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How Your Credit Score Affects Your Mortgage Rate

Without a high credit score, you won’t qualify for the best mortgage rates available, which could mean you’ll end up paying more money over the term of your mortgage. Even with rates at historic lows right now, the difference between 3.5% and 3.75% can add up, especially if you’re applying for a 30-year fixed-rate mortgage.

Why does your credit score matter to lenders?

Along with a low debt-to-income ratio and a strong financial history, a high credit score gets you a low mortgage rate. But why?

You’d probably be hesitant to lend money to a friend who usually takes forever to pay you back — or doesn’t pay you back at all. Lenders feel the same way when it comes to mortgages. They want to lend to people who have a record of on-time payments to creditors.

“If somebody has a high credit score, what that shows us is that they’ve been good on meeting their obligations, whether it be credit cards, car loans or other home loans in the past,” says Brian Hoovler, a loan production partner with People’s Home Equity in San Francisco. “It means we’re more likely to want to give you a loan, because we know you’re going to pay us back.”

Your credit score is calculated most often with the FICO scoring model, and is derived from the information on your credit reports, which are compiled by credit reporting companies. Your reports include a history of your payment habits with borrowed money.

Your credit score is “one of the most important parts to qualify,” says Michelle Chmelar, vice president of mortgage lending with Guaranteed Rate in New York. “But it is a part. You have to have the whole package: income, sufficient assets and credit.”

Best scores for conventional loans

“Typically, when you have a score of 700-plus, you’ll get a pretty good interest rate,” says David Lin, a former director of risk management for consumer credit at Barclays and Citibank. He says that while you can still qualify for certain loans if your score is under 680, the 700s are where you want to aim in order to pay the lowest rates.

If you’re at the top of the scale, say 720 or above, you’re in the territory known as excellent. As you move down toward 700, your score is considered good. Once you get to 680, you’re heading toward average, and if you’re closer to 640, you might have trouble getting a conventional mortgage from a bank or online lender, Chmelar says.

The lending industry carves up the credit score scale into 20-point increments and adjusts the rates it offers borrowers each time a credit score moves up or down by about 20 points. For instance, if your score drops to 740 from 760, you’re likely to see a small bump up in the rate you’ll be offered. In the industry, this is called “loan-level pricing,” and every time you go down a level, there’s an increase in costs, according to Hoovler.

“If you have a score of 760 or above,” Hoovler says, “you’re pretty much golden. From there down, every 20 points you’ll start seeing small hits here and there.”

Chmelar offers up a scenario to illustrate a 100-point difference in credit scores:

A borrower with a 20% down payment is applying for a 30-year, fixed-rate, $300,000 loan to purchase a single-family home in Westchester County, New York. She has a 780 FICO credit score, which gets her a 3.5% rate. Out of pocket, that’s $1,347 a month.

If the borrower’s score dropped by 100 points to 680, her rate would bump up to 3.75%, and her monthly payments would increase to $1,389, an extra $42 a month, or $500 per year. “That’s a lot of fun at Starbucks,” Chmelar says.

The impact of the difference in the rates may not seem significant at first, but added up over years, you could end up paying a lot. For example, Chmelar’s 100-point-drop scenario has the borrower paying an additional $15,120 over a 30-year period.

If your score is already good, however, you should consider taking the rate you qualify for. “The difference between a 710 and a 750 score is not so huge that you should wait to raise it,” Hoovler says. If mortgage rates go up while you’re fine-tuning your credit score, “the increase is in all likelihood going to offset any benefit the higher credit score gives you.”

Other loan types

With conventional loans — those backed by Fannie Mae and Freddie Mac — a lot of focus is put on your credit score, according to Dan Keller, a mortgage advisor at New American Funding in Seattle.

Government-insured FHA and VA mortgages, on the other hand, may accept a score as low as 580. The impact of that lower score won’t be as substantial as it would be with a conventional loan, Keller notes. He says to get the best interest rate with an FHA or VA loan, the focus isn’t on a 760 score as it is with conventional loans — it’s on 700+.

So, there’s some leniency when it comes to credit scores and underwriting guidelines with government loans. But the loan fees are more expensive: You’ll have to pay private mortgage insurance, as well as an upfront and an annual mortgage insurance premium.

Jumbo loans — loans that exceed conforming limits imposed by Fannie and Freddie — have stricter credit score requirements. “Ideally you’d want to be at 760 or above for a jumbo loan,” Hoovler says.

But those credit score guidelines don’t tell the whole story. Most lenders have what are known in the industry as “overlays,” which are extra requirements or standards that allow them to require higher credit scores as a precaution, regardless of loan type.

Hoovler says these overlays vary widely from company to company, and if a borrower fails to meet overlay requirements with one lender, it doesn’t mean a mortgage is out of reach. “Just because one lender says you’re not qualified doesn’t mean you can’t get a loan,” he advises. “It just means you may have to do some more digging to find somebody who’s willing to work either with your credit situation as is, or is willing to help you find someone who can put you into a better credit situation.”

How to improve your credit score

Here are some of the best ways to improve your credit score:

  • Make payments, including rent, credit cards and car loans, on time.
  • Keep your spending to no more than 30% of your limit on credit cards.
  • Pay down high-balance credit cards to lower balances, and consider balance transfers to free up credit.
  • Check for any errors on your credit report, and work toward fixing them.
  • Shop for mortgage rates within a 30-day period — too many spread-out inquiries can lower your score.
  • Work with a credit counselor or a lender to improve your score.

“The number one way to improve your credit score is to look at your balance-to-limit ratio,” Keller says. “For example, if you had a credit card with a $10,000 limit, and I pull your credit and you’ve got $8,000 charged on that and your credit score is a 726, if I can get you to pay down that credit card to 30% or less — down to $3,000 — your credit score would jump substantially.”

Michael Burge is a staff writer at NerdWallet, a personal finance website. Email: mburge@nerdwallet.com

How to Choose an Investment Account

You’ve decided to open your first investment account. You compare commission costs and account minimums and — boom — mission accomplished. You’re ready to start investing in stocks. But then …

It could be anything, really: Surprise fees. Limited choice. An awkward interface. Or lousy customer service. One day you realize that the one-size-fits-most broker you’re using just isn’t a good fit.

You don’t have to settle for “almost right.” Some upfront financial self-analysis will steer your search for the right brokerage account.

If you already have an idea … We’ve done extensive research into the top brokers, selecting the best for different types of investors, including: Best for beginners Best for stock trading Best for free stock trading Best for mutual funds Investor, know thyself (and your broker, too)

Let’s talk about your needs — a sort of investing for beginners — and what you should consider when shopping for your first investment account:

  • How much money you have. The type of account can dictate the minimum a broker requires to even open an account.
  • What types of assets you intend to buy. Individual stocks are standard fare. Exchange-traded and mutual funds are, too, but selection can vary widely. Check a broker’s lineup if you have a specific investment in mind.
  • How frequently (or not) you plan to transact. Buy-and-hold investors can put commission costs lower on the priority list than can active investors.
  • The level of service you need. First-time investors should consider the availability of educational tools, investment guidance, stock-trading research and access to real-life humans.
  • How well you and the broker “click.” The broker’s platform and reporting style should be intuitive and easy to navigate.

Misalignment on any of the above can quickly turn the broker-investor relationship sour. To avoid any future unpleasantries, try to identify potential problems before you commit to an online broker.

Here’s what to look for.

How much is required upfront?

A broker’s entry fee may depend on the type of account you’re opening. A $500 to $2,500 minimum for a regular account (aka, non-retirement) is not uncommon. However, the bar is often set a lot lower (as in a $0 minimum) when opening a retirement account, such as a traditional IRA or a Roth IRA. Some brokers waive the initial deposit requirement for customers who sign up for automatic monthly deposits.

Tip: If the initial balance requirement is the only thing standing between you and a broker that fits all of your other criteria, it may be worthwhile to postpone your investing start date until you’ve amassed enough to open an account.

» MORE: Best brokers for IRAs

Is there an investment minimum?

Paying the cover charge gets you in the broker’s front door. To move beyond the foyer, you must meet its initial investment minimum.

For stock investors, calculating the minimum required investment is easy enough: You have to pay the share price plus the commission. Same for ETF investors. It’s trickier with mutual funds, where a minimum initial investment requirement can run as high as $1,500 to $2,000, depending on the fund. That said, after meeting the fund minimum for your initial contribution, additional investments at lower dollar amounts are allowed.

Tip: If after calculating the investing costs and minimum requirements it turns out that your first choice is financially out of reach, don’t just walk away. It’s better to start investing something now (and get compound interest rolling) with a broker that fits your current and near-future financial reality than to put it off for too long.

What are the trading costs?

Buy-and-hold investors can afford to pay a bit more for commissions in exchange for access to other features they value more. That said, when you’re just starting out and building up a diversified portfolio of stocks, plan for higher trading costs upfront as you seed your account. After you’ve established your positions, the impact of commissions will dwindle.

Low commission costs are more important to those who plan on trading frequently (10 or more trades per month) on an ongoing basis. Placing 10 trades a month at $9.99 apiece adds up to $1,198.80 a year in commissions. At $4.99 per trade the annual tab is $598.80 — but you may “pay” for the difference elsewhere: Some deep-discount brokers may not offer research tools or robust customer support. Completely free trading apps are bare-bones services where dividends aren’t automatically reinvested and only taxable accounts (not IRAs) are supported.

There are other fees to consider, too: Annual or quarterly IRA administrative fees (for not maintaining a certain account balance or setting up auto-deposits), inactivity fees (for not placing a minimum number of trades during a specified period), add-on fees for data or premium reports ($5 a month to hundreds of dollars for premium reports), trading platform fees (mainly by brokers catering to options investors and futures and commodities traders).

Tip: Sign-up bonuses are a great workaround for investors who don’t want their initial deposit eaten up by commissions. Many brokers offer pretty sweet deals, like a bunch of commission-free trades or cash bonuses/account credits for opening a new account. The value of the sign-up bonus may be based on the initial investment amount or require customers to set up automatic monthly deposits. Finally, don’t be blinded by a pretty bonus: It’s what’s inside that counts for the long term. Make sure the broker will still be a good fit after the promotion period ends.

» MORE: Best discount brokers

Can you get the help you seek?

Customer service can be a lifesaver — and money-saver — for beginner investors. The simple act of clicking “buy” for the first time can be fraught with anxiety if you’re not sure you’re doing it right. All the research and tools on the planet are worthless if you don’t know how to use them.

Consider what level of service and guidance you want, and check whether there’s a cost to getting the support you think you’ll need. For example, broker-assisted trades can cost from $10 to $45. Some companies offer only phone and email support.

Tip: Client support can be delivered in a number of ways: FAQs, video tutorials, real-time chat, email, one-on-one in-person advice. Some of the bigger brokerages have physical branches where customers can schedule consultations and attend local seminars and investor meet-and-greets. Before you become a customer, stop into one of the branches and have a representative walk you through a test-drive of the broker’s trading platform.

How easy is it to quit?

Your first investment account doesn’t have to be your “forever” broker. It happens: Maybe you thought you’d trade stocks but then decided that index investing is more your speed. Or you couldn’t afford the investment minimum of your first-choice broker and later became flush enough to switch. Or perhaps after a year of training-wheels trading you’re ready to graduate to a more sophisticated investing strategy that’s costlier to execute at the broker you chose in your newbie days.

This first account may turn into the investing equivalent of a starter marriage. Only less depressing … and — bright side! — the uncoupling costs are lower, too.

If you know you’re going to be moving on in the not-too-distant future, do some upfront research into account transfer and liquidation fees. These can range from $20 for a partial transfer to $75 for a full transfer, and the amount is often based on account type, where moving IRA money is cheaper than transferring out of a regular taxable brokerage account.

» JUMP BACK: Revisit our picks of the best brokers » MORE: Use our tool to find the best broker

Tip: Let your next broker pick up the tab for transferring your account. All brokers will assist you in making a transfer, and some will even fully or partially reimburse your transfer fees.

Dayana Yochim is a staff writer at NerdWallet, a personal finance website: Email: dyochim@nerdwallet.com. Twitter: @DayanaYochim.

Millennials’ Retirement Savings Goal Could Change in Slower Economy

Millennials’ already stretched finances could face a new stress: slower growth of the U.S. economy. Compared with their parents, today’s younger workers may need to save more of their income for retirement, according to a new NerdWallet report.

A number of analysts predict that the continuing pattern of slower growth that has taken hold since the Great Recession could cause stock market returns to fall from 7%, the annual average since about 1950, to a possible 5% in the decades to come. And that could hurt investors saving for retirement.

The new goal for retirement

The difference of two percentage points in broad stock market returns has big implications for younger adults who are just starting to save for retirement and also for those who’ve been investing for about a decade. NerdWallet’s analysis shows that millennials, who could earn a 5% return over the bulk of their investing lifetimes, may be required to save 22% of their annual income to make up the gap. Many retirement experts currently recommend saving 15% of annual income.

“The era of supernormal returns is over,” says Martin Small, the head of U.S. iShares for BlackRock, the world’s largest asset manager. “Over the longer term, younger investors should expect yields and equity market returns to be low.”

NerdWallet’s analysis

To help a millennial investor prepare for the future, NerdWallet analyzed the saving needs of a 25-year-old earning $40,000, the median salary for ages 25-29, according to the U.S. Census Bureau’s 2015 Current Population Survey.

Based on the 7% average in stock market returns each year since 1950, a 25-year-old earning $40,000 can meet a common retirement goal of replacing 80% of his or her income by age 67 by saving 13% of annual income.

But if average annual stock market returns fall to 5%, NerdWallet’s analysis shows a 25-year-old will have to set aside 22% of annual income to save the same amount. That’s an increase of $3,400 this year — equivalent to over three months of rent, based on the median monthly rent of $937 for 25- to 29-year-old households.

 

 

How millennials can start preparing now

Start saving. In addition to saving more income, lower investment returns mean millennials may need to start contributing earlier to a retirement savings account than their parents did, or plan for longer careers. Use a retirement calculator to assess progress toward retirement goals and identify potential gaps.

Take advantage of tax benefits and employer matches. Estimates show a quarter of employees aren’t contributing enough to get the full 401(k) match. That match is free money that gets you closer to your savings goals.

Those who don’t have a 401(k) can get a tax deduction by making contributions to a traditional IRA.

Don’t stash your retirement money in a savings account. Focus first on earning your employer’s 401(k) match and setting aside at least $500 in case you need quick cash. Then, consider opening a Roth IRA account and start funneling savings into that. By investing in low-cost vehicles like exchange-traded funds and index mutual funds tied to the overall stock market, like the S&P 500 Index, your money will go to work for you over the decades rather than collecting the low interest rates of most savings accounts.

Jonathan Todd is a data analyst at NerdWallet, a personal finance website: Email: jonathan.todd@nerdwallet.com. Twitter: @yontodd.

Why Free Shipping Isn’t Always Free

Every online shopper has probably experienced it: You’ve added all the items you need to your cart, and a box pops up that says, “You’re only $11 away from free shipping!”

There are many ways to get your stuff shipped gratis. Some retailers offer it to shoppers who spend a certain amount of money; thresholds often fall between $25 and $99. Other stores, such as Amazon, give it to users in exchange for an annual subscription fee. And members can claim rebates to reimburse their shipping costs at cash-back site FreeShipping.com.

But consumers’ demand for free shipping comes with at least a few unintended consequences.

Our fascination with free shipping

Shoppers have come to expect free shipping, thanks in part to the rise of online commerce, says consumer psychologist Kit Yarrow, a professor at Golden Gate University and author of “Decoding the New Consumer Mind: How and Why We Shop and Buy.”

“It’s funny,” she says. “People go to the post office or UPS and they have no trouble paying for shipping fees. They totally understand the value of a shipping fee. But when it comes to buying something, it does not compute for consumers.”

An overwhelming 88% of consumers say free shipping would make them more willing to shop online, according to the 2016 Walker Sands Future of Retail report. Consumers found this perk more persuasive than streamlined returns processes or same-day shipping.

David Bell, marketing professor at the Wharton School of the University of Pennsylvania, says that Amazon Prime is driving the perception that shipping should be free. Among other benefits, Prime provides members free two-day and even free same-day shipping on a variety of items for a $99 annual fee. This encourages shoppers to place smaller orders, and more of them, rather than waiting until they want enough items to qualify for free shipping based on the amount spent.

“If I qualify for free shipping all the time, that’s going to make me order more,” Bell says. “And even if some of those orders the company loses money on, over the life cycle of my orders, they’re making money on other ones, so it probably evens out.”

Retailers can attract more frequent orders with low free shipping minimums, or bigger orders with higher free shipping minimums, he says.

» MORE: How to use coupons effectively

You may be charged more for free shipping

Retailers that already have high margins — that is, the profit from the sale of the item exceeds the cost of producing it — can generally absorb the cost of shipping, according to Yarrow. But other stores raise their prices in order to give online shoppers free shipping.

“Low-margin retailers are saying, ‘Somehow or another we’ve got to get these costs back into the hands of consumers.’ Otherwise they won’t stay in business,” Yarrow says.

She has noticed that items eligible for free shipping are often more expensive than those that don’t qualify. She recommends consumers compare prices on Google Shopping, which calculates taxes and shipping costs, before making purchases.

We used the website to compare prices on the Echo Design EO30-1720 “Crete” square embroidery decorative pillow. The lowest price came from Macy’s, a store that did charge for shipping. Stores with free shipping on the pillow tended to charge more for the item itself.

For example, in mid-September, Macy’s charged a $27.97 base price with $9.95 shipping for the item, while Bed Bath & Beyond listed a $39.99 base price with free shipping.

Bell, too, recommends vigilance. If a retailer you already frequent begins offering free shipping, check for price inflation.

You may be paying more for free shipping

Even if a retailer doesn’t charge you more for free shipping, you could be paying more of your own volition.

As Yarrow points out, people spend money to get free shipping; it’s tempting to add something else to your virtual cart when you’re only a few dollars from that threshold. But you’ll be spending more than you intended and possibly more than shipping would have cost. It’s rare to find an item that costs exactly the difference, so you’ll likely pay more than the minimum required for free shipping.

In his research, Bell found that consumers prefer free shipping to a $10 discount on their orders. “I think it’s because people feel like it’s an extra you shouldn’t have to pay for,” he says.

Take free shipping offers with a grain of salt, and if you find yourself throwing things you don’t need into your cart to get no-cost delivery, take pause.

“Just like our grandmas told us, nothing in life is free,” Yarrow says. “Such a bummer, but it ended up being true.”

Courtney Jespersen is a staff writer at NerdWallet, a personal finance website. Email: courtney@nerdwallet.com. Twitter: @courtneynerd.

The 5 People Who Make Your Mortgage Refinance a Reality

Refinancing your mortgage involves fewer people than when you first bought your home, but it still takes a village to accomplish the task.

Meet the 5 people 1. Loan officer 2. Loan processor 3. Underwriter 4. Appraiser 5. Title company representative or notary

You’ll likely meet just a couple of these people face to face when you refinance your mortgage. Most of the back-and-forth happens with your first point of contact — your loan officer — by email or phone.

Here are the main players involved in the refinance process:

1. Loan officer

The loan officer is the face of the refinance transaction, says Alex Margulis, vice president of residential lending at Perl Mortgage in Chicago. This person will explain the loan process upfront, negotiate the terms of the loan and act as your main point of contact throughout the process.

Your loan officer will collect all of the documents needed to get the application started, including W2s, pay stubs and a copy of your most recent mortgage statement.

Aimee Renkes, a senior loan officer with Midwest Lending Corp. in Chicago, says your loan officer will also help you determine if refinancing makes sense for you.

“Your loan officer should be your go-to if you have any questions or concerns at any point in the process,” she says. “That’s why you want to make sure you’re working with a loan officer you’re comfortable with, and who’s experienced and is going to take care of you.”

Many loan officers have assistants or coordinators who might also contact you during the process for more documents.

2. Loan processor

Once your loan officer gets the ball rolling, she’ll pass along your refinance application to the loan processor.

Karli Spahr, a sales manager with New Penn Financial in Minneapolis, says the loan processor gathers things like verification of employment, verification of deposit and title work. This person packages all this information and sends it to the underwriter for review.

3. Underwriter

Like the loan processor, the underwriter works behind the scenes and never interacts directly with you. This person is like the “enforcer,” Spahr says. He validates your documents, making sure that everything meets the guidelines of the loan that you’re applying for. The underwriter is the person who gives final approval to your application.

4. Appraiser

The appraiser is assigned by the lender through a third-party appraisal management company. This usually happens during underwriting.

If all your interactions with your loan officer have been through email or phone up to this point, the appraiser is the first person whom you’ll meet face to face.

Matt Gougé, a senior loan officer with Mountain West Financial in Sacramento, California, says the appraiser will reach out to you directly and arrange a time to come to your home. He or she will evaluate the condition of your home and grab comparable sales from the area, then report to the lender.

5. Title company representative or notary

Early in the refinance process, the title company gives the lender all of its fees for the initial disclosure, Gougé says. The title company runs a preliminary title report to make sure your home is free of liens and other title issues, and often holds the escrow account that funds your final loan. Your lender is in contact with the title company until the very end, making sure everyone is clear on fees before your loan officer sends you the final disclosure.

The title company conducts the closing process. Depending on what state you live in, you’ll meet either a title company representative or a notary face to face, either at the title company’s office or a location of your choosing. An attorney might also be present, again depending on where you live. The title company will send all the signed documents back to your lender.

You have three days after signing to change your mind — this period is known as a right of rescission. If you’re still on board after those three days, a funder at the lending company authorizes your new loan and sends it to the title company. The title company then pays off the existing loan.

How you can help the refinance process run smoothly and quickly

Most lenders give a timeframe of 30 to 40 days to complete a mortgage refinance. Depending on the volume of applications a lender is handling, it may take a bit longer. Here are some things you can do to help the process run as smoothly and quickly as possible:

  • Send your loan officer the information she requests in a timely manner.
  • Don’t make any big purchases, like a new car.
  • Don’t take out a new line of credit.
  • Don’t leave your current job.

More from NerdWallet How to refinance your mortgage Compare mortgage refinance rates Find a mortgage lender

Michael Burge is a staff writer at NerdWallet, a personal finance website. Email: mburge@nerdwallet.com.

Mortgage Rates Today, Sept. 30: Little Change, Pending Sales Dip

Thirty-year and 15-year mortgage rates held steady, while 5/1 ARM loan rates slipped a hair, according to a NerdWallet survey of mortgage rates published by national lenders Friday.

Mortgage Rates Today, Friday, Sept. 30 (Change from 9/29) 30-year fixed: 3.60% APR (NC) 15-year fixed: 3.01% APR (NC) 5/1 ARM: 3.50% APR (-0.01) NAR: Pending home sales retreat

Pending home sales retreated in August for the third time in four months and to their lowest level since January, according to the National Association of Realtors.

A shortage of existing homes for sale prompted NAR’s Pending Home Sales Index to fall 2.4% to 108.5 in August from a downwardly revised 111.2 in July — the second-lowest level this year after January (105.4).

The NAR index is based on signed real estate contracts for existing homes, with 100 representing average activity in 2001, the first year to be examined.

“Contract activity slackened throughout the country in August except for in the Northeast, where higher inventory totals are giving home shoppers greater options and better success signing a contract,” NAR chief economist Lawrence Yun said in a news release. “In most other areas, an increased number of prospective buyers appear to be either wavering at the steeper home prices pushed up by inventory shortages or disheartened by the competition for the minuscule number of affordable listings.”

NAR warned that a lack of new home construction, which has long hampered many metro markets, could derail housing’s recovery, especially as we head into the slower sales season. Even more worrisome: Housing inventory has declined year-over-year for 15 straight months, and existing-home prices have jumped year-over-year for 54 consecutive months, NAR said.

Homeowners looking to lower their mortgage rate can shop for refinance lenders here.

NerdWallet daily mortgage rates are an average of the published APR with the lowest points for each loan term offered by a sampling of major national lenders. Annual percentage rate quotes reflect an interest rate plus points, fees and other expenses, providing the most accurate view of the costs a borrower might pay.

More from NerdWallet How to refinance your mortgage Compare mortgage refinance rates Find a mortgage broker

Deborah Kearns is a staff writer at NerdWallet, a personal finance website. Email: dkearns@nerdwallet.com. Twitter: @debbie_kearns.

Ask Brianna: Will I Ever Be Able to Afford a House?

“Ask Brianna” is a Q&A column from NerdWallet for 20-somethings or anyone else starting out. I’m here to help you manage your money, find a job and pay off student loans — all the real-world stuff no one taught us how to do in college. Send your questions about postgrad life to askbrianna@nerdwallet.com.

This week’s question:

Affording a house seems out of reach. Will I ever be able to buy a home of my own?

I’ve asked myself this question too many times to count, maybe because I know homeownership wasn’t always so hard to achieve. My parents bought their three-bedroom house on Long Island in 1978 for $46,000, or $169,782 in today’s dollars. My dad was a truck driver, and my mom was an artist, both in their late 20s.

Now, nearly 40 years later, I’m also in my late 20s, but I drop off a rent check each month instead of making a mortgage payment. First-time homebuyers are four years older than they were in the late 1970s and rent longer before buying, according to research by real estate website Zillow. Median incomes for first-time buyers didn’t change much between 1978 and 2013, but the median home price for that group went up more than $40,000.

So here we are, fellow 20- and 30-somethings, eager to buy homes but unable to afford them.

It’s not your imagination. The most recent data for median existing home prices shows they reached a new high of $244,100 in July, according to the National Association of Realtors. Low interest rates have kept monthly mortgage payments affordable by historical standards, says Jonathan Spader, senior research associate at Harvard’s Joint Center for Housing Studies, but higher home prices make it tougher to cobble together a down payment.

That’s especially true when student loan payments and high rents drain our bank accounts. A record 21.3 million renter households allocated more than 30 percent of their pretax incomes toward housing in 2014, reports the Joint Center for Housing Studies, a 44 percent increase from 2001.

While you don’t need to own a house to be happy, many of us still want a place we can be proud of. It’ll take some creativity, but it is possible to buy a house someday. Here’s how.

Save longer

If you want to settle in an expensive area long term, you’ll have to save diligently and feel comfortable waiting longer to buy, which is what I’m doing. A down payment averages 24 percent of the home’s purchase price in high-priced locations, according to real estate data firm RealtyTrac. That makes the down payment one of the biggest hurdles to overcome if you’re angling to live in a competitive market, where mortgage lenders look for more money down as an indication that you’re an attractive buyer.

Sock away a portion of your annual bonus from work, or increase the amount you save whenever you get a raise or quit subscription services you don’t use. Set up an automatic transfer into a savings account designated for your down payment so it grows without much effort.

Look into first-time homebuyer programs

Those strategies might not be enough to reach your down payment goal. If you’re eager to buy a house soon, government-sanctioned companies Fannie Mae and Freddie Mac will let you make a down payment of just 3 percent of the home’s price. The Federal Housing Administration also offers mortgages that require down payments of 3.5 percent. Local housing counseling agencies can tell you what programs you qualify for and whether down payment assistance is available in your area, Spader says.

You’ll need to weigh the trade-offs of a smaller down payment. You’ll pay mortgage insurance if you put less than 20 percent down, for instance, which increases your monthly mortgage payment. A mortgage calculator can help you figure out what monthly payment you can afford.

Search in affordable locations

You might be able to have your long-awaited housewarming party sooner than us coastal dwellers — without stretching your budget to its limit — if you live in or move to a region known for its affordability.

A September 2015 report by real estate website Trulia found that eight of the 10 most affordable cities for homeowners were in the Midwest, for instance, while seven of the 10 least affordable cities were in California. The median home price in the Midwest was $194,000 in July, according to the National Association of Realtors, about $50,000 less than the national median.

Lower prices mean lower down payments and a mortgage that won’t take a huge chunk of your income. Living in a lower-cost area isn’t the right choice for everyone, but it’s an option if you’re ready to put down roots sooner than a higher-priced city will allow.

Brianna McGurran is a staff writer at NerdWallet. Email: bmcgurran@nerdwallet.com. Twitter: @briannamcscribe.

This article was written by NerdWallet and was originally published by The Associated Press.

3 Ways to Teach Kids About Money

Kids get some funny ideas about money. David Frisch, president of Frisch Financial Group in Melville, New York, co-founded an investing club at his kids’ middle school in 2014. One fifth-grade club member told his classmates that his family doesn’t worry about money because his dad has a “special thing you just buy stuff with, and you don’t have to pay for it — it’s called a credit card,” he says. “It was priceless.”

Cute or not, misconceptions about money can sprout when parents avoid the topic, as many do — 71% of parents are reluctant to discuss money with their youngsters, according to a T. Rowe Price Kids and Money survey. The good news is that kids who get opportunities to talk about finances can quickly advance from oblivious to sophisticated.

“You can start teaching your children about money from a young age, as early as 5 or 6 years old,” says Stacy Francis, president and CEO of Francis Financial in New York City. “Children are a lot more perceptive than we often think. They listen to how we speak about money, notice our attitudes towards it and what we do with it.”

She and other experts shared some ways they’ve taught their kids about money.

1. Invest pretend money

The investing club Frisch and a teacher founded, called Fantasy Stocks, had a group of about 20 kids who would meet after school every two weeks in the school’s computer lab. Each student set up a mock brokerage account with $10,000, using a free online stock simulator. They got to pit their stock portfolios against each other’s and learned to search financial sites for good and bad news on their stock picks.

Frisch’s own triplets, then 12, were enthusiastic investors in the club. “Conversations at the dinner table changed to, ‘I’m thinking about buying Apple because there’s a new phone coming out,’” he says. His daughter showed interest in the clothing company Michael Kors as a business rather than just for fashion trends.

One important investing experience in particular will likely stay with the kids for life. That first fall, the stock market performed well and many of the young investors watched their portfolios increase in value. “But in January, the market fell hard, and they quickly learned that it can go down, and it can go down big,” Frisch says. That’s a fundamental lesson that would serve any investor well.

2. Play games with money lessons

If you think about it, some of the most beloved board games revolve around financial decisions. The classic game Monopoly, for example, models real estate investing, while The Game of Life has players driving spouses and kids around the board in pastel-colored cars through a variety of financial ups and downs.

Francis, the New York City financial planner, uses her favorite board game to explain complex financial concepts to teenagers and younger kids. “One thing we like about [the game] Cash Flow for Kids is it allows kids to learn about the difference between assets and liabilities,” she says. Kids easily understand that assets are things you own, like a bike or a toy, while things you have to pay each month are liabilities — like a cable bill, she explains.

Players aim to get assets that generate income, so they can earn money without working for it. “The goal of the game is to have enough ‘passive income’ to pay for all of your expenses, so that you don’t need your salary to pay for them,” Francis says.

3. Fill out FAFSA together

When the time came to fill out her college-bound daughter’s financial aid application, Marguerita Cheng, chief executive of Blue Ocean Global Wealth in Rockville, Maryland, saw it as an opportunity to start a conversation. She suggested that the two fill out the Free Application for Federal Student Aid, or FAFSA, together. Her daughter agreed to help.

“I made her get the tax return and read off the line items,” Cheng says. Being exposed to the specifics of family finances for the first time was a learning experience. “It was eye-opening because she learned why you have to keep good records,” she says.

The first time filling out the FAFSA was a bit difficult, but doing it together has become an annual ritual and the basis for meaningful conversations about student loans, interest payments and future career plans, Cheng says. “I think she’s more aware of how much it’s costing. There’s an appreciation of what it costs for her to go to school.”

When parents find ways to talk with kids about real-life finances, it’s doing them a favor. “By teaching them about money, you are empowering them by giving them knowledge and tools they will use for the rest of their lives,” Francis says. In fact, the most important thing you can do is to start having those money conversations with your family sooner rather than later.

Jeanne Lee is a staff writer at NerdWallet, a personal finance website. Email: jlee@nerdwallet.com. Twitter: @jlee_jeanne.

Money Market Accounts Could Drag Down Your Retirement Savings

After the stock market meltdown of 2007 and 2008, many Americans grew wary of investing and moved more of their savings into money market deposit accounts. These have less volatility than stocks and a higher return rate than traditional savings accounts.

In fact, the total amount in money market accounts has nearly doubled since the stock market crash, from around $2.7 trillion at the end of 2007 to more than $5.1 trillion as of this June, according to data from the Federal Deposit Insurance Corp.

Trading the volatility of stocks for the safety of a money market account might sound like a good idea, but many financial advisors believe that putting long-term savings, such as retirement savings, into money market accounts — and forgoing the better long-term returns of the stock market — would cost Americans plenty.

Money market accounts usually return 1% or less, which is lower than the rate of inflation. That means people are essentially losing money they’re hoping will ease them through their retirement years.

We asked Anna Sergunina of MainStreet Financial Planning to explain how money market accounts may be hurting consumers and what they should be doing instead. Anna is a member of NerdWallet’s Ask an Advisor network.

Are people costing themselves money by putting their retirement savings in money market accounts?

Yes. Money market accounts are good places to park your short-term money, but these accounts are paying very low returns, 1% per year if you are lucky. With inflation at 3% or more per year, you won’t be able to make your savings stretch very far. That’s where stock and bond market investing comes in handy. It helps you stay ahead of inflation.

Are there some cases where you should keep your money in money market accounts?

Yes, but only if you plan to be using the money in the next year or two. This way you can avoid any short-term market fluctuations and the potential loss of principal.

It’s best to think about your financial goals: Are you planning to buy a car in the next few months? Are you going to do a home remodel next year? Are you going to take a costly vacation soon? If the answer to these questions is yes, putting money in a money market account is a good idea, because you wouldn’t want to see that money shrink due to a bad month for the stock market.

You can also use a money market account as the place where you keep your emergency fund. This is the place where you want to keep at least three months of expenses to pay for any unforeseen costs that come up, like car repairs. Money markets are liquid, so you can easily withdraw this money when it’s needed.

» MORE: Here are the best money market accounts

What would you tell cautious investors who think the stock market is dangerous?

The stock market is not a dangerous place if you have the right strategy in place. The key thing to know about the stock market is that it needs time — time to work for you and time for your money to grow. Historically the stock market grows an average of around 7% per year. But that doesn’t mean it grows that much every year. For this reason, we recommend investing more money in the stock market when it is for long-term goals such as retirement savings, because then you’re giving it time to grow and you can ride out the ups and downs.

Are there any other investing tips people should keep in mind?

I like the idea of a “buckets of money” approach for investing. Think of your savings vehicles as short term (one to three years), medium term (three to seven years) and long term (seven years or more).

In your short-term bucket, you should only have “safe,” FDIC-insured investments such as savings accounts and money market accounts. Your medium-term bucket can include some stocks and bonds to generate more return, since three to seven years should be enough time to capture the upside of the stock market. For your long-term bucket you definitely need to have significant stock-market exposure. Your goal is to help your money grow so that it lasts longer and beats inflation.

Anna Sergunina is a financial advisor, the owner of MainStreet Financial Planning, and creator of the Money Library platform. MainStreet has offices in California, Maryland, New York and Washington, D.C.

How to Deal With Student Loans When You Owe More Than Your Annual Salary

You borrowed money to pay for school, but when it came time to start working you found that your loans add up to more than your first year’s salary. It’s not ideal, but it’s not an impossible situation, either.

Follow these tips to make your payments more manageable.

Assess your financial situation

The first step toward taking charge of your student loan debt is figuring out where you stand. For your student loans, find out how much you owe, what your interest rates are, how much of your monthly payments goes toward paying down the principal and how long you have to pay it off. Then do the same exercise for any other types of debt you have. Once you have all the information in front of you, it’ll be easier to see where your money should be going.

But before you can solely focus on paying off your student loans, registered investment advisor Tom Martin advises considering another aspect of your finances: your emergency fund. It’s how you’ll be able to handle unexpected costs, like a flat tire or a fried hard drive. As a general rule of thumb, NerdWallet advises saving three to six months’ worth of living expenses.

For Martin’s millennial clients with student loan debt, he suggests starting off by working toward a $1,000 emergency fund.

Prioritize your high-interest debt

Anyone with a large amount of student loan debt knows the weight of that debt hanging over your head can be stressful. And it’s probably tempting to throw all of your extra cash at your student loan payments.

But you may be better off using that money elsewhere. Credit cards and personal loans, for example, tend to have higher interest rates than federal student loans — think 25% or higher versus 3.4%.

“Financial advisors typically talk about the benefits of compounding interest to millennials because of their long time horizon. Carrying high-interest debt causes just the opposite. With debt, compounding is now working against you,” says Matt Hylland, a registered investment advisor based in Virginia.

Take advantage of repayment plans and forgiveness options

If you have federal loans, switching to an income-driven repayment plan can lower your monthly payments to as low as $0 per month. Plus, after 20 to 25 years, any remaining balance will be forgiven.

There are a few financial drawbacks: The forgiven amount will be taxed and your total interest payments will be higher. You also have to reapply every year. But keeping your payments manageable will help you stay on track and out of default, which can negatively impact your credit score, lead to wage garnishment, and cause your entire student loan debt to become due at once.

Another forgiveness option for federal loans is public service loan forgiveness. It’s available to those who work for a nonprofit or the government for at least 10 years and make 120 on-time payments on their loans. If you plan to sign up for PSLF, you can cut costs even further by switching to an income-driven repayment plan to lower your monthly payments.

If you’re ever having trouble making your monthly payments, contact your loan servicer to go over your options. If you have loans from a private lender, you may be able to postpone your payments for a period of time.

Live like you’re still in college

Getting that first big paycheck is cause for celebration, but you should continue to be pragmatic with your spending. That doesn’t mean you have to wipe out fun purchases altogether: Financial planner Catie Hogan advises taking a creative approach to cutting monthly costs.

“Instead of going out for an expensive night of dinner and drinks, have a dinner party where everyone contributes to the meal,” Hogan says. “So many cities now offer free community fitness and yoga, festivals, and concerts. It’s all about how resourceful you can be.”

Whatever changes you can make to cut your cost of living, know that it’ll be easier to replicate the college lifestyle when you’re fresh out of school rather than when you’ve spent months living at or above your means. So the sooner you make those adjustments, the easier it’ll be.

Use deferment and forbearance as a last resort

If your student loan payments are too high and you’ve exhausted all other options, look into getting a deferment or forbearance on your loans while you get your finances in order.

Both deferment and forbearance will allow you to postpone your student loan payments, but only deferment on federal loans allows you to do so interest-free; the government pays the interest on subsidized federal direct loans and Perkins loans when they’re in deferment. If you don’t qualify for deferment, you may be able to put your loans into forbearance instead, but interest will continue to accrue. For private loans, contact your student loan servicer to see if deferment or forbearance is an option.

If your financial situation is more secure before you come out of deferment or forbearance, consider paying off any accrued interest before your regular payments begin. That way you’ll avoid having that interest capitalized, or added to your principal balance, and save money in the long run.

Devon Delfino is a staff writer at NerdWallet, a personal finance website. Email: ddelfino@nerdwallet.com. Twitter: @devondelfino.

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