Smart house hunting: The Senichs
Thanks to falling prices, this couple bought more home than they could initially afford. And on an ARM, no less.
NEW YORK (CNNMoney.com) -- The housing bust is not all bad news; some homebuyers have purchased their dream homes at prices they couldn't even hope for a year or two ago.
Take Sara and Jay Senich. They're the proud owners of a newly renovated colonial just outside Washington D.C. - one they had previously rejected as too expensive.
When they first started shopping late last summer, the Senichs set a budget of $500,000. For the money, the couple, in their early 30s, wanted a home close to rail transportation and the District to make Sara's commute to her federal government job more reasonable. They also wanted a big yard and closets, something in short supply in the older suburban neighborhoods they were searching in. And they wanted a good-sized kitchen for Jay, who enjoys cooking.
But they soon found that their budget was too little to get them everything they wanted - and too much for them to afford due to rising interest rates.
"It was a little frightening," added Jay, who is a Web site developer. "That was a lot of money to spend. [Rates] made the monthly payment a lot more than we thought."
So they began to look at less expensive homes. They also hired a broker to act as their buyer's agent because, as first-time homebuyers, they felt inexperienced. The couple selected John Sullivan, with Buyer's Edge in Bethesda, Md., and agreed to pay him 3% of the purchase price for his assistance.
"He was very patient," said Sara. "I asked him a lot of questions, about the neighborhood, the schools, everything. My advice is 'Don't feel dumb about asking questions.'"
Over the next several weeks they slogged through a few dozen house showings. "We didn't find many homes that we thought would work for us," said Sara. "Either the location or the living space was no good."
One place in Glenmont, Md., was almost a keeper; it had a screened-in porch they especially liked. It was $419,000. They bid $405,000, which the seller mulled over. But, when the couple investigated the parking situation at the Glenmont train station, they found you had to arrive by 7 a.m. to get a space. They withdrew their offer.
Discouraged, the couple went through a phase where they checked out homes beyond their budget, to see if they could get more for their money. That's when they found what they really wanted: A newly renovated three bedroom, two-and-a-half bath with a nice yard in Takoma Park, Md. But the listing price was $535,000.
So they decided to wait. They noticed that home prices had begun to drop, and they agreed to be patient and persistent to get the deal they wanted.
"Things were becoming very affordable," said Sara. "We were newlyweds. Our lease was expiring, and we knew we wanted to buy a house. So we narrowed in on what we really wanted."
For two months they kept an eye on their Takoma Park home. When the price finally fell to $500,000, they pounced, putting in a bid for $475,000. A counter-offer was made and, after negotiations, the seller agreed to $480,000.
Helping make it affordable was the great deal they got on their mortgage. After analyzing their options, they made what many might think is a surprising choice: They financed 92% of the deal with an adjustable rate mortgage (ARM).
ARMs have taken a lot of flak for the mortgage meltdown crisis. With these loans, borrowers pay out at a low initial rate for a fixed period of time. After that, mortgages reset to (usually) higher rates. Critics say they lure borrowers into purchases they can't afford.
The Senichs, however, got an initial interest rate on their FHA-insured ARM of just 3.875% for the first five years. After that, it resets once a year and cannot go up by more than one percentage point annually. It has a five point lifetime cap, so the rate can never exceed 8.875%.
The Senichs figured that their initial savings would keep them ahead of the game for at least 12 years. Their monthly mortgage payment will be little more than $1,800 a month, a couple of thousand with taxes, and mortgage and property insurance.
At closing they had to pay their buyer's agent, Sullivan, 1/2% of the home price, or $2,400, out of pocket. The remainder of the 3% fee was paid for through Sullivan's split of the listing agent's 5% commission.
But they say it was worth every penny. "It was money well spent," said Sara. "He saved us money on so many things. I contacted the title company for a lot survey and it came back with a quote for $1,800. I called John and he said that's too high. He found someone to do it for $500."
All things considered, the Senichs feel they have done very well. They bought more house for a better price with very affordable home payments than they imagined they could before they started to shop.