Remember the good ol' home-buying days, circa 2006?
You took out a $450,000 adjustable rate mortgage, at 4.25% (set to re-adjust after five years, but who cared) and bought a $440,000 home—with just $10,000 down.

You can't get away with that today—and thank heaven.

Being a smart home-buyer now means returning to the tried-and-true laws of lending: Keep your debt-to-income ratio low and only buy as much home as you can afford.

Livin' large. Not.
That means, keeping your total debt-to-income ratio at about 36%, and your housing payment at about 25% of your gross income.

Even these days, some lenders may allow you to borrow more—but in this climate, owing less and paying less is a good recipe for sleeping soundly—and being able to save.

We tried a few different affordable home calculators and liked these two: one offers a range of loans and home prices, based on your income and other variables; the other offers a target amount for each.

Bottom line
In case you don't have time to click, consider this: Let's say you earn $65,000 a year, make a $25,000 down payment, and have $350 in monthly debt payments (car, credit card). Ideally you would borrow a 30-year fixed loan of about $208,000 at 5.5% and purchase a home of about $233,000.

Total monthly payment (including taxes and insurance of $331/month): about $1,500.

With interest. Tell us: What's your debt-to-income ratio? Would you sell or downsize to get that monthly payment down to a range where you can sleep better and save more?

Read more...

Just say the phrase "rental property" and people's eyes light up. Everyone knows that rentals have the potential to generate income above and beyond the cost of carrying the property.

And some folks do turn a nice profit from rentals.

But the devil himself is in the details—as I discovered when we decided to rent out a house we owned in 2008. Little did we know that the rent would barely cover our costs, the upkeep would cost thousands, and we'd end up trying to sell it for zero gain. Here's what I wish someone had told me:

1. Wear a flak jacket. Dealing with leases, tenants and repairs is not for wimps. Build up the muscle for hard-nosed negotiations and legal battles before you start. Brace yourself to see the worst side of human nature: raw greed, deception, blinding rage. Everything may go smoothly. Or not. Be prepared.


2. Know the rules. Tenants' rights are strong. Retain a savvy local lawyer to help you draw up leases and contracts. Tap into landlord-friendly resources to help you sort out complex issues. A strong defense is your best offense.


3. Run the numbers. Many people get fixated on the idea of profit—forgetting that no one is paying for a new garage door but you. Also, loan terms and insurance rates are typically higher for rentals. Yes, you can deduct many rental costs (mortgage interest, property taxes, repairs)—and you may be able to write off some losses. But the out-of-pocket costs can eat into your earnings. Do the math, factor in the drain on your time—then decide if being a landlord is the path to wealth for you. I wish I had.

On the money. Have you set up successful alternate income streams? Swap stories here!

Read more...

Sudden savings alert! Mortgage rates are dropping again. How much could you save if you refinanced at a lower rate?

At the moment, a 30-year fixed rate loan is about 4.75%; a 15-year fixed is about 4.02%, according to Bankrate.com.

Pay less, save more
A refi only makes sense if the numbers work. For example, if you wanted to refinance your current 30-year fixed mortgage of $175,000, which is at 5.75%, down to 4.75%, you could save $162.00 per month now—and about $22,600 in interest over the life of the loan.

But, there are costs associated with a refi, as we describe here. In our current example, assuming the refinance costs are about $2,000, it would take about a year to recoup those fees.

Use this calculator to run your own numbers. (MP and Amanda are considering refis right now. MP wants to swap her 30-year for a 15-year. She'd pay about $120 more per month, but save $121,000 in interest!)

It ain't saving until you save it
But wait. There's one more key step. Whenever you kill a bill, cancel a sub or drop a charge—it ain't savings until it's in the bank.

So save your savings, as we describe in our recent post for Ramit Sethi's "I Will Teach You to Be Rich" blog.

Your move: Tell us some other ways you've saved money on a loan.

Read more...

Q: I am a 23-year-old professional, and I'm eager to buy a home. I just landed a new job with great pay and benefits. What's your advice to a young woman ready to spread her wings? {

A: First, you need to decide how much home can you afford.
It's not an easy question. But figuring it out can be fun—in a treasure-hunting sort of way. Let's start with three of the most important factors that will drive your purchase:

• The estimated price of the home you want.
• The target amount of your down payment.
• How much you can afford to spend each month on ALL the expenses relating to home ownership.

Although you may know, say, what a one-bedroom condo is likely to cost in your area, you'll need to call a realtor to find out the maintenance charges, fees and property taxes.

Next, determine the amount you can save each month. If you can sock away $700 a month, it will take you at least 21 months to save a $15,000 down payment. Reality check, right?

Now, experiment with a mortgage calculator like this one.

If you earn $50,000 and put down $15,000, that could enable you to buy a $154,000 home, with a 30-year fixed mortgage of about $139,000, and an $1,166 payment (including insurance, taxes).

Can you afford that much house? Remember: You need to save a few thousand for closing costs. And if your down payment is less than 20% of the purchase price, you'll pay an extra sum for private mortgage insurance (PMI) each month. If you're buying a condo, factor in maintenance or building charges every month, too.

So, with a salary of $50,000 -- and approximate take-home pay of $35,000, or about $2,900 per month -- a mortgage payment of $1,166 leaves you only $1,750 to cover all your other expenses.

Ideally, your monthly payment should be about a third of your income. So start over: reconsider your target price, or making a bigger down payment, until the numbers add up to what you can afford comfortably. Happy treasure hunting!

Here's a great chart that detailing how much you can afford, broken down by salary level.

Read more...

Just what is a balloon mortgage, and should you be wary of this type of loan?

Remember, oh, about a year ago, when the credit markets went haywire and we learned that millions of Americans had taken out home loans they suddenly couldn't afford? A number of factors played into that perfect storm; one was the popularity of balloon mortgages.

Balloon loans are deceptive. They usually carry a term of five or seven years, but the payments are based on, say, a 30-year repayment schedule. At first payments are modest — as if you had 30 years to repay the loan! But you don't. After five or seven years, you owe the entire balance of the loan.

Let's do the math: If you borrow $100,000 balloon loan for a period of seven years, at 6.0% interest, your monthly payments are about $599. After seven years you would have paid only about $49,700, with $90,225 now due.

Given that most people don't have that kind of cash, they usually plan to refinance before the loan ends — or sell their home. If the value of the home drops (see economic crisis, above), they may not be able to cover the balloon payment before it pops.

Why we like balloons, sort of: They're often a much lower interest rate than a fixed loan. They're also convenient, if you need a short-term loan and you have ESP and know that you can refinance or sell before you owe that ginormous payment.

Why we think they're scary: Scads of research on financial behavior has shown that people tend to fall for the promise of a short-term gain ("Only $600 a month, honey!") and ignore the price they'll pay down the line.

As with any big financial decision, do your homework, consult online calculators, reckon not only your present comfort level, but your long-term peace of mind. Then go with a fixed rate loan, OK?

Read more...