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 Follow Elizabeth Warren’s Money Management Advice?

March 16, 2017

While much of the country is discussing the president’s tax return, I stumbled upon an interesting article from a few years ago about the finances of one of the president’s possible opponents in 2020, Senator Elizabeth Warren. The article is titled “You, Too, Can Invest Like Elizabeth Warren” and is based on the information she submitted in a financial disclosure report along with tips from a financial planning book she wrote called All Your Worth: The Ultimate Lifetime Money Plan. Regardless of what you think of her politics, should you follow her financial recommendations? Before we get into the investing side next week, let’s take a look at the first set of recommendations called ”First Things First:”

1. Get debt free. Warren recommends that you “Drain your savings account, empty your checking account, and sell any stocks or bonds” to pay off all your debt. Warren herself has no debt except for a $15k student loan at 0% interest. In some ways, her advice makes a lot of sense. If you’re paying 18% interest on a credit card, paying it down is like earning a guaranteed tax-free 18% on your money and will also improve your credit score.

However, there are a couple of reasons why you might not want to “drain your savings account” to become debt-free. What if you suddenly find yourself in between jobs? You generally can’t put those mortgage or car payments on a credit card so now you risk losing your car and home. You can’t always rely on lines of credit either since they can be cancelled, especially if you’re unemployed or if the economy is weak. That’s why it’s always important to have some emergency savings (ideally enough cash to cover at least 3-6 months worth of necessary expenses) even before paying down high-interest debt.

Second, you might not want to pay off any debt balances early that have interest rates below 4-6% like many mortgages and student loans. That’s because you’re likely to earn more by investing that money instead. Perhaps that’s why Warren hasn’t paid off that 0% loan yet. This is especially true if you’re not contributing enough to your employer’s retirement plan to get the full match and leaving that free money on the table.

2. Don’t buy a sailboat if you work at Wendy’s (or are a journalist). What Warren really means is that 50% of your income should go to needs, 30% to wants, and 20% to savings. But how can you really separate “needs” and “wants?” Is your home a “need” because you “need” somewhere to live or a “want” because you’re paying extra for a really nice place you “want” in a great location? The same goes for everything from the car you drive to the food you eat.

This also seems like too much of a one-size fits all approach to me. Your spending and saving should be based on how you decide to balance your various personal goals and priorities. For example, I personally save a lot more than 20% of my income because achieving financial independence is a high priority of mine and I’m willing to live in a small studio apartment and not have a car to do it. If you work at Wendy’s and are willing to live with your parents and not spend much money so you can achieve your dream of buying a sailboat, go for it. As long as you understand and are willing to accept the trade-offs, do what makes YOU happy.

3. Pay off your mortgage if you have one. Mortgages tend to be low-interest and we already addressed the downside of paying off low-interest debt early, but mortgages have an additional benefit in that the interest is also tax-deductible. That means if you’re in the 25% tax bracket, a 4% mortgage costs you only 3% after-taxes so that’s the number you should consider when deciding whether to make extra payments. (You can calculate your mortgage tax savings here.) In fact, considering the low mortgage rates and the tax breaks, there’s even an argument for NEVER paying your mortgage off.

Of course, there’s much worse things you can do than getting debt-free, creating a money management plan, and paying off your mortgage. I just think her advice is overly simplistic. Next week, we’ll take a look at Warren’s investment advice…

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.

What If I Can’t Pay My Mortgage?

January 31, 2017

Recently, I received a call from a friend that was laid off a few months ago. She was worried that it was taking longer than she thought to find permanent employment and she was not sure how long her savings would last. She was concerned about not being able to pay her mortgage and was looking for options. My guidance for her was to do the following:

First, contact your mortgage lender ASAP. Even if you are current, contact your lender to let them know you may have a problem in the future. The earlier you contact them, the more likely they are to work with you and the more programs you may be eligible for.

Assess your situation. Most options will involve assessing your current finances to determine your ability to pay your mortgage now and in the future as well as a written reason why you cannot pay your mortgage. Create a budget and assess what you can afford to pay.

Then review your budget for areas where you can cut back. Shelter is essential, so if you are current on your credit cards and late on your mortgage, consider focusing on your mortgage. Ideally, your home expenses (mortgage, HOA dues, etc.) should not take up more than 25%-35% of your take home income.

In my friend’s case, her situation was temporary and her mortgage was affordable. She had savings and could always do contract work if she could not find a permanent full-time job. If your financial situation is temporary and you will be able to pay your mortgage plus catch up on overdue payments in the future, consider the following options:

Forbearance. A forbearance temporarily reduces or suspends your mortgage payments for a set period of time. Keep in mind that once your forbearance period ends, you are expected to set up a plan to get current on your mortgage, which means paying both your current mortgage and overdue payments.
Repayment. If you can make your current mortgage payment but struggle to repay overdue payments, a repayment plan may be an option. A repayment allows you to spread your past due amounts over a period of time.

If your financial situation is long term or you will have difficulty, making payments to get your mortgage current consider the following options if you want to stay in your home:

Modifying your loan. Your lender agrees to change the terms of the loan to make the payments affordable. The changes may involve changing the interest rate, the length of the loan, or the payment amount or adding past due amounts to your mortgage principal.
Refinancing. If you are current on your mortgage and have equity in your home, you may qualify to refinance your home. You get a new mortgage with interest rates and terms that may lower your payments. Even if you do not have enough equity in your home, you still may qualify for refinancing under the government’s Home Afforable Refinance Program (HARP).

If you if find that even with a modification you may not be able to afford the mortgage payment or you are ready to leave your home consider the following options:

Deed-in-Lieu. Also called a mortgage release, a deed-in-lieu is an option where your lender agrees to let you voluntarily transfer the property title to them in exchange for being released from your mortgage obligation. This option can negatively impact your credit score.
Short Sale. Sometimes known as a “pre-foreclosure” sale, a short sale is when your lender agrees to let you sell your home for less than your mortgage balance. This option may be a consideration if you do not qualify for a refinance or modification and your home is worth less than the mortgage. This option can also negatively impact your credit score.
Renting. Depending on your location, you may be able to rent your home until you are ready to sell or your financial situation has improved enough to where you can afford the payments. Websites like Zillow can give you a gauge as to how much you may be able to get in rental income.

As you can see, there are a lot of options. The most important thing is to keep the lines of communication with your lender open. The earlier you contact them, even if you are current, the more options they may have for you and the more likely they are to work with you.

Should You Pay Off Your Mortgage Early?

December 23, 2016

One of the questions that I have fielded fairly often in my career as a financial planner is about paying off a mortgage vs. keeping it for those who have the ability to write a check and pay it off all at once. I have had a lot of discussions with my friends who are in financially -oriented careers as well as with friends who have no financial background but who always show an ability to use common sense. After years of having this same debate, we have found that there is no true consensus around this topic. But we have come up with the most important points to consider on each side.

In favor of keeping the mortgage: If the mortgage rate is 4% and it’s tax-deductible, the tax-adjusted cost of the loan is around 3%. If you can do better than 3% on your investments, keep paying the mortgage and invest your cash.

In favor of paying it off: For every dollar you pay in interest, you get a tax break of maybe $.25 to $.40. To me, that sounds like losing 60-75% of each dollar. The total interest cost can be 2-3x the amount borrowed over the life of the loan. You still lose over half of each dollar paid in interest with the tax impact factored in.

And in down markets (not that we’ve seen one since 2008), you not only lose money in your investment accounts (think about the -37% S&P 500 returns in 2008), but the interest on your mortgage is lost opportunity cost. Paying off the mortgage in Jan ’08 would have yielded a 4% return with the assumptions above. Keeping it would have cost 41%, the 4% paid in interest along with the 37% lost if your returns were similar to the overall US stock market. A mortgage can be viewed as a means of leverage, and as we’ve seen with the financial markets, leverage isn’t always a great thing.

I have seen dozens of “keep vs. pay off” mortgage calculators. The inputs on the calculators usually include the interest rate of the mortgage, the investment account’s assumed rate of return, and income and/or tax rate of the homeowner, along with other more specific data items. The one thing that is NEVER seen in these calculators is “How are you wired? How would you sleep best at night? Do you like having a mortgage or do you really despise owing money to anyone?”

The most sophisticated calculators miss the single most important factor in this decision. Which option feels best to you? Financial planning isn’t always about the numbers. Sometimes human behavior and psychology are even more important.

In my experience, the option that feels best is the option that individual will choose. This is the same in your financial life as well as with exercise and nutrition. The things that work best are the things that you feel are consistent with your internal wiring.

There is a lot of analysis, discussion, calculations, changing of assumptions, and an enormous amount of time devoted to this decision. In the end, I’ve seen that what matters is the emotional viewpoint of each individual. Almost always, emotions outrank number crunching in this kind of analysis.

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 I Learned From an Early Retirement Package

November 11, 2016

Over the last few weeks, I have been having a whole lot of conversations about retirement with employees of one of our client companies. They are offering an early retirement package (ERP) to a fairly large number of employees, and they have a fairly short window of time in which to make a decision about accepting it or declining the offer. When retirement is no longer something that has a long term time horizon and is suddenly presented as an immediate opportunity, what is important suddenly becomes crystal clear, and that is slightly different for each person.

I have been able to make some observations on the factors that have driven the decision for most of the candidates for the ERP. It isn’t hugely surprising, but these factors are helping people make one of the most important decisions of their lives. So let’s learn from them so that we can be in a great position to make our retirement decisions with a clear head and on our own time lines. Here’s what I’ve found over the last several weeks:

People with very low levels of debt are much more likely to be able to accept the ERP. The people I met who have paid their mortgage off are, with an almost unanimous vote, accepting the offer and moving on to the next phase of life.

What I learned: I want to pay my mortgage off ASAP! Any debt should be eliminated quickly and you’ll be in a better position over the long haul. When all debt is gone, your embedded cost of living is lower for the rest of your life. That can do nothing but extend the life of your asset base.

The cost of health insurance in the future was a factor in everyone’s decision. Some had a spouse who could cover them or had the ability to roll into Medicare. Others are going to price policies on the exchanges or with affinity groups or simply price policies on a few insurer websites. Those with a clear plan for how to handle the cost of insurance had a very good likelihood of accepting the ERP.

What I learned: In order to prepare for medical costs in the future, I’m planning to max out my HSA annually and invest the account for long term growth, while paying most medical costs out-of-pocket. I plan to keep abreast of the ever-changing landscape of health insurance as well. Recently, we saw significant increases in premiums for health insurance in the exchanges so being aware of the landscape is always a best practice.

The folks who were confident in their ability to land another job before the severance package ran out were also much more likely to accept the offer. With a relatively generous severance package, those who could get jobs relatively quickly could “double dip” for a while. With income from two jobs, they can work on paying debt off or invest a sizable portion of their income.

What I learned: Having an updated resume and refreshing your LinkedIn profile periodically is always a best practice. One never knows when the employment market will turn into the next batch of good (or bad) news, so being prepared at all times is a very worthy endeavor. Keep your contacts organized. Stay in touch with former coworkers, as well as current ones. Use your internal network to help find opportunities.

The lessons I learned over the last few weeks will provide more benefits to me than the benefits I provided to the individual employees. I will consider all of these factors and work to make sure that when the time comes for me to consider retiring, I have all of my I’s dotted and T’s crossed. You should too.

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.

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.

How Do You Make Financial Decisions?

March 04, 2016

For the last week, I’ve read a lot about Apple vs. the U.S. government regarding the request of the government that Apple build a back door into the phone of one of the San Bernadino killers. The case is very controversial and I understand why both sides feel so strongly. The government wants to break into the phone to see if there is evidence that can help understand and track down anyone who might have helped the killers. Apple is concerned that an important part of their products, a strong encryption that makes them very secure, could be no longer a strength if the encryption code they would write gets into the hands of the wrong people. Both sides have strong arguments, and I will keep my opinions out of this. Continue reading “How Do You Make Financial Decisions?”

5 Things to Know About Applying for a Mortgage

December 09, 2015

Even though interest rates are likely to begin rising again (haven’t we been saying that for a couple years now?) mortgage rates are still reasonable, and buying a home these days is still cheaper than renting in most areas, providing you’re planning to stay for a bit. Buying a house is more than just a financial decision, but if after considering all the factors, you’ve decided that now is the time to buy, prepare yourself for the mortgage application process. And I mean gird yourself because it is a royal pain. Here’s what to expect: Continue reading “5 Things to Know About Applying for a Mortgage”

Permanent Life Insurance or Mortgage Payoff?

August 20, 2015

We recently received a question on our Facebook page from a couple in their 50’s who are trying to decide between a fixed universal life insurance policy with a quoted return of “7% minus fees” vs paying off a mortgage with a 3.5% interest rate. This combines two common question topics: using permanent life insurance as an investment and paying off a mortgage early. Let’s take a look at some things to consider: Continue reading “Permanent Life Insurance or Mortgage Payoff?”

Should You Buy or Rent a Home?

June 11, 2015

Summer is often a popular time for people to buy a home. In fact, I was recently talking to an employee who wanted to buy a place but she noted that the mortgage payment would be more than the rent for similar priced homes in the area she was looking at. However, after looking at the tax breaks and possible home appreciation, we discovered that owning would actually be cheaper for her. Continue reading “Should You Buy or Rent a Home?”

Laughter Can Be Retirement Medicine

May 01, 2015

Earlier in the day, I had a conversation with a couple who were convinced that they didn’t have nearly enough money to retire any time soon and this was a very problematic issue for them.While she loved her job and said she planned to work until she’s the oldest employee ever at her company, he is absolutely miserable. Through a reorganization at his company, he now reports to a manager that he absolutely cannot stand and he said he feels like life is being slowly sucked out of him. The new boss, in his view, is an absolute megalomaniac who makes life miserable for everyone in their department. Nearly half of the staff has left for other opportunities within the last 6 months and the workload for those remaining is overwhelming to the point that he feels like his health is being compromised. Continue reading “Laughter Can Be Retirement Medicine”

Is Paying Off Your Mortgage Worth Losing The Tax Deduction?

March 12, 2015

Updated June 14, 2017

I recently received a question after one of my workshops from a woman who was wondering if she made a mistake paying her mortgage off early because she no longer has the mortgage interest deduction. I can’t tell you how many times I’ve gotten different versions of that same question (including after a later workshop session that same day). Here are several reasons why this is a classic case of letting the tax tail wag the dog: Continue reading “Is Paying Off Your Mortgage Worth Losing The Tax Deduction?”

4 Ways The CFPB Can Help You With Financial Issues

May 20, 2014

Are you dealing with a challenging financial issue? Whether it’s a decision you need to make or a mess you need to get out of, the Consumer Financial Protection Bureau (CFPB) exists to help. Its mission is “To make markets for consumer financial products and services work for Americans – whether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products.” How can the CFPB help you? Continue reading “4 Ways The CFPB Can Help You With Financial Issues”

Explore Your Hidden Volcano

November 29, 2013

The Earth is still so full of mysteries even though we have had scientists exploring what seems like every nook and cranny of Earth’s surface, the oceans and the atmosphere. As much as we think we know (from a global perspective, not an individual one) about how the planet works, there is still much to learn and discover. Recently, there was some volcanic activity in Antarctica and the implications for the planet are completely unknown at this time. It’s fascinating stuff! (or at least it is to me) Continue reading “Explore Your Hidden Volcano”

4 Financial “Myths” Than Can Actually Help You

August 22, 2013

I recently read this blog post on Forbes called “4 Financial Myths Than Can Hurt You.” Sounds interesting doesn’t it? Who doesn’t want to bust some myths that could be hurting you financially? The problem is that in trying to dispel these myths, the author perpetuates some of his own. Let’s take a look at each “myth.” Continue reading “4 Financial “Myths” Than Can Actually Help You”