Townhouse/Condo Purchase - Am I Ready?

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Townhouse Purchase - Am I Ready?

Yes
1
6%
No
16
94%
 
Total votes: 17

Topic Author
lyner
Posts: 26
Joined: Mon Jul 02, 2012 9:21 pm

Townhouse/Condo Purchase - Am I Ready?

Post by lyner »

***See bottom of this post for update to question***

Age: 20s
Tax Rate: 25%
Roth IRA: $16,000
401k: $47,000
Savings: $23,000
Emergency Savings: $7,000
Student Loan Debt: $18,000 @ 6.8% (Deferment ends soon)

Monthly Rent for 1br/1ba Apartment: $900

3br/2.5ba Townhouse Asking Price: $130,000
HOA Fees: $150 per month

Pros:
Build equity
More space and privacy

Cons:
More debt
Cannot pay off student loan debt in lump sum when deferment ends
Lost opportunity with past Roth IRA contributions if used for downpayment
Less mobility

I have not shopped around for a mortgage yet. My credit score is approximately 720+ the last time I checked. I am contractually obliged to remain in this area for another 2 years. I can see myself staying here for 5+ years as well. Would an FHA loan be a terrible move for me?

Update: Would your opinions change if I look for a condominium instead? The HOA will be ~$150 a month, but the 1br/1ba condo would only be $60,000. The unit would be in a resespectable, gated neighborhood with decent finishes (tile in kitchen and bathroom, granite countertops, etc.) The initial downpayment (20% in this case) and mortgage payment would impact my other financial woes less and allow for rapid payment. Thoughts?
Last edited by lyner on Sun Feb 10, 2013 6:07 pm, edited 7 times in total.
Cookies
Posts: 10
Joined: Sun Jan 29, 2012 6:03 pm

Re: Townhouse Purchase - Am I Ready?

Post by Cookies »

Are you scraping by with you rent or do you have plenty left to spend each month? I'd expect with a 5% downpayment you will be paying ~ 950 a month after tax, hoa, pmi, mortgage and insurance assuming a rate of 3.75% and a property tax of ~.84%. I'd not go with an FHA loan if at all possible as you have to pay a fairly hefty fee upfront to cover the mortgage insurance. It is possible to get 5% downpayment loans outside of FHA if your credit is high enough. You can run a quote with your assumptions through zillow's mortgage search and get an idea of rates and fees.

Make sure you check out the new york times rent or own calculator (search for that string and you will find it). It will give you a very good idea of the tradeoffs for different time horizons. If you are going to want to move in 2 years then I would continue renting. The loss of mobility is also a great trade off at your age but only you can evaluate that.

The other consideration when looking at the timeframe is to consider how much principle you will actually pay down. After 2 years you will have paid down about 5k of principle. After 5 you will be up to 13k. This is after 35k of payments. So, you have 'wasted' less money then rent, but you are not as far ahead as you might assume.
Johm221122
Posts: 6394
Joined: Fri May 13, 2011 6:27 pm

Re: Townhouse Purchase - Am I Ready?

Post by Johm221122 »

I would pay debt with savings (at least when deferment ends)
Bigger EF will then be needed
then save for house/condo
Just my 2 cents
John
User avatar
bottlecap
Posts: 6906
Joined: Tue Mar 06, 2007 10:21 pm
Location: Tennessee

Re: Townhouse Purchase - Am I Ready?

Post by bottlecap »

Hard to tell without knowing your expenses. My thinking is that if you need an FHA loan, you can't afford it.

JT
NorCalDad
Posts: 774
Joined: Sun Mar 25, 2012 11:14 pm
Location: Northern California

Re: Townhouse Purchase - Am I Ready?

Post by NorCalDad »

I agree with John. I'd retire the 6.8% loan with savings, especially considering your MAGI is probably already near the point where you can't claim the interest deduction. Then I'd rebuild the e-fund.

After that, I'd start saving for a down payment. By the time you reach 30, you may be in a different life situation and ready to move from your city, and you should have enough to put 20% down on a house you really want long-term. Like bottlecap, I'm not a fan of FHA loans, and I think you should really strive to put 20% down. I'm also not a big fan of buying a condo unless you're in an area like a collegetown, vacation spot or metro (NYC, SF) that lends itself to high demand for condos.
stan1
Posts: 14246
Joined: Mon Oct 08, 2007 4:35 pm

Re: Townhouse Purchase - Am I Ready?

Post by stan1 »

I agree -- be very careful on buying a townhouse.

What about the unit will make it appealing to the person you eventually want to sell it to when compared to dozens of similar units likely to be for sale at the same time?

Is it an end unit with more windows? Does it have a 2 car garage instead of a 1 car garage, carport, or uncovered parking? Does it have a small private yard? Is it within walking distance to a major public transit station or grocery store? Does it have 3 usable bedrooms?

Don't buy an "average" or "below average" property because just because its cheap. The argument that rent is "throwing money away" is real estate agent propaganda. You have to live someplace, and $900/month is reasonable. Try to avoid societal or family pressure that presumes owning is more desirable than renting or that owning property is a status symbol. You aren't a lesser American if you rent. Don't buy into the logic that you have to own a home to be bought into the American dream.

Why do you need more space? Again, bigger is not better. Paying mortgage, insurance, and maintenance on space you aren't using is an expense -- not an investment.

In case you can't tell -- I'd continue to rent until you have more compelling lifestyle reasons to buy.
Warning: I am about 80% satisficer (accepting of good enough) and 20% maximizer
Valuethinker
Posts: 49035
Joined: Fri May 11, 2007 11:07 am

Re: Townhouse Purchase - Am I Ready?

Post by Valuethinker »

lyner wrote:Age: 26

Income: $75,000
Roth IRA: $16,000
401k: $47,000
Savings: $23,000
Emergency Savings: $7,000
Student Loan Debt: $18,000 @ 6.8% (Deferment ends soon)

Monthly Rent for 1br/1ba Apartment: $900

3br/2.5ba Townhouse Asking Price: $130,000
HOA Fees: $150 per month

Pros:
Build equity
More space and privacy

Cons:
More debt
Cannot pay off student loan debt in lump sum when deferment ends
Lost opportunity with past Roth IRA contributions if used for downpayment
Less mobility

Other Notes: I have not shopped around for a mortgage yet. My credit score is approximately 720+ the last time I checked. I am contractually obliged to remain in this area for another 2 years. I can see myself staying here for 5+ years as well. Would an FHA loan be a terrible move for me?
Emphatically not.

With a 6.8% loan, even deferred, you have an excellent, risk free Internal Rate of Return (6.8% *after tax*) just by paying off loans. that's a higher return than you can expect from *stocks* in the next 10 years.

Other than taking advantage of tax advantaged space, debt repayment should be your priority.

Property is a huge tie: limits where you can work, there are always unexpected items that crop up that suck money.

Also at your age you want to have *fun*. I'll assume you are single and male, and fun translates as doing what you do (scuba diving, mountain biking, going to gigs, going to classical concerts, hanging with friends) but doing it with young single women (making a second assumption re orientation ;-)).

The time, in your 20s, spent around young single women is *never* wasted. Take it from a guy more than twice your age. It's not that we do not love our spouses, but when you check out of the dating rat race, you want to know you gave it a really good go. Also in your 20s your friends have time for you. In your 40s, you are lucky if they visit your Facebook page in between shuttling kids to soccer, working late at the office, looking after sick parents, etc.

Remember, in life, you regret more what you did not do, than what you did do (that went wrong).

Housing has a slight complication to that, had I bought a house when I wanted to (at the peak of the 1980s housing bubble) I would have been ruined, financially, career wise, and every other way. I was going to buy a house at 28, wound up buying one at 35 in a different country-- best decision to defer I ever made.

You can wait a couple of years to buy a home. pay down that debt.

And have fun.
skyvue
Posts: 66
Joined: Tue May 08, 2012 7:14 am

Re: Townhouse Purchase - Am I Ready?

Post by skyvue »

No way. I would never buy a home until all other debts are paid off, I had 20% to put down, an emergency fund of 6 months of expenses in a savings account and enough money to furnish the place.

In addition, I personally would not advise a 26 year old to rush into buying either. Keep your options open to easily move across the country if you feel like it.
tphp99
Posts: 374
Joined: Sun Jan 03, 2010 7:47 pm

Re: Townhouse Purchase - Am I Ready?

Post by tphp99 »

Purchasing will tie you down. Not sure if I would do it at your age. It is easy to find a 3/2 rental. We bought a few years ago because we could not find a place to rent (we wanted +5,000 sf home - kids, entertaining). I secretly regret being tied down here, even though when we bought, we committed to 10 years to this area. I'm considering opportunities elsewhere and the house definitely ties me down.

Why not wait until you can pay cash for it - you'll definitely be ready then.
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Watty
Posts: 28860
Joined: Wed Oct 10, 2007 3:55 pm

Re: Townhouse Purchase - Am I Ready?

Post by Watty »

Student Loan Debt: $18,000 @ 6.8% (Deferment ends soon)
Relaistically you could get most of the advantages of buying by renting a better apartment or house.

You didn't mention having a car loan. If you have a paid off car that is worth a significant amount then you could get a car loan for about 2% from some place like PenFed and use that money to pay down the 6.8% loan.
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grap0013
Posts: 1892
Joined: Thu Mar 18, 2010 1:24 pm

Re: Townhouse Purchase - Am I Ready?

Post by grap0013 »

Building equity isn't always the case. Have you noticed the 2006-20** housing meltdown? Also, you can get more space by renting a bigger place. I would never buy as a single person. You have no idea where you might end up. Calculate all the extra fees that go along with buying and selling and it will make you ill.
There are no guarantees, only probabilities.
Valuethinker
Posts: 49035
Joined: Fri May 11, 2007 11:07 am

Re: Townhouse Purchase - Am I Ready?

Post by Valuethinker »

tphp99 wrote:Purchasing will tie you down. Not sure if I would do it at your age. It is easy to find a 3/2 rental. We bought a few years ago because we could not find a place to rent (we wanted +5,000 sf home - kids, entertaining). I secretly regret being tied down here, even though when we bought, we committed to 10 years to this area. I'm considering opportunities elsewhere and the house definitely ties me down.

Why not wait until you can pay cash for it - you'll definitely be ready then.
You fascinate me, here, 5,000 square feet (say 475 square metres) is almost a castle (this is the UK and we don't do finished basements either).

If I had lots of kids maybe I could see the point.

But don't you find that you rattle around in a house that big? Too much to clean and keep tidy? Rooms you never visit or use much?

Anything over 3,000 square feet I reckon is getting really big.
Topic Author
lyner
Posts: 26
Joined: Mon Jul 02, 2012 9:21 pm

Re: Townhouse/Condo Purchase - Am I Ready?

Post by lyner »

Update: Would your opinions change if I look for a condominium instead? The HOA will be ~$150 a month, but the 1br/1ba condo would only be $60,000. The unit would be in a resespectable, gated neighborhood with decent finishes (tile in kitchen and bathroom, granite countertops, etc.) The initial downpayment (20% in this case) and mortgage payment would impact my other financial woes less and allow for rapid payment. Thoughts?

(I also appended this update to my initial post.)
User avatar
ElJay
Posts: 691
Joined: Tue Jun 12, 2007 6:08 pm

Re: Townhouse/Condo Purchase - Am I Ready?

Post by ElJay »

Why would you want to purchase a condo instead of renting? To me a condo brings all of the same annoyances of renting an apartment (primarily people typically living on all sides of you) while locking you into a location that you might want to leave in a few years to find a different job. The condo idea seems to bring the list of "pros" down to "build equity," and as others have mentioned, that's not a sure thing. So really you're down to a list of one possible pro and four definite cons.

If you want granite counter tops and tile floors, you can find apartments with those. My landlord likes me so much that she upgraded my counter tops to granite a few years after I moved in. Though I have to say she was more excited about them than I was.
Topic Author
lyner
Posts: 26
Joined: Mon Jul 02, 2012 9:21 pm

Re: Townhouse/Condo Purchase - Am I Ready?

Post by lyner »

The way I see it is:

A 1br/1ba apartment in a good location and in good condition goes for ~$850 around my neck of the woods. A $52,000 condo would provide the same amenities, location, and condition as the apartment. I can pay this condo off with the HOA fees in 6 years while staying under the budgeted $850/month. If it so happens that I need to relocate, I can cover the 15 year mortgage payment + HOA with a 60% rental rate. The most likely repairs/maintenance items that would be needed down the road are appliances, but even those are fairly new.
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steadyeddy
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Joined: Tue Mar 31, 2009 5:01 pm
Location: The Alps of the Midwest

Re: Townhouse/Condo Purchase - Am I Ready?

Post by steadyeddy »

Lyner,

My wife and I unexpectedly caught the home purchasing bug for a bit while apartment shopping last month. We realized that we could pay $1,200 a month for a crummy apartment near work, whereas an $80,000 condo would allow us to build equity with a significantly lower monthly payment! Of course the devil is in the details. In our case, the inexpensive condos would inevitably be in an undesirable part of town, further from work, and with appliances and finishes that looked good in pictures but always turned out to be quite cheap when inspected.

But by then we had already run some numbers and realized that buying could sometimes cost less per month than renting; renting is such a bad deal, and we have cash sitting around earning practically nothing! "Well these condos are not ideal, but what if we went ahead and bought our first single family home? Then we can live in a really nice space, have plenty of room, be ready for the kids in a couple years or so, and it's really not much more expensive than rent would have been anyway! Our parents will be thrilled that we're growing up." Then comparative analysis set in. For only $150k we can buy everything we need. For $200k we can buy a three bedrooms and a finished basement near a school we like better, but LOOK(!) for $300k this one is on the bluffs overlooking the river! It has an extra bathroom, and it's really not so far away from work. This one for $220k backs up to this land that the city converting into a nature preserve with natural stone paths, but of course we'll need to replace those cupboards and put in an island to make it more like the $300K property on the bluffs... On and on it went until we both looked at each other one day and said, "What on earth are we doing?" We had originally set out to rent a convenient apartment close to work, and here we were discussing remodeling projects for a house that would have put is in gridlock traffic twice each day!

We turned our full attention back to apartment shopping and we just turned in an application to rent a townhouse just five minutes from work. It has the sort of kitchen and finished basement we liked so well in the homes we perused, but the rent is a fraction of the hypothetical SFH mortgages we were running, and the commute could be made on foot in the time it would have taken us to drive from the suburbs. I realize our situations are not completely alike, but my recommendation to you is to search for a new rental that gives you some of the upgrades you're eyeing, and see if you can't find a bargain that allows you to have these features for the same price you're currently paying. In a not too long you'll have your debt paid off, a down payment of 20% or better, and perhaps a better idea of where to put down roots anyway.
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