Traditional wisdom encourages you to pay off your mortgage faster by taking a 15-year mortgage instead of 30 years, or by paying an additional principal amount each month. However, these actions have risks. If you encounter financial difficulties and don’t have an emergency (reserve) fund, you could face foreclosure. Be sure your emergency fund has enough to cover several months of mortgage payments to avoid losing your home.
Some financial advisors suggest that if your reserve fund earns a rate greater than your mortgage rate (also taking into account tax benefits), you may decide to invest rather than pay down your mortgage. This approach could give more flexibility when encountering an economic downturn, which might include refinancing your mortgage at a lower interest rate.
Also, beware of organizations promising to help you make additional mortgage payments. You can do this on your own, without the fee they will likely charge.
For additional information on paying off your mortgage early, click here.
Have students talk to others about the benefits and drawbacks of paying off a mortgage early.
Have students develop a visual to compare paying off a mortgage early with saving and investing additional funds instead.
What are the benefits and drawbacks of paying off a mortgage early?
Describe actions to take when trying to decide if to pay off a mortgage early.
Which source of home-buying finances has “millions of satisfied customers, has never asked for a bailout, and really cares about its borrowers”? It’s the the “Bank of Mom and Dad.”
Parents and relatives are a common source of funds when buying a home. With a difficult housing market, this financial assistance for young homebuyers is often necessary. According to a study by Legal & General, the “Bank of Mom and Dad” is the seventh largest source of home-buying funds. The top six were Wells Fargo, JP Morgan Chase, Quicken Loans, Bank of America, U.S. Bancorp, and Freedom Mortgage.
The downside of this trend is that many parents are postponing, and even endangering, their retirement years to provide financial assistance to their children. Before accepting funds from family members, consider these factors:
Assess the current and future financial impact for family members involved.
Evaluate the tax situation and costs that might be involved.
Determine potential implications for other family members.
Consider other sources and possibilities, such as making it a loan rather than a gift’ also investigate government or private programs available to lower-income or first-time home buyers.
For additional information on family assistance for home buying, go to:
While car ownership has been a cultural milestone in our society, this tradition is diminishing with a trend toward renting or borrowing rather than owning. This situation is partially related to fewer teenagers opting to obtain a driver’s license. Also, fewer young people are buying homes, giving preference to the flexibility of renting.
The owning of “stuff” is shifting toward “decluttering” and choosing instead to rent items as needed. A strong belief that overconsumption is putting our planet at risk is driving the rise of the sharing economy. In addition, there is a growing trust to value exchanging items with “real people” rather than buying from major companies.
In addition to Zipcar, which rents vehicles by the hour, other rental business models include:
Ann Taylor’s Infinite Style service that allows a person, for a $95 monthly fee, to rent up to three garments at a time.
SnapGoods rents cameras, power tools and home appliances, such as blenders.
Frankfurt airport has a service that allows travelers to store winter coats when flying to warmer climates. Other businesses are considering a service to rent cold weather clothing to travelers arriving from tropical areas.
Since about one-third of new vehicles are leased, Cadillac created the “Book By Cadillac” program allowing a person to exchange up to 18 vehicles a year.
The many empty stores in malls create opportunities for “swap meets” and “rental fairs” for various products, using these spaces to also build connections in the local community.
For additional information on renting instead of buying, click here.
Have students locate examples of sharing economy businesses and rental companies in your community and online.
Have students talk to others to obtain ideas for new types of rental businesses.
What do you believe are the benefits and drawbacks of renting instead of owning?
Describe actions that might be taken to determine needs and ideas for rental businesses in a community.
While more people are renting in recent years due to various economic and household situations, home ownership is still a financial goal for many. A financial comparison between renting and buying often overlooks various factors. An online calculator may be used to consider buying items such as the opportunity cost of investing your down payment (along with the taxes on capital gains), condo or home association fees, maintenance costs, and, of course, the tax benefits of property taxes and mortgage interest. On the rental side, the calculator considers initial costs (such as a security deposit and any broker’s fee) along with the opportunity costs of the initial costs and recurring costs, such as renter’s insurance.
For additional information on calculating the renting vs. buying your home, click here.
Have students ask people to describe factors that affected whether they own or rent their housing.
Have students conduct a personal financial analysis for renting and buying a place to live.
What are benefits and drawbacks of renting and buying a place to live?
Describe financial factors that might be overlooked when comparing renting and buying a place to live.
Every day, approximately 10,000 people in the United States turn age 62, according to the Census Bureau. And if they are homeowners, they may be eligible to borrow against a portion of the equity in their house by using a loan called a “reverse mortgage.”
The Consumer Financial Protection Bureau (CFPB) is warning consumers about potentially misleading reverse mortgage advertising. In June 2015, the CFPB issued a consumer advisory stating that many television, radio, print and Internet advertisements for reverse mortgages had “incomplete and inaccurate statements used to describe the loans”. In addition, most of the important loan requirements were often buried in fine print if they were even mentioned at all. These advertisements may leave older homeowners with the false impression that reverse mortgage loans are a risk-free solution to financial gaps in retirement.” For example, the CFPB said, “After looking at a variety of ads, many homeowners we spoke to didn’t realize reverse mortgage loans need to be repaid.”
Visit the website of the American Association of Retired Person (AARP) at aarp.org. Locate the AARP Home Equity Information Center, which presents facts about reverse mortgages. Then prepare a report on how reverse mortgages work.
Ask students to visit Fannie Mae’s website at fanniemae.com/homebuyer to find out who is eligible for reverse mortgages, and what other choices are available to borrowers.
Why should you consult a qualified professional before you decide to get a reverse mortgage?
Where can you find Housing and Urban Development-approved Home Equity Conversion Mortgage counseling agencies near you?
“A house is the largest purchase most of us will ever make so it’s important to calculate what your mortgage payment will be and how much you can afford.”
While technically not the usual article you expect to read on the Kapoor Money Minute blog, the information about this Bankrate mortgage calculator can help you determine how much your monthly home mortgage payment will be. To use the calculator, you simply input the requested financial information in the boxes provided and the calculator will determine your monthly mortgage payment. You can also access an amortization table that shows how much of each payment is for interest and how is used to reduce the unpaid balance on your home mortgage.
In addition to this calculator, the Bankrate.com site provides additional calculators and information on many personal financial topics. Take a look and be surprised at the amount of useful information available on this site.
You may want to use the information in this blog post and the original article to
Use the calculator to help students determine how much house they can afford.
Discuss other expenses that could increase the cost of home ownership.
Take a look at the information that you must enter in order to use the mortgage calculator described in this article. How do the amount of the mortgage, interest rate, and term of loan impact the monthly payment for your home mortgage?
In addition to your monthly home mortgage payment, what other costs can you expect when you buy a home?
Buying a home is a “big” financial decision. Are there additional factors besides mortgage payment and other home ownership expenses that you should consider before making a decision to buy a home?
“While our original $150,000–$170,000 price range would have put our housing costs at a manageable 30% of our total income, springing for a $200,000 loan shot that number up to just shy of 50%.“
For many people, a logical step after completing college is often purchasing a home and inching closer to the American dream. And yet, there are pitfalls to obtaining a home that can lead to financial stress and the inability to reach important short-term and long-term financial goals.
This article describes how one couple took all the right steps to prepare for a home purchase, but eventually decided to purchase a home that cost more than they planned to spend on housing. The reason was simple: They fell in love with a home that was too expensive when compared to their total income. The article continues to describe what happens next in their attempt to regain their financial health.
Many home buyers do not shop around for a mortgage. Failing to comparison shop for a mortgage often means higher monthly payments and paying thousands of dollars more in interest over the life of the loan. A recent survey of mortgage borrowers revealed that:
Nearly half of borrowers only consider one lender or broker before applying for a mortgage.
Over three-fourths of borrowers only apply to one lender.
Lenders and brokers were the most common mortgage information source; with real estate agent also used. Other source of information were websites, financial and housing counselors, friends, relatives and coworkers.
Home buyers should complete an application with multiple lenders or brokers in an effort to get a better deal. Also, ask questions and take actions to help you find the best mortgage for you
For additional information on comparing mortgage rates, click here: