SD Chp. 11 Saving your home: an overview

Report
Get Your Financial
House in Order Before
House Hunting
Erica Abbott, Family Finance Student
Dr. Jean Lown, FCHD Dept.
Financial Planning for Women June 2013
1
Welcome to FPW
• Personal Finance Action Plan
– Make a commitment to yourself to take specific
action by a specific date
• Please sign “attendance” sheet with name &
email address
– (print clearly)
• First time attendee?
• PF magazine give-away
2
Overview
• Is now the time to buy?
– Employment & family plans
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Rates are low but be realistic re: affordability
Spending plan
Emergency fund
Pay down debts: don’t take on more debt
Save for down payment & closing costs
Check credit reports
Improve credit score
3
How much can you
afford?
• Set firm limits to house payment
• Don’t rely on real estate agent or mortgage
broker to tell you what you can afford
• Payment no more than 25% of take home
pay
• Down payment at least 10% of loan amount
– Utah Housing FTHB: 3 ½%
• Don’t deplete emergency fund
4
Consider the cost
• Property taxes
– *Cache County estimate $8.21 for $1000
borrowed.
– $100,000 home = $821 annual property tax!
• Insurance
– PMI insurance if you don’t have 20% down
• Estimate $40-$50 a month for $100,000 borrowed
– Homeowners insurance
• Varies
• *LowTaxRate.com estimator
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Consider the cost
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Moving expenses
Closing costs: Ave. 3 – 6% home price
Home inspection
Title insurance
Utilities
– Bigger home = higher bill
– Required deposits for utilities
• Yard care/snow removal equipment
• Remodeling or updating
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Set Goals before
you Buy
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What Kind of Goals?
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Spending plan that works
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Emergency Savings
•
Paying down debt
•
Credit in order
•
Saving for closing costs, misc. costs, and
down payment
•
Make your goal specific and manageable
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Monthly Spending
Plan
•
Create a ZERO budget. Every dollar has
a name! -Dave Ramsey
• Spreadsheet on computer
• Spreadsheet on paper
• Envelope
• Computer Programs
• Quicken, Quickbooks, Mint.com, etc.
• Combination
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Spending Plan
Methods
•
Online: https://www.mint.com
•
Get personal help at USU Family Life
Center
•
(435) 797-7224
•
$15 per 2 hour session
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Emergency Savings
•
3-6 months of living expenses
•
Used for emergencies ONLY!
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NOT part of your down payment
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Saving for a Down Payment
& Closing Costs
•
It's great to have 10% down.
•
20% is better
•
Utah Housing first time home buyer:
•
Avoid cost of private mortgage
insurance
•
Closings costs UT Housing: 2.5 - 3%
•
More is better
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Paying Down Debt
• Set specific goals to pay off debt.
– PowerPay.org program (Debt Snowball)
– Pay off debt smallest to largest to build up
momentum or
– Pay off debt highest interest rate first to save $
13
Are you ready to be
a homeowner?
• In addition to building savings & boosting
your credit score…
– How long do you plan to stay in the community?
• Plan at least 5 years in house (otherwise rent)
– Consider your job security (Spouse/partner?)
– Planning on having (more) kids?
– Planning to cut back from 2 incomes?
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Rent Vs. Buy
Pro Rent
• No big up-front costs
– 1-3 mo. Rent
• Cheaper than buying
– Big transaction costs
• Flexible: Move easily for
new job or if income
drops
• Less risky
• LL does repairs
• More $ for other goals
Pro-Buy
• Sense of pride,
accomplishment, belonging
• POSSIBLE tax deduction
– Not likely due to low rates &
high standard deduction
• Make changes you want
• Potential to build equity
• American Dream
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Questions?
• Ideas or experiences to share?
16
Mortgages 101
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Types of Mortgages
• Fixed rate mortgage: the interest rate
doesn’t change throughout the life of
the loan
• Adjustable rate mortgage: Interest
rate can go up or down depending on
current interest rates
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Types of Mortgages
• Balloon loan: A short-term mortgage in
which small periodic payments are
made until the completion of the term,
at which time the balance is due as a
single lump-sum payment
– TheFreeDictionary.com
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Types of Mortgages
• Veteran Administration Loans (VA Loan):
– Requires nothing down
– No PMI insurance
– Sometimes higher interest rates than you can
get with an FHA or conventional loan.
– Max 41% of gross income
*http://www.zillow.com
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Types of Mortgages
• Federal Housing Administrations (FHA)
– Low down payment (1 to 3%)
– Low closing fees
– Works with people with lower credit scores
– Conventional might be better if you have more
than a 5% down payment
– Max 31% of gross income
*http://www.zillow.com
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Types of Mortgages
• Conventional mortgage
– Most require between 5 and 20% down
– 620 credit score or better
– Buyer will pay
• Origination fees
• Down payment
• Mortgage insurance etc.
– Max 28% of gross income unless nonconforming loan
*bankrate.com
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Building a Positive
Credit Report
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Overview
• Credit Report
– How & why to get your free reports
• Credit Reporting Agencies: The big 3
• Credit Score(s)
– What it is
– How it is used
– What’s a ‘good’ score?
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What is a credit
report?
• A continuing record of a borrower’s
debt commitments and how well they
have been honored.
• Married couples each have their own
report
• Find yours by going to
AnnualCreditReport.com
25
How to build a credit
history?
• Time and good behavior
• Start with a low limit credit card
– “You don’t have to carry over a balance,
but you do need to use it.” –Rod Griffin, Experian
• Pay on time
– Sign up for automatic payments
• Use less than 50% of your credit limit
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What’s in a Credit
Report?
1. Identifying information
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Name, current & past addresses, SS#
2. Credit use information
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Active and inactive accounts
Payment history
3. Public record information
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Criminal convictions, foreclosures, lawsuits
4. Inquiries
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by creditors & your applications for credit
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What to look for
• Potentially negative items
• Open accounts
• Status of accounts
– open/never late is good
– closed, past due, maxed out limit, etc.
– Duplicates (account appears twice but is only
one loan)
• Clear this up
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Find wrong
information?
• Contact CRA (credit bureau)
– Report explains how to correct mistakes
• Is it your mistake?
–Spouse could have taken on debt
–Unfamiliar company name
• Bought electronics, etc; store provides credit
through finance company
• Lender changed names; was bought out, etc.
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Negative
Information?
• Write 100 word explanation that goes
with credit report
– Explain reason for problem
• Negative Information should be
removed after 7 years
– 10 years for bankruptcy
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Close accounts you
aren’t using?
• Consider impact on credit score if your
credit utilization ratio increases
• Wait to close unused accounts until you
get your mortgage
– Unused accounts: ID theft potential
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CRAs do NOT decide
if you get credit!
• Each lender makes own decision
• Lenders offer range of mortgage rates
based on credit score
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Free Annual Credit
Report
• Get a free credit report once/year/ CRA:
Experian, TransUnion, Equifax:
– http://www.annualcreditreport.com
– 1-877-322-8228
• Reports are likely to differ
– Order all 3
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Q on Credit Report?
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Credit Score
• Number (300-850) that reflects information in
your credit report
• Determines how much you pay for credit
– Higher score = lower cost credit
– http://www.myfico.com/HelpCenter/FICOS
cores/Curious.aspx
– Table shows $ impact of credit score
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Credit Score
Retrieved from MyFico.com May 17th 2013
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Who Determines
your Score?
• FICO=Fair Isaac Company
http://www.fico.com
– The 1st, most common, most important
score
– Average is 692; range:300-850
• Average changes with time
– Each CRA also calculates & sells own
score
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FICO Score
• Based on:
– Payment history (35%)
– Outstanding loan balances (30%)
• Credit utilization ratio
– Length of credit history (15%)
– Inquiries (10%)
– Types of credit (10%)
• Variety is good: credit cards, vehicle loan, mortgage
• Avoid finance companies
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Credit Score Costs
• FICO score: $19.95
• Experian: $7.95
Equifax: $15.95
Transunion: $9.95
• Costs as of June 2012
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Estimate your FICO
Score
• Range: 300-850
– http://www.bankrate.com/calculators/creditscore-fico-calculator.aspx
– Answer 10 Q to estimate your score
• About FICO Scores
http://www.myfico.com/Default.aspx
– Map shows average score by state
– What is a FICO score?
– Understanding credit
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Beware of Scams
• Debt relief companies
• Credit repair scams
– Claims to repair your credit are just not true.
– Only time, effort and repayment will improve
credit report & score
• Focus on paying current bills on time
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Summary
• Order free credit report today
• Build a strong credit history
• Use credit cards prudently
– 2 cards are enough
– Pay in full at end of month or be a debt
slave for life
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Resources
• Federal Trade Commission: credit & loans
– http://www.ftc.gov/bcp/menus/consumer/credit.shtm
• Housing & Financial Counseling @ USU
Family Life Center
http://www.usu.edu/fchd/housing
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First time homebuyer
workshops
• USU Family Life Center Housing & Financial Counseling
http://www.usu.edu/fchd/housing/
• 435-797-7224 to register
• 8:30 am. to 4:30 pm first Saturday
• July 13th
• August 3rd
• September 7th
• October 5th
• November 2nd
• December 7th
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Upcoming FPW
• July 10th: Saving for college with 529 college
savings plans
• August: No Meeting! Enjoy your Summer Break
• September 11th: “Social Security and Retirement
Timing,” with guest speaker and financial planner
Suzanne Dalebout
– Evening program will be at the Logan City library in the
Bonneville Room.
• October 9th and November 13th: TBA
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Where to Find FPW
• www.usu.edu/fpw
• http://fpwusu.blogspot.com
• http://www.facebook.com/FinancialPlanningforWom
en
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