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Pedro Said:How do I go about trying to buy my first house?
We Answered:I like your thinknig and you are taking a positive step by wanting to be conservative with money and not overextending yourself financially.
There are a few problems with your scenario, though.
First (and foremost) - I'd be very surprised if a house that you could buy for $20,000 would be habitable. The area would be suspect and the home would be suspect. One of the most important parts of buying a home is the home inspection (and appraisal), but they cost money. It is generally well worth a few hundred bucks for the home inspection (and it's a few hundred more for the appraisal), but if it turns out to be really lousy you don't get that money back. On a $20,000 house you would probably be trying a few before you found one that was ok.
There are closing costs on a home and other expenses associated with owning a home (vs. renting). Closing costs are generally said to be 3-5% of the house price, but that's a rule of thumb based on $200,000 houses. You will still need a $500 title search and a $500 attorney, even on a $20,000 house. Then you need to pay a year's worth of insurance at closing, and often almost a year's worth of real estate taxes. I'd be surprised if the city/county only appraised the house at $20,000 and you could end up with a rather large property tax bill - say the county says the house is worth $50,000 and you might have property taxes of $800 a year.
When you own a house you have to pay all utilities. There is heat (maybe electric), electric, water, sewer, garbage and then phone, internet and often TV. I wouldn't be surprised if your utility costs easily exceeded the mortgage payment. Heat is a major expense in areas that get cold. A house that costs only $20,000 is going to be older and energy inefficient. Even a small house could cost $100's per month to heat in the winter. Keeping a house too cold puts the house systems at risk - like the potential to freeze a water line.
When you own a house you are also completely responsible for maintenance. Even if all of this stuff did work out so that you found a house that was in the right price range, you managed to come up with closing costs, you got a mortgage and appraisal and the inspection didn't show major defects - you could still get hit with a huge repair bill at any point. A roof on an average house costs $5000. The furnace would start at about $1500. Structural problems or plumbing problems can easily run hundreds of dollars. A $20,000 house probably wasn't maintained well and will require more intensive repair work. A rule of thumb states that you'll pay an average of 1% of the cost of the home in repair per year. That assumes a 'normal' price and not being run down. This $20,000 house is probably in an area with more expensive homes (even if they are $50,000 to $80,000) so you could easily expect almost $1000 a year in maintenance.
Even though you aren't super happy in your efficiency, it's only $330 a month with NO RESPONSIBILITY. No taxes, no repairs, no maintenance (on your part). Heat is lower because your attached to other units. You probably have some utilities included (water? garbage?)
Even with all of the items I listed out above, keep thinking creatively. Get more information so that you can make informed decisions. Keep yourself on the right road financially (it will serve you well). Don't make rash money decisions!
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