First time home buyer loan

[MickZagger]

My folks are pushing me to buy a house. 3% down for the 1st time home buyer loan and ridiculous tax breaks for my 1st year. My brother wants to live with me for a little while. We both work at the same place, doing the same job. He's 5 years younger. Been looking at homes around North Portland (spendy neighborhood). Its a huge responsibility to buy a house. I'm 28 years old, soon to be 29.

How old were you when you bought your first house? Any words from the wise?

 

[SlyPokerDog]

Buy a triplex or 4plex. You can do it with a first time buyer FHA loan. You will only be debt loaded for 1/3rd to 1/4th of the value of the loan because you will have rent coming in. In a few years then you can buy a regular home because the bank will look at your plex as investment income.

 

[MickZagger]

Buy a triplex or 4plex. You can do it with a first time buyer FHA loan. You will only be debt loaded for 1/3rd to 1/4th of the value of the loan because you will have rent coming in. In a few years then you can buy a regular home because the bank will look at your plex as investment income.

Yeah, my dad is kind of steering me that way.

 

[JfizzleBlazer]

Bought my first home at 24 at the down turn of the economy. Sold it and bought a better house last year. Try to look for good deals. If you can find a foreclosure that you can put a little sweat equity into it go for it.

 

[MARIS61]

Buy a triplex or 4plex. You can do it with a first time buyer FHA loan. You will only be debt loaded for 1/3rd to 1/4th of the value of the loan because you will have rent coming in. In a few years then you can buy a regular home because the bank will look at your plex as investment income.

Unless Mick has a minimum of $20,000 cash left for liability insurance, maintenance, repairs, vacancies, vandalism and legal fees to deal with the multitude of issues that come with renters, this is a quick way to lose everything he now has and possibly be faced with foreclosure and/or bankruptcy. If a tenant cooks a little meth and gets caught your property may be condemned, razed, and you will pay the bill for it. And the bottom line is you will still be living in an crappy apartment which you could just rent and not lose your ass trying to keep it.

A rental property will be beat to shit in a matter of months, will not build any measurable equity, and it can take upwards of a year to actually get rid of a problem tenant. Plus, you will live in a shitty neighborhood with shitty neighbors. After a couple years of having no time to even enjoy your (home) you'll likely be ready to cheap-sell it and run.

Buy a nice home, as new as you can get, not too big (size=maintenance cost) but make sure it has 2 bathrooms or it will be a bitch to re-sell when the time comes. Single-level homes are the easiest to resell, a second story rules out most buyers with seniors in their family. A neighborhood with a lot of rentals or industrial/commercial property also kills your ability to profit from home ownership, as does NOISE (trains, traffic, airports). A more recent red flag that kills resale value is a neighbor with barking dogs in the yard. Especially pit bulls or any large dog that might be scary to some people.

Home buyers generally shop in contrast to how renters shop. Most renters want to be on a bus line, close to shopping, don't care much about the neighbors or neighborhood condition. Home buyers are polar opposites from that.

Mick has a decent paying union job and could buy a nice home in a nice neighborhood and watch his equity grow between 5%-20% a year for the foreseable future. And still have free time and money to spend enjoying it.

I'm not saying owning rentals is a bad idea, if you have a home already. I'm saying it's a bad idea to risk your chance at home ownership on it. Buy a home, then watch for a good deal on a rental on the side.

 

[donkiez]

Maris has good advice. I like the plex option but he's right, they are often in lesser neighborhoods. For livability and resell I would stress two bathrooms as most important. Also look for deals in places that could be easily fixed, but dont underestimate the work required in fixing something. Kitchens and bathrooms are where most of the money is at, say find a place with a nice kitchen and bathroom that just needs some tile and paint can really go a long way. Older houses are nice and have a lot of character but often need more work and were built in a time when the living standards were different, ie small bedrooms, bathrooms, and kitchen.

 

[MARIS61]

And ALWAYS get a professional home inspection.

 

[BLAZINGGIANTS]

Bought my first place at 23 at the height of the market. Cleaned it up nicely, sold it 2 years later well after the crash began for $30K more than I purchased the place for. There are some good deals out there right now, so if you can make it happen, it's a solid time to buy. Maris offered a lot of good advice - my advice would have been very similar to everything he said.

 

[JfizzleBlazer]

If you don't mind buying in Vancouver you can still get good deals there currently. Same with Gresham. People think these areas suck, but they have areas that are really nice and safe. I know you've lived in Vancouver before, so you'd be good at knowing which areas are safe or not. In Gresham, anything past 201st is generally decent. If you get out by Gresham Fred meyers where Burnside and Powell meet, you can find some really nice neighborhoods.

 

[EL PRESIDENTE]

Get the shittiest house in a great neighborhood.

You're young, live in a fucking cool place, not the boring ass burbs, bruh. When you're poppin' out babies and shit, then worry about good schools otherwise you'll just be dealing with asshole cops and their speed traps and bored boring people.

 

[PtldPlatypus]

Get the shittiest house in a great neighborhood.

You're young, live in a fucking cool place, not the boring ass burbs, bruh. When you're poppin' out babies and shit, then worry about good schools otherwise you'll just be dealing with asshole cops and their speed traps and bored boring people.

No, do exactly the opposite. Get the best house in a terrible neighborhood, start the gentrification process, and profit.

 

[magnifier661]

I agree with Maris. Remember location is the best rule of picking the house. Example in my location: a 2,000 sq ft home in east Lancaster cost around $220k. The same house in West Lancaster (same builder and design mind you) cost $480k.

When the market went to shit about 5 years ago, the west side didn't drop as much as the east side. Someone making much less money will be more willing to foreclose their house. Higher income earners usually will try and ride out the crash. Less foreclosures in your area, the better the value.

 

[THE HCP]

I made minimum wage til I was 28, so I got a late start. Wish I had been able to buy earlier now! Crappy little house in the BEST neighborhood is the way to go bro! You won't regret it.

 

[Daweez04]

Bought my first house at 27, will turn 29 on Monday.

If you aren't in a rush, look into short sales. I got my house 20k+ below it's appraisal, and was pretty much turnkey. Needed new paint and carpet, other than that was ready to go. I had the offer in for 6+months, but was well worth it. Plus you can back out of a short sale at anytime, so if something else comes along, you can walk.

Buy the smallest house in the neighborhood, I am surrounded by 4 and 5 bedroom houses, mine is a 3 bedroom 1500 sq ft. It's value has skyrocketed since I bought.

Make sure whatever you buy, you can afford it without your brother paying rent. Make his contribution being icing on the cake, that way when he moves out, and you want to live alone, you can. Plus you will want the extra cash to make the house your own, trust me. ( I have a buddy renting a room now, it is freaking awesome having basically 100% profit given to me every month)

Get a Realtor that knows the area, best if you find someone who grew up in the area. Make sure you tell them your timeline and that you aren't going to rush into anything. If you end up looking on the west side, let me know, I have a guy.

Get a professional inspection.

Be ready to do chores. You don't have a super when you own your home, you are the super.

 

[donkiez]

Be ready to do chores. You don't have a super when you own your home, you are the super.

haha this took the most getting use to for me. You know that bulb thats burned out and you walk by it 1000 times and always think, someone should change that. In 2006 I bought my house which was built in 1944. It has so much character but with all my upgrades and fixes I really under estimated how much effort and money it was going to cost me. To give you an idea since I moved in I bought new windows, reinsulated the house, built a paver stone patio, built a shed and wired it, ran wire to my detached garage, painted the whole of the inside twice, partially finished the basement, completely refinished a spare bedroom in the basement, installed gas for a dryer, replace the refridge, dishwasher, and microwave, repaired the roof, remodeled and tiled both bathrooms, new kitchen countertops, tiled the fireplace, built a dog run, and did tons of landscaping for my garden. Add that to the daily chores of upkeeping a house and it keeps me very busy. I also got a big yard, which I thought I wanted till I mowed and raked it for a few years. Ive gotten a lot of enjoyment out of it all though and it makes me feel like my extra money is being useful and invested, but I do look forward to the day I will downsize and cash in. Also with all the work it needed, and with my limited budget and time, it took years for it to be the house it was meant to be but now its how I want it, but there is still a ton of work that really needs to get done.

 

[Denny Crane]

I've done well buying the worst houses in the best areas. You get a discount on the price and with some sweat equity, you can improve the property to the point you have a lot of difference between your loan amount and price you could sell for (e.g. equity).

Be sure whatever improvements you envision for a property aren't overdoing it. If you have a house you want to sell for $150K over the price of the house next door, it may be a hard sell. There are certain neighborhoods where that doesn't matter, though. Those are ones with all custom houses.

 

[donkiez]

Thats a good point. Every neighbor hood has a price cap. For instance in my neighbor hood I figure the most I could ever hope to see from my property is $350k (in todays money). I bought it for $225k, so I had a lot of room for growth. You can sort of figure out the neighborhoods house price cap by looking at house values on zillow, check out the nicest comparable places in the neighborhood and figure thats about where you can potentially get your house to. Its near impossible to get your place more valuable than theirs and realistically you will just get it in the ball park so Ill knock of 10%-15% in my head. Then estimate the cost of all the improvements you want to do (and double it because you underestimated) and you'll get more of an idea if its worth it. The fun part of owning a house though is that its yours so some of your improvements are for you not for the home value, quality and enjoyment of life.

 

[Denny Crane]

If you buy for $225K and put in $125K worth of improvements, you're only breaking even

I think that having a super nice upgraded place is going to fetch top value for the neighborhood only, but it will sell faster than a dump at the same price ...

 

[magnifier661]

The key is upgrading, but not to a point that it's not eating into your equity.

For example: Putting in hard wood floors could cost you $10k, but the only true upside is the possibility of your house selling before the stock home down the street for the same price.

A pool cost at minimum is roughly around $20k. The equity for a pool is roughly $10k.

Travertine or marble tile is very expensive flooring, but you can get the same "value added" with using slate or even stamped tile.

Appliances are the biggest factor. Adding high end appliances can increase the value, but not to a point to warrant the equity increase. But if you use mid grade appliances, that are about 60% the cost of high end appliances, you still get the "wow factor" yet paid 40% less.

If there is any advice I would give its buying the cheapest house on the most expensive block that requires some upgrading. Throughout the years of living there, you work on each part of the house one at a time. When finished with the kitchen, then move onto a bathroom. NEVER go crazy unless this is the house you want to stay in forever. Also, don't be suckered into the 5/1 arms or shit like that. Also, the 15 year loans look great because so much of the principle is getting knocked off each year, but this is a leveraged investing.

What is leveraged investing?

Lets say you find a house that cost $100k. Most the time, you must put down 20% to start the loan. So basically, you are getting a $100k home for 20k. Now if that home increases value in 2 years to, lets say $220k, then there is a capital gain of 120k. You can sell your house, get back your 20k deposit, earn tax credits throughout the entire time of owning this home, and make an additional $120k (usually at a 15-20% capital gains). Basically you spent 20k to make 120k.

But this only works when you have a home in a neighborhood that has a better chance of growth. Hence the cliche "Location, location, location"

 

[JfizzleBlazer]

There are usually only two out of three items you can get when buying a home.

Price, location, home.

Pick two. Because you'll never find all three being available for a good deal.

 

[Denny Crane]

Except on a $200K mortgage, you'll pay $418,000 for the loan over its lifetime.

 

[JfizzleBlazer]

While a 15 year mortgage limits the interest rate, I'm more of a fan of the 30 year mortgage for a couple reasons.

First, if something happens and you lose your job, a 30 year mortgage is must less of a burden on you because it will be a little easier to scrape together enough to pay each month.

If I'm doing well and have extra money, I can make additional principal payments every month with no penalties. So it's not like I have to abide by making the minimum pmt every month and really waiting an extra 15 years to pay off my home.

 

[Denny Crane]

Pre-paying principle shortens your loan, it doesn't reduce the principle and interest payments you make. The banks collect their interest up front.

 

[Denny Crane]

See this: http://www.mtgprofessor.com/a - biweekly mortgages/alternative early payoff plans.htm

 

[magnifier661]

Except on a $200K mortgage, you'll pay $418,000 for the loan over its lifetime.

I guess you missed the part when you sold it after 2 years.

 

[JfizzleBlazer]

Pre-paying principle shortens your loan, it doesn't reduce the principle and interest payments you make. The banks collect their interest up front.

It does lower the interest you pay over the life of the loan.

http://www.bankrate.com/finance/mortgages/pay-extra-toward-mortgage-principal.aspx

And play around with this

http://www.bankrate.com/calculators/home-equity/additional-mortgage-payment-calculator.aspx

You might not be saving much based on tax breaks from mortgage interest lowering your taxes, but that all depends on where you live and what your taxes are like.

 

[Denny Crane]

Sure. If you pay off the whole loan right away, you'll not have to pay any of the interest.

The bankrate article supports what I said.

Now, to your question: I'm not sure if you've thought that plan through. Your interest payments are based on your outstanding loan balance, not on your monthly principal payment. If you pay next month's principal payment, you will save a little interest, but not that much because your overall balance hasn't been reduced by that much.



And the example he gives is really aggressive. Paying two full extra mortgage payments a year turns a 360 month loan into 286 months. You won't get bills from the bank that decline as you pay extra toward your principle.

 

[JfizzleBlazer]

Sure. If you pay off the whole loan right away, you'll not have to pay any of the interest.


The bankrate article supports what I said.

Now, to your question: I'm not sure if you've thought that plan through. Your interest payments are based on your outstanding loan balance, not on your monthly principal payment. If you pay next month's principal payment, you will save a little interest, but not that much because your overall balance hasn't been reduced by that much.



And the example he gives is really aggressive. Paying two full extra mortgage payments a year turns a 360 month loan into 286 months. You won't get bills from the bank that decline as you pay extra toward your principle.

Sure I'll save a little interest, but if I make that additional payment every month, I can save myself from paying $20,000+ In interest over the life of the loan as stated in the example.

You act like two months is a lot to be prepaying, but in the example given, that equates to only an extra $100/month.

Uhhhh what? You said the banks get their interest up front, which is not true. Interest is determined each month based on oustanding balance, you don't pay off the full amount of interest first, then total principle afterwards

 

[Denny Crane]

It is true. In month 1, you pay $350 in interest. In month 280, you pay $50. I'd call that collecting interest up front. If you pay $50,000 in month 1 to pay down the principle, you'll still be paying real close to $350 in interest in month 2. But your loan would be paid off in 15 years.

If you want to pay $50K and reduce your payments, you refinance the loan. You'll save way more that way because the interest on a $50K new loan will be way less than the interest on the first 15 of the bigger loan.

$100 on a $500 payment is 20% extra. If you make a lot of money, the $500 may be peanuts. Realistically, people buy what they can make their payments on. The price of the house matters less than if you can afford the PITI. And if you're remodeling, you'd likely want to spend the $100 on drywall and paint, etc.

 

[JfizzleBlazer]

It is true. In month 1, you pay $350 in interest. In month 280, you pay $50. I'd call that collecting interest up front. If you pay $50,000 in month 1 to pay down the principle, you'll still be paying real close to $350 in interest in month 2. But your loan would be paid off in 15 years.

If you want to pay $50K and reduce your payments, you refinance the loan. You'll save way more that way because the interest on a $50K new loan will be way less than the interest on the first 15 of the bigger loan.

$100 on a $500 payment is 20% extra. If you make a lot of money, the $500 may be peanuts. Realistically, people buy what they can make their payments on. The price of the house matters less than if you can afford the PITI. And if you're remodeling, you'd likely want to spend the $100 on drywall and paint, etc.

No Denny. You don't refinance because you have 4k in closing costs from the refinance unless it's really a lower interest rate.

Go here
http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx

I entered a 100k loan, with 30 year mortgage, 4.5% interest rate, then told them I would be making an additional principal payment on my initial payment. Guess what? My first interest payment was $375 and my second was $187, not $375 as you stated it would be because interest is calculated on oustanding loan balance