Posting #7 Deferred Maintenance / Deferred Decorating / Making It The Way You Want = Becoming House Poor
When you buy a new home, all of this stuff in the prior postings on this topic are included in the monthly mortgage payment and spread out over 30 years. Too often, when people buy a used house they become “house poor” because all their disposable income is going towards deferred maintenance (part #3), deferred decorating (part #5) and making the house the way you want (part #6). Living in a house poor mode has all kinds of unintended consequences, which will be discussed in later postings, but the simple fact is this approach is not financially prudent.
For example, if the “deferred decorating” of $10,000 and “make it the way you want cost” of $15,000 was amortized in a loan when you build a new home, the monthly amount would be $134.21 per month and the interest is tax deductible. If you were able to invest the $25,000 at the same time at an annual interest rate of just 2% and made the monthly $131.21 payments out of $25,000 plus interest accrued, you would still have 16,616+/- after ten years in your account, assuming a 30% tax rate. If you were lucky enough to earn 10% percent interest, you would have $34,011 in savings after servicing the payment and tax obligations on the interest income after ten years.
Of course after ten years you would still have approximately $11,440 owed on the amount amortized. If you net the $16,616 you still come out more than $5,000 ahead. If you earn 10% on the amount invested, you would be more than $23,000 ahead. Bottom line becoming house poor is financially a bad decision!
Note: This blog is part of a multiple part series on the justification of building new versus buying used. If you haven’t read the prior postings, it is important to do so to understand the entire rational below.
|Utilities Savings Added||$0.00||$28,000.00 (Posting #2)|
|Deferred Main Added||$0.00||$46,500.00 (Posting #3)|
|Go Forward Main Added||$0.00||$9,250.00 (Posting #4)|
Description Used New
Payment @ 5% interest $ 1,342.05 $ 1,791.64
Utilities $ 291.67 $ 141.67 (Posting #2)
Deferred Maintenance $ 250.00 $ 0.00 (Posting #3)
Go Forward Maintenance $ 50.00 $ 0.00 (Posting #4)
Total $ 1,933.72 Mo $ 1,933.31 Mo
Deferred Decorating $ 10,000.00 Once $ 0.00 (Posting #5)
Make It The Way I Want $ 15,000.00 Once $ 0.00 (Posting #6)
House Poor $ 5,000.00 Once $ 0.00 (Posting #7)