It is harsh, but it is true. If you haven't been able to save anything of consequence before buying a house, your chances of accumulating any savings when you do buy a house are next to zero. If you aren't able to save anything you will not be able to maintain your house, or your car, or your kids.
I remember being a young twenty something and wanting to buy a car. At the time I didn't have a car payment, but had a car - I just wanted a nicer one. My dad suggested that I "test drive" my car payment before I committed to it. He said to pretend to make car payments to my savings account for 6 months. If I was able to do that I probably would be able to make the payments and would have a down-payment to add to it. My parents didn't drive a nice car, shy would I listen to them? Parents are so wise, and we think they are so foolish. What makes them so wise? They have been down this road before. I am not saying I am wise, but I've been down the road. By the way, I didn't even try his way - I should have.
Not that long ago people used to have 20% of the purchase price as a down payment. Why? It demonstrated financial responsibility! Slowly over the years it became less and less and now we are in the place we are today where people can buy a house with almost "zero" of their own money.
People who demonstrated no financial accountability (measured by savings) were able to buy houses. They gave us one (and we even put some down), what were they thinking! One little bump in the road and life gets hard real fast. It gets hard for you, it doesn't get hard for the bank. No one at the bank is losing any sleep over the fact that you are (or will be) struggling.
Here is a basic truth about money that can explain why things get more expensive (e.g., tuition, houses, etc). When money becomes cheap and easy to acquire then the actual price of things matters very little. The only thing that matters is can I afford the monthly payment. Who cares how long those payments will be required.
What difference does the price of my tuition make when I am not actually going to pay for it. I will eventually, but not now. What difference does the price of my home make when I am not going to pay for it right now. I will eventually, but not now. Or in most cases because no one stays in their home very long they are just "renting" from the bank with no intention of actually owning that home.
I went over my loan documents from our home purchase in 2006, here are the facts about the costs associated with just getting into a home. (Yes, I know this is just one example and there are others - some more, some less - it is an example, a real-world example).
The agreed upon sales price for our home in 2006: $145,000
Settlement charges/closing costs: $3,372.42
Gross amount due from borrower (that's me/you): $148,372.42
Mortgage amount: $137,636
Down payment: $7,225.89
Credit from seller: $1,000 (to fix sinking driveway, that amount only covered 25%)
Property Tax credit for previous year: $2,510.53
May I direct your attention to two items: settlement/closing costs & down payment
What were the settlement charges paid by the borrower (me/you)?
- appraisal fee $275
- credit report $20
- commitment fee $255
- underwriting fee $150
- flood zone certification $11
- interest 6/16/2006-7/1/2006 $315.82
- hazard insurance $186.51
- county property taxes $1529.43
- aggregate account adjustment -$124.34
- settlement or closing fee $100
- attorney's fee $300
- title insurance $133
- recording fees $51
- mortgage recording fee $23
- state surcharge fees $40
- assignment recording fee $21
- overnight fee $15
- POA recording fee $21
When we purchased our house in 2006 the interest rate we received at the time was 6.674%. Guess what, interest rates dropped and we refinanced our home in 2009, exactly 3 years later. We were fairly confident that all would be well. Our home had increased in value by $8,000 and we were making improvements that would increase its value (or so we thought). But the real reason we refinanced was that our budget was squeezed and we needed more money in our pockets every month. We had just had another baby, making us a family of 5.
We refinanced from 6.674% (2006) to 4.925% (2009). A difference of almost 2 percentage points made a significant different in our payments. From $953 to $827 (PI), a savings of $126 per month over the next three years.
BUT refinancing comes with it's own costs too: $3,154.03
- appraisal fee $300
- credit report $15
- commitment fee $245
- underwriting fee $160
- flood zone certification $10
- overnight fee $20
- interest 6/19/09-7/1/09 $186.56
- hazard insurance $218.04
- county property taxes $1665.93
- aggregate account adjustment -$163.50
- settlement or closing fee $110
- title insurance $220
- recording fee $40
- assignment fee $76
- overnight fee $20
Before you start saying that it looks like we made some poor financial decisions, let me remind you that when you are getting squeezed by your budget you will start to make choices that under other circumstances you would not. And you will justify it by saying it is the responsible thing to do. No one wants to pay more in interest than they have to! But in the long run whatever we saved was essentially wasted on fees, and additional interest. In the short term we survived another day.
When I total all the fees that were associated with this house in both obtaining a mortgage and then refinancing it (not counting property taxes) we spent $1,842.99 the first time and $1,488.10 the second time for a grand total of $3,331.09.
$3,331.09 for FEES and we are going to have thousands more in fees when it closes (that post will be fun). Regardless of what the housing market, or interest rates are doing there are fees everywhere! Fewer on the front end, and more on the back end. There is no way around it when you buy.
Owning a house is EXPENSIVE getting in, staying in, and getting out.
Next: The Mortgage Payment Breakdown