my new digs
by Danielle Tomassini

By the time you read this I will be the proud new owner of a brand spanking new condominium in Ann Arbor, Michigan. I’ve always believed I would begin to feel like an adult when I purchased a real bed frame, and not just one of those metal bases for the mattress to rest on. But the purchase of my own place makes me feel a little closer to adulthood.

BEGINNING THE JOURNEY The process began almost 5 months ago. I had decided, after many years of apartment living, to begin looking for a place of my own. For those unfamiliar with Ann Arbor, the real estate market is surprisingly expensive. I could have purchased a house, but I would not have been able to acquire one that did not need a lot of upfront work. Plus, being an MBA student with a full-time job doesn’t leave me with a lot of time to cut my lawn, do home improvements, and so forth. So I turned my attention to condominiums. Unfortunately, there were few that would compel me to liquidate everything I have. There were some affordable condos in the part of town I wanted to live (on the northside, a little bit away from the main UM campus); but these tended to be unattractive and old buildings, and the insides would have needed intensive care: new carpet, new cupboards, new appliances, and new windows. There were still others that were nice, but had no covered parking – not even a carport! I wasn’t ready to give that up, especially during the winter months.

UNCHARTERED TERRITORY Well, one day, I happened to be listening to a radio commercial and they mentioned a new development on the northside of Ann Arbor. Hmm. Interesting. It was a brand new construction, with detached garages, and in a great location. One week after my intense inspection (and bringing my mother out the second time for another opinion) I signed papers and slapped down a deposit. Unlike buying a home or condo from an owner, buying a brand new Condo from the builders involved no negotiation in price. It is good to know that prices will rise as more units are finished being built. So the first person to buy the same model I bought would get a cheaper price than the last person to buy the same model. Also, because it was new construction, I was able to pick out my own flooring, cupboards, countertops, and extras including humidifiers, laundry room cabinets, or appliances. Of course the higher quality items will add to the price of your condo. I knew I wasn’t planning on staying at this condo for too many years, so I thought about the resale value when making these decisions. Neutral colors will sell better than say black and white marble or blue carpet.

AFFORDABILITY Of course the biggest question was can I afford it? When I first started looking for places I went to a lender recommended to me and he provided me with a good faith estimate (GFE). A GFE provides estimates of closing costs, but also lets you know how much you can afford to borrow. Although I had done some preliminary investigation into the financing process to see how much I could afford, now that I had found a place I wanted to triple check to insure that I could in fact afford this new condo. Per the terms of the initial agreement I signed, I had one week to cancel the agreement and receive a full refund of the money I put down. During those 7 business days, I spoke with 4 or 5 different lenders – ones that were recommended to me by friends or the builder.

Initially, I expected to do an 80-10-10 loan. This loan means you take out an 80% 1st lien loan, a 10% 2nd lien loan, and I would put 10% down. The purpose of this loan was to eliminate the requirement of PMI (Private Mortgage Insurance). PMI is an additional cost paid on a loan if the borrower does not put a 20% down payment, but the interest paid on the 1st and 2nd liens is tax deductible. PMI is supposed to protect the lender by insuring a designated portion of the loan in case you default. Everyone argues that PMI is not desirable, especially because it is not tax deductible. However, sometimes it cannot be avoided or the alternatives are not always better. There are other lenders, like Rock Financial, that offer a myriad of other financing programs depending upon your needs and credit history. Personally, I found it best to go with a lender whom you feel most comfortable with and who is honest with you.

In the end, I wanted something simple. I didn’t feel comfortable taking out an 80-10-10 loan, but I didn’t want to pay the PMI. Because I am a current student, I remembered that I am eligible for student loans. Since the interest rate on loans is incredibly low, I decided to take out enough loans to allow me to put down a 20% payment. This allowed me to simply take out a loan that equaled 80% of my condo’s selling price, with no PMI. I am in a fortunate position where I did not require a significant amount of extra money to make a 20% down payment.

TERM OF OWNERSHIP/RATES The next question was what term length did I want? If I was planning on staying in my condo for longer than 7 years, it might be worth doing a 30 year fixed mortgage. This means you have 30 years to pay off your mortgage, and the interest rate you get will never change. There are also adjustable rate mortgages (ARMs). The most common forms are 7 year, 5 year, and 3 year ARMs. I ended up choosing a 5 year ARM. I only plan on staying in my condo for 2 years. I could have chosen a 3 year ARM, but I am risk averse and wasn’t sure if something would happen causing me to live there longer than 3 years. So for my mortgage, I have 30 years to pay off the mortgage, but my interest rate will only be fixed for 5 years. After that, it will float to the current going interest rate, and will adjust every year. There are rules on how much it can change in any one year, and for my loan, it can never go higher than 9% during the remaining 25 years. Of course, I can always refinance if I stay longer than 5 years.

The third option I looked into was a balloon mortgage. Like ARMs, they come in 7 year, 5 year, and 3 year forms. However, a balloon comes completely due at the end of the term. So if I did a 5 year balloon, I would have to pay the entire mortgage off at the end of the 5 years, or completely refinance. However, if you do know you’ll sell before the end of the term (or win the lottery), it may be worth securing a balloon mortgage. Check on the interest rates for both balloons and ARMs, as balloons may have lower rates.

Because my condo was new construction and the projected completion date was April, I could not lock in an interest rate. Normally you can lock in a rate 30 to 45 days before the closing date with no additional penalty. If I thought interest rates would rapidly increase over the next 4 to 5 months, I might lock the rate in immediately, and receive a higher rate than the current market rate (if you’re insanely risk averse, this higher rate might be worth it to not risk what it will be in 4 months). I decided to wait. And I’m glad I did; I was able to lock in a rate of 4% for a 5 year ARM.

CHAMPAGNE The 4 months since I signed the first agreement have flown by. I finished packing up my apartment today and finishing writing this on an airplane to Tennessee for business. I close in less than 2 days. I will have my final walk through to note anything that wasn’t done well. My lender has already given me the papers to review so I could read them over in detail and not panic at the closing. The only thing that will be left to do is pop the champagne!
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