When you need cash-not the 50 bucks you get from an ATM to tide you over for the day but, rather, $5,000 or $10,000 to handle an emergency-what asset or resource will you tap into to get it?
Historically, the answer to that question was a home-equity loan.
This was the normal course of action, because most people had built up lots of home equity. Prior to 2008, it was routine for many to discover that their houses had increased in value by 50 percent or more even if they had owned them only a decade or so.
Therefore, if someone needed $20,000 or $30,000 for an addition to the house, to help pay their children’s college tuition or to cover a medical bill, it was easy enough to tap into that equity. And with interest rates at historical lows, they could do it and still keep their mortgage payments steady.
Well, those days are long gone. It’s all thanks to the 2008 credit crisis, which caused many to lose their houses or watch their values plummet to the point that substantial home-equity loans were no longer so readily available.
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So if you need cash now, where are you looking to get it?
Unfortunately, retirement accounts have replaced the home-equity loan as the predominant source of cash today. They have become America’s new piggy bank.
We know this because the IRS collected $5.7 billion in penalties in 2011 for early withdrawals from 401(k) plans and other retirement accounts. (This is the latest data available.) The penalty for withdrawing before age 59½ is 10 percent, so this means that Americans in 2011 withdrew $57 billion from their retirement savings long before they were supposed to.
If you’re considering borrowing from your 401(k) retirement plan, you are most likely thinking: “What’s the harm? I’m just borrowing from myself.”
Read More Little-known 401(k) investment options
Well, think again. Nothing could be further from the truth.
Borrowing from your retirement plan for any reason-no matter how serious that reason may seem to you-will hurt you in the long run. It’s a sure way to destroy your retirement savings and put you at risk of having a lot less money than you had planned for in your golden years.
Here are my top 10 reasons why you should never, ever borrow from your 401(k) plan:
Borrowing defeats the purpose of the account. The money is there for one reason only: to provide for your retirement. No matter how urgent you think your present situation is, it will be nothing compared to what you’ll experience when you’re in your 70s or 80s without adequate funds. You simply must find another solution to today’s problem.The magic of compounding will be lost. Pulling money from your 401(k) means that you’re selling some of your investments. If they continue to rise in value, you won’t get the profits and the compounding power that goes with them.You’re likely to sell low and buy high. As you pay back the “loan,” you’re rebuying the previously sold shares-but at current (and probably higher) prices. You shouldn’t need me to tell you that that’s the exact opposite of what an investor should do.You will be charged added interest and fees. Most plans charge an origination fee of $75 regardless of loan size, and this goes to the administrator-not back into your account. Thus, if you borrow $1,000, you’ve lost 7.5 percent right away. While the interest you pay, which is based on prevailing rates (about 5 percent for many plans last year), goes back into your account, that’s money you otherwise could have invested for potentially higher returns. So paying interest-even to yourself-reduces the amount of wealth you could otherwise generate.Contributions could be suspended. Many plans won’t allow you to contribute to your 401(k) until you’ve paid off your loans. In some cases that could mean years, during which period you’ve lost the advantage of reducing your taxable income.Your take-home pay will be reduced. Most plans require you to start repaying your loan via automatic paycheck deduction starting with your next pay. Thus, your take-home pay is reduced, possibly by more than the amount you were contributing to the plan before. And this repayment isn’t tax-deferred, so your taxes could rise, lowering your net pay even further.Failure to repay by the deadline will trigger a tax risk. Most 401(k) plan loans must be repaid within five years. If you fail in that, your employer will treat the loan balance as a distribution, triggering income taxes and the 10 percent early withdrawal penalty if you’re under age 59½. You could also be forced out of your plan and prevented from contributing in the future.There’s additional risk if you quit or lose your job. If you leave your employer, the loan will be due within 90 days. But wait-you’ve already spent the money. If you don’t meet the deadline, the IRS will consider the unpaid balance to be taxable income, and you’ll face the same tax issues previously noted. And now you’re in trouble with an unrelenting lender-the IRS.You’ll incur double taxation. Loans from your 401(k) actually cause you to pay taxes twice. Why? Because you’re repaying with after-tax money and then later, when you withdraw the funds in retirement, you’ll pay taxes on that same money again.You will still be in debt. If you borrow from retirement savings to pay off other debts, you’ve simply exchanged one debt for another-and taken on all the above disadvantages in the process. A study by T. Rowe Price found that borrowing $10,000 from a retirement plan will reduce your account balance at retirement by $100,000.
A 2013 Fidelity study pointed to yet another danger: It found that, of 180,000 who took out 401(k) loans over the past 12 years, 66 percent took out more than one loan, 25 percent borrowed three or four times, and 20 percent did so five times or more. Thus, initial borrowing could put you in danger of becoming a repeated borrower, thereby causing even greater damage to your retirement savings.
Read More Are you prepared to retire? Take this quiz
So for all these reasons, discipline yourself to avoid borrowing from your 401(k) retirement plan or any other workplace retirement plan-no matter how badly you need cash.
Find another way to get the money you need. By doing so, you’ll come to appreciate what a huge favor you did for yourself by allowing your account to grow without setbacks. And it will make for a more comfortable retirement.
-By Ric Edelman, special to CNBC.com. Edelman is founder and CEO of Edelman Financial Services.
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SAN DIEGO, Calif., May 31, 2014 /Emag.co.uk/ — LoanLove.com is a borrower advice website that strives to empower home loan borrowers with first class information, valuable resources and connections to top rated industry professionals. Their articles offer in-depth knowledge in an easy to understand package which has quickly turned the website into a trusted destination for current news and expert loan advice. Down payment can be hard to come by for home buyers, and the experts at Loan Love know this. In their latest featured article, titled “Home Loan Down Payment Assistance (Know Your Options)” Loan Love offers to readers only the best home loan down payment assistance options among other financial advice tips.
A home down payment is nothing to scoff at, as the article states: “Pulling together a sizable stash of cash can sometimes stop a prospective homebuyer in his or her tracks. Unless you qualify for certain loan programs that require little money down, you’ve probably found coming up with your down payment to be the biggest challenge standing between you and home ownership. But there are several avenues to consider for home loan down payment assistance.”
The article goes on to say that before a home buyer searches for home down payment assistance, they must consider their options carefully. Specifically, ome buyers must first ask themselves the following four questions:
- “Are you able to verify beyond any doubt that the source of your down payment is legal and not a scam?
- Has your bank lender or mortgage broker confirmed that your potential source is an approved one, according to the rules of your particular loan program?
- Have you reviewed your plan with a certified public accountant to determine impacts on your taxes and/or retirement account, as applicable?
- Are you prepared to keep a detailed paper trail of any transactions for both your lender and for tax purposes?”
With that in mind, there are many low-risk options when it comes to down payment, home owners only need to know where to look first. The article shows a number of ways home buyers can get a down payment on a home which includes:
“Investigate state and local housing incentives. Depending on your location and situation, there may be state and local housing incentives, grants or special loan programs available to you. These change frequently, but your real estate agent is an excellent source for this type of information.
Maximize your savings. The traditional route for coming up with a down payment is to save a specific amount each month until you’ve got enough to get financing. Automatic deposits into your savings account out of each paycheck is a convenient way to grow your savings.
Liquidate unnecessary assets. Do you have a boat, jet ski, cycle or other toys? Now is the time to consider sacrificing a few of these goodies in the short-term to make your longer-term dream of home ownership come true.
Sell off other investments. If you have stocks, mutual funds, bonds and other taxable investments, sell these before you consider sources that carry tax penalties, like dipping into your 401(k).”
Other opportunities are also available for easing a down payment. An example of this is borrowing from a 401(k). Other opportunities include negotiating with the seller of the home. These are just a few ways to make the home down payment process easier. To learn more on what are some the best home down payment assistance options available, please visit LoanLove.com for the complete article.
Media Contact: Kevin Blue, LoanLove.com, 949-292-8401, firstname.lastname@example.org
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San Diego, CA (PRWEB) May 26, 2014
A new article from Loan Love takes a look at the options that home buyers have available when it comes to home loan down payment assistance. This new article titled “Home Loan Down Payment Assistance (Know Your Options)” continues to further the borrower advice website’s goal of helping borrowers to find loans that they will love by empowering them with first class knowledge, access to valuable resources and connections to top rated industry professionals.
The new guide to home loan down payment assistance says, “Pulling together a sizable stash of cash can sometimes stop a prospective homebuyer in his or her tracks. Unless you qualify for certain loan programs that require little money down, you’ve probably found coming up with your down payment to be the biggest challenge standing between you and home ownership. But there are several avenues to consider for home loan down payment assistance.” The article continues, “Before you settle on one or more pathways for coming up with sufficient cash for your down payment, be ready to put each potential source to the test by asking the following questions:
1. Are you able to verify beyond any doubt that the source of your down payment is legal and not a scam?
2. Has your bank lender or mortgage broker confirmed that your potential source is an approved one, according to the rules of your particular loan program?
3. Have you reviewed your plan with a certified public accountant to determine impacts on your taxes and/or retirement account, as applicable?
4. Are you prepared to keep a detailed paper trail of any transactions for both your lender and for tax purposes?
Once you’re ready to keep these four questions in mind, you can move forward by carefully considering your options for securing enough to cover the down payment on your new home.”
So what are the best home loan down payment assistance options? The Loan Love guide outlines some of the low-risk ways to procure help with a home down payment, such as state or local housing incentives, cash provided by family or friends, selling any unnecessary high priced items, cashing in investments, or simply saving up the good old fashioned way. Using one or a few of these options may be the best way to go about financing a home down payment, and those who wish to buy a home should look at these options first. However, there are other opportunities available, but they may be a bit more complex, require more documentation, or have heavier taxes involved, depending on the scenario.
For more detailed information on the pros and cons of these various home loan down payment assistance programs and strategies, click here to read the full guide at LoanLove.com.
Shelve sentiment and check out whether reverse mortgage or selling your home will lift your lifestyle
Senior citizens who have not saved enough for their retirement and don’t have regular cash inflows could face a financial squeeze in their golden years. But of help can be the house you own and live in. You can sell it, buy a cheaper house in a distant place and invest the balance for regular cash flows.
But if you are averse to shifting out of the area you live in, or are not comfortable moving into a smaller house, you have two options. You can take a reverse mortgage loan on the house, or sell it and move into a rented accommodation in the same vicinity. Both choices have their pros and cons.
With a reverse mortgage loan, you get regular income even while living in the same house. Factors such as the value of the property , the loan-to-value ratio, and your age determine the loan amount. Based on this, you get monthly cash inflows. The bank recovers the loan (from sale of the house) along with interest after you and your spouse pass away or move out. The excess, if any, is returned to legal heirs. Your legal heirs can choose to pay the loan dues and get back the property. It is better to opt for the reverse mortgage loan-enabled annuity scheme than the normal reverse mortgage loan scheme.
The annuity scheme, run by banks in tie-ups with insurance companies, can fetch you higher monthly inflows. Say you are aged 60 and take a reverse mortgage loan of ?30 lakh (at 60 per cent loan-to-value on a house valued at ?50 lakh).
The monthly payment under the annuity scheme, for example, can be up to ?19,500 per month (Star Union Dai-ichi Life Insurance-Central Bank of India). In contrast, the normal reverse mortgage loans offered by banks will get you less than ?3,000 a month.
Besides, annuity schemes give you cash flows as long as you live, unlike the 20-year cap in normal reverse mortgages.
Also, since October last year, payments from the annuity schemes are exempt from tax. Your house will be periodically revalued; this could make you eligible for higher monthly inflows. But reverse mortgage has its drawbacks.
You cannot bequeath the house. The loan dues could add up to a significant sum, especially in the annuity scheme; your legal heirs may not be able to pay this. You will have to bear ongoing expenditure such as insurance charges, taxes, maintenance and statutory payments toward the house.
Besides, there are restrictions regarding the use and maintenance of the house. You cannot rent it out. The loan can be foreclosed and the monthly payments stopped under situations such as bankruptcy, and non-payment of taxes and other dues. A similar provision restricts you from adding a new owner to the title. Finally, with rising prices, there is a risk that the monthly inflows may fall short of your requirement in the future.
Sell and rent
Selling the house and renting a similar accommodation in the same locality can also be worthwhile. The proceeds from the sale can be parked in safe debt instruments and the interest income used to pay the rent. Consider the above example where the house is valued at ?50 lakh. On sale of the house, you may have to pay capital gains tax. If your net realisation is ?45 lakh and you park this in fixed deposits, interest income after tax could be nearly ?4 lakh a year or about ?33,000 per month. Annual rentals are usually around 3-4 per cent of the house value. This means your annual rental outgo could be between ?1.5-2 lakh a year, or between ?12,500-16,500 a month. After paying the rent, you will still be left with ?16,000-21,000 a month for other expenses.
The problem with the sell-and-rent option is that your rental expense is likely to increase every year unless you are able to enter into longer agreements. Also, interest income from your investments will fall if rates decline.
These factors could force you to dip into the investments to meet rising costs. But this will reduce your regular interest income. So it is imperative to control other costs and keep an adequate buffer for contingencies in future years. There could also be the nuisance of having to shift houses if the landlord asks you to leave. Finally, even in the sell-and-rent option, you can not bequeath the house, though you could bequeath your remaining investments.
The better choice
From a financial point of view, selling and renting makes more sense, since it puts more money in your hands. On the other hand, a reverse mortgage loan will be more convenient operationally ? you get to stay in your own house while monetising it.
(This article was published on May 4, 2014)
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Such loans do not need any documents, facsimile or credit check to be conducted in the lendee. All these are unsecured loans, that help you during your financial crunch, until the following payday. As they may be short-term loans, a person does not need to be worried about the long-term loans or multiple payments.
We ended up using all of our taxes that year to catch up on all the fees and to pay off this loan. Because every week we did not have the money to pay it back so we would need to take out another loan. This added to the costs. It was a nightmare.
There are several places to find payday loan businesses. Normally by just checking the phonebook under loans or lenders you can find multiple services near you. If you cannot locate one there are many payday loan companies which operate in an internet environment. Internet cash advance firms have become much more well-known modern times. They also can provide working it is to you and normally directly deposited your payday loan in your own checking account. This method typically takes just 24 to 48 hours.
The mechanism for that loan is rather simple. All you’ll have to do is hunt to get a lender in the nearby locality and fill in the application form. Another choice is that you can fill in the form online. The lending institution will go through your identification and can get a credit report for those who have started sing credit related ability. The financial institution might also go through your current account. When the loan amount is very large then you might need to vow an asset as a collateral. The lender will send you a suggestion combined with the rate of interest. You would have to give your approval pay day loans, upon which the sum will likely be deposited into your bank account. The entire process only takes a couple of hours.
Conventional loan is a good alternative if you have exceptional credit. First time home buyer in a conventional loan has to pay the down payment including 5% to 20% of the buying cost of your house. But in case the first time home buyer features a high credit score, he/she can get an advantage of lower interest levels. Farther, with respect to the creditworthiness of the purchaser, rates of interest may also decrease.
Among the biggest plus purposes of an FHA loan is the low down payment than most other mortgage loans offered by financial institutions. You may get this loan by putting down as low as 3 percent of the home price payday loans uk, as your deposit.
Finding a great and inexpensive rate also depends upon the kind of loans that you’re looking to combine. When the loans have a lower interest rate, then the consolidation isn’t going to cause much of a difference. Nevertheless, if the loans have a high-interest rate, then consolidation will make them .
With the help of this loan, a property or the real estate may be renovated. This renovation makes the house elegant and comfy. The biggest advantage of applying for it in the long run is the market value of the property is definitely on a very high point, to the graph of real estate prices. The life span same day payday loans of this kind of improvised property can be regarded as long.
The only requirements for getting a no fax payday loan are steady employment, monthly salary of at least $1000, valid checking or savings account, be at least 18-years old, and don’t have any outstanding cash advance balances.
Bear in mind that you have to undertake a lot of research, before you choose a moneylender who offers you loans that satisfy your needs. Just like thousands of other Americans, you also can get a no fax cash advance, nearly instantly. Such loans prove to be a godsend for those people who are put in a short term fiscal catastrophe.
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Posted on March 22, 2014 by
Just discovered you’ll be getting a tax refund? Don’t let your enthusiasm for spending that unexpected money get the better of you.
Some taxpayers, upset at the delay until Jan. 31 of the start of the federal tax-filing season, might consider offers to get their refund money sooner via private programs. In recent years, attorneys general have filed suits against refund anticipation loan, or RAL, operations for failure to disclose full costs of the products to consumers. Consequently, RALs are effectively unavailable. But alternatives, such as refund anticipation checks, remain and, say consumer advocates, can be just as costly.
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Thanks to today’s technology, there’s really no need to pay extra just to get your hands on your tax money a tiny bit sooner. If instant cash is more a desire than a need when considering a quick refund, consider these alternatives:
Go electronic. Abandon the traditional paper return sent via the U.S. mail and file from your computer. You’ll get the money almost as fast as you would with a refund anticipation loan and get it without paying any loan fees or interest. In fact, you may not need to pay for anything. An Internal Revenue Service partnership with tax preparers and software companies offers free online tax preparation and e-filing to some taxpayers. For the 2013 filing season, the Free File program kicks off Jan. 31. Last year, the income cutoff was $57,000, regardless of filing status. An inflation adjustment of $1,000 increases that amount slightly to $58,000.
For the past few years, the IRS has also expanded the online program to include taxpayers who make more money. Via the Free File Fillable Tax Form option, anyone, regardless of income, can enter their tax data onto online forms and then file them for free directly with the IRS. This is not a tax software program, but simply blank forms you can use via computer, and file directly, rather than filling them out by hand.
The IRS says that any e-filing option you use will get you your tax refund much more quickly than mailing a paper return. Whereas paper filers could wait up to eight weeks for their refunds, most electronic filers can expect their tax checks to show up in their mailboxes in half that time or less. The agency also points out that the error rate is less than 1 percent for electronic filers.
Direct deposit. Electronic filers who opt for a refund via direct deposit do even better. The IRS says the money generally shows up in taxpayer bank accounts in 10 to 14 days. Even if you file the old-fashioned paper way, having your refund deposited directly into a bank account cuts the time you have to wait for your tax cash. Plus, it’s added protection against lost or stolen refund checks sent via the mail.
Use store financing. If you want your refund to finance a must-have new appliance, store interest rates usually will be better than a refund anticipation loan. Many stores offer free financing for limited time periods. By then, the refund should have arrived and you can use it to pay off the store credit — and pay no interest at all.
Impatience usually wins. “Theoretically, with electronic filing and quicker turnaround on refunds, the need for tax anticipation loans has become obsolete,” says John L. Stancil, CPA and professor of accounting at Florida Southern College in Lakeland.
But ultimately, a refund anticipation product is a personal preference, not a fiscal issue for taxpayers. The prospect of cash a few days earlier appeals to those who value speed over cost, such as the person who stands impatiently in front of the microwave complaining that it’s taking too long for dinner to be ready.
Companies that offer quick refund options are well aware of such impatience, and that’s why some opportunities survive even as electronic filing increases, especially in the past two years when official filing was delayed.
But if you can squelch your refund appetite for just a few days, then you — and your bank account — will be better off.
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When your uncle loans you $10,000 to tide you over, is it taxable income? Nope. What about when the bank loans you $100,000? No again. That’s provided it’s a real loan and not income. That’s a key distinction that lands lots of taxpayers in trouble.
But if it’s a real loan and is forgiven, it is income then. That’s cancellation of debt income, often shortened to COD income. You got cash when you borrowed the money. Then when you don’t have to repay it, that cash is no longer loan proceeds.
The tax code generally taxes you when you are relieved of paying back a debt, treating it like cash paid to you. See 10 Things About COD Income. This unpleasant rule might seem easy to ignore, except that when a loan is forgiven, you’ll generally receive a Form 1099-C reporting income to you—and telling the IRS. If you receive one and disagree with the amount shown, write the lender requesting a corrected Form 1099-C showing the proper amount of cancelled debt.
Don’t ignore Forms 1099. In some cases COD income isn’t taxed. If you believe the cancelled debt isn’t income because you’re insolvent or for any other reason, you’ll need to address this on your return.
If you receive a loan, can the IRS claim the “loan” you received—that is still outstanding and hasn’t been forgiven—isn’t a loan and was actually a sale? In other words, can the IRS claim that “loan” proceeds are really sales proceeds and therefore taxable?
Sometimes, yes. That’s exactly what happened to Jonathan Landow. Landow took out a 90% loan against securities he put up as collateral. The loan was non-recourse—meaning that Landow could not be sued personally if he defaulted. Yet the securities were pledged as collateral.
In fact, the lender had the ability to sell the securities in ways that were unusual for garden-variety loans. And that’s just what the lender did, even though Landow later claimed he had no idea his securities would be sold. Landow didn’t pay off any of the $13.5 million principal amount of the loan.
He also didn’t report the “loan proceeds” as income. The IRS claimed the loan transaction wasn’t a loan at all and instead was a sale. The Tax Court agreed with the IRS, treating the putative loan as a highly orchestrated transaction. They court thought everyone knew the transaction would be documented as a loan but really amounted to a sale.
How real is the danger that will IRS will treat loans as sales? In transactions like Landow’s, very. Landow’s deal was part of a litigated and controversial tax shelter that produced a series of cases. See Shao v. Commissioner and Kurata v. Commissioner. In that sense, the result in Landow’s case was no surprise.
How you structure a transaction is important, as is how the transaction actually plays out. In general, courts look to indicators such as whether legal title passes, how the parties treat the transaction, and the parties’ intent. There can also be danger in simple family transactions.
But there, the question is often whether something is a loan or a gift. Gifts may not trigger income tax, but they can trigger gift tax. Loan vs. income vs. gift? Think about taxes up front, and document what you intend. Everyone will be better off.
You can reach me at Wood@WoodLLP.com. This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.
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Most of us will face a cash crunch at some point in our lives. An unexpected bill or loss of income puts us into a position where we need a quick cash infusion.
When you face one of those times, try one or more of these quick cash solutions:
1. The first solution is the obvious one: Sell something.
Think beyond the simple yardsale. Websites such as Craigslist and eBay make it possible to get good prices for quality items. The trick is to find things you own that are worth more than a few dollars. Pretend you’re going to be on the “Antiques Roadshow.” Do a little Internet research on items that you think might have value.
When it’s time to sell, remember that collectibles will do better in a virtual auction, since more buyers will compete for your item. Heavy furniture or other items that are difficult to ship should be sold locally.
And don’t limit yourself to Internet sales. Consider specialty stores for some items. Electronics and tools might do well at a pawn shop. Your local jeweler might be interested in the broach you inherited from Aunt Agatha.
2. Look for money that’s due to you or you can borrow.
You were probably asked for a deposit when you began utility service on your home. If you’ve been consistently on-time with your bills, a company may give your deposit back early. Call the utility to find out.
Also check for unclaimed property. We live fast-paced lives and move often. Because of that we can unintentionally leave behind deposits, small accounts and refunds. The National Association of Unclaimed Property Administrators says 2.5 million claims for more than $2 billion was recently returned in just one year, and the average check was $892. Look for unclaimed funds at usa.gov.
3. Evaluate your tax deductions and 401(k) plan.
If your cash crisis is likely to be short term, consider changing your deductions to reduce income tax withholding. You will have to pay back the loan when your taxes are due in April, but it will increase your take-home pay until then. Ask your human resources department how it works.
If the problem is longer term, you might want to consider borrowing from your 401(k) plan. The law and most plans allow you to take a loan and repay it over time. Interest rates are governed by law but generally aren’t very high. The biggest drawback is that the whole loan must be paid if you leave or lose your job.
4. Add an additional source of income.
If the crisis is big, this may be your only choice. Your best option might be to take on a part-time job. Even if the pay is low, you’ll have a steady, predictable income source.
A less certain option, but one with more upside, is to offer a skill you have to friends and family. Whether it’s sewing or carpentry, letting people know you’re available for hire should generate some work for you. You won’t know from week to week how much you’ll make – and you will need to check with your local government to see what licences are needed – but if you can find enough work, you might make more working for yourself.
5. Offer a room for rent.
This cash source doesn’t require an additional job – just a little sacrifice. Taking in a roommate is a serious step that will change your lifestyle, but it can be a good regular source of income. Depending on where you live and your home, you could score hundreds of dollars each month.
Whatever your cash crunch, try these tips to bring a little extra into your account this month.
Gary Foreman is a former financial planner who founded The Dollar Stretcher website and newsletters. The site features thousands of articles on how to save your valuable time and money, including an article onwhen you’re desperate for [...]
With many pointing to the housing market as the backbone of the economic recovery, investors are flooding the market with all-cash offers and it’s squeezing out many traditional homebuyers.
“People are worried about the returns on alternative investments,” says Karen Dynan, vice president and co-director of economic studies at the Brookings Institute. “There is still a lot of uncertainty about bonds and the stock market, which makes the housing market look good.”
According to the National Association of Realtors May 2013 Confidence Report, all-cash offers account for 33% of home sales, with international buyers taking the lead. In addition, 87% of surveyed realtors say they are expiring constant or increasing home prices.
Homebuyers, particularly first-time homebuyers, are already battling low inventory and rising home prices, but the added pressure from investors creates stiff competition.
William Delwiche, investment strategist at Baird Research & Insights, says cash buys are being bolstered by investor pools snapping up real estate, and less so by individuals looking to live in the home. ;
“These are investment pools paying cash for houses to hopefully get returns,” he says. “It’s not necessarily a trend among individual homeowners because most people going to buy houses don’t have that kind of cash sitting around.”
And for sellers, an all-cash deal is ideal since is cuts down on complications, says Patrick Newport, U.S. economist at IHS Global Insights.
“If you own a home and are selling yourself, it’s probably easier if someone pays you cash—it cuts out the messiness and having the homebuyer get approved for a loan.”
Typical cash buyers are either young people who come into a lot of cash, or international investors, he says.
A Market Turnaround?
Cash buys signal a housing market that people are more willing to invest in, says Delwiche, but the market’s attractiveness may also be due to a lack of other solid investment options.
“The housing market is recovering, but people are also looking to diversify their portfolios,” he says. ; “They don’t’ want to put it all in stocks and bonds.”
It’s a sign that people are under the impression the market is turning around, says Dynan, which may be a self- fulfilling prophecy if enough investors follow.
“A lot of those cash investors are looking for a return,” she says. “If a lot of people think home prices will rise, they will put money into the market, and that increases demand and pushes up prices.”
Economic Benefit or Bust: Long and Short-Term Effects
The cash-buying trend also gives the overall economy a short-term boost, according to Delwiche.
“This helps to bid up asset values for houses, and is good for homeowners who already own houses,” he says. “There is also a benefit to state and local government finances because of the taxes associated with these purchases.”
Dynan says the trend will reinforce the momentum in the housing market, but will impact hopeful first-time homeowners negatively in the future.
“It just makes the housing market less affordable,” she says. “It’s good for the overall economy, but not for every person in the economy.”
Delwiche agrees, and says it may prevent more people from getting in to the market in the future.
“Home prices go up and it affects housing affordability,” Delwiche says. “You can’t have first-time homeowners who are seeds for long-term growth, because they are then crowded out of the market. So short term it’s something of a positive, but is a headwind for first-time homeowners.”
Delwiche says he’d be surprised to see the trend continue, as well.
“It’s just a reflection of poor alternatives for investment dollars,” he says.
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Dear Driving for Dollars, ;
I want to trade in my car for a new one, but I still owe about $11,000. How do I figure out if I have to put down any cash as a down payment on the new one or if I can just use my trade-in as the down payment alone?
Dear Joann, ;
The key to your question isn’t just how much money you owe on your car but how much your current car is worth. For example, if your current car is worth $12,000 and you owe $11,000, you have $1,000 that you could use as a down payment toward a new vehicle. This is the equity you have in your car.
Calculate your car’s value, including its options, mileage and condition, on all of the independent vehicle pricing sites and print out copies of the prices. You should expect the dealer to offer you an amount that is similar to the trade-in values listed for your car. Use the pricing data you’ve gathered to negotiate for a higher amount if the dealer gives you a low offer.
Whether the equity you have in your car is enough for you to avoid putting cash down as well as trading in your car will vary based on the cost of the new car you are buying and your credit score. If you have terrific credit, you may be able to finance almost the entire new-car loan and still get a good interest rate. Even so, you may not want to because financing almost the entire sale price of the car or more is not the smartest financial move. Financing the full price, especially if you roll your taxes and other fees into the car loan, will mean you are immediately “upside-down” on your car loan where you owe more than the car is worth.
Try to put down at least 10 percent of the car’s sale price, plus all the taxes and fees associated with the purchase, to avoid having an upside-down car loan. Putting down as much as you can will reduce your monthly payment and also will save you money on the interest on the car loan.
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If you have a car question, email it to us at Driving for Dollars. Read more Driving for Dollars columns and Bankrate auto stories. Follow her on Facebook here or on Twitter @SheDrives.
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