RISMEDIA, Jan. 3, 2008-One of the best New Years Resolutions homeowners can make is to eliminate expenses that are unnecessary and have no benefit. This is a tall order for many of us, with implications ranging from how you finance your mortgage to the energy efficiency of your home. Nevertheless it’s a very worthwhile exercise which will affect your current and future lifestyle. Many have already made some of the following ten 2008 New Years Resolutions for American Homeowners, but few probably addressed them all.
Resolution #1: I will get my home finances in order.
Despite all the disaster stories about the mortgage meltdown, mortgage interest rates are relatively low and widely available to creditworthy homeowners. This is therefore a good time to review how you are financing your home. You may be able to save money, reduce financial risks, improve your financial status and/or use the opportunity to incorporate home financing in your long term financial planning. This is especially true if you currently have a subprime and/or adjustable rate mortgage.
If you have an older mortgage, there’s a pretty good chance you can get a lower interest rate – and therefore lower monthly payments – if you refinance your mortgage today. Since most of your mortgage payments in the early years consist of interest, you will also end up with a larger mortgage interest tax deduction with a new mortgage. If you don’t take any cash out and your new rate is lower, your actual monthly payments will also be lower. Paying less money while getting a bigger tax deduction is a good proposition. Also, the cost of private mortgage insurance (PMI) is also tax deductible for mortgages originated after 2007.
If you have an adjustable rate or interest only mortgage that has not yet reset, you have done well in this period of low mortgage interest rates. But don’t assume that your good luck will continue. The increase in monthly payments could be frightening when mortgage rates increase in the future. Worse, the large number of adjustable rate loans is expected to trigger as many as one million foreclosures when their teaser rate runs out in 2008. This may be the best time to refinance to a safer fixed rate mortgage if your current income will qualify you for the monthly payments.
If you have substantial home equity when you refinance your mortgage you can take cash out for worthy uses such as remodeling. Since the remodeling is financed through a mortgage, the interest on the cash you took out for the remodeling project is tax deductible. This is a big plus compared to using your credit card to pay for remodeling costs, because credit card interest isn’t tax deductible. If you currently have substantial high interest credit card debt and/or a higher interest short term second trust on your home, it may make sense to use the proceeds to retire those as well. However, there are limits on the mortgage interest deductibility if you finance for more than the original cost of the home plus improvements. Check with IRS (www.IRS.gov or 800-829-1040) or your tax advisor for the limitations before you take cash out.
Resolution #2: I will stop lending the government money interest free.
More than 101.2 million taxpayers got more than $229 billion in income-tax refunds in 2006. The average refund was $2,264. Refunds from IRS may sound like good news, but the IRS didn’t pay those taxpayers any interest on that refund, which accumulates through the year. Taxpayers who received refunds would have been better off if they reduced the amount withheld from their income tax every paycheck by enough to break even with IRS at years end, and put the extra amount in their paychecks into investments that earn interest or dividends. If they are also paying interest on credit cards (which isn’t tax deductible), it would probably make even more sense to use the difference to reduce their credit card balances.
Some taxpayers save their income tax refunds, but others blow it on things they could live without. The latter is a big mistake, especially with the growing number of economists who see a growing likelihood of a recession in 2008. It may be wise to hold off until next year on a purchase of a new car, boat or other major expense that can be deferred another year.
Resolution #3: I won’t let fears of dropping home values, the mortgage market meltdown, and the growing risk of a recession stop me from purchasing a home in 2008.
Many homeowners have decided to put off the consideration of a home purchase because of these concerns, but in many cases those fears are unwarranted. If you want to move in 2008 you should take a closer look, because this year could be an excellent time to buy a home.
As previously stated, the risk of a recession is certainly increasing, and this is certainly no time to push the limits of your financing ability. However, many homeowners are in a strong financial position, thanks to good savings habits and accumulated home equity. While they need to make sure they keep plenty of liquid assets against the risk of a recession, in fact many homeowners have more than sufficient liquid assets for that purpose and are in a position to buy a home if they wish to.
The direction of home values is of little consequence if you plan to stay in the same area. According to the National Association of Realtors, the median moving distance in 2006 was 13 miles. This means that if the value of your current home has declined, so did the value of the home you’ll be buying if you stay in the same area. The price difference will probably remain about the same in most cases (and this relationship holds true if homes are appreciating in your area). The future outlook for home values will also be about the same, so the direction of home values will have relatively little consequence for most home buyers.
The mortgage meltdown/subprime crisis will make home financing difficult for many who could only qualify for subprime mortgages previously, and more expensive for home buyers with impaired credit when they can get financing.
Despite this bad news for some homeowners, mortgages are still widely available at attractive rates for the majority of home buyers, who have excellent credit histories, and a good financial profile. In addition the government has begun to step in to help those at the margins – FHA loans have been made more accessible, Fannie Mae and Freddie Mac programs have been allowed to expand, and more proposals to help home buyers are in the works.
On top of all this, the inventory of homes for sale is at an all time high in many areas. Yes, that means you’ll have to work harder to sell your home, but it also means you will never be as likely to find a replacement that fits your needs exactly as you are today. Because homes are moving slowly in today’s market, it makes far more sense to first sell your home before you commit yourself to buying your next home. Even so, some sellers in this current soft market will accept a home sale contingency in a purchase offer, but usually only if they are first convinced that the prospective buyers will be pricing their home extremely competitively. That’s not unreasonable – pricing competitively is something you must do in this market anyway if you expect to sell your home. The bottom line is that for many, if not most homeowners, 2008 is a great time to buy a home, and the gloom and doom on the housing and economic front should not stop you from looking into it.
Resolution #4: I will increase my saving and reduce or eliminate high interest loans.
Refinancing your mortgage is often the first step in this process (see resolution #1), and curtailing your interest free loans to IRS the second (see resolution #2). Next, make sure you are taking advantage of all matching employer contributions to a company IRA if you have one and if at all possible make the full tax deductible annual contribution to your 401k, 403(b), regular or Roth IRA, or other tax-deferred retirement accounts.
In order to pay their mortgage off sooner, many homeowners make additional payments above the required monthly amount to their mortgage lender. They would have been better advised to get mortgage with a shorter term (15 years, for example), because they would have received a slightly lower interest rate as well. While debt reduction is a worthy goal, many homeowners would be much better off from a financial and tax standpoint to instead put extra money into tax-deferred retirement accounts. Not only would they get employer contribution matches in some cases, but the accumulated interest or dividends will either be deferred or tax free until you withdraw them at retirement. A 2005 study found that more than 38% of households would have earned 11 – 17 cents more on the dollar by investing in tax-deferred retirement accounts instead of prepaying the mortgage. Those extra earnings would have resulted in additional annual savings of almost $400 per household.
Make sure that both your tax deferred accounts and investments are diversified and you aren’t overly exposed in any one investment, including holdings in your employer’s stock. Even sound, well managed companies can take a beating in the stock market. Make sure you invest in mutual funds or stocks with consistently good performance records. For example the Lipper Reports tracks mutual fund performance by category (i.e. large caps, energy, etc.) over 1, 3, 5, and sometimes even 10 years. If there are 100 funds in that category invest only in those that are consistently in the top quartile (which would be the top 25 if there are 100 funds in the category) over each of those periods, and you should do pretty well. Review your investments annually (or even better quarterly) against that standard to make sure they are maintaining their track record.
Review your annual Social Security Benefits statement to make sure that your earnings have been accurately reported and that no one else is using your Social Security number. If they have, they may also use your social security card to get a drivers license and credit cards in your name as well. You can order your statement online at www.ssa.gov.
Resolution #5: I will review my homeowners and other insurance to make sure I’m adequately protected.
Review your coverage with your agent to make sure you have enough insurance. The insured value of your home should reflect its current replacement value, including any additions or improvements, as well as the value of its contents.
Make sure you are covering all important circumstances. Insurance against flooding may not cover internal pipe backups or wind damage during a hurricane for example, and many insurers won’t provide flood insurance (in such cases you may be able to get flood insurance through the National Flood Insurance Program). Many policies also have standard fixed limits on certain types of contents (jewelry and furs, antiques, cameras, electronics, etc.) so you may need an additional “floater” policy to fully insure your home’s contents.
Life insurance needs change throughout your life. They are highest for young couples with children, far less for empty nesters with enough savings for their retirement. Depending on your situation you may be able to cut back on insurance costs.
Resolution #6: I will reduce my home’s energy consumption.
There are many ways to reduce your home energy costs. The American Homeowners Foundation has a free home energy audit. All it takes is a ten minute tour of your home with the audit questionnaire and a few simple tools you probably already have, and you will likely find numerous ways to reduce both your energy costs and global warming. For a free copy, e-mail AHF@AmericanHomeowners.org , and put “Free Energy Audit” in the subject line. We will e-mail you back the free home energy audit.
Among some of the “no-brainers” are replacing old manual thermostats with programmable thermostats, which typically will pay back their costs in several months, and replace standard light bulbs with compact fluorescent bulbs, which have dropped in cost recently. Also make sure your exposed hot-water pipes are insulated, furnace filters are changed regularly, leaky faucets are repaired, and run only full loads in the dishwasher and clothes.
Resolution #7: Whenever appropriate I will take advantage of new options to reduce real estate services costs when I buy or sell a home.
Internet-based real estate service companies will provide rebates of as much as 2% of the selling price of the home you buy if you use them to assist you in your home purchase (state real estate associations have managed to make real estate commission rebates illegal in several states, but the U.S. Department of Justice, the Federal Trade Commission and consumer groups like the Consumer Federation of America and the American Homeowners Grassroots Alliance are working to repeal those laws). Try to get an exclusive buyers agent (EBA) to represent you when you buy a home. EBAs represent only buyers, never sellers.
Many of the state real estate associations have also managed to convince their legislatures to allow traditional real estate brokers to simultaneously represent both the buyer and the seller of the same home, creating a potential conflict of interest you want to avoid if possible. This practice is called “dual agency” and in those states a real estate agent may refer to himself as a “buyer’s agent”, even though the brokerage is actually representing the seller of the property you’re considering.
With the market as soft as it is, buyers should consider selling their present home before buying its successor. There’s a large inventory of unsold homes in most areas, so finding your next home shouldn’t be a problem. Selling your current home will probably take much longer, especially if you don’t want to be forced to accept an unusually low price. For that reason most sellers aren’t willing to accept purchase offers contingent on the sale of your current home, unless you are pricing your home very competitively and/or only asking for a month or two to sell it. While it is inconvenient, moving into a short term rental if necessary after you sell will allow you to take full advantage of your negotiating leverage when you buy the next home.
Another tool that can simplify some of the chores related to buying are service aggregator Web sites that let you compare rates from different local providers of electricity, local, long distance and cellular telephones, oil and gas, TV and Internet services, and newspapers by zip code. Some aggregator Web sites charge a fee for their services and all of services providers in each area may not be available on each Web site.
Resolution #8: I will look for economical ways to increase the value and livability of my home.
If you are like most, you probably have a list of things that need to be fixed or upgraded in your home, and a remodeling project may be on the list as well. Many of the things on the list may have been on the list for many weeks, if not months. You may have noticed that those jobs seldom get done by themselves, and some conditions get worse over time.
Start by putting your home “to do” list in priority order. Put on top the kinds of repairs that can cost more if neglected (a leaky roof for example), or which will continue to cost you money until they are fixed (a broken refrigerator seal, leaky faucet or toilet, etc.). Usually the parts are the least expensive part of a repair. If you are at all handy force yourself to take the time to fix things yourself.
If you’re not handy or won’t have the time to fix everything in the next few months call a handyman or specialist for the things you can’t handle. A good independent handyman should be able to do most things you need at a far lower rate than a plumber would charge to fix your toilet or an electrician would charge to fix a broken appliance. Ask your neighbors for recommendations of good handymen, and find out their hourly rates. The handyman franchises, which advertise heavily in local media, can cost as much as a specialist, however. If you can get a specialist (i.e. electrician or a plumber) for about the same price, that’s a smarter choice. Reporting services like Angies List, which carry consumer ratings on local contractors, can be very helpful in identifying which contractors are the most reliable and least expensive.
More extensive remodeling projects will probably require a remodeling contractor. Many projects can return 100% of the investment when you eventually sell your home, and improve your lifestyle in the meantime. Another plus of remodeling is that if it will make the home better suit your needs in the future, it can be a lot less expensive than selling your home and buying another which has features. By the time you finish selling your home and buying another, you can easily spend 10% of your home’s selling price on real estate commissions and various settlement costs for both homes. You can do a lot of remodeling for that amount.
The best candidates for a good return on your remodeling investment are things like updating badly dated kitchens or baths, or adding a second bathroom in a one bath home. The National Association of the Remodeling Industry periodically publishes return-on-investment data on most types of remodeling projects. Don’t over improve to where your home’s value substantially exceeds that of the neighbors or you’ll have trouble recouping your investment when you eventually sell. You can also help keep costs down if you are willing to do some of the easier finish work yourself, like painting or trim work.
Check the references of remodeling contractors thoroughly. Consumer complaints regarding remodeling contractors consistently at the top of the Better Business Bureau’s and the American Homeowners Foundation’s complaint list. To avoid disputes always use a comprehensive contract when you hire a remodeling contractor.
Resolution #9: In the face of growing signs of recession, I will be cautious in 2008.
Because of the growing threat of a recession, 2008 is not a good year to become over extended. Whatever else you do, make sure that you have enough cash or liquid reserves to weather unforeseen events, such as company layoffs or family illnesses. If that means waiting until next year to buy a new car or new home, so be it. Prices and interest rates may be a little higher next year, but so will your savings. A little wait to avoid a significant financial risk is well worth it.
Resolution #10: I will engage in the political process to influence issues of economic impact to me and my home.
Home ownership is a nonpartisan condition, yet the votes of legislators and rules of regulators will have a lot to do with your economic future. Home equity is the single largest form of savings for most homeowners and many of those votes will impact the value of your home. Those votes will also impact your mortgage interest rates, your taxes and other major expenses for most homeowners, such as healthcare. All of them will impact your ability to buy a home and your lifestyle. For many years American homeowners have been the true “silent majority”. With a Presidential election this November the 75 million American homeowners can no longer afford to remain silent. We must raise our voices to policymakers at all levels in 2008 to protect the value of our homes and the institution of home ownership.
Courtesy of the American Homeowners Foundation and the American Homeowners Grassroots Alliance, www.AmericanHomeowners.org.