Monthly Archives: August 2013

You are browsing the site archives by month.

How (not) to sell a fourplex – Part I

Need to sell a fourplex? Do the opposite of what I did

A fourplex kitchen -- look at all the things that can break!

A fourplex kitchen — look at all the things that can break!

This story really begins back in 2001. I awoke to the DJ on the clock radio saying “I don’t usually tell people to stop listening to the radio and turn on their TV, but you need to turn on the TV right now.” I sat straight up in bed and just then the phone began ringing.

“OK, OK,” I responded to the panicked voice on the other end. “I’ll be there as soon as I can.” I got dressed, grabbed a mini television and ran to my car. I saw the second tower fall in real time from my office.

I was working in a startup travel company at the time and all of us working there knew that while this was mostly a horrific attack on America, we also knew the travel industry as a whole would be in deep shit.

There was a team meeting a few days later. There was one topic on everyone’s mind: layoffs. People were canceling hotel reservations left and right and no one (and I mean no one) wanted to fly. And remember this wasn’t long after the dotcom crash. The stock market was in a shambles. How devastated would the overall economy be when it was all over? Our vice president reassured us that no one was talking layoffs. He used the analogy of another disaster and calmly walked us through how he expected the travel industry to gradually come back. The anxiety among the team members quickly eased up and we went back to doing our jobs and hoping there wouldn’t be any further terrorism.

That’s when an interesting turn of fate changed my life forever. In a move of strategic brilliance, my company moved quickly to buy up the unused hotel inventory and to lock in favorable long-term contracts with hotels. As things recovered, there my company stood, the entire travel industry’s balls in its tight grip. Our stock soared over the coming years and even mid-level workers like myself were suddenly awash in unexpected money. In a truly twisted mindfuck, we found ourselves benefiting indirectly from the attack. I don’t like to think about that too much.

Anyway, flash forward a couple years. While I was certainly wasting my share of money on stupid crap like everyone else, overall I was more careful than most of my friends. And I was committed to not losing this small fortune. I decided to place my bet on real estate. After losing out on a couple nice properties due to a slow-moving realtor, I fired her and found a new realtor, a super sharp guy who knew the area very well.

Nothing happened for quite a while until I got a sudden call. “Nick, one owner is selling a dozen fourplexes right now. We need to meet, most of them are already sold!” We met and looked over the properties that hadn’t been picked up yet. Two fourplexes were left. Both were selling for the exact same price. Rents were about the same. Both had other pros and cons. Which one should we buy? We went back and forth on it for awhile trying to decide.

Finally, I paused, flipping the papers back onto his desk. “Tell you what,” I said. “Instead of 20 percent down on one, let’s buy both of them with 10 percent down.”

He did a little “double-commission” happy-dance and begin writing up the paperwork. That was 2003.

I researched property management firms, hired one, and began doing all the needed work myself (there was a lot). Every single weekend was spent fixing buildings, hauling appliances, fixing electrical outlets, repairing drywall, etc.

Meanwhile my property manager felt it was their personal role to be sure and empty out my buildings. I went from eight units full to maybe two or three occupied. Every time I brought it up with them, they shrugged and seemed unconcerned. My stock money was spent covering mortgage payments. Disaster!

I fired the property manager and hired another one who filled the units immediately. Cash began flowing and I started to relax. But I was still doing most of the work myself. That changed when I took a week of vacation to paint a unit that was looking a little grungy. I bought some materials at Home Depot and was preparing to get started. Somehow I decided to get a price from some Russian dude I found somewhere. When I saw how low the number was, I knew my days of working on these buildings was over. From then on I hired out all my work.

I sold one of the buildings before the real estate crash and re-financed the other one down so my payment would be lower, essentially just forcing the cashflow. I wish I’d sold both of them at that point.

But I didn’t. And as the years went by, I collected decent cashflow, but I never spent the money needed to bring up the rents. Instead I collected varying amounts of money over the years as tenants moved in and out as the needs of their lives changed.

The earth continued spinning around the sun and I focused on other areas of my life. Marriage, other real estate projects, travel, career changes, a new house and a new baby. Life was good.

But that little building was always there in the background, threatening to disrupt everything. What would be the next big surprise? A fire? A lawsuit? A new expensive repair? I’d cringe whenever the local news began a story with “an incident at a local apartment building left two dead this morning…”. Crossing my fingers, I’d chant “don’tbemybuilding-don’tbemybuilding-don’tbemybuilding” until the details came out.

Then the real estate crash happened and I was stuck. When the market came back a little bit, I tried to sell it. Year after year. No. Offers.

Things finally came to life last year when I finally got a few offers, but the buyers weren’t that serious and walked. Mostly it was bottom feeders and people looking for brand new inventory at rock bottom prices. A few of the offers got to the inspection phase and there was always something scaring people away. A roof that seemed soft, a mildewy windowframe, older electrical panels. If it wasn’t one thing, it was another. Since the building made money and I didn’t need to sell it, I just held it.

So this year, seeing a much better market and in particular a much better credit market, I tried again. And guess what? I got an offer almost immediately! That was in mid-May. Ten years after I first bought it.

And that’s when the story really begins.

My next post will continue the story of how I finally sold my fourplex and all my lessons learned!

Tame your housing costs to ensure a safe pretirement

How do you bring housing costs under control?

tame-housing-costsI realize looking back on my more than 5o posts so far that many of them are about or related to real estate. That shouldn’t be a surprise, I suppose, since housing costs will be what drags you back into the working world if you’re not careful.

Whether you rent or own your place, housing is likely eating up a good chunk of your monthly budget. The traditional rule of thumb for a mortgage, for example, is around a third of your income. They used to say 25% for renters, but I doubt that’s very realistic these days.

Even worse, as you head into a lower-income, but much happier, pretirement lifestyle, a surprise increase in your housing costs could crush your newly-found freedom.

I talked about this issue a bit in the old classic “Pop your own housing bubble“, but that was mainly about bringing your housing costs down in general, not as much about ensuring you keep control over expensive surprises.

There are a few common ways your housing costs could explode on you:

  • Rent increase
  • Interest rate increase if you have an adjustable rate mortgage
  • Property tax increase
  • Assessment or increase in HOA fees if you’re in a condo
  • Sudden need to upgrade
  • Remodeling or repairs
  • Spike in utility costs

Obviously your housing costs are going to rise over the years if for no other reason than inflation and maintenance. The trick is to bring them under control so they’re not a worry. And that can mean some tough decisions as you prepare to leave the working world. (Or in my case, after.)

Let’s run through a few approaches to keeping your housing costs under control. If you have some additional thoughts to share, be sure to add them in the comments.

Buy a home

There are a lot of advantages to renting. Particularly if you’re young and working in an expensive area of the country, buying can be a big waste of money. However, if you’re beginning to look toward pretirement and are still renting, it can be worth considering a purchase.

For young people working in expensive cities, one idea is to buy a home where you think you eventually want to settle down. Keep that place rented while you’re working. When you’re ready to leave the corporate world, boot your renters and move into a hopefully paid-off house! It’s a great alternative to buying in an overpriced city. If you think you’d like to pretire to a vacation-oriented community, that’s an even better reason to buy-in early if you can.

In general, however, and especially for older folks, deciding to buy and reaching mortgage-freedom as soon as possible will lower your monthly costs, dramatically bringing pretirement that much closer. And more importantly you’ll remove the risks of rent increases and evictions so you don’t need to worry about suddenly finding more income.

One other advantage to buying is that an owned home can be rented if needed. That could take the form of renting a spare room or simply living in an apartment or with family while someone else pays you to live in your house. You may not ever want to make that move, but it’s nice to know it’s there if you need it. In our case, we have considered living overseas for awhile at some point. The rent from our home here would easily cover our rent nearly anywhere else in the world and in some areas would cover our entire living expenses.

Control rent increases

If you’ve decided to remain a renter, there are still some ways to keep rent increases somewhat at bay. Now the first thing flashing through everyone’s mind is to sign a long-term lease. That can protect you to some extent, but it has some obvious downsides (although I burned two landlords back in my renting days so being locked into a lease isn’t as scary as you might think — it’s mostly there to protect the renter).

But there are some other options available to you. If possible, it can be worth finding a city with some rent controls in place. That will at least put you in a situation of gradual rent increases, vs. steep, sudden increases.

Additionally, I’d recommend looking for a landlord that isn’t part of a big rental management firm. These firms are incented to increase rents year after year and to keep up with the market. If someone moves out due to a rental increase, they actually are fine with it as they can go in and fix all the stuff you’ve been complaining about and then rent it for more money. In contrast, individuals who are renting out a spare home independently are often terrified of losing a good, reliable renter. It’s not unusual to find people who have been renting from the same people for decades with no rent increases. In addition, an independent landlord is very unlikely to pursue legal remedies if you walk away from your lease.

But all of that said, generally speaking I find renting a greater risk for a safe pretirement than buying.

Pay off your mortgage

Now obviously if you have a passive income source that covers your mortgage payment, you could say your housing costs are already under control. For example, if you’re one of those investing ninjas who keeps your home leveraged at a low interest rate so you can make a little extra margin in the market, you could argue you’re under control already. Unless, of course, your income source takes a hit. Say you’re a growth investor who has been averaging 6% in the market and have your house on a 30-year mortgage at 3%. Good for you! But, say we hit a big market downturn. Say it happens after your working career has ended. In effect your housing costs just shot upward. This is why I advocate paying off a mortgage, especially for anyone over 40. Getting rid of your mortgage just takes that risk off the table. Should you wish to remain leveraged to keep your pretirement fund growing as quickly as possible, I still recommend paying your mortgage down to a controlled amount, say $100,000 or so. This will help limit disaster if we hit an economic rough patch.

For some thoughts on how to pay off your mortgage quickly, see my old post on How to get rid of your mortgage.

Condo owners – watch out

I’ve never owned a condo so I don’t consider myself an expert in this area. That said, I have heard many (many!) horror stories over the years. Enough to where I think I have to add a few thoughts about condos here.

A quick note, first, however. Despite these unique risks of condos, they in some ways pale compared to the risks of owning a single family home — particularly in repairs and improvements. For every sudden $30,000 assessment there are 10 stories of surprise roof replacements. In return the smaller size and limited things to remodel have a natural built-in cost control component.

So as we all know, the two biggest surprises (if there are any others, let me know) to come along related to condos are increases in monthly dues and surprise assessments. I don’t know of any magical ways to avoid these once they occur, but by doing your homework before you buy, you can avoid some of these. I don’t think it makes a lot of sense to buy into one condo over another because the HOA fees are a bit lower. Low fees could mean the condo isn’t keeping up with maintenance which could in turn trigger an assessment. Look for reasonable, mid-range fees and a very well-maintained building. Most condo buyers only have their own unit inspected, but I’d see if I could get my home inspector to walk around the property a bit and look for potential big problems. Failing siding, decks or windows or just a general look of disrepair.

Remember that with real estate, what seems cheap can be very expensive! Buy quality, do your homework and you’ll be fine. Oh, and you may want to maintain a slightly larger emergency fund just in case.

Property taxes – ugh

Here in Washington state, we have an odd taxing structure. It’s a super screwed-up approach to taxation that keeps placing us on top of lists of most regressively taxed states, despite our being one of the most liberal states. This is because we stupidly have no income tax. Since our blissful liberal population wants to take care of its people and infrastructure, it forces governments to lean heavily on the only tax mechanisms available to them: sales taxes and property taxes (and fees such as car licensing and tolls, but that’s a minor issue). Anyway, the point of this is that not only are our property taxes super high, they are also continually going up. My half of our monthly property taxes is $220 — that is by far my largest monthly expense!

As long as I stay living here, my options for controlling this expense are fairly limited — thank goodness I don’t have a mortgage payment to make every month on top of that! I could challenge my assessed property value but that would have a tiny impact even if I won. No, unfortunately my best bet is to move. To a cheaper property and potentially to a place without such a high property tax. If we decide not to move, then I need to do some rough math on how much this expense is likely to grow (apply historical percentage increases forward, for example) and make sure my pretirement plan accounts for that.

Buy the right house for your needs

In Pop your own housing bubble, I wrote about how important it is to think about what you NEED vs. what you can afford. But beyond simply lowering your housing costs, it’s important to think about what life changes you might experience so you buy something that fits those needs. There are a few things that can happen in life that could drive a surprise expense. The most obvious, of course, is children. If you’re a pretirement over-achiever and put off having kids until you were financially independent, my hat is off to you. But you could end up rushing back to the warm embrace of a corporate job if you forgot to buy a home that was kid-ready. Even though your career was “ended” you might find yourself in need of a house that costs $100,000 more than what you’ve got today. Another, not as happy, example is thinking about aging. My inadvertent house flip had a major flaw: 20+ steps to the front door from where you park. Living pretired in a house like that could leave you in major trouble should age or an accident leave you unable to get to your own front door without help. Or the issue could simply be one of distance from work or the grocery store. Think about these issues early so you don’t get caught.

Remodeling, repairs and other risks

Fixing up houses is an addiction. It’s an addiction I have struggled with most of my adult life. I wish I could say I’m a recovering remodeler, but unfortunately my basement tells a different story. So I know very well that houses are often nothing more than rickety boxes you fill with your life savings. So what can you do?

First of all, try to buy something that doesn’t need a lot of work — especially if you’re 40 or older. Save the big mistakes for the young people!

Next, do fix things that need fixing — and fix them early and do it right. The clearest example I can think of is your roof. Before you quit your job for good, maybe you go ahead and spend the money on the roof replacement you’ve been putting off. Spring for a little higher quality and you might not ever need to touch it again.

Similarly with “nice-to-haves” — an updated kitchen, say — take care of these projects before you move into pretirement. You’ll want to live for a long time without an expensive project, so get it done early and do it right so you don’t have to come back to it later.

Bottom line: make a list of these potential timebombs early and attack them one-by-one before you pretire so you’re not caught scrambling later on.

Spend money to get utility costs under control early

I hate telling you to spend money, but utility costs are another area that can bite you if you’re not careful. If you lived through the 1970s like I did, you know what an energy shock feels like. We North Americans tend to get pretty complacent about energy when it’s cheap, like it is today. But regardless of when you think the next big surprise will happen, I think we can all agree on one thing: it will happen rapidly.

The thing about energy is that it’s such a commodity that when a ripple goes through the system, the speculators inevitably rush in to snag their share of the profit. So you see sudden, shocking spikes in cost. Should we have a sudden water crisis, the impact could be even more devastating. Those of you living areas of the country that are susceptible to drought or communities that live near where they’re poisoning the water sources by fracking really need to watch out for this.

If you’re still working, this is an issue, but not necessarily a life-altering one. If you’re pretired and need to keep expenses under tight control, this could be devastating. Your approach to controlling your utility costs will vary a lot by area of the country and type of house. But here are a few ideas to think about:

  • Drop your electricity use to the bare minimum. Swap out all light bulbs for LEDs, use a clothesline instead of a dryer, be very careful about leaving anything turned on unnecessarily. You can use a Kill-a-Watt device to measure the electrical usage of individual appliances and pinpoint where you can save. You might even find that upgrading your refrigerator or other appliance could make financial sense.
  • Consider home power generation. I’m dying to do this, but since we may not be staying here long-term, I’m holding off for now. The price of solar panels has been dropping rapidly and it makes a lot of sense to install your own panels now. If you wait a couple years longer, it may be idiotic to not do this (assuming your house gets some sun). Small wind is another great way to generate power at home. The two approaches together work quite well as wind tends to kick up when the sun isn’t shining.
  • Manage your heating and cooling costs tightly. We upgraded our furnace to natural gas (over the original 50-year old oil furnace) a couple years ago. I estimated it’d take around three years to break even, but more importantly to me was that the ongoing cost was lower and the added efficiency would help us avoid sudden expenses. We also have portable electric heaters that can be placed in bedrooms for an added boost or as a substitute should natural gas skyrocket.
  • Manage your water smartly. Very similar to electricity, managing your water usage tightly so you can get by on the bare minimum could be essential if water rates skyrocket. Showers and toilets are probably the first places to look.
    I also like the idea of storing water on-site. You condo people are kinda screwed, but you should at least have some emergency storage containers available. For those of you living in single family homes, though, installing some cisterns on-site can be pretty smart. I’ll only do this if I decide we’re definitely staying here, but it can make some smart sense, especially if you garden. I really like the idea of having enough water to get us through the summer, say 300 gallons or so. It’d be perfect for watering your garden or for emergencies. But in times of water rate spikes, you could even use this water for flushing toilets and cleaning if needed.

Well, that’s a pretty long list of things to think about already. I’m sure there are many other ways to control housing  costs that I didn’t mention here. Just remember, housing is typically the largest expense in your life — bring it under control to ensure that once you’ve pretired you can stay pretired.

Let me know what you think are the most important ways to bring your housing costs under control in the comments!

Dryer heats up but won’t spin? Here’s how to fix it for $5

As I mentioned awhile back, one of the things that changed once we had a kid was the massive amounts of laundry that we now contend with. One of the great mysteries of the world is how such a little guy can produce so many dirty clothes. Bibs, pants, diaper wraps, shirts, sheets, you name it. It builds up into giant piles that must continually be processed in the basement.

All that production came to a halt recently when Pretired Mama trudged upstairs to inform me that her clothes were warm but still wet. I went down to take a look and sure enough it was broken. “Well, the dryer heats up but won’t spin,” I told her. “It’s probably a broken belt.” I jumped on the interwebs to check my diagnosis and sure enough, we had a consensus.

I knew a broken belt on a dryer was usually a pretty easy fix so I was fairly sure I wouldn’t need a repairman to come out.  Fortunately I found a very clear video on that showed how to repair the drive belt. But just in case anyone ever runs into this, I thought I’d give the quick overview of how to replace the belt.


  • First, unplug your dryer. I probably shouldn’t have to say that, but we’re talking about enough power to kill you here, so just unplug it.
  • IMG_0613Open the top of your dryer (some models may open differently, but basically you need to access the outside of the drum). Mine opened by using a putty knife in the front by the corners. On mine there were also a couple screws by the lint trap.
  • IMG_0612Disconnect the wires that go to the dryer door. This is for the switch that turns off the dryer when you open the door.
  • Confirm the belt is indeed broken. You’ll be amazed how flimsy these little belts are.
  • Remove the front of the dryer. Mine had just two screws near the top and then it lifts up and out.
  • Pull the drum out. It just sits in there loose so it’s quite easy to just pull it out of the way. You’ll be amazed how little there is to a clothes dryer when you see the insides. It’s especially obnoxious when you think about what new ones cost.IMG_0606
  • IMG_0608Get your new belt handy. We ordered the Whirlpool 341241 Dryer Drum Belt
    on Amazon for $5.70. If you need it sooner, you can probably find it at a local parts outlet, but you’ll end up paying much more. Since we already had our clothes air-drying, we could afford to wait a few days for the part to be mailed to us. In my case, the tension wheel looked different (looked broken) than the diagram so I ordered one as well, just in case, for another $6. In the end, I didn’t really need it, but I used it anyway because I think it was a better design. While you have the drum out of the way, you might want to vacuum up the inside of the dryer.
  • IMG_0611Now for the tricky part: put the drum back in place. Hold it there while you slip the belt over the top, making sure it’s not twisted. You’ll need to keep the drum in place while you make the final belt installation. Having someone help you will be a good idea or you can stuff something under the drum so it stays put. The belt goes on top of the tension wheel, and through the wheel assembly before going over the motor. Getting that on correctly was by far the hardest part of the whole project.
  • Once the belt is in place, you can remove whatever you had holding the drum in place and try spinning it with your hand to make sure everything works correctly. The belt should be very tight and the motor should turn when you spin the drum.
  • That’s it: replace all the pieces you took apart when you started, making sure to remember to reconnect the switch for the dryer door. When it’s all back together, give it a try. Now instead of heating and not spinning, you should be back to a dryer that heats up AND spins!
  • IMG_0617Make sure to reconnect the air vent on the back of the dryer and you’re done! While you’re messing with the dryer, it’d be a good time to clean out or replace the vent hose. I once saved around 20 percent on my entire electric bill by switching the plastic collapsible style dryer hose with the smooth metal vent pipe you see here. Highly recommended!

That’s it! Next time you have a dryer that heats up but won’t spin, you’ll know just what to do and can save yourself an expensive repair bill!

The best mortgage term: 10 years

Want the best mortgage term? Think beyond the 30-year fixed

The best mortgage term: the 10-year fixed rate loan!

The best mortgage term: the 10-year fixed rate loan!

What were you doing 30 years ago?

Me, I was about to start my sophomore year in high school. I was thinking a lot about getting my driver’s license and staring at a lot of boobies. I had begun what would become a lifelong obsession with destroying my hearing, blasting Duran Duran, Men At Work and Loverboy through my orange-padded Walkman headset. All-in-all great times!

In other words, it was a lifetime ago. A lifetime.

Now think back to what you were doing 10 years ago. For me, I was working. My boss who thought highly of me got fired in a tussle with a hated adversary. That adversary became my new boss and he transferred all his hate to me. I was thus left fighting to save my job, even though from any objective measurement, I was doing great in my role. (No wonder I hate corporate America so much!) It was also the year I bought two fourplexes and I spent nearly every weekend for a year working on them.

The thing is, though, that doesn’t seem that long ago. Yeah, a lot has changed since then, but I still remember those days clearly.

Not long ago, when I wrote about how to get rid of your mortgage, I mentioned offhand that part of the strategy was a 10-year mortgage. I also mentioned in How much should you spend on your house that the payment on a 10-year loan should be the measure for how much house you should buy.

I realized I never completely explained my thinking around 10-year mortgages so I wanted to spend some time fleshing out my thoughts on that.

The 30-year term was created after the Great Depression in the 1930s to stabilize the real estate market. Now homes were accessible to a much larger market than ever before. As easy credit has a way of doing (we’re now seeing it with tuition costs), the rapid increase in the number of buyers created an increase in housing prices.

Thus, as time went on, the 30-year mortgage became less of an option and more of a necessity — particularly during periods of high interest rates. Now the 30-year mortgage is the standard loan in America. Nearly everyone with a house has one. Rather than simply believing it is the best mortgage term, many people assume there is no other option.

For people seeking pretirement, however, there is another option and it’s the best mortgage term: the 10-year loan.

Here’s why I say it’s the way to go right now while interest rates are still low:

It’ll help keep you honest about what you can afford

When I give the advice to not buy a house if you can’t afford the 10-year payment, I’m not necessarily recommending that you take out a 10-year loan — it’s just a way of determining the right loan amount for your budget. However in most cases I DO recommend it, because it prevents that money from cleverly turning into electronics and furniture. These many, many things that you’re going to want but don’t really need will be out of reach — and that’s a good thing. You may really want that nice, new couch for your living room, but you’re effectively buying that couch on credit if you’re only able to “afford” it because your house payment is artificially low.

The payment might not be as high as you think

Check out the difference in the payment amounts for two sample loans, one at $250,000 and the other at $450,000:

Loan AmountRate for 30 year fixedPayment on 30 year fixedRate for 10 year fixedPayment on 10 year fixedDifference in monthly payment

Now, I’m not pretending that the extra money you’ll be paying each month is not an insignificant amount of money. On the smaller loan example, you’d be out an additional $1,100 per month. That will sting. It’ll sting badly. On the higher-priced loan, you’ll be well over $2,000 more each month.

Here’s why I say that’s OK. While it certainly is a chunk of change, let’s remember that in most cases, we’re spreading this across two people. So on the smaller loan, we’re talking about $500 each. That should be doable. If it’s not doable, we have to say you’re buying too much house and send you back to my first point.

You’ll actually see results

Sure you’ll gain equity with a 30-year loan as well. Eventually. Nearly every first time home buyer is stunned that just a few pennies from their giant mortgage payment actually go toward principal. For YEARS you’ll watch your principal sit there, barely changing at all. If you sell in too short a time period and you haven’t seen any market appreciation, the theoretical equity that you’ve been earning by reliably making your mortgage payment each month will have been more than wiped out by realtor commissions, property taxes and home maintenance.

When you go with the best mortgage term — the 10 year fixed loan — it’s the opposite. We have a 10-year loan on my current house (AND I live mortgage-free — guess I should explain that one of these days). It’s incredible watching the principal balance drop in big heavy steps. In fact, I’m finding it rather hard to put into words how breathtaking I find it to be each month. Even in the first month our principal began dropping by $1,700 per month. Every year it’s another $20,000 gone. Compare that to a 30-year loan where on a loan of our size you’d see a drop of just a few hundred a month. Take a look for yourself with an online amortization table.

Low interest rates make it possible

My favorite reason to pursue a 10-year loan is that you can. The low interest rates we see currently make a massive difference on your total payment size, all else being equal. That means you can put your house purchase on the accelerated plan, something that was largely impossible for middle class buyers until recently.

You can lower your debt load

Back when I was carrying five mortgages at once, it really sucked doing loan applications. Sure, credit was unbelievably easy to get. I once had a loan officer looking at my list of five mortgages and ask me “So do you want to run this through as a no-doc loan?” Meaning they wouldn’t need to verify my income, they’d just approve the mortgage based on my credit score. WTF?

That was still easier than in the days following the great economic collapse. When the list of loans popped up  on my credit report, it would take about 45 minutes to walk them through each one, explain the rental situation for each and explain how I managed to make all my payments on time. While it’s still pretty tough for me to get a home loan, it’s getting easier. As I’ve been shedding properties (and related debt) in recent years, the ice has been melting. My overall debt looks much more reasonable and I don’t get the shocked questions about the eye popping numbers on my credit report.

It gives you options

Even if you have a few years left on your 10-year loan, your disciplined focus on getting rid of debt and building up equity creates new opportunities for you. You’ll be able to consider buying investment property or just pay off your house completely. You can take out an affordable home equity loan and start a business or pay for your kids’ education. You name it. But even more fun, if you start out on a 10-year loan path and save up a little on the side, you could pay off your mortgage in as little as seven years! Now that’s an option.

It’s less risky

The biggest push-back against a 10-year loan is usually fear of a cashflow crunch should hard times arrive. The classic scenario is one or both members of the couple lose their job. The house payment is too large to be made on one salary and the house of cards collapses and you lose the house and the kids are out on the street.

Is it really a concern? Of course it is. But you’re not going to run into this situation because you’re reading and are going to take some measures to keep yourself safe. If we look a little deeper we can see that it’s actually less risky to go with the 10-year over the 30 year loan. You wouldn’t be buying a house if your employment wasn’t reasonably stable anyway. But how far into the future can you see? You might feel reasonably safe for the next 7-8 years but what about the next 20-25 years? It’s a lot harder to predict a couple decades out, right?

Also, because you’ll be building up your net worth instead of buying a bunch of crap, you’ll have a larger margin of safety. If things go south on you, you’ll have equity available and controlled housing costs so you’ll have more security than your highly leveraged neighbors.

Which brings me to final reason you’re safer with a shorter-term loan: Your emergency fund. Now, in the first couple years things could be tight and you need to be careful. Bad things can happen. I’d say keeping 6-12 months of emergency cash handy is pretty important in the early years. In later years, however, you can open a line of credit to access your newly-built equity, which will serve as your emergency fund.

Your housing costs will be controlled

One of the important steps toward reaching pretirement is bringing your housing costs under control. Whether it’s as a renter or homeowner, you need to ensure housing costs don’t rise suddenly on you in later years, eating up your cashflow and sending you back to work. Getting rid of your biggest expense gives you a lot of power over your monthly finances.

You could be mortgage-free

Hey, need I say more? The American Dream used to be “owning” a house (even though the bank really owned it). These days, the American Dream is about getting rid of your mortgage as early as possible in life. That mortgage payment is what keeps us chained to our desks. You dream of doing something else, anything else, but the career brought you to this place and you’d have to make much less if you changed careers. Getting rid of your mortgage is what makes this possible. And the 10-year loan is the best path to getting there.

What do you think? Have I convinced you the 10-year fixed loan is the best mortgage term?

Image courtesy of Renjith Krishnan via
Related Posts Plugin for WordPress, Blogger...