FINANCIAL HOUSEKEEPING
Investigate the risk of interest-only loans
Many homebuyers looking to buy just a little more house or to beat the trend of rising interest rates have opted for interest-only mortgages, deals where the consumer pays interest on the loan without paying off the principal.
The big plus on most interest-only deals is that the monthly payments are much smaller; some deals require principal payments to begin after several years, while others build no equity for the life of the loan unless the homeowner makes additional principal payments.
But consumer advocates suggest that interest-only deals are fraught with additional risks, particularly in a rising-rate environment. At TomorrowsMoney.org – a website run by the Bond Market Association – homebuyers can find a good explanation of what happens to interest-only deals when rates rise. Don’t take on an interest-only loan without first taking a look.
SHORT COURSE
Automatic enrollment
A term that took on increasing importance with the recent passage of the Pension Protection Act of 2006, “automatic enrollment” refers to the way many companies will soon be signing up workers for the retirement plan.
The new law creates incentives for employers to put workers into the retirement savings plan. Instead of the traditional system – where the worker had to sign up to participate in the plan – many employers will now automatically enroll workers for retirement savings, taking a portion of earnings to do it. The money will go into a default option, and will remain there until the worker takes more direct control of his or her savings.
Workers can opt out of the plan, nullifying automatic enrollment, but legislators expect that automatic enrollment will lead to a dramatic increase in retirement-savings participation.
