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Thursday, January 21, 2010

How To Decide to Rent a Home or Buy - The Easy Way

A key piece to living a debt-free bigger life for me was to sell the bigger house and downsize my living expenses -- from the monthly entergy bill to the rent.  It took a year, but I sold my Big House with the plan to Buy a Smaller One. Lessons learned about EBay, Craigs List, Renting and Moving are some of  the more popular posts.

Selling the Pool Table via Craig's List
Creating Stability with UPS Address
First Steps in Downsizing

The equity has been sitting in a nice Capitol One savings stash, earning 4% interest until November 2009, and I had figured I was saving money renting versus owning (quite a contrarian opinion!).   But I was living in a luxury condo and paying $5,000 a year less in expenses, so there was no impetus to buy.*

Each of these free internet calculators offered me the information I needed to make that decision to rent for 18 months.  Thanks to the New York Times, Michael Blue Jay's Awesome Calculator, BankRate.com, JD Roth, a devil's advocate opinion from Bargaineering, About.com's "Not Everyone Should Own a Home!", as well as a few surprises such as the calculator on Move.com.

So...why am I two weeks away from closing on a townhome with the potential of saving $3,300 per year...and why should you consider doing the same?

For a couple of very good reasons -- the extended First-time Home Buyer's Tax Credit of $6,500 and the lowest interest rates on cash savings in a lifetime. Here's an example that any non-math major can follow with their own figures to figure out what's best for you.

A Simple English Major's Comparison of Renting versus Buying:

Fill in these blanks (my data is listed as an example below each number.

Rental Data:

1)  Rental property background:  1200 square feet, 2 bedrooms, 2 bath, in great mid-town, safe location.

2) Rent $:  _____
$1100 per month for a 2 bedroom, 2 bath 1200 square foot condo in about 10 minutes from work

3) Renter's Insurance:  _____
$40 per month

4) Utilities: _____
$100 per month average for gas and electric, water and sewer included

5) Cable Television:  _____
$45 per month

6) Cable Hi Speed Internet:  _____
$40 per month

Subtotal = $1325/mo

Then Deduct:

7) Tax Deduction for Real Estate Taxes: _____
$0

8) Tax Deduction for Mortgage Interest: _____
$0

9) How much you are earning from your down payment/equity being in a savings account, minus taxes: ____
$56 per month     ($53,000 down payment * 1.5% interest minus 15% tax effect/12)

Renting Annual Total = $15,228
($1269*12)

Purchase Comparison Data:
1) Purchase property background:  I'm purchasing a bigger townhouse (1,450 square feet) than the condo I'm renting so I'll get a couple of extra hundred square feet, but lose a screened in porch.  Not sure how to put that into monetary value, but

You can go to Bankrate.com or any other mortgage table calculator to figure out mortgage principal and interest for various scenarios.  In my case, my townhome price is $136,500, loan percentage and length is 5.125% loan over 30 years, $50,000 down, and closing costs of $3,075.  That gave me the numbers for #1 starting below.

2)  Mortgage$ (Principal and Interest): __________
$468.26

3) Hazard Insurance: _____
$62 per month (available from previous home owner or your insurance agent)

4) Real Estate Taxes:  _____
$100 per month estimate (estimates available from your local tax assessor)

5) Home Owner's Association: _____
$129 per month
(includes cable television)

6) Water and Sewer: _____
$60 per month

7) Maintenance Sinking Fund: _____
$200 per month, general rule of thumb.
(painting, decorating, new roof, new appliances)

8) Utilities: _____
$100 per month (same square footage as condo)

9) Cable Hi Speed Internet:  _____
$45

Subtotal = $13,968 or ($1164 * 12)

Then Deduct: 

10)  Deduct tax savings for real estate taxes: ______
(approximateley $70 per month for me in tax savings.  Real esate taxes $100/mo and mortgage interest $398 per month in first year = $468*.15 tax bracket =  $70 approximate per month in tax savings first few years if itemizing.)

11)  Deduct any interest on cash you aren't putting into the down payment, if applicable: _____
$23 per month ($22,000 still left in savings from first home sold equity * .15/12)

Owning Total:  $11,928
($1071 * 12)



Conclusion -- Although the monthly difference doesn't seem to be large, only $1071 versus $1269, you can see on an annual level how the annual total of $3,300 is a significant savings.  In  my tax bracket of 15%, I would have to earn an extra $3700 per year to get this kind of savings! 
Do you think I made the right? decision? Are you struggling with similar decisions?  Share!


1st Time Home Buyer's Tax Credit Note - The $6,500 first time home buyers tax credit covers closing costs and miscellaneous expenses such as moving, furniture, new draperies, unexpected repairs in first year.


*(Additional costs for the bigger home included $2,500 extra per year in maintenance, $1200 per year in lawn maintenance, $1,500 per year in water/sewer /pest control and additional utility costs of $1200 per year, because I was in double the square footage.)

Monday, January 11, 2010

New online PearBudget Makes Money Management Easy

JD Roth's Blog "Get Rich Slowly" is a constant source of fantastic money resources for English Majors.  Information on his blog inspired me to try the new online PearBudget money management software.  I have no idea what the Pear is all about, but the online version is the easiest envelope budgeting system I've ever used, and I've tried the top three or four.   They call it "really simple budgeting" and it's true.

With PearBudget, you have one category of expenses that are the same every month.  That group is separated from the expenses that you really can't predict, but can try to "set aside" a certain amount each month to be ready for them.  This is the trickiest part of monthly money management, in my opinion, and causes a lot of people to throw up their hands and just give up!  Don't do it...this problem can be solved
 

For example, you might use the irregular budget expense category for groceries and for medical.  Maybe you try to set aside $250 for groceries, and $100 or so for medical each month.  If you don't spend all that money in a month, it rolls over to the next month.  Shazam!  You are building a fund for whatever might happen medically (or better yet, you've got money to stock up on groceries for your next party). 

This program is so great -- it even prints out a "Go Card" that you can put in your wallet or purse.   You can adjust the Go Card to only include those categories of items that you tend to spend on while out and about each day.  Groceries, gas, personal care, dining out, entertainment, etc.  For example, when I open my wallet to buy that extra pack of gum at the convenience store -- my Go Card reminds me I only have $3.33 left until the end of the month in that category.  Might want to hold out!

Love, Love, Love this software, I think you will too.  I get no money from recommending it, either.  Just sharing the good news. 

You can try it for a month for free, then pay $3 a month.  I'm still on free trial, not sure if I'll switch over to the pay version.  There is also a free Excel Spreadsheet version that you can download.  Honestly, the online version is so smooth and amazing compared to the excel spreadsheet, I just may pay the $3.00.

Wednesday, January 6, 2010

Say Hello to the New Jackson Hewitt Tax Preparer

Well, it's official. I've completed 75 hours of training at Jackson Hewitt to become a tax preparer for the 2010 tax season. The company opened its offices this week and I'm not on the schedule yet. But after all the stuff I've learned, I'm excited about finally filling out someone's return and saying "your refund is Big this Year!"


The tips I'm telling friends most often include the American Opportunity Tax Credit for all 4 years of college and the new Louisiana tax credit for school fees, including books and private school tuition. It's up to $5,000 in deductions per child. That's a hefty chunk of change depending on your filing status and adjusted gross income. I'm keeping up with the federal tax changes at Bankrate and MSN Money has great tips as well.