Under your Own Roof - Reducing Your Home Expenses

Week 18: Reduce Expenses Tactic 5

Week 18: Reduce Expenses, Tactic 5

What to do this week

  • Look at your fixed expenses and how much of it is housing related.

  • No more than 50-60% of your income overall should go to fixed expenses is one rule of thumb for overall fixed costs. Housing is a large part of fixed costs for many.

  • Explore opportunities to reduce expenses related to housing

“Most workers reading this article earn enough money to be saving a lot of it. If you can't, it's likely because the gap between reality and your ego is larger than it should be. And if you dig into that gap, I think you'll find just three things:

• your house 
• your car
• your education

If you want to actually save money, start there.”

  • The above is not a popular take here in America. Housing until recently has meant for many a continual super-sizing over time to more and greater luxury.

  • Just look at your subdivisions with homes from the 1950s and contrast that with the new ones being built as only one indicator of our expectations changing over decades.

  • With the current price and interest rate environment, many are being forced to change their expectations.

  • If you’re serious about building wealth, it is really vital to evaluate the many cost factors involved in housing.

Housing Cost Factors

I asked Adam Coleman, a multi-faceted financial professional (lender, financial planner, and more) to provide some insight on opportunities consumers have to reduce their housing costs.

Borrowing Costs

“The single biggest thing someone can do to reduce the cost they pay on a mortgage is to improve their credit score as much as possible. Your credit score not only impacts your interest rate, but it could also impact the type of loan you can qualify for, the cost of mortgage insurance, and even potentially the cost of your homeowner’s insurance.

In nearly every scenario, the higher your credit score, the better your rate will be. A lower credit score might force you into a specific loan program (like FHA or a non-conforming loan) that can sometimes either carry a higher rate (non-conforming) or potentially higher monthly mortgage insurance (FHA).

For a $500,000 home with 20% down, the difference between someone with a 580 credit score versus someone with a 720 score would be over $300 a month. Even someone with excellent credit of 740 could still potentially save several hundred dollars in closing costs by increasing their score to 760+It’s important to work with an experienced mortgage lender who understands these nuances and can guide you through how to improve your credit scores as much as possible before you get under contract on a home.

Transaction Costs

Some ways Adam suggests to reduce your transaction costs for a new home include:

  •  Asking the mortgage lender if there are rate options that include lender credits to cover some of the closing costs.

  • You can also negotiate credits from the seller to cover closing costs.

  • The same can be negotiated with your real estate agent where they use a portion of their commission to provide a realtor credit to help cover some closing costs.

Ongoing Costs

  • The “phantom” costs of owning homes make the usual housing return on investment calculation pretty laughable (Sold Price - Bought Price = Profit (HA, HA).

  • Housing can sometimes be an inhibitor to building wealth.

As far as comparing different homes and the housing expenses associated with each, make sure to consider all the other potential costs beyond just simply the principal and interest on the mortgage.

  • Factor in differences in property taxes, homeowner’s insurance premiums, and HOA dues.

  • Take into consideration ongoing maintenance costs and bigger ticket items that might need replacing (HVAC, roof, hot water heater, etc).

Think about potential resale value in the future between one house to the next to calculate the total cost of ownership and not just the initial purchase price.

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