Saturday, March 22, 2014

Preface: Part 1 - Home Equity

PREFACE - the 7 1\2 years prior to this blog

Before I provide everyone with the actual financial details of where our family stands today, I believe it is important that I provide everyone with additional background on our family's journey leading up to the start of this blog. The preface below will hopefully provide everyone with a nice backdrop to better understand how our family is where we are at today. The preface will be separated into four parts: Part 1 - Home Equity (story behind the current equity in our home); Part 2 - Investments (highlights of investment tools I've tried to date); Part 3 - Retirement (various retirement accounts we have and hope to tap into during retirement); Part 4 - Saving & Emergency Fund (How we have planned for life's unexpected events).
Part 1 - Home Equity
Approximately 7 1\2 years ago, our journey officially began when I married my wife (whom I met and dated for 6 years). We actually tied the knot on the day of our 6th anniversary together.
Shortly after our wedding, my wife and I decided that she would move in with me and that we would continue to live in my first home (a home I had purchased from my parents a few years prior and where I spent the tail end of my bachelor years). This living arrangement, however, ended up lasting less than a year. As we saw home prices soar and the value of the home triple in value, we decided to seize the opportunity and put the house on the market. To our surprise, the home sold for asking price (more than 3x purchase price) and in less than a week! We walked away with almost $300,000 profit, after paying for related real estate fees.
Lesson learned: Even though things don't always go as you had planned, sometimes it is actually for the better!
That led us to the next part of our journey as a married couple. Since we had not planned for such a quick sale, we had to scramble to find a new place to live. Luckily, our search ended as quickly as it began. My in-laws were empty nesters at the time so they generously offered to provide us with a free place to live while we looked for a new home. Rather than go out and find a place to rent, my wife and I accepted their offer. We ended up staying with my in-laws for a little over nine months.

Looking back, although not the ideal scenario for a newlywed couple, it turned out to be one of the better decisions we've made. Living with my in-laws allowed us to patiently look for our home while continuing to build up our savings. During the nine months, my wife and I agreed to only live off the interest from the proceeds of our first home. And since both of us worked at the time, we save close to $100,000 during this time. Needless to say, if I had to do it over, I would waited a little longer to buy our home and come as close to buying a house outright as possible.
Lesson learned: You can really build savings fast when you have very little expenses!
We ended up looking at close to 100 homes in four different cities before we found our home - a beautiful seven year old home in master planned community, with excellent nearby schools, and several parks within a two mile radius! It was definitely our dream home and the home we saw ourselves starting a family in. It was perfect, except for one was a short sale! If you are not familiar with short sales, the process is painfully slow! I remember calling the agent almost every week for several months! At one point, we considered taking our offer off the table and find another home. In the end, after approximately four months, we finally closed escrow. Next month will be 5 years since we've move into our home.
Lesson learned: Never settle...good things come to those who wait!
Since moving into our home, we have refinanced three times because of falling interest rates. We started with a 30-year fixed at 5.875%. We refinanced a year and half later to a 30-year fixed at 4.875%. Then a year and half later, we refinanced a second time to a 20-year fixed at 3.875%. And just last June, we refinanced a third time to a 15-year fixed at 2.875%.

Although we've had to refinance three times now, I have no regrets because I know in the end we will save much more than we've spent towards the cost of refinancing.  And I'm pretty sure it's the last we've seen of rates at that level so I can say with some confidence that we've likely done our last refi on our home.  I'm really thankful we put a big down payment and didn't buy more home than we could afford.  Had we done either, I honestly don't think we would have been able to refinance our home.
Lesson learned: The general rule of thumb to lower your rate by at least 1% when refinancing works every time when you do the math.
During the first 3 years after purchasing our current home, we watched our home decline in value and dipped by up to 20% below our purchase price as the market continued its decline. Nevertheless, my wife and I never worried or panicked because we knew we got the house at a discount ( was a short sale) and that in time, prices would eventually recover. Since our plan was to live and raise a family in our home, we knew we had time on our side.  But I'm happy to say that, during the last 2 years, we've seen prices in the neighborhood steadily increase and the home value of our current home is now back above our purchase price of $720K.

Because we were lucky to have sold my bachelor home for almost $300K profit, and lived with my in-laws to save another $100K, we put a fairly large down payment on our home.  After 5 years and 3 refi's, we currently owe approx. $350K on our mortgage.  More than I truly prefer, but since we now have a 15-year mortgage, I'm really seeing our mortgage balance shrink each month. In fact, almost 2/3 of our payment now goes straight to our principal.  We sort of view our mortgage payment as a forced savings!

And once my wife goes back to work, our goal is to aggressively pay the house our mortgage (now approx. 14-year left).  Without a mortgage, our monthly expenses would drop significantly and so would the amount of money we would need to be FI!   
Lesson learned: When making financial decisions, always think long term for it allows you the luxury to wait out a storm.

No comments:

Post a Comment