Making the leap from being a renter to becoming a homeowner is a process that includes taking stock of your financial situation and determining whether you’re ready for such a massive responsibility. For most people, the primary question is affordability. Do you have enough cash in the bank to fund a down payment, or do you have a credit score high enough to qualify you for a home loan? But there are other considerations, tooâand plenty of misconceptions and myths that could keep you from making that first step.
Below, our experts weigh in on why some situations that may seem like roadblocks are actually not as daunting as they appear.
1. Buying a home means heavy debt
Some may argue that continuing to rent can spare you from taking on heavy debt. But owning a house offers advantages.
âBuying a home and using a typical loan would be spread out over 20 to 30 years. But if you can make one extra payment a year or make bimonthly payments instead, you can shed up to seven years from that long-term loan,â says Jesse McManus, a real estate agent for Big Block Realty in San Diego, CA.
Plus, as you pay your mortgage, you gain equity in the home and create an asset that can be used when needed, such as paying off debt or even buying a second home.
âCurrently, mortgage interests rates are at their lowest point in history, so … it’s a great time to borrow money,â McManus says.
2. At least a 20% down payment is needed to buy a home
âContrary to popular belief, a 20% down payment is not required to purchase a home,” says Natalie Klinefelter, broker/owner of the Legacy Real Estate Co. in San Diego, CA. “There are several low down payment options available to all types of buyers.â
These are as low as 0% down for Veterans Affairs loans to 5% for conventional loans.
One of the main reasons buyers assume they must put down 20% is that without a 20% down payment, buyers typically face private mortgage insuranceÂ payments that add to the monthly loan payment.
âThe good news is once 20% equity is reached in a home, the buyer can eliminate PMI. This is usually accomplished by refinancing their loan, ultimately lowering their original payment that included PMI,â says Klinefelter. âSelecting the right loan type for a buyerâs needs and the property condition is essential before purchasing a home.â
Watch: 5 Things First-Time Home Buyers Must Know
3. Your credit score needs to be perfect
Having a credit score at or above 660 looks great to mortgage lenders, but if yours is lagging, thereâs still hope.
âCredit score and history play a significant role in a buyerâs ability to obtain a home loan, but it doesn’t mean a buyer needs squeaky-clean credit. There are many loan solutions for buyers who have a lower than the ideal credit score,â says Klinefelter.
She says government-backed loans insured by the Federal Housing AdministrationÂ have lower credit and income requirements than most conventional loans.
âA lower down payment is also a benefit of FHA loans. Lenders often work with home buyers upfront to discuss how to improve their credit to obtain a loan most suitable for their needs and financial situation,â says Klinefelter.
McManus says buyers building credit can also use a home loan to bolster their scores and create a foundation for future borrowing and creditworthiness.
4. Now is a bad time to buy
Buying a home at the right timeâduring a buyer’s market or when interest rates are lowâis considered a smart money move. But don’t let the fear of buying at the “wrong time” stop you from moving forward. If you feel like you’ve found a good deal, experts say there is truly no bad time to buy a home.
âThe famous saying in real estate is ‘I donât have a crystal ball,’ meaning no one can predict exactly where the market will be at a given time. If a buyer stays within their means and has a financial contingency plan in place if the market adjusts over time, it is the right time to buy,â says Klinefelter.
5. Youâll be stuck and canât relocate
Some people may be hesitant to buy because it means staying put in the same location.
âI always advise my clients that they should plan to stay in a newly purchased home for a minimum of three years,” says McManus. “You can ride out most market swings if they happen, and it also gives you a sense of connection to your new space.”
In a healthy market, McManus says homeowners will likely be able to sell the home within a year or two if they need to move, or they can consider renting out the property.
âThere is always a way out of a real estate asset; knowing how and when to exit is the key,â says Klinefelter.
The post 5 Myths About Transitioning From Renter to Homeowner appeared first on Real Estate News & Insights | realtor.comÂ®.
Over the past three months, the stock market has been on a roller coaster. Investment portfolios have followed suit, which could be particularly concerning for those who are counting on those funds for retirement.
For those close to retirement, a lack of savings may mean monthly expenses go unpaid. As a result, retirees may be considering a reverse mortgage to bring in much-needed cash.
âRetirement accounts have been suffering under the macroeconomic conditions that we see out there today. People are looking at the use of home equity to absorb some of those shocks in their retirement plans,â says Steve Irwin, president of the National Reverse Mortgage Lenders Association.
Because there’s a long lead time for a reverse mortgage, Irwin says it’s too early to tell if the numbers are up. However, a leading indicator shows we might be on the edge of a wave of reverse mortgages.
NRMLA data shows an uptick in consumers who’ve taken the initial step and completed the financial counseling needed to proceed with a reverse mortgage. Irwin says counseling sessions in the month of March were up 25% compared with the year before.
Before homeowners can apply for a reverse mortgage or complete a final application, they must complete independent third-party counseling, he notes, adding that those counseling sessions are up significantly in the first quarter.
Historically, those counseling sessions had to be done in-person, but because of the COVID-19 pandemic, some states have allowed online sessions.
Reverse mortgage basics
Since the first reverse mortgage in 1990, over a million have been issued and currently about 550,000 are outstanding, according to the NRMLA. Unlike a forward mortgage, in which you pay down a loan to live in your home, a reverse mortgage draws from the equity you’ve built up in your home.
To qualify for a reverse mortgage you must meet the following criteria:
Be aged 62 or older
Own your property outright or owe a small amount on a traditional mortgage
Live in the home as your primary residence
Not be delinquent on any federal debt
Meet with an approved counselor
Most reverse mortgages are backed by the Federal Housing Administration as part of the Home Equity Conversion Mortgage program. Once approved, a borrower can withdraw funds as a lump sum, a fixed monthly amount, a line of credit, or a combination of these options. The loan comes due when the borrower either moves out or dies.
And although the instant hit of cash may be a welcome development, the homeowner is still responsible for other monthly payments.
âKeep in mind with reverse mortgages … you still have to have the financial resources to live in the house,â says Mary Bell Carlson, the accredited financial counselor behind the Chief Financial Mom. âYou’re going to be living in the house, you still owe the property taxes, you still owe the insurance, the HOA, and all the maintenance on the home while you’re living there.â
One other note: As with a traditional mortgage, there are fees and upfront costs.
Is now a good time for a reverse mortgage?
Keep in mind, a reverse mortgage will hand you money, but the lender uses the equity in your home to give you that money.
âThe amount of funds available through a reverse mortgage are calculated based on the age of the borrower, or in the case of a couple, the youngest personâs age, the homeâs value, and the interest rates in effect at the time,â Irwin explains. âThe lower the interest rate, the greater percentage of equity that can be made available.â
Currently, interest rates are at historic lows.
âWe understand a lot of people have been looking at the reverse mortgage and just havenât decided whether or not to move forward. But they understand that responsible use of home equity can absorb different shocks to peopleâs income streams,â Irwin says.
Another pandemic-related factor in play? Nursing homes and assisted-care facilities aren’t exactly an appealing option in the current climate. This may partly be why some seniors are opting to stay put in their own homes.
âWe know that people want to age in place, and I think many senior homeowners who may have been considering moving or moving to a care facility are almost hesitant and reluctant to go anywhere right now,â says Irwin.
Before contemplating a reverse mortgage in the current environment, you must consider if you can still pay the expenses that come with owning a home. Lower interest rates will mean more cash in your hand, but if you don’t have funds set aside to cover needed repairs, maintenance, and other expenses of homeownership, pause for a moment to suss out your best option.
âA [reverse mortgage] doesn’t mean that [borrowers] just live scot-free in the home. They still have to have some kind of cash flow to keep up the home, and they can’t let the home fall into complete disrepair. That is a violation of the contract, and they could lose the house for that,â Carlson says.
Irwin says the answer depends on each homeowner’s situation.
âThis is an individual case-by-case decision, and we want to ensure that it is a decision that’s carefully considered and discussed with trusted advisers and family members. But from strictly the available amount of proceeds given the current interest rate, yes, it is a good time.â
The future of reverse mortgages
Irwin says he expects more seniors to look at reverse mortgages as the pandemic-fueled financial crisis continues.
âItâs a needs-based transaction. They need to augment their financial stability,â Irwin explains. âThey need to augment whatever retirement funding they have in place, or they need to relieve themselves of the burden of monthly principal and interest payments of a regular mortgage. I think that we will see more and more the use of the reverse mortgage as part of a more comprehensive financial plan in retirement.â
The post As Markets Wobble, Will We See a Wave of Reverse Mortgages? appeared first on Real Estate News & Insights | realtor.comÂ®.
When it comes to affording a new home, you have a few types of home loans to choose from. Prospective homebuyers often compare the FHA vs. the conventional loan when researching loans. Each loan type has certain stereotypes associated with them, but we are here to give you the facts about both FHA and conventional loans. This post will help you understand what each loan is, familiarize you with the differences between them, and provide some guidelines for how to pick which one is best for you.
What Is An FHA Loan?
An FHA loan is insured by the Federal Housing Administration (FHA). These loans are issued by private lenders, but lenders are protected from losses by the FHA if the homeowner fails to repay. FHA loans are generally used to refinance or buy a home.
What Is A Conventional Loan?
A conventional loan is supplied by a private lender and isnât federally insured. Requirements for obtaining a conventional loan vary depending on the lender. When used to buy property, conventional loans are typically known as mortgages.
Differences Between FHA and Conventional Loans
The main difference between FHA and conventional loans is whether or not they are insured by the federal government. Conventional loans arenât federally backed, so itâs riskier for the lender to loan money. On the other hand, FHA loans are protected by the government, and as a result of less risk, they can typically offer better deals.
This difference in federal insurance is the reason why FHA and conventional loans vary when it comes to the details of the loan. Keep reading to learn the differences regarding credit requirements, minimum down payments, debt-to-income ratios, loan limits, mortgage insurance, and closing costs.
Minimum Credit Score
Minimum Down Payment
Maximum Debt-to-Income Ratio
Credit score of 500: 43%
Credit score of 580+: 43-50%
Credit score of 620: 33-36%
Credit score of 740+: 36-45%
Contiguous US: $548,250
High-cost counties, AK, HI, and US territories: $822,375
Mortgage insurance premiums required.
Private mortgage insurance required with down payments less than 20%.
Stricter standards, property purchased must be a primary residence.
Flexible standards, property purchased doesnât have to be a primary residence.
Sources: FHA Single Family Housing Policy Handbook | Fannie Mae 1 2 | Federal Housing Finance Agency | Freddie Mac | HUD 1 2 | Consumer Financial Protection Bureau 1 2
Your credit score is a determining factor in your loan eligibility. Your credit score is measured on a scale of 300 (poor credit) to 850 (excellent credit). Good credit helps you get approved for loans more easily and at better rates. FHA and conventional loans differ in their credit score requirements and represent financial options for individuals at either end of the credit spectrum.
Minimum Credit Score for FHA Loan: 500
Accepts a credit score as low as 500, but usually with a 10% down payment
These loans accept lower credit scores because they are insured
Note: Some lenders may only issue FHA loans with higher credit scores
Minimum Credit Score for Conventional Loan: 620
Accepted score may vary from lender to lender
These loans are usually offered to individuals with strong credit because they present less risk to lenders
Minimum Down Payment
A down payment is the sum of money that is paid as a percentage of your purchase up-front.
Minimum Down Payment on an FHA loan:
10% of your purchase with 500 credit score
3.5% of your purchase with 580+ credit score
Minimum Down Payment on a Conventional Loan:
3% of your purchase can be put down with good credit
5% to 20% of your purchase price is typical
Your debt-to-income ratio is the amount of money paid toward debt each month divided by your total monthly income. To be eligible for a loan, you must be at or below the maximum debt-to-income (DTI) ratio.
Maximum DTI Ratio Guidelines for FHA loans:
43% with a credit score of 500
43â50% with a credit score of 580
Maximum DTI Ratio Guidelines For Conventional Loans:
33-36% with a credit score lower than 740
36-45% with a credit score of 740 or higher
50% highest allowed through Fannie Mae
Both FHA and conventional loans have limits on the amount that you can borrow. Loan limits vary based on your location and the year your loan is borrowed. Find 2021 loan limits specific to your county through the Federal Housing Finance Agency.
2021 FHA Loan Limits
High-cost counties: $822,375
Low-cost counties: $356,362
2021 Conventional Loan Limits
Contiguous US (excluding high-cost counties): $548,250
Alaska, Hawaii, US territories, and high-cost counties: $822,375
Mortgage insurance is taken out to protect the lender from losses in case you fail to repay your loan. Whether you will pay private mortgage insurance or mortgage insurance premiums is based on your loan type and down payment percentage.
Mortgage insurance is required for all FHA loans.
It is paid to the FHA in the form of mortgage insurance premiums and includes an up-front and monthly premium.
MIP payments last the entire life of your FHA loan.
To get rid of MIPs after paying 20% of your loan, you can choose to refinance into a conventional loan.
Private mortgage insurance (PMI) is only required when a down payment below 20% is made.
PMI comes in different forms: monthly premium, up-front premium, and split premiums.
PMI requirements stop once you have met one of three requirements:
Principal loan amount is reduced to 80% before the loan term ends.
At least 78% of the principal balance is scheduled to be paid down.
The halfway point of your loan term has passed.
There are different property standards that must be met to use each loan. FHA loans have stricter requirements, while conventional loans have more flexibility.
Property purchased with FHA loans must be your principal residence, meaning the borrower has to occupy the residence
FHA loans canât be used to invest in property (e.g., renting out or flipping)
Title must be in the borrower’s name or name of a living trust
Property purchased with a conventional loan doesnât have to be a principal residence â second or third residences are allowed
Conventional loans can be used to purchase investment properties
Pros and Cons of FHA vs. Conventional Loans
As a result of the various differences between FHA and conventional loans, each type has its respective pros and cons.
Qualify with low credit and high DTI
Smaller down payments overall
More affordable with low credit
Lowest option for down payments with good credit
More affordable with good credit
Property doesnât have to be your main home
Mortgage insurance premiums required for life of loan
Property purchased must be your main home
Need higher credit and lower DTI to qualify
Typically has larger down payments
PMI required with a down payment less than 20%
Pros and Cons of FHA Loans
FHA loans are government-regulated and insured to extend flexible opportunities for homeownership. Theyâre flexible regarding credit and DTI, but stricter about insurance and property standards.
Flexible qualification with low credit and high DTI
Smaller down payments overall
More affordable with low credit
Mortgage insurance premiums required for life of loan
Property purchased must be your primary residence
Pros and Cons of Conventional Loans
Conventional loans can also offer flexibility, but generally only if you have good credit and demonstrate reduced risk to the lender. These loans have stricter qualifications, but flexibility in other areas.
Lowest option for down payments (3% with good credit)
Private mortgage insurance can be canceled (must meet requirements)
More affordable with good credit
Property purchased doesnât have to be a primary residence
Strict qualifications require higher credit and lower DTI
Larger down payments are typical
Private mortgage insurance required with a down payment less than 20%
Which Loan Is Better For You?
Both FHA and conventional loans have their advantages and disadvantages. Here are some general guidelines for when to use an FHA loan or a conventional loan.
When To Use an FHA Loan
You have a low credit score (500â619)
Your DTI ratio is on the higher side (between 45â50%)
You can only afford a small down payment
You plan to use the property as your primary residence
When To Use a Conventional Loan
Your credit score is fairly good (620 or above)
Your DTI ratio is on the lower side (33â36%)
You can afford a larger down payment
You want flexibility with insurance and repaying your loan
Itâs important to thoroughly research your options before choosing a loan. A key takeaway when comparing FHA vs. conventional loans is that FHA loans are federally insured and conventional loans arenât. This distinction results in different qualification and payment requirements for each loan.
Use the information in this post to carefully compare the differences in accepted credit scores, minimum down payments, loan limits, maximum debt-to-income ratios, mortgage insurance and property standards. In doing so, choose the loan that works for your circumstances and helps you best afford the home of your dreams.
Sources: FHA Single Family Housing Policy Handbook | US Dept. of Housing and Urban Development | Federal Housing Finance Agency | Freddie Mac
The post FHA vs. Conventional Loans: Which Is Better? appeared first on MintLife Blog.
If you’re a first-time home buyer shopping for a home, odds are you should be shopping for mortgage loans as wellâand these days, it’s by no means a one-mortgage-fits-all model.
Where you live, how long you plan to stay put, and other variables can make certain mortgage loans better suited to a home buyer’s circumstances and loan amount. Choosing wisely between them could save you a bundle on your down payment, fees, and interest.
Many types of mortgage loans exist: conventional loans, FHA loans, VA loans, fixed-rate loans, adjustable-rate mortgages, jumbo loans, and more. Each mortgage loan may require certain down payments or specify standards for loan amount, mortgage insurance, and interest. To learn about all your home-buying options, check out these common types of home mortgage loans and whom they’re suited for, so you can make the right choice. The type of mortgage loan that you choose could affect your monthly payment.
The most common type of conventional loan, a fixed-rate loan prescribes a single interest rateâand monthly paymentâfor the life of the loan, which is typically 15 or 30 years. One type of fixed-rate mortgage is a jumbo loan.
Right for: Homeowners who crave predictability and aren’t going anywhere soon may be best suited for this conventional loan. For your mortgage payment, you payÂ X amount forÂ Y yearsâand that’s the end for a conventional loan. A fixed-rate loan will require a down payment. The rise and fall of interest ratesÂ won’tÂ change the terms of your home loan,Â so you’ll always know what to expect with your monthly payment. That said, a fixed-rate mortgage is best for people who plan to stay in their home for at least a good chunk of the life of the loan; if you think you’ll move fairly soon, you may want to consider the next option.
Unlike fixed-rate mortgages, adjustable-rate mortgages (ARM) offer mortgage interest rates typically lower than you’d get with a fixed-rate mortgage for a period of timeâsuch as five or 10 years, rather than the life of a loan. But after that, yourÂ interest rates (and monthly payments) will adjust, typically once a year, roughly corresponding to current interest rates. So if interest rates shootÂ up, so doÂ your monthly payments; if they plummet, you’ll pay less on mortgage payments.
Right for: Home buyers with lower credit scores are best suited for an adjustable-rate mortgage. Since people with poor credit typically can’t get good rates on fixed-rate loans, an adjustable-rate mortgage can nudge those interest rates down enough to put homeownership within easier reach. These home loans are also great for people who plan to move and sell their home before their fixed-rate period is up and their rates start vacillating. However, the monthly payment can fluctuate.
While typical home loans require a down payment of 20% of the purchase price of your home, withÂ a Federal Housing Administration, or FHA loan, you canÂ put down as little as 3.5%. That’s because Federal Housing Administration loans are government-backed.
Right for:Â Home buyers with meager savings for a down payment are a good fit for an FHA loan. The FHA has several requirements for mortgage loans. First, most loan amounts are limited to $417,000 andÂ don’t provideÂ much flexibility. FHA loans are fixed-rate mortgages, with either 15- or 30-year terms. Buyers of FHA-approved loans are also required to payÂ mortgage insuranceâeither upfront or over the life of the loanâwhich hovers at around 1% of the cost of your loan amount.
If you’ve served in the United States military, a Veterans Affairs or VA loan can be an excellent alternative to a conventional loan.Â If you qualify for a VA loan, you can score a sweet home with no down payment and no mortgage insurance requirements.
Right for:Â VA loans are for veterans who’ve servedÂ 90 days consecutively during wartime, 180 during peacetime, or six years in the reserves.Â Because the home loans are government-backed, the VA hasÂ strict requirements on the type of home buyers can purchase with a VA loan: It must be your primary residence, and it must meet âminimum property requirements” (that is, no fixer-uppers allowed).
Another government-sponsored home loan is the USDA Rural Development loan, which is designed for families in rural areas. The government finances 100% of the home price for USDA-eligible homesâin other words, no down payment necessaryâand offers discounted mortgage interest rates to boot.
Right for: Borrowers in rural areas who are struggling financially can access USDA-eligible home loans. These home loans are designed to put homeownership within their grasp, with affordable mortgage payments. The catch? Your debt load cannot exceed your income by more than 41%, and, as with the FHA, you will be required to purchase mortgage insurance.
Also known as a gap loan or ârepeat financing,” a bridge loan is an excellent option if you’re purchasing a home before selling your previous residence. Lenders will wrap your current and new mortgage payments into one; once your home is sold, you pay off that mortgage and refinance.
Right for:Â HomeownersÂ withÂ excellent credit and a low debt-to-income ratio, and who don’t need to finance more than 80% of the two homes’ combined value. Meet those requirements, and this can be a simple way of transitioning between two houses without having a meltdownâfinancially or emotionallyâin the process.
The post 6 Types of Home Loans: Which One Is Right for You? appeared first on Real Estate News & Insights | realtor.comÂ®.
You probably donât need us to tell you that the earlier you start saving for retirement, the better. But letâs face it: For a lot of people, the problem isnât that they donât understand how compounding works. They start saving late because their paychecks will only stretch so far.
Whether youâre in your 20s or your golden years are fast-approaching, saving and investing whatever you can will help make your retirement more comfortable. Weâll discuss how to save for retirement during each decade, along with the hurdles you may face at different stages of life.
How Much Should You Save for Retirement?
A good rule of thumb is to save between 10% and 20% of pre-tax income for retirement. But the truth is, the actual amount you need to save for retirement depends on a lot of factors, including:
Your age. If you get a late start, youâll need to save more.
Whether your employer matches contributions. The 10% to 20% guideline includes your employerâs match. So if your employer matches your contributions dollar-for-dollar, you may be able to get away with less.
How aggressively you invest. Taking more risk usually leads to larger returns, but your losses will be steeper if the stock market tanks.
How long you plan to spend in retirement. Itâs impossible to predict how long youâll be able to work or how long youâll live. But if you plan to retire early or people in your family often live into their mid-90s, youâll want to save more.
How to Save for Retirement at Every Age
Now that youâre ready to start saving, hereâs a decade-by-decade breakdown of savings strategies and how to make your retirement a priority.
Saving for Retirement in Your 20s
A dollar invested in your 20s is worth more than a dollar invested in your 30s or 40s. The problem: When youâre living on an entry-level salary, you just donât have that many dollars to invest, particularly if you have student loan debt.
Prioritize Your 401(k) Match
If your company offers a 401(k) plan, a 403(b) plan or any retirement account with matching contributions, contribute enough to get the full match â unless of course you wouldnât be able to pay bills as a result. The stock market delivers annual returns of about 8% on average. But if your employer gives you a 50% match, youâre getting a 50% return on your contribution before your money is even invested. Thatâs free money no investor would ever pass up.
Pay off High-Interest Debt
After getting that employer match, focus on tackling any high-interest debt. Those 8% average annual stock market returns pale in comparison to the average 16% interest rate for people who have credit card debt. In a typical year, youâd expect aÂ $100 investment could earn you $8. Put that $100 toward your balance? Youâre guaranteed to save $16.
Take More Risks
Look, weâre not telling you to throw your money into risky investments like bitcoin or the penny stock your cousin wonât shut up about. But when you start investing, youâll probably answer some questions to assess your risk tolerance. Take on as much risk as you can mentally handle, which means youâll invest mostly in stocks with a small percentage in bonds. Donât worry too much about a stock market crash. Missing out on growth is a bigger concern right now.
Build Your Emergency Fund
Building an emergency fund that could cover your expenses for three to six months is a great way to safeguard your retirement savings. That way you wonât need to tap your growing nest egg in a cash crunch. This isnât money you should have invested, though. Keep it in a high-yield savings account, a money market account or a certificate of deposit (CD).
Tame Lifestyle Inflation
We want you to enjoy those much-deserved raises ahead of you â but keep lifestyle inflation in check. Donât spend every dollar each time your paycheck gets higher. Commit to investing a certain percentage of each raise and then use the rest as you please.
Saving for Retirement in Your 30s
If youâre just starting to save in your 30s, the picture isnât too dire. You still have about three decades left until retirement, but itâs essential not to delay any further. Saving may be a challenge now, though, if youâve added kids and homeownership to the mix.
Invest in an IRA
Opening a Roth IRA is a great way to supplement your savings if youâve only been investing in your 401(k) thus far. A Roth IRA is a solid bet because youâll get tax-free money in retirement.
In both 2020 and 2021, you can contribute up to $6,000, or $7,000 if youâre over 50. The deadline to contribute isnât until tax day for any given year, so you can still make 2020 contributions until April 15, 2021. If you earn too much to fund a Roth IRA, or you want the tax break now (even though it means paying taxes in retirement), you can contribute to a traditional IRA.
Your investment options with a 401(k) are limited. But with an IRA, you can invest in whatever stocks, bonds, mutual funds or exchange-traded funds (ETFs) you choose.
If you or your spouse isnât working but you can afford to save for retirement, consider a spousal IRA. Itâs a regular IRA, but the working spouse funds it for the non-earning spouse.Â
Avoid Mixing Retirement Money With Other Savings
Youâre allowed to take a 401(k) loan for a home purchase. The Roth IRA rules give you the flexibility to use your investment money for a first-time home purchase or college tuition. Youâre also allowed to withdraw your contributions whenever you want. Wait, though. That doesnât mean you should.
The obvious drawback is that youâre taking money out of the market before itâs had time to compound. But thereâs another downside. Itâs hard to figure out if youâre on track for your retirement goals when your Roth IRA is doing double duty as a college savings account or down payment fund.
Start a 529 Plan While Your Kids Are Young
Saving for your own future takes higher priority than saving for your kidsâ college. But if your retirement funds are in shipshape, opening a 529 plan to save for your childrenâs education is a smart move. Not only will you keep the money separate from your nest egg, but by planning for their education early, youâll avoid having to tap your savings for their needs later on.
Keep Investing When the Stock Market Crashes
The stock market has a major meltdown like the March 2020 COVID-19 crash about once a decade. But when a crash happens in your 30s, itâs often the first time you have enough invested to see your net worth take a hit. Donât let panic take over. No cashing out. Commit to dollar-cost averaging and keep investing as usual, even when youâre terrified.
Saving for Retirement in Your 40s
If youâre in your 40s and started saving early, you may have a healthy nest egg by now. But if youâre behind on your retirement goals, now is the time to ramp things up. You still have plenty of time to save, but youâve missed out on those early years of compounding.
Continue Taking Enough Risk
You may feel like you can afford less investment risk in your 40s, but you still realistically have another two decades left until retirement. Your money still has â and needs â plenty of time to grow. Stay invested mostly in stocks, even if itâs more unnerving than ever when you see the stock market tank.
Put Your Retirement Above Your Kidsâ College Fund
You can only afford to pay for your kidsâ college if youâre on track for retirement. Talk to your kids early on about what you can afford, as well their options for avoiding massive student loan debt, including attending a cheaper school, getting financial aid, and working while going to school. Your options for funding your retirement are much more limited.
Keep Your Mortgage
Mortgage rates are historically low â well below 3% as of December 2020. Your potential returns are much higher for investing, so youâre better off putting extra money into your retirement accounts. If you havenât already done so, consider refinancing your mortgage to get the lowest rate.
Invest Even More
Now is the time to invest even more if you can afford to. Keep getting that full employer 401(k) match. Beyond that, try to max out your IRA contributions. If you have extra money to invest on top of that, consider allocating more to your 401(k). Or you could invest in a taxable brokerage account if you want more flexibility on how to invest.
Meet With a Financial Adviser
Youâre about halfway through your working years when youâre in your 40s. Now is a good time to meet with a financial adviser. If you canât afford one, a financial counselor is typically less expensive. Theyâll focus on fundamentals like budgeting and paying off debt, rather than giving investment advice.
Saving for Retirement in Your 50s
By your 50s, those retirement years that once seemed like they were an eternity away are getting closer. Maybe thatâs an exciting prospect â or perhaps it fills you with dread. Whether you want to keep working forever or retirement canât come soon enough, now is the perfect time to start setting goals for when you want to retire and what you want your retirement to look like.
Review Your Asset Allocation
In your 50s, you may want to start shifting more into safe assets, like bonds or CDs. Your money has less time to recover from a stock market crash. Be careful, though. You still want to be invested in stocks so you can earn returns that will keep your money growing. With interest rates likely to stay low through 2023, bonds and CDs probably wonât earn enough to keep pace with inflation.
Take Advantage of Catch-up Contributions
If youâre behind on retirement savings, give your funds a boost using catch-up contributions. In 2020 and 2021, you can contribute:
$1,000 extra to a Roth or traditional IRA (or split the money between the two) once youâre 50
$6,500 extra to your 401(k) once youâre 50
$1,000 extra to a health savings account (HSA) once youâre 55.
Work More if Youâre Behind
Your window for catching up on retirement savings is getting smaller now. So if youâre behind, consider your options for earning extra money to put into your nest egg. You could take on a side hustle, take on freelance work or work overtime if thatâs a possibility to bring in extra cash. Even if you intend to work for another decade or two, many people are forced to retire earlier than they planned. Itâs essential that you earn as much as possible while you can.
Pay off Your Remaining Debt
Since your 50s is often when you start shifting away from high-growth mode and into safer investments, now is a good time to use extra money to pay off lower-interest debt, including your mortgage. Retirement will be much more relaxing if you can enjoy it debt-free.
FROM THE RETIREMENT FORUM
Military pension & SS 1/5/21 @ 2:55 PM
Re-locating 1/5/21 @ 2:53 PM
TSP and mortgage 12/23/20 @ 2:41 PM
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Saving for Retirement in Your 60s
Hooray, youâve made it! Hopefully your retirement goals are looking attainable by now after working for decades to get here. But you still have some big decisions to make. Someone in their 60s in 2021 could easily spend another two to three decades in retirement. Your challenge now is to make that hard-earned money last as long as possible.
Make a Retirement Budget
Start planning your retirement budget at least a couple years before you actually retire. Financial planners generally recommend replacing about 70% to 80% of your pre-retirement income. Common income sources for seniors include:
Social Security benefits. Monthly benefits replace about 40% of pre-retirement income for the average senior.
Retirement account withdrawals. Money you take out from your retirement accounts, like your 401(k) and IRA.
Defined-benefit pensions. These are increasingly rare in the private sector, but still somewhat common for those retiring from a career in public service.
Annuities. Though controversial in the personal finance world, an annuity could make sense if youâre worried about outliving your savings.
Other investment income. Some seniors supplement their retirement and Social Security income with earnings from real estate investments or dividend stocks, for example.
Part-time work. A part-time job can help you delay dipping into your retirement savings account, giving your money more time to grow.
You can plan on some expenses going away. You wonât be paying payroll taxes or making retirement contributions, for example, and maybe your mortgage will be paid off. But you generally donât want to plan for any budget cuts that are too drastic.
Even though some of your expenses will decrease, health care costs eat up a large chunk of senior income, even once youâre eligible for Medicare coverage â and they usually increase much faster than inflation.
Develop Your Social Security Strategy
You can take your Social Security benefits as early as 62 or as late as age 70. But the earlier you take benefits, the lower your monthly benefits will be. If your retirement funds are lacking, delaying as long as you can is usually the best solution. Taking your benefit at 70 vs. 62 will result in monthly checks that are about 76% higher. However, if you have significant health problems, taking benefits earlier may pay off.
Use Social Securityâs Retirement Estimator to estimate what your monthly benefit will be.
Figure Out How Much You Can Afford to Withdraw
Once youâve made your retirement budget and estimated how much Social Security youâll receive, you can estimate how much youâll be able to safely withdraw from your retirement accounts. A common retirement planning guideline is the 4% rule: You withdraw no more than 4% of your retirement savings in the first year, then adjust the amount for inflation.
If you have a Roth IRA, you can let that money grow as long as you want and then enjoy it tax-free. But youâll have to take required minimum distributions, or RMDs, beginning at age 72 if you have a 401(k) or a traditional IRA. These are mandatory distributions based on your life expectancy. The penalties for not taking them are stiff: Youâll owe the IRS 50% of the amount you were supposed to withdraw.
Keep Investing While Youâre Working
Avoid taking money out of your retirement accounts while youâre still working. Once youâre over age 59 Â½, you wonât pay an early withdrawal penalty, but you want to avoid touching your retirement funds for as long as possible.
Instead, continue to invest in your retirement plans as long as youâre still earning money. But do so cautiously. Keep money out of the stock market if youâll need it in the next five years or so, since your money doesnât have much time to recover from a stock market crash in your 60s.
A Final Thought: Make Your Retirement About You
Whether youâre still working or youâre already enjoying your golden years, this part is essential: You need to prioritize you. That means your retirement savings goals need to come before bailing out family members, or paying for college for your children and grandchildren. After all, no one else is going to come to the rescue if you get to retirement with no savings.
If youâre like most people, youâll work for decades to get to retirement. The earlier you start planning for it, the more stress-free it will be.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
When I was buying my first house, everything seemed too good to be trueâat least at the start of the process. I found a home within a couple of weeks, the price was fabulously low, it was in a cute lake community with a style I loved, and funding came through quickly and easily. I even received a first-time home buyerâs bonus for tax time. Plus, I didnât need much of a down payment.
But it turned out too good to be true. My smooth path to homeownership suddenly became rocky when the inspection report came back with a big fat failure on it. I immediately panicked. What did it mean? Was I still able to buy the house? And if I did, was it going to fall apart?
After a few calls with my real estate agent (who, at that point, had become more of a home-buying therapist), I learned that a bad inspection isnât that rare. In fact, my new home wasnât in as bad of shape as I initially feared. We were able to make some repairs and, after a second inspection, the house was appraised and the sale was able to go through.
During the process, though, I learned a lot more than I ever expected about home inspections. Whether you’re a first-time or repeat home buyer, hereâs my advice for getting the house you want after a shaky home inspection.
Houses don’t really pass or fail
Though my home inspection appeared to be a failure, homes aren’t actually graded on a pass/fail system.
âThere is no such thing as a failed inspection,â said Karen Kostiw, an agent with Warburg Realty in New York. âThe inspection just points out small and potentially larger issues that you may not be aware of.â
Sure, some houses can sail through the process and others may fare poorly, but itâs not a âYou can never buy thisâ situation if there are problems with the property.
For me, my mortgage hinged on a solid inspectionâso the initial results meant I wouldnât get the loan unless things were fixed. That being said, if I had enough cash on hand or wanted to try a different mortgage lender, I could have continued with the purchase even with a negative inspection report.
So if the house you’re set on buying ends up having issues, donât panic. You still have options.
Most inspection issues are small
Itâs important to remember every home inspection report will come back with something, according to Kate Ziegler, a real estate agent with Arborview Realty in Boston. My inspection report had noted about 40 fixes. But a lot of times, the problems arenât as bad as you think.
Keep in mind that the inspector’s job is to call out any trouble spot. Also, all issues noted in the report aren’t equal: Some problems flagged by an inspector can wait.
âThe inspector will find defectsâsometimes many defectsâbut that does not mean buyers are not purchasing a good home,â Kostiw says. âThe small leak might mean a bolt needs to be tightened, or the dishwasher is not working because the waterline was switched off by accident. These are easy fixes. However, when buyers see a laundry list of items, it can seem as if the home is falling down. This is most often not the case.â
Red flags do exist
Ziegler and Kostiw agree that though most repairs are easy fixes, some items should give you pause if you see them on your report.
Structural problems, antique electrical systems, old windows, unexplained water damage, evidence of termites or wood rot, a bad roof, asbestos, mold, radon, and lead paint are all red flags that can show up during a home inspection. If fixing these problems is impossible or way beyond the means your budget, you may want to reconsider your purchase.
âWhether or not inspection items warrant backing out entirely depends quite a bit on any individual buyer’s experience and bandwidth, as well as personal risk tolerances and financial situation,â Ziegler says. âIt’s true that houses don’t stay in good repair on their own. They require maintenance and care, just like your houseplants and your sourdough starter!â
Donât try to fix things yourself
Unless a repair is something truly minor like caulking a bathroom tub or putting a cabinet door back on its hinges, donât try to fix anything on your own. You could make things worse or even injure yourself. Hire licensed contractors that youâve vetted to handle any problems. And try not to leave it all up to the sellerâthey’re not going to be living in the home. You will be.
âMotivations in this case are not aligned,â Ziegler says. âThe seller wants to spend as little as possible to meet their contractual obligations, but [a] buyer should be more concerned with the quality of the repair.â
Work the costs into the sale
At first I worried I would have to pay to fix everything that was wrong with my house. But itâs important to know you can work the cost of repairsâand how long it should take to make themâinto the sale.
Say you can’t afford to fix the busted water heater but the seller can. You can raise the offer price by that cost, or you can trade off: The seller fixes one thing, and you fix another. In my case, I only had to add a banister to one stairwell. The sellers were particularly motivated to unload the home so they handled everything else.
Hopefully by the end of this process, every issue will be fixed and youâll be ready to purchase your home. And youâll be able to move in with a clear head, knowing everything is really as good as it seems.
The post My House Failed Its First Real Estate InspectionâHere’s What I Did To Get Through Escrow appeared first on Real Estate News & Insights | realtor.comÂ®.