Mary is moving from the Big Apple to a place where the median home price will buy you more than a broom closet. As a first-time buyer, she's trying to figure out just how much house she can afford?
My partner and I will be moving to a more affordable market soon. We'll be looking to save up to buy a home in that market eventually, but we're not sure how much to save. If you're a first-time homeowner, how much can we expect to get in a mortgage, and how much should we be prepared to put down for the down payment?
Mary W., New York, N.Y.
This question really has two very different answers: 1) how much will a lender give you? and, more importantly, 2) how much do you feel comfortable borrowing?
Especially for first-timers, you really need to start with question #2, and no one can answer it better than you can. If you’ve never made a budget, sit down and come up with one. How much cash do you think you can comfortably afford to devote each month to housing (mortgage) payments? Some people are willing to forego movies and dinner out, bring lunch to work every day and give up their car – anything to own a home. Some stretch too far and find themselves pouring all their income into the house, leaving themselves in permanent financial stress.
Once you’ve got that monthly cash flow number, go to one of the mortgage calculators on the Web (we like www.bankrate.com) and play around with different scenarios. Try 20 percent down and see how much house your monthly payment will get you. You may be able to qualify for just 10 percent down; a lot depends on your credit and income. (Avoid “interest only” mortgages -- you don’t save much money and you’ll never build up equity; it’s like paying rent to the bank.)
Armed with a good feel for how much you think you can afford, shop around for a few mortgage lenders and ask them how much they’d lend you. (This should be free.) You may be surprised to learn that the lender’s idea of what you can afford is a lot more than you came up with in your original exercise.
The formula they use includes some risk on their part that you’ll end up a little over your head. They’re willing to take a little risk because the bigger the loan they sell you, the more they make. But you don’t need to take that risk. Only you can determine your own comfort level.
Tax evasion for dummies
I have paid about $1,800 in estimated taxes this year as I am an independent contractor. My boss has decided to close his business and says he won't give me a 1099 so I do not have to report the income he gave me. I don't know what to do since I've already paid the estimated taxes. Help!
James, Toledo, Ohio
Report the income. Here are two good reasons:
First reason: Failure to do so is a crime. Tax evasion is a felony that can land you a prison term of up to 5 years or a fine of up to $250,000, or both. For more on how it works, here’s a sampling of recent tax fraud convictions.
Second reason: Though the exact number is obviously very hard to pin down, hundreds of billions of dollars in legally owed taxes go unpaid every year, according to IRS estimates. Every one of those unpaid tax dollars has to be made up by someone else. So if you don’t pay, all of us play-by-the-rules types will have to pay more.
After you file your return and join the play-by-the-rules crowd, go back to your boss and tell him to pay his fair share too. Tell him we’re tired of paying more taxes than we should because of slouchers like him.
My grandmother, age 77, has been advised to invest in Collateralized Mortgage Obligations. What are your thoughts and where does she go to get detailed information?
LaWana S., Atlanta, Ga.
First off, we don’t believe people should ever invest in something they don’t understand. So have your grandmother ask whoever came up with this idea to explain it to her. If they start talking about how these are complex instruments that are beyond the capacity of an individual investor's financial intellect, tell Grandma to smile sweetly and send the nice young salesperson on their way.
To get her started, Collateralized Mortgage Obligations are what are known as mortgage-backed securities, a form of derivatives. CMOs comes in various flavors, but essentially they are pools of home mortgages that are bundled together and then chopped up as securities and sold in relatively small amounts to individual investors. Wall Street loves these things because they get a fee for the bundling and another fee for the selling. In theory, CMOs are considered relatively safe because they’re backed by the stream of payments from homeowners paying off their loans.
While the basic concept of a CMO is fairly straightforward, the individual terms and conditions attached to each issue are not. Some are guaranteed, some aren’t. Some carry relatively high transaction costs (which means they’re hard to sell), and you can’t track them in your local newspaper the way you can a Treasury bond. At the end of all that, you may not get much more return than Treasuries.
There are other significant risks. And the devil is in the details: One round of CMA may be structured very differently than the next, and the exact structure creates specific levels of risk that are often difficult for an individual investor to decipher. And with any CMO, you face risks posed by changes in interest rates and defaults by homeowners. So these are not as safe as, say, a U.S. Treasuries.
I have two credit cards that pay a cash rebate of 1 to 5 percent depending on the card and the purchase. Last year this amounted to a surprisingly large dollar amount. Since I pay these cards off each month I pay no interest or fees, so it is clear that the rebates come from the vendors and other cardholders. At 5 percent the rebate amount is more than most vendors pays. My questions are: Why does this work for the card issuers? How long can they keep doing this?
Jarl M. -- Guilford, Conn.
Because for every guy like you who pays off his balance every month there are 100 others who sign up for cards to get the rebate and end up paying much more than that in interest and fees.
In other words, it’s worth it to the card company to lose a few bucks on you as a way of buying new customers who generate profits.