M is for Money

This is Part 7 of the First Time Home Buyer: Part 1, Part 2, Part 3, Part 4, Part 5 and Part 6

You’ve found it, the perfect house. Now the real stress begins, to move forward you have to make a written offer. This piece of paper is a contract between you and the seller that will lay out the terms of the transaction. Mistakes in your offer could end up costing you big money so it’s important to get it right. Let’s look at some key issues when making an offer on a house.

Local Custom

As I’ve said before, real estate is local. There will be local laws and customs to follow when putting in an offer. When I purchased my house my agent used a standardized form created by the state board of realtors. This form had all of the boilerplate legalese already typed up with blank spaces to input the particular details of the transaction. Your realtor should craft your offer based on your input, I sat down together with mine to put the offer together.

How Much do you Offer?

I can’t answer this question for you, it’s a huge decision. Any offer you make needs to be in the context of the current market and what the sellers are asking for. Your agent should gather information on recent sales of nearby homes, these are called "comps", a shortened form of comparable sales. From this information you can make a rough estimate of the market value of the home you are interested in. Whether the sellers understand the market value of their home is another story.

What if the market analysis says the home is overpriced?

You have two options if you think a house is overpriced, make a low offer or simply walk away. Often sellers have an unrealistic expectation of how much their precious home is worth, an offer well below the asking price may not even get a response.

Don’t Offer More than you Think the Home is Worth.

Your opinion on the home’s value isn’t the only opinion that counts, your lender has a say as well. To complete the sale of the house you must have an appraisal done to verify the value. Having a purchase offer for more than the house is worth will cause nothing but heartache. The lender will base their loan on the appraised price, not the price you offered.

If the house appraises below what you offered you have several choices:

-walk away (see contingencies below)
- try to get the seller to reduce the price to the appraised value
-cover the difference out of your own pocket.

Earnest Money Deposit

To show a seller that you are a serious buyer your offer should include an earnest money deposit. The amount depends on local custom but is typically several thousand dollars. My own was over $10,000 since the local custom is 3% of the purchase price. This money will later be applied towards your down payment or closing costs, provided you make it to closing. Make sure you have the money available when you make an offer.

This next point is very important – if you do not follow through with your half of the deal the seller gets to keep your deposit! Deposits are serious business, many a buyer has lost theirs by not understanding a purchase offer agreement. There are justifiable reasons to back out of the purchase, but only if they are listed in your offer. These are called contingencies, make sure you read the next section.

Contingencies

Contingencies are there to protect you and your deposit. A contingency will allow you to back out of the deal and get your deposit back, if certain conditions are met. There are a couple of standard contingencies that you absolutely need to include in your offer:

Inspection Contingency – you ALWAYS need to hire a property inspector to look over the house, even new construction. They will look for defects, problems or other issues with the house that you need to be aware of. Sometimes these inspections reveal problems that you don’t want to deal with. An inspection contingency will allow you to walk away without penalty pending inspection. This one is also good as a change your mind contingency since there are no stipulations on how bad the inspection has to be before you walk away. All homes have issues, the inspection will turn up something.

Loan Contingency – you can’t buy the house if you can’t get a loan. Now imagine the seller keeping your deposit because you can’t get a loan! Make sure your offer is contingent on your ability to secure financing. The contingency should include a threshold rate as well so you aren’t forced to chose between loan shark rates and losing your deposit. If you have been mortgage shopping then you have some idea of the current loan rates.

Appraisal Contingency – you need to protect your deposit in case the house fails to appraise at or above your offered amount. If you have this contingency, the seller will be more willing to negotiate the sale price rather than lose a buyer. If they won’t negotiate, you can walk away and get your money back!

These are not the only contingencies you can place in a purchase offer, include whatever terms you need to protect yourself. Remember that walking away after you’ve put down the deposit may mean losing your money. For common interest developments (condos and co-ops for example) you’ll want a contingency that allows you to review all the pertinent documents. There are often restrictions on how many pets you can have or what color your front door must be. You’ll want a chance to walk away after you discover the rules are a little too rigid for your tastes.

Deadlines

Don’t write an open ended offer, always include a date that your offer will expire. Keep the window short, this will limit the seller’s ability to hold out for a better offer and keep you from needlessly waiting. You might also include deadlines for the contingencies to expire or for when closing will occur.

Items to be Included in Sale

A lot of misunderstandings arise over what items convey in the sale. The default rules say that anything physically attached to the house stays. For example, blinds would probably stay but the seller can take the curtains. Appliances that are not built-in like stoves, refrigerators, washers and dryers are considered the seller’s personal property and are not automatically included in the house. But, you can ask that these items remain in the house in your purchase offer. In fact, you could list almost anything you like in the offer, though the seller may say no.

A Purchase Offer is a Contract

Your offer is the place to lay out all of the important aspects of the transaction between you and the seller. This document becomes a contract between you and the seller and any legal disputes will be decided based on what is in it. Make sure you cover all the bases, protect yourself and clearly lay out what it is you expect to happen.

Part 8 - During Escrow

Photo by: Andyrob

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We’ve been toting around the same auto policy coverage for years. But it’s important to realize that as your circumstances change, so should your insurance policies. Auto insurance is meant to both repair your car in the event of an accident and protect your assets if you are at fault for the accident. The coverage limits that we had on our policy years ago were enough to protect our then limited assets, but what about now?

The state of California has a minimum liability coverage that every driver must carry, whether they actually do is another story. The policy limits we had were above that minimum, but is that enough coverage? We’ve kept the same policy limits for nearly 5 years. When we first took out the policy we had very little savings and a whole lot of debt. My income was decent, but not exceptional. Based on that, $50,000 per accident seemed like plenty of coverage. Fast forward 5 years and we’ve finally straightened out our finances, paid off most of the debt and started saving a nest egg. Protecting that nest egg now is just as important as creating it.

For a long time I’ve been thinking that we need more coverage . Finally this weekend we did something about it. In a 10-minute phone call with our insurance carrier we were able to greatly increase our coverage at very little cost. Our prior liability coverage was $25k per person/$50k per accident. For a 6% premium increase we now have $100k per person and $300k per accident. I’ll sleep a lot better a night with those limits. But I can’t rest on my laurels for long, as our savings ramp up, so should our coverage.

Experts recommend reviewing your insurance policies at least once a year. Part of the process should include reviewing your coverage amounts and whether they need to be raised or lowered. Hopefully your assets are growing as the years go by, so your liability type policies need to grow as well. It only takes a moment of distraction to wipe out years of your hard earned savings. How much coverage you need depends on your circumstances - whether you own a home, your savings and your yearly income. If you drive a car that says money or have a profession that puts dollar signs in people’s eyes, you probably need more coverage than you think! If you have zero assets, rent an apartment and live paycheck to paycheck – the state minimum coverage may work for you.

Waiting so long to increase our coverage was a risky move, I don’t recommend neglecting this important task for years like we did. Personal finance is not only about saving and investing for the future, it’s about protecting what you have built. That makes insurance an important piece of the overall puzzle. Look at your auto policy, are you truly covered?


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I hope everyone is having a wonderful weekend. Earlier this week I hosted the Carnival of Debt Reduction, a popular theme right now. Paying down debt is one of the best ways to take control of your finances. I also had the chance to participate in several carnivals this week.

Festival of Frugality

The Festival of Frugality was hosted at Money Ning this week, who was kind enough to include my post on Tax Credits for Energy Efficient Improvements. As always there were many great articles on the meaning of frugality and ways of incorporating frugal practices into our lives. Here are a few of my faves:

-Wealth Pilgrim looks at Why we Send our Kids to Expensive Colleges
-VH at Funny about Money takes on the question is frugality hurting our economy in Frugality, Savings and the Causes of Doom
-Madison at My Dollar Plan talks about How to Manage Money in your Marriage


Carnival of Personal Finance

Four Pillars hosted this week’s Carnival of Personal Finance, which included one of my First Time Home Buyer Series – Get Your Finances in Order. For a few more financially stimulating articles, check these out:

-My Money Minute asks Should I Buy Pet Insurance?
-J. Money from Budgets are Sexy has some awesome pf raps that you have to check out
-Mrs Micah discusses this year’s stimulus and reminds everyone The Government is Not Giving You a Stimulus Check or Grant


Money Hacks Carnival

Money TLD hosted the Money Hacks Carnival this week, which included my post Mortgage Basics. Here are a few other articles from the carnival that you may enjoy:

-The Suburban Dollar asks Why is Money a Four Letter Word?
-Christian PF talks about the Top 10 Money Wasters
-Always the Planner gives advice on Learning How to Budget


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I’m in a rather blue mood after reading the comments on Laura Rowley’s article regarding the rising number of women in the workplace. There are obviously many angry men out there who are placing the blame for their own failures on the backs of women everywhere. For women it’s the classic conundrum – stay at home and be labeled a parasite sucking on the success of your husband or go out in the world and be labeled a man eating feminist. Either way, you can’t win.

I don’t have any wisdom into why women are experiencing greater success and men are falling behind. It is probably tied to women’s achievement in the classroom. We’re going to college in greater numbers, since college graduates tend to earn more than non-college graduates, it would stand to reason that women’s incomes and power are rising. It may be tied to the evolution of our economy, we’ve gone away from jobs that require brawn to jobs that require brains. Our smaller stature is no longer a disadvantage and our ability to communicate and cooperate is a great asset in the office.

What I don’t understand is why women’s success is seen as a negative. Why can’t we all work to the best of our ability? Why can’t we be proud of what women have achieved? Free market ideologies seem great - until you’re on the losing side of it. Of course these same commenters would bristle at any suggestion that they are a socialist. Isn’t hypocrisy amusing? Women are obviously doing their jobs well or men would replace them. I also loved their twist on pay inequality, either it was part of our evil plot to takeover the world or we’re unwitting pawns to the men in power. I haven’t seen these guys out championing for our equal pay so they must believe the former! Psst, will someone please clue me in on the evil plot cause apparently no one told me.

Our society needs talent regardless of gender. We live in the information age where intelligence is our most valuable asset. Anyone dare to argue that men are smarter than women? Mr. M often muses how amazing it is that my tiny little cranium possesses more power than his massive head. The brain really is quite remarkable. These men are like the knitters protesting the invention of the loom. Times change, economies change. Medieval Europe wasn’t that great.

For a few minutes I felt sad that so many men feel threatened by me. Depressed that I live in a world where some men hate me for being smart and successful. Then I got over it. That is how they want me to feel and I won’t give them the pleasure. Plus, I’m amused by the image of me intimidating these so called manly men.

Listen up my angry men, I’m smart and hard working and can replace 10 of you in the workplace. That is not a boast, it’s my reality. I work with a bunch of male chauvinist pigs who know they’d be screwed without me. I get respect because I’m good at what I do. It’s not my fault you’re a failure, why not look in the mirror for a second. You can whine and complain all you want that women belong at home, but that ship has sailed. Nostalgia for a time when men ruled the world isn’t going to bring that reality back to life. Either start making yourselves more valuable or go home and clean my house. At least then you’ll be useful.

Edited to Add: I went back to Yahoo to find a few of the more offensive comments to show Mrs Modern Tightwad what I was responding to and found they had been deleted. I was not responding to or commenting on the state of men and women in the workforce but rather these specific men whose own inadequacies drove them to degrade women in general and successful ones in particular. Obviously these comments were so offensive yahoo couldn't risk leaving them visible, that gives you some idea of their content.

Update: This article in the LA Times talks about gender and the recession. They pin it on two main factors - heavier layoffs in male dominated industries and women's higher education. It covers some of the points commenters have made.

Recession Hits Male Workers More

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This is Part 6 of The First Time Homebuyer: Part 1, Part 2, Part 3, Part 4 and Part 5.

You’ve looked at 10 houses today and already you can’t remember which house had that master bath you loved. House hunting means taking in a lot of information in a short period of time. Here are some ideas on how you can shop smarter when looking for your first house.

What are You Looking For?

What would your ideal house look like, what features would it have? Everyone’s needs are different, a beautiful gourmet kitchen is useless if you never step foot in it. What rooms do you plan to use the most, do you need space for a home office or a playroom for the kids? Do you hate yard work? I love to cook but bought a house with a tiny kitchen and a poor layout, oops.

Make a list of must-have features, things you could live without and things that you absolutely will not live with. How many bedrooms and bathrooms do you want? What style of home suits you, traditional or modern? These are the types of questions to ask yourself before the hunt begins, there is no sense in looking at houses that don’t meet your needs.

Bring a Camera

Take pictures of each house you visit to help jog your memory later. Those photos may reveal features you overlooked when you were at the property. It’s common to suddenly wonder about the kitchen cabinets - after you’ve left the house. Take pictures of the rooms that are most important to you to refer back to later.

Have a Checklist of Important Features

Create a checklist to bring with you so you can easily note whether the house does or does not have the features you are looking for. It’s easy to get distracted or emotional when looking at houses, meaning you overlook key details. The listing will probably note the number of bedrooms and bathrooms, but won’t tell you how they are arranged. The list of potential items is endless. If I were house hunting today, here are the features I would focus on as most important:

- a functional kitchen with plenty of counters and pantry space
- a kitchen that feels connected with the rest of the house
- a large, secure backyard with room for the dogs and space for a vegetable garden
- a garage that fits at least one of our cars
- bigger closets
- newer systems and plumbing!

A house, or condo, should fit your lifestyle. If you don’t enjoy yard work, look for a house without a yard. A jacuzzi tub will just gather dust if you prefer showers to baths. It’s better to think about these things before you plunk down $300,000.

Take Notes

Bring a notebook or leave room on your checklist for taking notes. It’s hard to absorb a lot of information at once, jot down anything that strikes you as you tour the house. Include both your likes and dislikes about the home, but keep it brief. Don’t let your notes stand in the way of absorbing the space around you. You’ll flee some houses too fast to even take notes, they just don’t feel right.

Ask Questions

Don’t be afraid to ask questions, now is the time to do it. The listing agent should answer as best they can or offer to get back to you later. There are many things that a simple look around the house won’t answer – the age of the roof, the type of plumbing and wiring and the age of any other systems like the furnace and air conditioner. Fixer-uppers are fine, as long as you know what you are getting into. It’s the surprise fixer that’s a killer.

Be Informed

The more you know about a house going into the purchase, the happier you’ll be after you move in. It’s never fun to discover that the house you bought isn’t what you thought it would be.

Part 7 - Making an Offer on a House

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Ashley at Wide Open Wallet is running a guest post of mine, Why Parents Should Help Their Kids Pay for College. Most parents will be expected to pay some of their kid's college expenses, our system of financial aid is built around that premise. If parents don't contribute their share their child will have to turn to private student loans to fill the gap, which have higher interest rates and worse terms for borrowers. Please stop on by Wide Open Wallet to read the post. My thanks to Ashley for the opportunity.


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A few weeks ago I joined Lending Club as an ‘investor’ looking for new ways to hopefully not lose my money. They are one of several players in the peer to peer lending market, which try to match borrowers with lenders in a mutually beneficial relationship. Borrowers get better terms than they get through traditional lenders and investors get higher returns on their money. It’s not without risks, hence my small initial investment.

Finding Loans to Fund

I had $100 in my account for funding loans. The minimum investment per loan is $25 so to spread out my risk I invested $25 each with 4 different borrowers. Finding your borrowers is a big part of the fun with Lending Club. They allow you to filter out borrowers based on several measures of credit-worthiness: debt to income ratio, credit score and delinquencies. You can also sort by the rate on the loan. You are given basic info on what the loan is for and how much the borrower is seeking along with their employment and income stats. Most borrowers were looking to consolidate debt, pay for a wedding or buy a motorcycle. Then there was the girl looking for money for a boob job, I guess she hasn’t heard of Care Credit yet (no I didn’t fund her loan). You can also ask the borrower questions about themselves and the loan. I found these little snapshots into people’s lives very compelling.

Low(er) Risk

I decided to fund loans across the lowest rate/risk spectrum, I excluded anyone with a poor credit score or recent delinquencies. This removed the highest rate loans, yeah I guess I’m risk averse right now. In general I looked for people with stable employment, low(ish) debt and a need I identified with. The weighted average interest rate for my portfolio is ~10.5%, well below the maximum 19%. My money is going to someone looking to pay off high interest debt, a family vacation, a wedding and to a guy wanting a motorcycle for weekend rides. Cool.

The Lending Club Experience

My 4 loans are still "in-funding," meaning the borrower has not received all of the funds they are seeking. If the borrower receives less than the full amount they can either take what they get, relist the loan or opt not to take the loan out. I’ll simply have to wait and see. Lending Club will handle everything from collecting the payments to distributing my share back into my account each month.

Right now I’m simply testing the waters, as with any investing I’m using money that I can afford to lose. I would gamble more but I’m trying to build up a bigger cash reserve this year. That money will sit safely in a savings account. Lending Club is definitely tempting me though. ING lowered the savings rate to 1.5% a few days ago, at this rate I’ll have to pay them soon. It’s not just the chance for better returns, I felt a little satisfaction from funding people’s dreams.


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This is Part 5 of The First Time Homebuyer: Part 1, Part 2, Part 3 and Part 4

It’s time to find your new home. By now you should have gotten your finances in order, saved up a down payment and determined how much house you can afford. You probably have an idea of what cities or neighborhoods you’d like to live in. With this information in hand, let’s go shopping.

House Hunting Enters the Digital Age

You don’t even need to leave home in order to house hunt. Most listings are available online complete with pictures, prices and basic information about the home. It’s no substitute for seeing a place in person, but it’s a great place to start. By starting your search online you can get an idea of what is available in your price range and what typical homes are like in your desired neighborhoods. Say you had your heart set on a big backyard but all of the houses are on postage stamp sized lots. You can either rein in your expectations or search for other areas with houses that meet your requirements.

There are many resources to get you started, but remember real estate is intensely local. A local market website may have better, timelier information than one of the large national sites. First search for sites that serve your area in particular, in Los Angeles there are several Multiple Listing Service (MLS) sites that the public can access. You won’t be shown as much information as an agent would see, but the basic stuff is there. Also check out the sites of any prominent local realty companies, often they will have a database of local listings. The large national realty companies, Coldwell Banker, Century 21 and Remax each have websites with searchable home listings.

The growth of the internet has changed the way homes are bought and sold. Several companies are taking advantage of this new model and have stepped in to rewrite the rules of real estate. Their sites provide another resource for the would-be homebuyer, though some only cover a small geographic area at this time.

Redfin – I love Redfin’s site for perusing homes for sale. Listings are shown both on a map and in a table that allows you to sort by various features. They also provide key information missing from other sites, like days on market and last sale price. But currently they only cover Seattle, San Francisco, Los Angeles, Orange County CA, San Diego, Chicago, Boston, Baltimore and Washington DC. If you use a Redfin agent to buy a house, they will share 50% of their commission with you (with limitations).

Zip Realty – how would you like to get paid to buy a home? That is the hook behind ZipRealty, which offers to give buyers a portion of the commission. They aim to reduce overhead, thereby saving money on the transaction of buying a house. Sellers get lower commissions to pay and buyers get a cash rebate.

Trulia – Trulia provides real estate listings but unlike Redfin and Zip Realty, they are not a realty company. Instead they offer information - in addition to searchable listings there are market trends for the area you are looking at. The presence of ‘real estate professionals’ AKA realtors, is both a positive and a negative. There is probably some good information in there, but you’ll have to weed through a lot of propaganda.

Zillow – the primary mission of zillow is property value estimates, which are available free for everyone to see. But they also overlay homes for sale on the maps they create, allowing you to view current asking prices in the context of zillow’s estimates and recent sales.

A Buyer’s Agent

Realtors are there to assist both buyers and sellers. As a first time buyer there are definite advantages to having an agent. First, generally you will not have to pay them. Realtors earn their commission off of the sale of a house, the seller will be responsible for paying both agents. Two, an agent will help lead you, the novice, through the intricacies of the home buying process. They will be able to suggest neighborhoods that might appeal to you, weed through the local listings to find just the ones that meet your needs and arrange showings. A good realtor is a valuable tool, but how do you find one?

Realtors tend to specialize in either specific geographic areas or property types, ie condos versus luxury homes etc. You want a realtor who knows the areas you are interested in first and foremost, they should be familiar with recent sales, trends in the neighborhood, local schools and the surrounding community. Second you want a realtor that you are comfortable with, you’re going to be spending a lot of time together driving around and looking at houses. Lastly you want a realtor who is willing to help you, the first time buyer, through the process. My own realtor failed at this last point because she did a poor job explaining what steps needed to happen, what things I was responsible for and the timeline for the process. This led to extra stress and a late closing. You can ask friends or colleagues for recommendations or interview agents to find one that meets your needs.

Do I Need an Agent?

You don’t have to have an agent, but it would be a good idea as a first time buyer. The rules of real estate transactions vary by location, your agent will know the local laws and customs to follow. You should remain wary of your agent as there is a slight conflict of interest. While they represent you, they are getting paid by the seller and of course want to see you buy a house, any house. Rarely do buyer’s agents have a contract, so you are free to find a new agent if you are not happy. Again, the rules governing buyer’s agents depend on the state you live in.

The Hunt

Some people fall in love with the first house they see, others it is the hundred and first. You need to stay open minded, the perfect house may not look as you imagined, and determined since the search may take months or even years. Happy Hunting!

Part 6 - Be a Smarter Shopper

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Spring has finally arrived. That means it is time to clean out the debt of years past and like flowers in bloom, start anew. I know what it feels like to be in debt, I once owed over $20,000 to credit cards. It was a hard lesson to learn. I encourage you to check out my series Deliverance from Debt, which breaks down debt reduction into a progression of steps based on my own experience.

-NCN at No Credit Needed talks about his approach to the classic problem Debt Reduction and The Emergency Fund. How important is an emergency fund to getting out of debt and how much should you save?


-Destroy Debt gives warning about Get Out of Debt Scams – many companies prey on people’s vulnerabilities, scams targeting debtors are common. Here are a few tips on avoiding these scam artists.

-Personal Grants to Pay Off Debt courtesy of Finance Tips 101 - a look into the truth behind ads promising government grant money to help pay off debt.

-The Consolidator presents The Truth About Debt Consolidation Loans at Debt Consolidation for Beginners – learn all you can about these loans that promise to help you get out of debt (before taking one out).

-Mrs. Money Tightwad gives Confessions of a Spender: Owning Up to Debt and Tooting Your Own Horn at Modern Tightwad – acknowledging you have a debt problem is the first step to dealing with it.

-PF Credit Cards presents Changing your Discover Card’s Payment Due Date – you can change the due date for your Discover card payment to a date that is more convenient for you, this may help prevent late payments.

-Steve at Debt Demolish gives his 10 Vital Steps to Demolish your Debt. Everyone needs a plan to get out of debt, here is the key to Steve’s plan for his own debt.

-Leave Debt Behind discusses What is Debt Settlement and How Does it Work? Many people heavily in debt consider debt settlement, but what is it and do you need to hire an expert to help you?

-Apply 4-Credit asks Should I Pay Only the Minimums on My Credit Cards? Sometimes it makes sense to only pay the minimum towards a debt.

-Credit Card Assist brings us Digging out of Debt – Credit Cards First. How should you organize and tackle your debts?

Money Management

-Money Ning talks about The Latte Factor and Becoming a Millionaire – is the Latte Factor the only thing standing between you and riches, or is the concept a myth?

-FMF at Free Money Finance presents The Best Cashback Credit Card – wise use of credit cards can make you money through the card’s rewards program, FMF looks at a few of the better cards.

-CPF at Christian Personal Finance presents a personal story Money Mistake #1 – Paying too Much for a Car. This is a mistake many people make at some point, unfortunately that mistake often comes with a loan (and more debt).

-Vital Motion gives tips on Negotiating with Car Salespeople: How to Get the Best Deal on Your Car – many people go into debt in order to buy a car, here are some tips to negotiate the price and reduce the amount of debt you take on.

-ALERT: Refinance Your Mortgage Now says The Dough Roller! Mortgage rates continue to fall so if you can refinance, now is the time to do it.

-Payday Loans Review looks at Payday Loan Flipping – are Interest Rate Caps the Answer? Many studies show that the payday loan borrowers are repeat customers, so how can you break the cycle?

-Jim at Bargaineering brings us Saver’s Credit: Retirement Savings Contribution Tax Credit. This little known credit helps lower income Americans save for retirement.

-The Smarter Wallet shares with us Wesabe Review: A Free Online Money Management Tool. Here is one online tool that will help you manage your money, all for free.

-Kate at The Paycheck Chronicles talks about No More ATM Fees. These pesky fees eat away at your money, Kate brings a few tips for avoiding them.

-Kathryn at Out of Debt Christian looks at The Relationship Between Clutter and Money. Cleaning out the clutter in your life just might save you money too!

-Shaun of Short Terms Loans explains Why You Shouldn’t Get a Short-Term Payday Loan. Payday loans trap many people in a cycle of debt with a high interest rate.

Photos courtesy of: Oakley Originals, Laram777, Noe, Peter Baker


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I hope everyone is having a lovely weekend. I’m busy preparing for the Carnival of Debt Reduction, which will be hosted here tomorrow. Stop by for articles from around the blogosphere on money management and debt reduction.

We escaped the city yesterday and headed north for the mountains between Los Angeles and the Antelope Valley. Unfortunately a thick fog obscured what must have been a spectacular view from this dirt road we took along the spine of the mountains. We’ve vowed to return in better weather, perhaps with the 4 wheel drive pick up rather than the Durango. We then drove through the California poppy reserve, which unfortunately is off-limits to canines. We attempted to cross back over to the freeway on the first road built through the mountains, but about 10 miles in we encountered a locked gate. I hope it is closed to repair the road because the view looks amazing from up there. This wilderness escape from the city is only an hours drive from our house, there is a lot more to LA than celebrities and plastic surgery. Last week I participated in 3 carnivals:

-56th Edition of the Money Hacks Carnival at Good Financial Cents – The Reserve Fund for a Better Budget
-169th Edition of the Festival of Frugality at Remodeling this Life – Small Space Gardening
-The Carnival of Personal Finance # 196 at Green Panda Treehouse – Are you Ready to be a Homeowner?

I confess, I opened a new credit card last week. I can’t help it, I’m addicted to rewards. My main card, a Chase Freedom Mastercard, gives you cash back depending on where you shop. Grocery stores, gas stations and fast food restaurants get 3% back and everywhere else is 1% back. Unfortunately they lowered the rewards for new card holders so I can’t recommend you get one. While most of our spending is in the top 3 categories, we do shop elsewhere. So I got a new card that pays 3% back no matter where I shop.

Of course there is a catch, the reward is not paid in cash. It’s a Subaru Mastercard and the reward is paid in vouchers good at Subie dealers for repairs, parts or even a new car. Now that my car is 4 ½ years old I expect more maintenance and repairs to crop up. Since I plan to have this car for a long time I want to keep it running and in good shape for years to come. The subie bucks will help cover those maintenance costs just by virtue of our regular shopping. We will still use the Freedom card for our grocery, gas and fast food purchases because I prefer straight cash rewards. But any other shopping will go on the new card. I don’t expect it will cover all of our maintenance costs, but every little bit helps. What rewards cards do you use and why?


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This is Part 4 of The First Time Homebuyer: Part 1, Part 2 and Part 3

The term mortgage is derived from the French word ‘mort’ meaning death. Sure you still want to buy a home? Unless you come from money or win the lottery buying a house requires taking out a mortgage. A lot of homeowners got into a lot of trouble by getting mortgages that they did not understand. It’s not difficult so let’s take a few minutes to educate you on the basics of a mortgage.

Terminology

There are a lot of terms associated with mortgages that you may not be familiar with. Let’s start off with a few common ones.
Prime – refers to borrowers with good credit
Subprime – borrowers with poor credit
Conforming – loan amount is below the limit for Fannie and Freddie to buy (limit varies by area and also changes from time to time)
Jumbo – loan is above the limit that Fannie and Freddie can buy
Prepayment Penalty – fee for paying off loan in the first few years
Balloon Payment – large lump sum payment due during the mortgage, often around year 7
Stated Income – little to no income documentation required, comes with a higher rate

Basic Loan Types

There are many variations of loans available but most fall into several broad categories depending on how the rate and interest are treated.

Adjustable versus Fixed – the interest rate may be either fixed for the life of the loan or adjust periodically. Even adjustable loans are typically fixed for a period of time, up to 7 years, after which the rate adjustments will start. Adjustable rate loans will lay out the terms for each rate adjustment, how often they will occur, the maximum adjustment allowed at each rate change along with an overall minimum and maximum rate you could be charged. Adjustable rate loans were popular for awhile because the rate was well below that of fixed rate mortgages. If you only planned to stay in the house for a few years, why not choose the lower rate? If you are considering an adjustable rate mortgage (ARM) make sure you understand the terms of the deal. How long is the rate fixed for, how much can it adjust and what is the maximum you might have to pay?

Interest Only – interest only loans allow you to pay only the interest portion of the payment for a set number of years. After that you must pay both the interest and principal for the remainder of the loan, meaning your payment will jump in the future. Since you are not paying down principal you are not building up equity (unless you are counting on price appreciation). Interesting fact – the first mortgages in America were always interest only. You paid back the principal only once you sold the house.

Reverse Amortization – also called pick a pay loans, these allow you to pay less than the monthly interest payment. The unpaid interest is tacked onto the loan balance, which is allowed to grow until you reach a preset cap. Eventually you have to pay back the principal and interest at which time the rate usually adjusts as well, so the payment skyrockets. These loans have a high default rate because of the payment shock.

What are Points?

Points are a fee you pay upfront to reduce the interest rate that you are charged on the loan. Each point is equal to 1% of the loan, so 1.5 points equals a fee of 1.5% of the loan. In turn the lender will lower the rate you are charged. On a $200,000 loan those 1.5 points translate to an additional $3,000 you need to bring to closing. If you plan to stay in the home for many years points are usually a good deal. It takes several years for the monthly savings to repay the upfront fee.

Where to get a Mortgage

You have several options when mortgage shopping. An obvious place to start is your current bank or even better your credit union. They usually have decent rates and may offer incentives like reduced closing costs to current customers. But they tend to have very strict standards for income, credit and most likely will require a 20% down payment. For customers who don’t fit neatly into that box, there are mortgage brokers. Unfortunately I got screwed by mine. But not all of them are bad. They work with many lenders and can shop your loan around to find the best source for your specific circumstances. One mistake I made – confusing a mortgage broker with shopping around. I should have gone to other mortgage brokers and lenders directly to comparison shop.

What it Takes to get a Mortgage

Lenders are looking for a few specific criteria in borrowers, if you don’t meet all of them it can be more difficult to get a loan. The ideal borrower has a good credit score, money for a down payment, savings even after making the down payment, and a steady job in a strong industry. Freelancers and the self employed typically have a harder time getting a loan because they can’t report a steady wage. Years of tax statements showing that your average annual income is strong will help. You will need to get a lot of paperwork together as part of applying for a loan. Typically they will want pay stubs, tax returns and recent statements for all of your assets and accounts. You’ll need to look up the current balance on your debts and supply information on each.

When to Shop

You can start shopping for a mortgage before you’ve found a house. You may also want to go through either a pre-qualification or pre-approval process to determine how much of a loan you can get, but lenders will have to pull your credit as part of it. Keep the number of credit inquiries to a minimum and do it all within a short time-frame to minimize the impact to your credit score. Shopping around ahead of time will allow you to compare lenders rates and terms, though they may change by the time you are ready to buy. In some cases you can lock in the rate you are quoted well in advance, though most rate locks are only good once you have a purchase contract. Locking in a rate is a good move when rates are increasing or a bad move when rates are declining. Any questions?

Part 5 - Starting the Search

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Merging my money with Mr. M’s provides special challenges for budgeting. I receive a paycheck every two weeks and after years of trial and error I’ve finally developed a budget that works for me. It’s not too difficult to budget a regular income, but yeah I still struggled. Now I’ve graduated onto the next level of budgeting - Mr. M’s work and income are entirely unpredictable. I’ve got to merge the two together.

There are several approaches you could take in our situation. One you could budget entirely off of my stable and predictable income. Then the irregular paycheck is used to replenish savings or pay off debt. I’ve opted against this method, while it could work I wouldn’t have our savings and investment goals budgeted. Paying ourselves first is a very important part of my philosophy.

Since there is a minimum level of income we expect Mr M to bring in each month I have developed a budget using that amount (unemployment) and my income. I then subtract our expenses, savings and investments. That leaves us negative $1000 a month. But, looking back over the past few years he should easily bring in more than unemployment. We simply need a savings fund to carry us through the lean months that would get replenished as work comes in. At a minimum I would like to keep $3000 in this fund, 3 months worth of expenses.

Mr. M worked three jobs over the last month, netting more than enough to set up the three month savings fund. My plan is to keep this money in an online savings account to be withdrawn as needed. Any extra money he earns will be applied to debt or savings as long as we always have that 3 months of expenses saved. When we dip below that $3,000 his earnings will be used to first replenish the fund. Hopefully this will carry us through the ups and downs of a freelance life. Any suggestions to make our new budget a success?


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This is Part 3 of The First Time Homebuyer: Part 1 and Part 2

The process of buying a home starts years before the actual purchase. Some of the financial preparations, like building up a credit score and saving up a down payment, take time. Let’s take a closer look at each of the steps to getting your finances in order.

Credit Score

The days of easy money for subprime borrowers are gone and the requirements to get a home loan are much stricter now. Prime borrowers, those with good credit, can still get loans. But everyone else may have trouble. The exact cutoff score to be considered a prime borrower varies depending on the agency preparing the score and the lender’s rules. Generally prime starts somewhere around 720 and up, scores between 680 and 720 would be considered Alt-A (not quite prime) and below 680 would be subprime. You can check your score for free using Credit Karma, though the score they give is only a rough estimate. Improving your credit score takes time so start early if you currently have poor credit. Services like Credit Karma will identify the top reasons why your score is not higher, these are the areas to focus on for improvement. If you are already in prime territory then you don’t need to do anything, a score of 800 will land you the same loan as a score of 750.

Down Payment and Closing Costs

The traditional down payment is 20% of the home’s value, this is to give the bank and buyer an equity cushion. These standards were relaxed over the last decade and that in part contributed to the rash of homeowners underwater today. In a backlash many lenders have returned to the 20% down payment rule, though it is still possible to find lenders who will accept 5% or 10% down. The zero down loans of the bubble years are history, you will have to make a down payment. Anything less than 20% will require PMI, private mortgage insurance. The premium for that insurance will be part of your monthly payment until you have 20% equity in the house.

If homes in your desired area average $200,000 you will need $40,000 as a down payment. Add to that the closing costs, which can be another $5,000 to $10,000. This is to cover the various fees, title insurance and other transaction costs associated with buying a house. If you choose to pay points to lower your mortgage rate that is additional cash you have to bring to closing.

Saving up the cash for a down payment and closing is the biggest hurdle to homeownership for first time homebuyers. In high cost of living areas you need $75,000 or more cash for a modest starter home! I suggest you look for lenders that will accept lower down payments or look for down payment assistance programs in your area. You should put down as much as you can, but I understand that 20% can be too difficult in some cities. Parents and family can help with cash but I recommend they transfer the money well ahead of your home search. Money from family is sometimes regarded as a silent loan, not truly your down payment. If the money has been in your bank accounts for some time, no one is going to wonder where it came from.

How Much House can you Afford?

The exact amount you can borrow will depend on your lender’s criteria, but you should set a price based on what is comfortable for your budget. Homeowners have some costs that renters never think of. In addition to your principal and interest payment to the bank, you must have homeowner’s insurance (your lender will require this) and pay property taxes every year. Homes require upkeep and maintenance, so you should save money every month for repairs. The other hidden cost is utilities, many apartment buildings cover some portion of the monthly utility bill. At my apartment I paid for telephone, electric and gas, but I did not pay for water, trash or sewer fees. Our trash alone costs over $30 a month! Also shared walls tend to reduce heat and cooling costs, single family homes can’t benefit from their neighbor’s leaked heat.

Once you have figured out how much monthly payment you can afford use those figures in a mortgage calculator. The current average loan rates are available online, or look at your bank or credit union’s rates. Here is an example: your budget says you can afford $1200/month for a payment, not including the taxes and insurance. If the rate you expect to pay is 5.5% for 30 years, that means you can borrow around $210,000. Add in the down payment you’ve saved and you get the maximum you can afford for a house.

Your debt to income ratio is another way to determine how much you can afford to borrow. Each lender has their own guidelines for the ratio they will accept. Here is how you calculate a debt to income ratio. The monthly payment based on D/I includes property taxes and insurance, you will have to subtract those expenses to determine the mortgage component of the payment. You can then plug the mortgage payment into a calculator to find the amount you can borrow.

First Time Homebuyer Programs

Many communities have programs to help first time buyers with everything from education about the home buying process to down payment assistance. Other first time buyer programs offer loans with small down payments, the government’s FHA backed loans are one such example. These types of assistance programs are located throughout the country, this site is a place to get started. It is definitely worthwhile to check out what aid is available to you. The current recession stimulus also provides an $8,000 incentive in the form of a tax credit to first time buyers, here are the details from the IRS.

Being Financially Ready

You can never be over prepared when it comes to buying a home. It is one purchase that will take years of saving and planning. Even if a home is many years on the horizon, now is the time to set yourself up for the future. The biggest financial decision of your life requires a huge financial commitment.

Part 4 - Mortgage Basics

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Did you know that homeowners can save some green while going green around the house? Once again the government is offering tax credits for energy efficient home upgrades like new insulation or windows. These credits are an incentive for homeowners to make the investment, which will also payoff in lower energy bills. Here is a run down on what upgrades qualify for the credit and how much you can expect to receive.

Types of Credits

The types of improvements eligible for the tax credit fall into two broad categories, upgrades to existing homes meant to improve efficiency and alternative energy installations for new or existing homes. The amount of the credit, requirements to receive it and deadlines are different for each category.

Energy Efficient Upgrades

If you own an existing home there are several types of improvements that qualify for the credit – but only when you install a product that meets the required standards. In general only the most efficient products on the market qualify. The energy star label isn’t enough, some energy star labeled products don’t meet the tougher energy credit requirements. If you install an eligible product you will receive a credit equal to 30% of the cost, up to a maximum of $1500. You must purchase and install these upgrades between Jan 1, 2009 and Dec 31, 2010. You can also claim the 30% rebate on multiple projects, up to a combined $1500 maximum. Some of the smaller upgrades alone don’t cost enough to use the full credit.

Here are the types of products that are eligible for the credit, for more detailed information on the efficiency requirements see the Energy Star site. There are very specific criteria for each upgrade and you will want to refer to them while shopping.

-Windows and Doors
-Insulation
-Roofs
-HVAC
-Water Heaters (non-solar)
-Biomass Stoves

*Important note, the tax credit only covers the cost of materials for windows, doors, insulation and roofs. Installation costs are not eligible. For HVAC and water heaters the material and installation costs are eligible for the tax credit.

Alternative Energy

There are fewer limitations on the alternative energy component of the credit. Owners building a new home can also claim the credit, there is no upper limit on the amount you can claim and the credit is available until Dec 31, 2016! Of course these upgrades typically have a very high up-front cost, hence the big incentives. The tax credit is equal to 30% of the cost, including both materials and installation. Here are the types of systems included:

-Geothermal Heat Pump
-Solar Water Heater
-Solar Photovoltaic Systems
-Small Wind Energy Systems
-Fuel Cells

Requirements to Claim the Credit

If you are planning to claim the tax credit for an upgrade, make certain the product you are installing meets the requirements. The Energy Star website has details on the criteria for each product, you should double check before making your purchase. To claim the credit you must have a Manufacturer’s Certification Statement, which says the product meets the requirements of the tax credit, and keep your receipts. Upgrades to investment or vacations homes are not eligible, it must be for your primary residence. To claim the alternative energy credit you must file form 5695 with your taxes. Credits are a direct dollar for dollar reduction in your taxes, unlike deductions.

Are you Now Considering these Improvements?

I have wanted to make several improvements to my home for years. This credit will certainly make me check my finances and get a few estimates. Who wouldn’t want to save some green while going green. What about you, any plans for new windows? Will this tax credit spur you to make improvements now rather than later?


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I’m enjoying a lazy Sunday around the house. I want to go to the gym, but my knee is still hurting from last week. Unfortunately my waistline is reflecting my laziness, I’m going to have to go on a diet soon or my pants won’t fit. Ugh. I hope everyone is having a relaxing weekend and is well rested for the coming grind. Here are last week’s carnivals, thanks as always to the hosts for including my submissions:

-The Carnival of Everything Money at the Penny Daily: The Marriage Penalty Myth
-Onemint – The Economy and Finances: Recession Taboos
-The Carnival of Personal Finance at Stock Trading to Go: My Money Mistake #3 – Cashed out a 401(k)

Each of us have our own way of handling money, something we’ve grown comfortable with it. That can make it a bit uncomfortable when it comes time to combine money in a relationship. What works for you might not work for your partner. You have to come up with a new joint system for handling money, goals you can both agree on and rules that you each have to follow. After 6 years together Mr. M and I are finally taking the plunge, we’re joining our money.

We took the first actual step today by creating a joint checking account. Since I plan to handle the majority of our money we simply added Mr. M onto my existing account. It only took a few minutes at a Bank of America branch. We followed that up by depositing his last two paychecks into what is now our account. He will keep his existing checking account for spending money only while I plan to handle the bills, savings and investments out of the joint account. We still have work to do on a budget, his irregular income makes budgeting very tricky. I also have to set up a joint savings account and add his name to some of the investment accounts. For now it’s a work in progress, more details are still to be worked out. But I’m hoping that together we can get farther financially than we are able to alone.

Organic produce comes with an oversized price tag, but you can grow your own for a fraction of the cost. I live in the city on a lot that doesn’t provide much space for gardening. I still manage to grow a variety of fruits and vegetables through the smart use of the space I have. Here are a few ideas on gardening when you don’t have a lot of room.

Grow Herbs on a Window Sill

This may be the only option for city dwellers without a balcony or outdoor space. Herbs are easy to grow and can be raised successfully in containers in a window. Fresh herbs are very expensive from the store, so growing your own can save some serious money while spicing up your culinary creations. You can buy rectangular planters that will fit perfectly in a window sill and grow your various herbs together or get several small pots and plant them individually. If you are impatient like me, buy small plants from the garden store rather than seeds. Trim your herbs regularly so that they don’t go to flower.

Container Gardening

With container gardening you don’t even need a yard to grow produce. Many plants offer smaller varieties that are well suited to growing in pots. This way a city dweller with only a balcony or courtyard can grow vegetables and some fruits. One word of caution, plants in containers can’t throw deeper roots to reach water. Use oversized pots and either water regularly or install a drip system to keep your plants hydrated. Strawberries, tomatoes and peppers do well in pots, I’ve also grown carrots and bush beans in containers. Look for compact or bush varieties that won’t need as much space.

Use Raised Beds

Raised beds help you make more efficient use of a small garden. You can minimize the walkway space, pack the plants tighter and plant them right up to the edge of the bed. Since you typically bring in soil to add to the bed, you can create an ideal medium for growing plants. They also cut down on many garden pests. Raised beds make your garden attractive and orderly.

Tight Packing your Plants

The tighter you bunch plants together, the more problems you create. It’s easy to place small sprouts or seeds close together without accounting for the grown size of the plant. They will compete for light and resources when crowded too close together and diseases will spread more easily. But, if you are vigilant about spraying before problems arise you can pack your plants in more closely and get a higher yield in a small space. I use neem oil, it’s a natural pesticide that also works on powdery mildew (big problem in my garden). Buy the pure oil and mix it at home with soap and water, it’s much cheaper than buying the prepared sprays that contain neem.

Go Vertical

Make the most of a small footprint by planting vertical growing produce like peas and pole beans. Last year I planted a compact variety of cucumber that I trained to grow on a trellis. Use stakes or cages for eggplants, tomatoes and peppers to encourage them to grow upward rather than outward.

Dwarf Fruit Trees

I have several small potted fruit trees. They are each dwarf varieties that are only a few feet tall but still produce full sized fruit. One is a multi-graft peach tree about 6’ tall, last year it produced over 9 pounds of peaches. These small yet mighty trees are now common in nurseries and garden stores. I also have dwarf kumquat and orange trees. Use the largest size pot or half barrel if you want to keep them in containers. You could also plant them directly in your yard.

Choose Plants Wisely

Some plants are space hogs, especially squashes and melons. They tend to takeover whatever space they are planted in and are often not appropriate to small gardens. Choose plants that can grow up rather than out, many plants come in both bush and vine varieties. The vining type will take up less space than their bushy cousins. You can also co-plant complimentary vegetables, for example plants that prefer cool, shady conditions can be placed next to taller plants. This allows you to plant more in the same space.

Small Garden, Big Harvest

Planting a vegetable garden is good for your health, your wallet and the environment. You don’t need a huge yard, a sunny spot will do. I use a combination of raised beds and pots to grow a variety of fruits and vegetables. During the height of summer my small garden produces more than we can eat, I have to freeze the excess. Using a few of the ideas here you can get big results in a small space.


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This is Part 2 of The First Time Homebuyer, for Part 1

Why do you want to own a home? Is it for a sense of place, a feeling of security or the ability to paint the walls something other than white? It’s easy to fall in love with the idea of owning a home, but the reality is far different. Any first time buyer needs to take a serious look at their motivations for owning a home before they commit to buying one. Even more important, are you ready to own a home?

Financial Commitment

Owning a home is the biggest financial commitment you’ll ever make (well besides marriage and kids). You are committing to make a large payment every single month for the next 30 years. If your income is unsteady or your employment uncertain, buying a house is a serious mistake. It’s not easy to walk away from a home and failing to pay your mortgage will have big consequences for your credit and your wallet. Depending on your lifestyle and career, you may be better off renting.

Buying a house comes after putting your financial house in order – paying off debt and building up an emergency fund. Existing debt will reduce the amount of house you can afford and stretch your budget thin. An emergency fund is even more crucial to homeowners, urgent house repairs can appear out of nowhere.

When you take on a mortgage you will pay as much in interest as principal. A $200,000 mortgage at 5.5% for 30 years will cost you $209,000 in interest. You will pay over $400,000 for that $200,000 loan. Does the house still seem worth it at twice the price?

Problems and More Problems

There is a reason houses are called money pits. Houses require upkeep, maintenance and repairs. Over time systems have to be replaced and tired interiors need to be renovated. The list of work that my house needs would run on for pages. How much do you know about painting, plumbing, and electrical? Are you handy with a wrench? There is no manager you can call. You are the manager and responsible for fixing your own problems.

If you are motivated and have a few tools you can do many repairs yourself. I hope you like Home Depot cause you’re going to be spending a lot of time there. Problems can also be solved with money, which you are going to need plenty of. Replacing a roof, painting the exterior or installing new wiring will run thousands of dollars. The cost of repairs is one thing that new homeowners severely underestimate. Some people can’t stand problems, if you are one of them, don’t buy a house.

Stuck in One Place

Do you like where you live, do you plan to stay for the next 10 to 20 years? Buying a house means throwing down roots in a community, which is a wonderful thing. But if your dream is to move back closer to family in a few years, buying a house in your current town is a mistake. The on-going collapse of the housing market illustrates why you should be ready and willing to stay in one place for decades - many underwater homeowners bought their houses 6 or 7 years ago. It will be many more years before prices recover, meaning they must stay in one place 10-15 years just to break even on their purchase. Anyone contemplating buying a home should realize they may be stuck with it for a long time. Even in a normal housing market it takes 3-4 years of ownership for you just to recoup the transaction costs.

Are You Ready?

I wasn’t ready to be a homeowner when I bought my place. I didn’t understand what it entailed - the high cost, the huge responsibility or the feeling of being trapped. There are things I enjoy about my house, but I often feel I should have rented for a few more years.

It’s OK if you’re not ready to buy, there is no timetable that says you have to buy a house by a certain point. In this case, it’s better to be over prepared. If you’re still committed to buying and I haven’t changed your mind, stay tuned. Next time I’ll discuss the financial preparations you need to do to before you buy – good stuff even for those not yet in the market.

Part 3 - Get Your Finances in Order

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Where do you keep your money? Are you happy with your bank? I have a variety of savings and investment accounts but my favorite is at FNBO Direct. FNBO Direct is the online arm of the First National Bank of Omaha, which has been around for 150 years. They are consistently one of the top rated online banks for both security and the interest rates they offer. Bankrate.com gives them 4 stars out of 5 in their ‘Safe and Sound’ rating. No wonder Kiplinger's named them the best online bank last year.

I opened my account several years ago when FNBO offered a promotional 6% interest rate on new savings accounts. Ahh, those were the days. Even after the promotion ended they have maintained some of the highest interest rates in the online banking world. Unfortunately with world’s economy in the toilet those rates aren’t very high right now. Still, FNBO beats the competition. Currently ING, another place I keep my money, offers 1.65% on its Orange Savings account. Compare that with FNBO’s 2.15%.

The difference is small but enough for me to stick with FNBO as my main savings account. They may not always offer the highest interest rate, but they are consistently near the top month after month. I’m not interested in rate chasing and moving my money from account to account. I don’t feel such strategies would net me any more than I get with FNBO.

I know many people are worried about where to put their money right now. If you haven’t tried an online savings account because you are concerned about the risk, there are several institutions that are as safe as most brick and mortar banks. FNBO has no minimum balance requirements and no account fees. You can open your account online and link it with an existing checking or savings account. It only takes a few days for the account verification to be completed. Happy Savings.


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The single biggest purchase you’ll ever make. A path to wealth for the middle class. The foundation for stronger communities. The American dream, my American nightmare.

Four years ago I rushed into buying my first home with little understanding of the purchase I was about to make. This was a recipe for disaster and I had the headaches to prove it. With a little education you can become a smarter consumer, a savvier home buyer. You don’t have to be me.

I imagine many people are thinking of buying their first home this year. In some cities prices have fallen 50%, the interest rates are low and Washington has added an $8,000 incentive. This may be enough to tempt those waiting on the sidelines. Don’t rush in like I did, take the time to educate yourself and to plan your purchase. You can avoid the hassles I encountered and you’ll be a happier homeowner.

Look Before You Leap

I was looking to rent, not buy, in 2005. But nothing met our needs for size, space and price. On a whim I started checking home prices and calculating mortgage payments. When I factored in the expected mortgage interest deduction, owning didn’t seem so expensive. It was higher than renting, but the appreciation would balance that out (ha ha). After consulting my mom, who enthusiastically encouraged homeownership, my mind was made up. Why rent when you can buy! I jumped into buying a home with little thought and no planning. A few months later the deal was done, but the headaches didn’t stop.

There is a lot more to buying a home than simply finding one you like. It is one of the biggest financial decisions you will ever make, wrong moves now will cost you for years to come. How much do you know about mortgages? How much house can you afford? It’s not a decision to make lightly, many people are not cut out for home ownership. It’s expensive, repairs are now your problem and you can’t move on a whim. Every first time homeowner is shocked by the high expenses, costs they didn't anticipate. Despite the downfalls, homeownership remains the goal of many Americans.

A Little Guidance

Buying my house was an eye opening experience, I was not prepared financially or emotionally. At the time I had too much debt and too little income. A house is a huge commitment. A wiser me looking back says, "boy was that stupid." But I can’t change the past.

The First Time Homebuyer is a series covering the home buying process from start to finish. I hope to give you the education that I lacked as a first time buyer. Each post will address an important angle to buying a home, starting with how to decide if homeownership is right with you. I’ll cover each of the major steps as you get ready to buy, shop for and eventually close on your first house. With a little guidance I hope you can be a better home shopper.

Part 2 - Are You Ready to be a Homeowner?

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Do you go over budget month after month? Do unexpected expenses ruin your attempts to stick to a budget? It’s easy to go wrong when budgeting because it’s nearly impossible to account for every expense in your life. It could be little things, like when a friend invites you out for a drink after work. Or it might be a routine expense you forgot to include, like the annual car registration. Many budgets fail because they are too rigid, they can’t handle unexpected expenses. One way to create a more flexible budget is to add a reserve fund. This is money you reserve for the many things not in your budget.

Be More Flexible

Some people enjoy strict budgeting and accounting for every dollar. I’m not one of them. I budget for the major categories, like bills and routine expenses. For the irregular expenses, especially gifts, car registrations and the occasional splurge I use my ‘miscellaneous’ fund. It’s a separate line in my budget that serves many purposes. I also use it as a buffer when I go over budget in another category. Rather than going into debt or dipping into savings I can take the money out of my reserves. I used to go over budget every month because I was too optimistic about my expenses. Adding the miscellaneous fund has solved many of my budgeting problems.

It also comes in handy when the unexpected happens. I’ve given up trying to anticipate every expense in my life, new ones are always appearing. But I have no problem paying for them because I have money set aside for no particular purpose. It could be doctors bills or a baby shower gift, my budget doesn’t have to know about these things to be prepared for them.

Trial and Error

How do you know how much money to reserve? When it comes to making a budget, your spending history is a good predictor of the future. How much do you go over budget every month? What expenses did you overlook in the past? I always found myself juggling my budget to pay for gifts, holidays and the auto club renewal because they weren’t in my budget. Rather than create new categories for every little expense, I lump them all in with the miscellaneous money. Some months I spend all of my reserves, other months I still have some leftover. It takes trial and error to discover how much money you need. Ideally you only set aside as much as you will use, this is not a savings account. This is money you expect to spend, you just don’t know where yet.

I include my miscellaneous fund as an item in my budget, the amount I set aside is based on my past experiences. I keep the money at ING and withdraw it as I need it. You can use whatever system you choose, as long as you are setting aside reserve funds as part of your budget.

A Reserve Fund is Not an Emergency Fund

The prudent person keeps both a reserve fund and an emergency fund, they are not the same thing. Emergencies should be very rare and way too large for your budget to handle. The E-fund is sacred, not to be touched because you want a new shade of lipstick. That is where the reserve fund comes in, it’s money meant for spending rather than saving. The reserve fund can tackle small emergencies, handle unexpected expenses and save you when you spend too much eating out one month. With this extra flexibility you and your budget can tackle anything.

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Los Angeles has its share of natural and unnatural beauty. This weekend we packed up the kids, AKA the terriers of terror, and visited Anza Borrego State Park. For a few weeks in late winter the desert springs to life. The seasonal winter rains allow millions of wildflowers to blossom in a short lived burst of color. It was a 2 ½ hour drive from our home in Los Angeles to the park, which is why we’ve never gone before. It’s a long day trip and over a tank of gas for the Durango.

Upon entering the park we headed up towards Coyote Canyon where the wildflower report said the flowers were in bloom. Apparently everyone else read the same report as even the dirt road had plenty of cars. We went as far as a water crossing, which I wasn’t willing to chance in a 2WD Durango. Mr. M was gunning for it of course. We stopped for lunch in a grove of occotillos before heading off for some less traveled back roads. We let the boys run off leash around a deserted dry lake bed, perfect because they couldn’t get out of sight. We crossed the park from west to east, ending up at the Salton Sea before turning for home. We had a few incidents, B stepped on a piece of dead cactus. It took awhile to remove from his foot but he was a trooper and didn’t let it slow him down. I managed to slam my knee into the trailer hitch, I’m still limping around and my knee is black and blue. Still, we had a nice day away from the city. Here are a few pictures from the trip to show that even in the desert, life blooms.

I like to learn things the hard way. I spent my 20’s making every sort of financial mistake. In the past I would read financial advice and promptly dismiss it from my mind. I had my excuses, it didn’t work for me or I didn’t have enough money to save. My lack of savings cost me in ways big and small, first I ran up too much debt. Then when I got downsized in 2002 and didn’t have an emergency fund to fall back on, I cashed out my 401(k).

It was the right choice at the time, but the wrong choice for my long term financial health. I knew I would be getting unemployment, but I didn’t know how long it would be until I found a new job. I was scared without any savings so when the paperwork came to either rollover or cash out my retirement plan, I took the cash. Cash is like a security blanket, it keeps you safe and warm. At least I learned a lesson that day, I learned that I really like savings. But it came at a price, a 10% early withdrawal penalty.

I had a new job two months later, but I never put the money back into a retirement account. My new job didn’t offer a 401(k) either. In fact I didn’t start contributing to retirement again until 2005, I was back at the starting line. I had co-workers with six-figure retirement accounts, there I was heavily in debt and with zero in my 401(k). I still lag behind my peers, the collapse of the stock market has hit my young portfolio especially hard.

The only 2008 numbers I can find come from Fidelity, who says the 401(k)s they manage fell 27% last year to an average balance of $50,200. As you can see from my net worth, I’m well behind that figure. When compared to my income group, I look even worse. In hindsight I should have left my retirement savings alone and forced myself to live solely on unemployment. Because I cashed out my first 401(k) and didn’t start another for years, I’m late to the start of the retirement race. Did I ever mention I’d like to retire early?

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