3 Common Home Buying Mistakes You Probably Haven’t Thought Of

June 13, 2017

When the real estate market is hot like it is right now, I can’t help but compare it to “whack-a-mole” — as soon as a listing goes up (or in some places, even before), it seems like it’s sold. I can’t help but think of buyers who often have to make a buying decision within hours of touring a new listing or risk missing their chance to “whack” and score their dream home.

When preparing to shop for a new home, most people do a great job following the general financial guidance such as:

  • Reviewing their credit scores,
  • Paying off high interest credit card debt;
  • Saving 20% for a down payment; and
  • Coming up with a budget to spend only 25%- 35% of their monthly take home pay on housing (this includes mortgage, interest, taxes, HOA fees AND insurance).

But when the market hits “whack-a-mole” status, I’ve found that few people give much thought beyond the basics. Digging into my own, “don’t ask me how I know,” file, here are three more considerations that buyers should keep in mind as they shop, no matter how hot the market is:

  1. Think about selling before you buy. Unless you are 100% certain that this is your “forever home,” consider your future buyers before making an offer. One of the biggest mistakes I made when I bought my first home was that I failed to consider how “sellable” my home would be if I wanted to move in the future. Several years later when I did move, I had a hard time selling because I owned in a struggling school district, which eliminated parents as potential buyers, as well as others who knew that a school district could make or break your ability to re-sell. Before you make an offer, do some quick research on the neighborhood and school district so that when you decide to move, you’ll be able to cast the widest net and capture as many potential buyers as possible.
  2. Shop around for everything. If my #1 mistake was not considering a future move, a close second was not shopping for all of the products and services I would need in the home-buying process. My Realtor was not bad, but I relied on her for everything, including finding a mortgage. When I reviewed my mortgage options after the fact, I realized that I could have gotten a much lower interest rate. I also realized that I paid too much for my appraiser, home inspector and even my homeowner’s insurance and Realtor’s commissions. (I still #FeelLikeASucker) Do not make my mistake – no matter how awesome your Realtor is, ask about her commissions. Shop for mortgage rates and compare your options.
  3. Buffer your budget. No matter how many websites you read about homeownership, some expenses are going to catch you off guard. For instance, I grossly underestimated utilities. I created my budget using the average my Realtor gave me, not realizing that it was an average or really what that meant. So when I moved in record cold temperatures in January, my gas bill was much higher than average. My moving expenses were also slightly higher than I expected, and I failed to factor in the fact that I was paying the final utility bills for my old apartment, while also paying utilities for my new home. To avoid becoming house poor in your first month, make sure you add an extra 10%-20% to your first couple months’ planned spending to account for the unexpected.

Following the guidance above may take some extra time, but trust me, it will pay off in spades and your dream of home ownership won’t turn into a cautionary tale.

Is It Time to Downsize?

June 12, 2017

Last week I wrote about why my husband and I decided to upsize our home, so this week I’d like to take on its opposite: downsizing.

Downsizing — selling a larger home and moving into a smaller one — seems much more popular than upsizing these days. Mobile homes and RV trailers have been brilliantly rebranded as “tiny houses,” and there are hours of weekly television programming devoted to stories about families selling larger homes and moving into much smaller ones. In fact, my nine year old son, who is an avid fan of tiny house television, has been campaigning for us to move into a smaller home. (He is not likely to convince me.) However, you don’t have to go “tiny” to downsize. Any home that is going to be less expensive to own and maintain can be considered downsizing.

Why downsize?

Downsizing is a natural response to changes in your family needs and financial priorities. Downsizing to a less expensive and/or smaller home may be right for you if:

  • The kids are grown up and you don’t need that much space anymore;
  • You can’t afford the house you are in with its related costs while still funding other goals such as retirement, paying off debt or building emergency savings;
  • You want to move to a better school district but homes are more expensive there.
  • You are prioritizing financial independence over increasing your current lifestyle;
  • You seek a home that makes it easier to live in as you get older (e.g., single story, walkable neighborhood, etc.); or
  • You want to spend less time maintaining your home and more time enjoying life.

Downsize your costs without downsizing your space

I live in the New York City area, where housing is very expensive. A common topic of conversation between my husband and I, especially when paying property taxes, is whether we should sell our home then take the equity and buy the same house in a less expensive state. We wouldn’t have a mortgage, and all our related costs would be lower.

Our friends recently did just that. They sold their home in a neighboring town and bought a larger, yet less expensive home in a southern state – near a beach! It may be hard to move while you are building your career or putting your kids through school, but not so hard to do when you are empty-nesters like our friends.

Alternatives to downsizing

For new retirees, there are other ways to downsize costs without downsizing amenities. Here are a few ideas:

  • Co-housing: An intentional community with private homes that share common spaces and responsibilities, co-housing is a growing practice among seniors from the Flower Power generation.
  • Share your home: Many retirees are looking to share their homes, either by renting out rooms or apartments in their own homes, in order to reduce costs and have companionship.
  • Move overseas: Adventurous retirees are moving overseas in droves, to less expensive ex-pat friendly retirement destinations where the cost of living is lower but the lifestyle is pleasant.

Why stay put?

If your total housing costs (mortgage, taxes, insurance, utilities, maintenance) are 35 percent or less of your net income (income after taxes), there’s no need to rush to downsize. There are plenty of reasons to stay put for the time being:

  • You may like your current home and its size fits your family.
  • You like your neighborhood and schools.
  • Your home can be easily modified to “age in place.”
  • You want to stay near your grown children or aging parents.

Moving is a big decision and our sense of community is often connected to a physical location. If your housing costs are not breaking the bank and you’re not sure if it’s the right time to move on, it may make sense to stay put until you have a clearer idea of where you want to go and what makes sense for your goals going forward. You can always change your mind in the future.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

Are You Really Ready To Upsize Your Home?

June 05, 2017

Real estate season is in full swing — everywhere I look in my area there are homes with “For Sale” signs. There are some larger homes for sale in my neighborhood, and the families who buy those neighbors’ homes have multiple children and want room to grow and an excellent public school system. Have you been wondering whether it’s time to make a move to go bigger? How do you know if you should stay where you are for the time being instead? Here are the factors to consider:

What can you afford?

You’ll have the most financial freedom in your life if you keep total housing costs (mortgage, taxes, insurance, utilities, maintenance) to 25 to 35 percent of your after-tax income. For example, if your family take home is $4,500 per month, your monthly housing costs would range from $1,125 to $1,575. With a 20 percent down payment and a 30 year mortgage at 4 percent, that’s a purchase range of approximately $212,000 to $300,000 (see calculation here). I realize the 35 percent ratio could be a challenge in an insanely expensive city like Los Angeles or New York, where housing costs can eat up to half or more of a family’s income, but it’s a helpful guideline for maximum financial ease.

Why upsize to a bigger home?

When we moved back to the United States after an overseas assignment in Bermuda, a country with a very high cost of living, it was the bottom of the U.S. housing recession. Great deals on large homes in good school districts were available, so we upsized our living space to have room for three kids and lots of visitors, and still spent less than our previous location’s housing costs. This house will be too large for us once all the kids are grown up, but for now, we’re happy with the decision. Upsizing may be right for you if you can afford it and:

  • You would like the space for all your kids;
  • Grown children or grandchildren are moving in with you;
  • One or more parent(s) are moving in with you;
  • You’re moving to a less expensive state and you can afford more house for the same cost;
  • You need more space for a home office/business; or
  • You’ve always wanted to have a big house – it’s a serious bucket list item.

You’ll upsize a lot more than your mortgage

Caution: with a bigger house or bigger acreage, you’re upsizing more than your mortgage. Everything costs more: property taxes, homeowner’s insurance, home maintenance, furniture, painting, landscape, etc. Make sure you take those increased costs into account when figuring out how much you can afford.

If your mortgage is 30% bigger, your other bills will be as well. For example, if you upsize from a $200,000 mortgage to a $300,000 mortgage you should expect your related costs to go up by a third as well. Upsizing can also prompt “keeping up with the Joneses” syndrome, where you feel like you must compete with neighbors who have a more lavish lifestyle. Finally, if you frequently have visitors, do you really need or want to accommodate them in your home, or would it be better and cheaper to put them up in a nearby hotel over time than to pay the costs of upsizing?

Or should you stay put?

A bigger house is a bigger financial commitment. If you can’t afford the total costs, you’ll be “house poor.” If you just can’t decide what your next home purchase should be and at what price it makes sense, there are plenty of reasons to stay put instead of upsizing to a larger home:

  • You like your current home and its size fits your family;
  • You enjoy your neighborhood and your neighbors;
  • You and your spouse don’t agree on what to do next;
  • You don’t want your kids to have to change schools;
  • The costs of selling a home and buying a new one may not make it worth it to move right now; or
  • You believe real estate prices will rise on your street over the next few years, so you are willing to wait to sell.

Moving is a big decision. Our sense of community is often connected to a physical location. You may find that going bigger gives you a more spacious and satisfied feeling, assuming you can swing the additional expense. On the other hand, if you’re not sure if it’s the right time to move on, it may make sense to stay put until you have a clearer idea of where you want to go and what makes sense for your goals going forward. There’s always next spring to revisit the question.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

How Should You Invest In Your Roth IRA?

April 20, 2017

If you’re like many people I’ve talked to recently, you may have decided to contribute to a Roth IRA before the deadline on Tue. However, it’s not enough to open an account and fund it. After all, a Roth IRA is simply a tax-sheltered account, not an investment. You still have to decide how to invest the money. Here are some options to consider:

Use it as an emergency fund. If you don’t have enough emergency savings somewhere else, you can use a Roth IRA as part or all of your emergency fund since you can withdraw your contributions tax and penalty-free at any time and for any purpose. (Earnings are subject to taxes and a 10% early withdrawal penalty before 5 years and age 59 ½ but the contributions all come out first.) In this case, you’ll want to keep it someplace safe and accessible like a savings account or money market fund. Once you accumulate enough emergency savings elsewhere, you can invest it more aggressively for retirement.

Save for a short term goal. A Roth IRA can also be used penalty-free for a first-time home purchase (up to $10k) or education expenses. If you intend to use your Roth IRA for either goal in the next few years, you’ll probably want to keep it in savings.

Choose investments that complement your other retirement accounts. For example, you may want to use your Roth IRA for investments that may not be available in your employer’s plan like real estate, gold, commodities, emerging markets, international bonds, and microcap stocks. They can help diversify a more traditional mix of bonds and large and small cap US and international stocks.

Choose a more conservative mix for early retirement. If you’re planning to retire before becoming eligible for Medicare at age 65 and are planning to purchase health insurance through the Affordable Care Act (assuming it hasn’t been repealed and replaced), a tax-free Roth IRA can help reduce your insurance costs because the insurance subsidies are based on your taxable income. Since a large percentage of the account may be coming out over a relatively short period of time, you may want to invest it more conservatively than your other retirement investments.

Choose more aggressive investments for long term tax-free growth. If you’re not planning to withdraw your Roth IRA early, you may want to take the opposite approach and use it for the most aggressive parts of your portfolio. That’s because the account is growing tax-free and may be the last to be touched. (It helps that Roth IRAs aren’t subject to required minimum distributions.) Some examples of more aggressive investments would be emerging market and small and micro cap stocks.

Keep it simple. If this all sounds confusing and you want to just keep your investing as simple as possible, you can look at each account separately. For example, you might choose a target date retirement fund for your Roth IRA since it’s a fully diversified one stop shop that automatically becomes more conservative as you get closer to the retirement date. All you need to do is pick the one with the date closest to when you think you’ll retire and set it and forget it. If you want something more customized, you can also use a robo-advisor or design your own portfolio based on your particular risk tolerance.

Like all financial decisions, your choice begins with your goal. Are you trying to save for emergencies? Do you plan to use the account early or late in your retirement? Or do you just want to keep things as simple as possible?

 

 

 

What Qualifies as Deductible Mortgage Interest? (The Answer Might Surprise You)

March 22, 2017

When it comes to being able to deduct the interest you pay on a mortgage, most people correctly assume that this applies to a home that you use as your primary residence. (There are some wonky rules around limits on the deductibility of certain types of mortgage interest from home equity loans or loans in excess of $1 million, which are best explained by Figure A on this page.) But many are surprised to learn that they may also be able to deduct interest paid on a second home and are even more surprised when they learn what the IRS considers a “qualified home.” Generally speaking, in order to be considered a home, a property must have sleeping, cooking and toilet facilities.

This means a boat, camper, or even a tricked out old ambulance could qualify as long as it has a bed, a stove and a toilet on board, and as long as any loan you took out to purchase the property is secured by the actual property. In other words, if you used a credit card to buy that fancy yacht, you can’t deduct the interest you pay on your card. But if there is a loan document that you signed that basically collateralizes the boat/home (aka if you don’t pay the loan back, the lender can repossess the property and sell it to satisfy the debt), it’s a mortgage and the interest is technically tax deductible. In most cases, the lender will send you a Form 1098 showing how much interest you paid. That’s one clue that you have an actual mortgage.

Another surprising aspect of the rule is that you don’t have to live there full time. In fact, you don’t even have to use it at all during the year as long as it’s not rented out. Note that if your second home is rented out, you may still qualify to deduct the interest. You just have to use it more than 14 days or more than 10% of the number of days it is rented, whichever is longer. If you don’t meet that qualification, you may still realize a tax benefit from interest paid, but it will be applied against the rental income you generate.

You shouldn’t go out and buy a second home, boat or RV you can’t afford just for the tax deduction, but it is worth knowing, especially if you’re looking into buying a second home for your future retirement or just a place to vacation throughout the years. If you’re thinking of taking out a loan to buy a boat or RV, make sure you shop around to get the best rates. Dealers often offer financing deals, but it’s worth it to double check that your bank or credit union can’t offer you a better deal. You can use this mortgage loan comparison tool to compare up to 3 loans and see which is the best financial deal.

 

Kelley Long is a resident financial planner with Financial Finesse, the leading provider of unbiased workplace financial wellness programs in the US. For more posts by Kelley or to sign up to have her weekly post delivered to your inbox each Wednesday, please visit the main blog page and sign up today.

 

Should You Use an Escrow Service?

February 06, 2017

If you are taking out a mortgage for the first time, one of the important decisions you’ll face is whether or not to establish an escrow account. My colleague Cyrus Purnell, CFP® and I were discussing this recently. Here’s what we decided are the essential FAQs for homeowners:

What is a mortgage escrow service?

An escrow account, in the case of a mortgage, functions as a middleman between a homeowner, tax entities, insurance companies, and anyone else whom the homeowner designates to pay with the funds saved in it. It is typically a mandatory savings account attached to the larger mortgage payment. Mortgage escrow services are popular with mortgage lenders because they prevent foreclosures due to the lack of payment of property taxes.

Advantages and disadvantages

One of the major advantages of an escrow is convenience. Rather than making individual arrangements to separately save for property taxes and insurance, these expenses are included in one payment. It’s the same principle as automating your monthly bills and 401(k) plan savings. A mortgage escrow service offers you a way to save for large bills monthly. That way the money is already there when you need it.

Another benefit is that you may get a slight reduction in your mortgage rate for maintaining an escrow account. Escrow accounts can function as an unintentional buffer to reality as well. If property taxes or insurance rates go up, you may delay action to shop for less expensive coverage or dispute a property tax appraisal because the escrow covers it. The lender benefits by having an escrow in place for taxes and insurance because it protects against the risk of the collateral for their loan (your home) being auctioned off by the county if those expenses are not paid. It also reduces the uncertainty of the property not being insured against catastrophe.

However, when purchasing a home, the up-front funding for the escrow account can add several thousands to the closing costs. The escrow generally has to maintain a minimum balance, and if taxes and fees come in higher than estimated, your escrow payment may grow to replace that minimum balance. This can cause uncertainty for your housing budget year-to-year. Another disadvantage is that some escrow accounts do not earn the account holder any interest. If you have a substantial amount to pay in property taxes, imagine an account holding thousands of dollars earning no interest.

Whose responsibility is to pay the taxes and insurance?

It’s your lender’s responsibility to pay your taxes and insurance. Generally, that happens without a hitch. However, keep in mind that it’s your responsibility to make sure that it has been done. If the lender didn’t pay, you could experience a lien against your property for unpaid taxes and/or a cancellation of your homeowners’ insurance policy. You should receive an escrow statement at least once per year that shows what has been collected and paid out.

Problems do happen, luckily rarely. When we first bought our home in NJ, our supposedly reputable national mortgage lender collected funds in an escrow account but didn’t pay our property taxes. We got a past due notice from our town, and it took some sleuthing to discover what the lender had done or not done.

Our town assessor’s office was very helpful once they saw our escrow statement and gave us a grace period until we could get it worked out with the lender. Although the lender apologized for their mix-up, it won’t surprise you to learn that we refinanced with another lender soon after that. We haven’t had any problems since.

Can you avoid using an escrow service?

Yes, but not always. Some mortgages require escrow accounts, especially for first-time home buyers or home buyers putting less than 20% down. If you pay your home down below 80% loan-to-value, you may be able to request removal of the escrow account, but there may be a fee for doing so.

Keep in mind that the escrow is not in place to protect the lender only. If you choose not to escrow, you will need to be very confident in your ability to save for the property taxes separately. You may also want to look into having the insurance premiums auto-debited as well.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

Should You Move For a Job?

January 23, 2017

Have you received an interesting offer to live and work somewhere else? Moving to a new city can be very stressful, especially if it involves changing jobs or re-locating with an existing employer. While this stress can be heavy on the person dealing with the job change or transfer, it can also affect others.

Before you accept the move and start plotting your appearance on HGTV’s House Hunters, you and your family will have to work through some tricky decisions. That’s the scenario my fellow planner Brian Kelly, CFP® was discussing with an employee on our Financial Helpline recently. Here’s what he had to say:

1. Don’t base your decision solely on the new salary. Think about how far your income will go in the new city. If you are moving to a place where the cost of living is much higher, you might have to eventually answer this question: “Is the location worth it?” The answer to this question might just be “yes, it is worth it to live in a smaller house near the ocean or have to spend more in a town that has more amenities,” but this is a trade-off that you should be aware of. You will also want to consider new expenses you are not currently budgeting for such as traveling to visit family and babysitters.

2. Calculate your net pay after benefits. Employee benefits are now a large part of a person’s compensation. Taking a new job with a salary increase but weaker benefits can actually decrease your total compensation so factor these in. See this guide for calculating the value of your benefits.

3. Consider your spouse’s career too. Think about this in a longer term perspective. In 5 years, is our “team” going to be better off?

4. How does the move affect your children? Moving children can have effects on their education, their relationships and possibly their well being. Do some research on school systems and after-school care. This might impact your decision on where to buy or rent.

5. How does it affect your parents? Some grandparents’ retirement plans center around time with their children and grandchildren. Others will need elderly care. You might need an extra bedroom in your new home.

6. Should you purchase a home right away or is it wise to rent for a certain time period? Purchasing a home is a major financial decision. The closing costs alone can make a short-term home buying decision a bad one if you have to sell before the house appreciates in value.

7. Lastly, you have to consider the real possibility that it doesn’t work out, for whatever reason, and have a plan B. Companies fail, managers can be impossible to work with, the job doesn’t turn out how you thought it would, parents get sick, or you just miss home.  In that case, have a backup plan.

Checklist of things to do:

  • Create a side-by-side budget with current and new income and expenses. Factor in cost-of-living and benefit changes.
  • Have a family meeting with spouse, children and/or parents to discuss how the potential move will affect them.
  • Visit before you make the final decision. See the new work facility, meet and interview people you will work with and check out schools and areas where you might want to live.
  • Research school districts and after-care if necessary.
  • Compare the costs of renting and buying a home. Consider renting, even if it’s temporary, until you are sure of where you want to live.
  • Articulate a plan B just in case.

Once you’ve worked through the action steps, the wisdom of one path vs. another should be more clear. What does your head tell you? Your heart? The balance of both will help you make the best decision for you and your family.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

 

How to Avoid Taxes on a Home Sale

January 20, 2017

Someone recently asked me if they were going to have to pay taxes on the sale of their home. They were downsizing out of a big house and were going to move into the “in-law quarters” of one of their children’s homes. This person was absolutely 100% convinced that he was going to have to pay taxes on the gains from the sale of his house since he wasn’t “rolling the gains” into a bigger house.

When I told him what the tax code says about capitals gains tax, he told me I was wrong. So with him in the office, I called a friend (on speaker) who is a CPA and asked what the tax implications were for selling a home. The CPA said exactly what I said, without prompting, and the soon-to-be-seller was still dubious.

So what is the real story on how the gains from selling a home are treated? According to IRS Topic Guide 701, you can exclude up to $250,000 (single) or $500,000 (married) of gains from the sale of your house IF it has been your primary residence for 2 out of the last 5 years. That’s it. It’s that simple.

There is no rule today about what you have to do with the proceeds. There were things like that in the tax code in the past, but the tax code is an ever-evolving entity. The biggest test is the 2 out of 5 years, which is very easy for most home sellers. IF the house has been your primary residence for the last 2 years, you’ve got a $250,000 or $500,000 tax-free gain.

If you’re married and your home has appreciated by $600,000, CONGRATULATIONS!!! The tax on the sale of your home will be $600,000 (gain) – $500,000 (exclusion) = $100,000 (taxable gain) * 15% (capital gains rate) for a $15,000 tax upon sale. You can buy a house, watch it go up in value by $600,000 and only pay $15,000 in taxes!  The tough part is finding a house that goes up in value by $600,000!

Here’s how you could possibly use this piece of the tax code creatively and to your advantage in a time when housing prices are rising. It’s a hypothetical situation and I can’t imagine anyone really doing this, but it illustrates the tax code’s interesting nature. You’d have to live as a bit of a minimalist to make this work. Moving a bunch of “stuff” can be time consuming and expensive, so the less you have to transport from one place to the next, the easier this is.  This only works if your home value increases regularly……

Step 1 – Buy a house.

Step 2 – Live in it for 2 years.

Step 3 – Buy a second house, move into it and rent out house #1.

Step 4 – Live in house #2 for 2 years and buy house #3, renting out houses #1 & #2.

Step 5 – Sell house #1 by the end of year 5 and the gains are tax-free since it was your home in years 1 and 2.  You could sell house #2 as well and pocket the tax-free gains.

With this example, you can see that if you’re willing to move A LOT and housing prices rise quickly, you could potentially never pay taxes on the gain from the sale of a house. In the real world, though, the IRS code allows most of us to sell a home with zero or a very small capital gains tax in comparison to our overall gain. Fortunately, for the dubious person in the meeting recently, he used his own laptop, went to www.irs.gov and was able to find that my answer was indeed factually correct. By the time the meeting ended, he was a surprised and happy home seller.

 

 

7 Questions to Ask a Prospective Real Estate Agent

January 05, 2017

Whether you’re looking to buy or sell a home, one of the most important decisions is who you select as your real estate agent since this will likely be the person you work most closely with during the transaction. You can identify prospective agents by asking family members, friends, and other professionals you work with (financial planner, accountant, lawyer) for recommendations. Then be sure to interview several of them and ask the following questions:

1) Are you a REALTOR®? People often use the terms “realtor” and “real estate agent” interchangeably, but they’re not always the same thing. While all REALTORS® are licensed real estate agents, not all real estate agents are REALTORS®. The main difference is that as members of the National Association of REALTORS®, REALTORS® have to follow an additional code of ethics. While this doesn’t mean that every REALTOR® is more ethical than every non-REALTOR®, it certainly can’t hurt to choose someone who has at least made a commitment to a higher ethical standard and is subject to penalties for violating it.

2) Who do you work for? As a seller, your agent always works for you. But as a buyer, be aware that an agent can also be working for the seller. Even “buyer’s agents” often work for a “dual agency” that represents the seller as well. You can search for an “Exclusive Buyers Agent” here.

3) How long have you been working in the area I’m buying/selling in? This question has two objectives. The first is to screen out agents that may be new and just starting out. You probably don’t want to be their “learning experience.”

The second is to measure their experience in your particular neighborhood. An agent who’s unfamiliar with the area you’re interested in may only be slightly more helpful than one who’s new to the business. After all, much of their value comes from bringing the kind of local, specialized knowledge that you may not be able to find with an online search.

4) How will you work with me? As a buyer, some of what you’ll want to know are how the agent will find prospective homes, how often they’re available to show places to you, and how they would handle multiple offers. As a seller, you’ll want to know how they will market the home and the fee that they’ll charge (which is negotiable but top agents will charge more). In either case, ask if the agent will let you cancel the agreement if you’re not satisfied with their service.

5) Who else do you work with? Agents typically play the role of quarterback with the other professionals that may be involved (mortgage broker or loan officer, home inspector, real estate attorney, and title and homeowner’s insurance agents) and can help you select them. Ask for a list of their recommended professionals, but be aware that if they are labeled as “affiliated,” the agent may be receiving compensation from them.

6) Do you have references? If an agent is experienced and has a lot of online reviews, you may not need to ask this question. However, it can be an important one for a new agent. Not having any references might be a red flag. You may also want to check your state’s real estate regulatory agency to see if any complaints were filed against them.

7) What documents do I need to sign? Make sure you look at them before signing and keep copies. If you’re a buyer, you’ll want the buyer’s broker agreement, agency disclosures, purchase agreement, and buyer disclosures. If you’re a seller, you’ll want the agency disclosure, listing agreement, and seller disclosures.

Finally, don’t’ forget the importance of personal chemistry when choosing a real estate agent. They may answer every question correctly, but if you just don’t feel comfortable with them, you’re probably better off with someone else. Buying or selling a home can be stressful so you’ll want an agent that can help alleviate rather than add to that stress.

 

 

 

 

Will Refinancing Save You Money?

December 14, 2016

The general rule of thumb is that if you can refinance to a new mortgage rate that is at least 1% lower than your current rate, it’s a good idea. But there are other things to consider in that decision, namely any closing costs associated with completing the refinance. This refinance calculator will tell you exactly how many months it would take you to recoup the closing costs through decreased interest, which is useful for a few reasons.

First, if you’re planning to move in the foreseeable future, you may find that the breakeven date is beyond when you may actually get there. This is what we found when we evaluated a refinance opportunity. Assuming you’re planning to stay in your house indefinitely, then knowing the breakeven date can help you decide how to actually fund those closing costs. If you have the cash in a savings account, it also lets you know how long it will take to rebuild your balance, assuming you take the monthly interest savings and deposit it to your savings.

What if you don’t actually have the cash available? It can be tempting to roll the closing costs into the new loan, but then you’re paying interest on that as well. An alternative strategy could be to use a 0% interest credit card to pay the closing costs (beware of any fees if you have to use it for a cash advance) then use your savings to pay off the card.

Where the breakeven date comes in handy is that it tells you whether or not this strategy will work. If you have a card with a promo rate that runs out in 10 months but your breakeven is 12 months, then it may be a bum deal. You’ll be paying credit card interest for those last two months, so make sure you enter that into your calculation.

Refinancing can be a great way to lower your payment. Try to keep the new loan term as close to your original loan’s term as well. Otherwise, you may have a lower rate and lower payment, but the total interest could still be higher if you spread it out over more years.

Finally, I find that a lot of people avoid finding out what rate they qualify for because they’re concerned that the hard inquiry into their credit will lower their score. It’s true that too many hard inquiries (when a lender actually pulls your credit to evaluate you for a loan) can have a detrimental effect on your credit score, but the character of the inquiry matters too. Applying for a mortgage refinance is unlikely to knock your score down enough to make a difference. What hurts is when you hit the mall and open up multiple store cards to save on your purchase. Take a break from those types of credit applications within six months of applying for any type of loan.

 

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What to Expect When Closing on a Home

November 28, 2016

You’ve found your perfect home, you’ve qualified for a mortgage to buy it and it’s passed inspection by a qualified home inspector. Now it’s time to sign on the dotted line. A closing is the last step in buying and financing real estate.

If you are buying a home for the first time, you’ll be in for a surprise. There’s a lot more to do in order to cross the finish line. Here’s how to make sense of the process:

Your lender will ask for a lot of documentation

Your mortgage lender has given you approval for your loan, conditional on you documenting your income and assets. Be prepared to submit:

  • Tax returns
  • Account statements
  • Pay stubs
  • Documentation of the sources of recent, large bank deposits

Your lender is likely to have a “trust but verify” attitude towards your documents. They want to see everything. Make sure you include every page, including the mysterious “this page left intentionally blank” one that you think doesn’t matter. Lenders typically run an additional credit check on borrowers right before closing date, so make sure you don’t do anything which could jeopardize your loan, such as opening a new credit card, taking a car loan or switching jobs.

You’ll need homeowner’s insurance

You will need to give proof of your new homeowner’s insurance policy to your lender, so start shopping around. Ask your real estate agent for suggestions on insurance carriers if you are new to the process. Make sure to get at least three written quotes before you decide on a policy. For more tips on shopping for a homeowner’s policy, see this blog post. FYI, if you live in a flood or earthquake zone, those aren’t included in a traditional policy, so decide if you need flood insurance or earthquake insurance.

You can’t bring cash to a closing

The cash you need to close can’t actually be paid in large bills.  Make sure you receive and understand the written instructions on whether to bring a cashier’s check or plan for a wire transfer of funds on the closing day.

Review your loan estimate

It’s up to you to understand the terms of the loan agreement you’ll be signing. Your lender will send you a loan estimate. Review this very carefully and make sure that the written terms of the loan match what you’ve discussed. You can use this guide from the CFPB as a framework. Be proactive about asking your lender questions if there are differences in what you have discussed and the loan estimate terms.

You can shop around for closing service providers

Closing costs can be expensive, especially costs relating to title. Not all of them are fixed, however. You can shop around for services in section c of your loan estimate (“Services You Can Shop For”):

  • Title costs, including insurance, title search and settlement agent
  • Pest inspections
  • Survey

Receive a closing disclosure and other key documents

Your lender is required to give you a closing disclosure statement three business days prior to your closing. Use this checklist as a guide to double check that all the details on the closing disclosure are correct. If you find that something isn’t correct, contact your lender immediately and ask for an explanation.  Ask for your other closing documents in advance in order to review them:

  • Mortgage (also called security instrument)
  • Promissory note
  • Initial escrow disclosure
  • Right to cancel form

You may want to consider hiring a real estate attorney to review your documents before closing.

Take a final walk through

The last step before you start signing paperwork is to take a walk through the home with your real estate agent to make sure the home is still in the same condition it was when you made your initial offer. Make sure that everything that the seller agreed to repair is repaired and that items they agreed to leave in the home (such as a washer/dryer, air conditioners or curtains) are still there. If there are big problems, this could potentially push back the closing or even void the deal. See this article for more walk through tips.

Don’t sign anything you don’t understand

Read everything you’ll be signing and ask questions about things that don’t seem clear or seem different from what you expected. This is the step that many homeowners skip and later regret. Remember, it’s up to you to understand the legal documents you are signing. Use the CFPB’s closing checklist for things to review before, during and after your closing. Don’t sign anything until you are comfortable that it’s correct!

 

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8 Inexpensive Ways to Prepare Your Home for Sale

November 14, 2016

Are you selling your home or thinking about doing so? Time to get to work – your home needs a pre-sale makeover. Once you’ve decided to sell it, think of your home more like a product and less like your home. You probably don’t want to invest a lot of money in major changes (despite what certain home renovation shows encourage). Here are eight inexpensive ways to prepare your home for a satisfying sale:

Remove Half of Your Stuff

Buyers want to imagine themselves in your home, and they can’t do it if it’s full of your stuff. Banish your clutter and create spaciousness. Unless you’re a minimalist, you probably have a lot to remove. Now is the time for a major purge.

For most items, if you haven’t looked at them in  a year, you probably don’t need them anymore. Homes for sale also generally look better with less furniture, so get some feedback from your real estate agent on what to remove. Spend as long as it takes to clear your house of half your things: throw away, recycle, donate, and sell what you no longer want and put the rest in a storage unit. See this list from Realtor.com for decluttering tips before a home sale. Everything that’s left should be arranged neatly, with personal items out of sight and off floors and surfaces.

Fix the Problems That Are Easy to Fix

Do you have marks on the wall from nails, discolored grout in the bathroom or an old refrigerator? You might not notice them, but a potential buyer will. Make a list of all the small projects and get a handy person in for the day to fix them all (or if you’re the handy one block out time to do this). If your appliances are old – and you have the cash – consider replacing them. For a checklist of things you should consider repairing, click here.

Repaint the Walls

Consider repainting your walls with neutral colors if you haven’t repainted in the past two years or you have highly personal color choices. If you are handy and detail-oriented, you could consider doing this yourself. If you’re not, a professional painter is worth the money.

Refresh Your Floors

Beautiful wood floors can add value to your home. If you have them, consider refinishing them if they are damaged or scratched or update them to a modern stain. According to Realtor.com, costs can be as low as $1 per square foot for recoating and as high as $5 per square foot for a custom look. If you have older carpet, consider replacing it (costs $1-$10 per square foot installed for) for a fresh and clean look. If your carpets are newer, get them professionally cleaned.

Clean the Inside until Spotless – and Keep it Clean

Even if you’re a clean freak, you’ll probably have to keep your home even cleaner while you’re showing it to potential buyers. Once you’ve refreshed your interior, give your home a top to bottom cleaning (or hire someone to do it for you). Think of it as if you are “detailing” your home. Look at every baseboard and around every light switch. Your home should pass the white glove test.

The hard part will be keeping it that way during the period you are showing your home. That’s when you’ll be glad you removed half your stuff. There’s less to clean now!

Beautify Your Yard

Once the inside of your home is squeaky clean, you can turn to the outside. Rake leaves, mow the lawn regularly and weed all your gardens. Put down mulch (if you use it) for a fresh look. Plant flowers around your home and/or in pots by your front door.

And speaking of the door – does it look good? If not, add that to the list of things to be painted. For more tips on landscaping your home to increase curb appeal, click here.

Upgrade Your Lighting

Good lighting can add to your home’s appeal to potential buyers. Make sure each room has at least three sources of lighting. This could be overhead lighting, standing lamps, table lamps, etc. Real estate agents will often leave all the lights on when showing a home so use energy efficient bulbs (and prepare for higher electricity bills during that period). For more tips on lighting, see this article.

Hire a Professional Stager

There’s a science to making homes look their best for a sale. Consider consulting with a home staging expert to set your home up for maximum appeal to potential buyers. A stager will work with what you already have in your home to rearrange and redecorate. Please don’t take her feedback personally if she doesn’t like your floor to ceiling collection of knickknacks and wants to banish them to storage. It’s a stager’s job to look at your home objectively to have the broadest appeal to buyers.

Selling your home can be an emotional time. The process you go through to prepare your home for sale not only sets you up to succeed, but also prepares you for your eventual move. It’s work – but it doesn’t have to be expensive!

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

Are You Ready to Buy A Home?

November 03, 2016

With all the speculation about interest rates possibly moving up soon, I’ve been hearing a lot of talk from people about buying a home. You may want to buy, but are you ready? The answer involves a lot more than what interest rates are expected to do. Here are some questions to ask yourself:

How’s your credit? If you’re planning to get a mortgage, one of the first things the mortgage company will do is run a credit check. To get the best rates, you typically need a score of 740 or above. If yours is lower, you’ll pay higher rates or you may not even qualify for a mortgage at all.

One of the quickest ways to improve your credit is to order a copy of each of your 3 credit reports from annualcreditreport.com (free every 12 months) and dispute any errors you may find that could be hurting your score. Another is to pay down credit card or other consumer debt, which also improves your debt/income ratio. If neither of these can improve your score in time, you may just have to build a positive record of on-time payments and wait for your score to rise over time.

Do you have enough savings for a down payment and closing costs? Ideally, you would have enough savings to put down 20% to avoid paying PMI, although mortgages with lower down payment requirements are available. You’ll also likely need another 2-5% of the purchase price for closing costs plus whatever you plan to spend on furniture, renovations, etc. This should be in addition to your emergency fund, which will be even more important with your home on the line.

Can you afford the higher payments? Contact a mortgage broker or loan officer to get a quote and see what your monthly payments would be with different purchase prices. Don’t forget to include estimated costs for insurance, taxes, utilities, and maintenance/repairs. Then see how this would fit into your current spending. It’s important to do this analysis before you even start looking at homes so you don’t fall in love with one and then talk yourself into being able to afford it.

Would buying be cheaper than renting? The rule of thumb is that you need to keep a home at least 3-5 years to make it worth the transaction costs and the risks of the home falling in value. You can do a more precision calculation with this Rent v Buy calculator from the New York Times that factors in everything from how long you plan to keep the home to the tax benefits of home ownership to the opportunity cost of not being able to invest the money you spend on the down payment. If you have a really good deal on rent, or home prices are particularly expensive, or you just don’t plan to stay put for long enough, renting may actually be more financially beneficial.

Are you ready emotionally? The numbers may make sense but they won’t matter if you don’t actually feel comfortable buying. Being a homeowner means freedom from a landlord but it also means being tied down to a home that you’re responsible for. No financial calculation can tell you if you’re ready for that.

 

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How to Make an Offer for a Home

November 02, 2016

If you’re a fan of home-buying shows that follow couples who are seeking a home in a new city, looking for a deal to flip or even searching for a much smaller home to live more simply (how do they do that???), then you’re probably familiar with some of the factors that go into looking for a home that provides a good value without over-paying. But one thing those shows don’t broadcast are the negotiations for price and how people actually arrive at what they will offer. Making an offer for a house is not just a wild guess. There are some things you and your real estate agent can do to find a price that will be accepted without overpaying. Here are some expert tips:

First, ask your agent to do a comparative market analysis (CMA). This is basically a mathematical analysis of homes that are similar to the one you’re looking at, including the number of bedrooms and baths, the square footage, the neighborhood, etc. and evaluates whether yours is priced in line with recent sales and other current listings. The CMA report will include the specifics of the properties used in the comparison so you can use your judgment as to how relevant the comparable pricing may be.

Keep in mind that it’s the sales price that matters, not the list price. There’s a rehabbed home in my neighborhood that’s listed for 50% more than the buyers paid a year ago. Sure they’ve done a lot of work to the property, but enough to double its price? Since it’s been on the market for several months now, I’d say that prospective buyers feel the same. Once the home sells, then we’ll know what it’s really worth.

As you’re deciding on what price to offer for “your” property, pay attention to the adjusted average sales price in your CMA. First, throw out comparables that are extreme, like a teardown/rebuild that was sold as a foreclosure or on the higher end of the spectrum, homes that are overly upgraded or way nicer than the one you’re looking at. Then adjust the average price by how the remaining comparables actually compare to yours:

  • Are they smaller or larger? More beds/baths or less?
  • Do they contain similar upgrades and features? (When we bought our top-floor condo, we felt it was only comparable to other top-floor units, even though many of the similar sales in our neighborhood were middle or ground floor. We were willing to pay a premium to not have footsteps overhead)
  • Are they actually in the same neighborhood? Depending on where you are looking, one street over can make a difference in price, so pay attention to proximity.
  • How long ago were they sold? The more recent the sales transaction, the more relevant the sales price.

Use your powers of reasoning to decide how comparable these other homes actually are. The averages aren’t worth much if there’s nothing nearby that’s similar to yours. That’s one of the issues with estimator sites like Zillow. It uses publicly available information to estimate values, but doesn’t adjust for things like inferior location or big upgrades post sale.

For example, Zillow shows our property losing $25k in value in the two years since we purchased due to several foreclosures and low sales prices on our street in the past year. What Zillow doesn’t “know” is that this is one of the hottest neighborhoods in the US right now and all of those properties were teardowns being rebuilt into multi-unit condo buildings similar to ours that will sell for possibly $100k more than our purchase price. Once those condos sell, I expect the estimated value of our place to far exceed what we paid.

Finally, knowing where the market is in terms of trends will play an important role in determining your offer price. Here are some factors to consider:

  • Buyer’s market versus seller’s market: If it’s a seller’s market, you may find yourself competing with other buyers and making several offers. In a buyer’s market, you’ll have more time to do analysis.
  • Number of days on the market: If you’re looking at a home that’s been on the market for a couple months, especially in a seller’s market, you’ll definitely be able to offer a lower price than if the property was just listed.
  • Timing: Generally speaking, spring and summer are hotter markets than fall or winter. The other timing factor is interest rates. Don’t buy a house just because rates might go up soon, but if you’re planning to buy, potential rate increases could add a sense of urgency that limits your bargaining potential.
  • Seller’s motivation: If you can suss out why the current owners are selling and you learn that it’s due to a pending divorce, job relocation or other more urgent need, you’ll know you can probably go lower than if they were just seeing if they could sell.

At the end of the day, your agent will be a tremendous source of guidance and advice in this area, which is one reason it’s important to find someone who specializes in the neighborhood you’re looking in. Here are two final tips when making your offer:

Make your best offer on your first offer. Assuming the sellers will counter could lead to a flat out denial, especially if you’re competing with other potential buyers. It can be tempting to play the “how low can we go” game, but if you really want the house, don’t play the game.

Don’t offer more than what the property can appraise for. Plenty of people learned this the hard way back in 2008–2010 after they paid top dollar for homes that ended up appraising tens of thousands of dollars less than they owed after the bubble burst. If a seller accepts your too-high offer and the appraisal comes back lower, you could end up back to square one without a deal.

Stick to what you can afford and accept that if you don’t get the house you want, it wasn’t meant to be. We had this experience with the first offer we made and our agent saved us from making a big mistake. We lost to someone who offered $25k more than the listing price, which in retrospect was a bad move… for the other buyer.

 

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When Should You Go the DIY Route?

October 24, 2016

Have you ever wondered, “when does it pay to have a professional do it versus doing it myself?” My fellow planner, Cyrus Purnell, CFP® and I were chatting about our funny home improvement adventures. Then the conversation turned to other areas where sometimes it’s better to go it alone and sometimes to get help. Here’s what he told me:

A couple of weeks ago, I saw an Instagram post of a buddy of mine with his face buried in his hands and a pair of car keys with the hashtag #failmomentoftheday. Apparently, he tried to program a new key for his wife’s car and managed to deprogram both keys. The result was hiring a tow truck to haul the car to the dealership – what he was trying to avoid in the first place.

I spoke with him afterwards and he mentioned he was convinced to go the DIY route after watching YouTube videos. If alcohol is liquid courage, YouTube is definitely digital courage. My own failures after a little digital courage include: various attempts to fix my car and lawnmower, burnt pieces of meat offered up to the grill gods and a Craigslist’s furniture fixer upper which now resides in my attic.

I can now laugh at these DIY disasters. However, sometimes doing it yourself may not be a laughing matter. At what point does the cost of making a rookie mistake outweigh the price of having someone else do it?

When does it make sense to hire a financial advisor to help guide you in decisions related to your nest egg? Should you try to write your own will? Can you find the best insurance and mortgage rates on your own? Here are some thoughts on the value of hiring a professional:

When should you hire a financial advisor?

The value of a financial advisor is found in their ability to work with you to build a portfolio you can tolerate during the inevitable ups and downs of the market. Time in the market generally beats timing the market and a good advisor can help you stay on track in this area. Additionally, once your nest egg is in place, a good financial advisor helps you design a strategy which allows you to take income.

If you want to invest outside of your employer’s retirement plan and retirement is more than 10 years away, DIY investing can make sense. There are a lot of low cost investment options to consider or robo adviser options which can function as an “advisor lite.” If you are simply not comfortable going alone or you are nearing your investment goal, it may be time to interview an investment advisor.

Financial advisor is a generic term so you may want to look for someone reputable and with training specific to your needs. My colleague Erik Carter wrote a blog post that explains exactly what to look for in a trusted adviser: https://www.financialfinesse.com/2012/10/04/can-you-really-trust-your-financial-adviser/. Doing your due diligence is so important my CEO wrote a book about it: What Your Financial Advisor Isn’t Telling You: The Ten Essential Truths You Need to Know About Your Money. That’s a good place to start to see if you really need one.

When do you need a professional to assist with estate planning?

An estate plan can direct where your assets such as a car, home, business, savings, etc., will go in the event of your death. Our own mortality is not the most pleasant topic, but it is one we all deal with it. A well thought out estate plan can make it much easier for those we leave behind.

If you have a blended family or assets across multiple states, professional assistance is especially helpful. If you think a trust might be necessary, you will certainly need to have an attorney to establish one. If you are looking for an attorney that practices estate planning law in your area, a great resource is your local estate planning council: http://www.naepc.org/. Also consider looking into whether your employer offers a legal assistance benefit.

Do you feel your situation does not merit hiring an attorney? Then it can make sense to find a tool to help you put a will in place. Websites like nolo.com offer wills which conform to the laws of your state.

When do you need to hire a tax professional?

If you are filing a 1040EZ or you are not claiming deductions beyond your home and your kids then using tax software will typically do a good job of filing your taxes at a minimal cost. There are cases when a software program may not be the right fit though. If you own a small business, collect income from rental property or if you are settling an estate, hiring a certified public accountant or an enrolled agent can be a very prudent investment.

If you are going to pay someone to help you, hiring a CPA, EA or an attorney would be preferable because they can speak to the IRS on your behalf if you are ever audited. Not only can these professionals help you file your taxes, but they can also give you advice regarding how to run your business to take maximum advantage of the tax rules. The IRS actually offers a site to find qualified professionals in your area: https://www.irs.gov/tax-professionals/choosing-a-tax-professional

When should you work with  a mortgages or insurance broker?

From personal experience, I can suggest the more “plain vanilla” your circumstance is the more likely you can save some time and money online, but the more complex your circumstances are, the better off you may be with a seasoned professional. What is not “plain vanilla?” In the case of life, disability, and long term care insurance, if you have a health condition that could be viewed as negative or uncommon, it may pay to talk to an insurance broker. They can point you to the right companies that will insure you in spite of that condition. In the case of a mortgage, if you have some instances which merit explaining on your credit report, it may pay to have a mortgage broker shop and find the bank or mortgage company that would look more favorably on your situation.

Knowing whether to hire someone or DIY can be tricky. Hopefully this gives you an idea of when to call someone. Otherwise, you may experience your own #failmomentoftheday.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

 

Sometimes It Does Take a Rocket Scientist

October 03, 2016

Portia Jackson believes that people should be able to design their finances around their lives and not their lives around their finances. A business strategy coach and former rocket scientist who is studying financial planning, Portia joined our team this year for a long term financial planning internship. I recently had a fascinating conversation with her about her world view and why she is pursuing her CFP® designation. The future for this mother and financial wellness evangelist looks bright!

Why did you become a personal coach? What influenced your decision to pursue the CFP® designation? How do you see combining those two paths?

I became a business strategy coach after many of my original podcast listeners (I used to host a podcast for working moms, Working Motherhood) kept emailing me and asking me how I was able to run a business, work full-time and manage my family, including a daughter with special needs. I loved my podcast and it gave me fulfillment, but as I started working with the members of the Working Motherhood, I realized I LOVED coaching so much more! I get to help people see an immediate difference in their lives? Yes, please!

I decided to pursue the CFP® designation after teaching a workshop course on tackling debt for many years. I loved the impact I was making on people’s lives and seeing the weight lifted off their shoulders after they realized they wouldn’t be in debt forever made my heart sing. I wanted that feeling all day every day so I decided to change careers and become a financial planner. I also wanted to do it right so I knew I had to be a CFP® professional. The two paths easily combine because I believe the combination of a solid financial plan (i.e. 6 months emergency fund, zero debt, fully-funded retirement and college plans, home ownership, estate plan, tax minimization and proper insurance coverage) with working at something you love to do is a complete path to financial wellness.

How does your background as an engineer influence your financial planning and personal coaching style?

My engineering background helps me as a financial planner and coach because I’m very data-driven. I work off of action, not just “what could happen.” If something isn’t working, I can course-correct. Planning a launch of a billion-dollar rocket and launching someone’s business or retirement plan are both very important so I use my strategic background to reduce some of the uncertainty that can surround those areas.

What’s your personal mission? Who do you most want to help?

My personal mission is to free people from financial stress and bondage so they can then pursue their personal mission in life. I feel that many times the amount of energy people put into worrying about money (even if they are doing everything “right”) can be put toward their personal calling in life. I believe everyone has a specific purpose in life and that purpose often goes unfulfilled because they are stuck in a job they dislike just to pay the bills and then they are too exhausted to do anything else or sometimes people are doing everything right and still can’t afford a decent lifestyle.

They aren’t trying to keep up with the Joneses. They just want to be able to own a home, have insurance, travel maybe 1-2 times a year and send their kids to college. In an expensive place like Los Angeles, that can easily add up to a lot.

What is the biggest mistake you ever made with your money, and what did you learn from it?

The biggest mistake I’ve ever made with money was buying a rental property at the age of 23 in a bad neighborhood with no money down in 2005 in Chicago right before I moved to Los Angeles for grad school. I really don’t know what I was thinking when that happened. Actually, I do. I was focused only on the POTENTIAL cash flow. Those late night real estate ads were apparently very convincing to me.

The property was a big pain the butt. It sucked up all of the money I won from a game show I was on and commercials I booked while I worked in Los Angeles. It also caused a LOT of stress for me during what should have been one of the most exciting times in my life.

What have you learned about money and marriage that you can teach the rest of us?

I’ve learned that communication is key and that understanding each other’s personality types is really important when it comes to family finances. My husband and I have monthly financial meetings, where we review our budget, our net worth statement, our financial goals and the financial mission statement we’ve written for our family. I’m the CFO of our family and while I can typically recite the budget down to the penny, he is the bigger visionary and wants to see where we are going.

When you got married and had children, did you feel prepared to deal with the financial aspects of partnership and parenthood? What do you wish you had known in advance?

We felt pretty prepared going into marriage because financial planning was part of the two pre-marital classes we took. (We like to be thorough, haha.) When our kids came (very soon actually, we had a honeymoon baby) it wasn’t too much of a disruption to our budget, although the budget for sending kids to daycare could feed a small country for a while.

How do you teach your kids about money?

Our kids are just 4 and 2 right now so we haven’t really had the money discussion yet, but we plan to use the envelope method that I used growing up — one envelope for giving, one for saving and one for spending. They will earn money through chores as they will not receive an allowance. As parents, we believe that we are to be mentors to our kids and train them for the real world and in the real world, there are very few handouts.

Is there anything that really surprised you about coming to intern at Financial Finesse?  Why?

Yes, I was surprised that workplace financial wellness as a type of  business actually existed. When I was searching for a place to complete my required experience hours for the CFP® designation, I came across many opportunities to sell products or gather assets, but I never heard anyone lead with the benefit of changing lives and offering unbiased financial guidance with no ulterior motive or sales pitch, which is what we do at Financial Finesse. The passion that everyone has here for helping people and for extending this vision to more people is truly amazing and a rare jewel in the financial services industry. Unlike in my brief wire house days of seeing people get excited to close a sale, people at Financial Finesse are excited about a great Financial Helpline call or one-on-one planning session.

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can also follow me on the blog by signing up here, and on Twitter at @cynthiameyer_FF.

 

 

Lessons in Home Buying

September 20, 2016

I was recently at an overdue dental appointment talking to the dental hygienist, Jana. I try to talk about anything that distracts me from the drilling and moans of pain I hear in the other booths. She started telling me about her new home purchase and how she used lessons learned from her last property to make a better decision – like giving her kids free reign to run around the house. I will admit that I have never heard of this as a house hunting strategy, so I asked for more info and below is what I learned from our conversation:

Test drive a new house. She said the mistake she made with her first home was that she did not think to check on how soundproof the home was, especially with four kids. When she was looking for a new home, she brought all of her kids with her and unleashed them in the prospective homes to test the sound quality of the different rooms. If you value peace and quiet with kids, have your kids go upstairs and be loud (they will love this), walk through the rooms, and close the doors to gauge the sound quality of the rooms

Neighbors are your best friends. Jana mentioned that after she bought her home, she talked to the neighbors and learned most of them were moving out within the next few years because the neighborhood was recently redistricted into a not-so-great school system. This time she walked around  prospective neighborhoods and struck conversations with neighbors who were not shy about telling her about the good, the bad and the ugly of the community. This saved her from potentially buying a home in an area that she learned was having major traffic issues during rush hour traffic – enough that some of the neighbors had formally complained.

Don’t just relay on what a real estate agent tells you. Visit a neighborhood you are thinking of living in during different hours to get an idea of the traffic flow and talk to neighbors. Many are not shy about giving you their opinion.

You get what you pay for. For the first home she bought, she went with the home inspector that was the cheapest. She was not present during the inspection and ultimately paid the price with plumbing, appliance and roofing issues. This time, she interviewed home inspectors and paid an additional fee for a more thorough inspection. She also stayed for the entire inspection, asked questions along the way and was able to get a rough idea of whether the repairs were small or large.

She said the lessons she learned saved her from making another home buying mistake and helped her get into the home of her dreams. Take the time, like Jana did, to take the extra steps to make sure you are choosing the right home for you. It will go a long way into making your home buying experience a good one.

 

 

How This Millennial Couple Bought Their First Home Before They Thought They Were Ready

August 17, 2016

We often discuss planning for obstacles in our financial planning workshops, acknowledging that even the most perfect plans need contingencies. Life happens! So when our director of PR, Danielle, and her husband Adam discovered they were expecting their first child a few years before they had planned to start their family, they obviously had to shift some of their other plans. “Obstacles” aren’t always negative things!

Danielle shared with me that she and Adam had a 3 year plan that included purchasing their first home before having kids, so when they found out they were expecting, the home purchase plan was pushed back. When she announced they were closing on a home less than 7 months after their son was born, I had to know how they worked that out! Here’s what I learned and what we can all learn from prioritizing goals and examining our spending, in an edited interview with Danielle:

Me: When did you and your husband start thinking about buying a house?

Danielle: We’d been talking about buying a home since we got married in 2014 as part of a three-year plan, but when we found out we were having our little boy earlier than we’d planned, buying our first family home became a ‘when we can’ sort of goal that sat on the back burner for about a year. We kept saving but weren’t looking seriously and were even discussing renewing the lease on our apartment when we filed our 2015 income taxes. The straw that broke the camel’s back was our tax guy telling my husband, “You need more kids and a house” to write off as we were paying a ton in taxes. We started our search then.

Me: Did it happen on the timeline that you planned?

Danielle: Surprisingly, it happened before we had planned. We didn’t think we could afford a home or were ready for the responsibility. When we realized that we’d saved enough for the required down payment and could get a pretty low rate because of the current economy, we thought now’s the time!

Me: What were the initial financial moves you made to start the process?

Danielle: We had to get our financial ducks in a row, so to speak. First, we checked our credit scores to see what kind of a rate we could get. My husband works in mortgage, so we had a pretty firm grasp on what we could qualify for and what the best program was for us based on our income and down payment savings.

We crunched the numbers to decide what our maximum monthly payment could be and then after dreaming a bit, settled on what a comfortable payment would be, and started looking. I am SO glad we stuck to the lower amount, even after looking at some awesome homes in our peak price range! We also decided to pay off some credit cards to make sure we could qualify since my husband’s income, being commission-based, could get complicated through the loan process.

Me: Did you make any changes to your spending in order to save for a down payment?

Danielle: Yes! We had been cutting back for about a year prior to looking, like going out to eat less and cutting our cable back from the full package to a basic package while using Netflix instead. I also have a hybrid car, so I started charging it more instead of filling up for more mileage on less money. We cancelled magazine subscriptions we weren’t using, and I cancelled my gym membership because our apartment complex had a pretty nice one on the premises.

My husband and I are pretty impulsive, so saving money is hard for us, but we knew we had to change those habits – especially if we were going to be responsible for a mortgage! We have been working hard to do that and it’s paying off. We also said “NO” a lot more to friends who invited us out for social events. Not only were we trying to save more in general, we were expecting a baby so we knew saving needed to be our number one priority!

Me: What tips or tricks did you learn from working at Financial Finesse that helped in this process?

Danielle: I have learned so much about simple ways to save money that can really equal large amounts of savings. I remember sitting at the counter with my husband and talking about where we could cut back. At first, it felt like nowhere!

But when we really began to break it down, we found hundreds of dollars every month we could save. That was pretty cool. I’ve also learned a lot about using credit wisely and keeping your debt to income ratio balanced, which paid off in the home buying process.

Me: Was there anything you wish you’d known before about buying a house that you have learned?

Danielle: Yes! I didn’t realize how difficult it is to buy a home in a competitive market like Southern California. It was extremely frustrating and at times, I couldn’t help but feel like the industry is pretty biased in some areas.

We were finding it was hard to even get our offers looked at. We were beat on several homes by all-cash offers, which is to be expected. What caught us off guard was that we were being completely overshadowed by offers that were being written by an agent acting as both the selling and buying agent.

This seemed crazy to me. How is this legal? It made it impossible for anyone who wasn’t working with the selling/buying agent to get a look.

When we lost a home we really wanted because the agent held off on even showing our offer to his client in order to give his buying clients a chance to put theirs in first, we learned our lesson and ended up going through the selling agent ourselves on the home we finally did get. As a result, we had to pay our agent outside of contract for all of his work with us AND the selling agent for getting our offer accepted. We were so desperate at that point, we went ahead with it, but if we weren’t needing a home (our lease was up in 3 weeks at this point!) we probably wouldn’t have done it.

Me: How does this change your financial picture going forward?

Danielle: It has helped us lay down our roots to really start planning for our future. We look around our new place and think, “Wow this is ours!” and it feels so good to not be paying someone else’s mortgage! Now that we have a home with a comfortable payment, we are focused on saving for our son’s education, preparing for more children and saving for our retirement someday. It was definitely the right decision for us even though we didn’t anticipate making the move for another year.

Me: What words of advice do you have for other young families who are thinking about buying their first home?

Danielle: Do your research. Don’t rely on what listing agents are sending or telling you. Go to open houses yourself and talk to the agents.

Get a scope of what the seller is looking for. It’s always good to get as much information as you can about what you’re going into. Compare loan rates at different financial institutions and ask about first-time home buyer programs.

Also, don’t skimp out on the inspection! My husband and I spent nearly $1,000 on three different home inspections because we decided to go with a very thorough inspector instead of a cheaper, less thorough one. As a result of what he found, we backed out of two homes that would have ended up being financial nightmares for us down the road.

Finally, start saving now. We didn’t honestly think we could buy a home this soon after having our son, but saving was pretty painless, and it wasn’t nearly as hard as we expected to cut back on things we rarely used anyway. Pick 2-3 small expenses you can cut and start there. You’ll find that it’s kind of fun to see how much you can save every month!

Thank you so much to Danielle for sharing this experience and wisdom! For tips on applying for a mortgage, check out Five Things to Know About Applying for a Mortgage. Now you tell me – what things did you learn as you saved and shopped for your first home? Anything you’d do differently? Please email me, share on our Facebook page or send me a tweet @kclmoneycoach.

 

 

Do You Know the Real Costs of Home Ownership?

August 15, 2016

How much does owning a home really cost? It’s more than you think it will. Owning a home requires more financial resources than just paying the mortgage. You must be prepared to make an ongoing investment in the care of your home. If you are thinking of buying a home or just want to plan better for the costs of keeping up your property, take this quiz to test your home ownership savvy:

1. What kind of damage does a standard homeowner’s insurance policy cover?

a) sewer back up

b) flood

c) termites

d) none of the above

Answer: d  Homeowner’s insurance is designed to cover events that are sudden and accidental, not things that could be prevented with routine maintenance, such as pest control or inspecting a sewer line for tree roots. In addition, standard homeowner’s insurance policies do not cover floods, but flood insurance may be purchased from the National Flood Insurance Program. Many homeowners find this out the hard way after a problem has already occurred.

Review your homeowner’s insurance once a year to make sure you’re covered for your risks. For an additional premium of $50-$400, you may be able to add coverage for certain perils to your standard policy. If you are considering buying in a flood region, keep in mind while flood insurance averages $700 per year, premiums can be exponentially higher if you live in a very high risk area.  Make sure you keep additional cash reserves in the amount of your homeowner’s insurance deductible as part of your emergency fund.

2. The average annual cost of a home repairs and maintenance is:

a) one half of 1 percent of the home’s value

b) 1 to 4 percent of the home’s value

c) $2500

d) $1250

Answer: b  What will you do when the furnace breaks, the roof leaks or you need to replace a washing machine? Don’t forget to look at maintenance costs before leaping into home ownership. For a $250,000 property, that means budgeting $2,500 to $10,000 for home repair and maintenance costs every year.

While it’s difficult to predict what is going to need repair or replacing during the year, count on the fact that something is going to require work. Have a brand new home with new appliances? You can probably get by for the first decade by reserving 1 percent of your home’s value in liquid savings to meet repair/maintenance expenses. Got a 150 year old house? You may find that maintenance and repair costs closer to 4 percent of the home’s value per year.

3. How much more will a mortgage cost if you have fair to good, but not excellent, credit?

a) .25 to 1.5 percent more than the rate of borrowers with high credit scores

b) .25 percent less than the rate for borrowers with high credit scores

c) the same as the rate for borrowers with high credit scores

d) people with fair credit scores will find it very hard to get a mortgage

Answer: a  The average FICO score for U.S. borrowers is good but not excellent, at 695. At current rates, a borrower with that score would pay about  four tenths of a percent more than a borrower in the highest tier of credit scores. According to this calculator for a $200,000 fixed rate 30 year term mortgage, the borrower with the average FICO score would pay $15,768 more in interest over the life of the loan given current rates – about  $44 more per month. Try this mortgage loan comparison tool to compare mortgages.

4. Maintaining the land and gardens surrounding my home is likely to require regular:

a) tree trimming and removal

b) lawn care, such as buying a lawnmower and garden tools or paying a landscaping service

c) investments in plants, bushes and other garden features

d) all of the above

Answer: d  If you have outdoor space, maintaining the lawn and garden is an important component of your home’s value. Doing all the work on the lawn and garden yourself is cost effective, but it will still cost money for equipment, plants and outdoor furniture, so make sure to include that in your annual budget. If you plan to hire help, expect to pay $40-$120 per visit for landscaping and lawn care, depending on where you live and the size of your property. Tree care is not something people can usually do on their own, so if you have large trees, make sure to budget for a tree service. The cost of trimming or removing just one large tree could be as much as $500 to $1000 because of the hazards involved.

5. When buying a home, homeowners generally spend how much on furnishing their new space:

a) $15,147

b) $3,895

c) $5,288

d) $9,733

Answer:  c   According to a National Association of Home Builders study, new home buyers spent $5,288 on furniture in the first year after buying a home built in 2004 or later. Many homebuyers fail to budget for what it will take to turn their house into a home that meets their personal aesthetic. It is unrealistic to think you won’t want to make changes. Expect that you will want to personalize your new space with paint, furniture and accessories and include those costs in your home buying budget.

Do you have questions or comments about the costs of home ownership? Email me at [email protected]. You can also follow me on Twitter @cynthiameyer_FF.

 

 

Should You Buy or Rent?

August 11, 2016

This is a question I recently got on our financial helpline and one that I’m struggling with myself right now. The conventional wisdom is that renting is “throwing money away,” but owning a home also involves throwing away a lot more money than it may seem. One way to see this is by using a “Buy vs Rent” calculator like this one from the NY Times. Not only are you paying interest on the mortgage, there’s also maintenance costs, taxes, the opportunity cost of not being able to invest any extra money you put towards buying, and the transaction costs of buying and selling. Here are some things to consider before making one of the biggest financial decisions of your life:

How long do you plan to stay? For most people, this is probably the single biggest deciding factor. The longer you stay, the more buying usually makes sense because it takes time for the financial benefits to outweigh closing costs and real estate agent commissions, not to mention the risk that the home could actually be worth less when you try to sell it. It’s generally better to rent if you plan to stay less than 3-5 years.

What mortgage rate can you qualify for? To get the best mortgage terms, you typically have to have a credit score of at least 750 and put down 20%. If your credit isn’t so great or if you can’t make much of a down payment, you may want to delay buying until your credit or savings is in better condition.

Where would you invest any extra savings? If you can save more by renting and earn a good return on those savings, renting may be better. For example, if you’re not contributing enough to max your employer’s match, or have high-interest debt to pay down, or are just an aggressive investor, the return on your savings can be quite high.

What’s your tax bracket? The higher your tax bracket is, the more you can save by deducting mortgage interest and property taxes. Just be aware that you only benefit to the extent that these itemized deductions exceed your standard deduction.

How handy are you? As a homeowner, you won’t be able to call the landlord anymore when something needs to be fixed. If you can keep maintenance costs down by doing a lot of your own work or even by being a savvy shopper, buying might be more beneficial.

I’ve been renting, but I’m now considering buying a home. I should be able to qualify for a good mortgage rate and I’m in a moderately high tax bracket. On the other hand, I think I can also earn a decent return on my savings if I rent, and I’m not the most handy person.

The tie-breaker might be how long I would plan to live in my next home, which is a tough call that involves a lot of big life decisions. In the end, the decision to buy or rent often comes down to an emotional one. There’s nothing wrong with that as long as you’re aware and okay with the financial consequences as well.