If your goal is to get your finances real estate ready in 2009, there’s not a moment to lose. While the real estate and financial markets aren’t expected to do much in the first half of the year, they could pick up positive momentum in the second half of the year, leading to a much more active 2010.
If that’s the case, and you decide to buy a home, you’ll want to have your finances in order. If you currently have a mortgage, but are underwater, you may need to boost your savings in order to qualify for a loan modification or a refinance.
In last week’s column, I suggested you put yourself on a budget (and trade down each of your expenses to a less expensive alternative), pay off your charge cards, and pay yourself first and last (as a way of building up your cash reserves for a down payment and closing costs).
But there are other ways to boost your personal finances, especially if you’ve experienced a foreclosure, short sale or bankruptcy first-hand.
Focusing on building up your credit history and raising your credit score is paramount. But you’ll also need to set aside cash to cover the required down payment (which is increasing to 3.5 percent on FHA loans), build up cash reserves, and pay for some closing costs and moving expenses.
Future home buyers should resolve to:
Pay all of your bills on time.
Whether you’re renting an apartment or you own your home, you’ll want to make sure that you’re paying all of your bills on time. This is especially important if you’re trying to re-establish your credit history after a financial crisis. <
While the credit rebuilding process can take years, paying bills on time helps to show a pattern of progress. Late payments show that you’re not managing money well, and even a single late payment can drop your credit score by 50 to 100 points.
The higher your score, the more financial options you’ll have, like credit card offers with terrific balance transfer options. For those with the highest credit scores, you’ll get the best mortgage options with the fewest fees and best interest rates.
Save your change.
Every day when you get home, empty your pockets (or wallet) of change into a glass jar. After two weeks, drop the change and your lowest denomination bill into the jar. At the end of a month or two, take it to the bank. You’ll be shocked by how much you’ll save and how you’ll never miss it in your daily routine.
Creating a solid financial future isn’t about winning the lottery or speculating on a hot stock tip. It’s about being smart with the dollars you have in your checking account at the beginning and end of the month and the change left in your pocket at the end of the day.
Contribute the maximum to your retirement plan.
Although the financial markets are down as much as 45 percent from their high point of October 2007, it’s still important to save for your retirement, preferably inside a 401(k) or 403(b) plan.
If your employer offers you a retirement plan with a company match, sign up as quickly as possible to take full advantage of it. Even if your employer doesn’t offer to match your contributions, you should still open up a plan and salt away cash before it ever hits your wallet. (If you’ve got cash in your wallet, or checking account, the temptation is to spend it.)
Traditional 401(k) retirement plans offer tax-deductible and tax-deferred growth. That means, your money is growing far faster than if you had to use after-tax dollars or if you had to pay taxes on your earnings each year. If your employer matches your contributions, every dollar of that match is free money.
If your employer doesn’t offer a 401(k) plan, and you qualify for a Roth IRA, you should open it up and start putting away money for your retirement. Resist the temptation to use your 401(k) or IRA as a piggy bank.
The cash you’ve saved in your 401(k) or IRA should only be touched as a last resort.
The government allows you to withdraw up to $10,000 from an IRA account for the purchase of a first home (you’ll pay taxes owed but no penalties on the withdrawal). But if you withdraw cash for any other reason, you’ll pay taxes on the money at your marginal tax rate (and the withdrawal may push you into a higher tax bracket). If you withdraw from your 401(k) or IRA and you’re under 59 1/2, you’ll pay a 10 percent penalty on the money.
Whether or not you can borrow any amount from your 401(k) or other retirement plan at work depends on the plan rules (check with your plan administrator).
Either way, carefully think it through before you take the cash from these accounts. If the $10,000 is your entire retirement kitty, you may be jeopardizing a secure retirement. If the $10,000 represents only a fraction of your retirement savings, you may have more flexibility.
The better solution is to simply borrow the money from another source. If you take out a larger mortgage, you may pay private mortgage insurance (PMI). The good news is that for new loans taken out as of January 1, 2007, your PMI premium is tax-deductible (if you earn $100,000 per year or less) and, your tax-deferred cash will continue to grow intact.
Consider refinancing or a loan modification when interest rates drop or when your credit improves.
Arguably, 2009 may be the best year ever to refinance your mortgage or complete a loan modification because we started the year with 30-year fixed rate mortgages at their lowest point ever (just over 5 percent). Many real estate experts and industry observers believe that the federal government will continue to use Fannie Mae and Freddie Mac to buy loans directly, pushing down the price of mortgages further.
If you can qualify for a loan modification or refinance, this should translate into big savings for you.
For many people, doing a loan modification will likely be the best and cheapest alternative for a number of reasons: Most loan modifications won’t require a new appraisal for the property which eliminates one big problem many homeowners are having now; costs are lower than a traditional refinancing, because generally the lender doesn’t need a new title insurance policy; and, you should be able to complete a loan modification (sometimes known as a streamline refinance), faster than a traditional refinance.
Whether you do a loan modification or a traditional refinance, your loan can be a good way to find extra money in your budget each month. If you can save even $50 per month, that’s $50 you can invest in yourself and your future.
Refinancing with a no-cost loan may be a good way to go, particularly if you’ll be staying only a few years in your home before selling. Otherwise, consider paying some costs or fees and taking a long-term view with a super-low interest rate.
This year should offer some excellent opportunities to refinance adjustable rate mortgages (ARMs) that may be coming due. You may be able to refinance to another 5/1 ARM or even a 30-year fixed rate loan and save money. With all of the sub-prime issues and mortgage problems out there, make sure you understand the fees involved in obtaining loan, the rate you are getting for your loan now and in the future, and whether there are prepayment penalties associated with your loan.
Keep up with your home maintenance.
If you keep your home in good shape, you’ll spend less over the years than if you let little things build into big problems that need replacing instead of repairing.
A small leak in your roof might cost $750 to repair. But if you let it go on for a year or more, it might cost several thousand dollars to repair the problems caused by moisture infiltration.
Regularly walk through your home, including the basement and attic, and around the exterior, looking for signs of rot, moisture, or pest infestation. The sooner you take care of these problems, the easier and cheaper they will be.
Don’t expect your savings to grow overnight, but if you start to implement a few of these strategies, by this time next year, you’ll notice a significant improvement in your financial net worth.
Jan. 19, 2009.
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