Texas Real Estate Blog - Texas Housing Market BlogRecently posted or modified blog posts in the category - Financial Planninghttps://www.realfx.com/blog/Copyright RealFX.com2022-04-18T09:34:40-07:00tag:realfx.com,2012-09-20:12696How to Improve Your Credit Score to Buy a Home or Car<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/improve-credit-for-car-loan.jpg" alt="How to Improve Your Credit Before Buying a Car" width="475" />Optimizing your credit score is the best way to get a good deal when <a href="https://www.realfx.com/blog/plan-for-large-purchases/">making larger purchases</a> for something like a house or a car. Overcoming credit-reducing habits may seem daunting, but if you stick to the practices outlined in this post you can <a href="https://www.realfx.com/blog/how-to-fix-a-bad-credit-score/">fix a bad credit score</a> in a year or less. Are you ready to get on track to make a purchase that helps you build wealth instead of draining it? Keep reading to learn how to improve your credit score to get the best prices on your car or home payments.
For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.
Communicate With Your Creditors
<a href="https://www.motor1.com/reviews/465802/bad-credit-auto-loans/" target="_blank">Car finance companies for bad credit</a> can help you buy a new or used vehicle. Buying a car is much like buying a new house. Credit score matters even if yours is low. These financing companies can identify opportunities to improve your credit and will help you get approved for an auto loan.
Improving your credit score can increase your chances of making a sensible car purchase. One way to improve your credit score is to talk to your creditors. Set up a payment plan with them if you cannot afford the monthly bills and miss payment deadlines. Focusing on this problem can soften the blow of significant outstanding balances and late payments.
Pay at Least Once During a Billing Cycle
Paying once or twice in a billing cycle can lower your credit utilization rate. You can also consider making multiple, smaller payments within a single payment cycle. The smaller payments can make budgeting easier, and clearing your outstanding balances before the deadline will help raise your score.
Set Up Billing Reminders
Missing payments is one of the fastest ways to reduce your credit score. You can use your phone’s calendar to set up payment reminders. This is also possible by creating payment reminders with billing apps. Don’t be discouraged if on-time payments don’t instantly raise your credit score; it can take three months of timely payments to see a change.
Keep Unused Credit Card Accounts Open
Holding onto your old credit cards can help increase your credit score. It will be advantageous for your score if your credit history is long. Your creditors will keep an eye on these cards. If you’re looking to close lines of credit, opt for closing the newer ones instead.
Review Credit Reports
You can ask for a free credit report each year from each of the three <a href="https://www.transunion.com/credit-reporting-agencies" target="_blank">credit reporting agencies</a>. Filing a request will not affect your score at all. Reviewing each report will allow you to see errors, and disputing them can help improve your credit score.
Possible errors include misspelled names and wrong addresses. Some of your accounts may belong to someone with the same name. Delinquent accounts, twice-listed debts, and accounts with wrong credit limits or balances are costly errors that you should also dispute. You may also have open accounts that you have already closed before.
Avoid Opening Multiple Credit Card Accounts
Keeping your old credit card accounts is favorable. This shows creditors that you have a long credit history. Opening many new credit card accounts over a short period can increase your credit limit and hurt your credit score. Keeping a maximum of two credit cards is ideal.
Practice Caution With Old Debts
You may still be aware of your old debts from years ago. Now that you can pay them off, you may want to do so. But doing so may be a bad idea if your creditor marked your old debts as charged-off, which means it's been removed from consideration to your credit score. Of course, you should make an effort to pay off all debts no matter how old they are. However, if you’re trying to get approved for a loan, it would be wise to wait until you’re approved to reintroduce old debts to your report.
Take a Credit-Builder Loan
A credit-builder loan is designed to improve negative credit reports by establishing a trend of timely payments. The borrower takes a loan, but won't have access to the funds until it's paid off entirely with interest.
After the loan is completely paid for, you get to keep the money and your credit report will show an improved history. This type of loan requires discipline, but when executed properly it can help you save money for a car and get a loan at the same time.
Consider a Debt Consolidation Loan
Debt consolidation loans can also help improve your credit score. For this type of loan, your debt will be bundled together and you can borrow the money needed to pay it off. Instead of making payments to multiple sources, you pay a single lender to cover all of your debt.
How Long It Takes to Rebuild Credit
It may take three to six months to consistent rebuilding efforts to improve your credit score meaningfully. Faster improvements are typically only possible after correcting some wrong information on your report. One example of such an error is one month of late bill payments when you were always on time.
Complete credit repair does not have a fixed period. But a credit report that has minimal negative information will lead to an easy credit score repair. It takes longer to repair a bad credit score than to build a good score. The mistakes on your credit report lower your credit score. This can deny the approval of your car loan. It can also make it difficult to get a job, rent an apartment, or set up utility services.
Things to Remember Before Getting a Car Loan
Wondering <a href="https://www.realfx.com/blog/what-can-good-credit-do-for-you/">what good credit can do for you</a> when buying a car? The following are solid reasons for updating yourself with your credit score and situation before you take out a loan for a new or a used car.
Credit scores decide your payment. Affordable monthly payments are essential. This will make it easy for you to maintain a good score. Your interest rate will decrease if you have a good credit score, and you will then have low monthly payments if you have a low interest rate.
Credit scores decide your interest rate. This is a fundamental reason for having good credit before purchasing a used or new car. High interest rates can make it agonizing to make the monthly payments. Improving your credit score can lower your interest rate.
Credit scores decide your eligibility. Your credit score can decide your eligibility for taking out a car loan. The lender will not finance your vehicle if you have poor credit or past car repossession.
Get the Best Car Loan By Improving Your Credit Score
Following these tips can help you <a href="https://www.realfx.com/blog/what-is-credit-score/">get on top of your credit</a> and increase your chances of getting a favorable car loan. It may be intimidating or even discouraging at first. But with the proper steps and determination, your credit score can get high enough for a car loan approval. Car finance companies for bad credit can help you get the car you need at the right time.
For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.2021-10-13T09:19:00-07:002022-04-18T09:34:40-07:00Tony Gilberttag:realfx.com,2012-09-20:7179How to Buy Your First 'Together' Home<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/buying-a-home-married.jpg" alt="Buying a Home as a Married Couple" width="475" />It's no coincidence that people often start thinking about <a href="https://www.realfx.com/blog/getting-a-mortgage-with-a-partner-what-to-know/">buying a home around the time they get married</a> or establish a long-term relationship. Buying a home often requires a higher income, which is typically easier to get with two people working full-time. With these tips, couples who are looking to combine their investment goals with viable housing can make buying a home easier and more productive for the future.
Start With a Professional
There aren't too many financial decisions that are as complicated as buying a home, but <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">real estate investments can set you ahead</a> in the long run. After all, many people only spend hundreds of thousands of dollars at once a few times in their lives. The sheer amount of money involved dictates all kinds of documents and paperwork that is designed to ensure that the buyers understand their obligations to the lender, the seller, and all the companies in the middle.
The best way to navigate the process is to hire a real estate agent with experience buying and selling homes in the area. They have knowledge of the common forms and how to secure the best deal on the buyers' behalf. They have negotiated home buying with all different kinds of people, finding ideal solutions for their unique needs. Real estate agents also know how to negotiate with sellers who usually have their own agents. Working with a professional can not only ensure a better result, but it can also saves a lot of time and money. Spending weeks learning about the basics on your own might not make it any easier to find a good home. Being able to rely on an agent to walk buyers through the steps and make sure they understand everything that's going on ends up being worth every penny in long-term customer satisfaction.
Find Ways to Compromise
Few people are able to find the perfect home at the ideal time. For most buyers, it's necessary to make at least a few compromises. For example, buyers might have to choose a home that is a bit smaller than they'd like in exchange for a great location. Or, people may decide to purchase in an area that demands a slightly longer commute, so that they can afford to buy a bigger home in a better location. Buyers have to plan for these kinds of compromises, because rejecting anything but the ideal home is likely to result in a fruitless home search.
To set themselves up for success, couples should plan to prioritize their needs and wants from a home they would like to own. There may be instances in which one person's needs outweigh the other's, but at first, it makes sense to create separate priority lists. With these lists, couples can compare what they want out of a property and begin to negotiate. If they can sort out the disagreements and come to a consensus before they start actively looking for homes, they'll be able to limit their search only to homes that meet their basic expectations in a property.
Plan for the Long-Term
When buying a home, the best investment couples can make together is to purchase a property that can grow with them and offer them a good future even if they want to sell it. With the average homeowner sticking with a property for about <a href="http://eyeonhousing.org/2013/01/latest-study-shows-average-buyer-expected-to-stay-in-a-home-13-years/" target="_blank">13 years</a>, even newlyweds who aren't planning for kids for a few years should at least consider what sending kids to school will look like in the area. This is a good litmus test for the property's ability to compete in the years to come as well. Homes in <a href="https://realestate.usnews.com/real-estate/articles/how-homebuyers-can-find-a-neighborhood-with-great-schools" target="_blank">great school districts</a> are attractive to home buying families, which means they'll be easier to sell. As an added plus, it's nice to be able to stay put instead of scrambling to find a home in a better district years down the road.
The size of the property and home also matters for couples who want to expand their families (or their interests) in the next several years. People change hobbies and even careers over the course of their lives. A home that will remain useful for a growing family has the flexibility to accommodate this sort of flux. The perfect home might look different among families. Some people might prefer a smaller home and property with a great park nearby, while others want to have several acres so they can really spread out. The key is to find something that isn't too unwieldy to manage at the present while offering plenty of opportunities for the future.
In looking at any property, couples should also ask themselves, "Where is this property going?" <a href="https://www.thebalance.com/buying-a-home-with-good-resale-value-1798336" target="_blank">Resale value</a> is a vital aspect of the home buying process, since so few homeowners buying in their 20s and 30s will live in their homes for the rest of their lives. Real estate agents can provide a gold mine of information about any particular neighborhood or area to give an idea of what may happen to the property in the next 5, 10, or 15 years.
When starting to look for homes as a couple, people should plan to balance their current expectations with their future needs. Organizing priorities and hiring an agent makes it a lot less of a hassle. That way, buyers can get a property that fulfills their basic goals as homeowners, grows with them over time, and will catch a good sale price once they are ready.2020-05-29T06:01:00-07:002020-05-29T06:19:36-07:00Danny Evatttag:realfx.com,2012-09-20:7175Don't Fear the Down Payment: Low Down Payment Options to Consider<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/dont-fear-down-payment.jpg" alt="How to Save For a Down Payment" width="475" />After the housing crisis, it might feel like the whole country went into a panic that lasted for several years. Fears that they had been too lenient in mortgage lending led some institutions to raise the bar significantly, reasserting the dominance of the 20 percent down payment. Since that sort of knee-jerk reaction rarely bodes well in any area of finance, the standards were gradually relaxed once again. The trouble is that the media is still working to catch up. People who hear that first-time home buyers, and particularly people in their 20s and 30s, cannot get a mortgage without 20 percent down, might think that their options are severely limited. The truth is more optimistic than many potential mortgage applicants might expect, so we're going to debunk this <a href="https://www.realfx.com/blog/common-home-buying-misconceptions/">common home buying misconception</a>.
Is the 20 Percent Rule Actually a Thing?
Decades ago, the process for securing a mortgage was quite different than it is today. People often bought homes with a sizeable down payment, because housing prices were fairly consistent with income. When the cost of housing rises independently of average household incomes and dramatically outpaces it, the expectation of a large down payment makes less sense. After all, if the first obstacle to buying a $250,000 home is $50,000 in cash, fewer people will buy homes. As such, the 20 percent rule isn't much of a rule at all. Lenders want borrowers to have somewhat of a financial investment in the purchase, but they recognize that it's good business to keep purchases and sales flowing. As a result, many lenders are perfectly willing to engage qualified applicants with a lower down payment.
What is Down Payment Assistance?
Almost all loans, including the ones that are willing to accept down payments of a few percentage points, expect borrowers to chip in at least a little. For first-time home buyers or people with limited income, states may also offer access to certain kinds of <a href="https://smartasset.com/mortgage/what-you-should-know-about-down-payment-assistance">down payment assistance programs</a>. These programs typically come in the form of a grant or a loan that the borrower is expected to pay back at some point. People who apply for down payment assistance are usually required to live in the home for a specific amount of time. The rules and restrictions on down payment assistance are left to the states and cities where they are applicable. This means that one state or region may have different guidelines than another.
There are even some businesses looking to help Millennials with their down payments, either by investing in the home's equity or trading the costs from the down payment in exchange for renting out a room.
Are There Low Down Payment Loans?
The way that the 20 percent rule is framed makes it seem like mortgages with <a href="http://www.bankrate.com/finance/mortgages/mortgages-no-or-small-down-payment-1.aspx">lower down payments</a> are quite unusual. In fact, they're fairly mainstream, and they may not limit applicants to first-time home buyers. It depends greatly on the loan itself. Lenders are allowed to set their own requirements for mortgages (as long as they don't cross into predatory lending territory), but they are more likely to permit a lower down payment with some support from the federal government.
The Federal Housing Administration (FHA) guarantees certain loans provided by lenders and may allow a down payment as low as 3.5 percent. Loans guaranteed by the Department of Veterans Affairs (VA) or the United States Department of Agriculture (USDA) might not require a down payment at all. People who can't qualify for these loans may be able to get mortgages conforming to Fannie Mae or Freddie Mac. These government-run organizations buy loan debt from lenders that meet their standards. Each offers a mortgage that requires only a 3 percent down payment. There are limits on the applications they will accept, but the guidelines are pretty reasonable.
How Do I Know When I Have Enough to Put Down?
There are benefits to making a low down payment, but there are also advantages to paying more if possible. In a market of growing home prices, being able to get in earlier with a lower down payment allows people to share in the generation of wealth through accumulated equity. However, it's also important to confirm that, in making a lower down payment, the <a href="https://www.thebalance.com/are-you-house-poor-2385832">monthly mortgage payment</a> isn't going to be too high to manage. Being able to buy a bigger house isn't super exciting if there's no money left for anything else after all the bills are paid.
Buying a home is a somewhat arbitrary milestone of adulthood, and people who aren't quite there yet should not feel bad about it. Getting a mortgage is a significant investment with many potential rewards, so it is a worthy goal that can <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">help you get an edge financially</a>. Fortunately, it may take less time to achieve than it has in the past several years.2020-05-27T13:08:00-07:002020-05-27T13:13:40-07:00Danny Evatttag:realfx.com,2012-09-20:7174Home Buying Myths and Facts: Debunking Commonly Held Misconceptions<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/home-buying-misconceptions.jpg" alt="Common Home-Buying Misconceptions" width="475" />Misinformation about home buying is about as American as apple pie. Standards change from one decade to the next, which leads the experienced to provide a different and often inaccurate vision of homeownership to people looking to break into the market. With an ability to distinguish between myths and facts, would-be home buyers can <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">get ahead of their peers with real estate</a> if they realize that buying a home is far more accessible than a lot of people make it seem.
Myth: I Need a Huge Down Payment
The rule that buyers need a 20 percent down payment to buy a home is so pervasive that it borders on discrimination against incoming homeowners. Sure, paying 20 percent down to get a mortgage was once fairly standard when homes cost a few-thousand dollars and wages kept up with inflation. The truth is that plenty of lenders are currently happy to provide mortgages to applicants who can make a <a href="https://www.nerdwallet.com/blog/mortgages/best-zero-and-low-down-payment-mortgage-lenders/">lower down payment</a>, even as low as 3 percent (or in some cases, nothing).
There are several options for prospective home buyers who can't afford the traditional 20 percent down payment, many backed by the U.S. Federal Government. By guaranteeing a part of the loan to lenders if the buyer defaults creates an opportunity where prospective home buyers can qualify to buy a home when they might not otherwise have been able to. A few of the most common loans are as follows:
FHA Home Loan: This loan was offers homeowners the chance to purchase a home with a down payment as low as 3.5 percent and a lower credit score than would traditionally be required. Buyers are required to pay PMI over the life of the loan, but it creates a more accessible starting point for buyers who can't save up for a full 20 percent down payment.
USDA Rural Development Loan: This loan was designed to help lower-income families afford homes and to develop rural areas. USDA loans have strict requirements for income and household location, but buyers can purchase a home without any down payment at all, saving potentially thousands of dollars in up-front costs. Buyers are again required to pay PMI.
VA Home Loan: The VA Home Loan was developed as a part of the GI Bill, and it gives veterans possibly one of the most favorable and powerful options for home buying loans. VA loans require no minimum required down payment, have no restriction based on location, allow buyers to qualify for a home with a lower-than-traditional credit score, and often boast lower interest rates compared to other loan options. They can also be reused indefinitely, allowing veterans to utilize their benefits again and again.
These loans offer several versatile and powerful options for those who want to purchase homes but are held back by the difficulty of saving up for a traditional down payment. They give buyers the power to achieve their goals by lowering the barrier to entry.
Additional options include new businesses that aim to help with down payments.
Myth: I Can't Qualify Alone
Although having two incomes on an application is certainly useful, it is hardly necessary. The idea that <a href="https://www.realfx.com/blog/getting-a-mortgage-with-a-partner-what-to-know/">buying a home with a partner</a> is the only way to buy a home went out with disco music and low college tuition. These days, standardized underwriting guidelines rule much more than a loan officer's personal comfort with an applicant. This means that one borrower with a solid income, good credit history, assets in reserve, and a stable future is just as likely to get a mortgage as a couple with the same qualifications.
Myth: All Mortgages Are the Same
A lot of people with a decent income and credit could probably qualify for a mortgage. What matters is the type of mortgage that a lender offers. There are <a href="https://www.mortgagecalculator.org/helpful-advice/types-of-mortgages.php">different types of mortgages</a> with varying lengths for the term, with two being the most popular:
Fixed-rate mortgage: A fixed-rate mortgage is one where the interest rate on a home loan stays the same throughout the entire life of the loan. This can be valuable for homeowners who purchase during a period with low interest rates, because they can lock into them until their home is paid off or they refinance.
Adjustable-rate mortgage: An adjustable-rate mortgage has an interest rate that changes annually to reflect the current rate of interest year to year. Though this mortgage type is riskier, buyers are often offered a lower interest rate than with a fixed-rate mortgage to compensate.
Lenders might present varying mortgage options to an applicant, letting the borrower decide which one works best for them. Applying to different lenders helps to ensure that an applicant gets the better options available.
Myth: My Credit Has to Be Super High to Qualify for a Loan
Having good credit is important to a mortgage application, because it shows the lender that the borrower is prepared to handle a large, long-term debt. However, this does not mean that a person's credit score has to be absolutely perfect to even qualify, as mortgage application is only one of the <a href="https://www.realfx.com/blog/steps-to-take-to-buy-a-home/">first steps to buying a home</a>. Very good or exceptional credit scores may be associated with greater loan options and lower interest rates, but those with fair or good credit scores could still qualify, giving more people the chance to get ahead financially with real estate. Lenders approving loans guaranteed by the <a href="https://www.fha.com/fha_credit_requirements">Federal Housing Administration (FHA)</a> may allow applicants with a credit score of 500 or higher.
Myth: A Mortgage is Always More Expensive Than Rent
People tend to focus on the price of a home as if it is always going to be more expensive than renting. However, the average cost of rent in any given area is dependent on more than just the cost of housing. High demand could make rent equal to or even <a href="https://www.trulia.com/blog/trends/millennials-rent-or-buy/">significantly more costly</a> than buying a home. People who are willing to make a few concessions in the name of having a housing investment could find that the price of a mortgage isn't much more than rent.
One of the reasons mortgages can seem so harrying is that there are several components that make it up. Homeowners have to pay property taxes, pay for any maintenance or repairs, the mortgage itself, and—if they put less than 20 percent down—private mortgage insurance. That's on top of all the other expenses they would have to pay as renters, such as utilities and insurance. Still, depending on both the housing and rental markets in an individual city, renters can find houses that are comparable in price even after additional expenses, making <a href="https://www.realfx.com/blog/how-to-transition-from-renter-to-homeowner/">transitioning from renter to homeowner</a> a realistic possibility.
Myth: Millennials Aren't Buying Homes, and Many Simply Can't
People in their 20s and 30s have had a slightly harder start in adulthood given the high costs of education and a slowly recovering economy. That said, plenty of people in this age group are buying homes, and they are now the largest segment of the <a href="https://www.nar.realtor/reports/home-buyer-and-seller-generational-trends">home buying market</a>. A bit more flexibility in lending has made it much easier for younger adults to qualify in recent years and discover the <a href="https://www.realfx.com/blog/benefits-of-homeownership-for-millennials/">benefits of Millennial home buying</a>.
The belief that millennials aren't entering the housing market at the rate they should can largely be attributed to the economic crisis of the late 2000s. However, where statistics indicate that millennials are buying at a slower rate, so are all other age groups across the board. If millennials are buying fewer houses than their parent's generation, it has less to do with the behavior of millennials and more with the sluggishness and slow recovery of the housing market. Fortunately, there are many options for <a href="https://www.inspectionsupport.com/resources/first-time-homebuyers-guide/" target="_blank">first-time homebuyers</a>.
Myth: Millennials Only Want to Live in Cities and Shun the Suburbs
Living in an urban area is ideal for many, but it is far from necessary. Many urban areas, such as San Francisco or New York City, feature high housing prices that are harder to reach without owning another home first. The truth is that people in their 20s and 30s are about equally likely to live in a <a href="http://www.latimes.com/business/la-fi-millennial-homes-20170303-story.html">city or suburb</a>. It simply depends on what they want from the property.
It's easy to get pessimistic about the home buying process when there are so many myths about what a person has to do to get a mortgage. <a href="https://www.realfx.com/blog/dont-fear-making-a-home-down-payment/">Don't fear the down payment</a>. Don't let your DTI get too unbalanced. People who are ready to buy homes may be able to get them far more easily than they thought possible, due to reasonable requirements and low down payment options.2020-05-25T13:06:00-07:002022-02-21T12:35:33-07:00Danny Evatttag:realfx.com,2012-09-20:7173How Does a Real Estate Agent Help Home Buyers?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/what-do-real-estate-agents-do.png" alt="What Does a Real Estate Agent Do?" width="475" />Buying a property is a big expense. Like all major purchases, it's nice to have an expert who is trained to handle all the details and is there to make sure the buyer gets fair treatment. A real estate agent hired to serve buyers will work with them through every stage of the process—from identifying their initial needs to explaining all the paperwork on the day the sale is completed. The <a href="https://www.realfx.com/blog/benefits-of-homeownership-for-millennials/">benefits of homeownership for Millennials</a> can be maximized with a real estate agent on your team to help you succeed.
Local Real Estate Expert
Starting the <a href="https://www.realfx.com/blog/how-to-find-the-right-home/">search for the right home</a> a lot of investigation. People can often find themselves mired in information as they browse through the different neighborhoods and available homes in the area, and learning about the <a href="https://www.nerdwallet.com/blog/mortgages/understanding-housing-market/" target="_blank">real estate history and trends</a> within the region can be completely overwhelming. It's a wise idea for buyers to educate themselves on the subject, but there just isn't a perfect replacement for an expert who really knows the area up and down. Real estate agents have the experience to know which neighborhoods are going to be more likely to meet a buyer's expectations and how the home values in that neighborhood have held up over time. This makes it easier for the buyer to catch a good opportunity <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">as soon as they're ready to buy a home</a> without having to spend weeks bogged down in research.
Assistance with Negotiations
Finding homes to look at is only the very first step in home buying. Next, the buyer has to make an offer, persuade the seller to accept it, and negotiate terms that work for everyone. This is harder than it looks, partially because it's not always easy to tell what the seller is hoping to gain from the arrangement besides a good sale price. In this part of the purchase, the buyer's agent <a href="https://www.credit.com/loans/mortgage-questions/how-to-negotiate-best-price-when-buying-home-purchase-offers/" target="_blank">acts like a negotiator</a>, helping buyers to:
Select an offer price that is neither too high nor too low
Negotiate options to sweeten the deal if there are multiple offers
Argue for contingencies that the buyer needs
Serve as a qualified buffer between the buyer and the seller
The seller's agent functions as an advocate for the seller, looking for the best offer possible. The buyer's agent ensures that the buyers' needs retain importance during those negotiations.
Objective Counsel
Anyone who has caught an episode of a house-hunting TV show knows that buyers don't always have the most objective views when they are looking for a home. Less important things like the staging furniture or a paint color can distract from the crucial aspects such as the overall flow of the home or its condition. Real estate agents have plenty of experience looking through homes in various states to determine which ones will serve as a good investment. They can walk with a buyer through a property and identify possible issues, as well as helping buyers to understand the kinds of questions they should ask as they look at different homes. People buying a home together also appreciate the ability to talk to a neutral third party to prioritize their needs. This allows buyers to start the decision-making process on a sure footing.
Guidance With Paperwork
The paperwork associated with buying a home can be very overwhelming—about as much as water is wet. There are so many aspects that need to be considered very carefully, from <a href="https://www.realfx.com/blog/common-steps-in-the-mortgage-process/">navigating the mortgage process</a> to <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">avoiding common mortgage mistakes</a> and submitting necessary paperwork for the home-buying process. One missed point could create months or years of future stress. The real estate agent can <a href="https://www.nolo.com/legal-encyclopedia/home-buyers-what-documents-expect-your-close-escrow.html" target="_blank">go through the paperwork</a> with the buyers and confirm that they understand what each section means and their responsibility once they've signed it. From ensuring that the buyers' interests are represented to verifying that the terms of the sale are appropriately described, the agent serves as an expert eye. There is no replacement for actually reading the information personally and comprehending each piece, whether it's contingencies or <a href="https://www.realfx.com/blog/what-is-the-debt-to-income-ratio-dti/">your debt-to-income ratio</a>. However, the agent can help to parse out the jargon and provide real understanding of the complete implications.
Buying a home in almost any kind of neighborhood requires deep knowledge of the local real estate market, homes that will meet the needs of the buyers, and how to work with sellers to make a practical purchase that satisfies everyone. With a real estate agent there to represent the buyer, people hoping to buy a home can waste less time worrying about what they don't know and need to learn and spend more time making progress toward <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">getting ahead with real estate</a>.2020-05-22T13:06:00-07:002020-05-28T09:34:59-07:00Danny Evatttag:realfx.com,2012-09-20:7172How to Pick the Right Property for Your Needs<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/choosing-the-right-home.jpg" alt="How to Choose the Right Home" width="475" />Thinking about the perfect kind of home can be a fun and engaging part of the home buying process. It is an excellent time to talk to others about what worked for them and what they wish they had done differently. However, it's vital to keep in mind that a buyer's priorities are unique. By putting needs first and being willing to compromise on things that aren't as important, buyers have a better chance of selecting a home that will be satisfying for the long haul so they can reap the <a href="https://www.realfx.com/blog/benefits-of-homeownership-for-millennials/">benefits of homeownership for Millennials</a> and <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">get ahead of peers using real estate</a>.
Picking the Right Home
Get five people into one room and tell them to come up with everything they need for a home, and there will be five different answers. Buyers who have to negotiate with a spouse, partner or co-buyer often find that there is some conflict in deciding what they need most in a home. Once you've decided you're <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">ready to buy a home</a>, negotiating before starting to look at houses helps put needs first and avoids arguments in front of a real estate agent.
Ensuring Room to Grow
Buying a home that's perfect for right now and for a few years into the future is a bit of a tightrope walk. On the one hand, having space for everything is important. On the other hand, paying a boatload to buy a house that will be perfect for the three kids that don't yet exist may not be practical. Even if buyers are planning to move up to a larger home in 3–5 years, that might not happen. Buying a home with enough <a href="https://qz.com/40707/meet-the-prototypical-american-home-three-bedrooms-two-bathrooms-and-central-air/" target="_blank">bedrooms and bathrooms</a> to make living there feasible for several years is the best way to ensure buyers can stay secure should the housing market be unfavorable for them.
Ideal Amenities
People say a lot about the number of bedrooms and bathrooms, but the rest of the space should also be useful. An open floor plan is perfect for the person who wants a place with a lot of room to move. A kitchen the size of an orange crate isn't going to work well for someone who spends all their free time cooking and baking. The practicality of certain add-ons requires some debate. A big backyard has a lot of potential for gardening and entertaining, but it can also be time-consuming and expensive to maintain.
Reasonable Resale Value
The future resale value of a home needs to be a big part of the decision as well. The average homeowner lives in a home for about <a href="https://chicagoagentmagazine.com/2013/01/07/nahb-study-average-homeowner-to-stay-in-home-for-13-years/">13 years</a>. That's enough time to ride out some dips in home values, but anyone who wants to sell sooner should buy something with good potential. This may take a little research and some input from a real estate agent familiar with the history of the market in the area. However, you should also make the common mistake of <a href="https://www.realfx.com/blog/common-steps-in-the-mortgage-process/">applying for a mortgage</a> on a home that's too expensive for you, as it can cause <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">difficulty in getting a mortgage</a> and negatively impact your <a href="https://www.realfx.com/blog/what-is-the-debt-to-income-ratio-dti/">debt-to-income ratio</a>.
Choosing the Right Neighborhood
Finding the best place to live concerns more than just the home itself. The best property on the planet may get old quickly if the commute to work takes an hour one way. Considering the neighborhood carefully sorts out the ideal choices from the options that are less practical for the long-term.
Inside the Neighborhood
Buying a home gives people their one best chance to be in an environment that works ideally for them. Neighbors' attitudes toward their own homes, and future resale values of the homes on the street, are only one part of the equation. Buyers who don't have kids at present but want to start a family should check out the playgrounds in the neighborhood as well as the <a href="https://realestate.usnews.com/real-estate/articles/how-homebuyers-can-find-a-neighborhood-with-great-schools">local schools</a>. Subdivisions with a lot of community activities may be perfect for people who like to get involved and make new friends.
Comparing Outside Factors
Situating the neighborhood in the broader area assists buyers in narrowing down the features they need the most. Location is important, not just for resale value but for overall contentment with the property. Access to utilities, like natural gas or fast Internet services, varies from one region to the next. Proximity to work, entertainment, and shopping make it easier for homeowners to get elsewhere with less hassle. People who work a traditional schedule should also think about the kind of traffic they'll face in and around the neighborhood.
Taking weeks or even a month to debate all these factors and put everything in order is the best way to target a home search. Organizing by needs and wants makes it easy to limit the possible homes to those that will meet all major needs both present and in the near future. Reach out to <a href="https://www.realfx.com/blog/what-does-a-real-estate-agent-do/">a real estate agent who can help you with the process</a> and get you into the right home for you.2020-05-21T13:05:00-07:002020-05-28T09:34:46-07:00Danny Evatttag:realfx.com,2012-09-20:7171What is the Debt-to-Income Ratio and Why Does it Matter?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/understanding-debt-to-income.jpg" alt="How the Debt-to-Income Ratio Affects Your Home-Buying Prospects" width="475" />Debt-to-income ratio is the seemingly ‘magical’ formula lenders use to determine if an individual’s monthly income is adequate to live somewhat comfortably, to pay his/her current debts, and to assume a mortgage payment. In other words, DTI determines if you are a safe bet when it comes to loaning you money and <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">if you’re ready to buy a home</a>.
Buying a home is the first step towards <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">getting ahead of peers with real estate</a>, and the first step towards buying a home is getting a mortgage. Getting a mortgage is all about your <a target="_blank" href="https://themortgagereports.com/13777/debt-to-income-for-mortgages-explained-in-plain-english">debt-to-income ratio</a>. The core of DTI are the calculations that describe a person's monthly debt load as compared to their monthly gross income. If your cumulative debts are too high, you should reduce and/or pay off those debts before applying for a mortgage.
Mortgage lenders break Debt-to-Income Ratio into two parts:
Front-end ratio: This is the percentage of your income consumed by mortgage expenses on the type of home you want to purchase.
Back-end ratio: This is the percentage of your income consumed by all debt burdens.
In general, to approve a mortgage, most lenders require potential homeowners to maintain a front-end ratio <a target="_blank" href="http://www.bankrate.com/finance/mortgages/how-much-house-can-you-buy—1.aspx">no greater than 28%</a> and a back-end ratio no greater than 36%. This is why the need to pay down and/or off credit card and other debts is often stressed. The lower your front-end ratio, the better your chance of getting a mortgage and a good interest rate.
It should be noted that debt-to-income does not indicate your willingness to make a monthly mortgage payment or mean you can't <a href="https://www.realfx.com/blog/benefits-of-homeownership-for-millennials/">benefit from buying a home</a>. It only measures a mortgage payment's economic burden on a household.
Click here to <a target="_blank" href="http://www.bankrate.com/calculators/mortgages/ratio-debt-calculator.aspx">calculate your debt-to-income ratio</a>.
How a Good DTI Benefits You
There are 3 reasons:
Available credit: While suggesting you pay off as much debt as possible in order to acquire a mortgage, acquiring a mortgage adds substantial debt to your DTI. And to add debt, you need good credit. This is why paying your bills on time, or even a day or two early, is so important. The better your credit score, the lower your interest rates will be. This is particularly true for credit cards, and in the end, you will need to furnish your new home.
Interest rates: Mortgage rates do fluctuate, just not as wildly as credit card interest rates. When you are looking at a $225,000 mortgage over 15 or 30 years, even ¼ of a percent adds up to a lot of money in the long run.
Home buying potential: <a target="_blank" href="https://themortgagereports.com/10854/how-much-mortgage-can-i-afford">How much house can you afford</a>? That seems like a basic question, but it can be mystifying when it comes down to figuring it out. Part of the answer will lie with your mortgage lender – FHA, Fannie Mae, Freddie Mac, a credit union, or a bank. The lower your mortgage interest rate, the more house you can afford if you have a favorable debt-to-income ratio and a sufficient down payment.
How to Improve Your Debt to Income Ratio
Improving your debt-to-income ratio is the key to obtaining a mortgage. Lowing your DTI is necessary and can be done in two ways. First and foremost is to reduce your recurring (monthly) debt and avoid common mistakes with your debt that will make it <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">difficult to get a mortgage</a>.
The other way is to increase your monthly income, which is not always an easy prospect. By this, we are not suggesting you add twenty or more hours to your weekly work schedule! The last thing you want to do is put your regular job in jeopardy.
Is there a second job you could do perhaps on a Saturday or Sunday only? What about freelancing opportunities you could pursue from home on your own time? Thinking creatively about how to increase your income might just turn up some great ideas.
Take time to pay down your debt and increase your income in order to improve your DTI, and you should be able to <a href="https://www.realfx.com/blog/how-to-find-the-right-home/">buy the right home for yourself</a> with no issue. If you’re unsure how to navigate the process, <a href="https://www.realfx.com/blog/what-does-a-real-estate-agent-do/">reach out to a real estate agent</a> who can help you with buying a home.2020-05-20T13:03:00-07:002020-05-28T09:34:33-07:00Danny Evatttag:realfx.com,2012-09-20:7170The Benefits of Homeownership for Millennials<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/benefits-of-homeownership-millennials.jpg" alt="What are the Benefits of Homeownership for Millennials?" width="475" />We are now a decade beyond the housing bubble that burst between 2007 and 2008. However, there are still some issues that mitigate home buying accessibility for millennials and Gen Z’ers. Affordability, coupled with the 20% down payment required in the <a href="https://www.realfx.com/blog/common-steps-in-the-mortgage-process/">mortgage process</a> by traditional banking institutions, are the primary prohibitive factors for the younger generations deciding whether they’re ready to <a href="https://www.realfx.com/blog/options-for-first-time-home-buyers/">buy their first home</a>.
How Student Loans Affect Home Buying
Additionally, student loan debt and lower credit ratings tend to hamper a steady <a href="https://www.realfx.com/blog/what-is-the-debt-to-income-ratio-dti/">debt-to-income ratio</a> towards purchasing their first home. However, both generations— particularly millennials—do <a target="_blank" href="https://www.cnbc.com/2017/05/26/most-millennials-want-to-buy-a-home-but-about-half-have-nothing-saved.html">have the desire to become home owners</a> despite their lack of having enough saved to meet this goal. As such, month after month, Millennials and Gen Z’ers continue to hand over a good portion of their paychecks to landlords. Rather than reaping the benefits of building equity in an appreciable asset, the younger generations are transferring that financial advantage to the home’s owner.
The Benefits Millennials Have For Home Buying
From a social standpoint, Millennials are ahead of the curve, although it is a common home buying misconception that they can never buy one. Millennials are known for their generosity and social consciousness, but they’re also known to struggle with developing strong financial skills. How can millennials overcome this gap? It’s commonly held that <a href="https://www.realfx.com/blog/steps-to-take-to-buy-a-home/">taking steps towards buying a home</a> and generating equity is a fundamental path to financial freedom.
Home and land ownership are assets that continue to appreciate in value over time, which is in stark contrast to credit cards and automobiles that provide access to depreciable assets. However, even if you’re not yet <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">ready to buy a home</a>, it’s prudent to think in terms of your long term financial health as well. And the benefits of home ownership are a part of that holistic equation.
Advantages of Purchasing a Home
There are additional advantages to purchasing a home beyond having equity in an appreciable asset. Taxes are an inevitable requirement of all governmental institutions, and homeownership provides certain tax incentives that help offset your tax bill. Of course, conferring with a licensed tax professional is the best method for determining exactly what can be written off throughout the year.
Another benefit is the greater freedom you have with regard to your personal living arrangement. Landlords restrict what you can and cannot do to the property. Want to paint the walls? You’ll need to clear it with your landlord first. Want to adopt a pet? Pet adoption places tend to be wary of adopters who don’t own their home, and some even call your landlord directly to make sure that adding a fur baby to the family is acceptable. Freedom is the key concept here.
When is Buying Cheaper Than Renting a Home?
Finally, depending on the area you intend to <a href="https://www.realfx.com/blog/how-to-find-the-right-home/">buy the right home</a>, buying becomes cheaper than renting within a 5- to 10-year time span. Again, the metrics are largely based on the price of the home that you intend to buy—which is in turn dependent on the housing demand within a particular city—in contrast to the going rate for rent in that same area. It’s even more achievable when <a href="https://www.realfx.com/blog/getting-a-mortgage-with-a-partner-what-to-know/">buying a home as a married couple</a>.
But, even if it does take 10 years to yield the financial benefit of <a href="https://www.realfx.com/blog/how-to-transition-from-renter-to-homeowner/">buying a home versus renting</a>, you’ll still be building equity, which you can turn around and use for access to emergency cash through an equity loan or line of credit. Your home is viewed as prime collateral for asset-based lending. This is not to say that you should dip into your equity for the purpose of taking repeated and lengthy vacations or to spend the money on an impulsive shopping spree.
Using Home Equity to Increase Your Home’s Value
Alternatively, equity lines of credit or loans can be used for home improvements, which help to boost the value of your home. The goal here is to reinvest the money into something appreciable or use it in an emergency. You want to offset the lending expenses incurred, such as the annual percentage rate, and continue to build equity that results in a larger payout should you decide to sell the home at a future date. This is crucial when it comes to <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">getting ahead of peers with real estate</a>.
Home buying has definitive pros and cons. However, investing in homeownership provides both financial and lifestyle benefits that eclipse continuing to be a renter in a homeowner’s world. See <a href="https://www.realfx.com/blog/what-does-a-real-estate-agent-do/">what a real estate agent can do</a> for you today in terms of finding the right home for you, <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">avoiding common mortgage mistakes</a>, and navigating the real estate process.2020-05-19T13:02:00-07:002020-05-28T09:33:43-07:00Danny Evatttag:realfx.com,2012-09-20:7144Can Student Loans Affect Your Ability to Buy a Home?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/student-loans-affect-homeownership.jpg" alt="Can Student Loans Affect Your Ability to Buy a Home?" width="475" />Getting a good education to land a solid, well-paying job with benefits is expensive and getting costlier every year. Students enrolling in a four-year institution can expect to pay at least $37,000 a year for tuition, fees, room, and board. People are put in the awkward paradox of needing a decent annual income just to get the education for a job with a decent annual income. Since scholarships and grants are restricted and can only go so far, student loans are a popular alternative for college financing. Used wisely <a href="https://www.realfx.com/blog/introduction-to-budgeting/">alongside careful budgeting</a>, student loans could help college students establish a respectable credit history. The repayment of student loans may result in long-term benefits or consequences for borrowers.
Building Credit with Student Loans
All money lent to a person may be reported on their credit reports. Some debts show up on all three reports from the three credit reporting agencies, while others report to only one or two. This explains some of the differences between reports. Fortunately, student loans can be a good way to build a <a href="http://www.experian.com/blogs/ask-experian/credit-education/improving-credit/building-credit/">credit history</a>. Potential lenders hope to see an applicant with a varied credit history, which can be harder to prove in young adulthood. Someone who has never purchased a car or put debt on a credit card can build a credit history with regular repayment of their student loans.
Since student loans are often a long-term debt for borrowers, they can allow people to establish years of good credit. On-time payment of debt is a significant portion of a person's credit score, so a debt that's paid in at least the minimum prior to the due date each month sets them up for future success. Depending on the type of student loans, borrowers may be able to negotiate some terms of the loan, including the minimum monthly payment. This allows people to ensure a higher likelihood of compliance in repayment of the student loans.
Minimizing Negative Credit Impacts from Student Loans
As with any debt, what gets reported to the credit reporting agencies has a notable effect on credit score and overall creditworthiness. On-time payments look good, but one or two <a href="https://www.creditkarma.com/article/what-happens-if-you-default-on-a-loan-21816">late payments</a> or missed payments have the potential to negate a year or more of on-time payments. Underemployment can be a common cause of missed payments, and a lower-paying job can turn the minimum student loan payment into an impossible situation. In this case, it's typically better to look for alternatives to missing payments as <a href="https://www.realfx.com/blog/debt-repayment-planning/">part of your debt-repayment strategy</a>, such as:
Payment deferment or forbearance (granted based on need)
Debt consolidation under a single monthly payment
Extension of the repayment plan
Graduated payments intended to rise with future income
Access to these programs depends on the type of loan and whether it's a private loan or one guaranteed by the federal government. Defaulting on student loans can also affect a borrower's ability to defer or restructure payments. If you're able to plan in advance, you might <a href="https://www.realfx.com/blog/what-to-know-about-student-loan-refinancing/">refinancing your student loans</a> for a better rate, as well.
Getting a Mortgage While Managing Student Loan Debt
Besides affecting credit score, student loans could alter a mortgage applicant's ability to buy the home they want. While credit scores are partially based on debt to available credit, mortgage qualifications often follow strict guidelines about monthly debt obligations in relation to income. Many lenders limit the total amount of debt to an applicant's income to <a href="https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/">43 percent</a> of gross income, including the mortgage payment itself. Other lenders may set the limit even lower to 36 percent of gross income. The lower the monthly non-mortgage debt, the higher the mortgage amount applicants could receive. People with higher monthly debts may only qualify for a smaller mortgage amount, as a result.
Restrictions on debt-to-income may encourage borrowers to consider the monthly payments they make on student loans each month, and how it might affect the price of the house they can afford to buy. Interest rates on student loans carry a lot of weight on the monthly payment, and private loans tend to have higher interest rates than federal student loans. As such, it may make sense to look at options to cut down on the student loan monthly payment to qualify to buy a better home.
With the way that college expenses have risen in the past <a href="https://nces.ed.gov/fastfacts/display.asp?id=76">15 years</a>, managing student loans is something that young adults have had to face much more than their parents. Starting a career path with a lot of debt can be frustrating when previous generations didn't have to. The good news is that with a <a href="https://www.realfx.com/blog/student-loan-repayment-possibilities/">solid plan to repay student loans</a>, people can tackle their debts and build a good financial future at the same time. Soon enough, you may find yourself in a good position in a <a href="https://www.realfx.com/blog/can-you-buy-a-home-while-paying-off-student-loans/">good position to buy a home with student loans</a>.2020-05-18T09:01:00-07:002020-05-18T09:08:19-07:00Danny Evatttag:realfx.com,2012-09-20:7127Still Paying Off Student Loans? Can You Buy a Home? Should You?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/buy-home-with-student-loans.jpg" alt="How to Pay Student Loans While Buying a Home" width="475" />Whether you are a recent grad or have been in the workforce for a few years, the reality of still paying off your student loan debts can be intimidating, if not downright scary, when you think about assuming a mortgage payment. When you feel like you’ll never be able to buy a home because of your student loans, compounding your trepidation are other debts you might have—things such as a car payment and credit cards. Most of all, for recently graduated students, you may think your student loans disqualify you from buying a home—but this is just a common misconception.
Like with anything, there are two sides to the decision to purchase a home. It all depends on your situation, your goals, and your comfort level with the choice.
We’ll first go through the pros and cons and then share the process, tools, and insights into getting a mortgage while <a href="https://www.realfx.com/blog/student-loan-repayment-possibilities/">managing your student loan debt</a>.
Let’s address the downsides first.
Reasons Why Buying a Home in the Immediate Future Might Not Be Right for You
The thought of being “house-poor” scares and depresses you, so you’re resistant to jumping into homeownership. Perhaps you remember your parents being overwhelmed by more than a few of the hidden costs that seem to go with homeownership—most often at the worst possible times. Things like a suddenly leaking roof or an HVAC system that dies aren’t DIY projects and can be costly. Many of the more regular maintenance issues such as gutter cleaning and deck refinishing can be handled perhaps with the help of a friend or a neighborhood teen.
The thought of being “tied down” just doesn’t fit your current needs. You haven’t a clue where you want to be in 5 or 10 years; your job involves a fair bit of travel and/or career upward mobility most likely will involve relocation, or you’re considering a career move; these are all valid reasons for continuing to rent.
Reasons Why Buying a Home Might Be Best Readdressed in a Year
You want to buy a home but know you need to <a href="https://www.realfx.com/blog/debt-repayment-planning/">clear up some debt with debt repayment planning</a> and improve your credit score. We’ve shared a number of articles on how to <a href="https://www.realfx.com/blog/introduction-to-budgeting/">create a livable budget</a> that allows you to reduce debt and save for a down payment.
The single most important element in being approved for a mortgage is your <a target="_blank" href="https://themortgagereports.com/13777/debt-to-income-for-mortgages-explained-in-plain-english">debt-to-income ratio</a>. Debt to income is the financial lending term that describes a person's monthly debt load as compared to their monthly gross income.
It makes sense to lower your debt-to-income ratio prior to applying for a mortgage, which can be done by decreasing your debts or increasing your income. If you’ve recently married, buying a home with your partner is one way to increase your income for the purchase. While you’re lowering your debts, spend the time investigating the optimal neighborhoods in which to purchase your home, the style of home that best suits your needs, potential resale values, etc.
Paying off debt from credit cards and possibly <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">paying off your car loan</a> will improve your DTI substantially. Concurrently, save for a down payment, and <a href="https://www.realfx.com/blog/what-to-know-about-student-loan-refinancing/">consider refinancing your student loans</a> if they have a high-interest rate. These are steps you will need to take prior to applying for a mortgage.
Why You Should Buy a Home While Paying off Student Loans
When can you tell if you’re ready to buy a home without being affected by student loans? Here are a few signs. You want to buy a home and your personal, work, and financial parameters all indicate homeownership is a wise choice.
Your debt-to-income ratio looks good. This is particularly true in your front-end DTI is significantly less than 28%.
You’ve saved up a sizable down payment. You’ve been able to pay down your loans and also save enough for a 20% or higher down payment.
You’re making enough money to handle the costs that accompany homeownership.
You could get more for your money. Not only will you build equity but possibly get more for your money by buying instead of renting.
You have a low-interest student loan. Student loan interest rates <a target="_blank" href="http://money.usnews.com/money/personal-finance/articles/2014/12/11/5-debts-you-should-pay-off-now-or-later">tend to be lower</a> than other loans, such as auto and credit cards. Student loans allow an extended repayment period. They’re also unsecured, which means that you don’t risk losing any personal collateral should you need to stop paying them for a certain time.
The best example of this would be to <a target="_blank" href="https://studentloanhero.com/featured/pay-off-credit-card-debt-faster/">repay $10,000 in credit card debt </a>versus paying off the same $10,000 in student loan debt.
If you’re <a href="https://www.realfx.com/blog/can-student-loans-affect-your-ability-to-buy-a-home/">ready to buy a home despite student loan debt</a>, there are a number of options first-time homebuyers can utilize.
Good News for Home Buyers with Student Loan Debt
By and large, homeownership is beneficial for Millennials, and fortunately, the FHA (Federal Housing Authority) has issued <a target="_blank" href="https://themortgagereports.com/20699/fha-deferred-student-loan-payments-update">Revised Student Loan Mortgage Qualification Guidelines</a>.
Deciding if homeownership is right for you depends more on when than anything else, and there are always steps you can take towards buying a home. All the other steps you can plan ahead of time.2020-05-13T10:17:00-07:002020-05-28T02:51:03-07:00Danny Evatttag:realfx.com,2012-09-20:7124How to Get Ahead of Peers With Real Estate Investing<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/get-ahead-with-real-estate.jpg" alt="How to Get Ahead of Your Peers With Real Estate" width="475" />Buying a home seems like such a common act, that it may not seem obvious what a good investment real estate can be. Everyone needs some form of housing, which means that access to affordable real estate will always be in some sort of demand. The <a href="https://www.realfx.com/blog/steps-to-take-to-buy-a-home/">benefits of homeownership</a> are many, and people who tap into real estate investment when they are young adults have the opportunity to build great wealth, often without a ton of maintenance to keep the investment going. Investors who can make the monetary investment and buy properties with growth potential may find that their futures are set long before they are ready to retire.
Accumulating Wealth with Real Estate Investment
For many people, <a href="https://www.thebalance.com/why-should-i-invest-in-real-estate-2867083">real estate investment</a> is the first kind of investment they make and one of the first steps they take outside of <a href="https://www.realfx.com/blog/introduction-to-budgeting/">basic budgeting</a>. After all, people have to live somewhere. In areas where the cost of rent is competitive to the cost of housing, buying a home and <a href="https://www.realfx.com/blog/how-to-transition-from-renter-to-homeowner/">transitioning from renter to homeowner</a> is a very reasonable way to create a passive source of wealth accumulation for the future while providing a place to live in the present. In most cases and over a period of many years, homes and properties will gain in value, so long as the owner performs basic maintenance and upgrades to ensure that it remains a viable place to live. Buying a first home often gives people the confidence they need to branch out into other forms of real estate investment, such as the purchasing of investment properties or real estate investment trusts. The end result is an increase of passive income that can snowball over time, and help to secure a person's financial future.
Real Estate Investing in Your 20s and 30s
Probably the biggest hurdle that younger adults have to contend with as they start to investigate real estate investment is <a href="https://www.moneyunder30.com/real-estate-investing-in-your-twenties">cash flow</a> and the idea of having to pay student loans while buying a home. It's the bottom line of virtually any small business, making sure that there is enough money coming in to keep the banks happy and the bills paid. People who are hoping to buy homes on the cheap, fix them up and sell them quickly at a higher price (i.e. “house flipping”) should be able to cover the mortgage while they make upgrades and get the home ready to sell. Investors who want to purchase a property to rent out to a tenant need to be ready to make payments until they can secure a tenancy and be able to ride out periodic vacancies. The earlier people start the process, however, the more wealth they can build over time.
Real Estate Investment Types
Although the idea of buying a single-family property and renting it out to tenants is a common example of real estate investment, it's hardly the only choice available. Some people have the income and available assets to purchase a multi-family property, such as a duplex or four-unit apartment building, with a goal of living in one of the units and renting out the others to qualified tenants. With experience and increased cash flow, investors can consider these <a href="https://www.thebalance.com/different-types-of-real-estate-investments-you-can-make-357986">investment types</a>:
residential real estate
commercial real estate
industrial real estate
retail real estate
mixed-use real estate
There are plenty of <a href="https://www.realfx.com/blog/options-for-first-time-home-buyers/">options for first time home buyers</a>, even those hoping to get into investing. People who want to break into real estate investment but don't want to deal with the individual properties, or who have limited assets available, might also consider real estate investment trusts. This concept involves purchasing shares in a corporation that owns real estate properties and splits income from rentals or sales to its shareholders.
Factors to Consider Before Getting Started
The biggest thing to remember is that <a href="https://retirementinvestments.com/how-to-invest-in-real-estate/" target="_blank">investing in real estate</a> is almost always a long-term endeavor. People who get into it hoping to become a millionaire within a few years are <a href="https://www.realfx.com/blog/common-home-buying-misconceptions/">falling victim to common home-buying misconceptions</a> and will probably be disappointed, and anyone pitching that kind of return may not be on the level. Instead, would-be investors will be best off if they plan carefully and choose properties that are likely to gain a good return over a period of several years. Areas with a high cost of living could be harder to start with but provide a higher rate of return over time. Similarly, regions where the cost of real estate properties is low may have a lower barrier to entry, but might not be able to guarantee a steady rate of growth or an easy selling process.
One useful trick is to research the common problems with real estate in the local neighborhoods and commercial spaces, and identify niches or possible ways to solve those problems. Offering real estate options that are in high demand, with low market saturation, is a great way to establish an investor's relevance at first and preserve that relevance in the years to come.
It's wise for anyone looking to get involved with real estate, <a href="https://www.realfx.com/blog/getting-a-mortgage-with-a-partner-what-to-know/">outside of personal ownership by themselves or with a partner</a>, to <a href="https://www.biggerpockets.com/renewsblog/2015/06/14/invest-in-real-estate-using-llc/">establish themselves as a business</a> so that their personal lives have some basic protections. Real estate investment can lead to millions of dollars in revenue, but it sometimes leads to losses. Creating a barrier between the actions of the business and its owners helps to protect their financial futures.
<a href="https://www.realfx.com/blog/millennial-home-buying-myths/">Contrary to common Millennial myths</a>, real estate investment might be one of the most practical and easily accessible methods of investing, particularly for people who have several decades before retirement and have a chance to <a href="https://www.realfx.com/blog/tax-tips-to-save-more-of-what-you-earn/">take advantage of tax benefits that help millennials</a>. By starting early and buying wisely, people can enjoy the profits of their investment and allow the growing wealth to finance their lives as they see fit.2020-05-08T08:31:00-07:002021-11-18T08:11:28-07:00Danny Evatttag:realfx.com,2012-09-20:7105Tax Tips to Save More of What You Earn<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/tax-tips-save-what-you-earn.jpg" alt="Tax Tips for Saving the Money You Earn" width="475" />It's often said that corporations don't pay anywhere near as much in taxes as individuals, and that the rich often have access to tax shelters that the working and middle classes can only dream of. How is this even possible? With the complications and intricacies of the United States tax code, there are many ways that high earners can reduce their tax liability and keep more of their income each year. These tips make it easier for people with moderate or higher incomes to maximize their tax deductions and <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">find ways to get ahead financially</a>.
Planning for Future Income
One of the most important keys to managing wealth is to plan for the long-term. Tax predictions don't always make sense if they are done one year at a time. Instead, experts suggest that people who need to balance possible tax deductions against higher income plan to claim deductions in the year where it will make the most impact. Deciding to maximize tax-deferred deductions, like retirement contributions, in a higher income year will reduce the tax liability to a greater degree than in a year with lower total income.
Maximizing Retirement Savings and Tax Deductions
Planning for retirement is a must for anyone who can't expect that Social Security will provide them any more than a supplemental income. The Internal Revenue Service makes it fairly easy to contribute to an employer's existing retirement plan. As of 2019, individuals under age 50 are allowed to contribute up to <a href="http://www.pensionrights.org/publications/fact-sheet/retirement-plan-contribution-and-benefit-limits">$19,000 per year</a> to a 401k, 403b or 457 savings plan. If they make less than $118,000 filing jointly, their contributions can be tax-deferred or deducted from their taxes. People with a limited income may also have access to the <a href="https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-savings-contributions-savers-credit">retirement saver's credit</a>, which permits a yearly credit of up to $1,000 on a maximum $2,000 in contributions.
Although contributing to a 401k is a very common method for people to plan for retirement, the use of an <a href="https://www.irs.gov/retirement-plans/2017-ira-deduction-limits-effect-of-modified-agi-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work">Independent Retirement Account</a> (IRA) also carries some potential deductions. The maximum amount of the deductions depends on the person's income, filing status, and access to a retirement plan at their place of employment. However, many people are allowed to deduct up to $5,500 per year of contributions to a traditional IRA. People should carefully consider the benefits of contributing to a traditional IRA compared to a Roth IRA if they meet the income requirements for a Roth IRA. While contributions to a traditional IRA can be tax-deferred, they cannot with a Roth IRA. It is up to the person to decide if their tax burden is greater at the present, or if they would rather pay the taxes now and claim withdrawals from a Roth IRA tax-free after they retire.
Itemizing Deductions
When people start to increase income and generate some wealth, they need to think about the benefits of itemizing deductions. This is often how a lot of people are able to significantly decrease their tax liability. Although the <a href="https://www.irs.gov/publications/p936">mortgage interest deduction</a> is common and possibly the best-known of the itemized deductions, there are others to factor in as well.
Mortgage Interest Deduction
When people buy a home, they spend the bulk of their mortgage payments in the first few years paying interest. This can be a handy tax break when homeowners need it most. With a few exceptions, buyers who obtain a mortgage to purchase a home to live in as a primary residence can deduct all the interest they pay, as long as the total mortgage balances are less than $1 million for a married couple filing jointly.
Medical Expenses
People who pay for their own health insurance premiums or who have a lot of medical expenses should consider tracking these expenses and claiming them as an itemized deduction. In order to claim the deduction, the expenses must exceed 10 percent of a person's adjusted gross income. Only the amount exceeding 10 percent can be claimed. People who have insurance provided through their employer may conclude that contributing to a pre-tax flexible spending account may help to minimize their tax liability without the same spending requirements.
Donations
Donations to charity, with some exceptions, might not be enough alone to justify itemizing expenses. When taken at the same time as the mortgage interest deduction, however, deducting the cost of money and goods given to charity might lower a persons' tax liability by a few-hundred dollars.
Taking Advantage of Favorable Rates on Capital Gains
Owning a business or selling property involves capital gains, which might be a very practical way to invest and save money on taxes. Selling a primary residence usually carries with it a capital gains tax exclusion of up to $250,000 for a single person, or $500,000 for a married couple filing jointly. Long-term capital gains taxes (on items held for at least one year, typically) are lower than tax rates on regular income. Putting money into an investment, business, or property and selling at an ideal time might lead to a lower tax liability on the income as a whole.
With greater income often comes a higher tax liability and a higher responsibility to <a href="https://www.realfx.com/blog/introduction-to-budgeting/">manage your budget well</a>, but that doesn't have to be the case across the board. By taking advantage of these tax tips, earners can find ways to put more of their income into practical use for the present and future while lowering their tax liability at the same time. <a href="https://www.realfx.com/blog/millennial-home-buying-myths/">Millennials don't have to be trapped financially</a>: Here are a few tips to get ahead.2020-05-07T07:14:00-07:002020-05-13T09:24:10-07:00Danny Evatttag:realfx.com,2012-09-20:7097Common Steps in the Mortgage Process<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/steps-of-the-mortgage-process.jpg" alt="Common Steps in the Mortgage Process" width="475" />Applying for and receiving a mortgage is a complicated process with many steps behind the scenes, but it can help you <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">get ahead of your peers using real estate</a> for financial security. With a better knowledge of what to expect, buyers can understand why this process takes time, and make individual stages run more smoothly.
The <a href="https://www.realfx.com/blog/benefits-of-homeownership-for-millennials/">benefits of homeownership for millennials</a> are vast, but a better understanding of the process is critical before starting.
Pre-Qualification vs Pre-Approval
<a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">When you're ready to buy a home</a>, one of your first steps is going to be preparing the financials for a mortgage. Getting pre-qualified for a mortgage is not the same as <a href="https://www.consumerfinance.gov/ask-cfpb/whats-the-difference-between-a-prequalification-letter-and-a-preapproval-letter-en-127/">pre-approval</a>, and there's an important distinction. Pre-qualification supposes that an applicant would be approved for a mortgage, given a specific set of circumstances. By comparison, a mortgage pre-approval letter is something that buyers can use in an offer to purchase a home. Unlike pre-qualification, pre-approval requires examination of the documentation the applicant has given to confirm that the interested buyer meets the lender's standards for a mortgage. Although pre-approval isn't a guarantee of funding, it shows that the lender would grant a mortgage, pending a fair home appraisal and assuming that the buyer's financial situation remains the same.
Organizing Financial Documents
The best way for home buyers to speed up the mortgage process is to get all relevant <a href="http://www.bankrate.com/finance/mortgages/documents-you-need-to-get-a-home-mortgage-1.aspx">financial documents</a> in order before applying. The less work the lender has to do to locate this information, the faster they can make an offer. Prospective borrowers should gather:
Recent paystubs
Verification of employment or business earnings if applicable
Proof of the amount of debts they have
Bank statements to show assets in reserve
They should also take an updated look at their credit reports and scores to confirm that everything seems to be correct. Be careful to avoid common <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">mortgage mistakes that affect your ability to get a mortgage</a>.
Finding a Home and Making an Offer
Mortgage pre-approval is often a useful task to complete before searching for homes because it gives buyers a very specific range to look for. Buyers are encouraged to look for homes that meet their needs but aren't required to take out the maximum amount they are approved to spend. <a href="https://www.nerdwallet.com/blog/mortgages/making-an-offer-on-a-house/">Making an offer</a> in a hot market can be tricky, especially if the average prices come close to the buyer's maximum limit. Buyers should get expert advice before making an offer that's too high because mortgages are usually dependent on an appraisal that comes close to the agreed-upon sale price.
Mortgage Loan Application
The mortgage application itself can be simple or complicated depending on how much information the buyer has in hand. Applicants who have already gone through the pre-approval process have provided information about their income, debts, and assets. A formal application for a mortgage loan also includes information about the property in question, such as its location, size, sale price, property taxes, homeowners association dues, and the anticipated closing date. The <a href="https://www.realfx.com/blog/what-does-a-real-estate-agent-do/">real estate agent</a> can usually provide this data for the lender.
Loan Processing
At first, the lender aims to make sure that all information is collected. Precision in the application is key because the lender can spot and request an explanation for any discrepancies in the application. During loan processing, the lender (or a third party hired by the lender) will confirm that all documentation is present and that the information provided depicts the most accurate picture. Applicants may receive contact during this time to explain inaccuracies or to give more documentation.
Underwriting
The <a href="https://www.thebalance.com/understanding-the-mortgage-underwriting-approval-process-2395236">underwriting process</a> is the practical application of the information gained during loan processing. At this time, the lender confirms that the applicant's a good candidate for a mortgage loan based on their credit, <a href="https://www.realfx.com/blog/what-is-the-debt-to-income-ratio-dti/">debt-to-income ratio</a>, and more, and determines the amount of money they could reasonably afford to pay to buy a home. Most mortgages are guaranteed by a government department like the Federal Housing Administration and the Department of Veterans Affairs, or purchased by government organizations such as Freddie Mac and Fannie Mae. Underwriting ensures that the loan and relevant paperwork conforms to the guidelines of one of these organizations as indicated.
Closing
Although there may be months between mortgage pre-approval and closing, the money isn't a guarantee until the last <a href="https://www.consumerfinance.gov/ask-cfpb/what-documents-should-i-receive-before-closing-on-a-mortgage-loan-en-181/">closing documents</a> have been signed. Before the final offer is made, the lender will make a cursory check to confirm that the borrowers' information has not changed during the buying process. If everything is in order, the lender will make a final offer to the applicant with notes on any factors that may have changed from the original offer. Once the buyer signs this paperwork, the loan is accepted and the lender will provide funds.
The time it takes to get a mortgage ranges from days to weeks depending on the lender and how much time the buyer needs to gather data. When everything is already prepared, the process can move much more rapidly and you can soon <a href="https://www.realfx.com/blog/how-to-find-the-right-home/">find yourself in the right home for you</a>.2020-05-06T07:23:00-07:002020-05-28T09:38:12-07:00Danny Evatttag:realfx.com,2012-09-20:7094Don't Become House Poor! Buying a Home Within Your Means<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/buying-a-home-within-your-means.jpg" alt="How to Buy a Home Within Your Means" width="475" />No matter how much you absolutely love a home or particular style of the house, there are criteria that will go a long way in defining how happy you will be in it—starting with being able to comfortably afford it.
What’s really important in determining <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">if you’re ready to buy a home</a> is that you budget not just for a home, but for all your priorities. This means taking into account more than your current debt structure and the costs of a loan <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">before filling-out the mortgage application</a>. Do you thrive on being able to go skiing more than once a year? Are the kids starting school in the near future – or, heaven forbid, learning to drive, which means needing another car plus insurance? Are you coming to the realization that now – as in today – is when you need to start putting cash into their college funds?
These are your real priorities when exploring the <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">possibility of homeownership</a>. The home you find needs to accommodate not only your physical and aesthetic needs but all your priorities as well. When seen from this aspect, what you want to pay on a mortgage diminishes. Buy what you want – but do not spend as much as you qualify to borrow.
Meeting your priorities means pushing back and saying “no thanks” when you are confronted with statements like, “Interest rates are so low. You can get a lot more house for your money in today’s market” or, “This neighborhood is so upscale; it is certain to appreciate in the future.”
Understanding All Aspects of a Mortgage
When you buy a home, you are assuming debts beyond simply the mortgage value and interest due on a monthly basis.
Items such as property taxes, home insurance, and mortgage insurance (if required) are all part of <a href="https://www.realfx.com/blog/monthly-mortgage-payments-breakdown/">what comprises your actual mortgage payments</a>, along with closing costs. On top of all this, your monthly expenses need to be factored in, as well as the up-front cost of <a href="https://www.realfx.com/blog/home-reduced-down-payment-options/">coming up with a down payment</a>.
There is a lot to be said for 30-year mortgages, primarily the lower monthly payments. But will you be living in the same home by the time your mortgage is paid off? According to the National Association of Home Builders, the answer is no. Statistics show that the average family remains in their home for less than 12 years.
By buying a house on the lower end of your housing budget, you might be able to afford the monthly payment on a loan with a shorter term. Imagine paying your house off within 15 years and all the financial freedom that would give you. Big, expensive houses may have their own set of benefits, but being debt-free will be priceless.
Bigger Homes Cost More
Everything—from utilities to property taxes to <a target="_blank" href="https://www.thesimpledollar.com/best-home-insurance/">home insurance</a>—depends on the location, square footage, construction, and layout of your home. The larger the home, <a href="https://www.realfx.com/blog/hidden-costs-of-homeownership/">the higher your costs</a> for standard maintenance and repairs. A leaky roof on a 4,000-square-foot turreted multi-level home is going to cost a lot more to repair than one on a single-level, 2,500-square-foot home. The same theory can be applied to the number of bathrooms, fireplaces, and so forth.
The Woes and Dangers of Being “House Poor”
Buying a home that makes you house poor and frantic every time you have to pay a bill, make plans, or even go to the market is a recipe for misery. Living paycheck to paycheck to support a mortgage is not what you intended to do with your life. And buying a home should not mean you have to suffer.
Gone are the days when real estate was an instant means to financial success. If the market stalls or goes downhill (we’ve been there in the recent past) having a home that costs you considerably less than what you qualified for means if there is another real estate market dip, it won’t impact you nearly as much. Plus, you won’t have used up your cash cushion in case of an emergency.
Avoiding the peril of being "house poor" is simple: it comes down to buying what you need. Buy in an area that has what you value. Peace of mind and a semblance of security is an easy trade-off for extra rooms you never use. Besides, there is less to clean.
There’s often a significant difference in what size loan you qualify for and what is a measured, careful, and beneficial purchase for your needs and future. Don’t let anyone talk you into buying more than you want or need. In actuality, if this means delaying or backing away from buying, that’s totally okay and actually a smart decision.
<a target="_blank" href="https://www.thesimpledollar.com/its-all-about-the-choice/">It all boils down to choices</a>: when you spend less than you can afford, you have choices; when you overspend, you don’t. Just remember to look beyond this year, and even this decade, when you make that choice. You might be giving up more than you think.2020-05-05T06:46:00-07:002020-05-28T02:30:32-07:00Danny Evatttag:realfx.com,2012-09-20:7092The Hidden Costs of Buying and Owning a Home<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/hidden-costs-of-homeownership.jpg" alt="The Hidden Costs of Buying a Home" width="475" />Research data and industry general agreement is that Americans pay, on the average, about <a target="_blank" href="http://lifehacker.com/know-the-extra-costs-of-homeownership-before-you-buy-a-1714178561">$9,000 a year in extra home ownership costs</a>. These costs run the gamut from initial closing costs to yearly insurance, taxes, home maintenance and various utility bills.
This article is intended to help you <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">determine if you’re ready to buy a home</a>, estimate what the real costs of buying and living in your new home will be, and to share some hints on how to decrease some of the expenditures.
Beyond the Mortgage Amount: The Costs of Actually Buying Your Home
Beyond your monthly mortgage payment and <a href="https://www.realfx.com/blog/home-reduced-down-payment-options/">your down payment</a>, including lender interest fees and insurance, the following are one-time expenditure. Closing costs will run an extra 2% to 5% of the home purchase price.
Lender fees over and above interest charged – These include everything from administrative costs to wire transfer fees to fees for pulling your credit report.
Appraisal fees – Your lender needs to confirm the home you are buying appraises for the sale price – i.e., is worth the lender investment in the form of a mortgage. These usually cost several-hundred dollars.
Title/attorney fees – This includes costs for government filing fees, escrow fees, notary fees, and any other expenses associated with transferring the deed over to you.
Escrow fees – You might be required to pay a portion of your property taxes and insurance into an escrow account upfront.
Inspections fees – One of the smartest things you will ever do! A proper home inspection keeps you from unknowingly buying a lemon – or a bottomless money pit. Even if the seller has a current home inspection document in hand, we caution you to have your own inspection done. You should be there during the inspection.
From roof to basement, electrical to plumbing, checking in advance for mold, lead paint, asbestos, etc., these are a few of the things that will cause you to either walk away from the property or negotiate the home asking price to cover all the costs of remedying listed problems. This general home inspection fee runs around a couple of hundred dollars based on the size of the home.
Next up on your inspection fee list should be one specifically for termites. You really do want to know before signing a 30-year loan if the house is crumbling around you. A termite specific inspection usually adds another one- to two-hundred dollars to your inspection fees total.
Sewer Inspection – depending on the age, condition, and setting of the home, a sewer inspection makes sense. Spending a few more hundred dollars to ensure you won’t be spending many thousands on repair is logical.
Land survey fees – Knowing exactly where your property line is can save innumerable headaches and hassles down the road. Are you or your neighbor responsible for the tree that is spreading roots into your yard? Where exactly does your backyard end before the guy behind you knocks down your fence? A land survey eliminates this sort of thing.
To help you get a better idea of potential closing costs on various homes, plug some numbers into <a target="_blank" href="http://twocents.lifehacker.com/this-calculator-estimates-your-home-closing-costs-base-1749884596#_ga=1.102156033.1662698338.1411053142">a closing cost calculator</a>.
Costs Included in Your Mortgage
There are three elements included in mortgage payments over and beyond the actual mortgage amount and interest rate incurred. If you can plunk a 20% down payment on the home, it avoids having to pay the second type of insurance, <a target="_blank" href="http://www.investopedia.com/terms/p/privatemortgageinsurance.asp">PMI</a>. And that lowers <a href="https://www.realfx.com/blog/monthly-mortgage-payments-breakdown/">your monthly mortgage payment</a>.
Property Taxes
Real estate taxes are assessed by state and/or local governmental agencies and used to fund public services. They are calculated on a per-year basis. Your lender amortizes the yearly real estate tax due on your home, and the total is evenly split over your yearly mortgage for the specific year. Your lender collects the payments and <a target="_blank" href="http://www.investopedia.com/terms/e/escrow.asp">holds them in escrow</a> until the taxes are due. Every <a target="_blank" href="https://wallethub.com/edu/states-with-the-highest-and-lowest-property-taxes/11585/">state has its own tax structure</a>.
One way to keep your property taxes down is to live in an adjacent state with lower property taxes than the one in which you work. Be sure to factor in your commute costs before deciding to do this.
Check what homeowners in your desired location and with a similar home are paying. This is in the Public Records and open to you. Review your home's assessment. If you spot a disparity between what you are being taxed and equivalent homes in the area, get an independent appraisal. Then present your documented case to the proper authorities.
Home Insurance
Home insurance protects your home and its contents from fire, theft and other disasters and is a must-have item.
Getting the best deal on home insurance is to first make sure the company is highly reputable.
Then compare quotes from equally reliable firms.
Bundle your insurance plans (car, life, etc.) as this is the easiest way to make sure you get a discounted rate on all of them.
Mortgage Insurance
This is PMI insurance coverage that is normally waived once you have 20% equity in your home.
Costs of Maintaining Your Home
A financial planner quoted in the <a target="_blank" href="http://www.nytimes.com/2009/09/12/your-money/mortgages/12money.html">New York Times</a> estimates that owners of a newer home who do some work for themselves and contract out major work will pay 3.6% of the original purchase price annually for maintenance. That number rises to 4.5% for older homes. Some dispute these percentages based on location, but estimating only 1% of purchase price for maintenance can leave you with a shocking bill.
While every home is different, they all come with certain <a target="_blank" href="https://lifehacker.com/top-10-home-improvement-tips-every-homeowner-should-kno-1656251243">maintenance requirements</a> and a lot of decisions. From DIY projects such as painting interior walls to “hire a pro projects” like adding solar roofs (a great way to decrease power bills and get a tax break) and skylights, none of it is free. We suggest having at least 4% of your buying price in reserve for annual expenses. Unused money can simply be rolled over for the following year.
Prepare for Higher Utility Bills
Homeowners pay a couple of thousand dollars extra on utilities every year comparedwith renters. The reasons are simple. Most homeowners buy a larger property than theone they were previously renting. More square footage = the larger the area to heat,cool, and light.
We don’t need to tell you that a single-story home is more cost efficient that a two- orthree-story home. Investing in new windows (double paned depending on where youlive) makes long-term sense for keeping these costs down as much as installing solarpower does. Invest only in energy efficient appliances. Do laundry on cold water settings – this will keep your heating bill down along with saving your clothes.
You will be paying monthly costs such as water, sewage, trash pick-up and such. Evenyour cable/internet bills will increase. More rooms mean more TVs and electronic devices. You might also find yourself having to pay for yard maintenance unless youenjoy pushing a lawn mower, trimming bushes and trees, and digging in the dirt.
Ask the seller for a record of utility expenditures over the last 12-24 months. You canalso order a home energy audit using the <a target="_blank" href="https://www.resnet.us/hers-index">Home Energy Rating System</a>. This involves an auditor inspecting your home to tell you how to improve its energy efficiency.
Know all the hidden costs entailed with <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">your potential new home</a>. If there is a long list of “oh no!” items that sound a warning bell, consider finding another property. <a href="https://www.realfx.com/blog/buying-a-home-within-your-means/">Buying your own home within your means</a> is a long-term endeavor, and being prepared is the best way to enjoy it.2020-05-04T08:48:00-07:002020-05-05T06:53:48-07:00Danny Evatttag:realfx.com,2012-09-20:70887 Signs You're Ready to Buy a Home<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/are-you-ready-to-buy-a-home.jpg" alt="Signs You're Ready to Buy a Home" width="475" />Have you found yourself checking out all the “For Sale” signs on properties in neighborhoods you like and fantasizing about <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">the possibility of homeownership</a>? Or every month wondering why you continue to pay rent when buying a home seems more logical?
Buying a home can be an intimidating process so finding a good real estate agent is important. You need to trust your agent to help make major decisions – so talk to more than one. Along with finding a real estate professional you trust and are comfortable with, talk to a financial advisor. Before you fall in love with a property that is beyond your reach today, get some financial advice as to what you can afford.
In this article, we supply you with a checklist of sorts to help you digest exactly what you need to know. Use it to better understand the ins and outs of the home buying process <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">before applying for a mortgage</a>, and to create your own inventory of where you stand in when considering buying a home.
Are You Ready To Buy A Home?
There’s a huge difference between wanting to buy and being ready to make the long term commitment that homeownership entails. <a target="_blank" href="http://time.com/money/collection-post/3012719/rent-or-buy-5-questions-to-ask/">Seven key questions</a> to ask yourself:
Is your credit rating good?
Are you planning on staying in the area for at least six or seven years?
Do you have money for a down payment without raiding your emergency savings fund?
What are the after-taxes costs of owning your home?
What hidden expenses should be factored in when determining the size of an affordable mortgage?
What’s happening in your market? Are the homes affordable? Is there a lack of rental properties? Are prices skyrocketing?
Are you and your partner (if you have one) in agreement on all of the above and on making a long term commitment?
Before considering home ownership, you need to check your credit score. The higher your credit score, the better the interest rate on your mortgage will be. These three free sites <a target="_blank" href="https://www.creditkarma.com/">Credit Karma</a>, <a target="_blank" href="http://www.credit.com/">Credit.com</a>, and <a target="_blank" href="http://www.creditsesame.com/">Credit Sesame</a> make checking your credit score easy.
Are Your Finances in Order?
This includes your credit score; your debt-to-income ratio; the amount you have in savings – over and beyond the must-have emergency fund, and your employment future.
Is your job secure, as much as a job can be in today’s world? Are you on the track for future promotions and a higher income with your present employer or will you need to change firms to move upward?
Are you and your partner anticipating any new expenses beyond a mortgage in the foreseeable future? Yes, this includes becoming a parent. Kids come with some hefty additional costs – no matter how much you love them.
Down Payments
The <a href="https://www.realfx.com/blog/home-reduced-down-payment-options/">total down payment</a> is greater than the generic 20% of your mortgage. There are closing costs on your home purchase and other expenses.
There are mortgages that require less than 20% down. FHA, VA, and USDA loans are the three major ones. All three are worth investigating to see if you are eligible. Each has specific rules and regulations that you will need to understand prior to applying.
Do not deplete your emergency fund stash to help pay the down. Do not clear out your saving account either. Rather, plan ahead and start a separate saving account specifically for your down payment.
Hidden Expenses of Buying a Home
Cautionary word of warning - this can be a bundle. Both the buyer and seller pay a portion of the <a target="_blank" href="https://www.realtor.com/advice/finance/how-much-are-closing-costs/?cid=sem_google_dsaadvice_desktop&medium=tsa&ds_kid=39700009358125656&gclid=EAIaIQobChMIwq6ozIiP1wIVDVmGCh2wRQ5tEAAYBCAAEgLjxPD_BwE&gclsrc=aw.ds">closing costs</a>, but the buyer shoulders the bulk of the load (3% to 4% of the home's price) compared with sellers (1% to 3%).
Along with the actual closing cost, there are a number of additional expenses written into the overall closing costs. All are related to acquiring your mortgage, with the bulk of your payments going directly to your lender.
Loan origination fee, which lenders charge for processing the paperwork for your loan.
A fee for the underwriter who assesses your credit worthiness.
A fee for the appraisal of the home you hope to own to ensure its value matches the size of the loan you want.
Home inspection fee which checks the home for potential problems from cracks in the foundation to a leaky roof.
Title search fee to determine if there are any liens on the property that could interfere with your ownership of it.
A survey fee for single-family home and townhouses.
Another <a href="https://www.realfx.com/blog/monthly-mortgage-payments-breakdown/">part of your monthly mortgage payment</a> is the mandatory (lender mandated) homeowner insurance. Both insurance and PMI are included in your monthly mortgage payment as this is considerably less onerous than making annual payments.
Property taxes are usually handled in the same way – amortizing the annual amount in equal payments included in your mortgage payments – with your lender paying the taxes.
The <a href="https://www.realfx.com/blog/hidden-costs-of-homeownership/">total hidden costs of homeownership</a>, from closing fees to taxes, can add up to more than $9,000each year. And that number will jump <a target="_blank" href="http://www.businessinsider.com/hidden-costs-of-being-a-homeowner-2015-6">if you live in a major US city</a>.
As the new owner, you obviously pay the utilities and any repairs as needed. No more calling the landlord – you are the landlord.
What is the Market Like in Your Area?
Do your research. Talk with real estate professionals. Ask about selling trends and prices over the past few years. Ask about the number of rental units in the area. What are those prices doing? A tight rental market usually means an even tighter purchasing market with escalating prices.
What are city and country development plans on the books for the next 10 to 20 years? This will impact your resale value. Focus on the long-term benefits vs. the immediate ones.
In Conclusion
<a href="https://www.realfx.com/blog/buying-a-home-within-your-means/">Buying a home within your means</a> is truly a long-term commitment. Signing a mortgage can impact your life for years, especially if you aren't aware of the <a href="https://www.realfx.com/blog/monthly-mortgage-payments-breakdown/">ins and outs of a mortgage</a>. The more you know about the entire process, the wiser choices you will make.2020-05-01T13:46:00-07:002020-05-28T02:26:36-07:00Danny Evatttag:realfx.com,2012-09-20:7087A Breakdown of the Monthly Mortgage Payment<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/monthly-mortgage-payments.png" alt="Breaking Down the Monthly Mortgage Payment" width="475" />When the <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">possibility of homeownership</a> comes up, it’s natural to want to know more about the home buying and mortgage processes. Your mortgage payment is made up of four very distinct and separate parts. The loan principal and interest; property taxes; home owners insurance, and mortgage insurance. This article is intended to be a short guide into what comprises a mortgage and how to understand what lenders are saying.
What Exactly is a Mortgage?
Briefly explained, a mortgage is a long-term loan designed to allow the borrower to purchase a home. By taking out a <a href="https://financialframework.com.au/resources/news-knowledge/mortgage-vs-super" target="_blank">mortgage</a> loan, the buyer pledges the house to the bank as collateral on repayment of the loan needed to purchase it. Should the homeowner default on payment(s), the lender has a legal claim on the house and can repossess it, so <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">make sure you're ready to buy a home</a>.
In return for lending the buyer money, the lender charges interest on the principal loan amount. Interest rates vary depending on market demand, the type, terms and length of the loan, and the individual borrower’s down payment and credit ratings.
Mortgages Dissected
The acronym for the <a target="_blank" href="http://www.investopedia.com/articles/pf/05/022405.asp">four components of a mortgage is PITI</a>; it stands for principal, interest, taxes, and insurance. Of these four, the actual loan principal and the lender’s interest rate charged comprise the heftiest amount.
There is an inverse relationship between the term of the loan and the size of the monthly payment. The more years a mortgage is in effect, the smaller the monthly payments. This is the main reason why 30-year mortgages are the most popular.
Determine How Large a Loan You Can Get
<a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">Before applying for a mortgage</a> determine how large a mortgage you can get while still <a href="https://www.realfx.com/blog/buying-a-home-within-your-means/">buying a home within your means</a>. First, check to see if you are eligible for a loan from the FHA, the VA, and USDA. These three lenders have the best terms for consumers, especially those who need to <a href="https://www.realfx.com/blog/home-reduced-down-payment-options/">make a reduced down payment</a>. If you do not qualify for any of the three, check the current terms for Fannie Mae and Freddie Mac loans, what an “open to all” credit union in your area might offer, and then your commercial bank and the competitors. Most, if not all, have websites with the needed info along with a mortgage calculator to make it easy to determine 1) if you qualify and 2) for how much.
The PITI Element
Now that you have an idea of the loan size and terms you can get, it’s time to discuss the four factors that play a role in the calculation of a mortgage payment. Those four items are principal, interest, taxes and insurance.
Principal
The loan principal is the amount of money borrowed for your mortgage prior to interest, etc. It is the portion of each mortgage payment dedicated to <a target="_blank" href="http://www.investopedia.com/terms/r/repayment.asp">repayment of the principal</a>. Loans are structured so that the amount of principal (your actual equity in the home) begins small and increases with each mortgage payment. While the mortgage payments in the first years consist primarily of interest payments, the payments in the final years are primarily of principal repayment.
Example: For a $100,000 mortgage, the principal is $100,000.
Interest
Interest is the lender's payment or fee for taking a risk and loaning money to a borrower. The interest rate on a mortgage has a direct impact on the size of a mortgage payment. Higher interest rates mean higher mortgage payments. The higher the interest rate, the less cash you can borrow; the lower the interest rate, the more cash you have access to.
If the interest rate on our imaginary $100,000 mortgage is 6%, the combined principal and interest monthly payment on a 30-year mortgage would be something like $599.55 ($500 interest + $99.55 principal). To get an idea of what a monthly payment amount is, based on a particular principal and interest rate, see <a target="_blank" href="http://www.investopedia.com/calculator/mortgagepayments.aspx">this calculator guide</a> to avoid being blind to some <a href="https://www.realfx.com/blog/hidden-costs-of-homeownership/">hidden costs of homeownership</a>.
Taxes
Real estate taxes are assessed by governmental agencies. They are used to fund public services such as school construction, police, and fire-department services. Taxes are calculated by the government on a per-year basis; homeowners can pay these taxes as part of their monthly payments or in a one-lump sum yearly. Frankly, it makes more financial and budgetary sense to pay your real estate tax as part of your mortgage. Your lender amortizes the yearly real estate tax due on your residence, and the total is evenly split over your yearly mortgage for the specific year. Your lender collects the payments and <a target="_blank" href="http://www.investopedia.com/terms/e/escrow.asp">holds them in escrow</a> until the taxes are due.
Insurance
There are two types of insurance coverage that may be included in a mortgage payment. Like real estate taxes, insurance payments are made with each mortgage payment and held in escrow until the bill is due. The first type of insurance is property insurance, which protects the home and its contents from fire, theft and other disasters.
The second type of insurance is PMI (mentioned above), which is mandatory for homeowners who purchase a home with a down payment of less than 20% of the home's cost. This type of insurance protects the lender in the event that the borrower is unable to repay the loan. Because it minimizes the default risk on the loan, PMI also enables lenders to sell the loan to investors who, in turn, have some assurance that their debt investment will be repaid.
PMI coverage can normally be dropped once the borrower has 20% equity in the home.
It should be noted that today, a 20% down payment is desirable, as this minimizes private mortgage insurance (PMI) requirements. However, there are mortgage programs available that allow significantly lower down payments.
Putting it All Together - the Amortization Schedule
A mortgage's amortization provides a detailed look at precisely what portion of each mortgage payment is dedicated to each component of PITI. As noted earlier, in the first years, mortgage payments consist primarily of interest payments. Over time, more of your monthly payment goes to the principal, giving you greater equity in your home.
Using our example of a $100,000, 30-year mortgage, the <a target="_blank" href="http://www.investopedia.com/terms/a/amortization_schedule.asp">amortization schedule</a> would consist of 360 payments. The schedule below shows how the balance between principal and interest payments reverses over time as later payments consist primarily of principal.
PaymentPrincipalInterestPrincipal Balance
1
$99.55
$500.00
$99,900.45
12
$105.16
$494.39
$98,772.00
180
$243.09
$356.46
$71,048.96
360
$597.00
$2.99
$0
The actual mortgage payment remains at $599.55 every month. But the amount dedicated toward principal and interest varies from payment to payment.
Because of the inverse relationship between principal and interest paid, at the start of your mortgage, the rate at which you <a target="_blank" href="http://www.investopedia.com/terms/e/equity.asp">gain equity in your home</a> is much slower.
This demonstrates the value of making extra principal payments if the mortgage permits pre-payment. Each extra payment results in a larger repaid portion of the principal, and reduces the <a target="_blank" href="http://www.investopedia.com/terms/i/interest-due.asp">interest due</a> on each future payment, moving the homeowner toward the ultimate goal of paying off the mortgage.
Understanding all the parts of what make up a home mortgage is essential in your decision to buy a home. Homeownership is a long-term commitment, and you should discuss your options with a financial advisor before signing anything. It is better to plan ahead in order to get the best deal possible, in both the short and long term, before jumpIng in.2020-05-01T13:27:00-07:002021-05-24T07:21:30-07:00Danny Evatttag:realfx.com,2012-09-20:7086Options For Paying A Reduced Down Payment<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/reduced-down-payment-options.jpg" alt="How to Pay a Reduced Down Payment When Buying a Home" width="475" />A huge part of the difficulty in <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">realizing the possibility of buying a home</a> is coming up with the requisite down payment. Did you know there are actually more than 2,400 programs nationally that can help? Finding them, determining which ones are applicable to you, and then understanding these programs parameters can be a challenge. This article is intended to discuss the major programs; share some insight into the lesser known programs; suggest sources to find highly specific programs you might be eligible for, and to give you the core elements into the most crucial things to look for and why.
Why Down Payments Are Important
First it is important to understand why down payments are important. In the proverbial nutshell, down payments are your mortgage lender’s padding against an upside-down situation should a buyer default on <a href="https://www.realfx.com/blog/monthly-mortgage-payments-breakdown/">their mortgage payments</a>.
By requiring a buyer to put some equity (cash investment) into their home of choice at the start is akin to the buyer putting some skin in the game so they’re more ready to face <a href="https://www.realfx.com/blog/hidden-costs-of-homeownership/">the costs of homeownership</a>. It is more than merely a safe guard for lenders; it is the tangible manifestation of a buyer’s honest intent to purchase and maintain the home for at least a while before listing it on the market for resale. It is sort of the “put your money where your mouth is” philosophy.
The buyer’s benefits of a down payment:
You build instant equity in your home – before making a single mortgage payment.
Your monthly mortgage cost is reduced as the loan you take out is for the value of the home as agreed to by the buyer and seller less the amount of your down payment. In other words, if you put in an offer on home worth $250,000 and you can put a 20% down payment of $25,000 – your mortgage would be $225,000 rather than the full sale price. Because you are financing less money the cost of your monthly mortgage payment is lower.
No MIP (Mortgage Insurance Payment) required when making a 20% down payment.
Who Offers Programs That Can Assist With Down Payments?
Our concentration will be on the first three; you need to check with your employer to see if down payment assistance is part of the benefits package.
State Housing Finance Agencies (HFA) often offer the broadest array of opportunities.
Cities and Counties offer programs with criteria adjusted for local median income and home prices.
Housing Authorities.
Non-profits.
Employers (check if your place of employment offers help)
General Overall Rules and Regs for Programs Offering Assistance
Homeownership programs are for owner-occupant buyers only; not investment properties.
Both you and the home you are purchasing must be eligible for qualification in any particular program.
You must make a minimum investment, qualify for a first mortgage and complete homebuyer education. <a target="_blank" href="http://downpaymentresource.com/qualify-payment-program/">Common eligibility factors</a> include the home’s sales price, homebuyer income and homeownership history.
A first-time homebuyer is defined as someone who hasn’t owned a home in 3 years. So, if you’ve owned in the past but are renting now, you can qualify as a first-time home buyer.
There are often additional benefits, or even entirely separate programs, for educators, public protectors (police, firemen, etc.), health care workers, veterans, and households with disabled members. Be sure to check available programs through your job and support groups.
The 3 Primary Sources for Financing Loans With Low Down Payments
There are <a target="_blank" href="https://downpaymentresource.com/know-your-programs-an-overview-of-the-three-most-common-homebuyer-assistance-programs/">three primary loan programs</a> for help with obtaining a low down payment loan. Two of these you probably have heard of; the 3rd is often misunderstood.
FHA Loans
A <a target="_blank" href="https://www.zillow.com/mortgage-learning/fha-loan/">FHA Loan </a>is a mortgage that is insured by the Federal Housing Administration. The federal government insures loans for FHA-approved lenders in order to reduce their risk of loss if a borrower defaults on their mortgage payments.
FHA Loan Requirements
The key element to remember when considering an FHA loan is that the lower an applicant’s credit score – the higher the down payment percentage required. That noted, there are a number of other requirements that must be met in order to qualify.
New FHA loans are only available for primary residence occupancy.
Borrowers must have a minimum credit score of 580 for maximum financing with a minimum <a target="_blank" href="http://www.zillow.com/mortgage-learning/down-payments/">down payment</a> of 3.5 percent.
If a borrower’s credit score is lower (500-579) a 10% down payment is possible if all other criteria is met.
FHA borrowers must pay mortgage insurance premiums (MIP) as a protection for the lender if a borrower defaults. Because FHA loan do not have the strict standards of a <a target="_blank" href="http://www.zillow.com/mortgage-learning/30-year-fixed-mortgage/">conventional loan</a>, they require two kinds of mortgage insurance premiums: one is paid in full upfront or financed into the mortgage and the other is a monthly payment.
Upfront mortgage insurance premium (<a target="_blank" href="https://www.hud.gov/program_offices/housing/comp/premiums/ufmain">UFMIP</a>): This is a one-time upfront monthly premium payment, which means borrowers will pay a premium of 1.75% of the home loan, regardless of their credit score.
Annual MIP (<a target="_blank" href="https://www.fha.com/define/mortgage-insurance-premium">Annual MIP</a>) is an annual premium that is charged incrementally over a twelve month period and is factored into your mortgage payment. The amount of the mortgage insurance premium is a percentage of the loan amount, based on the borrower’s <a target="_blank" href="http://www.zillow.com/mortgage-learning/loan-to-value-ratio/">loan-to-value</a> (LTV) ratio, loan size, and length of loan.
Duration of FHA mortgage insurance payments assigned on or after June 3, 2013 - borrowers will have to pay mortgage insurance for the entire loan term if the LTV is greater than 90% at the time the loan was originated. If your LTV was 90% or less, the borrower will pay mortgage insurance for the mortgage term or for 11 years - whichever occurs first.
Borrowers must have proof of a steady employment history.
Borrowers must have a valid Social Security number, lawful residency in the U.S. and be of legal age to sign a mortgage in your state.
Borrowers must pay a minimum down payment of 3.5 percent.
Borrowers’ front-end ratio (mortgage payment plus HOA {Home Owners Association} fees, property taxes, mortgage insurance, <a target="_blank" href="http://www.zillow.com/mortgage-learning/homeowners-insurance/">homeowners insurance</a>) needs to be less than 31% of their gross income as a general rule to guarantee they're <a href="https://www.realfx.com/blog/buying-a-home-within-your-means/">buying a home within their means</a>.
Borrowers’ back-end ratio (mortgage plus all your monthly debt, i.e., credit card payment, car payment, student loans, etc.) needs to be less than 43% of their gross income as a rule.
Borrowers must have a property appraisal from a FHA-approved appraiser and the property must meet certain minimum standards at appraisal.
Benefits of FHA Loans
Low Down Payment
Less Stringent Credit Score Requirements
FHA loans are an <a target="_blank" href="https://www.zillow.com/mortgage-learning/assumable-mortgage/">assumable mortgage</a>. This means if you want to sell your home, the buyer can “assume” the loan you have, pending credit approval and lender processes.
VA Loans
Available only to past service members, <a target="_blank" href="https://www.veteransunited.com/realestate/why-va-loans-dont-require-a-down-payment/">VA loans</a> are a huge benefit. Often they don’t require a down payment. Zero. None. This is because the federal guaranty takes the place of the down payment. Since a portion of the loan is backed by the government, there’s no need for an additional down payment.
As long as lenders follow VA guidelines, a part of every VA loan is guarded by a federal safety net. If a service member defaults on a loan, the federal government agrees to pay the lender back for at least a portion of the loss. This backing is the “VA Loan Guaranty.”
Another huge plus for VA loans is that buyers (you) are not charged mortgage insurance. In combination these two benefits can save homebuyers a bundle of money.
Benefits of VA Loans
No down payment.
No mortgage insurance.
They’re reusable. You can use your full VA entitlement over and over again as long as you pay off the loan each time.
There is no pre-penalty payment should you be able to pay off your mortgage early.
They’re available despite foreclosure or bankruptcy. Service members with a <a target="_blank" href="https://www.veteransunited.com/valoans/getting-a-va-loan-after-a-bankruptcy">history of bankruptcy</a> or foreclosure can secure a VA loan. Even borrowers who have had a VA loan foreclosed on can still utilize their <a target="_blank" href="https://www.veteransunited.com/va-loans/va-home-loan-advantages/">VA loan benefit</a>.
Restrictions on VA Loans
VA loans are for primary residences only.
VA loans are designed for ‘move-in ready” homes – single-family homes, condos, modular housing, some multi-unit properties, etc.
VA loans carry a mandatory fee called the VA Funding Fee. This <a target="_blank" href="https://www.veteransunited.com/valoans/va-funding-fee-explains-the-fee-who-pays-what-and-why/">fee</a> (usually 2% of the loan amount) helps the VA keep the program going and is required on both purchase and refinance loans. The fee can be rolled into the loan amount and waived entirely for those with service-connected disabilities.
It is no wonder that military buyers love their access to VA loans and the <a target="_blank" href="https://www.veteransunited.com/valoans/10-things-many-borrowers-dont-know-about-va-loans/">exclusive financing program.</a> It should be noted that the VA loan guaranty has cash limits which vary based on location. For a look at the limit for your area, check with the <a target="_blank" href="http://www.benefits.va.gov/homeloans/purchaseco_loan_limits.asp">Department of Veterans Affairs</a>.
USDA Loans
The USDA loan program is the one least known and least understood. It is a zero-down, <a target="_blank" href="https://themortgagereports.com/11306/buy-a-home-with-a-low-downpayment-or-no-downpayment-at-all">100% financing home loan</a> sponsored by the United States Department of Agriculture designed to promote homeownership in less-dense communities. it does not mean you need to be a farmer! Nor do you have to live in the boon-docks.
In reality a full 97% of the U.S. land mass falls into eligible status for USDA financing and is available to about 1/3 of the entire population. Check <a target="_blank" href="https://themortgagereports.com/ratequote">your USDA loan eligibility</a>.
The application process for a USDA loan is similar to that of a FHA loan.
Find a lender that offers USDA financing <a target="_blank" href="https://themortgagereports.com/ratequote">at this link</a>. Most lenders in the U.S. can approve USDA home loans.
Obtain lender preapproval.
Find a house: Use your preapproval letter to make an offer on a USDA-eligible home.
Obtain lender approval for your mortgage.
The lender submits your full loan file to USDA for approval.
Close on loan: You sign final paperwork and within a few days the house is yours.
Major Benefits of USDA Loans
The only civilian zero-down loan on the market.
Lower down payment than conventional or FHA financing.
Lower mortgage insurance than conventional or FHA loans.
More lenient credit score requirements than for conventional loans.
Unlike VA loans, there is no military service requirement.
Eligibility Requirements for a USDA Home Loan
There are two main factors for USDA home loan eligibility - the property and the home buyer.
Property Requirements:
USDA property eligibility - The home must be located within a USDA-eligible area.
Generally, cities and towns with a population less than 20,000 qualify, but bigger cities are eligible if they are “rural in character” or don’t have good access to mortgage credit.
Property eligibility maps haven’t been fully updated in over 15 years. This means many surprisingly populous areas across the U.S. qualify
Pass required safety standards, etc.
Buyer Requirements:
Owner occupant; single-family home, apartment, townhouse, or condo.
Lender will verify USDA rural development loan eligibility in the same way as for any other home loan program. Your credit, income, and bank account information will be compared to current guidelines for USDA loans.
You do not need to be a first-time home buyer.
USDA income limits require an income of 115% or less of your region’s median income.
The applicant’s income determines the maximum loan size.
Asset limits - If you have 20% down, you may not use USDA financing. According to USDA guidelines, this loan is reserved for those who can't qualify for other mortgage types, such as <a target="_blank" href="https://themortgagereports.com/21489/how-to-buy-a-home-conventional-loan-mortgage-rates-guidelines">conventional loans</a>.
Dependable employment for 2 years.
USDA loan debt-to-income ratio (DTI): 29% of your pre-tax income can go toward the principal, interest, taxes, insurance, and HOA dues on the home you plan to buy. A total of 41% of your income can be used for your proposed house payment plus all other debt.
You must be a U.S. citizen or have permanent resident status, be a non-citizen national or qualified alien to qualify for the USDA program. Valid evidence of residency status is required.
USDA offers Direct Loans and Guaranteed Loans
Guaranteed loans are offered by private lenders and backed by USDA.
Direct loans have more stringent requirements, such as very low income limits. USDA offices issue these loans directly to consumers.
Available in 30-year and 15-year <a target="_blank" href="https://themortgagereports.com/27360/fixed-rate-mortgage">fixed rate mortgage</a> options. Because fixed rates are the most time-tested and safe for home buyers, USDA does not offer adjustable-rate loans.
You can use USDA to refinance if you have a USDA mortgage currently. <a target="_blank" href="https://themortgagereports.com/26089/usda-streamline-refinance-program">Read more about USDA refinancing here</a>.
Check here for <a target="_blank" href="https://themortgagereports.com/ratequote">eligibility</a>.
In Conclusion
We’ve only covered the three major loan programs in this article. As noted at the start, there are a number of other sources to assist with putting together a down payment. Grants, gifts, and loans are a few. Some are need-based; others area of work; still others are focused on volunteer work. Investigate all your possible avenues.
Take a solid, hard look at your financial situation to understand if a lower down payment is right for you and <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">if you’re ready to buy a home</a>. Understand that finding an avenue offering low payments can mean more stringent terms, greater risk, more monthly payments, etc. Yes, finding a lower down payment can be tempting; to do so is a decision that cannot be taken lightly nor on surface value only. 2020-04-29T13:01:00-07:002020-05-05T06:54:48-07:00Danny Evatttag:realfx.com,2012-09-20:7059Don't Think You Can Own a Home? Homeownership is a Possibility for Everyone<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/possibility-of-homeownership.jpg" alt="Do You Have the Possibility of Owning a Home?" width="475" />Are you ready to buy a home? You might not be right now, but you can be with some work on your finances. Financial troubles can be rectified and you can own a home. By taking the necessary steps, your dream will become a reality. It might take some time and considerable effort, but achieving the financial security that comes with <a href="https://www.realfx.com/blog/are-you-ready-to-buy-a-home/">being ready to buy a home</a> is worth it. In reality, even if you decide not to buy, you will be in a much better financial situation - <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">before the application process</a>.
The Potential Benefits of Homeownership
Along with the personal satisfaction of <a href="https://www.realfx.com/blog/buying-a-home-within-your-means/">owning your own home within your means</a>, there are some major ‘real-life hardcore’ benefits.
Homeownership enables you to build equity in your investment—something that paying rent never will.
Homeownership is the bedrock for long-term planning for the majority of people.
Homeownership represents stability that renting can’t replicate. This stability has financial, sociological, and psychological impacts on everyone in your family. Example: homebuyers planning to have, or with children, actively identify the best school districts first. This narrows down the scope of preferred areas in which to purchase based on the need for stability.
Homeownership enables you to personalize your home. If you want to paint a wall violet or <a href="https://bellacontractingservices.com/services/demolition-new-jersey/" target="_blank">knock down a non-weight bearing wall</a>, it’s fine because you own the home.
Will You Need a Huge Down Payment?
While 20% is often seen as a requirement, it is not your only option when it comes to <a href="https://www.realfx.com/blog/home-reduced-down-payment-options/">making a down payment on your home</a>.
<a target="_blank" href="https://www.creditsesame.com/blog/mortgage/fha-loans-and-pmi/">FHA loan</a>s are mortgages insured by the federal government (versus a financial institution) and managed by lenders involved in the program. FHA loans have lower credit requirements than conventional loans, and borrowers can apply even if they have a bankruptcy or foreclosure on their credit report. FHA loans can have a down payment as low as 3.5% of the home value/selling price.
Options such as an FHA loan can help buyers with less-than-stellar credit get into homes; if you bank with a Credit Union, many of them offer lower interest rates on mortgages than the large commercial and consumer financial institutions. While working to improve your credit score, check out the Credit Unions in your area. They are not all restricted to a specific union or trade organization, and many are open to the public with a very nominal fee deposited into a savings account. The so-called “Thrift Banks” are small independent banks and are a good alternative if there is not a Credit Union near you.
You’ve heard of <a target="_blank" href="https://www.fhfa.gov/SupervisionRegulation/FannieMaeandFreddieMac/Pages/About-Fannie-Mae—-Freddie-Mac.aspx">Fannie Mae and Freddie Mac</a>, the government underwritten home buyer loans. The key difference between the two is that Freddie Mac underwrites homeowner loans from the smaller banks, i.e., "Thrift Banks” and Credit Unions while Fannie Mae buys mortgage loans primarily from commercial banks.
Improving Your Credit Score is Doable When You Have a Plan
Credit recovery takes time and work; this is a given. Reaching the credit score needed to purchase a home is possible. Tips for increasing your credit score include:
<a href="https://www.realfx.com/blog/introduction-to-budgeting/">Establishing a realistic budget</a> based on net income and required expenses.
Pay all bills on time.
Minimize the use of available credit.
Maintain very low balances on all credit cards <a href="https://www.realfx.com/blog/cutting-costs-food-entertainment-expenses/">by cutting costs</a>.
Work on developing a long and good credit history.
Only use credit when it is absolutely necessary.
What are Mortgage Lenders Looking For?
That’s the big question confronting you. Lenders look to see if someone can reasonably afford a home. They take into account credit history, employment status, savings/assets, and debt-to-income ratio. With a plan, you can improve all these things. That said, your credit score is the biggest factor in determining whether you get approved or rejected for financing.
Mortgages include collateral, a down payment, taxes, and insurance. All of these will <a href="https://www.realfx.com/blog/monthly-mortgage-payments-breakdown/">impact your monthly mortgage payment</a> as will the length of your loan. A 15-year fixed loan will require more cash per month paid to the lender than would a 30-year fixed loan.
Understanding Credit Scores as They Relate to Obtaining a Mortgage
There are three components to your credit history and score: your payment history, the length of time you’ve had a stable credit history, and your <a target="_blank" href="https://www.creditkarma.com/advice/i/debt-to-income-ratio">debt-to-income ratio</a>. The lower your outstanding debts are in relation to your total gross income, the more confident a lender will be that you can comfortably handle a mortgage payment. So your first goal is to pay down your debts, which you can do by <a href="https://www.realfx.com/blog/cutting-costs-home-lifestyle-expenses/">cutting costs</a> or increasing your income.
The FICO score, developed by Fair Isaac, is the most popular scoring model in the lending industry. Approximately 90% of mortgage lenders use this to determine your credit score and decide whether to approve you for a loan.
Credit Scores by Lender Rating
Excellent: 750–850
Good: 700–749
Fair: 650–699
Poor: 550–649
Bad: Below 550
Self-check <a target="_blank" href="http://www.myfico.com/fico-credit-score-estimator/estimator/">your FICO score here</a>.
<a href="https://www.realfx.com/blog/strategies-for-dealing-with-financial-stress/">Dealing with financial issues is stressful</a>, but you can qualify for a mortgage even if you have a rocky history with money. It takes an effort and a healthy dose of self-education plus an awareness of the <a href="https://www.realfx.com/blog/hidden-costs-of-homeownership/">hidden costs of homeownership</a>, but you can do it!2020-04-28T08:56:00-07:002021-07-21T09:08:49-07:00Danny Evatttag:realfx.com,2012-09-20:7053How to Manage Your Finances as a Married Couple<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/married-couple-finances.jpg" alt="How to Tackle Your Finances as a Married Couple" width="475" />Once the anxiety of wedding planning starts to fade into memory, a new possible source of conflict arises: finances as a married couple. Fortunately, by taking charge at the very beginning, couples can minimize a lot of the difficulties that can come when people have to make joint decisions about their financial future. The investment of time and plenty of communication over the years can help married people to build a financial arrangement that will suit them both.
Get Comfortable Talking About Money
For a lot of people, trying to gain a little familiarity with another's financial situation can feel like they are prying unnecessarily. From a young age, children are often taught that it's rude to ask adults how much money they make for a living. However, this situation can create a lot of problems within a marriage, if both sides are worried about alienating the other with discussion of money. In fact, money misunderstandings account for about <a href="https://www.forbes.com/sites/jenniferwoods/2015/07/06/10-ways-to-prevent-money-from-ruining-your-marriage/#4f00894e44c9" target="_blank">one in five divorces</a> these days, which underscores the importance of getting onto the same page as early as possible within the relationship.
Of course, talking about money and financial goals in the scope of a partnership doesn't automatically need to include the intense and immediate exposure of all of one's financial records and credit reports, especially at first. Starting slowly with friendly topics is a good way to establish a rapport that will last longer. Talking about basic financial goals for the next few years can eventually lead to the nitty-gritty of debt management and retirement plans.
Build a Strategy
After graduation from college, a lot of people find themselves with a <a href="https://www.realfx.com/blog/introduction-to-budgeting/">budget and financial strategy</a> as simple as, “Get my student loans to stop strangling me, and then I'll regroup.” The trouble is that it can be all too easy to let financial planning run on auto-pilot, especially when the monthly expenses eat up so much of what's coming in. However, putting money into emergency savings isn't just something for the future. And people who start to think about <a href="https://money.usnews.com/money/retirement/slideshows/10-retirement-planning-moves-to-make-in-your-20s" target="_blank">retirement funding</a> in their 20s will find themselves in a much better place than their peers, 10-20 years down the road.
Adding a co-pilot to the mix requires planning and agreement from both sides in order to <a href="https://www.realfx.com/blog/what-does-it-mean-to-be-financially-secure/">achieve financial security</a>. This is where all the dreamy late-night conversations about full vestment into a 401k <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">retirement plan</a> are really going to come in handy. Getting married means planning for two, and planning for two often costs nearly twice as much as one. By getting an early start and defining their boundaries, couples can set a purposeful financial course that will be easier to tweak over time.
Share the Good, the Bad, and the Credit Scores
Financial planning should involve a <a href="https://www.realfx.com/blog/debt-repayment-planning/">serious discussion about debts</a>, because married couples usually seek to manage their finances together, even if they don't totally combine their financial lives. When people apply for loans together, such as a mortgage, their <a href="https://www.nerdwallet.com/blog/finance/debt-marriage-divorce-wedding-responsible-common-property-law/" target="_blank">debts and credit histories</a> are looked at as part of a single broader package. This means that couples who want to plan a financial future together should be up-front with each other about various aspects of their financial histories, good and bad. It might not be necessary to bring up that one collection debt that was paid and fell off the report years ago. By comparison, <a href="https://www.realfx.com/blog/what-is-credit-score/">sharing each other's current credit reports</a> and talking over plans to handle existing debt brought into the marriage have an important role in financial planning.
Consider Making Accounts for Savings and Fun
Sharing finances is best done simply and fairly, with plenty of room for each person to make <a href="https://www.realfx.com/blog/advanced-budgeting-skills/">advanced budgeting decisions</a>. Financial experts often recommend setting aside accounts for savings, <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">investments</a> and retirement funds with automatic withdrawals. This way, the system doesn't rely on people to make the conscious choice to save each month. It's also practical to use separate accounts for shopping, vacation planning and allowances just for fun. Each person deserves to have some money to themselves, and it doesn't have to be the same amount across the board. Keeping discretionary spending separate from savings gives everybody the space they need to pay for a lunch with friends or another fun activity, and helps to avoid arguments about overspending.
Choosing Between Shared Finances and Split Finances
The ease of setting up automatic transfers these days brings up options in <a href="https://www.usatoday.com/story/money/personalfinance/2017/07/05/pros-and-cons-sharing-your-finances-married-couple/438157001/" target="_blank">shared finances</a> that might not have been practical decades ago. Couples who don't want to combine all of their finances—or who have good reasons not to do so—shouldn't feel compelled to put every last dollar into a shared account. When one person:
owns a business,
supports children from a previous marriage or
is working to rebuild credit or eliminate debt,
having some separate accounts may make perfect sense. Some couples keep their finances completely separate. Others may have their own accounts, with a combined account that receives transfers from both, from which they pay shared bills. There are virtually unlimited options for managing married finances, and the extremes are just a couple of paths that people might choose.
Ultimately, keeping an open dialogue about financial concerns is the best way to make progress toward shared financial goals and <a href="https://www.realfx.com/blog/how-to-build-long-term-wealth/">build long-term wealth</a>. Every couple is different, and so the ideal solutions to common financial problems they face will be unique for them. When people work together to research their options, they can build a stronger relationship.2020-04-27T08:47:00-07:002020-04-27T09:08:35-07:00Danny Evatttag:realfx.com,2012-09-20:7052The Problems Americans Face in Building Long-Term Wealth and Ways to Solve Them<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/building-long-term-wealth.jpg" alt="How to Build Long-Term Wealth" width="475" />There's an internal struggle in the upcoming generation poised to take control of the financial world within the next couple of decades. People who are currently in their 20s and 30s have a lot of income potential and are highly educated, but they have many reasons to hesitate before their opportunities for financial growth. If they can harness their skills and the technology around them to create a financial lifestyle that works best for them, they will be better able to build wealth and a future that is worth having.
Problem: Insufficient Financial Education
It should come as no surprise that people who are skilled at money management will find more practical ways to use it to <a href="https://www.realfx.com/blog/what-does-it-mean-to-be-financially-secure/">secure their financial futures</a>. The trouble is that the average person is undereducated about <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">what it means to invest</a>, and why savings are so important for future success. As the number of guaranteed pensions declines toward zero, <a href="https://www.realfx.com/blog/debt-repayment-planning/">debts for young adults</a> continue to rise, and incomes remain stagnant, people need to have ways to maximize the money they can make for use years down the road.
Solution: Turn-Key Investment and Savings Options
Issues saving money are pretty much ubiquitous across generations. A shocking survey from early in 2017 revealed that <a href="http://money.cnn.com/2017/01/12/pf/americans-lack-of-savings/index.html">more than half of the American population</a> couldn't produce $500 to cover an unexpected expense without getting into greater debt. This problem illustrates the need for savings options to be easier and require less thought. Solutions such as 401k auto-enrollment and integrated savings programs that can automatically withdraw money for people might make the difference between a person who is prepared for early retirement and a person who can't ever afford to retire in the first place.
Problem: Inadequate Structure in Budgeting
People who are constantly facing an income shortfall find it all too easy to live in a money-in, money-out lifestyle. The trouble is that without creating a <a href="https://www.thesimpledollar.com/heres-what-happens-when-you-dont-have-a-budget/">useful budget</a>, it's hard to know what to do with the money once income increases and it sticks around for longer than a couple of weeks. Adults who have a regular income but lack a budget that tells them what to do with the money might find themselves perpetually behind in their bills. This can negatively <a href="https://www.realfx.com/blog/what-is-credit-score/">affect their credit</a>, which can make it harder to buy a car, qualify for a mortgage, or even get a better job when they have some upward mobility.
Solution: Basic Budgeting Programs Like 70-10-10-10
<a href="https://www.realfx.com/blog/introduction-to-budgeting/">Creating a budget</a> doesn't have to be super complicated. Some people thrive on the knowledge that every dime has a unique purpose and take great pride in tracking their expenses and investments daily. Others find a simple budgeting system that keeps as much out of their hands as possible to be ideal. For people in the latter category, a 70-10-10-10 or similar system may make a lot of sense. In this system, a person breaks their after-tax income into several pieces. The largest part is living expenses, bills and debts, representing 70 percent of the total. The remaining 30 percent is divided into three equal pieces:
Long-term savings, such as a 401k or Independent Retirement Account (IRA) <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">retirement savings</a>
Short-term savings, immediate funds for practical purchase of an asset
Enjoyment, like travel, charity donations, or purchases that may depreciate over time
Even those with modest incomes would find that saving 20 percent of their monthly income would help them generate wealth at a surprising rate. People who struggle to meet that guideline should consider cutting their expenses, or working to increase their income.
Problem: Lack of Trust in Financial Institutions
Watching the terrible recession has been hard for everyone, even those who didn't have as much invested in it personally. Seeing banks getting millions of dollars in bailouts while regular people lost their homes and their jobs didn't do a lot to foster faith in financial institutions as they currently stand. The problem is that the alternatives may not be a very useful source of advice or wealth accumulation, and certainly not for the long-term. People who will take recommendations from older friends and relatives but avoid financial advisors for a perceived conflict of interest may ultimately find that they aren't getting the most from their money.
Solution: Greater Transparency Leads to Reliability
Ultimately, the best way to accumulate wealth is to <a href="http://time.com/money/collection-post/3619676/millennials-money-moves/">get into savings and investing</a> as early as possible and <a href="https://www.realfx.com/blog/how-to-manage-your-finances-as-a-married-couple/">discuss with your partner about your financial plans</a>. Companies are aware that consumers expect to have all the information at their fingertips, and many are working to improve the level of transparency that their clients can see. People who have the ability to control their investments from their smartphones may be more likely to buy or sell investments when it makes more sense to hold for a longer time. However, that access to information and flexibility promotes experience with the markets at-large, which can lead to a feeling of reliability in the system. There's little that people can do to erase the past, but they can give themselves a greater sense of confidence in their ability to ride out the bumps and dips in the market.
Building wealth for the future or <a href="https://www.realfx.com/blog/plan-for-large-purchases/">to make large purchases</a> is all about information and opportunity. People who work to educate themselves about the financial systems and <a href="https://www.realfx.com/blog/advanced-budgeting-skills/">advanced budgeting techniques</a> they can use to save and plan for retirement are more likely to see better results from their investments overall.2020-04-27T08:31:00-07:002020-04-27T09:36:41-07:00Danny Evatttag:realfx.com,2012-09-20:7041How Can You Plan for Making Larger Purchases?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/how-to-make-large-purchases.jpg" alt="How to Plan for Making a Larger Purchase" width="475" />For most Americans, <a href="https://www.realfx.com/blog/introduction-to-budgeting/">developing a budget</a> to plan for large purchases is an inevitable part of life in the U.S. Having a home is a fundamental necessity. In many areas, having reliable transportation is essential, and this often means purchasing a car. While a car is more feasible in terms of paying cash to purchase the asset outright, buying a home translates into obtaining a mortgage and providing a down payment (unless you have $300,000 or more laying around somewhere).
But large purchases aren’t limited to homes and cars. You’ll need to first consider the necessity of the item. Indeed, it doesn’t even have to be an “item” per se. It could be planning to return to school or going on an extended vacation.
So, the initial questions to ask yourself are:
Do you need it? Is this just for fun?
What value does it add, either intrinsically or extrinsically?
Granted, not everything you purchase requires that you have a specific financial <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">return on the investment</a>. Yet, depending on your financial situation, some have a greater ability to book a trip to Europe and travel there for a month without it greatly impacting their savings, investments, and continuing to pay their bills at home while traveling.
Indeed, if the purchase you’re planning means you’ll be cutting into finances reserved for the essentials (rent/mortgage, utilities, or any collateralized loans where the creditor can retake possession of property), then it’s likely that the purchase should be delayed until you’re in a <a href="https://www.realfx.com/blog/what-does-it-mean-to-be-financially-secure/">better financial position</a>. The purchase may not be practical for now.
Large Purchase Payment Possibilities
All is not lost. If you do some shopping around to seek price comparisons or possible rebates, you can try to negotiate the price depending on the item or other intended purchase. You’re not completely stuck with paying the initial asking price. Car dealers will often lower their price to get the prior years’ model off their lot. (They are losing money each day on their inventory, as cars depreciate in value.) Homes are trickier to negotiate, but there’s generally some wiggle room depending on other factors, including the local housing market and how fast the seller wants to sell their home.
After you’ve crunched some numbers (using an online calculator is highly recommended), and decided that the purchase is feasible, then it’s time to consider how you’ll pay for it.
Do you have a sizable savings or other investments that don’t level a penalty for cashing out some of the monies earned or invested?
If at all possible, if you have an emergency funds reserve, keep that untouched and locked away for emergencies only.
Financing vs. Paying Cash
As previously stated, large purchases often require taking out a loan or some <a href="https://www.realfx.com/blog/advanced-budgeting-skills/">advanced budgeting techniques</a>. Having a collateralized loan on your credit report can boost your credit score. But if you’re trying to finance something consumable and it isn’t a business purchase (e.g. buying clothes to resell and earn income), then financing the purchase will likely cost you more money due to paying interest on the loan.
This isn’t to say that you shouldn’t buy something for fun. If you have the cash on hand and all other financial signals are giving you the green light, then dipping into your savings might be the way to go.
The point here is to weigh the cost versus the benefit of either financing or paying cash. A basic rule of thumb is, if the item appreciates in value (such as a home or business purchase), then you’re in a better position to finance the purchase as long as <a href="https://www.realfx.com/blog/what-is-credit-score/">you have good credit</a>, as well as a a <a href="https://www.realfx.com/blog/debt-repayment-planning/">solid debt repayment strategy</a>.
Yet, if it’s just for fun and the primary value is for entertainment, then you’ll save money in the long run if you purchase whatever it is outright, because your purchase won’t serve to <a href="https://www.realfx.com/blog/how-to-build-long-term-wealth/">build long-term wealth</a>. Keep in mind that your credit score is also a determinant as to whether financing is available and the interest rate you’ll be charged by the creditor.
Ultimately, your decision comes down to your financial objectives both in the short and long term, for both <a href="https://www.realfx.com/blog/how-to-manage-your-finances-as-a-married-couple/">you and your partner, if you have one</a>. For fun purchases, paying cash will cost you less than financing. Meanwhile, for essential purchases or items that appreciate in value over time, the appreciative value can offset the interest you’ll pay.2020-04-23T05:44:00-07:002020-04-27T09:41:56-07:00Danny Evatttag:realfx.com,2012-09-20:7039Can My Savings Lose Value? A Lesson on Inflation<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/can-savings-lose-value.jpg" alt="Can Your Savings Lose Value?" width="475" />When you work hard to <a href="https://www.realfx.com/blog/introduction-to-budgeting/">develop and adhere to a budget</a> so you can put aside money, you don’t want to discover that it’s lost value. Is that a risk for your savings?
The simple answer is yes: your savings can lose value over time due to inflation. As it stands now, savings accounts, even the high-yielding accounts, have such low percentage rates that inflation is more likely to impact your savings when compared to other appreciable assets and <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">investments</a>. So, what is inflation exactly?
Basically, inflation is how much your money can buy in terms of goods and services. It’s the amount of purchasing power you have over time. As inflation rises, the value of the currency you’re using goes down as does your purchasing power. For example, in 1940 a car would cost you $800. Let’s say the car is a brand-new vehicle. The average new car price is roughly $34,000. You’re not buying the exact same car due to technological advancements and the additional features that cars in the 1940’s did not have, but over 70 years of inflation is also factored into the difference in selling price.
As you can see, inflation ties into the prices of everything available for purchase. Essentially, the result is an increase in prices. But, what goes down can also go up. Deflation has the opposite effect on currency valuation. This means that your purchasing power increases, and you’re able to buy more for the same amount of money. The trend, however, is towards inflation. You can buffer yourself against the impact of inflation on your savings.
But how?
Diversification of investments <a href="https://www.realfx.com/blog/how-to-build-your-investment-portfolio/">in your investment portfolio</a> is a key feature of successfully countering inflation. The focus here is on appreciable assets such as purchasing a home or land. <a href="https://www.realfx.com/blog/what-are-the-different-types-of-investments/">These investment types</a> tend to offset the power of inflation because, over time, they increase in real value. The emphasis here is “real value”, meaning not an artificially inflated valuation that occurs in an economic bubble.
For instance, the financial crisis that occurred in 2007 and 2008 was due to an overvaluation of homes. There were many moving parts to this that won’t be discussed here; however, the housing bubble and the ensuing drop in home prices, which was partly due to widespread foreclosures, is a prime example of artificial valuations.
Supply and demand are also significant factors in determining the value of a home. Currently in many U.S. cities, and particularly within the larger metropolitan areas, the demand is exceeding the available supply. This prompts an increase in prices.
The main point being made here is that homeownership is one of the best methods for lessening the impact of inflation. But it takes time as you <a href="https://www.realfx.com/blog/what-is-equity-building-equity/">gradually build equity</a> through paying your mortgage. It’s true that most people need to save cash for the down payment, and this circles back around to keeping an eye on inflation since a 1% interest rate on your savings account is wiped away by the current inflation rate. If you have credit card or other non-collateralized debt, this can compound the inflation issue, as the annual percentage rate you pay greatly exceeds the inflation rate.
In essence, you’re losing a great deal of money via loans and credit cards. This is not inclusive of mortgages since you’re building equity, which tends to appreciate at a faster rate than inflation.
In terms of <a href="https://www.realfx.com/blog/advanced-investing-strategies/">other financial investing instruments</a>, such as commodities or stocks, you can also counterbalance inflation through a well-constructed investment portfolio. The caution here is that financial markets are more volatile than the housing market. Also, there’s a learning curve if you choose to make these investments on your own. Fees and taxes are an additional consideration for buying and selling these investment classes.
This isn’t meant to deter you, rather the goal is to give you a broader perspective regarding which assets are more likely to counteract a devaluation of your purchasing power.
Inflation is a reality all consumers and sellers must grapple with, whether they’re trying to accumulate wealth or <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">save for retirement</a>. If you’re a low-risk investor and you’re currently saving for a down payment on a home, paying off your credit card debt or other non-secured loans is a step in the right direction. Ultimately, buying a home is one of the best methods for getting ahead of the inflation game. 2020-04-22T10:41:00-07:002020-04-22T10:48:54-07:00Danny Evatttag:realfx.com,2012-09-20:7034How to Become an Experienced Investor: Advanced Investing Strategies to Adopt<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/advanced-investing-strategies.jpg" alt="How to Practice Advanced Investing Strategies" width="475" />Dipping a toe into <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">the world of investing</a> can feel like the start of something big. While it is big, it takes a while to get there. Several months or a year after starting an investment strategy, the game might better be called, "Hurry Up and Wait." However, this viewpoint is precisely the one that usually works best for long-term investors to build wealth and manage the jumps and dips that investment offers over the years. With a cool eye and a confident hand, any investor can <a href="https://www.realfx.com/blog/introduction-to-budgeting/">move beyond basic budgeting</a> and ride out the temporary anxieties of investing and see progress from one year to the next.
When to Analyze Existing Investments
At first, it can be tempting to keep both eyes on every investment. Experts suggest avoiding this urge because it can prompt people to get trigger-happy about putting in or pulling out of an investment. With a little experimentation and some knowledge into what works, investors can relax their grip a little and let the good choices do their work. At least quarterly, it's a good idea to perform a basic check on the logic of any particular investment. Investments probably won't do exactly as expected, so this might be a good opportunity to contribute more money to one or less money to another. A stock or fund that is consistently growing with a solid return may be worth greater investment over <a href="https://www.forbes.com/sites/janetnovack/2015/02/05/5-big-mistakes-investors-make-when-they-diversify/#6ca7ac76395d">diversification for diversity's sake</a>.
Choosing New Investments
Making investments continually in <a href="https://www.realfx.com/blog/what-are-the-different-types-of-investments/">different types of investments</a> is key to a diversified portfolio and an ideal result at the end. Investment for the future takes several possible paths, including:
Education
Homeownership
Business
Stocks, funds, and bonds
Cash flow is vitally important to the success of any personal or family enterprise. As such, creating and maintaining an emergency fund of 3–6 months of expenses helps investors to keep their investments in place. <a href="https://www.carefulcents.com/invest-in-yourself/">New opportunities for investment</a> can be productive, as long as the person investing has some knowledge of the business or how the fund works. Investing in the latest hot item may seem like a good idea, but not knowing how the industry works can make it harder to know how the company is doing over the long-term.
Making Rational Decisions
People love to cite <a href="https://www.fool.com/investing/2017/03/22/7-personal-finance-tips-from-warren-buffett.aspx">investor Warren Buffett</a> for pretty much everything, especially his relaxed approach to managing investments. He recommends putting the most care into deciding which investment is best, and focusing less on what the investment does from day to day. There is a lot of advice out there to go "all-in" on an investment that is poised to take off. High rewards often come with high risks, which means that making a rash decision to put too much into one investment might turn into a Titanic-sized disaster. People who have done the research and invest in companies with a history of solid returns will enjoy a better result over many years of investment.
How to Sell Without Panicking
Long-term investing is how great wealth is accumulated, <a href="https://www.realfx.com/blog/what-is-equity-building-equity/">equity is built</a> and <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">retirement plans are saved</a>. Compound interest grows year after year and makes it easier to ride out temporary fluctuations in the market. People probably won't regret sticking with an investment that had a few years of low returns in decades of decent growth. Of course, planning to invest as if the only option is to fall in with a company for 10 years does not always make sense.
Throwing good money after bad is a liability as an investor. As such, <a href="http://www.investopedia.com/articles/stocks/07/when_to_sell.asp" target="_blank">selling an investment</a> earlier than expected might be an excellent idea in certain circumstances. Selling should be done carefully and calmly. If an investment is continually underperforming, or if an investor's overall portfolio has become highly imbalanced, it's wise to sell off the lowest-performing investment in that class. Selling costs money, in the fees paid to end the investment as well as the tax on the capital gains from the investment. That's often enough to deter people from making a snap judgement.
<a href="https://www.realfx.com/blog/how-to-build-your-investment-portfolio/">Maintaining an investment portfolio</a> for years is an exercise in calmness and patience that will ensure <a href="https://www.realfx.com/blog/can-my-savings-lose-value/">your savings never lose value</a>. Cooler heads will prevail, especially those who keep their money in good investments for a long time. Managing money almost begs for overthinking, but people who learn to control the urge to sell at the slightest provocation will be paid well for their composure. Staying informed without obsessing ensures a healthy long-term investment strategy.2020-04-21T10:06:00-07:002020-04-22T10:53:29-07:00Danny Evatttag:realfx.com,2012-09-20:7031Investing & Saving for Retirement on a Budget<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/retirement-savings-on-a-budget.jpg" alt="How to Save for Retirement on a Budget" width="475" />Yes, it really is possible to stash away a bit of cash for your future – even when you feel as if you’re living paycheck to paycheck. The sad reality is that the payday-to-payday syndrome is now the norm, but there really are ways to break free without <a href="https://www.realfx.com/blog/introduction-to-budgeting/">compromising your budget</a>.
If you are under 30, reaching retirement age is almost unfathomable. And if you have a family, retirement seems not only some vague concept that applies to others but also an impossibility. The reality is 20 or 30 years can go by faster than you think, so it just makes sense to plan as much as possible for that day.
A Winning Concept: Pay Yourself First!
This is really what investing and <a href="https://www.realfx.com/blog/how-to-plan-for-retirement/">saving for your retirement</a> is all about. Putting money into savings, retirement, and/or investments (before you do anything else with it) makes it easy, automatic, and budget-friendly. Even if all you can allocate is $5 a week, that amounts to $260 a year before factoring in interest earned.
Let’s say you can save $15 a week for 25 years: at an 8% annualized return, you’ll have $62,183. Save $30 a week for the same 25 years with the same rate of return and your nest egg becomes $124,365.
How to Start
The trick is to form a weekly habit that pays you back. The safest way is to first build up a contingency fund that is accessible if you have an emergency. This is best done with a savings account. Granted, the interest rates on savings accounts is low, but you have 24/7 access to that money if you need it.
This is the time to get out from under all those school loans and credit card bills. Pay down and then pay off the card with the highest interest rate. Keep working through all your credit cards in this order. Your focus is on putting an end to paying interest on anything other than your car loan and mortgage if you have one.
Interest Rates You Pay
Renegotiate fees as they take a big bite from your budget. At least once a year, review all your monthly payments such as mortgage, insurance policies and credit cards to see if you can find a better deal elsewhere. <a target="_blank" href="http://www.bankrate.com/">Bankrate.com</a> is a free and user-friendly online tool that lets you compare rates.
Retirement Accounts Through Your Workplace
Employee programs are the easiest way to start saving today. Does your <a target="_blank" href="http://money.cnn.com/retirement/guide/401k_401kplans.moneymag/index.htm?iid=EL">employer offer a 401(k)</a> (offered by for profit employers) or a <a target="_blank" href="http://money.cnn.com/retirement/guide/401k_403bplans.moneymag/index2.htm">403(b)</a> (offered by not-for-profit employers)? Does your employer offer <a target="_blank" href="http://www.bankrate.com/investing/ira/roth-ira-401k-whats-the-difference/">Roth IRA and/or Roth 401(k)</a> plans? If so, enroll ASAP. Most employers match a percentage of contributions, up to certain limits, but generally only if you chip in. So contribute enough to qualify for all of the free money available to you.
Retirement Account Options if Your Company Doesn’t Offer One
There are a number of <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">retirement plan options</a> available to give you flexibility in terms of how you invest in your retirement. Do you want more flexibility regarding when you can spend the money? Investigate a <a target="_blank" href="https://www.nerdwallet.com/blog/investing/what-is-a-roth-ira/">Roth IRA</a>. Like standard IRAs, Roth IRAs are funded with after-tax dollars and offer tax-free income in retirement. As a potential first home buyer, Roth IRAs offer an added bonus. Once your Roth IRA has been open for 5 years, you can withdraw some of the investment gains you’ve made penalty-free based on certain requirements. Using part of your money to pay for your first home is one of these requirements. As a side note, anyone can open an IRA or Roth IRA.
Other Possible Investments
Index funds and mutual funds can increase your investments incrementally each month, but it is necessary to watch out for and understand fees associated with these investments. An ETF (Exchange-Traded Fund) is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold whereas mutual funds trade only at the end of the day at the net asset value (NAV) price.
If you are considering investing in these, look into the various investment apps, often referred to as Roboadvisors, to 1) help you make decisions and 2) keep your costs down.<a target="_blank" href="https://www.acorns.com/"> Acorns</a> and <a target="_blank" href="https://www.stashinvest.com/">Stash</a> let people get started with contributions as small as $5. <a target="_blank" href="https://www.wealthfront.com/?gclid=EAIaIQobChMIhaWV28Kq1gIVhUGGCh3C9gxgEAAYASAAEgJFsvD_BwE">Wealthfront</a> requires a minimum of $500. <a target="_blank" href="https://www.betterment.com/start-investing/?utm_content=14545459&gclid=EAIaIQobChMIw5TVusWo1gIVigOGCh3CUAXNEAAYASAAEgKl8vD_BwE">Betterment</a> does not have a minimum balance, but if you have less than $10,000 in your account, you must contribute at least $100 per month to avoid higher fees.
Remember, the lower the fees you pay, the more cash in your pocket or account!
Read and ask questions so you thoroughly understand your various options to <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">invest in your future</a>. Start small; build a nest egg for emergencies; pay off high interest rate debts and set yourself up with a savings habit for years to come. When you find yourself sitting on the beach on that long-imagined island, you’ll be glad you did.2020-04-20T08:53:00-07:002020-04-20T09:10:46-07:00Danny Evatttag:realfx.com,2012-09-20:7032What is Equity? How to Empower Yourself By Building Equity<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/building-equity.jpg" alt="How to Build Equity" width="475" />Equity is the measurement that results from subtracting a person’s or enterprise’s assets from their liabilities <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">when they make investments</a>. Essentially, equity is the value left over after you’ve paid all of your debts, with liability representing debt, and assets being classified as those things you own (e.g., cash, cars, homes, and other items that can be liquidated to exchange for cash).
With regard to home ownership, equity is the value left over once you subtract the balance of your mortgage from the fair market value of your home. When someone says they are “upside down” in terms of home equity, this means they owe more to the mortgage lender than their home is currently worth. Fair market value is based on both objective and subjective factors. It answers the question, “What would a reasonably knowledgeable person, who is freely participating in the transaction, willingly pay for a certain asset within a given time frame?”
Equity also applies to other assets such as stocks, equipment or business ownership, and the two primary ways it’s built is through loan repayment and price appreciation. Keep in mind that assets which depreciate in value over time also decrease in equity. A car is a perfect example. Pretty much the moment you drive that shiny new vehicle off the auto dealer’s lot, it begins to depreciate in value.
Much like <a href="https://www.realfx.com/blog/can-my-savings-lose-value/">how savings can lose value over time</a>, if you took out a car loan, then your equity is almost immediately “upside down.” Certainly, you may keep the car in near-perfect condition, but should you resell or trade it in, you paid far more to the lender than you’ll receive.
Why Does Equity Matter?
The importance of equity is its liquidity, or ability to be exchanged based on a price that has stability. Cash is the most liquid of all assets and is <a href="https://www.realfx.com/blog/introduction-to-budgeting/">the core of building a viable budget</a>. Plus, cash is the most fluid in terms of how quickly you can exchange it for goods and services. A simple way to view equity is how much cash you’ll receive for an asset. So, the more equity you have, essentially the more cash is available to you—should or when it’s needed. As such, equity is your net worth directly related to your assets.
Equity can be leveraged to purchase a home or obtain loans. Lenders review your net worth as one of several measurements to determine how likely you are to repay the loan. Therefore, equity is inextricably linked to credit worthiness. Such is the reason mortgage lenders calculate your debt-to-income ratio. If you have a high income with a low amount of debt, then that points in the direction of having more equity. This is especially true if you own additional assets without any debt tied to them (e.g., a car you’ve paid off or if you own your home free and clear).
Ways to Leverage Equity
When you use your current equity to <a href="https://www.realfx.com/blog/how-to-build-your-investment-portfolio/">build an investment portfolio</a> or improve other appreciable assets, then you are leveraging equity in a beneficial way. Home improvements tend to raise the fair market value of your home. Returning to school is also an investment that can prove to boost your income over time.
Though using equity to take a vacation might be tempting, it’s not classified as an appreciable asset unlike <a href="https://www.realfx.com/blog/what-are-the-different-types-of-investments/">different types of investments</a>. Certainly, everyone needs to get away and regenerate, and this may translate into energizing your productivity when you return. But prudent use of your equity by placing it towards continual investment returns on appreciable assets and activities will yield greater financial benefit in the future. Would your future self also like vacations (and with more frequency)?
If an emergency arises and you need access to a large sum of cash, you can apply for a home equity line of credit or borrow against that equity. Keep in mind that any additional debt you add may place you back into the “upside down” equity (also known as negative equity) situation. You can also withdraw money from a <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">retirement savings account</a>, but this should only be done knowing it will affect your preparedness for the future.
When you hit the age of 62, you can also sell back your home equity through a reverse mortgage. This allows you to receive cash payments in exchange for the existing home equity. This is still considered a liability, as it is a loan and you must pay it back. The <a target="_blank" href="https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten">U.S. Department of Housing and Urban Development</a> lists additional and important specifics regarding a reverse mortgage on their website.
Equity is a valuable financial and investing tool that can help to enhance your lifestyle now and in the future, and improve your <a href="https://www.realfx.com/blog/advanced-investing-strategies/">leverage as an advanced investor</a>. Gaining equity and leveraging it in a responsible manner can make a significant difference in accumulating wealth and ensuring future financial stability.2020-04-17T10:07:00-07:002020-04-22T10:53:13-07:00Danny Evatttag:realfx.com,2012-09-20:7024Thinking Ahead About Retirement: Here's What You Need to Know<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/how-to-plan-for-retirement.jpg" alt="How to Plan For Your Retirement" width="475" />With the idea of retirement decades away, it might be too easy to put off building a retirement fund until finances improve, <a href="https://www.realfx.com/blog/introduction-to-budgeting/">the budget isn’t as tight</a>, and there’s more room for discretionary spending. The truth is that an <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">earlier start to investing</a> usually leads to a bigger payoff. Some people might decide to work past retirement age, but with the right funding approach, they may not have to do so. In fact, advanced thinking about retirement may even allow people to retire early.
When to Stop Working
Although the decision to retire is intensely personal, it is only based on four things:
How much someone has in their savings
What they will spend in retirement
Their overall health
Their interest in continuing employment
This can be difficult to predict, especially at younger ages. There are always sudden, extreme expenses (e.g. divorce, job loss) that could sideline retirement plans for a while. An early start, preferably in a person’s 20s but especially before their 40s, gives the best chance at building a nice nest egg that will continue to grow through investment and additional contributions.
Common Roadblocks to Building a Solid Retirement Account
The truth is, getting a leg up in the existing economy takes more than just cutting back on living expenses. <a target="_blank" href="https://fred.stlouisfed.org/series/MEHOINUSA672N">Wages have been lagging</a> since the late 90s. This means that everyone who was not already established in their careers by then has had to bear the brunt of the increasing cost of housing without the added reliability of a growing income stream to balance it out. On top of that, the expectation of a college degree combined with <a target="_blank" href="https://www.cnbc.com/2015/06/16/why-college-costs-are-so-high-and-rising.html">skyrocketing university tuition</a> has created a one-two punch, leaving younger workers with high rates of student loan debt and fewer well-paying jobs to choose from.
Getting Started
Pretty much everyone who waits to save for retirement wishes they had started earlier. People who are already making plans to establish some retirement savings are well ahead of the pack. It doesn’t take a lot of money to build wealth, either. Every dime put in right now, invested wisely, should return a nice chunk of change once retirement hits in 30 or 40 years.
Types of Retirement Funds
In thinking about starting a retirement fund, the first step is to <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">choose what type of retirement plan</a> is best-suited to you. First, people can see if their employers offers a 401k, a retirement fund managed through the employer that employees (and sometimes the company) can contribute to. People who work in fields such as education or tax-exempt organizations may have a 403b instead of a 401k. Employees whose companies do not offer a 401k can still contribute to an Independent Retirement Account (IRA). IRAs have lower maximum yearly contributions than a 401k, but they may be helpful in diversifying retirement investments.
How Much Should I Be Putting Away?
Employers often suggest putting 3–6 percent into a 401k, but this is probably not enough. With incomes not rising to meet the costs of housing, medical care and other expenses, it may be wise to save more. Most financial experts suggest that people plan to save <a target="_blank" href="https://www.nerdwallet.com/blog/investing/how-much-to-save-for-retirement/">10–15 percent of their income</a>. In some cases, people who are feeling the pinch between the cost of health care, student loans, and housing might start investing less and increase it with raises and growing confidence in investing. It is often easier to get used to a new savings program by easing into it gradually.
When Can I Retire?
Decades ago, retirement was more of a physical necessity. Some people simply could not work any longer than 40 or 50 years. Although this is still a reality for many people, it is worth noting that the concept of retirement is itself in flux. The rise of the <a target="_blank" href="https://www.inc.com/john-white/the-rapid-rise-of-the-gig-economy-is-changing-the-way-we-work.html">gig economy</a> means that both workers and employers are increasingly recognizing the benefits of employment outside of the traditional 40 hours in an office.
Although most people reach a point where they want to be done with work for good, others might go through a process of partial- or semi-retirement before they get there. A practical reason for considering this route is that workers can continue to bring in an income, rely less on savings if they’ve <a href="https://www.realfx.com/blog/saving-for-retirement-on-a-budget/">needed to save for retirement on a budget</a> and be able to adjust to a greater amount of free time.
There must also be a consideration regarding the type of home you would like to live in as you get older. This plays into your strategy as well. Do you own your home outright? Are you upside-down waiting for the economy to bounce back? You've got to be honest when answering these questions. There may also be a point where you or your spouse may require <a href="https://www.assistedliving.org/texas/" target="_blank">assisted living</a> or long-term in-home medical care.
Planning for a financial event decades down the road is complicated. From a realistic standpoint, whatever someone puts in while they are younger will make it easier for them later. Taking a reasonable road toward retirement planning and increasing contributions along with income can better ensure a good retirement at the right time.2020-04-16T09:58:00-07:002021-04-08T11:15:23-07:00Danny Evatttag:realfx.com,2012-09-20:7012IRA, 401k, 403b: Which Retirement Plan is Right for Me?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/types-of-retirement-plans-explained.jpg" alt="Understanding Different Retirement Plans" width="475" />As people start to delve into the <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">world of investment</a>, they may be inundated by the alphabet soup that is retirement plan acronyms. It can be difficult to distinguish between an IRA, 401k, and 403b. Plus, a lot of the information changes yearly. This guide distinguishes the common types of retirement plans and shows how to decide which one is most appropriate for individual needs when you’re <a href="https://www.realfx.com/blog/introduction-to-budgeting/">planning a budget</a> for your daily life or <a href="https://www.realfx.com/blog/saving-for-retirement-on-a-budget/">saving for retirement on a budget</a>.
Benefits of Paying Into a Retirement Fund
When parents teach about putting savings in a piggy bank, they may forget to explain the tasty bacon that is compound interest—especially when you remember that <a href="https://www.realfx.com/blog/can-my-savings-lose-value/">savings can lose value</a>. Putting money in a retirement fund that is well-managed is one of the best <a href="https://www.realfx.com/blog/how-to-plan-for-retirement/">ways to save for retirement</a> because it puts money to work. An investor puts money into the plan, and the money is invested into a variety of funds. Each year that the money stays in the fund, it collects interest. Compound interest means that it can collect interest on previous interest.
IRA
People can start to build retirement funds with an Independent Retirement Account (IRA), whether or not their employers offer some kind of retirement plan. Before opening an account, it is important to decide between a <a target="_blank" href="https://www.nerdwallet.com/blog/investing/roth-or-traditional-ira-account/">traditional IRA or a Roth IRA</a> account. The contributions to a traditional IRA offer a tax deduction for the year in which the contribution is made, for those who make less than $70,000/year filing single. This is convenient in that it allows investors to effectively defer the tax for that money until they start taking disbursements after they retire. With a Roth IRA, people cannot claim the contribution on their taxes, but the withdrawals that you take may not be subject to taxation.
The maximum that people under age 50 can put into any IRA (or a combination of IRAs) is $5,500 a year, depending on the person’s adjusted gross income. These contributions are invested into a fund that grows compound interest over time. In some instances, a person may decide to withdraw the money early. For those who have kept a Roth IRA for at least five years and are over age 59.5, there is typically no penalty and the withdrawals are not taxed. With a traditional IRA, any early disbursements are given a 10 percent penalty, plus a tax liability at the investor’s current tax rate.
401k
Another type of investment for retirement is the 401k retirement plan. A 401k is very similar to an IRA, but it is offered exclusively through an employer. To avoid the complication of the tax deduction at the end of the year, 401k contributions are usually made pre-tax. Employers may choose to partially or completely match employee contributions up to a certain amount, typically 3–6 percent. Younger workers can contribute up to $18,000 per year. This money is put into a fund managed by a third party designated by the employer. The employees retain some degree of control over the contributions they make personally.
The company may follow a <a target="_blank" href="https://www.thebalance.com/know-the-impact-of-your-401k-vesting-schedule-2894176">vesting schedule</a> for any contributions the employer makes on an employee’s behalf. For example, an employer may choose to give employees full vesting of their contributions to the plan or increase vesting over time. Workers who are not fully vested when they end employment with the company may only be able to keep a portion of the employer’s contribution. When people choose to withdraw the money early, they face the same taxation and penalties as a traditional IRA.
403b
Certain companies do not have the option of creating a 401k for their employees, and many of them are eligible to start a 403b instead. A 403b is fundamentally similar to a 401k, except it is designed for people who work in education or certain tax-exempt industries. Like a 401k, an employer can accept contributions from employees and match those contributions to a certain limit. Since these contributions are made prior to taxation on income, people pay taxes on it once they start taking disbursements. In addition, an employer may set a vesting schedule on its contributions. Like a 401k, the maximum personal contribution is currently set at $18,000 per year.
How Much Should I Contribute?
The best amount to contribute is unique, depending on the time left before planned retirement, the <a href="https://www.realfx.com/blog/how-to-build-your-investment-portfolio/">level of diversification in a portfolio</a>, and the kind of life a person plans to lead once they quit working. Experts suggest that people plan to have a nest egg large enough to cover 80 percent of their pre-retirement expenses. Social Security will probably still be around in some form, but many people find that Social Security alone is not enough to cover a reasonable life in retirement. Because of this, it’s better to develop your investing skills now.
It can be exciting to watch a retirement fund grow once the money has been put in, much like watching your home appreciate in value while you <a href="https://www.realfx.com/blog/what-is-equity-building-equity/">build equity</a>. With an understanding of the different types of retirement plans, investors can set retirement goals and see how well their money works for them.2020-04-15T11:08:00-07:002021-07-31T10:30:48-07:00Danny Evatttag:realfx.com,2012-09-20:7007What Are the Different Types of Investments?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/different-investment-types.jpg" alt="Different Types of Investments for Your Portfolio" width="475" /><a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">Making it big in investing</a> does not require a person to have been born by the 1960s, as much as it often feels this way. The truth is that a lot of companies have promise and fizzle out, while many others explode in value quite under the radar. The trick is to participate and diversify investments to create a better chance of catching the big fish. Once you’ve <a href="https://www.realfx.com/blog/introduction-to-budgeting/">mastered basic budgeting</a>, it’s time to get started with <a href="https://junilearning.com/courses/intro-to-the-stock-market-for-kids-private" target="_blank">investing</a>: Understanding the common types of investments is the first step.
Because <a href="https://www.realfx.com/blog/can-my-savings-lose-value/">savings can lose value</a>, here are some different investment options to choose from instead to get ahead financially.
Stocks
Buying stock in a company can be basic or complex, depending on the stock. Owning stock denotes the purchase of interest in the company. In essence, an investor becomes a part owner, even if that part is only 0.01 percent of the company. People <a target="_blank" href="http://www.finra.org/investors/stocks">buy stock</a> in shares, which then increase or decrease in value based on a number of factors. There are essentially two forms of stock: common and preferred.
Investors can make money buying stocks, but it is also possible for investors to lose money. There really is no limit to the amount of money that can be gained. What happens with an investor’s money relates to the overall success of the company, the health of the stock market itself, and the type of stock.
Deciding to buy common or preferred stock depends on what a person hopes to get from the investment. Common stock is available with any publicly traded company. Profits from common stock may rise or fall with the company, and yields are variable. If the company offers preferred stock, investors who hold preferred stock will be guaranteed a set dividend (although there are instances in which the dividend might not be given). Preferred stocks are considered lower risk, but they may also have a lower reward compared to common stocks.
Funds
In a larger plan to diversify investments, funds are often a good way to start. Funds take the money from many investors and put it into a particular investment. Think of it like buying into a pool of lottery tickets with a more predictable rate of return. This allows individual investors to access funds they might not be able to access on their own and helps to pool the risk. As an added benefit, the fund is managed by a third-party who has greater expertise, which improves the investment returns and helps to minimize losses.
To decide on the fund that is ideal, it is important to understand how each one works. <a target="_blank" href="https://www.forbes.com/sites/feeonlyplanner/2013/07/18/whats-the-difference-mutual-funds-and-exchange-traded-funds-explained/#23c58f6518ac">Mutual funds</a> act like a buffer between investor and investment. The company offering the mutual fund purchases shares in stocks or bonds, and then sells its shares to people who invest in the mutual fund. The price of shares in the mutual fund may not change as much as the price of individual stocks. Exchange-traded funds (ETFs) are investor-pooled funds that try to index the price of individual shares based on the prices listed in a particular market. There are fees to manage both types of funds, but ETFs are typically lower than the fees for mutual funds.
Bonds
Stocks or funds could have unlimited investment times. Bonds, on the other hand, have a specific maturity date, ranging from a few days to several decades. Although an investor can lose money purchasing bonds in a volatile market, bonds could also be the safest form of investment. Buying a bond means granting a loan to an entity for a period of time. There are many possible options for <a target="_blank" href="http://www.finra.org/investors/types-bonds">purchasing bonds</a>, several of which are available through the U.S. government. Common bonds include:
Treasury securities: bonds with variable maturity dates
Savings bonds: government-backed bonds available for a low investment
Mortgage-backed securities: bonds secured by real estate and houses
Corporate bonds: bonds for corporations, intended for capital expenditures
TIPS: bonds with values adjusted for inflation
STRIPS: bonds that allow investors to trade interest on certain treasury securities
Agency securities: bonds issued or guaranteed by government-sponsored enterprises (GSEs)
Municipal bonds: an investment in a state, city or county
International and emerging markets bonds: bonds offered by foreign countries and markets
The risk presented by each bond depends largely on the entity backing the funds. Some may be considered virtually risk-free, making them a fairly safe bet for new investors.
A basic understanding of the types of investments is only the beginning of an investment experience, whether you want to save up for a down payment on a home to <a href="https://www.realfx.com/blog/what-is-equity-building-equity/">build equity</a> or put <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">money in a retirement plan</a>.
Within each category is layers of complexity, and <a href="https://www.realfx.com/blog/advanced-investing-strategies/">advanced investors</a> understand them more thoroughly as they personally interact with stocks, funds, and bonds. Varying the risk <a href="https://www.realfx.com/blog/how-to-build-your-investment-portfolio/">throughout an investment portfolio</a> is key in order to quickly gain the knowledge necessary to make better investment decisions.2020-04-14T07:27:00-07:002022-04-11T06:03:06-07:00Danny Evatttag:realfx.com,2012-09-20:6993How to Build Your Investment Portfolio<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/how-to-design-your-investment-portfolio.jpg" alt="How to Construct an Investment Portfolio" width="475" />Building and maintaining a well-researched financial portfolio is instrumental to success for anyone <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">involved in investing</a>, but for those just getting started, it can be hard to determine what decisions are the right ones. What goes into an investment portfolio? How should assets be allocated? How does diversity affect the quality of a portfolio? An investment portfolio should help its owner meet their future financial goals, so it’s important for a prospective investor to begin with as much information as possible.
Create a Unique Investor Profile
One of the best things to do before getting too involved in various investments is to establish an investor profile based on a personal <a target="_blank" href="http://www.investopedia.com/articles/pf/07/risk_tolerance.asp">risk tolerance</a> and unique goals.
Determining risk tolerance generally involves the following considerations:
Age. Younger investors have a longer timeline during which their money will be able to grow. Because of this, they are able to make riskier investments that wouldn’t set them as far back as an older investor.
Timeline. When is the money needed? Investors seeking to earn money for a short-term goal may prefer more conservative, or safer, investments because they’re more likely to get the money they need by their decided deadline. Longer-term goals afford investors the luxury of riskier investing.
Personality. How much risk can be stomached? For investors able to handle the most harrowing fluctuations in the market or the possibility of losing the entirety of their investment, more aggressive and riskier picks are doable. If these same fluctuations and possibilities make another investor’s skin crawl and their hair fall out from stress, much more conservative investment decisions are more appropriate.
It is often tempting to follow advice from friends and family with regards to risk and investments, but their goals may not always overlap. For example, someone might want to make an expensive purchase or start a business within a few years, which means they need a higher rate of return in a shorter amount of time. They might also just be looking to build a tidy amount of <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">money for when they retire</a> decades from now, which would change their options when investing money.
Financial goals and <a href="https://www.realfx.com/blog/introduction-to-budgeting/">current established budget</a> determine the ideal risk level of any investment portfolio, ranging from conservative to aggressive. The more aggressive the investment, the higher the risk and the reward.
Asset Allocation
Building a portfolio requires consideration about the best way to split the assets among stocks, funds, and bonds. Diversification is key, and investors can keep it as basic or as complex as they like. It is, after all, their money.
However, there is a lot of wisdom in tailoring an <a target="_blank" href="http://www.investopedia.com/terms/a/assetallocation.asp">asset allocation</a> based on specific risk tolerance and current income goals. People might opt for a simple strategic asset allocation, which targets a specific rate of return and then invests in stocks, bonds or funds that balance out to that yield based on previous performance.
There is no guarantee of gains, of course, and an investor’s financial goals may change. This means they might have to step outside of a rigid asset allocation. In that case, they could decide to switch up their investments from time to time. Eventually, experience may make it easier to go for a dynamic asset allocation, where the average rate of return is in regular flux based on the investments made.
How to Balance Investments
The more diverse the investment portfolio, the more spread out the risk. Individual <a target="_blank" href="http://www.finra.org/investors/stocks">stocks</a> may be the riskiest <a href="https://www.realfx.com/blog/what-are-the-different-types-of-investments/">type of investments</a>, simply because the investor is relying on one company to succeed and the knowledge of the best companies to invest in. <a target="_blank" href="http://www.finra.org/investors/investment-funds">Funds</a> can spread out the risk a little by investing in several stocks or bonds. <a target="_blank" href="http://www.finra.org/investors/bonds">Bonds</a> are often the safest investments to make, depending on the organization that backs the bonds. With all investments, a higher degree of risk usually corresponds to higher rates of gain or loss.
General Investment Tips
Sending money out into the world is like a person taking their oldest child to kindergarten, but it’s better than letting the child stay home (or <a href="https://www.realfx.com/blog/can-my-savings-lose-value/">let the money sit in a savings account</a>). It is really tempting to become a helicopter parent to the investments, but there’s a degree of risk in doing so. With a diverse investment profile, investors can vary the degree of risk with each investment. This can help to calm an itchy “must sell now” finger. Experts strongly recommend <a target="_blank" href="https://www.cnbc.com/2016/03/04/warren-buffett-buy-hold-and-dont-watch-too-closely.html">keeping one eye</a> on all investments, but not to follow them so closely that they feel the pressure to buy or sell with the same money on a regular basis. Many investments can ride out minor bumps in the road. Paying restricted attention allows people to make a better decision about buying, holding or <a href="https://www.landcentury.com/articles-news/step-by-step-guide-to-selling-your-home" target="_blank">selling</a>.
Simple Online Investment Tools
Ultimately, getting started in an environment that provides a little insurance against crashing and burning is ideal. No one wants to lose 30 percent of value on a first investment. There are several tools available to provide guidance in the types of investments to consider, or even to simplify the process of investing and managing a portfolio. Organizations like Personal Capital, SigFig, Betterment, and Acorns allow users to create a profile and start investing quickly. In some cases, investors can even set up automatic deposits or transfers so that the process is more automated and seamless.
Investing is like eating potato chips: people can’t just have one. With a varied portfolio of investment types in differing degrees of risk, a <a href="https://www.realfx.com/blog/advanced-investing-strategies/">new investor can become experienced</a> and better ensure a predictable gain over time or a <a href="https://www.realfx.com/blog/what-is-equity-building-equity/">building of equity</a> in the instance of real estate investing. This will help to achieve personal financial goals, at a risk level that feels practical and appropriate.2020-04-13T10:10:00-07:002021-10-18T07:58:49-07:00Danny Evatttag:realfx.com,2012-09-20:6992Investing For Beginners: Resources & Advice For Investing In Your Future<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/basic-beginner-investing-tips.jpg" alt="How to Get Started With Financial Investing" width="475" />Putting money in a savings account is fairly easy to establish, but it also often has a disappointingly low rate of return and <a href="https://www.realfx.com/blog/can-my-savings-lose-value/">the possibility of your savings losing value</a>. People who want their money to work for them and earn their money must do so by investing it and making wise investment decisions. The good news is that anyone with some spare cash and time can get into investing.
For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any financial decisions.
Are You Ready to Start Investing?
There is some discussion about whether it’s better to prioritize investing or paying off debt is a better move financially. Paying down debt can <a href="https://www.realfx.com/blog/what-is-credit-score/">improve your credit score</a>, which can save you money and lends to securing better interest rates and financial opportunities in the future.
However, investing is a way for your money to earn you money while doing very little. The decision of whether to invest or <a href="https://www.realfx.com/blog/debt-repayment-planning/">pay down debt</a> depends largely on the terms of a particular debt compared to the opportunities of an investment. A debt that comes with a high interest rate that quickly compounds further debt should be paid down aggressively, particularly if the investment options available do not yield more money than the debt itself accumulates.
<a href="https://www.realfx.com/blog/how-to-build-long-term-wealth/">Anyone who desires to build long-term wealth</a> will have to come face-to-face with these questions and determine which financial moves are right for them in order to <a href="https://www.realfx.com/blog/what-does-it-mean-to-be-financially-secure/">achieve financial security</a>.
The Power of Compound Interest
<a href="https://www.realfx.com/blog/introduction-to-budgeting/">Building wealth through budgeting</a> and investing is all about compound interest, and how people get an interest in investments to pay them back in increasingly larger quantities. If someone invests $1,000 in a company and gets a 7-percent rate of return on an investment for the year, they will earn an additional $70. If they keep the money in the account for another year and get the same return, they will have about $1,140. Over decades, a small investment can generate tens of thousands of dollars in wealth.
Basic Investment Tips
When people start to consider investing, they often hear a great deal about buying, selling and holding. These are recommendations that investors are not obligated to follow, but they may help to make a practical decision. An investment with the recommendation to buy has a lot of growth potential. One suggesting that investors sell is essentially the opposite.
Holding is variable. If someone already owns the stock or security, they might hold it without a great deal of risk. However, an investment listed as “hold” may not be a wise choice to buy. Experts suggest that investors look at the <a target="_blank" href="http://www.investopedia.com/articles/financialcareers/06/snapdecisions.asp">previous two earnings reports</a> to get a sense for the company’s overall growth pattern.
Investment Types
There are many <a href="https://www.realfx.com/blog/what-are-the-different-types-of-investments/">types of investments</a>, and the best way to secure a reliable rate of return is to select a variety of them. Stocks involve an investment in a company, and may also provide regular dividends. People who bought or received a savings bond as a kid-friendly investment probably understand that bonds typically accrue interest and increase in value until they reach a specified date of maturity.
Funds are the most variable of the investment types, in part because the funds themselves may contain a combination of stocks, bonds, securities, and other investments. Common <a target="_blank" href="http://www.finra.org/investors/investment-funds">investment funds</a> include:
Mutual funds
Exchange-traded funds (ETFs)
Index funds
A mutual fund is an investment made with money pooled together from multiple investors and spread across <a href="https://www.realfx.com/blog/how-to-build-your-investment-portfolio/">a diversified investment portfolio</a> where all of the individual investors share the gains and losses of the overall fund. Mutual funds are a valuable asset for small investors because they provide access to diversified portfolios with a smaller barrier to entry.
Exchange-traded funds allow buyers to grow their investments at the rate of market growth based on an index fund (think NASDAQ, Dow Jones, or other indexes), and they require less active management because they only need to keep up with the market, not outpace its growth. Index funds are a type of mutual fund constructed to match a component of a broader market index, such as the S&P 500 or the Russell 2000.
Real estate can also count as an investment, as land, homes, and other <a href="https://www.realfx.com/blog/what-is-equity-building-equity/">buildings gather equity</a> as the owner pays off loans and takes control of the asset.
The type of fund an investor wants depends on how they plan to exchange and trade the stocks.
Purchasing Dividend-Paying Stocks
There are two types of stock: common and preferred. Preferred stocks often come with a dividend that is paid out first. Choosing a <a target="_blank" href="https://www.fool.com/investing/2017/01/20/8-dividend-investing-tips-that-could-earn-you-thou.aspx">dividend-paying stock</a> requires careful consideration. The trick is to find the stocks that have a consistent rate of dividends paid out to investors. As with any investment, an investment in stock relies on the company to follow wise business practices.
This can be hard to tell without a lot of research. Some companies with a high dividend and who yield year after year are taking a path that is hard to sustain. Sometimes, the smaller dividend yields are easier to guarantee year after year, making those stocks a better choice.
Building a Portfolio
It is rarely wise to put all nest eggs into one basket, so diversification is key. Put money into a few different stocks, bonds, and funds. Get a sense for the risk level of each investment so that it is easier to balance out investments based on individual risk tolerance. Keep an eye on investments, but focus primarily on the yearly returns. Be sure to factor in the <a target="_blank" href="https://www.thebalance.com/ask-about-fees-before-you-invest-2388527">cost of fees</a> to manage any investment arranged through a third party. Fees vary between types of investments and organizations.
Capital Gains
Taking dividends or pulling out any investments may trigger a tax liability on capital gains. <a target="_blank" href="http://www.investopedia.com/terms/c/capitalgain.asp">Capital gains</a> refers to the increase in value of a particular holding. Investments made <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">through a retirement plan</a> may be tax-deferred until retirement, but others could generate capital gains tax liability on a yearly basis. The rate of taxation for the investment depends on whether the investment was short-term (usually less than one year) or long-term.
Investment Tools
Of course, it can be intimidating to get into the market in the first place, especially if you're trying to <a href="https://www.realfx.com/blog/saving-for-retirement-on-a-budget/">invest or save for retirement on a budget</a>. Discussions of risk may make it seem like it is very difficult to succeed as a new investor. Fortunately, there are many organizations, apps and other tools to educate, make recommendations on investments, or help manage a portfolio. Consider companies like:
Acorns, which also has options for <a href="https://www.realfx.com/blog/how-to-plan-for-retirement/">retirement planning</a>
Betterment
Personal Capital
Stock Market Simulator
SigFig
Yahoo! Finance
Robinhood
Experts recommend trying out a variety of options and choosing the one that aligns best with specific investment goals for yourself or <a href="https://www.realfx.com/blog/how-to-manage-your-finances-as-a-married-couple/">for your joint finances with a partner</a>.
Starting to invest at a younger age is probably one of the best financial decisions someone can make in their lives, and it can help you <a href="https://www.realfx.com/blog/advanced-investing-strategies/">develop advanced skill in investing</a> and help with <a href="https://www.realfx.com/blog/plan-for-large-purchases/">planning for larger purchases</a>. With a thorough grounding in the essentials, it is easier to choose investments and have a more productive investment experience.
For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any financial decisions.2020-04-10T09:59:00-07:002020-04-27T09:33:55-07:00Danny Evatttag:realfx.com,2012-09-20:6987Advanced Budgeting: How to Take Your Budgeting Skills to the Next Level<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/advanced-financial-budgeting-techniques.jpg" alt="How to Develop Advanced Budgeting Skills In Your Financial Life" width="475" />So, you’ve been <a href="https://www.realfx.com/blog/introduction-to-budgeting/">adhering to your budget</a>, but perhaps life circumstances have shifted. Maybe you need to relocate due to a new job, or you’ve decided to return to school. Life is in a perpetual state of fluctuation, and your budget will continually reflect this reality. Therefore, it’s wise to review your current budget to ensure it fits your lifestyle as well as your financial goals and objectives.
It’s true that future financial projections are challenging to pinpoint precisely, and that can make <a href="https://www.realfx.com/blog/what-does-it-mean-to-be-financially-secure/">achieving financial security</a> difficult. After all, economic predictions aren’t completely accurate—no matter what tools experts may use to make those forecasts. This doesn’t mean you should take a defeatist position and throw in the towel. There are steps you can take to fortify your current financial perspective, whether you want to <a href="https://www.realfx.com/blog/plan-for-large-purchases/">plan for a large purchase</a> or simply develop more financial stability.
Emergency Fund
Your emergency fund is your go-to account should a large expense arise suddenly. Job loss, health issues, or other circumstances can quickly turn one’s life upside down. As such, the rule of thumb for your emergency fund is three- to six-month’s salary stashed away, preferably in a high yield savings account. If your expenses have increased, the challenge here is deciding if you can still comfortably contribute to the emergency fund. Realistically, if you’ve taken on additional debt or other financial obligations without an increase in income, then squeezing out more for the emergency fund presents a challenge.
But, is there anywhere else in your budget that can be decreased to offset the new financial responsibility? First, examine the lifestyle area of your budget; if you have a certain amount budgeted for the “fun stuff” such as dinner out with friends and family or that daily frothy coffee drink from your favorite coffee shop, then analyze where you can temporarily cut back on spending.
The next section to review is your monthly grocery budget. Though coupons may seem oh-so-20th century, you could save <a target="_blank" href="https://www.thebalance.com/how-to-save-your-nest-egg-by-using-grocery-coupons-940259">$300 per month</a> or more depending on how aggressive you are about “couponing.” If you go this route, make sure to move that savings into your emergency fund. You’ll be surprised how fast that money can add up. However, your emergency fund is not your retirement fund—though some of the money can be shuttled into a retirement account. After you’ve reviewed your emergency fund and are satisfied with the changes, it’s time to move onto your retirement fund.
Retirement Fund
As you are probably well aware, retirement funds are a long-term investment strategy. In fact, the IRS places restrictions on pulling money out of your retirement account prior to reaching a minimum age. These restrictions include some hefty tax penalties. If you’re currently contributing through your employer and you want to either increase or decrease the contribution, take some time to research the minimum and maximum allowed. Increasing the fund is the primary goal, but if your budget demands some priority adjustments, then temporarily downshifting the contribution is doable.
Investments
There's some debate over whether it's better to invest or <a href="https://www.realfx.com/blog/debt-repayment-planning/">plan to pay down debts</a>, but both options are financially viable in the right circumstances. When you're ready, <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">private investments</a> can include opening your own retirement account. Regardless of the type of account you choose, having both an emergency fund and an investment account can yield a larger return within a shorter period of time. Of course, this largely depends on your risk threshold. Investment accounts have varying restrictions on when and how you can withdraw funds. And you should continue to be mindful about IRS regulations regarding taxation on withdrawals. There are also various fees associated with investing (e.g. brokerage fees, commissions, costs per trade, etc.).
The minimum amount to open an account ranges from $250 to $2500. So, depending on your current budget and emergency fund balance, it may take some adjustments elsewhere in your budget. Also consider whether you have the time to manage a self-directed account as opposed to paying someone to manage the account for you. The latter is costlier in the short term, whereas the former might prove to be more trouble if you’re not keen on learning the various trading mechanisms and studying the assets you’re investing in.
However, if your budget allows, then seriously consider opening an investment account so you can <a href="https://www.realfx.com/blog/how-to-build-long-term-wealth/">begin to build long-term wealth</a>. Even the highest yielding savings account does not, at the current time, provide a higher ROI than an investment account. This isn’t to suggest that investment accounts are wholly superior; they are dependent on how the financial market is performing. So, covering both bases by having an emergency fund and an investment account provides a dual strategy for increasing your financial freedom.
Budgeting is a lifelong process, and it's one that has to be tackled whether you're doing it alone or <a href="https://www.realfx.com/blog/how-to-manage-your-finances-as-a-married-couple/">navigating finances with a partner</a>. But, if you overestimate or underestimate, it’s not the end of the world, even if <a href="https://www.realfx.com/blog/what-is-credit-score/">your credit score fluctuates</a>. Roll up your sleeves, take an hour, and adjust your financial health accordingly. 2020-04-09T10:38:00-07:002020-04-27T09:43:25-07:00Danny Evatttag:realfx.com,2012-09-20:6986Credit 201: What Can Good Credit Do for You?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/advanced-credit-score-utilization.jpg" alt="The Benefits of Having a Good Credit Score" width="475" />Credit cards are generally the first step for establishing a good credit rating, which is <a href="https://www.realfx.com/blog/introduction-to-budgeting/">key for a healthy budget</a>. While millennials and Gen Z’ers may bemoan the credit rating system—and with good reason—credit scores are still a fundamental requirement for accessing the acquisition of large assets such as cars and homes. When used correctly, credit cards can pave the way for greater financial freedom. The emphasis here is “when used correctly.”
As you <a href="https://www.realfx.com/blog/what-is-credit-score/">build your credit</a>, you’ll benefit from lower interest rates. As it stands now, “starter” credit cards often have a higher price tag in terms of the annual percentage rate (APR), <a target="_blank" href="https://www.valuepenguin.com/average-credit-card-interest-rates">which hover in the 20% range</a>.
Credit Card Fees & Interest Rates Become More Negotiable
Depending on your credit limit and how much you use the card, fees and interest rates can cost you hundreds of dollars more. But over time, these costs are reduced through timely payments and conscientious monitoring of hard inquiries for additional cards or other lending providers. When you apply for a loan or other form of credit, this is known as a hard inquiry, and it can bring down your credit score.
Being judicious about loan applications and repayment in the now translates into additional future benefits. Approval for higher lending limits is one of the short-term benefits of keeping a close eye on your credit card utilization patterns. Keep in mind that credit utilization is one of the metrics that affect your FICO and VantageScore. If you are granted higher credit card limits, this is not a green light to spend more. It can, however, lead to further advantages down the road.
Taking Advantage of Credit Card Perks & Rewards
Credit card perks and rewards are another benefit to wise credit card usage. Most credit card issuers will increase those perks as your good payment history continues. Want cash back on your grocery purchases? Are you a frequent traveler? Returning to school and need to pinch pennies for a while? A great credit score will help keep you afloat during those lean financial times—that is, as long as you keep up with your payments.
How Your Credit Score Affects Your Home-Buying Power
One particular advantage is obtaining a home loan. The higher your credit score, the more likely you’ll be able to secure a mortgage with a lower interest rate and a decreased down payment. Right now, the down payment required by a traditional financial institution is 20%.
Given that the median home price in the U.S. is $253,500, a 20% down payment means you’d have to scrounge up $52,700. Though there are alternative methods for obtaining a mortgage, such as programs available through HUD, the USDA, and VA, there are still limitations for taking advantage of these federal programs.
Why spend all that time and energy diligently paying your credit cards on time and keeping an eye on your credit score only to be limited to a certain type of home?
Credit Score & Your Power When Purchasing Insurance
Insurance is required for just about every aspect of our lives. Car insurance, in particular, is one of those “wish I didn’t have to pay this” responsibilities. Homeowners insurance can be added to that sentiment. In most states, the rates you are quoted for homeowner’s insurance, car insurance, or both, are based on your credit score. Therefore, the better your credit score, the more likely your insurance costs for home and auto are to decrease.
Certainly, your worth as a human being is not equivalent to your credit score, and <a href="https://www.realfx.com/blog/how-to-fix-a-bad-credit-score/">a bad credit score</a> isn’t the end of your ability to make financial moves. Your financial assets are merely a measure of how you operate within a single context.
Fundamentally your credit report, in combination with your credit score, answers the two-part question, “Do you pay on time, and have you demonstrated high-risk credit utilization?” If the answer to the first part of that question is yes, while the answer to the second part is no, then the you’ll reap the benefits of trustworthiness in terms of being a viable candidate for additional lending.
It all begins with using those new credit cards strategically. 2020-04-08T09:51:00-07:002020-04-09T10:07:22-07:00Danny Evatttag:realfx.com,2012-09-20:6974How to Fix a Bad Credit Score: Repair Your Credit & Find Financial Freedom<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/fixing-bad-credit-scores.jpg" alt="How to Fix a Bad Credit Score" width="475" /><a href="https://www.realfx.com/blog/what-is-credit-score/">Credit score is a powerful determinant</a> in what milestones any individual can make while trying to plan for the future. Qualifying for credit cards, <a href="https://www.realfx.com/blog/mortgage-mistakes-what-not-to-do-before-applying-for-a-mortgage/">car loans</a>, apartment leases, mortgages and, in some cases, even employment is dependent upon having a good credit score. Where do you stand in terms of credit score? In general, the credit scores are classified as follows:
720 or higher: Excellent
660 to 719: Average
620 to 659: Poor
620 or lower: Bad
Anything below 660 is considered poor or bad credit. So where does that leave people whose credit history is poor or damaged in some way? Fortunately, the credit scoring industry can be “forgiving” in the sense that past credit mistakes aren’t the death of your credit history. However, there is a caveat. It takes time and attentiveness to several factors.
What Causes Bad Credit?
The most significant factor prompting your credit score to fall is payment timeliness. In terms of your FICO score, paying on time accounts for 35% of the credit score calculation. Another whopping 30% depends on the amounts you owe. Thus, 65% of that ever-present, three-digit number hinges on paying on time and keeping your loan balances low.
This is particularly true of credit card balances and limits. While credit cards tend to be the primary way people start or rebuild a positive credit history, they are viewed as the riskiest form of debt from a lender’s perspective.
Credit inquiries can also bring down your credit score - but perhaps not an occasional inquiry, meaning you’ve applied to rent an apartment and they check either your report or score.
Usually, these soft inquiries are part of a general background check. It’s the hard inquiries, such as when you apply for a new credit card or other loan, that can have an impact on your score.
These inquiries are more likely to ding your score rather than deeply damage it, but it’s important to be mindful of all credit decisions and how they can impact financial possibilities in the future.
Habits Moving Forward
Paying on time is the number one way to leverage a boost in your credit score. If you’ve missed payments on your loans or debts, catch up on those as quickly as possible. Keep your credit card balances low and <a href="https://www.realfx.com/blog/introduction-to-budgeting/">develop a budget</a> to pay them all on time. The difficulty in giving a specific number for what “low” means is due to the fact that each individual is issued a different credit limit.
There is, however, a guideline: <a target="_blank" href="https://www.thebalance.com/understanding-credit-utilization-960451">keep your credit utilization below 30%</a>. Credit utilization is calculated via dividing the credit card balance by the total credit card limit. So, if your credit card limit is $500 and you have $250 as an outstanding balance, then the credit utilization for that particular card is 50%.
In addition to minimizing card usage, it’s wise to resist the urge to open new accounts. First, as previously mentioned, hard inquiries can put a dent in your score. Second, you will increase the credit limit factor used for the credit utilization percentage. Paying off credit cards that are still active accounts, continuing forward with timely payments and keeping the amounts owed low will promote an increase in your score.
Late payments and drastic financial experiences such as a bankruptcy can linger on your credit report between 7 and 10 years. While you can monitor your report and then ask for the negative reporting to be removed, if it fits within a given time frame (this is where credit “repairing” becomes trickier), there are variations in the aging window that depend on the type of account.
For example, an account sent to collections is likely to stay on your report for 7 years and 180 days. As such, when it comes to those negative accounts, it’s a waiting game. But, this does not prohibit your score from moving forward and adhering to credit card best practices:
Make on-time monthly payments on your balance or pay off your credit card completely each month.
Keep the number of credit card accounts low (do you really need more than three?).
Limit the number of hard inquiries.
Keep your credit utilization below 30%.
Opening new accounts, especially if you do so in rapid succession, may be deleterious to your credit score. Be choosy about your lines of credit.
In terms of closed accounts with negative reporting, you can either wait for them to age off your report or proactively ask each of the credit reporting agencies, Experian, Equifax, and TransUnion, to remove them when they’ve hit their respective 7- to 10-year limit.
This might be the more time-consuming route, as they are independent of one another, and you’ll need to approach each one to make the same request.
Barring any discrepancies you may find by analyzing your credit report, it’s likely less of a headache if you move forward by utilizing the credit card best practices and rebuild your credit over time so you can take full advantage of <a href="https://www.realfx.com/blog/what-can-good-credit-do-for-you/">what credit can do for you</a>.2020-04-07T08:16:00-07:002020-05-28T02:52:31-07:00Danny Evatttag:realfx.com,2012-09-20:6970Explaining Credit Scores: You Can Get On Top Of Your Credit!<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/explaining-credit-score.jpg" alt="What to Know About Credit Score And Your Financial Health" width="475" />While credit scores are not the end-all, be-all measurement of financial responsibility, having a good credit rating can mean the difference between becoming a homeowner versus being a lifelong renter.
Though renting is also a viable way to make sure you have a roof over your head while <a href="https://www.realfx.com/blog/what-does-it-mean-to-be-financially-secure/">establishing your financial security</a>, most apartments, condominiums, and landlords require a credit report at the time of your rental application submission. Beyond the narrow, yet important scope of establishing a household, there are additional considerations for maintaining a good credit score.
What is Your Credit Score Used For?
<a href="https://www.realfx.com/blog/what-can-good-credit-do-for-you/">Credit score can do a lot for you</a> in financial elements of your life. In certain U.S. states and cities, credit scores are used in hiring decisions. For example, in Las Vegas, it’s not uncommon for a background check to include pulling up your credit report. Though many might find this to be intrusive, if you’re handling money, casinos and other local businesses might use the credit report as one part of their risk metric.
Now, this doesn’t mean they have access to your credit score, nor can they see specifics regarding account numbers, etc. And certain states either prohibit or severely limit (Nevada does have limitations) employers from using your credit history as a part of their hiring decision. But it doesn’t hurt to keep all of your loan and credit card payments timely.
If you’re <a href="https://www.realfx.com/blog/plan-for-large-purchases/">in the market to make a large purchase</a> like buying a new vehicle, but don’t have the cash to buy the car outright, the dealership (specifically their loan officer) is going to require access to your credit score and report. In case you’re wondering, the credit score is a three-digit number <a target="_blank" href="https://www.credit.com/credit-scores/what-does-fico-stand-for-and-what-is-a-fico-credit-score/">ranging from 300 to 850</a>. Your <a target="_blank" href="http://www.myfico.com/crediteducation/in-your-credit-report.aspx">credit report lists</a> your payment history, accounts, inquiries, and public records, including bankruptcies, foreclosures and so forth.
What is a Good Credit Score?
There are different versions of the <a target="_blank" href="https://www.credit.com/credit-scores/what-does-fico-stand-for-and-what-is-a-fico-credit-score/">FICO scores</a>, and not all industries use FICO. Some use VantageScore instead. However, in general, the numerical scales of both follow a similar pattern:
720 or higher: Excellent
660 to 719: Average
620 to 659: Poor
620 or lower: Bad
The <a target="_blank" href="http://www.experian.com/blogs/ask-experian/the-difference-between-vantage-scores-and-fico-scores/">difference between FICO and VantageScores</a> is how they are calculated, meaning the weighting of factors they use to calculate that final three-digit number. To illustrate, FICO scores apply the following percentages to each category:
35% Payment history
30% Amounts owed
15% Length of credit history
10% Types of credit cards used
10% New credit
Meanwhile, VantageScore grades the categories slightly differently:
32% Payment history
23% Credit utilization
15% Balances
13% Depth of credit
10% Recent credit
7% Available credit
Because of this, your VantageScore and your FICO score are not likely to be the exact same number. Add to this that FICO offers different credit scoring depending on the industry (e.g. <a target="_blank" href="http://www.myfico.com/credit-education/credit-score-versions/">automotive, credit cards, and mortgages</a>), and each of these differences may also produce a slightly different credit score. Further credit scoring variations arise depending on the score calculated by the three major credit reporting bureaus: Experian, Equifax, and TransUnion.
How to Establish or Improve Your Credit Score
For most consumers, establishing a credit score comes about with obtaining a credit card. The post-2007–2008 fiscal disaster gave rise to lending institutions increasing their offerings of credit cards for those with sub-prime credit or those who are <a href="https://www.realfx.com/blog/debt-repayment-planning/">just beginning their “debt journey.”</a> There is such a thing as having too many credit cards, though the credit reporting agencies and FICO don’t specifically state what counts as “too many.”
Considering the largest chunk of your credit score calculation comes from your payment history, it’s safe to say that making on-time payments is the number one way to initialize a good credit score or improve a less-than-stellar one.
Credit utilization is also a key metric to <a href="https://www.realfx.com/blog/how-to-build-long-term-wealth/">building long-term wealth</a>. If you have three credit cards and each is maxed out, while you’re only making minimum payments, this can also weaken your score. Therefore, it’s wise to limit your credit card debt and make sure those cards are paid off as quickly as possible to avoid <a href="https://www.realfx.com/blog/how-to-fix-a-bad-credit-score/">developing bad credit</a>.
Once you have <a href="https://www.realfx.com/blog/introduction-to-budgeting/">demonstrated budgeting skills</a>, with on-time payments for 6 to 12 months, and you’re not carrying large balances on your credit cards, then you may be in a prime position for an auto loan or other <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">financial investment options that are available</a>. Mortgages are a trickier situation, as lending constraints depend on the financial institution’s internal requirements. Your partner's credit score can also factor into buying a home, so it's important to <a href="https://www.realfx.com/blog/how-to-manage-your-finances-as-a-married-couple/">have your shared finances sorted out</a> beforehand.
Suffice to state that if you continue to make timely payments on the cards or loans that you do have, and your utilization ratio (outstanding balances of all credit cards divided by the total of each card’s limit) is low, you’re well on your way to <a href="https://www.realfx.com/blog/advanced-budgeting-skills/">tackling more advanced budgeting skills</a> and reaching an excellent credit score.2020-04-06T10:05:00-07:002020-04-27T09:26:56-07:00Danny Evatttag:realfx.com,2012-09-20:6956What You Need to Know About Student Loan Refinancing<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/student-loan-refinancing.jpg" alt="What to Know About Student Loan Refinancing" width="475" />Deciding if you should refinance your student loans can be intimidating and confusing—very confusing to be exact!
In essence, refinancing is the process of obtaining a new loan with new terms and hopefully a lower interest rate in the process, and it can be a viable tactic for student loan <a href="https://www.realfx.com/blog/debt-repayment-planning/">debt repayment planning</a>. Refinancing and Consolidation are different, and certain student loans are restricted to one or the other. The confusion stems because the terms are often used interchangeably.
What is the Difference Between Refinancing and Consolidation of Student Loans?
Refinancing a loan refers to a single loan. A loan consolidation includes multiple loans that are bundled and then refinanced as one comprehensive loan. Both are voluntary steps taken by you to pay off the original lender(s) and to create a more favorable repayment schedule and terms.
Both involve selling the original loan(s) to an approved private lender who will then issue you a refinanced loan or a loan consolidation to include all your loans. It must be noted that unlike refinancing, consolidation does not offer any interest savings. We will explain how consolidated loans address the interest rate you pay further on in this article.
Generally, you select the repayment timeline based on several options. Wise financial planning is to select the shortest time frame manageable in order to pay off the loan and reap the biggest savings when it comes to the long term interest you will pay.
Lenders look for good credit and steady income along with lender-specific financial and education requirements.
Why Should I Refinance My Student Loans?
Far and away, the greatest benefit of student loan refinancing is to receive a lower interest rate than you had previously. This saves you considerable money over time and frees up <a href="https://www.realfx.com/blog/introduction-to-budgeting/">money in your budget</a> for other expenses. To determine if the process is worth it, use a <a target="_blank" href="https://www.nerdwallet.com/blog/loans/student-loans/student-loan-refinance-calculator">refinance calculator</a> to see how much you could save by getting a lower rate.
If the student loan you want to refinance is from a private (vs. government) source, it is eligible for refinancing.
If you have federal student loans but do not plan on taking advantage of a federal forgiveness program or income-driven repayment plan, then refinancing is worth checking into.
If you have a combination of federal and private student loans.
Remember, if you decide to refinance a federal loan, you automatically forfeit all federal protections offered to you with your federal student loans.
Private loan holders are not eligible for federal loan consolidation.
Why Should I Consolidate My Student Loans?
Consolidation refers to taking out one Direct Consolidation Loan, thus combining all of your federal student loans into one loan with one interest rate. It is a necessary logistical move in order to qualify certain federal loans for repayment programs. Find out if you need to consolidate your loans before signing up for income-driven repayment or Public Service Loan Forgiveness at <a target="_blank" href="https://studentloans.gov/myDirectLoan/repayOptions.action">studentloans.gov/repay</a>.
Federal consolidation (vs loan refinancing) is required in order for some borrowers to take advantage of particular repayment options.
Certain federal loans can only be consolidated.
Some loans, such as the <a target="_blank" href="https://studentloanhero.com/featured/student-loan-forgiveness-for-teachers/">Teacher Loan Forgiveness Program</a>, must be consolidated to qualify for programs like <a target="_blank" href="https://studentloanhero.com/featured/public-service-loan-forgiveness-do-you-qualify/">Public Service Loan Forgiveness</a> and some income-driven repayment plans.
Consolidation does not lower your interest rate, unlike refinancing. The government will give you a new interest rate that is a weighted average of your prior loans’ rates, rounded up to the next one-eighth of 1%.
If you are in financial difficulty and can’t <a href="https://www.realfx.com/blog/student-loan-repayment-possibilities/">afford your monthly payments for your student loans</a>, a refinance is not the solution. Instead, you should look at <a target="_blank" href="http://www.magnifymoney.com/blog/college-students-and-recent-grads/miss-a-student-loan-payment/">options to avoid a default on student loan debt</a>.
This is particularly important if you have federal loans.
Before Making a Move
Before deciding to apply for either loan refinancing or loan consolidation, do your homework! Check the ramifications of either option on your eligibility to apply for:
Income-driven plans
Loan forgiveness
Deferment or forbearance
What You Must Have to Qualify for Loan Refinancing and/or Loan Consolidation
Student loan lenders are strict; the federal government a bit less so (Loan Consolidation through the U.S. Government). In order to get a loan, you must have:
A strong credit score, generally around 700.
A solid history of prompt payments.
A documented steady income.
There are four highly rated, especially for transparency, <a target="_blank" href="http://www.magnifymoney.com/blog/college-students-and-recent-grads/refinancing-a-student-loan1091646352/">primary private lenders</a> dealing with student refinancing loans. Check if you meet their qualifications. Most lenders do not have a fee for applying for student loan refinancing, so make use of this if you like a few lender’s terms.
For all your federal loans, check the <a target="_blank" href="https://studentloans.gov/myDirectLoan/mobile/repayment/repaymentEstimator.action">federal loan repayment estimator</a> to make sure you are fully aware of all the federal options you have right now.
What to Look For
Application terms that fit your circumstance. Most refinancing companies offer repayment terms of 5, 10, 15, or 20 years. Aim for the shortest amount of time but be realistic. You want a loan that enables you to reach other financial goals even <a href="https://www.realfx.com/blog/can-you-buy-a-home-while-paying-off-student-loans/">if you have student loan debt, such as buying a home</a> and saving for retirement.
Favorable interest rates and payment periods. Interest rates are still low; go for a fixed interest for the duration of your loan.
There are pluses and minuses to refinancing and/or loan consolidation. The most important thing to remember is that any step you take is ‘forever’ until the loan is paid in full. Be timely in your decision to refinance, especially if you're planning to <a href="https://www.realfx.com/blog/can-student-loans-affect-your-ability-to-buy-a-home/">buy a home while paying off student loans</a>, and be sure to weigh all the options before moving forward with the process, as an overly hasty decision can take a long time to repair.2020-04-03T08:15:00-07:002020-05-18T14:23:53-07:00Danny Evatttag:realfx.com,2012-09-20:6954Student Loan Repayment Possibilities: Explanations and Resources<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/student-loan-resource-assistance.jpg" alt="Resources for Student Loan Debt Management" width="475" />Once you’ve graduated and found a job, the reality of <a href="https://www.realfx.com/blog/debt-repayment-planning/">debt repayment planning</a> for all those college loans hits hard and unpleasantly. And seemingly impossible to handle. This article is intended to give you as many resources as possible to <a href="https://www.realfx.com/blog/introduction-to-budgeting/">develop a budget</a> and to explain the core requirements, positives and negatives of the various payback options in clear and simple terms so <a href="https://www.realfx.com/blog/can-student-loans-affect-your-ability-to-buy-a-home/">student loans don't affect your ability to buy a home</a>.
Throughout, the terms “lender” and “loan servicers” refer to the organization that made the loan initially. Your lender could be the school attended, a lending institution such as a bank or credit union, the U.S. Department of Education, or a combination of the above sources.
Types of Student Loan Repayment Plans
Your lender will assign you an education loan repayment plan or ask you to select one when you first begin repaying your student loan. It is important to note that you can change repayment plans at any time at no charge.
Standard Repayment: The <a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/understand/plans/standard">Standard Repayment Plan</a> is the basic repayment plan for loans from the (William D. Ford) Federal Direct Loan (Direct Loan) Program and Federal Family Education Loan (FFEL) Program. In general, this plan costs less in interest as you pay a bit more monthly than with other loan repayment options. Payments are fixed and made for up to 10 years (between 10 and 30 years for consolidation loans).
Graduated Repayment: Designed specifically for those who have a low starting pay level but anticipate their income to increase over time, the <a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/understand/plans/graduated">Graduated Repayment Plan</a> starts with lower payments that increase every two years. Payments are made for up to 10 years (between 10 and 30 years for consolidation loans).
Extended Repayment: The <a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/understand/plans/extended">Extended Repayment Plan</a> allows you to repay your education loans over an extended period of time. If you need to make lower monthly payments over a longer period of time than under plans such as the Standard Repayment Plan, then the Extended Repayment Plan may be right for you. Note: you will end up paying a larger amount of interest if you go for this option. Payments are made for up to 25 years.
Income-Driven Repayment Plan: The <a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven">Income-Driven Repayment Plan</a> sets your monthly student loan payment at an amount that is intended to be affordable based on your income and family size. If your federal student loan payments are high compared to your income, this might be a good choice. Most federal student loans are eligible for at least one income-driven repayment plan. Eligibility for Income-Driven Plans is subject to a yearly recertification with your lender.
Income-Sensitive Repayment Plan: The Income-Sensitive Repayment Plan is available only to low-income borrowers who have Federal Family Education Loan (FFEL) Program loans. Under this plan, your monthly payments increase or decrease based on your annual income and are made for a maximum of 10 years.
Now to add to your confusion, there are two other loan repayment options that fall under and share characteristics of Income-Driven Loans.
PAYE: A 20 year loan. You must be a new borrower on or after Oct. 1, 2007, and must have received a disbursement of a Direct Loan on or after Oct. 1, 2011
REPAYE: A 20 year loan for undergraduate education and a 25 year old for graduate school. Any Direct Loan borrower with an eligible loan type may choose this plan.
Under both the <a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven#repayment-period">PAYE</a> and the <a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/understand/plans/income-driven#repaye">REPAYE</a> loans, any remaining loan balance is forgiven if your federal student loans aren't fully repaid at the end of the stipulated repayment period. For any income-driven repayment plan, periods of economic hardship deferment, periods of repayment under certain other repayment plans, and periods when your required payment is zero will count toward your total repayment period.
Because annual repayment amounts on both loans are based on your yearly income and family obligations (as with Income-Driven Loans), there is a possibility you will have a balance due when repayment period expires. In this case, your remaining balance will be forgiven. Your lender/loan servicer will track your qualifying monthly payments and years of repayment and will notify you when you are getting close to the point when you would qualify for forgiveness of any remaining loan balance.
Subsidized vs. Unsubsidized Student Loans
Both are federal student loans (often referred to as Stafford Loans) to help eligible students meet the costs of higher education.
Direct Subsidized Loans
<a target="_blank" href="https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized#subsidized-vs-unsubsidized">Direct Subsidized Loans</a> areavailable only to undergraduates. Your school determines the amount you can borrow, and the amount can’t exceed your financial need. The U.S. Department of Education pays the interest on a Direct Subsidized Loan while you’re in school at least half-time and for the first six months after you leave school (referred to as a grace period*), and during a period of deferment (a postponement of loan payments).
Note: If you received a Direct Subsidized Loan disbursed between July 1, 2012, and July 1, 2014, you are responsible for paying any interest that accrues during your grace period. If you choose not to pay the interest that accrues during your grace period, the interest will be added to your principal balance.
Direct Unsubsidized Loans
<a target="_blank" href="https://studentaid.ed.gov/sa/types/loans/subsidized-unsubsidized#subsidized-vs-unsubsidized">Direct Unsubsidized Loans</a> have no requirement to show financial need. Your school determines the amount you can borrow based on your cost of attendance and other financial aid you receive. You are responsible for paying the interest on a Direct Unsubsidized Loan during all periods.
If you choose not to pay the interest while you are in school, during grace periods and deferment or forbearance periods, your interest will accrue and be added to the principal amount of your loan.
Here’s a handy downloadable PDF detailing <a target="_blank" href="https://www.mygreatlakes.org/educate/c/document/repayment_options_reference.pdf">Student Loan Repayment Options</a>.
Options If You Can’t Afford Your Payments
There are two viable options available if you simply cannot meet your loan payments and one option that will negatively impact your credit rating for seven years. Both deferment and forbearance allow you to temporarily stop making your federal student loan payments or to temporarily reduce the amount you pay and should be your option(s) of choice.
<a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance">Deferment</a>: A viable option. A deferment or forbearance allows you to temporarily stop making your federal student loan payments or to temporarily reduce the amount you pay. If granted a deferment from your lender, you may not be responsible for paying the interest accrued on certain types of loans during the deferment period.
<a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/deferment-forbearance">Forbearance</a>: A viable option. If granted forbearance from your lender, you are responsible for paying the interest that accrues on all types of federal student loans.
<a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/default">Default</a>: Defaulting on your loan(s) comes from failure to make agreed-to monthly payments and not requesting either a deferment or a forbearance. And the consequences are serious. Your credit history becomes a huge red flag that keeps you from being able to finance a car, get a credit card, possibly even being able to sign up for utilities. It certainly prohibits getting a mortgage. Negotiate your loan repayments before default becomes a reality.
<a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/default/get-out">Loan Rehabilitation</a>: This is the fancy term for getting yourself out of default and on the road to economic recovery. The two main ways to get out of default are loan rehabilitation and loan consolidation. Loan rehabilitation is far and away the best option! Utilizing the loan rehabilitate option wipes your record of default from your credit history. Yes, your credit history will still show late payments reported by your loan holder before the loan went into default, but the actual default is off your credit record.
<a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation#when">Loan Forgiveness</a>: There are certain career paths such as teachers, certain government and non-profits that qualify for loan forgiveness status. The Peace Corp is an example of the latter. Check to see if you qualify.
Is Consolidating Loans a Viable Option for Refinancing?
<a target="_blank" href="https://studentaid.ed.gov/sa/repay-loans/consolidation">Loan Consolidation</a> and <a href="https://www.realfx.com/blog/what-to-know-about-student-loan-refinancing/">student loan refinancing</a> allows you to consolidate or combine multiple federal education loans into one loan with one monthly payment. Loan consolidation might give you access to additional loan repayment plans and forgiveness programs. There are pros and cons to consolidating your student loans and it is wise to check all your options before making a final decision.
Student loan repayments are daunting. However, by doing your homework, they can be manageable. Soon enough, you may even <a href="https://www.realfx.com/blog/can-you-buy-a-home-while-paying-off-student-loans/">be in a good position to buy a home even with student loans</a>!2020-04-02T09:36:00-07:002020-05-18T14:22:42-07:00Danny Evatttag:realfx.com,2012-09-20:6934Important Considerations for Paying Off Debts<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/considerations-for-debt-repayment.jpg" alt="Considerations When Repaying a Debt" width="475" /><a target="_blank" href="https://www.nerdwallet.com/blog/average-credit-card-debt-household/">Consumer debt is on the increase</a>. With tuition rates on a continual increase, <a target="_blank" href="https://www.forbes.com/sites/zackfriedman/2017/02/21/student-loan-debt-statistics-2017/#1ad0b1d15dab">student loans</a> are a considerable part of the debt that the younger Gen X, Millennial, and Gen Z populations face. Mortgages, auto loans, and credit card debt round out the types of debt that a majority of Americans will assume throughout their lifetime. While having some debt can boost your credit score, having too much debt can quickly become overwhelming. Here are a few considerations for paying off debt and <a href="https://www.realfx.com/blog/debt-repayment-planning/">planning your debt repayment process</a>.
Good Debt vs. Bad Debt
There is such a thing as “good debt,” <a href="https://www.realfx.com/blog/introduction-to-budgeting/">within the parameters of a budget</a> and the definition is largely situated on the return on the investment versus the cost of obtaining and maintaining the loan. Going into debt for school, obtaining a mortgage, or starting a business are often seen as good debt. Why? Because they are investments that tend to appreciate in value over time. Certainly, there are downsides. Depending on your chosen major in college, there are some areas of study that reap higher income levels (e.g. science, technology, engineering, and math). And not all businesses survive their first five years of operation.
But when compared to things like credit card debt or an automotive loan, attending school, buying a home or kickstarting a new business are appreciative investments. Meanwhile, high interest rates on credit cards (which are higher than mortgages or other forms of collateralized debt) translate into you paying more for consumable items than you would if you’d paid cash.
Should You Pay Debt Off Early?
While paying off debt, in general, is a good move to make, whether you should pay off your debt early depends on several factors:
Your current financial situation (do you have extra cash left over after paying all of your bills for the month and do you have an emergency fund in place?).
The interest rates on the various debt.
Potential tax incentives such as for mortgages and <a href="https://www.realfx.com/blog/student-loan-repayment-possibilities/">student loans</a>.
Possible penalties for early debt repayment.
Also, the type of debt often determines the benefits—if there are any—to early repayment. School loans, for example, stick with you regardless of your financial situation. They will not be removed in the event of a bankruptcy. There are various <a target="_blank" href="https://www.thebalance.com/you-may-be-eligible-for-higher-education-tax-benefits-795075">tax credits</a> for continuing to pay off the loan over time. However, these can change depending on decisions made by the current presidential administration and the U.S. Congress. One thing to consider is how that monthly expenditure can be turned into income. Once the school loan is paid off, that same amount can be shuttled into an investment account that earns interest. Therefore, you’ll be earning money rather than losing it.
Auto Loan Debt Repayment
Unless there is a stipulation in the auto loan contract that penalizes you for early repayment, this is one debt that is prime for paying off ahead of time. As much as you may enjoy your vehicle, it is a drain on your income and consistently depreciates over time. While it’s good to keep some debt on your credit record to demonstrate you’re a responsible debtor, that money could be used elsewhere to improve your financial position directly.
Mortgage Loan Debt Repayment
Mortgages have more flexibility in terms of early payment benefits. Although you’re purchasing (or have purchased) a home to live in, homes appreciate in value. So, you’ve already started your investment income by purchasing this type of asset. Should you have extra money on hand, you could also direct it into an investment account and earn interest more quickly than you would by paying off the mortgage. This also depends on whether or not you intend to sell your home at a future time. Though it’s considered to be an investment, it’s not an asset that provides an immediate yield, meaning you have to sell the home in the right market conditions to make a profit.
Credit Card Debt Repayment
Credit cards are an excellent way to build your credit score. But they have high interest rates, and yearly fees offset this benefit over time. Reducing your credit card balances also minimizes your debt to income ratio, which is an important factor for determining your credit score and the possibility of obtaining other loans. Carrying small balances and paying them off quickly is a great way to keep your credit score on the high end. So, paying off credit cards early is most beneficial as it lowers your monthly expenditures while maintaining good credit.
Plan Your Debt Repayment Strategy Today
Always read the fine print of loan contracts and the credit card terms and conditions carefully. Repaying all debt frees up your cash for other things including investments that actually earn you money rather than draining your bank account. 2020-04-01T09:34:00-07:002020-04-02T10:10:20-07:00Danny Evatttag:realfx.com,2012-09-20:6931Swimming In Debt? Here's How to Come Up With a Debt Repayment Strategy<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/debt-repayment-planning.jpg" alt="How to Navigate Debt Repayment Planning" width="475" />Becoming debt free takes careful consideration and planning. In some cases, using the debt avalanche method, where you pay off the high interest debt, is your best bet to <a href="https://www.realfx.com/blog/what-does-it-mean-to-be-financially-secure/">achieve financial security</a>. Meanwhile, for other types of debt the debt snowball method, or paying off the debt with the lowest balances, will be the best approach. It's likely you'll use a combination of both depending on the types of debt you currently have.
If you have a lot of high-interest debt, then the debt avalanche method tends to be the way to go, as it can save you hundreds (if not thousands) of dollars in interest, whether you're <a href="https://www.realfx.com/blog/can-student-loans-affect-your-ability-to-buy-a-home/">paying off your student loans to buy a home</a> or trying to reduce credit card debt. On the other hand, if you have several small balances such as credit cards or if you’re at the end of paying off a very large debt, then the debt snowball method will help you clear those debts as quickly as possible.
Things to Consider for Paying Off Debt Early
Not all creditors allow you to pay off a debt early without penalty. This is why it’s important to read the fine print on any loans or credit card contracts. It may seem odd that a creditor would want to “punish” someone for successfully paying off the debt early. But there are cases where it’s true and many times you need to ask that question directly (e.g. “Is there an early payment penalty if I pay this off early?”).
An additional <a href="https://www.realfx.com/blog/important-considerations-for-paying-off-debts/">consideration for paying down debt</a> is your current financial condition. Do you have <a href="https://www.realfx.com/blog/introduction-to-budgeting/">room in your monthly budget</a> to pay off certain debts early? Do you have loans with high interest rates that are eating away at your income? Are there certain debts that will give you a tax break or other advantage in paying them off, such as having the ability to deduct the interest that you paid? What types of debt do you have? All of these things can stand in the way of <a href="https://www.realfx.com/blog/how-to-build-long-term-wealth/">building long-term wealth</a>.
Credit cards, mortgages, auto loans, personal loans, and school loans all have different terms and conditions (with credit cards generally having the highest interest rates of all the debt classifications). The answers to these questions will help you to determine how feasible it is for you to use either the avalanche or snowball methods.
Using debt repayment calculators such as <a target="_blank" href="https://www.creditkarma.com/calculators/debtrepayment">Credit Karma</a>, Unbury.us, and Studentloanhero.com will help you determine how much you can save by paying off certain debts early and <a href="https://www.realfx.com/blog/what-to-know-about-student-loan-refinancing/">refinancing other student loans</a>.
Investing vs. Paying Off Debt
<a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">Investing that extra money</a> you’re using to pay off debt is an alternative to paying off the debt in the immediate future. It comes down to a choice between earning interest on your cash versus paying the creditor interest. However, if you have debt related to an essential asset, such as a mortgage, then securing your home debt-free will take precedence over all other debt. Collateralized loans, such as for homes and automobiles, mean the creditor can take those from you in the event you cannot make payments on the loan.
Additionally, <a href="https://www.realfx.com/blog/student-loan-repayment-possibilities/">if you have a student loan</a>, this debt is not removed through bankruptcy. The U.S. government and its associated creditors will find a way to get their money back regardless of your financial situation. So it’s wise to pay this debt off as quickly as possible while also continuing to place even the smallest amounts of extra cash into savings, retirement or other investment accounts.
Take a close look at the return on your intended investment. If you’re just starting out in the world of investing, a less risky portfolio is often recommended. These tend to have a lower rate of return in terms of earning interest. Certain investments have tax advantages that can save you money and lower your tax liability. A wise move would be to speak with a professional financial advisor who can detail the pros and cons of investment versus early debt repayment.
Good Debt vs. Bad Debt
In our <a href="https://www.realfx.com/blog/what-is-credit-score/">world of credit scores</a> and <a href="https://www.realfx.com/blog/plan-for-large-purchases/">big purchases that often require taking out a loan</a>, there is such thing as good debt as long as it’s managed carefully. On-time payments for mortgages, auto loans, and school loans can boost your credit score. Also, investing in your education through school loans and purchasing assets that appreciate, such as a home, are debts that reap a rate of return, even if you have to <a href="https://www.realfx.com/blog/can-you-buy-a-home-while-paying-off-student-loans/">buy a home with student loan debt</a>. Essentially, they are investments. Real estate appreciates in value, and those with a college education tend to earn higher salaries when compared to non-college graduates.
Credit cards and purchasing things that do not appreciate in value (e.g. cars, clothes, other consumable items) are in the bad debt category. Though owning a car may be an essential part of living in certain areas of the U.S., cars depreciate in value. While you’re not exactly throwing money out the window, you're paying for an item that will be worth less than the loan amount you’ll ultimately pay. Learning how to maneuver through <a href="https://www.realfx.com/blog/advanced-budgeting-skills/">advanced budgeting techniques</a> can help you determine what debt is worth assuming.
Ultimately, the decision to repay your debts early comes down to a primary variable: you (<a href="https://www.realfx.com/blog/how-to-manage-your-finances-as-a-married-couple/">and possibly your partner</a>). Research your options, use the recommended calculators (or others you may find on your own), and speak with tax and financial professionals to find the repayment and investment scenarios that best fit your current financial situation.2020-03-31T09:42:00-07:002021-07-31T09:52:30-07:00Danny Evatttag:realfx.com,2012-09-20:6919What Does it Mean to Be Financially Secure?<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/how-to-achieve-financial-security.jpg" alt="Achieving Financial Security Piggy Bank With an Umbrella" width="475" />The financial crisis of the late 2000s was a wake-up call for many people. Too many people watched their jobs evaporate, and with it their savings and financial security. Although millions will probably still feel the effects for many years to come, there are also opportunities to learn useful lessons for the future. These financial states help people to know how they are progressing toward their goal of financial security.
Financial Security: First a State of Mind, Then a State of Being
Unlike <a href="https://www.realfx.com/blog/what-is-credit-score/">knowing a credit score</a>, there is no particularly objective way to determine one's financial security. A certain financial setup might be lavish to one person and barely scraping by to another person. The state of financial security is a relationship between a person's finances and their feelings about them. There are always aspects of personal finance that fall outside of a person's control. Financial security happens when they have a way to control the expected in such a way that they can more easily minimize the stress of the unexpected. People may waver between financial security and insecurity more than once in their lives.
Maintaining a Healthy Emergency Fund
The unexpected is precisely what tends to crop up from time to time. People get hit with unplanned health care bills or car repairs that quickly sap their savings or force them to put it all on a credit card. Having access to a credit card with a high available credit limit can be a privilege in this instance, but paying it back plus interest is a chore. Financial security means that a person is prepared to handle such setbacks without having to resort to accumulating long-term debt. Experts recommend setting aside at least 3–6 months of expenses in an emergency fund that is easily accessible. This helps to keep the bills paid and food on the table during an unexpected job loss and time spent looking for new employment. If this seems difficult right now, that's not an uncommon view. Research shows that more than half of Americans have less than $500 in a savings account. Fortunately, people can often save money and put themselves on sure footing.
Enough Money to Pay All Bills, Plus Extra
The other part of preparing for the unexpected is <a href="https://www.realfx.com/blog/introduction-to-budgeting/">having a basic budget</a> and keeping expenses down and under control. People who live <a href="https://www.thebalance.com/stop-paycheck-to-paycheck-2385520">paycheck to paycheck</a> are dependent on the next month's income to cover the next month's bills. Under this arrangement, it can be difficult to save or invest in the future. Having the money to cover all the bills and incidental expenses with extra left over is often the first step of financial security. With this goal achieved, people have more options to handle how they pay their bills. They might decide to pay for some services early or in a lump sum to save money, because they have plenty in savings to cover other stuff they need.
Credit Cards are a Tool for Convenience and Rewards
People who aren't struggling from paycheck to paycheck have a world of opportunity available to them for credit, not just investments. <a href="https://www.moneyunder30.com/how-to-use-a-credit-card-responsibly">Credit cards</a> often offer rewards in the form of points, airline miles, or even credit for purchases, to entice people to spend on the card. Of course, the rewards are only beneficial to people who can pay the balances in full each month. The interest that gets tacked on for revolving debt can very quickly negate the rewards programs, especially for people who keep spending but don't pay it off quickly enough. By comparison, savvy buyers who keep their credit cards generally empty or have a <a href="https://www.realfx.com/blog/debt-repayment-planning/">solid debt repayment strategy</a> get to use them like an extra form of short-term cash flow. They can accrue points toward high-end rewards like plane tickets, hotel stays, or even merchandise because they aren't paying interest on their purchases.
Debt is a Balanced Investment
Asking someone to pay cash for a home may sound nonsensical to someone who is just getting into the real estate market. However, there are plenty of established home buyers who are able to do just that. By the time this financial aspect becomes a reality, the accumulation of debt is a decision about the best way to invest money. Debt is no longer something that sits on a credit card accumulating interest at a dramatic clip. Instead, people who have financial security can decide if they want to finance a car or pay out-of-pocket. They can leverage current interest rates on mortgages and other loans to decide if they will make more money by investing their liquid funds than <a href="http://www.investopedia.com/articles/personal-finance/071114/should-you-pay-all-cash-your-next-home.asp">paying cash to buy a house</a> or car. People in this situation know that if they open a new loan, they won't have trouble making the payments.
Building Wealth Through Diversified, Reliable Investing
Someone who is financially secure might finance a home because they know that they will build equity through ownership, and they will take the same sensible approach to other investments and <a href="https://www.realfx.com/blog/plan-for-large-purchases/">large purchases they make</a>. Insecure investors are often looking for the next “get-rich-quick” scheme, because they are expecting their investments to finance their present and not their future. Building wealth takes years—if not decades. A wise investor will take several opportunities to invest in a variety of <a href="http://www.nolo.com/legal-encyclopedia/how-diversify-investments-easy-rule-30216.html">investment types</a>, such as stocks, bonds, funds, or real estate. They are not in a hurry to cash out because they have enough security in their income and savings to <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">let their investments grow</a> over a period of many years and <a href="https://www.realfx.com/blog/how-to-build-long-term-wealth/">build long-term wealth</a>.
Retirement Contributions Are Easy
Experts say that putting into retirement is easiest in the early years. People who invest in their retirement as much as they can from the beginning of their adult careers will have a much better head start than those who wait until their 30s or later. Retirement is a time when people want to have the culmination of many years of financial security. Depending entirely on savings and investments instead of income can be nerve-wracking, especially if someone is worried they didn't save enough. This is why <a href="http://money.cnn.com/retirement/guide/basics_basics.moneymag/index7.htm">investment experts</a> recommend saving 10–15 percent of a person's annual income specifically for retirement. People who can meet that suggestion or even exceed it are more likely to arrive at retirement with the same level of financial security they already have.
Financial security is more than just a goal that people achieve and reside within for the rest of their lives, especially when you're <a href="https://www.realfx.com/blog/how-to-manage-your-finances-as-a-married-couple/">managing finances with a partner</a>. Rather, financial security is a balance of financial goals and objectives that allow people to become the masters of their own money. Once all these financial aspects have been met and <a href="https://www.realfx.com/blog/advanced-budgeting-skills/">advanced budgeting techniques</a> have been practiced, people can design their own destinies with a much greater degree of control than those who are living according to the whims of the economy at large.2020-03-30T10:55:00-07:002020-04-27T09:26:21-07:00Danny Evatttag:realfx.com,2012-09-20:6912Gain Control of Your Life With a Budget: The Importance of Financial Awareness & Literacy<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/planning-your-first-budget.jpg" alt="How to Plan Your Budget and Save Money" width="475" />While there is certainly more to life than just money, one of the primary ways to use it wisely and to your benefit is through establishing a budget. While budgeting can be unentertaining and tedious to understand, and <a href="https://www.realfx.com/blog/cutting-costs-home-lifestyle-expenses/">cutting costs can be a drag</a>, it's imperative to get a handle on your expenses now so you're in control of where your money goes and can <a href="https://www.realfx.com/blog/how-to-build-long-term-wealth/">build long-term wealth</a>.
How to Get Started
The quickest method to get started is to list all of your current expenditures. Whether you use an Excel spreadsheet or sit down and list everything out by hand, externalizing this information brings greater insight about your "needs" vs. your "wants." Don't skimp on this part, and make sure to list everything, including your gym membership, daily coffee, dining out, monthly bills, and clothing. You'll also need to look at the <a href="https://www.realfx.com/blog/how-to-manage-your-finances-as-a-married-couple/">shared finances you and your partner have</a>, if you have one.
Determine Essential Fixed Costs
Next, determine which expenses are your essential fixed costs. These include housing, utilities, and any existing loans. Separate these expenses from your expenditures that tend to vary such as monthly groceries, dining, and entertainment. However, make sure you have a total amount for all your expenses, because you'll need to subtract that number from your regular weekly or monthly income.
Determine Variable Expenses
After you calculate the difference between your income and expenses, it's time to look closely at the variable expenses category. Essentially, you're performing a financial self-audit. Which expenses can be trimmed? Dining out and entertainment are the two main expenditures that tend get out of hand the most. After all, you have to eat to survive. And what's life without a little entertainment? But if you could <a href="https://www.realfx.com/blog/cutting-costs-food-entertainment-expenses/">cut your variable expenses</a> and funnel that cash somewhere that will help you earn more of it (and you can), then curbing the instant gratification mindset will pay off down the road with a <a href="https://www.realfx.com/blog/what-is-credit-score/">better credit score</a> and savings put aside.
Reduce Essential Fixed Costs
When you've completed the analysis of the variable expenses and decided which are the least essential, move to the essential fixed costs. Can you cut costs by refinancing any loans you may have (including <a href="https://www.realfx.com/blog/what-to-know-about-student-loan-refinancing/">student loan refinancing</a>) and receive a lower interest rate? What are you including under utilities? Though it's pretty much sacrilege to not have a cell phone in the Digital Age, can you cut that cost by lowering the data usage maximum or switching from an unlimited plan to a less costly alternative? Reducing your debt can also <a href="https://www.realfx.com/blog/how-to-fix-a-bad-credit-score/">improve a bad credit score</a>, so that's an added bonus.
Following the <a target="_blank" href="https://studyclerk.com/blog/your-ultimate-budget-guideline">50/30/20</a> rule is a good idea when <a href="https://www.realfx.com/blog/what-does-it-mean-to-be-financially-secure/">working to be financially secure</a>. This can be revised down the road depending on other factors such as a change in income, expenses or a shift in your financial objectives (e.g. <a href="https://www.realfx.com/blog/student-loan-repayment-possibilities/">paying off student loans</a>, <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">purchasing a home</a>, <a href="https://www.realfx.com/blog/what-is-equity-building-equity/">building equity</a>, etc.).
Practice Good Saving Habits
Savings accounts have a lower rate of return in terms of interest when compared to the other financial products on the market, and sometimes <a href="https://www.realfx.com/blog/can-my-savings-lose-value/">savings can lose value if not handled right</a>. But unless you're prepared to jump into <a href="https://www.realfx.com/blog/how-to-build-your-investment-portfolio/">creating an investment portfolio</a>, setting aside a certain percentage of your paycheck and placing it in a savings account is the quickest way to earn interest and is a great precursor to <a href="https://www.realfx.com/blog/ira-401k-403b-which-retirement-plan-is-best/">planning for retirement</a>. The general rule of thumb is that somewhere between 10% and 20% of your income should be shuttled over into savings. You should also make sure that you <a href="https://www.realfx.com/blog/what-are-the-different-types-of-investments/">target different investment types</a> so all your money isn't in one place.
Emergency Funds
It's difficult to predict when you'll need emergency funds, and this is where having a savings account can save you. Almost <a target="_blank" href="https://www.theatlantic.com/magazine/archive/2016/05/my-secret-shame/476415/">fifty percent of Americans</a> don't have an extra $400 available to pay for even a small emergency expense, which can <a href="https://www.realfx.com/blog/strategies-for-dealing-with-financial-stress/">lead to tremendous financial stress</a> even if an individual has other savings accounts like a <a href="https://www.realfx.com/blog/how-to-plan-for-retirement/">retirement plan</a> in place.
Meanwhile, the recommended savings amount is between 3 and 6 months' salary, which will provide a buffer should your primary income source—your job—disappear.
By practicing good saving habits, squirreling away a fixed percentage of your income each week or month, and following a budget that balances essentials with some non-essential lifestyle expenses, you'll be in an excellent financial position should an emergency arise.
Personal Finance Tools
Given that there is now an app or other software tool for just about everything, <a href="https://www.realfx.com/blog/tax-tips-to-save-more-of-what-you-earn/">tax preparation strategies</a>, personal finance, investing, and <a href="https://www.realfx.com/blog/saving-for-retirement-on-a-budget/">saving for retirement on a budget</a> is literally at your fingertips. In addition to the old standby, Excel, there are several others on the market that help to create budgets in minutes, including:
<a target="_blank" href="https://www.quicken.com/front/2017">Quicken</a>
<a target="_blank" href="https://www.mint.com/">Mint</a>
<a target="_blank" href="https://www.youneedabudget.com/">YNAB</a>
<a target="_blank" href="https://www.personalcapital.com/">Personal Capital</a>
These personal finance tools can elevate your budgeting ability from beginner skills to <a href="https://www.realfx.com/blog/advanced-budgeting-skills/">advanced budgeting skills</a> and put you on the track for <a href="https://www.realfx.com/blog/what-can-good-credit-do-for-you/">maximizing what credit can do for you</a> and developing <a href="https://www.realfx.com/blog/advanced-investing-strategies/">advanced investing skills</a>.
Budgeting doesn't have to be a complicated issue, but it may take some ruthless self-evaluation depending on your current financial situation in relation to future financial objectives. Someone looking to <a href="https://www.realfx.com/blog/debt-repayment-planning/">pay down debt</a> has very different goals than someone who <a href="https://www.realfx.com/blog/investing-for-beginners-how-to-get-started/">wants to start investing</a>, or someone who is <a href="https://www.realfx.com/blog/plan-for-large-purchases/">saving up to make a large purchase</a>.
Budgeting is the first step to <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">getting ahead financially in life</a>, so begin planning your budget today to set yourself up for a better tomorrow.2020-03-27T08:48:00-07:002021-07-20T08:22:00-07:00Danny Evatttag:realfx.com,2012-09-20:6905Ways to Cut Costs Part 2: Quick Cost-Cutting Strategies in Your Home & Lifestyle<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/cutting-costs-financially.jpg" alt="How to Cut Costs in Your Home & Lifestyle" width="475" />When you want to take control of your budget, sometimes you need to cut costs. We’re bringing you this article as the second part of our <a href="https://www.realfx.com/blog/cutting-costs-food-entertainment-expenses/">realistic cost cutting strategies</a> series. Read on to learn more about how to effectively cut costs.
PART 2: Cut Your Home & Lifestyle Costs
There are many painless ways to cut costs that will <a href="https://www.realfx.com/blog/strategies-for-dealing-with-financial-stress/">reduce your financial stress</a> – more than you realize. One of the easiest methods is to lower your infuriating utility bills for electricity, gas, and water. Yes – infuriating – because these are bills that seem to increase nearly every month.
Water Bills
Check for drippy faucets and fix them. Check if the toilet(s) seem to run on flush for longer than normal and if there are any signs of a slow leak. If you rent, notify your landlord or the management company immediately. If a new toilet is needed, insist on an <a target="_blank" href="http://www.motherearthnews.com/green-homes/home-design/best-options-for-high-efficiency-toilets">energy efficient toilet</a>.
Electric Bills
Electricity bills can soar – so let’s get that under control first.
Hot Water Temperature
The fastest way to cut costs is to lower the heat setting on your hot water tank. Manufacturers set heat level to 140 ºF, which is higher than needed. Lowering the thermostat to 120 ºF will save between 4% and 22% of your bill annually, plus you won’t feel the difference. If you <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">own your home</a> or are renting a house where the lease makes you responsible for items such as the hot water tank, lowering the water temperature also saves you serious money in tank replacement costs.
Run your washing machine on the cold water setting. A good detergent works as well in cold as in hot water and makes your clothes last longer.
Air Conditioning and Heating
Keeping your home at a comfortable temperature during summer and winter usually means running the AC or heat. There are ways to <a target="_blank" href="https://energy.gov/energysaver/air-sealing-your-home">lower costs associated with HVAC usage</a>. Check that windows and doors fit properly and are insulated. A window or exterior door that doesn’t fit flush to the outside wall lets in air and plays havoc with trying to control costs.
Buy inexpensive filters and change them monthly. <a href="https://www.provincialheating.ca/blog/when-you-should-call-for-furnace-inspection/" target="_blank">Have the unit inspected/serviced</a> as recommended or at least every other year.
If you are renting and it is permissible, install a programmable device to your thermostat. This gives you greater control over when the AC or heat is actually on.
Ceiling Fans
Ceiling fans are a huge plus in lowering electrical bills. Set the blades to rotate in the proper direction to push warm air down in the winter and up in the summer. The cost of running ceiling fans is minimal. Be sure to keep the blades clean.
Lighting
Replace as many light bulbs as possible with LED (preferable) or CFL bulbs. Not only are they more energy efficient, but they last a lot longer.
Power Strips and Timers
Unplug unused devices or use power strips. Using a timer for that morning coffee not only saves money but lets you wake up to the aroma of a freshly brewed cup. A smart power strip will manage electricity flow based on a control device; as an example, a DVD player will only receive power if the TV is turned on first.
These are easy and small changes that will amount to substantial savings on your utility bills.
Lifestyle Changes
If you are renting, consider moving to a more cost-effective property. If your current location is great for the kids’ school district, work proximity, or you just love where you are – look at saving elsewhere.
Transportation Savings Tips
Consider using public transportation. If you are lucky enough to live in a city where public transportation is superb (Boston, NYC, Chicago, San Francisco, and Seattle to name a few), you’ll not only save money but time too. By relying on public transportation, your feet and the occasional Uber ride, you won’t even need to own a car. This means zero car insurance, gas, upkeep and parking fees. Some forward thinking employers even contribute to monthly public transportation packages. Check if your company is one of them.
If you must have a car, look into carpooling; everyone will save gas and parking fees.
Cell Plans
Check into various plans to lower your costs; this is usually best done face-to-face with your current provider before considering other options. You’ll be amazed at the results.
Generic and Store Brands
From medicine to cereal, buying generic brands can result in sizable savings. Read and compare the contents of the generic vs your favorite brand; if they are basically the same, buy the generic.
Clothing
Put an end to impulse buying. Just because something looks really fun and trendy doesn’t mean you need it. Every fashionista and style maven suggests buying less but buying better!
Look for clothing that is well-made and somewhat classic in style. Funk up your looks with inexpensive accessories and imagination.
Refinancing of Loans
Refinancing loans is another option. Because of the multiple factors involved such as type of loan, early payment penalties, etc., loan refinancing is a topic we will be addressing soon as an in-depth stand-alone entity.
Cut Costs In Your Home & Lifestyle Today
These suggestions may work for you when <a href="https://www.realfx.com/blog/introduction-to-budgeting/">taking control of your budget</a>; others will be less realistic. It is important to understand that budgeting is an ongoing process. The best way to approach it is figure out what is feasible for you and then stick with it. Then sit back and watch your savings accumulate.2020-03-25T08:56:00-07:002022-01-10T10:48:18-07:00Danny Evatttag:realfx.com,2012-09-20:6903Ways to Cut Costs Part 1: Quick Cost-Cutting Strategies in Food & Entertainment<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/cutting-costs-reducing-expenses.jpg" alt="How to Cut Costs in Food & Entertainment" width="475" />Planning a budget is hard, and it can be frightening to realize that your expenditures exceed your income, or to find that the margin you have isn't enough to achieve your financial goals. This is the first part of a two-part series designed to help find realistic and practical means to cut costs.
PART 1: Food & Entertainment
When <a href="https://www.realfx.com/blog/introduction-to-budgeting/">creating a budget</a>, it can be daunting figuring out what to eliminate and where to cut back. Whether you’re saving for a down payment on a home, or trying to increase your retirement savings, these basic strategies surrounding food and entertainment can help.
Set Spending Limits on Entertainment
There is a certain amount of cross over between entertainment and food, so it is easiest to set spending limits at the start. If there is a concert you are positively dying to attend but ticket prices are mind-boggling, consider foregoing something the month ahead and allocating the money saved to the ticket price. Living within a budget does not mean having to forego something you love; it does mean giving up something less important though.
Lowering your cable cost can be easy. Almost every family has a computer and internet providers have unlimited usage packages as standard offerings. Compare the costs of unlimited internet vs. cable fees; you’ll be pleasantly surprised at how much you can save by going digital for TV viewing.
If you have hard copies or internet subscriptions to newspapers or periodicals, review them. How many do you actually read on a sustaining basis? In many cases, the hard copy magazines are available online for less. Even more often, the same content is free of charge through news outlets, or the publication allows a certain number of free downloads per month. Your public library keeps a rolling stock of publications like National Geographic – and it is free. So, cancel as many paid subscriptions as possible.
Food and Eating Out
It might come as a surprise, but there really are some painless ways to save money. Many of them come with immediate and long-term health benefits as well.
Cut back or, better yet, eliminate fast foods from your lifestyle. You will be healthier and feel better.
Pack a salad, leftovers, or a sandwich for lunch. Rather than eating at your desk, plan ahead to have a lunch break with friends when everyone brings their own lunch and sits in a park to get some fresh air, weather permitting.
<a href="https://www.realfx.com/blog/strategies-for-dealing-with-financial-stress/">Dealing with financial stress</a> can encourage eating out or disorganized food choices due to avoiding the problem. Cut costs by crafting a meal plan and using the same ingredients in multiple dishes to save money while keeping the food fresh.
Shopping Habits Revised
Here are some shopping habits that can help you save money in the long run.
Buy Nonperishable Items in Bulk and/or On Sale
While Costco, Sam’s Club, and BJs sell memberships, you should take into consideration the outlet’s proximity to your home, the amount of storage space you have, and which products you use consistently that are always available before signing up. Your neighborhood Target or Walmart carries the same items. When on sale, the prices are about the same or less than the membership stores.
Buying Food – aka Perishable Items
Coupons no longer involve clipping things out of newspapers or throw-away flyers. Here is a list of the top 5 apps that will help you save.
<a target="_blank" href="http://www.couponmom.com/">Coupon Mom</a> is an easy app with downloadable current coupons that can also be accessed on your phone and scanned at checkout.
<a target="_blank" href="https://ibotta.com/">Ibotta</a> offers monthly rebates as well as coupons for Amazon purchases and purchases from chain stores from Target to Macy’s to drugstores and markets. Upload your receipt, and your savings payment comes in cash or self-selected gift cards.
<a target="_blank" href="https://www.checkout51.com/">Checkout 51</a> is focused on supermarket savings. It is very similar to Ibotta with the only difference being the need to have accrued $20 worth of savings to get your refund.
<a target="_blank" href="https://savingstar.com/">Saving Star</a> is another excellent marketing saver app. Tied to your loyalty cards, payment thresholds are $5 with the option to have your savings sent to your bank account or to your PayPal account.
<a target="_blank" href="https://www.retailmenot.com/mobile/">RetailMeNot</a>, while not food related, might just be your best shopping buddy. With over 50,000 participating retailers, from J. Crew to Amazon, you’ll find deals on almost everything. All you need to do is see what coupons are available, decide on your purchase, and scan the coupon from your phone at checkout.
The Best Value Foods to Purchase and Meal Planning
Cooking takes time and it might not be ‘your thing,’ but planning easy-to-make, nutritious meals and cooking in advance can save you a bundle of cash. If you have a crock pot, cooking can be almost painless. From soups to stews to chicken or chili – just toss it in the crock-pot.
So what are the best budget-friendly foods? Buy seasonal produce when possible – it is fresh and less expensive. Make an effort to plan ahead, have a shopping list, and avoid those spontaneous and often costly extras. Word to the wise: never go to the market when you’re hungry!
Some of the most economical, nutritious, and versatile foods to buy are:
Eggs
Beans (bulk buy friendly)
Chicken breasts (bulk buy friendly when on sale)
Peanut butter (bulk buy friendly when on sale)
Potatoes
Onions
Carrots
Spinach
Kale
Salmon: Look for flash frozen salmon on sale and toss a few bags into your freezer.
Shrimp: Look for flash frozen shrimp on sale and toss a few bags into your freezer.
Berries, mango and cherries (fresh or frozen but make sure no added sugar if frozen)
Greek yogurt
Almonds and most other nuts make great snacks and can be purchased in bulk.
Oatmeal (bulk buy friendly when on sale)
Milk (cow or almond although cow milk has far fewer additives)
What you eat and how you entertain yourself is about finding what works for you. Everyone needs to enjoy what they like every now and then, even if you’re tight on cash or saving up for a large purchase like <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">buying a home</a>. Finding multiple ways to cut costs can facilitate this while you build savings and pay off debts.
Read the second half of our cutting cost series about <a href="https://www.realfx.com/blog/cutting-costs-food-entertainment-expenses/">cutting home & lifestyle costs here</a>.2020-03-24T07:24:00-07:002020-04-28T09:05:58-07:00Danny Evatttag:realfx.com,2012-09-20:6897Dealing With Financial Stress: Avoid Stress & Heartache With Strategic Financial Planning<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/dealing-with-financial-stress.jpg" alt="Man stressed out dealing with financial stress" width="475" />There is simply no avoiding the fact that financial worries cause stress to you and those around you. Money concerns wreak havoc on the most laid-back personalities, so let’s look at proven ways to minimize, and maybe even eliminate, that stress.
The first step is to identify what financial aspect or aspects of your current situation is causing you to worry nonstop. Is it a car payment? Unexpected medical costs? Too high a rent payment? Too many credit card bills? Outstanding loans for education? Or a combination of some or all of the above?
Write down the issues that are causing you to stay up at night. Just naming specifics is the start to getting a handle on which ones are more quickly addressed and resolved. Now write down what you want and where you want to be. Silly as it might seem, the mere fact of committing reality to paper empowers you and puts you in charge.
Break Goals into Smaller, More Attainable Steps
One of the best ways to relieve stress related to financial stress is to reduce some of the demands on your money. You can do this by <a href="https://www.realfx.com/blog/introduction-to-budgeting/">developing good budgeting practices</a>.
Determine how much money you need for those day-to-day, week-to-week and month-to-month must-pay expenses. Now look at how much you spend. Every penny. The first thing most of us realize is that some of what we spend money on is extraneous to what we need.
If you can save twenty-five to fifty dollars a week by foregoing that mid-morning coffee and bagel and not grabbing lunch from the salad or sandwich shop, it amounts to an extra one-hundred to four-hundred dollars per month <a href="https://www.realfx.com/blog/cutting-costs-food-entertainment-expenses/">you can forego to cut costs</a> and allocate to paying off a credit card or two. Pay down the ones with the highest interest rates first.
This is the easiest change for everyone <a href="https://www.realfx.com/blog/cutting-costs-food-entertainment-expenses/">when it comes to cutting costs</a>, but one most people overlook out of habit. The best part? You will have made a huge step forward in eliminating that sinking feeling of despair because now you realize it can be done!
Focus On What You Can Change
Some things are completely out of our control, including illness, company sell-outs, cut-backs, or accidents. This is why having a contingency fund is so important. But until you can get a realistic handle on your budget, putting a bit of extra cash into that contingency fund seems unfeasible. Putting together a workable budget is key. And don’t worry about the unknown “ifs”. As you see your debt dwindle and accrue an increasing slush fund, those “ifs” won’t loom with such intensity.
Budget for Fun
You’ve determined the areas of greatest financial stress. You know what you want to achieve. You’ve figured out ways to cut back cash. Now you need to budget for fun things. And a lot of that fun can be completely free.
Living within your new budget does not necessitate living like a hermit. Trade the shopping trip to the mall with friends to a hike or bike ride with them. Check out the free concerts hosted by your city’s park and recreation department or local neighborhood art shows and jam sessions.
It’s Okay to Ask for Outside Help
Know you are not alone in your worry, frustration, fear, and despair. An astronomical number of people are going through exactly the same trials you are. That’s why many non-profit organizations, schools, and communities host free financial planning help seminars and events. You don’t need to sign or commit to a thing – but ask questions and gather more tips.
Financial planning businesses and credit counselors are another source. Therapists are skilled in helping people cope with stress and are far more conducive to a positive outcome than some self-medicating remedies.
Getting to the point of financial stability is a journey - and most often not an easy one. But with a plan and determination, anyone can improve their quality of life with minimal or no stress. In time, you may have investments, savings, and <a href="https://www.realfx.com/blog/homeownership-possibility-for-everyone/">look towards buying a home</a>!2020-03-23T09:50:00-07:002020-04-28T09:05:40-07:00Danny Evatttag:realfx.com,2012-09-20:7178Getting a Mortgage Together: What Married Couples Need to Know<img style="display: block; float: right; margin-bottom: 30px; margin-left: 15px; width: 475px;" src="https://assets.site-static.com/userfiles/610/image/buying-a-home-as-a-couple.jpg" alt="How to Buy a Home as a Married Couple" width="475" />When people get married, they often start to think about <a href="https://www.realfx.com/blog/how-to-buy-your-first-together-home/">buying a home together</a>. Although there are many instances in which one part of a married couple may purchase a home individually, there are benefits to applying as a couple. Younger pairs can usually qualify more quickly when they pool their funds together and <a href="https://www.realfx.com/blog/how-to-transition-from-renter-to-homeowner/">transition more smoothly from renter to owner</a>. These considerations help people discover the aspects about married home buying that are unique to buying a home alone.
Meet Income Requirements
The most obvious benefit to applying for a mortgage as a couple is the increase in potential income on the application so you can <a href="https://www.realfx.com/blog/how-to-get-ahead-of-peers-with-real-estate/">get ahead with real estate</a> together. The amount that an applicant can qualify for in a mortgage is governed by the monthly mortgage payment. This payment includes principal, interest, property taxes, and any insurance, if required. This combined bill is often called "PITI". Lenders usually prefer borrowers to have a PITI payment that is less than <a href="http://www.bankrate.com/calculators/mortgages/new-house-calculator.aspx">28 percent</a> of their gross monthly income, although lenders may make exceptions in high cost-of-living areas.
Since lenders take into consideration the mortgage payment, but also the total monthly debt obligations (PITI plus credit card debt, auto loans, and student loans), many people focus on decreasing their debt to boost their buying power. However, increasing the income portion of the ratio is another useful way that couples can improve the size of the mortgage they could possibly get. Any income that a married couple wants to count in the application should be consistent, regular, and easy to verify. Fortunately, there are a number of <a href="https://www.realfx.com/blog/options-for-first-time-home-buyers/">options for first-time home buyers</a>.
Consider Credit for Two
Married couples usually decide to share finances to some degree. They may open a few savings accounts together, or get a shared credit card for purchases. What they may not understand is how this can affect their credit individually. Just as combining income in marriage can be a boon for mortgage applicants, balancing all credit scores together could be somewhat of a liability. Everyone has three credit scores from the credit reporting agencies, and this doesn't change after marriage. As such, even a shared credit card account could affect one person's credit more or less than the other.
Couples who want to take advantage of the shared increase in income should make sure that their credit scores are in the best possible shape before applying for a mortgage. Lenders typically take the <a href="http://homeguides.sfgate.com/fico-score-mortgage-lenders-use-75991.html">median score</a> for each applicant into consideration, which means the middle score. This may not be the same as the average of the three credit scores. As a result, someone with a single score much lower than the other two might qualify more easily than a person with two lower scores and one higher one.
Set Preferences for the Home
Clearing the hurdle of mortgage pre-approval is just the first step in a longer process toward buying a home. The next step involves a great deal of discussion about <a href="https://www.daveramsey.com/blog/married-and-house-hunting-how-to-agree-perfect-home">potential homes</a> and deciding which one will present the best investment for the couple in the future. Many financial experts think it's wise to wait to look for homes until after people have an idea of what lenders will reasonably give in a mortgage loan. That said, it's never too early to share ideas about buying a home and come to an agreement about expectations and any <a href="https://www.realfx.com/blog/common-home-buying-misconceptions/">home buying misconceptions they may have</a>.
Buying a home as a single person is complicated enough, when only one person's opinion really matters. Couples will find the process a lot easier if they can come together to identify the things they really need in a home long before they start following up on Multiple Listing Services (MLS) listings. Hashing out the preferences concerning:
property and house size
amenities
location
future resale value
will cut down on the conflicts that could arise when it comes time to actually settle on a specific property. It may also significantly shorten the search for a home.
Putting Gifts Toward a Down Payment
For most mortgage applicants, buying a home involves a sizeable investment in the form of a down payment. These days, a lot of married couples are forgoing asking friends and relatives to help them stock their homes in wedding gifts in favor of <a href="https://smartasset.com/mortgage/what-are-the-rules-for-down-payment-gifts">asking for help with the down payment</a>. Although getting a leg up on the down payment can certainly help people to get into a home much sooner than they could save up on their own, it has to be done properly to be accepted by the lender.
Perhaps paradoxically, many lenders are perfectly willing to accept a gifted down payment of 20 percent or more, but expect that anyone putting down less than that contribute some of their own funds. Whatever couples want to put in for the down payment, the gift should be carefully documented. Lenders often won't accept gifts provided from people who aren't a parent, sibling, or grandparent. However, if the gift has been sitting in the applicants bank account for several months, the lender may not challenge the existence of the money at all. Couples who get a substantial gift shortly before applying for a mortgage should get a letter saying that the money is a gift, not a loan.
Although <a href="https://www.realfx.com/blog/steps-to-take-to-buy-a-home/">the steps of buying a home</a> have a few obstacles that couples have to pass through, <a href="https://www.realfx.com/blog/benefits-of-homeownership-for-millennials/">purchasing real estate can be a beneficial investment for Millennials</a> that ensures a better future for both people. When couples know what to expect from the process, they can improve their odds of an ideal result.2019-05-28T09:14:00-07:002021-07-25T16:21:02-07:00Danny Evatt