Beating Broke

Personal Finance from the Broke Perspective

3 Ways Young Homeowners Can Save $3745 (at least) Each Year

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If you recently bought your first home let me congratulate you. This is possibly the very best time to buy real estate that you’ll ever see in your lifetime. You made a smart move. And because you are a smart real estate investor, I know you’ll be interested in taking advantage of the following 3 ways young homeowners can save even more “moolah”.

1. Home Warranty

I owned a home warranty program for years and it was a waste of money. Of course it felt great not to have to worry about running into major unexpected expenses, but the cost just didn’t justify it. First of all, you are stuck with any repair person the home protection company sends out. Next, the deductible you have to pay is often pretty close to the amount you’d have to pay to a contractor of your own choosing. Last, when you do have a major repair, you are stuck (again) with whoever the company sends out unless you are willing to go through a great deal of red tape.

You’re always responsible for upgrades, code changes and any problems associated with misuse or poor maintenance. I cancelled my home protection plan several years ago and it turned out to be a fantastic decision. If you follow my lead on this, you’ll save at least $600 a year.

2. Life Insurance

If you are a young homeowner you might have a young family or plan on having one. As a result, you definitely need life insurance. But when it comes to term life vs. whole life – play it smart. Term life is your best friend. It’s cheap and it does the job. It’s true that at some point (20 or 30 years down the road) your term insurance will expire. But by that time, you may not need life insurance anyway. Term life is so much cheaper than whole life that you can take that savings and invest it. This way probably you’ll have much more than the whole life promises.

One of the biggest problems with whole life (and I feel it’s criminal) is that agents sell you the whole life you can afford because it pays them a whole lot more commission. (Maybe that’s why they call it “whole” life.) And because it buys a great deal less insurance than term, people end up dangerously under-insured. You could save several thousands of dollars each year and have better coverage just by having term instead of whole life insurance. Look into this ASAP.

3. Good Credit Score

Because you are a young homeowner, you’ll be using your credit for a very long time. And you might have to lean on that plastic a lot right now to pay for all that new furniture and appliances. If you able to get even a slightly better credit score, you might end up savings a bundle every month. That’s because a higher credit score will help you get lower interest rates on credit cards and mortgages.

Find out what your score is and make sure there are no errors. If there are mistakes, fix them. You can easily do most of this without paying a cent. You can even get your credit score for free and sign up for services that provide updates whenever there is a change to your rating. This has helped me a great deal.

As a young homeowner you might be facing some pretty hefty expenses and that can be daunting. Take these 3 steps. Dump the home protection plan. Get rid of your whole life insurance and buy term instead. Finally make sure your credit score is as high as possible.

Will you save $3745? I don’t know. You could save a lot more. You’ll never know until you start taking action.

What are the biggest expenses you face as a young homeowner? What have you done to reduce those costs?

This was a guest post written by Neal Frankle. He is a Certified Financial Planner ® and owns Wealth Pilgrim – a great personal finance blog. He writes extensively about ways to help people make smart financial decisions. One of his most in-depth posts was his review of CIT Bank.

Ready to Buy a Home—Really?

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Most of us reach a point in our lives when we think we are ready to buy our own home. If you’ve been thinking that yourself lately … pause for a minute and examine your reasons carefully. After all, home ownership is possibly the largest single investment of your lifetime and such a momentous decision deserves careful consideration. I am going to help you think this through by asking a few questions that will stimulate some introspection.

Consider these Questions

  • Do you have children? If the answer is yes, do you have all the children you plan to have or are you considering adding to your family?
  • Is your job stable?
  • If you are married or living with your significant other, is his or her job stable?
  • Do you think you may be required to move at some point in the future to meet the demands of your employer or for other reasons?
  • Are you “handy” or would you need to hire outside help for routine repairs to your home. (ed. note: See my DIY Deck!)
  • Do you regard the purchase of a home as an investment?
  • What do you think is the principal advantage of home ownership?
  • Have you considered the additional costs of home ownership beyond the mortgage payment?
  • Have you been living independently for at least five years?

Asked and Answered

If you’ve already asked and answered these questions in the course of contemplating home ownership, then you are probably ready to make the jump. If you haven’t, then I suggest you spend some serious time in contemplation. Home ownership is not for the careless!

Other Fees

That said, let’s look at why these questions are important. If you are buying a home, you are paying for appraisals, inspections, and a host of other fees. Given an economic climate where growth in value is not assured, it is prudent to buy with future needs in mind. How many bedrooms and bathrooms do you need? Do you need a yard? Does it need to be a large yard? Knowing these things in advance will allow you to buy as much home as you require and no more.

How’s Your Job?

Having stable employment will make it easier for you to secure a mortgage and ease the stress of home ownership overall. If you are relying on the income of your spouse or significant other, you must be reasonably certain of the reliability of that income stream. As a practical matter, I would not recommend buying a home whose mortgage payment cannot be met on one income. I realize this is a conservative position, but it is the most prudent approach.

Staying Put?

If you or your significant other has a job that is likely to require relocation in less than five years, you may want to consider remaining a renter. Homes aren’t appreciating at the same rate they were 10 years ago. You could find yourself in the unfortunate position of being forced to sell your home at break-even price or possibly at a loss.

Home Repair

Even if you buy a new home, repairs are inevitable. You must be prepared to pay out of pocket for repairs if you are not capable of accomplishing them yourself. Your lender is not going to be sympathetic if you miss a payment because you had to replace your water heater. Tuck some money away.

Don’t forget that once you’ve bought your dream home you’ll likely need a lawnmower, furniture, tools, appliances, curtains, etc. I wouldn’t recommend borrowing to acquire these necessities since you’ve already got a mortgage payment to pay.

Investing in Real Estate?

As an investment, homes represent a better bargain than stocks right now. Prices for existing homes are at their lowest since 2003. On the flip side, this means that previous owners lost 9 years of equity gains and that could happen again! I am not trying to discourage you from a decision in favor of buying. I just want to make you aware that there are downside risks. Do I think it is likely that home prices will continue to fall? Not really, and if they do, it will not be a significant drop.

The advantages of home ownership are many and varied. I just think it is important for you to have a clear vision of your reasons for buying a home. Buyer’s remorse can cost you more than just your money.

Independence

If you’ve answered yes to the question of living independently for at least 5 years, you have likely developed the level of self-discipline and life experience necessary to see you through the adventure of home ownership.

What did you stop to consider before buying a home? Was there anything you wanted to achieve or to have before you started looking for a house?

Saving on Home Loans

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One of the biggest purchases you will make over your lifetime is the purchase of a house.  Some will argue that purchasing a house is an investment.  But, if it’s your primary house that you intend to live in, it’s not an investment.  Sorry, it just isn’t.  If you intend to rent the house out, that’s another story, but your primary residence is just a purchase.  Even so, it’s a very large purchase.  It makes sense, then, that we will want to find as many ways as we can to save money on the purchase of our home.

Saving before a home purchase

I’ll discuss how to save on your home once you’ve already purchased it a bit further down, but you’ll find yourself a good bit ahead of the game if you start thinking about how you can save money on your home purchase before you make the purchase.

  1. Improve your credit, improve your rate – The rate at which you borrow the money to buy your home is a big deal.  A half a point on the rate can translate to thousands of dollars more in interest over the life of the loan.  The best way to guarantee that you get the best rate available is to have excellent credit.  Depending on how far you improve your credit, you could shave as much as two or three points off the interest rate of the loan.  Not only will that reduce the payment you’ll make, but it will reduce the amortized amount of the loan by tens of thousands.  Want to know what makes an impact on your credit score?  Read the Beating Broke Guide to Your Credit.
  2. Compare home loans – I mentioned how this will likely be one of the biggest purchases of your life, right?  Well, why on Earth wouldn’t you compare the loans available to make sure you were getting the best deal?  You’ve got to compare those loans!  Different lenders will have different policies, rates, and even lengths of loans.  Not only will failing to compare the home loans available cost you money, but it could cause you a lot of stress over the life of the loan.
  3. 20% down or more – If you’ve got the savings for it, put at least 20% down on the home.  Why?  Well, it reduces the amount of the loan, for one.  The less you have to borrow the better, right?  More importantly, 80% is the normal cutoff for when a lender will require you to add Private Mortgage Insurance to the loan.  It can add a hefty bit to the monthly payment, and it doesn’t go anywhere but into the insurer’s pocket.

Saving after a home purchase

  1. Refinance – This may not be for all of you looking to save, but with the current rates, it bears looking into for some of you.  Refinancing a higher interest rate mortgage into a lower interest rate loan can save you thousands over the life of the loan.  Refinancing into a shorter term mortgage can also save you thousands, but beware that the mortgage payment is likely to be higher due to the shorter amortization period.
  2. Make extra payments – If refinancing isn’t in the cards for you, make sure that your lender will accept extra payments to principle and then start making them.  Reducing the principle will reduce the interest, and by simply making an extra payment a year, you can shave years off of your mortgage.

Whether you’re looking at buying a home, or already have, saving money on the biggest purchase of your life is always worth looking into.  A few minutes on the phone with your lender can sometimes save you more than you would cutting lattes every day.  With the higher number of defaulting mortgages recently, many banks are much more willing to help you save money on your payments and pay the loan off early.  They like getting their money back too!

What other ways have you used to save money on your mortgage?  What’s the most extreme example that you’ve heard of?