Does it make sense to buy housing for our kids in college?
Question of the week: Does it make sense to buy housing for our kids in college?
Answer: Great question, and one we get asked a lot as families start to plan on the next school year with their already in college kids or have kids graduating high school.
As with most money questions the answer is, “do the math.”
As the parent of one college student and one about to be college student I know the high costs schools charge for dorm rooms and food plans. Were our two children in the same city we would be giving a serious look at the option of purchasing housing near campus.
There are three types of residential mortgage transactions, owner-occupied, non-owner occupied and second home.
Owner-occupied is self-explanatory, the borrower intends to occupy the property as their primary residence. Owner-occupied programs have the best rates and terms.
Non-owner occupied is the industry term for investment, or rental property. Because there is higher risk to lenders for investment property loans these programs have higher down payment requirements, more challenging underwriting guidelines and higher rates and costs.
Second homes, or vacation homes, are treated very similarly to owner-occupied programs in regards to the rates and terms. Location is a factor; it needs to make sense the property is one you will be using as a second home and not trying to make it look like a second home so you can get more favorable terms and rent it out. For example if you live in Seal Beach and are buying a “vacation home” in Fontana….hard to sell to an underwriter.
If you wanted to purchase student housing for your student what are your options?
You do not want to purchase the property as non-owner occupied because of the higher down payment and rates required.
Can you all it a second home? Will you be using the property for at least two weeks a year? You might be able to make a stretch that you can stay there in the summer or while visiting your student.
Is it owner-occupied? You won’t be living there, but…you student is over 18 years of age and therefore able to execute contracts, such as a mortgage. Yes, it is owner-occupied by putting your child on the loan and title to the property. You as parents are “non-occupant co-borrowers,” your child is the owner occupant and we are able to fund an owner-occupied mortgage.
Let’s do the math. The housing and mandatory dining plan option at your child’s college is about $2000 per month for September through May, or $18,000. In the immediate area near campus are some two bedroom condos selling for about $350,000 (obviously you child is going to school out of state).
Because we are owner-occupied you can purchase the property with only 10% down (or less, but we will use 10%), for a loan of $315,000. Assuming a rate of 3.25% with 10% down your monthly housing costs including HOA dues and mortgage insurance will be right around $2000 per month—the same as the housing and meal plan at the college.
But Dennis, the college costs are only for nine months, totaling $18,000, and the cost for the off-campus housing is for twelve months and will cost $24,000. Correct, but two items to consider. First, the housing and dining plan cost at the college is not fixed, those costs will go up. Second, you have an extra bedroom or two that can be rented out to other students.
Students are used to sharing rooms. Your student has two friends share the second bedroom and rents to them for $600, $700 each, your housing costs for your student has dropped to $600-800 per month for nine months. Your annual housing costs are nine months at $800 = $7200, plus three months at $2000 (assuming no summer student rental) = $6000, total is $13,200. You save $4800, deduct food costs and you are still ahead.
Other factors to consider. Your student is the landlord and part-owner of the property. S/he is learning responsibility and personal finance lessons. You own property in a college town that is highly rentable, when you student graduates is s/he does not stay in the same area you can rent the property to other students and work out a income-expense plan with your student. As some point in the future perhaps you sell the unit, get back your original investment and you child has funds for down payment on their own home.
Depending on where your kids are going to school and the cost of housing in the immediate area it might make very good economic sense to purchase student housing with your son or daughter on the loan and property instead of entering into a series of leases with the college or university.
If you want to run numbers on such a situation for your family please give me a call.
Have a question? Ask me!
No surprise in today’s announcement on retail sales in April. Well a little surprise as the 16.4% drop was more than the 12.5% drop that was expected. The news had little to no impact on mortgage rates as investors have already priced a recession and bad economic news into the market.
Rates for Friday May 15, 2020: Conforming rates continue to dip down for purchase transactions, high-balance rates have bumped up a little bit today as the mortgage market continues to shy away from high-balance and other products that are not 30 year fixed conforming purchases. Repeating what I have said for the past several weeks, these rates are for purchase transactions, rates for refinances vary, please call for your particular situation and need.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 3.00% Down 0.125%
30 year high-balance conforming 3.5% Up 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
Are you taking advantage of the slowly opening world around you? Beach, golf course, park, store…where have you visited for the first time since February? I am not, and have never been, a beach guy but am happy for those who do enjoy the beach and can go take walks, surf and enjoy themselves without fear of the law coming down on them. Having golf courses open however fills me with great joy, and then frustration when I hack away and chase the little ball around…
Have a great week,
Dennis
Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog
