house buying question...

Discussion in 'The Lounge' started by greenchris, Jan 1, 2008.

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  1. greenchris

    greenchris Turbo Monkey

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    Renting is getting old so I'm starting to think about buying a condo. I don't know much about mortgages but I'm going to start doing all my hw... A friend of mine did a interest only mortgage and was explaining it to me. It sounds pretty cool as his monthly payments are lower than what I'm paying for rent.
    Can anyone explain to me the good/bad about interest only mortgages? I live in Chicago and condos start at 300k. Since I don't have rich parents coming up with a 20% down payment would be impossible.
     
    #1 -   Jan 1, 2008

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  2. Brian HCM#1

    Brian HCM#1 MMMMMMMMM BEER!!!!!!!!!!

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    Interest only are good to get yourself into a house, try to put as much money down as possible. BE VERY CAREFUL!!!!! Look to see how long the loan is interest only, 2-5 years go by very quickly then you're stuck with this huge ugly monthly payment. If at all possible find a good mortgage broker who is looking out for your best interest. If you can swing it try to get a 30 year loan. Its also not a bad idea with the loan to have an impound account with it. That's were you pay extra each month on top of the mortgage & interest for your property taxes and insurance. Some people like to pay the property taxes on there own, but getting an ugly tax bill isn't my cup of tea. I like the out of sight out of mind approach.
     
    #2 -   Jan 1, 2008
  3. r464

    r464 Turbo Monkey

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    Interest only = no equity

    However, interest paid is tax deductible
     
    #3 -   Jan 1, 2008
  4. greenchris

    greenchris Turbo Monkey

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    Brian- thanks for the good info!

    but it would still be better than renting, no? My questions rise because renting round here is becoming expensive. 1400-1600 minimum for a condo quality place. With an interest only loan we can score a nice brand new condo in a decent area for less than that. Does it make ANY sense to buy w/ this method to only sell the property in less than 5 years? I know nothing so if my q's come off way off my apologies... I figure that housing cost will continue to rise in my market and if I pick a good location with a bit of foresight I can sell my place in 3-5 years and only lose minimal $ but gain some sort of equity. Plus I won't pay anymore cash to live in a sh!tty 500 sq ft apartment above crack heads
     
    #4 -   Jan 2, 2008
  5. LordOpie

    LordOpie MOTHER HEN

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    Not true. You can gain equity as the value of the property increases.

    I'm not advocating no-interest, just clarifying.

    You can also flip upside down too!
     
    #5 -   Jan 2, 2008
  6. daisycutter

    daisycutter Turbo Monkey

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    the country are dropping. Read the papers up to 30 million people are at risk of losing their homes. Home sales are slow for a couple of reasons, Most people looking to sell are believe their house is worth more then it is. In fact most of these homes are worth less then the home owners morgage. This would not be a huge issue but the problem is many of these home owners thought they would only own their home for a few years and then sell it, Now they are stuck with homes where they owe more then the value of their homes and thanks to interest only loans they are facing increasing home payments. The problem is even worse because buyers generally are not buying because they are betting prices will continue to drop. If you still decide to buy look at your closing costs they also take a bite out of you as well.
     
    #6 -   Jan 2, 2008
  7. Nick

    Nick My name is Nick

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    don't overlook the fact that there are upwards of 5,000 condos listed for sale at any given time in Chicago. Supply vs. demand will be working against your resale value for some time in all but the hottest neighborhoods.

    This sounds like a perfect time to consider relocation too.
     
    #7 -   Jan 2, 2008
  8. greenchris

    greenchris Turbo Monkey

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    woodsguy- thanks for the info as it helped!

    Nick- i'd love to relocate and it seems like a perfect opportunity but we are trying to have a couple options. It seems that we are going to either buy a place now and wait a few years to relocate after I finish getting my masters. Or just say to hell with it and move away this fall somewhere... Trying to make the right decision is tough...
     
    #8 -   Jan 2, 2008
  9. binary visions

    binary visions The voice of reason

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    Interest only loans seem like a really bad idea in this market.

    Housing values are extremely unstable now and will likely drop a little more before things get better. So if you're not building equity in the house through payments, you'll actually be losing money if housing values drop.

    While it's all well and good when the housing market is good to say you're building equity through property values increasing, this is not a market where you can be sure that will happen.
     
    #9 -   Jan 2, 2008
  10. douglas

    douglas Chocolate Milk Doug

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    IMO, interest only mortgage = dumbest idea ever
     
  11. binary visions

    binary visions The voice of reason

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    Eh, they're really not such a bad idea in housing markets where property values are rapidly increasing and often are too expensive to buy with a normal mortgage. Places in, say, Boston will run you a fortune but when the housing market is good, you end up with a small monthly payment and a property that is increasing in value.

    Lousy idea in a lot of areas, of course, or in certain housing markets... but it can work in some circumstances.
     
  12. Nick

    Nick My name is Nick

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    behind you, don't wait up.
    I think it was Warren Miller that said; "If you don't do it this year, you'll be one year older when you do."
     
  13. LordOpie

    LordOpie MOTHER HEN

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    If you're referring to the Snow God, approved! If not, who?



    I hope everyone who sees the fiscal bail out by our govt, is frustrated by the lending industries involvement in the problem, and put most of the blame on borrowers read this thread.

    You have a smart guy in Chris here who's trying to be responsible, grab a piece of the dream of homeownership, and do it the best way possible... no one here is insulting and slamming him for considering an interest-only, so I hope the haters can see how easy it is to get upside down.

    This is where real estate and mortgage professionals who are acting responsbily and professionally can give the proper advice and why borrowers shouldn't bear the sole burden of the market problems if (and probably so) were given advice not in their best interest.
     
  14. dante

    dante Unabomber

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    completely, 100% agree. this *only* works in a market where house prices are climbing rapidly, and everything I've seen is that the opposite is true. sellers are desperate to sell right now, and some people are saying that the housing slump could continue through the end of 2008 or even well into 2009. if you buy your condo now for 300k, and the value drops to 250k, you're stuck. you won't be able to sell it since you'll still owe the bank that extra 50k, and you won't be able to remortgage at the end of your "teaser" period since no bank is going to give you a mortgage for 300k when the condo is only worth 250k.

    so lets say that you had a 5 year interest only loan locked in at a reasonable rate, and then it would shoot up afterwards. well, if in 5 years you can't sell the condo, and you can't remortgage, you're stuck with your current loan when the interest rate goes through the roof. keep in mind that Condo prices have in the past been the most volatile, and with a LOT of them looking identical to each other, if buyers dry up (which they have been), you're going to have a hell of a time differentiating it to a prospective buyer.

    also, are you really saving that much with an IO (interest only) loan? run the numbers on www.bankrate.com, and you're looking at somewhere around $1500 for an IO loan, and $1800 for a fixed, 30 year (this is 300k loan, 5% down). then you have property taxes and/or condo fees, and regardless you're looking at quite a bit more than the 1400 you'd be renting now. you mentioned that you wanted to build equity over the next 3-5 years, but with an IO loan, you're not building any equity unless housing prices make a dramatic U-turn and start going up.

    honestly, I'd say figure out how much you're going to need per month for that 300k condo (probably 2200-2300+?) in mortgage, fees, taxes, etc. subtract your current rent from that number, and put the result into a savings account for at least the next year (so if you're currently paying $1000/month in rent, put $1300 every month into a savings account, online places like www.ingdirect.com offer better rates than your local bank, look for at least 4% interest). if you're able to do that religiously every month, then you can afford that in a mortgage PLUS you'll have at least an ok downpayment (the numbers in the above are ~$16k, plus interest, or 5% of a 300k place).

    lastly, if you don't have 5% to put down, I DEFINITELY would recommend against buying ANYTHING. under 5% you might be able to get an FHA loan (Federal Housing Authority for 1st time home buyers), but its definitely not optimal and quite a bit of a hassle.

    sorry this got so long, but there are a LOT of people who are upside-down on their loans right now (owe more than their house is worth) who can't sell their homes, can't remortgage, and can't pay their ever-climbing monthly payments. be careful, run all the numbers, read all the headlines, and don't buy more than you can afford.

    (can you tell I just went through the home-buying process? :twitch:)
     
  15. Lex

    Lex Monkey

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    Excellent post! The other hidden cost that can pop up with anything less than 20% down is PMI (private mortgage insurance). The less you put down on a property the higher it will be.
     
  16. DamienC

    DamienC Turbo Monkey

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    FWIW, at least PMI is tax deductible in 2007.
     
  17. Nick

    Nick My name is Nick

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    The one and only! :D
    I love that quote. I think I should heed that advice myself.
     
  18. Lex

    Lex Monkey

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    That's not worth much if it adds a couple of hundred dollars to your monthly payment.
     
  19. SPINTECK

    SPINTECK Turbo Monkey

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    I wouldn't do it now.I own my house and the only reason to own a house is if you have a family or want a yard to rip up. I know you feel you are pissing money out the door in rent, but when you own a house water/sewer/taxes/insurance really add up and also get pissed away for nothing. Condo fees were also mentioned. And there is always something to fix.

    I'm not sure of your situation, if you're single the best thing is to get a roomate. If you're married, I'd wait a few months. My bet is everything will be economically ****ty for the average joe until a new president is in office for a year or two. whatever you do, don't buy house more than you can afford- do the opposite. My wife and I can float our expenses on one salary if we had too. Good luck.

    You have no idea how lucky you are to be able to walk away w/out selling a house or worrying about it flooding or burning up. The freedom you have is worth something.
     
  20. jimmydean

    jimmydean The Official Meat of Ridemonkey

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    Owning vs. renting is a good idea, and this market is a good time to get a good deal. But interest only loans are generally a bad idea.

    Condo or not, save up 10% and get a good rate. Get a fixed interest, not adjustable, and make sure you can afford it. There are a ton of online calculators out there to see what you can afford based on income and whatnot.
     
  21. dante

    dante Unabomber

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    http://realestate.yahoo.com/calculators/rent_vs_own.html

    if the market is going to be going up by ~5%/year, it's worth it to own. otherwise, things like buying/selling costs, maintenance, fees, taxes, etc eat up any profit you would've made.

    and I wouldn't trust those online calculators one freakin' bit. they (and banks) will tell you that you can afford some ridiculous amount of money, which might be possible if you only ate Ramen noodles and played solitaire (the old fashioned way, with playing cards) for fun. do the math yourself, figure out how much you would/could be willing to spend a month on everything (mortgage, taxes, insurance, maintenance, etc) and see if you can live on the remaining $$ that you have coming in. then shop around and find out what is in your price range. when you sit down in the mortgage office, they're either going to say "what do you feel comfortable paying per month" or more likely "by your income level, you are able to afford $XXXX/month", where $XXXX is some other astounding amount.

    know what you can (and can't) afford per month, and stick to it.
     
  22. bluebug32

    bluebug32 Asshat

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    I don't know anything about mortgages or buying a home (I rent too), but it seems that from past and present posts, you're definitely sick of the area you're in. Is buying a better place to live simply a temporary quick fix or will you be happy with your decision in the long run? Regardless of where you're living, you'll open the front door and still be in Chicago.
     
  23. Brian HCM#1

    Brian HCM#1 MMMMMMMMM BEER!!!!!!!!!!

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    For new homes, condos, townhouse etc. Builders are offering some very good incentives. They might be worth looking into if that's what's available. Another perk into buying a condo is it can become a rental property when you're ready to move up into a single family home.
     
  24. Brian HCM#1

    Brian HCM#1 MMMMMMMMM BEER!!!!!!!!!!

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    I disagree 100%, why not buy? Why not get the tax break and put you money towards something that will eventually be yours, not someone else's. The market may continue to drop for now, but who really knows. The bottom line is, if you can afford it now, buy. The market will turn once again in a few years and continue to climb. When you rent you throw your money away.
     
  25. douglas

    douglas Chocolate Milk Doug

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    why not get the $250K condo and a 30 year fixed mortgage?
     
  26. SVPPB

    SVPPB Monkey

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    Right now renting is your best friend. You can walk away when you need to, and you're not hung with a boat anchor around your neck.

    Also, condos all over are the slowest part of the market.

    Wait a couple years, do a real/fixed mortgage.
     
  27. narlus

    narlus Eastcoast Softcore
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    that's a tough swing for most when you can't use the condo equity for the house down payment.
     
  28. dante

    dante Unabomber

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    I agree, but the "if you can afford it" is a HUGE part. If you can afford to put down 20%, if you can afford a 30y fixed, if you can afford the maintenance, if you can afford the taxes, if you can afford the insurance, if you can afford the condo fees and if you can afford to live there long enough to justify the 6% realtor commission, the 1-2% closing costs, etc. then yes, it's always a good thing to buy. Hell, I just did. :busted: But the OP was talking about buying into a downward spiraling condo market will little down and an interest only, adjustable rate mortgage. *That* is a huge recipe for disaster... :shocked:
     
  29. jimmydean

    jimmydean The Official Meat of Ridemonkey

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    I was just saying that the online calcs are nice because I have no idea how to map out amortization, so an online calc works best for me. If you know what you can afford a month, it will tell you what your price range is, not the other way around. Anyone (including banks) can fudge numbers to fit, but if you are honest with your budget, then a calc will tell you what your sale price is given a certain interest rate.

    Even in a down market, if you are in a payment you can afford (and not interest only) then you will come out ahead after 5 or so years. Also, I know around here there are so many empty new condos that builders are looking to deal. Due to the fact that new condos are such a good deal, it has forced the used condo market to also deal, often even better.

    <edit> Again, interest only, no down, adjustable rate are ALL bad news more often than not.
     
  30. dante

    dante Unabomber

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    cool, I was just referring to the "I make x amount per year, I pay 300/month for a car loan, how much house can I afford?" type question. it spits out a number that is so laughable i don't know how anyone can take it seriously. :cheers:
     
  31. jimmydean

    jimmydean The Official Meat of Ridemonkey

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    :stupid:

    I know how that goes. Banks want you to take out as much as you can qualify for, not how much you should pay :D
     
  32. SPINTECK

    SPINTECK Turbo Monkey

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    well, you're entitled to your opinion, but you are being very egocentric thinking that is the way to go for everyone. I own a building with an apartment and my house and I long for the days when I shared a 1200.00 apartment, split with a roomate with no headaches and lots of savings.

    Remember, the tax return is because you're spending money. So you spend $1000 on taxes/interest and get 300 back. YOU'RE STILL SPENDING $1000 ("spending dollars to save pennies"). If you have a family or need many rooms, you're are correct, buy something. If you're single and need minimal room, why commit now in a ****ty market that is going nowhere??? Cash earning compound interest (or if you are savy at buying dividend paying stocks) is much smarter- ESPECIALLY IF YOU DON'T HAVE ANY MONEY IN SAVINGS!!! Now you have to manage a mortgage, repairs and can't cash out easily.....and if you do, how long before you get your closing costs back?? especially with PMI and crap.

    I used to think the same way and all I'm saying is be careful and think about the value you have in renting if you have no other responsibilities. And as for renting out your place, I hate it!! A bad tenant is a pain in the a$$ and they can damage your place more than you know, although I've been lucky.

    I do believe condo renting is better because they can't sue for snow removal, steps and building issues. BUt don't think for a minute a tenant won't sue you if they want.
     
  33. SPINTECK

    SPINTECK Turbo Monkey

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    To be objective, you should buy if there is not anymore land for developers to build condo's on, such as the beach or very hot areas with good planning committees- do your homework. Your average yuppie area has plenty of room for new condos and houses, therefore used house prices never really rise.
     
  34. G-Cracker

    G-Cracker Monkey

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    My girlfriend and I purchased a townhome in September on a 30-year fixed-rate, interest-only loan. Our rate came in about 6.6% and our payment includes Mortgage Insurance and taxes. If I remember correctly, our interest will be paid off in 10 years and we most likely will be upgrading to a larger home well before then. Another plus is the value of the home. We paid $163,000 and the home was valued (at time of purchase) at $175,000. So we're already $12 grand ahead right there.

    I am a bit concerned about the market tanking and possibly causing problems for us in the future. But we also intend on making additional payments to the principal, and we're confident that Tucson will always be a growing housing market.
     
  35. Lex

    Lex Monkey

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    As many have already mentioned, what you can afford should include all of the associated expenses. The calculators won't tell you that. When my wife and I bought our current house we got hit with a completely unexpected increase in a bill that I will never take for granted again: Car Insurance. We had an 80% increase. Despite the fact that we live in one of the best areas of this city there are different/higher rates because of it's more urban setting than our previous house and more/worse drivers. Not a complete disaster but still one more thing to add to the pile.

    We also had an increase in the taxes from what was paid the year before we bought the house because the city reassessed as soon as we closed. I had expected that though so it was figured into the budget.
     
  36. Lex

    Lex Monkey

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    I'm not really sure I understand how you can have an interest only loan where the interest gets paid off in ten years. If you never pay any principle how is the interest ever going to go down?
     
  37. Brian HCM#1

    Brian HCM#1 MMMMMMMMM BEER!!!!!!!!!!

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    All the more reason to buy. The best thing is to buy in a sh*tty market and sell when it gets hot to move up. The market isn't going to be like this forever, I don't know why everyone thinks the the real estate boom is done. We've had this happen before in the late 80's and of course it rebounded a few years later. Price will rise again therefore you'll build equity over time. It's all a matter of timing. For first time buyers it's a perfect time, they can be choosy and don't have to worry about selling a property. I've been involved in the real estate transactions for the last 12 years and new construction 10 years before that. So I've seen what's happened over the last 20+ years.
     
  38. narlus

    narlus Eastcoast Softcore
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    brian, you live in SF-fantasy land...the rest of the country ain't like that microcosm...

    we haven't heard from Crashby in a while...i wonder how his flips are going these days.
     
  39. Brian HCM#1

    Brian HCM#1 MMMMMMMMM BEER!!!!!!!!!!

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    I'm sure the flip world has come to a halt for Crashby. I still believe this is a good time to buy if you plan to stay put for several years.
     
  40. Nick

    Nick My name is Nick

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    I gotta agree with Brian, though I think next year will be ever more of a buyer's market in many areas. Right now I'm trying to working on a plan to relocate at the end of June, and I hope to be able to buy in 12 months after I've moved and scoped out neighborhoods. I'm all for the sluggish market sticking around for a while.

    Lex: I believe your interest is calculated based on the standard 30-yr ammatorization, but you only pay down the interest.