Scary Money Stories: When Houses Haunt Your Finances
Come hear some of our readers' most spine-tingling tales of financial woe -- and find out what you can do if it happens to you.
The Money Pit
In the process of renovating our house, we thought we'd planned for everything. We talked to friends who told us to add 15 percent to 20 percent to whatever budget we thought we'd be working with, so we had $50,000 as a cushion for any unforeseen circumstances. And there have been several.
First came the roots of a 75-year-old pin oak that needed to be babied as our builder dug the foundation for the new porch. That cost $6,000. Then came the floors: It turned out we had to replace our original hardwood floors because they had been worn down too much. There went another $12,000.
But the most recent has been the hardest to swallow. We're required by our county to have our water line upgraded, and we ended up having to upgrade the corroded sewer line as well -- $10,000 just to keep things functioning as is. We've halved our emergency fund, and we're still only halfway through our build!
-- A.W., Washington, D.C.
With renovations, it seems that anything that can go wrong will, even with the most thorough planning. When choosing a builder, ask previous clients about their cost overruns. Some builders will bid low to get the job, only to tack on costs later. Of course, not all extra costs can be avoided. But be sure the company you choose doesn't have a history of underestimating.
Having a substantial emergency fund is absolutely essential. It is the thing that keeps your home renovations from becoming a financial home wrecker. Even if you don't encounter unexpected expenses, builds can be delayed for lots of uncontrollable reasons, such as bad weather, which can mean living in temporary housing for longer than you'd planned.
If you don't have at least a 20 percent cushion, consider delaying your project until you do. It can really reduce stress and make your build or remodel exciting, not a disaster.
I was working as an assistant professor when my funding was cut. At the time, we had our primary home in Mebane, N.C., and also had a beach house. I found another job in Fayetteville, N.C. At the time we were underwater on our Mebane house and couldn't sell it, so we rented it out. Then (here's the big mistake) we bought a house in Fayetteville.
When my wife's job was cut in September 2012, we were left with one income, two kids, and three mortgage payments. She soon found a new job in Richmond, Va. In March, I found a job in Richmond too, and we all moved into an apartment there. We now had three mortgages plus a rent payment.
We eventually sold two of the houses and moved out of the rental into a house in Richmond.
We made it through thanks to a good relocation package from my wife's company, a VA loan, very little credit card or unsecured debt, and the fact that we had substantial savings and retirement funds. So now we've got a house and a beach house -- and a substantial hole in our retirement accounts and savings. But we're slowly getting back on track.
-- S.W., Richmond, Va.
Losing a job is devastating, and being out of work and stuck with multiple mortgages would bankrupt many of us. S.W. and his wife were fortunate to be able to tap savings as a temporary bandage (click here for more ways to get cash in an emergency). They were also smart to start rebuilding their nest egg as soon as they got back on their feet.
As all of these stories demonstrate, an emergency fund is a must. A recent Bankrate.com survey showed that 27 percent of Americans have no emergency savings, and only 24 percent of us have the recommended six months' of living expenses stashed away.
If you don't have an emergency fund, start setting aside money today. Even if you can only contribute $50 or $100 per paycheck, you'll be surprised how fast that will add up. The peace of mind that comes with having some cash in the bank is worth a little short-term sacrifice.
Just weeks after my divorce was finalized -- stipulating that my now-ex would assume full responsibility for the home we co-owned so that I could buy a less pricey property -- he lost his job and said he would not be able to cover the mortgage, let alone the agreed-upon child support.
All my savings had gone to make the down payment on the new house and I was beyond broke.
%VIRTUAL-article-sponsoredlinks%The loan on my new home, which I qualified for only because the child support boosted my income, was set to close in a few days. I faced a tough choice -- bail on the new loan and stay in the old house (which I could not afford on my own) or try to find a renter, pronto. The house was about 20 percent underwater, so selling wasn't an option.
After several sleepless nights, I took a gamble and closed on the new house. Thankfully, it all worked out -- I found a tenant right away and picked up enough freelance work to cover the child support shortfall. But that was a very frightening few weeks!
-- R.M., Fairfax, Va.
Back before the recession, divorcees could petition their mortgage holder to remove one partner from the loan if the other wanted to keep the house. No more. Now, the only way to get your name off the loan once you part ways is for one person to refinance the home in their name alone or to sell. Even court-decreed settlements are useless -- if you signed the loan, the bank will hold you responsible for paying it back.
What could have helped here? Say it with me: an emergency fund! (Here are 15 more tips for building up yours.)
Scary money situations become a lot less frightening if you've got some extra cash to ease you through. Happy Halloween!
Robyn Gearey is a contributing writer for The Motley Fool. Try any of our Foolish newsletter services free for 30 days.