Lesson Learned: Buying Our First House

What would you have done differently the first time you bought a house?

The first year of my marriage, my wife and I had only casually talked about buying a house. We talked about how nice it would be having our own place, how comfortable we would be moving into a place larger than a 2 bedroom apartment, and how at ease we would feel once we could settle down. We had no intentions to buy a house anytime soon though.

Then one day we heard on the news that the federal first time home-buyer tax credit would be extended several months into 2010. We felt it was just too good to pass up, and we decided to go ahead and take the plunge of homeowner ship. We spent a few weeks looking at houses, but we didn't care for any of them, in particular the floor plans. We eventually decided that we wanted to go with a completely custom house rather than settle for something we didn't really like.

So we went through the design and build process. We had to close by the end of June to guarantee we would get the tax credit, so we were constantly giving feedback and decisions to the builder as quickly as possible so that we would not be the delay in the building process. We managed to scrape up the bare minimum closing payment for an FHA loan and the house was completed in time to sign the contract on June 30th, on the deadline.

A few months later after we started making mortgage payments, I started to realize that we were taking some significant risk with buying the house. The mortgage payment at the time was about 30% of our income, and when considering our student loan payments and furniture payments, about 50% of our income was going towards debt. We managed to pay off our furniture loan prior to when our second daughter was born. Up until then my wife had been working near full time, but then she had to stay home with the newborn at least for a few months, so we lost her income. We were now paying over 55% of our income towards debt. Luckily, we were able to make the payments, but at the same time we were not able to set aside any income for savings or investments. We couldn't afford to look toward the future, like some other people were trying to do around us.

One couple in particular near us were trying to sell their house. We knew that they had taken the first time home buyer tax credit, but because they were moving shortly after they bought the house they would have to repay it. Unfortunately the were trying to move at the same time when houses were still being built around the corner. They eventually had to settle for selling the house at a 19k discount, and they were out nearly 27K. If something had happened that forced us to move, we wouldn't be able to afford it and would of had to put the house up for foreclosure. I imagine that's what happened to one house by us that eventually went into foreclosure after the owners tried to sell the house for over a year with no luck.

Looking back if I'm not sure what we would have done differently, but we did learn some lessons to consider the next time we buy a house:

• Pay down debt prior to buying a house. Paying a mortgage and other debt at the same time puts unnecessary strain on your budget.
• Save up a substantial down payment to avoid mortgage insurance. It will also help you avoid going "underwater" on your mortgage loan.
• Get a conventional loan of possible. FHA loans are loaded with extra closing costs that are better served going towards equity in the house.
• There are thousands of dollars of expenses when moving into a your first home. Expect to buy furniture, appliances, and other miscellaneous house items.
• Building a new or custom home comes at a premium. Save some money by buying a house with a previous owner, or better yet, do some homework and buy a foreclosure in a developing neighborhood.

Lesson Learned: Financing purchases and no money down

What have you financed in the past?

The spring of my senior year I had finally decided to take the plunge and ask my girlfriend to marry me. I thought in order to propose I had to buy an engagement ring, even though I had no money to buy it. Oh well, I could just do one of those no money down deals that are everywhere now. So off I went looking for an engagement ring. I spent a grand total of 1 afternoon looking and I found one I liked, so I bought it on the spot. All I had to do was get a store credit card and the purchase would be put on it.

When I made my first payment I decided to look at the terms of the card and I was shocked. If I missed one payment, did not meet the minimum payment every month, or did not pay off the credit in one year, I would be back charged interest for every month since I made the purchase at an extremely high rate. I would then be charged interest every month until I completely paid off the entire balance. Luckily, I managed to get a job around that time and was able to payoff the loan in 6 months. Whew i thought, I dodged a bullet there.

After we were married for about a year we decided to buy a house. As many of you know, anytime you buy a house you never just buy a house. There is always an assortment of things you buy when you move in, and we were no exception. We must buy new furniture even though we already had hand me down furniture. So we went to the furniture store and bought a living room set consisting of a couch, a chair, and three stools. And I found myself in the same situation as I was in with the engagement ring - on pins and needles hoping my I would have enough money to make the payment every month in time because our budget was already tight. We were able to eventually pay off the furniture before the deadline and I was able to relax again.

Two and a half years after we wed we were expecting our second daughter. We knew we had to move the baby into the baby room and move our older daughter into her own room, which means we needed to buy her a bedroom set. So we decided that every month we would save up a $150 a month until the baby was born and we would be able to save up enough to cover the bedroom set. We did as we planned, and a couple of months before she was born we were able to finish saving up enough money ahead of time.

We went to the furniture stores and found something we liked for a decent price. If we had planned to purchase the set on credit we probably would have purchased the set right then and there, but with the cash in hand we decided to wait for a deal. And so we waited..and waited..and waited. Then the furniture store had the set on discount for 10%, so we went up to the store to buy. We asked since we have cash, could they cut us any other additional deals..and they gave us roughly a 10% additional discount. So just by having the cash on hand and waiting we managed to save nearly twenty percent, and without the risk of the financing.


We have decided to never finance purchases again, particularly for the following reasons:

1. No money down deals are extremely risky because the lender can easily back charge you interest at high interest rates
2. Major purchase items have financing costs built in - stores are willing to discount when paying with cash
3. Financing can added extra stress due to fear of late fees, penalties, and limiting the amount of money available for other expenses every month
4. Spending with cash gives you freedom to browse and say no without feeling the need to make the purchase right then and there

Next Lesson Learned: Buying a house

Lesson Learned: Paying for college with student loans

How long did it take you to pay off your student loans?

I remember the fall semester of my senior year in high school the teachers went on and on and on about applying for scholarships. I remember thinking that scholarships were only for the students with the most extracurricular activities, best grades, and most skill on sports, and that there was no point in applying because I would never get them. Eventually I applied to maybe 3 scholarships and I got one. I thought I was lucky and was ahead of the curve.

Towards the end of the year the school had a senior awards ceremony. During one of the awards presentations the award presenter mentioned that the award recipient had sent out *hundreds* of scholarship applications - and was awarded over 50 scholarships and grants. Needless to say, her school was paid for. So much for my one scholarship.

I received some help with paying for college from my family, but I needed to find a way to cover the rest of my college expenses. At that point I had two options: work during school or get student loans. I chose student loans because I thought that if I worked, I would end up flunking out because I didn't have enough time to study. I also figured that it was normal to have student loans and, besides, most people can pay them off quickly after college.

When I started the loan process I quickly found out that I needed a cosigner. I eventually asked my family to cosign for me, and they obliged. But after I received the loans I always felt uncomfortable visiting them. In the back of my mind I kept thinking of different scenarios that would make me unable to pay my student loans. What if I ended up dropping out of college? What if I couldn't find a job? What if the job didn't pay enough? What would I say to them, sorry? Holidays never felt the same again.

Fast forward to graduation and I had built up slightly over 40k in loan debt. 11 months later I married my wife, and she had some where around 8K loan debt. By the time we were married all student loans had entered repayment. We figured if we paid a substantial amount each month we could pay them off in a couple of years. But after a few months, life happened and we found out we were expecting our first daughter 9 months (to the day) after our wedding. Student loans fell down the priority list and we realized that we were not going to quickly them off,

We will make our last student loan payment this May, over 4 years after we started repaying. Then we can finally put college behind us. Altogether, we will have paid over 60k in principle and interest. We would have loved to used that money for other things, especially using it as a substantial down payment towards our house and setup an emergency fund.

If I could relive my senior year in high school and college, there are things I would have done differently:

1. Paid more attention to my grades to improve my chances for scholarships and grants.
2. Apply to as many scholarships and grants as possible. Nothing beats free money.
3. Work during college to pay off the rest of my expenses.

There are also a few other things I have learned in regard to student loans:

1. The relationship between a signer and a cosigner is strained, whether they consiously or subconsciously realize it.
2. Don't rely on things going perfectly to pay off student loans. Life happens and student loans are an unnecessary burden.
3. Student loans limits your opportunities and choices after college

Next up: Financing purchases and no money down

Lesson Learned: My First Credit Card

What were your experiences with your first credit card?

The summer prior to my first year at college I was mostly hanging out until dorms opened up. One day I got a call on the phone from a banker asking if I would like a credit card. My first reaction thought was, "Hmm, why would I need a credit card?". He must have sensed this because he started talking about all of the things you could buy with one, the financial freedom I would have, and how it was such a great offer because it would help me establish a credit history. So I said yes, without ever discussing credit limits, minimum payments, interest rates, or late payment fees.

I promptly got the card in the mail a few days later. When I held it in my hand I had a huge rush of adrenalin - wow, I had a credit card. I had power now. Adults have credit cards - that means I'm an adult now! I started using it immediately.

After a few months the adrenalin of the credit card had worn off and I started looking at the details of the card. The interest rate was 12% with a cash advance and wire interest rate of 30%. The interest rate would also jump to 30% if I made any payments late along with a $20 minimum late fee. I suddenly realized how easy it was to mess up using the credit card and promptly stopped using it..for a time.

About a year and a half after I got the card I started using it again. But this time I told myself that as long as I made it a point to make the payments in full on time, I would be just fine. But sure enough, I missed a payment by a day, and it cost me $20. Then I missed another, and another, and another..and I had just about had it with the card and I was about to cut it up. Then I saw an ad one day for a rewards program I could sign up for with the card. So I signed up for it thinking that I would be able to earn a substantial amount of money in rewards that I could use when I graduated college.

Fast forward about 3 years after I graduated and I had built up about $300 in rewards. In the meantime, I had paid roughly $200 in membership fees to stay in the program. Wow, all of that time and effort to stay on top of the credit card for a lousy $100??? Not to mention that I had subconsciously decided to buy some things that I would have otherwise not purchased if I didn't have the rewards program, which I'm sure cost me more than the $100 I had earned. I decided it wasn't worth it and canceled the card.

But canceling the card was hard. It took me 3 months to follow through with cancelling it - it was my first card after all. Now, I only use cash or my debit card. There are no membership fees, late payments, or accrued interest. There are no emotional highs, no emotional lows, and no concerns whether the payment went through in time. Just money.

So when all was said and done, I had learned:

• I had made a financial decision without fully understanding the consequences of my decision
• Getting my first credit card was an emotional roller coaster
• Having a credit card is a financial burden, not financial freedom - it was just as easy to slip up using a credit card than it was to use it "responsibly"
• The credit card rewards program was in place to make the bank money, not me
• I spent more money using the credit card than using cash because spending cash hurts

Next up: Paying for college with student loans

Lesson Learned: High School Savings

What did you do with the money you worked for during high school?

Back when I was in high school I, like many others, had a part time job. I worked fast food and was paid near minimum wage. I took it so that I could..well..spend it on something I wanted.

So I worked long enough to save up money to buy the parts I needed to build a computer. When the computer was complete, I was proud of myself for earning the money to buy something I wanted, and then saving up to buy it. So I did pretty good, right?

Sort of. I didn't get a loan, use credit, or borrow money to buy the computer. I earned the money the way it should be earned, by working at a job. I balanced my time between work and school and I maintained good to decent grades.

But when I was working, the only thing on my mind was using the money to buy the parts for the computer. I did just enough at the job to stay employed and get a paycheck. Then, I quit the job when the computer was complete. I later realized after I quit that my parents had planned on getting me a computer for graduation (ARGH!!!)

I should have worked not just to buy a computer, but to prepare for my future. If I had worked for a longer period of time, worked to serve the customers instead of myself, and cared more about the job, I would have received a raise and promotion and saved up more money. But if I did save the money rather than blowing it, what could I have done with it?

• I could have set the money aside in an emergency fund. It would have easily covered the car repairs and parking tickets I had during college that I ended up paying for with money that was "refunded" me with private student loans.
• I could have used the money for college expenses and take out less money in student loans. I will touch on the student loans in a later post, but it would have gone a long way towards covering the expenses I ended up paying for with a non-subsidized student loan.
• I could have invested the money. If I had set the money aside in a Roth IRA and ignored it for 45 years until retirement, the $2,000 I earned would have grown to roughly $72,000 averaging an 8% annual return, or even $176,000 averaging a 10% annual return, tax free!*

I am probably a little hard on myself. After all, I was only in high school and there is nothing wrong with spending the money I earned on something I wanted. But this does demonstrate how decisions with money early in life can significantly affect finances later in life.

Next up: My first credit card

*Investment return estimated using the investing calculator tool at  http://www.daveramsey.com/articles/article/articleID/investing-calculator/category/lifeandmoney_investing/