The American Dream, Version 2.0 April 6, 2009

It’s finally here: the day when the albatross lifts from my shoulders. The sale of our home closes today, and I feel like wearing a party hat and throwing confetti. If I just survive until this evening, I’ll be free.

How I felt as a homeowner. I kid you not.

True, the sale was only accomplished by our willingness to take a big financial hit. True, the process has been more painful than an unanaesthetized root canal. True, I have learned that the two agents involved in this transaction are the moral equivalent of actual plastic douche bags turned inside out and used as pooper scoopers in a dog park where the dogs have all had triple espressos and a platter of mozzarella sticks. Realtors, I am convinced, suck. Still…the end is in sight, and I’m approaching it with a profound sense of relief.

The $10,000 down payment I signed over in December of 2006? Gone, never to be seen again, along with about $24,500 of our cash reserves and available credit. But it’s worth it. It’s like amputating a dying limb, and saving the rest of the patient. True, he might not feel whole until he’s had extensive prosthetics and physical therapy, but he’s alive. He made it. And now he appreciates everything he sees so much more, because he almost lost it.

So why did we do what home-buying gurus claim is the dumbest thing possible? It’s the economy, stupid. #1: I work in retail, which means my days might be numbered. I’ve survived several rounds of layoffs so far, but there’s no such thing as a cocky advertising employee right now. #2: I live in Arkansas, which isn’t exactly the capital of economic development. On any given Sunday, there are more dogs for sale in the paper than there are jobs. It’s not a pleasant environment in which to find a liberal arts job, let alone one that lets you live above the poverty level, with benefits (even crappy ones). Faced with these possibilities, there is only one solution: make every dollar go further by reducing what it costs to live, month in and month out.

By opting out of the house, we’re looking at a significant reduction in monthly expenses. Here’s a brief tally of our projected savings:

–No property tax: + $225/month

–No homeowner’s insurance: + $57/month

–No homeowner’s association dues: + $41 a month

–Savings in monthly rent vs. mortgage: + $400/month

–Switching from Comcast cable/internet to AT&T no-land-line-required DSL: + $20/month

–Switching from TMobile to AT&T, to use my husband’s preferred employer discount: + $30/month (yes, our contract was up; no, I did not pay an early termination fee)

–Projected savings in monthly utilities: + $120/month (electricity, gas, sewer, water, garbage)

Total per month: + $893/month

And guess what: our 2-bedroom luxury apartment only costs $850/month. True, we have taken on a total of $18,000 in debt to get out of this house. But with aggressive savings, we can push hard and repay that amount in about two years. (Less than that if we forward our entire tax refund for those years to Citibank.) This way, if I lose my job, I’m covered. We owe much less on a monthly basis, and I can enroll in my credit card’s protection program that defers payments if I lose my job.

Will we need to keep our heads down and ignore the siren song of eating out multiple times a week, new clothes, and vacations? Yes, but so will many others. It’s a recession, after all. It’s the perfect climate to buckle down and pull yourself up by your bootstraps.  In a sick way, I’m almost looking forward to it.  I have a goal, a purpose, a mission. And when it is all over and we emerge with debt paid and a long hibernation of thriftiness, we’ll be smarter, stronger and wiser. And none of it would have happened if we hadn’t taken the plunge, shaken things up, and gotten the hell out of that house.

The Money Pit Part Deux: Tax Benefits for Homeowners? I’m Still Waiting March 10, 2009

First of all, thanks to everyone who commented on the first Money Pit post! Since so many of you asked about the tax incentives for homeowners, here’s what I have to say about that:  it’s a crock. I fell hook, line and sinker for this myth, and no one, not even my own parents, set me straight when I bought my home. Two full tax years later, I’m still waiting for these so-called benefits to appear. Maybe in some other market you’ll actually see a benefit, but in ho-hum Middle America, it just isn’t working.

Let’s refresh the basics:

I bought my home in Little Rock with a purchase price of $215,000 and a down payment of $10,000. My mortgage is broken up into two parts: $172,750 at 6% and $32,250 at about 11%, for a total of $205,000. My husband and I together have an annual household income of just under $70,000.

Before I bought a home, I believed everyone who told me there was an awesome tax benefit coming my way-friends, family, even random newspaper and magazine articles.  None of these sources explained HOW it was possible, but they all agreed that it was. Through some strange tax code alchemy, my mortgage interest would become this awesome way of ripping off the government. Sounds good? Of course. So I went along with it.

The ugly truth:

When you prepare your taxes, you deduct the total amount of interest you paid, along with any other deductions, from your taxable income. The folks from Countrywide (assholes) tell me that this amount is approximately $10,778.90 on my first mortgage, and $2,582.30 from my second for a total of $13,361.20.

Luckily, I am able to add to this total with a few other small itemized deductions: my husband works from home so we are able to deduct a portion of our utilities commensurate with the room he uses solely for work, the amount he pays for his own health insurance, and we donated his ugly single guy furniture to Habitat for Humanity and wrote off the value of the donation. This gets our total itemized deductions up to $15,763.

The standard deduction for a married couple filing jointly is $10,900. So right off the bat, owning my home has given me $4,863 of extra tax write-offs. But don’t get excited yet-none of this represents any actual money without two things: my taxable income, and the figure from the tax table that tells me how much tax I owe for the year.

Let’s do some math, with a little help from Jackson-Hewitt (these numbers are taken directly from our prepared taxes). Our total wages are $68,181 with $4,312 in adjustments (student loan interest, moving expenses, etc.). This puts our adjusted gross income at $63,869. From this, we get to deduct our exempt amount of $6,800. Our taxable income total is now $57,069.

NON-HOMEOWNER: If we did not own a home, we would not bother itemizing. Our standard deduction for a married couple filing jointly in 2009 is $10,900. We subtract this from our current taxable income ($57,069) for a new total taxable income of $46,169.  Based on our tax bracket, our tax due is $1,670 plus 15% of the amount over $16,700. This equals $6,090.35.

HOMEOWNER: Our itemized total is $15,763. We subtract this from our current taxable income ($57,069) for a new total taxable income of $41,306. We are in the same tax bracket, so our tax due is still $1,670 plus 15% of the amount over $16,700. This equals $5,360.90.

The total amount of tax I saved by being a homeowner is the difference between $6,090.35 and $5,360.90: $729.45.

Let’s pause for a moment of reflection:

I’m sitting here in stunned silence as that number stares me in the face, bold in more ways than one.  I am being robbed, and it’s as if I opened the door and put out the welcome mat for the thief.

I have paid $13,361.20 in interest, $2,700 in property taxes, a year’s worth of maintenance and homeowner’s association fees, plus a year’s worth of homeowner’s insurance for the unbelievable privilege of saving $729.45?  That’s the great tax savings I’m supposed to be so damn happy about? Are you freaking kidding me?

I had to deal with mice in the attic, a window broken by a freak accident, a brick mailbox plowed over and destroyed by a joyriding teenager, and all the other wonderful spur-of-the-moment surprises that YOU as a homeowner get to pay entirely out of pocket, and I’m supposed to be happy about it just because I owe $729.45 less in tax?  I expended more than that this year in home maintenance alone. Great savings.  Thanks a lot, Uncle Sam. Say hi to Typhoid Mary, will ya?

But the fun isn’t over. The total amount my husband and I have had withheld is $1,100 over the amount of our tax due (along with another $750 from the state of Arkansas). Our total tax refund amount is $1,850.  A small consolation, but hey, we still get to play with almost two grand, right? Wrong. Our yearly property tax bill arrives at the same time as the refund, and guess what? We still have to pay out of pocket. Our property taxes are $2,700, so once I fork over the ENTIRE refund, I’m still $850 in the hole.

Now let’s jump backward for a moment. If I didn’t own a home and we took our standard deduction, we would have paid a bit more tax, and only gotten a federal refund of $370.55, along with a state refund that would amount to slightly less than my homeowner-entitled $750. Let’s say I only ended up with $900 total in refunds….even so, it would have stayed in my pocket. No property tax, no maintenance, no nothing. I could put it in savings, take a cruise, or buy a new flat-panel TV. Now which sounds better to you…paying $850 out of pocket, or going on a Caribbean cruise that’s already paid for?

But, you might say, only idiots get their property tax bill at once. Most normal people fold it into their mortgage payment. (Why in HOLY HELL did no one tell us we’d be sorry if we didn’t do this?)  If we’d done that, we’d have paid the tax gradually and gotten to keep our refund. True, but my monthly payment would go up $225/month. Now, we don’t make so much money that that wouldn’t take a major chunk out of our budget. There are things we wouldn’t be able to do if that money had to come out of pocket…routine home maintenance would be put off, doctor bills and vet bills would probably be credit carded, car repairs would probably be credit carded, and we would in no way be traveling or shopping or putting small bits of money back into the economy. When we got that $1.850 refund, it would be eaten up by repairs and paying down high-interest credit card debt.

What can I learn from all this?

As a homeowner, I will never get to keep my refund. Never. I will always have to sign over whatever I get AND THEN SOME to Pulaski County. And what’s even worse is that a few years down the road, when my payments go toward principal and not just interest, I will have less and less and then nothing to write off.

The people who think there are tax benefits every single year of a 30-year mortgage are wrong. They are not paying a full year’s worth of interest every year of that loan term, so they will only get the maximum benefit of owning a home for the first few years, then the benefits will slow to a trickle and then dry up entirely as there is no longer any interest to write off at all.  And guess what? Does property tax ever go away? Nope. Does routine maintenance? Nope. Are you guaranteed a raise every year to help offset these costs? Nope-just be grateful you have a job.

So where are my great tax benefits?  What am I really saving?  Why did everyone lie to me and tell me this was going to work out in my favor, when every time I turn around I just have to pay and pay and pay for the privilege of owning my home?  Am I just supposed to be okay with handing over my refund in entirety every year and then some, just so I can say I’m a homeowner? I’d rather be a renter, keeping that refund and building my savings or traveling to Europe or using that money to self-publish either of the two novels I have lying around. Anything would be better than handing it right back over.  He giveth and then he taketh away.

Susan Powter had it right all along...stop the insanity!

The Money Pit: The Untold Secret of Home Ownership February 18, 2009

I will now reveal to you, my dear readers, the secret about owning a home that no one in the whole freaking world will tell you: IT IS COMPLETE AND TOTAL BUNK. It does not make you any money. It will always cost you money. Don’t believe me? Keep reading.

First off, the people who say it’s a great investment do so because: (1) they think paying rent is like flushing money down the toilet—you don’t own anything and you’re not building equity; (2) they have no nomadic instinct whatsoever, and (3) they care deeply about paint color and/or the kind of tile on their countertops. Now, let me prove mathematically, why these arguments are all HOOEY.

Rent vs. mortgage: Okay, we all know that you pay a crapload of interest on your mortgage, and you pay it up front. You do not pay interest on rent. If you buy a house for $205,000 and had no interest and a monthly payment of $1200, you would pay off your home in 171 payments (14.24 years). But that doesn’t happen. Instead, following the strictures of my own home loan, you pay $1200 bucks a month for 30 years at a fixed rate of interest. That’s an extra 16 years of payments, for a total of $230,400 that you pay over and above your principal. That means you’re paying $435,400 to own your home in 30 years. At that rate, it has to more than double in value just for you to BREAK EVEN.

Now, let’s not forget about homeowner’s insurance. Mine currently runs about $650/year, and it goes up by about $50 a year. Even if we say the price rises $50 every three years, you will pay $23,850 in 30 years of ownership IF you have no claims that cause your rates to rise more than my built-in inflation. This brings our 30-year total to $458,850.

And we also have the delightful surprise known as property tax. My property tax is about $3,000/year. Some urban areas run as much as $10,000/year and rural areas as low as $800/year. If I use my own tax amount as an estimate and assume the amount due every year does not change. I will pay $90,000 in tax over 30 years. Our grand total is now $548,850, just for the bare minimum a homeowner has to pay.

This is not including homeowner’s association dues, maintenance fees, landscaping, yard service fees, remodeling, refurbishing, appliances, etc. Over 30 years, you have to expect some of that. How much? I have no idea, but $1,200 a year seems a VERY low estimate ($100 a month for lawn service/maintenance and association dues). So let’s throw another $36,000 in the pot, for a revised grand total of $584,850, all for a house that started with a $205,000 price tag.

Still with me? Now let’s compare this to an apartment. My rent will likely be a bit less than a mortgage payment, but just to be generous, let’s say I increase my standard of living throughout that 30 year period. Let’s use $800/month for five years, $1000/month for ten years, $1200/month for 15 years. That gives us $384,000.

Renter’s insurance will cost me about $120/year. Let’s use the same metric for judging this potential cost increase as we did for homeowner’s insurance, just to be fair (an 8% increase every 3 years). This puts us with a 30-year total of $5,205. Not too shabby. This boosts our total to $389,205.

With an apartment, we have no property tax, so nothing is added to our total. We also do not have homeowner’s association dues, maintenance fees, landscaping, yard service fees, remodeling, refurbishing, appliances, etc. Some eager beavers might beg their landlords to let them repaint, but let’s just say you’re content to call the manager when the toilet clogs and that’s it. You have no additional costs added to your total.

Let’s compare:

30 years of home ownership: $584,850

30 years of rental: $389,205

The renter saves $195,645 over 30 years.

Now, for those who say the benefit of buying is to have a rent-free place to live after their mortgage is paid, that $195,645 saved could either (a) buy a decent house in a lot of parts of the country, in cash, if that money were socked away over 30 years; or (b) pay for 13.5 additional years of rent at the $1200/month price.

If you buy a house when you are 30 and live there for 30 years, you are 60 when your rent-free livin’ kicks in. If you had rented those 30 years, your 13.5 free years would get you to age 73 and a half. Not too shabby. In those 43 years of renting, you would never have had to fix your own roof, toilet, stove, or refrigerator. You could save just as much, if not more, of your remaining paycheck as a homeowner could, giving you at least the same (if not more) savings to see you through from age 73 and a half to death.

Equity? Good luck getting that in today’s market, and good luck pulling it out of a bank when you want to use it. With markets tanking right and left, you can no longer count on an easy $30,000 whenever you feel like it. For that matter, good luck getting the steady 4% a year increase in value I projected to try and make my home’s value double just so I could BREAK EVEN on my investment.

And what happens if you want to move? If you rent, all you do is ride out your lease, and lose a portion of your deposit ($100? $200? Unless you let your dog crap on the carpet, you’ll probably get most of it back). If you own, you have to hope your home has appreciated enough to compensate for the commission you will need to pay an agent. After all, in some parts of the country (mine), agents will blackball “for sale by owner” homes, thus forcing you to pay them if you truly want to sell. Add in closing costs (full or partial, depending on your agreement with the buyer), and you might be even more screwed. Plus, if you want to buy again, you have to have another down payment…don’t tell me you didn’t save another $20,000 in between the insurance and property tax and general repairs?

So. We have established that renting does not flush money down the toilet…in fact, it saves you enough to buy a home, eventually, or rent 13.5 years longer for no extra cost. It allows you to move at will, without paying an agent $8,000 every time. It does not allow you to tear down walls and paint everything pink, but hey, if I want that, I can do it when I buy a house at age 60 with all the money I’ve saved in renting for 30 years.

So the next time I’m at a party and someone asks me why I don’t want to own a home, I will direct him or her to this blog posting and smile smugly. Then I will pay cash for the cosmetic surgery that erases my smug smile lines; after all, I’ve got $195,645 to burn.