Many of us are trying to find ways to save money and spread our dollars in many directions. We clip coupons, or shop at wholesale stores, or brew coffee at home instead of buying Starbucks, or even make income on side hustles like photography or doing computer stuff for those who need help. It’s all good, but don’t forget to look at ways to save big hunks of money on the two biggest expenses for most:
I’m not Mr. Money Mustache (who doesn’t barely even drive a car), but we infrequently buy cars, drive them to 150,000+ miles (basically when safety or repair issues start to become annoying), and then sell them for what we can get. Our cars usually end up in the 7-10 year ownership range, and are well paid off for years and years before we give them up. It saves us thousands in costs for purchase, and even insurance later on in the life of the vehicle. But this post isn’t about cars, it’s about our biggest expense: our house.
If you choose to rent, I can certainly buy that argument as a long term wealth building measure depending on how the numbers look or how your personal situation is. There’s a lot to be said about not being tied down and obligated to “the man.”
Buying a home that you can afford is a big part of long term financial success. If you bite off more than you can chew on a house though, it can put you behind the eight ball in so many areas, such as saving for retirement, or college, or basics of providing for the family. The term is House Poor. It’s tough to not keep up with the Joneses when you’re watching all the McMansions on House Hunters, but saving money here will help most reach their long term financial goals. Various rules of thumb are out there for how much house you should own. They include a mortgage no more than 2.5x your gross annual income, other more aggressive sites (mostly banks, so they have an interest in lending more) say 4-5x gross income, others say all house costs (taxes, mortgage, insurance, any homeowner’s association dues) should be less than 32% of your gross income. We are more fiscally conservative and want safety factors built in, and the ability to save more (or pay off the house faster), so our existing mortgage we took on was about 1.8x last year’s gross, and all our housing costs (less maintenance, which varies each year) are under 17% of gross.
Regardless of who you are, if you can slice your long-term payments with limited short term costs, you should do so. It can potentially slice hundreds of dollars a month off your expenses just like :snapsFingers: that. The Wall Street Journal just did an article on this, as interest rates are again at historic lows. Unfortunately, many bought at the market highs in the late 2000’s, which means they might still be underwater. Though many home prices have risen in the last few years, I don’t believe they are still back to those market highs. If that is you, I feel for you as you’re probably still trying to get back to what you bought it in 2008, and it surely will be tougher to refinance in those situations where equity isn’t there, but it is still worth exploring. I don’t know enough to say if anyone is able to do it or not.
Most people can’t be troubled to switch banks or insurance companies even if it saves them money, so getting them to shell out some money and deal with the stress to get into a new mortgage can be intimidating. It’s a big step: paperwork, bank people, stuff to sign, so people just keep hitting the “ignore” button and don’t worry about it. Additionally, they need to have a few thousand dollars saved for the various fees and costs, and most don’t have even that much lying around to help make a refi happen. Dave Ramsey has built an empire off of these types of peoples. But I know my readers are better than that. However, I still understand that switching something this big is intimidating.
But let me illustrate the benefits from my own situation. We used our last home as a springboard to financial solvency and getting out of debt. While I won’t belabor the point, we bought a foreclosure, did a lot of improvements over 10 years, and sold for nearly twice what we bought it for, and in the process rid ourselves of most of our stupid (oh so stupid) debt we had taken on in our mid 20’s-30’s (though, we were partially smart since at the same time, we were still socking away considerable savings in tax sheltered vehicles). So a few years back we moved to our “dream” neighborhood, in our “forever” house, but made the sin of not having 20% down. The life improvement that came with it was worth it to us, but was costing us about $200/month in Private Mortgage Insurance (PMI) – needed if you were under the 20% equity/downpayment threshold. And even if your house increases in value, you can’t do anything under your original contract until you reach that original 80% value.
So the housing market in our area has slowly gone up in the the three years we’ve lived here, and we’ve been adding extra principal payments on every monthly mortgage bill to help reach our long-term goal of paying off our home early. Our mortgage is through a local bank, and we worked with a banker that lives in the neighborhood adjacent to ours and see him at school events. I really, really liked having a local bank own and service our mortgage, and want that in the future. Seeing his bank’s 30-year standard mortgage rate on the website was as low as I’ve seen it, I contacted him and in a matter of a few hours, we locked in a rate of 3.60%, something we couldn’t sniff when we bought our house a few years ago (and the thing is, I believe you can even find better rates than that depending on your credit and down payment and all that). I expect PMI to go away with a reappraisal, and our mandatory payments will end up $400/month less than it is currently. Think about how hard it is to save $400/month, or to get a $5,000 a year raise. Now we’ll still end up paying the same monthly amount that we do right now to apply more money to principal. To illustrate, an extra $400/month over a span of 20 years (the outside limit of when we want it paid off), puts nearly $100,000 towards principal (not to mention less interest in the long run), and helps to be out of the shackles of a mortgage.
Now we were only 3 years into a 30 year obligation. Still, if we were to go to the full 30 year pay window, we’d end up saving around $30,000 over the life of the loan by changing over 0.4% interest rate. Not insignificant. Now if you are closer to 15, or 20 years left on your existing mortgage, you should try to refinance to that window so you can continue to track towards getting out from under the bank, versus saving more today by taking on another 30 year loan obligation. A 15-year loan at our bank was listed as 2.85%, which is amazingly low in my opinion.
If you Google “refinancing news” you can find a lot more info, including calculators to see if it will work out for you. It does help to have a few thousand dollars allocated to this, but for us, the payoff on the out-of-pocket costs were less than four months. Anyways, something to consider if you are still above 4% (or higher) interest on your home loan and have some equity in your house.