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So I've got a plan I think makes sense but defies a very big rule of good personal finance so am hoping for some input.
Where I am at, a 2 or 3 bedroom apartment/house and 2 bath will rent for about $1500-$2500.
Right now I'm paying about $1650 for a 2/2 apartment. Houses near me sell for about $150k-$250k.
I've looked at a few at about $180k and generally like them. If I were to put $9k down (5%), with taxes, insurance, PMI, etc, I would most likely end up around $1100/month on a 30 year mortage. I could afford to put 10% down but it would be stretching my budget. My plan is to buy a house for a low down payment, eat the PMI and accept I'll have low equity for a while. I'll be saving about $500 a month from my current payment to the new one and I could stick that into a money market account and pull it out for repairs or (when it grows big enough) at 20% equity to get rid of PMI.
The way I view it is I'm essentially betting that in the next 5 years my house's lost value + repairs will be less than $30k ($500*12*5) plus the equity I would build (roughly $15,000 by my calculations).
This would mean in essence I'm betting that my $180,000 house won't lose $45,000 in value over 5 years in order for it to be a better choice than renting.
I know it would be alot better to put 20% down, but in my current situation I will not be able to save that for another 3-4 years most likely. So I've got one bad decision (renting) vs another (low down payment mortage).
You seem to be underestimating a tad on the monthly but its close, don't forget the hoa. Either way it looks like a better deal to buy if you can find a house.
Nope. I did the same math a while back - found that if I did not buy, I would never get ahead of the rent increases, and that was before tax benefits. The clincher was any potential rent (as an investment property) would put me in a positive cash flow. When I bought two years ago, I was in a bidding war and paid top dollar, but rent was just as competitive. My decision was driven by immediate needs and shrinking mortgage availability on the horizon. Good thing, too, 97% financing was suspended 90 days after my purchase. My rate is in the mid 3's, even after LPMI.
I did the same math and got the same answer.
(This was my 5th home - my first on my own. When I was married, we owned primary and an investment home).
So I've got a plan I think makes sense but defies a very big rule of good personal finance so am hoping for some input.
Where I am at, a 2 or 3 bedroom apartment/house and 2 bath will rent for about $1500-$2500.
Right now I'm paying about $1650 for a 2/2 apartment. Houses near me sell for about $150k-$250k.
I've looked at a few at about $180k and generally like them. If I were to put $9k down (5%), with taxes, insurance, PMI, etc, I would most likely end up around $1100/month on a 30 year mortage. I could afford to put 10% down but it would be stretching my budget. My plan is to buy a house for a low down payment, eat the PMI and accept I'll have low equity for a while. I'll be saving about $500 a month from my current payment to the new one and I could stick that into a money market account and pull it out for repairs or (when it grows big enough) at 20% equity to get rid of PMI.
The way I view it is I'm essentially betting that in the next 5 years my house's lost value + repairs will be less than $30k ($500*12*5) plus the equity I would build (roughly $15,000 by my calculations).
This would mean in essence I'm betting that my $180,000 house won't lose $45,000 in value over 5 years in order for it to be a better choice than renting.
I know it would be alot better to put 20% down, but in my current situation I will not be able to save that for another 3-4 years most likely. So I've got one bad decision (renting) vs another (low down payment mortage).
Am I missing anything?
Think of it this way. Instead of paying $1650 for rent you will be paying $1100 for rent. As long as you know you can stay there for a few years and sell it free and clear as long as you don't lose money you will be fine.
Also when you buy your mortgage won't go up unless your taxes and insurance do, when you rent they can double it when they want you out, and even a 3% increase means about $50 more a month, in 10 years that's $500 more a month in rent.
Look at it this way. You are paying for a home either way. Renting, you are paying for someone else's home. Buying, you are paying for your home.
Also, if the mortgage amount is $1100, if you put an additional $100 a month on the principal each month, you can reduce the debt payoff by at least 10 years as the first 10 years on a 30 year note is almost all interest.
So, do you pay for someone else's home or your home? That is the final question. BTW, put $100 a month back for repairs. Something WILL break.
We purchased a $240K home with 5% down and it lost 60K of value in less than 5 years. Granted, this was during the big housing crash, but it CAN happen. 8 years after we purchased and we are unable to sell because the house has not yet crept up in value to break even (we currently owe about $209K, plus we would need $$ for realtor fees, etc. which we do not have). Buying a house was the biggest mistake we have ever made.
Buying may be the right thing to do for you, but be sure that you will be willing to live in this house for more than a few years if needed, not to mention paying that PMI for a loooong time. Taxes and insurance can and will go up, probably every year. Our property taxes have gone up every year, even when our house tanked in value. We intended on living in our house for 5 years max, while we built some equity....which didn't happen.
Generally speaking I think buying is right for most people, vs. renting, but with buying you don't have the ability to walk away if things go south without trashing your credit. Just another POV.
You are definitely on the good side for buying a house. There are sites online that let tell you how long you need to live in a certain area in order to payoff all your closing costs via your savings from not renting. I have run into them by accident, so don't have any links to share, but they are around. In your case, 10 yrs of rent will be equal to the cost of a 200K house which is an excellent 'buy' position in general.
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