Iraq veteran wants his own home base
As an Iraq war combat veteran and a newly minted officer in the Los Angeles Police Department, Gabriel Medina knows a few things about strategy and planning.
The Lakewood resident wants to use that knowledge to plan his financial future, though he needs some help. He is looking for a way to buy a house while socking away as much as possible for retirement -- and still have enough to take his girlfriend on a vacation to Italy this summer.
“I don’t see buying a house as an investment,” said Medina, 26. “I want to stay in it a long time.”
With Southern California home prices plummeting 24% in the last year and likely to drop further the rest of this year, Medina has bargain-hunting on his mind.
He expects to get a decent place for no more than $350,000, though his girlfriend rhapsodizes over more-expensive homes.
But before he acts, Medina needs a reality check, said Brad Stark, a fee-only financial planner with Mission Wealth Management in Santa Barbara.
Medina has been aggressive in saving $10,000 for his retirement in his first 15 months on the job, but that has left him with only $1,700 in his checking account.
“In this environment, without liquid reserves, anyone who gives you a loan will charge a ridiculous interest rate,” Stark told him. “It’s strategy first, implementation second. You’ll be good at this from an LAPD-military standpoint.”
Most first-time home buyers act before they think, especially when tempted by low teaser interest rates on home loans, Stark said.
With discipline and certain changes, the planner said, Medina might save $15,000 -- enough money for closing costs and reserves to get the best loan terms -- in nine months. He may miss the bottom of the market but still catch it early in what Stark expects could be the beginning of a recovery.
The former Marine has spent lavishly on only one thing: his retirement. Part of his monthly pretax income of about $5,700 goes toward payments on his only long-term debt, a $16,000 student loan that carries a 4.5% interest rate. He also has a $1,100 credit card bill from buying a two-seat kayak for himself and his girlfriend.
But if he wants a home, Medina is going to have to rearrange his priorities, Stark said.
The first thing Medina must do is accumulate a minimum of $15,000, close to three months of salary. Savings are important because lenders want to see borrowers with assets.
If he gets a loan offered by the California Department of Veterans Affairs, he may not need to make a down payment. But he would need to cover several thousand dollars in closing costs.
To save enough, Stark said, Medina must stop contributing to his retirement account for a full year. He had been saving $800 a month, before taxes, so taking that money as ordinary income means he would pay an additional $275 a month in taxes, Stark said.
But, he said, saving $525 a month for a home is worth it.
Medina anticipates getting a $5,000 signing bonus from the LAPD, and he plans to squirrel that away to give himself a head start. To the new-house fund he can also contribute his overtime income, which lately has been running as high as $500 a week.
Through the CalVet program, he should qualify for a home-loan interest rate of 6.1% and 100% financing. That’s the good news.
The bad news is that even loans for veterans come loaded with fees of as much as $15,000 at Medina’s target price of $350,000. About $11,500 of that, however, may be financed and wrapped into the loan total.
Stark urged Medina to exercise discipline and not buy a more expensive home than he could afford.
“This house will become your project,” Stark said. “You’re going to be down at Home Depot every weekend buying stuff.”
“You’re probably right,” Medina acknowledged.
The planner suggested he start looking at $300,000 homes to avoid the temptation to spend too much.
Medina is pre-qualified for a veterans loan, but Stark told him to go through the lengthier process of securing a pre-approval.
“When you see a place you like, you need to be ready to go,” he said.
A year from now, after he has purchased a home, Medina should resume making contributions to his retirement account but saving only $400 a month while building his reserves back up to $15,000, Stark said.
Medina also should buy supplemental disability insurance, the planner said, even though he receives disability insurance through the LAPD for injuries sustained on the job. If he were injured off-duty in a traffic accident, for example, he would not be covered by the LAPD insurance.
“You think, ‘I’m strong. I’m a cop. I’m invincible,’ ” the planner said. “God forbid anything happens to you, because the whole house of cards comes down.”
Medina also should pay off the $1,100 on his credit card by the end of 2009. And he should call his credit card company now to ask for the maximum credit limit on the card -- then not use it.
Credit monitoring firms will increase a credit score if the balances on one’s cards stay below 25% of the available credit. Increasing the credit limit should improve his score and ensure he gets the lowest interest rate on his home loan.
As Medina acquires more money to invest, he should pay attention to the risk of the stocks, bonds and mutual funds he buys.
“Everyone looks at performance and return, but they don’t look at risk. You have to monitor your risk,” Stark said. “The key to investing is not how much you make when the market goes up. It’s how much you lose when the market goes down.”
Instead of choosing investments primarily based on historical returns, Stark said, Medina also should take into account a statistical calculation known as the standard deviation of each investment. In general, the higher an investment’s standard deviation, the greater your risk of loss.
After a three-hour crash course in constructing a lifetime financial strategy, Medina gathered up a stack of paperwork and nodded thoughtfully.
He’d like to get married and have children, but not right away. He now figures he needs to save more money first.
And the prospect of a low-budget trip to Italy this summer has lost some allure.
“My girlfriend and I might just drive somewhere,” Medina said with a smile. “This sort of changes everything.”
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Begin text of infobox
Competing goals
Who: Gabriel Medina
Income: $68,500 plus overtime
Goals: Buy a first home for no more than $350,000. Maintain savings for retirement. Vacation in Italy this summer with girlfriend.
Assets: $10,000 in retirement savings, $1,700 in checking account
Debts: $16,000 student loan at 4.5% interest rate, $1,100 on credit card at 12%
Recommendations: Stop saving for retirement for one year, freeing about $525 a month after taxes. Build up cash reserves to $15,000 before buying a home. Start shopping for homes priced at $300,000. Increase credit limit on credit card -- but do not use it -- to improve credit score. Pay off card in 2009. Buy supplemental disability insurance. Skip Italy this year.
About the planner: Brad Stark is a fee-only financial planner and principal at Mission Wealth Management in Santa Barbara.
