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New Tax Deduction Cap Could Turn Big Refund Into Big Tax Bill

February 13, 2019 - 4:28pm

(TNS)—The big tax question of the year: Will you get a supersized refund or suddenly discover that you’re going to end up writing one monster check?

No one really knows for sure in light of sweeping changes that hit homeowners, two-paycheck couples and families who once had a string of itemized deductions but no longer can take some breaks under the Tax Cuts and Jobs Act of 2017.

Taxpayers are getting their first look at how the new tax overhaul hits their pocketbooks when they file their 2018 federal income tax returns. The devil involving those deductions, such as those for property taxes and state income taxes, is in the details.

If you think you’re getting the same tax refund as last year—or even bigger with the tax cuts—think again. It’s not that simple. Some are owing more money.

A Novi, Mich., homeowner told me he was shocked when he was smacked with having to write a big check to pay his tax bill after he completed his 2018 tax return. He owes more than $3,000 when typically he received roughly a $4,000 refund in the past.

The couple in their 50s both have jobs and receive W-2s to report their wages. They pay about $9,000 in state income taxes and another $10,000 or so for property taxes on their Novi condo. Their children are older and don’t qualify for any child tax credit.

The homeowner told me that he understood there was a $10,000 limit on how much one could deduct for property taxes on the federal return, after the major tax overhaul. What he didn’t know: The $10,000 cap includes much more than property taxes. The limit also impacts how much the couple can deduct when it came to what they paid for state income taxes.

Together, what would have been more than a $19,000 deduction was limited to $10,000.

“Your total deduction for state and local income, sales and property taxes is limited to a combined, total deduction of $10,000 ($5,000 if Married Filing Separate),” according to IRS Publication 5307, which outlines basic changes in the tax package. “Any state and local taxes you paid above this amount cannot be deducted.”

Will You Be Able to Deduct State Income Taxes?
Many homeowners who itemize need to dig a little deeper into what’s known as the new SALT tax cap—the state and local tax deduction.

The limit covers how much you can deduct when it comes to property taxes, state and local income taxes, and sales tax, even license plates on cars in some states, such as Michigan, says Leon LaBrecque, chief growth officer for Sequoia Financial Group in Troy, Mich.

“I’m a good example,” LaBrecque says. “I pay a lot of Michigan income taxes, plus property taxes on two houses, plus license plates.”

Add all those taxes up, including the real estate taxes paid on his cottage, and he’s well over the new $10,000 limit for deductions.

Where people can run up against this limit: a larger property tax bill; a higher-income household; double-income W-2; multiple homes, like a cottage, LaBrecque says.

For example, a Michigan couple making $150,000 in income would pay around $6,500 in Michigan state income taxes. A home with a value of $165,500 might involve property taxes of $2,500 or higher in Michigan. Then state license tabs on a couple of cars (listed on Schedule A for those who itemize as “personal property taxes”) could be $300 or $350. If the cars are newer and nicer, the cost of the license tabs is higher. LaBrecque says his license tabs cost $800. He has a 2016 Jeep Grand Cherokee, 2016 Ford F-150, a 2015 BMW 550 and a 2017 Ford Escape.

The IRS also notes that: “No deduction is allowed for foreign real property taxes. Property taxes associated with carrying on a trade or business are fully deductible.”

What Happens If You Have a Cottage?
We heard much about how some taxpayers would be hard hit by the cap in high-property tax states, such as New York, New Jersey and Connecticut, but residents elsewhere are getting hit too, for various reasons.

“The vast majority of my clients are getting clipped due to the SALT ceiling,” says George W. Smith, a certified public accountant with his own firm in Southfield, Mich.

The ones getting hit often have higher earnings and possibly a second home, such as a cottage or a vacation home, he says. One client has a vacation home on the Chesapeake Bay along the East Coast and will lose about $20,000 in state and local tax deductions. She is single and will pay about $4,800 in income taxes.

The impact on the bottom line of the tax return, though, depends on whether they might no longer need to itemize because they can take advantage of the new standard deduction of $12,000 for singles and $24,000 for married couples filing a joint return.

“Some are benefiting from that regardless of the SALT cap,” Smith says.

Why You Shouldn’t Bank on a Big Tax
For many people, it’s a real surprise to see how their tax returns are playing out this year. Just because you’re getting a tax cut under the new rules doesn’t mean you’re going to see a tax refund in the spring. Many people already saw much of their tax break via their paychecks in 2018 when the tax withholding tables were changed and allowed workers to see an immediate break in take-home pay.

Some got more money during 2018 than they should have under their tax situation, and they will have to pay that back once their taxes are prepared and filed by April 15.

“That’s going to be a bad surprise for a whole lot of people,” says Christine Ishman, president of Northern Financial Advisors in Bloomfield Hills, Mich.

Ishman, an enrolled agent who prepares tax returns, says about 75 percent of her clients are paying more than they’d expected this tax season for a variety of reasons. Some lost key tax deductions. For example, the miscellaneous deduction was eliminated and one can no longer deduct job hunting expenses, moving expenses related to a new job, unreimbursed employee costs, tax preparation fees and the like. The costs of such items could have been deducted once expenses exceeded 2 percent of your adjusted gross income.

Take the case of the Novi couple. Under the new tax rules, they will still itemize but they lost miscellaneous deductions, according to Ishman, who prepared their return.

Like other tax filers, they also lost four exemptions for themselves and two children in college—which were $4,050 each on their 2017 returns. Each personal exemption reduced gross income by $4,050 on 2017 returns. The exemption phased out for higher earners.

They also saw more take-home pay, she says, and will now be giving some of that money back.

A variety of moving parts, of course, come into play when calculating your actual tax bill. Since the old tax rules no longer apply, your tax bill—and your tax refund—may not look anything close to what it did last year.

Most households will see some tax cuts, thanks to a lower tax rates and a higher standard deduction, which is nearly double what was used for 2017 tax returns. Nearly 65 percent of tax filers will see a tax cut overall and pay less for their 2018 individual income taxes than in the past under the old rules. The average tax savings would be about $2,180 for that group, according to the nonpartisan Tax Policy Center in Washington, D.C. About 6 percent are expected to pay more. The average tax increase would be $2,760. Twenty-nine percent would see no change.

Tackle your tax return as early as you can this year in order to claim any larger-than-expected refund. If you owe money, it’s better to know earlier in the game than at the last minute on April 15.

©2019 Detroit Free Press
Visit Detroit Free Press at www.freep.com
Distributed by Tribune Content Agency, LLC

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Categories: Real Estate

Should Smart-Home Owners Chill When It Comes to 5G?

February 7, 2019 - 4:04pm

Changes in 5G technology might be impacting consumers and homeowners in the coming years. According to the Federal Communications Commission (FCC), the U.S. is moving swiftly to a next generation of wireless connectivity. These new networks and technologies will enable faster speeds and low-latency wireless broadband services, cultivating the Internet of Things (IOT) and innovations not yet imagined, the agency reports.

Verizon, one of the recognized global leaders in facilitating 5G technology, tells consumers that to understand 5G, it’s helpful to understand what came before it:

  • Broadly, the first generation of mobile technology, 1G, was about voice. The ability to use a phone in a car, or anywhere else, really took root here.
  • The advent of 2G introduced a short-messaging layer—pieces of which can still be seen in today’s texting features.
  • The move to 3G provided the essential network speeds for smartphones.
  • And 4G, with its blazing data-transfer rates, gave rise to many of the connected devices and services that we rely on and enjoy today.

Under FCC Chairman Ajit Pai, the agency is pursuing a comprehensive strategy to facilitate America’s superiority in 5G technology (the 5G FAST Plan). The chairman’s strategy includes three key components:

  • Pushing more spectrum into the marketplace
  • Updating infrastructure policy
  • Modernizing outdated regulations

So how soon is this 5G tech going to hit home?

CNET.com posits that with all those connected locks, light switches and other smart household products fragmented both by software platforms and wireless communication standards, 5G seems like it has the potential to alleviate some of the confusion around smart-home connectivity—but their sources allude that power consumption challenges will limit various consumer and electronic devices accessing 5G tech to primarily those wired to robust power sources, like a home electrical system.

So while 5G wouldn’t be a good fit for battery-powered smart locks due to the power draw, beyond potentially streamlining at least some connectivity issues, some smart-home device makers do see 5G enabling improved performance. Stay tuned for more on the subject of 5G and its consumer/homeowner impact in future reports.

John Voket is a contributing editor to RISMedia.

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Categories: Real Estate

When to File 2018 Taxes and How to Dig Through New Rules

February 6, 2019 - 9:18pm

(TNS)—Sitting down to do your taxes in the next few weeks—or talking with your tax preparer—will involve tackling the most sweeping changes in the federal income tax rules in more than 30 years.

Tax filers need to keep in mind that more than 600 changes took place under the Tax Cuts and Jobs Act, which was passed by Congress in late 2017.

Will things end up being simpler? Maybe, if you’re able to tap into a substantially expanded standard deduction and you no longer must string together all sorts of receipts and paperwork to itemize deductions—or maybe, if your upper-income household can now skip the highly complex and much-dreaded alternative minimum tax.

Tax filers need to realize, though, that it won’t be business as usual when it comes to filing their 2018 tax returns. Far from it.

“It’ll be a little bit of a surprise and a learning process as they file their first tax return under the new tax rules,” says Joseph Rosenberg, senior research associate at the nonpartisan Tax Policy Center in Washington, D.C.

Tax filers will be asking more questions, but they might have a harder time getting answers from the IRS, given all the challenges relating to the shutdown and the new tax rules.

As a result, it makes even more sense to start early, and not wait until days before the April 15 tax deadline.

Here are key questions to consider as you try to get the biggest possible refund—and hold down your bill—on the 2018 federal income tax returns:

Will the same 1040 work for everyone?

All individual taxpayers will now use the same 1040 simple form. It replaces the old 1040, the 1040A and the 1040EZ, according to Mark Luscombe, principal analyst for Tax & Accounting at Wolters Kluwer in Riverwoods, Ill.

But it doesn’t end there. Supplemental schedules would be used by many taxpayers, such as if you itemize deductions or qualify for a variety of tax credits other than the basic Child Tax Credit. 

Will I or won’t I need to itemize?

Logical question, given that many of us have heard about a much higher standard deduction under the new tax rules. But there’s no simple answer.

“You still want to run your numbers both ways,” says Jackie Perlman, a tax research analyst at H&R Block’s Tax Institute.

Roughly 10 percent of tax filers will itemize deductions, such as the interest paid on their mortgages or what they paid in property taxes, on their 2018 federal income tax returns, according to estimates by the nonpartisan Tax Policy Center. That’s down from about 30 percent in previous years.

Families who own a home, in particular, will want to review whether they’d still itemize to lower their tax bill. You’d need deductions to exceed the new higher, standard deduction, which is nearly double from a year ago. And you’ll face new limits relating to the deduction you can take relating to state and local taxes, such as for what you paid for property taxes and state income taxes.

Married couples filing jointly are looking at a standard deduction of $24,000 on their 2018 federal income tax returns—that’s up $11,300 from the old amount on the 2017 tax returns.

Single filers are looking at a standard deduction of $12,000—up by $5,650 from the old amount on 2017 returns.

But there also is an additional standard deduction for those who are 65 or older, or blind.

A married couple filing jointly, for example, might have a standard deduction as high as $26,600 if both meet the age requirements or both are legally blind.

If married filing jointly and you or your spouse are 65 or older, you may increase your standard deduction by $1,300. If both of you are 65 or older, the additional standard deduction goes up to $2,600.

If you file single or head of household and are 65 or older, you may increase your standard deduction by $1,600.

If legally blind, the standard deduction would go up by $1,600 if single or filing head of household. The extra deduction goes to $2,600 if both you and your spouse are legally blind.

If you are married filing jointly and you or your spouse is blind, you may increase your standard deduction by $1,300.

For someone who is 65 or older and blind, both additional deductions would apply.

Important point: If you are married filing separately and your spouse itemizes deductions, you may not claim the standard deduction. If one spouse itemizes deductions, the other spouse must itemize.

Will I get any tax break for having children?

Most parents across the country with young children or teens will be able to tap into the child tax credit on their 2018 federal income tax returns—even if they couldn’t use that credit in the past.

“The child tax credit got supersized,” says Mark Steber, chief tax officer for Jackson Hewitt in Sarasota, Fla.

To claim the credit, the child must be 16 years old or younger, as of Dec. 31, and claimed as a dependent on your tax return. The child also must have a valid Social Security number.

The maximum credit has gone up to $2,000 from $1,000.

Another plus: Now, up to $1,400 per child is available as a refundable credit for those with earned income of more than $2,500. As a result, some families can get refunds even if their taxes are zero.

Couldn’t take the credit last year? OK, but new rules apply and more people will be able to take the credit now. The income threshold jumps all the way to $400,000 for married filing jointly and $200,000 for others before any phaseout. Under the old tax law, the adjusted income limits were far lower: $75,000 for singles; $110,000 if married filing jointly.

The supersize credit, though, will be needed to offset the loss of personal exemptions for families with children.

“We lost the $4,050 dependent exemption,” Steber says.

In the past, taxpayers could take an exemption deduction for themselves, their spouse and each dependent they could claim. Each personal exemption reduced gross income by $4,050 on 2017 returns. The exemption phased out for higher earners.

A new credit, often called the Credit for Other Dependents, offers $500 for each qualifying child or other dependent relatives, such as older relatives in your household, if they do not qualify for the child tax credit.

For this credit for other dependents, the dependent does not need a valid Social Security number. An Individual Taxpayer Identification Number or Adoption Taxpayer Identification Number would work.

I’m confused about my property taxes. Am I losing that deduction?

No, but some will face new limits. If you live in a high-tax state or possibly own both a home and a cottage at the lake, you’re going to want to pay extra attention to one major change on 2018 returns.

We’re looking at a new limit on how much you can deduct when it comes to what you paid in 2018 for state and local taxes. For 2018 through 2025, the deduction is limited to $10,000 (or $5,000 if married filing separately) for individuals who paid state and local real estate taxes, personal property taxes and income taxes.

“If they haven’t been keeping up with the news, they might be in for a surprise,” Perlman says.

Middle-income and higher-income families who live in states such as California, New York, New Jersey and Illinois may be particularly vulnerable. Generally, states with both high average incomes and higher-than-average state tax burdens would be impacted.

But remember, if you paid $12,000 in state and local taxes, you’re still looking at a $10,000 deduction—if you itemize. So you don’t want to entirely write off the possibility of itemizing deductions.

Like a host of other changes in the Tax Cuts and Jobs Act, how much the $10,000 cap will influence your tax bill remains to be seen in the year ahead.

“It really depends on your personal individual circumstances,” says Jennifer Lowe, senior director of Research and Learning at Wolters Kluwer.

Does the dreaded Alternative Minimum Tax go away?

The AMT isn’t dead, but it’s not the monster threat that it was for so many well-off taxpayers. Many will no longer be subject to the AMT in 2018 and in future years.

The Tax Cuts and Jobs Act raises the income cap so that fewer people will be impacted. The AMT taxable income exempted from AMT goes up to $109,400 for married filing jointly from $84,500. For single taxpayers, the income exempted goes up to $70,300 from $54,300.

An even more important change was that the new tax act significantly raised the income level at which the AMT exemption begins to phase out. Now the exemption from the AMT begins to phase out at $1 million of AMT taxable income for joint filers, compared with $160,900 on 2017 returns. The phaseout is $500,000 now for single filers.

The AMT was created in 1969 to ensure that high-income taxpayers paid a minimum amount of tax and didn’t benefit too heavily from deductions. But over time, more households were caught in the tax mess.

Now, the AMT will impact about 0.4 percent of households with incomes between $200,000 and $500,000 on 2018 returns—down from 27.2 percent on 2017 returns, according to the Urban-Brookings Tax Policy Center’s estimates.

For those with household incomes of $500,000 to $1 million, the percentage hit with the AMT drops to 2.2 percent on 2018 returns, down from nearly 62 percent on 2017 returns.

Will my refund will be smaller? Will I owe money?

Hard to say.

“Whether you owe taxes or not is really going to depend on your individual situation,” says Lowe at Wolters Kluwer.

One word of warning: The tax withholding tables changed in early 2018 to reflect lower tax rates and enable people to take home more money in their paychecks. But it’s possible that many people still did not have enough in taxes withheld—even with the new lower tax rates—based on their individual tax situations.

The IRS has announced that it is waiving the estimated tax penalty for many taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year.

“We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld,” IRS Commissioner Chuck Rettig says in a statement.

The waiver will be integrated into the tax software that many use to prepare taxes.

Tax experts note that there are so many moving parts when it comes to the tax changes that all sorts of situations will come into play. How many children age 16 and under do you have? Do you live in a high-cost tax state? Did your personal life change in 2018, perhaps by getting married? Or getting divorced?

So, yes, it’s possible that many people may owe more money or receive far less than what has been typical. But that just gives us another reason to do our taxes earlier this year—just so we know the score as early as we can.

What’s missing? Say goodbye to exemptions.

Before, you could claim an exemption for yourself, your spouse and dependents. An exemption in 2017 was worth $4,050, which reduced your taxable income. The IRS previously said the exemption would increase to $4,150 for 2018 before the new tax law changes were passed. Now exemptions have been eliminated.

For some, this may be negated by the increased standard deduction. For instance, if you’re married filing jointly and you have only one child, the exemptions added up to $12,450. But the new, higher standard deduction for that same family is $24,000, which more than covers the loss of the exemptions.

That’s not the case with larger families, though, says Kathy Pickering, executive director of The Tax Institute at H&R Block. “If you have a family of six…the increase in the standard deduction by itself won’t offset the elimination of exemptions,” she says.

Get your employer to pay business expenses.

If you have unreimbursed business expenses from last year, you won’t be able to deduct those anymore. Depending on your job, this could be a big loss. This can include travel expenses from business travel your employer didn’t pay for, scrubs or uniforms you paid out-of-pocket; or continuing education classes you took for your profession.

Don’t throw away those receipts, though. Some states such as Minnesota and Pennsylvania may allow you to claim some of those expenses on their state income tax returns, Pickering says.

Teachers also can claim a special educator expense deduction up to $250, or $500 for married teachers filing jointly, that wasn’t eliminated by the tax law, says Mark Jaeger, director of Tax Development at TaxAct.

Planning to move? The IRS won’t be giving you any breaks.

Starting this year, there is no longer a moving expenses deduction.

“That’s been a pretty important deduction to be able to claim, especially if you’re moving for a new job across the country,” Pickering says.

There is one exception: Taxpayers who are active-duty military and moving on military orders to a permanent location can deduct moving expenses, such as travel and lodging, transportation of belongings and shipping cars and pets.

However, under the new tax law, you won’t be taxed on moving expenses your employer reimburses.

“People had been surprised that those expenses were considered income,” Pickering says.

Tornado or break-in? You probably can’t deduct those losses.

Before, if your insurance didn’t cover the total cost to repair damage or replace losses to your home, possessions or vehicle from a weather event, theft or other catastrophe, then you could deduct the uncovered portions from your federal taxes.

“Now that’s mostly gone,” Jaeger says. “You can only can claim if your area is declared a disaster area by the president.”

Guess what else has been eliminated?

Job search expenses: You can no longer deduct for expenses related to finding a new job. Before, those expenses could include travel costs incurred for a job interview, fees for resume and cover-letter services or fees for job-placement services—”even if you didn’t get the job,” says Lisa Greene-Lewis, a certified public accountant and tax expert at TurboTax.

Tax preparation fees: You can’t write off any costs from getting help with your taxes from 2018 through 2025 under the new tax law changes. There’s one exclusion: Self-employed workers can still deduct these services as a business expense.

Some donations: If you’re a college hoops or football fan and a generous school donor, you won’t get a popular tax break anymore, says Jaeger. Before, you could write off 80 percent of a charitable donation to your school that ultimately helped you reserve better stadium or arena seats. Now that’s gone. However, other contributions to your alma mater remain deductible.

©2019 Detroit Free Press
Visit the Detroit Free Press at www.freep.com

Distributed by Tribune Content Agency, LLC

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Categories: Real Estate

‘The Bottom Is Here’: Surprise Drop in Mortgage Rates Opens Home-Buying Affordability Window

February 5, 2019 - 4:07pm

(TNS)—Swings in mortgage rates can sometimes make or break your home-buying prospects. When rates rise, it can squeeze your house budget to its limit and force you to reevaluate your plans. And when rates fall, you’re in a better position to qualify for loan amount that gets you the dream house.

An unexpected drop in mortgage rates in late 2018 has galvanized some homebuyers into action ahead of the busy spring sales season, spurring an early rush of mortgage applications. The average 30-year fixed mortgage rate was expected to hover above 5 percent in 2019, but instead fell to nine-month lows around 4.59 percent, according to a Bankrate.com survey of the nation’s largest mortgage lenders.

What’s even better for homebuyers is that revised forecasts call for rates to stay firmly below 5 percent over the next three years. For homebuyers, that’s a prime opportunity to snag a more affordable home loan, especially as price growth cools in some markets, says Joel Kan, associate vice president for Industry Surveys and Forecasts with the Mortgage Bankers Association.

The MBA’s January mortgage rate forecast revised the 30-year fixed mortgage rate down from 5.1 percent to an average of 4.8 percent in 2019—the same average for all of last year. The average rate is expected to stay below 5 percent through 2021, according to the MBA’s forecast.

‘The Bottom Is Here’
Many large housing markets are feeling a chill as price growth slows dramatically and homes linger on the market longer, says Adam Smith, president and founder of the Colorado Real Estate Finance Group in Greenwood Village, Colo.

For example, U.S. home-price growth is expected to slow to 4.8 percent from Nov. 2018 to Nov. 2019, compared to the 5.1 percent growth from Nov. 2017 to Nov. 2018, according to CoreLogic’s Home Price Index report.

Potential homebuyers who are crossing their fingers and waiting for home prices to fall further may miss the affordability boat if mortgage rates creep up again.

“I don’t think we’re going to see a bottom like this where interest rates and home prices will be lower than they are today,” Smith says. “Waiting a year (to buy a home) could be a six-figure financial decision in some major metro markets.”

A severe shortage in both new construction and existing housing stock means homebuyers won’t see softer home prices in the foreseeable future, Smith adds.

“We’re not in a housing bubble, and we have a legit supply-and-demand problem on our hands for years,” Smith says.

How Lower Rates Impact Your Monthly Payments
Using a mortgage calculator, you can run the numbers to see how today’s lower rates impact your monthly mortgage payment. Say you’re looking to buy a $300,000 home with a 30-year fixed mortgage at 4.5 percent and 10 percent down. Your monthly payment (before taxes and insurance) is roughly $1,368.

If you wait to buy a home and wind up with a 5 percent interest rate, you’ll pay $81 more per month ($1,449). While that doesn’t seem like much, the interest you’ll pay over the life of the loan adds up considerably. At 4.5 percent, you’ll pay about $247,220 in interest over the life of the loan compared to $279,767 with an interest rate of 5 percent—a savings of nearly $33,000 at the lower rate.

Make Lower Interest Rates Work for You
The decision to buy a home doesn’t hinge on finances alone, of course. Your ability to buy may depend on selling your current home, finding something suitable in your price range, or a time-sensitive job move. You may not have the luxury of a wait-and-see approach to see if home prices or interest rates fall further, Kan says.

“It’s true that more home sellers tend to list their homes in the spring,” Kan says, “but savvy buyers are realizing that stepping up their timeline while rates are still low could save (them money) when shopping for a mortgage.”

Most lenders offer a mortgage rate lock, allowing a borrower to lock in today’s interest rate for a limited time, up to 60 days in most cases. Some lenders may charge a nominal fee or offer a rate lock for free. Either way, you gain peace of mind that your interest payments won’t go up even if interest rates climb before closing day. Some lenders offer a float-down, too. They’ll lock your rate and even reduce it if rates fall more before your loan is funded.

Finally, don’t forget to shop with several mortgage lenders and a mortgage broker to compare interest rates, fees, loan types and terms. Comparing loan estimates side-by-side will help you narrow your choices to find the right loan for your needs.

©2019 Bankrate.com
Distributed by Tribune Content Agency, LLC

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Categories: Real Estate

‘Bucket’ Approach to Spending Reduces Stress of Retirement

January 16, 2019 - 4:13pm

(TNS)—Anyone retiring in 2019 could understandably be feeling a little skittish.

There’s retirement research showing market declines in the first few years can devastate a portfolio’s chances of providing enough income for life, and recent volatility after a nearly decade-long bull market is worrisome.

Interest rates moving higher could be a good sign, in theory, for someone hoping to build ladders of CDs, for example. On the other hand, if it also ushers in an era of rising inflation, that’s troubling, too. A prolonged government shutdown could have even more of an impact on the economy.

If delaying is no longer an option, either because of health, the job market or simply your own conviction, consider building in a few contingency plans. Several financial advisers contacted for this article say they are carving out cash buckets for retirees’ living expenses. Some of them take spending money directly from the cash bucket, replenishing it with stock gains periodically, while others keep the cash as a reserve to draw from during market downturns.

Either way, they say the cash acts as a volatility buffer, allowing clients to refrain from panic selling into a market decline.

“Creating a bucket strategy can help clients compartmentalize assets designed for certain purposes or periods of time,” says Ashley Folkes, a financial planner in Scottsdale, Ariz. “Having safe money to draw down from for the first few years alleviates some of the stress from the buckets (that are invested in stocks).”

Consider a couple retiring this year at precisely their full retirement ages, as defined by the Social Security Administration. The 66-year-olds will get a combined $3,000 a month in Social Security benefits and they have retirement accounts worth $500,000. Suppose the couple wants to withdraw $21,853 this year from savings, which is the spending rate recommended by BlackRock’s LifePath Spending Tool. Using a bucket strategy, the couple would put $65,559 into the cash bucket while investing the remaining $434,441 in a portfolio of 60 percent stocks and 40 percent bonds.

So, the couple will have about $260,665 invested in the stock market, $173,776 in bonds and the $65,559 in cash. Without the cash reserve, a 60/40 stock/bond allocation would mean the couple had $300,000 in stocks and $200,000 in bonds.

Clearly, the cash bucket creates a more conservative portfolio overall, which is important for retirees to understand as they try to find the appropriate amount of risk to cover their expenses and inflation.

Now, for the cost side of the equation.

Anyone about to retire should know precisely how much they are spending, though advisers says this is sometimes a big area for miscalculations. Particularly in the first few years, travel and hobby expenses can really add up, notes Mike Alves, a financial planner in Pasadena, Calif.

“Every client is different,” he says.

Rather than building in an unsustainable long-term withdrawal rate to accommodate a few trips in the early years, he carves out another bucket for big-ticket items. Clients see that bucket and know that when it’s gone, it’s gone, and they are left with their long-term withdrawal rate that pays the essentials, he says.

Janet Kidd Stewart writes “The Journey” for Tribune Content Agency. Share your journey to or through retirement or pose a question at journey@janetkiddstewart.com.

©2019 Tribune Content Agency
Distributed by Tribune Content Agency, LLC

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Categories: Real Estate

Government Shutdown: Resources for Federal Workers Who Can’t Make Mortgage or Rent

January 13, 2019 - 1:02pm

(TNS)—As the government shutdown grinds into its third week, more than 800,000 federal employees and 4.1 million federal contractors are caught in the crosshairs. Federal workers will go without paychecks beginning January 11.

Some of these unpaid employees are nervous about their finances, particularly being able to make their monthly rent or mortgage payment on time. That’s not surprising considering a recent Bankrate.com survey found that 23 percent of Americans have no emergency savings in the bank.

Before we cover what specific lenders are doing for these federal employees, here’s some advice for anyone who is having trouble paying their basic bills.

Steps to Take If You’re at Risk of Falling Behind on Mortgage or Rent
If you don’t have any emergency savings or enough of a cushion to get by, here are other options to consider to keep the roof over your head:

Talk to your landlord or lender ASAP. Don’t wait until you’re behind on payments. Lenders may work with you to waive late fees, set up a repayment plan or offer loan forbearance. The key is to explain the situation, says Jeff Cronrod, a founder and board member of the American Apartment Owners Association, one of the nation’s largest residential landlord associations in the U.S. representing 100,000 property owners.

“Not all landlords are rich; they rely on those rent payments to cover their mortgages and property costs,” Cronrod says. “They understand this situation isn’t the tenants’ fault.”

Cut all unnecessary spending and talk to your creditors. Account for every dollar going out. Look at canceling subscription services, recurring home maintenance services and vacation travel—at least until the shutdown (or your own cash crunch) is over. Learn about other ways to cut back on spending and how to create a budget.

Additionally, monitor account balances and, if necessary, pay only the minimum on credit balances until your income is restored, says Mark Hamrick, Bankrate.com senior economic analyst. The Office of Personnel Management posted sample letters on its website that impacted employees can use to ask creditors for leniency on bill deadlines.

“Call and speak with creditors, such as auto loan providers or utilities, to see if they have flexibility on payments for temporary hardship cases,” Hamrick says. “While they will not likely forgive the debt, some creditors might be willing to allow a delay in payment.”

You’ll still owe the money, but it might not be owed immediately—and that can improve near-term cash flow to pay for immediate basic needs, such as rent or mortgage, Hamrick adds.

Explore short-term, low-interest direct deposit loans. Some institutions are offering “furlough” loans for clients who have their paychecks deposited directly into a checking or savings account. These loans don’t require credit checks and are often for a limited amount at a low interest rate. Contact your bank or credit union directly to inquire whether this is an option.

Tap an open home equity line of credit, or HELOC. If you already have a HELOC and are still in the draw period, you could pull out cash from your available line to make your mortgage payment. The average interest rate for a HELOC is 6.52 percent and 5.88 percent for a home equity loan, according to Bankrate.com data. That’s much lower than the average interest rate on credit cards, at 17 percent or more.

Be cautious about using credit cards or borrowing from retirement and 401(k) accounts. If you’ve exhausted all other options, paying for your rent, mortgage or other bills with a credit card can get you by if it’s an accepted form of payment; however, you don’t want to rely too heavily on credit cards because you’ll pay much higher interest rates than other forms of borrowing, making credit cards harder to pay off as interest piles on.

You may need to turn to your long-term savings and investments for emergency cash; however, you should do so with extreme care. Roth IRA holders may withdraw their own contributions—not earnings—without tax or penalty, but traditional IRA holders will pay income taxes and a 10 percent penalty on the taxable amount if you’re under age 59. The IRS reports that 401(k) holders can borrow up to half of their account balance (a maximum of $50,000) tax-free, but funds must be repaid within five years in most cases. The catch is that you have to stay with your current employer for the duration. If you lose your job, you’ll have 30-60 days to repay the loan or face penalties.

Since these options can severely disrupt your retirement plans, consider them as a last resort. Before pulling funds from any long-term investment, read the fine print and consult your tax adviser.

Mortgage Lenders and Financial Institutions Offer Relief
Some of the nation’s largest mortgage lenders and credit unions are offering assistance programs to clients impacted by the shutdown. Here’s a look at some of them:

  • Fed Choice Federal Credit Union lists several relief options for mortgage and banking clients online, including short-term, low-interest furlough loans and mortgage refinancing options. Visit the credit union’s website for more information.
  • USAA is offering a low-interest, direct deposit loan to members who are active duty Coast Guard and National Oceanic Atmospheric Administration, or NOAA, employees only. Call (800) 531-8722 for assistance.
  • Navy Federal Credit Union is offering a zero-percent APR loan up to $6,000 during the government shutdown. The assistance is open to federal government employees and active duty members of the Coast Guard whose pay has been disrupted by the shutdown, and have an established direct deposit account. You can register on Navy Federal’s website, in branches or by phone at (888) 842-6328. Members impacted by the shutdown who don’t meet the eligibility requirements should visit a branch or call to discuss their situation.
  • Bank of America advises its mortgage clients to call its assistance line at (844) 219-0690 or visit one of its branches to inquire about the Client Assistance Program, says spokesman Lawrence Grayson. “We’re closely monitoring the situation and will work with clients on a case-by-case basis,” Grayson says. “Relief options may include late fee refunds or waivers, repayment plans or loan modifications.”
  • Quicken Loans is waiving all late fees for clients who may miss a mortgage payment due to the shutdown. For help call (800) 508-0944 or email Help@QuickenLoans.com. Here’s part of their emailed statement: “During the government shutdown, just like every day, we are fully prepared to accommodate each clients’ unique situation—especially those that may be dealing with any financial hardship—to help them through a period of uncertainty.”
  • S. Bank says it will assist customers who may be eligible for mortgage relief programs, including loan forbearance and deferred first payment dates for new mortgages. Payment plans may also be available for those who qualify, says spokeswoman Cheryl Leamon. For more information, call the U.S. Bank mortgage customer service line at (800) 365-7772.
  • Wells Fargo is offering forbearance or other payment assistance programs to its mortgage clients on a case-by-case basis. Call (888) 818-9147 or visit Wells Fargo’s website for more details.

If your loan servicer isn’t on this list, call your lender directly to find out what assistance options are available. Your current loan servicer may not be the lender that closed your loan; home loans are often resold on the secondary mortgage market to other companies after closing. Check your most recent mortgage statement to find the name and contact information of your loan servicer. 

©2018 Bankrate.com
Distributed by Tribune Content Agency, LLC

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Categories: Real Estate

3 Reasons Americans Count on Their Homes After Retirement

December 27, 2018 - 4:00pm

(TNS)—Retirees who own their homes outright are often at an advantage over their renting—and retired—counterparts. There are two reasons for this: their housing costs are generally lower, and they have access to safety-net cash in the form of home equity.

However, all homeownership is not created equal, explains Russ Thornton, financial advisor at Wealth Care for Women in Atlanta. For example, if you move often, owning a home outright by age 62 can be challenging. For most people, a 30-year mortgage is the norm. If you plan to retire by 65, then you would have to buy a home by 35 and stay in it to retire mortgage-free.

“Those who keep their homes for years and years and years tend to grow equity, which can be a wealth-builder,” says Thornton. “If there’s a reasonably high likelihood that you’re going to stay in the same home for 10 years or more, then you should probably buy. If you move every few years into more expensive houses, then you might not get the same benefits from homeownership as those who stay in one place.”

Devising a long-term plan, including what homeownership looks like in retirement, is important, Thornton says. Since the big goal for retirement is to eliminate as many expenses as possible, erasing a monthly housing payment is optimal. In essence, renters who plan on staying in the same general area for years to come should consider buying.

  1. They can say goodbye to mortgage payments.
    The twin bridesmaids of finances are income and expenses. When people retire, the money coming in usually shrinks, which means so should the money going out. A mortgage payment is one expense soon-to-be retirees should try to retire before they do.

“If you can be mortgage-free by the time you reach retirement, you’ll be in a good position. Retirees need to reduce their cost of living and owning a home is a good way to do that,” Thornton says.

Mortgage-free retirees can save hundreds or thousands of dollars each month. Even with property insurance, which costs an average of $93 per month, and taxes, the cost of owning a home is often less than renting.

Not only can retirees save on their housing costs; they can also make money on their homes. Retirees who travel can earn money while they’re on vacation through sites like Airbnb. Another option to get extra cash flow is to rent a room, Thornton says.

Downsizing can also save you money. Going from a large family home to a cozy condo or smaller house can reduce utility costs as well as allow you to cash out some equity in your home to fatten your nest egg. For people not ready to sell, there are other options that allow you to tap the equity while keeping the house.

  1. They can access home equity, if needed.
    With working years behind you, having a backup generator of cash is a good thing. There are several ways homeowners can tap the equity in their home without putting up a for-sale sign; two of the most common ways are a cash-out refinance and a home equity line of credit, or HELOC.

Equity-rich homeowners who want to lower their mortgage interest rate might consider a cash-out refinance. This increasingly popular option hit peak numbers in the second quarter of this year, reaching $16 billion of equity cashed out, the highest since 2008, according to a report by Freddie Mac.

A cash-out refinance is almost like selling your house to yourself. The bank would cut you a check for the equity, which is the difference between what you owe on the house and the market value. If your home is worth $200,000 and you owe $100,000, then you have $100,000 of equity in the home.

Banks usually limit the amount you get to 80 percent of the total equity. That means with $100,000 in equity, the bank might give you $80,000. The amount you qualify for is usually based on income, credit score and other determining factors.

Now comes the tricky part: When you do a cash-out refinance, you’ll get a new mortgage. If your interest rate is high because of poor credit or market conditions and you think you have a chance of getting a lower interest rate with a new mortgage, then a cash-out refinance might be an appealing way to access your equity; however, if your mortgage interest rate increases with a new mortgage, then you should consider other options, such as a HELOC.

Something else to keep in mind is the fact that a new mortgage usually means going back to square one if you choose a longer term. If your house is a few years away from being paid off, restarting the clock is probably not a good financial move. You’ll end up paying years more in interest and increasing your debt burden. 

  1. Even with a mortgage, they have liquidity options.
    For people who want to keep their homes and existing mortgages while tapping their home equity, one alternative is a HELOC.

HELOC lenders use the equity in your home as collateral to extend lines of credit over a fixed amount of time. Like a cash-out refinance, lenders typically cap the credit amount at 80 percent of the total equity. Some places, like Navy Federal Credit Union, go up to 95 percent of the total equity.

The benefits of HELOCs are that you only pay on what you use and the interest is tax-deductible if you use it to repair or upgrade your home. For retirees who want to retrofit their homes to make life easier, such as installing stair lifts, grab bars and handrails, a HELOC could be a good way to fund those upgrades and get a tax break.

Before you decide on a lender, make sure you understand the terms of the HELOC and any associated fees, says Johnna Camarillo, assistant vice president of Equity Processing and Closing at Navy Federal Credit Union.

Some lenders might charge a service fee or a fee if you have a zero balance. Likewise, some lenders require a balloon payment at the end of the loan, which could put some borrowers in hot water.

Balloon payments are typically large payments owed at the end of a loan. If a borrower hasn’t sufficiently prepared for that payment, then the loan could go into default and you could risk losing your home.

“Before you get a HELOC, ask yourself: ‘Can I afford the payments if I max this thing out?’ Every person is different, so it’s important to look at your budget and not overspend,” Camarillo warns.

Retirees who own their home are going to qualify for a HELOC easier than someone who holds a mortgage, which is beneficial if emergencies come up and you need to borrow a chunk of cash. HELOCs normally have lower interest rates than credit cards or personal loans, making them an attractive option for homeowners.

It’s important to remember that once you use that equity, it will likely take years and even decades to rebuild it.

“Home equity is like a bar of soap—the more you handle it the smaller it gets,” Thornton warns. 

Plan Ahead for Retirement
For folks nearing retirement who still owe on a mortgage, paying off that loan should be high on your list. If you plan on retiring in 10 years, then try to put more money toward your principal or even consider refinancing from a 30-year mortgage into a 15-year mortgage to lower your interest rate and repay the loan faster.

The dual benefits of lowering your living expenses and having access to cash in emergencies are great reasons to sail into retirement without a home loan springing a leak in your budget.

©2018 Bankrate.com
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Categories: Real Estate

The Journey: Changes in Tax Law Lead to Shifts in Giving

December 9, 2018 - 1:05pm

(TNS)—Older retirees may save Christmas for charities.

Donors gave a record $410 billion to nonprofit causes last year, according to Giving USA Foundation, in part because taxpayers were bunching contributions ahead of this year’s higher standard income tax deduction, experts say. That led to worries that 2018 might be a down year for philanthropy. The higher standard deduction means fewer people will likely itemize and claim charitable deductions.

Enter older retirees, who typically have more conservative portfolios, so thus may not be feeling the recent stock market plunges as keenly as younger people. They also may be feeling generous after a recent tax law overhaul left in place the ability to donate their required minimum distributions from IRA funds directly to charity tax-free.

Darin Shebesta, a financial advisor in Scottsdale, Ariz., recently advised a client in her mid-70s that she could save about $5,000 in taxes by donating her required distributions directly to a half-dozen charities. Of course, the tax savings only makes sense if retirees don’t need the funds for expenses.

One of the recipients was a nonprofit dance school she attended 60 years ago, but still remembered fondly.

“We got her connected back to the school, and she donated the funds in honor of her husband,” who died about two years ago, Shebasta says. “She had been underspending her withdrawal strategy and she had no kids,” so the money had been earmarked for friends after her death. The idea of seeing the money put to work now at an organization that mattered to her gave her a chance to, in effect, enjoy the money during her lifetime, he says.

Financial advisors say charitable giving strategies can be a way for them to better connect to clients, which has obvious marketing appeal—but it can also help retirees clarify their overall financial goals, prioritize spending and generally feel good about putting their life savings to work after focusing for decades on saving.

After working for 14 years in nonprofit fundraising, Juan Ros became a financial advisor about six years ago.

“I make it a point with every prospective client to talk about their charitable objectives,” he says. Not everyone has them, which came as a bit of a surprise to Ros after spending so many years around donors. The conversations produce a broad sense of a client’s interests in the world at large, he says, a point of learning that can help him frame retirement timing and spending plans, in addition to understanding charitable goals.

Other advisors, meanwhile, say clients are flocking to donor-advised funds this year as a result of the new tax law. The vehicles allow donors to take the standard deduction one year and then itemize the next year, spreading out the actual gifting of money to the charities at the donor’s leisure.

Advisor Mark Wilson encourages clients to donate appreciated securities equaling two years’ worth of donations to donor-advised funds. This allows them to avoid the capital gains taxes due on the investments (which are in taxable accounts) and control the timing of the gifts, he says. 

©2018 Tribune Content Agency
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Categories: Real Estate

Gift-Giving Guilt: Nearly Half of Americans Have Felt Pressured to Overspend During the Holidays

December 5, 2018 - 4:56pm

(TNS)—For many Americans, the holidays mean family, food and overspending.

More than two in five gift shoppers feel pressured to reach deeper into their wallets than they’re comfortable with, according to the 2018 Bankrate Holiday Gifting Survey.

Despite budget constraints, there are some lines most people refuse to cross to save money. Buying used and regifting are generally considered to be on the naughty list, the survey finds.

Feeling anxiety around providing a “magical” gift or exceeding someone’s expectations is natural, says Suzanne Degges-White, Ph.D., chair and professor of the Department of Counseling, Adult and Higher Education at Northern Illinois University.

“If you let yourself forget that Hallmark had it right when their tagline became, ‘It’s the thought that counts,’ you can be swindled into spending a lot more than you can afford in your efforts to prove your affection and devotion,” Degges-White says.

The survey was conducted online in Ispos’ Omnibus. The sample consists of 1,000 nationally representative interviews, conducted between October 12-14.

Parents and middle-income earners more likely to feel holiday pressure. More than half (54 percent) of respondents with children reported feeling pressure to overspend during the holidays, according to the Bankrate survey.

“I always tell parents to step back and recognize that we all have too much stuff. Let’s face it: Kids are going to outgrow their clothes and out-mature their toys. So, if you’re going to spend, spend wisely and be savvy about it,” says Nora Yousif, vice president and financial adviser at RBC Wealth Management.

Yousif recommends spending on intangibles, like contributions to college funds or shares in an innovative company. Or, families could do what she and her loved ones do and spend on a group vacation. This year, they’re going to Savannah, Ga.

“There’s nothing wrong with getting old-school,” Yousif says. “Not to sound like Scrooge, but teaching your children to want what they have is a valuable lesson, too. It may not be what the neighbors are gifting their child, but if you’re gifting yours something that will benefit them down the line, like contributions to their college fund, that’s the smarter, savvier gift in the long run.”

Middle-income earners may feel pressured to keep up with the Joneses during the holidays. More than half of those earning between roughly $50,000 and $75,000 felt pushed to overspend—a higher percentage than their peers, according to the Bankrate survey.

The people in the middle are really squeezed for income, says Mark Hamrick, senior economic analyst at Bankrate.

“In some ways, they have the worst of both worlds because there is at least the perceived pressure to spend and also some capability,” Hamrick says. “What’s universally true for all income levels is the need for everybody to have a plan and stick to it.”

Hamrick recommends people create a budget that looks at how much money they’re bringing in from work and other revenue sources each month, as well as how much cash is going out for bills and other expenses. If there’s money left over, people can use the cash to buy gifts. To make it easier, people can open dedicated savings accounts with strong interest rates and set money aside each month leading up to the holidays.

However, if there’s no money available after expenses, people should not reach for their credit cards and take on debt to buy gifts.

“If you’re overspending to try and maintain a certain quality to a friendship or family relationship, then that’s not sustainable,” Hamrick says. “Ultimately, if someone’s world is grounded in something that’s counter to the true spirit of the holidays, then there probably needs to be a reckoning for everybody.”

Overall, spending is expected to reach record levels during the holiday season, moving past the $1 trillion mark for the first time, according to an estimate from the market research firm eMarketer. Consumers are expected to spend an average of $638 on gifts during the holiday season, according to the National Retail Federation and Prosper Insights & Analytics.

Saving Money on Gifts During the Holidays
The vast majority of us won’t opt for the nuclear option to save money during the holidays; 13 percent of respondents said they were willing to skip or boycott gift-giving altogether during the upcoming holiday season, according to the Bankrate survey.

Other options that remain largely unpopular with shoppers looking to save include buying used or secondhand items and regifting, the survey shows. The stigma of picking up gifts from thrift shops might be lessening as consumers learn more about the environmental and eco-friendly reasons for looking beyond new gifts, Degges-White says.

The social taboo against regifting probably comes from the worst-case scenarios we’ve experienced, she says.

“They might have noticed gift tags that gave evidence that the gift was originally given to the giver; clothing items that were stained, wrinkled or noticeably outdated; or gifts that they had given the giver in the past,” Degges-White says. “Regifting isn’t inherently a bad practice, but when it’s done without grace or respect for the recipient, then it can create hard feelings.”

Most respondents looking to save money indicated they felt most comfortable limiting who they’re buying for or actively seeking out coupons and store sales to save money. People get creative in providing a great gifting experience without unwrapping their personal budget. Yankee Swap, Secret Santa and other games are popular for many families and friend groups.

This year, more than 10 million people are expected to use Elfster, an online version of Secret Santa, according to the California-based company.

“Elfster is a great way to save money during the holidays,” says Michael Johnson, spokesman for the company. “I have two main recommendations: First, make sure you set a spending limit that everyone in your group will be comfortable with. Second, make sure everyone gets a great gift. Why spend time and money getting a gift they don’t love? Try using the wish lists and our anonymous Secret Santa questions to make sure everyone gets a gift they will love. That can be a lot of fun and a great way to connect that you don’t experience with more traditional gift-giving.”

©2018 Bankrate.com
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Categories: Real Estate

7 Ways the Fed’s Decisions on Interest Rates Affect You

November 11, 2018 - 1:03pm

(TNS)—When the Federal Reserve raises interest rates, you feel it.

“The Federal Reserve has its fingers in your pocketbook to a greater degree than the IRS,” says Michael Reese, a certified financial planner in Traverse City, Mich.

In September, the Fed raised rates for the third time in 2018, and a fourth hike in December is likely.

The Federal Open Market Committee sets monetary policy, primarily by raising or lowering the Fed’s target for the federal funds rate, which is used as the benchmark for a range of consumer interest rates.

Here are seven ways the Fed affects your pocketbook.

  1. The Fed Influences Prices
    The Fed’s actions have an indirect impact on the prices you pay at the grocery store, gas pump and other retail outlets.

That’s because the cost and availability of money affect people’s willingness to pay for goods and services. When money is cheap and plentiful, there’s more demand and prices tend to rise.

“When the economy’s doing really well and the labor market is good and the unemployment rate is falling, that’s when you have concerns about employers hiring and bidding up wages and inflation rising,” says Gus Faucher, chief economist with The PNC Financial Services Group.

Traditionally, the Fed fights inflation by raising the federal funds rate, which makes money more expensive and scarcer. That is supposed to reduce overall demand and slow the pace of price increases. Raising the federal funds rate is less about fighting inflation and more about getting the rate closer to its long-term neutral of 3-3.5 percent, says Joel Naroff, president and chief economist for Naroff Economic Advisors.

  1. The Fed Affects Jobs and Wages
    At every meeting, monetary policymakers consider labor market data as they make decisions aimed at achieving maximum employment. They look at numbers such as:
  • Payroll changes
  • Labor force participation rate
  • Duration of unemployment

The Fed indirectly affects the job market. When it raises the federal funds rate, it tends to slow the economy. That leads to fewer people being hired. They also have less leeway to demand pay raises. This lack of power to bargain for higher wages is seen as a way to fight inflation.

  1. Fed Affects Credit Card Rates
    Most credit cards charge variable interest rates tied to the prime rate, which is about 3 percentage points above the federal funds rate. When the federal funds rate changes, the prime rate does, as well, and credit card rates follow suit.

Apply for a zero-percent APR balance transfer credit card before that happens. It will give you time to pay down your debt interest-free.

“What the Federal Reserve does normally affects short-term interest rates, so that affects the rates that people pay on credit cards,” Faucher says.

When the Fed sends credit card rates higher, it costs more to borrow. So people tend to borrow less, and buy less. That slows the economy and puts the brakes on inflation.

  1. Fed Nudges CD Yields
    If you rely on interest from certificates of deposit for income, you’re probably not happy that the Fed kept interest rates at rock bottom for so long.

“Retirees want to live on the interest on their CDs,” Reese says. “The Fed determines whether they can do that or not.”

CD rates largely follow the short-term interest rates that track the federal funds rate; however, Treasury yields and other macroeconomic factors can influence rates on long-term CDs.

Individuals should focus on the real rate of return on CDs, after inflation is taken into account, says Casey Mervine, vice president and a senior financial consultant at Charles Schwab. In the late 1980s, for instance, you could earn double-digit rates on CDs, but with inflation also in the double digits, your actual earnings were much lower due to the erosion of your purchasing power.

  1. Fed Drives Auto Loan Rates
    The federal funds rate chiefly influences short-term interest rates, because it’s a rate on money lent overnight between banks. But it also trickles through to medium-term fixed loans, such as auto loans.

“The rate the Fed sets ends up affecting almost everything in our economy,” Reese says.

Whether the lender is a credit union, bank or other institution, it will price auto loans relative to the prime rate, which moves up and down in sync with the federal funds rate.

If a bank is charging its customers 4.64 percent for a 60-month loan on a new car, and the federal funds rate increases by a half-percentage point, the lender will bump up the rate to about 5.14 percent. Auto loans also benefit from being sold into the secondary market, making more investors’ dollars available to finance your car purchase or refinancing.

  1. Little Influence on Mortgages
    Mortgage rates respond to market forces, specifically to the needs of bond investors. The Federal Reserve exerts an indirect influence on mortgages.

Sometimes mortgage rates go up when the Fed increases short-term rates, as the central bank’s action sets the tone for most other interest rates—but sometimes mortgage rates fall after the Fed raises the federal funds rate. Look at the last time the central bank went on an extended rate-raising campaign. Starting in June 2004, the Fed raised the federal funds rate 17 times in two years. What happened at first? Mortgage rates fell during the summer and fall of 2004. Back then, the Fed’s rate hikes caused investors to become less concerned about inflation, so mortgage rates fell.

Mortgage rates eventually rose, and were higher in June 2006, at the end of the rate-hiking campaign, than they were at the beginning, two years earlier.

In 2017, housing economists predicted mortgage rates would rise. Instead, they remained fairly steady despite three Fed rate hikes. Mortgage rates have been on a steady climb since the beginning of 2018, which shows the central bank’s actions aren’t predictive.

  1. Touching Home Equity Lines
    Your home equity line of credit, or HELOC, is linked to the prime rate. When the Fed raises its target rate, HELOC rates follow.

Because credit card interest rates will go up, too, it still could be to your advantage to consolidate credit card debt into a lower-rate HELOC if you have the self-discipline to pay off the debt as quickly as you can.

The sooner you pay off variable-rate debt, the better, because many investors and economists expect the Fed to keep gradually increasing the federal funds rate.

©2018 Bankrate.com
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Categories: Real Estate

Getting a Mortgage Is Now Easier, but It Could Backfire

October 31, 2018 - 3:25pm

(TNS)—Clearing the hurdles to qualify for a mortgage used to be much harder. House hunters with too much debt had their home-buying hopes dashed after being denied a mortgage.

That’s changing as mortgage lenders ease lending guidelines to expand mortgage credit to more people.

Borrowers with a high debt-to-income ratio now have more leeway than since the subprime mortgage meltdown of a decade ago. Your debt-to-income ratio, or DTI, is the percentage of monthly income you pay toward your monthly debts, including a new mortgage payment. It’s a key factor—along with your credit—that lenders use to determine whether you can repay a loan. The more debt you have, the higher your DTI ratio—and that’s a red flag for lenders evaluating your potential for risk.

Some consumer advocates worry that borrowers who are already struggling to stay afloat might get in over their heads with today’s laxer lending requirements. On the flip side, expanding access to mortgage credit could help creditworthy borrowers in higher-priced housing markets join the homeownership ranks they’ve increasingly been shut out from.

How Getting a Mortgage Has Gotten Easier
Fannie Mae and Freddie Mac, the two government-sponsored enterprises that back most U.S. mortgages, have eased their lending rules in recent years. Fannie Mae increased its maximum DTI ratio to 50 percent, up from 45 percent, in July 2017. Both agencies allow borrowers to finance up to 97 percent of a home’s purchase price, which is considered a high loan-to-value ratio.

Conventional lenders charge higher interest rates on high DTI loans to mitigate their risk. They also require a higher FICO score and more cash reserves.

Raising DTI limits is just one way lenders have made it easier to get a mortgage. LTV ratio increases help borrowers who don’t have a large down payment; however, you’ll pay private mortgage insurance when you put less than 20 percent down—and you might not be able to borrow as much as you need to buy a home.

Some conventional lenders have rolled out their own low down payment programs without private mortgage insurance in exchange for a higher interest rate. Government-insured loans require little to no down payment, and generally have more relaxed credit score requirements than conventional loans.

Mortgage Credit Standards Still Tighter Than Boom Times
Borrowers who don’t fit into a pristine credit box now have more options, says Joel Kan, associate vice president of Industry Surveys and Forecasting with the Mortgage Bankers Association. There’s more balance to the lending equation nowadays after the regulatory pendulum swung too far in the opposite direction—a move that shut out otherwise capable borrowers, Kan says.

Although standards have loosened considerably in recent years, today’s lending practices are still more stringent than they were before the housing crisis. The days of doling out loans without verifying income or employment are long gone.

“We’re still about one-quarter of where we were compared to the pre-housing boom,” says Kan of mortgage credit accessibility. “Standards are looser now than they were from 2010 to 2012 when credit access was the tightest, but it’s not subprime.”

The share of new, conventional conforming home loans with a DTI ratio above 45 percent spiked after Fannie Mae raised its DTI limit, according to research from CoreLogic. From early 2012 up until last summer, the share of these high DTI loans held steady between 5 percent to 7 percent. In the first quarter of 2018, that share nearly tripled, jumping to 20 percent. The average DTI ratio for these home loans rose by two points to nearly 37 percent from Q1 2017 to Q1 2018.

Even as high DTI loans gain popularity, lenders haven’t budged on credit score standards. Borrowers’ average credit score for conventional, conforming purchase loans remained unchanged at 755 in the first quarter of 2018 compared to the same period a year ago, CoreLogic found. That’s significantly higher than homebuyers’ average credit score of 705 in 2001—before the downturn.

Expansion of Mortgage Credit Has Its Drawbacks
High DTI and LTV loans aren’t without risks. A high LTV ratio increases borrowing costs, and you’ll likely have to pay mortgage insurance to offset the lender’s risk.

For starters, lenders calculate your DTI ratio using your gross monthly income (before taxes and payroll deductions) and debts that appear on your credit report. They’re not including monthly expenses like groceries, gas, auto or health insurance, daycare/tuition, utility bills and other recurring bills that can eat up a good chunk of your monthly budget, says Rebecca Steele, CEO and president of the National Foundation for Credit Counseling.

“It puts some borrowers in a more precarious position,” Steele says of high DTI loans. “Today, people have significantly less savings in reserve. To have that you need a stable income, and some consumers struggle with that. Most people have little disposable income, especially because rents are going up.”

A job loss or other major financial hardship could land you in a tighter spot than if you had paid down your debt and shored up your emergency savings fund before buying a home. You’ll also pay more interest with a high DTI loan, Steele says.

Another key issue that some first-time buyers overlook are the hidden costs of homeownership, says Jeff Levine, a certified financial planner with BluePrint Wealth Alliance in Garden City, N.Y. When you’re stretching your income to cover monthly debt payments, you won’t have as much cash on hand for maintenance expenses, homeowners association dues and major repairs that inevitably pop up. Borrowers should factor those expenses into the mix and avoid overextending themselves, Levine says.

“Just because you can get approved for a mortgage doesn’t mean you should get one,” Levine says. “People got into trouble (in the downturn) because they borrowed up to the hilt and didn’t have the capacity to repay.”

©2018 Bankrate.com
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