Hey everybody! Welcome back to Momming on a Budget! This is the final part of a three part series on cutting your top three expenses. As a mom, your decision on where to live is super important to your child(ren) development. Not only must you focus on location, but also, the schools, safety, yard size, ability to baby proof, the list goes on and on. I can't promise you that you will get everything off your wishlist, but you may change your priorities after reading this.
The best way to win the housing game is to own your home, renting will always be money thrown out the window. There are a few ways you can go about this: purchasing a foreclosure/auction in cash, buying a fixer-upper and invest in the renovations, or the traditional route of FHA and a 30 year mortgage loan. But, how do you go about buying a home without paying all the additional fees. By learning to organize, downsize and save like crazy. As a young parent I felt pushed into home ownership, feeling the need to provide stability to my child. But, looking back on the situation a year later I realize I should have given myself a little bit more time to prepare to avoid the costly fees I am currently paying. The fees associated with home ownership are as follows:
private mortgage insurance, if you don't put down at least 20%
maintenance and repairs
homeowner insurance, for fire or accidents
property taxes, paid into escrow monthly
I know this list seems overwhelming for many people but trust me, it's better to invest your money into home ownership than to allow it to get eaten up by rent. Here's where people hurt themselves, by paying the set payments the entire 30 years. That's ridiculous you end up paying nearly double the price of the house in mortgage and PMI fees. I realized how crazy housing contracts are when I realized only $177 of my $900 mortgage is being applied to my principal! The way to truly come out in an advantageous situation is by paying extra on your principal monthly.
Here's a few examples of how making an additional payment goes a long way. In this example the house is $150,000 and the interest rate is 4%, which equates to a monthly mortgage payment of $716 (keep in mind this does not include the other fees). The individual has been making regular on time payments for one year. If these payments continue to be made regularly with no additional principal payments the grand total spent repaying this loan would be $257,805.
Paying an additional $100 monthly would result in a shortened repayment schedule, 5 years and 11 months shorter to be exact. The final amount paid for the home would be $234,455, a savings of $23,350.
If you were capable of pitching in an extra $200 a month the repayment schedule would be 9 years and 9 months shorter. The total spent in this scenario would be $220,084, a savings of $37,721 in interest. How many of us could point out $50 a week of junk in our budget? Are to willing to sacrifice these things or add the replacement income needed to save 10 years off your mortgage?
$300 more a month results in a total savings of $47, 535 with a final payoff of $210,271. The amount of time cut off the contract would equal 12 years and 5 months.
If you could afford to add $100 a week to your mortgage the savings would rake up to $54,689. This would cut 14 years and 5 months off of a 30 year mortgage. Coming up with an additional $5,000 a year would cut your mortgage in half!
From here down I'll just post the stats. $500 month, repayment shortened by 16 years, $60,148 in savings.
$600 month, repayment shortened by 17 years and 3 months, $64,456 in savings, final payment of $193,349
$700 month, repayment shortened by 18 years and 3 months, $67,946 in savings, final payment of $189,859
$800 month, repayment shortened by 19 years and 2 months, $70,830 in savings, final payment of $186,975
$900 month, repayment shortened by 19 years and 11 months, $73,257 in savings, final payment of $184,548
$1000 month, repayment shortened by 20 years and 6 months, $75,326 in savings, final payment of $182,479
$1100 month, repayment shortened by 21 years and 1 month, $77,113 in savings, final payment of $180,692. Instead of paying a $1800 rent for a high end condo in the city, you could instead be paying off a mortgage in ten years.
So you get the point, the earlier you pay it off the better. If you are capable of saving a 20% down payment, do it! If not, save as much as you can before you commit. Look into what first time home buyer programs exist in your state and county. I went through a program that was structured quite similar to Georgia Dream but it was funded by my county. This program gives $5,000 to new buyers to be used towards down payment and closing costs, they also lock in a pretty low rate. They offer more funding assistance to community service workers. NACA is another program that helps out new homeowners, I've heard both good and bad reviews. In my personal experience they didn't move fast enough with their process, my lease was ending in less than 60 days.
Many of us do not have the credit or financial stability to purchase our first home immediately when we move away from home. Renting is part of life, but it must be controlled. Make sure you only rent what you need and don't get stuck with a huge rent payment. The less you spend on rent, the more you can save for a downpayment. Also use this opportunity to live simple, how much space do you really need to store your things and sleep comfortably? I think that having a smaller place keeps you motivated to save and move into the home of your dreams. Use this time to live frugally and pay off any debt.
But, don't get comfortable with renting. What are you gaining by throwing $700+ out the window? A roof over your head that you don't own and that you can't control. If you're going to spend the money anyways, you should be getting something out of it. You could be investing that money into home ownership, which serves as equity and long-term stability. I know that there are some people who opt against buying a home because they are unsure of where they want to stay. Well if you plan on staying somewhere at least 5 years, it's probably worth it to purchase. You will probably get a lot more bang for your buck and will probably make some money when it sells. But, that's if the market remains strong and continues to increase home values steadily.
RENT TO OWN
This is an option that I never suggest that anyone take, regardless of their circumstances. This route is supposedly one that allows you to purchase your home without the upfront down payments and closing costs. Unfortunately, based on my research these contracts usually don't provide a route to ownership, but instead just a debt trap. Some of these contracts give tenants the right to buy the home while others obligate them to make the purchase. What happens when a person doesn't make a payment? A variety of things can occur including balloon payments, loss of property, garnishment of assets, etc. depending on the terms of the contract. Many of these deals mean you no good and using a buyer program would be a lot more helpful.
If you can stay at home or live for cheap, do it! Just don't stay there forever. Set a goal of how long you want to stay at home or other conventional location. Once you set your goal make smaller goals that you can check off as you make progress. Here's an example. You want to move out of your parents house in 2 years or less, you goal is to purchase a $100,000 townhouse near the city. You would like to put down 20% or something close to it. So your goal is $20,000 in 24 months, which is $10,000 a year. Here's some smaller goals.
$5,000 a year
$417 a month
$104 a week
$21 per work day (5 days)
So now it's time to review your budget to see if this goal is currently obtainable with the resources and income available to you. Check out the post, 3 Simple Steps to Take Control of Your Finances, it even offers a spreadsheet to get you started.
Be respectful. I have been on my own since I left for college at 17, I have never looked back. But, I have been blessed enough to take a few people in over the years and I have learned a lot about each of those experiences. Always pay something, whether that's just a utility bill, toiletries, groceries, etc. make sure you are making the load a little easier on the homeowner. Be sure to keep your space clean and follow house rules. If you have any uncertainty about the rules of the home, have a open and clear conversation with your landlord so that you can be respectful. As I mentioned before, set a goal, verbalize it and stick to it. You will make everybody more comfortable if you stick to your original deadline.
I hope these tips will be useful for your housing expenses both now and in the future. Create a plan that fulfills the needs of your family while also allowing the ability to save or to build equity. I wish you the best in your journey to success. I also recommend that you check out the other two posts in this series if you haven't already, Saving on Transportation and Saving on Childcare.