Money Management

Sky-high interest rates have made it more expensive than ever to buy a home. Find out how one startup will use assumable mortgages to resuscitate low-cost home loans. 

A couple of years ago, every new week seemed to bring new record low mortgage rates. As the COVID-19 pandemic hammered businesses, the Federal Reserve tried to stimulate the economy by cutting the cost of borrowing. That meant the average 30-year fixed-rate mortgage hit a record low of 2.67% in December 2020, according to Freddie Mac data.

The picture is very different for today’s home buyers. Top mortgage lenders are offering rates of 6% or 7% on the same 30-year mortgage. Indeed, a recent Redfin report said the median mortgage payment had reached a monthly high of over $2,600, making it “more expensive than ever to buy a home.”

What’s all this about a 2% mortgage rate?

A new startup called Roam wants to use a little-known aspect of home loans called an assumable mortgage to make buying a home more affordable. Assumable home loans essentially mean a seller can transfer an existing mortgage to the buyer at the existing rate. The company’s site boasts potential mortgage rates that are as low as 2%. Unsurprisingly, there are a lot of caveats to that, which we’ll get into shortly.

Overall, Roam reckons assumable loans will help home buyers “wind back the clock and purchase their home with a low-rate mortgage included.” The idea is that if you bought when rates were at record lows, you could potentially sell both the property and the low mortgage rate. Roam’s thinking is that sellers can get more interest and a better price for their property, while buyers can dramatically reduce the cost of homeownership.

If Roam can popularize assumable loans, we are talking about hundreds of thousands of dollars in potential savings for home buyers. Let’s put aside factors like down payments, closing costs, and eligibility for a second. Here’s how that difference might look on home loan of $375,000 for a 30-year fixed-rate mortgage:

The scenario above somewhat over simplifies the potential savings. If you’re buying a home with an assumed mortgage, you’d only be able to get a low rate on the existing mortgage balance for the remaining term. Perhaps the home you’re considering buying costs $450,000 and the current owners owe $250,000 on their mortgage. You’d still need to pay $200,000. That might take the form of a down payment combined with a second mortgage at a higher rate.

In that situation, if you could swing a down payment of $75,000 and a rate of 6% on your second mortgage, your costs on a $375,000 total loan might look like this:

Don’t get too excited

Before you rush out and start celebrating the return of low rates, let’s look at some of those caveats. The biggest is that a 2% rate is low, even for the heady low-mortgage days of 2020. We used a rate of 3% in our calculations above. That’s more realistic, but the seller’s rate could be even higher: Roam says it will work with sellers whose mortgage rate is less than 5%.

Moreover, assumable loans are not common and come with a lot of red tape. Not all mortgages qualify, and Roam won’t be an option for every home buyer. Here are some of the other restrictions:

It only applies to FHA and VA loans: Roam says, “Any homeowner that financed their home purchase with an FHA or VA loan and has a mortgage rate below 5% is eligible.” Many home buyers may qualify for FHA loans, which are guaranteed by the government and are often easier to get for than traditional mortgages. However, for the most part, only active members of the military or veterans can qualify for a VA loan.Mortgage lenders won’t be in a rush to process the loans: According to The Wall Street Journal, there’s not a lot of profit in it for lenders in the assumable loan market. As a result, they may be slow to process the paperwork.Roam only operates in five states: It is early days, but Roam is starting out in five states. If you don’t live in Georgia, Arizona, Colorado, Texas, or Florida, you won’t be able to use Roam’s services.You’ll still need to pay fees and closing costs: There are always closing costs involved in home loans, but they are usually calculated on the loan, not the value of the home. Roam charges a fee of 1% of the property purchase price. So in the $450,000 home we looked at above, the buyer would pay $4,500.

Bottom line

Roam promises to help buyers in the states it operates in by finding available properties, dealing with the paperwork, and managing the process with everybody involved. If you’re a potential home buyer in one of the states where Roam is active, why not see what the company could do for you?

When things sound too good to be true, it’s often better to give them a wide berth. In this case, Roam’s offer isn’t quite as good as it sounds. But for certain buyers, it could still generate significant savings. Put simply, it’s worth looking into any ways to reduce the eye-watering costs of buying a home in today’s market.

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The Federal Reserve won’t be raising interest rates in September. Read on to see why that’s a good thing. 

The Federal Reserve has been on a mission to cool inflation. And while its work isn’t quite done, a lot of progress has been made.

In August, the Consumer Price Index, which measures changes in the cost of consumer goods and services, was up 3.7% on an annual basis. Given that inflation peaked at 9.1% in mid-2022, 3.7% is a vast improvement.

However, the Fed’s optimal inflation rate is 2%. It’s this level, the central bank feels, that’s most conducive to long-term economic stability. And we’re still not quite at that level as far as inflation is concerned.

As such, it was unclear as to whether the Fed would opt to raise interest rates yet again at its September meeting. The central bank has already raised interest rates 11 times since March 2022.

Thankfully, the central bank just announced that it will pause its rate hikes for the time being. And that could spell a world of relief for consumers looking to borrow, as well as those with outstanding debt.

A lifeline for consumers

The Federal Reserve does not set consumer borrowing rates. When you sign a personal loan or mortgage, your lender is the entity that determines what interest rate to charge you. Rather, the Fed oversees the federal funds rate, which is the rate banks charge each other for short-term borrowing.

However, when that benchmark interest rate rises, lenders tend to pass their higher borrowing costs onto consumers via more expensive rates for products like home equity loans and auto loans. That’s what’s been happening over the past year and a half. And it’s made borrowing extraordinarily expensive for consumers who are simultaneously grappling with elevated living costs. So the fact that the Fed has decided against a 12th rate hike for now is a good thing.

Furthermore, the decision to pause rate hikes is apt to work out well for consumers with existing HELOC (home equity line of credit) and credit card balances. These products tend to come with variable interest rates, so when the Fed raises rates, borrowers tend to see their monthly payments go up. But now, people in that boat get a bit of relief.

Savers are still in a pretty good place, too

While rising interest rates can be problematic for consumers looking to borrow or those paying down debt, they can be a positive thing for savers with money in the bank. Over the past year, savings account and CD rates have soared, allowing savers to earn more on their money.

Since the Fed is pausing rate hikes, we may not see banks raise their interest rates. But the Fed also isn’t cutting rates. So the interest rate you’re able to get on your savings account right now might hold steady. And you might still be able to lock in a CD at a competitive rate in the coming weeks and months — so if you have money to spare, don’t wait to open a CD.

Given the progress that’s been made on fighting inflation, it’s not so surprising to see the Fed pause its rate hikes. But that doesn’t mean another rate hike isn’t in the future.

The Fed says that it plans to wait for more data to understand how previous rate hikes are affecting the economy before raising rates again. But we could still see another rate hike in the future. So it’s important to keep tabs on what the Fed is doing, since it has the potential to impact your finances in a very big way.

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I don’t want to overfund my kids’ 529 plans. But read on to see why I may be less likely to do that if I put more money in. 

Saving for my kids’ college education is important to me. I graduated college owing money despite having worked throughout my studies, and if possible, I’d like to give my kids the opportunity to avoid that same scenario.

I’ve been putting money into different accounts earmarked for my kids’ college. A portion of their college fund is in 529 plans, and the rest is in a regular brokerage account.

The upside of the 529 plan is that investments in that account get to grow tax-free, and withdrawals used for qualified education expenses are tax-free. I’m not getting any tax benefits from my regular brokerage account, but I get flexibility.

See, the risk of funding a 529 plan is that if you end up with excess money and you withdraw it for non-educational purposes, you risk getting penalized on the gains portion of that withdrawal (not your principal, since contributions to a 529 go in on an after-tax basis). With a regular brokerage account, there are no restrictions. If my kids all decide they don’t want to go to college, I can keep that money for myself and use it to pay for retirement expenses, a new house, or anything at all that I want.

But recently, the rules changed about excess funds in a 529 plan. And so while I thought I was done funding my kids’ 529 plans, I’m starting to rethink that.

More flexibility with your extra money

Let’s be very clear. If you end up in a situation where you have more money in your 529 plan than you need for your kids’ college, you’re in a good spot. It’s far better than the opposite — saving diligently but still not having enough money to cover your kids’ college expenses in full.

But having extra money in a 529 plan can still be annoying, because you’ll face penalties on non-educational withdrawals. And while you are allowed to change your 529 plan beneficiary, that may not be enough to use up your extra money (and it may not be a viable option if, say, you only have one child).

It’s for this reason that I’ve made a point to only house a small portion of my kids’ college savings in a 529. Should they decide not to go to college or end up getting a cheap education, I don’t want to have to scramble to find a way to avoid penalties.

Recently, however, the rules of 529 plans were updated to allow you to roll up to $35,000 in excess 529 funds over to a Roth IRA without penalty. And that’s a game-changer.

Let’s say you have one child and manage to save $150,000 in their 529 plan, but they only end up needing $120,000 for their college costs. Normally, you’d either have to find a new beneficiary for that remaining $30,000 or face a penalty on the gains portion of that sum. But now, there’s a better solution. You can simply roll that $30,000 into a Roth IRA for your child so that money is reserved for their retirement.

Is a 529 plan right for you?

Even with this change, some people might still be hesitant to save for college in a 529 plan. And if sticking to a regular brokerage account is more in your comfort zone, so be it.

But it does pay to consider a 529 plan in light of this change — especially if your previous hesitation stemmed from wanting to avoid a penalty. It’s still a good idea to split your college savings between a 529 plan and a regular brokerage account like I do so you have more options. But this way, you can enjoy tax-free growth on some of your money.

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Tipping fatigue is real. Read on to see how one writer handles it. 

Although I never worked as a restaurant server, there was a time in my life when my income was largely dependent on tips. Every summer during high school, I worked as a camp counselor where our pay was minimal — I’m talking a few hundred dollars for eight weeks of chasing kids around and keeping them safe.

Back then, my fellow counselors and I relied on the generosity of parents for the bulk of our summer income in tip form. And inevitably, despite doing what I always felt was a good job, there were some parents who wouldn’t even stick $5 in an envelope as a thank you after eight weeks of sweat-inducing work.

As such, I’m sympathetic to people who earn the bulk of their income as adults from tips. And while I’d love to see some reform in the restaurant industry so servers and other workers are paid a more livable wage, I realize we clearly have a ways to go in that regard.

At the same time, I can’t help but feel that tipping has gotten pretty out of hand these days. And I’m not the only one. Many Americans are suffering from tipping fatigue. And it’s hard to know when to tip, when not to, and how much.

Of course, I can’t claim to be an expert on tipping. But I am happy to share my approach.

When I’m dining at a restaurant

When I go to a sit-down restaurant, I go in expecting to tip a minimum of 20%. And last year, 47% of Americans tipped 20% at sit-down establishments, according to a survey from PlayUSA. Whether I’ll tip above 20%, however, depends on the level of service I get.

Recently, I took my kids out to dinner and the server was extremely patient with my crew. She was also super attentive to our table. So when the bill came, I added an almost 30% tip to my credit card and didn’t mind one bit.

On the other hand, I dined out with friends a few weeks ago and our server was MIA for most of our meal. I gave a 20% tip because I felt obligated to, though I don’t think the server deserved it.

When I’m getting delivery

I’ll commonly tip 10% to 20% on a delivery order, depending on the circumstances. If the restaurant is close by and it’s a quick order, I’ll usually go with a 10% to 15% tip. But if the driver is coming from a distance or the weather is lousy, I’ll tip closer to 20%.

However, I pay attention to see if the restaurant I’m ordering from is charging me a delivery fee. If so, I’ll generally tip a bit less, though never below 10%.

When I’m picking up my own food

This is a tricky one. I’ll be honest and say that for the most part, I don’t tip on takeout orders because I’m the one getting in my car and fetching my own meal. The way I see it, tipping on a takeout order isn’t so different from tipping the cashier at my grocery store.

Yes, I realize there are people at the restaurant who have to put my meal together when I order takeout. But I’m paying for that meal. There are also people who have to stock the shelves at my local supermarket, and I’m not tipping them, nor am I tipping the person who rings my groceries up.

I do make an exception, though, for things like ice cream and coffee. If I’m ordering a plain old coffee with nothing else, I won’t tip. Sorry, but you’re pouring a premade beverage into a cup.

But if you’re making me a latte or some other fancy beverage, you’ll get $1. Truth be told, I rarely order those fancy drinks, so usually, I don’t tip for coffee.

Meanwhile, during the summer, there’s an ice cream store in town I take my kids to pretty often. The people who work there are always nice about letting us sample new flavors. And they never complain when my kids want something more complex than a plain old scoop of ice cream, like a milkshake. So I usually throw a couple of dollars in the tip jar there before leaving.

When I stop at a quick-service place to buy something like a premade sandwich, I generally don’t tip. I liken that to takeout. And I don’t tip on fast food, either. (Does anyone, though?)

So there you have it. I’m not saying my system is perfect, but it works for me. I might get bashed for not tipping on takeout, but so be it. I have to draw a line somewhere. And if you have to do the same, you shouldn’t feel bad about it.

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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.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Fetch. The Motley Fool has a disclosure policy.

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Falling behind on a car loan could be seriously bad news. Read on to see why. 

Owning a car is always expensive. But this year, you might really end up in over your head if you’re forced to sign a new auto loan.

During the first quarter of 2023, the average monthly car payment rose to $730, according to Edmunds. We can attribute that to a combination of higher vehicle prices and financing rates on the heels of the Federal Reserve’s recent string of interest rate hikes.

Of course, the more you have to pay on an auto loan, the greater the risk of falling behind. And so it’s not surprising to see that auto loan delinquencies are on the rise.

During the first quarter of 2023, the auto loan delinquency rate was 6.9%. During the second quarter of the year, it was 7.3%.

But falling behind on an auto loan could have serious consequences. It’s best to do what you can to avoid that situation at all costs.

When you can’t keep up with your car payments

Failing to make your auto loan payments could result in you having your vehicle repossessed. Auto loans are secured, which means your lender has the right to go after the asset your loan was used to finance.

More so than that, any time a loan of yours becomes delinquent, whether it’s an auto loan, a home equity loan, or an unsecured personal loan, you run the risk of damaging your credit score. Of the various factors that go into calculating your credit score, your payment history carries the most weight (35%). And it speaks to how timely you are with bills and debt payments. When you don’t pay your debts, you unfortunately send a message to future lenders that you may not be so trustworthy as a borrower.

How to avoid falling behind on your auto loan payments

When your financial circumstances change unfavorably and unexpectedly, you might fall behind on your auto loan despite having borrowed a modest sum given your income. And that can’t always be helped.

But let’s say you’re in the market for a new car. What you’ll want to do is make a list of your ongoing expenses, compare their cost to your paycheck, and figure out what monthly loan payment is reasonable for you given those numbers. If you set a limit as to what loan payment you can afford and don’t go beyond it, you’ll be less likely to fall behind.

Of course, this strategy doesn’t account for factors like job loss. But if you make a point to maintain an emergency fund, you’ll have cash reserves to tap so you can keep up with your auto loan payments and other bills in that sort of scenario.

Meanwhile, if you already owe money on a car loan and are struggling to pay it, reach out to your lender and talk through your options. You may be able to adjust your loan payments to a lower amount or even pause them for a period. But it’s better to discuss things with your lender than to simply stop paying, because if you blow off your loan payments, you might lose your vehicle and face serious credit score damage.

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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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