April 08, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to email@example.com
Carol in Crestview Hills: I’m 47 and looking to buy my first house. What’s the better option in your opinion: a 15-year mortgage or a 30-year mortgage?
Answer: There are benefits to both kinds of mortgages. With a 15-year mortgage, you’ll end up paying less interest over the life of the loan and your house will be paid off sooner. With a 30-year mortgage, your monthly payment is smaller and you could take out a larger loan.
In general, we tend to prefer a 15-year mortgage for the reasons listed above. But it’s important to understand your own financial situation because each mortgage could benefit you in a different way.
So, take a look at your finances as a whole. Determine if you’ll be able to support the higher payment that comes with a 15-year mortgage, and, if so, if it will take away from your retirement contributions. You don’t want to miss out on investing in your 401(k) or Roth IRA because you’re spending too much on your house. You also want to be sure your high-interest credit cards are paid off and you have an emergency fund of three to six months worth of expenses.
We also recommend having your house paid off before you retire since that frees up your retirement budget. So take your retirement age into consideration as well: you’ll have a 15-year mortgage paid off by age 62, but you’ll have a 30-year mortgage until you’re 77.
However, if you feel as though a 30-year mortgage is more suitable for you financial situation, you can always make additional payments. By making additional payments, you can pay down your loan faster, helping you save on interest. Just make sure your mortgage lender doesn’t have an early payment fee before proceeding.
Here’s the Simply Money Point: Deciding between these two types of mortgages really comes down to your personal situation, but generally speaking, in our opinion, a 15-year loan has more benefits.
Steve and Mary in Fort Thomas: We’re both nearing retirement and starting to get concerned about how much we have saved. Should we be buying an annuity to help with our cash flow?
Answer: An annuity is a type of financial product that generates regular income payments during retirement, so yes, an annuity can potentially be useful. But before you buy one, you need to understand the basics.
There are two basic types of annuities available: immediate and deferred. Immediate annuities lock in today’s lowest interest rates and you’ll receive a specific amount for the rest of your life or for a specific period of time. Deferred annuities are bought with a contractual guaranteed interest rate. This type of annuity is usually sold and produces a higher commission to the firm (or salesperson) selling the product.
Understanding the different types of annuities is extremely important if this is the direction you want to go for retirement. Simply Money Advisors recommends working with a trusted financial planner (preferably a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant®) who can help you determine if this type of financial product is a good fit for your financial goals and objectives. Annuities may not be right for everyone’s financial plan, but there are times when they make sense depending on an individual’s situation.
Once you fully understand the annuity you would like to put your money towards, ask whomever is selling you the product this key question: “If I move forward with your recommendation, what will the total compensation be for your firm?” This will allow the salesperson to be transparent. It will also show you the motivation for the suggestion. If the person or firm is getting a large commission, you may want to do some more digging to be 100% sure that this is the right choice for you.
The Simply Money Point is that working with a trusted financial planner can help you determine if incorporating annuities into your financial plan make sense for your financial objectives. Make sure to do your own research to fully understand the pros and cons of the recommended annuity. The more educated you are, the better financial decisions you will be able to make.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email firstname.lastname@example.org.