Mistakes To Avoid As A First-Time Home Buyer

Purchasing your first home is an amazing accomplishment and a big milestone in your life. That being said, oftentimes, most first-time home buyers face many difficulties and even make mistakes. We want to discuss common mistakes that these first-time homebuyers make and how you can learn from them. 

  1. Not Thinking About Home Ownership Costs

While you probably saved up a large chunk of money to use towards the down-payment of your house, you may not have been thinking about the costs of these other pieces of owning a house. 

  • Repairs
  • Home maintenance (homeownership issues)
  • Furniture
  • Lawn equipment
  • Misc. Items

2. Only Paying the Minimum 

While some people try to avoid putting more money down for their down payment, they often regret it after-the-fact. Mortgage payments and daily life expenses can add up, so its good idea to pay as much off as quickly as you can. 

3. Not Having An Emergency Fund 

Another mistake home-buyers make is not having an emergency fund. We know buying a house can be daunting, but it’s important to always be prepared for an emergency regardless. At Sherman Wealth we recommend building an emergency fund that can cover your monthly expenses in case of an emergency or termination of income.

4. Not Understanding How Refinancing Works

As the market volatility continues and interest rates fall, it’s important to understand and consider refinancing. Especially given the current environment, you should think about refinancing in order to save some money and to get you one step closer to becoming debt free. 

We know purchasing your first home can be an overwhelming and intimidating process, which is why you should not have to do it alone. Discuss with mortgage and financial professionals to help map out your situation prior to making the big purchase. If you have any questions, email us at info@shermanwealth.com.

30-Year Mortgage Rate Tops 3% for First Time Since July

As we follow up on our previous blog regarding the skyrocketing 30-year treasury yield, we are seeing its impacts on mortgage rates. Last week, the 30-year treasury yield hit its highest level in a year, before the coronavirus pandemic began. As this yield has risen, we have seen subsequent increase in the 30-year fixed-rate mortgage since mortgage rates tend to move in the same direction as the yield on the 10-year treasury. So, Americans who purchased new homes or refinanced their mortgages over the past few months may have done so at just the right moment.

The average rate on a 30-year fixed-rate mortgage rose to 3.02%, mortgage-finance giant Freddie Mac said Thursday. When rates hit 2.98% in July, it was their first time under the 3% mark in about 50 years of record-keeping, according to Freddie Mac. We will continue to monitor these rates and the impacts they have on other metrics. If you have any questions about refinancing or mortgages, please reach out to us and we will be happy to connect you with a mortgage professional. As always, give us a shout at info@shermanwealth.com or schedule a complimentary 30-minute consultation here.

Here Are The Impacts Of The Skyrocketing 10-Year Treasury Yield

Due to tremendous economic aid, interest rates, particularly the 10-year treasury yield, has skyrocketed back up towards where it was a year ago around 1.2%, prior to the coronavirus pandemic.

We have been following this rate quite closely on our instagram handle, @shermanwealth, as we recorded it last week hitting 1.6%. Of course this spike has created tremendous volatility in the housing market in terms of interest rates as well as the stock market in terms of how equities have been priced.

We will continue to follow the 10-year treasury yield closely for you all. Check out the video below for Brad’s take on these interest rates and the effects they are having countrywide. As always, if you have any questions for us, please reach out with questions at info@shermanwealth.com or schedule a complimentary 30-minute consultation here

 

Financial Advice For Parents

kids-earning-money-with-chore-chart-e1581111178885

Raising a child in today’s world can cost hundreds of thousands of dollars. As a parent of four children ranging from ages 5 to 16, I can attest to just how expensive kids can be. Besides just the essentials like food and clothes, there are club teams, tutors, dance lessons and so much more. With each additional family member comes new financial considerations and expenses. The importance of planning for these costs before they arise is a key reason why many financial advisors are targeting young families and helping them successfully navigate how to cover their children’s expenses without compromising their own financial security. Here are a few top takeaways from some of these advisors:

SAVING FOR COLLEGE

With a high school junior in our house, it won’t be long before we are paying that dreaded college tuition bill. And, due to the ballooning costs of higher education, this bill is not likely to be a small one! If possible, new parents should try to start saving as soon as they can for their child’s college tuition.The earlier you start saving, the better prepared you’ll be. If you save $500 a month at birth, you should have around $190,000 saved by the time that child reaches 18 (assuming an annual return of 6%). However, if you don’t start until your son or daughter is 10, you’ll only have around $60,000 by the time they graduate high school. Setting up a state-sponsored 529 college savings plan, allows parents to invest money and then withdraw it tax-free, so long as the funds are used for certain education expenses. However, as you prepare for your children’s future, make sure that you remain focused on your retirement saving as well. There are lots of ways to pay for college, but you can only use the resources you’ve accumulated for your own retirement.   

CHILDCARE AND HEALTH CARE

When our first child was born, my husband and I were both working, and trying to find affordable childcare was not easy. Childcare is one of the biggest expenses new parents will face, especially if both parents work. In some cases, one parent will decide to leave their job and take care of the child themselves, especially if the cost of childcare is more than one parent is making. This is exactly what happened when our second child was born, since it was no longer cost effective to pay for childcare for two children with my salary.   

Meanwhile, childbirth and adoption count as qualifying events that allow parents to make changes to their employee benefits outside of the open enrollment period at work. For example, new parents can expect to see their medical expenses rise and those who have access to a flexible savings account and health savings account at work should use them since the money put into an FSA or HSA avoids federal taxation. In some cases, employers offer a Dependent Care FSA, which can be used for costs picked up from a nanny, babysitter or childcare center.

When it comes to health insurance, if both parents work, you should examine which plan will cost less to add the child to. Most doctor visits in the first couple of years are considered wellness visits, which are typically free or very low-cost in most health-care plans today. But, you should look into which plan is most cost-effective in the event of a trip to the emergency room or having to see a specialist – even with good insurance, the price tag of a broken bone is a lot more than you might think!

LIFE INSURANCE

Even though it’s not something most people like to think about, preparing for death is of utmost importance when becoming a parent. Your financial advisor should be able to run various calculations to figure out the amount of protection you would need. Many families make the mistake of only getting life insurance for the main earner, experts say, but both parents should be covered. Many people think that since stay-at-home parent isn’t actually earning anything, they don’t need insurance. However, when it comes to life insurance, you need to evaluate what it would cost to have someone else take care of your children if something were to happen to that parent.  

It is also extremely important to put together estate planning documents, including a will and health-care directives, as well as discussing appointing a guardian in the event of an unexpected life event. When we found out we were expecting our first child, it forced us to have some difficult conversations about who we would want to take of our child and how our assets would be distributed if something happened to us. It’s also important to revisit those questions each time you add another child to your family or if there is another major change to your assets. The guardians you might have written in your will when you were 25 might not be the same guardians you would choose when you are 45. None of these decisions are easy ones, but they are vital to preparing for your life as a parent.

EMERGENCY SAVINGS

With all the additional expenses new parents can face, from diapers to a larger home and mortgage, it’s more important than ever to have a safety net for those unexpected costs. Having children is a good reason to have a bigger emergency fund, simply because there are now more people who are dependent on you financially. Aside from the random home and car repairs that always seem to pop up when you least expect them, now add braces, sports equipment and teenage social lives to the mix. Having some money from each paycheck deposited directly into an account that you don’t touch is an easy way to make sure you are creating an ample emergency fund should you need it.  

There are so many wonderful aspects of being a parent, but it is definitely a costly undertaking. Seeking some financial guidance before you become a parent is always a good idea, but it’s never too late to start planning for your future with a family. If you have any questions about saving for college, choosing the right health plan, putting together your estate documents or anything else related to your financial goals or plans, please contact us.  We offer a free 30-minute introductory consultation and would love to hear from you!  Check out our other blogs for more financial advice and tips.

 

Mortgage Strategies for Self-Employed Home Buyers

Morgages for self-employed applicants

Being your own boss is a great feeling with many benefits, but those benefits do not include a fast track to a great mortgage. Gone are the days of the easy mortgages, the no-income-verification loans, and The Big Short. In fact, qualifying for a mortgage may rank as one of the biggest challenges you face as someone who is self-employed.

And if that weren’t stressful enough, with recent signals from the Fed that mortgage rates may be rising in 2018, you probably want to act quickly to pre-qualify if you’re considering a move.

As a self-employed business owner who just bought a new home for our growing family, I can testify that the mortgage process is not for the faint-hearted. Every time I completed a lender’s checklist they come back to me for more information. This was not my first mortgage but the time and energy it took this time around was beyond what I expected – and I’m a credit-worthy borrower and financial pro with a background in the mortgage world.

So what’s the best way to prepare? To understand the issues, think like a bank. In deciding to lend you hundreds of thousands of dollars, the bank wants to know, first and foremost, that you will be able to pay them back – steadily, regularly, over time.

Here are 3 of the biggest hurdles you may have to overcome:

SHOW YOU MEET THE INCOME REQUIREMENTS

The first thing a potential lender asks to see is your W-2 form, the document that shows salaried workers’ annual wages and withheld taxes. Business owners and independent contractors are unlikely to have W2s, and instead need to present their full tax returns, including profit & loss and deductions & depreciation, as well as their own income.

Not only are lenders not likely to be expert at understanding your business and your cash flow, but the salary you show on paper may be deceptively low. That’s because most business owners invest a sizable chunk “back into the business” when they’re getting started as well as taking deductions for travel, leased vehicles, and purchases of computers, office supplies, and even their phone.

Getting ready: If you’re thinking about buying a house, consult a financial planner, your accountant, or a trusted mortgage professional (we’ve suggested a few below) about how much to accurately deduct – or not – this year to show sufficient income and an acceptable debt-to-income ratio.

HAVE ALL THE PAPERWORK

Having paperwork that tells the full story can make all the difference, so now is the perfect time to prepare a file with the documents you’ve already collected for the IRS. Remember, though, that this year’s tax returns and records may not be enough to show your business has been steadily growing. Be prepared with records from previous years, and bonus points for data about how your sector has been doing as well.

Getting ready: Keeping good records is key so if you haven’t already started, get started now, and see what you can put together for previous years.

MAKE SENSE OF COMPLEXITY

Every company and every consultant is unique and it may be hard to reconcile your business’ specific challenges and trajectory with the solid predictability a mortgage lender is looking for. You may want to bring a trusted accountant or financial or business advisor to the meeting with the lender – someone who knows your business well and can explain its structure, operations, and cash flow in context. If your advisor can’t be there, ask them to write a brief document explaining your data. Consider also requesting profit-and-loss statements prepared without personal expenses to show the difference between reported income and actual income.

Getting ready: be prepared to explain what your numbers mean in context and turn to a trusted advisor, if possible, who can translate your numbers for the lender and help them understand you’re a good candidate.

AVOID CREDIT SCORE SURPRISES

You wouldn’t be the first, or last, person to find discrepancies in your credit score. Correct any discrepancies and make sure it’s correctly updated before applying for a mortgage. And – obviously – pay off any outstanding debt.

Getting ready: get credit reports from the major agencies and make sure that they are accurate.

 

If you’re in the market for a new home, let us help you and guide you through the process. With the fed signaling a rate hike, we are happy to schedule a call with you for a free analysis of how that may affect your purchasing power.

We are well versed in the latest options from different lenders that may be most appropriate for your situation and have online tools to help you look at your overall financial situation to determine how much of a mortgage it makes sense for you to take on. We also have resources and experts we can refer you to, or, if you already have a mortgage professional, we will work with them to determine how much your can afford.

And we have experience: I’m pleased to report that, after what seemed like a never ending process, I succeeded in getting a mortgage with very favorable terms and – most importantly – we love our new home.

Don’t be daunted by the challenges involved with getting a mortgage when you’re working for yourself. With the right preparation and the right help, you too can make your dream home a reality!

Here are three resources trusted referral partners in the Washington area:

(As a fee-only financial planner, we have no financial vested interest in referrals. We just want to make sure you have the best advice possible!)

Jody H. Eichenblatt, Senior Mortgage Consultant at Prosperity Home Mortgage

Michael Parsons, Certified Mortgage Planning Specialist (CMPS) at Apex Home Loans

James Schneider, Loan Officer at Eagle Creek Mortgage

Todd Sheinin, Chief Operating Officer at Homespire Mortgage

CJ Kemp, Loan Officer SunTrust Mortgage, Inc

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions.  They are for information purposes only. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

If you have any questions regarding this Blog Post, please Contact Us.

Real Life Financial Planning

Hand of the businessman with the house

This past weekend my family has made the move into a new home, which needless to say, has been a chaotic process.  It really got me thinking, though, about real estate/home ownership and how it fits into client portfolios and their financial plans.

The mantra of the middle class is buy a home.  But is it always the best decision for your money?

Buying residential real estate certainly poses some undeniable advantages.  For many people, there is a certain pride in homeownership.  After all, it is the epitome of the American Dream.  Additionally, the interest and property tax portion of your mortgage is tax-deductible, and not unimportantly, homes tend to increase in value, build equity and provide a nest egg for the future.

But what is very often overlooked by the average American is the opportunity cost of their money and how their mortgages play a role in that.  A recent Wall Street Journal article highlights the important decision individuals face when they have excess cash.  It recommends taking a close look at what interest rates you pay on a mortgage and how those compare to the savings amount on your bank account as well as the rate of return on investments in equity and bonds.

When homeowners do this, they often are struck with a revelation: they are likely not getting as high of a return on their investment as they would have if they were invested more heavily in equity.  Ultimately, the opportunity cost of having your money tied up in your mortgage could actually hurt your long-term wealth.  Even worse, the tax breaks you are receiving do not cover the amount of loss incurred from your interest rate!  A recent Bloomberg article went so far to say that this simple understanding is one of the distinctions that separates the world’s wealthiest individuals from the middle class and one of the major contributing factors to income inequality.  Basically, it argues that a major difference between the middle class and the top 1% is that the middle class have too much of their portfolios tied in up residential real estate that is not providing adequate returns.

There is a theory out there that wealthy individuals are simply more skilled investors.  A recent study explains that this is not true. (In fact, they might be worse!)  Wealthy people just tend to own most of the equity in the economy, meaning that when business does well, they reap disproportionately large benefits.  Generally speaking, rich individuals own the upside of the economy in the form of stock, while the middle class’s gains are limited by the slow growth of housing wealth.  It is no surprise that the collapse of the housing bubble has exacerbated wealth inequality because stocks recovered more strongly than real estate did.  Maybe the difference between you and the 1% is just your perception of the options available to you.

Surely, shelter is one of the basic necessities of life.  Everyone has to live somewhere – but taking the time to consider all of your options before making any large financial decisions is something that every person should do.  At the very least, you should consider the opportunity costs of your cash and look into advantages of a less expensive housing option, renting, or investing more in equity to ensure that you are getting the most out of your money in the long run.

At Sherman Wealth Management, we believe that real life decisions call for real life financial planning.

These are the kinds of decisions we want to help you make, so don’t hesitate to contact us today to get started.

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

 

Why Reducing Your Tax Refund is a Good Thing

With tax day fast approaching, many people are counting on receiving a big check back from the Government. While you’re probably looking forward to this windfall, there are reasons why you may wish to minimize your end-of-year refund.

Why Big Refunds are Bad

Taxes are refunded to you when the Government takes too much of your pay each pay period. By overpaying each paycheck, only to get the money returned to you once a year, you are essentially lending the Government money at zero percent interest.

This is money that could have been budgeted for and spent, or invested, throughout the year. Even if you had put the money in a savings account over the year, you still would be better off.

How to Minimize Your Refund

In order to adjust the amount that is withheld for the IRS each pay period you need to fill out/change your W-4 form.

The W-4 allows you to specify allowances or exemptions that you are eligible for.

These can include:

  • Donations to charitable organizations
  • Interest on a home mortgage
  • Interest on student loan debt
  • Contributions to traditional IRAs

The W-4 form estimates the amount that you would receive from a tax refund. This amount is then distributed over the number of weeks remaining in the tax year, lowering the amount withheld from your paycheck each pay period.

You should also look into filling out a new W-4 every time you have experienced a major change in your life. Examples of this include:

  • Switching jobs
  • Marriage
  • Having a child
  • Losing a dependent (They either file their own tax return, or you can no longer claim them)

While trying to lower the amount that is withheld in taxes each pay period generally makes sense, it may be prudent to not list all of the exemptions you are eligible for on your W-4.

Why You May Not Want to Claim all Your Allowances

While having too much in taxes withheld can be compared to lending the Government money at a rate of zero percent interest, the reverse is also true.

If you underpay in taxes each paycheck, you end up owing money to the Government. In theory this is great. You could put the money in a savings account, and then at the end of the year pay back the Government while pocketing the interest that you collected.

In practice however this is not a prudent strategy for most people.

Individuals have a tendency to spend money that they have, and forget about longer-term consequences of their actions. Additionally while receiving a refund at the end of the year is exciting, the opposite is also true.

This is why it may make sense for you to leave a few deductions you are eligible for unlisted on your W-4. This ensures that you receive a tax refund, albeit a smaller one, rather than owing money.

What to Do When You Do Receive a Refund

While this advice can be helpful for next year, chances are this year’s tax season will provide you with a large refund.

If you do receive a large refund there are a series of things you can consider to maximize its value. Here are a few ideas to get you started:

  • Invest in yourself – Sometimes the best investment you can make is in yourself. Consider buying a book or taking a class to help improve your performance in work or at life.
  • Get your will done – this can often cost less than a $1,000 in total but can save your beneficiary’s significantly more both in terms of money as well as headache
  • Put money into a college savings plan
  • Pay down your mortgage
  • Invest in a non-tax-exempt account – if you have already maxed out your IRA
  • Save for a rainy day
  • Open/add to an IRA
  • Pay off student loan debt
  • Pay off credit card debt – if you have any credit card debt, this should be an immediate priority
  • Save the money and increase your 401(k) contributions – put your money in a safe place such as a savings account, and bump up your 401(k) contributions to reflect the fact that you have this money sitting on the side.

Regardless of what you do with your tax refund, it is important that you come up with a plan. A trusted financial planner can help you in the process of creating one.

With over a decade’s worth of experience in the financial services industry Brad Sherman is committed to helping individual investors plan and prepare for retirement.

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.

If you have any questions regarding this Blog Post, please Contact Us.