Money Management

Mortgage loan interest rates are still up, but they could fall over time. Keep reading to learn how to put yourself in the best position to refinance. 

All things considered, now isn’t a particularly good time to refinance your home loan. Mortgage interest rates climbed over the course of 2022, and according to Freddie Mac, as of this writing, we’re sitting at an average rate of 6.43% for a 30-year fixed-rate mortgage. Plus, mortgage refinance rates are likely to be even higher than those for a new purchase. But if a home loan refinance could be on the horizon for you if and when rates start to fall, will you qualify?

Per the credit bureau TransUnion, a general rule of thumb for refinancing your mortgage is that you must have at least 20% equity in the home. Let’s take a look at how home equity works and a few reasons you might consider refinancing when rates fall.

What is home equity, anyway?

One of the benefits of owning a home is that as you make payments on your mortgage loan, you build home equity. Home equity is defined as the amount of your home you own, as opposed to what is still owned by the bank that loaned you the funds to purchase the home in the form of a mortgage.

For example, let’s say your home is currently worth $250,000 and you still owe $200,000 on it, having made $50,000 worth of principal payments. In this instance, you’d have 20% equity in your home, and if you wanted to refinance, you might be able to based on that rule of thumb we discussed earlier. But if you had only paid $25,000 on your loan to this point, you’d be sitting at just 10% equity and may not qualify to refinance. But why would you want to?

Why refinance?

There are a few reasons to refinance your mortgage. If you’re struggling with how high your payments are, refinancing to a lower interest rate will reduce them, and so will changing the terms of your mortgage. For example, if you have 20 years left on your 30-year mortgage, you can spread the remaining amount owed across a new 30-year period.

You might also decide to change your mortgage type with a refinance. If you bought with an FHA loan and made a low down payment (3.5%), you would have been required to pay mortgage insurance premiums (MIP). If you’ve now reached 20% equity in the home, you might want to refinance to a conventional loan and save yourself the cost of that mortgage insurance.

You can also refinance to convert an adjustable-rate mortgage to a fixed-rate one. This will leave you with a set interest rate as opposed to one that changes every year after the initial fixed term of five or seven years.

How can you boost your home equity?

Generally, as you make payments on your home loan, your home equity will increase. If you want to help the process along, you can consider paying more on your mortgage, such as by making larger payments every month, making extra payments, or sending occasional extra money to the loan (such as a tax refund or work bonus). Improving your home (say, by remodeling or making upgrades) can also boost its value and therefore your equity.

Finally, if you’re not yet a homeowner but want to ensure you go into the mortgage with equity, make a higher down payment. Making at least a 20% down payment will save you from paying private mortgage insurance (PMI) on a conventional loan. But the more money you can put into a home purchase, the more equity you’ll have from the beginning.

If you’re hoping to refinance your loan when we start to see lower mortgage rates, have a look at your equity by comparing how much you still owe on the house. If you don’t have 20% equity but have a strong credit score, TransUnion notes that you may still be able to refinance. Shop around with refinance lenders and see what your options are based on your situation.

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Think you’re too old to own stocks? Read on to see why holding them might work to your benefit. 

It’s important to keep your money invested not just in the years leading up to retirement, but also in retirement. If you enter retirement with a $500,000 IRA or 401(k), you’ll want that balance to keep growing even as you’re taking withdrawals. That will give you more financial freedom as a retiree.

Now, you may have heard that stocks can be a risky investment for older people because their value can fluctuate on a whim, whereas more conservative assets like bonds tend to be more stable. The reason it’s okay for younger people to have most of their assets in stocks is that they have time to ride out market downturns. But if you’re in retirement and are already tapping your portfolio to cover living costs, you may not have that same flexibility.

As such, it’s a good idea to limit your stock holdings once you get older. But there’s definitely no such thing as being too old to own stocks.

It’s all about striking the right balance

The reason you want to keep some stocks in your portfolio when you’re older, whether it’s your IRA or a regular brokerage account, is that they commonly generate higher returns than safer assets, like bonds. And you want those higher returns to keep helping you grow wealth.

That’s why dumping your stocks completely in retirement is not the best move. But you also don’t want to go too heavy on stocks, either, because you want to limit your risk.

So how do you strike the right balance? One rule you can use is to take the number 110 and subtract your age. That could represent the percentage of your portfolio that you should keep in stocks. So if you’re 75 years old, you’d subtract 75 from 110 to arrive at 35% of your holdings in stocks.

You can also follow this advice from Schwab:

At age 60 to 69, consider a moderate portfolio that’s 60% invested in stocks.At age 70 to 79, consider a moderately conservative portfolio with 40% in stocks.At age 80 and above, be conservative and limit your stock holdings to 20%.

Or, you could simply develop your own strategy based on your personal risk tolerance, income needs, and other factors. If the idea of having more than 15% of your portfolio in stocks, for example, keeps you awake at night, then limit yourself to that percentage. Your comfort level is something that should absolutely be accounted for.

You’re not too old to grow your money

Keeping stocks in your portfolio is a great way to generate ongoing retirement income, which you’ll need to live comfortably and meet your goals. If you’re not comfortable holding a lot of stocks in retirement, go light on them. But think twice before you decide to dump your stocks completely.

If you stick with investments that are too safe, you might have to limit your spending or make other sacrifices. On the flipside, taking on a modest amount of risk might give you a lot more financial flexibility.

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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.Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab. The Motley Fool has a disclosure policy.

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Thinking of starting a 529? Read on to see if that’s a good college savings option. 

Paying for college is no easy feat these days. The average cost of tuition and fees at private college was $39,723 during the 2022–2023 academic year, according to U.S. News and World Report. Granted, there are less expensive options than private college. But even state schools have gotten expensive.

The average cost of tuition and fees at public out-of-state schools was $22,953 for the 2022–2023 academic year, and $10,423 at public in-state schools. This means that a student looking to attend college in their state of residence is facing costs of almost $42,000 all-in before even factoring in expenses like books and supplies (and assuming the aforementioned figure holds steady).

If these numbers are inspiring you to start saving for college before your kids are old enough to walk, you’re not alone. And that’s actually a really smart move. The earlier you start saving and investing for college, the more opportunity your money will have to grow.

Now, when it comes to saving for college, you have options. You could put your money into a brokerage account, and that way, you’ll have no restrictions. But you may want to consider saving for college in a 529 plan instead. Here are some pros and cons of going this route.

Pro No. 1: Tax-free gains

When you invest in a regular brokerage account and make money, you’re liable for capital gains taxes. With a 529 plan, you can get out of paying those taxes the same way you can in a Roth IRA, as long as that money is used for qualifying education expenses.

So let’s say you put $40,000 into a 529 plan over the course of several years, and that $40,000 grows into $70,000 over time. If you use all of your money to cover college expenses, you won’t be taxed on your $30,000 in gains. That’s a lot of savings.

Pro No. 2: Flexibility to change beneficiaries

You might fund a 529 plan to put your kids through college. But if they decide not to go to college, or if you wind up with more money in savings than what you need, you’re not out of luck. You can easily designate a new beneficiary for your 529 plan, whether it’s a grandchild or even yourself, should you decide to go back to school.

Con No. 1: There are penalties for non-qualified withdrawals

We just learned that 529 plans give you tax-free growth on your money if it’s used for qualifying education expenses. But if you take a non-education withdrawal, you’ll be assessed a 10% penalty on the gains portion of your withdrawal. You’ll also be taxed on your gains.

Con No. 2: There’s no tax break on contributions

When you put money into a traditional IRA or 401(k) plan for retirement, your money goes in tax-free. But 529 plans don’t work that way. The tax break comes on the gains portion of your account, but that may not make it any easier for you to carve out money to put into a 529 in the first place.

All told, a 529 plan could be a great home for your college savings. But you may want to spread out your savings between a 529 plan and other options. That way, not only do you get some tax benefits, but you also get more flexibility with your money.

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Not sure which type of account to invest in? Read on to see how to allocate your money. 

If you have money you might need for emergency expenses, it’s best to keep that cash tucked away in a savings account. But if you have extra money beyond that and you’re hoping to invest it, then your best bet may be to put it in a brokerage account or IRA where you can grow it into a larger sum. The question is, which is the better choice?

The difference between a brokerage account and an IRA

A brokerage account lets you invest for any purpose, and you can invest any amount of money you want within a given year. You can also take withdrawals from your brokerage account at any time without penalty.

IRA accounts work differently. With an IRA, you’re getting a tax break on the money you put into your account — meaning, your contribution is tax-free. You also get to enjoy tax-deferred growth in your IRA, so you don’t pay taxes on gains year after year like you would with a regular brokerage account. You simply get taxed on withdrawals when you take them.

Because IRAs are supposed to serve as retirement savings plans (“IRA” actually stands for “individual retirement account”), there are rules you need to follow. You can only contribute a specific amount of money each year — currently, the limit is $6,500 for savers under the age of 50 and $7,500 for savers 50 and over. You also can’t remove funds from an IRA prior to age 59½, and if you do, you’ll generally face a 10% early withdrawal penalty.

Clearly, regular brokerage accounts are a lot more flexible than IRAs. So if you’re not sure which option to invest in, you’ll need to ask yourself what you’re investing for.

How much flexibility do you need?

If you want to invest money specifically for retirement, then an IRA is generally your best option due to the tax breaks involved. But to be clear, you can also use a regular brokerage account to invest for retirement — you just won’t get the tax benefits.

You may, however, want the option to cash out portions of your portfolio prior to retirement. Maybe you expect to pull funds to pay for your kids’ college. Or maybe you want more leeway to take your money out for other purposes, whether it’s to buy a car or invest in a rental property. Either way, a brokerage account is going to give you the most flexibility with your money. So if that’s important to you, then it may be worth it to you to give up some tax breaks in exchange.

Of course, one thing you could always do is try to max out your IRA contribution for the year and then invest funds beyond that in a brokerage account. That essentially gives you the best of both worlds. And if you can’t afford to max out an IRA and fund a brokerage account, you may want to then take whatever money you have to invest and split it half, putting 50% into an IRA and 50% into a brokerage account.

An IRA is a great retirement savings tool, but it limits you in many ways. So if you feel that sticking to an IRA will mean risking penalties, then you may be better off giving up some tax breaks and going with a regular brokerage account instead.

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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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