I just heard an ad on the radio offering a 3.99% mortgage. That makes sense to me. Where I’m confused is when the ad then mentions a 4.22% APY immediately after that. What does it mean? What interest rate will I actually be charged?

First, let’s break down the terms.

APR, or Annual Percentage Rate, defines the interest rate that is charged to the principal of the loan. You will be charged a total of 3.99% interest on that loan over the course of a year.

APY, or Annual Percentage Yield, describes the percentage of the principal of the loan that you’ll have to pay over the course of the year.

The trick here is to understand that we’re talking about two separate and somewhat different things. An example will illustrate this difference clearly.

An Example: Quarterly Interest
Let’s say you have a loan from a bank that has 3.99% with interest that is compounded quarterly. That means that every three months, your loan is charged 1/4 of the interest for the year, which would be 3.99% divided by 4, or 0.9975% interest.

Let’s say your loan has a balance of $100,000 at the start of the year, to make the math more clear.

At the first quarter, your $100,000 loan will be charged 0.9975% interest, or $997.50. This gives your loan a new balance of $100,997.50.

At the second quarter, your loan has a balance of $100,997.50 and that balance will be charged 0.9975% interest, or $1,007.45. This gives your loan a new balance of $102,004.95.

At the third quarter, your loan has a balance of $102,004.95 and that balance will be charged 0.9975% interest, or $1,017.50. This gives your loan a new balance of $103,022.45.

At the fourth quarter, your loan has a balance of $103,022.45 and that balance will be charged 0.9975% interest, or $1,027.65. This gives your loan a new balance of $104,050.10.

Over the course of a year, your $100,000 loan turned into $104,050.10, earning $4,050.10 in interest. That’s 4.05% of the balance of the loan, which is your APY.

Thus, this loan has a 3.99% interest rate, but a 4.05% APY.

In the United States, APY is legally defined as being the rate achieved when using daily compounding. In this case, that would give you an APY of 4.07%. So, where does the rest of that 4.22% come from?

The Other Parts of a Mortgage
What the radio ad isn’t telling you is that in order to get that 3.99% interest rate, you’ll have to pay some fees and possibly a discount point or two. These are up-front costs that add to the balance of the loan.

In this specific case, the fees and points will add enough to the balance of the loan to raise the APY from 4.07% to 4.22%. In other words, the total of the fees and points will be somewhere around $165 on a $100,000 loan, or about $817 on a $500,000 loan.

These fees will be rolled into the true APR that the lender has to give you (not that nominal rate given on the radio that doesn’t include these fees), and it’s that APR that you should be paying attention to if you’re intending to live in the house for a long time.

Another point worth considering is the fact that banks are allowed to advertise interest rates as much as 0.125% lower than what they’ll actually give you. In theory, this is done to allow for market fluctuation between the time you hear the ad and the time you sign on the dotted line, but lenders often push this so that they can advertise with seemingly incredible low rates.

What’s the moral of the story? Two things.

First, shop around. Getting a mortgage is a major financial decision, one that will have an impact on you for a long time. You owe it to your finances to shop around.

Second, get the APR on paper. Remember that APR takes into account most loan costs (points, most loan fees, mortgage insurance), but doesn’t account for some other charges, like application fees, title insurance, title examination, appraisals, document prep, and so on. You’ll likely have to come up with some additional cash for those when you move forward with the loan.

No matter what, never take out a mortgage based on an advertisement. This is far too important of a decision to do it based on a radio ad. Spend the time doing your homework and shopping around first, even if your favorite radio host is recommending a particular product.

My husband and I are sitting on a thirty year mortgage (with twenty six years left to go). We still owe $330,000 on our home. A week ago, a very similar home to ours two blocks away sold for $220,000, so we’re under water by at least $100,000. We are thinking of just walking away from this mortgage and renting an apartment for a while until our credit clears up. What do you think?

First of all, there’s a strong personal moral element to this type of decision. Is it morally wrong to walk away from a mortgage? You’ll get strong, impassioned answers on both sides of the question. Some will argue that if you make an agreement with another entity, you’re obligated to stick to it to the best of your ability. Others will argue that banks know what they’re getting into with a mortgage and that foreclosure is a risk they accept in the agreement, so you’re just doing something within the bounds of the agreement.

As with most morality questions, I can’t tell you what to think. I personally feel walking away from your agreements when you have the capacity to fulfill them is morally wrong, akin to lying. If I were a lender, I would never lend to someone who walked away from a mortgage because I would simply view them as too big of a risk. But I’m not a mortgage lender.

Aside from that moral concern, though, is it really a good financial choice? I think it can be, but it depends on the other choices that the person makes.

First of all, walking away from a mortgage will drop your credit rating by 150 points and it will take several years to recover. Such a drop has a huge impact if your credit is good, but a much smaller impact if your credit is already bad.

What kind of impact? It will become incredibly difficult to get a car loan or another mortgage with any sort of competitive interest rate. Lenders will look at your credit score and if your score is low, they won’t offer you a prime loan (if they offer you one at all). You have to accept that you’ll either be paying for cars and homes in cash for the next several years or you’re going to be taking out loans with incredibly painful interest rates and down payments.

If you’re going to do this, your best approach is to make sure you have housing and automobiles lined out for the next several years before your credit collapses. If you’re going to get a mortgage on a second home, do it now and get a fixed rate mortgage while your credit is still good. If you’re going to rent, get your rental agreement set up now before you walk away. If you’re going to need a car in the next seven years, you might want to make the move now (unless you’ll have the cash to do it later).

Another impact is that many other services use your credit ratings to determine what to charge you and whether to do business with you. Insurance is one example of this – most insurance companies regularly do a “soft pull” of your credit and use declining credit as a reason to raise your rates. Many upscale renters will do the same thing and not rent to people with poor credit, which may limit the places where you can rent your housing. Potential employers often pull your credit (I’ve had two employers in the past do this) and use that as an element of their hiring decision, often leaning towards people with good credit over people with poor credit. These are all serious additional costs of walking into foreclosure.

In the end, I don’t think Kelli should walk away from her mortgage as a first response. She should try several other avenues first that would preserve her credit and perhaps even allow her and her family to remain in the home.

First, I’d simply talk to the lender. Explain your situation and discuss options available to you. It’s often easier for a lender to just refinance with you (sometimes even removing some of the principal) than it is to put the homes in foreclosure. Many lenders are currently focused on refinancing in this way rather than taking on more foreclosed homes, so it’s certainly an option.

Second, I’d look at the extra financial costs of what will happen if you do foreclose. Run the numbers carefully here. Include all the extra costs – a serious bump in your insurance rates, for example – and make sure you also include some estimate of the cost of the risks mentioned above – the extra cost of a new car or the challenge of finding a rental home or a new job. Those things have serious financial costs if they occur – or they might have no cost at all. A good way to appraise it is to figure out the cost if it does happen, then estimate the odds of it happening. So, if something has a cost of $100,000 and has a 40% chance of happening, it’d be a $40,000 cost.

You might be surprised to find that staying put is the best option, even if you happen to be underwater in your mortgage. If you still find that abandoning is the best option. then it becomes the moral question discussed above – and moral questions are things we all have to decide for ourselves.

My wife and I have been running our own home-based business for three years now. We rent and work out of a smallish 2-bedroom apartment in the very expensive SF Bay Area. One of those bedrooms is an office that we both share as an office. We spend day in/day out working together in this small space.

About a year ago we realized we could afford to buy a house in an outer suburb of the Bay Area now that the prices have come down. After a year of looking, we’ve now found ourselves in contract on a wonderful 4-bedroom house that we love. However, it’s at the top of our price range–about 30% of our income would go to the mortgage.

I realize that typically this would not be a good idea, as at least at the beginning, we would be stretched. However, the biggest reason we are looking to move right now is to gain more space so that we can grow our business. Currently, we feel like we’ve reach critical mass with what we can do in our small office. With this house, we feel it could be an income-generating asset for us in that it will afford us more space for us to grow our business and make more money. I very much feel like if we had more room to operate and a more official dedicated workspace, we could increase our income significantly.

Most financial advisers I’ve been reading say to buy a small, inexpensive home. This would be fine for us if we didn’t both work from home, but we simply need more space to operate our business.

Of course we could buy a small house and rent an office somewhere, but I’ve done the math on that too, and when you combine smaller house mortgage with separate office rent, the cost is essentially a wash.

The other option would be to rent a bigger house. Rents in the Bay Area are still high, and we would spend about $200/mo less doing this. I know every bit counts, but I don’t know if this savings outweighs the emotional benefits that go with working and living in a home that we own. We also want to start a family and are ready to put down roots.

Finally, we could ditch the Bay Area entirely and move somewhere much cheaper, such as Oregon. While there is some risk in leaving a few of our local clients behind, we could do this with not much risk, as most of clients are all over the country. This option would put us where we want to be financially, but as I mentioned, we want to start having kids soon, and most of my family is here in the Bay Area. Moving away seems daunting.

First of all, your emotional argument is clearly in favor of buying the home. Most of the argument you lay out here is one that makes the case for buying above all else.

Most of the time, regardless of the dollars and cents, people operate with their emotions. They’ll find ways to make the dollars and cents work. In fact, that’s when personal finance really cooks – people spend time soul searching, discover the key things they really want, and then stop wasting money on the things that don’t really matter to them.

In this case, it’s clear that the home matters to you. What things are less important in your life that you’re willing to trade for it?

The maintenance costs of home ownership are far higher than renting. When you buy a home, you no longer have a landlord to call when a toilet breaks or a hot water heater goes out. Instead, you’re calling a repairman – or doing it yourself – and all expenses come out of your pocket. You also have lawn maintenance costs. You also have homeowners’ insurance. You also have property taxes. You also may have association fees. Those can be enormous – they can be enough to break the back of someone who thinks they can afford home ownership.

Beyond the financial cost is the time cost. Suddenly, you’re spending time mowing the yard. You’re spending time changing filters and doing maintenance work on your equipment. You’ve also got more space than you had before, so you’re spending more time cleaning.

Paying these costs – in addition to merely writing the check for your monthly mortgage payments – will exact a toll on your life as you currently live it.

In exchange for that toll, you will gain other things – the room to grow your business and the room to house your family.

It’s an emotional decision that you have likely already made. There are just two things I would suggest seriously evaluating before you actually make the leap to buy.

First, do you have an adequate down payment? This is important for two reasons. First, if you don’t have the financial fortitude to save up that payment while living in a rental unit, where the costs are much lower, you may not have the fortitude to handle the costs of home ownership. Second, without a 20% down payment, you’ll be paying a higher interest rate and/or mortgage insurance costs.

Second, do you have a written, clear plan for how you will make ends meet and how you will utilize that space to grow your business? These both may be nebulous concepts for you right now, but if you buy, they will become your reality. Spend some time actually planning for both of these events. Make a home budget. Make a business plan. Make sure you can actually do this with some breathing room (and an emergency fund) intact.

Yes, this seems like a lot of planning that takes away the “fun” of buying a home. Without that planning, though, you’re quite likely to find yourself losing that very house in a few years. A little planning now makes your dreams come true.

On one bright spring day, my wife and I were visiting three homes for sale on the same block that were all having open houses at once. None of them really struck our fancy, but we did notice a fourth house on the corner that was for sale at a price about $60,000 over our price range.

We toured that house. We fell in love with that house. Even now, it’s really obvious to both of us that it was our favorite house that we toured.

But it wasn’t the house that we bought. We ended up with another home that was within the price range we had originally set.

It was a difficult choice. It was a choice that, if we had entered into the home-buying process with less planning and less self-control, probably would have turned out differently. It would have been quite easy to simply give into our desires and buy that house, but if we had, we would have been drowning in mortgage payments now. It was also a choice that many people made differently – and that difference in choice caused the housing bubble and a giant mountain of foreclosures.

It is so easy to just let our emotions take control when we’re making a major buying decision. It would have been so easy for us to walk into that house, tour it, smile at each other, recognize that we could probably make the mortgage payments, and then sign the papers.

But that one choice puts us on a different life trajectory. I would have been much more worried about leaving my full-time job. In fact, I probably would have wound up choosing it instead of choosing a writing career – and that would have meant the closing of The Simple Dollar. I would have had less time to spend with my kids – instead of taking them to the zoo or the Science Center of Iowa or just spending afternoons with them at the park, I would have been behind a desk somewhere. We would have had more money stresses on our marriage. We would likely have never chosen – or even considered – having a third child.

Yes, I would have loved to have that house. Yet, when I step back and look at all the good things that happened in our life because we stuck to the budget, I wouldn’t trade any of it for that house.

A house is not a home, after all.

The next time you’re about to make a major purchase, whether it be a home or an automobile or even just a high-end home electronic device, and you’re thinking about jumping outside of your budget for that purchase because you fell in love with somethng that dazzled you, step back for a moment and ask yourself about what you’d be giving up for this thing. Would you be tied even more to your job, at the mercy of your boss? Would you not have the financial resources to take advantage of opportunities that came your way? Are you going to have to push yourself more to earn more, taking away time from the other things you value in life?

On the other hand, if you simply stick to your budget and get a slightly downscale model, you gain the freedom to choose the life you want. What’s better, after all? The 2,000 square foot home that you have time to enjoy, or the 2,800 square foot home that requires you to work tons of extra hours?

Houses and cars and televisions and boats are just stuff. Don’t sacrifice your life for them because you want them in this moment.

This is a stage that I see us approaching as time goes on. We’re not quite there yet, but we’re close. Right now, I’m trying to knock out my final student loan (it’s a doozy), and then start focusing on my home mortgage.

Our home mortgage payment is just shy of $1,100 – that doesn’t include homeowners’ insurance and taxes, so when we get the house paid off, we now have $1,100 more a month to spend on whatever we choose.

I, for one, would roll that extra amount directly into savings. I’d simply change the automatic payment to be an automatic transfer into a savings account of some sort – perhaps an index fund. Then I just keep living life as normal until one day that account is full of cash for something great. For us, that “something great” is our long-dreamed-of house in the country, with a small barn out back, a big garden, and a chicken coop.

Is It A Crazy Goal?
My parents recently finished off their home mortgage after paying on it for thirty years. They’re pretty much debt free at this point for the first time in their marriage. So, for me, I have a great example in front of me that you can get rid of all of your debt. However, many people don’t have that example and it seems like an impossible goal. On page 186:

Anytime I speak about paying off mortgages, people give me that special look. They think I’m crazy for two reasons. One, most people have lost their hope, and they don’t really believe there is any chance for them. Two, most people believe all the mortgage myths that have been spread.

The “hope” factor is something I see popping up over and over again whenever I talk to people about money. Many people I talk to view their mortgage as simply a fact of life. If they were ever in a position that their mortgage became really easy to pay, it wouldn’t be time to double-up on the payments – no, no, it would be time to upgrade their homes.

I think this points to a prevalent mindset out there when it comes to debt. Many people simply view debt as a way to leverage the lifestyle they want now. It comes from a lack of patience – people don’t want to live in a small apartment watching their savings grow slowly when they could just get this loan and be in that house now – even if it costs them hundreds of thousands of dollars.

I think patience is one of the biggest tools a young professional can have when it comes to his/her money. Just wait for a while – you’ll be way better off over the long run.

The Tax Deduction Myth
Owning a mortgage just to get a tax deduction is something of a fool’s game, as outlined on page 187:

If you have a home with a payment of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would, in fact, lose the tax deduction, so they myth says to keep your home mortgaged because of tax advantages. [...] If you do not have a $10,000 tax deduction and you are in a 30 percent tax bracket, you will have to pay $3,000 in taxes [...] According to the myth, we should send $10,000 in interest to the bank so that we don’t have to send $3,000 in taxes to the IRS.

All the tax deduction does is lower the effective interest rate you’re paying on your home loan a little bit.

In fact, Dave doesn’t even make the case as well as he could. If you’re using your mortgage interest on your tax return, that means you’re foregoing your standard deductions because you have other things to deduct. So, take our situation – we have two adults in our home. Our standard deduction in 2009 is $11,400. If we choose to itemize our taxes (which we’d have to do to deduct our home interest), we have to have more than $11,400 in interest on our home mortgage (or other deductible expenses) to beat what we would already get.

So, if your only significant deductible expense is your home mortgage – and your mortgage isn’t gigantic – you’re not actually gaining much of anything at all in terms of taxes.

The Risk of Having a Mortgage
Another disadvantage of holding on to a mortgage is the risk – if something goes wrong in your life, it’s a lot better to not have a mortgage payment than it is to have one. On page 189:

If I own the home next to you and have no debt, and you (because of your investment adviser guy) borrowed $100,000 on your home, who has taken more risk? When the economy moves south, when there is war or rumors of war, when you get sick or have a car wreck or are downsized, you will run into major problems with a $100,000 mortgage that I will never have. So debt causes risk to increase.

I think this is a vital, overlooked point. Having a mortgage – or any debt – is a type of risk. You’re gambling that your future will be stable, no different than putting cash down at the roulette wheel. With a mortgage, your life is simply more at risk than it was before.

I have two young children at home. Risk stares me in the face every day. I encourage our children to push their limits a little, but I still stand very close by when my three year old grabs onto playground gymnastics rings and hangs there. Having a mortgage is something like telling my three year old to grab the rings for the first time while I stand far away. Sure, he might hold the rings for a while and then drop without a problem, but my distance increases the chance of a hurt elbow or a broken arm.

The risk of owning a fat mortgage is much like the risk of putting your child on a bike for the first time and shoving them down the sidewalk. Sure, they might ride like the wind, but they might also fall flat on the pavement. Instead, it’s better to do a bit of planning (like saving for a home) and then let go when they’re ready (like when you have enough saved up for a house). No broken bones, no broken lives.

Thirty Years Versus Fifteen Years
Many people advised me to get a thirty year mortgage instead of a fifteen year mortgage, arguing that I could make an extra payment each month and get the same speed benefit of a fifteen year without the risk of the larger minimum payments. That’s a bad idea because something will often come up, as is spelled out on page 190:

A big part of being strong financially is that you know where you are weak and take action to make sure you don’t fall prey to the weakness. And we ALL are weak. Sick children, bad transmissions, prom dresses, high heat bills, and dog vaccinations come up, and you won’t make the extra payment. Then we extend the lie by saying, “Oh, I will next month.”

A higher minimum payment is actually a good idea, because it forces us to work with what we have left over. A lower minimum payment means that we just have more to work with – if that extra payment isn’t required, it’s easier to argue that something else is more important for the moment.

With expenses like prom dresses, heat bills, bad transmissions, and dog vaccinations, you can always find ways to make it work. If you have a decent emergency fund, it shouldn’t be too tough at all.

What do you get in exchange for these little sacrifices? Your mortgage goes away in half the time. You find yourself free of that load much, much faster. Plus, the interest rate on a fifteen year loan is lower, meaning your payments won’t actually be anywhere close to double what they would be for a thirty year mortgage.

Home Equity Loans Make Poor Emergency Funds
One common question I get from readers is whether or not they should take out a home equity loan to deal with some problem in their lives. My feeling is that if you’re in that situation, you need to rethink about your emergency fund. Sure, the home equity loan might be the right solution for right now, but if you’re living your life in such a way that it has to be used, you might want to rethink how you’re managing your money.

On page 197, Dave dips his toes into this idea:

Even a conservative person who doesn’t have credit card debt and pays cash for vacations can make the mistake of the HEL by setting up a loan or a “line of credit” just for emergencies. That seems reasonable until you have walked through an emergency or two, and you realize very plainly that an emergency is the last time you need to be borrowing money. If you have a car wreck or lose your job and then borrow $30,000 against your home to live in while you make a comeback, you will likely lose your home. Most HELs are renewable annually, meaning they requalify you for the loan once a year.

Think of it this way. You’re using your home equity loan as an emergency fund. You lose your job, so you take out $30,000 to live on – it’s fine, since you have tons of equity in your home, right? Well, the end of the year comes and you still don’t have a job. The bank says, “Sorry, we’re not renewing your loan,” and they call in the $30,000. You don’t have it. They repossess your house. Any equity you built up is gone.

An emergency fund needs to be cash, period. If it’s not liquid or it puts you at risk to get it, then it’s not an emergency fund.

Our local credit union has hinted to us that we should have a home equity line of credit. I have torn up every single offer they have sent to us. I’m not interested in that kind of risk.

Paying Cash for a Home Is Impossible
I agree with Dave that it is indeed possible to pay for your home with cash. So why don’t people ever do it? It’s not easy. It’s a lot harder to go this way than it is to just go get a mortgage. On page 198:

Paying cash for a home is possible, very possible. What’s hard to find is people willing to pay the price in sacrificed lifestyle.

I think the problem is that many people view their home as more than just living quarters. They view it as a status symbol – they need a house they can show off to family and friends. It’s more impressive to live in a house than an apartment, isn’t it? So, if you back up and think about it, you pay hundreds of thousands of dollars in interest, home maintenance, and other costs – not to mention time – in order to impress others.

Again, the only people impressed with such things are people that you never speak to, who don’t matter in your life. They look at you and admire your home, but they don’t build a relationship with you. The people you build lasting relationships with like you, not your house.

We chose to buy a home with a mortgage. I don’t regret it, but if I had to do it all over again, I would have looked intensely for a great rental situation instead (since we originally lived in an apartment too small for two toddlers and two adults – we had to move) and kept saving.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the twelfth chapter – Build Wealth Like Crazy.

Whatever it is, it’s big. You could tackle it yourself, but you’d be working on it after work for weeks, losing many, many hours that could be spent on other activities. So you either dig into the drudgery yourself, put it off, or, worst of all, hire someone to do it.

I suggest a different route.

A few years ago, a close friend of mine decided that something needed to be done about his cracked driveway. One Saturday, instead of putting it off yet again, he pulled a big grill around to his front yard, iced up some coolers with a bunch of tasty beverages, and invited a bunch of friends over to help. They all worked together getting the old, busted cement out of the driveway and adding a fresh new batch. One friend was a carpenter who took charge of the operation, but more than a dozen guys offered up their labor, knocking out chunks of concrete, carrying things out of the way, putting forms in place, and smoothing freshly-laid pavement. Along the way, they enjoyed freshly grilled brats for lunch and some excellent thick steakburgers for dinner.

In one day, my friend got his driveway refinished with no labor costs – his only expense was a lot of beverages and a fair amount of food. Everyone else there got two free meals, a lot of free beverages, and an afternoon spent outside with a bunch of fun people.

How can such projects work? In order to make it happen, you need to plan ahead in several different ways – but the extra planning and effort will really pay off later. Here’s what you need to do.

Always volunteer to help with projects that others are doing. If a friend of yours needs a hand with a project, don’t hesitate to burn an afternoon helping to put up a deck, assemble a shed, re-shingle a roof, or install a driveway. Even if you don’t believe you have any skills to offer, there are always things you can be doing, even if you’re merely a gofer or you wind up being the food preparer. Every task that you can help with helps the entire project move forward.

Give some advance notice. Don’t just call people on the morning you plan to get started on the project. Instead, give them a couple weeks’ notice at least, and keep track of the ones who seem at least interested. Let them know that there will be plenty of people, food, and beverages – don’t just focus on the work.

Plan out your work. Know exactly what your project is going to entail. Have all the supplies you’re going to need on hand well in advance of the working party. Have a plan in place that details what needs to be done and in what order the tasks need to be accomplished.

Be organized. On the day of the working party, get all of the supplies you’ll need out and organized before anyone else arrives, so that they can easily be found when work begins. Do some of the early steps yourself – measuring, marking, and so forth. This way, when people begin to arrive, the real work can begin.

Don’t be afraid to ask for extra help from experts. If you have a friend who is skilled at carpentry, don’t be afraid to ask for a bit of extra assistance and advice from this person. Invite them to come over earlier – and don’t hesitate to give them some gift of appreciation if they go beyond what you might reasonably expect from them.

Have a wide array of beverages available – and plenty of them. Water and sodas are good choices for earlier in the day – beers are usually good choices for the end of the day. If you’re unsure what you should get, ask people when you call them. Make sure you have more than enough.

Keep the beverages cold. Take empty milk jugs, fill them 2/3rds full with water, and fill your freezer with these jugs in the week before the party. The day before, ask around for coolers to borrow – try to get two or three of them. That morning, take out the jugs, smash them, and fill the coolers with beverages and ice. Make sure you don’t run low on cold beverages – on a warm day where people are outside working, it’s vital that you keep plenty of cold beverages available for them.

Thank everyone that shows up, both when they arrive and when they leave. This is simply good manners and goes a long way towards ensuring that people don’t leave with a bad taste in their mouth. Thank people for coming as soon as they arrive, let them know where the beverages are and when/where the food will be, and brief them on what’s going on.

Work hard. Never stand around while others are working on your project. Be involved at all times – and if you’re not directly involved, be doing something else clearly productive or purposeful. There’s no better way to sour the mood of a working party than to have the host standing around while other people are building his or her deck.

Have someone focus on food preparation. Although you’re the host, your role should be out there working as hard as anyone else on the work project. This means that, for food preparation, someone needs to give a hand. One great tactic is to simply ask someone appropriate – your spouse is a good choice, as is someone who might have a physical handicap that makes it possible for them to prepare the food, but difficult to engage in the work. Arrange this ahead of time so that it’s not a concern.

Make it fun. Have a radio available, and tune it to something that many of the people will find interesting. Growing up, when my father would have events like this, he would make sure that the radio was tuned to a baseball game of one of the local teams – this is actually a pretty good suggestion. At the same time, keep conversation going – and keep people talking. Introduce people to each other if they don’t know each other well.

If you’re called later by someone who helped you, help them. These types of exchanges are often the beginning of a long-term relationship that will be beneficial for both of you.

A working party can be a great way to build friendships, have fun, and get a major task accomplished at a very inexpensive rate – but it does require a lot of work and preparation. Good luck!

I grew up in a home that measured about 850 feet of floor space. It was a three bedroom house, though one of the bedrooms was extremely small. Growing up, I shared a bedroom with both of my older brothers for several years, then eventually inherited that room as my own as the older ones moved out.

We currently live in a home that’s very close to 2,000 square feet. It’s far larger than the home I grew up in – it has four bedrooms, for one. Our two children share a bedroom together – there’s also the master bedroom, an office, and a guest room.

Both houses have a kitchen, a living area, a dining area. Both houses have plenty of room for two adults and two kids to live.

What’s really the difference between the two situations? What makes up the added value in that extra 1,200 square feet?

In the end, it’s mostly used for storage.

I think I realized this most clearly over the past weekend, when it seemed that time and time again, all four of us wound up congregated in the same room. We spent a lot of the day in our living room, playing with toys, reading books, and enjoying the relative freedom that a family weekend brings.

On an average day together, we spend most of our time congregated in either the family room or the living room (which could easily be one room). At nap time, both kids fall asleep in a single bedroom, and we sleep in a second bedroom. We use the kitchen and the dining room for meals. As for the rest? The guest bedroom is often unoccupied. I could do most of my writing at a small corner desk in the family room instead of using an office. The laundry room could basically just take part of the space used for the entryway. We could eliminate all but one of the bathrooms without a real crisis.

And suddenly we’re living in a 1,000 square foot home.

Does this mean I regret this house purchase, and that I’m now looking to downgrade to a smaller place? Not at all. I like the area in which we live, where there are children the same age as my son (or within a year or two) in virtually every direction. Last summer, my kids spent almost every evening and good chunks of every day running around in the yard with other children their age – well-mannered children who are also being raised to be intellectually curious. We have a nice big yard that borders on a field and also on other yards, creating a huge green space for our children (and other children) to play together on.

What I did learn is quite simple, though: the square footage shouldn’t be the primary factor when choosing a house. Although there are times when it feels good to have room to spread out, most of the space is completely unused most of the time (except for storage of things we probably don’t really need to keep). Even more important, choosing a lower square footage usually means much less expense over the long haul – you don’t really lose living space, but you do lose storage space, which means that you can’t accumulate as much stuff, which thus means you’ve got less money invested in material items that are just tossed into storage.

One thing’s for sure – as my wife and I consider these factors and re-work the plans for our retirement home, the plans are slowly growing smaller and smaller.

On New Year’s Eve 2005, my wife and I made a solemn commitment to start seriously saving for a down payment. We had a one month old child and were living in a tiny apartment that, even with just the three of us, was already getting tight for space. We knew that we would have to upgrade our living quarters soon and so together we resolved to make a change.

It didn’t go so well. Just four months later, we reached our financial low point – and we realized that just making such a resolution didn’t really help anything at all. We needed a plan in place if were were going to make things work, and so we got down to business with a real plan for saving for a down payment. Today, we’re happily entrenched in our own home.

What could we have done differently back then to make our resolution work? Here are some tactics that we used later on for our down payment plans that would fall right in line with such a hefty resolution.

Set a very clear goal right off the bat. So, you want to save up for a down payment. How much money is that?

Surprisingly, many people stumble even at that first question. The idea for a down payment is very vague in their head. I know that our original thoughts on the subject were incredibly vague – we just knew that we needed to save quite a bit of money.

Chasing after such an intangible goal is almost a guarantee that you will fail. Instead, do some basic house hunting in your area and get an idea of the prices on the type of house you would like to buy, then set a savings goal based on that price.

Let’s say, for example, that you decide that a $200,000 house is right for you. How much of a down payment on that house are you going to save for? A 10% down payment? 20%?

The larger the down payment, the better. You’ll need 20% down in order to get a typical fixed rate mortgage at a low interest rate. If you have less than that, you’ll usually have to get separate mortgages (an 80% mortgage along with an additional 10% mortgage) or, if they’re still being sold, an adjustable rate mortgage of some kind.

These two numbers will tell you what your dollar goal is, but what’s your timeline? Are you intending to save $40,000 in four years? That’s roughly $10,000 a year – $800 a month will get you there.

Your timeline, you see, will help you break down this big goal into smaller short-term goals. $800 each month – can you do that? Can you do it if you get creative with it? $800 is a tangible goal that you can shoot for each month – a vague notion of “saving for a down payment” will never push you towards your goal.

Make sure the goal is a realistic one. Once you’ve started breaking things down into real numbers, you’ll probably start gasping at the high amounts. Can I really afford that? Likely, you can make a pretty strong goal each month if you put your mind to it, adopt some frugal strategies, and settle in for the battle.

However, there is often a temptation to make the goals too high. If you’re attempting to save 50% or more of your monthly income for this goal, you’re probably not going to make it.

My suggestion is to try your savings plan for a month or two and see how it works for you. If it’s beyond your means, go back to the drawing board. Don’t be afraid to toss your plans aside and adjust things. Perhaps you can expand your timeline. Perhaps you can set your sights lower in terms of the house you intend to buy.

The key is to not decide that things are hopeless just because you’ve decided that your first attempt at a plan is just too much. Step back, look at the overall plan, and make some adjustments. Don’t just walk away because you find it too difficult.

Figure out where that money is going to come from. So, you’ve elected to save a certain amount of dollars each month. Where is that money going to come from?

In some situations, people are already natural savers and they already spend less than they earn, but this seems to often be the exception rather than the rule. Quite often, people who make a resolution about a down payment aren’t saving much at the moment to begin with, and coming up with a savings plan is going to be difficult.

First, look for ways to easily cut your spending. Look for big pieces and also ones that repeat monthly. Instead of leasing a car, perhaps you can buy a late model used one and drive it for many years, saving yourself a car payment that you can put away for your down payment. Perhaps you can eliminate that monthly Netflix bill, or maybe you can cut back on your cell phone usage – do you really need that many minutes or that big of a text message plan? Maybe you can adopt a “one meal out a week” plan instead of dining out every other evening – that will likely save you $10-20 a meal at least.

Second, adopt some simple long-term cost savers. Install CFLs throughout your apartment to cut down on electrical use. Install a programmable thermostat in your apartment (check with your landlord) and program it so that you’re not wasting money on your heating or cooling bills while you’re at work. Put your home electronics on a switch so you’re not paying for your cable box to sit there idle while you’re not at home. These solutions will save you significant money on your energy bill without thinking about it.

Finally, look for some extra income. Perhaps you could work a part-time job to earn some extra cash, or maybe you have some marketable skills that would work well in a freelance environment. If you can bring in extra cash, that cash could go straight to your savings without skipping a beat.

Automate the savings. As you begin to save, you’ll find that it’s often tricky to keep your savings in balance with your normal spending. You’ll try hard to keep money swept into a savings account, but it doesn’t always work smoothly.

Make it smooth. Institute an automatic savings plan with an online bank that has a good rate of return on their savings account (I use ING Direct). Then, each week, have the plan automatically withdraw a certain amount from your checking account. $190 a week, for example, equals out to roughly the same amount as $800 a month over the course of a year.

With an automatic savings plan, you know that the amount will be withdrawn each week, and you can plan ahead for it. It’ll force you to be much more careful with your spending, even if you seem to have the cash on hand to afford something frivolous. Even better, after a while, you can check that new account and see that the savings is really starting to add up.

Utilize windfalls effectively, even small ones. Another useful tactic is to immediately pass along any windfalls that come your way straight into your savings. Did you just get a small inheritance? Don’t spend it foolishly – instead, apply it directly to your savings without a thought.

This goes for little savings and windfalls, too. Let’s say you find a $20 bill on the street. You might be tempted to spend it on something fun, but why not just go ahead and put it towards your big dream? The same goes for any small savings you might make – let’s say you don’t eat out at all this week and save $25 in the process. Go ahead and sweep that straight into your savings.

What this will do is accelerate your dream just a little bit, and perhaps take some of the pressure off.

The real key to making a resolution to save for a down payment work is persistence. This isn’t a goal that will happen overnight. Instead, you need to provide a degree of constant focus in order to make it work. Good luck!

As I studied our homeowner’s insurance policy, I was surprised at how high the value of the insurance was for replacing home contents. It was one of those little things that threw up a red flag for me, and it kind of stuck in the back of my mind.

About a week later, I was still thinking about that number, so I took a very careful inventory of our home’s contents, adding up how much these items would cost to replace – and sure enough, the cash value of everything in the home was only about 40% of the amount we were insuring. Reducing that number would surely save us a significant amount on our policy, so I was about to call up and start discussing things with our insurers when my wife popped in.

She was curious as to how much value I was putting down for some of our most valuable personal items, like some of the handmade wooden artwork her grandmother made, a painting done by my great grandmother, and some mementos from our wedding.

I went through the list I’d made and rattled off a few prices, which were estimations of what they’d cost to replace with similar items. My wife shook her head and told me, flat out, that I was drastically shortchanging the items.

But was I? This has been a big question for discussion around here for a while, actually.

My wife’s position initially was that such items have a very, very high value. She propositioned it this way: how much would I accept in payment for that painting by my great grandmother? The price would have to be very high – and I don’t think I’d sell it at any price.

That’s the conclusion that many people come to when they consider insuring the property in their home. They look at those irreplaceable and personally valuable items and think about how much they’d feel was an appropriate price to let go of something so valuable. Quite often, that price is insanely inflated – but for good reason. The item has a great deal of personal value.

But consider this: would you be able to replace that item if it were destroyed? Would you even think about replacing it?

My grandmother’s painting is invaluable to me. I can’t even realistically name a price that I would sell it for. But if it were destroyed in a disaster, I wouldn’t even think of replacing it. I’d have my memories of it, and I’d probably lament that it was missing, but how could I possibly replace it?

In our new home, I would probably put up a print on the wall, or possibly an original painting by another artist, but neither one would come close to the value that I personally ascribe to my grandmother’s painting.

This gets back to the original question: how much should my grandmother’s painting be insured for? Considering that it’s not something I would ever be able to replace – nor would I really attempt to – I’d argue that it shouldn’t be insured for much at all.

Then, if you apply that rule of thumb to items in your house that really only have a deep personal value, you’ll often find that the cash value of the contents of your house is not nearly as high as you might think it is. In that case, you’re likely vastly over-insuring the contents of your home – and paying an extra premium for that privilege.

Now, that’s not to say that there isn’t a good argument for insuring on the high side of what you own. You’re far better off having a little bit of breathing room than cutting your insurance down to the bone.

But when you consider the value of the property in your home, think carefully. Ask yourself whether you’re insuring the value that you personally ascribe to things – or the real value of replacing things that you would actually replace. You might just find that you’re over-insuring your contents just because of your own personal feelings – and that’s a financial leak you can easily plug.

What is the “small house movement”?
From the website of the Small House Society:

The Small House Society is a voice for the Small House Movement. That movement includes movie stars who have downsized into 3000 square feet, families of five happy in an arts and crafts bungalow, multifamily housing in a variety of forms, and more extreme examples, such as people on houseboats and in trailers with just a few hundred square feet around them. Size is relative, and mainly we promote discussion about the ecological, economic and psychological toll that excessive housing takes on our lives, and what some of us are doing to live better. It’s not a movement about people claiming to be “tinier than thou” but rather people making their own choices toward simpler and smaller living however they feel best fits their life.

In other words, the “small house movement” includes people who are making a conscious choice to live in a smaller home rather than choosing a larger one. It includes people who could afford McMansions but live in only a 3,000 square foot home all the way down to single people living in a tiny one-room home (as depicted beautifully on that site).

There are a lot of reasons for doing this.

Ecology A small home simply uses fewer natural resources than a large one, both in the construction and in the maintenance (energy use, for example).

Psychology Because the home is small, one can invest fewer “mental cycles” in the upkeep of the home as compared to a large home.

Time Not only that, the actual upkeep takes significantly less time as well. With fewer square feet, it takes far less time to get the house clean.

And the big one…

How can a “small house” save me money?
There are several strong financial reasons for considering the “small house movement.”

Less initial cost Purchasing a smaller house means there’s a smaller initial cost to purchase the home. This may mean a smaller mortgage, a potentially lower interest rate on that mortgage, or perhaps even the ability to pay for the house using only cash.

Less maintenance cost With a small home, you’ll have a far lower energy bill. You’ll also have less expense for cleaning materials and fewer repair costs, too – a smaller roof means fewer shingles are needed to re-shingle, after all.

Less room to store unnecessary stuff If you own a smaller house, you have less space for storage, which directly impacts the amount of excess “stuff” you can accumulate. Thus, it becomes more difficult to spend money on impulsive buys – there simply isn’t anywhere to put it!

More time to devote to other money-making endeavors With the decrease in time needed to be spent on housecleaning and home upkeep, one can devote more time to other activities. Take those extra few hours a week and start a side business – or perhaps take up a part-time job for more income.

My personal take
My belief is that part of the recent trend towards large houses was fueled by the crazy housing bubble of the first part of the decade. People would build larger houses than they need under the impression that this house would be a great investment that would make their expenditure worthwhile.

In a normal housing market, you can reasonably expect that your home will appreciate to some degree, perhaps slightly ahead of inflation, but you should not expect that your home will be a great investment. Instead, it makes sound financial sense to view a home purchase as more of a functional investment than as a financial one.

In short, before you buy a home, know what you can afford, compare it to the rental options in your situation, and don’t put pressure on your budget. All three of these factors point toward buying a small home rather than a large one, as a small home is more initially affordable and won’t pressure your budget as much as a large home.

In other words, when it comes time to purchase a home, set your sights lower instead of higher. Taking all factors into consideration, a more modest home might be the right choice for your long-term financial future.

As a homeowner, this change in the season means one thing: what do I need to do to protect my enormous investment in this house from the brutal change in the weather and keep money in my pocket?

One big first step is to minimize your winter heating bills. I wrote a lengthy post covering twelve tactics for doing this – here they are in a concise list:

Air seal your home.
Make sure the attic is well-insulated.
Dress warmly inside and keep the temperature low.
Get a programmable thermostat.
Minimize or eliminate use of vent fans.
Turn off the heat in unused rooms.
Use space heaters.
Make sure you have a fresh furnace filter.
Use an insulation blanket on your hot water heater (if it needs one).
Keep blinds and curtains open on the sunny side of the house and closed on the other side.
Cook at home using the oven.
Microwave a hot water bottle before bed each night, then dip the temperature.

What else? Here are twelve additional useful steps for preventive maintenance for your home. These steps will help minimize the wear and tear of the changing of the seasons of your home, putting off potential major repairs for many years.

Call an HVAC professional to inspect your furnace and your ductwork. You should always do this before the first winter you spend in a house, as well as every few winters thereafter. It’s essential that your furnace remain in good working order with clean ductwork that’s in good repair, and a professional can properly evaluate things for you quite well.

Prepare your fireplace (if you have one). Make sure the chimney’s swept and that the damper opens and closes. Also, if your chimney is made of brick, examine the brick and mortar to make sure it’s in good repair. Have plenty of firewood cut and on hand for use. You may also want to install a screen on top of the chimney to keep pests out.

Check your roof shingles and do any minor repairs you can. Ice and snow buildup on a roof can wreak havoc, so make sure that your shingles are in good shape. At the very least, do a careful ground inspection of your roof, but it might be better to just go up there on a ladder and look around for yourself. Replace any worn out tiles you find.

Clean out your gutters. Similarly, when the temperature hovers around freezing and you’re facing a lot of melting and freezing water, clogging in your gutters can create a huge logjam of ice on your roof. Prevent most of this by cleaning out your gutters in advance of the winter season, removing leaves and bird nests.

Prepare your lawn-care and garden equipment for winter. Drain the oil and gas from your mower, tiller, and weed eater. Put into careful storage any lawn and garden equipment. Drain all of your hoses and put them into storage as well, as sitting water freezing and re-freezing inside a hose can really damage it.

Service your winter equipment. Make sure your snowblower starts up after you’ve properly tuned it and put gas and oil in it (as per the directions). You don’t want to go out there and fire up your snowblower for the first time and discover that it needs oil or new spark plugs.

Pull all vegetation away from your foundation. Vegetation near your foundation can continue to grow near the warmth of your home, possibly causing the roots to grow towards your foundation. Pull any vegetation near your foundation away from it to keep your foundation in good shape.

Check (or install) your carbon monoxide detector and smoke detectors. You should have a carbon monoxide detector near your furnace and a smoke detector in all rooms in the house. Check them all to make sure they’re in proper working order.

Trim any nearby trees. If you have tree limbs near your house, particularly ones anywhere near windows, trim them back. When they get weighted down with snow and ice, they’ll bend and perhaps break – and that can spell disaster for your windows or your roof.

Seal your driveway and deck. The constant freezing and thawing of a winter season can wreak havoc on unprotected outdoor surfaces. Spend some time in the next few weeks sealing your driveway and your deck to keep the freezing water from damaging your property.

Move in your potted plants. As the weather gets colder, your plants will be affected by the temperatures more and more. Move them inside for the winter and place them in an area with adequate lighting to ensure that they live through the cold season.

Prepare an emergency kit. Major winter storms can sometimes result in multi-day power outages. Have an emergency kit with plenty of flashlights, an emergency radio (that’s powered by batteries or hand crank), plenty of blankets, and some food and water on hand in an easily-available place.

Right now is the perfect time to walk through a checklist of ways to save money on your home. Starting on these things as early as possible will allow you to start saving money sooner rather than later.

Here are eighteen things to check on or do immediately that will reduce the energy and maintenance costs of your home over the long haul.

1. Check the insulation in your attic – and install more if needed. If you have an unfinished attic, pop your head up there and take a look around. You should see some insulation up there, and there should be at least six inches of it everywhere (more if you live in the northern part of the United States). If there’s inadequate insulation up there – or the insulation you have appears damaged – install new insulation. Here’s a great guide from the Department of Energy on attic insulation, including specifics on how much you should have depending on where you live.

2. Lower the temperature on your hot water heater down to 120 degrees Fahrenheit (55 degrees Celsius). This is the optimum temperature for your hot water heater. Most people do not utilize water that’s hotter than that, and thus energy used to keep the water that hot isn’t effective. Lower the temperature, save some on your energy bill, and you’ll never skip a beat.

3. Toss a water heater blanket over that hot water heater as well. While most modern hot water heaters are well-insulated, some are insulated better than others and many older heaters aren’t insulated well at all. A small investment in a blanket for your water heater will slowly and gradually save you money on your heating bill over time by keeping the heat in the water instead of letting it spread slowly out into your utility closet.

4. Install ceiling fans in most rooms. Ceiling fans are a low-energy way to keep air moving in your home. Because of the air circulation effect, you can get away with keeping your thermostat a degree or two higher in summer and a degree or two lower in winter, netting a rather large savings. A while back, I wrote a guide to maximizing ceiling fan use – most importantly, the air directly below the fan should be blowing down on you in the summer and should be pulled upwards away from you in the winter – you can use the reversal switch on your fan to switch between the modes.

5. Wrap exposed water pipes with insulation. Exposed hot water pipes lose heat as they move water from your heater to your faucet. Insulating them makes a two to four degree difference in the temperature of the water and also allows hot water to reach your faucet faster. Check the pipes into and out of your hot water heater first, as the first three feet out of the heater (and the last few feet of inlet water) are key. Use good quality pipe insulation for the job – it’s actually quite simple. Find out more about water pipe insulation at the EERE website.

6. Install a programmable thermostat – and learn how to use it. A programmable thermostat allows you to schedule automatic increases and decreases in your home’s temperature. This lets your house naturally warm (or cool in the winter) while you’re at work or asleep, saving quite a bit of energy use, and then when it comes time for you to actively use the house, the thermostat automatically adjusts the temperature of your home back to what you prefer. Such devices save money on cooling in the summer and heating in the winter.

7. Hang a clothes rack in your laundry room (or, better yet, an outdoor clothesline). A clothes dryer can really eat up your energy costs, but it’s convenient for many people. Battle that convenience (and save money) by hanging a clothes rack from the wall in the laundry room and use it for some items – t-shirts and underwear dry great on clothes racks. If you can hang up 20% of the clothes in a load on this rack, you can get away with running the dryer 20% less than before, saving you cash. Even better: if you can, install a clothes line outside where the wind can catch it and hang most of your clothes outside.

8. Check all toilets and under-sink plumbing for leaks or constant running – and check faucets, too. Do a survey of the plumbing in your home before you settle in. If you find a toilet is running constantly, it’s going to cost you money – here’s how to easily fix that constantly-running toilet. You should also peek under the basin of all sinks in your home, just to make sure there aren’t any leaks. Got a leaky faucet? You should repair or replace any of those, because the drip-drip-drip of water is also a drip-drip-drip of money.

9. Replace your air handling filter. When you first move in, you almost always need to replace the air handling filter (don’t worry, it’s easy to do – it takes about ten seconds). Go down to your air handling unit, find where the filter is (it’s almost always a large rectangle), and mark down the measurements (printed around the edges). Then, go to the hardware store and pick up a few of these, then go home and install one of them, replacing the old one. An outdated filter not only doesn’t filter as well, it also has a negative impact on air flow, meaning your air handling system has to work harder to pump out lower quality air.

10. Make sure the vents in all rooms are clear of dust and obstructions. None of the vents in your home should be covered or blocked by anything – doing that makes your heating and cooling work overtime. You should also peek into all of your vents and make sure they’re as dust-free as possible, and brush them out if you see any dust bunnies. This improves air flow into the room, reducing the amount of blowing that needs to happen.

11. Mark any cracks in the basement with dated masking tape. Many homes have a few small cracks in their basement walls from the settling of the foundation and the weight of the house. In a stable home, the small cracks aren’t growing at all – they’re safe. If they’re growing, however, you’ll save a ton of money by getting the problem addressed now rather than later. Take some masking tape and cover up the end of any cracks you notice inside or outside, and write today’s date on the tape. Then, in a few months, check the tape – if you see a crack growing out of the end of the tape, you might have a problem and should call a specialist now before the problem gets out of hand.

12. Install CFL and LED light bulbs in some locations. CFL and LED bulbs can save you a lot of money on energy use over the long haul, plus they have much longer lives than normal incandescent bulbs. Consider installing some in various places – we usually use CFLs for hall lighting and LED bulbs for closet lighting (though LED bulbs are improving all the time…).

13. Choose energy efficient appliances, even if you have to pay more up front. Unless you were lucky enough to buy a fully-furnished home, you’ll likely have to do some appliance shopping. Focus on reliability and energy efficiency above all, even if that seriously increases the cost you have to pay up front. A refrigerator that uses little energy and lasts twenty years is far, far cheaper over the long run than a fridge that runs for seven years and guzzles electricity. (If you’re worried about the up-front cost, check out tip #17.)

14. Set up your home electronics with a SmartStrip or two. Looking forward to getting your television, cable box, DVD player, sound system, and video game console set up? When you do it, set things up with proper surge protection (to protect your equipment). You might also want to consider a SmartStrip, which allows the on-off status of one device (say, the television) to control whether or not there’s power flowing to other devices (say, the DVD player or the video game console). Having the power cut automatically from such auxiliary devices can save a lot of money over time, especially since many such devices eat quite a bit of power as they sit there in standby mode, constantly draining your money.

15. Air-seal your home. Look for any places where air may be leaking directly into or out of your home. These aren’t just air leaks – they’re money leaks. Thankfully, fixing small air leaks is pretty easy – here’s a great Department of Energy guide to caulking and weatherstripping, which will keep such air leaks from costing you.

16. Plant shade trees near your house. Shade trees naturally cool your home during those warm summer months, reducing the amount of direct rays that hit your house. Lowering the external temperature of your home saves significantly on your cooling bills during the summer, plus it increases your property value. Plant them now, so they’ll grow and shade your house sooner.

17. Take advantage of tax benefits for any improvements you make. For starters, there’s the first time home buyer tax credit, which is essentially an interest-free $7,500 loan from the federal government for new homeowners. This is perfect money to help you with fixes you may need to make when you move in, like buying good appliances or putting in shade trees. Similarly, if you make energy-based improvements to your home in 2009, you can receive up to $500 in tax credit for that purchase, essentially making things like insulation tax free. Your state may have even more benefits, so be aware of all of these when you invest money improving the efficiency of your home.

18. Develop a home maintenance checklist – and run through it for the first time. One final tip – create a home maintenance checklist. This list should include regular home maintenance tasks that you’d want to do on a monthly or quarterly or annual basis. Then, make it a habit to run through the items on this list each month. Doing so will extend the life of almost everything in your home, saving you buckets of money over time.

Any other tips along these lines from the readers?

Hindsight is 20/20, after all, and now when I look back on that time, I see a lot of little things I wish we had done differently. Here are ten things that we overlooked or didn’t do quite right during our home buying process – and what we should have done instead. Hopefully, you won’t fall into these same traps.

Get serious about saving sooner. The earlier you start saving for that down payment, the easier it gets. We didn’t start worrying about it until it was too late and we had to get a mortgage over 80% of our home’s value (split up to avoid PMI). If we had been on the ball even two years earlier, we wouldn’t have had to do that.

Don’t rush things. We were somewhat forced into our situation. We had largely decided to stay in our apartment for another year until we found out that my wife was pregnant and we quickly realized that having the four of us in such tight quarters would have been untenable. So we rushed. We did manage to find a very nice house, but we didn’t really get to survey all of our options, especially outside of the two towns and surrounding country areas we decided to focus on. The more time you devote to looking, the more likely you are to find the perfect house for you and your budget.

Pad your emergency fund before the move. You’ll be shocked how many little things pop up when you’re moving. Utility fees, beer and pizza for the people helping you move, and countless other little things can eat right through your money before you blink. So, pad your emergency fund in the months while you’re looking and thinking about the move. Then, in the week before you move, put a big chunk of it right in your checking account so you can just pull out the debit card and deal with things.

Spend more time shopping around for a mortgage. I got a mortgage estimate from three different places. One place – the only credit union we tried – had a rate more than half a point lower than the two banks we looked at. So we went with that credit union. Knowing what I know now, I wish we had shopped around more, as saving just half a percentage point on a $200,000 house loan can save you $64 a month – or $23,000 over a 30 year mortgage.

Evaluate the house contents more carefully. During the home inspection process, we thought we did a very thorough job. We went through the house with the home inspector, looked at everything we could think of, and also followed the checklists in some home buying books we were reading. Another hour or two, though, would have been very useful. The big thing that we missed was the deplorable state of the hot water heater, not noticed because we simply didn’t leave the hot water running long enough. If you let the hot water run for about ten minutes, the hot water heater starts percolating madly – and even removing the entire plug fixture and draining the whole tank didn’t fix it. A hot water heater replacement is in our near future – and it’s something we could have asked for from the sellers had we been on the ball about it.

Have an additional set of friendly eyes look at a house with you. We trusted our own judgment on the house that we bought – and we were lucky. If I were to do it again, though, I would have called up one of my friends – likely the one who is so in tune with home construction he built his own as a hobby – and had him walk through the house with us. Different eyes spot different things, and friendly eyes will tell you the problems that they see.

Shop around for homeowners’ insurance. Also, don’t be afraid to move and bundle your auto insurance or other insurance with it. We initially packaged our insurance with our previously-existing auto insurance, but later moved everything to another provider who provided us a much less expensive package. Shop around – you’ll be surprised how much you can save each year with a strong package deal.

Evaluate the actual value of your contents and insure them appropriately. At first, we went with a default amount suggested by our home insurer, simply because we didn’t know. Later, having actually calculated the value of all contents, we adjusted downwards quite a bit. Remember, don’t count irreplaceable items – you wouldn’t replace them, anyway, and they have no real replacement value.

Don’t go furniture shopping the day after you move in. We had a bunch of cheap furniture from our college days at our old apartment that we didn’t bring with us. Again, by pure luck, we happened to stumble upon a liquidation sale at a furniture shop and outfitted our living room very cheaply, but it was really a mistake to decide that we needed new furniture for our new house. Upgrade it later on – you can have empty rooms for a while. Save up until you can afford what you actually want instead of buying furniture just to fill a room.

Offer to help others move for years in advance. How does this help you? Well, imagine over a three year period that you help ten different families move. When you move, you can call all of these people to help you move – five families can unload a truck and unpack boxes at an astounding rate. Our big mistake wasn’t the help we received, but how I managed it. Don’t have everyone come and help you at once. Ask two friends to come one day and two friends to come another day instead of having them all come at once – you’re far more productive that way.

The process of buying your first home is a wonderful experience. Do the readers have any more suggestions for things they’d do differently with their first home purchase?

Ramit Sethi

The article gives six distinct reasons for why the writer doesn’t want to be a homeowner, each of which are worth some commentary.

We’re too poor to buy a house. Our total household income is only around $55,000 a year. We hold stringently to idea that we should never have a mortgage which is more than double our annual income. We do that because we feel being house-poor is not a good idea, and could unnecessarily tie us down.

Liquidity This is a pretty sound economic reason, and also part of the reason why we elected to purchase a more modestly priced home that was about 1.8 times our combined annual salary (at the time). Note that this does not preclude them saving for a very large down payment – if you can save up $90,000, they could then get a $110,000 mortgage and buy a $200,000 home.

There are no safe, “nice” neighborhoods in our side of town which have 3 bedroom or larger homes available for $110,000. We’re not interested in moving to outlying areas because we have a business in this neighborhood, and value our time too much to waste it commuting.

Environment They prefer to live in the general area that they currently live in, but housing prices have made home ownership in their area quite expensive – far over $110K for the home that they wish to purchase. It’s worth noting that this article was originally written in 2001 – they likely saw far higher prices by 2005 or so.

We can’t earn more than around $50-70K a year because I lack the drive to spend too much of my time and energy earning money. I have too many other interests. I’m happy with making enough to get by.

Diverse interests The author understands clearly who he is and knows that his passions don’t lie in chasing the brass ring. Instead, he follows his diversity of interests and doesn’t worry about earning more and more money. Whether that’s a good choice or a bad choice will depend on your own beliefs – my feeling is that there are different paths that are right for each person and it takes a strong person to know which path is right for him or her.

My wife doesn’t work for money by choice. She educates our children, reads lots of books, gardens, does genealogical research, cooks from scratch everyday, and gives many hours of service to a women’s organization.

Stay-at-home parenting / personal choice The stay-at-home parenting choice is one that my wife and I struggled with for a long time – and we’re somewhat doing it now, with my writing career. Again, this is a choice that has no easy answer, regardless of what either side might say about it, and it takes some fortitude to simply put your foot down and do what you truly believe is right, regardless of the other consequences.

Which brings up another point: we don’t have any spare time in our schedule for home repair, maintenance, or upgrade projects.

Time management Actually, more than time management, it’s a confession that the person has no real interest in taking care of their property. While I find that somewhat disheartening (often, someone unwilling to maintain their living quarters is often unwilling to maintain other parts of their life, too), it’s again honest and straightforward.

And finally, we lack the discipline to save for a downpayment. Every time we get $5,000 to $10,000 together, we go and blow it on another family vacation.

Lack of discipline / other desirables This isn’t so much a lack of discipline – they are able to save up to five figures – it’s a matter of finding the gratification of a family vacation to Disney World followed by a year of renting higher than a family vacation camping followed by home ownership.

The Real Reason
On paper, this individual seems suited for home ownership. There’s a steady income, a tendency to save and spend less than they earn as a normal course of events, and a family situation where housing stability might be at a premium. Yet, through some self-evaluation, the family determined that home ownership wasn’t right for them. Why?

They have different goals in life.

Their goals certainly don’t match mine. I’m very proud to be a homeowner and, since my local area never really had what I wold call much of a real estate bubble, the home will hold value. I love to camp and I don’t have much interest in expensive vacations for my family, at least not until the children are old enough to deeply appreciate it. Those two philosophies alone put me in a different camp than the author of that article.

But what’s really key to notice here is that they set goals and achieved them – they just happened to be different goals than I do (or perhaps you do). Their goals revolve around expensive family vacations and having a stay-at-home parent – and those goals have both notable benefits and drawbacks.

And they’re meeting those goals. They’re regularly spending less than they earn so that one parent can be a stay-at-home parent and so that they can go on nifty family vacations.

Their life may appear different on the surface, but the fundamentals under the hood are the same. Set goals. Spend less than you earn, and sock away the difference.

That will take you to your dreams, no matter what.

wonder if you have weighed the pros and cons of switching to pellet/wood stoves for heat this winter? I live in Montana and our heating bills are slated to rise 50%, yes 50% this winter, partially due to the sale of Montana Power to Northwest Energy. Our heating bills (gas for heat and cooking and electric for the usual) get as high as $600 a month in the winter.

Liz, unless you have a very cheap source for a high volume of wood, installing wood heating options won’t save you any money for a very long time. In order to install an indoor wood stove, a fireplace, or an outdoor wood boiler, you have to have a chimney and a blower, which can cost thousands to install. Even if you already have the equipment, without a supply of very inexpensive wood, you won’t do too well.

How much does it cost, exactly? The calculation of how much wood you need is pretty simple. For many homes, the amount of wood you’ll need to replace your other heating is somewhere between three and six cords. A cord of wood costs roughly $150-200 just for the wood, and weighs about 5,600 pounds (2,500 kilograms). You can usually tack on another $50 or so per cord for delivery cost, so the cost of getting that much wood delivered would be about $250 a cord. Thus, your wood cost alone (if you don’t have your own source) is about $1,000 for the winter. That doesn’t include the effort of hauling in wood and so on.

So, unless you have a very cheap source of wood (your own chainsaw and a small forest out back) and are already set up for it, a wood stove is not a good solution for heating.

Incidentally, my father uses a wood stove to heat his garage and goes through probably 50% of a cord each winter. He has a lot of trees nearby and cuts the wood himself for his own use. This makes sense for him because the effort to cut the wood for the stove is not immense, plus he is already set up for it.

Given that, what actions can Liz take? Here are twelve things I’d do in her shoes.

Air seal your home. One sure way to have inflated heating bills is to continually lose heat to the cold outdoors. You can easily reduce this loss of heat by carefully air sealing your home. The Department of Energy’s office of Energy Efficiency and Renewable Energy has a wonderfully useful guide to air sealing an existing home, including walkthroughs on how to detect air leaks and how to caulk and weatherstrip any leaks you do detect. Doing this can save as much as 30% on your heating bill.

Make sure the attic is well-insulated. Since heat rises, it’s not surprising that quite a bit of heat is lost through the roof of your home, hence the need for significant insulation in your attic. Take a peek up there and make sure there’s plenty of insulation to go around. Also, if you can, check the insulation in other ceilings, exterior and basement walls, floors, and crawl spaces. Here’s an excellent EERE guide on home insulation.

Dress warmly inside and keep the temperature low. Why keep the house at a high temperature when you can just toss on an extra sweatshirt instead? Lower your home’s temperature a bit and cuddle up with a blanket – you’ll be toasty warm and you aren’t burning money to keep other parts of your home warm.

Get a programmable thermostat. A programmable thermostat can automatically lower the temperature of your home at night and when you’re at work, making the heat run less when you’re not actively using it. Such a device can pay for itself in a season, making it well worth the investment.

Minimize or eliminate use of vent fans. If you have a vent fan in your kitchen to eliminate cooking smoke, or you have one in your bathroom to get rid of moist air, try as hard as you can not to use them. Use a fan to ventilate the air out of the room into other areas of the house instead. A vent fan will carry that warm air straight outdoors, guaranteeing extensive heat loss.

Turn off the heat in unused rooms. Close the heating vent in the guest bedroom or any other room in the house that you don’t use very much. This works well if you have well-insulated interior walls – if you don’t, this won’t help much at all, but you may get a slight boost from it.

Use space heaters. If you spend most of your time in only one room or two in the house, drop the thermostat even lower and put a space heater in that room where you spend your time. It’s much cheaper just to have a space heater heat up part of a room than to have a furnace heat your whole house.

Make sure you have a fresh furnace filter. Furnace filters are vital at keeping dust out of the passageways in your home, making the furnace work less to keep your home warm (and keeping dust out of the air, too). Along those same lines, ensure that nothing is obstructing your furnace and also get an occasional tune-up to make sure it’s in good working order – once every few years should do it. Here’s some solid information about basic furnace maintenance.

Use an insulation blanket on your hot water heater. Most modern hot water heaters are already well insulated, but many old heaters lose a ton of heat in a very inefficient manner, causing you to waste money heating your utility closet. If you have an older hot water heater, consider getting an insulation blanket for it in order to help it keep the heat inside, keeping your water warm and not losing heat to the environment of your utility closet.

Keep blinds and curtains open on the sunny side of the house and closed on the other side. If sunlight is coming in a window, you should pull back the curtains and let the sunshine in. Otherwise, keep the curtains drawn, as without direct sunlight you’ll lose heat to the outside even through a well-insulated window. Let the sun be your guide here – if the sunlight’s coming in, open up the curtains.

Cook at home using the oven. Since it’s cheaper to cook warm meals at home than it is to go out, you should also take advantage of the fact that cooking in your kitchen adds heat to your home. Instead of going out to eat, fire up the oven and make a delicious meal at home. It might burn a bit more energy than you otherwise would consume, but not much more (since your home needs heat anyway), and the inexpensiveness of eating at home versus eating out makes a huge difference in your overall budget.

Microwave a hot water bottle before bed each night, then dip the temperature. This is a trick I learned from my father, who grew up with a wood stove in his kitchen and no heating in the bedroom. He and his siblings would put a bottle of water on the stove at night, get it very warm (almost boiling), then wrap it gently in a sheet and put it in bed with them, making their cold bed instantly warm. This same technique still works – lower the house temperature about an hour before you go to bed, then get some water boiling in the microwave just before you go (in a tea kettle, for example). Put that boiling water in some sort of sturdy container, wrap it in a pillowcase or two until it’s just nice and warm and not hot, then put it under the covers with you. Instant warm bed!

A few days ago, I received a long email from a friend I keep in occasional email contact with. That friend, who I’ll call Lindsay, is in an upside down mortgage – the current estimated value of the house is about 10% less than the amount still owed in the mortgage, and that difference is enough for a large down payment on a similar house in Iowa.

Anyway, Lindsay asked me how the housing market was in Iowa, since she was planning on moving back to the area with her family. I gave her my thoughts (pretty stable with some small growth in the “big” areas near Des Moines and Iowa City) and expressed some surprise that she was considering moving back.

In response, she flat-out told me that she was going to walk away from her mortgage. Instead of getting a mortgage for a house here in Iowa, she was going to pay for it all in cash (by cashing in some stock options), then walking away and handing the bank the keys to the house.

I wrote her back, told her my opinion on the move, and haven’t heard from her since.

In a nutshell, I feel that walking away from a mortgage is horribly unethical. While there might be a solid financial argument for doing so right now, it’s a complete act of bad faith, one that, as a borrower, you would never dream of accepting from a lender.

Let’s just translate it quickly into different terms. Let’s say you want an XBox 360 game console and a few games, but you don’t have the cash to pay for it. You agree to borrow $600 from your friend and you’ll pay that friend back $30 a month for 24 months to cover the cost. Three months in, you’ve defeated Halo 3, Orange Box, and Bioshock and have decided you’re tired of the console, so you announce to your friend, “I’m tired of paying you. Here’s the console and the games. They’re used. Oh well.” and walk away.

Or, you can reverse the equation. Let’s say you’re in an area where the home values are skyrocketing. You have a fairly new mortgage, but have built equity in your home. The bank decides, “Hey, we can cash in,” and then boots you from your home, regardless of whether you’ve paid the bill on time or not.

In short, any time you agree to borrow or lend from someone else, part of the assumption is good faith. Both partners believe that the other will operate in good faith to go forward with the borrowing agreement. From my perspective, walking away is not good faith.

Not only that, it’s also financially stupid when you start looking at the big picture. It drops an atom bomb on your credit for at least seven years, during which you’re going to be forking out a lot more for every type of insurance and also have horrible rates on things like car loans and so on – and don’t even think of trying to get another mortgage for a long time.

Another thing to consider: at some point, the market will rebound, and it’s already down 20% or so (depending on where you’re at). Whatever happened to “buy low, sell high”? Right now, you’re selling low – or at the very least, selling nowhere near the high. That’s just not solid investing – that’s the equivalent of buying a stock, watching it plunge 20%, then selling it immediately because it’s “bad” even though the same solid fundamentals exist.

A third factor: you’re probably walking away because you’re in an adjustable rate mortgage that’s either recently adjusted or about to adjust. The government is about to bail you out. Take a look at the Dodd-Shelby HOPE for Homeowners Act, among other things. Uncle Sam is going to step in and keep you safe from your own financial mis-steps.

An aside about the housing bailout: I really feel like the bailout is sending the wrong message to homeowners. Take me, for example. In 2007, I could have signed up for an ARM at a very, very low introductory rate, borrowing roughly twice as much as we did for a home. Instead, I looked at our finances, ran the numbers, was realistic and honest, and got a fixed rate mortgage that I knew I could afford. One year later, the government is bailing out the people who didn’t bother to do the homework and doing nothing to help the responsible people who made a well-considered choice. I understand that some families are in need, but it also sends a message that irresponsibility will be protected by the government.

In short, I’m not a fan of walking away from a mortgage. In the big scheme of things, it barely makes financial sense, and it certainly raises some big ethical flags. From my perspective, it’s not something worth doing. I’d love to hear your perspective.

Here are some additional thoughts on walking away from mortgages.
Why Not Just Walk Away from a Home? (@ npr)
New Attitude: It’s OK to Walk Away from a Mortgage (@ wall street journal)

Of course, you can save a lot more energy if you do some careful planning and tinkering when it comes to ceiling fan use. Here are some tactics to try.

Set your home’s temperature higher in the summer If you’re going to run ceiling fans constantly in your home on a hot day, raise the temperature on your thermostat by a few degrees. Your ceiling fan doesn’t directly cool the air by itself, but what it does do is circulate air, creating a breeze effect that makes the room feel cooler than it actually is. Thus, accompany ceiling fan use with a rise in thermostat temperature and your central air conditioning unit will run less, but you’ll feel just as cool. I recommend trying a four degree increase if fans run on high as compared to the fans not running at all.

Run the fan on high in one direction (usually counterclockwise) in the summer Most fans have a “clockwise” setting and a “counterclockwise” setting, each appropriate for a different season. Stand beneath the fan and turn it on. If you immediately feel a breeze from the fan, then it’s set on the “summer” setting, usually counterclockwise. Otherwise, turn off the fan, climb up near the base of the fan, and look for a little button or switch that sets the fan to run in the opposite direction. During the summer, you should have your ceiling fans running on high with the air blowing down directly below the fan. This creates the most air movement in the center of the room, which is where you need it most for the “breeze” effect, which will feel cool on your skin.

Run the fan on low in the other direction (usually clockwise) on low in the winter In the winter, however, your fan should be running in the opposite direction (again, just flip the switch or push the button near the base of the fan). Blades running in this direction will pull air up in the center of the room and push it down again near the edges. This forces warm air and cool air to mix in the room, keeping the room at a steadier temperature (not allowing heat to build up at the top and coolness to settle on the floor) and making your heating unit not have to work quite as hard to keep the house warm. You’ll feel this effect if you stand near the wall in a room – a gentle, warm breeze will blow over you.

When you buy and install a new ceiling fan, keep these tips in mind Almost any home can be made more energy efficient by installing a ceiling fan. Here are a few suggestions for shopping for a new fan.

Basic physics – if your fan’s blade angle is less than twelve degrees, it’s a waste of energy Ideally, you want the blade to push air upwards or downwards. If your blades are at a low angle (meaning nearly flat), they won’t do either – instead, they’ll have much the same effect as an airplane wing. They’ll just cut through the air without pushing the air at all. The very first thing you should look at with a new ceiling fan is the blade angle. If the angle is below 12 degrees, the fan will be largely decorative and will just eat energy without significant air movement. 12 degrees should be the minimum angle you purchase, and ideally you’ll buy one with a higher degree angle. Blades with a 16 degree angle or above push a lot of air, feeling much like a box fan attached to your ceiling, and that might be overwhelming in some situations. Get a fan with blades between 12 and 14 degrees in a room where you might have papers out, etc., but in general use rooms, get a fan with blades having a 14 degree angle or above.

Unless your room is very well lit, go ahead and get the light assembly, too You might not think it’s necessary now, but if you’re installing the fan in a room without perfect lighting – or are replacing a light fixture with a ceiling fan – you’re going to want more lighting in the room. If in doubt, get the light assembly right now – it’ll save you consternation and money later on.

Install it yourself – it’s not that scary Many people blow the process of installing a ceiling fan out of proportion in their minds and just hire someone to install it. Don’t – installing a ceiling fan really isn’t that hard. Here’s a very humorous but informative guide on installing a ceiling fan and a video produced by Home Depot on how to replace a ceiling fan (useful even if you’re not replacing one, just installing a new one). Don’t pay the fee to have someone else do it – this is a perfect small home improvement project that anyone can tackle themselves.

All of these tactics can save you significant money on your heating and cooling bills. A ceiling fan can be a great investment, particularly if you live in an area where the temperature is frequently far too warm or too cold to open the windows on a regular basis, even for just a few months out of the year. Ceiling fans, when used properly, can be a massive energy savings.

Given that we currently live in one of the most expensive parts of the state of Iowa, does it make sense for us to consider moving in the future? Here are the reasons we’ve come up with for moving in the near future, moving later on down the line, and never moving at all.

Reasons for Moving Soon

Children Right now, both of our children are young enough that a move to a different area wouldn’t be highly traumatic for them. When we moved into our current home, it took about two weeks for my son (who was about one and a half years old) to adjust to the new house, and now he doesn’t even remember our old apartment. There are very few social ties for them as well.

Family. Our move would be designed to take us closer to our parents, who are getting older. They also live quite far from their grandchildren and there’s not nearly the interaction there that any of us would like. Moving closer allows a lot of deeper bonds to grow.

We’re not entrenched, either Although we’ve lived in this school district for several years, we’re far from entrenched in the neighborhood on our street. We’ve become somewhat friendly with two of the families living near us, but we’ve not yet reached the point where we feel that we are a deep part of a community yet. More on that in a bit.

Reduced house payments We could buy an equivalent house to the one we’re living in pretty much anywhere else in the state of Iowa for about 40% less than what we paid for this one. Assuming we could re-sell this house for the price we paid for it (which is reasonable – the housing market is solid here), we could easily take that cash, pay off the full mortgage, and have enough left over for a very large down payment on the next house.

Reasons for Moving Eventually

Time to find the exact place we want. We’d like to move closer to our extended families, likely somewhere on the eastern side of Iowa. If we took our time, we could carefully investigate the whole region of the state and find the right place for us to move.

The opportunity to have the home we’ve always wanted. What we want isn’t extravagant – it’s basically our current house, except on two floors and with slightly larger bedrooms and a slightly larger master bath, in the country. We can likely build that for less than $200,000, and in several years, we’ll have the resources to make it so.

Increased financial resources. Waiting for a few years means we’ll have more financial resources with which to buy or build exactly what we want.

Our current home is in an obvious growth area. Holding onto it for the next several years will see a price increase. We live in an area where the population growth is tremendous – it’s the only “hot” area in the entire state and there’s little startup companies and all sorts of things going on. If we sit and wait, our home will do nothing but increase in value.

Reasons for Never Moving

We’re entrenched in the community. While we may not have settled on our current block yet, we are entrenched in our local community. I serve on one important civic council and have been strongly encouraged to run for another council position. I know literally hundreds of people in this area – some of them quite well. I have a burgeoning professional relationship with at least a few people.

We like the area and resources. The area we currently live in gives us pretty quick access to the greater Des Moines area for cultural events and at least seven grocery stores within fifteen minutes of driving. If we move to the area we’re thinking about, we’d be largely far away from such assets.

Our Conclusion

Taking into account all of these factors and how they overlap, we’ve decided to not move in the short term. Not only would moving right now be a very questionable financial decision, we don’t have a strong plan in place for where we would move and how we would transition my wife’s employment (luckily, being a “transient worker,” I can move much easier).

The one regret we have in this decision is family. All of us – my wife, my two children, and myself – would benefit from being closer to our extended families, both in terms of increased familial bonds, but also in terms of having some additional support for parenting. My mother is so anxious to build bonds with her grandchildren and also to babysit them that she’s traveling up here for a weekend in May and basically ordering us out of the house to spend a weekend together while she watches the children. That says something significant about the family bond.

Tentatively, we’re looking at moving in seven to twelve years, depending on our financial state. If things go very well with my writing, we could move earlier than that. The later we move, though, the less likely we will be to move because of the social changes that would be foisted on our children – I have no real desire to yank a twelve year old and a ten year old away from their friends for reasons that aren’t truly pressing.

First of all, the problems in the housing market are not due to home ownership. They’re due to lenders lending out ridiculous amounts of money to borrowers who couldn’t afford it, and borrowers agreeing to loans far beyond their realistic level to pay. That has nothing to do with the value of home ownership – it has to do with greed, both on the part of the lenders and the borrowers.

I’m going to deconstruct this article carefully for you guys, so that there’s a clear point-counterpoint to the major issues raised in this article. I’m not stating that the original article is strictly wrong, but that it presents an extremely one-sided viewpoint that deserves some counterbalance.

Buyers throw their money away for the first five years they own a home, because they simply give money to the bank for the privilege of borrowing money. Renters, on the other hand, pay for one thing every month: shelter. They don’t pay interest to the bank, property taxes or maintenance fees. They pay rent.

First of all, buyers are not “throwing their money away” for the first five years of home ownership. Their monthly payments do consist of primarily interest on their mortgage, but a portion of that payment goes towards the value of the home itself, and that portion grows larger with each payment.

Second, buyers have the option of making additional mortgage payments. These payments go wholly against the principal and make a dramatic difference in the interest paid over the life of a mortgage. Even $100 extra a month not only shaves years off of the repayment period, it also goes straight towards the value of your home.

Third, the “first five years” period is the only period where there is a perceived advantage in renting over homeownership. After that, the dual forces of progress on the payments plus the progress of rental inflation swing the advantage around towards the homeowners – but we’ll talk about that later.

Smart renters also take the money they save by renting and invest it somewhere else. Since the average renter saves hundreds of dollars every month, they can afford to invest in stocks, bonds and other vehicles that have a better rate of return.

That’s nice, in theory, but people in rental situations rarely do this and if they do, it’s so they can make a down payment on a home.

Let’s look at reality: the savings rate in America is negative, yet this article is using the argument that people might save and invest as a reason why rentals are more cost-effective? They might be more cost-effective for someone with their financial head on straight, but those people are homeowners who see the long-term losing strategy that is renting.

Contrary to popular belief, buyers do not get back the mortgage interest they paid throughout the year at tax time. Mortgage interest can only be deducted from taxable income. This essentially means that buyers pay a dollar just to save 30 cents. Furthermore, deducting interest has no tax advantage unless a buyer pays so much in interest that the amount exceeds the standard deduction that everyone–including renters–is allowed to take.

For most people, income tax deductions aren’t a consideration when buying. They’re merely a perk if you qualify for them. In my area of the country, very few homeowners would even qualify for any deduction when it comes to their homes, and even in expensive areas, the deduction amount is seen as a perk because the tax rules (including the standard deduction amount) is subject to change.

When it comes to owning, the only guarantee is that buyers will be required to pay property taxes. Since renters are not required to pay any taxes on the property they rent, it seems downright foolish to factor the ‘tax benefits’ of owning into a buying decision.

You do in fact pay property taxes when you rent – property taxes are a part of the calculation that comes up with the amount of rent you’re charged. Just because you don’t see the bill doesn’t mean that it does not exist.

When a person buys a home, the money that is paid upfront is more significant and may or may not be seen again. For example, a buyer must pay closing costs (typically five percent of the loan amount) and real estate agent commission (typically six percent of the loan amount) before being called a homeowner. This 11 percent ‘investment’ ensures that the home must appreciate by at least 11 percent before the buyer can hope to break even.

These costs mentioned above, in most modern homeowner transactions (particularly in a buyer’s market), are paid for by the seller, not the buyer. We did not pay a dime of any of these when we bought our house and the price we paid was roughly equal to the assessed value.

Even in a seller’s market, the real estate agent commission is covered by the seller and, while some of that is figured into the price of the home, the market in an area will end up being the factor that determines the value of the home, not the commission.

Initial costs aside, there are also other costs a buyer is responsible for that a renter is not, such as mortgage interest, property taxes, insurance and maintenance. These costs can add up and may even increase significantly over the years.

Unless you’re living in an extremely run-down area and enjoy living in slovenliness, there are maintenance costs for renting, too. Also, any rational renter will purchase renter’s insurance in order to protect the value of their property – the same logic by which a homeowner would purchase homeowner’s insurance. Plus, renters also have to actually pay the rent, which is akin to the mortgage interest discussed above.

At best, buyers have depreciating assets. Home prices are falling in nearly every area of the country. An estimated 50 percent of the buyers whose loans were originated after 2002 now owe more than their homes are worth.

Homeowners who have been paying on their homes for ten years or more are seeing their equity disappear. This means that the ‘investment’ they made through mortgage payments is gone–dried up virtually overnight through no fault of their own.

This would be true if we were going through the Great Depression, but it’s not. Depreciation in even the worst markets in the country is scarcely up to 20% and in many markets, it’s nonexistent. In fact, based on home sales in my area, prices have held steady (or perhaps gone up slightly) in the last year.

In other words, if you pay attention only to a handful of overheated housing markets, the quoted statement might have some semblance of truth, but once you open your eyes a bit and look at the nation outside of these markets, it’s not as bad as doomsayers want you to think.

Renters may not co-own a home with a lender, but this doesn’t mean that they don’t have assets. Many renters have a large and prosperous portfolio, Star Wars collectibles (just an example) and other assets that can be sold IMMEDIATELY for cash. The reason they own these things is because they haven’t been paying a lender to ‘rent’ money so that they could pretend like they own an asset.

I’m actually scratching my head here as to what the point is, honestly.

First of all, there seems to be some sort of implication that a renter is better off because they may have assets of some sort, which apparently include Star Wars collectibles. This is true of homeowners as well – anyone with stuff can liquidate that stuff if need be.

Second of all, homeowners are quite free to sell their home if they so choose and use the proceeds from that sale to eliminate their mortgage. It is the homeowners’ decision as to whether or not to sell, not the mortgage lender’s decision. Once you’ve signed the papers, it’s basically your asset to do with what you see fit – the only catch is that it’s collateral on a loan. But under that logic, you should always lease a car instead of buying it so that you don’t have to pay a lender to “rent” money so that they could pretend to own that car, even though it’s theirs free and clear in a few years.

During the housing boom, everyone thought that housing was a great investment. Many people bought under the assumption that home prices go up, not down. The result of this madness is the biggest foreclosure crisis in the history of the United States.

The reality is that housing is not an investment. It’s shelter. That is all housing has ever been. Self-serving organizations like the National Association of Realtors like to tell people that buying a home is a good way to build long-term wealth, but this statement couldn’t be further from the truth.

Let’s completely ignore the fact that you get a valuable asset at the end of a mortgage and look at the money you pay into the mortgage as rent. I live in an area where you can easily get a decent apartment for $600 right now. Otherwise, you could get a house with a $150,000 mortgage at 5.5% for about $850 a month.

Right now, the advantage goes to the renter because they’re paying in $250 less a month. But let’s move down the road ten years.

In ten years, with inflation at 4%, that $600 monthly rent has gone up to $888 a month. At the same time, the mortgage hasn’t changed a bit – you’re still paying $850 a month for your home mortgage. At this point, the renter might argue that they’re saving in other areas, like on property taxes and such, so we’ll still say that the renter is ahead here. Let’s roll ahead ten more years.

At the twenty year mark, with that inflation still at a steady 4%, that $600 monthly rent is now $1,315 a month, while that homeowner is still only paying $850 a month. It’s pretty tough for the ol’ renter to argue that the deal is better, but the delusion might still happen.

Let’s jump ahead to the thirty year mark. The homeowner sends in his last mortgage payment and now has to pay $0 a month. The renter, on the other hand, has seen his rent go from $600 a month to $1,950 a month. Not only that, the renter will have to continue paying that rent in perpetuity – and it’ll keep going up with inflation. The homeowner is done with that game.

This doesn’t even include the asset value of the home. Even strictly ignoring the asset value of the home, the homeowner is in a better situation at the end than the renter is.

Normally, I don’t get frustrated by articles like this, but when I see things like this posted on sites that are presumed to be respectable, I feel a deep need to respond and offer up a balance to the perspective.

A household inventory is a documentation of every item in your home so that you have this in the event of a disaster, such as a robbery or a house fire. It usually consists of a list of the items and/or a videotaped walkthrough of your home which captures images of the items.

Such an inventory can be very useful when dealing with insurance companies, as it provides documentation of the items that you own, thus helping your case for an insurance settlement.

Eight steps for making your own household inventory
One can make an excellent household inventory in just a few hours on a weekend. I was able to do my own home in about two hours of steady effort. It’s not too hard at all – it just takes time. Here’s the game plan.

1. Get a video recorder. If you don’t own one already, borrow one from someone. A video recording is a great way to document all of the items in your home, even the ones you forget to list.

2. Get a laptop – or a very good note taker. When we documented our home, we found it easiest to take a laptop from room to room in our home to jot down all of the information. If you don’t have a laptop, designate someone to be a note taker (maybe yourself, if you’re doing it alone).

3. Do one room at a time. Go to each room in your home and document all of the significant items in it. It’s not necessary to document individual foodstuffs and individual toiletries, for example, but I’d document things down to silverware and plates – my rule of thumb is that if it’s worth more than $10 and easily replaceable, or if it’s not easily replaceable no matter what, it gets documented.

4. Record as much information as you can about each item. Make, model, serial number, purchase date, and so on are all good pieces of information to have, especially for larger items. For smaller items, just list what they are and make sure that some video is taken.

5. Be sure to videotape or photograph any personal valuables. Jewelry and family heirlooms fall into this area. These are items that are not easily described and are best noted with visual proof of their existence.

6. Store the list/video in a secure place not in your home. This is a perfect item for a safe deposit box at your bank, for example. Just make sure it’s not in your home, as this is an item you’ll only need if there’s significant damage to your home or to the property in it.

7. Update the list semi-regularly. There’s no need to do this monthly, but an annual updating of the list can be useful. You can tack addendums on the end of your earlier lists or videos if you wish, covering any new purchases you’ve made.

8. Make sure that everyone knows where the list is, including a person or two who doesn’t live in your home. That way, if a real disaster strikes and you’re incapacitated, others can retrieve the list and help with insurance issues while you’re recovering – or can help your survivors get the insurance settlement that they’re due.