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Ask Farnoosh: Is Home Ownership Right for Me?

This week Farnoosh answers your questions about buying versus renting, refinancing a car and paying for college.

Alan emails: Is refinancing a vehicle ever a good idea? I have 48 months left and after inquiring what the interest rate was, I found out it is 14%!!! Never realized when I signed paperwork. 
 
Dear Alan,
 
That was some pricey fine print you overlooked! But luckily you made the discovery with ample time to turn things around. Refinancing a car can be a smart move for some borrowers — like you — who have years left on their auto loan and are stuck with interest rates that far exceed the average. (The current rate for a 48-month car loan is about 3.2% for a new vehicle and 3.5% for a used one, based on recent data from Bankrate.com.)
 
Given that refinancing a car loan is simpler than refinancing a home mortgage, surprisingly few people take advantage of this option. Just 12% of consumers have ever made the move, according to a survey  from CarFinance.com.  “There's not a lot of awareness around auto financing,” says Ron Montoya, consumer advice editor for Edmunds.com. “If you took out a short-term loan — planning to pay it off quickly — but are now overwhelmed by large monthly payments, you can lower them by refinancing. It's also a great way to snag a lower interest rate on your loan in an environment like this, when rates are so low," he says.
 
To get the ball rolling, contact a local credit union, bank or a designated auto lender. You can compare rates and apply at Capital One Auto Finance or Up2Drive.com, Montoya recommends.
 
Victor @Kesjv821h tweets: @FARNOOSH Got to prepare for two kids getting ready for college. (10th grade and 8th grade). Any financial tips? 
 
Good timing, Victor. The cost of getting a college degree has skyrocketed to ludicrous levels (more than 1,000% since 1978, to be exact), so the best way to begin addressing this is to involve your children in the college planning steps — and now. While encouraging them to pursue higher education, let them know how paying for college is a “family affair.” The financial burden shouldn’t be entirely on Mom and Dad; everyone’s expected to pitch in because paying full price at a private school is simply not practical, nor is taking out tens of thousands of dollars in student loans. (My rule of thumb is to avoid borrowing more than one-half of your child’s anticipated salary the first year out of school. Make up the rest in cash, scholarships and grants).
 
So the question is: how can your kids help strategize to make college affordable? Can they take on part-time jobs between now and graduation? Can they explore state schools? What scholarships can they begin applying for now?  
 
In my video series Financially Fit, I recently reported on ways to attend college for free, including tuition-free universities. Some helpful websites for you and your kids as you gear up for college include finaid.org, a rich resource for all things financial aid, and its sister site, fastweb.com, a comprehensive scholarship database.
 
Jimmy, a student at Penn State, asks: I know it is still early in the semester, but after having a conversation with my stepdad earlier I was wondering if we could have a lesson on buying a house verses renting. [Even though] you gain an asset of a house, does the increased rate of value added each year outweigh the cost of owning plus taxes? I know this will be different for each region… Although I won't be buying a home right away, I wonder about buying a condo versus renting.
 
Jimmy,
 
I like where your head’s at! It’s never too soon to think about the prospect of buying a home versus renting. Here’s my Q&A crib sheet to determine whether you’re really ready to buy. If you answer no to one or both of these questions, you’re probably better off cutting a rent check.
 
Am I financially prepared? Before becoming a homeowner, you’ll need to qualify for a mortgage, and with that comes a number of prerequisites. Cash is king, and offering a down payment of 15% to 20% in many cases raises your chances of qualifying for a favorable rate. Banks will also want to see that you have steady income, rainy-day savings and a low debt-to-income ratio. If you have stacks of credit-card bills, attack those before applying for a home loan. To score the lowest possible interest rate on a mortgage today, you’ll need a credit score of at least 760 or better, according to FICO. In general, the more polished your credit history, the better your chances of qualifying for a great loan. How much to borrow? I say avoid a monthly mortgage that's more than 25% of your take-home pay.
 
Beyond the mortgage, the ongoing costs associated with home ownership should be considered as well, including property taxes, utilities, insurance and maintenance. Having a six- to nine-month savings cushion will go a long way in ensuring you can keep the lights on, the taxes paid and the water running during tough times.
 
Am I personally prepared? So, let’s say your finances are all buttoned up. The calculations don’t stop there. Home ownership is a major personal commitment and knowing whether it’s right for you will depend largely on other life factors. For example, if you’re starting a business, you may prefer to keep your money liquid to support the start-up rather than tied up in a mortgage. Or say you don’t plan on sticking in the same place for long. In that case, renting might offer more flexibility. Zillow.com ’s researchers crunched the numbers and found that for most Americans, if you plan to live in a home for fewer than three years, it’s better to rent.   
 
Know what you’re getting into. Maintaining a home can be overwhelming. If your basement floods, there’s no “super” to dial. It’s all on you. For some, it’s a source of pride, for others an inconvenient burden.

Do you have a personal finance question? Email farnoosh@farnoosh.tv or tweet it @Farnoosh using #FinFit, and I may answer it in an upcoming column.

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