Category Archives: Financing

What Today’s Fed Rate Hike Means for Your Wallet

 

refiThe Federal Reserve decided to raise an interest rate known as the Federal Funds rate by 0.25 percentage points on Wednesday.

The decision itself only changes the rate at which banks borrow from the Federal Reserve, but the ripple effects are substantial. Here’s what it means for you.

Expect it to impact credit card rates, the cost of buying a home, the rate of some private student loans, and the amount of interest you can make from a savings account. Those impacts occur in different ways and on different timelines — predictably, the ways that consumers benefit tend to take longer than the ways they get hurt.

Credit Cards

Banks will now pay more to borrow money from the Fed, and they’ll be charging you more to borrow that money from them. In total, this hike could add $1.6 billion to credit card finance charges in the U.S., translating to about $14 extra per quarter to each household, according to WalletHub analyst Jill Gonzalez. If you have $1,000 in debt, a 0.25% increase equates to an extra $2.50 this year.

Mortgage Rates

Mortgage rates tend to go up after the Fed raises rates. If you have a mortgage already, the impact depends on whether your mortgage is fixed-rate or variable rate. The vast majority of Americans have fixed rate mortgages, meaning the rate is locked in. But those with variable rates are likely to see rates rise, and they will have to pay more every month.

If you’re looking to buy a home, you will likely have to pay a higher mortgage rate. But that doesn’t necessarily mean you’ll have to buy a smaller or a less desirable house. Higher rates can force home prices down, because sellers must accept the fact that buyers will be paying more in interest, and can presumably afford less in principal.

Student Loans

Federal student loan rates are locked in, but private loans can rise, depending on the terms. It’s crucial to know whether you have a variable or fixed-rate loan from your lender. If it’s variable, it might be worth considering refinancing at a fixed rate, given that interest rates are expected to rise for the foreseeable future.

Savings Accounts

Rising rates might hurt borrowers, but they should be great for savers, right? Not so fast. Banks are notoriously tight-fisted with savings accounts, and the average money market account still yields only 0.11%, according to Bankrate.com.

That’s a whopping $1.10 for every $1,000. Online banks often have better rates, and are worth checking out. CIT Bank, Goldman Sachs, and Barclays all have rates of at least 1%, according to Bankrate.

Banks still haven’t raised savings rates from the last time the Fed raised its rate in December, according to WalletHub. So don’t hold your breath for them to raise it now.

“Banks set savings account yields based on a number of metrics, including the health of their loan portfolio, size of their cash reserves, and generally profitability,” according to Sean McQuay of Nerdwallet. “So far, I have not seen a significant upward shift in annual percentage yields due to the last several Fed rate hikes.

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Borrowing From Your 401(K) to Purchase a Home

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Because down payment requirements are calculated as a percentage of the total price of a home, potential buyers are finding that the demand on their savings is greater than ever before, thanks to the rise in home prices across the country. Fortunately, there are creative solutions to any problem. If you have no (or not enough) down payment savings, borrowing from your 401(k) to purchase a home is something that you may want to consider.

According to the most current data available from the Employee Benefits Research Institute, 56% of 401(k) plans offer a loan provision to participants. However, there is no requirement for them to do so. If this is something you might be interested in doing, speak with your plan administrator to learn the details about your specific plan.  Typically, if 401(k) loans are permitted by your employer, you can borrow up to 50% of your entire balance, not to exceed $50,000. You’re given five years to repay the entire balance, which is almost always done by automatic payroll deduction. This, of course, comes with one caveat: if you fail to make a payment for 90 consecutive days, the loan will be counted as a distribution. If that happens, the sum will be counted as taxable income, and you’ll also have to pay a 10% penalty on top of those taxes. Because payroll deductions obviously cease when you leave your employer, this means that you should be prepared to stay with your current job until the loan has been paid off.

While taking an outright distribution from your 401(k) plan is generally discouraged, there is a lot to be said for taking a loan against these savings. First, there’s no bank approval process, which means you can have the money in hand very quickly. There’s no credit check involved, and the interest rate is usually a fraction of what you would pay to other lenders for a similar loan. Keep in mind that the term, “interest rate” is used quite loosely here. The interest that you are paying is actually money that is going directly back into your retirement account.

No solution is a perfect fit for everyone, but borrowing from your 401(K) to purchase a home is a great option to have. In many cases, it can save you significant sums of money over time. For instance, if your loan-to-value ratio is just past the threshold that requires you to pay expensive private mortgage insurance, borrowing from your 401(K) to make up the difference and avoid that extra monthly cost would be a wise choice. Most people would prefer to pay that amount back to themselves each month, rather than to a mortgage insurance provider.

Financial decisions are very personal. You should always weigh out your own unique circumstances before making the decision to borrow from your 401(K), but don’t be afraid to explore this very valid option if you’re in need of a timely way to pull together a down payment for your next home purchase.

The $25,000+ Mortgage Mistake Nearly Half of Borrowers Make

When I talk to people planning to purchase a new home with a loan, I always recommend “shopping around” for a lender.  I provide at least three referrals to lenders I’ve worked with in the past who have done a good job, have good rates and a variety of programs.  It’s an important detail in your home purchase plans.  The article below outlines how important.  I consider the lender, along with myself, the title company and inspector part of your home purchase team.

Let me know if I can help you with lender referrals.

Andria


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Did you pay too much for your mortgage? If you’re like millions of Americans, the answer is probably yes — and that means you may be throwing tens of thousands of dollars of your hard-earned money at the bank, when you might not need to.

A report released Tuesday by the Consumer Financial Protection Bureau finds that almost half (47%) of Americans don’t shop around for a mortgage when they purchase a home. “Consumers put great thought into the choice of a home, but the mortgage process continues to be intimidating,” CFPB Director Richard Cordray said in a statement.

Number of lenders Americans seriously consider before applying for a mortgage

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Source: Consumer Financial Protection Bureau

If you don’t shop around for a mortgage, you’re probably leaving free money (and a lot of it) on the table. “Interest rates can span more than half a percent for a conventional mortgage for borrowers with a good credit rating and a 20% down payment,” says Sam Gilford, a spokesperson for the CFPB.

While half a percent may not sound like a lot, it can be a more than $25,000 mistake for the average borrower (as of November 2014, the average price of a home sold in the U.S. was about $321,800, according to data from The Census Bureau), who takes a mortgage that’s half a percent higher than one he could have gotten by shopping around.

Say a borrower accepts a 4.5% interest rate instead of a 4% interest rate on the average home (a sale price of $321,800 and a down payment of 20% means he borrows a total of $257,440). If he gets a 30-year fixed rate loan at 4.5%, he’ll pay a total of $212,148 in interest; for a 4% interest rate, he will pay just $185,021 — a difference of more than $27,000.

For those who buy a home that costs more than average — or who put down a smaller down payment than 20% even on an average home — the results may be even more grim. For example, a person who gets a $500,000 mortgage would pay more than $412,000 in interest over the life of his 4.5% 30-year fixed rate loan, which is roughly $53,000 more than with a 4% rate.

To be sure, many people who don’t shop around may get the best rate anyway — or at least close to it. Others get a mortgage that may be a little too costly, but will later refinance and save themselves money. And still others will sell their home well before the 30-year loan period is up, so they end up paying less in interest.

Still, experts say it’s worth shopping around, as even 1/10th of a percentage point can mean thousands of dollars in extra payments to the mortgage company over the life of a loan. Luckily, doing so is relatively easy. Before shopping around, Greg McBride, the chief financial analyst for Bankrate.com says that you should pull copies of your credit reports from each of the three major credit bureaus (you can get these for free atannualcreditreport.com), consider what type of loan makes the most sense for you (see MarketWatch’s “How to Get a Mortgage” guide) and figure out how large of a loan you can afford (there are dozens of online calculators that can calculate your monthly payments and more).

Once you’ve done that, McBride says that you should get quotes from your local bank and credit union as well as online and apply with up to three lenders on the same day. (Kathleen Campbell, the founder of Campbell Financial Partners in Fort Myers, recommends using Bankrate to check mortgage rates, and considering online lenders like Quicken Loans, CapitalOne 360 and Pentagon Federal Credit Union.) Finally, “compare all lender fees and rates, negotiate to get the best deal, and select the best offer,” McBride says.

This story was originally published Jan. 13 on MarketWatch.com.