Over the years, many common money rules became traditional mantras that were passed down through family members and trusted friends. Rules like “never borrow against a 401(k)”,”avoid credit cards”, and “make the biggest down payment on your house that you can” were considered to be gems of wisdom to be lived by, but low interest rates and the resurgence of personal credit has made some of these rules questionable. Whether to adhere to traditional money rules or break them due to new financial information is a choice that every individual must make based on their personal financial situation.
Never Take Out A 401(k) Loan
For many years, taking out a loan on a 401(k) plan was considered to be a surefire way to derail your retirement savings. Today, borrowing from a 401(k) may be the cheapest loan available to the individual. The average interest rate for many credit cards today are around 14% or higher and personal loans can have interest rates that are prohibitive as well, but the interest rate on 401(k) loans are a fixed rate of about 4.25%, according to the Profit Sharing/401(k) Council of America. Nearly all employer sponsored 401(k) plans allow employees to borrow from them, the money paid back goes into their 401(k), and the terms of the loan may be as long as 15 years.
Always Go For Mortgage With Lowest Interest Payment
Getting the mortgage loan with the lowest interest payment often requires the person to put down a very large amount for their home – at least 20% – and choose the fastest repayment terms, creating a large monthly mortgage payment. Due to instabilities in the housing and employment markets, these strategies may no longer be the best option for borrowers. Instead of putting as much money as possible into the down payment for the home, now some experts are recommending that half of the amount be placed into an emergency fund for future needs.
It is also recommended to choose a 30-year fixed-rate mortgage over any adjustable-rate or 15-year mortgage. The monthly payments for a 30-year fixed-rate mortgage are generally 20% to 30% less than with the same amount financed with a 15-year mortgage. The money saved should be used as a hedge against future unemployment, costly medical emergencies, or other unexpected emergencies.
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