Which is best: renting or owning?

Q:  June, do you think it is better to rent or own?  I have read several articles on-line stating your money is better off in a 401k or some other portfolio than in real estate/owning a home.

-Don, Md.

A: The old saying “timing is everything” is especially relevant to your question of renting or owning.  There are definitely points in all of our lives where renting makes all the sense in the world.  To name a few, these include times when:

• employment is uncertain or job security is lacking
• you will be in a particular location only for a few years
• your proverbial ducks are not in a row (for example, when a mortgage payment doesn’t fit into your budget, you don’t have an emergency reserve, or you have no down payment or “move-in” fund)

On the other hand, owning a home is the original American dream!  In the right circumstances buying your home can allow you to build equity over time, potentially benefit from tax deductions, and ultimately know that the roof over your head is not contingent on anyone else’s whims or rent demands.  So, do I think you should use retirement vehicles like a 401(k) to build a robust nest egg for retirement—yes!!  Do I think owning a home is a good thing under the right circumstances—yes!!  The bottom line is that regardless of where you live, you should be saving for your financial security and retirement.  The decision to buy a home should be based on your own specific financial situation and outlook.  If the time is right, there’s more than enough room on your plate for a 401(k) and a home! 

VA Loan not available for ex-spouse

Q: I am a civilian and my husband is active duty, we are getting a divorce.  Am I entitled to his VA loan benefit for a home for our child and me?

-Rebecca, N.C.

A:  Sadly, I’ve written a lot about marriages breaking up in this column.  When it comes to divorce, my best advice is to find a competent attorney that is extremely familiar with the unique characteristics of military service and all that comes with (and because of) it.  This includes sort of abstract things like benefits, allowances, entitlements, retirement, etc.  So, while military retirement, active-duty income, and even the requirement for your husband to provide an allowance to house you and your child may be up for grabs and debatable, his VA loan entitlement is not.  Unfortunately, you can not use his VA loan benefit. 

Be sure to protect yourself, and your child, by finding a quality attorney.  To be fair, both parties should go on with their lives with emergency funds in tact, a plan for housing as well as education funding for the kiddo.  Another consideration that is often overlooked is ensuring sufficient life insurance is in place with the proper beneficiaries to continue child support payments should something happen to your ex while your child is still a minor.  The best of luck to you! 

 

Income is ticket to buying a home

Q: Is it mandatory for me to have a job to be able to buy a house. I am coming out of the military and I’ll be going to college. The military will be paying me disability and GI Bill money. Can I still get a house even though with full time college and a family I won’t have time to get a job?

-Vitaliy, Moscow, Nev.

A: Thanks for your service and sacrifice. Not everyone who buys a house has a job. However, if you want to borrow money to buy a new home, you’ll definitely need enough income to be able to make the monthly payment. So, you can certainly check with a lender or two and determine if and how much they might be willing to pre-approve you for based on your disability income. My inclination is that now might be the ideal time for you to rent. This would probably require less prescreening and perhaps alleviate some financial pressure while you’re working hard to get your degree. It will also allow you some flexibility to go where your degree will take you after you graduate. To prepare yourself for that significant purchase, be sure to carefully review your credit report to ensure it’s in ship shape. Also continue to pay bills on time (that solid payment history is crucial!) and keep credit card balances as close to zero as possible! Good luck and enjoy school!

Things to think about when buying a home

Q: I want to purchase a house in South Carolina and want to know where I should start.  I am a first time buyer, and I’m currently living in and working in Germany.  I am retired US Army. Thanks.

-Cliff

A: Retired Army, hooah and thanks for your service.  Not to put the cart before the horse, but I will mention that if it fits your timeline you’ll want to purchase your new house before December 1, 2009.  If you do that, you’ll be eligible for a 10% tax credit (up to $8,000) on the purchase.  So, any home purchase greater than $80,000 may result in $8,000 back in your pocket!  If you’re single, your modified adjusted gross income can not exceed $75,000 ($150,000 for married filing jointly) to receive the full credit.  That’s a pretty good incentive. 

However, your question as to where you should start is right on target.  A budget exercise including a detailed accounting of what will be coming in (military retirement, employment income, investment income, etc.) and going out (utilities, household expenses, food, clothing, etc.) is an excellent first step.  How much house can you afford?  Being fairly conservative, I would suggest that your payment (principal, interest, taxes, and insurance = PITI) should be less than 28% of your gross monthly income.  For example, if you’ll have $5,000 of income from all sources, you should target a maximum payment (PITI) of $1,400.  In today’s environment, this would equate to an absolute ceiling of around $225,000 for your new home.  Think hard about committing that much income to a house payment for 30 years.

The next step is to make sure you have a clean credit report.  It’s not uncommon to find errors on a report so review it closely and dispute anything that doesn’t belong to you.  If you’ve had an “oops” in the past, like an unpaid bill, make good on it now because a late payment – even if it’s really late – is better than a “charge off.”  You can get a free credit report every year from annualcreditreport.com.  Considering you’re overseas right now, you may have to give them a call to get yours.  Your score will cost an extra $8 or so.  And that number makes all the difference in the interest rate you get.  Even a quarter of a percent too much makes an enormous difference on the amount of interest you pay over the life of the loan.  It’s very important.

After determining what you can afford, you’ll want to get pre-approved for this amount through your lender.  Caution: your calculation of what you can afford should be your guideline, not what the lender is willing to lend!  There is a difference between qualifying for and affording a mortgage. Discuss using a Veterans Affairs loan with your lender.  A VA loan could certainly minimize the out-of-pocket costs to move into your new home as no down payment is required.  Now you’re ready to begin the hunt for your house.  In addition to helping you with the details, a quality realtor should be able to help you sort through neighborhoods and available properties.  This is especially important if you don’t know the area well.  Remember, real estate is a long term proposition, so do your homework and shop smart.  In the meantime, set aside funds in a savings or money market account so you’re ready for all of those expenses that inevitably come with moving into a new home.  Your emergency fund of 3-6 months of expenses should be well established before purchasing a home.  Good luck and welcome to the American Dream.

A Homeowner's Dilemma

Q: We currently own a home in Florida that is valued at $217,000. We owe $136,000 on the mortgage to include a $30,000 home equity loan that we used to improve the home. We paid $142,000 for it and have only lived in the home for one year in 2002. We bought it with the hopes of someday living there but it seems as if it will not happen. We have rented it off and on and have not until now been able to rent it for what we pay for the mortgage which is $1056 a month on a 30-year-fixed VA with a 7.5% interest rate. The taxes on the home are $3,500 a year. My question is: should we try to sell the home now since we probably will not be living in it or should we keep it as an investment and pay it off sooner? We do not have any debt other than the mortgage and with our son in college and another one headed to college; we would like to get rid of the payment one way or the other. Thank you.

--Melisa

A: I’m not sure about the area where your home is located, but a lot of the folks I’ve talked to in Florida have told me this is an awful time to be selling real estate. That said this may be a great time to explore your options with respect to refinancing. Based on the numbers you provided, it appears you may be able to refinance both of your loans in a new 30-year mortgage and reduce your monthly outflows. This may make the property all the more attractive as a rental and if and when the real estate market turns, you’ll be in position to make a decision to sell or hold on your own terms.

Buy a house now - or later

Q:  I have been in the military for two years now, and am currently deployed.  My husband is also deployed, but in a different branch than me.  We have been debating about buying a house. What kind of down payment and or price range can we afford to look into?  We are both e4, and he is about to get his e5.  We get out of the military in 2 and half years.  Should we buy now and start putting the housing allowance toward it, or save and buy later.  Thanks.

--Katie

A:  I really like your last four words…“save and buy later.”  Clearly one lesson that we have to take from the recent real estate market slump is that a home purchase is a long term proposition.  I would recommend that you start building your “home fund” by stashing away money – including your good idea of saving your Basic Allowance for Housing (BAH) - into a high yield money market or savings account.  In the meantime, decide where you want to live for the long term and figure out what you’ll do for civilian employment.  Your savings can be used for a down payment, closing costs, or just to outfit your future home.  When you actually get to the point where you’re ready to settle down and buy, a Veteran’s Affairs loan may make sense—it offers competitive interest rates and would allow you to buy without necessarily making a down payment.  That makes sense especially when you’re buying a fixer upper.  For now, focus on staying safe and building up your savings.

"Banking" on ATM fees

Q: My son is stationed at Sheppard Air Force Base in Wichita Falls, Texas, for his tech training, and then he will be stationed thereafter at Yokota Air Base in Tokyo, Japan. Is there a bank (or federal credit union) that would provide him free ATM withdrawals anywhere in the U.S.? Is there a bank on Yokota Air Base that provides the same service?

- Hilary, Newport News, Va.

A: First off, thanks to your son for his service; what a good boy, right, Mom? Your question does highlight one of the nice advantages of banking with us here at USAA Federal Savings Bank—we refund up to $15 per month in ATM fees incurred anywhere in the world. Not a bad deal. When out and about, your son will make purchases or pay dinner bills with Japanese Yen. He can conveniently withdraw Yen from the ATM machines provided on base. However, if your son plans to “live on the economy,” that complicates things a bit. He may need to get a local bank account to make transactions such as paying rent. He can check it out when he gets there. My Army Reserve assignment is at Camp Zama in Japan – what a beautiful country!

Basic Allowance for Housing

Q: My finance office is based in Norfolk, Va. and I will be moving there this July after my wedding. I am transferring to a college in Norfolk and have everything squared away. However, I have some questions.

How soon after we are married will my husband and I get Basic Allowance for Housing (BAH)? What does my finance office have to do to inform the Navy about the marriage? Will my husband get Basic Allowance for Subsistence (BAS) as well? I know that BAS is only for him and not for family members, but it would sure help.

Also, what Tricare plan would be good for us? How do I qualify for Tricare? Who can we contact to do that?

Thank you so much for your help!

-Alyssa, Grass Valley, Calif.

A: Congratulations on your upcoming marriage. It sounds like your husband-to-be is marrying right—you’ve clearly got your eye on the ball! As soon as you get hitched, your husband will have to complete the appropriate paperwork and provide documentation (marriage certificate) to his personnel office.

If your husband is living off-base, he should already be receiving Basic Allowance for Housing (BAH). Once you’re married and he provides the appropriate documentation to the personnel office, you guys will receive the increased “with dependents” rate. If he’s currently on-base and you plan to move, you’ll have to submit a copy of your lease agreement or mortgage to the personnel office to receive BAH. Basic Allowance for Subsistence (BAS) is a tax-free supplement meant to pay for food. He should already be receiving it and your marriage will not impact this allowance.

To qualify you for Tricare, your husband will need to update the Defense Enrollment Eligibility Reporting System (DEERS) and then you need to get an ID card. Usually, this is done at the same place identification cards are done on base. As long as you are on DEERS, you will be eligible for Tricare. Once you’re on the system, you can select one of three plans for your health care: PRIME, EXTRA, or STANDARD. Your active duty husband can only use Tricare PRIME. In the same order, your selection will be similar to choosing an HMO, PPO or major medical plan in the civilian world. Learn more at www.tricare.mil. Best wishes for a long and happy life together.