Liz Weston

Monday’s need-to-know money news

April 21, 2014 By Liz Weston

Today’s top story: How to pay off your student loan in four years or less. Also in the news: Affordable ways to help someone having a bad time, how healthy living could save you money, and an easy way to tell if you have good credit.

5 Tips For Paying Off Your Student Loans in 4 Years or Less
Shortening the lifespan of the student loan albatross.

6 Affordable Ways to Help Someone Who’s Hurting
It truly is the thought that counts.

How good health will pay off during retirement

Healthy living right now could pay off in the future.

A Super Simple Way to Figure Out If You Have Good Credit
It’s all about the credit report.

Are Reverse Mortgages a Good Idea for Retirees?
A look at the controversial mortgage program.

Q&A: Home equity loans, mortgages and retirement

April 21, 2014 By Liz Weston

Dear Liz: I wish to add a little more information for the retired individual who had trouble getting approved for a home equity loan because he had no regular income (although he had plenty of assets). I’d suggest consulting a mortgage broker, not a bank. An independent broker is not captive to one set of policies. My broker suggested that I set up automatic withdrawals from my IRA to show that I had income in addition to Social Security. Once this was done and I met all the other credit requirements, I closed on a refinance in less than 30 days at a very good interest rate. Then, I discontinued my automatic withdrawals and went back to taking my funds as needed. I learned to use a qualified mortgage broker many years ago after a divorce and not having a job. I could not get a mortgage on my own, but my mortgage broker did and at very good terms. Each time I’ve used a broker, the process went smoothly and was stress free.

Answer: Many people don’t realize that lender policies differ quite a bit. In this case, mortgage buyers Fannie Mae and Freddie Mac have clarified that mortgage lenders can calculate a retiree’s income based on his or her assets, but not all lenders are willing to do the extra work these loans require.

People who are W-2 employees with solid income histories and great credit scores probably don’t need help finding a loan, because plenty of lenders will want to compete for their business. When your situation is outside the norm, however, a mortgage broker may be able to track down a lender when others balk. The National Assn. of Mortgage Brokers at http://www.namb.org offers referrals.

Q&A: Helping retired parents refinance

April 21, 2014 By Liz Weston

Dear Liz: I am trying to help my retired parents refinance their home. Currently they are paying over 8% interest. (This loan should be illegal.) The problem is their credit score, which is around 536. They had a tax lien in 2004 (it has been paid off for over four years) and some minor credit card issues. The total card debt is less than $1,000. I see several bad footnotes on these cards. Some of the cards have a balance of less than $100. What is the best and fastest way to help them get the mortgage they deserve?

Answer: Your parents don’t have a single credit score. They each have their own scores. Mortgage lenders typically get FICO scores for each borrower from all three credit bureaus, for a total of six scores. Lenders look at the middle score for each person and typically base rates and terms on the lower of those two middle scores.

If that number is indeed 536, your parents have serious, recent credit problems. You may not think an unpaid credit card is a big deal, but it is to credit scoring formulas, which are designed to help lenders gauge a borrower’s risk of default. People with unpaid bills are far more likely to default on a new loan than people who pay their bills on time, and their respective credit scores reflect that reality. What people “deserve” isn’t a factor. How they handle their credit accounts is.

What you’re calling “bad footnotes” are likely records of late payments and perhaps charge-offs and collections activity. Those typically can’t be erased, but your parents can stop the ongoing damage to their credit by paying their bills on time and paying off any overdue bills to their credit card companies.

If the accounts have been sold to collectors, the process gets trickier. Paying off collections typically won’t help credit scores, but lenders usually want these accounts paid off before they will make a new loan. Your parents can try negotiating to have the collection accounts deleted in return for payment, but they won’t be able to erase the late payments and other negative marks reported by the original creditor.

Once they start handling their credit accounts responsibly, their credit scores will start to improve. The improvements will happen slowly, though, and they may well miss the opportunity to refinance at today’s low levels.

Money rules of thumb: Retirement edition

April 18, 2014 By Liz Weston

For every rule of thumb, there are hundreds of people who would quibble with it.

We saw that just recently with a USA Today columnist who quantified exactly how much you need to save for retirement (his answer, via an analysis by T. Rowe Price: $82.28 a day). Lots of people didn’t like that the number was an estimate, an average, and that their own mileage may vary.

But many more people don’t have the patience, knowledge or energy to sort through all the potential factors for every financial decision. Sometimes, they just want an answer.

Over the next few days, I’m going to share the most helpful rules of thumb I know. They aren’t going to apply to everyone in all situations. But if you’re looking for guidelines (or guardrails), there are a starting point.

Let’s start with retirement:

Retirement comes first. You can’t get back lost company matches or lost tax breaks, and every $1 you fail to save now can cost you $10 to $20 in lost future retirement income. You may have other important goals, such as paying down debt or building an emergency fund, but you first need to get started with retirement savings.

Save 10% for basics, 15% for comfort, 20% to escape. If you start saving for retirement by your early 30s, 10% is a decent start and 15% should put you in good shape for a comfortable retirement (these numbers can include company matches). If you’re hoping for early retirement, though, you’ll want to boost that to at least 20%. Add 5-10% to each category for each decade you’ve delayed getting started.

Don’t touch your retirement funds until you’re retired. That pile of money can be tempting, and you can come up with all kinds of reasons why it makes sense to borrow against it or withdraw it. You’re just robbing your future self.

Keep it simple–and cheap. Don’t waste money trying to beat the market. Choosing index mutual funds or exchange-traded funds, which seek to match market benchmarks rather than exceed them, will give you the returns you need at low cost. And cost makes a huge difference. If you put aside $5,000 a year for 40 years, 1 percentage point difference in the fees you pay can result in $225,000 less for retirement.

Thursday’s need-to-know money news

April 17, 2014 By Liz Weston

Today’s top story: What you need to save every day for a comfortable retirement. Also in the news: The three tax buckets, the 10 commandments of savings, and four boring but essential money conversations.