Should I buy the house???

Question

I am 23 years old and I just started my first job about 6 months ago. I make 40,000 year and I have 23,000 dollars in the bank right now. I am trying to decide how much i should use for my downpayment, and how much I should keep in the bank for an emergency fund. After I buy the house my total monthly expenses will be around 1700 including mortgage, bills, utilities, groceries, gas, car payment....everything. How many months worth of savings should I keep in my emergency fund, and how much should I use for my downpayment. House is around 115,000.

Thanks.

Answer 1

to those of you assessing points: i apologize for the verbosity, but i do believe that the purchase of your first house is scary enough as it is, so all these pre questions deserve honest and thorough answers. don't hold it against me!

i will address the savings issue after i tell you these things.

have you gotten a mortgage broker or mortgage lender yet? that is the first step. do it now, before someone else buys the house, because at your age, this is one of the wisest moves you can make for building wealth. you need to know what types of mortgages are available to you, what downpayment will prevent your having to pay private mortage insurance (PMI, which represents security against foreclosure to the people, the investors, that purchase mortgage portfolios, thereby providing cash to the banks in order to loan it out all over again). usually, you will not pay PMI if your downpayment is 20%. if you choose not to put the full 20% down, then you can ask the bank to discontinue charging you PMI, and it must abide to your request, once you have made principal payments that will bring your initial investment (down payment) up to the required 20%.

you do that by forming a habit that you can never lose on. that habit is to prepay the principal on your mortgage balance. you send in any amount that you have extra per month, or you use the proceeds of the income tax return that you will get (a return on the total dollars you spend for the interest portion of the loan, which is really high for the first 15 out of 30 years, as well as the deduction for the real estate taxes you take). but it's better if you pay it month by month, even if only $30 a month. the faster you pay off the principal, the fewer years you pay on the entire mortgage, and the interest you save is ASTRONOMICAL. there is no such thing as a prepayment penalty on residential, owner occupied real estate.

you see how, if you put down less than 20% to avoid PMI, you can build it up to the required 20%? it's easy.

you need to learn from your lender if it is truly reasonable for you to pay $115k for this house at your current income and your debt level. if your lender tells you you can get a higher purchase price as well as mortgage and there are better houses in the neighborhood, i say what i was told and had to learn the hard way: it is true, true, true that always, you should buy the most real estate that you can. it should be the best you can. it should be in the best LOCATION. try not to get a house that you have to spend all your free time on fixing!

okay, now for savings:

some people feel better if they put x number of dollars into their so-called "escrow" account, which would be a savings account that gains interest, to cover emergencies. well, it sounds to me that you have analyzed your costs so well that i doubt an emergency would arise that you have not already considered. that is, unless you think you'd face a layoff.

here might be an emergency: you go through the house with your home inspector, per contract, and he tells you that you will need a new hot water heater in about one year as well as a new roof (ask if you have to tear off the old one) within 3 years. either you will put that amount into your emergency fund, or you will be faced with borrowing it when you need those things.

the one thing that concerned me in answering you is this: how did you compute that your monthly mortgage payment and other expenses will be? you cannot do that, really, until you know, based on what amount you shall put down, because your down payment will affect the balance of the mortgage. interest will be charged on that mortgage amount. that's why i said up above, first, that you really need to talk to a loan officer.

know that gas prices doubled about 5 years ago, and that com ed is requesting a doubling of its electricity bills this year. i think they will get it. so imagine those costs too.

whatever your choice is, get the house. get a house as soon as possible. if it is a single family, detached house instead of a townhouse or condo, all the better: that real estate always, always sells quicker than any other, and it sells for a higher sales price against the listing price. it sells because the american dream is to have a house all your own, with a yard for the kids.

if you have a good health plan with your employer, perhaps you'd put aside some nominal amount to cover your deductible. also buy life insurance that will pay off all your bills, including the mortgage, in case you die, and do write a will.

it's best to get the car paid off and not to buy a brand new one with high payments over a long period of time. try not to live with debt.

gee, i'm sorry this answer is so long, but i know how it is. the other thing to know is not to allow yourself to be "house poor." that would mean that too much of your income is being put towards principal, taxes, insurance, and the ever terrible interest. if you pay out 40% of your gross monthly income on PITI, that is too much. then the other factor, that your lender will tell you about, is the percent of your gross monthly income that should go to PITI and your debts.

again, i tend to be wordy, but at least i hope i have given you thorough advice. buy the house. get your toehold now, in a big, huge buyer's market! good luck to you!

Answer 2

Should you buy is more complex than what does it take in terms of financing. Well done on making such a great start (job, savings and awareness of the need for emergency funds).

The local market conditions, your desire to stay in the area if there is a job transfer on offer, the chance that you could lose your job, future personal plans where you would be setting up home with someone else and other such things can be more important than the numbers.

As to the money side as that really was your question.

Some will say you need 6 months of gross income in liquid savings to weather a temporary set back. Others might say 12. The idea is you want to stay current with your bills while scrambling to find a new job if you get laid off. Plus you need cash for when something major breaks or there is an accident.

Your income and your savings implies you are pretty well positions. Normal assumptions as to a mortgage would have you putting 20% down, pay some sum in closing costs and then have all the move costs. If this is your first home expect to have to buy a bunch of stiff you might not have. More furniture, curtains, yard equipments, tools, etc. Hence the real cost of a move can be pretty high. Still worth it in some cases.

How is the local market. Is it really a good time to buy? I think down markets are a great time to buy as you are under less pressure to rush and sellers can be flexible. See if you can get the seller to cover your closing costs or otherwise help out (shifts some of the costs onto the mortgage as you pay their price but they pay for some of your costs that would have come out of pocket).

I purchased a house after about 1 year on the job. I was renting a room in a house prior. I decided to get roommates for the new home so that I would not have much to pay each month. It made a real difference to the cash flow. With the extra tax benefits I was able to actually reduce my monthly to less than what I was paying when I was renting and I was now the owner. It worked out just fine and I certainly ended up better off financially.

Answer 3

Like you many people are in need to sell their house for cash fast. Now days there are so much companies doing this. But people should choose the best one. A few days ago I have taken a service from a company around. They are best around.here is their website link- http://www.denversellhousecashfast.com/

Answer 4

Congrats on your upcoming purchase.

You are VERY smart to buy a house early. It will likely be the best investment you'll ever make, and it will only go up in value. And up in price if you wait.

The general rule of thumb is that your mortgage should (ideally!) not be more than 1/4 of your yearly income, but as long as THE MORTGAGE doesn't surpass 1/2 of your net, you'll do just fine.. So if you GROSS (not net) 2000 a month, you should ideally pay around $500.

If your credit is awesome, put down 10% and you'll get a fair interest rate - mine is between 5-6%, and my credit is a little rough. If your credit stinks, put down 20%, which usually means that the lender will put less emphasis on your credit history - since they have more money in their hand. But in your case, that would wipe out your entire savings. So shoot for 10%. Always have a couple thousand for reserve, in case the fridge breaks, or you discover a problem after you move in.

I did a conventional loan, with a FIXED interest rate. NEVER go ARM (Adjustable Rate Mortgage) because if times get rough in the financial world, you'll be feeling the pain. And make sure your loan allows you to pay off early.

You should always keep 3-6 months of "emergency fund" stored up for time between jobs, injuries, etc, but don't be so hard on yourself right out of the gate. BUT... on the same note, don't screw around getting that money saved up. If you work for a company that offers a 401k, invest 10%, let them match whatever they match, and in most cases, you could borrow against your own 401k. Most people have the inability to save 10% of their income for emergency purposes (me included), so I take out 10% before I even get paid, and it is tax deferred.

Figure after your downpayment, you will pay 100 bucks for every 10,000 you borrow. So after your 11,500 down payment, you'll have roughly 100,000 borrowed, so, you'll pay about a thousand a month for that mortgage at a 9% interest rate. SHOP FOR THAT LOW INTEREST RATE. Don't worry about your credit being pulled so many times - the difference between 5% and 6% will easily make up any "extra activity" that goes through your credit report. I went through Coldwell Banker, and they had a VERY good program and I got a good rate despite my credit report being a little shoddy.

I make about what you make, and my outgo is about the same as yours also. You'll do just fine. :)

Email me if you have any other questions. Good luck!

Answer 5

Since you are a good saver, I would keep my money (availavle to me) and only put the minimum down (3%-5%). But don't get lofty once you close ans start going crazy with the cash, remain frugal.

Also, just having the money on hand as a 'reserve' will in many cases be sufficient to secure low interest rates even though you are not putting down a larger percentage

Good luck, hope this helps.

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