Posts Tagged ‘Family Finances’

Real estate is hot, all right. Home prices are soaring, a real estate mogul occupies the White House, and here’s the latest evidence: Americans say housing is their best bet to make some money.

In fact, for the third consecutive year real estate is the favorite way to invest money not needed for at least a decade, according to a Bankrate national survey. No-risk cash investments are a close second — also for the third straight year — while stocks are relatively unloved, in third place.

The results should have you asking yourself: Do I have the right idea about how to build wealth? Because while a home and a bank account may feel like safe bets, especially among millennials, they do carry risks. You could be leaving money on the table.

Reasons we love real estate

There’s a strong appeal to owning property.

“If you have a long time horizon, you will win in real estate,” says Abhi Golhar, a 32-year-old Atlanta-based real estate investor who owns and rents out single-family homes.

Real estate is top investment choice

After bottoming out at the end of 2011 following the worst housing collapse in generations, home prices have gone gangbusters recently, climbing back above their record pre-crisis levels. Prices jumped 6.6 percent during the 12 months that ended in May, according to CoreLogic.

Toss in persistently low interest rates, tax goodies that come with owning a mortgage, and the psychological payoff from planting your roots, and maybe it’s no wonder real estate remains popular.

Reasons we ought to re-think that

Still, “it’s a rather poor investment,” says RBC Wealth Management financial advisor Darla Kashian. “It’s highly illiquid, and markets aren’t always rational.”

One study by professors at the London Business School found that housing returned only 1.3 percent per year after inflation from 1900 to 2011, while stocks tended to perform more than four times better.

Homes are costly to maintain and can be difficult to sell in both good markets and bad. During a downturn, there can be so few available buyers that your ability to ask for a higher price is diminished.

And what about stocks?

Stocks, meanwhile, continue to lag as an investment choice, even trailing cash.

Which is weird.

The current bull market turned 8 years old in March, making it the second longest-lasting winning streak for stocks since the end of World War II.

“If you look at historical averages comparing stocks and cash, it’s not close,” says Matt Becker, a fee-only financial planner and the founder of Mom and Dad Money.

Over the past 10 years, even including the financial crisis, stocks have returned an average of 8.6 percent per year, far above the earnings for money-market accounts and other cash investments.

Cash is a bad 10-year investment

Putting your money into very safe investments can actually cost you money, if you consider inflation. You do need some cash in a liquid account available at a moment’s notice in case of an emergency, but it shouldn’t be your top investment pick.

Young vs. old

The millennial money mind turns out to be a bit more complicated than conventional wisdom might have you believe.

“Contrary to the notion that millennials don’t want to buy homes, their preference for real estate as a long-term investment is exceeded only by their counterparts in Gen X,” says Greg McBride, CFA, Bankrate chief financial analyst.

Young adults split their vote evenly between real estate and cash (at 30 percent for each), with stocks trailing far behind (at 13 percent, behind gold). Compare that to baby boomers, who choose stocks second after real estate, with cash third.

Favorite investment? Millennials love cash

Millennials have years to earn and invest, so why would they seem more eager to play it safe than people who are in or near retirement? Here’s one possible reason: their relative lack of overall wealth compared to their parents and grandparents.

With fewer dollars to play with, millennials are less likely to want to take on risk, even if that means settling for weaker returns.

Americans’ financial security still solid

Regardless of how they would invest, Americans remain confident about their personal finances.

Bankrate’s Financial Security Index — based on survey questions about how people feel about their debt, savings, net worth, job security and overall financial situation — has hit its third-highest level since the poll’s inception in December 2010, despite dropping slightly from the record high seen in June.


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If you bought a house with a down payment of less than 20 percent, your lender required you to buy mortgage insurance. The same goes if you refinanced with less than 20 percent equity.

Private mortgage insurance is expensive, and you can remove it after you have met some conditions.

How to get rid of PMI

To remove PMI, or private mortgage insurance, you must have at least 20 percent equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80 percent of the home’s original appraised value. When the balance drops to 78 percent, the mortgage servicer is required to eliminate PMI.

Although you can cancel private mortgage insurance, you cannot cancel Federal Housing Administration insurance. You can get rid of FHA insurance by refinancing into a non-FHA-insured loan.

Canceling PMI sooner

Here are steps you can take to cancel mortgage insurance sooner or strengthen your negotiating position:

Refinance: If your home value has increased enough, the new lender won’t require mortgage insurance.
Get a new appraisal: Some lenders will consider a new appraisal instead of the original sales price or appraised value when deciding whether you meet the 20 percent equity threshold. An appraisal generally costs $450 to $600. Before spending the money on an appraisal, ask the lender if this tactic will work in the specific case of your loan.
Prepay on your loan: Even $50 a month can mean a dramatic drop in your loan balance over time.
Remodel: Add a room or a pool to increase your home’s market value. Then ask the lender to recalculate your loan-to-value ratio using the new value figure.
Refinancing to get out of PMI

When mortgage rates are low, as they are now, refinancing can allow you not only to get rid of PMI, but to reduce your monthly interest payments. It’s a double-whammy of savings.

The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. For example, if you bought your house four years ago with a 10 percent down payment, and the home’s value has gone up 15 percent over that time, you now owe less than 80 percent of what the home is worth. Under these circumstances, you can refinance into a new loan without having to pay for PMI.

Many loans have a “seasoning requirement” that requires you to wait at least two years before you can refinance to get rid of PMI. So if your loan is less than 2 years old, you can ask for a PMI-canceling refi, but you’re not guaranteed to get approval.

What mortgage insurance is for

Mortgage insurance reimburses the lender if you default on your home loan. You, the borrower, pay the premiums. When sold by a company, it’s known as private mortgage insurance, or PMI. The Federal Housing Administration, a government agency, sells mortgage insurance, too.

Know your rights

By law, your lender must tell you at closing how many years and months it will take you to pay down your loan sufficiently to cancel mortgage insurance.

Mortgage servicers must give borrowers an annual statement that shows whom to call for information about canceling mortgage insurance.

Getting down to 80% or 78%

To calculate whether your loan balance has fallen to 80 percent or 78 percent of original value, divide the current loan balance (the amount you still owe) by the original appraised value (most likely, that’s the same as the purchase price).

Formula: Current loan balance / Original appraised value

Example: Dale owes $171,600 on a house that cost $220,000 several years ago.

$171,600 / $220,000 = 0.78.

That equals 78 percent, so it’s time for Dale’s mortgage insurance to be canceled.

For a fuller explanation of the above formula, read this article about figuring the loan-to-value ratio to remove PMI.

Other requirements to cancel PMI

According to the Consumer Financial Protection Bureau, you have to meet certain requirements to remove PMI:

You must request PMI cancellation in writing.
You have to be current on your payments and have a good payment history.
You might have to prove that you don’t have any other liens on the home (for example, a home equity loan or home equity line of credit).
You might have to get an appraisal to demonstrate that your loan balance isn’t more than 80 percent of the home’s current value.
Higher-risk properties

Lenders can impose stricter rules for high-risk borrowers. You may fall into this high-risk category if you have missed mortgage payments, so make sure your payments are up to date before asking your lender to drop mortgage insurance. Lenders may require a higher equity percentage if the property has been converted to rental use.

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The Conference Board Consumer Confidence Index, which had decreased slightly in July, increased in August. The Index now stands at 101.1 (1985=100), compared to 96.7 in July. The Present Situation Index rose from 118.8 to 123, while the Expectations Index improved from 82 last month to 86.4.

Consumers’ appraisal of current conditions improved in August. Those stating business conditions are “good” increased from 27.3 percent to 30 percent, while those saying business conditions are “bad” remained virtually unchanged at 18.4 percent. Consumers’ assessment of the labor market was also more favorable. Those claiming jobs were more “plentiful” increased from 23 percent to 26 percent, however, those claiming jobs are “hard to get” also rose, from 22.1 percent to 23.4 percent.

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Although 92 percent of Americans surveyed have researched prices online before purchasing an item, only 30 percent said they look for better prices when shopping for major financial loans, such as a mortgage or an auto loan, according to LendingTree. Roughly 18 percent stated they never looked for better rates or prices on loans.

More than half of Americans, 56 percent, state they have visited multiple stores to compare prices on a particular item, with approximately 83 percent saying they have used a comparison shopping website such as Amazon, Priceline, or Expedia, yet, among those who do comparison shop online, only 14 percent comparison shop loan products.

LendingTree looked at further consumer data to calculate the amount of money consumers could be missing by not comparison shopping mortgages. Based on the survey, about 32 percent of homeowners looked at only one mortgage rate before buying their home. However interest rates offered to borrowers often vary from lender to lender. In Q3 2015, mortgage shoppers who received offers from at least two lenders through LendingTree experienced an average rate differential of .32 percentage points between the lowest offer and highest offer, a difference of $48.06 per month. Using this information, choosing the lowest offer could save a borrower roughly $17,300 over the life of the loan.

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Home equity borrowers, beware: Substantial “payment shock” could be coming soon to a mortgage near you.

Many home equity lines of credit (HELOCs) taken out in 2005 — just as home prices were peaking — may be nearing the end of their 10-year, interest-only payment periods. With a rise in interest rates likely coming soon as the Federal Reserve winds down its easy-money policy, monthly payments on these variable-rate loans could soon soar for millions of Americans.

If you’re in this situation, you may be able to avoid a potential financial disaster by refinancing into a fixed-rate mortgage or a new HELOC, or by enrolling in the Federal Housing Administration’s Short Refinance program. But first, review the full details on your loan to make sure you know what may be coming, or contact your lender to bring you up to date.

A real threat

Most HELOCs come with an “end of draw” date, which refers to the point at which you no longer can borrow against the credit line and, if you haven’t already started, must begin repaying the principal along with interest. At that point, your monthly payment can jump significantly.

The end of draw is approaching for many such loans. At least 2.5 million of the credit lines are scheduled to reset to include not just interest but principal repayment over the next three years alone, according to a report from Black Knight Financial Services in Jacksonville. It says the resulting “payment shock” may average $250 a month or more.

Americans’ appetite for HELOCs peaked in 2005. More than $180 billion in credit lines were established that year, just before home prices began to fall, according to a report by the Federal Reserve Bank of New York.

Let’s say your HELOC dates from 2005 and has a balance of $100,000 at 5.5% interest. During the 10-year, interest-only period, you paid about $458 a month. But you’re entering the 15-year period that requires you to start paying down the principal, too. That will mean the monthly payment will climb by $359, to $817. And that’s assuming the loan rate doesn’t rise as well.

As the Fed prepares to tighten credit, borrowers should also consider what rising interest rates will mean. HELOCs typically adjust when that happens, and payments rise. Using the above example, let’s say credit costs surge and your rate jumps to 8.5%. That would tack another $168 on your payment, making it about $985 — more than double the interest-only payment at 5.5%.

Because the loan is secured by your home, HELOC rate increases are capped, so the payment can only rise so much. But you still could face a double whammy of principal payments beginning just as rates climb. Failing to pay could result in foreclosure, so borrowers shouldn’t take this prospect lightly.

What you can do

If you’re unsure what to expect, ask your lender for guidance. Some HELOCs require the immediate repayment of the outstanding balance when the draw period ends, which can create an even bigger headache.

If you’re nearing the end of an interest-only draw period and would rather not cope with bigger payments or a full payoff, consider refinancing the balance with a new HELOC, which will provide you with a fresh interest-only window, says Don Maxon, a certified financial planner in San Rafael, Calif.

Another option is to roll the HELOC into a refinanced mortgage at a fixed rate, Maxon says. This lets you lock in historically low mortgage rates for the term of the debt.

“Combining both loans into a fixed-rate loan would eliminate the HELOC interest-rate risk and the resulting higher payments,” Maxon says.

What you must come up with each month may still rise, however, since it will include paying down the HELOC principal as well as the balance of your first mortgage. Still, your total interest costs will likely be lower, and your monthly payment won’t change over the life of the loan, according to Matt McCoy, a senior financial planner at Kumquat Wealth in Chattanooga, Tenn.

“You need to compare the fixed-rate payments to a rising-rate scenario under the current variable rate,” McCoy says. “Payments on fixed-rate loans are much easier to budget for long-term, since your interest rate does not fluctuate.”

However, housing prices were generally higher in 2005, so refinancing might be hard, if not impossible, especially for those with lower credit grades. Lenders often cap what can be borrowed against a home at 80% of its market value and have tightened up on risk tolerances for borrowers.

If you’re not behind on your mortgage payments, but feel that you can’t keep up and owe more than what your home is worth, an FHA Short Refinance may be an option. This federal program is designed to help financially underwater homeowners obtain a more affordable mortgage. But the lender has to agree to “forgive,” or write off, at least 10% of what you owe.

By being aware of your HELOC’s terms, and understanding all of the risks as you exit the draw period, you can guard against “payment shock.”

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FORTUNE — This column started — as many do — with a question from a reader. It ended in a place I didn’t expect. As I followed the breadcrumbs and figured out what was going on in my reader’s case specifically (which you’ll read about in a minute), I learned about something dragging down the credit scores of the millennial generation in general. Both were interesting. So, this week kicks off a two-parter on what’s happening in the world of credit scoring (and what you can do about it.).
Topic 1: Your Many, Many Credit Scores
So … back to my reader, a 40-year-old small business owner with a nice six-figure income living in the Northeast. She had been contacted by both her mortgage lender and the holder of her home equity loan and invited (by both, separately) to refinance, roll two into one, and lower her combined interest rate. That sounded good so she applied to her mortgage lender. In short order, she was denied. The reason: her credit score, which the lender said was an Experian score of 630. In the world of credit scores, this is fair bordering on poor.
My reader figured this had to be a mistake. Before applying she had done what many responsible consumers would do — she checked her credit score herself. For several years, she’d been paying $16.95 a month to TransUnion, one of the three major credit bureaus, for credit monitoring. From this service, she pulled a report detailing all three of her scores — one from each of the bureaus. They were all in the mid-700s.
So she applied again, this time to the holder of her home equity loan. Again, she was denied. This time the reason cited was an Experian score of 650.
How was it possible, she wanted to know, for her scores to be so all over the place? Some consumers already know they have more than one credit score. Many believe they have three — one based upon the credit reporting data from each of the major credit bureaus: Experian, TransUnion and Equifax (EFX). In fact, says John Ulzheimer, education expert at creditsesame.com, you have more than 50. (Yes, that’s 50 — as in five-oh.)
Most of these are various FICO scores, sliced and diced by FICO (formerly Fair, Isaac and Co.) to give lenders the information they want to use to make decisions about whether or not to give you money. Auto lenders, for instance, want to see information about how you’ve repaid prior car loans. Ditto for mortgage lenders, credit card companies, and insurance companies regarding their individual universes. Multiply each of these by the number of bureaus, and by iterations of the FICO score (think versions, like software) and you can start to see how the numbers add up. And that’s just FICO. A newer company, Vantage Score, started by the bureaus themselves to compete with FICO, has captured somewhere between 5% and 10% of the market according to Ulzheimer. It has multiple versions, too.
All of which is interesting. Frustratingly though, very few of these versions are actually available for you to see. That’s problematic for the consumers whose online scores tell a story so different about their risk than the scores lenders see that it bumps them from “Good” to “Fair” or “Fair” to “Poor” and results in them being charged a higher rate of interest or turned down entirely. How often does this happen? Customers are moved one scoring category about 20% to 25% of the time, according to a 2012 report by the Consumer Financial Protection Bureau.
What happened to my reader, however, was something different. What the lenders saw when they checked her credit were versions of her FICO score. What she saw when she pulled her own scores from TransUnion were Vantage Scores. FICO scores range from 300 to 850. Until the release of Vantage Score 3.0 in 2013, Vantage operated on a scale of 501 to 990. And, just like some Mac computer users are still running Snow Leopard, some users of the Vantage Score — including TransUnion — are still running the prior versions.
Makes you want to pull out your hair, doesn’t it? It did that and more to my reader. It cost her hours of her time (including the time she spent communicating with me and the time putting together the two loan applications). It cost her money (for that subscription, which she has since cancelled). And it cost her inquiries on her credit report that took her already wobbly credit score down a notch or two.
Bottom line: What can you do about this? Ulzheimer and Maxine Sweet, who leads consumer education at Experian, basically have the same message: Control what you can control. “There’s no such thing as improving your score,” says Sweet. “What you can do is improve your behavior.” That means, pay your bills on time every time, don’t use more than 30% of the credit you have available to you on any one card in particular or all your cards combined, don’t apply for credit you don’t need and don’t close old cards in haste. By doing this, you’re essentially managing the information that goes on your three credit reports. Every single one of your scores is based on the information on your three credit reports. And it’s a lot easier to manage three credit reports than it is to manage all of those scores. “If you have good credit then you’re going to have good scores regardless of the model,” says Ulzheimer. “That’s what’s guaranteed.”

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Source: NPR

A new report from the Harvard Joint Center for Housing Studies finds that affordability problems for renters have skyrocketed over the past decade, and in the aftermath of the economic recession, more people have been driven out of the housing market and into rental housing. As monthly rent swallows ever larger portions of Americans’ paychecks, homeownership grows out of reach. Overall, the number of American renters paying unaffordable amounts for housing reached an all-time high last year.

Making sense of the story
•More than half of renters – 21.1 million households – were cost burdened in 2012, paying more than 30 percent of income for housing. This is the greatest number of housing-cost-burdened renters on record.
•According to the study, between 2000 and last year, the nation’s median rent, adjusted for inflation, increased 6 percent, while the median income for renters fell 13 percent.
•Twenty-eight percent of renters paid more than 50 percent of their income on housing in 2011.
•From 2001 to 2011, nearly one in five households headed by someone in their 30s switched from owning a home to renting at some point; nearly one in seven households headed by a person in their 40s did the same.
•In order to pay their monthly housing costs, low-income households with severe housing cost burdens cut back most heavily on their spending for food, transportation, health care, and retirement savings.
•According to the study, about 13 percent of extremely low-income renters reside in homes with structural deficiencies.

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