I bought a condo with a subprime loan in 2004, but refinancing my mortgage means I now have cheap, stable housing in the Bay Area
Courtesy Laura McCamy
- My wife and I didn't have much money when we started looking for a house to buy in the San Francisco Bay Area. Owning our own home seemed like an impossible dream, but first-time homebuyer's assistance helped us make it happen.
- We purchased our house with a subprime mortgage that would have crushed us if we'd had to keep paying it long term, but we were able to refinance for a fixed-rate loan right before our original loan was set to change rates.
- Buying property when you don't have a large down payment is a bet that your income will go up enough to make the mortgage affordable over time. Our bet has paid off - our mortgage is less than Bay Area rents, which gives us stability in a volatile housing market.
My wife and I made the decision to try to buy a house in 2004 out of fear. We didn't have much money saved up, but the housing market in the Bay Area was getting hotter every month and we were afraid we would be priced out forever if we didn't buy then.
Buying a home was a longshot. I was a self-employed artist and my wife worked for a nonprofit that served children. Our bank accounts were thin and our combined income wasn't going to impress a mortgage lender. But I believed that, even if it was a stretch at first, buying a home would give us security. And it has.
It's not easy to make the winning offer when you've got very little to offer
We bought our home during the glory days of the subprime mortgage. Buying a house with little or no down payment seemed like a great idea. After all, everyone else was doing it.
In reality, it wasn't so simple. We got outbid every time we placed an offer. Houses that seemed to be in our price range ended up selling for much more than the asking price.
Then we got a lucky break. We heard about an opening in a cohousing complex. The condo was smaller than we had wanted and the price tag was $80,000 above what I thought we could afford. But the process was in our favor. Who we were was more important to the community than our bank accounts. And the price was fixed, so there was no bidding war.
Scrambling for a down payment
Buying a condo that was well above what we could afford forced us to get creative.
First, we approached our current landlord. We offered to move out so he could sell the building unoccupied. That would fetch him a higher price, since we lived in San Francisco where rent control rules make it hard for new landlords to evict existing tenants. In return, he would give us a buy-out. He agreed.
Then we asked both sets of parents if they could gift us money toward our down payment. Both agreed. After that, we had about $30,000 toward a down payment. But that still left us with a mortgage that was $50,000 too high.
A city program came to our rescue. Our condo met the requirements for the city's first-time homebuyer's assistance program, and our income met the program's requirements. We were able to get a silent second mortgage equal to 2.5 times our down payment.
Our second mortgage accrues interest (at a rate tied to the rate of our first mortgage), but we don't have to pay anything toward the second mortgage until we sell the property. At that time, we have to pay back the principal plus the accumulated interest or the appreciation on the city's share of the property (whichever is greater).
That brought us to $75,000. Our first mortgage would only be $5,000 over the goal I had set. We would be able to afford the payments.
Refinancing for better terms
The only mortgage we could qualify for was a subprime, interest-only loan. The first two years were affordable because we only paid the interest portion of the mortgage payments. We paid nothing toward the principal and got no equity during this period. At the end of two years, we would start paying down the principal - and the payments would go up by 30%. It wasn't a great deal, but it was the only deal we could get at the time.
We weren't allowed to refinance until after the interest-only period ended. So, toward the end of the two years, we applied for a refinanced mortgage from our credit union. We were able to get into a better loan right as our first loan became unaffordable. Our new loan was a 30-year fixed-rate mortgage.
We were lucky. Many people who took out subprime loans ended up in foreclosure. In the end, I'm grateful for that loan. It enabled us to buy at a time when we might not have qualified for a more traditional loan. And, after two years of regular payments, we had gained enough credit to get a better mortgage.
Our new loan's interest rate was 7%. Within a few years, interest rates dipped well below that, but the real estate bubble had burst and our house was worth less than we owed. Then the HARP loan program was introduced to help homeowners whose mortgages were underwater like ours. We were able to refinance and bring our monthly payments down substantially.
Refis do have downsides. Origination fees got rolled into our loan and increased the principal. In addition, each time we took out a new 30-year mortgage, we extended the amount of time we would spend paying off the loan.
On balance, however, refinancing has been a plus. It's allowed us to take advantage of lower interest rates and better financing terms and that has helped make our mortgage less of a financial stretch.
After 16 years, the bet has paid off
A lot has changed in the 16 years since we bought our little condo. We survived the recession and our home has now increased in value. We refinanced one last time, this time with a 20-year mortgage. My wife and I also earn more and our monthly mortgage payments are lower, so we can afford to pay extra toward the principal. Plus, Bay Area rents have gone up astronomically, so our monthly mortgage payment of less than $1,500 seems like a really good deal.
We have managed to survive 16 years in a one-bedroom condo without killing each other. We would like to have a bit more space, but our financial adviser counseled us not to buy a larger home. That would make us house rich and cash poor, a common problem in the Bay Area.
In addition, under the terms of our second mortgage from the city, we don't have to pay back the loan if we live in our home for 30 years. That's a big incentive to stay put.
Once all our loans are paid off, in about 15 years, our monthly housing expenses will be just utilities and HOA dues. The gamble we made when we bought our condo will provide us with an affordable place to live in the Bay Area after we retire. That reward is worth the risk we took when we bought on a hope and a prayer.
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