In article . com,
Slain wrote:
I also do not have the 20% needed for downpayment. What are some
options I can have?

One possibility is 80-10-10 financing. You take an 80% normal mortgage,
and make a 10% down payment, and take a home equity loan equal to 100%
of your equity (which is 10%). The home equity loan plus your down
payment makes 20%.

Your monthly payment will be your regular mortgage payment on the normal
mortgage, plus your repayment of the home equity loan, which will
usually have a shorter term than the mortgage, and be at a higher
interest rate.

The advantage this has over just doing 10% down and borrowing 90% is
that many lenders will require private mortgage insurance then. That
can cost more per month than the payments on the home equity loan in an
80-10-10 arrangement.

But before doing any of the above, or anything else other than the
common 20% down, 80% loan, consider how long it would take to save 20%.
Go into serious savings mode--eat out less, wait for movies to show up
on pay-per-view or at the rental store instead of going to the theater,
etc. You might be surprised at how fast you can accumulate money if you
really try.

Besides, knowing how much you can get by on is a VERY good thing to know
before buying a house, because a house is much more permanent than an
apartment. In an apartment, if you go through some rough times and need
to spend less, you can put your things in storage, and move into a
smaller, cheaper place, relatively easily. Or if you have to move to a
different city, it is again relatively easy.

In a house, that doesn't work. Sure, it CAN work, if you get very
lucky, and your hard times happen to fall at a time when your area is
booming, and there are plenty of buyers looking for houses. But if your
area is booming, you probably aren't going to be on hard times. Oops.
In real life, it is more likely that you'll fall on hard times when your
whole area is having problems, and it could take weeks, months, or even
YEARS to sell your house, unless you take a big loss. So, you want to
be damned sure that once you get the place, you'll be able to afford it,
even if you have to go through a job change, or other hardship. And
knowing just how much you can actually live on will help you figure out
whether you can do that.

I'd suggest that you take a trip to your local bookstore, and browse
through the books in the real estate section. There will be several for
first time buyers, and some of them are pretty good. There's "Home
Buying for Dummies", and "Mortgages for Dummies", and "Questions Every
First Time Home Buyer Should Ask" and something like "106 Mistakes First
Time Home Buyers Make (And How To Avoid Them)", and "Tips and Traps in
Mortgage Hunting" or something like that. Flip through a few of these,
and whatever others they have. Find a few that seem good to you, and
buy them and read them cover to cover. (And if spending $100 on books
to help prepare you for house hunting will blow your budget, you aren't
ready to buy a house, no matter what 0% down financing you might find).

But, getting back to a point I sort of raised earlier, analyze the hell
out of your finances! What I did was make a spreadsheet that let me
enter things like the following:

1. Financing terms for my loan,

2. House price,

3. Property tax and insurance rates,

4. House square footage,

5. Income details (salary, amount I contribute to my 401k, withholdings
for SS and Medicare),

6. Estimated utility costs other than electricity (electricity was
calculated based on my electric bills from my apartment, and the
assumption that this consists of a fixed portion that would be the same
in the house for things like computers, TV, fridge, etc., and a variable
portion for heating that would be proportional to the square footage of
the house).

7. Expected returns on my mutual funds, and expected appreciation of the
house,

8. Periodic expenses for a bunch of things. For example, I could tell
me spreadsheet that I want to buy a new laptop every 3 years for $2500,
and a new TV every 7 years for $3000, a new car every 7 years for $25k,
and so on.

9. Estimated maintenance costs for the house, as a percentage of the
price. (Although for specific items, like roof replacement, appliance
replacement, and things like that, I handled them under #8).

The spreadsheet would then tell me what my cash flow would be each
month, and draw me nice charts showing how much money I would have in
liquid form (mutual funds, bank) and my overall wealth taking into
account appreciation on the house and how much I'd paid, from now
through the next 20 years.

With this spreadsheet, I could drop in the price and square footage of
any house I looked at, and see if my savings were going to recover and
grow at an acceptable rate afterwards, and fiddle with things like how
often I want a new TV or laptop or car, to see what the effect of those
changes is. (It's a lot...going a year more on the car made a big
difference 20 years from now, for example).

More importantly, I could run this the other way--tell the spreadsheet
that I want to end up with a certain amount in savings, and a certain
amount in my 401k, 20 years from now, and ask it how much house I can
afford. (Result: I could go to around $350k and meet all my financial
goals and afford my desired level of non-house luxaries. My mortgage
company would have approved me to around $700k. This shows why you
should not base your budget on what the mortgage company is willing to
lend you!)

Oh, one more thing when you are figuring out the financial implications
of your future house: taxes. No doubt you've heard that you can deduct
mortgage interest (and for much of the life of the mortgage, most of
your monthly payment is interest!), and property taxes. HOWEVER, to
take those deductions, you have to itemize your deductions. That means
you do NOT get to take the standard deduction. So, if you are going to
have, say, $10k of interest and $2k of property taxes at a house you are
looking at, and are in the 25% bracket, don't make the mistake of
thinking you've got $12k of deductions there, so will be saving $3k/year
($250/month) on taxes compared to what you pay now. You'll lose the
standard deduction. That's around $5000 if your are single or $10000 if
you are married filing jointly. So effectively the house is only
getting you $7k or $2k in additional deductions, for a tax savings of
$146/month or $42/month. Nothing to sneeze at, but a far cry from
$250/month. It would be a shame to buy a place that is just within your
budget, when that budget was counting on the $250/month. People have
done that, I bet.

Let me sum all this up: (1) get books, and (2) analyze the living hell
out of your finances.

--
--Tim Smith