Friday, January 25, 2013


I have decided to continue a rollout of our family's budget categories and numbers, in an effort to demystify the American relationship with money and provide a forum for discussion.  Since so many people wanted to jump in on the conversation about health care costs last month, I thought I could do a monthly walk through the areas of our budget that stay static:  mortgage, auto and health insurance, student loan payment, phone, utilities (give or take), food (way give or take). 

This month is all about the mortgage.  We pay $794.87 each month for the privilege of the American dream - "home ownership" (a.k.a. living in a house while we buy it back from the bank).  I should actually clarify:  we pay $794.87 each month for homeowners' insurance, mortgage principal and interest, and property tax.  It's bundled and sent to the same financer, who places the extra in escrow and pays our other bills for us. 

When we knew that we would move back to Nashville in March of last year, we wanted to buy a house.  We haven't been living under a rock, so we knew that if ever there was a favorable time to make our first home purchase, it was now.  Historically low rates, sellers dying to get out of their homes, etc.

After months of haggling, being sure that we wouldn't get the house, arguing with the seller about upgrades to bring the house to basic code, and more . . . we signed (sight unseen, in my case - isn't that insane?)!  In June, we signed up for the biggest purchase we've ever made.  Our house, built in 1930, at a little over 900 square feet, cost $159,250.  We mostly paid for the neighborhood, which is hot.  (We constantly get offers in the mailbox from developers who want to buy our property and tear down the house!  Sorry suckers!  Not a chance!)  We paid for a good elementary school nearby.  We paid for amenities like shops, grocery stores, library, and parks in walking distance.  It was a bit of a shock.  In Topeka, where we had been living, the cost of buying a house was incredibly low.  We could have gotten the same house for half the cost.  I was really glad that we hadn't bought in Topeka, but had rather rented, because we wouldn't have gotten much in the sale between these two markets. 

Because of savings and a generous inheritance, we were able to put down 25% and avoid having to pay PMI (private mortgage insurance).  However, because we were able to put so much down, we also didn't qualify for a FHA loan, which would have had the very best rate of all. 

Jeff has okay credit, mine is good but not excellent.  We qualified for a 4.125% interest mortgage.  My stepdad's jaw dropped to the floor when I told him this number.  (He immediately called to refinance on all his rental properties!)  I didn't really realize it was that good a rate until I started talking shop with people who bought in previous years.  I felt really lucky that we could lock that on a 30-year fixed-rate mortgage.  Our broker had suggested even lower rates at the beginning - sub-4%! - but our credit and income just didn't get us there.

I am a person with good financial literacy, but the home-buying process boggled my mind a bit.  It became very easy for me to see how home ownership is a class distinction in our nation.  (Once upon a time, it was what defined the "middle class.")  Even if you have the money for it - if you don't have the paper trail, the people to vouch for you, and the understanding of what the h*** everyone is talking about . . . you can very easily get taken advantage of, or just cut out of the picture altogether.  I do have to confess, it made me feel like quite a grown-up to know what terms like "PMI," "sub-4%," and "escrow" mean.

When I wanted to know what a good price range would be for us, I found an incredibly helpful finance website that explained three rules for homebuying:  the rule of 28, the rule of 32, and the rule of 40. 

The rule of 28 is that your mortgage payment shouldn't exceed more that 28% of your monthly income.  We actually fall a little low on that.  Our mortgage payment is 26% of monthly income for us. 

The rule of 32 is that your total housing expenses (insurance, taxes, mortgage, and I count utilities in here, too) should not exceed more than 32% of your monthly income.  In a month with high utilities, we ride the line on this one, going between 30-35% of monthly income. 

The rule of 40 is that all your debt payments (consumer debt, student loans, mortgage, auto loans, etc) should not exceed 40% of your monthly income.  We do well on this one because we carry no debt except my student loan payment.  Our debt load is about 34% of monthly income.

All in all, I feel happy about our mortgage.  We are in an area we love, we are building equity in a long-term investment that we can borrow against in case of catastrophe, and even if my career causes us to move away, we can rent the house easily - there is a strong rental market in our neighborhood as well.  I'm happy that we didn't buy more house than we need.  It may not be the most impressive house on the block, but it's ours, and it's filled with love and family and good food and laughter. 

So tell me about your housing costs.  Did you buy high or low?  Still thinking about a first home purchase?  What do you pay per month for the American Dream?

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