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Down payments, interest rates and other newbie questions...
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SuperBreakout



Joined: 28 Jul 2007
Posts: 11

PostPosted: Sat Jul 28, 2007 12:57 pm GMT    Post subject: Down payments, interest rates and other newbie questions... Reply with quote

Hi All! First post, many questions... Smile

My fiance and I are beginning the house buying process. I've got all the regular concerns about whether now is the right time to buy or to wait a bit longer. I don't expect anyone to be able to answer that kind of question. What I'm really curious about is some of the basics...

Some background on us: I'm 33, she's 30. We have a combined household income of $156,000 + bonuses. She has some hefty student loans, mine are paid off. I've been in my profession for over 10 years, she just graduated (starts her full-time job in Sept.). I have a $500 /mth car payment that will be paid off in Feb. 2008. She will need a new car within a few months for around $400/mth. We've never owned before. We rent a 1 bedroom apartment Somerville for $1200 / month. She will work in Somerville, I work in Andover. I moved here from Canada to be with her while she went back to school. She is American and has lived her whole life in the Boston area so moving somewhere cheaper isn't an option. Smile

Affordability: when I run the above numbers through some of the online calculators they come up with a range of $450,000 - $600,000 depending on the interest rate. I've been looking at 3br, single family homes in Medford, Arlington, Stoneham and Melrose. Right now, I can find a house that meets our goals of size and quality with asking prices between $400,000 - $450,000. I'm hoping that with a market correction we can get something for under $400,000. Is this realistic? Should I expect these to get as low as $300,000 - $350,000 in the next 2 years?

Down payment: I've been the (nearly) sole income provider for the last 2 years so I don't have much saved. $9000 in the bank, $15,000 in 401k. I can't conceive of being able to come up with a 10% - 20% down payment on $450,000 without saving with both our incomes for years. I've read that first time buyers can get by with 0% - 5% down and just have to get mortgage insurance. I've also read that due to the sub-prime meltdown these kinds of mortgages will be / are hard to come get. Shoud I expect that we'll be required to have 20% down? I'm also unclear about what makes a mortgage "sub-prime"... an adjustable rate? no down payment?

Interest rates / Credit score: I've lived in the USA for just 2.5 years and the only credit I've had is an corporate Amex card which I've paid on time and haven't carried a balance. She should have a very good credit score but neither of us has actually checked. I've seen many websites that do this but they all seem kind of sleazy. Is there a recommended provider? Our banks? Should we be married before getting pre-approved? How are credit scores adjusted for couples?

Buyer's agent vs real estate agent: Does anyone have experience using a buyers agent? This concept is new to me but was recommended by my fiance's father. How much can you expect to pay a buyers agent? If they work on a fixed fee, are they willing to help with a prolonged search?

I want to say how much I appreciate the work and expertise of all the regular posters I've come across on this forum!
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tt



Joined: 02 May 2007
Posts: 19

PostPosted: Sat Jul 28, 2007 3:20 pm GMT    Post subject: Reply with quote

SuperBreakout I'll offer my opinions as time allows...


Right time to buy?: In the opinion of many the simple answer is NO . Prices continue to fall while foreclosures are accelerating, we're a long way to the bottom...

Down Payment: It's curious that you are “unclear” on subprime and ARMS, your post is otherwise well researched, go to Bankrate.com for explanation of the multitude of mortgage options. There is conflicting evidence as to how much mortgage companies have actually tightened lending in the face of the credit meltdown. Wells Fargo announced yesterday that they are doing away with there subprime division entirely while Countrywide still offers a wide array of gimmicky mortgages.
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admin
Site Admin


Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Sat Jul 28, 2007 7:56 pm GMT    Post subject: Re: Down payments, interest rates and other newbie questions Reply with quote

SuperBreakout wrote:
I'm also unclear about what makes a mortgage "sub-prime"... an adjustable rate? no down payment?


The term "subprime" has been used inconsistently to mean a variety of things in the past. Recently, I have noticed that it is mainly being used to describe loans to people who don't have a good credit history. However, sometimes it has been applied to loans that have non-traditional features, such as no down payment (as you mentioned), negative amortization, and/or stated income, for example. To help distinguish things a little better, the term "Alt-A" is also used to refer to loans with the non-traditional features which are made to people with satisfactory credit. This is my current understanding, anyway.

SuperBreakout wrote:

Buyer's agent vs real estate agent: Does anyone have experience using a buyers agent? This concept is new to me but was recommended by my fiance's father. How much can you expect to pay a buyers agent? If they work on a fixed fee, are they willing to help with a prolonged search?


I think that normally, the 6% commission that the seller pays to his broker gets split evenly between the selling agent and the buyer's agent, so they each get 3%. However, there are buyer's brokers who will refund part or all of their 3% to you, and who you pay hourly during the search. I think the implications are pretty obvious - there is a potential conflict of interest in the traditional scenario since the buyer's agent has an incentive to rush you and to have you buy at a higher price, whereas in the second scenario the broker will probably be quite happy about a prolonged search, since that means more hours for him.

- admin
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mikeremote
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PostPosted: Sun Jul 29, 2007 12:52 am GMT    Post subject: Credit score Reply with quote

My friend, the Federal Trade Commission has a good website about getting your credit report/credit score:

http://www.ftc.gov/bcp/conline/pubs/credit/freereports.shtm

You are entitled to a free credit report each year from each of the 3 main agencies. If you want your actual credit score you have to pay a modest fee, which you can do at the same time you claim your free credit report. All of these agencies will try to sell you extra products where you pay some fee for "credit watch" or "identity protection" services, but I don't recommend that. Just click no. You get all the information over the web in just a couple of minutes.

At the same time, I recommend finding an article on Yahoo Finance or some other site about ways to boost your credit score.

Good luck!
MikeRemote
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SuperBreakout



Joined: 28 Jul 2007
Posts: 11

PostPosted: Sun Jul 29, 2007 3:07 pm GMT    Post subject: Reply with quote

Thanks for the responses guys!

I tried using annualcreditreport.com but it said it couldn't give my report online. I've downloaded the forms so I'll try mailing that in.
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Sun Jul 29, 2007 3:23 pm GMT    Post subject: Reply with quote

SuperBreakout wrote:
Hi All! First post, many questions... Smile

Affordability: when I run the above numbers through some of the online calculators they come up with a range of $450,000 - $600,000 depending on the interest rate. I've been looking at 3br, single family homes in Medford, Arlington, Stoneham and Melrose. Right now, I can find a house that meets our goals of size and quality with asking prices between $400,000 - $450,000. I'm hoping that with a market correction we can get something for under $400,000. Is this realistic? Should I expect these to get as low as $300,000 - $350,000 in the next 2 years?


I'm going to guess that we're not going to see a nominal decline of 25% over the next two years (which would be an inflation adjusted decline of over 30%, on top of the 10% inflation-adjusted decline we've already seen). From the numbers I've seen prices are probably 20% too high right now, not 30%. Under $400,000 seems a more reasonable estimate, but it's really a guessing game.

I'd start saving right now very aggressively, especially if you're only paying $1200/mo in rent. If you can't start saving at least a $1000 a month for a down payment today, you're not going to be able afford a mortgage payment plus other homeowner costs (maintenance, taxes, etc.).

The good news is that prices probably won't climb over the next year or two, so you can save and not worry about being priced out of the market.
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SuperBreakout



Joined: 28 Jul 2007
Posts: 11

PostPosted: Mon Jul 30, 2007 11:55 am GMT    Post subject: Reply with quote

Is it better to save 1 - 2 years for a down payment (assuming prices drop or at least remain flat) or to buy within the next 6 months without a down payment?

Now that we have two incomes it should be easy to put aside $1500 a month. 24 months of doing this will net us $36,000 which is much less than 20% of the average Boston area home.

Would not having a down payment force us into an ARM? Require higher interest rates? Or is the only drawback the mortgage insurance required with less than 20% down?
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admin
Site Admin


Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Mon Jul 30, 2007 12:43 pm GMT    Post subject: Reply with quote

SuperBreakout wrote:
Is it better to save 1 - 2 years for a down payment (assuming prices drop or at least remain flat) or to buy within the next 6 months without a down payment?

What's the downside to waiting?

SuperBreakout wrote:
Would not having a down payment force us into an ARM? Require higher interest rates? Or is the only drawback the mortgage insurance required with less than 20% down?

I believe that you can trade off the private mortgage insurance for a higher rate piggyback loan. See http://www.bankrate.com/brm/news/mtg/20020725a.asp I don't think that you would be forced into an ARM, but that isn't something I have looked into, so maybe that is the case.

- admin
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admin
Site Admin


Joined: 14 Jul 2005
Posts: 1826
Location: Greater Boston

PostPosted: Mon Jul 30, 2007 1:50 pm GMT    Post subject: Re: Down payments, interest rates and other newbie questions Reply with quote

SuperBreakout wrote:
Shoud I expect that we'll be required to have 20% down?


To return to one of your original questions, this is something that I have been wondering about too but don't know enough (yet) to come to to any conclusions. There was an interesting discussion on the return of 20% down payments at The Housing Bubble Blog this weekend. Based on the information there and elsewhere, the way that mortgages are funded is dramatically different than in the past when 20% down was common. Wall Street owns the loans now, whereas it used to be local banks, so we are in uncharted territory and it is unclear what ways borrowers will be affected (apart from higher rates) as investors come to realize the risk involved.

- admin
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JCK



Joined: 15 Feb 2007
Posts: 559

PostPosted: Mon Jul 30, 2007 5:19 pm GMT    Post subject: Reply with quote

I believe the general setup is that a first (i.e., normal) mortgage, either fixed rate or ARM, can be up to 80% of the appraised value of the home without paying PMI. Many lenders will let you go up to 95% (loan to value) LTV with the first mortgage (again, either ARM or fixed) if you pay PMI until you reach the 80% LTV threshold.

As admin has pointed out, you can also do a two tier financing approach, by taking out a first mortgage for 80% of the value, and, the up to another 15% using a home equity line. From speaking with mortgage brokers, my understanding is that you need at least 5% down to get standard market interest rates on the first mortgage, regardless of which approach you choose.

Given the subprime fallout, it's difficult to to predict whether this will continue to be the case, or whether lenders will start requiring more in the way of down payments in the future, again as admin has pointed out.
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SuperBreakout



Joined: 28 Jul 2007
Posts: 11

PostPosted: Mon Jul 30, 2007 11:55 pm GMT    Post subject: Reply with quote

admin wrote:
SuperBreakout wrote:
Is it better to save 1 - 2 years for a down payment (assuming prices drop or at least remain flat) or to buy within the next 6 months without a down payment?

What's the downside to waiting?

- admin


I've been renting for over 10 years and I'd really like to move into the next phase of my life. I really dislike the apartment we live in now (landlord really - two family home, she lives upstairs) but we can likely find something else to rent in the area for around the same price to alleviate that concern.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Tue Jul 31, 2007 12:50 am GMT    Post subject: Reply with quote

Lowball.

However, you need the $36k: $25k for the 5% down payment and about $7-10k for the closing costs and prepaid accounts. You really ought to have at least another $20k for an emergency fund. Further, you should leave a little room between your family jewels and the hurdles you're jumping over, so you should be able to easily save a decent amount after the mortgage (28% of your gross monthly income should cover mortgage, PMI (if needed), property taxes and property insurance.

There is almost all you need to know on this website. Take a few hours and read all the posts. Others reeled in the information, you just have to read it. Best luck, and give back a few value adds for everyone else.
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SuperBreakout



Joined: 28 Jul 2007
Posts: 11

PostPosted: Tue Jul 31, 2007 10:38 am GMT    Post subject: Reply with quote

Thanks for the great responses all.
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BK - former Owner
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PostPosted: Tue Jul 31, 2007 3:25 pm GMT    Post subject: Emergency Fund and down payment Reply with quote

SuperBreakout,

You need to get your financial House in order before buying a home - you need to be prepared for losing a job, an illness in the family,

1. You need an emergencey Fund that is at least 6 Months of expnses (I prefer to have an emergency fund that will sustain us for 12-18 Months - I'm a survivor of the Tech Wreck of 2001).

2. You need a Down payment of 20%

3. Find a Financial advisor who can help you invest your saving in Funds that might do well in an inflationary environment. Make sure they've been in business for a long time - and find out what they were recommending in January of 200).

Financial safety is the most important consideration for a family considering buying a home. If you don't have an emergency fund and you don't have the down payment - are you making a prudent choice.

Renting is cheaper than owning - add up all the costs of Owning - replacing appliances, repairing the roof, Real Estate properties going up 6-9% annually.

When you rent you can spend all your free time socializing, working on hobbies, and spending time with your loved ones - the Landlord worries about the snow removal - the lawn care and managing contractors.
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john p



Joined: 10 Mar 2006
Posts: 1820

PostPosted: Tue Jul 31, 2007 4:56 pm GMT    Post subject: Reply with quote

You know, after my last post, I was kind of thinking the same thing as what BK just said.

$9k saved for a 30 something isn't that much, however if you've been footing the bill on your own nut, pooling your money together will give you some economies. It might benefit you to start to identify where some of the drains may be.

What you'll find is that kids that had their parents pay 100 percent of their college, gave them a car once out of school, and let them live at home rent free for a period after college have had an opportunity to sock away money which by 30 has been able to grow. Around 30 these groups start to separate. Think about if you had $100k in the bank. A 6-10% return would be more than most raises people get in a year. This is why hard workers that have had to foot their own bills and pay their own way for everything fall behind those who start off with family money. The rich are getting richer.

Stepping back and looking at the economy think of it this way: Rich people grab first. When the shareholders grab the profits of a company at a greater rate than they give raises to the workers, their returns pump out the money and it creates a richer ownership class. Now, what are these owners going to buy with all of the money? Well they tried real estate and created a bubble. Now all this money is floating around bloating the stock market. Money is available and is looking for a home. We need low interest rates so that we can pay for this catastrophe in Iraq so it created cheap capital which means that it is cheaper for a company to take on debt or for someone to get debt to buy a company. Because a company can either issue stock at a high price and take on debt at a low cost of capital there is tons of money out there. Some will try out the international scene but might find that it is more volatile than they'd hope. Further, the rich in other countries might be betting on the US workers versus their own socialistic nations so money might flow to us even though it seems that things are bad.

This is what is next (in my view). With all this money out there and with a shrinking workforce, the top talent will be paid a premium. I remember being in an MBA marketing class and I thought that a car manufacturer should market their engineering talent. I was laughed at and was told that it was all about the cup holders... Well, look at the Verizon ad's today; they showcase the workers, you see them walking through collocation facilities and you see the servers and routers... I think investors will start to get that an empty brand label is what it is, empty. The smarter investors will start to get that having a talented group with a developed game plan and tried and true best practices will yield more than just a brand name. People will pay for talent and professionalism will make a comeback. Once people finally get that they should reward those who lay the golden eggs, you will get wage inflation for the talented which will target our resources on the best and brightest which will catapult us into a new frontier economically. Those who want the big raises available will work harder at the task at hand versus networking and self promotion (building an individual brand).

If you ever go to the dog track (don't tell your financial advisor) anyway, the dogs chase "Swiftie" a fake rabbit that runs along a rail. That rabbit makes the greyhounds chase them. Right now, economically "Swiftie" ain't movin. The dogs don't have to run anymore, they are tearing each other apart to get a piece of "Swiftie". What our economy needs to do is to get people moving and work to catch "Swiftie". We need leaders like JFK that put us in a race to get to the Moon; we need a collective goal like curing diseases for an aging population or getting off of oil. What we don't have is a carrot; we don't have "Swiftie" to chase. The people with the carrots are happy just the way things are. So, either they lose and a socialist comes in and takes from them through taxes using the will of the people, or a few brilliant inventors partnered with pioneering investors turn things upside down. If the professional working class are so browbeaten that they lose their fertility, it may take some time. I think the rich will suffer the fate of the Chinese Seven Brothers

http://findarticles.com/p/articles/mi_qn4196/is_20050522/ai_n14637845

What will they buy if everything is swallowed up? If they yank out way more per year than what they pay the workers, what else will they invest in other than the successful companies? This is why we have bloated PE ratios and why people buy brands and not earning potential, after a certain point being productive is whatever.

I think an economic meltdown, a war with a challenging enemy, or something catastrophic will provide the impetus for the change. I hope it more comes from ingenuity and a realignment with fundamentals and professionalism.

Our economy is like the tunnel water leaks. When they poured the concrete walls they used slurry, a liquid type material that would push against the forms and float above the concrete as it was being filled into the forms. Because the slurry wasn't desanded or kept clean as it was scheduled to it got "cake" or junk in the slurry so that when the concrete filled in it went around these air pockets of junk which could not withstand the water pressure and are most likely the locations where the water is breaching. Because we have outer walls and inner walls the water tracks between each of them and we have no idea where the breaches may be. I think they are using wave echo machines to detect them, but that is a joke. The "cake" or the junk are like the unprofessionals who get rewarded too much in our economy, the subprime lenders that ignore the professional standards and allow the junk in. That is fine when someone is building a deck in their back yard, but we can never be great and build something great without great men of integrity. The lack of integrity and professionalism created the lack of value for the professional standards requiring the slurry to be desanded. Their personal egos and greed gave them the mindset to circumvent the standards. Just like the we can't find the leaks, we can't find those responsible. If the State could just go back to the fundamentals and look at the properties of the materials and read their specifications, they could reverse engineer the process and find out what went wrong. They can't retrace the steps because the fundamentals are beyond them and they don't know how it was supposed to be done to begin with. It's like the inmates are running the asylum.

Well I just went to a family wedding and I had to pass on some of my dance moves so that they would never be lost; they are a family treasure (sometimes I wonder whether they are laughing at me or with me....) My question is whether we can figure it out in time to prevent the crash or war or catastrophe? That's leadership, not standing on the wreckage afterwards and trading off of someone else's pain and suffering. Actually reading the briefing "Osama to attack within the United States" instead of going on extended vacations might have been the better course of action, but hey, if you've got a guy like Karl Rove that can turn your failure into success and brand you as a "War President", you know dress you up in an Eisenhower jacket and teach you some power red meat phrases like "resolve", "wanted dead or alive" etc. you don't have to worry about being real, just be an empty brand like the "Education President", or the "Uniter not Divider" or take away our liberties and protections and label it the "Patriot Act". Fundamentals of statecraft tell you that although it is better to be feared than loved, one should avoid being despised. Well we're despised around the world right now thanks to our silver spoon rich brat that never had to share his toys. What we need to understand is that competence matters, talent matters, reward competence, fundamentals matter in our leaders, the building materials we use, in every member of our society, and our word means something so we shouldn't blindly reward someone who put their name on letter asking to release a grand mother rapist. Both sides need to get the "cake" out of their slurry. Many think that the Central Artery Tunnel is emblematic of Boston's government. I see it as a possible opportunity to change the direction to a positive. I think that what we're seeing is lame so far, but we need to keep the heat on as it will change our fabric. We need to respond, if people get away with it it will change our consitution of who we are, people will realize that they can get away with it. Justice needs to be served. Many I talk to think that our economy won't balance until this President is out of office and we are out of Iraq. After Hurricane Andrew in Florida the Codes changed down there and the structures can weather the storms better. We've been dished the lessons, if we learn them I think we'll be reunited with our fundamentals.

This long blog really is trying to get you to think about whether we're headed for a big economic storm or not. If you think we can't pull out of this than rent and grow that emergency fund as big as you can. I am an optimist and belive in Americans so I think people will dust themselves off and adapt in a manner which respects capitalism and democracy. I think ingenuity, professionalism and most importantly integrity are the keys to yielding the potential of the marriage of democracy and captialism.
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