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Homebuying
Ronjon
Registered User regular
Registered User regular
Setting (not essential to question):
So a few weeks ago 2 of my friends and I got together and decided we should move out of our parents homes by the end of the school year (seeing as we're going into our 4th year at college). We did some talking and we can easily afford about 900 a month in rent before bills (2 of us had moved out previously and have a solid grasp on how much bills cost, so don't be concerned). We looked around at several apartment complexes around our campus and the only thing 3 bedroom was 915 a month (2 bedroom 810ish), which fit our budget ok but just seemed real expensive. We discussed that since one of my friends had some money in the bank, he could make a downpayment on a house and we could just pay him money.
Question:
After talking to a real estate agent and a lender, the lender said with no down payment we could get a 100,000 home for about 900 a month on a 15 year mortgate based on the 1 guys credit. He has 4000ish for a down payment, how much difference will that make? I have heard of 30 year mortgages, if we're only planning on living in the house for 4-5 years how much ($$) will taking a 30 year mortgage over a 15 year effect monthly payments and total cost? Which would be better?
We've found a few 120,000 dollar homes we'd like, so if we could get one for 800ish a month that'd rock, but I don't knwo how 30 year versus 15 year mortgages work nor do I know how downpayments effect things. Any comments would be appreciated.
tl;dr: 15 year mortgage versus 30 year mortgage for college kids planning to stay in house for 5 years
So a few weeks ago 2 of my friends and I got together and decided we should move out of our parents homes by the end of the school year (seeing as we're going into our 4th year at college). We did some talking and we can easily afford about 900 a month in rent before bills (2 of us had moved out previously and have a solid grasp on how much bills cost, so don't be concerned). We looked around at several apartment complexes around our campus and the only thing 3 bedroom was 915 a month (2 bedroom 810ish), which fit our budget ok but just seemed real expensive. We discussed that since one of my friends had some money in the bank, he could make a downpayment on a house and we could just pay him money.
Question:
After talking to a real estate agent and a lender, the lender said with no down payment we could get a 100,000 home for about 900 a month on a 15 year mortgate based on the 1 guys credit. He has 4000ish for a down payment, how much difference will that make? I have heard of 30 year mortgages, if we're only planning on living in the house for 4-5 years how much ($$) will taking a 30 year mortgage over a 15 year effect monthly payments and total cost? Which would be better?
We've found a few 120,000 dollar homes we'd like, so if we could get one for 800ish a month that'd rock, but I don't knwo how 30 year versus 15 year mortgages work nor do I know how downpayments effect things. Any comments would be appreciated.
tl;dr: 15 year mortgage versus 30 year mortgage for college kids planning to stay in house for 5 years
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Ronjon on
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Also, keep in mind that there are lots of other expenses/pains-in-the-butt involved in home-ownership. Taxes, maintenance, bills, etc etc.
Not to mention the fact that you've never shared a living-space with these guys (or, it appears, anyone but your parents) before.
I would strongly suggest that you consider renting for at least a year -- especially if you only have a few thousand dollars to put down on the house.
I'm sorry that I can't help you with your 15/30 year question.
I totally see the validity in what your saying, we've all moved out at different times and get along pretty well, we've gone on a few long road trips and we seem alright. The one guy with the down payment is going to be collecting rent from the other 2 with no expectation of repayment of any sort, so he'd also be responsible for taxes and such, he's a bit better off that the other 2 of us so he can handle that aspect pretty easily. The main person also will graduate after the next year and will easily be able to afford the house by himself afterward, with or without roomates.
There are so many things that can go wrong, it's not even funny:
That's just for starters.
If, against all rational thought, you decide to do this:
The difference between a 30-year loan and a 15-year loan is that the payments are significantly lower on the 30-year loan, but a lot less ends up going towards the principal, so if you sell later, you end up with less money in your pocket.
You can google "loan calculator" and just plug the numbers in, and you can google up an explanation of the formula, too. Just for example, though, if you got a 30-year $120,000 loan at a 6% interest rate (assume this is after the down payment) your payments would be $719 a month, and after 5 years, you'd have paid down about $8400 of the principal. Obviously, you'd hope the value went up during this time, but if this is an area where you're buying a house for $120,000, I wouldn't bet on it. There'd be a substantial risk of losing money on the deal. Also, I doubt you could get a 6% interest rate as college students.
Assuming a 15-year loan, 6% interest rate, your payments would be $1020 a month, and you'd have almost $30,000 of principal paid off after 5 years.
Again, though, this is a really awful idea.
EDIT: Honestly, if your friend is better off than the two of you, it's an even worse idea for him, because he can get royally screwed if he doesn't know what he's doing, which, since he doesn't even know the difference between a 15-year and 30-year loan, he clearly doesn't.
That's good to hear. Just one more word of advice: If you decide to go through with this, get everything in writing. It may seem weird to draw up a contract between friends, but it has the potential to save a lot of pain in the long run.
Good luck, with whatever course you choose.
Since you're living in a home he owns, you two are probably (depending on local laws) technically boarders. Say he gets pissed off at you guys one night, and tells you "I want you both out of the house by tomorrow, or I'm going to call the cops and have them throw you out."
If you don't get your asses out of his house by the next day, he's going to call the cops, and they're going to throw you out.
So, again, if, against all better judgment, you decide to go through with this, make sure you have a notarized, legally enforceable lease, which lays out both your rights and his rights.
There's homeowner's insurance, for one. Also, taxes can rise by the whim of voters, who're more likely to increase property taxes that affect only a certain segment of the population than, say, sales taxes that affect everyone. You may be responsible for a bit of maintenance around the property; the city made us pay to replace cracked slabs in the sidewalk around our house.
You also seldom see all the problems with a house before you start to live in it; there could be repairs needed. What if the roof eventually needs repair, or if there's an unforeseen water problem? The actual owner might get fed up with it. One of you guys might be short on money one month, start thinking that you don't want to spend your scarce cash on maintaining something in which you have no long-term investment, and leave.
If you guys greatly value your friendship, you shouldn't stake it on a highly risky financial venture. Money problems can and very often do break up relationships of all kinds. Please be careful.
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of doom
Also, in an area like Wichita, where prices probably don't move very much, you're probably going to lose value in the property, since when you sell the house, it's going to have 8 more years of wear and tear on it (and knowing college students, those won't be easy years). It looks like the property tax would be about $1,400 a year (based on this site), so really, after five years, you're talking about $1000. Assuming you don't have any unexpected expenses.
That's a lot of risk for $1000. A hell of a lot of risk.
Mortgage is not all you pay when you buy a house. If you have less than 20% of the loan available for downpayment, you have to pay PMI. You also have to pay homeowner insurance, property taxes, water, and have a slush fund for maintenance/repairs. If the bank says your mortgage will be $900, expect to pay 20% more than that when it's all said and done, each month.
As for the difference in mortgages, 15-yr mortgages are better than 30-yr mortgages, but not everyone can afford them.
A mortgage is [usually] an amortized loan, so the total amount of interest is calculated into each payment. So the shorter the loan, the faster you pay down the principal of the loan and the less you pay in interest. Think of it less like a place you live and more like a possession. The sooner the loan is paid off the more money you make when you go to sell it, even if it isn't all yours. Technically you don't "make money" when you sell a house, but you get back a buttload of the money you paid in.
So think of it this way -- if you pay cash for a house, it's all yours. If you sell it the next day for the same amount, you get that cash back. If you use a 2 year loan, at the end of 1 year you own half the house, and if you sell it you get half cash and the other half pays off the rest of the loan. 15 yr, 30 year, all similar.
Of course it's not entirely similar as amortized mortgages frontload the interest so you really only pay down the principal as time goes on. Which is why they say it's useless to buy a house if you're only going to live there for a year or two, as you'll only be paying interest.
Now, here's the real rub. If the house is in the guy's name, HE gets all of the benefits. That means that all of that mortgage interest that all 3 of you pay? HE claims it on his tax forms and probably will get amazing tax refunds in the thousands of dollars. When you guys all move, or he moves and sells the house? HE gets the profit.
What I would recommend is for you guys to offer to stay "as tenants" and he is the "landlord." You can do that without an official contract, if you're all agreeable people. As in, he pays the homeowners insurance, the PMI, any repairs or upgrades, etc. And you guys pay rent each month for your portion of the house you live in.
It's not a horrible idea, it's just not a very good one. Most cities recognize unmarried co-owners for house titles, so it's not like you'd be the only ones going in together to buy a house. But if it's just one guy, he ends up taking all the risk -- and also reaping all of the rewards. That may be cool with you guys, but you should lay it all out on the table. Don't go with what the bank says -- go with, say, $1200, slanted towards whoever the actual owner of the house is.
tl;dr: 15 yr is obviously better than 30 yr. The payment is more but the cost is less.
Also -
Oh, please understand, I wasn't insinuating with my maintenance concerns that it's a bad house. It's just that shit goes wrong with houses. Weather happens; age happens. I mean, it's like a car; things just wear out, even with proper maintenance. (Roofs are notoriously touchy.) Also, like Thanatos said, it's going to see wear and tear with four people in the household, even if you guys are responsible.
I'm not trying to make home ownership out as an unrelenting horror (even though only one of your group really owns the house); it just inherently involves a bunch of risks and expenses that provide further complications to your arrangement.
I don't know what the laws are in your state, but in Ontario there's the landlord and tenant act which provides certain protections for the tenants and responsibilities of the landlord. I'd make yourself very comfortable with those laws. Then again, you should for any rental agreement so you don't get f***ed.
You should always have a written agreement. It can work out fine without one, but if you don't have one, and it doesn't work out, you get screwed royally.
But actually it makes it much, much harder. My advice is don't live with a friend unless you can afford to lose them as a friend.
Not that it won't all work out, but in my experience it has a high probability of ending poorly.
I don't own a house and can't help with that part of it, but it sounds like you have that part covered.
As far as the friends things goes, we're friends, but we aren't best buds, we all have seperate friend groups we spend the majority of our time with. I really don't see that being an issue, but the fact that so many have brought it up makes it worth considering.