When you use those nifty online calculators that tell you how much house you can afford, it only gives you principal and interest (P&I) which may well be $900/month…BUT wonderful homeowner you are, you have to pay property tax and homeowner’s insurance now. Generally speaking, neither one of those is cheap. Unless you have a downpayment of 20% or more, you will usually have to pay into an escrow account. This means you pay property tax and insurance along with your mortgage every month and the mortgage company pays those two bills for you. So you thought you’d be paying $900/month but you’re really paying $1050/month (for example).

Also, if you live in a townhouse or condo (and sometimes for single family homes too), you will be paying HOA fees. For a nice complex, you can expect $100+/month. Depending on where you live, this might cover garbage and/or water and it generally covers basic outdoor maintenance. So now your $900/month mortgage has turned into $1150/month and you haven’t paid any other bills or bought any groceries.

Your utilities will probably go up, especially if you have natural gas heat (vs electricity). And guess what else? Houses need stuff. No, you won’t buy all that stuff at once but for the first year, expect to drain your wallet on “house stuff”. From lawnmowers to towel racks to blinds, there will ALWAYS be something you need to buy and I’m not even talking about decorating. So you should budget an extra $250/month for increased utilities and “stuff”. Now a $900/month mortgage has turned into $1400/month of expenses. Still think you can afford it?

You have two types of expenses – fixed expenses and discretionary spending. Let’s talk about fixed expenses first. Not all of those are as fixed as you think. While you probably can’t do much about your rent, there are ways to lower other expenses.

• TAX REFUNDS ARE NOT A GOOD THING! If you squeal with glee every year when you get that fat refund check, stop now. You’re giving the government an interest-free loan. Rather than letting them hold onto your money, you hold onto it yourself in your online savings account. If you get a large refund every year, you should adjust your withholdings so that less is taken out of each paycheck. Funnel that money directly to savings because you can’t miss what you never had. The IRS withholding calculator IRS withholding calculator will tell you how much you should be withholding and PaycheckCity will tell you approximately how much your check will be once you change your withholdings.

• Eliminate unnecessary features on your cellphone and home phone. Do you really need *69 and 2000 anytime minutes? Sure it may only save $5/month but all those little $5/month’s add up. Wouldn’t you love to have $50-100/month extra just by putting forth a little effort? Also, if you work for a large company like I do, you may be eligible for employee discounts. Most of the cellphone companies will discounts of 10-25% off just for being an eligible employee. And while you’re at it, cutback on the cable. Do you really watch HBO, Showtime AND Cinemax? Probably not. Maybe stick with just HBO and save $20/month.

• Save money and the environment. Make an effort not to waste water, electricity or gas. Stop running the dishwasher and the washing machine half full. Invest in programmable thermostats if you have high utility bills. Also, don’t believe the hype. You really don’t need a capful of detergent and a whole sheet of Bounce for every load. Try using half as much. I promise your clothes will be just as clean and just as soft and you’ll save money to boot. Stop running all over town everyday too. Combine your errands into one or two trips per week. You’ll save time, money and wear and tear on your car.

• Are you getting the best rate on your car insurance? If you haven’t done so lately, get online quotes from a few different companies to see if you’re getting the lowest rate you can. Also, re-evaluate the coverage you have. If you have an old beater that’s only worth $1000, it’s probably not worth it to have full comprehensive and collision. Drop back to just liability coverage and save the difference. Are you being charged for gap insurance? Unless you’re upside down on your car loan, you don’t need it. Drop it and save the difference. Another cost-saving measure is increasing your deductible if it’s below $1000. Also, consider taking a defensive driving course. This will lower your premiums as well. Courses can be taken online for as little as $45 and an hour of your time. I don’t have the link offhand but post in the comments if you want the link to the course I took.

• While credit card companies aren’t as prone to helping these days, it never hurts to ask. I hope you don’t have credit card debt, but if you do, there are ways to ease the pain. If you always pay your bill on time, call and ask the card company to lower your interest rate. If they won’t, call back in three months and ask again. You can save hundreds of dollars a year in interest payments just by making a phone call.

That’s all for now. The next post will be about saving on discretionary spending.

• Open an online savings account. Why not a “regular” savings account, you ask. Until recently, online accounts offered a better interest rate (3% or more) vs the 1% or less you will probably get at your current bank. However, that’s typically not the case now. But the benefit of online banking is that you can’t easily access the money so there’s less temptation to overspend and dip into your savings. No ATM card and while you can transfer money out, it will take 1-3 business days to post to your checking account. I like both HSBC and ING Direct. Also, if you deposit $250 or more, ING will give you a $25 opening bonus – nothing like free money.

• Pay yourself first – Put everything but what you REASONABLY need to live on until your next paycheck (i.e. gas, groceries, etc.) into your savings account from the start. You can’t spend what you don’t have. If you only have $65 in checking until your next paycheck you will be forced to brown bag it rather than buying lunch everyday. I leave myself $50 extra over what I believe I need until my next paycheck but that money isn’t for spending. It’s in case something truly unexpected comes up. That brings me to my next point…

• Plan for it – Irregular expenses like car insurance are not emergencies and should not be unexpected. If your car insurance is $600 every six months, then you need to be setting aside $100/month (preferably in your “regular” savings account that’s attached to your checking account) so that when the bill comes, you already have the money for it. Apply the same technique for birthday/Christmas spending. If you know you like to buy $600 worth of Christmas gifts every year, you should be setting aside $50/month all year so you don’t have to charge it.

• Stop charging stuff! If you’re putting expenses on credit cards and you’re not paying the bill IN FULL every month, then YOU CAN’T AFFORD IT! You’re spending money you haven’t even made yet. You’re jeopardizing your future for Red Lobster and PF Chang? Come on, you’re better than that. If you’re like most people, you probably don’t even realize how much money you spend on unimportant things (the important thing being getting a house). So…

• Write down EVERY CENT you spend – This can be done with a notebook, an Excel spreadsheet or software like MS Money or Quicken. You will be surprised to see how much money you nickel and dime away. Once you do this, you’ll see how much money you have to save as well as how much money you COULD be saving every month if you cut back your spending on the unimportant things. Next up….

• Create a budget but be sure to leave yourself some room for fun. It’s kind of like being on a diet. If you force yourself to eat healthily ALL the time, one day you’ll get tired of depriving yourself and eat the whole bag of cookies in one sitting. However, if you allowed yourself three cookies per week, you’d be better off for it.

I think that’s enough to digest for now so let that sink in and post any questions in the comments section. The next post will be WAYS TO SAVE MONEY.

A lot of people are excited because the homebuyer’s tax credit has been extended. While there’s no doubt that this credit can be beneficial, that’s only the case if you’re truly prepared and can afford to buy WITHOUT the credit.

For months now, news broadcasts have stated that it’s a “buyer’s market” due to the increasing number of foreclosures as well as continued low interest rates. If you’re someone who’s interesting in buying in the near future, there are several steps you need to take so this will be a series of posts. Step one is GET YOUR CREDIT RIGHT. Get your FICO score as well as copies of all three credit reports (Experian, Transunion and Equifax). You are entitled to at least one free credit report per year. The official site is www.annualcreditreport.com. However some states, like Georgia, allow you to receive two free reports per year.

If you have a FICO score of 700+, you’re doing great. If your score is 600-700, I’m not going to say don’t buy a house but you need to evaluate why your score is that low as well as realize you won’t be able to get the best mortgage rates. If your score is below 600, you don’t need to buy a house right now and with the current mortgage situation, you probably won’t be able to get a mortgage anyway. Get your credit right and revisit the issue in a year or so. However, DO NOT pay anyone who says they can fix your credit for you. Either they’re charging you to do something you can do yourself for free (disputing genuinely inaccurate info) or doing something dishonest and/or illegal.

Checking your credit reports is important because you never know what’s on there. I have excellent credit and always have but recently a collection showed up on my credit report. It was a bill from a city I hadn’t lived in for over three years and they attached a collection without ever contacting me. It took a few phone calls and faxing proof of when I moved out of the city but I got the collection removed.

The first thing you want to do is get any incorrect info removed (accounts that aren’t yours, accounts that are closed or paid off but don’t reflect that, etc.). If you do have negative information that IS accurate, you need to resolve those issues as well. If you have accounts in collections, get those paid. If you have late pays on accounts, call up the companies and ask if they’ll remove the negative notations once you have X months of on-time payments. However, DO NOT open or close any accounts. Both will generally hurt your credit score and you don’t want that to happen.

You don’t want to have credit card debt if you want to buy a home. However, if you do have debt, pay attention to your balance ratios. It looks bad if you are using more than 30% of available credit on any one card and more than 50% of your total available credit. For example, if you have a credit card with a $1000 limit, try to get your balance below 30% of that ($300). In a later post I will go into details about paying off debt vs saving for a down payment. However, this should get your started. If you guys have any questions, leave them in the comments and I promise to answer all of them. The next step (and next post) is GETTING YOUR MONEY RIGHT.

]]> http://www.msmoneysavvy.com/2009/11/09/homebuyer-credit-extended-so-you-want-a-house/feed/ 0 http://www.msmoneysavvy.com/2009/09/24/negative-home-equity/ http://www.msmoneysavvy.com/2009/09/24/negative-home-equity/#comments Thu, 24 Sep 2009 12:00:19 +0000 savvy http://www.msmoneysavvy.com/?p=372
Source: http://www.flickr.com/photos/robertkaleta/3660350489/

As always, I’m keeping my eye out for potential rental property.  Is anyone else considering buying a home (for residence or for rental) right now?

Condo/townhouse vs house – which is better? 

Well there’s no definitive answer.  Only you know what’s best for you.  Price aside, the main difference between attached and detached housing is lifestyle.  Do you want to share common areas (and walls) with your neighbors or do you want your own (separate) piece of land?  Do you dream of planting a garden or do you dread the idea of yardwork?

Neighborhoods – how to determine good vs. bad?

One major thing to look at is the school system.  It’s better to buy the worst house in a great school district than the best house in a crappy school district.  If you have children and live in a good school district, you will save money over living in a not so good school district and having to send them to private school.  Also, school district will matter when it comes time to sell.

Also, take a good look at the homes in the area.  Do people keep their homes and yards nice and have pride of ownership or are there broken down cars parked out front?  Drive through the neighborhood during the day as well as at night and on the weekends.  It is fairly quiet most of the time or does it become party central Friday and Saturday with music blaring?

How many houses are for rent or being rented out?  It’s no secrets that owners usually take better care of property and care more about the neighborhood than renters.  I would be leery of a neighborhood with a lot of houses being rented.

New construction vs. older home?

There are pros and cons to both.  My first house was new construction but my latest house was bought as a resale (two years old at the time).  With a new house, it’s nice because you get to choose everything – carpet colors, cabinetry, fixtures, etc.  However that also means that you will have to buy a lot of things that don’t always come standard – blinds, bathroom hardware, etc.  You will have to pay for any upgrades upfront.  Also, all new houses will have little glitches or issues that need to be resolved.  The house will settle over the first year or so, so you may notice little cracks or nail pops.  They are not cause for alarm though.

When buying a resale, someone else has already paid to upgrade everything and the house has already settled so you know exactly what you’re getting.  The landscaping has matured and most likely looks better than with new construction.  HOWEVER, you have to live with (or replace) the choices the previous owner made.  In our case, that meant a pink bathroom, a pink bedroom, a purple bedroom, murals painted on the walls…  It’s not all bad though because it also meant the basement was already wired for surround sound and a projector and they left the custom curtains in the two story foyer.

Ideas to pay off mortgages sooner than 30 yrs?

First off, unless you have a high interest rate, you would be better off (financially) investing any extra money because the rate of return will be much higher than the mortgage rate you’re paying.  In simple terms, if you have a 6% mortgage but earn 13% with your investments, it’s better to invest.  That said, a lot of people want to pay off their mortgage early for piece of mind or to improve their cash flow later in life.  There is nothing wrong with either tactic.  You should determine what your goals and priorities are and do what’s best for your situation.  Don’t let anyone tell you that what you’re doing isn’t the best thing to do.  Only you know what’s best for you and makes you comfortable.

If you do want to pay your mortgage off early, there’s the real easy way and there’s the slightly harder way.  The easy way is to simply round up your mortgage payments each month.  Let’s say you financed $100K at 5.875%.  Your payments will be $591.94.  However, if you pay an even $600 every month, you will pay off your mortgage 14 months early and saved yourself $5000 in interest payments.  And I’m sure you won’t even miss that extra $8/month.  The slightly harder way would be to throw the majority of your extra money at the mortgage each month.  However, I wouldn’t suggest that unless you have a healthy e-fund and are maxing out your 401k and IRA.  That’s just my preference though.  Once again, you have to do what suits you.

Duplexes vs. just sticking with the basics for a first time buyer.

That all depends on whether or not you want to be a landlord and whether or not you can afford the whole mortgage on your own if you don’t have a renter.  Can you deal with collecting rent every month and having people knocking on your door at all hours because the sink is backed up?  Do you have the stomach to evict someone if necessary?  Can you afford to pay the whole mortgage indefinitely in the event you don’t have a renter?  If the answer to all those questions is no, you should probably NOT get a duplex.

How long does it take to build equity in thinking of upgrading houses later on?

How it takes to build equity depends on your interest rate as well as if you make extra payments.  I would say don’t go into your first house with your mind on your next house.  First, if you’re not going to stay in a house for at least three years, you don’t need to buy.  You will most likely lose money on the deal (unless you’re fortunate enough to have bought in DC/CA/NY a few years ago).  Yes, lots of people have made lots of money in the last few years but that was then.  Also, bear in mind that you LOSE a big chunk of your equity when you sell because of realtor fees.  Let’s say you’re selling that $100K house for $110K two years later.  Guess what, you don’t walk away with $10K profit.  You have to pay the realtors which is generally 6%.  So you write a check for $6K and walk away with $4K plus any equity you had.  If you factor in all the home improvements you made as well as the property tax you’ve had to pay, you might have broken even.  From a purely financial point of view, you would have been better off renting.

Hopefully, this information has been helpful to you.  If you have other questions that haven’t been addressed, please feel free to post them in the comments section.

When you use those nifty online calculators that tell you how much house you can afford, it only gives you principal and interest (P&I) which may well be $900/month…BUT wonderful homeowner you are, you have to pay property tax and homeowner’s insurance now. Generally speaking, neither one of those is cheap.  Unless you have a downpayment of 20% or more, you will usually have to pay into an escrow account.  This means you pay property tax and insurance along with your mortgage every month and the mortgage company pays those two bills for you.  So you thought you’d be paying $900/month but you’re really paying $1050/month (for example).

Also, if you live in a townhouse or condo (and sometimes for single family homes too), you will be paying HOA fees.  For a nice complex, you can expect $100+/month.  Depending on where you live, this might cover garbage and/or water and it generally covers basic outdoor maintenance.  So now your $900/month mortgage has turned into $1150/month and you haven’t paid any other bills or bought any groceries.

Your utilities will probably go up, especially if you have natural gas heat (vs electricity).  And guess what else?  Houses need stuff.  No, you won’t buy all that stuff at once but for the first year, expect to drain your wallet on “house stuff”.  From lawnmowers to towel racks to blinds, there will ALWAYS be something you need to buy and I’m not even talking about decorating for real.  So you should budget an extra $250/month for increased utilities and “stuff”.  Now a $900/month mortgage has turned into $1400/month of expenses.  Still think you can afford it?

You have two types of expenses - fixed expenses and discretionary spending.  Let’s talk about fixed expenses first.  Not all of those are as fixed as you think.  While you probably can’t do much about your rent, there are ways to lower other expenses.

• TAX REFUNDS ARE NOT A GOOD THING!  If you squeal with glee every year when you get that fat refund check, stop now.  You’re giving the government an interest-free loan.  Rather than letting them hold onto your money, you hold onto it yourself in your online savings account.  If you get a large refund every year, you should adjust your withholdings so that less is taken out of each paycheck.  Funnel that money directly to savings because you can’t miss what you never had.  The IRS withholding calculator IRS withholding calculator will tell you how much you should be withholding and PaycheckCity will tell you approximately how much your check will be once you change your withholdings.

• Eliminate unnecessary features on your cellphone and home phone.  Do you really need *69 and 2000 anytime minutes?  Sure it may only save $5/month but all those little $5/month’s add up.  Wouldn’t you love to have $50-100/month extra just by putting forth a little effort?  Also, if you work for a large company like I do, you may be eligible for employee discounts.  Most of the cellphone companies will give 5-10% off just for being an employee.  And while your’re at it, cutback on the cable.  Do you really watch HBO, Showtime AND Cinemax?  Probably not.  Maybe stick with just HBO and save $20/month.

• Save money and the environment.  Make an effort not to waste water, electricity or gas.  Stop running the dishwasher and the washing machine half full.  Invest in programmable thermostats if you have high utility bills.  Also, don’t believe the hype.  You really don’t need a capful of detergent and a whole sheet of Bounce for every load.  Try using half as much.  I promise your clothes will be just as clean and just as soft and you’ll save money to boot.  Stop running all over town everyday too.  Combine your errands into one or two trips per week.  You’ll save time, money and wear and tear on your car.

• Are you getting the best rate on your car insurance?  If you haven’t done so lately, get online quotes from a few different companies to see if you’re getting the lowest rate you can.  Also, re-evaluate the coverage you have.  If you have an old beater that’s only worth $1000, it’s probably not worth it to have full comprehensive and collision.  Drop back to just liability coverage and save the difference.  Are you being charged for gap insurance?  Unless you’re upside down on your car loan, you don’t need it.  Drop it and save the difference.  Another cost-saving meaure is increasing your deductible if it’s below $1000.  Also, consider taking a defensive driving course.  This will lower your premiums as well.  Courses can be taken online for as little as $45 and an hour of your time.  I don’t have the link offhand but post in the comments if you want the link to the course I took.

• Credit card companies will help you if you ask.  I hope you don’t have credit card debt, but if you do, there are ways to ease the pain.  If you always pay your bill on time, call and ask the card company to lower your interest rate.  Most times they will.  If they won’t, call back in three months and ask again.  You can save hundreds of dollars a year in interest payments just by making a phone call. 

That’s all for now.  Tomorrow’s post will be about saving on discretionary spending.

• Open an online savings account. Why not a “regular” savings account, you ask. An online account will give you a better interest rate (3% or more) vs the 1% or less you will probably get at your current bank. In addition, you can’t easily access the money so there’s less temptation to overspend and dip into your savings. No ATM card and while you can transfer money out, it will take 1-3 business days to post to your checking account. I like both HSBC and ING Direct. Also, if you deposit $250 or more, ING will give you a $25 opening bonus – nothing like free money. (ING referral links are posted on the left sidebar. Disclaimer – You’ll get $25 and I’ll get $10.)

• Pay yourself first – Put everything but what you REASONABLY need to live on until your next paycheck (i.e. gas, groceries, etc.) into your savings account from the start. You can’t spend what you don’t have. If you only have $65 in checking until your next paycheck you will be forced to brown bag it rather than buying lunch everyday. I leave myself $50 extra over what I believe I need until my next paycheck but that money isn’t for spending. It’s in case something truly unexpected comes up. That brings me to my next point…

• Plan for it – Irregular expenses like car insurance are not emergencies and should not be unexpected. If your car insurance is $600 every six months, then you need to be setting aside $100/month (preferably in your “regular” savings account that’s attached to your checking account) so that when the bill comes, you already have the money for it. Apply the same technique for birthday/Christmas spending. If you know you like to buy $600 worth of Christmas gifts every year, you should be setting aside $50/month all year so you don’t have to charge it.

• Stop charging stuff! If you’re putting expenses on credit cards and you’re not paying the bill IN FULL every month, then YOU CAN’T AFFORD IT! You’re spending money you haven’t even made yet. You’re jeopardizing your future for Red Lobster and PF Chang? Come on, you’re better than that. If you’re like most people, you probably don’t even realize how much money you spend on unimportant things (the important thing being getting a house). So…

• Write down EVERY CENT you spend – This can be done with a notebook, Excel spreadsheet or software like MS Money or Quicken. You will be surprised to see how much money you nickel and dime away. Once you do this, you’ll see how much money you have to save as well as how much money you COULD be saving every month if you cut back your spending on the unimportant things. Next up….

• Create a budget but be sure to leave yourself some room for fun. It’s kind of like being on a diet. If you force yourself to eat healthily ALL the time, one day you’ll get tired of depriving yourself and eat the whole bag of cookies in one sitting. However, if you allowed yourself three cookies per week, you’d be better off for it.

I think that’s enough to digest for now so let that sink in and post any questions in the comments section. The next post will be WAYS TO SAVE MONEY.