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Talking about Housing Loans
Al and Virginia Baxter are talking to their banker ,Tony Flora ,about a housing loan.
Al:We'd like to get some information about mortgage loans,Mr.Flora.
We found a house that we'd like to buy.
Flora:Well,Mr.Baxter,we generally lend 80% of the bank's appraised value on 30-,35-or 40-year mortgages if the house is less than 10 years old .
Baxter:Oh ,it's almost a brand-new house .I think it was built two years ago .
A:Yes,it's a real good deal .The price is just right .
F:Bank appraisals are usually slightly lower than the actual market prices,Mr.Baxter,
so you'll have to figure on at least at a 25%-28% down payment .
A:Yes,we planned on that .We've accumulated enough in our savings for a 30% down payment.
B:What's the interest rate on mortgage loans?
F:It fluctuates a little depending on the various factors in the loan ,but around 8.75% for longtime clients.
A:Well,we've been banking here since we got married 8 years ago ,Mr.Flora ,so I guess we qualify.
F:Yes,you certainly do ,Mr.Baxter.Let's fill out this application ,so we can get started on the paperwork .
It takes some time to complete a mortgage loan transaction.
B:We will need title insurance and fire insurance ,too,won't we ?
F:Yes,you will.Here's our mortgage loan booklet which explains all the things which will be necessary .
Step 1: Create a Budget
Begin by listing your stable monthly income, as well as all expenses. That’s everything from your monthly house payment, down to how much you spend buying coffee on the fly.
It's usually best if you go back a few months. At a minimum, you should include the past three months. But going back six months, or even a full year, may provide a lot more insight.
It can be messy and involved, but there are budgeting apps that can help you do this in a matter of minutes. By linking your spending and income accounts to an app, the analysis can be done for you.[/en
[en]Step 2: Analyze Your Spending
Whether you do it manually or using an app, you should summarize your spending patterns. Create expense categories, such as mortgage, car payments, utilities, groceries, and entertainment.
The second point is the most important because it's the basic foundation of a budget. You don't want to merely track your spending, but develop plans and strategies to control it.
Once you know what your monthly spending is in each expense category, group your expenses into three categories:
Necessary fixed expenses. These include basic living expenses, like rent, health insurance, and debt payments.
Necessary variable expenses. These are items you need, but that vary in amount. It includes groceries, gasoline, and some utilities.
Optional expenses. This broad category includes everything else, and are desirable, but not necessary. Entertainment and eating out are two prime examples.
There's not much you can do about necessary fixed expenses. But you can work to gradually lower necessary variable expenses. For example, you can set a goal to cut your grocery bill by 20 percent, and your utilities by 10 percent.
The biggest savings will be optional expenses. Since these are totally discretionary, you can literally cut them to zero, without hurting your basic standard of living.
Now you don't need to cut your spending in this category by 100 percent. But 50 percent would free-up a solid amount of money for savings.
The entire purpose of categorizing and analyzing your expenses is to identify areas you can reduce in favor of saving.
Step 3: Set a Savings Goal
Set a target amount for savings. For example, you may want to have three month’s living expenses in an emergency fund. If you need $3,000 per month to cover your expenses, you’ll need $9,000 to fill the fund. That’s your savings goal––you can set others later.
You'll then need to create a reasonable plan to reach that goal. For example, you can decide you're going to save a flat dollar amount each month. If you save $450 per month in your budget, you'll reach your savings target in 20 months.
Step 4: Know When You’re Pushing Too Hard
You might set high goals at the very beginning, with the idea of making up for lost time. This is probably not a good idea. If you haven't been a saver up to this point, it’ll take time before it comes naturally.
Your best bet is to start with a savings goal that's doable. For example, if saving 10 percent of your income is fairly easy, go with that number. You can increase it over time, as your earnings increase, and you get better at cutting spending.
Step 5: Knowing When You’re Not Pushing Hard Enough
One of the inherent problems in setting any savings goal is the need to see results. In Step 4 I suggested starting by saving 10 percent of your income, or some other number that’s an easy fit. That's fine when you're just starting out, but it should increase as you go along. If not, your savings plan could derail.
Start small, increase your savings gradually, and you'll find that balance. Once you do, budgeting and saving will start to come naturally, and you'll begin to reap the rewards of an improved financial condition.