How I Bought My Dream Home for No Money Down  

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Like many young professionals, 31-year-old Brittany Pitcher thought her dream of homeownership dream would never quite line up with the reality of her financial outlook. Pitcher, an attorney in Tacoma, Wash., earns a good salary, but a large chunk of her take-home pay goes toward paying down her debt from law school, not leaving much room to save for her dream home — especially when most experts recommend coming up with at least a 20 percent down payment. 

“With my law school student loans, I could have never saved 20 percent down for a house,” Pitcher told MagnifyMoney. “Twenty percent is an outrageous amount of money to save.” 

But Pitcher managed to find a more affordable solution, and in 2015 she was able to purchase her dream home for $0 down.

Here’s how she did it:

A loan officer suggested Pritcher look into securing a grant from the National Homebuyers Fund (NHF), a Sacramento, Calif.-based nonprofit that works with a network of lenders nationwide to make the home-buying process more affordable, offering assistance for down payments, closing costs, mortgage tax credits and more. She applied and was awarded an $8,000 grant, which covered her down payment and closing costs. 

Each lender that works with the NHF to offer downpayment assistance has different eligibility requirements for borrowers. In Pitcher’s case, she had to earn less than $85,000 annually to qualify for the grant. She also had to take an online class driving home the importance of paying her mortgage. 

There were other stipulations, too. She was required to use a specific lender and agree to a Federal Housing Administration mortgage with a rate of 4.5%. Since FHA mortgage loans require only a 3.5 percent down payment, the grant fully covered her down payment.

But like all FHA mortgage holders, Pitcher soon learned there was a price to pay for such a low down payment requirement — she had to pay a monthly mortgage insurance premium (MIP) on top of her mortgage payment, which added an additional $112 per month.  

With the grant, Pitcher successfully purchased her first home in 2015, trading up from a one-bedroom rental to a three-bedroom house. And even with the added cost of MIP, her monthly mortgage payment was still roughly $100 less than what she would pay if she continued renting in the area.  

“When I bought my house, with my student loans, my net worth was like negative $120,000 or something horrible like that,” says Pitcher. “Now my house has appreciated enough to where my net worth is only negative $60,000. It’s been an incredible investment that’s totally paid off.” 

After she moved into her home, she came up with a strategy that would ultimately get rid of her MIP and secure a lower interest rate. Within a year, her house had increased in value enough for her to refinance out of the FHA loan and into a conventional loan, which both lowered her interest rate and eliminated her mortgage insurance premium. 

Pitcher’s experience highlights how the 20 percent down payment rule of thumb might actually be more myth than a hard-and-fast rule.  

“Historically, the typical first-time homebuyer has always put less than 20 percent down,” says Jessica Lautz, Managing Director of Survey Research and Communications for the National Association of Realtors (NAR).  

According to NAR’s 2016 Profile of Home Buyers and Sellers report, the typical down payment for a first-time homebuyer has been 6 percent for the last three years.  

How to get a house with a low down payment  

There are plenty of programs out there that can help first-time homebuyers get approved for a mortgage without needing a 20 percent down payment.  

Type of Loan

Down Payment Requirement


Mortgage Insurance

Credit Score Requirement

FHA


FHA

3.5% for most

10% if your FICO credit score is between 500 and 579

Requires both upfront and annual mortgage insurance for all borrowers, regardless of down payment

500 and up

SoFi


SoFi

10%

No mortgage insurance required

Typically 700 or higher

VA Loan


VA Loan

No down payment required for eligible borrowers (military service members, veterans, or eligible surviving spouses)

No mortgage insurance required; however, there may be a funding fee, which can run from 1.25% to 2.4% of the loan amount

No minimum score
required

HomeReady


homeready

3% and up

Mortgage insurance required when homebuyers put down
< 20%; no longer required once the loan-to-value ratio reaches 78% or less

620 minimum

USDA


homeready

No down payment required

Ongoing mortgage insurance not required, but borrowers pay an upfront fee of 2% of the purchase price

620-640 minimum

The U.S. Department of Housing and Urban Development, for example, has a tool where homebuyers can search for programs local to their area. 

“There might be programs there that first-time homebuyers could qualify for that either allow them to put down a lower down payment or help them with a tax credit in their local community, or even property taxes for the first couple of years after purchasing the home,” Lautz says. “Those programs are available. It’s just a matter of finding them.” 

Case in point: Maine’s First Home Program provides low, fixed-rate mortgages that require a small, or sometimes zero, down payment. Similarly, the Massachusetts Housing Partnership, a public nonprofit, boasts its ONE Mortgage Program. The initiative offers qualified homebuyers low down payments with no private mortgage insurance. 

Generally speaking, where low- or no-down-payment loans are concerned, potential homebuyers have a number of options. An FHA mortgage loan, funded by an approved lender, is perhaps the most popular. Folks whose credit scores are 580 or above can qualify for a 3.5 percent down payment. That number goes up to 10 percent for people with a lower credit score. The catch is that you’ll have to pay an upfront insurance premium of 1.75 percent of the loan amount along with closing costs. 

Veterans, active-duty service members, and military families may also be eligible for a VA loan, which comes without the burden of mortgage insurance. They do charge a one-time funding fee, but no down payment is required, and the rates are attractive. 

Check out our guide to the best low down payment mortgage options > 

Christina Noone, 34, and her husband Eric, 33, bought their first home in Canadensis, Pa., in 2011 with a USDA loan. USDA home loans are backed by the U.S. Department of Agriculture. The couple put 0 percent down for a $65,000 loan with no private mortgage insurance requirement. 

“Putting money down makes your payments lower, but this specific type of loan, designed for rural areas, is manageable,” Christina says of their $650 monthly payment, which includes their mortgage and taxes. “I might have liked to wait until we had money to put down so we could have bought a nicer house for the same payments, but with zero down, we were able to get into a house easily.” 

The biggest downside for Eric and Christina, who own a local restaurant, is that their house is “a big fixer-upper,” something the couple hasn’t financially been able to tackle yet. This is precisely why Steven Podnos, M.D., a Certified Financial Planner and CFP Board Ambassador, stresses the importance of having a three- to six-month emergency fund before buying a house — especially since putting down less than 20 percent often necessitates paying for private mortgage insurance. He also suggests keeping your overall housing costs under 30 percent of your income. When it comes to finding a lender, he adds that shopping around is in your best interest. 

“It’s a competitive process,” he says. “I always tell people: get more than one offer. Go to more than one institution because different banks at different times have different standards, different amounts of money they’re willing to lend, and different risks they’re willing to take.”

The post How I Bought My Dream Home for No Money Down   appeared first on MagnifyMoney.

Do You Really Need a Home Warranty?

When I bought my first house years ago, my real estate agent requested that the seller purchase a home warranty to cover our home for one year from the date of sale. It didn’t cost me anything, and I only used the warranty once that year when the dishwasher started leaking water all over the kitchen floor. I called the warranty company, and for a $60 service fee, a contractor repaired the dishwasher, a service that would average somewhere between $100 and $200. Once the year was up, I had to decide whether to pay more than $500 to renew the warranty or let it lapse.

You may find yourself facing the same decision, whether you’re deciding to extend a warranty past the initial year or buy a warranty when the seller is not willing to foot the cost. So, do you need a home warranty?

Unlike a homeowners insurance policy, which is typically required by your lender, home warranties are completely optional.

A home warranty is a service contract on your home’s appliances and systems. Unlike a homeowners insurance policy, which may cover your home’s structure and belongings in the event of a fire, storm, or other accident, a home warranty covers repairs and replacement of systems and appliances due to normal wear and tear. This might include:

  • Electrical systems
  • Plumbing systems
  • Heating and air conditioning systems
  • Washers and dryers
  • Kitchen appliances

How much does a home warranty cost?

The cost of a home warranty varies by location, coverage, and provider. American Home Shield, the largest home warranty company in the country, has plans that cover appliances only starting at $360 per year. Systems plans, that cover heating, air conditioning, and electrical systems but not appliances, start at around $408 per year. Plans that cover both systems and appliances start at around $516 per year.

Cedric Stewart, a residential and commercial sales consultant at Entourage Residential Group at Keller Williams in Rockville, Md., says home warranties range in price from $400 to $650 on average but can go much higher if you opt for additional coverage options. Those options may include coverage for spas and swimming pools, additional refrigerators, water softener systems, or water wells.

How to shop for a home warranty

Your realtor may be able to recommend one or two home warranty providers that they work with on a regular basis and let you know how much the warranty will cost and what is covered. Take a look at a sample contract and read the fine print to see exactly what the warranty will and won’t cover and how much you will pay per service call.

Next, look for online reviews from reputable review sites like Consumer Reports, Angie’s List, or the Better Business Bureau. Pay special attention to the bad reviews. Did customers have to wait days for service? Does the company deny a lot of claims? Were customers happy with the contractors hired to perform the work? These can all give you an idea of whether you’ll be happy with your purchase or experience buyer’s remorse.

Benefits of buying a home warranty

Some people love home warranties for the peace of mind it gives them. “In the event your hot water heater or furnace stop working,” Stewart says, “you make a service call, pay the fee to have someone come out, and they’ll repair or replace that item. Whether it’s the first or the 365th day of the warranty, the coverage is the same. So you could end up getting a $4,000-$8,000 system replaced for $400 bucks.”

Downsides to buying a home warranty

There are many arguments against buying home warranties, especially since home warranty companies have historically been one of the “worst graded” categories on Angie’s List.

  • Your claim can be denied if the problems existed before. Stewart says you should think of a home warranty like an insurance policy. When something happens, you file a claim (referred to as a “service call”). An adjuster comes out to assess the damage and submits his findings to the home warranty company, which renders a decision. That decision could be a denial of your claim. Stewart says one of the most common reasons home warranty companies deny claims is due to pre-existing conditions, or problems that existed before you purchased the policy. The company may even require that you turn over a copy of the home inspection report to ensure that the issue wasn’t cited during the inspection.
  • You can’t pick your contractor. Warranty providers require that homeowners work with specific, pre-approved contractors. Homeowners may sometimes be disappointed in a long wait time for service or poor quality of service provided by these contractors, but they can’t fire them and pick their own.
  • You may get repairs when what you want is a replacement. The service technician will always try to repair the appliance or system first and replace it only if it is beyond repair. That can be a hassle. I found this out when I rented a townhome covered by a home warranty. Several contractors told us that the 20-year old A/C unit should really be replaced, but the warranty company wanted to keep repairing the old system. As a result, the A/C went out three times over the course of one hot summer in Phoenix.

4 questions to ask yourself before you purchase a home warranty

Rocky Lalvani is a wealth coach and rental property owner, so he is well versed in what can go wrong in your first year in a new home. He recommends asking the following questions before deciding whether to purchase a home warranty.

  • What condition are the home, systems, and appliances in? If the heating, air conditioning, and appliances are older, the greater the need to protect against failure.
  • Can you afford to repair the items yourself? If replacing the furnace or buying new appliances in the next year would cause a financial hardship, you may be better off buying a warranty.
  • Are you planning on replacing the items in the near future? If you know you are going to remodel the kitchen and purchase all new appliances shortly, it doesn’t make sense to protect them.
  • What is covered and what is excluded? Read the policy so you know what coverage it provides. Each warranty provider has their own limits, rules, and caps on repair costs. “When you couple that with long wait times to go through the process, these factors may make the warranty not worth the cost,” Lalvani says.

Also, keep in mind that a separate warranty is typically not necessary for new homes since the appliances are covered under the manufacturer’s warranty. Homebuilders usually put a warranty on system and structural defects for 10 years. But read the fine print of your purchase contract to make sure you know what is covered.

The bottom line

If your seller is willing to cover the cost of a home warranty as a condition of sale, do take advantage of the free coverage. Just realize that you will have to pay a service fee, which could range from $50 to $75 per repair.

Otherwise, consider the age of each covered item and compare that to its average life span using this chart from the International Association of Certified Home Inspectors. The older the home and appliances, the more likely it is that something will go wrong. If the systems and appliances are newer or you’re planning on replacing them shortly after you move in, you may be better off setting the money aside in a home-repair fund. That way, you won’t end up paying for something that may not provide the coverage you expect.

The post Do You Really Need a Home Warranty? appeared first on MagnifyMoney.

How to Buy a House With a Friend — The Right Way

It’s completely possible for you to purchase a house or other property with someone who isn’t your spouse, like a friend or family member.

“It’s a beautiful occasion, but it’s also a complex business transaction,” says Senior Managing Partner of New York City-based Law Firm of Kishner & Miller, Bryan Kishner. “There are tremendous positives to the overall thing, but people need to be careful with the unforeseen items, and a lot of people say they didn’t think about that.”

For friends who are unable to afford a home in their area on a single income, or cohabiting couples, buying a home together can help both parties boost their net worth or simply achieve a goal of becoming a homeowner.

That being said, purchasing a home with a friend can be more complicated than buying a house with your spouse. The key to a successful co-homeownership arrangement is to set yourselves up for success from the get-go.

Choose the Right Joint Homeownership Structure

When you buy a home, you’ll get a title, which proves the property is yours. The paper the title is printed on is called a deed, and it explains how you, the co-owners, have agreed to share the title. The way the title is structured becomes important when you need to figure out what happens when a co-owner needs to part with the property.

These are the two most common ways to approach joint homeownership:

1. Tenants in Common

A tenants in common, or tenancy in common, is the most common structure people use when they purchase a property for personal use. This outlines who owns what percentage of the property and allows each owner to control what happens if they pass away. For example, a co-owner can pass their share onto any beneficiaries in a will, and that will be honored.

The TIC allows co-owners to own unequal shares of the property, which can come in handy if one owner will occupy a significant majority or minority of the shared home. For example, if two friends decide to buy a multifamily home, but one friend pays more because one friend’s space has much more square footage than the other friend’s space, they can split their shares of the home accordingly.

Kishner says to make sure you “reference and evidence your intent to use the tenants in common structure on the deed,” as it’s the primary evidence of your ownership — meaning you would write who owns what percentage of the property on the deed and note the parties chose a TIC structure.

The Pros of a TIC structure

Ownership can be unevenly split

You can own as much or as little as you want of the property as long as the combined ownership adds up to 100%. So, if you’re putting up 60% of the down payment, you can work it out with the other co-owner(s) to own 60% of the property on the title.

You don’t have to live there

You can own part of the property without living there. This is relevant for someone who simply wants to be a partial owner, but doesn’t want to live at the property.

You get to decide what happens to your share after you pass away

The TIC allows you the flexibility to decide what happens to your interest in the property in the event you pass away. You can decide if it will go to the other co-owners or to an heir. Regardless, the decision is yours.

The Cons of a TIC structure

Co-owners can sell their interest without telling you

Co-owners in a TIC can sell their interest in the property at any time, without the permission of others in the agreement. However, if they are also on the mortgage loan, they are still on the hook to make payments, says Rafael Reyes, a loan officer based in New York City.

2. Joint Tenants with Rights of Survivorship

This arrangement is different from a tenants in common arrangement in that in the case of one co-owner’s death, the deceased party’s shares will be automatically absorbed by the living co-owners. For this reason, this type of structure is more common among family members or cohabiting partners looking to purchase property together.

If, for example, you are purchasing with a family member and would like them to automatically absorb your portion in case you pass away unexpectedly, this is the option you’d go with. Even if the deceased has it written in their will to pass their interest to a beneficiary, that likely won’t be honored.

A joint tenants agreement requires these four essential components:

  1. Co-owners must all acquire the property at the same time.
  2. Co-owners must all have the same title on assets.
  3. Each co-owner must own equal interests in the property. So if you buy with one friend, you’ll own 50%, but if you buy with two friends, you’d own one-third of the property. This may be an important consideration if co-owners will occupy different amounts of space in the property.
  4. Co-owners must each have the same right to possess the entirety of the assets.

The Pros of a joint tenants agreement

Everyone owns an equal share in the property

There’s not arguing over shares if you go with a joint tenants arrangement, since it requires all co-owners to have an equal interest. So each co-owner has the same right to use, take loans out against, or sell the property.

No decisions to make if someone dies

There’s nothing for co-owners or family members to fight over after you pass away. Your ownership shares are automatically inherited by the other co-owners when you pass away, regardless of what might be written in a will.

The Cons of a joint tenants agreement

Equal ownership

Equal ownership can be a con as much as it’s a pro. If you’re going to occupy more than 50% of the space, or put up more of the mortgage or down payment, you may want to own more than your equal share of the property. If that will bother you, a TIC agreement is best.

How to Create a Co-ownership Agreement

Before you even start the mortgage lending process, it’s recommended to work out an agreement on how you’ll split equity in the home, who will be responsible for maintenance costs, and what will happen in the event of major life events such as death, marriage, or having children.

“You are more or less going into business together” when you purchase a home with a friend or relative, says Kishner. And like any smart business owner, you’ll want to protect yourself in case things go south down the road.

A real estate attorney can help you set up an official co-ownership agreement.

Kishner recommends each person in the agreement get their own attorney, who can represent each party’s personal concerns and interests during negotiation. Rates vary by location, but he estimates a good real estate lawyer would charge around $1,000.

Ideally, Kishner says, this agreement is created and signed before closing the mortgage loan. That way, if simply going through all of the what-ifs scares someone off, they have the opportunity to pull out.

3 Questions Every Co-ownership Agreement Should Answer

The co-ownership agreement you draft and sign will need to address many issues. Here are three common scenarios the experts offered us:

1. What happens if someone wants out?

Your agreement should outline an exit plan in case one or more of you want out of the property. This could be because of a number of reasons but is the area where things can get extremely complicated. For example, what if one of the co-owners wants to be bought out by the other co-owners?

Let’s say you’ve got three people on a mortgage and on the title to a property. If the other two can come up with the money for the equity, you’ve solved that problem.

But if someone wants to sell their interest in the property, for example, Reyes says they can’t just take the cash and walk away, since they’ll still have some financial obligation to the home if they are on the mortgage. So you’d need to also refinance the mortgage to get them off of it, and that could affect the other co-owner’s financial picture. The only way to relieve someone of their financial obligation to the mortgage is to refinance with the lender. That’s because if they leave and decide to stop making mortgage payments, that will affect your credit score.

Be prepared. When you refinance, the remaining co-owners will need to qualify again for the mortgage. If you decided to add a co-owner because you couldn’t originally qualify for the property based on your income, you might not qualify to own after a refinance.

If you can’t refinance, you all may decide to arrange for the departing member to rent out their living space in the household … then you’d need to deal with the issues surrounding finding a roommate or having a tenant. However you all want to go about handling this kind of situation should already be outlined in the co-ownership agreement, so you’ll have one less thing to argue over in a split.

2. What happens if a co-owner loses their job?

You want to be prepared to fulfill your financial obligations if someone loses their income. That’s why it’s recommended to create a shared emergency fund, which you can draw from in the case that one of the owners runs into financial issues (or, of course, to handle any maintenance needs). You can establish the contributions and rules surrounding a shared emergency fund in your co-ownership agreement.

Reyes advises putting away about six months’ worth of the property expenses into a shared savings account.

“That six-month reserve, at least, is important because ultimately, God forbid, if there is some kind of financial turbulence like job loss, they can cover the mortgage or they could sell the home within six months in this market,” said Reyes.

3. How will you pay bills and taxes?

The co-ownership agreement also needs to address how you all will split up housing costs. Kauffman says you should set up a joint account and agree on what each party should contribute to the fund each pay period.

You should consider the repairs, maintenance, and upkeep on the house, as well as things that could increase over time such as property tax and homeowner’s insurance, too, Kauffman adds. In the event those costs exceed what you’ve set aside to pay for them in escrow accounts, the co-ownership agreement needs to outline how the extra bill will be paid.

Applying for a Mortgage as a Joint Homeowner

If you want to purchase a home with a friend or relative, you’ll first have to decide whether or not both of your names will be on the mortgage.

A lender will consider both of your credit scores during the underwriting process, which means a person with a lower credit score could drag down your collective credit score, leading to higher mortgage rates.

Kauffman strongly advises reaching out to figure out your financing before applying for a loan with friends.

“Each of them might understand what they can afford on their own, but they may not be aware of how their purchasing power changes,” Kauffman says. You may find you qualify for more or less house than you thought you could afford.

He adds there are some serious things to consider when you decide to enter into an investment with other people that you’re not necessarily tied to. Carefully consider your personal relationships with the people you’re going into homeownership with.

“You’ve got to really consider who you’re getting into it with and really consider all of these things that are bound to happen when you have [multiple] lives,” says Kauffman.

It can also be potentially awkward when friends or colleagues realize they must reveal aspects of their finances that they might prefer to keep private, such as their credit score, credit history, and total income.

“Oftentimes people learn a lot about their [co-owner] through a credit report, and it becomes embarrassing and uncomfortable sometimes,” says Rick Herrick, a loan officer at Bedford, N.H.-based Loan Originator.

The post How to Buy a House With a Friend — The Right Way appeared first on MagnifyMoney.

10 Cities Where Millennials Are Buying Homes (& 10 Where They Aren’t)

Millennials are increasingly becoming homeowners, but in some cities more than others.

With staggering student loans, fewer affordable starter homes and lower earnings than the previous generation, young adults own fewer homes than ever. Considering the reputation millennials have in the media for poor financial skills — avocado toast, anyone? — it’s no surprise the millennial generation is very slowly entering the home buying market. Although millennials are the largest generation of adults, they only account for 7.5% of the value of all U.S. homes.

ABODO, an apartment listing company, analyzed the 100 largest metropolitan statistical areas by population from the U.S. Census Bureau 2015 American Community Survey to find the highest and lowest percentage of all millennial householders who are owners.

Home buying among adults ages 18 to 35 has slowed. In 2005, 39.5% of this age group owned homes. That share fell to 32.1% in 2015. (Remember, when buying a home, your credit plays a major part. Before stepping into the home buying market, it’s a good idea to check your credit. You can see a free snapshot of your credit reports on Credit.com.)

This trend might reverse. Recently, more millennials have been entering the home-buying market. Only time will tell if this trend will stick, but for now, here are the 10 cities millennials are buying homes — and the 10 where they aren’t.

Cities Where Millennials Are Buying Homes

10. St. Louis, Missouri-Illinois
Millennial Home Ownership: 40.2%

9. Detroit-Warren-Dearborn, Michigan
Millennial Home Ownership: 40.2%

8. Boise City, Idaho
Millennial Home Ownership: 40.6%

7. Baton Rouge, Louisiana
Millennial Home Ownership: 41.0%

6. Scranton-Wilkes-Barre-Hazleton, Pennsylvania
Millennial Home Ownership: 41.9%

5. Minneapolis-St. Paul-Bloomington, Minnesota-Wisconsin
Millennial Home Ownership: 42.4%

4. McAllen-Edinburg-Mission, Texas
Millennial Home Ownership: 43.3%

3. Des Moines-West Des Moines, Iowa
Millennial Home Ownership: 43.6%

2. Grand Rapids-Wyoming, Michigan
Millennial Home Ownership: 45.3%

1. Ogden-Clearfield, Utah
Millennial Home Ownership: 51.0%

Cities Where Millennials Aren’t Buying Homes

10. Durham-Chapel Hill, North Carolina
Millennial Home Ownership: 25.2%

9. Madison, Wisconsin
Millennial Home Ownership: 24.7%

8. New Haven-Milford, Connecticut
Millennial Home Ownership: 24.4%

7. Fresno, California
Millennial Home Ownership: 23.6%

6. San Francisco-Oakland-Hayward, California
Millennial Home Ownership: 20.5%

5. San Jose-Sunnyvale-Santa Clara, California
Millennial Home Ownership: 20.2%

4. New York-Newark-Jersey City, New York-New Jersey-Pennsylvania
Millennial Home Ownership: 19.8%

3. San Diego-Carlsbad, California
Millennial Home Ownership: 19.8%

2. Urban Honolulu, Hawaii
Millennial Home Ownership: 18.3%

1. Los Angeles-Long Beach-Anaheim, California
Millennial Home Ownership: 17.8%

Image: Bauhaus1000

The post 10 Cities Where Millennials Are Buying Homes (& 10 Where They Aren’t) appeared first on Credit.com.

Clever Ways to Make Homeownership More Affordable

We all know that aiming to live well below your means will help you save more money, get out of debt, and get ahead financially overall. To supercharge this process, you may want to consider attacking your largest expense: housing.

Just being able to save $200, $500, or more each month on housing could put a large dent in your debt repayment or help you seriously pad your savings. Reducing or eliminating your housing expenses might sound difficult, but there are so many different strategies, at least one could work for you.

What’s more is that these options don’t have to be permanent. You can always go back to a more traditional housing situation once you feel like the arrangement has run its course.

See if one of these ways of cutting your housing costs might work for you.

Be Energy Efficient

The eco-revolution is here, and as a result, there are so many ways to save on utilities. A bonus is that some energy-efficient modifications and products can help you earn federal tax credits.

The list of things you can do is long and can get expensive, but there’s some low-hanging fruit when it comes to reducing your energy consumption:

  • Stop air leaks with caulk, insulation, or weatherstripping
  • Swap out incandescent lights for LED lights
  • Turn down your water heater and get a jacket for it
  • Plug your devices into powerstrips that minimize idle current usage (or unplug devices altogether)
  • Use rainwater barrels for your outdoor water needs
  • Air-dry your clothing
  • Choose light colors on flooring and walls to minimize artificial light use during daylight hours
  • Program your thermostat
  • Get alerts for higher priced kilowatt rates during certain hours of the day

You get the point. The more you can minimize your energy use, obviously the more money you’ll save on these costs. Pick a few that work for you, then use the money saved to get ahead in your finances.

Put Your Bills on Autopay

Not only will this small gesture save your sanity, it could potentially save you fees and penalties connected with late payments. You can set up automatic payments to be deducted from your bank account or a credit card account. If you choose the latter, be sure to avoid carrying a balance from month to month and pay your credit card bill on time as well. Otherwise, the interest and late fees from missing your credit card payment could cancel out the benefits of your autopay setup.

Appeal Your Property Taxes

If you’ve ever gotten those solicitations in the mail from companies that claim to reduce your property tax bill, don’t put it in the junk pile quite yet. According to the National Taxpayers Union, up to 60% of U.S. properties are over-assessed. This means that 60% of Americans could be paying inflated property tax bills.

Many property owners don’t even know that they can get their property tax bill reduced via an appeal process. Because of this, it’s very possible that you are paying too much for your property taxes.

The appeal process to get your taxes can seem daunting, but it’s usually a string of paperwork and deadlines. Of course, you’ll be dealing with government entities so that could add a layer of complexity to the whole ordeal, but it’s not insurmountable.

If you have the time and ambition, it’s a process you could easily undertake yourself. If not, it may be worth hiring help to file and follow up through the property-tax appeal process. If the appeal is successful and your property taxes are reduced, you’d fork over a portion of the savings to the firm or person you hire.

Shop Around for Insurance

If you’ve got home insurance, you are likely to have other policies for vehicles, and perhaps you also have coverage for health and life insurance benefits, too. If you’ve got insurance needs that require multiple policies, you can leverage your buying power to shop around for better rates.

Shopping around for insurance can seem straightforward, but be ready to use your brain to the utmost in this endeavor. Not only will you need to compare prices, but you’ll also want to compare things like coverage amounts, premiums, deductibles, and available riders at the quoted prices.

Fortunately, there are comparison sites and independent insurance agents that can make this task a little easier. Either way you do it, it’s a good idea to check around every once in awhile to make sure your current insurance provider is being competitive and offering you the best rate.

Become a DIYer

One of the most costly expenses of owning a home can be maintenance, repairs, and upgrades. Save money by learning to do some things around the house yourself. There are many resources to help you with anything you don’t know much about, from books, to websites, to YouTube. Though it can take more time, you might come out ahead by cutting your own grass or installing your own kitchen backsplash.

If you’ve got complicated jobs that require special expertise and equipment, consider a partial DIY approach. For example, if you’re redoing your bathroom, you might ask the contractor about things you can do yourself to shave the bill down some. Demolition and cleanup of existing fixtures might be the type of work you can handle.

Don’t be afraid to experiment, but definitely be wise about the projects you decide to take on yourself. Finding the right balance between hiring and DIYing can save you time, money, and headaches as a homeowner.

Rethink Your Home Purchase Plan

Getting a conventional mortgage with vanilla terms that include a 10%-20% down payment and a 30-year loan period are all too familiar to the home-buying public. But if you really want to save on the single largest expense in your life, you might have to be a little more flexible than the standard terms accepted on most home loans.

Larger Down Payment

One approach to consider is putting down at least 20% on your home purchase. This will allow you to skip private mortgage insurance (PMI), which can amount to thousands of dollars over the life of your home loan. PMI can eventually go away over the life of the loan when certain criteria are met, but you can save more money by dumping it sooner than later.

Refinance Your Mortgage

Many people refinance their homes in hopes of getting a lower monthly payment or locking in a lower interest rate. Adjusting these numbers downward can definitely save money for some homeowners over the long run.

However, refinancing your home loan is not a silver-bullet solution that will work in every scenario. In some cases, it makes perfect sense to refinance, and in others, it wouldn’t be a good idea. The best thing to do is run the refinance numbers and make a decision. After doing the math, you might actually find that fees and extended loan terms could cause you to lose money rather than save it.

Make sure you fully understand the terms of your refinanced mortgage along with the potential impact on your entire financial outlook. Most definitely, confirm your assumptions about this move with math. If you need help running the numbers, check out this refinance calculator from myFICO.

Pay Cash for Your Home

While not an option for the average American, paying cash for your home is not unheard of. Paying cash for a home would eliminate tens, maybe hundreds of thousands of dollars in interest, mortgage fees, and PMI. If you think you’d like to go for the gusto and pay cash for a home, consider ways to make this feat possible:

Make Some Lifestyle Changes

Though these options aren’t for everyone, they are still worth a mention. These suggestions are for those who might be willing to change their lifestyle in order to garner the most savings possible when it comes to housing.

Get a Roommate (or Two)

The home-sharing revolution has caught on, and everyone from young professionals to empty nesters are finding boarders on places like Craigslist and Airbnb. If it works out, it can truly be a good solution to help lower your housing costs. Plus, having a roommate can be temporary or longer term, based on your living preferences.

Again, this option is not for the faint of heart. Adding a roommate to your living equation could be utterly disastrous or surprisingly pleasant, so choose your housemates wisely.

Buy a Multifamily Unit, Rent One Unit Out

Depending on the location and property type in these situations, homeowners can often cover their entire mortgage amount with their renters’ payments. It can definitely have its benefits, but don’t buy that two-flat just yet.

Remember, with this arrangement, you’ll be swimming deep in the waters of landlordship. How it all pans out can be based on so many variables: the landlord, tenant, property, location, and a host of other factors can make this arrangement easy income or a nightmarish headache.

If things go wrong with your property, your tenant doesn’t share the burden of fixing things though they live there just the same. There can be costs associated with maintenance and repairs that go well beyond the monthly income your rented unit brings in. You’ll want to have a comfortable cash cushion for incidentals before starting your homeownership journey as a landlord.

Downsize

You don’t have to join the tiny home revolution to downsize (though it’s not a terrible idea). Downsizing can look different for different people. Downsizing for one person might be moving from the lake-view two-bedroom apartment to a studio in a less ritzy location. You’ll have to decide what downsizing looks like for you and if it will be worth the effort.

While you might not be game for all of these suggestions, you can probably adopt a few that could change your financial situation significantly. Whatever measures you choose to save or eliminate your housing costs, make sure you are ready to deal with the consequences. These consequences can be both beneficial and somewhat inconvenient for your quality of life and your financial health. In the end, you’ll have to determine if it’s worth it.

The post Clever Ways to Make Homeownership More Affordable appeared first on MagnifyMoney.

The Hidden Costs of Selling A Home

With home values picking back up, many homeowners may be already dreaming of the money they’d make selling their home. Although the aim is to make money on a home sale, or at least break even, it’s easy to forget one important thing: selling a house costs money, too.

A joint analysis by online real estate and rental marketplace Zillow and freelance site Thumbtack found American homeowners spend upward of $15,000 on extra or hidden costs associated with a home sale.

Most of those expenses come before homeowners see any returns on their home sale. Most of the money is spent in three categories: closing costs, home preparation, and location.

Here are a few hidden costs to prepare for when you sell your home.

Pre-sale repairs and renovations

Zillow’s analysis shows sellers should plan to spend a median $2,658 on things like staging, repairs, and carpet cleaning to get the property ready.

Buyers are generally expected to pay their own inspection costs; however, if you’ve lived in the home for a number of years and want to avoid any surprises, you might also consider spending about $200 to $400 on a home inspection before listing the property for sale. That way, you can get ahead of surprise repairs that may decrease your home’s value.

Staging is another unavoidable cost for any sellers. Staging, which involves giving your home’s interior design a facelift and removing clutter and personal items from the home, is often encouraged because it can help make properties more appealing to interested buyers. Not only will you need to stage the home for viewing, but sellers often need to have great photos and construct strong descriptions of the property online to help maximize exposure of the property to potential buyers. If your agent is handling the staging and online listing, keep an eye on the “wow” factors they add on. Yes, a 3-D video walk-through of your house looks really cool, but it might place extra pressure on you budget.

You could save a large chunk on home preparation costs if you decide to DIY, but if you outsource, expect a bill.

ZIP code

Location drove home-selling costs up for many respondents in ZIllow’s analysis, as many extra costs were influenced by regional differences — like whether or not sellers are required to pay state or transfer taxes.

With a median cost of $55,000 for closing and maintenance expenses, San Francisco ranked highest among the most-expensive places to sell a home. At the other extreme, sellers in Cleveland, Ohio, pay little more than a median $10,100 to cover their selling costs.

Generally, selling costs correlate with the cost of the property, so expect to pay a little more if you live in an area with higher-than-average living costs or have a lot of land to groom for sale. Take a look at Zillow’s rankings below.

Closing costs

Closing costs are the single largest added expense of the home-selling process, coming in at a median cost of $12,532, according to Zillow. Closing costs include real estate agent commissions and state sales and/or transfer taxes. There may be other closing costs such as title insurance or escrow fees to pay, too.

Real Trends, a research and advisory company that monitors realty brokerage firms and compiles data on sales and commission rates of sales agents across the country, reported the national average was 5.26% in 2015.

Real Trends says rates are being weighed down by:

  • an increasing number of agents working for companies like Re/Max that give them flexibility to set commission rates without a minimum requirement
  • more competition from discount brokers like Redfin, an online brokerage service that charges sellers as low as 1%
  • an overall shortage of homes for sale pressuring agents to negotiate commission rates

The firm’s president, Steve Murray, told The Washington Post he predicts agent commissions will fall below 5% in the coming years.

Luckily, some closing costs are negotiable.

To save on real estate agent commissions, you can either negotiate their fee down or find a flat-fee brokerage firm like Denver-based Trelora, which advertises a flat $2,500 fee to list a house regardless of its selling price. Larger companies like Re/Max give their agents full control over their commission rates, so you may have better luck negotiating with them.

If you have the time on your hands, you could also list the home for-sale-by-owner to save on closing costs. Selling your home on your own is a more complicated and time-intensive approach to home selling and can be more difficult for those with little or no experience.

Other costs to consider:

Utilities on the empty home

If you’re moving out prior to the sale, you should budget to keep utilities on at your old place until the property is sold.

It will help you sell your home since potential buyers won’t fumble through your cold, dark home looking around. It may also prevent your home from facing other issues like mold in the humid summertime. Be sure to have all of your utilities running on the buyer’s final walk through the home, then turn everything off on closing day and handle your bills.

Make room in your household’s budget to pay for double utilities until the home is sold.

Insurance during vacancy

Again, prepare to pay double for insurance if you are moving out before your home sells. You’ll still need homeowner’s insurance to ensure coverage of your old property until the sale is finalized. Check the terms first, as your homeowner’s insurance policy might not apply to a vacant home. If that’s the case, you can ask to pay for a rider — an add-on to your basic insurance policy — for the vacancy period.

Capital gains tax

If you could make more than $250,000 on the home’s sale (or $500,000 if you’re married and filing jointly), you’ll want to take a look at the rules on capital gains tax. If your proceeds come up to less than $250,000 after subtracting selling costs, you’ll avoid the tax. However, if you don’t qualify for any of the exceptions, the gains above those thresholds could be subject to a 25% to 28% capital gains tax.

The Key Takeaway

Selling a home will cost you some money up front, but there are many ways you can plan for and reduce the largest costs. If you’re planning to sell your home this year, do your research and keep in mind falling commission costs when you negotiate.

List all of the costs you’re expecting and calculate how they might affect the profit you’d make on the sale and your household’s overall financial picture. If you’re unsure of your costs, you can use a sale proceeds calculator from sites like Redfin or Zillow to get a ballpark estimate of your potential selling costs, or consult a real estate agent.

The post The Hidden Costs of Selling A Home appeared first on MagnifyMoney.

3 Easy Ways to Pay Off Your Mortgage Faster

These tips are your ticket to mortgage-free living.

As long as you’re alive, you have to live somewhere and, generally speaking, you have two options: Rent an apartment (or a home) and line your landlord’s pocket; or buy a home, and over time, hopefully line your own.

This premise is one of David Bach’s most important messages. The author of the New York Times bestseller “The Automatic Millionaire,” is a firm believer in the idea that real estate is critical to building wealth. In fact, he says buying a home is one of the three most important actions people can take in pursuit of financial security.

“I’ve been a lifelong proponent of home ownership,” says Bach, author of 11 best selling books. “How do you build real wealth on an ordinary income? It’s not very sexy, but it’s a simple, timeless approach: Buy a home.”

It’s not merely the act of purchasing a home that Bach advocates. The secrets to financial success that he offers in “The Automatic Millionaire,” include urging readers to pay their homes off early via an approach he calls “automatic debt-free home ownership.”

It may sound radical to some, but according to Bach, who spent nine years as a financial adviser at Morgan Stanley, the common denominator among all of his clients who were able to retire early was that they had paid off their homes early.

Here’s Bach’s approach to debt-free home ownership.

1. Establish a Biweekly Mortgage Payment Plan

A biweekly payment plan is exactly what the name implies. Instead of only making monthly mortgage payments, split the payment down the middle and pay half every two weeks.

When you make a payment every two weeks, (instead of just one per month,) you end up making one extra month’s worth of payments annually. In other words, over the span of a year, you’re making 26 half payments, which is the equivalent of 13 full payments.

“By doing this, something miraculous will happen. Depending on your interest rate, you can end up paying off your mortgage early — somewhere between five and ten years early” he says in the book.

Additional Benefits of Biweekly Payments

The biweekly payment approach also saves the homeowner thousands, if not hundreds of thousands of dollars, in interest. (Having a good credit score can help you save on interest, too. If you don’t know where your credit stands, you can get your two free credit scores, updated every 14 days, on Credit.com.)

In his book Bach provides the example of a 30-year-mortgage on a $250,000 home. If the interest rate on that mortgage is 5%, then the interest paid over the life of the loan will be about $233,139. When paid biweekly, the same mortgage instead costs about $188,722 — a savings of more than $44,000.

Establishing a biweekly payment plan merely requires calling your lender. If the mortgage is held by a large bank, they may refer you to a third-party that handles payment processing.

But one critical point Bach makes in the book is this: Before signing onto biweekly mortgage payments ask the servicing company what the fee is for the program and what they do with your money when they receive it. The second question is particularly important because some companies hang onto the extra money you’re putting toward the mortgage and send it to your mortgage holder all at once at the end of the month.

You want the extra payments applied to your mortgage as soon as possible, so that you’re paying down the mortgage faster.

You also cannot just split your monthly mortgage payment in half yourself (without talking to your mortgage holder, bank or other servicing company) and mail in payments every two weeks. The bank may send the extra payment back to you, unsure of what to do with it.

This trick can also work for paying down your credit card balance faster. (Here are some other tips for paying off credit card debt.)

2. Pay Extra Each Month

The next approach to debt-free home ownership outlined in Bach’s book is a plan he calls “No-Fee Approach No. 1.” It involves merely adding 10% to whatever your monthly mortgage payment happens to be. If your monthly payment is $1,342, pay an extra $134 dollars each month. (Sending the bank $1,467 per month instead of $1,342.)

This approach leads to paying off a home in 25 years, instead of 30, saving about $44,000. However, Bach urges making the extra 10% automatic, so that you don’t come up with excuses not to do it. In other words, have the $1,467 automatically deducted from your checking account each month.

3. Make One Extra Payment Each Year

Pick one month each year and pay the mortgage twice. Translation: Send the bank one extra payment a year.

Try doing this with some of your tax refund, suggests Bach. But no matter when you choose to do it, don’t simply send the bank a check for double the normal mortgage amount.

According to Bach this will confuse the bank. He advises writing two checks. Send one in with your mortgage coupon and the other with a letter explaining that you want the money applied to your principal.

The big takeaway according to Bach is that if you don’t buy a home, you won’t get on the escalator to wealth that home ownership provides. He says this message is particularly important for millennials who have been shying away from home ownership.

“The critical point is that one — you can buy a home. Two — you should buy a home. And three — you will be glad that you did,” says Bach.

Image: filadendron

The post 3 Easy Ways to Pay Off Your Mortgage Faster appeared first on Credit.com.

Buying a House When You Have Student Loan Debt

Student loan debt is a reality for many people wishing to buy homes. Fortunately, it does not have to be a deal-breaker. But there’s no getting around the fact that a large amount of student loan debt will certainly influence how much financing a lender will be willing to offer you.

In the past, mortgage lenders were able to give people with student loans a bit of a break by disregarding the monthly payment from a student loan if that loan was to be deferred for at least one year after closing on the home purchase. But that all changed in 2015 when the Federal Housing Authority, Fannie Mae, and Freddie Mac began requiring lenders to factor student debt payments into the equation, regardless of whether the loans were in forbearance or deferment. Today by law, mortgage lenders across the country must consider a prospective homebuyer’s student loan obligations when calculating their ability to repay their mortgage.

The reason for the regulation change is simple: with a $1.3 million student loan crisis on our hands, there is concern homebuyers with student loans will have trouble making either their mortgage payments, student loan payments, or both once the student loans become due.

So, how are student loans factored into a homebuyer’s mortgage application?

Anytime you apply for a mortgage loan, the lender must calculate your all-important debt-to-income ratio. This is the ratio of your total monthly debt payments versus your total monthly income.

In most cases, mortgage lenders now must include 1% of your total student loan balance reflected on the applicant’s credit report as part of your monthly debt obligation.

Here is an example:

Let’s say you have outstanding student loans totaling $40,000.

The lender will take 1% of that total to calculate your estimated monthly student loan payment. In this case, that number would be $400.

That $400 loan payment has to be included as part of the mortgage applicant’s monthly debt expenses, even if the loan is deferred or in forbearance.

Are Student Loans a Mortgage Deal Breaker? Not Always.

If you are applying for a “conventional” mortgage, you must meet the lending standards published by Fannie Mae or Freddie Mac. What Fannie and Freddie say goes because these are the two government-backed companies that make it possible for thousands of banks and mortgage lenders to offer home financing.

In order for these banks and mortgage lenders to get their hands on Fannie and Freddie funding for their mortgage loans, they have to adhere to Fannie and Freddie’s rules when it comes to vetting mortgage loan applicants. And that means making sure borrowers have a reasonable ability to repay the loans that they are offered.

To find out how much borrowers can afford, Fannie and Freddie require that a borrower’s monthly housing expenses (that includes the new mortgage, property taxes, and any applicable mortgage insurance) to be no more than 43% of their gross monthly income.

On top of that, they will also look at other debt reported on your credit report, such as credit cards, car loans, and, yes, those student loans. You cannot go over 49% of your gross income once you factor in all of your monthly debt obligations.

For example, if you earn $5,000 per month, your monthly housing expense cannot go above $2,150 per month (that’s 43% of $5,000). And your total monthly expenses can’t go above $2,450/month (that’s 49% of $5,000). Let’s put together a hypothetical scenario:

Monthly gross income = $5,000/month

Estimated housing expenses: $2,150
Monthly student loan payment: $400
Monthly credit card payments: $200
Monthly car payment: $200

Total monthly housing expenses = $2,150

$2,150/$5,000 = 43%

Total monthly housing expenses AND debt payments = $2,950

$2,950/$5,000 = 59%

So what do you think? Does this applicant appear to qualify for that mortgage?

At first glance, yes! The housing expense is at or below the 43% limit, right?

However, once you factor in the rest of this person’s debt obligations, it jumps to 59% of the income — way above the threshold. And these other monthly obligations are not beyond the norm of a typical household.

What Can I Do to Qualify for a Mortgage Loan If I Have Student Debt?

So what can this person do to qualify? If they want to get that $325,000 mortgage, the key will be lowering their monthly debt obligations by at least $500. That would put them under the 49% debt-to-income threshold they would need to qualify. But that’s easier said than done.

Option 1: You can purchase a lower priced home.

This borrower could simply take the loan they can qualify for and find a home in their price range. In some higher priced real estate markets it may be simply impossible to find a home in a lower price range. To see how much mortgage you could qualify for, try out MagnifyMoney’s home affordability calculator.

Option 2: Try to refinance your student loans to get a lower monthly payment.

Let’s say you have a federal student loan in which the balance is $30,000 at a rate of 7.5% assuming a 10-year payback. The total monthly payment would be $356 per month. What if you refinanced the same student loan, dropped the rate to 6%, and extended the term to 20 years? The new monthly payment would drop to $214.93 per month. That’s a $142 dollar per month savings.

You could potentially look at student loan refinance options that would allow you to reduce your loan rate or extend the repayment period. If you have a credit score over 740, the savings can be even higher because you may qualify for a lower rate refi loan. Companies like SoFi, Purefy, and LendKey offer the best rates for student loans, and MagnifyMoney has a full list of great student loan refi companies.

There are, of course, pros and cons when it comes to refinancing student loans. If you have federal loan debt and you refinance with a private lender, you’re losing all the federal repayment protections that come with federal student loans. On the other hand, your options to refinance to a lower rate by consolidating federal loans aren’t that great. Student debt consolidation loan rates are rarely much better, as they are simply an average of your existing loan rates.

Option 3: Move aggressively to eliminate your credit card and auto loan debt.

To pay down credit debt, consider a balance transfer. Many credit card issuers offer 0% introductory balance transfers. This means they will charge you 0% interest for an advertised period of time (up to 18 months) on any balances you transfer from other credit cards. That buys you additional time to pay down your principal debt without interest accumulating the whole time and dragging you down.

Apply for one or two of these credit cards simultaneously. If approved for a balance transfer, transfer the balance of your highest rate card immediately. Then commit to paying it off. Make the minimum payments on the other cards in the meantime. Focus on paying off one credit card at a time. You will pay a fee of 3% in some cases on the total balance of the transfer. But the cost can be well worth it if the strategy is executed properly.

Third, if the car note is a finance and not a lease, there’s a mortgage lending “loophole” you can take advantage of. A mortgage lender is allowed to omit any installment loan that has less than 10 payments remaining. A car is an installment loan. So if your car loan has less than 10 payments left, the mortgage lender will remove these from your monthly obligations. In our hypothetical case above, that will give this applicant an additional $200 per month of purchasing power. Maybe you can reallocate the funds from the down payment and put it toward reducing the car note.

If the car is a lease, you can ask mom or dad to refinance the lease out of your name.

Option 4: Ask your parents to co-sign on your mortgage loan.

Some might not like this idea, but you can ask mom or dad to co-sign for you on the purchase of the house. But there are a few things you want to make sure of before moving forward with this scenario.

For one, do your parents intend to purchase their own home in the near future? If so, make sure you speak with a mortgage lender prior to moving forward with this idea to make sure they would still qualify for both home purchases. Another detail to keep in mind is that the only way to get your parents off the loan would be to refinance that mortgage. There will be costs associated with the refinance of a few thousand dollars, so budget accordingly.

With one or a combination of these theories there is no doubt you will be able to reduce the monthly expenses to be able to qualify for a mortgage and buy a home.

The best piece of advice when planning to buy a home is to start preparing for the process at least a year ahead of time. Fail to plan, plan to fail. Don’t be afraid to allow a mortgage lender to run your credit and do a thorough mortgage analysis.

The only way a mortgage lender can give you factual advice on what you need to do to qualify is to run your credit. Most applicants don’t want their credit run because they fear the inquiry will make their credit score drop. In many cases, the score does not drop at all. In fact, credit inquiries account for only 10% of your overall credit score.

In the unlikely event your credit score drops a few points, it’s a worthy exchange. You have a year to make those points go up. You also have a year to make the adjustments necessary to make your purchase process a smooth one. Do keep in mind that it is best to shop for mortgage lenders and perform credit inquiries within a week of each other.

You should also compare rates on the same day if at all possible. Mortgage rates are driven by the 10-year treasury note traded on Wall Street. It goes up and down with the markets, and we’ve all seen some pretty dramatic swings in the markets from time to time. The only way to make an “apples-to-apples” comparison is to compare rates from each lender on the same day. Always request an itemization of the fees to go along with the rate quote.

The post Buying a House When You Have Student Loan Debt appeared first on MagnifyMoney.

8 Questions to Ask Yourself When Deciding to Rent or Buy a House

Buying a home isn't for everyone. These questions will help you sort out whether it's a good financial move for you.

If you’re at the age when your peers are making major life moves — getting married, having kids and buying homes – you might be feeling it’s time to join them. Or you may simply just be at that stage all on your own.

Either way, plenty of young adults are starting to get the home-buying itch. While there are a lot of appealing benefits to homeownership, taking on that kind of debt is not without risk. The decision to rent vs. buy is one you should make carefully.

If you’re trying to figure out your next move, consider asking yourself these eight questions. The answers should steer you in the right direction.

1. What Is My Top Financial Priority?

Buying a home will slow down your ability to make progress on other financial goals. You’ll need to focus on lowering expenses or increasing your income so you can afford a down payment and monthly mortgage payments. (This guide can help you understand more about how to determine your down payment on a home.)

That extra cash will be funneled toward your mortgage rather than paying off credit cards or student loans if you have them. Other financial goals, such as saving for retirement and building an emergency fund, may also have to take a back seat.

Assess your competing financial goals and decide which ones take priority. Buying a house might come first in your book, or perhaps you’ll decide to work toward other money goals before committing to a mortgage.

2. Do I Have Savings For a Down Payment & Closing Costs?

Renting requires some savings – you’ll need enough cash to cover the first month’s rent and the deposit.

To buy a home, however, the minimum you’ll need to have saved is usually 6% or more of the home’s value. Even FHA loans require a minimum down payment of 3.5%, and closing costs add another 2-3% to the costs.

But that’s the minimum; a 20% down payment is better to give you a decent amount of equity and avoid private mortgage insurance.

If you don’t have sufficient savings, you’ll need to focus on saving for a down payment before you’re in a position to buy. And even if you do have savings, it’s worth it to think through the best use of those savings and whether you’d rather allocate that cash to other goals.

3. How Do Home & Rent Prices Compare?

Housing markets also affect whether it’s a better idea to rent versus buy. If you’re facing sky-high rent prices that climb each year, a mortgage starts making a lot of sense. On the other hand, if you want to live in an expensive area, you could be priced out of buying a home (especially without extensive savings).

4. How Long Do I Plan to Live Here?

The longer you live in a home, the more likely it is that the financial investment of buying a property will pay off.

If you like your city, have a steady job, and are ready to live in the same space for a few years, buying is often more cost effective, but not always. You may want to crunch the numbers to see how long you’d need to live in a home to break even on your initial costs.

5. Will I Qualify for a Good Deal on a Mortgage?

You’ll need a decent income and good credit to qualify for the lowest rates and best terms on mortgage loans. It’s sometimes possible to get a mortgage if you have bad credit, but you’ll pay a lot more over time. (Haven’t checked where your credit stands? Now’s the time. You can get your two free credit scores, updated every 14 days, on Credit.com.)

Think of it this way: most mortgages last 30 years. With that in mind, you may see that it’s financially worth it to spend a few months to a year rebuilding your credit if it means qualifying for a lower interest rate for those 30 years. For example, if you boost your credit score by 50 points – from the mid-600s to over 700 – you could qualify for a mortgage rate that’s 80+ basis points lower, according to MyFICO.com.

6. What Other Costs Will I Be Responsible for as a Homeowner?

When comparing costs of renting versus buying, make sure you’re including home-owning costs beyond mortgage principal and interest.

There are escrow costs, homeowner’s insurance, and property taxes. You can expect home maintenance costs to equal 1-3% of your home’s sale price each year. Then there are homeowners’ association fees and new utility costs such as trash collection and water. Meanwhile, renters are usually not responsible for any of these costs.

7. Am I Comfortable with the Risks of Owning a Home?

It’s a popular argument that owning is smarter than renting because you’re investing in a home. But as with any investment, owning a home has its own inherent risks.

There are no guarantees you’ll get a good return on your investment. Just ask the many homeowners who defaulted on their homes after the 2008 mortgage crisis. And even in a strong housing market, there are the everyday risks of unemployment or other financial hardships.

8. How Would Renting vs. Owning Affect my Lifestyle?

Guiding forces in your decision to rent or own are your lifestyle and values. For many, the freedom of choice, privacy, and control that come with owning a home are big selling points. Other people might prefer the convenience, flexibility, and short-term commitment that comes with renting.

Know what you want and choose a housing setup that will help you achieve it. Owning a home can be an admirable accomplishment for some people. Maybe it will be for you, too. Only you know the answer.

Image: fstop123

The post 8 Questions to Ask Yourself When Deciding to Rent or Buy a House appeared first on Credit.com.

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.

The post 3 Investing Strategies to Save for a New Home appeared first on MagnifyMoney.