Money Management

You may be eager to fix up your home this spring. Read on to see why waiting could be a better bet. 

At this time of the year, you’ll commonly see a lot of homeowners working on their properties, or paying professionals to do that work for them. Spring is a popular time for renovations, and according to a survey by Today’s Homeowner conducted earlier this year, 90% of homeowners have improvement projects planned for 2023.

You may have a number of projects you’re hoping to tackle as well. And if you have the money in your savings account to pay for all of them, great. But if you need to borrow money to cover your home improvements, then you may want to hold off for one big reason.

Borrowing has gotten expensive

It’s common to finance home improvement projects by taking out home equity or personal loans. But right now, you’re generally looking at paying a higher rate of interest on a loan, even if you’re a borrower with excellent credit.

The Federal Reserve has been raising interest rates for more than a year in an effort to cool inflation. That’s driven the cost of borrowing way up.

Now normally, borrowers with strong credit can lock in lower interest rates on loans. But even if your credit score is outstanding, you might end up unhappy with your loan options due to today’s general borrowing environment.

In fact, the aforementioned survey found that homeowners are hesitant to borrow money for improvement projects due to interest rates being higher. As such, more people are looking at going the DIY route.

But that’s not always feasible. If you’re talking about a project that requires lots of tools and skills, doing it yourself may not be possible or wise. And the last thing you want to do is take on a home improvement project that could result in injury.

Also, just because you’re doing a project yourself doesn’t mean you can pay for it outright. You might have the skills to remodel your own master bathroom. But even so, you’ll still have to buy things like tiles, a vanity, a sink, and so forth. If you can’t pay for those items outright, then your project could end up becoming very expensive when you factor in the higher cost of borrowing.

Waiting could really pay off

It’s one thing to borrow money for a home repair. But it’s another thing to borrow money to improve your home when that can technically wait.

Replacing a failing roof is essential, so even if you have to take out a loan to do that, you should probably make it an immediate priority. But if you have a perfectly nice patio and you simply want to expand it and upgrade to nicer stone, that’s the sort of thing that could easily wait.

No matter how you borrow money these days, you’re looking at a higher interest rate. So if you’re willing to postpone your plans to renovate for another year, you might end up being able to borrow far more affordably. And that’s a decision that could impact your finances for many years.

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A home is likely the biggest purchase you’ll ever make. Keep reading to learn a few misconceptions about getting a mortgage loan to buy one. 

A mortgage loan is most likely going to be the biggest financial obligation you take on in your lifetime. But despite the fact that deciding to take on this debt is a huge decision, many people believe in some common mortgage myths. You don’t want to be one of those people.

To make sure you know the truth about home mortgages so you can make informed choices about buying a home, here are four of the most common misconceptions people tend to have about home loans.

1. You need 20% down

According to the National Association of Realtors (NAR), 35% of people think the required down payment to buy a home is between 16% and 20%, while 10% of people believe their down payment must exceed 20% of the home’s value.

This is far off the mark. In fact, NAR reports first-time buyers have typically made a home down payment equal to between 6% and 7% of their home’s value since 2018.

Now, it is true that it is ideal to have 20% down. By making a 20% down payment, you can avoid private mortgage insurance (PMI). PMI usually costs about 0.5% to 1.5% of the loan amount annually, so about $2,000 to $6,000 annually on a $400,000 house. That’s expensive, especially since this insurance only protects against lender losses in case of foreclosure, not against homeowner losses.

But if you can’t or don’t want to wait until you have saved 20% to buy a home, don’t fall for this myth and assume you’ll have to put off ownership until you’ve grown your savings account balance.

2. You should borrow up to the amount the bank allows

Another misconception is that you should determine how much you can borrow based on what the mortgage lender pre-approves you for. After all, the bank will review all your financial credentials and give you a maximum loan limit, so you may assume that’s the right amount to spend.

The reality, though, is the bank only cares how much you can borrow without defaulting — and your lender wants you to borrow as much as possible, up to that amount, so it can make more money off you. You need to care about other things, like other financial goals you have.

You should decide how much to borrow based on what comfortably fits in your budget. A common rule of thumb is to keep housing costs — including taxes and insurance — to 30% of your income at most. You may want to keep your costs lower if you have other huge goals like retiring early or sending several kids to college.

RELATED: Mortgage Calculator

3. You’re guaranteed a loan if you’re pre-approved

There are some myths about mortgage pre-approval as well. Specifically, many people assume if they go through the pre-approval process — which involves sending the bank a lot of financial documents — that they will definitely get a loan.

That’s not necessarily true, though. Most of the time it works out and you get the loan you were pre-approved for. But if your home doesn’t appraise for as much as the bank wants it to or you take on new debt before closing and you no longer meet qualifying requirements, then the bank may not give you a final loan after all.

To avoid problems after pre-approval, make sure you don’t make any major money moves like changing jobs or getting a new car loan until after your new mortgage closes.

4. Your credit has to be perfect to borrow

Finally, you may assume you need excellent, or at least good, credit in order to borrow. And, again, that’s not necessarily true. There are plenty of loan options out there for borrowers with bad credit, including FHA loans, which allow you to borrow with a credit score as low as 500.

Ideally, you will improve your credit before getting a home loan so you can get the best rates. But if you have a good-sized down payment, can easily afford the monthly payments, and are ready to be a homeowner and don’t want to wait to get a perfect credit score, then there’s nothing wrong with shopping around and seeing what’s out there for you.

Now you know the truth about some major mortgage myths and hopefully you can make better, more informed choices so you go into homeownership with both eyes open.

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Payday loans often come with interest rates of 400% or more. However, these 19 states have outlawed the practice. Read on to find out why. 

When a lender imposes unfair loan terms on a borrower, it’s considered predatory lending. And there’s no doubt that payday lenders impose some of the most unfair loan terms on low-income borrowers legally permissible in their state. Fortunately, 19 states have outlawed predatory lending. Unfortunately, residents of 31 other states must learn to recognize predatory lending practices and come up with alternative ways to find the money they need.

If you live in any of these states, predatory lending is illegal:

ArizonaArkansasColoradoConnecticutGeorgiaMarylandMassachusettsMontanaNebraskaNew HampshireNew JerseyNew MexicoNew YorkNorth CarolinaPennsylvaniaSouth DakotaVermontWest VirginiaDistrict of Columbia

Shockingly high rates on payday loans

Of the 31 remaining states, five have set a rate cap limit of 36%. Ohio limits the rate payday lenders can charge to 28%. Still, rates are shockingly high. For example:

In Alabama, rates are capped at 456.25%.

In Alaska, consumers can’t pay more than 520%.

In Hawaii, the rate cap is 459%.

In Kentucky, consumers may get caught up in rates as high as 782%.

In Missouri, payday lenders can charge up to 1,955% on a 14-day loan.

Worse yet, perhaps, there is no limit on the interest rate consumers in Delaware, Idaho, Nevada, Texas, Utah, or Wisconsin may pay.

Difficult to escape, by design

When you’re desperate for money, payday lenders seem like an easy way to meet a need. All most payday lenders require you to provide is:

An active bank, credit union, or prepaid card accountProof or verification of incomeValid identification

Payday loans are meant to be short term. In theory, you’re supposed to pay the loan back when your next paycheck comes in — normally in one or two weeks. However, by the time the lender adds fees and interest to the loan, the average borrower can’t pay it back and must take out a new loan to cover the old loan. Once that happens, they’re forced to deal with a new set of fees and more interest.

According to the Consumer Financial Protection Bureau (CFPB), 80% of payday loans are not paid back by the date they’re due, causing the interest rate to soar and making the loan difficult to pay off. The Pew Charitable Trusts found that the average borrower requires five months to repay a $300 payday loan.

The “ideal” payday loan borrower

Payday lenders depend on borrowers with credit scores too low to borrow from a reputable lending institution. They justify their interest rates by pointing out that their clientele is “high-risk.” And yet, that’s who they advertise to and who they hope will walk through the door or log onto their site. The longer it takes a borrower to repay a loan, the more money the lender makes.

What happens if you don’t pay?

If you fail to pay your loan, the payday lender will cash the check you left with it as part of the lending agreement. If there’s not enough money in your account, you’ll be charged a fee by both your bank and payday lender. Some payday lenders may try to cash the check several times. Each time it bounces, you’re charged an overdraft fee.

If the payday lender can’t get the money from your account and you don’t roll the original loan over into a new, larger loan, it will likely send the debt to a collection agency. You’ll probably owe collections fees, and if the collection agency sues you, you may also owe court costs.

Tip: If you’re not going to be able to repay a payday loan in full by the date it’s due, let the lender know. There are steps you can take to get out of payday loan debt.

Explore other options

Before borrowing funds from a payday lender, take a look at your other options. For example:

If you’re a member of a credit union or have been with the same bank long enough, you may qualify for a short-term loan, even with poor credit. Check with your financial institution first. If you don’t need much money, ask a friend or family member if you can borrow from them. If they agree, put a loan agreement in writing so there’s no confusion as to when you’ll repay the money. Contact a local nonprofit that helps individuals with short-term financial issues. For example, if you can’t afford groceries, reach out to a local food pantry. Take a cash advance from your credit card. Yes, the interest rate will be high, but not as high as you are likely to pay through a payday lender.

Tip: Don’t forget that cash advances on your credit card carry a higher interest rate than everyday purchases. Check with your credit card company to learn what your rate would be.

The good news is that some states are working to end predatory lending practices. The bad news is that it’s a slow process. In the meantime, plan ahead. If possible, build a small emergency fund that you can tap when a problem arises. Even if you can only put a few dollars away a month, it will eventually add up. The only way to beat payday lenders is to never play their game.

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Investing as a minor is easy. Find out how teens and parents can safely invest together to meet financial goals. 

Investing early is fantastic for one’s long-term finances. Best case scenario, money trickles into a brokerage account and, thanks to the magic of compound interest, emerges as a flood of high-yield savings — enough to take the edge off college fees and other big expenses.

Here’s how you can start investing before 18 years old, how to invest smartly, and things both parents and teens should know before opening a custodial account.

Open a custodial account

Investing as a teenager requires two things: parental participation and a custodial brokerage account. A custodial account is a brokerage account that parents can open for their children. The parent, the custodian, has final authority over the account within legal limits.

The main perks of custodial accounts:

They are easy to open.They have zero contribution limits and offer investment flexibility.Money can be withdrawn anytime, so long as it directly benefits the minor.

Minors may want to open a custodial account to save money toward paying for college expenses, trips abroad, or a first apartment. Parents may be interested in opening a custodial account to kindle a healthy interest in “boring” finances within their child.

Regardless, opening a custodial account is a firm step in the right direction. Investors who understand how money compounds can only dream of the wealth they might have built had they begun when they were teenagers.

Follow long-term financial advice from experts

Financial experts like Suze Orman typically bring up a handful of rules that help investors make money. To make the best of investing before you turn 18, consider the following:

Stocks are historically some of the best long-term investments.Diversification makes portfolios more likely to earn income.Having money invested before 18 is an uncommon advantage.

This general wisdom holds for all investors, but it’s essential for minors new to the stock market.

Parents ultimately control the custodial account, but they’ll probably want to involve their children in investing.

Why? One day, minors will have complete control over the remaining funds. Custodial accounts come with risks. This brings us to some things parents and folks under 18 should know.

What to know before opening a custodial account

Two important things:

Custodial accounts may reduce eligibility for college-related financial aid.Minors have total control over the account when they come of age.

Colleges and the government consider custodial accounts when determining how much financial aid to distribute. Consider opening a tax-advantaged 529 savings plan instead if you want to spend 100% of those savings on college expenses.

A minor has complete control over the custodial account when they come of age. As many parents know, when money seems easy-come, it often ends up easy-go. Proving to minors that, hey, this money took an effort to build is part of preparing them to manage their account smartly.

Some custodial accounts, like Acorns, come with educational content. Building financial literacy is essential to getting minors up to speed on how money works. Custodial accounts allow minors to practice investing, saving, and spending with little downside.

Consider combining active participation with a top-tier custodial account to put that money to work. Starting early builds long-term savings and gives teens a head-start advantage. Properly executed, investing before 18 can be a win-win for teens and parents both.

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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.Cole Tretheway has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Graduating college? Read on to see why bunking with your parents could be a smart move. 

In the coming weeks, a lot of new college graduates will no doubt be packing up their dorm rooms or college town rentals and saying goodbye to their campuses for good. Getting a degree is a big milestone, and one you should be proud of. But now that you’re graduating, you might have a conundrum — where should you live?

Your first inclination may be to go out and rent an apartment, whether alone or with friends. But seeing as how the median monthly rent in March was $1,937 on a national scale, according to Rent.com, you may be better off going a completely different route — moving back home.

When it pays to return to the nest

After living on your own for a number of years, the idea of moving back in with your parents can seem unappealing. But if you go this route, it could really benefit you financially.

For one thing, many people graduate college with debt. Moving back home for a period of time could make it much easier to start chipping away at your loan balance.

Also, it’s important to have an emergency fund to cover at least three months’ worth of essential bills — and ideally, before you take on expenses like rent. If you’re just graduating from college and don’t yet have much cash in your savings account, moving back home for a year or so could make it possible to build up some reserves.

What’s more, these days, a lot of people are having a hard time buying a home. Mortgage rates are up, as are property values, and that combination has made homeownership unaffordable for a lot of people.

Now, if you’re first graduating from college, purchasing a home may not be that high on your list of priorities. But you may want to buy a home within the next few years. And if you live with your parents for a bit of time after college, it’ll give you an opportunity to save up a down payment to put toward a home purchase.

A move worth making

Between inflation and high rent prices, living on your own right out of college can be a tough thing. Remember, chances are, you’re going to be looking at entry-level jobs that come with entry-level salaries. And if you’d rather not have to spend a large chunk of your earnings on rent, then returning to your parents’ home could allow you to shed existing debt, boost your savings, and set yourself up to meet different goals.

Of course, you’ll want and need to set some expectations if you’ll be moving back home post-college. Talk to your parents about boundaries and make sure you’ll be able to respect each other’s privacy.

Also, don’t take too much advantage of their generosity. If your parents are paying their mortgage loan already, they may not feel compelled to ask you to pay rent. But if you’ll be using electricity and eating food out of their fridge, the nice thing to do is at least offer to chip in for those things.

By virtue of not having to pay rent for a place of your own, you’re apt to save a lot of money. And that could be a very good way to kick off young adulthood.

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I signed up for an airline credit card because I always travel on the same airline. Here’s why that’s an important consideration. 

Airline credit cards are cards co-branded with airlines. Usually, the cards can be used both for purchases with the airline as well as for other spending. These cards are an alternative to general purpose travel cards.

For a long time, I was against signing up for an airline card. But I changed my mind recently and I now have one in my wallet. I’m very glad about it — here’s why.

The big reason why I signed up for an airline credit card

The single biggest reason why I signed up for an airline credit card is because my family and I almost always fly with one particular airline.

For a long time, we used to shop around and pick our flight based on which airline offered the cheapest rates. But, because of our current family structure and our needs as far as when, where, and how we fly, we now have to fly with the same airline for all of our trips.

Since we are loyal to one particular airline, it made a lot of sense for us to sign up for a card offered by that airline. That’s because airline credit cards typically offer a huge host of perks, which can include things like access to their airline lounges, free checked bags, upgrades to premium seats, and more. However, you can usually benefit from using these perks only if you are flying with the airline that the card came from.

If I was flying with lots of different airlines like I used to, most of the perks the card offers would go unused or would be underutilized. I might get to take advantage of the free lounge access once or twice a year if I happened to be flying on the airline my card came from, but this wouldn’t be good enough to justify paying an annual fee. And, most airline cards offering the most generous cardholder benefits do charge a fee — so I wanted to make sure that paying it was justified.

My airline credit card gives me a lot of bang for my buck

I’m very glad I signed up for my airline credit card, because my family and I took 12 flights last year (including round-trip flights) — and on each and every one of those flights, we flew with the airline that issued our branded credit card.

This meant we got to enjoy airline lounge access 12 times at no extra cost which, by itself, was enough to make signing up for the airline card worth it. Of course, I could pay for a day pass at a cost of around $60 per flight, or join a program like Priority Pass that offers discounted rates to access lounges.

But, even with Priority Pass, which charges membership fees starting at $69, there’s still a charge for each lounge visit. The only way to get unlimited trips to the lounge without having to pay each time would be to pay $469 for a Prestige Membership — and even then, I’d have to pay for guests each time.

My card offered me not just lounge access, but tons of other airline-specific perks as well. As long as I continue to fly with this airline for all my trips, which is the plan for the foreseeable future, keeping the card will be well worth it. If I go back to choosing flights based on price and end up flying with all different carriers, though, I would absolutely cancel the card.

Anyone who is considering getting a card from a particular airline should take the time to think about how they prefer to travel. If you’re loyal to one airline and travel often on it, getting a co-branded card if that carrier offers one is often well worth it — even if you have to pay an annual fee to get all of the best benefits the card issuer offers.

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