a $180,000 house. I agree with Desert Scar's analysis-- there are plenty of compelling reasons why it could be a good idea, theoretically, but the problem is that it would stretch the buyer too thin. Then again, it truly depends on priorities. The priority I have developed over seven years working for a large corporation is the ability to walk away at any time with a minimum of unnecessary obligations. Noize might feel differently. I just think he can find something a lot more manageable.
I had wanted to let it go but you kept on insisting so I have to repeat it .... your numbers are wrong. 1) The guy has 40K in saving. To take the house price down from 177K to 140 K, he has to put down 37K in down payment . There is no way that he can do that. . Have you ever heard of closing cost? It can run anywhere from 2% (3.4K) to 5% (8K) the price of the house. I doubt that he can afford 20% downpayment, which means he has to pay PMI too. Let's be generous and take the number in the middle. ~3% maybe. ($5k). That already put him in a hole. . Did u ever think of the basic furnishings for the house. What about the deposits for all kind of utilities and services? What about holding on to 2 months of expenses in reserves? Since your premise of a 140K loan is way out of whack, all of your other numbers are off too. 2) You assume he can get a rate of 5.5%. With his credits, I doubt it. Call up someone and check. 3) Property insurance of $500 a year for a 177K house? U got to be crazy. Just pick up a phone and ask any insurance agent. The standard number is 1%. I incline to think you don't own a house if you threw out a number like that! 4) I raised the question about Illinois property tax. I did not say I was 100% sure. A little research says it is 8% of the assessed value, which is ~1/3 of the price of the house, which take it to 2.6% which is 4.6K. 5) You are not willing to pay, yet you want to claim a tons on the tax return. IF you pay $800/ month, $640 is the interest, plus $333 property tax, that is $977/ month or 11,700/ Year NOT 13.5K. If you are claiming the principal you are paying on your tax return, you better watch your back for the day the IRS come looking for you! Other than that you are not far off on this point but it is still off. 6) My original number for expenses. Monthly expenses: House payment: $1,000 - $1,200 Property tax: $ 400 - 500 Insurance: $ 100 - 200 Utilities: $ 300 - 400 (electric, gas, water, sewage) Maintenance: $ 200 - 300 (general wear& tear, clean-up, yard maintenance ...) Minimum $ 2, 000 a month or more. This does not even include telephone, tv cable, internet ... , gas, car insurance ... There is no way a guy making 36K can afford it. BOTTOM LINE, forget the hot air, just call up a realtor and check.
It is out of whack to assume a bid of 175K won't land the house? I thought I was being way conservative there, he might even get the sales price to 170K or below. Rarely to sellers get the full asking price (177K in this case). Closing costs usually run 2-3K in my experience--I guess it varies by state but 5K seems crazy. I agree putting 20% down and with closing costs it only leaves him 2 or 3K--but is sounds like he can rely on his parents until he gets his saving back to a safer margin like 5K. That is much preferrable than not putting 20% and having a higher monthly rate and perhaps paying non-deductable PMI (unless he takes a 2nd). 140K is abosulutely not out of whack unless there is zero negotiation on house price or Illinois really sticks it to you on title fees. I bet he definetly can get qualified below 6.00. No major credit blemishes, stable work history, and given his substantial savings, he will get close to the best rates most mortgage companies publically offer. I hope Noize checks this out next week. WRONG. I pay about .5% of my home's value in property insurance (USAA is my carrier). The number I saw was 6.8% before the 1/3 assessed value--and that is assuming the house sells and is appraised by the state at the full 177K (big ifs). Also if the house is in Cooke country (Noize is it?) it is 1/6 assessed value. Either way I'll go you your numbers, 2.6% on 177K--that absolutely most conservatove estimate--unless I see otherwise, $383 a month. You are correct you cannot take off for principal. $640 + $383 (revised prop tax) X 12 = about 13000. Then add his state income tax (1200) for about $14,200--and that assumes no other deductions (charity, business expenses, etc). Still a tax savings like $2200 over the standard deduction. I adjusted a lot of you numbers, and it still doesn't include the just less than $200 month tax break. Even still they are extremely conservative based on: that he would have to bid at 177K to get the house, prop tax factors (in Cooke county? Actual Ill valuation and rate), and other deductions (other deductable contributions?). Yes, I recommend he call Wells Fargo and 2 other local companies based on friends/fam recommendations to get prequalified and look at rates they will offer him. I can almost guarantee you a REPUTABLE lender will say "sure, you can afford a 177K house" and get him prequalified--but just because a lender agrees to it doesn't mean it is a good thing for his situation. Even reputable lenders these days are quite aggressive. It turth I would be conservative relative to the top number they agree to. For example, if they say 190K house, I might set my limit at 170K. If they say 170K is your prequalified limit I might go with 150K as my real limit, etc. The other lifestyle choices (roommate, singificant other, wanting cable and high speed internet), yes they matter in this whole calculation too.
You keep fudging with the numbers to fit into your equation: 1) The question was if he could afford a 177K house, now you are saying he can ... but only if he can get the house price down to 175k, 170k ... 2) I bought 2 houses, a condo, re-financed ... I know closing cost is that high. 3) You answer that he can afford the house if he relies on his parents ... How the heck is that good advice? Give me their number, I'll call. In any case .5% of 177K is still $880 not $500. Even your number is still off, let's just go with it. Instead of 2K, you are saying his housing expense is ~$1,400 a month and he can afford it? He makes 36K/yr or 3K/ month. His take home is 2K (2/3) to 2,250 (75%) He is left with $ 600 - 850 / month for everything else? I really have nothing to say after this!!!
