Our recent survey found these financial problems concern women most: living within your means, affording health insurance, getting rid of debt, buying a home, and saving for retirement. We looked through our viewer email and found five women who have these money problems. “Today” financial contributor and Money magazine editor-at-large Jean Chatzky has advice on how to buy a home.
“I’m a 51 year old single woman making $54,000 with a $558 car payment. I live in a cooperative townhouse worth about $137,000 on which I still owe $24,000. I live in Ann Arbor, one of the most expensive towns in Michigan, where a standard 3 bedroom, 2 bath colonial with attached garage runs between $285,000 and $315,000. Any chance of my ever owning a home of my own?”
— Lynn G., Arbor, MI
Pull your credit report
In order to get a mortgage — particularly one at an attractive interest rate — you need decent credit. And a decent credit score. Your credit score, which looks a lot like an SAT score, is a numerical measure of your fiscal responsibility based on how much credit you have available to you (and how much of that you use), how well you pay your bills (on time), etc. According to the folks at Fair, Isaac & Co (the leading generator of credit scores in this country), if you have a score of 700 or more you can net a rate on a 30-year mortgage of around 5.5 percent. With a score of 600, your rates climb into the 7 percent range. What do you do if your score isn’t where you want it to be. Try to clean it up by paying on time, paying down your balances so that they’re within about 60 percent of credit available to you, and closing credit lines you’re not using (though be careful not to get rid of the oldest cards in your wallet — the length of relationships you have with your creditors counts too.)
Save for a down payment
When your parents bought a home, they needed to have saved 20 percent of the money going in. That’s not true for you, as long as you have 5 percent of the purchase price, you have enough. But understand — you’ll also need money for closing costs, which can run thousands of dollars depending on where you live (though these costs can be rolled into your loan, and the seller of the property may also be willing to pick some of them up.) The best reason to pull together a substantial — 20% — down payment is that you no longer have to pay private mortgage insurance which can run hundreds of dollars a year. Once you own 20 percent of the equity in your house, it’s no longer necessary.
Get a grip on what you can afford
Often the choice of house boils down to how much a lender is willing to front you. In general, mortgage lenders like to see that your monthly housing costs — including mortgage payments, property taxes, homeowner and mortgage insurance) equal no more than 28 percent of your income. And they want to see those costs PLUS any other long term debts you’re repaying like car and student loans equal no more than 36 percent. HSH.com has a handy calculator on its website that can help you get a grip on how much house you can afford.
And don’t forget to add in your living costs. This is the wildcard and it often gets left out of the equation. If you’re moving out of a small apartment with no lawn where utilities are included, into a house that you’re responsible for maintaining the cost of existing can jump more than you’d believe. Before my husband and I bought our house, we sat down with my brother in law who opened up his books and showed us what it cost to maintain a similar house of a similar size in a similar neighborhood. Ask a friend to do the same for you. Or make a list of all the expenses you believe you’d incur each month — ask your realtor for help, and do some research to get a grip on the other numbers as well.
Find the right loan
As I noted earlier, right now is a really good time to get a mortgage. But getting the right mortgage is key. Different products abound and you need to figure out if you’re best off with one you’ll pay off in 15 years or 30 years, or one that is fixed for the entire term of the loan (where the rate holds steady) compared with one where the interest rate adjusts. The attraction of adjustable-rate loans is that their rates begin (sometimes much) lower than fixed rate loans. Right now, for example, a 30-year fixed rate mortgage averages 5.6%, a one-year adjustable averages 3.82%. Because of the lower interest rate, you can qualify for more house. The question is — if and when the interest rate on that loan jumps by as much as 2 percentage points a year (with a 6 point max) will you be able to afford the payments. Mortgage brokers can help you figure out which loan is right for you. So can lenders. You also will want to look into programs specifically for first time buyers that offer breaks for buying in particular areas. The Fannie Mae Foundation is manning our call lines today and they’ll be able to point callers toward first-time buyer programs in their state.
Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Information provided courtesy of Jean Chatzky and Money magazine. Copyright © 2003. All rights reserved. For more financial advice, visit the Money magazine Web site at: