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Financial Lessons Learned During the Pandemic

2020 has shaped all of us in some way or another financially. Whether it is being reminded of the importance of living within our means or saving for a rainy day, these positive financial habits and lessons are timeless and ones we can take into the new year. 

While everyone is on a very unique financial journey, we can still learn from each other. As we wrap up this year, it’s important to reflect on some of these positive financial habits and lessons and take the ones we need into 2021. Here are some of the top financial lessons:

Living Within Your Means

It’s been said for years, centuries even, that one should live within one’s means. Well, I think a lot of people were reminded of this financial principle given the year we’ve had. Living within your means is another way of saying don’t spend more than you earn. I would take it one step further to say, set up your financial budget so you pay yourself first. Then only spend what is leftover on all the fun or variable items.

Setting up your budget in the Mint app or updating your budget in Mint to reflect the changes in your income or expenses is a great activity to do before the year ends. Follow the 50/20/30 rule of thumb and ask yourself these questions:

  • Are you spending more than you earn?
  • Are there fixed bills you can reduce so you can save more for your financial goals? 
  • Can you reduce your variable spending and save that money instead?

The idea is to find a balance that allows you to pay for your fixed bills, save automatically every month and then only spend what is left over. If you don’t have the money, then you cannot use debt to buy something. This is a great way to get back in touch with reality and also appreciate your money more. 

Have a Cash Cushion

Having a cash cushion gives you peace of mind since you know that if anything unexpected comes up, which of course always happens in life, you have money that is easy to liquidate to pay for it versus paying it with debt or taking from long-term investments. Having an adequate cash cushion this year offered some people a huge sigh of relief when they lost their job or perhaps had reduced income for a few months. With a cash cushion or rainy day fund, they were still able to cover their bills with their savings.

Many people are making it their 2021 goal to build, replenish, or maintain their cash cushion.  Typically, you want a cash cushion of about 3- 6 months of your core expenses. Your cash cushion is usually held in a high-yield saving account that you can access immediately if needed. However, you want to think of it almost as out of sight out of mind so it’s really there for bigger emergencies or opportunities that come up.

Asset Allocation 

Having the right asset allocation and understanding your risk tolerance and timeframe of your investments is always important. With a lot of uncertainty and volatility in the stock market this year, more and more people are paying attention to their portfolio allocation and learning what that really means when it comes to risk and returns. Learning more about which investments you actually hold within your 401(k) or IRA is always important. I think the lesson this year reminded everybody that it’s your money and it’s up to you to know.

Even if you have an investment manager helping you, you still need to understand how your portfolio is allocated and what that means in terms of risk and what you can expect in portfolio volatility (ups and downs) versus the overall stock market. A lot of people watch the news and hear the stock market is going up or down, but fail to realize that may not be how your portfolio is actually performing. So get clear. Make sure that your portfolio matches your long term goal of retirement and risk tolerance and don’t make any irrational short term decisions with your long-term money based on the stock market volatility or what the news and media are showcasing.

Right Insurance Coverage

We have all been reminded of the importance of health this year. Our own health and the health of our loved ones should be a top priority. It’s also an extremely important part of financial success over time. It is said, insurance is the glue that can hold everything together in your financial life if something catastrophic happens. Insurances such as health, auto, home, disability, life, long-term care, business, etc. are really important but having the right insurance policy and coverage in place for each is the most important part.

Take time and review all the insurance coverage you have and make sure it is up to date and still accurate given your life circumstances and wishes. Sometimes you may have a life insurance policy in place for years but fail to realize there is now a better product in the marketplace with more coverage or better terms. With any insurance, it is wise to never cancel a policy before you a full review and new policy to replace it already in place. The last thing you want is to be uninsured. Make sure you also have an adequate estate plan whether it’s a trust or will that showcases your wishes very clearly. This way, you can communicate that with your trust/will executor’s, beneficiaries, family members, etc. so they are clear on everything as well. 

Financial lessons will always be there. Year after year, life throws us challenges and successes to remind us of what is most important. Take time, reflect, and get a game plan in place for 2021 that takes everything you have learned up until now into account. This will help you set the tone for an abundant and thriving new financial year. 

The post Financial Lessons Learned During the Pandemic appeared first on MintLife Blog.

Source: mint.intuit.com

What to Know Before Buying a Foreclosed Home

If you’ve been keeping your eye on real estate home listings, you might’ve seen more foreclosed properties for sale at a reduced price. 

With record levels of unemployment and underemployment, many homeowners are falling further behind on their mortgages. Currently, there’s a federal moratorium on the most common mortgage programs through December 31, 2020. Unless further homeowner protections are in place, the foreclosure market will see an unfortunate rise.

In fact, according to mortgage and real estate analytics company Black Knight, 2.3 million homeowners are already seriously past-due on their mortgages. 

As devastating as it is to have more homes undergoing foreclosure, it also means that prospective home buyers, who were otherwise priced out of buying a home, might have greater access to homeownership. Here’s what you should know if you’re thinking about buying a foreclosed home.

Buying a Foreclosed Home 

There are many ways you can buy a foreclosed home, depending on what stage of the process the foreclosure is in:

  • Pre-foreclosure. Many homeowners are willing to sell before they’ve officially been foreclosed on. Depending on how much equity they have, they might need to do a short sale. 
  • Short sale. Homeowners can seek approval from their lenders to sell you the home for less than they owe on the mortgage. The bank will get less than it’s owed, but it still often approves short sales since they usually cost less than a foreclosure. 
  • Auction. Once a home is foreclosed it’ll often be auctioned off by the bank. But you’ll need cash on hand for this, and that’s not an option for most folks who need mortgage financing. 
  • Real-estate owned (REO) properties. Alternatively, banks can simply sell the foreclosed home through more traditional markets, just like a normal home.

It’s usually easiest to buy the foreclosed home once the bank takes over and it becomes an REO property. That’s because you can take your time and go through the mortgage underwriting process. You can also work with a realtor, and — importantly — write contingency clauses in the contract that let you pull out of the deal if a home inspection reveals more repairs than you expected. 

7 Caveats to Buying a Foreclosed Home

Buying a foreclosed home isn’t exactly the same as buying one directly from the homeowner. You’re potentially buying a home from a bank who took over after the previous homeowners were unable to afford the home anymore. This introduces a few twists into the home-buying process for you. 

1. You’ll Need a Realtor Who Specializes in Foreclosed Homes

The world is full of realtors, even including your Uncle Bob and Cousin Carolyn. But not everyone is equipped to handle the nuances of buying a foreclosed home. There are a lot of issues that can crop up — unplanned property damage, squatters, homeowners who settle the bill and try to reclaim ownership, etc.

If you’re serious about buying a foreclosed home, seek out a realtor with extra experience in this area. There are even special designations that some realtors can get, such as Short Sales and Foreclosure Resource (SFR) or Certified Distressed Property Expert (CDPE).

2. Houses Are Sold “As-Is”

With a typical home sale, you have the change to get the property professionally inspected before signing on the dotted line. It’s not uncommon for new issues to arise, and in a normal home buying transaction, you can often negotiate with the sellers to either fix the damage or discount the price. 

That’s not the case when you buy a foreclosed home. If a home inspection reveals unexpected damage — like the need for a full roof or a septic system replacement — banks often aren’t willing to negotiate. It’s a take-it-or-leave-it sale. 

3. Expect to Put In Some Work

The above point is especially important considering that most foreclosed homes do, in fact, need a lot of fixing up. 

Think about it: the previous homeowners lost the house because they couldn’t afford the mortgage. There’s a good chance they also weren’t able to keep up with routine maintenance either. From their perspective, even if they did have the cash, what’s the point of spending money on repairs, if they know they’ll lose the home in a few months?

You can save money by putting in some sweat equity (HGTV, anyone?), but even then you’ll need the cash to pay for materials. This also means that the home might not be move-in ready. If you do move in, you might need to put up with construction debris for a little while. On the bright side, though, this does give you a chance to upgrade the home to your own aesthetics. 

4. You Might Need Creative Financing

This brings up another issue: how do you pay for those renovations? Generally, you can’t just ask for a bigger mortgage to cover the necessary repairs. Most lenders will only lend you as much as the current home appraisal is worth, minus your down payment. 

You have a few options, though. You can hold some money back from your savings to pay for it in cash, but this means you’ll have a smaller down payment. An alternative is getting a loan from a different lender, like a personal loan, a 0% APR credit card, or even a home equity loan or line of credit if you’re lucky enough to start from a position with equity. 

Finally, there are some special “renovation mortgages” available through Fannie Mae and other lenders. These mortgages actually do allow you to take out a bigger mortgage so you can pay for renovations. You might need to provide a higher down payment or have a higher credit score to qualify, however. 

5. Watch for Liens on Foreclosed Homes at Auctions

If you have a big pot of cash and can pay for a home on the same day, an auction might be your best bet. But then you have to worry about a new factor: liens. 

If the property had any liens attached to it (such as from the previous homeowners not paying their taxes, or a judgement from unpaid debt), you’ll inherit that bill, too. 

This is usually only the case for auctioned homes. If you buy a foreclosed home as an REO sale, the bank generally pays off any liens attached to the property. Still, it may be worth double-checking if you have interest in a specific property. 

6. Be Prepared to Act Fast

You’re not the only one with the bright idea to get a low-priced, foreclosed home. Chances are good that there are a few other buyers interested in the property, which increases competition. Even though the home is listed at a big discount, this competition can still drive prices up. You might need to be ready to act fast, just the same as in any hot real estate market. 

7. Be Prepared to Wait

On the flip side, there’s a lot of extra bureaucracy involved in buying a foreclosed home once the seller accepts your offer. There’s often extra paperwork to fill out or other complications. 

For example, the home appraisal might come back lower than expected, which might make it harder to get enough financing for the agreed-on purchase price. If it’s a short sale, it might also take longer for the bank to approve the lower sale price for the home, based on what the homeowner’s mortgage is currently worth. 

Pros and Cons of Foreclosed Homes 

Buying a foreclosed home isn’t necessarily a good or bad idea on its own. It all depends on your own goals — for example, are you willing to figure out financing for repairs to get a deal on the home purchase price? Also consider how important it is for you to have a “move-in ready” home with no hassle. 

Weigh these pros and cons carefully, and what’s most important to you when buying a home. 

Pros Cons
Can get a deal that’s lower than market price Property is sold “as-is” and might not be move-in ready
Can customize the home to your specifications with repairs and upgrades Likely needs a lot of repairs and upgrades 
Requires creative financing for repairs and upgrades
Foreclosure process is long and might fall through 

The Bottom Line

Buying a foreclosed home can be a win-win situation. You get a home at a good price, and (usually) you can bring the property back to good, working order by fixing it up. As long as you go into the deal knowing that it’s not the same experience as a typical home purchase, buying a foreclosed home is a great way to launch into homeownership or real estate investing.   

The post What to Know Before Buying a Foreclosed Home appeared first on Good Financial Cents®.

Source: goodfinancialcents.com

Check-In: Expecting Couple Struggling with Debt, But Future Looks Bright

When I first connected with Julia and John, the Queens, NY couple was expecting their first child and grappling with some debt, a lack of savings and income prior to the baby’s arrival. The couple was basically living paycheck to paycheck and in need of some advice to break through that cycle.

We reconnected this month to see how they’ve been doing. Julia is now nearing the end of her third trimester. The baby is due to arrive in two months.

I was hoping that with a baby on the way the couple would have found some ways to chisel away their debt or bulk up savings. Unfortunately, fie months later, they’re more or less still in the same money boat.

But they did act upon a couple of my tips and are benefiting from the goodness of New York and their parents, which has their futures looking brighter.

First, John, who lacks a college degree and was struggling to find full-time work, is going back to school. Not to a college or university, but to a 9-month software boot camp in New York that’s going to give him the skills and network to become a software developer. His potential earnings in the first year in the market could be as much as $75,000 (based on some people I know who’ve gone through similar programs in New York.)

The program will be about $15,000, a fraction of what it would cost to earn a bachelor’s degree. John’s parents have agreed to loan him the money. The couple’s decided to place that $15,000 family loan in savings and, instead, take out a small student loan to pay for John’s school. I agree with that strategy, given that their family is about to increase in size and having some cash on hand will be very important.

Once John completes school and finds work, I’d recommend the couple prioritize the credit card debt by paying at least double the minimums each month. Be most aggressive with the highest interest credit card debt first. Their student loan will likely have a smaller interest rate and can be paid over a 10-year period, making the monthly minimums relatively manageable. Automate those payments as soon as possible and benefit from a 0.25% interest rate reduction when they do.

While they’re taking on more debt, I’m okay with it. Investing in John’s education is one of the best ways this couple can get ahead and better secure their finances in the future – so long as they commit to earning more and paying it down.

Ahead of that program starting, John’s also taken on a side hustle (per my advice). He’s been working a few shifts here and there at Julia’s company, working with special needs patients as a social aide, taking them to community and outdoor events.

Some other good news that’s developed since we last spoke is that New York State has enhanced its Family and Medical Leave Act by implementing Paid Family Leave. In the past, certain employers were only required to provide workers with their jobs back after taking a leave of absence for up to 12 weeks. Now, qualifying private employers must provide paid time off and a continuation of health insurance for 8 weeks in 2018.

This came as a surprise bonus for Julia, who was preparing for zero paid time off from her employer.

It would be my recommendation to use part or all of that extra money to pay down their high-interest credit card debt.

Once Julia returns to work after her maternity leave, her mother-in-law will be the go-to caretaker during the day, another huge help.

They’re fortunate to have free childcare from a trusted, loved one. With that very big expense covered and John’s schooling about to start, I feel confident that the couple’s future is a financially bright one.

The post Check-In: Expecting Couple Struggling with Debt, But Future Looks Bright appeared first on MintLife Blog.

Source: mint.intuit.com

5 A.I. Programs That Aims to Make Your Homebuying Journey Easier

As the real estate industry continues to advance, technology expands into the homebuying journey – making it easier for homebuyers to find the home they love in less time than ever before.

The post 5 A.I. Programs That Aims to Make Your Homebuying Journey Easier appeared first on Homes.com.

Source: homes.com

What Is a Jumbo Loan? Finance Your Property in a Competitive Market

After years of building a stellar credit history, you may have decided you’re finally ready to invest in that vacation home, but you don’t have quite enough in the bank for that eye-catching property just yet. Maybe you want to begin your investment journey early so you don’t have to spend years bulking up your life’s savings.

If an aspiring luxury homeowner can’t sufficiently invest in a property with a standard mortgage loan, there’s an alternative form of financing: a jumbo mortgage. This mortgage allows those with a strong financial history who may not necessarily be a billionaire to get in on the luxury property market. But what is a jumbo mortgage (commonly known as a jumbo loan), and how exactly does it work?

Jumbo Loan Definition

A jumbo loan is a mortgage loan whose value is greater than the maximum amount of a traditional conforming loan. This threshold is determined by government-sponsored enterprises (GSE), such as Fannie Mae (FHMA) and Freddie Mac (FHLMC). Jumbo loans are for high-valued properties, like mansions, luxury housing, and homes in high-income areas. Since jumbo loan limits fall above GSE standards, they aren’t guaranteed or secured by the government. As a result, jumbo loans are riskier for borrowers than conforming mortgage loans.

Jumbo loans are meant for those who may earn a high salary but aren’t necessarily “wealthy” yet. Lenders typically appreciate this specific group because they tend to have solid wealth management histories and make better use of financial services, ensuring less of a risk for the private investor.

Due to the uncertain nature of a jumbo loan, borrowers need to present an extensive, secure credit history, as well as undergo a more meticulous vetting process if they’re considering taking out a jumbo loan. Also, while jumbo loans can come in handy for those without millions in savings, potential borrowers must still present adequate income documentation and an up-front payment from their cash assets.

Like conforming loans, jumbo loans are available at fixed or adjustable rates. Interest rates on jumbo loans are traditionally much higher than those on conforming mortgage loans. This has slowly started shifting over the last few years, with some jumbo loan rates even leveling out with or falling below conforming loan rates. For example, Bank of America’s 2021 estimates for a 5/1 adjustable-rate jumbo loan were equivalent to the same rate for a 5/1 adjustable conforming loan.

The Federal Housing Finance Agency (FHFA) has set the new baseline limit for a conforming loan to $548,250 for 2021, which is an increase of nearly $40,000 since 2020. This new conforming loan limit provides the new minimum jumbo loan limits for 2021 for the majority of the United States. As the FHFA adjusts its estimates for median home values in the U.S., these limits adjust proportionally and apply to most counties in the U.S.

Certain U.S. counties and territories maintain jumbo loan limits that are even higher than the FHFA baseline, due to median home values that are higher than the baseline conforming loan limits. In states like Alaska and Hawaii, territories like Guam and the U.S. Virgin Islands, and counties in select states, the minimum jumbo loan limit is $822,375, which is 150 percent of the rest of the country’s loan limit.

Jumbo Loan Rates for 2021

Ultimately, your jumbo loan limits and rates will depend on home values and how competitive the housing market is in the area where you’re looking to invest.

Jumbo Loan vs. Conforming Loan: Pros and Cons

The biggest question you might be asking yourself is “do the risks of a jumbo loan outweigh the benefits?” While jumbo loans can be a useful home financing resource, sometimes it makes more sense to aim for a property that a conforming loan would cover instead. Here are some pros and cons of jumbo loans that might make your decision easier.
Pros:

  • Solid investment strategy: Jumbo loans allow the investor to get a solid jump-start in the luxury real estate market, which can serve as a beneficial long-term asset.
  • Escape GSE restrictions: Jumbo loan limits are set to exceed those decided by Freddie Mac and Fannie Mae, so borrowers have more flexibility regarding constraints they would deal with under a conforming loan.
  • Variety in rates (fixed, adjustable, etc.): Though jumbo loan rates differ from conforming loan rates in many ways, they still offer similar options for what kinds of rates you want. Both offer 30-year fixed, 15-year fixed, 5/1 adjustable, and numerous other options for rates.

Cons:

  • Usually higher interest rates: Though jumbo loans are known for their higher interest rates, the discrepancies between those and conforming loan rates are starting to lessen each year.
  • More meticulous approval process: To secure a jumbo loan, you must have a near air-tight financial history, including a good credit score and debt-to-income ratio.
  • Higher initial deposit: Even though jumbo loans exist for those who are not able to finance a luxury property from savings alone, they still require a higher cash advance than a conforming loan.

Jumbo Loan vs. Conforming Loan- Pros and Cons

How To Qualify for a Jumbo Loan

As we mentioned before, jumbo loans require quite a bit more from you in the application process than a conforming loan would.

First and foremost, most jumbo lenders require a FICO credit score of somewhere around 700 or higher, depending on the lender. This ensures your lender that your financial track record is stable and trustworthy and that you don’t have any history of late or missed payments.

In addition to the amount of cash you have sitting in the bank, jumbo lenders will also look for ample documentation of your income source(s). This could include tax returns, pay stubs, bank statements, and any documentation of secondary income. By requiring extensive documentation, lenders can determine your ability to make a sufficient down payment on your mortgage, as well as the likelihood that you will be able to make your payments on time. Usually lenders require enough cash assets to make around a 20 percent down payment.

Finally, and perhaps most importantly, lenders will also require that you have maintained a low level of debt compared to your gross monthly income. A low debt-to-income ratio, combined with a high credit score and sufficient assets, will have you on your way to securing that jumbo loan in no time.

Furthermore, you will also likely need to get an appraisal to verify the value of the desired property, in order to ensure that the property is valued highly enough that you will actually qualify for a jumbo loan.

Key Takeaways:

  • Jumbo loans provide a solid alternative to those with a steady financial history who want to invest in luxury properties but don’t have enough in the bank yet.
  • A jumbo loan qualifies as any amount exceeding the FHFA’s baseline conforming loan limit: $548,250 in 2021.
  • Jumbo loan rates are typically higher than those of conforming loans, although the gap between the two has begun to close within the last decade.
  • To secure a jumbo loan, one must meet stringent financial criteria, including a high credit score, a low DTI, and the ability to make a sizable down payment.

For any financially responsible individual, it’s important to always maintain that responsibility in any investment. Each decision made should be carefully thought out, and you should keep in mind any future implications.

While jumbo loans can be a valuable stepping stone to success in competitive real estate, always make sure your income and budget are in a secure position before deciding to invest. You always want to stay realistic, and if you aren’t interested in spending a few more years saving or financing through a conforming loan, then a jumbo loan may be for you!

Sources: Investopedia | Bank of America | Federal Housing Finance Agency

The post What Is a Jumbo Loan? Finance Your Property in a Competitive Market appeared first on MintLife Blog.

Source: mint.intuit.com

What Happens to Mortgage Rates When the Fed Cuts Rates?

Just about everybody with a wallet is impacted by the Federal Reserve. That means you—homeowners and prospective buyers. Whether you’re already nestled in to the house of your dreams or still looking to find it, you’ll probably want to track what happens to mortgage rates when the Fed cuts rates. When the Fed (as it’s commonly referred to) cuts its federal funds rate—the rate banks charge each other to lend funds overnight—the move could impact your mortgage costs.

The Fed’s overall goal when it cuts the federal funds rate is to stimulate the economy by spurring consumers to spend and borrow. This is good news if you are carrying debt because borrowing tends to become less expensive following a Fed rate cut (think: lower credit card APRs). But in the case of homeownership, what happens to mortgage rates when the Fed cuts rates can be a double-edged sword.

What happens to mortgage rates when the Fed cuts rates depends on many factors.

The connection between a Fed rate cut and mortgage rates isn’t so crystal clear because the federal funds rate doesn’t directly influence the rate on every type of home loan.

“Mortgage rates are formed by global market forces, and the Federal Reserve participates in those market forces but isn’t always the most important factor,” says Holden Lewis, who’s been covering the mortgage industry for nearly 20 years and is also a regular contributor to NerdWallet.

To understand which side of the sword you’re on, you’ll need an answer to the question, “How does a Fed rate cut affect mortgage rates?” Read on to find out if you stand to potentially gain on your mortgage in a low-rate environment:

How a fixed-rate mortgage moves—or doesn’t

A fixed-rate mortgage has an interest rate that remains the same for the entire length of the loan. If the Fed cuts rates, what happens to mortgage rates if you are an existing homeowner with a fixed-rate mortgage? Nothing should happen to your monthly payments following a Fed rate cut because your rate has already been locked in.

“For current homeowners with a fixed-rate mortgage set at a previous higher level, the existing mortgage rate stays put,” Lewis says.

If you’re a prospective homebuyer shopping around for a fixed-rate mortgage, the news of what happens to mortgage rates when the Fed cuts rates may be different.

For prospective homebuyers: If the Fed cuts its interest rate and the 10-year Treasury yield is similarly tracking, the rates on fixed-rate mortgages could drop, “and you could lock in interest at a lower fixed rate than before.”

– Holden Lewis, mortgage expert and NerdWallet contributor

The federal funds rate does not directly impact the rates on this type of home loan, so a Fed rate cut doesn’t guarantee that lenders will start offering lower mortgage rates. However, the 10-year Treasury yield does tend to influence fixed-rate mortgages, and this yield often moves in the same direction as the federal funds rate.

If the Fed cuts its interest rate and the 10-year Treasury yield is similarly tracking, the rates on fixed-rate mortgages could drop, “and you could lock in interest at a lower fixed rate than before,” Lewis says. It’s also possible that rates on fixed mortgages will not fall following a Fed rate cut.

How an adjustable-rate mortgage follows the Fed

An adjustable-rate mortgage (commonly referred to as an ARM) is a home loan with an interest rate that can fluctuate periodically—also known as variable rate. There is often a fixed period of time during which the initial rate stays the same, and then it adjusts on a regular interval. (For instance, with a 5/1 ARM, the initial rate stays locked in for five years and then adjusts each year thereafter.)

So back to the burning question: If the Fed cuts rates, what happens to mortgage rates? The rates on an ARM typically track with the index that the loan uses, e.g., the prime rate, which is in turn influenced by the federal funds rate.

If the Fed cuts rates, what happens to mortgage rates? If you have an adjustable-rate mortgage, you may see your rate change.

“If the Fed drops its rate during the adjustment period, you could see your interest rate go down and, in turn, see lower monthly payments,” says Emily Stroud, financial advisor and founder of Stroud Financial Management.

Since ARMs are often adjusted annually after the fixed period, you may not feel the impact of the Fed rate cut until your ARM’s next annual loan adjustment. For instance, if there is one (or more) rate cuts during the course of a year, the savings from the rate reduction(s) would hit all at once at the time of your reset.

If the Fed cuts rates, what happens to mortgage rates for prospective homebuyers considering an ARM? An even lower rate could be in your future—at least for a specific period of time.

“If you’re looking for a shorter-term mortgage, say a 5/1 ARM, you could save considerably on interest,” Stroud says. That’s because the introductory rate of an ARM is usually lower than the rate of a fixed-rate mortgage, Stroud explains. Add that benefit to lower rates fueled by a Fed rate cut and an ARM could be enticing if it supports your financial goals and plans.

“If the Fed drops its rate during the adjustment period, you could see your interest rate go down and, in turn, see lower monthly payments.” 

– Emily Stroud, financial advisor and founder of Stroud Financial Management

Benefits of other variable-rate loans following a rate cut

If you have a Fed rate cut and mortgage rates on your mind and are a borrower with other types of variable-rate loans, you could be impacted following a Fed rate cut. Borrowers with variable-rate home equity lines of credit (HELOCs) and adjustable-rate Federal Housing Administration loans (FHA ARMs), for example, may end up ahead of the curve when the Fed cuts its rate, according to Lewis:

  • A HELOC is typically a “second mortgage” that provides you access to cash for goals like debt consolidation or home improvement and is a revolving line of credit, using your home as collateral. A Fed rate cut could result in lower rates for variable-rate HELOCs that track with the prime rate. If you are an existing homeowner with a HELOC, you could see your monthly payments drop following a Fed rate cut.
  • An FHA ARM is an ARM insured by the federal government. If you’re wondering about a Fed rate cut and mortgage rates, know that this type of mortgage behaves much like a conventional variable-rate loan when the Fed cuts it rate, Lewis says. Existing homeowners with an FHA ARM could see a rate drop, and prospective homebuyers could also benefit from lower rates following a Fed rate cut.

When it comes to a Fed rate cut and mortgage rates, refinancing to a lower rate could be an option for existing homeowners.

Refinancing: A silver lining for fixed rates

When it comes to a Fed rate cut and mortgage rates, refinancing to a lower rate could be an option if you have an existing fixed-rate loan. The process of refinancing replaces an existing loan with a new one that pays off your old loan’s debt. You then make payments on your new loan, so the goal is to refinance at a time when you can get better terms.

“If someone buys a home one year and a Fed rate cut results in a mortgage rate reduction, for example, it presents a real refinance opportunity for homeowners,” Lewis says. “Just a small percentage point reduction could possibly trim a few hundred bucks from your monthly payments.”

Before a refinancing decision is made based on a Fed rate cut and mortgage rates, you should consider any upfront costs and fees associated with refinancing to ensure they don’t offset any potential savings.

Managing your finances as a homeowner

You might be expecting some savings in your future now that you’re armed with information on what happens to mortgage rates when the Fed cuts rates. Whether you’re a homebuyer and financing your new home is going to cost you less with a lower interest rate, or you’re an existing homeowner with an ARM that may come with lower monthly payments, Stroud suggests to use any uncovered savings wisely.

“Invest that cash back into your property, pay down your home equity debt or borrow with it,” she says.

Understanding the connection between the Fed rate cut and mortgage rates can help you better manage your finances as a homeowner.

While news of a Fed rate cut may entice you to analyze how your mortgage will be impacted, remember there are many factors that help to determine your mortgage rate, including your credit score, home price, loan amount and down payment. The Fed’s actions are only one piece of a larger equation.

Even though the Fed’s rate decisions may dominate headlines immediately following a rate cut, your home is a long-term investment and one you’ll likely maintain for years. To best prepare for what happens to mortgage rates when the Fed cuts rates is to always manage your home finances responsibly and be sure to make choices that will lead you down the right path based on your financial goals.

*This should not be considered tax or investment advice. Please consult a financial planner or tax advisor if you have questions.

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The post What Happens to Mortgage Rates When the Fed Cuts Rates? appeared first on Discover Bank – Banking Topics Blog.

Source: discover.com

7 Money Steps to Take Before 2021

With the end of the year rapidly approaching, it’s a good time to take stock of your financial situation as you head into 2021. 2020 has been a strange year, and a difficult year for many people. With many people’s health and/or economic livelihoods affected by COVID-19, many people’s situation looks very different than it did back in January. As we head into a new year, here are a few things that you can do to improve your finances before the end of 2020.

#1 Put at least $1000 into an emergency fund

If you don’t have an emergency fund set up to handle unexpected expenses, that is a good first step to putting yourself on a solid financial footing. $1000 may not be enough to handle every possible thing that could go wrong, but it can be enough to handle your car breaking down or an unexpected home expense. If you don’t have at least a minimal emergency fund in place, make a plan for how you can start one before the end of the year.

#2 Fully fund your retirement accounts

401k, IRAs, and other retirement accounts have an annual contribution limit that caps the amount that you’re able to contribute each year. Before the end of the year, set aside some time to go through each of your accounts that have an annual contribution limit. Decide for which of those accounts it makes sense to fund before the end of the year.

#3 Consider donating to charity

With the increased standard deduction available in recent tax years, not as many people itemize their deductions. But if you do itemize your deductions, then remember that your charitable contribution may be tax-deductible. If you make that charitable contribution before the end of the year, you may be able to deduct it in this tax year — otherwise, you’ll have to wait an entire year before you’re able to deduct it.

READ MORE: 5 Best Credit Cards When You Make Charitable Donations

If you’ve already made charitable contributions in 2020, make sure that you have them documented and ready to include on your tax return.

#4 Make sure you have a financial security plan in place

Still, using the same username and password on every internet site? It may be time to get a financial security plan in place. With data breaches always a possibility now’s as good a time as any to take some steps to minimize your risk in case of a data breach or a hacker accessing your financial information. One thing that you can do before the end of the year is to set up a password manager to put some variety into your passwords. Another thing is to set up two-factor authentication (2FA) on your important financial accounts.

#5 Review your credit report

Each year you are entitled to a free three-bureau credit report once a year from annualcreditreport.com, and the end of the year can be a good time to do that. If you already have a Mint account, you have access to your credit score at any time, but reviewing your actual credit report can make a big difference to your credit report. Between 10 and 21 percent of people have errors on their credit report, and clearing up incorrect or inaccurate information can raise your credit score.

#6 Use up any money in your FSA

Flexible spending accounts can be a great way to save money on health expenses. An FSA is typically set up through your employer and allows you to make pre-tax contributions. Any money that you contribute to your FSA is not subject to tax, and you can use that money to get reimbursed for many different types of health expenses. The only downside is that most FSA plans are use-it or lose-it plans. So any money that is left in the FSA at the end of the year is forfeited. Check the details of your plan, and make sure that you use all the money in your FSA before the end of the year.

#7 Set your financial goals for 2021

Finally, the end of the year can be a great time to set up your financial goals for 2021. You don’t have to wait until January to start up a new resolution. Meet and talk with your spouse, family, or trusted friends and advisors. Decide where you want to be in one year, in five years and beyond, and start taking the steps to get yourself there.

The post 7 Money Steps to Take Before 2021 appeared first on MintLife Blog.

Source: mint.intuit.com

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