How to Save for a Home When All Your Money Is Going Toward Rent

Renters everywhere are feeling the constraints of rising rents. Higher rents erode your ability to save the cash you need to buy a home. Your living situation becomes a Catch-22: the longer you rent, the bigger percentage of your discretionary income you may need to save to offset rent increases.

Saving up to buy a home is no easy feat. You typically need at least a minimum of $20,000 to cover a down payment plus closing costs. That’s because you’ll need at least a 3.5% down payment to qualify for a mortgage and closing costs can be around $7,000 to $10,000 (about 2% to 3% of the purchase price). This goes without saying, but the higher the home price, the more funds you will need for the down payment.

(Keep in mind, you’ll also need a good credit score to qualify for the best mortgage rates. You can get your credit ready to buy a home by checking your free annual credit reports at AnnualCreditReport.com and looking at your credit scores for free each month on Credit.com.)

Picture this scenario: you’re diligently putting away at least 15% of your gross monthly income to buy a home in the near future. If your income is $8,333 per month ($100,000 a year) either from you or a spouse or combined, you would be saving $15,000 per year (or $1,250 a month) to meet that 15% mark.

Savings tip: A 15% home savings rate is a figure you may want to aim for if you make at least $60,000 a year and are looking to buy a house within the next two years. In some markets, however, your savings rate may need to be higher to be consistent with the cost of living in that area.

As demand for housing remains strong, monthly rents are subject to change commensurate with what the market will bear. Let’s say your rent payment is $2,200 per month now, but rises to $2,500 due to housing market changes. You would need to find a way to recover the $300 increase if that money was formerly going into your savings fund. How do you do it?

How to keep rent increases from ruining your plan

Taking no action and using the money you would be saving for a home to cover the higher rent payment will lengthen your home-buying trajectory as your savings rate diminishes. With the rent now at $2,500 and your annual income still at $100,000, your savings rate, as a consequence of losing that $300, falls to 11.4% a year.

You may still get you a home, but will perhaps have to look for one in a lower price range or a different neighborhood. Alternately, you can lengthen your timeframe for making your purchase. You can also cut expenses to offset the rent increase. Here are a few ways to possibly do so:

1. Cut an expense equal to the rent increase. Sounds obvious, but if you can find another spending area to cut back on (Daily Starbucks? A rarely used gym membership? Online shopping?) rather than diverting the home savings to cover your higher rent, you’ll be able to stay on track.
2. Look for a new place with a lower rental obligation. The process might be difficult, but could be worth it for the greater good of buying a home in the near future.
3. Move in with family to aggressively save for your new house. Going from $2,200 a month in rent to $0 can super-accelerate your home-buying timeline.
4. Get a roommate to help pay the rent and offset the increase.
5. Lock in your rental amount with a lease, keeping in mind that a lease binds you to the property. This contract, however, might not be such a bad thing if the term of the lease is consistent with your savings and home-buying plan.
6. Consider buying a home sooner, if you’re financially able to do so. Many 401(k) and retirement fund accounts allow for special privilege borrowing provisions to buy a primary residence. If you have a slush fund in your 401(k), this could be a good option and the money comes out of your paycheckpre-tax.
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   This article was written by Scott Sheldon and originally published on Credit.com.

Shared from:  http://www.realtor.com/advice/finance/how-to-save-for-a-home-when-all-your-money-is-going-toward-rent/

Should You Spend or Save?

Put your tax refund money to work for you. According to the IRS, about three-quarters of Americans will average tax refund of $3,000. Since a refund can feel like "free" money, you may be tempted to splurge on a big-ticket item such as a wide-screen TV or exotic vacation. While it may be OK to have some fun with your refund, consider putting that money to work for your future:

• Pay down high interest debt. For example, if your credit card annual percentage interest rate (APR) is 12% and your balance is $3,000, you can save $360 in interest by not carrying that balance over the next 12 months.  
• Increase your emergency savings so you won’t have to rely upon high-interest credit cards to pay for the unexpected.  
• If you’ve got a young family or other dependents, buy life insurance. Depending on your age, you may be able to get a $500,000 policy for a few hundred dollars a year.  
• Invest in retirement savings. At a 5% return, your $3,000 investment will double in 14 years.
• Mortgage interest rates are at historic lows. Use the refund to offset the closing costs of a refinance that can reduce your monthly payment and save you thousands in interest over the life of the loan.
• Perform needed car or home maintenance. According to the U.S. Department of Energy, fixing a serious maintenance problem on your car can improve your gas mileage by as much as 40 percent. Likewise, the U.S. Environmental Protection Agency states that energy efficient windows can save the typical homeowner up to %500 per year in energy costs.
• Take continuing education classes that can boost your income and job prospects.
• Finally, don’t whittle away the money on meaningless purchases. Have a plan instead. 　

*Information provided by Mortgage Connection Newsletter, Spring 2012*

Building an Emergency Fund

If getting your finances in order is a goal for 2012, there are three basic rules to follow; reduce your spending, get out of debt and have an emergency fund.  The first two rules are self-explanatory, however, there are many different opinions floating around regarding what a proper emergency fund entails.

What is an emergency fund?  Simply stated, an emergency fund is money set aside for unexpected expenses.  The basic purpose for this fund is to tide you over just in case you experience large-scale emergencies including a job loss or medical bills.  This same fund can cover minor expenses such as car and home repairs.  Credit cards and home equity lines of credit are not emergency funds even though many people turn to them in a time of financial need.

Home much should you save?  Experts' opinions regarding how much to save varies.  Most agree that an immediate fund of $1,000.00 will cover minor expenses.  Any money saved over that amount is up to you.  To determine this, you must decide how much you would need to tuck away in order to pay your bills if you become unemployed.  How many months will it take for you to become employed again or to replace your current income?

How do you get started? If you are currently living on a budget, getting started will be easy.  If you do not have a budget, make one.  There are on-line forms and advice available to help you.  Once this has been accomplished, simply add up your current monthly expenses that must be paid.  These will include housing expenses, food, utilities, transportation, insurance and other mandatory expenses.  From this amount, subtract any expenses that can either be eliminated or postponed such as vacation, entertainment and clothing.  Take the total and multiply it by the number of months it will take to have income coming in again.  Realistically, this number will be two to eight month's living expenses.  To this amount, add job hunting expenses and any bills you pay once a year such as taxes.

How can you succeed? There are two important things to do in order to succeed: 1) If saving a large amount of cash seems impossible, don't give up altogether, instead start small. It may take time to meet your financial goals, but even $25 saved each pay period adds up.  Start by scrutinizing your monthly expenses for extra money.  Contact your insurance agent to find ways to lower your home and automobile premiums, look around your home to find ways to lower your utility bills, eat out less, set up a car-pool to save on gas, and talk to your mortgage professional about refinancing your home; 2) Do not tap into this account for anything other than a true emergency.  If your refrigerator stops working, that is an emergency - if your television goes out, that is not an emergency.

Where should you save your money? Your money should be saved in an account where you will not incur early withdrawal penalties. It must be accessible anytime, anywhere.  For this reason savings accounts and money market accounts work well.  Make sure that you have a debit card tied to this account in order to pull out funds after hours or if you are traveling.

*Information above provided by Your Marketing Assistant Newsletter 2012.