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Life Events, Mortgage

Should You Save for Retirement or Pay Down Your Mortgage?

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The biggest question I hear about mortgages is whether or not you should pay them off. There’s no simple answer for anyone’s individual situation, but it gets even more complicated when you factor retirement savings into the equation.

Does it make sense to pay down your mortgage or save for retirement? These are two of the biggest “purchases” of your life, so it’s important to understand this situation from all angles.

Where Are Your Priorities Right Now?

There are several things to keep in mind when thinking through this question. On one side, you have the financial impact of the decision, and on the other, how you feel about your situation emotionally. You also need to consider the practical matters at hand, and this is where we need to place the focus to get started.

According to a November 2015 report from the Mortgage Bankers Association, the average loan size for purchase applications is $301,200. In other words, the average homeowner chooses to take on over $300,000 in debt when they buy a house. As for the average retirement account balance? A 2015 report from Fidelity concluded that the average employee 401(k) balance was only $91,800.

The numbers speak for themselves. Buying a home has long been considered a rite of passage on your way to becoming a well-rounded, secure adult. Society’s unspoken rule is that you should own your home when you reach a certain age.

The concept of proactively saving for your own retirement, however, is rather new to our society. Not too long ago, there was no need for a 401(k) plan or any other kind of self-funded retirement account. Most workers were covered by a pension plan at work. (Today, only 11% of workers have access to a pension.)

[The CFPB Just Made Shopping for a Mortgage Easier]

For most people, taking on a mortgage is a given, which can subsequently cause a drive to aggressively pay it off. And you can’t blame someone for wanting to own a home outright. It’s a great feeling. But it’s still just a feeling, and doesn’t mean that you’ve “made it.” After all, a home is not going to guarantee you a secure retirement life, only a well-funded retirement account can do that.

Herein lies the problem. How are you supposed to balance paying down your mortgage with saving for retirement? Which one comes first?

Prioritizing Your Mortgage or Your Retirement Savings

As is typical with planning for anything, there is no one right way to do it because you don’t know what the future holds. What you can do is focus on a few major factors that can help you understand the pros and cons of each option.

Paying down a mortgage feels great. There’s nothing like watching the balance owed move closer to zero. Plus, the faster you pay it off, the less you pay in interest. What’s not to love about that? But the numbers may tell another story.

As a financial planner, I often discuss the opportunity cost of taking this path with my clients. What alternative choices are they not able to benefit from because of their decision to pay down the mortgage? What else could they have done with their money, and might that other choice have yielded a better financial result than aggressive mortgage payments? In this case, that other opportunity is investing for retirement.

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The Impact of Opportunity Costs

If you look at the current state of mortgage rates, it’s obvious that we’re in an extremely low rate environment. According to the same Mortgage Bankers Association report cited above, the average interest rate on a conventional 30-year fixed mortgage was 4.18% in late November 2015. With lower rates comes less expensive interest payments.

Let’s say you by a home and get the average 30-year fixed mortgage of $301,200 with an interest rate of 4.18%. Over the life of the loan, you’ll end up paying a total of $528,985 for your home. The monthly payment would be $1,469.41 and the total interest paid over the life of the loan would be $227,785.

If you decide to make larger monthly payments of $1,853.91, you’d knock off 10 years from the loan and pay only $143,737 in interest – a savings of $84,048 over the life of the loan.

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What About Investing?

Now it’s time to switch gears and look at the other opportunity that we chose to forgo: saving for retirement. Based on research done at NYU’s Stern Business School, the compound investment return of the S&P 500 Index from 1928 to 2014 was an annualized 9.6%. We’ll use this investment return rate in our example to illustrate the other opportunity.

Instead of making additional monthly payments toward the mortgage, what if you invested that extra money into a retirement account for 30 years? You would save $384.50 every month instead of paying extra on your mortgage (this number comes from subtracting $1,469.41, the normal monthly payment, from $1,853.91, which is the amount you paid in when making larger payments in the example above). Let’s say you put this money into a Roth 401(k) (the Roth is used here to avoid the income tax implications of investing pre-tax dollars into a retirement account – the monthly investment amount is after tax dollars just like the mortgage payment).

After 30 years of investing $384.50 every month into your Roth 401(k) with a compound return of 9.6% per year, your account balance would be $798,381.

By paying down your mortgage early, you saved $84,048 in interest payments on your loan. But if you paid your mortgage at the normal rate instead of paying extra, and allocated the extra funds to your investments, you would end up with nearly $800,000 in your account — which means you would save over $700,000 more by prioritizing saving for retirement. Plus, you may benefit from a little peace of mind knowing that you are contributing to a secure financial future.

[How to Have a Million Dollars in Retirement with a $50k Annual Salary]

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Going by Numbers, Saving for Retirement Should Be Your Priority

There are certainly emotional considerations to contemplate here, but the numbers don’t lie.

Based on today’s interest rate environment, and assuming you can invest future dollars at the historical return of the S&P 500 (you can’t actually invest directly in this index), the numbers say that saving for retirement will produce a better result than paying down your mortgage.

(Disclosure: this comparison does not take into account the potential tax deductions available with mortgage payments. However, we also didn’t take into account the increased return that an employer matching contribution would add to the retirement account either, which has a much bigger impact than the tax deduction.)

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Eric Roberge |

Eric Roberge is a writer at MagnifyMoney. You can email Eric at ericroberge@magnifymoney.com

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How to Host a Successful Garage Sale

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Whether you’re prepping for a move or finally cleaning out the basement, decluttering your home can bring you peace of mind — and extra cash. Hosting a garage sale is a great way to get rid of old or unused items. Here are a few tips to help you make your sale as profitable as possible.

When is the right time for a garage sale?

Garage sales go by many names — yard sale, moving sale, tag sale, estate sale or rummage sale — but some portion of the event will likely take place outside. If you’re hosting your sale to get rid of stuff before a move, you’ll likely be stuck to a certain date, but if you have some flexibility, consider mild seasons like spring or fall. No one likes rummaging through old items in the blazing August sun, even for good deals.

How to prepare for a yard sale

While the concept of a garage sale is fairly simple, it’s easy to mess up. Many people who host a sale see little success — often because they failed to prepare. Sure, you can just set your unwanted items out on the lawn and have passersby stop and quickly sift through everything. But when you put in a little work ahead of time, the success of your sale is much greater.

“The more preparation that you can do, the more you’ll probably make,” said Ava Seavey, New York-based garage sale expert and author of Ava’s Guide to Garage Sale Gold.

Schedule wisely. First, you’ll want to pick a day for your sale, ideally a Friday or Saturday.  Then you’ll want to take the time to sort through your belongings and carefully select the items you want to sell, choosing items that people will actually find appealing and will want to buy.

Be strategic about prices. Seavey advised that costume jewelry, furniture and collectibles have the potential to make sellers the most money. However, how you price the items is key to ensuring you will earn what these items are worth.

“A good percentage of people who go to garage sales will pay what you have written down,” Seavey said. While some people will negotiate, if your stuff is priced correctly, people will pay it, she said.

Get the word out. You will also want to focus on advertising your sale in your local newspaper and online using garage sale-specific websites and social media channels. Go ahead and describe the types of items you’ll have for sale to attract the right customers.

Be prepared. You’ll want to make sure you have all the supplies you need, including:

  1. Tables
  2. Tablecloths
  3. Pricing labels
  4. Money apron (to hold cash)
  5. Bags
  6. Paper/newspaper (to wrap fragile items)
  7. Signs (to advertise the sale throughout the neighborhood)
  8. Notebook/ledger (to keep track of items sold and money collected)

This may seem like a lot to do in order to sell a few necklaces, purses or electronics. But this preparation can make your sale more appealing and profitable. If having your own sale sounds too time consuming to prepare, you and a friend, family member or neighbor could have the sale together.

What to expect during your garage sale

On the day of the garage sale, you’ll get a variety of customers depending on what you have available for purchase. If you have advertised correctly and have the right things for sale, you could draw in a large crowd.

“I would have plenty of things for everyone. Those are the best sales, when you have a variety,” Seavey said.

Try to keep the sale going from the morning to the late afternoon. Having a sale that lasts a few hours may hinder your ability to make money because you are limiting how many people will be able to come. If your sale starts in the morning and goes until later in afternoon, you can maximize the profits from the sale because those who could not make it during the morning hours can shop in the afternoon before the sale ends.

“There is no magic time to end, but you will do most of your selling in the morning,” Seavey said. “I like to go as long as I can.”

With the money you make from your sale, you can add to or start an emergency fund, pay past-due bills, or even purchase updated items for your new home if you are moving.

What to do after the yard sale

A successful yard sale will leave a lot of money in your pocket and very few unsold items on your lawn. Consider storing your newly acquired cash in an online savings account that earns you interest. If you’re stuck with leftover items, you can always hold another sale, or you can donate them to a charity, church or secondhand store. You won’t make any money when you go this route, but there are benefits to donating.

“You have unloaded everything, you’ve made some money and you have a tax write-off,” Seavey said. “It’s a win-win-win for everybody.”

A garage sale can be the answer when you want to rid yourself of unwanted items — and even make a little money in the process.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Kristina Byas
Kristina Byas |

Kristina Byas is a writer at MagnifyMoney. You can email Kristina here

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What the End of HARP Means for Your Mortgage

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Home values have been on the mend since the financial meltdown of just a decade ago. This has been good news for people who have struggled with negative equity in their homes, meaning the value is lower than the amount they owe on their mortgage.

The percentage of “underwater” homes has dropped significantly, decreasing 16% year over year at the end of 2018 to comprise 4.1% of all mortgaged properties, real estate research firm CoreLogic found. But that means there are still homeowners who need assistance with recovering their equity.A popular government-sponsored refinancing program aimed at helping these homeowners has recently ended, and people looking for help getting above water may not be aware of the other options they have.

In this article, we highlight and explain what the closing of HARP means for homeowners and several available alternatives.

What is HARP?

The Home Affordable Refinance Program, known as HARP for short, is an initiative that helped underwater homeowners refinance their mortgage. The program was introduced in 2009 after the housing crisis.

HARP allowed eligible homeowners to refinance their mortgages to lower their mortgage interest rate or switch from an adjustable-rate to a fixed-rate mortgage even if they were underwater. Typically, lenders will not allow a borrower to refinance if the house is worth less than what is owed.

In order to qualify, homeowners needed to meet the following requirements:

  • No late mortgage payments over the last six months that were 30-plus days behind, and no more than one late payment over the last year.
  • The mortgage you’re attempting to refinance must be for your primary residence, a one-unit second home or a one- to four-unit investment property.
  • Your mortgage must be owned by Fannie Mae or Freddie Mac.
  • Your mortgage was originated on or before May 31, 2009.
  • Your loan-to-value ratio is more than 80%.

The program had been extended a few times, but the last HARP deadline was Dec. 31, 2018.

Fannie and Freddie’s HARP replacements

Government-sponsored enterprises Fannie Mae and Freddie Mac have refinance products in place that are meant to replace HARP.

Fannie Mae’s High Loan-to-Value Refinance Option

Beginning on Nov. 1, 2018, Fannie Mae has offered a high loan-to-value refinance option to borrowers with mortgages owned by the government-sponsored entity. The product is meant to make refinancing possible for borrowers who are maintaining on-time mortgage payments but have an LTV ratio that exceeds the amount allowed for standard refinance options.

Borrowers must benefit from the refinance through a reduction in their monthly principal and interest payment, a lower mortgage interest rate, shorter loan term or by switching to a fixed-rate mortgage. There is no maximum LTV ratio for fixed-rate mortgages; however, the maximum LTV for adjustable-rate mortgages is 105%.

The eligibility requirements include:

  • The loan being refinanced must be an existing Fannie Mae-owned mortgage.
  • The loan must have been originated on or after Oct. 1, 2017.
  • At least 15 months must pass between the loan origination of the existing mortgage and the refinanced mortgage.
  • Borrowers must be current on their mortgage, have no late payments over the last six months and only one 30-day delinquency over the last 12 months. Delinquencies longer than 30 days aren’t permitted.
  • The existing mortgage can’t be a Fannie Mae DU Refi Plus or Fannie Mae Refi Plus mortgage.

Freddie Mac’s Enhanced Relief Refinance Mortgage

Freddie Mac offers the Enhanced Relief Refinance mortgage to borrowers who are current on their mortgage but can’t qualify for a standard refinance because of a high LTV ratio. The mortgage being refinanced must meet the following requirements:

  • The mortgage must be owned or securitized by Freddie Mac.
  • The mortgage can’t have any 30-day delinquencies over the past six months and only one 30-day delinquency in the last year.
  • The closing date for the mortgage was on or after Oct. 1, 2017.
  • The mortgage can’t already be a Relief Refinance mortgage.
  • There should be at least 15 months between when the original loan was closed and the refinanced loan’s origination.
  • The loan can’t be subject to an outstanding repurchase request.
  • The maximum loan-to-value ratio for adjustable-rate mortgages is 105% and there’s no max for fixed-rate mortgages.

Borrower benefits include a lower interest rate, switching from an adjustable-rate to fixed-rate mortgage, shorter mortgage term or lower monthly principal and interest payment.

Alternatives to refinancing when you’re underwater

If refinancing your mortgage doesn’t sound like the best move for you, consider one of the following alternatives.

Mortgage modification

A mortgage modification is a way to change the original terms of your loan without going through the refinancing process. In some cases, you can work with your lender to switch from an adjustable-rate to a fixed-rate mortgage, extend your loan term, lower your interest rate or add past-due amounts to your unpaid principal balance.

Modifying a mortgage could be beneficial for homeowners facing hardship who aren’t eligible to refinance and are delinquent on their mortgage payments or expect they will eventually fall behind.

Mortgage recasting

If you have a lump sum of at least $5,000 in cash, you could potentially recast your mortgage. A mortgage recasting results in lower monthly mortgage payments. You pay a lump sum of cash to your lender to reduce your outstanding loan principal amount, then your loan is reamortized based on the lower remaining principal balance. Your interest rate and loan term stay the same.

This option makes sense if you’re expecting a bonus from your employer, a large income tax refund or some other financial windfall.

The bottom line

Although HARP has come to an end, there are still options for mortgage borrowers with Fannie- or Freddie-owned loans. In order to qualify for the enterprises’ refinancing programs, it’s helpful to maintain on-time payments even when your loan amount exceeds your home’s value.

If you don’t qualify, be sure to strategize on how best to attack your mortgage balance and rebuild equity. Consider making extra mortgage payments whenever possible by freeing up room in your budget, earning extra income or dedicating unexpected money to your mission.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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