Preparing for Homeownership

Home - No Place Like ItFor many of us, a home will be the single largest purchase we will make during the course of our lifetime. Buying a home requires an understanding of all the factors that will impact a potential purchase and savvy management of finances to close the deal.

Getting it done the right way, limiting emotion to the greatest extent possible, will serve you well. What follows is a one-year plan for preparing for homeownership.

Suggested activities during the first six months:

• Start saving and understand the different types of available loans
• Check and improve credit reports as necessary
• Determine your needs
• Determine the mortgage you can afford through budget analysis

Your Primary Residence is a Home, Not as Asset [RetirementSavvy]

Day 1 of Month 1, Start Saving:  The down payment required will vary by loan type. With a VA loan, $0 down is required for eligible members (i.e. service members, veterans, and eligible surviving spouses). Another government program, the FHA home loan, requires a minimum of 3.5% down. With conventional loans, a minimum of 5% down is possible with a good credit score. However, if less than 20% is put down, the lender will likely require Private Mortgage Insurance (PMI) which will increase your monthly mortgage payment. The more money you put down, the better the chances of securing a loan and avoiding PMI.

Month 1, Check Your Credit Reports:  A good credit report, generally considered to be a FICO score above 700, can be a valuable asset. With a higher score you can get a better interest rate on a loan. Even seemingly insignificant errors can result in a higher interest rate or cause you to be denied a loan completely. Therefore, check your credit report regularly for completeness and accuracy from all three bureaus (Experian, Equifax, and TransUnion). Free credit reports are available through Annual Credit Report, a government-approved site.

Months 2 – 3, Determine Your Needs:  The home’s neighborhood, square footage, number of bedrooms, etc. will determine the cost. Spend some time researching different potential neighborhoods and evaluating how much house you really need early in the process. By doing so, you will get an idea of how much your desired home will cost and the amount needed for a down payment.

Months 4 – 6, Determine The Mortgage You Can Afford: Developing a budget – a spending plan for the money you earn – is critical for determining the mortgage payment you can afford. The first step in the budget process is to track expenses over a three-month period, identifying ways to decrease expenses – freeing up more money to contribute to savings for the down payment – and helping with determining the mortgage payment you can afford are two benefits to tracking expenses and budgeting.

Suggested activities during the second six months:

• Account for new expenses in your budget
• Continue to save, save, save
• Perform detailed research

Month 7, Account For New Expenses In Your Budget:  You can expect larger bills and new expenses with a home. As a renter, some of your utilities (e.g. water) may be paid by a landlord, and those you pay now are likely to be higher in a larger house. Additionally, there will be new expenses such as property taxes, homeowner’s insurance, and maintenance. Be prepared to update your budget accordingly.

Months 8 – 10, Continue Saving:  Along with your credit score, the amount you are able to save will be a key factor in determining if you will be able to afford a house. During this period, verify the anticipated amount of money you will have for a down payment as you will need that information when you speak with potential lenders.

Months 11 – 12, Perform Detailed Research:  Get recommendations for potential lenders from friends and family.  Evaluate your bank, other mortgage bankers, as well as credit unions. From these sources, identify at least three potential lenders.  The lenders you have chosen will pre-qualify you for a loan based on your gross monthly income, total monthly payments (e.g. car and credit card payments, etc.), and credit score to determine the amount of the loan – and the interest rate – they would be willing to make to you.

With the costs of potential homes in mind and the offers from the lenders in hand, use an online mortgage calculator to determine what your monthly payment would be based on the loan amount, the down payment, the interest rate, and factors such as PMI if necessary. Doing so will reveal if you have enough money for a down payment on a home that meets your needs and if you can afford the monthly payments.  If not, do not get discouraged. Now that you have started saving, managed your credit report, understand the process of picking a lender, understand how much you will need for a down payment, and identified the amount required run a home on a monthly basis, you are in a good position to buy a home at a slightly later point in time.

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What’s Your Savings Rate?

Meeting Financial GoalsA BBC documentary I was watching recently served as the impetus for this post. The documentary was discussing education, productivity, consumption, and the savings rate in China as compared to Western nations, primarily the United States and the United Kingdom.

The one topic that really jumped out for me was the savings rate in these countries. A quick note, a household’s disposable income is the difference between a household’s total income and the amount available for savings and consumption (the money spent on goods and services) after taxes have been paid.

New Reports Suggest Americans Are Not Saving Enough [U.S. News]

Therefore, the savings rate would be the percentage of total income that is saved/invested after taxes are paid; and money is spent on goods and services. With that as the backdrop, we can further state that since we have very little control over taxes, a household’s savings rate will be largely be driven by their appetite for consumption. The more that is consumed, the less that will be available for savings.

Chinese Piggy BankIn “man on the street” interviews in the U.S. and U.K. most of the respondents indicated that they were essentially living paycheck to paycheck, saving very little. Conversely, the Chinese respondents indicated that they were saving anywhere between 30 – 50% of their income.

Why the high savings rate? Most of the Chinese indicated they wanted to save for their children’s education and they also noted the lack of a social security net. In other words, their attitude was that they are on their own and they would need to save to attain financial security. Does that suggest that one of the reasons Westerners save significantly less is because there is a belief that they can spend today – vice saving and investing more – with the knowledge, or belief, that a social safety net will catch them should they fall?

Savings Rates for a Secure Retirement [Bankrate]

The documentary prompted me to do a little research on savings rates to see exactly where we stand here in the U.S. Also, I took a closer look at where my own household stands…about 39% as it turns out.

OCED Savings Rates

Source: OECD (2013), “Household saving rates – forecasts”, Economics: Key Tables from OECD, No. 7. doi: 10.1787/hssv-gr-table-2013-2-en

 And in China…

China Household Savings Rates

Source: National Bureau of Statistics, Flow of Funds data and Urban and Rural Household Survey. 

As you can see from the two charts, the savings rate (past and projected thru 2015) in the U.S. averages 5.1%. Compare that to China where the savings rate in the last year, 2009, is just under 30% in the Combined Urban and Rural Surveys.

My guess is that there are a number of reasons for this significant differences. As I touched on earlier, a different perspective on safety nets, or lack thereof, is probably one reason.

What do you believe may be more reasons why Chinese save significantly more than Americans?  How about you SavvyReader, what is your savings rate? 

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Veteran’s Resources

Veterans Day ImageI wanted to honor veterans today by highlighting resources, financial and otherwise, that might be beneficial to those who have served. I believe the best place to start is with the United States Department of Veterans Affairs website. As noted in their Mission Statement, the purpose of the Veterans Administration is to fulfill President Lincoln’s promise “To care for him who shall have borne the battle, and for his widow, and his orphan” by serving and honoring the men and women who are America’s veterans.

As you might imagine, this website is the most comprehensive site for all matters related to veterans. The three key areas for veterans, and family members, are front and center on the homepage: Health Care (hospitals, clinics and online pharmacy), Benefits (compensation, education and training) and Burials and Memorials. If you are a veteran, or the family member of a veteran, this is a great place to start if you have questions or are looking for veteran related information.

Within the VA website you will find The National Center for Veterans Analysis and Statistics (NCVAS). The purpose of NCVAS is to support planning, analysis, and decision-making activities through the collection, validation, analysis, and dissemination of key statistics on Veteran population and VA programs. In other words, how veteran services evolve and are administered is based on the surveys, reports, etc. that are maintained here. Some interesting information regarding veterans can be found here. Ever wonder how many VA hospitals exist? It’s 150. Want to know the current number of veterans? Curious to know how veterans are geographically disbursed? As of September 30, 2014, there were 532,206 in my home state of Arizona.

USAA LogoInterested in conducting your insurance, banking, investing and real estate affairs with a financial services company that focuses on active duty members, veterans and their families? You might consider USAA. As noted on the site, USAA membership is open to U.S. military service members, veterans who have honorably served and their eligible family members. In our household, my wife maintains a checking account with USAA while I have a term-life insurance policy through them.

Are you an active duty member or a veteran, like myself, that has gone on to continue service as a federal employee? If so, you should absolutely be familiar with the Thrift Savings Plan (TSP) as you conduct your retirement planning. The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. It was established by Congress in the Federal Employees’ Retirement System Act of 1986 and offers the same types of savings and tax benefits that many private corporations offer their employees under 401(k) plans. By participating in the TSP, Federal employees have the opportunity to save part of their income for retirement, receive matching agency contributions, and reduce their current taxes.

Vets Can Make Out With Several Freebies on Veteran’s Day [USA Today]

TSPIn addition to the TSP site itself, a great source for understanding the TSP program and the options available for TSP participants – uniformed and civilian – is the official TSP YouTube site. Various topics covered in multiple videos include understanding why investment expenses matter, understanding the Roth TSP, frequently asked questions and withdrawals along with many more.

The TSP is considered among the best available retirement savings plans. One indication of that fact?  The low expense ratio. In 2012, the average expense ratio for each of the available funds was 0.029%. For those that are familiar with the negative impact of fees, that incredibly low rate can be appreciated. If you are a uniformed service or civilian member, I strongly encourage you to visit both sites as they will assist you in fully understanding the TSP and how it can benefit you in your quest for a comfortable retirement. Additionally, if you know someone, perhaps a family member that is a service member or civilian employee, you should encourage them to check out both sites.

As noted on the website, Military.com connects servicemembers, military families and veterans to all the benefits of service — government benefits, scholarships, discounts, lifelong friends, mentors, great stories of military life or missions and more. Some good links on the Benefits page include: GI Bill calculator, military pay, job search, veteran networking, and post-traumatic stress disorder. Also, be sure to check out their Veterans Day Discount and Freebies page which provides links and information for Veterans Day discounts on restaurants, goods, services and events.

TRICARE logoTRICARE is the health care program for almost 9.5 million beneficiaries worldwide. If you are a retiree looking for information related to eligibility, health plans, prescriptions, military hospitals and clinics and filing claims, this is a good place to start.

If you know of a resource or a service that benefits veterans, please feel free to make mention in the comments section and provide a link if applicable.

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Learn About the Economy

We The EconomyDocumentary Series: We The Economy (2014). Paul G. Allen – the Microsoft co-founder – and Morgan Spurlock – of Super Size Me fame – have partnered through their production entities, Vulcan Productions and Cinelan respectively, to produce We The Economy, 20 short films. Each film focuses on a specific aspect of the economy and at 5 – 10 minutes each, they are easily digested.

The series aims to drive awareness and establish a better understanding of the U.S. economy; and seeks to demystify a complicated topic while empowering viewers to take control of their own economic futures. Each film is directed by an acclaimed filmmaker, each with their own creative vision, and the lessons are shared through animation, comedy, musical, non-fiction, and scripted films.

A panel of top economic experts including academics, analysts, journalists, and historians helped identify 20 key topics about the U.S. economy that every American should understand. Those and other economic advisors worked with the different filmmakers to shape the topics that answer the following questions: what is the economy, what is money, what is the government’s role in the economy, what is globalization, and what causes inequality?

Among my favorite films within the series are the fifth film, A Bees invoice; the Hidden Value in Nature, the seventh (and eighth films as it is broken into two parts), That Film About Money (and That Second Film About Money) and the twelfth film, An Animated Film on the Debt & the Deficit.

A Bees invoice; the Hidden Value in Nature uncovers and incorporates the hidden value of natural capital in the measurement of our economy; and asks questions such as, “Are natural resources vital to the economy and why should nature be taken into account when looking at the economy as a whole?” That Film About Money discusses concepts such as fractional reserve banking and asks questions such as, “What is the real value of a dollar and what do banks do with our deposits?”

An Animated Film on the Debt & the Deficit asks, “Why do we have budget deficits and a national debt?” and does a nice job explaining the difference between debt and the deficit, something many people are confused about and in fact, often use the terms interchangeably. I also thought the ninth film, Recession, did a nice job of explaining the what and how of the economic event … plus I really enjoyed the choreography of the Pilobolus Dance Company in the film. Additionally, City on the Rise and Made by China in America, the 16th and 17th films in the series, did a nice job at looking at the impacts of globalization on the economy as a whole and manufacturing specifically.

In a nice gesture, the producers have made the films available for streaming, free, via the We The Economy website and Netflix, YouTube and Amazon. I absolutely recommend that you carve out some time this weekend to watch this series.

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