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After years of watching the stock market dip and dive, and then holding our breath as home values decreased, it’s hard to know what to do with your money. The rules have changed, and lots of people aren’t sure how to make smart money moves. Pay off debt? Save for retirement? We’ve asked experts to help separate fact from fiction, so you can feel secure in your financial future.

 

MYTH: It is always better to own a home than to rent one.

For generations, we’ve come to believe that owning a home translates into success. Isn’t home ownership the cornerstone of the American dream? Yet, many homes have lost value in recent years and people are becoming more transient, so renting has gained some appeal.

“Renting a home is making a decision to defer a long-term commitment to a house, which requires a fairly significant capital contribution,” says Theodore Massaro, president of M Financial Planning Services. “If you’re in a rental position, you’ve got flexibility. That is appealing to younger people who are much more mobile and are relocating, as well as the baby boomer generation.”

That’s a trend that will affect the housing market in the foreseeable future. Baby boomers downsizing into rental properties may well provide a glut of homes on the market as the large population of boomers outpaces the demand from people looking to buy.

“Renting by itself is not throwing away money, it’s a decision as to what is the best living accommodation that’s going to satisfy your needs today,” says Massaro.

 

 

MYTH: You should pay off your mortgage as quickly as possible.

Many people believe that your house is your greatest asset, and the quicker you pay it off, the better off you will be financially. While that may have been true in the Depression era, history proves it’s not true today.

“If you have a 3-percent mortgage, for example, by paying it off, you’re avoiding paying a 3-percent cost,” says Richard Michelfelder, associate professor of finance at Rutgers School of Business in Camden. “And then, when you subtract the long-term rate of inflation which is about 3 percent, your returns are basically nil. Instead, if you don’t pay off your mortgage and you instead invest that money into a well-diversified portfolio of stocks and bonds, you can easily double or triple those numbers.”

Over the long term, your earnings would be far greater than what you’re saving on your mortgage. In addition, it may be important to keep a nest egg in case something unexpected happens. Even with your mortgage paid off, you still have to pay property taxes, insurance and other living expenses.

“In the great recession of the mid-2000s, people were qualifying for teaser-rate mortgages of 1 percent, and they thought if they couldn’t afford it, the house would rise in value and they could sell it and make a lot of money,” says Michelfelder. “That didn’t happen, so believing the best use of your money is paying off your mortgage is stilted thinking.”

 

 

MYTH: Using a credit card will destroy your credit rating.

There are certainly people who get into trouble using credit cards, and for them, it’s probably better not to own any. But if you have the discipline to use a credit card appropriately, it’s an important tool to actually helping you improve your credit score.

“But you have to use it wisely,” says Massaro. “You have to pay it off every month and keep the balance well below the maximum.”

This is important because the amount of available credit you use is a component of your credit score. Also, opening and closing credit cards can adversely affect your credit rating, so only apply for credit if you need it and plan on using it. You can stop using cards you no longer need, but you shouldn’t cancel them as that will also lower your credit rating. And choose your cards wisely.

“For example, furniture store credit cards that give you no interest for 12, 24 or 36 months can be very misleading,” says Massaro. “The problem is, if you don’t pay off that debt before the period ends, they charge you substantial interest expense from the first day, in many cases retroactive to your original balance. It isn’t free money if you don’t monitor how you’re paying that off.”

“Using a credit card is also valuable because you get other benefits from it,” adds Michelfelder. “Some give points or added discounts, and sometimes you just don’t want to carry cash. You also get protection from a credit card. If you buy a product and it’s faulty and they won’t make good on it, your credit card company will stop payment until your dispute is settled.”

 

 

MYTH: I don’t have enough money to start investing.

There was a time when high brokerage fees made it difficult for small-time investors to jump into the market. But today there are a multitude of companies that offer trades for as little as $5, which means it’s possible to invest even small sums of money. The hurdle for many people is setting aside even that modest amount.

“People say, ‘I can barely meet my bills’ as they walk into a Starbucks and spend $5 on a latte,” says Michelfelder. “Or, they buy an $8.50 pack of cigarettes. If they looked at their budget, many people would find they have spurious spending that they’re not even conscious of doing.

If they can save $5 a day, that’s $25 a week, and over 50 weeks that’s $1,250 a year. For 10 years that’s $12,500 and if you’ve been earning 8 or 9 percent on that, all of a sudden you’re in the $20-some thousand category just by avoiding drinking the $5 latte every day.”

For employees with a 401K plan, it’s easy to have your employer put a small percentage – even 2 percent – of your pay into the plan. In many cases, the employer will match the percentage you invest, which is free money.

“If you put in 3 percent and your employer matches it, you’re making 100 percent of your money just by the match, without the investment return,” says Massaro. “People come to us in their late 40s or early 50s who are finally starting to realize they should have started saving and investing when they were much younger. They could have started with a much smaller amount and been further along in the game. Now they have to really accelerate their savings. Unfortunately, a lot of people can’t retire because they didn’t save enough over the years.”

“People say they don’t have enough money to start investing, but the question is: what are you willing to give up to do that?” says Michelfelder.

 

 

MYTH: It’s virtually impossible to get a mortgage.

We all know mortgage lenders have good reason to be skeptical when it comes to granting mortgages, considering the deluge of customers who defaulted on their loans over the last few years. Not wanting to repeat earlier mistakes, banks are much more careful approving new loans – but that doesn’t mean you won’t get one.

“The difference today versus several years ago is that banks are under much more scrutiny to make sure the loan is completely documented,” says Steve Warrington, vice president of mortgage sales for Fulton Bank. “So loans become harder to get because of the amount of documentation required and the fact that there’s less discretion on behalf of the underwriters. If the loan doesn’t fit inside the box of lending guidelines 100 percent, they won’t make the loan.”

But many people are able to meet the loan requirements – it just may take a little more effort. You will have to provide documentation that proves you are able and willing to repay the loan, including your credit report, pay stubs, bank statements and income tax forms. If you think you can meet the loan requirements, Warrington says to contact your bank to review your options.

“Banks definitely want to loan money,” he says. “They make money by lending money.”

 

 

MYTH: Banks want to foreclose on homes.

When a borrower can’t make monthly payments on a mortgage, the lender has the option to foreclose, meaning the mortgage is canceled and the bank demands either full payment or reclaims the property.

“Because there have been a high number of foreclosures over the past several years, people think banks did this on purpose,” says Warrington. “Banks do not want to own the real estate – they’d rather have the money back.”

Remember, mortgage lenders are not in the real estate business. When the bank is forced to retake the property to try to recoup the money they loaned, they are faced with the upkeep and maintenance of the property, and have to spend more money to find a new buyer.

“That doesn’t benefit the banks in any way,” says Warrington. “Any foreclosures happening today on properties that were purchased in the 2005-2006 period are usually foreclosing at a loss.”

December 2013
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