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My husband and I have a tough decision to make in the next couple of months. We've been in this area for almost 2 years and we love it. We are both in our 40's with no children and really would love to buy a home and settle down. We hoped to be able to do that within a year of being here but I had just got re-employed at that time.
At the beginning of June (2 months notice) we have to inform our landlord whether we are moving. Our hope was to buy a home this year, but we are debating whether it is the best time for us. We are also worried that if we wait a year housing prices and interests rates will be significantly higher. Some information:
* By conservative estimates right now we could afford a home up to $220,000
* My husband's job is stable and he will likely be earning around the same he is now with raises for years
* My job is stable but I took a job to "get my foot in the door" and am looking for a job in the company. I should hopefully be earning considerably more with a new position in the next year.
* With a 5k reserve we would have about a 18k down payment. (Certainly not 20%)
* Present Rent - About $900 a month
* Want to buy a no HOA home to stay in for many, many years to come
* We both have excellent credit scores with no debt
* Only loan obligation is one car payment
*We are primarily looking at houses in Tempe, but South Scottsdale, Chandler, and Ahwatukee may be possibilities.
In some ways we are very ready but we have a couple of concerns. For one, we don't have a 20% down payment. Houses in the current $180,000 to $220,000 range tend to have deficiencies and challenges. It would be much easier for us to find home to be happy in for many years if we were able to afford more. Houses in the $250,000 range look a lot more appealing. The issue is the market. Will those $220,000 homes be considerably more in a year's time? If we wait a year will we not have really gained anything financially because of interest rates and housing prices?
In a year's time I hopefully will be making potentially double what I'm making now. We also should have more of a down payment, though if we are looking at more expensive homes it still likely won't be 20%. There will certainly be less ambiguity regarding which job I will be in and our income. This would be a much easier decision if we knew what the future home market and interest rates will be.
Does anyone have any advice on the situation? What would you do in our shoes?
If you find the perfect home on the market and in your price range, I would go for it now. Rates are low and no one can predict whether housing prices will rise or fall over the next year.
All realtors I have spoken with believe that the market will be increasing in price over the next few years as more buyers enter the market (those that foreclosed or short sold their homes are at the point now where they can now get approved to buy again). Rates are still quite low. Your challenges are ones you already pointed out. Finding a home in a non-HOA at that price point isn't easy. Can you go month to month with your landlord? Or can they offer you a 3 month lease rather than a year?
And I wouldn't stress too much about the downpayment. There are FHA loans out there for down to 3%. Of course the more you can put down the better off you will be...but it can be done. Talk to your lender.
If you find the perfect home before your notice period to landlord, go for it, but it sounds like you haven't been able to do so at this point. Perhaps you could negotiate a month to month or a shorter term lease or extension of your current lease for six months?
If it were me, I would wait to figure out what my financial situation was going to be a year from now. I would want more clarity in that department, and I would also want to save more for a down payment. I would use this next year to live as frugally as possible to save toward the down payment, which would give you a little more cushion when figuring out what you can afford.
Sure, interest rates may go up, as well as home prices (and they may go down!), but I don't think it will be enough to justify buying now versus later, when you have more financial certainty with your job, and more financial security with your down payment. Also, if you can get 20% down, or closer to it, will be helpful.
I have been in the market for a home just over a year and I haven't noticed much of an increase in prices (though I know home prices are more realistically tied to various locations and price ranges), or any increase in interest rates. So, if there is an increase in either or both over the course of the year, I doubt it will be so great that it will have a huge impact on your buying power.
I'm on the sideline until next winter/spring, but ready to buy if the perfect house comes along. Taking my chances on any increases in prices/interest rates, which would be offset by additional financial security.
For the OP - great considerations on your timing for potentially buying a home. One more thing to consider.
You note that, on June 1st you could give two month's notice. That infers you would be moving into a new home on August 1st. That doesn't give you a whole lot of time to first decide if you want to make the plunge into the market, find an agent, find a house and then go through escrow and closing. You may be limiting yourself to a select few homes where the sellers are able to turn over on a fairly quick closing date.
As another response noted, you should ask if you can convert your lease to better terms so you can have broader options. From your description of your thought process, I bet you're very organized and are terrific tenants. I suspect the landlord would give you some leeway in the lease.
I think there are many families in Phoenix in a similar situation and facing the same question. That's why markets move in big trends one way or the other for most of the time. I see young people becoming more interested in buying too. As the other poster said, can you go month to month and then search in peace? On the other hand there should be somethibg reasonable out there right now too.
My husband and I have a tough decision to make in the next couple of months. We've been in this area for almost 2 years and we love it. We are both in our 40's with no children and really would love to buy a home and settle down. We hoped to be able to do that within a year of being here but I had just got re-employed at that time.
In a year's time I hopefully will be making potentially double what I'm making now. We also should have more of a down payment, though if we are looking at more expensive homes it still likely won't be 20%. There will certainly be less ambiguity regarding which job I will be in and our income. This would be a much easier decision if we knew what the future home market and interest rates will be.
Does anyone have any advice on the situation? What would you do in our shoes?
Hi OP!
I like your situation a lot. Here's my breakdown.
Important Note: I don't work in the mortgage industry, I'm not a realtor, and I'm just benchmarking in a spreadsheet here.
Mortgage rates are difficult to predict. If the economy sucks, they'll stay low. If the economy soars, they will probably go up somewhat. Current 30-year conventional rates are around 3.7% for at least 10% down. Let's say you buy new - a builder will normally add a little to the lowest rate available. If you buy existing, you might still have to shop to get the super-lowest possible rates.
Let's go with these assumptions:
$220,000 home price
4% interest rate
1.25% tax rate
Primary Mortgage Insurance (PMI) at .75%/yr (not sure if this is realistic, but let's go with it)
The principle and interest would come in at $945.28.
Below 20%, you'd have to pay PMI, which could add $70-80 a month. Call it $1020.
Most communities have a token HOA, so let's say $1080.
With homeowner's insurance at around $50 a month, you're at 1130.
With taxes at around 1.25%, you add $230.
I'd guesstimate your basic cost at $1360.
Let's say interest rates go up a full point. At 5%, your incidental costs don't go up, but your principle and interest do.
The principle and interest would come in at $1121.96.
Below 20%, you'd have to pay PMI, which could add $70-80 a month. Call it $1195.
Most communities have a token HOA, so let's say $1255.
With homeowner's insurance at around $50 a month, you're at 1305.
With taxes at around 1.25%, you add $230.
I'd guesstimate your basic cost at $1535.
Or in other words, each 1% change in interest rates would add about $180/month to your payment. In the grand scheme of things, that's not what I'd consider a significant amount, so over a time frame like yours, neither home prices nor interest rates would make a big difference.
Home prices are easier to predict. One thing I've noticed is the trend in Phoenix for home prices to remain flat because of two factors: aging inventory and buildable land. In areas with less buildable land, home prices tend to increase slightly. In areas with lots of buildable land (the Southeast/Southwest valley), prices are not driven by relative scarcity. Buying a house in a development next to open land means that someone, at some point, could put up shiny new houses over on that land, and you have no way to guess whether those houses will cost less than what you'd want to sell your house for. Not to mention that new-build houses tend to be slightly smaller, on smaller lots, and tend to cost somewhat more.
Right now, the builders are somewhat distressed, because mortgage applications are way down, and I'd guess that goes along with a dramatic drop in qualified buyer traffic. So they're going slower on large developments (such as the expansion of Layton Lakes in Gilbert, or the new builds at Tatum & Pinnacle Peak in north Phoenix), and discounting in existing developments. That's not true across the board - some developments are busier than others, of course - but builders invest a lot opening a development, and once it's open, they have a significant incentive to build even if they don't fully maximize their profits.
So I'd say that home prices are likely to remain mostly flat over the next 3-5 years. By mostly flat, I mean perhaps a 3-5% increase in price per square foot over 3 years. If we use the model above, here's what that would look like.
Let's say you buy in 3 years, the price goes up 4%, and the interest rate has gone up to 6% by then.
The home price would be up perhaps 3%, to $228,800. (only up $8,800)
The principle and interest would come in at $1,235.
Below 20%, you'd have to pay PMI, which could add $70-80 a month. Call it $1,310.
Most communities have a token HOA, so let's say $1370.
With homeowner's insurance at around $50 a month, you're at $1,420.
With taxes at around 1.25%, you add $230.
I'd guesstimate your basic cost around $1650.
To summarize:
4% - buy now, $220,000 - payment is about $1,360
5% - buy later this year/early next, $220,000 - payment is about $1,550
6% - buy in 3 years, $228,800 - payment is about $1,650
You could scale these as well. If you decided to buy at $250,000, just take the $1550 and multiply by 250,000/220,000. If you decided to buy at $280,000, take the $1550 and multiply by 280,000/220,000.
The advantage for you is that your income levels are going up, while your mortgage payment would stay the same, so your general sense of affluence will increase over time.
In your shoes, I'd buy something now - at the highest price point that will let you sleep at night - and lock in the low interest rates, with the expectation that your house won't appreciate much in value over time.
There is no reason to concern yourself about the 20% down payment. Of course having 20% down does have some advantages like no PMI and a lower principal. But there are some great 5-10% down programs which offer great rates and will allow you to remove PMI after 5 years. In a way, I like to see buyers have a little extra cash in the bank for unexpected expenses instead of pouring everything you have into the DP and end up short on reserves.
Only you can decide if buying now is right for you, but if you have not talked to a mortgage loan officer to get a solid estimate of what you are qualified for, what the costs will be to obtain a mortgage and what your payment estimates will be, you really should. There is no way to predict what interest rates, home values or rents will be in one, two or three years it is all speculation. You have to decide whether owning your own home is better than renting. The best way to make a decision of this type is to use factual numbers.
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