Top 4 Things I Love About Dave Ramsey Baby Steps (And 4 Things I’d Change)

Dave Ramsey has helped thousands of people around the world through the 7 Baby Steps for financial peace and freedom.

The process works.

His book titled the Total Money Makeover has had some impressive sales numbers. The book has sold over 5 million copies and has been on the Wall Street Journal Best-Selling list for over 500 weeks. (That data is from August 2017, over 4 years ago, so it’s sold more by now.)

So, we know that the 7 Baby Steps work. There’s a lot to love above the process, and we will address 4 of those attributes here. We will also cover 4 things that we think could be updated this year (as it has been almost 30 years since the Baby Steps were created).

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7 Baby Steps really do work. There are three great reasons why the plan actual works:

a. The Baby Steps Force You To Get Gazelle Intense When It Comes To Paying Off Debt

I’ll mention this later, but I really appreciate that Dave Ramsey keeps the emergency fund smaller to force you to be gazelle intense. Having such a small emergency fund of $1000 really does force you to get out of debt faster because having too much money in the bank can cause you to stagnate. 

b. Dave Strongly Encourages Your Behavior Modification

Too many financial gurus don’t give it to you straight. They may tell you that you need to invest in real estate or cryptocurrency.  It often feels like a lie that you can achieve financial freedom without putting in a lot of work.

Dave Ramsey comes off as blunt many times, but he forces people to confront that the debt is often our fault (with some exceptions). His bluntness, along with the Baby Steps, forces you to self-reflect.

c. The Plan Is Simple And Shows How You Need To Focus On One Step At A Time

I’ll mention this more below, but it’s evident that his focused intensity on the Baby Steps plan helps you stay focused on the task. You complete the first 3 steps consecutively and the following 4 steps concurrently in a prioritized order. 

You don’t have to multitask. Also, you don’t need to think about another step. You just need to focus on the step at hand.

2) Dave Ramsey Is Right That You Need A Plan

Dave Ramsey has many helpful quotes. One of my favorite of Dave Ramsey’s quotes is, “You must plan your work and then work your plan”. 

Too often we go through life without a plan, but we expect that everything is going to work out just fine. I remember the first time I budgeted.  I thought that I spent a certain amount of money on eating out each month, only to realize that number was much higher.

We need plans. It could be a debt payoff plan to stay on top of your debt. It could also be a budget to understand your income and expenses. Or it could be a plan to pay off your home early as per Baby Step 6.

Dave Ramsey understood that which is why the Baby Steps plan is so useful. You stick to the plan and you get out of debt. Voila.

3) The Baby Steps Get Progressively More Challenging

One thing I noticed early was that the Baby Steps seems to get progressively more challenging. This helps build momentum. It is much easier to save $1000 than to pay off your house early. By starting and taking baby steps, the baby steps themselves actually don’t feel very babyish. 

Paying off your home early per Baby Step 6 feels much more like a big kid step, but it’s still just a Baby Step like the others. It’s impressive how Dave structured these baby steps.

4) The Community Around Dave Ramsey Baby Steps Is Incredible

You don’t have to look far to realize that the community around Dave Ramsey is incredible. You can take a Financial Peace University class at your local church. These classes are excellent to encourage you and help keep you accountable while you eliminate debt. You’ll learn the baby steps inside and out with others in your community. 

You can also be a part of a vibrant Dave Ramsey Facebook Community. Personally, I am a part of many of these communities where I receive a ton of encouragement when sharing wins and losses in the process of debt elimination.

There’s a lot to love about the Dave Ramsey Baby Step method.

Now, let’s cover a few things that could use a refresh.

1) Can Creating A Budget Be Baby Step #1?

I am a budget fanatic. I would love to see a Baby Step dedicated to budgeting. Why? Because budgeting helps you understand where every dollar goes. I used “every dollar” like that on purpose because Dave Ramsey himself created a budget app called EveryDollar for that very purpose.

What better way to understand how much money you have to put towards your emergency fund than starting with a budget.

I am not sure why Dave doesn’t start with a budget, but I would be keen to start the Baby Steps with creating one.

2) Dave Ramsey’s Emergency Fund May Need A Refresh

Dave Ramsey’s emergency fund calls you to save $1,000 in Baby Step 1. Is $1,000 enough? It really depends. 

First, adjusted for inflation, $1,000 in 1990 is now worth $2,043.26 per the US Inflation Calculator.

Dave Ramsey's emergency fund needs to be larger due to inflation

There’s a plethora of questions you can ask yourself when considering whether the emergency fund is big enough, such as:

  1. How much debt do you have to pay off?
  2. Do you own a home?
  3. How old is your car?
  4. How many kids do you have?
  5. Do you have insurance?

Another question I like to ask is, “where do you live?”. Personally, my family and I live in the Bay Area, California where the cost of living tends to be quite high. $1,000 wouldn’t get us very far.

3) Is The Snowball Method The Best Way To Pay Off Debt?

As a refresh, the debt snowball method means that you line up your debts from smallest to largest and pay your monthly extra to your smallest debt first then snowball into higher debts. The debt avalanche method is where you line up your debts from the highest interest rate and use your monthly extra to pay off the highest interest first. The savvy debt method is where you pay off 1-2 of your smallest balances first via snowball before reverting to the avalanche method to save the most in interest.

Dave Ramsey loves the debt snowball method. It has worked for many people, so why wouldn’t he? He feels the opposite for the debt avalanche where he mentions that it doesn’t work.

The challenge is that you could lose thousands in interest if your smallest debts also have the smallest interest rates. This can be possible because higher debt amounts carry a higher risk to the lenders, meaning potentially higher interest rates.

You can see how much the snowball method loses in comparison through this debt payoff calculator which compares interest paid from snowball to savvy methods. For reference, we are comparing 4 debts: $23,000 at 22%, $18,000 at 19%, $12,000 at 9% and $8,000 at 7% interest rate. The monthly payment is $1,825.00

debt snowball versus other debt payoff methods

In this example, you would lose over $3,500 in interest by choosing the snowball method.

Does that mean that the snowball method is always worse? Absolutely not. The snowball method may provide the psychological benefit that you need to exterminate your debt.

You choose the debt payoff app and debt payoff method that is best for you.

4) Should You Follow Dave Ramsey’s Advice And Pay Off Your House Early Or Invest?

Dave Ramsey loves mutual funds and paying off your home early. My question is what if your mutual funds are making so much more in interest than paying off your home would save you?

Wouldn’t the prudent thing be to continue to pay off your home and then get the higher interest from investing in mutual funds?  It’s not a one size fits all solution, but it is something to consider.

There are also often benefits of not paying off your home early such as interest paid being tax-deductible. That said, you would really need to determine whether you would make more money from mutual funds than saving from interest payments to determine what’s best for you.

What Do You Think About The Baby Steps?

The Dave Ramsey Baby Steps have helped thousands around the globe. What do you like about the Baby Steps? Do you agree or disagree with what we would change in 2021?

4 things I love about Dave Ramsey's baby steps and 4 things I'd change

Top 4 Things I Love About Dave Ramsey Baby Steps (And 4 Things I'd Change)

Source: biblemoneymatters.com

Which Bills to Pay Off First (or Cancel) When Money Runs Tight

Whether it’s from job loss due to a recession, a drop in income, or an unexpected major expense, there may come a time when you struggle to pay your bills. What can you do when your income and expenses don’t match up?

It’s essential you prioritize your bill payments and what you owe, paying the most important bills first.

Bills to Prioritize When You’re Low on Money

The most important bills are those that cover the necessities: shelter, food, water, and heat, for example.

The next most important are bills that cover things that make it possible for you to get where you need to go, such as your vehicle expenses.

Last on the list are bills that can ding your credit history, but not much else, if you fall behind on them.

Although you can make some adjustments to the order you pay bills based on your circumstances, it’s usually best to focus on paying your housing bills first, then paying what you can with the money you have remaining.

1. Mortgage or Rent

If you fall behind on mortgage payments, you risk having the lender foreclose on your home. If you fall behind on rent, your landlord can evict you.

Even though the foreclosure or eviction process can take months, it’s not something you want to risk happening. Keeping up with your housing payments is a must if you want to stay in your home.

When money is really tight and you’re not sure you can pull together enough to make a payment one month, the best thing to do is talk to your landlord or lender.

Many mortgage lenders have programs in place to help homeowners who are facing financial hardship. Your lender can review your options, such as forbearance or loan modification, with you.

During forbearance, you stop making payments on your loan, but interest continues to accrue. If a lender agrees to modify your loan, they adjust your interest rate or otherwise make changes to lower your monthly payment.

The United States Department of Housing and Urban Development (HUD) also has programs available to homeowners struggling with their mortgage payments. You can contact HUD to connect with an approved counseling agency. The counselor can work with you to create a plan to help you avoid foreclosure.

If you’re a renter, talk to your landlord as soon as you know you’ll have difficulty paying rent. Explain the situation to them in detail, including whether you think you’ll be late with payment, won’t be able to pay all your monthly rent, or won’t be able to pay at all.

Many landlords are willing to work with you to come up with a solution. You can help the situation by suggesting solutions.

For example, if you’re going to pay late, tell the landlord when you plan to make the payment. If you can’t pay the full amount this month, tell the landlord how you’ll make up the difference. For example, you can add an extra $100 or so to subsequent payments until you pay off the balance.

If you’re renting and your landlord can’t or won’t be flexible about payments, you might have more wiggle room than a homeowner.

Depending on how much time you have left on the lease, you can simply wait it out, then look for a less expensive place to live. Another option is to try to find someone to take over your lease so you can move somewhere that costs less.

2. Utilities

After your mortgage or rent payment, the next most important bills are your utility bills: gas, water and sewage, and electricity. Although some people count TV and the Internet as utilities, those services aren’t essential for everyone.

Fortunately, many programs exist to help people who need emergency financial assistance paying bills. The first place to look is your local utility provider. Many utility companies have programs to help people pay their bills.

Another option is the Low Income Home Energy Assistance Program (LIHEAP), a federally funded program that provides financial assistance to help people pay energy bills. LIHEAP has specific income requirements and is grant-funded, meaning only a set amount of money is available each year.

If you think you qualify for LIHEAP, the sooner you apply for it, the better your chances of receiving aid.

3. Insurance Premiums

Having insurance is always a good idea, as it provides financial protection against the worst things life can throw your way, such as illness, fire, or accidents. Paying your insurance premiums even when money is tight is a smart move. Without insurance, medical bills can easily add up.

If you’re struggling to afford your premiums, you do have some options, particularly when it comes to health insurance.

If you purchased a plan from the Healthcare.gov marketplace, you qualify for a special enrollment period if you’ve recently lost your job and associated coverage, if you’ve had a change in income, if you’ve gotten divorced, and for a few other reasons.

During the special enrollment period, you can apply for Medicaid or CHIP if your income is below the threshold or a credit on your insurance premiums based on your income. Doing so can lower the cost of your health insurance considerably.

4. Food & Household Necessities

Food, soap, and paper products are up there with shelter, heat, and hot water on the list of essentials.

Luckily, you have more wiggle room when it comes to adapting your food and household supply costs compared to your mortgage or rent payments and utility bills.

When money’s tight, there are many ways you can trim your food and supplies bill:

  • Limit Shopping Trips. Plan your meals for the week, make a list of the ingredients you need, and go to the store once. The more you go to the store, the more likely you are to buy things you don’t need.
  • Buy Store-Brand Items. Store-brand products usually taste the same as or similar to their brand-name counterparts, but they cost a lot less. If you typically purchase branded foods and supplies, try switching to the store brand. It’s likely the only place you’ll notice a difference is in your wallet.
  • Limit Packaged Products. Packaged foods, such as grated cheese, bagged salads, and prechopped vegetables are convenient, but that convenience comes at a cost. You can save a lot if you buy whole, unprocessed foods and prepare them at home.
  • Skip Bottled Water. If you live in the U.S., it’s highly likely your tap water is safe to drink. According to the CDC, the U.S.’s water supply is among the safest in the world. Bottled water is expensive and terrible for the environment and is often little more than repackaged municipal water.
  • Buy In-Season Produce. Pay attention to seasons when shopping for fresh produce. Fruits like strawberries and blueberries are usually in season and inexpensive during the summer but cost more in the winter. You can cut your grocery costs if you buy what’s in season.
  • Grow Your Own. Another way to cut your food bill is to grow your own fruits and vegetables. Herbs and green vegetables are usually the most cost-effective edible plants to grow, as you can get an entire plant for the price of a handful of herbs or greens at the grocery store. You don’t need a ton of outdoor space to start a garden. You can grow plants in containers on a small balcony or patio.
  • Use Your Freezer. Frozen vegetables and fruit often cost less than fresh, so it pays to purchase those when money is tight. You can also prep double batches of meals to freeze for later. That way, if you run out of money before the end of the month, you have a supply of ready-to-eat meals waiting for you.

Note too that depending on your income, you can qualify for financial assistance with groceries. The Supplemental Nutrition Assistance Program, aka food stamps, helps to cover the cost of groceries for people with income below certain thresholds.

Pro tip: Make sure you’re saving as much money as possible on your grocery trip. Apps like Fetch Rewards and Ibotta allow you to save money on purchases by simply scanning and uploading your receipts.

5. Car Loan & Other Expenses

Your car gets you to and from work and other important places, such as your kids’ school, the grocery store, and the doctor. If you have a monthly car payment, it’s crucial to find a way to pay it.

Just as you can call your mortgage company to work out a deal, you can call the lender behind your car loan to see if you can come to an agreement. Like mortgage companies, these lenders can also offer you loan modifications, refinancing, or forbearance.

Loan modification or refinance can lower the amount of your monthly payments, making it easier for you to afford the car. Forbearance means you don’t make payments for a set period.

Another option is to sell your current vehicle, use the proceeds to pay off the loan, then purchase a less expensive model. If you decide to sell, look for a replacement car that has a low cost of ownership to keep your expenses low. Some vehicles are more reliable than others, meaning you don’t have to worry about expensive repair or maintenance bills.

6. Unsecured Debts

Although you should make every effort to repay your debts, when money is tight, unsecured debt, such as credit card debt and personal loans, should move to the back burner. While these debts typically have the highest interest rates, they also have the lowest impact on your daily life.

You don’t go hungry if you miss a credit card payment, nor can your credit card company take your home or car if you pay late.

That said, it’s still best to pay what you can toward unsecured debts, such as the minimum due on a credit card. If even that is too much for you right now, contact the card company or lender. Sometimes, credit card companies are willing to work with you to create a debt repayment plan or let you temporarily pause payments.

7. Student Loans

While you should make every effort to pay your student loans when money’s tight, the loans often have the most flexibility when it comes to repayment, particularly federal loans.

If you have federal student loans and you’re struggling to keep up with payments, you have multiple options. You can request a deferment or forbearance from your loan servicer, or you can switch to an income-driven repayment plan, which adjusts the amount you pay each month based on your income.

The situation with private student loans is a bit different, as they don’t have the same protections as the federal student loan program.

If you’re having trouble affording private student loan payments, your best option is to contact the lender to see if it offers forbearance, repayment plans, or loan modification.


What to Cancel When Money Is Tight

While some monthly bills are essential, others are considerably less so. Budgeting often involves deciding what you need to spend money on and what you can live without.

When it’s a struggle to make ends meet, here’s what you can consider cutting:

Subscription Services

Netflix, print or digital newspapers, and meal kits are all things that can go. In many cases, you can find free alternatives to the subscriptions you were paying for. For example, some local libraries give you access to streaming movies and local or national newspapers for free.

Make sure you don’t miss any subscriptions that you might have forgotten about. Services like Truebill will find subscriptions and either cancel them or negotiate lower rates for you.

Cable and Internet Service

You may not want to disconnect your Internet completely, but see if you can switch to a slower, less expensive plan.

If you have data on your phone, some providers, like Xfinity Mobile, let you use your phone as a hotspot to get online. In this case, you wouldn’t need a separate home Internet plan.

Phone Service

While you do need your phone to stay connected, you most likely don’t need both a landline and a cellphone. You probably don’t need the most expensive cellphone plan, either.

Shop around with companies like Mint Mobile or Ting to see if you can get a better deal.

Gym Memberships and Wellness Services

Maintaining your well-being is important, especially when money is tight. But if you’re worried about having enough money to pay your most important bills, you shouldn’t have to worry about paying for a monthly gym membership or studio pass.

There are plenty of ways to work out for free from the comfort of your home. For example, you can find workouts available for free on YouTube.


Final Word

When money is tight, it’s vital you focus on paying for the things that can help you sustain your life and well-being, such as food and shelter, when times are tight.

While a missed payment can affect your credit history, in desperate situations, your health and safety are more important than your credit score.

Along with prioritizing your monthly bills, talk to your lenders and service providers. Many companies have programs in place to keep you from sinking deeper into debt and to help you avoid repossession of your home or vehicle. Keep the lines of communication open, and remember you’ll get through it.

Source: moneycrashers.com

What is a Home Equity Line of Credit?

As housing prices continue to rise homeowners are looking into how they can leverage their home’s equity to receive low-interest financing. A home equity line of credit, or HELOC, is a great way to gain access to a line of credit based on a percentage of your home’s value, less the amount you still own on your mortgage.

The downsides are that if get yourself into a situation where you cannot repay your HELOC, the lender may force you to sell your home in order to settle the debt.

How a HELOC Works

Home Equity Line of CreditHome Equity Line of Credit

Let’s say your home has an appraisal value of $400,000 and you have a remaining balance of $200,000 on your home’s mortgage. A lender typically allows access to up to 85% of your home’s total equity.

(Value X Lender Access) – Amount Owed = Line of Credit
$400,000 X 0.85 = $340,000
$340,000 – $200,000 = $140,000

Unlike home equity loans, your home equity line of credit will have a variable rate, meaning that your interest rate can go up and down over time. Your lender will determine your rate by taking the index rate and adding a markup, depending on the health of your credit profile.

When a HELOC Makes Sense

Your home equity line of credit is best used for wealth-building uses such as home upgrades and repairs, but may also be used for things like debt consolidation, or the cost of sending your kid off to college. While it may be tempting to use your HELOC for all sorts of things, such as a new car, a vacation, or other splurges, these don’t do anything to help improve your home’s value. To ensure that you will be able to pay back your loan, it’s important to focus on wealth-building attributes where you can.

Home Equity Line of Credit vs. Home Equity Loan

If you’re exploring various lending options, you’ve probably come across two different home lending terms, home equity line of credit and home equity loan.

While home equity loans give you all the flexibility and benefits of tapping into the value of your home when you need it, a home equity loan offers a lump-sum payment.

Depending on your situation, a lump-sum withdrawal may be better suited for your needs. Understanding the differences is the first step in making a loan decision that is best for you.

Home Equity Loan (HEL) – A home equity loan lets you borrow a fixed amount in one lump sum, secured by the equity of your home. The loan amount you will qualify for will depend on your Loan to Value ratio, credit history, verifiable income, and payment term. These types of loans have a fixed interest rate, which is often 100% deductible on your taxes.

Home Equity Line of Credit (HELOC) – A home equity line of credit is not so much a loan, but a revolving credit line permitting you to borrow money as you need it with your home as collateral. Applicants are typically approved based on a percentage of their home’s appraised value and then subtracting the balance owed on your existing mortgage. Things like credit history, debts, and income are also considered. Plans may or may not have regulations on minimum withdrawals and balances, as well as a variable interest rate.

Before tapping into your home’s equity, it’s important to weigh the pros and cons of each type of loan for your situation. Because your home equity line of credit and loan involves your most important asset – your home – the decision should be considered carefully. Is a second mortgage better than a credit card or a secured loan? If you’re not 100% sure, talk to a finance specialist before putting your home at risk.

Source: creditabsolute.com

9 Technology Tools to Help You Buy a House

Technology has totally transformed the house buying experience. You no longer get in your agent’s car, and the agent drives you around to different properties. Now, you can sit on your couch and view hundreds of homes with the click of a mouse.

In addition to home listings, there are a bunch of other technology tools to help you find the perfect home. These tools are easy to use, at your disposal and can help you make a better decision when purchasing a home.
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Google Maps

Many of us are familiar with Google Maps because we often use it for directions anytime we go somewhere. It’s also a valuable tool when buying a home. You can use the tool in several different ways. Most importantly, you need to know where the house is located and once you have the location of the home, you can easily calculate the distance to the airport, local schools and the closest grocery store.

Google Maps also gives you an overall view of the region when you pull back the view. You can locate the nearest park and get a sense of the community’s population density. You can use the street view feature in Google Maps to virtually drive around the neighborhood. This helps you better understand if the community fits with the type of neighborhood that you are seeking.

Local Property Search Tools

Most counties and cities have made property records easily accessible online. It’s not like the old days of going to the country courthouse and entering a room with hundreds of books with local property records. Now, you enter the address into a database, and the program pulls the property record. The listing contains recent sales of the property and the assessed value. These are valuable pieces of information when making an offer on a house. You want to better understand the owner’s selling position in the market.

School District Rating Sites

If you have or plan to have children, schools are an important part of the decision-making process when you buy a home. You want your children to attend well-rated schools. There are several school rating sites online — greatschools.org and a niche.com are two examples. All of these sites usually feature a grade and give parents the opportunity to comment on their experiences at the school. Most states also make the yearly report cards from standardized testing available online.

Digital Camera

If you are actively looking for a house, you are going to open houses and your real estate agent is setting up viewings. You can easily confuse different houses that interest you. You should take picturesoft the houses that you visit. You want to focus on the features that most interest you and areas that concern you. You can review these pictures when you are serious about a house.

Mortgage Calculator Website

When buying a house, you are most likely going to need a mortgage. That means you need to know what it’s going to cost. A mortgage calculator can quickly calculate your monthly payment. You just enter the price of the house, the down payment, interest rate, and whether you are seeking a 30- or 15-year loan. The website will kick out the monthly payment, and that will let you determine if the payment fits within your budget.

Sex Offender Registry

You want to get a sense of your neighbors when you buy a house. You also need to know if the neighborhood contains anyone on a sex offender registry. Most states make the sex offender registry public information online. You can search by the address of a house you are considering buying and the website you let you know if anyone in the area is on the registry.

Community Billboard Apps

NextDoor and several other community billboard sites have become popular over the last few years. These are sites where people post concerns and observations about the neighborhood. They also post questions. You get a sense of the important issues in the neighborhood and whether there are things that should concern you. The app. is easy to download. Once installed, you search for the particular neighborhood and find the bulletin board. You can scroll through the different posts.

Note-Taking App

When you visit a house, you might want to write down notes and document your thoughts on a house. Evernote and other note-taking applications allow you to easily organize your notes. You can add photos and other information to the note, and the information can be tagged for particular keywords. That makes it easier to sort in the future.

Drones

Drones are becoming common in the real estate industry. Real estate agents use them to fly around a house, and the camera footage is placed with the listing. But you can also use a drone to gather more information about the house. You can fly a drone around the neighborhood to get a bird’s eye view of the neighborhood. You can record the flight and watch the video later. It’s just another piece of information to help you in your real estate purchase.


James Shea is an award-winning journalist and author. He owns Media Lab, a content marketing and search engine optimization company is Richmond, Virginia.

Source: homes.com

How the New Tax Law Affects Vacation Home Rentals

The new tax law that took effect in January includes several changes that have a significant impact on owners of second homes, including vacation homes. It’s a good idea for current owners and those who are thinking of buying a second home to familiarize themselves with the new law now. It’s not too soon to plan for your 2018 tax returns.

The news isn’t so good for families that don’t rent out their vacation homes because they probably won’t be able to deduct as much as they have in the past. However, those who use their second homes only or mostly for the rental income may do better than they did under the old law.

A luxury home sitting on a lake shore.A luxury home sitting on a lake shore.

Deducting state taxes

The new law limits the total amount of state and local taxes you can deduct to $10,000 on a joint return for single and joint returns. The new limit covers sales, occupancy, income and property taxes, including taxes paid at closing on a new property. If you own a primary and secondary home, you will almost certainly exceed this limit. You will be able to deduct less-perhaps a lot less in property taxes than you did last year. The new limit on state tax deductibility will affect homeowners in high tax states more than others.

Mortgage interest deduction

Despite attempts to eliminate or seriously reduce its value to homeowners, the deduction for mortgage interest survived largely intact in the new law. The most significant change was the lowering of the limit on total amount of the cost of mortgage debt for all homes owned by a taxpayer.

The new law “grandfathers in” or exempts mortgage interest on homes purchased before December 15, 2017. Homes purchased after that date will come under the new lower limit for the mortgage interest deduction. Thus, homeowners who already owe $750,000 or more in mortgage debt and buy a second home this year, they can’t deduct any of the mortgage interest incurred in the new purchase.

The new law increased the standard deduction to $12,000 for single filers and $24,000 for joint returns. Because of the changes in the deductibility of state property taxes and mortgage interest, homeowners who have little or no mortgage interest and buy a moderately priced second home this year on which they pay less than 12 months of mortgage interest may find that they are better off taking the standard deduction on their 2018 taxes.

Incentives to become a landlord

For owners who want to use their second homes only for the use of their family and friends and not to rent out, the new tax law will create a disincentive to buy a home. For those who plan to rent out their property, if only for a few weeks during the year, the new law may be a boon.

Most landlords “pass-through” rental income so that it’s taxed as personal income. According to the Nolo website, if the rental activity qualifies as a business for tax purposes, as most do, you may be eligible to deduct an amount equal to 20 percent of the net rental income. If you qualify for this deduction, you’ll effectively be taxed on only 80 percent of your rental income.

Second, rental properties (even a vacation home used by the owner for several weeks a year), may not fall under the limits on deducting state taxes and the cap on mortgage interest.

Friendly realtor or landlord talking showing modern luxury house for sale to young couple customers, real estate agent discussing rental home with renters tenants, planning property purchase concept.Friendly realtor or landlord talking showing modern luxury house for sale to young couple customers, real estate agent discussing rental home with renters tenants, planning property purchase concept.

“On a rental property, you could have a mortgage of $10 million and deduct the full amount of the interest. If the property is part rental and part residence, you can deduct the mortgage interest without limitation for the period of time that it’s a rental property — provided it rented for 15 or more days,” said Robert Gilman, a partner at New York-based accounting firm Anchin, Block, & Anchin LLP recently featured in the Wall Street Journal.

If so, an owner of a vacation home that’s rented out for two weeks or more can write off on a pro-rated basis all mortgage interest and state taxes along with all other operating expenses incurred by owning and renting the property, including maintenance, advertising, and repairs.

According to Stephen Fishman on the Nolo site, “Thus, the portion of a rental host’s mortgage interest and property tax allocated to the short-term rental activity don’t come within the limits. These are rental deductions, not personal itemized deductions.”

Finally, the new tax law includes a new tax deduction for individuals who earn income from businesses owned individually or by pass-through entities like limited-liability companies or partnerships.

Family of four on wooden jetty by the ocean.Family of four on wooden jetty by the ocean.

“During 2018 through 2022, hosts will be able to use 100% bonus depreciation to write off in a single year the full cost of long-term personal property they use for their rental business. Bonus depreciation may now be used for both new and used personal property. It may not be used for real property,” writes Fishman.

Some economists forecast a drop in demand for vacation properties as a result of changes in the tax treatment of vacation homes. However, demand has remained strong in most of the nation’s vacation destinations.


Steve Cook is the editor of the Down Payment Report. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.

Source: homes.com

How to Determine What You Can Afford for a Car

How much can you afford for a carHow much can you afford for a carYour dream car and the car that you can realistically afford can be two totally different things. If you are paying cash, then your car choice may not be a complicated one. However, if financing is your only option then how to determine what you can afford for a car becomes a crucial undertaking.

Ideally, you should go for a car whose monthly payments do not exceed what your income can handle. Your calculations also have to factor in the extra costs that go into buying a car as well as the operational expenses that you will encounter on a daily basis.

What’s an affordable car? How do you go about the calculations? Let’s find out.

Breaking Down your Car Budget

Apart from the price listed on a car, there are other costs that you should consider. These are expenses that you find out on your own and plan for; the car salesman won’t reveal them to you!

Up-sells and Cross-sells: The dealer will try to increase the displayed price, a strategy known as upselling. You will be enticed with features like extra body kits, chrome wheels, warranties, etc. Another common trick is being led to buy a different and more expensive brand or model; cross-selling. Avoid these extra costs by sticking to your first choice.

Dealership Fees: There will be registration fees, sales tax, and documentation fees. These are for you to bargain with the dealership. Such fees can drive the price up by around 10%.

Ownership Expenses: Once you own the car, other expenses start: insurance, maintenance, repairs, annual registration fees, depreciation and the like.

Gas is another major ownership expense that most people neglect to factor when making a purchase. Let’s use a Toyota Prius, a favorite for first-time owners as an example; it goes for around $20k plus a possible 5k to cover the other costs.

The car consumes about 44 miles per gallon. Data from Federal Highway Administration show that on average a driver covers 13,476 miles per year. This translates to around $907 per year at $2.96 per gallon (13,476 miles x $2.96 / 44 mpg).

True Cost of Owning a Car

After you have calculated the expected cost of the car you are looking for (plus the extra costs), your budget starts to take shape. Using the above example, you are looking at around $25,000 for a new car with a 5-year (60months) car loan. However, for the true cost of owning you need to factor gas expenses for the loan duration;

True cost of owning = Purchase + Other costs + Gas = $20,000 + $5000 + ($907 x 5) = $29,535

Can your Income Sustain the Monthly Payments?

With car financing, you will be repaying the loan on a monthly basis. So what’s the optimal percent of your monthly income that should go to the car? There is no specific answer to this since budgeting depends on your priorities.

Most experts, however, recommend that transportation should cost 10-15% of your net pay. This follows a 50/30/20 rule where 50% of your income goes to living needs, 30% to flexible spending and 20% to investments and other long-term financial goals. Your car is included in the ‘living needs’ category with the remainder of the 50% going to mortgage and utilities.

It’s upon you to ensure that your car loan repayments fall within the 10-15% range. For the Prius, the monthly cost will be around $493 (the total cost of owning/ 60 months). Hence your take-home pay should be at least $3290 for you to afford this car.

Monthly income= $493 x 100/15 = $3290 (assuming 15% of your pay is the car budget)    

Final Thought

Before you walk into a car dealership, do your homework on all the costs that will go into owning a car: Make use of free online calculators to get a rough idea of which car you can afford and understand all costs that may come with other deals like trade-ins. Lastly, negotiate your car loan for cheap rates, keep in mind that a longer loan term could mean a lower resale value by the time you have paid off the loan due to depreciation.

Source: creditabsolute.com

Six Ways to Build Equity Faster

Equity is the money you make from owning your home. You can calculate your equity by subtracting the amount of principal you owe on your mortgage from your home’s value. Equity increases as you pay off your mortgage and as your home increases in value. It decreases should your home lose value.

Getting your hands on your equity is not easy. You can get cash from your equity in one of three ways: refinancing your existing mortgage, taking out a second mortgage, or selling your home. You can borrow against your equity with a home equity line of credit, but a HELOC is a loan that you must repay.

Following the housing crash in 2006-2007, home values plummeted, especially in markets like Las Vegas, San Francisco and Miami where they had appreciated quickly during the housing boom. US households lost over $7 trillion in home equity before prices recovered. Some 22 percent of all homeowners went “underwater;” they owed more on their homes than they were worth. Millions of homeowners lost their homes during the Great Recession when they could not meet their mortgage payments and owners had no equity in their homes.

Now that the recovery is underway and prices are rising, equity is booming. During 2017, the average homeowner gained $15,000 in equity. By the end of the year, less than 5 percent of all homeowners still had negative equity.

As long as home prices are rising in your market, you are probably gaining equity. You can gain equity even faster by taking steps to increase the value of your property or decrease the amount that you owe on your mortgage. Here are six ways you can speed up the growth of your equity.

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Three Ways to Reduce Your Mortgage Principal:

1. Make a Larger Down Payment

You don’t need to put 20 percent down to get a mortgage today. Last year, 61 percent of first-time buyers put down less than 6 percent. Lower down payment options, like FHA and down payment assistance programs, help families to become homeowners if they don’t have the cash available for a 20 percent down payment. With a lower down payment, however, homebuyers must repay a higher principal, which results in higher monthly payments, more interest, and less equity. Buyers who can afford a 20 percent down payment build equity faster. They also avoid the requirement to take out mortgage insurance.

2. Take Out a Shorter Mortgage

Most buyers today take out 30-year mortgages because monthly payments are lower than mortgages with a shorter term. However, they pay more in interest over the 30-year lifetime of their mortgage, so over its lifetime, the cost of a 30-year mortgage is higher than a 15-year mortgage.

3. Pre-Pay Your Mortgage

After several years in your home, you or your spouse may be making more money each month. One way to put that extra income to good use is to pay more than your required mortgage payment each month. The amount you pay that exceeds your monthly mortgage payment goes towards reducing your mortgage principal. By pre-paying your mortgage, you are increasing your investment in your home by building equity. You also reduce the time it will take to become mortgage-free and improve your credit by reducing your debt.

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Three Ways to Increase Your Home’s Value

1. Keep Your Home Clean, De-cluttered and in Good Repair

Some owners wait until they are selling their homes to get it ready for sale. Keeping up with repairs on an ongoing basis is a better idea. Well-maintained HVAC, electrical and plumbing systems will last longer. You won’t lose things or forget to do something because you put off repairs and de-cluttering until the last minute. It’s much more pleasant to live in a home that is clean and spacious than one filled with clutter. When you are ready to sell, getting your house clean and staged won’t be a big deal.

2. Make Home Improvements to Increase Your Home’s Value

It’s a fact that most remodeling projects don’t increase the value of your home enough to pay for themselves on a dollar-for-dollar basis. In other words, when you sell your home, you should not expect to recoup every dollar you spent on most improvement projects. However, all improvements increase your value somewhat, and some will be necessary to sell your home. Since you are going to have to make these improvements anyway, it’s a good idea to make improvements as you go. Remodeling magazine conducts an excellent annual cost vs. value survey of small, medium and major projects.

3. Get an Appraisal

Determining a house’s value is far from an exact science. Many factors, including your home’s age, location, size, condition, and style, determine the value of your home. Moreover, home values are constantly changing to reflect local real estate markets. Home appraisers value your home on the basis of recent sales of nearby comparable homes. It makes sense for you to have your home appraised to get an accurate and fresh valuation of your property after you have completed some projects. With a current appraisal, you can use it to calculate your home’s equity accurately. If you sell in a few years, a relatively recent appraisal will come in handy when you price your home for sale.

For many couples, equity is a nest egg that is the foundation of their personal wealth and financial security. The housing crash shook many homeowners’ faith in homeownership. Now that conditions are improving and equity is building in their homes, owners are taking a very conservative approach towards their equity by refinancing to convert some of their equity into cash.

Homeowners who lived through the housing crash ten years ago learned the hard way that every investment, including homeownership, has its risks. Individual owners can’t do much about trends in real estate markets, but prudent owners who take good care of their homes and protect their equity are more likely to come out ahead.


Steve Cook is the editor of the Down Payment Report. He is a member of the board of the National Association of Real Estate Editors and writes for several leading Web sites, including Inman News. From 1999 to 2007 he was vice president for public affairs at the National Association of Realtors.

Source: homes.com