Archive for September, 2012

The Emergency Fund: Borrowing from Yourself Instead of the Bank

September 27, 2012

By Leith Guth, North Carolina Cooperative Extension, FCS Agent, Lincoln County

On the day my husband and I moved out of state for his graduate school, a passing truck threw a rock into our windshield and cracked it.  Thus began our love hate relationship with that car and a brilliant illustration on why everyone needs an emergency fund.

An emergency fund is an accessible account where money is saved for an emergency.   Ideally, an emergency fund would be in a savings vehicle that is earning some interest.   In the past, experts advised one to put enough money to cover three months of expenses into an emergency account.  Today, with unemployment more prevalent and most job searches taking up to six months, advisors suggest having emergency funds to cover six months of expenses.    Emergency funds are for unplanned expenses like car repairs, unemployment, illness or exploding washing machines.  Christmas comes at the same time each year and does not qualify as an emergency!  With an emergency fund, one can pay for unexpected expenses from that fund balance without taking out a loan or incurring credit card debt.  Instead of paying  principal and interest on a loan back to a creditor, one pays the money back to her emergency fund.  One should be able to access her emergency funds within one or two days.  It is not wise for the emergency fund to be accessible by ATM or to serve as the overdraft for a checking account; easy access to these emergency funds can make them disappear easily if you get the spending bug.

Our graduate school car saga demonstrates why I needed an emergency fund.  In those days, we used a credit card as our emergency fund.  In our haste to pay off the credit card, we would pay too much on our credit card, depleting our cash on hand.  Then, another emergency expense would occur, a trip home for a funeral for example.  With no emergency fund and little cash on hand, we would charge tickets on our credit card; it was a vicious circle where interest charges mounted.  With a proper emergency fund of even $500, we would have paid for our car repair from our fund without incurring interest charges.  Then, we would pay back our emergency fund instead of the credit card company.

Nationally known financial gurus insist that everyone make an emergency account a priority in their financial life, before other savings or investments.  Even a small monthly amount deposited into an accessible account that earns interest is a step in the right direction.

National Competencies: Saving, Borrowing

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I’m Buying a Home, What Do I look For?

September 19, 2012

By Robin Landsman, Wake County Extension Agent

This is the third installment in three-part series about homeownership and will cover successful strategies for purchasing a home that will meet a family’s needs.

“I’m buying a home; what should I look for?”  This is a question many Agents have probably heard over the years.  Determining housing needs and wants according to affordability before shopping, can help homebuyers avoid the disappointment of looking at houses they can’t afford or don’t need.  The homebuyer’s lifestyle, and any special circumstances, should factor into the selection.  As the homebuyer begins this process, he or she may find the assistance of a realtor to be very valuable.  The help of a good agent will save time, allowing the homebuyer to take notes and ask questions while sorting through the hundreds of homes currently on the market.  Here are some tips to share with potential homebuyers.

First, determine what you can afford.  Lenders determine mortgage qualification by assessing one’s credit report.  If you know that you have had some late payments and a history of high consumer debt, it is best to postpone looking for a mortgage until you have a satisfactory credit record.

A home is more than the bricks and mortar that make up the square footage and rooms.  There are several concerns that must be taken into consideration before you select your future home: price, location, size, and amenities.  Taking time to proactively examine what you want in a home will save you lots of effort when it is time to actually see potential homes.

Your price range depends on the amount of down payment you have saved and mortgage amount that the lender is willing to loan.  Remember, just because the lender approves you for a loan amount, doesn’t mean you can afford the mortgage.  There are lots of considerations, including other financial obligations that could impact your housing budget.

Location is crucial in your decision to purchase a home.  Schools, shopping, services and commuting distance are all fundamental elements that will require your consideration and prioritization.

The size of your family and what home features and benefits you seek are the criteria that you will need to use to determine your wish list for today as well as anticipated changes in the future.  The needs of a married couple with no children will be different from a bachelor looking to enjoy the single life, or the single mom with three teenagers.  A son caring for his disabled father may need to think about spacing for wheelchair access, the ability to add a ramp to the front entrance, or having a bedroom on the first level.  In thinking about your needs, you will need to make allowances for any special circumstances that may exist.

Many experts recommend making a list of what you and your family must have, would like to have, as well as what you don’t want and prefer not to have.  It is important to find a home that fits with your particular lifestyle.  The responsibility of yard maintenance may not work well for the businessman who spends 50 percent of his time traveling.  The convenience of a townhouse or condo with a small patch of green grass at the entrance may work better.  If you are environmentally conscious, finding a home with energy efficient features and appliances is a must.  Or as a parent who enjoys spending time outdoors with your children, a home in a neighborhood with a playground, walking trails or a community pool would be very desirable.

Your list of “wants” in your new home can be endless.  It will help to do a bit of research so you can identify some of the amenities that you prefer.  For example, you may prefer hardwood floors versus carpeting or vinyl siding versus brick.  Note that certain features may be standard in certain price ranges of homes.  Some of your desired amenities can be added, such as new appliances and cosmetic upgrades after you purchase the house; whereas location and lot size are fixed assets.  Thinking about all the dimensions to a home will provide greater understanding of the purchase.  Again, a realtor can be quite valuable in providing you with this information.

As you create the profile of the place you will eventually call home, remember, you are about to make a big investment in your future and that of your family.  Take time to think about those things that are important to you and that add to the quality of your life.  To ensure your overall satisfaction of your home purchase, look for homes that address your needs, accommodate your wants and complement your life style within a comfortable price.

Resources:

http://rebac.net/homebuyer_resources.cfm

www.nchfa.com  North Carolina Housing Finance Agency

National Core Competencies discussed in this post:
Borrowing, spending

Home Ownership – What Are The Costs?

September 12, 2012

By Robin Landsman, Wake County Extension Agent

This is the second is a series about homeownership and covers the costs associated with homeownership.   The next and final installment in the  series will provide tips for making a smart purchase.

Buying a home is the biggest investment that most consumers will make and is a major achievement.  Home ownership is also a major financial responsibility.  Proper planning and money management are key to making wise choices when it comes to buying a home. Understanding the upfront and ongoing costs of homeownership is a critical part of the decision process.

There are significant expenditures to be anticipated before and after home purchase.  The upfront costs of purchase include closing costs, which are the out-of-pocket expenses comprising the appraisal, survey, loan application, home inspection, legal fees, title insurance, title or deed registration fees to record your ownership, and any other payments to professionals assisting with a home purchase.  These fees are in addition to the cash required for down payment.  The total upfront costs associated with a home purchase will depend on the type of loan and whether the purchaser qualifies for any special programs, of which are available in North Carolina.  The availability of programs to assist with the costs of owning a home can greatly reduce out of pocket expenses.  On average, total closing costs can range from two to seven percent of the purchase price of the home.

The minimum amount needed for a down payment is determined by the lender and represents the buyer’s first investment in a home.  Closing costs are often paid in advance of closing or payable at the time of closing.  Escrow, is an account established by the lender to hold funds to pay on the homeowner’s behalf, the homeowners annual insurance premium and periodic property taxes.   An escrow account is typically funded at closing in an amount equal to the initial two or three month payments of taxes and insurance.  However, as much as six months might be required, ask your lender about their procedures.  Be sure you know the tax rate in the area where you plan to purchase.  Homeowners’ insurance cost can vary from insurer to insurer, call a few insurance companies and ask for an estimate based on the type of property you plan to purchase.  Knowing your costs and the lender’s escrow account rules will assist you in estimating how much money you will need at closing to fund the escrow account.  A lender may require mortgage insurance, hazard insurance (typically for rental property) and/or flood insurance (be aware of the flood zone rating for the property you are considering).  Additional insurance requirements increase the monthly costs to the new homeowner since these are in addition to the mortgage (principal and interest) and taxes.

After signing on the dotted line and receiving the keys, the ongoing costs of home ownership begin with moving in.  Whether hiring a moving company or fitting all of one’s belongings into a car, it costs money to move.  Additionally, some utility companies require a deposit to open an account.  It is a good practice to request a history of expenses from the previous owner to estimate the total monthly cost of living in the home, including water, energy bills, garbage removal, etc. to better estimate monthly out-of-pocket expenses.  As a new homeowner, estimating the monthly costs, including mortgage payments, insurance and increased utilities payments, is only one piece of the budgeting process.

New homeowners also need to save for those unexpected repairs. When the first day of summer brings 90-degree heat and a broken air conditioner, a new homeowner learns the first lesson of homeownership.  Prepare for those expected and unexpected expenses by having a reserve fund. It is a good idea to have a ballpark estimate of what it will cost to maintain the home.  Housemaster.com estimates that homeowners should spend between 1 and 3 percent of the value of the home for maintenance and repairs.  All homes are different, and new homeowners should create their own ballpark estimate and include it in their monthly budget.

Owning a home is still the American dream, even with the changing economic factors that have added a few challenges to the process.  New homebuyers can set realistic goals by assessing their credit and getting pre-approved (not pre-qualified)  for a mortgage before seriously looking at property.  Being focused and planning carefully by understanding the costs involved lead individuals and families to successful home ownership.

There are many resources to guide consumers to make smart choices to buy, maintain and keep their homes:

http://hud.gov   US Department of Housing and Urban Development

www.homebuyinginstitute.com

www.consumer-action.org

www.money-wise.org

National Core Competencies discussed in this post:

Borrowing, spending, protecting

Is Homeownership Right For Me?

September 6, 2012

By Robin Landsman, Wake County Extension Agent

This first in a 3-part series on homeownership will cover the consideration of renting versus buying a home, the costs associated with homeownership, and tips for making a smart purchase.

Interest rates are at historic lows and the housing market is a veritable buyers’ smorgasbord.  So everyone who can purchase is running out to purchase, right?  Not necessarily.  Homeownership is not for everyone.   Is the “American Dream” for you?

There are several things to consider when trying to decide if buying a home is the right choice.

First, consider advantages that homeownership offers:

Stability of monthly payments:  When locking into a fixed rate mortgage for 15, 20 or 30 years, you are guaranteed that your principal and interest payments will never go up.  However, taxes and insurance, when added into your mortgage through an escrow account, may cause your house payment to fluctuate over time. By comparison, rental costs over this same 15, 20 or 30-year period will almost certainly increase.  To help in this process, Missouri Extension has a very helpful on-line calculator.  You may find this useful as you work with clients as they make this decision:  http://extension.missouri.edu/p/GH5002

Tax benefits:  The interest you pay on your mortgage, along with the property taxes you pay each year, are deductible from your taxable income. As always, it’s best to talk with a tax consultant to get your full benefits.

Home equity:  Equity represents the portion of the home that you own and increases as you make monthly payments that reduce the outstanding loan balance. Over time, the home’s appreciation can increase the home’s market value your and help to increase your equity in the home. This equity can be used to secure a loan for other purposes, or can be converted to cash if you decide to sell.

Now let’s consider the downside to homeownership:

Maintenance:   The monthly cost of maintenance and utilities are normally more costly to the homeowner than to renter.  You are now the responsible party for maintenance and repairs.  As a renter, if you awake to find that there is no hot water for your morning shower you could call the landlord.  As a homeowner, it is now your responsibility to repair or replace the hot water heater.  There are costs in both time and money to maintaining the inside and outside of the home as well as the yard.

Relocating:   You may find it more difficult to relocate with the responsibility of a home.  Renters have the luxury of giving proper notice at the end of a lease, and they’re off.  When you own a home, it takes time to sell, or even rent, your home in today’s market. Additionally, you may find it difficult to find a lender in your new area willing to extend a loan for your next home without first selling or renting your current home.

Value:   And finally, there are no guarantees when it comes to the increase in value of your home. Unstable market conditions, wear and tear on the property and other factors could contribute to a decrease in value. Remember, you are primarily making a decision to buy a home in which to live rather than making a financial investment.

Homeownership is personal choice, and it is not for everyone.  To weigh the advantages and disadvantages these questions will help you determine your next move:

  1. Do you know what you want in a home?  Have you thought about what you need?  Taking the time to learn about the steps involved in the buying process will help ensure that you purchase a quality home at a price you can afford.
  2. Have you decided where you want to live?  Will you still want to live there in three or five years?
  3. Are you ready for the financial responsibility?  Is your income secure?  Will your income change in the near future?  Consider whether your employment situation or occupation stable such that you expect steady income.
  4. Is your financial house in order?  Do you have the down payment and closing costs saved?  Do you have an emergency savings account as well?
  5. Have you done your homework in learning mortgage basics?  Do you understand the differences between fixed and variable mortgage rates and the implications of those differences?
  6. Can you afford it?  Even if you have been pre-approved for a mortgage, you may not be comfortable with monthly mortgage costs for the approved loan amount.  The rule of thumb is that your total housing costs (mortgage, insurance, taxes) should not consume more than one third of your income.  It is perfectly fine to accept a mortgage loan in an amount that is less than for what you were approved.
  7. Are you ready to take care of repairs and ongoing maintenance?

Homeownership is not a decision to make easily, even in a buyer’s market.  Being prepared by knowing what you want will help you make the decision that is right for you.

Resources:
http://www.Realtor.org / National Association of Realtors   “Field Guide to Buying vs. Renting

National Core Competencies discussed in this post:
Borrowing, spending