Tag Archives: emergency fund

Preparing for Surprise Closing Costs

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photo by Chris Potter

The Wall Street Journal quoted me in Buying a Home? Prepare for Surprise Closing Costs. It opens,

Note to house hunters on a budget: A home’s sale price isn’t really the sale price—there are lots of closing costs and expenses that jack up the final number.

According to online real-estate listings site Zillow, buyers typically pay between 2% and 5% of the purchase price in closing costs. So if a home costs $300,000, that buyer can expect to pay between $6,000 and $15,000. Since the financial crisis, there’s more transparency on the part of lenders when disclosing the costs associated with a mortgage, so buyers know in advance how much they’ll need for the closing. But experts say that might not be enough.

Lender fees are only one part of the total cost of homeownership. Buyers must also pay appraisers, home inspectors and settlement agents, as well as the cost of title insurance, homeowners insurance and property taxes. And the fees don’t stop at the closing. Utilities, regular home maintenance and unexpected repairs add up as well—and can derail even the most experienced buyer.

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Here are a few considerations to help you avoid surprises at the closing table.

Stash your cash. There is no real rule of thumb as to how much money buyers should put aside in addition to the balance of the purchase price and closing costs. But the more, the better. “You definitely want an emergency fund,” says David Reiss, a Brooklyn Law School professor who specializes in real estate. “Appliances have a habit of breaking right after you buy a house.”

Close on the last day of the month, or just before. One of the fees due at closing is prepaid interest, the daily interest charge accruing between the closing and the day on which your first mortgage payment is due. Closing on the last day of the month reduces this upfront cost.

Get an estoppel letter from the association. Your real-estate agent or attorney may obtain this letter, which lists the maintenance fee, when it’s due, any required escrows or membership fees and whether a special assessment has been levied. Review this letter carefully, and compare it with the purchase contract to make sure all fees are apportioned accurately between buyer and seller.

Leverage in a Tight Market

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photo by Rex Pe

TheStreet.com quoted me in Home Shoppers Seeking Leverage in a Tight Market. It opens,

Homebuyers have faced tight supply issues this year, and obtaining leverage in this market has been challenging.

The lower inventories pushed sales in July down by 3%, according to the National Association of Realtors, a Chicago-based trade organization. The decline has resulted in sales falling back to levels in March and April with an annualized pace of 5.39 million, bringing the sales pace down by 2% from July 2015. The level of inventory of homes for sale has declined by 6%.
As the faster summer buying pace has moved into the fall phase when there are fewer buyers, consumers have a greater advantage as homes are on the market longer. For both May and June, the listings stayed on Realtor.com a median of 65 days. By July, that figure rose to 68 days and August brings even more options and should end at 72 days. The reduction of inventory has occurred for 47 consecutive months, helping sellers, but restricting options for buyers.

For homebuyers who want to nab their dream house in the neighborhood they have been eyeing, they still have leverage, but here are some tips to improve the process.

Home Buying Tips

Before consumers start shopping, they should work on improving their finances and avoid making any large purchases such as a car. After finding out your FICO score, the goal is to find ways for it to rise above 700, which means you will qualify with more lenders and obtain a lower interest rate, saving you thousands of dollars, said Jonathan Smoke, chief economist for realtor.com, a Santa Clara, Calif.-based real estate company.

Determine how much you can carve out of your savings for a down payment, but still maintain six months of emergency funds, especially if you are buying an older home which may have unexpected repairs.

The average down payment in 2016 is 11% across the U.S., but it depends vastly on the market and loan you are seeking.

“If you are struggling to come up with a down payment necessary for your market or type of mortgage, research down payment assistance programs,” he said. “Get all of your financial records organized, including recent bank and financial statements, the last two years of income tax filings and pay statements.”

There are many opportunities available since mortgage rates remain near historic lows and are unlikely to see substantial moves soon.

“The buying opportunity is still substantial and now the annual cycle means you will face less competition on homes that are on the market,” Smoke said.

Sellers want to see serious buyers, so getting pre-approved from a lender is important.

“A pre-approval letter as part of an offer will communicate to the seller that you have the ability to close,” he said.

Sellers still have an advantage and even though there are fewer potential buyers with fall right around the corner, the existing inventory remains low, so getting a house under contract can still be problematic, Smoke said.

“Don’t expect sellers to feel desperate,” he said. “Sellers may still act like it is the spring. Listen to the advice of your realtor on the composition of the initial offer so that you are more likely to keep the conversation going rather than face complete rejection.”

While you continue to search for another home, maintain your savings and increase the amount of your down payment and keep paying down your credit cards and student loans. Consumers who will be receiving a bonus in December should include these funds it into their down payment. If the interest rates for your credit card rates are fairly low, consider bulking up your down payment since mortgage rates are very low, said Colby Sambrotto, president of USRealty.com, a New York-based online real estate broker. said. These measures will help increase your odds as you house hunt.

“Ask your lender to recalculate your loan preapproval to reflect your updated debt-to-income ratio and the greater amount you can put down,” he said. “That can reframe your search parameters.”

Down payment assistance is available through employer and community group programs. Some companies will offer loans if you remain employed there for a certain number of years, said Sambrotto. A good source for more information about various programs is Down Payment Resource.

“The loans are usually geared to encourage employees to buy around a certain area, usually within walking distance of the employer,” he said.

Location is Key

Transportation can emerge as a “hidden cost” if your commute includes costly tolls or you want quicker access to cultural and sporting events, schools for children, shopping districts and professional education opportunities.

“Narrow your search to neighborhoods that offer economical options for commuting and routine errands,” Sambrotto said. “Look for neighborhood groups on Facebook and ask to join the conversation so you can quiz current residents about the true cost of living in that area.”

While homeowners might prefer a standard standalone house, a two-family duplex might be a better option, said David Reiss, a law professor at Brooklyn Law School in New York. These homes have a clear advantage because they generate investment income along with various financing, tax and capital gains advantages which the traditional single-family house does not have.

“Think through your preferences and then take a fresh look at the market,” he said. “You might have that idealized picket-fenced house in mind, but a duplex will expand the number of houses you can look at. They also bring along all sorts of additional maintenance responsibilities with them, so they are not right for everyone.”

Down in ARMs

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TheStreet.com quoted me in Top 5 Lowest 7-Year ARM Rates. It opens,

U.S. mortgage rates have continued to decline in the aftermath of the Brexit vote, low Treasury rates and stagnant economy, giving potential homeowners an opportunity to save money because of the dip.

The current market conditions give homeowners in the U.S. an opportunity to take advantage of the continuation of low mortgage rates since the Federal Reserve has not increased interest rates.

But, how do you snag the absolute lowest rates, especially if you don’t plan on staying in your first home for more than seven years and are learning toward 7/1 adjustable rate mortgages (ARMs)?

The 7-year ARMs are attractive to consumers, especially first-time homebuyers, because the interest rates are lower, helping you save more money each month compared to the traditional 30-year mortgage.

“You get what amounts to a fixed rate mortgage, but at a lower rate than the traditional 30-year fixed,” said Greg McBride, chief financial analyst of Bankrate, a North Palm Beach, Fla.-based financial content company.

While lower monthly payments are appealing, the interest rates reset after seven years, and it can be difficult to determine how much they will increase.

“If your timetable changes, then you may want to reconsider the loan you have,” he said. “You don’t want to be in the position of facing rising monthly payments that squeeze your budget or jeopardize your ability to afford your own home.”

Consumers on fixed incomes and saddled with student loans and credit card debt might opt for a 30-year fixed rate mortgage, because it represents “permanent payment affordability,” McBride said. The principal and interest will never change, because it is a fixed rate and can be easier to budget.

“It may not always be the optimal choice, but it is the safest choice,” he said.

Adjustable rate mortgages can still be beneficial if homeowners take advantage of the savings each month and allocate it towards paying down debt or into an emergency fund.

“Even if you’re still holding the 7-year ARM at the end of seven years, that doesn’t automatically turn it into a bad decision,” McBride said. “You will have banked seven years of savings relative to the fixed rate mortgage that can help you absorb any payment increases until you refinance or sell the home.”

Many consumers gravitate toward the 30-year mortgage, because the payments are stable and have been very low, said Jonathan Smoke, chief economist for Realtor.com, a Santa Clara, Calif.-based real estate company. Others are seeking the 7-year ARM, because they are more likely to qualify for a mortgage.

Mortgage activity so far in 2016 reveals that only 3% of mortgages have had shorter rate terms, according to Realtor.com’s analysis of purchase mortgage activity. Hybrid term mortgages such as the 7/1 ARM typically increase in share when “mortgage rates rise because the shorter fixed term offers a lower rate, often between 40 and 100 basis points,” he said. “The lower rate translates into a lower payment for the duration of the initial term, which is seven years.”

Each lender utilizes a benchmark such as a the 10-year U.S. Treasury or LIBOR rate and a margin, which is “what is added to the benchmark to determine your new rate,” Smoke said. The loans also have a cap on how high any single rate change can be and also a ceiling on how high the rate can ever be, he said.

At the end of the seven years, homeowners can choose to refinance to a lower fixed rate, but need to budget for the closing costs.

A lower rate upfront can be favorable for younger homeowners, but examining the ceiling rate and how it will impact your monthly payments is crucial.

“A mortgage broker or lender can help you walk through scenarios to determine if your timeline could benefit,” Smoke said. “To help calm any nerves about just how high your payment could go, ask yourself if you are willing to exchange the initial seven year savings for how long you might keep that mortgage after the seven-year period is up.”

Paying the premium for the peace of mind that your payments will remain static means that if interest rates rise several percentages in the next few years, you won’t be faced with having to consider the lower rate options or lower priced homes and/or more money down, he said.

“That’s why hybrids will likely become more popular in the future compared to how little they are used today,” Smoke said.

Since people have a tendency to change homes every seven years on average, a 7/1 ARM could be a good option because the savings can be substantial, said David Reiss, a law professor at Brooklyn Law School in N.Y.

“Even if you are not planning to move now, the future may bring changes such as divorce, frail relatives, job loss or new job opportunities,” he said. “Some people like the certainty of the 30-year fixed rate mortgages, but it is worth calculating just how much that certainty will cost you.”

Building Emergency Funds

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Rainy Day Fund

MainStreet.com quoted me in Here’s How to Build a Sturdy Household ‘Cash Crisis’ Fund. It reads, in part,

Americans aren’t big on emergency savings funds: only four in ten U.S. adults have one, according to a 2015 study by Bankrate.

But if your Jeep Cherokee needs $1,000 worth of transmission work, or you need to cover a $6,500 health care plan deductible in a medical emergency, a household rainy day fund may be one of the best insurance policies you’ll ever own.

Before we get on the path to starting a savings fund quickly and effectively, understand first that an emergency fund and a rainy day fund are two different animals. A rainy day fund is smaller in size than an emergency fund: whereas $1,000 might form a good rainy fund, a decent-sized emergency fund should have between $3,000 and $10,000 in cash.

The key to building both, however, is similar – just get started.

“Jump start an emergency fund with a windfall like a tax refund, profit sharing check, stock sale, or an inheritance,” says Sharon Marchisello, author of the book Live Cheaply, Be Happy, Grow Wealthy.

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Once you have accumulated a decent-sized emergency fund, don’t take the experience for granted.

Building the perfect emergency fund calls one part diligence, one part creativity, and one part patience. Put all three together and sleep easier at night as your safety net fund grows accordingly.

Tax Refunds Into Mortgage Payments

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photo by 401(K) 2012

TheStreet.com quoted me in Investing Your Tax Refund Instead of Spending It Boosts Retirement Savings. It opens,

Ramping up your emergency cash fund or IRA with your tax refund is a better option than spending it on a new smartphone or vacation.

Three out of four taxpayers received a refund of $3,000 in 2015. Although many consumers look forward to this windfall each year, it is not a “cause for celebration,” said Joe Jennings, a wealth director for PNC, a Pittsburgh-based financial institution.

“If you are receiving a large refund check, it actually means that you have loaned money to the government throughout the year and the next year the government is paying you back without interest,” he said.

Adjusting your withholdings is a good strategy if your refund exceeds $1,000. Changing the number of exemptions on your W-4 means you will net more income from each paycheck.

Bankrate.com, a North Palm Beach, Fla.-based financial content company, found that 31% of Americans who receive a tax refund this year plan to save or invest it. The survey revealed that 28% will use the funds to pay down debt, 27% will spend it on necessities like food/utility bills and 6% will splurge with a shopping spree or vacation.

Some consumers view the refund as a method of forcing them to save money each year or a way to pay down existing debt such as credit card balances with high interest.

Pay Off Existing Debt

Use your refund check to pay off as much as your credit card or student loan debt as possible since the amount of interest you are paying each month adds up quickly, said Jonathan Bochese, director of resolution services for Tax Defense Network, LLC, a Jacksonville, Fla.-based tax resolution company.

“The best use for any tax refund is to use it to pay off high interest revolving debts,” he said.

With the current low interest rate environment in money market funds and CDs, paying down debt is a no-brainer.

“If you can only make 3% on your investment and your debt is at a higher rate, pay off the debt,” said Carl Sera, a portfolio manager with Covestor, the online investing marketplace and managing principal of Sera Capital Management, a registered investment advisor in Annapolis, Md. “Don’t make it a habit to receive a tax refund, because it is money you have lent the taxing authority at a zero interest rate.”

Homeowners who do not have any other debt should pay down their mortgage by making an extra payment or two instead of stashing the refund in a savings account that is only receiving minimal interest, said David Reiss, a law professor at Brooklyn Law School.

“By doing so, you are making the equivalent of a pre-tax return of the interest rate on your mortgage,” he said. “If your mortgage has a 5% interest rate and your savings account has a 0.1% interest rate that is like getting a 4.9% higher rate of interest without taking any risk at all.”

Keeping Cash on Hand

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1127px-American_CashTheStreet.com quoted me in Why Some Investors Are Keeping Large Sums of Money in Cash. It reads, in part,

Investors are still holding large positions in cash amid the continued volatility in the stock market since they remain uncertain about the outlook of the economy.

After being spooked by the markets this year — evinced by the 21 times the Dow gained or lost 200 or more points through March 1 compared to only nine in 2015 — investors are finding a large cash reserve to be a reassuring cushion.

A report by Capgemini and RBC Wealth Management in 2015 cites the total cash held by high net households or those who have $1 million or more investable assets in North America as $3.8 trillion. Out of that total, $3 trillion to 3.5 trillion of those assets are estimated to be in the U.S., said Gary Zimmerman, CEO of MaxMyInterest, a New York-based company that maximizes cash balances for savers.

One reason cash remains popular among all age groups is because the sentiment of the economy, job growth and markets is viewed unfavorably. Data on the amount of cash that consumers keep in checking or savings accounts or CDs are not tracked.

“Cash is still a favored asset for investors, because frankly, people are nervous about the economy,” said Sean Stein Smith, a CPA in Hackensack, N.J.

Even wealthy people are allocating large sums of their assets in cash, with 23.7% of high net worth people keeping their portfolios in cash in 2015, according to the report.

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Homeowners should also consider starting a repair fund in addition to having emergency savings to cover household expenses, said David Reiss, a law professor at Brooklyn Law School in N.Y. Some repairs need to be made immediately such as a roof leaking during the rainy season or the boiler during winter months.

“A homeowner who wanted to be conservative could put an amount equal to 10% of his or her mortgage payment into a comparable fund for home repairs,” he said. “There is probably not one right answer for everyone. Some people are handy and can do all sorts of repairs themselves, others can’t.”