Myths On Money

This is a guest post by Larry Merrill. Larry has been a Realtor® since 1995, and is the founder of Advance Tech Realty.

The market has some great deals right now and I wish I could take the time to do my home buyers program (it takes 1 1/2 hours). But in short, some of the steps in finding a good deal.

1). Talk to lenders in the area you want to buy a home. Interview a few to see who you would like to work with. Also, check out the rates and types of loans available and what kind of down payment will you need to come in with. Look at closing costs closely, generally the lower the closing cost the better off you will be. Even if the interest is a little higher. This is because the average person stays in their home 5-7 years. So if you pay a lot for a low interest rate, you probably will be throwing away money in the long run.

2). Now that you know how much you can borrow and the amount you need to bring in for closing costs, contact your real estate agent. Again doesn’t hurt to interview (or I can help you locate one). If the agent can set you up on a drip system or hotsheet then you can get an e-mail of any homes in your price range. Also, in this market we are seeing people who just want you to take over payments or seller financing. This can help you get into a house without as much out of pocket money. It is recommended you use professionals to help you set up these types of transactions, don’t try to do them on your own. You will find a good real estate agent can do a lot to help get you into a house or when the time comes get it sold.

3). Make sure you have inspections done on the property before buying. Talk to neighbors to find out if there are problems. This could be about the home you are buying, the subdivision, neighbors, city, etc.

4). Be aware buying a home is stressful, and many times you will wonder if you are doing the right thing. But when you own instead of rent I think it will be worth it. Just do your due diligence…

This is just a brief explanation of buying a home. If you have questions you can check out www.move2cda.com and contact me from there.

Everyone seems to think that I am opposed to buying a home. Almost every fan of the blog that I talk to seems astonished when I tell them that I am very much in favor of people buying homes.

So, let me clarify again my position on renting versus buying.

In my opinion, far too many people (particularly first time home buyers) jump into buying a house because they can’t bear to “waste any more money on rent.” These people have a very valid point. Home ownership provides equity appreciation on the home, which in the large majority of cases will far outstrip any return you could earn in a savings account. This makes buying a home a generally good investment, and certainly can provide much greater long-run results than renting.

I am concerned, however, that first time homebuyers rush to buy before they are financially prepared. Home ownership is much more expensive than renting. You have to pay for hazard insurance, property taxes, repairs, upgrades, and (for first time homebuyers) mortgage insurance. These extra expenses can stretch a family’s budget far beyond what they anticipated when they bought the home. Many of the families who are losing their homes to foreclosure are young couples just starting out. In their desperation to avoid wasting money on rent, they overextended themselves and eventually lost their home.

After losing the home, how much better off are they? They get no equity, pay tons in interest and taxes, and any work they did on the house is pure loss. It’s financially devastating to be foreclosed on. Many families could avoid that if only they would take their time, research the un-told costs of home ownership, and go into the deal with their eyes open. Any financial decision you rush into headlong is susceptible to catastrophe. With a decision this large, potential homebuyers cannot afford to be hasty, because the consequences can be dire.

I think that it is perfectly fine for a family to rent an apartment or small home while they build their financial strength. Once their situation can support the mortgage EASILY, they ought to buy their own place and start up the equity ladder. You must only enter a mortgage if you can have a little extra room in your budget. Don’t stretch to the absolute maximum of your budget to buy the home, because you will find yourself overextended. You have to prepare for unexpected expenses and costs.

Lastly, I am hugely opposed to mortgages. Investment leverage is the only good thing I can think of about a mortgage. Everything else about them is terrible to your finances. A HOME is a great asset: a MORTGAGE is a great burden. Your mortgage is at least DOUBLING the cost of your home over 30 years. Just imagine all that your mortgage is costing you, and how strong your finances could be without that mortgage payment.

Of course, renting does not provide the option of eliminating your housing payment at some point. When you buy a place, you can pay off the mortgage and someday be rid of your housing expense completely. When you rent forever, you pay forever. That’s why I don’t support the idea of long-term renting. If you can pay off your mortgage in less than 30 years (and I can teach you how to get rid of your mortgage AT LEAST 7 years sooner without any extra cost to yourself), then you will have some time to really sock away some money into savings.

I hope that clarifies my thoughts on renting versus buying. If you want more clarification, fell free to drop me a line.

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.