Last night we met with our realtor to discuss the fate our old home. Now that the new flooring is going down it is time for decisions to be made on how we will list it.
Prior to this meeting we told our agent that we were leaning towards selling it, provided we would be able to get a decent price for it. We simply wanted the home gone. He has always encouraged us to consider leasing it (he feels the area will appreciate nicely) but he said he would do the analysis based on selling it.
When we replaced the roof, the insurance company valued the home at $171K. I recognize it’s in the company’s best interest to value it high (higher deductible) but we still felt encouraged by that figure. However, when we looked up our home on Zillow it showed it being valued at $158K, which is the tax appraisal value. We looked up the homes currently for sale in the neighborhood to get a feel for what they were being offered for. Only two were on the market, both about 2000 sq ft (same as ours), and both were listed at $159K. We were really hoping to get no less than $165K for our home after negotiations, especially since we just spent $8K for a new roof, flooring, paint, and repairs. We started to wonder if it would be smarter to lease it until home prices rebounded. Maybe we could get enough in rent to cover the mortgage payments but we weren’t sure.
Our agent handed us a nice folder detailing all the recent sales and leases in our neighborhood. To our surprise, he said we could definitely list the home at $168K for an adjusted sale price of $165K. Apparently, the homes are selling very quickly in our area and the new flooring and paint could easily justify a higher asking price.
Wanting to know all our options before making our decision, we also asked about leasing. Our agent owns ten rental properties and even runs a rental management company so he is very knowledgeable about that market. He felt confident that he could get a tenant in our property at $1295 a month. Again, we were pleasantly surprised to hear that. Our old mortgage, with taxes and insurance comes to $1045. That’s a profit of $250 a month!
A few of our friends own properties in other areas and some rents aren’t covering the mortgage payments. But even at a loss they are still providing benefits through tax write-offs and available equity. If we were to lease it, we could write-off a large portion of the $8K we put into fixing it up and we could grow our equity using the tenant’s money until we are ready to sell in a better market.
I will say this though - Eric and I aren’t exactly keen on being landlords. Neither one of us has the kind of personality that would enjoy it. So, if we leased the home we would want to drop our profit margin slightly (by $50 a month) and have it managed by our realtor’s company. That means he does all the advertising, screening of tenants, contracts, rent collection, repair management, and even the evicting if it comes down to it. If the A/C goes out, he is the one that fields the phone calls and uses his connections to get a repair guy out there. Our responsibility at that point is to cash the rent checks and fund major repairs if needed.
So – it comes down to this:
- Do we sell the home to take the equity and invest it? OR
- Do we lease the home for a small profit (as much as $200 a month) and sell it a year or two later when the housing market has rebounded?
I don’t think we will be disappointed either way since both scenarios exceed our expectations. Right now, Eric and I are thinking it might be better to lease it and become the reluctant landlords. Tonight we are going to sit down and work through the numbers to be sure. I’ll report back on what we discover!
Once our builder told us there were only 30 days until closing, we had to jump to it and find ourselves a mortgage.
Because a mortgage is such a large amount of money, we had to shop around to find the best deal we could find. Let me tell you, that was no easy task. I’ll write a post in the future giving a lot more detail to the process we used, but I wanted to cover just one aspect of it now.
We only had enough money to cover a 10% down payment on our house. On top of that, we don’t want to be too heavily invested in just our house as we would prefer to invest any extra money we have in the stock market. We want to pay down the house early, but putting too much money up front was going to hurt us more financially than what it was worth. 10% is the number we agreed to some time back, and was the goal we met with our savings.
The problem is, you have to have 20% equity in your home to avoid paying for Private Mortgage Insurance (PMI). This is essentially another fee you have to pay that, at least in the past, you didn’t get any sort of tax deduction for. It adds up to quite a bit extra each month. We wanted to avoid going to pay PMI.
That left us with two choices – pay 20% down (we couldn’t afford this, and even if we could, it would put too much of our current finances into the house), or get two loans for the house (what is commonly referred to as an 80-10-10 loan). When you get an 80-10-10 loan, you generally have the bulk of the loan (the 80) financed at the going rate for mortgages (which varies from lender to lender). The second loan is normally higher – sometimes 1-2% higher, and is frequently a 15 year loan instead of a 30 year. This makes your monthly payments that much higher (because of the higher rate and the shorter term). You can also ask for the secondary loan to be amoritized over 30 years. This means that you will have lower monthly payments, but will have a “balloon” payment at the end of the loan that will be due all at once. That means you’ll have to be prepared with a wad of cash before the end of the term of the loan.
We thought an 80-10-10 was going to be our only option. However, upon investigating, we found that there were a couple more alternatives.
Some loan companies would let us pay a fee up front to get out of PMI. This wasn’t cheap, but would be cheaper than having to pay PMI for years. We also found a lender that would let us get out of PMI and finance 90% of the loan. We didn’t think this would have been an option, but there it was being offered to us. At a decent rate, too!
I’ll get into the details on the math we did to determine which loan met our needs the best in another post, but I thought this information might be useful to those that are looking to buy a house. If you can afford 20% down that’s great, and a very good way to go. If not, or if you would prefer to have more of your money in investments instead of your house, then financing more of the loan might be a good option. It won’t be right for everyone, but it fits our needs quite well.
Yes, folks, this is it! It’s the final countdown!
We have been given our closing date so now we are now in the final stretch.
The big day: 11/30.
So much for Thanksgiving! We had to call the folks to let them know we won’t be coming down to visit and cook. Unfortunately, we will need to dedicate that vacation time to packing now that the closing date is just days away.
Although we were hoping the house wouldn’t be completed until January they appear to have made our home a priority and are getting it done early. I guess we shouldn’t be surprised. They gave us a timeline of 6-9 months and it’s been over 6 months since we signed the papers.
Many people who are building homes complain of there never being workers on site and that the home just sits there. It seems like they had the entire crew in our home every time we drove by. I guess having ample workers on a project can speed things up considerably.
We are nervous now and feel the need to come up with a plan. Just last weekend we finally started the packing process. We were packing in anticipation of the 30-day notice, that unknown date off in the distance. Now, we have to pack “for real” and there is a sense of urgency around it. 25 days and counting…
From a financial standpoint, the first thing we need to do is choose a lender. With the closing date being official it is time to start shopping for a loan so we can get a lock on a rate.
Today and tomorrow we will be on the prowl for several good faith estimates. I have gathered all the information we need to prove our loan-worthiness. I am compiling the following information for our meetings:
- Pay stubs for last 2 months
- 2 years of W2′s
- Brokerage account statements (retirement and stock assets)
- Bank and ING account statements (liquid assets)
- Proof we paid off the car loans
We had already been pre-approved and received GFEs from two different companies in May. Now we have to get real bids for our loans and choose our lender. We have 10% down and want a primary loan for 80% (30-year fixed) and a secondary loan for the remaining 10% (30-year fixed). The secondary loan can be paid off with our current home’s equity once we sell it.
We have decided to get GFEs from:
- our agent/loan officer
- the builder’s agency of choice (they had the best GFE rate previously)
- our credit union
- Bank of America
- a local broker we found online
We have managed to build great credit scores and pay down our debts so we are hoping to get really low rates on the loans. But with the current lending environment and the crunch on secondary loans we are curious to see how we will be affected. Once we are able to compare the GFEs we will make sure to write about it. It will be interesting to see who comes ahead with the best deal for us.
Now the stress is setting in. I can’t believe it’s happening so soon.
By the way – that video cracks me up every single time I watch it!
Earlier this year my husband and I encountered this very question. We had always talked about moving into a new home after we married, one that was “ours”. But could we really afford to take on a higher mortgage payment? After all, we had been living way outside our means and had only just figured out how to make ends meet in our current home.
Sure, on paper we could afford a higher mortgage payment if we subjected our budget to the ol’ slash-and-burn treatment. But could we actually tolerate a tighter budget to reach our dreams of a new home? We didn’t want to assume we could handle it or that “we’ll just make it work”. We needed to know we could handle it before we committed to higher housing costs.
Here are the two ways we gave a new mortgage a “test-run”.
Take it for a spin
Seeing a mortgage payment on paper and actually living with that payment are two different things. In order to be sure you can handle the higher payment it’s important that you try living with it before you commit to it.
First, figure out the difference in cost between your current housing payment and the “new” mortgage payment. Make sure when estimating this new payment that you err on the side of caution and go high.
|New Mortgage Payment (w/ taxes, insurance, etc)||$1400|
|Current Housing Payment||$800|
Set up an automatic transfer to deposit the difference ($600) each month into a high-interest savings account like ING Direct. No dipping into it, it is essentially spent, just like the new mortgage would be. By saving this amount in addition to paying your current housing payment you are now mimicking the effect the new mortgage payment would have on your budget.
This experiment helps you in two ways:
- You experience and learn to adjust to a higher mortgage in “real life” (instead of just on paper)
- You build up savings dedicated for moving/new home ownership costs
In the example above, you would have saved up $3600 (plus the interest) if you stuck to it for 6 months. If you can handle testing out the “new” mortgage for 4-6 months, without running up bills or needing that extra income, you can feel pretty confident about taking on a higher payment. If not, rethink if you can really afford it.
Work that budget
Not only will you need to adjust your budget to allow for the higher mortgage but you will also have to prepare for the other potential costs related to moving into a new home. What household bills can you expect to change? For example, how will your utilities be affected? You will need to look at all your expenses and estimate how the move might increase or decrease certain areas and reallocate your income accordingly. When we went through our budget we identified many areas that would need to be increased after the move.
To find the additional money needed your budget will need to be scrutinized. Where can you trim the fat? The money needed for the new mortgage and related expenses must come from somewhere, and we aren’t talking about relying on your credit cards. Evaluate what is essential or most important to you and work aggressively to cut spending in all other areas. Rework your budget, funneling the money you cut from those areas into the categories that need more cushion.
Remember – you still need to be figuring in debt payments and savings goals into these budgets. You should avoid falling behind on those goals in order to reach this one. If you can’t find the money in your budget without scaling back on your savings or debt payments then really think if it is in your best interest to make this move.
We now feel confident that we have the ability and the discipline to handle the costs of “moving up”. We are no longer simply guessing that we can afford it or going by the assumption that we will be able to “just make it work”. We know we can because we have been living it.
Since we have already been budgeting for our new mortgage, the “lifestyle adjustment” many people experience when they have less disposable income should be minimal for us. At first, not having that money in the budget was difficult but we have worked through the aches and pains and are comfortable now. I’m just glad we dealt with that struggle beforehand instead of after the commitment of the new mortgage.
The best part of all of this is that we have been able to save up a tidy sum in our ING account to purchase items like solar screens and a sprinkler system without having to go into additional debt after the move.
Our move is coming ever closer and we’re in a unique position where there is the possibility we could keep our current house and rent it out. The typical price a tenant will have to pay to rent a home in our area tends to be higher than our current mortgage costs. Even after taxes and home owner’s insurance (and maybe even a home warranty), we might still be pulling in a slight profit.
Home prices have gone up in our area pretty significantly. We’ve got some equity in this house that we could use to invest for our future, or to pay down the mortgage on the new house. The idea of eventually making a reasonable profit renting the house out to folks, and maybe even paying off the house while it earns that profit is also appealing. But there’s more to the picture than that.
We’re not sure we want to be landlords. The whole idea of having to make sure other people have the rent in on time, or to deal with problems that happen in the house (who wants a 4AM call about the air conditioner going out) aren’t really appealing to us. To bring in a management company to handle that would probably put us in a situation where we aren’t making enough off of rent to cover all the related expenses. We could also run into that situation if things start breaking down in the house, whether from neglect or just age. If problems arise, it may put us in a position to have to tap our emergency fund, and it might directly erode any profit we might have made. And if we have trouble finding renters, it would be very difficult for us to make both the mortgage payments, and we may be forced to tap our emergency fund (or go back into debt).
On the other hand, if we sell the house (and get a reasonable profit), we can pay down most of our secondary house loan, reducing the amount of time we carry that mortgage, or we could put that money into investments for our retirement. I don’t see a lot of downside to that, but over the long run, if we were renting the house (and presumably our equity would continue to increase), we may be in a better financial position in the future.
Right now, I’m leaning toward selling the house and investing the equity. So is Melissa. But I want to “do the math” and make sure that doesn’t sway us (one or another). We only have a few months left to make our decision. Once I get some more solid information from the realtor on what the house is worth (and what the current rents are in my area now), I’m going to sit down and figure out what our options look like. If I find something particularly interesting, I’ll probably write a post about it.
If you have some experience in these areas, and have some advice, we’d love to hear it.
Photo credit Umjanedoan