Personal Finance

What first-time buyers need to know

Published

3 months ago

August 1, 2024

Two renters pose in front of their new home that they’re renting from Roots, a program that helps renters invest in real estate.

Courtesy: Katie Curran

When Will Hunnicutt was searching for an apartment in Atlanta earlier this year, pricey leases and application rejections left him feeling defeated.

“The three-and-a-half times income-to-rent ratio is kind of hard to fulfill when they’re wanting $3,000 in a lot of places,” the 30-year-old social worker said.

Then Hunnicutt found a $1,050-per-month two-bedroom apartment tied to Roots, a real estate investment trust based in the Atlanta area that works to help renters of the properties in its portfolio build wealth toward homeownership. His $1,000 security deposit is invested in the REIT, and he has earned another $200 in quarterly rebates so far for taking care of his unit and paying rent on time.

“The end goal is to buy a house, so having investment funds, that passive income, would be very helpful,” Hunnicutt said.

Will Hunnicutt with his dog Bailey in his Atlanta home that he rented through Roots, a company that helps renters build wealth by investing in real estate.

Courtesy: Will Hunnicut

Roots is currently only available in Atlanta, but has plans to expand this fall. It’s just one approach to a broader aim: helping consumers get financially ready to buy a home.

As buyers continue to struggle with home affordability, experts say programs that help with down payments may be worth another look.

The dream of owning a home is moving further out of reach for many as homes get more expensive. Aspiring homebuyers need to make $113,520 a year to buy a typical U.S. home, according to national brokerage site Redfin — 35% more than what a typical household earns annually.

One barrier toward homeownership is having enough savings for a down payment. Nearly 40% of Americans who don’t own a home point to a lack of savings for a down payment, according to a 2023 CNBC Your Money Survey conducted by SurveyMonkey. More than 4,300 adults in the U.S. were surveyed in late August for the report.

‘Thousands of down payment-assistance programs’

Down payment-assistance programs come in different forms, and from different sources — including state agencies, cities, nonprofits, financial institutions and mortgage lenders. So you’ll have to hunt around to see what’s available in your area.

Usually, assistance programs focus on first-time homebuyers and buyers who meet certain income qualifications. There are also programs focused on “first-generation homebuyers.”

In many down payment-assistance programs, participants have to take a homebuyer education course. Depending on the program, they may also have to meet other conditions, like getting their mortgage through a specific lender or saving a set amount to contribute toward their home purchase.

The aid can be significant. For example, Alternatives Federal Credit Union in Ithaca, New York, has programs offering $9,000 up to $20,000. The Chicago Housing Authority can assist with up to $20,000.

These kinds of programs are one way to work toward equality in homebuying, as systemic barriers still block the path to homeownership for many Americans, housing experts say.

This is especially true for Black Americans, who have largely made up the receiving end of decades of redlining, exclusionary zoning and predatory lending, according to Nikitra Bailey, executive vice president of the National Fair Housing Alliance.

Programs targeted toward first-generation homebuyers are crucial, she said. While it’s common for family to help with a down payment, would-be buyers whose parents rent are less likely to be able to offer that help.

“We know there are thousands of down payment-assistance programs that cities have adopted,” but their reach in “underserved consumers of color” is limited, Bailey said. “And that’s why ‘first generation’ is very important, because it’s a race-neutral way to target resources to the consumers that the future health of the housing system depends on.”

How much you need for a down payment

Part of the reason coming up with a down payment is so daunting is that buyers often think they have to put down 20% of the home purchase price. They’re mistaken, experts say.

A National Association of Realtors survey based on transactions from July 2022 to June 2023 found the typical first-time homebuyer has an 8% down payment. And some loans require even less, as little as 3.5% or even 0% down.

Keep in mind, putting less than 20% down typically means you would have to pay private mortgage insurance, or PMI. PMI can cost anywhere from 0.5% to 1.5% of the loan amount per year, depending on different factors, according to The Mortgage Reports. Typically, you can request for mortgage insurance to be removed after you reach 20% equity.

‘Those dollars should not be invested in the market’

First-time homebuyers may qualify to make penalty-free withdrawals up to $10,000 from a 401(k) plan or traditional or Roth individual retirement accounts. But financial advisors recommend preserving those funds for retirement when possible.

While Roots may help its renters invest to build wealth, experts typically emphasize saving rather than investing for short-term goals.

Low-risk options including high-yield savings accounts, certificate of deposits or Treasury bills may be ideal for people whose timeline to buy is up to five years.

“Anything that you need dollars for in the next three to five years, those dollars should not be invested in the market,” said Janet Stanzak, a certified financial planner and founder of Minnesota-based Financial Empowerment. “Markets typically cycle in three to five year cycles, and the worst case would be, you find a home you want to move on and your money’s in the market and the market takes a downturn.”

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Personal Finance

Maximum Social Security retirement benefit: Here’s who qualifies

Published

2 hours ago

October 17, 2024

Business Finance News

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Millions of Social Security beneficiaries will benefit from the 2.5% cost-of-living adjustment for 2025, set to take effect in January.

With that increase, the maximum Social Security benefit for a worker retiring at full retirement age will jump to $4,018 per month, up from $3,822 per month this year, according to the Social Security Administration.

But while those maximum benefits will see a $196 monthly increase, retirement benefits will go up by about $50 per month on average, according to the agency.

The average monthly benefit for retired workers is expected to increase to $1,976 per month in 2025, a $49 increase from $1,927 per month as of this year, according to the Social Security Administration.

Who gets maximum Social Security benefits?

The highest Social Security benefits generally go to people who have had maximum earnings their entire working career, according to Paul Van de Water, a senior fellow at the Center on Budget and Policy Priorities.

That cohort generally includes a “very small number of people,” he said.

Because Social Security retirement benefits are calculated based on the highest 35 years of earnings, workers need to consistently have wages up to that threshold to earn the maximum retirement benefit.

“Very few people start out at age 21 earning the maximum level,” Van de Water said.

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Workers contribute payroll taxes to Social Security up to what is known as a taxable maximum.

In 2024, a 6.2% tax paid by both workers and employers (or 12.4% for self-employed workers) applies to up to $168,600 in earnings. In 2025, that will go up to $176,100.

Notably, that limit applies only to wages that are subject to federal payroll taxes. If a wealthy person has other sources of income, for example from investments that do not require payroll tax contributions, that will not affect the size of their Social Security benefits, said Jim Blair, vice president of Premier Social Security Consulting and a former Social Security administrator.

How can you increase your Social Security benefits?

There are beneficiaries who are receiving Social Security checks amounting to more than $4,000 per month, and they usually have waited to claim until age 70, according to Blair.

“Technically, waiting until 70 gets you the most amount of Social Security benefits,” Blair said.

By claiming retirement benefits at the earliest possible age — 62 — beneficiaries receive permanently reduced benefits.

At full retirement age — either 66 or 67, depending on date of birth — retirees receive 100% of the benefits they’ve earned.

And by waiting from full retirement age up to age 70, beneficiaries stand to receive an 8% benefit boost per year.

By waiting from age 62 to 70, beneficiaries may see a 77% increase in benefits.

However, because everyone’s circumstances are different, it may not always make sense to wait until the highest possible claiming age, Blair said.

Prospective beneficiaries need to evaluate not only how their claiming decision will impact them individually, but also their spouse and any dependents, he said.

“You have to look at your own situation before you apply,” Blair said.

Also, it is important for prospective beneficiaries to create an online My Social Security account to review their benefit statements, he said. That will show estimates of future benefits and the earnings history the agency has on record.

Because that earnings information is used to calculate benefits, individuals should double check that information to make sure it is correct, Blair said. If it is not, they should contact the Social Security Administration to fix it.

Personal Finance

Inherited IRA rules are changing in 2025 — here’s what to know

Published

3 hours ago

October 17, 2024

Business Finance News

Jacob Wackerhausen | Istock | Getty Images

What to know about the 10-year rule

Before the Secure Act of 2019, heirs could “stretch” inherited IRA withdrawals over their lifetime, which helped reduce yearly taxes.

But certain accounts inherited since 2020 are subject to the “10-year rule,” meaning IRAs must be empty by the 10th year following the original account owner’s death. The rule applies to heirs who are not a spouse, minor child, disabled, chronically ill or certain trusts.

Since then, there’s been confusion about whether the heirs subject to the 10-year rule needed to take yearly withdrawals, known as required minimum distributions, or RMDs.

“You have a multi-dimensional matrix of outcomes for different inherited IRAs,” Dickson said. It’s important to understand how these rules impact your distribution strategy, he added.

After years of waived penalties, the IRS in July confirmed certain heirs will need to begin yearly RMDs from inherited accounts starting in 2025. The rule applies if the original account owner had reached their RMD age before death.

If you miss yearly RMDs or don’t take enough, there is a 25% penalty on the amount you should have withdrawn. But it’s possible to reduce the penalty to 10% if the RMD is “timely corrected” within two years, according to the IRS.

Consider ‘strategic distributions’

If you’re subject to the 10-year rule for your inherited IRA, spreading withdrawals evenly over the 10 years reduces taxes for most heirs, according to research released by Vanguard in June.

However, you should also consider “strategic distributions,” according to certified financial planner Judson Meinhart, director of financial planning at Modera Wealth Management in Winston-Salem, North Carolina.

“It starts by understanding what your current marginal tax rate is” and how that could change over the 10-year window, he said.

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For example, it could make sense to make withdrawals during lower-tax years, such as years of unemployment or early retirement before receiving Social Security payments.

However, boosting adjusted gross income can trigger other consequences, such as eligibility for college financial aid, income-driven student loan payments or Medicare Part B and Part D premiums for retirees.

Personal Finance

Nearly 2 in 5 cardholders have maxed out a credit card or come close

Published

6 hours ago

October 17, 2024

Business Finance News

Asiavision | E+ | Getty Images

Between higher prices and high interest rates, some Americans have had a hard time keeping up.

As a result, many are using more of their available credit and now, nearly 2 in 5 credit cardholders — 37% — have maxed out or come close to maxing out a credit card since the Federal Reserve began raising rates in March 2022, according to a new report by Bankrate.

Most borrowers who are over extended blame rising prices and a higher cost of living, Bankrate found.

Other reasons cardholders blame for maxing out a credit card or coming close include a job or income loss, an emergency expense, medical costs and too much discretionary spending.

“With limited options to absorb those higher costs, many low-income Americans have had no choice but to take on debt to afford costlier essentials — at a time when credit card rates are near record highs,” Sarah Foster, an analyst at Bankrate, said in a statement.

As prices crept higher, so did credit card balances.

The average balance per consumer now stands at $6,329, up 4.8% year over year, according to the latest credit industry insights report from TransUnion.

At the same time, the average credit card charges more than 20% interest — near an all-time high — and half of cardholders carry debt from month to month, according to another report by Bankrate.

Carrying a higher balance has a direct impact on your utilization rate, the ratio of debt to total credit, and is one of the factors that can influence your credit score. Higher credit score borrowers typically have both higher limits and lower utilization rates.

Credit experts generally advise borrowers to keep revolving debt below 30% of their available credit to limit the effect that high balances can have.

As of August, the aggregate credit card utilization rate was more than 21%, according to Bankrate’s analysis of Equifax data.

Still, “if you have five credit cards [with utilization rates around] 20%, you have a lot of debt out there,” said Howard Dvorkin, a certified public accountant and the chairman of Debt.com. “People are living a life that they can’t afford right now, and they are putting the balance on credit cards.”

Generation X at risk

Gen X most likely to max out their credit cards, survey finds

More than any other generation, Gen Xers in their 40s and 50s are most likely to have maxed out a credit card or come close in the past two and a half years, according to Bankrate’s report.

Of Gen Xers, 27% have maxed out their credit cards compared to 23% of millennials and 17% of Baby Boomers. Young adults in Gen Z are the least likely to have maxed out a card, according to the survey, which polled more than 3,500 adults, including 3,015 who are credit cardholders and 1,104 who have either maxed out their credit cards or come close.

Gen X, the so-called “sandwich generation,” must contend with supporting the generations ahead of them and their children at a time when the costs of higher education and health care have never been higher, studies also show.

Potential problems ahead

Cardholders who have maxed out or come close to maxing out their credit cards are also more likely to become delinquent.

Credit card delinquency rates are already higher across the board, the Federal Reserve Bank of New York and TransUnion both reported.

“Consumers have been measured in taking on additional revolving debt despite the inflationary environment over the past few years, although there has been an uptick in delinquencies in recent months,” said Tom McGee, CEO of the International Council of Shopping Centers.

A debt is considered delinquent when a borrower misses a full billing cycle without making a payment, or what’s considered 30 days past due. That can damage your credit score and impact the interest rate you’ll pay for credit cards, car loans and mortgages — or whether you’ll get a loan at all.

Some of the best ways to improve your credit standing come down to paying your bills on time every month, and in full, if possible, Dvorkin said. “Understand that if you don’t, then whatever you buy, over time, will end up costing you double.”