Free Money Finance

How to Free Up Cash by Moving

I've covered the issue of moving to save money quite a lot in the past (see these posts for details: More on Moving to Save a Bundle -- How One Couple is Saving a Fortune, Free Money Finance Top 10 Most Hated Posts/Themes: #2 Moving to Save Money, Move, Save Money, Become a Multiple Millionaire -- All in One Step), but this piece from Yahoo takes a bit of a spin on the same concept as it tells how people can free up some significant cash (and often upgrade their housing situation) by moving to another area of the country. Here are examples of how two couples did it:

• Manion had always admired Colorado's friendly people and landscape, and his wife has friends and a brother there. The Manions sold the home they had owned for just seven years for $925,000. They're building a new place in a gated community on three acres of land for $800,000; the extra will go into the kids' 529 college plans.

• Six years later, home prices had tripled. "We thought if don't do it now, we'll never do it," says Kathy Marks. With nothing else lined up, Greg quit his job, and they sold their place in Chula Vista for a profit of nearly $440,000. They paid cash for a 3,700-square-foot home on an acre of land in Oconomowoc, Wis., and also paid off their two cars.

Here are the basic economics of the issue:

1. People purchase a nice/decent home sometime back in the past.

2. Over the years, housing prices skyrocket, making a once "nice" house worth a fortune (think people who bought in California 20 years ago.)

3. They sell the house, move to a less expensive state, and get a bigger, newer house with more land for a fraction of the price.

4. They pocket/save/invest the difference.

Not a bad deal if it works out that way. Unfortunately, there's no guaranteed way to replicate this. Still, if you're in this situation (or maybe your parents are), it's an issue to be considered as you do your financial planning for the future.

Save Money When Selling Your Home

Here's a simple yet very effective money saving tip:

When you sell your home, ask your real estate agent to take a reduced commission.

SmartMoney magazine says that with the current slowing in housing sales, real estate agents are much more willing to reduce their fees a bit. The details:

As more brokers compete for sales in a slowing real estate market, savvy homeowners can save thousands by negotiating their commissions. "Commissions are becoming more negotiable than used to be the case," White says. He chalks it up to several factors, including more competition from discount and a-la-carte brokers, which offer less comprehensive services than full-service brokers, but charge discounted sales commissions or offer buyers rebates upon closing. And then there's more consumer awareness of the market. Thanks to web sites like Zillow.com, anyone with an Internet connection can find out what homes are for sale or recently sold in a given area — information once only available to real estate agents.

This can add up to some big bucks. If you're selling a $200,000 home and would normally pay a 6% commission but can get it to 4.5% (the example used in the SmartMoney article), you'll save $3,000. Not bad, huh?

Should You Pay Off Your Home or Not?

I'm on record as being a fan of having no debt. Most people agree with this position as it relates to consumer debt, but once you get into paying off your house, that's where things get a bit messy.

I paid off my mortgage and recommend people doing so under certain circumstances (such as not neglecting other sorts of savings/financial priorities.) I was reminded of this issue (being sure you save in other places before paying off your house) by this Smart Money article on being debt free. Near the end of the piece they say:

Struggling to stay debt-free or to become debt-free can also lead to problems when you do so at the expense of saving for your future, says Elaine Morgillo, a certified financial planner based in North Andover, Mass. Continuously deferring savings — or dipping into them — to maintain a debt-free lifestyle could lead to serious financial woes come retirement.

"You can't exactly go back and say, 'I'd like to make up that retirement contribution from two years ago,'" says Schatsky. In other words, when tackling debts be sure to tackle other goals, like saving for retirement, at the same time. It may be the best way to ensure that you aren't looking for a loan during your sunset years.

I agree. That's why I detailed my thoughts on when you should pay off your mortgage. You MUST save for other items first. And if you can control your spending enough to save and pay off your house, then that's great!

In addition to the SmartMoney article, the first two comments to it contrast the opposite opinions in the "should you pay off your mortgage?" debate. Here's the first, representing the "don't pay off your mortgage but invest the money instead" argument:

Being in debt means I pay $7,000 per month in interest on all my loans, and it also means I make $13,000 in income from that debt. If I paid off all the debt, I would be making $0 off of it. Which is better, $6,000 net or $0? Keep living debt-free, someday you'll be 1/3 as wealthy as I am.

Ok, he's kind of snotty, but you see where he's coming from.

Here's the second comment from the "pay off your mortgage now" camp:

Would you borrow on your house to invest in the stock market? Probably not. That's basically the same as waiting to pay off the mortgage and investing in the market.

Interesting concept/thought.

So, what's your take on the issue?

Five Steps to Get Your Home in Shape for Summer

After your career, your house is probably your biggest asset -- so it pays to take care of it. Here are five steps to get your home in shape for summer from Laura Rowley:

1. Clean your gutters and inspect for damage caused by ice damming.

2. Inspect the roof.

3. Inspect siding, paint, and caulking around openings, and cracks in brick and mortar.

4. Make sure all windows and doors open and close smoothly.

5. Change your furnace filters.

My thoughts on these:

1. Don't get me started on ice damming and damage. I fight ice most of the winter. And believe me, we have plenty of it with 70 inches of snow a year. Anyway, I do clean out my gutters every spring.

2. We got a new roof a couple years back and I do a long-distance visual inspection of it. I try to stay off it as much as I can.

3. Yep, I do this every year and fill any cracks with caulk.

4. Yes, do this as well.

5. I change our furnace filter every other month or so. I don't want to be breathing any more dust than needed, plus I want the furnace/AC to run as efficiently as possible. And since filters are relatively cheap, why not replace then regularly?

6. In addition to these, I also do the following:

• Prune trees to keep them from touching the house. I have one in particular that keeps wanting to become part of my home.
• Put out ant traps and sticky insect catchers in the garage.
• Buy my first round of lawn fertilizer for the summer and apply it.
• Change the oil in the lawn mower and sharpen the blade.
• Check my garden tools and sharpen as needed.
• Buy the supplies (fertilizer, mulch, etc.) to get the garden ready.

Whew! I'm tired just listing all of this (and I'm sure I forgot a ton of things.) What would you add to the list?

Do Personal Finance Bloggers Have a Bias Against Investing in Real Estate?

Here's a portion of an interesting conversation I recently had with a reader via email. He sent me the following:

I'd like to hear your thoughts on something.  Do you think there's a bias against real estate as an investment vehicle in the personal-finance blog community?

Because, as I get more familiar with the conversations going on, I'm starting to pick up on one.  It seems that people think that:

1) Real estate is too risky because of its lack of liquidity

2) On average, it's less profitable than other investments like stocks

Coming from a family of professional real estate investors, I find it fascinating.  I'm not sure where the bias is coming from.  Maybe a backlash against all of the get rich quick gurus in the real estate industry?

Here was my response:

I think there are more reasons than those, but the ones you name are certainly part of the equation. I'd add:

1. It's complicated (at least it is compared to investing in stocks/index funds.)

2. It's time-consuming. There's a cost to finding, managing, etc. the right real estate.

3. For those of us who don't like debt, it goes against our personal preference not to borrow money.

4. You're usually dealing with such large numbers that many people can't participate. For instance, you can invest $5,000 in stocks, but you can't buy a house or commercial property for $5k (and not have debt.)

I'm a minor member in a real estate LLC (we only have one property at the time), invest in a mutual fund REIT, and, of course, own my house, so I feel like I've got real estate covered as a decent part of my overall net worth. I'm not going to add any extra real estate to my portfolio unless I find a really great deal locally (as home owners get desperate to sell.)

How about you? Do you invest in real estate? Why or why not? And if you do, how much do you have invested?

How to Eliminate Housing Costs

Here's an interesting concept for saving a bundle on housing expenses: live in a house rent free. The details:

They live in one of the most expensive housing markets in the country, but Lisa and Taylor Halverson say they make ends meet by living in a spacious five-bedroom house with an ample backyard and stylish furnishings on a quiet tree-lined street. The kicker: They don't pay a dime in rent.

No, they aren't mooching off friends or relatives. The thirty-something Palo Alto, Cal., couple are house sitting for a Stanford University professor away on vacation. This is their sixth house-sitting gig since they moved to the area seven months ago from Bloomington, Ind., where they were paying $680 a month on a mortgage for a three-bedroom, 1,900 square-foot home. Rents for a modest two-bedroom apartment in Palo Alto, however, run about $1,500 to $2,000 a month. And to rent a comparable space as where the Halversons are currently house sitting would cost upwards of $3,500, says Taylor.

I did something similar to this in college. I was working in Washington, DC, paying what was a fortune to me to live in a youth hostel while serving an internship. Then one of the guys I worked with was going to be out of the country for two months and said I could pay him the same amount as the hostel and stay in his two-bedroom condo complete with pool, grocery store on the bottom floor, and all the luxuries of home. Granted, I didn't save any money, but I sure increased my standard of living. My roommate and I took him up on the offer and moved all our stuff via the metro -- three trips in all. Yeah, it was one of those things only crazy college students would do.

If you're interested, the piece goes on to tell how you can finds homes where a house sitter is wanted. Click through the link at the top of this post for the specifics -- it could save you some big bucks.

House Prices to Keep Falling

Well, it looks like we haven't hit the end of the housing market decline -- at least that seems to be the case for many markets across the US. Here are the details on falling real estate prices from Money magazine:

"[National] inventory is 20 percent higher than last year, vacancy rates have soared and prices are down about 3 percent," he says. "Now, with the tightening of credit, I don't see how prices don't fall another 5, 6 or 7 percent."

The tightening of credit could take as many as one million buyers out of the market, says Baker, citing Bear Stearns research. "Even if you cut that in half, say to 400,000 or 500,000, that's huge."

All that has led Zandi to alter his projection of a 3 percent decline in housing prices this year to a mid-single digit decline. The hardest hit areas, which he thinks will be Arizona, Nevada, parts of California and Florida, will absorb high single digit or even double-digit punches.

A few thoughts on this:

1. The biggest sign that housing prices are falling in my area: I got my revised assessment for real estate taxes and the listed assessment value went DOWN. It wasn't by much, but it still went down. I've NEVER had that happen before.

2. I don't necessarily believe the whole doom-and-gloom articles. It will certainly be bad in some markets -- the ones that were very hot the past few years -- but overall I think it will be just as much "flat" as "down."

3. I'm still sticking to my real estate investment plan for the downturn. Nothing to report on it yet -- I'm still looking for a good to great deal. ;-)

Details on How I Paid My Mortgage Off Early

I write a lot about getting out of debt -- completely out of debt. Not just credit card debt, not just consumer debt, but all debt. As such, I have several posts on how to pay off your mortgage early since it's the single-largest debt that most people have. For a review of what I've had to say on the issue, see these posts:

• Should a Tax Deduction Keep You from Pre-Paying Your Mortgage?

• Why You Should Pay Off Your Mortgage

• When to Pay Off Your Mortgage

The other day (probably in response to one of these posts) I received an email from a reader as follows:

Why did you payoff the house early?  Were you already maxing out retirement options?  Was it possible to pay off the house in a short amount of time?  I was wondering how do you account for mortgages like mine which are $400k?  And will take quite a few years to pay off even if we focused on it?  And if we did so we'd have to forgo a maxing out IRAs and 401k.

Most of these questions are answered in the posts above (such as whether I suggest paying off the mortgage first or saving for retirement), but one thing that isn't is a detail of how I actually paid off my mortgage early. I may have covered this in an earlier post (I have so many posts, even I'm forgetting what I've written about) and the steps follow those I detailed in My Formula for Buying a House, but I thought they were worth covering just in case anyone missed them.

Here's how I responded to the email: 

I fully funded my retirement account, had an emergency fund, and so on, and still paid off my house. Here's how I did it:

1. I bought a house below what I could afford. Based on what the banks were willing to loan me, I could have had a house 2-3 times the cost of what we got. But the one we bought was nice, met our needs, was in a great neighborhood, etc. -- why did we need more?

2. We scraped together all we could to put down a good-sized downpayment. It was somewhere in the 30-35% range.

3. We lived substantially below what I earned. Thus we had great cash flow to save for retirement, fund our lifestyle, and pay off the house.

4. We put EVERYTHING extra into the house payment -- bonuses, Christmas gifts, extra income from a side business, etc.

It took us somewhere in the 7-year range to pay it off doing this.

It's that "simple." ;-)

Many people want to pay off their house early but don't want to (or can't/won't) follow steps 1-3. But they ask me how they can do it anyway. I don't think there's a way for most people to pay off their house early without at least doing a couple of these steps.

What do you think?

Should a Tax Deduction Keep You from Pre-Paying Your Mortgage?

As many of you know, I have a specific formula for buying a house that includes pre-paying your mortgage and becoming debt free in 7-10 years. It's not only my recommendation on what to do, it's what I've done in my life. And it's worked out pretty well for us.

One reason many people argue against pre-paying a mortgage is because you lose the deduction on your income tax return. Well, here's what Yahoo had to say about this issue:

Not everyone who owns a home can use the mortgage interest deduction, and where the mortgage interest expense doesn't do much more than replace the standard deduction, prepaying the mortgage only has a marginal impact on their taxes -- the margin being the difference between itemized deductions and the standard deduction.

Your goal to be mortgage-free isn't a nightmare. Keep the dream. I think that it's a great goal for homeowners to have the house paid off before they retire. What I counsel is to not abandon other financial goals, such as retirement savings, to focus solely on paying off the house.

My rule of thumb is, if you expect to earn more on your other investments, on an after-tax basis, than the effective (after-tax) rate on your mortgage, then don't prepay your mortgage. For example, if you're skipping out on contributing to a 401(k) plan and missing the company match, you should be contributing to the 401(k) up to the limit of the company match before making any additional principal payments on your mortgage.

This is in line with what I believe. If you can get GUARANTEED returns above what your mortgage costs you (such as matching funds from an employer 401k), you should put your money there first before paying off your mortgage. If, however, you simply take the money and invest it in the market and assume you can beat the cost of a mortgage, I'd go for paying off the debt. Not only is it a decent financial move, but being debt free gives you a feeling that money simply can't buy.

I'll admit that it's hard to argue with the logic of "I have a 5% mortgage and surely I can beat that in the market." From a purely theoretical standpoint, I think I would have the weaker argument. However, from a practical standpoint, I think I have the better argument. Why? Because while I've heard myriads of people saying they can take the money they would have used to pay off that 5% mortgage, put it into the market, and earn 5% or more back, I have never seen it done. Instead, what do the do with it? You guessed it -- they SPEND it. On TVs, boats, etc. -- items of pleasure, for sure, but not anything that improves their net worth. Not that everything they do has to improve their net worth. But when they make a financial decision based on one plan of action and do something totally different, then they are on shaky financial ground at best.

Hence I say -- pay off that mortgage!

For more thoughts on pre-paying your mortgage, see these links:

• Why You Should Pay Off Your Mortgage

• When to Pay Off Your Mortgage

• A New Way to Pay Off Your House

Why You Should Pay Off Your Mortgage

Why should I write posts detailing my thoughts on a subject when commenters here seem to be doing a good job of it? ;-)

Here's a comment left on my post titled To Pay or Not to Pay Off Your Mortgage that was in response to another commenter saying keeping a mortgage was a good idea:

To Aaron: Sounds like you're a mortgage broker from ditech.com or something.

1. How is a fixed rate mortgage "monthly payment" better than "0.00" nothing, nada, zip, zero payment? I don't understand the logic on this one!

2. Tax Advantage. This is the most misleading reason to retain a mortgage. The true value of this deduction is about 20 to 25 cents on the dollar. I'll gladly give you .25 cents for every dollar you give me. Heck, I'll give you .80 cents for every dollar you give me. Like me know which account to wire the money too. HE HE

3. Yes, you're right, your home does have a 0% rate of return, but the monthly payment you place in an IRA doesn't. How about this. Take a $200,000 @ 6% fixed for 30 years $1199.00 monthly payment = $231,676.00 in interest plus the original $200,000 purchased price. Total of $431,676.00. Ok. Let's pay off the same home in 20 years. Reasonable right. Let's take look. Interested paid $143,886.00. Total purchase price $343,886.00. Take that same mortgage payment of $1199.00 per month for 10 years at a return rate of 6% would = $196,491.00 in a tax free IRA. If may tax deduction saves me $2,000 per year over 30, I would have $60,000.

Ok so to recap the numbers:

• $200,000.00 Purchase Price
• $231,676.00 Interest over life of the loan At 6% fixed
• $431,676.00 Total Cost of home
• $ 60,000.00 Less Tax saving deductions
• $371,676.00 Total cost of home at 30 years

Pay the home off in 20 years:

• $200,000.00 Purchase Price
• $143,886.00 Interest over life of the loan At 6% fixed
• $343,886.00 Total Cost of home- skip tax deductions cause most people can't itemize anyway.
• $ 27,790.00 instant savings by paying home off.
• $196,491.00 Add money in IRA "Here's the real kicker"
• $224,281.00 Total savings and increase.

Oh, I forgot to mention that the home after 30 years would be worth $485,452.49 at a 3% Appreciation year over year. Total net worth $709,733 with a home free and clear for retirement.

4. Disability - Ok If it happens in the first 20 years of my example above I would hope they have disability ins or term ins in the event of a death to cover the home. If this is the only reason for obtaining a mortgage or keeping a mortgage then I need to place myself in a bubble free from people and disease.

My only acceptance of a mortgage and not paying it off early is if you're in your career early and you move a lot for upward progression (may want to concern renting) less hidden cost involved or for investments. Now, I do love those tax advantages.

Stocks Beat Real Estate for Solid, Long-Term Investment Returns

That headline got your attention didn't it? And I'm sure I'll hear it from you real estate investors out there for writing it (and this post.) ;-)

But Ben Stein recently wrote such an interesting piece comparing investment returns in real estate versus returns in the stock market. He goes back and forth quite a bit and has several caveats (which he fully admits) yet comes to this conclusion:

I myself love houses, and own a lot of them. I get immense joy from them. But for long-term gains, broad indexes (also called indices) of stocks are where you want to be.

You can read the whole piece if you like to check out his reasoning.

Personally, I'm in 100% agreement with what he has to say. I agree that real estate is a good investment and that it also has utility (you can live in it) in addition to appreciation. It's also relatively insulated against big losses, much more so than stocks. Furthermore, I agree that owing your own home is one of the best money moves you can make.

That said, I also agree that stocks are the better place to be for long-term results. I personally prefer index funds.

Ok, let the debating begin. Who likes real estate better? Who likes stocks better?

When to Pay Off Your Mortgage

Here's a piece from Money Central that talks about how people are making wrong decisions by paying off their mortgages early. That's the attention-grabbing headline anyway. The real story is that many people are paying off their mortgages before making other, more lucrative, financial moves. Here are the details:

You normally don't think of people who prepay their mortgages as being wasteful or careless. But a recent study suggests these households blow more than $1.5 billion a year, or $400 per household, by accelerating their mortgage payments instead of contributing more to their retirement accounts.

The research found that at least 38% of those who were making extra payments on their mortgage were "making the wrong choice." Instead, these households would get back 11 to 17 cents more on the dollar by putting the money into a workplace retirement plan like a 401(k).

I'm a big fan of paying off your mortgage early -- it's the last step in my formula for buying a house -- so I had to comment on this piece.

I would certainly agree that there are other financial moves to make before paying off a mortgage. But that doesn't mean paying off a mortgage is wrong, it simply means that it's a bit lower on the list than other options.

So what other options would be above paying off your mortgage? Here's my list:

1. Contributing to your 401k to get the full employer match. It's a no-brainer to put in money when an employer is matching it dollar-for-dollar or 50 cents on the dollar. It's hard to beat a 50% to 100% return on your money.

2. Pay off your credit cards. This is likely the highest interest debt you have, so get rid of it first.

3. Pay off any other debt that has a higher interest rate than your mortgage. For instance, your car loan, the doctor's bill, etc.

4. At this point, I'd recommend paying off your mortgage. Many others would say that as long as you think you can earn more on your money investing, growing a side business, etc., then you should do those things before paying off your mortgage. I disagree -- for various reasons I've discussed before -- but here it becomes more of a personal preference. For me, I wanted to be debt free and thus paid off my house. I now have plenty to invest and no debt whatsoever. If nothing else, that feeling of financial freedom is priceless.

Your Money Matters: Buying First Home Need Not Be Overwhelming

Here's some advice courtesy of ARA Content on how to buy your first home:

Are you one of those people who considers life to be pretty good? You’re thinking about getting married, have a good job, nice car and money to pay off the student loans. You have spare time to spend hangin’ out with your friends.

The only negative in your life right now is having to pay rent and dealing with roommates. For many Americans in their late 20s and early 30s, the “whoosh” sound of paying rent each month eventually turns to thoughts of owning your own piece of the American dream. However, the process of actually buying a home can seem overwhelming, even daunting, to some.

"First-time homebuyers can feel intimidated by or even 'out of control' during the whole home-buying process," says Jim Ferriter, executive vice president for GMAC Mortgage. "But there's hope. An experienced loan officer, combined with innovative products and services, can help a first-time homebuyer better understand their financing options and boost their confidence in purchasing their first home."

Ferriter, who has more than 25 years experience in mortgage lending, offers the following tips for first-time homebuyers:

1. Save, Just A Little Bit More – Of course it’s important to save money for the down payment and closing costs. But there’s more to buying a home than figuring out if you can pay a monthly mortgage payment. Your costs may be similar to renting, but now you must be prepared to maintain a home, too. Weekly shopping trips to your local big box home store to purchase everything from decorating items to a lawn mower can add up quickly. That's why many mortgage lenders recommend that first-time homebuyers have at least three to six months of additional savings. An excellent way to save cash is with a money market account from GMAC Bank (www.gmacbank.com), which can be opened with as little as $50.

2. Check Your Credit -- An individual’s credit score will have a significant impact on their mortgage loan approval and interest rate. A good first step in the home-financing process is to check your credit history. You can request a free credit report from any of the three credit reporting bureaus: Equifax, Trans-Union or Experian. Carefully review your report and contact the credit reporting bureaus to correct any misinformation.

3. Get Pre-approved -- Before you start working with a real estate agent, consider contacting a mortgage lender to obtain a pre-approval credit decision. A loan officer will review your financial status, including your income, cash flow and credit score, to help you determine the maximum monthly housing payment for which you may be able to qualify, and, if qualified, "pre-approve" your mortgage before you've found a home. Armed with a credit pre-approval, you can start searching with a much better idea of the price range you should be looking in, and in turn save time as you’ll know the right homes to focus on.

As you start thinking and preparing for the pre-approval process, start shopping for the mortgage lender from which you would like to obtain a mortgage for your new home. Because this process is new, it's easy to go with the first lender or loan officer you meet. Instead, take your time and shop around. Start by asking friends, co-workers and family members for recommendations. When you’ve identified two or three loan officers, ask for references. Remember, obtaining a pre-approval may offer more confidence and certainty to home sellers.

In addition to pricing (interest rate and closing costs), focus on customer service as well as other services and tools that a mortgage lender may be able to offer you. For example, in addition to offering the pre-approval program, GMAC Mortgage offers a feature called “HomeCommand,” which allows you to cap a mortgage rate for up to 126 days while you shop for your dream home, as well as a free, internet-based home-finder service that can give you a jump on other house hunters, alerting you to homes that hit the market that match your search criteria.

4. Don’t Be Afraid to Ask Questions – Once you’ve found your new home, the mortgage lender will help you through the details of the loan process. From application to closing, your loan officer will work through the financing process with you, just as your real estate professional will in the home buying process. Your mortgage loan officer can also be a valuable source of information, so be sure to take advantage of his or her expertise. Throughout the process, read all loan documents carefully, and involve an attorney, if necessary.

5. Inspect I -- Before you commit to purchasing a home, don't forget to hire a licensed home inspector to conduct a thorough assessment of the property. An inspector can alert you to any major problems with the home, and/or help you understand potential short-term and long-term home maintenance issues.

Buying a home for the first time can seem like you're riding on a roller coaster. But, by doing your homework, asking lots of questions, and taking your time, you can stay "in control" and discover an overwhelming sense of accomplishment in buying your first home.

How 0% Loans Can Backfire

Here's a recent comment to my post titled Are 0% Loans Good, Bad, or Does it Depend? My Response that illustrates exactly what I was talking about (and warning people about) in the post:

I live in Michigan and took out a 0% down loan about 3 years ago. Since then housing values have actually dropped in Michigan. Therefore, I am now stuck in a house with a mortgage that is greater than the value. So if I were forced to sell (job loss, illness, etc.) I would have to cover the loss with cash, which at this point I do not have. I am STUCK in my house no matter what. I made a terrible decision to take out a 0% down loan. I can't change that now, but I wish I would have known then what I know now. I listened to the common advice that you are better off buying than renting, even with 0 down. I have since changed my views on money and we are working to be debt-free, but this poor decision from 3 years ago is making that a much greater challenge.

My advice, if you don't have at least a 10% down payment, do not even think about buying a home. This 10% would at least cover the commissions if had to sell your house sooner than expected. Even better, just wait until you have 20% down....there is no hurry to purchase a home. Trust me.

Exactly. This is exactly why I hate these sorts of loans.

Don’t Wait for Trouble: Get Your ARMs Around the Terms of Your Mortgage

Here's some advice courtesy of ARA Content on what to do if you have an adjustable rate mortgage:

Are you among the millions of American homeowners who financed a home with an adjustable rate mortgage (ARM) loan? ARM loans account for about 24 percent of all mortgage loans in America. But these types of loans were not the best decision for every homeowner.

Typically, ARM loans offer a lower fixed rate in the early stages of the loan, and then adjust or “reset” to a rate in line with current market conditions. This happens after a period of time agreed to by the homeowner at the time the loan is made -- usually one, two, three, five or seven years. These loans may be a great choice for you if you expect to move after only a few years in the home, or expect your income to climb significantly before the loan readjusts.

However, if homeowners decide not to leave their homes, their incomes don’t increase as much as expected, or they have large, unexpected expenses come up, they may find that they can’t manage their higher mortgage payment. It is easy for many ARM homeowners to forget that their mortgage will readjust. And due to the record rate of ARM loans made over the past few years, many Americans may be surprised by this adjustment in the very near future.

Thousands of homeowners are concerned about their ARM loans, and are turning to their lenders or third-party nonprofit organizations such as the Homeownership Preservation Foundation for help.

So if you have an ARM mortgage, what can you expect? And what can you do to make sure your payments stay affordable? Colleen Hernandez, president and executive director of the Homeownership Preservation Foundation, offers the following advice:

• Find your mortgage contract. Your contract should clearly spell out the terms under which your loan will adjust, and when to expect that adjustment.

• Avoid being surprised. Lenders must inform you before your rates adjust and your payments change, but this may not give you enough time to adjust your personal budget to meet the higher payment. Ask your lender the details of when the loan will adjust and how much more you will be paying per month. “Being prepared well in advance for that higher payment increases the options available to you, and may make the difference between saving your home and losing it,” says Hernandez.

• Look at your budget. Once you learn how much your payment will adjust, take a hard look at your entire financial picture. Can you afford this payment easily? Has your situation changed to make it close to impossible for you to avoid missing payments?

• Work with your lender. If you find that your new payment is more than you can or want to handle, or even if you have already missed some payments, you can work with your lender to determine what your options are. “Despite myths to the contrary, it is in your lender’s best interest to keep you in your home,” advises Hernandez. “Your lender may be able to help you refinance your loan, offer a manageable repayment plan or one-time grant, or take other steps to help you continue to make your payments. Be prepared to share the details of your financial situation in an honest, straightforward way. The more your lender knows about your budget, the more options he or she can suggest to help you stay in your home.”

• Get counseling. If you are unable or unwilling to work with your lender, third-party foreclosure prevention counseling can help you create a plan to help resolve your financial problems. Look for a nonprofit counseling agency that offers all of their services at no cost -- not just a one-time free consultation. For example, the Homeownership Preservation Foundation offers free, HUD-certified foreclosure prevention counseling toll-free at (888) 995-HOPE or online at
  www.995HOPE.org.

The bottom line? Know when your ARM is going to reset as early as possible and plan accordingly. The earlier you prepare, the more options are available to you, and the easier it will be to stay in your home.

Home Improvements that Pay You Back

Here's a piece on which home improvements are good investments courtesy of ARA Content:

Purchasing a home is perhaps the most significant investment you’ll ever make. One way that millions of Americans are increasing the return and value of their homes is through remodeling. Remodeling is not only a great way to enhance your investment, but it can also provide you with greater satisfaction with your living environment. But before you call the contractor, there are a few other things to consider.

“Remodeling projects can offer significant rewards whether you are looking to put your house on the market in the immediate future or even if you are not interested in selling for years to come,” says Jim Ferriter, executive vice president, retail lending for GMAC Mortgage. “But before you get started, you need to identify which remodeling projects will increase both the resale value of your home as well as your day-to-day comfort.”

Here are some ideas from GMAC Mortgage for home improvement projects that pay off.

• Kitchens. Kitchen remodels are among the best for recouping the cost of renovations. Modernize with new appliances, counter tops and cabinets.

• Bathrooms. Adding a bathroom increases the value of your home. So does upgrading an existing one. Adding new light fixtures, vanities with plenty of storage, ceramic tile or marble, and a new coat of paint are just some of the ways to improve a bathroom.

• Decks. Building a deck enhances your enjoyment of your yard and lets you recover approximately 85 percent of the project costs in added value.

• New rooms. Converting an attic into a bedroom or adding a family room are great ways to add value and make your home fit your needs as your family grows.

• Painting. One of the most affordable and effective improvements you can make to your home is painting both the interior and exterior. Painting the exterior not only helps maintain the beauty of the home, it also helps prevent damage to the siding.

• Enhancing energy efficiency. Replacing your old furnace, putting in new windows and doors, and replacing your roof can help you improve your monthly energy costs as well as enhance the resale value of your home. Some states even offer credits for remodeling projects designed to enhance energy efficiency in the home.

So how can you pay for your remodeling projects? According to a recent nationwide study sponsored by GMAC Mortgage, over half of consumers would pay for their remodeling projects with cash from either their checking or savings. However, approximately 29 percent would use a home equity line of credit or home equity loan.

Why are more and more people turning to the home equity option? One reason is that borrowing against the equity in your home is often cheaper than maxing out credit cards that usually carry higher interest rates. In addition, payments on a home equity loan or home equity line of credit may be tax deductible. How do you decide whether to get a home equity loan or home equity line of credit? GMAC Mortgage has these tips to offer:

• A home equity loan provides a flat amount of funds that you pay back in fixed monthly payments over a set period of time. If you like the idea of a fixed, non-adjusting rate of interest and a constant monthly payment and you are also certain of your total costs while allowing for some over-budgeting, a home equity loan might make sense for you.

• The home equity line of credit is like a credit card by nature, with the homeowner accessing cash when they have the need. The interest rate is usually variable, often tied to the fluctuation of the prime rate of interest. You can make minimum payments and allow for month-to-month decisions on cash flow. The home equity line of credit is a revolving line of credit that stays open as long as you haven’t used up your credit limit.

With interest rates at historical lows, now is still a good time to tap into your home equity to get started on your remodeling projects. For more information about using your home’s equity to finance a home remodeling project, visit http://www.gmacmortgage.com or call (800) 888-GMAC (4622).

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Note: I do NOT recommend you tap into your home equity to do a remodeling project. Instead, save in advance and pay cash for it (or charge it on your credit card to get cash back and pay it off on the first bill you receive.)

How to Sell Your House Fast in a Slow Market

Money magazine had a piece on home sales in its November issue. The part that caught my eye was a sidebar that suggested "How to Sell Fast in a Slow Market." The tip that stood out to me was:

The quickest way to get a house sold is to lower the price. It may also be the cheapest, once you factor in the mortgage, taxes and upkeep you'd pay while it sits on the market. But make the cut substantial, advises San Diego real estate agent Bonnie Adams of Coldwell Banker: "You want to beat the market down, not just follow it." That means at least a 10% cut for a house that's attracting few potential buyers."

This is good advice, but, as I've said before, people are often too emotional and financially tied to their house to take reasonable advice like this. They'd rather price high to "good," sit on the house for a few months, and then take the needed reduction they could/should have taken in the first place. Like the quote above says, consider what they spent to keep the house during this time, and you'll see that a price reduction that sells the house quickly can certainly pay off.

What Newlyweds Need to Know About Homeowners Insurance

Here is some advice for newlyweds getting homeowners insurance courtesy of ARA Content:

It was the wedding of your dreams and the honeymoon of a lifetime. Now you’re settling down to enjoy married life. You’ll probably do a lot of things to nurture your marital bliss – from slipping little love notes into each other’s brief cases or lunch bags, to learning the “right” way to argue. But don’t forget the more mundane things you need to do to protect your life together – including updating your homeowners insurance.

“Marriage creates tremendous life changes,” says Jeff Beyer, senior vice president and chief communications officer of Farmers Insurance Group. “One or both partners may change their names. Households and finances get merged. One party may move into the other’s current home, or they may move into a new house together. Whatever your housing arrangements, marriage means you will need to update your insurance to reflect your new marital status.”

Updating your policy involves a bit more than simply notifying your insurer of new names. Beyer offers the following tips to make sure your homeowners insurance meets your new needs as newlyweds:

1. What’s in a name? When it comes to your insurance policies, everything. If you or your spouse is changing your last name, be sure that’s reflected on your policy – both in terms of the policyholder and beneficiaries.

2. Inventory your stuff. Modern marriages are commonly the merging of two households, since most couples have lived on their own prior to marriage. Go through the entire house – yes, even the garage where you’ve stashed everything that doesn’t fit in the house. Open drawers, closets and crawl spaces. Make a list of all high-value items, including household appliances, electronics, jewelry, china, silverware, stemware, etc. This process will not only help you update your policy, it can also help eliminate items you don’t need or that you have multiples of – like microwaves, toasters, and other items.

3. While you’re making your inventory, take some pictures as well. Photograph or videotape your belongings in every room of the house. Write brand, make, serial numbers, models, years and dates of purchase on the back of photos of high-value items. If possible, staple original receipts or photocopies of receipts to the photos as well.

4. Store your inventory list, videotapes and photos in a safe place. These items will be invaluable if you ever need to make a claim. Consider a safety deposit box in your local bank or giving a copy to your Farmers insurance agent. Or, store originals at home in a fireproof box and complete copies at the home of a relative or friend. You may also choose to store the photos online.

5. Ask your insurance agent to add high value items – like jewelry, furs, art or antiques– to your policy. Otherwise, your policy may not adequately cover these items in case of loss.

Beyer notes that protecting your possessions does not have to be hard work.

To learn more about protecting your possessions, visit www.farmers.com.

Review: The Real Guide to Making Millions Through Real Estate

Here's what I love about investing in real estate: it can be very profitable.

Here's what I don't love:

• You either need a ton of money that you can afford to tie up for a long time or be willing to take on a good amount of debt.

• Finding, buying, managing, and selling real estate can take up a good bit of time.

• If you don't do it right, you can lose a bundle very quickly.

Given the items above, I'm not a big real estate investor. I have a bit invested in a real estate LLC in addition to owning my own home (my biggest real estate investment), but that's about it. As such, I'm probably not the best person to offer my opinions of The Real Guide to Making Millions Through Real Estate: Start Your Portfolio With as Little as $3000. But they sent me a book, so here goes.

I'd place real estate books into two categories. First is the "you can get rich in no time at all and using other people's money" sort of book that's all hype and speculation but not really realistic for 99.9% of investors. Then there's the "here's a reasonable way to make money in real estate" -- a book that most people can read, understand, and apply. Despite the hype-y title, The Real Guide to Making Millions Through Real Estate: Start Your Portfolio With as Little as $3000 falls into the latter category, something I was extremely grateful for once I started reading the piece.

In short, the book is a beginner's guide to investing in real estate. It covers all the basics -- similar to, through not as elementary, as Real Estate for Dummies. If you know only a bit about real estate yet want to start finding, buying, managing, and selling property, this book lays out what you need to know and do.

That said, it's not a whole lot different than all the other books that deal with the basics of real estate. Sure, they each have some little twist, are written in a different style/voice, or have this or that particular way of doing the same thing, but in the end, they are 90% the same.

Therefore, I'm going to give two ratings for this book. If you're interested in real estate and want to know the basics, I'd give The Real Guide to Making Millions Through Real Estate: Start Your Portfolio With as Little as $3000 6 Stars. But if you're interested in all areas of personal finance and are interested in finding something to teach you something new and grow your knowledge base, I'd give the book 3 Stars.

How to Sell Your House in a Buyer's Market

It's been awhile since I've talked about the lowly housing market, slowing housing sales and the like, so I thought it was about time to bring up the subject again, but this time from a how-to perspective. Specifically, I'm going to share Smart Money's suggestions for how to sell your house in a buyer's market:

1. Tempt the buyer or the buyer's broker

2. Stage your house

3. Throw a party

4. Do your homework

5. Rent it out

This is similar advice to what I saw in December's issue of Money magazine (their #2 and #3 tips are the same as Smart Money's #2 and #5 tips above.). Their best suggestion was to "price your house like a buyer" if you wanted to sell it (in other words, don't list a place for $299,000 when similar houses in the same neighborhood are selling at $249,000.) Their thoughts on this issue in particular:

The reason so many people are stuck with a house they can't sell is that they haven't priced it right. Most of us grow attached to our home, and good memories and ego can distort how much we think it's worth. Go to open houses of similar properties in your neighborhood and decide how much you'd pay. Then list yours for that price. You may know that your house is better for entertaining, but that won't get a buyer to pay more. That's knowledge you gained only after living there. Forget about charging more than a neighbor because you have a new kitchen. "These days upgrades will get your house sold, but they won't get you any more money," says Lars Fahlberg of Prudential California Realty.

My thoughts on this subject:

1. I am amazed at how much people think their home is worth. We get fliers of homes for sale in our neighborhood all the time, and I'm familiar with many of the homes. They are similar to ours, but are asking $20,000 to $50,000 more than the price I'd ever ask for our house. Is it any wonder their house sits for months? (I have a house two doors done from mine that's been for sale for six months or so now because the owner is in la-la land on what he thinks he can get for the place.)

2. In addition to the emotional issue, I think many people price their homes at what they'd LIKE to get out of them or what they NEED to get out of them. The former is simply someone wanting a certain amount of money for their home. The latter (which is common) happens because people buy a house they can't afford (instead of using my formula for buying a house), finance it with an evil home loan, then find themselves in a net loss position because of having to pay selling costs when they move. So they price their home higher to cover these costs (and maybe to help them pay for their new house.) Neither of these have anything to do with what the market will bear or with what a buyer is willing to pay.

3. We keep our home about $20,000 below its fair market value in Quicken when we compute our net worth. This way, we're protected a bit against downward market pressure as well as selling costs.

Don't Rely on Home Equity for Cash

Here's a piece from Money Central that says you shouldn't rely on your home equity for cash. The article talks about home-equity loans and gives this warning:

Thinking about tapping into your equity for a loan? That could be a dangerous move. In a financial crisis, you could be forced to sell your home or wind up in foreclosure.

The piece includes this funny bit from Dave Ramsey:

Dave Ramsey, a radio talk-show host and the author of "The Total Money Makeover," points out that the banking industry calls home-equity loans "HELs" for short. "My experience tells me they simply left off an 'L,' " he says. "These loans are dangerous, and an unbelievable amount of them end in foreclosure."

Ha!

Of course my thoughts on this mirror Ramsey's, but no one wants to read what I think about evil home loans (or even My Formula for Buying a House or Paying Off Your House Early). So I'll just be quiet and let all you comment how great you think HELs are -- something I'm sure will happen. ;-)

By the way, I want to clarify my thoughts on paying off your house early. I do not advocate you putting every extra dollar to pay off your house early and then have 90% of your net worth tied up in an illiquid asset. What I do suggest is living below your means, saving and investing, and also paying off debt (including your mortgage) -- all at roughly the same time. If you can't afford to do that, then take the appropriate actions one step at a time -- same in your 401k to get the full employer match, pay off credit card debt, save, and then pay off your mortgage.

Even though we've had our house paid off for several years, it's never been more than a third of our net worth. We simply lived far enough below our means to be able to save and pay off the mortgage at the same time.

For more thoughts on this subject, see The 10 Best Money Moves You Can Make.

People Will Borrow Whatever the Bank Will Lend Them

Here's a comment left on my post titled Free Money Finance Top 10 Most Hated Posts/Themes: #5 My Formula for Buying a House that I believe accurately reflects the state of home borrowing these days:

Honestly, people will buy for whatever the bank will lend them. When we were mortgage shopping two years ago, we ran some numbers and figured out what we could afford, but lenders were beating down our door trying to give us 150% of the maximum that we could afford. Ultimately we opted not to buy, which is good, because real estate values in this area are beginning to plummet. But seriously, until this practice is stopped, people won't quit buying beyond their means.

Yes, most people borrow as much as the bank will let them borrow. This is unfortunate since you should never let a bank tell you how much to borrow for a home. Why? Because their job is to make as much money off of you as possible -- not to watch out for your financial future/best interests.

For those of you interested in my thoughts on buying a house, check out my formula for buying a house.

How Much You Should Pay in Mortgage Payments and Other Debt

Here's another item on Money magazine's list of 25 rules to grow rich by. Today's tip lists how much you should pay in mortgage payments and other debt:

Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.

We've had a lot of discussion here at Free Money Finance on various topics related to this advice including how much you should borrow when you buy a home, evil house loans, my formula for buying a house and paying off your house early, so I probably don't need to say much more. But I will add, however, that I prefer having debt be as low as possible -- whether that be mortgage, car, credit card (especially!) or other kinds of debt.

A New Way to Pay Off Your House

Here's a new, interesting idea. It's called an accelerator loan and it's designed to help you pay off your mortgage early. These loans have been popular in Australia and the U.K. (where one-third and one-fourth of homeowners use these loans respectively) and are now coming to the U.S. The overview from MSN:

Not to be confused with biweekly programs that shorten a mortgage through extra payments, the mortgage-accelerator program is based on an approach common in Australia and the United Kingdom, where borrowers deposit their paychecks into accounts that, every month, apply every unspent dime against the mortgage loan balances.

The piece then gives the details:

The premise is that borrowers finance a purchase or refinance existing property using home-equity lines of credit. Borrowers then directly deposit their entire paychecks into the credit accounts. Monthly expenses, other than mortgage payments, are funded by draws against the lines of credit, whether those are through automatic bill payments, checks, cash withdrawals or credit cards. Even if borrowers end up not paying anything extra on the principal during a month, they still capture some interest savings because the average balances are less than they would have been with conventional loans.

What? I need an example. Here goes:

As an example, let's say your mortgage payment on a conventional fixed-rate mortgage is $2,000 and your monthly net income is $5,000. With the mortgage accelerator, even if you spend the $3,000 difference, your average mortgage balance for the month is $1,500 less than it was with the conventional mortgage. That's because the entire $5,000 is deposited in the loan account and you made draws of $3,000 for living expenses spread over the month. At a 7.75% loan rate, that saves you about $10 in interest expense that month.

Now, $10 here and $10 there does add up over time, although both loan programs have annual fees of $30 to $60, but the accelerator part of the mortgage lies in having all your net pay going against the mortgage and an assumption that you have a positive monthly cash flow -- meaning you don't spend as much as you make.

In addition, these loans have an advantage over simply making additional payments on your mortgage:

Where a mortgage-accelerator loan program gives a homeowner additional flexibility, however, is in having a line of credit available if there is an emergency need for cash. If you make additional payments on a conventional 30-year fixed-rate loan, you can't borrow that money without taking out a home-equity line of credit or a home-equity loan. With the mortgage-accelerator program, you already have the line in place. That gives homeowners confidence that they can be aggressive in paying their mortgages and still have money readily available if a financial emergency crops up.

There are a few "watch -outs" (variable rate interest, etc.) that the piece also details, so if you're interested in more details, click the link above and read the entire article.

A few thoughts from me on this issue:

1. This is certainly a step in the right direction -- much better than the evil house loans we seem to see so much of.

2. In the end, this loan helps you pay off your house early, a financial move I support.

3. Personally, I don't like the "deposit your entire paycheck, use what you want, and the rest goes towards the mortgage" part of this. Seems like it would be a hassle if you wanted to keep a bit more in your account to save up for something down the road. (Maybe you'd then just transfer the money to a savings account?) I like a bit more freedom, and since I was able to be disciplined and make my own extra mortgage payments, I paid off my house the old-fashioned way. But, as the article says, accelerator loans will help people who aren't disciplined but who do want to pay off their mortgages early.

Save Money on Taxes by Making an Early Mortgage Payment

Here's a great money saving comment left on my post titled The Year-End Personal Finance Moves You Should Make:

Another solid year end financial move (for those with a mortgage) is to make your January 07 payment in Dec 06. It will result in added interest that you can deduct on your 06 tax bill. Granted, you will (potentially) have less to deduct next year, but a dollar today is worth more than a dollar a year from now!

I used to do this every year when I had a mortgage and do the same with my real estate taxes now. Yes, I want to cut my taxes as much as possible THIS YEAR -- and I'm sure I'll find some more things to deduct next year. ;-)

Besides, making an early mortgage payment could save you a bit on interest as well! And while you're at it, why not just make an EXTRA payment to help you pay off your house early?

How Much You Should Borrow when You Buy a Home

Here's another item on Money magazine's list of 25 rules to grow rich by. Today's tip is related to how much you should borrow when you buy a home:

Spend no more than 2 1/2 times your income on a home. For a down payment, it's best to come up with at least 20%.

Many buyers in recent years have stretched the limits of affordability, and have bypassed the traditional 20% down model. But make a smaller down payment, and most lenders will require you to have private mortgage insurance (PMI), which adds a minimum 0.5% of the loan amount to your mortgage payments, about $1,000 more a year on a $200,000 principal.

Good advice -- though millionaires make it a bit more extreme and only buy houses worth two times their income. Either of these probably works in my formula for buying a house, though I'd lean toward putting down a bigger downpayment and having a lower mortgage. Of course, I'd recommend paying off your mortgage early too, but that's not a popular subject. ;-)

For more real estate related posts, see these links:

• Six Cost-Effective Ways to Protect Your House This Winter

• Should You Buy a House With No Money Down?

• Best of Free Money Finance: Real Estate Posts

The Best Home Renovations for Your Money

In the November issue of Money magazine, they list 25 rules to grow rich by and I want to highlight and comment on several of them over the next couple of weeks. Today's tip is related to making the best investment when renovating your home:

For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.

The return on investment on a mid-range bath modernization is 102% of its cost. Kitchens can add about 90% of their costs to the home's value.

This is pretty much home improvement return 101 -- bathrooms and kitchens are good investments, all others probably won't pay for themselves. That said, if you're going to be living in a place for several years, go ahead and fix it like you want it. Even if it only returns 50% when you sell the house, you'll still have several years of enjoyment out of the change.

For more real estate related posts, see these links:

• Six Cost-Effective Ways to Protect Your House This Winter

• Should You Buy a House With No Money Down?

• Best of Free Money Finance: Real Estate Posts

Free Money Finance Top 10 Most Hated Posts/Themes: #4 Evil House Loans

My #4 most hated theme here at Free Money Finance is evil house loans.

Ok, so what do I mean by evil house loans? Here are some examples:

• 50-Year Mortgages

• Interest-Only Mortgages

• No Money Down Mortgages

• Other risky loans

But no matter how much I show that these are dangerous (as well as not financially sound) ways to buy a house for the vast majority of people (even though a large percentage of people use them), people still give examples of how great these loans are for them, how they've made so much on their house using them (paper gains, not actual gains), how they couldn't have afforded a home without one of these (which is exactly my point, by the way, they can't afford that home), etc. Why is this? Are people just in denial? Or maybe I'm missing it somehow? I just don't see it.

Yet there is a light at the end of the tunnel for me on this issue. My guess is that with the current state of the real estate market, a lot fewer people will be hassling me about these posts. ;-)

Free Money Finance Top 10 Most Hated Posts/Themes: #5 My Formula for Buying a House

Ooooooooooooo! Now I'm getting into your biz-ness!!!!!! ;-)

If you've been reading Free Money Finance for any amount of time, you've probably seen My Formula for Buying a House. This formula is based on my experience buying and selling houses for 20 years. This is what's worked for me and hence it's what I recommend to others.

But people hate this formula. Specifically, they hate two parts of it:

1. Live in (or move to) a cheaper area of the country. This topic is a real argument-starter and thus deserves its own place in our top ten list. Stay tuned to future posts in this series where I'll talk about it more in-depth.

2. Buy a house you can easily afford. Here's what people hate about this advice:

If you're not yet wealthy but want to be someday, never purchase a house that requires a mortgage that is more than twice your household's total annual realized income.

As soon as I say that I get "that can never be done," "this is impossible in my area," and on and on.

A couple thoughts on this:

1. This is what's worked for me -- I've done it. I assure you, it can be done, so don't say it can't. No, it probably can't be done on a 3,000 square-foot home on a golf course in New York, but that's just the point -- if your income's not high enough, you shouldn't be buying a place like this.

2. Note that it says that the MORTGAGE shouldn't be more than twice your household's income, not the VALUE of the house. Maybe it means you need to save more up front as a downpayment to get to the point where your mortgage is low enough to meet the criteria.

I think this is good advice and if followed, it will help you grow your net worth. That said, people still don't like my formula and hence it makes #5 on my most hated list.

Reverse Mortgages Are A Last Resort

Here's a piece courtesy of Marotta Asset Management that says reverse mortgages are a last financial resort:

Before reverse mortgages, pensioners wishing to tap into home equity were presented with two options: either sell the house or get a home equity loan. But since their humble beginnings in the late ‘80s, reverse mortgages provided seniors with an additional tool for accessing home equity. The going offer: get cash now, make no monthly payments, and keep your home sweet home. For retirees struggling to make ends meet, a reverse mortgage can provide a much-needed way forward.

A reverse mortgage should be considered only as a last resort. With early retirement planning, such 'last resort' options can be easily avoided. Still, reverse mortgages are a far cry from the blinking neon signs offering fast cash in exchange for a car title. At least with a reverse mortgage the borrower gets to keep the title and avoid the ugly monthly payments.

To understand the way a reverse mortgage works, let’s look at its opposite: the traditional home mortgage. Both are mortgages. But with a standard home loan—also known as a forward mortgage—over time the homeowner’s equity rises and the debt falls. A reverse mortgage does just the opposite. With a reverse mortgage, the debt rises and the homeowner’s equity falls.

Unlike a home equity loan or a home equity line of credit which immediately begin monthly collections on the loan, no payment is due on a reverse mortgage until the borrower sells or moves. Borrowers are given a guarantee of lifetime occupancy of the home. But, once the borrower no longer resides at home, the loan must be repaid. Typically, repayment is made from the proceeds from the sale of the home. The good news here is a reverse mortgage will not hold the borrower personally liable nor can they owe more than the market value of the home.

Minimum qualifications require borrowers to be age 62 or over and must either own their home free and clear or have little remaining debt against the house. But, meeting the initial requirements won’t mean the loan is a done deal. Borrowers should be prepared for an extensive interview and educational component before they can sign on the doted line.

Reverse mortgages are becoming ever more popular, in part, due to the customizable distribution options. Seniors may choose to receive one lump sum or monthly advances—either for a limited time or spread out over the course of their lifetime—for as long as they reside in the home. Others may choose to open a line of credit or pick a combination of payment options to suit their cash flow needs.

But, the convenience offered by a reverse mortgage comes with a price tag. Although loan fees can be financed as part of the loan, origination fees can easily cost borrowers in the neighborhood of $12,000- $18,000. Add to that the principal loan amount, interest, and maintenance fees, and the total cost will likely account for a sizeable portion of the home’s total value, if not all of it.

In addition to the costs of maintaining the home, borrowers are also expected to continue home owner’s insurance and property tax payment in addition to paying for routine maintenance on the home.

Currently, reverse mortgages come in three flavors: single-purpose, proprietary, and federally-insured loans. Single-purpose reverse mortgages are very low-cost. But, unlike the other two, they can only be used for one purpose, such as paying property taxes or making house repairs. Proprietary loans are offered through private banks. Although they are more expensive, they lend larger sums. Of the three loans types, the most common is the federally insured Home Equity Conversion Mortgage (HECM).

The actual amount a homeowner can hope to borrow using a reverse mortgage will be significantly less than the market value of the home itself. Although a HECM offers lower interest rates than private lenders, borrowers are subject to regional 203b loan caps ranging from $200,160 to $362,790. Ultimately, the total loan amount will be determined by the value of the home or the regional loan cap (whichever is less), the borrower’s age and the going interest rate.

So how do you know if a reverse mortgage is right for you? AARP advises prospective borrowers to consider three questions: 'How much would I get?' 'How much would I pay?' and 'How much would be left at the end of the loan?'

Although the lender almost always wins, a reverse mortgage does offer a Band-Aid solution to pending cash flow problems. Some seniors take the loan to eliminate remaining forward mortgage payments still owed on their home. The majority, though, choose a reverse mortgage to pay medical bills. In either case, a reverse mortgage allows the homeowner to live at home while shoring up immediate, and even long-term, cash flow shortfalls.

There are some cases in which you should never take a reverse mortgage. Avoid a reverse mortgage if you are close to the minimum age requirement. Assuming a reverse mortgage early on will provide you little income and will ensure you will have no equity left in your home at the end of the road. If you currently have little equity in your home, a reverse mortgage is also not worth the cost of the loan origination fees. The fees alone will likely eat up what little equity you have. Finally, avoid a reverse mortgage if you expect to move in the near future. The hefty costs of getting the reverse loan will be wasted and the loan will come due as soon as you move out of the home.

Before going forward with your reverse mortgage, consider your options carefully. There are many creative ways of managing cash flow needs without taking a loan against the value of your home.

As always, begin by looking at your budget and cutting unnecessary expenses. Generating additional income may be as simple as renting out a portion of your home. Or, you may consider moving to an area with a lower cost of living. Sell high and buy low. Then, invest the profit from the sale of your home. By doing so, you may be able to create a permanent cash stream without taking on any debt at all!

Finally, investigate community assistance programs. You may find that you qualify for additional social security benefits or for property tax relief.

More information about reverse mortgages can be found by visiting the AARP website at www.aarp.org. Of course, the best way to avoid a reverse mortgage is by planning early for retirement.
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Two points worthy of mentioning again:

1. "A reverse mortgage should be considered only as a last resort."

2. "The best way to avoid a reverse mortgage is by planning early for retirement." For assistance in this area, see Best of Free Money Finance: Retirement Posts.

Free Money Finance Top 10 Most Hated Posts/Themes: #8 Paying Off Your House Early

I currently do not have a mortgage. We paid it off on our last house several years ago and then bought our current house with cash (when we moved and sold the old one.) I'm a big believer in having no debt and write about it on a regular basis. Unfortunately, not everyone's on the same page with me on this one.

Most financial authors, writers, and bloggers would say NOT to pre-pay your mortgage if the interest rate (adjusted downward for the tax savings from having a mortgage) is below what you could earn investing the money instead. They say you'll be better off in the long run doing this, and technically, they're right. If a person has a mortgage at 5% and if they earn 6% on their investments and if they do actually invest the money they would otherwise be using to pay the mortgage (rather than spending it) then they will be better off financially. But to me, that's a lot of ifs.

Here's my main reasoning for pre-paying a mortgage from Should You Prepay Your Mortgage?:

1. You SHOULD be able to beat the cost of the loan [if it's low]. But paying off the loan is guaranteed, the return is not.

2. What if the interest rate increases? For holders of variable-rate loans, the interest rates can (and do) go up.

3. There is a HUGE difference between a philosophical answer and the practical execution of that answer. What I've seen most people do is not pre-pay their mortgage, then spend (not invest) the extra amount each month. It's a rare person who actually invests the amount as planned.

4. There's a great feeling to being totally debt free. I've been without debt for several years now, so I'm speaking from experience.

All that said, most people still don't like it -- hence, this topic gets position #8 on my most disliked list.

Avoid Capital Gains Tax on the Sale of Your Home

Here's a piece courtesy of Marotta Asset Management on how to avoid capital gains on the sale of your house:

If you own a home you are likely aware of the tax benefits such as deducting your mortgage interest and property taxes. However, you may not be aware of the tax-free earnings you can take after you sell your home. Under the Taxpayers Relief Act of 1997, capital gains generated from the sale of a primary residence are tax-free. Individuals pay no taxes on profits up to $250,000. And, couples are allowed to combine their tax credit and exclude up to twice the amount from a home sale.

The income exclusion is so lucrative many homeowners have adopted a lifestyle of home improvement with the hopes of buying low, selling high and making a handsome tax-free profit every two years. A little elbow grease invested in home improvements can generate a handsome reward on the day of sale. Imagine selling your home at a significant markup and paying no taxes on that income.

Previously, profits from the sale of a home automatically triggered capital gains tax, unless that is, you plunked the profits back into another home with a bigger price tag. The only other option was a one-time exclusion of $125,000 if you were over 55. Under current tax law, there’s no need to apply your gains to the purchase of another home. Profits can be spent on a trip to Europe, or better yet, saved and invested.

Capital gains is figured by taking the sale price of the house and subtracting your closing costs, realtor fees, and cost basis (what you paid for the house plus any significant house repairs). What’s left is your profit, or capital gains. If you are filing individually, any profits up to $250,000 ($500,000 if you are a couple) are yours to keep, tax free!

Let’s consider an example. The Smiths purchased their home for $100,000. Over the years, they invest another $50,000 in renovations into the house. Once the kids leave for college, they decided to downsize. With many years of appreciation, the Smith’s home sold for $500,000. Fees and realtor’s commission aside, their profit on the house was $350,000 ($500,000-$150,000). Under the Taxpayer Relief Act, the Smiths pay no taxes on the $350,000 profit. Not bad.

As with any great offer, there is of course, the fine print at the bottom. For one, you can only claim the exclusion every two years. And to qualify, you’ll need to pass two important tests: the "ownership" and "use" tests.

The "ownership" test requires you to have owned the home for two years. To pass the "use" test, you must have lived in the home as your primary residence for two of the past five years. Your two years can be a combined total of 760 nonconsecutive days over a five-year period in which you lived in the home as your primary place of residence.

Let’s look at another example. Newlyweds, Jack and Jill live in Manhattan. After their wedding, Jack moved into Jill’s townhouse, a home Jill had owned for the previous five years. Soon after their wedding, Jack and Jill decide to sell the home. They sell the home and make a profit of $400,000.

In this example, although Jack and Jill were just married and ownership moved from individual to joint ownership, the home has not changed hands. Uncle Sam will allow them to pass the ownership test. But, to pass the "use" test, both parties must live in the house for two of the past five years. In this case, only Jill meets the criteria, so only $250,000 of the earnings can be excluded. Jack and Jill will have to pay capital gains tax on the remaining $150,000.

Waiting until the two-year anniversary to sell your home will likely be worth the wait. Homeowners who sell their home before they reach the two-years mark will find no pot of tax-free gold at the end of the rainbow. Any profits generated from the sale of a home which exceed your exclusion limit will be taxed at the long-term capital gains tax rate of either 5 or 15 percent, depending on your tax bracket.

Profits from the sale of a home owned for more than one year but less than two years will be taxed at the long-term capital gains of either 5 or 15 percent. Worse yet, homeowners buying and selling within a one year period are taxed at the ordinary income rate, anywhere from 10 to 35 percent.

There are, however, some welcome exceptions to the rules. If you are divorced and gained full ownership of your home as part of a divorce settlement, you are permitted to take the full exclusion of up to $500,000, assuming you still pass the two-year "use" test.

Members of the armed forces who are forced to relocate can take the full exemption regardless of how long they have owned their home. Homeowners forced to relocate due to health reasons, divorce, or job reassignments may take a pro-rated exclusion if they don’t meet the full two-year "ownership" and "use" tests.

If you are hoping to sell your vacation house - the one you visit for two weeks out of the year - you won’t qualify you for the exemption. However you might consider moving your official place of residence to your vacation house, live in it for two years, and then take the exclusion.

In May 2006, President Bush signed into law new tax laws extending the lower capital gains tax rates until 2010. Through 2010, sellers who turn a profit over and above the exclusion limits will pay a maximum capital gain tax of 15 percent. Sellers in the lowest two tax brackets will see their capital gains rate of 5 percent in 2006 and 2007 drop to 0 percent from 2008 through 2010. After 2010, all long-term capital gains tax will move back up to 20 and 10 percent respectively.

Of course, these considerations alone should not dictate when you sell your home but should be part of your overall financial plan.

Six Cost-Effective Ways to Protect Your House This Winter

After your career, it's likely that your house is your biggest financial asset. And as we approach winter (or are in it already if you live in Michigan) it's time to do those basic maintenance tasks that keep our homes safe and financially sound. Here are six cost-effective ways to protect your house this winter from Kiplinger's:

1. Have the furnace cleaned.

2. Call in a chimney sweep to check your fireplace or wood stove.

3. Check your smoke alarms.

4. Install a carbon-monoxide detector.

5. Clean the clothes-dryer vent.

6. Clean the rain gutters.

Here's where we stand on each of these:

1. We have an agreement with a local company that comes out and checks our AC in the spring and cleans the furnace in the fall. We save about $30 every year by contracting for both (versus buying them separately) and since our system is near the end of its useful life, this seems like a good investment.

2. We NEVER use our fireplace. In fact, we've turned the gas to it off.

3. I check the alarms every quarter or so (including battery checks). We had new ones installed a year or so ago, so they have plenty of life.

4. We have two carbon-monoxide detectors -- one in the basement and one upstairs where we all sleep. They each have read-outs, though they are the battery-operated kind.

5. I hate cleaning the clothes-dryer vent (it's very hard to get to), but I need to do this soon.

6. We have covers over the gutters in back (they are high off the ground and have lots of trees around), but I handle the ones in the front of the house. I have to clean them out a few times before all the leaves are gone.

Make Money by Staging a House You're Trying to Sell

In The Benefits of Staging Your House for Sale -- Another Sign of Softness in the Housing Market. I said that "staging" a house was new to me. While it is new to me, it seems that many people have been doing it (with quite a good amount of success) for a long time. Here's a comment left by a reader on how she made a bundle by staging her house:

I sold a house in 2004 and staged it beforehand. It's actually unusual to see a house for sale in Northern California that isn't staged. Everyone expects it now. Most buyers have little or no imagination. I staged the house myself, having a pretty good eye and understanding of what buyers want to see. I priced the house high - very high - and expected to negotiate. Instead, I had an offer from a buyer who not only wanted the house, but wanted to buy all the furniture, artwork, bedding, etc. that I had used to stage it. I received full asking price for the house, plus an extra $14K for everything else.

Full asking price plus $14k, huh? Not bad. Not bad at all. I'm sure many people with houses for sale in Northern California would love to have this same result today.

As Home Sales Slow, Home Auctions Pick Up

So what do I know? I thought "staging" a home was something new (we've never done it), but based on the comments, it seems like many people have been doing it for quite some time.

But here is something that, while not new, is certainly increasing in popularity due to the slow-down in home sales, the home auction. Here are the details from MSNBC:

Other motivated sellers are resorting to similar non-traditional techniques now that the real estate market is losing steam. Real estate auctions are gaining traction again, with revenues increasing 39 percent over the past three years, according to the National Auctioneers Association.

Despite their past reputation of selling distressed and foreclosed homes at dirt-cheap prices, auctioneers say they are now selling homes at all price ranges to multiple bidders who sometimes raise the final price to above market value. Auctions also allow the seller to control the timing of a sale and avoid the contingencies common in conventional sales, such as stipulations that a buyer can pull out if he is unable to sell his current home or obtain financing.

Let's put it this way, if I was trying to sell my house now, I'd be pulling out every trick in the book: staging, auctions, buy the house get a kid free -- ok, maybe not that last one, but it is getting pretty desperate out there. And why not? After all, the median home price dipped in August for first time since 1995.

This said, there is good news in the housing decline for some potential investors.

LA Housing Market is Collapsing

In more news that the housing market is starting to crack across the U.S., Jason Calacanis that the Los Angeles housing market has reached the tipping point. His thoughts :

The "fake markup" in houses right now is becoming a running joke at this point for us. You walk into a home and you immediately take 10-15% off the asking price because the selling agent tells you immediately that there is "room." Room is ~10% overpriced. If the broker tells you "bring any offer," "there's a lot of room," or "make an offer, who knows" that means the home is overpriced 15-20%.

Clearly from the title of this post I think we just had a tipping point caused by the fact that buyers believe that the market is going to correct 5% a year for the next two to three years--something they keep saying in the press over and over again. To get there folks off the sidelines you need to go 10-15% below the 15% "fake markup," or 25-30% of the asking price right now.

Ouch! 25-30% of the current asking price? Are things really that bad? Seems so.

But this isn't really surprising. LA has been a hot market for some time, and the hottest markets have the most room to fall as housing prices drop.

For more thoughts on the housing situation, see these posts:

• What I Think Will Happen to the Housing Market

• Homeowners Becoming Desperate to Sell -- Start Burying St. Joseph Statues All Over to Sell Homes

• My Real Estate Investing Plan for the Housing Decline

• More Signs the Housing Market is Headed Down

Should You Buy a House With No Money Down?

Here's a piece from Kiplinger's where a couple asks whether or not they should buy a house with no money down. You know what I would say (more on that later), but here are some of the reasons Kiplinger's gives why you should NOT buy a house with no money down:

• Saving for a down payment will lower their costs and give them both security and flexibility.

• Equity in your home also gives you a source of cash in an emergency.

• The bigger the down payment, the lower your monthly payments, which may mean one of you can afford to stop working, if you wish.

• Buying a house with no money down comes at a price. With less than 20% equity in a home, you'll generally have to buy private mortgage insurance, which costs up to 1% of the loan amount.

Ok, here's my answer to "should you buy a house with no money down?" in as short of a space as I can put it:

No.

Why? It's contrary to my preferred formula for buying a house. Besides, the only way you can get a house without a down payment is to take out an evil house loan -- which is something you don't want, especially with what's going on in today's housing market.

The Benefits of Staging Your House for Sale -- Another Sign of Softness in the Housing Market

Well, I've certainly detailed what I think will happen to the housing market, noting that many homeowners are becoming desperate to sell and, above this, there are even more signs the housing market is headed down. I've also laid out my real estate investing plan for the housing decline. So, I've covered the issue from many angles.

But this is a new one to me. I found this article on home "staging" at MSNBC. Basically, for a fee, a professional will come into your house and rearrange furniture, change lighting, add some curtains instead of blinds, and on and on -- all with the intention of making your home look better to prospective buyers. And it seems to work. Check out these facts:

According to a 2006 StagedHomes.com survey, homes listed for sale without staging spent an average 4.5 months on the market; homes staged before listing spent less than 1.5 months on the market. The average time for a staged home to reach a ‘sales pending’ status was about a week. And staging boosts the estimated sales price by 3 percent, according to other industry surveys. On average, certified stagers charge $1,900 per listing, Schwarz estimates, although that varies widely depending on region.

While no independent national surveys have been conducted to substantiate these industry claims, anecdotal evidence suggests the ranks of staging adherents are growing.

Very interesting.

So, if you have a $200,000 house and spend $1,900 on staging it, on average you'll save three months on the market and make a sale for $6,000 more than you would otherwise? Seems like a good deal to me.

As I was reading this article, I thought, "This is a creative idea. But it certainly does highlight the fact that it's getting harder and harder to sell a home. What will they come up with next -- families you can hire to live in your house and make a good impression?"

Then I clicked to page two of the article and read:

Headquartered in Mobile, Ala., Showhomes has been staging homes nationally for 20 years.  But it practices a more extreme form. The company moves one of its home managers — along with the manager's family and possessions — into a vacant home. Then the home manager stays until the listed home is sold and closes.

This too seems to work:

Professional golfer Jeff Johnson and his wife, Rebecca, were uncertain where they wanted to live when they moved their family to Charlotte, N.C., late last year, so they signed up with Showhomes to be ‘home managers.’  They are already in their fourth home.

“All three of their previous homes sold for 94 to 97 percent of their list price," according to Lucy Henner, director of marketing for Showhomes. And they sold within weeks of the Johnsons moving in.

Ok, so while these new methods of selling homes seem to be helping, they also reflect the fact that the real estate/housing market is getting tougher and tougher for sellers. They are having to be more and more creative to sell their homes and consider new and "outside the box" ideas. Which isn't bad -- that's one of the benefits of capitalism, that you see a financial process, add to it to make it better, someone then adds to that idea, and so on and so on. But still, why are these creative ideas just coming into the mainstream now? I think it's because homeowners are facing a slowing market and have to do a bit extra to sell their homes.

Interview with Lisa Vander, Author of The Real Guide to Making Millions Through Real Estate, Part 2

Here's part two of my interview with Lisa Vander, author of The Real Guide to Making Millions Through Real Estate. Today Lisa offers us some very useful and practical tips on how to think about investing in real estate:

Free Money Finance (FMF): Can anyone make millions in real estate?  If so, what are the keys for the average person to be successful in doing this?

Lisa Vander (LV): Yes, everyone who is willing to stretch themselves and be out of their comfort zone.  People who make millions in real estate have to put in time, energy and money to make real estate investing work for them in the long haul. 

There are six keys for the average person to be successful:

1. Have a winning attitude:  Be positive and get good advice from people who have succeeded in real estate investing before you.

2. Have a solid Real Estate Plan before you spend your capital.  Know what you are targeting and where you want to go so your decisions are driven by your plan first.

3. Spend money on education so you know what you are doing before you make snap decisions and lose money by not knowing enough.  Education is the best money to spend to secure real estate success.

4. Have a clear understanding of how real estate works in different markets.  Learn how to identify key economic conditions and market cycles so you are prepared to stay in long term regardless of changing market conditions. 

5. Evaluate your real estates performance each year according to your plan.  Evaluate how your property is performing so that you can make adjustments and decisions on how your equity is working for you.

6. Know when you have met your goals and objectives according to your plan and begin to live the life you have always wanted by being financially free.

FMF: What about the risks and pains associated with buying real estate such as it being an illiquid investment?

LV: Real estate is not for the person who wants to put money in for a short period of time.  Real estate performs best when used for long term investing.  The best part about real estate is that it performs for people over time.

FMF: It takes lots of time/effort to buy/manage/sell. Should these be concerns for potential investors?

LV: Yes, real estate is not for people who are not willing to do some work to manage their growing wealth.  Real estate does not have to be as hands on as people think.  A successful investor needs to use their brains and think things through by working on their goals.  Real estate investing pays off because you have the ability to increase the rate of return on your investment but it requires being more actively involved than other investment opportunities.

FMF: Dealing with tenants is a hassle isn’t it?

LV: Yes, dealing with tenants is a hassle.  That is why you should let someone else handle it for you.  My most successful investors do not handle their own property management.  The wealthy learn to manage the managers.  Let the property manager handle the problematic tenant.

FMF: Don't you need a good amount of money to be a real estate investor?    

LV: Yes, you need money to invest in real estate and occasionally have money for repairs and unexpected costs.  Getting money is usually not an issue in today’s economy.  It is more important to learn how to manage your money by making sure the investment you made is good for the amount of money you have and your financial position. 

Beginner investors can start with as little as $3,000.  They will start small and grow to larger properties as they develop their skills and equity over time.

FMF: Don’t these various "difficulties" turn people off toward investing in real estate?

LV: No, more and more people are choosing real estate as their investment alternative.  People like the rewards that real estate offers.  Real estate investing is not for everyone.  But for those who choose to use it and use it effectively do very well by Making Millions through Real Estate.

FMF: What advice would you give people who are looking to make money in the current real estate market given that prices are likely to fall?

LV: Make sure you know how real wealth is made in real estate over time.  Wealth is not made in real estate by price or appreciation alone.  People get the benefits of owning real estate through cash flow, loan reductions and tax benefits.  Focusing on these other benefits will show the investor why real estate investing can still be good when prices are naturally declining. 

The ability for investors to leverage their money is also powerful in the growth of a real estate portfolio.  This is not available in other business opportunities the investor may be considering when deciding how to grow their money.

FMF: Why should people buy The Real Guide to Making Millions through Real Estate?

LV: This book will give the investor a “How to Guide” to making millions that increases the probability of creating financial security for themselves.  This book is designed to inform, motivate and keep people on target.  Staying involved and learning real estate makes willing people very successful over time.

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As you may be able to tell from some of my questions, I'm often skeptical of books on making money in real estate. They seem to promise the world but often are nothing more than 250 pages of hype. This one, however, seems to be different, at least from what I can tell from this discussion to Lisa. She seems to have a balanced and realistic approach to real estate investing and, as such, I'm really looking forward to reading her book.

Click here to read part 1 of this interview.

More Signs the Housing Market is Headed Down

In a recent post, Jason Calacanis notes that housing prices in LA are taking big drops. He says the housing market there is still going down and makes these comments:

There is a still a huge gap between what people are asking for and what people are willing to pay.

At one house the broker told us that the price was going to go down 10% immediately because the client overpriced the house against her wishes. She said that there was another 10% of room from there. So, in other words the price the person was willing to sell for was 20% less than what they listed it for--at least. Of course, we thought the house was worth 30-40% of what they were asking. Interestingly, 35-40% less the (absurd) asking price would put the house at the price it would have sold about two years ago.

Later, he shows two other houses in California in a post titled Flippers in Trouble. Prices there are down 17% to 25%. Yikes!

If you find yourself in this sort of market, you may want to check out my thoughts on what to do in a slow (and slowing) real estate/housing market. In most places, housing prices haven't come down that far yet, though there are certainly signs of desperation out there. Personally, I'm waiting for the right time -- after prices fall dramatically -- to enter the market as a real estate investor.

Interview with Lisa Vander, Author of The Real Guide to Making Millions Through Real Estate, Part 1

One of the books I have in my review pile is The Real Guide to Making Millions Through Real Estate. I haven't had the chance to even look at it yet (I hope to soon), but since the author was available for an interview now, I decided to go ahead and talk with Lisa Vander, author of The Real Guide to Making Millions Through Real Estate to get her thoughts on investing in real estate. Here's part 1 of our discussion:

Free Money Finance (FMF): What led you to write “The Real Guide to Making Millions through Real Estate?”

Lisa Vander (LV): I was inspired to write “The Real Guide to Making Millions Through Real Estate” because I saw so many new and seasoned investors spend their money for real estate investing without having a clear understanding of how real estate works over time.  Investors with education and strategy make wiser decisions and are able to stay in real estate when market conditions adjust over time.

FMF: Tell us in your own words what the book is about.

LV: “The Real Guide to Making Millions Through Real Estate” is a real estate investment book that gives the investor foundational information on how real estate works for long term wealth development.  “The Real Guide to Making Millions Through Real Estate” also provides step by step instruction of “How To” safely invest and keep their capital growing in real estate.  There are many graphs, worksheets and instructions that bring the theory of real estate investing into action for every investor.

FMF: What are the core concepts of the book?

LV: There are several:

• Investing in real estate is a marathon, not a sprint.  Successful wealth development takes time by implementing sound investment strategies.  Having a Real Estate Plan guides investors into knowing where they are going and how to make adjustments within their Plan to ensure they arrive at their financial goals.

• Real estate investing is powerful when it is defined in terms of the overall rate of return on the equity in the property.  This equity definition includes four major components: Appreciation, Cash Flow, Loan Reduction, and Tax Benefits.  Investors who analyze their properties annually based on the Rate of Return on Equity (ROE) have the capacity to compare and contrast other real estate opportunities in the market place based on mathematics and solid analysis.

• Successful investors know how to read market conditions and are prepared for these adjustments by learning how to use specific loans in different markets and by having good property management techniques. 

• Investors who understand and are prepared for real estate market adjustments are able to stay in real estate regardless of market conditions.  Long term investment strategies secure wealth development for the average busy investor who wants to know that their real estate investing will be here today, tomorrow and into the future.

FMF: Who is the book written for?

LV: The theories in this book are for everyone who wants to have financial security.  This book is great for the beginner investor who wants to learn the fundamentals with a step by step process for getting into action.  This book also teaches the seasoned investor how to increase their profits and diversify their already existing real estate portfolio.

-----------------------------------

So far, the interview is simply a "get to know" the book and what it's about. But as you'll see in part 2 tomorrow, she offers some really great (and balanced) advice for investing in real estate. You won't want to miss it.

Click here to read part 2 of this series.

What I Think Will Happen to the Housing Market

I read an article on Money Central last week that included a summary of exactly what I believe will happen to the housing market over the next few months. The quote:

Eventually enough sellers -- led by those who have to sell -- will decide to cut prices enough so that enough buyers who have been waiting for bargains will decide that bargain prices have arrived. Sales volumes will start to pick up. Price declines will gradually slow and finally vanish. The housing market won't bottom until prices have declined enough to match buyer expectations.

Now, the big question is how low will prices go before sales volumes start to pick up? Will they drop 5%? 10%? 20%? More?

Of course, no one knows. Personally, I'm hopeful for a good-sized drop so I can take advantage of my real estate investing plan for the housing decline.

What do you think is going to happen? Is there any action you're planning to take as a result of those feelings?

Exotic Mortgages Losing Their Allure

With the housing market cooling down, people are starting to use a bit more common sense regarding their real estate financing choices. In particular, they are moving away from evil house loans and becoming a bit more financially prudent as the market changes.

This article from MSNBC discusses this trend and says that exotic mortgages are losing their allure. Here's why:

Now these cheap mortgages that fueled the real-estate boom are beginning to hurt the homeowners they once helped. Higher interest rates and the end of honeymoon periods for too-good-to-be-true teaser rates are increasingly causing payment shock for borrowers.

Many of these mortgages carry negative amortization features that permit borrowers to pile on additional debt beyond their original balance, and make minimal payments for the first several years. Once the initial period is over, however, payments could shoot up by 100 percent or more as the loan resets.

Other programs allow interest-only payments with no reduction in the original loan balance until the reset point. Then payments can jump by 50 percent or more in order to amortize the debt balance over a compressed number of years.

Does anyone remember the debate we had here a few months ago about this sort of mortgage? Remember how I said way too many people were taking advantage of them? And I made this comment:

My contention is that way, way, way, way, way, way more people are getting these loans than should be getting them and they're setting themselves up for a big fall. So, for the vast, overwhelming majority of people out there, this type of loan is not a good idea.

Others countered that they had this sort of loan, they had "made" (on paper) a ton of money on their house, that the loans were fine, yada, yada, yada. Well, they don't seem so fine now, do they?

My purpose here isn't to say "I told you so" or to hold myself out as some sort of great financial visionary that knows what's going to happen in the future. Also, I'm not sure that this problems described above are impacting that many people yet (you know how the media likes to blow things out of proportion). But I do want to again warn people to the dangers of having an evil mortgage and suggest that they avoid them at all costs. Here's one example of how bad these loans can be:

The letters contain hypothetical examples of what lay ahead. One is a California homeowner making only minimum payments on a $402,000 loan. The current full interest rate on the loan is 7.6 percent, but the borrower has been paying just $1,348.47, far less than what's needed to fully amortize the mortgage over its 30-year term.  If the loan reset at today's rates, the full payment required would be $2,887.50 — more than double what the homeowner is currently paying.

The bottom line is that there is a reasonable, financially solid way to buy a house and if you follow it you should be fine almost no matter what the real estate environment is like. On the other hand, if you stretch yourself to the breaking point to buy a house you really can't afford, you will be the one broken when financial problems show up (which they almost always seem to do).

So, what should you do if you currently have one of these loans? Here are some suggestions:

Countrywide does offer advice to customers who want to prepare for resets in the coming year: They should either switch from the minimum and move to either a 15-year or 30-year standard amortization plan, switch to an interest-only option if full payments are not feasible to fend off still-higher principal debt balances, or explore alternative refinancing options sooner than later.

Greg McBride, a senior financial analyst at Bankrate.com advises exotic-loan holders to consider where they’ll be a year before their rate changes. “If you’re thinking that you’ll stay in your house longer than the four of five years you originally expected to, it’s time to refinance for a more appropriate loan.”

Long-term dwellers who started out with an exotic interest-only or pay-option ARM should take a look at fixed-rate mortgages, which are now at four-month lows, he said. “You’ll see a big payment increase but at least you’ll be certain that the payment will not change.”

Another option is to downsize to a more affordable home, especially if the current home was purchased three to four years ago. “You’re sitting on a nice chunk of equity that can give you some latitude to avoid payment shock,” said McBride.

In summary: Get out of a bad mortgage as soon as you can and get into a more solid, traditional mortgage.

For more of my thoughts on real estate and housing, see Best of Free Money Finance: Real Estate Posts.

Best of Free Money Finance: Real Estate Posts

Here's a list of what I consider to be some of the best real estate related posts here at Free Money Finance:

• My Formula for Buying a House

• 8 Cheap Places You'd Want to Live (And How to Find More)

• Don't Let a Bank Tell You How Much to Borrow for a Home

• How Much House Can I Afford?

• Increase Your Home's Value with Cheap Landscaping Tricks

• 3 Basic Rules for Hiring a Great Real Estate Agent

• Save on Property Taxes

• Six Ways to Cut Mortgage Costs

• Why Homeowners Get Rich and Renters Stay Poor

• What to Do in a Slow (and Slowing) Real Estate/Housing Market

• How to Set the Right Price When Selling Your Home

• 10 Cheap Fixes to Boost Your Home's Value

• When to Buy versus When to Rent

• The Richest Man in Babylon: Seven Cures for a Lean Purse Part 5, Make of Thy Dwelling a Profitable Investment

Homeowners Becoming Desperate to Sell -- Start Burying St. Joseph Statues All Over to Sell Homes

I think we're all aware that the U.S. real estate market is starting to cool down (though it's still too soon for real estate vultures to get a great deal). The only question remaining is -- how low will it go? Here's a piece from Money Central that details the decline. It starts with an example of a homeowner becoming desperate to sell. The details of this particular story are as follows:

Margot Ray, a radio-ad saleswoman in Stockton, Calif., put her five-bedroom, three-bath house on the market in February for $480,000.

There it sat, along with about 3,000 other homes for sale. She dropped the price to $465,000 in April. Nada.

In July, she had a brainstorm: Why not advertise on the radio? The ad put the house on the map. Now agents remember the address. The price is down to $427,000 and, at a recent open house where Ray raffled football tickets and a spa day, 15 groups of potential buyers showed up on a 107-degree day. But it still hasn't sold.

Ouch, that's a big hit. Down over $50,000 so far and no sign of a buyer. How low will prices go?

Yes, it's just one story, but this story is being repeated all across America. Oh, what a difference one year makes:

Was it only last summer that houses sold in a day, buyers were bidding up prices and sellers in some markets haggled down real-estate agents' commissions? Nationally, 39% more "existing" homes -- not new ones -- are on the market than last year this time.

This situation is forcing sellers to get creative:

In the toughest markets -- including the Florida cities, Detroit, Atlanta, Dallas, Stockton, Sacramento and San Diego -- incentive is the name of the game. One Florida agent offered a Mercedes-Benz with a house sale. Others dangle vacations or gift cards with thousands of dollars in gasoline.

I always thought a "buy this house and get a car free" offer would certainly get people's attention. Who knows -- it may end up that even this isn't enough and sellers will have to band together to offer "buy one get one free" deals on homes. Yikes!

Unfortunately, there are signs that the bad news is spreading:

In its report released Aug. 15, the National Association of Realtors reported that 26 of 151 metro areas experienced outright price declines in the March-June quarter. The biggest price drops in percentage terms were in Danville, Ill., where home prices fell by 11.2% in the spring compared with the spring of 2005, and the Detroit area, where home prices were down 8%. For condominiums, 1 in 4 metro areas reported a decline in prices.

And, for me, some information that hits very close to home (I live in Michigan):

Michigan, where automakers have laid off large numbers of middle-class workers, is one of the most difficult places to sell a home. The Detroit News reports a 43% increase in homes on the market since last year.

Good thing I'm not trying to sell my home right now. In fact, this news may even help my plan to make money on the real estate downturn. Though I'd still rather see our state doing better where house prices are concerned.

I'm also in a better position financially than most due to the financial principles I've followed (and talk about here on Free Money Finance):

People who bought recently and have little equity are in the most difficult situation, says Vince Rizzo, managing partner and broker for HungryAgents.com, a St. Louis-based referral service through which sellers negotiate with local agents for lower commissions. "There are so many people now that borrowed 95% or 100%, and with the market slipping back a little, and you have to pay 6% commission, you are going to have to bring money to the table," Rizzo says.

I have not bought recently, I have 100% equity in my house, and I don't have a risky loan of any sort.

Finally, if you are truly desperate to sell, there's the "tried and true" method of burying a statue of St. Joseph:

To some sellers, it can't hurt to enlist a little heavenly intercession. Myth has it that a statue of St. Joseph can be buried upside down in a property to enhance its chances for sale. The Charlotte, N.C.-based CatholicCompany.com sells a St. Joseph home sale kit, including statue, instructions and a prayer. It's a popular seller, says Les Teahl, customer service manager, but no more now than before.

Teahl and his wife recently got the kit to help sell their home in Charlotte. He recommends against burying it. Instead, he advises, put it in a place of honor, a spot like the corner of his home with an American flag, a big crucifix and photos from his son's wedding.

"We've had people do that and next day the house sold," Teahl says. "It's got a high success rate."

Oh, yeah, that's great financial advice -- for the guys selling the statues. ;-)

One way to avoid lots of the risks associated with buying real estate is to follow a great formula for buying a house. If you're one of the few buyers out there, I suggest you take this advice to heart as you look at potential homes.

Five Money Mistakes to Avoid

Here are five money mistakes we should all avoid according to personal finance author Suze Orman. She claims that these are moves that men are more inclined to make than women, so pay attention, guys (and don't turn away, ladies). Here goes:

1. Funding early retirement with a home equity line of credit.

2. Not paying off the mortgage early.

3. Neglecting to make a will.

4. Refusing to take the investing long view.

5. Assuming the role of the family's sole money manager.

Ha! Boy, has she got us pegged! ;-)

Here are my thoughts on each of these:

1. Does anyone really do this? What a crazy idea! How about the strange concept of funding early retirement with something like, say, savings? What a novel concept, huh?

2. Oh, yeah, she's talking my language now! If you buy the right house, you should be able to pay your mortgage off in 10 years at the most. So what's the issue?

3. Yep. No one wants to make a will (including me). But we have to. Just read Do Yourself (and Your Family) a Favor: Read This, then Do Something About It and see if you don't agree.

4. Many people want to get rich quick with a "hot" stock tip. Me? I'd rather get rich slowly -- investing in index funds and letting the power of time and the power of compounding work for me.

5. I do most of the money management in our family, though my wife and I have regular money meetings to make sure we're on the same financial page.

My Real Estate Investing Plan for the Housing Decline

I've previously noted that I hope to make some money (if the right situation presents itself) during the current/pending real estate price decline that many of the areas of the country are experiencing/about to experience. My part of the country is certainly impacted (in June of 2005 there were more than 8,800 homes listed with about 1,450 sold. This past June about 10,500 listed, but only 1,100 sold) and may present some "buying opportunities." Anyway, I thought I'd share my plans in this effort.

But before I start, let me say that what makes investing in real estate possible for me is that I have no debt and have saved a good amount of money over the past several years -- the kind of stuff I recommend on my posts here at Free Money Finance. So while tons of homeowners are scrambling to make their increased mortgage payments (as adjustable rates increase) on houses that are falling in value, I'm looking to make some money by buying a bargain or two. It's a good place to be.

Here's my plan specifically:

1. Track local housing prices. I plan to keep tabs on local pricing by looking online, in the paper, and keeping in touch with a few real estate agent friends.

2. If I can find a good property (good location, well-built, one that I wouldn't mind holding for a bit, etc.) at a great discount (off it's previous high as well as relative to the market -- this may mean finding a desperate buyer), I can snap it up by paying cash (I'd have to sell some investments, of course, but offering cash may help me negotiate an even lower price than I'd otherwise expect.)

3. I'd hold it for awhile, until the softness is gone, then sell (if I wanted to) or hold it even a bit longer. Eventually, there will be increased prices for good real estate in good locations and I should do just fine.

Of course, I realize that the right circumstance may never present itself, and if that's the case, I'm fine. I don't HAVE to buy something -- and I won't push to make it happen just to "do something." I'm cautious and willing to wait and will only move if the right circumstance presents itself.

How about you? Anyone else out there planning a similar strategy? If so, I'd love to hear what you're planning.

Slim Pickings for Real Estate Vultures -- So Far

I've said before that I hope to make some money off the housing slowdown. I have no debt and some cash on the sidelines, so if things get bad enough (or good enough, depending on how you look at it) I may buy a property or two -- if I can get a really, really good deal. Then, I'd be willing to sit on it for awhile, selling it a few years down the road for a decent profit (hopefully)

Well, the timing's not right for that -- yet. At least according to this Money piece that says there may be a real estate slowdown, but bargain hunters still aren't finding much to feast on. Their key thoughts:

As signs mount of a slowing real estate market, the "vultures" are beginning to circle. But home prices may still have to fall further to create the bargains they crave.

These savvy home buyers who "save their pennies, wait for bargains and then pounce" are already out and about in Manhattan, according to Leonard Steinberg, an executive vice president with Prudential Douglas Elliman.

I agree that it's way too early in the ball game to start buying. In fact, it's not even pre-determined that the housing market will fall enough to make it worth buying for investment purposes (prices may fall a little, then simply level off). But, there are signs that there may be some opportunity in the future:

Lee says that there could be some bargains soon in some once bubbly markets, such as South Florida. Another market that Lee identifies as ripe for a fall is the condo segment in the District of Columbia and its upscale suburbs. And he's eyeing California's Central Valley cities, including Bakersfield, Stockton and Modesto.

That's on the "pro" side of this "buy at the bottom" idea. The "con" side is:

"Besides," he says, "it's tricky. How do you know if you bought at the bottom? It's timing the market and, short-term, you can get burned."

That's true. Very true. I think the keys are knowledge, information and patience. You need to know your market very well, have the information to find great properties, then be patient enough to get a price that works for you. It's like value investing in stocks (or even Phil Town's idea of buying $1 for 50 cents.) ;-)

For me, there's another motivation besides making money. I wouldn't mind owning some land as well as a place a bit away from civilization. So if I find just the right place at just the right price, I won't mind holding on to it for a long, long time -- maybe forever.

8 Cheap Places You'd Want to Live (And How to Find More)

One of the money saving tips I'm recommended several times (and people seem to hate, BTW) is that if you're having a hard time making ends meet where you live, why not consider moving? It's an economic fact that a move from New York City, San Francisco, Boston and the like to, say, Indianapolis, can make a positive impact on your budget and net worth -- even if you have to take a pay cut when you move there. It's just that much cheaper to live in some places than others. Yes, larger cites offer more options, but do you really need to fork over all that money just so you can go see Pirates of the Caribbean at 3 am if you want to?

Here's a piece from MSN that suggests 8 cheap places you'd want to live. They suggest you look for a strong economy, a college and low crime in addition to a place being affordable. In addition, they added in an "X" factor:

But we were looking for something else -- that spark, that liveliness, that extra something that makes a city, however big or small, an interesting place to be. Because let's face it, there's still plenty of cheap real estate out there; the problem is that it's in places few people would want to live.

Using this criterion, here's what they recommend:

• Asheville, North Carolina: Cost-of-living index 90.7 (read: "9.3% cheaper than the average U.S. city")
• Austin, Texas: Cost-of-living index 90.6
• Boise, Idaho: Cost-of-living index 91.2
• Fayetteville, Arkansas: Cost-of-living index 88.2
• Minneapolis, Minnesota: Cost-of-living index 124.5 (24.5% more expensive than the average U.S. city)
• Nashua, New Hampshire: Cost-of-living index 117.7
• Olympia, Washington: Cost-of-living index 107.8
• Prescott, Arizona: Cost-of-living index 115.0

I know that some of these (the ones with cost-of-living indices over 100) are more expensive than the average U.S. city, but they're still way cheaper than some of the larger, expensive U.S. cities and thus represent a great savings.

For fun, I went to Sperling's Best Places and compared the cost-of-living indices for major U.S. cities to that of Minneapolis, Minnesota (the most expensive city above). Minneapolis's cost-of-living index looks like a major bargain compared to those of these cities:

• New York, NY: 172.3 (in other words, for you could earn $125k in Minneapolis and be as "wealthy" as someone earning $172k in NYC. Just think what you'd save if you moved to Austin!)
• San Francisco, CA: 207.7
• San Diego, CA: 157.3
• Boston, MA: 145.1
• Washington, D.C: 137.4

FYI, the most expensive cities in the U.S. are:

• Manhattan
• San Francisco
• Los Angeles
• San Jose
• Washington, D.C.

Ok, the data from one site to another is a bit off, but there are regulars at the top of any "most expensive city" list.

So let's say you like the idea of moving to a cheaper location, but don't like any of the suggestions above. What do you do? You simply follow MSN's suggestions for locating your own great place on the cheap. here's what they suggest:

• Look for a healthy economy.
• Try to avoid a place in the middle of a huge boom.
• Look for places on the outer fringes of metro areas.
• Seek out that college presence.
• Do some basic research.
• Get the local newspaper.
• Visit.

So if you're in the mood to save anywhere from 10% to 50% of your salary, you may want to consider this simple tip: move. Even if you want to stay in an expensive area, there are affordable, nearby alternatives (see the chart at the bottom of the page on this link).

Save Money and Increase Your Home's Value with a Carpet Steam Cleaner

A few days ago I posted on 10 Cheap Fixes to Boost Your Home's Value tip #7 was as follows:

Look underfoot. Carpeting is another detail that can quickly update a home and make it look cleaner. A professional carpet cleaning is an inexpensive investment, especially if your rugs are in good shape and are neutral colors.

I made the following comment on this point:

My wife steam cleans the carpet every year (something she spent a day doing last week) and it looks great (even with two kids in the house, though we don't have any pets).

A reader asked about this in the comments, saying:

"My wife steam cleans the carpet every year"

Curious how you do this. Do you rent a steamer or own one? Any recommendations? We occasionally hire a company that does a good job and they are reliable, but the cost prevents us from doing it as often as we'd like (which is pretty often with three kids and two dogs).

So, I asked my wife the particulars about our steamer and here's what she had to say:

1. We bought our steam cleaner four years ago for approximately $200 (she couldn't remember the exact price and I didn't want to track it down).

2. Since then, she's cleaned the carpets in the house four times (once a year) and has also used it for spot cleanings here and there.

3. She felt like buying her own cleaner was the way to go. The ones that can be rented are "nasty" in her opinion (she's seen them in pretty bad condition and thought they would add to the dirt in the carpet, if anything, versus actually cleaning it.)

4. The other option is to hire a company to come in and clean the carpets, but then we'd be looking at a couple hundred dollars for ONE cleaning.

5. The machine is like new and still has several years worth of use left in it, so she thinks it will be the best investment in the long term.

6. She used to use a "recommended" cleaning solution with it, but this year switched to a natural alternative (some mixture of vinegar and water). She said it cleaned well -- even picking up soap residue from last year's cleaning (you could see the soap bubbles in the machine).

7. The one thing she'd change about our model is the way it cleans stairs. The hose is too short to reach all the way up the stairs (we need to move it in mid-flight) and the cleaning attachment at the end of the hose is too small. If she was buying again, she would be sure the new machine had a better way to clean stairs (though she acknowledges that stairs will always be a pain no matter what machine you buy.)

8. In addition to our use of the machine, we've had friends use the cleaner a couple of times, so it's been nice to help them out. However, the last time it was used by a friend was a bit of a pain as they had pets and my wife had to clean pet hair out of the machine for an hour or so.

So that's it. Her opinion is that buying your own carpet steamer is a great investment as it saves money over the alternatives, gives you the flexibility of cleaning when you want, and helps keep your carpets looking good (ours are seven years old and they look brand new).