Peter (bigpeteb) wrote,
Peter
bigpeteb

Housing 2: Looking back on the purchase

We finally did it; the purchase closed and we own a house!

I did say I'd document what we ended up doing, to compare our estimates going in to what we actually ended up with. Maybe someone will find this information helpful, but in part I just want to do a post-mortem sanity check.

Okay, first some up-front facts. As I said before, at my previous apartment I was paying $999/month for 1450 square feet, 3br 2ba. (The rate for new tenants was something like $1050, close enough.) Now I have 2183 square feet (3br 2.5ba) plus a 2-car garage, and a yard and a deck. The house's list price was $183,900, and we offered $180,000. Because we didn't have much cash for a down payment, we got an FHA loan at 3.5% down payment. With everything, the PITI (principle + interest + taxes + insurance... in other words, the monthly payment) comes to ~$1275/month.

(More specifically, the principle and interest is $825, the mortgage insurance for putting less than 20% down is $165, and taxes and insurance are $285.)

So, I'm paying ~25% more towards my residence, but getting 50% more living space, not counting the garage and yard. (And that payment will drop when we pay off enough to cancel the mortgage insurance... which will take 5-10 years, but will happen eventually.) There are other benefits, like not sharing walls/ceilings with neighbors. If you wanted that much space in an apartment I think it would cost a lot more than $1275/month.

I did say before that there were a lot of foreclosures going for under $100,000, and that's true. But once I spent many hours sorting through the listings, and saw some of them in person after getting an agent, I saw that most of them were either too small, or were badly designed/laid out, or in too bad of shape. If you have the money and time to hire contractors to spend many months fixing up a house, you could end up with a great house for an amazing price.

I was a little more eager to move than that, but mostly I just don't have that kind of cash on hand. I'm willing to do some upgrades over the long term, but in the 12-month future I wanted something that was close to move-in ready. (I also found, after seeing a bunch of houses, that the features I was looking for in the layout (large kitchen, spacious master bath, etc.) just weren't done in older houses. I decided I'd rather have a newer house that's laid out how I wanted, than a charming older house that doesn't fit how I know I use my dwelling space.)

We had already set ourselves an absolute maximum of $200,000, figuring that we should easily be able to find something less than that, but if we did go that high it would still be a safe purchase given our income/spending. (It's actually a very conservative number, as we could afford that much on just my income alone, though it would be at the limit of what's recommended.) So although our goals shifted a bit as we explored options, we stayed within our plan. The house appraised at $200,000 to buy or $233,000 to build, so I think we managed to get a good deal, too... just not as good as I'd rather optimistically thought we could get.

To complete the purchase, we put 3.5% down, so that's ~$6300. There are also a lot of additional costs at closing, such as fees to set up your mortgage, paying for lender-required inspections and appraisals, and starting off your escrow account (used to pay taxes and homeowner's insurance). However, Fannie Mae offered an incentive of 3.5% of the sale price towards closing costs if we closed by a certain date. So even though I thought our closing costs were a bit high (the loan origination fee seemed a bit pricey to me), we ended up owing nothing in closing costs... we only had to pay the down payment and the escrow, which came to ~$7900.

There are lots of expenses that go with maintaining a home, which you don't have to deal with in an apartment. Even little things, like needing garden hoses and ladders... until now I've never needed them.

I also had to purchase/install quite a lot of things in fairly short order so that we could move in, such as a refrigerator. But, I got to purchase my refrigerator, so I have one that is spacious, efficient, and arranged the way I want it. It's unfair to say that it's a purchase I had to make because I own a house, because I would have done it in the apartment if I could, except I wasn't allowed to.

(Speaking of better quality, I now have walls constructed with proper insulation and 5/8" drywall, a powerful, high-efficiency HVAC... instead of the cheapest materials and systems the builders and managers could get away with. The list just goes on.)

So, I assert that although I'm paying more than I was as a renter (both per-month and in a continuing series of "one-time" purchases like the fridge), I'm getting much more for my money. If I had shopped for a house that was roughly the same size and build quality as my apartment, I'm certain I would have ended up paying less than I did for rent.

But there's the additional benefit that of the $1275/month I pay, $258 of it is building up equity in the house (assuming the value of the house remained constant), and I can count $566 of it as a deduction on my taxes. If you naively equate building equity with keeping the money, and treat the rest of it as being thrown away, then I'm throwing away $1017/month... almost exactly the same as I threw away in rent! Except with the mortgage, that number will slowly shrink as I pay off the principal (rent only ever goes up), and it will drop by an extra $165 when I pay off 20% and can drop the mortgage insurance.

Granted, for "throwing away" the same amount of money, I'm getting less services. No one comes to cut my grass or blow the driveway. But again, on the other hand I have a lawn and driveway that I don't have to share with others. So you get more of some things and less of others, and it's a matter of perspective which is better.

For the sake of comparison, I ran my actual numbers through Ginnie Mae's Buy vs. Rent Calculator, just to see what it says. I'm using an assumption that I'll stay in the house for 5 years before moving. Depending on the tax rate and appreciation rates I enter, it thinks I'll save anywhere from $12,000 to $34,000 by buying.

Some thoughts for anyone who hasn't already gone through the home-buying process before:
  • Any house—new, used, or foreclosed—is a risk, and your only defense is a thorough and trustworthy inspection. It's true that when people are evicted from their foreclosed house, they often strip it down, taking light fixtures, shower curtain rods, etc. However, you're probably saving more than $10,000 by buying a foreclosed or REO house, so you can afford to install new fixtures... and now you have your choice of style. The warnings that people who are foreclosed on may have slacked on regular maintenance and upkeep also apply to regular sales, too, and constant vigilance on your part is the only way to avoid a problem house. I will definitely include REOs in my search the next time I buy a house; banks are likely to paint, replace carpets, and do some upgrades to make the house reasonably presentable.
  • Do some introspection and know as much as you can about what you want from a house before you talk to an agent. Know what area you want to live in, what size house you want, how you want the house to be laid out, features you definitely want or don't want, etc. You can have ranges or multiple options for all of these questions, but the more questions to which you say "I don't know" or "I don't care", the harder it's going to be for the agent to sift through the listings looking for something that will fit you. In terms of space and features, we knew that we wanted a house that has a logical use of internal space (i.e., prefer no grand entrys or cathedral ceilings, no awkward sized bonus rooms, no pointless ledges or decorative pillars), a large gourmet kitchen, a formal dining room, and a spacious master bath.
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