What do you think of my home buying strategy?

David · Joined: 19 May 2004 Posts: 703

I'm still planning, but let me throw out some numbers, and tell me what you think?

Let's suppose I save $24,000.
Now let's suppose I get a loan on a $400,000 house, and my payments are $3000 per month including insurance and property tax. I'm buying this house in a very stable area, and I think the chances are good that the house will increase in value at a reasonable rate.

I put no money down on the house, but I have the $24,000 in savings. Assume I have trouble making payments, and am only able to pay about $2000/month. Therefore, I remove $1000/month from savings for 2 years. So after 2 years my savings are depleted.

During those 2 years, let's also assume I paid about $10,000 into principle (about $420 month average toward principle on a fixed rate loan).

Now let's suppose my home appreciates 5% for 2 years, so the value of the house becomes $441,000. Now I am sitting on a house worth $41,000 more than I paid, and used up $24,000 of my savings, and I have paid in $10,000 in principle.

So ...
at the end of 2 years I would be holding $51,000, a lot more (in equity) than when I started with $24,000 in savings.

I would love to have someone tear this apart and tell me of any weaknesses in my strategy.

Haplo · Joined: 20 Jan 2005 Posts: 2406 Location: Springfield, IL

The main concern that I'd have for you is that you're depleting your savings. What will you do after 2 years? Refinance? You still have to cover the payment. You could sell it, and cover your realtor fees (not cheap!) Are you putting anything back into the house? Something may come up in those 2 years, you never know.

The only real problem i see with this is the 'after 2 years' part, assuming all the rest of that stuff.

David · Joined: 19 May 2004 Posts: 703

Assuming I did get that $51000 value (or somewhere thereabout), how terrible would it be to refinance at that point?

Haplo · Joined: 20 Jan 2005 Posts: 2406 Location: Springfield, IL

That's not really the problem. The problem is that at the end of that two years, you refinance, and do what? It's not like you're going to have a $1000 lower payment to cover the difference of what you've been squeeking from savings (That doesn't look like it's spelled correctly..oh well.)

If your income was going to increase by then, then sure! Go for it! Or if there's some other compensation.

It is simply a question of at that 2 year mark, what happens? You're out of savings, and are you going to be able to cover that payment?

Why would you refinance then? I could see it if rates came down, or you were converting from an ARM to a Fixed, other than that, this is your magical scenario, so you tell me what your plan is in 2 years, and why it is that you believe that it'll work :) (e.g. increased income, etc)

chow · Posted: Thu Nov 24, 2005 10:38 am Post subject:

I don't think rates will go back down to the remarkable low's we had, but I don't have a crystal ball either.

David, the other thing is-why use savings? If you can't afford the payments on what you want, then buy a home that requires a smaller payment. You're self employed, and you started out small and grew your business-correct? Use the same process with your house. Buy what you can afford without scrimping. Stress, due to finacial issues with house payments, car payments and running your own business isn't something you want my friend. I love money in the bank, and in good investments. I sleep better at night knowing my money is there if I need it, I can afford my house payments, and my bills are paid on time. You seem to be a fairly conservative type, with an open mind-but don't use your savings for more than you have to-on a house that is more than you can afford to buy without the normal downpayment, and closing costs. You may need that money to start another income stream in your business. You saved that money for a reason or two. Like Haplo said-"what if"????

We are your friends-that is our humble opinion. Maybe someone else will stop by who doesn't know you and offer the other side of the coin for thoughts.

David · Joined: 19 May 2004 Posts: 703

The problem is it is difficult to find a house in a safe neighborhood that is in town without spending well over 300k. I'm thinking maybe if I can increase my savings even more I will be a little safer, giving me even more time to increase my income to be able to make the full payment.

chow · Posted: Fri Nov 25, 2005 3:41 pm Post subject:

Pesky high home prices! :lol: I was talking to a friend of mine who got moved out in southern CA yesterday. She's a contract underwriter for MGIC. She was telling me how my house with my lot size in a decent area out there- would be valued at one million.

That ain't right! I have a nice house, and a large lot-but 1MM?

:shock: That's only about $820,000 more value than it is worth in central Indiana!

Mac · Joined: 04 Feb 2005 Posts: 276 Location: Knightdale, NC

David, the problem I'm seeing is the same as Haplo's. It is difficult in the best of times to accumulate savings and you are going to use it on a suspicion that home values will increase. A very risky concept in these times. Even the best of markets can drop like a stone overnight for the strangest reasons. Especially, like haplo has pointed out, you are in essentially the same boat you started in 2 years later.

Although I am not a big proponent of them, perhaps an option arm might be a better alternative for your income concerns right now.

David · Joined: 19 May 2004 Posts: 703

What would be the amount of savings per month an option arm would provide on a payment of $2500/month (compared with a fixed)?

Mac · Joined: 04 Feb 2005 Posts: 276 Location: Knightdale, NC

David, I am not that well versed in this product but here is my take on it for what it's worth.

Typically the option arm will give you about 1/2 the payment a conventional fixed loan will all things being equal. This would depend on the initial rate of the option arm and the rate on the fixed loan of course.

You might talk to Bryan Anderson
Sr. Account Executive
Nations Home Lending
Div. of Colorado Federal Savings Bank
Ph: 270-339-3901
Fx: 270-875-4431
bryan.anderson@cofedbank.com
{non working link removed}

He is an AE and cannot do your loan directly (need the broker go between) but he can probably offer a better insight to this product than I can.

chow · Posted: Mon Nov 28, 2005 6:30 pm Post subject:

David,

I spoke for an MGIC UW for over 5 hours this weekend. This is one of the companies that secures the loans for a 80% Loan to Value. IE: Fannie Mae, Freddie Mac. MGIC is one of the underwriter's for the mortgage insurance for the loans that go over 80%- and charges MI for up to 100%

They have a deep concern for property values in the increasing markets.

:wink:

Norman · Joined: 04 Dec 2005 Posts: 5

David poses a very interesting hypothetical. Assuming that David will live in the home for the two year period and will not fall in love with the property and will be willing to sell at the end of the two years and take his profit, I like his thinking.

First of all, assuming that David does not go through with this transaction, how much money will he spend for his housing costs for the next 2 years? Will it be $1,000 per month ($24,000 over 2 years) or $2,000 per month ($48,000 per month over 2 years) Rental money will only make David's landlord rich, not David. Assuming David gets a job. The tax considerations are significant as the interest paid on his mortgage loan and taxes paid on his home provide tax advantages not available to homeonwners.

I believe that David would more than double his money and enjoy living in a $400,000 home of his own for the two years. His alternative is 1% or 2% or maybe 3% bank interest.

If possible, a 2 family home would be a logical alternative with the rental income offsetting the the monthly mortgage payments and taxes so that David might not have to deplete his savings.

I would offer David the following observation: No money down does not mean that you can go to a closing without your checkbook. A lender will require title insurance, they may require a tax escrow and or an insurance escrow and there will probably be a mortgage tax. The lender's lawyer may charge a fee. Your lawyer may charge a fee. There will be the cost of an appraisal and there may be other costs. A mortgage of more than 100% may be available and you might be able to get a seller's consession.

To make sure that there is a profit, David should not wait until month 24 to sell his home. If the average time on MLS or other service to sell a home where David wants to purchase his is 3 months than I would suggest that 18 months into the deal, David should pursue his exit strategy.

In considering mortgages lenders look at the "mid score" when they evaluate a loan. David should buy a $400,000 home in a neighborhood that has, as its mid price range homes of $400,000 which will make it easier to sell and less likely to be adversely affected by a market drop. It certainly would not be wise to buy the most expensive property in a neighborhood and personally, in a two year period the cheapest home may not prove to be a bargain.

Go for it David. Ignore the "look before you leap" philosophy and remember "he who hesitates is lost".

Cheers!

David · Joined: 19 May 2004 Posts: 703

I really appreciate your answers.
Though I'm not quite prepared to embark on this strategy, I feel there is some hope for me in living this neighborhood.

chow · Posted: Mon Dec 05, 2005 9:35 pm Post subject:

David has a job. we need not assume that. My only concern for any friend here is: Are you comfortable with the product you have?

If you are, why shop? :roll:

He (david) could run around like a ferret on the internet and find what ever I told him to come up with-if need be for a home loan.

He's our "Brother", He was looking for some help himself, and a few other spots available for a group discussion area, and figured:

Why NOT?

David,

Value is in the eyes of the person willing to pay for the item. If you can't get everything you want NOW, is there anything wrong with starting out at first base? (I have found first base to be very warm and comfy...)

Son, (David) Right now, you're afraid of first base. You have to start somewhere.

Here's my take on a goal.

Lead, Follow, or get the Heck out of my way! None of us have the crystal ball. If we did, we would give you a free sighting. I Place about as much faith in crystal as I do on the NASDQ. :roll: :roll: :roll: :roll: :roll: :roll:

macp · Joined: 13 Dec 2005 Posts: 8 Location: Phoenix

Have you thought of putting money down and doing an option arm. When times get ruff you can pay the minimum payment. But if you ask me, if you think you cant pay the full mortgage at times, maybe its too much house for you and you should look for a cheaper home. Or get an IO or a 40year to lower the payments.

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