4

In the area I currently live, we are experiencing massive population growth. Land and house prices haven't risen as fast as rent, to the point that renting is now at least 3-4x as expensive per square foot as owning. This makes saving a down payment very difficult while renting. Given these conditions, would it make sense to buy with 0 down when I can get double the space and pay less even with PMI than my current rent?

Additional info: rent on a 1 bedroom apartment in my area is currently around $1600, but I can find decent houses in the 175k-225k range. Financing even with 0 down is no problem to obtain. I have been unsuccessful in finding any roommates who could split the cost of a larger unit.

To clarify, I am looking for the lowest cost place to live. Rent continues to climb, where mortgage payments would be fixed. I do not consider the house an investment, so even if, say after 3 years I had to sell at a bit of a loss, I consider it a win if the total amount paid for the house, upkeep, taxes, selling costs, etc are a lower total than the rent would be over the same period. I have owned before so am familiar with the additional costs of renting vs owning, and do most maintenance myself. I guess what I really want to know is, how do you figure out where the line is? How high does rent have to get so that it would be better to buy?

  • Will you definitely be staying there for 15 years? – ChrisInEdmonton Nov 6 '15 at 18:54
  • Probably not. Most likely 3-5 years. Long enough to break even on any selling costs, to be sure. – Enkiduh Nov 6 '15 at 19:09
  • 2
    Not sure about your math there. 175k-225k range (say 200k midpoint) for a 15 year mortgage is ~1400-1500/month with a very good interest rate (source: I just refi'ed at an excellent rate and the refi'ed amount was about 200k), plus PMI, plus property taxes, plus home insurance. Definitely not going to be 1600 afterwards - more like 2k. – Joe Nov 6 '15 at 20:11
  • 1
    Another $300 a month (at least) should be budgeted for repair, maintenance, etc… And, if you buy a house with 0 money down, you are instantly underwater due to real estate brokerage fees if you need to sell. – Scott Simpson Nov 6 '15 at 20:15
  • wow - where is this? rates look good! how do you get 0% down deals? – ina Nov 7 '15 at 21:54
4

Whether or not you choose to buy is a complicated question. I will answer as "what you should consider/think about" as I don't think "What should I do" is on topic.

First off, renting tends to look expensive compared to mortgages until you factor in the other costs that are included in your rent.

  • Property taxes. These are a few grand a year even in the worst areas, and tend to be more. Find out what the taxes are ahead of time. Even though you can often deduct them (and your interest), you're giving up your standard deduction to do so - and with the low interest regime currently, unless your taxes are high you may not end up being better off deducting them.

  • Home insurance. This depends on home and area, but is at least hundreds of dollars per year, and could easily run a thousand. So another hundred a month on your bill (and it's more than renter's insurance by quite a lot).

  • Upkeep costs for the property. You've got a lot of up-front costs (buy a lawnmower, etc. types of things) plus a lot of ongoing costs (general repair, plumbing breaks, electrical breaks, whatnot).

  • Sales commission, as Scott notes in comments. When you sell, you're paying about 6% commission; so you won't be above water, if housing prices stay flat, until you've paid off 6% of your loan value (plus closing costs, another couple of percent). You hit the 90% point on a 15 year about year 2, but on a 30 year you don't hit it until about year 5, so you might not be above water when you want to sell.

  • Risk of decrease in value. Whenever you buy property, you take on the risk of losing value as well as the potential of gaining value. Don't assume that because prices are going up they will continue to; remember that a lot of investors are well aware of possible profits from rising prices and will be buying (and driving prices up) themselves. 2008 was a shock to a lot of people, even in areas where it seemed like prices should've still gone up; you never know what's going to happen. If you buy a house for 20% or so down, you have a bit of a safety net (if it drops 10-20% in value, you're still above water, though you do of course lose money), while if you buy it for 0% down and it drops 20% in value, you won't be able to sell (at all) for years.

All that together means you should really take a hard look at the costs and benefits, make a realistic calculation including all actual costs, and then make a decision. I would not buy simply because it seems like a good idea to not pay rent. If you're unable to make any down payment, then you're also unable to deal with the risks in home ownership - not just decrease in value, but when your pipe bursts and ruins your basement, or when the roof needs a replacement because a tree falls on it. Yes, home insurance helps, but not always, and the deductible will still get you.

Just to have some numbers: For my area, we pay about $8000 a year in property taxes on a $280k house ($200k mortgage), $1k a year in home insurance, so our escrow payment is about $750 a month. A 15 year for $200k is about $1400 a month, so $2200 or so total cost. We do live in a high property tax area, so someone in lower tax regimes would pay less - say 1800-1900 - but not that cheap. A 30 year would save you 500 or so a month, but you're still not all that much lower than rent.

  • So, let's say I find a roommate. In an apartment I am still looking at > $2k a month total payment for a 2 bedroom in my area, for a much smaller space than any of the houses. I understand that as owner I would have to pay tax on what they pay me as rent in the house where we could do a simple split in the apartment, but I have owned in this area before on a practically 0 down loan and the total monthly payment on a 190k mortgage in that situation, including PMI, escrow, and so on was about $950. – Enkiduh Nov 6 '15 at 21:09
  • 190 @ 0% for 15 is over 1000$ – Ross Nov 6 '15 at 21:52
  • 1
    @vic -- Yes, 6% is the general figure for single-family residential real estate commissions in the United States. It is generally split in half: 3% goes to the agent who worked with the seller, and 3% goes to the agent who worked with the buyer. It usually does not include the cost of "staging" a house to look good to buyers, the cost of a lawyer (if applicable), surveyor (if applicable), title researcher (if applicable), escrow and settlement agent (if applicable), or title transfer tax (if applicable). – Jasper Nov 7 '15 at 16:44
  • 1
    @vic -- Of the 3% that each real estate agent receives, typically 1% to 2% goes to pay the agent, and the remaining 1% to 2% goes to the agency (to pay for "back office" costs, advertising, signs, Multiple-Listing-Service subscriptions, offices, et cetera). These commissions are negotiable. In some areas of the country, there are now agencies that are a bit less expensive. So-called discount brokerages often rebate about 1% of the home price to the party they are working with. – Jasper Nov 7 '15 at 16:50
  • 1
    @vic -- If a market is slowing down, a seller can increase the commission percentage, and dedicate the extra percentage to the (hoped-for) agent who will work with the (hoped-for) buyer. Simply increasing that agent's share from 3% to 4% can be very effective. (It gives those agents a strong incentive to show that house to their clients.) – Jasper Nov 7 '15 at 16:54
0

In the situation you describe, I would strongly consider purchasing. Before purchasing, I would do the following:

Think about your goals.

  • Consider where you want to live in a few years. In a home you might buy now? In another home in the same area, and rent out the home you might buy now? Somewhere else entirely? If your family grows, will it make sense to add on to the home you might buy now?
  • If you are not married now, or don't have children yet, consider whether buying a home now will make it easier to get married, or harder? Easier to have children, or present an extra obstacle?
  • Find out where you can live that is not at risk of flooding.

Work with good people.

  • Get a good real estate agent. (Preferably a buyer's agent, whose legal responsibilities are to you not the seller. Also, preferably one who can warn you about obvious expensive problems with houses you are considering, so that you do not have to pay for more than a couple of houses to be inspected.)
  • Find a good honest mortgage lender, who has experience working with people in your financial situation. I would avoid BofA, Chase, and PHH. (Avoiding PHH means avoiding USAA, NavyFed, and any other company that outsources their mortgage operations to PHH.)
  • Get a good home inspector, who can tell you what is wrong with a house you think is worth buying, so that you can decide if you can really afford the house.

Set a budget.

  • Find out how much you will need to pay in financing costs for a fixed-rate loan: interest, principal payments, mortgage insurance.
  • Find out how much you will need to pay in taxes: Property taxes, homeowners' association dues, fire department fees (rare, but essential where applicable).
  • Find out how much you will need to pay for insurance: Homeowner's insurance, earthquake insurance, et cetera.
  • Find out how much you will need to pay for utilities: Electricity, natural gas (if available), water, sewer, garbage, et cetera.
  • Find out how much you can choose to pay for services: Landscaping, lawn mowing, snow plowing (if applicable), annual sprinkler testing and backflow prevention testing (rare, but required for some houses with built-in fire sprinklers).
  • Set aside a monthly budget for all of those costs.

Be able to handle surprises.

  • If you do not yet have $ 5,000 in savings, and do not yet have a $ 5,000 available line of credit, get such a line of credit. (Even if it is at a high interest rate.) Do not use the line of credit. Instead, keep it in reserve in case your house's dishwasher, refrigerator, and water heater all fail one-after-another.
  • If you need to get the line of credit, tell the mortgage lender you are working with what you are doing, and why. (If he works for a bank, he may even be able to set you up with a good deal.)

If buying a home makes sense, you can do the following after buying:

  • Move in.
  • Save the difference between your total housing budget (listed above) and what you had been spending on rent in an emergency fund.
  • If the situation is as you have described, after a year you should have enough money in the emergency fund that you should never need to borrow against the emergency line-of-credit.
  • Optionally, after your emergency fund is built up, you could pay down your mortgage.
  • How much, roughly, would you pay such a buyer's agent? And is it in form of a fixed fee or percentage of the house price? What is his incentive in getting you a lower purchase price? – vic Nov 7 '15 at 16:41
  • 1
    @vic -- Typically, the commission for the buyer's agent follows the standard structure. The buyer's agent usually negotiates with the buyer a minimum amount for the commission. This minimum might be a dollar amount, or a percentage of the sale price. This protects the buyer's agent from (rare) sellers who think "Why should I pay any commission to someone who does not legally represent me?" Typically, the commission is only paid if the deal happens. If the seller refuses to pay the buyer's agent's minimum commission, the buyer pays the agent directly, and lowers their offer for the house. – Jasper Nov 7 '15 at 17:18
  • 1
    @vic -- The incentives (to do a good job, and negotiate a good price) for the buyer's agent are the same as in a regular deal: Build a good reputation, get repeat business from their client, get referrals from their client, get deals done, avoid wasted effort, have happy clients. Most agents work with their clients to find a good budget, and then look for the "best" available homes that can be purchased for that budget. Thus, the amount of the agent's potential commission is mostly determined by the buyer's budget. – Jasper Nov 7 '15 at 17:25

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.