Things to Consider
How financial literacy can affect your kids' homeownership decisions
Many parents are now homeschooling their children for the foreseeable future, and it's virtually impossible to overstate the importance of literacy. The ability to read and write serves as the building blocks to ongoing education, and the earlier parents help their children learn their ABC's, the better off they're likely to be as they grow older.
Similarly as crucial is financial literacy. In many ways, it's the foundation to personal economic prosperity and can provide young people with the intellectual ammunition to make smart, well-informed money-related decisions in their teenage years and into adulthood, including choices that relate to homeownership.
However, based on the infrequency with which financial literacy is taught in many of the country's schools, many students lack the solid grounding they need to succeed. Take this homeschooling opportunity to teach your children basics of personal finance, from looking over a budget, to writing a check and balancing a checkbook.
In the United States at large, only public high schools in just five states - Missouri, Tennessee, Utah, Virginia and Alabama - require students to take personal finance courses, according to statistics compiled by Visual Capitalist. That's the equivalent of only 16% of students overall who must successfully complete personal finance-related curriculum to graduate, a rate that drops to a mere 8.6% when excluding the aforementioned states.
What does financial literacy mean?
As the National Financial Educators Council defines it, financial literacy is the ability to comprehend how money works, both in the macro sense - the world economy, for example - as well as the micro, such as being able to maintain a budget, write a check or understand how interest works.
But financial literacy goes well beyond these basic fundamentals. It also applies to saving. For example, while most Americans anticipate retiring at some point in their lives, their ability to actually do that is almost entirely dependent on building the economic resources they need to draw from to finance the costs of day-to-day living. According to polling conducted by Gallup, more than half of Americans in the workforce at the time of the poll believed they would be able to retire comfortably. Of these individuals, roughly 1 in 3 said they would rely on Social Security as a major source of income.
However, with the worker to beneficiary ratio at 2.8 to 1 - meaning around three people are paying into Social Security for every person drawing from it - most financial experts agree that retirees will not be able to live comfortably off of Social Security income alone.
Of course, well before determining when to retire are decisions about homeownership. For most people, buying a home is the biggest purchase they make in their lives, as the current median in the country overall stands at approximately $274,500, according to recent statistics available from the National Association of Realtors. Aside from the creature comforts that derive from buying a house, homeownership comes with a variety of short-term and long-term advantages. Chief among them is equity, meaning the valuation of a property. According to ATTOM Data Solutions, more than 14 million homeowners in the third quarter of 2019 in the U.S. were considered equity-rich. Being in a state of positive equity typically enables homeowners to sell their house for a higher selling price than they purchased it for and to apply for certain types of loan products, like home equity loans or home equity lines of credit (HELOC).
While most polls illustrate that young people want to become homeowners and take advantage of these perks, some of their financial decisions are preventing that from happening. For example, as a survey from Zillow showed, approximately 50% of Americans who currently rent are unable to purchase a home because of student loan debt. The same goes for 39% of buyers, meaning that unpaid tuition is delaying them from moving on from a starter home.
Of course, serious debt - which can come in many forms - isn't necessarily a function of poor financial literacy. Things happen over the course of a lifetime that can't be avoided, like medical emergencies and sudden job loss. Yet at the same time, a firm grounding in the fundamentals of money management can make overcoming life's adversities easier.
Financial literacy can also help individuals decide between whether they should rent an apartment or buy a home. According to estimates from Zillow, in the last decade, tenants spent a combined $4.5 trillion in monthly rent. To give this figure some context, that's a larger amount than the gross domestic product of Germany and the market value of Alphabet - which owns Google - Apple, Microsoft and Amazon - combined!
Because there are no down payments or ongoing maintenance costs that come with renting, it can seem like it makes the most sense from a cost perspective. More often than not, though, buying a home is the better bargain. Indeed, as ATTOM Data Solutions found, it's cheaper to purchase a three-bedroom house than a three-bedroom unit in more than half of the country, or in 455 of the 855 counties that were analyzed.
Todd Teta, chief product officer at ATTOM Data Solutions, said that even though sticker prices are higher these days, homeownership beats renting in the lion's share of the U.S.
"Owning a home can still be the more affordable option, even as prices keep rising," Teta explained.
Given the importance of financial literacy, you may be wondering what you as a parent or guardian can do to improve your children's understanding of money and how they manage it. Here are a few suggestions, as recommended by the Financial Industry Regulatory Authority:
Consult with your child's school
Depending on their age, your kids spent much of their day within the four walls of a classroom, learning about math, science, history and the like. But what, specifically, are they learning about as it pertains to finances? You may want to ask about that the next time you connect with their teacher(s). If the school isn't adopting some of the lessons you'd like them to, consider reaching out to the school board or PTA to see what can be done to include more financial literacy-related material in the curriculum.
Talk to your kids about money
How you interact with your children in terms of their ongoing education will play a key role in their interests as they grow and develop. Depending on their age, you should talk to them about the value of a dollar and introduce concepts that they'll be able to understand. For instance, if they're in junior high, you may want to discuss the principles of saving, investing, or how interest works for financial products like credit cards or savings accounts. If they're in high school, you may want to introduce slightly more complicated concepts like what a mortgage is or how credit works.
Show them a credit report
Credit, in many ways, is the financial equivalent of your reputation. And a credit report allows lenders to see how effective you are with money management. Your kids may not know how credit works or how to interpret a credit report, so consider showing them one. Again, how in depth you go will largely depend on their age, but it never hurts to provide them with some of the basics, like how credit scores are determined. FICO® has some helpful resources, blogs, charts and short videos available at its website.
Much like a well-built house, your children's ability to learn and grow depends on a solid foundation. You can lay down the necessary groundwork by making their financial literacy a priority.
Things to Consider
Pay less in taxes with this deduction for new homeowners
Whether you have someone file them for you or you do it every year on your own, the tax return process is something that most people don't particularly look forward to. There are plenty of other things you'd rather do, as it takes time and effort just gathering all your documents - never mind the computations and manual input. And if you itemize, tax preparation is a whole lot longer. It's part of the reason why the chore is put off until the last minute - sometimes literally!
However, there's some pretty good news to report on the tax filing front, as a highly popular deduction that was originally introduced in 2007 - and rescinded - is back. Taking advantage of it can help reduce your taxable income and potentially add to your refund.
If you're unfamiliar with the mortgage insurance premium deduction, here's a little bit more about its history and the finer details so you can determine if you're eligible:
What exactly is the mortgage insurance premium deduction?
Passed by Congress in 2007 and signed into law by then President George W. Bush shortly thereafter, the mortgage insurance premium deduction allows homeowners who have a mortgage insurance policy out on their home to use those funds as a tax write-off, thus reducing the cost of homeownership. Originally included in the Tax Relief and Health Care Act, this deduction has been extended several times by lawmakers over the years, largely because of its popularity and the fact that so many people have mortgage insurance, which is generally required for those with FHA loans or who make down payments that are below 20% of a property's purchase price.
Based on the most recent statistics available from the National Realtors Association, the current down payment average among first-time homebuyers is 7%. It's more than double that - 16% - for those who have bought residential real estate previously. In 2017, an estimated 2.2 million homeowners across the country took advantage of the mortgage insurance premium tax deduction, which has slashed an average of between $1,000 and $1,550 off their taxable income, according to estimates from U.S. Mortgage Insurers.
For whatever reason, lawmakers decided not to extend the deduction beyond 2017 when it came to a vote and has sat dormant since. However, thanks to its reintroduction by California Rep. Julia Brownley and enthusiastic support of legislators on both sides of the political aisle, the mortgage insurance premium deduction has returned - much to the delight of homeowners and housing authorities.
"Mortgage insurance has helped millions of middle income Americans become homeowners and for nearly 10 years, the tax deductibility of MI premiums has helped to reduce the cost of homeownership," USMI President and Executive Director Lindsey Johnson explained, shortly after the extension was made official. "In a bipartisan manner, our elected lawmakers in Congress demonstrated today their commitment toward helping low down payment first time homebuyers by keeping mortgage insurance tax deductible."
Cost of homeownership still an issue
Affordability of homes has been an ongoing problem for the past several years, largely due to the balance between supply and demand, as builders can't quite keep up with the pace at which people are buying. In December, for instance, purchase activity for existing homes rose 3.6%, according to NAR data. This contributed to the 14.6% dip in total housing inventory, which now stands at three months as of the end of December, at the current sales pace. Additionally, for the 94th month in a row, median existing-home prices across the U.S. climbed, with the typical property selling for $274,500.
Every extra dollar saved helps, and supporters of the mortgage insurance premium tax deduction are hopeful that its return will provide extra breathing room for new, repeat and would-be buyers.
How to determine if you're eligible
The mortgage insurance premium tax deduction is much like most others in the tax code - certain restrictions apply. It's designed for middle-class families, specifically those whose annual income before taxes is less than $100,000. Given the typical American household earns a yearly salary of $63,179, according to the latest figures published by the U.S. Census Bureau, the vast majority of homeowners in the U.S. should be able to take advantage of this deduction if they so choose. Roughly 40% of borrowers with mortgage insurance earn a salary of $75,000 or less, based on USMI calculations.
Another caveat of the mortgage insurance premium deduction when it comes to eligibility is when you actually first bought the house you currently reside in. Given the original deduction wasn't in the tax code until the late 2000s, the tax break only applies to those who applied and were approved for a home loan by Jan. 1, 2007 and afterward.
But let's say that you bought a house in 2018, which was one of the rare years in which the mortgage insurance premium deduction wasn't in effect. Does that mean you're out of luck? To the contrary. The IRS generally allows you to amend your tax return retroactively for the past three years that you filed. This means that you should be able to take advantage of it well after the fact.
How you can go about claiming the deduction
Although tax filing is increasingly paperless, the same can't be said for forms - there are loads of them. To claim the mortgage insurance premium deduction, you'll need Form 1098. If you haven't already received this from your lender, be sure to ask them for it, as you'll need it to enter the appropriate data. As noted by The Balance, what you actually spent in mortgage insurance premiums can usually be found in Box 4 and reportable on line 13 of Schedule A. If you're doing your own tax preparation with a software program, be sure to itemize rather than using the standard deduction method.
As Tax Day fast approaches, you should consult a tax advisor for further information regarding the deductibility of the mortgage insurance premium. Thus, ensuring you can take advantage of the deduction allowing you to fully realize the ongoing benefits that derive from your wise investment
Things to Consider
Non-rate reasons for refinancing your mortgage
When it comes to the very latest in residential real estate events, stories that tend to make the news are usually related to asking prices, and the availability of homes for first-time or move-up buyers. But another newsmaker is the state of interest rates, which fell rather sharply in 2018.
The general rule of thumb is if you can lower your interest rate by 0.5% or more, refinancing is worthwhile by virtue of helping you save potentially thousands of dollars over the life of the loan. However, a low-interest rate environment is not the sole reason why refinancing can be a smart move. Here are a few other reasons why it can be worth the time and effort:
Reduce the loan's term
Generally speaking, there are two options you can choose from when it comes to how long you intend to pay off your home loan: 15 and 30 years. Overwhelmingly, the most common choice is 30 years. However, with the economy in bull territory, salaries increasing, job availability outnumbering those looking for work and the national unemployment rate as low as it's been in over half a century, you may be in a better position to pay more per on a per-month basis. The upshot here is, you'll be able to pay off the entirety of the loan more quickly and ultimately pay less than you would with a 30-year mortgage.
You can find out exactly how much you stand to spend per month by changing to a 15-year term length - and how much you'll save - with a mortgage calculator.
Switch from FRM to ARM
Just as you typically have two choices of terms, you also have dual options for the type of interest rate: Fixed Rate Mortgage (FRM) or Adjustable Rate Mortgage (ARM). Fixed is the most common choice because it provides borrowers with the predictability they need to make the appropriate adjustment with their budget and how much they can expect to spend.
However, depending on how long you've owned your residence, your circumstances may have changed, making an adjustable-rate mortgage a better option. For example, if you're thinking about moving in a few years - which you may not have considered when you first applied for a mortgage - an ARM may be a wiser option, in part because rates at the outset may be lower than they are with fixed.
Alternatively, if you no longer plan on relocating, switching to fixed with rates where they are now can help keep your monthly payments in historically low territory so you never have to worry about the impact rising rates will have on your wallet when - not if - they do climb.
Tap into home equity
It's said that real estate is one of the best investments you can make. This is largely due to the direction of home prices, as they've risen consistently on a year-over-year basis for 92 months in a row, according to the most recent figures available from the National Association of Realtors. Similarly, home equity levels have also surged. In the third quarter of 2018, over 54 million homes were equity-rich, according to estimates from ATTOM Data Solutions. That's the equivalent of more than 1 in 4 homeowners. Meanwhile, just 3.5 million mortgages were underwater.
Tapping into the equity your home has built up can provide you with more options when it comes to decisions that cost money. For example, if you want to refurbish your kitchen, bathroom or dining room, cashing out can supply you with the funds necessary to pay for the equipment and labor involved. You may also want to use the proceeds to purchase a business or make a down payment on an investment property. All this can be done by refinancing.
Forego mortgage insurance
Many people are under the assumption that they have to make a 20% down payment in order to buy a house. In reality, you can buy a house with as little as 3.5% down, and if you're a veteran or active duty member of the military, or purchase in a designated area, you may not need a down payment at all.
Perhaps the main reason why this 20% down requirement myth has persisted is due to mortgage insurance. If you put down less than 20% of the house's listed price, mortgage insurance is generally required so the lender can be made whole if the borrower defaults.
If you're someone that currently has mortgage insurance and you want to avoid paying the premiums associated with keeping the policy current, you may be able to eliminate it by refinancing into a conventional mortgage. Since more properties these days are equity-rich, you may have the 20% equity that is necessary to waive mortgage insurance.
There's a caveat
As you can see, the reasons why refinancing can make a lot of sense aside from taking advantage of historically low mortgage rates run the gamut. However, just because a variety of other scenarios exist does not necessarily mean that you should - or will even be able to.
Whether you should or not depends on your goals first and foremost. If you don't know or they're still a work in progress, avoid refinancing until you're sure of the path forward. You may want to speak with a financial advisor for some direction. A loan officer may also be able to help you to chart out a strategy for real estate investing decisions.
The other thing to be mindful of is refinancing qualification. Refinancing a mortgage is just like a purchase mortgage, in that you need to have the appropriate qualifications in order to be eligible. Some of the things your lender will look at are your income, your loan-to-value ratio, credit history and FICO® score. Talk to your lender about the documentation necessary to refinance. Much of the material you'll need is similar to what's required in order to pre-qualify.
Talk to your lender for more news and information on refinancing and whether you're in a situation that makes you an ideal candidate.
Things to Consider
Buying a house next year? Here's how to prepare:
The years seem to be flying by with increasing speed, and it's safe to say that 2019 was no different. Did you get everything done you wanted? What do you plan on doing in the new year? If buying a house is on your 2020 to-do list, now's the time to prepare.
Years may be measured in months, hours, minutes and seconds, but they're also measured in moments, and 2019 was a rather momentous one within the housing market. While home prices continued to rise on a year-over-year basis - for more than 90 straight months now, according to the National Association of Realtors - builders made some solid gains in improving supply levels throughout much of the country. This results in price increases slowing down, which allows buyers - many of whom are earning appreciably more thanks to steadily rising incomes - a chance to catch up.
Plus, with housing starts jumping nearly 14% in October, based on estimates from the National Association of Builders, remarkable growth in inventory could make 2020 the first year in quite some time that asking prices slide. In short, if you're on a budget, next year just may be the perfect time to start seriously looking for a house, whether it's your very first or likely the last.
How do you prepare now so you're ready later? Here are a few suggestions:
Attend open houses
Even though actually making an offer on a home may not happen for several more months, think about attending open houses you see advertised. Pictures and descriptions in online listings are great, but they don't give you the full story on what a house looks and feels like. Take some time to go to as many as possible so you can get a sense of what homes or condominiums are selling for. These visits can also provide added context on the exterior and interior housing features you'd like in your soon-to-be home and those that are turn-offs.
Get your finances in order
If you do anything in the next several months to prepare, make it this one. Once you gain pre-approval for a mortgage, you'll have the flexibility and understanding of how much you can afford to spend, which can help you narrow down your search. But in order to obtain such a letter, your lender will need to assess how you're doing financially. Depending on how imminently you plan on entering the market, try to avoid any major purchases if you can. Also, see if you can raise your credit score by paying off bills prior to their due date and keeping any credit card balances low.
Write your representative or senator
As the NAHB points out, there's no silver bullet to housing affordability. Lowering asking prices will take a united effort, from the consumer public, the business community as well as the government. One way of going about this is by lawmakers reducing red tape. Did you know that 25% of the cost for housing construction is attributable to regulatory requirements? To make it cheaper for builders to develop, Congress will need to act. Send a letter to your representative, urging them to support legislation that helps to lower the cost of development. The savings may be passed on to you.
Write a persuasive letter
Bidding wars can be stressful and they typically end in favor of the one who offers the most money. That's not always the case, though. You may want to think about writing a letter that explains why you're the right person for a house. Sellers do take more into account than dollar signs when evaluating offers. Your letter just may win them over.
Happy New Year and best of luck in all your homeownership endeavors in the days and months ahead!
Things to Consider
Instead of working for your money, wouldn't it be great if your money worked for you?
It can when you start investing.
From precious metals to mutual funds, high-yield savings accounts to treasury securities, there are lots of potential options. Whichever you choose, one overarching rule is key: Invest in what appreciates - it can build net worth.
This is one of the main reasons why a number of financial experts consider buying real estate to be a smart decision. The numbers don't lie. For instance, in July - the most recent month for which complete data is available - the median existing-home price in the U.S. was $269,300, according to the National Association of Realtors. Not only was this total up more than 4% from the previous year, but it represented the 89th consecutive month of year-over-year growth.
Whether it's something done on the side or a potential career pursuit, the amount of time and money you devote to investing in real estate is up to you.
Before we get into the specifics, it's helpful to understand the types of real estate investments that are available. As you might imagine, investment property options are endless.
Financial experts often suggest that before buying investment properties, you should start out small by paying off your home. If nothing else, doing so provides a certain sense of comfort, control and security for your family, knowing they will always have a place to call home.
However, should you decide to sell - perhaps when the kids move out or upon retirement - you should be able to make back what you spent; the dollar amount can vary considerably depending on market conditions and supply and demand.
There are several different roles rental property owners can assume. Perhaps the most basic is landlord.
Renters pay the monthly rate and in return receive shelter. But a landlord's role typically goes above and beyond providing tenants with a place to stay. They often also take care of the ongoing maintenance and repair needs that may develop, such as a leaky faucet, broken window or clogged drain. They may also pay for certain utilities as part of the rental agreement with the landlord. In short, the amount of time rental investment property owners devote to this type of real estate can be considerable and may not be the best choice for those looking for a short-term investment vehicle.
Similar to residential landlords, office building property owners are charged with addressing various maintenance and incidentals that companies may run into from time to time, whether they're relatively simple or complicated and costly.
Because office units tend to be larger than residential apartment units, the rental prices are generally higher. And with more space typically comes more responsibility. Furthermore, if you own an office in a high-rise development where other businesses are located, you may be required to abide by certain policies dictated by the state or whomever owns the building itself.
If you ever watch the DIY Channel or HGTV, then you probably have a good idea of what house flipping is all about. These types of investment properties may be in a state of disrepair when they're first purchased. The buyer commits to renovating the place and then "flips" it to another buyer who may want to use it to live in or as a vacation property. The goal of house flipping is to turn a profit by creating more value than what was spent on the initial purchase and renovations.
Home flipping is quite popular nowadays. According to the most recent figures available from ATTOM Data Solutions, an estimated 59,876 single-family units and condominiums were flipped between April and June. That's an increase of 12.4% from the first quarter. On a percentage basis, this means that of all the homes sold during this period in the U.S., close to 6% were flips.
Those who rehabbed them wound up making a profit, grossing an average $62,700, ATTOM Data Solutions found.
That said, it's important to understand that those who flip houses don't always make money. The cost of renovation may be more than originally estimated or market fluctuations may cause the price of the house to drop below what was spent to buy it in its original form. Financial experts as a result may not point to house flipping as a vehicle for investing in real estate.
Investment advisors questioned about how to start investing in real estate may point to REITs as a good launching point, because it enables people to work with those who are already in the real estate market. Additionally REITs may come tax free, provided the income earned goes to shareholders as dividends, as noted by Bankrate.com.
As with virtually all investments, there are some risks with REITs. Their value may decline depending on economic and real estate market forces. Additionally, you may not have authority to make further investment decisions with the property, especially if it is privately held (as opposed to publicly traded).
This may be a sound investment strategy for those who are looking to invest on a short-term basis or are skilled in house flipping. As noted by Auction.com, the benefits of house hacking include improving cash flow and building your investment portfolio, meaning that it can be a smart area to get your feet wet.
Much like apartment unit or office building landlords, they also serve in retail property capacities and are charged with the same maintenance-related responsibilities, although the nature or frequency of these tasks may be different. For example, because retail locations host potentially tens of thousands of people in a given week - and millions in a year - repair issues may be more common than at an office building that sees the same number of people from week to week.
Another difference may be in how retail property investment owners are compensated by the companies renting them out. As The Balance noted, in addition to a base rent, they may also be paid on a percentage-of-sales basis, as the retailer may have the added advantage of the property being highly visible or in a busy part of the city or town. In some cases, greater customer traffic may lead to better sales compared to a location that's hidden or out of view.
Believe it or not, that's just the beginning when real estate investment opportunities, as warehouses, mixed-use, industrial and vacation properties are a few others. So when you're considering how to start investing in real estate, your first task is determining which one to choose. No one can answer that question but you, although you may want to talk with a trusted financial advisor for further guidance.
Here are some additional pointers for how to start investing in real estate and what's important to keep in mind:
Get a handle on your finances
As previously stated, every investment contains some level of risk. The key is to reduce as much of it as possible so surprises aren't too jarring.
The best way to ensure that is by smart money management. According to data compiled by The Wall Street Journal, consumer debt reached over $4 trillion in 2019, which doesn't include mortgages. There's nothing necessarily wrong with having debt, but before investing in something as big as real estate, you should know how you'll pay debt off. Whether that's by refinancing interest rates, saving more or increasing cash flow by working a second job, being financially stable is key to smart real estate investing.
Reflect on why you want to invest in real estate to begin with. Is it to generate some additional cash flow as a second job? Is it to raise money to help put your soon-to-be high school graduate through college? Or is this something that you see yourself doing for the long term because you've always had an interest in it? Whatever it is, be as specific as possible about what you'd like to get out of buying real estate. It can help you determine how much time and money you'd like to put in.
Start out small
A common mistake that many people make upon entering the real estate market is biting off more than they can chew. This is a potentially highly lucrative investment when you get it right, so it can be really exciting to begin big. It's best, however, to take it slow by first paying off your house. Once you've done that, talk to friends, co-workers or loved ones who have real estate investments. You're almost guaranteed to find that they too started out slowly by first buying a share in a REIT or a single apartment unit. As you build income and experience, you can then decide if you want to take things a bit further.
Read, read and read some more
There are hundreds and hundreds of resources on real estate investing, so many that you may have a hard time deciding which ones to choose. In this case, the more you read, the better off and more informed you're likely to be. If you're not sure where to begin, consider speaking with a real estate agent or a real estate investor. They should be able to list off some books that were helpful for them.
Do your homework
Although this may sound similar to the tip about reading as much as you can, doing your research is slightly different. Real estate is a highly fluid medium. What may be the norm in one geographical region may be different in another, particularly with prices. As mentioned earlier, the goal in real estate investing is to place your money in properties that appreciate. This may be a function of where you live. In July 2019, for example, the median price for an existing home in the Northeast was $305,800 - well above the national median, according to NAR data. In the Midwest during the same month, the price was $226,300.
The price difference is partially attributable to the amount of people that live in these respective parts of the country as well as availability of houses to sell. Regardless of where you live, do your research into price trends for single-family or multi-family units, which you should be able to find at websites like the National Association of Realtors or the National Association of Home Builders. It can give you some added confidence and understanding of the direction of prices and in what types of houses (e.g. condominiums, townhouses, single-family, multi-family, etc.).
Run the numbers
In addition to the purchase price of the property itself, there are other costs, such as property taxes, homeowners insurance, mortgage insurance (if you're putting less than 20% down as a down payment) and maintenance-related expenses, which can be unpredictable. Make out a list of the costs involved. Then, pair it with what you'd earn monthly from tenants' monthly rent payments. If the profit outweighs your costs, you're golden.
When you do it right and you come prepared, investing in real estate may be the smartest move you'll ever make. And it can be quite rewarding to boot. If you feel like you're ready to get started, then jump on in - the water's fine.