Forced Savings

One of the big banks has a voluntary program available that transfers $100 each month from your checking account to your savings account. In five years, the account owner would have over $5,000 because of a type of forced savings. 

Similarly, when a person buys a home with a standard amortizing loan, each month, a part of the payment is used to reduce the principal loan amount. Amazingly, over $4,000 would be applied toward the principal in the first year of a $250,000 mortgage at 4% for 30 years. In five years, the loan amount would be reduced by almost $25,000 through normal payments.

The other dynamic that is in play is that while the unpaid balance is being reduced, appreciation causes the value to increase. The difference between the two makes the equity grow even faster. Three percent appreciation on a $250,000 home would increase its value in five years by almost $40,000.

A 30-year mortgage of $250,000 will be paid for in 30 years. At an average of 3% appreciation, the asset would be worth about $600,000. If you continue to rent, the asset belongs to your landlord instead.

Many experts believe that the homeowner benefits from the forced savings of amortization and the leveraged growth that takes place in the investment. It has been observed in the tri-annual Consumer Finance Survey by the Federal Reserve Board that homeowners' net worth is considerably higher than that of renters.

At least consider a shorter one

Affordability and stability are reasons homebuyers choose a 30-year fixed rate mortgage. It makes the payment lower than a 15-year mortgage and the principal and interest portion of the payment will be constant for 30 years.

A common belief among homeowners for decades was that they would always have mortgage payment. The Great Recession has caused many individuals to rethink that concept and make plans to get their home paid for sooner.
For people who can afford it, shorter term mortgages will provide a lower interest rate and build equity faster. A 3.09% 15-year fixed-rate mortgage compared to a 3.87% 30-year loan will have a $562.42 higher payment.
The equity would be $66,903.04 greater on the 15-year term at the end of seven years. Even after you consider the higher payment on the shorter term, the equity difference is still almost $20,000 greater.


By choosing a 15-year loan, a borrower is committing to the higher payment for the term of the mortgage in exchange for a slightly lower interest rate. Another approach would be for the borrower to acquire a 30-year mortgage and make payments as if it were on a 15-year term. The slightly higher rate would allow the borrower the flexibility of not having to make the higher payment in the event he could not afford it on any particular month.

Discussion with your Insurance Agent

Insurance and homeowners go together like peanut butter and jelly. Lenders require fire insurance at a minimum for homes with a mortgage but many owners opt for a more comprehensive coverage with a homeowner’s policy.

However, comprehensive doesn’t mean that everything is covered. Filing a claim is not the time to learn that you don’t have the right coverage. Discuss the following issues with your insurance agent to get a better understanding of your policy and whether some adjustments might be in order.

• Flooding?
• Rising water? 
• Mold?
• Earthquakes?
• Pools?
• Termites?
• Certain kinds of pets or breeds of dogs?
• Limits on jewelry and cash?
• Deductible amount?

The whole concept behind buying insurance is to transfer the risk of loss that you cannot afford for an annual premium that you can. Price and coverage need to be considered when comparing policies. Call your agent and make sure you understand what you’re insured for and if there are alternatives available.

Cut Mortgage Insurance

Making additional payments toward the principal of your mortgage will do three things for the homeowner: save interest, build equity and shorten the term on fixed rate mortgages.

These things should be beneficial enough to justify the extra payments but another huge advantage is available to those who have private mortgage insurance on their loan. Mortgage insurance rates vary but can range from seventy-five to two hundred dollars a month on a $200,000 mortgage.

Lenders are required to automatically terminate mortgage insurance when the principal balance reaches 78% of the original value of the property. It is important for homeowners to monitor their balance because sometimes lenders may inadvertently fail to terminate the coverage.

Mortgage insurance is a necessary but expensive requirement for many people who are limited to a down payment of less than 20%. Eliminating the need for it can save thousands of dollars over time.

The Consumer Financial Protection Bureau, CFPB, issued a compliance bulletin on August 4, 2015.

Checking for Water Leaks

An unexpected, larger-than-normal water bill could lead a person to think that they might have a leak. Before incurring the cost of a plumber, it is fairly easy to run your own test.

Locate your water meter. They’re usually in the front of the house, near the street. In some cases, you might need a meter key to open it; they can be purchased at Lowe’s, Home Depot or other hardware stores.
Step One - Write down the numbers on the meters to get a current reading. Don’t use any water for thirty minutes. If the meter shows water usage during the test period, proceed to step two.
Step Two - Shut off the valves to all of the toilets. If you have a pool with an automatic filler, it has a similar device. Repeat the test again for the same thirty minute period. If the numbers haven’t changed this time, it indicates that the toilets probably need servicing.
If the numbers have changed during step two, it is an indication there may be a leak and it will need to be tracked down. This could be the time to call a plumber or plumbing leak specialist. Your water department may have a consumer help line that can offer suggestions also.

More Home for a Lower Cost of Housing

What if you could live in a larger and possibly newer home for less than you are currently? Would you consider moving? Do you want to hear more?

Interest rates, while they’re expected to go up, actually took a small dip and are still hovering at the 4% or below mark for a 30 year mortgage and almost one percent less for a 15 year term.

Let’s assume that you have a $225,000 mortgage currently at 6% which has a principal and interest payment of $1,348.99. With a 4% rate, you could have a $282,561 mortgage with the same payment. A $57,000 more expensive home could help you get what you need most such as more square footage or a different location or a newer home.

If you’re going to be making that payment for years to come, why not allow lower interest rates to help you get the features you want without having to necessarily pay a higher payment. Taking that logic a little bit further, let’s see how utilities can make a difference too.

A newer home could easily have lower monthly utility costs than your current home due to being more energy efficient. Construction materials, windows, doors, insulation, modern HVAC systems and energy efficient appliances all contribute to lower utility costs. A new home with these advantages could easily save a homeowner up to 25-50% on utilities for the same size home.

The concept is simple: get the most home you can for the amount you spend on the payment and utilities. It will take some investigation and your real estate professional can help.

Wait a Year...It Won't Matter?

There is a frequently quoted expression “more money has been lost from indecision than was ever lost from making a bad decision.” Regardless of the extent of its accuracy, most people can recall when procrastination has cost them money.

There are markets so short of inventory that buyers have become frustrated after losing bids for several homes and have decided to wait until more homes come on the market. In the meantime, the shortage of homes is driving the prices up more by the month.

There are buyers who can’t find what they want for the price they want to pay and think that waiting will somehow change things. In some cases, what they want just keeps moving farther and farther away from them.

The other dynamic in play is, of course, the mortgage rates. While they’ve remained low for several years, most experts agree that they’re going to rise; it’s just a matter of when. If you look at what positive increases in both of these would do, it becomes apparent that waiting will matter.

A $250,000 home purchased today on a FHA loan at 4% for 30 years will have a principal and interest payment of $1,151.76. If a buyer were to wait a year and the price increased 5% and the rate went up by 1%, the payment would increase by over $200 a month. In a seven year period, the increased payment alone would cost the buyer over $17,000.

Use the Cost of Waiting to Buy calculator to see how much it will matter based on the home you want to buy and what you think the prices and rates will do in the next year.