From how to save for a home to how to sell one you can no longer afford, Suze Orman explains everything you need to know about some of the biggest investments you'll ever make.
Affording a Home
Q: My husband and I are in our early 30s, and after living expenses and debt payments, we have $1,500 left over each month. Our plan is to put this first toward credit cards (we owe $6,000) and then toward an emergency fund. Once we're out of credit card debt and have savings in place, should we put that $1,500 toward the $175,000 we owe in student loans? We'd like to save to buy a home—is that a financial no-no until we're completely debt-free?
A: Wow, your combined student loans are more than the median price for a home these days (about $172,000). You already have a huge mortgage, but it bought both of you a college degree, not a home.
Before we talk about those college loans, I want to applaud your paying down credit cards and building an emergency fund. You are speaking my language, girlfriend. The only tweak I'd offer is to split the extra $1,500 between debt and savings each month. You'll still have your credit cards paid off in about eight months, and starting a safety cushion can't wait.
Now let's talk about your plan's next phase. The four-year limit on undergraduate federal Stafford loans for dependent students is $31,000, so I'm guessing you have private student loans. I want you to focus on paying those down, even if it means delaying the home purchase for a few years.
One problem with private loans is they typically have a variable interest rate. Right now interest rates are very low. But with $175,000 in debt, you will be making payments for a long time, and eventually rates will rise. With these loans, you also need to be vigilant about making timely payments; as with credit cards, one late payment is the only excuse a lender needs to jack up the rate.
Your college debt will play a big role in whether you even qualify for a mortgage, and in the loan terms. One of the most important factors banks consider is your debt-to-income ratio. As a general rule, they don't want housing payments to be more than 28 percent of your gross monthly pay, and a mortgage shouldn't bring total debt to more than 36 percent. Estimate what your mortgage payment might be for a home in your area, then add that to what you pay each month for student loans and any other debt. If that figure is higher than 36 percent of your monthly salary, you know that decreasing your debts is the necessary first step before you focus on buying a home.
Keep Reading: Should you buy a house, or go for a condo?
Q: My husband and I owe $300,000 on our house (valued at $900,000), but that is our only debt. We have about $40,000 in mutual funds, so we have some emergency money, but our retirement account is only fair. Our annual income is about $325,000, and my husband will receive a $30,000 bonus at the end of the year. Should we pay our mortgage with it, invest in annuities or buy a resort property?
A: I'm confused. You and your husband make more than $300,000 a year and yet you have only $40,000 in mutual funds and a "fair" retirement account. What's up with that? It sounds like you do not have a handle on spending.
The money you have in mutual funds is not an emergency fund; it's an investment. Markets go up and down, and your $40,000 can become $30,000 before you know it. An emergency fund is money kept in a federally insured credit union or savings account; it is invested in safe deposits that do not fluctuate in value. You need to figure out where all your money is going and make sure you have eight months' worth of living expenses in an emergency fund. You need to pay off the current mortgage and boost your 401(k) and IRA contributions before you even think about buying a vacation home.
Keep Reading: Suze explains how to calculate what kind of a home you can afford to buy
Q: During the market boom, I locked into two adjustable-rate home loans that I can hardly handle now. I'm a single 34-year-old woman with a job that pays well, but I can't count on a raise, and I'm bringing in just enough to cover the mortgages and my living expenses. I'm looking for someone to rent a room for the extra income. In the meantime, do I ride this out and hope that the housing market makes an upturn, try to sell the place now, or what?
A: Hope is not a sound housing strategy. I still think real estate is a solid long-term investment—but only if you can afford what you bought. Let's be realistic about your situation. It's better to get out on your own terms than to be pushed into foreclosure because you were waiting for your luck to turn. It seems you were seduced, like so many buyers during the boom, into financing your home with two loans: a primary mortgage and a second mortgage that covered some or all of your down payment. The fact that both loans are adjustable is a huge concern. It sounds as though you've already been hit with one rate adjustment that boosted your costs, and another reset could happen relatively soon. You already feel pinched, but realize that things can still get worse.
If you can get rid of the property at a price that covers your mortgage cost and the 5 or 6 percent commission you will owe your real estate agent, sell and consider yourself lucky. You would be getting out relatively unscathed. Then you can move into a rental and start saving for a down payment so that, next time, you can buy with one standard loan. But if the price you can get today is less than what you owe on the mortgage, talk to your lender as soon as possible. The worst time to ask for leniency is after you're already behind on payments. You may be able to negotiate a deal where you lock into two fixed-rate loans at a better rate than your adjustables. If that doesn't pan out, ask about a short sale: You unload the house for the best price you can get, and the lender forgives the difference between what you owe and the sale price of the home in today's market. But lenders aren't exactly excited to take a loss, and even if they do agree to a short sale, you may have to pay tax on the forgiven amount. Learn more at HousingEducation.org, a terrific resource with plenty of useful information about home ownership.
Keep Reading: The basics of getting a mortgage
Next: When is moving a good idea?
Q: I am a divorced, self-employed 56-year-old. I own a home with at least $350,000 in equity even in this slow market, and I have $100,000 in savings and zero debt. But I'm the definition of house poor: All my disposable income goes into maintaining my property. The cost of living is so high in my area that a decent income still leaves me with little left over. There's got to be a smart way to leverage my assets. How do I summon the courage to make the bold move of moving to the country?
A: I'm thrilled that you have no debt, and your home equity is a great asset. But be aware that only the first $250,000 in capital gains from a home sale is tax-free ($500,000 for couples). Earnings beyond $250,000 will be subject to a federal capital gains tax of up to 15 percent. Additionally, the home must be your primary residence, and you can claim the full exclusion only if you lived in it for at least two of the past five years. So you need to calculate what your net after-tax profit would be from selling, then figure out the price of living in the country. Remember, even dream houses come with utilities and property taxes, so be sure your move would sharply reduce your monthly living costs.
So often we approach decisions as all or nothing. How about a little of both? Can you move and continue to work with your current clients? That's important because your $100,000 isn't enough for a comfortable retirement. I want you to make it a goal to put away at least $10,000 a year until you're 65. With those savings plus what you've already got, you could have a $350,000 nest egg by the time you're 65. That's a decent sum, and Social Security should provide more income.
Q: When we moved into our neighborhood in Detroit, it was a nice working-class area—a safe place to raise our kids. Now they're grown, my husband and I are both 64 and retired, and the neighborhood has gone downhill. We own the home outright and aren't sure what to do next. Buy a new house and rent out our current one? We wouldn't get much for it. Are we better off staying put?
A: Sometimes moving on is the only way to move forward. I can imagine your frustration watching the place where your kids grew up unravel over the years. But the only reason to stay put would be that you think the area will have a renaissance. Let's hope so! Right now, though, you have to step back and assess the facts. If there are lots of foreclosures around, you're likely looking at years, not months, before prices climb back to a level where you can sell at a profit; it will take time for the backlog of bank-owned foreclosed homes to be put on the market and then sold. As for the renting option: Do you think, considering the neighborhood's current state, you can attract responsible tenants who would pay enough to cover your property tax and maintenance charges? Even if you could, do you really want to be a landlord? Don't forget you'd still have to deal with the upkeep of the home. Getting "not much" today—even if that means downsizing to a smaller place in a better area—may well be worth the freedom from waiting and hoping for a turnaround.
Paying for Repairs
Q: I'm retired and would like to downsize, but my home needs repairs. Should I get a reverse mortgage to fix it up?
A: Absolutely not. A reverse mortgage is far too expensive to make sense for you. Up-front fees can eat up nearly 10 percent of the mortgage amount, and while a new type of reverse mortgage insured by the FHA reduces those fees, the ongoing insurance costs embedded in reverse mortgages make them a poor choice for a short-term loan. (To learn more, visit ReverseMortgage.org.)
A real estate agent who has experience marketing fixer-uppers can explain your options. Depending on your market and the repairs your house needs, you may be better off selling it as is. At the very least, an agent can tell you what repairs to focus on to make your home salable at a solid price.
If you do decide to take on the repairs, and your intention is to get the work done and sell shortly thereafter, a home equity line of credit (HELOC) could be your best move—if you're careful. First, don't borrow more than 20 percent of your home's value. Second, know that even if you qualify for a low interest rate—which is likely if you have all or most of your mortgage paid off—HELOC interest rates are variable, meaning they rise and fall. So use a HELOC only if your intention is to sell within a year; I don't anticipate rates will rise dramatically in the short term.
Keep Reading: How to save for home fix-ups
Dealing with Foreclosure
Q: My husband and I purchased our first home by taking out two mortgages on it. Within six months, the house went into foreclosure because we couldn't cover the larger mortgage. We have negotiated with the lender of the smaller loan to pay back the principal with a 3 percent interest rate over 10 years. It sickens me to think that we're paying off a house we no longer own. I'm wondering if we should declare bankruptcy. What's your opinion?
A: I think it's important—and fair—that you repay the small loan. You signed those documents in good faith, so it's only right that you take responsibility for what you borrowed. The fact that the lender is charging you 3 percent interest sounds like you're being given an opportunity to make good. Bankruptcy is a very serious process that's meant to address situations in which individuals have no way of meeting their obligations—it isn't an out for when you don't feel like paying up. Besides, bankruptcy laws were tightened in 2005; even if you did file, chances are you would be pushed into Chapter 13, and a judge would probably require you to follow a repayment plan.
The other thing you need to think about is your credit profile. You say that your goal is to eventually buy another home, which you will no doubt need to finance with a mortgage. While the foreclosure on the primary loan is going to remain on your credit report for up to seven years, at least you won't have two of them on your record. Bankruptcy stays on your report up to 10 years. There's no formula for determining exactly how much each ding hurts your record, but bankruptcy is worse than foreclosure. Any lender willing to take a risk on you after you've gone bankrupt is going to charge a much higher interest rate than it would for someone with a solid credit score. Finishing off that loan is the best thing you can do to show future lenders that you can be trusted.
Keep Reading: Why foreclosure is not always the best way to start over
Next: Everything you need to know about breaking up
Q: I am recently divorced. My ex-husband and I still own a home, which we are trying to sell. The house has been on the market for 18 months. My ex says he can't afford to keep paying the mortgage, and neither can I. We have no other options besides a short sale or foreclosure, but I don't want to ruin my credit. I have no savings and no family to help me. What should I do?
A: I appreciate how hard it is to contemplate a short sale or foreclosure, but it's also important to face reality and do what is right for you over the long term. If that means losing the house, then that's what needs to happen. But before we get there, I want you to contact your lender and see if there is any chance you may be eligible for a "mortgage modification" to reduce your current payment. Many lenders are now willing to help borrowers stay in their homes by reducing interest rates, extending the number of years left on the loan, or possibly reducing the amount of money that they owe. Modifications are not easy to score, due to a variety of market and administrative issues. But I recommend that you try. Another option is to take in a boarder to cover some costs.
If you can't work out a modification that makes the payment affordable, then it is time to let go of the house. Be strong. The sooner you make the decision, the sooner you can begin to move forward. It is true that a foreclosure or short sale stays on your credit report for seven years, but that doesn't mean you are doomed. With each passing year, its impact on your credit score lessens as it's given less weight in calculating your creditworthiness. You have a long life ahead of you; get past the challenges of today, and you'll be closer to reaching the happiness you deserve. I know you can do it.
Keep Reading: How to deal with your debt after foreclosure
Breakup Real Estate 101
Q: My boyfriend and I bought a house together several years ago. Pretty quickly, I learned that he wasn't the person I wanted to progress with in life. I tried to convince him that we should put the house up for sale, but he wouldn't budge. He didn't want to end the relationship. I moved out and am renting an apartment. I've asked him to buy me out, but he says he doesn't have the cash. Though I paid for half the new furniture, I don't even care about it. I just want to end this co-ownership and get on with my life, and I think he should do the same. I haven't actually said those words to him because I thought he would have decided to sell by now. What rights do I have?
A: It seems that your ex isn't ready to be your ex. He thinks that keeping the home is a way of keeping you connected to him. You say you tried to convince him to put the house up for sale. Sounds to me as if you were merely asking or suggesting. That was a nice way to start, but now it's time to get serious.
You don't need his permission to sell the house. As co-owner you have a right to bring what's called a partition action in court. This is a legal process by which the co-owner of a property files a lawsuit against the other owner to force a sale and divide the profits. Let's see if you can get him to agree to unload the house without having to take this step. Often just the threat of an expensive legal battle is enough to get the other party onboard.
But that means you need to be firm about telling him what you want. I get the impression that you're finding it hard to articulate your needs. He senses that, so he's free to do and say whatever he wants. You have to be strong and lay out exactly what has to happen. If he still doesn't budge, hire a lawyer who specializes in real estate litigation and let her take it from there.
Q: I purchased a time-share with my boyfriend in 2005, putting both our names on the deed. Two months later, we split up on bad terms. He hasn't paid any of the $10,600 he owes; I've been the one making the mortgage installments. Financially, I know the legal process may not be worth it, but morally, I feel he needs to fulfill his end of the bargain. He's frequently tried to use the time-share, which is now in default due to my inability to pay. What do you suggest I do?
A: Your opinion of your ex-boyfriend's moral obligation doesn't matter right now. For two years, he's made it clear that he doesn't share your sense of duty, and you simply don't have time to try to convince him to own up to his share of the responsibility.
With the mortgage in default, you're heading into dangerous waters. Your credit is going to be ruined, and you could be pushed into bankruptcy. It's time to unload both the time-share and this loser from your life!
Because your ex is on the deed, you'll need his permission to sell. He'll also be entitled to a share of any profit, though you'll likely have to sell at a loss. Time-shares are notoriously difficult to make money on. Check out sites like the Timeshare User's Group (Tug2.net) and eBay, both popular places to list time-shares for sale. And remember, this is about starting over rather than trying to hold on to the past.
More Great Advice from Suze
Printed from Oprah.com on Wednesday, December 11, 2013
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