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I'm going to be moving sometime within the next year (likely this spring) from my long-time apartment in Rosslyn to hopefully either a townhouse/duplex or a small SFH/rambler. The only areas I'm willing to consider are northern Virginia inside the Beltway---Arlington, Alexandria, Annandale, Falls Church. I have a fed job in Rosslyn I'm unlikely to leave at any time in the foreseeable future, and my family is just me and my young child, who will be going to Montessori school throughout elementary (if unable to get into the APS program, most likely schools in the Annandale/Falls Church area).
My debt to income ratio (not counting child support) would imply I could spend $2685 on housing costs, but that is much higher than my comfort level; I would feel much better capping out around $2k per month, particularly if I'm hoping to pay for private school.
I have about $20k so far, but I'm concerned that if I spend it all on a down payment, I will have nothing left for emergencies, not to mention that I'm driving a very old car that will need to be replaced eventually, and I need furniture. I could reluctantly take $10k out of my IRA as a first time home buyer. My questions:
*What is "rent to own"? Is it worth looking at? What are the down sides---limited inventory and higher rent?
*Should I rent? That would leave open some flexibility (what if I choose a school and it doesn't turn out to be a good fit?), and would allow me to preserve cash and continue growing savings for awhile longer.
*Or should I buy? Interest rates and housing prices are so insanely low that it seems like a real possibility now; not long ago, I didn't think I'd ever be able to afford something inside the Beltway in a reasonably safe neighborhood. Add to that how quickly rent has risen (my apartment is easily worth 25% more than it was going for 6 years ago when I moved in...I've simply been lucky with a private landlord). I'm afraid that if I rent a house at $2000 this year, I won't be able to afford rent increases in the years ahead (my salary will not grow, it's at cap for its grade). Also, subsequent moves will be harder---I don't own furniture or even a TV right now (furnished place), and I hate buying all that stuff and then potentially moving again in a year or two. Max, I'd like to put down roots for my kid's sake in another 2-3 years anyway. I'm fearful I'll miss an opportunity and end up buying after the market recovers and interest rates start to rise.
Thanks for all input. I hadn't really considered buying at all until I looked at ... and ran the calculator and realized that there were homes in the $330k range (give or take) that wouldn't be much more in mortgage than my current apartment, and would still be below $2k a month even with property taxes added in. Not sure about how it would work out, though, once I add in homeowners insurance, taxes going up when property values recover, and of course $x per month for maintenance/repairs/improvements. Sorry for the long post, the decision seems so complicated!
Last edited by FindingZen; 01-27-2012 at 02:29 PM..
Reason: sorry, only generic MLS sites like realtor.com can be referenced here
Since you say your $20k would eat up all your savings, I would suggest you continue to rent until you can save more money for a down payment while preserving a 3-6 month emergency fund. The last thing you need is to spend your last dime and then your car break down. Also when purchasing you should factor in around 3% of the purchase price in closing costs.
I don't have a crystal ball, but it doesn't seem the housing market will bounce back any time soon. The Fed recently said they are going to continue to keep interest rates low so this is an indication that consumer confidence is still low and they don't want to hinder growth. Plus there are still a ton of foreclosures in the market as well as waiting to go into foreclosure. Last I heard there were 7 months of inventory. The way I see it, it'll be like this for at least a few more years.
True, but continuing to rent also means tying up $2k in security deposit, and then setting aside another $2k for a future security deposit in case I have to move again (usually you don't get the old deposit back until long after you've put up the next one), and the cost of hiring movers once I have heavy things to move (furniture). I also lose some flexibility, in that I'll need to buy at the end of a lease, neither before nor after. Right now, I can move anytime so long as I find a tenant to replace me (easy in this area), so I can afford to wait and shop around. And I could put a smaller down payment to retain some savings (as with an FHA loan), and/or tap into the IRA. Just not sure which is the wisest financial move in the long run. Buying certainly has its risks, and I'm no handyman.
My wife are in pretty close to your situation, so here's my perspective.
We are currently living in a cruddy apt. in the Crystal City area with WAY below market value rents, thanks to a landlord who prefers stable tenants rather than maximizing his rent. However, we're going to be having a child and need more space and more "mod cons," as the English say. I get to walk to work at the moment, but my wife works in Reston, so we're going to swap convenient commutes and rent a townhouse in one of the better parts of Herndon.
Based on what we saw, you will need to focus on Annandale and older SFH neighborhoods like Edsall Park if you want to stay inside the Beltway for $2,000 or less, and even then you're not going to get the greatest houses--you're essentially looking for about the lowest that rents will go. We ultimately decided that it would be better for one of use to be close to home & daycare etc., so we stopped looking inside the Beltway.
Like you, we have a high household income and some savings, but not nearly enough to put down 20% on anything in this area. Realistically, you're going to need at least $60k for a downpayment (probably a lot more for anything decent), and as you say, you don't want to have zero left in the bank after doing that. We're planning on a couple more years of renting before we have the down payment ready. I don't know whether lenders are still permitting 10% down payments, but that seems foolish anyway because of having to pay PMI, which is just money down the drain.
I've always been a little dubious about rent-to-own, simply because it's a private arrangement between you and the owner. As such, the terms can vary wildly and you're pretty much on your own. Basically, what happens is that the owner applies a percentage of your rent to the purchase price. After a certain number of payments, the house is yours.
The laws on rent-to-own vary across the country, and I'm not sure about Virginia. Traditionally, the danger was that you could miss a single payment and lose everything if the owner evicted you, since the owner retained title to the property until you paid off the full purchase price. In a regular property sale, the buyer acquires title immediately, subject to a mortgage lien by the bank. As such, the buyer has a lot more protection, since they actually own the house from day one. In rent-to-own, the renter owns nothing until the final installment is paid. However, some states have enacted laws to protect the tenants/buyers in rent-to-own situations--in other words, they are entitled to a refund of some sort if they are evicted.
You don't see much rent-to-own around here, because it is more prevalent in slow or depressed housing markets. Owners can sell easily here and have little interest in dragging things out for multiple years, plus the legal and financial risks they take in becoming a landlord. I've seen a few ads for it on Craigslist, but they all seem to be in the ghetto parts of Woodbridge, where selling a dump is more difficult.
Sounds like you want someone to convince you to buy, but the reality is you just don't have the cash to do it. There are lenders that will do 5% down with single payment pmi (ie no monthly) if you have good credit. FHA is actually pretty terrible since they raised the PMI; I'd advise against it unless your credit is less than stellar.
You won't be saving any money by buying and the last thing you want to be is house poor. The types of homes you could get inside the beltway for $300K will either be really tiny or in need of some updating. I'd say keep saving. There's nothing wrong with renting and you are not going to miss out on some crazy second housing boom.
Charveldude...your situation does sound very similar, right down to being walking distance from work right now (not that it matters when I have to drive the kid to preschool!).
I'm perplexed by this notion that pmi is money down the drain...rent payments aren't money down the drain?
Boyd888...you may be right, in the sense that I'm asking myself why not buy if the monthly payments are going to be the same even with taxes and insurance. In the long run, I'd prefer knowing that my housing costs won't go up so I can budget. I'm talking to people who have had 6% rent increases the past two years in a row. I'm just not sure it makes sense to continue renting and hassling around with more moves. I have no problem with tiny; I'm living in a 700sq 1-bedroom apartment now, anything out there is going to be a step up in standard of living. So, unless the mortgage calculators on redfin, trulia, etc. are way off, it seems like there are plenty of acceptable options that cost no more (except perhaps in maintenance costs) than renting something similar.
I'm perplexed by this notion that pmi is money down the drain...rent payments aren't money down the drain?
When you are renting you are trading money directly for a living space. True, you don't get any of it back, but you don't get back anything from non deductible interest/pmi/property taxes/maintenance when you own either. PMI literally does nothing for you and is essentially a penalty for not putting 20% down. It IS money down the drain.
I'm not telling you don't buy, I'm saying save more first. Big difference. It may not seem like it is going to cost more, but ask anyone who bought their first home in 2006 how it worked out for them. There are risks to buying and I just think you need more savings first.
Charveldude...your situation does sound very similar, right down to being walking distance from work right now (not that it matters when I have to drive the kid to preschool!).
I'm perplexed by this notion that pmi is money down the drain...rent payments aren't money down the drain?
Boyd888...you may be right, in the sense that I'm asking myself why not buy if the monthly payments are going to be the same even with taxes and insurance. In the long run, I'd prefer knowing that my housing costs won't go up so I can budget. I'm talking to people who have had 6% rent increases the past two years in a row. I'm just not sure it makes sense to continue renting and hassling around with more moves. I have no problem with tiny; I'm living in a 700sq 1-bedroom apartment now, anything out there is going to be a step up in standard of living. So, unless the mortgage calculators on redfin, trulia, etc. are way off, it seems like there are plenty of acceptable options that cost no more (except perhaps in maintenance costs) than renting something similar.
You rent, there will be money lost from rent increases and rent. You buy, there will be money lost through mortgage interest, unexpected housing repair costs, condo fees, potential drops in house prices. It evens out. The only way to truly avoid losing money on housing is to move in with parents. Or minimize lost money through either a gigantic down payment or through renting out rooms, although I don't want the stress of tenants.
If you seek to make money from house appreciation, then I think you need to look in a different country.
I view PMI as "money down the drain" because you're not really getting anything for the money, other than reassurance for the lender. Rent payments are the actual, direct cost of buying shelter.
To add to Boyd888's points, I would say that you (all of us, not you in particular) have to get beyond the emotions evoked in being a homeowner and look at it purely as a financial transaction. My wife and I have struggled with that very thing.
There's nothing "magical" about home ownership. In many cases, it makes better financial sense to buy than to rent. However, doing financial contortions simply in order to become a homeowner is rarely a good idea. Small down payments plus PMI result in a much higher monthly payment and a considerably longer period of time before you have any real equity. To me, it makes more sense to wait until your financial and personal situation is right before taking the leap.
The only way to truly avoid losing money on housing is to move in with parents.
LOL, love it, that's awesome. Honestly, I'm not trying to make a buck off a house...I'm only hoping to come out ahead in the sense that I'm projecting what rents will be ten years from now versus how much it will likely cost to buy a house in this area at that point...seems like owning is the better deal. Besides, I've been a homeowner before (twice---trust me, emotionally I've been averse to home ownership for awhile), and in the end the 20% down was a financial sleight of hand because then we simply took out a bigger mortgage so we'd have cash on hand to "finish out" the house.
I agree that PMI is wasted money if, when added to other costs of ownership, it brings your monthly total far above what you'd be paying in rental costs. But if total costs including PMI are x and rent is x, there's no difference---they are both a cost of putting a roof over your head. And if rent is x and you still have y to save toward a 20% down payment, then couldn't you make a balloon payment to get rid of the PMI the same number of years down the road, except in a home you own during that saving time instead of in a rental the whole time?
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