Worldwide Success

This is a Guest Post by Catherine Brock - MortgageLoan.com (related articles…)

A recent study indicates that financial sophistication peaks at 53.4 years of age. Take a moment to learn why your middle-aged friends are financially savvy, and you can become similarly astute, regardless of your age.

Imagine a sip from the fountain of youth.  You’d feel a new sense of energy and a revitalized outlook on life. But don’t get caught up in the fantasy yet. Being younger may also mean that you pay more when borrowing money and negotiating mortgage rates.

A recent study entitled, “The Age of Reason: Financial Decisions Over the Lifecyle,” discovered that being financially savvy might be a natural by-product of middle age. The study, completed by four economists—Sumit Agarwal from the Federal Reserve Bank of Chicago, John C. Driscoll, from the Federal Reserve Board, Xavier Gabaix from MIT, and David Laibson, from Harvard—compiled and analyzed a wide cross-section of personal financial data. Among other things, they looked at interest rates paid for first and second mortgages, personal credit cards, and small business credit cards. They found that younger and older borrowers are more likely to make the mistakes that middle-aged borrowers avoid.  These errors led them to incur higher interest charges and more fees. Here are some common mistakes:

• Incorrectly estimating a home’s value. Mortgage rates are heavily influenced by the relationship between a property’s value and the loan amount requested. Because property values can fluctuate, lenders like to have a 20 percent cushion between the amount of the loan and the value of the collateral. When this cushion is less than 20 percent, the lender adjusts for the increased risk by charging a higher mortgage rate.

  The problem occurs when applicants misstate the home’s value on a loan application. If the misstatement causes the loan-to-value ratio to be lower than it actually is, the lender will correct it and charge a higher mortgage rate of interest. But when the misstatement causes the ratio to be higher, the lender won’t voluntarily offer a lower mortgage rate loan. Middle-aged borrowers were more likely to catch this mistake themselves. Younger and older borrowers often didn’t, and ended up with a loan that was more expensive than it should have been.

• Using credit card balance transfer offers inefficiently. Credit card companies normally apply payments to the lowest-rate balances first, and the higher-rate balances second. This practice can get expensive for borrowers who open up new cards to switch their balances to a lower interest rate. If the low rate for balance transfers doesn’t apply to purchases, you’ll need to pay off the entire transferred balance before any of your payments will be applied to the higher-rate purchase balance. On average, the middle-aged borrower took the least amount of time to determine the most efficient way to use those compelling, low-rate balance transfer offers.

The next time you start daydreaming about your youth, ask yourself if you’d rather have a little extra energy or more money in your pocket?  If you choose the latter, celebrate your middle-aged savvy. You’re likely to be in a financial position to do so!

Social Bookmarks: