HELOC vs Cash Out Refinance

The following blog post was written by our interns, Mauria Ferrell and Brady Gray in response to a question we received on a recent Money Talks show. You can listen to the episode here. 

If you need money to consolidate debt or for any other financial goals, there are ways you can access money from the value of your home. Two of the most common ways to pull equity out of your home are through a home equity line of credit (HELOC) or through a cash out refinance. 

A home equity line of credit or HELOC is a line of credit that is tied to your home as the second loan on the property. You are able to take the money out as needed. Think of it as an on-demand loan. HELOCs often come with a floating interest rate tied to the prime rate plus whatever the bank is charging. This could pose an issue for some borrowers as your monthly payment will almost always be different. 

HELOCs work similarly to a credit card by letting you borrow as much as you need, whenever you need it, as long as you do not exceed the set limit. Most banks loan up to 89.99% of the value of the property minus any existing loans. Be sure to shop around at different banks because HELOCs often come with different terms based on the lender. Banks have different borrowing terms, usually around 60 months for HELOCs. When the term is up, you can pay off the loan completely or apply for a new HELOC. 

It is important to remember that this is by no means a conventional mortgage. Lenders have discretion on who they loan to but there is a general criteria that borrowers must meet. Some common requirements are a credit score of at least 700, and a debt-to-income ratio that is under 45%.

When using a cash out refinance, you are refinancing your home to free the equity you have already paid into the home. In this process, you would take out a new mortgage to replace your current mortgage. Let’s take a $500,000 home that has a remaining mortgage balance of $250,000 as an example. You could do a cash out refinance for $400,000 paying off the old mortgage and leaving $150,000 in your pocket. 

Applying for a cash out refinance may be a little harder than getting a HELOC because you are getting a new mortgage instead of a second mortgage. Applicants should have a debt-to-income ratio of 36% or less and have a credit score of no less than 700 and as it increases you will get a better interest rate. Also, it is important that you need to have at least 20% equity in the home to qualify. This type of home equity loan offers fixed interest rates and longer terms creating an easier payback schedule. Keep in mind that closing costs are higher for cash out refinances. 

Deciding which loan is better for you can be hard. Home equity line of credit (HELOC) is a second mortgage that requires an additional monthly payment. Banks are usually more lenient because it won't require appraisal under a certain amount. Cash out refinance replaces your original mortgage with a new loan that is greater than what you currently owe. Interest rates for cash out refinance are typically higher than HELOC because with cash out refinance you are paying back more interest. 

Keep in mind that all banks are going to have different requirements and terms, so be sure to find the option that works best for you. Also, consult a financial advisor to see what fits your needs!

When Should I Take Social Security?

Finally, after a lifetime of working, you are beginning to think about retirement. Congratulations! You made it!  Oh happy day! 

Or maybe your situation is different. You are approaching retirement age, but you love your job. You built your business. You are not ready to hand it over to the next generation. You are enjoying the fruits of your labor. It's not time yet, is it? 

 

These scenarios and so many others may apply to your situation. Whatever your feelings about approaching retirement, every working person is faced with the same question:  When should I take social security? The answer? It depends.

 

There is no one-size-fits-all answer to this question. First, take a look at your overall picture. Hopefully, you have enough saved to support your preferred lifestyle in retirement, but many people do not. How much of your income will social security represent? The larger the percentage, the more importance assigned to the question. 

 

Your first step should be creating an account at www.ssa.gov to be able to view your working credits and see how much your social security payment will be each month, and the different amounts available at different ages. Generally, the longer you wait, the bigger the reward.

Your second step is to look at what you have versus what you will need. Will your income be enough to sustain you in retirement? If you have enough retirement income without social security, then it makes sense to delay your social security check and let it grow as much as possible. Is there a big difference in the amount you would draw initially versus the amount you would draw if you waited? If so, another good reason to wait. Will you continue to work in retirement? If so, postpone your social security benefit. 

 

However, if you need to retire sooner, or if delaying would not increase your draw amount significantly, or if your spouse's income is the greater -  these may all be reasons to take your social security now. Plus, in the future, if you are the surviving spouse with the lower social security amount, you may be able to draw your spouse's social security upon their death. If any of these scenarios would apply to you, it may be time to draw your check!

 

As with any season of life, your income, expenses, upcoming changes in lifestyle, anticipated needs, etc., are all factors when it comes to deciding whether or not to take your social security now or delay it. Not just one answer is right for everyone. Still have questions? Your financial advisor can help you navigate the questions, and you can set sail for your retirement securely!

Saving and Paying for College: A Guide for Parents and Their Kids

The following blog post was written by our interns, Mauria Ferrell and Brady Gray.

Saving for college can be a very stressful process, especially if you aren’t using the tools to your advantage. Today, you will learn about different ways to save for college, and you can pick the one that makes the most sense to go with your financial life.

When discussing saving for college, you have probably heard about 529 college savings plans. 529 college savings plans are tax advantaged investment accounts that let you save and invest for your child’s education. They work very similarly to a Roth IRA. You are investing “after-tax” (after Federal taxes – states may offer a state tax benefit for savers) money, but it grows tax free, and you can withdraw it tax free when paying for higher education expenses. Each state has its own 529 plan that may offer unique tax advantages.

It is important to know that money in 529 plan can only be used for what is considered qualified education expenses. While this might sound very limiting, in actuality, this money can be used for almost all college costs. It can be used to pay for everything from tuition to housing to computers. For more information on what is considered a qualified expense, search on your college or university’s website to find the cost of attendance. 

Mississippi has their own college savings plans through the treasurer’s office. They are the Mississippi Affordable College Savings Plan (MACS) and the Mississippi Prepaid Affordable College Tuition Plan (MPACT). Each of these plans have different advantages to offer.

The MACS plan is a savings account that anyone can open for a particular beneficiary, and you only need $25 to get started. Mississippi taxpayers may deduct up to $10,000 from their state income taxes for deposits. The deposits can be invested, or just saved as cash if the beneficiary is closer to college age. The growth is tax free as long as it is used for qualified education expenses.

The MPACT plan is much different. The main advantage to this plan is that it allows you to lock in today’s tuition rates and begin paying in advance. The sooner you open this account, the less your payments will be. Contributions to this plan can also be used to lower your state income tax.

Overall, these are two great plans offered by the state of Mississippi. Talk with a financial advisor to see if this is an appropriate account for you and to see how much you should be saving.

If these are not an option for you, there are other grants and scholarships to consider. Unlike loans, scholarships and grants do not have to be paid back. There will be many scholarships offered by the college your child wants to attend and most of them will require essays. Most scholarships are awarded for academic and athletic achievements, extracurriculars, and community service and will require essays. 

The main difference between scholarships and grants is financial need. Grants take into consideration the family’s financial situation. The most well-known grant is the Federal Pell Grant. By filling out the FAFSA(Free Application for Federal Student Aid), the government grant programs award money based on their financial need. The current maximum Pell Grant is worth $5,775. The amount they get from the Pell Grant is not affected by any other financial aid they are awarded. The FAFSA must be filled out every year for your child to receive grants or loans.

How does the Federal Reserve work?

 The following blog post was written by our interns, Mauria Ferrell and Brady Gray. This is Part 2 of their series on the Federal Reserve.

As we talked about in Part I, the Federal Reserve is a central bank. They have a process they use to control the amount of money in the economy. The Fed can “create” money by giving commercial banks money to lend out to consumers. On the other hand, they can take money away from the banks, resulting in higher borrowing costs and effectively “destroying” money. The Fed is constantly trying to find a solution to keep our economy stable. It’s a continuous cycle that never ends.

Right now, they are trying to destroy money. During the pandemic we saw record low borrowing costs. That paired with fiscal policies of the government has created high inflation that we are seeing today. The Fed is trying to combat this inflation hike by destroying money and making the cost of borrowing higher. 

The Fed uses three main tools when conducting monetary policy. They are reserve requirements, open market operations, and the discount rate. They are used to grow or shrink the economy. Reserve requirements are the amount of cash that a bank must have on hand at any time. Open market operations refer to the practice of buying and selling U.S. Treasury securities. The Fed relies mainly on open market operations because this is how they purchase or sell bonds. The Federal Reserve also sets the discount rate also known as the Fed funds rate. It is charged to banks for the short-term loans they take from the Federal Reserve Bank.

What is the Federal Reserve?

The following blog post was written by our interns, Mauria Ferrell and Brady Gray. This is Part 1 of their series on the Federal Reserve.

The Federal Reserve is the central bank in the United States. They are in charge of regulating the financial system across the nation. The Federal Reserve was created to facilitate healthy economic growth, while managing to keep inflation and unemployment rates low.

So, what is a central bank? It is the bank at the center of the financial system across the United States. It is your bank’s bank. Our central bank is run by 7 board members that are appointed by the president and confirmed by the senate. The board members purpose is to conduct monetary policy. Also, it is good to know that there are 12 districts that hold 12 Federal Reserve Banks across the country.

Other countries have central banks that operate similar to ours. Some have their differences when it comes to things like managing growth and influencing value of currency in their nations. For example, the European Central Bank gives their market early notice before they make any changes to interest rates. Also, they try to keep the annual growth in consumer prices below 2 percent, unlike the Fed. 

Monetary policy refers to the measures taken by the Federal Reserve to achieve economic stability. Their goal is conduct monetary policy in a way that influences the economy to have stable prices, inflation, and employment. They want to make sure the financial system is healthy and that they are doing what is in our best interests. They do this by overseeing and managing the financial industry across the nation.

They have the power to influence the nation’s supply of money. Stay tuned for Part II of the series as we will discuss how all of this happens.