If you stick with a house you can afford, you can pay it off, then use that extra money to work less.
ILLUSTRATION: MOTHER EARTH NEWS STAFF
One Sunday afternoon while I was mowing my lawn, my neighbor, the meter reader, came out to mow his lawn as well. We happened to turn the corner at the curb and match step as we proceeded down the property line toward the garages. I looked at him as he looked at me, then I looked beyond him to see the row of identical suburban tract houses. It was as if I was between two large mirrors, seeing the endless repetition of my own flaws fade into eternity. I killed the motor and came stumbling inside and cried out "June, oh June, I need to change my life or go in for that frontal lobotomy." My wife replied, "Ward, is that you Ward?
I was sick of making $40,000 a year, yet still feeling the quiet desperation of being broke. I wanted to be the master of my time, and therefore my fate. I wanted to have a three-day weekend every week for family, reading, gardening, painting classes, volunteer work, my spiritual path. I wanted to have this time without sacrificing the basics of a house and cars, as well as enough surplus funds to support a high F.Q. (Fun Quotient) lifestyle of camping, skiing, workshops, and conferences. What's more, I wanted to have integrity in my work life; I did not want to work as a leveraged buyout villain or high-paid hustler of any type. I wanted to work no more than 30 hours per week at my challenging, creative, flexible service job at the charity that was so rewarding and definitely made the world a better place. Oh, and I wanted to flap my arms and fly to the moon, too.
All those goals seemed not only in conflict with each other, but also with reality. This dream was such an impossible dream it made the Man of La Mancha look like an amateur. But, I am writing this article at the end of a 10-year plan that allowed me to meet all of my goals. It took some patience, but I now live well—cheaply—because of this simple, slow plan.
To free myself of the vicious mortgage cycle, I decided to do two things: Change the rules to the real estate game, and change the rules to the car ownership game. These are the causes of the quiet desperation experienced by most working men and women who cannot get ahead because they start out each month in the hole. First, let's talk dream home (next month, I'll take on automobiles).
The Barrier to My Dreams
The rules to the real estate game for people in pursuit of the American dream are: Buy a house on a 30-year note, get the biggest house you can afford by spending 30 percent of your income on the monthly payment. We followed those rules and got the first glimpse of the nightmare behind the American dream when the amortization schedule arrived from the bank as we purchased our first home. After five years of $668 per month payments we were only going to have about $1,000 equity in the house. Multiply $668 times 60 months and you get $40,000. If you subtract the tax savings impact of interest expense deduction of $11,000, it still takes a net output of $29,000 to get $1,000 in equity. AAAAGGGGHHHHH!
That day I started the plan. I bought a house that I could pay for in five years. By that time I could afford a monthly payment of $933 (principal/interest/taxes and insurance) per month. With my $5,000 in savings I began to look for a $45,000 house. According to the realtor's formula I could have afforded a $100,000 house with a 30-year mortgage. I figured that I could live in a dump for a few years to escape the vicious mortgage cycle for the rest of eternity. The logic was to pay off the house in five years, sell it, take the $45,000 equity, then buy the $100,000 house, which would be paid off five years after that.
Ten years to real home ownership; it would be such a blessing. We did find a modest little home on the edge of town, 30 minutes from work, for $45,000. It needed work, but it was livable for a few years. Then we looked for and found our dream home. The sale of the old house gave us a down payment of $45,000, and now we could afford monthly payments of $1,300 per month. So we bought the $85,000 home (our tastes had become rather modest) and paid it off in three years.
What now? When that mortgage was paid off three years later, we all of a sudden had $1,300 extra per month to spend.Then, thank God, common sense took over before we bought a time-share vacation or whole life insurance, and, "aha!" I realized that I had to earn $1,700 per month before taxes (or about $20,000 per year) to get that $1,300. So now I could continue in the consumerism feeding frenzy, or work less. When I was struck by that bolt of enlightenment, a line from a Tracy Chapman song stuck in my mind. "Don't give or sell your soul away because all that you have is your soul:" So, now I work two, days per week earning money, and fig, days per week caring for my soul.
I just now did the calculations on how much equity I would have accumulated if I had stuck with the old common consensus of "buy a home on a 30-year note instead of owning an $85,000 home and no debt," I would still owe about $70,000 and over the next 20 years make payments totaling $224,000 to pay it. In summary: If you make $40,000 per year, you can afford a $933 monthly house payment to: buy a $100,000 house on a 30 year note; or buy a borne for $40,000 and pay it off in five years. And believe it or not, those livable $40,000 homes really are out there.
After you have identified what exactly you need in a home (or what you would settle for) and how fir you are willing to drive to work or school, seek out those preferred neighborhoods, and search for homes that fit these economic criteria.
1. (food location. Ideally it would be in a neighborhood with homes twice its value. Have selling prices of nearby homes appreciated or depreciated in the last five years?
2. A motivated seller. Most borne sellers have arranged to buy another, or are simply tired of the old headaches and more than ready to move on. You'll sense if you are doing thorn a favor by alleviating their burden.
3. INOR: In Need Of Repair. Focus on cosmetic problems that scare away average buyers. Ugly paint, lunar landscaping, rubbled driveway, shag carpeting, and paneling are great because they are cheap to remedy. The good news is that $1 of needed repair increases the home's resale value by $3 to $5. Get several estimates on repair before you do the calculations, however. Don't allow yourself to be surprised. here are a few of the "great deals" you would do well to avoid:
A. The former mansion in the slums. Most 70- to 100-year-old homes need extensive professional attention. They are a black hole into which your wallet will vanish.
B. Any home with taillights. Mobile homes wear out like a car; after 20 years they are ready to be put out lo pasture.
C. Any home that has been moved to its present location from somewhere else. these are known to be worse than Frankenstein's monster in their final state of assembly.
D. Three-story homes, and if possible, two-story as well. Repairs to high walls and damaged roofs require scaffolds and special equipment. Do yourself a favor and lay low.
Do not be afraid to make low offers
Most homes sell for 10 percent less than the asking price which means that the buyers probably attired 20 percent less. Be bold, take risks, and make them an offer They can only say no.
One Last thing: Loath as I am to line another's pockets, I do recommend a professional realtor or attorney for the close. I found the legal complexities way over my head and now I always play it safe .