Do you keep a home inventory? When was the last time you update it? If the answer was “no” or “last year,” it’s time you thought about keeping or updating your home inventory. Without it, you could be spending lots of valuable time trying to remember, and prove, the things in your home if you ever are the victim of a burglary, Mother Nature, or bad luck.

The purpose of a home inventory is to document the personal property in your apartment or home so that, in the event of a loss, you can expedite the recovery process with your insurance company. It also can give you an idea of how much insurance to purchase, where too much can be as bad as too little insurance.

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When we were looking at houses a few years ago, I was paying about $600 a month in rent. I was splitting a $1189 per month, 2-bedroom apartment with a friend and my half was a little less than half. $600 a month in rent is fantastic in the Baltimore-Washington D.C. area and I was thrilled to be able to save up some cash for a house, despite housing prices soaring back then. So, when I started looking, the prospect of paying a $1500 mortgage was downright scary.

That’s when I learned the technique of “pretending” as a way of preparing yourself for major purchases. I should “pretend” I currently have that mortgage and see how it affects my financial situation.

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Cash is king.

I was reading a great story on CNN today about a families being able to buy homes at a fraction of the price they sold at a few years ago:

Mary Ann Lepley, her husband, Derrick, and their 2-year-old daughter, Melody, have been in their 3,000 square-foot home here for about three months. They bought it for about $250,000. Just two years ago, amid California’s housing boom, the same house sold for nearly $550,000

I’m glad that they were able to take advantage of the current state of the economy because they deserve it. According to CNN, they were “cautious with their spending and savings in recent years,” as other took out home equity lines of credit and borrowed against their future. Now, with the economy turning, they were able to buy a house at more than 50% off. That’s a wonderful story.

I feel for the other family in the story, the Aceves, who bought their house a few years ago for $620,000. Their neighbors bought their house for $220,000 and a house across the street sold for $267,000. (If you’re wondering about these huge swings, it all depends on how much of a view you have in the case of houses that are on the side of a hill) I’m not saying the Aceves were reckless, far from it (I don’t know their situation), but I think everyone would agree they overpaid.

If you have money because you saved when other spent, it’s now your turn to take advantage of the situation. Your financial prudence has opened up a lot of doors.

The economic malaise has probably had an effect on your life, I know it has had one on mine. However, as bad as you think your personal prospects are, it’s worse for companies that have to make payroll, rent, and debt obligations. At the end of the day, you have to take care of you and your own, which is why I recommend that you periodically shop around and use that information to strong arm your way to a better deal on the services you already buy.

Don’t feel badly about using your most powerful a weapon, the power of choice, to negotiate a better deal. When you pay $60 or $80 or $100 a month for cable television, you’re not getting $60 or $80 or $100 worth of service. You’re getting something the company is selling to someone else for $30 a month. They will charge whatever the market will bear and it’s up to you, the consumer, to push back and tell them that their price is too high. At the end of the day, they would rather you spend $5 a month than quit and spend $0.

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With all the financial turmoil, let’s turn our Friday Your Take from the current to the fanciful. A recent Marketwatch article talks about crazy home add-ons that people are looking forward to now that the prices on those gadgets is coming down (the article pre-dates the financial turmoil, which has seen the value of our brokerage/retirement accounts come down).

Instead of digging through our closets to find the perfect complement for a new shirt, we may hold it up to our bedroom mirror for a computer to scan. Using radio-frequency identification technology, our electronic fashion stylist will then offer suggestions based on what’s in our closet or how the latest edition of Vogue or Teen Beat pairs up something similar.

Some of the more mundane items, things I’d actually consider getting, aren’t quite so futuristic (or trendy) are energy saving devices that talk to one another. The article discusses a phone armed with a GPS system could notify your home’s heating or cooling system that you’re getting close, then activating the HVAC system. I think that’d be pretty slick.

Something else that would be slick? Rosie.

What’s funny is that it’s not that outlandish an idea.

What crazy futuristic home add-on is on your wishlist?

Update 2/12: The $15,000 provision has been replaced by an $8,000 first-time home buyer credit, according to the Wall Street Journal. The credit is set to expire November 30th unless it is extended (which is currently being discussed).

Senate Republicans added a provision that would make the credit a $15,000 tax credit for all home-buyers, not just first time home-buyers. It would also be a true credit, not a “credit” you have to pay back over 15 years.

One of the big pieces of the housing rescue bill, passed and signed into law in July, was a $7,500 “tax credit” for first time homebuyers. While experts aren’t sure whether it’s “going to work,” these types of tax credits have been used in the past so they do have some history.

There is one aspect of this bill that is surprising and it has to do with one of the qualification rules. You can own a vacation home or a rental property and still qualify for this tax credit. I don’t know if it’s an oversight because of the strict determination of “primary residence” or if it was an intended rule. I don’t think individuals who own rental property or vacation homes necessarily need assistance on buying a primary residence.

First Time Homebuyer Tax Credit Rules

To qualify, you must satisfy these conditions:

• The home much be purchased as a primary residence.
• You must not have owned a primary residence in the last three years. For couples, both individuals must not have owned a primary residence in the last three years. Vacation homes and rental properties don’t affect this (you aren’t DQ’d if you have a vacation home or rental property).
• Must not be a non-resident alien as defined by the IRS in Publication 519.
• Individuals must have a modified adjusted gross income of less than $75,000 annually and couples MAGI of less than $150,000 to qualify for the full amount.
• The phaseout range begins at $75,000 and ends at $95,000 for individuals, $150,000 and $170,000 respectively for couples.
• The home must be closed between April 9th, 2008 and July 1st, 2009.
• No mention of a credit score or history requirement, but knowing that will help when it comes to getting a mortgage. I recommend checking out myFICO.com, a service of Fair Isaac, the people who invented the FICO credit score.

How the “tax credit” works:

• The tax credit is 10% of the home’s sale price with a maximum of $7500.
• You can claim the credit on taxes filed in 2008 or 2009.
• It’s a credit and not a deduction (difference between tax credit and tax deduction).
• “Tax credit” is a misnomer because it’s really a zero percent loan with some qualifications.

Tax Credit Loan Repayment Terms

The tax credit isn’t really a tax credit, it’s really just a tax free loan with some qualifications. You have to start paying back this loan within two years and you make equal payments over 15 years. When you sell your home, any profits will go first into paying off that loan. If you sell at a loss, the difference will be forgiven… meaning you will not owe any money on the loan (though it should be recorded as income as is typical with most loan forgiveness agreements, so you will owe taxes on it).

Should You Do It?

I would, why wouldn’t you take an interest free loan?

(Photo: orvaratli)

I haven’t written a Devil’s Advocate post in a while, the last one was about how you shouldn’t move from job to job (and that one was a month away from the DA post before that), but this one is a doozy and quite appropriate given our current home and mortgage climate. A lot of folks now are in trouble because they bought too much house. They were able to buy too much house because credit was cheap and lenders were greedy, so a lot of riskier ARMs, no credit down, no documentation-type loans are now impacting the rest of us.

This is about the time you say: “Woah woah, Jim, slow down. You’re going to give us a post about how we should buy more house than we need after just telling us that people’s live have been beaten down because of unscrupulous lending?”

Yes. Now, here’s where I pull out a bit of a wordsmith on you, I’m recommending that you consider buying more house than you need, not more house than you can afford. Ah ha! I’m sure you all can appreciate the subtle distinction between the two and it’s the latter that got people in trouble. Here’s why you should buy more house than you need…

You Will Grow Into Your House

I’m engaged and I live in a house with approximately 2400 square feet, four bedrooms, three and a half bathrooms (one of the bedrooms and full bathrooms is in the basement, so it’s a bit of cheating in the listing). Two people don’t need 2400 square feet of space, they could easily live in a 900 square foot apartment and many do. The fact of the matter is that the townhouse we’re in is much bigger than we really need, but the idea is that you grow into a house. Since the transaction cost of a new home is so high, you want to look a few years into the future and consider how much house you’ll need in the future instead of just how much you’ll need now. 900 square feet is fine for two, but it’s not so good if you have more.

Happiness Is More Important Than Money

Some would argue that it’s more important to save your money, buy only as much as you need right now, and plan for the future. I would argue that that’s a bunch of crap. Retirement is very important but your happiness right now is just as important, there’s no sense needlessly suffering now just as there’s no sense in ignoring the future and blowing all of your money today. In that middle ground you’ll find that if having a larger home, enjoying the more luxurious features, and living a little in the now makes you happy then by all means get a little more house. I’m extremely happy in my home right now, it’s more than we need, but it’s not so much that I’ve leveraged the future in order to buy it. It’s not a mansion, it’s not ridiculous, but I’m happier in this home than I would be in a 900 square food condominium.

Transaction Cost of Changing Homes Is High

As I mentioned earlier, the transaction cost of changing homes is extremely high. After you consider all the fees, taxes, and other costs related to the selling of your home and the purchase of a new home, you’re talking thousands and thousands of dollars just to change your address. So, you would like to reduce the number of times you need to do this by purchasing a little bit more than what you’ll need right this moment. Ask any mother (or father, whoever buys the clothes) you know and ask them how they purchase clothing for their young children. If her kid is a size X, she’s buying a size x+4 because that little tyke is going to grow out of that size in about five minutes. It’s the same idea, but on a larger scale.

Higher Priced Home Means Greater Appreciation

If your home appreciates at 4% a year, then wouldn’t it be better to have that 4% be working on $300,000 than on only $100,000? Well of course it would be! The higher the price your home commands, the greater is appreciable base is. While you do have greater costs associated with a more expensive home, the fact of the matter is that the nominal dollar amount of the appreciation is going to be so much greater with a more expensive home.

In closing, it’s important to note that when I say, as a Devil’s Advocate, that you should buy more house than you need right now, I also want to recommend that you keep within your budget as well. I mean you might want to consider stretching a little bit but don’t leverage your future just because you “might” need it one day. Consider buying more house than you need, but don’t buy more house than you can afford.

This DA suggestion comes by way of Foobarista, whose neighbor recently had their furnace fixed “for free.” A home warranty is a warranty on the appliances and mechanical systems of your home, such as a furnace, and is most often offered for the first few years of a home and most people suggest that you don’t get it because of its cost. When you consider what can possibly break in your home and how much the deductible is, there aren’t going to be many things breaking that the warranty will cover. It will, however, become useful if something catastrophic happens which is the point of insurances anyway, right? So, why should you get a home warranty?

You’re Likely Cash Strapped Right After Closing

It’s very likely that you won’t have a lot of cash on hand right after closing because you’ll put as much as you can towards the initial downpayment, so it’s crucial that you get some sort of protection if there’s a larger than marginal chances something bad could happen. Now, if all of your appliances are brand spanking new and the building is brand new, you can probably skip on the warranty. If you have a 15 year old water heater or a 20 year old HVAC, you might want to consider the relatively small cost of the home warranty as a hedge against a bad situation. Now, a busted water heater or failing HVAC isn’t a hazardous situation (you can work around both of those), but imagine if your roof collapsed or if you discovered termite infestation missed by the inspector – now you’re talking dangerous situations you need to have resolved ASAP (assuming the warranty covers it). Different warranties cover different things, so if you do get one, be sure to double check what it covers.

Peace Of Mind Is Priceless

You might say that this is what the insurance companies want you to believe, that you’re not buying insurance but instead buying peace of mind and you’d be right – it’s what insurance companies say but it doesn’t make it untrue. Some people worry more than others and for those folks, insurance buys them peace of mind and likely a few more years in their life, don’t discount that. Peace of mind is a wonderful thing when you don’t have it and if you can get it on the cheap, by all means get it!

Remember, this is a Devil’s Advocate post so the conventional wisdom says you don’t want a home warranty (the deductible is killer! $100 deductible is huge when your payouts are counted in the hundreds) so do your research, I just wanted to offer up the other side for debate.