House Buying 101

House

You may recall that in March of last year we bought a house. We’ve been loving it, but that isn’t the point.  The point is that the whole process is terrible and arcane and a pain in the ass.

Well, a friend of mine recently reached out to me to ask if I had any tips or basic information because he was just starting to think about buying a home.  I ended up writing a pretty lengthy email back to him and thought I would share it in case it helps anyone else out there who is looking for a basic overview of how the process works.

Hey buddy,

Future homeowners, how exciting!  Unfortunately the process is really arcane and overly complicated.  But I’ve got a few tidbits that may (or may not) prove helpful.

[ Warning: this ended up being really long, so settle in before continuing 🙂 ]

The first thing you should get sorted out is the financing. It’s the most complicated part, and the part during which you get the least guidance. Essentially, you can get pre-approved for up to a certain dollar amount by your mortgage lender, which means that the people who own your potential future home know that you can afford to buy it which, of course, makes it more likely that they will accept your offer.

Note that there is big difference between “pre-approved” and “pre-qualified.”  You definitely want the former.  It’s much more rigorous and means a lot more to the seller. If they aren’t asking for bank statements and tax documents then you aren’t getting pre-approved.

As to finding a specific lender, we used a local credit union but I’ve heard good things about Quicken Loans online program, and I’m sure that there are a lot of places that are easy to work with.

Also, don’t be concerned if pretty much immediately after you take out the loan it gets sold to another lender. It’s my understanding that that is how it works about half the time. The terms of your mortgage won’t change even if the original lender sells the note to someone else.

A couple of things to watch out for regarding mortgages.  Of course, you want to shop around a little to make sure you are getting the lowest interest rate.  There is also something known as “points” on a loan, which essentially means that you can pay extra cash up front for a lower interest rate.  You’ll have to crunch the numbers for yourselves to see what’s better.  Here’s some extra info about it http://www.bankrate.com/finance/mortgages/mortgage-points.aspx.

Another thing is you want to make sure that there is no “pre-payment penalty”.  This just means that if you want to pay the mortgage off early you won’t be charged a fee to do so. It’s effing insane that they can even legally charge a fee for this but they can so make sure you read your documents when you sign (don’t just take their word for it).

Also, I would personally stay away from adjustable rate mortgages in today’s interest rate environment, but that’s a personal preference.  [Mrs. Dragon] and I went with a plain-vanilla, no pre-payment penalty, 30-year fixed rate mortgage.

Mortgages are a pain in the ass but making sure you get the right one can literally save you tens of thousands of dollars over the life of the mortgage, so make sure you shop around, ask lots of questions, and read all your documents before signing them.

OK, that’s probably more than you wanted about mortgages so moving on …

We recommend that you use a “buyer’s agent” when looking at houses. The house seller (not you) pays them. And if you don’t find something you like, you don’t have to pay them.  It’s no-risk for you and they will be able to tell you information about the local market. That being said, make sure you meet with at least two (and preferably 3-5) to find one you think will genuinely listen to you and have your best interests in mind.

The agent gets paid at the purchase and, of course, some people are better than others. Some won’t care if you are happy in two years. You want to avoid someone who seems too “salesman” like, plus you just want someone that fits your personalities.  You’re basically going to be hanging out with them for an hour or two several weekends in a row (probably).

The agent will help you navigate making the offer (they will do all the paperwork for you), reading the contract, setting up inspections, etc.  It’s really important to get one that is easy and transparent to work with.

Also, if you want to start shopping around, we find that realtor.com is the best and most reliable of the real estate websites.  It’s directly linked with the MLS so you know that the properties aren’t scammy.  Of course, your agent will also be showing you houses, but it’s a good idea to be looking around on your own to see what prices are like and what sorts of homes are available.

I would recommend talking together and setting caps on price and square footage, and maybe the least room/bathroom combinations before you meet with agents. For example, we knew we didn’t want to spend more than $135k, we didn’t want larger than 1500 square feet, and ideally we wanted at least 3 beds and 1.5 baths.

The Realtor makes more money the larger/more expensive the house you buy (and so does the bank). But don’t buy more house than you want/need. That is the number one financial mistake people make. If you guys want a large house that’s great, but just make sure you talk together and decide before you go looking at houses.  It will give you a much clearer picture to describe to your Realtor what you are looking for.

I know this is already a novel, but I just want to throw in a quick timeline for what to expect once you actually find a house you like and make an offer.  Of course keep in mind that this is all very rough and I am far from an expert.

1.) You make an offer on a house you like.

2.) The seller generally responds within 48 hours either accepting your offer, making a counter-offer, or just declining.

3.) After you reach an agreed upon price, you will have to put up some earnest money to ensure that you are serious.  Generally 1% of purchase price (roughly).

4.) Once the contract is signed by both parties you generally have a 7-14 day window to get inspections done and if you find something you don’t like, you can back out with no obligations (and you will get back your earnest money).  This is the window where you will have a home inspector come check all the general stuff (plumbing, electric, condition of the roof, foundation, etc), and a pest person (make sure there aren’t termites, or raccoons living in the attic and such).  Depending on the area there may be other standard inspections.  Your Realtor should be able to tell you about this.

5.) After the inspection window clears, you are officially under contract and if you decide you don’t want the house you will forfeit your earnest money. Depending on what you work out with the seller in the contract, the closing date (when you get the keys and sign the mortgage documents) will be anywhere from 15 – 90 days after the inspection window.

I guess that’s probably more than you were looking for, but hopefully there’s some helpful stuff in there 🙂

Good luck with the house buying process.  We’d be happy to talk/skype and tell you more details or about our specific experience if you think it will be helpful.

Just remember not to let anyone rush you during ANY step of the process.  This will probably be the biggest single purchase you ever make, so do your due diligence and if something doesn’t feel right then walk away.

Love you guys!

If I left out anything important, feel free to add it in the comments!

The Hoard: October 2015

The Dragon's Hoard

Every good dragon has a hoard.  You know.  The collection of gold, jewels, and other valuables that the dragon guards in his or her cave.  For me, The Hoard is what I call my assets.  The collection of stocks, bonds, and other income producing assets that Mrs. Dragon and I have collected thus far.

Mythological fire breathers have to protect their hoard from knights seeking glory, wizards wanting power, etc.  Real-world FIRE breathers have more mundane, but very real dangers to their own hoards: the tax man, the cable company, lifestyle inflation, high-fee brokers, and many more.

This is one post in a series that documents my progress towards financial independence.

You might recall that I don’t include our primary residence in the assets (it doesn’t produce income) and I don’t include our primary mortgage against the assets.  If we had a rental house, I would include it in both parts of the equation, but I’ll address the primary residence in a separate category.

I do not differentiate between tax-advantaged accounts and taxable ones in the number for The Hoard.  Assets are assets.

We use the excellent (and free!) service Personal Capital to keep track of how The Hoard is coming along.  It lets you view all your accounts on a single homepage for a convenient snapshot of your financial life.  It is a top-notch service.  Highly recommended.

Mrs. Dragon and I want $600,000 in liquid assets and a paid-off house to consider ourselves financially independent.

How are we currently doing?

The current market value of the hoard is $105,345 (vs last month’s $95,372).  This is about 17.6% of our $600,000 goal.

Primary residence: The mortgage is $96,447  (vs last month’s $96,708), which means it’s about 1.58% paid off.

Hell yeah! This is the first time that The Hoard has broken the six figure mark!!!

They say the first $100k is the hardest and I certainly hope they’re right.  It took thirty years to get the first one, and I’m hoping for more like 1.5 years to get the next one. 🙂  I guess time will tell.

I was actually a little surprised to see such a big jump in our net worth this month. We didn’t do anything out of the ordinary.  After looking around in Personal Capital, I see that our investments grew by about 3.5% over the last thirty days.

Thus far, fluctuations in the market haven’t really affected our bottom line very much.  But now that we actually have a decent chunk of money invested, I can see that going forward the market will start to dominate the performance of our bottom line.

This is, of course, to be expected, but it’s very different to know that theoretically versus seeing your bank accounts shrink and swell as the market moves.  Either way, I’m pumped for this new development.  It means we’re starting to pick up some momentum.

We continue to invest versus aggressively paying down the mortgage and I don’t think that will change any time in the next 6 months at least.

Right now we are making a really aggressive push to try to fill up all our tax-deferred accounts as much as we can before the end of the year.

As I mentioned in this post, between the two of us Mrs. Dragon and I have a total limit of $83k a year that can be put into tax-deferred accounts.  We won’t quite make the full $83k this year (mostly due to buying the house), but I’m hopeful that we might get it all next year.

Anyway from now until December we are trying to squeeze out any extra dollars that can be put in those accounts before the year ends.

All in all I’d say this was a kickass month for The Hoard.  Any time we get a $10k boost from one month to the next is definitely a huge win. We’d be completely FI in five years if we could do that every month.  But, as they say, “if ifs and buts were candy and nuts we’d all have a merry Christmas.”  Am I right?!

How did the last month treat your investments? Do you think we are on track for FI by Feb 2025?

The Hoard: July 2015

The Dragon's Hoard

Every good dragon has a hoard.  You know.  The collection of gold, jewels, and other valuables that the dragon guards in his or her cave.  For me, The Hoard is what I call my assets.  The collection of stocks, bonds, and other income producing assets that Mrs. Dragon and I have collected thus far.

Mythological fire breathers have to protect their hoard from knights seeking glory, wizards wanting power, etc.  Real-world FIRE breathers have more mundane, but very real dangers to their own hoards: the tax man, the cable company, lifestyle inflation, high-fee brokers, and many more.

This is one post in a series that documents my progress towards financial independence.

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Why We Invest Vs Paying Off the Mortgage

RoadI’ve read more than my fair share of personal finance blog posts during the last three years. I’m sure some of you out there can relate :). One topic that comes up repeatedly is whether it is better to pay off your debts or invest with your extra money.  The answer to this differs from person to person depending on their personality and what motivates them.

I think most people would agree that if you have any high interest debt, say anything above 5-6%, then you should take the guaranteed 5-6% return on investment and pay off the debt.

But when your interest rate is lower, say in the 3-4% range it becomes a less obvious choice.  Mrs. Dragon and I don’t have any non-mortgage debt, and our mortgage is at 3.65%.

Our goals for FI are $600,000 in liquid assets and a paid off house by Feb 2025.

Each of these is a long road, but we’ve decided to prioritize investing over paying off our mortgage and here are all the reasons why (in no particular order).

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Expenses: May 2015

ExpensesExpense report!  Since I’m a total voyeur for finance, these types of details are exactly the kind that I love to read on other people’s blogs.

Don’t get me wrong though, these numbers are primarily written for me and Mrs. Dragon.  Every good FIRE breather knows that to be successful, you have to track your expenses.

You have to track them like a dog tracks mud in the house. How else will you know when your Hoard is big enough to accomplish what you want?

Without further ado, here are the numbers for May (rounded to the nearest dollar):

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We Bought a House

House

Mrs. Dragon and I are officially home owners!  As I mentioned in previous posts, we were in the process of buying a house, and we closed earlier this month.   To be clear, I am not someone who thinks that everyone should own their own home.  In lots of cases, it may make more sense to rent.

However, we knew we were going to purchase a home in our new city (we moved here last summer for jobs).  It was only a matter of when.

Neither of us have ever owned a home before, so we’ve never taken out a mortgage before.  In case you haven’t heard, it’s a huge pain in the ass.  In theory it’s a relatively simple thing.  You want to buy a house, the bank gives you the money, and you use the property as collateral on the loan.

In practice, however, it is a well-oiled machine of cluster-fuckery.  There were all sorts of last minute snags that were totally avoidable.

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