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Showing posts from December, 2019

Another Source for a Down Payment

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Borrowing from a 401k, 403b or the cash value of life insurance policy is a common financial strategy.While taxpayers are not allowed borrow from either a traditional or Roth IRA, they can withdraw funds before age 59 ½ for specific purposes like a first home purchase, qualified higher education expenses or permanent disability without incurring a 10% penalty.First-time home buyers can make a penalty-free withdrawal of up to $10,000 if they haven't owned a home in the previous two years.This would allow a married couple who each have an IRA to withdraw a lifetime maximum of $10,000 each, penalty-free for a home purchase.In many cases, the money would be used for a down payment or closing costs.However, some buyers might consider this source to increase their down payment so they could qualify for a loan without mortgage insurance.There is another condition where a taxpayer can withdraw money from their IRA without triggering the tax or penalty if it is returned to the IRA within 6…

Anticipating the Cost of a Home

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The largest expenditure a buyer has when purchasing a home is the down payment which can range from zero for veterans or 3.5%, 5%, 10% and 20%.With mortgages come closing costs which can be another 2-4% and must be paid at settlement in cash.Most mortgages require an escrow account to pay the property taxes and insurance when they are due.Generally, the lender will require one to three months of taxes and one month of insurance so they can be paid before the actual due date.First-time buyers should be aware that they'll need this amount of funds available to purchase a home.  Unlike tenants who are not responsible for repairs, homeowners are, and it is necessary to be able to pay for them when they're needed.Newer homes will need less repairs and older homes probably, more.At some point, components like the furnace, air-conditioner and appliances will need to be replaced which could crush a homeowner's budget if they are not expecting them.Homeowners should expect between …

Personal Finance Review

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Even if Benjamin Franklin never actually used the expression "a penny saved is a penny earned", the reality is that it has been a sentiment for frugality for centuries.He did say: "Beware of little expenses; a small leak will sink a great ship."At the end of the day, it is not about how much you make as much as it is about how much you keep.The first step in a personal finance review is to discover where you are spending your money. It can be very eye-opening to have a detailed accounting of all the money you spend.Coffee breaks, lunches, entertainment, happy hour, groceries and the myriad of subscription services you have contribute to your spending.This revelation can lead you to obvious areas where savings can be accomplished.The next step is to dig a little deeper to see if there are possible savings on essential services.Get comparative quotes on car, home, other insurance. Review and compare utility providers.Review plans on cell phones.Consider eliminating t…

an Investment Perspective on a Home

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Looking for an investment that will turn $10,000 into $80,000 in seven years?Sound too good to be true?What if I told you that you could live in it every day during that seven years?Would that sound even better?A $300,000 home purchased today on an FHA loan would have a $10,500 down payment.If it appreciated at 2% annually, which is less than  the U.S. average, the future value of the home would be $344,606 in seven years.The unpaid balance on the loan would be $256,350 based on normal amortization which would make the equity in the home $88,256.The annual compound rate of return on the down payment would be 35%.This number sounds so large, that you might start doubting the credibility of this example.Looking at some alternative investments, a ten-year Treasury note is currently paying 1.73%.You can earn 2.1% on a ten-year certificate of deposit.If you could handle the volatility of the stock market and pick the right stock, you might earn 7-10%.There really is no alternative investme…

Understanding the Mortgage Interest Deduction

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Mortgage interest paid on your principal residence is deductible today as it was in 1913 when 16th amendment allowed personal income tax.The 2017 Tax Cut and Jobs Act reduced the maximum amount of acquisition debt from $1,000,000 to $750,000.Acquisition debt is the amount of debt used to buy, build or improve a principal residence, up to the maximum amount.A common misunderstanding among taxpayers is that you are entitled to that much debt even if you refinance a home during your ownership years.Acquisition debt is a dynamic number that changes over time.It decreases with normal amortization as the principal amount of debt is reduced.The only way to increase acquisition debt after a home is purchased is to borrow additional funds that are used for capital improvements.Assume a person buys a home with a new mortgage and after the home has enjoyed significant appreciation, refinances the home for much more than is currently owed.Let's also say that the refinance amount is less than …