Property Ownership: It’s Not About Finding Your Dream Home

I think back to just a few weeks ago when we were considering buying a loft in our neighborhood and we had come across an over-priced turkey. I think, in our minds, we saw a loft we have been dreaming of, but in our hearts, we knew there was something wrong with the big picture. The main problem was that the price the seller was asking for did not match the perceived value that we had of the loft. Luckily, signs of an uncooperative seller really pushed us away and his personality became an additional factor that made us hesitate for a moment. That moment was enough.

I remember how it happened very vividly. It was a pivotal moment in our house buying venture. We had exactly three days to respond to the seller’s counter-offer … if you could call it that. We received it on a Friday and Mike and I decided to go do something we hardly do, which was to dine out. We went down the street to a chicken and waffle stand called Bruxies to talk about the pros and cons. We both were dancing around the question of, “Do we let this go or do we just bite the bullet and sacrifice a huge expense in order to get this space?” Deep down, we both knew that it wasn’t worth the cost. But we were fearful, too. Of missing out on an opportunity. Of missing out on this imagined dream.

It turns out that all of this was a blessing in disguise. As we were sitting there that summer evening, waiting for our trays of fried food to be delivered to us, I remember casually turning on my phone and searching Zillow. It was a thing I’ve done the last year and a half or so, and I’ve probably memorized nearly every listing on the market. I just liked to see what was out there, out of curiosity. On that particular day, we were primed to buy a place. On that particular day, we were determined not to be duped of our money. On that particular day, we were in a specific headspace or state of emotions. On that particular day, a loft was added to the listings.

It was actually the first property that showed up on my feed, which meant that it was the most recent addition. Or, well, re-addition I should say. I knew exactly where the loft was located, and I knew what it was listed for before. There was a $20,000 price reduction. The loft was selling for under $500,000, which, if you live outside of California and New York, you probably would not understand how great of a deal this was. My obsessive habit of scrolling through Zillow has paid off! I knew right away that those lofts were selling for a bit more than the listing price. I showed Mike, and in an instant, I think we both knew the answer. Though we didn’t say it out loud, there was a hint of a spark, maybe from some neurons firing in our brains or a shooting star over our heads or whatever, that told us this could be the one.

After that moment, we couldn’t stay close-minded anymore about the property we were going to buy when we realized there were better opportunities. The main reason why we wanted the loft in our current neighborhood was because we had already lived here. We were comfortable, we knew the pros and cons. We knew the floor plans and the neighbors. We knew the HOA people and the surrounding businesses. But it does not mean that it was the best option. The minute you get comfortable, you start to close off doors to other opportunities. Practicing the art of purposefully seeking discomfort in life, it makes sense that we went with this other loft. We had texted our real estate agent and within minutes , we had an appointment to view the other loft the next day. The loft that we ended up getting. By refusing to entertain the grossly priced loft in our immediate neighborhood, we found a loft that checked off a lot more.

  • Location: The loft we found was in the heart of downtown. Originally, we were hesitant to even consider these lofts because of the location. But once we opened up to the idea, the location ended up being its best feature. We initially feared being located in the heart of downtown, where there would be potential noise from concerts on weekends, or busy sidewalks and traffic during the day. But once we got over that, we realized that this location had more pros than we thought. Walk outside and there are many restaurants, bars, and coffee shops to go to. We would be one block away from the farmer’s market, three blocks away from one of my work offices, and within a few blocks from the courthouse, the library, the post office, and many other governmental offices.  It is one block from Main Street and located on 3rd Street, so that if and when we do decide to open our own business downstairs, we would get decent foot traffic. But best of all, the loft we ended up with was next door to one of our close friends! As in, we share a wall. As in, the exact friend whose housewarming party we went to three years ago and whose loft inspired us to live in a loft of our own.
  • Style: The style we were looking for was a live/work loft. I would admit that it doesn’t look nearly as industrial as the one we currently live in, but it definitely has the vibe of something more than just a traditional home. Vaulted ceilings, large windows, cement floors, metal railing, and exposed vents. We can always add additional industrial touches at a later date.
  • Price: The asking price for this loft was incredibly cheaper. As I calculated in the previous post How to Decide if Property Ownership is a Good Financial Decision for You, the equivalent of our current monthly rent would be a property that is less than $520,000. The loft we bought was actually originally listed at $520,000! But after a previous potential buyer changed their mind, the seller lowered the costs down to $499,000. That weekend, we placed an offer for their asking price, which is $150,000 cheaper than if we went with that fake seller. Since I have been studying the market for over a year, I knew right away when this came on the listings that the price was fair. Our appraisal came back at $505,000, so we were very happy with the one we chose.
  • Commercially Zoned Space: The loft is already commercially zoned for business! Just thinking ahead to our future dream of starting a business that’s our own gives me the shivers.
  • No Immediate Renovations Needed: Unlike the first loft we were considering, the bottom floor in this loft is already partitioned with it’s own full bathroom. Which allows our roomie to stay with us. Plus, the loft requires no immediate renovations. The inspection report came back with minor tweaks, but we can move in once escrow closes and assume our day to day without a hitch.

All of this to say that persistence and patience pays off. That fear of a new adventure should be stifled almost immediately. That comfort will lead you to over-priced turkeys and closed doors. That curiosity can lead to wonderful new paths. That sometimes, it’s not about what you plan for, what you prepare for, or what you dream of, but rather, what life gives you, and whether or not you choose to take it by the reigns and just go with the flow. That it is not about finding a dream home, but instead, finding a home that will get you to your dream life.

Property Ownership: The 45% Rule in Mortgage Lending + IBR’s Saving Grace

So I know that we WERE in the process of refinancing our student loans in the Spring, which we announced on zee blog prior to an Oregon trip. Now that we are returning to Oregon once again in a week, I wanted to say that we STILL have yet to finalize the refinancing. And no, we did not wuss out. Don’t fret, refinance is still in our near future plans. If anything, we manned up a bit more. How? It was at that time that we decided to tackle property ownership as well! So why did refinancing have to be put on hold?

Related Posts:

There were two moving parts that we were balancing at the same time. Firstly, we decided that we can tackle student debt quicker by refinancing to a lower rate than our current 6.7%. Secondly, we also agreed that a sure heck of a lot of money was going towards rent, and then disappearing into thin air. After much consideration, we decided that tackling property ownership was yet another financial challenge we wanted to pursue.

Here’s the catch. Both actions would affect the results of the other.

The 40% Rule and the 45% Rule in House Buying

The general rule with mortgages is that lenders will want to see that your property’s monthly mortgage payments do not exceed 40% of your monthly gross income. For example, if you’re monthly take home pay was $5,000 a month, then the monthly mortgage cannot exceed $2,000. Which is fine, because we chose a home that would be a close equivalent to what we were already paying for in rent, and it is nowhere near 40% of our monthly gross income.

The problem lies in the second general rule. General rule number two states that your monthly housing expense and monthly repayment of non-housing debts, can total up to, but generally be no more than, 45%. By non-housing debts, I mean car payments, credit card payments, and yes, student loans. Uh-oh! Do you remember when I told you that 100% of my income was going towards paying down student loans? How in the world were we able to get a mortgage loan with a rule like this? Well, IBR is our saving grace.

IBR is a Saving Grace

When you are under the IBR program and are applying for a mortgage, they consider only your minimum monthly payment, which is a small percentage of your income. This is regardless of whether you are funneling more than the minimal payment towards the loans in hopes to reach financial freedom faster, or not. So buying a property while under IBR is “easy”! Because no one assumes that you would be crazy enough to pay down your student loans, when you can wait for loan forgiveness instead.

If we had refinanced prior to getting a property, the monthly payment of the refinanced loan would be $5,500/month. When you add that towards the monthly mortgage payments, then we get very close to exceeding the 45% rule. Even though we would still fit the rule, the tightness in the budget does not allow enough breathing room for emergencies, or whatever life chooses to throw our way. We all know I need breathing room! And once you refinance, there is no turning back. IBR is lost for good. There goes your saving grace.

So refinancing would have likely swept away all hopes of property ownership in the upcoming few years. Which means more money spent on rent and not funneled towards building wealth. Now you can see why we had to put our refinance on hold. We do not wish to refinance until after we close escrow on a property. Refinancing student loans first would have put us much farther behind on our financial goal of owning property. But buying a home first does not put us much farther behind on our financial goal of paying down student debt.

Mortgage’s Effects on Refinancing

Unfortunately, there ARE effects of a mortgage on student loan refinancing. Owning a property can affect the refinanced loan rate of the student loan. Since the loan company will now see that we have a mortgage to pay on top of the student loans, they may apply a higher loan rate to our refinanced loan than the originally quoted 5.5%. But the chances of refinancing at a rate lower than 6.7% is still present! Now in our particular case, a student loan company may think that $500,000 in student debt is crazy. They may not trust in our ability to pay them back in ten years, on top of having a home. And we don’t blame them. It is a scary thought, after all, and they know nothing about our personalities or financial story. So if a loan DOES deny refinancing the full $500,000, here is what you do. Refinance part of your loan. For example, get $250,000 refinanced at a lower rate. That seems more doable to the refinancing company. Then pay only the minimum amount towards the refinanced loan, and funnel the rest into the loan at 6.7%. Why? You want to pay down the loan with the higher percentage first, since the interest rate will be charging you like crazy. Meanwhile, you’ve cut part of the interest that you would be paying under IBR. As the numbers dwindle, consider refinancing again in the future, this time the loan in its entirety. Since we still plan to keep up with our $6,500 payments per month towards student debt, a lowered interest rate will help us out, no matter what. If they do not approve the loan in its entirety, we take baby steps. Even if only a portion of the loan is refinanced, it still doesn’t deter us or set us back from our plan to be free from student debt in less than ten years!

In the end, our choices were this:

Refinance first, and have a very difficult time securing a mortgage.

OR

Pursue property ownership first, and refinance at a slightly higher rate, but still at a lower rate than the current loan.

As you can see, we went with the latter.

And I am pleased to say that we are almost there! Once we’ve secured the property portion of our game plan, we ARE going to refinance. And I will share with you guys THAT process as well!