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5 student loan refinancing mistakes to avoid
With interest rates sliding downward, it seems refinancing a student loan is a savvy financial move. Student loan refinancing rates are as low as 3% (given excellent credit) and with the average student loan debt burden standing at $1.56 trillion in the U.S. — the average borrower owing $37,172 — refinancing makes sense right now.
Borrowers can visit Credible to compare student loan refinancing rates from multiple lenders simultaneously.
“There are multiple scenarios in which refinancing a student loan makes sense, but there are caveats,” said Kalicia Bateman, a student loan specialist at Best Company. “Most lenders who offer student loan refinancing services generally require borrowers to have an excellent credit score,” she said. “Consequently, if your credit score has increased over time then you’ll be in a better place to receive approval for refinancing with the most competitive rates and terms.”
What student loan refinancing mistakes should I avoid?
With rates low, the urge to refinance into a lower rate may be hard to resist. If that’s the case, and a borrower goes forward with a student loan refinancing deal, make sure to steer clear of these trap doors on the way to loan approval.
Here are five student loan refinancing mistakes to avoid.
Not comparing rates and terms
Refinancing with a private lender if you’re a federal loan borrower
Not checking your credit report for errors
Focusing on interest rates alone
Not factoring in the CARES Act
1. Not comparing rates and terms
Make sure to compare rates and terms from multiple lenders. You don't need to take the first option you come across. “This may take more time and research, but taking the time to get the best rates and terms you can will be worth it in the long run,” Bateman said.
When it comes to rate shopping, Credible should be your go-to site. The multi-lender marketplace can help you compare rates and lenders instantly and show you how much money you could save by refinancing.
2. Refinancing with a private lender if you’re a federal loan borrower
Student loan borrowers should refinance federal loans using federal student loan refinancing options.
“If you refinance your federal loans using a private lender, you will lose all federal student loan consumer protections, and the relief measures in the CARES Act will no longer apply to your loans,” Howard said.
3. Not checking your credit report for errors
Studies show that 80% of credit reports contain errors.
“If you can pay off debts and fix errors on your credit report to increase your credit score, you'll likely secure a more favorable rate when you shop for a refinancing opportunity,” Howard said.
Credible can reveal what rates you qualify for with your current credit score. You can compare student loan refinancing rates from up to 10 lenders without affecting your credit. Plus, it's 100% free!
WHAT ARE STUDENT LOAN REFINANCING RATES?
4. Focusing on interest rates alone
An under-the-radar mistake a borrower can make is to look only at the interest rate of the loan and not the repayment term.
“A lower interest rate coupled with a long repayment term might result in more interest paid to the lender than a loan with a higher rate and shorter repayment term,” Howard said. “Every penny of interest that goes to the lender is a penny the borrower can't save for themselves. Depending on the goals and circumstances of the borrower, it may be important to understand what the total amount of interest paid to the lender will be over the life of the new loan.”
With Credible, you can see what student loan lenders are offering when it comes to loan terms and repayment timelines. Start doing your research today so you don't miss out on potentially thousands in savings.
STUDENT REFINANCING RATES GOING DOWN - HERE'S WHY
5. Not factoring in the CARES Act
The CARES Act’s temporary COVID-related suspension of federal student loan payments actually makes refinancing less attractive.
“That’s the case until the currently scheduled suspension end date,” said Brian Martucci, personal finance expert at Money Crashers. “Currently, student loan payments are set to resume in January, but the suspension is wildly popular and could certainly be extended. During the suspension period, it’s wiser to use the funds saved as a result of the suspension to save up for a potential lump-sum payment once payments resume.”
Visit Credible to get prequalified student loan refinancing rates – without affecting your credit score.
EVERYTHING TO KNOW ABOUT STUDENT LOAN FORGIVENESS
What are the advantages of refinancing student loans?
Refinancing a student loan makes sense if the borrower is trying to do any of the following:
Lower their monthly payments
Secure a lower interest rate
Change the loan term
“Refinancing can also work if a borrower has multiple loans that could be more easily managed through consolidation,” said Jonathan Howard, a financial advisor with SeaCure Advisors in Lexington, Ky. “For example, with federal student loans, forgiveness provisions and valuable income-based repayment options are only available if the borrower refinances their loans to a federal consolidated loan.”
Private student loans can be refinanced, too.
Comparison shopping to get quotes from several lenders can ensure you're getting the most affordable loan possible. Use Credible to compare student loan refinancing rates from multiple lenders and find the best offer.
STUDENT REFINANCING RATES GOING DOWN - HERE'S WHY
“I had private student loan clients who came to me after they helped pay for their daughter's education year-after-year with education loans,” Howard said. “Interest rates varied between the loans and they were struggling to manage them. They took advantage of refinancing and reduced their monthly payment by nearly $500 thanks to lower interest rates.”
Millennial Money: Financial advice that rarely fits all
By SARA RATHNER of NerdWalletNovember 17, 2020
When I hear financial tips that are unrealistic or shame-inducing, I cringe. Any advice that makes complicated money moves seem like an easy path to profit is downright dangerous.
Questionable guidance is all around, oversimplifying important decisions or claiming a one-size-fits-all approach will work. Amid the black-and-white world of advice-giving, there’s a lot of gray. Don’t ignore your unique needs and circumstances when plotting out your finances.
LACK OF WEALTH DOESN’T MEAN YOU LACK DISCIPLINE
There’s a subset of social media dedicated to what I call “hustle worship.” These posts will have you believe that if only you’d work harder, wake up earlier and eat the exact same breakfast as Elon Musk does, you’d be a billionaire.
This advice glosses over larger issues that prevent millions of hardworking, disciplined people from attaining financial security — like crushing student loan debt, job uncertainty and budget-busting child care costs. According to NerdWallet’s 2019 American Household Credit Card Debt study, the average U.S. household with student loan debt owes $46,459. Average annual U.S. child care costs ranged from $18,442 to $26,102 in 2019 for two children in full-time care in a child care center, according to a report by Child Care Aware of America.
Discipline is good, but it’s also OK to recognize your limitations and obligations.
Start by writing down all of your expenses for a month so you can get a picture of where your money goes. Then, create a budget that leaves room for needs AND wants, like the 50/30/20 budget: 50% of your take-home pay covers needs like housing and groceries; 30% covers wants like dining and travel; 20% covers savings and debt repayment. This way, you don’t stress if you have a moment of weakness. You’ve built a budget that allows for fun.
AUSTERITY ISN’T ALWAYS A VIRTUE
As your income grows through the years, it’s wise to funnel the extra cash into savings and investments without otherwise changing your spending habits. But it’s OK to spend money on luxuries or conveniences that will make your life better or easier.
Jonathan Howard, a former visual effects artist who is now a financial adviser, experienced his own spend-or-save decision when he and his family relocated from Los Angeles to Lexington, Kentucky. Howard’s salary decreased. But his wife rejoined the workforce, the cost of living was lower in Lexington, and they sold their L.A. home for a profit. His initial impulse was to save the entire profit from the sale, but their new home’s kitchen didn’t function well, and that’s the room where his family spends much of their time.
They opted to spend around 25% of the proceeds from their old home on a kitchen renovation. “It was a sum that, when I looked at it on paper, made me nauseous,” he said in an email. “But several months later, we could not be happier with the results.”
Melissa Lowe, who lives in St. Thomas, U.S. Virgin Islands, recently left her job to blog full time. While she’s currently not earning an income from blogging, her family decided to keep their professional house cleaner and cut back in other areas.
“She even folds and puts away my laundry and if that isn’t heaven on earth, I’m not sure what is,” she said in an email. “I will eat peanut butter and jelly sandwiches before I give her up.”
Living below your means helps you save toward goals, but leave room in your budget for purchases that can make your life easier.
NOT ALL INVESTMENTS ARE ‘PASSIVE’
Some investments, like 401(k)s and IRAs, are often “set-it-and-forget-it.” You can automate contributions and select target-date funds that will adjust your asset allocation for you. But other investments, like real estate, require not only regular effort, but also significant investments of money and time.
I briefly considered buying a duplex until I witnessed how much work my then-landlord had to pour into my last apartment because previous tenants neglected to report some serious maintenance issues. By the second ceiling leak, my dreams of earning rental income faded. Not every landlord has a horror story, but they do acknowledge that it can take time before a property starts paying for itself.
Michaelson Buchanan owns three properties in Richmond, Virginia, and spent $130,000 on fixing up the first two. “We do a lot of the work ourselves so we can do these things economically,” he said. “I would say it’s the house that Google built.”
Buchanan has dealt with maintenance issues and problem tenants over the years, but ultimately recommends owning a rental property so long as you have the savings to afford major issues. “Don’t have unrealistic expectations about what you could get in rent,” he says. “You won’t get wildly more money because you’ve fixed a property up.”
Investing is key, but it’s a space where one old adage does ring true: To make money, be prepared to spend money.
_______________________________
This column was provided to The Associated Press by the personal finance website NerdWallet. Sara Rathner is a writer at NerdWallet. Email: srathner@nerdwallet.com. Twitter: @SaraKRathner.
RELATED LINKS:
NerdWallet: 2019 Credit Card Household Debt Study https://bit.ly/nerdwallet-household-debt
Child Care of America: The U.S. and the High Price of Child Care: An Examination of a Broken System
College Can Cost as Much as $70,000 a Year
College Can Cost as Much as $70,000 a Year
As seen on cnbc.com
—
KEY POINTS
When adding in room and board and other expenses, the total college tab can be more than $70,000 a year.
Because so few families can shoulder the burden, they have increasingly turned to student loans.
President-elect Joe Biden has said he would forgive some of that debt.
—
This year, because of the coronavirus crisis, college costs have become an even bigger consideration among students and parents.
At the same time, the price tag for a four-year college or university has never been higher.
Tuition and fees, alone, reached $10,560 for in-state students at four-year public colleges in the 2020-21 academic year, and $37,650 for students at four-year private institutions, according to the College Board, which tracks trends in college pricing and student aid.
When adding in room and board and other expenses, the total tab can be more than $70,000 a year for undergraduates at some private colleges or even out-of-state students attending four-year public schools.
For years, college costs have crept up, rising 3% to 5% every year, outpacing inflation and family income.
Now, in the middle of the pandemic, schools are under more pressure to keep these increases in check.
As a result, increases in tuition and fees were the lowest in three decades, the College Board found – increasing just 1% to 2% in 2020-21 at public and private colleges.
“This year’s data underscore the profound impact Covid-19 has had on higher education,” Jessica Howell, the College Board’s vice president for research, said in a statement.
“Although average tuition increased again this year, the increases are among the lowest we’ve seen since 1990-91.”
The nation’s most expensive schools include the Massachusetts Institute of Technology, Yale, Duke, Tufts and Brown University, according to a recent report by GoBankingRates, based on data from U.S. News & World Report.
At MIT, for example, tuition and fees, room and board and other student expenses came to over $73,160 last year. The school was among several institutions that freezed tuition during the ongoing economic crisis. (A smaller number announced tuition discounts or even more dramatic tuition cuts.)
Because so few families can shoulder the burden, they have increasingly turned to federal and private aid to help foot the bills, pushing outstanding student debt to a stunning $1.7 trillion.
Despite a steep drop in interest rates, overall student debt has only increased during the pandemic, according to a separate report by Fidelity Investments.
President-elect Joe Biden has said he would forgive $10,000 in student debt for all borrowers, and the rest of the debt for those who attended public colleges or historically Black colleges and universities and earn less than $125,000 a year.
In all, that would slash the country’s outstanding student loan tab by about a third, according to calculations by higher-education expert Mark Kantrowitz.
Now, as the payment pause for student loan borrowers nears its end, Biden is under increasing pressure to go even further.
In a recent Pew survey, 58% of student loan borrowers said that it would be difficult for them to resume making payments.
These Colleges Raised Tuition, Despite Going Online
These Colleges Raised Tuition, Despite Going Online
As seen on cnbc.com
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KEY POINTS
Stanford, Yale, Dartmouth, Brown and Harvard all raised undergraduate tuition for the 2020-2021 academic year, even though classes are being taught largely online.
Students argue remote learning should cost less, not more, than an in-person education.
—
Until the coronavirus crisis, nothing had been able to slow the pace of annual college tuition increases.
Year after year, college costs edged higher, rising 3% to 5%, on average — outpacing inflation and family income.
However, in the midst of the pandemic, schools are under pressure to keep these increases in check. Several institutions said they would freeze tuition during the ongoing economic crisis, while a smaller number announced discounts or even more dramatic tuition cuts.
As a result, this year increases in tuition and fees were the lowest in three decades, according to the College Board — rising just 1% to 2% in 2020-21 at public and private colleges.
And yet, there were schools that raised their prices anyway, including some of the nation’s most elite institutions, with healthy enrollment numbers and solid endowments.
Stanford, Yale, Wellesley, Amherst, Brown, Dartmouth, Rice and Grinnell College all raised undergraduate tuition for 2020-2021 about 4% to 5%, even though classes are being taught largely online, according to a recent report by GoBankingRates.
“There are no instructional cost savings for Grinnell to pass along to students who enroll online,” according to Grinnell’s website. “Consequently, we will not apply a universal discount to the cost of courses offered online.”
Harvard University and California Institute of Technology were fully remote in the fall and invited only a limited number of students on campus for the spring. However, tuition still increased roughly 4% at both institutions.
At colleges across the country, undergraduates have voiced extreme dissatisfaction with remote learning, particularly at the same high cost they were previously paying for an in-person education.
Some have even taken their cases to court to argue that tuition should be lowered while they are studying from home.
“Here we are in a pandemic, people cannot afford to pay more — they can’t even pay the same amount,” said James Toscano, president of Partners for College Affordability and Public Trust.
“This is going to come to a head again when institutions set their tuition for next year,” he added.
Pandemic hammers higher education
Many schools, however, are in a bind. Most are facing a significant financial shortfall from declining public funds and decreased enrollment as some students decide to opt out, for now.
These days, tuition accounts for about half of a school’s revenue and providing a college education — even online — is only getting more expensive, according to Richard Arum, dean of the School of Education at the University of California, Irvine.
Paying for faculty is one of a school’s largest expenses and those outlays remain fixed, plus there are extra costs from software and technological upgrades as well as new public safety measures due to Covid-19.
Already, universities have announced revenue losses in the hundreds of millions.
Lawmakers Step Up to Improve Access to College Aid
Lawmakers Step Up to Improve Access to College Aid
As seen on cnbc.com
—
KEY POINTS
Studies show students are more likely to enroll in college when they have the financial resources to help them pay for it.
A number of states are considering bills to make the FAFSA mandatory for high school seniors.
—
As college costs rise, financial aid is a growing necessity, yet many students still don’t apply.
Now, more states are requiring that they do — and paving the way to a college degree for some who might not be able to otherwise afford it.
The Free Application for Federal Student Aid, or FAFSA, serves as the gateway to all federal money, including loans, work-study and grants, which are the most desirable kind of assistance.
Currently, only Louisiana and Illinois require you to file a FAFSA to graduate from high school. But soon the same will be true for Texas and at least another eight states, including California, Florida, Hawaii, Indiana, Kentucky, Maryland, Nebraska and New Jersey, which are all considering bills to make the FAFSA mandatory, as well.
The idea behind making the FAFSA mandatory is that students are more likely to enroll in college when they are aware of the financial resources available to help them pay for it, according to the National College Attainment Network.
FAFSA completion can boost a student’s likelihood of going to college and graduating, studies show.
In Louisiana, high school graduation rates have risen since the state implemented this rule, and the number of high school graduates immediately enrolling in college has climbed to an all-time high, according to early data.
“Time will tell if this is an effective approach, but more broadly, what’s particularly encouraging is that we’re seeing a collective understanding of how important it is for students and families to complete the FAFSA,” said Ashley Boucher, a spokeswoman for education lender Sallie Mae.
A lengthy and overly complicated application is another hurdle for many students and their families, Boucher said.
To that end, congressional education leaders have also been working toward simplifying the FAFSA, which would go a long way to increasing access even without state mandates.
In December, the Consolidated Appropriations Act was passed to streamline the process.
“Reducing the FAFSA from 108 questions to 36 will remove the biggest barrier to helping more low-income students pursue higher education,” said former senator Lamar Alexander, the leading driver behind simplifying the form, said in a statement.
However, those changes won’t go into effect until the 2023–24 academic year.
Amid the Covid-19 pandemic, parents and students may need more immediate help paying for college.
Yet even fewer families have applied for financial aid this year.
As of January, the number of applications was down 10% from last year, with roughly 144,000 fewer high school seniors applying, according to the National College Attainment Network.
“That is a number that certainly concerns us,” said Carrie Warick, director of policy and advocacy at the National College Attainment Network.
Some would-be undergraduates may have opted to find jobs instead of going to college to help their families through the economic crisis, Warick said. Others simply feel that the tuition tab is not worth it while colleges are operating remotely, particularly at the same high cost they would pay for an in-person education, she added.
In ordinary years, high school graduates miss out on billions in federal grants because they don’t fill out the FAFSA. Many families mistakenly assume they won’t qualify for financial aid and don’t even bother to apply.
Meanwhile, college costs are rising. Tuition and fees plus room and board for a four-year private college averaged $50,770 in the 2020-21 school year; at four-year, in-state public colleges, it was $22,180, according to the College Board, which tracks trends in college pricing and student aid.
For families who have already filed the FAFSA but have since experienced a financial shock, it is also possible to amend their FAFSA form or ask the college financial aid office for more aid, according to Kalman Chany, a financial aid consultant and author of The Princeton Review’s “Paying for College.”
“For students filling out the FAFSA this year, it won’t encompass how the pandemic may have impacted your financial picture,” he said.
If your household income has gone down, file your 2020 return so that you can document that reduction, he advised. “The more documentation you can provide, the better.”
Colleges are likely receptive to appeals, he added — particularly now.
How To Negotiate For More College Aid in the Fall
How To Negotiate For More College Aid in the Fall
As seen on cnbc.com
College applications are up by 10% this year, according to the Common Application, the most widely used college application. Yet those more selective public and private schools saw a 17% jump.
However, small institutions saw a decline across the board, except for the more selective private ones. Public school applications fell in both the more and less selective categories, by 3.76% and 4.71%, respectively, and applications to private, less selective colleges dropped 1.28%.
“Colleges and universities are businesses,” said certified financial planner Lawrence Sprung, president of Hauppauge, New York-based Mitlin Financial. “They are very well-run, well-oiled machines.
Requesting more financial aid
Financial aid decisions for the incoming freshman class are based on 2019 income levels. So, if your family’s finances took a hit during the pandemic, or there was any other change in your financial situation, you can file an appeal for more money.
Vasconcelos said common reasons include:
A job loss.
A hit to your savings since you completed the application.
High out-of-pocket medical expenses.
Support of elderly relative or family overseas.
Extra medical or care expenses for a special needs child.
Private high school tuition for a younger sibling.
Capital gains on stocks in 2019 that was not repeated.
You are no longer receiving the child support you got in 2019.
Parents’ student loan debt.
To file your appeal, go to the school’s website and fill out an official appeal form. If there is no form, email the school’s financial aid office. Explain the change in circumstances and ask for additional aid.
You’ll have to include documentation to support your request, such as a termination or furlough letter, a large medical bill, your W2 or updated bank statements.
“The financial aid offices are very prepared for a big year of financial aid appeals,” Vasconcelos said.
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Here's how refinancing your student loan can 'increase your cash flow'
If you're interested in refinancing your student loan, there's one very strong incentive: historically low interest rates. You can save thousands with a student loan refinance right now. In fact, that's one of the many reasons there's been a surge in refinance applications in recent months.
"Rates can't get much lower than this, so now is one of the best times ever to lock in what may be the lowest rate you'll ever see," said Jonathan Howard, a financial advisor with SeaCure Advisors in Lexington, Kentucky.
The Federal Reserve slashed interest rates to near-zero early in 2020 in an effort to mitigate the economic impacts of the coronavirus pandemic. That move resulted in interest rate drops for both federal student loans and private student loans. With the Fed Funds rate expected to stay low through 2022, that's creating a money-saving opportunity.
If you're looking to cut your student loan debt fast (and saving money is your goal), then you should visit the online marketplace Credible to learn more about the refinancing process. Just enter some simple information to see how a refinance could impact your loan payment and whether or not it could cut the life of the loan.
Before refinancing student loans, it's helpful to consider the pros and cons.
How can a student loan refinance 'increase your cash flow'?
Refinancing now could make sense if you're hoping to get a lower interest rate on your loans or you want to move from a variable rate loan to a fixed-rate loan.
"The biggest pro is that you may increase your cash flow through refinancing to a lower rate," Howard said. A lower rate means less interest paid over the life of the loan and more money you could funnel toward other financial goals.
Howard said people who may benefit from refinancing student loans include borrowers who have:
Good to excellent credit scores and credit history
Consistent and secure income
Outstanding loans with rates higher than what exists in the market today
Even if you don't have perfect credit (though there are easy ways to boost your credit score), refinancing may be worth looking into if you have someone who's willing to cosign. A cosigner with a solid credit history could help you qualify for the best interest rates on student loan refinancing.
If you're curious about what kind of rates you may qualify for, you can use an online tool like Credible to compare options from different private lenders. Checking your rates won't affect your credit score.
WHAT ARE STUDENT LOAN REFINANCING RATES?
Using an online student loan refinancing calculator can also help you estimate what your monthly payments are likely to be with a new loan. You could also gauge how much you could save on interest at a lower rate.
What happens when you refinance student loans?
Student loan refinancing simply means taking out a new loan to pay off your existing loans. Going forward, you'd make payments to the new loan.
Refinancing student loans is different from consolidating. When you refinance, you're getting a new loan from a private student loan lender, ideally with a lower interest rate and monthly payment than your previous loan.
When you consolidate student loans, you still roll your existing loans into a single loan. But this is typically associated with federal student loans and the goal is streamlining monthly payments, rather than reducing your interest rate.
Comparison shopping to get quotes from several lenders can also help ensure you're getting the most affordable loan possible as rates do vary. You can use Credible to compare student loan refinancing rates from multiple private lenders at once without affecting your credit score.
REFINANCE YOUR STUDENT LOANS NOW TO SAVE THOUSANDS OF DOLLARS IN INTEREST
Is it worth refinancing student loans?
If you have private student loans, refinancing could help you secure a lower interest rate given where rates are currently. Refinancing multiple private loans into a single loan could also make it easier to manage your monthly payments. Just keep in mind that you may need a cosigner if you don't have a lengthy credit history.
Refinancing federal student loans could also yield a lower rate or help you get out of default but consider the trade-offs involved. If you're hoping for student loan forgiveness or you want to keep deferment and forbearance protections, you may be better off trying to consolidate your loans instead.
Getting prequalified can help you gauge whether refinancing is the right move. Use an online tool like Credible to get prequalified student loan refinancing rates from multiple private lenders.
HOW TO FIND A COSIGNER FOR A LOAN
When should you not refinance student loans?
Refinancing your student loans can potentially offer savings on interest and lower your monthly payments. But it isn't right for every borrower.
If you have federal student loans, for instance, refinancing them into a private student loan means losing out on certain benefits, such as deferment and forbearance periods. You'd also be ineligible for student loan benefits associated with the federal CARES Act, including the option to temporarily pause payments.
"Federal loans have the best consumer protections in the student loan marketplace and have forgiveness options that don't exist in the private loan space," Howard said. "Make sure you aren't forfeiting forgiveness provisions by refinancing."
The federal student loan forgiveness program could help relieve some of your student debt burden. But it requires you to enroll in an income-driven repayment plan for federal student loans, something you can't do if you refinance them using private student loans.
Also, consider how long it'll take to pay off your loans after refinancing. If refinancing student loans means adding more years to your repayment term, you could still end up paying more in interest even if you qualify for a lower rate.
DON'T IGNORE LOW STUDENT LOAN RATES - WHY YOU SHOULD REFINANCE TODAY
What Are Unsecured Loans?
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While the name might sound intimidating, unsecured loans are a common form of borrowing. They include several types of debt, from credit cards to student loans, all with the same key feature: they are not guaranteed by any tangible assets.
In order to get an unsecured loan, you do not need to put up any collateral, like a car or home. That’s how it differs from a secured loan, which requires that the borrower pledge an asset as security. With an unsecured loan, there is no asset for the lender to seize if you stop paying; only your creditworthiness determines whether you will get the loan, and under what terms.
The Different Types of Unsecured Loans
Unsecured loans are riskier for a lender, since there is nothing to repossess if the borrower defaults. Because of this, unsecured loans typically come with higher interest rates than a secured loan.
Types of unsecured loans include:
Personal loans, which are paid in a lump sum and must be repaid over a given time; lenders have no control over how you spend the money. While interest rates on personal loans are higher than on secured ones, they are much lower than on credit cards. According to data from the Federal Reserve, the average interest on personal loans in the second quarter of 2020 was 9.50%, although you might qualify for a lower rate depending on your creditworthiness. The average interest rate for credit cards was 15.78%.
Debt consolidation loans, which are a way to combine various other debts — typically unsecured ones —in one place, so you only have to make one monthly payment, generally at a lower annual percentage rate (the actual cost of repaying the loan). Note that there also are secured debt consolidation loans.
Student loans, which usually have lower interest rates than personal loans. There are specific stipulations for their use, and different terms than a personal loan. Student loans can be obtained from the federal government as well as from private lenders.
Credit cards, which are a form of unsecured debt giving you access to a certain amount of credit without time limits, as long as you’re meeting your repayment obligations.
Unsecured loans tend to be for smaller amounts compared to secured ones. The average balance of unsecured personal loans, for example, is $8,500, according to data collected by the St. Louis Federal Reserve.
The proliferation of financial technology or “fintech” companies, which include many online-only lenders, has helped the unsecured loan market grow fast, mostly through a rise in personal loans. In 2019, there were 38.4 million personal loan accounts in the U.S., an 11% increase from the previous year. Because of the quick and easy application processes offered by many online lenders, fintech companies generate almost 40 percent of all unsecured personal loans, according to an estimate from credit monitoring company TransUnion in 2018.
When an Unsecured Loan Makes Sense
Unsecured loans “are accessible to most anyone who has decent credit, regardless of what they own,” says Nishank Khanna, Chief Financial Officer of New York-based online lender Clarify Capital.
PRO TIP
Talk to your lender in person. You can access loans completely online, but you might get a better deal if you have a one-on-one conversation.
You can get an unsecured loan from a variety of sources like local banks, credit unions, online companies, and so-called non-bank financial institutions or NBFIs, which include brick-and-mortar finance companies, insurance companies, peer-to-peer lenders, and other non-bank entities as well as fintech lenders.
Major banks are cutting back on issuing unsecured loans right now, says financial attorney Leslie H. Tayne, author of Life & Debt and founder and managing director of Tayne Law Group in New York. As they evaluate risk amidst the economic uncertainty created by the coronavirus pandemic, they often consider unsecured loans too risky for all but the most qualified borrowers.
If you have poor credit, an unsecured loan from any of the above lenders would carry a relatively high interest rate — although one that will remain fixed for the life of the loan, unlike with credit cards. Unsecured loans also have origination fees, which can be 1% to 5% of the loan amount.
You should also consider why you want to apply for the loan. If you’re simply looking to fund non-vital expenses you don’t currently have the money for, borrowing this way may not be a good idea: “If it’s living outside your means, a personal loan can just be a temporary stop-gap measure,” says Joseph Toms, president and CEO of Freedom Financial Asset Management in San Mateo, California.
If you default on an unsecured loan, meaning you don’t make your monthly payment for a period of 30 to 90 days, your loan can go to collections. This can drastically affect your credit score for up to seven years, says Jonathan Howard, a financial advisor with SeaCure Advisors in Lexington, Kentucky. This might also result in a lawsuit, with the collector trying to secure repayment — including fees and accrued interest — through wage garnishment. It might even result in an outcome that defies the original nature of an unsecured loan: The creditor may place a lien on your personal property.
Pros and Cons of Unsecured Loans
Pros
No collateral required
Can help you consolidate high-interest debt with better terms
Personal loans often come with fixed terms, so you can budget and plan for regular monthly payments
Cons
May carry high interest rates and fees
Often require a very good or excellent credit score, especially for good loan terms
You may be approved for a smaller loan amount than with a secured loan, depending on your credit
Getting Approved for an Unsecured Loan
You’re more likely to get approved for an unsecured loan with a credit score at least in the high 600s, but scores in the 700s will guarantee you a better interest rate.
Besides your credit score, you should also know your debt-to-income ratio.
“Ideally, your monthly debt payments should not exceed 15% of your normal take-home pay,” Howard says.Another way to calculate the most unsecured debt you can take on, says Howard, is to “look at your annual take-home pay and make sure that your total consumer debt doesn’t exceed that number.”
While applying for an unsecured loan is quick and easy online, Tayne is a proponent of having a human-to-human conversation with a lender, such as a local bank or a credit union, when shopping around for unsecured loans. Beyond more personalized service, they might potentially offer lower interest rates, especially if you have a low credit score; more flexible terms; and smaller loan amounts.
Once you have a shortlist of potential lenders, Howard recommends getting pre-approved, requiring only a soft credit check — which does not affect your credit score — so you can compare interest rates and know the amount of the loan you’ll be approved for. Toms also suggests asking if the lender is offering any discounts, especially if you are applying with a co-borrower who can provide additional income guarantees, or if you have retirement savings.
Make sure you understand the terms of the loan, like the interest rate, any application fees or upfront costs, if there are penalties for prepayment of the principal, and what the payment terms are. For unsecured loans, it’s especially important to understand what happens in case you default, says Tayne.
The lender will also run a hard credit check, which will affect your credit score, before approving or rejecting the application. You’ll need to provide your Social Security number, a government-issued ID, and most likely proof of income. Depending on the lender, you could also be asked to provide an account of any outstanding debts and your employment history. To receive the funds, you’ll need to provide your bank account information for deposit. Once the loan closes, it might take up to a week for the funds to arrive, Howard says.
Bottom Line
People looking to borrow money in a lump sum with no collateral have a variety of options. If you have good credit and are looking to repay the money in the short term, an unsecured loan may be the right option for you. Shop around for the best interest rates — but do not let the ease of applying for a loan online push you into borrowing money this way if you are not in a financial position to do it.
Further Reading
We’ve written extensively about loans, including personal loans, and debt management. You can find some highlights of our past coverage below.
Personal Loans
3 Times a Personal Loan Might Make Sense, and 3 Times It Definitely Doesn’t
Know Your Options Before Deciding Where to Get a Personal Loan
Can You Get a Personal Loan With Bad Credit or No Credit, or If You’re Unemployed?
Debt Management
Refinancing private student loans is now the best way to lower costs — here's why
Private student loans typically come with higher interest rates than those on federally-backed options. If your rates are on the higher side, refinancing private student loans is now the best way to lower costs and save money. After all, interest rates have dropped dramatically since the spring — and refinancing is a good trick to slashing your loan interest rate even further.
A student loan refi can reduce your interest rate, lower your monthly payment, and spread your payments out further. With Credible's free online tools, you can find the best rates available by comparing multiple private lenders at once without affecting your credit score.
Do you have any private student loans to your name? Are you drowning in student loan debt and need better repayment options? Then here are four reasons you should refinance.
Lower interest rates
Consolidating loans
Saving money
Federal benefits aren't affected
1. Lower interest rates
The biggest reason you’d want a student loan refi is to lower your interest rate. Over the last few years (recently due to the pandemic), interest rates have dropped considerably.
Fixed-rate loan rates have fallen 31% since 2017
Variable-rate loans have slipped 63% since February last year
Private and variable-rate student loan rates are now as low as 1.95%
“With interest rates at all-time lows, it makes perfect sense for people to take a look at the current interest rate on their student loans and see if they can refinance to a lower rate,” said Randy Lupi, Regional Vice President with Equitable Advisors. “It’s almost always worth refinancing, even for a half a percentage point savings. With today’s prevailing interest rates so low, it’s possible to refinance to a much lower interest rate in many cases.”
If you have private loans, check to see if the current student loan refinancing rate is lower than yours. If it is, then use Credible to get actual personalized rates based on your credit history.
WHAT ARE STUDENT LOAN REFINANCING RATES?
2. Consolidating loans
If you have several private student loans to your name, refinancing can help you consolidate them — essentially rolling all your loans into one. This can make them easier to pay off (just one bill to pay per month), and it could give you a lower student loan interest rate, too.
Here’s how Jonathan Howard, a financial advisor at SeaCure Advisors, explained it: “When a student is in college, he or she takes out loans on a year-by-year basis. This can result in a confusing jumble of loans to repay after graduation. Refinancing allows a borrower to consolidate multiple loans down to a single loan. This can help someone make a complex situation much simpler and easier to manage.”
Student loan refinancing rates range. To snag a good student loan refinancing offer, you'll want to have a good credit history, credit score, and income — as your new student loan interest rate is based on your financial credentials.
If you have these things, you'll likely be able to reduce total student loan repayment costs and get a lower monthly payment. Provide your current private student loan details to Credible — some simple personal information, including your current loan amount — and you can compare rates and terms from multiple private lenders. Credible also offers a "best rate guarantee."
WHEN'S THE BEST TIME TO REFINANCE YOUR STUDENT LOANS
3. Saving money
You don’t need perfect credit to refinance student loans. Though a higher credit score can mean better interest rates, it’s not required to refinance. In most cases, you only need a FICO score of 600 or slightly higher.
“Having a good credit score of at least 670 opens you up to the most options when refinancing student loans, but it’s not always necessary, “ said Anna Serio, a certified loan broker for Finder.com. “You can still refinance student loans even if you have bad credit, as long as you have a cosigner with good credit.”
You also don’t need a ton of savings to pay for a student loan refinance. With the majority of private lenders, there aren’t any fees or charges, and refinancing student loans is free.
“Unlike refinancing a house, there are no fees for refinancing a student loan,” Howard said. “That’s great news for borrowers.”
Credible’s partner lenders don't charge prepayment penalties, loan application fees, or origination fees. So, you can shop for loan lenders and a better repayment term without the added headache.
HOW TO GET INCREDIBLY CHEAP STUDENT LOAN REFINANCING RATES
4. Federal benefits aren't affected
If you have both private and federal student loans, you don’t have to refinance both. In fact, keeping your federal loans as is (mainly because of student loan forgiveness options available to you), and then refinancing your private loans is almost always the best option.
“Private loans should never be consolidated with federal loans,” Howard said. “Federal loans have forgiveness options that you don’t find in private loans. If you consolidate a federal student loan into a private loan, you’ll lose any chance at loan forgiveness in the future.”
5 SECRETS TO REFINANCING STUDENT LOANS THAT COULD SAVE THOUSANDS
Should I refinance my private student loans now?
With rates as low as they are, refinancing can be a smart move if you have private student loans. Just make sure you shop around for personalized rates, lower your monthly payments, choose a more optimal repayment period, and find the best possible lender for your needs (Credible’s tools can help here).
“Compare factors like rates, terms, loan amounts, and additional services,” Serio said. “Once you’ve narrowed down your options, consider prequalifying with a few to get an estimate of the rates and terms you might qualify for. Once you’ve found a lender you like, follow their instructions to complete your full application. At this point, you’ll need to provide details about your current loan so the lender can pay it off."
Before finalizing your application, you should use loan calculators like this one to gauge your monthly payment. This will ensure you’re getting a payment you can comfortably afford and manage moving forward.
Do you still have questions about student loan refinancing? Consider reaching out to a financial advisor for more information.
Variable rate student loans are now near 1% — see if they're right for you
Variable rate student loans are low – as low as 1% – as the fall semester approaches, and that could be a good scenario for college loan borrows – if they play the interest rate game correctly.
What are variable rate student loans?
In a word, they’re private student loans that feature low rates at the beginning, with loan rates rising as the loan payment period rolls on. Those rate changes usually change monthly, depending on the loan’s contract terms.
You can always turn to online marketplace Credible to research private student loan options and better understand the rates and terms that are currently available to you.
FIXED-RATE OR VARIABLE-RATE STUDENT LOAN: WHICH IS BEST?
“A variable interest rate loan is a loan that does not have a fixed rate of interest over its life,” says Jonathan Howard, an advisor with SeaCure Advisors, in Lexington, Ky. “Variable rate loans will often start at a lower rate of interest than fixed-rate loans. However, the lender will define a schedule in which they can adjust that rate, either up or down, based on an underlying benchmark or index. The lender will tell you what benchmark they use and how often they will adjust the rate.’ Borrowers need to take the loan view with variable rate student loan, according to Howard.
“The benefit of a variable rate loan is that there is a chance your overall interest payment, over the life of the loan, may be lower than you'd have to pay with a fixed loan,” Howard says. “Studies show that variable rate loans are generally more affordable over the life of the loan than fixed loans. The lower interest rates at the front end of the loan can make payments more affordable when income is lower, and when interest rates potentially increase later, your income will be higher to accommodate those payments.”
Visit Credible to learn more about different types of student loans.
6 WAYS TO LOWER YOUR STUDENT LOAN INTEREST RATE The downside is that borrowers give up control of the loan’s interest rate.
“As in 2008, variable rate loans have a famous history of becoming untenable for borrowers,” Howard adds. “Also, with interest rates at historically low levels right now, you're almost certainly looking at interest rate hikes on a variable loan in the future. In contrast, a fixed-rate loan is simple. The interest rate established at the inception of the loan isn't going to change.”
Variable-rate student loans, by the numbers
Some student loan experts say that variable-rate student loans are a risk worth taking, if a lower total loan amount is a big priority. But the rates could change and the cost associated with that difference could be significant.
Again, you can use Credible to compare student loan rates from up to eight lenders in just minutes.
A lower interest rate can save college students significant money over the life of the loan.
That said, there are isolated risks tied to variable-rate student loans. Specifically, students should be aware that interest rates could change based on factors like the Federal Reserve rate. Low rates are also dependent on having an excellent credit score.
HOW TO FIND A PRIVATE STUDENT LOAN COSIGNER
Best practices on variable rate student loans
If you decide to use private student loans – either fixed or variable – create a financial plan to understand how much you should borrow and how you'll pay it back.
“To do this, look at your total household debt load (i.e., credit cards, car loan, student loans) and make sure that debt does not exceed your gross (pre-tax) annual salary,” Howard says. “If your total debt breaks this rule, stay away from the loan. As a student, you can use the lender's projected loan payments and the projected starting salary figures for your major and geographical area to estimate this ratio."
When leveraging variable-rate student loans, also know that rates can and do change – and their likely trend is to move upward eventually.
3 THINGS TO KNOW BEFORE BORROWING FOR COLLEGE
“Interest rate changes can lead to a higher bill if the underlying index or benchmark the lender uses increases from where it was when the last interest rate was last locked in,” Howard says. “Rates are historically low right now. They have only one way to go: Up. So, a variable loan today will almost certainly have a higher rate in the future. Lenders will adjust the rate monthly, quarterly, or annually. The schedule will always be defined in the loan terms.”
Your income stability should also be a factor when weighing variable rates student loans. “Studies show that variable rate loans are more affordable to the consumer than fixed loans over the life of the loan,” Howard says. “Longer term loans are more risky than shorter term loans because they have a longer time during which they will be exposed to potentially higher interest rates.”
The borrower’s salary will largely dictate how risky a variable rate loan is, as well.
“If you’re in a field like medicine or work for a large tech firm where you have a strong potential for high income and regular salary increases, you will be largely immunized against the potential interest rate increases you'll have with a variable rate loan,” Howard adds. “If you’re an entrepreneur or doing contract-based work where income is feast or famine, the unpredictability of variable loan rates could create too much uncertainty.”
When shopping and comparing lenders to get the lowest interest rates, leverage a loan platform like Credible. There, borrowers can choose among multiple loans in a matter of minutes.
First-Time Homebuyer? Here’s How to Prepare Financially
Are you thinking of buying your first home? Before you hire a real estate agent or start house hunting, you need to take the time to prepare yourself financially. By improving your finances and educating yourself as much as possible, you can buy your new home with fewer monetary concerns and a positive outlook for the future. Whether a new home is a few years off or you’re already exploring the housing market, use these tips from financial experts to ensure you’re prepared to make the best purchase decision possible.
Justin M. Follmer, MBA, AIF®, Coastal Wealth Advisors: To avoid PMI, many homebuyers, especially first-time homebuyers, strive to secure that magic 20% down at all costs. Borrowing from your 401(k) plan may provide that down payment, but it may not be in your best interest over your lifetime. This opportunity cost may be greater than the temporary cost of PMI so it is important to run your numbers and find your break-even points to ensure you’re making the best decision for you and your family.
Brad Kingsley, CFP®, Maximize Your Money: While mortgage principal, interest, taxes, and insurance will all be combined into your mortgage payment, don’t forget that there are additional expenses beyond that amount. Expenses often forgotten might include annual heating and cooling system checkups, pest control, exterior maintenance including the yard, and others.
Ryan Cole, CFP®, Citrine Capital: Shop around for a low mortgage rate. We recommend that you get loan estimates from at least four lenders. If you use the estimates as a bargaining chip, you can usually get other lenders to beat the estimate by lowering interest rates and/or closing costs. Lowering your mortgage interest rate by even a small percentage can result in tens of thousands of dollars or more over a thirty-year period.
Donnie J Carpenter, CFP®, First Move Financial: After making sure your payment estimate includes property taxes and homeowner’s insurance, take the amount that’s an increase over your current rent, and put that money in a high yield savings account for several months. That way you’ll have extra savings for your down payment or to help furnish your new home.
William A Liberti, Senior Vice President-Investments, Boston Harbor Group: The primary preparation for first-time homebuyers is to spend less than you earn and to have the excess either yield some return or pay down high-interest debt. This formula will allow debt to be paid down more quickly, and down payments to be accumulated—while also improving credit scores. Your home purchasing power will be determined by your income but will be heavily influenced by your debt load, down payment and credit score.
Linda Rogers, CFP®, Planning Within Reach: Before buying your first home, confirm you are on track for retirement, have an adequate emergency fund, and have paid off high-interest debt. Aim for a down payment of at least 20% of the purchase price to avoid mortgage insurance. Use your emergency fund towards the down payment only if you have great job stability, comprehensive insurance coverage, and expect to have positive monthly cash flow after the home purchase.
Marci Bair, CFP®, Bair Financial Planning: Work on getting your credit score as high as you can prior to applying for a mortgage which will help you secure a lower interest rate. Don’t over-buy, meaning make sure you still have good cash-flow after your mortgage to pay all your bills and still contribute monthly to your retirement plans and other financial obligations.
Jeff Vistica, CFP®, AIF®, Vistica Wealth Advisors: When looking to borrow money for the purchase of a home, be cautious not to place too much emphasis on the ability to deduct mortgage interest. The new tax law has capped mortgage interest on the first $750,000 of home mortgage indebtedness. The new standard deduction in 2019 at $24,400 (for couples) and $12,200 (for single filers) may mean that you don’t have enough in itemized deductions for the mortgage interest deduction to help you any more than the standard deduction would.
Reid Abedeen, Managing Partner, Safeguard Investment Advisory Group: Three things to consider that will help you now and in the long run are to first create a spreadsheet. Itemize and calculate the amount you are able to afford by outlining your monthly costs to see where you can trim your expenses. Second, compare mortgage rates in order to keep your payments as low as possible. Lastly, be patient. Remember, Rome was not built in a day, and neither will your overall wealth. By saving consistently, and contributing to your 401K, not only will you have the opportunity to purchase your first home, but perhaps additional income-generating real estate in the future.
John Dameron, RICP®, CLTC, Spaugh Dameron Tenny: Prior to looking at homes and possibly falling in love with one that is out of your price range, there is a key step to take. Before house shopping, determine how much house you can afford based on all your goals. Knowing the big picture will allow you to align the purchase of your new home with your budget.
Ben Wacek, CFP®, Wacek Financial Planning: Don’t buy a house unless you’re in a solid financial situation to do so. Even if you get a great deal and a great interest rate, if you cannot afford the mortgage payments or don’t have enough margin in your budget to cover the extra expenses that inevitably come up, you will regret buying the house.
Adam D. Van Wie, CFP®, Van Wie Financial: The most frequent mistake our clients make when buying a new home is underestimating the costs associated with owning a home. When you rent, repairs and maintenance are taken care of by the property owner. When you own, you are responsible for everything, and those costs can add up. The easy things to budget for are monthly costs which can include lawn care, pool care, and pest control. The difficult things to budget for are one-time items that seem to come up every few months. This can include plumbing or electrical issues. Other things that can be hard to budget for include appliances failing, a new roof or air conditioner, or even as something as simple as a ceiling fan needing to be replaced. Be sure to include “home repair costs” as a monthly item in your budget to cover these items, and consider putting aside money for a new roof in a savings account every month.
Roger Ma, CFP®, lifelaidout: I ask my clients three questions to better understand whether they should buy or rent: 1) Can you buy? 2) Should you buy? 3) Do you want to buy? “Can you buy” deals with whether you have sufficient upfront and ongoing cash to purchase a home, meaning at least enough saved up for a 20% down payment, closing costs, and have money left over for a three to six-month emergency fund after. “Should you buy” gets at whether you plan to stay in the home for at least five to seven years (and if not, rent!). “Do you want to buy” addresses reviewing all of your financial goals and determining whether it makes sense to devote your savings to a home purchase or your other financial goals.
John A. Kvale CFA, CFP®, J.K. Financial Inc. and Street-Cents: One of the most important things to remember is buying a home is likely going to cost more and take longer than you initially think. So have extra emergency funds set aside and be sure to wear your patience hat.
Patrick King, CFP®, Transformative Financial: In that moment after all the due-diligence and before signing the contract, take a quiet moment to listen for the voice of your intuition. Does this feel right? The biggest financial mistake you can make is spending all that time and money buying a house that will never really feel like home.
Rachel Songer, CFP®, Keener Financial Planning: We recommend that you have a good handle on where your money is going today. From here, forecast out what the expenses associated with the house will look like: mortgage payment, taxes, insurance, maintenance, and utilities. Once you have determined a comfortable budget, start looking for houses that will work within those parameters.
Lia Bertelson, CFP®, Together Planning: When you are setting a budget for buying a house, don’t forget to factor in maintenance and repairs. Hopefully, your new home was left in tip-top shape by the previous owners, but sooner or later something will break. Make sure you will be able to afford those surprises.
Josh Scandlen, CFP®, Heritage Wealth Planning: Do whatever you can to keep a cash reserve on the side. Do not liquidate all your savings in order to make the largest down payment possible. There’s a good chance you’ll need funds for unforeseen future expenses. We do not want you to go into debt to pay those.
Jon Howard, Advisor, SeaCure Advisors: For most people, your first home will not be your last and your loan, which is collateralized by the home, will likely be the cheapest money you’ll ever borrow. The money you put into your house is very difficult to access if there is a financial emergency and does not accrue any interest. Make sure you do a careful budget and cash flow analysis and strike a balance between maintaining your required reserves of liquid money, which may require a low down payment, and having an affordable monthly bill, which may require a higher down payment.
David Ragland, CEO, IRC Wealth: The first step is to sit down and review what you have spent on average over the last 30 and 90 days and to categorize your purchases. The biggest thing we see with people when we look at their spending patterns is that oftentimes they didn’t realize how much they spent in certain categories. Being mindful of how you spend allows you to make better purchasing decisions.
Jim Marrocco, CFA, CFP®, Thinking Big Financial: Look at what your cash flow will look like each year after the proposed purchase closes. Do you still have the flexibility to live the way you want to? Are you sacrificing saving? You want to make sure you can still do all the other things in life that are important to you and own the home at the same time.
Adam Werner, CFP®, CPWA®, EP Wealth Advisors: The full monthly costs of owning a home (mortgage, insurance, HOA fees, and property tax) is often more expensive than your current rent. So prior to jumping into the deep end, practice! Figure out how much more your full home payment might be compared to your current rent. Then set aside that additional amount every month into your “home savings” account. This is a great way to prepare you for the lifestyle of homeownership (and ensure you can afford it!), while also boosting your home savings at the same time.
Andy Hill, Marriage, Kids and Money: It’s important not to forget the cost of furnishing and updating your new home. When I bought my first house, the only thing I was worried about was whether I could afford the mortgage payment. After I needed to repair my HVAC unit, replace my roof and furnish my entire home, I quickly realized that the mortgage is only one piece of the homeownership puzzle.
Sophia Bera, CFP®, Gen Y Planning: Make sure you’re on track with your other financial goals before diving into your first home purchase: pay off any high interest rate debt, clean up your credit, build up at least 3 months of emergency savings, and make sure you’re prioritizing saving for retirement. A solid financial foundation is key before taking on a mortgage payment.
Tyson Koska, CEO, OnTrajectory.com: Key to purchasing your first home is knowing exactly ‘how much home’ to buy. Do not simply buy whatever you get approved for, but consider how your mortgage may impact other parts of your financial life — such as your ability to make 401k, 529 or HSA contributions. Tools like OnTrajectory are designed to make those impacts clear.
Jared Hoole, CFP®, Lakeside Financial Planning: You should be purchasing a home that costs no more than 3.5x your gross salary. Ideally, you should purchase a home that is 2x – 3x your gross household income.
Kristi Sullivan, CFP®, Sullivan Financial Planning: Set aside an additional 2%-3% of the purchase price for unknown expenses as you move in. There is always something you will want/need to take care of right away (plumbing leak, wallpaper removal, window blinds, landscaping, cracked concrete) in a new house.
Michelle J. Gessner, MSM, CFBS, LUTCF, CFP®, Gessner Wealth Strategies: The key to saving enough money to buy your first home is to religiously pay yourself first from every paycheck, as though you are paying any other bill. The best way to do it is to use the automatic transfer feature available in your bank to move the money to a savings account at the same time your paycheck arrives before you see the paycheck deposit. Then, when you have saved at least 20% of the purchase price which is typically the down payment needed to avoid PMI, you are ready to go.
Al Procaccino, CFF®, CFP®, CFS®, Castle Financial: It is wise to set up sinking funds to put aside and invest money for future expenses like a pool, extension, back yard patio, etc. In addition, considering the needs of a growing family and not just for more children than anticipated. Elderly parents moving in with the children for example.
Jeff Hohman, Emerge Financial Services: Oftentimes, when people are preparing to purchase their first home, and they have a less-than-perfect credit history, they want to start by paying off collections accounts. This can actually hurt your credit score, sometimes lowering it 30-40 points. It best to start by talking with a mortgage expert; they will assist you in creating a plan to reach the dream of homeownership.
White Rhino Financial: Property taxes are something only other people complain about — until you become a homeowner. So, earn your right to complain by doing your homework! Before buying a home, use a property tax calculator online to help you estimate your tax bill. Let’s say it’s $5,500. Divide that by 12 and make a monthly contribution of $458 to a separate tax savings account, so you’re prepared when the tax bill comes due at the end of the year.
Timothy J. Watters, CFP®, Watters Financial Services: The hardest part of getting a home is building your down payment. Three ways to do this:
Set up an online savings account and set an automatic payment each month. This will also help you to see if you can afford to spend more on a mortgage
Borrow from your 401k. You can borrow 50% up to $50,000.
Get a gift or loan from a family member. Gifts do not count against you for mortgage affordability rules but a loan does.