Part 2: Homeownership... To Buy or Not to Buy?

     In our last post, we explored the basics of getting started in the process of homeownership. We’ve estimated how much your dream home will cost by using mortgage calculators such as BankRate, and we’ve also taken some time to review your credit report and make any necessary changes. Based on the information you discovered, you might be rethinking your plans entirely. You might decide that you are completely comfortable with your estimated mortgage payment and look for a more attractive home with a larger price. Alternatively, your new perspective with an estimated monthly mortgage payment may convince you to stick with renting for another year or two.

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     If you’ve gotten this far, congratulations! You are well on your way! But before you go online or to your bank to fill out an application for a mortgage, take some time to talk to some of your friends and family about homeownership. Ask them about the process. Do they have recommendations for a realtor or mortgage loan officer?  Is there anything they would have done differently? Was there a step in the process that they felt unprepared for? Their experiences may not apply to your situation, but their information is nonetheless helpful in navigating your home purchase process.

     I strongly recommend that you practice having a mortgage. If expect to take on a mortgage with a $1000 monthly payment, then “pay” your mortgage by tucking it away in your savings account. What impact does that have on the rest of your budget? Are you comfortable? Do you still have the ability to save, pay off existing debt, and spend money on things you enjoy? What do you have to give up in order to make that $1000 payment?

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     At this point you are ready to obtain a pre-approved mortgage. A pre-approved mortgage is basically a promise from a lender that you qualify to borrow up to a certain amount of money at a specific interest rate. This promise is subject to a number of conditions, but allows you to see how much the lender has evaluated that you can afford. Keep in mind the following:

1.) Each application can cause a small drop in your credit score, so apply with moderation. Use referrals from your friends and family. Did they have particularly good or bad experiences with a particular lender?

 2.)Remember, lenders are in the business to issue loans and make money on the interest. Your pre-approval is for the maximum amount you could potentially borrow. This does NOT mean this is what you can afford. You don’t want to become “house poor,” where you have an amazing home, but not enough income for anything else!  

     Many individuals ask, “How much home can I afford?” Like we said earlier, “it depends,” but a general rule is roughly 25%-33% of your gross income. Make sure you are including the cost of your homeowners insurance, real estate taxes, and HOA fees in addition to your mortgage repayment cost. It is also a good idea to factor in an annual housing maintenance budget into that percentage, generally 1-3% of the purchase price. So a $150,000 home would have an annual maintenance cost of $1500, or $125 a month.

Homeownership...To Buy or Not to Buy?

 I’m going through that stage in life when more and more of my peers from high school and college are “settling down,” as we so commonly say. They’ve navigated through their student loan payments and college credit card debt, and landed a secure job.  Now they ask me…Emily, can I buy a home How do I get started? How much house can I afford?

      We will tackle this subject in a few parts to break things down. Hopefully these thoughts can help!

       CAN I BUY A HOME? The answer to this, and many other questions in personal finance is almost always, “it depends” because of the plethora of variables that make the answer “yes” or “no.” While all mortgage underwriting guidelines are different, if you’ve had the opportunity to build a solid credit history and have sufficient income to support a mortgage, YES you probably can!

Photo Courtesy of http://wooderice.com/wp-content/uploads/2014/09/Rent-Or-Buy.jpg

           Many clients ask me, “How do I get started?” If you are asking me, you’ve probably done some exploring in the area you dream of buying a home. You’ve also probably taken a quick inventory of the cost of those homes. Now, take the average price of those homes and use a mortgage calculator. I recommend starting with a mortgage calculator, like BankRate. This will allow prospective homeowners to get an idea of what interest rates look like, as well as their principal and interest payment. At this point you may be ready to sign on the dotted line or rocking back and forth in the fetal position. Take a breath, and keep in mind these calculations do NOT factor in- taxes, homeowners insurance, and PMI (if necessary).

          Now that you’ve got an idea of what your dream home will cost you, I recommend you take a look at your credit report to look at how your credit stacks up. Please, please do not get sucked into one of the credit monitoring “services” out there. If the site requires a credit card, leave the site entirely. In fact, the ONLY place to review your credit report according to the FDIC is www.annualcreditreport.com or call 1-877-322-8228. Here, you can request a free credit report disclosure (available every 12 months) from each of the three major credit bureaus- Equifax, Experian, and TransUnion. Read your report carefully, and ask your financial planner to take a look with you.  Pay close attention to “factors negatively impacting your score.” That will give you an idea of what action you can take to improve your overall credit score and report, which may very well in turn pay off with a lower interest rate on your mortgage.

Photo courtesy of http://www.paulettetupper.com/wp-includes/ms-files.php?file=2014/12/rent-vs-buy-1024x438.jpg

                 Stay tuned! We will be back with MORE helpful tips and answers with Part 2 of “Homeownership… To Buy or Not to Buy?”

What is a CFP® and Why Choose One?

"CFP" is the trademarked, official designation for those who have earned designation as a Certified Financial Planner.  To earn this designation, a financial advisor must meet various certification requirements.  This includes passing a challenging, 2-day examination that covers all the elements of financial planning, and at least two years of experience working in the field of financial planning.  To maintain CFP® designation, an advisor must meet annual continuing education requirements and satisfy the CFP Board's rigorous ethical standards.

Why choose a financial advisor with the CFP® designation?

Scary news for individuals and families seeking financial advice: anyone can set up shop as a financial advisor.  Advisors who have earned the CFP® designation, however, have received comprehensive education and training in financial planning.  By passing the CFP® Board's examination and experience requirements, the CFP® designee proves her understanding of all of the elements of financial planning.  The CFP® designee has also committed herself to a high level of ethical practice.



For more info on the CFP Board, visit CFP.net.

A New Will for the New Year?

The New Year is a good time to make sure your estate plan is in order.  Most importantly, you should review and update your will, or have one prepared, if you haven't already.

One of the most common misconceptions about estate planning is that the primary planning concern is avoiding the federal estate tax. However, for 2014, the estate tax only applies to individual estates that exceed $5.34 million.  Why, then, is it still critical to have an up-to-date estate plan?

First, many states impose their own estate tax with lower income thresholds.  For example, CT imposes up to a 12% tax on estates over $2 million.  In NY, estates over $1 million face up to a 16% tax. Proper planning can minimize these taxes.

Second, transferring property through your will, or a will-substitute, can save your heirs taxes.  Property transferred upon death receives a step-up in basis for tax purposes, whereas inter vivos gifts receive a carryover in basis from the purchaser.  Thoughtful planning will maximize the value of your bequests.

Finally, even if you plan to distribute all of your assets through will-substitutes, like trusts, a will is still important to ensure the efficient and cost-effective administration of your estate. 

Our favorite personal budgeting tool

With various bank accounts, credit cards, and online payment plans, it’s increasingly difficult to keep track of where your money goes every month.  That’s why we were excited to discover Mint.com, a free budgeting tool that we’re using ourselves.  Mint hooks up to your bank accounts and credit cards to automatically categorize your expenses and income.  You can sign up for weekly or monthly updates on your spending.  You can also design weekly budget goals by expense category and receive notifications when you have reached your budget limit.  Mint also has a credit-checking service that, although not free, is a great resource for monitoring your credit score and resolving any credit score disputes. While we have not had any problems with Mint in the past, remember to monitor your accounts and change your passwords often to ensure you money’s safety.

You'll provide for your children when you pass. What about your pets?

When a loved one dies, family and friends have numerous details to take care of, all while grieving their loss. To ensure your pets are not neglected in this tumult, you should consider creating a testamentary pet trust. In such a trust, the pet owner, called the testator, sets aside assets for the lifelong maintenance of her surviving pets, including funds for food and veterinary care. The testator designates a “trust protector,” who receives a set fee from the trust and is responsible for distributing trust funds for maintenance of the pets. The trust is a legally enforceable document in almost every state, including Connecticut and New York; Probate Courts in these states can remove the trust protector if she fails to fulfill her obligations and can order restitution for any misused trust funds. When the last surviving pet dies, the trust automatically terminates; any remaining assets are distributed as directed by the trust document or by the testator’s will.

So, how do you create a pet trust? The first step is to identify the person, bank, or other institution who you want to be the trust protector. You should consult this person or institution to see if it is willing and able to take on the trust responsibilities, which will include monitoring the trust and basic accounting of trust assets. Second, you must prepare and execute the actual trust document. In this document, you must clearly identify the trust protector, the pets you want to benefit from the trust; the standard of care you desire for the pets; and where you want the remainder of the trust funds to go after the last surviving pet passes away. You can either consult an attorney to write the trust or prepare it yourself using a template. Finally, you must fund the trust. You can do so through your will by directing that certain assets go to the pet fund. By following these simple steps, you can ensure that all of your loved ones are adequately cared for, even in your absence.

College is expensive. How will you pay?

For the 2013-2014 academic year, a moderate budget at a private college averaged $44,750 and $22,826 for an in-state public college. These costs are expected to increase by 6% annually. At that rate, today’s fifth graders should be prepared to pay $305,000 for a private, and $110,000 for a public, college education. With these costs, it is critical to start planning and saving early if you hope to fund, or even meaningfully contribute to, your children’s college educations.

There are various vehicles available for education savings, many of which are tax-advantaged. To begin, “529 Plans” are state-run education savings plans. You can contribute up to $300,000 per beneficiary to most plans and select from a variety of investment options for the funds. Although contributions to the plan are non-deductible, investment earnings are never taxed, as long as they are used for qualified higher education expenses, such as tuition, fees, books, and room and board.

New York and Connecticut, among other states, offer state tax deductions for contributions to in-state 529 Plans. The funds can be applied to education in any state, but, if you live in one of these states, you can deduct up to $5,000 per year by as an individual and up to $10,000 per year as a married couple filing jointly. If you live in a state that does not offer a deduction for plan contributions, such as Massachusetts or California, you should shop around for the state program which best meets your investment wishes since you won’t be benefitting from the state deduction anyway. Morningstar provides a comparison of every state’s 529 Plan, including advantages and disadvantages of each plan.

Similar to the 529 Plan, the Coverdell Education Savings Account (ESA) accepts non-deductible contributions that grow tax-free. A significant advantage of the Coverdell, as compared to the 529 Plan, is that funds can be used for college, graduate school, or K-12 qualified expenses, including tuition and fees for private elementary school. Each individual can have up to $2,000 contributed per year on their behalf. Unlike the 529 Plan, there are income limits to who can contribute to a Coverdell. So it may take extra planning to take full advantage of the plan.
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The Hidden Cost of Income-Based Loan Repayment

Income-Based Repayment (IBR) Plans can ease the burden of student loan debt by basing your monthly loan payments on your income and family size.  After 25 years, whatever amount is left on the loan will be forgiven. The IRS calls this forgiven amount “cancellation of debt” income and taxes it accordingly.

For example, let’s assume you refinance to an IBR loan repayment plan and conscientiously make your IBR payments every month for 25 years.  You finally receive notification that the remainder of the debt, let’s say $40,000, will be forgiven. But don’t take out the bubbly just yet: That $40,000 will be included as gross income for the year and will be taxed at your marginal tax rate.  So, if you pay a 28% tax rate and are single, you will owe $11,200 in tax on the forgiven debt.

In addition, that $40,000 will be included in your adjusted gross income for the year, likely pushing you into a higher tax bracket. Consequently, you’ll have to pay a higher tax rate on all of your other income as well.

Unless you work out a payment plan with the IRS, this tax will be due in the year the loan was forgiven.

So when you consider refinancing your loans to an income-based payment plan, remember that “There’s no such thing as a free lunch.” In the case of IBR’s, the bill may not come for many years, but it will come nonetheless.​