Buying or Selling a Home
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First Time Home Purchase with Very Low Down

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By babyfrog
January 15, 2004

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First things first... You said that you're 31 years old with two children and still living at home with your parents. Since you did not mention any rent payments, I'll presume you're living rent free, but please correct me if you are being charged rent.

You mentioned that your salary is $3967.50 per month, which by my calculation puts you at $47,610 annually. Your expenses look like they run you about $1260 per month, and you do manage to sock away $650 per month between your money market fund, 401(k) and the investment club.

Quick question for you... $3967.50 - $1260 = $2707.50. $2707.50 - $650 = $2057.50. After your listed expenses and your savings, I see more than $2000 left over. You didn't account for taxes, so I'll make a rough guesstimate that 40% of your gross income gets taken by the government. $3967.50*.4 = $1587 for a rough estimation of your tax burden. Your listed salary, minus your listed expenses, minus your listed savings leaves you with $2057.50. Subtract the $1587 in taxes (estimated), and I see around $470.50 every month in income that you're not accounting for anywhere.

Do you know where that money is going? Do you pay rent to your parents? Chip in on the utility bills? Or are your other expenses higher than you think they are? Or did you just inadvertently leave out a few things... You list a credit card debt balance of $1400 and a money market balance of $2000. With a salary like yours and a listed set of expenses like yours, you ought to be able to save up a down payment, if you really want that house. Houses are expensive to keep. You need to pay the mortgage. You need to pay the utilities. You need to pay for the upkeep/repairs/maintenance. Even if you are quite handy, there are expenses associated with home ownership that go beyond the mortgage. And if you're not paying anything towards those expenses now, believe me, they can be a rude awakening.

First things first, you need to find out where all your money is going currently, so that you can afford not just to buy your house, but to live in it and keep it, as well.

You're looking at a house in the $150K - $185K range. For the sake of discussion, let's say you find a house for $185K. With no down payment, you'll have to borrow 100% of the money. There are creative financing options, such as an 80% first mortgage, 20% second mortgage that you can use to buy the house with little out of pocket expenses. I'll make a wild guess on interest rates and say 6% across the whole financing package. With a 30 year amortization loan, that gives you a payment of $1109.17 on the mortgages alone. Add property taxes and property insurance, and the numbers start to grow... Let's guess that your property insurance is going to be $50 a month and your property tax is 1% of your property value every year, or about $1850 a year or about $154.17 per month. Add the insurance and property taxes to the mortgage payment, and you're looking at $1313.34 in payments every month, just to keep the roof over your heads.

That doesn't include things like electricity, water, garbage, sewer, natural gas... You're saving $650 a month, and you have about $470.50 a month that you didn't account for in your post. Adding the two together, and you still only come up with $1120.50. That doesn't reach the $1313.34 mark that we guessed that you'll need to keep the roof over your heads, and it certainly doesn't pay the electric bill...

Before you buy a house, make sure that you can really afford the payments and the costs of ownership. Go through an exercise like I did in this post. Add up the mortgage costs (Principal + Interest), the other escrowed costs (Property Taxes + Property Insurance), and the utility costs that you estimate. Call the local utilities and ask them - they will likely be more than willing to help you estimate. Or, since you're living with your folks, ask your folks what they pay and use that as a starting point for your estimation...

Once you've added up your total estimated costs of just staying in the house, you can subtract out any of those things that you currently do pay. For example, if you pay some rent to your parents, you can subtract that out. If you pay a portion of the utility bills, you can back that portion out... What's left is an estimate of what it will cost you, above and beyond your current lifestyle expenses, to go and buy that house and at least keep the lights on.

Take that estimate, and save it. Every month. So I guessed $1313.34 every month just for the carrying costs, and for the sake of discussion, I'll add $250 in a guess of the net gas, electric, garbage, water, sewer, and telephone bills. That turns the total into $1563.34, in new monthly "keep the lights on" living expenses. If you can't save that much every month now, then you cannot afford the $185,000 house.

And don't forget, as a homeowner, you are the lucky duck who gets to take care of the roof, the air conditioner, the heater, the pipes, the lawn, the driveway, the toilets... Or you could pay someone to do that for you... So even after you figure out how to make the payments, you need to figure out how to pay for the "Stuff Happens" expenses.

So first things first. Figure out where your money is going now. Figure out how you are going to make the payments on your house. Try saving the cost, to get a feel for what your life may be like. And then, if you think you can do it, go looking for the house. Because the last thing I want is to see you, your wife, and your kids frozen to death in those Michigan winters for lack of payment on the gas bill or kicked out of your house back into your parent's house for lack of payment on the mortgage.

Oh - and as for your question on the interest only loan... Presuming that you can get the same 6% we guessed earlier, on that interest only loan, then your LOAN ONLY payments will be around $925.00 per month, for the interest. Compare that with the $1109.17 per month for the 30 year amortizing loan, and you'll see that the difference will be around $184.17 per month, or probably not as much as you had hoped. You may have seen those ads that claim "Buy a $300,000 house for $800 per month with our interest only loan." Well, if you read the fine print, you'll see that it relies on a teaser interest rate that doesn't last very long... The harsh reality is that those banks and financing companies will make money off of you...

Best of luck to you!

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