Sunday, November 13, 2011

Update on the house-buying process

Man, when things rain around here, they really pour.

So, 18 days ago we got pre-approved for a mortgage. Eight days ago we found a fantastic house. Seven days ago our offer was accepted and we put down earnest money. Five days ago we passed inspection with flying colors. Three days ago we discovered our scheme of delaying closing per the sellers' wishes wasn't going to pass muster so we agreed to a rent-back option (yes, making us defacto landlords on the first house we own). Yesterday we got revised numbers from our mortgage broker and were asked to decide whether to finance the mortgage insurance, pre-pay, or pay it monthly. Today we locked in our interest rate and have written the check for the appraisal fee. This week, I guess, we get the results of the appraisal and do some more paperwork, and start shopping for homeowners insurance so we can finalize the rent-back agreement. Then, I think we just sit on our laurels until closing, which will happen right after the holidays.

Oh, except for all the time I'll spend on virtual makeover sites seeing what the rooms look like in different colors.

The process is still going very smoothly and fairly quickly, but it's in the middle of a whirlwind of other things, including a weekend-long sales conference for me that's left me hardly able to type in complete sentences.

This whole homebuying experience has taught me that I really know nothing. Earlier this year, I said a 20% downpayment was a necessity for Peanut and I to buy a house, because I was really morally opposed to paying private mortgage insurance, or PMI. I really had no idea what PMI was, exactly, except that it was something only suckers -unqualified buyers- got dinged with and something to be avoided at all cost, probably about a 20% fee on your annual payment. Turns out, it's a charge on the sales value of the home that enables you to go in with less of a downpayment, and the cost of it varies by the amount of your downpayment - in our case, less than half of one percent (not the violently evil charge I was expecting!). Trent's article at The Simple Dollar explains it well.

Yes, Peanut and I could have waited until we had 20% to buy a house, which would have taken us another year or so to save up. In the meantime, we would be putting the rest of our life plans on hold, and possibly paying a higher interest rate a year from now - meaning we wouldn't be much further ahead anyway (and that increase would be over the life of the loan, not until we'd eared another 10% equity). As it is, we are putting down 10%, which is apparently a very good number since the housing crash a few years ago. We'll still have a healthy emergency fund in the bank, and our monthly costs will be less than our rent in New York, for THREE TIMES as much living space. It'll still make more sense to pay back our student loans on an accelerated schedule before attacking the mortgage to get rid of the PMI - 6.8% and 5% are way more evil than 0.49%. (Trent explains this philosophy here.) We'll be able to handle the mortgage payment on either of our salaries alone, which was a big requirement. And with two incomes, we'll have enough money to sock away a healthy chunk each month for quicker student loan payments, an eventual second car, new furniture, and so on.

Just goes to show that what you think you know about finances, when you haven't actually had to make these decisions or looked at the numbers close up, isn't necessarily an accurate portrayal of reality.

So. I'm Little Miss Moneybags. I'm a personal finance blogger, and I will be paying PMI. I also put all my monthly expenses on a credit card, took out loans for graduate school, closed my oldest credit card, merged all my accounts with my spouse, and only contribute to a 401(k) up to the company match. Sometimes, I buy shoes just because I like them - even if they're not on sale. If those things bother you, oh, well. That's why it's called personal finance. :)

What was a financial term or decision you thought you understood, but when you faced it personally, you felt differently?


7 comments:

  1. For me, it's the emergency fund. I started diligently saving up an emergency fund, only to realize it was ridiculous to have a stash of cash making next to nothing in interest while I was paying interest on my debts. So, the E-fund went onto the debts, and now my line of credit is my emergency fund while I word on paying it off.

    Congratulations on buying the house, and kudos on emphasizing the personal in personal finance :)

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  2. I agree with diggingoutandup there is no point in saving about a whole lot for a crappy interest rate when your debt is accruing more interest than you are earning.

    I'm from Canada and I didn't fully understand the TFSA before I started putting money into it (stupid decision). I didn't understand that it counted all your contributions and did not subtract the money you took out.

    "Sometimes, I but shoes just because I like them, even if they're no on sale" -- love it, love it, love it!
    Thanks for emphasizing the importance of the "personal" aspect!

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  3. We didn't put down 20%, which I regret still but our PMI isn't terribly high, so we're not too upset. We needed a place to live, so we were still happy.

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  4. We pay PMI, too, and I don't regret it one bit! I also always thought only suckers paid PMI, but ours isn't very expensive and it was worth it to us to buy a house when we did. We needed more space, and it made financial sense (PMI or no PMI) to buy instead of rent. I find our day-to-day lives much more relaxing now that we own a home, because we don't have to deal with a landlord and we can do whatever we want to the house.

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  5. I paid PMI too. And I use a credit card for my daily purchases for the cash back. yipes!

    I also eat out several times a week. Shh... don't tell anyone about that one!

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  6. Recently got first Visa card with annual fee. It was the summer British Air promo Visa. So I have 100k miles and can fly pretty much anywhere in the world with those miles. But every year I get charged that $95 fee. Not sure how I will feel about the fee after using the free ticket. And to boot my spouse got a card too. But we can fly to Europe together twice so I am sure a couple of $95 fees won't ruin the trip.

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  7. My financial decision was to built my financial independence castle...

    I recently did some calculations and the results are very much frustrating, to be brutally honest.
    Have looks yours self - they are all published.

    If you invest $ 40, 000 a year over 35 years, at modest inflation rate of 2% and administration fee of 1-2% you need stock market to perform at 4% just to preserve value of your money and higher to gain anything.

    This means that you are only preserving money you are investing at a very high risk. So it is just plain wisdom - is there a point to be frugal and try to save, if you ended up loosing money?

    Feeding financial industry and no living your life in full?

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Thanks for commenting!