Ask the Readers: Buy a Home, or Max Out Retirement Savings?
Published on - October 26th, 2007 (by J.D. Roth) The toughest personal finance choices are those where your heart wrestles with your mind. Justin wrote because he’s found a great place to live, but it’s just on the edge of what he can afford. He wants help deciding what to do:
I’ve been renting for the past two years (and several years before that in college). My roommate recently bought a place, and that’s thrown me into the hunt for new housing. Either I buy a place, or find a place to rent alone. After an extremely bad experience, I refuse to room with a stranger.
I’ve found a condo with an awesome location and a near-perfect floor plan for my tastes. The place is being short-sold (sold for less than the current mortgage amount). I can probably fetch it for $195,000, though the decision is in the bank’s hands about what to accept. They are already sitting on an offer of $190,000, so there is a lot of time-pressure here. Other condos in the same building even are going for $240,000+. I know that intrinsically this is a great deal, and that I won’t find better in this price range.
Here’s the question: When I work out a monthly budget, including every cost I can think of, the final numbers are really tight. I worked out the budget with the assumption that I keep my current 401k contribution rate of 20%. I know I can’t keep up that rate forever, but at what point do I lower it? Is something like this worth lowering the contribution rate by 5% to give some wiggle room? Or is this simply a sign that I’m outside my price range?
A few things to consider: I have no debt. I have an emergency fund of $6000 established. Beyond that, I have about $6500 between savings and bonds to play with. The plan is for most of that to go to deduction points on the mortgage to get a nice rate. I do have other possibilities at a lower price range, but they aren’t as nice in location nor floor plan.
What’s the best course of action here?
Buying a home can be scary. It’s a huge commitment in time and cash. And as many people have learned over the past few years, what seems affordable on paper can be unworkable in the real world.
Still, it sounds as if Justin has a good handle on his finances. He’s been saving at a phenomenal rate. If I were in his situation, I’d probably be willing to accept the 5% reduction in 401k contributions in order to pick up a great deal on a home. There are two things for Justin to consider:
- If he does purchase the condo and lower his 401k contributions, he should consider bumping these back to 20% the next time he receives a salary increase.
- If his situation is appropriate, he might also find it profitable to ask for a raise now. If this ploy is successful, he might not have to lower his 401k contributions at all.
This isn’t a decision to be made lightly. A high housing payment can really put the squeeze on your monthly cash-flow, making life miserable. When Kris and I bought our current house, things were tight for a year or so. Now that I’ve reduced me debt, my cash-flow has improved. The housing payment is no longer oppressive, which means I’m less tense about my financial situation.
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Go for the condo if you are 90%+ sure that you will live in it for at least 5 years. Otherwise, the closing costs, etc. is not worth ti.
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JD, I agree that Justin sounds like he has a great handle on his finances and the suggestions you’ve made are good ones. One thing I’d like to add that I think is important not to overlook is how long he thinks he’ll be in the condo for.
The condo has a “near-perfect floor plan” for his taste but for how long? I’m guessing Justin is rather young (two years out of college?) so it’s probably safe to say that his lifestyle will likely change within the next 5-10 years or so.
If Justin decides to get married and perhaps even start a family in the next 5 years, will the floor plan still be perfect? Gone are the days when you could buy real estate for short term gains. I’m a strong believer that, if you can’t be nearly certain that you’ll stay in your house / condo for at least 5 years, you’re better off to rent. Consider realtor fees, closing costs, moving costs, etc. and consider that, if this turns out to be a short-term purchase and the condo doesn’t increase in value, you too could be short selling, just the guy / gal that lived there previously.
Don’t get caught up into thinking that renting is for suckers. It isn’t. I would suggest Justin make a list of reasons as to why he wants to become a home owner. He may just find that none of them are all that great.
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The younger you are when you make your retirement contributions, the more they’ll grow by the time you retire. Dramatically.
Also, I think any budget should have some breathing room, if possible. If you buy the condo and then lose your job or you just want to have more spending money, you won’t be able to free up that money very easily.
Rent.
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Wow, I wish I’d been this financially savvy when I was just a few years out of college!
I personally would cut back on my 401(k) contributions and buy the condo with the idea of eventually turning it into a rental property. A few things Justin doesn’t mention are how much of a down payment he’ll be able to make, how long it will take him to replenish his savings, and what the housing market is like where he lives (though it sounds like it’s extremely unlikely the value of the condo would decrease in the next few years).
Unlike Brandon, I think a two-year minimum stay in the condo would be sufficient, just thinking of tax purposes (hence the importance of market conditions). However, because he’s so young, I think it’s a great idea to buy what he can afford now, stay there for a while (say, until he is ready to start a family) and direct all income increases into savings.
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If your mind is set on buying, rather than finding a one-person rental, then you need to minimize closing costs as much as possible. It sounds like you’re not working with a realtor, that’ll save a chunk. Forget about paying points at the closing. The break-even point ~8 years in the future, and the odds heavily favor you moving before that time.
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Seriously, go for the condo. Even if the 401(k) drops back to 15%, that’s still a decently-sized contribution, and even with closing costs the condo is still very cheap. Normally I would agree that it’s a bad idea to buy if you intend to move within 5 years, but $190K for a $240K property is a huge bargain, and it means that a profit can still be made in the event of a change in circumstance. Go for it!
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Mathematically renters always come out ahead. There are intrinsic values to owning your own home but renting is the purely mathematical choice. With no children or spouse I would say continue to rent and keep building your retirement. If you really want to purchase a hone, and the market the way it is, you could buy a foreclosure for much less than a traditional sale.
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One should also consider the property value since the property is being sold at a discount, which will equate to immediate equity. Maybe you cannot realize that gain today but it is still a discount you need to keep in mind.
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I think it’s also very important to consider job security/flexibility.
After I finished school, I accepted a high paying position in a large firm and, after a few years, purchased a house. Some time later, after realizing there was no “light at the end of the tunnel” in my then current job, I started casually looking for other employment. A few months later, somewhat fortuitously, a really great position opened up. But, this public sector job required me to take a VERY BIG hit to my salary. I almost turned this opportunity down because of my commitment to my house/mortgage. (Given the market where I live, selling the house was not a great option — unless I wanted to take another big hit.)
Justin seems to be in better shape (and a better market) than I was in. But, I agree with J.D.: buying a house is not to be taken lightly; it is a serious commitment, and all possibilities should be considered.
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We’re at the end of an unprecedented run up in housing costs, and I can’t recommend that anyone spend any money in real estate right now, regardless of “how cheap it is”.
When I am faced with a decision in life, I always ask myself, “If I choose to do this, will it leave me with more options or less later.” As a general rule, I try to make decisions that always leave me more options. For this young man to choose to spend his money in real estate would leave him less options. He would be saddled with the mortgage, and quite probably would be unable to sell in any reasonable length of time if he needed to get out before the magical five year window was up.
Being financially responsible in your mid-twenties is wonderful, and I applaud this young man. But, he should allow himself the freedom his age affords. As a renting twenty, he could take new jobs in different cities if he saw fit. He could build a small nest egg and take six months off to sail the Mediterranean. He could spend a couple of years in the peace corps. He can live the freedom his age provides. He should not be making a RUSHED decision that could effect 30 years worth of decision making. There will be another condo. There will be time later. (Justin: You are making sound financial decisions, and in this market there is no clear difference between renting and owning. To quote an adage: if it ain’t broke, don’t fix it.)
Editorial note:
People seem to forget the whole way price is determined in real-estate — COMPS. Since this condo is going on the market for 190k, that means the condo, and all like it, are worth 190k. Not 200, 220, or 250 — they are all worth 190k. Do not get suckered into the fools game cheered by the realtors — most of whom would fail a micro-economics course. (I choose micro-economics as “all real-estate is local”.)
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Think really hard about this- I bought a condo a few years back (second home) because I got a great deal. I later realized I couldn’t really afford it and sold it. It was $178,000. I got a low interest rate, and my actual mortgage payment was around $600/month.
BUT- add taxes on top of this and a $295/month condo fee and it ended up costing me $1100 month- nearly twice what I thought!
Also- be aware that condo fees CAN and DO go up. Find out what the condo fee is right now!
I’d think about this long and hard…
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Justin is the buyer. A Realtor shouldn’t cost him a dime.
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I don’t get it…how do we know $190k is a steal? Three years from now if Justin is selling, isn’t it entirely possible that $190k could be overpriced?
I’m curious to know what a condo in this building would rent for. I think that would help us better understand this property’s value.
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Go for the condo. Your home is the single most important material thing affecting the quality of your life, and you can’t afford to regret not getting something you were 100% happy with. I once bought and lived in a place for investment purposes, and they were the most miserable years of my life (ie, it impacted on everything from social life, work, physical health and even mental wellbeing). I’d say this even if Justin wasn’t just choosing between property or pension- it’s worth cutting back even on staples to be happily homed.
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The post is a little light on facts . . . does he have 20% to put down, what about closing costs and prepayments for insurance and real estate taxes, etc. Sounds like he’s going to clean out his savings to get a lower rate and then he’ll have no cushion when the first house repair pops up (with Murphy’s law that will happen the first week). What about costs for moving, new furniture, etc. for the new place? What % of his income is going to go towards housing expenses?
Putting aside the retirement contribution issue, from the facts put forth in the post I’d be concerned whether he has enough money in general to afford this condo. While the condo does sound like a great deal, you don’t want to be house poor with no savings account.
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What I wondered, in reading this, is what the effect of that reduction in pre-tax withholding will be on Justin’s take-home pay. Simply the fact that he’ll be getting 65 cents on the dollar for that “extra” 5% of pay may mean it’s not as much breathing room as he’d hoped.
In fact, I think I recently saw an online calculator that would tell you what the effect would be on your take-home pay if you changed your 401k contributions to x amount, but I can’t recall where it was. Helpful, I know!
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First of all, I take issue with the statement “Mathematically renters always come out ahead”. You, sir, are no mathematician if you believe that. Please reference http://tinyurl.com/2u8ars
Justin indeed has much going for him, but I’m not sure it’s enough to warrant jumping into a mortgage. First of all, he needs to look at what percentage of his his monthly income his mortgage payment will consume. This needs to be the whole payment, too — the PMI, Taxes, etc. Many mortgage payment calculators (the ones owned by the banks) don’t include this info in the calculations and your payment ends up being a fair amount higher than the calculators told you it would be. Anyway, most analysts say that a good range for a mortgage payment is 25-35% of your income. If you get much above that, then you don’t leave much room for other financial goals.
As to the emergency fund, $6000 is a good start, but I would recommend working towards $10K-15K, especially if you plan to buy a place. Replacing a furnace or fixing some other huge problem could eat up that $6K in one fell swoop.
Lastly, don’t let the time element pressure you into making a decision. That’s one of the big tricks of the real estate industry. Honestly, if you miss this “deal”, another one will come along if you’re patient. The fact that you called the floor plan nearly ideal makes me think you’re trying to convince yourself to make this deal quickly. The worst thing you can do is be pressured into making a decision you later regret.
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If you’re budget is that tight I would have concern. You really don’t have that much money saved. Finally it sounds like you’re rushing into this. I would just wait. There’s plenty of condos for sale and just because this is a short sale doesn’t mean you’re getting a deal.
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Curious as to why Justin is choosing to buy – simply because the friend did? Because that’s a really important goal for him?
The answers to those could make a huge difference in whether or not living tightly is worth it.
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This is my first time adding a comment, after lurking for a long time. However, this is a very important issue for Justin and many others.
So, here are a couple of examples from my family.
My son, who is now 37, hasn’t had to work since he was in his late 20s. Why? Because he bought his first condo at age 18. He still owns it, along with a lot of other property and other investents. He and his wife (who also doesn’t have to work) live in a large house that they built at the beach in California. They travel the world and have time to devote to charitable causes.
What he did: While in college he rented out 2 of the bedrooms, which made his monthly payment. After graduation, it became a rental. Several years later he used some of the equity to get his next property. And so on.
Another example: My husband and I married young and had 3 children. We were broke. Yet we bought a home and eventually traded up several times to a home that was eventually worth a lot. We sold it, bought smaller, and ended up with a nice home free and clear and enough money to retire comfortably.
Justin, think of the long term. Will this condo make a good rental later?
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If you really want to own a place, then go for it. There are some home ownership negatives to consider though such as maintenance. If the oven or the dishwasher breaks you can’t just call maintenance to come fix it (how I miss apartment living sometimes). Not that it’s a deal breaker, but you will find that lots of things start to pop up that drain your money more than you had expected.
If the mortgage payment is 20-25% of your net pay, I’d say you’ll be pretty comfortable with it. Any more than that and I would pass for now.
Best of luck!
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Don’t buy a home (condo, house, whatever) unless you have enough down payment that your mortgage payment is less than 25% of your TAKE HOME pay on a 15 year, FIXED rate mortgage.
Don’t buy your first home (or move up/across in house) unless you are *completely* debt free (except an existing mortgage, if moving up/across) and have 3-6 months emergency fund.
New home buyer trends are to immediately do a bunch of work, upgrades, appliance replacement, etc etc in the first three years of home ownership. If you have a big hairy payment (more than 25% take home) and other debts, those ‘new home expenses’ are going to land you in debt up to your eyeballs, and then you’ll be normal.
“Don’t be normal. Be weird.” – Dave Ramsey.
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Wow, I was in nearly the exact same situation this summer. I wound up buying the $195,000 condo, and two days later someone bought an identical unit for $240,000. That was kind of neat.
A red flag to me:
Without enough money to at least put down 10%, I don’t think Justin is ready to buy yet. He shouldn’t buy until he can put down a minimum of 10%, and still have money left over to buy down points as well as some cash still in the bank to cover a few months worth of emergency expenses.
When you’re putting down less than 20% on the value of your home, you are either going to be stuck with private mortgage insurance (add $80 per month or so to your monthly costs), or you’ll wind up with an adjustable-rate mortgage that will eventually start ticking upwards.
If Justin already thinks it will be tight financially, he should also consider the other costs: the mortgage payment includes PMI, 1/12th of total property taxes, a homeowner’s association payment (could easily be over $150/month) and homeowner’s insurance.
It’s great that he’s able to put 20% into his 401k, but if he is looking to buy a home he should consider reducing that contribution to 10% or 15% until he gets more savings in the bank.
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We (my husband & I) were actually in pretty much the same situation- we’re a year & a half out of college, have a $6000 emergency fund, and are funding out 401Ks to our employers’ match (though not as aggressively as you are). We saved up a $10,000 down payment over the last year, and closed on a house this week. Admittedly, our area is very affordable, and our principal & interest payment will be less than our current rent- BUT, as other commenters have pointed out, home insurance, mortgage insurance, and taxes add up, making the monthly payment much higher than those convenient calculators might lead you to believe. Also, your $6500 will be eaten into by closing costs (unless the bank pays them for you)
If you want to buy a house, I’d suggest saving up purposely for a down payment (rather than just having money “to play with”), and, when you’ve hit your down-payment goal (whether its a percentage or an amount), then start looking for another ‘perfect’ floorplan, in a place you’ll commit to be for 6+ years. If you want to make buying a house a priority, that may mean lowering your retirement contributions. For us to get a down payment saved up, we saved aggressively. Now, our house payment (even paying 1/3 more than the minimum!) will be less than what we were saving per month + rent, and we can now save aggressively for something else- probably a car fund to replace the 15-year-old sedan we’re still driving.
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The Real Estate market in most parts of the country is starting to plummet as the credit crisis is revealed more and more. A lot of people’s ARM loans are kicking into a higher rate as the third year starts and they can’t afford the price increase so they are going into foreclosure.
Because of this, I suggest you think long and hard about if this condo is really the one you want. It’s a buyer’s market and there are many, many ways to find available housing at discount prices. Don’t rush into this one just because “you think you’ll love it”, or “it’s such a steal!”. I suggest you buy something, but something that works and doesn’t make you house poor and cause you to lower your retirement fund.
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Everything returns to moderation and knowing yourself. If you’re “chasing money” then you’ll find yourself in a perpetual “rat race” and things will always be “tight.”
With that said, remember that, as author, Mitch Anthony, says, “life is not about making money, money is about making a life.” Some of the life decisions you make have a “rate of return” that goes beyond monetary means. If your savings rate goes down by 20% but your “life enjoyment rate” goes up by 50%, the decision becomes easier…
You just need to remember the all-important moderation and knowing yourself…
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If the house is currently priced @ under market value, I think that Justin should jump on the deal.
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I would be very cautious. Justin has to make a change, but now is a poor time with housing prices freefalling. Finding a cheap one place rental and waiting out the downturn in prices is a much better choice. That also gives him a chance to accumulate more cash for a downpayment.
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I would say it depends on what he has for a down payment. If Justin only has a total of $12,500 available for a downpayment and he can only just afford it at a 30 year mortgage, then I would suggest skipping the deal and saving for another year or two. You might end up with a better deal if the housing market keeps dropping and it likely will for the next two years or so as more mortgages come off their discount rates.
Yet if Justin has 10% or more as a down payment and he can afford a 25 year mortgage, I would say go for it.
I know the feeling of really wanting a house, but you must NEVER fall in love with a house. There will always be other deals in the future.
Tim
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One of the ways we determine the line between affordable and unaffordable is whether we can still max out our retirement accounts (401(k)s, IRAs) with the new expenses. So, I’d take the issue of reducing retirement funds as a red flag.
I am also following the comments about purchasing issues with interest. We’re in the midst of buying another property that we plan to use both as an income property and a place we’ll live for a period of time, and we are struggling with similar issues of determining the price we want to pay, and whether to wait to see where the market goes. It’s nice to be in a buyers’ market for a change and not have to rush everything, but it’s still hard to be patient.
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I say if you have a fixed mortgage and it’s about 25% of your monthy incom and you have no other debt. You won the game. There is nothing you cannot afford at this point
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Justin, no one but you can make this decision. But I would recommend IGNORING any advice based on how financially beneficial home ownership has historically been. There aren’t any guarantees. I wouldn’t buy this house because of any real-estate investment notions. Buy a house because you want to be a home-owner and you’re ready to stay put for awhile. I’d also buy less house than you can afford. Even for the finally-savvy among us, there can be some unanticipated costs. My taxes went up quite drastically right after I purchase my home. Your condos fees may also rise, along with insurance, utilities and home-improvement repairs.
I’m in my 20s, a saver and I bought a house two years ago. I paid less than what I wanted to spend. I don’t know that I would make the same decision today I’m a worrier and it can be stressful and a lot of work. Home-ownership CAN limit your options. Don’t rush your decision either. There will always be another deal.
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I am not sure what the appeal of a condo. is, but I would prefer to buy a small single, family home over a condo because there are strange fees associated with condo. life, and it’s basically an apartment. That being said, I bought a house 6 years ago, and I haven’t had any problems with it. Yes, it’s good to have some money saved for emergencies, but try to find something that is in good condition to begin with so you can focus on saving money instead of buying and fixing things the day after you move in.
My dad also said that you should never fall in love with your house because you may prevent yourself from seeing great opportunities if you are too “in love” to move.
There are a lot of upfront costs the day after you move in-curtains, bathrugs, furnishings, dish towels, etc.. so don’t forget to take those things into consideration when thinking about costs.
Best of luck to you with whatever you decide, and let us know what happened.
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I would buy the place and lower the contributions for the time being. Make sure you check out the place thoroughly before putting an offer though. Real estate can be tricky – the agents bluff a lot about “there’s another offer” etc. If you didn’t use an agent to find this property, you might be able to talk with the selling agent to work out a better deal. (They’d have to split the earnings if there are 2 agents whereas if there’s only one, they keep it all).
Unless you plan to stay there long term (more than 5 years), buying the rate down is not really worth it. Even so, many people who *do* plan to stay at a home long term end up moving early because of jobs, growing families, or other events in life.
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I’d say go with the house, EVEN if you can just barely make it through if others are worth 240k. That’s an IMMEDIATE return of $45,000 – and unless you’re contributing that much per year in your 401k, I think you’d be silly not to – Buying a house IS a big investment, but well worth it, especially at that rate. Big business real-estate firms make money off the PURCHASE of a house, not the SALE. Cash in!
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“Don’t buy a home (condo, house, whatever) unless you have enough down payment that your mortgage payment is less than 25% of your TAKE HOME pay on a 15 year, FIXED rate mortgage.”
Um that is wrong. I agree that this would be a great ideal, but doesn’t reflect current realities. What if you can purchase a home for the same monthly payment as rent (or less)?
I would say that purchasing a home isn’t all about economics. Finances play a large role, but do not completely overwhelm.
Renting has advantages, more flexibility, reduced risk of repairs, etc.
But renting also has downsides. You don’t own the place, and can be forced to move, submit to inspections. You can’t control your home (ie no painting, changes etc).
You also can’t pick up and go to Zimbabwe as wasy. Tradeoffs.
My inclination would be to purchase the condo, if you can comfortably afford the payments. Also, check into rental restrictions as some condos limit the number of non-owner occupied units. Check the condo assoc’s financial reserves (VERY IMPORTANT – as this determines the ability to pay for common area maintenance, exterior repairs etc)
If you can afford the payment, and decide to live elsewhere you can rent the unit out, and have another stream of income.
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I wouldn’t worry too much about reducing the 401(k) contribution if you really want to buy as 15% is still quite a lot. The key question is why you want to buy now? It should be because you are ready to settle down somewhere for a few years, not because everyone else is. And you need to be confident that you can afford it.
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I wouldn’t stress on it. Keep putting money away and save up more down payment. The reason:
We are probably in for another 12 to 18 months of down turn in the housing market. I didn’t see where you are buying and the market is very local (in fact its going up in some places) but here is the assumption I am making:
If you are in a place that is already having short sales your location is one that is over priced and probably will start having more and more foreclosures as the rest of the mortgages reset.
if you have already seen a bunch of foreclosures then go ahead and take the plunge. However, I bet this is the first wave.
if I were in your case, keep saving putting stuff away and wait on the condo til next year. Late next year.
That’s my two cents however I just work in the mortgage servicing side of the business so I could be wrong.
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J.D., I’m sure you knew this topic would bring me out of lurking.
To be honest, “Justin” doesn’t give us enough information to provide well-informed advice for his situation. Additional details that are pertinent include:
- What city is this in?
- How big (sqft, bedrooms) is the condo?
- Is Justin making a down payment? (It doesn’t sound like it from the post.)
- Will Justin’s loan be a fixed-rate?
The financing questions are especially important, since one of the main benefits to home “ownership” is having a fixed payment (aside from taxes) as your income grows. Without a fixed-rate loan, that advantage disappears.
The questions about what city and the size of the condo are important in assessing the question of “is it a good idea to buy the condo at all.” Ask yourself: “Why is this a short sale?” Doesn’t that mean that the value of the condo dropped since it was mortgaged? Is a 2-bedroom, 1,000 square-foot (or whatever it is) condo really worth $200,000? Really? Given the current state of the real estate market, don’t you think there’s a good chance that the value will continue to drop? Why stretch your finances to buy into a declining asset?
Lastly, although Justin is clearly trying to be somewhat thoughtful about his decision, the use of phrases like “awesome location and a near-perfect floor plan” reveal that he also has already become highly emotionally invested in this potential purchase. Honestly, high emotional investment + low financial investment (little to no down payment) + stretched finances = a recipe for disaster. That’s exactly what has gotten thousands of people into the foreclosure mess that we’re now seeing unfold across the nation.
There’s not enough information here to give Justin concrete advice, but my general advice given the assumptions I’ve stated above would be to hold off, and rent somewhere cheap for the next few years. Your finances will thank you.
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I don’t know about the rent vs. buy decision (I’ve only ever rented) but I want to add that a nice house can be worth the extra money.
When I quit my day job to go freelance, my husband and I decided to move into a cheaper apartment. After a few weeks of looking at shoebox-sized duplexes with no yard and other downsides, we found the perfect place for a little *more* than we were currently paying.
We agreed to move in that day; it’s totally worth it. My house is beautiful, and we’re in a convenient part of town. There’s a yard for the dogs to run around in, and space for a garden patch, a washer and dryer, a kitchen big enough that a few dirty dishes don’t paralyze all the sink and working space.
For a small increase in rent, we got lots of things that are important to us and probably save a bit of money – like not going to a laundromat, not having the dogs destroy stuff when they get bored (that fenced yard is a godsend) and the efficient kitchen design makes it so easy to cook a meal rather than give up and eat out.
So, my advice to Justin, if he’s not sure whether the cost is worth it, is to ask whether the condo is worth the extra costs to him? If it is, he’ll find room in his budget somewhere, just like you’ll find room for a kid or a pet or a hobby you love. But if it’s not worth it, keep looking.
And one last thing – it doesn’t matter whether $190k is supposedly a deal compared to the other condos. It only matters whether *you* get $190k of value out of it.
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There’s a lot of great comments on here warning Justin to be cautious about buying into today’s real estate market, but there are a few nonsensical comments as well that I’d like to take a moment to address.
Russ @ 6: “$190K for a $240K property is a huge bargain”
Hank @ 35: “EVEN if you can just barely make it through if others are worth 240k. That’s an IMMEDIATE return of $45,000″
These comments seem to be coming from a mindset that says home prices never go down. This is demonstrably false, and is in fact happening right now all across the country. If this property is sold for $190,000, then it is worth $190,000—no more, no less. In fact, if its previous sale was $240,000, and it is now selling for $195,000, the value of this condo has declined 19% since the last sale. Who is to say it won’t drop further?
Saving Freak @ 7: “Mathematically renters always come out ahead.”
As someone else already pointed out, that’s just plain false. I hope you didn’t get this misguided notion from my guest post. It is true that at the moment, in many markets renters will come out financially ahead of home-buyers, even given a 10 year or longer horizon. However, there are still some markets (mostly in the mid-west and Texas) where buying is actually a better deal than renting, and in a historically “normal” market, buying is usually a better deal.
Jerry in OC MD @ 12: “Justin is the buyer. A Realtor shouldn’t cost him a dime.”
That’s funny, because I thought that in a home transaction the only person that comes to the table with any money is the buyer. Sorry, but “an agent doesn’t cost you anything as a buyer” is a marketing lie that’s perpetuated by the real estate industry.
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I’m not sure I have any advice for Justin – as others have said, there are too many blanks in the info to fully evaluate this. However, I would like to suggest one thing for him to try. There are plenty of retirement calculators out there – pick one, or several even, and run through them using your current 401K balance – try them with both the 15% and the 20% contribution. I always try those calculators with very conservative estimates (higher inflation rates, lower raise rates and lower returns on my investments) Based on your relative youth, you may find that with compounding, the difference between the 2 contribution rates may be just how much money is left over for your heirs. If, instead, the calculators predict that the rate will be the difference between a nice living and eating cat food in your golden years, well, that would give pause to this purchase idea, wouldn’t it?
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It is very difficult to look at your own financial situation objectively when you have found home that you really want or think of as near perfect.
If your budget is tight with every possible thing you can think of included, than that doesn’t leave much room for the stuff you didn’t think of. Have you ever been faced with an unexpected cost? It happens to us all. Also, $6000 is a pretty small emergency fund for a single homeowner.
If you are young and single and thinking about paying points, ask yourself how likely is it that you will be keeping the mortgage long enough to recapture that cost. Have you even thought about what life will serve up over the next few years?
Lastly, making a purchase decision under time-pressure may be ok if it is 9:59 AM and they stop serving breakfast at 10, but it’s probably not a good idea to purchase a first home under such pressure. There will likely be other homes, possibly that you will like even more, that you can take some time to evaluate the merits of such a large purchase.
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I wish people wouldn’t spread the lie about renting being ALWAYS better then buying: I could go into a sociological examination of how this can only hurt the poor, and only benefit the upper class, but i won’t.
I’ve done the math, and it’s almost NEVER worth paying for points! Also, make sure you aren’t paying PMI, if at ALL possible. Another thing to consider with a condo is the Condo Fee (& taxes). Too many people don’t count those in when they are looking at a place to buy.
But seriously, dude, you can SO afford to cut your 401(k) down by 5%points to save on housing.
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Don’t buy the condo. It’s luxury disguised as a necessity (i.e., a place to live) and if it’ll put you at the edge of what you can afford, it’s a bad idea. Any time a person is living the highest lifestyle they can afford, it’s a bad idea if they want ever to get rich. What if your employer goes under? How many payments will your emergency fund cover (after using it for food and the like)? The whole thing just leaves you too vulnerable.
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I would only consider buying a condo or a house in today’s market if I was absolutely sure I wanted to be in it for the duration of raising a family. Read up on the likelihood of a housing recovery. Check out http://globaleconomicanalysis.blogspot.com/2007/10/when-will-housing-bottom.html for example.
Even if you stay in it for 5 or more years, what happens when you want to sell and the price hasn’t recovered yet?
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uh, I just skimmed the other 43 comments and it didn’t seem like anybody addressed this, so I apologize if this ground has been covered before, but, if “Other condos in the same building even are going for $240,000+” why on earth would the bank short it for $195K? Are they idiots? Did the forclosee rip out and cart off $45K worth of copper piping and granite countertops?
I’m not a realtor, but simple common sense tells me that either the other units aren’t worth $240K, or THIS unit is not worth $240K.
No bank is going to walk away on a $45K investment just to get the property off their balance sheet when they could likely wait a couple months and get a buyer (if it is indeed worth more than the short sale price).
Justin’s realtor is deluding himself, and trying to delude Justin as well.
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I was thinking the same thing as @47. I’m not convinced this condo is a bargain. Someone else thought it was only worth $190,000. That’s a lot less than $240,000. And if another one sold for $240,000 was THAT person paying a fair price? Or were they bamboozled by the market and paying a hideously inflated price which they’ll regret? It’s hard to say. (Has Justin tried Zillow.com to check? But even condos brought recently may not be a good comparison if the condo-price is in freefall.) I’m worried about not having much spare cash or wiggle room. If this is not the sterling investment that it appears to be, this could be a bad choice. And there are ALWAYS other places with good location and floor plans. Not having the pressure to buy from the roommate situation would allow more choices.
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Justin, congratulations on such a GREAT savings rate! You are an inspiration!
Now, on to your decision. I agree with “The Tim” that you really haven’t given us enough to go on. There are a lot of factors in your situation. We don’t even know where you live, so our opinions about whether or not the condo is a good deal are baseless.
I do have a few tips for you, though, as you’re pondering your options…
First, consider the amount of money you’ll be spending on top of that mortgage payment. Think about condo fees, transportation to and from services (if you are moving to a new area, this cost may change), maintenance, furnishings, utilities, and taxes.
Next, look to see if there are any pending assessments. After my husband and I bought our first house, we were blind-sided with a $1k assessment for new road construction. Ouch!
Finally, make sure you look at the budget documents and ask lots of questions. If it’s new construction and the builder is still handling things, the association fee may jump significantly when it’s turned over to the residents (been there, done that).
So, that’s my $.02 for the time-being. Keep in touch. I’d be interested in knowing what you decide to do. Good luck!
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I have to agree with Telly,icup and others…
There is no such thing as a “deal” in real estate. If you can buy it for $190k then that’s what it’s worth.
There are a million condos out there and the market is going down…wait until you can afford one.
Mike
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