Monday, July 25, 2011

Now really gambling

I am in process of buying house (A).

My thinking originally was we would buy a condo, put 3% down pay the PMI and get 5/1 ARM which would get me Mortgage payment ~$600 less than apartment wanted for rent if we moved to upgraded unit (which we have to do within a year or move out). Advantage was thought I could walk away saving a few dollars at expense of credit rating if housing market out here continued to plummet.

Problem with a condo is you never know what you are going to deal with as far as resident below or above you goes. My latest downstairs neighbor seems nice enough but he smokes about once an hour, his wife doesn't let him smoke inside and he has not adhered to my polite request to warn us when he is lighting up so we can close sliding glass door and windows for a few minutes.

I would rather have the brothel back downstairs than have apartment smell like cigarettes.

Townhouse has only 2 neighbors no one below so we have solved the smoke problem.

What I can't help but think is I own the downside risk of home price until down payment is exhausted and I also need price to rise 6% to break even.

Other risk is to choose 5/1 ARM at 3.375% or 30 year fixed at 4.625%.

3rd risk is that wife won't spend too much money once we are in a "home"

On positive side demon child gets to stay in same High School and would live closer to her BFF as well as my tax adjust cost of housing is fixed at ~ what I was looking at for rent in a year.


Astin said...

And now the question I ask everyone who deliberates over a home purchase: Why are you buying it?

Is it primarily an investment or a home for your family? If it's an investment, then figure out your time frame to sale and make sure you can make a profit in that time. If it's a place for your daughter to continue to grow up and your wife and you to grow older in, then the number-crunching is less important, because the plan will be longer term and have intangibles involved.

The only time it matters in the latter situation is if you find yourself underwater and won't be able to walk away.

I'm always a supporter of buying over renting if you can own for less than you rent. Just keep it withing your means.

Shawn said...

I think Astin made some good points.

You've mentioned that you've weighed the pros/cons of walking away if things continue to tank. The other scenario that I'd consider is if prices go stagnant but interest rates sky rocket. What are the terms of the adjustable rate mortgage you looked at? Is there a maximum % increase to the rate? What happens if the home price goes down only slightly, making it hard to sell but not quite easy to walk away from; meanwhile your payments rise up into uncomfortable territory? Will you find yourself making payments your not happy with but not far enough upside to justify the credit damage of walking away?

Bayne_S said...

I will be spending less for shelter each month for the next 5 years based on assumption that asking price for rent is stagnant.

Really have no idea how long I will be living in house but have to assume 6 year minimum to give kid 4 years in college.

But I am buying house at 2001 prices at this point but that was well into bubble.

Josie said...

Don't look, leap.

KenP said...

Lifestyle Change Notice

Hanging at Home Depot instead of Bay 101.

The Neophyte said...

I would definitely look to take the fixed rate mortgage. I can't see how rates will be as low when the ARM resets than they are now.