The Home 
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Financial Tips for Before You Buy a House

Buying a home can be a stressful and expensive experience.  Home hunting, closing a deal, and moving in can take a lot out of you.  When we were first thinking of buying a house, I started to make lists of things we would need to pay attention to.  I knew we were going to need a mortgage and that homes come with extra expenses as well.  Here are a few financial tips to keep in mind before you buy a house.

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 NEWS 
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3-Month Homebuyer Tax Credit Extension

For Sale By OwnerThere have been a lot of news reports of a potential 3-month extension of the $8,000 Homebuyer Tax Credit and those reports are all correct, albeit a little misleading. The bill they voted on would extend the deadline for closing a home sale as long as there was a signed contract by the original signing deadline of April 30th. So this doesn’t extend the tax credit itself, just the deadline for paperwork process. If you didn’t have a signed contract by April 30th, nothing has changed for you. If you did and the process has dragged on much longer than you planned, then you’ll get until April 30th (as long as the measure passes the Senate).

The House of Representative voted 409 to 5 to pass HR 5623 Homebuyer Assistance and Improvement Act of 2010. The measure will now go to the Senate for a vote and, assuming they approve it, will go to President Obama for signature. The Senate had included a similar provision in a much larger tax package that didn’t secure enough votes.

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 The Home 
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Don’t Buy A House (Yet)

House on the HillAs you read this, you might be wishing that you graduated just a year earlier and could take advantage of the $8000 first time homebuyuers credit. It’s not every day that Uncle Sam is willing to give you $8,000 for anything, let alone for something widely regarded as a fantastic investment.

But consider yourself lucky… buying a home within the first year or two of graduation can be a huge mistake for new graduates. My personal recommendation is that you don’t buy a home within five years of graduation.

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 Personal Finance 
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Four Rules of Thumb In Need of Refreshing

Thumbs Up!Rules of thumb are great. They teach you a little nugget of wisdom and have been vetted by generations of experience. Don’t swim thirty minutes after eating, don’t mix hard liquor and beer, and don’t date your relatives. Follow those rules of thumb and you’ll live a happy and healthy life.

The same can be said about financial rules of thumb. Don’t spend more than you earn, save 10% of your salary, and always buy a used car. You don’t have to always follow those rules of thumb, but if you want to achieve financial prosperity, it’s best to heed them.

However, over the years, some rules of thumb are in need of a refresher. Times change. A rule that made sense ten or twenty, or even a hundred, years ago may not make sense. Let’s have a look.

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 Investing 
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Realtors Want You to Time the Market!

This is a guest post from Ramit Sethi, the founder of iwillteachyoutoberich.com. His new book, I Will Teach You To Be Rich, will be published on March 23rd.

A few weeks ago, I got an email from a reader named Dave:

A few months back I was looking to buy a home in Houston. During my search I decided to look at this builder because of the “incentives” they were offering. Well, I soon found out that these “incentives” were nothing more than a bait and switch tactic.

Anyhow, a couple of days ago out of the blue I received the e-mail below, and couldn’t believe what I was reading. With all of the unfavorable economic conditions we’re facing, home builders continue to send out this garbage.


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 Investing 
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Bubbles Burst When People Invest in Symbols

Tulip Mania!One of the best things I ever did was read Wall Street: A History: From Its Beginnings to the Fall of Enron by Charles R. Geisst. In it, I learned about the famous tulip bulb craze in 1630s. During that craze, people were buying exotic colored tulips like they were going out of style (which they soon would) and many folks ended up with little more than a couple pretty flowers (check Wikipedia for the full scoop).

Let’s compare that with the dot com bubble and the housing craze and see if there are any similarities. In the dot com boom, investors were putting money into companies that were little more than an idea and a URL. In the tulip bulb boom, someone was able to sell shares in a company that claimed to one day be involved in the trading of tulip bulbs (this is based on my memory of what was included in Geisst’s book, there’s no mention of this on the Wikipedia page), only to run off with the money. In the housing craze, people were given 100% LTV loans based on the magic lenders were able to make in the books and not based on the borrower’s actual ability to pay (in this case, the lender was the investor). So in all three cases, the bubbles formed because people were so greedy that they invested in the “symbol” and not the fundamentals.

The lesson here is that you shouldn’t let greed cloud your judgments. Remember that Rule #1 is “don’t lose money.” Warren Buffett is plenty rich and he basically skipped the dot com boom. Some had written him off because he missed it but he said that he was just fine. Buffett only invests in things he can understand. He couldn’t understand why people were paying these ridiculous valuations for companies that had zero earnings.

So, the next time you see people acting all crazy (how many people told you to invest in a hot stock or to buy a house because it can’t do anything but go up?), don’t jump in. Watch from the sidelines and you’ll save yourself a lot of money.

(Photo: powi)


 Government 
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Housing Stimulus Bill Explained

Foreclosure! Housing Stimulus BillThis week, the Senate passed a housing bill a little over a week ago (the House joined last Wednesday) that seeks to give the housing market a shot in the arm. With 1 in every 171 homes going into foreclosure, the cries for help are getting loud and loud and, with the next year’s deficit nearing half a trillion dollars, we might as well pile it on. What’s another few hundred billion? Personally, I don’t like the idea but economic turmoil doesn’t help anyone. It doesn’t help the people who erroneously got themselves into bad loans, it doesn’t help the people who intelligently avoided them, and it doesn’t help everyone else standing on the sidelines. Considering we can’t pass energy legislation and likely won’t before Congress recesses in a week, we might as well take what we can get.

So, what’s going on? Here are the bits that are likely to affect you.

The Main Bailout

The FHA will be allowed to insure up to $300 billion in 30-year fixed mortgages for those at risk and who are living in owner occupied homes. The net result of this is that some loans will be restructured from their current state to an FHA insured loan. It’s help but it’s not a get out of jail free card, you’ll see why in the second paragraph of the gotchas section.

Who is qualified? You qualify if you have a loan that was issued between January 2005 and June 2007, must be spending at least 31% of your gross monthly income on mortgage debt, the total debt cannot exceed 95% of the home’s appraised value, and prove that they will not be able to continue to pay their mortgage. They can be defaulting or current, that won’t matter, but they have to retire all other debt on the home.

What happens? If you think you qualify, go to an FHA-approved lender and they will take it from there.
Any gotchas, catches, or tricks?There are two types of gotchas. First, in order for this go through, the lender will have to write down the value of the existing loan to 90% of the home’s current value and take the hit. Lenders won’t do this unless they think they’ll lose more than that, so you will probably really have to be in trouble to qualify.

The second type of gotcha is the restrictions and extra payments the borrower will have to bear. You can’t get a home equity loan for at least five years, you’ll have to pay the 1.5% annual insurance premium to the FHA for the guarantee, you’ll have to pay a 3% exit fee on the principal to the FHA if you sell or refinance, and finally you’ll have to give up all profits to the FHA if you sell or refinance within a year. After a year, you’ll only be on the hook for 90% of the profits and drops by 10% each year until it gets to 50%, where it will be forever. That’s a long time.

The Supporting Cast Measures

There are a few other additions to the bill that may be of interest.

Conforming Loans ceiling set to $625,500. A temporary measure increasing the maximum value of a “conforming loan,” or loans that would be guaranteed by Fannie Mae or Freddie Mac, was increased and pegged to home prices in a geographic region. I mentioned it as the Little Footnote on the 2008 Tax Stimulus Package and it really was a boon for the higher end housing market. Well, it’s permanent now.

10% home-buyer “credit,” up to $7,500. It’s not really a credit, it’s a 15 year no-interest loan of up to 10% of a home’s purchase price, no greater than $7,500. I don’t know if this will induce many folks into buying, there’s no sense rushing to buy something if you think it’ll still go down in value. No one loses money by sitting on the sidelines in this market.

My Thoughts

Overall, I think the way the “bail out” was structured was reasonable. Borrowers might be bailed out, only if the lenders accept the writing on the walls, but they don’t get to reap any rewards on the back end. I like the idea that the government gets at least 50% of a bailed out home’s appreciated value if it’s sold or refinanced. That’s a hit and the cost of doing business. Qualified borrowers get to keep their homes, lenders don’t lose as much, both sides seem to win.

It appears that the only losers are those excluded from the deal (taxpayers included). Lenders may be stubborn and refuse to take the hit, borrowers may find themselves close but not quite over the 31% gross income rule, and others may be left out because of the date of issue on their loan.

You can’t save everyone.

(Photo: respres)


 Frugal Living 
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Remember to Pinch Pounds Too

A while back I discussed how you could save some cash by cutting just one cup of coffee a week and by brownbagging it just one day a week. That’s when, in chatting with Paid Twice, she joking said “yeah… all these years of home brew coffee and packing lunches – explains why we’re broke. :) ” She said it tongue in cheek but it’s a legitimate concern. So many people budget to a penny, diligently track their expenses, yet find themselves behind the eight ball and I suspect it has to do with expenses on the other side of the spectrum – the big ticket items. (I suspect this because that’s what happened to me!)

With respect to frugality, I see the world in two different categories. The first category is for those big ticket items where savings can be significant. Big ticket items are marked by lower frequency but high savings potential, such as a car. The second category are those smaller day to day expenses where there is a much higher frequency of expenses but lower potential for savings. Many times we focus on the small items because we deal with them every day but get panicky or pressured when we start talking major expenses, but those big expenses are the ones where the big savings are too.

Unfortunately, big ticket items aren’t things you can change overnight and they also tend to be more stressful. I recognize that. The two big ticket items most individuals have to pay for are housing, either renting or buying, and a mode of transportation, usually a car. The two are generally marked with higher levels of stress (what’s more stressful, buying a house or making your own detergent? duh!) in part because of the higher dollar values but also because of time constraints. With housing, you’re usually under the gun because you have to move by a certain date according to your lease or some other agreement. With a car, you’re usually under the gun because you need a car ASAP and the whole car sales business is a pressure cooker anyway.

So, how do you counter it? Remove the pressure and reduce those expenses as best as possible.

Remove the Pressure

Sales Pressure: With either a car or a house, there will always be a measure of sales pressure on the part of the agent or the salesperson. It’ll be far worse with a car dealership salesperson because they know they might not get you the next time in so they want you to buy now. Combat this by doing one thing… never sign anything the first time you walk into a place. If you meant to go test drive a bunch of cars, don’t buy that day. Always sleep on a decision and always get a second and third opinion from people you believe are both trustworthy and knowledgeable. You can save yourself from making plenty of bad decisions if you sleep on it and ask for second-party opinions.

Housing: You know when your lease will expire, so start your housing search as early as possible. If you’re buying, start it several months in advance of your move. If you’re going to rent again from another place, start a couple months in advance of your move. Chances are, if you’re renting, even if you can’t find another place to live, you can always go month-to-month on your lease and pay a small premium. Paying an extra hundred dollars a month for one month is far better than rushing into another lease or even a 30 year mortgage!

Car: What’s the worst thing that can happen if you don’t buy a car and your car is kaput? At best, you’re inconveniencing yourself and perhaps friends and family that agree to drive you around. At worst, you rent a car at about thirty or forty bucks a day until you settle on a car. What’s worse, overpaying a few thousand on a car or shelling out for a rental? There is no pressure to buy a car as soon as possible.

Reduce the Costs

The topic of how to reduce the costs of housing and a car, at the tactical level, is way too complex to go into in a few paragraphs here. If you want to know the best tactics for negotiating down the price of a car or a home/rental, you can find plenty of information online . I will however say a few words about how I view homes and cars from a philosophical level and I’m interested in hearing your opinion as well.

Housing: When I rented, I saw my apartment as a temporary location for, at most, a few years. Since it was temporary and I wasn’t building a long term solution, I tried to spend as little as possible on my housing. My end game was to buy a house, not rent a swank apartment, so I never painted or put up pictures. The point was to pay as little as possible so that I could put as much as possible towards a down-payment. To this end, I spent two years renting, always had the same roommate, and we tried to keep costs down as low as possible – I never paid more than $600 a month for rent. I’ve know people who have spent $1200 to $1500 on single bedroom or studio apartments because they wanted someplace nice. That’s $600 to $900 a month that person can’t put towards something else (which is perfectly alright, we all have our own tastes). However, if you are looking to save money, you have to make a lot of detergent to recover $600-$900 a month.

Car: My car gets me from A-to-B and I want it to be affordable, reliable, and fuel efficient. I know some people like to buy cars because it projects a certain image, they want to be able to drive their co-workers or bosses around in a nice ride, but luckily I never worked in industries where that mattered or could affect my future job growth.

Total Cost Considerations: This post is getting a little long winded but I wanted to throw in one last point about total cost. When you sign up for a house or a car, you’re signing up for years and years. A lease is often for twelve months minimum. When you make these purchases, remember to consider the monthly costs as well as the initial costs.


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