Money Management

Adjustable-rate mortgages are always a bad idea, right? Maybe not. Read on to learn when an ARM might be a good choice to buy a home. 

Are you hoping to buy a home soon? It’s still not the best time to buy, as the supply of homes for sale remains low, tipping the scales in favor of sellers. Home prices are also up as a result. And, to add insult to injury, mortgage rates are about double what they were in the salad days of late 2020 and 2021, when the average rate for a 30-year fixed-rate mortgage was in the 3% range, per Freddie Mac.

As of this writing, the average rate sits at 6.39%, which will definitely make an already more expensive home even costlier. What’s an aspiring buyer to do? Well, you might consider getting an adjustable-rate mortgage, also known as an ARM. Just 1% of surveyed buyers bought a home with one last year, according to the 2022 Home Buyers and Sellers Generational Trends Report by the National Association of Realtors (NAR).

What’s an adjustable-rate mortgage?

An ARM is a mortgage loan with an interest rate that changes over the life of the loan, usually once annually after a fixed period of five, seven, or 10 years. The interest rate is determined by a financial index and could either go up or down. What you lose in predictability of what your payment will be for the full term of your loan, you may gain in a lower initial interest rate, which could really come in handy at a time like this. However, ARMs come with a potential drawback.

Since your rate adjusts periodically, you could later end up paying more per month than your initial payment amount. This could put you in real trouble if your income and budget can’t support those payments, and you may end up wanting to refinance to a fixed-rate loan before yours begins adjusting. That said, there are a couple times when an ARM might just be a fit when purchasing a home.

1. When you’ll get a lower starting interest rate than on a fixed loan

Interest rates for consumer borrowing are up across the board right now. The Federal Reserve’s interest rate hikes (10 at last count) since March 2022 were intended to moderate the rampant inflation we’ve all been living with by making it more expensive for banks to loan each other money. This has the effect of making consumer interest rates higher, too. But if you can save on the first few years (or longer, depending on the type of ARM) of your mortgage, an ARM might be worth considering now. If rates end up falling, your payments might even be lower after that first adjustment.

2. When you’re planning to move in a few years

An ARM can be a good way to save money on a home purchase if you don’t intend to stay in the house long enough for the interest rate to change at all. Let’s say you’re planning to move in less than five years, and can get a lower rate on an ARM than on a fixed-rate loan. In this instance, it could make sense to go for the ARM, as you won’t be affected by a changing rate if you can stick to your original plan.

Adjustable-rate mortgages have a bit of a negative reputation, but there are some instances where getting one could be a fine choice to buy a home. Just be sure to read the fine print on yours, so you know when to expect rate adjustments. And if you intend to stay in the home for the long haul, you might want to consider refinancing to a fixed-rate loan for more certainty of how much your payments will be over time.

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Looking to save more money? Read on to learn how one key choice could be your ticket to doing just that. 

One of the most important financial moves you can make when you’re relatively young is build up an emergency fund. That gives you cash reserves to tap when an unplanned expense pops up. And it could also be your ticket to avoiding costly credit card debt when unanticipated bills arrive.

But let’s face it — when you’re young and first embarking on a career, it can be really difficult to carve out money to put into your savings account. After all, you have rent to cover, utilities to pay, and other expenses to manage that come with living on your own.

But what if you were to not live on your own for a period of time? You might think that the idea of moving back in with your parents isn’t so appealing. But if you go that route, you won’t be going it alone.

Recent data from Empower shows that 22% of Generation Z is living with their parents in order to save money. And if you’ve been struggling to build savings, it’s a move you should strongly consider as well.

The upside of moving back home

Many people are able to live at home as young adults without having to pay rent. Now in that situation, the nice thing to do is chip in for things like utilities, streaming services, and groceries, especially if you have a tendency to take long showers, watch your fair share of Netflix, and raid the fridge. But you might save yourself a bunch of money by virtue of not having to pay rent alone.

RentCafe reports that the average rent across the U.S. is $1,702 a month. Now if you’re sharing a small apartment in a moderately priced city with two roommates, your monthly rent might only be around a third of that.

But let’s say you’re currently spending $600 a month on rent and you move back home for a year. That could easily make it so you’re able to bank $7,200 in 12 months’ time. Plus, if your parents are doing well financially, they may not even take your money for things like electricity and streaming services. So you might manage to save even more, thanks to their generosity.

A short-term sacrifice worth making

You might feel that moving back in with your parents is a major setback on the road to becoming an independent, functional adult. But rather than look at the negative, think about the financial upside.

Will you be giving up some amount of privacy and even freedom by moving back home as a young adult? Possibly. But think about the financial freedom you’ll gain by having a nicely padded savings account.

Of course, if you’re going to move back home, it’s important to set ground rules. Those might include things like you texting your parents as a courtesy if you’ll be out until 2 a.m., keeping quiet late at night, and doing your share of the cleaning.

All told, you might prefer to live outside of your parents’ home now that you’re grown and capable of hacking it on your own. But moving back home for even a single year could do a lot of great things for your savings. So if your parents are open to the idea, then it pays to take them up on that option and return to the nest temporarily.

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It’s hard to get out of credit card debt when you only pay the minimum. Check out these strategies that can help you increase your monthly payments. 

It’s widely recommended to pay more than the minimum on credit cards, and for good reason. If you’re only making minimum payments, it takes an extremely long time to pay off credit card debt.

To give you an example, let’s say your credit card has a $5,000 balance and a 20% interest rate. If you only pay the minimum, it will take you 277 months (over 23 years) to pay off your debt. You’ll also pay $7,723 in interest, meaning that debt ends up costing you $12,723 total.

But people who pay the minimum usually aren’t doing it because they don’t know any better. It’s often because that’s seemingly all they can afford to pay. If you feel as if you can only make minimum payments on your credit cards, here are the best ways to free up money and pay more.

1. Pay your credit card right when you receive your paycheck

A common piece of advice that helps with saving money is to pay yourself first. Instead of waiting until the end of the month to put money in your savings account, do it right after you get your paycheck. If you wait, it’s easy to overspend and end up with nothing left over later. If you do it immediately, you force yourself to save.

The same strategy works just as well with paying your credit cards. Instead of waiting until your payment is due, pay as much as you can right when you get your paycheck.

2. Focus on increasing your income

Increasing your income is one of the biggest financial improvements you can make. Finding ways to cut spending is great, and we’ll go over some options for that as well, but it only goes so far. That’s especially true if you’re already on a tight budget.

A higher salary makes it much easier to pay down your credit cards. Here are a few options to consider that could help you earn more:

Pick up more hours at work.Apply for a promotion or ask for a raise.See if there are any side hustles or freelance opportunities that fit your skillset.

3. Stop going out for food and drinks

Dining is an area where a lot of people overspend. In fact, 30% of consumers spend an average of $180 per week at restaurants. That’s over $9,000 per year, more than enough to pay off the typical adult’s credit card balance.

Even if you’re not spending that much on dinners and drinks, try cutting these from your budget for the time being. You may be surprised how much money it frees up and how much faster you can pay down your credit cards.

4. Start doing no-spend weeks

You could also take your spending cuts a step further and add no-spend weeks to your regular routine. A no-spend week is exactly what it sounds like. You don’t spend any money on nonessentials. Use all the money you save that week for your credit card payment.

The more frequently you do this, the more extra money you’ll have. Doing it week in and week out probably won’t be feasible, and it definitely wouldn’t be enjoyable. But one or two no-spend weeks per month is a good goal that can make a big difference.

5. Use an app

Many personal finance apps are designed to help you manage money better, save on bills, or get out of debt. Here are a few of the best types of apps that could speed up your progress on your credit cards:

Debt payoff apps offer payment plans, automated payments, and tools to help free up more money in your budget.Budgeting apps connect to your financial accounts and help you better track your spending.Coupon apps allow you to get discounts and cash back at the stores where you shop.

6. Redeem your rewards toward your credit card bill

If you have a rewards credit card, remember that you may be able to use your rewards as a statement credit on your bill. This option is available with cash back credit cards, so if you have one of those, use any cash back you’ve earned to lower your card’s balance.

Many travel credit cards also give you the option of redeeming your points this way. The drawback is that you normally get less value per point than you would if you redeemed them for travel. But if you’re in credit card debt, paying that off should be the priority, even if it means not quite getting the maximum value for your points.

When you’re making minimum payments on credit card debt, progress is slow. Your best bet is to see what you can do to start paying more so you can get out of debt more quickly.

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It’s important to invest in assets that are capable of generating solid growth. Read on to find out how you should invest when you’re young. 

If you have money you don’t need to keep in a savings account for emergency fund purposes, then it pays to put that money to work by investing it. You can do so in a regular brokerage account, a 401(k) plan through your job, or an IRA.

But if you’re going to invest, it pays to choose assets that are likely to deliver a solid return over time. And stocks easily fit that bill.

Recent data from Empower, however, shows that only 51% of Generation Z consider stocks a top asset to invest in. So if you’re a younger investor who’s been shying away from stocks, you may want to reconsider your stance.

When it pays to take on risk

There’s a reason some people are hesitant to invest in stocks. Stocks can be volatile, and when you buy them, there’s a chance you’ll lose money.

This risk is generally mitigated, however, by investing in stocks over a long period of time. The logic there is that your portfolio might lose value on a temporary basis. But if you sit tight and ride things out, you’re more likely to avoid losses.

It’s also important to remember that historically, the stock market has rewarded investors who have stuck with it. In fact, over the past 50 years, the stock market has generated an average annual 10% return, as measured by the performance of the S&P 500 index.

This doesn’t mean the stock market has had a great year every single year, though. Rather, that 10% average annual return accounts for years when the market performed poorly.

The point, though, is that on a long-term basis, investing in stocks has a tendency to pay off. So even though there’s some risk involved, it’s important to try to move past your fears and put some stocks into your portfolio — especially when you’re young and have time on your side.

How much wealth could stock investments bring you?

To illustrate the importance of investing in stocks, let’s say you’re 25 years old and invest $1,000 in stocks in your brokerage account. If your portfolio delivers an average annual return of 10%, and you don’t touch that money until age 70, you’ll end up with almost $73,000. That’s a huge increase.

Better yet, let’s imagine you invest $1,000 a year every year for those 45 years. Assuming that same return, you’re looking at a portfolio worth $716,000. That’s a nice sum to potentially retire on.

Of course, just because the stock market’s average yearly return is 10% doesn’t guarantee that’s the return you’ll end up generating with your investments. You may end up with a lower return on your money or a higher one.

The point, however, is that if you’re a member of Gen Z, it certainly pays to put your money into stocks since you have ample time to ride out market downturns and come out ahead. And if you make a point to assemble a diversified portfolio, you can lower your risk of losing money even more.

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You may want a low mortgage rate, but it’s important to be realistic about your borrowing options. Read on to learn more. 

In 2020, in the wake of the pandemic, mortgage rates dropped to record lows. Back then, you could sign a 30-year mortgage at or around 3%. And so not only did many prospective buyers rush to try to purchase homes, but many existing homeowners rushed to refinance their mortgages.

But mortgage rates began rising sharply from their pandemic-era lows in 2022. And since the start of 2023, 30-year mortgage rates have been hovering in the 6% range.

Historically speaking, that’s not actually so high. In fact, Freddie Mac says the average mortgage rate going back to 1971 is 7.75%.

But recent research from John Burns Research and Consulting found that 71% of home buyers insist they won’t sign a mortgage at a rate of over 5.5%. And 62% of buyers believe a “normal” mortgage rate is below 5.5%.

Unfortunately, though, it doesn’t look like mortgage rates are going to dip below the 6% mark anytime soon. And that’s something would-be buyers need to come to terms with.

We’re in a different environment

The reason today’s mortgage rates might look high or even unreasonable is because borrowers got used to the record-low rates that became available in 2020 and lasted through early 2022. But at this point, we’re in a different borrowing environment. And it’s best that prospective home buyers accept that and find ways to cope with today’s mortgage rates.

Of course, mortgage rates can fluctuate from week to week and month to month. But generally speaking, they’ve been stuck in the low- to mid-6% range so far all year. And they’re likely to stay in that vicinity as 2023 moves along. So if you’re eager to buy a home but you’re holding out for mortgage rates to get to 5.5% or below, you might be waiting a long time.

That’s why a better bet is to run the numbers and see if you can afford a home based on what mortgage rates look like at present. If you’re able to purchase a home you’ll be comfortable in and keep your total monthly housing costs to 30% of your take-home pay or less, then signing a mortgage at, say, 6.4% isn’t necessarily a terrible thing.

What you don’t want to do, though, is push yourself to buy a home at today’s rates if your monthly housing costs will exceed 30% of your pay or constitute a financial hardship. If today’s rates make it so that buying a home isn’t yet affordable, then your best bet is to wait.

You can always refinance

Mortgage rates are unlikely to plunge anytime soon. But in time, they could go down. And once that happens, you may have the option to refinance your loan to one with a lower interest rate, thereby slashing your monthly payments.

Unfortunately, signing a mortgage at over 5.5% might be a given these days. Even 15-year mortgage rates are averaging more like 5.75% today, according to Freddie Mac. So rather than fixate on that specific cutoff, instead, figure out what you can afford based on today’s borrowing conditions. If anything, you could always try negotiating a lower purchase price on the home you buy to make up for your higher borrowing costs.

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Some consumers pay their credit cards more frequently than required. Find out how paying your credit card bill every week could be beneficial. 

Since credit card bills are due monthly, most people pay theirs once a month. This isn’t the only option, though. You can technically pay your credit card as often as you want. Some consumers prefer to pay more often, such as every two weeks or even on a weekly basis. It might seem pointless, but there are actually a couple of benefits to paying your credit card every week.

It keeps your credit utilization lower, which is good for your credit score

Weekly credit card payments are one of the easier ways to boost your credit score. That’s because of an important scoring criteria called your credit utilization ratio. It’s a measurement of how much of your credit you’re using. Card issuers report your balances and credit limits once per month, and these are used to calculate your current credit utilization.

Paying weekly keeps your balances and your credit utilization lower, which is better for your credit score. Here’s an example to explain how this can be beneficial.

Let’s say you have one credit card with a $10,000 credit limit and a $5,000 balance. Your bill is due on the 28th, but the card issuer reports your balance on the 24th. You could do either of the following:

Pay monthly. You pay $5,000 on the 28th. Your card issuer already reported a $5,000 balance on the 24th. Because your credit limit is $10,000, your credit utilization is 50% and will negatively impact your credit score.Pay weekly. You pay $1,250 on the 7th, 14th, 21st, and 28th. Your card issuer reports a balance of $1,250 on the 24th. Your credit utilization is 12.5%, which is excellent and will positively impact your credit score.

How much this matters will depend on your typical credit utilization. If it’s on the high side (under 30% is recommended), paying weekly can lower it.

It could help you budget

As a general rule, the more you monitor your spending, the easier it is to stick to a budget. So, if you review and pay your credit card bill weekly, that could work better for budgeting than doing so monthly.

Imagine that you’ve decided to spend no more than $500 per week and $2,000 per month on your credit card. The first week, you spend $650. If you pay your credit card every week, you’ll see that you went over your limit. You can then figure out where to cut back and adjust your weekly spending the rest of the month so you don’t exceed $2,000 total.

If you pay your credit card monthly, you might not notice you’re overspending. Maybe you end up spending about $650 per week. By the time you get to the end of the month, you have a $2,600 bill, putting you $600 over budget.

There are plenty of other ways to monitor your spending. Lots of consumers like to use budgeting apps that connect to their financial accounts. But paying your credit card every week also works well.

It might be inconvenient

The drawback to paying credit cards weekly is that it’s more time-consuming. You can set up autopay for your monthly credit card payment. No credit card company that I know of has the option of setting up automatic weekly payments.

That means you’ll need to log in and make a manual payment every week. If you have multiple credit cards, then it’s even more to manage.

Should you pay your credit card bill every week?

The only rule about paying your credit card is to always make your payment by the due date. Ideally, you should pay the entire statement balance. If you do that, the card issuer won’t charge you interest on your purchases.

As long as you’re making at least your monthly payment, the frequency is up to you. Paying weekly could be a good idea if your credit utilization has been hurting your credit score, or if you want to better stay on top of your spending. But making weekly payments can be inconvenient, so it’s fine if you’d rather stick to paying monthly.

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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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