Can Graduate Students Obtain a Mortgage?

As many of you all know, I am currently saving up money for a down payment and attempting to obtain a home mortgage loan in preparation for closing on the purchase of a condo/townhouse/house this fall when I begin graduate school.

Why do I want to buy a house/condo/townhouse instead of renting?
Since I will be in graduate school for 4-5 years, I would like to be building up some kind of equity during this time period, instead of just wasting money with rent payments. Additionally, I want to try to follow the rule of thumb that it is better to buy your housing if you plan to be in the property for 3-5 years or longer.

Note: in a future post, I am planning to create a rent vs. buy calculator spreadsheet for everyone to use.

From a previous post (see link below), I was able to calculate that the loan amount I can afford is ~$95,000.

My Money Blog – How Much of a Mortgage Loan Can I Afford?

While I am certain that with my income right now, I can get approved for a home loan, I was not really sure if I would be able to gain approval for a home loan this fall, given that my income will be drastically less ($23,000 per year) during graduate school.
However, approximately 1 month ago, I went ahead and applied for pre-approval of a home mortgage loan, using a mortgage broker that was recommended by both the real estate agent and a friend who is also in graduate school.

I filled out all of the forms, provided tax statements, proof of income, proof of 2 years of employment, total net worth calculations, and account statements from where my various investment instruments are located.

Everything seemed to be going well, and the mortgage broker calculated that he should attempt to pre-approve me for a $125,000 FHA home loan (3.5% down payment minimum). However, when my application was submitted, the mortgage underwriter could not approve it due to the following reasons:

• The letter of employment from the university in which I will be attending graduate school this fall did not show a guarantee of employment for 3 years. Personally, I think this is a little ridiculous because even normal jobs are never guaranteed (if you don’t perform well).
• The letter did not mention if I would be liable for any tuition payments in my schooling.

Interestingly enough, it was never mentioned that my application was denied due to the normal reasons you hear about, such as insufficient credit or lack of income or liquidity.

He said that I would need a non-occupant to cosign the mortgage loan with me in order to get approved.

Conclusion
While it may be possible for a graduate student to obtain a home mortgage loan as the sole borrower, I definitely was not able to, given the income I will be receiving. It really seemed to throw off the mortgage lenders that I was going to be a paid student, as I am guessing they don’t receive too many of those applications.

In order to qualify for a home mortgage, you will most likely have to have a co-signer/co-borrower, even with great credit and a sizable net worth.

Keep on learning!

Jacob

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Jacob

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My Current Asset Allocation and Net Worth Growth – May 2010

From April 7th (when the last portfolio update was published – see link below for more information) to May 4th, the S&P 500 index went down 1.33%.

My Money Blog – April 2010 Portfolio and Net Worth

During that time period, my net worth increased 5.24%. I have now achieved the following financial goals in 2010:

• Achieved my short term target net worth for this year 
• Contributed the maximum contribution level of $5000 allowed for my Roth IRA for the year 2010 (and 2009 as well)
• Eliminated all significant holdings in individual stocks from my portfolios
• Have accumulated 82% of the cash towards my down payment target for a condo purchase this fall

Currently, 31% of my net worth is invested in fixed income instruments (cash or bond funds), and 69% is invested in equity. This is undoubtedly off of my targets of 25% and 75%, respectively, for these categories. The cash portion of my net worth has increased significantly since I am building up funds for a down payment for the condo I want to purchase this fall.

While the overall percentages for these categories are not ideal, a detailed look (table below) at the allocation breakdown reveals the real story and provides for better analysis of the current state.

Remember: a red flag goes off if your current % allocation in a category is greater than +/- 5% off of the target allocation.

% Cash (money market target 5%)      15%
% non-inflat Bond Funds (target 15%) 15%
% TIPS Bonds (target 5%)                  0%
% International Equity (Target 11%)    12%
% International Emerging Markets (Target 11%) 7%
% Domestic Large Cap (Target 8%)    20%
% Domestic Small Cap (Target 9%)     10%
% Domestic Small Cap Value (Target 13%) 8%
% Domestic Large Cap Value (Target 13%) 6%
% REIT (target 10%)                            6%

The components of my portfolio highlighted in red above are outside of the 5% safety band, and therefore, need to be analyzed for reallocation. Unfortunately, due to my current situation of saving up money for a mortgage down payment, it may just not be possible to satisfy all requirements at this time.

• Cash – As I have mentioned several times, I expected that this would be high due to accumulating funds for a down payment. No action can be taken.
• TIPS Bonds – Since I have no extra cash right now (due to cash accumulation above), I cannot purchase this fund due to the fact that you have to have $3000 to purchase it with Vanguard.
• Domestic Large Cap – Unfortunately, this is being held in my 401k account, and therefore, has a greatly reduced selection of index funds from which to choose. Because of this, no further action can be taken.
• Domestic Large Cap Value – Since this is held in a taxable account, I cannot sell my holdings to contribute funds to it. I will have to wait until new funds can be added to increase the allocation %.

Note: as mentioned before, I currently have a VERY large percentage of my portfolio in Domestic Large Cap stocks. This is due to the fact that I was contributing 100% of my 401k contributions purchase S&P500 index fund shares for 1.5 years.

Towards the end of March, I began moving money from the S&P500 fund to a domestic small cap fund in my 401k. This progress can be seen by the fact that the domestic small cap funds now make up 10% of my net worth, up from 6% at the beginning of March. Since the proportion has now passed my domestic small cap allocation target of 9%, I will stop this transfer activity.

My next moves for the May/June time frame will be to do the following:

• Since I am looking at buying a condo/townhouse in the summer/fall time frame, I will be trying to build up cash reserves in my high yield savings account for the down payment. I have already accumulated approximately 82% of the cash I am targeting for my down payment.
• Get pre-approved for a home mortgage loan
• Wish List (since most of my extra cash this month is being used to save for down payment, I will not have as much extra to play around with as normal – so these may or may not happen)
• Purchase an inflation adjusted bond mutual fund (TIPS)
• Begin contributing to the large-cap value funds in my taxable Vanguard mutual fund account.
• At some point, purchase the Vanguard Total Stock Mkt Idx (MUTF:VTSMX) to replace S&P 500 index fund. This gives better, broader diversification to the US stock market.

eBay vs. Amazon – Part 2 – Comparison of Buying

FREE 1 Month Netflix Trials

Good evening everyone!

As I have stated in previous posts (and as you can see by the advertisement in the website sidebar), I am an avid believer is using Netflix for receiving/viewing movies as opposed to paying for cable tv. See the link below for more details.

My Money Blog – Netflix

When I came home tonight from work, by a stroke of luck, Netflix sent me 4 one month FREE trial memberships that I can share with people, so I figured I would post them on the site!

How do you get your free Netflix trial?

1. Go to Netflix.com – Tell a Friend.
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• Everything that is included in a regular Netflix subscription!
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• Get 1 DVD at a time delivered to your house.
• No due dates or late fees for returns
• Free shipping both ways for DVDs.

Keep on learning!

Jacob

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eBay vs. Amazon – Part 1 – Comparison of Selling

Keep on learning!

Jacob

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How Does Home Ownership Fit in to Your Overall Asset Allocation?

In previous posts, I have covered the following topics related to mortgage payments and asset allocation:

• My Money Blog – How Mortgage Payments Fit in to Account Payments Hierarchy
• My Money Blog – Target Asset Allocation

However, in these posts, I did not include exactly how the mortgage payments (and resulting home equity that is built) should fit in to your overall asset allocation target/strategy. This will be the subject of today’s posting.

To try to shed some light on this topic, let’s first see what the financial advisors do to handle this question. We will then see how we need to adapt their strategy since we have no restrictions with what we do.

How do financial professionals handle the asset allocation strategy with home equity?
Through an examination of the opinions of the financial press (see three links below), I discovered that there are basically three “camps” when it comes to opinions on how home equity should be treated when it comes to figuring out your overall asset allocation.

1) Not including home equity in the target asset allocation percentages at all.

This approach is generally taken because real estate values/equity are difficult to determine exactly and because most of the time, it is not possible to adjust your allocation %’s in real estate because you cannot simply leave a house for another one.

2) Not including home equity in asset allocation percentages unless it is an investment property (so not including including your primary residence).

This approach of excluding your primary residence from your asset allocation decision making is taken because of the fact that you NEED a place to live, and you cannot simply exchange your home for shares of a mutual fund if your allocation %’s change.

3) Include all residences, investment properties, and REIT investments as a “real estate” category in your asset allocation strategy.

This approach is generally taken to have a conservative strategy that ensures that all assets are captured. However, since it is a little harder to follow, it is generally the least popular strategy.

MyMoneyBlog – Home Equity in Asset Allocation
BusinessWeek.com – Home Equity in Asset Allocation?
Investment News – Including Home Equity in Asset Allocation

Which approach will I take?
I believe that for my needs, situation, and investment style, I am going to choose to follow Approach #1 – not including my future home equity in the property I am planning to purchase this fall – with a slight adjustment.

Why is this exactly?
In short, home equity in a single house cannot be considered exposure to real estate because it is not diversified enough.

A passage on pages 282-285 of one of my favorite asset allocation books titled, “What Wall Street Doesn’t Want You to Know,” by Larry Swedroe does a great job of breaking this down in to terms the layperson can understand.

In the book, Swedroe describes that your home is clearly real estate.

However, it is very undiversified real estate in the following ways:

• It is undiversified by type (aka office, warehouse, industrial, multifamily residential, single family residential, hotel, etc) and owning a single family home only gives you exposure to a small piece of the overall real estate sector.
• It is undiversified geographically (meaning that real estate prices in different areas of the country vary greatly due to what employers are present there and how well they are doing – just think of if you lived in a small town where 90% of the wealth comes from one manufacturing company, and that one company shuts down. Real estate prices will plummet).

So, because the home you live in is very undiversified and have trust deeds associated with it, counting it towards the real estate portion of your overall asset allocation would be as foolish as a Pfizer executive counting a large quantity of Pfizer stock as their sole exposure to large cap US asset class. They are really not diversified one bit.

Since owning even one share of an index real estate investment mutual fund, such as a REIT that Vanguard, gives you broad exposure to all types of real estate across many different regions, this should be the route that is chosen to represent the real estate portion of your asset allocation picture.

So, how will I treat/consider my home purchase since I am not including it in my asset allocation mix?
Just to recap – in my mind, I want to purchase a home vs. rent one for the following reasons:

1. I am always going to need to live somewhere.
2. To take advantage of the tax benefits associated with home ownership, such as tax deductions for property taxes and interest payments (see information at the following link – My Money Blog – Tax Benefits of Home Ownership)
3. To gain some equity and increase my net worth while making my cost of living payments.

On a similar note, I would want to invest in additional real estate properties to take advantage of tax benefits of home ownership, such as being excluded from paying capital gains on profit from selling the property (described in previous post at link above).

Given the considerations above, here’s the way I will treat home equity:

• Shoot for getting as close as possible to paying a 20% downpayment, since this reduces cost by having to avoid Prive Mortgage Insurance.
• Sign up for a bi-weekly mortgage payment plan and pay off mortgage according to that schedule (see post at following link for more information My Money Blog – Biweekly Mortgage Payment Plan), according to the My Money Blog – Account Hierarchy.
• Track my home equity as part of my net worth, but not in my overall asset allocation targets.
• Continue to pay off my biweekly payments on my mortgage through graduate school, aspiring to obtain 40-45% of my net worth in property ownership, as recommended by the article from Business Week (see link above for more details).
• A number of years down the road, if it becomes apparent that the % of my net worth that is represented by property ownership dips too far below 40%, I would then use that % as a starting place to make a decision if I would want to invest in additional rental property.

So, I hope this investigation/discussion helps guide you through some of the tough decisions you will have to make regarding how you will treat home ownership. As always, please let me know if you have any questions.

Keep on learning!

Jacob

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Should I Enroll In a Biweekly Mortgage Payment Plan?

• I would accumulate $600 more equity in the first year of home ownership by using the biweekly mortgage plan, given the same downpayment.

• I would pay off the home loan in 25 years instead of the normal 30 years with the monthly payment plan.

• Using the monthly payment plan, the $95,000 loan would end up costing me a total of ~$194,000.

• Using the biweekly payment plan, the $95,000 loan would end up costing me a total of ~$174,000.

• This would result in a savings of ~$20,000 for only this small loan amount! The magnitude of savings would be even greater for larger loan amounts!

• Using the biweekly payment plan (including a $400 one time set up fee), over the 5 years, I would pay a total of $35,461 in biweekly payments, resulting in an additional $10,273 accumulation of equity (on top of initial downpayment).

• Using the monthly payment plan, over the 5 years, I would pay a total of $32,364 in monthly payments, resulting in an additional $7,162 accumulation of equity (on top of initial downpayment).

 So, in my situation, since I am accumulating an additional $3,111 by using the biweekly payment plan, this definitely warrants the addtional $3,097 expenditure needed to make it happen.

I hope this post helps you understand the biweekly mortgage payment world a little bit better! Please let me know if you have any questions.

Keep on learning!

Jacob

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Adjust Your Tax Withholding With Your Employer, Save Money

Listed below are the amounts of my federal tax refunds from the past two years.

2008 Federal Tax Refund = $2,975
2009 Federal Tax Refund = $2,347

As you can see by looking at these amounts, they are quite high! However, it wasn’t until last Thursday when I posted the amount of my 2009 tax refund on the social networking site, Facebook.com, that I was alerted that the magnitude of these sums was much higher than necessary. Given the magnitude of these taxes, I would no doubt being looking forward to the 2011 payroll tax holiday. Prior to posting on Facebook.com, I figured that these sums were pretty normal for someone that is my age with no children to claim as exceptions.

And, what was more, I learned that I could do something about it fairly easily – just by adjusting the amount of withholding that my employer keeps from my paycheck each month. Since this realization was a fairly significant and interesting find for me, I figured I would commit a post to this topic to share my mistakes with everyone and explain how you can avoid it!

How Much Is My Employer’s Maximum Withholding Costing Me?
So, let’s get started! First, just out of curiosity, I wanted to create a tool to use to capture the amount of money I had lost out on by giving the government an interest free loan instead of investing the money in a way that I found most appropriate.

What I put together can be found at the Google Docs link below. To adjust it to your specific situation, complete the following steps below:

• Download an Excel version copy of the spreadsheet by clicking File –> Download As –> Excel sheet.
• Open the file and enter the $ values of your 2008 and 2009 federal tax refunds in the green cells in the upper right hand side of the spreadsheet.
• The spreadsheet will then automatically calculate (in blue highlighted cells) the amount that you would have made by adjusting your federal tax withholding with your employer in such a way that you don’t get any refund back when tax season rolls around, and investing the difference in an S&P500 index mutual fund.

Google Docs – How Much is Withholding Too Much Tax Costing You?

Entering the tax refunds amounts shown above that I received in 2008 and 2009, I calculated that I would currently have $795.47 more net worth than I currently have, due to the face that I gave the government a very generous interest free loan.

Dang, I really wish I would have known this before! Blast!

How Do You Adjust Your Withholding Preferences?
So, now you’ve realized that you have an opportunity to save some money by having your employer withhold less of your income for federal tax payments, how do you take action to make this a reality?

As it turns out, it is VERY easy to make this adjustment. All you have to do is either a) log-in to your employer’s online payroll management website (if available), click on the Payroll and Compensation tab, and then click on the link labeled, “Federal W-4 Tax Information” or b) call up your Human Resources department, and request that you want to view/adjust your Federal W-4 Tax Information reporting.

Please note: that the exact wording will change, depending on your employer. But as long as you know that the Federal W-4 Tax Information is what you want to adjust, you’ll find your way!

Once you have accessed the correct system (whether online or through the phone), you will then look for the field where you can adjust the total number of allowances you are claiming.

If you’re like me, you are probably wondering, “What exactly is an allowance?” Essentially, a withholding allowance is used by your employer when tabulating the amount of income tax to be withheld from each paycheck you receive. The range of withholding allowances you can choose is from 0 up to a maximum of 10. The more allowances you have, less money will be withheld for taxes. For most people, this is the same number of personal exemptions they are planning to claim on their taxes.

So, for example – if you are married and filing jointly, you would claim 2 allowances. If you are single, you would claim 1 exemption. Get the pattern?

What Amount of Withholding Is Right For Me? How Many Allowances Should I Claim?
As a general rule of thumb, a personal should claim the same amount of allowances as the number of exemptions they are claiming on their federal taxes.

However, since this is the My Money Blog, where we go all out to save every dime we can, we will use online calculators to figure out what number of allowances we should be claiming so that we do not overpay on our taxes.

The two best withholding calculators I could find online can be accessed using the links below. To use them, click on the links, print off a copy of your current paycheck with all of the deductions for taxes and insurance premiums, and fill out the required fields in the calculators.

IRS Withholding Calculator
HRBlock – Tax Withholding Calculator

Using the calculators above, I saw the following results –

Using the HRBlock Calculator, it computed that I should be claiming 10 allowances (the maximum). While this may seem pretty crazy, it may actually make sense because I will be taking a 67% paycut when I attend graduate school full time this fall. However, I am a little cautious to follow this since the HRBlock calculator does not take in to consideration the wages that I will receive while working as a graduate student this fall.

The verbatum results from the IRS Withholding Calculator are as follows. “Based on the information you previously entered, your anticipated income tax for 2010 is $1,885. If you do not change your current withholding arrangement, you will have $7,020 withheld for 2010, resulting in an overpayment of $5,135 when you file your return. If you want your withholding to more closely match your anticipated tax, adjust your withholding on a new Form W-4 as follows:

• For the only job you entered (which has a projected salary of $XXXXX): 6 allowances.
• Check the “Single” box on your Form W-4.

Assuming these recommended allowance(s) are in effect for the rest of 2010, your expected refund should be about $600. Following this recommendation will ensure that the amount withheld from your wages will cover all of your projected tax liability while minimizing your refund.”

So, looks like 6 allowances is the number that I am changing my claimed allowances to! 🙂 I tend to trust this number more because the IRS Calculator gave me the opportunity to enter my salary that I will be earning throughout the entire year.

And, do you want to know the great thing? Since I have already paid enough taxes this year for the 6 allowance level, I will not have any federal income tax withheld from my paychecks after making this change!

Do You Ever Have to Pay Penalties For Not Having Enough Taxes Withheld?
Before I jump in and increase my number of withholding sixfold from 0 to 6, I want to also know if I will be penalized for doing this by the IRS. In other words, I want an answer to the question, “Will I be penalized if I underpay the IRS for decreasing my withholding?”

According to the article at the link below, the IRS penalizes taxpayers who have to pay more than 10% of their tax when they file their annual tax return. So, theoretically, since the IRS calculator states that I will still have a refund of $600 for 2010, I should be all right and not get penalized.

Penalties for Not Having Enough Tax Withheld

When Would It Be a Good Thing to Get a Big Refund Back?
Since I am a fairly effective saver of money, having larger than necessary amounts of money withheld from my paycheck is not needed, in my opinion.

However, I do believe claiming fewer allowances than needed is good for people that have trouble saving money because it acts as a forced savings program (similar to the way paying for a home mortgage is, by nature, a forced savings plan).

I hope this post was insightful and that it helps you on the road to financial success. Please let me know if you have any questions.

Keep on learning!

Jacob

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Can Drinking Wine Make You Live Longer?

In a previous post (see link below), I described the various long-term financial ramifications and cost savings that could result, depending on the type of wine you choose to buy.

My Money Blog – Comparison of Wine Prices

In this post, I briefly mentioned the commonly known hypothesis that drinking two glasses of wine per day will result in better health and longer life. However, is this really the truth? And if so, how does it work? What causes you to have longer life? Does this benefit come from all wines or just some specific types?

The answers to these questions will be the topic of today’s post. Let’s get started.

Does Drinking Wine Help You Live Longer?
To gain an insight in to this ongoing debate, we first need to know if drinking wine helps you live longer.

And, through an investigation of the two articles from Xomba.com and Webmd.com (can be found at the links below), it appears that the answer to this question is, “yes.”

Xomba.com – Will Drinking Wine Help You Live Longer?
Webmd.com – Does Drinking Wine Give Longer Life?

The results showed that men who drank less than half a half glass of wine per day lived an average of five years longer than men who avoided wine completely. They also had a lower risk of heart disease and heart attack.

To my surprise, the results are much less clear for women. While some studies have shown that there is potential for women to improve their heart health by drinking small amounts of wine, other studies have shown that drinking even small amounts of this delightful drink could result in an increased risk of breast cancer, a disease that is already horribly prevalent in the women population.

How Does Drinking Wine Help You Live Longer?
While the study results conclusively support the finding that drinking wine improves health (at least in men), scientists are not certain of what exactly causes the improvement to occur. Nonetheless, there are several hypotheses attempting to explain the result.

Hypothesis 1) Wine is a source of phytochemicals, including flavonoids and polyphenols, that contribute to wine’s ability to increase lifespan. According to the link below, although the experiments are currently ongoing, flavonoids show potential to stabilize blood capillaries (i.e. improve cardiovascular health) and excite enzymes that destroy mutagens (i.e. reducing risk of cancer) in the body.

Wikipedia.org – Flavonoids


Hypothesis 2) Wine is a source of resveratol. According to the link below from Wikipedia, resveratol is a chemical that occurs naturally in certain plants to protect from attack of bacteria, fungi, and other microscopic predators.

Resveratol has currently been shown in mice and rats to have anti-cancer, anti-inflammatory, blood-sugar-lowering and other beneficial cardiovascular effects (similar to what is seen from a calorie-restricted diet). However, conclusive results have yet to be seen in humans.


Wikipedia – Resveratrol

What Types of Wine Carry This Benefit?
As it turns out, white wine drinkers are out of luck when it comes to lifespan extensions. The reason for this is due to the manners in which white and red wine are made. White wine is made from the juice of the grapes, and red wine is made using the whole grape.

And, since the skin is where the chemicals discussed above are created and stored, red wine is the only type of wine that offers health benefits (in small quantities of course).

What’s the Bottom Line?
So, although it is not yet determined exactly what the cause is, it is certain that small quantities of red wine (1-2 glasses per day) do improve health and increase lifespan in men. So, drink up men!

For women, even though the results are less “cut and dry,” I still wouldn’t worry too much about indulging in a glass or two every day – especially if it is something that gives you happiness!

Keep on learning!

Jacob

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