If you’ve ever lamented the fact that you signed a 30 year fixed mortgage instead of a 15 year fixed mortgage (it was one of 8 regrets of 2007 for Trent of The Simple Dollar) because of how much money you could’ve saved, don’t. I’m going to do some simple Dinkytown.net (using this fixed mortgage loan calculator) math to show that the difference between prepaying a 30 year fixed mortgage and a 15 year fixed mortgage is big. The current rates on Bankrate (as of early morning on April 16th, 2008) for a 30 year fixed mortgage is 5.62% and for a 15 year fixed mortgage is 5.20%, so we’ll be using those. Rates have since changed but the analysis still holds.

If you had a $300,000 mortgage and made additional payments (~$677) onto the 5.62% 30-year mortgage such that the payments matched the 5.20% 15-year mortgage (~$2403), the difference in total cost (principal and interest) is ~$19,153 pre-tax across fifteen years. After you discount it by your marginal tax rate (say 25%), divide it across the 180 months, it’s only $79.80 a month. $80 difference on a $2403 mortgage payment is 3.3%.

You might say: “Jim, you’re just conveniently ignoring the $19,153 and focusing on the smaller monthly number of $80 - that’s just mathematical hocus-pocus. I’m upset about the $19,153! Also, $80 might not be a lot to you Mr. Money-bags, but I’d rather have that money than give it to a mortgage company.”

To which I would respond: “Ah, good point, but let us calculate the present value of that $80 a month and see how much it’s really ‘worth’ to us today. As for the $80, I too would rather have it in my pocket, but I’m not going to cry over spilled milk.”

If you assume that inflation will be at 4% a year, 180 payments of $79.80 is worth approximately $10,788 today (if I did it right in my TI BA-II Plus calculator). It’s a $10,788 difference on a $300,000 mortgage. Ten thousands dollars isn’t a trivial amount of money, but that’s the cost of having the flexibility to make the 30 year payment into a 15 year payment if you want to. If you have a 15 year mortgage, you are required to make that payment.

Lastly, if you still are bothered about the difference, you can always refinance.

(someone please check my math!)

This guest post comes courtesy of Fred at One Project Closer, a home improvement blog written by one of my friends. As a sign of how good of a friend he is, he still made to my wedding despite his basement being flooded by a burst water heater. And until I read his post, I had no idea he was late!

With rising energy prices, fear of a recession, and the stock market erasing the gains of the last six months, you’re probably looking to save wherever you can right? Well, today I have the opportunity to share ten fantastic tips you can use, many with hardly any up front investment whatsoever, right this very second to save yourself some money.

1. Insulate Your Hot Water Heater ($20.00 investment). Unless you have a newer tankless model, your hot water heater has a large reservoir of water it keeps constantly heated. Traditional hot water heaters are constructed with a relatively small layer of insulation between the inner water reservoir and the outer metal shell, requiring the heater to run frequently to keep the water hot. Manufactures under-insulate hot water heaters to keep the units small enough to fit into tight spaces. For about $20.00, you can find a hot water heater insulation wrap at your local home improvement big box. Upon installation, a typical homeowner will save between $3.00-5.00/month on energy costs.

2. Turn Down Your Hot Water Heater Temperature ($0 investment). Most people are very conscious of raising/lowering the thermostat on their central AC/heating system, but haven’t even considered lowering the temperature on their hot water heater. Your hot water heater should always be set to the lowest temperature that provides your household the hot water you need. Lowering the water temperature from 125 deg. to 115 deg. saves a typical homeowner about $3.00-$10.00.

3. Don’t Let the Water Run While You Wash Dishes ($0 investment). It sounds silly, doesn’t it? But the reality is that nearly all of the cost of running the water is in heating the water. Leaving the water running for 30 minutes could cost you as much as $3. Instead, use your dishwasher (just don’t use the built drying heater or a water heating option like sanitize rinse). Dishwashers use less than half of the water to perform the same task. Or, better yet, fill your sink basin and wash dishes with the water turned off. That method uses less than a quarter of the water of the first method.

4. Don’t Use Your Fireplace on Extremely Cold Nights ($0 investment). Traditional wood fireplaces require an open flu to allow smoke to escape. The air that’s leaving the house with the smoke has to be replaced with air from somewhere else. In most traditional setups, replacement air comes back into the house through pores open to the outside (outlets, leaky windows and doors, attic accesses, etc). On very cold nights, the cold replacement air coming into the house more than offsets any heat gained from the fire itself. As a result, using a fireplace on a cold night could cost $1.00-$3.00 in energy just to replace the lost heat.

5. Caulk Your Attic Access Door ($3.00 investment). Gaps in attic access doors allow heat to escape from the upstairs of your house. Since you don’t go up into the attic much anyway, caulk the rim of the door to prevent your energy from floating away. Estimated savings: $2.00-4.00 / month.

6. Replace Your Light Bulbs with Energy Efficient Models ($20.00-80.00 investment). Compact Fluorescent (CFL) technology has come a long way in the last 5 years. More than ever, CFLs look and behave just like incandescents. These bulbs use about 23% of the energy of their incandescent counterparts and last about 20 times longer. One 100-watt equivalent CFL can save a homeowner more than $60.00 over the course of its life. You shouldn’t wait for your incandescents to burn out either. Every day an incandescent burns, it wastes nearly 80% of the energy it uses. Since you’ll have to replace it when it burns out anyway, you should make the switch today.

7. Consider Replacing Your Refrigerator ($700-1000 investment). Refrigerators that are more than 10 years old use about 50% more energy than their modern counterparts. The older your model, the more inefficient it is. For models that are more than 20 years old, a homeowner can expect to recover the investment in as little as 2.5 years. If you can find a newer model on Craigslist or in the classifieds, you might realize a recovery period of as little as 1 year.

8. Change the Filter on your HVAC every 3-6 months ($5 investment). HVAC filters remove dust and allergens from your house as your HVAC circulates air for heating/cooling. These filters get dirty, eventually restricting air flow. When this happens, your furnace has to work harder to achieve the same temperature change - wasting energy. Changing the filter takes only minutes. If you haven’t changed your filter for more than a year, you can expect a ~$5.00/month savings in months where you run your HVAC the most.

9. Install (and use) a Programmable Thermostat ($50-$100 investment). Programmable thermostats allow you to adjust the temperature in your home based on the time of day, and day of the week. If no one is home during the day, it simply doesn’t make sense to keep the house at the same temperature. Typical homeowners can expect to see $10.00-$40.00 / month savings after installing these nifty little devices. Remember that a programmable thermostat will only save money if it’s programming features are actually used. So, get a programmable thermostat that’s easy to learn.

10. Set Your PC to Auto-hibernate ($0 investment). A computer, monitor, and printer can easily draw 300 watts. With electricity as high as $0.15/KWh, this equates to more than $1.00/day. If you only use your computer for 2 hours a day, setting the system to auto-hibernate (instead of leaving it on) saves as much as $25.00/month.

One of the less often discussed effects of the subprime lending crisis and falling home values is the effect lower home values will have on property taxes. While a drop in home values is bad for a homeowner, a lower property value assessment is sort of like the silver lining. Unfortunately for homeowners, counties and states aren’t so good at lowering assessments. So, if you suspect your home has recently fallen in value, consider fighting your next assessment.

As an aside for any Maryland homeowners, you will have to apply for the Homestead credit this year if you want to stop your property taxes from shooting through the roof. The state discovered that lots of investors were getting tax breaks through the Homestead Tax Credit and have instituted a one-time application process. If you own your home and are living in it as your primary residence, they’ll approve you. With property taxes going down, they’re looking to squeeze out tax revenue from wherever they can find it. For more information, read this FAQ on the Maryland Homestead Tax Credit.

The follow seven tips come straight from Money but I can boil it down into something a little simpler.

How does your county assesses the value of homes? Two common ways are with comparables (or “comps”) and with replacement/rebuilding value (very similar to how banks appraise homes). With comparables they just look at similar houses and what they recently sold for. With replacement/rebuilding value, they “guess” based on how much they think it would cost to replace it. After you figure that out, request your assessors evidence so you can examine it for any errors. Chances are the assessor didn’t walk through every room in your house (or even enter your house) and is basing it on public records. Did he or she put the correct number of bedrooms and bathrooms? Is the square footage correct? Any discrepancies can be used to adjust the value of your home.

Build a case for a lower property assessment and do it quickly. Most places have a time limit for an appeal, Money says 60 days it the norm but I’ve seen places with 45 days and 90 days. Your case will be based on how your county assesses home value. If they use comparables, get some comparables and use them as ammunition (get 5-10, more is better).

Meet with the assessor first, then file an appeal. If you can convince the assessor that he or she assessed your home higher than he or she should have, it’ll help your case when it comes time to appear before the review board because they’ll be there. If you convince them, they’ll put up less of a fight. At the appeal board, prepare an 8-10 minute presentation with pictures of the comparables and a spreadsheet of the data. Think about what you would want to see if you were on the board. If you’ve done your homework, act professionally, then you have a good shot.

What if you lose? They recommend you move up to the state board and then to court if that fails. Money says that going to court will require a lawyer but that counties and states will often want to settle just because it’s just as expensive for them as it would be for you. They might not give up all of it, but they could give up a big piece.

Good luck!

Two nights ago my fiancée and I discovered that the carpet in the upstairs office was a little damp. After a little investigating, we discovered that the wall was soft! We tore down the drywall, removed the soaking wet insulation, and realized that our roof was leaking. After a restless night, I woke up the next day, called up three contractors, and eventually had some repairs done. The culprit appeared to be the flashing around the chimney and the tin covering on the chimney. The final bill was $675 (though I worked out something with the contractor where I’d get that rebated back on a full blown roof replacement, which I know I’ll need) and a weight off our shoulders. I still need to replace the insulation, drywall, and paint that office… maybe the painting will happen after the honeymoon. (I’m also a little hesitant to put everything back up in case our repairs didn’t solve the problem…)

Ugh…

On a happier note, I discovered a cool site called FreeRice.com through BzzAgent. I’m a BzzAgent, which means I occasionally get free products, give them away to my friends, and write about their reactions to them (if you want to join, email me). I’ve given away gum, yogurt, etc. etc. Anyway, one part of the site involves talking about cool websites that have tried to improve their online exposure through BzzAgent. Until today I hadn’t written anything about any of them because they didn’t really appeal to me, until FreeRice.com. You answer multiple choice vocabulary questions and they donate 20 grains of rice for each correct answer. You don’t sign up for anything, they don’t send you anything, and they donated 149,541,380 grains of rice donated yesterday (Valentine’s Day). Give it a whirl, maybe you’ll learn a few words and someone gets a bowl of rice.

My friend Miller at My Pocket Change has recently begun the wonderful journey that is the path to homeownership by submitting his information to LendingTree. Through LendingTree you can help determine what the bank(s) believe what homes are considered “affordable” to someone with your income and assets. While your own perceptions of what is affordable may be more aggressive or more conservative, having that additional data point helps. In talking with Miller, we both were getting confused as to the various terms. I remember getting a preauthorization letter, he’s working towards getting a prequalifying letter - though it sounds like we were providing the same types of documents… so what’s the difference? Were we just talking semantics? Here’s the difference:

Prequalifying Letter

A prequalifying letter is issued after a brief discussion with a mortgage lender, it requires no documents and is non-binding for the lender who issues it. The idea behind it is that you lean on the mortgage lender’s experience to give you an idea of what you are likely able to afford. You provide no documents and there is no credit check, the lender simply takes your word at face value and issues you the letter.

The value of the letter is in the eyes of the beholder. The seller knows you’ve at least talked to a lender but they can’t reasonable assume that just because you have this letter that financing is a sure thing. However, having this letter beats having nothing at all.

To give your letter a little boost, you can request that the lender check your credit and indicate on the letter that a credit check was performed. The number one reason for a loan falling through is that a credit check gave the lender cold feet (and given the current climate, they get cold feet a lot more now than they used to!).

Preauthorizing letter is another term for a prequalifying letter.

Preapproval Letter

If the prequalifying letter is the little bunny rabbit, then the preapproval letter is the roaring lion of the two. Preapproval letters are issued when you actually make a loan request, provide all the documentation, and the lender agrees to loan you the funds on the condition that the property appraises for enough and the title review comes up clean. You will have to submit all the paperwork (W-2s, bank statements, etc.) and be subjected to a credit check because the difference is in verification of your financial situation because the bank is agreeing to lend you money.

This letter is better in negotiating with sellers because it shows that: 1) you’re serious because you already talked to a lender, and (more importantly); 2) a bank has agreed to lend you money subject to some standard conditions. There are other benefits to this, such as a more diligent real estate agent (with this letter, you’re serious… not just window shopping), but the main benefit is with the seller - you are in a much stronger position.

Preapproval letters are not binding. The house hunting process can often take many months (I know someone who looked for a year) and so your financial situation could drastically change, it would be unfair to keep a lender (or you) to the terms of the letter. Whatever the reason, it’s important to note that this letter is not binding.

It’s All Semantics

In my research, I’ve seen a lot of places refer to a preapproval letter as a prequalifying letter and a prequalifying letter as a preauthorizing letter (and vice versa). Ultimately, the difference is in the rigor and due diligence of the review. If you are required to provide actual statements and W-2s, you’re getting the “Preapproval letter;” if you’re just chatting it up with no verification, then it’s “Prequalifying Letter.” Either way, the real estate agent and the seller will easily be able to tell the difference regardless of the document’s name and you’ll get the credit you deserve for it.

(Photo by slack12)

Two and a half years ago, I did a quick and dirty rent vs. buy analysis prior to purchasing my home. At 3% annual appreciation, my breakeven point was approximately 8 years away. At 6% annual appreciation, the break-even point was a mere 2.3 years away. I believed the regional market I was buying into was only slightly bubbly and that 6% “seem[ed] somewhat reasonable” for an appreciation rate. Nearly three years have passed so how did my analysis stand up?

First, let’s try to establish the “actual” appreciation based on recent home sales in my neighborhood. In the three years, five homes have been sold in my little cul-de-sac (homes within two hundred feet of my front door). These homes have nearly the same configuration as mine with some minor differences. For example, none of them had fireplaces, none of them had finished basements, one of them had original 20-year-old windows. In the last six months, two of those homes were physically connected in my row of townhouses and they sold for $305k and $309k. On paper, my home was likely going to command a higher price. However, we’ll just assume a nice round conservative premium of $10,000 (for new windows, finished basement, and a fireplace) putting the value of my home at $319k. That’s an appreciation of $24k from my purchase price of $295k.

That’s an annual appreciation of 3.67% over the last two and a half years, or slightly higher than my low estimate and far short of my “somewhat reasonable” guess of 6%. Had it appreciated 6% over two and a half years, we’d be looking at a sale price of $341k. Was it reasonable back then? Hard to say, I can’t put myself in that mentality, but it’s certainly unreasonable now.

So, did I make a mistake in buying? I don’t think so. In my original analysis, I also assumed a monthly rent of $1,100 and a marginal tax rate of 20% (among other things, but those were the big “wrongs”). In this area, $1,100 gets you an apartment with less square footage than one floor of my townhome. I think a more reasonable figure for rent is $2,000, based on estimated rates based from Craigslist. The marginal tax rate of 20% is also low (plus that bracket doesn’t even exist) for me, I believe the 28% rate is more accurate. Based on those numbers, plus the reworked appreciation rate of 3.67%, the new breakeven point is 1.3 years.

What!? How did that happen? The difference is in the estimated cost of rent ($2k instead of $1,100). If it were adjusted back to $1,100, the breakeven point would be 3.6 years - or close to the 3% estimate. During my analysis, I wasn’t comparing apples to apples, I was comparing one destined for Snow White versus one destined for apple sauce! There’s no way, definitely three years ago, one could rent a townhome for $1,100. I can’t fault myself for using that number because I wouldn’t have rented a townhome, but it was a mistake to use that number for this comparison. You can’t compare an apartment to a townhome in that way.

Did I make a mistake in my analysis? If I performed the analysis correctly and the numbers just didn’t work out, that’s fine. If my approach was wrong then I have the potential to repeat the mistake. In this case, I think bounding the lower rate at 3% was too optimistic. I think I did make one error (not counting the aforementioned apartment to townhome comparison), I didn’t plan for the worst case. While I don’t explicitly state that 3% is my worst case scenario, it became the de facto worst case because it was the worst of the situations I looked at. I should probably spend more time thinking about the lower bound in the future and be comfortable with the results should that happen. This is typical risk analysis type thinking, assign a worst case and a probability; are you comfortable with those values? If not, how do you mitigate? Luckily it didn’t burn me (yet).

So, based on my analysis, it sounds like I’ve broken even on a home! I’ve broken even mostly because I’m not “throwing” money away in terms of rent, but even that argument is tenuous. While the strict numbers may say I’ve broken even, the fact of the matter is that the decision isn’t really between renting a townhome and buying it (at least back then). Either way, it’s good to revisit decisions and analysis, it’s something I don’t think many people do and luckily I have the benefit of reading old blog posts!

What do you think of my analysis? Any glaring holes (or not glaring holes)? I agree that it’s a very rough analysis, I don’t consider things such as home improvements and maintenance costs, but I think on the whole it’s a decent look at the problem.

When I purchased my home two, nearly three, years ago, I had a great interest rate of 5.75%. With the recent Fed rate cut of 0.75%, a question that has been swirling around the heads of my friends has been whether or not they should be refinancing. Some of them have loans at higher rates or HELOC’s and 2nd mortgages at higher rates - for them the analysis is worth performing. As for us, with the Bankrate quoted rates at around 5.40% for a thirty year mortgage (under 5% for a 15 year mortgage), the answer for us is unclear… this calls for an analysis!

Comparing Total Interest Payments

The current outstanding balance for our mortgage loan is approximately $224k and, given minimum payments for the remainder of the loan, puts us on pace for paying out a total of $217k in interest and $224k in principal. The $224k in principal is given, what interest rate do I need in order to pay less than the $217k in interest? According to the calculators at Dinkytown.net, the answer is approximately 5.16% on a 30 year mortgage. This analysis does not include closing costs, some of which I would be responsible for even if the lender paid for the closing costs (at the very least, I’d have to pay the scam that is title insurance). In actuality, on a 30 year mortgage, I would need something that’s slightly less than 5.16%.

Lower Monthly Payment

Another consideration, if I were to get the break even mark of 5.16%, my payments would be $1,200 for 360 months - approximately $200 less than our current payment. If I felt that the extra cashflow was necessary, I would definitely go for a refinance if the numbers were right. As it were, we are currently paying extra each month (approximately $300) so that the 30 year mortgage is closer to a 15 year mortgage. Having a lower payment but paying more gives us the flexibility to treat it like a 15 year mortgage but only be obligated for a 30 year, should our cash flow situation tighten up.

What If? The 15 Year Mortgage

What if we went with a 15 year mortgage? Let’s say we could get a 15 year mortgage at 4.875% (Nickel just locked in this rate) on my balance of $217k. The monthly payments would increase to $1750 each month (or $150 less than our current actual payment) but the total interest paid would plummet from $190k (the amount given the $300 extra paid) to $92k, nearly a hundred thousand dollars. Am I willing to save $100k (it’s really only a $75k savings given taxes) and lock in the $1700 per month payment? That’s a much harder question to answer.

Summary

Refinancing to a fixed 30 year mortgage doesn’t appear to be make much sense but refinancing to a fixed 15 year mortgage, given our extra principal payments, looks to save us $75k over the loan period. These all assume that there will be no closing costs but would I be willing to pay a little extra in front in order to get some savings in the long run… perhaps. I have to think about this some more, please share your thoughts in the comments and please tell me if I’ve done my math wrong!

Next Steps

I think the next step for me is to take a look at Lending Tree, where I like to go to get a quick snapshot of what’s available. When I bought the first time, I used Lending Tree to get a pre-approval letter and to help me get a better handle on what rates would actually be for me. They gave me a good snapshot, so I’m going to use them again to get a feel for what’s out there.