Financial Education

Answers

BUDGETING
YOUR HOME

How can I save money when I don’t feel like I have much disposable income now?

close answer x It is amazing how cutting out a few restaurant visits or making coffee at home versus buying it can save a lot of money over the long term. Reducing your spending can be worth more than you might think. Use this calculator to see just how much your budget reductions may be worth, if you were to invest them. View the value of this new potential nest egg both with and without taxes factored in.

What will it take to help reach my savings goals?

close answer x This financial calculator helps you find out. Enter in your savings plan and view graphically your financial results. Click the report button to get more information about your plan, and what you can do to make sure that it is on track.

How do I know when I need to revise my budget?

close answer x There are several instances where it may be appropriate and possibly necessary to revise your budget. If you are going through a major life change, having a child, moving, changing careers, planning to buy a house or any situation similar, it is time to review your budget and possibly make changes. Some other lesser known examples would be if you find that you are living paycheck to paycheck, or you find yourself relying on credit in order to cover every day expenses. In these cases it may also be time to re-evaluate your current budget and see if there is room for change.

How do I start budgeting for college when my kids are still young?

close answer x The simplest solution is to open savings accounts at the earliest possible time. An easy way to fund this account is to have a portion of your paycheck directly deposited into a savings account, or having an automatic transfer out of your checking account and into a savings account. This amount could be as small as $10 a paycheck, but the amount adds up fast, and over time, compounding interest can do wonders.

How do I budget if I’m self-employed?

close answer x There are many wonderful advantages to being self-employed, but creating a sound budget can be a little overwhelming. Here are a few tips that may help create the right budget for your situation.

One very important piece of your budget will have to be setting aside money every month to account for taxes. These funds can be automatically transferred every month out of your working account and into a savings account specifically for taxes.

It is also important to set an earnings budget. If you don’t know how much you expect to make and what your ideal earnings are, it is impossible to know whether or not you are meeting those goals. It is easier to set a budget for the month when you know what you expect to be making.

One last key tip on creating a budget is to decide how much you would like to save each month and then think of that as a fixed expense. Having a set amount of money directly transferred into a savings account solidifies the commitment to save, rather than relying on you to save the funds in an account with more accessibility or mixed in with money that you plan to use for everyday spending.

Do I really need an Emergency Fund? If so, how much should be in it?

close answer x Yes. The amount that needs to be in your savings account varies person to person and can change based on your part in your family’s financial structure. Financial experts suggest having 3-6 months living expenses put aside in a separate savings accounts for emergencies. These emergencies could be anything from losing your job, to having a major medical issue. The 3-6 month milestone is going to be different for everyone. If you are self-employed, you may want to put away a little bit more, whereas if you are one of two people bringing in a stable paycheck, you may only need 3 months. The amount may vary, but everyone should be contributing to an emergency fund, no matter how modest the paycheck.

When should I dip into my emergency savings?

close answer x An emergency savings is exactly what the name suggests. This account is solely to be used for emergencies. These include major life changes such as losing your job, a major medical issue, major necessary home repairs, and things of that nature. Smaller medical expenses or car repairs should be budgeted for in your typical yearly budget vs this account that is specifically for unforeseen major emergency expenses.

I got a raise/bonus, what is my next step?

close answer x Depending on the size of this raise, there are many ways to handle the next steps. It is always suggested that you raise the percentage that you contribute to a 401k or 403b if your company offers this. If your company offers a matching program of any kind, the more you put in, the better. If you already have a portion of your paycheck directly deposited into a savings account, it would be beneficial to increase the amount that gets directly deposited into your savings to take into the account the excess funds. If you don’t already have a portion going into savings, this new raise is a great opportunity to start saving the difference.

How much of my paycheck should I be saving?

close answer x If we base this on the 6 month emergency fund milestone, you should be savings between 25% and 30% of each paycheck. For those who have higher debts, 15% can be more beneficial. They key is to be building up an emergency fund, but also saving for accountable expenses that happen every year. These would include regular medical/dental expenses, car repairs, and holiday spending.

When should I start planning and budgeting for retirement?

close answer x It is never too soon to start! If your company provides a match for a 401k program, the earlier you start contributing, the better. The compounding of earnings will make all of the difference. If your company does not provide a 401k, it would be wise to invest in a Roth IRA and start the saving process yourself. Even saving 5% of your paycheck for retirement can make a serious impact. Try increasing this amount every year in order to fully benefit when retirement comes.

Home Equity

How do I determine my home's equity?

close answer x The equity in your home is determined by subtracting your outstanding mortgages or liens from the market value of your property.

Do I need a home equity loan or a home equity line of credit?

close answer x Both products use your home as collateral. The main differences between the products are: The line of credit is accessible for a long–term draw period, usually by check. Once you pay down your balance, you then have more money available to spend again if necessary. A home equity loan disburses all funds at once when the loan term starts and you cannot access any further funds without refinancing. A line of credit has a variable interest rate. A home equity loan has a fixed rate. A home equity loan has payments that don't change. A home equity line of credit has a payment that can change every month, either because the balance changes (increases if you spend more; decreases if you pay down what you owe) or because the interest rate changes because of the Prime rate changing.

What is the difference between interest rate and APR?

close answer x The interest rate is the cost to borrow the money disbursed in the loan. The APR is the total cost of the loan over its life, including costs, points and fees.

Mortgage

What are "closing costs?"

close answer x Your purchase price and mortgage interest are the main costs of buying a home. However, to close the sale legally (and to protect interests of everyone involved), the services of many professionals from a variety of fields are necessary. Closing costs cover these services, and they usually total between 3% and 5% of the typical Massachusetts mortgage. Not all Massachusetts mortgages have the same types of closing costs. Your closing costs may include:

Appraisal fees
Closing/attorney fees
Recording fees
Survey fees
Investor fees
Credit reports
Title or tax services
Homeowner's insurance
Private mortgage insurance
Title insurance
Escrow fees (fees associated with setting up an account to pay tax and insurance monthly with a mortgage. Escrow accounts are required for any purchase with less than 20% down payment.)
Loan origination charges Points (charges for "buying down" your interest rate)

To help you firm up your budget, your home mortgage professional will give you a good faith estimate of your closing costs shortly after you apply formally for your mortgage.

What are "points?"

close answer x One point = one percent of your loan amount. You may wish to pay points at the closing in order to reduce your loan interest rate and lower your expenses over the life of your mortgage.

What will my monthly mortgage payment include?

close answer x The answer depends on the terms of your mortgage. One portion of every monthly payment pays down your principal. Another portion (usually larger, especially in the earlier years of your term) goes toward your interest. Every month, you may pay additional money to reduce your principal balance. Additionally, portions of your mortgage payments may go toward any or all of these costs:

Private mortgage insurance (PMI)
Homeowner's insurance
Property taxes
Flood insurance if applicable

Your mortgage holder may disperse these funds from the escrow account set up with your mortgage.

What is PMI?

close answer x If you are putting less than 20% down on your home, you will be required to purchase private mortgage insurance, or PMI. PMI protects your mortgage holder in the event you default on your mortgage. Your PMI premiums are part of your monthly mortgage payment and required until your principal balance is paid down to a percentage of the appraised value of your home. This percentage is dependent on the specific mortgage program that you select. Hint: If you are required to purchase PMI, it pays to add a little extra to your monthly payments in order to reduce principal balance and discontinue PMI sooner.

Should I choose a fixed-rate or adjustable rate mortgage?

close answer x The answer mainly depends on how long you expect to stay in your home. Interest rates on fixed-rate residential home mortgages never change over the life of the loan, no matter how long the term. Fixed rates are preferable if you plan to stay in your home for more than five or seven years. If Massachusetts mortgage interest rates go up, you're protected; if they drop, you can refinance. Adjustable rate mortgages (ARMs) are pegged to an index such as the variable LIBOR (London Interbank Office Rate) and, therefore, may change upward or downward. You may be able to save on interest costs with an adjustable rate mortgage if you only expect to stay in your home for a few years. For example: You may find a "5/1" (or 3/1, or other term) ARM with a competitive interest rate. That rate would stay unchanged for the first five years of your loan (the "5" in "5/1"), then reset every year afterward (the "1" in "5/1"). However, you can't predict whether your rate will reset up or down-or by how much. If you're confident that you'll move before your rate resets, an ARM may save you money. By the way, you can also refinance an ARM to a fixed-rate mortgage if rates go down.

How much home can I afford?

close answer x That depends on a few factors. Our calculator can help you make an estimate.

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