Lease and Buying a Home

[Kat Mack]

My current lease is up the end of December 2008. I am currently considering buying my own home and awaiting subsidy opportunity,,and after approval the right home. If the grant money comes in after I have renewed my lease and I find a home what can I do about the yearly lease? Thank you very very muchm

[Jon Holdman]

The interest will be a large portion of your payment. The good thing, is that its tax deductible. You don't say the price range you're talking about, so let me just do the example at $100,000. At 6.5% interest and a 30 year loan, your P&I (principle and interest) payment will be $632.07. Of that, $541.67 will be interest and the remaining $90.40 will go to reducing the loan balance. Assuming you're in the 28% tax bracket, you would get a $151.67 tax credit on the interest. So, that makes your effective after tax payment $480.40. But, as you can see, the bulk of that payment is actually the interest, i.e., "rent", on the money you're using.

Now before you say woo-hoo, houses are cheap, please realize there are other costs.

For one, you will almost always have to pay property taxes and insurance as part of the monthly bill. These vary widely in different areas, so you need to find out what they are locally. These will add somewhere between about $100 and $200 or more to the monthly payment.

In addition, there's nobody at your back. When you rent, especially in an apartment, the landlord takes care of a lot of stuff. They mow, clear the snow and leaves, fix the roof, and paint the exterior. If anything goes wrong inside, like a leaky sink or the furnace quite, you call them and they get it fixed. When you own, you have to take care of any of this stuff. You're going to mow the lawn and shovel the walks. Some areas will fine you if you don't stay on top of things like this. You'll have to fix the gutters, and paint once in a while. You'll have to fix that leaky sink or toilet. You'll have to fix or replace that balky heater.

If its a condo or townhome, or sometimes even a house, there may be an HOA which takes care of some of this, for a fee you pay each month.

You can always call someone to fix things. But, that will turn a $10 toilet repair into a $100 plumbing bill.

There are a lot of upfront costs. Unless you can get into some low down payment program (e.g., FHA progams), you'll need a hefty down payment. You'll have to pay 14 months of insurance and four months of taxes up front. There will be other costs, typically about 2% (though highly variable) of the purchase price. You'll typically pay one point (i.e., 1%) of the loan as a origination fee. So, you will need some cash up front. And, you'll want some money in the bank to deal with things in the new place.

All that said, there are real advantages to owning. You can paint the walls any color you want. You can put up as many pictures as you want. You can rip up carpets or put them in. You can get a dog or cat or birds or rats to your hearts content (well, cities do have regulations, too.)

I'd recommend a few things. One is to go to a bookstore or library and pick up a couple of books for first time home buyers. I'd say you should speak with a few mortgage brokers, but it sounds like you're already doing something like that. Find out what you'll be able to afford if you get that subsidy. Then, start looking around. If you're settled on an area, spend a few (or, more than a few) Sunday afternoons driving around. Look for open houses and have a look. Look on the MLS for houses in the area (realtor.com, for one, but there may be something better locally.) When you're at those open houses, spend some time chatting with the agents. If you find one you like, see about working with them. It won't cost you anything to have your own agent, and they will guide you through the process.

Take you time. Not sure what the market is like in Schectady, but its pretty slow in many areas. Its a big committment to buy a house, and hard and expensive to undo. Best to spend time up front.

A final bit of advice to contridict myself. Just like buying a car, don't fall in love with a house. You'll find there are many similar houses that would work for you. If you are of a mind that any of several will work, you'll be in a better position for bargaining. If you find one that you just love and just have to have, you'll end up paying more. Just think, Bill Murray in Ghostbusters.