Your First Home: The Financing Stuff Nobody Told You

So we’ve been hearing from a lot of first-time homebuyers, lately. WE LOVE FIRST-TIME HOMEBUYERS! But we’re finding a lot of you have big questions — and even more of you are afraid to ask. Or maybe you know you someone who should be buying but you’re not a “math person.” So here we go, a real life example of a first-time homebuyer we’re working with a real house they’ve looked at. We’ve made up some of their details to protect their privacy, but I’d say they are representative of a lot of our clients. 

DO NOT TRUST ONLINE CALCULATORS! They’re usually incomplete or overly simplified and don’t factor in things like mortgage insurance. 

The Buyers — Our buyers are a young couple, they have credit scores over 760, make about $150,000/yr combined, and have car leases and student loan payments totaling $800/mo. Right now they’re renting for $2300/mo. Between savings and a gift from their parents, they have about $45,000 to put towards their first home. Like most of our first-time buyers, they are limited by their savings and not so much their incomes. 

The House — It’s a cute place, fully-remodeled, and priced at about $635k — but I think we can get it for $620k. It’s an older home, the property tax rate is about 1.19% and there are no Mello Roos taxes like newer developments sometimes have. And because it’s Westminster, the taxes include trash service. 

6442 Bannock Road, Westminster, CA 92683 (MLS # OC17219445)

(all data current as of 9/19/2018)
Price $620,000
Beds 4
Baths 2 baths
Home size 1,237 sq ft
Lot Size 7,210 sqft
Days on Market 54
Status Sold
This gorgeous ranch-style home, located in the sought out Indian Village neighborhood, has been fully remodeled and is now awaiting its new lucky owners! Featuring updated 4 bedrooms and 2 baths, this home is completely turnkey. Upon entering, you have a welcoming front entryway in which you will enjoy an open and flowing floor plan with natural light that shows off the newly installed floors throughout (no carpet!). You have indoor laundry hook-ups, new windows, kitchen has new cabinets, quartz countertops, stainless steel appliances (dishwasher, micro/hood combo, stove), which includes a 6-burner stove. The home features a stand-up shower bathroom with a glass enclosure and a tub/shower combo, both with new tile and plumbing fixtures, updated from the top to the bottom. Not only are you getting a new home, but a beautiful big backyard with plenty of space for entertaining and future expansion. Conveniently located close to the 405 and 22 freeways for easy access to any commute. This beauty will not last long in this market. Submit your offer today!

Property Type(s): Single Family

Last Updated 11/15/2017 Tract Other (OTHR)
Year Built 1955 Community 60 - Westminster South of West
Garage Spaces n/a County Orange
Total Parking n/a

Listing information deemed reliable but not guaranteed. Read full disclaimer.

Listing provided by : Lorena Arguelles, Gary Rocha, Broker

(view all details for MLS #OC17219445)

Financing (let’s get down to it) — With $45,000 available for their home purchase, they do not enough for 20% down or even 10%. But that’s okay! For buyers with good credit, 5% down ($31,000) is available easily. This does involve mortgage insurance, but for buyers with excellent credit, it’s surprisingly reasonable. Rates are still low so these buyers are looking at 30 year fixed-rate loans at 4%. So let’s take a look at what the payments might look like:

OMG! They’re going from $2300/mo to $3700/mo!@#$!@#$ — Well, not quite. Homeownership is the long-game for sure. This isn’t about building wealth overnight. But there are are four very important factors that the monthly payment doesn’t address:

  1. Loan Equity – Of that $2812, some of it goes to actually pay down the loan…what’s another term for paying down the loan? BUILDING EQUITY. So how much of that $2812 goes to paying down the loan? $100? $200? $400? Nope, from the very first month $845 goes towards paying down the loan. And it only increases over time. Live there 10 years and you would have paid off over $125,000 of the loan. 
  2. The Payment Doesn’t Change Very Much – Unlike rents, which have steadily risen in Southern California, your mortgage payment is largely immune. Sure, insurance can rise. Property taxes can go up by 2% a year. But your basic mortgage payment is fixed. And if you keep the loan long enough, the mortgage insurance can be removed. So your payment may actually go down. Where do you think our buyers’ $2300/mo rent will be in 10 years? If it goes up by 3% annually, in 10 years than $2300/mo will be $3091/mo. 
  3. Tax Benefits – Everyone’s situation is different, but homeownership afford you some great tax deductions. Expect this benefit to be anywhere from $200-$1000/mo for these buyers. 
  4. Appreciation – We saved this for last because, frankly, don’t buy a home because you think it will go up 20% a year. But, let’s be super conservative and assume home prices go up, on average, 1%/yr. That’s way less than inflation. 1% might not sound like much, but 1% of $620,000 is over $6000 or $500/mo. So you can see how this can make a big difference in long-term wealth. 

Homeownership can be so difficult because people look at the right now. This is a long-game and like saving for retirement, you win bigger the earlier you do it in life. It’s not the right option for everybody and it’s not always the right time for everybody. As always we welcome your questions! 

If you’d like to receive a no-obligation, no-cost, get all of your individual questions answered session — don’t hesitate to reach out. 

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