You Can Afford A Bigger House, But Should You Buy One?

I’ve seen a lot of articles in the news about how higher priced homes are a great bargain.  This article in Yahoo Finance discusses this trend and points out how higher end homes have fallen in price-per-square-foot more than any other segment of the market during the crash.

A good friend is beginning to think about getting in the housing market, and are considering higher priced property.  The properties that they are looking would have been unaffordable even a couple of years ago, but have now fallen to where they are considering a move to a higher priced property.

They have their finances in order so I’m confident that they would be able to afford the down payment and monthly payments, but it’s still worth considering that even though you can afford a higher priced property, should you?

Here are a few things that I think come to mind that should be considered when you look at the type of property you might buy:

  • Down payment and monthly payment – Make sure that you can afford both the down payment and monthly payment
  • Taxes – Even if your dream home is way lower in price, chances are the taxes to support that house may not have dropped.  Make sure to factor the tax payments in your budget
  • Cash flow – Even if you can afford your dream home, make sure it’s not going to put you in a cash poor position.  There is good, free budgeting software available that can help you make sure things are on track, especially when that time comes to e-file your tax returns.  If you find yourself funneling every dollar into the payments, you might not end up enjoying your dream home as much as you anticipated.
  • Flexibility – Make sure that your payments leave flexibility both for things in your control and out of your control.  If you’d be in trouble if you or your spouse lost your job, you might want to re-consider.  If you might consider going to a single-income household, make sure you’re prepared for this up front.
  • Utilities – A bigger house is going to use more energy.  There are more cubic yards to heat, more lights to keep on, perhaps more yard to water and keep up.
  • Upkeep – Any house is going to require upkeep.  Things will wear down or break.  When it comes time to put on that new roof and replace that carpeting, realize that those things (and many others) will cost a lot more than a more modest house.
  • Opportunity cost – Any extra dollar you spend on your home is money that you can’t use elsewhere.  Make sure you understand and are prepared for that.  You might be standing on the sidelines while people you know are investing in something paying a big return, unable to do so because you don’t have the cash.

Each person and situation is different.  I’m not saying that taking advantage of the real estate market to buy a nice home is right or wrong.  That decision varies with each person and there’s a lot of gray area.  All I’m recommending is to think about things other than price when making your decision.

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Don’t Pay For A Bi-Weekly Mortgage Plan

My boss recently bought a house, so quite a few of our work related conversations over the past couple of months have shifted away from work and discussing the various stages of home ownership.

One recent conversation brought to light that it’s probably worth reminding people that it’s generally not a good idea to pay to enroll in the bi-weekly mortgage plan.

Me: How’s everything with the move going?
Boss: Pretty good.  Hey, look at this.  We just closed last week but I already got something from the mortgage company.  They offered this bi-weekly mortgage plan for $295.  It shortens the mortgage time by seven years.
Me: Yeah, I get those all the time.
Boss: I was just doing the math and it looks like all they’re doing is making twenty-six “half” deductions instead of twelve “full” deductions.  That basically means that they’re just taking an extra payment a year, right?
Me: You got it.
Boss (getting excited now): So can’t I just add extra to my payment each month and accomplish the same thing?
Me: Yep.
Boss: So, why would anybody pay $295 for this?
Me: Because a lot of people see the savings, figure a $295 investment is worth it, but don’t realize that they can accomplish the same thing without paying a dime for it.
Boss: Sneaky.
Me: It sure is!

My boss and many others have figured out on their own that paying for the bi-weekly plan is simply not worth it.  If you want to do the same thing, all you have to do is:

  1. Identify what your monthly payment is for principal and interest only.  This means that if part of your payment consists of an ‘escrow’ amount to cover such things as property taxes, insurance or association fees, you should exclude this.
  2. Divide the amount above by twelve.
  3. Add this payment amount to your monthly payment.  If possible, make sure you specify this as an extra payment towards principal.  Also, make sure that you don’t have a pre-payment penalty (most standard mortgages don’t).
  4. Enjoy the shorter mortgage pay-off time AND the $295 you saved by not letting the bank do this for you.

Example:
Your monthly mortgage payment is $1500 broken down by:
Principal and interest: $1200
Escrow (taxes / insurance): $300

You only want to concentrate on the principal and interest, so your focus is on the $1200.

Divide that by twelve and you end up with $100. That’s going to be your ‘extra’ payment per month.

Contact the bank (or logon to your account if your bank lets you) and add $100 per month to your payment, specifying it to go towards principal.

Your payment will now be $1600 per month:
Principal and interest: $1200
Extra principal payment: $100
Escrow (taxes / insurance): $300

We aren’t doing this at the moment because we’re redirecting any extra money we have towards other things like paying down student loan debt and saving for some home renovations, but should this be a priority, this will be the formula we’ll follow!

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How We Saved Money On Our Vacation

As mentioned a couple of days ago, we went on vacation to Florida for a few days.

We had a great time but I’d be remiss if I didn’t go over a few ways that we saved some coin during the trip!

  • Split the cost – We had initially planned our 2010 trip as a week trip where we would rent a lakefront cottage here in Michigan.  When our in-laws said that they were thinking of going to Florida and asked if we’d like to come, we said yes instantly.  Not only did we love Florida, but this meant that we could split the cost with them and save some money all around.  My in-laws are great, but for those of you who couldn’t fathom that idea, think about working with a sibling, a friend, or someone else that could help defray the costs and make for good vacation companions!
  • Eat some meals in – We had a condo with a kitchen as our rental, so we were able to stock our kitchen with some staples that allowed us to eat in for various meals.  Often, we would eat breakfasts and lunches in.  For us, not only did this save us money, but gave us more pool and ocean time!
  • Take your couponsMy wife is awesome!  She has definitely kept pace with me in trying to look for savings.  When packing our stuff, she took our coupon organizer knowing that we’d be going to the grocery store and figuring why not save some money if we could?  I would have never thought of it but she did and it made me break out into the biggest grin as she added it to our items to take.
  • Enjoy free things – Most of our fun time didn’t involve any extra costs.  Why?  Because we spent a majority of it down by the pool or around the ocean.  While there were things like para sailing, riding wave runners, or even a short jaunt to Disney World that could have all been fun, we spent time relaxing by the pool, swimming or walking near the ocean, or sitting outside watching sunsets.  We didn’t feel deprived and we didn’t spend any extra money doing any of these things!
  • Weigh travel options – We looked at flying versus driving.  For us, flying ended up working out to be a cheaper option (the $300 stupid tax that I paid for booking the wrong week notwithstanding), but for our in-laws driving was the better option.  They were able to drive pretty much straight through the 18 hour car ride, whereas we would have had to make more frequent stops and most likely factor in a hotel room since we were traveling with an infant.
  • Look for hidden cost benefits – The fact that our in-laws were driving meant that we could send our luggage down with them, therefore avoiding the ridiculously unfair baggage fees that airlines have imposed.

I’m sure that there were other saving opportunities, but these are a few ways where we were able to save some bucks during our vacation!

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Advice For Those Soon To Be Married

I’ve seen a number of my favorite personal finance bloggers recently announce their engagements and weddings.  Many have detailed various things regarding the planning of their weddings in their blogs, which makes perfect sense since weddings are often expensive and are inevitably going to involve many things related to finance, including the cost of the wedding itself, the merge and handling of finances, etc. etc. etc.

I heard something in passing the other day that I thought I’d share as a perspective that we should always keep during the hustle and bustle of planning a wedding.  I thought it was fitting given that this is typically around the start of the ‘busy’ wedding season.  I’m paraphrasing but it goes something like this:

“Are you going to put the same effort and enthusiasm into your marriage as you are into the planning of your wedding?”

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