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Mint Money Audit 6-Month Check-In: How Did Michelle Allocate Her Windfall?
In March I offered some financial advice to Michelle, a Mint user who was struggling with debt, a lack of retirement savings and a bit of family financial drama amongst her siblings.
Michelle was anticipating a cash bonus from her company and wasnât sure if she should save the money or use it to relieve her debt.
I recommended a two-prong approach where she uses the cash to play savings catch-up in her retirement account and knock down some of her debt, which, at the time, included a $3,000 credit card balance and $52,000 in student loans.
Six months later, Iâve checked in with the 38-year-old real estate developer, to see if any of my advice was helpful and if sheâs experienced any shifts in her financial life.
We spoke via email:
Farnoosh: Have your finances have improved over the last 6 months since we last spoke? If so, what has been the biggest improvement?
Michelle: Yes. I’ve aggressively been contributing to my 401(k) â about 50% of my pay – and had hoped to reach the annual maximum of $18,000 by June, but looks like it will be more like October. I also received a $40,000 distribution from a project that I closed.
F: What aspects of your financial life still challenge you?
M: Investing for sure. I never know if I’m hoarding too much cash. I am truly traumatized from the financial downturn. I just joined an online investment platform, but it was also overwhelming. Currently I have $45,000 in a regular savings account that earns 1.5%.
Another challenge is not knowing whether to just bite the bullet and pay off my student loans or to continue to pay them monthly.  I hate that I’m still paying loans 16 years after I graduated and it’s a source of frustration [and embarrassment] for me.  I owe $36,000. Often times I have an inner monologue about the pros and cons of just paying them off but then my trauma from 2008 kicks inâ¦and I decide to keep my $45,000 nest egg safely where I can check the balance daily.
F: I recommended allocating $45,000 towards retirement. Was that helpful? What are some ways you’ve managed to save?
M: Yes, I recall you saying you recommended having a total of $100,000 towards retirement for a person my age. Currently, I have $51,000 in my 401(k), $35,000 in a traditional IRA and $17,000 in my Ellevest brokerage account, so I’ve broken the $100,000 goal.
I did add a car note to my balance sheet. My old car suffered a total loss (major electrical failure due to a sunroof leak!) and the insurance gave me a check for $9,000. I used it all towards the new vehicle (a certified used 2014 Acura) and I’m financing $18,000.
F: Your dad’s home was a source of financial stress, it seemed. Were you able to talk with your siblings and arrive at a better place with that?
M: My dad actually has passed since we last spoke. He passed in February and so his will went to probate. My siblings and I have decided not to make any decisions about the house for at least one year. Yes, this is kicking the can further down the street however, they recognize that I maintain the house and pay the real estate taxes and so they are not pressuring me to move or to sell.
The new deed has been recorded and the property is under all our names and so everyone seems ok with knowing that I can’t do anything regarding a sale or refinance unilaterally.
So, for now, I live rent free other than paying utilities, miscellaneous maintenance on the house and real estate taxes quarterly. This, too, is helping me save aggressively.
Also, the new car note has replaced the hospice nurse contribution so I’m not feeling that my budget is overburdened with the new car.
I think ultimately I will buy out at least two of my siblings and stay in the house. Verbally they have expressed being okay with this.
Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note âMint Blogâ in the subject line).
Farnoosh Torabi is Americaâs leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, sheâs become our favorite go-to money expert and friend.
The post Mint Money Audit 6-Month Check-In: How Did Michelle Allocate Her Windfall? appeared first on MintLife Blog.
Source: mint.intuit.com
5 Telltale Signs That You May Not Be Ready To Buy a Home
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If the dream of owning a home is on your bucket list, you’ve likely combed through listings, narrowed down your home preferences, and even attended a few open houses. But while you might be mentally ready to buy a home, your financial situation might tell a different story.
âRenters who are ready for homeownership should have their financial house in order before contemplating a purchase,â says Ben Creamer, co-founder and managing broker of Downtown Realty Company in Chicago. âI tell my clients to approach buying a home as they would for their jobâit requires planning, diligence, and structure to be successful.â
There are a number of monetary factors that can rule you inâor outâas a viable candidate for a mortgage. Here are some signs youâre not ready to be a homeowner.
1. Crummy credit score
Those three little numbers, which are based on your history of financial stability and how responsible you are with your credit, play a big role in the mortgage process.
âA low credit score will directly impact your ability to get a mortgage loan for a home, because it shows that you have not been responsible with managing and paying down consumer debt,â says Creamer. Â
He says a score thatâs basement-level lowâtypically anything below 500âmeans a prospective buyer will likely not qualify for a home loan of any kind. If a credit score is low enough to flag the buyer as a credit risk, a loan may be approved but the terms will be more costly (e.g., having to pay more in loan origination points, a higher cash down payment, a higher interest rate, or all of the above).
âIn the end, if you canât manage consumer debt, youâre not ready for mortgage debt,â says Creamer.
On the other hand, having a high credit score (typically above 740) significantly improves your chances of receiving your loan’s lowest possible interest rate, says Lauren Brown, a real estate agent at Keller Williams Realty in San Diego.
âThis way you can save thousands of dollars over the life of your loan,â she says.
2. Patchy job history
Lenders want to see a stable job history, so switching jobs every year or so might not look great.
âJob stability is vital to pre-qualifying for a loan to purchase a home. Most lenders require not only proof of employment but also ask for up to 12 months of financial statements to ensure you are qualified to take on a mortgage,â says Brown.
Creamer says a home purchase is not something that should be done on a whim, since the buyer is responsible for the mortgage payment every month for the next 30 years.Â
âBanks want to see a steady, uninterrupted stream of income from a borrower. A prospective buyer who canât commit to a job might want to rethink committing to a 30-year mortgage payment,â says Creamer.
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Watch: 5 Things First-Time Home Buyers Must Know
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3. Not enough money saved for a down payment
If you’re looking to buy a home, you should have saved and built a nest egg that can cover a down payment and any unforeseen expenses that may come up during the purchasing process.
“It’d be wise to save enough to cover at least a 20% down payment,â says Brown. This amount is typically recommended since it means the lender won’t require you to also pay for private mortgage insurance.
Of course, 20% down is not always realistic for most buyers. In fact, the average down payment in January 2020 was just 11.4%, according to real estate data firm Optimal Blue. That’s why, at the beginning of your home search, you should find an experienced real estate agent or lender that can give you a realistic picture of how much house you can afford and how much of a down payment you’ll need.
4. You can’t get a favorable loan
When shopping for loans you’ll become quite familiar with mortgage interest rates, aka the extra fee you pay your lender (based on your total loan amount) for loaning you the cash you need to buy a home.
Your financial situation determines the type of rates you qualify for, as well as the upfront fees you may have to pay. But if you’re not pleased with the terms of your mortgage, you shouldn’t move forward with the purchase.
“A higher percentage interest rate may not seem like a big deal, but it actually translates to tens or maybe even hundreds of thousands of dollars over the course of the loan. Itâs better to hold off on buying until you can secure a more favorable loan,â says Creamer.
Brown advises speaking with your lender about developing a course of action to improve the terms of your loan.
5. Too much debt
Someone who is drowning in debt should tread carefully before juggling a home mortgage loan.Â
âIf you havenât managed your consumer debt wisely, youâre not ready to take on a sizable mortgage debt,â says Creamer.
Brown says in a lender’s eyes, you probably can’t afford to add a mortgage payment to your budget if your other bills eat up 50% of your monthly income. She says it would be best to pay off any debts before purchasing a home.
The post 5 Telltale Signs That You May Not Be Ready To Buy a Home appeared first on Real Estate News & Insights | realtor.com®.
Source: realtor.com
What Happens If I Stop Paying My Mortgage?
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During the current financial crisis, you may ponder the idea of simply stopping payment on your mortgage. It is an option that some may want to consider in difficult times, but it is a bad decision all the way around.
The reason: It will affect your credit for years to come and is likely to result in the loss of your home. As a topper, the bank doesnât really want your house. Lenders are willing to help and would rather not foreclose.
So don’t adopt the tactic of pooh-poohing your payment and hoping for the best.
According to the Mortgage Bankers Association, almost 7% of all mortgage loans are currently in forbearance as of April 19. Thatâs up from just under 6% the week before. To give some perspective, at the beginning of March, the number was just 0.25%.
While some mortgage holders are asking for help, the temptation not to pay is real. Let’s reiterate: It is a bad idea.
What happens if I donât pay my mortgage?
If you donât pay your mortgage, it will set you on the path to foreclosure, which means losing your house.
A mortgage is a legal agreement in which you agree to pay a certain amount to a lender for a certain number of years. Failing to pay violates that agreement.
Right now, federal (and some state) foreclosure proceedings are paused, but they will resume as soon as the economy begins to open up again. In some states, that may be imminent. The idea behind the pause was to ensure that people made it through the shelter-in-place orders with a place to shelter.
âThis is not a moratorium that [lenders] will never foreclose again,â says Mary Bell Carlson, an accredited financial counselor known as Chief Financial Mom.
âYou need to take this seriously and not just stop paying. Because if you stop paying and it adds up, youâre going to be first on the list to foreclose on when the economy reopens.â
Consequences of missing payments
Mortgage payments are due the first of each month and are considered late after the 15th of the month. Thatâs when late fees, penalties, and correspondence from the loan servicer begin.
âFirst off, youâll get a letter in the mail from your servicer which says you owe x amount and it must be paid by this date,â Carlson says. The letters will outline any penalties and late fees and will often include an offer of help.
âThe bank is not in the business of owning homesâthatâs not what they want to do,â she says. âTheyâre not looking to take over your house.”
She adds that lenders want to work out solutions to keep you in your house and avoid lengthy foreclosure proceedings.
Meanwhile, be wary if you receive a call or an email from someone saying theyâre your lender and you havenât paid. It’s probably a scam, says Carlson. Your lender will send notifications via the postal service.
Will not paying my mortgage damage my credit score?
Your loan will go into default after 30 days of nonpayment. The mortgage servicer will probably file a notice of default with your local government and report the nonpayment to the credit bureaus, which will negatively impact your credit score.
âThe credit is the first thing that gets hit. Your credit will take a nosedive if you stop paying your mortgage,â Carlson says.
âIf you just close your eyes and stop paying, your credit is going to dissipate, and it takes years for those things to fall off.â
A low credit score may impact your future ability to get a mortgage or to rent.
âNo one is going to want to rent to somebody who has just declared bankruptcy or has been foreclosed on, because that’s going to be a huge red flag,â Carlson warns.
As you continue to miss payments, penalties, interest, and correspondence from lenders will accumulate. Eventually, you’ll get a notification that the foreclosure process is underway.
How long will it be before foreclosure?
The foreclosure process is different in each state, so the process and its length may vary. Carlson says the process often begins in earnest after about six months of nonpayment.
She added that from the time of the first missed payment to about the six-month mark, lenders will work on solutions to avoid foreclosure. But if they don’t hear from you then, be prepared to lose your home.
âAt the six-month point, they say, ‘OK, all options are off the table at this point. You’re unwilling to work with us, we’re going to start foreclosure,’â says Carlson.
When this happens, the entire loan becomes due and repayment plans are no longer an option.
The timeframe varies by state, but sometimes as quickly as six months after the first missed payment, a lender can list the home for sale or hold an auction. A homeowner will have to vacate.
The current economic climate is delaying foreclosures, but proceedings will resume once states begin to lift suspension orders.
What do I do if I’m struggling to pay my mortgage?
If you’re having difficulty making mortgage payments, there are options. Some will help keep you in your house, while others will protect some of your credit. But don’t bury your head in the sand and simply stop paying.
âCommunicating with your lender is the key,â Carlson advises. âSo if you cannot pay, the communication methods need toâand must beâopen to communicate that to your lender and discuss the options you have.â
Here are a few of the common options if you want to stay in your home:
- Forbearance: A lender allows a borrower to pause payments for a period of temporary hardship, sometimes waiving late fees or penalties. Interest will often still accrue. At the end of the forbearance period, the missed payments become due. Forbearance is a good option if the financial situation is a short-term setback.
- Loan modification: Changing the terms of the loan and payments is possible. Often, this involves a divorce, job change, or an unexpected increase in expenses. Loan modifications are a tactic to deploy if you want to stay in your home, but can no longer afford the current payments.
- Repayment plan: If you are a few payments behind and think you can catch up, one option might be a repayment plan allowing you to make a lesser payment temporarily, until your finances are back on track.
Some alternatives if you don’t want to stay in your home and would rather walk away:
- Deed-in-lieu: In exchange for partial or total debt forgiveness, you voluntarily give ownership of the home back to the lender. This is usually when foreclosure is imminent, and you can no longer afford the payments and do not want to sell the property yourself.
- Short sale: If you want to sell the home yourself and owe more than the home is worth, you could ask your lender if you could do a short sale. The property usually sells for less than the balance of the mortgage.
These options may hurt your credit, but not as badly as a foreclosure.
The post What Happens If I Stop Paying My Mortgage? appeared first on Real Estate News & Insights | realtor.com®.
Source: realtor.com
How Much Cash Do You Really Need to Buy a Home?
Are you ready to buy a home? Youâre not aloneâin 2019, more than five million people bought an existing home. And that doesnât even include the number of people who purchased new construction.
The point is, the housing market is always bustling and busy. And if itâs your first time buying a home, it might seem a bit daunting. You might have a couple of questionsâhow much money do you need to buy a home? And how can you even get those funds?
Overwhelmed? Donât be. Weâre here to guide you towards saving up, so hopefully youâll be able to afford your dream home. Keep reading to learn more!
How Much Do You Need for a Down Payment?
Letâs start with one of the first payments you might have to makeâa down payment. When someone takes out a mortgage loan, theyâll put down a percentage of the homeâs price. Thatâs the down payment.
You mightâve heard that down payments are about 20% of the total cost of your new home. That can be true, but it really just depends on your mortgage. There are mortgage options that require little to no down payment, and how much you need often depends on your eligibility for different programs. Here are some different loan options:
1. USDA Mortgage
The USDA guarantees mortgages for eligible buyers primarily in rural areas. These loans do not have down payment requirements. To qualify for a USDA loan:
- The property must meet eligibility requirements as to where it’s located.
- Your household must fall within the income requirements, which depend on your state.
- You must meet credit, income and other requirements of the lender, though they may be less rigorous than loans not backed by a government entity.
2. Conventional Mortgage
Conventional mortgages are financed through traditional lenders and not through a government entity. Depending on your credit and other factors, you may not need to put down 20% on such loans. Some lenders may allow as little as a five percent down payment, for example. But you’ll have to pay private mortgage insurance (PMI) if you put down less than 20%.
3. FHA Mortgage
FHA loans, like USDA loans, are partially guaranteed by a government agency. In this case, it’s the Federal Housing Administration (FHA). A down payment on these loans may be as low as 3.5%. Requirements for an FHA loan can include:
- You’re purchasing a primary home.
- The home in question meets certain requirements related to value and cost.
- A debt-to-income ratio between 43% and 56.9%.
- You meet other credit requirements, though these may not be as strict as with conventional loans.
How much do you need to make to buy a $200K house?
Given the above information, here’s what your down payment might look like on a home worth $200,000:
- USDA loan: Potentially $0
- Conventional loan: From $10,000 to $40,000
- FHA Loan: As low as $7,000
These are just some options for mortgages with low down payment requirements. Working with a broker or shopping around online can help you find the right mortgage. In addition to the down payment, you do need to ensure that you can afford the mortgage and make the monthly payments.
Don’t Forget the Cash You’ll Need for Closing
Closing costs are typically between three and six percent of your mortgage’s principal. That’s how much you’re borrowing, so the less you put down, the more your closing costs might be.
Here’s a range of closing costs assuming a cost of three percent of the low range home purchase, when buying with less than 20% down:
- For a home purchase between $500,000 and $600,000, you’ll need at least $15,000 for closing costs
- Between $300,000 and $500,000, at least $9,000 for closing costs
- Between $150,000 and $300,000, at least $4,500 for closing costs
Where Can You Get the Money to Buy a Home?
These numbers should give you an idea of how much cash you’ll need for a home purchase. Acceptable sources for procuring cash to close on a house can be one or any of the following:
- Stocks
- Bonds
- IRA
- 401(k)
- Checking/ savings
- A money market account
- Retirement account
- Gift money
The key here is that the money needs to be documented. You have to be able to prove you had it and didn’t borrow it simply for the purpose of making your down payment or covering closing costs.
Don’t have cash available from any of the above-mentioned sources? There are other sources you can use as long as they can be paper-trailed, such as your tax refund or a security deposit refund on your current home rental.
Plan for Other Important Costs
While down payments and closing costs are the biggest out-of-pocket expenses involved in buying a home with a mortgage, you may need to cover other costs. There might be some additional home buying and moving-in costs. Those could include inspections, the cost of any necessary repairs not covered by the sellers and moving fees.
Are You Ready to Buy a Home?
Saving up the right amount of money is just one step in buying a home. You must also ensure your credit score is in order. Lenders look at different credit scores when they consider someone for a mortgage. Sign up for ExtraCredit to get a look at 28 of your FICO Scores to understand how lenders might see you as a borrower. Once you check your scores, you can decide whether you need to build your score or start shopping for your mortgage.
The post How Much Cash Do You Really Need to Buy a Home? appeared first on Credit.com.
Source: credit.com
15-Year vs. 30-Year Mortgages: Which is Better?
Once you decide to become a homeowner, itâs likely that you will need to take out a mortgage to purchase your new home. While the conclusion that you need a mortgage to finance your home is usually easy to arrive at, deciding which one is right for you can be overwhelming. One of the many decisions a prospective homebuyer must make is choosing between a 15-year versus 30-year mortgage.
From the names alone, itâs hard to tell which one is the better option. Under ideal circumstances, a 15-year mortgage mathematically makes sense as the better option. However, the path to homeownership is often far from ideal (and who are we kidding, under ideal circumstances weâd all have large sums of money to purchase a house in cash). So the better question for homebuyers to ask is which one is best for you?
To help you make the most informed financial decisions, we detail the differences between the 15-year and 30-year mortgage, the pros and cons of each, and options for which one is better based on your financial priorities.
The Difference Between 15-Year Vs. 30-Year Mortgages
The main difference between a 15-year and 30-year mortgage is the amount of time in which you promise to repay your loan, also known as the loan term.
The loan term of a mortgage has the ability to affect other aspects of your mortgage like interest rates and monthly payments. Loan terms come in a variety of lengths such as 10, 15, 20, and 30 years, but weâre discussing the two most common options here.
What Is a 15-Year Mortgage?
A 15-year mortgage is a mortgage thatâs meant to be paid in 15 years. This shorter loan term means that amortization, otherwise known as the gradual repayment of your loan, happens more quickly than other loan terms.
What Is a 30-Year Mortgage?
On the other hand, a 30-year mortgage is repaid in 30 years. This longer loan term means that amortization happens more slowly.
Pros and Cons of a 15-Year Mortgage
The shorter loan term of a 15-year mortgage means more money saved over time, but sacrifices affordability with higher monthly payments.
Pros
- Lower interest rates (often by a full percentage point!)
- Less money paid in interest over time
Cons
- Higher monthly payments
- Less affordability and flexibility
Pros and Cons of a 30-Year Mortgage
As the mortgage term chosen by the majority of American homebuyers, the longer 30-year loan term has the advantage of affordable monthly payments, but comes at the cost of more money paid over time in interest.
Pros
- Lower monthly payments
- More affordable and flexible
Cons
- Higher interest rates
- More money paid in interest over time
|
15-Year Mortgage |
30-Year Mortgage |
|
|
Pros |
⢠Lower interest rates ⢠Less money paid in interest over time |
⢠Lower monthly payments ⢠More affordable and flexible |
|
Cons |
⢠Higher monthly payments ⢠Less affordability and flexibility |
⢠Higher interest rates ⢠More money paid in interest over time |
Which Is Better For You?
Now with what you know about the pros and cons of each loan term, use that knowledge to match your financial priorities with the mortgage that is best for you.
Best to Save Money Over Time: 15-Year Mortgage
The 15-year mortgage may be best for those who wish to spend less on interest, have a generous income, and also have a reliable amount in savings. With a 15-year mortgage, your income would need to be enough to cover higher monthly mortgage payments among other living expenses, and ample savings are important to serve as a buffer in case of emergency.
Best for Monthly Affordability: 30-Year Mortgage
A 30-year mortgage may be best if youâre seeking stable and affordable monthly payments or wish for more flexibility in saving and spending your money over time. The longer loan term may also be the better option if you plan on purchasing property you couldnât normally afford to repay in just 15 years.
Best of Both: 30-Year Mortgage with Extra Payments
Want the best of both worlds? A good option to save on interest and have affordable monthly payments is to opt for a 30-year mortgage but make extra payments. You can still have the goal of paying off your mortgage in 15 or 20 years time on a 30-year mortgage, but this option can be more forgiving if life happens and you donât meet that goal. Before going this route, make sure to ask your lender about any prepayment penalties that may make interest savings from early payments obsolete.
As a prospective homebuyer, itâs important that you set yourself up for financial success. Fine-tuning your personal budget and diligently saving and paying off debt help prepare you to take the next steps toward buying a new home. Doing your research and learning about mortgages also helps you make decisions in your best interest.
When picking a mortgage, always keep in mind what is financially realistic for you. If that means forgoing better savings on interest in the name of affordability, then remember that path still leads to homeownership. Try out these budget templates for your home or monthly expenses to help keep you on a good path to achieving your goals.
Sources: Consumer Financial Protection Bureau
The post 15-Year vs. 30-Year Mortgages: Which is Better? appeared first on MintLife Blog.
Source: mint.intuit.com