Day 10, Buying a House

Back to the lesson's learned portion of the first days of the new decade. Houses are generally the biggest part of your net worth and really can and do make up the bulk of your savings. Knowing what you are doing is very important so here is a small discussion of Buying a house.

HOUSES are generally the largest item you will buy and one of the least understood investments made. Yes, I said investments. If you buy a $100,000 house today at 5.5% interest (fixed) on a 30 year loan just how much does that house cost? The cost of interest actually doubles the cost to $204,000. I would personally recommend paying it off by adding principle to each payment and using an amortization schedule to see what the cost really is. I personally recommend a 15 year fixed mortgage but understand that you might not be able to qualify for that so get it on a 30 year loan and pay it off early. Add Insurance and Property taxes and the cost will probably double again in 30 years. If I were to make a bold statement, your house payment should cost less than 25% of your take home pay. One way to make sure you have the payment is to have a regular amount taken out of your paycheck and deposited into a savings account. That account should be used to make a monthly payment on the house. I do not recommend property as an investment as rentals unless you are handy with tools and like to have to repaint your property a lot when people leave. The cost of rentals is a whole another discussion.

Do not be surprised when you find that your house needs a new roof in 20 years, need new flooring and carpet in 10 years and you will have repainted the inside three or four times bu the time you pay off the mortgage. UP KEEP will be required and can be costly.

One of the least understood part of a home loan is how the Mortgage company figures out the escrow account. If you have that $100,000 home in Shawnee County, Kansas, you can expect that an additional $250 per month for taxes and $100 for insurance will be needed. Right off the bat your $5oo per month house payment will swing towards $900 a month. Once you pay off 20% of the principle of your note, you might be able to get the Mortgage Company to let you pay that direct. I tell a funny story about a great friend of mine who like me, paid off his mortgage early. The next year I was reading the delinquent property tax names that were posted in the paper and there was my friend's name as delinquent. I walked down the hall to his office with a copy of the paper and asked him if he had forgotten anything. Nope, he had his day runner up to date and he was on top of everything important. I showed him the paper and his face got red, then redder, then he picked up the phone and asked his wife to go to the County court house and pay the taxes. After 20 years of having someone else pay his taxes, he just forgot that with a paid off mortgage it was now his job.

The last part of owning a house that I will address here, is insurance. For the sake of a few dollars, my first house was covered with a policy that just had coverage and it was a set amount to cover the loss of the belongings. Notice I didn't say replacement value replacement, but a set value. The insurance company expected me to list every item I owned and when I bought it to establish the depreciated value at the time of the loss. Thank god the tornado didn't blow my house away, just tore it up a lot. I was able to go in and take pictures and remind myself of what I owned. had it been a bigger tornado, or a fire, I would have been at a loss to do the paper work. Now, I take my Digital Camera and take pictures of every room once a year, put that on a DVD and put it in the fireproof safe.



  1. I bought five houses in my past lives and never once had an escrow account for taxes and insurance. I'm just philosophically opposed to the concept.

    One thing my father told me: "NEVER consider your home an investment; it's just a place to live." The ol' man was correct, even though I did make some serious money on two of my five houses. I lost my ass on one and broke even (or slightly better) on the other two. The market can be a fickle thing... and sometimes renting is the better option.

    Case in point: I'm glad I DIDN'T buy when I moved to SFO in 2000. The dot-bomb collapse happened about six months after I took my new job there, right at the PEAK of the real estate market. If I'd have bought I'd have either wound up eating the house brick by brick when I left or I'd still be living there to avoid taking a huge loss. Neither alternative would have been acceptable, especially at my late stage of life.

  2. Buck, I read that our houses are the biggest investment people normally make in their life and make up the majority of their net worth. In California, they have the largest percentage of renters over any State by far. My point is to understand what the true cost is and be sure you know the whole picture if you do buy. I predict a time when a flat tax without deductions will be implemented and houses will fall in value. Everyone will have to shoulder the burden and there will not be a break for low income, price of your house or the number of kids you have. Make a dollar and see if the government can't find a way to spend 15%. MUD

  3. I'm glad we bought our house. We rented for several years while we were bumping around.

    But when we determined in our mind that we were here "for good," we bought our house. It's an old house, in an old neighborhood. And, we've spent many thousands renovating it...and still have many thousands to spend to get it just like we want it.

    But, we worked hard, and paid it off in 10 years. My father-in-law (God rest his soul) always said, "They can't hardly starve you out if you own your house."

    I know what he means. Even in tough times you can get insurance and taxes together...and enough for groceries. But, with a mortgage note, or rent hanging over your head every month, the noose seems to tighten pretty quick.