I’ve been meaning to blog about this for quite some time, and then over the weekend a fellow reader got it out of me in an email exchange :) Which is copied & pasted below for your pleasure/learning/entertainment. Nothing incredibly Earth shattering or anything, but nonetheless something to keep in mind if you’re debating between some serious decisions.
Here’s the email that started it:
I bought my house a couple years ago, and I love it. It is dated and moving into the the need-replacing stage, but with some TLC, it could be my dream home. Given the market timing of my purchase and unfortunately the rush into buying that I had to do – life happens, sometimes, doesn’t it? – I am about 10% upside down.
I’ve been wrestling with myself lately whether I should be putting my extra bits of money into the mortgage to both get right-side up and remove PMI, or if I should save up for home improvements, like renovating the bathrooms and kitchen and repairing the HVAC system. At this point, everything is usable and safe, but it’s dated/ugly and there is existing damage from previously leaky faucets.
I will put in sweat equity, but I am still looking at a couple thousand per renovation, and the only ROI I see is personal – my joy when I see it and no embarrassment when having people over. I have no plans on moving anytime soon – assuming life cooperates – and while the renovations would increase home value, I know it’d be a small fraction of what I put into it.
GREAT question indeed – and one I ponder just about 3 times a day, haha… We, too, are in some need of minor repairs and especially cosmetic ones (our cupboards are from the 80’s and are all a nasty yellow, including counter tops) and I go back and forth between killing our mortgages and making improvements.
But yeah, tough call and pros/cons either way. I think what it really comes down to is personal preference and what excites you the most. If that means a nicer inside both for everyday pleasure and when guests come over (and of course future selling/renting one day), then I’d go that route. But if you’re like me and just hate those damn mortgages, I’d switch to that one instead – esp if it saves you more money continuously each month too by ridding the PMI.
The good part here is that you can’t really lose with either route as they both pay dividends going forward, ya know? So my advice (which is limited since I don’t know you or how you think/operate much, or at all, haha…) is to do whatever makes you happy right NOW. And if that switches in a few months, then switch where your money’s going too! I firmly believe you can’t go wrong when doing what’s the most exciting at the given point in time, and in cases like these it’s easy to keep switching where your money’s routing too.
I do it all the time with my mortgage plan I linked to up there – some months I’m dead on w/ paying $2k extra, and others I’m not in the mood and would rather use it towards saving or investing, or the dreaded home repairs that happen out of the blue like our water heater dying :( Which is the worst cuz those aren’t cosmetic at all! So def. make sure you have an emergency fund set up too for all that kinda stuff, regardless of where you’re putting your future money – that’s important.
And then this was her response back :)
Thanks so much for responding. This is going to sound really silly, but I never really thought that I could re-purpose the money! For some reason, I’ve thought that I *have* to stick with whatever choice I make. Although, if I did put money directly into the mortgage or a home improvement, I am stuck with that choice, but if the money is sitting in an account, I can change my mind whenever. And of course, I change up future money’s direction. I don’t know why that never occurred to me. Weird!
I completely understand the cabinet disgust – I have the original 70s brown cabinetry in the kitchen and baths, complete with scratches and dings from decades of use. My parents own a cabinet shop, and when my dad helps me repair one of the cabinets, he razzes me about having such crappy cabinets when I know people. I remind him that I have to save for the upgrade.
Way to go on the extra mortgage payments, you’re an inspiration! I round up to the nearest hundred each month but haven’t had a chance to do more. I whole-heartedly agree with the house emergency fund. I had a home warranty for the first 3 years and they replaced the main breakers and the water heater, repaired the furnace, and did some plumbing repairs to both tubs.
Now that the “major” stuff is out of the way, I am my own home warranty, paying a savings account the same amount as I was paying the home warranty company. Unfortunately, I still have to come up with money for stuff that a home warranty wouldn’t cover, like the roof I replaced last year, the attic insulation I had blown in, and Solatubes that I had installed when the roof was replaced. (Randomness: Solatubes are amazing! I have natural (and free!) sunlight in my windowless bathroom and dark hallways. I love them!) I did some hardcore cringing when I looked at how much money went into the house last year, but I remind myself that I love my house, and renting a comparable place would cost a couple hundred more.
As much as I despise the looming cloud of debt, I think the home renovations would yield more personal happiness – I’d have the pride of sweat equity and a house matched perfectly to my tastes. So to compromise with the rational side of the brain, I’ll probably divvy up the bits of money with a little more towards the mortgage and the rest set aside for home improvements.
Thanks again. If I get to any of the renovations in a reasonable time, I’ll send you an update on whether it was worth it or not :D
That first line up there is key: “I never really thought that I could re-purpose the money.” Most of us DON’T when we’re in the thick of the decision-making like that, especially the bigger picture things. Or at least I don’t. I always think that whatever’s happening right this instant will continue on forever like a big ol’ dummy :) Which is actually pretty amazing that I can plan for the future financially no problem, but am at a total loss when it comes to anything else!
Anyways, good food for thought. Again, nothing too new here, but do know it’s okay to change your mind as time and life presents themselves to you. You can only fully understand what’s going on *today* since we don’t have any crystal balls for later, ya know? And it’s not like anyone’s going to tell on you anyways – most people are too wrapped up in their own problems to even notice ;)
(Photo by Tax Credits)
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Good point! And the same applies to investing. If you buy stocks, there isn’t a law that you can never sell them and switch to bonds or a plain old savings account. Or vice versa. It’s one of the unsung beauties of investments: you can switch out any time.
Yup! Although that part is a lot more trickier with emotions and what not – I sometimes wish there WAS a rule that you couldn’t sell for x amount of time! haha… I guarantee the market would be a lot more normal if that were true ;)
I think repurposing money can keep us from becoming burnt out focusing on a single agenda item for too long. But I also think that we can accomplish so much when we retain focus… so I guess you’ve got to work to try and find a balance. =)
I actually repurposed some money for another goal to our house fund that we used to buy our new to us house. It wasn’t for anything necessary though, it was totally discretionary so I didn’t mind spending it on the house!
I like that you say, “Do what excites you most.” That is a great way to keep your eye on the ball. Ultimately, we are all looking to make our money work hard for us in the best way possible. There are a lot of ways to get there, but you have to stick with it. If you aren’t excited about it, chances are you could slip up and make some mistakes.
I was thinking the same thing Greg. In my mind you have to be happy with your choice and so choosing something that excites you is a great way to stay focused.
Agreed x two.
I used a part of my emergency fund towards the 20% down payment on my house. No, it wasn’t an emergency but I felt it was a good use of my money, so I ignored the fact that the label and purpose didn’t match up. I think money is meant to be spent and put to good use. Even though I love putting my money in various savings accounts with their designated purposes, I will use it if the right opportunity comes along. :)
I’m always thinking about re-purposing money. Should I be investing, or building my emergency fund, or buying something that I need. I also think about it in terms of, “what happens if I have to tap my emergency fund? How fast should I refill it?” and “What if the market creates an amazing buying opportunity? How much should I move into investments?” etc.
That’s cuz we’re all finance nerds like that ;)
I agree completely! We can get so locked in on something that we fail to realize that we have the flexibility to change our direction at any point. Something else to note is that it is really important to constantly and consistently evaluate the direction you are headed, and how to best get where you want to go. At certain times, things change, and the steps aren’t what we originally thought they would be.
YES!! More often than not we wait wayyyy too long to stop and implement new changes just cuz we’re all so busy all the time… Perhaps a good idea would be to set a calendar item to go off every 3 months that just says, “Hey you! Is your money where it’s supposed to be?” Haha… Or something like that.
Great point. We work so hard to make a decision and forget about being the decision maker. We can change what we want to do because we are the ones that made the decision in the first place. Have the flexibility is key and I like what you said about making yourself happy now.
Agreed – if the debt you’re working on is low interest mortgage debt, I don’t think that qualifies as a “swarm of bees that’s trying to kill you.” So you’ve got some flexibility in how you allocate your money. I’ve often thought of going to some kind of two months on/one off plan with paying off the house. Two months of attacking the mortgage followed by one month of throwing all that money into making the house nicer.
Of course, that will have to come after I do get rid of all other debt – which is like a swarm of bees trying to kill me.
(Those damn bees are sneaky!)
Or if your life allows, you can still rent like me. I don’t pay for any major repairs and although I wish I had more space and little things like a fenced in yard, I remind myself that I can save the money that I would be using on maintenance for those things which will allow me to buy a great house a few years down the road. I don’t mind living like a college student a little while after college if it allows me to buy the “perfect” house.
I wouldn’t mind renting either myself – despite being out of college for over 10 years now! Haha… no shame in renting in my opinion – it’s all a matter of priorities in life.
I can’t really advise him on what to do since I don’t have a house. However, I know I would not want to pay PMI. One of the reasons we have waited to buy a house is because we are saving the 20% down payment. I would pay off as much as possible until PMI is gone, then redirect the money that was once the PMI payment to renovating.
Great point J. We definitely get stuck in our “habits”, so it is not always easy to remember that we get to direct the money. For my part, I would rather pay down the mortgage before making significant renovations.
For me, it would be all about the numbers. If the mortgage was a 15 year at 3%, I probably wouldn’t put an extra dime into the mortgage, ever! (I love you Lending Club and your 10% returns!). However, if the mortgage was a 30 year at 6.5%, I’d be shoveling money into that thing like the guy shoveling coal on the Titanic.
With that said, I really hate having mortgage debt!
Haha… a man who knows what he likes :) Financially speaking you will always pick the best route! Which I can’t say the same about myself…
“I always think that whatever’s happening right this instant will continue on forever like a big ol’ dummy”
J, that doesn’t sound like being a dummy, it sounds like projection bias! Here is a link to a related study: http://qje.oxfordjournals.org/content/118/4/1209.short
nice! will go and check it out after I’m done commenting here :)
Very timely blog for me. We’re debating whether or not to re-paint our entire house (outside), or put the money towards our next down payment on a home.
that’s a tricky one. although perhaps repainting it will increase the value enough to sell it for more and/or quicker? or do you plan on living in your current house for a few years still while selling?
I once read something about doing all the upgrades in your house *while you’re living there* so you can enjoy it all before you sell and give the joys to the new owners :) one of those “if you’re going to do it anyways, might as well be now!” type mentalities. A lot easier said than done, of course.
When we first bought our house, we had a mortgage to cover the majority of the purchase and a home equity loan to pay off the PMI. We got rid of that model when we refinanced. Is this something that people are still doing when they buy a house but don’t have enough for the PMI?
This is a very good point – money can be re-directed; in fact keeping flexible is probably the way to get maximum value and enjoyment. But I do tend to get stuck; some may call it ‘projection bias’ but I call it obsession and inertia. Ought to make an effort to remember!
My late husband and I built our house in ’92. While I know we built with big time quality items, I think I would love to do the granite counter tops etc. My current husband (it has been over nine years since I lost the love of my life, I still trip over comments about late/current husband shit) is a thrifty man.
Our mortgage is at 2.9%, I would still like to smack that bad boy down! Our mortgage is at 35K right now, cheaper than renting where I live.
Sorry about your loss – that’s so sad :(
This is such a good point, and something that I think most people intellectually understand but don’t think about in these terms. I also get very “stuck” on one thing and think I’m not “allowed” (I’m 28! I can do what I want!) to change my mind. But the great thing about saving money is that you can always move it somewhere else. As long as you don’t spend it, it’s there to shift around as you see fit :)
haha yup! exactly. reminds me of when I bought my first cadillac even though my dad always said they “weren’t economical” :) true as that may be, I’m an adult now! a father no less, so I can do whatever the heck I want! haha…
Good to remember that we don’t have to be stuck doing one thing! Do what makes you happy in that moment.
Great insight! I would say that it also depends on what you’re comfortable with; if you can stand some of the amenities being put off, then go for righting the debt as soon as possible!
Something else to consider is that when it does come time to sell the house (or rent it out) if you’re planning to vacate in the near future: your sales price or rental rate will certainly be additionally depressed due to outdated kitchens, bathrooms, etc.
I helped a friend redo his kitchen (major sweat equity) in his under-water house and he ended up being less under-water due to the remodel (his increase in value was greater than the cost because he and I did 95% of the labor).
Every home and project is different, but you could talk to a local real estate agent to get a sense for what’s selling (how much and why) and what’s not (and why not) so you have as much info as possible.
If you’re staying in the house for more than 5 years and not paying PMI, do the renovations. 5 years is a very long time to live in a place that depresses you because you’re underwater, and then doubles down on the depression-factor because you don’t like the amenities…
yup, good good info to keep in mind for sure, thx man.
We bought our house 15 years ago and it was in need of updating like you wouldn’t believe. Fortunately my husband is very handy so we did all the work ourselves. Sweat equity is great, but you still have to buy stuff – like faucets, cabinets, flooring, etc and it adds up. I don’t think I would ever buy an older house again because living through the renovation is a major pain. Next time, give me the brand new house with no work to do!
Haha I hear that. Or better yet – an older house fresh off a reno!
I suggest you pay down more to avoid paying PMI. Once you move in, you can always renovate when you get a chance and when you have saved the money for it. If it’s livable and I am sure it is, wait till you save to do the TLC.
That makes sense; always point your money to where it has the highest effective ROI — which of course should include psychic value.
yeah, the psychic/emotional value is an important one which a lot of people don’t consider. sometimes for the best, but ultimately you gotta go with what makes you most comfortable :)
If your reader can pay down the mortgage to the point at which she no longer has to pay PMI, she’d be in a great situation. Now she has additional cash flow (because of a lower mortgage payment) which she can direct in any way she feels is prudent: towards making extra mortgage payments, towards investing, towards renovating her house, towards building an emergency fund, etc.
When we bought our house in 2004, we did so with the intention of painting and minor cabinetry projects within two years, and a major renovation around years three to five.
But finances were tighter than we expected because of a layoff, and the even the inexpensive projects took years to complete. The big renovation (basement remodel) happened at year eight.
Now that we are done, the house was not only more pleasant in appearance, it was far more functional. It fits how we actually live and want to use our space. That’s a much more tangible return on investment than anything else we could have done with our money.
Sounds awesome :) Congrats on making it happen!
I change stuff up with my budget pretty regularly, but i still get stuck sometimes. Its usually related to trying to do too much. I wanted to rebuild my emergency fund, max out my roth, buy a lawn tractor, and do home renovations this year. Its not happening, and unfortunately, the least critical item is the Roth. Once i took that out, everything worked again. I’m hoping i can scrape together extra cash throughout the year and be able to contribute half the max, but well see. I just needed to let go and realize that i just bought a house, and its perfectly fine to make this a year of getting all that did set up.
I hear ya on that. We can’t have our perfect worlds all the time, eh?