Modern Down Payments

DownpaymentThere is this magical fraction where home buying is concerned: 20/80. It means twenty percent down on the cost of the home with the mortgage for the remaining eighty percent of that amount. Thus, the $100k home would have a mortgage of around $80k after the down payment is made.

Why is this a magic number? No one can really explain why lenders want to see that 20% put down against the purchase, but even if you don’t have that sum at hand, you can still find a way to get the funding together in order to get the best terms possible.

For example, let’s consider a few ways that people can pull together the 20% down payment if they don’t have it already sitting around in a bank account.

1. Gift- Most lenders are absolutely fine with you supplying the magical 20% down if a portion of it comes as a gift. For instance, let’s say you are able to sock away $10k over the first four or five years you are married. You find the perfect house, but you know that getting a mortgage for it with a ten percent down payment is not likely to be possible. You don’t qualify for a subsidized or first-time homebuyers loan, and so you feel like you might be unable to take any action. Your parents, uncle, or best friend learns of the matter and says that they’ll give you the remaining money. They see it as all of your birthday and holiday gifts at once or as your inheritance, etc. The bank sees it as cash in hand. The one thing that they will ask of you is to validate the source of the funds. Most ask for a gift letter and documentation that traces the origin point of the money and how it made its way from “account A” into “account B”, etc.

2. Loan – Take a loan to get a loan? Most banks will not let you borrow from another lender to get your down payment together, but if that parent, uncle, or best friend can lend you the $10k over a five year period (or longer), the bank may be able to work with you. Here’s how it would have to work: an official loan is made to you from that person(s) and formal documentation surrounds it. There has to be at least a minimal amount of interest applied to the loan, and you have to make monthly payments over five years or more to quality. Naturally, this loan is now put into the debt to income ratio and used to calculate whether or not you can afford the mortgage with this loan and any other monthly payments you must make as well.

3. Borrow against 401(k) – This is not one we suggest. It is tricky at best and may not even be allowed. It can turn into a total disaster if you lose your job after you take this loan because you will end up owing the entire balance within the next 90 days. So, if you borrow that $10k from the 401(k) and lose your job a year after you get the house, you somehow have to put together that money within three months.

Don’t despair if you don’t have the 20% sitting in the bank. If you have friends or family who can give or loan you the funds, most banks are happy to consider that as part of the loan approval process.

Get Realistic about Credit Card Rewards

credit cardsFriends were adjusting to the “empty nest” syndrome after their youngest child went to college. “We have to make so many changes in the way we think about things now,” one of the parents sighed, “and it isn’t just about how much to cook at dinnertime!”

One thing I instantly suggested was that they give their credit cards a review to ensure they were getting the right rewards from them. “Think of it as seeing the glass half full here people,” I said as I started to explain how their “new lives” meant entirely different rewards.

For instance, as my friends were raising their young children and spending their income on the typical things – food, clothing, gas, etc. – they had their credit cards’ rewards systems geared towards those items too. It made sense since that was where the bulk of their expenditures occurred, but even before the kids left home, there was a sort of shift.  For example, as we talked about the financial changes one of the parents indicated that they had already decided to opt for a rewards card that gave them cash back from purchases. She did this because the two older kids were in college and she was spending thousands on their textbooks through the website.

“So,” I asked them “where can you get your well deserved payback now?” We began to talk about their hobbies, the things they could do now that the kids were not the priority, and so on. Obviously, one of the first words that popped out of both of their mouths was “travel”. Clearly, getting miles or travel related rewards (hotel points, etc.) was a “must”, but I suggested to them that they think less grandly and consider a card that gave them rewards towards things like eating out rather than trekking around the globe.

This brought us into a conversation about how one could streamline this sort of credit card review process. I told them that they had to break it down into a sort of “keyword” issue based on their main focus. For instance, the categories I use include: Shoppers, Diners, Household, Travel, Techies, Events Fans, and Business Owner rewards. These tend to be the primary ways that you can use credit to get rewards, and if you steer your search towards the most appropriate category, it will help to direct you towards the cards that are the best match.

There are websites that let you do instant comparisons of the most popular and commonly chosen rewards cards, and that is where I sent them to overhaul their credit card plans.

How to Invest During the Election Year

election year investingHere is a fantastic quote from financial analyst and expert Jason Zweig:

“Since 1926, when reliable stock-market data began, the United States has had 15 presidents and nine elections in which control of the White House passed from one party to the other. That’s a small sample. So you should take any statistical conclusion about the relationship between presidential election results and financial returns with a grain of salt the size of the Capitol dome.”

Rather than speculating about the financial impact of a Democratically controlled White House or a shift to a Republican one, the smart investor thinks about the interest rates. Thus, and as always, it is the Federal Reserve’s monetary policy that tends to create the most movement in either direction.

Wait a second, you might think, what about all of this talk about “gridlock” being good for the economy? You know, when Congress is divided and bickering creates certain reactions in the markets? While there is some validity to this issue, the data shows us that stocks tend to return more (both large and small stocks – though small stocks show returns of around 26%) when the Fed is reducing rates.

Great, you say, so what does this mean to me as an investor? Basically, it means that you cast your vote based on your politics – not your portfolio. Ignore those who tell you how to alter any pre-established plans for investment because one or another party has inherited control of the White House. Historically and statistically, it is the interest rates that make the difference in the financial markets, not the person or party that wins the U.S. Presidential elections.

Yes, there may be some slight indications of one party seeming to benefit thanks to Fed cuts in the rates, but for now those have to be seen as anomalies. Until the election has come and gone, and even in the weeks afterward, you are going to be literally bombarded with all kinds of recommendations, panicky suggestions, and endless commentary about the things you should and should not do with the portfolio. Unless your trusted financial advisor tells you to follow a particular course of action, or your research and planning identifies a savvy change in plans, stay the course. Election years are times of general confusion about the future, and you should never let a “knee jerk reaction” or sense of panic guide your financial plans.