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Home Buyer Make-Over

The Waiting Game

A first-timer saved years for a down payment--then the hot market hit


Pat Cici Jr. is well prepped to buy a house. He researches neighborhoods, checks the rise and fall of interest rates as if he's watching the stock market and keeps himself on such a tight budget that he tracks every expense on a piece of paper he carries with him in a pouch.

"Two dollars for lunch," said his father, Pat, who chokes up every time he thinks about his youngest child moving out of their Hacienda Heights mobile home. "He even writes that down. He's always been like this."

With all his penny-pinching, the younger Cici, 32, has managed to squirrel away nearly $20,000 while living at home with his father and stepmother, Lea.

In fact, he's never lived away from home--not even during his days as a drummer for a punk rock band.

"I could never understand throwing my money away on rent," he said. After years of paying his folks $300 a month in rent and utilities, he's saved enough for a down payment and wants to capitalize on today's low mortgage interest rates.

"I've spent most of my waking minutes [lately] thinking about buying a house," said Cici, who stills plays drums occasionally but now works as a project manager for a packaging company. "If I'm out with my girlfriend, I don't want to bring her back to my one-room 'house.' I just want my own place."

Though Cici's done all the right things to get ready to buy a home, he couldn't have prepared for this year's sellers' market and record-breaking prices.

Although he hopes for a bump in salary after an upcoming review, he takes home about $40,000 a year. That, along with only $45 a month for a credit-card payment and $350 a month for the lease on a 2000 Chevy Silverado truck, puts Cici in the enviable position of having excellent credit.

"Pat is not your typical first-time home buyer," said Barron Delaney, branch manager with H&R Block Mortgage in Woodland Hills. "He has a substantial amount of savings. Most first-time buyers usually don't have that much."

While Delaney might have recommended that Cici put nearly all that $20,000 down on a home, Cici, always thinking conservatively, is reluctant to deplete his savings. At the same time, he also feels strongly about not paying private mortgage insurance, or PMI, a monthly payment that protects the lender in case the borrower defaults.

Although most loans with less than 20% down require PMI, not all do. Instead, these types of loans are offered at a slightly higher interest rate in exchange.

To meet Cici's desire to put less than 20% down yet still avoid PMI, Delaney recommended a 30-year fixed loan of $135,000 with a 5% down payment. The loan had an interest rate of 6.99%, slightly higher than today's market rate, because it did not require PMI. Additionally, the loan required a payment of 2 points--an upfront fee paid to the lender--that amounted to $2,700.

In contrast, Delaney calculated that a similar loan requiring a $117-a-month PMI payment would cost Cici $7,020 over five years. However, that particular loan was offered at a lower interest rate of 6.75% and required no payment in points.

"That's the baby he's got to weigh," said Delaney--to make the PMI payments or take on a higher-interest loan with points.

According to Delaney, how quickly a home might appreciate is important to consider when deciding whether or not to pay PMI. This is because when a homeowner has built up sufficient equity, the lender can remove the PMI payment. Another factor to consider, Delaney said, is the length of time the buyer plans to stay in the home. If it's short term, PMI may not calculate as a big expense, especially when compared with paying a higher interest rate and points.

But because Cici said he planned to stay put for a while, ultimately Delaney recommended that he not take on the PMI payment. "PMI can be a ton of money over the long term in a slower-appreciating area," he said.

The loan that Delaney recommended for Cici would allow him to shop for homes around $142,000 for a monthly mortgage payment (including principal, interest, taxes and insurance) of about $1,075, for a 45% income-to-debt ratio--definitely on the high end, but doable. His closing costs, including the 2 points, would be $11,897.

But after years of saving and scrimping, Cici was disappointed. "What the heck am I going to find for $142,000?" he asked. "I [feel like] I will have to wait and wait until I make more money or until the housing market comes down, and who knows when that will be?"

To increase Cici's purchasing power, Delaney recommended that Cici eliminate the $350-a-month lease on his truck--Cici's only real debt, but a large payment in relation to his income. After that, Delaney estimated that Cici would be able to shop for homes in the $180,000 range, provided he not take on any more debt.

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