Wait or Buy House in Denver area?

Question

My wife and I would like to mortgage a house in Denver. However, the house we like is $360k and we dont have 30% to make as down payment. It would take us at least 4 years to save that much and we'd rather wait than buy now.

The option of putting 3.5% down with a government loan is attractive, but our monthly payments would be high and we would have interest on 96.5% of the money loaned. Expensive.

We also thought about buying a condo/townhome, but feel that would be a segway away from saving for "the house."

I'm curious if it'd be beneficial to wait until we can put a 1/3 down on a house or take advantage of low interest rates, and put down 3.5% and get the house we want?

Note: I'm assuming that interest rates will be higher 4 years from now.

Suggestions/opinions welcomed...

Grant P. · Answer

I would stray away from the FHA loan unless you have a poor credit score.  The fees and new PMI rules make this a last resort IMO.

I work with multiple lenders that do 3% down loans for conventional financing if you are going to occupy the property.

It sounds like to  need to get in contact with some new lenders, and do some more research.  If you need the names of some lenders in Colorado that can help feel free to contact me.

Welcome and good luck

Jon Holdman · Answer

That's a more complex question that it might seem.

Folks who make commissions off buying and selling houses love the idea of buying a start house, a move up house, a mini mansion and then a move down retirement house.  Lots and lots of commissions in all those transactions.  I think that's a serious mistake because of all those commissions and other closing costs.

A house you live in is, IMHO, just an expensive doo dad.  Like a car or boat.  Somehow people think buying a car is a bad thing and buying a house is a good one.  IMHO, they're both bad.  They're just expensive things that suck your money.  People sometimes say "but I paid $50K for this house 30 years ago, now its worth $250K, it was a great investment".  That's only a small slice of the story.  In that 30 years you probably paid a large amount of interest, taxes, insurance and routine maintenance.  You probably made a number of significant upgrades.  A house with a 30 year old kitchen would be described as "dated" or "fixer-upper".

OTOH, we all have to have a place to live.  If our income supports a nice place, and $360K in our area would certainly qualify as nice, then why not.  Just realize its not an investment.  Its a liability.

I don't think the interest rate is much different between the two loans you're considering.  You don't need 30% down, unless there's something more complex going on in your financial situation.  My math says P&I on a 3.5% FHA loan for a $360K house is $1658 and on a 20% down loan its $1375.  $284 a month difference.  No idea what PMI is these days.  You probably do, so add that on.  Now, consider that buying now vs. buying later avoids the need to live somewhere else now.  If, for instance you buy a $150K condo now and sell it in four years, you'll have to make all the payments between now and then, and you'll have $15K or so in transaction costs to buy and sell.  If you rent, you'll have to pay rent for the next several years.

So, I think this is just a math problem.  If you can afford to rent and save up $60K ($1250 a month) over the next four years, then write down your total outlay over the four years.  Impossible to say where interest rates will be four years from now.  Four years ago I predicted they would be higher now than then.  I'm dead wrong.  So, just go with todays rates.

Now, compare that to the higher payment buying now.  Consider where you will be if you put that extra $1250 into your payment instead of socking it away.

Callum K. · Answer

Most lenders I have spoken with only require 20% down payment (unless regulations have changed recently).  It does not help the objective but it might shorten your savings period.  I would check with multiple lenders to see what is required by each.

With respect to an FHA loan, although the 3.5% is enticing, I bought my first home as an FHA back in 2008 and since then they have increased the PMI to almost double, they have added significant fees to closing, and now you must keep PMI for the life of the loan rather than it being removed after you reach the 20% equity.  To me, I think FHA is not worth it right now, so I would look deeper into other options, but thats just my opinion.