GRS-reader Luneray is in the process of buying her first home. I've been following her weblog with interest, as I well-remember the stress from the two times my wife and I purchased a house. Here, with permission, I am reprinting the first installment of her Seattle homebuying adventure. (Bold emphasis added by J.D.)
Oscar and I made a big leap into True Adulthood today. We've decided to buy a house, and we spent the afternoon with a realtor. Unfortunately, we hadn't heard from our mortgage broker to see how much we'd prequalified for, so we don't know how many of the houses we saw, if any, we could actually afford. I hope we qualify for $180k because that means we could buy a house that isn't a total dump. A lot of the places we looked at have been rentals and it's really amazing what some renters will do to a place. (To be fair, a lot of landlords don't give a crap about maintaining their properties either.)
The realtor started out with a list of 79(!) houses that met our criteria. We narrowed it down by limiting the price to $175,000 but that still left 35 on the list. We walked through ten vacant houses and drove by at least five more.
There are some important things I learned today:
- I don't know anything about architectural styles. When we met with the realtor, he asked us how we felt about ranch style houses, and I said that I don't like them. But of all the houses we saw today, the ones we liked the best were all classified as “ramblers”, which gets lumped in with ranch style. I guess what I should have said was “I don't like houses with long hallways.”
- What I mean by “needs cosmetic work” and what a realtor means by that phrase are two completely different things. To me, “cosmetic work” means I move in first and make the changes as I live there — for example, remove wallpaper or paint cabinets. It does not mean that I have to clear out all the junk, fumigate it, and totally replace the floors before moving in.
- Any room can be considered a bedroom, even if it's a section of the basement with unfinished concrete walls and floors, no windows, no door, and water marks on the walls from previous flooding.
The first house we looked at was very old, very quirky, very charming, and I liked it a lot. It needed some work — everything was functional and in good shape, but the kitchen needed a remodel for efficiency reasons. The price was good, the neighborhood was “transitional” — meaning it's a good thing that we have a rottweiler/pit-bull mix — but the house didn't have a proper foundation. It was built on concrete blocks, but it's survived 105 years and at least two major earthquakes. I wonder if it's possible to put in a foundation for about $20k, because that was the price difference between that house and the cheapest of the next houses that we liked. (To be honest, I don't think Oscar would be interested in this one unless it were truly the only one we could afford.) $149,900
My favorite of the houses was a little rambler that had been inhabited by the same person for the last 50 years. A lot of the furniture is still in the house, and it was like entering a time warp. But in a good way. The kitchen was small, but efficient, and the bedrooms were decently sized. And they were true bedrooms, even if one did have a freezer in it. (Good for those hot summer nights when you really want an ice cream bar but don't feel like getting out of bed.) $159,950
One house had a fantastic yard. It was secluded and well landscaped. The house itself was fine, too, but needed some cosmetic work (by my definition of the term). Orange and gold shag carpeting? Gotta go. Gold and orange wallpaper? Outta there! And the dark wood paneling covering every other wall in the house? What were they thinking? Was it popular once to make your house as dark as a cave? And let's not even talk about the rust-red carpet panel squares glued to the hardwood floor in one bedroom. $174,950
One house was a “flip”. Someone bought specifically as a quick turn-around investment. I guess you have to be careful with flips because sometimes a person will do extremely minor changes (like painting) but nothing else. In this case, the person did a lot of work: revamped electrical (to code, I hope), new floors, remodeled bathroom. This place also had a nice basement and nice yard. The yard wasn't really landscaped, but the backyard was quite large. And it's within walking distance to a nice yarn shop! $175,000
The final place we saw was technically three bedroom even though one of the rooms was so narrow that it would work much better as an office. This place had a nice kitchen, a great deck, and a very large yard (big enough for a nice veggie garden and space for the dogs to run around). It was on a busy street, but the front windows were triple-paned so it was actually pretty quiet inside. (Heck, we live next door to a bar. Almost anyplace would be quieter than the place we live now.) The only thing I didn't like about it was that the washer and dryer were in the basement, which was only accessible from the outside. Not a deal-breaker but not ideal. $169,900.
Of course none of these houses is actually in Seattle. None of these houses is even in King County. They are all in Tacoma, within two miles of the Tacoma Dome Transit Center, with its frequent express buses to Seattle.
Making the Offer
We looked at more houses today, but we didn't see anything that we liked more than the 50s time-warp, so we made an offer on that. You remember the 50s time-warp, don't you? The one with the freezer in the bedroom? It is a very cute house, actually.
The house has been on the market for months. It's an estate sale, and the heir lives in California. I don't know if buyers just aren't interested in the house, or if the heir is just asking too much. The price has been reduced a few times, but the realtor still thinks it's too high (based on recent selling prices of other houses in the area that are the same size and in similar condition). So we offered $5000 less. If we get that, great. If she won't budge from the current asking price, that's fine too. As long as the inspection doesn't turn up any fatal flaws, then we are okay with the current price.
Three days later…
The shock and enormity of actually buying a house are starting to sink in.
Last night, Oscar and I signed and initialed loan papers. Lots and lots of loan papers. I'm having trouble wrapping my brain around the concept that mortgage payment doesn't mean house payment. Rent is rent. My current rent is $950 a month (which is below median for this neighborhood). The mortgage will be about $1150, which is about what I expected. However, the house payment is currently estimated at $1300, adding in taxes and various required natural disaster insurances. Homeowners insurance is separate. A person may not have a mortgage, but they will always have a house payment.
My big fear right now is: Will we actually be able to afford to live in this very modest, extremely inexpensive (by local standards) house? We already live a pretty pared-down lifestyle. We will essentially be doubling our housing costs, plus assuming all the maintenance expenses. I just got a promotion, but I haven't started the job yet. The earliest I'll see that salary increase is October 10th. (And you know that the raise is never quite as much as you expect it to be.)
Oscar's supervisors said he'd be hired permanently at a higher rate, but they haven't mentioned anything about that lately. I'm counting on him getting hired at the rate they promised. If that's not going to happen, then I'd like to know now so that I can legally back out of the mortgage deal, hopefully without forfeiting the earnest money.
I'm in the freak-out stage right now — in time I'll be able to address my concerns more rationally.
Dealing with Debt
This house buying experience has been a real eye-opener when it comes to finances, besides the overwhelming shock of sheer indebtedness. I've been trying to figure out a way to get everything paid off as soon as possible.
I've been reading about the debt snowball method of debt reduction. Conventional fiscal wisdom says that the smartest plan of action is to pay off the debt with the highest interest rate first. From a fiscal standpoint, that's probably the wisest choice, because you pay the least amount of interest this way. However, humans are flighty creatures, prone to frustration and despair. If you are like me and have multiple individual debts (seven separate student loans!), and if your loan with the highest interest rate also has one of the highest balances, then it will take a long time to get that loan paid off.
The debt snowball technique is not the most prudent financially but it's good psychologically. We humans like encouragement, and we are likely to continue the good work when we see results. With this method, you make aggressive payments to pay off the loan with the smallest balance first and make the regularly scheduled payment on all the rest. When that first loan is paid off, you take the money you paying toward that and add it to the regular payment to the next smallest loan until that's paid off, then take those two payments and add it to the third — you get the idea.
I've been playing around with Excel today, trying to get an idea how quickly these loans can be paid off. Our car has the smallest balance, so if I increase our payment to $250 a month, then it will paid off by August. Oscar's student loan repayments begin in November, so we will make regular payments until August when I'll take that $250 and add it to loan #1. (Yes, you read that right. His repayments begin in November. And we decide to buy a house right now. Student loans and mortgage payments all begin in the same month!) With the regularly scheduled payments, all the loans will be paid off in 2026. (Twenty year repayment for most of them.) With the snowball method, loan #1 will be paid off in January 2009, loan 2 in April 2010, loan 3 in April 2011, and so forth.
I've also read a strategy to pay off the mortgage faster. If you get paid every two weeks, then if you pay half of your monthly mortgage payments out of each paycheck, then you can pay off your mortgage several years in advance. Seriously. However, what I've never heard is that if you can still knock several years off your mortgage if you pay half your regularly scheduled mortgage payment twice a month.
Consider a $150,000 mortgage, 30 year loan period, 6.25%. The monthly payment is $923.58.
With monthly payments, you will have 360 scheduled payments and you will pay $182,487.29 in interest. On that same mortgage, with 24 yearly payments (semi-monthly) instead of 12, each payment is $461.58, so you still pay the same amount each month. However, If you pay twice a month, you are paying a little more towards the loan principal each time, so you are not earning as much interest and you can still knock several years off the life of the loan without any additional out of pocket expenses. (In this case, you will pay off the loan in just 16 years instead of 30, and you pay $123,922.40 in interest.)
Assuming, of course, that your bank will let you set up semi-monthly payments.
So I wonder how quickly I can pay off the student loans using the semi-monthly strategy. Unfortunately, this will mean having to make manual payments (actually sending in a check!) instead of an automatic withdraw, plus it puts a lot of responsibility on me to actually keep up with it. It's kind of nice having the car and visa with the credit union because I can transfer money toward the balances anytime I feel like it.
Oh damn. I just got this message from the mortgage broker:
“Regarding the bi-weekly question. Most lenders will offer that as well, also usually after the loan is closed. Here's my take on that option, take it for what it's worth. Most lenders will not accept a partial payment, so when they pull the first half of payment they hold it (making interest) until the second half is pulled at which point they apply it to the loan. Usually they charge to set that option up, I've seen as much as $500 set up fee. The true benefit is that with 52 weeks in the year and therefore 26 bi-weeklies, you are actually making 13 payments a year which will cut the payoff time down on your mortgage. I normally suggest, that if that's your goal, if you paid basically an extra $100/month, which equates to $1200/year, you are essentially making that extra payment a year, without them making the interest off your money 1/2 of each month and your set up fee. I don't know if that helps at all, but it's always seemed to me that while it's a good idea to make the extra payments, I don't think they should make money off of you to do that.”
Calm Before the Storm
This house buying process is going so smoothly that I'm starting to worry that the Trickster God of First-Time Homebuyers is lulling us into a false sense of security before springing something nasty on us.
- We found this house on our first day of looking at houses. (Admittedly, it was one of ten houses we saw that day.) There were four houses we both liked and this was my personal favorite of the four.
- Two weeks later, this house was still on the market. We saw more houses but nothing in our price range that we liked more than this one.
- On the realtor's advice, we offered almost five thousand dollars less than the already reduced price, and our offer was accepted immediately. The house had been on the market for nearly five months. Apparently, a lot of potential buyers didn't like the idea of living next door to four pit bulls. Those four dogs knocked $15,000 off the original asking price, and made the seller so desperate that they accepted our low bid as well. (I must remember to thank them.)
- The housing inspection went well. (At least for us. The original inspector we had lined up had a severe accident; he fell off a roof and broke several vertebrae. The second inspector only suffered a flat tire on the way to our appointment.) The house is in good shape for its age. The roof is new. The heater is new. The vapor barrier is new. The only two major things we have to do now are ground the outlets and seal the crack in the foundation.
Our financing is ready and we are pre-approved for everything. We may even get possession before the actual closing date. (This depends on whether the seller wants the actual funds in hand before surrendering keys. Sometimes the seller is okay with it once the bank has authorized releasing the funds.)
How did people buy houses before the age of electronic media? Seriously, this would have been such a hassle if we couldn't email or fax anything. The only real problem we've had so far is that it took over a week for the loan officer to receive the financial documents that I sent him in the mail. Snail mail really lived up to its name in that case.
So, Trickster God, what do you have in store for us? Is the water line going to burst the day after we sign the papers? Is the water heater going to break? What about all the appliances? They are currently in working order, but…
Preparing to Close
So the house buying process was progressing smoothly. The last thing we had to do was be present for the house inspection, and that was two weeks ago. All we've done since is wait. The realtor has called us a few times just to give us progress reports, and he said that this has been the most hassle-free sale he's ever done. I'm glad he thinks that.
But it ain't over until it's over. Our closing date is Sept. 28, which means we are supposed to sign the paperwork on Sept. 27. [Note: This series is on a three-week delay from Real Life.] But, of course, on Friday [Sept. 22] the mortgage people suddenly found something that they don't like. I guess pre-approval doesn't always mean “approval”.
Apparently, there were some glitches in their computer system because the mortgage broker submitted most of our documentation as electronic attachments, and a lot of the attachments didn't arrive. (Well, the broker said there were glitches; I suspect the computer system assumed the attachments were spam.) The broker had been on vacation for the past two weeks. Although he left clear instructions on his voice mail to contact his assistant (I know, I called), the mortgage underwriter apparently decided to wait until he returned to let him know of the missing documentation. So he called me on Friday afternoon, all panicky because the loan papers need to be approved by Tuesday at the latest and the loan company needs some more information beyond the typical documents.
And just what information does the mortgage company need? Verification that we've paid our rent for the past twelve months. (One would assume that we've been able to live here for twelve years because we are paying our rent.) Since we rent from a private person (instead of a company), they need a letter from him. They also want copies of our cancelled rent checks.
But I always pay my rent with a cashier's check and not a personal check (because I got sick of landlords waiting three weeks to cash checks — if they are going to be so adamant about me paying them on time, I expect them to cash the damn things in a timely manner), which I always thought was a great system, except it's now bitten me in the ass because I don't have any cancelled checks! And no, I don't have all the receipts either. I found some, and I hope those receipts plus copies of my bank statements from the other months (which shows the same withdrawal amounts at the same time each month) will suffice. If not, I'll see if the credit union can find copies of the receipts for the missing months. sigh
Both the realtor and the mortgage broker told me that they have never heard of this before. Although I know the realtor and the broker will work very hard to ensure that this deal goes through (otherwise they don't get paid anything), we need to make sure that the loan that the lender gives us is actually the same loan we thought we were getting. I don't want a bait and switch right now.
I honestly don't know what will happen if that Tuesday deadline isn't made. I assume we will just select a different closing date. The seller has already signed the papers, and Oscar and I aren't interested in backing out. We may not be able to move in on the date that we'd expected, but at least that will give us some more time to pack.
Today is one of those days that Oscar and I will look back and laugh about. Eventually. I hope. But not now. Right now I am sulking. This is an improvement. A few hours ago I was seething.
Tomorrow [Sept. 28] is the closing date, which means we had to sign our papers today (or, at the very latest, tomorrow morning). Ideally (I gather), the paperwork is signed at least 24 hours in advance of closing, and we should have signed our paperwork this morning. No go. Yesterday I had three frantic calls from the escrow officer. Today she called me every two hours, nearly hysterical that the documents hadn't been sent to her. She wanted us to sign first thing this morning, which turned into just before lunch, which turned into 3pm.
Meanwhile, at 12:05 I received a call from the Insurance Agency: “I have your mortgage broker on the line and we just need to verify that you are going to use this Agency for your Homeowner's insurance.” I had called the insurance agency THREE WEEKS AGO! It's 12:05 on the day we are supposed to sign our papers — why are there still so many loose ends?
At 2pm, I got The Call.
Escrow officer: “Be here by three. If you can be here by 2:45, that's even better because then we can make the 4:15 FedEx courier service! Oh, and I haven't received the Good Faith Estimate so I don't know how much you will have to bring to escrow.”
Me: “I don't believe we will owe anything. According to our Good Faith Estimate, we should get several hundred dollars back.”
So we drove to the escrow company. As we turned off the freeway, my cell phone rang.
Escrow officer: “I just got the Good Faith Estimate. You will need to bring a cashier's check for $213.02 made out to us.”
Me: “Um, that's kind of a surprise. We've just turned off the freeway. Do you know the nearest Bank of America to your office?”
Escrow officer: “No, hold on and I will ask. [shouts through office] Anyone know where the nearest BofA branch is? No, I don't know!! They've just turned of the freeway. They are almost here!!”
We found a BofA and went inside to get the cashier's check. We were at the head of the line when my cell phone rang again.
Escrow officer: “We checked over the paperwork and realized there was an error. You need to bring a cashier's check for only $11.84.”
Me (waving patrons to move ahead of me): “$11.84?”
Escrow officer: “Yes, $11.84, made out to the escrow company.”
This made me unhappy because we were in Bank of America, whose unofficial motto is: “We charge you for breathing.” I had cash, so I gave the teller $20. She told us that cashier's checks are free to Gold Account holders. But for us, it would be $6. Oh, it hurt to pay $6 for a cashier's check for $11.84. It really hurt. I knew they would charge us (“We charge you for breathing”), but I thought that was a bit excessive.
At 3pm we entered the escrow office. The escrow officer came out, greeted us, led us to her office, sat us down, looked at her computer monitor, and then completely freaked out. Remember, she had already called me several times today to express her concern that the documents hadn't arrived in a timely manner. And she was really concerned about meeting the deadline. So there we were, one hour and fifteen minutes before the documents must go out the door, and she freaked out about another client: “Oh my god! I just got this information released from the wire! It was supposed to be done by 3:00! Give me five minutes!!”
I don't know what the actual problem was, but it was obvious that she was Really Upset. She frantically called several parties to release some info, but it all ended up falling apart in the end. She went from Really Upset to Angry.
We sat there, biding our time. Finally, at about 3:20, she got to our paperwork.
Several friends had joked that we would need to limber up our wrists before we started signing papers in order to prevent a cramp. They were right. Doubly so. See, we actually have two mortgages. We didn't have a 20% down payment so our “down payment” amount was financed as a second mortgage. We had two giant stacks of mortgage papers to sign.
First, we handed over the cashier's check. The escrow officer said that she hated asking people to bring in cashier's checks for such small amounts. I mentioned that the check cost us $6 and that I wished we could have just paid cash. “Oh, you could have paid cash! I should have told you!”
The first stack of papers went okay. I made a mistake on one piece of paper by forgetting to include my middle initial in my signature, so I had to correct that. (The IRS and Immigration department aren't this anal!)
Then, at approximately 3:50, we started signing the paperwork for the second mortgage. Most of the paperwork was identical to the first set (lots and lots of disclosure statements!), so she didn't have to go over all of them in the same detail. But when we got to the actual loan paperwork, my eyes focused on two words that made me nearly pop a vein in my head: BALLOON PAYMENT.
What. the. %*#&???
Me: “Excuse me. This isn't the loan that we agreed to.”
I am an intelligent person. I've read several books about the home-buying process. I'm aware of that there are several different financing strategies. But Oscar and I are first-time homebuyers. Unfortunately, the mortgage broker must have assumed that I knew a lot more about mortgages than I actually do. Things apparently weren't made crystal clear because I guess they figured I knew enough not to be a total n00b, but obviously not enough to ask proper questions. I had brought copies of all the paperwork for the loan and there was NOTHING about balloon payment.
The mortgage broker never mentioned that the second mortgage was a balloon loan. We never signed a Good Faith Estimate for the second mortgage. Never having gone through the mortgage process, I thought the GFE was for both (since the payment info for both was included on the same sheet). I knew that we would have two mortgages. I knew that they were different interest rates. But this took me completely by surprise because all the documentation we had for the second loan gave repayment info based on a 360-month repayment plan. That's a 30-year mortgage — fairly standard.
What is a balloon loan? It is a 15-year loan with monthly payments based on a 30-year repayment plan. This is done to lower the monthly payments. But the kicker is that at the end of 15 years, the balance comes due as a single payment, which in our case would be about $33,000. The justification behind these is that most people don't stay in one place for 15 years. Also, people can always refinance the loan.
Why didn't I catch that it was a balloon loan? Because the mortgage broker didn't give us a GFE for the second loan, where the term BALLOON payment is clearly noted. And all the repayment info is based on a 360-month repayment plan. Why amortize a loan for 30 years if it's due in 15???
I am a half-empty person in terms of finance. There's no guarantee that interest rates won't rise into the double digits like they did in the late 1980s. There's no guarantee that eventually refinancing this loan would make things better.
I was not pleased. Not pleased at all. I sat there for about five minutes debating what to do. Perhaps I'm excessively cautious, but I didn't want to sign to anything that I knew I couldn't meet. I seriously considered walking out. The terms of the loan were not made clear to us. Two things I wanted to avoid were “variable interest rate” and “balloon payment”.
The escrow officer called the mortgage broker, who swore up and down that he had explained to me what this kind of loan was. I swore up and down that I didn't know it was a 15-year loan, and that I was really upset. He said this is the first time in his 21 years that a customer found out loan details during loan closing. I told him the repayment strategy was not explained to me. Both he and the escrow officer explained that these were pretty common terms, that they didn't know any lender that would finance a second mortgage with 30-year terms. The escrow officer tried to make us feel better by saying that her own home loan is interest-only, that this was the only option she could afford. (Okay, but interest only is another thing I wanted to avoid.)
Perhaps this was the best way to go, perhaps it was the only option that was available to us — BUT WE WEREN'T MADE AWARE OF IT BEFOREHAND!!!
I asked Oscar what he thought. He is a half-full person — he felt it was worth it. I sat and stewed for several minutes. Could we do it? I'd already set up an elaborate plan for paying off our debts using the snowball method, so I knew we could put a few hundred dollars more into the payments each month. I knew we could pay off the mortgage in 15 years. But I didn't like having to be locked into it.
What to do, what to do. Are the gains worth the risks? Could we live with this? Could we do this?
We signed. It was 4:10, and I was signing the paperwork so quickly that my signature was an illegible scrawl. There could have been a murder confession in the fine print and I wouldn't have seen it.
We made deadline. But I am not happy. I also thought we would get the house keys after we signed the papers, but we didn't. That would have made things a bit better. After signing the paperwork, I expected to feel elated, anxious, even worried. But all I am is angry.
The paperwork has closed and the title transferred and recorded. We are homeowners. But all I feel is numb.
Oscar and I spent the afternoon down at Our Place doing a wee home improvement project before we moved in. It was a really simple project. Really. I thought it would take us three hours max.
But we hadn't yet learned the Laws of Home Improvement:
- A project, no matter how simple and small, will take you at least three times longer than you think it will. This does not include the time it takes for various goos and putties to dry and cure.
- No matter how well you plan in advance, you will always need something that you don't have.
- You and your spouse will have entirely different ideas of how said project should be done.
Tomorrow was supposed to be full-steam-ahead packing day. But I lost several hours today, and tomorrow I can easily see spending most of the day finishing said home improvement project. It's only a stupid shower insert. Why is it so difficult?
Many thanks to Luneray for allowing me to reprint her adventures. And best wishes for a safe and happy home. I may share periodic updates of her new home in the future. I'll also share some old stories about remodeling my house. If you have stories about homeownership you'd like to share, drop me a line.