Grad Money Matters: Mortgage and Home Ownership

Cheaper Housing Options For The Mortgage-Battered

(This article is part of a weekly guest column by Claire Moylan*)

Housing used to be a solid investment, but it has become less so over the years. Now, we don’t know with any certainty when housing will recover enough to be worth looking at it as an investment again. Of course, the American Dream is all about owning your own home, and this has plenty of emotional payback, but if you want to just buy a home as an investment, you might want to compare several choices: renting an apartment or home, co-housing, and buying a smaller home.

How Housing Has Changed
There were red-hot areas in the United States that were seeing double digit appreciation on homes. Now, these same areas might be experiencing thousands of dollars in devaluation. Until the inventory in housing starts to lessen, the odds of getting a home that will retain or gain in value is an iffy proposition in some markets. Even if you find a home you want to buy, it has also become much more difficult to qualify for a mortgage because even lenders have gotten scared. Gone are the days of no down payment. Now, you will be expected to have at least 10% available for a down payment. Your credit score will also be very important. Your income will be scrutinized much more severely to make sure that you can make the payments on the home. If after all this, you qualify, you still might find your lender has collapsed and the deal has been canceled. If you do not qualify for the home, you still have an option to rent until the market changes or your financial situation improves.

Why Renting Can Be Good
Renting can be a positive experience, when compared to owning a home you can’t afford. You won’t be responsible for maintaining the structure of the apartment or home that you rent. In a market where the housing prices are dropping, people who own housing may try to meet their financial obligations by renting it out instead of selling it. This can lower the price of rentals. You can get all of the emotional benefits of being in a house without feeling the pain of having a mortgage over your head. You won’t get any tax write-offs, however.

If you don’t mind being in an apartment community, you can also wait for the housing prices to bottom out in a more luxurious setting. Apartment complexes do many things to attract renters, adding pools, clubhouses, and sometimes even on-site gyms. Any money you save when renting can be put aside for your down payment, when you see the housing prices start to recover slightly.

Co-Housing To Share Expenses
Some people get tired of buying a house with everything in it and instead opt for co-housing communities. These communities can offer a very neighborly feel and they share many resources too. You probably won’t save money on a price per square foot basis, but the homes are also built in these ecological-friendly communities to be smaller and more energy efficient than today’s standard McMansions. People who live in these communities are usually more involved in sustainable living and are apt to share anything from tools, to kid’s toys, and everything in between. Often, such communities have childcare options for the people living within the community that can be a substantial savings for family with children. Many offer community meals that can help save on food and preparation costs. The common areas are maintained and held in common ownership by all the members of the co-housing community. This means that you probably will have to give some of your time back to the community on a monthly basis.

Living Within Your Means
Sounds old-fashioned and boring, but it’s also the best way to have a sound financial footing when buying a home. It also means that if prices drop, your loss is less too. Most experts agree that drops in housing prices are temporary and if you plan on living in a home more than five years, you probably can ride out some if not all of the damage. In the meantime, you can get a smaller home that you can afford with your income. This will give you a tax write-off and the capacity to build some equity. This is good for people starting out buying their first home or for those who wish to downsize. By buying a smaller home, you save money on the mortgage, on the utilities, and on maintenance too. Plus, you won’t be tempted to buy a lot of extra stuff you don’t need to fill the house up. While it may not be the house of your dreams, it can be a very wise step towards your final goal of getting into another home that does meet the standard for being the home of your dreams.

About the author: Claire Moylan is a freelance writer specializing in ebooks and custom-tailored articles for niche websites. You can view her portfolio online or check out her constant content page for more information about her writing assignments.

*Image Credit: cumortgageservice.com

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DIY Projects for Frugal Home Owners: Carpet Cleaning Basics

This article is a part of the series “DIY Projects for Frugal Home Owners”, an attempt to get me (and hopefully a few readers) more interested in handling simple DIY projects around the house and saving some money along the way.

No matter who you are, there is a good chance that your home will get dirty from time to time. This holds true even if you clean your home each and every day. The most common area for dirt and grime are the carpets since it gets the most wear and tear. Carpets are what people walk on every day and are always coming in contact with dirty shoes, grease, dust, pets etc. The good thing is that you do not have to live with this type of dirt in your home. You can clean your own carpets very easily in order to present a better home.

Some homeowners think that they need to hire a professional to clean their carpets, but nothing could be further from the truth. Do it yourself projects, such as cleaning carpets is quite easy to complete. Sure, you are going to have to put a bit of time and sweat into these projects, but in the end you will be glad that you did this on your own. A job well done is a reward in itself – if that isn’t good enough there is all the money you can save by doing things yourself :)

Cleaning the carpets is all about getting the deep down dirt. The first step however is to start with vacuum cleaning to get rid of the surface dirt. I would highly recommend investing in a good vacuum cleaner. I have been drooling over a Dyson for a while, but we decided to settle for a Bissell (that was available on sale). The problem with such run of the mill vacuum cleaners is that after a few uses, they seem to lose the suction or worse, start to kick up dust. By the time we have kids, it will probably be time to retire this vacuum cleaner anyway, and maybe then we will buy a Dyson.

A neat trick I learnt from the time that we called maid service is to use a carpet cleaning and deodorizing powder. I think she used the “Resolve” brand and I really liked how fresh it made the room feel. It is supposed to contain absorbent granules that attract the tiny dirt particles in the carpet to attach to it. And since the granules are heavy and not “stuck in” they can be vacuumed right off. Leave it in for a few minutes and then vacuum, to get a clean fresh smelling carpet.

If you have set-in stains, you may need to spray a stain remover and scrub the area first before using a vacuum cleaner. Personally, we have a bit of an obsessive compulsive streak and we keep a can of carpet stain remover handy. Anytime there is a spill we immediately spray the foam and scrub it with the brush attached to the canister and then mop it up with a towel or paper napkin. Since we do not usually allow a stain to set in, I do not have much experience with removing set-in stains, but here is an index for removing pretty much any stain that you can think of from your carpet.

When regularly used, good vacuum cleaners can be quite effective in removing surface dirt and preventing it from settling in. However, if you prefer a more deeper cleaning, then it is time to get a heavy duty rug scrubber. You have two options here. You can either buy a rug scrubber so that you can use it whenever you want in the future, or you can rent one. If you anticipate deep-cleaning your carpets on a regular basis (got toddlers?), you might want to consider buying one. But in most cases, I suspect renting is going to work out just fine.

Rug scrubbers are available for rent in most big chain grocery stores as well as home improvement stores like Home Depot, Sears, Lowes etc. For a 24-hour period rental, they cost anywhere from $19.99 to $29.99 depending on the type of equipment you choose. You can choose to buy a deep cleaning solution or use warm water and soap (or a mild shampoo). The rug scrubber (“Rug Doctor”, “White track” etc) often comes with instructions about how to use it. If the instructions require you to stay off of the area for 12 to 24 hours make sure you plan your cleaning schedule accordingly.

Cleaning carpets is part of being a homeowner. Dirt will get into the house no matter how careful you are. But if you do what it takes to rid of it, you can reap some great benefits while trying to sell your stain-free house some day. Even though prevention is the preferred choice, the cure is not all that hard. The only thing that it needs is a bit of elbow grease :)

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If you consider yourself a frugal homeowner, you know that a used mobile home is about as cheap of a house that you can get. You may not even need a mobile home loan to get one! Though if you're looking for something a little bigger, there are some beautiful modular log cabins and houses that would make great homes.

~~~oOo~~~

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Campaign Against Financial Myths:
Part 4 - Mortgage & Home Ownership

(This article is a part of the series aimed at dispelling some of the popular financial myths. Please refer to the full index for myths related to other financial topics. Oh, and a quick disclaimer: I am not a financial advisor. I have made every effort to research the facts before presenting them here. But, if you have a reason to believe any of the statements are incorrect, please feel free to correct me.)

Myth: “If I can afford the mortgage payments, I can afford to own the house”

here

Myth: “I can save a lot of money on my taxes if I buy a house, since interest payments are tax deductible.”

this bankrate article

Myth: “I cannot afford the payments for a 30 year mortgage. My bank offers me an option of 40 or 50 year mortgage. Sounds like a good idea!”

here

Myth: “I need to enroll in the mortgage company’s bi-weekly payment program to shave a few years off my mortgage.”

Realtytimes article

Myth: “Unlike renting where my rent can increase every year, if I lock in a fixed-rate mortgage, my monthly payments will remain constant.”

Myth: “If I cannot put 20% down payment, I have to pay PMI.”

this bank rate article

Myth: “If I refinance my loan, my clock starts over and I have to pay mortgage for another 30 years.”

Myth: “Shopping for the lowest rate can result in multiple inquiries and ding my credit score.”

this article

Myth: “I should shop for the house first and only after I find the house, I need to start looking for loans.”

before

Here

here

Myth: “By buying a house, I own a big asset”

Wrong. Until you payoff your mortgage, what you have is just a big debt. Technically, the lender owns a big chunk of the house, and if you slip on your payments, the lender can have you out of the house and sell the house in an auction to recover the remaining amount on the mortgage. Additionally, if you fall behind on your tax payments, the government can slap a tax lien on your property. So, while it is true that the house is a huge assent, technically, until you pay off your mortgage, it is not quite your asset.

Update:

this comment

So, those are some of the popular myths and misconceptions about mortgage and home ownership. Over the next few weeks, I will cover more about the common myths in other finance-related matters - so stay tuned. Once the series is complete, you should be able to access the full list of myths via this index.

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Buying a home is a big step, whether you're buying a luxury home or modular home. If you don't have a huge budget, home loans are a great option. It doesn't matter if you're buying a manufactured home or a mansion, since there are plenty of financial options.

~~~oOo~~~

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Rent Vs. Own: A Look at Our Expenditure Then, and Our Expenditure Now

No, this is not going to be yet another post on whether owning a house is better or if one should continue to rent. That issue has been discussed quite a bit in the finance blogosphere (links to some really good discussion in the “Related Articles” section at the bottom of this post). Rather, what I would like to do here is to provide a comparison of the expenditure we had while we rented and now when we own a home. Whether you want to rent or own, is your call.

Rent Vs Mortgage
Cost while renting: $685 per month.
Cost while owning a home: $986 (principal + interest) per month.
Explanation: During the time we rented, there were many new apartment complexes in our area and the rent was quite cheap. So, we could get a luxury two bedroom apartment with a fireplace, balcony, washer & dryer, covered parking etc., for an average of $685. The mortgage on our house was taken out when the interest rates were quite low and we managed to lock in on 5.125% for a 30 year loan. It’s a 2900 sq ft. two story house in a nice neighborhood and a good school district. (Very similar to the house in the picture).

Insurance Costs
Cost while renting: $0
Cost while owning a home: $900 per annum.
Explanation: When we rented, we were at first students and later the better half started working while I continued to be a student. We did not have anything that was of much value in our apartment, so we never bothered with renters’ insurance. But once we bought the house, we definitely had to get a homeowners’ insurance. One more thing to note here is that the number above does not include a PMI since we put down a payment of 20%. If you do not plan on putting a down payment, remember to account for PMI.

Property Tax
Cost while renting: $0
Cost while owning a home: $6200 per annum.
Explanation: Yes, that is outrageous! We live in Texas and the property taxes are very high to compensate for not having a state income tax. Nothing we can do about that :(

Electricity
Cost while renting: $40 - $80 per month
Cost while owning a home: $60 - $175 per month
Explanation: Summers in Texas are brutal and you cannot live without the a/c being ON most of the time. So the electric bills in summer are significantly more than the electric bills the rest of the year. In our current house, we have a split a/c, ie a different unit for each floor, and we try to keep only one of them ON, whenever possible. Also, when we go to work we turn off the a/c and turn it back on when we return. But still, the electric cost for our house is much more than that we had in the apartment.

Water
Cost while renting: 0 (included in rent)
Cost while owning a home: $75 - $120 per month
Explanation: The first month after we moved to this house we received a water bill of $195!!! Our jaws dropped open, especially since we didn’t even have a separate water bill while we were in the apartment! We later found out that when the house was on the market, the realtor had set the sprinkler to come on every day, so the lawn would look nice and green. And since we were busy with unpacking and settling in, and have never really lived in a house before where we had control over the sprinklers, we never even thought about checking it or changing it! Over time, we have optimized the sprinkler schedule as best as we can to reduce the cost. We still need to use it quite a bit though to make sure we have a lawn and not a hay-patch in our front yard.

Gas
Cost while renting: $20 - $40 per month
Cost while owning a home: $20 - $40 per month
Explanation: Both at the apartment and in the house, hot water uses gas and this was probably the only bill that remained similar to our old bills.

Furnishing Costs
Cost while renting: ~$2,000
Cost while owning a home: above cost + $3,500 (not quite done yet)
Explanation: We brought most of the furniture from our old apartment to our new home. Most of our stuff was bought new while a few pieces came from Craigslist. Right now, we have furnished the living room, the family room, dining area, master bedroom and one of the guest rooms. The other guest rooms and the game room are still empty. When we buy furniture, we try to find a balance between something frugal and something of high quality and sturdy – so hopefully the rooms that are already furnished will not cost us much more (except for a few knick-knacks every now and then) for quite some time to come. (Updated, based on comments from Debbie) Fortunately, we did not have to spend on painting our home since the previous owners did it for us. And so far, we have not done any other re-modeling projects either. Maybe a few years down the line, we will upgrade our kitchen counter tops. If you are moving into a resale home, you need to take these expenditure into account too. Two of my friend who bought homes around the same time as we did had to repaint the walls of the spare rooms since the previous owners had painted them to match their kids taste, which was not what my friends liked :)

Appliances (Updated. Thanks, Debbie for pointing this out.)
Cost while renting: $0
Cost while owning a home: ~$2,000
Explanation: While we were in an apartment, the refrigerator, the washer and the dryer were included with the unit. But when we moved to our own house, we had to buy these appliances ourselves. Until we are in the market for these appliances, we had no clue how complicated buying on of these could be. For instance, you can get washers and dryers ranging anywhere from $200 to several thousands!!! By managing to buy our appliances during a sale, getting some discount for bundled buy and availing the price match options, we managed to get all three appliances for ~ $1,800. In addition, we moved our old TV to the bedroom and got a new TV for the family room. It cost us around $200. A large flat screen TV purchase is still pending, but we have put it off for now.

Pest Control
Cost while renting: $0
Cost while owning a home: $330 per annum.
Explanation: While we were in a apartment, we didn’t have to worry about this since the apartment managers took care of it. When we moved in to our house and noticed a few ants, we decided to pick something up from the Home Depot and take care of pest control ourselves. But the better half is allergic to ant bites and our initial attempts to get rid of the ants was only partially successful, so I eventually called the pest control and signed up an annual contract.

Lawn & Garden care
Cost while renting: $0
Cost while owning a home: ~$800 in 2 years.
Explanation: Again, at the apartment, this was taken care of. But at home, we have to take care of it ourselves. The first summer, we just hired someone to do it for us and it cost us $30 a pop. We did not sign up a contract and called the person only when the lawn was quite over grown. During the second summer though, we went ahead and purchased a bunch of equipment and it cost us a little over $400. Add to that the other knickknacks that we had to buy for gardening and we must have spent a grand total of around ~$800 so far. This summer though, it shouldn’t cost us anything more than routine maintenance since we have already bought the equipment and the better half will take care of the lawn himself and so we don’t need to hire anyone.

Other maintenance
Cost while renting: $0
Cost while owning a home: $0 (so far)
Explanation: Our house is about 5 years old, and so far we have not had to do any other maintenance (knock on wood). But the last time the pest control guy was here, he pointed to a tree that was growing very close to our roof and said it was not only a path for pests to get in, but can also damage the tiles. We asked around a bit for estimates for trimming the tree, but the quotes were so ridiculously high, that we haven’t done anything about it yet. Also, since it’s been two years that we moved in, we are planning to have the carpets steam cleaned, the a/c ducts cleaned etc. So this summer we are going to have to spend a bit on maintenance – hopefully that will avoid some of bigger bills in the future.

Equity
While renting: 0
While owning a home: ~$60K
Explanation: Since we put a down payment of 20% and are paying off our mortgage quite aggressively, we have built a fair amount of equity in the house.

Appreciation
While renting: 0
While owning a home: ~$35K
Explanation: Ok, that is a totally hokey number. I mean, when you really sell the house, you don’t know if someone will buy it for that price and also, you have to pay about 6% of the sale price in realtor fees. But just for the thrill of it, I would like to think our house has appreciated quite well. How did I come up with that number? Like every body else – mostly by picking up the flyers when some of the houses in the neighborhood go on sale, by browsing on zillow and the county appraisal for tax purposes.

My intention in writing this article is neither to encourage you to own a house, nor to discourage you from it. I just want to provide you with a general idea of the differences in the costs, so you can make an informed decision. All of you out there who own a house, please feel free to chime in with anything I left out or point out to any differences depending on your location.

Related articles:

Why I Want A Home: Six Frugal Things That Just Aren’t Convenient In Our Apartment @ The Simple Dollar
Renting Makes You Richer @ Consumerism Commentary
Housing -- Renting is not better than buying @ One Million to My Name
Rent Forever, Don’t Buy A Home Devil’s Advocate post @ Blueprint for Financial Prosperity
Our First Lesson in the Costs of Homeownership @ Get Rich Slowly
Rent vs. Buy: a new way of looking at it... @ My Open Wallet
More Thoughts On Buying Vs. Renting Calculations @ My Money Blog

(feel free to suggest more articles to be linked here)

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Why Do Some People Prefer to Pre-Pay Mortgage, while Others Prefer to Invest the Money Instead?

Through good fortune and diligent savings, we have some money left over each month after paying off the bills and funding the 401K. Our mortgage rate is currently 5.125%. Investing in index funds will possibly offer a return of over 8%, over the long term. Rationally, it makes more financial sense to stash the additional money we have in a well-chosen index fund. But month after month, we apply the money to the principal of our mortgage loan. It’s not like we are this irrational all the time – while paying off our debt, we chose to pay down the highest interest loan first, instead of Dave Ramsey’s feel-good theory of paying the lowest balance loan first and I dabble in credit card arbitrage quite a bit. So, why are we so irrational when it comes to mortgage?

I have been mulling over this question for a long time now. I think I may finally be able to explain it using some of the behavioral economics concepts that I am reading. Here is one of the example “stories” from the book Why smart people make big money mistakes and how to correct them. Pay close attention and answer honestly.

Imagine that you are a commander in the army, threatened by a superior enemy force. Your staff says your soldiers will be caught in an ambush in which six hundred of them will die unless you lead them to safety by one of the two available routes. If you take route A, two hundred soldiers will be saved. If you take route B, there’s a one-third chance that six hundred will be saved and a two-thirds chance that none will be saved. Which route should you take?

Have you decided? If yes, then let me repeat the question, this time phrased a bit differently. Read the question carefully again, and answer honestly. Don’t let your previous answer affect you – just choose an answer that pops at the top of your head when you finish reading the question.

Imagine that you are once again a commander in the army, threatened by a superior enemy force. Once again, your staff tells you that if you take route A, four hundred soldiers will die. If you take route B, there’s a one-third chance that no soldiers will die and a two-thirds chance that six hundred soldiers will perish. Which route should you choose?

The book says that, according to research conducted by two Israeli psychologists, it is more than likely that you chose route A in the first scenario and route B in the second scenario. Even though it was the exact same choice, the first question was framed to highlight a sure saving of two hundred lives, which makes it a choice hard to pass up for most people. On the other hand, the second question highlights the guaranteed loss of four hundred lives. When presented with a choice between a huge loss and a gamble with the possibility of saving all lives, most people are willing to take the chance rather than commit to a huge loss.

The authors explain that this is the same with our financial decisions. Quoting from the book – "In financial matters this phenomenon results in a willingness to take more risk if it means avoiding a sure loss and to be more conservative when given the opportunity to lock in a sure gain". I think that nails it!

Let’s apply it to our decision about the mortgage. I have mentioned before that we had made some bad decisions early on and were in considerable amount of debt before. It left a very bad feeling in our mouth. We worked very hard to get rid of it. So when we took on a huge debt like mortgage, and now have some money to spare, we frame the decision as the choice of whether to lock in the *guarantee* that we will reduce our debt, or take the chance that we *might* get better returns by investing it elsewhere. When the decision is framed that way, the choice seems to be to go for the guaranteed reduction in debt. While responding to a comment in an earlier post, even before I started thinking of this from a behavioral economics perspective, I had said, "Stretching the mortgage longer will make sense only if you can guarantee that the interest rate on your investment will be higher than your mortgage rate. Paying the minimum on mortgage and investing the rest in stocks/mutual funds etc can provide the higher rate of return but there is no guarantee. If the stock market crashes, you have neither the equity on the house, nor the stocks. With a huge loan like mortgage, I would rather err on the conservative side." That pretty much says it all.

Now think of someone who does not have a bad experience with debt but has a bad experience with a lost opportunity. Or someone who has had the sweet taste of making huge returns on a successful investment. The scenario looks different. They look it as the choice of the huge opportunity cost of lost interest versus a chance to earn good interest. In which case they choose to not pay off the mortgage, but rather invest the money in ventures that earn better interest.

That said, is one choice better than the other? Well, if we think of it from a purely rational point of view, our choice to pay-off the mortgage is the one that is wrong. But from a psychological perspective, the more conservative approach offers us more peace of mind. We are more relaxed about where we are going financially. Also, since we have a prior run in with debt and have a deep seated hatred towards it, I believe we work harder at scrimping and saving when we aim to get rid of debt. This gives us a better chance to succeed at our financial goals. In other words, some times what is right rationally, may not be really *right* if you are not psychologically prepared for it. So, one way or the other pick what's right for you and keep at it. As long as you are making progress - be it in reducing the mortgage or increasing your wealth through smart investments - you are doing good.

P.S.: The book that the example stories came from - Why smart people make big money mistakes and how to correct them – is really nice. If you had an "aha" moment when you read the stories, I definitely recommend that book to you. It's chock full of example stories like these, to explain the different concepts in behavioral economics.

Update 05/09/07: I mailed JLP @ All Financial Matters about this post and he put up an article about it on his blog. There is an interesting discussion going on there which you might want to check out, if this topic interests you.

Related Articles:

Should You Get a 40 (or 50) Year Mortgage?

Steps to Avoid Foreclosure: What to Do When You Can’t Keep Up With Mortgage Payments

Attitudes Towards Debt, Bills and Credit Card Arbitrage

Debt – Were We Really Irresponsible or Just Ignorant?

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Steps to Avoid Foreclosure: What to Do When You Can’t Keep Up With Mortgage Payments

According to this news article 20 percent of the sub-prime loans issued over the past two years will wind up in foreclosure, perhaps driving more than two million families from their homes! If you are one of the unfortunate people snagged into a sub-prime loan or know of someone who is, and finding it hard to keep up with the mortgage payments, it is important to remember that a foreclosure can be avoided. You need to be aware of your options and take action to prevent your home from becoming a part of the above statistic. Here some steps to take to avoid foreclosure.

Avoid being in denial
If you are starting to feel the heat and finding it difficult to keep up with the mortgage payments, being in denial is one of the worst things you can do. Do not miss any payments. If you already have, do not ignore letters from the lender. The sooner you speak with the lender, the better are your chances of avoiding foreclosure. When it comes to foreclosure, the lender is on your side. They need your interest payments – your house is a big white elephant they don’t particularly care to own. So, first take stock of your financial situation and determine how much you can continue to pay. Next call your lender.

Ask your lender to reduce your interest
Here is a discussion on fatwallet finance forum that has a lot of information on whether it is possible (short answer, yes) and how to approach the lender to reduce the mortgage interest. In summary, a lender can reduce your interest rate without requiring you to refinance, through a process called Loan Modification (also called, streamline modification). Loan Modification allows the lender to reduce the interest rate while keeping the terms similar to your existing loan. However, it is up to the lender whether the start date of your loan remains the same as before or is reset (in which case, your payoff date will extend). Note that this is *not* the same as refinancing your mortgage and so you will not be required to pay any closing costs. (Check this article for difference between loan modification and loan refinancing). Not all lenders offer loan modification since the banks sell off their loans to mortgage pools or mortgage backed securities. But there is no harm trying and this should be one of the first things to do. Make sure you speak to someone in the “Loss Mitigation” department.

Ask the lender for “repayment plans”
If you are in good standing with regards to your payments so far and you have a good credit history, the lender may agree for differed payment. In this case, you are allowed to skip a couple of payments, but will have to pay multiple installments later. If you plan to add another stream of income (eg., take up second job, spouse can start working etc.,) this may buy you some time.

Try to sell your house
If you are not very much upside-down on the loan, you might want to try and sell your house before it gets uglier. It is a very difficult decision, but it is better to sell you house than let it go into foreclosure. Remember, foreclosure not only wreaks emotional disaster on you and your family, it will wreck your credit rating too.

If you are upside-down and cannot sell your house, but have a buyer interested in a lower sale price, speak to your lender about “short sale”
Lenders do not like foreclosures because the cost of putting the house for sale and recovering the costs is huge, and it is not their main line of business. So, if you can bring in a buyer who is willing to buy the house for a little lower than the debt amount, the lender may be willing to cut the losses by accepting the trade and writing off the difference. So, if you have a buyer, definitely approach your lender.

Look for foreclosure hotlines or other non-profit organization that can negotiate on your behalf
It may be possible for a third party to negotiate with the bank on your behalf. In such a case it may be possible to have the lender write-off a part of your loan, and refinance you for the remaining amount.

Once again, the earlier you realize that you are in trouble and look for ways to resolve the situation, the better are your chances of avoiding a messy foreclosure. Here are some additional links that provide information about avoiding foreclosure. Good Luck.

Avoiding foreclosure

How to Avoid Foreclosure

How to Stop a Home Foreclosure Auction

How to Avoid Foreclosure

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Should You Get a 40 (or 50) Year Mortgage?

I recently read a post arguing that one should go for a 30 year mortgage when possible, but it is not that big a deal to go for 40 and 50 year mortgages if it is necessary. These very long-term mortgages are offered in some of the west coast cities and are touted as options for bringing home ownership within the reach of the common man. I had initially dismissed these types of mortgages as an exotic type of mortgage that not many banks offer, and even if they did, not many people will consider going for it. But I was quite surprised during my trip to California last week, when this topic came up while chatting with and a bunch of friends and it turned into quite a heated discussion. Here are some of the arguments and alternatives that some of us who were against the 40 year mortgage brought up, with some number crunching added in to make the case more powerful. I know some of you believe that 40 year mortgages are a blessing that can make home ownership possible for you, and I understand that if you have made up your mind, I could possibly not sway you. That said, please read through the arguments here before taking out a 40 year mortgage – if nothing else, you will know more about what you are getting into.

The interest rate is usually higher on a 40 year loan
Since the 40 year loan has 10 more years during which a person taking the loan can default, it is a higher risk for the banks. To compensate for this, the banks charge about a quarter of a percent point higher interest rate on 40 year loans compared to 30 year loans. So by going for a 40 year loan, you agree to pay a larger interest for a longer term.

Very little reduction in monthly payments
Going for a 40 year mortgage instead of a 30 year mortgage is not going to reduce your monthly payments drastically. Consider a loan of $500K. That will still not buy you much in many of the “hot” cities in California, but with the real estate market coming down, my friends aim for something in this ball park after putting 20% in down payment. A 30 year mortgage with a 5.75% interest rate on the 500K loan will result in a monthly payment of $2917.86*. On the other hand, a 40 year mortgage with a 6.00% interest rate will result in monthly payment of $2751.07*. That is a difference of $167 per month. That’s not a whole lot!

Too much additional money thrown away in interest
For the loan above, for the 30 year loan at 5.75%, the total interest (not including principal) is $550K* (yeah, my jaw dropped open too!). On the other hand for the 40 years at 6.00% the total interest (not including principal) is $820K*! That is a difference of $270K! In other words, you have 270K less saved up for your retirement (or other goals) and the bank is richer by 270K. I feel that is just not justifiable!

Takes a long time to build equity
The amortization of the mortgage means that in the first few years, most of your monthly payments go towards paying off the interest and a very small amount actually applies to the principal. For the 40 year loan, in the first monthly payment, $2500* will go towards paying the interest, while only $251.07* will be applied to the principal. What this means is that, it will take a long time for you to build equity. For instance, for the 40 year loan considered above, it will take you 11.5* years to pay down 10% of the principal. Compare that to 6.5* years that it will take for you to pay down 10% of the principal on the 30 year loan considered above.

Do you really want a huge monthly bill even in retirement?
How long do you plan to work? If you are like me, you want to be able to at least partially retire by the time you hit your 50’s (if not, much sooner!). Say you start working at the tender age of 20. By the time you retire (fully or partially) at 50, you will still have a decade more of payments to go! How do you plan to support your retirement, if you have a fixed monthly bill every month that is by no means a small amount? If you wait until your mortgage is paid off before retiring, you have to wait until you are 60. And if you buy your home later in life, which by the way, is more likely, add that many years to your retirement age! Still think that 40 year loan is juicy?

OK, supposing that you agree with me that it’s not a good idea to get a 40 year mortgage. How else can you afford a home in a market with these soaring house prices?

Buy an older or smaller house
For instance, if you are willing to spend ~$2750 per month on mortgage anyway (from the calculation above, this is the monthly payment for the 40 year loan), going for a 30 year loan with 5.75% interest rate requires you to stay to a loan amount of $470K* instead of the original $500K you were considering. Going for a slightly older home or a smaller one could possibly put a house in that price range, ridding the need to go for a 40 year loan. It may not be your dream home, but it can still be a decent starter home which you could possibly flip after a few years to buy a bigger/newer home.

Move to a different location where the house prices are not that high
The difference in interest alone of 270K between the 30 year loan and a 40 year loan is sufficient for you to buy a large 3000 sq ft. 4-bedroom mansion in Texas! No matter what anyone tells you, believe me, Texas is a very live-able state. Dallas and Houston are huge metro areas which can rival most other big metros in the US in terms of culture, nightlife and job opportunities (and, unfortunately, the traffic too). Austin is deemed the live music capital and is a medium sized city with a vibrant culture (They have a logo “Keep Austin Weird” - it’s true!). San Antonio is another wonderful option, but job opportunities for the techies may not be as abundant as the other cities. And that’s just Texas. There are a lot of other states that have cities with similar profiles and a very affordable housing market. So reconsider if you indeed want to be in the city you currently are in.

Rent out your basement or a spare bedroom
When I did an internship in California, I was hosted by a family in their spare bedroom. This is not an option for everyone, though. It depends on how willing you are to let a stranger into your house and how it might impact your privacy. Fortunately, I got along very well with the family and it felt like a home away from home. It was a single income family, and subletting the room helped them keep up with the monthly mortgage payments. I am not sure of the legal implications of this though. Since I was there for only a few months, I did not bother about it much. But if you consider this seriously, I recommend you educate yourself about the legal (and tax?) implications first.

Share the mortgage with someone
This one sounded very strange to me, and I personally would probably not be able to do it. But since it came up the other day, I decided I will mention it, and maybe some of you can provide more details. Apparently, in some cases, two friends get together and get one house, and share the mortgage. Most likely a split level plan. The kitchen and the living areas are “common” areas, while the bedrooms are owned “individually”. Also, I believe there are homes with two master bedrooms that support this kind of a deal. Again, this sounds very strange to me, and I have no idea of how this works. If you know more about it, please share it with me and the other readers.

So, the bottom line is, by getting creative you can find different ways to own a home even in a market where the house prices have sky rocketed, without having to resort to a 40 year mortgage. So, please think carefully before signing up for a longer mortgage term. Is the true cost really worth it?

*All calculations based on bankrate.com mortgage calculators.

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Attitudes Towards Debt, Bills and Credit Card Arbitrage

Everyone has heard about making money using credit card arbitrage. (If not, you can read about it here). I finally got into the game last year, since that was the first time I had access to a 0% balance transfer offer on a large credit line. I don’t quite care to go through the arbitrage, if the returns are just a few hundred dollars – the effort and the management headache are just not worth it. But last year, with just three credit cards – two of mine and one belonging to the better half - we got access to $50K of credit at 0% APR. By adding $5K to it, we opened a CD for $55K and will now earn an interest of around $2K on it. I was very happy for being a smart enough credit card user and pulling it off.

The better half on the other hand, while glad to be making the $2K, is distinctly uncomfortable with the idea of carrying credit card “debt”, that too, to the tune of tens of thousands of dollars. I have mentioned before (here and here) that we had a bad run in with debt earlier. That, and way he was raised makes him cringe at the thought of debt even if it is good debt (in my opinion). I managed to convince him to jump on board initially, but ever since, he has been bringing it up on and off in our financial conversations with sentences like “…not while we still have so much debt”. It bugs me to no end. How can it be treated as a liability, if the money is sitting pretty in a CD and earning us interest, and in the unfortunate event that something goes wrong, we can just break the CD and pay off the credit card company?

The 0% BT term ends in a month or so. Instead of paying back the credit card, I want to roll it over to another credit card and keep the game going. Who doesn’t like free money? The better half on the other hand, just wants to pay back the credit card company and stay away from such “hustler” schemes! Not carrying any debt, to him is much better than making free money! While I have been saving the 0% APR credit card offers I have been receiving in the mail box for the past couple of months so I can choose the best offer to roll the balance into, the better half has signed up at an opt-out website and diligently shreds the offers that made it through the cracks of the opt-out system.

“Debt” as it turns out, means entirely different things to different people.

Here’s the neat thing though. The way we manage finances in our household - even though we have a common money pool, each of us makes our own financial decisions. So, I offered to roll over the balances from the better half’s credit card into my own cards. Turns out that while the better half has issues carrying balances on his credit card, he is not half as anxious about me carrying those balances! I don’t think it is a flippant “I don’t care what you do” attitude, since he will raise all hell, if I actually get into real debt, (instead of “arbitrage debt”). And it is a common money pool, after all. Which makes me wonder is he really against the debt, or is it the anxiety of managing the debt that is really causing the difference of attitudes here? I am fairly obsessive-compulsive about tracking my credit cards, and making sure that a little over minimum payments is sent out each month, well ahead of the due date. The better half on the other hand, hates this, and lesser the bills he has to deal with the better, even if the bill shows him the money that is earning interest for him!!!

That brings me to more general musings about “debt”. Maybe the reason why so many people are into debt is that they are a few steps beyond me in the spectrum of tolerance for the bills. While the better half is not OK with receiving any kind of bills, I am OK with bills indicating debt, as long as I am not paying any interest for it, and earning interest on that money instead. What if there are people who have an even more relaxed attitude towards handling the bills? – maybe they are OK with low interest instead of high interest. And then, at the other extreme end are the people who are perfectly fine with any interest rate since they do not perceive it as a threat at all. Our perception of “debt” and “debt management” seem to be intricately tied together.

This also explains why there are so many opposing opinions about whether to pay off student loans ASAP or keep them for longer. And whether to pay off mortgage ASAP or keep it for longer. People like the better half will try to pay off all these as soon as they can – even if it is a low interest student loan or a mortgage. People like me won’t stress it out too much. I personally prefer to make extra payments since the loan is not at 0% and I am not guaranteed that if I put the money in other investments I will receive more than the 5.125% interest rate we are currently paying on the mortgage. So, if I can comfortably make additional payments on the mortgage, I will. At the same time, if I find a good investment opportunity (our alternate investment vehicle is real estate back in home town where the market is hot, and it is essentially a wait-and-pounce game) I will pick that in favor of making the extra payment on mortgage. Then, there are some friends I know who will intentionally make only the minimum payments on their student loan and mortgage to keep it for as long as possible, so they can invest the money else where. Sometimes, they earn better interest on their investment than they are paying for their loans. Sometimes they don’t. But unlike me, they are OK with it. Finally, there are the people who do not perceive a high interest as threat at all. How they can do it, is beyond my understanding though, so I won’t even try to write anything about them.

I guess finally, it all boils down to one thing. Every person has to find his/her comfort zone, when it comes to financial dealings. And should try and maximize the returns within the realms of their comfort zone. There is no one right way of doing things. Every now and then, re-evaluate if you have stagnated and if so, see if you can push the boundaries a little. As long as we keep thinking and trying to the best we can within our abilities and try to push our limits a little every now and then, I think we should have a good chance to succeed – irrespective of what the exact approach is.

Related articles on this blog:

Large Credit Lines on Credit Cards: How to Make Some Easy Money

Building Credit History

7 Steps That Made Me Debt-Free

Debt – Were We Really Irresponsible or Just Ignorant?

Stop Blaming Your Credit Card!

Relationship Hack: “Independent Money Management, Common Money Pool” - How to Make it Work

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The best way to be a smart credit card user is to apply for the best credit cards for your needs. Airline credit cards are perfect for jetsetters, and those who make frequent purchases might enjoy the benefits of cash back credit cards.

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A Dollar a Day Keeps the Pests Away

My knight in shining armor (known to some of you as the better half) will climb the loftiest mountains, fight the vilest creatures and brave the meanest storms without flinching or wincing. But put a tiny little fire ant on his arm and watch him cringe and whimper, as he breaks into hives, turns a fiery shade of red and helplessly itches all over. Even his throat and tongue swell until he can hardly speak! Add breathlessness to that and you have me panicking and driving like a maniac to rush him to the nearest emergency room!

So, when we bought the house with a small sized yard that the better half had to maintain, I knew we needed to give some serious thought to pest control. Especially in our part of the country where the fire ants owned the land long before humans did! Living in an apartment until then, my only encounter with the terms pest control were on the notices that the apartment people left to inform me that the apartment was treated while I was away. Aaaahhhh, the bliss of non-homeownership! Now with lawn mowing, driveway cleaning, remembering garbage days, programming sprinklers and changing air filters, we also had to take care of pest control!

Frugal souls that we are, our first approach was to DIY. Yep, we marched into home depot, the two weekend warriors, picked up some fierce looking red ant spray and scattered it all over the yard. We watched carefully for the next few days to see if we would see any of the tiny terrors. And for a few weeks there were none. Just when we were about to break out the bottle of champagne, they started making a comeback. One or two at a time, at first. And then with friends and relatives. And if you have watched the discovery or national geographic channels, you know, ants have large families!

Our next resort was to call the friendly neighborhood pest control man. Actually, I called several of them comparing and calculating. Finally, I chose one who offered cheapest-by-comparison-but-expensive-nevertheless service and had the whole house treated, inside and out. The next few months were just great! I put a reminder on my calendar to call the guy again next year. What my friendly little pest control man didn’t tell me though, was that where I live (and probably the rest of United States as well), stores are not allowed to sell chemicals that stay potent for more than 3 months. So even the best chemicals (assuming he used the "best" chemicals) would be effective for only 3 months. Agreed we need to save the environment, but geez, what do you take us home owners for? But like I said, our pest control guy forgot to mention this to us while he was here, and we simply shredded the quarterly reminders he sent us assuming they were an effort to sucker us into shelling out some more of our hard earned shillings. Ha Ha, you ain't gonna get us this time, pest man!

The winter wasn’t that bad actually. But come summer, we were hit by the attack of red ants like never before! Our yard was literally teeming with life. Creeping and crawling. Making intricate patterns across our drive way. Spilling out of the yard and threatening to take over our house. Fortunately, we noticed the problem before they found their way in. The thought of those critters crawling all over my house, still sends cold shivers down my spine. This time, I called a reputable pest control company, found out all the info I could and signed up for an annual contract with pre-scheduled quarterly treatments. The tab? $368 (–10% discount for signing up the annual contract). Or in other words approximately a dollar a day! Just to keep the pests away!

Sigh! It’s days like these that I tend to agree with Jim’s devils advocate post - Rent Forever, Don’t Buy A Home!

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Cheaper Housing Options For The Mortgage-Battered

DIY Projects for Frugal Home Owners: Carpet Cleaning Basics

Campaign Against Financial Myths:
Part 4 - Mortgage & Home Ownership

Rent Vs. Own: A Look at Our Expenditure Then, and Our Expenditure Now

Why Do Some People Prefer to Pre-Pay Mortgage, while Others Prefer to Invest the Money Instead?

Steps to Avoid Foreclosure: What to Do When You Can’t Keep Up With Mortgage Payments

Should You Get a 40 (or 50) Year Mortgage?

Attitudes Towards Debt, Bills and Credit Card Arbitrage

A Dollar a Day Keeps the Pests Away

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