No Debt Plan

No Debt Plan is a blog about living a debt-free life. If you're new here, you may want to subscribe to my RSS feed (e-mail subscription also available). Learn more about me, or read some other popular articles. Thanks for visiting!

(Photo by natebeaty)

I’m not a huge fan of homeowners associations.

Correction, I’m not a huge fan of overly restrictive homeowners associations.

The concept makes sense. You come up with some set guidelines to make sure that no one in the neighborhood paints their house glow-in-the-dark green or keeps a flock of flamingos in the backyard. You make noise rules so that no one throws a jazz festival or runs a dog farm in the backyard. I like that, thumbs up there.

What I don’t like is that any changes you want to make to your house has to be approved. If we wanted to add a second tree to our front yard, technically, we have to wait for approval. When we got DirecTV, the guy told us it had to be mounted in a certain place on the house. When I called the association for permission, they said it had to go as far back as possible. I looked around the other houses that had been done the exact same way — close to the front, but on the side — and said okay.

I also don’t like that the association meetings are typical gossip sessions. I haven’t been to ours, but I think it’s a fairly common phenomena.

However! I will say that our homeowners association actually was worth something this week. We pay $440 per year to the association currently. A neighbor down the street let their yard just go to hell and back. They moved out, there is no “For Sale” sign out front. I would bet good money on it that the owners had a 0% down adjustable rate mortgage that they now cannot pay. Instead of trying to get rid of the house, they are just walking away. They left a huge pile of trash in the driveway — not bagged, not canned — and as I mentioned let the yard just go. The backyard in some spots was close to waist high. Seriously. I’d get lost in there.

Needless to say, it was an eye sore.

I had been meaning to call the association simply because the trash people won’t pick up trash that isn’t in a can. Even if it is laying all over someones driveway and obviously is trash. But someone beat me to the punch. Wednesday night I came home from work and there were two trucks, a trailer, and a group of five guys mowing, edging, and cleaning up the house.

So for this week, I say hooray Homeowners Association. Now if it were only free…

I’ve told you about the experience my wife and I have had learning how to tend to our lawn and plants at our new home. We’ll continue to share stories of our rookie mistakes like how we bought weed killer on clearance as our lives progress.

I’ll get to the plants that pay dividends in a minute, but a brief background on our landscaping and gardening abilities:

We did some more landscaping a few weeks ago. It seems every time our parents come to visit, we put them to work in the yard. They seem to enjoy it though — they have green thumbs. We have brown. They are doing everything they can to get a hint of green in our thumbs.

Our parents tend to love saying “Oh, with this plant you just can’t kill it.”

A few weeks later and all we have left is brown, crispy, crunchy, ruined plant. It never fails. Brown thumb strikes again.

Seriously, buy plants that pay dividends

Honestly… in general, I like plants. Green, yellow, red… they’re all fine to me. You might go as far to say I find them aesthetically pleasing (just don’t tell me group of guy friends). Take the plant to the right here, Dianthus deltoides. We have some form of dianthus that my Mom brought from home planted in the back. Apparently it should spread over the years and take over the area it’s in. We’ll see — we’re just trying not to kill it.

Now if I could only buy plants that money would grow on, I’d be set!

Until I am able to breed that plant in my laboratory (what, I haven’t told you about my laboratory?), I’ll stick with other plants that pay dividends.

We’re not talking about public corporations that make plants. Or plants that earn you 3% cash dividends. No, I’m talking about perennials.

For those like me (the uneducated gardner): There are two types of flowering plants: annuals and perennials. Annuals are plants that you have to plant annually. You plant them once, they bloom then seed themselves, and die. I used to think it was the type of plant that came back (without needing to replant) annually. “Annuals come back annually, right?” Not so.

Instead, perennials are flowers that you plant once and they reappear every year* with minimal effort. Of course minimal depends on your definition of the word. Plants need water, proper soil, and maybe a bit of fertilizer so it isn’t necessarily a no-work required deal. But it’s a lot better than replanting annuals every year.

* = Perennials can apparently be short lived as well, but usually live up to two years. Some can last eons.

It’s a bit of a stretch to make this comparison, but what the heck: buying perennials is kin to investing in a stock that pays a consistent dividend payment.

1. Buy once.
2. Plant once.
3. Enjoy multiple years of flowers.
4. If you’re lucky and have a green thumb, your plants might even spread and grow extra plants. This is equivalent to reinvesting your dividends in a DRIP plan. Your plant DRIP plan will work better if you use water. Ha-ha.

What do you think? Are you a fan of annuals-only, perennials-only, or a mix? And stick around, tomorrow I intend to have an article up about a modern pre-fab green home that I’d move into today if I had the chance.

I received a comment recently on the article where I asked How Much House Do You Buy Each Month? Nuggie asked,

How does escrow fit in, and does it ever make sense to prepay escrow?

Here’s a brief overview of escrow in relation to a home mortgage. (You can also get the general idea from Lending Tree’s information on escrow. The following is just my opinion.)

A quick explanation of escrow

Escrow is an account that the mortgage company opens up for you to hold onto different monies. Your homeowners insurance and property taxes are the most common uses for escrow. Part of your monthly payment includes your escrow monies. That means the mortgage company is holding onto your money to insure that you pay your property taxes and homeowners insurance. In fact, they pay them for you.

Why does the bank hold onto escrow for me?

The bank has a vested interest in the house. They require you to have insurance so that if it burns down, you can pay back the money they lent you. They require you to pay your property taxes so that your state/local government can’t take the house from you. That makes sense from a business perspective. I’m not going to lend a few hundred thousand dollars out to someone if I can’t be reasonably sure I will either get the money back or get the asset into my ownership.

Should I ever prepay escrow?

There are not many situations I can dream up where you would want to prepay your escrow. I do know that our mortgage holder, Suntrust Mortgage, gives us the option to apply any additional payment to escrow. As we discussed, escrow payments are based off of your insurance and property tax costs. This should stay fairly consistent year to year. However, a new tax assessment or perhaps upping the coverage on your house could increase either of the underlying costs behind escrow payments.

Your bank may also only make adjustments once per year. Our taxes should be lower than what we are paying into escrow because we were able to homestead our home here in Alabama. But Suntrust told us they only adjust the escrow payment for taxes once per year. If you were going the opposite direction — higher costs — then you might want to start paying extra each month so you don’t end up owing a large amount to your escrow account at the end of the year.

(Photo: Mill Street by Paul Keleher)

Have a question? Don’t be afraid to ask! I love to help clear up concepts or issues for readers. Or feel free to bash me. Whatever feels right. Drop me a line, or leave a comment on a post.

Example amortization graph from Karl’s Mortgage Calculator

You “own” your home. The bank really owns your home, but you are making payments. Every month you write the check or send in the payment online. Do you really know how much house you buy each time?

How to do the Math

We are locked into a 30 year, fixed rate mortgage. Actually, a regular mortgage and then a second mortgage for the other 15%. We’ve been paying off the second mortgage as quickly as possible.

There are two different ways to get a number for this. One is to figure out how much you are currently getting for each regular payment. The second is to figure how much house you are buying with each extra payment to principle you are making.

Amortization Schedule

The first method is tricky because it is constantly changing. For example, when we made our first payment to the house we paid $150 in principle to the first mortgage. Last month, we paid $154. It gradually increases over time. Thankfully, our mortgage company breaks down the payment information online. If your mortgage holder doesn’t do this, you can set up an amortization schedule in Excel. You can Google how to do this.

Extra Principle Payment

As I mentioned, we are paying off our second mortgage at a steady pace. In fact, we should have it knocked out by the beginning of 2012. If you’re doing the same thing, maybe you’d like to know how much each extra payment is “buying” you in house equity. Let’s use an example:

Your purchased the house at $200,000 and put 10% down, or $20,000. You have one mortgage that was originally for $180,000. You’ve achieved free cash flow and now have $300 per month to put toward paying off your mortgage. How much house is that really buying?

Simple. Just divide $300 by the total cost of the house. That comes to: $300 / $200,000. Result? 0.15%. Not a whole lot of extra, but you are chipping away at the debt.

Some caveats to remember:

• It doesn’t matter if your house has increased or decreased in value. You agreed to pay $200,000 for it, so that is what your calculations should be based off of. Even if the home value was $400,000, you still bought at $200,000.
• As you make extra principle payments — even as little as 0.15% at a time — you also increase how much your normal monthly payment will get in principle. It may only add an extra dollar per month at the beginning, but you will really start to chip away at it with time.

Of course some of you will argue that you shouldn’t be paying off your home. I’ll tackle that topic in the future, but you’re welcome to share your opinion.

See results of our window treatments at the bottom of this post.

Our house has two thin windows next to the front door that look into the foyer. When we moved in we didn’t think much of them. However, the way the house is designed you can see all the way into the living room if you were standing at our door. That really ruins the “walking around in your underwear” part of owning a home.

Once we realized we needed to cover the windows, we thought of our options: blinds, curtains, or something else. We walked around the neighborhood to see what other folks had done. Mostly we saw open windows without coverings, and blinds.

The problem with blinds and curtains is how to mount them above the door. We have a rounded window above the door rather than dry wall, and it would be weird to cover that up. Blinds can be expensive too. We had Lowe’s install all of our blinds throughout the house. The charge to have the guy come out to do it was $35, on top of the cost of the blinds. We set aside $200 to take care of this need figuring that we would need to order two more sets of unique blinds, plus installation.

We took a walk down the window aisle and discovered what is called window film. Essentially it is a large roll of material that you stick to the window similar to tint for car windows. There are several different kinds. The styles range from tinted to frosted to stained glass. We ended up buying a frosted style from a brand called Gila. Cost? $20.

Installation is somewhat complicated, but if you have two people it works out pretty well.

Here’s what you need:

• a lint-free cloth (or coffee filters)
• a sprayer bottle (an empty Windex bottle that is really cleaned out will do — don’t use Windex, it is ammonia based and that can ruin the film)
• baby shampoo
• a couple of towels
• a credit card
• a razor blade

There was a display right next to the film that offered a “film installation kit” for $8 or something like that. It included the “special liquid” that you would need to keep the film wet for installation, a lint-free cloth, and a squeegee. That special liquid is essentially soapy water. We picked up a new sprayer bottle and baby shampoo for maybe $2. I had everything else on hand.

Basically this is how it works: clean the window really, really well. It has to be spotless and lint-free. (Anything left on the window will cause bubbles to form under the film). Put a small amount of baby shampoo (perhaps 1 tsp.) in the sprayer bottle, fill the rest with tap water. Place the towels around the window to catch dropping water. Cut the film (per included instructions) to fit your window.

Now, this is where it gets kind of complicated. You are going to wet the window with your sprayer bottle, remove the backing from the adhesive side of the film, and put the film on the wet window. After that you wet the film down on your side as well. Make sure the window and film stay constantly wet. This allows you to slide the film around on the window to get it into place.

After you’ve got it into place you will squeegee the water and air bubbles out from the center of the film to the sides. If there isn’t enough room on the sides (the film is flush with the window frame), use a razor blade and the edge of the credit card to give yourself a 1/16″ edge all the way around. Squeegee it out a few times, and leave it alone. Wait a few days and the film will be securely stuck to your windows.

In the end, we spent at most $25 for doing it ourselves. I’m not saying it is a perfect substitute for blinds, but it really does block visibility into the house.

Pros:

• Mission accomplished. Underwear walking can re-commence.
• We saved $175 off of our budget expectations. I don’t know if those expectations were reasonable, but it was definitely inexpensive.
• We didn’t really like the blinds or curtains we saw, and we like how this looks.

Cons:

• Semi-permanent. I would imagine it would be difficult to get it off of the windows. Perhaps not, I’m not educated enough to know.
• No way to peek at an unknown visitor at the front door. This is the only downside I see. We could cut a peephole into one side, I suppose.

Overall we are very pleased with the results which you can see below. Has anyone else used window film on their household windows? (And who loves the wreath my wife picked for spring?)

On Monday I’m going to share with you how much house we actually buy each month. Stay tuned.

Sometime in the past two weeks I was working on No Debt Plan with the TV on in the background. We happened to have the channel on HGTV, and the show “My First Place” was on. I also happened to have it two nights ago when I was writing this article.

As you might imagine, the show is based on the premise if helping first time home buyers find that perfect first home. It also is a great opportunity to show off some really, really bad decisions. After watching the show, I can see exactly why we have a foreclosure problem in the US right now. (Photo: Four letter word by Justin Shearer).

The first episode included a married couple that lived and worked in Seattle. Combined, the couple earned $100,000 per year. As the show unfolded, I started to sigh to myself. Apparently, this is going to be frustrating to watch. They visited several properties ranging from single detached homes to condos. Their original budget was, if I remember correctly, $230,000 to $250,000.

They didn’t like the condo because it felt like they were living in an apartment. I don’t blame them — we didn’t like condos/townhouses we visited either. Of course, they saw a few options that they always found something wrong with. Either the commute was too long, or the grass wasn’t just right, or (name your excuse here). So they started to look at houses that were more expensive than their budget.

The couple did a whole slew of things wrong that really disappointed me in the show. You’d think instead of just taping a disaster-to-be that the show would offer some advice. Apparently not. They ended up with a $262,000 house, a 6.75% interest-only mortgage. Unbelievable.

Some mistakes I picked up on:

• They were not pre-approved for a mortgage, so they were shopping prices that they did not know they could get a mortgage for. A pre-approval process would help them figure out what they could afford on a 30 year (or 15 year) mortgage.
• They had no savings. None. If you are making $100,000 per year and have nothing to show for it, something is seriously amiss.
• The mortgage they chose was terrible. The broker or lender they chose should be ashamed of themselves. They even laid out the numbers on what a fixed mortgage would be, but going to interest-only would save them $200 per month. Of course, they will never own their house, but they said they would pay extra in principle after they were settled. Coming from people without savings, I highly doubt it.
• They spent above their target budget. They ended up in a $262,000 house and the target price was $230,000 to 250,000. Of course their initial expectations may have been unrealistic. I think that is fair to say with most first time home buyers. But they still spent above what they targeted on the high end by $12,000. That’s no small amount of money.

The second episode was fairly similar. It featured a single woman in Atlanta that was trying to get out of her apartment. She worked as a personal assistant and was starting an event planning company on the side. She connected with one of her sorority sisters that was in real estate. Her target price was $250,000 to $260,000.

The realtor took her from house to house, and of course there were things she didn’t like about the houses that were in her range. She settled on a $265,000 house and offered $262,000 with the seller paying closing costs. As she signed the offer sheet, she became very nervous about being able to afford the payments. She was hoping she could be approved for it. Again, no pre-approval letter showing what she could afford.

A house inspector came and found a few small things wrong with the home. They were fixed by the seller. The week before she was to close on the house, she was laid off from her position. She had until the following week to find employment so that she could close. Unable to do that, she ended up losing the house. (I do wonder if she lost any money in the process, like deposits, etc.)

She was lucky because she lost her job before she got the house. Imagine moving into your house the day you lose your job. This isn’t entirely her fault, but there were still several mistakes she made along the way.

Overall, I am disappointed that the show doesn’t offer any advice to the first time home buyers. Instead, they seem to just document what is happening.

If it were my show, this is the advice I would give first time home buyers:

1. Get pre-approved for a 30 year fixed mortgage. Don’t consider any other options except a 15 year fixed mortgage. None of that interest-only or ARM junk.
2. Save for a down payment. The market will probably require a 10% down payment for most areas these days. We only put 5% down, but we are rapidly paying down the principle on the mortgage to get to 20% as fast as possible (currently at 7-8% in 6 months — not bad). Putting down just 5% may have been a mistake for us as well. I’m not saying we’re perfect.
3. Based off of your pre-approval, find out how much house you can afford. If your range is $230,000-250,000, don’t buy a $259,000 house. It is out of your range. You may even be approved for more house than you need. Don’t make that mistake either. (Just because the bank says you can afford $300,000 doesn’t mean you need that much house.)
4. Consider all of the costs involved. The mortgage and realtor fees is just a starting point. Don’t forget the cost of moving, closing costs, and furnishing the house. If you live in a one bedroom apartment and buy a three bedroom house, you now have two extra rooms to furnish. Throw in lawn, garden, and patio furnishings and it really begins to add up.

shipping container getaway by rolu dsgn

As I announced last week, I am going to start sharing green living ideas here. Not only will living green save the environment, in most cases it will save you money.

These are some excellent green living resources that I have had bookmarked for quite a while. I will continually add and update this list. And let me know — what are your personal favorites?

• Tree Hugger’s Go Green series examines multiple topics, and how to go green in them. A few examples: How to green your kitchen, how to green your laundry, and how to green your water. A really solid group of article filled with links to quality products.
• Inhabitat’s series on Green Building 101 is great as well.
• Global Green is just an all around great green organization.
• One way to save money on your gas or electric bill is through Hot Water Recirculation Systems. This is a good article explaining the concept and cost.
• GreenHome offers an online store to buy green stuff… for your home. What a concept.
• Dwell Magazine is also pretty good from what I can tell.
• Build It Green is another non-profit.
• The Department of Energy also puts on a Solar Decathlon. Architecture students build green “homes” to compete. Very, very cool.
• Greywater Re-use Systems are an interesting idea. Every little bit of water saved helps.

Architecture:

• FabPrefab - a great website with links to a bunch of different pre-fabricated green homes. This is where I go to dream.
• Greenbuilder Sourcebook is a list of a bunch of different green building ideas to implement within your home.
• Clever Homes, Resolution: 4 Architecture, Modern Modular, Michelle Kaufman, BlueSky MOD, Rocio Romero, and Marmol Radziner are all green prefab designers. I get lost in these webpages — I could spend hours here.
• Living Homes is a very interesting company that make very green homes. The website is superb with videos showing the different green technologies used in this one great house.
• Zero Energy Homes design homes where net energy use is zero.

Energy:

• US Department of Energy - Wind Powering America
• American Wind Energy Association - Small Wind
• Stirling Energy Systems - (Website is currently getting a makeover.) Very cool idea on how to concentrate solar power with mirrors.
• Home Power Magazine - As you would expect it to be.

Blogs:

• EcoGeek (RSS) - publishes up to 10 articles a day about innovations that are going to save the planet.
• Ecotality Life Blog (RSS) - Ecotality is a renewable energy company. This is the company blog that covers green technology.
• Jetson Green (RSS) - One of my favorite green blogs. Discusses a lot of architecture and green home stuff.
• TreeHugger (RSS) - the Google of the green blog world.