Tag

mortgage

Don’t Bite Off More Than You Can Chew

By | 2019, Money Moxie, Newsletter | No Comments

How Much Home Debt is Too Much?

You’ve decided to buy a house. Congratulations! Now, what? How do you know how much home you can afford? The last thing you want to do is take out more debt than you can handle. Remember, lenders will approve you for a loan with payments much higher than you should ever pay on a monthly basis! It’s up to you to know how much you can really afford.

Flexibility

Consider your budget. Are vacations a priority? What about other interests and goals? You need to keep your monthly debt payments under 36 percent of income, so you have the financial flexibility.
(Sharla’s recommendation of 28 percent on page 5 was for housing debt only, while the 36 percent is for total debt.)

Interest Rate

Something else that will affect your budget is the interest rate on your mortgage. Even a small change in interest rates can significantly impact how much you can afford. If interest rates go up, or your credit history is a little rough, you won’t be able to afford as much home since you will have to pay more in interest.

Total Debt

Your monthly mortgage expenses and all other debt payments should not exceed 36 percent of your gross monthly income. Add your potential mortgage payment and other debt payments (car loans, credit card debt, student loans, etc.) together, then divide by your before-tax monthly income.

For example, if John is considering a housing payment of $1,800 (including mortgage, insurance, property taxes), a car payment of $300, and a student loan payment of $150, that would equal $2,250. Divide by his $6,500 monthly, and we have the percentage. These fixed expenses would be 34 percent of John’s gross income (under 36 percent, so he should be in the clear).

Monthly Payment

To get the price of a house you can afford, search for a mortgage calculator online and plug in the numbers. Going back to my previous example, we determined that John could afford a mortgage payment of $1,800 per month. If he gets a 4 percent interest rate and has $20,000 for a down payment and closing costs, with a loan of 30 years, he could afford a home that is around $285,000.

Down Payment

The amount of your down payment will also factor into how much you can spend on a home. The more expensive the house, the bigger down payment you will need. The bigger your down payment, the less your mortgage and payment will be.

If you have a 20 percent down payment, your monthly payment will be much less since you won’t be required to have mortgage insurance.

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A New Housing Paradigm

By | 2019, Money Moxie, Newsletter | No Comments

Since the housing crisis and recession of 2008, the American dream of homeownership has changed. Younger generations are weighing the benefits of owning their own home with the freedom that renting provides–flexibility to move for work and to avoid responsibilities and expenses that come with ownership. Plus, they are weighing the additional amenities that can be enjoyed from some rental communities: pool, fitness center, dog park, common use areas, etc.

Aging boomers are also considering changes. They are also interested in reducing responsibility, as well as downsizing their homes. Having someone care for the lawn and shovel the snow is enticing. Not to mention the fun of living among neighbors near their own ages.

5 things to consider before purchasing a home:

(1) Your monthly mortgage payment should not equal more than 28% of your gross monthly income. This includes principal, interest, taxes, and insurance.

(2) Avoid mortgage insurance. It does not benefit you. You can do this by making a down payment of 20 percent or more. If you can’t put down at least 20 percent, then once you have 20 percent equity, check on removing the mortgage insurance.

(3) Plan for extra expenses! If your home is new, this will include window coverings, appliances, and landscaping. If buying an existing home, plan on costs for updating and fixing known and unknown problems.

4) Keep the loan term as short as possible without financially boxing yourself in. A 15-year mortgage should have a lower rate than a 30-year mortgage. Always try paying extra principal each month.

(5) Keep money available for emergencies in a dedicated savings account. Using a credit card or a loan for emergencies will compound your problems.

5 things to know before downsizing:

(1) Ask yourself if your current home can be modified or updated to accommodate your needs as you age. You can always pay for someone to care for the yard.

(2) Increased demand for patio-style homes and planned living communities has driven up the prices. You may find that selling your large home to downsize may not be worth the price.

(3) Determine what you want. Some retirees want to be close to family or need a place to host family. Others are looking to get away or want an adult community.

(4) Understand the additional costs of Home Owners Association (HOA) fees that cover the services, upkeep, and common areas. Get a copy of the HOA contract and consider asking about its current financial condition.

(5) Protect your retirement. Avoid debt. Remember, using savings to purchase a retirement home may create future liquidity problems.

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Financial Basics

By | 2019, Money Moxie, Newsletter | No Comments

The world of credit can be a mysterious one, to say the least. There is a lot of misinformation when it comes to credit and how to build it. Here are three things you need to know:

How Credit Scores Are Determined
(1) Your payment history makes up the most significant percentage of your credit score, so it is imperative that you make payments on time!
(2) Credit bureaus also look at the amount of money you owe compared to how much credit is available to you. The smaller the amount you owe, the better your credit score will be.
(3) The other, smaller portions pertain to the types of credit you have, like installment loans such as a car loan or mortgage, and revolving credit like credit card debt. (4) Any new credit you’ve applied for is also examined.

Your credit score can range anywhere from 300-850 and can affect many things, like the interest rate you can get on loans and mortgages, and it can even determine whether you are accepted to rent a place to live.

Credit Cards Aren’t Bad, but You Need to be Careful
I have heard many times that credit is bad and you should never use it. That simply isn’t true, but credit does need to be used wisely.

If misused, credit can get you into trouble. Instead, make sure you are paying off your entire credit card balance on time each month. If you only make the minimum payments, you will be charged interest and it will become a never-ending cycle of payments and even higher debt. Making the minimum payment will not make a dent in what you owe.

How to Check Your Credit Report
It is important to check your credit report a few times a year to make sure it is correct. There are three credit bureaus: Equifax, Experian, and TransUnion. Each one is required to give you one free report every year. The easiest way to request your report is at annualcreditreport.com. If your report is not correct, reach out to the credit bureau. Its representatives should help you with the process of correcting it.

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Buy a home now or wait for a recession?

By | 2018, Money Moxie | No Comments

The U.S. housing market is hot and home prices are going through the roof. This is due to a growing economy. Utah is especially impacted by Silicon Slope companies that are bringing in a lot of high-paying tech jobs; i.e. high demand compared to supply.

With home prices continuously increasing, people are questioning if this is the right time to buy a home or if they should wait for a time when the housing market cools off.

There are always ebbs and flows to the economy and markets, including the housing market. Many people remember all too well the housing collapse that we had in 2008, even though that was a decade ago.
We don’t expect another housing collapse like that one in the next few years, but we do expect the overall market to soften up. Maybe we will have a smaller recession in 1-3 years. When that recession happens, housing prices will come down. The question for potential home buyers is, “How far will they come down?”

If housing prices in the area you are looking do become cheaper than they are now, then you may be better off to wait. This is a probability, but there is a chance that even though house prices decrease at that time, they will still be higher than they are today.

The other piece of the equation that many people frequently forget to consider is interest rates.
A 1 percent move in interest rates means you can afford roughly 89 percent of the home you could before. If you were looking at $400,000 homes before, now you can only afford to buy a $356,000 home for the same monthly payment.

The Federal Reserve has indicated that they plan to raise the fed funds target interest rate by 0.25% several more times this year and in 2019 as well. These are short-term rates, but they will impact the longer-term rates that determine your mortgage interest and payment.
We have been at historically low-interest rates for the last decade and once that ship sails I don’t expect to see interest rates this low for a very long time. However, an economic slowdown could bring rates lower again.

If you are moving, at least you have the increase on your existing home to help offset the increase on the home you are buying, unless you are moving from a depressed area to a hot area.

If you are buying for the first time and plan to stay longer than 3 years, now might be the right time to buy just to lock in low-interest rates. However, you still need to seriously consider your financial situation and whether you can afford the home you want. Don’t jump into something that is too much money just because you feel the pressure to get a deal done. Know your limits and be willing to back out if the deal gets too hot.

Renting may feel like you are throwing your money away, but it also provides flexibility. If you only do it for a few years you won’t be that far behind financially. In a few years, you may even be in a better financial situation. Who knows? You might be able to buy a home at a cheaper price than you can today.

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Payment calculation based on a 30 year mortgage, loan of $400,000, principal and interest payment of $1,961 and interest rate of 4.25% vs. 5.25%. Data in graphics and tables from Federal Reserve Bank of St Louis.

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5 Ways Rising Interest Rates Will Impact Your Life

By | 2013, Money Moxie, Newsletter | No Comments

On May 21st, the Federal Reserve Chairman, Ben Bernanke, announced that the Fed was going to start tapering their bond buying program sometime in the fall. In essence they feel the economy is doing well enough that they don’t need to keep pumping as much money into it. Ironically, the better economy is both good and bad news, depending on your perspective.

The bad news came as mortgage rates jumped about one-half a percent within a month. That left many people wondering how they will be impacted as interest rates continue to rise in the future. Here are five things you should know about how rising interest rates will impact your mortgage, savings accounts, and investments in bonds.

1. Mortgage rates are still low, but are on the rise.

The mortgage rate cruise ship has just started its engine as it prepares for a long cruise to the North. We have probably seen the lowest rates that we will see for a long time, maybe even our lifetime. This isn’t to say that everyone should abandon ship and never plan to move. Life doesn’t work out that way. It just means that if you are planning to move, and the move is in your control, then it may be better to move sooner rather than later.

Interest rates in the 4’s and even 5’s are still incredibly good by historical standards. As interest rates rise, you will either see your anticipated mortgage payment rise, or you will need to look for a slightly smaller and less expensive home. For example, the monthly payment on a 30-year mortgage of $400,000 went up by about $100.2 So, either you will find it in your budget to afford the additional $100 or you will look for a less expensive home.

2. If you are thinking of refinancing, you better do it soon.

Most people with equity in their home and great credit have already refinanced. However, if you have procrastinated, listen to the last call of “all aboard” and get on the low rate cruise ship before it leaves the harbor. If you didn’t have enough equity to qualify before, check again, because “rising (home) prices pushed 850,000 homes into the black in the first quarter.”3 If you are still underwater, you may be available to refinance through HARP. Check out the details at Harpprogram.org.

3. Lock in your rates now, if you are ready to buy.

This may help you avoid any short-term rate spikes. “Most lenders won’t charge for a 45- or 60-day rate lock.”4  Only pay for a longer rate lock if the deals are closing slowly. You should be able to ask your lender about this ahead of time. Also look for a free float down option in case the rates dip a little. Mortgage rates are still close to their all-time lows. So, lock in a rate for a long time, especially if you are looking to get a 30-year mortgage.

In this current environment, an adjustable mortgage makes sense only if you know you will move within a few years. You don’t want to get a 5-year adjustable loan and stay in the home for 30 years.

Rates going up will probably slow down the housing recovery a little, but it won’t be derailed. Rates are going up because the economy is healthier. For savers, the increase in interest rates is a mixed bag.

4. Interest in savings accounts, CD’s, and money markets will increase.

This is good news and bad news. The good news is that the abysmally low rates we have seen for the last few years will go up a little. The bad news is that you probably still won’t keep up with inflation.

One concern is that we may have inflation like we did in the ‘80s. So, if you are looking at putting your money in a CD or other investment that is locked up, avoid locking it up for a long time. For example, right now may NOT be a good time to put your money in a 5-year CD paying 1%. Inflation was already 2.1% in 2012.6

If inflation goes up higher, being locked in and earning only 1% would feel like a jail sentence. Another strategy would be to place your money in a one-year CD and roll it into a new CD every year anticipating that rates may go up each time you renew.

5. Bond investors, be cautious.

Since the market crash in 2008, many people have fled the stock market and moved into bonds in search of safety. However, bonds are not without their own risk. As inflation increases, the value of a bond may actually go down.

Many bond investors have seen this firsthand as they have watched bonds in their account stay flat or go down despite the growth in the stock market this year. This is not to say that you should get out of bonds completely. Even aggressive investors often have some bond exposure to help with the unpredictability of the future. However, in a rising interest rate environment you have to pay attention to what types of bonds may still do well and incorporate those bonds into your portfolio.

The good news is that there is a general consensus that the U.S. Economy is healthier and continuing to move in the right direction. However, this will most likely lead to higher interest rates, which can be both good and bad. Pay attention to how you will be impacted and if needed, make some moves now so the impact won’t be a tidal wave.

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