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A Financial Plan for Your Home

January 7, 2011

I am not big on New Year’s Resolutions but I am big on having a plan. This is a good time of year to make a plan because the calendar is fresh and clean (and half priced if you still like to use wall calendars). Your home is probably your biggest investment. To manage it, create a financial plan that takes into account repairs, upgrades, mortgages, insurance, and taxes.

Use our home financial plan budget worksheet, and start by writing a list of expenses, such as:

Mortgage

Taxes

Home insurance, including liability

Repairs and maintenance, such as new furnace, roof, painting

Voluntary upgrades, such as a swimming pool, a premium range, a new powder room

What will you learn from this home financial plan weekend exercise?

How much you have to spend

How much you need to allot in the short- and long-term for necessary maintenance and voluntary improvements

With this newfound grip on your home’s expenses, you can create a home financial plan that’ll help you there for years with maximum enjoyment and minimum anxiety.

The mortgage: Pay it—and then some

Yup, you already shell out a lot for your mortgage, but can you pay more? Even a little extra each month can add up to an earlier payoff. Let’s say you have $200,000 in outstanding principal and a 20-year fixed-rate mortgage at 5%. Your monthly payment is $1,319.91. But if you can manage to pay another $100 a month, you’ll save $14,887 in interest.

Run the numbers yourself for your home financial plan.

Advantages of an early payoff, says Alan D. Kahn, a financial planner in Syosset, N.Y.:

Less debt means more money to spend later.

It feels darn good to own your house outright as soon as possible.

Minimal tax loss. Toward the tail end of the life of a loan most of your payment goes to the principal, not the interest, so you’re getting only a small tax break anyway.

Of course, if you’re still saving for retirement, put the 100 bucks elsewhere:

A retirement plan

An account for the inevitable home repairs

An account for discretionary improvements, which can raise your home’s value

Insurance: Protect your property

Your vegetable garden is pointless without a fence to keep out rabbits; likewise, your home financial plan will come to nothing without an insurance “fence”:

Homeowner’s insurance. Basic coverage for your home and everything in it. The average cost is $636 per year but this varies widely by state.

Liability coverage. Protects you from a lawsuit if someone gets hurt on your property, for example. Your best bet: An umbrella policy. For about $300 a year you can by a typical $1 million policy.

Various disaster insurance policies. Optional policies cover flood, earthquake, and hurricane damage. As part of your home financial plan, you have to research to see what disaster coverage, if any, you need in your area, and what your standard policy already covers. For $540 a year you can buy flood insurance, for example.

Don’t under- or overbuy insurance

For your basic policy, get homeowners insurance with full replacement coverage in case your house burns to the ground.

That sounds simple, but heads up on calculation. Remember that you own a house as well as the land on which it sits. So even though you bought your home for $300,000, it may cost only $100,000 to rebuild it. Your policy limits should reflect this. This difference will vary widely by region.

Another heads up: Don’t make the common and potentially disastrous mistake of thinking that because your home has fallen in value you need less insurance. If you bought a $1.2 million townhouse in Florida during the boom, it’s true it now may only sell for $600,000. But the replacement cost of the townhouse hasn’t changed much, so you can’t improve your home financial plan by cutting insurance costs that way.

Other ways to cut your insurance budget:

If you make structural improvements, such as adding storm shutters, your insurer may give you a break.

If you belong to certain groups, such as AARP or veterans’ organizations, your premiums may be lower.

Repairs and renovations: By choice or necessity

You own a home, so you’ll be spending money on everything from a new faucet to—surprise!—a new roof. Freddie Mac and other authorities say as part of your home financial plan, you should be prepared to spend 1% to 3% of the market value of the home annually on maintenance. To be extra-prudent, open a savings account and make regular payments until your account reaches 1% to 3% of your home’s current value.

To help you budget:

Start with the inspection report you received when you bought the house. Did the inspector indicate that you would need a new roof in five years? A new furnace in 10?

Keep a log of your major appliances’ age so you can estimate when they’ll need replacing. Some estimated life spans:

Roof: 20-25 years

Heating systems: 15-20 years

Range/ovens: 11-15 years

Water heaters: 8- 13 years

Then get estimates on what replacements will cost and start saving.

Consider ongoing non-emergency maintenance, too. Do you live in New England? Price a snow blower and get bids from plow services.

Resist the siren call of the home equity loan to take care of everything. That just defeats your efforts to pay off the mortgage early.

Separate out what you want from what you need. A $50,000 kitchen remodel is nice, but you’ll recoup only 76% of the project cost your home’s resale, according to Remodeling magazine.

If you can afford to redo, go for it. Just don’t confuse your necessary repairs (new oil furnace—about $4,000) with your discretionary upgrades (Viking range—$6,000 and up).

Taxes: (Almost) no way around them

Even if your lender handles your property taxes from an escrow account, you need to budget for them in your home financial plan. They creep up almost every year, it seems. Take responsibility for tracking the changes in your area: Look over past tax bills to get a sense of how quickly they’ve risen in the past.

Or if your lender handles escrow and you haven’t saved your bills, ask for an accounting. The median annual property tax payment is $2,198, but that hides the enormous range in medians from state to state:

New Jersey: $6,320

New York: $3,622

California: $2,829

Alabama: $383

Louisiana: $188

You can generally deduct property taxes on your federal return. A tax pro can tell you how much of a tax break you’ll get, to help you fine tune your home financial plan.

You may be able to reduce your tax burden by getting a reassessment. Do your homework first: Are comparable houses taxed less than yours? Ask the local assessor what formula is used to set tax rates. You can challenge the assessed value and get yourself a rollback.

A plan is exactly that – a great way to pace yourself and keep working towards your financial goals. The unexpected will always happen and with a plan you are prepared for that. Now, who is going to spend their Friday Night writing out a financial plan for their home? 🙂

Tax Tips for Homeowners Looking Ahead to 2010 Returns

January 3, 2011

In addition to the standard tax deductions for home owners, here are some additional ones that you might want to check your records to see if you qualify.

The tax areas that are most beneficial for home owners are; mortgage interest, points paid to refinance your mortgage, PMI, capital gains up to $250k for qualifying home owners, home improvements that have increased the value of your home at your future sale (and reduce the amount of capital gains), real estate and property taxes, home offices, *some* relocation moving expenses, home improvements for medical reasons and vacation homes.

Check out these additional tax tips for homeowners looking ahead to 2010 returns.

Claim remaining energy tax credits

It’s time to get cracking if you didn’t exhaust your full allotment of residential energy tax credits during 2009. Although tax credits for big projects like residential wind turbines and solar energy systems have no upper limit and are good through 2016, energy tax credits capped at $1,500 expire at the end of 2010. Eligible capped projects include new windows and doors, insulation, roofing, water heaters, HVAC, and biomass stoves.

Here’s how it works with capped federal credits: You can earn energy tax credits worth 30% of the cost of qualifying improvements, but the total tax credits can’t exceed $1,500 combined for 2009 and 2010. So if you only took, say, $700 worth of capped energy credits on your 2009 tax return, you’re still due for another $800 in credits in 2010. Some projects include the cost of installation–a furnace, for example–while others, such as insulation, are limited to the cost of materials.

Max out tax benefits of a vacation home

Use a vacation home wisely, and it’ll provide a break from taxes as well as the hustle and bustle of everyday life. The rules on tax deductions for vacation homes can get a bit tricky, but understanding and adhering to them can yield many happy tax returns.

If your vacation home is truly a vacation home meant for your personal enjoyment, as opposed to a rental-only income property, you can usually deduct mortgage interest and real estate taxes, just as you would on your main home. You can even rent out the home for up to 14 days during the year without getting taxed on the rental income. Not bad.

Now, let’s say you want to rent out your vacation home for more than 14 days in 2010, but also use it yourself from time to time. To maximize the tax benefits, you need to keep tabs on how many days you use your vacation home. By restricting your annual personal use to fewer than 15 days (or 10% of total rental days, whichever is greater), you can treat your vacation home as a rental-only income property for tax purposes.

Why is that a big deal? In addition to mortgage interest and real estate taxes, rental-only income properties are eligible for a slew of other tax deductions for everything from utilities and condo fees to housecleaning and repairs. Deductions are limited once personal use exceeds 14 days (or 10% of total rental days), so get out your calendar now to strategically plot your vacations.

Take advantage of tax breaks for the military

In salute to members of the armed forces serving overseas who want to purchase a home, the IRS is extending a lucrative tax perk for military personnel. If you spent at least 90 days abroad performing qualified duty between Jan. 1, 2009, and April 30, 2010, you have an extra year to earn a homebuyer tax credit. In addition to uniformed service members, workers in the Foreign Service and in the intelligence community are eligible.

Thanks to this extension of the homebuyer tax credit, qualifying military personnel have until April 30, 2011, to sign a contract on a new home. The deal must close before July 1, 2011. Just like non-military buyers, first-time homebuyers can earn a tax credit worth up to $8,000, and longtime homeowners can earn a credit of up to $6,500. The same income restrictions and $800,000 cap on home prices apply.

Military personnel can also get a break if official duty calls and they’re forced to move for an extended period. Normally, the homebuyer tax credit needs to be repaid if you sell your home within three years, but this requirement is waived for uniformed service members, Foreign Service workers, and intelligence community personnel. The new extended duty posting doesn’t need to be overseas, but it must be at least 50 miles from your principal residence.

Challenge your real estate assessment

You can’t do much about the rate at which your home is taxed, but you can try to do something about how your home is valued for taxation purposes in 2010. The process varies depending where you live, but in general local governments conduct a periodic real estate assessment to determine how much your home is worth. That real estate assessment figure is used to calculate your property tax bill.

You can usually appeal your real estate assessment if you think it’s too high. Contact your local assessor’s office to find out the procedure, and be prepared to do some research. There’s often no charge to request a review of your assessment.

Look for errors. You probably received an assessment letter in the mail, and many local governments provide the information online as well. Make sure the number of bedrooms and bathrooms is accurate, and the lot size is correct. Also check the assessed value of comparable homes in your area. If they’re being assessed for less than your home, you might have a case for relief.

Even if your assessment is accurate and comparable homes are being taxed at the same rate, there might be another route to tax savings. Ask your assessor’s office about available property tax exemptions. Local governments often give breaks to seniors, veterans, and the disabled, among others.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.

Homeowners Insurance: Time for an Annual Check-Up

December 30, 2010

Okay…so this isn’t a very exciting topic but it’s necessary! An annual check-up on your homeowners insurance can result in a healthier policy and a healthier pocketbook.

What type of coverage do I have?

The most effective type of coverage is known as “replacement cost,” which covers, up to your policy limits, what it would take today to rebuild your house and restore your belongings, says Jerry Oshinsky, a partner at Jenner & Block in Los Angeles who has represented homeowners in litigation against insurers.

“Extended” replacement cost coverage provides protection to your policy limit, say $500,000, and then perhaps another 20% of the cost after that. Percentages vary, but in this example you could recoup up to $600,000 on a $500,000 policy, assuming your losses reach that high. Extended coverage can compensate for any unanticipated expenses like spikes in construction costs between policy renewals. Now harder to find due to the industry shift toward extended replacement coverage, “full” or “guaranteed” replacement coverage covers an entire claim regardless of policy limits.

A less attractive alternative is “actual cash value” coverage that usually takes into account depreciation, the decrease in value due to age and wear. With this type of policy, the $2,000 flat-screen TV you bought two years ago will be worth hundreds of dollars less today in the eyes of your claims adjuster. Kevin Foley, an independent insurance broker in Milltown, N.J., favors replacement cost coverage unless you can save at least 25% on the premium for going with actual cash value coverage instead.

Even if you have replacement cost protection for your dwelling and personal property, don’t assume everything is covered. Structures other than your home on your property—such as a detached garage or swimming pool—require separate coverage. So too do luxury items like jewelry, watches, and furs if you want full replacement cost because reimbursement for those items is typically capped.

How much coverage do I really need?

OK, now that you’re clear on what type of policy you have, you need to figure out how much policy you truly require in dollar terms. Let’s say you purchased your home five years ago and insured it for $200,000. Today, it’s worth $225,000. Simply increasing your coverage to $225,000 may nonetheless leave you underinsured. Here’s why.

The key to determining how much dwelling coverage you need isn’t the value of your home but the money you’d have to pay to rebuild it from scratch, says Carlos Aguirre, an agent for Liberty Mutual Insurance in Arlington, Texas. Call your local contractors’ or homebuilders’ association and inquire about the average per-square-foot construction cost in your area. If it’s $150 and your home is 2,000 square feet, then you should be insured for $300,000.

There’s no rule of thumb for how much your homeowners insurance should cost. Insurers use numerous factors—age, education level, creditworthiness—to determine pricing, so the same policy could run you more than your neighbor. In recent years the average annual premium was $804. Oshinsky advises against scrimping on insurance because big increases in coverage probably cost less than you’d think. He recently purchased a liability policy that cost $250 for the first $1 million in coverage. Adding another $1 million increased his premiums only $12.50 more.

How can I lower my premiums?

The higher your deductible, the amount you pay out of pocket before coverage kicks in, the lower your premium. Landing on the appropriate deductible level requires remembering that insurance should cover major calamities, not minor incidents, says Foley, the independent insurance broker. Most homeowners should be able to absorb modest losses like a broken window pane or a hole in the drywall without filing claims. If you can, then you’re wasting money with a $250 deductible.

Foley’s rule: If you’re a first-time homeowner and don’t have a lot of savings, moving up to a $500 deductible will probably stretch your budget. However, if you live in a ritzy home and drive an expensive car, then you should be able to afford a $1,000 deductible. In Milltown, N.J., for example, the premium for a $200,000 home with a $500 deductible would be $736, according to Foley; moving up to a $1,000 deductible drops the annual premium to $672. That’s $64 in savings.

Every major insurer offers discounts to various groups, such as university employees or firefighters. Figure about 5%. Ask which affiliations would entitle you to a discount and how much. If an AARP membership would result in a $50 savings, pay the $16 dues and pocket the $36 difference. Many insurers also offer discounts ranging from 1% to 10% or more for installing protective devices like alarms and deadbolt locks, for going claim-free for an extended period, or for insuring both your car and your home with the same carrier.

Between-the-Studs Shelving and Storage: Find Your Niche in Life

November 8, 2010

Houselogic is a free website where you can find some amazing information as a homeowner. They have many articles sorted by topic ranging from DIY projects to rallying community support to put in a neighborhood playground. You can log in and track your projects, find the best prices at your local DIY stores and earn facebook badges.

I really liked this article because I have limited storage space in my own house and often think about “built-ins” as a solution. Now…I need a stud finder…

Recessed, between-the-studs shelving and storage niches help you de-clutter and stay organized without sacrificing valuable square footage.

Using between-the-studs shelving and storage

Kitchen: Between-studs shelving is ideal as a kitchen pantry because the shallow shelves are perfect for canned goods. You also can use a niche for storing spices, hanging utensils, or storing and displaying your cooking pans.

Bathroom: Install a between-studs storage niche in the shower for holding shampoo bottles and soaps. A shallow niche beside the toilet holds magazines and toilet paper. Near the sink, create a recess for toiletries and personal items.

Bedroom: Use recessed storage for CDs, paperback books, magazines, belts, scarves, and jewelry. You can also create a wall niche for your flat screen television as long as a header provides support where studs are removed.

Family room: Store pool cues, balls, and the triangle as well as CDs, wine or liquor, and barware.

Create between-the-studs shelving and storage

You’ll need moderate DIY skills and a basic knowledge of framing to build your own recessed wall niche. Once you’ve located studs with a stud finder and made sure the wall cavity is void of wires, plumbing, or air ducts, frame the opening and finish it with drywall or other materials, such as beaded board, then add shelving. Cost: $17 to $35, for a 14×36-inch niche.

Various sizes of prebuilt recessed wall niches are available in wood as well as less expensive polyurethane units. These units are customized to perform a range of storage tasks, including serve as a medicine cabinet, a home bar and as a shower niche. Cost: $90 to $500.

With four home renovations to her credit, Jan Soults Walker is a devotee of improvements, products, and trends for the home and garden. For 25 years she’s written for a number of national home shelter publications, and has authored 18 books on home improvement and decorating.

By: Jan Soults Walker

Published: October 1, 2010

Looking for your own DIY project home? Check out the available properties here and then give me a call.

Newest dream-home must-haves: Majestic boilers and designer pipes

October 20, 2010

No longer exiled to dank basements, high-efficiency — and high-design — heating and cooling equipment has become something homeowners show off.

By Gwendolyn Bounds of The Wall Street Journal

In June, Peter and Sara Starr gave dinner guests a tour of their new Bayside, Calif., home. There’s the designer kitchen fitted with free-standing ergonomic furniture, and the valley views, complete with majestic redwoods. But the pièce de résistance sits just off the living room: a 100-square-foot nook otherwise known as the boiler room.

Inside hums the heart of about $70,000 in state-of-the-art heating and electrical equipment. Rooftop solar panels feed a sleek hot-water tank and an array of batteries storing electricity and feeding excess power back to the grid. Hanging nearby, a petite black boiler provides radiant heat while hundreds of feet of copper piping snake outward, delivering warmth and water to the 1,800-square-foot house.

“It looks like the ‘Star Trek’ Enterprise,” says Peter Starr, 61. “It’s really a little focal point and a sign of pride.”

Say goodbye to the scary room, that dank, dark spot where boilers and water heaters work among the spiders, with human visits taking place only when something — “Honey, there’s no hot water!” — goes wrong. As homeowners begin to in renewable energy and other high-efficiency equipment, some are spiffing up the mechanical room and, in some cases, trying to make the air conditioner a showpiece. (Bing: Federal tax credits for energy efficiency)

Producers of this stuff are touting style. Take the LG Electronics Co. Art Cool duct-free air-conditioning units, which hang directly on interior walls and can frame works of art. Last year, Nortek Inc. launched a line of Maytag gas furnaces with “fingerprintless” faux stainless doors. General Electric Co. recently rolled out its futuristic, $1,600 GeoSpring hot-water heater, which looks like it might share DNA with the Jetsons’ cartoon robot maid, Rosie.

Slide show: Inside the high-fashion boiler room

Such gadgets are the latest means for leaving the Joneses in the dust.

“The mechanical room is now like the wine room or the library,” says Stephen Bohner, owner of Alchemy Construction Inc. in Arcata, Calif.

Bohner installed some of the Starrs’ equipment. He says all of his new construction projects include renewable-energy equipment, such as solar panels.

“If you are spending money on that stuff, you want to show it off,” he says.

Vince Kimbel recently installed a GeoSpring water heater in his Louisville, Ky., home. The unit combines energy-efficient heat-pump technology with an electric heating element, pulling warmth from surrounding air and transferring it into the tank. Says Kimbel, a builder: “The look translates into people saying, ‘This is different.’ If it was a traditional water heater, they wouldn’t give it a second look.”

The mechanical makeovers come as the residential heating and cooling industry battles back from lean years. Home-improvement spending is expected to climb nearly 5% this year, the first increase since 2006, according to Harvard’s Joint Center for Housing Studies. Helping sales are federal tax credits and rebates that offset outlays on certain energy-efficient equipment.

Of course, as with any trend, there are downsides to jumping on the bandwagon. Appliance styles can fall out of fashion, and updates cost money. Sears Holdings Corp. has phased out its “Pacific Blue” and “Sedona” orange-hued washers and dryers, replacing them with more au courant colors called “Ginger” and “Chili Pepper.”

And like a stunning pair of stiletto heels, what’s fashionable might not be all that practical. Three years ago, Dirt Devil launched two cordless vacuum models called Kurv and Kone. Now those models, resembling a scepter and small megaphone, are being discontinued.

Slide show: Inside the high-fashion boiler room

“They were great-looking, but from a utilitarian standpoint, they didn’t meet customers’ expectations,” says Dave Chaney, Dirt Devil general manager.

Slide show: 13 amazing facts about green roofs

Payback time on investments such as solar panels can be 10 to 15 years in some cases, and as in electronics, something new and better is always on the horizon. While 70% of future homebuyers said they’d be inclined to buy a “green” house in a down market, according to a McGraw-Hill Construction survey, the struggling housing market means sellers might not recoup what they’ve put into mechanical upgrades.

Some designers are trying to tap into the mania for the design flourishes of Apple’s iPhones and iPods. American Hometec Inc. of Wilmington, Del., in May introduced the Everun tankless water heater, which heats water only as needed. The units, which cost $200 to $1,200, resemble brushed chrome-and-white wine coolers and have slide-touch controls and an optional shelf to hide wires (or hold a vase of flowers).

“It’s designed to be like the iPod of water heaters,” says Dave Millilo, American Hometec’s vice president of marketing.

Others seek their muse in high art. Sears recently launched an in-room air cleaner called the Kenmore PlasmaWave, which takes inspiration from a Richard Serra minimalist sculpture.

“People don’t want to look at things that are unpleasant,” says Ellen Glassman, a Sears vice president overseeing design.

It’s unclear how the interest in pricey, energy-efficient appliances will hold up once certain tax credits and rebates begin to dry up at the end of this year. Earlier this year, Sean and Grace Cunnane of Rock Tavern, N.Y., installed a Viessmann boiler and new royal blue Buderus hot-water tank. The project, which cost $17,000, was partially offset by a $1,500 federal tax credit for the boiler.

“It helped,” says Sean Cunnane, 45.

The retired police officer has been showing off his new stuff to family and neighbors, but he says there’s more behind his latest splurge than bragging rights. With the weak housing market, he says he expects that he and his wife will be in the house living with — and looking at — their purchases “for a while.”