MONEY Ask the Expert

How to Negotiate the Best Price From a Home-Improvement Contractor

For Sale sign illustration
Robert A. Di Ieso, Jr.

Q: Can I negotiate the cost of a home improvement project? I feel like these guys all really want my business, but I don’t want to anger anyone by suggesting they lower their bids.

A: Yes, you can negotiate with a contractor; the trick is doing it without making it feel like a negotiation. Anytime you’re haggling over someone’s work (versus a mass-produced product like a car or flat-screen television), look for a way to ask for a lower price without any suggestion of insult. The last thing you want is an angry contractor looking for ways to cut corners on your project to make it come in at what he thinks is an unjustly low price.

Here are three effective techniques you can use:

1. Announce that you’re getting multiple bids. One of the major advantages to getting three or more bids for any significant (say, more than $5,000) home project is that you can tell the prospective contractors, honestly, that you’re doing so. That gets the message across that a) you’re concerned about the price, b) he’s competing with other contractors for your job, and c) he’d better sharpen his pencil and give you the best possible number he can. This is not to say that you should hire the contractor with the lowest bid. Hire the one whose work and reputation are the best. But the process of competing for your business will almost certainly drive down everyone’s price.

2. Ask him to “value engineer” the plans. Rather than flat-out asking your contractor if he will lower his price to win your business, which could backfire, ask for his advice on how you can rein in the cost of your plans. If his bid is $30,000 and you’re trying to keep the project to $25,000, for example, tell him so, and ask him if he can recommend any changes that could bring the cost in line. Maybe he will suggest a similar-looking-yet-more-affordable tile for your new master bathroom or a different layout that keeps the fixtures where they are and therefore slashes the plumbing costs. An open conversation about where to scale back doesn’t run the risk of making him mad—in fact, it shows that you value his opinion. And it further drives home the message that your budget is tight, possibly leading him to make other money-saving suggestions elsewhere.

3. See if you can contribute some sweat equity. If you’re handy and have the time, you might be able to knock off a portion of the project yourself. In that case you can ask the contractor to reduce his price accordingly. If you have a good hand for painting, for example, that’s a perfect project to tackle yourself. You could also do some basic demolition (assuming you have the know-how and gear to do it safely), excavation work (for small projects that don’t require power earth-moving equipment), or landscaping around the finished job. Any of these could easily slash hundreds or thousands of dollars off the project price.

 

MONEY mortgages

Here Come Cheap Mortgages for Millennials. Should We Worry?

young couple admiring their new home
Justin Horrocks—Getty Images

The federal agencies that guarantee most mortgages are launching new loan programs that require only 3% down payments for first-time buyers. Is this the start of financial crisis redux?  

According to new research from Trulia, in metro areas teeming with millennials, such as Austin, Honolulu, New York, and San Diego, more than two-thirds of the homes for sale are out of reach for the typical millennial household.

That goes a long way to explaining why first-time homebuyers have recently accounted for about one-third of homes sales, according to the National Association of Realtors, down from a historic norm of about 40%. And it should concern you even if you’re not a millennial or related to one: A shortage of first-time buyers makes it harder for households that want to trade up to find potential buyers; and spending by homeowners for homes and housing-related services accounts for about 15% of GDP.

Now the federal government appears intent on reversing the trend — or at least on easing the pain of the still-sluggish housing industry.

Trulia’s dire analysis assumes that buyers need to make a 20% down payment — a high hurdle for anyone, let along a younger adult. But Fannie Mae and Freddie Mac, the government agencies that guarantee the vast majority of mortgages, this week launched new loan options that will require down payments of as little as 3% for first-time buyers (and, in limited instances, refinancers as well). Fannie’s program will be live next week; Freddie’s, which will be available to repeat buyers as well, will launch in early spring.

Before you get all “Isn’t that the sort of lax standard that fueled the financial crisis!?”, it’s important to realize significant differences between now and then.

The only deals that will qualify for the 3%-down programs are plain-vanilla 30-year fixed-rate loans. No adjustable-rate deals, no teaser-rate come-ons, and, lordy, no interest-only payment options. And flippers are not welcome; the home must be the borrower’s principal residence.

Both Fannie Mae’s MyCommunityMortgage and Freddie Mac’s Home Possible Mortgage program are aimed at moderate-income households. For example, to qualify for Fannie Mae’s program, household income must typically be below the area median. Income limits are relaxed a bit in some high cost areas, such as the State of California (up to 140% of the local median) and pricey counties in New York (165% of the median).

That said, lenders will be allowed to extend these loans to borrowers with credit scores as low as 620. That’s even lower than the average 661 FICO credit score for Federal Housing Administration-insured loan applications that were turned down in October, according to mortgage data firm Ellie Mae. (The average FICO credit score for FHA approved loans was 683.)

Like FHA-insured loans, the new 3% mortgages offered by Fannie and Freddie will require home buyers have private mortgage insurance (PMI). That can add significantly to mortgage costs.

For example, a $300,000 home purchased with a 3.5% fixed rate loan and a 3% down payment would have monthly principal and interest charges of about $1,300 a month. The PMI adds another $240 or so to the monthly cost; that’s nearly 20% of the base monthly mortgage amount. (You can estimate the bite of PMI using Zillow’s Mortgage Calculator.)

But one significant advantage the new Fannie/Freddie loan programs have over the FHA program is that they will allow homeowners to cancel their PMI once their home equity reaches at least 20%. Beginning in 2013, the annual insurance charge on FHA-insured loans, currently 1.35% of the loan balance, can never be cancelled regardless of whether the borrower has more than 20% equity.

 

MONEY housing

Fannie, Freddie Announce Plans to Back 3% Down-Payment Mortgages

According to officials with the companies the move is designed to help those with lower income and good credit to afford homes.

MONEY Retirement

Don’t Choose These 10 Cities If You Want to Retire Comfortably

These spots fall short when it comes to housing costs, taxes, health care, and activities.

Retirement is a time to enjoy hobbies, move a little slower in daily life, travel, and after decades of hard work, just rest. All of which is tough if you pick the wrong retirement city. (See also: 10 Unexpected Things You Should Consider When Picking Where You Retire)

When looking at locations, you’ll generally want to weigh six categories: cost of living, housing costs, taxes, the health care system, activities for seniors, and, yes, the weather. And with those in mind, you’ll likely want to steer clear of these 10 cities that fall short in one or two or more of those categories.

 

  • 10. Providence, RI

    Providence Performing Arts Center in Providence, Rhode Island, USA.
    Sean Pavone—Alamy

    Across numerous rating scales out there, Providence almost always appears at the top of the worst lists. This is due to a high cost of living, high tax rates, and one of the highest unemployment rates in the nation (currently at a rate of 10% for the city and 3rd highest for the entire state.) If you are hoping to supplement your income or kill some boredom during your retired years, finding a part-time job in Providence may be impossible.

  • 9. Washington, D.C.

    Georgetown, Washington, DC
    Glowimages—Getty Images

    In addition to brutally cold winters, economics continues to be a problem for our nation’s capital, with the numbers of those under the poverty line increasing — despite a rise in median income. With seniors living on a fixed income, the high cost of real estate can also cause concern.

  • 8. Philadelphia, PA

    House of James Madison on Spruce Street.
    Franz Marc Frei—Getty Images/Lonely Planet Images

    While it’s not as expensive to live in as New York City, there are some issues that may keep the 65 and older crowd away from the city of brotherly love. A higher-than-average sales tax and poor air quality may be of concern to retirees. Throw in the high rate of crime (it ranks 5th nationwide), and you have a few good reasons to shop around for your retirement abode.

  • 7. Chicago, IL

    El train crossing North Clark Street, The Loop, Chicago, Illinois, United States of America, North America
    Amanda Hall—Getty Images/Robert Harding Worl

    Illinois as a whole gets a low approval rating from its own residents, with one in four saying the state is the worst place to live. Why? It could possibly be because of the high income tax hikes and lower bond rates, both signs of a troubled economy. Add in the fact that many Chicago residents have decided to leave the city altogether, making Chi-town the 6th most-abandoned large city in the U.S. and it’s a less appealing option to live out the rest of your years.

  • 6. New York, NY

    Brownstone townhouses, Brooklyn, New York City
    Antenna—Getty Images

    The Big Apple requires a big budget, as real estate is pricey and hard to afford on a fixed income. By taking your current retirement budget and adjusting it to the high cost of living for any of the more popular parts of NYC via this calculator, you can see that the real estate isn’t the only thing that will cost you. Even retirees who own their own homes will feel the pinch of higher utility bills and transportation fees.

  • 5. Bridgeport, CT

    Bridgeport, CT
    iStock

    High taxes are a major concern for retirees, and some states tax retirement income much more than other states. (Florida’s low rate is what makes it one of the most desirable states for retirees, for example.) But Connecticut is one of those states that taxes both Social Security and pension income. Bridgeport, more specifically, has expensive housing costs and even more expensive health care costs. Assisted living facilities in this area of the country can charge over over $400 a day — almost twice the national average for long-term care, which will deplete your nest egg very quickly should you require assistance at some point.

  • 4. Louisville, KY

    Louisville, KY
    GoToLouisville

    The low cost of living, modest housing costs, and picturesque mountains may make it appear to be a good choice for retirement, but Louisville has been named as the “worst place for allergy sufferers to live,” making it an easy destination to avoid by retirees with respiratory or other health issues.

  • 3. Oklahoma City, OK

    Downtown Oklahoma City skyline, Oklahoma.
    Healthcare is a concern for all seniors, and it will be a real concern if you retire to Oklahoma, which ranks among one of the worst in the country for health care (trailed only by West Virginia). Crime is also a problem here, with the city ranking 7th in the nation for crime among large cities. Gary Cralle—Getty Images

    Healthcare is a concern for all seniors, and it will be a real concern if you retire to Oklahoma, which ranks among one of the worst in the country for health care (trailed only by West Virginia). Crime is also a problem here, with the city ranking 7th in the nation for crime among large cities.

  • 2. Honolulu, HI

    Honolulu, HI
    iStock

    While the location is beautiful and the weather gorgeous year round, Honolulu will require you to have quite a large nest egg. According to a recent study done by WalletHub, cost of living in the city are among the highest in the country. It’s also very expensive to travel to and from Hawaii, making family gatherings more difficult.

  • 1. San Francisco, CA

    San Francisco, CA
    Scott Chernis

    The weather is very mild — it doesn’t get hot in the summer and winters are usually rainy. However, the cost of housing in this area is so high that most retirees are not going to be able to find it within their budget. Retirement income is taxed heavily in the state of California, unlike many other states. The cost of living is also very high. In fact, Kiplinger ranked California as the worst state to retire.

     

    Read more articles from Wise Bread:

    -The Five Types of People Who Never Retire (Are You One of Them?)
    Book review: Cash-Rich Retirement
    -Tiny Nestegg? Retire abroad!

MONEY home prices

Brooklyn Is Now the Least Affordable Housing Market in the Country

Brooklyn brownstones
Jay Lazarin—Getty Images

Big surprise.

GENTRIFICATION, noun.

The process of renewal and rebuilding accompanying the influx of middle-class or affluent people into deteriorating areas that often displaces poorer residents

- Merriam-Webster

Poor hipsters. In the process of turning Brooklyn into a hive of artisanal mustache boutiques and fixie-bike shops, they may have priced themselves out of the neighborhood. According to a recent study by RealtyTrac, which analyzed the affordability of 475 counties through October 2014, Kings County—also known as Brooklyn—was the least affordable in the nation.

The study gauges affordability by measuring the percentage of the locality’s median monthly household income that is required to make monthly payments on a median-priced home in the area.

When RealtyTrac ran the nation-wide numbers in October, payments on a median-priced home required 26% of the average household income. In Brooklyn, by contrast, where the median home costs $615,000 and the median household brings in only $46,960, home payments take up about 98% of a regular family’s wages. That’s less affordable than Manhattan — and even than San Francisco, where half of all homes sell for $1 million or more.

In fact, the typical homebuyer has been priced out of the borough’s real estate for longer than you might have thought. RealtyTrac’s report also measures affordability between January 2000 and October 2014. Over that 14-year period, home payments on a median-priced house still would have cost the typical family 95% of their income. Earlier this year, RealtyTrac found Brooklyn was also one of the most expensive places for young people looking to rent.

Why has BKLN gotten so expensive? The answer is probably a mixture of stagnant wages, investor interest, and an influx of more affluent residents. “Incomes have not grown nearly as fast as home prices” in the regions where affordability declined, said Daren Blomquist, vice president at RealtyTrac, in an interview with Bloomberg. “That disconnected home-price growth has been driven by investors and other cash buyers who aren’t as constrained by income.”

MONEY Ask the Expert

When a Reverse Mortgage Does—and Doesn’t—Make Sense

For Sale sign illustration
Robert A. Di Ieso, Jr.

Q: My wife and I have no heirs. Our home is worth about $700,000 and nearly paid off. We’re thinking of taking a reverse mortgage at retirement. How does this work, how much could we get, and is it even a good idea? —Larry, Chesapeake Beach, Md.

A: A reverse mortgage is exactly what it sounds like: You are borrowing against the equity in your home, but instead of paying the bank every month, the bank pays you.

Like any home equity loan, a reverse mortgage allows you draw equity out of your house while continuing to live there. Its big advantage over other home equity borrowing is that you don’t have to pay back a dime while you live in the house, but once you sell or are no longer able to occupy the home as your primary residence, the total loan balance, plus interest and fees, must be paid in full.

You can receive the loan as a lump sum, a monthly amount, or a line of credit (essentially, a checkbook you use to spend the funds as needed), or some combination of these. If you still owe money on your mortgage, the new loan can be used to pay off the remaining balance.

The amount you can borrow depends on a variety of factors, including current interest rates, an appraisal of your home, your age (you must be at least 62 to qualify for a reverse mortgage), and your credit rating. The maximum amount allowed by the federal government is $625,000 for 2014. Reverse mortgage interest rates are fairly low, currently around 2% for a variable rate and around 5% for a fixed rate.

As good as that all sounds, there are serious pitfalls to reverse mortgages, says Sandy Jolley, a reverse mortgage suitability and abuse consultant in Los Angeles. The big one is that you’re spending down what’s likely your largest asset. Even though you don’t have heirs to leave the house to, you might need it later to help pay for assisted living or extended home health care. And you cannot take out another home equity loan once you have a reverse mortgage.

Also, reverse mortgage fees can clock in at a whopping 4%—not just of what you borrow but of your maximum loan amount. So in your case, you could be charged $25,000 (4% of $625,000) even if you opened up a reverse mortgage line of credit as an emergency reserve and never drew out any funds. “The fees are rolled into the loan and charged monthly compounded interest until the home is sold or taken by the lender to repay the debt,” Jolley says.

Another major concern with a reverse mortgage is that the lender can call the loan—meaning you have to pay the balance immediately, even if you have to sell your home to do so—should you ever let your homeowners insurance policy expire, get into arrears on your property taxes, fall behind on home maintenance, or move into an assisted living facility for a full year.

Because of these high costs and risks, Jolley suggests using a reverse mortgage only as a last resort. Consult a trusted family member or a financial planner who’s not in the business of selling reverse mortgages about whether you really will need that money in order to live comfortably in retirement. The combination of Social Security and your retirement savings (and the lack of a mortgage payment; congrats on that!) may provide the income you need to live the way you want to live. Save your equity until you really need it.

CORRECTION: An earlier version of this story indicated that at the end of the loan the bank owns the property. The owner retains title to the home.

Read more about reverse mortgages:
When Tapping Your Home Pays
Should You Get a Reverse Mortgage?
The Surprising Threat to Your Financial Security in Retirement

MONEY housing

Housing Prices Bounce Back In October

After September numbers seemed to show a slowdown in the housing market recovery, October figures are a little more promising.

MONEY Ask the Expert

The Best Tools to Give a New Homeowner

141201_REA_toolkit_1
Getty

Q: My grandson just bought his first home. He’s excited about putting in some sweat equity, but he has no tools because he’s always lived in an apartment. I’d like to surprise him with a good starter set. What should I get?

A: Not only will this thoughtful gift save your grandson the considerable cost of establishing a collection of DIY paraphernalia, it will also save him countless trips to the home center. Chances are, he would go out to buy the tools he needs piecemeal, meaning a trip (or two!) every time he tackles a new project.

Here are a few different types of starter kits you could get him:

Loaded tool bag: A tool bag is like an inside-out toolbox; all of the gear is exposed, stowed in dedicated pouches and pockets and easy to see and grab. You could buy a bag and load it up with tools yourself—or just purchase the Craftsman Evolv ($40 at Sears). It contains all the basics: screwdrivers, measuring tape, hammer, pliers, utility knife, and a plastic sorting tray for the nails, hooks, and screws he collects over the course of his projects. This is far from every hand tool he’ll ever need, but there’s room to add more as he builds his collection.

Cordless power tool set: Since he doesn’t already own any tools, we’re assuming he’s not expert enough to need a whole array of heavy-duty power tools. More affordable and handy would be a set of battery-operated power tools. Today’s lithium-ion batteries deliver plenty of muscle, hold their charge between uses, and use rechargeable batteries that are interchangeable for a host of same-brand tools. Porter-Cable offers a four-tool kit (circular and reciprocating saws, drill/driver, and flashlight, with two 20-volt battery packs, so one can be recharging while your grandson is using the other) for about $200 at amazon.com.

Extras: He’ll be able to tackle most any job around the house if you round out his collection with a large ratchet set (such as the Husky 65-piece mechanics toolset, $30 at Home Depot) for removing and installing bolts of any size; an electronic stud finder (like the Bosch Digital Multi-Scanner, $80 at Lowes) to make easy work of locating framing from which to hang shelves and cabinets soundly; and a small bubble level (like the magnetic aluminum torpedo level, $15 at Ace) to make sure those shelves and pictures are hung straight.

 

MONEY Face to Face

How to Deal with a Roommate Who’s Late Paying the Rent

Past Due envelope slipped under door
Jim Corwin—Alamy

Unfortunately, sharing an apartment can also mean sharing money woes. Use these conversation starters to make sure your own finances don't end up in the gutter—and you don't end up on the street—because of someone else's problems.

If your roommate can’t manage his or her share of the rent, you’ve got more than an uncomfortable situation on your hands.

When both your names are on the lease, you’re both liable for the full amount owed to the landlord, and you can both be evicted if payments aren’t made in total. Your credit score may suffer in the process, too—making it difficult for you to get another apartment. Serious stuff.

Still, the first time your roomie misses a payment, you might give him a pass, says San Francisco-area financial counselor Susan Bross. “But if this happens more than once, it’s about bad decisions they’re making with their money.”

And since the situation could worsen, you’ve got to address it head on, she says. Here’s how:

OPEN GENTLY: “Can we talk about what’s going on with our rent payments?”

Your first goal is figure out why your roommate was late, so that you can determine whether missed payments will continue to be a problem in the future.

If your housemate has just started freelancing and hasn’t yet figured out how to balance expenses against an irregular income, the problem may resolve itself once she gets more settled. But if she’s got a shopping habit that eats up all her paycheck before she can get to her bills, you may have a regular headache ahead.

As you try to ascertain the situation, try your best not to come off as accusatory, says Dr. Eric Dammann, a New York City clinical psychologist and financial coach.

The last thing you want to do is put your housemate on the defensive before you’ve had a chance to discuss resolutions. And if the conversation escalates to a fight, it’ll be tougher for you to live harmoniously under the same roof going forward.

“So bring it up in the gentlest way you can,” he says.

PUT IT IN PERSPECTIVE: “I was late paying some of my other bills last month because of the missed payment.”

If your roommate’s not opening up, or if he acts like missing the deadline is no big deal, let him know how his lateness is affecting you or the rest of your roommates.

“Suggest ways in which it is a big deal,” says Dammann. “You might get through that way.”

Also, explain to him the possible consequences if his portion of the rent is not met every month (e.g. you’ll get kicked out and both end up with poor credit).

FIGURE OUT A GAME PLAN: “Let’s come up with a system so we make sure we don’t have to have these conversations again”

or

“If you’re not able to keep up with rent payments, I need to know so that I can go to our landlord and try to renegotiate the terms of our lease.”

If the late payments are truly only a matter of forgetfulness, try to encourage your roommate to set up a new system to avoid missing payments, so that you’re not left scrambling for money again.

The fix could be as simple as a Google alert, a gentle reminder on a whiteboard in the kitchen, or together using a site like Splitwise, that helps roomies coordinate shared expenses.

But if you find out the issue is more serious or more chronic, start by asking your roommate if he sees any possible resolution, such as asking a parent for money. No end in sight to the problems? Without being too aggressive, let your flatmate know that you’ll have to get the landlord involved in order to protect your own finances.

Then do so, stat. “Most leases can be modified,” says Brandy Peeples, a Frederick, Md. litigation attorney specializing in real estate. “If your landlord knows you’re having problems, he or she may work with you—it’s practical to go back and ask.”

You could see if your landlord will allow you to bring in an extra roommate to reduce everyone’s individual contributions. Or you could try negotiating an early termination fee that allows your roommate to pay a fine and leave the apartment.

“It’s good to keep the landlord into the loop,”says Peeples. “If you wait until after the fact, a lot of times the landlord is not going to be so forgiving.”

RELATED: 3 Tools that Help You Nudge Friends to Pay You Back

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