Buying Your First Home

Posted by dfederman on Jun 30, 2011 in Investor Education | Comments Off

Key Points

• How Much Mortgage Can You Afford?
• How Much Home Can You Afford?
• Costs of Buying a Home
• Ongoing Costs
• Choosing a Neighborhood
• Finding a Broker
• Points to Remember

Home ownership is the cornerstone of the American Dream. But before you start looking, there are a number of things you need to consider. First, you should determine what your needs are and whether owning your own home will meet those needs. Do you picture yourself mowing the lawn on Saturday, or leaving your urban condo for the beach? The best advice is to look at buying a home as a lifestyle investment, and only secondly as a financial investment.

Even if housing prices have recently fallen in many areas, buying a home can be a good financial investment over time. Making mortgage payments forces you to save, and after 15 to 30 years you will own a substantial asset that can be converted into cash to help fund retirement or a child’s education. There are also tax benefits.

Like many other investments, however, real estate prices can fluctuate considerably. If you aren’t ready to settle down in one spot for a few years, you probably should defer buying a home until you are. If you are ready to take the plunge, you’ll need to determine how much you can spend and where you want to live.

How Much Mortgage Can You Afford?

Most mortgages today are resold in the secondary markets. The Federal National Mortgage Association (Fannie Mae) is a government-sponsored organization that purchases mortgages from lenders and sells them to investors. Mortgages that conform to Fannie Mae’s standards may carry lower interest rates or smaller down payments. To qualify, the mortgage borrower needs to meet two ratio requirements that are industry standards.

The housing expense ratio compares basic monthly housing costs to the buyer’s gross (before taxes and other deductions) monthly income. Basic costs include monthly mortgage, insurance, and property taxes. Income includes any steady cash flow, including salary, self-employment income, pensions, child support, or alimony payments. For a conventional loan, your monthly housing cost should not exceed 28% of your monthly gross income.

The total obligations to income ratio is the percentage of all income required to service your total monthly payments. Monthly payments on student loans, installment loans, and credit card balances older than 10 months are added to basic housing costs and then divided by gross income. Your total monthly debt payments, including basic housing costs, should not exceed 36%.

Many home buyers choose to arrange financing before shopping for a home and lenders may “prequalify” you for a certain amount. Prequalification helps you focus on homes you can afford. It also makes you a more attractive buyer and can help you negotiate a lower purchase price. Nothing is more disheartening for buyers or sellers than a deal that falls through due to a lack of financing.

In addition to qualifying for a mortgage, you will probably need a down payment. The 28% to 36% debt ratios assume a 10% down payment. In practice, down payment requirements vary from more than 20% to as low as 0% for some Veterans Administration (VA) loans. Down payments greater than 20% generally buy a better rate. Lowering the down payment increases leverage (the opportunity to make a profit using borrowed money) but also increases monthly payments.

Costs of Buying a Home

Many home buyers are surprised (shocked might be a better word) to find that a down payment is not the only cash requirement. A home inspection can cost $200 or more. Closing costs may include loan origination fees, up-front “points” (prepaid interest), application fees, appraisal fee, survey, title search and title insurance, first month’s homeowner’s insurance, recording fees, and attorney’s fees. In many locales, transfer taxes are assessed. Finally, adjustments for heating oil or property taxes already paid by the sellers will be included in your final costs. All this will probably add up to be between 3% and 8% of your purchase price.

Ongoing Costs

In addition to mortgage payments, there are other costs associated with home ownership. Utilities, heat, property taxes, repairs, insurance, services such as trash or snow removal, landscaping, assessments, and replacement of appliances are the major costs incurred. Make sure you understand how much you are willing and able to spend on such items.

Condominiums may not have the same costs as a house, but they do have association fees. Older homes are often less expensive to buy, but repairs may be greater than those in a newer home. When looking for a home, be sure to check the actual expenses of the previous owners or expenses for a comparable home in the neighborhood.

Choosing a Neighborhood

Before you start looking at homes, look at neighborhoods. Schools and other services play a large part in making a neighborhood attractive. Even if you don’t have children, your future buyer may. Crime rates, taxes, transportation, and town services are other things to look at. Finally, learn the local zoning laws. A new pizza shop next door might alter your property’s future value. On the other hand, you may want to run a business out of your home.

Look for a neighborhood where prices are increasing. As the prices of the better homes increase, values of the lesser homes may rise as well. If you find a less expensive home in a good neighborhood, make sure you factor in the cost of repairs or upgrades that such a house may need.

Finding a Broker

If you are a first-time home buyer, you will probably want to work with a broker. Brokers know the market and can be a valuable source of information concerning the home buying process. Ask lots of questions, but remember that most brokers are working for the seller, and in the end, their primary obligation is to the seller and not to you. An alternative is a so-called buyer’s broker. This individual does work for you, and therefore is paid by you. Seller’s brokers are paid by the seller.

Brokerage commissions average 5% to 7% and are split between the listing broker and the broker that eventually sells the home. Don’t be surprised if your broker is eager to sell you their own listing since they would then earn the entire commission.

Once you’ve determined a price range and location, you’re ready to look at individual homes. Remember that much of a home’s value is derived from the values of those surrounding it. Since the average residency in a house is seven years, consider the qualities that will be attractive to future buyers as well as those attractive to you.

Although it can be difficult, try to remember that you will probably want to sell this home someday. The more research you do today, the better your decision will look in the years to come.

Points to Remember

1. For many, a home represents their biggest asset and long-term investment.
2. Think carefully about how much you can afford to spend and consider borrowing guidelines like those used by Fannie Mae.
3. Prequalifying with your lender is a good way to determine how much house you can afford.
4. You will need cash for a down payment and closing costs. Generally speaking, the higher the down payment, the lower the interest rate and monthly mortgage payment.
5. In addition to your mortgage payments, you will also need to consider the other costs of home ownership.
6. Schools, taxes, services, crime rates, transportation, and zoning are important considerations when selecting a neighborhood.
7. Brokers usually represent the seller, but they can be valuable sources of information for buyers as well.
8. Remember to consider resalability when buying your home.

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

June 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

To Reinvest or Not to Reinvest? That is the Question

Posted by dfederman on Jun 28, 2011 in Investor Education | Comments Off

by Dan Federman, CFP(r)

Investors who buy individual stocks, mutual funds, or Exchange Traded Funds (ETFs) are faced with the choice of whether or not to reinvest dividends (or capital distributions) back into the respective stock, mutual fund, or ETF. To be clear, this is entirely a matter of personal preference. Assuming the investor needs income, the choice may seem obvious. But what about when the investor does not need income?

In spite of some statistics showing that an investment in the S&P 500 WITH DIVIDENDS REINVESTED produced 8x the return (since 1950) as that of an investment in the S&P 500 WITHOUT DIVIDENDS REINVESTED, 0ur preference and recommendation to our clients is to take the cash rather than reinvest into the security.

There are a few reasons we prefer to take the cash rather than reinvest:

First, is diversification. Cash is a separate asset class apart from stocks, bonds, real estate, oil & gas, precious metals, etc. By allowing cash to build up, it will eventually reach a percentage of the portfolio greater than the recommended target level, creating a trigger to rebalance the portfolio by investing the cash into one of the other under-weighted asset classes such as stocks or bonds.

Second, is administrative hassle. Reinvesting dividends back into stocks or funds causes an investor to accumulate fractional shares and can create an administrative nightmare when tracking cost basis for tax purposes if/when someone decides to sell his/her investments.

Third, is risk. By reinvesting dividends into a mutual fund or individual stock, an investor may be increasing his/her risk by accumulating too much of a particular risky investment. This risk is more pronounced, in our view, when reinvesting dividends back into individual stocks or into retail mutual funds run by managers with unusual “hot streaks” of “market outperformance.” As an example, consider all the bank stocks that paid dividends for so many years, and then collapsed in the financial crisis of 2008. Anyone who had been reinvesting all their dividends into these banks would have lost most, and in some cases, all of their wealth. Unfortunately, there were people who viewed bank stocks as “safe.” Similar things can be said of utility stocks AND “5-star mutual funds with good track records.” Always keep in mind that past performance is not an indicator of future results.

So, if you’ve been reinvesting your dividends into your investments for years, consider these points. You may not be diversified enough, you may be creating an administrative headache for yourself or your CPA, and you may be increasing your risk unintentionally.

To get a free portfolio review, contact a financial advisor at Ariba at 1-800-808-7488 x101

What Records to Keep and How Long to Keep Them

Posted by dfederman on Jun 22, 2011 in Investor Education | Comments Off

Courtesy of ElderLaw News, a weekly e-newsletter that brings you reports of legal developments and other trends of vital interest to seniors and their advocates. This newsletter is distributed by The Estate Planning & Elder Law Firm, P.C. If you are interested in a free subscription to the Elder Law News, then please e-mail them at office@lifecareplanning.com, telephone them at (703) 243-3200, or fax at 703-841-9102.

Digging through piles of records can be a frustrating task. It can take only one search to find something to raise the question: “Do I really need to keep all these documents?” While the answer may be “No,” one must be careful about discarding old records.
Before you do a complete cleansing and shredding of all the documents in your filing cabinet, please note that it is important for you to retain certain documents. Shredding old records will help protect you against identity theft, but disposing of too much can leave you unprotected. While there are no firm rules on record retention, the following information can be used as a guide to help you in determining what documents you should keep and how long you should keep them:

ATM Receipts: These should be kept only until you balance your checkbook. After that, shred them.

Bank Statements: You don’t need to keep your bank statements. The only exception is if you are applying for a mortgage, and even then you need only a three month history.

Credit Card Statements: These should be kept for only the past three months. Credit card statements merely reflect the charges to your card, and your credit card company can reproduce these reports if you need them.

Financial and Investment Documents: Investments often result in receiving vast amounts of mail, such as prospectuses, privacy notices, and address confirmations. If you don’t plan on acting on this information, get rid of it. You need to retain balance statements for only the past three months. Any time you purchase a new investment, however, you should retain the transaction record until you sell the investment and complete your income tax return. In addition, you may want to keep any benefit information if it would be helpful to you in determining your future benefits.

Home Insurance: Retain home insurance documents for a minimum of five years; however, if there is any question that issues may arise in the future, then keep these records for ten years. Insurance companies do keep this information, but you should not rely solely on them to provide it.

Home Repair Bills: The general rule is to keep these records for ten years. This should adequately protect you should litigation or other disputes arise that are connected to the repairs or workmanship. If there is a lien on the property connected with the work or repairs, then make sure to obtain a satisfaction of lien from the contractor and keep that document as long as you own the property.

Life Insurance Policies: Life insurance policies should be kept for the duration of the policy, plus an additional three years.

Medical Records: Personal health records, such as medical history, contact information of personal physicians, and prescribed treatments and prescriptions, should be kept indefinitely. All other medical records, however, such as premium statements, physician or hospital bills, copies of prescriptions, only need to be kept for five years after treatment has ended, unless you have claimed items on your tax returns, in which case the supporting documents should be kept for seven years.

Mortgage Documents: You should keep mortgage documents for the duration of the mortgage. Once you have paid off the mortgage, the bank must record a satisfaction of the mortgage. Keep the record of satisfaction as long as you own the property.

Pay Stubs: If your pay stubs contain the history of all the past pay stubs for the year, then you need to keep only the most recent one. If they don’t provide payment history, then keep all pay stubs until you receive an overview statement at the end of the year. After you receive the overview statement, you may discard all previous pay stubs. Please note that pay stubs contain all the information an identity thief needs to steal your identity. Therefore, dispose of these cautiously, preferably by shredding them.

Tax Returns: The general rule is to keep tax returns, whether business or personal, for seven years. Thus, when you file a new return, you may shred the one no longer needed. Although the IRS has three years to audit you after you file your income tax return, there are several exceptions to this rule, and it is better to be safe than sorry. Further, it is important to save all the information used in preparing your returns, for it is up to you to provide this information if you are audited or asked related questions.

Utility Bills: You need to keep your utility bills for only the last three months. If you write off on your income tax return anything contained in these records, then you should keep these documents as tax records.

To learn more about Ariba Asset Management or to request a free portfolio review, visit www.aribaasset.com or call 800-808-7488 x101 to speak with a financial adviser.

Do You Need Disability Income Insurance?

Posted by dfederman on Jun 20, 2011 in Investor Education | Comments Off

The key to determining your needs is to assess how much you would be required to spend during each week or month that you would be unable to earn your normal pay.

Your best defense against a financial catastrophe brought on by long-term illness or injury may be the purchase of a disability income insurance policy with enough coverage to compensate for your lost wages. Disability insurance provides you with cash that you can use for paying your mortgage or rent, buying groceries and meeting other ongoing living expenses.

Putting Policies in Perspective

For most people, there are two main forms of disability income insurance to consider: employer-sponsored policies (called “group” policies) and private insurance policies. Group policies are relatively inexpensive and generally remain in effect for as long as the individual remains with the employer. But there are often significant limits on the benefits provided by these policies, so it’s important to determine whether coverage is adequate for your needs.

Private insurance policies, paid for by individuals, typically are more expensive than group policies but may also provide a higher level of coverage. In certain instances, those with a group policy may want to consider purchasing a private policy to fill in the income gaps frequently associated with group-only coverage.

How Much Disability Income Insurance Do You Need?

The key to determining your needs is to assess how much you would be required to spend during each week or month that you would be unable to earn your normal pay. For example, if you would need 80% of your pretax earnings but your group policy would only pay an amount equal to 60%, then you may need additional coverage.

Disability Defined

The way in which an insurance policy defines disability can determine your eligibility to receive benefits. The following is a quick overview of three basic definitions:

• Own-occupation. The most comprehensive definition of disability, it states that you are unable to perform the duties of the occupation you were performing at the time of the disability.
• Income replacement. Policies with income replacement coverage define disability as sickness or injury that doesn’t allow you to perform the duties of your occupation and typically stipulates that you are not currently engaged in any other occupation.
• Gainful occupation. These policies define disability as the inability to perform the duties of your occupation or any occupation that you are considered to be reasonably qualified for by way of your education, skills or training.

A qualified insurance professional can help you assess your need for disability income insurance and find a policy that is most appropriate for you.

Because of the possibility of human or mechanical error by Financial Communications or its sources, neither Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

June 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Confessions of a Stockaholic

Posted by dfederman on Jun 17, 2011 in Investor Education | Comments Off

Yesterday I ran into a neighbor who stopped me and said, “What is the deal with the stock market? It’s IMPOSSIBLE to make money in stocks.” He went on to tell me how he read William O’Neil’s book, “How to Make Money in Stocks,” and he’s been implementing the trading rules recommended in Investor’s Business Daily (O’Neil’s publication), such as “sell when your losses reach 7 to 8% below your purchase price.”  He explained that he was more aggressive and used a 10% stop/loss price.  In the two instances he used this discipline, his stocks were sold (for a 10% loss), then subsequently jumped more than 30% in the following weeks!  He then pulled out an annual report for an oil service company who does business in the Gulf of Mexico. He frustratingly asked me, “how can this stock NOT be doing well? Look at their financials! They’re making tons of money.”

I am SURE this is a common experience of many individual investors (or stock traders who think they are investors). This guy is trying his best to following a well-documented trading/investing discipline, yet his personal experience is that it is much more difficult than it appears. Meanwhile, he has a 15 month old son who has 16.5 years left until he reaches college age. I suggested thinking in terms of financial goals (such as college savings) rather than trying to make quick gains in the stock market.

I told him people who are socking away money into their 401k’s are making money in stocks. He said, “yeah, but it’s only their contributions that are adding up.” It’s all a matter of perspective of when you take the snapshot of account values. The point I am really making is that consistent contributions to investment accounts are critical to reaching investment and financial goals. Also, the longer the time horizon, the more likely someone will earn positive returns on stocks. My neighbor’s problem is that he’s desperately trying to earn 20 to 30% returns in very short time horizons. Without trying to sound too preachy, I opined that stock trading is an addictive behavior, and it will likely prevent him from achieving long-term financial success.

Dan Federman, CFP(r)

To learn more about Ariba or to request a review or your portfolio, visit www.aribaasset.com or call 1-800-808-7488 x101