The Money Class Part 3

Qualifying Rules for PLUS Loans Your FICO credit score is not a factor in qualifying for a PLUS loan. Your credit report will, however, be checked to confirm that you are current on all your payments-meaning no payments are ninety days past due-and that you have not declared bankruptcy or gone through a foreclosure in the past five years. (Short sales, however, are okay-you can still get a PLUS.) If you are not eligible for a PLUS loan, you will want to notify the financial aid office at your child's college; your child may be eligible for more aid from the school and could qualify to borrow more from the Stafford program. When parents are ineligible for a PLUS, the unsubsidized Stafford loan limit rises to $6,000 a year for freshmen and soph.o.m.ores and $7,000 a year for juniors and seniors. At FinAid.org, which is run by college financing expert Mark Kantrowitz, you can learn more about all federal loans.

How Much to Borrow in PLUS Loans One of the flaws of the PLUS program is that it does not set any borrowing limits based on your income. The basic rule is that you can borrow up to the total cost of attending school, minus any aid your child receives. But please, parents, do not tell yourself that you can afford any amount.

My recommendation is to use the calculator at the College Board website (www.collegeboard.com) to get an estimate of what your payments would be. You are to borrow only an amount that you are confident you can repay out of your monthly cash flow and within 10 years of your child leaving school.

For parents who may have used a PLUS loan in the past, I want to point out that an important change was inst.i.tuted in 2008. Instead of being required to start your repayment of the PLUS loan within six months of receiving the loan, you can now defer your payments until your child leaves school. This can make it easier to pay some costs while your child is in school, and then handle the repayment after school. It also means that your child will be out of school and may be able to chip in some money to help get your PLUS loan paid off sooner rather than later.

HOW TO CHOOSE THE RIGHT SCHOOL.

Okay, let's pull this all together. When your child is accepted to colleges, you will be given your aid package and what your family's contribution is expected to be. I am not exaggerating here: This could be the biggest stand-in-the-truth moment for all of you. I need you to understand what I mean by "the right school." The right school is the best school that is also affordable. That means you and your child can swing the tuition from a combination of current income, 529 savings, Staffords, and borrowing a reasonable amount in a PLUS.

If you find yourself contemplating borrowing more from a PLUS, or you or your child is considering a private student loan, please stop yourself right there. Take a deep breath and stand in the truth. You are about to make a financially dishonest choice that could undermine your family's long-term financial stability. Remember, cost matters. The annual cost for a four-year state school for an in-state resident was about $15,000 in 2010. For an out-of-state student attending a public school the average cost was $26,000. At a private four-year school the average cost was more than $35,000. If the more expensive schools do not offer you enough financial aid, the honest move is to consider the school that will not hijack your ability to realize all of your family's financial dreams, not just paying for college.

And if the cost of an in-state school is still too high, you and your child should consider having him start at a community college. Your child could live at home-a big cost savings-and then after the first year or two, he can look into transferring to the in-state school.

LESSON 4. HOW TO HELP ADULT CHILDREN FACING FINANCIAL CHALLENGES HOW TO HELP ADULT CHILDREN FACING FINANCIAL CHALLENGES.

The empty nest isn't what it used to be. Life postcrisis shows that more college graduates are moving back home with Mom and Dad, sometimes out of necessity if they have yet to find a job, but also because they know that the house they grew up in is going to be a lot nicer than what they could afford on their own. And having to move back with your parents doesn't carry the same stigma as it did years ago. A survey by Monster.com reported that 52% of 2010 college graduates reported that 52% of 2010 college graduates who have a job who have a job had nonetheless moved back in with a parent or guardian. At the same time, many adult children who have been independent for years are now facing financial challenges-a layoff, a too expensive mortgage-that have them turning to their parents (and grandparents) for help. had nonetheless moved back in with a parent or guardian. At the same time, many adult children who have been independent for years are now facing financial challenges-a layoff, a too expensive mortgage-that have them turning to their parents (and grandparents) for help.

The truth is, there is no age when a parent stops worrying about the welfare of a child. And the instinct is always there to step in and ease the pain. But it is very important for both parent and adult child to navigate these new family dynamics with care and respect for each other's financial well-being. To that end, I would encourage you and your children to proceed with a few ground rules: Every child who moves back home must pay rent. Even if they have yet to find a full-time job, I think it is important that they contribute to the family finances. If you want to give them a six-month grace period while they adjust, that's fine. But then start charging rent. Look, they need to understand they are no longer your babies; you are helping them start to make the transition to being an independent adult. This is not about whether you can afford to take care of them or not. You will be helping them stand in their truth if you treat them like the adults they are.

One idea for those of you who are squirming at charging your kids is to quietly-without your child's knowledge-put their rent into a separate savings account. Once they are ready to step out on their own you can return all that money to them.

Make sure they have health insurance. Young people get sick and have accidents. If they do not yet have a job with health insurance coverage you have two options for getting them insured: - Consider adding them to your employer-provided plan. A feature of the 2010 health reform was to allow children to stay on parents' health plans until they turn 26. (If your child is in fact living in another state, adding them to your policy may not make sense if your company's health insurer offers the best terms only to in-state providers. You could find yourself paying more out of pocket if your child needs to use an out-of-plan provider.) - Shop for an individual plan. Young adults in good health can often qualify for an inexpensive plan. You can shop for coverage at ehealthinsurance.com.

Get them on schedule with their student loan repayments. After a six-month grace period upon leaving school, all students must start repaying their federal student loans. If they have yet to find a job they will be able to apply for a loan deferment. But they cannot afford to ignore their loans. Fees and penalties will just make matters worse, and they could end up having part of their salary-once they get a job-siphoned off to repay the loan. I also want you to make sure your college graduate understands that even if they were to someday declare bankruptcy, their student loan debt would not be forgiven. Please make sure your child stays on top of this debt. Their school's financial aid office should have given them a lecture on all of this before they left school. If not, they-and you-can learn more at www.studentaid.ed.gov.

How to Handle Student Loans That Are in DefaultIf you have existing student loans that have already fallen into default-that is, you have not made your payments, for whatever reason-then I am asking you now to face up to the consequences of these actions with all the courage you can muster. You must do everything you can to get your loans out of default. If you fail to work out a payment plan, you may find your wages garnished up to 15% to settle your debts and your credit score will be such a mess you will find it hard to borrow for a home or car at an affordable rate. That's right, take a deep breath. I urge you to deal with this problem now, because no matter what you may be thinking, you cannot outrun it.

Some resources to help you figure out your options:* If you have a federal loan, start at the Department of Education's website (www.ed.gov), which explains your options for getting back on track with a defaulted loan.* The FinAid.org website, run by student loan expert Mark Kantrowitz, has a clear explanation of what's at stake, and how to address a default: website, run by student loan expert Mark Kantrowitz, has a clear explanation of what's at stake, and how to address a default: www.finaid.org/loans/default.phtml.* The website for Student Loan Borrower a.s.sistance (www.studentloanborrowera.s.sistance.org) has terrific advice on dealing with defaults and how to deal with loan servicers and collection agencies from a place of strength. Click on the "Default and Delinquency" tab on the left side of the site's homepage.

HOW AND WHEN TO HELP INDEPENDENT CHILDREN WHO ARE IN FINANCIAL TROUBLE.

It is a fact of the times we live in that many young families that might have been doing just fine are now in dire straits because of the recessionary economy. If your grown children come to you asking for financial help I need you first of all to stand in two truths: yours and theirs.

Your truth: Can you afford to offer financial a.s.sistance? I am asking you for just one moment to suspend your parental instinct to help without hesitation. I need you to do a financial accounting of what you can honestly afford to give them without putting yourself at risk. I understand how hard this is, but if you end up on shaky financial ground, and they are on shaky financial ground, you haven't helped anyone but have only increased your family's financial problems. Can you afford to offer financial a.s.sistance? I am asking you for just one moment to suspend your parental instinct to help without hesitation. I need you to do a financial accounting of what you can honestly afford to give them without putting yourself at risk. I understand how hard this is, but if you end up on shaky financial ground, and they are on shaky financial ground, you haven't helped anyone but have only increased your family's financial problems.

Their truth: Is their financial problem short-term or long-term? If they need your help to bridge a short-term problem, then by all means, if you have the ability to give them money, go right ahead. But in many instances I think you will find that your children have a bigger, more persistent issue causing the hards.h.i.+p and that might well require more than just the immediate boost that a gift or loan from you can provide. Is their financial problem short-term or long-term? If they need your help to bridge a short-term problem, then by all means, if you have the ability to give them money, go right ahead. But in many instances I think you will find that your children have a bigger, more persistent issue causing the hards.h.i.+p and that might well require more than just the immediate boost that a gift or loan from you can provide.

For example, if your daughter and son-in-law cannot afford their mortgage and are hoping to get a loan modification, I would tell you to resist giving them money to float them while they go explore this option. As I explain in the Home Cla.s.s, very few borrowers are able to qualify for a loan modification. It makes no sense to give money when the sooner they can accept the truth, the better: They probably need to walk away from that home. The same is true if your child's family is coping with a layoff. I understand helping out for a few months, but you need to clearly define how long you will be able to offer help. You-and they-also need to stand in the truth that even once they find a new job, in this economy, it may not necessarily pay as well as their prior job. If that means they can't afford to maintain their current living costs, the solution should be for them to find ways to reduce their living costs.

Cosigning Loans: Be Very CarefulWhen your adult child asks you to cosign a loan I need you to promise me-and yourself-that you will make your decision once you are firmly standing in some very crucial truths. Begin by considering the following matters:* Why is your child asking for your help? Why is your child asking for your help? If it is because a lender doesn't think your child is qualified to handle this loan, then you should be cautious as well. Is the issue that your child is trying to spend too much money? If he were to lower the price tag of the car or home he has his eye on, would he be able to qualify on his own? If so, that is the far better move. I know you only want to help; but encouraging self-sufficiency is incredibly helpful. And if the lender is hesitant because your child has a low FICO credit score, well, that should be a big warning signal. Look, if your child has a bad score because of one inadvertent slipup, that's okay; maybe they were slow to grasp how important it was to be on schedule with their student loan repayments, but are now doing great, making timely payments. But if your child has a low credit score because of poor credit card management that's a different story. That tells me she hasn't yet learned how to be financially responsible. By cosigning the loan you are not just potentially walking into a money pit of a deal, but you are enabling your child to continue her irresponsible behavior. I am not saying you can never cosign for her. But how about waiting a year and in the interim, you work with your child to help her get a firm grasp of what it takes to be financially responsible? If it is because a lender doesn't think your child is qualified to handle this loan, then you should be cautious as well. Is the issue that your child is trying to spend too much money? If he were to lower the price tag of the car or home he has his eye on, would he be able to qualify on his own? If so, that is the far better move. I know you only want to help; but encouraging self-sufficiency is incredibly helpful. And if the lender is hesitant because your child has a low FICO credit score, well, that should be a big warning signal. Look, if your child has a bad score because of one inadvertent slipup, that's okay; maybe they were slow to grasp how important it was to be on schedule with their student loan repayments, but are now doing great, making timely payments. But if your child has a low credit score because of poor credit card management that's a different story. That tells me she hasn't yet learned how to be financially responsible. By cosigning the loan you are not just potentially walking into a money pit of a deal, but you are enabling your child to continue her irresponsible behavior. I am not saying you can never cosign for her. But how about waiting a year and in the interim, you work with your child to help her get a firm grasp of what it takes to be financially responsible?* Can you truthfully afford to cosign? Can you truthfully afford to cosign? Mom and Dad, the minute you cosign you are committing to making good on the entire amount of the loan if your child falls behind in the payments. I know your child is wonderful. I know how much you love her. And I am not even suggesting she is actually irresponsible. But what if she is laid off? And the next job doesn't pay as well? Or an illness prevents her from continuing at the same job? Life happens. To all of us. I am asking you to consider how prepared you would be to take over the loan if your child were not able to handle it on her own, for reasons completely beyond her control. Mom and Dad, the minute you cosign you are committing to making good on the entire amount of the loan if your child falls behind in the payments. I know your child is wonderful. I know how much you love her. And I am not even suggesting she is actually irresponsible. But what if she is laid off? And the next job doesn't pay as well? Or an illness prevents her from continuing at the same job? Life happens. To all of us. I am asking you to consider how prepared you would be to take over the loan if your child were not able to handle it on her own, for reasons completely beyond her control.I want you to ask yourself: If I had to make the monthly payments-for the life of the loan-would it in any way impact my financial goals? If making those payments would eat into your emergency savings, or cause you to scale back or stop saving for retirement, then you must stand in your financial truth first. That is not selfish. Putting your own financial stability at risk is never a good idea, for all parties. I also want you to think this through for the life of the loan. If you are 50 years old and your child asks you to cosign a 30-year mortgage, could you in fact handle the payments once you retire?* Rules for cosigning Rules for cosigning: If you can in fact afford to cosign, go right ahead. But I hope you will also require that you receive formal confirmation each month that the payment was made on time. Your child can arrange for you to receive a duplicate statement or email alert that confirms the payment. Think that's invasive and infantilizes your adult child? I don't. If your child is standing in his truth he would volunteer to do this without your even having to ask. You have just taken on a huge financial responsibility. I think the least your child can do is show you he respects that gift and wants to give you peace of mind that he is on top of the payments.And if you are cosigning a loan for a child who has struggled with on-time bill payments, I would go as far as having your child pay you the amount of the monthly payment-at least 10 business days before the payment is due-and then you can be the one to make the payment to the lender. This isn't just about your kid; this is about protecting your FICO credit score.

LESSON 5. THE CONVERSATION EVERY ADULT CHILD SHOULD HAVE WITH HIS OR HER PARENTS THE CONVERSATION EVERY ADULT CHILD SHOULD HAVE WITH HIS OR HER PARENTS.

If your parents are in their 50s, you probably planned on skipping the Retirement Cla.s.s aimed at people in their 40s and 50s, not to mention the cla.s.s on living in retirement. But guess what: I am going to ask you to read those cla.s.ses too because they contain a few important lessons. There are some defining conversations you should have with your parents while they are still young (yes, parents in their 50s and even early 60s are young by my standards). As I explain in that cla.s.s, there are some critical measures to be considered and acted on in your 50s to help ensure your financial security in your 70s, 80s, and beyond.

Too often, families avoid these conversations about the inevitable road ahead. Then when the parents are in their 70s and not in great financial shape, they turn to their child for help, and at that point there is less time and opportunity for either the parents or the child to deal with things effectively. If you have this conversation sooner rather than later, you will both be better off. This isn't an attempt to accelerate a type of role reversal; this is about adults-children and parents-coming together to work out a plan for the future.

So go to the Retirement Cla.s.s and "audit" that cla.s.s; know what your parents are facing. And when you're ready to have the talk, here is a short list of topics you will want to cover: Will they be able to retire mortgage-free? Whether they plan on staying in their current home or relocating, their goal should be to have no mortgage costs in retirement. Whether they plan on staying in their current home or relocating, their goal should be to have no mortgage costs in retirement.

Have they considered long-term care insurance? If your parents cannot afford a policy on their own, you (and your siblings) should consider whether you can help with the premium cost for a policy. Spending a hundred dollars or so a month now to help with LTC premium payments could save you tens of thousands of dollars decades from now if your parents will require nursing care or a.s.sistance with daily activities when they are elderly. If your parents cannot afford a policy on their own, you (and your siblings) should consider whether you can help with the premium cost for a policy. Spending a hundred dollars or so a month now to help with LTC premium payments could save you tens of thousands of dollars decades from now if your parents will require nursing care or a.s.sistance with daily activities when they are elderly.

Have they carefully run the numbers on their retirement income? If your parents are considering retiring before age 66 or so, do they feel confident that they will have enough retirement income to support themselves for 20 or so years? In the Retirement Cla.s.ses, I discuss strategies that can deliver more income in retirement, from delaying retirement, to waiting until at least age 66 or 67 to begin receiving Social Security, to choosing the right payout option if they are ent.i.tled to an old-fas.h.i.+oned pension. If your parents are considering retiring before age 66 or so, do they feel confident that they will have enough retirement income to support themselves for 20 or so years? In the Retirement Cla.s.ses, I discuss strategies that can deliver more income in retirement, from delaying retirement, to waiting until at least age 66 or 67 to begin receiving Social Security, to choosing the right payout option if they are ent.i.tled to an old-fas.h.i.+oned pension.

Building Family Financial Security Under One RoofFor most households, the monthly expense of the mortgage or rent, and all the other costs that come with maintaining a home, are the biggest line item in the budget. If you look down the road and find that your dreams require a dramatic reduction in living costs, then quite possibly your next conversation should be about whether it makes sense to combine households. Yes, I am talking about multiple generations living under one roof.Of course, you know best whether family dynamics would doom this to fail or could make it a brilliant move. But if you are a close-knit family and the thought of moving in with your parents, or having them move in with you, doesn't set off your stress receptors, then I am here to tell you that combining households is a phenomenal idea. Interestingly, even before the recent recession took hold, a survey by the Pew Research Center found 16% of households-accounting for 49 million Americans-had at least two adult generations present. That's up from 12% in the 1980s. I fully expect that that percentage is higher today, simply because of the vast number of families that have lost their homes or are struggling with long-term unemployment.But I don't think extreme financial hards.h.i.+p is all that is at play here either. Part of the New American Dream is a s.h.i.+ft in emphasis. Overextending ourselves to buy more or own more has lost some of its cachet. Sure, we still want to live well and have our creature comforts. But I sense we are also rethinking the extent to which our material possessions matter, and recognizing-or remembering-that it is relations.h.i.+ps that matter most.Now, of course, not every family can pull this off. Personalities will dictate what is possible for your family. But I ask those of you who can envision combining households not to be shy about raising this possibility and starting the conversation. I think for many families-across generations-it could be the path toward ensuring everyone's new dreams are realized, together.

Do your parents have their essential legal doc.u.ments updated? It's not enough that they drew up a will or revocable living trust 10 or 20 years ago. They-and you-need to make sure that those doc.u.ments are up to date. If there has been a death, divorce, or remarriage, they might inadvertently be disinheriting you. It's not enough that they drew up a will or revocable living trust 10 or 20 years ago. They-and you-need to make sure that those doc.u.ments are up to date. If there has been a death, divorce, or remarriage, they might inadvertently be disinheriting you.

Go to The Cla.s.sroom at www.suzeorman.com:I have written extensively in the past on the essential doc.u.ments every adult must have. On my website you can find articles on why a simple will is often not nearly enough protection for you and your loved ones, and on how to put together the key essential doc.u.ments: a will, a revocable living trust, and an advance directive.

Make sure, too, that your parents have an advance directive that spells out what level of medical intervention they want if they ever become too incapacitated to speak for themselves-and that they give you a copy. Without that doc.u.ment, adult children are exposed to unnecessary heartache, and often irreparable sibling arguments, about how to handle end-of-life decisions. The parent can make sure it never comes to that, by having this doc.u.ment in place.

When a Parent RemarriesWe tend to think of the impact of blended families mainly in terms of small children, but the truth is, adult children need to pay attention here too. Very often when a parent remarries, he or she moves into a new home and takes owners.h.i.+p as joint tenant with right of survivors.h.i.+p (JTWROS). That means that when one co-owner dies the other inherits full control of the home. So let's say your mom remarries and puts money down for a new home she moves into with your stepfather. He is a great guy, don't get me wrong. But if Mom and Stepdad own the home as JTWROS, and she dies first, your stepdad has full owners.h.i.+p of the home, with no legal obligation to leave you any portion of the home when he pa.s.ses. Mom didn't mean to disinherit you, but it can happen nonetheless. Please understand that even if Mom's will or trust says you are to inherit her stake, it doesn't matter. How the home is owned-the t.i.tle-overrides what is in a will or trust. What your mom and stepdad should have done is take t.i.tle as Tenants-in-Common; at either's death, their portion of the home would pa.s.s to their heirs, not the surviving spouse. (At that point the heirs could then make arrangements, if they chose, to allow the surviving spouse to remain in the home until his/her death.) In The Cla.s.sroom on my website I review the various ways you can take t.i.tle to property.So while you're having those very adult conversations with your parents, you might want to touch on the matter of how their house is owned and what they would like to happen to it in the event of their pa.s.sing. And then make sure their will and trust reflect their wishes.

I recognize that these may not be the easiest of conversations to initiate, but bring the right energy to the task and I think you may be surprised by how cathartic this could be for everyone. The goal here is to establish that your parents have what they need for a comfortable and secure retirement. In my opinion, it is a great way to honor your parents-to show them they have raised responsible, thoughtful, farsighted children with their best interests at heart. What a powerful legacy that is.

LESSON 6. ADVICE FOR GRANDPARENTS: HOW TO BUILD A LASTING LEGACY ADVICE FOR GRANDPARENTS: HOW TO BUILD A LASTING LEGACY.

According to a recent poll by the MetLife insurance company, grandparents bestowed $370 billion in financial support on their grandchildren from 2003 through 2008. The median gift was $3,000, and nearly 4 in 10 grandparents with a college degree were contributing to a grandchild's education.

The beating heart at the core of all that giving is, without a doubt, love. Every grandparent I know yearns for their grandchildren to have the resources and opportunity to live a wonderful life. That is a universal dream. But in the years since that survey was taken, the financial gifts grandparents can provide have taken on a new importance. As parents struggle to retool their financial plans, a.s.sistance from grandparents can be a huge help. In the MetLife survey, more than 80% of gifts were made in cash. I don't think that's smart. The money you give today funds the dreams of your grandchildren. Do you hear that? Grandparents: You are the dream makers for your grandchildren! In the lesson that follows I will share strategies that will help you help your grandchildren make the most of your giving.

The benefits to your grandchildren aside, it also happens to be a smart way to s.h.i.+ft a.s.sets out of your estate. In 2011 any individual can gift up to $13,000 to any other individual without running afoul of gift tax laws.

Here are a few different ways to consider how to gift money for dreams: Follow the parents' lead. Ask your kids if they have inst.i.tuted any savings programs within the family. As I explained earlier for parents raising kids, I recommend encouraging children from an early age to set aside some money for savings and charitable giving. Grandparents can partic.i.p.ate in the plan that is already in place and you can inst.i.tute your own matching policy.

529 college savings plans. Ask your kids if they have set up a 529 college savings plan for their children. You can make contributions directly into that plan.

Set up a Roth IRA for a teenage grandchild who has a part-time job. As long as your grandchild has earned income you can fund a Roth IRA for them. So let's say your grandson made $2,000 last year in a summer job. You could give him $2,000 to open a Roth IRA; he doesn't have to invest his own money. As long as he made $2,000 you can bankroll the IRA contribution. In fact, if your grandchild earned at least $5,000, you could give him that much in 2011 for a Roth IRA; $5,000 is the current maximum annual contribution limit to Roth IRAs for anyone under the age of 50.

Here's where the legacy part comes into vivid display: Let's say you contribute $2,000 a year to your grandson's Roth IRA each year from the age of 15 to 25. So you have contributed a total of $20,000 over 10 years. Now let's a.s.sume that money grows at an annualized 6% all the way until your grandson turns 70. Your $20,000 in Roth IRA gifts could be worth nearly $400,000. And as I explain in the Retirement cla.s.ses, contributions to Roth IRAs can be withdrawn at any time without owing a penny in tax. Wow-I wish someone started an IRA for me when I worked my first job as a counter girl making sandwiches in my dad's delicatessen when I was a teenager. That's quite a legacy to put in place.

Help them save for a car and/or home. Notice I said "help." I think it is very important that your grandchildren-and your children, for that matter-make the commitment to save on their own for big-ticket purchases. If they lack the resolve and the resources to save for a long-term goal, then they are probably not yet responsible enough to make that purchase. I think it is great if you contribute to their goals, but I do not want you to bankroll anything in full. Sit down with your grandchild and ask him what he hopes to save up for in the future and then offer to become his co-saver. Think of this like a 401(k) match. Maybe for every dollar he puts in the down payment fund you can match 25 cents, or a dollar, or $5.

Give experiences, not things. Recent studies have shown that happiness comes more from pleasurable experiences than from buying things. I think that's a great opportunity for grandparents. Focus on gifts that you can experience together, whether it's tickets to a ball game, a weekend jaunt to the city to hit museums and the theater, or a weekend getaway at your home just to spend some time together. In addition to the fun of the here and now of the experience, you are also building memories, and maybe pa.s.sing along some legacies as well. That, after all, is the most precious gift you can ever give.

LESSON RECAP.

- Stand in the truth together, as a family. The more you talk and share, the greater your ability to reach your new dreams.

- Raise your children to be financially honest. Teach the value of saving, but give them the s.p.a.ce to spend as well.

- Choose a college that is a great financial fit. Cost matters.

- Know how best to help a family member in need. Are you solving a problem or providing a temporary patch that just delays the inevitable?

- Pay it forward. Grandparents can seed the dreams of grandchildren.

CLa.s.s.

HOME.

THE TRUTH OF THE MATTER.

There is no aspect more fundamental to the cla.s.sic notion of the American Dream than homeowners.h.i.+p. Ask anyone their definition of the American Dream and I have no doubt that the first thing out of their mouth will be "Home." The postwar boom years of the last century and the rise of suburban life ingrained this notion in us that homeowners.h.i.+p is not only something to strive for as an American but very nearly our right. There is no single image that speaks to our security so much as a family home. And there is no greater manifestation of how each successive generation has fared better than the previous one-that very American promise-than the way we've traditionally "traded up" in the area of real estate. And why shouldn't we have come to believe in this? After all, as a general rule, home values have historically risen over time. Your parents or grandparents most likely bought their first house for less than what you might spend today on a new car, and that house probably increased in value dramatically over the years. No surprise, then, that we grew to expect that you would buy a house that in time would be worth significantly more than what you paid for it, and that house would provide for you and your children. The equity you had in the house would be a safety net, a way to help fund college costs, to bridge a shortfall, to ease some of the anxiety of an underfunded retirement account. And then over-night, everything seemed to change.

The implosion of the housing market has already resulted in more than five million foreclosure notices in 2008 and 2009 and another 2.8 million in 2010, according to RealtyTrac. To be sure, the epic proportions of this disaster were the result of lax lending standards that allowed unqualified borrowers to become homeowners. But also to blame was a kind of ent.i.tlement gone wild-the American Dream careening out of control, fueled by greed and recklessness and untethered to a genuine sense of fiscal responsibility. I'm not going to lecture and point fingers-I did that in my 2009 book, Action Plan; Action Plan; we all know what went into making that perfect storm and we know all too well that the damage and repercussions are far from over. But I will point out that the housing crisis has ruptured and twisted our view of the American Dream like nothing else in my lifetime. we all know what went into making that perfect storm and we know all too well that the damage and repercussions are far from over. But I will point out that the housing crisis has ruptured and twisted our view of the American Dream like nothing else in my lifetime.

And the truth is, greed is not the entire story. Many families that didn't overreach during the bubble years are nonetheless suffering as well. As I write, more than six million Americans have been unemployed for more than six months. Nearly one in five of us is either unemployed or working part-time, because we can't find a full-time position. Continuing to make a monthly mortgage payment under those circ.u.mstances is proving painfully difficult given those harsh realities and the jobless recovery that we are told is under way. The federal government's mortgage modification program has been a ma.s.sive disappointment; from its start in the spring of 2009 through late 2010 barely more than one-third of homeowners who were enrolled in the Home Affordable Modification Program (HAMP) were granted permanent modifications. And thousands continue to wait a year or longer to learn their fate.

And let's not forget that millions of people who have dutifully and responsibly made their mortgage payments have been direly affected as well. Deflated home values have put an end to the prospect of a home as retirement fund or college fund and raised the question of whether homeowners.h.i.+p in fact even makes sense anymore. I am shocked by the number of people I talk to who view their home as an albatross, who are underwater, owe more than their home is worth, and regret the day they thought a home purchase was a great idea. It still surprises me to hear so many of you tell me you can't wait until you can unload your house, that you long for the days when you sent your landlord a rent check and slept soundly at night. I guess my surprise is a measure of how ingrained the desire to be a homeowner is in every one of us. Even those of us who know the steep costs and the pitfalls of buying real estate, can't help but feel some sense of betrayal, deep down, that this form of security has been taken from us.

So where does that leave the American Dream? In desperate need of revision, I'll tell you that much. If your home is no longer the rock-solid financial foundation of your net worth, then it is time to rebuild that dream from the ground up. And guess where we start? You got it: by letting go of beliefs and plat.i.tudes that may no longer be a part of your reality, looking deep inside, locating your truth, and standing firmly in it.

If we are going to create together a New American Dream that defines us and sets down values that are durable, crystal clear, and unimpeachable, for generations to come, then we need to agree on some fundamental truths at the outset. Interestingly, you'll see that many of these ground rules are ones your grandparents would have embraced-another case of going back to the future. So maybe in the end, we are not rewriting the American Dream so drastically after all; we are just getting back in touch with it in its purest form.

Before we begin this cla.s.s in earnest, I would like us to walk through some governing principles, to make sure we are in step in our views about real estate: * A home is not a stock A home is not a stock. Investing in a home because you think it will rise in value enough to finance other financial goals-your retirement, college tuition, expensive annual vacations-was never wise. I appreciate that for a decade or so, watching your home's value rise at a double-digit annual pace and being able to tap into those gains with a home equity line of credit was simply too irresistible for many. But we now know where all that financial dishonesty led and we are not going back there.

As I will explain in this cla.s.s, homeowners.h.i.+p is still a viable and smart step for many families. But it must not be viewed exclusively in terms of an investment. It is a place to live, first and foremost, a place to raise your family. That is its primary function. And when purchased with the right financial strategy and expectations it will also be a solid investment. It is a long-term savings vehicle you live in, not a short-term a.s.set you flip to pay for other financial goals.

* Renting may work best for many Americans Renting may work best for many Americans. While the old American Dream was rooted in the notion that it always made sense to buy once you could afford a home, the new dream requires a more complex a.n.a.lysis of what honestly makes sense given your career and family situation.

* Financing is cheap, but not easy Financing is cheap, but not easy. As I write this in early 2011, mortgage rates are remarkably low. The fact that you can lock in a 5% interest rate on a 30-year mortgage is an incredibly great deal. But qualifying for that great deal is no easy task as lenders have tightened their standards. To obtain a conventional mortgage you must now come to the lending table with a higher credit score, a higher down payment, proof that you have ample savings to be able to keep paying the mortgage if you are laid off, as well as full doc.u.mentation of all your income and a.s.sets. Refinancing now requires having at least 20 to 30% equity in your home; just a few years ago you could refinance with no equity.

For those of you looking at today's low prices and thinking it may be a smart time to buy, I ask you to stand in the truth of whether it may make more sense for you to rent. For homeowners who are struggling to keep up with a mortgage I ask you to stand in the truth that letting go may be the most honorable way of moving your family forward. And for all of us, we must adapt to the fact that a home is not a liquid investment whose value will rise at a fast and furious pace. I want to be clear: I still think that homeowners.h.i.+p can make great sense for many of you. But you must have a clear-eyed understanding of what a home is and what it isn't. I ask you to read every word of this cla.s.s carefully and leave your a.s.sumptions behind. The work of this cla.s.s is absolutely critical to shaping our notion of what truly const.i.tutes your New American Dream.

I have organized the Home Cla.s.s into the following lessons: - The Truth About Home Values - When It Makes Sense to Rent - The New Rules of Buying a Home - What to Do If You Are Underwater - How to Reduce Mortgage Costs - The Dangers of Home Equity Lines of Credit - Reverse Mortgages - Investing in Real Estate LESSON 1. THE TRUTH ABOUT HOME VALUES THE TRUTH ABOUT HOME VALUES.

If all you know about the housing market is based on what happened during the past 10 years, then the truth is you know very little. The extreme gyrations in the market since 2000 are in fact exceptional. Therefore, this lesson must begin by making sure you understand that recent history was completely disconnected from the longer-term story. Whether you are a renter thinking of buying or an owner deciding whether to stay put, trade up, or trade down, understanding what happened during the housing bubble and its costly aftermath is the foundation of this lesson.

A DECADE OF EXTREMES.

From 2000 through the spring of 2006, the S&P/Case-s.h.i.+ller index of home values in twenty metropolitan areas more than doubled. The average annual gain of 12% during that stretch exceeded the 10% long-term average for stocks. But since that peak, the same index has shed more than one-third of its value through October 2010.

I am here to tell you that neither double-digit annual gains nor double-digit annual losses is in any way normal. The ride up was fueled by a confluence of unprecedented events we all know are unlikely-I hope-to ever occur again. Lax lending standards allowed otherwise unqualified borrowers to become homeowners, and many more qualified buyers to purchase more house than they could actually afford. And don't get me started on the role of Wall Street and regulators in aiding and abetting the dishonesty.

The ride down of the past three years is the painful process of coming back to the truth. That truth, over many decades, is that home values rise at an average annual rate that matches or slightly exceeds the long-term average annual 3.54% rate of inflation. For all the pain of the bubble bursting I find it so interesting that the same housing index today is 43% above where it stood in 2000. That works out to about a 3.3% annualized rate. Not too far off the long-term rate, is it?

Of course, national averages do not tell the real story of what is happening in your area. In the regions that had the biggest boom, the bust has been the most painful, and it may be a few more years before we see prices stabilize in those areas, since the backlog of foreclosures must be winnowed down. But the point here is that whatever has happened to your market, whenever it reaches its bottom, I want you to know what you can rationally expect to happen going forward. And that is why I want you to focus on a rate of 3.5% or so, on average.

STAND IN THE TRUTH.

That brings us to our central stand-in-the-truth moment for the Home Cla.s.s: Be realistic about what your home is worth today and be realistic about what it may be worth five, 10, 20 years from now. A $300,000 home in 2006 that is now worth $200,000 might "get back" to $300,000 in about 12 years, a.s.suming an average price gain of 3.5%. Even at a very strong 6% rate it would take more than six years to get back to 2006 levels.

The decisions you need to make-the housing dream you are in charge of re-creating-must be grounded in your personal truth of what you have today, not what you had at the peak of the housing bubble in 2006. And I am asking you to look toward the future with an expectation that housing prices will, at best, post gains that are more in line with their long-term historical trend of keeping pace with inflation. This brings me back to a point I introduced at the outset of this cla.s.s: A HOME IS A SAVINGS ACCOUNT, NOT A HOT STOCK.

Even though a home can still be a very solid investment that over time should grow in value, it is never ever to be mistaken for a liquid investment. Your emergency fund at your bank or credit union is liquid; you have access to it 24/7 and you know exactly what it is worth. A stock or bond investment is also fairly liquid; you can sell it five days a week and have the money in your account typically within a few days.

Your home, on the other hand, is an illiquid investment. If you wake up tomorrow and decide to sell, the best-case scenario is that you might have the cash deposited in your bank account in sixty days, and that's me being highly optimistic. In late 2010 the average time it takes to sell a home is three to six months in many markets. That's a long time to wait for your money.

What about a home equity line of credit (HELOC)? As far as I am concerned the rise of the HELOC is one of the most costly tricks the financial services industry played on willing homeowners. I never advocated turning your home equity into an ATM you could tap at any time. And as I explain later in this chapter, I think HELOCs could be especially dangerous in the coming years.

So do I think owning a home is still a viable dream given my insistence on expecting moderate appreciation going forward? Absolutely. But so too is renting. Remember what I explained in the very first chapter of this book: The way you create lasting security for you and your family is to focus on creating entirely personal dreams that reflect what is right and honest for you and you alone.

LESSON 2. WHEN IT MAKES SENSE TO RENT WHEN IT MAKES SENSE TO RENT.

It used to be, not all that long ago, that renting was something you settled for if you couldn't afford to buy a home. Renting was a way station en route to buying, a rite of pa.s.sage. My, how times have changed.

These days, in my opinion, renting can be the end in itself, a far better move, depending on your personal circ.u.mstances.

To those of you currently renting who are wondering if now is a smart time to buy because you can get a good deal on a house, I want you to first make sure you can answer yes to every item in my checklist: - Do you intend to live in your home for a minimum of five to seven years?

- If you lost your job-or wanted a new job to advance your career-could you reasonably expect to find a comparable job locally (i.e., one that would not require that you relocate)?

- Can you afford a 20% down payment?

- Do you place a high value on knowing you don't have to answer to the whims of a landlord?

My 5-to-7-year rule is to help you avoid the likelihood that you would someday sell your home and have less in your pocket than what you paid. What you must realize is that when you go to sell you will need to spend about 8% to 10% on settling all your selling costs. The way the real estate system works, the seller pays all of the agents' fees; typically that is 6%. On top of that you may have to pay a transfer tax to your state or county that might be 1% or more of the sale price. If you live in a condominium, cooperative, or other development that has a homeowners' a.s.sociation, you could even encounter a fee when you sell; this practice has become more common as a way to discourage investors who buy with the intention of flipping a property. Then there is the cost of moving. Add it all up and you can see why I say you need to plan on giving up 8% to 10% of your sales price to make the move. Given that we may still have a few years ahead of us before the market stabilizes, I think buying today with anything less than a 5-year to 7-year time horizon is risky. Over a shorter period we can't confidently a.s.sume you will get anywhere near enough price appreciation to cover the 8% to 10% cost of selling.

Your job outlook is another important factor as well. If you have any reason to expect you might need or want to relocate within the next five to seven years, then renting can in fact be the far better option for now.

I also think renting is smart if you have yet to save up a 20% down payment. I am well aware that loans insured by the Federal Housing Administration (FHA) come with very low down payments. But as I explain later in this chapter, your housing dream will be more sustainable if you can make a 20% down payment.

Another important consideration is whether you really, truly, deep down yearn to be a homeowner. Don't listen to anyone else. Do not feel like it is something you should do. Your new dreams must be as firmly rooted in emotional truths as in financial truths. If you are scared of buying, then embrace the truth that you are meant to rent. If you don't really care that you can't renovate the kitchen or that you might have to move in a few years if the landlord raises your rent too high, then renting is right for you. Respect your feelings; they have as much sway here as your finances.

THE MATH OF RENT VS. BUY.

There are of course many factors that come into play when deciding whether it makes financial sense to buy or rent. At the top of the list is what it would cost you to rent a comparable home that you are considering buying. Then you need to factor in the purchase costs (closing costs on your mortgage can equal 5% or more of your purchase price) and the eventual cost of selling as well. While you are an owner you will have the benefit of some tax breaks, as well as full responsibility for maintenance and property tax.

At the same time, I want to make sure that renting is not overplayed as the "best" solution. As with all financial decisions there are trade-offs. And with renting you must prepare-and budget-for the possibility that the landlord will raise your rent, or decide to sell the home, and the new owner imposes a big rate hike at the next renewal. And you must put a personal price on how important or unimportant it may be to you to know you can stay put and renovate the home to your choosing.

The Best Buy vs. Rent Calculator: The New York Times The New York Times has a free online calculator that allows you to build a very customized calculation based on your personal circ.u.mstances. The calculator will show you an expected break-even date where the cost of buying (and eventually selling) makes more sense than renting. No calculator can perfectly capture every nuance of each individual situation, but this calculator does an excellent job of making sure key costs are accounted for. Give it a spin and see how long you would have to stay put before the cost of buying would be worth-while. Go to has a free online calculator that allows you to build a very customized calculation based on your personal circ.u.mstances. The calculator will show you an expected break-even date where the cost of buying (and eventually selling) makes more sense than renting. No calculator can perfectly capture every nuance of each individual situation, but this calculator does an excellent job of making sure key costs are accounted for. Give it a spin and see how long you would have to stay put before the cost of buying would be worth-while. Go to www.nytimes.com/interactive/business/buy-rent-calculator.html.Tips for Using the Calculator - Base your purchase information on making a 20% down payment.

- Plug in the current rate for a 30-year fixed-rate mortgage.

- Check your local newspaper or ask a real estate agent for an estimate of what comparable homes rent for in your area.

- a.s.sume that both home prices and rents will rise at either 3% or 4% a year.

- If you are considering buying a condo, please click the "Advanced" settings b.u.t.ton so you can input the fees you may likely pay.