3 Investing Strategies to Save for a New Home

Buying a home is one of the most significant financial decisions you will make in your lifetime. For many Americans, saving for a purchase of that magnitude can feel impossible. The good news is there is no shortage of strategies you can choose from. The number one factor to consider (apart from your income) is how much time you have to save. Depending on when you plan on buying, some options may be better than others.

Here’s a guide to saving for a new home with various timelines in mind.

If you want to buy a home in the next 3 years…

Every investment option comes with a degree of risk, and with only a few short years to save, it’s likely not a wise idea to take big risks with your savings. The last thing you want is for the money to lose value without enough time to recover.

In this case, you should be looking for savings options that offer safety rather than growth, like a high-yield savings account and certificates of deposit (CDs). These are very low risk and, best of all, come with guaranteed returns on investment. If you’re looking for the highest paying savings accounts in your area, you can use our free comparison tool. We also have a list of the best CDs for the month.

If you want to buy a new home in 4 to 7 years…

The longer you have to save for a home, the more creative you can be with your investing strategy. The key is to strike the right mix between safety and growth. You want your money to grow at a comfortable enough pace to beat inflation but maintain enough conservative investments to offset any potential losses you might experience in the market.

You may be able to achieve this with a 25/75 portfolio.

The 25/75 portfolio strategy is pretty simple — no more than 25% of your money is invested in stocks, and the remaining 75% are in bonds. This blend of stocks and bonds should allow your money to grow modestly while keeping safety top of mind. You can start this process by opening a brokerage account and choosing your own mutual funds to reach the right mix. But do your research first. For example, U.S. News & World Report maintains a list of funds that are ranked for their allocation, fees, and performance. 

If you want to buy a home in 8 to 10 years…

Time is certainly on your side if you’ve got nearly a decade to save for your dream home. The key is taking on the right amount of risk. Because you have so much time to save, you can afford to take riskier investment bets, which can potentially reap much higher rewards in the long run.

Consider a 50/50 investment strategy: You’ll invest 50% of your savings in stocks and 50% in bonds. You should have just enough risk to ensure you’ll beat inflation and then some, but still be conservative enough to be able to weather any downturns in the market. To achieve the perfect 50/50 mix, you could split your money evenly between your own selection of stocks and bonds. For those who like a more hands-off approach, U.S. News & World Report has a ranking of mutual funds that are preset to give you the 50/50 allocation. There you can select the fund you feel suits you best. 

Deciding where to invest 

Where you invest your money matters. Save your money in the wrong place and taxes could eat up a portion of your gains each year. You could also be in a situation where taking the money out to buy a home could cause a penalty as well.

If you plan on buying a home in five years or more, strategically using a Roth IRA could be your best option. With a Roth IRA you can withdraw all of your contributions without penalty; additionally, you can withdraw $10,000 of the earnings without tax or penalty for a first-time home purchase. 

Lastly, a plain brokerage account may suit you. There are no tax advantages to investing here, but if you’re using the account to buy a home in the future, there may be more benefits in other areas. You can only contribute $5,500 ($6,500 after age 50) in a Traditional IRA or Roth IRA, and withdrawals are subject to strict rules. A regular brokerage account, on the other hand, has no limits to what you can put in or take out for home purchases or any other purchases. Take a look at your situation and see which options fit you best.

What about my 401(k)?

A common question most people ask is whether they should use their 401(k) to grow the money and then use it to buy a home. This is usually a bad idea. If you withdraw the money before age 59½, you would be subject to a 10% penalty, plus income taxes on top of that amount. In addition, the amount that you withdraw could severely alter your retirement goals. This is called an opportunity cost.

A better idea, though still not one we recommend, is taking a loan from your 401(k). You are allowed to take a loan of up to $50,000 or half the value of the account balance, whichever amount is less. This is still a loan, however, meaning it could affect your ability to qualify for a mortgage. You also have to pay this loan back. Depending on your company’s 401(k) rules, if you leave the company, the entire balance of the loan might come due within 60 to 90 days after you leave. If you stay with the company, you could be required to pay the loan back within five years.

Thankfully, your 401(k) isn’t your only option. Taking money from a Traditional IRA is a bit better. You are allowed to withdraw $10,000 without penalty for a first-time home purchase. This may change your tax situation as any withdrawal would have to be counted as part of your regular income. For most people this still isn’t the best option but certainly better than dipping into your 401(k).

Making a clear goal

Do some research to see what home prices are like in your desired area. Then make a clear savings goal. An easy way to do this is to take 10 to 20% of the average home value in your area to estimate your downpayment. Use this calculator to see how long it will take you to reach your goal.

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17 Things Homeowners Forget to Do Once a Year

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Image: Xavier Arnau

The post 17 Things Homeowners Forget to Do Once a Year appeared first on Credit.com.

Your HOA Payments May Now Affect Your Credit Score

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Homeowner associations can be great for neighborhood maintenance, settling disputes and enforcing community guidelines, but all of those benefits come with a cost: the association dues.

A good chunk of American homeowners agree to pay them — nearly 25%, according to RealtorMag.org — but unlike the mortgage, insurance and tax costs those homeowners also must pay, HOA fees aren’t reported to credit bureaus. Until now.

Credit data aggregator Sperlonga has agreed to become the first company to furnish HOA payment and account status data to Equifax Inc., one of the three major credit reporting agencies. Details on when that reporting will begin was not immediately available. According to the Community Association Institute, homeowner associations and property management companies collect approximately $70 billion in HOA payments each year through at least 333,000 community associations.

For years, experts in the credit scoring industry have talked about the value of adding things like rent payments and utility bills to credit scores as a way of giving more people access to credit. It’s something they refer to as alternative data.

“Until now, HOA payments have gone largely unreported to the national credit reporting agencies. Our service will help elevate association payments to the same level of importance as the consumer’s other financial obligations like residential mortgages, auto loans and credit card payments,” said Matt Martin, chairman and founder of Sperlonga, in a prepared statement. “Property owners that pay HOA fees on time should begin to see the similar impact to their credit reports as they would with other payment obligations traditionally found in a credit report.”

Of course, now property owners who are late or delinquent with HOA payments could likewise see a negative impact on their credit scores, just as they would with a late mortgage payment.

“Introducing new sources of data beyond what has traditionally been found on credit files can provide additional insight into a consumer’s financial behavior and help deliver expanded credit access,” Mike Gardner, senior vice president at Equifax, said in a press release.

You have a legal right to access the information consumer reporting agencies collect about you and dispute any inaccuracies. So, if you’re wondering which of your account payments might be reflected on your credit report, it’s a good idea to track your credit by pulling your free annual credit reports each year. You can also see how the data being reported is affecting your credit standing on a more frequent basis by checking your two free credit scores, updated every month on Credit.com.

More on Credit & Credit Cards:

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5 Unexpected Homeownership Costs to Consider Before Buying

Purchase agreement for house

If you’ve saved up enough money to put down a substantial down payment on a home (keep in mind that experts recommend at least 20% to avoid paying the infamous Private Mortgage Insurance, or PMI), you should be very proud of yourself.

Unfortunately, that’s just the beginning.

For many people, home ownership is still a dream that’s well worth attaining. If you’re in this group, then it’s important to consider some of the extra costs that come with owning a home that aren’t exactly broadcasted with the price tag of the house. The following are some of the big ones to consider.

Fee No. 1: Closing costs

I’ll never forget the day my sister and her husband bought their first home. They got home from their realtors office and she called me and said, “Did you know there’s this thing called ‘closing costs’? It’s so much extra money!” Now you may have heard the term ‘closing costs’ before, or you might at least be aware that there are some additional fees that go along with closing on a home, not just your down payment amount, but it’s worth doing a little extra research to determine just how much your closing costs are estimated to be based on where you live. Different states have different laws about these things, and when it’s a couple extra thousand we’re talking about potentially having to spend, it’s worth budgeting that in with your down payment costs from the beginning.

Fee No. 2: Property taxes

When you own a home, you’re much more a part of a community than you are when you live in, say, an apartment — at least you will be expected to pay to be a part of a community more so than you are when you live in an apartment. Property taxes are an unfortunate downside of living somewhere and being expected to help maintain the upkeep of the surrounding area. Depending on where you live, property taxes could even total somewhere between $500 and $1,000 or more a month on top of your mortgage payment, so again, it’s worth checking into this added fee before signing on the dotted line of your new place.

Fee No. 3: Homeowner’s insurance

If you already live in your own apartment then you should already be somewhat familiar with the concept of renter’s insurance. When you buy a house, though, the cost that you’re paying each month for the security of your home should you need to make repairs may go way up. For starters, an entire home will most likely be larger, and you’ll need more stuff to fill it, so right there the amount of money it’ll take to insure your things will go up. You can get a handle on how much of an additional cost this might be to your monthly budget by calling your current renter’s insurance company and getting quotes based on the size and price home you’re in the market for.

Fee No. 4: HOA fees

Not all houses will come with this fee, but if you’re looking for a condo, townhouse or to purchase an apartment, especially, expect to probably have to dish out for homeowners’ association fees. These fees can start in the low hundreds and go up to the thousands, based on how fancy of a place you’re looking at, but it’s definitely worth factoring into your monthly budget, as well. The good thing about HOA fees is that they’re used to help take care of common areas and in some cases may even cover areas around your own specific home, like the yard, roof, driveway, etc. (This is good in the sense that any repairs needed in those areas will already be covered in your HOA fees, but it’s somewhat bad in the fact that if you’re HOA covers an area, you’ll probably get little to no say with what can be done to them.)

Fee No. 5: Maintenance

Remember when you had mold in your apartment and you called up your maintenance man and he fixed it? Or when the dishwasher broke and suddenly a new one appeared? Whether or not it took a while for your maintenance people to actually fix problems in your apartment, the truth was it was kind of nice that at the very least, you didn’t have to worry about paying for the repairs. When you own your own home, guess what? That’s all on you. Leaky roof? Grumbly dryer? Termite infestation? While the good news is now you and you alone have a say on how quickly these problems get fixed (well you and your repairman, at least), the bad is that you also have to pay out of your own pocket for them.

If you’ve taken all these additional costs into consideration and you still feel ready to take the leap into homeownership, check out this story for nine additional tips for first-time homebuyers to make the experience a little easier.

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