Great Savings 32 – Cut The Cost Of Home Ownership

 

There are many costs in home ownership besides the purchase price.

This big, beautiful house costs more than it lists for.

As you go to buy a house you’ll look at a list price. Often, you can dicker over the number, but the price that ends up on your purchase contract still represents a fraction of the home’s real cost. Why? Because a list price doesn’t include interest charges on the mortgage, mortgage insurance, certain costs to close the deal, and all the maintenance, property taxes and homeowner’s insurance you’ll spend over the years. In short, the list price is only the beginning.

 

A French castle just out of Nice.

Do you consider your home a castle? It might be, but that won’t guarantee it’s a good investment.

There’s little question owning a home is an expensive proposition, and this begs a question: How can a person spend the least amount of money on a home and still be proud to call it their own? If your goal is to save money and build long-term wealth consider the following 7 steps to cut the cost of home ownership:

 

(1) Make a big down payment. When you go to buy a home make the biggest down payment possible. If you can’t come up with at least 20% down, you’ll end up paying for mortgage insurance. A mortgage insurance policy is something you pay for that ultimately benefits the bank. In other words, if you can’t pay off your loan, the policy reimburses the mortgage holder. Worse, the cost of mortgage insurance can run several hundred dollars per month. Thus, by saving up cash for a sufficient down payment first, you can completely eliminate the need to buy mortgage insurance. That can save thousands. And let’s not forget interest on your debt. Every dollar of debt you take on as a consequence of buying a home equates to paying out more interest over the years. Thus, always go into a home with the biggest down payment you can afford.

 

A credit score of 850 is considered outstanding.

How’s you’re credit score? Poor? Good? Outstanding? A good score can save thousands.

(2) Protect your credit rating. The interest on your home loan is directly related to your credit worthiness. If you have good credit and sufficient income you’ll get the best rate available on your loan. If you have poor credit, than expect to pay a much higher percentage or be disqualified altogether. Look at it this way: On a $100,000 30 year loan, lowering the rate you pay from 6.5% to 5% will lower the total dollars you pay for interest from $227,543 to $193,257. This represents a savings of $34,286! Thus, the better your credit rating the better deal you’ll get on the true cost of your home.

 

 

(3) Refinance your mortgage. If you’re in a position to refinance your mortgage and you intend to stay in your home for at least two more years, then check with a mortgage broker to see if you qualify. Refinancing rules have tightened substantially over the past few years, but the changes reflect an effort to protect consumers from getting in over their heads. Mortgage brokers generally represent a number of banks or other companies who buy mortgage loans and they can therefore offer different programs depending on factors like your credit history. If you (a) don’t intend to stay in your home at least two years and (b) you won’t cut your interest rate by 1.5-2% in a refinance, then it may not be worth doing as there are certain costs involved like loan origination fees, appraisals, etc. Some costs may be waived by your broker so you’ll want an actual “truth-in-lending” loan estimate before deciding. Again, even a small improvement in interest rates can save thousands over the years.

 

Great Savings Tip #32 Cut The Cost Of Home Ownership(4) Pay your loan off early. As long as your loan doesn’t’ charge a “pre-payment” penalty, the sooner you can pay your loan off the better. In fact, you can reduce the number of years you’ll be paying on the loan much faster just by paying a little extra each month. Let’s take an example: Suppose you could afford to pay an extra $50 with each mortgage payment. Thus, if you have a 6% loan (which is high at current rates, but historically pretty good) and you have a payment of $600 per month, you might choose to pay $650 per month instead. If you do this, that little bit of extra every month will mean paying the entire mortgage off about 5.4 years sooner! Better yet, that means saving about $24,500 in interest had you gone the full 30 years. Thus, not only are you out of debt earlier, but it costs you less overall.

 

The cost of owning a home isn't set in stone.

How would strangers see your house? Would they see the value you do? Would they find things in need of repair?

(5) Switch to a “biweekly” payment plan. The biweekly payment plan is a variation of the early payment method mentioned immediately above. The difference is this plan is managed by the bank or a third party and that makes it less flexible if you run into a month with a spending emergency. Here’s how it works: By paying every two weeks instead of every month, you end up making the equivalent of 13 mortgage payments per year (i.e. 26 half payments), instead of 12 monthly payments. You could say you’re making the equivalent of one extra payment per year that applies entirely to your loan’s principal. Again, by reducing your principal in this manner you end up shortening the life of your loan and paying substantially less overall interest.

 

A house in need of TLC.

This house is ready for a new roof and a fresh coat of paint. The cost of major projects like these can really start to add up.

(6) Keep your home in good repair. Other than another economic downturn, nothing will affect the value of your home faster than letting it fall out of repair. Your home’s value is a reflection of the market in general, the market in your area and the way you maintain it. Let it go and pretty soon the cost of repairs can add up to the point you won’t be able to handle them, or any potential homebuyer will require a substantial discount off the asking price. Many home repair issues are simple enough to do yourself and you can save thousands this way. For more ideas check out our Home Project Tip series or go to YouTube™ and search on the specific type of home repair you’d like to make. If you’re uncertain whether it’s a project you can do yourself and need some guidelines, see our Great Savings Tip #4 – Make Your Own Repairs.

 

(7) Keep insurance in full force. If you own a home you also need to factor in the cost of home insurance. To be sure you’re getting the best deal on your insurance, watch your credit rating and be sure you talk to more than one agent and get multiple quotes. Also, it can pay to review your plan every few years. Many policies have home replacement costs built into them that can change significantly depending on the local economy or the local real estate market. You’ll want to be sure that any loss you may suffer will be fully covered. If you live in an earthquake area you may also want to check our post: The Earthquake Quiz: How Ready Are You? It offers several tips you can use to protect your home, your family, and your personal assets.

 

Action Item: Identify at least one step you can take to start saving money on your home immediately. Can you improve your credit score? Can you fix a small problem before it gets bigger? Can you pay a little extra every month? Remember, even a small extra payment every month can add up to years off your home loan and saving thousands in interest.

 

For more detail on the subject of home mortgages and interest see our post: Cut Your Mortgage Down To Size.

 

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