finance

There are a number of factors to consider

Reviewed by Caitlin Clarke
Fact checked by Katrina Munichiello

If you’re looking to buy a home, it’s important to understand how much you can afford to pay. A general guideline for the mortgage you can afford is 200% to 250% of your gross annual income. However, the specific amount you can afford to borrow depends on several factors, not just what a mortgage lender is willing to lend you. You need to evaluate your finances, preferences, and priorities. Here is everything you need to consider to determine how much you can afford.

Key Takeaways

• The general rule is that you can afford a mortgage that is 2x to 3x your gross income.
• Total monthly mortgage payments are typically made up of four components: principal, interest, taxes, and insurance.
• Your front-end ratio is the percentage of your annual gross income that goes toward paying your mortgage, and in general, it should not exceed 28%.
• Your back-end ratio is the percentage of your annual gross income that goes toward paying your debts, and in general, it should not exceed 43.

How Much of a Mortgage Can I Afford?

Most prospective homeowners can generally afford to finance a property whose mortgage is between two and three times their annual gross income. Under this formula, a person earning $100,000 per year can only afford a mortgage of $200,000 to $250,000. However, this calculation is only a general guideline.

Ultimately, when deciding on a property, you need to consider several additional factors. First, it’s a good idea to understand what your lender thinks you can afford and how it arrives at that estimate.

Second, you need to have some personal introspection and figure out what type of home you are willing to live in if you plan on living in the house for a long time and what other types of consumption you are ready to forgo—or not—to live in your home.

Important

While real estate has traditionally been considered a safe long-term investment, recessions and other disasters (like the 2020 economic crisis) can test that theory—and make would-be homeowners think twice.

How Do Lenders Determine Mortgage Loan Amounts?

While each mortgage lender maintains its own criteria for affordability, your ability to purchase a home (and the size and terms of the loan you will be offered) always depends mainly on the following factors.

Many factors go into the mortgage lender’s decision on homebuyer affordability, but they boil down to income, debt, assets, and liabilities. A lender wants to know how much income an applicant makes, how many demands there are on that income, and the potential for both in the future—in short, anything that could jeopardize its ability to get paid back.

Your income, down payment, and monthly expenses are generally base qualifiers for financing, while your credit history and score determine the rate of interest on the financing itself.

Gross Income 

This is the level of income a prospective homebuyer makes before taking out taxes and other obligations. This is generally deemed your base salary plus any bonus income and can include part-time earnings, self-employment earnings, Social Security benefits, disability, alimony, and child support.

Front-End Ratio

Gross income plays a vital part in determining the front-end ratio, also known as the mortgage-to-income ratio. This ratio is the percentage of your yearly gross income that can be dedicated toward paying your mortgage each month. The total that makes up your monthly mortgage payment consists of four components, known as principal, interest, taxes, and insurance (PITI). If required by your mortgage, the insurance portion includes property insurance and private mortgage insurance (PMI).

A good rule of thumb is that the front-end ratio based on PITI should not exceed 28% of your gross income. However, many lenders let borrowers exceed 30%, and some even let borrowers exceed 40%.

Back-End Ratio

Also known as the debt-to-income ratio (DTI), it calculates the percentage of your gross income required to cover your debts. Debts include credit card payments, child support, and other outstanding loans, such as your car loan and student loan.

In other words, if you pay $2,000 each month in debt services and you make $4,000 each month, your ratio is 50%—half of your monthly income is used to pay the debt.

However, a 50% DTI ratio isn’t going to get you that dream home. Most lenders recommend that your DTI not exceed 43% of your gross income. To calculate your maximum monthly debt based on this ratio, multiply your gross income by 0.43 and divide by 12.

Your Credit Score

If one side of the affordability coin is income, then the other side is your debt. Mortgage lenders have a formula to determine the level of risk of a prospective home buyer. The formula varies but is generally determined by using the applicant’s credit score.

Applicants with a low credit score can expect to pay a higher interest rate, also referred to as an annual percentage rate (APR), on their loan. If you want to buy a home soon, pay attention to your credit reports.

Be sure to keep a close eye on your reports. If there are inaccurate entries, it will take time to get them removed, and you don’t want to miss out on that dream home because of something that is not your fault.

The 28%/36% Rule

The 28%/36% rule is a heuristic used to calculate the amount of housing debt one should assume. According to this rule, a maximum of 28% of one’s gross monthly income should be spent on housing expenses and no more than 36% on total debt service (including housing and other debt such as car loans and credit cards). Lenders often use this rule to assess whether to extend credit to borrowers. Sometimes the rule is amended to use slightly different amounts, such as 29%/41%.

How to Calculate a Down Payment Amount

The down payment is the amount that the buyer can afford to pay out-of-pocket for the residence, using cash or liquid assets. Lenders typically demand a down payment of at least 20% of a home’s purchase price, but many let buyers purchase a home with significantly smaller percentages. Obviously, the more you can put down, the less financing you’ll need, and the better you look to the bank.

For example, if a prospective homebuyer can afford to pay 10% on a $100,000 home, the down payment is $10,000, which means the homeowner must finance $90,000.

Besides the amount of financing, lenders also want to know the number of years for which the mortgage loan is needed. A short-term mortgage has higher monthly payments but is likely less expensive over the duration of the loan.

Homebuyers need to come up with a 20% down payment to avoid paying private mortgage insurance.

Personal Considerations for Homebuyers

A lender may say that you can afford a considerable estate, but can you? Remember, the lender looks primarily at your gross pay and other debts. The problem with using gross income is simple: You factor in as much as 30% of your paycheck—but what about taxes, FICA deductions, and health insurance premiums? Also consider your pre-tax retirement contributions and college savings, if you have children. Even if you get a refund on your tax return, that doesn’t help you now—and how much will you get back?

That’s why some financial experts feel it’s more realistic to think in terms of your net income and that you shouldn’t use any more than 25% of your net income on your mortgage payment. Otherwise, while you might be able to pay the mortgage monthly, you could end up house-poor.

The costs of paying for and maintaining your home could take up such a large percentage of your income—far and above the nominal front-end ratio—that you won’t have enough money left to cover other discretionary expenses or outstanding debts or to save for retirement or even a rainy day. Whether you should be house-poor or not is mostly a matter of personal choice; getting approved for a mortgage doesn’t mean you can afford the payments.

Pre-Mortgage Considerations

In addition to the lender’s criteria, consider the following issues when contemplating your ability to pay a mortgage:

1. Income

Are you relying on two incomes to pay the bills? Is your job stable? Can you easily find another position that pays the same, or better, wages if you lose your current job? If meeting your monthly budget depends on every dime you earn, even a small reduction can be a disaster.

2. Expenses

The calculation of your back-end ratio will include most of your current debt expenses, but you should consider future costs like college for your kids (if you have them) or your hobbies when you retire.

3. Lifestyle

Are you willing to change your lifestyle to get the house you want? If fewer trips to the mall and a little tightening of the budget don’t bother you, applying a higher back-end ratio might work out fine. If you can’t make any adjustments or already have multiple credit card account balances—you might want to play it safe and take a more conservative approach in your house hunting.

Personality. No two people have the same personality, regardless of their income. Some people can sleep soundly at night knowing that they owe $5,000 per month for the next 30 years, while others fret over a payment half that size. The prospect of refinancing the house to afford payments on a new car would drive some people crazy while not worrying others at all.

Costs Beyond the Mortgage

While the mortgage is undoubtedly the most considerable financial responsibility of homeownership, there are many additional expenses, some of which don’t go away even after the mortgage is paid off. Smart shoppers would do well to keep the following items in mind:

• Property Taxes: Understanding how much you owe is an important part of your budget. The city, township, or county establishes your property tax based on your home, lot size, and other criteria, including local real estate conditions and the market. The amount varies by state, and some states boast lower property taxes than others. For example, New Jersey’s was an average of 2.08% in 2024, but Alabama’s was 0.36%. You will always have to account for paying property tax, even when your mortgage is paid off in full.
• Home Insurance: Every homeowner needs home insurance to protect their property and possessions against natural and human-made disasters, like tornados or theft. If you buy a home, you will need to price out the appropriate insurance for your situation. Most mortgage companies won’t let you purchase a home without coverage for the purchase price. You may need to show proof of home insurance to be approved by your mortgage lender.
• Maintenance: Even if you build a new home, it won’t stay new forever, nor will those expensive appliances. The same applies to the home’s roof, furnace, driveway, carpet, and even the paint. If you are house-poor when you take on that first mortgage payment, you could find yourself in a difficult situation if your finances haven’t improved by the time your home requires significant repairs.
• Utilities: Heat, insurance, electricity, water, sewage, trash removal, cable television, and telephone services cost money. These expenses are not included in the front-end ratio and they aren’t calculated in the back-end ratio. Nevertheless, they are unavoidable for most homeowners. Consider that a bigger house means higher utility bills due to heating and cooling energy needs to condition the bigger space. Many people overlook that when they see a big charming home.
• Association Fees: Many condominiums and coops and specific gated neighborhoods or planned communities assess association fees. They can be less than $100 per year while others are several hundred dollars per month. Some communities include lawn maintenance, snow removal, a community pool, and other services. Some fees are only used for administration costs. It’s important to remember that while an increasing number of lenders include association fees in the front-end ratio, these fees are likely to increase over time.
• Furniture and Decor: Before you buy a new house, take a good look at the number of rooms that will need to be furnished and the number of windows that will require covering.

Tips for Buying a Home

To help ensure that you can afford your home and maintain it over time, there are some smart measures you can take. First, save up a cash reserve that exceeds your down payment and keep it tucked away in case you lose your job or can’t earn income. Having several months of mortgage payments in emergency savings lets you keep the house while you look for new work.

You should also look for ways to save on your mortgage payments. While a 15-year mortgage will cost you less over the loan’s life, a 30-year mortgage will feature lower monthly payments, which may make it easier to afford month-to-month. Certain loan programs offer reduced or zero down payment options such as VA loans for veterans or USDA loans for rural properties.

Finally, don’t buy a bigger house than you can afford. Do you need that extra room or the finished basement? Does it need to be in this particular neighborhood? If you are willing to compromise a bit on things like this, you can often score lower home prices.

How Much of a Mortgage Can I Afford Based on My Salary?

The amount of a mortgage you can afford based on your salary often comes down to a rule of thumb. For example, some experts say you should spend no more than 2x to 2.5x your gross annual income on a mortgage (so if you earn $60,000 per year, the mortgage size should be at most $150,000). Other rules suggest you shouldn’t spend more than 28-29% of your gross income per month on housing.

What Does It Mean to Be House Poor?

House poor is a situation where most of your wealth is tied up in your house and much of your income goes toward servicing the mortgage debt and related expenses. An example would be if you had $100,000 in savings and used all of it to finance a $500,000 property with a $2,500 monthly mortgage payment when your net income is $3,000 per month.

Such a situation can give the illusion of economic prosperity but quickly unravel to foreclosure if things turn sour.

How Much Debt Can I Already Have and Still Get a Mortgage?

The amount of debt you can have will depend on your income, and in particular your debt-to-income (DTI) ratio. Generally having a DTI of 30% or less is the rule of thumb going into the mortgage application process, and with the mortgage it shouldn’t then exceed 43% on the back end.

The Bottom Line

The cost of a home is the single largest personal expense most people will ever face. Before taking on such an enormous debt, take the time to do the math. After you run the numbers, consider your situation and think about your lifestyle—not just now but into the next decade or two.

Before you purchase your new home, consider not only what it costs you to buy it but how your future mortgage payments will impact your life and budget. Then, get loan estimates for the type of home you hope to buy from several different lenders to get real-world information on the kinds of deals you can get.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau (CFPB) or with the U.S. Department of Housing and Urban Development (HUD).

Over the years, Warren Buffett has repeatedly called one deal his worst investment ever: the 1993 purchase of Dexter Shoe Company for $443 million worth of Berkshire Hathaway Inc. (BRK.A) stock. As of February 12, 2025, those same shares would be worth $17.87 billion—a staggering loss that Buffett has said “deserves a spot in the Guinness Book of World Records.”

While Berkshire Hathaway shares soared in value over the last three decades, those for Dexter Shoe collapsed, making it not only a bad investment but what Buffett says was a “monumentally stupid decision” in how the deal was structured. Below, we take you through why.

Key Takeaways

• Buffett’s Dexter Shoe Company purchase demonstrates how paying with company stock instead of cash can magnify losses dramatically over time—the $443 million in Berkshire stocks he traded in 1993 would be worth about $17.87 billion today.
• The investment failed because Buffett misread Dexter’s competitive advantage, not realizing that overseas competition would quickly erode the company’s market position.
• Ironically, the scale of the loss is measured by Berkshire Hathaway’s incredible success—which was built on Buffett’s general ability to avoid such mistakes and identify those firms with sustainable competitive advantages.

What Went Wrong With Dexter Shoe

When Buffett bought Dexter Shoe Company in 1993, the Maine-based company seemed to have everything the famed value investor looks for: It was profitable, well-managed, and seemed to have what Buffett calls a “moat,” a sustainable advantage over rivals. American-made shoes, particularly Dexter’s high-quality casual and dress footwear, were also getting premium prices and had customer loyalty at the time.

Mistake No. 1: Misreading the Competitive Landscape

Buffett had missed a crucial shift happening in the industry. Foreign factories, particularly in China, were rapidly improving their quality while keeping their labor costs much lower than their American peers. Within just a few years, overseas competitors began flooding the U.S. market with similar shoes at much lower prices.

“What I had assessed as a durable competitive advantage vanished within a few years,” Buffett wrote in his 2007 letter to shareholders. By 2001, Dexter had closed its last Maine factory, and the brand was eventually folded into H.H. Brown, another Berkshire-owned shoe company.

Mistake No. 2: Paying with Berkshire Stock

Making the acquisition was only half the problem. Buffett’s bigger error was paying for Dexter with Berkshire Hathaway stock instead of cash. The 25,203 shares he used to buy Dexter were worth $433 million in 1993 (or about $949.20 million today)—but those same shares would be worth $17.87 billion today.

The lesson to take from this? “Too often CEOs seem blind to an elementary reality: The intrinsic value of the shares you give in an acquisition must not be greater than the intrinsic value of the business you receive,” Buffett said.

Note

In late 2024, the local paper where Dexter Shoe was located caught up with those benefiting from owner Harold Alfond’s sale. Even after splitting her father’s gains from the deal with three brothers, Susan Alfond of Scarborough, Maine, still had enough to make her the wealthiest person in the state, about $3.3 billion, according to Forbes.

The Bottom Line

Warren Buffett says he violated two of his core principles in the Dexter Shoe deal: never pay with undervalued stock and always ensure a business has a sustainable competitive advantage. While Berkshire Hathaway’s subsequent success has made this mistake look far worse in dollar terms, BRK.A’s share price is only what it is today because Buffett has been disciplined in buying what he calls excellent businesses at fair prices, not fair businesses at excellent prices. “The best thing that happens to us is when a great company gets into temporary trouble,” Buffett has said repeatedly.

They’re helpful in some cases but also come with risks

Reviewed by Lea D. Uradu

Television commercials for reverse mortgages commonly extol the benefits of a guaranteed tax-free income for homeowners aged 62 and older. However, reverse mortgages can be expensive and, in some cases, put a person’s home at risk. You may also become ineligible for certain government benefits, put your family members at risk for eviction, and leave your heirs with more hassles after you die.

Key Takeaways

• A reverse mortgage can provide a lump sum of cash or a regular income stream to homeowners over age 62.
• There are several types of reverse mortgages, the most common being home equity conversion mortgages, which are insured by the federal government.
• Reverse mortgages can be expensive compared to other types of loans.
• They can also put the borrower at risk of foreclosure and losing their home in certain cases.
• A spouse who qualifies may be able to remain in the home if their spouse dies or moves into a nursing home.

What Is a Reverse Mortgage?

A reverse mortgage allows a homeowner with sufficient equity in their home to draw on that equity for income. Unlike a home equity loan or line of credit, which the homeowner has to pay back on a regular schedule, the income from a reverse mortgage need not be paid back until the homeowner leaves the home, sells it, or dies. At that time, the loan balance, interest, and accrued fees must be paid in full, usually with the proceeds from selling the home.

For homeowners with few or no other assets, a reverse mortgage can provide a much-needed income supplement in retirement. It can also help pay for medical bills or other unexpected expenses. However, it has some potential drawbacks worth noting before you apply.

Review our list to compare the Best Reverse Mortgage Lenders.

How Reverse Mortgages Work

The most common type of reverse mortgage is a home equity conversion mortgage (HECM), which is issued through private lenders but insured by the Federal Housing Administration (FHA). These mortgages are available only to borrowers over the age of 62.

Lenders can also issue their proprietary reverse mortgages, often with higher loan limits than HECMs and sometimes without the same age restrictions. In addition, some states and municipalities offer single-purpose reverse mortgages, designated for a specific use, such as home repairs or tax payments.

The amount that a person can borrow depends on different factors, including their age (and that of any co-borrowers), their loan’s interest rate, and the appraised value of their home.

Reverse mortgages can be structured in several ways. The borrower can receive the money as a single lump sum, as a credit line that they can draw on as needed, or in regular monthly payments for a set period or for as long as they live in the home.

While reverse mortgages can be useful in some instances, they also have downsides that anyone who’s considering one needs to be aware of.

Relatively High Fees

Lenders can offer slightly different products under the reverse mortgage banner. But they all charge an assortment of fees, and a reverse mortgage will typically be more expensive than a regular mortgage.

Before taking out a HECM, borrowers must receive counseling from a reverse mortgage housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD). Typically that will be free or involve a modest fee. The counselor should explain all of the likely costs and how they work.

The following fees apply to HECMs, but other kinds of reverse mortgages will have similar lists of their own.

• Origination fee: With a HECM, the lender can charge either $2,500 or 2% of the first $200,000 of your home’s value, whichever is greater, plus 1% of the amount over $200,000. The fee can’t exceed $6,000.
• Real estate closing fees: As with a regular mortgage, reverse mortgages can rack up different closing costs, including a home appraisal and inspection, title search, recording fees, mortgage taxes, and a credit check of the applicant, among others.
• An initial mortgage insurance premium: This is typically equal to 2% of the home’s value.

Borrowers can pay these upfront costs with their own money or use the loan proceeds to pay for them. In addition, borrowers can expect ongoing expenses, including:

• Interest: The interest on a reverse mortgage accumulates, adding to the amount the borrower or their heirs will have to pay back at the end. Unless the borrower takes the money in a lump sum, the interest rate will be variable, which means it can rise or fall.
• Servicing fees: These monthly fees reimburse the lender for its ongoing costs, such as making payments and processing paperwork. The HECM rules limit these fees to no more than $30 for fixed-rate loans or variable-rate loans that adjust just once a year and no more than $35 for variable loans that adjust monthly.
• Annual mortgage insurance premium: This will be 0.5% of the outstanding loan balance every year. As such, it will rise over time as the borrower draws out more equity.

Again, these numbers apply to HECMs and may be higher or lower with other types of reverse mortgages. Either way, borrowers will be in for a lot of fees, which has been a traditional complaint with these types of loans.

Ineligibility for Certain Government Benefits

In some instances, a reverse mortgage can affect a homeowner’s eligibility for government benefits.

If the homeowner wants to receive Medicaid, the joint federal and state health insurance program for some low-income and elderly Americans, their eligibility is based on their income and assets. Income from a reverse mortgage won’t count against them, but if they receive a lump sum from the reverse mortgage, that will be included among their assets. If their total assets exceed the limit for their state, they will have to spend the money to be eligible.

Money from a reverse mortgage lump sum can affect a person’s eligibility for Supplemental Security Income (SSI), a federal program for low-income individuals. The SSI program also sets limits on assets (which it refers to as resources), currently $2,000 for individuals and $3,000 for couples.

Important

A reverse mortgage will not affect Social Security or Medicare benefits.

Lenders May Foreclose

When homeowners take out a reverse mortgage, they agree to keep the property in good repair and to continue to pay real estate taxes, homeowners insurance premiums, and any association or related fees out of their pockets.

Failure to do so can allow the lender or loan servicer to foreclose on the property and cost the borrower their home, according to the Consumer Financial Protection Bureau (CFPB).

Other Family Members Can Be Evicted

Once the borrower(s) on a reverse mortgage die or leave the home for a certain length of time, the reverse mortgage can become due and payable. In the past, this sometimes meant that a spouse who wasn’t listed as a borrower in the loan agreement (often because they hadn’t reached age 62 when their spouse took out the loan) could be evicted.

Major reforms enacted in 2014 and 2021 for HECMs issued after those dates expanded the protections for some spouses. In particular, those who qualify as eligible non-borrowing spouses can now remain in the home for the rest of their lives.

• Under the 2014 rules, eligible non-borrowing spouses must have been legally married to the borrower when the reverse mortgage closed and remained married to them until the borrower’s death. For couples prohibited by law from marrying before the closing because of their gender, the survivor was eligible if the couple legally married before the death of the borrower and remained married until that person’s death. The non-borrowing spouse must also have lived in the property at the time of the closing and continued to live there as their principal residence.
• The 2021 rules broadened eligibility so if the borrower didn’t die but moved into a nursing home or similar facility, their spouse could remain in the home. Before then, the spouse would have had to pay off the mortgage after one year.

Spouses who don’t meet these requirements must still pay off the loan if they wish to remain in the home. This is also true for other heirs, such as children, who may live there. Otherwise, they will need to sell it.

The good news is that if they can sell it for more money than is needed to pay off the loan, they get to keep the difference. And even if the loan balance exceeds the sale price, they won’t have to make up the difference as long as they sell it for at least 95% of its appraised value. According to the CFPB, the lender uses the proceeds from the sale of the home as payment on the loan while the “rest of the loan is covered by the mortgage insurance that the reverse mortgage borrower paid during the duration of the loan.”

As an alternative, they can simply turn it over to the lender and walk away.

Smaller Inheritances and Greater Hassles for Any Heirs

A reverse mortgage can also deplete much of the homeowner’s wealth, especially if their home is basically all they have, leaving little behind for their heirs.

That said, it is their home to do with as they decide, and it may be better for them to take out a reverse mortgage than to rely on their family for financial assistance. And it is certainly better than having to live out their last years in poverty.

Leaving a home with a reverse mortgage to heirs (other than an eligible spouse) also puts a burden on them. In general, they’ll have 30 days after receiving a due and payable notice from the lender to pay off the debt, either by selling the home, buying it themselves, or signing it over to the lender. However, some lenders will extend that period by up to six months. This can be helpful if an heir wants to keep the home but needs to obtain financing to do so.

What Are Alternatives to a Reverse Mortgage?

Homeowners can also consider a home equity line of credit (HELOC), a home equity loan, or a cash-out refinance to borrow against their home’s equity.

How Much Money Can a Homeowner Get With a Reverse Mortgage?

The amount of money someone can get with a reverse mortgage depends on their age and the age of any co-borrowers, the value of the home, and the interest rate on the loan. The current maximum for a HECM is $1,149,825. Private loans can have higher limits but may also have higher interest rates.

Can a Borrower Cancel a Reverse Mortgage?

A borrower can cancel a reverse mortgage within three days of the loan closing without paying any financial penalties. This is known as “the right of rescission.” 

The Bottom Line

A reverse mortgage can allow an older homeowner to tap the equity that has built up in their home over the years without having to sell it or move out. However, these loans can be expensive and also have some disadvantages for the borrower’s heirs, so it’s worth considering the alternatives.

Fact checked by Suzanne Kvilhaug
Reviewed by David Kindness

We get it—given the state of the world, it may feel weird to start putting money aside for much later in life. In fact, 73% of Gen Z say the current economy makes them hesitant to set long-term goals. Not to mention, making a good living and building your savings is tough, with expenses like housing and essentials getting more and more costly.

Even so, investing in your future is a fundamental practice to ensure you’ll live comfortably down the road. Luckily, some systems and tools can help make the process smoother.

Once you calculate an ideal (and feasible) retirement age, there are a few routes you can take. If your job offers 401(k) benefits, you can aim to save at least 15% of your pretax income—the percentage that many financial advisors suggest.

Key Takeaways

• Starting early and contributing to a 401(k) in your 20s is crucial for long-term financial security.
• Aim to save at least 15% of your pretax income for retirement.
• Take advantage of employer matching contributions to maximize your savings.
• Use the 50/30/20 rule of thumb to determine the amount to contribute to your 401(k).
• Increasing your contributions over time can significantly impact your retirement savings.

In some cases, your employer will match part or all of your contributions, which is essentially a way to double your savings. If you don’t have a 401(k) plan through an employer, you can open an individual retirement account (IRA). We’ll explain.

Understanding 401(k) Contributions

A 401(k) is a retirement savings plan offered by many U.S. employers. As an employee who signs up for a 401(k), you agree to have a percentage of each paycheck paid directly into an investment account, and the employer may match part or all of that contribution. If you have a 401(k), you can choose among several investment options, typically mutual funds.

Taking advantage of a 401(k) plan is smart for a few reasons, one of which is the tax benefits. Your investments are pretax, meaning you keep a higher portion of each paycheck. Taxes and penalties typically apply only if you withdraw funds from your 401(k) before you turn age 59½. You can also deduct any traditional 401(k) contributions from your taxable income, which may reduce the amount you owe in federal taxes.

“It’s like why we buy toilet paper in bulk. A 401(k) is bulk buying,” said Jeanne Sutton, CFP, CPFA, MBA, who specializes in future financial planning. “A bunch of people are banding together and creating an investment account and getting lower pricing for doing that. So in general, a 401(k) should be the first, and for most Gen Z, the only place they have to save right now.”

Factors When Calculating Your Contribution Amount

To understand how much of your paycheck you should aim to invest, you need to consider several factors.

Calculate an Ideal Retirement Age

Start by calculating your ideal retirement age. This is based on your individual goals and circumstances.

There are several retirement calculators that let you adjust numerous factors to help determine how much you need to save. They factor in your current age, target retirement age, annual income, annual retirement savings, expected income increases, etc.

Aim To Save 15% Early in Your Career

While it may seem difficult to balance housing, basic necessities, a social life, school, and hobbies all on the same paycheck, there’s still no time like the present to start—literally. These days, 20-somethings are often not saddled with some larger financial obligations such as dependents and mortgages.

If we’ve learned anything in our 20-something years on earth, it’s that things tend only to get more complicated—the longer you wait, the more you’ll have to put away later in life. It’s smart to start as soon as possible rather than risk running out of money or having to defer retirement.

If you are financially stable—not sweating—you should aim to save about 15% of your annual salary early in your career. The more time you give your 401(k), the more opportunity your contributions have to grow compound interest—essentially, the interest you grow on your interest. 

“We believe that we need a bunch of money to start investing or that we can wait to get started when, in actuality, if we take a relatively small amount of money but allow it to grow and with as much time as possible, that’s the way to do it,” said Tori Dunlap, New York Times bestselling author and founder of HerFirst100k. “So I always tell people that time is more important than the amount of money when it comes to investing.”

Gen Z workers who have been in their 401(k) plan for five years straight saw their balances climb to an average of $29,100 in the third quarter of 2023, according to Fidelity. “With a relatively small amount of money, I can allow it to grow and work harder for me as I progress,” Dunlap said.

Take Advantage of Employer Contributions

Many employers offering a 401(k) plan also provide an employer match, in which the company matches employee contributions up to a certain percentage of their salary. According to Vanguard, the median contribution in 2023, the most recent year for which data is available, was 4%.

Employers have several options for matching 401(k) contributions. They can opt to match employee contributions dollar-for-dollar up to a certain percentage, or match a partial amount, e.g., 50 cents on the dollar up to 4%. Employers can also create a tiered formula, for example contributing 100% of the first 2% of the employee’s contribution and 50% of the next 2%. Some employers also set a dollar cap on the total contribution.

Your employer may also choose to set a vesting schedule for their matching contributions. In this case, you will be entitled to a percentage of the matching contribution after a set number of years of service.

Typically, vesting schedules increase with your tenure at the organization until you are fully vested. For example, you might be 20% vested at two years, 40% vested at three years, and so on, until you’re 100% vested at six years of service.

Important

An employer 401(k) match is free money. Whenever possible, it makes sense to contribute enough to maximize your 401(k) match.

Alternative Options for Savings

If you don’t have a 401(k) package in your role, you still have the option to begin your retirement savings. Opening a Roth or traditional IRA is a great way to allocate a portion of your income and invest it for your future self.

A Roth IRA allows you to contribute post-tax dollars, so there are no immediate tax savings, but once you retire, the amount you paid in and the money it earns over time are both tax free. Conversely, a traditional IRA allows you to contribute a portion of pretax dollars. This reduces your annual taxable income while setting aside money for retirement. You will have to pay taxes when you withdraw this money. Similarly to a 401(k) plan, you should allocate the money in your account to ensure that you’re investing these funds instead of letting them sit.

In fact, Gen Z tends to lean in favor of IRAs over 401(k)s. This could be due to the prevalence of the gig and creator economies. Gen Z investors saw a 63% increase in IRAs year over year, while overall dollar contributions increased 51% in the third quarter of 2023, according to Fidelity.

Applying the 50/30/20 Rule

The golden rule for money management is the 50/30/20 rule. In this framework, you spend 50% of your after-tax paycheck on needs, 30% on wants, and 20% on savings.

It’s intended to help you get in the habit of managing your after-tax income responsibly, especially to have funds on hand for emergencies and retirement. Every household should first prioritize creating an emergency fund in case of layoffs, unexpected medical expenses, or other unforeseen costs.

Needs include:

• Rent or mortgage payment
• Car payment
• Insurance and healthcare
• Grocery
• Minimum debt payments
• Utilities

Wants include:

• New clothing
• Tickets to events
• Eating out
• Vacations and nonessential travel
• The latest gadget

Savings include:

• Creating an emergency fund
• Making contributions to a 401(k) or IRA
• Investing in the stock market
• Setting aside funds to buy property
• Making debt repayments beyond the minimum

Of course, following this framework can be incredibly difficult—and few actually can. As of January 2024, the average monthly personal saving rate for individuals in the United States was just 3.8%. Even if it’s just aspirational for now, keeping this framework in mind will help you set lasting, healthy habits with your money.

Tips To Maximize 401(k) Contributions in Your 20s

Contributing your 401(k) may feel like a luxury in your 20s. You’re just beginning your career and likely have other expenses competing for a share of your entry-level salary including student loans and skyrocketing housing costs.

However, there are ways to fit 401(k) contributions into your budget and begin the habit of saving for your future.

• Start small: Even 1% of your salary will make a difference over time. Given that your 401(k) contribution is probably pre-tax, you may not even notice the difference in your take-home pay.
• Start early: As the saying goes, it’s not timing the market, it’s time in the market. Getting started early will help you maximize the power of compound interest, which will grow your savings over time.
• Aim to meet your employer match: If you have an employer match, take advantage of it. Let that percentage be your initial savings target.
• When you get a raise, your 401(k) gets a raise: Make a commitment to increase your contribution whenever you get a raise, promotion, or new job.

Alternatives to a 401(k)

As mentioned above, IRAs are excellent alternatives to 401(k) plans if you don’t have a benefits package in your role.

Another option is to have your employer match your student loan payments. Under the SECURE 2.0 Act, the Internal Revenue Service (IRS) authorizes linking 401(k) matching contributions to employee student loan repayment.

While this may seem like an excellent option for many, it’s still good to start saving for retirement soon. Any debt repayments should be prioritized by how high the interest level is; if it’s small—say, under 6%—it may be more financially beneficial for you to contribute to a retirement plan than pay off your loans faster.

What Is the Best Age To Start a 401K?

As soon as possible. Unless you’re barely scraping by on every paycheck, you should take advantage of your 401(k) plan immediately.

Can I Withdraw From My 401K in My 20s?

Technically, yes, though it’s not a good idea. If you withdraw before age 59½, you’ll face hefty fees and penalties. However, it’s not impossible: Fidelity says that in the third quarter of 2022, some 2.3% of workers took hardship withdrawal. The top reasons behind this increase were avoiding foreclosure or eviction and paying medical expenses.

What Happens to My 401(K) if I Switch Jobs?

You can roll your 401(k) plan over to your new role. If your new role doesn’t offer a retirement savings plan, you can still roll your 401(k) into an IRA and invest it from there.

The Bottom Line

Contributing to your 401(k) in your 20s will help you maximize the impact of compound interest, giving your money the most time to grow. If you can’t commit to saving 15% of your income right off the bat, start small. Focus on meeting your employer match, if you have one. Over time, you can increase your contribution as you earn more money.

Ultimately, any money you invest in your 401(k) when you’re starting your career is an investment in your future financial security. Best of all, you’ll be building solid money-management habits that will last a lifetime.

Reviewed by Lea D. Uradu
Fact checked by Suzanne Kvilhaug

The Internal Revenue Service (IRS) considers bonuses to be supplemental wages, which means your employer is required to immediately withhold 22% of your windfall.

You could get some of that back at tax time. On the other hand, a bonus might bump you into a higher tax bracket.

Below are five strategies that may help you keep as much of that extra cash as the IRS allows.

Key Takeaways

• A bonus or windfall can be a great way to jumpstart your retirement savings.
• If you are paid in shares of stock, consider the best time to sell some to offset or limit your capital gains.
• If you itemize your deductions on Schedule A, you can shield some of your bonus by making a charitable donation.
• It may be possible to delay your compensation in order to cut back on your reportable income for the year.

1. Set It Aside for Later

A bonus or windfall can boost your retirement savings.

401(k)s

It might make very good sense to use the extra cash to maximize your 401(k) contribution. This move may even reap an additional reward if your employer kicks in a matching sum.

The maximum amount you can contribute to your 401(k) is $23,500 for the 2025 tax year, while the catch-up contribution is $7,500 for those age 50 or older. (For the 2024 tax year, the maximum was $23,000 while the catch-up contribution was also $7,500.)

Keep in mind that when changing your 401(k) allocation through your employer, there may be a delay before they are recorded in the payroll department. This can be critical when planning for a windfall received at the end of the year.

IRAs

Your total contributions to all of your traditional individual retirement accounts (IRAs) and Roth IRAs cannot be more than $7,000 for the 2025 tax year, plus $1,000 if you’re age 50 or older. (The maximum was also $7,000 in the 2024 tax year and the catch-up contribution was also $1,000.)

The deduction you can take on IRA contributions, however, is subject to limits based on your income, filing status, and whether your employer has a retirement plan in place.

Note: If you received the windfall on the last day of 2024, you can still make contributions up until the 2025 tax filing deadline of April 15, 2025.

Roth IRAs

Another strategy, says Rosalind Sutch, a certified public accountant (CPA) at the tax consulting firm Armanino LLP in Philadelphia, is to make a contribution to a traditional IRA, then convert the account to a Roth IRA before the end of the year. You will need to pay taxes upfront, but distributions you take in retirement (after age 59 ½) will be tax- and penalty-free, as long as you’ve had the account for at least five years.

The caveat is that you’ll need to walk through the paperwork carefully with your accountant to avoid tripping up and generating taxable income, especially if you already have an IRA. Also, you’ll need to fit the Roth income limitations.

2. Defer Compensation

When it comes to getting back some of that 22% withheld bonus, you have a number of options. For one, you might look into a deferred compensation plan at work, which will allow you to spread out both the money you pocket and the tax liability.

If you are paid in shares of stock, you’ll want to consider the best time to cash out of a security that has increased in value—in order to offset or limit capital gains. Long-term capital gains rates are 0%, 15%, and 20%, depending on your income level.

Any prepayment of property taxes that have yet to be assessed cannot be deducted. In any case, taxpayers are advised to check with their accountant before trying this tack.

3. Pay Your Taxes

One beneficial way to use your bonus is to catch up on estimated tax payments or your withholding-tax obligations and sidestep an IRS penalty for coming up short.

Under certain circumstances, you might be able to pay next year’s real estate taxes in advance. It depends on when your real estate taxes were assessed. Under IRS rules, you can deduct the prepayment of property taxes for the next tax year if the assessment was received and paid in the current tax year.

4. Give It Away

If you itemize your deductions on Schedule A, you can shield some of your bonus by making a charitable donation. For most cash contributions, up to 60% of adjusted gross income (AGI) can be deducted.

The IRS maintains an online resource to help taxpayers determine the deductibility of their contributions to tax-exempt organizations.

If you cannot decide on a charity, you might consider a donor-advised fund (DAF), which is a tool for high-net-worth individuals. When you contribute to a DAF, the money goes into an account with your name. You are permitted to take the full charitable deduction in the year it was made, even though the funds might not be dispersed to charity until later. As with any donations, you should make sure that the donations to the DAF are deductible.

5. Pay Your Expenses

Another way to shelter a bonus or windfall is to pay upcoming deductible business or personal expenses before December 31. You might consider upgrading your computer equipment or footing utility bills for your home office before year-end. Using a credit card may make sense, provided you can pay off the additional balance in January.

Another idea: If you have a health savings account at work, consider using part of your bonus or windfall to pay up to the contribution limit. Just be sure it’s money you can carry over to next year, or that you know you will spend in time.

Can I Avoid Having Taxes Taken out of My Bonus?

Companies are generally required to withhold appropriate taxes from your paychecks, including those included in a bonus. In any case, you will owe some taxes on that bonus no matter what strategies you deploy to reduce them.

Consider ways to reduce your total taxable income for the year, such as making a contribution to your tax-deferred retirement accounts or paying deductible expenses in advance.

Why Might My Bonus Be Taxed at a Higher Rate?

In some cases, the IRS may view your bonus as supplemental income. Supplemental income is taxed at a higher rate than regular earned income.

Are Bonuses Taxed Twice?

In many cases, bonuses are treated the same as regular earned income for taxes. In some cases, bonuses may be paid out of income to a corporation which is taxed at the corporate level, then distributed to employees and taxed at the individual level. However, if the corporation is able to deduct the bonus expense, the charge is not taxed twice. In either case, bonuses are only taxed to the individual once.

How Are Bonuses Reported on a W2?

When an employer pays its taxes, it will often report the bonus in Box 1 for your W2. This bonus will be combined with all earnings and salary earned for the year. In addition, any taxes withheld from the bonus will be added to the W2 and reported as part of the W2.

The Bottom Line

As soon as you know you’re about to get a bonus or windfall, consider booking a meeting with a tax advisor to explore ways to reduce the taxes you’ll owe on it.

“Like a lot of tax issues, things can get very complicated,” says Sutch. “You don’t want to get whipsawed on some of the more intricate rules, so it’s a good time to lean on a competent tax adviser’s advice.”

The commissions and fees are among the expenses you may face selling a home

Fact checked by Amanda Jackson
Reviewed by Doretha Clemon

Buying a home is expensive, but sellers are also responsible for paying different expenses. The costs of selling a home can include commissions and fees such as filing fees or notary fees, as well as potential taxes. You may also have to bear the costs associated with preparing your home to show to buyers or hiring a lawyer. Learn more about what to expect with the costs of selling a home and ways to minimize what you have to pay, including which costs are negotiable.

Key Takeaways

• Costs associated with selling a home include real estate agent commissions and potential tax on profits.
• A seller typically pays commissions to their agent as well as to the buyer’s agent.
• Preparing a home to show to buyers can entail several expenses, such as repainting or new landscaping.
• If the home sells for a significant profit, the seller may also be subject to capital gains tax.

Real Estate Agent Commissions

The largest cost involved in selling a home is often paying the real estate agent commissions. It may come as a surprise to some first-time sellers that the seller is typically responsible for paying commissions for both their agent and the buyer’s agent.

A 6% commission split between the seller’s and buyer’s agents was the standard, but commissions are negotiable. The national average commission for 2025 is estimated to be around 5.32%, which is split between the listing and buyer’s agent at 2.74% and 2.58%, respectively.

Preparing Your Home to Sell

Real estate agents often refer to a home’s curb appeal, which is the first impression the property makes on potential buyers. If you’re selling your home, you’ll want it to be in the best condition possible to attract more buyers and to help you get a higher price.

Potential costs with preparing your home to sell can include repainting, landscaping, or any home repairs. If a home inspector identifies problems with the property, you may have to pay to fix them or negotiate with the buyer.

Some sellers invest in staging their homes to increase their appeal. That entails decluttering or buying (or renting) new furniture. Experts say the median value of staging a home ranges between $400 when sellers stage their homes themselves and $600 when they use staging services.

You can also save on commissions by selling your home without an agent. You may still have to pay the buyer’s agent, and you will be taking on a great deal of work that your agent would handle for you.

Incentives for Buyers

In a strong housing market, a home might receive multiple bids, and you may not have to offer additional incentives to compete for potential buyers.

In a weaker market, however, incentives can make a difference in selling your home. Common incentives include paying points toward the buyer’s mortgage (known as seller-paid points), covering some of the buyer’s closing costs, or giving the buyer some furniture or appliances.

Note

As many as 20% of selling agents said staging increased sales prices by 1% to 5%.

Paying Off Your Mortgage

If you still owe money on your mortgage, you’ll have to use some of the sale’s proceeds to pay it off. For the deal to go through, you’ll need a payoff letter or statement from your lender. It will show how much you owe the lender, including any fees or prepayment penalties associated with the transaction.

If you have an escrow account with your lender, the lender should either apply that amount to your outstanding debt or refund it to you.

Hiring a Lawyer

Whether you’re required to use a lawyer in selling your home varies from state to state, but it’s often a good idea either way. The seller’s lawyer can draft the sales contract and represent the seller’s interests at the closing.

What you’ll pay for hiring a lawyer can vary widely, but it’s likely to be from several hundred to several thousand dollars. This depends on the type of transaction, property, location, and your needs.

Other Closing Costs

Paying the real estate agents’ commissions will account for the bulk of the closing costs the seller is responsible for, but there can be others. For example, the seller may be expected to pay any transfer taxes, which some states impose when a property changes hands. If the property is part of a homeowners association, the association might charge a transfer fee, as well.

These rules also vary from state to state, and who pays a particular closing cost can often be negotiated between the buyer and the seller as part of the contract.

Income Taxes

If you make a profit from selling your home, you may be subject to federal income taxes. However, you might be eligible to exclude a portion of your profit if you meet these two criteria: You owned the home for at least two years, and you lived in it for at least two years out of the past five.

Assuming you qualify, you can exclude up to $250,000 of the profit as an individual or $500,000 as a married couple filing a joint tax return.

Your profit isn’t based on what you paid for the home initially but on your adjusted cost basis. That consists of what you paid for the home plus the cost of any improvements you’ve made over the years. So, for example, if you add a new roof, central air conditioning, or wall-to-wall carpeting, those expenses will increase your basis and lower your profit. You can add some of your closing costs from when you purchased the home to the basis as well.

Also, the length of time you owned your home will have an impact on the capital gains tax you’ll have to pay. If you owned the home for at least a year, your profit (if any) will be taxed as a long-term capital gain. If you owned it for less than a year, it will be taxed at a potentially much higher rate for short-term capital gains.

What Closing Costs Does a Homebuyer Have to Pay?

Homebuyers are responsible for several fees. Typical closing costs include a mortgage origination fee, property appraisal fee, title search fee, title insurance premium, and first-year homeowners insurance premium. Note that some of these fees may be negotiable, and the seller may agree to chip in as part of your deal. In total, a buyer’s closing fees often range from about 3% to 6% of the home’s sale price.

Are Closing Costs Tax Deductible?

Most closing costs are not tax deductible. The exceptions are mortgage interest (including points) and real estate taxes, and that’s only if the buyer or seller itemizes deductions when they file their tax return for the year. However, sellers are allowed to add some of their original closing costs to the adjusted cost basis for their home, which can reduce their tax liability.

What Is a No-Closing-Cost Mortgage?

A no-closing-cost mortgage is one in which the lender will either add the borrower’s closing costs to the loan amount or charge a higher interest rate to make up for them. In other words, even if you don’t have to pay any closing costs initially, you’ll still pay them over time.

The Bottom Line

Selling a home can entail several expenses. The largest single expense is likely to be real estate agent commissions, but there are other costs and fees to keep in mind as well. If you sell your home for a significant profit, you may also owe income taxes on a portion of that amount.

Reviewed by JeFreda R. Brown
Fact checked by Vikki Velasquez

Investors who diversify their portfolios typically strengthen their investment goals by maximizing returns while reducing risk. Many choose stocks, bonds, commodity-centric mutual funds, futures, and currencies, but investors can add commodities. These are basic goods that can be transformed into other goods and services.

Key Takeaways

• Investing in commodities can provide investors with diversification.
• Supply, demand, and geopolitics all affect commodity prices.
• Investors can trade commodity-based futures, stocks, ETFs, or mutual funds or hold physical commodities such as gold bullion.

What Is Commodity Investing?

Commodity trading historically linked cultures and people. From spices and silks in the early days to the exchanges where these assets are now traded, commodities are still popular investment vehicles. Commodity-hungry investors can consider investing directly in the physical commodity or indirectly by purchasing shares in commodity companies. These companies are accessible through several mutual funds or exchange-traded funds (ETFs).

Investing in commodities tends to protect investors against the effects of inflation. Generally, demand is high during periods of inflation. Commodities are also a good bet against the U.S. dollar. When the greenback declines, commodity prices rise.

Investors can maximize returns with commodity investing due to strong global demand. However, commodities tend to be more volatile than other investments, especially funds that track a single commodity or a specific sector of the economy. Investors who trade futures should remember that it involves speculation. Futures contracts track an underlying commodity or index. Futures have unique risks that must be managed independently of the underlying commodity.

Pros

• Protect against inflation

• Diversify a portfolio

• Hedge against a decline in the base currency

• Help hedge price risk

Cons

• Increased volatility when compared to other investments

• Margin trading in commodities potentially resulting in significant losses

• Speculative nature of trading with uncertainty of the outcome

Important

Futures markets are regulated by the Commodity Futures Trading Commission (CFTC).

Crude Oil

After production, crude oil is refined into products like gasoline. However, petroleum products include plastics, medicines, floor wax, shingles, ink, cosmetics, synthetic fibers, solvents, fertilizer, and asphalt. Crude oil generally reacts to the laws of supply and demand. When demand exceeds supply, prices tend to rise. When demand wanes, prices tend to fall.

Similarly, demand from developing nations such as China and India—whose economies are still growing—pushes up prices. Geopolitics impacts the price of crude oil. Tensions in the Middle East, where much of the world’s oil is produced, can increase oil prices.

Oil futures are a favorite of day traders and are bought and sold through brokerages. However, futures can be highly volatile and require capital. Investors may consider purchasing stocks in oil companies, crude oil mutual funds, or ETFs. Other options include buying shares in energy sector mutual funds or ETFs, which invest directly in oil company stocks. The U.S. Oil Fund is one example. It tracks the movement of West Texas Intermediate light, sweet crude oil.

Important

Historically, oil prices were influenced by the producer cartel OPEC. In the early 21st century, the development of new technology, particularly hydro-fracturing (fracking), created a second U.S. energy boom, largely decreasing OPEC’s importance and influence.

Gold

Gold is found in jewelry and technology and used by central banks and investors. This precious metal has traditionally been a safe investment and a hedge against inflation. When the U.S. dollar goes down, gold prices go up. Prices are affected when central banks—which hold gold—decide to diversify their monetary reserves by buying more gold.

Unlike crude oil, investors can hold the physical commodity. Investors can purchase gold bullion bars or coins. But this means having to pay to store it in a deposit box, vault, or safe place. Gold futures contracts require investors to deposit an initial margin. If the price rises, investors will profit; however, if the price drops, the investor stands to lose their money.

With gold stocks, investors aren’t limited to producers but also exploration and mining companies. Gold ETFs track the price. For instance, the SPDR Gold Shares ETF exposes investors to bullion without having to take possession of it.

Silver often trades similarly to gold, but with a gold/silver price ratio that fluctuates over time.

Base Metals

Base metals are used in commercial and industrial applications, such as construction and manufacturing. Aluminum, zinc, and copper are examples. They are relatively inexpensive, and supplies are generally stable because they’re commonly found globally.

Prices tend to be much lower than for precious metals; however, the increase in base metal applications and rising global demand—particularly from China and other developing nations—positively impact prices.

Investors can hold stocks in base metals firms like aluminum or steel companies. Furthermore, holding ETFs like the SPDR S&P Metals & Mining ETF provides exposure to companies involved in metals and mining.

Are ETFs a Good Investment Vehicle for Commodities?

Commodity ETFs allow for easy trading because they are purchased like stocks, provide diversification, are not traded on margin like futures are, and typically have low expense ratios.

When Should Investors Buy Commodities?

Commodities are a hedge against inflation, so buying before periods of high inflation is a common investment strategy. Commodities should be viewed as any other investment concerning an investor’s time horizon and risk profile.

What Are Common Base Metals?

Base metals are nonferrous metals that are not considered precious or noble metals. The most common base metals are copper, lead, nickel, tin, aluminum, and zinc. 

The Bottom Line

Like any investment, commodities come with risks but can still be a way to diversify an investor’s portfolio. In addition to oil, gold, and base metals, other commodities to consider are platinum, palladium, silver—lithium, cotton, and food products such as coffee, corn, oats, wheat, soybeans, and sugar.

Heirs must adhere to deadlines and payoff rules

Fact checked by Amanda Jackson
Reviewed by Lea D. Uradu

A reverse mortgage uses home equity to provide cash for homeowners who are age 62 or older. This Home Equity Conversion Mortgage (HECM) allows homeowners to borrow money against the value of their home and receive funds as a lump sum, a fixed monthly payment, or a line of credit.

When the borrower dies, the loan balance becomes due. If the borrower’s heirs inherit a home with a reverse mortgage, they generally have 30 days to buy the home, sell it, or turn it over to the lender. However, the deadline can often be extended to six months to allow heirs time to buy the home or secure financing.

Key Takeaways

• Inheriting a property with a reverse mortgage depends on several factors, including when it originated. 
• A widow or widower could potentially lose the home upon their spouse’s death. 
• After the homeowner’s death, a reverse mortgage loan is due within 30 days but may qualify for an extension.
• For homeowners who plan to leave a home with a reverse mortgage to heirs, they can create an estate plan.

Spouse or Co-Borrower

Heirs can inherit a home with a reverse mortgage but will be responsible for settling the debt, either by paying it off, selling the home, or turning it over to the bank. The rules depend on several factors for those who inherit a home with a reverse mortgage from a spouse:

• Co-borrower: A co-borrower can remain in the home and receive reverse mortgage payments. Otherwise, the loan balance must be paid within 30 days, with a potential six-month extension.
• Timeline: Some individuals may still qualify as an eligible non-borrowing spouse under U.S. Department of Housing and Urban Development (HUD) rules. Qualifying can be difficult, but heirs can keep the home without paying off the debt. The process works best if the reverse mortgage was secured on or after Aug. 4, 2014.
• Married Spouse: If a spouse took out the reverse mortgage after Aug. 4, 2014, the remaining spouse will qualify as an eligible non-borrowing spouse and stay in the home without paying back the reverse mortgage loan.

If two spouses live together in a home and only one is the borrower, the other spouse risks losing the home if the borrower dies. Check with the reverse mortgage provider to include both names on the loan if that’s what was intended.

Inheritance Issues

A reverse mortgage can create problems for heirs. Though both spouses have to consent to reverse mortgage loans, both don’t have to be named as co-borrowers. If both spouses hold the title and are borrowers on the reverse mortgage, then the surviving spouse may continue the reverse mortgage and can continue living in the house.

However, if an heir is neither a co-borrower nor the spouse of the borrower, they must pay back the reverse mortgage to the lender by:

• Paying off the mortgage balance in full with estate or other funds.
• Paying off the balance of the reverse mortgage in full by obtaining a traditional mortgage on the property.
• Paying off the reverse mortgage with the proceeds from selling the property. 

Heirs who want to keep the home by paying off the debt must repay either the loan balance or 95% of the appraised value, whichever is less. Alternatively, they could sell the home to pay off the debt and generate cash, which is the most common option, according to the Consumer Financial Protection Bureau.

Important

Heirs who want to keep the home can face problems if it has a reverse mortgage they cannot repay. A traditional fixed-rate forward mortgage can offer these heirs a funding solution, but they may not always qualify. If they cannot repay the debt, the home must be sold to satisfy the reverse mortgage debt.

Deadlines

At 30 Days

Lenders issue a Due and Payable Notice to the estate within 30 days of receiving notice of the borrower’s death. At this time, heirs are given three options:

• Pay off the remaining loan balance of the Home Equity Conversion Mortgage
• Sell the property for at least 95% of the appraised value 
• Provide the lender with a deed-in-lieu of foreclosure 

Within 60 Days

Thirty days after the Due and Payable Notice is sent, heirs must secure an appraisal of the home. A surviving, non-borrowing spouse, may apply for a deferral if eligibility requirements are met.

At 6 Months

By the end of six months, if heirs have not sold the house or repaid the debt, a lender may start the foreclosure process to satisfy the loan.

12 Months After Death of Borrower

Heirs commonly have six months to satisfy the debt. HUD may approve heirs eligible to receive two three-month extensions to pay the HECM balance, giving them a year to pay off the loan after the borrower dies.

What Happens If the Home Sells for Less than the Reverse Mortgage Owed?

If the property sells for less than the amount of debt, the heir would receive no cash from the sale. A property may sell for less than the outstanding reverse mortgage if home values have declined, if it has physically deteriorated or been damaged, or if the borrower outlived the life expectancy. Heirs are not responsible for paying outstanding debt after the proceeds from the home sale are applied. Instead, Federal Housing Administration (FHA) insurance covers the lender’s shortfall.

Can a Family Member Take Over a Reverse Mortgage?

A family member cannot take over a reverse mortgage unless they are a co-borrower. Instead, they must pay off the mortgage with cash or a traditional mortgage. They can sell the property, and the resulting funds will be used to pay down the debt, with any remaining amount going to the heirs.

What Happens If a Homeowner With a Reverse Mortgage Goes Into a Nursing Home?

Reverse mortgages have residency requirements. If you go into a nursing home for an extended period, then the reverse mortgage loan will become due, the home may be sold, and any proceeds from the sale of the home may make you ineligible for government benefits.

The Bottom Line

Heirs may encounter several problems when inheriting a reverse mortgage. The process for inheriting a property with a reverse mortgage depends on whether the heir is a spouse or a co-borrower of the mortgage and when it originated.

You can have only one reverse mortgage, but there are other ways to access equity

Fact checked by Timothy Li
Reviewed by Doretha Clemon

Reverse mortgages are limited to primary residences, and since you can have only one primary residence, it is not possible to have two reverse mortgages at the same time.

Reverse mortgages can be suitable for snowbirds who also are seniors. Many snowbirds have second homes in the Sun Belt, Hawaii, or Florida, so they have built up equity in two distinct properties. Since a reverse mortgage is an option for only one of those properties, there are alternatives such as home equity loans or cash-out refinance plan.

Key Takeaways

• Many snowbirds have equity in two homes: their primary residence and their vacation home. 
• A reverse mortgage can be a good way to access this equity, but you can only have one at a time. 
• Reverse mortgages can be taken out only on your primary residence, meaning the place where you spend the majority of the year.
• There are other ways of accessing the equity in your properties. These include a cash-out refinance or a home equity loan.

What Is a Reverse Mortgage?

A reverse mortgage is a special type of loan that is available to people who are 62 and older who own their own homes and have a considerable amount of equity in their properties. It allows retirees a way to borrow money against the value of their homes. The loan is advanced in a lump sum, as a fixed monthly payment, or as a line of credit.

There are three types of reverse mortgages. The most common is the home equity conversion mortgage (HECM). Under this program, the mortgage amount that you may borrow will be the lesser of:

1. The appraised value
2. The Federal Housing Administration (FHA) HECM limit of $970,800, or
3. The sales price (only applicable to HECM for Purchase). If you need to borrow more, you can look into a jumbo reverse mortgage, also called a proprietary reverse mortgage.

Reverse mortgages come due when the homeowner dies, moves away permanently, or sells their home.

Reverse Mortgages for Snowbirds

Many snowbirds choose to buy a second home in their vacation spot of choice, whether in Florida, Hawaii, or somewhere else warm and sunny. They also may have significant equity built up in their primary residence. It’s possible to use a reverse mortgage to access some of this money, giving them regular monthly payments, a lump sum, or a line of credit, in exchange for giving away the equity in their home.

However, residency rules for reverse mortgages state that the property on which you have the reverse mortgage must be your principal residence. This means you can’t be away from a property for more than six months and have a reverse mortgage on it.

This effectively bars snowbirds from taking out a reverse mortgage on their second home if they already have a reverse mortgage on their primary residence. However, if you have a significant amount of equity invested in your second home and want to access it, there are alternative ways of doing that. 

Important

If you have a second home and spend a lot of time there, be careful with the residency rules of reverse mortgages. If you are away from your primary residence for more than six months at a time, then your reverse mortgage lender can assume that you are in breach of the lending terms and may even start foreclosure proceedings. Make sure that you keep records, and respond quickly to requests (generally annual) to confirm where you are living.

Accessing Equity for Snowbirds

A reverse mortgage is not the only way to access the equity that you have built up in a property. In fact, reverse mortgages only make sense for a small proportion of senior homeowners. That’s because the high costs associated with reverse mortgages make other forms of borrowing more cost-efficient in the long term.

And unlike reverse mortgages, it’s possible to use these alternative sources of borrowing on two properties at once or to use them just in association with your vacation home. The alternatives include a:

• Cash-out Refinance: This option can help you access considerable equity in your home at one time. Keep in mind that you must make monthly payments to the lender if you take this route.
• Home Equity Loan or Home Equity Line of Credit (HELOC): You can access a great deal of equity in your home by taking out a HELOC. This option also requires regular monthly payments. But, there may be fewer associated fees, making this a much less expensive alternative to a reverse mortgage or cash-out refinance. Another benefit is that you can secure a HELOC with your primary or second (vacation) home—or both if you choose to do so.

Whichever option you take, make sure that you stick within the residency rules for your first reverse mortgage and plan for the long term. While taking equity out of your properties might be attractive in the short term, you should plan carefully to make sure that it doesn’t leave you short of money in the long term.

Can You Have Two Reverse Mortgages?

No, borrowers can only have one existing reverse mortgage at a time. However, borrowers who have paid off a reverse mortgage can get another reverse mortgage. And borrowers with an existing reverse mortgage can refinance the reverse mortgage to another one.

Does a Reverse Mortgage Have to Be on Your Primary Residence?

Yes, the residency rules for reverse mortgages state that you must spend the majority of the year in the property on which you have the reverse mortgage. If you are away for more than six months, your lender might say that you’ve broken the lending terms and may even start foreclosure proceedings.

Can I Use a Reverse Mortgage to Buy a Second Home?

Yes, but be careful. The fees and interest associated with a reverse mortgage mean that you may end up with a lot less money than you invested in your first home. Other ways of accessing your equity, including a cash-out refinance or a home equity loan, might make more sense in the long term.

The Bottom Line

Many snowbirds have equity in two homes: their primary residence and their vacation home. A reverse mortgage can be a good way to access this equity, but you can only have one at a time. Reverse mortgages can be taken out only on your primary residence, meaning the place where you spend the majority of the year.

There are other ways of accessing the equity in your properties, though. These include a cash-out refinance or a home equity loan.

Reviewed by Amy Soricelli

Those entering the workforce armed with a degree in finance face a tough choice. Do they head to Wall Street and the lucrative, although risky, world of high finance? Or, do they head away from the path of the investment banker and develop the tools to become a future giant of corporate finance?

Of course, there are even more choices than that. Below we take a look at the options available to those entering the workforce and provide some tips on how to land a finance job.

Key Takeaways

• Finance majors usually study a robust curriculum of critical subjects from risk management to financial forecasting.
• Coursework may vary from school to school, but overall, finance courses cover multiple areas of the industry.
• Internships often play an essential role in getting hired after graduation.
• Accounting, Operations, Compliance, and FinTech are four popular areas of finance.

Working in Financial Services

Coursework for finance majors varies from school to school. Typically, the curriculum teaches students several key subjects, including business fund management, financial markets, security analysis and valuation, financial institutions, investments and securities, risk management, trading, financial forecasting, capital structure, venture capital, and security issuance.

Overall, finance courses are more quantitative than qualitative, meaning that students really need to develop some real-world experience through internships to build up the interpersonal skills that the workplace requires. This is one of the primary reasons so many schools have students work on projects in teams. So what does a job in finance actually look like? The answer is a broad one, but we’ve rounded up five popular careers in finance.

Accounting

The success of financial firms may ebb and flow and the fates of investment bankers may change at any moment, but there is one employee that firms can rarely get enough of—accountants. Accounting work on Wall Street involves reviewing and handling financial system data, maintaining financial schedules and journal entries, and keeping track of where a firm’s obligations are.

Taking this career path requires an eye for order and a stomach for complexity. Tracking the value of a security position may not seem difficult in a textbook, but keeping track of a dizzying array of derivatives requires a certain finesse that requires more than just standard knowledge of accounting principles.

Important

When you graduate with a degree in finance, there are many career paths open to you from accounting to investment banking.

Investment Banking

Essentially, investment banks are consulting firms that provide advice on initial public offerings (IPOs), mergers, stock repurchases, and corporate refinancing. These firms rely on smart personnel with inquisitive and detailed minds to help them examine the inner workings of their clients, which makes it easier to bring in sizable billings.

Business analysts work with clients to identify their needs and develop strategic plans that will move them toward meeting those needs. This all happens while setting requirements and tasks to improve the likelihood of sustained success among clients.

Going down this career track requires skill in identifying the big picture and the patience to work with clients who may not know what they want. This position often involves interfacing with many different clients, as well as working with members of the firm who are specialists in specific fields. Projects may be short and defined or long and vague.

Operations

The heart of a Wall Street firm is its operations. Work in this area involves project management, gathering requirements, and business process planning—tasks generally not considered when college graduates think of an investment bank.

Employees may track complex trades to ensure that all parties are settled and that the ownership of securities passes to the correct group. They may examine how deals are executed in order to improve the process, and they focus on accomplishing the firm’s goals efficiently and with the fewest resources required.

Operations staff, much like accountants, need an eye for the relationships between different parties and factors and should be comfortable with business process mapping and modeling.

FinTech

The world of finance changes rapidly—so much so that it barely resembles the days when computers were first used to evaluate transactions. Today, financial engineers create new financial instruments that would have been impossible to implement in the past. Complex derivatives, exotic options, and multi-party trades require employees who understand financial economics, mathematics, and software engineering. They also require imagination and diligence.

A financial engineer may be charged with developing software that can reduce the time it takes to execute a trade, allowing firms to profit from the smallest of fluctuations in a security’s price. Tasks might require modeling financial formulas and developing simple interfaces so that other employees can interpret data.

Compliance

When Wall Street draws the ire of Main Street, politicians and regulators often step in to fix an industry that may be considered broken. Since before the Great Depression, regulatory bodies such as the Securities and Exchange Commission (SEC) have provided rules and guidelines that firms must follow in order to protect consumers and other businesses. Breaking these regulations often comes with a hefty fine.

To avoid conflict with regulations, firms employ compliance officers to make sure that the strategies and processes they employ are legal. Compliance officers review and evaluate business processes and compare them to regulations, audit company activities in order to mitigate risk, and develop policies and procedures designed to make breaking the rules evident and preventable.

This position is often the “bad cop” of the company, as its function is to limit behavior that increases a firm’s risk, even if that behavior is highly profitable. Knowledge of process planning, financial forensics, and business law are all desirable assets for achieving success.

Do You Need A College Degree to Work in Finance?

Yes, most entry-level jobs in finance require applicants to have an associate’s degree or – preferably – a bachelor’s degree. Meanwhile, more advanced positions may require applicants to hold a master’s degree or specialized industry certification. While you can get a entry-level job without a degree, you’ll likely find it much harder to advance your career without one.

What Are Some Entry-Level Jobs in Finance?

Numerous entry-level positions exist in financial firms, from banks to insurance companies. Common positions include junior accountants, personal bankers, financial advisors, financial analysts, underwriters, and registered representatives.

What College Degrees Are Most Common for Finance Jobs?

A degree in finance is usually a good option if you want to land a job in finance. However, there are plenty of viable alternatives, especially if you want to work in a specialized career. Popular options include economics, actuarial science, statistics, and mathematics.

The Bottom Line

Working on Wall Street means long hours and backbreaking work, all thrown in with something commonly referred to as “paying your dues.” Entry-level work can often be thankless, and the rewards of the job may vary greatly from firm to firm and position to position.

Tough economic times and political influences also change what Wall Street jobs have to offer. Many factors can focus the public’s eye on a number of facets of Wall Street that might have typically gone unnoticed.

Ever-changing bonuses, salaries, regulations, and technology will adjust the benefits and restrictions of a career in finance. The days of the “fat cat” may not be over, but they certainly have changed.