The following is a post by Sasha Kahn, with information provided by Genworth Financial

I remember when my parents bought their first house, the house that my younger sister was born in. The house that my parents still live in. Prior to buying, we’d lived in a rented apartment over a garage that was a part of a large estate. Even though the property was over ten wide-open acres, the apartment itself was the size of a two-car garage. I have no idea how they managed to live there with a young child who was probably bouncing off the walls half the time. But it was the seventies; and I guess things were different then.

When they closed on the house, they were immensely proud, as if the house itself affirmed that they’d become the adults they always wanted to be (as if having two children wasn’t enough!).

Fast-forward a few decades (my entire lifetime), and now I’m the one looking to buy my first home along with my husband. But I feel none of the eager, youthful enthusiasm that I remember carrying my parents through the process. Instead, there are financial worries, a depressed housing market, a terrible economy and the looming worry that at any point either of us could lose our jobs.

We are lucky enough to have my parents offer to help with the down payment. But even that doesn’t meet the lender’s preferred 20%. Enter mortgage insurance – which in the end is what made buying the house a reality.

Not to be confused with mortgage life insurance (which pays off a mortgage if the homeowner dies or becomes disabled) or homeowners’ insurance (which protects homeowners from loss due to theft, fire or disasters), private mortgage insurance, or PMI, protects the lender and investor from loss, not the borrower.

My first reaction to needing to buy PMI (aside from the clutch of anxiety seizing my stomach) was that this was just another loan that would need to be paid off. But on closer examination, I understood the benefits. First of all, it’s affordable. One loan with mortgage insurance is often a lot cheaper than taking out two separate loans. There are tax benefits as premiums are tax deductable, and without it we wouldn’t have been able to close on the house.

There are other benefits as well. Genworth Financial for example, offers job loss protection so that you can continue to make mortgage payments if you lose your job. It can help you prevent foreclosure. On the lighter side, Genworth’s mortgage insurance also offers some perks in the form of discounted offers and special rebates from certain vendors like Sears and Bed, Bath & Beyond so that you can get to the fun part of owning a home.

There are no guarantees in life. And my husband and I are still anxious about the leap we’re about to take. It will be expensive. We’ll have a mortgage to look forward to for what seems like the rest of our lives. But we both hope to make this a home filled with a lot of happiness.

Oh, and my mom just called me to celebrate the final payment on their own mortgage. The last $25 had been sent off to the lender – and the house that they bought in their twenties was all their own.

I got into a conversation a few weeks ago about the idea of “stretching” to buy a nice home. The idea that was given to me was that it’s worth it to pay a little more than you might want to right now, in order to get a house that’s a bit out of your comfort zone financially.

The justification was that over time, your income should go up, while the mortgage payment will be fixed.  Thus, what seems like a big payment now based on what you see in an E-Mortgage calculator will seem much smaller later. Additionally, the idea went, if you buy a bigger home up front, you won’t have regrets later.

This isn’t the first time I’ve heard this. And just like I did that prior time, I argued against the notion of stretching once again.

Admittedly, I think that I might be in the minority when it comes to such a belief.  When I bought a condo way back in the day, I was in the majority of first-time buyers that simply didn’t fully understand all the nuances of mortgages, they payments that go along with them, and where they can fit into your overall finances.  Luckily, I ended up selling the thing for a small profit. Hooray! However, there are clearly some people who weren’t as lucky, and got burned.

My guess is that they didn’t run the numbers, didn’t have a household budget, and didn’t really plan enough for the payments. What I think many people with financial literacy issues do is just listen to what the lender tells them they could afford. Then, they spend that much. After that, they just try to figure out how to live on the rest.

Why? Good question. My guess is that for many people, a home is an overly emotional investment. Somehow, it’s looked at as worth spending a ton on because it’s a place you’re actually living. Or, there’s an assumption that a home is always a good investment. Or, perhaps, some people still think that the bigger the interest payment, the bigger the tax benefit, thus take out a big loan (NO!).

Whatever the case is, I think it’s important to separate emotions from the decision to buy a home, as much as realistically possible.  More importantly, think in terms of wants versus needs.

For example:

• Is it truly necessary to buy a newly constructed home, or can you live in a 20 year old house?
• Do you actually need that 4th bedroom, or can you make do with 3 bedrooms?
• Does your lot have to have a huge yard, or can you live on less space?
• Do you really need to have granite counter tops, or can standard counters work for now?

By thinking about wants vs. needs, we can truly be willing to understand that when buying a house, we’re making purchasing tradeoffs just like we do with other decisions. The difference is that the stakes are likely much higher here.

You can end up spending a ton more money to get something you want vs what you need, and end up having to work harder and for more years to make those extra payments on the wants versus the needs. Plus, as we’ve seen, homes aren’t always liquid assets, and they can actually decline in value quite a bit in the wrong circumstances.

Bottom line: While emotion and preferences of course have a place in the home purchasing process, I think it’s important to buy a home primarly based on logical needs, not emotional wants. To those who think that this takes away from the enjoyment of life in some way, I’ll come back by saying that it probably enhances the enjoyment of life, as you’ll have less pressure and more free time due to having to spend less money on the home.

My Questions for You:

Do you think it’s a good idea to stretch for a more expensive home, or do you think it’s best to find a home that fits your current financial situation very comfortably?

Do you also think that many people let emotions get in the way when buying a home, or do you think that a home is a much different type of purchase in which emotions are a big part of it?

Do have something you’d like to improve in your home? It seems like many people always have some kind of running list of things they would like to get done at home.  Some of them can really make a home feel much more livable, and even improve marketability to potential buyers.

When doing renovations, one can always take the DIY route, or pay someone to get the work done for you. Personally, I lean toward hiring a professional over DIY for some things that require more specialized knowledge or time. Why spend inordinate amounts of time and money unless you can do it right?

Anyway, if you do go the professional route for major home improvement projects, it’s good to be careful. For example, I know that a close family member picked out one person for a particular project, and it turned into a disaster where the guy wouldn’t show up and left work half-finished.  To avoid situations such as that, it’s a good idea to do your due diligence when hiring someone to work on home improvement projects.

Here are tips for finding the right home improvement contractor:

1. Have a clear vision of the project.  Before talking to any potential candidates for the work, have a very good idea of exactly what  you want done.  This will save time and avoid any misunderstandings later. Plus, you don’t want to risk having the scope your project expanded later, and pay for things you never originally intended to get done.
2. Ask family and friends for referrals.    Sometimes, for many of us, it’s a big unknown as to whether or not the person we’re considering for work will be good or not.  One could try Angie’s List (I haven’t, but would be interested to do so sometime), but family and friends are right there to answer questions – provided they live close enough to have used someone you could potentially hire.
3. Get At Least Three Bids.  This is important. Going with the first person you speak with might seem easy and expedient, but you often need to get different quotes.  Personally, in my work experience when hiring vendors to do projects, I’ve generally sought out at least 3 vendors for bids. Granted, these were not home improvement, but marketing/finance related projects, but the concept holds. Make the project expectations clear with each, so you can compare each contractor on an apples to apples basis.
4. Ask for References, and Call Them.   Someone may talk a good game, provide a good quote, but have limited experience.  Again, call them to verify the quality of work and capabilities of the contractor you are considering hiring.
5. Be Careful With Payment Agreements.  Make sure that you arrange for payments to be made in such a way that doesn’t give the contractor too much up front.  Once money is in hand, there’s less incentive to hustle and get the job done as well. Arrange for payment to be made in installments as milestones are completed.  This could have helped the family member to whom I referred earlier.

My Questions for You:

What do you think of this list? Is there anything you’d like to add to it?

What have your home improvement or contractor experiences been like?

When it comes to buying a home, there is often much excitement. A new place to call home and make new memories can be source of much joy. Of course, there can also be some nerves in the whole process as well.  Most of us aren’t fortunate enough to buy with all cash, and thus end up taking out a mortgage of some kind.

I remember buying my first condo, at about the time when many others I knew were buying their first homes – either condo or single family home.  Now, some of us are more interested in personal finance techniques and applications than others are.  For those of us that have an interest in this area, we pay closer attention to what a mortgage means, how they work, etc. There are many others who simply buy what they’re told they can afford, stretch themselves with the biggest loan possible, and just sign on the dotted line hoping for the best.  Clearly, there’s a range of experience out there!

Soon after my first condo was purchased, I recall having dinner conversation with a local couple with whom we had become friends.  They had purchased their first home about a year before mine was purchased, and were carrying a 30-year mortgage. My home also had a 30-year mortgage.  Sounds the same, right? Well, not really. Aside from their property being a bit more expensive to begin with, they had bought at a time of higher interest rates. Between the two time periods of their purchase and mind, rates had dropped almost a point. Or, more accurately, they paid an extra percentage point of interest.  It might have been slightly more or slightly over, but it was around a point. I’m guessing they didn’t spend too much time looking for a good rate, not being too financially oriented.

Anyway, the guy in the couple directly asked me the rate I got, and when I told him he seemed a bit surprised. I mentioned the topic of refinancing, as if I had been in his place, I’d be looking to refinance my home.

Now, of course it might be uncomfortable for some of us to talk about financial issues with friends in such a comparative manner.  I rarely feel good about letting anybody know that I got a better deal than they did, even if I was directly asked.  There are some cases, however, where I might say something for the sole reason that I’d like to help out in some way. In this case, I tried to make the case that they could save thousands of dollars by refinancing, particularly since they were planning to stay there for a while.

Here’s what I’m talking about:

Let’s say someone has a $250,000 loan, and is paying 5% interest on it over 30 years.  The monthly payment on that mortgage will be about $1,342.   If you simply lower the rate by 1%, down to a 4% interest rate, the payment will be about $1,194.

That’s a $148 difference per month! Multiply that by a larger number of months, and it adds up. Of course, there are costs to refinancing. However, if one is going to be in the home for the long haul – like the couple I mentioned – it would be worth it.  When interest rates drop by a significant enough margin, refinancing becomes a real option for some people – depending again on how long they are planning to stay in the same place.

Admittedly, and for full disclosure, I didn’t refinance my own home at the time.  I had a good reason though: I didn’t anticipate being in my place for too long. So, I can’t speak to this with direct experience of my own. Additionally, while I knew that their home was more expensive, I didn’t know their exact loan amount.  However, the ballpark math clearly points toward refinancing as a good option for that couple.

I wonder why they were so leery about refinancing? Maybe it was inertia, fear of the unknown, or competitiveness? The guy seemed to get a bit worked up (while his wife’s eyes clearly mocked him), and I could see a silly competitive side come out.  I suppose sometime people are just like that by nature. Whatever.  I do know that there could have been some savings for them, and I tried to help by suggesting refinancing:)

My Questions for You:

Have you ever refinanced? Or, in retrospect, wished you had?

How much do you monitor rates before you try to do so?

Home ownership can be a fantastic thing. However, owning a home can be more expensive than meets the eye.  It’s a situation that new homeowners figure out after a few years, and prospective homeowners often don’t fully realize when planning a purchase. However, it pays to be prepared, and to think about what’s involved.

This is a topic that I first brought up in May of 2010, back when Squirrelers was in it’s first few months and just starting to pick up some readers. The post was titled The True Long-Term Costs of Home Ownership, and explored the subject in some detail. You can click the preceding link to read it in full.

Within the post, I spelled out 5 ways home ownership generates increased costs vs renting:

• Taxes
• Association Fees (typically with attached housing)
• Maintenance
• Updating
• Outdoors

A year later, as we’ve seen continued softening of real estate prices in many areas, I revisited the post, and still find each area to be important to think about when making a home purchase.

That said, one area jumped out at me a little bit more: Taxes.

Why taxes?

With declining home values, people may be paying less for their homes in terms of principal and interest. Not that debt is a good thing, but for better or worse many people will borrow money to buy a home.  Lower prices just might mean a lower payment, if you’re focusing on house rather than payment. Sounds great, right?

Well, maybe. Part of housing costs may be declining, but are real estate taxes going down? Probably not. So, as a percentage of home payments, real estate taxes just might be increasing.

The big takeaway with real estate taxes – and I find it to be more true than ever – is that they’re a great example of why you never really own your home free and clear.

Sure, if you have no mortgage, it might mean that you paid off a loan or perhaps paid all in cash if lucky enough. That’s all fine and great. However, what happens if you decide not to pay your real estate taxes? The concept of ‘ownership’ changes pretty quickly, and you’ll realize just how much you really ‘own’ your house when taking that course of action.

It seems like it might be a buyer’s market for the short-term, and home ownership is something that’s a great thing in many ways anyway.  So, this post is not about casting doubt over owning a home.

Having said that, just keep in mind that real estate taxes are like a mortgage payment that never goes away. Rather, it tends to increase over time. So, when buying a home, consider holistically the concept of ‘ownership’ and the actual costs involved, regardless of category or classification.

Have you paid close attention to real estate taxes when home shopping? Are taxes reasonable where you live, or borderline intolerable?

Improving the appeal of your home to potential buyers, while helping to shorten its time on the market and selling it for top dollar, can be done with some fairly basic steps. Often, it’s about handling purchaser objections.

This topic came to mind as I watched an episode of House Hunters on HGTV. Have you ever watched this show? If not, it generally follows the format of featuring home buyers that are looking to purchase in a specific community, and is deciding between 3 homes. These can be condos, townhomes, or single family homes, depending on the episode. As the buyers go through each home, they comment on what they like or dislike about the features. The better episodes can give a basic feel for what it’s like to be in their shoes when making purchase decisions that best fit their preferences. Some people like the show, some think it’s cheesy. Personally, I don’t view it as much as I once did, but on occasion it’s interesting to watch.

Anyway, one episode caught my attention as a homebuyer commented on the color of the walls in a room, insinuating that they were ugly. This seemed to turn her (I think it was the wife) off to the house in general, the way the comment came out. Really, I suspect that this is quite common in general, where one or both buyers turn their noses up at the walls, and complain about the walls and how they don’t like the color scheme, how it’s so “70’s”, or something of the like. I’ve heard of people complaining of the color of appliances too, saying they look too “yellow” or “avocado green”. Well, that’s the way they looked in that era! Might as well get a new appliance upon purchase, and look at the existing one as a free appliance. It’s often how we frame things, right?

The thing is, small factors as this are no reason to think negatively about a home.  It’s an easy fix, as painting doesn’t cost much.

If you’re a home seller, it can be frustrating to have people complain about things like that. Why can’t they see that they’re complaining about something so nonsensical?

Well, home buyers aren’t always rational. Even someone like me, who probably spends more focus on the value of the home than the feel of it, has personal preferences and biases too. When they emerge based on first impressions, it can be an early hole that a home seller has to dig out of.

Instead of leaving it to the buyers, why not do a few quick things to improve the appeal of your home?

Here are 6 low-cost tips to make your home more attractive to buyers, some of which I employed in the past:

1.  Fresh Coat of Paint. Repainting the inside of your home with a fresh coat, using colors that have broad appeal, can go a long way. If you walk on the wild side with the color palette, you might hit a home run with a few buyers but turn off many others. Best to avoid objections, and keep your house in play with as many buyers as possible, by being safe with colors.

My Experience: A condo I once owned had totally neutral colors – as in white – while an older home I owned had a few bolder colors. I got no objections on the boring white walls, and more objections on the more interesting colors. The thing is, even those “interesting” colors were really not so bold – they just weren’t all totally neutral.

2.  De-Clutter. Buyers want space at the best price. The problem is that if you as the homeowner have a lot of furniture, pictures, knickknacks, etc – it might take away from the sense of spaciousness in a room. Simply reorganizing a room and moving unnecessary personal items away can make a room seem more spacious, thus letting prospective buyers see the potential for the room and imagine their own furniture and belongings there. Keep in this mind for kitchens, as they tend to be a focal point in a home. 

My Experience: When the aforementioned house was on sale originally, there were larger kids’ toys present in the family room. They were actively used and enjoyed, so I didn’t want to remove them or relocate them. I figured that home life came first, and I didn’t need to remove them just to please some short-sighted buyers. I soon figured out, based on other realtor feedback, that the room seemed a bit cluttered and would show better with the toys completely removed. It was a bit of a nuisance to move them elsewhere and change play patterns for a little child at home, but it had to be done. 

3.  Shape up the Exterior Appearance of Your Home.  This primarily applies to single-family homes. When people come to see your home, they have probably seen a picture of it online. Technically, that might be the first impression. However, the first “real” look at your home, in person, will probably make a stronger impression. Two houses could be identical, but one could be a bit shabby looking in terms of the landscaping and exterior, and the other could be clean and crisp. Much of this work can be done at moderate costs. Don’t let this be an immediate objection that immediately sours a homebuyer on your home.

My Experience:  I made sure to keep the home’s exterior looking sharp, in terms of grass mowed, basic landscaping taken care of, etc. I employed a lawn service for weed prevention as well. There were costs involved, but it was worth it for making a good first impression. Prospective buyers liked the curb appeal as a result. Even with a value-minded approach as a homebuyer, even I’ve slipped into judging a home based on its exterior appearance. It’s kind of like a “halo effect”: “if this looks shabby, I wonder if mechanicals are shabby too?” Imagine what a less-rational homebuyer might think.

4.  Make the Front Entryway Hospitable and Inviting.  Again going back to first impressions, once the buyers get to your front steps, they’re about to get their first impression of the home’s interior. If you walk into a house and the front door’s paint is peeling (or dented, etc), and the foyer area is plain – or worse, dirty – it won’t look good. Simply making sure your front door looks good, and the entryway is warm and inviting can help keep early buyer impressions positive. Make them feel like this could be a home, so perhaps an accent like a very nice rug could add to this feel 

My Experience:  Initially, I had an older storm door in front of the front door, and a regular looking rug. It cost me $200 total to get a nice new storm door put in, along with the front door repainted and a nice rug purchased.  Feedback from my agent (with buyer feedback) was positive once that took place

5.  Stage Furniture.  You want to make the home seem spacious and allow the buyer to feel like they could call your place home. Along those lines, don’t arrange the furniture to fit your own needs. Rather, arrange it to how it looks best to prospective buyers. Let your agent help you arrange your furniture in such a way that you’re making a buyer-friendly presentation.

My Experience: Not wanting to change things up, I originally kept furniture in place. After hearing some specific feedback on how the rooms looked, I moved things around a bit. Again, making that room appear more spacious and inviting helped create a more favorable impression.

To me, these tips are all about removing buyer objections.

Short of pouring money in remodeling your home (new kitchen, bathrooms, etc), your home really is what it is in the big picture. You can’t make a 40 year old home with 3 bedrooms and a small kitchen look like a brand new house with 5 large bedrooms, a master suite, and a large gourmet kitchen. What you can do, however, is take what you have and let the buyers see it in the most favorable light.

There is a lot of low-hanging fruit in these efforts, and it doesn’t require a ton of cash to make your home more appealing to would-be buyers in terms of initial impressions.

My Questions for You:

1.  Have you ever sold a home, and if so – have you ever employed any of these techniques, or did you resist?

2.  If you’ve ever been searching for a home, did many of these superficial things bother you? Like I said, they can even impact me a bit despite my perception that I’m fairly rational and bigger-picture in mindset when looking at such aspects of a home. What about you?

When purchasing a home, there are a variety of different factors that we consider as we make our big decision. These include the size of the house, number of bedrooms and bathrooms, layout, fixtures, condition, neighborhood, location, etc.  Clearly, there’s a lot that we weigh in our minds when thinking about a home.

I recently had a conversation with someone on the topic of tradeoffs when purchasing a home with kids in mind. We were talking about all the features of a home, and the desire for things such as a yard, a playroom, a location away from heavy car traffic, and so on. After we had been talking a bit, I brought up the topic of school districts.

“What about them”, the friend replied.

Surprised, I commented on how of course you would want to make sure that your kids would be able to go to a really good school. (Note: I’m considering the public schools here).

“Of course you want them to go to decent schools that are safe”, was the friend’s response.

My subsequent response was that I would want kids to go to very good schools that were safe, not just decent schools.

“Yeah, but a lot of those schools are in overpriced areas. You’ll be living in a shoebox just to get into one of those districts.”

My response was to spell out how I thought that while the shoebox statement was hyperbole, I do agree with the idea that tradeoffs need to be made. In which case, you trade off some of the qualities you’re looking for in a home, in exchange for having your kids get a better school.

“You can get a good education at a lot of schools; it’s not just the name that matters. You’re paying for a brand name when a good generic can do just fine. No way would I want to trade down from a great house with good schools to an average house with very good schools.”

Now, that was an interesting analogy. I do like to buy quality generics – or store brands – when they’re comparable to expensive name brands. I see the point, and it’s a nice way to put it. The only thing is, I don’t totally buy that argument in this case. These are schools we’re talking about, not products. Some schools have exceptional reputations for a reason.

It became clear that we saw this issue differently. Here are the two arguments:

1.      Nice, Newer Home in a Good School District

My friend’s argument here was that they would rather have a nice, spacious home with all the right features. That was important to them. We’re talking about features such as right number of bedrooms, the right size yard for kids, a finished basement in which the kids can play, a nice upgraded kitchen with upscale countertops and appliances. Basically, it was a house that they could be happy in, considering the physical structure.

The schools are good, definitely better than average. Are they among the better schools in the metropolitan area? No. But they’re decent. Test scores show it.

The Tradeoff: Get the house you want, and send the kids to schools that are good enough.

The Justification: Kids learn most of their values at home, and a household with supportive parents that value education and family can help the kids succeed in life even if they didn’t go to the very best schools.

2.      Ordinary, Older Home in an Very Good School District

This point of view, which happened to be mine, was that a very good school district, with a great reputation and high test scores, can be a help to a kid as he or she progresses through the grades and ultimately goes on to college. My view is that the scores are high for a reason, and the kids will ultimately have stronger fundamentals, be better prepared, and have higher peer group expectations as they complete school. This will help them compete as they establish themselves as young adults and beyond.

The thought process here is that I would rather have this for my kid, and not have an ideal home. Maybe it would be much older, have less updated features, smaller rooms, smaller lot, etc.

The Tradeoff:  Don’t get the house you want and just settle for an acceptable older house, and send the kids to schools that have excellent test scores – as opposed to good ones in the aforementioned district.

The Justification: A nice home is not a need, it’s a luxury. One can live in a less spacious, older place – at the same price – in order to give the kids the advantages of being in a higher rated school district that has higher expectations of its students.

Question for You:

What point of view do you hold in this situation – Excellent Home/Decent Schools, or Decent Home/Excellent Schools?

I’m curious what you think about this subject, and the rationale behind the two viewpoints. If you don’t have kids just yet, please think ahead to what you would do in this hypothetical tradeoff situation.

Don’t put all your eggs in one basket.

This, of course, is another way to say “DIVERSIFY”, which I often recommend here. In personal finance terms, this means don’t tie your financial future to just one investment or source of income. This story from CBS News, about a dam bursting due to heavy rains, shows how this concept can also apply to a single, important investment. 

Apparently, heavy rain in Iowa caused a dam on a nine-mile long lake in that state to burst. The result: what was a beautiful lake is now nothing but a small stream with a lot of mud and dead fish strewn about. Homeowners no longer have lakeside homes; rather, they have mud homes with a view of a muddy mess.

According to one an individual quoted in the article, the lake area had about $100 million in property value. Additionally, what would have been a $500,000 home would now be worth about 25% of that.  Losing $375,000 in the blink of an eye – or the quick bursting of a dam – would be painful for most people, no question about it.

I feel for these people, and hope they get help rebuilding this dam. This totally stinks, and not just due to the dead fish. Can you imagine losing that much equity in a home that fast – in a matter of minutes?  I mean, the real estate market in some places has been really bad, and it has caused a lot of problems, but it doesn’t help when Mother Nature takes a sledgehammer to your home equity.

What jumps out at me is the driver of home values on the lake. Yes, of course, it was the lake. I assume this, having never been to Lake Delhi, but if home valued drop once the lake is drained it’s clear to see that people paid a huge premium to live on water. That alone isn’t surprising, as people have been known to pay astronomical sums for great views, including locations on or near water. But what’s interesting to me is that the lake’s existence was apparently dependent of this dam functioning properly.

Thus, connecting the dots, the home values were actually dependent on the dam functioning properly. These homeowners in Iowa, in effect, had their financial lives tied to a dam built in 1927.

Now, people do regularly buy homes that are at the mercy of Mother Nature. Theoretically, this could be the case anywhere. Tornadoes, lightning, earthquakes, tropical storms, flooding, and other weather-related factors can harshly impact people’s lives. That said, there are probabilities and risks to consider related to these factors when buying a home.

For example:  if you buy a home right on the ocean, you can have the thrill of living a beach life right on the water – but you’re at higher risk for high waves crashing through your property. Buying a home on higher ground a mile away won’t give you the beach life, but won’t subject you to the same risks either. You’re taking a chance by living on the beach.

Additionally, there are other risks with home purchases in terms of location. One might choose to take a chance by living in a high crime area.  Considering the right security system, such as Home Security System in Canada, can be a smart step in protecting oneself.

Bottom line:  it’s important to fully think through the risks associated with any purchase – including nature-related risks when buying a home. And remember not to put all your eggs in one basket.

Have you considered such factors when buying a home or choosing a place to live? As you think about it further, are you subject to risks that you might not have originally considered?

In the present-day economy, there are clearly some areas of the country that are doing much better than others. Some places have economies that are strong; in others, things are quite bleak. For some of these places, these trends have been in place for a while – long before the recession.

Clearly, job and career prospects are brighter in some geographic areas vs. others.

In terms of quality of life – as measured by attributes such as low housing prices, short commutes, mild weather, cultural and entertainment options – there are clearly some areas of the country that offer more than others. For many, living in a cold, gray, decaying city is not as attractive as living in a place with warm weather, scenic landscapes, and fun outdoor activities.

Obviously, while subjective, it’s safe to say that there are some places that are generally more appealing than others.

So, given these two variables – economy and quality of life – wouldn’t it make sense for each of us to try to move to a place that would seem to have more to offer than where we are currently living?

Logically – looking at it that way – yes. Why live someplace with less to offer.

Practically, however, it doesn’t quite work that way.

Why?

Here are four major reasons why people don’t relocate so readily:

1) Selling a Home. Homes aren’t quite as liquid in many places here right now – at least not at a price many people might want to accept. Depending where one lives, a home could be rented out. Of course, there still might be rental income tax to attend to in that case.

2) Finding a new job. It might take some time in this economy to find a new job in a new city, much less the one you might be in right now.

3) Family considerations. For many people, there are family ties that make it emotionally difficult to move. There could be relatives close by, or kids who are established in their schools. Perhaps some family members need care. Whatever the reason, the people factor makes it tough to pick up and move anywhere.

4) Resistance to change. Sometimes people just don’t want to change. People get comfortable in their surroundings and daily interactions. Even though something might seem to be exciting, fun, and profitable, it can be scary for people who don’t want their regular routines and comfort zones to change.

There are likely many additional reasons why people don’t want to move. Perhaps you are thinking of one related to yourself.

Having said all of this, I propose that you consider this hypothetical situation:

A company or organization within your profession or line of work approaches you with a job offer. They tell you that the job will be in a city over 1,000 miles away. The job will be a comparable position as your current role, in an organization with comparable prospects and reputation. Additionally, the company will insure that your working spouse, if you have one, will receive a position in that same new community that is comparable to his or her old job. One other factor: the company will provide relocation expenses.

Taking this into consideration, here is the question:

How much would your compensation have to increase, on a percentage basis, for you to accept the new position?

My hypothesis is that as one gets older, this percentage gets higher. In fact, I am guessing that it gets disproportionately higher as one gets older.

I have a friend who once told me that he wouldn’t move from his home in Wisconsin unless he was offered a salary increase which was not in any way unrealistic. I asked him if he would move if his pay was doubled, and wasn’t even sure then! He would have moved at a much younger age, he said, but now his kids were established in school, his family lived in the area, and he was comfortable.

At the time, I thought that might have been a bit narrow-focused. Now, older and with a family, I understand. Frankly, I don’t plan to move. Now, as much as truly enjoy the Chicago area, I wouldn’t mind living on the West Coast.  It would be great to have a second home, though the economics behind that are completely laughable right now – and for the foreseeable future.

The bottom line: I’m not considering moving out of the area until my kids are out of school. I now see how my friend wouldn’t want to move across the country even if his salary was doubled. Sure, it would be a good financial opportunity. But there’s more to life and happiness than money alone. For me, relationships and health play a big role in decisions I make as well.

What about you? What percentage increase in income would it take for you to relocate to a community over 1,000 miles away?

This article was included in the Carnival of Financial Planning at My Trader’s Journal

Home ownership has long been touted as a foundational element of building personal wealth. Rather than rent, the theory often goes, by taking on a mortgage you are avoiding “throwing away money”, as a portion of your payment goes toward principal, and you obtain tax deductions as well. Plus, it feels better for many to own than rent, as you have a sense of possession and pride with your own home. The emotional component of this is important to note. Overall, home ownership seems like a great deal, especially for those aspiring to buy their first place.

I am very positive toward home ownership, as long as the market is stable (a topic for another day). If your hope does appreciate at a modest rate – say 2% per year – you can amplify the return through leverage. This means that if you have a $300,000 home with 20% down ($60,000), your 2% increase ($6,000) can appear to be a 10% return on investment. Very good, indeed.

The only thing is – those same people looking to buy their first home tend to overlook the true costs of home ownership. I will make the following two suggestions here:

1. It is more expensive to own a home than many first-time buyers realize
2. You don’t ever truly own your home

It is more expensive to own a home than many first-time buyers realize

Taxes: When people rent, they typically pay the rent, plus renters insurance, and that’s about it. With homeownership, there is the mortgage payment, plus insurance, plus property taxes. That last component can be significant. The national average in the US has hovered around 1.0% of market value, but many counties have average rates well over 2.0% of market value. Thus – with that $300,000 home I mentioned, taxes at 2.0% would be $6,000. Sure, there is a tax break, but if you end up paying a net $4,000 of taxes after deductions, it comes out to around an extra $333 per month. That’s not small change.

Association Fees: This isn’t applicable to all homeowners, but most condominium or townhouse complexes will require association fees. The fees typically cover things such as common area costs (roofing, siding, landscaping, etc). These fees vary by complex or building, due to each one’s unique needs, but these fees can be relatively significant. For a $300,000 home, you could be looking at $100 or more per month – perhaps in the $500 or more range for a high rise building. With single family homes, this is less prevalent, but some newer ones do have neighborhood association fees.

Maintenance: When you rent, it’s a matter of calling the landlord to have him come fix the problems. When you own, you’re on your own (so to speak)! If the roof leaks, you have to fix it. It there is a plumbing problem, you have to handle it. Either you personally fix problems or you pay someone else to do it, which will be expensive. Plus, you have to account for the periodic replacement of certain things – the aforementioned roof, sump pump, appliances, etc. It is a wise idea, I believe, to budget at least 1.5% of your home value for such expenses. Thus, for the $300,000 house, you put away $4,500 annually for such expenses. It might not all be spent up each year – some years less, some more. But the money should be regularly set aside. Problems will happen, and shouldn’t be entirely unexpected.

Updating: If you buy a pre-owned home, you may be tempted to update a room in the house – perhaps the kitchen, maybe the master bathroom. You might even want to put new flooring throughout your place. Even if you like the place as is, you might want to change some things after living there for a long period time. All of this takes money, and in some cases it takes significant money. For example, a total remodel of a large kitchen can easily cost over $30,000 (U.S.).

Outdoors: If you are renting, outdoor maintenance is covered. If you own attached housing such as a condo or townhouse, this is likely included in your association dues. With a single family home, you will have to pay for things such as lawn mowing, snow shoveling, landscaping, etc. Even if you do it yourself to save money, you will be spending time on such activities.

You don’t ever truly “own” your home

Lets say you purchase a home and take out a mortgage. What a great feeling, you are a homeowner! Now, if you try to stop making those mortgage payments, you’ll see whether or not you truly own it. Remember – if you have a mortgage, you may have the title, but you’re still paying for it. It’s not yours free and clear.

Speaking of free and clear, what exactly does that mean with respect to home ownership? In most circles, this has come to mean the mortgage is paid off in full. Some people hold little parties for this accomplishment, when their loan is finished and they feel that they own their home outright. And make no mistake, it is a great accomplishment as you no longer owe money to the party that is servicing your mortgage.

Realistically though, your payments are not done. Furthermore, they probably won’t ever be done. In effect, you have rent payments to make on your home, and they go on in perpetuity. These payments are called property taxes. Back to that example above with the $300,000 home – those taxes of $6,000 annually will most likely move higher over time. If you try to stop making those payments, once again you’ll see if you truly “own” the home.

All of this said, should a first time homebuyer be leery of buying a home? After all, its easier to just write the rent check and forget about it. As I said, I’m pro-home ownership. Long-term, it’s a good move financially, and there’s something about having your own home that’s point of deep personal pride for many of us. But the timing has to be right, and it’s a step that can be taken with complete knowledge of the true long-term costs of home ownership – which continue even beyond when the mortgage is paid off.

This article was included in Carnival of Personal Finance #257 at Canadian Finance Blog