Buying with Nothing Down!
January 31st, 2007In some circles, this is touted as the greatest wealth building secret; buying real estate without a down payment, and relying on this to boost your wealth. In practice, it’s a lot more difficult than it’s made out to be.
The key rule to keep in mind here is that there’s significantly higher risk and cost, for a zero-down purchase. Typically, you get a zero-down by getting a second mortgage or a HELOC style loan; other alternatives include adjustable rate mortgages (ARM’s), where you pay only the interest for a specified period.
Not surprisingly, the interest rates charged on these loans tends to be a lot higher than a regular mortgage. Plus, you may need to take out additional mortgage insurance that protects the lender against default.
Unless you’re getting a real bargain, think twice about this route for your primary home. The last thing you want is to have to sell out at a loss, especially if interest rates rise or other conditions change around you.
Getting set
January 30th, 2007Typically, the process of buying a home involves a long term commitment. There are several things you need to decide upon and do, before going ahead.
- Be sure you’re staying put. While a home is an investment, and can be sold to recover your equity, it isn’t a quick or painless process. Furthermore, there are transaction costs involved - agents fees, title charges, loan termination etc.
If you anticipate moving around, or needing a larger home in the near future, it doesn’t make sense to buy. - Clean up your credit record. It’s possible to drop your interest rates by upto a couple of percent, if your credit score is good. While you may not be able to close off all debt, you can clean up some part of it; plus, make sure all bills are paid on time. Get a copy of your credit report and check that there are no adverse remarks.
- Aim for an affordable house. As we remarked earlier, a good thumbrule is to look at two and a half times your annual income; but use a mortgage calculator to estimate what you can afford.
- Schools and other amenities trump good looks any day. You can renovate a run-down property, but you can’t change the school’s reputation or other local facilities. A cardinal rule in real estate is that it’s all about location.
- Get pre approved for a loan. You’ll be surprised at how it strengthens your bargaining power.
- Offer low, and bargain up. Many sellers will negotiate on the starting price, but you don’t know how much. Plus, if he wants a quick sale, he may compromise a lot more than you think he will.
- Get professional help. A good realtor and a home inspector are a must. You’ll save a lot more than you’ll pay them.
A home is where you want to feel happy, everyday that you live there. Don’t skimp on the process.
Buying a home.
January 25th, 2007If you’re currently renting a home, the amount you pay towards rental only gives you the right to stay for a limited period; until the next rental is due. Given that it’s usually a large chunk of the monthly income, it makes sense to explore whether you could do better buying it instead.
In some areas - typically large cities like New York, where property prices are much higher but rentals relatively low, it doesn’t work out. You’d end up paying more to buy than to rent. It might still make sense from an asset building perspective - but you need to check out whether it does.
But in most places, you could find homes such that the mortgage and other monthly payments work out to around the same as your rental. If you can, jump at the option; instead of paying just to live there, the same or similar payment allows you to live there plus own the place.
A good thumbrule to start with is to look for properties with a price that’s two-and-a-half times your yearly income or less; that makes it affordable with your current income. If these are comparable to the place you’re living in, then it’s a lot easier to go ahead.
Home truths
January 23rd, 2007A home is typically the biggest expense or investment for most people. Whether you’re renting a place, or paying your mortgage instalment, you’re likely to be spending anywhere from 20 - 30% of your takehome pay on housing. The exception is when you’re living with parents; but that isn’t something that lasts for ever.
There are several ways to save on home expense, without compromising on the quality of your life. Consider the following, when renting a home.
- Find the right size for your needs. A mansion doesn’t make sense for a single or even newlyweds. Apart from the direct costs, maintaining the place adds more expense to your monthly budget
- Alternate locations. Some districts tend to be more expensive; you could find bargains close by but not considered part of the exclusive area.
- Daily commute: If you’re staying far away from work, or need to drive long distances for groceries, add that expense to your housing budget, and then decide whether you have a bargain.
- Sharing a place : Typically, this makes sense for singles; however, make sure that you aren’t getting hit with extra expenses because of location or maintenance.
- Stocks are expected to continue to do well this year, although the rate of growth may not be as high as before. With the early days of trading setting a positive trend, this is one area you should be focusing on.
- Real estate - especially housing. While not yet a buyer’s market, the rise of interest rates and the downturn in prices mean that bargains can be had; if you do your homework.
- Start, or build up, your retirement fund. With the kind of tax breaks you get with IRA’s, and the growing unease over Social Security, you need all that you can keep!
- Explore high yield CD’s - with interest rates currently quite high, you could lock into a long term fixed income quite easily. Watch the interest forecasts, though.
- Make savings a habit. Even better, make it automatic; have it paid directly from your paycheck or checking account, into whichever saving vehicle you choose.
- Watch your expenses. It’s easy to slip into the dollar-a-day habits; over time, they cost you a pretty penny. Now is always the best time to break a bad habit.
- With interest rates and gasoline prices stable, there is no reason consumers should not continue to spend and send the economy up 2.5% to 3% next year. This is slower the 3.5% to 4.5% average over the past three years, but enough to keep corporate profits rising.
- 2007 will be another good year for stocks, although returns will not be as high as 2006. U.S. stocks should return about 8%, with foreign stocks doing perhaps a little better.
As a thumb rule, rental expenses shouldn’t exceed 25% of your take home pay; around 15-20% is good.
Saving Style
January 17th, 2007As discussed earlier, you get the biggest bang for your buck by focusing on the big tickets. There’s another advantage here - it doesn’t require a change in habits for the saving to kick in; just a one-time effort.
Let’s look at this further. Most “Latte Factor” savings talk about changing a habit; not buying a coffee at Starbucks everyday, or brown bagging your lunch. That’s not a one-time exercise; if you stop for a couple of days and then slip back, all the potential savings go down the drain.
On the other hand, decisions about home choices, travel and transport, or vacations aren’t taken every day. You take these decisions once - and that continues all through.
We aren’t saying that it’s wrong to sweat the small stuff; just that it isn’t easy to keep it up. If you are able to do it, that’s great.
But if you do find it difficult, take the easy way out.
Saving Big
January 14th, 2007Different strokes for diff’rent folks - that’s the name of the game for saving more. Gurus like David Bach talk of the “Latte Factor” - how cutting down on small daily splurges can add up big time. While this is true, it does require a regimen of discipline; of not giving in to little extravagances.
And that can be really difficult. Peer pressure, for instance; do you want to be a party pooper when friends or colleagues are heading out for a cup, or a beer together? No, you don’t. But then, your mini-savings plan goes down the drain.
Instead, think big. Where are the big expenses in your monthly budget - where money goes out in a big chunk? Chances are, the largest single expense items are housing, transport, groceries and toiletries, and vacation or entertainment expenses. Making a one-time change here can pay off big; bigger than your daily cuppa.
Doing More
January 10th, 2007Some people believe in making New Year resolutions; even if they fail to keep them up. Others choose not to make them, because they believe these are bound to fail.
But rather than doing it for the New Year, it does make sense to make resolutions, especially if these are of benefit. The key resolution for personal financial success, is to do more; Earn more, Save more.
Earn more - that’s something everyone would like, but quite often, pessimism sets in. “I’m already doing all I can.” Or “If I have to get more, I have to move to another city”. “I don’t have the skills to get more”. Not true; there are ways and means for anyone to earn more, as long as you’re willing to do it.
Save more - this is what most people detest. Because it seems to imply that you have to avoid spending, or give up things you like because it isn’t “necessary”. Again, not true; you can still spend on activities you love, without compromising on your saving.
As in all things - it isn’t how hard you work, it’s about how smart. More on this, through the year ahead.
New Year Plans
January 9th, 2007New Year is traditionally the time to recharge and restart your life anew; with a holiday break to catch up on things left undone, enough opportunity to reflect on what’s happened and what hasn’t, and quality time with family, it’s probably the best time of the year around.
Now that the holiday is over, it’s time to look at what this year holds for your money; and to decide which way you’ll grow. Among the options :
And may this year be the best one you’ll have.
New Year 2007
January 1st, 2007At the outset, Greetings and Best Wishes for the year 2007 to all readers. We hope this year brings you success in all your endeavours, and happiness and good cheer.
What will the year be like? In general, expectations seem to be for continued economic growth - Jeremy Siegel over at Yahoo Finance shares his views.
Key highlights :
With the economy expected to continue strong, 2007 should be a good year for finance and investments. We will continue to monitor and bring you information and analyses, as developments unfold.
Merry Christmas
December 24th, 2006Wishing everyone a Merry Christmas. May this festival of cheer bring all good things to your life.