Cut up those credit cards?

One of my goals for this year, that I have partly accomplished, is raising my credit score. I need to get my score above 740, at minimum, so that when I apply for a mortgage loan, I’ll be able to get the best rate. I still need to raise my score about 40 points (this is an average as all 3 credit bureaus are reporting slightly different scores). One thing I’ve learned about improving my credit score, is keeping my debt to credit ratio low. Since I’ve paid off all of my credit cards, I’m looking pretty good here. However, another factor that affects a credit score is how much total credit banks are willing to loan you. Since I’ve been on a mission to improve my poor credit history, I haven’t had much credit extended to me these past few years leaving me with very low credit limits.

So, here is my dilemma: I have two credit cards with low credit limits that are charging me monthly fees and/or annual fees (totaling approx. $155 for the year) . I don’t use these cards at all anymore. However, there is a catch with these two cards: they were originally a way to pay off old collection debt. These cards were offered to me about 6 years ago to pay off two other credit cards that had gone into collections. Once I paid the old debt off in full, they extended a limited amount of credit to me. I’m now thinking of canceling these two credit cards now that they are paid in full, but then my overall total available credit limit will be reduced by almost $1,000. How will this affect my credit score? Will it ding my score by a few points? Since I’m hoping to apply for a mortgage loan with in the next year or so, I’m trying very hard to keep the activity on my credit report to a minimum.

After doing some research, canceling my two credit cards would probably affect my credit score a little bit. By how much, I don’t know exactly. I have two options; A.) I cancel these cards and save $155 annually, with the potential of losing a few points off my credit score, or B.) I keep these cards until I am able to purchase a home.  That could be up to 18 – 24 months meaning I would have to spend up to $310 on fees, but I’d be saving my credit score.

For now, I think I will keep the cards. If purchasing a house becomes ever more elusive and my time frame extends to more than 24 months, I might just go ahead and cancel these two cards. I do know that when I obtain that mortgage loan, these two cards are getting the ax!

What do you think? Would canceling these cards now be beneficial? Am I making the right choice by keeping these cards a little longer?

A nice house. But should I buy it?

As I browse the business sections of MSN.com, so many articles are written to encourage prospective buyers to take the plunge and buy a house. Headlines read like a “going out of business” sale, “Mortgage rates at rock bottom, buy now” is the theme. But just because mortgage rates are the lowest they’ve been in years, and home prices are much more reasonable than three years ago, does that mean everyone should go out and buy a house?

I’m playing devil’s advocate here, even though my goal is to purchase a home of my own, because I think these articles that are appearing in the business section of major news sources mislead prospective buyers. My stance is this: No one should buy a home unless they are financially prepared to do so, no matter how low interest rates are or how inexpensive homes may seem. Financial Samurai recently posted his interview with Consumerism Commentary and stated that he believes in the 30/30/2 rule when it comes to purchasing property. That is you have 30 percent saved, for a 30 year mortgage (I think this is the second 30, I can’t remember this one – Sam?), and pay no more than twice your annual income for the house. I agree, but with a slightly different variation; a person can probably comfortably afford a home at 2.5 time their income.

This means, however, that if you want to purchase a $300,000 house, you need $90,000 saved. How many new home buyers do you know that put down that much in cash for a house? It’s difficult to save that much money when an average salary hovers around $40,000. And, if you only make $40,000 a year (add a spouse that may equate to $80,000 total income), your home should cost no more than $200,000. Where I live, there are few homes in this price range. So what does this mean? It means I’m not ready to own a home yet, even with articles luring me to purchase because mortgage rates have never been this low and are primed for spiking within the next year.

Marketing pressure is what lead to the recent housing bubble, hopefully this pressure isn’t leading more purchasers down this same path. With tighter lending practices in place, due to the financial melt down, this should remedy some of the problems of the housing market. However, no matter how enticing home prices and mortgage rates seem,  I won’t be making that plunge until I’m sure I can afford a home comfortably.

What is your thought on buying a home? Is it always the best option? Are renters financially illiterate people? What about all the articles sounding like advertisements for prospective home buyers? Should people follow the advice and just buy a home before it’s too late?

This photo reminds me of the journey towards financial freedom; lots of steps that are sometimes elusive.

I’m realizing that my goal to purchase a house with in the next year is still many months away. I started out with a 3-step plan: pay down debt, raise my credit score, save for a down payment. My first two goals are going swimmingly; I’ve paid off close to $8,000 in debt and am working towards paying off my line of credit and my car loan. I used a debt repayment calculator and found that at the rate I’m going, I should have both paid off in under two years. That’s great news, if I can pay it off before then, even better. I’ve also raised my credit score by over 100 points in a year. All there is for me to do is keep making my student loan payments, use my credit cards lightly, then pay them off in full every month. If I keep this strategy up, I should see a 740 score this year.

However, I’m struggling with the 3rd step of my plan: save a down payment. These last few months my income has waned. As a a temporary employee with a school district that is running out of funds, I’m seeing this as a long-term pattern. My husband’s business is doing okay, but he is only bringing in enough income to equate to one salary plus a part-time employee (who is a programmer). This means I have to develop a new plan for bringing in more income.

My plan is still in the fuzzy- vague-I’m not sure what I’m going to do yet stages, but at least I have a direction:

• Option A: Be a marketing genius and bring in more work for my husband, which would create a job for me. This plan is more long-term and the results wouldn’t be immediate. However, if I am successful, it would be my ideal option.
• Option B: Take on a part-time position with a local company or the Census Bureau. This would bring in extra cash for a few months while I develop a more long-term strategy, still allowing me to take teaching gigs.
• Option C: Stick it out with the current school district and hope their budget improves. This is a risky scenario, I don’t want to wait until the bitter end only to find out I was right all along.
• Option D: Go get a permanent position and switch professions. I’ve been teaching for almost 9 years, I haven’t had to work in a corporate office or go on a job interview in a very long time. I like my summers off and my three weeks of winter break. This option scares me!

As I switch gears and begin moving towards option A, I realize I need to be really organized and manage my time wisely. I can easily fall into a pattern of sleeping too late, or wasting time running errands when I ‘work’ for my husband. To optimize my time, I’ll begin focusing on tasks using my task manager in Outlook. This should keep me in line.

Have you had to change jobs lately? How do you manage your time when you’re at home? Which option would you choose if you were in my position? Do you use a program to help organize your tasks?

Mesa House in Arizona

My trips to Arizona always leave me questioning life style choices. I think it’s because central Arizona, to me, is a conundrum: It’s a beautiful state in the winter, and a horrid place in the summer. The newly paved roads make driving pleasant, yet the endless mini-marts and beige-colored housing developments make for a boring and repetitive landscape. Which brings me to the topic of endless housing developments.

With each visit, usually twice a year, I notice a new community that wasn’t there before. Of course building has slowed over the last 18 months, but there are still areas that are going strong. For instance, my sister-in-law lives in a new development in the far east end of Maricopa county. On our last visit, her’s was the only one in that vicinity, making it easy to find. This visit, we noticed many more had been completed and we had the darndest time finding her street. Every house was brown or beige, or a variation of taupe, making it very confusing to find the right street to turn on. With housing communities all butted up against each other, there are very few landmarks to cue a driver where to go. Eventually, we figured out that by counting the streets, we could navigate her look-alike community.

After four years of my sister-in-law (SIL) and her family living in their newish house, many things are already falling apart and looking worn. Some of this may have to do with their three children. Children usually aren’t very careful with banisters, doors, or cleaning up after themselves. However, some of the things my husband and I noticed, had nothing to do with little hands touching it. They seemed to have more to do with the quality of the houses. Like the creaky doors, for instance. I live in a rental house that is over 50 years old. My interior and exterior doors don’t creak when opened. The back patio door of my SIL’s house sounded like a door off a haunted house. Since my husband smokes, he would remove himself to the back patio, but felt horrible that every time he opened it, it would make a loud crrrrrreaking sound. Another item that seemed like it was really poorly made were their bathroom floor tiles. The edges were already chipping and the grout was completely cracked in many places.

Knowing that they paid a premium price for their home four years ago, I decided to keep my opinions about the quality of their house to myself. Or in other words, I kept my mouth shut. Yet I realized that they may not have had much choice in the matter. With home builders developing mass quantities of homes in short periods of time, the quality of the homes seems to have been at the bottom of the contractor’s check list. Why pay for premium materials when the home owner may not notice the difference? Or at least, not when the house is brand new. A few years back, when buying homes was a frenzied activity, home builders could get away with building quick and crappy homes. With time and wear, however, the lack of quality really stands out. I’m not sure if my in-laws are thinking of selling their home anytime soon, but the wear and tear will definitely have to be remedied before they do.

Have you bought a new home recently? Is it made of quality material? Have you lived in an older home and noticed that the home seemed more durable?

Just the other day, Get Rich Slowly wrote a terrific post about renting versus buying property. I’ve been meaning to write my own post about this, especially since purchasing property has been on my mind now for over a year. It is also one of my goals I hope to accomplish by the end of this year or the middle of next year. However, I’m still not ready to take the plunge for a few reasons:

• Down payment: I don’t have the down payment saved up. I’d like to have at least 10% saved, which would be about $30,000 on a $300,000 home. I am really far from this goal.
• House prices: Decent homes in good neighborhoods are still selling for around $300,000. We live in a suburb of Los Angeles, so our prices are a little inflated compared to the rest of the nation.
• Fluctuating income: My husband owns his own business and it’s currently a little slow (normal for January). I work as a substitute teacher so I’m not ever guaranteed work. This will also make it a little difficult to qualify for a traditional 30-year mortgage at a decent APR.
• Indecisiveness: Lately, there are a few things about LA that are really getting on my husband’s nerves. He’s been complaining about everything: from the traffic to the grocery store clientele, to our neighbors. I’m not so sure he’ll be happy in LA in a couple of years if the city doesn’t begin to offer better services, smoother roads, or less traffic! Also, there is little hope for me obtaining a teaching job within the next couple of years with the school district I work for. They are one of the largest districts, and can’t find the money to continue paying it’s teachers. I live smack-dab in the middle of that district.

This brings me to rethink our idea of purchasing property. I know that we will eventually be property owners, I just don’t know if it’s going to be as soon as I had hoped. I have been really struggling with this new train of thought. That is until I read J.D.’s post. Basically it boiled down to what it really means to own property and is it a good investment?

Deep down I know that owning property is a good thing. If by the time of retirement, the home we purchase is either paid off or is worth more than we purchased  it for, it could be used to help us retire or move. It could function as an added security later in life. However, if we move only 5 years after we purchased our property and the market hasn’t improved, we would be breaking even if we’re lucky. In that event, we would be better off renting.

I found a great, free calculator from Yahoo.com that puts renting and owning in perspective. (I tried the NY Times link on GRS, but you have to be a subscriber to use it). Here is what the calculator figured out based on my numbers:

Rent vs. Buy Calculator

You’ll notice that based on these figures, it would be better if I continued to rent. The only thing this really doesn’t calculate is the profit earned by selling the property. I’m not quite sure how that works, but I would think that if you purchased a property for $300,000 and decided to sell 20 years later, the property would be worth more than what you paid for it. This is in sharp contrast to renting for the same period of time, there’s no profit in that scenario at all.

Again, I do intend to be a property owner myself in the near future. At least now I don’t feel as rushed or guilty if I don’t own my own little house in the valley by mid-next year.

What are your thoughts? Does this calculator factor in everything? Or is it missing the resale value somehow?

For the past 10 months, my husband and I have been working to pay down our debt, increase our credit scores, and save for a down payment. We live in the second most expensive city in the United States, so houses are a wee bit expensive as well. Earlier this year, housing prices dipped to their lowest price in about 10 years. This, along with really low interest rates,  is what prompted us to get serious about purchasing a house.

As I have been keeping track of foreclosed homes in our neighborhood using RedFin, I have noticed a startling trend: Prices are creeping up! And we’re not quite ready. Of course, houses are still much more affordable than they were, say, two years ago. However, this trend is making me reevaluate the price of home we can afford. My original estimate of what I felt we could comfortably afford was about $250,000. I am now realizing that there are very few, if any, homes available in this price range.

Therefore, my new ballpark figure, which is slightly higher than I originally wanted to settle for, will be closer to $300,000. In many states, 300K gets someone a terrific, large, newer home. However, in my case, I’ll be lucky to purchase a 1,000 square foot fixer upper. This new, higher price also means that to save 20% for a down payment,  I will have to save MORE money than what I originally had planned. This probably also means I won’t be putting 20% down on a house, it will most likely be closer to 10%. After using some mortgage calculators, here is the breakdown of what our payments would be:

• Down payment of $30,000 on $300,000 home (or 10% down)
• Monthly mortgage payment $1500 on a 5.25% 30-year home loan
• 1.5% property tax divided by 12  months $375 per month
• Homeowners insurance monthly payment approx. $125
• Total monthly payment: $2000 (only $200 more a month than what we are currently paying for our rental house)

This monthly figure is about $100 more than what I had actually hoped our monthly mortgage would be, and this is based on a very low interest rate. Of course we could always opt for a 7/1 ARM (which is not my favorite option), or perhaps find a major fixer upper for less than $300,000. What I’m finding though, is that the major fixer uppers don’t qualify for a home loan, they are cash-only sales.

Our original goal was to get into a house by summer of 2010. This goal still seems feasible providing the housing market doesn’t spike up or interest rates increase greatly within the next 8 months. Of course, if this does happen before we are able to purchase a house, we could always go with plan B; purchase land, then build on it later. Of course there is always plan C; change our lifestyle and go with an alternative housing idea.

I haven’t written about houses in a while, yet they are frequently on my mind. Small houses, large houses, cookie-cutter houses; so many choices, but what can I afford? So far, I can’t afford anything yet. My husband and I are still working on saving for a down payment. We’ve made progress, though:

• Paid off $6,000 in credit card debt
• Paid down $1,700 on our line of credit
• Gotten my student loan out of default
• Saved $5,000

Every month we accomplish some small goal towards owning our little house in the valley. While we are hard at work saving for our down payment, we often talk about what we like about the houses in our neighborhood and adjacent neighborhoods. This keeps the objective of our goal in mind and it will hopefully save us some time when we begin searching for homes.

A house for sale in my neighborhood, 1951

Our current neighborhood, where we rent a house, is compiled of 1950’s mini-ranch style homes. Due to their small size, all hovering around 1,000 square feet, I wouldn’t call these homes ranch-style at all. However, I came across a very old brochure of our neighborhood and that is how the original developers marketed these homes. If I were to redesign their brochures, I would have called them more cape-cod or cottage style homes. Our rental house is basically a large square shape, with 3 smallish bedrooms, 2 teeny-weeny bathrooms, one long living/dining area, and a decent sized square kitchen. In contrast, ranch style homes are frequently more rectangular in shape and long.

Our neighbor, who has been camping in his tent while his rebuilds his house, has decided to disregard the neighborhood architecture and appears to be building a Mediterranean-style mansion that takes up the entire lot. As I have been watching the progress over the last several months, I’m a bit taken aback by his choice in design. When the house is finished, I’m afraid that it will stick out like a sore thumb. This is something I’ve taken into consideration when thinking about what kind of house I would like to purchase. There’s something to be said about consistency within a neighborhood.

I’m not taking about the current cookie-cutter style homes that developers are now building. The ones that have only 4 different models and appear in an AABB pattern within newer communities. I’m talking about slightly older communities that have had time to change color schemes, add on rooms, and have some sort of variation in design (even if it is just a matter of moving the placement of the garage.) These homes don’t seem like duplicates of each other, and there is more detail in the architecture, whether it’s the fake birdhouse-style homes or the added scalloped trim around the porch. Older homes may need more work, but this can mean fixing it up to my liking and adding features I think are important, like a solar-heated water heater.

Here is a snapshot of an older block not far from where I live. You’ll see that the homes have taken on unique changes over the years:

Changing neighborhood architecture

Hopefully by this time next year, I will be reporting back that I own a similar style house.

10% Savings

This month, I’m going to try that 10% rule: Pay yourself first by depositing 10% of your income into savings. I don’t know how successful I’ll be, since our bills are quite high, and our income has slowed down over the last couple of months. However, I see the need to do this.  Over the summer, there were a few instances where we had to dip into our “house savings”. Good thing we had this savings account set aside. We would have sank into debt had that money not been there.

However, now we are almost back to square one: having to save for our down payment again. It doesn’t help that we still have one large client invoice that is outstanding. Hopefully, by the time we receive that payment, we can stuff most of it into savings. So, my current plan is to set aside 10% of what I know is coming in, then to add an additional 10% to any other income that we make over the next month.

My first strategy is clearly outlining my budget. You can see my total monthly budget here. This month, I can count on having a total of $1,000 left over, even after I’ve deducted all of our bills from our known salary. Most of the left over funds will be deposited into our savings account. But first, I will probably take $300 or $400 out of this for an extra payment to pay down our line of credit, our highest interest and remaining debt. My student loan and car loan payments are factored into my monthly budget, so I won’t be making any extra payments this month.

Then, if any additional client invoices roll in this month, or we book a few more jobs, my goal is to shove at least 50% of this income into savings. I’m being realistic, I don’t want to say I’m going to put it all into savings. I also like to plan ahead for the upcoming month’s bills, meaning December. If any extra expense comes up, like say, the holidays, I’ll have some extra money in my account that I can use towards these items.

So far, a few small  invoices have come in this past week (or are about to be deposited or paid), and I’ve been good sticking with the 10% rule:

• client invoices totaling $154 = $15 went into savings
• client invoice totaling $140 = $14 to be deposited into savings this week
• upcoming invoice due this week $500 = $50 to be deposited into savings this week

By Saturday, I should be able to schedule a transfer of $64 into savings. It’s small, but a start!

Savings Small and Large

There’s an old saying that states, “It takes money to make money.” Well, I’m here to say that it sometimes also takes money to save money. For instance, my husband is charged an annual monthly web hosting fee for one of our web servers. It is slightly on the expensive side, but we get a lot of use out of it, and we generally like our hosting company. The other day, he received an email that touted a great deal: Purchase 5-years of web hosting in advance, and save 3  months off your host bill. Well, that sounds terrific. However, the bad news is that the 5-year deal would cost us $18,800, and this is after the 3-months off!

So, this got me thinking about other things that are a great deal, if you have the chunk of change lying around and can afford it. I’ll begin with the small items, the ones that seem more doable for most people.

• Bulk Groceries through a warehouse-style store: purchasing bulk paper goods, canned items, and dry food goods through Costco, or someplace similar to this, usually saves a shopper some money. But the catch is that you need to pay for an annual membership, usually about $50. You also need to be able to afford the total cost of the bulk items, so even if you save $8.00 on the bulk paper goods, you need to be able to afford $25 out of pocket to begin with.
• Carton of cigars or cigarettes: Of course, I’m not advocating smoking, it’s a dirty, nasty habit. Unfortunately, my husband is a cigar smoker. He finds that purchasing cigars in large quantities saves money, usually $2.50 per pack is saved. But, again, the initial pack costs almost $60. When we have this amount to spend, so that we can save in the long run, we purchase the boxes. If not, we are stuck with purchasing single packs from 7-11 for almost $5.00 a pop. Double Yuck!
• Metro Passes: You can save a ton over the long haul if you purchase a monthly metro pass for $40-50, especially if you ride the subway or bus daily. However, there are many people who don’t have that cash on hand, so they are stuck paying up to $5.00 a day or more for their transit. This can add up quickly to $60 or more a month. Purchasing the pass could save at least $10 a month.
• Parking permits: If you have to pay for parking near your work, or you go to school, purchasing a monthly or quarterly parking permit will save you money in the long run. But, again, you need to dish out $300 or more, depending on how long the parking permit is good for, up front. Yet another example of spending money to save money.

Now for some examples of large ticket items, the more money you have to begin with, the more you can save. Here are just a few examples:

• Putting a large down payment on a house: The more money you have saved for a down payment, the less of a loan you will need to take out. Usually, the large down payment will also qualify you for the lowest interest loan (providing your credit matches up with the amount you saved).
• Vacation Specials: JetBlue recently ran a special, pay $599 for a month and fly as much as you like. This is great, if you have the money and the time to fly.
• Auto purchase: This is pretty much the same as the house, put down a large down payment on a car, get a better APR on your auto loan. The amount of the loan will also be smaller, which is makes it easier to pay off.

I’m sure there are many, many other items I could think of or research. These are just ones that popped off the top of my (I mean my husband’s) head. Sometimes, those closest to you are the inspirations for ideas (and posts)!

This weekend  I called my step-mom to catch up. She is currently enrolled in school to become an acupuncturist, which is quite interesting. She’s always sworn that acupuncture can cure just about anything, now she is learning the medical craft herself. Within our conversation, she mentioned my step-brother (her son) building a house within the next year in Colorado on some land he purchased a while back. My step-mom lives in New York, and I have to be quite honest, has no clue about money or finance. She briefly mentioned that he and his wife had looked at a model home they really liked and wanted to emulate. Her description of the model home was that it looked like a multi-million dollar home from where she comes from, New York, but in Colorado it would probably be about $700K or $800K. That got me thinking, is it really that expensive in Colorado? I don’t really know, because I live in Los Angeles, the second most expensive city after New York, according to Forbes Magazine.

So, I decided to research a few metros across the nation. Within my research, I stuck to my price range, which has been creeping up lately, that I feel comfortable with: $300,000. I also only checked Zillow.com, since I was running out of time to cross check against other real estate sites. Based on what my husband and I make annually, this $300,000 figure is above the 2.5 times our income estimate, a good base figure. What I found was surprising, but I wasn’t completely flabbergasted. As a disclaimer, I also don’t know the particulars about the neighborhoods that these homes are located in, so the homes may look grand, but the neighborhoods may be sketchy for all I know.

Here is my summary, the photos follow below:

• Northridge, CA (where I live) : $309,900 – Slightly older neighborhood, home built in 1952. 5 bedroom, 3 bath (however, the garage has been converted into one or two of the bedrooms) no square footage available, but judging from the photo, and what I know about these homes, maybe 1,300 sq. ft.  FIXER UPPER.
• Denver, CO: $300,000 – Built in 1890 (an old house, so this one may need some upgrades!) 5 bedroom, 4 bath, 3,440 square feet. This one doesn’t look like a fixer upper from the interior photos on Zillow.com.
• Dallas, TX: $299,900- 4 bedroom, 2 bath, 3,736 square feet, no build date and no interior photos. I’m not sure if this would need some work or not, exterior looks nice.
• Raleigh, NC: $299,200 - 4 bedroom, 2.5 bath, 2,900 square feet, built in 1989. The interior and exterior look immaculate, no work would need to be required except personal choice. Very large lot in my standards, over 10,000 square feet.
• White Plains, NY (the closest I could get to Manhattan without going into the Bronx): $299, 900 – 1 bedroom, 1 bath apartment, 750 square feet, built in 1987. So, I guess I am luckier than those who live in White Plains, at least I would get double this square footage!
• Colorado Springs, CO (where my step-brother and his family plan to build a house): $300,000 – 4 bedrooms, 3.5 baths, 2, 789 square feet, built in 1998. No interior photos, so again I’m not sure if this would need major repairs inside. The exterior looks nice.

Again, I’m basing this off what Zillow has in their database. I know nothing of these neighborhoods, so maybe, like Detroit, MI, the homes are inexpensive and large, but the neighborhood is really bad. Here are the images to go along with my above descriptions:

Northridge, CA in comparison to Denver, CO homes for sale

Dallas, TX in comparison to Raleigh, NC homes for sale

White Plains, NY in comparison to Colorado Springs, CO homes for sale

Based on these comparisons, Raleigh, NC or Denver, CO look like the best places by far. What do you think? Did I miss something in my comparison? Should I have also focused on crime rates in each of these neighborhoods? Do you live in an overpriced or under-priced gem of a city?