Alright friends. We just purchased a home - FINALLY 12 years after we arrived in US! Creating this thread to discuss home purchasing for those interested.
Summary
Home ownership is everybody's dream and a key step in life. The timing could vary from one person to another but the key factors for decision making as well as things that bring true joy in this process are quite similar. Financial situation, need for flexibility, personal/family situations and likes and most importantly being comfortable putting a peg in the ground are things that are key factors for decision making. However once you buy a home, the joy of home ownership, a sense of belonging, the way kids enjoy their own home is very real and invaluable even if one chooses to ignore the material comfort of the physical home ;and possible financial benefits of home ownership.
The remaining article (divided in two posts here) talks about following key steps:
1. To Buy or Not To Buy
2. Financials
3. Home Search
4. Price Negotiation
5. Contracting
6. Move & Setup
1. To Buy or Not To Buy
We arrived in US 12 years back. Then new 3-4 bed houses were available for as low as $60K in the midwest. And we thought we are certainly going to buy one right after college. Our reasoning then was simple, instead of paying $700-$1000 per month to an apartment, $60K for a new house was a no-brainer.
However, by the time I graduated and moved to Arizona for work, the housing market was already hot. By the time we were settled and ready to purchase the house which was around May 2003, we realized - the time is probably wrong.
So lesson # 1 - Purchasing a house immediately when you move from one city to another makes sense especially if relocation is paid by the employer. That willa) cover lots of costs either fully or partially - moving / closing / financing etc.
b) save you from multiple moves.
c) most importantly help you time key things in your life. many times we do have good gut feel of what is right. But fear prevents us from doing the right things. And I am talking purely about financial decisions!
The lack of green card notwithstanding, we were not sure we were going to settle in US. That substantially impacted our desire to buy home.
So lesson #2 - If you are anyway going to settle in US, then everything being equal, it's a good idea to buy a home. Do not delay it.
Finally financial planning actually paid a huge role in the decision. Until very recently we paid house rent almost same as a 3 bed apartment in Phoenix. And so enjoyed living in a house and yet were worry free from all hassles of owning house. But frankly we avoided the housing bubble and also purchased house today at a reasonable price and at very low interest rate. However I can confidently say that lesson #3 is that buying a house is NOT just a financial decision. Financial factor is a necessary factor but not a very critical one IMHO.
There are of course reasons why one shouldn't buy a home:
1. Job Uncertainty
2. Location uncertainty
3. Immigration uncertainty
4. Not wanting to spend time maintaining property chores!
But I think we finally made a decision to put a peg in our life and who knows tomorrow we might actually move to India. But the key to happiness is being rooted in today where you are rather than plan too much ahead in future or get stuck in past; and so we chose to do so.
2. Financials
Financials of course is a key thing. Rent vs Own comparison of course factors in. Renting means no maintenance costs, HOA fees, property taxes, insurance or warranty costs. Owning of course entails all those costs - but then owning also entails benefits such as building of equity as well as tax deductions on interest and property taxes. But equally importantly owning means locking in your monthly payment which is not true for renting. The rent will increase YoY. And that would be quite a lot over 30 years. With owning - yes you may end up paying more on the first month. But then that stays constant. Over time of course you are paying more towards equity rather than interest. So one needs to arrive at a comfortable factor from financial perspective to make a sound financial decision on buying a house.
Then the question is how - high you should go? A rule of thumb says 3 times your annual salary is ok. But depending on the market - the ratio could be 5-6 e.g. in san francisco or 1-2 in ohio. Of course one can choose to stay at 3 and choose to buy less or more home.
Finally the question is how much should you pay down. You can pay down 3.5% (e.g. with FHA loan for first time homebuyers) or upto 20% or more with lenders like citi wells fargo etc. We chose to pay 5% down simply to make sure - if there is another housing shock - we don't loose too much equity. I have friends who paid down 300-400K on a 600-700K house and then during the housing crisis the price crashed 60%. While the chances of further price erosion are less - it is entirely possible that the prices could continue to come down - especially as the interest rates go up. Another thing that does influence down payment is that it costs to buy a home other than the price of the house. The process to buy home - called closing - usually costs 0.8-1.0% of house purchase price. So unless the seller is covering that cost for you, you should be prepared for that cost as well.
Another cost that one MUST be cognizant of when buying a home is the cost to sell home. This matters a lot to somebody who is thinking of selling the home 3-5 years within buying it. The cost to sell home is HUGE. 6% of the selling price + closing costs (primarily title insurance). For a $500K house that would equal to $33-35K. It would be foolish to not consider this cost when making a decision to buy a home. Of course you can try to sell your home without an agent but I do not personally know anybody who has successfully sold or bought a home without agent. Just saying....
Finally, interest rates matter too but I am not a big believer that I would make a decision based on interest rate. The reason is - A persons ability to pay is tied directly to his income. And income doesn't vary hugely. So one is looking at 2-3-4K as his/her monthly budget to pay for house. So if interest rates go high - the house prices will come down to match the consumer budgets. So you can see why the interest rates are low today. That's the way to ensure "Price Stability" which Fed says is its mandate. (Funny how the same mandate is not followed on food and gas!!! Officially those things are out of inflation bucket. But hey that's a political discussion and so I digress!) So fed is trying to ensure that house prices do not go below where they are by adjusting interest rates.
I have come to the conclusion - that howsoever smart you are financially - including wharton MBA or Chicago MBA - DO NOT FIGHT THE FED. In other words don't try to think too much about interest rates and where house prices will be 5 years from now etc etc. Just do basic arithmetic on rent vs own and that's good enough.
Last few things that are important to consider about financials are loan time horizon (15 years vs 20 vs 30 vs 40 vs ARM) and type of loan FHA vs non-FHA, interest only vs normal etc. I didn't think too much there - 30 years conventional mortgage and no points. Period. Didn't want to be too smart and go for ARM. The rates are already low enough. I did look at 15 year rates though 2.85% sounded really good. But then one has to ask - can one just make extra payments and try to pay off in 15 years? I think that is perfectly possible. So I chose flexibility of 30 years rather than lure of lower interest rate. You can calculate the price of this flexibility over 30 years and make a decision for yourself.
One final advice - go for a local lender who works with a national lender. This is very useful to achieve quick close. The national lenders are swamped with work. So the closing process there is taking 2 months or more. A local lender also will be desperate to win your business. So you actually will find better deal. Get preapproved for 20% more than your budget. Get a quote from multiple lenders and play them against each other. Check if your employer has preferred lenders who will give you a good deal.
3. Home Search
I do not have any different advice here other than what everybody says - Location - Location - Location. First and foremost find an area that suits your daily schedule and is conducive for your career growth and your children's education as well as family friends cultural enrichment. Other than these things do use online resources to find out demographics of the area from economic, age, education and criminal perspective. Usually every county/ state has a sex offender registry and you can also find the registered sex offenders in an area.
Then we simply used ziprealty to find a good house. (But missed on using redfin which today seems better than ziprealty - plus they give 1% or more cashback!). Make sure you know whether you want 2 story vs 1 story, the size of house, pool or not, how old and so on. I wouldn't venture too much there - but my personal preference was for two story primarily for kids safety reasons. Just can't have their bedrooms on ground floor. But that's me. Don't read too much into it. Size is an important thing. As long as you can afford it - have a good size home. I am a believer in bigger the better (to the extent you can manage it!). Having a gated community is a plus but not a must in my opinion. But I more emphasized in spacious roads and less crowded layout of the community. I certainly will advise you to avoid crowded communities and especially Z lots where the lots are in Z shapes. Finally ensure HOA fees are not going to kill your budget. So this whole deal about community center / club house etc is ok ... but decide yourself whether you really need all that.
Article continued below..
