This “checklist” series of articles looks at common areas of spending to identify a list of opportunities to reduce costs. Not every tradeoff opportunity will make sense for you, but we hope you find this a helpful compilation.
For most Americans, housing costs comprise the biggest single expense in their budget (averaging 34% of spending for the average American in 2021). Accordingly, even a small opportunity here can have an outsized impact. On a typical 30-year mortgage at a 5% interest rate, the lender will pay almost double the purchase price of their house over the 30 years. At today’s interest rates (early 2023) that number can be significantly higher! With those kinds of impacts, it makes sense that this is high on the list of financial priorities…and a great place to look for opportunities.
Trade-offs to Reduce Housing Costs
Refinance your mortgage
Check market mortgage rates at least every 3-5 years. If rates go down by 0.5% or more and you plan to remain in the home for several years, evaluate refinancing at the lower mortgage rate. Key things to know before you “refi”:
- Refinancing will come at a cost (“Closing Costs”) These costs will can vary from a few hundred to a few thousand dollars.
- Whether this makes sense for you will depend on how long you expect to own the home. Think about how many years you’ll need to stay in the home before the extra costs you paid to refinance are paid for in lower interest fees. This is called your “break even” period.
- Some people use refinancing as a means to extend the term of your home (taking out cash). Although it can make sense in rare cases 1When income is lower, but a significant savings is available to draw on , this will invariably increase the amount you pay for your home over time.
Get rid of PMI
Move to less costly housing
Moving is expensive, costing the seller an estimated 8-10% of the value of your home (due to agents, lawyers, surveyors, bank fees, and taxes). If you buy elsewhere bear in mind that the seller of that home is likely paying a similar amount. However, if living in your home is financially unsustainable, delay in moving will only add costs and will eventually lead to foreclosure and removal under unfavorable terms. The key question here is how much housing you can afford. Here are a few rules of thumb: Mortgage payments (including ALL debt collateralized by your house such as home improvement and 2nd mortgages) should be no more than 25% of take-home pay. Your down payment should target 20% (lower rates typically require private mortgage insurance which is a pure addition to cost to the buyer)Target a shorter term (15 years) vs. lowest payment (30 years). A lower payment is tempting, but bear in mind that the trade-off here is that you will be more than twice as much in interest expenses (and only very slowly build equity in your home)The mortgage should be fully paid by age 55 When you fall outside these parameters and are experiencing financial duress, consider moving.
Share housing costs
Another viable strategy when housing costs are too high is to share the space and costs with others whom you deem to be trustworthy.
- Friends & family… Share space and costs with friends or family members (i.e. in-law apartment; room and board with friends or family members)
- Tenants and travelers… Another way to offload part of the expense is via rental to tenants (i.e. duplex) and travelers (i.e. Air BnB). The trade-off here can be more significant 2 I can attest that making it look like 3 kids didn’t live here would be no small feat [/modern footnote] but the trade-off could be significant, particularly if you’re traveling for long periods of time or live in an high traffic area.