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Save $389,000 with 4 Key Housing Decisions

For most people, the biggest expense is housing. And the bigger the house, the bigger the payments for mortgage interest, taxes, insurance, repairs, and utilities.

Depending on your home’s operating costs, you feel either joy or pain each month. I’m here to help you feel joy. How? By helping you get used to the idea that living in less house is good for you. You won’t get help from real estate brokers on this. After all, the more you spend, the more they make. Nor will your bank tell you to buy less. The larger the loan, the higher the interest payments (and if you can’t pay, the bank can always foreclose). Nor will any mainstream consumers help you into a smaller house. In their view, the best proof of anyone’s status is a large, well-appointed home. Why skimp when you’re out to impress?

Perhaps I could persuade you to buy into less house by showing some sample projections. These would detail the many burdens of housing overload. But future projections form no substitute for real life experience. So I’ve dug deep into my files and done some research. I’m happy to report I can now share the details of my own choice of residence. Enjoy.

I bought my house in October, 1993. It was almost new (built in 1992) and relatively small (1,631 square feet). It featured two bedrooms, 2.75 baths, and a two-car attached garage. Located in a rural area, it had its own well and septic system. There was no homeowner’s association, so there were no HOA fees. The purchase price was $215,000. I put $50,000 down and paid for the remaining $165,000 with a thirty year mortgage at 6.95%. My monthly payment was $1,092.22.

According to rules of thumb that prevail in the lending industry, I could have afforded to buy much more house. One rule states that buyers can afford mortgages equal to 2½ times their annual gross salaries. Another rule, the “Back-End Ratio,” claims that monthly debt payments can consume as much as 36% of the borrower’s monthly gross income. Yet another rule, the “Front-End Ratio,” asserts that borrowers can afford to pay up to 28% of their yearly gross income in principal, interest, taxes, and insurance (PITI, as in “how PITIful”).

I ignored all these standard rules of thumb, which in retrospect look more like “rules of dumb.” My problem with these rules is that they all frame the purchase decision in terms of “how much house can I afford?” That’s a question designed by the housing industry to increase their profits by saddling borrowers with maximum debt loads. Here instead is a far saner question: “how much house do I need?” This switch in focus makes all the difference. When I thought carefully about my needs and acted on them, I spent less than half of what the housing industry said I should. How much has my frugality saved me? The answers reside in my archives. Here’s a detailed summary.

Mortgage Repairs and Property   Gas and Homeowners Annual
  Interest Hardware Tax Electric Insurance Total
1993 $2,128.80 $400.00 $50.00 $2,578.80
1994 $11,336.00 $200.00 $1,709.00 $1,000.00 $300.00 $14,545.00
1995 $11,207.00 $200.00 $1,708.00 $1,000.00 $300.00 $14,415.00
1996 $11,070.00 $200.00 $1,767.00 $1,000.00 $300.00 $14,337.00
1997 $10,924.00 $1,250.80 $1,523.16 $1,100.17 $383.00 $15,181.13
1998 $10,822.00 $1,156.53 $1,530.18 $1,304.35 $436.18 $15,249.24
1999 $10,600.00 $57.14 $1,476.26 $1,194.02 $442.43 $13,769.85
2000 $10,420.00 $2,479.47 $1,747.28 $1,304.68 $466.00 $16,417.43
2001 $10,227.00 $921.17 $1,802.88 $1,798.46 $476.00 $15,225.51
2002 $10,845.67 $6,042.25 $2,123.10 $1,416.69 $503.00 $20,930.71
2003 $1,754.42 $1,044.53 $2,327.42 $1,752.19 $525.00 $7,403.56
2004 $2,521.37 $3,150.34 $1,996.50 $450.91 $8,119.12
2005 $7,283.58 $2,497.84 $2,005.05 $465.14 $12,251.61
2006 $4,592.53 $2,232.04 $1,851.84 $524.16 $9,200.57
2007 $6,134.18 $2,019.92 $1,773.19 $564.17 $10,491.46
2008 $1,349.01 $2,180.00 $2,007.30 $669.55 $6,205.86
2009 $3,539.70 $2,135.30 $1,551.00 $656.55 $7,882.55
2010 $1,540.93 $2,028.70 $1,519.12 $650.40 $5,739.15
2011 $1,569.19 $2,055.22 $1,491.75 $679.36 $5,795.52
2012 $2,246.69 $1,420.76 $1,320.60 $943.92 $5,931.97
2013 $1,245.21 $1,377.56 $1,365.25 $1,119.20 $5,107.22
$101,334.89 $45,574.28 $38,811.96 $30,152.16 $10,904.97 $226,778.26

This chart reports my home’s annual operating costs from October, 1993 through December, 2013—a period of more than twenty-one years. It’s beautiful, isn’t it? I’ve collected data from mortgage documents, tax returns, and old spreadsheets. All numbers reflect actual costs except for a few estimates for 1993-1996 (I wasn’t keeping spreadsheets back then). All reported figures reflect pre-tax dollars, which means I haven’t netted out deductions for mortgage interest and property taxes.

This chart reflects four key decisions. I’ll discuss each one in turn. See what you think.

Decision No. 1: Buy Only Half the House I Could Afford
Savings: about $227,000

Over the course of twenty-one years, the cost of operating my 1,631 square foot home has been $226,778.26. Had I purchased twice the property, I would have doubled my expenses. Sure, I could have acted like a typical mainstreamer and bought into more house. But I didn’t. A McMansion would have stunted the growth of my net worth. By limiting overhead, I always had enough money left over each year to fund tax advantaged accounts like IRAs, 401ks, and HSAs—and I always funded them to the fullest extent allowed by law. Bottom line: my house stayed small and my net worth grew fast.

Decision No. 2: Pay Off the Mortgage Early
Savings: about $95,000

As the chart shows, I paid off my mortgage in early 2003. This wasn’t something I  planned. While traveling for work in January, I missed a monthly payment. In response, the bank imposed a $50 late fee. When I called and asked for a waiver, not only did the representative refuse my request, he rubbed it in my face that I hadn’t paid my obligation on time. So I had him transfer me to the pay-off department. Once there, I learned it would cost $144,550 to retire the loan. This was a daunting sum, but I had enough money on hand because ten years earlier I’d ignored all the industry rules and bought a smaller home. Within two weeks, my loan was history. Of course, the bank made me pay its $50 late fee, but in the process it lost a steady stream of interest payments (at some point I would have refinanced with another bank, perhaps in early 2012 when rates slumped to 4%). I estimate that I’ve saved about $95,000 in interest costs since paying off my mortgage. Here’s the math.

Decision No. 3: Stay in Place
Savings: about $57,000

According to title company studies, the average single family home in Colorado changes hands once every 8.9 years. Real estate agents must know this statistic. A few years after I moved into my house, my agent began calling me to ask if I was interested in “upgrading” my home. Like a waitress trying to turn a table, she was trying to plant the seed for another commission. I told her I wasn’t interested in any “upgrade” because I was comfortable where I was (that didn’t stop her calls, though). So while a mainstream homeowner would have moved twice in twenty-one years, I stayed put. By doing so, I saved on broker fees, moving expenses, and closing costs. Here’s the math.

Decision No. 4: Skip the HOA
Savings: about $10,500

HOA fees vary widely depending on how many services and amenities the association provides. I figure at less expensive subdivisions, these fees cost around $500 per year. So I saved about $10,500 by buying a house that wasn’t located within an HOA.

*   *   *

I love the clarity of hindsight—especially when decades of data can be reduced to a single chart. Looking at the twenty-one neat rows of numbers above, I can see the power of frugality in all its beneficent glory. By thinking for myself and ignoring the self-serving rules of brokers and bankers, I saved hundreds of thousands of dollars. So the next time you shop for a new home, consider a tip that’s based upon a well-charted course. Instead of taking industry rules at face value, brighten your future by ignoring them. Buy only as much house as you need. It worked for me; it can work for you.

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5 Responses to Save $389,000 with 4 Key Housing Decisions

  1. Lisa Van Gemert May 5, 2014 at 11:50 AM #

    I love this! Our kids are grown and have left our house, and we’ve considered moving, but we keep coming back to this math. I love this math! Every day you stay put is money in the bank. Nice to consider.

    • A Noonan Moose May 5, 2014 at 11:57 AM #

      Thanks Lisa!

  2. gcai October 13, 2014 at 11:30 AM #

    Agree 100% with #2 and #3 – #1 I waffle on and #4 doesn’t really exist where I live (Canada) – aside you seem to have many Canadian followers Moose:)

    #1 – I actually bought more house than needed mainly because we were newly married and were intending on a family – did the math and figured that moving was going to cost at least $30K (this was 30 years ago!) so looked in the our target house price range plus the $30k – one of the best decisions ever – still in the same place and intend at least a few more years here. Note: we did NOT buy the maximum house we could have afforded so in that way I guess we went down market.

    #2 – yes kill that mortgage ASAP, especially in Canada – no mortgage income tax deductions so the interest cost is after tax
    – we had a variable rate mortgage (US = ARM) – one of the first in Canada btw it was number 75 at BMO- and this was when prime was 14% – however it had unlimited prepayment privileges ($100 minimum) and best of all no buyout costs – so it became the intense focus of killing it off, as we had substantial unallocated cash flow at that time and have a risk free return of what ever prime was (it hit a peak of 18% I recall) times our marginal tax rate (remember after tax up here) – total no brainer – killed the mortgage in 25 months.

    and as for number # 3 – still in the same place 30 years later and the capital appreciation (tax free up here) has been great – plus I got to live basically on the operating costs (utilities, property taxes and maintenance (almost all DIY)) !

    • A Noonan Moose October 13, 2014 at 11:57 AM #

      Fantastic! Thanks for improving the post with such a detailed comment gcai!

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