Family and Finances: Episode 9, Part 2

I think where people make the biggest mistakes is when they actually buy the house, how they buy the house, how they structure their financing. I don't know if you remember, Ann, we tried to buy a house in the 80s, we went into the savings and loan, we applied for a loan, and interest rate, the mortgage rate, was 18%. We didn't know any different, so. We were young and we thought, well, I guess people pay 18%. You know, today, that was historically the highest, today it's historically the lowest. But I remember that lender said to me, you will never see fixed rate mortgages return in America. That was in the 80s. He was so sure of himself, so he said, you have to get an adjustable rate mortgage. And that meant, you know, it stayed, you know, less than 18%. We have 12% for five years, and then they could adjust it up or down, which is really a terrible way to finance a house. Because we look at it as a long-term decision, that we never would buy a house if we didn't think we would be there at least five years. Because there's just too many friction costs, moving in, moving out, getting set up, a little fix up, and there's not enough opportunity for it to appreciate. And so having that kind of financing was a bad idea. So our process has always been 20% down. We want to put 20% down of the purchase price. And that avoids private mortgage insurance, PMI. And PMI is when the lender says, I'm not sure you're qualified, so I'm going to charge you a premium, not necessarily on your rate, but on this insurance, that if you default, then the loan will be covered. And if we ever had to have PMI, we would just say, we're not going to buy it. Right. Well, a lot of people are refinancing right now, because the rates are so low. Well, when it comes to refinancing, our rule of thumb has been, if you can't save at least one full percentage point on your mortgage, we don't do it.

There's two things that people forget about refinancing. Your time to pay off your mortgage resets. So when you get 10 years into a mortgage, let's say, suddenly you're paying a lot more towards your principal than you are interest. When you refinance, it goes back the other direction. Suddenly you're paying a lot more towards interest instead of principal. And so your long-term cost will not be that much improved unless you drop a significant percentage in your mortgage rate, in the rate to insurance. And the length of time. And the length of time. You know, going from a 30 to a 15-year note. That means for many people, their payment is going to go up, but their long-term cost of owning it will go down. So what we've always done is we've gone for the standard 30-year fixed payment, which gives us the lowest payment and the most flexibility, and then tried to pay it off with increased payments each year or a little more each month, and tried to get ahead of that. And then just recently, because rates had dropped so much, then we were able to refinance. And I think we cut our mortgage rate in half, and the amount of time and the amount of interest we're saving, and how soon we'll have it paid off. And so the goal is to buy a home you can afford now. Let's talk about percentages, Ann, because the standard lender will say you can borrow up to 40% of your annual income to move into a house. And what many people do is they say, oh, well then my payment can be 40%. That's not what that means. That means that your total cost of homeownership should be no more than 40%. That's taxes, insurance, maintenance, utilities. All that has to be included. Now if all of that is under 40, you're safe. But we like to advise couples, why not try to do 30? I remember the research you did on Super Savers.

Oh, yes. They go way below the average. Intentionally. Because this is typically the biggest expense in our budget. And so the Super Savers say, well, if the world's doing 40%, I'm going to do 20. And they will live way below their means so that that margin is built into their budget. Well, the stress of being house poor is horrendous. For me, I just hated it. We've been there before. I was going to say, you want to describe that? It's awful. Well, house poor means. You have more house than you can afford to live in and you've bitten off this mortgage that you're stuck with and we've been stuck with that and you know the two things that happened in that house and we were so excited to move in. We put money into it that did not improve its value. You know we just did what we wanted to do to it. We put the kind of carpet, paint, everything in it we liked and we thought man that's going to do it and what we realized it added no value at all to that house and then because we were under pressure we had to sell it and we had to sell it for less than what we wanted for it. So we lost money practically in every way on that house and I think that's when we realized never again, never again we want to live like that and get into that kind of financial bond. Chuck, we've received questions from listeners and one of those is how quickly should we try to pay off our house? Some of that's a little bit of your own personal preference and how you and your spouse might decide that what that priority is in your life. I think it's a good thing to aspire to but it's not necessarily essential to make that your top financial priority. In many ways this is a good time to lock into a long-term interest rate at very low cost and do other things with your money. I don't think it's a good idea to look at your house as your primary investment vehicle. We've talked about that Ann, it's a place to live, it's a place to call home, it's a place for a husband and wife to express their gifts and talents. We had a friend whose home burned down and I remember they knew that God owned it all

and they were good stewards but I remember how painful it was and what they said standing outside that home after it had burned down is that a piece of themself was expressed, the piece of their creativity, their heart, their memories were that was expressed in their own home and it was gone and so it was extremely painful for them to lose the place where they'd been living. So consider it your home, consider it a place where God's given you a foundation to operate from and to serve other people from but I don't like looking at it as a place to just pump money into to try to make a big return on the money. You may or you may not, the main thing is not to get into trouble in the decision you've made and how you've chosen to finance the house. Let's assume we move into an inflationary time. How will that affect housing and payments? We're in that time right now Ann with zero percent interest rate coming from the Fed that means that mortgage rates are at a historic low and what people don't realize is that prices are going up as a result of it and so I'm going to say this it's going to sound controversial but in an inflationary period debt is good. So you buy something with debt and it's going to go up because the cost of money is so low. However where the danger comes in is in a deflationary period if you've borrowed a lot of money and your price of your house goes down that's called getting upside down on your mortgage. It's called getting you know in red ink it's called getting near foreclosure and we saw that in the crisis of 08 and 09. People were flooding us with calls of there was the so-called mailbox walkaway where they would put the keys in the mailbox and tell the lender come and get it we'll never pay it off and so that's we don't know if we're going to stay in inflation or go into deflation. So you have to be very very careful and just be really wise. You and I believe that it's good to make it a priority to have everything paid for we have no debt except a mortgage but we have an appreciating asset and so we're not in a super hurry to get it paid off. Okay great answer. Should I buy a fixer-upper? Thank you. A move-in ready home or a brand new one? It depends on what your gifts and talents are. A fixer-upper can be overwhelming to people. We have a child that likes to buy fixer-uppers and they have done extremely well and in fact they kind of look at it like an investment opportunity as a young couple because they're talented and they've made money doing that. The fixer-upper has to be a known opportunity because if you buy somebody else's problem and don't know how to fix it then you will lose money but if you know in advance that you can fix it it's a good move. You know we've got friends and speaking of fixer-upper you and I went to college in Waco

so we know Waco well. We've never met Chip and Joanna but they've made Waco the most city in America on these real estate search engines and so some of our friends who live there decided they would do a fixer-upper and we were talking to him the other day and they bought and sold I think eight houses in Waco. A lot of risk, a lot of money involved, a lot of time and energy and in the eight houses they've profited $80,000 total, $10,000 a house average and they've lost money on some of them and they said it is not easy at all to flip houses and so they really put out a warning. You would think in the Waco market it would be so easy but it hadn't been easy so if you're capable to buy a fixer-upper, new homes, that's a different decision than just a move-in ready home. A new home is typically going to be priced into that the maximum value. You know the builder knows that you're willing to pay top dollar so you have to be careful to know that it's going to appreciate and sometimes in a new subdivision or a new area there's a little bit of risk in that. I've personally and you and I personally always wanted to buy a used home more move-in ready. That's just been our preference. Well because we would know the neighborhood and had the opportunity to meet neighbors ahead of time. Yeah but if you buy in a great neighborhood and that builds out well and all the lots are sold and you know it's going to appreciate and do very well for you. I don't think we've ever bought a new home. I don't know. I guess we haven't.