Beating Broke

Personal Finance from the Broke Perspective

Why We Don’t Plan to Renew Our Homeowners Warranty

By 7 Comments

Our house came with a homeowners’ warranty.  The realtor we worked with, noting that our air conditioning unit was 18 years old, told us to make sure to keep up with the warranty because that would cover the cost of replacement on our central air unit.

At $650 a year, keeping up with the homeowners’ warranty to replace a $4,000 to $6,000 central air unit that was on its last legs sounded like a good deal.

Homeowners’ Warranties—Buyers Beware

Last year, one week into home ownership, our hot water heater died, and we got a glimpse of how the homeowners’ warranty worked.

Homeowners WarrantyI was not impressed.

We had to work with a specific company, I’ll call Company A, designated by the homeowners’ warranty, to replace the hot water heater.  Company A asked me to call my home owner’s insurance to see if they would pay to have a different company, Company B, come clean up the water damage.  (We had very little water damage, but Company A’s repair man assured me we’d get mold, even though we’re in Arizona with very little humidity.)  Luckily, I didn’t do that because Company B wanted to charge us $1,000 to clean up the water.

Clearly, Companies A and B must have had kickbacks with one another for business referrals.

Also, I thought we’d only have to pay the $75 service fee to get our hot water heater replaced, and then the homeowners’ warranty would pay the rest.

Wrong.

We still had to pay $375 more for parts and repairs that weren’t covered under the homeowners’ warranty.

The homeowners’ warranty paid $650, so that year, despite the annoyance and out-of-pocket expenses for the hot water heater replacement, the policy paid for itself.

Homeowners’ Warranty Will Only Help If the Appliance Dies

This year, after much thought, especially considering the bad experience with the hot water heater, we decided to renew the policy.  We paid another $650.

And then, our air conditioner started the march to a slow death.

First, it worked over time, running all the time, but it couldn’t seem to cool the house.

When our next electric bill came, it was $120 higher than usual.

But, the homeowners’ warranty wouldn’t pay anything for the air conditioner unless it was not working at all.

We called our own repair person and paid $200 to have two pounds of Freon replaced.  Two months later, and the cycle is repeating itself.  The air conditioner is working constantly, but the house is not cooling.  I’m guessing we are already out of Freon.

Now, we’re faced with a choice.  Wait for the unit to die so the homeowners’ warranty will cover the cost of the replacement, or replace it ourselves.

If we wait for the unit to die, the homeowners’ warranty may cover the majority of the cost, but we would have no say in the company doing the work or the replacement unit.  Meanwhile, we will keep paying to replace Freon and having higher than usual electric bills until the unit dies.

Or, we could replace it ourselves and stop the flow of wasted cash and energy caused by the old air conditioner.  We could choose the company we want to work with and what model we’d like as a replacement, the more energy efficient, the better.

While a homeowners’ warranty can save people money, in the long run, for us, it seems to be too much of a hassle and too restrictive to keep up with.

Do you have a homeowners’ warranty?  If so, do you find it valuable?

We’re All Financial Optimists, and It’s Hurting Our Bottom Line

By 12 Comments

Are you an optimist or a pessimist?

Do you see the glass half full or half empty?

No matter your answer, I have a secret for you.  We’re all financial optimists, and it’s hurting our bottom line.

Don’t believe me?

I didn’t expect you to.

You might say, my finances are a mess.  I have debt; I’ve pulled money out of my 401(k).  I’m definitely not a financial optimist.

But, I’d argue that you are.  When you look into the future, you don’t see bankruptcy and years of the same financial mess.  You likely think that eventually things will get better, and you make decisions based on that.

If your financial situation isn’t that bad, you’re probably even more of a financial optimist.  Say you’re getting ready to buy a house, and you know that your limit is a house that costs $250,000.

You find the perfect house.  The problem?  It costs $270,000.  Still, you decide to buy it, even though you know you can’t afford it.

What do you tell yourself?

  • It’s in a good neighborhood, and the house will appreciate.
  • In just a few years, inflation will make your now nearly unmanageable payment much smaller, and paying it won’t be such a hardship.
  • You’re just starting your career, and in a few years you’ll be making a lot more money, so the house payment will be easier to afford.

Sound familiar?

Just a few years ago, millions of people thought their houses would appreciate, and then they were caught up in the housing crisis.

Houses don’t always appreciate, but we optimistically think ours will.

[Tweet “Houses don’t always appreciate, but we optimistically think ours will.”]

Sure inflation will make your house payment more manageable, but you’ll have other expenses in a few years that you’re not thinking of because you’re thinking optimistically.  In a few years, maybe you’ll have a few kids to fill that house, and they’ll cost a lot of money.  You’ll be spending more on food, health care, transportation and day care, just to name a few things.  Suddenly, having a manageable house payment doesn’t really make a financial difference because you’ll have so many other expenses competing for your money.

If you’re lucky, your career will soar, and you’ll make more money, but that doesn’t always happen.  You might get laid off and have to find a job that pays less.  You or your spouse may decide to quit so one person can stay home with the kids.  Or, maybe you do get raises, but at the same time your health care premiums go up every year so your pay essentially stays stagnant.

Of course, thinking optimistically is beneficial to our mental health, but for our financial health, recognize that thinking optimistically hurts your bottom line.  When you get ready to make a large purchase like a house or a car, don’t forecast into the future.  Determine if you can afford the item now, in your current situation.  If you can, you’ll tie up less of your future money and benefit from this.  If you can’t, it’s best to pass it up.

3 Ways Young Homeowners Can Save $3745 (at least) Each Year

By

If you recently bought your first home let me congratulate you. This is possibly the very best time to buy real estate that you’ll ever see in your lifetime. You made a smart move. And because you are a smart real estate investor, I know you’ll be interested in taking advantage of the following 3 ways young homeowners can save even more “moolah”.

1. Home Warranty

I owned a home warranty program for years and it was a waste of money. Of course it felt great not to have to worry about running into major unexpected expenses, but the cost just didn’t justify it. First of all, you are stuck with any repair person the home protection company sends out. Next, the deductible you have to pay is often pretty close to the amount you’d have to pay to a contractor of your own choosing. Last, when you do have a major repair, you are stuck (again) with whoever the company sends out unless you are willing to go through a great deal of red tape.

You’re always responsible for upgrades, code changes and any problems associated with misuse or poor maintenance. I cancelled my home protection plan several years ago and it turned out to be a fantastic decision. If you follow my lead on this, you’ll save at least $600 a year.

2. Life Insurance

If you are a young homeowner you might have a young family or plan on having one. As a result, you definitely need life insurance. But when it comes to term life vs. whole life – play it smart. Term life is your best friend. It’s cheap and it does the job. It’s true that at some point (20 or 30 years down the road) your term insurance will expire. But by that time, you may not need life insurance anyway. Term life is so much cheaper than whole life that you can take that savings and invest it. This way probably you’ll have much more than the whole life promises.

One of the biggest problems with whole life (and I feel it’s criminal) is that agents sell you the whole life you can afford because it pays them a whole lot more commission. (Maybe that’s why they call it “whole” life.) And because it buys a great deal less insurance than term, people end up dangerously under-insured. You could save several thousands of dollars each year and have better coverage just by having term instead of whole life insurance. Look into this ASAP.

3. Good Credit Score

Because you are a young homeowner, you’ll be using your credit for a very long time. And you might have to lean on that plastic a lot right now to pay for all that new furniture and appliances. If you able to get even a slightly better credit score, you might end up savings a bundle every month. That’s because a higher credit score will help you get lower interest rates on credit cards and mortgages.

Find out what your score is and make sure there are no errors. If there are mistakes, fix them. You can easily do most of this without paying a cent. You can even get your credit score for free and sign up for services that provide updates whenever there is a change to your rating. This has helped me a great deal.

As a young homeowner you might be facing some pretty hefty expenses and that can be daunting. Take these 3 steps. Dump the home protection plan. Get rid of your whole life insurance and buy term instead. Finally make sure your credit score is as high as possible.

Will you save $3745? I don’t know. You could save a lot more. You’ll never know until you start taking action.

What are the biggest expenses you face as a young homeowner? What have you done to reduce those costs?

This was a guest post written by Neal Frankle. He is a Certified Financial Planner ® and owns Wealth Pilgrim – a great personal finance blog. He writes extensively about ways to help people make smart financial decisions. One of his most in-depth posts was his review of CIT Bank.