A new condominium might be a good way to start the new year. Chances are that if you have a secure, well-paying job and are aware that interest rates are at their lowest level in a generation you may already be thinking seriously about investing in your first home.
On the other hand, even though you know that a home is a smart investment, you’re not entirely comfortable with the idea of a purchase that you think might make you house poor and cramp your lifestyle, possibly depriving you of pleasant vacations and the nights out that you enjoy so much for R&R.
Practically everyone shopping for a new home is aware that mortgage rates are at or near the lowest rate in at least 30 years. Interest rates recently hovered around 6.5 percent on average for 30-year fixed-rate mortgages. Just three months earlier the average was 6.9 percent. These recent rates are the lowest since Freddie Mac, the major mortgage buyer established by the U.S. Congress, began tracking rates in 1971.
If your dilemma sounds familiar, the picture may not be as bleak as you might think.
“At these rates, owning a condominium may cost you less than renting an apartment,” observes Steve Laner, senior vice president, residential lending, with Deerfield-based Perl Mortgage Inc. The firm is a prime lender for Magellan Development Group Ltd., one of Chicago’s most prolific downtown condominium developers.
He offers the following scenarios as examples for buyers at Park Alexandria near the financial district on the Near West Side and The Caravel in the booming River North neighborhood.
The first hurdle for first-time home buyers who want to own a home and still have a life is to answer “How much can I afford?”
Laner says that a standard rule-of-thumb answer is 3 1/2 times your salary.
“For example, let’s say you are contemplating a $171,500 studio at the Park Alexandria, a 32-story building with 266 residences being developed at 125 S. Jefferson St., for your first home purchase. That’s 3 1/2 times $48,751, so that’s the gross salary you should have to qualify,” he explained.
Of course, you will need a downpayment and the minimum would be 5 percent, or $8,575. That leaves a mortgage of $162, 915, which leaves you with the monthly payments of about $1,025 for principal and interest on a 30-year, fixed mortgage at 6.5 percent.
But your obligations don’t end there.
You still have to pay closing costs for title, etc., that for this particular unit would run about $1,400 to $1,500, Laner explains.
“If you elect the minimum 5 percent downpayment you would also be required to take out private mortgage insurance, which would run about $100 a month. And monthly assessments for the studio would run about $200 a month,” he said, so you obviously cannot deal from an empty piggy bank.
And what about real estate property taxes?
“Property taxes are not assessed on new construction but lenders typically ask for a $50 monthly payment to cover future taxes,” Laner explained.
To avoid painting yourself into a financial corner, a lender’s yardstick is that you allocate 33 percent of your gross income for mortgage payments or 38 percent for mortgage and other credit debt, like credit card purchases.
It’s also a good idea to have about four months of housing payments in reserve after you close since you will. also have other expenses, like furnishings, and you don’t want to be caught short.
Liz Miller and Heidi Graf, Magellan co-sales managers, are quick to point out that there is more to a housing investment than meets the eye.
“The first thing you face are costs. But bear in mind that in the first few years you are getting a big tax break since most of your early mortgage expenses are interest payments that are tax deductible,” they said.
In the above example, the first year outlay would come to approximately $13,000. But if you are in a 31 percent tax bracket you would have a tax deduction of about $4,000, which would mean that your investment would actually run about $9,000 the first year, or $750 a month.
“Compare that with the cost of renting a similar apartment downtown and you’ll probably find that it is actually less expensive to own than to rent,” said Miller and Graf. “And don’t forget that you are paying for real estate that you actually own, and which is very likely to appreciate in value over time. It’s an investment that’s tough to beat. Even if it only appreciates 5 percent a year, in five years that home will be worth about $217,000, a gain of $47,000. That’s not a bad return for an initial investment of $8,500.”
Miller and Graf say the financial scenario is somewhat different at the $50 million Caravel, which will rise 28 stories at the northeast corner of Dearborn and Ontario streets and offer 126 residences pre-construction priced from about $300,000 to more than $1 million.
“We’re attracting more professional couples and empty nesters to The Caravel and the financing picture is somewhat different,” said the sales team.
“At this price range it is best to plan a downpayment of at least 10 percent, although buyers are typically putting 30 to 40 percent down. But many popular upgrades are standard inclusions at the Caravel, so what might otherwise be considered expensive options elsewhere are built into the price,” they noted.
In many cases this cash is readily available, thanks to tax reforms that allow couples to realize capital gains of up to $500,000 on the sale of a primary residence with no tax obligations, explains Laner.
“This tax-free profit gives the baby boomer empty-nesters, returning to the excitement of living downtown, the liquidity to make a large downpayment and have money left over for other investments, traveling, etc.”
He explains that those buyers who choose to make more modest downpayments at The Caravel are required to take a “jumbo” loan that applies to any mortgage loan of $275,000 or more, and interest payments on such loans tend to run one fourth to three eighths of a point higher than the standard rate.
But there are other variations in financing a purchase, observes Laner.
“For example, a buyer might prefer an adjustable rate mortgage (ARM) where mortgage interest rates on three-to-five-year loans are currently running as low as 5.5 percent, significantly lower than the rate for a longer-term, fixed rate mortgage.”
For additional information, telephone (312) 943-2100 or visit the Magellan Web site at www.magellandevelopment.com. Also, Magellan’s design/sales center is located at 33 W. Superior St.(at State Street). For additional information on residential financing, call Steve Laner at Perl Mortgage (847) 317-1900.
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