Why Today’s Retirees Need to Pursue Tax-Minimization Strategies

Today’s retirees face many obstacles, from an unpredictable market to a lack of guaranteed income in retirement. While these are important challenges to address, they would be remiss to ignore their future tax burdens. We’ll likely see increased taxes in the future, and this will affect today’s retirees more than tax increases have affected retirees in the past.

Retirement Then vs. Now

Today’s retirees are the first IRA generation: Whereas previous generations could primarily rely on Social Security benefits and pensions to cover their retirement expenses, many of today’s retirees find themselves having to fund a much larger portion of their retirement through their own pre-tax retirement accounts. And while retirement accounts such as 401(k)s and IRAs have significant benefits, they also come with downsides, namely that all of the withdrawals in retirement are taxable as ordinary income at the current tax rates in our country.

This means that if tax rates were to rise, the retiree living off of IRAs will have to pay more in taxes and therefore live off of less after-tax income. Previous generations saved their money in after-tax accounts, meaning if tax rates were to rise, it would not affect them the same way it will for this IRA generation. When we look at the history of taxes and the Biden administration’s tax-increasing proposals, it’s clear that retirees need to have a tax-minimization plan.

Could We See Taxes Increase?

We need to plan for the tax rates of the future, not the present. Previously, tax increases primarily affected wage earners. The Social Security payroll tax and income tax increases had little effect on Social Security beneficiaries and retirees who saved in after-tax accounts. However, those who take distributions from a tax-deferred retirement account and who invest in the market are affected by both income tax increases and new taxes.

These could include:

  • The possible elimination of the favorable long-term capital gains taxes rates for the wealthiest investors. This could mean those with incomes of $1 million or more might pay up to 39.5% on their gains, rather than the current top rate of 20%.
  • Lowering of the current standard deduction. Many retirees don’t itemize their deductions and rely on the standard deduction.  Therefore, if the current standard deduction is lowered, people’s taxes could go up.
  • Imposing the Social Security payroll tax on workers or households earning over $400,000 annually. This tax — in which employers and employees each pay 6.2% and the self-employed pay the full 12.4% — helps pay for Social Security benefits.
  • Lowering the federal estate tax exemption amount, which could affect estates above about $5 million.

Retirees should note that we may be experiencing tax rates at 100-year lows now, and that this could end in light of recent increased government spending. Our already large national debt increased during the pandemic, with the CARES Act of 2020 costing $2.2 trillion and the American Rescue Plan Act of 2021 costing $1.9 trillion. We will have to pay for this eventually, and retirees with large tax-deferred IRAs could be the ones to do it.

When we look at history, we see that after a period of increased government spending during World War II, income tax rates in the following decades were much higher than they are now. In 1944, the top rate peaked at 94%, and by 1964 it had only gone down to 70%. This doesn’t mean that an individual’s tax bracket will go from 22% to 70%, but there is a lot of room in between where retirees could feel the effects.

When running a financial plan, retirees need to calculate how much taxable income they will have and how much of that will be left after taxes. If tax rates rise, retirees could need to withdraw more from their taxable retirement accounts to be left with the same amount of income, ultimately drawing down their savings faster.

RMDs

Taxes on retirement income can become more burdensome starting at age 72. Most retirees must take RMDs (required minimum distributions) from their traditional retirement accounts starting at age 72, and the amount they must withdraw is based on their age and account balance.

RMDs could force someone to withdraw more than they normally would from their tax-deferred retirement account, causing them to jump into a higher tax bracket. Retirees under the age 72 should look to do careful planning that may minimize this effect by the time they reach this age.  (Keep reading for an idea on how to help do that below.)

Taxes and Your Legacy Goals

RMDs can also potentially increase a beneficiary’s tax burden due to the SECURE Act passed in 2019. It ended the “stretch IRA,” which allowed beneficiaries to stretch out distributions from an inherited retirement account over their lifetimes. Now, most non-spouse beneficiaries must empty traditional accounts within 10 years of the original owner’s death.

Those who want to pass on their retirement accounts should consider tax minimization strategies when creating an estate plan. One possibility is a charitable remainder trust.

What Can Retirees Do Now to Prepare for Higher Taxes Later?

Those who will draw a significant portion of their retirement income from taxable retirement account should take note, and work to minimize their overall tax burden. There are many strategies they can employ, including converting part or all of their traditional 401(k) or IRA to a Roth IRA. This involves paying tax on the amount converted and eventually withdrawing it from the Roth tax-free. If we see taxes increase in the future, a Roth conversion at today’s rates could potentially be a good strategy for those whose tax burden won’t substantially decrease in retirement.

In addition to providing tax-free income, a Roth is also exempt from RMDs. This means that the money in a Roth IRA can continue to grow throughout the owner’s lifetime tax-free. When it’s inherited, the beneficiary will have to drain the account in 10 years, as with a traditional IRA. However, distributions from traditional IRAs, distributions from Roth IRAs are not taxable and will not incur an early withdrawal penalty as long as the account is at least five years old.

The Bottom Line for Retirees

Retirees who have both traditional and Roth IRAs can strategically withdraw from each to avoid going into a higher tax bracket, continue to reap the tax-advantage benefits of a retirement account after age 72, and pass on potentially tax-free wealth to their beneficiaries. Those who think tax hikes are on the horizon and who don’t plan to live on significantly less income in retirement should consider tax-minimization strategies such as a Roth conversion.

Investment Advisory Services offered through Epstein and White Financial LLC, an SEC Registered Investment Advisor.  Epstein & White Retirement Income Solutions, LLC is a licensed insurance agency with the state of California Department of Insurance (#0K53785).  As of March 31, 2021, Epstein and White is now a part of Mercer Global Advisors Inc. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an Investment Adviser with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. The information, suggestions and recommendations included in this material is for informational purposes only and cannot be relied upon for any financial, legal, tax, accounting, or insurance purposes.  Epstein and White Financial is not a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Please consult with your own accountant and financial planning professional to determine how tax changes affect your unique financial situation. A copy of Epstein & White Financial LLC’s current written disclosure statement discussing advisory services and fees is available for review upon request or at www.adviserinfo.sec.gov.

Founder and CEO, Epstein and White Retirement Income Solutions

Bradley White is founder and CEO of Epstein and White. He’s a Certified Financial Planner™ and has a bachelor’s degree in finance from San Diego State University. He’s an Investment Advisor Representative (IAR) and an insurance professional.

Source: kiplinger.com

7 Ways Biden Plans to Tax the Rich (And Maybe Some Not-So-Rich People)

President Biden’s latest economic “Build Back Better” package – the $1.8 trillion American Families Plan – isn’t kind to America’s upper crust. It would provide a host of perks and freebies for low- and middle-income Americans, such as guaranteed family and medical leave, free preschool and community college, limits on child-care costs, extended tax breaks, and more. But to pay for all these goodies, the Biden plan also includes a long list of tax increases for the wealthiest Americans (and, perhaps, some people who aren’t rich).

Whether any of the president’s proposed tax increases ever make it into the tax code remains to be seen. Republicans in Congress will push back hard on the tax increases. And a handful of moderate Democrats will probably join them, too. So, don’t be surprised if a fair number of the plan’s revenue raisers are dropped or amended during the congressional sausage-making process…or even if some new tax boosts are added.

While we don’t know yet which – if any – of the proposed tax increases will survive and be enacted into law, wise taxpayers will start studying the plan now so that they’re prepared for the final results (any changes probably won’t take effect until next year). To get you going in that direction, here’s a list of the 7 ways the American Families Plan could raise taxes on the rich. But even if you’re not particularly wealthy, make sure you read closely to see if you might be caught up in any of the proposed tax hikes, since a few of them could snare some not-so-rich people in addition to the one-percenters.

1 of 7

Increase the Top Income Tax Rate

picture of a calculator with buttons for adding or subtracting taxespicture of a calculator with buttons for adding or subtracting taxes

The 2017 tax reform law signed by former President Trump lowered the highest federal personal income tax rate from 39.6% to 37%. According to the White House, this rate reduction gave a married couple with $2 million of taxable income a tax cut of more than $36,400. President Biden wants to reverse the rate change and bring the top rate back up to 39.6%.

For 2021, the following taxpayers will fall within the current 37% tax bracket:

  • Single filers with taxable income over $523,600;
  • Married couples filing a joint return with taxable income over $628,300;
  • Married couples filing separate returns with taxable income over $314,150; and
  • Head-of-household filers with taxable income over $523,600.

(For the complete 2021 tax brackets, see What Are the Income Tax Brackets for 2021 vs. 2020?)

President Biden has said many times that he won’t raise taxes on anyone making less than $400,000 per year. But there have always been questions and a lack of clarity as to what this exactly means. For instance, does it apply to each individual or to each tax family? We still haven’t received a crystal-clear answer to that question. As a result, we’re not entirely sure if the president wants to adjust the starting point for the top-rate bracket to account for his $400,000 threshold. According to a report from Axios, an unnamed White House official said the 39.6% rate would only apply to single filers with taxable income over $452,700 and joint filers with taxable income exceeding $509,300. That would satisfy the president’s promise for single people, but it’s a bit trickier for married couples filing a joint return.

If the 39.6% rate kicks in on a joint return when taxable income surpasses $509,300, a married couple could end up being taxed at that rate even if both spouses earn well under $400,000 per year. For example, if Spouse A makes $270,000 and Spouse B makes $260,000, their combined income ($530,000) is over the $509,300 threshold. Using the 2021 tax brackets, they wouldn’t even make it into the 37% bracket (they’d be in the 35% bracket). So, each spouse would face a tax increase under the Biden plan, even though neither one of them earn over $400,000 per year.

To be fair, this type of “marriage penalty” exists for the current 37% tax bracket, since the minimum taxable income for joint filers is less than twice the minimum amount for single filers. However, the current brackets weren’t set up with a pledge not to raise taxes on anyone making less than $400,000 per year in the background. Perhaps the Biden administration will recognize this and eventually adjust the brackets to fix the marriage penalty issue.

2 of 7

Raise the Capital Gains Tax

picture of computer screen with stock market charts showing market increasespicture of computer screen with stock market charts showing market increases

The American Families Plan also calls for an increase in the capital gains tax rate for people earning $1 million or more.

Currently, gains from the sale of stocks, mutual funds, and other capital assets that are held for at least one year (i.e., long-term capital gains) are taxed at either a 0%, 15%, or 20% rate. The highest rate (20%) is paid by wealthier taxpayers – i.e., single filers with taxable income over $445,850, head-of-household filers with taxable income over $473,750, and married couples filing a joint return with taxable income over $501,600. Gains from the sale of capital assets held for less than one year (i.e., short-term capital gains) are taxed at the ordinary income tax rates.

Under the Biden plan, anyone making more than $1 million per year would have to pay a 39.6% tax on long-term capital gains – which is almost double the current top rate. As noted above, that’s also the proposed top tax rate for ordinary income (e.g., wages). So, in effect, millionaires would completely lose the tax benefits of holding capital assets for more than one year. Plus, there’s the existing 3.8% surtax on net investment income, which would bump the overall tax rate up to 43.4% for people with income exceeding $1 million.

[Note: A summary of the American Families Plan states that application of the 3.8% surtax is “inconsistent across taxpayers due to holes in the law.” It then states that the president’s plan would apply the surtax “consistently to those making over $400,000, ensuring that all high-income Americans pay the same Medicare taxes.” No further details are provided, but this could mean expanding the surtax to cover certain income from the active participation in S corporations and limited partnerships.]

3 of 7

Eliminate Stepped-Up Basis on Inherited Property

picture of a last will and testamentpicture of a last will and testament

There’s another capital gains-related tax increase in the American Families Plan – eliminating the step up in basis allowed for inherited property. Under current law, if you inherit stock, real estate, or some other capital asset, your basis in the property is increased (“stepped up”) to its fair market value on the date that the person who previously owned it died. This increase in basis also means you can immediately sell the inherited property and avoid paying capital gains tax, because there’s technically no gain to tax. Why? Because gain is generally equal to the amount you receive from the sale minus your basis in the property. Assuming you sell the property for fair market value, the sales price will equal your basis…which results in zero gain (e.g., $1,000 – $1,000 = $0).

President Biden wants to change this result. Although details are scarce at this point, the president’s plan would nullify the effects of stepped-up basis for gains of $1 million or more ($2 million or more for a married couple) – perhaps by taxing the property as if it were sold upon death. There would be exceptions to the new rules for property donated to charity and family-owned businesses and farms that the heirs continue to operate. Other yet-to-be-determined exceptions could also be added, such as for property inherited by a spouse or transferred through a trust.

This is one of the tax changes that could impact Americans making less than $400,000 per year – perhaps only indirectly. Anyone, regardless of their own income level, can inherit property. If the heir’s basis is not adjusted upward any longer, that in essence is a tax increase on him or her. If the capital gains tax is levied before the property is transfer, that could mean there’s less to inherit – which could be considered an indirect tax on the person receiving the property. It can be a bit tricky, but there’s certainly the potential for someone inheriting property who makes less than $400,000 per year getting the short end of the stick because of this Biden proposal.

4 of 7

Tax Carried Interest as Ordinary Income

picture of investment fund manager looking at several computer screenspicture of investment fund manager looking at several computer screens

In certain case, an investment fund manager can treat earned income as long-term capital gain. Known as the “carried interest” loophole, this lets the fund manager take advantage of the long-term capital gains tax rates, which are usually lower than the ordinary income tax rates he or she would otherwise have to pay on the income.

The American Families Plan calls for the elimination of the carried interest rules. The Biden administration sees this change as “an important structural change that is necessary to ensure that we have a tax code that treats all workers fairly.”

For a fund manager, this change would result in a potential tax increase on the affected income of up to 19.6%. For example, assuming the income is high enough, he or she could go from a rate of 23.8% (20% capital gain rate + 3.8% surtax on net investment income) to 43.4% (39.6% ordinary tax rate + 3.8% surtax on NII).

One would think that most, if not all, fund managers earn at least $400,000 per year. But if there are any of them out there making less than that amount, then this change could raise taxes on someone making less than Biden’s $400,000 per year threshold. Yeah, it’s not likely…but it’s theoretical possible.

5 of 7

Curtail Like-Kind Exchanges

picture of several office buildings with a for sale sign in front of thempicture of several office buildings with a for sale sign in front of them

If you sell real property used for business or held as an investment and then turn around and buy other business or investment property that is the same type, you’re generally not required to recognize gain or loss for tax purposes under the “like-kind” exchange rules. Properties are of “like-kind” if they’re of the same nature or character. For example, an apartment building would generally be like-kind to another apartment building. This is true even if they differ in grade or quality.

The Biden plan would end this special real estate tax break for gains greater than $500,000. Since there are no income thresholds for the taxpayer, this change could potentially prevent someone making less than $400,000 per year (the $500,000 gain could be offset by other tax deductions, exemptions, or credits). Again, in most cases, wealthier people would be impacted by this change, but it’s possible that someone making less than $400,000 could also end up with a higher tax bill if this proposal became law.

6 of 7

Extend Business Loss Limitation Rule

picture of worried businessman looking at bad financial statementspicture of worried businessman looking at bad financial statements

Under the 2017 tax reform law, individuals operating a trade or business can’t deduct losses exceeding $250,000 ($500,000 for joint filers) on Schedule C. The excess losses may, however, be carried forward to later tax years. This rule is currently set to expire in 2027 (it was also generally suspended by the CARES Act for the 2018 to 2020 tax years).

President Biden’s American Families Plan calls for this business loss limitation rule to be made permanent. According to the plan summary, 80% of the affected business loss deductions would go to people making over $1 million. But, once again, someone making less than $400,000 could also incur a large business loss that wouldn’t be deductible after 2026 if the Biden proposal is adopted.

7 of 7

Increase Enforcement Activities

picture of yellow road sign saying "IRS Audit Ahead"picture of yellow road sign saying "IRS Audit Ahead"

Biden wants to increase tax enforcement activities aimed at high-income Americans – and give the IRS an extra $80 billion over a 10-year period to do it. While this really isn’t a tax increase, it certainly could result in wealthier Americans pay more in taxes. The idea is to “increase investment in the IRS, while ensuring that the additional resources go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000.” The IRS would also focus resources on large corporations, other businesses, and estates. The audit rate for Americans making less than $400,000 per year wouldn’t increase under the president’s plan.

The American Families Plan summary also states that financial institutions would be required to “report information on account flows so that earnings from investments and business activity are subject to reporting more like wages already are.” The income of wealthier Americans disproportionately comes from investments and small businesses, which are harder for the IRS to verify than other sources of income like wages. As a result, the Treasury Department estimates that up to 55% of taxes owed on some of these less visible income streams goes unpaid. And more of that unpaid tax is owed by people with higher incomes. The proposal would funnel additional information to the IRS about the hard-to-verify income without burdening taxpayers.

All-in-all, the White House claims that the increased tax enforcement efforts would raise $700 billion in revenue over a 10-year period.

Source: kiplinger.com

How to refinance a mortgage with bad credit

Refinancing your mortgage with a bad credit score is completely possible, but is a more complicated process than refinancing with a good score. Because your credit score is such a large aspect of any loan application and refinancing process, it is in your best interest to consider all of your options before moving forward.

Refinancing your mortgage could be a great opportunity to gain some payment flexibility or even take advantage of a lower interest rate. To avoid leaving money on the table, explore all of your options for refinancing with bad credit.

How Credit Scores Affect Refinancing

Lenders use your credit score and overall lending history to calculate the risk of lending you money. A lender will view a borrower with a low credit score caused by loan defaults and constant late payments as a high risk. Because the borrower has shown negative borrowing practices in the past the lender will be more reluctant to sign or refinance a loan.

30-Year Mortgage Rates Based on Credit Scores

FICO Score APR
760–850 4.6%
700–759 4.8%
680–699 5.0%
660–679 5.2%
640–659 5.6%
620–639 6.1%

Based on 2018 national averages for a $200,000 fixed loan.
Source: FICO

Putting together a mortgage refinancing package for a borrower with a bad financial history might cause the lender to increase the length of the loan term, increase the total interest rate or even increase the total monthly payments. Unfortunately, when a borrower has a pattern of falling behind on payments, a lender will offer more expensive refinancing packages to make up for the added risk.

Is Refinancing Right for You?

It is important to note that refinancing your mortgage may not always save you money. You might come out with the same financial deal or a worse option than you currently have, especially if you have a low credit score. In fact, looking at the average outcomes of Freddie Mac mortgages that were refinanced between 1994 and 2018 shows that only a small fraction of refinances actually resulted in the borrower saving money.

Graphic: Average Mortgage Refinancing Outcome

Source: Freddie Mac

While refinancing may not be right for everyone, it’s still important to consider the benefits of flexibility and length of terms. If you see yourself falling behind on payments or want to pay off your loan faster, refinancing your mortgage might still offer you some benefits.

Refinancing With Your Current Lender

When approaching your current lender about refinancing your mortgage it is first important to assess where you stand as a borrower. If you make payments on time and are in great financial health the lender will most likely want to continue doing business with you. However, if you have been late on payments and are struggling to cover other financial responsibilities the lender might be more reluctant to refinance your mortgage.

1. Shop Around for Low Rates

Before approaching your current lender for refinancing options, it is important to check for other options. To aid with any negotiations you should first check with other banks to see what interests rates are the best. Coming to your current lender after already shopping around for prices will give you more bargaining power to get a lower rate.

2. Show Proof of Savings

If your credit score is low but you have money in the bank a lender may still offer you a competitive rate. Showing proof of income and savings is a good option for new borrowers with short lending historys. For lenders, any proof that a borrower will be able to make payments toward a mortgage or loan will lower the overall lending risk and make a positive impact on the terms of the refinancing agreement.

3. Get a Loan Cosigner

If you have a low credit score and do not have sufficient money in the bank to lower your overall risk, you can use a loan cosigner. A cosigner shows the validity of an agreement and essentially promises to pay any debts that are outstanding if the borrower cannot pay. Depending on your financial situation, it can be difficult to get someone to agree to be your loan cosigner. As such, you should only approach people you’re close with.

4. Show Proof of Income

Even if you do not have a large amount of savings in the bank you can still demonstrate you will make payments on time and carry through with your mortgage agreement by showing proof of income. If you have a well-paying job or have sufficient income coming in, a lender will be more likely to offer a good refinancing option to you. Even without money in the bank or a good credit score, showing proof of income demonstrates that you are financially stable enough to make payments on the loan.

5. Improve Your Credit Score

Before visiting your lender to inquire about mortgage refinancing options you should first look at your credit report for points of action around how you can build your credit score. If your credit report is full of negative items like late payments, hard inquiries and delinquent accounts there could be some places to make up some extra points. Through a series of disputes, letters and phone calls with the major credit agencies you can work toward getting a higher score. There are also companies that offer credit repair solutions that can get your credit removal cases rolling to help improve your score.

Consider Cash-Out Refinancing

Cash-out refinancing is a mortgage refinancing option ideal for people who owe less than their house is worth. It is important to note that a cash-out refinancing option trades your current loan for a cash payment and a larger loan. Lenders can typically refinance a loan for up to 80 percent of the current market value.

Equity is earned on a home when its market value price increases over the price in which you paid for it. Earned equity is normally cashed out with the sale of a home, but it can also be tapped into with cash-out refinancing.

Graphic: 80% have tappable equity on their home

The largest disadvantage to a cash-out refinance is the equity loss of your investment. Although the amount of money between what you currently owe and what your house is valued can be a sizable help for short-term debts, you will still be accountable to pay back the new and larger loan in the long term.

Apply for the Home Affordable Refinance Program

The Home Affordable Refinance Program (HARP) is an initiative created by the Federal Housing Finance Agency following the 2008 economic recession, which caused large mortgage defaults in America. With the sudden drop in housing prices, many Americans were overpaying for their mortgages. HARP has helped refinance over 3 million mortgages so far and represents over 20 percent of all refinances. It is important to note that HARP is not the best solution for everyone, and has five main requirements for eligibility.

  • Your loan is currently owned by the mortgage-backed securities companies Freddie Mac or Fannie Mae.
  • Your mortgage/loan was signed before May 31, 2009.
  • Your current loan-to-value ratio is over 80 percent.
  • You are up to date with your mortgage payments and have not missed a payment in the last six months nor missed more than one payment in the past year.
  • The mortgage was either for your current residence, a second home or a four-unit investment property.

Seek FHA Refinancing

The Federal Housing Administration has a number of refinancing options built to help homeowners with existing FHA secured loans. Unfortunately, the streamlined refinancing is not available for loans that originated outside of any Federal Housing Administration secured lenders. One benefit of refinancing through the FHA is credit or income checks are not part of the process. If your mortgage is secured with the FHA, there are some prerequisites for the refinancing program.

  • You are current on payments and have not missed or been late on a payment for the past year.
  • You have owned the house for over six months.
  • You use an FHA approved lender or an FHA approved bank when refinancing.

If you are still unsure if you qualify the FHA mortgage portal includes a step-by-step guide that can give you an estimate of your best refinancing options available.

Mortgage Refinancing During the Coronavirus Outbreak

Graphic: Coronavirus Impact on Refinancing Your Mortgage

The coronavirus outbreak has impacted our lives on every front. Loss of jobs and income has lead to uncertainty and has made it difficult for many Americans to make their mortgage payments. Many homeowners have been taking advantage of the mortgage relief that was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), legislation that was signed in on March 27, 2020. This allows eligible homeowners with FHA-insured mortgages to have their payments due dates pushed back, also known as forbearance.  

Other homeowners are taking this opportunity to refinance their mortgage. According to the Mortgage Bankers Association, refinancing applications are being filed at a rate that’s 168% higher than during the same period in 2019. Though re-financing sounds like an attractive plan-of-action, it may not be right for everyone — there are additional considerations to make if your credit score is less than ideal.

To better understand your options, see some refinancing factors, considerations, challenges and resources below.

Is Refinancing Worth It?

It is worth looking into refinancing but this may not be the right move for you depending on a variety of factors. In a broader sense, this is a great opportunity to save money if the determining factors are on your side — in that case, yes, it could be worth refinancing your mortgage.

Refinancing Factors To Consider

Before you jump on the phone with your mortgage lender, there are some factors that you should consider that can help you determine if you are a good candidate.

  • Your credit score: As mentioned before, a lower score will typically equate to a higher APR. See the table above for an idea of how your FICO credit score correlates with your APR. Refinancing typically doesn’t negatively affect your credit but there are instances where it could, like refinancing too often.
  • Your recent payment record: If you have a recent history of late or missed payments (not tied to the coronavirus pandemic) that could have a negative impact on your results.
  • Occupancy length: How long you’re planning on living at your house is another huge factor that can affect your savings.
  • How old your mortgage is: The amount of years that you have left on your mortgage is a huge factor. If you are close to paying off your mortgage, it’s likely not worth it.
  • Many of the same rules apply: Regardless of coronavirus, there are certain actions that can improve or hurt your chances when refinancing. To recap, those best practices are: 
    • Shopping around for low rates
    • Showing proof of your savings
    • Getting someone to cosign your loan
    • Showing proof of your income
    • Improving your credit score

Current Mortgage Rates

Mortgage rates are historically low right now, the lowest being 3.13% on March 2, 2020. As of April 16, 2020, the average 30-year fixed mortgage rate was 3.780%, according to Bankrate and 3.341% according to NerdWallet. These rates are changing rapidly so it’s important to keep tabs on their movements if you’re considering refinancing. Check out daily rate updates on Mortgage News Daily to stay up-to-date on mortgage rate information.

Challenges and Risks of Refinancing Your Home

There are always risks that come with refinancing your home. One of the biggest challenges that the current climate has created is the time it may take to get your refinancing request through due to the high demand right now. See that challenge and additional ones below:

  • Longer to acquire: Requests are backed up because lenders don’t have the capacity to process all of the requests that are coming in due to demand coupled with staffing shortages.
  • Closing costs: Most refinancing processes require some sort of fee for processing the request. Depending on your situation, that’s something to consider.
  • Savings loss: Just like refinancing at any other time, there is no guarantee of savings and many people end up in the same spot or with a loss in savings due to increased rates or loss of certain benefits.

Questions To Ask Your Mortgage Lender

Before calling or making an appointment with your lender it’s a great idea to use a mortgage refinancing calculator to get a preliminary idea of how refinancing could work out for you. If you see a positive result and decide to call your lender, make sure you have your proper documents handy and have questions ready to ask them. Some of those could include:

  • What is the estimated turnaround time for this process? 
  • What are the new interest rate and APR?
  • Will I be able to lock in my loan rate?
  • What additional costs would I incur (title policies, inspections, credit reports, etc.)?
  • Will the new agreement include prepayment penalties?

H3: COVID-19 Mortgage Resources

Below is a collection of helpful resources to make sure you understand your options and keep up with the ever-changing rates and information that’s being distributed.

Coronavirus-Specific Resources

Additional Mortgage Information

In the end, there is no ‘one size fits all’ answer to whether or not you should attempt to refinance your home. We recommend reaching out to an advisor who can evaluate your individual situation. If you’re worried about your credit score hurting your chances of refinancing, try a free credit consultation to learn more about your score and how credit repair could help your financial situation. 

Source: lexingtonlaw.com

How to refinance a mortgage with bad credit – Lexington Law

Refinancing your mortgage with a bad credit score is completely possible, but is a more complicated process than refinancing with a good score. Because your credit score is such a large aspect of any loan application and refinancing process, it is in your best interest to consider all of your options before moving forward.

Refinancing your mortgage could be a great opportunity to gain some payment flexibility or even take advantage of a lower interest rate. To avoid leaving money on the table, explore all of your options for refinancing with bad credit.

How Credit Scores Affect Refinancing

Lenders use your credit score and overall lending history to calculate the risk of lending you money. A lender will view a borrower with a low credit score caused by loan defaults and constant late payments as a high risk. Because the borrower has shown negative borrowing practices in the past the lender will be more reluctant to sign or refinance a loan.

30-Year Mortgage Rates Based on Credit Scores

FICO Score APR
760–850 4.6%
700–759 4.8%
680–699 5.0%
660–679 5.2%
640–659 5.6%
620–639 6.1%

Based on 2018 national averages for a $200,000 fixed loan.
Source: FICO

Putting together a mortgage refinancing package for a borrower with a bad financial history might cause the lender to increase the length of the loan term, increase the total interest rate or even increase the total monthly payments. Unfortunately, when a borrower has a pattern of falling behind on payments, a lender will offer more expensive refinancing packages to make up for the added risk.

Is Refinancing Right for You?

It is important to note that refinancing your mortgage may not always save you money. You might come out with the same financial deal or a worse option than you currently have, especially if you have a low credit score. In fact, looking at the average outcomes of Freddie Mac mortgages that were refinanced between 1994 and 2018 shows that only a small fraction of refinances actually resulted in the borrower saving money.

Graphic: Average Mortgage Refinancing Outcome

Source: Freddie Mac

While refinancing may not be right for everyone, it’s still important to consider the benefits of flexibility and length of terms. If you see yourself falling behind on payments or want to pay off your loan faster, refinancing your mortgage might still offer you some benefits.

Refinancing With Your Current Lender

When approaching your current lender about refinancing your mortgage it is first important to assess where you stand as a borrower. If you make payments on time and are in great financial health the lender will most likely want to continue doing business with you. However, if you have been late on payments and are struggling to cover other financial responsibilities the lender might be more reluctant to refinance your mortgage.

1. Shop Around for Low Rates

Before approaching your current lender for refinancing options, it is important to check for other options. To aid with any negotiations you should first check with other banks to see what interests rates are the best. Coming to your current lender after already shopping around for prices will give you more bargaining power to get a lower rate.

2. Show Proof of Savings

If your credit score is low but you have money in the bank a lender may still offer you a competitive rate. Showing proof of income and savings is a good option for new borrowers with short lending historys. For lenders, any proof that a borrower will be able to make payments toward a mortgage or loan will lower the overall lending risk and make a positive impact on the terms of the refinancing agreement.

3. Get a Loan Cosigner

If you have a low credit score and do not have sufficient money in the bank to lower your overall risk, you can use a loan cosigner. A cosigner shows the validity of an agreement and essentially promises to pay any debts that are outstanding if the borrower cannot pay. Depending on your financial situation, it can be difficult to get someone to agree to be your loan cosigner. As such, you should only approach people you’re close with.

4. Show Proof of Income

Even if you do not have a large amount of savings in the bank you can still demonstrate you will make payments on time and carry through with your mortgage agreement by showing proof of income. If you have a well-paying job or have sufficient income coming in, a lender will be more likely to offer a good refinancing option to you. Even without money in the bank or a good credit score, showing proof of income demonstrates that you are financially stable enough to make payments on the loan.

5. Improve Your Credit Score

Before visiting your lender to inquire about mortgage refinancing options you should first look at your credit report for points of action around how you can build your credit score. If your credit report is full of negative items like late payments, hard inquiries and delinquent accounts there could be some places to make up some extra points. Through a series of disputes, letters and phone calls with the major credit agencies you can work toward getting a higher score. There are also companies that offer credit repair solutions that can get your credit removal cases rolling to help improve your score.

Consider Cash-Out Refinancing

Cash-out refinancing is a mortgage refinancing option ideal for people who owe less than their house is worth. It is important to note that a cash-out refinancing option trades your current loan for a cash payment and a larger loan. Lenders can typically refinance a loan for up to 80 percent of the current market value.

Equity is earned on a home when its market value price increases over the price in which you paid for it. Earned equity is normally cashed out with the sale of a home, but it can also be tapped into with cash-out refinancing.

Graphic: 80% have tappable equity on their home

The largest disadvantage to a cash-out refinance is the equity loss of your investment. Although the amount of money between what you currently owe and what your house is valued can be a sizable help for short-term debts, you will still be accountable to pay back the new and larger loan in the long term.

Apply for the Home Affordable Refinance Program

The Home Affordable Refinance Program (HARP) is an initiative created by the Federal Housing Finance Agency following the 2008 economic recession, which caused large mortgage defaults in America. With the sudden drop in housing prices, many Americans were overpaying for their mortgages. HARP has helped refinance over 3 million mortgages so far and represents over 20 percent of all refinances. It is important to note that HARP is not the best solution for everyone, and has five main requirements for eligibility.

  • Your loan is currently owned by the mortgage-backed securities companies Freddie Mac or Fannie Mae.
  • Your mortgage/loan was signed before May 31, 2009.
  • Your current loan-to-value ratio is over 80 percent.
  • You are up to date with your mortgage payments and have not missed a payment in the last six months nor missed more than one payment in the past year.
  • The mortgage was either for your current residence, a second home or a four-unit investment property.

Seek FHA Refinancing

The Federal Housing Administration has a number of refinancing options built to help homeowners with existing FHA secured loans. Unfortunately, the streamlined refinancing is not available for loans that originated outside of any Federal Housing Administration secured lenders. One benefit of refinancing through the FHA is credit or income checks are not part of the process. If your mortgage is secured with the FHA, there are some prerequisites for the refinancing program.

  • You are current on payments and have not missed or been late on a payment for the past year.
  • You have owned the house for over six months.
  • You use an FHA approved lender or an FHA approved bank when refinancing.

If you are still unsure if you qualify the FHA mortgage portal includes a step-by-step guide that can give you an estimate of your best refinancing options available.

Mortgage Refinancing During the Coronavirus Outbreak

Graphic: Coronavirus Impact on Refinancing Your Mortgage

The coronavirus outbreak has impacted our lives on every front. Loss of jobs and income has lead to uncertainty and has made it difficult for many Americans to make their mortgage payments. Many homeowners have been taking advantage of the mortgage relief that was part of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), legislation that was signed in on March 27, 2020. This allows eligible homeowners with FHA-insured mortgages to have their payments due dates pushed back, also known as forbearance.  

Other homeowners are taking this opportunity to refinance their mortgage. According to the Mortgage Bankers Association, refinancing applications are being filed at a rate that’s 168% higher than during the same period in 2019. Though re-financing sounds like an attractive plan-of-action, it may not be right for everyone — there are additional considerations to make if your credit score is less than ideal.

To better understand your options, see some refinancing factors, considerations, challenges and resources below.

Is Refinancing Worth It?

It is worth looking into refinancing but this may not be the right move for you depending on a variety of factors. In a broader sense, this is a great opportunity to save money if the determining factors are on your side — in that case, yes, it could be worth refinancing your mortgage.

Refinancing Factors To Consider

Before you jump on the phone with your mortgage lender, there are some factors that you should consider that can help you determine if you are a good candidate.

  • Your credit score: As mentioned before, a lower score will typically equate to a higher APR. See the table above for an idea of how your FICO credit score correlates with your APR. Refinancing typically doesn’t negatively affect your credit but there are instances where it could, like refinancing too often.
  • Your recent payment record: If you have a recent history of late or missed payments (not tied to the coronavirus pandemic) that could have a negative impact on your results.
  • Occupancy length: How long you’re planning on living at your house is another huge factor that can affect your savings.
  • How old your mortgage is: The amount of years that you have left on your mortgage is a huge factor. If you are close to paying off your mortgage, it’s likely not worth it.
  • Many of the same rules apply: Regardless of coronavirus, there are certain actions that can improve or hurt your chances when refinancing. To recap, those best practices are: 
    • Shopping around for low rates
    • Showing proof of your savings
    • Getting someone to cosign your loan
    • Showing proof of your income
    • Improving your credit score

Current Mortgage Rates

Mortgage rates are historically low right now, the lowest being 3.13% on March 2, 2020. As of April 16, 2020, the average 30-year fixed mortgage rate was 3.780%, according to Bankrate and 3.341% according to NerdWallet. These rates are changing rapidly so it’s important to keep tabs on their movements if you’re considering refinancing. Check out daily rate updates on Mortgage News Daily to stay up-to-date on mortgage rate information.

Challenges and Risks of Refinancing Your Home

There are always risks that come with refinancing your home. One of the biggest challenges that the current climate has created is the time it may take to get your refinancing request through due to the high demand right now. See that challenge and additional ones below:

  • Longer to acquire: Requests are backed up because lenders don’t have the capacity to process all of the requests that are coming in due to demand coupled with staffing shortages.
  • Closing costs: Most refinancing processes require some sort of fee for processing the request. Depending on your situation, that’s something to consider.
  • Savings loss: Just like refinancing at any other time, there is no guarantee of savings and many people end up in the same spot or with a loss in savings due to increased rates or loss of certain benefits.

Questions To Ask Your Mortgage Lender

Before calling or making an appointment with your lender it’s a great idea to use a mortgage refinancing calculator to get a preliminary idea of how refinancing could work out for you. If you see a positive result and decide to call your lender, make sure you have your proper documents handy and have questions ready to ask them. Some of those could include:

  • What is the estimated turnaround time for this process? 
  • What are the new interest rate and APR?
  • Will I be able to lock in my loan rate?
  • What additional costs would I incur (title policies, inspections, credit reports, etc.)?
  • Will the new agreement include prepayment penalties?

H3: COVID-19 Mortgage Resources

Below is a collection of helpful resources to make sure you understand your options and keep up with the ever-changing rates and information that’s being distributed.

Coronavirus-Specific Resources

Additional Mortgage Information

In the end, there is no ‘one size fits all’ answer to whether or not you should attempt to refinance your home. We recommend reaching out to an advisor who can evaluate your individual situation. If you’re worried about your credit score hurting your chances of refinancing, try a free credit consultation to learn more about your score and how credit repair could help your financial situation. 

Source: lexingtonlaw.com

Will you get a second stimulus check? – Lexington Law

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

By mid-May 2020, the IRS had issued more than $218 billion in stimulus checks related to the CARES Act, and it was still working to ensure all eligible Americans received theirs. But in early August, 2020, almost five months after the CARES Act was passed, many people were wondering if they would receive a second stimulus check. Find out what’s known about stimulus checks and future financial assistance from the federal government in the article below.

Will There Be a Second Stimulus Check?

Judging on the number of bills being passed around Congress, there’s a possibility another stimulus act is coming, and it may come with a second round of stimulus checks. But the details—including how much the check will be worth and who will be eligible—depend on which of the acts ends up making it through.

Bills currently being discussed include:

By mid-May 2020, the IRS had issued more than $218 billion in stimulus checks related to the CARES Act.

The HEALS Act

The HEALS Act comes from the Republicans and is a stimulus package similar to the CARES Act. If this act passes in its current form it will include many of the details described below.

How Much Money Will People Get?

Yes, this act does include stimulus payments to many Americans. The details of how much and who might get what amount are included below.

  • Individuals making less than $75,000 per year will get $1,200.
  • Couples filing jointly and making less than $125,000 per year will get $2,400.
  • People making above those amounts may still get a check. The stimulus is reduced $5 for every $100 of income above those limits until it tapers off completely. So, someone making $80,000 per year would get $950, for example.
  • An additional $500 is also included for every dependent claimed on the person or couple’s tax return, which is different from the CARES Act, which excluded dependents over the age of 16.

Who Would Qualify?

The income and dependent restrictions explained above will determine who would qualify for the stimulus. Qualification would likely be based on tax returns or Social Security benefit statements as was the case with the CARES Act.

What Other Benefits Are Included?

The HEALS Act contains a number of other benefits and stimulus efforts for businesses, schools and workers. Some of the main provisions are highlighted below, but this is not a comprehensive list.

  • Additional unemployment benefits would be provided, but it would be less per week than under the CARES Act.
  • The act would expand the Paycheck Protection Program by another $190 billion and make it easier for businesses to comply with the payroll requirement.
  • A return-to-work bonus may be offered to unemployed workers who find new jobs.
  • Funds to schools to help support reopening efforts would be included.
  • Some protection against lawsuits related to COVID-19 would be provided for businesses.
  • The act also includes $16 billion in coronavirus testing support.

The HEROES Act

This is the stimulus act being proposed by the Democrats. It also includes stimulus payments and other benefits for individuals and businesses.

How Much Money Will People Get?

As with the other bills, the HEROES Act includes a round of stimulus payments for qualifying Americans. The details of the payment amounts being proposed are summarized below.

  • Individuals making less than $75,000 get a $1,200 check under this act.
  • Married people filing jointly making less than $125,000 total annually get a $2,400 check under this act.
  • The stimulus is reduced $5 for every $100 of income above those limits until it tapers off completely.
  • The HEROES Act provides $1,200 per dependent for the first three dependents for an individual or married couple with no age restrictions. So if you claim three children, you would get an additional $3,600 in stimulus funds.

Who Would Qualify?

The qualifications for stimulus checks would be similar to those under the HEALS and CARES Acts as represented above.

What Other Benefits Are Included?

Here are some of the other benefits included in the HEROES Act:

  • This act includes the same enhanced unemployment benefits available under CARES, just extended for a longer period of time.
  • The HEROES Act also includes expanded eligibility for the Paycheck Protection Program and a reduction in the payroll requirement.
  • An expansion and extension of the eviction moratorium and protections for renters is included in the HEROES Act but not the HEALS Act.
  • Funds to support school reopenings are also included in this act.

When Could a Second Stimulus Check Come?

When a second stimulus check might arrive depends heavily on when a bill is passed. Both the House and the Senate must pass the bill, and then it has to be signed by the president. But the hope is that it won’t take as long for the IRS to turn around payments as it did in March and April. Ideally it won’t—the IRS has now done this once already and has probably learned lessons and put a system in place that speeds up the second round.

In fact, Steven Mnuchin, the US Treasury Secretary, said that the IRS could start sending payments within a week of an act being passed. So, if the act is passed anytime in mid-September, for example, the checks could start rolling out before the calendar moved into October.

The Stimulus check process in 4 steps

Will This Be the Last Stimulus Check?

It’s pure speculation at this point to discuss a second, or even third or fourth stimulus check. But it’s not impossible. It likely depends on the state of the economy and job market as the COVID-19 pandemic continues. If future stimulus checks do come, though, they may become increasingly more targeted as time passes. For example, it’s possible stimulus funds might start to go to people who can demonstrate a need.

However, until this second act is passed and lawmakers move on to considering future bills, there’s simply no way to know.

Protecting Your Financial Status During COVID-19 and After

Whether you’re waiting for and relying on a second stimulus check or you’re beginning to see a light at the end of your own personal COVID-19 financial tunnel, it’s definitely important to keep an eye on your personal finances during these trying times. That can include checking your credit report to ensure all the information is accurate and disputing inaccurate items so they don’t drag down your score in the future. It can also include managing your debt, income and investments in the most responsible way. During COVID-19 and beyond, Lexington Law offers information that can help you navigate finances and plan for the future. Check out articles that range from student loans to mortgages, and consider our credit repair services if you need help getting your credit report back to rights.


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

The Perfect Storm for Retirees

Today’s retirees are unlike any other retirees in history: They’re living longer, and many of them want to spend more in retirement than previous generations. At the same time, the fear of running out of money is incredibly common, and for good reason.

The bargain made decades ago in the transition from defined benefit pension plans to the modern 401(k) gave workers control over their savings but also transferred longevity risk from the employer to the worker. As such, these days few retirees can rely on a significant pension and must make their savings last for decades. This may be even more difficult considering that we could see persistently low interest rates, higher inflation and market volatility in the coming years.

The result? Today’s retirees could face a perfect storm, and they may have to use different financial planning strategies than retirees of the past.

Low Interest Rates

The Federal Reserve recently announced that it would maintain the target federal funds rate (the benchmark for most interest rates) at a range of 0% to 0.25%. The Fed cut rates down to this level in March of last year in hopes of combating the crippling economic effects of the pandemic, and it may not raise them for years. Interest rates are expected to stay where they are until 2023. Even when they rise, they could stay relatively low for some time.

As the U.S. government borrowings increase dramatically, the motivation for holding rates down increases. This combination works in favor of immense government borrowing, but for retirees it creates an intrinsic tax in the form of persistently low rates paid on savings. Borrowers love low rates as much as savers detest them. This truth is very much in play today. This poses a problem to retirees who want to earn a reasonable rate of return while minimizing their investment risk.

The Potential for Inflation

Coupled with persistently low interest rates, retirees could face increased inflation in the coming years. Government spending increased significantly due to COVID, with the CARES Act costing $2.2 trillion and the American Rescue Plan Act costing $1.9 trillion alone. The Federal Reserve has said that there is potential for “transient” inflation in the coming months and that it would allow inflation to rise above 2% for some time. While most experts don’t think it’s likely that we’ll return to the high inflation rates of the 1970s, even a normal inflation rate is cause for concern among those nearing and in retirement. Over the course of a long retirement, inflation can eat away at savings significantly.

Consider this: After 20 years with a 2% inflation rate (the Fed’s “target” interest rate), $1 million would only have the buying power of $672,971.

The combination of low interest rates and higher inflation may drive many retirees to take on more market risk than they normally would to account for that.

Market Risk

Those nearing retirement and recently retired can expose themselves to sequence-of-returns risk if they take on too much market risk. This is when a portfolio experiences a significant drop in value while the owner is withdrawing funds, owing to nothing more than unlucky timing. This risk is actuated by the timing of the age of the individual retiree and when they plan to retire, not something anyone usually times around market levels or investment performance but rather around lifestyle or even health factors. As a result, often the portfolio cannot fully recover as the market bounces back, due to the burden of regular withdrawals, and may be left significantly reduced.

Today’s retirees live in an uncertain world with an uncertain market. No one could have predicted the pandemic or its economic effects, and similarly, no one can predict where the market will be next year, in five years or in 10 years. While younger investors can ride out periods of volatility, retirees who are relying on their investments for income may have significantly lower risk tolerance and need to rethink their retirement investment strategy.

Is There a Solution?

This leaves many retirees in a perfect storm. They need to make their savings last longer than any previous generation, but with interest rates at historic lows, they may feel pressured to subject their savings to too much market risk in hopes of earning a reasonable rate of return. The most fundamental step to take is committing to regularized, frequent reviews with your financial adviser. Depending on portfolio size and complexity, this is most often quarterly, but should be no less frequent than every six months. This time investment keeps retirees attuned to shifts in the portfolio that will sustain them for decades to come.

Finally, consider the breadth of options available to your adviser, or on the retail platform you use if you are self-managed. Sometimes having the right tool is everything in getting the job done.  Often advisers have a greater breadth of options available that can more than offset their cost. Remember there are options beyond equities. The best advisers have access to guaranteed income insurance products, market linked certificates of deposits and other “structured assets.” This basket of solutions can provide downside protection ranging from a buffer of say 10%-20% all the way to being fully guaranteed by the issuing insurer or commercial bank. Even within the markets themselves, there are asset managers who create stock and bond portfolios that focus on a specific downside target first, emphasizing downside protection above growth right from the start.

Although market risk remains, it’s true that by focusing on acceptable downside first, those portfolios are likely to weather downturns better even if they do surrender some upside as an offset. And while none of these approaches is perfect, they can work as a component to offset a portion of the market risk retirees probably need to endure for decades to come.

The article and opinions in this publication are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you consult your accountant, tax, or legal advisor with regard to your individual situation. Securities offered through Kalos Capital Inc. and Investment Advisory Services offered through Kalos Management Inc., both at 11525 Park Woods Circle, Alpharetta GA 30005, (678) 356-1100. SouthPark Capital is not an affiliate or subsidiary of Kalos Capital or Kalos Management.

CEO, SouthPark Capital

George Terlizzi has worked in business for more than 25 years as an entrepreneur, consultant, dealmaker and executive for early and mid-stage companies. He has substantial concentrations in finance, technology, consulting and numerous forms of transaction work. Today George advises wealth clients individually and sets the strategic vision for SouthPark Capital. George’s insatiable curiosity, action-oriented approach, and broad-ranging interests are invaluable to those he advises.

Source: kiplinger.com

Creating a Debt Reduction Plan

When you’re worried about money and feel your options are limited, debt can feel like a pair of handcuffs. And if it feels like you can’t do what you want to do—which is to pay it all off and get yourself free—there’s the temptation to do nothing. But there are some things that can be helpful when crafting a debt reduction plan that will work for your situation.

Prioritizing Expenses

Before you start prioritizing expenses, it’s important to have a clear understanding of what income is available and how much is being spent. This can be done with pen and paper, or by leveraging an all-in-one app, such as SoFi Relay.

Keeping a roof over their head is a number one priority for most people. Mortgage lenders are not very patient when it comes to getting their money, and failing to make a house payment can leave a big black mark on a person’s credit record. For renters, paying the property owner on time each month may have a positive impact on their credit report.

Making sure a car loan and car insurance are current, especially if that’s the only way to get to work, might be next in order of importance. After that come big debts, such as student loans, but those may be eligible for student loan forgiveness depending on the type of loan and if the qualifications for forgiveness are met. Refinancing student loans into one manageable payment might be worth considering if that would save money with a lower interest rate or a shorter loan term. (For federal student loan borrowers, though, refinancing may not be the best option right now since the CARES Act has offered some relief through September 30, 2021.)

Making a plan to tackle credit card debt is also important. Each month, making the monthly minimum payment is important, otherwise, a person’s credit report can quickly reflect any lack of payment . And to manage the outstanding balances on those credit cards, it may be time to work out a new payment plan to get out from under credit card debt.

Once all that information is accounted for, moving forward with a personal debt reduction plan will make it easier to deal with all those long-term bills and relieve debt-related worry.

There are four popular approaches to knocking down debt. The debt avalanche method is probably best suited to those who are analytical, disciplined, and want to pay off their debt in the most efficient manner based solely on the math.

The debt snowball method takes human behavior into consideration and focuses on maintaining motivation as a person pays off their debt.

The debt fireball method is a hybrid approach that combines aspects of the snowball and avalanche methods.

And a personal loan may be an option for those who have a solid financial history or whose credit score has improved since they first signed up for their high-interest loans and credit cards.

Here’s how each strategy typically works.

Debt Avalanche

This method puts the focus on interest rates rather than the balance that’s owed on each bill.

1. The first step is collecting all debt statements (e.g., credit card, auto loan, student loan) and determining the interest rate being charged on each debt.
2. Making a list of all those bills is next, looking past the total amount owed on each debt. This method puts the debt with the highest interest rate in the spotlight, so that one will be at the top of the list, with the other debts listed in order of interest rate, second highest to lowest.
3. Some things to keep in mind might be any fees, prepayment penalties, or tax strategies that could make one debt more or less expensive than the others. When using a balance transfer credit card to save money on any particular debt, reprioritizing the list once the introductory rate runs out and a higher rate kicks in plays a part in how this method works.
4. Continuing to pay the minimum on each bill—on time, every month—is important. But paying extra (as much as possible) toward the bill at the top of the list will help that debt be paid off as quickly as possible.
5. When the first debt is paid off, moving on to the next debt on the list and starting to pay extra there will start the process over again. Money will be saved as each of those high-interest loans and credit cards are eliminated, which can allow all the bills to be paid off sooner.

Debt Snowball

This approach can be effective in getting a handle on debt by slowly reducing the number of bills there are to deal with each month.

1. This method also starts with collecting debt statements and making a list of those debts, but instead of listing them in order of interest rate, organizing them from the smallest debt to the largest (total amount owed, not monthly payment amount).
2. Continuing to pay the minimum—on time, every month—but paying as much extra as possible toward the smallest debt on the list is key to this method. (If possible, completely paying off the balance on that very first bill might provide some sweet momentum to get started.)
3. As with the debt avalanche method above, paying attention to fees, penalties, and tax strategies may determine which debt gets paid first.
4. Moving on to the next debt on the list, and so on, will keep this method in motion. Keeping track of paid-off debts with a visual tracker might help with motivation.
5. No longer using credit cards that have been paid off is a good way to stay out of debt for the long term. And having a goal to set up an emergency fund to cover unexpected expenses—a medical bill or car repair, for example—to stay on track is a good way to stay ahead of the game.

Debt Fireball

This strategy is a hybrid approach of the snowball and avalanche methods. It separates debt into two categories and can be helpful when blazing through costly “bad debt” quickly.

1. Categorizing all debt as either “good” or “bad.” “Good” debt is generally in the form of things that have potential to increase net worth, such as student loans, business loans, or mortgages, for example. “Bad” debt, on the other hand, is normally considered to be debt incurred for a depreciating asset, like car loans and credit card debt. As this list is being developed, identifying all debt with an interest rate of 7% or higher is likely the “bad” debt that may be beneficial to focus on first.
2. Listing bad debts from smallest to largest based on their outstanding balances will provide the working order.
3. Making the minimum monthly payment on all outstanding debts—on time, every month—then funneling any excess funds to the smallest of the bad debts is the focus of this method.
4. When that balance is paid in full, going on to the next smallest on the bad-debt list will keep the fireball momentum until all the bad debt is repaid.
5. When that’s done, paying off good debt on the normal schedule can be a smart way to invest in the future. Applying everything that was being paid toward the bad debt to a financial goal, such as saving for a house—or paying off a mortgage, starting a business, or saving for retirement, for example, is a good way to look forward to a financially secure future.

Personal Loan

Consolidating debts at a lower interest rate or with a shorter term offers another option to pay those debts off in less time than expected.

1. Gathering debt statements and totaling up the debts to be paid off is the first step.
2. To have an idea of interest rates that might be available (most lenders will offer a range), making sure the information on credit reports is accurate is the next important step. Any errors found on a credit report can be reported to the credit reporting agency.
3. Looking at a variety of lenders to find the best interest rates and terms available will help when setting a goal to find a manageable payment while paying off the debt load as quickly as possible.
4. Considering member benefits or other perks that lenders may offer, such as a hardship deferral or a discount on a future loan might make a difference when choosing a lender. Then, applying for the loan that best suits the borrower’s needs is the next step in the process.
5. Paying off old debts with the personal loan and staying current with the new loan payments will help keep things manageable. Sticking to a budget that prevents the same spending mistakes from being made again is important to keeping debt at bay.

Personal loans used for debt consolidation can help pull everything together for those who find it easier to keep up with just one monthly payment. A bonus is that because the interest rates for personal loans are typically lower than credit card interest rates, the amount paid on the total debt may be less than what would have been paid just by plugging away at those individual debts. For those who qualify for a rate that’s less than their credit card rates, a personal loan can make sense.

The Takeaway

With an unsecured personal loan from SoFi, debts can be consolidated and paid off in a way that works for your income, budget, and timeline.

Whatever payoff method you choose, the point is to do something. Having a debt reduction plan in place is key to getting rid of those financial handcuffs and being able to look forward to a successful financial future. Planning ahead, saving for specific goals, and sticking with a budget will go a long way to minimizing dependence on credit cards or high-interest loans in the future.

Ready to tackle your debt head-on? A personal loan from SoFi can help you consolidate your debt into one easy-to-manage monthly payment.



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Source: sofi.com

Will you get a second stimulus check?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

By mid-May 2020, the IRS had issued more than $218 billion in stimulus checks related to the CARES Act, and it was still working to ensure all eligible Americans received theirs. But in early August, 2020, almost five months after the CARES Act was passed, many people were wondering if they would receive a second stimulus check. Find out what’s known about stimulus checks and future financial assistance from the federal government in the article below.

Will There Be a Second Stimulus Check?

Judging on the number of bills being passed around Congress, there’s a possibility another stimulus act is coming, and it may come with a second round of stimulus checks. But the details—including how much the check will be worth and who will be eligible—depend on which of the acts ends up making it through.

Bills currently being discussed include:

By mid-May 2020, the IRS had issued more than $218 billion in stimulus checks related to the CARES Act.

The HEALS Act

The HEALS Act comes from the Republicans and is a stimulus package similar to the CARES Act. If this act passes in its current form it will include many of the details described below.

How Much Money Will People Get?

Yes, this act does include stimulus payments to many Americans. The details of how much and who might get what amount are included below.

  • Individuals making less than $75,000 per year will get $1,200.
  • Couples filing jointly and making less than $125,000 per year will get $2,400.
  • People making above those amounts may still get a check. The stimulus is reduced $5 for every $100 of income above those limits until it tapers off completely. So, someone making $80,000 per year would get $950, for example.
  • An additional $500 is also included for every dependent claimed on the person or couple’s tax return, which is different from the CARES Act, which excluded dependents over the age of 16.

Who Would Qualify?

The income and dependent restrictions explained above will determine who would qualify for the stimulus. Qualification would likely be based on tax returns or Social Security benefit statements as was the case with the CARES Act.

What Other Benefits Are Included?

The HEALS Act contains a number of other benefits and stimulus efforts for businesses, schools and workers. Some of the main provisions are highlighted below, but this is not a comprehensive list.

  • Additional unemployment benefits would be provided, but it would be less per week than under the CARES Act.
  • The act would expand the Paycheck Protection Program by another $190 billion and make it easier for businesses to comply with the payroll requirement.
  • A return-to-work bonus may be offered to unemployed workers who find new jobs.
  • Funds to schools to help support reopening efforts would be included.
  • Some protection against lawsuits related to COVID-19 would be provided for businesses.
  • The act also includes $16 billion in coronavirus testing support.

The HEROES Act

This is the stimulus act being proposed by the Democrats. It also includes stimulus payments and other benefits for individuals and businesses.

How Much Money Will People Get?

As with the other bills, the HEROES Act includes a round of stimulus payments for qualifying Americans. The details of the payment amounts being proposed are summarized below.

  • Individuals making less than $75,000 get a $1,200 check under this act.
  • Married people filing jointly making less than $125,000 total annually get a $2,400 check under this act.
  • The stimulus is reduced $5 for every $100 of income above those limits until it tapers off completely.
  • The HEROES Act provides $1,200 per dependent for the first three dependents for an individual or married couple with no age restrictions. So if you claim three children, you would get an additional $3,600 in stimulus funds.

Who Would Qualify?

The qualifications for stimulus checks would be similar to those under the HEALS and CARES Acts as represented above.

What Other Benefits Are Included?

Here are some of the other benefits included in the HEROES Act:

  • This act includes the same enhanced unemployment benefits available under CARES, just extended for a longer period of time.
  • The HEROES Act also includes expanded eligibility for the Paycheck Protection Program and a reduction in the payroll requirement.
  • An expansion and extension of the eviction moratorium and protections for renters is included in the HEROES Act but not the HEALS Act.
  • Funds to support school reopenings are also included in this act.

When Could a Second Stimulus Check Come?

When a second stimulus check might arrive depends heavily on when a bill is passed. Both the House and the Senate must pass the bill, and then it has to be signed by the president. But the hope is that it won’t take as long for the IRS to turn around payments as it did in March and April. Ideally it won’t—the IRS has now done this once already and has probably learned lessons and put a system in place that speeds up the second round.

In fact, Steven Mnuchin, the US Treasury Secretary, said that the IRS could start sending payments within a week of an act being passed. So, if the act is passed anytime in mid-September, for example, the checks could start rolling out before the calendar moved into October.

The Stimulus check process in 4 steps

Will This Be the Last Stimulus Check?

It’s pure speculation at this point to discuss a second, or even third or fourth stimulus check. But it’s not impossible. It likely depends on the state of the economy and job market as the COVID-19 pandemic continues. If future stimulus checks do come, though, they may become increasingly more targeted as time passes. For example, it’s possible stimulus funds might start to go to people who can demonstrate a need.

However, until this second act is passed and lawmakers move on to considering future bills, there’s simply no way to know.

Protecting Your Financial Status During COVID-19 and After

Whether you’re waiting for and relying on a second stimulus check or you’re beginning to see a light at the end of your own personal COVID-19 financial tunnel, it’s definitely important to keep an eye on your personal finances during these trying times. That can include checking your credit report to ensure all the information is accurate and disputing inaccurate items so they don’t drag down your score in the future. It can also include managing your debt, income and investments in the most responsible way. During COVID-19 and beyond, Lexington Law offers information that can help you navigate finances and plan for the future. Check out articles that range from student loans to mortgages, and consider our credit repair services if you need help getting your credit report back to rights.


Reviewed by Kenton Arbon, an Associate Attorney at Lexington Law Firm. Written by Lexington Law.

Kenton Arbon is an Associate Attorney in the Arizona office. Mr. Arbon was born in Bakersfield, California, and grew up in the Northwest. He earned his B.A. in Business Administration, Human Resources Management, while working as an Oregon State Trooper. His interest in the law lead him to relocate to Arizona, attend law school, and graduate from Arizona State College of Law in 2017. Since graduating from law school, Mr. Arbon has worked in multiple compliance domains including anti-money laundering, Medicare Part D, contracts, and debt negotiation. Mr. Arbon is licensed to practice law in Arizona. He is located in the Phoenix office.

Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.

Source: lexingtonlaw.com

PPP Loan Basics for Small Business Owners

COVID-related shutdowns and restrictions have hit small businesses particularly hard. Many of them have closed permanently, while others are hanging on by their fingernails. Fortunately, there is some help available through the Paycheck Protection Program (PPP), which was first introduced in March 2020 as part of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Under the PPP, small businesses can get up to 24 weeks of cash flow assistance through federally guaranteed loans. Plus, the loans can be forgiven to the extent the proceeds are used for payroll and certain other expenses during the COVID-19 pandemic. Borrowers can apply for a PPP loan through any existing Small Business Administration 7(a) lender or through any federally insured bank, credit union, eligible nonbank lender, or Farm Credit System institution that is participating in the program.

The PPP has an up-and-down history, though. For instance, initial PPP funding – roughly $349 billion – was exhausted just a few days after the program was launched. Some mom-and-pop businesses had a hard time getting loans, too. But Congress later provided an additional $310 billion in funding and made important changes to the program, such as allowing more time to spend the loan proceeds and making it easier to get a loan fully forgiven. However, new PPP loan applications then were halted on August 8, 2020 – until a second stimulus package was signed into law in December 2020 that restarted the program with an additional $285 billion in funding. The law also opened up a second PPP loan for businesses that used up all the proceeds of their first PPP loan. The relief bill signed into law on March 11, 2021, injected an additional $7.25 billion into the program.

As it stands right now, the PPP will run until May 31, 2021, or until funds are exhausted, whichever occurs first. So, there’s still time to tap into this form of assistance. Although uncertainty and confusion have surrounded the PPP since its launch, that shouldn’t stop small business owners from participating in the program. Yes, there are a lot of rules and procedures you need to follow. But getting familiar with the PPP basics is a good place to start. That’s what the following overview is designed to do.

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First Draw PPP Loans

picture of owner of small coffee shoppicture of owner of small coffee shop

Small businesses that didn’t received a PPP loan in 2020 under the CARES Act may apply for a “first draw loan.” Existing PPP borrowers that didn’t receive loan forgiveness by December 27, 2020, may reapply for a first draw PPP loan if they previously returned some or all of their first draw PPP loan funds. A borrower who received the full available benefit of a first draw loan in 2020 under the CARES Act may only be eligible for a second draw PPP loan.

To be eligible for a first draw PPP loan, a borrower must have been in operation on February 15, 2020, and either (1) had employees for whom it paid salaries and payroll taxes, (2) paid independent contractors, or (3) operated as a self-employed individual, independent contractor or sole proprietorship with no employees. The borrower must also be either a:

  • Small business that, together with affiliates (if applicable), have 500 or fewer employees;
  • Business with more than 500 employees that meets the SBA’s size standards (either the industry size standard or the alternative size standard);
  • 501(c)(3) or 501(c)(19) organization with 500 or fewer employees per physical location;
  • 501(c)(5), 501(c)(7) or 501(c)(8) organization with 300 or fewer employees per physical location that doesn’t receive more than 15% of its receipts from lobbying activities;
  • Tribal business concern;
  • Nonprofit news organization;
  • Online news publisher;
  • Housing cooperative with no more than 300 employees; or
  • 501(c)(6) organization or a destination marketing organization with 300 or fewer employees.

Borrowers can use first draw PPP loans for the following purposes:

  • Payroll costs (salaries; wages; vacation, parental, family, medical or sick leave; and health benefits);
  • Mortgage interest;
  • Rent;
  • Utilities (electricity, water, sewage, telephone, internet, transportation costs, etc.);
  • Operations expenditures (e.g., any software, cloud computing, or other human resources and accounting needs);
  • Property damage costs (e.g., from damages due to public disturbances that occurred in 2020 and not covered by insurance);
  • Supplier costs (e.g., any purchase order or order of goods made before receiving a PPP loan essential to operations); and
  • Worker protection expenditures (e.g., any personal protection equipment or property improvements to remain in compliance with government requirements or guidance established by the Department of Homeland Security, Centers for Disease Control and Prevention, Occupational Safety and Health Administration, or any state or local agency related to worker safety due to COVID-19).

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Second Draw PPP Loans

drawing of man in front of large sign saying "PPP Second Draw"drawing of man in front of large sign saying "PPP Second Draw"

As of January 2021, certain eligible borrowers that previously received a PPP loan can apply for a “second draw loan” with the same general loan terms and conditions as the first draw PPP loan (see above).

There are, however, some important differences. Each borrower must be an eligible recipient of a first-draw PPP loan and, together with its affiliates, have no more than 300 employees. The borrower must also be able to demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.

Borrowers seeking more than $150,000 must submit documentation, such as annual tax forms or quarterly financial statements, at the time of their application to support the 25% reduction in revenue relative to 2019. Borrowers that receive less than $150,000 must provide such documentation when applying for loan forgiveness.

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PPP Loan Forgiveness

picture of PPP loan forgiveness application formpicture of PPP loan forgiveness application form

Up to 100% of the principal amount of a PPP loan and accrued interest can be forgiven. Both first and second draw PPP loans made to eligible borrowers qualify for full loan forgiveness if during covered period following the loan disbursement:

  • Employee and compensation levels are maintained in the same manner as required for the first draw PPP loan;
  • The loan proceeds are spent on payroll costs and other eligible expenses; and
  • At least 60% of the proceeds are used for payroll costs.

A borrower may choose a covered period between 8 weeks and 24 weeks after the receipt of PPP funds from the lender.

To have all or part of a PPP loan forgiven, a borrower must complete and submit a loan forgiveness application. Borrowers also need to keep records and have accurate bookkeeping to prove their expenses during the loan period. When the covered period is over, borrowers must apply for forgiveness through their lender. Use SBA Form 3508, Form 3508EZ, or Form 3508S (Forms 3508EZ and 3508S are shorter versions of the application for borrowers who meet specific requirements).

Some lenders may have their own forgiveness forms, too. So, borrowers should check with their lender to determine which form is the right one for their loan. After a borrower applies for forgiveness, the lender must provide a response within 60 days.

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Maximum Loan Amount

picture of bag with dollar sign on itpicture of bag with dollar sign on it

For first-time borrowers, the maximum loan amount is 2½ times their average monthly 2019 or 2020 payroll costs up to $10 million. Borrowers applying for the first time may use either calendar year 2019 or calendar year 2020 for purposes of calculating their average payroll costs.

The maximum loan amount of a second draw PPP loan is 2½ times the borrower’s average monthly 2019 or 2020 payroll costs up to $2 million.

For borrowers in the accommodation and food services sector (NAICS Code 72), the maximum loan amount for a second draw PPP loan is 3½ times the borrower’s average monthly 2019 or 2020 payroll costs up to $2 million.

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Taxes

picture of tax form for small business S corporationspicture of tax form for small business S corporations

Normally, cancelled debt is generally considered taxable income. However, the CARES Act says that any forgiven PPP loan amount won’t be taxed.

The IRS originally ruled that borrowers couldn’t claim a tax deduction for business expenses that result in forgiveness of a PPP loan. However, Congress reversed that decision in December. As a result, tax deductions are allowed for the payment of eligible business expenses even if the payments would result (or be expected to result) in the forgiveness of a PPP loan.

Source: kiplinger.com