The Most Expensive Mistake of My Life

[rowyn]

This was going to be my title for the last entry, but I decided to save it for a bit.

I don't know, of course, that buying a house is a mistake. Obviously, I'm betting that it isn't. But if it is, it'll probably be the priciest.

The sellers rejected my request that they pay closing costs, unless I upped my bid by the amount of said closing costs. There is a sort of logic to doing this -- it means the closing costs can get financed by the mortgage, instead of me having to pay them in cash. For example, if I buy an $80,000 house with $2,500 in closing costs, and I want to put 20% down (and I want to put 20% down) I need to come up with $16,000 for the downpayment, plus $2500 for the closing, or $18,500 total. On the other hand, if the price tag for the house is $82,500, and no closing costs, I only need to come up with $16,425 in cash up front. Of course, my loan in the first case is for $64,000, and in the second it's for $66.075. I'm paying the same amount either way.

But I don't really have great piles of cash lying around, so having to come up with less is, in fact, convenient. I dropped the estimate for the closing costs down a bit (I doubted they'd come in low, but I'd feel dumb upping my bid so the sellers would pay closing costs, and then having the costs come in at less than my increase), added it to the price, and told the agent to go back with it. That was about 2:30PM; haven't heard back from her yet, but Amy thought it wouldn't be until the morning. Knowing Amy, that'll mean around noon; I don't think she's called me earlier than that yet. :)

But it seems likely they'll accept the bid -- from their perspective, it's the equivalent of what they asked for.

I cashed in one of my index-fund accounts -- the only non-retirement savings I have. It's all money I invested between '99 and '01. That means I was buying while the market was nearing a peak that it hasn't approached even with the recent recovery, so I'm realising my first losses in the market with this transaction. On the bright side, at least I don't have to pay capital gains tax.

And I called an inspection company that had been recommend to me, to see about getting the house inspected.

Amy had told me that the cost of an inspection should be between $175 and $250.

The company I called gave me an initial estimate of $760.

I had them break it out: $300 was for the structural/mechanical part. $50 was for termites. $110 was "safety": checking for things like lead paint and radon. And $300 was for the septic tank.

While I'm not convinced that I care about radon in my house (the woman at the inspection company was convinced this was a big deal, but frankly, I doubt I've ever lived anywhere that had been tested for radon and I don't know why I should start worrying about it now) I do want the place checked for termites, and I do want the septic tank checked. I may or may not need to do that from the perspective of financing, but I sure don't want to find out there's major trouble with it after I've bought the house. (Ugh.)

$650 (or even $760) as part of the cost of buying the house doesn't bother me too much. I liked this house better than houses that were $10k more, so it's a good deal for me even if the closing costs come out to be more than anyone expected.

But what does bother me, though, is the thought of spending this much not to buy the house. I mean, if the guy looks at it and tells me "the foundation's shifting" then I've just spent $650 for the opportunity to go find somewhere else to live.

I dunno. Maybe if I go out with him I can get him to do the mechanical/structural part first, and if there are any indicators of certain DOOM on that one, we can skip the rest of it.

In any event, I'm certainly calling some other companies as well. Even the basics from this place were higher than Amy's estimate.

I still haven't told my current apartment complex that we're moving. We're supposed to give 30 days' notice. The trouble is, I'm not going to feel confident that I'm moving until I've got the inspection done and there are no problems with it. I don't want to wind up paying rent here for all of December if I've got a house by Thanksgiving -- but if the deal falls through, I don't want to be out on the streets for a month, either.

Of course, I doubt that the current place would kick us to the curb if we said "oops, changed our minds, staying another month after all". But I do need to talk to them about it. Bleah.

I could talk about my day at work now, but I think I'll skip it.

Comments

[verminiusrex.livejournal.com]

This is the guy that did our home inspection in Lawrence three years ago.
http://www.idir.net/~dstoffer/
I don't know if he does inspections in KC, but it would be worth checking into. He did a good job and he didn't cost nearly as much as you were quoted.
Good luck.

[rowyn]

Thanks! The septic tank (which most people aren't stuck with) seems to be what's really going to hammer me on this, but I'm sure I can do better. I appreciate the referal. :)

[kagetsume.livejournal.com]

Have you considered a 80/20 split loan to avoid PMI and avoid having to cough up that kind of cash?

-- Kagetsume

[rowyn]

I'd briefly considered trying to arrange something like that, but I didn't pursue it. I called my father about it, saying that I figured I had three options: (1) I could put 5 or 10% down and pay PMI (bleah) or (2) I could cash out part of my 401k (first-time home purchases are an exception to the penalty). At this point he suggested (3) borrowing money from my parents.

I could also borrow against my 401k, which effectively means cashing in part of the 401k, but not losing the tax-deferred status on the money, and having to pay it back to the account with interest.

Of these options, I'm leaning towards borrowing from my parents. I know that's one of those red-flag Things Not To Do, but my whole family is good with money, and I don't think it'll be a problem. I'll pay him interest, and I'm hoping I can pay him back for it within a year or so. We'll see how it goes.

I know that a straightforward cash-in on part of the 401k wouldn't be a smart financial move. But I have to confess that it's tempting. I'm very debt-adverse, and whether it's my parents or a bank or a 401k loan, you can bet I'll be working to pay it off ASAP. Yucky debt.

And I know you understand just how I feel. :)

[tuftears.livejournal.com]

Debt isn't so bad, you can refinance the loan, or now is actually a decent time to buy because interest rates are low. It's just paying rent, really.

[jordangreywolf.livejournal.com]

... except that if you decide you want to go somewhere else, it's a lot more hassle and obligation than if you were really just renting. =P

[rowyn]

Yah, that too. Renting is underrated. :)

[rowyn]

It's just paying rent, really.

Oh sure. Apart from having to pay for electric, gas, repairs, yard work, maintenance, sewers, garbage, insurance, and real estate taxes -- am I forgetting anything? -- it's just like renting.

And no, I don't have to pay seperate bills for any of that now.

It's hard to imagine this will be cheaper than my current arrangement. I have to be pretty optimisitic about how much all of those other expenses are going to come to. But, hey, maybe they're not as bad as they all sound. And I will be closer to work and have more space.

But "just like paying rent" doesn't exactly cover it. :)

the 401k loan isn't so bad

[telnar.livejournal.com]

The 401k loan might be better than it appears at first glance. The nice thing about it is that it's a closed system. You pay the interest to yourself, so (aside from small differences in how much you get to put back into the 401k) it doesn't really matter how much interest you pay (you'll have to sell 401k assets temporarily and replace them with a retirement investment in "Rowan's loan"). The loan from your parents works more like a margin loan on your investments. It lets you stay fully invested, but you probably won't be able to make any new investments in the 401k soon. In fact, you might end up motivated to pay it back faster than you would a 401k loan (since you're borrowing the money from a real person). If you would have been more willing to take your time repaying a 401k loan (and there's no financial reason not to), then you might be able to make maximum 401k contributions while you're repaying the loan leading to a higher total 401k balance over, say, 5 years.

The next question, though, is whether you want that higher 401k balance. After all, you will have essentially $0 in taxable savings after buying the house, so the larger taxable savings you'll probably end up with from the plan that doesn't leave you in debt to your 401k might be a benefit.

Btw, while I don't share your debt aversion, if we take it as given, I think that it's easy to argue that it shouldn't apply to money that you owe yourself. On the other hand, even I wouldn't want to owe money to people with whom I interact regularly. If you borrow from an impersonal entity like a bank, then it's easy to put your interests first in deciding what to do in the event that making payments becomes uncomfortable. Dealing with relatives or friends could be different. Imagine, for example, that you became unemployed. How would you decide which payments to make first? Would your parents feel obligated to forgive the loan? How would you react if they tried? I suspect that the reason that your family "is good with money" is that everything has always worked smoothly and that everyone tries to keep it that way. That's partly a result of attitudes, but I claim that it may also be partly because no one has needed to make the sorts of difficult choices which can cause loans to strain relationships.

Re: the 401k loan isn't so bad

[rowyn]

You might be able to make maximum 401k contributions while you're repaying the loan leading to a higher total 401k balance over, say, 5 years.

Getting money into retirement accounts is not a problem for me currently. At the begining of this year, Toddler upped the max percentage contribution to the 401k from 15% to 50%. And, of course, I can put $3000 a year into IRAs. I'm not saving $15,000 a year currently, so the odds that I'm going to save that much after I buy a house approach 0.

To be honest, if I were suddenly plunged into such dire financial straits that I wanted my parents to forgive the debt, they would offer to do so and it wouldn't be an issue. I guess this could happen if I lost my job and the stock market collapsed utterly so that my retirement savings became worthless, and then I couldn't find a job in the six months of unemployment that I'd get -- or I couldn't collect unemployment -- and couldn't sell the house for even as much as 90% of what I paid for it -- you know, this is the sort of dire contingency that hardly seems worth planning around.

Nonetheless, OK, point taken that I should at least investigate what I need to do to borrow against the 401k. I've emailed HR about it, as I believe this is something I'd arrange with the 401k administrator and not the bank.

Too much help might be a problem also

[telnar.livejournal.com]

At the time, I wrote my comment, the scenario I was visualizing was that you might be in mildly dire financial straits and find it inconvenient but not impossible to make payments. That situation might tempt your parents to offer to forgive the loan when you didn't want them to or when they had mixed feelings about doing it.

[prester-scott.livejournal.com]

Buying a house is seldom a mistake as long as the house itself is sound, and not in a bad area ("bad" defined as "frequent flooding zone," "crime so high the cops won't even come," "built atop a huge termite colony," "undocumented hazmat burial ground," etc.).

It is certainly better than paying rent for 30 years, unless you plan to move again soon.

It's great for your credit, it's one of the most heavily-insured and tax-exempt investments you could make, and even if you default in a serious crisis situation (a la Great Depression), "possession is nine-tenths of the law" and chances are you'll get to stay.

[rowyn]

Thank you. The house is not in a great area, but I think it rates above "really bad", at least. :) And it'll undoubtedly be more expensive than where I live now, in the short run. On the other hand -- my house payments won't go up any more. :)