(Or why I’d look at renting this house)
It’s a buyer’s market, we are being told. This year’s normalized market is offering us a wide selection of homes to choose from. Builders are offering all kinds of incentives- now is the time to buy"!
Two weeks ago I reviewed the financing offered by Shea Homes in an Arizona Republic ad. I came to the conclusion that it wasn’t a bad deal- if you didn’t mind doubling your home payment after five years.
This week I again turned to the Arizona Republic’s Home section to find a new deal for home buyers, and it looked like I had a good one- Richmond American :
The Richmond American Advantage
OWN A $275,000 HOME FOR $930/MONTH
Or
Take advantage of our 30-year fixed interest rate starting at 2.875%***
If you look at the itty-bitty print at the bottom you will see that Richmond American is offering two payment options. There’s another option Richmond American doesn’t mention in the ad. Consider this:
Here’s the deal if you buy:
This is an inventory house located in the Village at Town Center,Gilbert, AZ. It’s the Ashford model. It has 3 bedrooms, 2 baths, with a 2 car garage, 1564 square feet. It is located at 77 E. Palomino Dr. They are asking $276,993, which is pretty close to our $275,000 example.
You would start out paying about $1200-$1600 the first year, and increase to about $1880-$2150 in year three. (Including estimated taxes, insurance, HOA) For loan programs that are supposed to be fixed, they seem to move around a lot.
(If you want to see the numbers for a $275,000 example,they are at the end of the discussion.)
Here’s the deal if you rent:
This is another home in the Village at Town Center- 3 bedrooms, 2.5 baths, 2 car garage, 1573 square feet.? It is located at 85 E. Palomino Dr. it’s just a couple of homes down from the inventory home. The owners are asking $1200/month rent- but with all the homes for rent in Gilbert, rent on single family homes is usually negotiable.
So which is better? If you made this purchase in a rapidly appreciating market you might overcome the inherent flaws in the loan programs described below- it’s a strategy that has worked for years for many people. In a declining market though, you could end up with your payments going up, as your values are going down. It all depends on how much you want to bet- and every year for the first three years in these loan programs, you are betting more each month.
The payments on the rental on the other hand, probably won’t be making the big payment jumps that the purchase will, and you won’t be on the hook if things go down.
Poker anyone?
_______________________________________________________________
See the Shea post on how the 3/1 ARM works. The payment starts at $930/month, but even if interest rates remain the same, you’ll be looking at a payment of $1,630.75 in three years- and will have paid down virtually no principal. This doesn’t include taxes, insurance or HOA fees either- so you’d better tack on about $250.
Here’s what happens with that 30 year fixed-
The loan is an 80/15/5. That means you have a piggyback loan. With an 80% first mortgage, you don’t need to pay private mortgage insurance. So you have a first mortgage fixed at 6.875% for 30 years, but the seller is discounting the percentage to 2.875% the first year, and 4.875% the second- this does include principal and interest.
The second has a 30 year fixed rate of 9.125%, but you have a 15 year balloon. After year 15, you’ll want to refinance- unless you want to cough up over $30,000 when the balloon comes due.
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It’s a short-term flipper loan. Better flip within three years after purchase or it becomes a suicide loan.
The ad claims these loans are for “owner occupied only” – but I think that term is a standing joke any more.
David Seiders of the National Association of Homebuilders says he doesn’t see recovery in the industry until 2008- and he has a reputation for being overly optimistic. You might not have to wait three years to have that loan be a “suicide” one- you could be feeling the pain before then.