Should we purchase SFH? Advice needed.
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Anonymous
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Not really great at making wise financial choices but have seen a lot of wisdom here...so advice needed.
I keep hearing how interest rates are historically low and interest rates and home rates are on the rise...this makes me feel pressured to purchase a SFH house in the immediate future but not sure if that is wise. Here are our current financials: HHI: 160k Savings: 8k Retirement: 35k combined Age: 31 and 32 Student Loan: 80k Car Loan: 7k Condo Mortgage: 245k, value 160k (could break even renting out) Childcare: Will start paying 1k in fall for daycare We are considering at most a 450k house with a 100% mortgage option with no PMI through credit union and would ask for closing cost assistance. Should we just sit on sidelines until we have more liquid assets/less debt? If we wait on sidelines, should we focus on more liquid assets, less debt or both? No rocks please...seeking CONSTRUCTIVE advice as we don't have a strong financial background. |
Anonymous
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This is as much a cash flow question as it is an existential one. If you told me interest rates and balances I could build you a plan but without them, I can only give you broad brushstrokes.
Based on the figures I see here, I would strongly advise you against a SFH. You are in a negative equity position already, with a medium debt load and little to no safety net. What you are proposing is the exact recipe for foreclosure. Few priorities first - Your savings figures are low. You need to get that to roughly 3 months salary, ideally, six. This should be your first priority or if things go sideways you'll end up having to tap out your retirement, as you really can't tap the equity in your home, as its clearly underwater. Second, I'll assume the car loan is your other most painful from a cash-flow perspective. I would tackle that next. 7K is an achievable goal. Third, once you've done #2, the condo mortgage, I'd start paying bi-weekly rather than monthly. This will send in 1 extra payment a year in effect, and shaves about 7 years off a 30 year mortgage. Fourth, I'd re-assess your retirement savings and ensure you are getting the maximum from your employer contributions. Fifth, the childcare expenses feel quite low. Are you sure on these? |
Anonymous
| You are in no position to buy anything. You have no cash at all, negative equity in your condo, and a ton of student loan bedebt. Before you even think of buying you need a 6-mo emergency fund, 20% down on the house, closing costs, and money for potential repairs. Save 100K, then reassess. |
Anonymous
| Forgot to add, you can count on a single family adding perhaps $5,000 a year in expenses to your bottom line. Perhaps more. |
Anonymous
| Totally agree with PPs. You are not in a position to buy right now. |
Anonymous
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You don't need 20% down or 6 months savings.
Our position is almost identical to yours except we had no existing upside down mortgage to begin with. My advice: Refinance the condo with a 15-year mortgage with your credit union. Your interest rate could be less than 2%. That way, your monthly payments will pay down the principal so much faster so that you can get out from underwater and sell, and then buy a house. And pay extra every month if you can. |
Anonymous
| Refinancing when you're that far underwater is easier said than done. |
Anonymous
The upside down part is a pretty "except". And anyway. I dont think they can afford a 15-year. The interest rate wont be below 2%. 15-year rates are at 2.75% or so. Assuming they are at 4% now - they pay $1170 - refinancing to 2.75% would push them to $1660. Thats a big jump when they barely save money. This couple, bless their heart, is the exact couple that has no business whatsofuckingever getting into a SFH, or for that matter refinancing into a locked-in 15 year. They are WAY too close to the line. Yes, a 15 year will pay off the debt quicker. So will just sending in extra payments. They would be far better served doing that and keeping the cash-flow optionality if they end up with a few tight months. |
Anonymous
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21:07 Thank you for the thoughtful advice. Our student loans are a mixture of interest rates that I don't know off the top of my head but believe average about 3-4%. The car loan is 2.9% and our mortgage is currently 2%. I qualified for a loan modification before I got married (due to high DTI ratios not due to any late or missed payments). Through the modification, the interest rate was 2% for the first five years (two years left at that rate), 3% for the sixth year, and 4% for the seventh year until the interest rate is fixed at 4.875% for the remainder of the loan. My original interest rate was 5.375%. The child care costs are 1k per month not total...my apologies for not clarifying.
Unfortunately, I purchased my place in 2007 at the height of the bubble. My interest in buying now is partially motivated by this as I am nervous that at the point that I may get 100k saved as 21:13 suggested that both the prices and the interest rates will rise past the bargain they are now and I have a growing family that my outgrow this condo in the next couple years. Not an excuse to make poor financial decisions, just additional context. |
Anonymous
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We rent our TH out and bought a SFH. FWIW, my advice below.
I would focus on building emergency funds - 6 months of mortgage for condo minimum before you rent it out. What happens if you have a renter who stops paying and has to be evicted? (Though research how to pick a good tenant to prevent this in the first place, but still, you need reserves.) Your retirement is 35k - how much are you saving annually? This # should be higher, but need more information. What rate are your student loans at and what is your term? Same question on car loan. Depending if your debt interest rates are low, and if they are, I would focus on liquid assets. If you have long-term low interest rate debt, I would just keep making the payments. If any of it is higher interest rate (post those and I'll offer my opinion) then might need to eradicate that piece. Also - what is your condo mortgage? Have you done a HARP II refinance? Are you eligible? While you are the principal owner / resident, you should refinance this to the longest term, lowest interest rate you can qualify for (in my opinion). Once you no longer live there, you will not be able to do this. Finally, a mortgage broker will not count your rental income in your ability to service a new mortgage. I would start to dialogue with one now to find out if your 450k price is even realistic - it might be, and it might not. That is a good conversation to have early. |
Anonymous
| 23:09 here - I wrote this a few hours earlier and just hit submit - sorry see you have answered some questions. |
Anonymous
| OP again - so in terms of the condo, my thought was to keep it as a rental property so that renters could pay it off and it could produce income during retirement either through it's sale at that time or through monthly rental income. Do I need to sell or payoff the condo before buying a SFH if I have reserves to cover the potential of a few missed payments while renting? |
Anonymous
PP here again (15-year mortgage person) - I know people who got foreclosed on who did what you are trying to do - straddle two mortgages with one place underwater. It's just too risky. Even if your 15-year rate would be over 2%, I'd shop around, try to find a low 15-year mortgage, and pay that place down before moving. You are already in the market, so you won't miss any property value explosion because you own now, so don't worry so much about getting into the market by buying a SFH. I know people in your position, and that is what they are doing. Refinancing at 15 years and they cannot wait to break even and move. Plus I'm sure a $250K 15-year mortgage with condo fees cant be much more than a $450K mortgage payment at 30 years. |
Anonymous
| Or, do what another poster said and try to pay extra on your mortgage every month without refinancing (and without losing another 10K in equity in closing costs). |
Anonymous
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23:09 back - if you don't have enough cash flow to service both mortgages, I would be really really careful about renting - b/c you are one bad tenant away from a foreclosure (or a good tenant with a job loss- you get the idea...)
I don't think the lenders will let you push that too far anyways, but just personally even if they would, I would only feel comfortable with significant reserves. I will also add, that I have found the adage "Having no tenant is better than a bad tenant." to be true. Having enough cash or income to feel comfortable paying both mortgages is essential to being able to implement this philosophy. If you are really hard up for a tenant, you will feel like you have to just get someone in there. Can make for some bad tenant decisions which cost $$$$$ in the long run. |