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How a Mortgage Nerd Bought a House in a Seller’s Market

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I closed on my house about eight months ago, but it feels like it was in another lifetime. Yes, the COVID-19 pandemic makes time feel bizarrely elastic, but also, the housing market has undergone dramatic changes during that time period. As a writer focused on mortgages and homeownership, it’s my job to watch this stuff, and what I’ve seen in 2021 has been legit bananas.

If you’re struggling to find a home you can afford or trying (and failing) to get an offer accepted, I just want to say — take it easy on yourself. It’s not you. This is really hard.

For those of us who aren’t already rolling in dough, it may take big sacrifices to afford a home: sacrifices like taking on an extra job while living on a spartan budget, breaking a financial “rule” like borrowing from retirement funds, pooling resources to create a multifamily or multigenerational household, moving from a high-cost part of the country to a low-cost one, or any combination of the above — plus all the things I did.

Here’s how I bought a house. It wasn’t glamorous, and most of it wasn’t fun, but these are the kinds of moves people determined to become homeowners are making in this market. And if you’re not in a position to follow suit (or just don’t want to) don’t sweat it: There’s no shame in continuing to rent and bolster your financial health in the meantime.

I moved in with my mom

Is moving in with a parent when you’ve been living independently for years the coolest move? No. Was it a smart one for me? Yes, and I am beyond grateful to have had that support; I realize not everyone does. Working remotely from my childhood bedroom let me sock away the money I’d been spending on rent. And, hey, because I moved in summer 2019, when COVID hit, I was way ahead of the moving-back-home curve.

The National Association of Realtors found that from July 2019 to June 2020, roughly 4% of all home buyers said they’d moved in with family or friends to save money for a home purchase. That number’s around 7% for first-time home buyers.

Kristen and Robert Toth Jr. weren’t first-timers, but they opted to move in with Robert’s mother not long after listing their Allentown, Pennsylvania, starter home in October 2019. That way, they’d have some breathing room before buying again and would be able to bulk up their down payment. They ended up staying for 10 months, anxiously watching as properties were snapped up sight-unseen for tens of thousands of dollars over the asking price during Pennsylvania’s shutdown last spring.

“There was zero way we could have moved out of our old house and moved into an apartment, paid rent, and been able to afford this house,” Kristen says of their three-bedroom, 1950s ranch home in the suburbs of Lehigh Valley. “If we weren’t living with a relative, we don’t know what we would have gotten.”

Kristen and Robert Toth Jr. closed on their Pennsylvania home in October 2020. (Photo courtesy of Kristen Toth)

I made a 20% down payment

Same, Kristen, same — there was no way I could have swung my 20% down payment without cutting an expense as big as rent. Even though I’d managed to pay off my car and student loans, without drastically reducing my monthly spending it would have taken me years to save up for a down payment.

In the first quarter of 2021, the median sale price of an existing home was $319,200, according to the NAR. You’d need to skip nearly six years’ worth of lattes to make a 3% down payment (the minimum down payment for a conventional loan) on a house at that price. Assuming a $4.50 cup of java, that’s like 2,128 lattes — and that doesn’t even include the other upfront expenses involved in a home purchase, like paying closing costs or hiring movers.

Another issue? While making the minimum down payment is easier on your bank account and, with mortgage interest rates at historic lows, lets you borrow more money cheaply, it can be a liability in a hot market. That’s especially true now, with home prices at times outstripping appraisals and sellers concerned with a mortgaged buyer’s ability to cover an appraisal gap.

“When you’re evaluating offers as a seller, and you’ve got a 3.5% [Federal Housing Administration loan] and a 20% conventional, if they’re both equal and both are trying to hit a $350,000 appraisal, naturally you’ll choose the one with the higher down payment, since you know they’ll be able to hit that gap,” explains Mike Ferrante, a real estate agent with Century 21 Homestar in Cleveland.

In other words, since the 20% buyer has more cash on hand, a seller may assume they could use some of those funds to cover an appraisal gap and simply make a lower down payment. An appraisal gap occurs when the appraised value of a home is less than what you offered.

Lenders won’t allow you to borrow more than a house is worth. So if you want to keep going despite a low appraisal, you have to be able to make up the difference in cash. (Or the seller has to reduce the price, something unlikely to happen in a super-hot market.) Buyers who plan to put down 20% are better positioned to shift some of that cash to cover an appraisal gap, while still meeting minimum down payment requirements. That may be one reason why in March 2021, 29% of first-time home buyers put down 20% or more, according to NAR data.

I got a mortgage preapproval

When I was ready to stop just scrolling through real estate listings and actually see properties, I researched lenders and ended up applying for mortgage preapproval with about half a dozen. Full disclosure: I don’t know that I would have thought to do this, or even compare lenders at all, if I didn’t write about mortgages for a living.

By the time I was looking at homes in spring 2020, my local real estate market was hot, but sellers were also wary of too many strangers trooping through their homes. Many sellers asked buyers to show proof of financing before allowing them to view homes in person.

A year later, it’s less about coronavirus concerns and more about sellers anticipating multiple offers over the listing price. “We won’t even take people out if they don’t have prequalification or preapproval; you’re not going to get accepted if you don’t have an offer in hand,” says Re/Max Key Properties agent Brent Landels, who’s based in central Oregon. Landels advises looking at homes that are listed below your preapproval amount because it gives you room to bid higher.

The author standing outside the front door of her yellow house.

The author closed on her home in September 2020. (Photo courtesy of Kate Wood)

I bought a fixer-upper

I walked through more than 20 homes in person and scrolled through who knows how many more online. Finally, in September 2020 I closed on a 1740s Cape Cod-style home in eastern Connecticut that needed a lot of love (you read that right, it’s almost 300 years old). It had loads of period charm, a large lot with plenty of mature trees, but had it been move-in-ready, I doubt I would have been able to afford it.

That low upfront sticker price can come with a cost, something Monica Lee and her partner, Dan Hart, have also found to be true of the fixer-upper they bought just outside Washington, D.C. “We found a house in Takoma Park that was ridiculously inexpensive, but it was unlivable,” Lee explains. In August 2020, the couple purchased the home, which Lee says had been unoccupied for roughly 10 years, with an FHA 203(k) loan covering the cost of the home loan as well as their planned renovation.

The logistics of their loan proved more difficult than anticipated. “I’ve worked in government, I get permitting, I thought I was going into it with eyes wide open and I could keep things moving,” Lee says. Red tape and trouble securing contractors pushed back the couple’s timeline again and again, but Lee says, “You do learn a lot. You feel like you accomplished something. I will feel like we love the house.”

Be patient with yourself and the market

Buying a house in a seller’s market has definitely meant even more work (and money) than I anticipated. I ended up staying at my mother’s for months after closing while I got the house into livable condition. But I’m coming to love my house, too.

If you can hang in there, make the sacrifices this market demands, and end up with a place to call your own, congrats. And if you choose to bail on your home search for now, I can’t say I blame you.

Yeah, you’ll have to keep renting longer, but you’ll also have more time to save for a down payment and maybe tune up your credit score, which can help you get a better interest rate. The market could even become a bit friendlier to buyers. There’s still plenty of time for you to become a homeowner — and if this isn’t the right time for you, that’s totally OK.

Top photo: The author’s circa 1747 Cape Cod-style home. (Photo courtesy of Kate Wood)

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3 Times You Need Money Advice From a Human

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You can now manage most aspects of your money without ever consulting another human being. You can budget, borrow, save, invest, buy insurance, prepare your tax return and create a will — among many other tasks — by using apps, websites and software.

But technology still has limitations, especially when you’re facing a money situation that’s complex or involves judgment calls. Consider consulting a human expert in the following situations:

1. You’re dropped by your homeowners insurance

Insurers typically can’t cancel a policy after 60 days unless you fail to pay premiums, commit fraud or make serious misrepresentations on your application, according to the Insurance Information Institute, a trade group. However, insurers can decide not to renew your policy when it expires.

With auto insurance, you often have many options after such a “non-renewal.” Even if you’ve had accidents or multiple claims, you typically can find coverage with companies that specialize in higher-risk drivers.

If a homeowners insurance company dumps you, however, you may have trouble finding coverage, says insurance consumer advocate Amy Bach. That’s especially true if you were dropped because you made too many claims, or your area is considered high risk because of wildfires, extreme weather or crime, for example.

How would other companies know? Insurers share such information in databases, and application forms typically ask if you’ve been “non-renewed” by another insurer, Bach says.

Bach’s nonprofit organization, United Policyholders, recommends seeking out an independent agent or broker who has relationships with several insurance companies. The agent or broker should know which insurers may be more receptive to your application and can put in a good word for you, Bach says. While most underwriting decisions are made by computers, there are still ways for human beings to override the algorithms.

“It will make a difference if [the agent or broker] can call an underwriter that they know and vouch for you as a good bet,” Bach says.

If your area has been labeled high risk, ask your neighbors for referrals to agents or brokers who helped them find coverage. Otherwise, you can ask an accountant, attorney or financial planner if they have recommendations. Friends and family may be able to provide leads as well.

2. You’re facing a “face-to-face” tax audit

Most IRS audits are conducted through the mail and are relatively routine. The IRS sends a letter requesting additional documentation to support a deduction or other tax break you’ve taken. If you mail back sufficient evidence, your case will be closed with no taxes owed. Otherwise, the IRS will mail you a bill.

However, if the IRS wants to meet with you, the stakes get much higher. In fiscal year 2020, the average amount of additional taxes recommended in face-to-face audits was nearly 10 times larger than the average for a correspondence audit: $72,210 versus $7,658, according to IRS statistics.

Even tax pros hire someone to represent them in face-to-face audits, says Leonard Wright, a San Diego certified public accountant and financial planner. Wright has plenty of experience: He was chief financial officer of a company that was audited, and his personal tax returns have been audited four times. In each case, he hired another CPA to represent him.

It’s all too easy to say something you shouldn’t when you’re under scrutiny, Wright says. You could volunteer information that might not be helpful to your case, or get defensive or confrontational.

“You don’t want it to become personal, and you don’t want to ruffle the feathers of the auditor,” Wright says.

If you used a tax preparer, you may assume that person can represent you in an audit, but that’s not always the case. Typically CPAs, attorneys and enrolled agents can represent clients in IRS audits, but other tax pros usually can’t. Your tax preparer may be able to refer you to someone who can represent you, or you can get referrals from friends, family or financial advisors.

3. You’re creating an estate plan

Will-making software and estate-planning sites can help you create essential legal documents if money is tight. Otherwise, you should probably consult an attorney, says Betsy Hannibal, senior legal editor for self-help legal site Nolo.

“Why not get personalized advice that’s tailored to your situation, if you can?” Hannibal says.

Getting help is particularly important if you need or want to do something complicated with your estate like putting conditions on a bequest, providing for someone with special needs or creating a trust, she says. You’ll also want an attorney’s help if you have a lot of debt, because there may be ways to protect your assets from creditors. Finally, consult an attorney if you think someone might contest your will. A lawyer can put additional protections into place and serve as a professional witness that you knew what you were doing, Bach says.

“If someone doesn’t think you were in your right mind, going through an attorney can help make sure that (a legal challenge) can’t go forward,” she says.

This article is meant to provide background information and should not be considered legal guidance.

This article was written by NerdWallet and was originally published by the Associated Press.

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What Is a Crypto Interest Account?

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This article provides information for educational purposes. NerdWallet does not offer advisory or brokerage services, nor does it recommend specific investments, including stocks, securities or cryptocurrencies.

Some cryptocurrency platforms, such as BlockFi and Gemini, have begun to offer a way to earn interest on crypto. The process has parallels with traditional savings accounts, and the rates can be eye-popping, with some in the double digits.

But like most crypto activities, there are big risks in losing more money than you earn with these accounts. Here’s a quick explainer on how crypto interest accounts work.

What is a crypto interest account?

A crypto interest account is generally a crypto platform’s offering that lets you earn interest on digital assets that you’ve bought. You agree to lend out Bitcoin or altcoins (any cryptocurrency that isn’t Bitcoin) in exchange for interest. This is similar to how savings accounts work at banks: You deposit money, then the bank lends it out and pays you back plus interest. You can generally take your money out anytime.

“It does work conceptually identical to how banking institutions lend money,” says Ryan Greiser, a certified financial planner in Doylestown, Pennsylvania.

But the differences in rates and risk, among other factors, are huge.

7 things to know about crypto interest accounts

1. Rates can be astronomically high

The crypto firm BlockFi, for example, offers rates from 0.10% to 9.50% on its website, and the firm Celsius has several yields around 9% — with one nearly at 14% — for U.S. customers (there’s a 17% rate for non-U.S. customers). The best high-yield savings accounts, in contrast, tend to have interest rates closer to 0.50% annual percentage yield. And the national average rate for a regular savings account is 0.06%.

2. Returns over time are hard to compare

With traditional savings accounts, everything is in U.S. dollars so you can estimate the total possible interest you can earn in a year, assuming a rate doesn’t change. When browsing a crypto firm’s rates, however, you might be looking at dozens of digital assets with varying levels of volatility. It’s good to be familiar with at least two broad types of digital assets:

  • Native cryptocurrencies such as Bitcoin and Ethereum can have daily fluctuations in value.

  • Stablecoins such as USD Coin are a type of cryptocurrency with value that is pegged to the U.S. dollar or another real asset.

3. Withdrawal fees and limits may apply

Watch out for fees that may vary by cryptocurrency and might not be listed in U.S. dollars. Also, check for any minimum or maximum withdrawal amounts. Some crypto firms offer different types of access:

  • Flexible terms have no constraints on when you can withdraw.

  • Fixed terms require agreeing to not access funds for a period, generally a few months. These fixed-term yields have parallels to certificates of deposit, a type of savings account where you lock up funds in exchange for a higher rate. (If the idea of locking up crypto for more rewards appeals to you, you may also be interested in crypto staking, which involves helping to verify valid crypto transactions on a blockchain network.)

4. Crypto has big risks

Risks include but aren’t limited to:

  • No deposit insurance: Crypto interest accounts are not insured by the Federal Deposit Insurance Corporation, so if a firm goes bankrupt, there’s no government guarantee that you can get funds (including interest) back.

  • Default risk: What if a borrower can’t pay you back? Greiser recommends understanding what measures a crypto exchange is taking in case borrowers default on their crypto loans (which might be using the crypto you’re lending). Crypto exchange Gemini, for example, explains on its site how it’s regulated by the New York government and how it vets borrowers’ risk management processes.

  • Digital assets can lose value, and some can go extinct: There are more than 13,000 cryptocurrencies, according to market research website CoinMarketCap.com, and it’s unlikely they’ll all go up in value over time. Some might even go away completely. You can find “dead coins,” or previous crypto that went out of circulation, on websites such as Coinopsy and Deadcoins.

5. Regulation of crypto interest accounts is underway

In September, Coinbase — the biggest U.S. crypto exchange — canceled its launch of a lending product that would earn interest for customers. This action occurred after Coinbase received notice that the U.S. Securities and Exchange Commission threatened to sue, though the reason wasn’t clear, Coinbase wrote in a blog post. In addition, securities regulators in two states have ordered BlockFi to stop opening new interest accounts for customers, according to BlockFi’s website. There’s likely more regulation to come, which could affect the usage of these accounts.

6. Not all crypto firms work in all states

BlockFi’s and Crypto.com’s platforms, for example, aren’t available to New Yorkers, though the accounts are options in most states.

7. Crypto is not for everyone

Greiser says the person who has the right risk appetite, time horizon and willingness to do their own due diligence and research may consider crypto interest accounts. In doing research, you’ll likely need to learn various technical processes, such as how to transfer crypto between platforms or from a crypto wallet outside a platform and how to report crypto earnings or losses for taxes. If you’re just getting started, consider these three questions before buying cryptocurrency.

The author owned Bitcoin and Ether at the time of publication. NerdWallet is not recommending or advising readers to buy or sell Bitcoin or any other cryptocurrency.

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Roth IRA Contributions – What You Should Know

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For nearly everyone, the Roth IRA is the ideal place to start the journey to building a retirement fund. While most people have heard of them, they are still a bit misunderstood. That could mostly be because many people find it difficult to even begin investing due to the complexity.

However, just know that if you are still a bit unsure about the idea of opening a Roth IRA, you’re not alone. This article will provide you with foundational knowledge to have an educated conversation with your financial advisor as to whether a Roth IRA is right for you.

Roth IRA – What Is It?

A Roth IRA is a type of tax-advantaged retirement account that anyone in the U.S. can open who meets a few minimum requirements, which we’ll get into later. The Roth IRA allows one to deposit money regularly, or all at once, up to certain annual maximum limits.

Most major investment firms offer investors the option to open a Roth IRA, and the funds you deposit would be held separately from your regular brokerage funds, if any. This is because of the tax advantages offered to Roth IRA funds.

The most important benefit of a Roth IRA is that all profits enjoyed over the life of the account are tax exempt.

Requirements to Open a Roth IRA

The Roth IRA was created in 1997 as a way for middle-income Americans to enjoy some tax benefits not afforded to those of wealthier status. The first requirement to open a Roth IRA is that your income falls below certain maximum limits. For single filers, your gross income should be below $140,000, and for married filers, your gross income should fall below $208,000.1

It’s important to note that there is a bit of a workaround to these income limits. While the standard requirements are fairly straightforward, you should consider consulting with a financial advisor and perhaps a tax professional as well. You might be able to contribute to a Roth IRA account if you make more than the incomes limits via “backdoor” Roth IRA contributions.

Another requirement to open a Roth IRA is that you have what is known as “earned income.” This means that you earned taxable compensation for work performed which can be reported on a W2, 1099, or other similar IRS form for income.

Pension allowances management for retirement funds

Benefits of a Roth IRA

As we mentioned earlier, the most important benefit to a Roth IRA is the tax-exempt status of the returns on your investments.

Another little-known benefit of a Roth IRA is that it can act as an emergency fund. A 401(k), for example, comes with restrictions to almost all withdrawals. While you can technically withdraw funds from a 401(k), these distributions could – and most likely will – be subject to heavy tax penalties for early withdrawal.

In the case of the Roth IRA, you can withdraw all funds you’ve deposited, also known as principle, without any penalties. While you can withdraw principal investments at any time, any withdrawal of profits prior to age 59 ½ will generally be subject to heavy tax penalties like those of early withdrawal from a 401(k) or Traditional IRA.

Drawbacks of a Roth IRA

Returning to the 401(k) example, the maximum contribution limit for 2021 is $19,500.2 This brings us to the major drawback of the Roth IRA, which is that the maximum contribution per year is $6,000 for those below age 50. Those older than 50 are able to contribute up to $7,000 per year.

Consider maximizing both your company-sponsored retirement plan contribution and the Roth IRA contribution if you have the means.

What’s Next: What You Should Know About Roth IRAs

The Roth IRA is often said to be funded by “after-tax” income. This means that all money that goes into a Roth IRA has already been taxed via your regular income tax rate. While there are a few requirements you must meet prior to opening a Roth IRA, they are available to nearly anyone who can show earned income, and they have many tax advantages that, over time, could provide enormous benefits to those building up their retirement accounts.

If you still have more questions about Roth IRA contributions, check out this article from Pittsburgh financial advisors, Fragasso Financial Advisors, for some more insights. You should always consult with a financial and tax professional before making any decisions.

Investment Advice offered by Investment Advisor Representatives through Fragasso Financial Advisors, a registered investment advisor.

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