Pay off debts Archives

August 17, 2022August 22, 2022

Pay Off Debt or Build Savings? Prioritizing Your Financial Goals

Deciding whether to save or pay off debt is a very personal choice — and one that depends on many different factors. However, there are a number of ways to weigh your options in order to pick the best one for you. Below, we’ll cover the pros and cons of each route so you can more confidently answer the question: should I pay off debt or save?

Option 1: Pay Off Debt

Advantages to paying off debt include reducing the amount of interest you’re paying over time, improving your credit score, and lessening the stress and psychological burden that comes along with having the cloud of unpaid financial obligations hanging over your head. It also might make more sense to focus on getting rid of debt if it can help you accomplish some long-held financial goals.

In terms of choosing whether to pay off debt or invest, it may help to know that experts generally advise that if the total interest rate on your debt is greater than 6%, you should pay it down first before focusing on savings or investing.

When it comes to how to pay off debt, there are a couple of different approaches you can take. They’re grouped into what’s known as the avalanche and snowball methods.

With the avalanche method, you make minimum payments on all of your debts, and then use any remaining funds to pay off the debt with the highest interest rate. This plan for paying off debt can make the most sense if you’re working toward a long-term goal rather than a short-term financial need.

The snowball method, on the other hand, means that while you make minimum payments on your debts, you then address the smallest debts before taking care of the larger ones. If you’re someone who is inspired to work toward goals by seeing smaller signs of progress along the way, this route might be more appealing to you.

To get a quick idea of which debts may make the most sense to prioritize, a calculator for debt payoff can help. You can plug your current debts, including interest rate and remaining balance, into our Cost of Debt Calculator and get a better idea of how much your obligations are setting you back — as well as how long it will take you to pay them off at your current rate. This tool is also helpful for figuring out which debts to pay off first.

Should I pay off my credit card in full? When should I pay off my credit card?

It’s typically best to keep your credit card paid off for a couple of different reasons. Not only will it help save you money you would be paying in mounting interest payments that add up each month, but unpaid credit card debt can also negatively affect your credit score. If you already have an outstanding balance that you’re able to pay off, it’s a good idea to start here as a first step.

Option 2: Build Your Savings

Choosing to save also has its benefits, however. You may be able to take advantage of compounding interest — the more time your money is in savings, the more your money grows.

You also have better control over your timeline this way, as you don’t have to wait until your debts are repaid to begin getting closer to your bigger goals.

You’ll want to consider what you’re saving up for and whether right now is the best time to pursue it. If it’s your first home, other factors like the current market conditions and the cost of a mortgage versus renting come into play as well, and it may make sense to hold off and handle debts right away.

In any case, setting a target savings goal works toward either a debt payoff or savings strategy, so it often makes sense to begin here no matter what your ultimate objective is — and creating a savings account or emergency fund is a sound decision to avoid debt in the future.

One fairly quick and painless way to begin building your savings is to set up a direct deposit account that automatically puts a percentage of your paycheck into a designated account. If you’re able to afford it, even if it’s a small percentage of your paycheck to start, this can be a smart move.

Another way to save that might seem a bit counterintuitive is to spend money on home improvements that will improve your energy efficiency and cut costs down the road. Even if you don’t make full-scale updates, taking a look at your daily habits with respect to heating and cooling (for example, turning your thermostat down a few degrees or keeping the air conditioner off unless absolutely necessary) can slash ongoing bills and make a difference.

Should I pay off student loans or save?

It can be especially tricky to decide whether to prioritize student loan payments or begin saving, but the most important thing to consider is whether you currently have a comfortably padded emergency fund that will provide a safety net in case of an emergency, or even just a solid cushion in place to handle any major upcoming life events like a move, wedding, or higher education. You should also look at the current interest rates on your loans. If they’re pretty low, you can feel more comfortable starting to save and place your focus back on loans at a later time.

Should I use savings to pay off debt?

Again, it depends. While it can be tempting to dip into your savings to pay off debt, it’s recommended that you maintain a certain amount of emergency funds first before using savings towards debts. Otherwise, you might find yourself unprepared and without enough money to cover an unexpected or emergency situation that arises.

If you decide that paying off debt could help you take steps toward financial freedom, there’s an alternative option to traditional solutions, a home equity investment, that may be a fit. You’ll receive cash in exchange for a share of your home’s future value, and unlike loans for paying off debt, there’s no interest or monthly payments to worry about, so you can start eliminating it more quickly.

Are you a homeowner who could use some extra money to begin chipping away at debt or even add to your savings? Take our five-minute quiz to see if a Hometap Investment might be a good fit for you.

YOU SHOULD KNOW…

We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

August 18, 2021June 23, 2022

How to Resolve Underwater Mortgages and Negative Equity

An underwater mortgage is defined as a home purchase loan for which the principal (i.e. the original amount owed) is more than the value of the home in the free market, which leads to negative equity. In other words, the homeowner owes more than the home is worth. Most commonly, an underwater mortgage — also known as an upside-down mortgage — occurs when home values in a particular area are decreasing.

The 2008 financial crisis was perhaps the biggest example of a widespread underwater mortgage phenomenon, which occurred in part due to less rigorous lending requirements and a heightened level of foreclosures and defaults.

You probably already know if you have an underwater mortgage, but you can double check by determining how much you owe on your mortgage, how much your home is currently worth, and subtract the amount you owe from your home’s value. When a mortgage goes underwater, it can cause a laundry list of problems for a homeowner, including the inability to refinance or sell their home unless they have the cash in hand to pay for the difference. In addition, it usually eliminates equity available for credit.

The good news is that if your mortgage has already gone underwater, you may be able to reverse it. Here are some ways to get started.

Create a Budget

One of the easiest and most common ways to do this is by cutting costs through creating a budget and making your mortgage payments your top priority. It might not be the most fun exercise in the world, but you’ll thank yourself later when you’re able to get back on track and begin building equity in your home once again.

Read “4 Steps to Personal Financial Planning” and document your spending with the helpful budget tracking sheet.

Increase Your Home’s Value

Another way is to grow your home value and in turn, your home equity. Some ways to do this include upgrading appliances and finishes, investing in energy-efficient features like a smart thermostat, lighting, windows, and doors. Don’t forget about curb appeal, either; improving your home’s exterior and landscaping can go a long way to boost the worth of your home.

Refinance with FMERR

While you won’t be able to qualify for a traditional refinance if you have negative equity, there’s another program that may be able to help you. The Freddie Mac Enhanced Relief Refinance (FMERR) Program, which replaced the HARP (Home Affordable Refinance Program) is an option designed for homeowners who want to refinance but don’t have enough home equity for a conventional refinance.

You’ll still need to meet certain criteria to qualify for financing through the FMERR program. Some of the qualifiers include:

Initial mortgage closed on October 1, 2017 or later
A 15-month seasoning period since closing on your mortgage or refinancing
Less than 3% equity in your home (or in other words, an LTV ratio above 97%)
No delinquent mortgage payments

Sell Your Home Through a Short Sale

If you have an underwater mortgage, you can’t afford your monthly payments, and you don’t have the money to make up the difference between your home’s value and your current mortgage balance, a short sale might be an option. With a short sale, your lender needs to agree to sell your home for less money than you owe on it, which means that they lose money. Because of this, it’s typically a last resort after you’ve demonstrated that you’re unable to handle your monthly payments and don’t have any way of making up for them. Short sales also typically have a negative effect on your credit.

Plan Ahead with a Home Equity Investment

If you do have a good amount of positive equity in your home, or if you’ve recovered from an underwater mortgage, you may be eligible for a Hometap Investment. A home equity investment with Hometap will keep your mortgage above water and allow you to pay off debt, grow your home’s value through a renovation, or handle life expenses. You’ll get cash in exchange for a percentage of your home’s future value, and there aren’t any monthly payments or interest, so you can focus on prioritizing on paying for what’s most important to you right now.

Find out if a Hometap Investment can help you tap into your equity by taking our five-minute quiz.

YOU SHOULD KNOW…

July 19, 2021December 20, 2022

5 Ways to Pay Off Your Home Mortgage Early and Save

Paying off your mortgage early can be beneficial in a number of ways. Most importantly, it allows you to save money in interest, and also lets you shift your focus to saving for retirement, building an emergency fund, or simply just enjoying life a little more.

However, it’s important to note that you shouldn’t stretch your budget if you have more pressing financial needs. For example, if the money you plan on using to pay off your mortgage would be better used to invest, build a retirement fund, or save for emergencies, that might be a better decision. In addition, by paying off your mortgage early, you’ll lose the benefits of claiming mortgage interest as a tax deduction.

That being said, if you already have some cash set aside for emergencies, a retirement fund that’s aligned with your goals, and don’t have much outstanding debt, paying off your mortgage early can still be a smart priority. And if your mortgage was taken out after January 10, 2014, you likely don’t need to worry about any prepayment penalties.

If you’re curious about how long it will take you to pay off your mortgage at your current rate, you can use this early mortgage payoff calculator. Simply select “other” when prompted for the type of debt and input your current interest rate and the amount you’re paying each month to receive an estimated total cost and timeline for being mortgage-free.

Then, get started by exploring some of the best methods for paying off your mortgage faster.

1. Get rid of PMI

One of the biggest obstacles to paying off a mortgage quickly is private mortgage insurance, or PMI. PMI is usually tacked onto mortgages when the borrower is unable to afford the minimum down payment on a home — usually 20% — as a step to protect the lender in case the borrower stops paying the loan.

If you have PMI, you could end up paying hundreds of dollars a month in addition to your regular payment — so getting rid of it as fast as possible is often key to reducing your payoff timeline. There are more than a few ways to do this, including getting a new home appraisal, increasing your home’s value, and requesting early cancellation.

2. Pay more each month toward your principal

If you’re able, pay extra toward your principal, which in turn reduces the total interest you’ll pay.

The chart below shows the total mortgage cost when making the minimum payment versus 10%, 20%, or 30% extra per month on the average balance of $208,185 over a 30-year period.

3. Make one more payment each year

Some homeowners opt to make just one extra monthly payment per year to shorten their timeline. If you choose to do this, you don’t necessarily need to make the payment all at once; in fact, it’s more common to use this approach by making bi-weekly payments of half your monthly amount on an ongoing basis. This way, by the end of the year, you’ll have added another installment without having to locate a lump sum of cash to pay in full. If you go this route, you’ll want to make sure you check with your mortgage provider first, as it may require some advance planning.

4. Refinance your home

While a cash-out refinance might be the first solution that comes to mind when thinking about refinancing your home, a home equity line of credit (HELOC) is often a better choice since it might offer a lower interest rate than your current mortgage without dealing with the closing costs you’d be saddled with if you went with a traditional refinance. One downside that you need to be aware of is that while you can initially make interest-only payments on a HELOC, at the end of your “draw” period, you’ll have to pay back the interest and principal together each month — which might be more than your previous monthly payment.

5. Consider a home equity investment

A home equity investment gives you access to cash in exchange for a share of your home’s future value, but unlike a HELOC, doesn’t accrue interest or require monthly payments. While this option isn’t common as a primary reason to receive an investment, some homeowners find it to be an advantageous secondary use of funds. For example, if you decide to use an investment to pay off debt or renovate your home and have cash left over, you can put it toward paying off PMI or your principal. Take it from California homeowner Elizabeth, who used a Hometap Investment to handle the debt she incurred from a Home Energy Renovation Opportunity (HERO) loan and used the rest toward her mortgage balance.

Take our five-minute quiz to find out if a Hometap Investment can help you pay some or all of your mortgage balance off early.

YOU SHOULD KNOW…

December 23, 2020May 20, 2022

5 Smart Ways to Consolidate Growing Debt

Debt can wreak havoc on your ability to achieve your financial goals. That’s why it’s critical to pay off debt quickly so you can get your finances—and life—back on track. While it may feel impossible to get out of debt, consolidation can help you chip away at the burden. Here are five ways to do it.

1. Tap Into Your Largest Asset

As a homeowner, you can access your equity through a HELOC, home equity loan, cash-out refinance, or home equity investment and pay off your debts in full. A home equity investment, like Hometap provides, allows you to get cash to pay for what’s most important to you without the hassle of monthly payments or interest.

The option that will make the most sense for you depends on your debt and financial goals. Compare your options using our guide to find the best one for you.

Take our 5-minute fit quiz to get started.

2. Use a Balance Transfer Credit Card

Depending on the amount of debt you have, you may be able to transfer it all to one credit card. If you transfer it to a credit card with a 0% interest promotional period, you can avoid paying interest. You’d then have only one monthly payment while eliminating the high interest your other cards carried.

However, you’ll still need to qualify for these cards, which may require a good credit score. Plus, if you can’t pay off the debt by the end of the promotional period, you may end up paying more through higher interest. You’ll need to stick to a disciplined payment schedule if you want to avoid additional debt.

3. Take Out a Personal Loan

If you can secure a personal loan with a lower interest rate than the rate on your current debts, it may make sense to take out a loan.

Personal loans don’t require collateral. That means they don’t require you to back the loan with assets like your house or car in case of nonpayment. You’ll still need a good credit score, however, especially if you’re hoping for a low-interest rate.

4. Consider Debt Settlement

Debt settlement isn’t so much debt consolidation as it is payment consolidation. With debt settlement, a firm negotiates with your creditor(s) to lower the total amount of debt you owe. You then make one monthly payment to a settlement firm.

While that may sound ideal, you’ll want to look into the details. The process can take months, you’ll be racking up interest, in the meantime, and the firm will charge a fee. You may even have to pay taxes on the forgiven debt, and your credit score can be affected for seven years.

5. Borrow From Retirement

Consider this option with caution: If you have a retirement plan you may be able to take out a 401(k) loan. You’ll need to determine if your specific plan allows this and its terms. If you pay the loan back on time (usually five years), the cost to you is relatively low. The interest you pay on the loan actually goes back into your own account. You can also repay the loan without prepayment penalties and many plans may allow you to take payments out of your paycheck.

Over 50 and have $0 for retirement? Here’s your roadmap to get on track >>

But if you don’t pay your loan back on time, you’ll likely have some serious setbacks. At this point, it’s considered an early withdrawal, which means you’ll face a penalty and income tax. You’ll also want to consider your job status. If you leave your job, you’ll have to pay the loan back within 60 days.

Take our 5-minute quiz to see if a home equity investment is a good fit for your debt consolidation goals.

DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

November 18, 2020March 22, 2023

Surge in Virginia Home Value Gives Homeowners an Edge

When it comes to livability, Virginia has a lot going for it: historic charm, plenty of outdoor and cultural activities, and the perfect mix of city and country areas. With 176 colleges and universities, it’s also a great place to learn, and its proximity to the metropolis of Washington, D.C. means that there are ample opportunities for career growth. Not to mention, it has some of the lowest state and income taxes in the entire nation, and Virginia home value is on the rise.

So, it’s not hard to see why many choose to put down roots here, and continue to do so despite the economic upheaval caused by COVID-19 in 2020. Home sales in Virginia increased 25% from August of last year, with the median home price also up more than 10% to $330,000 compared to the same time in 2019. In certain regions, like Northern Virginia, the median price is up more than 14% from last year to $495,000, and Forbes recently named Richmond as one of the leading housing markets in the country. Demand is also higher and homes are selling at a more rapid rate—an average of 12 days faster than past years.

What’s Happening with Virginia Home Value?

According to Virginia Realtors, this relative stability is due to a few different reasons, like the fact that several of the most prominent industries in the state, including government and professional and technical services, weren’t as severely impacted as others by the pandemic.

Another area of the market that’s thriving, perhaps unexpectedly, is the purchase of second homes in Virginia, as more and more buyers are looking for more space and privacy in the face of the pandemic—as well as a lifestyle shift toward remote work and spending more time at home.

“There’s less congestion, less traffic to and from various destinations and more self-contained, semi-off-the-grid properties for families to enjoy and feel safe,” explained Gloria Rose Ott, vice president and broker associate for Sotheby’s International Realty in Virginia, to The Georgetowner.

One of the main challenges currently facing the Virginia housing market is that inventory is much lower than it was pre-pandemic. As of the end of September 2020, there were more than 40% fewer available houses than in September 2019.

“The houses are selling faster than I’ve ever seen, Virginia Realtor Kerri Lane Mariano told The Northern Virginia Daily. “We don’t have enough homes for the buyers out there.”

Of course, this is creating a spike in Virginia home value. Northern Virginia home sales in Fairfax and Arlington counties reportedly just reached a 16-year high with nearly $1.5 billion in sales.

Read “What Trends Are Causing House Prices to Appreciate?”

While those looking for homes might feel pretty confident about buying right now in the event that they’re able to put an offer on their perfect property, it’s quite a different story for some Virginia homeowners, who are uncertain about what the near future might hold. According to recent Zillow data, 31% of those who were considering selling their home in the next three years are now holding off due to an unstable or insecure financial situation. Much of this hesitation stems from job losses due to COVID-19: 27% of those surveyed by Hometap received lower hours or less pay as a result of the pandemic, and 17% reported a spouse’s unemployment.

Fortunately, there’s no reason to sell your home to access your home equity now, especially when so much is up in the air. If you’re a Virginia homeowner, you have a unique opportunity to reap the benefits of the thriving climate and make the most of your property value—especially when you consider that homes in the state saw an average $14,000 equity increase in just one year.

Hometap can help you tap into a portion of it and get the cash you need in as little as three weeks. You can use it however you wish, no questions asked. Pay off debt, build that dream kitchen, or stress less about your child’s tuition payment. It’s up to you.

DISCLAIMER

November 16, 2020June 23, 2022

California Dreams Breaking the Bank for San Diego Homeowners

The balmy weather, 70 miles of pristine coastline, and relaxed vibe attract people from all over to San Diego County, for both vacations and relocations, but the latter is becoming increasingly difficult to afford. The city that’s known for its transplant population may be pricing out those hoping to migrate, and making it difficult for many native residents to keep their heads above water.

Major cities in California, including San Diego, San Francisco, and Los Angeles, have long topped the lists of priciest places to live, work, and own a home, but slow wage growth coupled with skyrocketing home prices are pushing San Diego further out of reach than ever. In fact, the cost of living is currently 44% higher than the national average, moving the city from No. 8 to No. 5 on Finder’s list of most expensive U.S. cities for homeowners. Wages in the county increased just 2% from 2008 to 2018; not nearly enough to keep up with inflation.

San Diego boasts a diverse population, making it difficult to define a “typical” household, but when you look at average home maintenance costs alongside median wages, it’s apparent why many San Diego homeowners are struggling to accomplish financial goals on top of their mortgages and related costs.

Snapshot of a San Diego Homeowner

Inside the average San Diego home is a family of three, bringing in a median household income of $75,450. Just under half of residents (47%) own their home versus rent, of which 73% are still paying down their mortgage.

Purchasing a home today in San Diego requires a six-figure salary, an estimated $101,023 annual income. That figure takes into account an average home value of $690,900, non-housing expenditures costing $38,156, and carrying non-mortgage debt of $16,584.

These housing expenses are approximately 136% higher than the national average—but it doesn’t stop there. Grocery prices are about 13% more costly, healthcare is 8% higher on average, and utility prices are 15% higher.

A recent WalletHub report put San Diego in the top 11% of cities with overleveraged mortgage debt, proving just how frequently homeowners are overborrowing and overextending themselves to get into a house.

“San Diego is among the cities with the highest mortgage debts,” Jill Gonzalez of Wallet Hub, told GlobeSt.com. “This makes housing affordability a serious issue. However, people want to own a home, and they end up taking mortgages that can put strains on their household budgets.”

Home Maintenance

Of course, the costs of owning a home aren’t restricted to the mortgage. Maintenance costs to keep up home value come with their own hefty price tag.

In 2020, San Diego homeowners typically paid anywhere between $11,783 and $94,270 for home renovations, averaging $53,026.

“With San Diego being one of the hottest real estate markets in the country and so many people working from home as well as home schooling, I believe our business will continue to grow in 2021,” Gregg Cantor, President and CEO of Murray Lampert remodeling told Hometap. “Roughly half of our clients finance their improvements through a cash-out refi, home renovation loans or home equity lines of credit.”

That also means that while these homeowners are likely adding great value to their homes, they’re then carrying a greater burden of debt and accumulating interest payments.

The Toll on Small Business

COVID-19 has added more financial stress for self-employed homeowners and small business owners everywhere, and San Diego is no exception. The city is No. 3 for most self-employed residents in the country, behind Miami and L.A.; approximately 12.2% of San Diegans are self-employed, and small businesses in the county depend on tourism in the summer months to make up for the slow season.

$700 million in PPP loans were given to local San Diego businesses at the onset of the pandemic, and it was recently announced that an expanded loan program would include broader qualification criteria to help larger-staffed small businesses operating in cities.

Still, many small business owners fear it’s too late.

“We haven’t seen any money from the [PPP], but it doesn’t really matter because it would’ve only put a Band-Aid on the problem,” Damon Goldstein, co-owner of Truly Fine Wine told the San Diego Tribune. “It doesn’t give me the runway to manage collection issues, or to make orders. It doesn’t get me back off the ground. Without our income stream, we don’t have enough to run our business.”

A Silver Lining

In the second quarter of 2020, the average California homeowner gained approximately $12,000 in home equity over the previous year. If the competitive housing market keeps up, homeowners may see that number climb in 2021.

Median sales prices in San Diego have risen 17% in recent months, hitting a new record in September. Real estate experts in the area point to a few factors causing the market spike: many sellers are keeping their properties off the market as they wait out the pandemic, making the competition for a limited pool of homes intensify, and the remote working trend is driving more renters to look for larger, more permanent homes.

Record-low interest rates make refinancing an attractive option for homeowners with built-up equity looking for additional cash flow. For those looking for a way to access their home’s value without adding more debt, home equity investors like Hometap have expanded their footprint to invest in homes across California, providing an interest- and monthly payment-free way to turn home equity into cash now.

San Diego homeowners can receive as much as $400,000 from their home equity to use toward high-interest debt like renovation loans and credit card debt, keep their small business going, and pay their mortgage for a more manageable monthly amount.

Find out if a home equity investment from Hometap could give you access to your equity.

DISCLAIMER

November 9, 2020June 23, 2022

The Benefits and Costs of Being a Massachusetts Homeowner

With its world-class healthcare and education, close proximity to the ocean and mountains, and rich history, there are certainly plenty of reasons to love living in Massachusetts. The only downside? Residing in the Bay State can often come with a pretty hefty price tag. In fact, according to research by The Ascent, it sits at number three in terms of average home cost, trailing only Hawaii and California as one of the most expensive in the entire country.

And home values are only continuing to trend upwards. A recent report by the Massachusetts Association of Realtors found that the median single-family home price in the state increased $45,000 in just one year, from $395,000 to $440,000 in April 2020. Similarly, single-family homes specifically saw an even bigger increase from August 2019 to August 2020, with the median value jumping 14.3% to $480,000.

Urban Exodus

Those who are itching to be in the center of the action will have to be prepared to shell out even more money; home prices in the bustling Boston area alone have risen 73% in the past decade, with the median price currently hovering just above $653,000. In Boston proper, the median price for a single-family home shot up 59% since 2019 to $2.8 million in 2020. “Anything right outside of Boston is going like wildfire, but especially the single-family homes,” Massachusetts Realtor Anthony Lamacchia told HousingWire. “I’ve never seen bidding wars with consistency in the fall like I have this fall. It’s crazy.”

What’s more, the historic character and charm that makes so many of these beautiful, old New England homes so appealing is exactly what can add unexpected maintenance and upkeep costs on top of monthly mortgage payments. Just ask Boston-area homeowners: more than 70% have reported that their housing expenses are rising faster than their income, and 64% also admitted that these bills have hindered their ability to reach other important financial goals.

As a result, many homeowners have been eyeing more affordable areas elsewhere in the state, like Northampton, Worcester, and Salem, as well as those farther afield in New England, including Portland, Maine, Providence, Rhode Island, Exeter, New Hampshire, and Brattleboro, Vermont. But this isn’t the only choice. Before you accept defeat and decide to relocate, it might pay off (literally) to explore your options.

A Better Way Forward

The current landscape can certainly be a challenge for homebuyers, especially first-timers trying to break into the market. “I was hoping it would be like those HGTV episodes where you see like three houses and you get to pick the one you like the best, but that did not happen,” recent buyer Jennifer Brogan told WBUR. “It had to be almost your full-time job.” However, if you already own a home in Massachusetts, this means that you have a huge opportunity to maximize your home’s value by tapping into your equity today; especially since nearly half of homeowners in the area say that most of their net worth is tied up in their home. According to our 2019 study, the average Boston-area homeowner has lived in their home seven years. Given the skyrocketing home prices in the region, it’s very likely that their homes have increased in value since it was purchased, so it could be the perfect time to make the most of its appreciation.

With a home equity investor like Hometap, Massachusetts homeowners can get cash right away in exchange for a share in the future value of their homes. Then, they can use the money for whatever—whether it’s paying down debt, funding renovations, covering children’s tuition, or making a down payment on a second property—all without having to wait until selling their home. And unlike other more traditional options, there aren’t any nagging monthly payments or loans involved, so homeowners can pay for what’s most important and rest easy knowing that they don’t have to worry about taking on additional debt.

Find out if a Hometap Investment can help you live a more enjoyable and less stressful life in your Massachusetts home. Take our five-minute quiz now.

DISCLAIMER

October 16, 2020June 23, 2022

Borrowing from 401(k) Retirement Savings: What You Need to Know

Even the best planners face unexpected financial challenges. As your financial picture changes, you may be tempted to dip into your 401(k) to cover these needs. There are definite pros and cons to borrowing from your retirement plan. Here, we’ll cover the answers to the most commonly asked questions about 401(k) loans and how borrowing from your retirement savings works.

What is a 401(k)?

A 401(k) plan is an employer-sponsored retirement account designed to help you save money for your future. These plans allow you to contribute pre- or post-tax dollars, and grow over time from your automatic payroll deductions, interest accrued from investments, and if you’re lucky, an employer match. For employees of public education institutions and certain non-profits, you may have a 403(b) plan.

What are the most common reasons to borrow from your 401(k)?

Typical reasons you may consider dipping into your 401(k) include:

Paying off debts e.g. credit card debt, medical bills, college loans, business, etc.
Down payment on a home
Unplanned repairs to your home or car
Small business shortfalls due to an emergency such as COVID-19
Medical emergencies

There are a few different ways an individual may be able to borrow against their retirement savings: a hardship distribution, wherein the money is taxed to the individual and is not paid back to the borrower’s account, a loan plan, which must meet specific requirements, and an early withdrawal. However, not all 401(k) plans allow for loans that are not hardship distributions. Before you use your 401(k) to fund emergency expenses, you’ll want to weigh the pros and cons. Just because you can borrow against your 401(k) doesn’t mean you should.

What are the advantages to borrowing from your 401(k) plan?

Some of the benefits of borrowing from yourself include:

No credit check required. There is no credit check required to borrow from your retirement savings, and no impact on your rating unless you fail to pay the amount back on time.
Principal and interest go back into your pocket. Since you’re borrowing from yourself, you won’t lose out on the interest that would normally go to a lending institution.
Short-term need for fast cash. Investopedia defines a “serious liquidity need” as a one-time major crisis that can’t be met by your regular income flow. The 401(k) borrowing process is relatively fast and you’ll avoid incurring the additional debt of a typical high-interest loan. But you’ll want to be sure it’s a need versus a want. Borrowing against your 401(k) has the potential to hurt your future.

What are the disadvantages to borrowing from your 401(k) plan?

There are some drawbacks to tapping into your retirement plan, that you’ll want to consider before taking any action, such as:

If you leave or lose your job, payment must be made in full faster. Repayment is generally within five years. But, if you leave or lose your job, that repayment period shrinks to 60 to 90 days. The CARES act has extended this grace period and eliminated the tax penalty if you’ve been directly impacted by COVID-19.
If you miss payments, be prepared to pay on your tax return. The outstanding balance borrowed will be considered taxable income for that calendar year. If you’re under age 59 ½, add a 10% penalty for making an early withdrawal from your 401(k) retirement plan.
You’ll earn less in your 401(k) fund. In some cases, companies don’t allow you to continue to contribute to your 401(k) while a loan is outstanding. Plus, the longer it takes you to pay back the money, the greater chance you miss out on earning interest and a company match.

How much can you borrow from your 401(k)?

The IRS sets the 401(k) loan rules with a ceiling of $50,000 or 50% of your vested account balance, whichever is greater. However, in April 2020 the CARES Act increased that amount to $100,000 or 100% of your account balance, whichever is lesser. This exception is available to those impacted by COVID-19 until September 2020.

How does borrowing from your 401(k) work?

Not every 401(k) plan will follow the same rules. As a first step, review your plan description or talk to your plan provider. Some plans are strict about the purpose of your “loan,” while others have a “loan page” online to facilitate the process.

You’ll have to pay back the principal amount borrowed and interest on a certain schedule. Make sure you understand the amount of interest — often lower than a traditional loan — the schedule, and any penalties for defaulting on payments.

What are the alternatives to borrowing from your 401(k)?

The good news is you have options for accessing cash in an emergency, so you can choose what works specific to your financial need.

Home renovation loans: Whether a planned renovation or an emergency repair, there are a variety of home renovation loans from the Federal Housing Administration, Fannie Mae, and Freddie Mac. Read more about each type here.
Small business loans: From the new Paycheck Protection Program (PPP) to traditional Small Business Administration (SBA) loans, how much funding you need could determine the options you decide to pursue.
Loans for personal debt or big purchases: If you’re a homeowner, there are several options to consider to offset personal debt (e.g. medical, college, divorce, etc.) as well as fund a major purchase such as a new home or car:

o HELOC: A home equity line of credit (HELOC) is like a credit card. For a period of 10 years, you’ll draw on the equity in your home as cash and make payments on interest only. After the draw period, repayment kicks in, typically over 20 years, with both principal and interest owed. If you intend to stay in your home indefinitely, a HELOC may be the choice for you.

o Reverse Mortgage: For those 62+, a reverse mortgage helps supplement your retirement income and allow you to stay in your home with no monthly mortgage payments. Be aware of the drawbacks of a reverse mortgage, however, such as high fees and inheritance.

o Home Equity Investment: For the debt-averse, home equity investments like Hometap’s are an attractive solution to short- and long-term financial needs. And like borrowing from your 401(k), a home equity investment is like borrowing from yourself. You can get access to fast cash with no payments, no interest, and no additional debt. Hometap invests in the future value of your home in exchange for a percentage of its equity. This flexible alternative can be used for any type of financial need — renovation, purchase, debts, small business expansion, etc. Unlike the $50,000 ceiling on 401(k) loans, a Hometap investment is up to $300,000 or 30% of your home’s total value.

Before choosing a means to fund your financial need, compare all your options to see which one makes most sense for your situation. Finding the best option can allow you to meet your short-term financial need and long-term financial goals — without one being at the expense of the other.

See if a Hometap Investment is the right fit for you.

DISCLAIMER

March 26, 2020January 19, 2021

The Hometap Guide to Signings Amid Social Distancing

The following document is intended for homeowners who have accepted an Investment Offer from Hometap and have scheduled their signing.

We have made some important adjustments to the investment signing process during this time of social distancing. Please carefully read through the following guide about your signing process, and reach out to your Investment Manager with any questions.

We are continuously working to ensure that our team members and partners understand and follow all CDC guidelines and best practices.

We are communicating with our partners, including home appraisers and settlement agents, to ensure that no one is conducting inspections or signings who shouldn’t be, including those who have recently traveled, shown signs of symptoms consistent with those of the ongoing coronavirus, or who have been in contact with someone with symptoms. Please read and follow these guidelines closely, and reschedule your signing if you are experiencing symptoms.

Before Your Signing Appointment

Please review your Hometap Investment documents. If you have any questions, we urge that you ask your Investment Manager in advance of your signing, as the settlement agent may not have the necessary information to accurately answer your questions.

The day before your scheduled signing appointment, your settlement agent will call you. During this call, you should set expectations, including where the signing will take place and how you prefer to exchange signing papers. For example, you may tell the agent you wish to meet them in the driveway, at your vehicle, or at the front door.

To expedite the process, you will receive two files in an email prior to signing: one includes all of your signing documents, and the second includes all signature pages so that you can print them in advance of your appointment if you choose. It is important that you do not sign these pages without the settlement agent present. The agent will also come prepared with all documents and is responsible for mailing all paperwork following the signing.

During Your Signing Appointment

The settlement agent must verify your identification before accepting any signed documentation. You may do this by holding your identification up to glass doors or windows, screen doors, vehicle windows, or holding your ID out at a safe distance of six feet for the agent to verify. Valid forms of ID include a valid driver’s license, firearms license, passport, or permanent resident card. The signing process should take no more than thirty minutes.

Florida homeowners must have an adult (18+) witness present for the signing.

As we work together to reduce the spread of the virus, we ask that you take the following precautions:

Avoid shaking hands with settlement agent
Sanitize entry door knobs before and after signing appointment
Wash hands thoroughly before and after signing appointment
Avoid sharing pens throughout transaction

We are excited to complete your Investment as safely and efficiently as possible

Thank you for your help!

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

March 19, 2020June 23, 2022

A Glaring Reminder About Importance of Emergency Funds

Most everyone knows an emergency fund is a good idea, but it’s more than a “nice to have.” In fact, many business experts suggest that an emergency fund should precede your investing funds. In a best-case scenario, it can help replace an oven or a vehicle without forcing you to miss other bills that month. At its worst, it can act as a buffer if you find yourself suddenly out of work. Small business owners, homeowners, parents, and those with family members with compromised health know that an emergency fund is a necessity, yet 28 percent of adults have no emergency savings.

The recent COVID-19 outbreak is an unfortunate reminder of the importance of an emergency fund. While the numbers continue to change, more and more people are finding themselves out of work and without child care, with little information on how long it will be until things return to normal.

Businesses who rely on supplies and trade with China are seeing an impact. Small businesses, and the food and travel industry are hurting as they are forced to close or to decide whether to stay open, despite consumers buying less. And while some workers are taking their office home and working remotely, millions of workers can’t or need to take care of their kids due to school closures and no childcare.

The financial impact—and the threat of that impacting only increasing—prompted Italy to suspend mortgage payments during the outbreak.

Of course, this isn’t the first time a virus has wreaked havoc on the global economy. In 2014, the Zika outbreak rapidly spread throughout the world, having the greatest impact on Latin America and the Caribbean. The short-term impact in that region was estimated at $3.5 billion in 2016 alone. In 2002, the economy also took a hit due to SARS. Of course, China’s role in the global economy today means we may feel an even greater impact due to this latest coronavirus.

In situations like this, staying out of debt or recovering quickly will be more challenging for some than others. An emergency fund or “rainy day fund” is critical to help make ends meet and ride out the leaner times.

While you may or may not feel the economic impact yet, it’s important to know your options if and when you need access to additional funds. As a homeowner, you may have a major asset that can help you weather financial downturns: your house.

Not the First Time, nor the Last

There are likely a lot of people that have been putting off starting an emergency fund wishing they’d started sooner. But COVID-19 is far from the first reminder about why such a fund is important.

Every tornado and wildfire is a reminder that financial stability can be swept away in an instant and — despite cities’ and businesses’ best efforts to soften the blow with financial assistance — that help is rarely immediate, forcing the victims of these disasters to make difficult decisions about where to spend the little savings they do have.

Read “Preparing for the Financial Impact of a Natural Disaster”

For example, the 2008 recession suddenly put North Carolina homeowner Butch and his wife out of work for a year, forcing them to put necessities like groceries and electricity bills on high-interest credit cards.

“We knew we had to do something to pay off the debt,” said Butch, who was concerned that all the hard work he and his wife had put into achieving financial well-being could be so easily erased. After some research, Butch decided to access some of the equity in their home using a Hometap Investment. In a few weeks, they had the cash they needed to pay off their credit cards and still have money left over for home repairs.