Creative college financing: A condo for your kid?
How about, “Rent or own?” I think anyone considering college housing these days should at least evaluate the less common path of buying a place for a son or daughter while they are in college.
If you run the numbers, you may be surprised how the two options stack up.Consider one possible scenario
Room and board cost an average of $9,498 annually at four-year public universities for the 2013-14 school year and $10,823 at private schools, according to the College Board’s annual survey of college costs. That’s about $800-900 a month.
In the Mortgage Bankers Association survey for the week ending Aug. 1, 2014, the average contract interest rate was 3.32% for a 5/1 adjustable-rate mortgage, which has a fixed rate for five years and will then adjust annually in line with an interest-rate index. Based on those figures with 20% down and a home purchase price of $250,000, a buyer would have a monthly mortgage payment of approximately $878. On a $150,000 home with 20% down, the mortgage payment would be approximately $527. My calculations are just for the mortgage. Remember to add to the mortgage payment other common costs, such as your property taxes, insurance, maintenance, and if it is a condo or otherwise applies, homeowners’ association (HOA) dues, and any other fees or costs that may apply.
There are two approaches to buying a house in a college town – as a primary residence for the student or as an investment. Your choice can affect the interest rate on the mortgage and the down payment requirements. If you buy a house in a college town as an investment property, your down payment requirement will vary, depending on the sale price of the house. Also, a mortgage on an investment property typically carries a higher interest rate than a loan on an owner-occupied property.Options to consider
To purchase a home as a primary residence, I suggest families consider FHA loans, which are only available for owner-occupied houses and condos. Two big advantages of an FHA loan are the low down payment, and it allows parents and children to comingle income and assets to qualify. As a co-owner, the student satisfies the owner-occupied requirement of an FHA loan, while the parents’ income will mostly carry the lion’s share of the weight in underwriting the loan and determining the borrowers’ ability to repay.
Our daughter attended Arizona State University in Tempe. We did not buy a place for her at the time because the market values were declining, but that trend is currently changing in some markets. When she started school there in August 2009, the median home price was $187,000, according to Zillow. The median price in the Tempe market has risen to $222,900 today. Of course, keep in mind that property values don’t always go up.
Buying a house or condo for your college-bound child may reduce your room and board costs in some cases, and it may provide potential upside if the home appreciates and you decide to sell. That said, I have two big caveats: Make sure your kid will be a good tenant and take care of the property – especially if your child decides to have roommates to share day-to-day living expenses, such as utilities. Also, think through what you might do if your son or daughter doesn’t stay at the school the full four years.