Jagged Thoughts | Dr. John Linwood Griffin

April 14, 2013

The washing machine sounds like a jackhammer!

Filed under: Homeownership — JLG @ 1:05 AM

Every few weeks we find ourselves driving in the nearby neighborhood where we lived last year, usually to visit Boloco or Zenna Noodle Bar or one of those ubiquitous self-serve yogurt places that are proliferating like 1990s-era Starbucks.  The drive through invariably takes us by the apartment we used to rent on the ground floor (of four, plus basement) of a gorgeous building in a great location.  But what a strange feeling it is to see our old apartment form outside:  It’s a place that invokes memories of home…yet, after less than a year, it’s a place that feels inaccessibly distant.  Did we really used to live there?

(In terms of inaccessibly distant memories, even worse are the places we lived before moving up here to the craggy hills of Massachusetts.  I’ve recently visited friends who live near our former Florida house and friends near my former Maryland apartment.  And I was stunned at how those places don’t even look like what I remember them looking like.  Yikes.)

Still, we have no regrets at having switched from making monthly lease payments to a faceless landlord in California to making monthly mortgage payments to a faceless bank in Ohio.

Along those lines, here are some of my recent lessons in homeownership:

  • Read the Deed (or: just because you hired a lawyer doesn’t mean you don’t need to check his work).  

We just discovered that the closing attorney made four errors in closing our house.  (I’d been aware of three errors but dug up a fourth this week.)  Here are the errors from least severe to most:

1. The attorney miscalculated our share of the property tax.  When you buy a house you reimburse the seller for some of the property tax that’s already been paid.  In our case the seller had already paid taxes for the period April 1–June 30, so we needed to reimburse him for the period June 15–30 (we closed on June 15).  The attorney calculated the wrong amount.  But it was only a $15 error (“chump change”, as my former racquetball partner would have said).

2. The attorney miscalculated the size of our required monthly escrow payments by $180/month.  So every month we’re paying an extra $180 unnecessarily into our escrow account (beyond the amount that is needed to fully pay our property tax and insurance premium) — a $1,620 overpayment so far, and growing.  Once a year our mortgage servicer is supposed to recalculate the required monthly escrow payment, so I do expect to get the money refunded sometime late this year.  But in the meantime, we have $1,620 less in our bank account.  What’s most annoying to me is that I pointed this error out the day before closing (we only received the draft settlement statement at 4:26pm the day before our 10:00am closing) but the attorney didn’t bother to fix it.

3. The attorney made two errors on our Massachusetts Declaration of Homestead: a misspelled property address and an invalid signing date (May 15 instead of June 15).  I worried that these scrivener’s errors could invalidate the document — in a worst-case scenario, an invalidated declaration of homestead could put up to $375,000 of our home equity at risk — so I had the attorney file a replacement declaration with the correct address and new date.  To the attorney’s credit, his office paid the $35 filing fee for the second filing.

4. The doozy: The attorney misprepared the deed to the property!  In Massachusetts there are three main ways to co-own real property.  If you are married you generally want to take title as tenants by the entirety; we certainly did, and the attorney confirmed our choice over a month in advance.  But the deed he prepared and filed gives us title as tenants in common.  Argh!

The deed currently reads:

I, [the seller], in consideration of [the sales price], grant to JOHN GRIFFIN and EVELYN GRIFFIN of [address] with quitclaim covenants…

It should instead state:

…grant to JOHN GRIFFIN and EVELYN GRIFFIN, husband and wife, as tenants by the entirety, of [address]…

Argh indeed.  The solution is for us to deed ourselves the property, inserting that phrase into the new deed.  Again to the attorney’s credit, his office is eating the $125 cost of the second filing.  (I asked whether filing a new deed would have any impact on our title insurance policy, homestead declaration, mortgage note, or our filings with the IRS.  His answer is “no”, since the new deed won’t change the parties involved in ownership — just the form of tenancy.)

I discovered the problem when I compared our deed to the deeds of other married couples we know, and looking up the discrepancy in the relevant statutes.

  • The washing machine sounds like a jackhammer!

Whenever we ran a load (in the LG high-efficiency front-load washer) with warm or hot water, the house piping rattled like a jackhammer and the washer’s intake hoses vibrated so strongly that I was worried that it would dent the wall behind the washer.  A quick search of the Internet led me to diagnose a rapid-fire water hammer effect, likely due to the washer rapidly opening and closing the hot water valve in a misguided attempt to regulate intake temperature.  And there’s a cheap and easy fix:

$10 and no more worries that your washing machine is going to rip your pipes out of the wall.

$10 and no more worries that your washing machine is going to rip your pipes out of the wall.

What you need is a water hammer arrestor.  You actually need two ($20 total), one for each intake hose — and no more jackhammering.  But, while you’re flailing away behind the washing machine:

  • Is the dryer supposed to be venting so much exhaust into the laundry room? 

While installing the water hammer arrestors I discovered that the dryer’s exhaust vent wasn’t flush with the exhaust pipe leading to the outside.  (“Discovered” by noticing that there was lint everywhere behind the dryer.)  Although much of the hot, humid, lint-filled dryer exhaust correctly went outside, some of the hot, humid, lint-filled air was staying inside and slowly coating the back of the dryer, the wall, the floor, and the hoses with hot and humid lint.

The ruffled pipe on the left is correctly inserted into the exhaust pipe on the right. When incorrectly non-inserted (not shown), some of that warm moist air unsurprisingly flows back into the laundry room.

The ruffled pipe on the left is correctly inserted into the exhaust pipe on the right. When incorrectly non-inserted (not shown), some of that warm moist air unsurprisingly flows back into the laundry room.

It was pretty easy to fix by moving the dryer so that the pipes lined up correctly.  My guess is they were knocked out of alignment a few months ago when the insulation contractors were busy drilling holes in the walls and pumping them full of cellulose.

But the larger lesson for me is that nobody is going to come knocking on our front door asking to check whether our dryer is venting correctly.  Gone are the days when some faceless property management company dropped by periodically to take care of these kinds of things.  So I’m making an effort to look behind things (like the kitchen stove), or underneath things (like the refrigerator coils), or around things (like the toilet flush mechanism), or inside things (like the bathtub drain), to ensure I understand what’s going on and especially to ensure I notice when something isn’t quite right.  (It’s surprising how much more you care about fixing a problem when it’s your problem instead of being your landlord’s problem.)

And speaking of venting:

  • Is the bathroom fan supposed to be venting so much exhaust into the attic?

The short story here is that the electrical contractors used duct tape to connect the fan exhaust ducts to the roof vents.  This image from Lowes.com shows the components that usually route air from your exhaust fan to the outdoors:

Roof vent kit. The middle component is the coupling that would normally connect the hose (upper left) to the vent cap (upper right). Instead of buying this $3 part, our electrical contractor decided to use duct tape, with predictable results. Image source: Lowes.com

Roof vent kit. The middle component is the coupling that would normally connect the hose (upper left) to the vent cap (upper right). Instead of buying this $3 part, our electrical contractor decided to use duct tape, with predictable results. Image source: Lowes.com

It took me months to notice that the contractor had skimped on the coupling; the rest of the installation was very professional.  (I did notice that he had wrapped the connection area with duct tape, but I assumed he put it there to support the weight of the hose, not to connect the hose to the cap.)  I only discovered it when I noticed a “used bathroom smell” in the stairwell leading to the attic space:  The fan was drawing air out of the bathroom and pushing it into the attic, which then pushed it towards the stairwell, then back towards the bathroom.  When I checked the attic I discovered that the duct tape on both hoses was failing, causing the hoses to vent partially into the attic space.  $6 of parts (and about an hour of cursing and bumping my head) and all is well.

(Side note 1:  If I could go back in time, I’d have specifically instructed the contractor to use rigid ducting to exhaust the new fans; I think that would reduce the fan noise even further.  I may eventually go in and replace the ducting myself.)

(Side note 2:  Putting the bathroom fans on a timer switch is easily one of the most satisfactory modifications that we’ve done to the house.  Before we take a shower we simply press the “60 minute” button on the switch and forget about the fan — and we have no more moisture problems in the bathroom.  Try it!)

(Side note 3:  There is a conventional formula that you can use to determine what capacity [cubic feet per minute, CFM] bathroom exhaust fan you need.  I was tempted to get an oversized fan but decided to get exactly the size called for by the formula.  My decision was correct:  if you install a timer for your bathroom fan, you don’t need an oversized fan.)

  • One snow shovel isn’t enough for two people.

Lesson learned:  Two snow shovels would have gotten the job done in half the time with twice the fun.

Before the cold season I bought a good-quality plastic shovel for bulk snow removal.  Our neighbor later mentioned (correctly) that we also need a square metal shovel to break up and remove ice from the sidewalk, for those days when freezing rain sticks to the walkway and stairs.

Our roofing contractor recommended we get a roof rake because of the shallow slope of the roof over our porch.  You use them to rake heavy snow off your roof to avoid potential collapse from the weight of the snow.  I ended up being glad we bought one (the rakes are about $50 each, but prevention is cheaper than repair); I ended up using it twice this winter when we had deep snows followed by rain.

  • Which bulb to buy?

One nice thing about homeownership is you can finally start thinking in terms of years for things like “what’s the return on investment of buying one of those newfangled expensive light bulbs?”

When we bought the house all the fixtures had incandescent bulbs.  When the Mass Save folks came to give us a free energy audit, they replaced all the incandescents with CFLs (for free!)  CFLs use about 25% of the energy of incandescent bulbs (lower wattage, less heat) and have a longer service life than incandescents.  Unfortunately, CFLs take a few minutes to warm up to full brightness and can be pretty dim for the first few moments after turning them on — fine for some rooms but not really good for places like stairwell lighting.  As a test we’ve replaced a couple screw-in CFLs with LED bulbs and so far are very happy with the light distribution, color, and instant-on performance of the LED bulbs.

I also put three low-lumen LED bulbs in an outdoor lamppost to try them out.  I ended up writing a review of the bulbs in which I calculated the long-term cost savings you get by buying an $11 LED bulb instead of a $1 incandescent bulb:

These things are advertised as “2700–3000K” but they look much whiter to me — maybe 4000K? — certainly nothing like the warm orange-y color shown in the item description. My only complaint is that they don’t look as pretty as the dimmed 15W incandescent bulbs they replaced (the ones with the nice orange filament glow). But these bulbs don’t look bad, just a little futuristic.

I really like their light intensity of 50 lumens per bulb; I bought them in part because these were the dimmest bulbs I could find. I installed them in a lamppost next to our front steps. The old 110 lumen incandescents were harshly bright on dark evenings, so much so that three of them together hurt my eyes when I glanced at them. These LED bulbs are pleasantly dim (though still too bright to stare at directly) — the bulbs aren’t distracting when viewed from across the street, but they still provide enough illumination to make out the steps.

These bulbs are currently $11/bulb[.] I’m curious to see whether I get the claimed 3-year (30,000-hour) service life out of these LEDs, especially with them being in the outdoor fixture. At current electricity rates, each 1.5W LED bulb costs me $0.92 per year if I leave them on 24/7. So if the bulbs do last three years, then it’ll cost me $4.59 total (bulb cost plus electricity cost) per bulb per year.

It turns out that that’s a bargain in comparison with my old 15W incandescents ($1.09/bulb, 1500-hour service life). A 15-watt bulb costs $9.24 in electricity per year when run continuously, and a 1500-hour service life means you’ll burn through six bulbs each year…so the total cost for incandescents running 24/7 is $14.69 per bulb per year.

(In actual use I only ran the incandescents at night and I had to replace them after about six months. Under that 12-hour “only at night” scenario, the incandescent cost is only $6.80 per bulb per year — but that’s still more expensive than the $4.59/year if I run the LED bulbs full-time. And in an apples-to-apples comparison, if I were to run the LEDs only at night [and if they last six years that way] then the total cost for the LEDs is only $2.75 per bulb per year.)

In order to get these bulbs to work I had to screw them in more tightly than I’d had to with the incandescent bulbs. At first they didn’t light up and I worried that I’d received three dead bulbs, but it turns out that a little extra torque fixed the problem.

Most of the LED bulbs we’ve bought have a smaller “candelabra” base.  One downside to both the CFL and LED screw-in bulbs in the candelabra form factor is their large size relative to incandescent bulbs.  The CFL and LED candelabra bulbs we have are surprisingly larger than the incandescent bulbs they replace — which makes sense in order to squeeze in the extra circuitry, but which made it challenging to fit the newer bulbs into candelabra-sized wall fixtures.

February 24, 2013

Nondeductible IRA contribution or mortgage prepayment?

Filed under: Homeownership — JLG @ 10:28 PM

Having just filed our 2012 taxes, I’m pondering an interesting question.  Over the past year I set aside $5,000 that I’d planned to put into a traditional IRA as a nondeductible (after-tax) contribution.  It occurs to me that I could instead use the money as a principal prepayment on our mortgage.  The question is:  Should I?

[The IRA contribution is nondeductible because I participated in my company’s 401(k) plan in 2012.  As a result I am not eligible to deduct my IRA contributions from our federal taxes.  As the IRS explains: “If you were covered by a retirement plan (qualified pension, profit-sharing (including 401(k)), annuity, SEP, SIMPLE, etc.) at work or through self-employment, your IRA deduction may be reduced or eliminated. But you can still make contributions to an IRA even if you cannot deduct them.”]

If every year I chose $5,000 mortgage prepayments over nondeductible IRA contributions, then:


  • Faster payoff.  We would pay off the mortgage in 20 years (or fewer) instead of 30.
  • Less interest.  We would save at least $75,000 in interest payments over the life of the loan.
  • Zero risk.  Each prepayment would yield a guaranteed return of 3.625%/year (our mortgage rate) through 2042.
  • More equity.  We would have more equity in the house if we decide to sell (if we move or “trade up”) or if we need to do a cash-out refinance.


  • Underfunding retirement?  We would be reducing our retirement savings.  (However, during years 21-30 we could pay ourselves “mortgage payments” directly into our retirement savings.  If we are disciplined about it, those payments would make up much of the difference.)
  • Tax deferral.  The prepayment wouldn’t experience tax-deferred growth as it would in an IRA.
  • Lower returns?  There’s the chance that an IRA would grow in value significantly more than 3.625%/year.  Additionally, the IRA would continue to grow (or shrink) in value until withdrawn (or until we die, I suppose), whereas a prepayment’s “zero-risk return” ends when the 30-year mortgage term ends.
  • Inflation hedge.  If the dollar experiences high inflation in the next few years, we’d be better off if we were carrying lots of debt (i.e., a high mortgage balance).

Either way I wouldn’t be putting all of our retirement eggs into one basket, in that I’m already making contributions to a 401(k) retirement plan.  (By the way, the best answer I’ve found to how much should I save for retirement? is in Rande Spiegelman’s article “Play the Percentages”.)

Two things made me start thinking about this trade-off between mortgages and nondeductable IRAs:

  1. the notion that both are illiquid ways to invest for retirement, and
  2. this Mortgage Professor article about mortgage repayment as a long-term investment.

The Professor addresses a similar question in his article Roth IRA contributions vs. mortgage prepayment.  (My question is about traditional IRAs.)  The only other relevant advice I’ve found so far is in this paper comparing mortgage prepayment with pre-tax retirement contributions.  (My question is about nondeductible traditional IRAs.)

Until this year my strategy for retirement investing has been:

  1. If you have a 401(k) (or similar) plan with company matching contributions, first make contributions up to the company match.  (For example, if your company matches up to $3,000 of contributions then put your first $3,000 into the 401(k).)
  2. Next, make contributions to a Roth IRA up to the maximum allowable amount.
  3. Next, max out your pre-tax contributions to the 401(k).
  4. Next, make deductible contributions to a traditional IRA up to the maximum allowable amount.
  5. Next, make nondeductible contributions to a traditional IRA up to the maximum allowable amount.

So the conundrum is whether I should replace step 5 (or even step 4) with “Next, make prepayments against your mortgage principal.”  Arguably I have until April 15 to decide, although if I choose prepayment then every month’s delay costs me $500 more in interest paid over the life of the loan.

December 19, 2012

Eighteen hours later

Filed under: Homeownership — JLG @ 10:12 PM

Not even 18 hours after I wrote the previous post, our water heater’s relief valve decided to relieve itself.

Water heater pressure and temperature relief valve.

Water heater pressure and temperature relief valve. The valve releases water into the pipe (shown), which in turn releases water onto your basement floor (not shown).

Fortunately for us it didn’t flood very much.  The water was about an inch deep in the middle of the basement (a concrete floor with no sump or drain) and was dry along much of the basement walls.  I was easily able to reach the water supply cut-off valve and stanch the flow.  Most worrisome is that the bottom of our expensive new furnace was submerged—though thankfully none of the internal components got wet—so I’ll need to keep an eye out for rusting for awhile.

The plumber’s working theory is:

  1. We had the temperature set higher than necessary (about 135 degrees);
  2. the old temperature control module somehow caused the temperature to rise much hotter than the setting;
  3. the relief valve opened due to overheating; and
  4. the relief valve stuck open due to sediment in the tank.

We now have a shiny new relief valve, several shiny new water sensor alarms, and a shiny new bill for emergency service from our plumber.

Other things that were helpful to have on hand:

  • Wet/dry vacuum.  We have a model that is able to empty itself automatically via a garden hose attached to the pump exhaust.  Without this feature you’ll spend 10 minutes emptying the bucket for every 1 minute you spend vacuuming up the flood.
  • Dehumidifier.  We have a model that automatically pumps its contents into the basement sink via a supplied 18-foot hose.
  • Box fan.
  • Shop towels.
  • Large garbage bags into which to put the sodden contents of the cardboard boxes that just yesterday you moved from shelves onto the floor “just for a couple days.”

While waiting for the plumber we spent a day with the water heater shut off.  And holy smokes, Boston tap water is cold this time of year.

It could have been much, much worse.  I went to the basement yesterday morning just to see if there was any seepage through the basement walls from the heavy rain outside.  (And good news: I didn’t see any seepage from the walls.)  If it hadn’t been raining we probably wouldn’t have noticed anything amiss until the flooding shorted out the main electrical panel, which at that point would have represented tens of thousands of dollars of damage and the loss of our “claims free discount” from the insurance company.

$10 water sensor alarms are your friend.

December 16, 2012

So you’ve bought a house!

Filed under: Homeownership — JLG @ 9:14 PM

Once you’ve bought a house there is a temptation to be very Munroevian about the whole matter:

The Munroevian approach to homeownership. (Source: xkcd.com/905/)

It’s been pretty fun geeking out about home maintenance options, making plans for repairs and additions, and even picking up a hammer myself now and then.  There are several surprisingly informative websites with details about how houses work, including:

  • Inspectapedia:  for example, this article about the insulation we just had installed.
  • Check This House:  for example, this article about the importance of second-floor air return ducting (a potential long-term maintenance item for our house).

Six months after closing I understand a little better the #1 question in buying a house—“how much house can I afford?”—or, more to the point, “how big a monthly housing expense can I afford?”

Monthly housing expense = mortgage payment + homeowners insurance + property tax – interest tax deduction + maintenance [or association fees]

Mortgage payment:

Conventional wisdom says to make your mortgage payment as large as possible.  It will be painful now but less painful over time, especially as your earnings rise over the course of your career.  That easing is because your payment will stay the same over the lifetime of your mortgage:  If you have a 30-year mortgage and you make $1000/month payments today (on principal and interest), you’ll still be making exactly $1000/month payments in 29 years.

The effects of inflation will mean that, in 30 years, your $1000/month payment will only feel like a $400/month payment.  (Note however that it is statistically unlikely that you will hold the same mortgage for 30 years—I’ve read several times that mortgages average about 7 years before the house is sold or refinanced.)

Low interest rates are good except for one thing:  I worry about resale value if interest rates rise significantly.  At 3.5% interest rates, a buyer who can afford $1000/month payments can buy a $225,000 house.  But at 7.0% rates, that same buyer can only buy a $150,000 house.

When interest rates go up, many prospective buyers won’t be able to afford to pay as much for your house as you did.  Will we have problems selling our house without taking a bath?

Homeowners insurance:

We pay $90/month.  Annoyingly, our loan documents require a $1,000 deductible for the policy—i.e., we’re not allowed to crank up the deductible to lower our rate.

One thing that surprised me is that none of the “big boys” (Allstate, State Farm, GEICO, etc.) write insurance policies in Massachusetts.  I had a similar problem trying to get renter’s insurance in Florida.  Perhaps we should move to some milquetoast state with uniform laws and no propensity for natural disasters?

Property taxes:

You can find out what we (or your neighbors, or pretty much anybody) pay for property taxes by looking them up on the county tax assessor’s website; these are matters of public record.

As with many jurisdictions, Boston has a residential tax exemption—your taxes are reduced by $130/month if the property serves as your principal residence.  So budget for additional expense if you plan to rent out your house.

Tax deduction:

I can’t imagine the federal mortgage interest tax deduction surviving much longer.  My guess is that it will be phased out over the next few years.  Without the deduction our monthly housing expense will increase by $300/month.

Also, as with rising interest rates, I suspect a tax deduction phase-out will have a depressing effect on home resale prices.


The expensivity of home maintenance has surprised me.   So far we’ve spent money in three categories:

A. Required maintenance:  $10,000 for new roof shingles.

The home inspectors and roofing experts who evaluated the house initially gave us a one to two year window for replacing the roof.  However, when we had roofers up to do minor repairs (repointing the chimney, recementing the vents, cleaning the gutters) they found cracking asphalt and other problems that prompted us to schedule the replacement immediately.  The new roof will hopefully be good for about 20 years.

B. Opportunity-cost improvements:  $3,600 for whole-house insulation and $3,900 for an oil-to-gas conversion of the furnace.

Massachusetts has an astounding program called Mass Save where you can receive an interest-free loan to defray the up-front costs of energy-efficiency improvements to your house.  The improvements will pay for themselves within three years (in the form of reduced utility bills), plus the house is more comfortable afterwards.  It’s a total win-win-win program for homeowners.

There are also incentive rebate programs for efficiency improvements.  The insulation work actually cost $5,600 (minus a $2,000 rebate from Mass Save); the furnace conversion cost $4,700 (minus a $800 rebate from our gas utility company).

We could have waited a year to make these improvements—the oil heater and indoor fuel oil tank were only about ten years old—but with the rebates and interest-free loan there was no reason not to jump on these, especially with the possibility that the program might not be renewed in future years.

The old 275-gallon oil tank, taking up space in our basement.

With the oil tank removed, there is space aplenty to eventually install a demand water heater.

C. Functional improvements:  $6,000 for electrical work and exhaust ventilation.

Our house is over 100 years old and (not surprisingly) didn’t have outlets or lights or exhaust fans everywhere we wanted them.  Worse, we were occasionally tripping breakers by running too many appliances on a single circuit.

We could have waited a year or two before performing this work, but I wanted to have the new wires pulled before having the insulation work done on the exterior walls and in the attic.  (The electricians said they could certainly do it even after the insulation was put in but that it would be “messier”.)

Also, it is a perpetual source of happiness for me to walk into the kitchen and see:

New externally-vented range hood. We use it daily. The white square of paint is where the over-the-range microwave used to be hung.

or into the bathroom and see:

New bathroom electrical outlet (one of two). Previously the bidet power cord ran along the bathroom floor, via an ugly grey extension cord, into the outlet by the sink.

Every time I take a shower I look over at the safer, neater, convenient bathroom outlet and feel the joy of homeownership.  (We also solved four other extension-cord problems elsewhere in the house, each of which bring joy in turn.)

D. Deferred maintenance and improvements:  Water heater replacement, carpentry, repointing the basement walls.

Our water heater is nine years old and has a nine year warranty.  I don’t believe it’s been cleaned nor flushed regularly, nor had the sacrificial anode replaced, so given the lack of maintenance I worry that it could start leaking—that would be a big problem since there is no floor drain in the basement—so I plan to replace it in 2013 with a demand water heater.

Demand water heaters need a fat gas pipe.  They consume up to 200,000 BTUs/hour or more; in comparison, our new high-efficiency furnace that consumes only up to 60,000 BTUs/hour and a typical gas stove and oven consume up to 65,000 BTUs/hour.  Our current gas pipe is thin, old, and lined (basically not up to snuff) so I’ve submitted an application to the gas company to lay a larger pipe in the spring.  I’ve requested a future-proofed pipe large enough to accommodate those three appliances plus a potential upgrade to a gas clothes dryer and a natural gas grill.

The lesson learned for me is if you’re buying a house, keep at least an extra $10,000 in reserve to cover any urgent maintenance items.  In other words, don’t completely exhaust your financial reserves by making a larger-than-needed down payment or purchasing new furniture too quickly.

In aviation there is a concept of prepaying into a maintenance fund every time you fly your own aircraft.  You know that you’re required to pay for major maintenance every 2,000 flight hours—at a cost of tens of thousands of dollars—so you divide that cost by 2,000 and prepay $10 into your maintenance fund for every hour you fly.

I’ve seen similar recommendations about prepaying for home maintenance.  You know that you’ll periodically have to pay for roofing work, new water heaters, and whatnot, so forecast out when you’ll make those repairs and start prepaying into a maintenance fund.  (If you buy into a condo association, part of your condo association fees are earmarked for exactly this purpose.)

There are a couple other housing-related websites I’ve been reading regularly, including The Mortgage Professor and (perhaps of local interest only) the Massachusetts Real Estate Law Blog.  The professor relates a story of an ill-prepared homeowner, who asked:

“I hadn’t been in my house 3 weeks when the hot water heater stopped working. Only then did I realize that I hadn’t been given the name of the superintendent…who do I see to get it fixed?”

One of the challenges we’ve faced is finding good contractors.  Here’s what I’ve learned about finding good contractors:

  • Get three quotes.  Not because you’re trying to find the absolute lowest cost, but rather that you’ll hear three different perspectives on what they think you should do.  For example, I had three heating contractors in to discuss the oil-to-gas conversion.  One suggested that I simply replace the burner on my existing furnace; one suggested that I install a new 100,000-BTU gas furnace; one suggested that I install a new 60,000-BTU gas furnace because of the square footage of the house.  Those three conflicting opinions gave me a lot of information to mull over; in the end I chose option #3 and it’s worked out perfectly.
  • Ask your neighbors for recommendations.  Several folks in my community recommended a particular roofing company; I ended up hiring them and was thoroughly satisfied with their work and professionalism.
  • Join Angie’s List for recommendations.   I hesitated to join at first—whining about how it costs money!—but in the end I figured was only hurting myself by not joining.  I ended up hiring an electrical contractor that I found on Angie’s List and was thoroughly satisfied with their work and professionalism.

And here’s what I’ve learned about hiring contractors:

  • Read the installation manuals yourself.  I wasn’t happy about how the heating contractor didn’t bother to configure the DIP switches on my new furnace.  (Specifically, he didn’t set the furnace’s fan speed to match the tonnage of the air conditioner’s compressor; he claimed it wasn’t important because he’d never done it before.)  So, I read up on furnace fan speeds and compressors myself, make the correct setting myself, and now find myself self-satisfied with better air conditioning performance.
  • Do your own homework before the contractors arrive.  I asked potential electricians about adding an exhaust fan in our half-bathroom.  One of them suggested that I buy the fan and he’d install it.  I asked why; he explained that if it were up to him he’d just buy the cheapest fan available, but he felt I’d likely be interested in a higher-end fan.  And he was correct!  After I scoured the Internet for information on exhaust fans I identified one of the low-sone (quiet) fans as the one I wanted, and we’re much happier with this choice than we would have with a louder fan.  (Note: I also installed a wall-switch timer on the exhaust fan—a great idea that I learned about while doing my homework on options for fans.)
  • Keep track of your paid invoices.  Some work you perform might increase your basis in the property (see IRS Publication 523), which could reduce the amount of tax you (might) pay when you sell the house.
  • Be ready to be flexible.  The heating contractor said it’d be done in one weekend, but it ended up taking a month and a half before the last of the work (sealing the old hole in our chimney) was complete.  The roofing contractor gave a two-week window in which they’d do the work, then ended up doing the work three days before the start of the window.  The insulation contractors said it’d be a two day job, but it ended up being a three-day job spread out over two weeks.  Fortunately, all of our contractors have taken pride in their work—so we’ve been left largely happy with the work that’s been done.

July 6, 2012

Leveling up in the American Dream MMORPG

Filed under: Homeownership — JLG @ 10:55 PM

We bought a house!  Or, as friend Brendan put it:

Grats on leveling up in the American Dream MMORPG!  Your character now has an improved credit score.

We are first-time homebuyers, so everything about the house feels surreal—everything from sitting in the yard (“this is our house?”) to reading mortgage documents that assert “Borrower has promised to…pay the debt in full not later than July 1, 2042.”  2042?

We moved to Boston in October 2011.  Our plan was to rent for a couple of years, decide whether we liked Boston, then maybe dip our toes in the housing market.  The plans changed when our landlord notified us that he would likely raise the rent when our lease renewed in Fall 2012.  Since we indeed like Boston, we decided to dip our toes in ahead of schedule.  And wow did things move fast at that point:

  • April 4, 2012: Started researching potential neighborhoods in Boston, plus looking at online listings to get a feel for prices and availability.
  • April 17: Met with a realtor, discussed what we were looking for, made an appointment to see houses two days later.
  • April 19: Toured eight houses, fell in love with #8, did some quick research, put in an offer, received a counteroffer, sent a counter-counteroffer. (Paid $1,000 deposit.)
  • April 20: Counter-counteroffer accepted by the seller!  At this point we’ve “bought” the house, so long as we are able to get a mortgage commitment, the inspection is satisfactory, and the bank’s appraisal is at least equal to the agreed sale price.
  • April 23: Mortgage application submitted.
  • April 24: Landlord (from whom we were renting) began looking for new tenants, in hopes of allowing us to break our lease early.
  • April 27: Home inspection and radon test completed. ($525)  The inspection revealed concerns about the roof, leading the seller to offer a $2,500 closing credit towards roof repairs.
  • May 1: Mortgage rate locked in with the bank.
  • May 3: Bank’s appraisal of the property completed. ($350)
  • May 4: Purchase and sale (P&S) agreement negotiated and signed. ($20,800 deposit.)
  • May 5: Mortgage underwriting paperwork submitted.
  • May 15: Moving company scheduled.
  • May 23: Mortgage commitment received from the bank, one day before deadline.
  • June 1: Homeowner’s insurance policy obtained.
  • June 5: Landlord signed lease with new tenants to start July 1, saving us $5,200 in rent!
  • June 8: Wire transfer to closing agent’s IOLTA of funds needed to close. ($74,000 deposit plus $20 wire fee.)
  • June 15: Closing.  At this point we took possession of the house.
  • June 20: Locksmith hired to change keys and replace some locks. ($190)
  • June 22: Moved into the house.
  • August 1: First mortgage payment due.

One of the secondary joys of house hunting was the chance to “geek out” and dig deeply into understanding how things like property assessments, securitizable mortgage loans, and purchase and sale agreements work.  For example:

It costs more to buy a house than the price of the house.

On the closing date (the date we signed all the documents and got the keys to the house, plus the date on which our deed to the house was recorded with the Suffolk County Registry of Deeds) we paid in full both the down payment ($87,200) plus a variety of miscellaneous loan-related fees, escrow and tax prepayments, and adjustments ($10,395.77).  Even if we had paid cash for the house we still would have paid at minimum $2,500 for legal representation, title insurance, inspection, appraisal, a homestead declaration, and government recording fees.

Of course, there’s also the interest paid on the mortgage over the life of the loan (we chose a 30-year fixed at 3.625% interest rate).  If we stick to our loan schedule—if we don’t refinance, make any principal prepayments, or sell the house—we will pay $223,853.59 in interest on the $348,800 loan.  (I’m not complaining, though.  Interest rates are at a historical low right now.  Five years ago the interest rate was 6.5%, which would have made the total interest paid $444,870.41.  However, if rates were that high then housing prices would probably be lower than they are now, in which case we could have gotten a smaller loan and owed less interest.)

Our loan requires us to make payments of about $225 monthly into an escrow account to cover property taxes and homeowner’s insurance.  (You may apply for a loan that doesn’t have an escrow requirement, but such loans are more expensive because of the risk to the lender that you won’t make the required payments.)  That amount, plus $1,590.71 monthly towards loan repayment, yields a housing cost of about $1,815/month—meaning that payments on a 4-bedroom house are less expensive than rent for 2-bedroom apartments where I lived in New York City, Arlington (VA), and Boston.  But mortgage interest is federally tax deductible:  In 2013 we will pay $12,436.27 in mortgage interest (netting a $290/month reduction in federal tax), so our effective monthly housing payment next year could be as low as $1,525—significantly cheaper than rent on equivalent detached single family houses in those locations.

…Of course, amortizing the roof (and other) repair/replacement costs will increase our effective monthly housing payment for a while.  As will amortizing the $10,395.77 mentioned above.

Speaking of finance:  By far the most informative resource I found about home buying is The Mortgage Professor.  I recommend you start by reading the “Questions by Topic” on that site; before you know it you’ll have spent days reading almost every article on the entire site.  The site also solicits new questions from readers; I sent the professor (Prof. Jack Guttentag) a query about the effectiveness of principal prepayment and received an informative answer just four hours later.  Another useful site for understanding the mortgage process is Bankrate.com.

Real estate agents make 2.5% commission on each sale.

That is, the agent representing the buyer makes 2.5% and the agent representing the seller makes 2.5%.  So our agents walked away with $10,837.50, and the seller’s agent walked away with $10,837.50.  (In other parts of the country, 3% is common.)

Several websites (especially the interesting but self-serving REALTOR.com blog) claim that you as a buyer shouldn’t worry about agent fees because the seller pays the real estate agents’ commissions.  That’s technically true, but it’s also technically true that I had to eat the cost regardless—as the seller likely hiked up his asking price by 5% to pay the real estate commission.

How can a percentage-based sales commission possibly be construed as ethical by the real estate industry or legitimate by government regulations?  Especially given that one of the agents’ primary tasks is to negotiate the sales price—a price in which the agents have a conflicting compensatory interest?  And, perhaps controversially, assuming that people purchasing $100,000 houses deserve equal agent representation/engagement/effort as people purchasing million dollar homes?

Note that I’m not saying that real estate agents don’t work hard to earn their pay.  Case in point: my first email exchange with my realtors took place after 8pm; later in the process I received messages from them as late as 11:03pm and as early as 7:07am.  Our agents provided excellent advice and guidance throughout the whole process, and we ended up with a great house; I would not hesitate to use them again.

Just as I can’t imagine driving a motorcycle without first taking the MSF RiderCourse, I can’t imagine buying or selling a house (at least for the first time) without agent representation.  Agents certainly deserve professional compensation that is commensurate with the effort and time they expend on behalf of their clients.

However, the other major parties involved in the purchase—the mortgage loan originator and the lawyer serving as the closing agent—both received fixed compensation for their services.  Why are real estate agents paid on commission?

Points on a mortgage—I’d heard of them but had never sat down to figure out what’s the point.

Points are a wager you place with the lender:  If you pay points you’re betting that you’re going to keep the mortgage for longer than 3 years.  The lender makes money either way, but makes more money if you bet wrong.

One point is 1% of the price of the mortgage.  Our mortgage is for $348,800, so one point is $3,488.

When you “pay points,” you are essentially giving extra money at closing to the entity loaning you the money.  As described above, we paid $10,395.77 at closing in miscellaneous fees, prepayments, and adjustments.  Part of that amount was $2,441.60 we paid (equal to 0.7 point) to reduce our interest rate by 0.25%.

The advantages of paying points are:

    1. By paying points you reduce your interest rate.  In our case we could get a 30-year fixed mortgage at a 3.875% interest rate, or we could pay 0.7 point ($2,442) for a 3.625% interest rate, or we could pay 1.3 points ($4,482) for a 3.5% interest rate.
    2. By paying points you also reduce your monthly payment.  In our case we could make loan service payments of $1,640 (at zero points), or $1,591 (0.7 point), or $1,566 (1.3 points).
    3. Points you pay may be tax deductible. Our $2,441.60 payment of points effectively cost only $1,757.95 due to the reduction of our federal taxes.

The disadvantage is:

The money you spend on points doesn’t increase your equity in the house; it’s basically free money for the lender.  It takes 3 to 5 years to “break even” when you pay points [for the reduction in monthly payments to catch up to the amount spent on points]—for example, if we were to pay three points (~$10K) this year, and if we sell the house next year [or if we refinance next year at a lower interest rate] then we’ve effectively flushed $9K down the toilet.

With the 0.7 point we paid, if we sell or refinance the house in three years it’s a wash.  Beyond 3 years we save money; if we keep the loan for 30 years then we will save $17,812.50 in interest payments.

The legal definition of a point is “prepaid interest.”  (That’s why it lowers the interest rate—you’ve already given the lender a guaranteed return on investment.)

There is also a concept of negative points where the lender pays some of your closing costs in exchange for a higher interest rate on the loan (and therefore higher monthly payments).  According to our loan originator at the bank, one scenario where you might agree to negative points is if you believe interest rates will fall in the near future—such that you will be able to refinance soon, at a lower rate, without “flushing” any money as described above.

Real estate case law can be fascinating.

See for example this case about adverse possession, and many of the other articles at that site.

Overall we found it really helpful to solicit advice from our friends who are homeowners.  Some of the best advice:

  • If you think you might buy a house in the next couple of years, go ahead and get your financial ducks in a row now.  I didn’t do this; instead I made a couple of rookie mistakes that could have ended up costing us extra money.  The first mistake was that I (unnecessarily) asked one of my credit card companies to increase my credit limit last fall, which caused an Inquiry to show up on my credit report, which reduced my credit score.  Lower credit scores can result in higher interest rates for mortgage loans.  The second mistake was that I kept some of our down-payment money in an “aggressive strategy” mutual fund until after our offer was accepted.  As a result I had to sell those fund shares immediately, at whatever the current price was, instead of (for example) setting up a systematic withdrawal plan over several months or trying to time the market for a favorable sale.  Also as a result we had to provide extra documentation to the mortgage underwriter to explain why all of this extra money suddenly showed up in our checking account right before we submitted our loan application.
  • Pay close attention to the recommendations and referrals made by your real estate agents.  We expected the house-hunting & offer & sale process to be long and arduous.  It turned out to be very easy because our agents did a lot of the “heavy lifting” for us—for example, instead of just advising us to search building permits before making an offer (to ensure all previous work was permitted and performed to code), our agents performed the search for us while showing us how we could repeat the search when we needed to.  We found our agents by lucky happenstance: They were the listing agents for one of the properties we found listed online, and when we contacted them (by that point the property was “under agreement” and no longer available) we were so impressed by their prompt and helpful responses—this was the after-8pm email exchange—that we asked if they also represented buyers.  Yes.  Soon thereafter we found ourselves putting in the offer on this house.
  • Once you have a signed offer, you don’t have to worry about the seller backing out.  For several weeks I expected someone to call us up with the grim news that the seller had decided that he didn’t want to sell the house after all.  It turns out I needn’t have worried; our lawyer explained that once an offer was signed by both parties, the buyer can sue for specific performance if the seller tries to back out of the deal.  There were also a few deadlines that felt unnecessarily nail-biting; for example, we only had seven days to inspect the house, but the inspectors we tried were all booked more than 7 days in advance.  (In the end our recommended inspector had someone else cancel on him, so we were able to squeeze the inspection in just in time.)  Also our mortgage underwriter waited until the last moment to approve our loan even though we’d submitted all required documents (multiple times for some documents) well before the deadline.
  • “Don’t get freaked out by the home inspection,” advises my colleague Jeremy.  He notes that it’s the inspector’s job to nitpick every small thing they find; during the inspection you’ll likely become afraid that the whole house is going to collapse around you any moment.  Listen for big-picture items and for the inspector’s overall assessment of the house at the end of the inspection.  Our inspector asked if we wanted to perform a $50 radon test; we weren’t sure at first whether we should, but in the end we were glad we chose to run the test.  (2 pCi/L: nothing to worry about.)
  • When you buy a condominium, understand that you’re entering into a business contract with the other condo owners—make very sure they’re the kind of people with whom you’re comfortable being in business.  Prior to this year I’d never wondered how condo associations work, although we got a taste of it last year watching our landlord argue with his condo association over who should pay for a plumber to track down a mystery leak in the building.  (After three plumbers in as many months, it was discovered that the overflow valve on our bathtub had rusted through…so our landlord ate the cost.)  As we looked at condo listings in our neighborhood I came across several articles warning about dysfunctional condo associations or despotic homeowners associations.  In the end we were happy to have found a place subject to neither type of association.
  • Understand your basis and other tax implications.  Basically, read IRS publications 530, 936, and 523, and possibly some other ones I haven’t quite gotten around to reading.  I was surprised to find some key differences between federal and state laws; for example, there is no deduction for mortgage interest on Massachusetts state taxes.
  • Don’t sweat the small stuff.  Our closing agent made a $15.67 error in the seller’s favor.  (Earlier this year the seller had paid the quarterly real estate taxes covering April 1 through June 30, so part of our closing costs on June 15 were an apportioned refund to the seller for June 15-30.  The closing agent miscalculated this amount.)  But so what?  The seller negotiated with us in good faith, he maintained the house in excellent condition, he gave us a few extra items for free (including a $500 portable air conditioner), and he even left us a nice bottle of wine for us to celebrate our new house!  We got a good deal on a house we already adore; we couldn’t be happier.