July saw inflation rise once again, and interest rates are still rising. In fact, the average rate on credit cards is now nearly 21%, up from just 15% a little over a year ago. With these economic headwinds, you might find yourself in need of extra funds — to repair your home, to cover unexpected costs, or maybe just as a financial safety net.
Either way, if you’re a homeowner, you may think about tapping your home equity. Home equity loans and HELOCs both allow you to turn your equity into cash, which you can then use however you wish.
Is now a good time to do that, though? And what should you consider before tapping your home equity in today’s market? We asked experts for their opinion to help you decide.
Start by exploring your home equity loan options here to learn more.
Is home equity worth using now? Here’s what experts think
Thinking of using your home equity today? Here’s how the experts we spoke to recommend homeowners proceed.
Know what you’ll use it for
Tapping your home equity means putting your home at risk, so having a clear idea of what you need the money for is key before making a decision.
“Why do you need the money? Is it really necessary? Are you investing in your future or in something that strays away from your financial goals?” asks Jim Black, executive director of lender strategy at mortgage lender Calque. “Some things, like vacations, might not be the best reason.”
In short: Make sure the risk is worth it. Fixing the roof on your house or putting money into your business likely fall within that category. But pulling out equity to pay for new clothes or buy a new couch may not.
Using your home equity might also be smart if you’re eyeing a new home but currently have an ultra-low mortgage rate. In this scenario, selling your house and buying a new one would mean trading up for today’s 7%-plus rates. You might consider leveraging your equity and improving your existing house instead.
“Homeowners have the unique opportunity right now to tap into an incredible amount of home equity that’s built up over the past few years,” says Bill Banfield, executive vice president of capital markets at Rocket Mortgage. “They can use this cash to do home renovations and make their space better fit their life — without having to pick up and move to a new house.”
Get started with a home equity loan here now.
Weigh it against other options
You’ll also want to weigh all your options before turning to home equity. Depending on what you’re looking to pay for, you may be able to use a credit card, personal loan, student loan or one of many other financial products.
Typically, home equity loans and HELOCs are going to have lower rates than credit cards and personal loans, but they’re higher than rates you’d see on first mortgages and refinances. Because of this, it’s important to get quotes for several different products (and from different lenders) to ensure a home equity product is the most affordable path forward.
“Do you have other options?” Black asks. “Look at different ways to get the financing you want and compare them.”
If you do opt to tap your home equity, you should also compare your options within that realm. Home equity loans and HELOCs are the most commonly used products, but depending on your age, you may also consider a reverse mortgage (these are only for seniors). Home equity investments — which give you an upfront payment in exchange for part of your home’s future value — are an option, too.
“These provide funds upfront with no monthly payments or debt accrual, but in exchange for the some future value of your home — or its appreciation over time — or both,” says Sarah Dekin, president of Hometap, a home equity investment platform. “The potential disadvantage here, of course, is that you may miss out on some part of the future value of your home down the line when you settle.”
Think long term
Finally, think about your long-term financial picture before you tap your equity. Calculate the total cost of tapping your equity — the interest, closing costs, or lost appreciation you could see — and make sure those costs are worth it.
As Black puts it, “Banks are in the business of making interest, and this means you need to see the worst-case amount of equity you will be losing by borrowing. You also need to evaluate the cost of attaining the additional debt.”
Consider your employment and income prospects, too. Is your job stable? Do you expect your income to be the same or higher 10 years down the road? You want to be sure you can afford your payments not just now, but throughout your entire loan term (and some home equity loans are as long as 30 years).
Keep in mind that if you use a HELOC or another product with a variable rate, your payments could rise over time, too, so make sure you’ll have the capability to make those higher payments should they come about. If not, you could lose your home to foreclosure.
“The most important consideration is affordability,” says Adam Boyd, executive vice president of home equity, credit cards, and unsecured lending at Citizens Bank. “Since the borrower is using the home as collateral, it is critical they ensure they can afford the loan. If there’s any concern that rising rates will impact your ability to afford the loan in the future, it may not be the best option.”
Learn more about your home equity options here now.
Other home equity benefits to know
Home equity products can be smart tools when used in the right scenarios. They may be able to save you on interest compared to other loans and financing options, and they allow you to spread your costs out over many years. You may even get a tax deduction, depending on how you use the funds.
Just remember: Using your equity means putting your home on the line as collateral. If you’re not sure this is the right move for your finances — or you want help evaluating your full range of options — consider talking to a financial professional first. They can point you in the right direction.
While it’s not necessarily a huge concession, the top mortgage lender in the country has pledged to waive late fees for those who paid their mortgages late this month.
The move by San Francisco-based Wells Fargo is the result of the recent government shutdown, which lasted just over two weeks (October 1st-16th).
It’s unclear how many government employees with mortgages were actually affected by the shutdown, though Wells is the largest residential loan servicer in the land, managing some 12 million or so home loans.
Undoubtedly some individuals were affected out there…
A spokesman didn’t tell Reuters how much the bank charges in late fees, but one statement reviewed by the news service revealed that the typical late fee for a $200,000 loan with a 20-year term set at 3.3% is around $24.
That’s close to 2% of the monthly mortgage payment. It’s not uncommon for banks to charge 5% of the delinquent payment amount if sent in after the due date and grace period.
For the record, mortgage payments already tend to have 15-day grace periods that allow homeowners to pay until mid-month without any kind of penalty.
Watch Out for the Credit Hit
While it’s a sign of good faith by the bank and mortgage lender, or perhaps just a publicity stunt, the bigger issue to worry about is failing to pay within 30 days and getting a late payment recorded on your credit report.
The article didn’t indicate what would happen if borrowers were unable to make good on payments before that occurs, but I doubt Wells Fargo will extend that type of relief seeing that the shutdown is over.
You certainly don’t want a late payment to show up on your credit report, as it can cause your credit score to tank big time and jeopardize future refinancing attempts or home purchases.
While no other companies have announced similar efforts, it’s possible that various large (and small) banks will also offer similar late fee waivers, so contact your loan servicer if you were affected by the shutdown.
And always be sure to make your mortgage payments on time!
The Ivy League is made up of eight elite private colleges, all of which are based in the Northeast. Being accepted to an Ivy League college is something some students work toward all their lives — but there’s more to gaining admission to these schools than good grades and a long list of extracurriculars.
With admission rates now hovering in the 3.4% to 5% range, there’s a heightened sense of competition among top students in high schools across the country and around the world.
Read on to learn more about Ivy League colleges, including which schools are considered “Ivies,” the benefits of going to an Ivy League college, how much they cost, and ways to make your application stand out.
What Are the Different Ivy League Schools?
Named for their ivy-covered campuses, the eight private colleges that make up the Ivy League have many things in common. However, each school has its own unique reputation and characteristics that attract different kinds of students. Here’s a closer look at these top-ranked schools. 💡 Quick Tip: You can fund your education with a low-rate, no-fee private student loan that covers all school-certified costs.
Brown University
Located in Providence, Rhode Island, Brown is known for its humanities programs as well as its Warren Alpert Medical School. Its open curriculum allows for a relatively free-form educational model where students are encouraged to take classes they like without having to accumulate certain requirements. Brown also gives students the option of taking as many classes as they want on the basis of pass-fail.
Columbia University
Located in New York City, Columbia is one of the most diverse Ivy League schools with 46% of undergraduates identifying as students of color. It also has one of the highest percentages of international students at any Ivy League, with 13% of its student body coming from foreign countries. This cosmopolitan college is host to renowned business, journalism, and law schools, and requires students to adhere to its core curriculum, which focuses largely on liberal arts.
Cornell University
Located in Ithaca, New York, Cornell is one of the largest Ivy League universities, occupying a sprawling campus in this scenic upstate town. Known for its agriculture and engineering schools, Cornell also has strong Greek life and a wide range of athletic programs.
Dartmouth College
Located in Hanover, New Hampshire, Dartmouth is the most rural of the Ivies, drawing a student body interested in the outdoors and Greek life — around 60% of students participate in sororities or fraternities. Its somewhat smaller student body allows for more one-on-one attention in classes and a strong sense of community on campus.
Harvard University
Located in Cambridge, Massachusetts, Harvard encourages students to take a wide range of courses through their general education requirements, which allows students to broaden their interests and take advantage of intellectual curiosities. The school has 12 residential houses that seek to foster a sense of community in an otherwise imposing setting.
The University of Pennsylvania
Located in Philadelphia, Penn is known for its four distinct undergraduate colleges, including the Wharton School of Business and the College of Arts and Science. Students have the option of taking part in Greek life, and are also encouraged to explore opportunities in the greater Philadelphia area, from internships to the wide array of cultural events available.
Princeton University
Located in Princeton, New Jersey, Princeton University offers either a liberal arts or engineering and applied science degree for undergraduate students, with both programs including general education requirements. Princeton is known for its international affairs and engineering programs, as well as their storied eating clubs, which serve as coed dining halls and social centers for students, and are comparable to non-residential fraternities or sororities.
Yale University
Located in New Haven, Connecticut, Yale University is known for its creative writing and arts programs, as well as a residential college program and an array of secret societies. It’s also home to a renowned graduate drama program and law school.
Recommended: Ultimate College Application Checklist
Benefits of Attending an Ivy League School
For those who get that coveted acceptance letter, the benefits can be worth the years of hard work it took to get in. From growing your network to gaining access to world-renowned resources and professors at the top of their field, attending an Ivy League school can set students on an accelerated path to intellectual and professional success.
Having an Ivy League school on your resume may open countless doors when it comes to applying for jobs, fellowships, or graduate programs and may provide a leg up when it comes to advancing your career.
The amount of funding available at Ivy League schools can also be a major draw. All Ivy League schools have need-blind admissions policies, meaning that admissions officers will not look at a student’s financial need when considering their application. They also have a promise to meet 100% of demonstrated financial need based on household income.
Brown, Columbia, Harvard, and Princeton take things one step further, packaging aid with no loans for each student. Ivy League schools also have incredible funding opportunities for research and travel for students, allowing them to broaden their interests and perspectives.
Recommended: Paying for College With No Money in Your Savings
The Cost of an Ivy League School and Options for Paying for Tuition
All of the Ivy League schools are private universities, which usually implies a hefty price for tuition. The average undergraduate tuition for an Ivy League school for the 2022-2023 school year was $59,961, plus room and board. But due to these universities’ impressive endowments, ranging from Brown’s $5.6 billion to Harvard’s staggering $53.2 billion, these schools are able to offer generous financial aid packages to prospective students.
While Ivy League schools do not offer merit-based or athletic scholarships, there are generally a wide variety of need-based scholarships awarded to students depending on their household income.
A student’s household income is equal to the combined gross income of all people occupying the household unit who are 15 years of age or older. Among Brown’s class of 2025, for example, 99% of students with household incomes below $60,000 received an average of $80,013 in annual financial assistance — nearly full rides, including room and board. For families making between $100,000 and $125,000, 98% of students received an average of $56,538 in annual need-based aid.
In addition to aid offered by Ivy League schools directly, students or their parents may choose private student loans to help ease the burden of paying college tuition and expenses.
Students will generally want to exhaust all ffederal student aid options (which include grants, scholarships, work-study, and federal student loans) before considering private student loans. But if there is still a gap between federal student aid and the remaining cost of attendance, a private loan may be an option for some students. 💡 Quick Tip: It’s a good idea to understand the pros and cons of private student loans and federal student loans before committing to them.
GPA Requirements for Ivy League Schools
An impressive grade point average (GPA) is only one aspect of a student’s college application. However, to even be considered for admission to an Ivy League school, students may want to see if their own GPA falls within the average for admitted students. Among the Ivies that release statistics on accepted students’ GPAs, the average weighted GPA is about 4.0, meaning mostly As.
How to Make an Application More Competitive
In addition to a high GPA and impressive SAT and/or ACT scores, prospective students will need to prove themselves in other ways to gain admission to an Ivy League school.
Excelling in advanced courses, like honors and Advanced Placement (AP) classes throughout high school may improve students’ chances of admissions, especially if students show a particular area of interest, like science or humanities.
While in the past, college admissions counselors would advise students to be “well-rounded” candidates, it’s now advisable to develop and demonstrate a passion for a particular subject area, which helps Ivies to build a more overall well-rounded student body.
Students can show their interests beyond academics by taking part in extracurricular activities. By engaging in activities early in high school and growing that interest over time, students show their commitment and enthusiasm for a particular area.
Strong interviews and letters of recommendation can also improve a student’s application, along with a strong personal essay. Ivy League admissions teams look for essays that highlight a student’s best qualities, perhaps expressed through a personal anecdote or description of a unique passion that displays a candidate’s distinctive character.
Hitting the “Submit” Button
Following the tips above may help improve a student’s Ivy League application, helping to gain admission to one or more of the most prestigious universities in the world. Of course, there are many schools that have the same academic rigor of an Ivy League, and it’s generally advisable to sprinkle in one or two “safety” schools for good measure.
But once a student has decided they want to apply to an Ivy League school, determined which is the right one for them, applied for financial aid, and completed their applications, it’s time to hit submit!
The Takeaway
If you’re hoping to attend an Ivy League college, you’ll want to consider each school’s admission rate, along with its particular academic program and financial aid statistics, to determine which is the right school to apply to.
However, it can be helpful to apply to a range of schools, both in terms of admission’s standards and tuition costs. This will give you options in case a school’s financial aid package isn’t as generous as you hoped.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
Cover up to 100% of school-certified costs including tuition, books, supplies, room and board, and transportation with a private student loan from SoFi.
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Recent developments surrounding WeWork have brought into question again the future of the two big Unicorns in the real estate industry.
Compass and Opendoor
Back in July, this person (me) didn’t think too much about the future of the two big unicorns, Compass and Opendoor. Since then, Compass’ COO, Maëlle Gavet, has exited, stage right, following other key executives out the door. Out in San Francisco, Opendoor recently announced a bunch of new executive hires with technology/e-commerce know-how but not one whit of real estate experience.
Then this Inman article came out in the last week. For what it’s worth, I think that Greg Robertson is a smart business guy and he isn’t going to walk away from a deal with a unicorn, however short-term the arrangement may be.
The author was a little hard on Greg and he clearly isn’t a fan of Opendoor either. He also cites a study that, in the end, doesn’t reach any firm conclusion. Nothing necessarily wrong there but the author does go on to say that Opendoor needs agents more so than the agents need Opendoor. Bingo! Maybe that’s why Opendoor is cutting deals left and right with more recognizable industry names like W+R Studios and Keller Williams.
But Wait – There’s More!
Then there was this recent not-so-good assessment of Compass and Opendoor as candidates for IPO’s by a fellow who is definitely qualified to speak on such topics.
And then there’s this telling Inman article by Teke Wiggin hot off the presses in which Eric Wu makes a few statements that should turn heads and raise eyebrows. While this podcast with Kara Swisher runs 58 minutes, you can read the synopsis by Teke. Memo to Mr. Wu: Buying or selling a house is not like buying a car.
Last but not least, Opendoor’s massive personnel shift to Phoenix has yet to be reflected in any published operating numbers but it’s worth reading the company’s Glassdoor reviews from the past five or six months. To be sure, such reviews should be viewed as anecdotal. But it’s hard to ignore the volume of negative comments by current and former employees in such a short time span. Someone with some spare time might want to go through them in more detail, compare them to the initial flush of its employee startup enthusiasm from a couple years ago, and see if they can spot a few tell-tale trouble signs.
Technology as a Game Changer or a Green Curtain?
Third quarter numbers should be out in the next few weeks and everyone will be able to identify meaningful trajectories in the iBuyer market just by looking at Zillow’s and Redfin’s iBuyer segments. I’d love to hold off a few weeks and include those numbers in this write-up and I’m sure that someone like Rob Hahn or Mike Del Prete will publish some analysis of the market based on those numbers as well as any numbers that Opendoor chooses to release. And I’m also sure that Wall Street will continue to punish Zillow for at least another two or three quarters for its pivot a year ago to agent referrals and the iBuyer business.
Like I’ve said before, technology is very important in the real estate industry – ask people like Jeremy Sicklick over at HouseCanary. It still has a seat at the big table but it still isn’t the game changer that Opendoor has been advertising. And it may yet turn out to be simply a green curtain that Compass and Opendoor management have kept their operations hidden behind while they continue to shuffle management.
Boots on the ground, discipline of execution, and an in-depth understanding of the real estate business matter more than technology. Winter is still coming to these two Unicorns and the investing public at some point will get to see the financial books at Compass and Opendoor. Then we’ll all see if they are really what they claim to be. Based on the current situation and recent events, my bet is that people will be disappointed at what they see behind the green curtain.
Fun fact: your mortgage lender—the bank or company that granted you your loan—probably isn’t cashing your mortgage payment check each month. That’s because almost immediately after you closed on your loan, they turned around and sold it.
With the housing bubble that caused the recession still on everyone’s mind, it’s more important now than ever for home buyers to know how the system works—and how it went so wrong.
What many homeowners and buyers don’t realize is that there’s an entire secondary mortgage market where the lender becomes a seller. Here are the basics to help you understand how that market influences the primary mortgage industry and the rest of the economy.
What is the Secondary Market for Mortgages?
Once you close your loan, your bank takes it to a marketplace, where a variety of investors can purchase it. Sometimes, the final purchaser is lined up before you even close and the paperwork at your signing includes a statement as to who they will be.
The largest investors by far are Fannie Mae and Freddie Mac, two corporations that are owned by the United States government. They were designed to provide backing on the secondary market for low-income and very-low-income home purchases, and they have expanded under the Obama administration to take on more and more purchases.
There are other investors on the secondary mortgage market, and often those investors will purchase the loan and bundle it together with other loans into a fund called a mortgage-backed security, or MBS for short.
Understanding How Mortgage-Backed Securities Work
If your mortgage is bundled into an MBS fund, the investor or investment entity that created it then sells out shares of the fund to other investors in the same way they might sell shares of a mutual fund or a company’s stock.
Investors then buy the shares of the fund knowing that as the loans are paid, a portion of the returns (a.k.a. your interest payment) comes back to them. How large a portion depends on several factors, including how many shares of the security they bought, how many mortgages are bundled into the security, and how many of those loans are performing as expected.
The reason why such a large number of mortgages are bundled together? Reduced risk.
After all, if more mortgages are part of the fund, then when a few have repayment difficulties, that relatively small number is outweighed by the larger number of still-performing mortgages and the fund as a whole remains profitable.
For this reason, MBSs were, historically, one of the most secure investments available.
MBS Funds and the Financial Meltdown
Many homeowners are rightly wary about mortgage-backed securities on the secondary mortgage market in light of what happened with the financial meltdown of 2007-2008.
Here’s how it worked: private equity investors grouped higher- and lower-risk mortgages in separate categories, called tranches. They then sold these without disclosing the risks of investing in a particular tranche to the investors.
In fact, during this period, investors were rarely told about the tranches, leading to situations where investors were misled about the risks. When these funds began to fail, it affected many of the investors involved, and for many, it was the first time they fully realized which risk category their investment had fallen into.
The results are history.
MBS Funds in Today’s Secondary Mortgage Market
After the financial meltdown, the Obama Administration unveiled a comprehensive plan for reforming the mortgage market, one that put Freddie Mac and Fannie Mae front and center. The plan sought to achieve a few key changes to the market:
To use the government-backed corporations to underwrite mortgages and provide stability, so ordinary people could purchase with confidence again.
To expand the programs to cover most American home purchases in the short term.
To use FHA measurements to ensure that housing was being provided to low-income and extremely-low-income families who qualify.
To stabilize the market so banks could continue to offer mortgage loans with confidence.
To eventually scale back these programs as the private equity market regains strength, BUT
To fund all of the programs’ commitments for the duration of the loans they underwrite.
As a result of these clear policy goals, today’s secondary mortgage market is dominated by Freddie Mac and Fannie Mae, who acquire around 90 percent of all new mortgages between them.
MBS funds do still play a role in the marketplace, especially when it comes to jumbo loans, commercial real estate loans, and mortgages that do not meet Fannie Mae and Freddie Mac requirements.
As time goes on, they are also growing in popularity again, and the new regulations on their structure and constitution have restored some consumer confidence in their use.
Whoa, have you seen what just happened to interest rates!?
Suddenly, after at least fourteen years of our financial world being mostly the same, somebody flipped over the table and now things are quite different.
Interest rates, which have been gliding along at close to zero since before the Dawn of Mustachianism in 2011, have suddenly shot back up to 20-year highs.
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Which brings up a few questions about whether we need to worry, or do anything about this new development.
Is the stock market (index funds, of course) still the right place for my money?
What if I want to buy a house?
What about my current house – should I hang onto it forever because of the solid-gold 3% mortgage I have locked in for the next 30 years?
Will interest rates keep going up?
And will they ever go back down?
These questions are on everybody’s mind these days, and I’ve been ruminating on them myself. But while I’ve seen a lot of play-by-play stories about each little interest rate increase in the financial newspapers, none of them seem to get into the important part, which is,
“Yeah, interest rates are way up, butwhat should I do about it?”
So let’s talk about strategy.
Why Is This Happening, and What Got Us Here?
Interest rates are like a giant gas pedal that revs the engine of our economy, with the polished black dress shoe of Federal Reserve Chairman Jerome Powell pressed upon it.
For most of the past two decades, Jerome’s team and their predecessors have kept the pedal to the metal, firing a highly combustible stream of easy money into the system in the form of near-zero rates. This made mortgages more affordable, so everyone stretched to buy houses, which drove demand for new construction.
It also had a similar effect on business investment: borrowed money and venture capital was cheap, so lots of entrepreneurs borrowed lots of money and started new companies. These companies then rented offices and built factories and hired employees – who circled back to buy more houses, cars, fridges, iPhones, and all the other luxurious amenities of modern life.
This was a great party and it led to lots of good things, because we had two decades of prosperity, growth, raising our children, inventing new things and all the other good things that happen in a successful rich country economy.
Until it went too far and we ended up with too much money chasing too few goods – especially houses. That led to a trend of unacceptably fast Inflation, which we already covered in a recent article.
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So eventually, Jay-P noticed this and eased his foot back off of the Easy Money Gas Pedal. And of course when interest rates get jacked up, almost everything else in the economy slows down.
And that’s what is happening right now: mortgages are suddenly way more expensive, so people are putting off their plans to buy houses. Companies find that borrowing money is costly, so they are scaling back their plans to build new factories, and cutting back on their hiring. Facebook laid off 10,000 people and Amazon shed 27,000.
We even had a miniature banking crisis where some significant mid-sized banks folded and gave the financial world fears that a much bigger set of dominoes would fall.
All of these things sound kinda bad, and if you make the mistake of checking the news, you’ll see there is a big dumb battle raging as usual on every media outlet. Leftists, Right-wingers, and anarchists all have a different take on it:
It’s the President’s fault for printing all that money and running up the debt! We should have Fiscal Discipline!
No, it’s the opposite! The Fed is ruining the economy with all these rate rises, we need to drop them back down because our poor middle class is suffering!
What are you two sheeple talking about? The whole system is a bunch of corrupt cronies and we shouldn’t even have a central bank. All hail the true world currency of Bitcoin!!!
The one thing all sides seem to agree on is that we are “experiencing hard economic times” and that “the country is headed in the wrong way”.
Which, ironically, is completely wrong as well – our unemployment rate has dropped to 50-year lows and the economy is at the absolute best it has ever been, a surprise to even the most grounded economists.
The reality? We’re just putting the lid back onto the ice cream carton until the economy can digest all the sugar it just wolfed down. This is normal, it happens every decade or two and it’s no big deal.
Okay, but should I take my money out of the stock market because it’s going to crash?
This answer never changes, so you’ll see it every time we talk about stock investing: Holy Shit NO!!!
The stock market always goes up in the long run, although with plenty of unpredictable bumps along the way. Since you can’t predict those bumps until after they happen, there is no point in trying to dance in and out of it.
But since we do have the benefit of hindsight, there are a few things that have changed slightly: From its peak at the beginning of 2022 until right now (August 2023 as I write this), the overall US market is down about 10%. Or to view it another way, it is roughly flat since June 2021, so we’ve seen two years with no gains aside from total dividends of about 3%.
Since the future is always the same, unknowable thing, this means I am about 10% more excited about buying my monthly slice of index funds today than it was at the peak.
Should I start putting money into savings accounts instead because they are paying 4.5%?
This is a slightly trickier question, because in theory we should invest in a logical, unbiased way into the thing with the highest expected return over time.
When interest rates were under 1%, this was an easy decision: stocks will always return far more than 1% over time – consider the fact that the annual dividend payments alone are 1.5%!
But there has to be some interest rate at which you’d be willing to stop buying stocks and prefer to just stash it into the stable, rewarding environment of a money market fund or long-term bonds or something else similar. Right now, if a reputable bank offered me, say, 12% I would probably just start loading up.
But remember that the stock market is also currently running a 10% off sale. When the market eventually reawakens and starts setting new highs (which it will someday), any shares I buy right now will be worth 10% more. And then will continue going up from there. Which quickly becomes an even bigger number than 12%.
In other words, the cheaper the stocks get, the more excited we should be about buying them rather than chasing high interest rates.
As you can see, there is no easy answer here, but I have taken a middle ground:
I’m holding onto all the stocks I already own, of course
BUT since I currently have an outstanding margin loan balance for a house I helped to buy with several friends (yes this is #3 in the last few years!), I am paying over 6% on that balance. So I am directing all new income towards paying down that balance for now, just for peace of mind and because 6% is a reasonable guaranteed return.
Technically, I know I would probably make a bit more if I let the balance just stay outstanding, kept putting more money into index funds, and paid the interest forever, but this feels like a nice compromise to me
What if I want to Buy a House?
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For most of us, the biggest thing that interest rates affect is our decisions around buying and selling houses. Financing a home with a mortgage is suddenly way more expensive, any potential rental house investments are suddenly far less profitable, and keeping our old house with a locked-in 3% mortgage is suddenly far more tempting.
Consider these shocking changes just over the past two years as typical rates have gone from about 3% to 7.5%.
Assuming a buyer comes up with the average 10% down payment:
The monthly mortgage payment on a $400k house has gone from about $1500 at the beginning of 2022 last year to roughly $2500 today. Even scarier, the interest portion of that monthly bill has more than doubled, from $900 to $2250!
For a home buyer with a monthly mortgage budget of $2000, their old maximum house price was about $500,000. With today’s interest rates however, that figure has dropped to about $325,000
Similarly, as a landlord in 2022 you might have been willing to pay $500k for a duplex which brought in $4000 per month of gross rent. Today, you’d need to get that same property for $325,000 to have a similar net cash flow (or try to rent each unit for a $500 more per month) because the interest cost is so much higher.
And finally, if you’re already living in a $400k house with a 3% mortgage locked in, you are effectively being subsidized to the tune of $1000 per month by that good fortune. In other words, you now have a $12,000 per year disincentive to ever sell that house if you’ll need to borrow money to buy a new one. And you have a potential goldmine rental property, because your carrying costs remain low while rents keep going up.
This all sounds kind of bleak, but unfortunately it’s the way things are supposed to work – the tough medicine of higher interest rates is supposed to make the following things happen:
House buyers will end up placing lower bids which fit within their budgets.
Landlords will have to be more discerning about which properties to buy up as rentals, lowering their own bids as well.
Meanwhile, the current still-sky-high prices of housing should continue to entice more builders to create new homes and redevelop and upgrade old buildings and underused land, because high prices mean good profits. Then they’ll have to compete for a thinner supply of home buyers.
The net effect of all this is that prices should stop going up, and ideally fall back down in many areas.
When Will House Prices Go Back Down?
This is a tricky one because the real “value” of a house depends entirely on supply and demand. The right price is whatever you can sell it for. However, there are a few fundamentals which influence this price over the long run because they determine the supply of housing.
The actual cost of building a house (materials plus labor), which tends to just stay pretty flat – it might not even keep up with inflation.
The value of the underlying land, which should also follow inflation on average, although with hot and cold spots depending on which cities are popular at the time.
The amount of bullshit which residents and their city councils impose upon house builders, preventing them from producing the new housing that people want to buy.
The first item (construction cost) is pretty interesting because it is subject to the magic of technological progress. Just as TVs and computers get cheaper over time, house components get cheaper too as things like computerized manufacturing and global trade make us more efficient. I remember paying $600 for a fancy-at-the-time undermount sink and $400 for a faucet for my first kitchen remodel in the year 2001. Today, you can get a nicer sink on Amazon for about $250 and the faucet is a flat hundred. Similarly, nailguns and cordless tools and easy-to-install PEX plumbing make the process of building faster and easier than ever.
On the other hand, the last item (bullshit restrictions) has been very inflationary in recent times. I’ve noticed that every year another layer of red tape and complicated codes and onerous zoning and approval processes gets layered into the local book of rules, and as a result I just gave up on building new houses because it wasn’t worth the hassle. Other builders with more patience will continue to plow through the murk, but they will have less competition, fewer permits will be granted, and thus the shortage of housing will continue to grow, which raises prices on average.
Thankfully, every city is different and some have chosen to make it easier to build new houses rather than more difficult. Even better, places like Tempe Arizona are allowing good housing to be built around people rather than cars, which is even more affordable to construct.
But overall, since overall US house prices adjusted for inflation are just about at an all-time high, I think there’s a chance that they might ease back down another 25% (to 2020 levels). But who knows: my guess could prove totally wrong, or the “fall” could just come in the form of flat prices for a decade that don’t keep up with inflation, meaning that they just feel 25% cheaper relative to our higher future salaries.
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When Will Interest Rates Go Back Down?
The funny part about our current “high” interest rates is that they are not actually high at all. They’re right around average.So they might not go down at all for a long time.
Remember that graph at the beginning of this article? I deliberately cropped it to show only the years since 2009 – the long recent period of low interest rates. But if you zoom out to cover the last seventy years instead, you can see that we’re still in a very normal range.
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But a better answer is this one: Interest rates will go down whenever Jerome Powell or one of his successors determines that our economy is slowing down too much and needs another hit from the gas pedal. In other words, whenever we start to slip into a genuine recession.
In order to do that however, we need to see low inflation, growing unemployment, and other signs of an economy that’s not too hot. And right now, those things keep not showing up in the weekly economic data.
You can get one reasonable prediction of the future of interest rates by looking at something called the US Treasury Yield Curve. It typically looks like this:
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What the graph is telling you is that as a lender you get a bigger reward in exchange for locking up your money for a longer time period. And way back in 2018, the people who make these loans expected that interest rates would average about 3.0 percent over the next 30 years.
Today, we have a very strange opposite yield curve:
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If you want to lend money for a year or less, you’ll be rewarded with a juicy 5.4 percent interest rate. But for two years, the rate drops to 4.92%. And then ten-year bond pays only 4.05 percent.
This situation is weird, and it’s called an inverted yield curve. And what it means is that the buyers of bonds currently believe that interest rates will almost certainly drop in the future – starting a little over a year from now.
And if you recall our earlier discussion about why interest rates drop, this means that investors are forecasting an economic slowdown in the fairly near future. And their intuition in this department has been pretty good: an inverted yield curve like this has only happened 11 times in the past 75 years, and in ten of those cases it accurately predicted a recession.
So the short answer is: nobody really knows, but we’ll probably see interest rates start to drop within 18-24 months, and the event may be accompanied by some sort of recession as well.
The Ultimate Interest Rate Strategy Hack
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I like to read and write about all this stuff because I’m still a finance nerd at heart. But when it comes down to it, interest rates don’t really affect long-retired people like many of us MMM readers, because we are mostly done with borrowing. I like the simplicity of owning just one house and one car, mortgage-free.
With the current overheated housing market here in Colorado, I’m not tempted to even look at other properties, but someday that may change. And the great thing about having actual savings rather than just a high income that lets you qualify for a loan, is that you can be ready to pounce on a good deal on short notice.
Maybe the entire housing market will go on sale as we saw in the early 2010s, or perhaps just one perfect property in the mountains will come up at the right time. The point is that when you have enough cash to buy the thing you want, the interest rates that other people are charging don’t matter. It’s a nice position of strength instead of stress. And you can still decide to take out a mortgage if you do find the rates are worthwhile for your own goals.
So to tie a bow on this whole lesson: keep your lifestyle lean and happy and don’t lose too much sweat over today’s interest rates or house prices. They will probably both come down over time, but those things aren’t in your control. Much more important are your own choices about earning, saving, healthy living and where you choose to live.
With these big sails of your life properly in place and pulling you ahead, the smaller issues of interest rates and whatever else they write about in the financial news will gradually shrink down to become just ripples on the surface of the lake.
In the comments:what have you been thinking about interest rates recently? Have they changed your decisions, increased, or perhaps even decreased your stress levels around money and housing?
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* Photo credit: Mr. Money Mustache, and Rustoleum Ultra Cover semi gloss black spraypaint. I originally polled some local friends to see if anyone owned dress shoes and a suit so I could get this picture, with no luck. So I painted up my old semi-dressy shoes and found some clean-ish black socks and pants and vacuumed out my car a bit before taking this picture. I’m kinda proud of the results and it saved me from hiring Jerome Powell himself for the shoot.
While other countries have tried to catch up, there’s still nothing quite like Japan’s rail network.
Since 1964, Japan’s Shinkansen trains have zipped travelers between major cities — currently at speeds up to 200 mph. Add in regional and local trains, and you can get pretty much anywhere on Japan’s main islands by rail.
If you’re planning to visit more than one city, a Japan rail pass can make it cheaper and easier. But there’s more than one rail pass: Travelers have dozens of options to choose from. Picking the right one is key to balancing cost and ease.
Here’s what you need to know about getting a pass, Japan rail pass prices, and where to buy a Japan rail pass.
Types of rail passes in Japan
Japan’s train companies offer foreign tourists dozens of rail pass options. Picking the right one for your trip depends on which part or parts of Japan you want to visit.
If you want the flexibility to go anywhere, you’ll want to get the countrywide Japan Rail Pass — also referred to as the JR Pass. This pass is sold in increments of seven days (up to 21 days). It lets you access virtually any JR-operated train — as well as JR-operated buses and certain ferry boats — across Japan during the validity period.
However, don’t overlook regional passes. These rail passes can be a cheaper option when you need unlimited travel within a particular area.
For instance, say you plan to visit the eastern part of Japan. JR EAST offers a half-dozen types of rail passes, each covering a different region from Tokyo.
Meanwhile, JR WEST offers nearly a dozen train passes in and around Osaka and Kyoto.
The Hokkaido Railway Company offers a variety of train pass options around the northern island of Hokkaido.
Japan rail pass prices
Japan rail pass prices vary drastically, starting around $17 for a one-day Kansai Area Pass to up to $644 for a three-week Japan countrywide pass in the first class Green Car. The cost depends on which Japan rail pass (or passes) is right for your trip.
Keep in mind that some passes are cheaper when purchased abroad. Usually, this is a modest savings. For example, you’ll save around $7 when buying a five-day Hokkaido Rail Pass abroad. Still, it’s worth considering as a way to reduce the cost of your trip.
🤓Nerdy Tip
If you plan on visiting Tokyo and Kyoto or Osaka on the same trip, you’ll likely want to get a countrywide Japan rail pass. That’s because Tokyo is part of the JR EAST region, and Kyoto and Osaka are part of the JR WEST region.
Cost of countrywide Japan rail pass
For ease and simplicity, most tourists consider getting the countrywide Japan Rail Pass. While you can wait until your arrival in Japan to purchase this pass, the cheapest way to get this Japan rail pass is through authorized sales offices online.
The cost varies slightly by the sales office, so shop around for the cheapest price. At the time of writing, Japan-Rail-Pass.com sells countrywide Japan rail passes at the following prices.
Standard Pass
Green Car (first class)
Consider combining rail passes
Let’s say that you’re planning a 10-day trip to Japan. The simplest solution would be to buy a 14-day countrywide Japan Rail Pass for around $350. However, you may be able to save by combining a couple of rail passes instead.
If you’re flying into Tokyo, the three-day JR TOKYO Wide Pass can be a steal at around $71.
To start, you can use the pass to travel to downtown Tokyo from either major airport. Then, use it to visit iconic Tokyo neighborhoods like Shinjuku and Akihabara, take a day trip to Lake Kawaguchiko to view Mt. Fuji or visit the UNESCO-recognized shrines and temples of Nikkō. During the winter, you can use this pass to ski or snowboard at Gala Yuzawa.
The JR EAST website includes several other itineraries that are cheaper when you buy the JR TOKYO Wide Pass rather than buying individual train tickets.
When you’re ready to visit another city, activate your seven-day Japan Rail Pass, which costs around $220. This will let you visit Kyoto, Osaka, Nagoya, Sendai and Hiroshima or Sapporo. Adding up the passes, you’ll pay $293 vs. $350 for a two-week pass.
Where to buy a Japan rail pass
How to buy a rail pass depends on the type of pass you choose. Different passes have different purchase requirements. For some, the only option is to buy a rail pass in Japan. Others are best purchased before you depart.
Countrywide JR Pass
The countrywide Japan Rail Pass can be purchased in one of three ways:
Online from the Japan Railways Group.
In person at a JR ticket office in Japan.
Through an authorized sales agent.
Buying a Japan Rail Pass online or from a JR ticket office would intuitively be the cheapest option. But these are actually the most expensive options. Plus, you’ll have to navigate limited business hours — even for the website.
That means the cheapest option is actually to buy through one of the dozens of authorized sales agent offices located around the world. While prices vary slightly between retailers, the process is generally the same. You’ll receive a packet in the mail with a voucher that you’ll need to exchange and activate once you arrive in Japan.
Regional Japan rail passes
Unlike the countrywide Japan Rail Pass, you’ll generally want to buy regional rail passes directly from the JR company that sells them. The best way to do so will depend on the company and the type of pass.
For example, you can purchase JR TOKYO Wide Pass in advance online. However, the pass costs the same, and it may be simpler to wait to purchase it from a vending machine or ticket office in Tokyo.
However, consider purchasing JR Hokkaido train passes before leaving for Japan to get a discount of the price of the pass.
If you’re considering getting a Japan rail pass
Getting a rail pass can be a great way of saving money on travel within Japan. However, don’t simply default to the countrywide Japan Rail Pass. Instead, check to see if the cheaper regional train passes are a better fit for your trip.
If you plan to purchase a countrywide pass, shop around for the best option. Prices will vary between authorized sales agents, so take a few minutes to check the options.
For regional passes, check your purchasing options. You may be able to save by purchasing your pass in advance. If not, see how to purchase the pass once you arrive. It may not be worth it to purchase the pass online, especially as you’ll likely need to visit a ticket office or kiosk to get it anyway.
How to maximize your rewards
You want a travel credit card that prioritizes what’s important to you. Here are our picks for the best travel credit cards of 2023, including those best for:
Of the many varieties of mortgage loans out there, the VA loan—a type of mortgage backed by the Department of Veterans Affairs—just might be the one with the most advantages. There’s no down payment required or mortgage insurance premium to pay. Plus, VA lenders are more flexible than conventional lenders when it comes to credit scores and loan limits, too.
Of course, not just anyone has access. VA loans are available only to active-duty service members and veterans who meet service requirements. In some cases, spouses can also qualify.
“They’re a major benefit—earned by people who have served our country,” says Rob Posner, CEO of mortgage lender NewDay USA.
If you are of the estimated 14.1 million living veterans or million-plus current service members who might qualify, here’s what you need to know to get started.
What is a VA home loan?
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs. VA loans are typically issued by private mortgage lenders (we’ll go into the one exception later on) but the VA assumes some of the risk. This means if a VA borrower fails to make payments on their loan and defaults, the VA will repay the lender a portion of its losses.
Because of this added protection from the government, lenders (those who are approved to offer VA loans, at least) can be more lenient on credit score and down payment requirements when making these loans and lend out larger amounts.
Created in 1944 as part of the GI Bill of Rights, the VA loan program was intended to help service members returning from war more easily purchase homes and reintegrate into society. Today, VA loans account for about 11% of all mortgage activity, according to the Mortgage Bankers Association.
Types of VA loans
VA loans can be used for the purchase, refinance or renovation of a home (with some stipulations), and there are several types to choose from. Just keep in mind: Not all lenders can issue VA loans, and even among those that do, the loan options can vary.
VA purchase loan
The most common type of VA loan is the VA purchase loan, which allows you to purchase a property to live in as your primary residence. According to the Consumer Financial Protection Bureau, 57% of all VA loans originated in 2022 were used to purchase a home.
VA construction loan
Some lenders offer purchase loans that can be used to build a home from the ground up. These are sometimes referred to as VA construction loans. You’ll need to submit your building plans when applying for your loan and use a VA-approved builder. There are also certain appraisal and inspection requirements you will have to meet.
VA renovation loan
If you’re buying a home that requires some updating, a VA renovation loan allows you to finance the purchase price of the home—plus the costs of eligible repairs and improvements and ultimately roll it all into one balance. “These are great for buying a home that needs work that the seller doesn’t want to do,” says Garrett Puckett, CEO of lender Security America Mortgage.
Take note, though: You can’t use your renovation loans for just any project (sorry, no luxury upgrades such as a new swimming pool allowed). To qualify for VA funding, the updates must improve the safety or livability of the home—things such as fixing the stairs or improving accessibility. You’ll also need to complete the renovations within 120 days of closing on your loan.
VA Native American Direct Loan (NADL)
NADL loans are for Native American veterans or veterans married to a Native American person. They can only be used to buy, build or renovate a home that’s located on federal trust land—land that’s owned by the government but is set aside for a specific Native American tribe’s use.
These VA loans are issued directly by the VA and offer some of the lowest rates around. Currently, interest rates for NADLs issued after March 13, 2023, start at just 2.5%. (The VA sets the base rate for this loan type, and then lenders can adjust based on the borrower’s credit, loan term and other factors.) For reference, the average rate on 30-year conventional loans is currently 7.23%.
VA Interest Rate Reduction Refinance Loan
The VA’s IRRRL program is often referred to as a “streamline refinance,” as it’s designed to make refinancing quick and easy for existing VA borrowers. It requires no credit check, there’s no appraisal, and the whole point is to reduce the borrower’s interest rate and monthly payment.
VA IRRRLs “are much faster to get underwritten and closed because we need very little information,” says Mason Whitehead, who manages VA-approved lender Churchill Mortgage in Dallas. “We just refinance the loan and drop the interest rate.”
VA cash-out refinance
The other VA refinancing option is a cash-out refinance, which lets you borrow from your home’s equity. With these, you take out a new VA loan that’s bigger than your current mortgage, pay off your old loan balance, and get the difference back in cash.
Unlike the streamline refinance, you don’t need to have a current VA loan to use this program. So if you want to refinance from a conventional loan to a VA loan, for example, this is the program you’ll use.
How are VA loans different from other mortgages?
Once you have the loan, VA mortgages function much like other loan programs, allowing you to pay off the cost of purchasing a house over time. However, many of the upfront fees, qualifying requirements and application processes are quite different.
Down payments
Perhaps the biggest and best known benefit of a VA loan is that VA borrowers don’t need to make a down payment. Considering other loan programs require at least 3% down—or about $12,500 on a median-priced house—this can make it significantly easier for VA-eligible consumers to become homeowners.
There may be cases when borrowers want to make down payments anyway, pros say. If you have extra cash and want a lower monthly payment or to reduce your long-term interest costs, for example, you may want to put some money down. You can also lower your funding fee (more on these below) by making a down payment. As Whitehead explains, “It’s a sliding scale. The more down payment, the lower the VA funding fee.”
Funding fees
Most VA borrowers pay a funding fee—a one-time charge that’s designed to keep the VA loan program afloat. The fee ranges from 0.5% to 3.3% of the loan amount depending on the type of loan you use, how many times you’ve used your VA loan benefit (VA loan benefits can be used multiple times) and your down payment amount.
With a first-time VA loan with no down payment, the funding fee would be 2.15%—so $8,600 on a $400,000 loan, for example. And that’s only if you owed the fee. Some borrowers are exempt from funding fees if they have a disability due to their military service or if they meet other requirements.
You also have the option to roll the VA funding fee into your loan balance. Just be careful if you do this. Not only will it add to your long-term interest costs, but it could pose a challenge if you want to sell.
With this strategy, Whitehead says, “You end up owing more on the house than you paid for it. So, you need to be prepared to live in the house for quite a while to build up equity, so that when you do sell the house, there is sufficient equity to pay off the mortgage and closing costs.”
Loan limits
With VA mortgages, there are no loan limits, and technically you can borrow as much as you need. (Before 2020, down payments were required for loans above certain limits.) This is different from other government-backed loan programs, which have set thresholds for how much you can borrow. On FHA loans, for example, you can’t borrow more than $472,030 in most parts of the country.
That’s not to say that the sky’s the limit with VA loans. VA lenders will still look at your down payment, monthly income and debt to determine how large a loan you can afford to comfortably repay.
Credit score requirements
Unlike other government-backed mortgage programs, the VA doesn’t have any set credit score requirements. Instead, it lets lenders set their own standards. Because of this, credit score minimums can vary quite a bit from one lender to the next—ranging anywhere from 580 to 640, depending on which company you go with.
VA loans also aren’t subject to a VA debt-to-income ratio maximum, so lenders have leeway here, as well. This can make them “more flexible and easier to qualify for than conventional loans,” says Jennifer Beeston, a lending executive and branch manager with Guaranteed Rate.
Interest rates
Interest rates charged on VA loans tend to be lower than on other mortgage types, since the VA assumes some of their risk. Currently, the average rate on a 30-year VA mortgage is 6.908%, according to mortgage pricing engine Optimal Blue.
VA loans
FHA loans
Conventional loans
Aug. 24, 2023
6.94%
7.09%
7.28%
Aug. 24, 2022
5.34%
5.57%
5.74%
Aug. 24, 2021
2.72%
3.14%
3.06%
Aug. 24, 2020
2.64%
2.98%
2.91%
Aug. 23, 2019
3.59%
3.99%
3.84%
Optimal Blue
With VA loans, borrowers can choose a fixed interest rate, which remains consistent for the entire loan term, or an adjustable rate. These are interest rates that start low and fixed, but eventually adjust annually or every six months.
Property requirements
VA loans can only be used on properties that meet certain “Minimum Property Requirements”—a list of basic must-haves that ensure the place is safe, sound and free of health hazards. These include having working electric and HVAC systems, being absent of lead-based paint and wood-destroying insects and having a leak-free roof.
To confirm a property you’re trying to buy meets these requirements, you’ll need to get a VA appraisal before you can close on a VA mortgage. These can only be done by VA approved appraisers and typically cost between a few hundred dollars to over $1,000 depending on the size of the home and where it’s located. You’ll pay for this as part of your closing costs. If you are buying a condominium, the VA must also approve the condo complex.
Who can get a VA loan?
VA loans are only available to active members of the U.S. military and veterans who meet military service requirements, as well as some National Guard and Reserve members. Some spouses can qualify, too. This is the case if a veteran spouse is missing in action, a prisoner of war or died while in military service or from a service-related disability.
Here’s a look at exactly who can use VA loans and the unique requirements they need to meet:
Group
Time of service
Service requirements
Active military members
Currently serving
90 continuous days or more
Veterans
Aug. 2, 1990 to present
One of the following:
– 24 continuous months
– The full period you were called to active duty (must be 90 days or more)
– 90 days or more if you were discharged for a hardship or reduction in force
– Less than 90 days if you were discharged due to a service-related disability
Veterans
Sept. 8, 1980 to Aug. 1, 1990
One of the following:
– 24 continuous months
– The full period you were called to active duty (must be 181 days or more)
– 181 days or more if you were discharged for a hardship or reduction in force
– Less than 181 days if you were discharged due to a service-related disability
Veterans
May 8, 1975 to Sept. 7, 1980,
Feb. 1, 1955 to Aug. 4, 1964, July 26, 1947 to June 26, 1950
One of the following:
– 181 continuous days
– Less than 181 days if you were discharged due to a service-related disability
Veterans
Aug. 5, 1964 to May 7. 1985, Nov. 1, 1955 to May 7, 1975 (in the Republic of Vietnam), June 27, 1950 to Jan. 31, 1955, Sept. 16, 1940 to July 25, 1947
One of the following:
– 90 continuous days
– Less than 90 days if you were discharged due to a service-related disability
Veteran officers
Oct. 17, 1981 to Aug. 1, 1990
One of the following:
– 24 continuous months
– The full period you were called to active duty (must be 181 days or more)
– 181 days or more if you were discharged for a hardship or reduction in force
– Less than 181 days if you were discharged due to a service-related disability
Veteran officers
May 8, 1975 to Oct. 16, 1981
One of the following:
– 181 continuous days
– Less than 181 days if you were discharged due to a service-related disability
National Guard
Aug. 2, 1990 to present
90 days of active duty
National Guard
Prior to Aug. 2, 1990
One of the following:
– 90 days of non-training active-duty
– 90 days of active duty service, including at least 30 consecutive days
– 6 creditable years in the National Guard and an honorable discharge or retirement
Reserve (any branch)
Aug. 2, 1990 – present
90 days of active duty
Reserve (any branch)
Prior to Aug. 2, 1990
One of the following:
– 90 days of non-training active-duty
– 6 creditable years in the Selected Reserve
Plus one of the following:
– An honorable discharge
– Retirement
– Transfer to Standby Reserve or another Ready Reserve element after honorable service
– Continued Selected Reserve service
How to apply for a VA loan
Not all mortgage companies offer—or are even allowed to offer—VA loans, so your first step is to find a VA-approved lender.
Once you’ve found one, the application process looks like this:
1. Apply for your Certificate of Eligibility
Your Certificate of Eligibility is a document that confirms you meet the eligibility requirements of the VA loan program.
You can request one online (within your VA.gov account), via mail or through your mortgage lender. Depending on what type of service member you are, you may need to show a copy of your discharge papers, service record, annual point statement, active duty report or a statement of service signed by your commander, adjutant or personnel officer. The VA has a full list of COE requirements, but if you choose to go through your lender, your loan officer will let you know what documents you need.
2. Get preapproved
After you’ve received your COE, you’ll need to apply with your lender for preapproval. This requires filling out a loan application (usually online) and providing some financial documents, such as your tax returns, pay stubs and bank statements. The lender will also pull your credit score and report and consider your debt-to-income ratio in the process. Again, VA loans are more flexible when it comes to these financial details, so if you’re worried about qualifying, talk to a loan officer. You may be surprised.
Once they’ve evaluated your application and finances, they’ll give you a preapproval letter stating how much you can qualify to borrow and at what interest rate. Be aware, though: This doesn’t mean your loan has been approved. Your lender will need to do a final approval after you’ve found a home and it’s been appraised.
3. Find a home
The house hunt is next. When you find one you’re ready to buy, you’ll include your preapproval letter in your offer. If the seller accepts, you’ll sign a purchase agreement, let your loan officer know and begin the full loan process.
Make sure your real-estate agent knows you’re using a VA loan before you make an offer. VA loans allow the seller to pay certain fees and closing costs, so they may want to negotiate for some of these on your behalf.
4. Have the home appraised
Your lender will order the VA appraisal next to ensure the property meets the VA’s Minimum Property Standards and that the amount you’re looking to borrow matches the home’s actual value. If the home is appraised at a lower amount than what you’ve offered to pay, you may need to renegotiate with the seller or make up the difference in cash.
5. Go through underwriting
After your home has been appraised, your loan will move into underwriting, which is when your lender gives everything a final look. They may request updated documents at this step, especially if it’s been a while since your initial application.
You will also need to secure homeowner’s insurance at this point, as it is required before you can close on your loan.
6. Close on your VA loan
Finally, it’s closing time. You’ll meet with your loan officer, closing agent and, sometimes, real-estate agent to go over the final paperwork.
Once you sign, pay your closing costs and any down payment you’ve decided to make, you’ll officially be a homeowner. You should get your keys and be free to move in shortly.
More on mortgages
The advice, recommendations or rankings expressed in this article are those of the Buy Side from WSJ editorial team, and have not been reviewed or endorsed by our commercial partners.
When you’re about to make an offer on a home, your real estate agent will ask how much “earnest money” you’d like to put down. Earnest money is a type of security deposit, also known as a “good faith” deposit, made to the seller of a home. It represents your intent to buy the property by showing the seller you’re serious about purchasing the property. In most cases, earnest money can also act as a deposit on the property you’re looking to buy.
This Redfin article gives an overview of what earnest money is, why you need it, and how much you may need, and how to protect the money once you deposit it.
What is earnest money in real estate transactions?
Earnest money is the money you pay after a home seller has accepted your offer on a house and before closing on the home. Earnest money assures the seller that you as the buyer are acting in good faith, and it provides them with some compensation in case you back out of the deal without a valid, contractual reason.
Once the seller’s agent is able to confirm that your earnest money has been deposited into an escrow account, the buyer and seller will enter into a purchase agreement and the seller’s agent will mark the listing as a pending sale — in effect taking the property off the market. At this stage, various inspections, appraisals, and possibly other contingencies you had in the offer contract move forward to finalize the sale.
Who keeps earnest money if the deal falls through?
If the buyer backs out, the earnest money is paid to the seller. If the deal falls through due to something coming up on the home inspection that would be prohibitively expensive (like a cracked foundation) or any other contingency listed in the contract, the buyer gets their earnest money back.
How much earnest money do you need to offer?
The buyer and seller can negotiate the earnest money deposit amount, but it typically ranges from 1% to 3% of the sale price, depending on the market. However, if you’re buying a home in a seller’s market (when there are more buyers than homes for sale), or bidding on a highly competitive home, the earnest money deposit might range between 5% and 10% of a property’s sale price.
Be sure to talk to your real estate agent about how much earnest money you should offer in the housing market you’re competing in.
Do you need to pay earnest money?
In the strictest technical terms, the answer is no – earnest money is not a requirement when you make an offer on a house. However, your offer likely won’t receive the seller’s serious consideration without putting a good faith deposit down of some kind. Earnest money can act as added insurance for both parties in the transaction.
How is earnest money paid and where does it go?
In most cases, your earnest money deposit is paid to the escrow or title company, which holds it in an escrow account until the transaction closes. If you work with a real estate attorney, the deposit may be put into escrow there. You can pay this deposit with a personal check, a cashier’s check from the bank, a money order, or wired funds, depending on the terms of your contract.
What does the good faith deposit count toward?
Once the sale of the home has been completed, the earnest money you paid can be applied toward your closing costs or down payment. Alternatively, you can receive your earnest money back after closing. Because the sale went through the home sellers do not get to keep the earnest money deposit.
When does a seller keep the earnest money deposit?
If you fail to meet your offer’s contractual obligations, your earnest money could now belong to the seller. Examples include:
After the due diligence period is over (usually a couple of weeks), you learn that the home sits in a flight path or near a refinery and you decide to walk.
You back out for any reason not listed as a contingency in the contract.
You cannot close on time, without a relevant contingency, and the contract has a “time is of the essence” term.
If you face any of these issues but still want to purchase the house, don’t give up. Have your agent get with the seller’s real estate agent. If you are upfront about the situation, the seller may extend the timeframe.
Is earnest money refundable?
As a buyer, you can reclaim your earnest money for a couple of reasons:
If the seller doesn’t fulfill their side of the purchase contract. For example, if the home inspection found faulty windows and the seller agreed to replace them – but did not follow through by the contract deadline. That breach of contract allows a buyer to back out of the purchase and receive a refund of their earnest money.
If you have a contingency in place, and you have a reason related to that contingency to cancel the contract. There are a number of contingencies you can put into the contract and, if not met, you can walk away from the deal with your good faith deposit in hand.
Other examples of when your earnest money would commonly be refunded:
The title company finds a lien against the property.
Your lender denies you the loan, but you have a financing contingency in your offer.
If your offer is contingent on selling your current home, but you are unable to do so after a given period of time.
If you have an appraisal contingency, and the home appraises at a lower rate but the seller won’t reduce the price of the home.
Having a contingency may also allow you to negotiate the terms of your contract. For example, you may be able to ask the seller to perform repairs or give a credit at escrow to cover the agreed-upon repair costs. Typically, a buyer and seller can negotiate a resolution so the sale can be completed.
What if a buyer can’t afford a good faith deposit?
Most sellers will not consider an offer without earnest money. Keep in mind, however, that it may be possible to negotiate a work-around. If you can’t afford an upfront earnest money deposit, let the real estate agent and seller know right away. If your purchase method and financing look solid otherwise, maybe the seller will agree to move forward with the sale. If you are serious about the purchase, you may be able to ask a family member or friend to assist with a gift or loan of funds for the good faith deposit.
A word of caution: Before taking a gift, institutional loan, or getting a cash advance on a credit card for your earnest money, be sure to consult with your mortgage lender. Any new gift, bank loan or cash advance that leads to high credit card balances during your transaction timeline could be detrimental to your mortgage loan approval. This deposit is meant to secure the property, not put it at risk of losing it.
Earnest money in action: Common scenarios
Let’s look at an example scenario of how earnest money may play out. Evan and Mia have listed their homes for sale in Washington, DC. Amelia is in the market for a new home and is interested in both properties and can’t make up her mind. In the event that both sellers require an earnest money deposit, three potential scenarios can unfold.
Scenario 1: The forfeited deposit
Because Amelia can’t decide which house to buy, she puts a good faith deposit down on both properties, prompting Evan and Mia to take their homes off the market.
Later, Amelia decides to buy Mia’s house. Now, Evan needs to relist their home for sale all over again. Luckily, Amelia’s earnest money is Evan’s to keep because Amelia backed out, which offers some compensation for time and money lost while the home was off market.
Scenario 2: The early closing payment
After giving it some thought, Amelia decides to make a single deposit on Mia’s home and everything runs smoothly. On closing day, Amelia gets the keys and the deposit is put towards their downpayment.
Scenario 3: The failed contingency
Amelia makes a single deposit to Mia. However, during the home inspection, Amelia discovers the electrical wiring is not up to code and will be very expensive to update. Luckily, Amelia has a home inspection contingency in the purchase agreement and decides not to buy and gets the deposit back from Mia.
How to protect your earnest money deposit
Take the following steps to protect your earnest money against fraud or unjustifiable forfeiture:
Document Everything. A home is one of the largest purchases many of us will make. Make sure the contract clearly defines what amounts to cancel the sale and who ends up with the earnest money. Include any amendments to details like buyer responsibilities and timelines.
Use an escrow account. Instead of working directly with the real estate seller or broker, use a reputable third-party, such as an escrow company, legal firm, or title company. Ensure the funds are securely held within an escrow account and obtain a receipt.
Understand the contingencies. Familiarize yourself with the contingencies included in the contract, and double-check the contingencies that protect your interests are included. Do not sign a home purchase agreement that doesn’t have the clauses that protect you.
Fulfill obligations. Real estate purchase agreements typically establish deadlines to safeguard sellers. Honor these deadlines and be sure to promptly address inquiries, submit necessary documents, and meet inspection, appraisal, and closing timelines.
Earnest money is an integral part of most real estate transactions. Before signing a Purchase and Sale Agreement to buy a home, carefully review all contingencies, understand how much money you’ll need to pay, and know-how to successfully recover your earnest money if you need to back out of the sale.
With record-low inventory nationwide, real estate agents seem to be hearing the same thing day in and day out: “I’d list my home, but where would I move?”For most agents, that’s the end of the conversation, ending the possibility of taking a new listing as well as facilitating the buyer side. Nationwide, inventory is at all-time lows. According to Altos Research, this week there are only 465,000 active listings. We are still at least a million listings shy of being a balanced market, so this excuse is not going to subside anytime soon.
Stop answering clients’ concerns by saying, “Yeah, there’s really nothing on the market, I mean everything in the MLS is already pending.I’ll put you into my search widget and we’ll watch for something to pop up together.”
While that’s onemethod of finding a home for your would-be sellers to buy, you can’t end the conversation there and expect to do any business this year. The key is to set up the ‘drip system,’ then move the conversation forward by being a problem solver. How does someone list and buy at the same time successfully in a market like this?
Here are 10 solutions for sellers who what to buy that go beyond waiting and watching for magic inventory to appear.
Build a home instead of chasing after the scarce resale inventory
30% of available homes are new construction, so there are several advantages to this option. First, many builders are buying down interest rates using their in-house financing. Builders are closing loans in the 4.5 to 5.5% range currently! Next, the house is new. No rehab for them and no inspection woes for you. Your client can get their home on the market a few months before construction is complete and not have to move twice. Finally, when your client builds, they don’t have to compete in a bidding war.
Buy first, close and then list the previous home
Don’t assume your clients won’t or can’t utilize this option. They may have a downpayment saved that isn’t their home equity. They might use a bridge loan to borrow their equity, close on the next home and then sell the old one. You don’t know if you don’t ask. The advantage here is that your client can make a non-contingent offer, secure their next home and deal with their old house later. Make sure you know lenders who offer bridge loans and understand how to explain this option.
Sell first, rent for a while and take the time to look for the right home
The advantage here is the seller has cashed out their equity and is ready to pounce on the right home, but without the pressure of scheduling closing and possession dates. Who are your go-to leasing agents? Maybe youare a leasing agent. Consider both traditional rentals, short-term vacation rentals, as well as apartment complexes. Many have some great amenities which could work for a short to longer-term lease while you help your client find the right home to buy.
Offer acceptance contingent on seller finding suitable housing
The buyer will probably want a specific time frame, but you can usually get 90 to 120 days to secure the next home. Many buyers in today’s market are simply anxious to find the right home, so they will be flexible with the seller’s situation. It’s still a seller’s market. The advantage to your client is they won’t have to move twice and you’ve built in enough time to look for the next place.
Convert the previous home into a rental
You can handle the lease yourself or refer it to your favorite leasing agent. The home stays an asset for your client and they can keep their low-interest rate mortgage. Don’t assume that this isn’t an option. You have to ask! Remember that Americans currently have record-high credit scores. They may be more comfortable taking this option than you think. In some markets, keeping the home and turning it into a short-term rental can be very profitable. It might be the best option for your client. You can always run the numbers and see if it makes sense, at least in the short term.
Leasing back the home
In this scenario, the buyer is happy because they secured the house, and your seller is happy because they have both time and money coming in to facilitate their move to the next place. Once the home has been purchased by the new owners, your clients would essentially pay rent to stay while they house hunt.
Buying an RV, a houseboat or a sailboat
There are endless examples of sellers who cashed out their homes, bought a recreational home and traveled for a while. You might be surprised that it’s not just baby boomers or retirees who are doing this! Another version of this option involves sellers cashing out and renting a series of short-term rentals in different areas of the country or the world, trying out new possibilities before they decide where to land.
Find your would-be seller an off-market home to purchase where that seller has flexibility
In this scenario, you are in complete control of both sides of the transaction, and you may pick up yet another client when the off-market seller also needs to buy. Refer to our podcast series and HousingWire articles about how to find inventory that’s not in the MLS.
Moving into an assisted living care facility
Many of the homes that are coming onto the market right now are in 55 and over communities. There is also inventory from families downsizing, new empty-nesters moving and the like. Are you prospecting in those neighborhoods?
Moving in with relatives
Whether that’s moving in with parents, kids or cousins somewhere else, it can be a short-term solution for sellers who don’t have another property in mind yet.
Bottom line? You can’t just wait around for listings to appear for your sellers! Stop relying on your ‘drip system.’ Be proactive with different solutions that could work for them. You’ll have more transactions and they’ll value your expertise, netting you both current business as well as future repeat and referrals.
Tim and Julie Harris host the nation’s #1 podcast for real estate professionals. https://timandjulieharris.com/category/podcast has new podcasts every day. Tim and Julie have been real estate coaches for more than two decades, coaching the top agents in the country through different types of markets. https://PremierCoaching.com to get started for FREE today.