Please help me assess condo purchase and overall finances

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Bob_Sacamano
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Please help me assess condo purchase and overall finances

Post by Bob_Sacamano » Sun Sep 16, 2018 2:02 pm

I'm in the process of purchasing a 2 bed/2 bath condo in Atlanta for 190k (HOA is $232/mo). I'm currently renting a 1 bed apartment at $930/mo. I used the NY Times rent vs buy calculator to conclude that buying is sensible given that I expect to keep the condo for at least 5 years. Of course this relies on many assumptions.

Age: 27, single
Salary: 70k (expecting a 5k-10k raise soon)
Ally: $47,662
Roth IRA: $34,136
401k: $25,115
HSA: $16,943
$0 debt

1. How much should I put towards the down payment?
As you can see I have enough in my Ally account to make 20% and avoid PMI. My mortgage broker, however, is recommending that I put down 10% to preserve some savings. She also claims that it returns a lower interest rate (how?). She estimates PMI will only be $40/mo. With 10% down I will build equity at a slower pace; is that really a bad thing in a seller's market?

2. Why is my interest rate so high?
I was very surprised to see my loan estimate show a 5% interest rate. My credit score is above 750, I've never missed a payment, and I have no debt. When I submitted my pre-qualification, I forgot to include retirement savings. My mortgage broker says this does not affect my interest rate. She says I got a higher rate because I'm purchasing a condo vs house.

3. Is this a smart buy?
I expect my monthly housing expenses to be about $1400/mo (mortgage + HOA fee + property tax + insurance). This is a big jump from $930/mo but I still think it's affordable. My other expenses total about 1k/mo.

delamer
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Re: Please help me assess condo purchase and overall finances

Post by delamer » Sun Sep 16, 2018 2:08 pm

Get mortgage quotes from a local bank, credit union, and a big national bank.

I din’t think you’re getting good advice from your broker.

For instance, there is an option to get a 80% 1st mortgage, a 10% 2nd mortgage (at a higher interest rate), and put 10% down. That way you avoid PMI and accumulate equity faster.

Gill
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Re: Please help me assess condo purchase and overall finances

Post by Gill » Sun Sep 16, 2018 2:11 pm

Not responding to all your questions, but my gut feeling is one of your problems is the mortgage broker. Much of her advice seems self serving. Have you tried other sources for funding?
Gill
Edit: After posting this, I see delamer agrees. The broker is looking out for her pocketbook, not yours.

student
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Re: Please help me assess condo purchase and overall finances

Post by student » Sun Sep 16, 2018 2:14 pm

If your job is stable, you are fine having a mortgage 3x your salary although I would say it reaches the limit (not including buying at VHCOL areas). I would say you should do a 20% down mortgage. It maybe a little tight at the beginning but given that this is a condo, there should be no surprises for a few years. You should make sure that the condo has a reasonable sized reserve fund to take care of needed repairs.

GeoffD
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Re: Please help me assess condo purchase and overall finances

Post by GeoffD » Sun Sep 16, 2018 2:16 pm

Bob_Sacamano wrote:
Sun Sep 16, 2018 2:02 pm
3. Is this a smart buy?
I expect my monthly housing expenses to be about $1400/mo (mortgage + HOA fee + property tax + insurance). This is a big jump from $930/mo but I still think it's affordable. My other expenses total about 1k/mo.
I bought a condo at the top of the market many years ago at about your age and got slaughtered. There was a big housing market correction. Condos tend to correct far more than single family homes. Real estate prices tend to correct downwards far less in towns with top school systems. "Atlanta" could be anywhere so it's hard to guess that part of the risk.

The lesson I learned the hard way many years ago: Don't buy a property you're not prepared to own forever. Don't buy a property if you think there's some chance you'll job hop to where you have a lousy commute.

If your goal is to accumulate wealth, keep paying the $930 rent and invest the difference. Unless you're in a very unusual housing market (like California, Seattle, NYC, DC, Boston), you'll come out way ahead. Most people buy because that's the only way in to a town with a top school system. Those places don't tend to have a heck of a lot of rental housing. Beyond that, it's discretionary spending because you can typically buy something that is higher quality than you can rent.

Bob_Sacamano
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Re: Please help me assess condo purchase and overall finances

Post by Bob_Sacamano » Sun Sep 16, 2018 2:31 pm

You guys have me worried now. I'm past the due diligence period and closing is set for October 2. If I get a another quote, I won't meet the closing date. The loan has not been finalized so I can still decide to put down 20%. Is it possible that my interest rate is in fact 5%? I think the daily average is somewhere around 4.7% now.

I'm not too worried about the affordability aspect of this as I don't expect to be single forever. The condo is significantly closer to work and overall much nicer. The apartment I'm in now is older and I constantly have maintenance issues. I can still achieve a 50% savings rate with this mortgage.

delamer
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Re: Please help me assess condo purchase and overall finances

Post by delamer » Sun Sep 16, 2018 2:44 pm

Bob_Sacamano wrote:
Sun Sep 16, 2018 2:31 pm
You guys have me worried now. I'm past the due diligence period and closing is set for October 2. If I get a another quote, I won't meet the closing date. The loan has not been finalized so I can still decide to put down 20%. Is it possible that my interest rate is in fact 5%? I think the daily average is somewhere around 4.7% now.

I'm not too worried about the affordability aspect of this as I don't expect to be single forever. The condo is significantly closer to work and overall much nicer. The apartment I'm in now is older and I constantly have maintenance issues. I can still achieve a 50% savings rate with this mortgage.
You have nothing to lose by contacting a couple other lenders. Tell them when closing is scheduled and see if they can help.

I’d also ask your broker about the 80/10/10 option.

Good luck.

student
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Re: Please help me assess condo purchase and overall finances

Post by student » Sun Sep 16, 2018 2:48 pm

No need to worry. What you have is a reasonable enough plan.

Bob_Sacamano
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Re: Please help me assess condo purchase and overall finances

Post by Bob_Sacamano » Sun Sep 16, 2018 5:03 pm

Can someone comment on the 10% vs 20% argument. As I see it, the PMI is easily offset by the fact that I'll have more savings with 10% down that I can then invest or even put into a Ally no penalty CD. Also she claims the 10% down payment earns me a lower interest rate, could this be true? And finally, a lower down payment just means less equity in the home.. is this necessarily bad? what if the real estate market tanks? I have more to lose then, no?

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Mlm
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Re: Please help me assess condo purchase and overall finances

Post by Mlm » Sun Sep 16, 2018 6:10 pm

Bob_Sacamano wrote:
Sun Sep 16, 2018 5:03 pm
Can someone comment on the 10% vs 20% argument. As I see it, the PMI is easily offset by the fact that I'll have more savings with 10% down that I can then invest or even put into a Ally no penalty CD. Also she claims the 10% down payment earns me a lower interest rate, could this be true? And finally, a lower down payment just means less equity in the home.. is this necessarily bad? what if the real estate market tanks? I have more to lose then, no?
I would make the decision from a cash flow stand point. Is 20% down plus closing costs going to leave you with little savings? It sort of looks like it. I would want to plan for large unexpected expenses such a medical emergency. I also wouldn't throw money at a property I was only going to stay in for five years. In your situation I would lean towards 10% down.

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BostonBoy
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Re: Please help me assess condo purchase and overall finances

Post by BostonBoy » Sun Sep 16, 2018 6:14 pm

The rates at Pen Fed Credit Union are currently 4.25 for a 5/5 adjustable mortgage. I would put 20% down and avoid the PMI.

jb1
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Re: Please help me assess condo purchase and overall finances

Post by jb1 » Sun Sep 16, 2018 6:15 pm

Why not rent out the other room?

I put 5% down and pay $50 a month in PMI. Mortgage is 180k for a 3 bed 2 bathroom in NC. I rent out my two other rooms for 975 combined.

However after this hurricane I will need to put some claims in..

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wabbajack
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Re: Please help me assess condo purchase and overall finances

Post by wabbajack » Sun Sep 16, 2018 6:17 pm

Bob_Sacamano wrote:
Sun Sep 16, 2018 2:31 pm
I'm not too worried about the affordability aspect of this as I don't expect to be single forever. The condo is significantly closer to work and overall much nicer. The apartment I'm in now is older and I constantly have maintenance issues. I can still achieve a 50% savings rate with this mortgage.
What's the equivalent rental for a 2BR apartment across the street? If you expect the 30-year mortgage to be ~$1400/mo, I'd guess-timate a rental of about $1100/mo would be better. You're young enough that it makes sense to be flexible about your housing situation. You're also not factoring inevitable maintenance and repairs that you will incur in your condo over the 5 years you expect to own it.

FYI: I'm turning 27 and just bought a house this year.

mortfree
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Re: Please help me assess condo purchase and overall finances

Post by mortfree » Sun Sep 16, 2018 6:21 pm

Avoid PMI.

Don’t trust the mortgage broker.

Bob_Sacamano
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Re: Please help me assess condo purchase and overall finances

Post by Bob_Sacamano » Sun Sep 16, 2018 7:43 pm

I wanted to compare 10% vs 20% down after 5 years so I did a little math. Please check me on this:

So off the bat with 10% down I am putting 19k less towards the condo. Putting 20% down, however, means:

$6,120 less mortgage paid ($917/mo vs $815/mo)
$4,565 less interest paid (used an amortization schedule to determine this)
$1,487 (up front lump sum payment option for PMI)

After 5 years, 10% down still comes out ahead by $6,828 (19k - 6120 - 4565 - 1487). In other words, I've put $6,828 less into the house after 5 years.

HOWEVER, this doesn't account for the value of the condo appreciating. I used a simple savings calculator for this part and assumed a conservative 3%.
https://www.bankrate.com/calculators/sa ... lator.aspx

20% down
Initial amount: $38k
Monthly deposit: $815
$96,829 - $38k - $815 x 60 = $9,929 growth

10% down
Initial amount: $19k
Monthly deposit: $917
$81,352 - $19k - $917 x 60 = $7,322 growth

FINALLY, $9,929 - $7,322 - $6,828 = -$4,221 in favor of 10% down

Obviously, if I stay longer and assume a higher growth, it starts to favor 20% down

Traveler
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Re: Please help me assess condo purchase and overall finances

Post by Traveler » Sun Sep 16, 2018 8:24 pm

Living in the Atlanta metro area, in my opinion location and proximity to work is key to where one lives. If you'll save significant time, gas, etc on a shorter commute, that should factor into your decision as well.

Your condo sounds like mine, even down to the HOA dues. I'm in a townhouse in Sandy Springs and units were selling quickly with multiple offers over the summer but have lingered on the market longer now. I think the market is slowing a bit. I live five minutes (1.5 miles) from work and except when they get on the road for the hour plus commute, people sometimes make fun of me for not living ITP. Whatever, I save at least 90 minutes a day in the car or even more on Marta. To each his own.

middistancerunner
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Re: Please help me assess condo purchase and overall finances

Post by middistancerunner » Mon Sep 17, 2018 7:14 am

Have you gotten a quote from Ally’s mortgage services? I didn’t go through the entire process with them but I was impressed in my interactions with them and expect they would be competitive and can move fairly quickly.

Bob_Sacamano
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Re: Please help me assess condo purchase and overall finances

Post by Bob_Sacamano » Thu Sep 20, 2018 3:30 pm

I feel like my closing costs are relatively high. Even subtracting the single payment for PMI and mortgage points ($9,826 - $1,487 - $812) my closing costs are $7,527 or 3.96% of the sale price. Do any of these seem abnormally high to anyone? Can/should I negotiate this with my mortgage broker?

https://imgur.com/a/l7CSpxO

delamer
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Re: Please help me assess condo purchase and overall finances

Post by delamer » Thu Sep 20, 2018 3:34 pm

Bob_Sacamano wrote:
Thu Sep 20, 2018 3:30 pm
I feel like my closing costs are relatively high. Even subtracting the single payment for PMI and mortgage points ($9,826 - $1,487 - $812) my closing costs are $7,527 or 3.96% of the sale price. Do any of these seem abnormally high to anyone? Can/should I negotiate this with my mortgage broker?

https://imgur.com/a/l7CSpxO
Your origination fees are too high.

You need to find another source for your loan.

The mortgage broker is costing you money.

Bob_Sacamano
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Re: Please help me assess condo purchase and overall finances

Post by Bob_Sacamano » Thu Sep 20, 2018 3:57 pm

I can't risk missing my October 2 closing date. Can I negotiate origination fees? I don't know why there's an administration and processing fee. I'm sure the lender has a perfectly good reason...

delamer
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Re: Please help me assess condo purchase and overall finances

Post by delamer » Thu Sep 20, 2018 4:03 pm

Bob_Sacamano wrote:
Thu Sep 20, 2018 3:57 pm
I can't risk missing my October 2 closing date. Can I negotiate origination fees? I don't know why there's an administration and processing fee. I'm sure the lender has a perfectly good reason...
The reason is to take money out of your pocket and put it in the lender’s. Not to mention that your interest rate is not great and you are paying points.

You received advice earlier to check out other lenders; did you?

Are you buying from a private seller or from a developer?

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Meg77
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Re: Please help me assess condo purchase and overall finances

Post by Meg77 » Thu Sep 20, 2018 4:10 pm

Hi there! I am a banker and also have taken out and refinanced quite a few mortgages myself so I'm happy to offer some insight.
Bob_Sacamano wrote:
Sun Sep 16, 2018 2:02 pm
I'm in the process of purchasing a 2 bed/2 bath condo in Atlanta for 190k (HOA is $232/mo). I'm currently renting a 1 bed apartment at $930/mo. I used the NY Times rent vs buy calculator to conclude that buying is sensible given that I expect to keep the condo for at least 5 years. Of course this relies on many assumptions.

Age: 27, single
Salary: 70k (expecting a 5k-10k raise soon)
Ally: $47,662
Roth IRA: $34,136
401k: $25,115
HSA: $16,943
$0 debt
I agree; it looks like you can certainly afford to buy this condo. I bought my first home, a condo in Dallas, in my early 20s and lived there for 8 years before getting married and moving. I rented it out after that. You could own this for the long term and rent it out if/when you move!
Bob_Sacamano wrote:
Sun Sep 16, 2018 2:02 pm
1. How much should I put towards the down payment?
As you can see I have enough in my Ally account to make 20% and avoid PMI. My mortgage broker, however, is recommending that I put down 10% to preserve some savings. She also claims that it returns a lower interest rate (how?). She estimates PMI will only be $40/mo. With 10% down I will build equity at a slower pace; is that really a bad thing in a seller's market?
What your mortgage broker is probably saying is that it will cost you an extra $19,000 down in order to avoid PMI of $40 a month. He/she is probably arguing that you can earn more than $40 a month if you invest that $19,000 instead. Which might be true. You'd have to earn around 3% before taxes to "break even." But remember that usually interest rates are slightly lower if you put down 20% versus 10%. I'd double check with the broker about this (and it doesn't hurt to shop around - just email a few other banks from the link on their mortgage site to ask what their current rates are given your purchase plans).

If the rate really is the same or close to the same either way, I'd probably pay PMI and put down 10% in order to free up cash to max out my roth ira and HSA and get my 401k match (if you can afford to do all that AND put down 20% then by all means that's the better option).
Bob_Sacamano wrote:
Sun Sep 16, 2018 2:02 pm
2. Why is my interest rate so high?
I was very surprised to see my loan estimate show a 5% interest rate. My credit score is above 750, I've never missed a payment, and I have no debt. When I submitted my pre-qualification, I forgot to include retirement savings. My mortgage broker says this does not affect my interest rate. She says I got a higher rate because I'm purchasing a condo vs house.
That's right - savings have nothing to do with your rate. Only credit score, debt to income ratio, down payment, zip code and property type impact the rate. Condos usually cost half a point to a point more than single family mortgages. They are riskier loans, which is the reason why. Statistically, more people default on condos and their values are subject to more fluctuation (in a recession condo values will sink faster than single family homes).
Bob_Sacamano wrote:
Sun Sep 16, 2018 2:02 pm
3. Is this a smart buy?
I expect my monthly housing expenses to be about $1400/mo (mortgage + HOA fee + property tax + insurance). This is a big jump from $930/mo but I still think it's affordable. My other expenses total about 1k/mo.
Yes, if you plan to stay put and espeically if you'd plan to rent it out later on, I think this is a smart move. You have the money, you're doing great and you can afford it. Go for it! :)
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Meg77
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Re: Please help me assess condo purchase and overall finances

Post by Meg77 » Thu Sep 20, 2018 4:14 pm

Bob_Sacamano wrote:
Sun Sep 16, 2018 2:31 pm
You guys have me worried now. I'm past the due diligence period and closing is set for October 2. If I get a another quote, I won't meet the closing date. The loan has not been finalized so I can still decide to put down 20%. Is it possible that my interest rate is in fact 5%? I think the daily average is somewhere around 4.7% now.

I'm not too worried about the affordability aspect of this as I don't expect to be single forever. The condo is significantly closer to work and overall much nicer. The apartment I'm in now is older and I constantly have maintenance issues. I can still achieve a 50% savings rate with this mortgage.
Read this after I posted my response. Don't worry! 5% is still a great rate, and that is very reasonable in this market for a condo. Sounds like it will be a big upgrade in lifestyle so that's awesome. And you're about to get a raise as well to help. Your savings rate is admirable. It's more than OK to spend a bit of your hard earned money on a home that you enjoy and will own for years to come.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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