First Time Home Buyers - Down Payment - Potential 2-3 Year Stay

Discouraged with the rental situation here in Flagstaff, my wife and I have started to weigh the merits of owning our home rather than renting.

Average rent in town is $1,200 for a decent place (2bd/1ba/washer/dryer/dishwasher/no dirty storage), or $900 for a place that'll cost twice as much to heat during the winter. Garage? That'll be $1350. Pets? That'll be another $100, oh and it will limit your choices by half.

Anything in the $1000-$1500 range gets snatched up immediately. If those places allow pets and have a garage they might only be available for a few hours. Literally, we've called about 10 places all of which had 2-3 in line. If you want to rent your property and can offer it for under $1500 you likely will no vacancy.

Average 3-bed 2-bath house with a garage built after 1985 sells for between $180,000 and $235,000. We've seen some new places sell for that price range as well.

We could make a 15% down payment on a house in that price range, but it would empty our pocket for a few months. It would also lower our monthly mortgage payment to a rate that would allow us to competitively rent it.

Points of Concern:

• realtor thinks we should take the "no down payment" option and settle in with a $1400 a month mortgage. I'm hesitant as this would be more difficult to rent.
• there is a lot of new construction happening in this town, as supply catches up to demand, will our home value and potential rental price go down?
• we're not intending to settle down here, and her parents may provide us a free place to live on the east coast in 3-4 years.
• we can't get the type of place we want for the (monthly) price we want as renters, but as buyers we could easily get it.

If we could find that sweet deal of 2/bd 1.5/ba rental with space for bikes and garage for wrenching, all for under $1300 a month, we'd give up the idea of home ownership for another couple of years, thing is, we can't even find that type of rental, much less anything its comparable price range.

Keep looking and make sacrifices, or consider buying and make sacrifices?

PS: Yes I've used the NYTimes "Rent or Buy" Calculator and it almost always comes up as "even", but it doesn't measure the ability to actually FIND the housing you want. If I could get the rental for the price it says I could I would easily rent, but the problem is I can't, instead of I'm paying that price for half the space. Its much easier to buy the size of house we want in this town.

If you don't think you'll need to sell in the next 5 years, buying is probably not a bad idea. Since I bought my first house back in the day, I've always wanted to own.

The down payment thing is a matter of taste. The theory is that interest rates are so low now, you should play with OPM, other peoples money. But to your point, that's more risk if you have to rent later as you'll probably have to throw money at it every month to cover your expenses. I'd probably split the difference; put down the minimum needed to not have the mortgage insurance (which covers the lender, not you; usually a few hundred a month). But be careful, especially if you go variable rate (which is almost always the best/cheapest unless you plan on owning this forever) as you don't want to have interest rate increases hurt you.

Exciting times for you guys.

Have you looked at buying a duplex? Having someone else paying my mortgage is helpful. Does Flagstaff have a university or college? You could rent your basement to students and when you move a local management company could look after your property if you don't sell.

Second what crewperson said. A small investment property might be the way to go here. Live in one unit and rent the other(s).

I'd be tempted to rent for 12 months to make sure your work situation is stable and that you get a feel for where you want to live in town. Yes, interest rates are low right now but that'll mostly mean you may buy the wrong house or the right house in a wrong location for a cheaper carry cost. Not sure that that's worth it.

Also, with the transaction costs involved in buying and selling a house, you're betting on massive house price growth if you want to break even in the next 3-4 years. If you don't plan to hang around for 5-7 years I wouldn't buy a house.

Forgot - if a 15% downpayment will wipe out most or all of your savings, you can't put 15% down. You'll have to have extra money for the closing costs, plus I'd be really surprised if you bought a house that wouldn't need some money thrown at it immediately.

Also, if you plan to keep the house after you move and want to turn it into a rental, factor in that you'll have to pay a property manager locally to look after the house. You don't want to manage a house from 2000 miles away, trust me.

In your situation, I'd suggest renting (even with the hassles you outlined). You have several strikes against you that will make it more difficult to be successful in owning a home:

• New to area (you'll have a much better idea of where to buy after living there a few years)
• No network of contacts (helpful when you need the inevitable repairs on purchased home)
• Lack of down payment + emergency fund (necessary to fund inevitable repairs on purchased home)
• High transaction costs when you sell (realtor fees)
• New employment
• Short time horizon
• Risk that if the real estate market drops, you'll lose money

We recently purchased a home that we knew what we were getting into, and have proceeded to easily drop $20k into it in the past three years we've been here. Things like a new furnace, exterior painting, deck refresh, septic work, interior painting, etc. tend to add up quickly. And the crazy thing is, we've done a lot of work ourselves! You don't want to do that in a home where you may only spend 2-4 years.

If you want to read more about buying a home, this is a blog I'd highly recommend: http://www.searchlightcrusade.net/

I've got a vote for rent as well.

The bad thing is that the interest rates are going up long term and buying on other people's money is slowly going away. But that doesn't change that you don't have a good down, you don't have the job situation settled, and don't know the city well. Combine that with the high possible opportunity costs of not knowing if you want to stay and it just doesn't make sense.

1. Rent vs. buy calculators tend to way underestimate the maintenance/upgrade/refurbish/etc. portion of the budget. I've seen 1% thrown around a lot there. No berkeleying way. Especially if you are married.

2. Rent vs. buy calculators don't take into account spare time. Remember, a LOT of stuff is taken care of on rental properties that isn't on your own house. Time = money. When you factor that in, some things change.

3. As others said, don't put 15% down if it will tap out your savings. Also, does 15% get you to the point where you don't have to pay PMI? I'd be doing the minimum down payment to cover PMI and weigh any extra against the rate it would get me.

4. Also remember that on top of your initial down payment you will incur a lot of costs just buying E36 M3 you've never needed before because you were smart enough not to own a house.

In reply to ProDarwin:

IIRC the PMI threshold is 20% down.

BoxheadTim wrote: In reply to ProDarwin: IIRC the PMI threshold is 20% down.

I thought so too, but didn't know if it varied from area to area or lender to lender.

Agreed, if you can't put at least 20% down , I would probably not buy and if I did....I would finance as much as possible.

Enyar wrote: Agreed, if you can't put at least 20% down , I would probably not buy and if I did....I would finance as much as possible.

As someone who has bought twice with less than 20% down. Don't berkeleying ever do it. Ever.

Fueled by Caffeine wrote:

Enyar wrote: Agreed, if you can't put at least 20% down , I would probably not buy and if I did....I would finance as much as possible.

As someone who has bought twice with less than 20% down. Don't berkeleying ever do it. Ever.

Care to tell me more?

From what I understand, back in the day if you put less than 20% down you we're stuck with PMI until you had 20% of equity. Now, if you are required to pay PMI at the beginning of the loan youre stuck with it for the entirety of the loan.

i didnt read the whole thing but dont empty pockets for a down payment, stuff breaks

Sounds like wife needs a job and we need to gather up some serious savings. I don't want PMI but advise says not to empty pockets either.

Enyar wrote: From what I understand, back in the day if you put less than 20% down you we're stuck with PMI until you had 20% of equity. Now, if you are required to pay PMI at the beginning of the loan youre stuck with it for the entirety of the loan.

Did not realize that. That would be a major bummer.

mtn wrote:

Enyar wrote: From what I understand, back in the day if you put less than 20% down you we're stuck with PMI until you had 20% of equity. Now, if you are required to pay PMI at the beginning of the loan youre stuck with it for the entirety of the loan.

Did not realize that. That would be a major bummer.

Yeah, that's just berking ridiculous. And to think I was pissed that they didn't automatically cancel our PMI when we got up over 20%, and I paid a few extra months' worth before I noticed.

Even leaving finances aside, you haven't lived there long enough to buy the right house. We bought our first (and only) house when we were right around our 30s, in a town I knew pretty well but had never actually lived in. 20 years later, we are still in it, and I still wish we had paid $20,000 more for a house 2 blocks away from where we ended up. But at that point, $20,000 seemed like a stupendous amount of money.

Duke wrote:

mtn wrote:

Enyar wrote: From what I understand, back in the day if you put less than 20% down you we're stuck with PMI until you had 20% of equity. Now, if you are required to pay PMI at the beginning of the loan youre stuck with it for the entirety of the loan.

Did not realize that. That would be a major bummer.

Yeah, that's just berking ridiculous. And to think I was pissed that they didn't automatically cancel our PMI when we got up over 20%, and I paid a few extra months' worth before I noticed. Even leaving finances aside, you haven't lived there long enough to buy the right house. We bought our first (and only) house when we were right around our 30s, in a town I knew pretty well but had never actually lived in. 20 years later, we are still in it, and I still wish we had paid $20,000 more for a house 2 blocks away from where we ended up. But at that point, $20,000 seemed like a stupendous amount of money.

Why is that? What is so much better about that house vs. yours?

It wasn't even a particular house. But that 2 blocks would have gotten me notably farther away from a couple of heavily trafficked neighborhood cut-throughs. I'm not in a bad area but it would have been 50% more peaceful for about 10% more money if we were 2 blocks farther north. The location looked like a perfectly quiet residential street during the several times we visited before buying... except from 7:00a-8:00a and 5:00p-6:00p.

My point was that this is the kind of detail you wouldn't figure out until you'd really lived in the town for a while, so don't be in any huge rush to buy straight off the bat.

Good advice. And right in line with what my dad has always told me: Don't fall in love with a house. Anything on a house can be changed, assuming there is space and money. Fall in love with the location, sure, because that is the one thing that can never be changed.

Side note: My "dream house" for the next 15-30 years is a ranch on a cul-de-sac.

As someone who is moving away from a busy road next to some railroad tracks, I concur.

2-3 years I would pay more in rent honestly. Your going to loose the 6% on sale and any real increase in the house price will be eaten up by maintenance in that time frame. Say 250K home 15K in sales costs plus another 5K in closing. 20K over 3 years is an extra 550$ a month that you can spend on rent.