Hoboken411 Financial Guru – 11/13/2008
Here’s the first official weekly installment of the Hoboken411 Financial Guru series!
I’m intimidated with buying real estate!
“I have a question for the Financial Guru about buying a condo. Frankly, we are totally intimidated by the condo-buying process. I feel like we will never have enough money to buy a place, but on the other hand, I feel like if we rent for the rest of our lives, we will end up being a burden to our children (which we don’t even have yet).
In all honesty, how much money do you need to have upfront to buy a place and second, can you rent forever without a negative financial impact?”
411 Financial Guru Says:
Ah, the age old question of renting vs. buying. The easy answer is that buying is good, you invest for the future, you save on taxes, live the American Dream, blah blah blah… we’ve all heard the sales pitch. But before making like a zombie to the nearest real estate office (just look for the place next to the nail salon) it’s important to consider if it’s right for YOU.
Owning a home doesn’t always lead to happiness. For some, it’s one headache after another. For others, it’s financial security and a chance to have something all your own.
It’s not something to do just cause everyone else is doing it. I have a friend who always says that buying was one of the best decisions he ever made– but it helps that he bought 15 years ago when prices were much lower. I happen to rent and I couldn’t be happier with my living situation. When I examined the option of buying, I found I’d have to sacrifice space and location to pay the same amount every month. Plus, I don’t like fixing (or paying to fix) things myself. But, I do lose out on the ability to deduct the mortgage interest on my taxes– and I’ll miss out on the next housing boom. But I also missed out on the housing bust. I’m content that I may be losing an investment opportunity. I wouldn’t be happy in a cramped studio far away from the Path or in another town.
For the down payment, a major factor is your credit rating– you can meet with a mortgage broker before you search for your home to get a sense of the down payment expected. I’d be interested in opinions from any professionals in the mortgage industry. There was a time when 20% down was the minimum. Then, with the optimism that the real estate market would be booming forever, lenders loosened their standards and you’d see 5%, 3% or even 0% down. Then (shockingly) it didn’t work out so well when the sh*t hit the fan. Lenders are getting tighter– that doesn’t mean they’re all going to require 20% all of a sudden, but the days of a small down payment without really good credit are over. If you’re willing to stay in your first home for awhile, there are some great government programs out there with smaller down payments for first time homebuyers– www.hud.gov is a good resource to research these.
SEE THE REST OF THE GURU’S ADVICE AFTER THE JUMP!!
(Hoboken411 Financial Guru – Real Estate Buying, continued…)
Personally, when it comes to saving, I see far too many people who ignore how much savings they’ll have after they cover the down payment and closing costs. The fact is, emergencies are far more frequent when you own a property. Take the ongoing property tax fiasco in Hoboken. I saw a lot of people freaking out (and rightfully so) when their property tax spiked up overnight. Renters will still be affected (for those of you new to Hoboken, you’ll likely soon be introduced to the magic of the tax and sewer surcharge) but it won’t all come at once. If you get an increase, you’ll have some time to move out if you choose. It ain’t that simple for a property owner. Say you’re a renter and your boiler breaks– while it may take forever to get it fixed, you’re not fitting the bill. The property owner has to shell that money out– but the reward is, they can act quickly– anyone with an a*hole landlord could see the advantage of being to able to do stuff yourself.
Here’s how you can get a quick idea of how much mortgage you can afford. Use the calculator on this website: http://www.bretwhissel.net/amortization/amortize.html
You can either plug in the total loan amount and see how much that’d be a month or do this in reverse and figure how much you can afford to buy. Then, add in all the extra costs associating with owning– maintenance fee, property tax, heat, etc. Let’s say it’s $500 more than your current rent. Over the next few months, you can test your ability to afford this by moving $500 to savings on the same day you write your rent check. If you can’t, then you’re getting in over your head. If you can, it’s a good excuse to save the money you’ll need.
Trust me– I’ve met plenty of people who own that feel they’re not providing for their children. Mortgage payments can have a way of sucking your budget dry and preventing a parent from covering college costs. Can you rent forever and still get ahead? Sure– if you’re doing everything else wisely. If you live within your means, save for retirement and live debt free. (Although I’ve read comments on this site about some people who pay more than $3000 a month in rent. If you can truly afford that and plan to stay in town awhile, then renting is a waste in my opinion.)
OK, property owners– share your stories of success and failure when you took the home buying plunge. Was buying the best decision you ever made or your worst nightmare?
And keep those questions coming to email@example.com.