Sure, there’s plenty of parental advice that will never grow old: Learn to prioritize your time. Follow the Golden Rule. Wear sunscreen. But when it comes to financial tips, some of those age-old lessons fail to fit in with a millennial’s reality. Here are four expert-approved updates to once-common wisdom:
Old advice: Wait until your student loans are paid off before buying a home
“Student loans are a reality for many of today’s prospective buyers, but having them does not mean putting homeownership on the back burner,” says Kathy Cummings, senior vice president of homeownership solutions and affordable housing programs at Bank of America. “It does mean you’ll need to be even more in tune with your budget and financial realities to reach your goal.”
For example, if homeownership is one of your goals, Cummings says to talk to a financial specialist about switching to a graduated student loan repayment plan. Your loans will start low and then will be incrementally raised every two years to match your income. You’ll have more cash to save in your early career, and it will help you with your debt-to-income ratio, which she says is an important piece to getting a mortgage approval. However, be aware that it’s likely that you will pay more over time in interest for these loans than you would if you were on the traditional repayment plan—you’ll also likely be paying longer than 10 years, too.
Karma Herzfeld, a loan originator with Motto Mortgage Alliance in Little Rock, Arkansas, says she often sees student loans on her borrowers’ credit reports. “It is definitely possible to purchase a home while also carrying student loan debt,” she says.
In fact, a new report from the U.S. Department of Housing and Urban Development found that the average debt-to-loan ratio of FHA purchase mortgages has been rising for the past six years—likely because there are more people with student loans buying houses. If paying loans is a big reason why you’re delaying buying a home, it may be worth it to talk to a finance professional to reassess your situation, Herzfeld says.
Old advice: You need to save 20 percent down
According to Bank of America’s Homebuyer Insights Report, Cummings says, almost half of first-time buyers believe they need 20 percent or more of a home’s price for a down payment. “But this isn’t always the right approach for everyone, especially millennials who are early in their salary earning careers,” she says, noting that there are many options available that require significantly less than 20 percent.
Herzfeld agrees, adding that fewer than 10 percent of her clients put 20 percent down—and those who do are more likely to be second- or third-time homebuyers who are using home equity and settlement funds. She urges potential first timers to look at low down payment options like rural development loans and FHA loans, as well as conventional loans with PMI.
Old advice: Buying is always better than renting
Why waste your money on rent if you could use that cash to buy your place? Well, even though buying a home renders a large portion of your monthly housing as an investment, it may not be for everyone.
“If you feel you may move to a different city within the next few years, it may be wise to consider renting until after you make your move,” Cummings says. Additionally, she warns that you shouldn’t jump into homeownership just because you’re in a good financial place now. If you’re feeling financially stretched, it may be right to wait and get your desired budget in place, she says.
For some individuals it may make more sense to funnel money into short- and long-term savings first before putting down a down payment, says Mary Beth Storjohann, CEO of Workable Wealth, a financial planning company geared toward Gen X and Y. Instead of buying a home, it may make more sense to save for future childcare expenses, invest in your retirement fund, pay down personal debts, or build up an emergency fund, she says. Again, talk to a financial professional to get a holistic view of your present and future finances to make sure your investment is working for you.
Old advice: Pay off your mortgage as soon as possible
Sure, you may have heard that the quicker you pay off your mortgage, the less money you pay in interest—but funneling more cash money into your mortgage may cost you in missed opportunities. “If you can contribute to a retirement fund or investments that are earning more interest than you are paying on your mortgage loan, do so,” Herzfeld says. Additionally, if you have credit card debt, pay those off first because your credit card likely has higher interest than your home loan.
Already doing all of these things? Then you can make an extra payment toward your principal—it will shorten the term of the loan and lower the principal amount remaining, she says.
Looking to improve your finances? Here are some quick things you can do to help you have a better financial future, in five minutes or less.