[Editor's Note: This is a guest post from regular reader Matthew Pirotte, MD, who you can follow on Twitter (@MJP_MD). This post details his personal experience with his first home purchase and the lessons he took from it. The more you can learn from the mistakes of others, the fewer mistakes you have to suffer through on your own. We have no financial relationship.]
My wife and I just closed on a condo. We are very happy with our purchase and feel like we got a great deal in a place we really want to live. Getting here was a long, winding, and generally unpleasant road. What I’d like to do in this post is lay out some practical lessons I learned along the way. There are tons of good stuff out there about shopping for mortgages and affordability and I’m not going to rehash that. Just for reference we were shopping in the city of Chicago (we both work in the city and so wanted an easy commute) and our final price range was about 1.5x our gross annual salary (well within the 2X maximum WCI guideline.) We ended up buying a place that met both those conditions. Here is what I learned.
The Windy City
# 1 Real estate agents are salespeople, not your new best friend.
While there are good agents and bad ones, they all have exactly similar pitches: “I know the market better than anyone,” “I get listings no one else gets,” “I’m the most responsive,” “My company is the best.” We had a terrible experience with our first 2 agents. The first was just far too busy, working with probably 8-10 people who were seriously house hunting as opposed to just keeping a toe in the water. We were regularly told we could not go look at properties because she was busy with other clients. We fired her after she spent the day we were making an offer partying at a sports event and finally picked up her phone at 9pm tipsy.
We found a second guy who seemed great, he gave us the pitch above (“I get listings no one else gets”), told us he would never treat clients like the first agent did, and proceeded to send us a list of totally generic listings many of which were FAR outside our geographical area and price range. When we asked him about it he got defensive and said, “I don’t have time to sort through all these properties for you, that’s your job.” See you later bro! Another agent expressed frustration that we were not looking to spend more money (music to my ears as a faithful WCI devotee!) Late in the process we finally found John, whose pitch was actually true and who we loved. My advice: if you are at all uncomfortable with your agent, fire them immediately and find another, it won’t be hard. Don’t be afraid to lay out what you want and tell them that if they can’t or don’t provide it you will be looking elsewhere. Be really careful about recommendations. Most people will love or hate their agent based on how quickly they found a place, not based on things that really matter if you’re in for a long search.
# 2 There are two or three things about your market that you don’t know but need to
In Chicago, there is a huge problem with a shoddy construction material that is now illegal (cinder block.) Some agents will blow this off because your leaking basement 2 years into your new purchase doesn’t affect their commission. Schools are also a big deal here as there are a wide range of public school options; some rival private schools while others really struggle. There is a neighborhood here which is not particularly fun or trendy where property values are really high because of an amazing public grade school. We also had it pointed out to us that a beautiful third floor walk-up that seemed like a sun-drenched aerie would turn into a nightmare as soon as carrying a baby and stroller up three flights of stairs was in the picture. In your area it may not be cinder block or schools, but there are things about the market you would do well to figure out. If something seems below market rate, it is so for a reason, you are not just getting lucky! This is one of the areas where I think a good real estate agent can be really helpful. I would ask them explicitly – what do I need to know about this market?
# 3 You have to walk through the properties
It sounds really simple, but we were consistently shocked by how misleading the website pictures could be. Wide angle lenses could turn a cramped shotgun-shack style living room into an expansive great area. A place that looked luxuriously elegant online was dingy on the walk through. On the flip side, places that just hadn’t been decluttered for pictures could clearly have potential. By the end of the process, we tried to walk through any place that met our criteria and became incredibly skeptical of website photos.
# 4 Securing your loan may be much more complicated than you thought
We did a physician mortgage loan and ended up with a great rate but a very frustrating process. The amount of documentation the lender wanted came close to what I considered a serious invasion of privacy. At one point I was on the phone with a credit rating agency who was calling a retail company to verify that I had not carried a balance (which of course I never had.) I had the fun experience of listening to two people whose identity I couldn’t verify share my DOB, SSN, and credit card number. My mortgage loan officer went from someone I could get on the phone within an hour to a shadowy recluse who was evasive about simple questions. If you are thinking about buying a home in the next year or so just avoid anything that will generate a check on your credit score. I had stupidly opened up the aforementioned retail credit card because it was going to save me a couple hundred bucks on a few new suits and I figured I could use it once a year for a 10% discount when I bought dress shirts and socks. That retail card ended up requiring about 20 pages of documentation during the underwriting process. This was despite having what is basically a perfect credit score.
# 5 Do not become emotionally involved with a house until you are closing on it
The first place we put an offer in on did not pass inspection (see #2 re: cinder block.) We were DEVASTATED because we had already planned where our second kid was going to play – we don’t have any kids right now so we were really going crazy. Tears were near the surface if not actually in evidence. The second place we offered on did not appraise for the asking price. We were disappointed but had learned our lesson. By the time we put our offer in on the last place we basically had no expectations. It was the right frame of mind because when it came time to haggle over final price we set a firm line and said to each other that if they refused we would just shrug and go back on the market. We had started to look at places more as a collection of positives and negatives rather than our future home. It sounds calculating but ultimately I think it’s healthy. I went thinking this was going to be like finding my spouse (what do I love?) and ended up thinking about it much more like buying a washing machine (what is going to get the job done for my price range?)
# 6 It helps to be in a place you like already
I was a good dog and lived like a resident for 2 years out of residency. I paid off all my high interest debt, maxed out the retirement accounts, had a nice little cash reserve and a nice little brokerage account, drove a sensible car, and did not accumulate any more debt. When we got married my wife and I moved into a nice 2 bedroom condo with on-site deeded parking, a big master suite, a huge kitchen etc. On balance I think this was a good financial move because it gave us the ability to walk away from places on our house hunt. We didn’t hate where we lived (we loved it) and we didn’t “have” to move. It put all the power in our hands. Could we have lived cheaper? Absolutely. Might it have forced our hand in our real estate search? I think almost certainly so.
So that was my experience: lots of negatives, a few positives. I would be very curious to see any comments about other people’s experiences. Nothing feels better than turning the keys in a place you love. Now here’s hoping the roof doesn’t fall in….
Your turn readers. What did you do right and wrong with your first home purchase? Any lessons learned you can pass on to your younger colleagues? Comment below!
I must have lucked out, to get a home 0.75 times my gross. Its in the school district we want too, and only 20 mins to work.
I think I better count my experience as lucky. We loved the first realtor we hired. It was a husband and wife team. What really helped was they lived in the neighborhood we were trying to buy.
We had a regular loan at 3.5%. The paperwork was just a breeze. I basically called up 6 lenders and went with the cheapest one. Again our real state agent pointed us in right direction, even though we didnt end up using her lender, cause they were offering the second best rate.
In our case too, the first two house didnt work out for offers. But when we saw the third home (0.75 x Gross) we were ecstatic. It was Saturday, the first day of the house on market, made the first offer and they cancelled the open house for Sunday.
I hated the street we were currently renting, it was on a major road next to a stop light and I couldnt back out for 15 minutes.
Wish that happened more often.
Two things I should have been part of in my home purchase.
1) I should have Brent here during the inspection to ask questions and make sure they did I good job. I was not there, and the job was shoddy.
2) I wish I did a final walk through prior to signing on the dotted line.
The things I did right.
1) Had 20% down so no PMI and a rate of 2.75% for 15 years.
2) bought a home at about 1 X salary and now am taking some of the extra cash to make additions that will make the house ours and a place we can live the next 20 years.
One intrasting thing I now realize is that property tax is huge and really will eat away at your wealth just to have a few extra square feet or nicer fixtures. We as emotional people get carried away in what is really important in a home and place too much value on some silly details that may cost a lot of money in the long run.
If it’s a resale try to get a history of the homeowners insurance policy for claims
Check basement for water
Do they have a sump pump
Find out the age of the ac and heating units and roof
Go there and speak to neighbors
Doctors need to watch more HGTV with a watchful eye.
2 of the most outstanding points from your post.
1. Real Estate agents are salesman. Spot On!!! Most (not all) are the same as the ‘1970 slimy car salesman”. They get paid very handsomely often times for very little work. Have bought and sold homes without a real estate agent and saved tons of money and hastle doing so!
2. Don’t get emotionally attached to a house. It’s just a frickin house! Once you own it you can make it yours, but for every house there are 20 others that will be just as good or better that will come on the market in the next 6 months.
Good post and I went through many of the same problems the first time I bought a house (although I was just starting residency….a WCI no-no). In the end turned out ok for me but taught me a lot about the real estate process!
Oh to be able to purchase a house for under 2x salary…. Wouldn’t that be nice! Maybe if I wanted a shack in a lousy neighborhood or were a plastic surgeon? At any rate I wish I had known more about renovation costs. We kind of trusted our agent on her estimates (she’d flipped a bunch of homes) and didn’t look into it too much ourselves – no surprise there that her estimates were low. I’m not sure it would have changed what we did, but boy was that kitchen remodel more than I thought it would be when I bought the house. On the plus side it is nice to pay cash for renovations and have lower mortgage and property taxes. And now we have the kitchen we want!
Where do you live that 2X a physician’s salary is a shack? Bay Area, Manhattan, Boston, D.C.? 2X a primary care salary in my area gets you a 4000+ square foot home. 2X a specialist’s salary gets you into a very nice gated community with a nice new mansion. My state is about mid-range on the cost of living scale, with about half cheaper and half more expensive. I’ve written before if you are in a very high COL area you might have to go to 3X-4X, knowing it will require scaling back elsewhere (cars, vacations, retirement date etc).
agree with jim’s question. 2x our combined MD income would have been a mansion in most communities in the usa. we happen to live in a high COLA area but we found something awesome at 1.5x (really with bonuses and moonlighting more like 1.3x).
I know I know! Bay Area. We are only spending about 2.5X (primary care + a good but not 6 figures salary) on what would be a *very* modestly sized home elsewhere (and needs some seriously costly upgrades). To be fair we have only one car that is 16 years old, have a 15 year mortgage, paid off our 100k of student debt within 3 years out of residency, and still do feel blessed with oodles of money. I may not retire super early, but that’s okay. Most of my coworkers are spending considerably more than we did and many do feel tight on money. And I have no idea what I would do with 4000 sf – probably get lost.
Sounds like you’re going to do just fine to me.
I’m not the person above, but I live in the Pacific Northwest, on a 2 physician income. MEDIAN home prices in our area is just a little higher than 1x or combined gross. It’s crazy!
Seattle and Portland seem like California North sometimes, don’t they? Can’t be a sunshine tax though.
I am building new in Denver, as I found the deals on the resale market were only comparable to what we’d get building new yet would not offer us the choice to customize the place from the outset. After looking at a million houses and then going through the wringer of the “design center” for this new build I’m now much more cognizant of small differences in sinks and the like when I see other houses. Before all this I had a vague idea of what looks nice. Now I can tell where the buyers cheaped out.
Assuming a year where my section gets its full bonus it ended up at about 1.8x gross income. I’d have liked for it to be a bit lower than that but it’ll certainly be manageable. Good public school district will save me money down the road (kids are preschool age and infant age, respectively). Very energy efficient design (R-36 walls, R-50 roof with solar standard, tankless water heater, etc.) will make for low costs each month as well as some weak hedging against future energy price rises, not that that’s a significant portion of the monthly budget.
I did violate the WCI mantra and went for a 30 year fixed mortgage, however. I’d rather have more month to month flexibility, and at rates ~3.75-4% with no PMI, no closing costs, and 90% LTV via Bank of America’s doctor loan program I’m not complaining. 10 years from now when student loans, preschool tuition and the like are long gone then I’ll be able to sit pretty and assess the state of the market, current interest rates, and then decide whether to minimize debt at that point or dump more money into my taxable accounts.
Just because you took a 30 doesn’t mean you have to pay it like one. We always threw 1 extra payment a year at our 30 which cut it by 7-8 years even while paying off student loans. It also gives you room to “cut back” if your budget ever gets tight. Anytime over the years that we refinanced I never dropped the payment by extending the term, just took advantage of the lower rate. Enjoy your new home.
That’s a good point, Dr. Mom. If I’m going to pay down any debt quicker than its listed term I’m going to go in strictly decreasing effective interest rate order, and the mortgage will have a lower effective rate than my wife’s student loans.
That said, it’s nice to keep a little leverage and bank on the markets doing better than ~3% nominal…
All true, and how I felt twenty years ago. But, back then my husband was doing the finances and felt very strongly about just one extra payment per year on the mortgage. I can tell you now at 50, I am so glad we did. One day you may see the benefit of a paid off home sooner than later. Once you start doing it, you stop thinking about it and never miss it. Nothing wrong with your way. Just glad now that I conceded that point to my husband:)
the 15 vs. 30 thing is not gospel to me in the same way that saving 20% of your income for retirement or not landing a bunch of consumer debt should be.
my wife and i really talked long and seriously about this and she wanted a bit more freedom of cash-flow every month so we did a 30. she was just starting her job and was worried about what our actual cash flow would look like — a point I think was very reasonable. neither of us have any intention of carrying the note for 30 years but it frees up a few grand a month for unexpected expenses.
make sure you’re crushing the big stuff and don’t kill yourself agonizing over the less critical things. if you’re doing everything right but have a 30 instead of a 15, you’re still winning!
I agree. But one thing to keep in mind is that if you’re buying a 2X (mortgage not value) or less house, both a 15 year and a 30 year are VERY affordable. That mortgage isn’t going to cause you financial stress, so might as well knock it out in 15 and take advantage of the lower rate.
I think 15 year is the way to go. We bought our house and originally financed with a 30yr fixed (Sorry Jim, wasn’t into reading the blog yet, and frankly, still stumbling like a toddler on some issues financially). Timing was good and got a good rate under 4%. We always paid extra to shave off payments. When we started getting our act together (though we fortunately have always been frugal and lived way below our means), I did the math. With out extra payments we were on track to pay off in about 22 years. I looked into refi to a 15 year after being in our home for about 15 months. Without really changing our monthly payment (really, only about a $15 difference more, as were were paying extra principal every month) we refied into a 15 year at under 3%. This essentially shaved 7 years of payments (quite a tidy sum!) and the cost of refi was about one months payment which we have already recouped with out new schedule. 15 year all the way! Im just mad I didn’t do it from the get go.
Other good comments in this post are also to consider the taxes. As a first time home buyer, these can sometimes be a hidden cost. I would also add, consider the cost (or time and therefore personal cost) to maintenance of you property. Sure it would be nice to have an acre or more, but that is a lot of grass/shrubs/trees etc that will need work!
I’ve internally debated the 15 y vs. 30 y fixed rate mortgage ad nauseum and have always landed on the side of the 30 y for reasons listed above (cash-flow flexibility and invest the difference to be able to beat > 3% nominal).
One useful way of looking at this argument that I learned from reading Harry Sit is to consider the extra amount of cost in taking the 30 year term as “payment flexibility insurance”
This post from The Finance Buff explains it nicely:
http://thefinancebuff.com/payment-flexibility-insurance-pay-a-30-year-loan-on-a-15-year-schedule.html
In my case, the different on a 30y vs 15y was 3.75 vs 2.75% and this “premium” difference ends up costing me abour $3300/year to maintain the flexibility to pay less with a 30 year term (not taking into account the potential return on investment if you invest the difference)
So you can assign a cost of maintaining that flexibility and see if that is worth it to you. In my case, I changed my mind and decided on 15 y term based on the “cost” of maintaining flexibility.
Me too and I think that’s EXACTLY the way to think about it.
I’ll second that. The difference between the 30 and 15 year, was about $2000 vs $1600 a month becuase of the lower interest rate with the 15. When I looked at it as about $400 a month to pay my house off twice as fast it was easy. If I needed that flexibility of the $400 I could see a few extra patients once a month and still have it.
Now not having the mortgage allows the greatest flexibility!
I also started with a 30 year loan and refinanced as rates dropped to a 15 then a 10. I also made extra payments and paid it off in my early 40s. I found I became more aware of homeowners insurance costs when they were not bundled into a mortgage payment. I have saved lots of money by getting quotes every few years from different homeowner insurance agencies.
And property taxes too. We were able to get ours reduced by contesting them. Didn’t think about that until I actually had to write a check for that at the end of the year instead of inside the mortgage.
Great post. I agree with most of the points. I’ll add a couple.
1. Make the RE agent work for you. Also, find one who is local to the areas you’re targeting, as they may know parts of the neighborhoods you were never aware of.
2. If good schools are important to you, confirm for yourself what school district your house is in (burned on this the first time). And, don’t trust greatschools.org or any of the review sites, they often underestimate # of students per class by 25-40%, in my experience.
3. Find a mortgage broker who communicates well, and isn’t flaky. With the online sites now, there are plenty of places that will take your business. You don’t want to be a couple of days from closing only to find that your loan isn’t going through b/c your broker doesn’t have the proper documents. By that time, it’s too late to switch brokers.
My 2 cents….2x income houses?…sigh….not in socal
My house cost 0.4 my initial annual income. Small city in the midwest. Old, renovated house. Very nice inside. Great old neighborhood with lots of kids running around. 2 blocks from work, so only 1 car. Lifestyle is so much better than it would be in a suburban area. So many potential financial problems never appeared once we decided that I didn’t need the low quality McMansion of suburbanites.
Thanks. This was very informative. Our household is a credit card churner household and most of our assets are in stock investments and we are saving enough for a 20% down payment + 10% extra expenses for a house in late 2016. I guess we will have to put a hold on credit card applications 6 months ahead of the planned purchase.
What do you guys think of going for a mortgage loan through one of the big banks like Chase? Getting preapproved and all that. Does that cut down your risk of hassles? The chase website lets you gets quotes through their home mortgage calculator tool and you can see your closing cost estimates.
https://apply.chase.com/mortgage/CRQ/CRQResults.aspx
I’m glad to hear they’re doing that. This process should be way more transparent than it is. If your best option is through Chase, then great!
I agree stopping the churning for 6 months is probably a good idea.
Even with preaprroval the process can be cumbersome once you enter closing. We refied about a year ago and were preapproved and it was still a frustrating process. We were even refinancing through the same mortgage broker and bank! Ever since the meltdown and change in mortgage requirements it is crazy the things they ask. I had to literally mail in a certified letter stating “my dad sent me a check for $50 for as a Christmas present.” I am told it is to prevent “drug trafficking and money laundering.” Seriously? Crazy!!
Great…. I hate these stupid hassles… our house hold is like a big finance operation – stocks, dividends, regular check deposits and clearing, opening and cancelling credit cards etc. I’m starting to think all cash to avoid the hassle.
George-
I would be very cautious with your financial activities for more than six months leading up to the mortgage. I churned credit cards as well but quit more than a year before we finished residency and purchased a house in a new city. Even more than credit card activity, large or frequent movements of cash will set off alarm bells and require you to prove that everything you’re doing has a paper trail that the bank’s underwriters can verify. The credit card points will end up being relatively minor compared to the financial cost of a higher mortgage rate over 15 to 30 years.
As for Chase- I went with them earlier this year because they have the best deal for us
Ours is with Chase, but because they were the best deal at the time. They have been very easy to refi with over the years. They have always had the best deal for us. We have never had any issues with them. Their website and calculators are great. All that said, if they are not your best deal, don’t use them. Schwab offered a better HELOC deal. We opened it as backup funds with two kids in college, but never used it. Will probably just let it expire. Good luck.
Some good tips, but the transcendent notion is a bit off. Some people look at their budget and choose amongst the list of things in that bucket. Ok, if your primary focus in life is cost. Another option is to think of what it is that will satisfy your needs ?(not wants, needs) and then aggressively pursue the best price. Getting a good deal on a bucket of shit does not change it from a bucket of shit.
One might also adjust their thoughts from living in a house for 20 years as their parents may have, to the kind of lifestyles that surround us. Many folks change locales and houses much more often nowadays for all kinds of reasons that may not be apparent at present.
Yes, people move more often, making renting more attractive than it may have used to be.
great EMOTIONAL FEELING paying off one’s mortgage
I’ve only bought one house and I live in a great market (D/FW). I guess I didn’t have the typical experience.
1) I bought new or rather built. Lots of new construction where I am living, plus not having a ton in the bank I really didn’t want to risk having major repairs.
2) I pretty much hate the real estate agent game. If you dont’ have time or you don’t live in the area then I think they can be a nice asset but if you have the time (or a spouse who does) or live close enough that you can look yourself than I think you are better of doing that. Real estate agents take a RIDICULOUS fee for the amount of the work they actually do for you. Most people look at less than 5 homes and for most people those 5 homes aren’t the ones the agent thought were the best but the 5 that the agent needed to try to move. A good agent can sell 2-3 houses a month. In my area that means they are pocketing 20k a home. Think of that profit margin….
3) I had a VA loan so securing a loan didn’t really worry me much. I locked in around 3.5
4) D/FW has so much influx that you would think housing would be scare but there is also a ton of new construction as well. Sure prices are jumping in the downtown areas but if a home gets snapped up in the suburbs there will be several similar available.
RE agents: I didn’t use one. Glad to have saved the money but I had the advantage of being from the area.
2. A $20K agent commission suggests a home price of $1.33M. That’s a pretty darn nice home in DFW. Remember that the commission is 6%, half to the seller and half to the buyer. The agents have to split that with the broker.
3. VA loans are generally not the best loans out there. If you qualify, sure, take a look, but I’ve been pretty disappointed that our vets get such a raw deal.
If you are buying a new home, all 6% goes to the “buyer’s agent” there is no split. You don’t get a discount. 6% of 350K is 21K.
Even at half that rate its still a ton of money for the amount of work most do nowadays. (They search the same online listings you can).
It’s true that most agents don’t own their own business but rather work under someone else but there really isn’t anything preventing them from hanging their own shingle either. Its just a simple pyramid scheme at that point.
As to your point on VA loans. I disagree. They may not be the best in all cases but they are pretty much the best if you plan to pay a small down payment or even none. My rate at 5% down was what others were offering at 20%. Now if you wanted an ARM, I’m sure you could get a better deal but getting an ARM when the going rate was 3-3.5% is just dumb.
Not sure what you’re trying to say about the commissions. Typically, the seller pays 6% in commission. 3% of the 6% goes to the buyer’s agent and his broker. 3% goes to the seller’s agent and his broker.
Compare the costs on a VA loan and you’ll see why I don’t think it’s great. It’s not just rate remember. You also have to look at fees. Take a look at this: http://www.benefits.va.gov/homeloans/documents/docs/funding_fee_table.pdf
So, for example, the funding fee for a VA loan ranges from 1.25-3%. FHA is 1.75%. It’s typically lower with a doctor loan.
A lot of times veterans actually come out better using an FHA instead of a VA loan, and I think that’s a travesty. Certainly your fees are far lower on a conventional than either of those programs.
Fees are fairly equivalent to PMI (1.5% on most) which needs to be carried for almost anyone with less than 20% down. If greater than 20% you don’t need a VA loan in the first place. Only difference is that with the VA you pay the fees up front rather than paying monthly PMI for the first 7-8 years. Still when I was looking around 3 years ago the VA loan was better than just about any option for minimal down (to be fair I didn’t look into “doctor’s loans” as I didn’t know they existed).
Doctor loans don’t require PMI.
https://www.whitecoatinvestor.com/personal-finance/the-doctor-mortgage-loan/
Fees and hassle are lower than FHA/VA in my opinion. If you’re a doc and not going to put down 20% and get a conventional (which is what I’ve done the last two times) I’d get a doctor loan. I just see little reason for a doc to go VA/FHA.
I agree now. But like I said. Didn’t know they existed at the time.
Great on-point article. I learned a tough lesson that pertains with a recent refi. I filled out the piles of forms including all the contact info for my practice, release of info authorizations, etc. Refi folks wanted to confirm my income so they sent a copy of my W2 to my employer via fax. Unfortunately, that fax went to our practice’s generic fax number so my W2 was made available to all of the office staff. Don’t know if anyone ever saw it but could have been VERY awkward for all the office staff to have my take-home pay put in their faces. Nothing has come of it so guess I got lucky but I’ll definitely be a lot more restrictive in giving permission for sharing my information next time through.
Your office staff isn’t aware that doctors make tons of money? 😉 I know what you mean though.
The same thing happened with our 401k we started. Had to pass out to everyone what the entire account holds and since few participated it was obvious that the docs had rolled in some precious plan stuff. I didn’t know that was part of the government regulations each year for our plan, was a shocker when I found out.
We have used lump sum payments after closing on our last 2 homes to shorten the mortgage term without committing to a 15 year mortgage. We cut 6 ½ years on our previous home and 4 years on our current home. Although we did refinance to a 15 year when rates dropped for only $20 more per month.
Excellent points.
My wife and I recently bought a house at slightly less than 1x my yearly gross with a 15 yr doctor loan at less than 3.5%. I am almost 2 years out of training and paid off my school loans last year. We save over 30% of our gross income and have a solid emergency fund. We live an inexpensive lifestyle in the midwest but travel and enjoy ourselves. I am considering throwing my yearly bonuses at the principle each year (30k to 40k before taxes) and paying off the house in about 5 years. We do not factor the bonus into our monthly or yearly budgets because it is not guaranteed. Too extreme? Am I losing any significant tax benefits etc. with this approach?
Thanks.
at 3.5% rate, just put the bonus into taxable index funds and you can retire a lot early
Darn autofill …. so much for anonymity.
Just the interest deduction and the arbitrage between the effective interest rate and a possibly higher investment return. That assumes you’re maxing out all other tax advantaged accounts.
I made my wife get her real estate license because I needed the following:
1) An agent who was good with numbers and highly intelligent (difficult to find)
2) An agent that was responsive and could write an offer same day.
I had a tough time finding an agent that could accomplish both needs who wasn’t already busy with investors and other buyers who would get first priority. Therefore, I am my own agent (through my wife). In 2010, I would write blind offers at numbers that I knew were great without looking at properties. If an offer was accepted, I would then view and make sure I had a contingency to back out. This saved a ton of time looking at houses.
My wife and I just closed on a house 2 weeks ago. It was just under 1.5x gross salary after we offered 6 grand over to compete with a total of 7 offers. Before finding our new home, we had been expecting to have to purchase a home costing 150 thousand more than the home we found. We had been looking off and on for the past 6 months knowing that we would buy once I finished residency. It was a really depressing/frustrating process mostly because of not being able to find one we liked at a reasonable price point. We have 3 kids (3,1,1), one on the way and had been living in a 2 bedroom 1 bath apartment during residency. Rent was only $600 a month which was great since $8-900 is the average for a similar size (military base in town jacks up the rates). The more expensive homes in the area we wanted, would have needed more money put in for updates, not enough bedrooms, and just didn’t seem worth it. Other newer communities were not on the side of town we wanted and were not that great for the price point. Multiple people in my circle (residents, faculty, wife’s friends) had used a particular mortgage broker. Meeting with her was far easier than I expected and actually quite painless. We got approved for 2.5x my gross salary on a conventional loan with 5% down, 15 year loan. The difficult part was now finding a home. After multiple open houses and hours looking at potential walk-throughs online, we found a nice red-brick, built in 1964, beautifully updated kitchen and bathrooms (exactly how my wife would have done it), with a decent yard (kids playground included), 6 bedrooms, 3 baths, extra large 2 car garage that popped up on realtor.com. My wife and I knew we wanted to see it. We had it arranged the following night and put an offer in. After finding out there were 2 additional offers we went from from $1,000 over to $6,000. It was nerve racking once we learned there were 7 total offers (had already committed error #5) but ours was accepted. We did not want to go higher even though the seller’s agent sent out communications trying to get people to offer more. Everything went mostly smooth through closing. The inspections seemed like a waste of money as they did not go into much detail on anything but overall not too bad. Since moving in, we have found little bonuses which have only made us like the house even more. The previous owners had updated with plans on staying and not flipping. Final rate was 3% interest rate which I am thrilled with. We will be able to pay more towards the monthly payments as well. Honestly feel lucky to have stumbled on the house we did. Our living space was bursting from the seams and I think my wife was going to go crazy. Our realtor did not have to lift a finger to find the house (she had done a few walk throughs previously). Anyway, that is my recent and first-time home buying experience. Frustrating along the way but turned out rather well.
Reading WCI during the process definitely prepared me and directed me to look for potential pitfalls in the process.
My husband and I are about to close on a coop apartment in Brooklyn, NY. We are both first time home buyers and have learned a huge amount in the process.
(1) For my next transaction, I would not use a real estate agent as a buyer or a seller as I see no value added beyond things I have to do myself anyway. The website streeteasy.com provides comprehensive listing information (everyone lists properties there — it is the go-to site for NYC), and allows for custom searches on comparable transactions. I am shocked that people here would work with a broker more than once considering the huge $ involved in cutting out a middleman of such low value.
(2) I would ask different questions when interviewing my attorney (an attorney is not required by law in NYC, but almost everyone engages one and some parties won’t interact with you if you don’t have one). Our attorney is now refusing to volunteer information regarding simple questions about the closing process and I think perhaps we could have teased out his approach to communication (read: none) up front and avoided working with him. I’d also fully vet and interview attorneys before even seeing my first property – the market here moves so quickly that you won’t have time to properly do this if you wait until after making an offer.
(3) Next time, I’d make sure to only lock my rate with one major lender and leave my options open with another. Then, if rates fell, I could take advantage at the lowest possible cost and continue to negotiate them off one another. Overall, though, I’m happy with the rate and low closing costs we’re paying.
(4) For a coop, ask how many copies of the board package they’d like to see. Our worthless RE broker provided only one copy, and the chuckleheads on our board just passed it around themselves rather than asking for or simply making copies themselves. It took them over a month to schedule our board interview for this reason!
Point #1 is critical and I learned this the hard way. I would express it more directly than many of the comments here, which is to say, a Real Estate Agent is does *not* have a fiduciary relationship with you. This means they are *not* obligated to act in your best interest. They can (and will) fully endorse a transaction that is a terrible idea for you financially, as long as they can make their commission off the deal. This is not to say they are bad people, they are simply in business to make money, not to help you, and this is a fact. Again, their goal is to make money, not to do what is in your best interest. I think doctors have a hard time understanding this since we assume that other “professionals” behave as we do and recommend what is in the client’s (patient’s) best interest. This is *not* the case in many other professions and it is essential to be fully aware and accepting of this when working with a real estate agent. After my last two experiences I have decided I do not want to work with one in the future.
yeah good point actually. i could have made this even more starkly.
again like you said, it’s not a personal attack it’s just where the incentives are aligned.
my first realtor told us not to buy the shoddy construction when we saw a place with it that didn’t really suit us, told us how she tries not to sell it etc, then when we really liked the interior of a place and the commission starting becoming a possibility she walked it back “well it’s not that big of a deal.” fortunately my inspector is a beast and a “deal killer” according the RE agents (music to my ears). he flat out said to us “if you were my kids i would tell you not to buy this place.”
I agree with no 2. You really have to check the location and the neighborhood and see if the house is best for you. Great blog by the way and thanks for sharing your experience of buying a house. Keep sharing!