Cash Flow and Down Payments


By EastCoastBubbleBoy   Follow   Mon, 2 Jul 2012, 2:05pm   4,941 views   40 comments
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How much to put down? (I already know what I'm going to do, but it was an interesting exercise.)

I found a house for a fair price (not great, but fair based on its age, condition, size, etc.) that needs some work in the not too distant future (new roof, etc.) Nothing too major – just the normal wear and tear that you would expect for a 30 year old home.

I can put down 20%, but it leaves very little margin for error if something unexpected comes up down the road. Plus, the work it needs would eat up most of my cash reserve if I were to put down 20% - particularly when you factor in the other closing costs.

With rates so low (3.5 for 30 year fixed with 0.25 points as of today) It turns out that, for my situation, putting down the 10%, taking the PMI hit ($110/month) and conserving the cash is the better option.

For what its worth I was hell bent on putting 20% down up until this weekend. I ran the numbers and found that the PMI hit isn't as bad I first thought – plus with a bit more cash reserve I can sleep at night. (This will be a conventional loan not an FHA / Fannie / Freddie).

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  1. PockyClipsNow


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    1   4:51pm Mon 2 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    What is 5/1 ARM loan at? I thought it was 2.5% - thats what I would get.

    Intrest rates only going lower in the future IMO and if not - just pay off the loan.

  2. drew_eckhardt


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    2   5:19pm Mon 2 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    PockyClipsNow says

    What is 5/1 ARM loan at? I thought it was 2.5% - thats what I would get.

    If the original poster does that and you're wrong with a 6% cap they could see their P&I payment nearly double in 7 years from $395/100K borrowed to $769 which is substantially higher than the $449 they'd be paying with a 3.5% fixed rate loan.

    Maybe the OP will be making more money in 7 years. OTOH my salary hasn't changed over the last 4 years.

    Maybe their current salary will cover that if other expenses don't increase too much.

    People really need to look at these things in terms of the most likely case, the best case, and the worst case. If they can't pay for the worst case they need to look at other options.

    Intrest rates only going lower in the future IMO

    Short term? Sure. Long term? Unlikely.

    and if not - just pay off the loan.

    The original poster has only managed to accrue 20K/100K borrowed in down payment and emergency savings over who knows how many years. Where's he going to get the remaining 80K/100K borrowed assuming he hasn't spent any on financial emergencies like job loss?

  3. PockyClipsNow


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    3   10:26pm Mon 2 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    well thats what I would do...

    other people might consider very low or zero down and arm loan. if rates go up u live there 3 years free squatting and get cash for keys.

    i really cant imagine a world where the 100 milllion people who paid more for a 30 year fixed are laughing at all the foreclosing arm loan owners. unpossible. the bank cartel raises and lowers rates to maximize churn and for this to work rates must zig zag downward as we have seen since 1980.

  4. E-man


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    4   10:47pm Mon 2 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    ECBB,

    I know it is ideally to put 20% down and not having to pay MI, but do what you're most comfortable with. Losing sleep over it is just not worth it. :o)

  5. Michinaga


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    5   12:24am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    Aside from the additional interest you'll pay, you'd be paying $1320 per year just in PMI. Is having more cash in the bank really worth that?

    At least make a down payment large enough to avoid that massive expense. Do you know for an absolute fact that you'll need to put work into the house in a given year, or can that be put off for a year?

  6. Rent4Ever


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    6   5:54am Tue 3 Jul 2012   Share   Quote   Permalink   Like (1)   Dislike  

    EastCoastBubbleBoy says

    For what its worth I was hell bent on putting 20% down up until this weekend. I ran the numbers and found that the PMI hit isn't as bad I first thought – plus with a bit more cash reserve I can sleep at night. (This will be a conventional loan not an FHA / Fannie / Freddie).

    Maybe you aren't financially prepared to buy a home yet.

    The biggest issue with a home purchase is throwing all your cash into one non liquid asset and being bent over a barrel if life doesn't go just right.

    Leveraging yourself even more by only putting 10% down will definitely work today, just as a financing a car over 6 years will help you get into that car today. But it won't help you over the long term. That much more interest to pay, that much more PMI to pay, that much more in closing costs, etc...Add it all up and what does that amount come to? Extrapolate that amount invested over your working lifetime, now what is that amount?

    Dare I say you are getting emotional? It was easy to sitback and watch the bubble burst and say you'd never buy a house unless you had 20% to put down. But now you've found a house you like, you are emotionally attached possibly to it, and you are going against your unbiased instincts of when you weren't actively pursuing a house.

  7. CaptainShuddup


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    7   6:18am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike (1)  

    What's the PMI hit, back in 2010 when I bought it was $70 a month on a 160K loan.
    I ended up going with 3.5% down because the 20% down didn't make that much of a dent in the monthly payment. And it's a good thing too, because had I paid that 20% and now the county says the house is just a little under 20% less, can't they come back and make me pay PMI?

    Where were all of you people when Houses were 300% over value?

  8. chemechie


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    8   6:24am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    ECBB,
    I know it is ideally to put 20% down and not having to pay MI, but do what you're most comfortable with. Losing sleep over it is just not worth it. :o)

    I agree - do what you are comfortable with and can afford - this is YOUR decision, so don't let yourself feel pressured to do something you don't feel is right for you.

  9. Mobi


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    9   6:57am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    Crashing Housing says

    Why buy when prices and interest rates are falling?

    There:

    "other people might consider very low or zero down and arm loan. if rates go up u live there 3 years free squatting and get cash for keys." (Courtesy of Pocky)

  10. swebb


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    10   7:03am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    I have pondered the same question. Its exceedingly difficult
    for the typical Person/family to save for retirement, collect a 20% down payment and have a good emergency fund on hand. In your case you also know you will need a roof in the near term (which could get expensive, btw).

    In my case (haven't bought anything yet) I have decided that it's ok to draw down the emergency fund lower than normal to put together a down payment. The logic is that I have been more aggressive on the retirement savings and if a true emergency arises I could dip into the Roth IRA penalty free if I had to.

    Consider putting 15% down as your PMI factor should be lower.

  11. tatupu70


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    11   7:06am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    Does anyone still do the 15/5 where you immediately take a second loan of 5% to cover the 20% down payment? So you avoid PMI but still keep some of your emergency fund.

  12. chemechie


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    12   7:34am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    I am in the process of buying another house (I'll move up to it and rent the other out). I was pleasantly surprised to find that the difference between a 20% downpayment and an 3.5% downpayment was a monthly PMI of $53; at rates like those, in our current uncertain situation it makes sense to hold funds in reserve for future uncertainties instead of as a downpayment.

    tatupu70 says

    Does anyone still do the 15/5 where you immediately take a second loan of 5% to cover the 20% down payment? So you avoid PMI but still keep some of your emergency fund.

    I could not find anyone in my area that would do this; every bank I talked to wanted at least 3.5% down and most wanted 15% or more.

  13. tatupu70


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    13   7:38am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    chemechie says

    I could not find anyone in my area that would do this; every bank I talked to wanted at least 3.5% down and most wanted 15% or more.

    Sorry-I wasn't very clear. I thought there used to be loan programs where you could put down 15% and then take a 2nd (or heloc) for the last 5% to avoid paying PMI..

  14. FortWayne


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    14   9:30am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    Stay away from Arm loans, these are toxic, very toxic.

    My philosophy is that if you can't afford to comfortably put 20% down without creative financing you shouldn't be buying that in the first place.

    There is no reason to rush either, prices have no reason to go up. Most likely pressure will be for rates to rise long term and prices to reflect down. Even if they reduce rates temporarily it's same cost to you at the end as a wash.

  15. Call it Crazy


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    15   10:22am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike (2)  

    tatupu70 says

    chemechie says

    I could not find anyone in my area that would do this; every bank I talked to wanted at least 3.5% down and most wanted 15% or more.

    Sorry-I wasn't very clear. I thought there used to be loan programs where you could put down 15% and then take a 2nd (or heloc) for the last 5% to avoid paying PMI..

    How about this way:
    Take a first loan for 80% (prevents PMI)
    Take a second HELOC for 15%
    Put down 5%.

  16. seaside


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    16   11:11am Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    FortWayne says

    My philosophy is that if you can't afford to comfortably put 20% down without creative financing you shouldn't be buying that in the first place.

    This is what I am thinking too. But you're really getting close to there, and then, little bit of more time hitting the buttons of your calculator may get you an idea that works for you.

    swebb says

    Consider putting 15% down as your PMI factor should be lower.

    The thing about PMI is that, it protects someone else (the lender) at your expense. Should avoid something like that entirely if possible, or at least try to minimize it.

    So, the above is what I recommend too, of course, if it is not pushing you too hard. Check yourself what you're PMI would be if you do so. Your monthly PMI will be cut into half, the duration will be shorter, your monthly mortgage payment will be smaller due to more downpayment and you still have some cash reserve. Looks like 15% can be a good middleground that works.

    tatupu70 says

    Sorry-I wasn't very clear. I thought there used to be loan programs where you could put down 15% and then take a 2nd (or heloc) for the last 5% to avoid paying PMI..

    Do they still do this 80-10-10, 80-15-5 sort of stuff for the borrowers?

  17. Call it Crazy


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    17   12:39pm Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike (2)  

    FortWayne says

    My philosophy is that if you can't afford to comfortably put 20% down without creative financing you shouldn't be buying that in the first place.

    There is no reason to rush either, prices have no reason to go up. Most likely pressure will be for rates to rise long term and prices to reflect down.

    Question, if what you feel actually does happen and prices go down, then how would it be smart to put 20% of your money into a depreciating asset and lose access to it?

    If prices continue down, then smart money leverages the bulk of it and keeps their own money in their pocket for future use.

  18. EastCoastBubbleBoy


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    18   2:25pm Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    I like the house. No doubt. It meets all of my “needs” (in terms of living area, condition, etc.) and most of my wants (large lot, good schools, well built). Making a rational decision during the price negotiation stage was difficult, as I was trying desperately not to be “house happy”. If anything I kept trying to be my own devils advocate. I even contacted some of my fellow Patrick.neters (privatly) to make sure I wasn’t loosing my grip (that is, If I had one to begin with.)

    At the end of the day I’m getting it for a fair price. Not a great price, but a fair price. One that factors in (to a certain extent) future price declines, (10% below the taxing authorities current FMV), should that happen.

    In truth, this particularly property is a semi-rare find given that, in my area, prices are still somewhat inflated relative to asking prices. This one was priced right. End of story. Even if it goes down in price over the next few years, I wouldn’t care. Heck I’m expecting that to happen. This area is still overpriced.

    20% plus closing costs leaves me with about $30k left in the bank. Not a great emergency fund, but there’s room in the budget to build that back up over time.

    Put only 10% down and that almost doubles the emergency fund… plus goes a long way to the upgrading and repair work that is most certainly inevitable. That’s the downside of homeownership. No one to do the work for you.

    Granted some of the work can wait… but it’s a thirty + year old house, and certain aspects will need to be done. Knowing Murphy’s law, said repairs will be needed sooner rather than later. Or something else might come up – car breaks down, childcare costs go up, who knows what the future holds. Much to my surprise, having the extra cash in reserve gives me a piece of mind. We have the HH income needed to support the payments – even with the PMI. That’s what surprised me the most.

    I look at it this way. Everyone KNEW prices would only go up… until they didn’t.

    Everyone KNEW college is the best way to maximize earnings over ones lifetime… until the cost outpaced the earning capacity for many fields.

    Everyone KNOWS that 20% down is the standard that shows you are responsible enough, and have enough skin in the game, to make a home purchase…. Until the math shows otherwise.

    E-Man +1, At the end of the day I can sleep at night. Fort Wayne – As much as I agree in principal, this is the better path for this specific situation. Prices may not be going up, but push is coming to shove. Weather its buy or rent a larger place, we have outgrown the place we are in currently. Perhaps I am not frugal enough, perhaps I’ve become accustomed to a certain level of accoutrement given my lot in life, fortunate as it is, but the way I see it unless you pay all cash, you’ll never TRULY feel ready to take this leap.. there’s always a “Yes, but.” Or a “What If”. Time will tell if this is prudent. But in that gut-check moment, when all you have left to sign, it seems to be so.

    Those of you who have been around long enough know I analyze the bejeezus out of just about everything, and I’m not afraid to admit when I’m wrong. But as my great aunt used to say “God hates a coward”. Carpe Diem.

    The point of this post is I was surprised how LITTLE impact PMI has. With rates at $110/month and rates at only 3.5%, it makes more sense to pay the PMI in this case. Having an extra $30,000 now is worth the overall cost, even when you factor in the additional interest that would be paid if the loan went to term.

  19. swebb


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    19   3:33pm Tue 3 Jul 2012   Share   Quote   Permalink   Like (1)   Dislike  

    EastCoastBubbleBoy says

    The point of this post is I was surprised how LITTLE impact PMI has. With rates at $110/month and rates at only 3.5%, it makes more sense to pay the PMI in this case. Having an extra $30,000 now is worth the overall cost, even when you factor in the additional interest that would be paid if the loan went to term.

    And if you find yourself a year down the road with lower expenses than you expected, you can pay down the principal balance of the loan to get it to 80% LTV ratio (maybe have to get it down to 78%) and the PMI goes away. At least that's how I understand it.

    So you can hedge your bets by keeping more cash on hand in the short term...any way you slice it, though, your interest rate is so low that you probably shouldn't sweat it too much.

  20. EastCoastBubbleBoy


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    20   3:49pm Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    swebb - agreed.

  21. EastCoastBubbleBoy


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    21   3:55pm Tue 3 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    tatupu70 says

    Does anyone still do the 15/5 where you immediately take a second loan of 5% to cover the 20% down payment? So you avoid PMI but still keep some of your emergency fund.

    A good friend of mine asked me that just yesterday. Short answer is I don't know for sure, but anecdotal evidence is "NO"

  22. E-man


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    22   3:53pm Wed 4 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    ECBB,

    Are you in contract now and waiting to close escrow? I don't like to congratulate you prematurely. Let us know when that day comes. :)

    It seems like your MI is only about 0.5% of the loan value, which is pretty good. There are a couple of things that you can do to get rid of the MI early. Get the house renovated before you move in. Keep a copy of all the receipts so you know how much you spend on the renovations.

    Say you bought the house for $300k. You put $30k down and borrow $270k. You will spend $30k on renovation. Who knows, it may worth $330k in the next couple of years. That's when you refinance & get rid of the MI. I know I'm being optimistic here, but who knows right? Keep monitor the market. When you see an uptick in your market in the next several years, talk to a mortgage broker to see if you can refi & get rid of the MI. the mortgage broker can run a comparable analysis free of charge to check for your home value before you spend money for a formal appraisal.

    Keep the receipts so you can show the appraiser how much money you spent on the renovation. Maybe he would work with you & give you a fair value for your renovation.

    Now don't be a stranger from now on ok? I find you, seaside and TechGromit very genuine and would hate to lose you guys from this forum. So two down one more to go. When will it be your turn to buy seaside? :o)

  23. woppa


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    23   8:26pm Wed 4 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    Do you really need that much (30k) on hand? Some one with good credit and a good salary could easily take out a 10k @ 0% credit line for 18 months (they are everywhere) and pay it down within the time period. Hell you could even get another 18 months 0% balance transfer from a new card if u have a balance left over. It may be worth it as you will be saving 1300/yr in mortgage insurance alone and you may not even need to go this route if nothing comes up in the immediate future.

  24. seaside


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    24   9:18pm Wed 4 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    Well, E-man, as you specifically asked me about that matter...

    The only reason that I still am a renter is simply because

    EastCoastBubbleBoy says

    I like the house. No doubt. It meets all of my “needs” (in terms of living area, condition, etc.) and most of my wants (large lot, good schools, well built).

    this does not happen to me yet. For this, I envy him and edvard2. :)

  25. JodyChunder


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    25   1:56am Thu 5 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    Something is very much amiss when your premise for buying a residence (following a bubble like what we just come out of) is "I don't care if it goes down some in value." Son, if the house is not a screaming deal, you are simply surrendering to the tremendous pressure to own vs rent. There is no other reason for overpaying, even if you can afford to. I know supply is being played with. I know interest rates are being played with. I know you wife is talking about leaving you for another man because you rent such a tiny place. But trust Jody. You are buying what you feel you can afford to lose. That is not very savvy logic.

    If you ever ditch the (B)east for the (B)est, you let me know. I would love to rent you a house. I'll give you 2700 sq ft with a view for 1150 a month.

  26. EastCoastBubbleBoy


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    26   5:34pm Thu 5 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    Jody,

    There is no other reason for overpaying, even if you can afford to.

    I’m cognizant of the fact that I can’t time the market – which means that in the short term it may loose value. So be it. I factored that into the price.

    if the house is not a screaming deal, you are simply surrendering to the tremendous pressure to own vs rent.

    No, its not a screaming deal, but IMHO it’s a fair deal. I’m buying what I know I can afford.

    I know you wife is talking about leaving you for another man because you rent such a tiny place.

    Please, leave my wife out of it. As any good woman will tell you, size isn't everything.

    would love to rent you a house. I'll give you 2700 sq ft with a view for 1150 a month.

    I’d let you rent me a place, but there’s 3000 miles plus between us.

  27. EastCoastBubbleBoy


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    27   5:40pm Thu 5 Jul 2012   Share   Quote   Permalink   Like   Dislike  

    @E-man, thank you for the kind words. I'll keep you guys posted as this develops. Still some hurdles to clear before it happens.

    @woppa - call me conservative, but you never know. Two medium sized unexpected bills can really throw a wrench in the works. $30k ain’t what it used to be, particularly in my neck of the woods.

    @seaside - I hope you get your chance before too long. I never thought I’d get this close (and its still not a guarantee). If it does all come to fruition I’ll have to post the long and involved story as to how it came to be. Let's just say I had to beat the bushes for a long time.

  28. EastCoastBubbleBoy


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    28   2:49am Mon 24 Sep 2012   Share   Quote   Permalink   Like   Dislike  

    Three months later I'm still clearing hurdles. Summer SLOWED things down like y'all would not believe. Every time I turned around it was "they took the afternoon off" or "they are on vacation this week". Now that we are a few weeks post labor day there is finally forward progress. Not quite a done deal yet but its getting closer.

    When all is said and done I'm writing a book "How not to buy a house" the entire process has been slow, nerve racking and pitfall ridden - and I still have a few more hurdles to clear before I am home free.

    Ugh. I'll be glad when it is over.

  29. EastCoastBubbleBoy


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    29   9:44pm Wed 24 Oct 2012   Share   Quote   Permalink   Like   Dislike  

    A month since my last post and I can finally see the finish line….

    Let’s hope I finish strong and don’t simply stumble across.

  30. JodyChunder


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    30   12:30am Thu 25 Oct 2012   Share   Quote   Permalink   Like (1)   Dislike  

    EastCoastBubbleBoy says

    Let’s hope I finish strong and don’t simply stumble across.

    It's just a mortgage - not a death race!

    I'm sure you will be fine.

  31. E-man


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    31   12:31am Thu 25 Oct 2012   Share   Quote   Permalink   Like   Dislike  

    EastCoastBubbleBoy says

    A month since my last post and I can finally see the finish line….

    Let’s hope I finish strong and don’t simply stumble across.

    What's taking you so long? Anyways, good luck to you. Hope you finish this thing strong. :)

    PK & I just got an approval on another short sale a couple of days ago. We should be in contract on another property this Friday or Monday. That should be it for this year. We might do one more deal next year before he's leaving & retiring in another country.

    Fingers crossed. :)

  32. JodyChunder


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    32   12:44am Thu 25 Oct 2012   Share   Quote   Permalink   Like   Dislike  

    E-man says

    We might do one more deal next year before he's leaving & retiring in another country.

    I've heard of long-distance property management, but that's just silly.

  33. E-man


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    33   12:59am Thu 25 Oct 2012   Share   Quote   Permalink   Like   Dislike  

    JodyChunder says

    E-man says

    We might do one more deal next year before he's leaving & retiring in another country.

    I've heard of long-distance property management, but that's just silly.

    His properties are in good hands until he's being billed to death. LOL!!!

  34. EastCoastBubbleBoy


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    34   3:29am Thu 25 Oct 2012   Share   Quote   Permalink   Like   Dislike  

    JodyChunder says

    EastCoastBubbleBoy says

    Let’s hope I finish strong and don’t simply stumble across.

    It's just a mortgage - not a death race!

    I'm sure you will be fine.

    Thanks.

    Perhaps it is a death race... the term mortgage is derived from French for "dead pledge"

    http://dictionary.reference.com/browse/mortgage

  35. EastCoastBubbleBoy


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    35   3:31am Thu 25 Oct 2012   Share   Quote   Permalink   Like   Dislike  

    @Eman - I think the Louisiana Purchase was completed in less time.

  36. JodyChunder


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    36   6:35am Thu 25 Oct 2012   Share   Quote   Permalink   Like   Dislike  

    EastCoastBubbleBoy says

    Perhaps it is a death race... the term mortgage is derived from French for "dead pledge"

    Rent or Mortgage, you pay your monthly installments until gravity finally sets in.

  37. EastCoastBubbleBoy


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    37   10:47am Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Finaly my quest has ended! Closed today.

  38. E-man


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    38   4:21pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    EastCoastBubbleBoy says

    Finaly my quest has ended! Closed today.

    Congrats my friend. PK and I also closed on another deal today. It's November the 13th, 2012. You see a pattern there? 11-13-12. :)

    If you don't mind sharing the details. How much did you pay for it? What's the property tax for your area? Fire Insurance cost? Any flood insurance? Size and age of the house and its lot.

    Cheers. :)

  39. woppa


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    Bronx, NY

    39   5:42pm Tue 13 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    What part of ny did you buy in? What bank?

  40. EastCoastBubbleBoy


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    40   4:06am Thu 15 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    @E-man

    Here are the specs.
    4 BDRM, 2.5 BATH ON 12 ACRES
    Approx. 2400 ft2
    House is about 30 years old. Needs some updating, but overall is in good condition.

    The guy that built it was “a perfectionist” and that’s according to the structural engineer I had give the place a once over – who know the original owner personally.

    I purchased direct from the seller; no real estate agents were used.

    I ended up Putting 10% down. with loan terms slightly better than what was stated in the OP.

    Sales History
    August 2003: $460,000
    December 2011: $350,000
    November 2012: $300,000

    The only kicker is the taxes - current FMV is supposedly $365,000.
    In the coming months, I will file a grievance and, with any luck, knock that number down a bit.

    That said, as of today taxes are as follows:

    Village: $550
    County: $4300
    School: $9000

    No flood insurance needed - area is not in a food zone.
    As far as I know my homeowners policy will cover fire.

    That about covers it. Perhaps this weekend I’ll write a longer post about how the process went start to finish.

    Payment is right within our budget, (just north of $2500 / month for PITI).

    @woppa- house is about 10 minutes from where I live right now.
    Sterling National Bank.

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