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First-Time Buyers Account for Nearly Half of All New Mortgages

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First-Time Buyers Account for Nearly Half of All New Mortgages

Prospective first-time homebuyers are facing stiff challenges as they enter today’s housing market – including finding an affordable home. A profound shortage of starter homes is limiting choices and raising home prices.

According to Trulia, as of April 2018, the inventory of starter homes decreased 48.6 percent from six years prior while prices rose 57.9 percent.

Many would-be first-time buyers are millennials, saddled with student loan debt and struggling to save for a down payment.

Interest Rates

To make matters worse, the run of historically low interest rates appears to be over as the Federal Reserve gradually increases interest rates and mortgage rates follow suit.

According to data from Freddie Mac, first-time homebuyers are buying in record numbers despite these challenges. Excluding refinancing loans, first-timers constituted 46 percent of all new mortgages in the first quarter of 2018.

That’s the largest share of first-time buyers recorded by Freddie Mac since they began collecting data in 2012 -– and it’s a continuation of a general upward trend.

Simple Economics

What’s behind the shift? It may be simple economics. The housing crisis knocked many potential homebuyers out of the market through job losses and tightened credit.

Since that time, unemployment has dropped, the economy has recovered, and credit has loosened a bit — putting more first-timers in an economic position to buy a home.

The affordable home shortage is a logical product of this pent-up demand from millennials. If a greater number of affordable houses were to magically appear, the share of first-time homebuyers would be even higher.

Why So Many First-Time Buyers?

It’s also possible that some buyers are stretching to get into their first home before home prices and interest rates rise even further. They may be right. Economists are not optimistic about the supply of affordable homes in the near future.

Are you ready to make your plunge into the home-buying market before interest rates and home prices go up again? Before you begin, take a few moments to consider your overall financial situation.

Start with a review of your credit report and credit score. A low credit score or red flags such as missed monthly payments or excessive debt could disqualify you for a mortgage loan – and any loan offers you get will come with higher interest rates.

Conventional loans backed by Fannie Mae and Freddie Mac generally require a minimum credit score of 620, while FHA loans can go as low as 580 with 3.5 percent down payment or 500 with 10 percent down payment.

With scores that low, you will probably need another factor in your favor to secure a loan (such as a high income or a very low debt load).

Consider All the Costs

Next, consider all the costs associated with homeownership. Many first-timers focus on the down payment and monthly mortgage payments, forgetting the many auxiliary expenses.

If you’re on the edge of qualifying for a home, consider your qualifications for alternative programs such as FHA or VA loans that require lower down payments and are more tolerant of low credit scores – but remember that these programs come at a cost. You are borrowing more money and will pay more in interest over the life of the loan.

Join the ranks of first-time homebuyers if you’re ready — as long as you make sure that you really are ready.

Consider downsizing your home goals or delaying your purchase if you are stretched too thin and adjust your budget to plan for a future home purchase instead.

This article was provided by our content partners at MoneyTips. Photo ©iStockphoto.com/vladimirvladimirov

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5 Ways To Have Your Student Loans Forgiven

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And Which Forgiveness Paths Could Close Soon

5 Ways To Have Your Student Loans Forgiven And Which Forgiveness Paths Could Close Soon
Does your student loan situation look hopeless? Don’t give up hope yet. Consider these alternative repayment programs that can provide manageable loan payments and lead to forgiveness of a portion of your loan in exchange for some form of service.

1. Public Service Loan Forgiveness (PSLF)

As it stands, the PSLF program allows those working in government organizations and certain non-profit organizations to achieve loan forgiveness.

To qualify for forgiveness, borrowers must make ten years of qualifying payments under one of the income-driven repayment (IDR) programs offered by the Department of Education.

These programs are popular with certain professions like police or fire department employees and public defenders where collegiate expenses aren’t in line with the pay provided by a public service position.

Legislative Changes

The 2018 Consolidated Appropriations Act, which was passed in March and funds the government through September, has created a one-time-only $350 million expansion of the PSLF program.

This fund will cover the cost of canceling the loans of public servants who unknowingly selected non-qualifying repayment plans.

These loans will be forgiven on a first-come, first-serve basis until the fund runs out.

Watch for Updates

The Department of Education is currently assessing the full impact of the Act on PSLF, so keep checking the official site for the latest updates.

Be warned: Although the latest spending bill ignored many of President Trump’s proposals, his administration still seems intent on eliminating the PSLF program eventually.

It isn’t clear whether this would also include eliminating the corresponding Teacher Loan Forgiveness program aimed specifically at teachers in low-income districts or service agencies.

2. IDR Programs

As with PSLF, the IDR programs may be subject to change within the next budget. Currently, there are four federal programs that generally offer loan forgiveness after twenty years of regular payments that represent 10 percent of your discretionary income.

The four are the Revised Pay As You Earn plan, the Pay as You Earn plan, the Income Based Repayment  plan, and the Income Contingent Repayment plan.

However, the proposed Trump budget seeks to combine all these programs into one program, changing the monthly payment to 12.5 percent of discretionary income but forgiving the remaining loan balance after fifteen years.

3. State Student Loan Forgiveness Plans

If the federal government won’t help you, perhaps your state can. Currently, there are only five states that do not offer at least one form of student loan forgiveness plan (Alabama, Connecticut, Tennessee, Utah, and West Virginia).

Texas leads the way with nine different programs targeted at specific groups such as physicians, nurses, and educators. Check the options in your state to see if any state programs apply to you.

4. U.S. Military Service

The Army, Navy, Air Force, and National Guard all have a series of programs for loan forgiveness for active-duty military members and veterans.

While some loan forgiveness programs may end up on the budgetary chopping block, it seems highly unlikely that the current administration – or most administrations – would accept cuts in forgiveness programs within the military.

If forgiveness does not apply, the military also offers deferment options on subsidized loans during active duty service.

5. Employer Programs

Some larger employers offer partial student loan repayment as a recruiting tool. Only 4 percent of employers offer these programs, according to an estimate from the Society for Human Resource Management — but if you find such an offer, take full advantage of it.

In special circumstances, other loan forgiveness programs may be available. If your school closes prior to your graduation, you may be able to have the loan discharged.

Students at for-profit institutions that engage in fraudulent or illegal practices may also qualify for student loan discharges.

Remember Taxes

While forgiveness can make a huge difference in your finances, don’t forget about taxes. Except for the PSLF and Teacher Loan Forgiveness programs, loan amounts that are forgiven are classified as taxable income for that year — and your tax bill may skyrocket as a result.

The President could suggest to do away with the PSLF and IDR programs again in the next budget proposal later this year.

Keep up with the latest developments to see what options are available to you – and make sure that you make your existing student loan payment on time to maintain eligibility for any forgiveness programs.

This article was provided by our content partners at MoneyTips.com. Photo ©iStockphoto.com/DanielBendjy

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This Startup Helps Employers Repay Employees’ Student Loans

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Employers Offer to Help Pay Student Loans Start-Up Company Sets Up Loan Payback Program for Companies

It’s not uncommon for companies to help with tuition payments for their employees who are continuing their education, especially if they are working toward a professional degree that will help them in their job or with future advancements in the firm. Such a program can be a great recruiting tool.

Unfortunately, these programs do not help a company’s recent hires who have already absorbed huge student loan debts on the way to graduation.

Gradifi, a start-up technology company based in Boston, has addressed this problem by setting up a platform that allows employers to make direct contributions toward their employees’ student loan debts in a secure fashion.

Student Debt Increases

Tim DeMello, founder and CEO of Gradifi and a trustee at nearby Babson College, got the idea for Gradifi in 2014, after a presentation at Babson showing the incredible increases in student debt.

Gradifi’s first high-profile client was the massive accounting and consulting firm PricewaterhouseCoopers (PwC), which signed on in 2015.

PwC puts aside $1,200 per year for an employee’s first six years, to be directed toward student loan payments for employees within the first employment tiers.

Increase Goodwill

That will not pay off many debts, as the average loan balance in 2018 was $26,700, but it certainly goes a long way toward reducing employee debt and increasing employee goodwill.

A student loan repayment program should be an extremely useful recruiting tool for companies that hire large numbers of new graduates, especially for white-collar positions that require significant degrees at entry-level.

A survey by Oliver Wyman showed that 45 percent of professionals with a bachelor’s degree or higher, who were either employed or seeking employment, would prefer student loan repayment assistance to employer-based health benefits. Over half would prefer student loan assistance to additional contributions to their 401(k) plan.

Highly Competitive

Student loan payback benefits are a way for firms in highly competitive fields to distinguish themselves from the pack. According to the most recent survey by the Society for Human Resource Management, only 4 percent of employers offer this type of benefit.

PwC is a perfect candidate for a student loan program, as it recruits almost 16,000 students annually with a high requirement for professional degrees, but PwC is not alone in seeing the benefit of helping their recent hires deal with student loan debt.

Other high-profile clients include beauty brand Estée Lauder, banks First Republic and Peoples Bank, and book publisher Penguin Random House.

Similar Deals

These employers offer deals similar to that of PwC, although some offers continue for the life of an employee’s student loan.

Others work on a tiered basis, with the amount of payments increasing, for example, from $1,200 in the first year of the employee’s enrollment to $1,800 in the second year and $2,400 in the third year, when it plateaus.

It might be a stretch to expect this type of benefit to catch on outside of professional niche markets. It is easy to imagine Silicon Valley firms putting this program to use, but it is hard to envision a Wal-Mart or a similar lower-margin operation offering such a perk.

Higher Expectations

DeMello has higher expectations. He suggests that over the next five to ten years, somewhere between 50,000 and 100,000 companies will offer some variant of the student loan payback benefit.

It gives companies a means of increasing effective take-home pay without having to raise salaries outright. Combine this with other financial planning and financial literacy programs and you have a workforce that is content, motivated, and focused on work instead of money.

A student loan repayment program by itself is not going to attract potential employees — it must be part of an overall support system with adequate salary and baseline benefits.

Moreover, if the company culture does not match employee expectations, it may not matter how good the perks are.

Still, all signs point to student loan assistance being a unique, useful perk. If DeMello and Gradifi’s platform continues to succeed, perhaps it will not be unique in the future.

This article was provided by our content partners at MoneyTips.com. Photo ©iStockphoto.com/sturti

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How the Fed’s Interest Rate Increases Affect Your Finances

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Fed's interest rate increase
The U.S. Federal Reserve Bank just raised interest rates a quarter of a percent. How does that actually work and at what point does it impact your finances?

Eight times a year, the Fed’s Federal Open Market Committee (FOMC) meets to discuss policy changes.

One of the main decisions the central bank faces is whether to change the interest rate imposed upon interbank loans, which is known as the federal funds rate.

Federal Funds Rate

At its core, the federal funds rate dictates the costs associated with one bank lending reserve funds to another. But, when this rate changes, it doesn’t just affect financial institutions; it impacts you too.

The federal funds rate can alter interest rates on products like mortgages, car loans, and credit cards. This occurs because it shifts the prime lending rate, which is the base amount banks charge consumers.

Here’s how the outcome of Federal Reserve meetings can ultimately impact the interest rates on debt you have now or that you might take on in the future.

Fixed Rate Debt

Whether you’ll see a change in your debt interest rates depends on one thing: whether your rate is fixed or adjustable.

Fixed-rate installment debts have interest rates that are largely set in stone. The loan contract outlines a specific interest rate, and that is what you’ll pay. This means, even if the federal funds rate goes up, you shouldn’t see a change.

In most cases, fixed-rate revolving debts, like credit cards, won’t change either. However, a bank can attempt to change your rate. Typically, they must notify you in advance and give you a chance to opt out. If you opt out, they may close your account, but it usually lets you avoid an interest rate increase on the amount you still owe.

Floating Rate Debt

An adjustable or variable rate debt is different, regardless of whether it is an installment or revolving form of credit. In most cases, the prime rate plus a specific additional amount, such as 5 percent, is what determines what you pay.

Since the prime rate is part of the ongoing calculation, if the Fed’s rate change impacts the prime rate, your interest rate shifts accordingly.

How Your Rate Will Change

What the Fed decides to do during their meeting determines if and how your rate will likely change. Just because the FOMC gets together that doesn’t mean they’ll change the federal funds rate.

If they don’t change the rate, then your adjustable interest rates will probably stay the same. Similarly, your rates will rise if they increase the federal funds rate.

The Federal Reserve can also lower the federal funds rate. When this happens, if your interest rate is tied to the prime rate, you may end up paying less in interest.

Obtaining New Credit

The federal funds rate has a significant impact on interest rates for new forms of credit. In fact, just the anticipation of a rate change can cause banks to change their offerings.

If they expect the federal funds rate to go up, banks may increase their interest rates on new accounts in advance. This lets them offset the rising cost, even though it hasn’t yet come to pass.

Similarly, if they anticipate a decrease, new accounts may have lower interest rates. And, if the federal funds rate isn’t likely to change, banks may keep their rates the same.

Ultimately, understanding how the Federal Reserve meetings and federal funds rate impacts you helps you make smarter credit decisions. Now, you know how a rate change can affect your existing debts, as well as any new accounts.

Do you worry about rising interest rates after Federal Reserve meetings? Tell us about it in the comments below.

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5 Biggest Warning Signs for Student Loan Debt

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5 Biggest Warning Signs for Student Loan DebtAs a nation, America’s student debt load is reaching crisis proportions. The New York Federal Reserve puts the total student loan debt at over $1.52 trillion, with the delinquency rate over 11 percent.

Is your personal student loan situation nearing a similar crisis? Consider these five warning signs to assess whether you are handling your student loans responsibly or are on the road to potential default.

1. Apathy or Denial

This may be the most dangerous sign of all – refusing to realize the consequences of defaulting on a student loan. Adam Carroll, Founder and Chief Education Officer of National Financial Educators, likens student loans to “the worst weed to have in your yard because if it goes unchecked, it will grow to massive proportions.”

You can’t just wave a magic wand and make your student loan debt go away, nor can you pretend there aren’t serious consequences for defaulting.

At best, your credit is ruined for years. The Federal Student Aid Website contains information on alternatives like income-based repayment options and deferment or forbearance – but you have to make the effort to seek them out. Note that you may also not qualify for certain options.

2. Missing Monthly Payments

You must make the minimum monthly payment on your student loan to avoid penalties and other detrimental side effects. If you find yourself missing a payment or making overdue payments for any reason, you may be in trouble – whether it’s from carelessness or lack of funds.

Set an alarm on your phone or computer to remind you that a payment is due. If you don’t have a budget, make a realistic one to control your spending. If you do have a budget, stick to it. Do whatever it takes to get those monthly payments in on time.

3. High Interest Rates

Generally, federal student loans provide reasonable interest rates compared to the open market – but if your student loan has abnormally high interest rates, consider your refinancing options through the Federal Student Aid website or through private lenders. Why pay any more in interest payments than you must? Find out quickly at what rate you can refinance your student loan.

4. Excessive Overall Debt

Did you rack up excessive credit card debt during the grace period? Does your job not bring in sufficient income to cover all your bills?

It’s easy to think you can make minimum payments and pay everything back in better times, but you run the risk of falling into a debt spiral – where interest payments on your balances become so large that you can never catch up.

Don’t consider bankruptcy as a viable option either. Student loans generally can’t be discharged in bankruptcy.

Again, budgeting and spending control is the answer. It may not be the answer that you want to hear, but it’s the correct one.

5. Poor Repayment Priorities

It’s wise to attack high-interest debt like credit card debt first – but you must make at least the minimum monthly payment on all outstanding debts, including your student loans.

If you devote all your funds to credit card debt and ignore other payments, the fees and penalties that you incur will negate your gains.

Warning Signs for Student Loan Debt

Of course, to have funds to pay down debt spending must be less than income. This requires sticking to a reasonable budget. Are you spotting a pattern? The answer to all these warning signs is responsibility – taking responsibility for your debt and managing your spending and income to meet all your obligations. Do any of the warning signs apply to you? If so, you know what to do.

This article was provided by our content partners at MoneyTips.com. Photo ©iStockphoto.com/Nastasic

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Jumbo Student Loans Increasing — What Indebted Students Should Do

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Jumbo Student Loans Increasing What Indebted Students Should Do
Jumbo debt is usually associated with commercial borrowing along with large residential mortgages — not something that college students normally take on. Until now: Jumbo student loans account for 17 percent of academic debt.

There’s nothing inherently wrong with large student loans, and historically the default rate has been low on such loans. People who borrow large sums of money usually go for advanced degrees that translate into higher salaries.

However, a February 2018 study by the Brookings Institution found that large-balance student loan borrowers have increased dramatically in recent years – and the typical profile for such borrowers has changed.

Large Balance Borrowers Soaring

In 1992, only 2 percent of student loan borrowers owed over $50,000 upon leaving school. In 2014, that number rose to 17 percent. Just over half of total student loan debt is held by this small percentage of large-balance borrowers.

Default rates are low in this group (typically around 4 percent), but the consequences are large. Student loan borrowers with balances over $50,000 account for almost 30 percent of defaulted student loan dollars.

Large-balance borrowers aren’t making much progress on repayment. The median borrower in this group from 2010 owes 5 percent more on their debt than they did after leaving school.

Demographics and Deferments

According to the Brookings study, the change in borrower demographics and the increase in deferments and forbearances are largely to blame.

The share of large-balance borrowers attending for-profit schools – where the eventual salaries are less likely to cover borrowing costs – increased from 2 percent of borrowers entering repayment in 2000 to 15 percent in 2014.

If you are struggling to deal with a jumbo loan, these statistics don’t surprise you. Your greater concern is how to get out of the mess you’re in.

Limited Options

For borrowers with large balances and lower income levels – and no reasonable expectation of an income large enough to cover your debts – the options are limited.

Deferment and forbearance may help in the short term, but they only delay the inevitable.

Bankruptcy is not generally an option for student loans. A sound repayment strategy is the answer.

 

“If you’re in a tough position income-wise, though, it can make sense to start by getting on income-based repayment if you qualify,” said Miranda Marquit, a money expert with financial education website Student Loan Hero.

She continued, “While it’s not the best long-term strategy, it can at least help you get your feel under you and improve your cash flow while you work on your repayment strategy.”

You’ll need to reassess your budget, cutting spending to bare minimums and reducing other forms of debt.

Create Surplus

Create a monthly surplus and apply that to the student loan with the highest interest rate first. Make sure your student loan servicer is applying any extra payments per your wishes.

“You might actually have to call your servicer and specify that extra payments should go to principal,” Marquit said.

She continued, “Many servicers just apply to the next month’s payment, including next month’s interest. It’s more effective if the entire amount of your extra payment is reducing your principal.”

It’s important to avoid credit card balances during the repayment period. You’re going in the wrong direction if you’re accumulating credit at 16 percent interest or higher to pay off a student loan with a single-digit rate.

Loan Forgiveness Programs

If you have federal student loans, see if you qualify for income-based repayment plans or the Public Service Loan Forgiveness Program (PSLF).

Both programs provide avenues for forgiveness of remaining debt after 25 years of payments – and in the case of PSLF, the forgiven amount isn’t considered to be taxable income.

PSLF requires planning, since you must be working full-time for a qualified employer (government positions at any level along with certain non-profit jobs) and make ten years’ worth of qualifying payments. If you find this path appealing, find a suitable job and apply now.

Can You Refinance?

Refinancing may be an option, but only if you can secure a better rate – and if you are burdened with high student loan debts and are having trouble paying it off, the odds of qualifying for a lower rate than your student loan are grim.

“You need good credit and a solid income to qualify for many refinancing programs. They can be a great tool, but you might not meet the criteria,” ,” Marquit said.

“Instead, it’s important to carefully evaluate your education options before settling on school and then being aggressive in paying off debts when you finish.”

Jumbo debt should only be incurred when you’re likely to have a future jumbo income to pay it off. Make sure that you look at college as a value investment and not just a reason to avoid the real world for several years.

This article was provided by our partners at moneytips.com. Photo ©iStockphoto.com/AldoMurillo

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