Gather Little by Little

Photo by: Nadia308

This is a guest post from Darlys who writes at JasonandDarlys, her family’s blog about their journey through life. If you like what you read, you can subscribe to her blog via her RSS feed.

Keep renting or buy? This a question my husband and I have weighed heavily since finding out we will be staying in our current town several years longer than originally planned. Would we be throwing away money by renting? What about the risks of buying a house? Where do we even start? After researching our area’s housing market and looking into rental options, we concluded that in our area and for our situation, buying now should save us money in the long-run. We began searching and eventually found just what we were looking for – an older house close to the university (prime spot for resale and close to both of our jobs), small enough to keep us from accumulating “stuff” but roomy enough for guests, and well within our budget. As a bonus, it was completely and beautifully remodeled a few months ago, minimizing the work we anticipated doing prior to move-in. So, after five years of renting as singles and two and a half more years renting together, we are about to make the big switch to owning our first home. Here’s a taste of what we’ve learned over the past few months.

First, seek advice from wise counselors. Proverbs 15:22 says “Plans fail for lack of counsel, but with many advisers they succeed.” With this in mind, we asked a lot of people for input. This meant opening our finances to others and humbling ourselves enough to listen even if they said something we didn’t want to hear. When we found a house we liked enough to seriously consider, we had several people come with us to see it before putting in an offer: a friend who has been in the area for many, many years and has experience with older houses, another friend who lives in a nearby neighborhood and has real estate experience, and a family we trust and that knows us well just to get their gut feeling. We also met with a couple who teaches a financial class to talk about mortgages, go over our contract, and ask lots of questions about escrow, insurance, inspections, etc.

Second, examine what you can actually afford, not just what the bank says you can afford. Banks are businesses and are interested in making profit. They also don’t take into account that you may have other monthly expenses, such as tithes, giving, daycare, or even expensive hobbies that would decrease the amount free each month for a house payment. We began by evaluating our budget to see how much actually was free for monthly payments. In doing so, we also accounted for other expenses associated with home ownership that would not necessarily be reflected in the mortgage, such as maintenance, higher utilities (including the addition of trash, water, and gas since we currently don’t pay these), internet, possible homeowners’ association fees, insurance, and taxes. Then we used online mortgage calculators to find out how much we could afford to pay. This told us that we could afford to spend up to about $120,000, which was much different than the $168,000 the bank told us we would qualify for. Be diligent in sticking to your price range. Many realtors will try to take you to houses “just a little” above your price range. We decided to just say no. We didn’t want to see houses a step bigger and better and risk not being satisfied with what we could actually afford.

Speaking of qualifying for a loan, it’s a good idea to get pre-approved before you fall in love with a house. This will save the heartache of finding your dream home and then finding out that the bank won’t approve you for what it will cost. It also makes your offer look better if you’re pre-approved and not just pre-qualified. This step was not as easy as I had imagined, as there are lots of different fees and many options to consider. We went to several banks to find out interest rates and closing costs. Be sure to ask for a Good Faith Estimate for closing costs, ask specifically if there are any other costs or fees not on the GFE, and make sure there are no penalties for early pay-off. It seems to me that it’s important to know yourself and your financial status and habits well before choosing a loan type and options. Here are some things to consider.

Down payments, PMI, 80-20, or 80-10-10?

A wise person pointed out that if we don’t have money down on a house, we don’t really own much of it at all. Optimally, we’d like to be able to put 20% or more down. Currently, we have enough saved for 10% down and closing costs if we want to keep something in our emergency fund (which we definitely do). Rather than pay PMI (insurance required in many places if you pay less than 20% down), we chose an 80-10-10 loan, in which we pay 10% down and have a second loan for 10%. The 10% loan is at a higher interest rate, so the only reason we are dong this is that we have plans to pay it off within one year. If we didn’t have a history of paying off loans early, this wouldn’t be a reasonable plan. An 80-20 loan means you don’t pay anything down at all – you have one loan for 80% of the price of the house and one loan for the other %20. There may be cases where this is a good option (like I said, I’m not an expert), but I personally would rent a while longer and save for a down payment rather than going the 80-20 route.

Thirty-year or fifteen year mortgage?

As for mortgage lengths, there are calculators to show you the difference you will pay in interest for a 15-year loan or a 30-year loan. For a $100,000 loan at current interest rates (and assuming you’re in the house for the duration of the loan), you pay $127,500 in interest over 30 years, and only $54,300 over 15 years. That’s quite a difference! Some advocate choosing the 30 year loan in case something happens and you can’t afford the higher monthly payments of the 15 year loan, but still make extra payments each month as if you had the 15 year loan. This takes quite a bit of self discipline, and frankly, most people won’t follow through.

Escrow or no escrow?

There are also different convictions about escrow (paying the bank estimated tax amounts monthly with your mortgage so you don’t have a large sum to come up with on tax day). Some advocate doing that so the money is definitely there. Others say put it aside yourself and earn interest on that money throughout the year. If you know you’ve never been faithful to put money into savings and not touch it, it’s probably a good idea to use escrow. Be honest with yourself on this one and also pay attention to fees for not using escrow.

Points or no points?

I kept hearing about “points” in association with mortgages but had no idea what anyone was talking about. I just figured that since in most sports, more points means you’re winning, points must be good, right? Well, not necessarily. Basically buying points means you pay extra in closing costs to lower your interest rates. Sometimes the interest rates offered assume you’re paying a certain number of points. We found that we were actually better off going for a little bit higher interest rate rather than buying points because it decreased our closing costs significantly (by about $2000). We plan to stay in the house about 5 years, and it would take longer than that for the higher interest rate to cost us $2000. We went with the lower closing costs but this is not the best option in every case. Evaluating this may take some time, but it’s well worth the effort!

After getting pre-approved and finding that “perfect” house, it is time to make an offer. I won’t say too much for this step of the process because I know it’s not a strength of mine. I only have two pieces of advice in this area: One, get comparables for houses recently sold in the area from your realtor – make sure they’re sale prices, not asking prices. Two, don’t let anyone pressure you into making an offer you’re not comfortable with or before you’re comfortable with making an offer.

Once the price was negotiated and our offer was accepted, the excitement of buying a house quickly turned to fear as we realized we were really about to make an actual purchase! So what do you do when you get cold feet? As a person who does not like making big decisions, I realized that this feeling is totally normal. We talked with some people and got down to the deeper issues of why we were having doubts. For my husband, the issue was the price. We had originally made a lowball offer and when they asked us to come up, we went too high too fast. For the age and size of the house, we may have offered too much. Going up so quickly probably hurt our bargaining power in the inspection stage. Once my husband realized that was the main issue he was struggling with, he had a lot more peace; the price was still well within our budget, and, because of the location, the value would continue appreciate. We’d still come out ahead after 5 years. For me, this was not enough. I was still in turmoil over it until I realized that every time I drove down the street, I kept eyeing the house for sale on the corner. We had our realtor show us that house again so I could make sure I’d be happy with the house we had chosen.

Currently, we’re in inspection stage. I don’t believe I could overstate the importance of finding a good inspector. Ours was recommended by some friends, and we are very thankful for his thoroughness. Many inspectors will just turn on the sinks and bathtubs briefly to make sure they work and don’t leak. Our inspector let them run for quite a while, and in doing so found that there is a major leak, and the pipes may be rusty. Replacing the pipes could cost us tens of thousands of dollars, which we are not willing to pay since we’re already offering top dollar. My advice to myself at this point is to know what I’m willing to pay and what I’m not willing to pay and to not be afraid to exit the contract if that’s what needs to happen. In the event the owners aren’t willing to fix major problems, another great house will come along if we’re patient.