By Admin on Feb 27, 2010 in Personal Finance
Aamina asked:
Right now I’m renting and I’m paying $1300 a month for rent. I’m looking to buy a place because the apartment that I live in is really dingy and the people in my area are really scary. the city that i live in is extremely expensive, so $1300 a month for rent is actually really cheap.
If i want to rent some place nice, it’s going to cost me $1700 – $200 a month. So now i’m looking into buying.. but if i buy with an amortization period of 25 years, my mortgage per month will be $2100, without maintenace and other fees.. which means i’ll be paying minimum $2500 a month for my home… which I can’t afford. But if i go with a 35 year amortization period my monthly costs will drop to $1780 and with maintenance fees, hydro, etc., maybe around $2100 per month.
Right now I’m renting and I’m paying $1300 a month for rent. I’m looking to buy a place because the apartment that I live in is really dingy and the people in my area are really scary. the city that i live in is extremely expensive, so $1300 a month for rent is actually really cheap.
If i want to rent some place nice, it’s going to cost me $1700 – $200 a month. So now i’m looking into buying.. but if i buy with an amortization period of 25 years, my mortgage per month will be $2100, without maintenace and other fees.. which means i’ll be paying minimum $2500 a month for my home… which I can’t afford. But if i go with a 35 year amortization period my monthly costs will drop to $1780 and with maintenance fees, hydro, etc., maybe around $2100 per month.
So if I’m losing money right now paying $1200 for rent that I will never again see, would it just be smarter to buy a home with a 35 year amortization period? What else do I need to consider with the amortization period other than paying more interest? What if I want to sell the house in a year or two? does that affect me?
There was a time when everyone (pretty much) assumed that real estate would always go up. We have found to our horror, that is not always true. Lately, we (as a country) have had to come to grips with the idea that property values can go down and even are going down. I have read that property values are expected to lose at least 6% over the next year.
That is why so many people feel that their loans are “underwater” and are walking away from their mortgages. Underwater is owing more on a house that the market value of the house. One of the ways people could afford a house in the past, was by getting variable mortgage rates. The problem was, they could afford the initial rate, but could not afford the rate as it escalated. They could afford the house at 5%, but could not afford it at 7 %. Many people just thought they would be able to refinance to a lower rate. Now that is very unlikely.
Since you are worried about the cost of a mortgage at $2100 versus one at $2500, that doesn’t leave you with enough room to be wrong. Throwing away money on rent is just an idea. What if you bought a house with a 35 year amortization and found two years down the road that it was worth 188,000. Then you are offered a fantastic job three states over but have to sell the house to move. You are planning to rent it out when it doesn’t sell? Maybe it won’t rent for 4 months. You are now paying both mortgages and the renter runs out owing you $ 6000? Now you are paying two mortgages, one house is underwater, you are out six thousand dollars…Can you see this is a recipe for disaster? If you are renting, the worse that is likely to happen is that you have to pay a months extra rent if you break your lease.
If you are really smart. Pay yourself the difference between what you pay in rent and what you would pay to own. Put that money in savings until you are at the point where you do not have any doubt about whether you can afford a property, and you have someone else to help you pay the mortgage or you are at a place in your life where you know that nothing could make you leave. Then, think about buying a house. You do know, I assume, that you will now have to put 20% down. That is $40,000 on a $200,000 house.
LiberryAnn | Mar 3, 2010 | Reply