Are we in over our heads?

   I was just reading this article:

http://finance.yahoo.com/banking-budgeting/article/105396/Five-Signs-That-You%27re-Living-Beyond-Your-Means

Which talks about living beyond your means, and 5 signs that you are doing
so.

  I was wondering, does a house payment count as savings?

  We specifically bought a fixer-upper that would eventually be an
investment property, but right now is our first house. (double)  We also
took on a 10 year mortgage instead of a 30 year, so that interest would be
low.  As such, most of our monthly payment goes to the principle, rather
than interst. (which is a modest 5.2% on our loan - not much more than
inflation)

  Anyway, we are paying $370 a month, and have gotten the balance down to
about $11,000 in 5 years, with 5 years remaining.  We have paid extra, so
should get it all paid off early.  The actual payment due each month is
about $345, so we pay a little extra each month as well as put anything we
have left over towards the loan.

  I stay home and take care of our toddlers, plus do some freelance writing
and home repair/renovation when I can.  My wife makes the bulk of our
income, bringing in about $40k a year.

  So we're paying something like 15% or 20% of what we get after taxes
towards the house.  If you include repair costs, the figure is definitely
20%.

  However, almost all of this is building up equity in the house, and plus
getting us closer to the point where we can move out and realize rental
income from the property, so I'm not sure if it should be viewed as if we
had spent too much and bought a dream home that we couldn't afford. (we got
this place for about $45,000 - but it needed a new roof and other repairs
right away)

  So would our house related spending be considered savings, or even an
investment where this article is concerned?

  I've never considered it something that would be a sign that we were
living beyond our means - just the exact opposite, in fact.  We were SORELY
tempted to buy something closer to a dream home, which would have forced us
to take on a LOT more debt, and do a 30 year mortgage.  I just couldn't
stomach the thought of most of our monthly payment going to interest.

 

You can "consider" it however you want to.
Financially, I've never considered my house anything but a debt and an
expense.
When my remaining mortgage is paid off, the house will be expense
only.
Since I always want a house for my "home" the only time I'd consider
its market value is when I'm thinking about selling it to buy a
different house.
I always considered paying down the mortgage as reducing debt.
As to savings, the only thing I've considered as savings is FDIC
insured savings/CD/IRA-CD accounts - minus my debt.
The one exception to that was 401k money market "savings" which
was not FDIC guaranteed.  I did include that when considering my
retirement, and immediately upon retirement rolled it out of the 401k
and into FDIC insured IRA-CD's at 3 times the interest rate.  
Yes, I'm conservative that way.  Some might call it frugality.
But I never overestimate my actual worth. and always know what I can
afford.
I know a number of people whose "life plans" are rapidly changing
because they considered Wall Street equities "savings."
That's like a guy throwing dice at a casino craps table with a 10
grand stack of chips on the table and thinking he has 10 grand to his
name.
He's got to see what's in his pockets when he leaves the casino.
BTW, I'm not exactly a stick in the mud, as I usually have a commodity
futures trade active - pure gambling.  That account sits aside from
all others.  If I take money out it goes to savings, and if I put
money in it comes from savings.  Otherwise its balance is meaningless.
Like the market value of my house.  

--Vic

 

http://finance.yahoo.com/banking-budgeting/article/105396/Five-Signs-That-You%27re-Living-Beyond-Your-Means


Yes. But it can more complicated than that when house values plunge.

And interest only house payments dont, and normal house payments are
partly capital and partly interest and the interest is lost money, not savings.

Corse the alternative, rent, is no savings at all.


property, but right now is our first

that interest would be low.  As such,

is a modest 5.2% on our loan - not much

Then most of your payment is savings.


$11,000 in 5 years, with 5 years

actual payment due

income, bringing in about $40k a year.


getting us closer to the point where we can

should be viewed as if we had spent too

Nope, its a quite effective saving as long as the value of the place doesnt
drop too much and even if it does, it probably wont drop to below what you
paid for it, even if you include what you have paid for the renovations etc.


repairs right away)

Likely still reasonable value.


beyond our means - just the exact

Correct.


have forced us to take on a LOT more debt,

And you would have seen that drop in value a lot more too.


interest.

And now you get to take advantage of the substantial drop in house values
and can buy that dream house much more cheaply than you could have if
you had bought that in the first place.

Worth waiting a bit tho to see if the house prices continue to drop even more
yet if you do decide to move.

 
No.  it is debt.



Rental property is an investment, not savings.  If you have the other half of
the "double" rented out, you made a smart decision in buying the property in the
first place.  If you do not yet have it rented out, but are still living within
your means -- reducing any other debt rather than accumulating more -- then you
made a smart move.



That is well below the 36% threshold that is widely viewed as a mortgage debt
cap.  You're doing well!



It would be an investment.  "Savings" in context generally means liquid
investments.  Your house is not liquid, especially while you are living in it.



That may be the ONLY hard spot in your plan...  If you plan to rent out the
house, then putting all your spare cash into the mortgage, instead of building a
down-payment fund for your "dream home" (or at least the next step toward it),
may not be the best approach.  To buy your next one with a sane mortgage, you
will need 20% down to avoid private mortgage insurance.  While you might be able
to use your present house to provide a home equity loan or line of credit, that
will still be more debt, and would count toward the 36% cap if you used it for a
down payment or to reduce your next mortgage.

Your current priorities should be:
    Pay your current debts.  After required mortgage/car payments pay any credit
card debt as quickly as possible, highest interest first.
    Accumulate an emergency savings fund of 6-9 months take-home pay.  Money
Market accounts or staggered short-term, renewable CDs (e.g., 12-month CDs, with
equal amounts invested every 2 months for a total of 6 CDs) are good vehicles
for this purpose.
    Start your retirement planning.  At the minimum, the max allowable IRA
contribution every year plus the max into any 401k  fund that will be matched by
your/your wife's employer (often 10% of salary, matched at 50% by the employer).
    Build your down-payment fund.  Decide how much you will need, and when.
Figure out how much you need to save monthly to accumulate it.
    Pay down your mortgage beyond the minimum payment.  In your position, this
is actually the LAST thing you should be paying.  Once you move out and rent the
house, your rental income will cover the mortgage, taxes, insurance, and likely
a modest positive cash flow.

 jrweiss98155remove@remove.comcast.net says...

so.

Not necessarily.  Making a house payment is paying down debt, which IS a
form of saving.  If the house payment was spent on anything else, the
debt would grow, and that, to an economist, is considered "negative
savings".

--Gene