Why you need a home down payment

My wife and I just got married and we'd like to buy a house soon. We've been setting aside money for the down payment but we have quite a way to go -- we'd need about $70,000 to make a 20% down payment in our area. We're wondering whether we should just go ahead and buy a house now with no money down, or wait until we've saved the 20%?
Lenders are making it a lot easier to buy a house without the traditional 20% down payment, but you're going to pay a lot for that option. If you borrow more than 80% of the home's value, you'll usually have to pay private mortgage insurance, which protects the lender if you default on your loan. That tends to cost 0.5% to 1% of the loan value, up to $3,500 per year on a $350,000 home, or $5,000 on a $500,000 home. It's money that doesn't go toward your principal or interest.
Another option is to piggyback two loans. If you take out one loan for 80% of the cost and another for 20% (or for 15% and pay 5% in a down payment), you can avoid private mortgage insurance. The interest on both loans is generally tax deductible, but the rates on that second loan are quite high -- now running in the low- to mid-9% range.
If you wait to amass the 20% down payment, you can avoid these extra costs, qualify for a lower-rate loan and keep your mortgage payments much lower, which gives you a lot more flexibility in the future.

8 big mortgage mistakes and how to avoid them

You can borrow too much or prepare too little. You can misjudge terms or overestimate your credit. With so much at stake, it’s no wonder so much can go wrong. Applying for a mortgage can be a daunting experience.
It's not enough that you're agreeing to take on the biggest debt of your life, one that represents two to three times your annual income. You're also confronted with piles of paperwork, flurries of fees and a tidal wave of terms, from amortization to title insurance, whose meaning is fuzzy at best.
"Whether it's a professor at Stanford or a ditch digger," said San Francisco mortgage broker Leon Huntting, "most people don't understand the loan process."
In this confusing and pressure-filled atmosphere, it's easy to make some mistakes. Here are some common ones that lenders and mortgage brokers see, and what you can do to prevent them.
Not fixing your credit Mortgage brokers say they're confounded at the number of buyers who apply for a mortgage with their fingers crossed, hoping their credit will allow them to qualify for a loan.
Before you even think about applying for a mortgage, obtain copies of your credit report and your FICO credit score. Your FICO score is the three-digit number that's used in 75% of mortgage-lending decisions. You can order your FICO score on the Web for a fee of $14.95, which includes a copy of your credit report.
Doing this at least six months in advance should give you plenty of time to challenge any errors on your report and ensure that they're removed by the time you're ready to apply for a loan. You can also see the legitimate factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt

7 home-buying traps

First-time home-buyers face an unfamiliar road and risk purchasing the wrong place at the wrong time. Here's a guide to the potholes. Buying your first home is an exercise in faith. You don't really know what you're getting into, you're awash in unfamiliar terminology and everyone you meet seems to have strong (and utterly contradictory) ideas about which way the housing market is headed.
You may not be able to avoid every home-purchase mistake, but you can keep your regrets to a minimum by avoiding the following traps:
Blindly using your agent's inspector Your agent may recommend a home inspector because he does a good job -- or because he keeps his mouth shut about problems that could torpedo the sale.
Yes, it's terrible to have to be so suspicious, but this is a big investment you're making. A good home inspection can keep you from buying a money pit. You can ask your agent for a recommendation, but get referrals from other recent buyers and try to interview at least three potential candidates before making your choice.
Few states regulate home inspectors closely, so real-estate columnist Ilyce Glink recommends you choose someone who belongs to the American Society of Home Inspectors, which requires its members to complete at least 250 inspections (or 750 if they don't have other licenses and experience). Ask about fees (which typically range from $300 to $700) and whether the inspector is licensed, bonded and insured, said Glink, author of "100 Questions Every First-Time Home Buyer Should Ask." Make sure you get a detailed, written report and, if at all possible, accompany the inspector so you can discuss the findings while they're still fresh.
Taking advice about what you can afford Your agent, your broker and your lender don't know what you can afford. At best, they know the underwriting guidelines for various loans, which are designed to minimize the lenders' losses, not ensure that you'll maintain your financial health.
As I wrote in "8 big mortgage mistakes and how to avoid them," lenders know that you'll do whatever it takes to pay your mortgage, even if that means shortchanging your retirement, forgoing vacations and piling on credit card debt. You need to be the one to set limits on how much you want to borrow and how you borrow it. In general, limiting your housing costs -- including mortgage, property taxes and homeowner's insurance -- to 25% of your gross income will ensure you have enough money left over to cover other goals, like retirement savings.
Getting a 'temporary' loan I'm hearing this potentially dangerous advice more often now that so many markets are spiraling out of the reach of first-time home-buyers: Get a mortgage with a low payment now, then refinance in a few years when your income is higher. This is the way some brokers and lenders are hawking adjustable-rate mortgages as well as their more exotic cousins, interest-only and flexible-payment loans.
There are a couple of problems with this advice. The first and most obvious is that no one can predict where interest rates will be five years from now. If they're substantially higher, you will have just passed up the opportunity to lock in rates when they were near generational lows. If your payment has been rising with those rates, you may not be able to afford your home even if your income is higher.
The other problem if you opt for one of the exotic mortgages is that you may not be building any equity in your home. If prices drop, you may owe more on your house than it's worth, which is going to make refinancing pretty tough unless you can come up with a ton of extra cash.
More experienced homeowners who are disciplined about money might be able to handle a trickier mortgage.
The better advice for first-time home-buyers may be to opt for a loan that will remain fixed at least as long as you plan to be in the home. If you plan to move after five years, for example, a good choice might be hybrid loan that remains fixed for five years before becoming an adjustable-rate mortgage. If you'll be in the home for a decade or more, or aren't sure how long you'll be there, you might want to opt for the security of a 30-year fixed-rate loan.
"You're locking in your housing costs for the next 30 years," said real-estate investor Gary W. Eldred, author of "The 106 Common Mistakes Homebuyers Make (and How to Avoid Them)." "If interest rates go up, your payment stays the same, and if they go down, you can refinance." Before you decide on a mortgage, spend some time in MSN Money's Home Financing Decision Center and educate yourself about the options.
Opening or closing credit accounts Both can hurt your all-important credit score, the three-digit number lenders use to help gauge your credit-worthiness. That can result in your getting stuck with a higher interest rate or losing the loan you want all together. (Read more about credit scores at MSN Money's credit rating Decision Center.)Real-estate columnist Tom Kelly knows how important credit scores are, but didn't think much about the ramifications when he applied for a new credit card while in the process of applying for a home-equity line of credit. That, plus his wife's closure of a few other accounts, shaved more than 30 points off the couple's credit score.
It was "really bad timing," Kelley said. "The lender for our proposed line of credit basically said, 'What have you guys been doing?' after our application had been filed and the new FICO scores had arrived."
Failing to investigate the neighborhood "One common mistake is not looking at the property and the neighborhood at various times," said Dick LePre, senior loan consultant for RPM Mortgage in San Francisco and author of the RateWatch newsletter. "Look at it during the day, the late afternoon when kids tend to cluster, at night and on both weekdays and weekends."
This ongoing inspection can reveal good news, bad news or both. You may find your home is on a popular shortcut for commuters or near the gathering place for local kids, but only for a few hours a day.
"Something which you construe as a problem might only happen one day a week or at a certain time of the day," LePre said.
He also recommends quizzing a few neighbors about what they like and don't like, and about which direction the neighborhood seems to be going.
"Find out if there are any 'crazies' on the block," he said. "If there is empty space nearby, ascertain what the zoning is for that empty space. Is the next block over ... zoned commercial? Do you want a McDonald's as a neighbor?"
Buying when you're not ready Buying a home is a great way for the average person to build wealth over the long run, but it's not for everyone in all circumstances.
If your finances are uncertain or your job prospects are up in the air, you might want to wait. Renting is also a better option if you're planning to move in a year or two.
Not buying when you are ready All that said, you shouldn't let fear or uncertainty keep you on the sidelines if you're otherwise ready to buy a home.
Eldred notes in his book that the media have been decrying the high cost of housing and predicting price peaks at least since the 1940s. Although prices have fallen in various cities at various times, the overall trend has been upward.
Eldred recommends being cautious if your market is showing signs of weakening, such as:
Properties staying on the market longer.
A widening gap between the costs of owning and the costs of renting.
Even then, don't put off a purchase if you're able to stay put for several years -- long enough to ride out any downswings.
"In five or 10 years, prices will be higher than they are today," Eldred predicted.

Speed your home sale with these fast fix-ups

Small expenditures of money or time on carefully targeted projects can improve your chances of selling quickly -- and ensure you get the best price possible.
You don't have to spend a fortune renovating your house to ensure a quick sale at the best price. Some of the most effective fix-ups are also the cheapest.
Spending just $400 to $500 on fresh landscaping, for example, can boost your home's value by $1,600 to $1,800, according to a survey of real estate agents conducted by HomeGain, an Internet real estate service. Spend another $300 on cleaning and de-cluttering your home, the survey found, and you could add another $2,000 or more to the sale price.
To pinpoint the projects that make the most sense, start by touring your property with fresh eyes, as if you were a prospective buyer. Drive or walk up to your house and see how it appears from the street. Walk through the front door and take a look around. You might ask a trusted friend to help you spot problems, clutter and weird smells that you've long since stopped noticing. Keep a pen and pad handy to list the projects that need to be done.
On the outside Here are some suggestions for the exterior of your home:
Start at the sidewalk. Landscaping makes a huge difference in how people perceive your home. Whack back overgrown bushes and trees so your house is visible from the street. Plant colorful annuals in the flowerbeds. Keep the lawn green and trimmed, even if you have to hire a gardening service or a local teenager to help.
Revive a tired exterior. Painting exterior doors and window trim can freshen your home's look without the huge expense of a complete exterior repainting. Shine or replace worn door knockers and hardware. Replace or remove torn screens or damaged storm windows. Make sure exterior lights are working and have fresh bulbs -- some buyers like to cruise by your home at night to see how it looks.
Remove outside clutter. Get rid of anything that blocks pathways or clutters up side yards, back yards and patios. This includes toys, excess furniture and tools.
Clean your windows. You want your home to look as light and bright as possible. Dirty or spotted windows drag down a home's appearance.On the inside Once inside, inspect your floors, your walls, your kitchen, your bathrooms and your closets -- because your buyers will. Here's what to tackle:
Dig out the dirt. You can do it yourself or hire a crew for a day, but a deep cleaning is essential for a good first impression. It's also key to keep up the cleaning as long as your house is on the market, which will probably mean a daily dusting and vacuum session. Bathrooms and the kitchen should be kept spotless.
Banish bad smells. Air out your home by throwing open the windows at least once a day (or, in bad weather, by running all your exhaust fans). Don't cook smelly or greasy foods, which linger in the house. If you have cats, clean the litter box at least once a day. Use potpourri or bake cookies before buyers visit to give your place a "homey" smell.
Remove inside clutter. You need to move anyway, so why not get a head start and make your home look larger by packing away at least one-third of your stuff? Stowing away knickknacks, mementos and family pictures helps depersonalize your home, which is actually a good thing: You want potential buyers to picture themselves living in your home instead of being distracted by your personal effects. Consider renting a temporary storage space rather than stuffing your packed boxes in your closets or garage, which will make them look smaller.
Organize what's left. Tidy closets and pantries look bigger and more appealing.
Fix your floors. Real estate agents say buyers really notice the condition of floors. Hardwood should be polished and carpets shampooed or, if they're in bad shape, replaced. Repair any broken tile or linoleum.
Brighten your walls. If you've painted or wallpapered in recent years, you may be able to get away with just washing your walls. Otherwise, consider repainting your rooms in neutral colors.
Beware the big projects What about bigger projects, such as a kitchen update, a new roof or upgrades to an electrical system? Generally, you won't get your money's worth from these projects, but here's what you should consider:
Remodeling is for buyers, not sellers. Major renovations usually don't pay for themselves, let alone add enough value for you to make a profit. So why would you want to go through the hassle and the expense right before you move? Concentrate instead on smaller fixes with bigger impact, and let your buyers remodel to suit themselves.
Get the latest from Liz Pulliam Weston. Sign up to receive her free weekly newsletter.
Preferred format:HTMLPlain TextLearn more about newsletters
Beware of deferred maintenance. Buyers expect your home to be in decent shape. That means a roof that doesn't leak, paint that isn't peeling and household systems (heating, cooling, electric and plumbing) in good repair. If you've neglected your home, you face a tough choice. You're unlikely to recoup much of the cost of your repairs in the form of a higher sales price, since buyers are unlikely to pay you a premium for maintenance you should have been doing all along. Yet not making the fixes may turn off buyers altogether. Talk with an experienced real estate agent about which projects you should tackle before listing your home.
Consider a pre-sale inspection. Hiring your own inspector before you put your home on the market can alert you to problems you didn't know about, giving you a chance to fix them before they complicate -- or ruin -- a potential sale. If the repairs are expensive, you may face the same difficult choice described above. But that's better than being surprised once your home is in escrow.

A new way to pay off your house

Accelerator loans, common in Australia and the U.K. but new to the U.S., use special accounts that encourage borrowers to apply all extra money toward their mortgages. The savings can be big. A different type of home loan, called a mortgage accelerator, has migrated to the United States. It uses home-equity borrowing and a borrower's paychecks to shorten the time until a mortgage is paid off, potentially saving tens of thousands of dollars in interest expense.
Not to be confused with biweekly programs that shorten a mortgage through extra payments, the mortgage-accelerator program is based on an approach common in Australia and the United Kingdom, where borrowers deposit their paychecks into accounts that, every month, apply every unspent dime against the mortgage loan balances.
In Australia, more than one-third of homeowners use mortgage-accelerator programs. In the U.K., it's about 25%. In the United States, the two firms now offering these mortgages are Macquarie Mortgages USA, which calls the program the Macquarie Asset Manager, and CMG Financial Services, whose offering is called the Home Ownership Accelerator.The premise is that borrowers finance a purchase or refinance existing property using home-equity lines of credit. Borrowers then directly deposit their entire paychecks into the credit accounts. Monthly expenses, other than mortgage payments, are funded by draws against the lines of credit, whether those are through automatic bill payments, checks, cash withdrawals or credit cards. Even if borrowers end up not paying anything extra on the principal during a month, they still capture some interest savings because the average balances are less than they would have been with conventional loans.
Here's how it works As an example, let's say your mortgage payment on a conventional fixed-rate mortgage is $2,000 and your monthly net income is $5,000. With the mortgage accelerator, even if you spend the $3,000 difference, your average mortgage balance for the month is $1,500 less than it was with the conventional mortgage.
That's because the entire $5,000 is deposited in the loan account and you made draws of $3,000 for living expenses spread over the month. At a 7.75% loan rate, that saves you about $10 in interest expense that month. Now, $10 here and $10 there does add up over time, although both loan programs have annual fees of $30 to $60, but the accelerator part of the mortgage lies in having all your net pay going against the mortgage and an assumption that you have a positive monthly cash flow -- meaning you don't spend as much as you make. A simulation calculator on CMG's Web site has stock assumptions that you may have 10%, 20% or even 25% of your net pay left over each month that you can apply to your mortgage balance. The Macquarie site has a calculator, too.
Help for the undisciplined Of course, all borrowers already have that money available with a conventional mortgage and without the cost of refinancing. A borrower would simply need the financial discipline to use all that money as an additional principal payment.
For the undisciplined, the mortgage-accelerator program makes the additional principal payments automatically. That's the real hook to this program: Unless you spend the money by drawing against the line of credit, your paycheck goes toward paying off the house.
Where a mortgage-accelerator loan program gives a homeowner additional flexibility, however, is in having a line of credit available if there is an emergency need for cash. If you make additional payments on a conventional 30-year fixed-rate loan, you can't borrow that money without taking out a home-equity line of credit or a home-equity loan. With the mortgage-accelerator program, you already have the line in place. That gives homeowners confidence that they can be aggressive in paying their mortgages and still have money readily available if a financial emergency crops up.
Homeowners could cobble together a payment plan similar to a mortgage accelerator on their own by taking out a conventional home-equity line of credit, but a mortgage product specifically structured for this approach to consumer finances has advantages.
Mortgage-accelerator loans have interest-only minimum payments during the first 10 years, although that goes against the idea of paying off a mortgage as fast as you can. After 10 years, the line of credit decreases by 1/240 each month over the remaining loan term (20 years multiplied by 12), forcing principal repayment until the loan is paid off.
Another argument for this approach to financing is that your idle cash is saving you the mortgage interest rate versus earning a low passbook-savings rate. Though short-term investing alternatives that pay higher rates do exist, the savings are automatic with the mortgage-accelerator program.
Now for the fine print A home-equity line of credit is a variable rate, and the interest rate will fluctuate with changes in the underlying pricing index. Lifetime caps limit a homeowner's exposure to higher interest rates, with CMG's Home Ownership Accelerator limiting that risk to 5% over the starting rate. The Macquarie Asset Manager loan program has a lifetime interest cap of 21%.
As of November, CMG's program is available in more than 20 states, and Macquarie's program is available in about two dozen, with availability in a half-dozen more states on a correspondent lending arrangement.
Brooke Barnett, an "ownership accelerator specialist" at Rancho Funding, a San Ysidro, Calif., mortgage broker that offers the CMG loan program, calls the program ideal for financially savvy homeowners who spend less than they make each month.
The savvy part -- being able to earn the mortgage interest rate on idle cash instead of the low rates paid on checking and savings accounts -- attracts customers who take a big-picture view of their finances. Money that isn't going toward expenses is reducing the balance on the mortgage and, by doing that, reducing the interest expense.
Barnett suggests that a Home Ownership Accelerator loan could also be used in lieu of taking out a reverse mortgage. With enough equity in the property, a homeowner could avoid minimum payments over time using negative amortization up to the amount of the home-equity line of credit.
Closing costs on a mortgage-accelerator loan are about equal to the closing costs on a conventional 30-year fixed-rate mortgage. Like any refinancing decision, those costs are a factor, and the longer you plan to be in the house the easier it is to justify refinancing your mortgage loan.
The lenders expect homeowners to be less rate-sensitive about these accelerator mortgages because of the interest savings available through the program. The product is new enough in the U.S. market that it will take some time to validate that expectation.
Interest savings are still available the old-fashioned way by making additional principal payments on a conventional fixed-rate mortgage. Bankrate.com's mortgage payment calculator allows you to make additional-principal-payment assumptions on your mortgage, and you can then compare the interest savings against the results of the calculators offered by Macquarie and CMG.
By Don Taylor, Bankrate.com

Don't bite off too much house

The classic formulas for mortgage affordability could lead you to disaster. Here’s how to get a better handle on what you really can afford. Thirty years ago, first-time home buyers were often encouraged to stretch as far as they possibly could to buy a house. Back then, that advice made some sense.
Today, it can be a recipe for disaster.
A too-big house payment can, at the very least, leave you with too little money for other goals: retirement, vacations, college funds for the kids. At worst, it can leave you vulnerable to foreclosure and bankruptcy.
What's more, you can't count on your real estate agent, a mortgage loan officer, your friends and family or an Internet calculator to know what you can really afford. That's a decision you have to make yourself after reviewing your finances, your future obligations, your goals and your gut.
Yet many first-time buyers are still being pushed into mortgages that are bigger than they can handle, based on old-fashioned advice.
Here's what's changed in the 30 years (or more) since your parents bought their first house:
Inflation. Rapidly rising prices in the 1970s and early 1980s meant you could count on hefty annual raises. Today, you can't rely on double-digit income boosts to make your mortgage payment less of a burden each year.
Two-income couples. A generation ago, single-income families were more common. If the breadwinner lost a job, the other spouse could go to work to save the house. With more two-income families needing both paychecks to make the mortgage payment, there's no one on the sidelines to take up the slack -- unless you put the kids to work.
The lending industry. Thirty years ago, it was pretty tough to get a mortgage for more than you could really afford. Today, it's fairly commonplace. More lenders have loosened their criteria, knowing that the vast majority of their borrowers will do whatever it takes to pay their mortgage -- even if it means trashing the rest of their financial lives.
Retirement. A much bigger proportion of the workforce was covered by traditional, defined-benefit pensions 30 years ago -- which means they didn't have to save massive amounts of money on their own to have a decent retirement. Today, the onus is typically on you to carve enough out of your budget to fund 401(k)s and IRAs.
Let's get real So how much should you spend on a house? The traditional way to calculate that is to add up all your income and make sure that your housing expenses -- mortgage payment, homeowners insurance and property taxes -- don't exceed a certain amount of that total. The traditional limit, still used by many lenders, is 28% of gross monthly income. Some financial advisers recommend capping your outlay at 25%; others suggest stretching to 33% or more.
These limits, by the way, apply only if you don't have a lot of other debt. Most lenders don't want more than 36% of your total income to go toward mortgage and other debt payments. If your total debt would push you over that figure, most lenders will reduce the size of the mortgage for which you qualify. Here's how the varying limits translate. The figures assume you earn $45,000 a year and that you would pay $480 in homeowners insurance and $2,000 in property taxes annually. (In reality, those figures would fluctuate with the value of the home you buy.) This also assumes a 30-year loan at 5.5% interest and a big enough down payment that you'll avoid private mortgage insurance, or PMI.


How large a mortgage can $45,000 a year get you
If share of income devoted to housing is:
The monthly cash requirement is:
Less: taxes and insurance …
… leaves cash needed to pay the mortgage …
… and translates into this loan amount
25%
$938
$207
$731
$128,745
28%
$1,050
$207
$843
$148,470
31%
$1,163
$207
$956
$168,372
33%
$1,238
$207
$1,031
$181,582
*If gross income is $45,000 a year. **$480 a year for insurance, $2,000 for taxes. *** Assumes a 30-year, fixed-rate loan at 5.5% interest.
As you can see, the percentage of income used has a huge effect on how much house you can buy.
Fixing a glitch in the calculators
Most Internet mortgage calculators use the 28%-of-total-income figure. If you want to see how much mortgage you could afford under other scenarios, adjust your income by using the following multipliers:
Income converter to make online calculators work better

Income converter to make online calculators work better
Share of your income* devoted to housing:
Multiply your income by:
25%
0.9
28%
1
31%
1.11
33%
1.18
* Gross income
Then, use the calculators.
Your own math is more important The best way to figure out how much house you can afford is to do your own math.
Figure out how much money you need to contribute to various goals, such as your retirement and your kids' college educations.
Estimate how much your house is going to cost you in maintenance and repairs each year (figure about 1% to 3% of the home's total value annually, depending on its age and condition -- see "The hidden costs of homeownership" for more details). Then see how much of your remaining income is eaten up by your housing costs (including insurance and taxes), and see how you feel about that.
All that math making your head hurt? Here's the short version: You'll probably be most comfortable using the 25% lid. You may want to go even lower if:
You plan to have children. Kids can be expensive, and many couples discover they want to have the option of one partner staying home, or working part-time, once kids arrive. That's tough to do if you need every penny of both incomes to make ends meet. If you really want to be conservative, do your calculations based on the income you think you'll have post-baby.
You have an expensive hobby, like travel. Most homeowners are willing to put their wanderlust on the backburner to buy more house. If that's not you, buy less house.
Your income varies considerably. Most American workers have variable incomes, thanks to the prevalence of overtime pay and bonuses. If yours swings wildly from year to year, though, consider basing your calculations on your average earnings over several years or (even more conservative) on the minimum you expect to make.
You may think you can't possibly limit your housing expenses by that much, especially if homes cost a lot where you live. You do, in fact, have plenty of alternatives.
However, you can stretch further if:
You're absolutely debt-free. No credit card debt, student loans or car payments -- and none anticipated in the near future? You probably can handle a bigger nut.
You don't have to worry about retirement. Many teachers and civil servants have terrific pensions -- so good that to be sure they'll be fine, they just have to throw a few bucks each year into an IRA or deferred-compensation plan.
You're pretty sure your income will climb steeply in coming years. Fresh out of law school and doing a few years in the public defenders' office? If private practice is your goal and you don't want to wait to buy a home with the bigger income that's coming, stretching now can work out okay.

7 creative ways to buy your first house

A pricey market poses big challenges for first-time buyers. Though some are daring, one of these options might be for you.
So you want to buy a place of your own but can't figure out how to pull together the necessary cash and financing? If you're willing to think creatively, there are several offbeat ways to buy your first home.
The fixer upgrade When you can't afford what you want, look for what you can afford and use it as a stepping stone.
Case in point: Jamie Carroll, 46, and her husband bought an $80,000 two-family house about six years ago. They renovated, sold it and invested in a $200,000 two-family place in a nicer town. In a few years, they'll repeat that process and buy their dream house in the woods of Massachusetts.
Their first house was far from ideal, but the down payment was only $5,000, and the rental income allowed them to pay for repairs without incurring more debt. After the sale, they walked away with more than $30,000. Ditto in their new home, but the rental income is higher, so they'll save more toward their next purchase -- enough so that they can buy the new house and keep the rental property as an investment.
Pros: There are plenty of lower-priced houses out there in need of repair, and the income from a tenant can help both with repair costs and mortgage payments. Even in overheated markets, there's little likelihood that the value of homes at the low end will suffer in a slump.
Cons: This method isn't for the impatient or the status conscious. To save money, the couple did many repairs themselves, and it will be almost 10 years before they can settle into their dream house. Just be careful not to buy a place where the cost of repairs will eat up any profits you might make when you sell.
The shared load If buying your own property is prohibitive, consider buying into a dwelling with shared ownership. There are several options here, with varying levels of complexity and commitment. One of the most common uses a legal form of ownership called "tenants in common."
Case in point: In 1991, when the average San Francisco one-bedroom apartment was selling for about $250,000, freelance writer Sharon Fisher paid $170,000 for a one-bedroom in a tenants-in-common building with five other units. "I couldn't have bought real estate without this," she says.
Fisher eventually sold her TIC share for a tidy $420,000 when her building went condo. However, she says it would have sold for less if it had remained a TIC, and she would most likely have had to pay the buyer's legal fees.
Pros: Buying into a TIC is less expensive, and this form of joint ownership does a better job of protecting the rights of individual owners (as in the case of unmarried partners who want to buy property together).
Cons: Joining a TIC can be legally and financially complicated, and the details vary from state to state. Some TICs may restrict when you can sell and impose other conditions. And though you own your own place, you need people skills: Tenants negotiate noise, repairs, who puts out the garbage, etc.
Find out more about tenancy in common here.
The friendly option If you don't want the legal hassle of setting up a TIC, it's possible to buy a property with a friend you trust, sharing the mortgage and the title. This form of ownership is called joint tenancy, and it's the way most married couples hold property.
Case in point: In 2003, Bryan, 34, bought a three-bedroom house with a buddy for $299,000. They each put down $10,000, and they rent out the third bedroom to a friend, which helps cover costs.
Pros: The two are only paying slightly more than they would in rent, while they're building equity and the house is appreciating.
Cons: The legal particulars of joint tenancy vary from state to state, so you'll need to check with a lawyer. Under joint tenancy in many states, any owner can force the sale of a house or transfer ownership rights without the permission (or even knowledge) of the other owners. The costs and all decisions about maintenance and financing are shared equally, which is fine so long as everyone agrees.

Continued from page 1
advertisement
dap("&PG=INVLD1&AP=1089",300,250);
Advertisementvar inDapIF=true;window.setTimeout("document.close();",30000);\n\n\n'));" frameBorder=0 width=300 scrolling=no height=250>
Article Tools
E-mail to a friend
Tools Index
Print-friendly version
Site Map
Discuss in a Message Board
Article Index
var s_re=s_gi("msnportalrealest");

Find a new home or apartment
Existing Homes- REALTOR.com©
New Homes- Move.com™
Foreclosures- RealtyTrac.com™
Rentals- Move.com™
Price Range: $0$10,000$20,000$30,000$40,000$45,000$50,000$55,000$60,000$70,000$75,000$100,000$125,000$150,000$175,000$200,000$225,000$250,000$275,000$300,000$325,000$350,000$400,000$450,000$500,000$550,000$600,000$650,000$700,000$750,000$800,000$850,000$900,000$1,000,000$1,250,000$1,500,000$1,750,000$2,000,000$2,250,000$2,500,000$2,750,000$3,000,000$3,500,000$4,000,000$4,500,000$5,000,000$6,000,000$8,000,000$10,000,000
–
$10,000$20,000$30,000$40,000$45,000$50,000$55,000$60,000$70,000$75,000$100,000$125,000$150,000$175,000$200,000$225,000$250,000$275,000$300,000$325,000$350,000$400,000$450,000$500,000$550,000$600,000$650,000$700,000$750,000$800,000$850,000$900,000$1,000,000$1,250,000$1,500,000$1,750,000$2,000,000$2,250,000$2,500,000$2,750,000$3,000,000$3,500,000$4,000,000$4,500,000$5,000,000$6,000,000$8,000,000$10,000,000No Maximum
Select a StateAlabamaAlaskaArizonaArkansasCaliforniaColoradoConnecticutDelawareDistrict of ColumbiaFloridaGeorgiaHawaiiIdahoIllinoisIndianaIowaKansasKentuckyLouisianaMaineMarylandMassachusettsMichiganMinnesotaMississippiMissouriMontanaNebraskaNevadaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaNorth DakotaOhioOklahomaOregonPennsylvaniaPuerto RicoRhode IslandSouth CarolinaSouth DakotaTennesseeTexasUtahVermontVirginiaWashingtonWest VirginiaWisconsinWyoming
Or
Senior Living
Home Plans
Manufactured Homes
Senior Living
Learn More.
Senior Living
Home Plans
Find out more about joint tenancy here.
The instant neighborhood Cohousing has its origins in Europe and is practically like buying a neighborhood along with your house. Residents own one of a group of small homes clustered together and share ownership of the land.
In 1992, Tom Moench and his family bought a small (1,150-sq.-foot) 3-bedroom house for $157,000 in a cohousing development on Bainbridge Island, Wash. A similar private home would have cost about $185,000 then, or 17% more, Moench estimates.
Pros: In many cases, property prices are lower than market. And though houses tend to be smaller, residents share ownership of the common facilities. "We had a 5,000-square-foot common house, with guest rooms and dining rooms where you could entertain large groups," Moench says. Residents may cook meals together or swap babysitting time.
Cons: Cohousing is largely a blue-state phenomenon with vaguely utopian overtones, but it's slowly spreading throughout the country. You need a high tolerance for meetings, because many decisions have to be made jointly by the owners. When selling your property, there may be some restrictions, and the buyer has to want to join a communal setting.
Find out more about cohousing here.
The parental plan Saving enough for a down payment usually requires some kind of a sacrifice, so don't rule out living with family.
Case in point: Saddled with hefty school loans and about $25,000 in credit card debt at the end of their medical residencies, Sonya Cottone, 37, and her husband decided to move in with his parents for a year to pay off their plastic and save for a down payment. "People thought we were crazy," she says. "But it worked out really well."
Pros: Can you say super savings? Within 15 months, the Cottones had paid off their credit cards and saved enough to put $50,000 down on a four-bedroom colonial in Long Island. "And we're all still speaking to each other," she jokes.
Cons: Mixing family and finances can be a stress cocktail. To diffuse tension, Cottone says, discuss money and expectations up front (everything from paying rent to doing chores). And though your savings will make you feel flush, "don't see it as extra," Cottone says. Stick to your savings strategy or you'll be living with Mom and Dad for years.
The no-money-down Hail Mary It can be tough to save enough cash for a down payment, but in certain circumstances you can finance your way around it.
Case in point: Kerrie, 36, bought a small two-family home in Brooklyn for $560,000 last February. "I didn't put any cash down," she says. "I did an 80% mortgage and a 20% second loan. I used my $30,000 in savings for renovation."
Sign up to be notified whenever MP publishes a new article.
Preferred format:HTMLPlain TextLearn more about newslettersIt's a risky strategy, but it worked for Kerrie because a) the property was undervalued and b) she knew that a basic overhaul would bring it up to market value, which it has. In a year, Kerrie plans to refinance her adjustable-rate mortgages and get a 30-year fixed mortgage. Meanwhile, her upstairs renter offsets part of her costs.
Pros: You can buy a house without any upfront cash.
Cons: You need to have nerves of steel (in case property values drop) and be willing to live in contractor hell for a few months. And if your credit is less than stellar, this may not be an option at all.
The susu-super saver This simple saving strategy goes by different names in different communities, but the method is the same. Members of a "susu" contribute a fixed amount each week or month for a certain period (e.g. $200 a month for 10 months). At regular intervals, one member gets a specified payout in cash. .
Case in point: Laverne, a single mother in her 50s, has participated in over a dozen susus over the last 20 years. Right now she's in a 26-week susu in which each member will get $7,000.
Pros: Although the amounts are small, usually under $10,000, a disciplined saver could participate in several susus to fund a down payment.
Cons: Only communal pressure and the honor system ensure that everyone gets their turn (and that folks don't default). And your money doesn't earn interest.
But wait, there's more In the course of excavating all these options, I came across a wide array of federal, state and local programs designed to help first-time buyers and low-income buyers purchase a home. For example, you may be able to borrow from your 401(k) or take money from an IRA (you escape the 10% early withdrawal penalty, but not income taxes). The Federal Home Loan Bank sponsors programs that match savings, $3 for every $1 put aside. There are loan subsidies for buyers in rural areas and in inner cities, too.
The best place to start is with your state's housing finance agency. Find out more about what these agencies offer here. To find your own state's housing finance agency, click
http://www.ncsha.org/section.cfm/4/39