MONEY Financial Planning

The Most Important Money Mistakes to Avoid

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Smart people do silly things with money all the time, but some mistakes can be much worse than others.

We asked three of our experts what they consider to be the top money mistake to avoid, and here’s what they had to say.

Dan Caplinger
The most pernicious financial trap that millions of Americans fall into is getting into too much debt. Unfortunately, it’s easy to get exposed to debt at an early age, especially as the rise of student loans has made taking on debt a necessity for many students seeking a college education.

Yet it’s important to distinguish between different types of debt. Used responsibly, lower-interest debt like mortgages and subsidized student loans can actually be a good way to get financing, helping you build up a credit history and allowing you to achieve goals that would otherwise be out of reach. Yet even with this “good” debt, it’s important to match up your financing costs with your current or expected income, rather than simply assuming you’ll be able to pay it off when the time comes.

At the other end of the spectrum, high-cost financing like payday loans should be a method of last resort for borrowers, given their high fees. Even credit cards carry double-digit interest rates, making them a gold mine for issuing banks while making them difficult for cardholders to pay off once they start carrying a balance. The best solution is to be mindful of using debt and to save it for when you really need it.

Jason Hall
It may seem like no big deal, but cashing out your 401(k) early has major repercussions and leads you to have less money when you’ll need it most: in retirement.

According to a Fidelity Investments study, more than one-third of workers under 50 have cashed out a 401(k) at some point. Given an average balance of more than $14,000 for those in their 20s through 40s, we’re talking about a lot of retirement money that people are taking out far too early. Even $14,000 may seem like a relatively easy amount of money to “replace” in a retirement account, but the real cost is the lost opportunity to grow the money.

Think about it this way. If you cash out at 40 years old, you aren’t just taking out $14,000 — you’re taking away decades of potential compound growth:

Returns based on 7% annualized rate of return, which is below the 30-year stock market average.

As you can see, the early cash-out costs you dearly in future returns; the earlier you do it, the more ground you’ll have to make up to replace those lost returns. Don’t cash out when you change jobs. Instead, roll those funds over into your new employer’s 401(k) or an IRA to avoid any tax penalties, and let time do the hard work for you. You’ll need that $100,000 in retirement a lot more than you need $14,000 today.

Dan Dzombak
One of the biggest money mistakes you can make is going without health insurance.

While the monthly premiums can seem like a lot, you’re taking a massive risk with your health and finances by forgoing health insurance. Medical bills quickly add up, and if you have a serious injury, it may also mean you have to miss work, lowering your income when you most need it. These two factors, as well as the continuing rise in healthcare costs, are why a 2009 study from Harvard estimated that 62% of all personal bankruptcies stem from medical expenses.

Since then, we’ve seen the rollout of Obamacare, which signed up 10.3 million Americans through the health insurance marketplaces. Gallup estimated last year that Obamacare lowered the percentage of the adult population that’s uninsured to 13.4%. That’s the lowest level in years, yet it still represents a large number of people forgoing health insurance.

Lastly, as of 2014, not having health insurance is a big money mistake. For tax year 2014, if you didn’t have health insurance, there’s a fine of the higher of $95 or 1% of your income. For tax year 2015, the penalty jumps to the higher of $325 or 2% of your income. While there are some exemptions, if you are in a position to do so, get health insurance. Keep in mind that for low-income taxpayers, Obamacare includes subsidies to lower the monthly payments to help afford health insurance.

TIME

This Is The Dumbest Reason You’re Losing Money

TIME.com stock photos Money Dollar Bills
Elizabeth Renstrom for TIME

Your inaction could cost you big

Interest rates might be low, but they’re not going to stay that way forever. And when they do rise, the chance to save a bundle will vanish. In spite of that, most Americans won’t take advantage of this window of opportunity.

A new survey from HSH.com, a site for comparing and calculating mortgage rates, finds that only 9% of Americans plan to refinance a mortgage this year, while only 30% say they’re going to pay off credit card debt.

This means we’re leaving money on the table in a big way. “Given that most credit cards are variable-rate, a rising interest rate environment would tend to be more costly over time, so there is even a greater benefit to retiring balances as quickly as possible,” says HSH.com vice president Keith Gumbinger. When the prime rate goes up, so will your monthly rate, even if you haven’t added to your overall balance.

“As far as mortgage refinancing goes, it’s a matter of opportunism,” Gumbinger says. “At the moment, fixed mortgage rates are at about 20-month lows, and very close to as much as 60-year lows.” While there are more variables to consider when refinancing, such as if your credit is good enough to qualify for the lowest rate, how much equity you have in your home and whether or not you plan to stay in that home for a while longer, Gumbinger says the opportunity for greater savings — and month-to-month cash flow — can make refinancing worth it under the right circumstances.

Even though Americans might be aware of their collective inertia when it comes to taking these steps, Gumbinger says the actual number of people who make a proactive improvement to their finances is likely to be low. “Even the best intentions are rarely realized, and over the course of the year there are likely to be many distractions,” he points out. For comparison, last year only 24% of us paid off credit card debt, although 15% did take advantage of low rates to refinance a mortgage.

Unfortunately, it’s not even like we’re socking away the money we do have for the future. The survey finds that only a third of Americans say they’re going to save for retirement this year. That’s an improvement from the 27% who say they did last year, but it’s still low.

“The calendar continues to work against you in the battle to amass assets,” Gumbinger warns. “Incomes are growing again, so if IRA [or] 401k contributions have been on the minimal side over the last few years, here’s a bit of a chance to play catch-up.”

MONEY mortgages

Half of Home Buyers Make This $21,000 Mistake

rows of model houses
Jonathan Kitchen—Getty Images

47% of buyers aren't comparison shopping for a mortgage, and it's costing them tens of thousands of dollars.

When it comes to purchasing a home, most buyers generally don’t have trouble comparison shopping. According to a recent study, 22% of house hunters even described themselves “addicted” to online listings. But while home buyers love shopping for homes, they aren’t doing the same with mortgages. And it’s costing them tens of thousands of dollars.

A new report from the Consumer Financial Protection Bureau shows that 47% of home buyers seriously considered only a single lender or broker before deciding where to apply for a mortgage. And 77% of buyers only applied with one lender or broker instead of applying with multiple lenders and selecting the best offer.

Granted, shopping for a mortgage isn’t nearly as fun as shopping for a house, but rushing this part of the process can cost consumers an enormous amount of money. The bureau’s research showed that a borrower looking for a conventional 30-year fixed rate loan could be offered rates that differ by more than half a percent. According to BankRate’s mortgage payment calculator, the difference between a 4% and 4.5% interest rate for a conventional 30-year fixed-rate mortgage of $200,000 is slightly more than $21,000 over the lifetime of a loan. Put another way, comparison shopping for a mortgage can save you enough money to buy a second car.

Why don’t most buyers make the effort? Aside from the obvious—comparing financial instruments isn’t exactly a day at the beach—the CFPB found that being informed has a lot to do with consumer behavior. Borrowers who felt confident about their knowledge of available interest rates were nearly twice as likely to comparison shop as those who were unfamiliar with the interest rates they could expect to receive.

To solve that problem, the bureau has created a website to educate prospective buyers on the home purchasing process. Among other tools, it offers a page that lets consumers check interest rates for their particular situation using their location, credit score, down payment, and other factors.

For more answers to your mortgage questions, check out our Money 101 on home-buying:
What mortgage is right for me?
How do I get the best rate on a mortgage?
What will my closing costs be?

MONEY real estate

Obama Cuts Mortgage Insurance Premiums to Help Low-Income Home Buyers

aerial view of subdivision
David Sucsy

The changes will save borrowers an average of nearly $1,000 a year.

The White House announced on Wednesday plans to reduce government mortgage insurance premiums in an effort to make homeownership more affordable for low-income buyers. President Obama is scheduled to talk about the policy in a speech Thursday in Phoenix, Arizona.

In the announcement, Housing and Urban Development Secretary Julián Castro said the Federal Housing Administration would slash insurance fees by more than a third, from 1.35% of the loan amount down to .85 percent. The FHA had a 30% share of the mortgage insurance market in the third quarter of 2014, according to Bloomberg.

Mortgage insurance, required of FHA borrowers, is meant to protect the lenders in case of default by allowing them to recoup some of their losses.

Over the next three years, the FHA projects the rate drop will allow 2 million borrowers to save an average of $900 a year when they purchase or refinance a home. The agency also estimates these savings will encourage 250,000 first-time buyers to enter the market.

The move marks a trend of recent policy changes meant to help low-income Americans get into the housing market. In December, mortgage providers Fannie Mae and Freddie Mac announced that certain first-time buyers could now qualify for a loan with a down payment of just 3 percent of the home’s value.

Taken together, today’s announcement and lower down payment requirements should make the housing market far friendlier for the economically disadvantaged. However, David Stevens, CEO of the Mortgage Bankers Association, told CNBC that the effect of the new policy may not spur an especially large increase in home buying.

“I think the marginal impact on sales will be small because potential buyers make the decision to purchase based on trigger events, such as a new job, marriage, kids, etc,” Stevens told the network. “Changes in affordability only impact how much home they can buy.”

While Democrats have been supportive of policies that aid low-income and new homebuyers, Republicans are concerned that lower insurance premiums could put the government at risk if borrowers once again default in large numbers. The FHA has previously required billions in taxpayer assistance, and while the agency is no longer losing money, its capital requirements will not meet the legal limit until 2016.

Find more answers to your home-buying questions in Money 101:
What mortgage is right for me?
How to I get the best rate on a mortgage?
What are the steps in a home purchase?

MONEY Housing Market

Why 2015 Might Be the Year You Finally Sell Your House

141224_REA_sold_1
Martin Barraud/Getty Images

Home price gains are slowing, credit is thawing, and more first-time buyers may be hitting the real estate market in 2015.

Better balance in the housing sector is “in” next year, as far as trends go. That’s likely to put buyers and sellers on a more even footing.

Some prospective sellers sound especially bullish on housing. In a recent Trulia survey, the biggest chunk of consumers, 36%, said they expect next year to be much or a little better than 2014 for selling a home.

To be sure, like politics, all real estate is local. Some sellers have stayed on the sidelines in recent years, investing in improvements amid a dearth of buyers. For others, low inventory and rising home prices meant a bidding-war bonanza.

The landscape next year’s sellers are likely to encounter depends a lot on where they live. But here are a few broad trends to bear in mind.

Bringing Back Buyers

Mortgage credit is becoming more available as lenders scale back requirements. The average FICO score on a conventional purchase loan in October was 754, according to Ellie Mae. That’s a five-point drop from last year’s average. (You can check your credit scores for free on Credit.com to see where you stand.)

Tough credit and underwriting requirements have been a huge hurdle for many would-be buyers. So is liquidity, but there’s also good news on that front: Fannie Mae and Freddie Mac recently rolled out a mortgage option that allows for a 3% down payment. These two government-sponsored behemoths purchase about two-thirds of all new mortgages.

If conventional lenders get on board, the new low-down-payment option could pull more first-time buyers into the marketplace. During a time of tight credit and stagnant wages, this crucial group of buyers has been all but absent from the housing picture.

“If access to credit improves, we could see substantially larger numbers of young buyers in the market,” Jonathan Smoke, chief economist for Realtor.com, noted in his 2015 housing forecast. “However, given a high dependency on financial qualifications, this activity will be skewed to geographic areas with higher affordability, such as the Midwest and South.”

Affordability May Be a Concern

Lower credit and down-payment thresholds are causes for optimism. But rising home values and mortgage rates will impact affordability, especially in costlier housing markets. Realtor.com’s Smoke expects affordability to decline 5-10% next year.

Job and wage growth will play a big role in shaping homebuying activity. Gains in both may offset the price and rate increases likely on the horizon.

Sellers in more affordable housing markets, especially those with improving economies, are likely to see more buyers.

Home Prices & Inventory

Home price growth is slowing after years of big gains. Zillow’s chief economist predicts home values will rise about 3% next year, about half the current clip. More listings are hitting the market each month, too, although inventories are still tight in some places and price ranges.

Housing inventory nationwide jumped nearly 16% in October year over year, according to Zillow.

The combination of cooling prices and more inventory means the balance of power is tilting back toward buyers in some markets.

“Sellers have had their day in the sun for several years in a row now,” Zillow’s economist, Stan Humphries, told U.S. News & World Report. “It’s time to get back to a balanced market and for buyers to have their day.”

More on Mortgages & Homebuying:

TIME

The Most Completely Depressing Stat About Americans’ Debt

knife cutting dollar bill
David Franklin

Oof, it's a rough one

Consumer confidence may be up, but the picture changes when Americans think about their debt load and the likelihood they’ll ever dig out from it.

In a new CreditCards.com survey, 18% of Americans with debt say they won’t eliminate those debts in their lifetime, double the number who said the same in a 2013 survey.

There are a few reasons behind this rapid increase, says the site’s senior analyst, Matt Schulz. Our ballooning student loan debt and increasing willingness to carry balances on credit cards play a role, but they’re not the only factors.

“Underemployment is still a problem as is wage growth, even though unemployment is lower,” he says. This malaise stretches across the economic spectrum. The survey found that higher incomes don’t translate to optimism. Households who earn more than $75,000 aren’t much more confident about their ability to shed their debt than less well-off families.

The average age when borrowers expect to be completely debt-free, owing nothing on credit cards, car loans, student loans, mortgages and loans, is 53, but a significant number of people think it will take longer. More than 40% of people who carry debt think they’ll be over the age of 60 before they pay everything off, and almost a third of debtors 65 and older say they’ll never get out of debt.

If these debtors are correct in their hunch, there could be some significant macroeconomic fallout, Schulz says.

“Continuous debt can mean indefinitely postponing retirement and that can cause a host of issues,” he says. “It can also cause great economic stress on those people’s children.” This “sandwich generation” are often caught in the middle trying to support both their grown children and their parents.

Those grown children — millennials — are considerably more optimistic than their parents and grandparents when it comes to their debts, but their optimism may be misplaced. Only 6% of millennials surveyed think they’ll die with debts, but the reality could give them a rude shock. Unlike even their struggling grandparents, young adults have fewer options for getting rid of their debt other than buckling down and paying it down, since much more of what they owe is in the form of student loans, which can’t be discharged in bankruptcy, rather than the credit card debt or even mortgages that weighed down older generations.

“Someone who sees themselves as trapped forever by debt might stop working to get themselves out of it,” Schulz says, and that inaction brought on by hopelessness could contribute to their balances ballooning if they stop trying to pay them down.

MONEY mortgages

Here Come Cheap Mortgages for Millennials. Should We Worry?

young couple admiring their new home
Justin Horrocks—Getty Images

The federal agencies that guarantee most mortgages are launching new loan programs that require only 3% down payments for first-time buyers. Is this the start of financial crisis redux?  

According to new research from Trulia, in metro areas teeming with millennials, such as Austin, Honolulu, New York, and San Diego, more than two-thirds of the homes for sale are out of reach for the typical millennial household.

That goes a long way to explaining why first-time homebuyers have recently accounted for about one-third of homes sales, according to the National Association of Realtors, down from a historic norm of about 40%. And it should concern you even if you’re not a millennial or related to one: A shortage of first-time buyers makes it harder for households that want to trade up to find potential buyers; and spending by homeowners for homes and housing-related services accounts for about 15% of GDP.

Now the federal government appears intent on reversing the trend — or at least on easing the pain of the still-sluggish housing industry.

Trulia’s dire analysis assumes that buyers need to make a 20% down payment — a high hurdle for anyone, let along a younger adult. But Fannie Mae and Freddie Mac, the government agencies that guarantee the vast majority of mortgages, this week launched new loan options that will require down payments of as little as 3% for first-time buyers (and, in limited instances, refinancers as well). Fannie’s program will be live next week; Freddie’s, which will be available to repeat buyers as well, will launch in early spring.

Before you get all “Isn’t that the sort of lax standard that fueled the financial crisis!?”, it’s important to realize significant differences between now and then.

The only deals that will qualify for the 3%-down programs are plain-vanilla 30-year fixed-rate loans. No adjustable-rate deals, no teaser-rate come-ons, and, lordy, no interest-only payment options. And flippers are not welcome; the home must be the borrower’s principal residence.

Both Fannie Mae’s MyCommunityMortgage and Freddie Mac’s Home Possible Mortgage program are aimed at moderate-income households. For example, to qualify for Fannie Mae’s program, household income must typically be below the area median. Income limits are relaxed a bit in some high cost areas, such as the State of California (up to 140% of the local median) and pricey counties in New York (165% of the median).

That said, lenders will be allowed to extend these loans to borrowers with credit scores as low as 620. That’s even lower than the average 661 FICO credit score for Federal Housing Administration-insured loan applications that were turned down in October, according to mortgage data firm Ellie Mae. (The average FICO credit score for FHA approved loans was 683.)

Like FHA-insured loans, the new 3% mortgages offered by Fannie and Freddie will require home buyers have private mortgage insurance (PMI). That can add significantly to mortgage costs.

For example, a $300,000 home purchased with a 3.5% fixed rate loan and a 3% down payment would have monthly principal and interest charges of about $1,300 a month. The PMI adds another $240 or so to the monthly cost; that’s nearly 20% of the base monthly mortgage amount. (You can estimate the bite of PMI using Zillow’s Mortgage Calculator.)

But one significant advantage the new Fannie/Freddie loan programs have over the FHA program is that they will allow homeowners to cancel their PMI once their home equity reaches at least 20%. Beginning in 2013, the annual insurance charge on FHA-insured loans, currently 1.35% of the loan balance, can never be cancelled regardless of whether the borrower has more than 20% equity.

 

MONEY housing

Fannie, Freddie Announce Plans to Back 3% Down-Payment Mortgages

According to officials with the companies the move is designed to help those with lower income and good credit to afford homes.

MONEY Out of the Red

Have You Conquered Debt? Tell Us Your Story

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iStock

With patience, you can pay off large amounts of debt and improve your credit. MONEY wants to hear how you're doing it.

Have you gotten rid of a big IOU on your balance sheet, or at least made significant progress toward that end? MONEY wants to hear your digging-out-of-debt stories, to share with and inspire our readers who might be in similar situations.

Use the confidential form below to tell us about it. What kind of debt did you have, and how much? How did you erase it—or what are you currently doing? What advice do you have for other people in your situation? We’re interested in stories about all kinds of debt, from student loans to credit cards to car loans to mortgages.

Read the first story in our series, about a Marine and mother of three who paid off more than $158,169 in debt:

My kids have been understanding. Now I teach them about needs and wants. The other day, I was coming home from work, and I said, “Do you need anything from the store?” My son said, “We don’t need anything, but we’d like some candy.” If they want a video game, they know they need to save their money to get that video game—and that means there’s something else they won’t be able to get. They understand if you have a big house, that means you have to pay big electricity and water bills. I’m teaching them to live within their means and not just get, get, get to try to impress people.

Do you have a story about conquering debt? Share it with us. Please also let us know where you’re from, what you do for a living, and how old you are. We won’t use your story unless we speak with you first.

MONEY mortgages

Here’s How Long It Will Take to Get a Mortgage

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Dougal Waters—Getty Images

Banks are asking for a lot of documents these days, so don't assume the process will be speedy.

You’re scrolling the online listings, looking for houses, when — boom — the love of your real estate life pops out from the page. You’ve found the perfect home, with the best imaginable location, layout, size, finishes, and price. You’re ready to buy.

Just one problem: You haven’t started looking for a loan yet. And the seller will only accept offers from pre-approved buyers. Unfortunately, you won’t be able to make that happen by tomorrow.

Getting a loan, even a pre-approval, doesn’t happen overnight. There are key hoops you must jump through. How long should a borrower expect each step to take? And why must you start before you begin your hunt, especially in a competitive market? Let’s take a look.

Step 1: Comparison shopping for loans.

It’s unlikely you would buy a car, piece of furniture, or appliance without shopping around. You definitely shouldn’t take on a 30-year loan without some serious research.

Search for mortgage providers online, and visit a local bank or credit union. Schedule a meeting with a mortgage loan officer, who will pull your credit (more on that below) and give you a reasonable estimate of the interest rate, closing costs and terms you can expect. Then expand your search to other financial institutions, including community banks or other credit unions, or continue looking online, and compare the terms you’re offered from each bank.

Although each lender will look up your credit information, you don’t need to worry every inquiry will hurt your credit score. The Fair Isaac Corporation, or FICO, allows people to “rate-shop” for a mortgage without dinging their credit scores, as long as you do all of your shopping within a 14-day window. Abide by that timeline and the credit bureaus will regard that first credit pull as a “ding” but ignore the subsequent ones.

Helpful tip: When comparing lenders, pay attention to the annual percentage rate (APR), not just the interest rate. The APR covers the “total cost” of borrowing, including loan origination fees and other ancillary costs.

Total Time: 14 days.

Step 2: Get a pre-qualification letter.

Most buyers will require your pre-qualification letter before they’ll even consider your offer — but don’t worry, this step is quick and easy.

Ask any of the lenders with whom you spoke to during your mortgage shopping spree for a pre-qualification letter. These are relatively easy to get and simply give a rough, unverified estimate of the loan size you may qualify to receive. Most lenders will give you a pre-qualification based on your verbal self-reporting of your income, assets, debts, and down payment size.

Helpful tip: You don’t need to take out a loan from the same lender that gave you your pre-qualification letter.

Total Time: one to three days (overlapping with the timeframe for the first step)

Step 3: Get pre-approved.

The pre-approval stage is when lenders verify everything you’ve told them. You’ll need to supply identification documents such as your Social Security card, proof of income, assets, and employment, as well as records of any debts you hold. The lender will pull a credit report.

If you have a simple situation, such as stable employment with no debt, this process can be as short as one to two weeks. If you’re self-employed, own several other houses, have had a previous divorce or bankruptcy, have a pending court case or lawsuit against you, are in the U.S. on a temporary visa, or have other complicating factors, the loan officer may require additional documentation, which can extend the process several weeks or months.

Once you’re pre-approved, you’ll receive a conditional letter stating the exact amount of loan for which you’re approved.

Helpful tip: All else being equal, sellers often prefer to work with buyers who have pre-approval letters, rather than pre-qualification letters, particularly in a competitive market where homes get multiple bids.

Total Time: one week to several months

Step 4: Final loan approval.

Armed with your pre-approval letter, you make an offer on your dream home and it’s accepted. (Hooray!) Next, you’ll need the lender to conduct an appraisal.

In this instance, an appraisal is official verification that you’re buying the home at a reasonable market value. It protects the lender from the risk of loaning an unreasonable sum, such as $300,000 on a house that should be valued at $220,000.

Scheduling a time for a licensed appraiser to visit the property is frequently the longest part, and may take up to two weeks (depending on availability in your area, as well as the flexibility of the seller). Once the appraiser makes a home visit, the approval (or rejection) comes through within a day or two.

Time: three days to two or more weeks

The good news? Now that you’ve passed the appraisal process, you’re ready to close on this loan — and this house. Enjoy the moment, before you have to start packing.

 

To read more from Paula Pant of Trulia, click here.

 

Related:

How do I get the best rate on a mortgage?

Which mortgage is right for me?

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