Debt Management

Should I Accelerate My Mortgage Payments?

Josh Bitel Contributed by: Josh Bitel, CFP®

Should I Accelerate My Mortgage Payments?

Most homeowners make their regular mortgage payments every month for the duration of the loan term, and never think of doing otherwise. But prepaying your mortgage could reduce the amount of interest you'll pay over time.

How Prepayment Affects a Mortgage

Regardless of the type of mortgage, prepaying could reduce the amount of interest you'll pay over the life of the loan. Prepayment, however, affects fixed rate mortgages and adjustable rate mortgages in different ways.

If you prepay a fixed rate mortgage, you'll pay off your loan early. By reducing the term of your mortgage, you'll pay less interest over the life of the loan, and you'll own your home free and clear in less time.

If you prepay an adjustable rate mortgage, the term of your mortgage generally won't change. Your total loan balance will be reduced faster than scheduled, so you'll pay less interest over the life of the loan. Every time your interest rate is recalculated, your monthly payments may go down as well, since they'll be calculated against a smaller principal balance. If your interest rate goes up substantially, however, your monthly payments could increase, even though your principal balance has decreased.

Should I Prepay My Mortgage?

A common predicament is what to do with extra cash. Should you invest it or use it to prepay your mortgage? You'll need to consider many factors when making your decision. For instance, do you have an investment alternative that will give you a greater yield after taxes than prepaying your mortgage would offer in savings? Perhaps you'd be better off putting your money in a tax-deferred investment vehicle (particularly one in which your contributions are matched, as in some employer-sponsored 401(k) plans). Remember, though, that the interest savings from prepaying your mortgage is a certainty; by comparison, the return on an alternative investment may not be a sure thing.

Other factors may also influence your decision. The best time to consider making prepayments on your mortgage would be when:

  • You can afford to contribute money on a regular basis.

  • You have no better investment alternatives of comparable certainty.

  • You cannot refinance your mortgage to obtain a lower interest rate.

  • You have no outstanding consumer debts charging you high interest that isn't deductible for income tax purposes (e.g., credit card balances).

  • You are in the early years of your mortgage when, given the amortization schedule, the interest charges are highest.

  • You have sufficient liquid savings (three-to-six months' worth of living expenses) to cover your needs in the event of an emergency.

  • You won't need the funds in the near future for some other purpose, such as paying for college or caring for an aging parent.

  • You intend to remain in your home for at least the next few years.

Particularly against a fixed rate mortgage, regular contributions toward prepayment can dramatically shorten the life of the loan and result in savings on the total interest you're charged. As always, consult your financial planner before making any large financial moves. We’re here to look at the big picture and help you make the best decisions for your particular situation.

Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.


UPDATED from original post on December 6, 2016 by Matt Trujillo.

Any opinions are those of the author and not necessarily those of RJFS or Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James Financial Services, Inc. and your Raymond James Financial Advisor do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.

3 Reasons to Get an Early Start on College Savings

Robert Ingram Contributed by: Robert Ingram

Get an Early Start on College Savings

The back-to-school season is right around the corner. And if you have school-aged children, the thought of planning for their college education may be enough to cause your own case of back-to-school jitters. Costs of a four-year education at many colleges and universities are already well into the six-figure range (per child!). For many families hoping to cover a large portion of the costs, significant savings goals are likely required. That’s why, more than ever, you should create a college savings plan as early as possible. 

College Costs Keep Rising

When planning to fund an education goal that may be years away, focusing on today’s costs is (unfortunately) just the beginning. Like the prices of many other goods and services, college costs have increased over time. These costs, however, have been rising much faster than those of other household expenses. According to JPMorgan Asset Management’s research, tuition costs have grown by an average annual rate of 6.4% since 1983. At this rate, today’s cost of tuition would double in about 11 years. Even if this rate of inflation slowed somewhat, potential college costs are eye-opening.

The illustration below shows projected total tuition, fees, and room and board expenses for a four-year, public or private college education, with a 5% annual increase in costs.

Source: JPMorgan Asset Management College Planning Essentials, using The College Board,  2018 Trends in College Pricing . Future college costs estimated to inflate 5% per year. Average tuition, fees and room and board for public college reflect four-year, in-state charges.

Source: JPMorgan Asset Management College Planning Essentials, using The College Board, 2018 Trends in College Pricing. Future college costs estimated to inflate 5% per year. Average tuition, fees and room and board for public college reflect four-year, in-state charges.

As you can see in this example, a child who is 10 years old today could expect a total cost of $136,085 at an in-state public college or university. Her education at a private college could cost over $308,000.

The power of compound growth on your savings and invested earnings can be one of your best allies as you save for these potential future costs. Let’s say the family of our 10-year-old child began saving $3,600 each year. At 7% growth compounded annually, they would have $36,935 by the time she turned 18. What if, instead, they began saving that same amount eight years earlier, when the child was age 2? At the same 7% annual return, they would have $100,396. The sooner you can begin saving and investing, the more time compounding has to work its magic.

The Burden of Student Loan Debt

As the costs of college have continued to rise, the amount of student loan debt has grown as well. A recent report from the New York Federal Reserve Consumer Credit Panel showed that outstanding student loan debt totaled $1.44 trillion as of September 30, 2018. In addition, studies from the Institute of College Access and Success found that 65% of students graduating in 2017 from public and private, non-profit colleges had student loans, and the average borrower owed $28,650.

Loans can help provide students the funds to complete their educations, but a large debt balance can have serious implications for a graduate’s personal finances. As new graduates begin their careers, servicing this student loan debt can take up a large portion of their budgets. More dollars going to pay down debt means fewer dollars available for other needs, for building an emergency fund, saving for a house, or saving for retirement. (Click here to see some financial tips for new graduates). Parents managing student loan debt can also feel similar constraints. Often, parents in the home stretch toward retirement are paying down debt instead of funding their own retirement plans. 

Of course, every dollar of college expenses paid from savings can mean one less dollar of debt to service. More than that, the longer you have to build college savings, the greater the difference between the out-of-pocket cost of paying for college with debt and the out-of-pocket cost of saving. Take a look at the following chart, which compares the cost of funding education through loans (the principal borrowed and interest) with the cost of saving over 18 years.

529 college savings plan vs. college loan

In this hypothetical example, the total out-of-pocket amount of $65,800 contributed to the savings plan combined with investment earnings of 6% annually provided the total balance of $117,698. Borrowing that same $117,698 could result in total spending of $168,390 for the loan principal and interest.

What about Financial Aid?

If you’re like many clients thinking about college planning, you may be concerned that your savings and investments will negatively affect your eligibility for college aid. You might be worried that the more you save, the less likely it is that you will receive assistance.

To determine financial aid eligibility, schools use an Expected Family Contribution (EFC), which is a measure of a family’s financial strength. The EFC formula takes into account the incomes and assets of both the student and the parents. While the amount of savings and investment assets are considered, assets – and particularly those held in parents’ names – are a much smaller factor than incomes.  

The EFC formula includes up to 50% of the student’s income and 47% of parents’ income. On the other hand, the EFC considers up to 20% of the student’s assets and only 5.64% of the parents’ non-retirement assets, above a protected amount. Although balances in college savings plans are counted along with other non-retirement assets, the smaller percentage applied to parental assets can allow parents to build some meaningful savings without drastically affecting their student’s EFC. For a closer look at the financial aid process, check out our college planning webinar.

As with other areas of financial planning, college savings involves balancing your goals and priorities in order to most effectively align your resources. Your own unique circumstances will determine the right amounts to save, and when and where to save. If we can be a resource for any of your college planning needs, please let us know!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

5 Financial Tips for Recent College Graduates

Robert Ingram Contributed by: Robert Ingram

financial tips for recent college graduates

Congratulations Class of 2019! This is an exciting time for recent college graduates as they begin the next phase in their lives. Some may take their first job or start along their career path, while others may continue their education. Taking this leap into the “real world” also means handling personal finances, a skill not taught often enough in school. Fortunately, by developing good financial habits early and avoiding costly mistakes, new graduates can make time an ally as they set up a solid financial future.

Here are five financial strategies to help get your post-college life on the right path:

1. Have a Spending Plan

The idea of budgeting may not sound like a lot of fun, but it doesn’t have to be a chore that keeps you from enjoying your hard-earned paycheck. Planning a monthly budget helps you control the money coming in and going out. It allows you to prioritize how you spend and save for goals like buying a home, setting up a future college fund for children, and funding your retirement.

Everyone’s budget may be a little different, but two spending categories often consume a large portion of income (especially for younger people early in their careers): housing costs and car expenses. For someone who owns a home, housing costs would include not only a mortgage payment, but also expenses like property taxes and insurance. Someone renting would have the rental cost and any rental insurance.

Consider these general guidelines:

  • A common rule of thumb is that your housing costs should not exceed about 30% of your gross income. In reality, this percentage could be a bit high if you have student loans, or if you want more discretionary income to save and for other spending. Housing costs closer to 20% is ideal.

  • A car payment and other consumer debt, like a credit card payment, can quickly eat into a monthly budget. While you may have unique spending and saving goals, a good guideline is to keep your total housing costs and consumer debt payments all within about 35% of your gross income.

2. Stash Some Cash for Emergencies

We all know that unexpected events may add unplanned expenses or changes to your budget. For example, an expensive car or home repair, a medical bill, or even a temporary loss of income can cause major financial setbacks.

Start setting aside a regular cash reserve or “rainy day” fund for emergencies or even future opportunities. Consider building up to six months’ worth of your most essential expenses. This may seem daunting at first, but make a plan to save this over time (even a few years). Set goals and milestones along the way, such as saving the first $1,000, then one months’ expenses, three months’ expenses, and so on, until you reach your ultimate goal.

3. Build Your Credit and Control Debt

Establishing a good credit history helps you qualify for mortgages and car loans at the favorable interest rates and gets you lower rates on insurance premiums, utilities, or small business loans. Paying your bills on time and limiting the amount of your outstanding debt will go a long way toward building your credit rating. What goes into your credit score? Click here.

  • If you have student loans, plan to pay them down right away. Automated reminders and systematic payments can help keep you organized. To learn how student loans affect your credit score, click here.

  • Use your credit card like a debit card, spending only what you could pay for in cash. Then each month, pay off the accumulated balance.

  • Some credit cards do have great rewards programs, but don’t be tempted to open too many accounts and start filling up those balances. You can easily get overextended and damage your credit.

4. Save Early for the Long Term

Saving for goals like retirement might not seem like a top priority, especially when that could be 30 or 40 years away. Maybe you think you’ll invest for retirement once you pay off your loans, save some cash, or deal with other, more immediate needs. Well, reconsider waiting to start.

In fact, time is your BIG advantage. As an example, let’s say you could put $200 per month in a retirement account, like an employer 401(k), starting at age 25. Assuming a 7% annual return, by age 60 (35 years of saving), you would have just over $360,000. Now, say you waited until age 35 to begin saving. To reach that same $360,000 with 25 years of saving, you would need to more than double your monthly contribution to $445. Starting with even a small amount of savings while tackling other goals can really pay off.

Does your employer offer a company match on your retirement plan? Even better! A typical matching program may offer something like 50 cents for each $1 that you contribute, up to a maximum percentage of your salary (e.g. 6%). So if you contribute up to that 6%, your employer would add an extra 3% of your salary to the plan. This is like getting an immediate 50% return on your contribution. The earlier you can contribute, the more time these matching funds have to compound. 

5. Get a Little More Educated (about money and finances)

Ok, don’t worry. Forming good financial habits doesn’t require an advanced degree or expertise in all money matters. To build your overall knowledge and confidence, spend a little time each week, even just an hour, on an area of your finances and learn about a different topic.

Start with a book or two on general personal finance topics. You can find reference books on specific topics, from mortgages and debt to investments and estate planning. Information offered through news media or internet searches also can provide resources. And you can even find a blog not too far away (Money Centered Blog).

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

Protect Your Credit by Checking and Correcting These Reports

Josh Bitel Contributed by: Josh Bitel

If you’re like most people, you probably don’t think or worry about your credit score unless you’re getting ready to use it. Your credit report provides detailed information about your credit history and may even make or break your applications for loans, mortgages, or credit cards. Errors or false applications bogging down your score could also prevent you from receiving a better interest rate, for example.

protect your credit by checking and correcting these reports

Tips for checking your credit report

  1. Visit annualcreditreport.com to request your free credit report from your choice of three agencies: Equifax, Experian, and TransUnion. Use all three. You are entitled to a free report from each every 12 months.

  2. Set an annual reminder to pull your report with each agency. Stagger these reminders, so you can check your full report once every four months and keep a closer eye on it.

  3. Review all information, including the basics – addresses, phone numbers, employers, etc. – to spot any errors or discrepancies.

  4. Make sure you recognize all accounts, loans, credit cards, etc. listed on your report.

Fixing or disputing errors

When you notice a problem, first directly contact the credit reporting companies and let them know what information you believe is not correct. You may be asked to provide supporting documentation to dispute a claim as fraud. In some instances, that may be hard, if not impossible, to do. It can be difficult to produce proof that you never opened a credit card, for example. Still, putting forth your best effort is well worth your time.

Second, contact the fraud/security department at the company that reported the fraudulent information. They will send dispute paperwork for you to submit with supporting documentation. Inform them, in writing, that the account was opened or charged without your knowledge, explain why you dispute the information and are asking that it be removed or corrected. Keep a paper trail for yourself.

Also, verify whether the debt has been sold to a collections agency. If it has, make sure they will notify the collections agency that the debt is in dispute. And brace yourself! It could take 90 days (or more!) before you see a resolution. Set a reminder to follow up if you have not heard anything within the time promised. Once you have received confirmation that the fraudulent claim has been discharged, make sure they have also closed the account in your name.

Haggling with credit reporting agencies can be a pain, but the work is a necessary evil. Misreported information could lead to your credit score suffering by as much as 100 points, and unless you review and monitor your reports on a consistent basis, you’ll never know.

Josh Bitel is a Client Service Associate at Center for Financial Planning, Inc.®


Repurposed from July 23, 2015 - Previous blog

Why Retirees Should Consider Renting

Nick Defenthaler Contributed by: Nick Defenthaler, CFP®

“Why would you ever rent? It’s a waste of money! You don’t build equity by renting. Home ownership is just what successful people do.”

Sound familiar? I’ve heard various versions of these statements over the years, and every time I do, the frustration makes my face turns red. I guess I don’t have a very good poker face!

why retirees should consider renting

As a country, we have conditioned ourselves to believe that homeownership is always the best route and that renting is only for young folks. If you ask me, this philosophy is just flat out wrong and shortsighted.

Below, I’ve outlined various reasons that retirees who have recently sold or are planning to sell might consider renting:

Higher Mortgage Rates

  • The current rate on a 30-year mortgage is hovering around 4.6%. The days of “cheap money” and rates below 4% have simply come and gone.

Interest Deductibility

  • Roughly 92% of Americans now take the standard deduction ($12,200 for single filers, $24,400 for married filers). It’s likely that you’ll deduct little, if any, mortgage interest on your return.

Maintenance Costs

  • Very few of us move into a new home without making changes. Home improvements aren’t cheap and should be taken into consideration when deciding whether it makes more sense to rent or buy.

Housing Market “Timing”

  • Home prices have increased quite a bit over the past decade. Many experts suggest homes are fully valued, so don’t bank on your new residence to provide stock-market-like returns any time soon.

Tax-Free Equity

  • In most cases, you won’t see tax consequences when you sell your home. The tax-free proceeds from the sale could be a good way to help fund your spending goal in retirement.  

Flexibility

  • You simply can’t put a price tag on some things. Maintaining flexibility with your housing situation is certainly one of them. For many of us, the flexibility of renting is a tremendous value-add when compared to home ownership.

Quick Decisions

  • Rushing into a home purchase in a new area can be a costly mistake. If you think renting is a “waste of money” because you aren’t building equity, just look at moving costs, closing costs (even if you won’t have a mortgage), and the level of interest you pay early in a mortgage. Prior to buying, consider renting for at least two years in the new area to make darn sure it’s somewhere you want to stay.

Every situation is different, but if you’re near or in retirement and thinking about selling your home, I encourage you to consider all housing options. Reach out to your advisor as you think through this large financial decision, to ensure you’re making the best choice for your personal and family goals.

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick works closely with Center clients and is also the Director of The Center’s Financial Planning Department. He is also a frequent contributor to the firm’s blogs and educational webinars.


Any opinions are those of Nick Defenthaler, CFP® and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected.