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House Sales Improved in June, But is the Housing Crisis Over?

by Flexo on July 30, 2009

in Real Estate and Home

“Now is a great time to buy.” That has been the advertising mantra of the National Association of Realtors regardless of the state of the housing market. The NAR certainly has a purpose; its mission and vision is clearly displayed on the organization’s website: “The core purpose of the NATIONAL ASSOCIATION OF REALTORS® is to help its members become more profitable and successful.”

The NAR looks out for its due-paying members. Notice that the mission of this non-profit organization is not to help consumers either find bargains when buying a house or to help sellers find the highest bidders. Real estate brokers, particularly those who qualify as Realtors (which according to the organization, should be represented in all uppercase letters, include the registered trademark symbol, and be pronounced in the unnatural American English combination of phonemes “REAL-TORE”) stand to be more “profitable and successful” by increasing the number of transactions they broker.

From what I understand about commissions, a 6% commission is often split between the buying agent and the selling agent, and if the agent is part of a realty company, the 3% is split with the company. A real estate agent holding out for a buyer’s asking price of $250,000 rather than $220,000, a difference of $30,000, stands to increase his income approximately $450. That seems hardly worthwhile if it takes several months before the asking price is met. The $450 is hardly an incentive for the broker; he could do better by closing the deal and moving on. On the other hand, the $28,200 (the $30,000 in price difference minus the 6% paid to the agents) is a significant difference for the seller. This just illustrates that real estate agents have little incentive to work hard for either the seller or the buyer except to create a good relationship in order to foster referrals.

That’s not the point. The point is that the National Association of Realtors’s only goal is to encourage more real estate transactions, and this is why they have been saying that, “Now is a great time to buy,” no matter what’s going on in the world around them. This is also why any data provided to the public by the NAR should be regarded as marketing rather than a true gauge of the economy.

For a well-accepted measure, media generally turn toward the Case-Shiller Price Index (CSPI), measured by Standard & Poors (a company with its own conflicts of interest as well). The CSPI shows that home prices increased for the first time in May. Other positive data include June numbers: new housing starts and existing home sales were both up 3.6% and sales of new homes were up 11%.

Is this a sign that the housing crisis is over? It must mean that there is increased confidence in the ability to find the right price as well as increased availability of loans.

There are some problems, though. Unemployment continues to rise, so consumers may find themselves in financial trouble. That could result in fewer purchases and more mortgage defaults. The increase in purchases may be due to speculators trying to snag deals rather than families moving from apartments to houses. Even if we are at a bottom, the numbers could mean that real estate is leveling without significant increase for some time.

What do you think? Are we headed for a recovery or are there still dark clouds ahead?

Looking for a Housing Recovery, Casey B. Mulligan, New York Times, July 29, 2009.

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When Going Into Debt is Worthwhile

by Flexo on June 10, 2009

in Debt Reduction

On a macro level, debt was a force behind the incredible economic expansion over the past two centuries, and the availability of debt at the family level played a role as well. Despite all that debt has brought society, many financial gurus and authors vilify debt and explicitly call the idea of borrowing money “evil.” Typical mass-produced financial advice often calls for avoiding debt as much as possible. Is this a realistic goal in economically developed nations in the twenty-first century?

For some, it is. There is no doubt that there are many ways families can survive and thrive while avoiding the need to borrow money at all. Avoidance of all debt can be a struggle for most families, particularly in today’s United States. Are the sacrifices worth the effort?

To join in this discussion, you must accept that debt is not evil. All forms of money are tools to simplify the exchange of goods and services. As tools are objects with no inner consciousness, they can neither be good nor evil, as these words indicate a nature of intentions. Intentions require a sophisticated neural network, something lacking as much in money as it is lacking in a doorknob.

If you’re still with me and you agree that borrowing money is not an evil concept, you might also agree that the tool of debt could possibly be used for both wise and unwise decisions, designed by the active neural networks in human beings (the tool-wielders).

From a pure numerical viewpoint

Even though amounts and values of money are normally symbolized by numbers, money is never solely about digits on a ledger. If it were, there would be only one reason to go into debt: an opportunity to use someone else’s money to earn more money than what is borrowed — a sure thing. If I offered you $10,000 without interest with the only caveat that you repay me slowly each month and in full by the end of twelve months, it would be wise to accept the offer, invest the $10,000 in a safe investment like a high-yield savings account, pay me back, and keep the interest you’ve earned for yourself without much effort.

This is what credit cards have been offering, though less frequently recently, with 0% balance transfer offers, or so they’d like you to believe. If you look deeper, there are usually some risks:

  • The credit card companies might drop the promotion.
  • If you fail to make a payment in time, even if your check arrives on someone’s desk one minute too late, you will owe interest to the credit card.
  • The bank might lower the interest rate you are earning in the savings account to a point where the exercise is not worthwhile.
  • Your credit score will decrease due to an increased utilization ratio, forcing you to pay more for new loans or mortgages.

The numbers are trickier when you question whether to take on debt at a higher interest rate with the possibility of earning more from a riskier investment, like stocks. Here you have to weigh the probability of not earning more than the interest you will be charged for borrowing the money.

In the end it is a judgment call. You could devise complex algorithms to help you to decide whether to borrow money at one rate for the possibility of earning a higher return on an investment, but anything can happen.

Debt for education

University of Delaware Campus

One of the most prominent rationalizations for accepting debt for education, like student loans, is from the purely mathematical viewpoint. People who go to college earn more throughout their lifetime than people who do not. The numbers show that in many cases, money spent for college, including interest payments lasting ten years after graduation, are worthwhile thanks to increased career opportunities and salaries. On average, an individual with a Bachelor’s degree will earn twice as much as an individual with only a high school diploma, though the statistics will differ depending on the field of study and the career.

Thus, it often makes mathematical sense to enter into debt to obtain a Bachelor’s degree, if necessary. There are ways to avoid education debt, such as having parents who have earned and saved enough money to fully fund the education, choosing a free or less expensive school, obtaining grants or scholarships, or even working. When these options fail, the possibility remains that choosing to attend and graduate from a certain college and accruing debt will be a better decision than not earning the degree at all.

Student loans can generally be found with low interest rates or with a portion of the interest being subsidized by the government because it is in society’s best interest to produce a well-educated workforce and thinkforce.

Your career’s start-up expenses

When a new company is formed with a visionary idea, there are often required start-up expenses. These include finding real estate for an office or storefront, furnishing the office or acquiring inventory, hiring employees and paying them salaries, and spreading the word about the new business. I like to compare this process with a recently-graduated student entering a career. Unless the business has received help from investors (who often require that they become part owners), these start-up companies rely on loans.

Similarly, in some cases new employees can be excused for using debt to put them in a competitive position for starting their careers. Dressing appropriately and presenting a professional appearance requires expenditures for which a newly-minted graduate may not be financially prepared. (This is one reason I suggested the gift of clothing or gift cards for recent graduates.) Attending networking events, sending out resumes and traveling to interviews are all start-up expenses that must be financed in order to land the right job.

That first job is an important indicator of the remainder of your career, particularly if you remain in the same career path your entire life (as fewer people do). The better placed and paid you are in your first job, the higher your income will be throughout your career.

If necessary, a moderate amount of debt at the point you start your career will provide the opportunities to place you in a better position for future earning.

Owning a house

McMansion

Thanks to the prevalence and availability of debt, consumers have reached higher and higher beyond their means. In the 1960s, median house prices were about 2.5 times the median annual household salary and at the height of the housing market in the early part of this century, the multiple was around 5 (source). Saving to pay for a house with cash could take years or even decades.

During the height of the housing frenzy, many families were willing to take on debt using the above numerical viewpoint. House prices seemed to go up without fail, and the prospect of earning more by leveraging a house purchase with debt seemed to make financial sense. Unfortunately, the underlying assumption that real estate prices always increase proved to be incorrect and many families were hurt due to over-leverage.

But that doesn’t mean that it’s never wise to buy a house with help from a loan. Buying a home should not be a purely financial decision. Families often want to create a stable home environment, and settling down in a location with the intent to stay for several decades is a key component of that idea. Furthermore, families with children want to ensure that the free public education offers a quality experience, and regions known for excellent education, in high demand, will often be more expensive.

A mortgage, while a decades-long debt sentence, is not evil. It makes sense for families to live in the best location they desire if they can afford the debt payments.

When else is debt worthwhile?

If you accept debt into your life, there are sacrifices you will need to make. You will also need to accept other sacrifices if you refuse to enter debt. It comes down to personal choice. Is it crazy to be willing to accept debt, as long as it is affordable and well-purposed? Or do you agree with idea that money is a non-intentioned tool, to be used in whatever situation logically calls for it? Are there any other instances where it can be a smart decision to take on debt?

Photo credits: mathplourde, snapped_up

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Pros and Cons of Interest-Only Mortgage Payments

by Flexo on June 3, 2009

in Debt Reduction

Yesterday, Consumerism Commentary reader Ryan suggested I write about interest-only mortgages.

There is no such thing as an “interest-only mortgage.” Wouldn’t that be nice, though, to have a mortgage that did not require you to pay any principal back to the lender? Unfortunately, when you become a borrower, your lender will insist upon receiving interest payments as well as principal at some point. What does exist, however, is an interest-only payment option for mortgages. The interest-only payment option can apply to adjustable-rate mortgages and fixed-rate mortgages alike. The purpose is to allow borrowers to reduce monthly payments for a period of time. Rather than a monthly payment of $1,200, in which $600 goes to interest and $600 goes to the principal, the monthly payment would only be $600.

The lower monthly payments during the interest-only period are good for households with irregular income such as commission payments less frequent than monthly, or households with unpredictable income, like that of a business owner who is expecting low income while the business is in a period of growth.

Interest-only payment options also allow borrowers to “afford” a more expensive home. This can be important for an executive who needs to entertain clients at home and its appearance is crucial to career success, but there could be a strong desire to use the lower payments to buy a home beyond the means of the borrower.

This is a dangerous prospect, especially in an environment where we can’t be sure whether the value of the house will rise in the short term. While making interest-only payments, the borrower is not building equity in the house. if the borrower is not building equity, the concept is similar to renting, particularly if home values are stagnant or decline. The amount you owe on the mortgage will never decrease. Even worse, some interest-only payments don’t cover the full amount of interest due each month. The excess, non-paid interest would then be tacked onto the principal, causing the borrower to owe more in principal than the home was worth when purchased.

When house values are declining, like they have been in many areas of the United States, this problem is compounded. Not only does the borrower owe the full purchased value of the house while making the interest-only payments, but the house’s declining values means the borrower will quickly owe more than the home is worth. Then, if it is sold, the borrower could owe more money to the lender than he received in the sale.

Interest-only payment options don’t last forever. After the interest-only period ends, the lender will expect the borrower to start paying back the principal. This can result in a significant increase in the number written on the checks sent to the lender. If the income hasn’t increased as expected or if the business has not moved past the “growth” stage, the new payment — a larger payment than you would have had throughout the life of the mortgage if the interest-only option was not selected — might be unaffordable.

The Federal Reserve Board has a helpful comparison chart outlining the differences in payments you might expect if you choose an interest-only payment option, reproduced below. Notice how low the equity is in the last column, identifying borrowers who opt for the interest-only method.

Interest-only mortgage payment comparison

Do you have or have you had an interest-only payment option on a mortgage? Please share your experiences or opinions.

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Money Basics: Simple Interest, Compound Interest, APR and APY

by Flexo on April 22, 2009

in Banking

April is National Financial Literacy Month in the United States. In most cases, schools do not extensively teach financial skills. Teenagers, highly susceptible to messages from the media, often do not have guidance from teachers, who are not trained to teach financial skills, or from parents, many of whom do not model healthy financial behavior. This series of articles at Consumerism Commentary serves to help inspire discussion about basic financial concepts. Please feel free to forward this article to someone who might benefit from a basic financial overview.

This article covers the staple financial resource for anyone seeking long-term financial stability, the savings account. This is the third article in the Money Basics series; so far this series has covered checking accounts and savings accounts.

What is interest?

Interest is a fee paid for the use of someone else’s money. Any individual or company that lends money will charge the borrower interest, always designated as a percentage like 5%. This percentage is almost always means “per year.” The most common forms of interest appear in savings accounts, where a bank pays you interest for depositing your money in the account, and credit cards and other loans, where you pay a company for allowing you to use their money for a time. Hundreds of years ago, society frowned upon charging interest, but as lending money became more prevalent for uses other than acquiring goods such as modern commerce, the stigma of interest slowly disappeared in many cultures.

The two main forms of interest are “simple interest” and “compound interest.” Simple interest is easily calculated. If you borrow $1,000 from a bank that charges you 5% simple interest, you will owe 5% more than $1,000, or $1,050, at the end of the year if you do not borrow more and do not pay back part or all of the loan. The $1,000 is a “principal.” Multiply the principal and the rate of interest (5% becomes 0.05 when multiplying) to determine the amount of interest ($50). Adding the interest amount and the principal results in the total due after one year: $1,050. With simple interest, if you don’t pay the loan back until the end of the second year, you will have another $50 to pay for a total of $1,100. Your second year of interest is based on your original principal.

Compound interest is more common than simple interest, but there are many nuances. Say the bank charges 5% interest on that $1,000 loan, but it is compounded annually rather than not compounded (simple). At the end of the first year, the first year’s interest, $50, is added (compounded) to the principal. Your second year’s interest is then calculated based on your new principal of $1,050. 5% of $1,050 is $52.50, so rather than owing $1,100 at the end of the second year, you would owe $1,102.50.

If only life were that simple. Interest can also be compounded monthly, daily, or continuously. A 5% interest rate compounded monthly, paid to you by a bank in return for your $1,000 deposit, leaves you with $1,051.16 in your bank account at the end of the year assuming no further deposits or withdrawals. That is a little more than the $1,050 of simple interest or interest compounded annually. If that same 5% interest rate is compounded daily, your ending balance would be $1,051.27. Compounded continuously, the 5% rate would also result in $1,051.27, but a fraction of a cent more than the result of daily compounding.

Banks will usually describe their compounding method in the fine print, but this is only a minor concern for savings accounts, as I’ll explain below.

Don’t be misled by interest rates and terminologies

You would think that all financial terms would carry the same definitions regardless of the circumstances in which they are used. But there is some confusion when comparing interest rates for loans with interest rates for savings accounts. Indeed, there is further confusion when comparing savings account interest rates from one bank to another bank. Here are some tips for discerning the differences.

Loans, like mortgages, are often advertised by interest rate. But sometimes, a secondary rate, is also given. The first rate on the advertisement is the nominal interest rate and the second rate is the effective interest rate; the true cost of borrowing the money including the results of compounding as well as any fees that may be charged. Consider the mortgage loan advertisement I found online yesterday.

Mortgage advertisementThis ad lists an interest rate of 4.625% but the true annual cost is actually 4.879%. This advertiser calls the nominal interest rate the “rate” and the effective interest rate the “APR” (annual percentage rate), and this is common terminology for loans. Lenders are required to clearly display the true annual cost of a loan, the APR, but this often just leads to more confusion.

Unfortunately, savings accounts reverse part of this word usage pattern. A savings account’s APR usually refers to the nominal interest rate, and the true annual result, after compounding based on that particular bank’s method, is called the “APY” (annual percentage yield). For example, in our continuous compounding method mentioned above, while the savings account’s interest rate is 5%, the APY is closer to 5.127%. When banks advertise their savings accounts, they usually include the APY, leaving the nominal interest rate to be found only in fine print if anywhere. The APY is a standard metric that makes it easy to compare savings accounts across banks regardless of the type of interest, and I use APYs to compare high-yield savings rates here.

If you are thoroughly confused, you can always head to dinkytown.net, which offers calculators to help you determine a loan’s APR (true annual cost) if you know the loan’s (nominal) interest rate and fees and to help you compare how much more you would earn by switching to a savings account with a higher interest rate (APY).

Albert Einstein probably never called compound interest “the most powerful force in the universe,” though this quotation or one similar is often attributed to him. If you want to “get rich,” all you need is compound interest, preferably at a rate above inflation, and lots time on your side.

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8 (or More) Ways to Benefit From the ARRA

by Smithee on March 20, 2009

in Economy

Our financial crisis is being combated on many sides, with a seemingly endless series of opportunities for people facing serious hardships. I thought it would be helpful to summarize all the options created as a result of the American Recovery and Reinvestment Act of 2009 and give you just the facts that you need in order to consider pursuing one or more of them.

1. Mortgage Refinancing and Modification

You may be having trouble making mortgage payments (either your rate went up significantly, or your income decreased, or maybe both), or you’ve been paying your mortgage on time but your home value has decreased, so you can’t take advantage of lower interest rates. Help is available for both groups.

Visit MakingHomeAffordable.gov, and find out if you are eligible.

Also worth pointing out on that site is the special Beware of Scams page. The idea of losing your home is one of the more frightening ones I can think of. People may not always make sound decisions.

Earlier coverage of this from Consumerism Commentary

2. Tax Reduction for 95% of Working Americans

You don’t have to take any action to benefit from this. You’ll either notice your regular paycheck increasing, or you won’t.

Earlier coverage of this from Consumerism Commentary

3. $250 for SSI or Social Security Recipients

There’s a one-time payment of $250 that should be made by the end of May 2009 for people on Social Security, a veteran with a pension, or people with disabilities. You don’t have to do anything special to receive this, either. More information at Social Security Online.

4. Tax Credits for Making Energy Efficiency Improvements

The Low Impact Living blog has a great summary of the different ways you can save in 2009 by making specific “green” improvements. I’m seriously considering a few of these.

5. Over $15 Billion for Medicaid

I don’t know much about Medicaid, except that many people rely on it, and if you were worried that you wouldn’t be covered, there’s a good chance you will be, now. Read the Press Release at the White House.

6. Tax Credits for Buying a House

There was a tax credit for buying a house last year, and there’s a tax credit for this year. They have different rules and Flexo did a great job explaining both, and how to act on either one.

7. Tax Deduction for Buying a Car

Trucks are included, too. If your income isn’t too high (taxable income of $125,000 / year or $250k for couples filing jointly), you can deduct the sales tax on a new vehicle. Read more (especially the first comment) at the Sound Money Matters blog.

8. More Money for Students

An additional $17.1 billion in Pell Grants means an increase of a maximum Pell award from $4,850 to $5,350. There’s also an additional $200 million for work study programs. Quite a lot more information at the U.S. Department of Education Web site.

More details about this, additional credits and 529 plans can be found at the Online Education Blog.

Summary

Whether you think the ARRA is a good idea or not, it’d be foolish not to take advantage of the opportunities that make sense for you and/or your family. Mostly, though, I hope the growth of our various tent cities slows down really soon.

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Should You Walk Away From a House and Mortgage?

by Flexo on February 20, 2009

in Real Estate and Home

In the real estate boom, many homebuyers extended themselves financially to buy a house that may have been beyond their means. With the exuberant market, people were encouraged to buy with low introductory interest rates and interest-only loans, the belief that their income would increase to meet their payments, predictions that real estate prices would never fall. As should have been predicted, adjustable-rate mortgages have adjusted and monthly mortgage payments are higher and income hasn’t increased. More people have fallen behind with their mortgage payments.

With declining home prices and interest-only mortgages, more families owe more on their mortgages than their home is worth. Financially, it could make sense, at least in the short term, to walk away. In this state of negative equity, abandoning the mortgage and the house would actually be financially beneficial.

Here is why:

If the house you purchased for $400,000 is now worth only $300,000, but thanks to an interest-only mortgage, you still owe $400,000, your net worth increase by $100,000 simply by wiping the mortgage and the house from your balance sheet. Of course, if this is your primary residence, you still need a place to live. But from this point you could buy a more affordable house or rent for a while.

There is a major drawback to abandoning your responsibilities. If you walk away, you will trash your credit rating, making it more difficult or impossible to rent an apartment, qualify for a new mortgage, and perhaps get a job.

Freakonomics addresses this dilemma (if it is a dilemma at all):

My new wife and I bought our home in Temecula, Calif., as a place for us to start a family… We bought the house in early 2007 for $445,000 and put $50,000 down… Now that the market has crashed in our area, our house is worth about $250,000.

Although our monthly mortgage payments are high, we can still afford to make them, but should we? If we walk away and buy another house with my parents cosigning on the loan (or even just rented a place), we could save almost $1,000 a month in payments and maybe even have positive equity in the next few years. If we stay in our home, we’ll be stuck for many years, and if the market ever does get back to what we paid, the best option we’ll have will be to break even with a sale and then buy another house with an inflated value.

I’m certainly concerned about the ethical side of it, and know that walking away is not “the right thing to do.” But my question is from a purely economic perspective and I’d be saving a significant amount of money by lowering my monthly payments and erasing $140,000 in debt.

What should this family do? Are there ethical considerations, or is it simply a question of math? Credit rating aside, the financially responsible option may be to walk away, accept your mistakes, and start over. But if people can simply walk away from their obligations, what incentive is there for people to buy houses they can afford and work hard to continue making payments responsibly?

New laws are now in place to help families facing foreclosure, which should encourage people to choose options other than abandonment. But they may not help every family that finds itself in this predicament. What should they do?

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Senate Amendment to 2009 Stimulus Bill: Moratorium on Foreclosures

by Flexo on February 2, 2009

in Real Estate and Home

As Barack Obama’s 2009 economic stimulus plan makes its way through Congress, the Senate is taking the opportunity to modify the bill with the intent of providing assistance to the lagging housing market. Rather than allow the market to continue correcting itself, the government would like to encourage consumers to jump into the market, allowing prices to begin climbing again.

Republicans and Democrats in the Senate would like to see 30-year fixed-rate mortgages at 4%, improvements to the first-time home buyer credit, and a 90-day moratorium on foreclosures.

Senate Banking Committee Chairman Christopher Dodd, D-Conn., told reporters last week that he would like a provision in the stimulus package that would impose a 90-day moratorium on foreclosures. Dodd may consider other housing measures as well. (CNN)

People facing foreclosure are unlikely to qualify for a typical mortgage refinance, a tool for those who have been able to pay their monthly bills but who would like to take advantage of lower rates. A 90-day moratorium would give those in danger of losing their homes more time to negotiate with lenders. There are some instances in which this might improve the situation.

I can imagine that someone who has been out of work and unable to pay the mortgage — usually the last payment to be affected when an emergency arises — could be given more time to find a new job. But in this economy, is three months enough time for someone to get back on his or her feet?

The goal of economic stimulus is to prevent another Great Depression or a repeat of Japan’s extended slump during the 1990s. The theory seems to be for the government to throw everything it can at the economic downturn, including the kitchen sink, and see what sticks.

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Big Mistakes That Cost, Part 1

by Flexo on February 16, 2008

in Personal Finance

It’s great to focus on the little things that save you money, like The Expensive Coffee-Related Drink Factor. Reducing small, regular expenses add up over time. But all that focus on the minutiae is for naught if you make big mistakes. Consumer Reports recently published an article that explains how much some of those big — thought not always apparent at the onset — mistakes cost.

1. Investing too conservatively during retirement. I had a major problem with Kiplinger Personal Finance’s recent series on saving $1,000,000 for retirement starting at various ages. The authors there suggest shifting your retirement asset allocation away from equities much too quickly. Retirement funds have to last longer than the beginning of retirement. With people living into their 70s, 80s, and even 90s, retirement funds have to last much longer than they used to. Unless you can afford to withdraw only 1% of your assets every year for expenses, you’re going to need to stay strongly invested in stocks. Consumer Reports says this mistake can cost you $360,000 to $750,000.

This is risky; stocks fluctuate, and a drop in the market at the wrong time can have some ill effects. It makes sense to have more stable investments once you retire, but you’ll need those equities to make the funds last. Here’s what Consumer Reports found:

Overall, we found that an asset mix leaning more toward Standard & Poor’s 500 stock index than bonds provided bigger returns and annual cash draws. On average, over a variety of 20- and 35-year periods from 1940 through 2006, an all-stock portfolio provided our investor with $750,000 more than an all-bond one.

2. Retiring before you need to. Early retirement is tempting. I’d like to stop working while I can still enjoy my life. There is enough I’d like to do that I won’t get bored with my time. But Consumer Reports says that early retirement can be an idea that provides the opportunity to forgo $237,000 to $309,000. Stay in the workplace longer, and the nest egg with which you start retirement will be significantly larger and will last longer. Also, the earlier you retirement, the less you’ll receive from Social Security. I’d hope that by the time I retire (if I take the traditional career path), Social Security will be the least of my concerns.

What else? Health care costs can be brutal if you quit the workforce before Medicare can help you:

What’s more, Medicare won’t cover you until age 65, so you might have to buy individual health insurance at an age when costs are apt to be at their highest. And each year you postpone is one less year your savings will need to support you.

divorce bargain3. Launching a divorce war. Unless you’re a “gold digger,” divorce can be a costly action. If it’s a particularly nasty divorce, not only can it drain you emotionally, but financially as well. A divorce could cost a person $49,000 to $188,000, though Consumer Reports cites an expert who says that a full courtroom ordeal could easily exhaust $250,000. That’s a quarter of a million dollars for a judge to say, “You get the house and you get the retirement accounts.”

So what do you do? Skip the divorce and live unhappily ever after? Mediation is a common cost-cutting measure. Finding a new rich spouse is an option.

4. Underinsuring your home. I am a poor example. I’ve been meaning to ask my insurance company about and shop around for renter’s insurance. I find myself busy during business hours and I put it off, even though I know that’s not an excuse. A home that’s not properly insured could end up costing you $16,000 to $194,000 more than necessary, according to Consumer Reports.

This has more to do with damage to a house, which as a renter I currently don’t need to worry about other than the contents inside. That could certainly contribute to a loss of $16,000. Consumer Reports explains that home owners, if they haven’t updated their insurance policies from the time they purchased their homes, could lose out on all gains if the house is damaged or destroyed. And if they’ve been living in the same place for a decade, that could be significant gains. The money you would receive from the insurance agency, while an amount that might have helped a decade ago, would be insufficient considering the climb in house prices.

5. Overpaying for your mortgage. You better shop around. It is absolutely worthwhile to look at different lenders when you plan on initiating a mortgage. Consumer Reports shows that a difference of 750 basis points between two otherwise similar mortgages could unnecessarily cost $27,000 extra down the road. Why pay someone an unnecessary $27,000? If someone asked me for that amount of money for no reason, I would turn them down. Why give such a gift to a mortgage lender? Find the lowest cost mortgage possible.

6. Carrying a credit-card balance. When should you carry a credit card balance? I can only think of two situations. The first is if you are using the credit card for arbitrage: earning more from a liquid investment than you’re paying in credit card interest. That’s a dangerous adventure for someone who isn’t prepared. The other situation is if a credit card is the only source of funding for starting out in a career. If your first job out of college requires a suit and you have no money saved up after boozing your way through higher education, you’re going to need to make do. Of course, it’s imperative to get rid of credit card debt as soon as possible.

If you have a card with an interest rate of 15 percent and you pay only the minimum due each month, it will take you 22 years and 2 months to retire a $5,000 debt, and you’ll have paid $5,729 in interest.

Minimum payments are not the way to go. They’re designed to keep you in debt for a long time. You must pay more than the minimum payment suggested by the credit card company. In most circumstances, take Consumer Reports’ advice and use credits only for security features (and I would add for rebates) and pay off the balance every month. Otherwise, you can end up paying $5,000 to $23,000 over the course of your life in credit card interest alone.

Common sense will help you with the small mistakes that add up over time. It often takes some education and awareness in addition to common sense to avoid wasting hundreds of thousands of dollars unnecessarily.

Image credit: banjo d
12 money mistakes that could cost you $1,000,000 [Consumer Reports]

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