New Home for the New Year? Make Your Resolution a Reality
With the New Year comes the promise of 365 days of change. Every New Year’s Day, people pledge to lose their guts, give up smoking for good, or stay away from meat and caffeine. Some focus on improving their personal finances: saving money, paying down debt, and achieving a big goal — like purchasing a home.
And then come the other 364 days of the year.
Promises can be hard to keep. Only 59 percent of all American adults who made at least one New Year’s resolution in 2014 managed to maintain it for at least part of the year, according to a recent Marist Poll.
“Change is very difficult, so despite people’s best intentions, changing old habits is an uphill battle,” says Dr. Jim Taylor, a business psychologist based in San Francisco, CA.
There are simple reasons why some New Year’s resolutions don’t last, he notes. Some people lose focus on their goal. There’s no plan in place to execute the resolutions. There are “competing needs and wants.”
When it comes to a long process like saving up to buy a home, it is “perhaps even more difficult to stick to because the rewards are delayed and there are often conflicting forces at work,” says Taylor.
It may not be easy, but by no means is it impossible — 52 percent of recent homebuyers managed to save up for their down payment in a year or less, according to a report by the National Association of Realtors®.
The down payment amount needed may be less than prospective borrowers realize. Lenders can give qualified borrowers affordable and sustainable loans with down payments as low as 3 percent, as policy changes by Fannie Mae and Freddie Mac have opened up access to credit for prospective homeowners, which means that New Year’s resolution to own a home can be a reality with the right discipline and a good plan.
There are a number of smaller resolutions aspiring homeowners can make to help them get to their big goal. Getting out of credit card debt, cutting unnecessary spending, saving money, and improving credit scores are among the key steps people can take to build their case to become a homeowner.
Another good step is to keep a keen eye on the 10-year U.S. Treasury note to get a better idea of what direction mortgage rates are heading, says Dr. Don Taylor, otherwise known as “Dr. Don,” a columnist with Bankrate.com and the president of Emmett Advisers, a financial planning firm.
“Fixed-rate mortgages are priced off the yield on that security,” says Dr. Don. “The 10-year [note] recently dropped below a 2 percent yield. Low mortgage rates make homeownership more affordable.”
For those with bad credit scores, don’t fret but learn patience. “Time heals all wounds,” says Dr. Don. It takes up to seven years for negative information to come off one’s credit report. So if owning a home in a year’s time doesn’t look like an accomplishable goal due to a poor credit score, Dr. Don advises people to make a resolution to lower their existing credit balances.
There is also a therapeutic benefit of paying off debt. Debtors should recognize the “pain” of their financial situation — the financial and psychological stress it causes them and their families, says Taylor. Getting rid of debt can mend relationships and boost confidence, he adds.
New Year’s resolutions aren’t just for homebuyers. Existing homeowners can set goals to do major home improvement projects, like adding a bathroom, finishing a basement, or remodeling a kitchen.
And it should be no surprise that the story is the same for them: financial discipline.
The first step homeowners should do is to always start with a budget, says Ellen Rady, the owner of Ellen Rady Designs, an interior decorating company near Cleveland, OH.
“It helps to make a list of the ‘must haves’ and the ‘would be greats’,” adds Rady. A “must have” can include furniture, fixtures, and appliances that will prove essential to the renovation project, while “would be greats” can be a custom tile backsplash and coffered ceiling trim work, she says.
Having the budget and all the items necessary for the project will also help bring contractors and designers more in tune with the homeowner’s goals.
When homeowners have the equity available to finance the project with a mortgage loan, they can explore the options of choosing cash-out refinancing, a home equity loan, or a home equity line of credit (HELOC) to bankroll it, says Dr. Don.
“The homeowner should pick the option that minimizes the total interest expense of funding the repair, including closing costs, and should consider the impact on the mortgage interest deduction on their income taxes,” adds Dr. Don.
For her clients, Rady prefers that they call her in to design and price a project six months in advance so they have time to financially prepare.
In one instance, months after giving a client a better idea of what the scope and cost of the remodeling project will look like, the client called Rady to let her know she had saved enough money to see the project through. “She enjoyed the entire remodeling project, and we never went over budget,” she adds.
The road to keeping a resolution is taken one step at a time. You can lower your weight and strengthen your finances by putting that money in the bank instead of buying your daily latte. If you make a plan and stick to it, you could be toasting the arrival of 2016 — and many more new years to come — in a home you love.