Save more, spend smarter, and make your money go further
Is your debt stressing you out? If so, we promise you’re not alone. Especially if you are financing a home. According to the Center for Microeconomic Data, mortgage balances—the largest component of household debt—rose by $60 billion during the second quarter of 2018.
If you’re committed to getting out of debt, we’ve got you covered on how to set up a debt repayment plan to make sure you stay on track and reach debt freedom as soon as you can.
Here are five simple steps on how to jump-start your debt repayment journey:
#1 Assess The Amount of Debt You Owe
Of course, that’s what Mint is here to help you do — easily and automatically track where every last penny goes. Tracking your expenses will help you see where you can cut down, thus helping you reduce outstanding debt, as well as your debt/income ratio (outstanding debt divided by annual net income). Having a clear view of the numbers will empower you to make a plan that actually works based on where you are now.
#2 Sleuthing For Savings
Don’t think you have any extra money to create a debt destroyer? Once you start tracking your expenses, you might be surprised. For example, can you can cut your cable bill (average of $75 a month) and switching to a streaming service (about $10.99 a month)? Or is there a subscription you’re paying for that you don’t actually use? The smallest things here and there can really add up, so make sure you understand what you don’t actually need to be paying for in order to find some extra cash to put toward your debt goals.
#3 Pick A Debt To Tackle First
Some people choose the smallest debt first because getting a few wins on the board helps motivate them to keep working toward bigger goals. Others choose to go after debt with the highest interest rate first because it’s costing the most money right now. Once you choose which debt to work on first, pay the minimums on all other outstanding debts, and put every leftover dime toward the debt you’re targeting.
#4 Start Snowballing
After you pay off the first debt, move on immediately to the next one on your list, instead of taking a break and using that extra money elsewhere. As your number of debts decrease, the amount of money you have to attack the ones that remain increases. This means you can snowball your payments until all of your debt is pummeled
#5 Enjoy Life After Debt
Once you’ve started paying down debt, now you’re ready to establish a commitment to saving. First, determine what you are you saving for! The first goal you should set is an emergency fund. This will help protect you in case of sudden unemployment, a medical emergency or other unexpected expenses. If you want to be consistent with your savings contributions, try automated savings. Start small and then increase the deposit amount when you feel confident that you can set aside more.
The earlier you get started with a strategic debt repayment plan, the better. Remember, take things step by step and first get organized to figure out what you owe. We know debt can feel overwhelming at times, but it’s important to remember it doesn’t have to last forever if you’re committed to creating a better financial future!
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Medicare is one of the largest government programs, and it helps provide health insurance coverage to millions of seniors across the nation. If you’re enrolled in Parts A & B, you may assume that you have all of the protection that you need.
If you have original Medicare coverage, there are plenty of gaps that the program doesn’t cover. Those left over expenses could leave you with a massive amount of bills and other debts. Every year, health care costs continue to rise, and there is nothing that you can do to stop the rising costs, but there are a few ways that you can protect yourself from those massive fees. One of the best ways to guard your savings is to purchase a Medicare supplement plan.
What is a Medicare Supplement Plan?
Medicare Supplemental Plans are sold by private insurance companies across the nation, and their purpose is to work with your traditional Medicare coverage to fill in the gaps left behind by Medicare Parts A & B. Unlike a Medicare Advantage policy, Medigap plans don’t replace your regular coverage and you will still have to pay the premiums or your original plan as well as the premiums for your Medigap coverage.
There are ten different plans that you can choose from, and all of them are going to offer different coverage or pay for various portions of expenses. They are denoted by a letter of the alphabet, A through N. Some plans are more basic, like Plan A, while plan f is the most comprehensive of any of the medigap plans. The smaller plans, are going to be more affordable, and it’s important that you choose a plan that’s going to work best for you.
These Medigap plans are standardized by the government, which means that regardless of which company that you choose, the coverage is going to be identical. The only difference between companies is any additional benefits and the price of the premiums. If you want to save money, it’s important that you compare dozens of companies before you decide which one is going to work best for you.
Medicare Supplemental Plan M
Now that you have a basic understanding of Medigap policies, let’s look specifically at Plan M. Plan M is a more comprehensive policy, but there are still a few gaps that the plan doesn’t cover. It’s vital that you understand all of your options when you’re shopping for supplemental protection. If you’ve done some other research, you’ll notice that Plan M is almost identical to Plan D, minus a few exceptions.
Your Medigap Plan M will pay for two specific parts of Medicare Part A, the hospice care coinsurance payment or co-payments and the Part A hospital coinsurance and hospital costs for an extra 365 days after your traditional coverage have expired. Both of these coverage categories could result in massive bills depending on your situation.
For example, if you were to require an extended stay in a hospital, you could rack up a serious bill. If you didn’t have Medigap coverage, you would be responsible for hospital fees worth thousands and thousands of dollars. The longer that you’re in the hospital, the bigger that bill is going to be. Your supplemental coverage will ensure that you aren’t stuck with a mountain of debt after you leave the hospital.
Medigap Plan M also coverage Part B copayment or coinsurance. Every time that you go to the doctor or get a service that is covered by Part B, you will still be required to pay a small copayment. In most cases, this is a relatively small expense, but if you’re frequently going to the doctor or hospital, it can quickly add up. With a Medigap Plan M, all of all of those co-payments will be taken care of.
Additionally, you’ll also have the first three pints of blood for any procedure paid for. If you ever have surgery or are involved in an incident in which you need blood, you won’t have to pay for it yourself. It’s important that you get all the protection that you may need, and pints of blood could be one of the dozens of expenses that you may run into.
One of the unique coverages of Plan M is that it will pay 50% of Part A deductible. With your traditional Medicare coverage, you’ll have to meet the deductible before the program starts paying for anything. Once you’ve reached the threshold, then the coverage will kick in and they will start paying for their expense categories. With a Plan M, half of that deductible will be paid for you.
If you plan on doing a lot of overseas traveling in your retirement, then one coverage category that you should take note of is the foreign travel emergency coverage. With your Plan M coverage, you will have 80% of any foreign travel emergency coverage. You traditional Medicare plan is not going to pay for any of those bills, but without supplemental protection, those hospital bills can ruin your vacation.
While Plan M pays for a lot of the holes left behind, there are a few expenses that it doesn’t cover, and the most notable one is Part B excess charges. Whenever you receive any medical services, there is a pre-determined amount that Medicare is going to pay. Legally, the doctor or hospital can charge 15% more than that set amount. Every dollar above that limit is considered excess charges, and with a Plan M, you would be responsible for paying for them out-of-pocket.
Picking the Best Plan for You
All of the ten plans are excellent options for supplemental coverage, but how are you supposed to decide which one is best for you? There are a couple of different factors that you should consider to ensure that you’re getting the best health care protection for you.
The first thing that you should look at is your budget. Your supplemental coverage should give you the protection that you need to ensure that your finances aren’t drained because of health care bills, but your plan shouldn’t break your bank every month either. Before you apply for any Medigap plan, take a long and hard look at how much money you can spend on your supplemental insurance.
The next thing that you should consider is your health and family history. You can’t predict the future, but you can make an educated guess. The purpose of your Medigap policy is to ensure that you get the health care services that you need without draining your savings account. If you’re in excellent health and you have a spotless family history, then you can take the risk on purchasing a smaller policy that leaves more coverage gaps. On the other hand, if you have several red flags on your medical record, then you will need to consider purchasing a more encompassing plan that fills in all of the gaps.
Enrolling in a Medigap Plan M
Once you’ve decided which plan that you’re going to buy, it’s important that you understand everything about enrolling in these plans. First of all, purchasing one of these plans is very simple. It’s just like purchasing any other type of plan. An experienced agent can walk you through the process and ensure that everything is handled correctly. What’s more important is WHEN you enroll in your plan.
The best time to purchase one of these policies is during your Medigap Open Enrollment period. This is a six-month opportunity that begins the month that you turn 65. During this time, the insurance company can’t decline your application, regardless of your health or any medical problems that you may have. If you’re in very poor health, then this might be your only change to get supplemental coverage.
Additionally, during this time, the insurance company will not be able to increase your rates because of your health. Regardless of any condition that you have, you’re going to get their lowest rates. Once you’re outside of the open enrollment date, your application will have to go through all of the medical underwriting and hoops, and they could raise your premiums based on your health. If you want to save money, it’s vital that you enroll during this time.
Questions or Concerns?
I know that shopping for Medigap coverage can be confusing. I hope this post gave you all of the information that you need to make an educated decision about your health care insurance. If you have any questions about supplemental insurance plans, feel free to check out my other posts or contact me. The older that we get, the more that we are going to spend on health care, but don’t let those bills turn your retirement dream into a retirement nightmare.
If you’re an active-duty service member or a veteran seeking a mortgage, you may have heard about the VA loan program.
Backed by the U.S. Department of Veteran Affairs, this mortgage program offers a range of benefits to eligible borrowers, including the ability to purchase a home with little or no money down. Below, CNBC Select provides an overview of VA loans and guides you through the process of determining whether one might be the right financing option for you.
What we’ll cover
What is a VA loan?
VA direct loans are a type of mortgage loan funded and provided by the Department of Veteran Affairs (VA). A VA-backed loan is issued by private lenders such as banks and mortgage companies, but guaranteed by the VA. When we say that a federal agency has guaranteed a loan, we mean that the agency promises to cover some or all of the lender’s losses if the borrower defaults.
Much like conventional loans, FHA loans and other mortgage options, VA loans can be used to buy a primary residence, refinance an existing mortgage, or make home improvements. Here are some of the common types of loans available under the program:
VA Purchase Mortgage: Allows eligible borrowers to purchase a home with no minimum down payment and no private mortgage insurance requirement.
VA Cash-out Refinance: Allows eligible borrowers to refinance their current mortgage loan for a larger amount than they currently own and receive the difference in cash.
VA Streamline Refinance (also known as an Interest Rate Reduction Refinance Loan): Allows eligible borrowers to refinance an existing VA loan with a new one to reduce their monthly mortgage payment, shorten their loan term, or receive a lower interest rate.
VA Rehab and Renovation Loan: Allows eligible borrowers to finance both the purchase price of a home and certain renovations for it within a single package.
Native American Direct Loan: Allows eligible Native American Veterans and their spouses to purchase, build, or improve homes on federal trust land.
How do you apply for a VA loan?
If you’re interested in applying for a VA loan, you can follow these steps to get started:
Determine your eligibility: Check if you meet the eligibility requirements by reviewing the guidelines on the VA website.
Obtain a Certificate of Eligibility: If you are eligible, you will need to obtain a Certificate of Eligibility from the VA. You can get one after applying online through a portal, by mail, or through a VA-approved lender.
Find a VA-approved lender: Look for a lender that is approved by the VA to originate loans. CNBC Select gathered some of the best lenders that offer a VA loan. Navy Federal Credit Union — one of the lenders on that list — offers term lengths that range from 10 to 30 years. PenFed Credit Union, which is another solid contender, offers a VA loan option without lender fees.
Navy Federal Credit Union
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, VA loans, Military Choice loans, Homebuyers Choice loans, adjustable-rate mortgage
Terms
10 – 30 years
Credit needed
Not disclosed but lender is flexible
Minimum down payment
0%; 5% for conventional loan option
PenFed Credit Union Mortgage
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loan, VA loan, FHA loan, Jumbo loan and adjustable-rate mortgage (ARM)
Terms
Not disclosed
Credit needed
Minimum down payment
3.5% if moving forward with an FHA loan
Complete the loan application: The lender will guide you through the application process and help you gather the necessary documents, including ones for income and employment verification, credit reports and bank statements.
Wait for the loan approval: Once you submit your application, the lender will review it and determine if you meet the credit and income requirements. They will also order an appraisal of the property to determine its value.
On average, the VA loan approval process takes 53 days to close, according to a 2021 report from ICE Mortgage Technology.
Why choose a VA loan?
The VA guarantee provides a layer of security in the event the borrower defaults. This allows lenders to offer mortgages to people they might otherwise consider too risky, such as those with a limited credit history or a lower credit score.
VA loans also make it easier for military personnel and their families to access credit at more favorable terms. Borrowing other types of home loans can be expensive. FHA loans require a minimum down payment of at least 3.5% and conventional loans typically require a minimum of 5%. Plus, home loans typically come with private mortgage insurance if the down payment is less than 20%.
By opting for a VA loan, borrowers can save thousands of dollars on upfront costs. One of the most significant benefits is that VA loans typically require no down payment or private mortgage insurance. Additionally, they offer competitive interest rates and reduced closing costs.
These benefits can be especially appealing if you’re still paying off other debts or need to keep as much money on hand as possible for potential home renovations or an emergency fund. Just make sure to keep any money you’re saving for a short-term goal in a high-yield savings account where it can grow off the earned interest. The Western Alliance Bank Savings Account currently provides a high APY with a minimum deposit of just $1, and UFB Premier Savings also offers a competitive rate with no fees (with the possible exception of an overdraft fee).
Western Alliance Bank Savings Account
Western Alliance Bank is a Member FDIC.
Annual Percentage Yield (APY)
Minimum balance
$1 minimum deposit
Monthly fee
Maximum transactions
Up to 6 transactions each month
Excessive transactions fee
The bank may charge fees for non-sufficient funds
Overdraft fee
The bank may charge fees for overdrafts
Offer checking account?
Offer ATM card?
Terms apply.
Who is eligible for a VA loan?
Only qualified U.S. veterans, active-duty military personnel, and some surviving spouses can receive VA loans. To be eligible, you must meet the minimum service requirement and not have received a dishonorable discharge. You’ll also want to double-check with each lender for any additional eligibility guidelines.
Service members must serve for at least 90 continuous days, while veterans must meet minimum requirements that change depending on when they served (the same holds true for National Guard and Reserve members). The VA website lists the conditions for different periods.
Even if you don’t meet the minimum requirements, you may still be eligible if you were discharged for certain reasons, such as medical conditions or a disability connected to your military service.
Spouses qualify for VA loans if they are married to a veteran or service member who meets the eligibility criteria. Surviving spouses of veterans who died in the line of duty or because of a service-related injury may be eligible as well.
Credit and income requirements vary by lender. The VA does not have a minimum credit score requirement, but lenders usually look for a credit score of at least 620 and proof of stable income, according to Veterans United.
Before the property can be purchased with this type of loan, it must meet specific usage requirements, including being a primary residence and passing a VA appraisal.
What are the drawbacks of a VA loan?
Taking out a VA loan usually also requires you to pay a funding fee, which is a one-time charge from the VA to offset the cost of the program. It can range from 1.25% to 3.3% of the loan amount, depending on factors like whether it is the borrower’s first VA loan, according to the department website.
A major benefit of the VA loan program is being able to buy a home without making a down payment or paying for out-of-pocket expenses like closing costs. This can be a great option for those who do not have significant savings.
Borrowers can choose between paying the VA funding fee upfront or rolling it into their monthly mortgage payments. If you choose to roll the fee into your monthly payments, you’ll wind up needing a larger budget to cover all your expenses for the month.
It makes sense to pay the fee upfront if you can, but borrowers should weigh both of these options with their lender.
Another aspect of the program to consider is that the home appraisal process can be more rigorous for VA loans than those for other types. The VA requires that an approved appraiser conduct a thorough check of the property to determine its value and ensure that it meets the VA’s minimum property standards.
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Bottom line
Eligible veterans or service members looking to purchase a home or refinance an existing mortgage should explore VA loan options. They offer a variety of benefits, such as a smaller down payment and no private mortgage insurance requirement. That makes them particularly beneficial for those who are looking for a more accessible path to homeownership.
Catch up on CNBC Select’s in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
After paying your bills and covering necessary expenses each month, you may have money left over. While it’s tempting to splurge, it’s usually better to use that extra money to make extra payments on outstanding debt or invest.
If you have a large student loan balance, you may want to put all extra funds into paying off those loans. However, investing could be a better option to explore when you can reasonably expect a return that’s higher than your student loan interest rate.
Key takeaway
If you have a high interest rate on your student loans, putting more toward your loans may be a good idea. But if you’re in a loan forgiveness program or have a low interest rate, consider investing.
When to pay off student loans
Paying off student loans before investing can take some time, but for many borrowers, it can relieve a lot of stress and free up more cash for other goals, including investing. It can also make your life feel a little less complicated. You should consider paying off your student loans if you have high interest rates, you have an unpredictable cash flow or you’re looking to remove debt from your finances.
Pros:
You’ll save money in interest.
You’ll become debt-free sooner.
Your debt-to-income ratio (DTI) will improve, making it easier to qualify for a mortgage.
Cons:
It can take several years to pay off your student loans, even with extra payments.
It’s unnecessary if you’re working toward loan forgiveness or repayment assistance.
You won’t be able to maximize the student loan interest deduction.
Best for:
People whose top priority is to be debt-free.
Borrowers with high-interest student loans (8 percent or higher).
Borrowers who have private student loans with a variable interest rate.
People hoping to purchase a home but who can’t because of a high DTI.
When to invest
Investing sooner rather than later can help set you up for a successful retirement as you take advantage of the power of compound interest. While investing never offers a guaranteed return, if your research shows that the rate of return for your investments will likely be higher than the interest rate for your loans, it could be a good idea to start investing.
Pros:
You can often get a better rate of return than most student loan interest rates.
Investing sooner will help you avoid having to work longer in your older years.
With certain investment accounts, you can take withdrawals if you need the money in the future.
Cons:
You may still struggle with your monthly payments.
Investing won’t help improve your DTI.
Investing can be extremely risky.
Best for:
Borrowers with a low interest rate on their student loans.
Borrowers who are enrolled in a student loan forgiveness plan.
People who already have investing knowledge.
Pay off student loans or invest: Factors to consider
Cecil Staton, president and wealth advisor at Arch Financial Planning, says that when it comes to choosing between paying off your loans and investing, it’s more a question of “opportunity cost.”
“Do you expect a higher rate of return than the interest rate charged to your student loans?” Staton says. “If so, it could make sense to invest. If not, aggressive repayment strategies may be in your best interest, and you may delay investing. Ultimately, a balance between the two usually makes sense.”
Here’s what to think about when deciding between paying off your student loans and investing.
Personal priorities
Start by thinking about your overall financial picture. You need to consider your other debts, savings goals and personal priorities. Here are some other goals you might decide to prioritize:
Save for emergencies: Before you pay off student loans or invest, save at least one month’s worth of expenses. Over time, try to build up to six months’ worth of expenses.
Save for retirement: If your employer offers a 401(k) match, take advantage of it. Explore other opportunities outside of a 401(k) to start contributing to retirement accounts and saving for your retirement.
Pay off high-interest debt: Credit card balances, personal loans and other types of debt might have high interest rates. Paying these off first can give you a higher return than investments or student loan debt.
Tackle big life goals: If you’re looking to have kids or save for a house down payment, you might decide to make minimum payments on your debt and hold off on investing for now. This gives you space in your budget to save for those bigger financial milestones.
A final personal priority to think about is whether becoming debt-free is a top goal for you. If so, you may want to hold off on investing and put all excess funds toward paying off your student loans early.
Interest rates
Depending on when you borrowed the money and whether you have federal or private student loans, interest rates can range anywhere from 1 percent to 13 percent. Paying down your debt is like a guaranteed return on the money, so if your student loan interest rate is 5 percent, then you’re getting a 5 percent return.
Compare this rate of return to your expected investing return. Stocks can generally offer a long-term rate of return of over 9 percent a year. If you’re investing for the short term, however, returns can be volatile.
If your student loan interest rate is lower than what you can realistically expect to earn investing, then it could make sense to prioritize investing over paying down student loans early.
Tax deductions
When you’re paying off student loans, you might be able to deduct interest payments you make on that debt. Eligible borrowers can lower their taxable income by up to $2,500, which helps offset the cost of student loans over time.
At the same time, you can also deduct contributions made to a 401(k) or traditional individual retirement account. Think about which tax break is more important to you.
Forgiveness programs
If you have federal student loans, you might be able to get student loan forgiveness, which eventually cancels all or some of your student loan debt. If you plan to take advantage of student loan forgiveness, then it doesn’t make sense to put extra payments toward the debt. You could instead put the extra money toward investing and grow your money over time.
But look closely at the loan forgiveness details to ensure that you will meet the qualifications. This may affect your decision to enroll in one of these programs or to start investing now.
The bottom line
Deciding whether to pay off student loans or invest depends on your financial priorities and which option gives you a better return. If the rate of return in investing is higher than your student loan interest, then making minimum payments on your student loans and putting any extra cash toward investing may be a good choice. Conversely, if your student loan interest is higher than any possible return on investment, then focusing on getting out of debt faster may be the better path.
Medical bankruptcy is an unofficial term for clearing out medical debt under Chapter 7 or Chapter 13 bankruptcy.
According to the U.S. Census Bureau, Americans hold nearly $200 billion worth of medical debt. As you can imagine, medical debt can cause quite a bit of financial distress for anyone who has it.
Medical bills can affect your credit and make paying off other bills difficult. Filing bankruptcy due to hefty medical bills may help you eliminate your medical debt and have a fresh start, but it isn’t always a perfect solution. Here, you’ll learn what medical bankruptcy is and how it works so you can decide if it’s the right choice for your situation.
What does medical bankruptcy mean?
“Medical bankruptcy” isn’t a legal term used in bankruptcy court, but it’s often used unofficially to describe filing for bankruptcy to eliminate medical debt. The most common forms of bankruptcy for individuals struggling with medical debt are Chapter 7 and Chapter 13—they have some similarities as well as differences for discharging debt.
Can you discharge medical debt in bankruptcy?
Both Chapter 7 and Chapter 13 can help you discharge medical debt as long as you follow the court’s guidelines and are approved for the filing. When you file bankruptcy, your debts are categorized as either secured or unsecured debts. Secured debts are types of debts for which you provide collateral or a down payment, like a home or a vehicle. Credit cards and other non-collateralized debts are unsecured debts.
Medical bills fall under the unsecured debts category, which gives you more options when you’re filing for bankruptcy. For example, if you’re approved for Chapter 7 bankruptcy, you may be able to have the entirety of your medical debt eliminated.
Which type of bankruptcy should you file for medical debt?
Choosing which form of bankruptcy to file depends on your unique circumstances as well as what the courts will approve. The primary difference between Chapter 7 and Chapter 13 bankruptcy is that Chapter 7 allows you to eliminate debt after liquidating some of your assets. With Chapter 13 bankruptcy, you’re provided with a repayment plan to pay off debts over time.
How to file Chapter 7 bankruptcy for medical debt
To qualify and file for Chapter 7 bankruptcy, you’ll need to pass a means test. The means test is when the court takes a look at your household income compared to the average in your state. If you’re below a certain threshold, you can file for Chapter 7. When people ask, “Does bankruptcy clear medical debt?” they’re usually referring to Chapter 7.
During a Chapter 7 bankruptcy, you’re assigned a trustee who evaluates your financial situation and your assets. For assets that don’t fall under your state’s specific exemptions, you may be required to sell them in order to pay back a portion of your debt. Once the assets are sold to pay back creditors, the remaining debt is removed.
How to file Chapter 13 bankruptcy for medical debt
People with a steady source of income typically file Chapter 13 for their medical bankruptcy. If your medical condition isn’t preventing you from working and receiving regular pay, this may be your best option for bankruptcy.
Under a Chapter 13 bankruptcy filing, you submit a proposal to the courts, which is based on your income. The proposal contains information on how much you believe you can pay on a monthly basis. You’re given a three-to-five-year timeline to repay your debts based on the court’s decision. Once your repayment plan is complete, the court discharges your bankruptcy.
Alternatives to filing medical bankruptcy
Medical bankruptcy is an option that many people turn to, but it can affect your credit for seven to 10 years. Derogatory marks on your credit can make it difficult to apply for loans, and it can also result in putting down larger deposits when renting a home or turning on utilities.
Before filing for medical bankruptcy, here are some alternative ways to pay your medical bills and avoid bankruptcy:
Sell assets: Yes, this is part of Chapter 7 bankruptcy, but it does not affect your credit if you do it on your own. You can use these funds to pay down your medical debt.
Borrow from a friend or family member: This is typically a good option to avoid interest, but medical debt doesn’t accrue interest. It still may be helpful to avoid the debt going to collections.
Settle your debt: Much like other forms of debt, you may be able to call and negotiate with your medical debt creditors to settle the debt for less.
Consolidate your debt: Debt consolidation allows you to combine multiple medical bills into one, which can help reduce the number of creditors you have and make repayment more manageable.
Find extra sources of income: Depending on your medical condition, it can be helpful to work additional hours or find side work to pay down your debt.
FAQ
The following are some of the most common questions when it comes to medical bankruptcy.
What is the difference between bankruptcy and medical bankruptcy?
Technically, there’s no difference between bankruptcy and medical bankruptcy. While medical bankruptcy isn’t a legal term, you can claim medical debt when you file for bankruptcy.
How long does medical bankruptcy last?
Chapter 13 bankruptcy takes three to five years to repay your debt, and it remains on your credit report for seven years. Chapter 7 bankruptcy can take four to six months and will stay on your credit report for 10 years.
How does medical bankruptcy impact credit?
Medical bankruptcy affects your credit score, so it’s helpful to understand the downsides of filing for bankruptcy. Chapter 7 bankruptcy stays on your credit report for 10 years, while Chapter 13 bankruptcy only lasts for seven.
As long as a bankruptcy is on your credit report, it hurts your credit and is also a red flag for lenders and anyone else who checks your credit. This can result in loan rejections as well as higher deposit requirements when you rent or start a utility service.
Can you claim medical debt on bankruptcy?
Yes. You can claim an unlimited amount of medical debt when you file for bankruptcy.
Does a medical bankruptcy affect your spouse?
If you’re married, your medical bankruptcy can affect your spouse, even if you file alone. Your spouse’s assets may need to be liquefied under Chapter 7 bankruptcy, but if you file individually, your bankruptcy will not affect their credit.
How to repair your credit after medical bankruptcy
Medical bankruptcy may be the best way to get back on your feet financially, but it can also affect your credit for years to come. If you’re planning on buying a home or car, or if you’re hoping to make other big purchases using credit, it can be difficult to get approved for these.
Lexington Law Firm has a team of legal professionals who can help you repair your credit. We have different credit repair services like credit monitoring and financial education tools to help you on your journey to rebuilding your credit. To learn how Lexington Law Firm could assist you, contact us today.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.)
Reviewed By
Vince R. Mayr
Supervising Attorney of Bankruptcies
Vince has considerable expertise in the field of bankruptcy law.
He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.
Save more, spend smarter, and make your money go further
Personal finance and investing gurus are fond of an old Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.” Chances are you’ve heard it before.
It’s a profound quote, and trees are a great metaphor for growing your investment portfolio. If you water the tree daily – and have patience – you can expect to reap the rewards in due time. Whether you start investing in college or after you turn 40, the important thing is planting the seed.
The problem is, this proverb actually undersells the importance of starting as soon as possible from an investing perspective.
While a tree grows to maturity at a sustained rate and only reaches a certain height, investments actually grow larger the earlier you start. If investments are trees, then the seed you planted today may grow as tall as a mighty redwood, while the one you plant in 20 years becomes a pine. In other words, the growth potential of your portfolio is directly tied to the amount of time you give it to grow.
This is thanks to something called compound interest, where the interest your account accrues is compounded on itself. Here’s everything you need to know about compound interest – how it can help you, how it can hurt you and how to maximize its benefits.
Keep reading for a comprehensive look at compounding interest, or skip to the section you’d like to learn more about using the navigation links below.
What is Compound Interest?
There are two ways to accrue interest: simple and compound. Simple interest is when you earn interest only on the principal. So, if you have $1,000 invested at 5% interest, you’ll earn $50 every year.
Compound interest is earned on the principal and the interest in your account. Let’s look at a hypothetical example. Pretend you have $5,000 in a retirement account, earning 7% interest each year. The first year that your account is open, you earn $350 in interest, which brings your total to $5,350. The following year, interest is calculated based on that $5,350 total, not the original $5,000. You earn $374 in interest and now have a total of $5,724.
Even if you never deposit anything but the original $5,000, you’ll have $38,061.28 in 30 years. That’s a $33,061.28 profit.
Compound interest rewards people who invest over long periods of time, not necessarily those who can afford to invest the most. It’s specifically helpful for young people who start investing early.
A 25-year-old who invests $200 a month with 7% interest will have $226,705.89 in 30 years. If they wait 10 years to start investing, they’ll have to more than double their savings rate to reach the same total.
Use our compound interest calculator to see how much of a difference it can make.
Pros and Cons of Compound Interest
Compound interest is your best friend when you’re investing or saving for a long-term goal, but it’s your worst enemy if you have debt that’s not being paid off.
Here’s an example: A borrower with $30,000 in student loans defers their loans for a year while they look for a job. During that year, interest continues to accrue on those loans. Once they’re ready to resume making payments, they discover their $30,000 balance has grown to $45,000 because of compound interest.
To slow down the negative effects of compound interest, you should pay off your debt as quickly as possible. You can also refinance your loans to a lower interest rate. When you borrow money, compounding interest works against you and benefits the lenders. The interest rate a lender charges is the trade-off for taking on the risk of lending money and giving out loans. However, it makes it very important for you, the borrower, to pay off your loans on time and keep tabs on your interest rate.
If you have credit card debt, you may want to consider transferring your balance to a card with 0% APR to avoid interest while you pay off the balance. Otherwise, you’ll accrue interest that makes it more expensive for you to carry debt month to month.
Calculating Compound Interest
To calculate compound interest, you’ll need to use the formula below:
Compound Interest = Amount of Principle and Interest in Future (or Future Value) less Present Value
= [P (1 + i)n] – P
= P [(1 + i)n – 1]
P = principal, i = nominal annual interest rate in percentage, and n = number of compounding terms.
Compound Interest Investments
Some banks only calculate interest on a monthly basis, while others do it every day. More frequent compounding is better when you’re trying to maximize interest, so find out how frequently your bank calculates interest. You might have to call or poke around the fine print to determine their compounding schedule.
Next, find the highest interest rates possible while also minimizing risk. If you have a savings account with $10,000, choose a high-yield savings account. Aim for 2% interest or higher. A $5,000 savings account with 2% interest will be worth $7,459.04 in 20 years, but only worth $5,204.05 in a savings account with .2% interest. Using an investment calculator can give you a better idea of how interest will impact your return.
Compounding interest investment accounts can help both grow your money and secure your future. But it’s important to start early. And before you start investing in stocks, it’s important not to get ahead of yourself. Do your research and familiarize yourself with different investment options. Make sure you’re only investing money after you’ve topped off your emergency fund. It’s also important to ensure that you’re current on all your loan payments. Otherwise, any investment gains might be negated by snowballing debts.
If you’re saving for retirement, invest in low-fee index funds. Fees of 1% or more will drag down your profit and cut into your compound interest. Index funds will follow the market’s course and provide a solid rate of return. Avoid investing in individual stocks, as their volatility can be problematic.
Compound interest works best if you start saving as soon as possible, even if it’s just $25 a month. A 22-year-old who saves $25 a month at 7% interest for five years will have $1,795.80. When she gets a raise after those five years and can afford to put away $100 a month, she’ll have $294,213.07 when she retires at age 67. If she hadn’t started investing until after her raise, she’d only have $264,689.70.
Even though she only contributed $1,500 during those first five years, her portfolio is worth nearly $30,000 more. For most people, that’s enough to retire a full year earlier, and all it cost her was a monthly contribution of $25. Even someone earning an entry-level salary can afford that.
The same principle applies to debt. Even if you defer your student loans, keep making payments on them as much as you can afford to. Taking time off will only delay your debt payoff and increase how much you pay in interest.
Always compare rates before taking out a loan and get at least three quotes. Each percentage point matters when you’re borrowing money, especially for long-term debt like a mortgage. You can also limit compound interest by borrowing money for as little time as possible.
A 30-year $200,000 mortgage at 4.85% interest will cost $379,940 in total. A borrower who takes out the same loan for 15 years will only pay $269,910. That’s a difference of $110,000, which is more than half the total mortgage principal.
Takeaways: The Power of Compounding Interest and Growing Your Wealth
Compound interest can help you grow your wealth and secure a more stable financial future. Even if you can’t afford a large principal or large ongoing additions to your investment, you can still extract value from small investments with compounding interest. The key is to start as early as possible and do adequate research to ensure that you’re making investment decisions that make sense with your overall financial goals and situation. With these tips, you’ll be on your way to stabilizing your financial foundation and making your money work for you.
For more information on compounding interest, you can check out dolv.gov for more resources.
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Zina Kumok is a freelance writer specializing in personal finance. A former reporter, she has covered murder trials, the Final Four and everything in between. She has been featured in Lifehacker, DailyWorth and Time. Read about how she paid off $28,000 worth of student loans in three years at Conscious Coins. More from Zina Kumok
When a lender looks at your home loan application, one of the main things they look at is your borrowing power.
Of course, borrowing power changes from applicant to applicant and is based on numerous factors such as salary, debt, living expenses, and credit history (just to name a few).
However, it’s easy to forget that having children (or dependents) affects your borrowing power, too. Let’s consider this here.
How do children affect your home application?
While having children is a gift and fulfilling for many, lenders can see it as an increase in living expenses. Raising kids costs time and money, and lenders consider this extra cost when evaluating your financial capacity to make mortgage repayments.
According to the Australian Institute of Family Studies, “the estimated weekly costs for low-paid families of raising two children – a 6-year-old girl and a 10-year-old boy – is $340 per week or $170 a week per child.”
Which is about $17,680 for two children or $8,840 for one child each year.
That extra expense means you have less disposable income that could go towards paying back your home loan.
Let’s look at an example: Patrick and Jeremy have a combined income of $120,000 with $30,000 in annual living expenses. They also have no children. Based on Mozo’s borrowing calculator, that puts their average borrowing capacity at about $710,000.
However, having two kids (or two dependents) would increase their annual expenses to about $47,000, bringing their borrowing power down to $528,408. Almost a $200,000 decrease!
Typically to avoid this, many Aussie couples think ahead and purchase property in preparation for starting a family. But it is easy to forget that if they want to refinance their loan in the future, which is common, lenders will take into consideration the new dependents.
Refinancing after having children
Currently, 75% of Australian homeowners are on the brink of becoming home loan hostages, so they can’t easily refinance their home loans to escape higher interest rates.
And as mentioned earlier, having children is a significant expense that lenders consider when evaluating refinancing applications.
However, having kids doesn’t mean you’ll never be able to refinance. Financial situations change over time and it’s perfectly normal. But if you want to switch lenders and you have a child, you’ll have to change your game plan to increase your borrowing power.
How to increase my borrowing power if I have kids?
When looking at home loan applications, lenders want to know that you have enough disposable income to pay your loan on time without any issues. This includes being able to make your repayments if interest rates increase.
Below are four tips on how to increase your borrowing power.
Have a larger deposit. Saving for a larger deposit means having more equity and needing a smaller home loan.
Pay off any debts. Consider paying off any credit card or personal loan debts. This might help increase your borrowing power.
Negotiate a pay rise. One of the easiest ways to increase your borrowing power is by having a pay rise. More money coming into your bank account means more disposable income (which lenders love).
Lower living expenses. Audit your living expenses and identify areas where you could cut back—got any memberships you don’t use? Streaming services you never watch? Maybe cut back on your takeaway orders. Small changes here and there could genuinely enhance your savings in the long term.
Don’t feel discouraged from becoming a property owner if you’re thinking of having kids. But it’s something to keep in mind and plan properly for.
Compare home loans through our mortgage hub. Are you just starting your property journey? Check out our home-buying guides.
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WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.
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Initial monthly repayment figures are estimates only, based on the advertised rate. You can change the loan amount and term in the input boxes at the top of this table. Rates, fees and charges and therefore the total cost of the loan may vary depending on your loan amount, loan term, and credit history. Actual repayments will depend on your individual circumstances and interest rate changes.
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Mozo provides general product information. We don’t consider your personal objectives, financial situation or needs and we aren’t recommending any specific product to you. You should make your own decision after reading the PDS or offer documentation, or seeking independent advice.
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Homebuyers with good credit scores will soon be facing higher mortgage fees as the Biden administration seeks to close the racial homeownership gap and get more first-time and low-income buyers through the door.
A new federal rule could raise the monthly mortgage payments of buyers with good credit scores by over $60 a month, while riskier borrowers will get more favorable terms because their fees will be reduced.
Starting in May, the current structure of the Loan-Level Price Adjustment (LLPA) matrix will be upended by the Federal Housing Finance Agency (FHFA) in the hope of addressing housing affordability challenges in the U.S.
But there have been complaints that the rule change is unfair and potentially ineffective.
“In the short term, this may increase homeownership among the targeted group, but I’m afraid it could decrease homeownership among the middle class,” Jerry Howard, CEO of the National Association of Home Builders, told Newsweek. “I’m not sure that we’re not robbing Peter to pay Paul here.”
Only about 25 percent of homebuyers with Federal Housing Administration loans are people of color, according to the White House. Black and Hispanic people, on average, have fewer savings to use as a down payment on a home and tend to have lower credit scores, according to David Stevens, former CEO of the Mortgage Bankers Association (MBA) and a former FHA commissioner during the Obama administration. The current policy is being rolled out by the FHFA.
He told Newsweek that this can be attributed to factors like distrust in the banking system or being a first-generation American. He added that low credit scores can be a significant barrier to homeownership.
But in order for the FHFA to close the gap by bringing down LLPAs for those borrowers, the agency will compensate for the reduction in borrowing fees by raising the LLPAs of borrowers with higher credit scores, who tend to be white.
The average credit score in white communities was 727 in 2021, compared with 667 in Hispanic communities and 627 in Black communities, according to data analyzed by FinMasters, a personal finance blog.
The effort to get more low-income Americans and Americans of color into homeownership is essentially being subsidized by borrowers who have better credit scores and can contribute more to their down payment, Michael Borodinsky, a vice president at Caliber Home Loans, told Newsweek.
Borodinsky said while the plan was designed to help people who have historically faced obstacles to homeownership, it comes at the cost of negatively affecting buyers who worked hard to save enough money for a larger down payment and maintain a strong credit rating, especially since those buyers can “be of all demographics.”
“This new rule unfairly penalizes Americans for having good credit and rewards those who accrue debt and don’t pay their bills with cheaper loans,” GOP Representative Michael Lawler of New York told Newsweek. “The way to expand access to housing isn’t to reward bad credit—it’s to bring down inflation, reduce property taxes, cut energy costs and invest in critical infrastructure.”
Although the new rule, which takes effect May 1, is designed to assist low-income and minority borrowers by encouraging homeownership, industry experts have expressed concern that the plan fails to meet that goal.
Stevens said that while the generational limitations on homeownership among racial groups in the U.S. need to be addressed, FHFA director Sandra Thompson’s actions weren’t enough to lower borrowing costs to the point it will “make a difference.”
“We just went through to this completely convoluted discipline around risk-based pricing in the hopes of accomplishing something that isn’t going to be accomplished,” he said.
However, in a statement shared with Newsweek, the FHFA defended the changes. It called the recalibration of its pricing framework “minimal” and stressed that the agency’s goal of making sure that the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac “fulfill their role in any market condition.”
But former National Economic Council director Larry Kudlow said those GSEs have never “penalized” people who don’t need government programs to help them own homes, calling the Biden administration’s new rule a “middle-class tax hike.”
“We learned the hard way [in 2008] that if you can’t afford a home, just getting a subsidy one time to get a mortgage, you won’t be able to carry it,” Kudlow told Fox News on Thursday.
A spokesperson for the National Association of Realtors (NAR) told Newsweek that a GSE could still incentivize homeowners without punishing others and stressed that such a move is “especially needed” at a time when there is limited affordable housing “in all areas of the market.”
“NAR urges the FHFA to eliminate the fee increase on strong credit borrowers,” the spokesperson said.
Newsweek reached out to the White House for comment via email.
The timing of the upcoming LLPA changes is also “not ideal,” given the spring buying season and low inventory, an MBA spokesperson told Newsweek. But the MBA is more concerned about another mortgage change: the addition of an LLPA for loans with a debt-to-income (DTI) ratio greater than 40 percent, which Borodinsky stressed is often a “moving target.”
The DTI is calculated by taking a person’s monthly debts, including minimum payments on credit cards and loans, and dividing it by that individual’s income. The result is used to assess a person’s ability to make the necessary monthly payments on a loan.
In a March 15 statement, MBA president and CEO Bob Broeksmit warned that because the DTI often fluctuates throughout the mortgage application and underwriting process, the new fees will further vary those estimates, thus “increas[ing] compliance costs and confus[ing] borrowers.”
“[It] makes for a ‘no win situation,'” Borodinsky said. “Especially because the borrower will feel that they were taken advantage of by the lender due to these changed circumstances.”
After the MBA asked the FHFA to remove the DTI adjustment, the agency delayed the DTI ratio-based fee to August 1. But the MBA expressed disappointment that the FHFA is not considering alternatives to the new fees, which “simply are not workable for lenders and borrowers alike.”
Stevens agrees and said: “This would just make things really difficult for the lending community and for potential homebuyers.” He added that he’s “hopeful” Thompson will gut the adjustment before it goes into effect during the summer.
Update, 04/24/2023, 5:10 p.m. ET: This story was updated to clarify which federal agency is behind the mortgage fee policy change.
For most people buying a house is the most expensive purchase they will ever make. While there are government programs that help people get into houses without a lot of money, houses are still expensive. Many people believe buying their dream home is not within the realm of possibility, because of the costs associated with houses and life in general.
Real estate is an incredible way to build wealth thanks to the ability to buy real estate below market value and the United States tax code. Even someone with a modest salary can buy their dream home if they make some sacrifices and plan their real estate purchases well. I am not saying you should sacrifice what you think your dream home should be; I think it is vitally important to dream big. It will take time and hard work to get to a place where you can buy your dream home.
I own more than 20 rental properties, fix and flip 15-30 homes a year and own a real estate brokerage. I have learned many tricks over the years that can be used to build wealth through real estate and you do not have to have a lot of money to get started!
Cash needed to buy a house
There are many ways to buy a house, but most people will get a loan from a traditional bank or lender. If you are buying as an owner occupant you can put no money down with some loans like VA. Other loans will allow buyers to put 3.5 percent or 5 percent down as an owner occupant. When you get a loan, you will have to pay closing costs which consist of an origination fee to the lender, pre-paid insurance, taxes, appraisal, and a few other costs. Closing costs can range from 2 to 6 percent of the loan amount depending on what loan you use and who the lender is. On most loans 3 percent is a common amount for the loan costs on a low down payment owner occupant loan. Here is the cost break down on a 5 percent down loan for a $200,000 home.
Down payment: $10,000
Closing costs: $6,000
Total: $16,000
You can lower these costs by asking the seller to pay some or all of the closing costs or using a loan that has a smaller down payment. The amount needed to buy a home will also vary based on the purchase price. You may also have some more costs like an inspection that could run from $300 to $600. Remember you will also have to be able to qualify for the loan by having decent credit and a steady income.
Start small with a great deal
A $200,000 house may not be your dream house, and in many markets, $200,000 may not get you even a starter home. Most people will not be able to buy their dream house when they buy their first house. It will take time and hard work to build yourself into a position to buy your dream home. One way to buy your dream home is to make more money, but this article will focus on doing it strictly with real estate.
One reason I love real estate is that you can buy houses below market value. With the stock market and most products, you buy them at market value. Houses can be bought below market value because they are not easy to value, they may need work or the seller may need to sell the house quickly. I buy all of my houses below market value and that is how I am able to make so much money on my rentals and fix and flips.
If I were in the market for a $200,000 home that would be my personal residence, I would want to buy that house for at least 20 percent below market value. If it was a fix and flip, I would want to buy it for even more below market. I would buy the home for $160,000 assuming it needed no repairs and if it needed work, I would want to buy it even cheaper. It is not easy to buy homes this far below market, but it is possible.
How can the tax code help?
The United States tax code is very favorable to people who buy owner-occupied homes or investment properties. Investment properties are treated as a business and even if you make money on your rental houses, because of depreciation, they could show a loss on your taxes. The great part about owning a house as an owner occupant is that you may not pay any capital gain taxes when you sell the home. You have to live in the home for 2 out of the last 5 years to qualify for this tax treatment. Your interest payments on the mortgage for the home are also tax-deductible as an owner occupant. If I buy a home for $160,000, live in it for 2 years and then sell the home for $200,000 I would not pay any taxes on the $40,000 I made. Please note I am not an accountant, make sure you talk to one for all the details.
While you were living in that house for two years it may have even gone up in value or you could have made repairs or improvements that added more value. I bought a personal residence in 2008 for a little over $200,000 and ended up selling it five years later for over $300,000 and paid no taxes on that profit. While you are living in the home you are also slowly paying your loan off and increasing your equity in the home.
There is a good chance the home I would buy for $160,000 could be worth as much as $220,000 two years later. I would have some costs into the houses as I would probably spend money on maintenance and some repairs. Here is the cost breakdown when I sell the home:
Sales price: $220,000
Selling Costs: $15,000 (paying a real estate agent and other costs)
Repairs: $5,000
Loan Payoff: $149,000
Total cash: $51,000
After selling the home you would have $51,000 in cash leftover, but you paid a down payment and possibly closing costs when you bought the home so that is not all profit.
Next, buy a more expensive house
After selling the first house, you have $51,000 to buy another house plus any money you have saved up. You may be able to qualify for a larger home than you first bought if your income has gone up or your debts have gone down (I don’t think it is smart to buy the most house you can qualify for if you want to invest in rental properties). If you can now get a loan for $200,000 that means you can buy a much nicer home than your first home. With your next home, you want to buy a $300,000 house that is also bought below market. You will purchase the house for $240,000 and you can now put $50,000 or more into the home for the down payment. Your new loan is under $200,000 even if you have to pay closing costs and you can sell the house again in two years.
After two more years here are what the numbers look like:
Sales price: $340,000
Selling costs: $25,000
Repairs: $5,000
Loan payoff: $188,000
Total cash: $122,000
For the next house, you buy you will have an even bigger down payment, you will be able to buy a more expensive home and make even more money on the next sale. This process can continue to be repeated over and over until you buy your dream home.
Is putting all of your money into your dream home a good idea?
Buying houses this way will build wealth and help you buy your dream home. The tax advantages of an owner-occupied buyer in the United States are a huge advantage, but I don’t use this strategy. I try to buy my personal houses below market value, but I don’t move every two years and I don’t spend all my money on a personal house. I like to save money and invest it in rental properties that provide long-term cash flow. There are also some dangers like the prices could decrease instead of increase, but that is a risk whenever you buy a home or invest in anything. I also think it is very hard to save money if you buy the most expensive house you can qualify for. If your main goal is to buy your dream home and you are not as worried about saving and investing, this can be a great strategy to build wealth.
Conventional wisdom says to pay off the mortgage in its entirety before you retire. That way you won’t have to worry about sizable housing costs when living on a fixed income.
Lately, this age old rule has been challenged by a lot of folks because mortgage rates are at unprecedented low levels (or were).
Heck, they still are super low, which makes the argument stronger to hold onto the mortgage longer, especially seeing that mortgage interest is tax deductible.
But new research from the Center for Retirement Research at Boston College reveals that those with debt are more likely to continue working well into old age.
In fact, their working paper revealed nearly half of those in their 60s with debt continued to go to work, compared to just a third of those with no debt.
And mortgages seem to be the major culprit, seeing that the debt is often much larger on home loans than credit cards or other loans.
More Than Two-Thirds of 64-Year Olds with Mortgages Are Still Working
The researchers, Barbara Butrica and Nadia Karamcheva of the Urban Institute, found that at age 64, more than two-thirds of homeowners with mortgages still had to huff it to work.
Meanwhile, just over half of those who had paid off their mortgage still went to work each day.
So it’s clear that those who tackle the mortgage before they hit their golden years can actually retire at an appropriate age.
This new research was a follow-up to a study released last summer, in which the pair highlighted increased borrowing among adults aged 62 to 69 since the late 1990s.
For this group, median debt levels jumped from $19,000 to $32,100 (inflation adjusted) and debt as a share of total assets increased.
Should You Pay Off the Mortgage Before Retirement?
This is a great question, and not necessarily the easiest one to answer.
This study tells us that those who pay off the mortgage earlier tend to retire faster.
So if you don’t want to work forever, it might be wise to pay off the mortgage early, or turn to a shorter-term fixed-rate loan, such as the 15-year fixed mortgage.
The other side of the coin is that mortgage rates are exceptionally low right now, with many borrowers enjoying rates in the 2-3% range. And if you factor in the mortgage interest deduction, the real rate of interest is even lower.
In other words, it doesn’t cost a lot to hold onto the mortgage these days. This is especially true if you can put your money to work somewhere better, such as the stock market or even somewhere safer, like bonds.
It doesn’t make sense to pay the mortgage before maxing out retirement contributions either. If your company is willing to match “X” amount of your income, it’s foolish not to take them up on the offer.
There’s also the chance that your house could go down in value, though over time this tends to work itself out. Still, you’re dumping money into an illiquid asset, and tapping the equity will cost money.
Find a Balance to Retire When You Want
There are certainly pros and cons to paying off the mortgage before retirement. The obvious one being that you actually CAN retire!
A paid-off mortgage should give you peace of mind and let you sleep at night, and give you the confidence to call it quits at work.
Those who whittle down their mortgage earlier on might also be more money-conscious knowing they’ll have access to less money.
After all, if you’re paying the bare minimum, you might think you’ve got extra play money to wine and dine and travel the world.
At the same time, there are a lot of benefits to holding onto your mortgage these days, what with the low interest rate and tax deductions. Factor in inflation and today’s mortgage payment could seem like a car payment in 20 years.
At the end of the day, it’s best to find a balance that works for your personal financial situation.
It’s important to contribute to your nest egg AND pay off debts as you travel the road to retirement. That way you’ll actually get there.
Read more: Should I pay off the mortgage or invest instead?