Hidden Home Savings
Everyone says home ownership is fraught with hidden costs, but what are they? And how can you combat them? Today we’ll explore some ways to save when it comes to buying and maintaining a home, and minimizing utility costs.
Buying
I can’t recommend enough that you save a 20% down payment before purchasing a home. Sure, you probably know someone who bought with nothing down and lived to tell about it. But there are many good reasons to begin home ownership with some equity.
First, putting 20% down is the best way to avoid paying PMI, which is a form of insurance against your loan. In other words, you pay money to the bank every month that does not build any type of equity. Secondly, you could easily end up upside-down in your loan, owing more than you own, should your home value dip and you want or need to sell. While it may not seem likely, plenty of homeowners have found themselves in this unfortunate situation. Lastly, you’ll decrease your loan amount, and therefore your monthly payments and the amount of interest you’ll pay overall.
A home inspection is another important step before purchasing. It may be tempting to skip the inspection since they run $300-400 or more, depending on your location. But an inspectors’ knowledge can save you a lot of trouble and money over time. We passed on buying one house after the inspection revealed foundation problems. Many issues can be fixed, but it’s nice to have that information up front so you can ask the seller to make the repairs or lower the purchase price. It’s hard to determine a good price for a home without the inspection results.
Before purchasing, shop around for the best interest rate. Just be sure to get a fixed rate. If rates drop after your home purchase, crunch the numbers for refinancing. While finance fees will lengthen the time till you recoup the upfront expense, a lower interest rate over the long haul could be very beneficial. We refinanced to a lower rate in 2012 with a no-fee refinance for instant savings.
Insurance
Choosing a good neighborhood could not only improve your home value over time, but also reduce the cost of home owner’s insurance.
Researching insurance alternatives can help reduce this cost. For example, protecting your home with a wireless security system could save you nearly $700 in insurance fees over the course of a year.
Another indirect type of “insurance” is making sure your home’s electrical is updated to avoid property damage due to fire. Just last week, Neil’s cousin lost his home to a fire. Fortunately no one was harmed, but of course it if very difficult to start over after losing your home and belongings.
Energy
Updating insulation can make a big difference in energy bills. It’s very affordable to rent a machine and DIY installation of lose cellulose insulation to keep heat from escaping your home. Sealing leaks with caulk or weatherstripping is another low-cost way to reduce heating and cooling costs, while also making your home less drafty and more comfortable. Unlike updating windows, updating insulation, caulking and weatherstripping all have a relatively short ROI time. For more on home energy savings see our utility series: Pretend to Be Warm, The Electric Slide, Hippies, Hustlers, and Vampires, and Who Ya Gonna Call About Utility Bills?
We’ve also replaced our shower heads with low-flow shower heads that aerate water so it uses less water without feeling like you’re showering under a tiny trickle. Efficient shower heads are inexpensive and easy to install, making them a great way for homeowners to lower their water and energy bills.
Appliances
Keeping your refrigerator temperature at 38-40 will keep food safe while costing less than colder refrigeration settings. The refrigerator and other vents may be the last thing on your cleaning list, but it does help them run more efficiently. And softening your water can also lesson energy costs for all appliances that rely on water to run.
Stay tuned for more on home buying within the next month!
How do you save on home ownership and energy costs?
Who Wants a Death Pledge?
If someone asked you if you wanted to take a death pledge, how fast would you run away?
Actually, there’s a good chance you already have one. While reading The Big Short, we learned that the word mortgage means “death pledge” in French. Despite being a former English teacher, I never thought about the etymology of the word mortgage. I just assumed it was finance jargon. And it is—would you have a thought a little harder about taking a mortgage if everyone called it a death pledge?
“I’m refinancing to a better interest rate on my death pledge.”
“Death pledge rates are really good right now.”
“Death pledges are good debt.”
“I’m debt-free except for the death pledge.”
“You’re invited to celebrate my new death pledge!”
The literal translation suggests a very serious commitment that is going to be with you for life. This isn’t something you’re going to waltz away from easily if you change your mind. You’ll be stuck with this contract until you die.
Though many mortgages are paid off long before death, the allusion to a serious, long-term contract still applies. You can check out the math behind the death pledge in Mortgage Myths. Today let’s consider other aspects of the decision to purchase a home.
Sorting Out Your Emotions
Many have pointed out that purchasing a home should not be an emotional decision. It is a business transaction. But let’s be honest—it’s hard not to be influenced by emotion when buying a house. A house becomes a home, and “there’s no place like home.” After all, “home is where the heart is.” I’ve heard people who are moving say that they are sad to sell because “this is where I brought my babies home” or “this is where I raised my kids.”
Seeing a beautiful home we believe will meet our family’s needs, host friends, and provide comfort day in and day out is emotional. Rather than pretending we can eradicate emotion, why not recognize them and navigate the decision making process with attention to how those emotions influence us?
Creating a spreadsheet of the features, size, costs, pros, and cons of our final death pledge candidates helped us objectify the choice. Sleeping on any big decision such as a death pledge is also essential. We also gained valuable insights from bringing an entourage of friends and family (the remodelers) to weigh in on prospective properties.
We purchased our home after three years of contemplation, number-crunching, and a year of renting in the neighborhood where we purchased. We questioned the cultural assumption that we needed a house and seriously considered the option of renting long-term. This was a helpful exercise which brought a perspective of gratitude, stewardship, and financial sobriety to our decision to sign a death pledge.
Is a House an Investment?
All the research we did surrounding our home purchase led us to a belief that has been truly freeing for us: buying a home (for your residence) isn’t primarily about investment.
I broke down the math debunking this myth in Mortgage Myths. If you are going to live in, maintain, furnish, pay taxes & interest, and insure a home—you are not primarily making a financial investment. Even if your home appreciates significantly, you probably won’t make a huge profit when all is said and done. And that’s perfectly fine, so long as you aren’t expecting it to be wildly profitable.
There are exceptions, of course. Some people get a great deal on a foreclosure, purchase with plans to rent the home in the future, or buy in a hot location that will drastically appreciate. And then there is actual real estate investments, not to be confused with purchasing what amounts to a liability on many levels.
The house we bought was our least favorite home style, in a city we didn’t love, in a neighborhood we didn’t love, to be near people we love. By near I mean I can watch my four-year-old ride his bike to his best friend’s house down the street. In many ways our home is more of a real worth investment than a net worth investment. I’m not offering that this example as great financial advice, but we couldn’t imagine living any further from our friends.
The false assumption that real estate is sure to appreciate has been brutally exposed, so while you shouldn’t purchase a personal residence as your main investment strategy, I wouldn’t be nonchalant about the numbers, either. Purchasing a home you can afford with wiggle room for all the hidden costs is prudent. Especially after seeing so many go upside down in their death pledges, even though they never missed a payment. I’ll bet that feels a bit like death.
Viewing our home as primarily a home, not an investment, also takes some pressure off when it comes to living in it. We knew hosting parties would invite stained carpet and having kids would invite stained everything! Of course we maintain our home with the hopes of being able to sell it when the time comes.
If you scored a killer deal on a home, congrats! But if you’re contemplating acquiring a death pledge, I’d encourage you to acknowledge your emotions, clarify why you want to purchase a home, and make sure your financial expectations are realistic.
Do you view your home as an investment or residence? What advice would you offer a prospective home-buyer?
Ramsey vs. Alcorn Throw Down
Should I leave an inheritance or give away most of my money during my lifetime?
Should I pay off the mortgage early or invest that money in retirement accounts and college funds?
How much life insurance is enough?
How much retirement savings is enough?
How much money should I give away?
These are hot topics for those who are living below their means and have income to work with. We’re such money nerds we’ve even been known to discuss these topics during our monthly date nights. Once you get your spending under control, have a yearly budget, and have implemented some practical thrifty ideas, it’s time to start thinking about building and sharing wealth. As I mentioned in Resolve Your Reasons This Year, I recently read Money, Possessions, and Eternity by Randy Alcorn (2004) and chased it with Dave Ramsey’s latest, The Legacy Journey (2014). Both authors are Christians and wrote these books at least in part to share what they believe the Bible says about money. Their messages are strikingly similar in some areas while very different in others. Reading them back-to-back was challenging and thought-provoking, which is why I’m comparing and contrasting their views for you.
Before getting into the details, I want to fairly convey the purpose of each book. Alcorn’s book is not a how-to book. He is a full-time pastor with some thoughts on practical financial principles, but the book is mainly a treatment of the Scriptures on money-related topics. The subtitle of Ramsey’s book is “a radical view of Biblical wealth and generosity.” This is the famous financial adviser’s first book to delve into the Scripture’s teaching on money, but he only deals with a few passages he believes are often misunderstood. The main topics of his book are leaving an inheritance and giving generously. His book is A LOT shorter!
Ramsey’s book aims to counter the “toxic messages” that rich people are evil, their wealth always takes away from others’ fortune, and that they should be judged for enjoying their wealth while also giving generously. He provides practical examples of what to do with “extra income” beyond a set amount one agrees to live on. He suggests setting ratios on the overflow for giving, (taxes), investing, and “lifestyle” (= fun). Basically, his book is for people with money. Normal people who are approaching steps 6 (early mortgage pay off) and 7 (build wealth and give) will benefit from his book and it may help them make decisions about investments, budgeting extra income, giving, and leaving an inheritance.
Alcorn’s book basically assumes the reader will not become wealthy since he advocates giving away most extra income immediately, after investing something for retirement, children’s college, and leaving room for modest discretionary spending. With the exception of the tithe he avoids specific, numeric advice to leave room for personal decision-making. He says he struggles all the time with the tension of how much to save for retirement vs. how much to give away now. Clearly he prefers to err on the side of generosity. He critiques “financial independence” on some of the same grounds we do, which is why we’ve coined financial flexibility. We’re managers, not owners, of the wealth God’s given us, and we always want to depend on God financially and otherwise. And we want to use money to help others as well as meeting our needs.
Here’s the throw down of their positions on different financial topics, with my two cents, too:
| Ramsey | Alcorn | Pretend to Be Poor | |
| Debt | No consumer debt.Get rid of student debt ASAP.
15-year mortgages recommended; pay off early after steps 1-5. |
“We shouldn’t normally borrow and should always pay off debt as soon as possible”
“Not all debt is the same” e.g. mortgages can be reasonable. He paid his off early. |
No consumer debt, including cars.
Get rid of student debt ASAP by living like a student. 15-year mortgage; pay off early if possible. |
| Insurance | Get term, not whole life insurance. | Most Americans are over-insured.Life insurance should meet family’s needs for a period of time but not indefinitely.
Don’t replace depending on God & Christian community with insurance. |
Get term, not whole life insurance. |
| Investing for retirement | Once consumer debt is paid and 3-6 emergency savings funded, invest 15% of income in retirement accounts. | People think they need enough to live a high-expense lifestyle indefinitely to retire.
Don’t replace depending on God & Christian community with retirement account. Tension between meeting others’ present needs and our future needs; seek the Lord. |
Get your employer match.
Invest 15% after consumer debt paid & emergency fund in place. Conflicted about investing more vs. paying off house early. Investing makes more sense mathematically but we like the flexibility of no debt. |
| Giving | 10% minimum.
Not over 10% until out of consumer debt. Occasional extra giving after out of consumer debt.Set an amt to live on & set a giving ratio for “overflow.” “Go crazy” with giving once you get to step 6 or 7 (see above). Leave a golden goose (principle) that will continue to lay eggs. |
10% minimum.
Set an amt to live on that includes some recreational/discretionary spending, and investing for retirement/college funds, and give away the rest. Your lifetime is your opportunity to give; leaving isn’t giving; aim to leave as little as possible beyond small gift amounts. |
10% or more recommended.
Live on less without being miserly. Extra giving: prayerfully respond to needs as they arise. Time is also an important resource; therefore, we do not plan to build wealth at the expense of spending time to help others now. |
| Inheritance | A good man leaves an inheritance to his children’s children.
Only to be given to children who are following the Lord & agree on how to use the money for God’s kingdom. The golden goose should be kept to lay eggs to give away. |
Only leave small gift amounts.
You don’t know what your children will do with wealth; it is more likely to ruin than to help. Don’t set up a foundation; how can you tell God the principle is untouchable? |
??? Not there yet in our financial journey.
As of now we’d leave money for our children’s care since they are young. |
Overall, the normal income person could come away from the books with very similar applications. Give at least 10%, and more when you can (I don’t believe there’s anything magical about 10% but it’s a decent baseline). Get out of debt and stay out. Don’t over-insure. Plan for retirement and kids’ college. The big difference is their take on investments for building wealth and giving. I can see why, as a pastor, Alcorn has a different take on these issues than Ramsey, who has advised very wealthy people. I tend to agree with Alcorn’s interpretations of challenging money’s passages, but don’t like how he explains away Ramsey’s key verse about leaving an inheritance to your children’s children. I’ll post a more in-depth review of Alcorn’s book next since he deals with a lot of interesting principles that don’t fall into these categories.
Which author do you tend to agree with more? What financial questions do you wrestle with? Have you thought about leaving an inheritance?
Mortgage Myths
“Renting is throwing money down the drain.”
“Real estate is a good investment.”
These major myths circulate about home-buying, though maybe the housing market slump exposed the truth. Housing, transportation, and food costs represent the three largest areas of expense in our country. We covered some basics of food costs in Cut Your Grocery Bill in Half and Cut Your Grocery Bill in Half, Part 2. Now here’s a primer post on buying a home.
When we began our house hunt, I thought buying a house at a decent price was automatically a good investment because real estate values rise. What I didn’t analyze was how much a homeowner pays in interest, taxes, insurance, maintenance, utilities, and other incidentals, plus the impact of inflation. Over 30 years you’ll pay something like 115% of the loan value in interest alone.
Let’s break down the promise of easy earnings by crunching some numbers. For example, say you buy a $150,000 home with a 20% down payment ($30,000), to be paid over 30 years. For round numbers make the interest rate 5%.
A mortgage payment is made up of four parts which are represented by the acronym PITI: Principle, Interest, Taxes, and Insurance. A realistic cost for the monthly taxes and insurance on a $150,000 home would be $250. So your total PITI or total mortgage payment each month will be $894. If you don’t make a 20% down payment you also have to pay PMI, or Private Mortgage Insurance, of about .5% of the loan value, until you have gained 20% equity. Gaining this equity takes some time because so little of your PITI actually goes toward principle, and therefore equity, the first 5-10 years.
If you pay $894 each month for 30 years and never borrow against your equity, you will pay $321,908 before you own your home. $111,908 of that amount is interest. Taxes and insurance account for $90,000. These figures assume the cost of your taxes and insurance never increase, but they most certainly will.
Will a $150,000 home be worth $321,908 in thirty years? Probably. On the other hand, you spent tens of thousands paying for utilities, taxes, repairs and maintenance, home improvements, yard care, and the like. Spendthrift blogger Ken Rockwell calculated the total cost of his mortgage, interest, taxes, utilities, repairs, association fees, and other related expenses over the seventeen years he owned a condo. When he sold it at four times what he paid in a favorable market, he found his investment averaged to 1% a year.[1]
Counting utility value, owning a condo wasn’t a waste of money for him, but it wasn’t a stellar investment either. Even a basic savings account can offer a better interest rate.
One problem the mortgage myth overlooks is that most people only stay in their homes for five to seven years. Is that a good investment? Let’s crunch the numbers. For the above scenario, you’d pay $53,600 in PITI over 5 years, but you’d only gain $11,000 of equity. And you’d be out $42,600 in interest, taxes, and insurance. Plus you paid about $5,000 in closing costs, and any remodeling, improvements, or incidentals (appliances, lawnmower, broken AC unit) you encountered those five years.
Will the value of your home increase by $42,600 in five years? It certainly isn’t guaranteed, and you’ve spent $60,000 to get there. And people say paying rent is flushing money down the drain?! In my Midwestern town you can rent for less than that. We chose to purchase a home because we wanted one, but with several principles in place:
- Make a 20% down payment. This is the minimum percent to avoid PMI.
- Get a 15-year mortgage and pay it off quicker if possible. This dramatically reduces the amount paid in interest, plus debt sucks.
- Don’t view your house as an investment or asset. Too many people are upside down in their mortgages. If you want to invest, do so in a 401k or IRA.
- Be hospitable. Whether hosting neighbors, events, overnight guests, or even providing a place for someone in need to live, our home is not just for us.
If you’re considering buying a home, go in with eyes wide open to the hidden costs of home ownership. If you’ve purchased a home, why not work toward paying down your mortgage in order to lower your expenses and increase flexibility? Stay tuned for more ways to free up cash for this purpose.
Has anyone else decided to pay off their mortgage quickly? What are your reasons?
[1] Ken Rockwell. “How to Afford Anything.” http://www.kenrockwell.com/tech/how-to-afford-anything.htm