MONEY Debt

The Hidden Threat to Your Retirement

More older Americans are approaching their golden years with heavy debt loads.

When Wanda Simpson reached retirement a couple of years ago, the Cleveland mom had an unwelcome companion: Around $25,000 in debt.

Despite a longtime job as a municipal administrator, Simpson wrestled with a combination of a second mortgage and credit-card bills that she racked up thanks to health problems and a generous tendency to help out family members.

“I was very worried, and there were a lot of sleepless nights,” remembers Simpson, 68. “I didn’t want to be a burden on my children, or pass away and leave a lot of debt behind.”

New data reveal that Wanda Simpson has company—and plenty of it.

Indeed, the percentage of older Americans carrying debt has increased markedly in the past couple of decades. Among families headed by those 55 or older, 65.4% are still carrying debt loads, according to the Washington, D.C.-based Employee Benefit Research Institute (EBRI). That is up more than 10 percentage points from 1992, when only 53.8% of such families grappled with debt.

“It’s a two-fold story of higher prevalence of debt, and an uptick in those with a very high level of debt,” says Craig Copeland, EBRI’s senior research associate. “Some people are in real trouble.”

To wit, 9.2% of families headed by older Americans are forking over at least 40% of their income to debt payments. That, too, is up, from 8.5% three years earlier.

The only bright spot in the data? The average debt balance of families headed by those over 55 has actually decreased since 2010, according to EBRI, from $80,564 to $73,211 in 2013.

Still sound high? It is especially so for those heading into reduced earning years, or retiring completely.

The primary culprit, according to Copeland: rising home prices and the longer-term mortgages that result, often leaving seniors with a monthly nut well into their golden years.

Seniors are even dealing with lingering student debt: 706,000 senior households grappled with a record $18.2 billion in student loans in 2013, according to the U.S. Government Accountability Office.

It’s not an easy subject to discuss, since older Americans may be ashamed that they are still dealing with debt after so many years in the workforce. They do not want to feel like a burden on their kids or grandkids, and so keep their financial struggles to themselves.

But financial experts stress that not all debt is automatically bad. A reasonable mortgage locked in at current low rates, in a home where you plan to stay for a long period, can be a very intelligent inflation hedge.

“I always suggest clients consolidate it in the form of good debt, like a mortgage on your primary residence,” says Stephen Doucette, a planner with Proctor Financial in Sherborn, Massachusetts. “You are borrowing against an appreciating asset, you don’t have to worry about inflation increasing the payment, and the interest is deductible.

As long as this debt is a small portion of your net worth, it is okay to play a little arbitrage, especially considering stock market risk, where a sudden decline could leave older investors very vulnerable.

“A retiree who has debt and a retirement account with equity exposure may not have the staying power he or she thinks. The debt is a fixed amount; the retirement account is variable,” says David Haraway, a planner with LPL Financial in Colorado Springs, Colo.

It is important not to halt 401(k) contributions, or drain all other sources of funds, just because you desire to be totally debt-free. Planner Scot Hansen of Shoreview, Minn. has witnessed clients do this, and ironically their good intentions end up damaging years of careful planning.

“But this distribution only created more income to be reported, and more taxes to be paid. Plus it depleted their retirement funding source.” he says.

Instead, take a measured approach. That’s what Wanda Simpson did, slowly chipping away at her debt with the help of the firm Consolidated Credit, while living off her Social Security and pension checks.

The result: She just sent off her final payment.

TIME Race

Minorities Face Significant Barriers to Home Ownership in the U.S., Report Says

'It's clear that the housing playing field remains strikingly unequal in this country'

Minorities continue to face significant barriers to home ownership in the U.S., according to a new report.

The report, released by online real estate database Zillow, shows a significant disparity in home ownership, property values and home loan approval rates between white and minority communities.

Read More: The Long, Tangled Roots of the Michael Brown Shooting

More than 25% of loan applications by black applicants in the U.S. are denied, compared with 10% of their white counterparts, the report found. Additionally, nearly three in four white Americans own their homes, compared to less than half of black and Hispanic Americans.

The value of homes owned by minorities also tended to be less stable. While prices in white neighborhoods have largely recovered from the economic downturn of 2008, home prices in predominantly black and Hispanic neighborhoods remain well below peak levels.

“It’s clear that the housing playing field remains strikingly unequal in this country,” Zillow Chief Economist Stan Humphries said in a statement.

MONEY mortgages

The Case for Refinancing Your Mortgage—Now

houses with the number 7.3 in them
Adam Voorhes If you're one of the 7.3 million homeowners who could benefit from a refinance, now might be your best chance for a while.

After falling through the first weeks of the new year, mortgage rates are starting to tick up.

At its meeting last week, the Fed did as expected and said it would hold interest rates steady in the near term. While the announcement did little to calm skittish markets, the news could spell opportunity for another group: homeowners who might benefit from a mortgage refinance.

As of the end of last week, the average rate for a 30-year fixed mortgage stood at 3.8%, down from 4.39% a year ago and close to the 19-month low set in mid-January. After falling through the first weeks of the new year, rates are starting to tick up. If you are one of the more than 7 million borrowers identified by mortgage analytics firm Black Knight Financial Services—folks paying over 4.5% and with good credit and at least 20% equity—now could be time to refinance.

It’s worth considering if you think you can shave off a half-point or more. Here’s how to get started:

Go local. Start by calling your existing lender, which already has all of your information and may be willing to cut you a deal on fees (expect to pay up to 2% of the principal). But don’t stop there: Compare that offer to same-day quotes from at least two other lenders, including a credit union, says Bankrate’s Greg McBride.

Think big picture. Even if you’ll be in the house long enough to break even on refinancing fees, don’t forget about the total cost of the loan. For instance, say you’re 10 years into a $200,000, 30-year mortgage at 5.7%. Refinancing into another 30-year loan at 3.8% will save you $390 per month, but you’ll essentially break even on the total cost—and you’ve added a another decade of payments. (Try an online refinancing calculator to see how much you might save.)

Shorten up. For the best deal over the long term, trim the length of your loan. The rates for a 15-year fixed dropped to 3.1% in mid-January, so refinancing that same 30-year mortgage into a 15-year fixed loan will have little effect on your monthly payments, but will save you a whopping $69,000 by the end of the term. If you can’t stretch that far, run the numbers for a 20- or 25-year fixed at the new rate. Alternately, refinance for 30 years and use your monthly savings to prepay your mortgage, suggests HSH’s Keith Gumbinger: “That could accomplish what you want, and if things get a little pinched you don’t have to send in the prepayment.”

Read more about mortgages:
How do I get the best rate on a mortgage?
What mortgage is right for me?

MONEY Financial Planning

The Most Important Money Mistakes to Avoid

iStock

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 Hedge fund managers take a big cut of returns

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.

 

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser