How much house can you afford?

MSN money has a useful tool to see how much house you can afford. Before, going to get pre-approved, have an idea of how much you really want to and can take out in a mortgage. Use this tool to find out:

How much house can I afford?

Personal Finance iPhone Apps

After reviewing the apps for a months or so, here is my list of the useful personal finance iPhone apps:

1. Mint.com - see what happens to all of your money
2. All your banks such as Chase, which even allows you to take a picture of your check to deposit instead of visiting an actual branch or an atm
3. PayPal - Monitor your account and send money to friends easily
4. Investment accounts such as ShareBuilder to monitor your holdings
5. Zillow.com - useful if you are looking to rent or buy or are just interested in the prices of the houses around your location
6. LoanCalc - See how much sooner you will payoff any loan if you increase your minimum payment
7. Pay Off Debt Lite - See what percentage of your debt you have paid so far since the beginning to motivate you to pay more
8. Credit Card accounts such as Amex to allow yourself to pay your bills from your phone
9. ScoreAdvice - See what you can do with your credit score to improve it
10. Ask Dave - Although I don't always agree with what he says, he does have some good advice, this is an app with clips of his radio show
11. NPR News - the Money Matters radio program releases some great shows on personal finances
12. Local stores such as Walgreen's app to see what's on sale this week
13. Daily deal apps such as Groupon to see the deals of the day
14. News websites such as CNN money to keep up with the current personal finance news
15. Coupon Sherpa - coupons for retail stores near you, although coupons seem to be available for only a few stores
16. GasBuddy - will help you find the cheapest gas near you
17. Kayak - to find the best travel deals
18. Around me deal apps such as AAA Discounts (must have AAA membership) state discounts available using your current location
19. Bar code scanners such as ShopSavvy will help you find the best deal online or in stores
20. Key Ring - if you forget your loyalty card, you can scan the card on your Key Ring app instead
21. Check-in apps like Yelp that allow you to check in to a restaurant or a shop and  receive a discount or a freebie

If you have other personal favorites, let us know in the comments.

Kiplinger - Archives

Yesterday, I was looking through the Kiplinger magazine archives on Google Books. They have full online issues of magazines starting from 1947. Personal advise has obviously changed since then, especially since now we have more complicated products such as IRAs and ARM mortgages.

Here are some things that I found interesting.

Mortgages:

• Feb 1957 - When you borrow for a mortgage, make sure that you borrow reasonable amounts. A safe amount for a monthly payment on a mortgage is no more than 25.6% of your take home pay. You are probably okay with 28.8% of your take home pay. If the mortgage is over 33.2% of your income, you are going into the risky territory. The higher your income, the less mortgage that you should take out as it will be harder to maintain in time of a job loss.
• Feb 1957 - If your rent is 15% of your take home pay, you are either economizing or getting a break. If your rent is 25% or more of your take home pay, you are stretching it. Mortgages can be a higher percentage of your income as you will keep the home after it is paid off.
• Sept 1961 - The government approved 40 year mortgages. The article strongly advises against them as it would take you 29 years on a $12,000 mortgage at 5.5% to reach the tipping point, which the article describes as your loan being worth as much as the house. This example does not include a down payment. Graphs that were used clearly demonstrated that 15 year mortgages were the way to go as it saves a ton in interest costs. In fact, the magazine was trying to show that, due to interest, your monthly payments would only be slightly lower in a 40 year mortgage than in a 15 year mortgage. I did the math and the payments were $98.05 for a 15 year mortgage and $61.89 was for a 40 year mortgage. Doesn't seem like a large difference to us now, but the 15 year mortgage payment is more than a 1/3 higher. However, the magazine showed the difference per dollar borrowed, emphasizing that the difference is not that great.
• Mar 1964 - The average down payment declined from 28.4% to 24.5% in a year. The average mortgage term went from 19.7 years to 24.5 years in the same year. Please note that the average down payment was more than 20% in either case.

Student loans:

• Jul 1958 - First student loans are discussed. The loans have a 36 months term at 4.5%. Students are borrowing a few hundred dollars a year.
• Apr 1964 - 72 month terms for school are discussed.

There is much more information in those magazines. It is also interesting to see how, through the history, the down payments became smaller, the loan terms became longer, more types of loans became available such as personal loans and credit cards, and those other types of loans became more popular.

Money in your 20's

Money management skills should be learned as early as possible and the 20's is a great place to start. Here are 10 financial projects you should take on in your 20's:

1. Learn to live on less than you make. Many people who find their first job, go all out with a new wardrobe, a new car, decorations for the new apartment, etc. Control your spending and only spend what you can afford with the money you have. See the Cash Flow blog post to see how you can see your cash flow with ease.
2. Start saving. Use the budget worksheet to see where you are overspending if you are unable to spend 15% of your take home pay. If you have large student loan payments, try to cut down in all areas to free up some space for savings, even if it's $5/month.
3. If your company offers a 401(k) match, start putting in the minimum amount you have to put in to get the full match.
4. Build an emergency fund in a high interest savings account.
5. Maintain a good credit score. Make sure you are never late. Automating your bills is an easy way to make sure of this.
6. Pay down on your student loan or any other debt with any extra funds that you have. If you receive a gift, a tax refund, or a bonus, try to apply it directly to your debt. See the Debt Pay Off Methods to see how you want to tackle your debt. See how even $5 per month extra will make a difference in your debt by using the Bankrate Amortization Calculator.
7. Save for retirement. Starting early is one of the best things you can do. Use a retirement calculator to see how much you should save. Start small if you can't contribute the full amount you are advised and increase your contributions yearly.
8. Designate separate savings accounts for various goals. Retirement should be saved in a 401(k) and an IRA. You should also have separate savings accounts for an emergency fund, grad school, vacation, car, down payment, etc. You can save in each account simultaneously or take it one step at a time and once your emergency fund is full, save for a vacation, once you have enough in that account, you can save for grad school and a car, etc.
9. Get health insurance. One accident can ruin all of your plans. 
10. Earn more money. Ask for a raise at the annual review or find a job that will pay you 15%-20% more and present the offer to the current employer. Be ready to leave for the new job if the offer isn't matched.

Zillow.com

If you own a home, you need to know the current value of your home to calculate your net worth. The best site for that is Zillow. Zillow will not only give you the current value of your home, but will also give you fun statistics like your locations Walkability score which looks to see how close you are to closest school, grocery stores, bars, etc. If you are looking for a house, this is a great way to see how much houses in your area are going for.

I look at the website for fun. It's fun to see that I can buy an apartment in downtown Miami for 25K, it might be in a run down area, but the luxury apartments are less than a mile away.

Reverse Mortgages Explained - the Good and the Bad

Retirement has many options such as annuities, IRA income, social security, etc. Reverse mortgage is one of them. A reverse mortgage is a loan that you can take against the equity that you have in your house and the loan can be taken out in a lump sum or in monthly payments. You do not have to repay the loan until you die or move. You must be 62 to qualify for this retirement program.

The Good:

• Money is quickly available in a lump sum to use to pay off debt in retirement
• Monthly payments that could support your social security and retirement distributions
• You can stay in your house
• Credit history is irrelevant to obtain this loan as your home is the collateral
• You can use the loan to pay off the remaining balance of the mortgage and never pay your mortgage again

The Bad:
 

• Fees to obtain a reverse mortgage can be high
• You are still liable for the insurance and taxes
• If you move (i.e. nursing home), you must start paying back the loan
• Once you die, the estate repays the loan and the fees if they want to inherit the house
• If you receive some payments and pass away, and your estate does not have the money to repay the payments and the accumulated interest, than your estate will loose the house

It is a great program for those who do not need/want to leave anything to their heirs and for those struggling in retirement. However, do keep in mind that you must live in the house to not have to pay back the loan. As soon as you sell the house or move, you must start repaying the loan back to the bank.

Purchase Price to Rent Ratio

I earlier wrote a post about Renting vs. Buying with a link to a calculator. There is also a simple way to see weather you should buy a place or rent using the Purchase Price to Rent Ratio. What you do is figure out the cost of the house/apartment you are renting and divide that by the total yearly rent. If you get a number above 15, it is better to rent and if you get a number below 15, it is better to buy. For example: your rented dwelling is worth $250K, but you are paying only $12K per year in rent. Your number is 20.83, which is higher than 15, so, according to this formula, you should keep renting.


I could buy my apartment for 150K (at the low end) while my current yearly rent is $12,600. The Purchase Price to Rent Ratio is low, 11.91. It seems that I should buy the apartment, however, you must consider other factors. The association fees for my building are $500 per month and regularly increase. Therefore, buying would be more expensive.

The NY times calculator in the previous post accounts for the association fees, however, the Purchase Price to Rent Ratio is easy to use on the go.

Financial Goals

The whole point of learning and keeping up with your finances is to attain our financial goals. What are your financial goals.

Here are some examples of goals:

1. Save X amount in an emergency fund
2. Save X amount of months of expenses/salary in an emergency fund
3. Save X amount for retirement this year
4. Save X% of each paycheck for retirement this year
5. Max out your IRA
6. Pay down my student loan in X amount of years
7. Pay double the minimum on my debt
8. Save for a vacation
9. Save for graduate school
10. Save for a down payment
11. Buy a car with cash

What are you saving/hoping for?  Whatever it is, my favorite tool to keep an easy track of your savings and goals is to open up a high yielding savings account (see my earlier post where to find one), and set up a goal in Mint (see an earlier post about this website as well). You can set up multiple goals as long as you have a different account for each goal and keep track of your progress. Mint will tell you if you are on track, behind, or ahead on your goals and the amount of time it will take you to reach them.

Renting vs. Buying

Before even considering if you should be a home owner, you should have a 20% down payment to minimize the risk of foreclosure and to avoid paying the mortgage insurance. You also should have a full funded (whatever that means for you) emergency fund since home emergencies can come up regularly. Some even advise that you should build a separate home emergency fund valued at 1-3% of the purchase price.

Once you have both of those criteria, it is smart to see if you should purchase a piece of property for yourself. The NY Times "Is It Better to Buy or Rent?" Calculator is great for determining just that. Have you considered association fees, insurance, taxes, maintenance, and closing costs? The property costs more than just the price tag. Do you know how long you are going to stay in that property? The break even point can come 10 years after the purchase. If that is the case for your situation, are you prepared to wait that long before your investment pays off?

Having lived several years in CA, I always thought that buying is better than renting, however, now that I live in Miami (a renter's market), I can see that there is no way I could afford a house in the area that I am renting and break even, even after 30 years. Therefore, landlords seem unavoidable in my foreseeable future.