PMI: How to get rid of it!

Private Mortgage Insurance or PMI for short is insurance that only protects the mortgage company not you. If you stop paying your mortgage, this insurance ensures the lender does not lose money on the loan.

Bottom-line is if you have mortgage insurance, you don't want it because it doesn't help you at all. You should want to get rid of it as quickly as possible. So here a couple ways to get rid of it.

1. When your loan to purchase price reaches 80% you can request your mortgage company cancel the PMI. So if you purchased your home for $100,000 and now your loan has $80,000 balance or less you can request the PMI be removed. Also, when it reaches 78% the lender must automatically cancel the PMI.
2. Let's say you got a great deal on your house and/or the value has gone up over the last couple years. You can order an appraisal and have the ratio based on the appraised value instead of the purchase price. For example, you purchase your home as short sale 4 years ago.  The purchase price was $120,000, you put 5% down so the original loan amount was $115,000. The current balance is $105,000; 105,000 divided by 120,000 is 87.5%, not enough to remove PMI. But you order an appraisal and the actual value is $170,000, 105,000 divided by 170,000 is 62%, now you can request the PMI be removed. Often times a minimum of 2 years is required before the appraisal can be ordered. Read you mortgage documentation to double-check.

* Note current FHA loan originated in the past year have some additional stipulations

Understanding How Much Taxes You Pay

An important aspect in financial planning is understanding how much taxes you  pay and why. Below is the table of the federal tax-brackets for 2012. So lets say you make $90,000 from your job in 2012 and you filing you are single. First take  off the standard deduction ($5800) out and you will not pay federal income tax on the first $5800. So the remaining income you are taxed on is $84,200.

So the quick math is 10% of income up to $8700 which is $870. Now take 15% of all income between $8700 and $35,350 which is $3,997.50. Now take $84,200-$35,350 that is all of the income that will be taxed at 25%, this is $12,212.5 So your total taxes out of $90,000 would be $870 + $3997.5 + $12,212.5 = $17,080 which would be an effective tax rate of 19%.

Understanding how the tax brackets work is very important for retirement planning and annual planning, in higher income years it can be beneficial to reduce tax exposure by increasing IRA, 401K, and/or HSA contributions.

2012 Marginal Tax Rate	Single
10%	$0 to $8,700
15%	$8,700 to $35,350
25%	$35,350 to $85,650
28%	$85,650 to $178,650
33%	$178,650 to $388,350
35%	$388,350+

Credit - Why it Matters and How it Works

Like it or not; banks, credit cards, and other lenders use your credit score to determine your credit-worthiness. This score along with total income are used to determine how much and what terms/rate to  lend money to you. So any person concerned with borrowing money either now, or at any point in the future needs to be concerned with their credit score.

The two largest factors in determining a credit score are: payment history and debt amounts. Payment history looks at on-time payments. Debt amount focuses on how much available credit is used (on a per account basis and on the sum of the accounts). For example if one has $10,000 of available credit on all combined credit cards and it currently utilizing $9000 this would have a negative effect on one's credit score. Also, if one has a credit card with a $1000 limit and that credit card has a balance $900 that would also have a negative affect on ones credit score even if the rest of your credit has low utilization.

Two cautions here:

1. In the past I've gotten credit lines for 0% interest rates for medical procedures and for large jewelery purchases. These often show up as credit cards on your credit report, so be aware if you get Laser Eye Surgery for $4000 with the special 0% offer that will show up as 100% utilized on your credit report.  One way to fix this is to negotiate for more "credit" than the purchase will be.  And yes 0% introductory offers do always count in your credit score.

2. Your credit score is based on a moment time, so even if you pay off your credit card bill in full every month you can still run negatively affect your credit score by having over 30% on any one card or the sum of all your cards. Not a major issue but just be aware of this if you are shopping for car or home loans. You can address this problem by requesting to increased credit limits- remember the gold rule, "if you don't ask you don't get!" You can also pay off your card in the middle of month.

Living Rent Free! Things you don't think you need to spell out

In the winter, it's not appropriate to open your windows, put an exhaust fan in and run a space heater.

Yogurt and other items need refrigeration.

You use the bathroom, so you need to take turns cleaning it!

Paper towels and toilet paper are not included and it is not appropriate to put toilet paper in the paper towel rack.

If you make less than 14000 per year you cannot afford 550 per month rent.

Living Rent Free! - Buying

So now you've determined the location and the size of the house you would to purchase. Now it's time to start looking and eventually buying! As a buyer there is no point in not using a licensed real estate agent (it doesn't cost you anything, well sort of....but that would require a separate blog post)

1. Find out how much money you have available, by getting pre-approved by a lender
2. Look at the monthly cost of different loan amounts, just because you can get X dollars doesn't mean you should!
3. Begin working with a realtor to narrow your search and locate properties that fit your criteria

Additional tips and considerations:

• When looking at houses pay particular attention to the major systems: roof, heating, A/C, bathrooms, and kitchens. These are going to be the most expensive items to replace or update, so these need careful consideration when comparing houses and eventually making an OFFER.
• Right now it is still a buyers market, make lots of low offers! If it isn't embarrassingly low, it's not low enough.
• To get the best deal possible, the SELLER MUST WANT TO SELL MORE THAN YOU WANT TO BUY.

Living Rent Free! - Choosing House Location and Size

So you are interested in purchasing a home and renting out rooms, to offset the mortgage, here are some thoughts to get you started!

Picking a Location
Not all locations are created equal for renting out rooms. The two most important things to you need to know about an area are: is there demand for room rentals and what are the prices. You can get a quick idea of both of these by using Craigslist, look in the "Housing wanted" category, are there lots of people seeking rooms who have not found one yet? Next, look at the "Rooms/shared" categories this will give you an indication of price and amount of available rentals. Often time there a lot of postings but don't worry many of them are duplicates. Browse around; get a feel for the prices and types of rentals available. I always find it preferable to ask slightly less money per month but charge first, last months, rent and a one month security deposits. It also allows you to be more slightly more selective picking the roommates.

Picking House Size/ Configuration

Certain house configuration lend themselves to being ideal room rentals. Given the choice a 3BR/2BA or a 4BR/2BA are preferable, and if you luck enough to find a 4BR/3BA it is a very nice layout. As the owner of the house, I prefer to have my own bathroom, but this is really up to you! Any more than 3 people sharing a bathroom will become bothersome so keep that in mind when considering a 4BR/1BA or even 3BR/1BA home.

Other Factors to Consider

Some other factors that make a home more desirable for room rentals are:

• Adequate off-street parking
• Washer and dryer in-house
• Private bathroom for each bedroom
• Full kitchen
• Access to public transportation
• Adequate jobs in the area
• Universities in the area
• Community recreation included- pool, walking trails, gym, or tennis courts

Living Rent Free! - Introduction

Wouldn't living rent free be nice?  And I'm not talking about living with your parents, I am talking about living in your own house for free. Many people in their twenties and beyond currently share rental properties with 2, 3, or even 4 other roommates. Why not continue this lifestyle but own the house and collect rent?

I will give a very simple example for how this works. You have a 3 bedroom house, the mortgage is $1000 per month and your rent out 2 bedrooms for $500 each. That is $1000 per month, now you are living for free! Well almost, there is a lot more responsibilities.

I will be doing a series blogs on this topic; explaining the pros and cons and laying out a step-by-step plan.