Our Riskiest Money Decision

Yes, risk taking is inherently failure-prone. Otherwise, it would be called sure-thing-taking. ~ Tim McMahan

Why not go out on a limb? Isn’t that where all the fruit is? ~ Frank Scully

I don’t consider myself a very risky person. Sky-diving or bungee jumping do not really appeal to me. But I have taken on a bit of a risk this summer and it has to do with our mortgage.

I wrote last week about how buying a home within our means was our wisest money decision. I also mentioned in the post that we have refinanced several times and that is where my risk comes into this story.

In May 2010, I saw an ad in the newspaper for a bank offering a Home Equity Line of Credit (HELOC) with an interest rate of 2.74%. The fine print stated the loan rate would be prime rate less .51% and prime was at 3.25%. The fee would be $25 a year, but waived the first year.

A HELOC is a line of credit that taps into the equity that you have accrued on your home and it uses one’s home as collateral for the loan. The interest rates on HELOCs are variable and are based on a prime rate that is set by the Federal Reserve. That rate is currently at 3.25%. It has been at 3.25% since December 2008. Many analysts believed it would go up by the end of this year, but after last week’s meeting, the Federal Reserve announced that will not happen.

Wow, my wheels were turning. What if I transferred my current mortgage, which was at a fixed rate of 4.99%, to the HELOC? Our home loan was about 40% of the value of our home, so we had the equity. Fortunately, we bought our home in 2001 right before home values rose dramatically and we live in a neighborhood where home prices did not tank when the housing market fell recently.

The history of prime rate changes are in small increments. So the prime rate has to move up to 5.50% for it to equal my prior rate of 4.99% with my .51% reduction. I’m going to take a chance that based on history the rate is not going to jump up to 5.50% quickly; it will be done slowly. Some other things have to happen before the prime rate goes up, per Primerate.wsjprimerate.us,

“when the Fed is satisfied that the US economy is not just growing, but growing sustainably, and at pace that will prompt companies to add new and previously laidoff workers to their payrolls. Before the Fed will even consider raising the fed funds target rate, there will have to be a whole lot fewer than 15 million unemployed people in the United States, and threat of deflation will have to have been eliminated.”

Do you see any indication that any of that is happening yet or any time soon?

We are going to be aggressive and pay off as much as we can at the 2.74%. I’m keeping my eyes and ears open for rate change information and I have even added the Prime Rate website to my RSS reader. As the rate goes up, I will re-evaluate our options.

I do understand that home loan rates are at an all time low right now, but there are usually fees that go with those loans and those fees need to be assessed to see if the loan is worth refinancing. The fees with this HELOC promotion were minimal and even waived the first year.

By buying a home below our means and refinancing several times over the years, we have been able to aggressively pay down our mortgage without feeling too much pain. Our goal is to pay off the loan quickly with in the next 5 years and pay as little interest as possible.

Converting a home loan to a HELOC is not for everyone and I am not suggesting to anyone to do it. I am taking on a risk that I understand. The prime rate will go up, but the economy is still tough and I don’t think they are going to raise rates rapidly, but that is just my humble opinion and I am willing to take this risk in an effort to save quite a bit of money over the term of the loan.

How much risk can you tolerate when it comes to your personal finances? What has been your riskiest money decision? Let us know in the comments.

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This post is linked to:

• Frugal Friday at Life as Mom
  
  

Our Wisest Money Decision

We bought a house below our means.

That one decision will have the most influence on our financial goals than anything else we will ever do.

Back in 2001, at a time when McMansions were starting to populate the landscape with their 2500+ square footage and three car garages, we bought a 3 bedroom, 1850 square foot home with one full bath and a one car garage. As we were moving into this home, a family member asked us how long we were planning to stay in it. “This is a good starter home”, he said. We had not even slept in the house yet and someone was concerned about when we were leaving.

At the time, I was working full time while my husband was building his new business. We were approved for a loan, but after looking at many homes and running countless numbers we chose a home that was 20% lower than what we were approved for.

Over the years, we have refinanced our home several times from the original rate of 7.25% and reduced the terms from 30 years to 15 years. For us, refinancing was not to try to reduce the size of our monthly payment but to save ourselves thousands of dollars over the course of the loan. Buying a home below what we could afford will allow us to pay the loan off faster and then give us the flexibility to work towards other financial goals, like financial freedom.

Back in 2001, we knew that we would eventually start a family and our hope was that I would be able to stay home with the baby. If we bought a bigger home at that time with a much higher mortgage that dream might not have become a reality. Our mortgage payments are well within what we can afford on a monthly basis and as I stated above we are able to work towards paying off the mortgage early. And the primary reason is because we bought a home below our means.

Now that we are a family of four, we have made a firm decision that we will stay in the house…pray for me when I have 2 teenage girls and only one full bath. I’m sure we’ll get through it.

We have made plenty of financial mistakes, and in 2001, we didn't realize that buying a home below our means would become our wisest financial decision.

What has been your wisest money decision? Let us know in the comments.


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This post is linked to:

• Frugal Friday at Life as MOM

What Does A Beach House REALLY Cost?

I was fortunate to spend last week at the beach with my family for a much needed vacation. We love the beach and every year I find myself daydreaming, or rather morning-dreaming, during my morning runs about what it would be like to own a beach house as a second home or to retire to a beach community.

It always appears to be a far-fetched dream, but my husband brought home a sales flyer from a local home that was for sale. Could it be achievable or is this too good to be true?

The flyer read, “What Does A Beach House REALLY Cost?”.

It goes on to state, “Curious as to what property values are? You may have heard that some homes here help pay for themselves with their rental income. How does that work? Here’s an example:

6 bedroom, 4 full bathrooms, 2 partial baths, pool and hot tub, Furnished and recently renovated.

Price $549,000

Expenses $39,093

Net Rental Income $37,600

Total Cost per year $1493

Expenses include: property taxes, insurance, utilities, association fees, pool and hot tub maintenance, and 30 year fixed mortgage at 5%.”

The flyer includes 3 pictures of the home and it looks beautiful, although it is not the home in the picture above.

Could it really only cost $1493 a year to own a beach house? WOW, but questions start flying in my head. How difficult is it to rent the home? How well do vacationers take care of the property? Is the home a sound structure or a money pit? Could I even get a second mortgage?

Really only $1493 a year? Really? Does this smell too good to be true to you too?

Part of me wants to investigate a little more and part of me knows that I should just keep dreaming.

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Help...I Have House Envy

A few weeks ago, I dropped my daughter off for a play date in a neighborhood very different from ours. I was in awe of the size of the homes as soon as we pulled into the development. These homes were monstrous, at least two times the size of our 1800 square foot home. I wasn't so much inspired by the aesthetics of the homes as much as the size of them.

I've been feeling a little cramped lately. Recently, all 4 of us were trying to brush our teeth at the same time in our one and only full bathroom. As we were elbowing each other for spitting room, I realized that with the kids at 4 and almost 2, it is easy now, but what will happen when they are older. How cramped will I/we feel then?

Don't get me wrong, there are a lot of reasons for me to love our home.

• We love our neighborhood. The homes in it are over 40 years old and many of the existing homeowners still reside in them. The neighbors are very friendly and everyone looks out for each other.


• Our home is also just minutes from my husband's office and makes it easier on us when he works a lot of hours.


• We love the size of our mortgage. We refinanced a year ago and we now have about 7 years left on our mortgage.

But there are some things that I would change if I could.

• We only have a one car garage and we haven 't been able to put a car in it for years. It is full of our stuff, like bikes, scooters, and outdoor toys.


• Also as I stated above, we only have one full bathroom that is becoming more and more cramped.

As I was driving away from the play date, I started dreaming about what I could do with all of that space. No more elbowing at the bathroom sink. I could have my own office. The kids could have their own play room. With a three car garage, there would be room for both vehicles and all of our bikes and outdoor toys. I bet they don't have to shovel their cars out of the snow. Those cars are probably nice and toasty during a snow storm.

AAAAAAAHHHHHHHHHHHHHHHHH

Okay, back to my reality. We genuinely love our home. We are on track to pay off our mortgage early. My utilities are probably half of that big home's bills. Our quarter acre lot is very easy to take care of. And we love our cozy, little neighborhood. I also know that the size of one's home doesn't always equate to the size of one's balance sheet.

I am trying to make myself feel better, but I still have house envy. Somehow I have to get over it. I think I will go work through my feelings with a big plate of Christmas cookies and a big glass of milk.

Do you ever get house envy? Please tell us how you cope!!

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Refinancing our Mortgage will save us $9000!

I received an email last Friday from our primary bank about the 4.99% rates on their 15 year home equity loans. The email also stated NO Prepayment penalties, NO points, and NO closing costs.

We currently have our mortgage in a 15 year home equity loan at 5.74% at a different bank. I quickly ran some numbers using an online calculator. We only have 10.5 years left on our existing loan but if we apply our current payment to the new loan we can pay off our house in less than 8 years and SAVE $9000.

After I ran these numbers I could hardly contain my excitement. On Saturday morning I applied online and received a phone call by 4:30 from the bank that we were approved. The paperwork will be processed this week and then we are on our way to pay down our house even earlier than originally planned!!

When we bought the house in September 2001, our mortgage was a 15 year balloon with a rate of 7.25%. This is the third time that we have refinanced. Is 4.99% as low as we can get? We'll see...I am going to keep my eyes open.

Have you refinanced your home recently? Let me know how you made out.