Money Management

There’s a benefit to participating in a 401(k). Read on to see what it is. [[{“value”:”

It’s essential to save for retirement consistently throughout your career so you have money to fall back on once your paycheck disappears. And when it comes to building a retirement nest egg, you have choices. You could open an IRA at any institution that offers them, or you could sign up for your company’s 401(k) plan if you work for an employer that provides this benefit.

There are definite perks to saving for retirement in a 401(k), and the potential for an employer match is one that might stand out in your mind. Vanguard reports that 95% of employers match worker contributions to some degree in their retirement plans.

But while free money might seem like the best feature a 401(k) might offer, there’s a good reason to sign up for your employer’s plan even if there’s no match involved. You may find that there’s another huge benefit to becoming a 401(k) participant.

When your retirement savings are funded automatically

There’s a trap people tend to fall into when saving money, whether it’s for an emergency fund or a retirement nest egg. We often tell ourselves we’ll do our best to spend carefully during the month and send money into savings at the end of it.

But how often does that plan backfire? For many of us, it happens a lot. You tell yourself you’re aiming to make a $200 IRA contribution at the end of the month only to get invited to a concert that’s just too hard to say no to. Poof — there goes your $200 for retirement.

Now, on a one-off basis, it’s not the end of the world to skip an IRA contribution. But if you end up not funding your account most months during the year, you could end up with a serious savings shortfall on your hands come retirement.

And that’s what makes 401(k) plans so valuable. With a 401(k), you’re not sending money into that plan out of your checking account every month. Instead, what you have to do is sign up with your employer and let it know how much you want to allocate to your account. You may have to do this as a contribution number (for example, $5,000) or as a percentage of your salary (for example, if you earn $100,000, you’d tell your employer you want to allocate 5% of your pay to get to $5,000 a year in contributions).

The money for your 401(k) then gets withheld from your paychecks automatically. So when you get paid by your employer, your 401(k) has already been funded. That means you’re basically forced to stay on track with your contributions.

To be clear, 401(k) contributions aren’t set in stone. You can make changes during the year as needed or wanted.

But usually, that means filling out paperwork with HR and having to potentially wait a while for those changes to get processed. So on a yearly basis, the amount you sign up to put into your 401(k) is the amount you should expect to stick with. And that’s actually a really good thing.

You can make an IRA function similarly to a 401(k)

The fact that 401(k)s are funded automatically is a great feature. Sure, employer matches are great, but if you don’t put in any money, you won’t get your match. By automating contributions, you’re more likely to stay on track with your savings goals and get your match.

But don’t worry — if you don’t have access to a 401(k), you can make your IRA work similarly to one. Just find an IRA that allows for automatic contributions (since many do) and set up a recurring transfer that occurs every time you get paid.

So let’s say you receive a monthly paycheck of $3,400 on the first of each month, and you want to allocate $200 of that toward retirement savings. You’d simply set up a $200 monthly transfer to your IRA for the first of the month as well so that money leaves your bank account before you have a chance to spend it.

It’s not so easy to stay disciplined in the course of funding a retirement plan. So if you have the ability to participate in a 401(k), it pays to do so for the automation alone. And if a 401(k) isn’t on the table, find yourself an IRA that works the same way.

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Airbnb rentals can be an excellent way to invest in real estate and have a vacation home for your family to enjoy. Find out the down payment you’ll need. [[{“value”:”

Vacation rental platforms like Airbnb have made owning short-term rental properties more accessible than ever before. More than 5 million hosts (and growing) list their properties on Airbnb in 2024, and owning an Airbnb property can be a great way to start investing in real estate and potentially have a vacation home for your family at the same time.

I’m an Airbnb owner and can tell you firsthand that it can be a rewarding and lucrative way to buy your first rental property. But what about financing for an Airbnb?

In most cases, you need 20% down or more to qualify for an investment property mortgage. But Airbnb rentals don’t always fit the traditional definition of an investment property. So, if you’d love to own an Airbnb but aren’t sure you can afford the down payment, here’s what you need to know.

Different types of loans for different types of Airbnb properties

The biggest point to know is that there are different types of loans you can use, depending on the location and nature of your Airbnb rental property.

We’ll start with traditional investment property loans. Investment property loans can generally be made for properties with one to four housing units (five or more units typically define a “commercial” property), and while Fannie Mae’s guidelines allow for one-unit investment property loans with 15% down payments, in practice, most mortgage lenders want 20% down or more for an investment property.

While this isn’t an exhaustive list, here are a few situations where you would likely have to use an investment property mortgage:

You aren’t planning to use the property for personal reasons at all.The property is a one-unit residence that is close to your primary home.You’re planning to make it available through Airbnb 100% of the time.

If these situations don’t apply to you, there might be good news. Two types of mortgages can be used to buy short-term rental properties in certain situations.

Second-home loans

To be clear, there is no set-in-stone definition of a second home. But in general, lenders consider a second home to be a single-unit property that isn’t near your primary residence, which you plan to personally occupy at least some of the time.

This is important because there is a special type of mortgage designed to be used to buy a second home.

Second-home loans not only have generally lower mortgage interest rates than investment property mortgages, but they also have lower down payment requirements. Fannie Mae’s underwriting guidelines allow second-home loans with as little as 10% down (although 20% is required to avoid mortgage insurance).

Different lenders have different definitions of a second home. Some allow you to rent it as much as 90% of the time, while others are more restrictive and have their own guidelines. For example, some lenders don’t allow second homeowners to hire a property manager. Be sure to shop around — not just for the best rate, but for a lender with a second-home definition that works for you.

FHA loans (Airbnb house hacking)

FHA loans only require a 3.5% down payment if you have a credit score of at least 580. And while it’s true that you can only get an FHA loan for a property you live in, the property you buy can have as many as four housing units.

For example, you can use an FHA loan to buy a triplex (three-unit property) with a 3.5% down payment. You can live in one unit, and use the other two as rentals, even through short-term rental platforms like Airbnb.

You don’t need a massive down payment to own an Airbnb

The bottom line is that while 20% is the typical down payment lenders want to see for investment properties, Airbnb rentals are not the traditional investment properties that the rule is based on. Because you can use short-term rentals yourself, and because multi-unit properties can make excellent Airbnb rentals, it’s entirely possible to become a vacation rental owner with a much lower upfront financial commitment.

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Mortgage rates are expected to fall later in 2024. Just how far they fall is the big question. Read on to learn more. [[{“value”:”

There’s a reason so many people have been struggling to purchase a home this year. Not only are housing prices elevated as a result of low inventory, but mortgages are expensive to sign.

As of this writing, the average mortgage rate on a 30-year loan is 6.82%, according to Freddie Mac. But rates have fluctuated a bit since the start of the year, and they’ll likely continue to do so based on general market conditions.

Meanwhile, most mortgage experts expect rates to cool later in the year. But how low will they go? That’s the big question.

Federal Reserve actions could lower borrowing costs for home buyers

The Federal Reserve raised interest rates 11 times between 2022 and 2023 to help slow the pace of inflation. While the Fed’s actions don’t always completely correlate to movement in mortgage rates, they have the potential to influence them. As such, it’s not a big surprise that mortgages are currently expensive to sign.

There’s some good news, though. Despite the fact that inflation remains stubbornly elevated at over 3%, which is above the 2% level the Fed is targeting, it’s cooled nicely since 2022. As such, the Fed still thinks it can move forward with three interest rate cuts in 2024, the first of which could come within months.

What this means is that mortgage rates could fall quite a bit between now and the end of the year. But it’s tough to get a handle on how low they’ll go.

Is it conceivable that mortgage rates will drop to about 6%? Yes. Whether they’ll go lower is the big question, and that’s a hard one to answer right now.

In January, the National Association of Realtors projected that mortgage rates would fall to 6.3% by the fourth quarter of the year. But if rates fall to 6.3% at the start of that quarter, they may be closer to the 6% mark by the end of it.

How to lock in the most competitive mortgage rate you can

It’s hard to know exactly how low mortgage rates will go in 2024. So instead of fixating on that, try to focus on steps you can take to set yourself up for a more attractive mortgage rate.

For one thing, try boosting your credit score. You can do so by paying bills on time and shedding some credit card debt. Checking your credit report for errors is also a great idea.

Also, try to work on reducing your debt-to-income ratio. That measures the percentage of your income that’s allocated toward existing debt payments. Paying off some credit card debt could help in this regard, too.

Finally, be prepared to shop around. You never know when one lender might have a better rate to offer you than another.

It’s fair to assume that mortgages will be less expensive to sign by the time 2024 gets close to wrapping up. But how much less expensive is a question that remains tough to answer.

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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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