Buying or Selling a Home/Buy This Home or Not?
QUESTION: My wife and I recently relocated to the Temecula area in Southern CA. There is lots of new construction as well as pre-owned homes for sale in this area. We really have fallen in love with the area and are ready to settle down here for at least 5-7 years, maybe longer. While there are lots of choices, the only home we feel strongly enough for to make a purchase is a 2+2 new construction townhome. Price is $250K. Location of the complex is fantastic, reasonable HOA dues, amenities are first rate, excellent floor plan, etc. Here is where my question comes in.
The only way we would be able to buy this home is to borrow the 3.5% down payment ($9,000) from my 401k for an FHA loan. Is this just a terrible idea? Are townhomes not a worthwhile home purchase? Is now not a good time to buy in general?
We are happily renting at the moment, but we just loved this townhome and are willing to make it work if it is worth it. What do you think? Buy this condo or keep renting? Thank-you for your feedback!
ANSWER: Hi Michael.
Thank you for your question. You may find you have asked the wrong person! I am -almost- always in favor of buying versus renting. Here's why:
* Why pay for someone else's investment?
* Tax deduction! Mortgage interest, in your case mortgage insurance, and property taxes.
* You can put nails in, and paint on -- your walls plus change the flooring, cabinets, door knobs...all of things you'd like to change where you're renting but don't want to, well, pay for someone else's investment. <smile?
* HOAs - restrictions on fences, window type, exterior paint and some landscaping, noise level, pets...However, if there are amenities you will use, or benefit from --like a gym, pool, club house, RV parking, gated community, etc...and you don't want to worry about exterior painting, driveway, or roofing, then = good, again!
* Taking money from 401k. If you're young enough to replace the funds over time, then borrowing at no fee from your retirement -could- build you a faster nest egg, in many cases, than your 401k investment in the stock market.
Please keep in mind I am not a financial adviser and I am not familiar with your personal financial circumstances. So, the best I can do is give the general answer of 'yes'. As a Realtor, it would be my recommendation. If you haven't already involved a Realtor to represent you in the transaction, and you haven't already registered with the development you're interested in, I'd also suggest getting that professional help. If it's too late, here are a few suggestions for you to look for:
* Being oversold on 'upgrades' that you could do yourself, or contract out, less expensively and with better products.
* Keep location within the development in mind. You don't want to be too close to the pool and the lack of parking and noise that can bring.
* Don't under-estimate how annoying the sound of trains, traffic and lights shining in your window/s can be.
* Ask for a copy of the HOAs current guidelines. Be a part of the HOA board and have some say in your community. Watch for rent time limits. For example: You have to be on a waiting list in order to rent your condo out. If you can't even consider that for 5 years, what if you have a change of lifestyle and want/need to move yet the HOA won't let you rent your place out?
* Developer's warranty. Do they guarantee their, and that of their contractors' for a minimum of 1 year? What does their guarantee cover? Is there a deductible? etc. Be aware -- it is not uncommon for mysterious plumbing leaks, sinking floors, or whatever, that developers walk away from and can't be accountable for without litigation. No guarantee? Run!
-- Btw, be sure you completely understand how an FHA loan works and how long it will be before you can refinance and get rid of the extra mortgage insurance payment.
'Hope that helps! Best wishes, Michael. 'Sounds great!
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QUESTION: Wow. Thank-you Kathryn. That was an absolutely incredible answer! I have a few more details to fill you in on to perhaps provide an even clearer picture.
My wife and I are both 31 years old and do not have any children just yet. I believe that is young enough to recoup funds in my 401k? (I know you're not a financial advisor, so I won't hold you to it :))
The builder, Woodside Homes, provides a 10 year structural warranty and two years on anything "in the walls" plumbing and electrical. Everything else has a 1 year warranty.
Great advice on being apart of the HOA board. HOA mandates you wait 1 full year after purchase to turn unit into a rental. Doesn't seem too bad. I think FHA requires you to stay in the home as your primary residence for 3 years? Not sure if FHA cares if you turn it into a rental or not within that time frame.
I have heard the PMI does not disappear anymore from FHA loans. It is the only way I qualify since we are a single income household.
I agree with everything you are saying. We are just nervous to dive into the housing market as I have heard we are in another "mini bubble" for the sellers.
Still go for it?
ANSWER: Thanks, Michael. <smile> I believe you are young enough if your 401k is utilized appropriately; read as -- review annually and adjust accordingly.
From what you're reporting, I'd say the builder is providing good warranties all around. Good for them -and- you!
The 1 year wait period is to protect the community from investors. I believe you are correct about the 3 year stay FHA requirement. One of the things you'll want to know, just to know.
The restrictions on PMI will be also be good to know. AND, talk with your mortgage person re: when you can refinance. Being able to refinance into a conventional loan will release you from the FHA loan and the related PMI. AND, if you refinance out of the loan within the first 5 years, you may be able to get a portion of your Up Front Mortgage Insurance Premium back -- ask your broker for details.
NOTE: There should not be any restriction on who you use to finance your home. You should be able to use your own mortgage broker. I would recommend a broker versus your person at your local bank or the one the builder provides. The broker will have more lender options. This could mean lower interest rates and lower fees. If you're pressed by the builder, get a written quote and take it to your broker for comparison. The gov't has put laws in place to facilitate this process for the betterment of the consumer. This means standardized, easy to compare forms. Do take advantage of it!
No one knows what the market will be doing 6 months, 1 year, or 5 years from now. What we do know is:
* Going to a builder reduces the stress of competing for a home.
* What you can afford, and is best for you, is yours regardless of what the market is doing around you. Try to keep focused on YOUR financial situation and that most people kept their homes during the recession and have either approached, met, or surpassed the on-paper value they previously had on their home. The market goes up and down. It's life. What's best for YOU is what you want to concentrate on, right?
I know you're nervous. Trust me, that is completely normal! And, the financing and escrow period will keep you stressed. But, in the end you'll enjoy the feeling of accomplishment, a new home you can call your own, and know that going to work each day buys more than just a nice car to show for it! Of course, if you're nervous because you'll be pushing your finances too far, you definitely need to talk with a mortgage person who can look at your numbers and talk with you about what will / won't work.
Good luck, Michael. I sincerely hope it works out. Please do let me know!!
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QUESTION: Again, I want to thank you Kathryn for all your valuable feedback up to this point. I understand all your points. I have checked with my financial advisor on the 401K aspect and have been given the go ahead. I am only 31 and have lots of time to play with my 401K. I am not certain though that we could commit to this property for 10 years. 5 years, yes, but 10 years may be a stretch if we decide to have a child in the next 2-3 years form now as my wife and I have been discussing. So if I cannot commit to 10 years, should we back away from the deal?
My other major concern has just recently been brought to light with the severe drought conditions here in California. I am now wondering if it is a ludicrous idea financially to purchase property in a state whose water supplies are quickly dwindling down to minuscule amounts? If this does happen in the near future, I would think there would be a mass migration out of California into other states with water, leaving the housing market in California in shambles. I realize we cannot accurately predict the weather or see the future of water supplies here with certainty, but this is weighing heavily on my mind. Any thoughts on this consideration?
Hello again, Michael.
Unfortunately, no one is going to be able to set all your fears aside. You are doing the right thing in asking for financial advice. Numbers are very black and white. The housing market, as it depends on people's actions and inactions, is not so well defined. And, as you pointed out, there's no forecasting the weather years in advance...
What I can tell you is that historically the purchase of one's primary residence has been a highly valued investment financially and emotionally. Yet, everyone's risk level thresholds are different. Yours seems pretty low. It will take those around you who know you best to walk you through the reassurance you're going to need to take your next step forward. While you're going through this process please keep in mind the transaction you've been looking at will not be available forever. So, you may want to get on the phone with everyone you think could be helpful and make a decision sooner rather than later...
Good luck, Michael. Hang in there!