First home buyer, financing questions

Question

My and my wife are planning to buy a home or apartment in Florida. We don't know what kind of property would be the best choice so we wont regret it in the future. Our monthly income is around $4000, probably going to be around $5000 in the near future, of course it may be more but this is what the facts are at the moment. Right now we are paying $1450 in NY rent each month and we are doing fine from month to month but we are able to save any money. We have around $15k in savings. I think we would be good with paying around $1200 monthly mortgage fees (with all other property fees included like tax etc.) and there will still be some left to save with the perspective of making at least $5000. I cannot be sure that we would stay in the house for 30 years, probably not, I hope we would be making enough money in few years to afford a much better home so I want to get something with the perspective of paying it off, selling it or renting it in 10 years at most. Just to add we are under 30 years old. So my question to you is,

• Should I look for a home or an apartment? House would be around $200k, apartment would be under $140k, a small house with pool that I would be very satisfied with would be around $250k. Apartment would very likely have some HOA fees so it might be better to just get a home but apartment is easier to rent or sell in the future.

• What mortgage term should I get 10, 15, 20 or 30 years? I would be willing to pay weekly or bi-weekly to save some money on interest.

• What to do with the $15k that I have? I was thinking about putting a down payment but it might be better to leave it on a savings account

• Is it worth making principal payments if I wont plan to stay in the property for a long time? I would probably do better with putting that money to the savings account. If I would get a more expensive home I don't think it's a good idea to make any principal payments as I would probably lose them when I would want to sell the house and pay off the mortgage. What do you think?

I have a lot going on in my mind, that is all I could think of at the moment. Answers from someone experienced with that would help me really a lot. Thank you.

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Yes, I think you are right. So I am removing $250k house from my list.

The thing is that the rent will exceed mortgage payments, I would not be paying less for an apartment than what I am paying now. Even if I would save another $10k next year I wouldn't change my situation, after a year I would still end up looking for the same valued house, so I don't see the point of renting. And Florida property value is increasing very quickly now so I would have the risk that the house would cost $215k instead of $200k so I would still be in the same spot even with saved money.

Other thing that came up to my mind is that if I would get a home that needs some renovation and put the lowest down payment, I could make some updates which would add some value to the property. If the value would increase by around 20%, would I be able to get rid of the PMI?

Answer 1

I think we would be good with paying around $1200 monthly mortgage fees (with all other property fees included like tax etc.)

You probably can't get a $250k house for $1,200 a month including taxes and insurance. Even at a 4% rate and 20% down, your mortgage payment alone will be $954, and with taxes and insurance on top of that you're going to be over $1,200. You might get a lower rate but even a drop to 3% only lowers the payment $90/month. Getting a cheaper house (which also reduces taxes and insurance) is the best option financially.

What to do with the $15k that I have?

If you didn't have a mortgage I'd say to keep 3-6 months of living expenses in an emergency fund, so I wouldn't deplete that just to get a mortgage. You're either going to be

Since 1) the mortgage payment would be tight and 2) you aren't able to save for a down payment, my recommendation is for you to rent until you can make a 20% down payment and have monthly payment that is 25% of your take-home pay or less. Which means either your income goes up (which you indicate is a possibility) or you look for less house. Ideally that would be on a 15-year note, since you build equity (and reduce interest) much more quickly than a 3-year note, but you can get the same effect by making extra principal payments.

Also, very few people stay in their house for 30 years - 5 years is generally considered the cutoff point between renting and buying. Since you're looking at a 10-year horizon it makes sense to buy a house once you can afford it.

Answer 2

When you say "apartment" I take it you mean "condo", as you're talking about buying. Right or no?

A condo is generally cheaper to buy than a house of equal size and coondition, but they you have to pay condo fees forever. So you're paying less up front but you have an ongoing expense.

With a condo, the condo association normally does exterior maintenance, so it's not your problem. Find out exactly what's your responsibility and what's theirs, but you typically don't have to worry about maintaining the parking areas, you have less if any grass to mow, you don't have to deal with roof or outside walls, etc. Of course you're paying for all this through your condo fees.

There are two advantages to getting a shorter term loan: Because you owe the money for less time, each percentage point of interest is less total cash. 1% time 15 years versus 1% times 30 years or whatever. Also, you can usually get a lower rate on a shorter term loan because there's less risk to the bank: they only have to worry about where interest rates might go for 15 years instead of 30 years. So even if you know that you will sell the house and pay off the loan in 10 years, you'll usually pay less with a 15 year loan than a 30 year loan because of the lower rate. The catch to a shorter-term loan is that the monthly payments are higher. If you can't afford the monthly payment, then any advantages are just hypothetical.

Typically if you have less than a 20% down payment, you have to pay mortgage insurance. So if you can manage 20% down, do it, it saves you a bundle.

Every extra dollar of down payment is that much less that you're paying in interest. You want to keep an emergency fund so I wouldn't put every spare dime I had into a down payment if I could avoid it, but you want the biggest down payment you can manage. (Well, one can debate whether its better to use spare cash to invest in the stock market or some other investment rather than paying down the mortgage. Whole different question.)

"I dont think its a good idea to make any principal payments as I would probably loose them when I would want to sell the house and pay off the mortgage" I'm not sure what you're thinking there. Any extra principle payments that you make, you'll get back when you sell the house. I mean, suppose you buy a house for $100,000, over the time you own it you pay $30,000 in principle (between regular payments and any extra payments), and then you sell it for $120,000. So out of that $120,000 you'll have to pay off the $70,000 balance remaining on the loan, leaving $50,000 to pay other expenses and whatever is left goes in your pocket. Scenario 2, you buy the house for $100,000, pay $40,000 in principle, and sell for $120,000. So now you subtract $60,000 from the $120,000 leaving $60,000. You put in an extra $10,000, but you get it back when you sell. Whether you make or lose money on the house, whatever extra principle you put in, you'll get back at sale time in terms of less money that will have to go to pay the remaining principle on the mortgage.