Taking the Plunge
I am a 41-year-old single woman and never before thought I would buy a home on my own. But I don't want to rent anymore, because I feel like I'm throwing money away. I have $35,000 in savings and $30,000 invested in my 401(k). I earn $80,000 a year and currently pay $1,500 each month in rent. How much can I spend to buy a condominium?
Suze Says:
Like many single women, you may have been waiting to be in a committed relationship before buying a house. But good for you that you're not sticking to that old-fashioned notion. You are ready to buy on your own. And how fabulous that you have the financial ability to do just that!
I like your idea of buying a condominium unit. It's a nice transition from renting to owning. But you need to understand a few basic issues that pertain to condos. In addition to your mortgage, insurance, and property taxes, you're also going to pay a monthly association or maintenance fee to the condo management. It's your share of the costs of maintaining all the public areas within the condo, as well as security. It's smart to find out how many times the fee has been raised in the past five years and by how much, so you can get a decent idea of what to expect down the road.
Focus on condos where at least 90 percent of the owners live in their units, rather than rent them out. It makes for a much better sense of community and affects resale value. I also want you, or a real estate lawyer, to make sure there aren't any lawsuits against the owner or builder of the condo, or any other legal problems. That's especially important if it's new construction that hasn't been completed. You don't want to move in and then find out the elevators won't be finished because the developer went belly-up. Also, check out how soundproof your unit is. Better to find out before you sign the contract that your upstairs neighbor wears three-inch Jimmy Choo slingbacks on her hardwood floors and has a penchant for punk rock. You get the idea: You need to be careful and thorough.
Okay, now we're ready to talk money. I think it's smart for your monthly housing costs to be about the same as your current $1,500 rent. I want you to be comfortable with your investment. So let's go with what we know you can handle.
Suze Says:
Like many single women, you may have been waiting to be in a committed relationship before buying a house. But good for you that you're not sticking to that old-fashioned notion. You are ready to buy on your own. And how fabulous that you have the financial ability to do just that!
I like your idea of buying a condominium unit. It's a nice transition from renting to owning. But you need to understand a few basic issues that pertain to condos. In addition to your mortgage, insurance, and property taxes, you're also going to pay a monthly association or maintenance fee to the condo management. It's your share of the costs of maintaining all the public areas within the condo, as well as security. It's smart to find out how many times the fee has been raised in the past five years and by how much, so you can get a decent idea of what to expect down the road.
Focus on condos where at least 90 percent of the owners live in their units, rather than rent them out. It makes for a much better sense of community and affects resale value. I also want you, or a real estate lawyer, to make sure there aren't any lawsuits against the owner or builder of the condo, or any other legal problems. That's especially important if it's new construction that hasn't been completed. You don't want to move in and then find out the elevators won't be finished because the developer went belly-up. Also, check out how soundproof your unit is. Better to find out before you sign the contract that your upstairs neighbor wears three-inch Jimmy Choo slingbacks on her hardwood floors and has a penchant for punk rock. You get the idea: You need to be careful and thorough.
Okay, now we're ready to talk money. I think it's smart for your monthly housing costs to be about the same as your current $1,500 rent. I want you to be comfortable with your investment. So let's go with what we know you can handle.
While you could use your entire savings for the down payment, I prefer that you limit it to between $20,000 and $25,000 so you'll have cash available for moving and closing costs, including the fees you'll pay the lender to cover a variety of expenses and charges. You should look at condo units that go for $250,000 or less. That way your down payment could be at least 10 percent.
If we assume you find a $250,000 unit with a $25,000 down payment, that works out to a $225,000 mortgage. At today's 5.5 percent interest rate on a 30-year loan, your monthly payment would be about $1,277 per month. But then you need to add the cost of insurance, about $50 a month. Property taxes can add about 1 percent of your mortgage cost, so let's say $225 each month for that. And we've also got that monthly condo maintenance fee; for this example we'll say it's $250.
There's one other cost you need to consider, since your down payment is less than 20 percent: private mortgage insurance (PMI), which is the lender's way of getting extra protection because you are a slightly higher risk. The PMI would run you about $100 per month until your equity in the home reaches 20 percent.
When you add all that up, you're at $1,900. Now, don't worry. I know that's a lot more than your $1,500 rent bill, but you're about to enjoy one of the nicest breaks of home ownership: the mortgage-interest tax deduction. Your income puts you in the 30 percent tax bracket, so 30 percent of the interest you pay will be deductible. In the early years of the mortgage, the vast majority of your money goes to pay the interest, not the principal. So that $1,277 mortgage payment is going to give you nearly $400 in deductions per month. Voilà: Your net monthly costs are down to $1,500. (You can find great mortgage calculators at mortgage-calc.com.)
Of course, you don't get that tax deduction back until you file your taxes the following year. If that's going to make for a tight squeeze, ask your payroll office to adjust your withholding so you have about $400 less per month siphoned off for taxes. Essentially you're giving yourself the interest-deduction money each month, rather than waiting for a refund after you file your return. Okay, new homeowner-to-be, start looking!
If we assume you find a $250,000 unit with a $25,000 down payment, that works out to a $225,000 mortgage. At today's 5.5 percent interest rate on a 30-year loan, your monthly payment would be about $1,277 per month. But then you need to add the cost of insurance, about $50 a month. Property taxes can add about 1 percent of your mortgage cost, so let's say $225 each month for that. And we've also got that monthly condo maintenance fee; for this example we'll say it's $250.
There's one other cost you need to consider, since your down payment is less than 20 percent: private mortgage insurance (PMI), which is the lender's way of getting extra protection because you are a slightly higher risk. The PMI would run you about $100 per month until your equity in the home reaches 20 percent.
When you add all that up, you're at $1,900. Now, don't worry. I know that's a lot more than your $1,500 rent bill, but you're about to enjoy one of the nicest breaks of home ownership: the mortgage-interest tax deduction. Your income puts you in the 30 percent tax bracket, so 30 percent of the interest you pay will be deductible. In the early years of the mortgage, the vast majority of your money goes to pay the interest, not the principal. So that $1,277 mortgage payment is going to give you nearly $400 in deductions per month. Voilà: Your net monthly costs are down to $1,500. (You can find great mortgage calculators at mortgage-calc.com.)
Of course, you don't get that tax deduction back until you file your taxes the following year. If that's going to make for a tight squeeze, ask your payroll office to adjust your withholding so you have about $400 less per month siphoned off for taxes. Essentially you're giving yourself the interest-deduction money each month, rather than waiting for a refund after you file your return. Okay, new homeowner-to-be, start looking!
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