Loans

When (And When Not) To Refinance Your Mortgage

June 3, 2015

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many common reasons why homeowners refinance: The opportunity to obtain a lower interest rate; the chance to shorten the term of their mortgage; the desire to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa; the opportunity to tap a home’s equity in order to finance a large purchase; and the desire to consolidate debt. Some of these motivations have benefits and pitfalls. And because refinancing can cost between 3% and 6% of the loan’s principal and – like taking out the original mortgage – requires appraisal, title search and application fees, it’s important for a homeowner to determine whether his or her reason for refinancing offers true benefit.

Securing a Lower Interest Rate
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb was that it was worth the money to refinance if you could reduce your interest rate by at least 2%. Today, many lenders say 1% savings is enough of an incentive to refinance.

Reducing your interest rate not only helps you save money, but it increases the rate at which you build equity in your home, and it can decrease the size of your monthly payment. For example, a 30-year fixed-rate mortgage with an interest rate of 9% on a $100,000 home has a principal and interest payment of $804.62. That same loan at 6% reduces your payment to $599.55.

Shortening the Loan’s Term
When interest rates fall, homeowners often have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a shorter term. For that 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to $5.5% cuts the term in half to 15 years, with only a slight change in the monthly payment from $804.62 to $817.08.

Converting Between Adjustable-Rate and Fixed-Rate Mortgages
While ARMs start out offering lower rates than fixed-rate mortgages, periodic adjustments often result in rate increases that are higher than the rate available through a fixed-rate mortgage. When this occurs, converting to a fixed-rate mortgage results in a lower interest rate as well as eliminates concern over future interest rate hikes.

Conversely, converting from a fixed-rate loan to an ARM can also be a sound financial strategy, particularly in a falling interest rate environment. If rates continue to fall, the periodic rate adjustments on an ARM result in decreasing rates and smaller monthly mortgage payments, eliminating the need to refinance every time rates drop. Converting to an ARM may be a good idea especially for homeowners who don’t plan to stay in their home for more than a few years. If interest rates are falling, these homeowners can reduce their loan’s interest rate and monthly payment, but they won’t have to worry about interest rates rising in the future.

Tapping Equity and Consolidating Debt
While the previously mentioned reasons to refinance are all financially sound, mortgage refinancing can be a slippery slope to never-ending debt. It’s important to keep this in mind when considering refinancing for the purpose of tapping into home equity or consolidating debt.

Homeowners often access the equity in their homes to cover big expenses, such as the costs of home remodeling or a child’s college education. These homeowners may justify such refinancing by pointing out that remodeling adds value to the home or that the interest rate on the mortgage loan is less than the rate on money borrowed from another source. Another justification is that the interest on mortgages is tax deductible. While these arguments may be true, increasing the number of years that you owe on your mortgage is rarely a smart financial decision, nor is spending a dollar on interest to get a 30-cent tax deduction.

Many homeowners refinance in order to consolidate their debt. At face value, replacing high-interest debt with a low-interest mortgage is a good idea. Unfortunately, refinancing does not bring with it an automatic dose of financial prudence. In reality, a large percentage of people who once generated high-interest debt on credit cards, cars and other purchases will simply do it again after the mortgage refinancing gives them the available credit to do so. This creates an instant quadruple loss composed of wasted fees on the refinancing, lost equity in the house, additional years of increased interest payments on the new mortgage and the return of high-interest debt once the credit cards are maxed out again – the possible result is an endless perpetuation of the debt cycle and eventual bankruptcy.

The Bottom Line
Refinancing can be a great financial move if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. When used carefully, it can also be a valuable tool in getting your debt under control. Before you refinance take a careful look at your financial situation, and ask yourself: How long do I plan to continue living in the house? And how much money will I save by refinancing?

Again, keep in mind that refinancing generally costs between 3 and 6% of the loan’s principal. It takes years to recoup that cost with the savings generated by a lower interest rate or a shorter term. So, if you are not planning to stay in the home for more than a few years, the cost of refinancing may negate any of the potential savings. It also pays to remember that a savvy homeowner is always looking for ways to reduce debt, build equity, save money and eliminate that mortgage payment. Taking cash out of your equity when you refinance doesn’t help you achieve any of those goals.

H/T Source: Investopedia, LLC.

Loans

What Is a Share Pledge Loan?

May 26, 2015

A share pledge loan is a type of personal loan available only from a credit union. For an individual with a credit union banking relationship, this type of loan can be a low-cost way to borrow some money. Different credit unions will apply different terms to share pledge loans.

Credit Union Accounts

  • Credit unions use different terminology from banks to describe accounts and deposits in accounts. An account with a credit union is called a share account. When someone joins a credit union by depositing money in an account, he has ownership rights with the credit union. A credit union account is described as a share account earning dividends, but the account functions in the same manner as a bank account with a cash balance earning interest.

Share Pledge Loan

  • A share pledge loan is a loan provided by the credit union secured by money in a share account. The amount of the loan is limited to the amount of money on deposit in the account. If a credit union member has $25,000 in her share account, she could receive a share pledge loan for up to $25,000. If the loan is taken, the funds in the share account are frozen until the loan is repaid.

Pledge Loan Features

  • A share pledge loan will have an attractive interest rate. The rate is often set at a margin above the interest rate being earned on the share account. For example, the share account is earning 2 percent and the share pledge loan margin is 3 percent. The interest on the share pledge loan would be 5 percent. A share pledge loan will have fixed monthly payments of principal and interest to pay the loan off in a fixed amount of time.

Considerations

  • Since the loan is secured by deposits in the credit union, credit qualification for a share pledge loan is usually easy and this type of loan can be used to rebuild a credit history. As the loan balance is paid down, the amount of money frozen in the share account will be reduced to match the outstanding loan balance. The limitation on share pledge loans is the credit union member must already have the money to back up the loan.

H/T Source: eHow.com

Loans

What Do I Need for a Signature Loan?

May 19, 2015

Signature loans take less time for a bank to process than other types of loans because the lack of collateral means that the loan underwriter bases the decision to approve or decline the loan purely on your own financial situation. Not all banks offer signature loans, and bankers may direct customers to apply for credit cards instead. When signature loans are available, you must provide your lender with income verification documents and have a good credit score for approval.

Identification

  • Before you can submit a signature loan application, you must first identify yourself to the loan officer. By law, every bank must have written procedures in place that employees must follow in order to identify people who are attempting to open new accounts. Typically, you must show the loan officer at least one form of government-issued identification such as a state ID card or your passport. You must also provide the banker with your name, date of birth and Social Security number, as the banker uses that information to check your credit report.

Credit Score

  • When you apply for a secured loan, the lender has to contend with the risk that you might default on the loan, but if you do fail to repay the debt, the lender can cover some or all of its losses by selling the collateral. With an unsecured debt, the lender has little recourse if you default, which means that signature loans are riskier for banks. Therefore, do not expect to qualify for a signature loan if you have poor credit — in fact, many banks only offer these loans to people with credit score of 720 or higher. If you have a mediocre credit score, you should attempt to pay down your debts and take other measures to improve your score before applying for a signature loan.

Debt to Income

  • The lender uses your credit score to verify your personal information and to review your past credit history, but lenders also check your credit report to determine your debt-to-income (DTI) ratio. Your DTI consists of your debt payments, shown as a percentage of your gross income. Creditors file monthly reports with the credit bureaus that include details of your debts and debt payments, and lenders use this information to see how much of your income goes toward covering debts. You usually cannot take out a signature loan if your DTI exceeds 36 percent. You must prove your income by giving the lender your last two years of tax returns and W2s and your most recent pay stub.

Business

  • You can also take out signature loans for your business, in which case you must provide the bank with the same information that you would provide for a personal loan. Additionally, you must provide the lender with your business license, articles of incorporation, general partnership agreement or other applicable documents that show you have registered your business with the sate. Everyone with a 20-percent ownership stake in the business must sign as a guarantor on the loan and provide the bank with a personal financial statement that lists their assets and liabilities. You also need to give the bank the business’ recent bank statements and a cashflow analysis that shows the income and expenses of the business.

H/T Source: eHow.com

Savings

How to Balance a Checkbook

May 12, 2015

Balancing your checkbook is one of those crucial life skills. It will give you a clear sense of not only how much money is in your bank account, but where your money goes. It can also help prevent you from bouncing checks, stick to your budget, help you avoid fees, and detect errors from your bank or even fraudulent billing.

Part 1 of 3: Recording Your Income and Transactions

1. Use the check register. You know that extra little notebook that comes with your checks, and slips right into your checkbook? It’s designed to help you keep track of your all your income and expenditures and all your transactions, from deposits, ATM withdrawals, debit card usage, fees, to any checks you write.[1]
  • If you do not have a check register, you can buy or make one. A ledger, graph paper, or even a blank sheet of lined paper will do.
2. Find out your current balance. Log on to your account online, call or visit your bank, or visit an ATM and get the current balance on the account you wish to track.[2]
  • Write this balance in the box at the top of the page or on the empty first line with the note “balance forward”.
  • There may be checks or electronic debits that haven’t cleared yet, so today’s figure, while correct, will not account for debits that have not been processed yet. If you’re not sure of your exact, current balance, keep an eye on your account and check the balance in the next several days.
3. Record all your transactions. Write down any debit (money being taken out) or credit (money being added) to your account. There should be two columns in your checkbook — one for debits and one for credits. Place the dollar amount being taken away in the debits column and the dollar amount being added in the credit column.[3]
  • Record all checks that you write. Write down the check number, the date, the payee (who you write the check to), and the amount of the check.
  • Record any withdrawals or payments you make from that account. If you withdraw money from the bank or ATM, or if you purchase something at the store or online using an ATM or debit card, write down the amount of the purchase. If there is a fee for using the ATM, write down that amount also.[4]
  • Record any online bill payments. If your online bill payment service gives you a confirmation code, you may wish to jot this code in your check register next to the payee information.
  • Record any deposits into your account. If the transaction changes the amount of money in your account, always write it down!
4. Label your transactions. Doing this will help you can remember what each transaction was for when it is time to balance your checkbook.
  • Use specific categories like food, utilities, mortgage, dining out, etc.
5. Adjust your records daily if you share an account with someone else. Try to touch base with them often about any transactions done using the account so you can each record the payments and the current balance of the account in your individual checkbooks.
  • If you are balancing multiple accounts, keep a separate register for each account so they are easy to track.

Part 2 of 3: Balancing Your Checkbook

1. Recalculate the balance in the account regularly. You can do this after a transaction, or less frequently, such as when you sit down to do your bills.[5]
  • If you have a history of bounced checks or an overdrawn account, you should re calculate your balance after every transaction or every other transaction.
  • Subtract the amount of any expense, payment, check, or withdrawal from the total. Include transfers out of the account in this subtraction.
  • Add the amount of any deposit, credit, or transfer into the account to the total.
  • Subtract all your debits from your credits. You should end up with a positive number. Write the new balance after each transaction in the rightmost column.
2. Reconcile your checkbook. When your bank statement arrives, compare your check register to your statement and check off which transactions have cleared.[6]
  • Add any interest that the bank has paid you.
  • Subtract any fees that the bank has charged you.
  • Check that the transactions in your account register match what is on your statement. Make sure your recorded balance matches what the bank thinks you have, not including any transactions that haven’t yet cleared and aren’t listed on the statement.
3. Correct any mistakes in your checkbook. If you find any discrepancies between your numbers and your bank’s numbers, figure out where they came from and correct them.[7]
  • Double-check your math. Make sure you added and subtracted everything correctly since the checkbook last balanced correctly.
  • Look for missing transactions. Did you forget to write something down? Has something not cleared or have you recorded something that happened after the statement date?
  • Subtract the balance in your check register from the balance on the statement. Does the amount match the amount of one of the transactions? If so, that transaction has probably not been accounted for correctly yet.
  • If the difference between the balance in your checkbook and the balance on your statement has an even number of pennies, divide the difference by 2. Does this new amount match the amount of one of the transactions? If so, that transaction was probably added instead of subtracted or vice versa.
4. Determine if all your checks have cleared. The money taken out for checks and other payments may not be taken out immediately. If you think a check or other payment has not yet cleared, subtract the amount of that check from the bank’s balance and see if it matches yours.
  • One way to stay on top of this is to check your account regularly and put check marks next to every check that has already cleared.
5. Notify your bank if you think there are fraudulent charges on your account.Call or visit your bank to discuss any suspicious charges or charges that are not accounted for in your checkbook and you do not remember making and discuss possible refund options.[8]
  • Always make sure you report any suspected fraud on your account, even if it may end up being a charge you simply forgot about or threw away the receipt for.
6. Finish balancing. Once everything is balanced you may want to draw double lines under the balanced amount in your check register. That way the next time you go to balance you have an idea of the last known correct amount in your register.[9]
  • This will also remind you where an error is in the check register for the next time you balance your checkbook.

Part 3 of 3: Understanding the Importance of a Balanced Checkbook

1. Know that banks can and do make mistakes. Balancing your checkbook probably seems like something only your grandpa does in today’s modern age. But many financially responsible people still balance their checkbook so in the rare event the bank commits an error, you can recognize it and get it corrected.[10]
  • Think about it: If all you do is look at your bank or credit card statement to make sure your monthly transactions are correct, it will likely be difficult to tell if your bank makes a mistake. And their mistake will then be your loss.
2. Spend less by keeping track of your spending. Because you know exactly what you have in your bank account based on your balanced checkbook, you will be able to budget your money easily and avoid spending money you don’t have on things you don’t need.[11]
  • Keeping your relationship with your money honest will prevent you from overspending or under budgeting and help you save.
3. Prevent bounced checks and unnecessary bank fees. If you’re writing a check, chances are you may not have your current bank statement in front of you, so you may not know how much money you have in your account. Having a balanced check book will help you determine whether you have the necessary funds to write the check and feel assured the check will not bounce.[12]
  • Most banks charge a bounced check fee. Some banks waive fees if you have direct deposit set up for your paycheck. Ask your bank if you’re not sure about the fees they charge.
  • Keep in mind deposited checks, depending on the amount, will take some time to “post”; that is, the money may not appear in your account immediately. Some banks offer provisional credit from the deposit, such as releasing $300 or $1000 of the funds and holding the remaining amount for 2 – 5 business days, and some don’t offer any provisional credit.

Tips

  • Balancing your checkbook is an excellent opportunity to total up the amount of money you spend each month and look for ways that you could save money next month.

Warnings

  • The safest form of transaction for your check register is paper checks. Until banks devise a “Check card register”, paper checks are the easiest and safest way to bank.

H/T Source: wikiHow.com

Direct Deposit

5 Tips to Inspire Employees to Use Direct Deposit

April 24, 2015

Some employees simply do not like to have their paychecks directly deposited into their checking accounts.  The idea of having a tangible check in their hands after they have earned it provides a certain amount of security and peace of mind.  Furthermore, there may be concern regarding their employer having secure information and access to their checking account.  If explained properly, these concerns can be addressed, overcome and will go a long way to help further automate your payroll system.  There are several ways to inspire employees to take advantage of direct deposit into their checking account.  Below are some ideas, however keep in mind your employees should never feel coerced into signing up for direct deposit.  Unless it is a state law, all you can do is educate them on the benefits of the system.

One way to inspire your employees to use direct deposit is to explain to them the ease and convenience of having their money made ready to them on payday, sometimes even the day before their scheduled pay date.  No more taking their lunch hour to run to the bank and deposit a check or fight traffic on a Friday night to get their money into their checking account.  Furthermore, if payday falls on a Saturday or holiday, the employee may have to wait for funds to be available until the following Monday.

Speaking of convenience and safety, what happens when an employee loses or has his or her paycheck damaged?  How many days will a check reissue take?  What if a check is stolen?  Or, what if a paycheck is accidentally deposited into the wrong person’s account at the bank?  With direct deposit, none of these possibilities are a concern.

A second effective way to encourage direct deposit is to have employees who do use direct deposit vouch for the ease and convenience of using the system.  It is one thing to hear an employer extol the virtues of direct deposit, but there is a much greater level of credibility when a co-worker attests to its’ reliability.

Third, let your employees know that direct deposit actually saves them money.  This will definitely get their attention and perhaps inspire them to sign up.  There are actual costs, direct and indirect, of manually depositing a check; costs such as the time to get to the bank, maintenance on a vehicle, and gas to get to the bank.

A fourth idea to inspire your employees to use direct deposit is to have them speak to the manager at their bank to explain the benefits and walk them through their valid concerns.  When an employee remains unconvinced about the reliability and safety of direct deposit, having someone with authority at the institution in which their money is being deposited goes a long way to assuage their fears.

The fifth and final tip is to actually practice what you preach.  Have your management team and yourself enroll in direct deposit and let your employees know.  This will show them that you truly do believe in what it is you are trying to inspire them to do.

H/T Source: Gatekeeper Business Solutions

Loans

How to Consolidate Your Debt

April 17, 2015

 

Are you trying to figure out how to consolidate your debt?

1. Check your credit reports and get your credit score.

You can get your credit reports from each of the three major credit reporting agencies for free once a year at AnnualCreditReport.com. It’s a good idea to review them so you don’t end up in the situation Norma found herself in, getting denied due to a mistake or negative items you weren’t aware of on your credit reports. Your credit report should also list most, if not all, of your debts, which will help you with the second step.

You can check your credit score for free using Credit.com’s Credit Report Card. It will show you what factors in your credit are strong and what may need some work. You can also find out whether your credit is excellent, good, or not so hot.

2. Take an inventory of your debt.

Make a list of the balances you owe on each of the cards or loans you want to consolidate, the interest rates and the monthly payments. This will help you identify the debts that are most important for you to consolidate. For example, in Norma’s case, while both of her interest rates are high, she should try to consolidate the balance at 29.99% first, since it is so high.

3. Research debt consolidation options.

You may be able to consolidate with a loan from your local bank or credit union, an online lender that offers personal loans, or by transferring a balance from a high-rate credit card to a low-rate one. If you get a consolidation loan online, be sure to deal with reputable lenders as there are scammers who will take the information consumers submit with applications and use it fraudulently.

Before you apply, try to find out if the lender can provide you any information about its credit requirements. Some lenders, for example, may require a minimum credit score or won’t extend credit to those with bankruptcies listed on their credit reports.

4. Apply for a consolidation loan.

Once you’ve narrowed down the field of places to get a consolidation loan and learned as much as you can about their lending requirements, it’s time to apply for a consolidation loan. In most cases, you can get an answer almost immediately. If that answer is “yes,” you can move onto the next step.

If the answer is “no,” take a careful look at the reasons you were turned down. If you think those answers don’t really apply, try calling the lender and ask to be reconsidered for the account. If you are turned down due to the debt you are carrying, for example, but explain that you are going to use the new loan to consolidate that debt, you may have a shot at getting the loan. It doesn’t hurt to ask!

If you can’t get approved for one of these loans after trying a couple of lenders, you may want to talk with a credit counseling agency. These agencies can often help clients lower their interest rates or payments through a Debt Management Plan (DMP). If you enroll in a DMP, you’ll make one payment to the counseling agency which will then pay all your participating creditors, so even though it’s not technically a consolidation loan, it feels like one.

5. Consolidate your debt.

If you are approved for a consolidation loan, you can then use that new loan to pay off other debts. If you don’t get a new credit line large enough to consolidate all your debt, focus on paying off your higher rate loans or balances first.

6. Pay your loans off as fast as possible.

If you can add a little extra to your monthly payments, you’ll be able to pay off your new loan faster. Even if you don’t, you’ll want to do your best to avoid the temptation of tapping the credit lines you have just paid off. After all, your goal with debt consolidation should be to dig out of debt — not to dig the hole deeper!

H/T Source: YahooFinance.com

CD

What is a Certificate of Deposit (CD)?

April 9, 2015

Sold by banks, certificates of deposit (better known as CDs) are low-risk –- and relatively low-return — investments suitable for cash you don’t need for months or years. If you leave the money alone during the investment period (known as the “term” or “duration”), the bank will pay you an interest rate slightly higher than what you would have earned in a money market or checking account. All gains from CDs are taxable as income, unless they are in a tax-deferred (IRA) or tax-free (Roth IRA) account.

CDs are among the safest investment a persona can make. The interest rate is determined ahead of time, and you’re guaranteed to get back what you put in, plus interest once the CD matures. What’s more, if the bank goes belly up, your deposit is probably insured by the FDIC for up to $250,000.

Here are the most common types of CDs:

• Traditional CD: You receive a fixed interest rate over a specific period of time. When that term ends, you can withdraw your money or roll it into another CD. Withdrawing before maturity can result in a hefty penalty.

• Bump-Up CD: This kind of account allows you to swap your CD’s interest rate for a higher one if rates on new CDs of similar duration rise during your investment period. Most institutions that offer this type of CD let you bump up once during the term of your CD and keep the interest rate for the remainder of the original CDs term.

• Liquid CD — This kind of account allows you to withdraw part of your deposit without paying a penalty. The interest rate on this CD usually is a little lower than others, but the rate is still higher than the rate in a money market account.

• Zero-coupon CD — This kind of CD does not pay out annual interest, and instead re-invests the payments so you earn interest on a higher total deposit. The interest rate offered is slightly higher than other CDs, but you’ll owe taxes on the re-invested interest.

• Callable CD — A bank that issues this kind of CD can recall it after a set period, returning your deposit plus any interest owed. Banks do this when interest rates fall significantly below the rate initially offered. To make this type of CD attractive, banks typically pay a higher interest rate. These accounts are typically offered through brokerages.

• Brokered CD — This term refers to any CD offered by a brokerage. Brokerages have access to thousands of banks’ CD offerings, including online banks. Brokered CDs will generally carry a higher rate of interest from online and smaller banks because they’re competing nationally for depositors’ dollars. However, you’ll pay a fee to purchase the account.

H/T Source: The Wall Street Journal

Investments

Guide to Your 401(k)

March 30, 2015

1. A 401(k) offers three compelling benefits.

A 401(k) represents a way to reduce your taxable income since contributions come out of your pay before taxes are withheld; many plans include a matching contribution from your employer; and the money you save benefits from tax-deferred growth, which lets your money compound more quickly than it would if it were taxed yearly.

2. The federal limit on annual pre-tax 401(k) contributions is on the rise.

In 2013, the maximum contribution is $17,500, or $23,000 if you’re 50 or older.

3. Matching contributions are “free money.”

If you can’t afford to max out your 401(k), contribute at least enough to get the matching contribution, a.k.a.. free money. The typical match is 50 cents on the dollar up to 6% of your salary.

4. Taking money out of a 401(k) before retirement is expensive.

Loans must be repaid with after-tax money plus interest. And, with few exceptions, if you withdraw money before age 59-1/2 you must pay income taxes plus a 10% penalty. What’s more, lost time for compounding will substantially shrink your nest egg.

5. When setting up your 401(k) investments, figure out what your mix of stocks and bonds should be.

Two factors influence this decision: your time horizon until retirement and your risk tolerance.

6. You’re limited to the investments your employer chooses for your 401(k) plan.

If you don’t like many of the selections, keep your choices simple by investing, for example, in a broad-based index fund. Don’t boycott the plan altogether. If you do, you lose out on tax-advantaged compounding and a matching contribution.

7. When you change jobs, you’ll often have three choices: leave your 401(k) money where it is, roll it into an IRA or another 401(k), or cash out.

If your account balance is less than $5,000, your employer may insist you take it out of the plan, but cashing out is like shooting yourself in the foot financially. Even small amounts can grow large with time and tax-deferred compounding. You’d be better off rolling the money into another retirement account.

8. When you do roll money into an IRA or 401(k), make it a “trustee-to-trustee” transfer.

That is, have the check made out to the custodian of your new account, not you. Otherwise, you risk possible penalties if you fail to execute the rollover properly.

9. IRS rule 72(t) provides one way to take early 401(k) withdrawals without penalty.

You must take a fixed amount of money out for five years or until you reach 59-1/2, whichever is longer. The annual withdrawal amount is based on your life expectancy.

10. Some employers let you leave money in your 401(k) account when you retire.

Find out what rules, if any, the employer imposes on when and how you must start taking distributions. If there are none, you may leave the money untouched until you’re 70-1/2. That’s the age when Uncle Sam insists all retirees begin withdrawing money from traditional IRAs and 401(k)s.

Why invest in a 401(k)?

Uncle Sam doesn’t offer many gifts, but a 401(k) is one of them.

If someone offered you free money, would you refuse it? Probably not. But that’s just what you’re doing if you don’t contribute to your 401(k). The more you contribute, the more free money you get. Here’s why:

Contributing part of your salary to a 401(k) gives you three compelling benefits:

  • You get an immediate tax break, because contributions come out of your paycheck before taxes are withheld.
  • The possibility of a matching contribution from your employer — most commonly 50 cents on the dollar for the first 6% you save.
  • You get tax-deferred growth — meaning you don’t pay taxes each year on capital gains, dividends, and other distributions.

The federal limit on annual contributions has been increasing gradually, and will be $17,500 for the 2013 tax year. If you’re 50 or older, you may contribute an additional $5,500.

Keep in mind, however, that while federal law sets the guidelines for what’s permissible in 401(k) plans, your employer may set tighter restrictions. Plus, it will take time for the administrators of your plan to implement the changes.

What’s more, there are other federal non-discrimination tests a 401(k) plan must meet, one of which applies to “highly compensated” employees. So if you make more than $115,000 a year, you may not be permitted to contribute as high a percentage of your salary as some of your lower paid colleagues.

For all its tax advantages, the 401(k) is not a penalty-free ride. Pull out money from your account before age 59-1/2, and with few exceptions, you’ll owe income taxes on the amount withdrawn plus an additional 10% penalty.

Also, be aware of your plan’s vesting schedule — the time you’re required to be at the company before you’re allowed to walk away with 100% of your employer matches. Of course, any money you contribute to a 401(k) is yours.

H/T Source: CNN Money

Home Loans

Home Equity Loans

March 23, 2015
Home equity loans allow you to borrow against the value of your home. These loans appeal to borrowers who find that they can borrow relatively large amounts of money, and they’re easier to qualify for than other types of loans (because they are secured by your house). If your home is worth more than you owe on it, a home equity loan can provide funds for anything you want (you don’t just have to use it on home-related expenses, for example).

A home equity loan is a type of second mortgage. Your “first” mortgage is the one you used to purchase your home, but you can add other loans to borrow against the property if you have built up enough equity.

Benefits of Home Equity Loans

Home equity loans are attractive to both borrowers and lenders. Here are a few of the key benefits for borrowers:

  • Home equity loans typically have a lower interest rate (or APR)
  • They are easier to qualify for if you have bad credit (sometimes)
  • Interest costs on a home equity loan may betax deductible
  • Borrowers can qualify for relatively large loans with this type of loan

Most of those benefits (except for the tax deduction) are available because home equity loans are generally safe loans for banks to make: the loan is secured by your house as collateral. If you fail to repay, the bank can take your property, sell it, and recover any unpaid funds. What’s more, borrowers tend to prioritize these loans over other loans because they don’t want to lose their homes (faced with the choice of missing a mortgage payment or a credit card payment, you might skip the card payment).

Of course, banks have to be careful not to lend too much (as they did in the housing crisis) or they risk major losses. To protect themselves, lenders try to make sure that you don’t borrow any more than 85% or so of your home’s value – taking into account your original purchase mortgage as well as any home equity loan you’re applying for. The percentage of your home’s value available is called the loan to value ratio, and may vary from bank to bank.

Logistics

When you get a home equity loan, you get a lump-sum of cash, and you repay the loan over time with fixed monthly payments. Yourinterest rate is set up-front, and each payment reduces your loan balance and covers some of your interest costs (it is anamortizing loan).

If you don’t need all of the money at once, you can also consider a home equity line of credit (HELOC). That option provides a pool of money that you can draw from if and when you need it, and you only pay interest on any money that you’ve actually borrowed. However, be aware that banks can close or cancel a HELOC before you’ve had a chance to use the money, and the interest rate on a HELOC generally changes over time.

Common Home Equity Loan Uses

You can use a home equity loan for anything you want. However, they usually get used for some of life’s larger expenses because homes tend to have a lot of value to borrow against. For example, you find that a lot of borrowers want to:

  • Remodel, renovate, or otherwise improve the house and property
  • Pay for a family member’s college education
  • Fund the purchase of a second home
  • Consolidate high-interest debts

Pitfalls of Home Equity Loans

Before using a home equity loan for any purpose, you should be aware of the risks of using these loans. The main problem is that you can lose your home if you fail to meet the payment schedule required by the loan.

Because these loans can provide a lot of cash, it’s tempting to use your home as an ATM. Be sure to use your home’s equity only for the most important expenses; things that will improve the value of your home or improve your income are good examples.

Another common pitfall of home equity loans is that scammers have found plenty of ways to cheat homeowners out of their most valuable asset (or at least get a lot of cash out of the deal). Be sure that you know who you’re doing business with. If something smells fishy (like a high-pressure sales pitch or a reluctance to put things in writing), then take a step back and make sure the deal is legitimate.

How to Find the Best Home Equity Loans

Finding the best home equity loan can save you thousands of dollars – at least. In order to get the best loan, I recommend that you:

  • Shop around. Try a variety of sources (banks, brokers, and credit unions)
  • Manage your credit score and make sure your credit reports are accurate
  • Ask your network of friends and family who they recommend
  • Compare your offers to those found on websites and advertisements

Additional Tips

Before you borrow, pause and make sure that this type of loan really makes sense. Is a home equity loan a better fit for your needs than a simple credit card account or anunsecured loan? If you’re not sure, figure it out before you put your home at risk.

Also, make a detailed plan of your income and expenses (including this new loan payment) ahead of time. These large loans can come with large payments.

Review and consider insurance to cover the payments if something happens. You may or may not need insurance, and nobody can force you to use it. If you’re going to include insurance as part of a home equity loan, go with monthly premium payments – not up front – so that you only pay for what you use (assuming the insurance is just for the home equity loan).

H/T Source: BankingAbout.com

Financial Wellness

Protecting Your Home From Foreclosure

March 16, 2015

Don’t ignore your mortgage problem.

If you are unable to pay–or haven’t paid–your mortgage, contact your lender or the company that collects your mortgage payment as soon as possible. Mortgage lenders want to work with you to resolve the problem, and you may have more options if you contact them early. Call the phone number on your monthly mortgage statement or payment coupon book. Explain your financial situation and offer to work with your lender to find the right payment solution for you. If your lender won’t talk with you, contact a housing counseling agency. You can find a list of counseling resources at NeighborWorks  and on the U.S. Department of Housing and Urban Development’s (HUD) website or by calling (800) 569-4287.

2

Do your homework before you talk to your lender or housing counselor.

Find your original mortgage loan documents and review them. Review your income and budget. Gather information on your expenses, including food, utilities, car payment, insurance, cable, phone, and other bills. If you don’t feel comfortable talking to your lender, contact a housing or credit counseling agency. Counselors can help you examine your budget and determine the options available to you. They may also advise you about ways to work with your lender or offer to negotiate with your lender on your behalf.

3

Know your options

Some options provide short-term solutions/help, while others provide long-term or permanent solutions. You may be able to work out a temporary plan for making up missed payments, or you may be able to modify the loan terms. Sometimes, the best option may be to sell the house. For information on different options, visit HUD’s website or Foreclosure Resources for Consumers for links to local resources.

4

Stick to your plan.

Protect your credit score by making timely payments. Prioritize bills and pay those that are most necessary, such as your new mortgage payment. Consider cutting optional expenses such as eating out and premium cable TV services. If your situation changes and you can no longer meet your new payment schedule, call your lender or housing counselor immediately.

5

Beware of foreclosure rescue scams.

Con artists take advantage of people who have fallen behind on their mortgage payments and who face foreclosure. These con artists may even call themselves “counselors.” Your mortgage lender or a legitimate housing counselor can best help you decide which option is best for you. For tips on spotting scam artists, visit the Federal Trade Commission’s website, Foreclosure Rescue Scams. Report suspicious schemes to your state and local consumer protection agencies, which you can find on the Consumer Action Website.

Several options are available to you. Some options provide temporary solutions for short-term problems, such as being one or two months behind in your mortgage due to illness. Other more permanent solutions address long-term financial difficulties, such as job lay-offs or long-term unemployment. If you have an FHA-approved loan, special loan modification programs may be available to you–ask your lender about them. Unfortunately, in some cases, keeping your home may not be possible–options for handling that situation are available as well.

Temporary solutions for short-term financial problems:

  • Reinstatement: Lenders are often willing to “reinstate” your loan if you make up the back payments in a lump sum by a specific date. A forbearance plan may accompany this option.
  • Forbearance: Your lender may be able to provide a temporary reduction or suspension of your mortgage payments for a short period, such as 3 or 4 months. After this time, your lender will work with you to create a repayment plan for the loan. You may qualify for forbearance if you have experienced a reduction in income (for example, if you have become unemployed) or an increase in living expenses (for example, higher medical bills). You must provide information to your lender to show that you will be able to stick with the new payment plan.
  • Repayment plan: Your lender may agree to a plan that includes your regular monthly payments plus a portion of the past due payments each month until your payments are caught up

Long-term solutions or adjustments to your loan:

  • Loan modifications: Your lender may be willing to rewrite the terms of your original mortgage loan to address your financial situation. A loan modification is designed to make your monthly payments affordable. Changes to your loan may include extending the number of years to repay and changing the interest rate, including changing an adjustable rate to a fixed rate. You may have to pay a processing fee to obtain a loan modification.
  • Partial claim: If your mortgage is insured by a private mortgage insurance firm, your lender might help you file a claim. Some insurers provide a one-time, interest-free loan to bring your account up to date. The interest-free loan is due when you refinance, pay off your mortgage, or when you sell the property.

If keeping your home is not an option, you may want to consider these alternatives:

  • Sale: Your lender will usually give you a specific amount of time to find a buyer and pay off the amount you owe on your mortgage. Your lender may require you to use a real estate professional to help you sell the property.
  • Pre-foreclosure sale or short sale: If you can’t sell the property for the full amount of the loan, your lender may accept the amount you get for the selling price, even if it is less than the amount you owe. You may owe income taxes on the difference between the amount you owe and the amount you are able to pay back. Check with the Internal Revenue Service for tax information.
  • Assumption: A qualified buyer may be allowed to assume (take over) your mortgage. Ask your lender whether this option is available to you.
  • Deed-in-lieu of foreclosure: You may be able to “give back” your property to the lender, who then forgives the balance of your loan. Again, there may be income tax consequences, so check with the IRS. This option will not save your home, but it is less damaging to your credit rating. Some lenders impose certain restrictions on taking back property. For example, they may require that you try to sell your home at a fair market value for at least 90 days.

H/T Source: Board of Governors of the Federal Reserve System

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