Personal Finance Resources

Reverse mortgages are a great way for retirees to supplement their income using the equity in their home. The simplest way to define a reverse mortgage is to think of it as the opposite of a traditional home loan. When a homeowner executes a reverse mortgage, the bank will pay them for the equity in their, and recapture it later when the home is sold. The homeowner can choose to take the money in one of three ways:  either by a lump sum, a line of credit, or monthly payments. Most often, the homeowner chooses to receive monthly payments from the bank. This increases their monthly income, and can close the gap on any deficiencies in their budget.

Other Benefits of the Reverse Mortgage

In addition to being able to supplement your income while in retirement with the equity in your primary residence, there are also some further key benefits to you:

• You will never owe more than your home is worth.
  In the event that property values decline and your balance is greater than the appraised value of the home, mortgage insurance will cover the gap. This is a great feature to provide stability for the borrower and their heirs.
• In additional value will be paid to your beneficiaries.
  That’s right, after you pass on, and your heirs sell the home, just like a regular mortgage, if the sales price exceeds the loan amount, then they will get the additional money.
• The income from the reverse mortgage does not count as taxable income.
  So as you supplement your income with this type of loan, you don’t have to worry about paying any additional taxes on the gain.
• Income from a reverse mortgage will not count against any Social Security or Medicare benefits.
  Sometimes if you get a job during retirement, and you income exceeds a certain amount, you can lose some or all of your all of your Social Security and Medicare benefits. Not true in the case of the reverse mortgage. The proceeds do not count against any quotas that these programs may have.

Some Downsides to a Reverse Mortgage

The reverse mortgage is a loan, and does acquire interest. So be sure to get a Truth in Lending statement from the mortgage company or bank you are working with to be sure of exactly what will be owed at the end of the reverse mortgage, what your interest rates are, etc. The rates on these loans should be good, considering you have good credit, etc.

Another issue with the reverse mortgage is that you must own the home free and clear of any other liens. If you have an existing mortgage, that mortgage will have to be paid off upon closing the reverse mortgage.

Last, I just don’t like having debt. I currently have a regular mortgage on my house and would like to not have the payment. With a reverse mortgage, you don’t have to pay the money back until death, however I just would like to be completely free and clear of debt, period.

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I noticed some of you that found my free amortization calculator were interested in being able to input additional payments to see how it would shorten the life of your mortgage. So I took the time to come up with the additional calculations to automate the process for you. This amortization calculator is still based on a standard 30 year mortgage with monthly payments, however I added a column called “Additional Payment”. In my example, I defaulted the additional payment column to $50, and as you can see, on a $90,000 loan amount, the additional $50 takes the 30 mortgage down to about 23 1/2 years. Not bad for a little bit more paid each month. Now, in order for this to work for you, you must instruct the bank in writing with each additional payment that you intend for the entire amount to go towards principle only. Without this instruction, they may apply a part of it to interest, just like your regular payment. Here’s a quick look at the first ten payments in this amortization tool:

All you have to do with this amortization calculator is input your original loan amount and interest rate, and then input your additional payment amount in the appropriate column. This calculator is flexible, e.g. you can enter a different additional payment amount each month if you wish, and the calculations will automatically adjust. Have fun with this, and sign up for my RSS feed for updates to all the latest and greatest at this personal finance blog.

You may download the Amortization Calculator with Additional Payments Applied .xls free of charge.

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Whenever you get a new job, or if you are in a job and always end up with a large tax refund check, you may want to consider re calculating withholding allowances for your w-9 again. But Jeffry, why would I want to lower my tax refund check? I like getting that big check back in April. My question to you is, do you like giving the government an interest free loan? Because that is exactly what you are doing by not increasing your allowances during the year to compensate for your overpayment to the government in income taxes. I understand that you don’t want to end up owing the government anything at the end of the year, and on that point, I agree with you. So what I wanted to do today was give you a quick formula to even out those withholding payments to the government, thereby increasing your take home pay and minimizing your tax refund check. Don’t worry, it isn’t going to be complicated, these are just some brush strokes.

Gross pay - charitable deductions - exemptions - mortgage interest expense = taxable income (for our purposes)

There are many more deductions out there, but I wanted to take the basics here just so you can quickly make a better decision when setting your number of allowances. Before I run an example, you need to know a basic calculation for each part of the above equation.

Charitable Deductions

Donations to your Church or other charitable organization is currently 100% tax deductible. So whatever you anticipate giving to these organizations this year, just fill that into the blank.

Exemptions

On a family tax return for 2008, you can take $3,500 per exemption, so a husband, wife, and 3 children could take 5 exemptions, or $17,500.

Mortgage Interest Expense

Although this will vary from year to year, just simply use your last statement of interest expense as a quick number to use for the purposes of calculating withholding allowances.

A Quick Withholding Allowance Example

Ok, now that we know the parts of the equation, let’s run a quick example. Let’s say that you are married and have 3 kids, like above, you make $50,000 per year, you gave 10% of your income to your Church, and paid $2000 in interest to your mortgage company last year. So then the quick equation is:

$50,000 - $5,000 (charity) - $17,500 (exemptions) - $2,000 (mortgage interest)  =  $25,500

Ok, so now that you have a yearly approximation, then divide that by 12 (for monthly payments), or 26 for biweekly payments, then look at this tax table (for 2008) to figure out about how much you owe in taxes on every paycheck. In our example, we would be liable for $980.77 every biweek, which means our equivalent tax would be $76.10 per paycheck. Now that you have that, just check with your payroll department to see how many allowances would be about right for $76.10 tax liability per paycheck. Also, just check with them to make sure you are about right in your calculations, just to be sure you don’t undershoot or overshoot too much, then have them make the change.

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With the price of gas expected to top $4 on average across the US the summer, some small gas saving tips are beginning to become more important. Recently, I was talking with my wife and thinking about what we could do to drive less, and other ways to save on gas. Upon conclusion, I wanted to tell you about a few of those gas money saving tips:

• Mail your deposits to the bank, instead of driving to it.
  In the old days, it cost about as much or less in gas to  drive to the local bank. But at $3 per gallon, and an approximate 8 miles (16 miles round trip) to our bank, we are looking at significantly more money to drive there than to mail it. Our Acura Integra gets about 26 miles to the gallon so: 16 miles / 26 miles to the gallon X $3 per gallon = $1.85 as compared to a 41 cent stamp and a few pennies for an envelope. Unbelievable, but its the honest truth. On a side note, don’t send cash through the mail, make sure it is in your name only, and write “for deposit only” just below your signature on the back. That will minimize the chances of someone making off with your money.
• Leverage the internet to pay your bills.
  Absolutely wherever possible, use the internet to pay your bills. Many, many typical household service/product companies like mortgage companies, cable companies, internet service providers, electrical providers, etc. have websites that you can use to pay your bill online. My wife and I use this in almost all of our bills. Be careful of the ones that charge a fee for the online bill pay service. In this case, it is often best just to mail in your payment (this is what we do).
• Buy gas early in the morning.
  Gasoline, as is the case for most liquids, tends to be more dense when cold. So if you can get the gas while it is cool outside, you stand a chance of getting slightly more gas for the same amount of money. It isn’t going to be much more, but again, at $3+ per gallon, every little bit helps.
• Plan, plan, plan.
  Plan your trips during the day. It doesn’t take much to come up with a list of things you need to do, and take care of them all in one shot. This will avoid having to turn around, waste time, and spend more money on gas.
• Keep the idling of your car to a minimum.
  So on those cold days when you want to warm up the car, don’t. Warming up your car for 30 minutes a day, everyday can cost you a considerable amount of gas. Just bundle up, jump in, and go to work. Often it will only take a couple of minutes for your car to warm up and you can get the heater going. It usually only takes me about 2-3 miles to warm up the engine, then the heater works good.

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If you have been following this personal finance blog, you know that I work in real estate, and hold a realtor license. I had received some feedback from post Realtor License via email that I think would be helpful to the community. In this article I explain my thoughts on why you should consider having a realtor license, regardless of whether you intend to become active in real estate investing or any other realtor activities. This email came in from a person who was thinking about getting his license here in Texas. The following is an excerpt from the email he sent me:

Just read your realtor license post and couldn’t agree more w/ the benefit of holding such a license.  You mentioned that it cost you about $800, did you use take an online or traditional class?  Also do you have any resources that you found really useful while going through the process?  And how long did it take you to obtain the license?  I am in TX and really considering getting my license specially since I might be putting my home on the market soon.

To which I responded with:

Thanks for the contact. I completed my prelicense education online via http://www.dallasrealestateuniversity.com/. It was the cheapest online method I could find. Make sure that the school you choose is listed on the TREC approved list of education providers at http://www.trec.state.tx.us/education/providers_core.asp

The process is pretty simple. TREC provides a 1-2-3 type list here: http://www.trec.state.tx.us/licenses/salesapp.asp. For the education part, I recommend buying a package that gives you all the hours you need. If you have some college, you can follow TREC’s method to send in your transcript, and not have to take the full 210 hours, you’ll just have to take 150 hours. I went with the 150 hour option.

After you complete the TREC steps, then you need to negotiate with a real estate broker to allow you to hang your license with them. Once you have one, it is a simple form to send to TREC saying you will be working for them. That will activate your license and you will be ready to go.

This is just a basic help guide to making sure you have a checklist of exactly what to do to acquire your realtor license here in Texas. Before you go, take a moment to sign up for my RSS feed, and get automatic updates to everything going on here at Personal Finance Resources.

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For some folks, coming up with a budget is hard enough. But assuming you are following some kind of personal budget guidelines, you may still be unhappy with your results at the end of the month. So today, I want to give you some further budget tips and ideas to save more money, and look to the future.

Reprogramming Your Brain

In today’s world, we see thousands and thousands of advertisements every week. We are constantly pressured to spend what little money we have, on things we do not need. There are only two ways to handle this kind of pressure. One is to ignore it (which is much easier said than done) or to eliminate it. I recommend eliminating it. How? By aiming at the source of most of the advertisements we see. TV! We are living in a society that is absolutely drowned by the television. The best thing to do is just to turn off the television. I mean completely. My wife I do not even have cable TV. We only have a couple of Christian movies and some exercise videos. So if you were to eliminate your cable, you would immediately be saving $30-$200 per month. But beyond the immediate savings, you are not going to hear about the newest gadget, the latest best selling widget, or the latest Ford mustang (I hate the new mustangs, especially because they are made by Ford). And if you aren’t hearing about these things, you will not have the desire to buy them. Don’t think it will work? Try it for a month and leave your comments below. I challenge you.

Thinking Twice Before Acting on Impulse

Impulse buying will absolutely destroy your budget. And usually it isn’t the high dollar item that you impulsively buy, it is the $7 lunch at a fast food restaurant that you eat everyday, and indulging to go out for ice cream, or for guys, going out a buying another $5 fishing lure you will never use. And so on. You must break the habit. The best way to do this is to track these items on your budget for a whole month, and come up with a total number of frivolous buying for that month. You will be shocked and amazed at how much money you wasted. From there, just think about that insanely high number you spent when you think about stopping at McDonald’s for an ice cream.

Commit to do a Little Research

On items that we do actually need, like mortgages, home insurance, vehicles, groceries, communications, etc. make a commitment to look for at least three different offers from competing companies before purchasing. Do a little haggling with each one. What do I mean? Just tell one of them about the better offer you had from their competitor. Many business will honor discounts that are advertised by their competitors. I know it takes a little time to do this, but not really that much time, and the benefits far exceed the extra couple of days to make a decision. Also, having to wait to get pricing from competitors will help you to stop acting on impulse, and act on strong financial planning.

All of these ideas, in a nutshell have to do with a retooling and retraining of your mind, and how you look at life. Don’t be led around by the commercials, and let the peer pressure force you to buying things you don’t need, that are ridiculously priced. Spend a few extra minutes in the morning to make lunch, instead of going out. Scale your house down. Buy cash cars. Buy clothes you intend to wear for years, not for seasons. And find cheap or no cost ways to have entertainment, like going for a walk in a public park, swimming in a public pool, playing basketball in a public area, doing puzzles, playing cards or dominoes, and many, many other ideas to keep the bills down.

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If you have ever thought about selling your house via an owner financing arrangement, you may have thought about doing a contract for deed.  But just how does a contract for deed work? It may be easy for a realtor to advise you to use a contract for deed when you are making inquiries, but telling you how exactly to do one is another story. Luckily, I have done this type of contract before, so I can give you the details.

The Basics of a Contract for Deed

A contract for deed, in a nutshell, is a cross between a true mortgage, and a rental agreement. In this scenario, the buyer agrees to make a certain number of payments at an agreed priced, while the seller agrees to sign over the deed to the property at the end of all payments. In essence, the seller is giving the buyer a mortgage on the property, but not delivering the title to the property until the mortgage is completely paid off.  It is highly recommended to get a contract like this notarized, because the seller is not going to be filing the agreement for public record. The agreement is strictly between the buyer and seller, and to all other parties attached to the property (e.g. the county clerk’s office, any lien holders, etc.) it is still fully owned by the seller. In most cases, the seller is using the contract for deed as a “wrap-around” for their existing financing.

Contract for Deed Problems and Cautions

If you are the seller, be careful using this method of owner financing. If your existing mortgage has an alienation (or due on sale) clause, then your mortgage company has the right to call the note in full upon the discovery of a new owner. These days, most conventional mortgages contain a clause like this, however FHA financing does not contain this clause, and you can do a contract for deed.

If you are the buyer, request a copy of all current and future mortgage statements from the seller. You want to make sure that the seller isn’t taking your money, and not paying the mortgage. You could, and others have ended up losing their home this way, as the mortgage company forecloses on the property.

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I’m going to try and keep this short today, but if you are thinking of investing in certificate of deposits, think again. Though safe, these investments yield little to nothing in interest. Even if you can get 5% on a certificate of deposit (which is unlikely in today’s market), you will still only be doing slightly better than the current inflation rate. Now some of you may be thinking this:

But Jeffry, not only is a certificate of deposit safe, but I can borrow against it when I need some money.

Problems with Investing in Certificate of Deposits

Hmm…borrow your own money? That sounds like a very smart idea (not). You see, savings and commercial banks use certificate of deposits for one thing - to raise money for use in lending. So they take your money, pay you a low rate of interest, then turn around and lend that money to someone else at much higher rate of interest. Let’s take the example posed above, if you were to get 5% interest on your certificate of deposit, and then took out a personal loan against it, you will probably end up paying somewhere around 6-8%. You will be losing 1-3% on your money. Not a very smart idea from an investment point of view.

Another problem with investing in certificate of deposits is that you agree to tie up your money for a certain period of time. Further, to get a better rate of interest, you have to agree to tie up your money for much longer periods of time. If you break a certificate of deposit early, you will forfeit a substantial amount of your earnings in early termination fees.

When Investing in Certificate of Deposits Make Sense

In the example above, I talked about borrowing from your certificate of deposit. Normally not a good idea, however, if you are trying to build up good credit or restore your credit ratings, then this is a good short term solution for doing so. The loan is easy to get, and if you make your payments on time, you can boost your credit in a relatively short period of time.

If you are in retirement and want to maintain low risk on your money, but can afford to tie it up in a certificate of deposit for a while, then it makes sense.

Another viable use of investing in certificate of deposits is when you need a specific loan like an auto loan. In almost every case, the bank is going to want collateral for issuing the car loan, and a certificate of deposit is an excellent way to fulfill that requirement.

So my overall take is this - if you are looking to really make some money, steer away from certificate of deposits and focus more on better earners, like bond and mutual funds, and real estate investments. But if you are looking to build credit or apply for particular types of loans, then investing in certificate of deposits can be a vehicle to get you there.

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If you have followed this personal finance blog very long, you know that real estate investing is near and dear to me. I am a licensed Texas realtor, and have rental properties of my own as well as managing property for others. But how does that benefit you as a residential home buyer? It means that I can provide you sound advice and tips on buying a home. So what are the key things to look for? And what are some ways to minimize the risk of buying a lemon?

First thing first - Location, Location, Location

The old saying is true, location is the most important factor when buying a home. If you are new in town, I recommend driving the neighborhood and talking to some of the potential neighbors scoping out that next home. Also, make sure and find out about the school zone the property is located in, and what specific school your children will be routed to.

Get a Home Inspection

After finding a great place, you need to know if the home has any problems. Sometimes when folks go through a home, they love it, and gloss over the potential problems. A home inspection will level the playing field between you and the seller, and give you some points to negotiate on. You may think that you don’t want to incur the $100-$200 cost of the inspection, but hey - ask the seller to pay for it! Even if you can’t come to terms with the seller, the seller can use the report to help them fix any issues with the home, and give comfort to the next potential buyer.

Find Out what the Tax Value is, and the Tax Amount

Often these can be found online via a city website, otherwise just look up the phone number for the county clerk’s office and inquire about the home. Be sure to ask if your county uses “100% market value assessments” or some other valuation method. You can then use this information to bargain down the price of the home.

Shop Around for Home Owner’s Insurance, and Use a High Deductible

While most of you know that shopping around for insurance is a good idea, you may not agree with obtaining a high deductible. But let me explain. Don’t buy insurance with the intent to use it - insurance is designed for catastrophes, not everyday use. Look at it this way: Would you rather pay $150/month for a $500 deductible, or $100/month for a $2000? This example is fictitious, however the concept is that you will pay for the $1,500 deductible gap in less than 3 years of premium payments. So again I say, think of insurance as a guard against disaster, not as an everyday crutch.

Negotiate the Purchase of the Home

Duh! Right? Well, often people don’t do a good job of this. Let me put it to you this way, I have been on the seller’s side, and I can almost guarantee that the seller built some negotiation into the price, e.g. they have increased the price in order to be able to come down and make a deal that they are happy with. For sale by owner homes are the best for this, as you can speak directly with the home owner and gauge their reactions. When talking to the owner, try to identify things with the home that would merit a lower price. Butter them up, so to speak, but don’t make a verbal offer. Always submit written offers. If they are expecting a lower offer, when they get it they will be less likely to get angry and throw it away.

If the home is listed with a realtor, you will just have to submit an offer. I recommend starting very low, and just see if you can get a response. Don’t get emotionally attached, or you will spend way too much for the home.

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There is a lot of hype around choosing a bank these days. Lots of promotions and other corporate-like strategies to induce you to give a particular bank your money. But be careful - many of the larger banks that offer free checking, free online bill pay, free this and free that have the worst customer service around. The following is just a simple checklist for choosing a bank; what to do and how to do it.

• Make Sure the Bank is FDIC Insured
  This almost goes without saying, however it is only prudent to be absolutely sure of it. If someone were to rob the bank, etc. you want to be positive that your money is safe.
• Get a Comprehensive Rate Sheet
  Most banks will have a leaflet sized sheet that explains all of the fees, etc that are charged by the bank for the particular type of account you are interested in opening. Just go through each one, and ask all of your questions. Even if they claim the account is “free” I guarantee there are fees; fees that could be outrageous like $35-$40 NSF fees, daily charges for a negative balance, etc.
• Ask For a Line of Credit
  More specifically, ask for a line of credit that automatically covers any overspending you might accidentally do. I have a $5,000 line of credit at my bank directly tied to my personal account, just for such occurrences.
• Ask About Online Services
  Nothing compares to free online bill pay. The ability to send out checks and online payments from the comfort of your home without any or cost is worth tons. Also, being able to go back and view a check image to find out why you spent that money is great as well.
• Ask About Interest Bearing Checking Accounts
  It isn’t done all that often, but sometimes you can even get better than a free checking account - an interest bearing free checking account. Enough said.
• Relationships, Relationships, Relationships
  Find out who the highest ranking employee is at the branch office you will be doing business with. Talk to him/her personally and starting building a relationship. When it comes time to get that loan for business or a house, etc. they will come in very handy. I know the the VP at one of the local banks I do business with, and he has already put me on to a good commercial loan (blanket loan, that I wasn’t able to find elsewhere) for two duplexes specifically for rental income.
• Stick with a Local Bank
  Don’t go with a national chain. You won’t be able to make connections with decision making employees, and you will be treated like a number. I just got away from a national chain bank and I am relieved beyond words.

Comments? Questions? More ideas? Please leave them at the bottom of the page.

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