Money Management

Have a chance to refinance your mortgage at no cost? Read on to see why it could pay to take it, even with rates being high. 

When mortgage rates plunged to record lows in 2020 and 2021, many homeowners rushed to refinance. But those days are long gone. As of this writing, the average rate on a 30-year mortgage is 7.5%, according to Freddie Mac. For many homeowners, that’s more than double the rate they locked in a few years ago. So it’s easy to see why refinancing activity has slowed down tremendously.

Some mortgage lenders, however, may be offering free mortgage refinances in an effort to drum up business. A free mortgage refinance, or a no-cost refinance, is one where you aren’t charged closing costs.

Normally, the closing costs for a mortgage refinance can range from application fees to origination fees, and they can be quite expensive. A refinance can be more appealing when you don’t have to worry about those fees at all.

But even without having to pay closing costs, it’s hard to get around today’s mortgage rates. So for many people, even a free refinance won’t make sense. In the following situations, however, it could.

1. You’re actually able to qualify for a better interest rate

A big reason to refinance a mortgage is to lower the interest rate on that debt. If you locked in a 3% mortgage in 2020, then chances are, you’re not looking to swap that home loan with a new (and more costly) one today.

But what if you’re sitting on a much higher mortgage rate? It may be that you signed your mortgage before rates plummeted during the pandemic and at a time when your credit score wasn’t in particularly good shape. If that’s the case, it could be that today’s rates are actually lower than the rate you locked in, despite rates being elevated right now.

Normally, because there are closing costs involved in a refinance, it makes sense to try to shave about 1% off of your loan’s interest rate in the course of swapping an old mortgage for a new one. You want that savings to justify your closing costs.

However, if you aren’t being charged closing costs, you can be more flexible. If, for example, you have a mortgage at 8% and can refinance to 7.5%, it could pay to do so if there are no costs or fees involved.

2. You want to consolidate costlier debt

It may be that you’re sitting on a mortgage with a rate much lower than 7.5%. However, if you have a lot of non-mortgage debt that’s costing you a ton in interest, then it could pay to do a cash-out refinance, especially if you can snag one at no cost.

A cash-out refinance lets you borrow more than your remaining home loan balance. And you can use that excess cash to pay off other debts.

So let’s say you owe $60,000 on a bunch of credit cards with interest rates in the 20% to 24% range. Let’s also say you have a 5% mortgage rate on your current home loan. Even if you’re looking at refinancing to a rate of 7.5%, that might still make sense financially, because it could lower the interest rate on your overall debt and save you money that way.

A lot of homeowners aren’t so eager to refinance today, and that makes sense. But before you write off the idea, see if these two scenarios apply to you. If you can snag a new home loan with zero closing costs, going that route could pay off.

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Your credit score matters a lot. Read on to see why you don’t want to settle for a score that’s just fine. 

Many people don’t pay much attention to their credit score until they need to borrow money, whether in the form of a loan or a credit card. But your credit score is something you should aim to keep tabs on at all times, since you never know when a need to borrow might arise.

FICO is the most commonly used credit scoring model in the U.S., and a FICO® Score of 670 to 739 is considered good. By contrast, a score of 580 to 669 is classified as only fair, while a score that’s less than 580 is considered poor.

Clearly, you’ll be in a much better position to borrow money with a credit score of, say, 700 than 600 or 500. In fact, if your score is between 670 and 739, you may decide you’re happy with it, since it is considered good. But settling for a credit score that’s “just fine” like that might cost you when the time comes to borrow.

It pays to boost your credit score

You might manage to qualify for a loan with a just fine credit score of 670 to 739. But it might cost you in the form of a higher interest rate.

Let’s say you’re looking for a $300,000 mortgage loan. With a credit score of 800, which is exceptional, you might snag an interest rate of 7.020%, says myFICO.com, resulting in a $2,000 monthly payment. But let’s say your score is “just fine” at 700. That score might give you an interest rate of 7.242%, resulting in a monthly payment of $2,045.

So right there, your okay-but-not-great credit score is costing you an extra $540 a year. Wouldn’t you rather save that money or have the option to spend it on something fun?

That’s why it pays to boost your credit score. FICO says a score of 740 to 799 is very good. But a score of 800 or higher is exceptional. If you can get your score up to that level, you might really save big the next time you have to borrow.

How to boost your credit score

Boosting your credit score can take time. That said, if you’re starting off with a score that’s fine, and not poor, then you may find that you’re able to raise it relatively quickly.

The one thing you really want to focus on when trying to raise your credit score is your payment history. Being timely with bills could help that number increase.

However, if you’re eager to boost your credit score really quickly, paying down a big chunk of outstanding credit card debt could get you to that goal. That’s not an easy thing to do, but if you happen to come into some extra money, using it to whittle down an existing credit card balance could give your score a nice lift in fairly short order.

Another important thing to do for better credit is to monitor your credit report several times a year. Spotting and correcting errors could result in a notable bump in your score.

You may be satisfied with a credit score that’s perfectly fine but not particularly outstanding. But you should know that the higher your credit score, the more favorable an interest rate you’re likely to snag on a credit card or loan. That could result in a lot of savings. So for that reason alone, it’s worth making the effort to bump your credit score up.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Are you taking advantage of rising interest rates with high-yield CDs? Here’s what it could mean for your taxes. 

Certificate of deposit (CD) accounts have become far more popular over the past couple years, and it’s easy to see why. As the Federal Reserve has hiked the benchmark federal funds rate in an effort to combat inflation, CD yields have risen sharply. It is now possible to get a 1-year or 2-year CD with a yield significantly greater than 5% — a solid return for a risk-free investment.

However, with many people adding CDs to their saving and investing strategies for the first time, it’s important to know what it could mean for your tax bill.

Is CD interest taxable?

The short answer is yes. Interest you earn from a CD, is considered “interest income” in the eyes of the IRS, and is therefore subject to federal income tax.

Not only that, but interest income is taxed as ordinary income. While capital gains and qualified dividend income is taxed at preferential rates in most cases, interest income is taxed according to your marginal tax rate.

One important point is that CD interest is taxable in the year it was paid even if you leave it in the account. It doesn’t necessarily need to be paid directly to you, or even be available for withdrawal without penalty. In other words, if you have a 5-year CD, you’ll have to report the interest you earn every year.

CD interest tax reporting requirements

Technically, you are supposed to report every dollar of taxable income to the IRS. But for practical purposes, the IRS sets minimum thresholds of income that banks, employers, and other entities are required to report.

In most cases, if you have earned more than $10 in interest during a single year, the bank or credit union that paid the interest is required to send you a tax document known as a 1099-INT statement. And all taxpayers should know is that if you receive a tax document, it’s a safe assumption that the IRS received a copy as well and knows about the income.

Even if your bank doesn’t send you a 1099-INT, or you simply don’t receive one in the mail for one reason or another, you’re required to report interest income of $10 or more. This is a fairly low threshold, and it means that if you owned a CD with at least a few hundred dollars in it during 2023, there’s a strong probability you’ll have reportable interest income.

Can you avoid paying tax on your CD interest?

There are some situations where you might be able to reduce your tax bill, or even avoid taxes on your CD interest entirely. As one example, if you pay an early withdrawal penalty for taking money from a CD early, it can be deducted from your taxable income, even if it exceeds the interest income you earned.

Another way to avoid taxes on CD interest is to use a tax-advantaged retirement account, such as a traditional or Roth IRA. Many banks allow customers to open an IRA, and many of the top online brokerages offer a selection of CDs issued by several different banks. For the 2023 tax year, you can contribute as much as $6,500 to IRAs, or $7,500 if you are 50 or older, and you might even be able to deduct the amount of money you put into the account and avoid taxes on interest income. Keep these tips in mind if you’re hoping to lower your tax bill for the CDs you own.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Black Friday is coming. Read on for tips on how to snag great deals without landing in debt. 

Some people stash money in their savings account for Black Friday all year ’round so they have money to spend on what’s commonly hailed as the biggest sales event of the year. Ideally, you went that route, too.

But whether you did or not, the reality is that Black Friday can be a very tempting day to shop. And so it’s easy enough to land in a situation where you come home with more purchases than expected — and a giant credit card bill to boot.

The last thing you want is to end up with debt as a result of Black Friday. So rather than let that happen, use these tips to make the most of the day without going overboard.

1. Research deals ahead of time

Comparison shopping ahead of Black Friday is one the best ways to avoid overspending. Make a list of the items you want to buy that day and then compare prices once they drop so you know which retailer to hit.

Keep in mind that a lot of stores offer Black Friday deals online, so you don’t necessarily have to stress yourself to get to five different places to capitalize on the best deals. Also, many retailers leak Black Friday deals before the big event to drum up hype. It pays to check a few days ahead of time, so there’s less work to do the day of.

2. Set a budget so you know what you can afford to spend

It can be tempting to buy almost everything in sight on Black Friday due to the deals at hand. But you really don’t want to close out the day with a mountain of debt you have to carry into the new year.

A better bet? Set a spending budget for the day ahead of time. If you can’t swing more than $400 without carrying a credit card balance forward, then $400 is your limit.

Also, sticking to that budget means not falling back on a “buy now, pay later” plan. Although these installment plans aren’t the same thing as a credit card balance, when you sign up for one, you’re taking on debt nonetheless. And there can be serious consequences to falling behind.

3. Focus on the things you need right away

Maybe you want to upgrade some electronics on Black Friday, but you really need a new vacuum cleaner because yours just bit the dust. It pays to scoop up a new vacuum while they’re on sale. But if the other items on your list are sort of just general wants and not pressing needs, then it could pay to hold off on buying them. That way, you can space out your purchases and potentially steer clear of debt.

Also, holding off on certain items could mean snagging a better deal down the line. If you don’t need a new TV right away, for example, then it could pay to wait until January or February, as that’s when TVs tend to be most heavily discounted. And if you wait until then, you may come across extra money in the interim, such as cash gifts for the holidays from relatives or a year-end bonus from your employer that makes it easier to cover that expense.

4. Hang onto your receipts

Black Friday prices are often hailed as the lowest ones of the year. But that’s not always true. The last thing you want is to pay, say, $199.99 for a tablet only to see its price marked down to $179.99 a few weeks after the big event.

The good news, though, is that many retailers are in the business of price matching during the holiday season. So it’s important to keep your Black Friday receipts. That way, if you see an item you purchased marked down within 30 days, you can potentially go back to that retailer and get refunded the difference.

You don’t want to go on a Black Friday spending spree and regret it later. Follow these tips to snag some great bargains without putting yourself in a bad financial situation.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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