Our House Buying Adventure

I’ve always enjoyed looking at houses and floorplans and going to open houses. I get this from my parents who, despite not moving in over two decades now, used to take us to look at random houses that we never moved to (which really confused us as small children and teenagers). So it’s no surprise that I would get automated emails about similar properties to our current apartment on a regular basis, to stay on top of the market. Nor is it a surprise that I have regularly dragged my husband to open houses in the past. If you’re at all considering moving, it’s really helpful to have an approximation of what you think you could get for your current place, which helps to anchor you with prices for other types of places in your area.

Recap of my decision to buy our current condo

I didn’t grow up in a big city and for some reason, I associated owning with owning a house, perhaps because I had always lived in houses that my parents owned and I didn’t know any other ownership model. I thought that all apartments and townhouses were rented. So when in my early twenties, I started to find myself with extra money, I first didn’t even think of buying a house, but I saved money anyways. I really loved living in an apartment, but I also loved the idea of having my own garage directly attached to my place where you could leave your groceries for a few minutes while you ran in to use the bathroom.

My first realization that you could buy not houses was a townhouse, so that’s where I concentrated my search in late 2011. My picture of a townhouse though, wasn’t one in the city – it was one in a more suburban area. The ones I pictured didn’t have direct entrances on a street, street noise, or garages that were at weird angles to get into because they were, you know, larger communities on more land. As a single woman, I didn’t want to live in a city in a place with a direct entrance on a street, plus there were several annoying floorplan decisions that weren’t changeable made in many of the townhouses I was looking at at the time that I now realize was common of that particular era of building. From those big items, I ruled out living in a townhouse and thus buying a townhouse back then.

Next, I realized that you could buy an apartment, which was the most mindblowing amazing idea ever. I loved living in my apartment! I could see myself living in an apartment like mine through the rest of my twenties! So why not buy one? I wanted a full second bedroom so that my office had a window versus the den in my then-apartment, but otherwise, my apartment was great. I looked at many apartments, including one that fell through, and eventually found this one that just felt like home when I walked in. I loved that it had rooms and doors and some separation between rooms. For a single person, it felt like a mansion. (And it still does when only one of us is home!)

How did I decide on budget? I had enough saved to put 20% down and wanted to find a place where the monthly payments (mortgage, condo fees, taxes, and insurance) were similar to what I was paying to rent. I originally started looking at places that were about 70% of the purchase price of the place I eventually picked. They felt more affordable, but I realized eventually that I didn’t want to live in those areas as much. That resulted in me buying an apartment that was about 4x my then-salary income. It wasn’t a big stretch in hindsight since it was very comparable to what I was paying for rent, plus my income did go up and I also had a decent amount of non-salary income eventually, but the mortgage felt so huge compared to my income at the time. I’m really glad now that I stretched to buy this place though it was a bit stressful at first.

How we feel about the condo now

We love: there is space for a king-sized bed in the master bedroom (though we don’t have one yet!), the master ensuite (including the separated toilet), great closet space, and space to barbecue outside. We love the area, especially its walkability. We love how much light there is in the living room. We love all of the little changes that we’ve made, with thermostats, overhead lighting, painting, light switches, replacing a pedestal bathroom sink with a vanity, and putting in quite close toilet seats everywhere. We love the cost, how small this mortgage is and how close we are to FI if we stay in this place. We love all the kitchen storage space. I love that it’s a place I bought on my own and substantially paid off by myself too.

We dislike: the kitchen, other than the storage space. It is beautiful for someone, but not for us. We cook far more than I did when I bought this place and there simply isn’t enough counter space to do the amount of cooking we do. Our kitchen has great square footage, but very little counter space. We have bought a couple of tables/carts to makeshift give us more counter space for appliances that we use regularly enough that they shouldn’t get put away in a cupboard. We don’t have quite enough personal space in our current floorplan – what was a mansion for one isn’t a mansion for two. The condo association won’t replace windows with energy efficient versions (and we can’t either without their authorization, which they won’t give), which is really frustrating when all of the light in our living room is discoloring furniture. The association has also been really poor at both following the rules and maintaining the building.

We’ve put a lot of work into reforming the space to improve its use for both of us, which has helped, but not quite enough. If we weren’t frustrated with the board, would we move over the kitchen and personal space restrictions or would we work with it to avoid moving and save the money? I don’t think we can properly answer that question.

What we looked for this time

Our basic ideal place items are the items we like about our current place, plus a total of three bedrooms (to aid in the more personal space desire), about 50% more finished square footage, an amazing, large house-sized kitchen and dedicated garage space. We’ve looked off and on starting about two years ago, during which time prices have gone up. Location again really impacts price and to be price conscious, we were trying to limit ourselves to at most 1.4x what our current condo is worth, which was requiring us to change neighborhoods. After finding enough places we liked the inside of, but not the neighborhood enough to buy it, we realized we needed to adjust our budget or find a way to become happier with our current place. We also realized that we are really particular about our color preferences (but generally aligned!) in that neither of us are a fan of super dark kitchens, for example. We generally prefer contemporary, modern minimalist decor.

We looked at a lot of different types of places this run. We looked at the occasional three bedroom apartment. We looked at single family houses built last century, townhouses built this century (and ones this decade), and single family houses built this century.

We ruled out three bedroom apartments because they’re hard to sell, difficult to even find, are generally only in smaller condo associations (which is one of our lessons from this place), and their floorplans aren’t often conducive to the additional personal space we were desiring since the secondary bedrooms are so small. They’re typically only about 10-15% larger than our current place and our goal was closer to 50%.

We were really attracted to single family houses because I ideally wanted a single level. (part of why I’ve loved apartments for so long!) The catch with the single level houses was that they weren’t always in walkable areas (or if they were, they were substantially less central) since that requires more land and more central places tend to be more dense. We also realized that we didn’t want the maintenance of a yard and there were some other cons to a yard as well. Newer construction single family houses tended to be about 2500-3500 square feet while the older, remodeled ones were more in the square footage range we were looking (1500-2000 sqft), but they often had weird layouts or parts with ceilings too short for my tall husband or no garage, which was really important to us for the secure bicycle storage. (To get a newer build in our desired size range, you need to

Townhouses (or attached houses, depending on your region) vary a lot in their features. Some have an HOA, some don’t. Some have shared garages, some have their own. Some don’t have garages. Some are really narrow, which I didn’t like! Some have shared maintenance agreements, but no HOA. With townhouses, we automatically ruled out any units that were a middle unit (we love our windows!), attached to too many units, shared a garage with any other unit, or had any shared maintenance agreements without an HOA. We looked at a new construction townhouse a couple years ago that was near us (so we liked the area), but the units were too small and narrow at three levels with only about 15% more square footage than we have now, which really just covers the stairways, meaning the rooms all felt tiny and we hated the colors they had picked. We have friends who own townhouses without HOAs or shared maintenance agreements but functionally share items such as utilities or garage space, which is its own frustration.

What we picked (!) this time

Their marketing worked because I saw a sign showing new construction townhouses near the grocery store one day. The first time I saw it, I thought we don’t want to move, we like our apartment. The second time, I looked it up and thought they were too expensive. The third time, I looked again and really, really liked one of the floorplans and that lower priced one wasn’t so bad of a price. (Which of course, that was not the unit we picked.) I forget at what point exactly I suggested my husband look at it too, but he also thought it was interesting. We actually had a hard time picking which floorplan we liked best because they had quite a few we liked! We drove by the area to see how far along they were and figure out where it was. It turned out to be in quite a good spot! And they were pretty far along with some units, which was helpful because we could walk through a unit with an outside and fully framed to get a feel for the space.

A few days later, we walked into one of the units that was fully framed and immediately felt like this could be home and could work! Both of us!

We picked an end unit! It has a garage, lots of windows, three bedrooms, an amazing, spacious kitchen that we are really jazzing up, a walk-in closet in the master bedroom and a separated toilet with a double sink in the ensuite. The garage has tons of space for working on bicycles and storing them, plus our car. The main entry is on the kitchen level, but the kitchen isn’t right at the entrance. There is a powder room on the kitchen level. (We saw so many places with no bathroom on the main level with the kitchen! That would drive me crazy.) The laundry is on the main bedroom level, which is great. (So many places put it on the garage level and I’m not interested in carrying laundry up two flights of stairs on a regular basis.) We also get to pick quite a few parts of the place: flooring, the neutral interior wall paint color, all of the appliances, countertops, cabinet colors, toilets, sinks, showerheads, faucets, speakers, light switches, networking equipment, etc. It’s been a bit exhausting and overwhelming, but we’re both really excited to pick things out together and to build a house we will love!

The price is the only catch here, which terrifies us a bit. This condo was a really great financial decision and I really hope this new townhouse doesn’t turn out to be a terrible one. I’m really glad that I bought our current condo when I did because that’s a big help in us being able to afford the new place comfortably versus our friends who are just buying places now and are picking different neighborhoods entirely.

We really struggled with how to figure out how much house we could afford. My previous formula of around 20% down and monthly cost should be comparable to renting didn’t seem like the right answer with how much further along we are in our financial lives. We, as usual, were far more conservative in how much house we could afford than any mortgage lender: we tried to keep our maximum house price at most definitely no more than our combined net worth and preferably below our current condo equity plus our cash and taxable account balances. The house definitely costs less than our current combined net worth and it costs about 10% more than the estimated second figure as of our estimated closing date in the future. We don’t want to empty our taxable accounts and want to continue to balance them with paying off the new mortgage by the time we are 40.

Those numbers all feel comfortable with our current household income and we ran the budget with about 60% of my husband’s current income, though the numbers are also definitely larger than what we had been paying. We definitely had to wait to buy a house until we were comfortable using all of our incomes as household to cover life going forward – houses are too expensive otherwise – and we really had to be solid on the no kids plan because otherwise we likely would have picked a very different place. At first we debated if we should lower our travel, giving, or personal budgets because of this. We immediately said no, we shouldn’t lower the giving budget because this townhouse is a discretionary expense, and we’ll keep it as is. We likely won’t contribute to our Donor Advised Fund at all in 2019 though and will push that out to 2020 so that we get the tax benefits of itemizing. The travel and personal budgets will continue to be under discussion since they’re more discretionary than giving.

Our new place costs about 2x what our current condo is currently worth, which feels like a very steep increase. We asked ourselves a lot of questions in deciding that was okay, primarily: how much does it push out our FI date and are we okay with that? Our FI date was near enough in the future that it really does feel like it’s getting pushed out, but buying the new townhouse should still keep our FI date in our 30s, which was a key for us. It feels so weird that we can afford this large number that I keep re-running the numbers just to verify that it’s okay.

Our new place won’t be ready for somewhere around a year or a bit more, which creates some interesting financial planning situations that I’ll talk through over the next year: When should we sell our current place? Should we sell it sooner and rent for a while? How much of our taxable accounts should we cash in versus save up more down payment in cash in the next while? How much should we put down on the new place before we sell the current place? How much should we re-invest versus apply to the new mortgage recast after we sell our current place? How does this affect our overall financial plan? How much cash should we keep on hand?

This feels like a really expensive and delightful planned for splurge and we are both super excited! It’s super fun to watch it be built and to go check it out since we aren’t really moving neighborhoods!

Readers, how did you decide how much house you bought or will buy? How does our formula this time feel to you?

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Reflections on Condo Ownership: 6 Years In

Rightsizing your space for your needs is so important. We have worried we didn’t have quite enough off and on. Without plans to have children, however, a large two bedroom apartment is really a great size. It’s forced us to change our packrat mindsets and get rid of stuff we don’t need, which is great.

In 2017, this condo cost just shy of $15,000 in housing expenses (mortgage interest but not principal, condo fees including special assessments, property taxes, condo insurance, electricity, and repairs). Despite minimal income from me in 2017, our housing expenses are still quite low compared to our income for the year. That’s the pro side of buying a reasonably priced place when your income is lower. We are currently budgeting about $2,000/month for our 10 year mortgage payment, condo fees, property taxes, and condo insurance, which includes a parking spot, in-unit laundry and a storage unit and sees about $800/month going to principal of the mortgage payment. For a similar rental apartment nearby, we would pay at least $3,000/month before even getting a parking spot. Purchasing this condo when I did was an incredible financial decision and has substantially influenced the wealth that we now have.

Although we didn’t meet my original five year payoff plan, we have made substantial progress on the mortgage over the years. The balance has dropped by $30,715.48 since I last made an extra payment in December 2014. We have now paid off 60.7% of the original mortgage. We refinanced to a 10 year amortization, which means we have at most 10 years left on this mortgage. We have a new plan to pay it off within 5 years from now and should see the balance drop to five figures sometime in early 2019. We also have enough in cash to pay off the current mortgage balance due to our cash holding preferences.

When you’re buying a condo, you read through so many documents. You get access to condo association meeting minutes for the last while, budgets, and nest egg (this is not the technical term, but the technical term seems to vary regionally) information. You do due diligence then. You have to keep doing that due diligence even after you’ve bought. Every year, you should get a budget, updated fee schedule, and nest egg information. You need to ask questions.

People complain about condo fees being “high”. Take a look at what your condo fees cover. Condo associations do need to pay for items that you don’t have to pay for when you own a house, such as filing a tax return and other fees, licenses and permits related to being a non-profit association, management fees, ridiculous costs of photocopying and postage, regular studies on the building’s nest egg, elevators, fire systems, and a phone line for the callbox. Never buy a house with an elevator – they’re expensive as all hell. The condo budget also covers building insurance (why our condo owners policy is so cheap), water, sewer, garbage, cable TV, cleaning of the common areas, outdoor landscaping, roof maintenance, plenty of plumbing, electrical, and repairs of many structures including windows. Those fees aren’t a waste of money, though they surely feel high when it’s one single chunk coming out each month instead of small dribbles.

I remember when I was looking at condos, everyone talked about how special assessments are bad, without much discussion of why they are bad or how they happen. In my experience, they happen when the people running the board don’t plan for the future, but also, when unexpected events arise. Our condo building is now older and needs a fair amount of work done in the next several years. The board in the past had chosen to never save money for future maintenance issues and to only raise money from homeowners each year for the maintenance that they planned to do that year. That turns into a problem when you need to replace the elevator, windows, roof, decks,and siding all at the same time, to the tune of a five figure amount per homeowner (about $25,000 at the maximum).

Thanks to some turnover, this year, the board in our building chose to raise our monthly condo fees by a bit more than 50% to start saving money for the future. They also did a small special assessment (< $1,000 for our portion), though presumably a larger one will be coming in 2019 or 2020 as we still have a low five figure amount to pay according to the last nest egg analysis.

The money part is a smaller portion of the issue to us – coming up with a low five figure sum to pay the special assessment when we've been spending so little on housing the last several years isn't a huge deal. The more frustrating part to us is realizing how much maintenance has been deferred (roof, elevator, windows, siding, as well as ongoing pipe issues – basically all of the major projects), how out of the loop homeowners not on the board have been kept, how little control we have over the general maintenance level of the building, and how much random power the board thinks they have. I spent 2017 on the Board, which increased our knowledge of what was going on, bringing with it, the stress of how chaotic the board was and how no one on the board really agreed with each other other than that all maintenance should be future owners' problems and not current owners' problems. The Board has, on multiple occasions, done work that affected our unit without notifying us or shown up at our door without notice to do work, both of which are against the actual policies the building has.

Well, that future is now. The maintenance is the current owners' problems because it needs to be taken care of.

All of this led us to open houses of small-ish single family homes. You can't, however, find a single family house as centrally located as we are. And then instead of being frustrated with the condo board not doing the maintenance, we would need to take care of it all. A house is a substantial lifestyle change from our current situation. A house that meets all of the requirements we laid out would end up moving us to a new neighborhood, increasing commutes, not necessarily come with a garage, be further from lovely walking trails, and its purchase price would be somewhat more than what we estimate we could sell the condo for at the moment. All to avoid being in a condo association. Is that worth it?

So in the end, which compromises do we want to make about our housing situation?

For now, we concluded that we should work on improving our cash position over the next few years to get ourselves in a position that we could buy without selling stocks, if we wanted to. The financial plan that I drew shows that we could save a 20-30% down payment on our ideal house's price over the next two years, depending on how much we choose to invest and how much income I add to the pot. Our current idea is to invest 1/3 of our available money for savings and save the other 2/3 for a house, which we can adjust depending on how we are feeling as the plan goes along. We'll also likely stick to our new five year mortgage payoff plan as a hedge of staying, it has a small impact on our overall cash flow, and we would roll any condo equity into a house.

Would I have still bought this place if I went back in time? Probably. I would have done more research into state law on condos though and more due diligence each year.

Readers, how have you decided to move in the past?

Adjustable Rate Mortgages adjust eventually: time for a new one!

If you’re a long-time reader of the blog, you’ll know that I’m a big fan of my Adjustable Rate Mortgage (ARM). When I bought my condo, I took out a 5/1 ARM with a 3% initial rate. I refinanced six months later to a 5/1 ARM with a 2.5% initial rate.

It’s now over five years later (almost six in the condo!) and I didn’t actually pay off the mortgage like I had planned I would. I/we have paid off just over 60% of the original balance though! Back in early June 2017, we got a letter from our mortgage company explaining how the reset would work, with what the interest rate was then. Then again in early December, we got another letter, which is when they committed to an interest rate and new payment for the year. That letter explained:

• The new interest rate: 4.125%
• The new payment: $614.48 (versus the old payment of $1,027.32)
• How much of the new payment would go to interest versus principal ($395.23 versus the prior $242.80 would go to interest)

This was a huge jump in interest, which we were not happy about. Yes, it was mitigated by the extra principal payments that I had previously made, but it still seemed unnecessary. I had been doing research haphazardly and had found a lender a few years ago that offered low cost refinances, which was really important with the fact that our mortgage balance is now in the low $110,000 range. It’ll take about 3 months to break-even, so we will only save about $500 on interest in 2018, but we’ll save about $2,000 in 2019, especially since our current mortgage would have continued to reset annually (and at today’s rates, it would go to 4.875% at the next reset). We concluded back then though that we should wait until the rate reset to refinance again and that we would probably go with a 10 year amortization.

Research was done, spreadsheets were made, and I eventually won my husband over that we should refinance to another ARM! I was pretty surprised he came on board with the ARM. He attributes it primarily to realizing what the mortgage balance will be in another 5 years on a 10 year amortization – it will sit around $60,000 and by then, we will likely have gotten bored of it finally and paid it off. We did ponder this quite carefully though because it seems once your mortgage balance goes under $110,000, you can’t get as good of rates any more, so that means that this is our last chance to refinance to a more favorable rate. When we first started looking, the 10 year fixed rate mortgage was 3.19% and the 5/1 ARM with 10 year amortization was 3.09%, so the fixed rate seemed like a better choice. By the time we actually applied though, the 10 year fixed rate was up to 3.59% and with a 0.5 percentage point difference, we pulled the trigger on the ARM!

We’ve also discussed our strategies for paying off the rest of the mortgage, after letting it go with “just” the required payments for the last 3 years. (I say just in quotes because they paid the balance down by $28,465 or just about $10,000 per year thanks to all of those extra principal payments I had made in the first 2.5 years.) We’ve tossed around two main ideas:

1. Paying it off when one of us receives a bonus that is more than the remaining mortgage balance
2. Paying enough each year to keep it on track to pay it off before the rate resets in 5 years, which works out to about $12,000 per year or $6,000 twice per year

If we let it ride for the remaining 10 years, don’t pay anything extra, and the interest rate resets in the worst way at each adjustment date, then we have $25,415.07 left to pay in interest, which is a huge improvement over the $300,000+ that I started the mortgage with back in mid-2012, so no matter what we decide, it doesn’t have nearly as huge of an impact anymore.

Refinance by Day

It turns out that applying for a mortgage when your annual salary income is more than the mortgage balance is really easy and quick to be approved! It was a relatively calm refinance, compared to my previous one that involved stressing over whether the appraisal would come back high enough to give me 30% equity! They didn’t even ask our condo association for any information beyond the building’s insurance records. I was really worried that they wouldn’t put both of us on the mortgage since I currently have no income, but that wasn’t a problem at all, likely because we are married and our loan is under 20% of the condo’s appraised value.

Day 1: Saturday of a long weekend, we applied for the new mortgage, right after filing our taxes. An exciting date night!

Day 2: Second business day after we applied, both of our credit was pulled and we got a request for my husband’s 2017 W-2, 30 days of paystubs for him, and our photo identification. We uploaded the documentation and signed some documents.

Day 3: The appraiser contacted me to set up a time to come out and measure and photograph our place.

Day 4: The appraiser came out. The loan was approved based off of our income, though still contingent on the appraisal.

Day 14: The appraisal came back and all of the contingencies on the loan have been removed.

Day 28: We received the preliminary closing disclosure, which contained the original numbers from the application.

Day 29: We were contacted by the title company to schedule closing, which we scheduled for the following week.

Day 30: We received the closing disclosure.

Day 36: Closing day! We signed 90+ pages of documents and gave them a check that covered our $295 closing fee, $98 in fees to pay off the previous mortgage loan, interest for all of March and a bit of April to the old loan company AND interest for most of April to the new loan company.

Day 42: Loan disbursement day. The old mortgage was paid off this day and has been marked as paid off on my credit report. It feels a bit anticlimactic to log into the online banking and see the mortgage paid off when a new one is still coming, with a different bank.

Conclusion

We don’t have to make a payment to the new mortgage company until June 1st, so we calculated how much we missed paying in principal since we paid all that interest at closing, but no principal. I’ve already made a $670.85 principal only payment to the new mortgage this month and we will make a similarly sized one in May, plus any interest we get back from the old mortgage, which should hopefully come in the next couple of weeks.

The other side benefit of this is that now both of our names are on the mortgage and the deed of the condo! Now my husband has a better response for when his friends sass him about this being “my” condo and not ours or his. (Yes, this means we settled up the equity in the condo so we both own half of it. It’s really nice to have a decent sized taxable account of my own now!)

I’m really glad I didn’t let myself be scared into a 30 year mortgage when I bought the place six years ago. I went from a 3% 5/1 ARM to a 2.5% 5/1 ARM and now to a 3.09% 5/1 ARM with a 10 year amortization. Thanks to reducing the amortization so much (from 25 years to 10 years), the rate we have now is really not that different from my first rate six years ago and the required payment is even lower than my first payment was ($1,205.79). I’m glad I didn’t take out a 15 year fixed rate mortgage six years ago – that would have left me with a $1,975 required monthly payment, which felt huge on my monthly salary at the time. Instead, I took out a 5/1 ARM with the same interest rate and made extra payments when I could, with my non-salary income.

 

Reflections on Homeownership: 4.5 Years In

 

Life was so busy this summer that I forgot to write my annual reflections on homeownership post, so here I am at 4.5 years in instead. I cannot believe that I am coming up on my five year anniversary of buying this wonderful condo come this spring! This fall marks 5 years since I started looking for a piece of real estate to buy.

There have been many discussions lately over the fact that in today’s hot real estate markets, you need to decide pretty quickly whether you are committed to spending several hundred thousand dollars on a particular piece of real estate. Yet, every week it seems we discover something new and fascinating about this condo in which we live.

Lately, one question has been “How much did I really think through this neighborhood selection?” Within a mile radius, we have what I thought was pretty much everything one needed: a post office, courier services, multiple grocery stores, a library, a drug store or two, a hair salon, barber shop(s), a gas station, park(s), and multiple restaurants. Yet, whenever we want to go to a restaurant, our first choices are never the local ones, which results in Uber’ing to another neighborhood. There is no takeout in the area that I like. (Is that a good thing or a bad thing? Probably not so bad for the wallet.) Our friend in the nearest proximity is a full mile away. It is pretty easy to get downtown and it’s easy for friends to park near us if they drive to visit. The commute to my job at the time was pretty good, as it is to my husband’s job, but my commute to campus is a bit inconvenient, as was my commute to my last job.

We finally finished the furniture tetris game I mentioned last time we talked about my ideas on homeownership. We now have furniture that we both love and that we chose together. We repainted many rooms. We’ve decorated together. It really solidly feels like our place. It is wonderful. Our home brings us joy again.

A realtor told me that they would list this condo of mine for ~45% more than what I paid for it. Two more years or so and that would run up against the $250,000 single capital gains exemption for home value increases, though we may not need to worry about that as we got married and that increases the exemption to a ludicrous $500,000. (I’m unsure what exactly the requirements are to qualify for the married exemption over the single one, however.)

In 2016, this condo cost a whopping $14,000 in housing expenses (mortgage interest, HOA dues, property taxes, condo insurance, electricity, repairs, interest lost from having the equity locked up, and tax savings).

I was pretty conservative in my calculations when I bought this place, which has now put my husband and I in the situation where our housing costs (including the full required mortgage payment of which only the interest is included in the $14,000 figure) are around 6% of our combined gross income in 2016. If you take out the principal portion of the regular payment, it’s even lower.

Perhaps I skipped the 4 year post back in the summer because we were super busy going to open houses every weekend. We were frustrated with our furniture tetris and unsure that we would ever figure it out, so we became convinced that we might need a larger place. This condo has two bedrooms and is relatively spacious in the lower 1000 sqft range, but we were not utilizing the space particularly well. With our then-existing furnishings, there wasn’t enough room for each of us to feel like we had personal space to pursue our home-based hobbies. The increasing market ranges mean that we would need to spend about 40-50% more than the value of this condo to get a three bedroom townhouse. We developed the mantra “Is this cheaper than moving?” (which is pretty much true for everything when your alternative is to spend several hundred thousand dollars) and we started trying new hypotheses. We hired an interior designer to help us refurnish the living room, who came up with ideas that we never would have. It was expensive, yes, but it sure was cheaper than moving. The designer asked us early in the process “How long do you plan on staying here?” and our answer was “So long as we stay in this city and don’t have children, quite possibly decades.”

Homeownership means that our lives revolve around our central home, rather than our home moving as our lives shift.

Hindsight on Years of Aggressive Mortgage Pre-payment

I have written in depth about my mortgage and my aggressive payoff plans. I really hope that you don’t follow in my example and treat your mortgage like a pants on fire debt emergency like I did because that was a huge mistake. Keep in mind that while aggressively paying down my mortgage, I also maxed out my pre-tax 401(k), my HSA when it was available, and my Roth IRA. I also maintained a healthy six month emergency fund and another six months across liquid stock index funds and bonds.

I regret aggressively paid down a 2.5% mortgage. Over the course of 2.5 years, I made $126,000 in extra payments. At my current expense level including my required mortgage payment, that is 2.6 years of expenses. Instead of hiding $126,000 in my Vanguard taxable investment account in the form of stock index funds or in a cash savings account, I hid it in my mortgage, from which the only ways I can extract equity are by applying for a HELOC currently priced at ~4.25% in advance of when I need the funds or by selling half of the condo to my husband over time.

Doesn’t this chart look motivating? I made such huge strides on eliminating that mortgage debt pretty quickly: within the first 2.5 years, I paid off exactly 50% of the original mortgage balance.

Why did I do this?

I was scared of my mortgage.

My original mortgage balance was 3x my gross base salary when I bought the condo. I had never had debt before (no student loans or credit card debt) and having 3x my base salary in debt was HUGE.

15 year fixed mortgage rates and 5/1 ARM rates were the same when I bought my condo. A decent portion of my income came in the form of deferred compensation and I didn’t want to lock myself into the payments of a 15 year fixed rate mortgage, so I thought that a 5/1 ARM was the perfect compromise – the rate of a 15 year fixed rate mortgage with a 30 year amortization. I didn’t trust in my then-income level enough to lock in the 15 year fixed rate payments. The difference between the two payments? $1,900/month versus $1,20o0/month when the lower payment caused me to see zero increase in my annual expenses over renting and I was stashing $2,000/month into savings on top of maxing out my pre-tax 401(k) and Roth IRA.

I didn’t understand compound interest.

My parents preached that debt is bad, anyone who carries debt is financially irresponsible, and no one should hold their mortgage or student loans or any other debt any longer than minimally necessary. I’m not really certain of their investing strategy because they think the stock market is too risky and you should invest entirely in bonds, real estate, cash. That’s a debate for another time. I started saving for retirement while I was in college (back in 2007), but all of that was put into certificates, not into the stock market. No one explained compound interest to me until I found the financial blogosphere back in 2011 and despite the number of advanced math classes I took in high school and college, I never figured it out either. You don’t have to save nearly as much for retirement if you frontload it in your twenties and thirties and invest in stocks. The Vanguard S&P 500 Index Fund, for example, has an average annual return of 10.83% since its inception in late August 1976. That’s just over 40 years ago. That is pretty much unheard of in cash returns! At least in my lifetime that I can remember.

I was scared of the stock market.

Yes, I had no comprehension of compound interest, yet somehow I was perfectly happy locking away money in retirement accounts for many decades and investing in stocks there, while being scared of investing in the stock market outside of my retirement accounts. I would rather get a guaranteed 2.5% return than incur the increased risk of the stock market that could possibly get me a 10.83% return. (For the record, Vanguard currently tells me that I have seen a 9.0% return over the last 6.5 years that I’ve had accounts with them or 9.8% over the last 5 years, which is when I started hunting for a condo.) I was so scared of losing money, of seeing my account balances go down, that I took the guaranteed 2.5% return instead.

Why was this a huge mistake?

Liquidity.

I’m sitting on a desire to take a sabbatical from my highly paid tech job and I’ve spent much of 2016 setting aside additional liquid funds in order to finance that. Had I not paid down the mortgage so aggressively, I would have already had that fund. Assuming I had invested the exact same amounts I paid extra on the mortgage into Vanguard Total World Stock Index Fund on the exact same days that I made extra mortgage payments, I would have had $148,924.73 in the index fund on 10/1/2016 and I would have been ahead. Now, the stock market has done reasonably well over the past 4.5 years, so in the following chart I also compare aggressively paying down the mortgage to aggressively saving in a 1% interest earning savings account:

Notice how the green line and the red line are pretty much on top of each other? Cash currently would be worse than aggressively paying the mortgage by a mere 2%. Investing has been at best 19% better than aggressively paying the mortgage and at worst, $215 better, thanks to a rising stock market over the last several years. You look at this second chart and wonder why I paid the mortgage so aggressively when I could have accomplished the same net mortgage balance within $2,000 by just keeping the extra funds in cash.

What does this math show?

If I could have been convinced to not blow all of the money I threw at the mortgage over the last 4.5 years, I would have been better off leaving it in a 1% savings account than throwing it at the mortgage quite so aggressively. That would have left me with significantly more liquidity.

In late 2011, I wrote a post entitled “What to do with extra monthly and bonus cash flow?” in which I explained several ideas I was tossing around:

1. Split the money up three ways into investments, pre-paying the mortgage, and saving for a 20% down payment on a house
2. Split the money up 50/50 into investments and pre-paying the mortgage
3. Split the money up 50/50 into pre-paying the mortgage and saving for a 20% down payment on a house
4. Invest all of the money
5. Use all of the money to pre-pay the mortgage and pay it off really quickly

My conclusion? “Right now, I prefer the first option since it still allows the extra funds to be diverted back to mortgage pre-payments or investments at any point. The fifth option isn’t very flexible and the fourth option is the riskiest.” Yet, that is not at all what I did. I went with the fifth option.

But then, once I bought a place, I picked a 5/1 ARM, set out to pay it off before the rate reset, which was absolutely a side effect of the fear of the rate resetting, and got addicted to the high of paying down the mortgage. It was so much higher than any high I have ever experienced from saving. I was really convinced that the mortgage would be paid off before the rate reset, before life happened in the form of my now-husband moving in, a job change that unexpectedly reduced my income, starting grad school, and getting married. I’ll talk later about how we plan to handle the mortgage going forward in our marriage.

Back in July 2012, I thought “I’m not the sort of person who would *not* take out a loan to invest. I’m the sort of person who would have more job security if I lowered my yearly fixed expenses by $14,469.48 than by having a larger amount of money in the bank.” I no longer believe that to be true and I can’t take back the large payments I made on the mortgage without doing a cash-out refinance or opening up and drawing down a HELOC. I was addicted to the fact that early on in the mortgage, I could pay $X in an extra payment, which was about Y normal monthly payments and shave off 2*Y regular monthly payments off the end. I got addicted to paying down my mortgage.

It’s all incredibly irrational. Personal finance is all so personal. But that chart doesn’t lie – I would have been better off keeping my mortgage payoff fund in cash.

Aggressively paying down my mortgage being my biggest financial mistake shows how much financial privilege I have. If you hate debt as much as I do, I am absolutely on board with paying extra on your mortgage, but not this all or nothing approach for several years like I did. That said, buying this condo is quite probably the best financial decision that I have ever made – by a stroke of luck, it has appreciated an average of 11% annually since I purchased the property. I didn’t even need to pay the mortgage any extra to get the benefit of that appreciation.

Cash could have been turned into extra mortgage payments later.

Liquidity is king.

Reflections on Homeownership: 3 Years In

It was three years ago this month that I bought my condo. I was pretty staunchly single then and life has definitely changed quite a bit, but the two bedroom condo that I bought has been able to evolve with my life, which is really great. We’re still working on the furniture tetris game from my boyfriend moving in. We at last know exactly what we’re doing with all the furniture, even if it hasn’t happened yet, and we’re planning on re-painting a room and have mostly picked a color. By the end of 2015, it should definitely feel like a shared living space rather than just my place. We both feel like we’ve finally found the right way to balance sharing living costs! I pay for all of the costs related to the condo, we both have separate insurance policies, and he covers a similar dollar amount in other costs, which right now works out to the internet and electricity bills, groceries, music services, small appliances and furniture, and eating out together.

I’ve stopped comparing whether renting vs buying is better because as of February, assuming I could sell my condo for the exact same amount I bought it for 3 years ago, buying was cheaper by $1,500. A realtor from the brokerage I used to buy my place contacted me in February and he mentioned that he would list my place at about 25% more than what I paid for it. Based on the emails I get about similar units near me, I think it’s up about 30% from purchase price now, but I’m going to leave it at 25% up in my net worth calculations. I am so, so glad I bought when I did! It has been such a slam dunk in terms of being cheaper than renting and the market is so much crazier than when I bought.

In 2015, I expect this condo to cost a total of $13,700 in housing expenses (mortgage interest, HOA dues, property taxes, condo insurance, electricity, repairs, interest lost from having the equity locked up, and tax savings. If we wanted to rent a similar place, we would be paying about $36,000 to $40,000 per year in rent between the two of us, so somehow I have a feeling we would have moved to a cheaper part of town if I hadn’t bought this condo.

In the last year, the mortgage hasn’t moved nearly as much as it was in the past. Last June, it sat at $152,167.66. Now? It’s at $138,600.73. Meaning I’ve paid it down by $13,566.93 in the last 12 months, about 2/3 of which came from the regular payments. I have 13.25 years left on the mortgage and have paid off 51.5% of it. Why has the mortgage paydown slowed down so much? I’ve been prioritizing other things like changing jobs, taking a couple months off unpaid, setting aside money for tuition, textbooks, and a larger emergency fund in planning for grad school, and contributing even more money to retirement accounts. It’s still on my radar, but I doubt I’ll make any substantial progress on it until 2016.

I don’t care that much about how much my condo has appreciated (that’s just icing on the cake) because our housing costs are pretty much dirt cheap for how much money we make. My housing costs are approximately 9% of my expected gross income this year, which ignores the fact that my boyfriend also makes a decent income and he also has pretty minimal fixed expenses, which means that we have pretty decent savings power between the two of us.

As much as I like to run the numbers on buying vs renting, homeownership is also a lifestyle choice and I’m so glad I chose it. It is a really good fit for my personality and my boyfriend’s and I could see us staying in this condo for many more years. Neither of us are big on moving and keeping fixed expenses low is pretty sweet for being able to spend more money in other areas of your life, like travel and/or putting more into savings and investments.

2015 Mortgage Payoff Plan

With my current savings calculations, I’ll have about $2,788.33 leftover if I pay off my mortgage at the end of 2015. My current plan involves making the following extra payments to stay on track:

February 28th: $18,710.71 – net of my signing bonus and savings from February paychecks

March 31st, April 30th, May 31st: $1,873.21 – savings from paychecks

June 30th: $25,873.21 – emptying my savings account down to $20,000 and savings from June paychecks

July 31st, August 31st: $1,873.21 – savings from paychecks

September 30th: $11,461.73 – a small bonus and savings from September paychecks with Social Security tax done with for the year

October 31st, November 30th: $2,542.42 – savings from paychecks

December 31st: $66,906.33 – savings from December paychecks, plus the proceeds of selling all of my ESPP funds (which my honest plan is to sell them as soon as the holding period is up, but I don’t know when that’ll be so for now I’m assuming I’ll just sell them all at the end of the year), emptying my savings account, selling my Series I Savings Bonds, and my taxable investments. I’m not completely sold on the idea of selling the taxable investments since I would then end up re-buying them at a higher cost basis not long after, so it would seem a waste of paying the capital gains taxes. If I don’t sell the taxable investments, then I’ll make a $33,252.89 extra payment in December (also leaving my savings account in place) and make a few more payments early in 2016:

January 31st (2016): $1,873.21 – savings from paychecks

February 29th (2016): $6,377.71 – a small bonus and savings from paychecks

March 31st (2016): $22,182.55 from savings from paychecks and emptying my savings account would leave $321.25 remaining, which I could then just pay off since there is $1,027.32 in the budget for the required mortgage payment :)

 

This is my only real goal for 2015 financially – paying off the mortgage. We’ll see how that ends up going. I’ll make my 2015 Roth IRA contribution in February from my savings account, but I won’t worry about the 2016 contribution until 2016. I’ll also contribute the maximum to my 401(k), contribute a bit to my Health Savings Account (my employer will contribute quite a bit, so I don’t “need” to contribute that much), and contribute to my Employee Stock Purchase Plan with a good discount, which I’ll then sell later to pay down the mortgage. I’ll come up with a more specific investment plan for the year later, but this is my general plan.

Readers, what is your plan for your finances in 2015?