10 Things to Know Before Applying for a Mortgage

Applying for a Mortgage

Remember our rent vs. buy debate discussed in previous episodes of The Money-Guy Show? While that episode covered the arguments for and against both renting and buying, it didn’t take a deep dive into the actual process of financing a home. Today, Brian and Bo look at the ins and outs of applying for a mortgage and cover what you need to know before you borrow money.

Mortgage financing can be tricky (especially if it’s your first time going through the process), but Brian and Bo share 10 things to know so you can come to the table prepared.

Know What You Need Ahead of Time

It’s important to take inventory of what your house needs are before applying for a mortgage. Otherwise, someone else will fill in that blank for you, and it’s easy to fall for possible traps when you’re not informed.

Mortgage brokers and realtors might suggest you can afford a house that’s around 35% of your salary, for example, (while Brian and Bo suggest keeping it at 28% or less), and they may try and convince you to purchase more house than you actually need.

Vision Plan the Future

The Money Guys return to vision planning, and for good reason. You need to sit down and figure out what you want your future to look like. How long are you planning on staying in this house for? Will the desire to have a family mean you need more space in the future?

What stage of life are you in right now? If you’re close to retirement, you might want to consider a house you can pay off in 15 years so you enter retirement debt-free. If you’re younger, you might be okay with a 30 year mortgage as you’ll have time to pay it off.

Understand Your Down Payment

A down payment of 20% is optimal to avoid private mortgage insurance, of course, and the more you put down the lower your monthly payments will be over the life of your loan. But the guys say that if you have to get creative with your financing, it’s okay to have a lower down payment. PMI, while not an ideal expense, is at least deductible. And if a lower down payment means more cash in your pocket which you can then invest in other ways, that might make more sense for your situation.

What’s the Lock Period?

Underwriting can be a lengthy process when applying for mortgage financing. As such, you want to make sure your rate is locked in longer than you’ll be in underwriting for. Brian recommends looking into a 45 day lock for refinancing, and at least a 60 day lock for purchasing.

What About Points?

Brian briefly touches upon mortgage points, and suggests doing a break-even analysis to judge whether or not paying is worth it. Figure out what you’ll be saving per month, and divide that by what you’d be paying for the points. Then see how long it will take you to recoup the cost.

Plan for Contingencies

You don’t want to end up house-rich and life-poor. You must plan for contingencies (which should be part of your overall vision planning process). Leave yourself with enough breathing room so you can handle any curveballs life throws at you.

Overall, make sure you shop around and get the best rates. Know that most mortgage brokers and realtors aren’t going to be looking out for your best interests — that’s your responsibility. Get information from unbiased third parties, and save as much as you can.

Want to pick up the full 10 things you need to know before applying for a mortgage? Make sure you tune in to this episode of The Money Guy Show!

12 Mistakes to Avoid Making With Your IRA

Mistakes to Avoid with IRA

Individual Retirement Accounts (IRAs) are critical in securing financial independence in retirement. Because of this, Brian and Bo took the opportunity to discuss what mistakes they see clients make — and how you can avoid them. This episode was inspired by an article published by Morningstar back in February called 20 IRA Mistakes to Avoid.

These mistakes are also applicable to other retirement plans as well! If you’re contributing to a 401(k) or 403(b), you’ll want to listen in and understand the 12 mistakes the Money Guys say you must avoid making.

Here’s a quick rundown of the errors Brian and Bo cover in this podcast:

Procrastinating on Making Contributions

The Morningstar article cites the fact that if you’re investing later rather than sooner, you could be losing out on growth thanks to compound interest.

Many people also think they can take their time if they’re getting an extension on their taxes. That doesn’t apply to traditional and Roth IRAs — those contributions need to be in by April 15th.

Not Understanding Tax Bracket Implications

Do you understand the retirement account options you have and the impact each can have on your taxable income? Brian and Bo explain when you should invest in a Roth IRA over a traditional IRA, and which retirement vehicles you should prioritize.

Not Understanding Roth Conversions

If you’re looking to retire early, you’ll be able to plan your tax strategy in advance. Once you retire, you don’t have any earned income, and converting to a Roth IRA might prove to be a good decision as there are no required minimum distributions.

Being Retirement Rich and Liquidity Poor

Having a 7-figure portfolio and nothing in reserves won’t do you any good in the present should something go wrong. Plus, if you retire early and can’t start withdrawing until you’re 59 ½ years old, you’ll need money to tide you over.

Ignoring Spousal Contributions

If you or your spouse work while the other doesn’t, you can still take advantage of spousal contributions. The non-working spouse can use the other spouse’s earned income to make contributions for themselves.

Buying an Annuity

Purchasing an annuity within a retirement plan is usually a bad idea as you’re doubling up on tax shelters. Make sure buying an annuity actually makes sense for your situation.

Treating Your IRA as a Piggy Bank

Say you do leave your job – that technically means you have a distributable event. That doesn’t mean you should make the most of it and buy a new pool or TV. Ignore the temptation to withdraw funds and roll your money over.

Not Updating Beneficiary Designations

Have you divorced or remarried? Then you should update your beneficiary designations – you wouldn’t want your ex-spouse inheriting your money, would you?

Want to grab more tips and understand the mistakes you need to avoid with your IRA? Be sure to tune in to this episode of The Money Guy Show for advice on how to better manage your IRA!

What Are Mid-Term Goals, and How Can You Plan for Them?

Mid-Term Goals

What kinds of financial goals do you want to work toward?

In the short term, you may like to pay off your credit card with the outrageous interest rate and to tuck away some money in the bank for an emergency fund. Perhaps in the long-term, you’d like to put a bit away towards retirement.

But what about preparing for all the things you hope to do between now and retirement? These are your mid-term goals, and they can be tough to identify and plan for. It may take a long time to achieve them, they can involve large sums of money, and they can be easy to push off in favor of shorter-term projects.

But don’t fall into this trap! Instead, educate yourself and devote a little time to thinking about those mid-term plans. Here’s how you can get started.

Find Your Mid-Term Goals

Planning for intermediate financial goals is important. But what sort of goals are we talking about here?

Mid-term goals usually happen after you’ve graduated college, secured a job and really started your career — but before you start dreaming about your day-to-day retirement schedule for when your working career is over.

In the next three to ten years, you may want to:

  • Buy a house
  • Pay for a wedding
  • Start a family or have another baby
  • Pay off student loans or go back to school
  • Go on a dream trip
  • Start a second career
  • Start a business

Many of us want to do all of these things, and it’s an expensive proposition.

With any goal, it’s essential to know exactly what you’d like to accomplish. Nail down exactly what you’d like to do, and then figure out how much money you’ll need to make it happen.

Tackling Your Mid Term Goals

One way to tackle all your goals is to sequence your goals. You’ll meet one goal, and then move on the next. Consider both the importance and the timeline of your goals.

Is there one that you’d like to do more than all the others? Which goal would you like to do in two years, and which goal would you like to do in five years? Use this to make your list.

Another approach is to save for all of your goals at the same time. Open a specific saving account for each goal and divide the money you have available to put away between the accounts (or use percentages to determine what amount goes where).

Set smaller goals for each year to remain motivated and keep those balances growing.

If you’re motivated by seeing higher balances and checking goals off of a list, you’ll probably prefer to sequence your goals. If you like the idea of pursuing all your goals at once, you might prefer the separate savings account method.

Take Care of Your Savings

Taking care of your money for medium term goals is tricky. You keep your emergency fund some place safe since it’s possible you’ll need it tomorrow. You invest your retirement money in tax-advantaged accounts like a 401(k) and a Roth IRA since you don’t expect to need it for years.

But what do you do with the money for all the goals in between? You want to preserve your savings, but you don’t want to lose out on growth if it’s going to take ten years to save up for your goal.

You want mid-term savings to be easy to access. It’s a bad idea to put the money in a 401(k) or another tax deferred retirement account as you’ll pay a penalty to access your savings.

Instead, consider a taxable investment account or a high interest savings account so you can reach your money without penalty — and give it an opportunity to work for you and compound.

Think About Your Timeline and Manage Your Risk

Since the timeline for your mid-term goals is shorter than your timeline for retirement, you’ll want to manage your risk carefully. You’ll need to strike an effective balance between protecting the savings you’ve worked so hard to accumulate while getting a bit of growth and offsetting inflation.

It depends on your timeline — is this a two year goal or a ten year goal? For more urgent goals, you can always use a high interest savings account or short term CDs. For goals with a bit longer timeline, you can consider conservative investments structured to preserve your savings in a taxable investment account.

There’s a lot of life to live between now and retirement. Start saving for your mid-term goals so you can create the life you want without worrying about how you’ll pay for it.

 

The Serious Impact of Investment Fees

InvestmentFees

Investing is a major part of building wealth and creating a nest egg that can work for you in the long-term. Unlike savings accounts, investing can result in remarkable returns on investment and can help beat the cost of inflation.

Investing is a key component to building wealth and paving your financial future. But there’s a not-so-hidden aspect that can slowly eat away at a nest egg if you’re not careful to guard against it: outrageously high investment fees.

The Serious Cost of Investment Fees

Investment fees may seem innocuous at first. But  they become more detrimental over time. Ignoring costs is a huge mistake.

Some of the worst fees appear in employer-sponsored 401(k) plans, and most people don’t even know how much the plan is costing them each year. Many employers are in the same boat, and simply don’t know the costs associated with the plans they’ve chosen for their employees.

Investors trying to go it alone may also end up paying more than if they had hired a trusted advisor working in their best interest, if they don’t understand how to evaluate funds or if they don’t know to pay attention to things like turnover in management, mutual fund fee structures, and other factors that can increase their expenses.

It doesn’t have to be this way. You need to learn how to manage those fees so you can maximize your returns.

How to Minimize the Impact of Investment Fees

Many people choose to invest their money because of the magic of compound interest, failing to realize that investment fees compound too. How can you avoid the pitfalls of investment fees as an investor and hold on to as much money as possible?

Be financially smart and choose low-cost options and do your due diligence when choosing a professional to help you manage your investments.

You’ll want to choose wisely when it comes to who manages your money too. Some financial advisors may take a large commission, which will eat away at your earnings. Choose a financial advisor who works as a fee-only planner and upholds a fiduciary standard.

Also, don’t forget to speak up! If you have an advisor or an employer that manages your 401(k), ask them about what investment fees you will be paying. Ask about any expense ratios, internal fees, commission fees, annual fees, trading fees and administrative costs that might cut into your investments.

You have a right to know and are entitled to that information, but you have to do your due diligence and ask. If your advisor isn’t transparent about fees and how they’re compensated, it’s time to find a new one.

And before investing in anything, think about rates, commission fees, managements fees, trading fees, and so on. Consider the long-term implications of how it will affect your portfolio.

If you’re in a position to make decisions around your company’s retirement plan options, you can do the following to potentially save thousands of dollars in fees for the employees of the business:

  • Establish a prudent process for selecting investment alternatives and service providers
  • Ensure that fees paid to service providers and other expenses of the plan are reasonable in light of the level and quality of services provided.
  • Monitor investment alternatives and service providers once selected to see that they continue to be appropriate choices

As an investor, empower yourself with information and do your research on any investment fees before funneling more money into any assets or funds. After all, it’s your hard earned money that you worked for — don’t you want to keep most of it?