Does It Make Sense to Pay Off Your Mortgage Early?

Contributed by: Matt Trujillo, CFP®

Owning a home outright is a dream that many Americans share. Having a mortgage can be a huge burden, and paying it off may be the first item on your financial to-do list. But competing with the desire to own your home free and clear is your need to invest for retirement, your child's college education, or some other goal. Putting extra cash toward one of these goals may mean sacrificing another. So how do you choose?

Evaluating the Opportunity Cost

Deciding between prepaying your mortgage and investing your extra cash is challenging because each option has advantages and disadvantages. But you can start by weighing what you'll gain financially by choosing one option against what you'll give up. In economic terms, this is known as evaluating the opportunity cost.

Here's an example. Let's assume you have a $300,000 balance and 20 years remaining on your 30-year mortgage, and you're paying 6.25% interest. If you were to put an extra $400 toward your mortgage each month, you would save approximately $62,000 in interest and pay off your loan almost six years early.

By making extra payments and saving all of that interest, you'll gain a lot of financial ground. But before you opt to prepay your mortgage, you still have to consider what you might be giving up by doing so—the opportunity to potentially profit even more from investing.

To determine if it makes more sense to pay off your mortgage with extra cash on hand or invest the cash, you first need to see the risk-free return rate. The risk-free rate of return is the return you could get on your money if you invested in a savings account at the bank, a CD, or a money market fund, something that has little risk of loss of principle. If that rate is lower than your current mortgage rate, then deploying your cash to pay down that debt makes sense. If the risk-free rate is higher than your mortgage rate, you may want to consider investing your money and paying your planned mortgage payments.  

Keep in mind that the rate of return you'll receive is directly related to the investments you choose. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful. Investments with the potential for higher returns may expose you to more risk, so consider this when making your decision.

Other Points to Consider

While evaluating the opportunity cost is important, you'll also need to weigh many other factors. The following questions may help you decide which option is best for you.

• What's your mortgage interest rate? The lower the rate on your mortgage, the greater the potential to receive a better return through investing.

• Does your mortgage have a prepayment penalty? Most mortgages don't, but check before making extra payments.

• How long do you plan to stay in your home? The main benefit of prepaying your mortgage is the amount of interest you save over the long term; if you plan to move soon, there's less value in putting more money toward your mortgage.

• Will you have the discipline to invest your extra cash rather than spend it? If not, you might be better off making extra mortgage payments.

•  Do you have an emergency account to cover unexpected expenses? Making extra mortgage payments now doesn't make sense if you'll be forced to borrow money at a higher interest rate later. And keep in mind that if your financial circumstances change, if you lose your job or suffer a disability, for example, you may have more trouble borrowing against your home equity.

• How comfortable are you with debt? If you worry endlessly about it, give extra consideration to the emotional benefits of paying off your mortgage.

• Are you saddled with high balances on credit cards or personal loans? If so, it's often better to pay off those debts first. The interest rate on consumer debt isn't tax deductible and is often far higher than your mortgage interest rate or the rate of return you're likely to receive on your investments.

• Are you currently paying mortgage insurance? If you are, putting extra toward your mortgage until you've gained at least 20% equity in your home may make sense.

• How will prepaying your mortgage affect your overall tax situation? For example, prepaying your mortgage (thus reducing your mortgage interest) could affect your ability to itemize deductions (this is especially true in the early years of your mortgage when you're likely to be paying more in interest). It's important to note that due to recent tax law changes, specifically the increase in the standard deduction, many individuals aren't itemizing their taxes and are no longer taking advantage of the mortgage interest deduction.

• Have you saved enough for retirement? If you haven't, consider contributing the maximum allowable each year to tax-advantaged retirement accounts before prepaying your mortgage. This is especially important if you are receiving a generous employer match. For example, if you save 6% of your income, an employer match of 50% of what you contribute (i.e., 3% of your income) could potentially add thousands of extra dollars to your retirement account each year. Prepaying your mortgage may not be the savviest financial move if it means forgoing that match or shortchanging your retirement fund.

• How much time do you have before retirement or until your children go to college? The longer your timeframe, the more time you have to potentially grow your money by investing. Alternatively, if paying off your mortgage before reaching a financial goal will make you feel much more secure, factor that into your decision.

The Middle Ground

If you need to invest for an important goal but also want the satisfaction of paying down your mortgage, there's no reason you can't do both. It's as simple as allocating part of your available cash toward one goal and putting the rest toward the other. Even minor adjustments can make a difference. For example, you could potentially shave years off your mortgage by consistently making biweekly, instead of monthly, mortgage payments or by putting any year-end bonuses or tax refunds toward your mortgage principal.

Remember, no matter what you decide now, you can always reprioritize your goals later to keep up with changes in circumstances, market conditions, and interest rates.

Matthew Trujillo, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® A frequent blog contributor on topics related to financial planning and investment, he has more than a decade of industry experience.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory services offered through Center for Financial Planning, Inc.® Center for Financial Planning, Inc.® is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James.

Student Loan Forgiveness Announced

Contributed by: Kali Hassinger, CFP®, CSRIC™

On Wednesday, August 24th, President Biden announced a highly anticipated plan to forgive a portion of student loan debt for approximately 43 million borrowers. He also extended the pandemic-driven student loan repayment freeze through the end of the year.

For single taxpayers making less than $125,000/year and Joint or head of household taxpayers making less than $250,000/year, $10,000 of their current student loan balance will be forgiven. For those with Pell Grant debt who meet these income requirements, $20,000 will be forgiven. Pell Grants were given to students with "exceptional financial need." The annual amount of this type of grant awarded is capped at $6,895 for the 2022-2023 school year, and the limit has historically been lower with slight increases each year.

Regardless of the loan type, the amount forgiven will be tax-free. However, whether eligibility will be phased out based on income or a cliff (meaning income $1 over the limits would eliminate eligibility) is unclear.

Loans taken out after June 30th, 2022, will not qualify for this relief. However, current college students who are still considered dependents will be eligible for forgiveness based on their parent's income.

Details on how to apply for forgiveness are still pending, with the understanding that an application will be available before the December 31st repayment freeze ending date. The need to submit an application and certify income will likely be required. Those repaying their student loans through an income-driven repayment plan must certify income yearly. There's also the possibility that some portion of loans will automatically be forgiven if the Department of Education has current and relevant income data. We expect that additional and more detailed guidance will be released in the coming weeks.

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Kali Hassinger, CFP®, CSRIC® and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

5 Tips to Keep in Mind for Financial Awareness Day

Contributed by: Kali Hassinger, CFP®, CSRIC™

Sunday, August 14th, marks National Financial Awareness Day. For many, unless you decide to focus on finances at some point in your life or you're already working with a professional, you may be left unsure whether you're making the right decisions and progressing toward financial independence. The good news is that a few steps can be taken to help you get on a sound financial path. 

Tip #1: Make a budget. And stick to it.

This is one of the most challenging steps for many to accomplish. There are things we need to pay for like housing, food, insurance, gas, and utility bills, and then there are unessential, discretionary items like clothes, concerts, and going out for dinner and drinks. Therefore, it's important to track your spending. How much of your overall budget goes toward the essentials each month? How much are discretionary or lifestyle expenses? If there are areas within the discretionary bucket that can be reduced and could ultimately be allocated toward additional savings, commit to making that adjustment. Budgeting is the foundation of getting ahead financially and progressing toward your goals.

It's also a good idea to look at your net income. Subtract out your fixed and essential expenses, and then allocate the leftover money towards savings goals and discretionary spending. Consider an online budgeting tool or app to help you achieve this.

Tip #2: Save.

Sure this seems obvious, but it's common to feel unsure of how much to save and whether you're saving enough. Saving depends on your age and the amount you've accumulated so far. It also depends on how much you plan to spend in retirement or what your upcoming financial goals require. If your employer has a retirement plan in place, it's important to contribute at least enough to take advantage of the employer match.

Many would suggest that you should always try to contribute the maximum amount allowed into your employer's retirement plans. When you consider current and future tax rates, timeline to retirement, and savings balances today, it gets more complicated. If you're later in your career and have accumulated a good balance, you may have the flexibility to reduce your savings rate and possibly your income. If you're behind and need to catch up, pushing yourself out of your comfort zone and saving aggressively may be necessary. If you're just venturing into the workforce, your income may be lower now than in the future. In this example, you may want to work in Roth IRA or 401k savings instead of tax-deferred vehicles. 

Saving rates are personal. Life is about balance and saving the amount right for you, your family, and your goals. 

Tip #3: Invest. 

But only take on the amount of risk that you can afford. Determining the appropriate blend of stock, bonds, and cash is essential to both growing and preserving wealth. In recent years of stock market growth, picking a lemon of an investment has been challenging. 2022, however, has reminded us of the importance of diversification and your overall allocation mix. If you have an investment strategy in place, now is not the time to abandon that plan. High inflation, rising interest rates, and international turmoil have created a volatile environment, but it can also create opportunities. If you have yet to invest, there's no better time than now to get a plan in place.  

If the idea of investing seems foreign, I suggest you review our Investor Basics blog series that our outstanding investment department provided a few years ago: 

• Stocks 101

• Bonds 101

• Drawdowns 101

Tip #4: Understand your credit score.

For a number that's so important to our ability to buy a home, purchase a car, or rent an apartment, credit scores can feel mysterious and sometimes frustrating. In reality, a formula is used to determine our credit score, and five main factors are considered. 

• 35% Payment History: Payment history is one of the most significant components of your credit score. Have you paid your bills in the past? Did you pay them on time?

• 30% Amounts Owed: Just owing money doesn't necessarily mean you are a high-risk borrower. However, having a high percentage of your available credit used will negatively affect your credit score.

• 15% Length of Credit History: Generally, having a longer credit history will increase your overall score (assuming other aspects look good). However, even people with a short credit history can still have a good score if they aren't maxing out their credit card and are paying bills on time.

• 10% New Credit Opened: Opening several lines of credit in a short period almost always adversely affects your score. The impact is even greater for people that don't have a long credit history. Opening multiple lines of credit is generally viewed as high-risk behavior.

• 10% Types of Credit You Have: A FICO score will consider retail account credit (i.e., Macy's card), installment loans, mortgage loans, and traditional credit cards (Visa/ MasterCard, etc.). So, having credit cards and installment loans with a good payment history will raise your credit score. 

It's important to manage your debt balance, only take out credit when necessary, and pay your bills on time. If you already have credit cards, student loans, and/or personal loans, try to pay off balances with higher interest rates to keep them from becoming unmanageable. Some people find it easier to pay off a smaller balance first, giving them a sense of progress and accomplishment. This is a more than acceptable start to proper debt management.

Tip #5: Work with a Professional.

There's no better time than now to build the foundation for financial security and independence. Working with a professional can help you answer questions and address the unknowns. By making smart decisions now, you're positioning yourself for future success. Use these helpful tips, and keep progressing toward the ultimate goal of a worry-free, financial future and retirement. 

Feel free to contact your team here at The Center with any questions. Take control now, and you'll rule your finances – not the other way around!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The Secure Act 2.0 and Possible Changes Coming to Your Retirement Plan!

Contributed by: Kali Hassinger, CFP®, CSRIC™

The Secure Act, which stands for Setting Every Community Up for Retirement Enhancement, passed in late 2019. This legislation was designed to encourage retirement savings and make significant changes to how inherited retirement assets are distributed. We have written about the Secure Act a bit over the last two years or so (you can read some of our posts here, here, or here), and now, it seems Congress is considering some additional ways to encourage Americans to save for retirement. 

It is, of course, important to note that this is still being debated and reviewed by Congress. The House passed a version of The Secure Act 2.0 on March 29th, but the version that the Senate could pass is expected to differ and be revised before ultimately hitting President Biden’s desk. Some of the key changes that the House and Senate versions of the Bill include are highlighted below:

Automatic Retirement Plan Enrollment

• The new Secure Act would require employers with more than ten employees who establish retirement plans to automatically enroll new employees in the plan with a pre-tax contribution level of 3% of the employee’s compensation. A 1% increase in contributions would be required each year until reaching at least 10% (but not more than 15%) of the employee’s pay. Employees can still override this automatic system and elect their own contribution rate.

Boosting Roth Contributions

Roth Catch-up Contributions

• Catch-up contributions are available at age 50 and, as of now, can be either pre-tax or Roth, depending on what the employee elects. The Secure Act 2.0 could require that all catch-up contributions to retirement plans would be subject to Roth tax treatment. 

• In addition to the current $6,500 catch-up contribution amount at age 50, they could also allow an extra $10,000 catch-up contribution for participants aged 62 to 64.  

Roth Matching Contributions

•  There could be an option to elect that a portion (or all) of an employer’s matching contribution would be treated as a Roth contribution. These additional matches could be included as income to the employee.

Student Loan Matching

• An additional area of employer matching flexibility is associated with employees paying off student loans. While employer matches have traditionally only been provided in conjunction with the employees’ plan contributions, this would allow employers to match retirement plan contributions based on employees’ student loan payments. This would give some relief to those missing retirement plan contributions because of the burden of student loan repayment schedules.

Further Delaying Required Minimum Distributions

•  The original Secure Act pushed the Required Minimum Distribution age from 70 ½ to 72. The Secure Act 2.0 could continue to push that timeline back as far as age 75. The House’s version of the Secure Act would slowly increase the age in a graded schedule. In 2022, the new Required Minimum Distribution age could be 73, with the age increasing to 74 in 2029, and finally up to age 75 by 2032.

Another item on our watch list is related to the original Secure Act from 2019. The Secure Act limited those who could stretch an inherited IRA over their lifetime, and many became subject to a 10-year distribution ruling. The IRS is working to provide more specific guidance on the rules surrounding inherited IRA distribution schedules. Based on the proposed regulation, non-spouse beneficiaries who inherit a retirement account on or after the period when the original account owner was subject to Required Minimum Distributions would be subject to both annual Required Minimum Distributions and required to adhere to the 10-year distribution timeline.

If or when the Secure Act 2.0 is passed into law, we will be sure to provide additional information and guidance to clients, so be on the lookout for possible upcoming blogs and webinars related to this topic. We continuously monitor, discuss, and review these changes with clients and as a firm. If you have any questions about how the Secure Act 2.0 could affect you, your family, or your business, we are always here to help! 

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion

How To Manage Your Finances After A Divorce

Contributed by: Kali Hassinger, CFP®, CDFA®

Divorce isn’t easy.  Determining a settlement, attending court hearings, and dealing with competing attorneys can weigh heavily on all parties involved. In addition to the emotional impact, divorce is logistically complicated.  Paperwork needs to be filed, processed, submitted, and resubmitted.  Assets need to be split, income needs to be protected, and more paperwork needs to be submitted!  With all of these pieces in motion, it can be difficult to truly understand how your financial position will be impacted.  Now, more than ever, you need to be sure that your finances are on the right track.  Although every circumstance is unique, there are few steps that are helpful in most (if not all) situations.

Assess your current financial situation

Following a divorce, you’ll need to get a handle on your budget. You may be responsible for paying expenses that you were once able to share with your former spouse.  What are your current monthly expenses and income?  Regarding expenses, you’ll want to focus on dividing them into two categories: fixed and discretionary.  Fixed expenses include things like housing, food, transportation, taxes, debt payments, and insurance.  Discretionary expenses include things like entertainment and vacations.

Reevaluate your financial goals

Now that your divorce is finalized, you have the opportunity to reflect on your needs and wants separate from anyone else.  If kids are involved, of course their needs will be considered, but now is a time to reprioritize and focus on your needs, too.  Make a list of things you would like to achieve, and allow yourself to think both short and long-term.  Is saving enough to build a cash cushion important to you?  Is retirement savings a focus?  Are you interested in going back to school?  Is investing your settlement funds in a way that reflects your values important to you?

Review your insurance needs

Typically, insurance coverage for one or both spouses is negotiated as part of a divorce settlement, however, there is often still a need to make future adjustments to coverage.  When it comes to health insurance, having adequate coverage is a priority.  You’ll also want to make sure that your disability or life insurance matches your current needs.  Property insurance should also be updated to reflect any property ownership changes resulting from divorce.

Review your beneficiary designations & estate plan

After a divorce, you’ll want to change the beneficiary designations on any life insurance policies, retirement accounts, and bank or credit union accounts. This is also a good time to update or establish your estate plan.

Consider tax implications

Post-divorce your tax filing status will change.  Filing status is determined as of the last day of the year.  So even if your divorce is finalized on December 31st, for tax purposes, you would be considered divorced for that entire year. Be sure to update your payroll withholding as soon as possible.

You may also have new sources of income, deductions, and tax credits could be affected. 

Stay on top of your settlement action items

Splitting assets is no small task, and it is often time consuming.  The sooner you have accounts in your name only, the sooner you will feel a sense of organization and control.  Diligently following up on QDROs, transfers, and rollovers is important to make sure nothing is missed and the process is moving forward as quickly and efficiently as possible.  Working with a financial professional during this process can help to ensure that accounts are moved, invested, and utilized to best fit your needs.

When your current financial picture is clear, it becomes easier to envision your financial future.  Similarly, having a team of financial professionals on your side can create a feeling of security and support, even as you embrace your new found independence.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.

The Key To Financial Planning Is Sticking to the Basics!

Contributed by: Sandra Adams, CFP®

A colleague of mine and I were recently presenting a session on Savings for Junior Achievement for a Detroit High School class as part of The Center’s Financial Literacy initiatives. As part of our presentation, we both shared personal stories about how the fundamentals of budgeting and savings had personally impacted us during our earlier years. Why am I sharing this with you?

First, it was a good reminder that our perspective about money certainly changes over time. Thinking back, I now realize that how I think about money now is certainly different than how I thought about money in my teens and twenties. This is important especially when we are talking to our children and grandchildren about handling money.

Second, it was a good reminder that our experience teaches us good lessons. The things we have been through over our lifetimes, especially with money, sticks in our minds either positively or negatively. Positive experiences and behaviors we will tend to repeat and negative experiences and behaviors we hopefully will learn from and NOT repeat. Although some people take longer to learn than others.

Third, and most importantly, I was reminded with my own story that sticking to the financial planning basics works.

The Basics Are:

• Paying yourself first. (Building savings to yourself right into your budget!)

• Living within your means (spending first for needs and then for wants; spending for wants only if there is money in the budget).

• Building a savings reserve for emergencies.

• Building savings in advance for short-term goals.

• Not accumulating debt that is not needed and paying off any credit in the money that it is accumulated.

• And once you can do all that, building long-term savings for long-term goals like buying a house and retirement.

At one point in my life, I was in a real financial hole, but by sticking to the basics and having a lot of patience, I slowly dug myself out. And I sit here today being able to say that by following the fundamentals, you can be financially successful.  Sticking to the basics works!

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

5 Tips For Home Buyers In 2021

Contributed by: Angela Palacios, CFP®, AIF®

Real Estate Boom: The Perfect Storm

For many investors our home is one of our biggest assets.  Over the past year, we have been stuck inside of our biggest asset nearly 24/7.  You’ve heard the saying “Distance makes the heart grow fonder.”  This seems to apply to our home for many of us.  Over the past year, companies like Home Depot or Lowes have seen success because we nowhere to spend money except on home projects.  Others have spent so much time at home they have outgrown it or find they want different things from their home.  This has resulted in one of the hottest home real estate markets since 2005.  A recent Zillow survey shows 1 in 10 Americans have moved in the past year!  I saw the first open house in mid-April in my own neighborhood and there was a steady line of people going in and out of the house all afternoon, cars were lined up down the street!

Buyers are competing against each other in a frenzy putting offers on homes 10% or more above asking prices and eliminating contingencies, offering free rent etc.  Doing anything they can to have their offer move to the top of a sellers list.  Home prices are up 15% in the last year alone and houses are only staying on the market for a few days.

Low interest rates are another catalyst, yet again.  According to bankrate.com, 30 year mortgage rates are well below 3% as of April 13th, 2021.  This is lower than they have ever been making homes more affordable (at least until prices were driven up).  Also, don’t discount the stimulus money potential home buyers may have been banking!

Lastly, and probably one of the biggest behind the scenes driver of this housing market, is the fact that home building never recovered after the 2008 financial crisis. 

According to the Census Bureau 991,000 single-family homes began construction in 2020.  This is the 9th year in a row that the number has increased.  However, when you consider back in 2005 the all-time US record for new home starts was 1.72 Million we are still far off the pace set over a decade ago!

As one of our largest generations, millennials, are starting families they are exploding onto the scene ready to buy homes.  After 2008, the home building industry hasn’t been able to build these cheaper entry level homes as the price of inputs has gone up so there is very short supply.

So what can a home buyer do for an edge today?

1. Get preapproved for a mortgage – an offer that is contingent upon this will likely fall to the bottom of the list

2. Have your down payment ready PLUS! – if you really want a home you may need to come up with additional money to put down if the bank doesn’t appraise the home you want for the price you have to pay

3. Don’t forget the home inspection – but your bidding competitors might forego this to make their offer look better so consider bringing a general contractor or someone knowledgeable in home repair projects you know with you to look at the house

4. Act quickly – reach out first thing in the morning for an appointment if you see a home listed for sale

5. Know someone in your desired neighborhood?  Ask them to post on the neighborhood Facebook page to see if anyone is selling soon.

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Is Now The Time To Refinance Your Mortgage?

Contributed by: Kali Hassinger, CFP®, CDFA®

Long-term interest rates and thus mortgage rates have hit historical lows this month. This has been a continuing trend with mortgage interest rates hitting historical lows eight times in the last five months. This is partially due to the Fed’s aggressive purchasing of mortgage-backed securities since March.  

If you’re like many, you may be wondering if this is the right time to refinance. Although there are many benefits to refinancing, it’s important to be sure it’s appropriate given your current situation.

Here are some items to consider if you’re thinking of taking advantage of these once again, historically low mortgage rates:

• How long do you plan on staying in your home? There is a cost to refinancing. To justify the fees, you should be planning to stay in your home for at least another two to three years.

• What is more important to you: lowering your monthly payment or lowering the amount you pay over the life of the loan? Reducing the term of the loan, even if it means the payment will slightly increase, can significantly reduce the total interest paid!

• If you have an outstanding second mortgage or home equity line of credit, consider combining them into one loan with a fixed interest rate.

• If you have an adjustable-rate mortgage (ARM), now is a great time to move to a fixed rate to avoid payment fluctuations in the future.

• Consider a modest cash-out refinance to pay down high interest rate loans or debt.   

As with any major financial decision, such as a refinancing or a new home purchase, we encourage all of our clients to reach out to us before making a final decision. Please don’t hesitate to reach out if you’d like to talk through your options and see if changing your mortgage rate or term aligns with your overall financial plan and goals.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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Raymond James Financial Services and your Raymond James Financial Advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified Raymond James Bank employee for your residential mortgage lending needs.

Should I worry if my 401k savings are down?

Contributed by: Robert Ingram, CFP®

It can be scary when financial markets are volatile and selloffs happen. Understandably, many are concerned about how COVID-19 will impact the economy, our health, and our financial security. These fears and the volatile markets that follow can temp retirement savers to make drastic changes to their investment portfolios; some may even cease investing entirely. For example, if you watch your 401(k) continue to lose value, you may want to stop contributing. However, I’ll explain why you should stick with your current long-term savings and investment plan.

Why Its Beneficial to Keep Contributing

Contributing to a retirement plan like a 401(k) or 403(b) is still one of the best ways for most Americans to save and build wealth for retirement, particularly in times of economic uncertainty. 

• Tax Benefits 

  Contributions to most 401(k) plans are made pre-tax, meaning these amounts are excluded from your taxable income in the year they are made. This reduces your current income taxes. It also allows those savings to grow tax-deferred year-after-year until they are withdrawn.

  Employer plans that offer a Roth designated account (i.e. a Roth 401(k) or Roth 403(b)) can present a great opportunity for investing. Roth contributions are made after-tax, so those amounts do not reduce your taxable income like the 401(k) does. However, those savings grow tax-deferred. The withdrawals and earnings are tax-exempt, provided you are at least age 59 ½ and have held the account for at least 5 years. This tax-free growth can be a powerful tool, especially for individuals that may be in a higher income tax bracket in the future.

• Opportunity To Buy Low

  For investors that are still contributing to their plans, a downturn in markets actually presents an opportunity to invest new savings into funds at lower prices. This allows the same amount of contributions to buy more shares. As markets and economic conditions rebound, you will have accumulated more shares of investments that could grow in value.

• Matching Contributions

  Need another incentive to keep those contributions going? Don’t forget about opportunities to receive employer matching with retirement plans. If your employer offers a 401(k) match, you would receive additional savings on top of your own contributions. Let’s say your employer matches 50% on contributions you make up to 6% of your salary. By putting 6% of your income into your 401(k), your employer would contribute an extra 3%. That’s like earning a 50% return on your invested contributions immediately. Those extra contributions can then buy additional shares which can also compound over time. 

Should I Ever Consider Stopping Contributions?

Even in a booming economy and during the strongest bull market, it’s important to have a strong financial foundation in place before deciding to invest over the long-term. Having key elements of your day-day-finances as stable as possible is necessary as we navigate the incredible challenges created by COVID-19. A few examples include:

• Control Over Your Cash Flow

  Do you know exactly how much money you earn and spend? Understanding where your income exceeds your expenses gives you the fuel to power your savings. How secure is your employment? Are you in an industry directly or indirectly impacted by the economic shutdowns due to COVID-19? What would happen to your cash flow if you had a reduced income? If there are other expenses you could cut in order to maintain your contributions, you should still try to contribute. However, if you need every dollar possible to pay your bills, you would have no choice but to suspend your 401(k) contributions.

• Cash For Any Short-Term Needs

  Having cash reserves is a critical part of a sound financial plan. If an unexpected expense occurs or you had a loss of income, be sure to have cash savings to draw from rather than being forced to sell investments that may less valuable or to use credit cards with high-interest debt. If your savings is less than a month’s worth of normal expenses, you should consider focusing your efforts on reinforcing your cash reserve rather than on your retirement plan. Then, ideally, you should work towards building 3 to 6 months’ expenses for your emergency fund as you continue to save for retirement or other goals.

• Tackling Your Debt

  If you have high-interest rate debt that you are working to pay off and are unable to find additional savings in your budget to increase your payment amounts, it could make sense to redirect your retirement plan contributions to pay the debt down first. On the other hand, if your employer offers a company match, you should still consider contributing at least enough to get the full amount of matching dollars (remember that free money could see a return of 50% or more). You could then redirect any amounts you are contributing above that maximum match percentage.

Your situation and needs are unique to you. It’s important to work closely with a financial advisor when making decisions, especially in these incredibly difficult times.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

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Keep in mind that investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.

Can I Afford To Buy A Second Home In Retirement?

Contributed by: Robert Ingram, CFP®

It’s a dream for many Americans as they envision retirement, having a second home as a vacation getaway, a seasonal escape, or a primary residence someday.  Even with the relatively mild winter we’ve just experienced in Michigan, it’s easy to appreciate the idea of living away during the cold months or enjoying a summer home up North.  But before you can live the dream, do your due diligence and crunch the numbers.

Retirement income expenses include the daily cost of living and the things you want to enjoy.  Making a large purchase, such as buying a second home, will take a significant chunk of your savings.  If you’ve underestimated the cost, it will wreak havoc on your retirement income.  

So, how realistic is your second home retirement plan? Factor in our suggestions below.

Purchasing costs

If you plan to buy the home using a mortgage, you will of course have a monthly payment.  While the continued low interest rates may help with the home’s affordability, this payment does add to the expenses that your retirement income sources will support.  Calculate your withdrawal rate (the percentage of savings needed to be withdrawn each year) and determine if it’s sustainable over your retirement years.

Now, if you’re able to purchase the property without a mortgage, yes, you would avoid paying interest and you would have no monthly payment.  On the other hand, using a portion of your retirement savings to purchase the home could mean that you have fewer assets reserved for other retirement spending needs.  Consider the impact it may have on the sustainability of your retirement income and whether purchasing or financing the property is more advantageous.

Don’t forget about property taxes. They’re ongoing expenses that you must factor into your budget. They vary widely depending on the state and local community.  Consider any difference in tax rates; non-homestead property is taxed higher than homestead property.

Additional costs

Unfortunately, we know that the cost of owning a home doesn’t end with the purchase. This is certainly true with a second home as well.  Depending on the property type, location, and climate/environment there may be additional costs that you aren’t used to with your current home.  It’s vital that your plan supports these costs as well.  Some examples include:

• Insurance: You’ll pay annual premiums for homeowner’s insurance on two properties.  Plus, homes with higher risk (e.g. hurricane prone southern states) often require additional flood or wind damage insurance.  In some cases, this nearly doubles the cost of the new policy.

• Condo/Association Fees:  Buying a condominium or a standalone house in a community with a neighborhood association will likely mean additional monthly fees.  Homeowners associations may also impose special assessments during the time you own the property for maintenance projects, community amenities, etc.  Understanding the previous history of assessments and the need for future projects can help you better prepare for those potential costs.

• Maintenance on two properties:  Now you have two homes to maintain.  If your second property is far away or you won’t visit often, you may need to hire people locally to provide the maintenance services for you.

• Home security:  Especially for a home that is unoccupied for long periods of time, you want to protect it from vandalism, trespassing, and burglary.  That could mean investing in security systems or working with local service providers to routinely check-in on the property.   

• Heating and cooling year-round: Unlike cottages or houses up North that you can close down and winterize, vacation homes in warm climates may require you to run the air conditioning when you’re not there.  Issues like mold and mildew can be a problem when temperatures and humidity are too high, which is another reason you may need to hire local services to make sure everything is working properly.

• Insect/pest control:  Your second home may be in a region with insects or other critters that require more regular/aggressive pest control.  Add this to your list of monthly or annual maintenance expenses.

What if I plan to rent out my second home?

• Renting out your second home could be an excellent way to generate additional income to offset the costs of ownership.  However, you could face lifestyle compromises. Here are some considerations:

•  Local rules on renting:  It’s critical to understand any local government ordinances or homeowners association restrictions on using your property as a rental.  In some cases, short-term rentals are not allowed or there are limits on the total number of rentals.

• Property management:  The farther the distance between your rental and primary properties, the greater chance you’ll need to hire a property manager to provide on-site service for your vacation guests or long-term tenants.  Property managers can advertise, book renters, and manage financial transactions.  The cost to outsource these services is typically between 10-35% of the rental cost.

•  Additional insurance coverage:  Tenants may not be covered by your insurance.  Homeowners insurance often covers incidents only when the property is owner-occupied.  You may need to add a form of landlord insurance, depending on factors such as the frequency and amount of days you will have the property rented.  Review your policy to be sure.

• Extra maintenance and repair:  You may face repairs and/or need to replace furniture.  Studies suggest that the cost to maintain a vacation rental is 1.5-2% of the property value each year.

The decision to buy a second home involves a combination of both lifestyle and financial considerations. Build a sound plan by balancing your priorities.  Consult with your financial planner as you work through these important life goals, and if we can be a resource for you, please reach out to us! 

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.