"The home you looked at today, and want to think about until tomorrow, is the same home someone else looked at yesterday and is coming back to

Own Today!"

Theresa Bralish, Certified Residential Specialist.

 The two don’t really compare at all. The one advantage of renting is being generally free of most maintenance responsibilities. But by renting, you lose the chance to build equity. Take advantage of tax benefits, and protect yourself against rent increases. Also, you may not be free to decorate without permission and may be at the mercy of the landlord for housing.

Owning a home has many benefits. When you make a payment on your house, you are building equity. And that’s an investment. Owning a home also qualifies you for tax breaks that assist you in dealing with your new financial responsibilities-like insurance, Real Estate taxes, and upkeep-which can be substantial. But given the freedom, stability, and security of owning your home, they are worth it.

"WHAT OTHER TAX ISSUES SHOULD I TAKE INTO CONSIDERATION?"

Keep in mind that your interest that you pay on your home and Real Estate taxes will likely be deductible. A qualified Real Estate Attorney or Tax professional can give you the most current and correct details on Real Estate tax benefits. 

Remodeling: Some Common Sense from Bob Vila

How much should you spend on your brand-new kitchen? The renovation guru tells how to navigate the fine line between comfort and indulgence

Photo Gallery: The Cost of Your Dream Kitchen

With a wealth of enticing high-tech and high-design appliances populating the remodeling market, the urge to indulge in a kitchen that will make you look and feel like a culinary master has never been greater. But before outfitting your space with the latest and greatest, you should carefully weigh what functions you or future owners will find practical against what value you are actually adding to your home.

Ask Bob Vila how much money to invest in your brand-new kitchen and he'll tell you: "Put together a budget for a kitchen remodel, then go to the local real estate broker and ask what you could get for your place…tomorrow. Then have the conversation, 'Does it makes sense for me to put in a $50,000 kitchen?'"

The foremost expert on do-it-yourself remodeling and the longtime host of This Old House and Bob Vila's Home Again, Vila continues to provide info and advice to many folks embarking on large home improvement projects. His Web site, BobVila.com—in its seventh year of operation—hosts a multitude of DIY instructional content, including a video archive of Vila's former shows and a recently developed social network of online DIYers dubbed MyProject.

BUYING LEAP. According to Vila, one of the main factors driving extravagant spending in the remodeling market is borrowed equity: "In the past decade, we've had an economy that allowed many people to pull equity out their homes; consequently, they have had the money to buy the high-end appliances."

A lot of these grand investments are made in haste with the assumption that a valuable, attractive kitchen proportionally boosts resale value and buyer incentive if the house should go on the market some time down the road. In the event that a homeowner invests $40,000 on a high-end kitchen remodel, and then has to sell her home for unexpected reasons, it's possible she might only see $20,000 of her original investment reflected in the closing bid.

Because of this risk factor and others, many choose to upgrade to lower-cost kitchen appliances that still emulate some of the more practical characteristics of their costly counterparts. The Miele MasterChef, a high-speed oven with two compartments, combines high-end functionality with a competitive price tag of $2,349. The model's main competitor, TurboChef's Speedcook Oven, comes on the market for about double that price.

CENTERPIECE STRATEGY. If your lifestyle does demand some of the best in culinary hardware—or if you just can't help from splurging a little—pick the one top-of-the-line appliance you feel will have the most impact on both the kitchen's aesthetic and functionality. In a growing number of remodels done in this country, imported European furnishings like cabinets and counters, though costly, strike a surprising balance between form and function.

"In Germany, people buy cabinets and hang them [on metal bars] to create 'arrays' around a kitchen, and when they move, they can just take them with them," says Vila. "The systems that they've developed are very simple, but very beautiful." Cabinetmakers Allmilmö and Poggenpohl, both based in Germany, distribute these types of cabinets in many parts of the U.S. With a little forethought, homeowners looking to spiff up their living space can achieve that blend of the elegant and practical without breaking the bank.

2006-04-04 17:59:40

How to Save for Your First Home As Buying One Gets Tougher

By Kelly K. Spors,
Wall Street Journal Online

It's a dream of many young adults to buy a first home. But there's an unfortunate reality: Even buying a "starter home" with today's lofty prices can mean saving tens of thousands of dollars for a down payment.

How do you pull it off? The key, obviously, is to save like crazy. Beyond that, here are several suggestions that may make the path to home ownership a bit easier.

1. Aim for 20% down.

Timothy Wyman of the Center for Financial Planning in Southfield, Mich., says you may be able to get by with putting only 10% of the purchase price down, as long as you are confident your income will remain steady or grow and you plan on keeping the home at least five years.

But Mr. Wyman says buyers should ideally aim to save up 20% or more of the price. The risk of putting down too little: If the home falls in value and you sell at a loss, you'll owe more to the lender than you receive from the buyer.

In addition, many mortgages require buyers who put down less than 20% to get private mortgage insurance, which can add $80 to $100 to your monthly bill. And the less you put down, the higher your loan balance and therefore your monthly payment will be.

Mortgage lender Washington Mutual estimates that a buyer who puts down 5% on a $300,000 home with a 5.88% 30-year fixed-rate mortgage might pay $2,133 a month, including fees and property tax, while a buyer who puts 20% down would likely pay $1,682 a month. (The estimate assumes the 5%-down buyer must pay for mortgage insurance.)

You'll also need extra money set aside on top of the down payment for closing costs such as title insurance and mortgage fees, which can reach up to $5,000. If you want to pay "points" to lower your mortgage rate -- a smart idea for borrowers who expect to stay in a home several years -- you'll want a few thousand dollars more.

To find out the price of local starter homes, so you can estimate what you'll need to save up, you can check out home listings on Realtor.com or compare sales data at Zillow.com.

2. Keep it separate.

Set up a separate account for your down-payment funds, so the money doesn't get intermingled with other savings and so you can keep track of how much you save. This would probably be a taxable account at a bank or brokerage firm.

Mr. Wyman suggests setting up regular automatic deposits from a checking account into the down-payment account to force regular savings. "You want to be moving money to this account before you spend it," he says.

3. Consider your time horizon.

How best to invest down-payment money depends on your time horizon for purchasing a home. Those planning to buy in three years or less should put the money in conservative investments such as short-term certificates of deposit or short-term bond mutual funds to shield themselves from potential market downturns.

If you're waiting at least five years to buy, you can invest more aggressively. A balanced mutual fund that invests in, say, 60% stocks and 40% bonds, such as Vanguard Balanced Index Fund, is a good choice and should perform better over the longer period.

4. Get extra help.

Few first-time buyers pony up the entire down payment on their own. Nearly 23% of first down payments come as gifts from relatives and friends, according to a recent survey by the National Association of Realtors.

While such assistance is great, there are also other places you can look. There are many down-payment assistance programs for first-time buyers that are offered by banks, local governments and charities. Many are open only to low- or moderate-income buyers and some are targeted to specific communities.

Some programs lend buyers a substantial portion of the down payment. For example, the California Housing Finance Agency can provide eligible first-time home buyers in Los Angeles 3% of a home's purchase price as down-payment or closing-cost assistance. The money must be repaid when the buyer sells the home, refinances or pays off the loan.

Many lenders have information about assistance programs that borrowers can seek help from.

5. Clean up your finances.

Your credit history will determine the loan terms and mortgage rates you qualify for. You could be offered a smaller loan or charged a higher rate if a lender is concerned you might not be able to repay.

So before approaching lenders, first-time buyers should give themselves the financial equivalent of a physical exam, says Ellie Deskin, a financial planner in Troy, Mich. This means checking your credit score and credit reports with the three major credit bureaus and fixing any errors. (Consumers can now get one free copy of each report annually by going to Web site annualcreditreport.com.)

Also consider paying down some debt, especially high-interest debt such as credit cards, that might flag you as a riskier borrower.

While some debt is okay, being overloaded will likely tarnish your loan terms.

6. Weigh mortgage tradeoffs.

Lenders increasingly offer creative loans, such as interest-only loans and certain types of adjustable-rate loans, that can reduce your monthly payments -- at least for a while. But these alternative loans can be much riskier than fixed-rate loans, because monthly payments can jump after a few years.

A general rule of thumb is that your monthly mortgage payment shouldn't exceed 28% of your household's gross monthly income. Check out some mortgage calculators at Dinkytown.net to calculate what your monthly payment would be with different types of loans.

7. Hands off retirement savings.

If you're just shy of saving up enough for a home, you might consider taking a small loan from your 401(k) plan or withdrawing some principal from a Roth IRA. But many financial advisers caution against tapping retirement accounts too heavily for a home purchase.

For one thing, you're going to need your retirement stash, so you don't want to gouge it. Taking a loan from your 401(k) can also be risky, since you may have to pay it back if you leave the company. And if you take money out of your Roth, you can't replace it, so you lose some of the Roth's long-term benefit of tax-free earnings.

It's almost impossible to live debt-free; most of us can't pay cash for our homes or our children's college education. But too many of us let debt get out of hand.

Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income. That's one factor mortgage bankers consider when assessing the creditworthiness of a potential borrower.

It's far too easy to spend more than you can afford, especially when you pay by credit card. The average American household with at least one credit card carries nearly a $9,000 balance, according to CardWeb.com, and personal bankruptcies have hit record highs in recent years.

Of course, avoiding debt at any cost is not smart, either, if it means depleting your cash reserves for emergencies. The challenge is learning how to judge which debt makes sense and which does not, and then wisely managing the money you do borrow.

Good debt includes anything you need but can't afford to pay for upfront without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.

Bad debt includes debt you've taken on for things you don't need and can't afford (that trip to Bora Bora, for instance). The worst form of debt is credit card debt, since it carries the highest interest rates.

Sometimes the decision to borrow doesn't hinge on how much cash you have, but on whether there are ways to make your money work harder for you. If interest rates are low, compare what you'll spend in interest on a loan versus what your money could earn if it were invested. If you think you can get a higher return from investing your cash than what you'll pay in interest on a loan, borrowing a small amount at a low rate may make sense. 

THREE EXAMPLES OF GOOD DEBT HOME, SCHOOL AND YOUR CHARIOT QUALIFY

Debt is not always a bad thing. In fact, there are instances where the leveraging power of a loan actually helps put you in a better overall financial position.

Buying a home: The chance that you can pay for a new home in cash is slim. Carefully consider how much you can afford to put down and how much loan you can carry. The more you put down, the less you'll owe and the less you'll pay in interest over time.

Although it may seem logical to plunk down every available dime to cut your interest payments, it's not always the best move. You need to consider other issues, such as your need for cash reserves and what your investments are earning.

Also, don't pour all your cash into a home if you have other debt. Mortgages tend to have lower interest rates than other debt, and you may deduct the interest you pay on the first $1 million of a mortgage loan. (If your mortgage has a high rate, you can always refinance later if rates fall. 

A 20 percent down payment is traditional and may help buyers get the best mortgage deals although that's become less of a truism as the housing market has boomed along with the mortgage lending market. Many home buyers do put down less - as little as 3 percent in some cases. But if you do, you'll end up paying higher monthly mortgage bills because you're borrowing more money and you will have to pay for primary mortgage insurance (PMI), which protects the lender in the event you default.

Paying for college: When it comes to paying for your children's education, allowing your kids to take loans makes far more sense than liquidating or borrowing against your retirement fund. That's because your kids have plenty of financial sources to draw on for college, but no one is going to give you a scholarship for your retirement. What's more, a big 401(k) balance won't count against you if you apply for financial aid since retirement savings are not counted as available assets.

It's also unwise to borrow against your home to cover tuition. If you run into financial difficulties down the road, you risk losing the house.

Your best bet is to save what you can for your kids' education without compromising your own financial health. Then let your kids borrow what you can't provide, especially if they are eligible for a government-backed Perkins or Stafford Loans, which are based on need. Such loans have guaranteed low rates; no interest payments are due until after graduation; and interest paid is tax deductible under certain circumstances.

Financing a car: Figuring out the best way to finance a car depends on how long you plan to keep it, since a car's value plummets as soon as you drive it off the lot. It also depends on how much cash you have on hand.

If you can pay for the car outright, it makes sense to do so if you plan to keep the car until it dies or for longer than the term of a high-interest car loan or pricey lease. It's also smart to use cash if that money is unlikely to earn more invested than what you would pay in loan interest.

Most people, however, can't afford to put down 100 percent. So the goal is to put down as much as possible without jeopardizing your other financial goals and emergency fund. Typically you won't be able to get a car loan without putting down at least 10 percent. A loan makes most sense if you want to buy a new car and plan to keep driving it long after your loan payments have stopped.

You may be tempted to use a home equity loan when buying a car because you're likely to get a lower interest rate than you would on an auto loan and the interest is tax deductible. But before going this route, make sure you can afford the payments. If you default, you could lose your home. And be sure you can pay it off while you still have the car, since it's painful to pay for something that has been consigned to the junkyard.

Leasing a car might be your best bet if the following applies: you want a new car every three or four years; you want to avoid a down payment of 10 percent to 20 percent; you don't drive more than the 15,000 miles a year allowed in most leases; and you keep your vehicle in good condition so that you avoid end-of-lease penalties.

Whatever route you choose, shop for the best deals. Remember, it's in the car dealer's best interest to finance at the highest rate possible, so look at what you'll pay overall, not just the monthly amount. If you tell your car dealer you can spend $400 a month, you could end up with a new car for $400 a month based on a noncompetitive interest rate.

BORROWING FOR OTHER EXPENSES A HOME-EQUITY LOAN OR HOME-EQUITY LINE OF CREDIT IS SMART IN SOMEINSTANCES.

Besides life's big ticket items home, car, and college -- you may be tempted to borrow money to pay for an assortment of other expenses such as furniture, appliances and home remodeling.

Generally speaking, it's best to pay upfront for furniture and appliances, since they don't add value to your home and are depreciating assets. If you do finance such purchases, however, read the fine print.

Retail stores often charge high interest rates. And even if they offer a low-interest or no-payment period for several months on a purchase, you may be required to pay for the item in full at the end of that period or risk being charged a high interest rate dating back to the day of sale.

Taking a home equity loan or home-equity line of credit makes sense if you're making home improvements that increase the value of your house, such as adding a family room or renovating your kitchen. The interest you pay in many cases is deductible and you increase your equity.

If, however, a home project doesn't boost your house value, consider paying cash or taking out a short-term, low-interest loan that will be paid off in five years or less. 

TAKING A LOAN TO PAY OFF CREDIT CARDS IT CAN WORK, BUT THERE ARE DRAWBACKS.

If you're saddled with a lot of high-interest credit card debt, you might be tempted to pay it off quickly by borrowing from your 401(k) or taking out a home-equity loan.

There are two key advantages to home-equity loans: They typically charge interest rates that often are less than half what most credit cards charge. Plus, the interest you pay in most instances is deductible. (Note, however, when you use a home equity loan for non-housing expenses, you may only deduct the interest paid on the first $100,000 of the loan, according to the National Association of Tax Practitioners.)

But there is one potential and very significant drawback when you borrow against your house to pay off credit cards: if you default on your home equity loan payments, you may lose your home.

Borrowing from your 401(k) is even less advisable. That's because you lose out on two of the biggest advantages to workplace retirement plans: tax-deferred compounding of your money and tax-deductible contributions. Sure, you pay yourself back with interest, but that interest is paid with after-tax dollars and it will be harder for you to make new contributions while you're repaying your old loan.

Also, if you quit or lose your job, you'll probably have to repay the entire borrowed amount within three months. If you aren't able to do that, you'll owe income taxes on the money, plus a 10 percent penalty if you're under 59-1/2.

One other word of caution if you take any kind of loan to pay off your credit cards: Once your credit card debt is paid off, you have to be vigilant about not running up your balance again, because you still will have big loan payments to make.

If you're having chronic trouble paying off your credit card debt, it may be time to consult a debt counseling service for help managing your finances in the future. 

MANAGING YOUR DEBT SIMPLE STEPS PUT YOU-- NOT YOUR BILLS--IN CHARGE.

Outside of fixed monthly bills such as your housing or car payment, you probably don't have a precise idea of how you spend most of your money.

If you want to get your debt under control, start by figuring out your spending patterns and identifying unnecessary expenses. "People who don't want to quantify where they're at are in the danger zone," said CFP Paul Weiner of Los Angeles.

For one month, write down every cent you spend. "Every" means "every," including that $2 cup of coffee that starts your workday or that $4 magazine you buy on a whim. That will clarify in black and white how much of your spending is fixed and how much is variable (and hence easier to curb).

Tally the expenses on the list and compare the sum to your monthly income.

How much do you bring in after taxes? How much do you have left at the end of the month after paying fixed expenses? How much do you spend on variable items like that $2 cup of coffee every morning?

Consider, too, whether there's any way to boost your take-home pay. If you get a big tax refund every year, that means you're having too much withheld from your paycheck. If that's the case, you can reduce your withholding by changing your W-4 at work.

Next, make a list of all your debt obligations and the interest you're charged for each.

Once you've done all that, you're ready to start lightening your debt load.

The basics of debt reduction are simple: Cut down on your variable spending and put the extra money toward your debt payments. Once you determine the maximum amount you can pay off each month, pay down the debt with the highest interest rate first -- that usually means your credit card balance -- while paying at least the minimum monthly amount due on all other revolving bills.

Once the debt with the highest rate is wiped out, put your money toward paying the debt with the next highest rate. One exception: If you have a credit card with a low teaser rate that will go up after a fixed amount of time, strive to eliminate that balance before the low rate expires.

You might also consider moving some of your high-interest credit card balances to a card with a lower interest rate. But read the fine print on any invitation to transfer balances. Sometimes such low-interest-rate offers are only in effect for short periods of time, after which the rate skyrockets. What's more, consolidating your debt on one card may lower your credit score if your debt-to-available-credit ratio worsens.

For many people, reining in discretionary spending for a few months goes a long way toward tackling debt. But if that's not enough, try to reduce your fixed expenses. Take steps to lower your household bills; refinance your mortgage to get a lower interest rate; or, if you have a good payment history, ask your credit card company to lower the interest rate you're charged.