Primarily About the Primary
Primarily About the Primary
Scott and I ‘worked’ on this house very early on in the piece, so I kind of feel ‘at home’ just reading this post 🙂
If you haven’t already done so, you should check out the photos, as Scott suggests, over at our Community Site …
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In the next exercise, it’s time for all the MIT’s to evaluate our current primary residence, our mortgage situation with this residence and how this relates to the 25% and 20% rules!
As you may have seen in my Networthiq profile, the mortgage on my primary residence is currently at around 322k. This mortgage is fixed on a 30 year, 6.25% interest mortgage. My payment(including taxes and insurance) comes to $2,438.00 per month. My net, take-home household income seems to be averaging around 11k per month at this moment, however this is down from normal due to my wife recently losing her job. In the current economy, my wife has lost 2 different jobs in the past 6 months.
The first job she lost paid her 65k per year, so naturally that gave us a much bigger financial tool to use, when coupled with my income. The interesting thing is, when she was making this money before she lost her job, I was averaging around 120k per year (so approximately 180k together). Right around the time I acquired 50% ownership of my practice from the original owner(which naturally raised my income), almost immediately, my wife lost her job, so income stayed about the same or perhaps dropped a little, lol. Go figure! Anyway, she was unemployed for about a month, then found a job with another company, which paid her 40k(big step back for her), but that job only lasted around 4 months, unfortunately.
So when she is working, we have about 14k per month or so in net monthly income and when she isn’t working, it’s around 11k per month. You can see that in either one of those scenarios, we set up our primary residence situation to make sure that we didn’t violate the 25% rule, meaning that our primary mortgage, including taxes and insurance do not exceed 25% of our monthly net income. With her not working, it’s hovering around 20% actually and when she is working, it’s a mere 17% or so. So, good to go on that rule!
Now, as far as the 20% rule goes, our primary residence was last estimated to be worth around 380k(now this could have dropped a little in recent months. Zillow has not yet reported any values for this home for some reason, so it’s hard to tell without paying a professional to come out and give us an estimate). With the mortgage balance of 322k, that gives us around 15% equity in this house against the mortgage, or roughly $58,000.00. As you can see, this 58k is approximately 38% of our 150k net worth. A big no- no, according to the 20% rule! The trouble is, at only 15% equity, we cannot tap this equity yet and use it toward investments, so I think we are a little stuck in the mud in our violation at the moment, that it is, until our savings and investments otherwise build our networth up to the point where this is no longer the case mathematically.
We love our home and really have no intentions to purchase another, even in the near future(although circumstances and people certainly do change!). This home is a 101 year-old, historic farmhouse and our only plans for it are to finish renovations and cosmetic work to bring it back to it’s original ‘charm and glory.’
(see pics of it on shareyournumber.com!)
We have currently budgeted $1000.00 per month of our net income to use as a “home improvement” budget for this work. We figured that way, the improvements come slower and more manageable over time, we don’t have to concern ourselves with going out and borrowing any additional money and naturally, this work will help to slowly increase the value of the property as work is slowly completed.
I believe that this is money well spent for several reasons, because it’s not the same as taking $1,000.00 per month and putting it towards spending money, toys, a Porsche Cayman S lease, or anything like that. It is rounding out the home that we plan on living in the rest of our lives, so we won’t have to worry about eventually spending 1 or 2 million dollars on a home with our valuable number, just to be satisfied with our primary residence. And as the value of our home increases because of this work, we can simply tap into this equity in the near future when available and apply this equity toward investments, so that we maximize the speed of growth toward our number by our date.
Let me know what you think!
Scott – I agree with your philosophy regarding the $1K/month rehab budget. If it were me, I’d consider it just like any other dollar cost averaging investment that I have.
Looks like you have ample room relative to the 25% Income Rule to comply with the 20% equity rule when the time comes.
Good Luck, Jeff