Resolutions for Homeowners - Part II : Rooftop Views

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Resolutions for Homeowners - Part II

Here is the second two of 10 resolutions that the American Homeowners Foundation urges all Homeowners to adopt this year.

One of the best New Years Resolutions homeowners can make is to eliminate expenses that are unnecessary and have no benefit. This is a tall order for many of us, with implications ranging from how you finance your mortgage to the energy efficiency of your home. Nevertheless it’s a very worthwhile exercise which will affect your current and future lifestyle. Many have already made some of the following ten 2008 New Years Resolutions for American Homeowners, but few probably addressed them all.

Resolution #3: I won’t let fears of dropping home values, the mortgage market meltdown, and the growing risk of a recession stop me from purchasing a home in 2008.

Many homeowners have decided to put off the consideration of a home purchase because of these concerns, but in many cases those fears are unwarranted. If you want to move in 2008 you should take a closer look, because this year could be an excellent time to buy a home.

As previously stated, the risk of a recession is certainly increasing, and this is certainly no time to push the limits of your financing ability. However, many homeowners are in a strong financial position, thanks to good savings habits and accumulated home equity. While they need to make sure they keep plenty of liquid assets against the risk of a recession, in fact many homeowners have more than sufficient liquid assets for that purpose and are in a position to buy a home if they wish to.

The direction of home values is of little consequence if you plan to stay in the same area. According to the National Association of Realtors, the median moving distance in 2006 was 13 miles. This means that if the value of your current home has declined, so did the value of the home you’ll be buying if you stay in the same area. The price difference will probably remain about the same in most cases (and this relationship holds true if homes are appreciating in your area). The future outlook for home values will also be about the same, so the direction of home values will have relatively little consequence for most home buyers.

The mortgage meltdown/subprime crisis will make home financing difficult for many who could only qualify for subprime mortgages previously, and more expensive for home buyers with impaired credit when they can get financing.

Despite this bad news for some homeowners, mortgages are still widely available at attractive rates for the majority of home buyers, who have excellent credit histories, and a good financial profile. In addition the government has begun to step in to help those at the margins - FHA loans have been made more accessible, Fannie Mae and Freddie Mac programs have been allowed to expand, and more proposals to help home buyers are in the works.

On top of all this, the inventory of homes for sale is at an all time high in many areas. Yes, that means you’ll have to work harder to sell your home, but it also means you will never be as likely to find a replacement that fits your needs exactly as you are today. Because homes are moving slowly in today’s market, it makes far more sense to first sell your home before you commit yourself to buying your next home. Even so, some sellers in this current soft market will accept a home sale contingency in a purchase offer, but usually only if they are first convinced that the prospective buyers will be pricing their home extremely competitively. That’s not unreasonable - pricing competitively is something you must do in this market anyway if you expect to sell your home. The bottom line is that for many, if not most homeowners, 2008 is a great time to buy a home, and the gloom and doom on the housing and economic front should not stop you from looking into it.

Resolution #4: I will increase my saving and reduce or eliminate high interest loans.

Refinancing your mortgage is often the first step in this process (see resolution #1), and curtailing your interest free loans to IRS the second (see resolution #2). Next, make sure you are taking advantage of all matching employer contributions to a company IRA if you have one and if at all possible make the full tax deductible annual contribution to your 401k, 403(b), regular or Roth IRA, or other tax-deferred retirement accounts.

In order to pay their mortgage off sooner, many homeowners make additional payments above the required monthly amount to their mortgage lender. They would have been better advised to get mortgage with a shorter term (15 years, for example), because they would have received a slightly lower interest rate as well. While debt reduction is a worthy goal, many homeowners would be much better off from a financial and tax standpoint to instead put extra money into tax-deferred retirement accounts. Not only would they get employer contribution matches in some cases, but the accumulated interest or dividends will either be deferred or tax free until you withdraw them at retirement. A 2005 study found that more than 38% of households would have earned 11 - 17 cents more on the dollar by investing in tax-deferred retirement accounts instead of prepaying the mortgage. Those extra earnings would have resulted in additional annual savings of almost $400 per household.

Make sure that both your tax deferred accounts and investments are diversified and you aren’t overly exposed in any one investment, including holdings in your employer’s stock. Even sound, well managed companies can take a beating in the stock market. Make sure you invest in mutual funds or stocks with consistently good performance records. For example the Lipper Reports tracks mutual fund performance by category (i.e. large caps, energy, etc.) over 1, 3, 5, and sometimes even 10 years. If there are 100 funds in that category invest only in those that are consistently in the top quartile (which would be the top 25 if there are 100 funds in the category) over each of those periods, and you should do pretty well. Review your investments annually (or even better quarterly) against that standard to make sure they are maintaining their track record.

Review your annual Social Security Benefits statement to make sure that your earnings have been accurately reported and that no one else is using your Social Security number. If they have, they may also use your social security card to get a drivers license and credit cards in your name as well. You can order your statement online at www.ssa.gov.