Myths On Money

I realize that I have written a lot about the rent vs buy question. And I also realize that my writings have come off as very pro-rent. But the fact of the matter is that I am very much in favor of people buying homes. It is a great thing. I recommend 95% of everybody buy a home. The reason I have taken a pro-rent stance in these posts is because nobody ever tells the truth about the costs of home ownership. And since this site is dedicated to exposing the financial lies you have been told your whole life, I figure I ought to expose the truth of how expensive buying a home can be. My purpose in so doing was not to convince you to rent, but to make you fully aware of the situation you face when you consider buying, so that you can make a wise, well-informed decision.

I have not yet purchased my first home. A lot of people give me a hard time about not buying a place, especially in this market. Believe me, no one would like to take advantage of this market more than I would. A buying opportunity like this market affords is a once-in-a-lifetime opportunity, and I would LOVE to take advantage. But I have my reasons to not buy. Want to know what they are? Well, here are just three of the reasons why I have chosen not to buy a home yet.

3. Location Location Location. Our apartment has a fantastic location. It is within walking distance of the train station that I take to work everyday. It is only a few hundred feet from the entrance to the two major freeways in the city. And, the best benefit of the location, is that we do not have to have to have two cars—I can walk to the train and take it downtown to work.

2. Price. In order to get a home that would offer similar benefits as our apartment’s location offers, we would have to either live in the ghetto (NOT an option, I assure you!), or we would have to pay way more than we can afford for the home. We could afford to buy a home in a less preferable location, although doing so would make it necessary for us to purchase another car that I could drive to work, since the train would no longer be a viable option.

1. Saving. If we were to buy a home now we would have no income left to save. Sure, we could make the payment, pay the taxes, etc for the home, but we would be living at the very edge of our means. And that is not only scary, it is outright dangerous. If we have no extra income to save, then in order to get the car we would need (because of reason two) we would need to get a loan because we would not have been setting money aside. With a new car payment, we would be over our heads, because the home already took everything we had. Our finances would become extremely tight. We would have to very carefully control all our expenses in order to pay for the car and the home. We would live under constant stress. We would fight about money a lot. We would not be happy. Sure, we would have all the possessions that are supposed to bring happiness (car, home), but we would not be happy. And isn’t happiness what it is really all about?

There are two lessons I hope you might take away from this little foray into my own personal finances.

Lesson One: No financial decision can be made independent of any other. Notice how intertwined my three reasons are. I could easily have lumped them into one single reason, because they are all linked. The chart below illustrates the chain-reaction that buying a home would have on our finances.

Look at the impact buying a home right now would have on us. This decision is not just about payments or appreciation or interest. The effect it has on every other aspect of our financial situation is huge. So, when contemplating your own major financial decisions, it is worth your while to take look down the road and try to see what other impact the decision might have.

Lesson Two: Doing what you feel would make you happy might not actually do so. I would be thrilled to own a home. I think it would make me happy to take ownership of a property, and make it truly my own. If I had stopped my line of thinking at that, you can see that I would have been in trouble. In fact, doing what I thought would have made me happy would have had the opposite effect. Sure, I would be classified a home owner and received satisfaction from that. But, when I thought it out, I realized that it would have put immense pressure on my finances, pressure that would have inevitably made its way into my marriage, and that most assuredly would have caused both my wife and I great unhappiness.

So, will I buy a home? You bet! When the time is right. Until then, I will continue happily socking away my savings in preparation for the time when it would not put un-toward pressure on my finances. Only then will I buy a home, and I will pay it off as quickly as possible. Maybe I will not get a deal as great as I could now. Oh well. I will regret missing the deal. But it is worth it to ensure that my family is secure in the long run.

Do you own a home? If yes, then please go to the “ask a question” page and share with us why you decided to buy your first home. If no, I would love for you to share your reasoning for that decision as well. One response will be chosen to be posted right here on the blog as a guest post! Hurry, submissions will only be accepted for two weeks!

With interest rates at all-time record lows, refinancing is becoming quite a popular past time. The trouble is, refinancing costs money, and it can be hard to tell when it is a good time to refinance your mortgage. Here are a few tips to consider when thinking about refinancing:

1. How do the rates compare? This is the most straightforward and obvious question to ask. The benefit of reducing your interest rate by 4% is obviously greater than the benefit of reducing your rate by only 1%.
2. Don’t stress about waiting for “the bottom” to hit. This one is important for one very simple reason: no one knows when interest rates will bottom out. If it makes sense to refinance now, then do so. If rates drop more in the near future, it’s okay because you have already cashed in on a great deal. If you wait until you are sure that rates have bottomed out, then you are likely to miss out on the low interest rates altogether. Take the deal when it’s available. You’ll sleep better, and you’ll be certain that you’ve made a good decision.
3. Consider how long you plan on remaining in this home. The time you remain in your home is very important to all mortgage-related questions, and the question of when to refinance is not exempt. The reason this question is important is because it determines how much you will benefit from the decreased interest rate. If you can save $100 per payment, but only make 3 more payments, was it worth paying $5,000 for the refinance? Obviously not.
   
4. Get a calculator. If you’ve followed the blog for any amount of time, you have seen me do a number of calculations that may seem almost magical in their ambiguity. Trust me, no one has seen this more than I have. The truth is, in finance, the interrelations of all the factors that contribute to the final solution are anything but straightforward. There are certain trends, true, but because of the nature of the equations involved, the relationships are anything but one-to-one. So, get a calculator to help you decide when to refinance. It just so happens that I have one right on this very site that you can use. The actual functions of this calculator are complex, and delve deep into the more difficult concepts in finance, so I won’t go into detail as to how it works. Suffice it to say, it works, and you can use it to help you get an idea of whether or not you should consider refinancing. So go ahead, try it out.