Reports so far suggest that Individual Development Account (IDA) programs are popular and genuinely help participants build a financial stake for themselves. As of 2003, there are IDA programs in almost every state. Many are privately supported by foundations and other organizations. In many states, the state government also contributes relatively small amounts of money in a variety of ways. The federal government has created a pot of money for IDA programs, only some of which has been spent so far. But the need and demand for IDAs seems much greater than current state and federal government support for it. For more information and ideas about IDAs visit http://gwbweb.wustl.edu/csd/ and click on "IDA" or "State Policy."
The Family Self-Sufficiency (FSS) program has had success not only in helping people get on and up the job path, but also in building a financial stake that they can call their own when they complete the program. But many public housing authorities across the states could do even more to help the program work. In some areas, additional funds pay for more staff who assist people in reaching their goals through case management and by tapping into more resources that exist in the community. To find out about the FSS program, visit http://www.cbpp.org/4-12-01hous.htm.
vouchers (“Section 8” certificates) that help pay for private rentals by lower income families also run a Family Self-Sufficiency Program (FSS). This pro- gram helps participants with supports and services not only to get and keep jobs with good wages, but also to build a financial nest egg. Ordinarily, public housing tenants and voucher users must pay more rent as their earnings rise. But for FSS program participants, some of their increased payment is put into a special account. All the money in that account becomes available to them when they successfully complete the FSS program. In some states, PHAs run additional programs that work like FSS. If you receive housing assistance, contact a PHA in your area to learn about programs of this kind in which you might participate.
Saving for the long haul: Investing in a home
Once you have saved enough to meet your short-term needs, you can think about putting more money aside and investing your savings over the long term. Investing can bring greater financial rewards, but it also may come with greater risk. You can lose money as well as make it. It can be the right strategy for you if you learn about the different risks and rewards and make wise choices about your investments.
How Homeownership Works
Owning a home is more than having a house to call one’s own. It’s also a way to build wealth. According to one estimate, house- holds in America may have as much as $8 trillion of their net wealth in homes. For many, it's the most important part of the net wealth they have. You will need savings of your own (a down pay- ment) and money you borrow (the mortgage loan) to have enough to buy a house. You will have to pay for other fees and expenses to cover the cost of the transaction (closing costs).
Required minimum down payments for conventional loans may be as high as 20% of the sales price, although government loans typically have lower down payment requirements. For example, the Federal Housing Administration (FHA) and the Department of Veteran Affairs (VA) may offer assistance in paying your up-front cash requirements. To learn more, visit the Government National Mortgage Association web site at http://www.ginnie mae.gov/ypth/Info_Center/1_learn/govt_programs.htm. Also, you can check the web site of the Department of Housing and Urban Development (HUD), http://www.hud.gov/buying/localhomebuy.cfm, to find out about other local down payment assistance programs. In addition, visit the website of Fannie Mae, the largest single private source of money for home mortgage lending. (Go to http://www.fanniemae.com/index.html, click on “Find a Mortgage” and click again on “Mortgage Solutions.”) There you will find a list of mortgage products designed to meet the needs of different kinds of borrow- ers and lenders who offer those products.
If the home you want costs $145,000, a down payment between 10% and 20% will cost you between $14,500 and $29,000. The money will primarily
come from your savings and perhaps some help from a family member. Once you have the down payment, you will need to borrow the rest (get a mortgage loan). The most important features of a mortgage loan are the amount of the principal, the term, and the interest rate. The principal is the money you borrow from a financial institution. The term is the number of years you have to pay back the loan. The interest rate determines the extra amount you have to pay to the financial institution for borrowing the principal. In 2003, interest rates have been the lowest in decades, well below 6%; during the last few years, they have been has high as 8.3%. Whenever you seek a mortgage, be an educated buyer and shop around to get the best buy! For example, it would cost you over $23,000 more in interest to make all the pay- ments on a 30-year mortgage loan for $100,000 at 7% interest, than for a loan at 6%.
Building Equity in a Home
Over the years, the net wealth you have in a home – the equity – can grow. This equity can be important to even more wealth creation and economic stability because you may be able to use the higher equity to improve your home, start a business, or pay for your education or that of your children. At any time, the equity you have is represented by the following formula:
(The purchase price is what you paid for the house. The sale price is what you can sell it for.)
First, you start with your down payment, the amount of your own savings that you invest to buy your house. Next, each month that you pay your monthly mortgage loan, you not only pay interest to the lender for borrowing the money, but also lower the amount you borrowed – the principal – for the follow- ing month. The more you pay back, the more your stake in your house grows. Also, over time, the price of your house may increase above what you paid for it. If it does and you sell your house, you get more than you started with. For example, suppose you buy a new home for $145,000, make a down pay- ment of $14,500 and get a 30-year, 6.5% mortgage for $130,500. After five years the principal your mortgage payments pay back will increase your equi-