Money Management

Your home bank is far less likely to view you as a number that needs to undergo a risk assessment. 

One of the most important financial moves you can make is to rate shop before taking out a loan of any kind. It’s only after checking with several lenders that you can be sure you’re getting the best deal. That said, you should first check with your home bank or credit union.

Here are five reasons why.

1. A powerful, often overlooked human response

As humans, we crave human connection — and there’s a good reason for it.

A decade ago, a great article in Scientific American explored how we’re wired to connect with each other. According to scientist Matthew Lieberman, our need to connect is as fundamental as our need for food and water.

Our need for connection is so great that scientists say loneliness can lead to a host of physical and emotional problems. According to cognitive scientist and Yale psychology professor Laurie Santos, surveys indicate that around 60% of Americans report feeling lonely on “a pretty regular basis.” Santos said, “And everything we know suggests that loneliness might be as big of a public health threat in terms of the effect that it has on our bodies and our minds.”

Think of the last time you felt rejected or excluded from a social situation. If what you experienced felt a lot like physical pain, that’s because the feelings are as intense as physical pain. Lieberman says that humans have evolved to view social rejection as a threat to our survival. In other words, our ancestors knew they could not survive on their own, and the loss of camaraderie was a risk. We carry the need for connection with us to this day.

Takeaway: Even if your financial institution offers the option to apply for a loan directly through its website, it’s a good idea to make an appointment with a loan officer for an in-person meeting.

2. You’re more than a number

This matters because everything boils down to relationships. If you have banked with your financial institution for years, employees may know your name. At the very least, they may recognize your face. Even if we’re not close friends with someone, there’s a comfort to be found in seeing a familiar face.

When you walk into your home bank, you’re more than just a number. You’re a loyal customer, someone the staff hopes to keep happy. They may even know your family members or, at the very least, think you have excellent taste for choosing to bank there.

Finally, if you qualify for a personal loan with your home bank, it may look for ways to reward you. It’s common for banks to save the best interest rates and loan terms for their current customers.

Takeaway: If you know a particular loan officer, ask to meet with that person to discuss loan options.

3. You may even be an “owner”

If you happen to be one of the estimated 132.6 million credit union members, you may benefit from that membership. Credit unions are nonprofit organizations, and as such, each member owns a small piece of the financial institution. Members can run for a position on the board of directors, no matter how much or little they have in their checking accounts. They’re allowed to vote on all major issues facing the credit union.

Another benefit of being a nonprofit organization is that credit unions have more flexibility regarding loan approval. For example, if a member’s credit score is less than perfect, a credit union has more wiggle room when deciding whether to grant a loan. It’s more likely to look at things like how well that member has managed their accounts and how long they’ve worked in their current field.

Takeaway: Whether you’re a credit union member or bank customer, focus on boosting your credit score before there’s a need for a loan.

4. Offering collateral becomes a realistic option

The European Central Bank describes collateral like this: “Collateral is an item of value that a lender can seize from a borrower if he or she fails to repay a loan according to the agreed terms.”

According to the blog LendEDU, 76.12% of loan applications are denied. While several factors go into loan eligibility, two of the most common reasons for denial are a low credit score or poor credit history. And that’s where collateral can come in handy.

By giving a lender something of value “to hold,” it knows that if you fail to make payments, it can sell the collateral and recoup the lost money. A lender does not take physical possession of the collateral unless you miss payments.

Typically, a lender that deals with collateral will accept any item of value that can be appraised. For example, you may use heirloom jewelry, gold coins, a classic car, or property to secure a loan. Some people even use investment accounts, like an IRA. Once the item is appraised and the lender knows its worth, it can determine whether the collateral is valuable enough to cover potential losses.

Online lenders can be an excellent source for low-interest personal loans. However, they are not able to accept collateral to secure a loan because it would be challenging to appraise items or repossess and sell the collateral if needed.

Takeaway: If you’re concerned that your credit score isn’t high enough to qualify for a loan, consider whether securing a loan with collateral is the right move for you. One important thing to keep in mind is this: If you miss payments, the lender will take possession of that collateral, sell it, and recoup its losses.

5. You can look someone in the eye

Getting back to that need we have for human connection, there’s power in looking a person in the eye. Rather than some random number on a loan application, you’re a real person who truly needs a loan. You can explain why you need the money and how you plan to use it. If the bank officer has any questions about your credit history, you’re right there to answer.

For example, if you’ve only been out of college for a year or two and have not built a credit history, you can explain this to the loan officer. If there was a divorce in your recent past and it damaged your credit score, you can point out which financial obligations were yours.

If the lender denies your loan request, you can ask whether you would qualify for a smaller loan with a shorter term. You can also find out if the lender accepts cosigners on loan applications. In short, there are avenues open to you when you’re face to face with someone that are unavailable when your application is just another piece of data run through a loan approval algorithm.

It’s difficult not to feel for the person sitting across the desk from us. Working with your bank means sitting down with someone who would prefer to see you happy, especially when they know they will likely see you again in the future.

Takeaway: Never underestimate the power of human connection in lending.

Whether things work out with your home bank or not, you owe it to yourself to check with several lenders. The pre-approval process consists of a “soft” credit check, which will not impact your credit score. Typically, a lender will not conduct a “hard” credit check until they’ve pre-approved your loan and you’ve committed to accepting the loan. The ding to your credit caused by a hard credit pull should be minimal and your score will rebound once you begin making regular monthly payments.

It’s easy to view banks as cold, impersonal organizations. But financial institutions are filled with flesh-and-blood humans, knowledgeable and willing to help. Those are the people you can turn to as you navigate the loan process.

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You may not like what you see. 

It’s hardly a secret that U.S. home prices were quite elevated in 2022. Between that and higher mortgage rates, many buyers struggled with affordability.

But in recent months, home prices have started to cool. We can actually thank higher mortgage rates for that.

In a recent tweet, financial and real estate expert Graham Stephan said, “The housing market correction has already caused homeowners to lose $2.3 trillion.” He then went on to say, “It’s the first time we are seeing consistent drops in home prices after the 2008 crisis.”

Now at first glance, that message might seem alarming. After all, a $2.3 trillion drop — even across the entire U.S. housing market — is not insignificant. But should you be worried if your home has come down in value? Well, it depends.

It’s a matter of whether you’re looking to sell

Let’s say you bought a home for $500,000 last year that’s now only worth $480,000. Seeing that drop can be a bit disheartening, the same way it never feels great to log into your brokerage account and notice that your portfolio value has taken a hit due to market volatility.

But a decline in home prices doesn’t necessarily have to be a problem. And if you’re not looking to sell your home any time soon, then you really shouldn’t lose sleep over the fact that its market value has dropped.

In this example, let’s say you can afford your mortgage payments just fine and there’s no reason for you to move. If your home is now worth $20,000 less than it may have been worth a year ago, all it means is that you have a bit less equity.

Now if you’re planning to borrow against your home equity, whether via a home equity loan or line of credit, then you may want to apply sooner rather than later, before U.S. housing prices further decline as a whole. But otherwise, you really shouldn’t sweat it if your home isn’t worth quite as much as it was last year.

And also, frankly, you shouldn’t be surprised. Home prices were very clearly elevated in 2022. It would stand to reason that higher prices wouldn’t be sustainable on a long-term basis — especially at a time when mortgage rates are up.

What if you need to sell?

Maybe you bought your home last year with the intention to stay put for years, only you’ve recently received a great job offer that requires you to relocate. In that case, if your home is worth less than it was when you bought it, you might take a bit of a loss on the sale.

But that won’t necessarily be a catastrophic loss you can’t recover from. Home prices may be down, but they haven’t plunged. And as long as you’re not underwater on your mortgage, selling at a lower price than you’d like won’t necessarily propel you into financial crisis mode.

As an example, let’s say you borrowed $400,000 to buy a $500,000 home, and your home is now worth just $480,000. That means you can still satisfy your mortgage obligation by selling your home, so you can walk away free and clear.

Remember, any time you buy an asset whose value has the potential to fluctuate, whether it’s a house, a share of stock, or an index fund, you run the risk of having to sell at a less opportune time. But that doesn’t automatically mean you’re ruined financially. So try not to stress too much over a lower home value — and recognize that it’s one of those things that just plain happens.

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It pays to snag a higher interest rate on your money if you can. 

There was a time not so long ago when banks were paying such a small amount of interest on savings accounts and certificates of deposit (CDs) that it almost wasn’t worth trying to chase a better deal. But these days, savings account and CD rates are much higher. So if you’re not getting a great return on your money, it pays to look elsewhere.

Don’t sell yourself short

You might think that snagging a higher interest rate on your money isn’t worth the hassle of having to look around for a new bank and get used to using it. But actually, getting a higher rate of return on your money could get you closer to meeting different financial goals.

Let’s say you have $10,000 in your savings account and are earning 2.5% interest on your money. That means you’re getting paid $250 a year.

But what if you were to find a bank offering 4% interest on savings accounts (which is possible these days)? That would put $400 back in your pocket instead of $250.

Meanwhile, let’s say you’re almost done paying off your credit cards but still have $500 in debt to contend with. Wouldn’t getting an extra $150 in interest from your bank help you get closer to knocking out that balance once and for all?

It’s not just about the higher interest rate

Because interest rates are generally higher across the board right now, it does pay to chase a more generous one than what you’re getting today. But that’s not the only reason to look at switching banks. You may want to make a move if your current bank doesn’t offer such a great digital experience, and you’re looking for the convenience of an easy-to-use platform for your online banking.

A recent study by The Ascent found that 91% of consumers regard digital banking as an important factor in choosing a bank. And consumers also tend to prioritize security and fraud protection.

As such, it could benefit you to move to a bank that makes managing your money digitally a snap. And in researching different banks, dig into what steps they’ve been taking to keep your money secure.

When change isn’t easy, but necessary

If you’ve banked with the same institution your entire life, then moving to a new bank is apt to be an adjustment. And there are certain steps you might need to take as part of that transition, such as contacting your payroll department at work and arranging for your direct deposits to land in a new account, and switching certain bills that are set up to get paid automatically.

But if there’s a bank out there offering a much higher interest rate than what you’re eligible for, then it pays to snag a higher return on your saved money. And while you’re at it, you might find a bank that offers a better, more secure digital experience on a whole. In a world that’s going increasingly digital by the day, that’s really important.

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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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It might help to know that if you have a bunch of debt, you’re not alone. 

Maybe you racked up a giant credit card balance after having gone overboard on holiday spending. Or maybe your balance has been slowly but steadily climbing ever since inflation took hold and just about every bill you’re responsible for went up in cost.

If you owe a rather large sum on your credit cards, you may find it comforting to learn that you’re in good company. A good 42% of U.S. adults say they’re carrying credit card debt, according to New York Life’s latest Wealth Watch survey. And the average balance carried by U.S. consumers is $6,320.98.

Still, having credit card debt can wreak havoc on your finances due to the large amounts of interest credit card companies are known to charge. So the sooner you’re able to pay off that debt, the better.

Consolidating your debt could pay off

The higher the interest rate on your credit card debt, the harder it’s apt to be to pay it off. So you may want to find a way to consolidate your debt and lower the interest rate on it in the process.

You have a few options to look at in this regard. First, you could apply for a personal loan, which will allow you to borrow money for any purpose, and use the proceeds to pay off your existing balances. You’d then simply pay that personal loan back in installments.

The upside of going this route is that you’re likely to snag a lower interest rate on a personal loan compared to what your credit cards are charging you. And also, personal loans offer the benefit of fixed interest rates, which means you don’t have to worry about your monthly payments rising over time.

Another debt consolidation option to consider is a balance transfer. Here, you’d simply move your existing credit card balances over to a new card with a lower interest rate attached to it.

Many balance transfer offers even come with a 0% introductory rate for a limited period of time. And getting a reprieve from racking up interest could make your debt much easier to pay off. Plus, this way, you’re only making one credit card payment every month — not several.

Do your best to shake that debt

Not only can credit card debt cost you a lot of money in interest, but too much of it could actually cause damage to your credit score. So whether you decide to consolidate your credit card debt or simply tackle your balances one by one in an order that works for you, do your best to dig out of debt as quickly as you can.

You may need to pick up a side job or cut back on spending in a serious way to chip away at your balances. But doing so could, depending on the sum you owe, save you hundreds or even thousands of dollars in interest. And that’s money you’d no doubt rather keep for yourself than hand over to a bunch of credit card companies.

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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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Dave Ramsey said to get a 15-year mortgage, but you should probably ignore that advice. 

Buying a home is a big decision and it can be hard to know how to do the process properly. Finance expert Dave Ramsey has offered many tips for success, but only some of his advice is worth following. Here are all the tips you should listen to — and ignore.

Listen to this Dave Ramsey advice when buying a home

Ramsey’s best advice on home buying focuses on ensuring you’re making smart decisions so your home purchase will not put your long-term financial security in jeopardy. Here’s Ramsey’s best advice about home purchases.

1. Figure out how much you can really afford

Ramsey’s first crucial piece of advice relates to setting and sticking to your home-buying budget.

“You absolutely have to know how much house you can really afford,” Ramsey urged. “Commit to staying within that budget no matter what — don’t cave to the pressure to buy because you’re tired of watching competitors pluck good homes off the market.”

While many people opt to borrow as much as the bank allows, Ramsey doesn’t want you to do this. Instead, figure out your budget based on what feels comfortable to you — especially given other financial goals you might have.

The bank is focused only on making sure you don’t default, while your focus needs to be on making sure your mortgage loan payment doesn’t prevent you from paying off debt, saving, or doing other things that matter to you.

The best way to figure out exactly how much you can afford is to look at your budget and see how much money is left over for housing costs after your other expenses — including saving for things that matter to you. If you have $1,500 to devote to housing, for example, you can work backward and ensure the total cost of your mortgage, utilities, and other expenses will be less than that.

You can also practice living with your mortgage payment to make sure it’s comfortable for you. If you are currently paying $1,200 in rent and utilities and are considering a $1,500 mortgage, put an extra $300 into savings each month for six months to see how it feels to live with a $1,500 payment. If it works for you, then move forward with the purchase.

Implementing this Ramsey advice — and not giving into pressure to purchase a house that’s too expensive — is going to make a huge impact on your purchase.

2. Keep your housing payment to 25% of your take-home pay or less

Ramsey also wants to make sure you do not end up “house poor,” which is what happens if you spend too much of your income on a property. He suggests keeping your total housing costs to 25% or less of the amount you bring home after taxes. This includes not just your mortgage payments, but other homeownership costs too.

“This payment includes principal, interest, property tax, home insurance, homeowners association (HOA) fees and, if your down payment is lower than 20%, private mortgage insurance (PMI) — an extra fee added to your mortgage to protect your lender (not you) in case you don’t make payments,” Ramsey explained.

3. Make a larger down payment

Ramsey suggests you save up a 20% down payment whenever possible to avoid having to buy private mortgage insurance.

PMI is insurance that you will be required to purchase if your down payment is below 20%. Lenders view low down payment loans as a greater risk. This is because you don’t have as much at stake and they may not be able to recoup the entire loan amount if they have to foreclose. As a result, they generally require PMI when you put down less than 20%.

The cost of PMI is typically between 0.1% and 2% of your loan amount. If you are borrowing $350,000, it could cost you as much as $7,000 per year or $583.33 per month.

While Ramsey said avoiding this cost is ideal, he acknowledged it’s not always possible. But, while you may not be able to put 20% down, he believes you need to put some money down.

“For first-time home buyers, a smaller down payment like 5% to 10% is okay too,” Ramsey said. And he issued a stern warning against loan programs that allow you to make no down payment at all.

“‘Special’ mortgage programs — ones that allow you to put next to nothing down — were designed for people who can’t get approved for a mortgage that meets traditional lending guidelines,” he said. “But remember, lenders who approve low-down-payment mortgages end up taking more of your money in the long run.”

In 2022, first-time home buyers accounted for 26% of all buyers purchasing properties — the lowest share since the National Association of Realtors began collecting this data. For the 75% of buyers who already owned homes and who were purchasing new ones, it may be easier to come up with a larger down payment by using equity from the sale of the previous property.

For both new and repeat buyers, the key is to save diligently and have a plan. Know when you want to purchase and how much you’ll need saved, and set up automated transfers of that amount of money into your savings account each month so you stay on track.

Ignore this advice

Ramsey also has some advice to ignore, including the following tips.

1. Choose a 15-year mortgage

Ramsey’s worst piece of home-buying advice is to get a 15-year mortgage. This is definitely a tip to skip.

A 15-year mortgage has higher monthly payments than the more popular 30-year counterpart because you are paying off your loan in half the time. This gives you less flexibility. If you want to pay off your mortgage earlier, you’re better off choosing a 30-year mortgage and making extra payments so you aren’t locked into such a big monthly obligation.

For most people, though, paying off a mortgage early doesn’t make sense. Even at today’s mortgage rates at around 7%, you can typically earn a better return on investment (ROI) by investing in relatively safe investments in a brokerage account (such as an S&P 500 index fund) than you would earn by paying off your mortgage early. There’s a huge opportunity cost to committing to large mortgage payments rather than choosing a more affordable 30-year loan.

As many as 78% of all recent buyers secured financing for their home purchase, according to the National Association of Realtors. So, think carefully about whether you would rather have a more flexible loan if you’re among this group.

2. Buy a house without a credit score

Ramsey also said it’s fine to buy a house without a credit score because you can just find a lender that uses traditional underwriting. This is bad advice.

You’ll have fewer options for lenders who don’t consider credit as a key factor. And without a good credit score, you’ll likely be seen as a riskier buyer and end up with a higher interest rate.

If you are thinking of buying a house, you should work on earning a credit score of at least 680, and ideally closer to 700 if you can. You’ll be able to get a much better rate and have a broader choice of lenders. You can improve your credit by getting a credit card and using it responsibly by maintaining a low balance and paying bills on time.

Make sure you’re an educated home buyer

Remember, a home purchase is one of the biggest of your life and you owe it to yourself to do the research necessary to make it a success — which means questioning any advice you hear, even from financial experts like Dave Ramsey.

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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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