The average for a 30-year fixed-mortgage is 7.36% today, up 0.07% compared to one week ago. The average rate for a 15-year fixed mortgage is 6.76%, which is an increase of 0.06% compared to a week ago. For a look at mortgage rate movement, see the chart below.
Given that inflation data hasn’t been improving, the Federal Reserve has been pushing off rate cuts. Though mortgage rates could still go down later in the year, housing market predictions change regularly in response to economic data, geopolitical events and more.
Today’s average mortgage rates
Today’s average mortgage rates on May. 09, 2024, compared with one week ago. We use rate data collected by Bankrate as reported by lenders across the US.
Mortgage rates change every day. Experts recommend shopping around to make sure you’re getting the lowest rate. By entering your information below, you can get a custom quote from one of CNET’s partner lenders.
About these rates: Like CNET, Bankrate is owned by Red Ventures. This tool features partner rates from lenders that you can use when comparing multiple mortgage rates.
How can I choose a mortgage term?
Each mortgage has a loan term, or payment schedule. The most common mortgage terms are 15 and 30 years, although 10-, 20- and 40-year mortgages also exist. With a fixed-rate mortgage, the interest rate is set for the duration of the loan, offering stability. With an adjustable-rate mortgage, the interest rate is only fixed for a certain amount of time (commonly five, seven or 10 years), after which the rate adjusts annually based on the market. Fixed-rate mortgages are a better option if you plan to live in a home in the long term, but adjustable-rate mortgages may offer lower interest rates upfront.
30-year fixed-rate mortgages
The 30-year fixed-mortgage rate average is 7.36% today. A 30-year fixed mortgage is the most common loan term. It will often have a higher interest rate than a 15-year mortgage, but you’ll have a lower monthly payment.
15-year fixed-rate mortgages
Today, the average rate for a 15-year, fixed mortgage is 6.76%. Though you’ll have a bigger monthly payment than a 30-year fixed mortgage, a 15-year loan usually comes with a lower interest rate, allowing you to pay less interest in the long run and pay off your mortgage sooner.
5/1 adjustable-rate mortgages
A 5/1 ARM has an average rate of 6.82% today. You’ll typically get a lower introductory interest rate with a 5/1 ARM in the first five years of the mortgage. But you could pay more after that period, depending on how the rate adjusts annually. If you plan to sell or refinance your house within five years, an ARM could be a good option.
Why are mortgage rates so high right now?
Over the last few years, high inflation and the Federal Reserve’s aggressive interest rate hikes pushed up mortgage rates from their record lows around the pandemic. Since last summer, the Fed has consistently kept the federal funds rate at 5.25% to 5.5%. Though the central bank doesn’t directly set the rates for mortgages, a high federal funds rate makes borrowing more expensive, including for home loans.
Mortgage rates change daily, but average rates have been moving between 6.5% and 7.5% since late last fall. Today’s homebuyers have less room in their budget to afford the cost of a home due to elevated mortgage rates and steep home prices. Limited housing inventory and low wage growth are also contributing to the affordability crisis and keeping mortgage demand down.
Will mortgage rates fall in 2024?
Most housing market experts predict rates will end the year between 6% and 6.5%. Ultimately, a more affordable mortgage market will depend on how quickly the Fed begins cutting interest rates. The central bank could start lowering interest rates in the fall, but it will depend on how the economy fares in the coming months.
Mortgage rates fluctuate for many reasons: supply, demand, inflation, monetary policy, jobs data and market expectations. Homebuyers won’t see lower rates overnight, and it’s unlikely there will ever be a return to the 2-3% mortgage rates we saw between 2000 and early 2022.
“We are expecting mortgage rates to fall to around 6.5% by the end of this year, but there’s still a lot of volatility I think we might see,” said Daryl Fairweather, chief economist at Redfin.
Every month brings a new set of inflation and labor data that can influence the direction of mortgage rates, said Odeta Kushi, deputy chief economist at First American Financial Corporation. “Ongoing inflation deceleration, a slowing economy and even geopolitical uncertainty can contribute to lower mortgage rates. On the other hand, data that signals upside risk to inflation may result in higher rates,” Kushi said.
Here’s a look at where some major housing authorities expect average mortgage rates to land.
Calculate your monthly mortgage payment
Getting a mortgage should always depend on your financial situation and long-term goals. The most important thing is to make a budget and try to stay within your means. CNET’s mortgage calculator below can help homebuyers prepare for monthly mortgage payments.
Where can I find the best mortgage rates?
Though mortgage rates and home prices are high, the housing market won’t be unaffordable forever. It’s always a good time to save for a down payment and improve your credit score to help you secure a competitive mortgage rate when the time is right.
Save for a bigger down payment: Though a 20% down payment isn’t required, a larger upfront payment means taking out a smaller mortgage, which will help you save in interest.
Boost your credit score: You can qualify for a conventional mortgage with a 620 credit score, but a higher score of at least 740 will get you better rates.
Pay off debt: Experts recommend a debt-to-income ratio of 36% or less to help you qualify for the best rates. Not carrying other debt will put you in a better position to handle your monthly payments.
Research loans and assistance: Government-sponsored loans have more flexible borrowing requirements than conventional loans. Some government-sponsored or private programs can also help with your down payment and closing costs.
Shop around for lenders: Researching and comparing multiple loan offers from different lenders can help you secure the lowest mortgage rate for your situation.
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Learning how to build credit as a student is important so you’re ready for life after graduation. Focus on building healthy credit habits—paying bills on time, keeping your credit utilization low and avoiding common credit mistakes.
While the government considers you an adult at 18, many people consider graduating college and starting their first job as the first real marker of adulthood. However, adulthood comes with responsibilities, many of which require a credit score—putting utilities in your name, renting your first apartment, putting car insurance in your name and even buying a car.
Read on to learn about some of the ways you can build credit as a student so you can graduate college with a degree and healthy credit.
Become an authorized user on a credit card
For many students, the first step to building credit is using a credit card to build credit. Unfortunately, it can be challenging to get a credit card if you don’t have any credit.
Often, a person’s first credit card isn’t actually theirs. Instead, they become an authorized user on someone else’s credit card. An authorized user is someone who is added to another person’s credit card account with full spending privileges. Responsibility for paying the credit card bill will still belong to the primary cardholder, who is usually a parent, close friend or relative.
The advantages to being an authorized user don’t end with being able to use the card like it’s your own. You also piggyback credit because the credit card’s account and payment histories are added to your credit report. This extends the length of your credit history, builds your payment history and increases the amount of credit available to you, which should all help improve your credit.
If you want to ask someone to make you an authorized user on their account, make sure they have a good credit history. You don’t want to be added as an authorized user to a primary cardholder who doesn’t pay their bills on time, since that would hurt your credit more than help it.
Open a student credit card
If you can’t become an authorized user on someone’s credit card, you can open a student credit card instead. A student credit card is a type of credit card specifically geared for students looking to build credit.
Often, the only difference between a traditional credit card and a student credit card is that they have a lower credit limit. Some also offer rewards for students, such as incentives for good grades and other cashback and rewards offers.
Open a secured credit card
Another type of credit card to consider as a student is a secured credit card. With this type of credit card, you make a deposit to cover your credit limit, which minimizes the risk to the issuer. As a result, credit card issuers are more likely to offer credit to someone with no or low credit.
As you use the credit card and pay your bill on time, you’ll build credit and eventually graduate to an unsecured credit card.
Develop healthy credit habits
College is full of great experiences, but the costs can add up quickly, and being financially responsible can be challenging. Throw in access to credit for the first time, and it’s easy to see why many students struggle with credit initially.
While students may want to take advantage of that new credit limit, it’s important to use your credit card wisely. Only use it for emergencies or small, regular expenses that you have the cash to pay for. These actions seem small, but they will establish the skills you need to keep your credit high throughout your life.
From the moment you have your new credit card, do the following:
Keep your balance low. This keeps your credit utilization rate low, which is one of the factors impacting your credit health. Experts recommend only using 30 percent or less of your credit limit. An easy way to stick to this is to use your credit card for small, regular purchases each month. For example, put all your subscription services on your credit card or only use it for gas. This habit will also prevent you from overspending or spending money you don’t have on nonnecessities.
Pay your balance each month. While you are only required to pay off the minimum balance each month, you’ll owe interest on the unpaid balance. The interest is applied to your balance, which can hurt your credit utilization rate, not to mention cost you more over time. Get in the habit now of paying off your entire balance every month.
Avoid opening too many accounts. Don’t open too many credit cards at once. New credit can damage your credit score, and having too many credit cards can make it harder to monitor your spending.
Take out a credit builder loan
Your credit mix, or the types of credit you have, play a role in your credit score. So, just having a credit card may not be enough to build credit quickly—you need other types of debt. Instead of taking out a loan for a car you don’t need, consider a credit builder loan.
The sole purpose of a credit builder loan is to build credit, so you won’t get money to put toward something else. Instead, the bank will put the money you’re borrowing into a savings account. You’ll make regular payments to repay the loan, and once you’ve satisfied the loan terms, the money in the savings account is yours.
Get a cosigner
When you’re starting to build credit, it may be difficult to get lenders to let you borrow money on your own. You can add a cosigner, someone with a better credit history than you who agrees to take responsibility for the loan if you miss payments. The cosigner minimizes the risk to the lender, making them more likely to lend to you.
As long as you make your monthly payments on time, you can build your credit history and payment history with a cosigner.
Get credit for rent and utility payments
Usually, only credit cards and installment loans such as a student loan or car loan affect your credit. Monthly bills like rent, utilities, and cell phones won’t appear on your credit report unless they’re delinquent.
A few programs and services enable you to add some of your monthly bills to your credit report to track on-time payments and build your credit. For example, ExtraCredit® is a program that reports utility and cell phone bills to credit bureaus, and rent reporting services will add your rent payment history to your credit report.
Only add these bills to your credit report if you pay them on time. Adding them to your credit report and then missing payments will hurt your credit more than help it. Be aware that some of these programs and services may charge a fee.
Think carefully about your student loans
Student loans seem to be a fact of modern life, with over 43.5 million Americans carrying $1.7 trillion in student loan debt. While the exact amount varies, the average student graduate has more than $37,000 in student loan debt.
Using your loan as income might be necessary, but if you can help it, only take out enough to cover your education expenses. Look into work-study or student aid options as alternatives to an oversized loan.
Monitor your accounts carefully
Keep an eye on your accounts to protect yourself from identity theft. By monitoring your account using the credit card app, you can shut down the card as soon as you see fraudulent activity, preventing the problem from escalating.
If you are the victim of identity fraud, you can remove fraud from your credit account.
Check your credit report annually
Experts recommend that you check your credit report and score annually or more often to ensure they’re accurate. AnnualCreditReport.com will give you one free credit report from each of the three credit bureaus at least once every 12 months (currently, you can see your credit reports once a week!).
You can sign up for credit monitoring services if you want to review your credit report more often than once a year. Keep in mind that building credit takes time, and even though you may be able to check your credit score every 14 days with some services, it will still take time to see results.
Avoid these common credit mistakes
Being a student means learning, and so does building credit. You’ll want to keep the five factors that impact your credit in mind when making decisions. Those five factors are:
Payment history: 35 percent
Amounts owed: 30 percent
Length of credit history: 15 percent
Credit mix: 10 percent
New credit: 10 percent
While mistakes are part of the learning process, you’ll want to avoid these common credit mistakes to avoid long-term consequences to your credit.
Mistake #1: Waiting too long to start building credit
Credit factor: Payment history
Most experts agree that the best time to start building credit is at age 18. The length of your credit history determines 15 percent of your FICO credit score. If you start building credit at 18, you’ll have around four years of credit history by the time you graduate and need to start putting bills and loans in your name.
Mistake #2: Using your credit card for nonessentials
Credit factor: Amounts owed
When you don’t see the physical money you’re spending, it can be easy to lose track of your spending and spend more money than you have. Avoid this by limiting credit card purchases to essential items only. Use it to pay for groceries and gas, not expensive vacations.
Mistake #3: Maxing out your credit cards
Credit factor: Amounts owed
Maxing out your credit cards hurts your credit utilization rate. The less money you carry from month to month, the better it is for your credit.
If you have a low credit limit, you can avoid maxing out your card by paying more often than the monthly payment due date. For example, if you buy gas and groceries over the weekend, check your balance on your credit card app a few days later and pay it off.
Mistake #4: Missing payments
Credit factor: Payment history
If you aren’t used to them, remembering to pay monthly payments at first might be rough. But you want to avoid late payments at all costs because they can hurt your credit for up to seven years.
Avoid missing payments by setting up automatic payments or calendar reminders on your phone. If you missed the payment because it didn’t line up with your paycheck and you didn’t have the money, you may be able to change your payment date with the credit card company.
Mistake #5: Closing accounts too soon
Credit factor: Length of credit history
If you open a student or secured credit card and graduate with a traditional credit card, it might be tempting to close those other accounts. But if you don’t have any additional credit beyond those initial credit cards, closing them can actually hurt your credit health by minimizing the length of your credit history.
Instead of closing them and opening new credit cards, see if your credit card issuer can convert the student or secured credit card account to a traditional one. That way, you can keep the account active and preserve the length of your credit history.
If you can’t convert the account, hold onto it and make a small purchase every month to keep it active. After you’ve had the new credit card for a while, you can cancel your initial credit cards.
Mistake #6: Taking out too much credit
Credit factor: Amounts owed
Just because someone offers you credit doesn’t mean you should take it. Sometimes lenders offer more money than you need because they make money off your interest payments. When considering credit offers, look carefully at monthly payments and consider your budget. Only take out credit for the amount you need and can reasonably afford to pay back each month.
For example, when you apply for an auto loan for your first car after college, the lender might preapprove you for $20,000. Run the numbers and ensure that’s a monthly payment you can afford. You’ll probably find that you can only comfortably afford to borrow a lower amount.
FAQ
Here are some answers to common questions about how you can build credit as a student.
How long does it take for a student to build credit?
Typically, it takes about six months to a year to build up some credit. Your exact timeline may vary based on your specific situation and how responsible you are with credit-building techniques like a student credit card.
How can a college student build credit with no income?
Usually, you’ll need income to qualify for credit, but there are a few ways around it. You can use a cosigner for a loan or ask someone to add you as an authorized user to their credit card. As an authorized user, you won’t have to make any payments with your credit card to get the card put on your credit report.
Trust Lexington Law Firm to fight for your credit
Building credit is tough—it’s hard to build from scratch but frustratingly easy to damage. Don’t let a lack of credit or a few credit mistakes destroy your confidence. The credit repair team at Lexington Law Firm could help you challenge inaccuracies affecting your credit. Learn more about our services to see how we can help.
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.
Mortgage demand ticked up last week as interest rates decreased following the news of a slowing job market. Applications increased by 2.6% on a seasonally adjusted basis during the week ending May 3, according to the Mortgage Bankers Association’s (MBA) weekly mortgage applications survey.
“Treasury rates and mortgage rates fell last week on the news of a slowing job market, with wage growth at the slowest pace since 2021, and the Federal Reserve’s announced plans to ease quantitative tightening in June and to maintain its view that another rate hike is unlikely,” Mike Fratantoni, MBA’s senior vice president and chief economist, said in a statement.
According to the MBA, the average 30-year conventional rate dropped to 7.18% as of May 3 while the average rate for Federal Housing Administration (FHA) loans fell 17 basis points to 6.92%, the first time in three weeks it has been below 7%.
Purchase loan application volume ticked up by 2% from one week earlier, driven by a 5% gain in FHA applications.
“First-time homebuyers account for roughly half of purchase loans, and the government lending programs are an important source of financing for these homebuyers,” Fratantoni added. “The gain in FHA activity is a sign that this segment of the market is active.”
Meanwhile, refinance volume rose by 5% from the prior week. The refinance share of mortgage activity increased to 30.6% of all applications.
“Even with the increase, which included a 29% jump in VA refinances, refinance volume remains about 6% below last year’s already low levels,” Fratantoni said.
The MBA survey showed that the average mortgage rate for 30-year fixed loans with conforming balances ($766,550 or less) decreased to 7.18%, down from 7.29% last week.
Meanwhile, rates on jumbo loans (balances greater than $766,550) also decreased week over week to 7.31%, down from 7.39%.
On Wednesday, HousingWire’s Mortgage Rates Center showed the average 30-year fixed rate for conventional loans at 7.48%, down from 7.58% one week earlier.
The cost to buy a home has reached historic highs in the U.S. — the median price of a home is $420,800, according to the Federal Reserve Bank of St. Louis — and housing and mortgage costs are increasingly turning into a November election issue.
Home shoppers today need to an annual income of $114,000 in order to comfortably afford a typical home in the U.S., according to Redfin, nearly double what was needed to afford a typical home in 2020. That figure is far above the 2022 median household income of $74,580, according to the Census Bureau.
Higher monthly payments are driven by higher home prices as well as significantly higher interest rates. Mortgage interest rates, which dipped to an historic low of 2.65% on a 30-year fixed mortgage in 2021, have soared beyond 7%, higher than they’ve been since 2001. Interest rates are set by the independent Federal Reserve, and President Joe Biden has insisted on the Fed’s independence. The Federal Reserve has been raising interest rates since 2021 in order to combat stubborn inflation.
smaller, entry-level homes, several experts agree.
Once interest rates are removed from the picture, “then you’re left focusing mainly on the supply shortfall,” said Jim Parrott, fellow at the Urban Institute and former Obama White House economic adviser.
The housing market has seen a severe shortage of smaller starter homes, Parrott said. Builders, he said, are incentivized to build large, often mansion-like homes, which more easily turn a profit.
“The cost of building larger homes tends to be quite high, and it’s easier to recoup those costs if you’re making big, expensive homes,” Parrott said.
The federal government needs to “make the math for building homes at the bottom of the market more favorable” for developers, Parrott suggested. And Congress can do this with the tax code. One approach would be to give a tax cut to any builder who constructs a residence for a first-time home buyer at below the median home price, Parrott said.
“You need to provide some sort of tax benefit for building homes in the parts of the market where we need them the most,” Parrott said.
But getting this divided Congress to work together on something like this would be challenging, Parrott said.
“I’m afraid that the legislative environment right now just isn’t conducive to this sort of big, bipartisan effort,” Parrott said. “Hopefully after the election we’ll see a reboot that provides a more hopeful window.”
Withhold funding from localities that don’t change zoning laws
Most of the control over zoning lies with state and local governments. And states have been working to overhaul zoning to ease restrictions on denser residential construction. But the federal government isn’t entirely powerless on zoning.
Parrott said the federal government has used a carrot approach to encourage localities to rezone in favor of denser housing, but now he thinks maybe it’s time to use a stick. For instance, any federal funding for communities could be conditioned on how zoning decisions are made. Communities receive substantial financial support from the Department of Housing and Urban Development (HUD), the Transportation Department and other agencies for projects, Parrott noted.
“If federal policymakers were to condition even a little bit some of that funding on whether or not local decision-making is supportive of or prohibitive of more density,…then you could begin to change things at the local level in a way that would really matter,” Parrott said.
Such a move would be almost certain to trigger strict opposition from localities and unions. But more states have already been enacting legislation to supersede local zoning rules, said Alex Horowitz, director of housing policy at The Pew Charitable Trusts. Horowitz said nine states have passed laws allowing accessible dwelling units or ADUs — like small, independent, mother-in-law suites — on homeowners’ properties.
Sell federal land to use for housing
“The federal government owns hundreds and hundreds of millions of acres, and we’re not talking about the National Parks here,” said Edward Pinto, co-director of the American Enterprise Institute’s Housing Center.
But that’s a proposal that Congress would need to authorize.
It has been tried. Sen. Mike Lee’s HOUSES Act of 2022 would have approved the sale of federal land to states and localities for below-market rates for housing projects. The federal government owns two-thirds of the land in Lee’s home state of Utah, and the gap between median household income and median home cost is largest in the West, according to HUD.
But his bill went nowhere. The Bureau of Land Management, which oversees federal land, said in written Senate testimony that it would be forced to “sell land without sufficient evaluation of the values to the public or to future generations, or sufficient compensation to the American taxpayer.”
The sale of unused land could also attract opposition from environmentalist groups, though sometimes that can be overcome. In March, Washington Gov. Jay Inslee signed a law that will allow that state’s Department of Natural Resources (DNR) to transfer some of its property to localities to build affordable housing.
Washington state GOP Rep. April Connors, who introduced the bill, noted that that the DNR had 7,000 acres of land that was unusable for timber harvesting because it was too close to developed land. Building housing on it could ease the shortage of homes in Washington, Connors noted in a statement, pointing out that the state has the “fewest housing units per household in the nation and nearly half of renters spend a third of their income on rent.”
Improve consumer access to financing for manufactured housing
Manufactured homes are factory-built residences built after 1976 — formerly known as mobile homes — that can be placed on land. The average new manufactured home sold for $126,600 in November 2023, according to the Census Bureau.
But loans are harder for homebuyers to secure for manufactured homes than for traditional ones, Horowitz said. And since manufactured housing usually involves shipping over state lines, the federal government plays a big role. HUD controls access to financing for manufactured homes, and rules are stricter than they are for traditional homes.
Interest rates are typically also higher for manufactured home loans than for traditional home loans, in part because unlike traditional homes, which tend to appreciate in value over time, manufactured homes can depreciate. The structures are also viewed as riskier than conventional homes because they’re usually harder to sell on the market. Horowitz suggests HUD could make it easier for borrowers to access loans.
Eliminate tax breaks for second (and third) homes
Congress could increase the national housing stock over time by eliminating tax breaks for any homes that aren’t a primary residence, said AEI’s Pinto.
Getting rid of the mortgage interest rate deduction for non-primary residences would eventually encourage many homeowners to sell, Pinto said.
“Why should they be subsidized by the tax code,” Pinto asked.
Without that tax break, hundreds of thousands of homes would come back onto the market as primary residences, Pinto said.
“It would cost the federal government basically nothing,” Pinto said. “They’d actually save some money on the tax savings, and it would not increase demand at all.”
This isn’t likely to happen soon though. Such a measure would have to be passed by Congress — and many lawmakers own second and third residences. And a number of their constituents and donors own multiple homes. Realtor interest groups would oppose it, too, Pinto said.
The most Congress has done in recent years to address tax breaks for expensive residences was in 2017, when the GOP-controlled Congress capped the deduction limit for state and local income taxes, which hit coastal, heavily Democratic states like New York and California particularly hard.
Still, eliminating the tax break for secondary homes is “low-hanging fruit,” and would increase supply and reduce demand simultaneously, Pinto said.
Economists mostly doubt that action by the Federal Reserve to significantly lower interest rates would help much.
“If the Fed were to cut rates in a way that allowed mortgage rates to fall to the 4% range, we would see both supply and demand increase in the housing market,” said Chen Zhao, who leads the economics team at Redfin.
And whether home prices rise or fall would depend on what then happens to housing supply and demand.
“If demand increases more, then prices would grow at a faster rate than they are currently,” Zhao said. “However, it’s also possible that supply would increase more because sellers have been so locked in by low existing mortgage rates. If that’s the case, then price growth could fall. I think it’s unlikely in either case that prices would fall outright.”
Would Biden or Trump’s policies help or hurt housing costs?
Former President Donald Trump hasn’t offered policy suggestions to address housing affordability yet, although he criticizes mortgage interest rates and home prices under President Biden.
The president has proposed giving a $10,000 tax credit to first-time middle class homebuyers, and up to $25,000 to first generation home buyers. He’s also introducing a $20 billion fund that in addition to helping build affordable rental units, is meant to peel away local barriers to housing development and spur the construction of starter homes.
Down payment assistance may help home shoppers in the near term, although the tax credit probably falls short of the traditional 20% down payment on most homes. With monthly payments at record highs, this down payment assistance would not lower monthly costs. And down payment assistance could have unintended consequences, Pinto said: “It would increase the price of entry level homes.”
The effect down payment assistance or a buyer tax credit would have on the housing market is complicated in a supply-constrained market, Horowitz said.
While Trump hasn’t made specific proposals on housing, his proposals in other policy areas would likely drive home prices up, Parrott said. Mass deportations of undocumented migrants, for instance, could drive the cost of labor higher, and raising tariffs on China could drive up material costs, Parrott said.
“The things that Trump has said relevant to housing almost all cut the wrong way,” Parrot said.
How home costs could affect the election
The cost of home ownership is a top concern for Democrats and Republicans, city dwellers and rural residents alike, said Parrott. Once an issue has broken through the barriers of red and blue, metro and rural, “then it changes the probability of something happening,” Parrott said.
“Housing has found its way to the grownups table, in effect, for the first time,” Parrott said.
And even though it’s the Fed that controls interest rates, Mr. Biden could be held accountable by voters.
“President Biden’s reelection is closely tied to the cost of homeownership and thus, the fixed mortgage rates,” Mark Zandi, chief economist at Moody’s Analytics predicted. “The fixed rate is currently just over 7%. If it rises above 8% for any length of time, his reelection odds will fade, and if it falls closer to 6% his odds will increase meaningfully, all else equal.”
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Kathryn Watson
Kathryn Watson is a politics reporter for CBS News Digital based in Washington, D.C.
The standard narrative of buying a house involves a real estate agent. The Realtor acts as your tour guide, guiding you not only through available homes, but also through the complicated process of becoming a homeowner.
However, some independent sellers prefer to sell their home without a real estate agent’s services. As a prospective buyer, you would interact with the homeowner instead of a Realtor.
This process, known as a sale by owner or FSBO sale, offers potential buyers the opportunity to bypass some traditional real estate transactions, which may save money on agent’s commission fees. FSBO sellers handle every aspect of the sale, including setting the listing price, marketing the house for sale, and negotiating the purchase price.
FSBO sales differ from a typical sale, as they require the home buyer to assume tasks that a real estate agent would usually handle. This includes finding FSBO listings, validating property details, and negotiating the sales price with the FSBO seller directly.
Key Takeaways
A For Sale By Owner (FSBO) transaction allows buyers to negotiate directly with sellers, potentially bypassing real estate agent commissions but requiring extra due diligence.
Buyers should secure mortgage preapproval, verify property details through CLUE reports and title checks, and consider hiring a real estate attorney or title company to manage legalities.
Closing a FSBO sale involves setting up an escrow account, preparing extensive paperwork, and understanding post-closing steps like utility setup and managing property taxes and insurance.
An Overview of the FSBO Process
A FSBO sale, where an owner sells their house without a real estate agent or a listing agent, differs from a typical sale. Understanding the intricacies of these real estate transactions can be vital to a smooth closing. FSBO sellers handle everything from setting the listing price, marketing, negotiating, and closing, offering more room for direct communication and price negotiation.
However, an FSBO transaction requires the buyer to take on tasks typically handled by a real estate agent. Unless you are working with a buyer’s agent, closing can be complex. You may be on your own for a home inspection. Getting an appraisal and negotiating a selling price will be up to you. Completing the title search and other tasks usually falls to the seller’s agent.
Prepare for the Purchase
Buying a home is exciting, but it’s also a venture that requires substantial financial planning and understanding. Preparing for the financial aspect of your purchase can increase your chances of a successful transaction and make the overall home buying experience less stressful.
Determining how much house you can afford is the first step. Getting pre-approved for a mortgage is essential. You’ll also need funds for a down payment and closing costs. Buying a FSBO home is similar to purchasing through a real estate agency.
Assess Your Credit Score
Your credit score is a key player in this process. It has a significant impact on your ability to secure a home loan, dictating your interest rates and loan terms. Before you start shopping for an FSBO house, check your credit score and, if necessary, take steps to improve it. This may involve paying down debts or correcting any errors on your credit report.
Secure Loan Preapproval
Once your credit is in check, securing preapproval for a home loan can give you a head start. This process involves a lender checking your financial history and assessing whether you’re a viable candidate for a loan.
Upon preapproval, you’ll know the maximum amount you can borrow, which helps you set a realistic budget for your house hunting. A mortgage broker, with their extensive knowledge and resources, can guide you through this process and help you choose the best loan for your needs.
Set Aside Savings
Additionally, it’s essential to have savings set aside for a down payment and closing costs. Down payments typically range from 3.5% to 20% of the home’s purchase price. Closing costs, on the other hand, usually amount to 2% to 5% of the loan amount. These costs can add up, so preparing for them can prevent financial surprises down the road.
Ensure a Mortgage Contingency
Lastly, when setting the terms of the purchase contract, ensure it includes a mortgage contingency. This clause protects you if your final home loan approval falls through, allowing you to back out of the deal without financial repercussions.
Research the Property
Buying an FSBO home requires thorough due diligence and understanding your local market’s dynamics.
Familiarize Yourself with the Market
Familiarize yourself with FSBO listings in your desired area. Assess the features of various properties, their listing prices, and how long they’ve been on the market. This exercise can help you gauge a fair price for the property you’re interested in.
Verify Property Details
In FSBO sales, buyers need to take extra care when verifying property details. These include, but are not limited to, ownership history, physical condition, and any past insurance claims related to the house for sale.
CLUE Report: A good starting point for property research is the Comprehensive Loss Underwriting Exchange, also known as CLUE. This database contains up to seven years of insurance claims history for properties. Requesting a CLUE report can provide insight into any past damages or issues that have led to insurance claims. This information helps when assessing the overall condition of the home and can play a role in price negotiations.
Check the Title: Another important element in property research is checking the home’s title. The title outlines the history of property ownership, and any issues, like liens or disputes, could complicate the transaction. You might want to consider hiring a title company or a real estate attorney to ensure a clear title, further securing your investment.
Conducting extensive research on the property not only aids in making an informed decision but can also arm you with valuable information during price negotiations.
Understand the Legalities
Buying a house is not just a financial commitment, it’s a legal one too. Understanding the legal aspects of real estate transactions can protect you from potential complications, particularly in a FSBO sale, where you might not have a real estate agent guiding you through the process.
Hire a Real Estate Attorney or a Title Company
In a traditional real estate transaction, a buyer’s agent handles the legal paperwork. However, in a FSBO sale, buyers often need to manage these tasks themselves. This is where a real estate attorney or a title company can help. These professionals can assist with the legal aspects of the transaction, including:
Ensuring the house is a separate legal entity operated correctly, free from liens, and without any outstanding claims.
Conducting title searches to confirm the legitimacy of the property’s ownership.
Assisting with the closing process, ensuring all necessary documents are correctly filled out and filed.
Review the Purchase Agreement
The purchase agreement is a binding legal contract between the buyer and the seller. It outlines the final purchase price, terms of the home sale, and any conditions that must be met before the sale can be finalized.
Given its importance, it’s recommended to have a lawyer review the purchase agreement before the buyer and seller sign it. This review can ensure that all the stipulations are in your best interest and that there are no potential loopholes that could cause problems later.
Pricing and Negotiations
FSBO sales often provide room for more negotiation when it comes to the home’s asking price. This flexibility can result in a lower purchase price, potentially saving you money.
Home Appraisal
A home appraisal can be an essential tool during these negotiations. An appraiser evaluates the property and provides an estimated market value. This estimate is based on various factors, including the home’s condition, location, and comparable homes in the area.
With an appraisal in hand, you have a foundation for negotiating the home’s price with the seller directly. It gives you a benchmark, helping to ensure you don’t pay more than the property is worth.
Handling a Low Appraisal
A FSBO transaction can become complicated if the appraisal is lower than the agreed-upon purchase price. In this scenario, you have a few options:
Request a price reduction: If the appraisal comes in lower than the agreed-upon price, you can ask the seller to reduce the price. They may be willing to do this to keep the sale on track.
Challenge the appraisal: If you believe the appraisal was inaccurate, you can challenge it. You’ll need to provide compelling evidence, such as recent sales of comparable homes that were not included in the original appraisal.
Handling these situations tactfully can keep your home purchase on track while ensuring you get a fair deal. Remember, every real estate transaction is unique, and dealing with these challenges may require professional guidance from a real estate attorney or a buyer’s agent.
Home Inspections
Investing in a home inspection is a prudent step in the homebuying process. A comprehensive inspection can reveal potential problems or necessary repairs that may not be immediately apparent. This is especially critical when buying a FSBO property, as there might not be a real estate agent involved to facilitate this step.
Choosing a Home Inspector
Finding a qualified and experienced home inspector is paramount. Look for inspectors who are certified by a national association and who have a good reputation in your local market. Your home inspector should evaluate the following:
Structural elements: walls, ceilings, floors, roof, and foundation.
Systems: plumbing, electrical, and HVAC.
Other components: insulation, ventilation, windows, and doors.
Outside: drainage, driveways, fences, sidewalks, and any potential safety hazards.
After the Home Inspection
Once the home inspection is complete, you will receive an inspection report outlining any identified issues. Depending on the findings, you may:
Request repairs: If the inspector identifies any issues, you can ask the seller to make necessary repairs before closing.
Renegotiate the asking price: If there are significant issues that the seller is not willing to fix, you might renegotiate the price to account for the repair costs.
Walk away: In the case of severe problems, such as foundational issues or extensive water damage, it might be in your best interest to walk away from the sale.
Securing Financing
Once you’ve agreed on a sales price and completed the home inspection, the next step is to finalize your home loan. This stage requires careful consideration as it can significantly impact your personal finance situation.
Compare Mortgage Options
Start by comparing different mortgage options. Each loan type has its advantages and drawbacks, and the best one for you depends on your individual circumstances. A mortgage broker can be a valuable resource during this process, helping you understand the nuances of each option and finding the best fit for your financial situation.
Review the Loan Estimate
Mortgage lenders are required to provide a loan estimate within three days of receiving your application. This document outlines the specifics of your loan, including:
Loan amount: The total amount that you’ll borrow.
Interest rate: The cost you’ll pay each year to borrow the money, expressed as a percentage.
Closing costs: The expenses you’ll need to pay to finalize your mortgage, which can include origination fees, appraisal fees, and title insurance.
It’s essential to review the loan estimate thoroughly and make sure you understand all the costs involved. If something seems off, don’t hesitate to ask your lender for clarification. After all, this is a significant financial commitment, and you want to be sure you’re making an informed decision.
Closing the Sale
Closing a FSBO sale involves several key steps that vary slightly from a typical sale involving real estate agents. However, the primary goal remains the same: to legally transfer ownership of the property from the seller to you, the buyer.
Setting Up an Escrow Account
In real estate transactions, an escrow account is used to safeguard the earnest money — the deposit you make to show the seller you’re serious about buying the house. This account is managed by a separate legal entity, such as a title company or escrow company, ensuring the funds are protected until the sale is finalized.
Preparing the Paperwork
The closing paperwork can be quite extensive and typically includes:
The deed: This transfers ownership from the seller to the buyer.
The bill of sale: This outlines the terms and conditions of the sale.
The affidavit of title (or seller’s affidavit): This document states the seller owns the property and there are no liens against it.
It’s best to have a real estate attorney or a title company prepare these documents to avoid any mistakes.
Title Insurance and Closing
Your lender may require you to purchase title insurance. This protects both you and the lender in case any undisclosed liens or ownership disputes arise after the sale.
On the closing day, you and the seller will sign all closing documents. The funds held in the escrow account, including your down payment and closing costs, will be appropriately distributed, and the property’s ownership is legally transferred to you.
Post-Closing Steps: What Comes Next?
After the exhilarating process of buying a house, there are a few additional steps to take post-closing.
Utility Setup and Address Change
Ensure utilities are set up in your name, including water, electricity, gas, and internet. You should also update your address for any subscriptions, credit cards, bank accounts, and identification documents.
Understand Property Taxes and Home Insurance
As a new homeowner, it’s important to understand your obligations regarding property taxes and home insurance. Familiarize yourself with due dates and payment procedures to avoid late fees or potential complications.
Dealing with Potential Problems
If any problems arise with the home past closing, consult your home inspection report before paying for repairs out of pocket. If you’ve received a home warranty as part of the sale (which is different from home insurance), it may cover some of these post-closing issues.
Remember, buying a FSBO home might be more complicated than a typical sale, but the potential benefits, such as saving on the agent’s commission, make it an attractive option for many home buyers. With careful planning, research, and professional guidance, you can manage the FSBO homebuying process with confidence.
Conclusion
Though a FSBO transaction can be intimidating, with research and preparation, potential buyers can make the process go smoothly. Buying a house for sale by owner can offer significant savings and more room for price negotiation, as you bypass the real estate agent’s commission.
However, you need to remain diligent and informed throughout the process. Understand the local market, conduct a thorough home inspection, and engage professionals like a real estate attorney or title companies for a smooth real estate transaction. The homebuying process may be a marathon rather than a sprint, but with patience and perseverance, you’ll cross the finish line to your new home.
For most Americans, having a car is a necessity. We need it to get to work, school, the grocery, the doctor, and all our weekly errands. Unfortunately, both new and used cars are expensive — and auto loan rates are on the rise as well.
So when buying a car, does it ever make sense to use a personal loan instead of traditional financing? We’ll break down the difference between personal loans and car loans and when you might want to use the former to buy a new set of wheels.
Personal Loan vs Auto Loan: An Overview
You can use a personal loan for almost anything, including buying a car. But why would you use a personal loan to purchase a vehicle when there are very specific loans — auto loans — to finance this purchase?
As we’ll see, personal loans can offer some benefits over car loans, including less buyer risk, no down payment needed, better negotiating power, and potential savings on car insurance. But car loans still have their place and may be cheaper in the long run.
Personal Loans
A personal loan allows you to borrow money from a bank, credit union, or lender to fund nearly any kind of purchase. People commonly use personal loans for debt consolidation, home renovations, weddings, vacations, and even new and used car purchases.
Personal loans can be unsecured (no collateral required) or secured (collateral required). For the sake of our personal loan vs. auto loan comparison, we’ll be looking at unsecured personal loans, as they’re more common.
Recommended: Types of Personal Loans
How Interest Rates Work on Personal Loans
Because unsecured personal loans aren’t backed by any collateral, interest rates tend to be higher than what you’d get for a car loan. Average personal loan interest rates vary depending on your credit score and the loan terms, but typically, they max out at 36%.
Most personal loans come with fixed rates, meaning your interest rate will stay the same over the life of the loan. It is possible, however, to get a variable-rate personal loan. Check out our guide to fixed vs. variable rate loans to figure out which is right for you.
Terms for Personal Loans
Personal loan terms vary by lender, but you can typically take out a loan with a repayment term of one to seven years. The faster you pay it off, the less you’ll pay in interest — but your monthly payments will be much larger. 💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.
Car Loans
When buying a new or used car through a dealership, the dealer’s finance department can help you find a loan through a bank or credit union. Alternatively — or when buying from a private seller — you can shop around for a car loan from various banks and credit unions on your own.
Auto loans are usually secured loans, meaning the car you’re buying serves as collateral. This means, if you fall behind on payments, the lender can repossess your car. (It’s possible, but less common and more expensive, to get a car loan without putting the car up as collateral.)
How Interest Rates Work on Car Loans
The collateral on the car loan reduces the risk to the lender, which usually results in a lower interest rate. Still, auto loan interest rates depend on your credit score.
Car loan rates for both new and used cars have increased in recent years, but they’re still typically lower than the average personal loan rate. Notably, car loan refinancing rates are lower than regular financing rates.
Terms for Car Loans
Like personal loans, car loans might stretch 84 months (that’s seven years), but some are as short as 24 months (two years). Also like personal loans, it’s common to repay your car loan over three to five years. 💡 Quick Tip: In a climate where interest rates are rising, you’re likely better off with a fixed interest rate than a variable rate, even though the variable rate is initially lower. On the flip side, if rates are falling, you may be better off with a variable interest rate.
Can You Use a Personal Loan to Buy a Car?
Yes, you can use a personal loan to buy a car. In fact, you can use a personal loan for (almost) anything. However, it often makes more sense to get traditional vehicle financing when buying a car.
Recommended: Personal Loan Calculator
Is It Better to Get a Personal Loan to Buy a Car?
In some ways, it can be better to buy a car with a personal loan. You don’t have to stress about saving up for a down payment, there’s no risk of your car being repossessed, and you might even have more negotiating power at the dealership.
However, many buyers prefer the structure of an auto loan. These loans tend to be cheaper in the long run because of the lower interest rates. And they’re easier to get — both because of lower credit score requirements for car loans and because dealerships can help you find the best car loan for you.
Pros & Cons: Car Loan vs Personal Loan
Buying a car with a personal loan instead of an auto loan has its share of advantages, but there are also drawbacks to consider.
Pros
• Less risk: When you take out a car loan, the car itself serves as collateral for the loan. If you miss enough payments, the lender could repossess your vehicle. With an unsecured personal loan, you don’t face that risk, though there are still consequences if you default on a personal loan.
• More negotiating power: When you don’t have to go through the hassle of securing financing, the car buying process is much easier and faster for you and the dealer. That means you might be able to negotiate a better deal, like a discount for paying in full.
• Lower insurance costs: When financing a car, the lender may require you to carry comprehensive, collision, and gap insurance. But when you pay for the vehicle outright with the funds from your personal loan, no one can require you to carry those car insurance coverages.
• No need to save for a down payment: Personal loans don’t require a down payment. Though some have origination fees, you might even be able to roll those into the cost of the loan. That means you could use a personal loan to get a car with no money down.
Cons
• Higher cost: Interest rates are typically higher for personal loans, which means you’ll end up spending more money on your car in the long run than you would if you got traditional auto financing. Origination fees for personal loans may also be higher than they are for car loans.
• Higher credit score requirements: Because auto loans are secured by the vehicle being financed, lenders are a little more willing to work with lower credit scores. The credit score you need for a personal loan is typically higher (around 670), though this varies by lender.
• More insurance risk: There may not be an auto lender requiring you to carry comprehensive, collision, or gap insurance, but declining those coverages just because your personal loan lender doesn’t mandate them could open you up to a lot of risk. If your car is totaled and you don’t have the proper coverage to get reimbursed, you’ll still be on the hook for making your personal loan payments — so think carefully before minimizing your car insurance coverage.
The Takeaway
Both auto loans and personal loans can help you get behind the wheel of a new (or used) daily driver. Determining which type of loan is right for you comes down to your needs and preferences.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Is it easier to get a personal loan or car loan?
Getting a car loan is usually easier than getting a personal loan. That’s because car loans are secured by the vehicle you’re buying. That means less risk to the lender, who will be willing to accept lower credit scores.
Should I take out a personal loan to buy a car?
While you can get an auto loan through a bank, credit union, or the dealership, you can also pay for a car with a personal loan. Personal loans reduce your risk — there’s no chance of your car being repossessed — and they may give you more negotiating power. However, personal loans typically cost more in the long run.
Am I allowed to use a personal loan to buy a car?
Yes, you can use a personal loan to buy a new or used car. In fact, you can use personal loans for just about anything. Just read the fine print of any loan agreement to make sure.
Photo credit: iStock/skynesher
SoFi Loan Products SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
A nest egg is a substantial amount of money that you save for a specific purpose. Savings accounts, investment accounts and working financial professionals can help you grow your nest egg.
A nest egg is a fund that you set aside for a specific purpose. Nest eggs can be large sums of cash that you store in a safe, retirement accounts like 401(k)s and IRAs, or investments like index funds and government bonds.
Nest eggs are one of the best investments for long-term financial goals. This fund shouldn’t be touched until months or years into the future. Below, we’ll further break down what a nest egg is, how it works, and how you can contribute to it over time. We’ll also share helpful financial tools like Credit.com’s 401(k) calculator.
Key Takeaways:
Cash, savings accounts, and investments can all be a part of your nest egg.
An FDIC-insured savings account protects up to $250,000 from losses.
Once you reach age 59 ½, you can withdraw funds from retirement plans, like your 401(k) and IRA, without penalties.
What Can You Use a Nest Egg For?
Funds that you place in a nest egg can serve various purposes later in life. Some of the most common reasons people utilize this savings tool include:
Family: A nest egg can cover costs if you have to go on unpaid family leave.
Education: Saved funds can help you pay for your children’s education or your post-graduate studies.
Rainy days: A nest egg can double as an emergency fund.
Early retirement: Some people save money to retire before age 59 1/2
Big purchases: Saving for a new car, a house, or a business expense.
Inheritance: Here, investors gather their funds for the sake of their beneficiaries.
Charity: The funds in your nest egg can help charities support numerous other people.
No matter your reason for building out your nest egg, knowing how to increase your funds is key.
How to Build a Nest Egg?
You’ll need to set money aside to successfully create a nest egg over time. Savings accounts are excellent tools for storing future funds—especially high-yield savings accounts, which can generate a significant amount of interest based on your initial deposit and subsequent contributions.
Effectively budgeting your funds is crucial to growing your nest egg, and you can do this in many different ways.
Set Clear and Realistic Goals
Creating savings milestones for yourself based on your current finances can help you steadily grow your nest egg over time. This process can be as simple as aiming to save $100 each month or as elaborate as saving to make a down payment on a home in 10 years.
Budget to Ensure Spending Aligns With Nest Egg Goals
Once you have a goal or series of goals in mind, you can adjust your spending habits to help you consistently meet those goals. For example, canceling subscriptions and eating out less can free up more funds to add to your nest egg.
The opposite is also true—once you know you’re regularly hitting your savings goals, you can treat yourself or donate extra funds with far less stress.
Leverage Savings Accounts With High Interest and Tax Advantages
High-yield savings accounts are excellent tools for safely storing funds and building interest long-term. These accounts protect up to $250,000 of your funds from losses via FDIC insurance.
A 401(k) and an IRA can help you save for retirement while offering distinct tax advantages on your funds. Employers offer 401(k)s, and they’ll match a percentage of the money you contribute to this fund. This is why financial experts encourage you to maximize your 401(k) contributions if possible.
IRAs are individual retirement accounts that you contribute to on your own. Traditional IRAs offer tax-deferred growth (meaning, tax payments aren’t due until later), while ROTH IRAs offer tax-free growth for any after-tax dollars you contribute.
Adopt Better Debt Management Strategies
Debt limits the amount of money you can add to your nest egg, so making repayments now can lead to increased funds in the future. The avalanche method and the snowball method are two popular strategies to pay off debt fast.
With the avalanche method, you pay off your debts with the highest interest rates first and work your way down. The snowball method calls for a different approach: you tackle your debts in order from the smallest to the largest amount.
Create a Diversified Investing Portfolio
When you diversify your investments, you create greater opportunities to build your wealth. For example, spreading your funds across a mixture of high-yield savings accounts, tax-advantaged accounts, stocks, bonds, and futures can potentially lead to a bigger return on investment than going all in on one type of account.
It’s important to manage your expectations when investing, as getting too ambitious can lead to big losses. It’s also pivotal to understand the risk involved with each account—stocks are more volatile than government bonds, for the most part.
How Much Should You Have in Your Nest Egg?
Everyone has different financial needs, so there’s no one-size-fits-all amount for nest eggs. Factors like your savings goal, location, and income all influence your unique needs. We recommend speaking with financial advisors to get the most accurate idea of your nest egg goal.
Even if you don’t yet have a specific goal in mind, you can always dedicate funds from each paycheck toward your nest egg. Using tools like a monthly budget template can help you get a better sense of your regular expenses and how much you can afford to save each month.
How Do You Protect a Nest Egg?
The methods for protecting a nest vary based on its form. FDIC insurance can protect a preset amount of the funds in your savings account in the event of a loss. For example, FDIC insurance protects up to $250,000 in a money market account,
Eliminating debts and increasing your financial knowledge will also help your nest egg in the long run. The fewer debts you have, the more money you can contribute to your savings goal—and knowledge will help you wisely allocate your funds.
To best protect your nest egg, watch out for get-rich-quick schemes that promise astronomical returns if you make an equally large investment. Lastly, set up alerts on your banking accounts to notify you about strange transactions.
Find Personal Finance Resources With Credit.com
Growing a nest egg is one of the more intuitive financial concepts out there, and it gets easier the more you know about money management. Check out Credit.com’s personal finance guide to deepen your understanding of methods for growing a nest egg and other investment strategies.
Inside: Unlock the secrets of debt types and management. Explore everything from mortgages to student loans, and devise savvy debt strategies for financial health.
Understanding debt is essential as it is a common financial obligation that, must be managed wisely, if mismanaged, can lead to financial strain.
Most importantly, comprehending the fundamentals of debt is crucial for financial literacy. Debt spans various forms of credit, from mortgages to personal loans to credit cards.
Debt is a powerful force in the consumer’s financial life; it has the power to either create opportunities or trigger economic stress.
You must realize the multifaceted role that debt plays is a prerequisite for achieving and maintaining financial stability. As such, a comprehensive understanding of the various types of debts is not merely beneficial—it is indispensable.
Right now, consumer debt has reached $17.1 Trillion in 2023. 1
With this knowledge, you can navigate the financial tides with confidence, distinguish between advantageous and precarious borrowing, and ultimately wield debt as a tool for prosperity.
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The Mainstream Maze Examples of Debt Types
Understanding the various types of debt is crucial for anyone looking to maintain or improve their financial health.
Debt, often viewed in a negative light, can actually be leveraged as a powerful tool if managed correctly. Each category of debt — from secured to unsecured, installment to revolving — functions differently and influences your financial profile in its own unique way.
Recognizing these differences enables individuals to make informed borrowing decisions, repay their debts more effectively, and develop strategies tailored to their personal financial goals.
With this background in mind, let’s understand the different types of debt:
Navigating Through Secured and Unsecured Loans
Secured loans require collateral, reducing risk for the lender, like a mortgage or auto loan.
Unsecured loans rely on creditworthiness and come with tighter requirements.
Understanding Revolving vs. Installment Debt
Revolving debts, like credit cards, offer flexible borrowing limits.
Installment debts involve fixed payments over a period.
Fixed-Rate vs. Variable-Rate
Choosing between fixed-rate and variable-rate debt shapes your financial commitment and interest rate.
Fixed rates provide predictability in repayments.
Whereas variable rates fluctuate with market trends, potentially lowering costs or introducing variability.
Short-Term Debt vs. Long-Term Debt
Short-term debt, to be settled within a year, requires immediate attention.
Long-term debt, with extended maturities, often permits strategic repayment over time.
Defining Callable Debt vs. Noncallable Debt
Callable debt allows issuers an early exit option, granting them the ability to retire debt before maturity.
Noncallable debt, in contrast, guarantees the term’s completion, offering predictability for both investor and issuer.
Delving into Secured Debt Details
Secured debt plays a pivotal role as it hinges on collateral to assure lenders of repayment.
This type of debt brings with it the potential for lower interest rates and higher approval chances, but also the risk of losing valuable assets should a borrower default.
Collateral Commitment: Risks and Rewards
Rewards of Secured Debt
Risks of Secured Debt
Lower interest rates due to reduced lender risk.
Risk of losing the collateral property, such as a house or car, on failure to make payments.
Access to larger loan amounts because of collateral provision.
Limited use of borrowed funds typically for a specific purpose (e.g., a home or vehicle).
With continued payments, a credit score increase is likely.
Possibility of incurring additional fees or penalties if the loan goes into default and the property is seized.
Increased likelihood of loan approval because the loan is secured by an asset.
Potential negative impact on credit score and financial stability if unable to repay the loan.
Notable Nuances of Mortgages, Auto Loans, and More
Mortgage interest rates generally fluctuate between 3% and 5%, influenced by economic conditions, with the option of fixed rates or adjustable rates that can change annually within set limits. Typically, a fixed interest rate is the best option for homeowners. Most common mortgage lengths are 15 or 30 year terms.
In contrast, auto loan interest rates tend to be high with shorter terms of 5 or 7 years. Many times, these loans are often subsidized by automakers’ promotional offers to attract buyers with good credit, thereby varying considerably based on the loan’s duration and the borrower’s creditworthiness. Another option is to secure a car loan at a local credit union.
With mortgages tied to real estate and auto loans to vehicles, both present unique terms and implications for borrowers navigating the nuances of substantial purchases.
National Debt Relief
While this isn’t our first choice to pay off debt, for some of readers, it is the only option to get ahead on their debt.
Either way, it is helpful to confront your situation, and then find out your debt relief options – with no obligation.
Free Debt Relief Quote
Unmasking Unsecured Debt
Unsecured debt is a form of financing that does not require borrowers to pledge assets as collateral.
This type of debt is granted based on an individual’s creditworthiness and typically carries a higher interest rate due to the increased risk to lenders. The typical interest rates start at about 15% and go upwards from there.
Credit Cards and Personal Loans: No Collateral Needed
Credit cards and personal loans exemplify unsecured debt, with no collateral needed to secure them. Their accessibility hinges on the borrower’s credit history, representing a choice for financing without asset risk.
Many college students start with their first credit card and have no idea how it works.
The Pros and Perils of Unsecured Borrowing
Unsecured borrowing can offer financial flexibility without collateral, a clear advantage.
However, the perils include higher interest rates and the potential for a strained credit history if repayments falter, necessitating cautious consideration. This is how many people quickly rack up large amounts of debt without realizing the consequences of their actions.
Thus, why young adults need basic financial literacy.
Rolling with Revolving Debt
Revolving debt is a type of credit that lets you borrow money up to a certain limit, repay it, and then borrow again as needed, often seen with credit cards or home equity lines of credit (HELOC).
Unlike fixed installment loans, this type of credit emphasizes the borrower’s ability to manage and repay borrowed funds over time, which can have a significant influence on their credit score.
Mastering the Mechanics of Credit Lines
Credit lines empower consumers with fluid financial options, replenishing funds as balances are paid. Understanding their mechanics is critical in leveraging such revolving credit without succumbing to debt traps through accumulated interest.
Evaluating the Ubiquity and Utility of Credit Cards
Credit cards are ubiquitous in modern-day finance, serving as a versatile tool for electronic payments. They offer convenience and the potential for rewards but can lead to costly interest charges for those who fail to manage them judiciously.
Personally, I received a $942 cash back from my credit card. But, I pay off my balance monthly.
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Installment Debt Explored
Installment debt is a financial mechanism that allows individuals to borrow a lump-sum amount of money and repay it over a fixed period through regular payments, known as installments.
These debts, which can be secured or unsecured, usually involve fixed interest rates and include common financial products like mortgages, auto loans, student loans, and personal loans.
How Student Loans and Mortgages Shape Long-term Debt
Student loans and mortgages are pivotal in shaping long-term debt landscapes. They represent significant financial commitments with enduring impacts, facilitating education and homeownership while posing substantial repayment responsibilities.
You need to be wise in how much you decide to take out for either student loans or a mortgage. It is always best to take out less than offered by your lender.
Paying Off Different Types of Debt
Around here at Money Bliss, I stress the importance of paying off debt fast!
To effectively pay off different types of debt, starting with high-interest rate debts, such as credit cards, is essential because it reduces the amount of money paid on interest over time, allowing for more significant savings. This is the core idea behind the “avalanche” approach.
Alternatively, paying off smaller balances first using the “snowball” method can provide psychological wins and motivate continued debt repayment efforts.
For structured debts like student loans and mortgages with lower interest rates, adhering to the standard repayment plan while focusing extra payments on higher-interest debt can be a balanced strategy.
Additionally, employing methods like debt consolidation or transfers to lower APR vehicles can further aid in reducing the cost of borrowing and accelerate debt payoff.
Learn more about debt snowball vs debt avalanche.
Striking a Balance: Managing Varied Debts Wisely
Crafting an effective debt management strategy is a fundamental step toward financial health.
Implementing tailored repayment plans, such as debt consolidation or debt management programs, can alleviate the stress of multiple liabilities.
You don’t want to be at a point where you must get out of debt ASAP. Employing debt payoff methods such as the Snowball and Avalanche techniques can accelerate the journey toward being debt-free.
Credit counseling is often necessary to dig into the root of spending problems because it provides professional guidance on budgeting and debt management. Thus, helping individuals restructure their financial practices and develop a targeted plan to overcome excessive spending habits.
Frequently Asked Questions (FAQs)
Debt represents money owed across various agreements, while a loan is a specific form of debt where money is borrowed under agreed repayment terms and interest rates.
The most common debts include mortgage debt, credit card debt, auto loans, and student loans, reflecting the widespread financial needs for housing, education, transportation, and consumer spending.
Opting to pay off higher-interest revolving debt first generally saves money and boosts credit scores more effectively than tackling installment loans, due to the compounding effect of revolving debt interest.
This is a personal decision and one you must decide on yourself.
Which Consumer Debts Make Sense to You?
In conclusion, the takeaways are not all debt is created equal, and each type can affect your financial future differently. By recognizing whether a debt is secured or unsecured, or if it revolves or is due in installments, you can better strategize how to handle your obligations.
This knowledge is not only beneficial for making decisions about new loans or credit lines but also for creating a robust plan to tackle existing debt.
Comprehending this area of financial literacy, you position yourself to make wiser decisions that align with your financial aspirations. Ultimately, striving for a future where debt works for you, not against you.
By gaining a deeper understanding of the characteristics and consequences of each debt type, you can not only avoid common pitfalls but also harness debt as an instrument to build wealth and secure a robust financial future.
Then, you can stick with these debt free living habits.
Source
Experian. “Experian Study: U.S. Consumer Debt Reaches $16.84 Trillion in Q2 2023.” https://www.experian.com/blogs/ask-experian/research/consumer-debt-study/. Accessed May 7, 2024.
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I started working with a client a couple years ago whose incoming portfolio was 20% Starbucks. That’s a lat(te) in one stock. I’ll see myself out.
For comparison, Starbucks comprises 0.20% of the S&P 500. The S&P 500 should only be a portion of an individual’s stock holdings, which are only a portion of an overall portfolio (with bonds, alternatives, real estate, whatever). 20% is way too much Starbucks.
When I started explaining this thought process, the client protested. “Jesse – there’s a Starbucks on every corner in America. Why would we sell it?”
This logic is very understandable. After all, there is a Starbucks on every corner in America. The premise is true. But this client’s conclusion—“Therefore, why sell Starbucks?!”—doesn’t follow his premise.
That’s the logical misstep we’ll dive into today. A “good company” doesn’t always make a “good investment.”
Lessons from History
My hometown pride, Kodak, was once one of the most visible companies in the world.
It would have been easy to sit there in 1985 and think,
“Kodak is everywhere. They own the global film market the same way GE owns consumer electronics and Sears owns department stores. Why would I ever diversify out of Kodak?”
A seemingly logical investor
Well…
That’s a share price going from ~$90 per share to zero in about 17 years. The stock market and economic history are littered with “good companies” going broke. It’s called “creative destruction” and is an essential part of a healthy economy.
But it’s terrible if you happen to own those specific stocks.
It’s Not About Popularity or Frequency
Investor Peter Lynch is known for many quips, perhaps none more famous than:
“Invest in what you know. Know what you own and know why you own it.”
Unfortunately, many investors interpret that quote as:
“Invest in what you’ve heard of, and own it because you’ve heard of it.”
…and what they’ve heard of, naturally, are popular consumer brands and companies with a “high frequency” in society e.g. those with many stores, many products, long histories, etc.
But what Lynch actually meant in his quote is: “The more familiar you are with a company, and the better you understand its business and competitive environment, the better your chances of finding a good ‘story’ that will actually come true.”
You can’t just “know” Starbucks because you enjoy its coffee or because you see it on every corner. You must “know” its business fundamentals, competitors, potential future paths, etc. The market does not care about popularity or frequency alone. It only cares about popularity and frequency insofar as those factors positively or negatively affect the objective fundamentals of the business.
Past vs. Future
Riffing off the previous stanza, concepts like “popularity” and “frequency” are both hallmarks of a company’s past. The stores you see, the brand’s standing in our culture, and the company’s heretofore investment returns are all a function of what the company has done in the past.
But the stock market is forward-looking. The thousands of investors who buy and sell stocks and determine their daily prices don’t care about the past. They are, quite literally, trying to predict a company’s future. They are pricing in that anticipated future into today’s fair value.
Quite understandably, most investors don’t do this. They either shape their opinions based on the past (popularity, frequency, past investment returns, etc.) or they react to current-day news. These are both mistakes.
The intelligent investor thinks about the future. But any statement akin to, “Company ABC will be great in the future,” is a challenging statement to make accurately.
Wonderful Company? Fair Price?
Nothing against Peter Lynch, but most of you know I’m a fan of Uncle Warren, who is famous for saying:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Even if Starbucks is one of Buffett’s “wonderful companies,” is it trading at a “fair price”? Most people – including many investment professionals – are terrible at determining what a “fair price” truly is. Price is a defining feature of any investment!
I frequently use the “Honda Civic” example to explain this idea.
Is a Honda Civic a fair car? Sure. A good to great car? Quite possibly! Would you be happy owning a new Honda Civic? Many of you would say, “Sure, why not?”
But would you pay $100,000 for that new Honda Civic? No way.
It’s not enough to say, “Starbucks is a good company. Perhaps a great company.” That’s challenging enough on its own. But we must go further and ask ourselves if Starbucks is trading for a “fair price.” And quite simply, most of us are terrible at determining what “fair price” truly means – at least when it comes to stocks.
Needles
I’m biased, but I’m a big fan of this article I wrote in May 2023. I won’t rehash it too much here, but I encourage you to read it right now.
Most stocks perform worse than simple Treasury bonds
Only ~4% of stocks (or 1 in 25) account for all historical stock market outperformance over bonds
Anytime your odds are 1 in 25, you should think hard about your actions.
Sizing and Allocation
Play along with me. Let’s assume, for the sake of argument, the client was correct. Because Starbucks is everywhere, it must be a good stock to own, and it’s trading at a good price.
If that’s true, does it necessitate Starbucks should comprise 20% of our portfolio? Put another way: are there only ~5 good companies in America?
Any way you cut the biscotti, a 20% position is severely overweight. In financial planning, we want to reduce our range of potential outcomes. That’s why we diversify. Having 20% of your money tied to one single stock leads to a wide range of potential outcomes.
Closing the Cafe
For what it’s worth, the client did listen to our counsel and has been divesting out of Starbucks (as tax efficiently as possible). This past week’s ~17% drop in Starbucks’ stock price hurts, but not as much as it would have two years ago.
I’m sure there are more reasons not to own a few single stocks, not to own Starbucks specifically, and not to have too many eggs in any basket. What do you think? If I’ve missed some low-hanging fruit (salad) in terms of my reasoning, please leave me a Comment below!
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
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After formally endorsing plans for an ambitious new Bay Area City in Solano County this week, Vacaville’s vice mayor is in the hot seat after it was revealed that he had earlier sought to associate his home loan business with the developer’s campaign for the project known as California Forever.
Through his real estate license, Vice Mayor Greg Ritchie and owner of Citizens Financial Home Loans filed two fictitious business names or “Doing Business As” titles as “California Forever Home Loans” and “California Forever Homes,” in January, according to The Mercury News.
Ritchie has faced some backlash over his support of the project on social media. Members of the California ForNever Facebook group advised in a post that Vacaville residents should reach out to their City Council representatives to voice concerns over Ritchie’s affiliation with the project.
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In an attempt to address the filings, Ritchie’s informational website, California Forever Home Loans, now redirects inquiries to a personal message from the vice mayor acknowledging the filings by saying he was “energized … by the forward thinking proposal by California Forever to supply $400M in downpayment assistance specifically for Solano and Travis families as part of their East Solano Plan. It is an unprecedented benefit for working families across Solano County.”
The original content on the website was removed because Ritchie said it caused confusion since “the project is still a few years from building homes.”
“I want to make one thing crystal clear — neither my company nor myself have any economic relationship or interest in California Forever,” Ritchie goes on to say in his online message. “I have also not received any donations or political contributions for my endorsement. My endorsement was given purely based on my professional and personal belief that this is a good project that will help thousands of Solano families reach the dream of homeownership.”
Ritchie could not be reached for comment by The Times.
On Tuesday, the Bay Area tech leaders behind the California Forever campaign held a news conference to announce that they had turned over more than 20,000 voter signatures to the Solano County registrar in support of putting the issue before local voters. If the county validates at least 13,062 of those signatures, the measure would go before voters in November, seeking to amend zoning codes to allow the residential project to be built on agricultural land.
Backers tout the project as an innovative way to create more affordable housing in close proximity to the Bay Area. The designs calls for transforming 18,000 acres now dedicated to ranching and wind farms into a community of 50,000 residents that would grow, over time, to as many as 400,000. The project promises 15,000 higher-paying jobs in manufacturing and technology, as well as parks, bike lanes and a solar farm.
“Solano voters have made their first decision, and they have made it loud and clear,” said Jan Sramek, a former Goldman Sachs trader who is chief executive of California Forever. “People from all walks of life, all parts of the county are all saying the same thing. They are saying, ‘Yes, we want to have a say in the future of this place that we love.’”
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Along with Sramek, backers of the project include LinkedIn co-founder Reid Hoffman, venture capitalist Marc Andreessen, and Patrick and John Collison, who founded the payment-processing company Stripe.
Even if the measure is certified for the November ballot and voters approve it, the project faces a number of challenges and regulatory hurdles. Chief among those are additional approvals, including from the federal government, and the specter of lawsuits from environmental groups that have signaled they intend to take the nascent effort to court.