Buying a condo- advice

[LuluLovesDisney]

I am buying a condo for the first time and I am learning a lot as I go. I have 3 mortgage options:

bank- low app fee, 5 year fixed at 4% then adjustable, no more than 2% increase per year, max cap of 10%

broker- very high app fee, 5 year fixed at 3.75%, then adjustable, no more than 2% increase per year, max cap of 10%

broker fixed- same high app fee, 30 year fixed at 5.25%

Also both broker options require our insurance and taxes to be held in escrow instead of paid directly to ins. company/city tax dept.

Well, I know a fixed is more secure than an ARM but it is a small place (2 bedroom) and we are using it to build equity. In other words, we are using it to build equity but it is too small once we have kids, so in 4-7 years we will be ready to move on to a bigger house. I still think it is a much better idea to buy this place than continue to pay rent.

So, if I am only planning on being here 4-7 years max and we could def. afford the mortgage (I qualify for double what the condo costs, we are debt free, our rent is significantly higher than the est. mortgage payment, actually rent + cost of offsite storage unit = a bit higher than mortgage+insurance+taxes) is the ARM still a bad idea if it is a lower insterest rate? I am hoping with a lower interest rate we could make double our monthly payments and build our equity really fast. Then, we need to decide if we want to put as much as possible into equity or if we want to build our savings more, but that's for another day.

Thanks again!

 

[BrettS]

I would be a bit surprised if the bank loan doesn't require the insurance and taxes to be paid through an escrow account too. I think it's pretty rare to find something that doesn't require it these days.

Since you say that you are only planning to be there for 4 to 7 years, I would suggest going with one of the adjustable rate mortgages with the lower interest. Obviously be prepared for the worst in 5 years when it can start adjusting, but you may be out of there by then anyway or at least be able to refinance if your plans have changed and you will be there much longer.

As far as which one of the two would be best, figure out what the difference in payments would be based on the interest rate difference and multiply that out over 4 of 5 years to figure out if you would spend less money now on the app fee or less money over time with the slightly higher interest rate.

Of course, also consider whether you can afford the higher closing cost right now too. Even if you would pay a little more money over time with the higher interest rate it might be better for your financial situation to spend less now.

Note that the interest will be tax deductable, so that will help a bit with the higher interest. Also note that any points paid at closing are tax deductable as well, which could help if part of that higher fee for the second loan is to buy points.

 

[*pixie*dust*]

Are the condos in a high demand area? Condos typically don't appreciate in the same way that stand alone homes do. Unless you are getting a steal or it is in a very high demand area, a condo may not be the best investment for building equity.

 

[akcire]

I would avoid a broker.

The bank should have any product you want ARM, Fixed, etc. Banks/Credit Unions generally have lower "junk" fees. I would call around to a few banks and get some numbers (but don't give them all enough info to run your credit--you just want some numbers on the programs they are currently running).

If you are planning to only stay the 5 years--an ARM would be okay; however to get the $8,000 home buyers credit requires you to be under contract by the end of April and closed by June.

 

[LuluLovesDisney]

Thanks so far. The bank does not offer fixed for a condo, just 1 or 2 family homes.

We are not buying it as an investment property. We want to live there. It is across the street from where I work and to be honest, yes, we are getting a GREAT deal on it. It is a short sale. We're already under contract, they did that on basis of my preapproval.

 

[LuluLovesDisney]

Just to add- we checked out another bank, but that bank wanted a 25% down payment which we really couldn't swing.

 

[Tnkrbelle565]

If there is a cap at 10% and you can afford the payment at 10%....I would go for it. That way if you CAN'T get rid of the condo (I have a lot of friends who are stuck in 2 bedroom condos with 2 kids because they couldn't sell for anywhere near what they paid)- you'll know you can afford it until it does sell. If you are able to sell than you just made out with a great interest rate while you were living there. Personally, since there is very little apprecation in condos, I would build your savings account so that you have more to put down on a house (or do home improvements) when you are ready.

 

[geek]

Have you look into a 15 year fixed? Lower rate, and no surprises.

 

[cm8]

I say option number 1, but that would be only if you could afford to pay for the mortgage in the event that something happened to you or DH and you had to stay put for the remainder of the loan. Good luck

 

[dvcgirl]

What state do you live in? If that's not asking too much.

With a 4-7 year window I'd be a bit nervous buying a condo. The condo market is going to take a lot longer to recover than the single family home market. None of us has a crystal ball, but I personally don't think you're going to build a lot equity in that time frame in a condo.

Unless your mortage/taxes/insurance payment is substantially less than what you'd pay for the same unit if you rented it....I'd probably rent and pile up cash for a down payment on a home 4-5 years out.

 

[PGHDisneyfan]

Just being realistic here but the best laid plans of mice and men........ Go fixed and be safe this market is WAYYYYY to unpredictable to go adjustable. With the way inflation is going to hit us in the next 2-3 years I wouldnt be shocked to find yourself at or near the 10% max before you turn around twice.

 

[Tink1073]

I would say, don't do it! we bought a townhouse before kids, 5 year ARM. Now, we have negative equity, 2 kids, and no hope of selling! Our rate did just adjust, and our gamble paid off somewhat, our interest rate went down to 3.2%!! But, we're stuck here until we build equity to buy a house..who knows how long!

 

[mistysue]

I wouldn't count on building equity in 4-7 years.

By the time you pay all the fees to close the loan and the sale, most people can't start getting anywhere until they are in a house at least 10 years. That is what people used to advise in a steadily improving market...

Unless you somehow KNOW without a doubt that the value of that place is going to go up significantly, and that somebody will pay what you feel the value is, that is a lot of risk to count on building equity.

Your equity is worth nothing unless somebody is willing to pay that price.

You might be better off finding a cheap rental and putting the difference of what the condo would cost you into savings or an investment fund.

 

[Bren's Mom]

Definitely do NOT get an adjustable!

Do you have a RE agent? Does the company they work for have a mortgage broker working for them? We've had great luck with the broker that works for the RE company we used to sell. We paid no app fees. And she had access to literally hundreds of loan programs, she was able to beat everything we could come up with on our own.

I would also suggest looking at a credit union. Many of them you just have to be a resident or work in a certain town to join. They often have excellent loan programs.

I'd try to get a 15 or 30 year fixed for sure.

 

[lastminutemom]

In 5 years, when you have outgrown it, can you see yourself renting it out (are there rules in the complex about the percentage of renters)?

Condos and townhomes recover their value far more slowly than single family homes. I would so do the fixed rate.

 

[prncess674]

I have a 30 year fixed rate loan at 6% on a condo. Granted 1 bed/1 bath in my building go for 400K and up. My loan is thru Bank of America. Condos can be very risky depending on your area of the country.

 

[katied]

Go with FIXED!

When I refi'ed our house years back, I went with an ARM, saying that we would definately sell in 5 years, so why not. Well, 5 yrs came, and we did end up moving out of state, but also, the real estate market tanked and selling our house did not seem to be the best choice for us. So, last year we had to re-fi again, because I was not interested in the risk of an ARM anymore. All indications are that interest rates will be going up, and staying up, for the foreseeable future. Who knows how our real estate market will react, and condos are sometimes a bit iffy to sell.

You may decide your best option down the road is renting it.

So, my recomendation is to stick with a fixed rate mortgage and know that even if your plans change, you're safe.

BTW - I've never used a mortgage broker. I've always managed to negotiate with different banks direct and find a good deal.

 

[JCMHutch]

I would go with a fixed rate. As a previous poster said, you may not want to sell it in a fews years but keep it as a rental. Most places include and escrow account for the taxes in your mortgage. If you are not required to get insurance by you mortgage company, you should anyway. Most condo/townhouse complexes have a group insurance that will cover the building, but not your belongs if there is a fire, etc.

Also, just keep in mind that you may not build the equity you want in that amount of time. I bought a 2 bedroom townhouse 6 years ago. I live in an area of the country that has higher housing costs. Two years after I bought it, the selling prices went up an insane amount for the units in the complex. It was crazy. Now, even with the new windows and new carpeting I have added, the townhouse has a lower market value than I paid for it. It was a huge swing up and down in 6 years.

 

[neatokimmo]

bank- low app fee, 5 year fixed at 4% then adjustable, no more than 2% increase per year, max cap of 10%

broker- very high app fee, 5 year fixed at 3.75%, then adjustable, no more than 2% increase per year, max cap of 10%

broker fixed- same high app fee, 30 year fixed at 5.25%

For 1 and 2, take the cost of the mortgage and multiple it times 1.25%. If the app fee is less, go with #2 over #1. For example, let's say the app fee is $300 more and the condo is 100K. 1.25% of 1K is $1250, #2 would be the way to go.

The difference between 1/2 or 3 is the rate. Use 2 as the example, 6.25% is being saved with #2 the first 5 years. So IF the variable rate cant be higher than 2% a year, you won't even match %s until 8 years.

So that being said, I'd get 1 or 2 and pay it off in 10 years. You said your rent was more expensive, keep paying that amount plus some if needed.

(would also help if numbers were posted, fake math is harder than real math )