What Is a Bond Mutual Fund – Risks & Different Types of This Investment

Investing is an important part of saving for the future, but many people are wary of putting their money into the stock market. Stocks can be volatile, with prices that change every day. If you can’t handle the volatility and risk of stocks or want to diversify your portfolio into a less risky investment, bonds are a good way to do so.

As with many types of investments, you can invest in bonds through a mutual fund, which gives you easy diversification and professional portfolio management — for a fee.

Are bond mutual funds a good addition to your portfolio? Here are the basics of these investment vehicles.

What Is a Bond?

A bond is a type of debt security. When organizations such as national and local governments, government agencies, or companies want to borrow money, one of the ways they can get the loan they need is by issuing a bond.

Investors purchase bonds from the organizations issuing them. Typically, bonds come with an interest rate and a maturity. For example, a company might sell bonds with an interest rate of 5% and a maturity of 20 years.

The investor would pay the company $1,000 for a $1,000 bond. Each year, that investor receives an interest payment of $50 (5% of $1,000). After 20 years, the investor receives a final interest payment plus the $1,000 they paid to buy the bond.


What Is a Mutual Fund?

A mutual fund is a way for investors to invest in a diverse portfolio while only having to purchase a single security.

Mutual funds pool money from many investors and use that money to buy bonds, stocks, and other securities. Each investor in the fund effectively owns a portion of the fund’s portfolio, so an investor can buy shares in one mutual fund to get exposure to hundreds of stocks or bonds.

This makes it easy for investors to diversify their portfolios.

Mutual fund managers make sure the fund’s portfolio follows their stated strategy and work towards the fund’s stated goal. Mutual funds charge a fee, called an expense ratio, for their services, which is important for investors to keep in mind when comparing funds.

Pro tip: Most mutual funds can be purchased through the individual fund family or through an online broker like Robinhood or Public.


Types of Bond Mutual Funds

There are many types of bond mutual funds that people can invest in.

1. Government

Government bond funds invest most of their money into bonds issued by different governments. Most American government bond funds invest primarily in bonds issued by the U.S. Treasury.

U.S. government debt is seen as some of the safest debt available. There is very little chance that the United States will default on its payments. That security can be appealing for investors, but also translates to lower interest rates than other bonds.

2. Corporate

Corporate bond funds invest most of their assets into bonds issued by companies.

Just like individuals, businesses receive credit ratings that affect how much interest they have to pay to lenders — in this case, investors looking to buy their bonds. Most corporate bond funds buy “investment-grade” bonds, which include the highest-rated bonds from the most creditworthy companies.

The lower a bond’s credit rating, the higher the interest rate it will pay. However, lower credit ratings also translate to a higher risk of default, so corporate bond funds will hold a mixture of bonds from a variety of companies to help diversify their risks.

3. Municipal

Municipal bonds are bonds issued by state and local governments, as well as government agencies.

Like businesses, different municipalities can have different credit ratings, which impacts the interest they must pay to sell their bonds. Municipal bond funds own a mixture of different bonds to help reduce the risk of any one issuer defaulting on its payments.

One unique perk of municipal bonds is that some or all of the interest that investors earn can be tax-free. The tax treatment of the returns depends on the precise holdings of the fund and where the investor lives.

Some mutual fund companies design special municipal bond funds for different states, giving investors from those states an option that provides completely tax-free yields.

The tax advantages municipal bond funds offer can make their effective yields higher than other bond funds that don’t offer tax-free yields. For example, someone in the 24% tax bracket would need to earn just under 4% on a taxable bond fund to get the equivalent return of a tax-free municipal bond fund offering 3%.

4. High-Yield

High-yield bond funds invest in bonds that offer higher interest rates than other bonds, like municipal bonds and government bonds.

Typically, this means buying bonds from issuers with lower credit ratings than investment-grade bonds. These bonds are sometimes called junk bonds. Their name comes from the fact that they are significantly riskier than other types of bonds, so there’s a higher chance that the issuer defaults and stops making interest payments.

Bond mutual funds diversify by buying bonds from hundreds of different issuers, which can help reduce this risk, but there’s still a good chance that some of the bonds in the fund’s portfolio will go into default, which can drag down the fund’s performance.

5. International

Foreign governments and companies need to borrow money just like American companies and governments. There’s nothing stopping Americans from investing in foreign bonds, so there are some mutual funds that focus on buying international bonds.

Each country and company has a credit rating that impacts the interest rate it has to pay. Many stable governments are seen as highly safe, much like the United States, but smaller or less economically developed nations sometimes have lower credit ratings, leading them to pay higher interest rates.

Another factor to keep in mind with international bonds is the currency they’re denominated in.

With American bonds, you buy the bond in dollars and get interest payments in dollars. If you buy a British bond, you might have to convert your dollars to pounds to buy the bond and receive your interest payments in pounds. This adds some currency risk to the equation, which can make investing in international bond funds more complex.

6. Mixed

Some bond mutual funds don’t specialize in any single type of bond. Instead, they hold a variety of bonds, foreign and domestic, government and corporate. This lets the fund managers focus on buying high-quality bonds with solid yields instead of restricting themselves to a specific class of bonds.


Why Invest in Bond Mutual Funds?

There are a few reasons for investors to consider investing in bond mutual funds.

Reduce Portfolio Risk and Volatility

One advantage of investing in bonds is that they tend to be much less risky and volatile than stocks.

Investing in stocks or mutual funds that hold stocks is an effective way to grow your investment portfolio. The S&P 500, for example, has averaged returns of almost 10% per year over the past century. However, in some years, the index has moved almost 40% upward or downward.

Over the long term, it’s easier to handle the volatility of stocks, but some people don’t have long-term investing goals. For example, people in retirement are more concerned with producing income and maintaining their spending power.

Putting some of your portfolio into bonds can reduce the impact of volatile stocks on your portfolio. This can be good for more risk-averse investors or those who have shorter time horizons for their investments.

There are some mutual funds, called target-date mutual funds, that hold a mix of stocks and bonds and increase their bond holdings over time, reducing risk as the target date nears.

Income

Bonds make regular interest payments to their holders and the majority of bond funds use some of the money they receive to make payments to their investors. This makes bond mutual funds popular among investors who want to make their investment portfolio a source of passive income.

You can look at different bond mutual funds and their annual yields to get an idea of how much income they’ll provide each year. For example, if a mutual fund offers a yield of 2.5%, investors can expect to receive $250 each year for every $10,000 they invest in the fund.

Pro tip: Have you considered hiring a financial advisor but don’t want to pay the high fees? Enter Vanguard Personal Advisor Services. When you sign up you’ll work closely with an advisor to create a custom investment plan that can help you meet your financial goals. Read our Vanguard Personal Advisor Services review.


Risks of Bond Funds

Before investing in bonds or bond mutual funds, you should consider the risks of investing in bonds.

Interest Rate Risk

One of the primary risks of fixed-income investing — whether you’re investing in bonds or bond funds — is interest rate risk.

Investors can buy and sell most bonds on the open market in addition to buying newly issued bonds directly from the issuing company or government. The market value of a bond will change with market interest rates.

In general, if market rates rise, the value of existing bonds falls. Conversely, if market rates fall, the value of existing bonds rises.

To understand why this happens, consider this example. Say you purchased a BBB-rated corporate bond with an interest rate of 2% for $1,000. Since you bought the bond, market rates have increased, so now BBB-rated companies now have to pay 3% to convince investors to buy their bonds.

If someone can buy a new $1,000 bond paying 3% interest, why would they pay you the same amount for your $1,000 bond paying 2% interest? If you want to sell your bond, you’ll have to sell it at a discount because investors can get a better deal on newly issued bonds.

Of course, the opposite is true if interest rates fall. In the above example, if market rates fell to 1%, you could command a premium for your bond paying 2% because investors can’t find new bonds of the same quality that pay that much anymore.

Interest rate risk applies to bond funds just as it applies to individual bonds. As rates rise, the share price of the fund tends to fall and vice versa.

Generally, the longer the bond’s maturity, the greater the effect a change in market interest rates will have on the bond’s value. Short-term bonds have much less interest rate risk than long-term bonds. Bond funds usually list the average time to maturity of bonds in their portfolio, which can help you assess a fund’s interest rate risk.

Credit Risk

Bonds are debt securities, meaning they’re reliant on the bond issuer being able to pay its debts.

Just like people, companies and governments can go bankrupt or default on their loan payments. If this happens, the people who own those bonds won’t get the money they lent back.

Bond mutual funds hold thousands of bonds, but if one of the issuers defaults, some of the fund’s bonds become worthless, reducing the value of the investors’ shares in the fund.

Bonds issued by organizations with higher credit ratings are generally less risky than those with poor credit ratings. For example, most people would consider U.S. government bonds to have a very low credit risk. A junk bond fund would have much more credit risk.

Foreign Exchange Risk

If you’re buying shares in a bond fund that invests in foreign bonds, you should consider foreign exchange risk.

Currencies constantly fluctuate in value. Over the past five years, $1 could buy anywhere between 0.80 and 0.96 euros.

To maximize returns, investors want to buy foreign bonds when the dollar is strong and receive interest payments and return of principal when the dollar is weak.

However, it’s incredibly hard to predict how currencies’ values will change over time, so investors in foreign bonds should consider how changing currency values will affect their returns.

Some bond funds use different strategies to hedge against this risk, using tools like currency futures or buying dollar-denominated bonds from foreign entities.

Fees

Mutual funds charge fees, which they commonly express as an expense ratio.

A fund’s expense ratio is the percentage of your invested assets that you pay each year. For example, someone who invests $10,000 in a mutual fund with a 1% expense ratio will pay $100 in fees each year.

Expense ratio fees are included when calculating the fund’s share price each day, so you don’t have to worry about having cash on hand to pay the fee. The fees are taken directly out of the fund’s share price, almost imperceptibly. Still, it’s important to understand the impact fees have on your overall returns.

If you invest $10,000 in a fund that produces an annual return of 5% and has a 0.25% expense ratio, after 20 years you’ll have $25,297.68. If that same fund had an expense ratio of 0.50%, you’d finish the 20 years with $24,117.14 instead.

In this example, a difference of 0.25% in fees would cost you more than $1,000.

If you find two bond funds with similar holdings and strategies, the one with the lower fees tends to be the better choice.


Final Word

Bond mutual funds are a popular way for investors to get exposure to bonds in their portfolios. Just as there are many different types of stocks, there are many types of bonds, each with advantages and disadvantages.

If you don’t want to pick and choose bonds to invest in, bond funds offer instant diversification and professional management. If you want an even more hands-off investing experience, working with a financial advisor or robo-advisor that handles your entire portfolio may be worth considering.

Source: moneycrashers.com

The Ultimate College Senior Checklist

Earning a college degree is no easy feat. Think countless late-night cram sessions, tedious loan applications, heavy textbooks to haul around. For some college seniors, June cannot come fast enough, and it’s understandable why senioritis kicks in. That said, there’s still a lot of important work to do before crossing that graduation stage.

From jumping through the logistical hoops of making it to graduation day to launching a job search and addressing student loan payments, there are a lot of important pre-graduation to-do’s that may require prompt attention.

Here’s a comprehensive checklist that will help college seniors be prepared to graduate and enter the working world.

Dotting I’s and Crossing T’s

Ideally, before senior year begins (or sooner for those planning to graduate early), students should meet with their guidance counselor to make sure they have all of their ducks in a row in order to graduate. Switching majors, studying abroad, or misunderstanding degree requirements can lead to confusion about which classes must be taken to graduate.

Before setting a class schedule for the year, it can’t hurt to double-check with a college counselor that all requirements are being met. Some schools even have a certain amount of community service or chapel hours required in order to graduate, so again, it’s smart to confirm that everything is moving along as it should be.

Preparing for the graduation ceremony needs to be done in advance. Colleges and universities often require students to apply to graduate and register their planned attendance at the ceremony well ahead of the actual day.

To streamline the process, many schools have grad fairs where students can pick up their commencement tickets; buy a cap and gown, class rings and commencement announcements; and ask questions about the logistics of graduation day.

Transcripts can come in handy when applying for jobs and graduate school programs, so picking up a few copies while still on campus can save time down the road. And don’t forget to turn in those library books! No one will want to trek back to campus after graduation to pay late fees.

Getting a Jumpstart on a Job Search

It’s no secret that college graduates flood the job market each June, so getting ahead of the pack can make job searching a little easier. Applying for jobs earlier in the spring can lessen the competition and give seniors confidence that they have a job lined up when they graduate.

If launching a full-blown job search during school isn’t possible, college seniors can at least take steps toward preparing for the job search.

Stop by the career center and see what resources it can provide. Schools have a career center for a reason! Most are ready to help students prepare their resumes and perfect their cover letters, and they typically have job postings from companies looking to hire recent graduates.

Some career centers may offer mock interviews so students can hone those skills, or they may provide support when issues arise during a job search. Popping by between classes to see what services are offered will only take a few minutes.

At the very least, college seniors can poke around online job boards and research local companies to see what opportunities are out there.

Making Connections

As a student, it may feel like having a professional network is unattainable, but many build one while in school without realizing it. One easy way to get a head start on a job search, without doing too much work during a hectic final year of school, is to focus on building relationships and requesting references.

Professors, employers, and intern supervisors can all provide references that can strengthen a job search. Finding that first job out of college can be tricky, when resumes are on the shorter side, so a handful of strong references can make all the difference.

While requesting references, college seniors should tell their connections what career path they’re hoping to pursue. One never knows where the next opportunity might come from.

Paying Back Student Loans

Preparing to navigate life after college can be overwhelming, especially when it comes to finances. No one wants to think about student loan payments, but it can be helpful to start making repayment plans before graduation day.

Try beginning the planning process by simply looking up the current balance for each student loan held, including both federal and private loans. Then note when the grace period ends for each loan and when the lender expects payment. It’s important to plan to make loan payments on time each month, as that can boost a credit score.

Lenders usually provide repayment information during the grace period, including repayment options. Many federal student loans qualify for a minimum of one income-driven or income-based repayment plan.

Federal student loans may qualify for a variety of repayment plans, such as the Standard Repayment Plan, Graduated Repayment Plan, Extended Repayment Plans, Revised Pay As You Earn Repayment Plan, Income-Based Repayment Plan, Income-Contingent Repayment Plan, and Income-Sensitive Repayment Plan. It is important to carefully research each payment plan before choosing one.

For private student loan repayment, it is best to speak directly with the loan originator about repayment options. Many private student loans require payments while the borrower is still in school, but some offer deferred repayment. After the grace period, the borrower will have to make principal and interest payments. Some lenders offer repayment programs with budget flexibility.

Whether students or their parents chose to take out federal or private student loans (or both), reviewing all possible repayment plan options can provide choices. And who doesn’t like choices?

One Loan, One Monthly Payment

Some graduates may want to consider refinancing or consolidating their student debt.

Borrowers who have federal student loans may qualify for a Direct Consolidation Loan after they graduate, leave school, or drop below half-time enrollment.

Consolidating multiple federal loans into one allows borrowers to make just one loan payment each month. In some cases, the repayment schedule may be extended, resulting in lower payments, after consolidating (but increasing the period of time to repay loans usually means making more payments and paying more total interest).

Refinancing allows the borrower to convert multiple loans—federal and/or private—into one new private loan with a new interest rate, repayment term, and monthly payment. The goal is a lower interest rate. (It’s worth noting that refinancing a federal loan into a private loan can lead to losing benefits only available through federal lenders, such as public service forgiveness and economic hardship programs.)

Refinancing can be a good solution for working graduates who have high-interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans.

If that sounds like a good fit, SoFi offers student loan refinancing with zero origination fees or prepayment penalties. Getting prequalified online is quick and easy.

Learn more about SoFi Student Loan Refinancing options and benefits.



SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF SEPTEMBER DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SOSL20019

Source: sofi.com

From Bitcoin to GameStop to SPACs: 8 Tips for Mania Investing

Market speculation is seemingly everywhere.  From new SPACs being issued, to the prevalence of Reddit stocks such as GameStop to the popularity of electric vehicle stocks and the rise of cryptocurrency – speculation is alive and well in the markets today. 

“Mania” is a good word to describe the energy surrounding these types of investments.  Dramatic daily swings are the new normal in these holdings.  Hollywood elites and business moguls are attaching their names to crypto and the latest SPAC investments. 

The top mania investment areas are electric vehicles, cryptocurrency, Reddit stocks, space, SPACs, precious metals and pot stocks.  The dictionary definition of mania describes “excessive or unreasonable enthusiasm.”  That seems about right.  The result has been a meteoric rise in value not tied to business fundamentals but tied to hype, expectations or projections. 

Investors looking to boost performance often wonder how much exposure to these types of investments should they have.  With strong appreciation in some of the holdings, it is tempting to get into the game.  Here are our top eight tips for mania investing. 

1 of 8

1. Admit that it is a mania

A woman is swept away on waves of water.A woman is swept away on waves of water.

Have some honest reflection about the investment environment you are in.  Mania investing can be fun, it can be thrilling and, ultimately, it can be painful.  But mania investing is not your conventional long-term investing strategy.  Admit you are being swept up in a mania and acknowledge what that might mean regarding your tactics.  It’s impossible to explain to yourself or your friends the fundamentals of a company with no earnings, so stop trying to make sense of it.  It is a mania, not an investment based on fundamentals. 

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2. Have an exit strategy & set a price target

Price tags.Price tags.

How far are you willing to watch your investment drop before you pull out?  Set a price target and stick to it.  Some of the biggest mistakes happen with investors who fall in love with a company or a product and hold it while closing their eyes.  Mania investments are not typically long-term plays, and you must plan for how much risk you are willing to take.  Set a target to get out and limit your downside exposure.

3 of 8

3. Limit your overall portfolio exposure

A colorful pie chart.A colorful pie chart.

If you are going to be a mania investor, maybe you limit your exposure to 3%, 5% or 10% of your total portfolio.  Understand it is the high-risk portion of your portfolio and do not allocate more than you are willing to lose.  The older you are and the closer to retirement, the less you can afford to lose.  The younger you are, the more you might be willing to allocate to more aggressive strategies. 

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4. Diversify your manias 

A woman balances a bitcoin on a red tightrope.A woman balances a bitcoin on a red tightrope.

Maybe you like cryptocurrency — go ahead and invest in it, but buy into three different types, instead of just one, to diversify.  Maybe you like electric vehicles. If so, consider adding some exposure to space or precious metals as well.  Even in your mania investing, you do not want to concentrate all that allocation to just one mania strategy.  Diversification can help reduce risk even in a risky space.  Although, be careful of too much diversification.  In a world like electric vehicles, there is a possibility of there being few winners and many losers. 

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5. Understand performance in context 

Woman standing under an orange umbrella in the rainWoman standing under an orange umbrella in the rain

The S&P 500 10-year average over the past 100 years is around a 10% return per year.  Warren Buffett has averaged about 15% per year.  If your mania investments have made 100% in a year, understand how rare that is and that the odds of duplicating that performance year after year are incredibly remote.  Part of good investment performance is not just making money in good times, but also weathering losses during challenging times. 

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5. Know the difference between investing and speculating

A stack of gambling chips tumbles over.A stack of gambling chips tumbles over.

Investing for the long term carries its own set of disciplines and rules and expectations.  Mania investing is more akin to speculating or even gambling.  It often has dramatic movements in price over a short period of time.  It might include hype in the media, memes on social networks and inexperienced people giving investment advice.  Be careful and realize speculating is a high-risk game — it is not the same as sound investment on fundamentals.   

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6. Take some winnings off the table

A man cashes in his gambling pot.A man cashes in his gambling pot.

Maybe you own one of the stock names that have doubled or tripled in value over the past year.  Consider selling some of the holdings and locking in your gains.  Maybe reduce your exposure by 50%.  Keep some of the holdings a bit longer, but diversify into something more stable or consistent.  Setting a price target on the upside can be just as important as setting one on the downside. 

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7. Do not gamble the farm

The sun sets over the red barn of a farm.The sun sets over the red barn of a farm.

A smart gambler, if they go to Vegas, will set their own personal limit on what they are willing to lose.  Whether that is $100, or $10,000 — set a limit when it comes to mania investing.  Also, do not raid all your retirement money on a whim to chase manias.  While a portion could make sense, the lion’s share of your retirement should be focused on fundamental investment strategies that are consistent.  Pulling all your retirement money to buy into different manias would likely be a crazy idea, just like putting your house keys in the pot of a poker table would be ill advised. 

Investing in some of these sexy stocks and industries has appeal, and there is money to be made.  But there is also money to be lost, and it is important to have a rule set for investing even if you are investing in mania stocks.  Finally, know how risk taking can fit in your overall financial plan and realize that the risk you are willing to tolerate is likely to be different from someone else. 

Investing carries an inherent element of risk, and it is possible to lose principal and interest when investing in securities. Strategies are used to assist in the management of your account. Even with these strategies applied to the account, it is possible to lose money. No strategy can guarantee a profit or prevent against a loss. There may be times when the strategy switches between equities or fixed income at an inopportune time, causing the account to forfeit potential gains.

CEO – Senior Wealth Adviser, Sterling Wealth Partners

Scot Landborg has over 17 years of experience advising clients on retirement planning strategies. Scot is CEO and Senior Wealth Adviser for Sterling Wealth Partners. He is host of the retirement planning podcast Retire Eyes Wide Open. Scot is a regular contributor to Kiplinger.com and has been quoted in “U.S. News & World Report,” Market Watch, Yahoo Finance, Nasdaq and Investopedia. He also formally hosted the nationally syndicated radio show “Smart Money Talk Radio.”

Investment Adviser Representative of USA Financial Securities. Member FINRA/SIPC A Registered Investment Advisor. CA license # 0G89727 https://brokercheck.finra.org/

Source: kiplinger.com

What Is a Security – Definition & Types That You Can Invest In

Securities are one of the most important assets to understand when you’re starting to invest. Almost every investment you can make involves securities, so knowing about the different types of securities and how they fit in your portfolio can help you design a portfolio that fits with your investing goals.

What Is a Security?

A security is a financial instrument investors can easily buy and sell. The precise definition varies with where you live, but in the United States, it refers to any kind of tradable financial asset.

Securities may be represented by a physical item, such as a certificate. Securities can also be purely electronic, with no physical representation of their ownership. The owner of a security, whether it is physical or digital, receives certain rights based on that ownership.

For example, the owner of a bond is entitled to receive interest payments from the issuer of that bond.


Types of Securities

There are many different types of securities, each with unique characteristics and a different role to play in your portfolio.

Stock

A stock is a security that represents ownership of a company.

When a business wants to raise money — for example, to invest in expanding the business — it can issue stock to investors. Investors give the business money and receive an ownership interest in the company in exchange.

The number of shares that exist in a company determine how much ownership each individual share confers. For example, someone who owns one share in a company with 100 shares outstanding owns 1% of the company. If that business instead had 100,000 shares outstanding, a single share would represent ownership of just 0.001% of the business.

Investors can easily buy and sell shares in publicly traded companies through the stock market. Shares regularly change in value, letting investors buy them and sell them for either a loss or a profit. Owning stock also entitles the shareholder to a share of the company’s earnings in the form of dividends if the company chooses to pay them, and the right to vote in certain decisions the company must make.

Bonds

A bond is a type of debt security that represents an investor’s loan to a company, organization, or government.

When a business or other group wants to raise money but doesn’t want to give away ownership, it can instead borrow money. Individuals typically borrow money from a bank, but companies and larger organizations often borrow money by issuing bonds.

When an organization needs to borrow money, it chooses an interest rate and the amount that it wants to borrow. It then offers to sell bonds to investors until it sells enough bonds to get the amount of money it wishes to borrow.

For example, a company may decide to issue $10 million worth of bonds at an interest rate of 5%. It will sell bonds in varying amounts, usually with a minimum purchase requirement, until it raises $10 million. Then, the company stops selling the bonds.

With most bonds, the issuing organization will make regular interest payments to the person who owns the bond. The payments are based on the interest rate and the value of the bond purchased. For a $1,000 bond at an interest rate of 5%, the issuer might make two annual payments of $25.

The bonds also come with a maturity date. Once the maturity date arrives, the bond issuer returns the money it raised to the bondholders and stops making interest payments. For example, when it matures, the holder of the $1,000 bond might receive a final interest payment of $25 plus the $1,000 they initially paid to buy the bond.

Interest payments and returned principal go to the person who holds a bond on the payment date, not necessarily the original purchaser. This means that people who own bonds can sell them to other investors who want to receive interest payments. The value of a bond will depend on how much time is left until it matures, the bond’s interest rate, the current interest rate market, and the bond’s principal value.

Money Market Securities

Money market securities are incredibly short-term debt securities. These types of securities are similar to bonds, but their maturities are generally measured in weeks instead of years.

Because of their short maturities and their safety, investors often see money market securities and investments in money market funds as equivalent to cash.

Mutual Funds and ETFs

Mutual funds and exchange-traded funds (ETFs) are both securities that purchase and hold other securities. They make it easier for investors to diversify their portfolios and offer hands-off management for investors.

For example, a mutual fund may purchase shares in many different companies. Investors can purchase shares in that mutual fund, which gives them an ownership stake in the different shares that the fund holds. By buying shares in one security — the mutual fund — the investor gets exposure to many securities at once.

The primary difference between mutual funds and ETFs is how investors buy and sell them. With mutual funds, investors place orders that settle at the end of the trading day. That makes mutual funds best for long-term, passive investment. ETFs are traded on the open market, so investors can buy them from or sell them to other investors whenever the market is open. This means ETFs can be used as part of an active trading strategy.

There are many different types of mutual funds and ETFs, each with its own investing strategy. Some mutual funds aim to track a specific index of stocks. Others actively trade securities to try to beat the market. Some funds hold a mix of stocks and bonds.

Mutual funds and ETFs are not free to invest in. Most charge fees, called expense ratios, that investors pay each year. For example, a fund with an expense ratio of 0.25% charges 0.25% of the investor’s assets each year. Fees vary depending on the fund provider and the fund strategy.

Preferred Shares

Preferred shares or preferred stock are a special kind of shares in a company, which have different characteristics than shares of common stock.

Compared to common stock, preferred shares typically:

  • Have priority for dividends over common stock
  • Receive compensation before common shares if a company is liquidated
  • Can be converted to common stock
  • Do not have voting rights

Derivatives

Derivatives are securities that derive their value from other securities rather than any value inherent to themselves.

One of the most common types of derivatives is an option, which gives the holder the right — but not the requirement — to buy or sell shares in a specific company at a set price. Derivatives are more complex financial instruments than generally aren’t suitable for beginners because they can be confusing and come with elevated risk.


How Securities Fit in Your Portfolio

Most investors use securities to build the majority of their investment portfolios. While some people may choose to invest solely in assets like real estate rather than securities like stocks and bonds, securities are highly popular because they make it easy for people to build diversified portfolios.

The mix of investments you choose is called asset allocation. Each type of security fits into an investment portfolio in different ways.

The Role of Stocks

For example, stocks generally offer high volatility and some risk, but higher rewards than fixed-income securities like bonds. People with long-term investing plans and the risk tolerance to weather some volatility may want to invest in stocks.

Within stocks, investors often hold a mixture of large-cap (large, well-known companies) and small-caps (smaller, newer businesses). Typically, larger companies are more stable but offer lower returns. Small-caps can be risky but offer greater rewards.

Large-caps often pay dividends, which are regular payments to shareholders. This makes them popular for people who want to produce an income from their portfolio but who don’t want to shift too heavily into safer, but less lucrative investments like bonds.

Pro tip: Earn a $30 bonus when you open and fund a new trading account from M1 Finance. With M1 Finance, you can customize your portfolio with stocks and ETFs, plus you can invest in fractional shares.

The Role of Bonds

By contrast, bonds are good for people who want to reduce volatility in their portfolios. A retiree or someone who wants to preserve their portfolio’s value instead of growing it might use bonds.

Bonds experience much less volatility than stocks, with their values changing primarily with changes in interest rates. If rates rise, bond values fall. If rates fall, bond values rise.

If you hold individual bonds and don’t sell them, you can only lose value from the bonds if the issuer defaults and stops making payments. That means that bonds can provide a predictable return, assuming you can hold them to maturity.

Bonds also make regular interest payments, often twice annually, making them very popular for income-focused investors.

The Role of Mutual Funds

A huge number of everyday investors opt to invest in mutual funds and ETFs instead of buying individual stocks and bonds. These funds hold dozens or hundreds of different stocks and bonds, making it easy for investors to diversify their portfolios. There are also many different funds that follow different investing strategies, meaning that almost everyone can find a mutual fund that meets their needs.

One of the most popular types of mutual funds is the target-date fund. These funds reduce their stock holdings and increase their bond holdings as time passes and gets closer to the target date. This makes them an easy way for investors to reduce risk and volatility in their portfolio as they get closer to needing the money,

For example, someone who wants to retire in 2062 might invest their money in a target date 2060 or 2065 fund. In 2020, the fund might hold a 90/10 or 80/20 split of stocks and bonds. By 2060, the fund will have reduced its stock holdings and increased its bond holdings so that its portfolio is a 40/60 split between stocks and bonds.

The Role of Derivatives

Derivatives are designed for advanced investors who want to use more complex strategies, such as using options to hedge their portfolio’s risk or to leverage their capital to produce greater gains.

For example, a trader could use options to short a stock. Shorting a stock is like betting against it, meaning the trader earns a profit if the share price falls. On the other hand, if the share price increases, the trader will lose money.

These are best used by advanced investors who know what they’re doing. Derivatives can be more volatile than even the riskiest stocks and can make it easy to lose a lot of money. However, if they’re used properly, they can be a safe way to produce income from a portfolio or a hedge to reduce risk.


Final Word

A security is the basic building block of an investment portfolio. Most assets that people invest in — like stocks, bonds, and mutual funds — are securities. Each type of security has different features and plays a different role in an investor’s portfolio.

Many investors succeed by investing in mutual funds or ETFs, which give them exposure to a variety of securities at once. If you want an even more hands-off investing experience, working with a robo-advisor or financial advisor can help you choose the best securities to invest in.

Source: moneycrashers.com

The evolution of the good faith estimate

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.

A good faith estimate (GFE) is a comparison of mortgage offers provided by lenders or brokers to a consumer. It was recently replaced by the loan estimate—a similar concept with a few small differences. 

What Is a Good Faith Estimate Designed to Do?

The GFE’s purpose was to present mortgage shoppers with all the details they need to know about their mortgage options to help them make well-informed decisions. This transparency ensures consumers are aware of all the costs associated with the mortgage—including fees, APR and other expenses.

Borrowers would receive a GFE three business days after submitting their mortgage application, and after thorough review, would then select which mortgage option they would like to move forward with. 

Are Good Faith Estimates Still Used?

The term “good faith estimate” is not used by lenders anymore, but the concept remains prevalent. In 2015, the GFE was replaced by the loan estimate. Anyone who purchased a home after October 3, 2015, received a loan estimate rather than a GFE. 

In October of 2015, the good faith estimate was replaced by the loan estimate.

If you applied for a reverse mortgage, HELOC, a mortgage through an assistance program or a manufactured loan not secured by real estate, you will not receive a loan estimate. Instead, you will receive a Truth-in-Lending disclosure. 

The purposes of a GFE, a loan estimate and a Truth-in-Lending disclosure are largely the same: providing transparency to borrowers. The main difference—and benefit—of a loan estimate is that there’s more regulation by the Consumer Financial Protection Bureau (CFPB). Since the GFE was not standardized through regulations, they were sometimes difficult to decipher, especially for first-time homebuyers. Conversely, each loan estimate must contain the exact same information in a standardized way, which we’ll cover below. 

What Appears on a Loan Estimate?

According to the CFPB, a complete, compliant loan estimate should include the length of the loan term, the purpose of the loan, the product (fixed versus adjustable interest rate, for example), the loan type (conventional, FHA, VA or other), the loan ID number and indication of an interest rate lock. Additionally, the loan estimate will include the following:

  • Loan terms: A summary of the total loan amount, interest rate, monthly principal and interest and penalties, and whether these amounts can increase after closing.
  • Projected payments: A summary of monthly principal, interest, mortgage insurance, taxes and insurance. Broken down by years 1–7 and 8–30 for a 30-year mortgage.
  • Costs at closing: Estimated closing costs and the total estimated cash needed to close, which includes the down payment and any credits.
  • Loan costs: Origination charges—which is broken down by 0.25% of the loan amount, application fees and underwriting fees—and other fees.
  • Other costs: Taxes, government fees, prepaid homeowners insurance, interest and prepaid property, escrow payment at closing and title policy.
  • Comparisons: Metrics you can use to compare your loan to others. Includes the total principal, interest, mortgage insurance and loan costs you will have paid after five years.
  • Other considerations: Information about appraisal, assumption, homeowner’s insurance, late payment fees, refinancing and servicing.
  • Confirmation of receipt: A line at the end of the statement that confirms you have received the form. This does not legally bind you to accept the loan.

Your loan estimate will also include your personal information, including your full name, income, address and Social Security number. Make sure to double-check all of this information for errors, as they could cause potential problems later in the process.

To better understand your loan estimate, explore the CFPB’s interactive guide.

Closing Disclosure

For first-time homebuyers in particular, it’s important to understand the timeline of events so that you can be prepared for your home buying process and have all the information and necessary documents at hand.

Closing Disclosure Timeline

Lenders are required to send you a loan estimate form no more than three business days after receiving your application. Finally, at least three business days prior to loan consummation—when you are contractually obligated to the loan—you will receive a closing disclosure.

Lenders are required to send you a loan estimate no more than three days after receiving your application and a closing disclosure at least three days prior to loan consummation.

What Is the Purpose of a Closing Disclosure?

The purpose of a closing disclosure is to assign “tolerance levels” to fees listed in the loan estimate form. This means that fees cannot increase over their tolerance level unless a specific triggering event occurs. There are three different tolerance levels:

  • Zero percent tolerance: Fees in this category cannot increase from what is listed on the loan estimate. These fees are typically those paid to a creditor, broker or affiliate, such as origination fees.
  • 10 percent cumulative tolerance: Fees in this category are added together, and the sum of these fees are not to increase by more than 10 percent of the amount listed in the loan estimate. Fees include recording fees and third-party service fees.
  • No tolerance or unlimited tolerance: Fees in this category have no limits at all, and can increase by any amount, as long as they are disclosed “in good faith,” using the best information available. These are usually fees lenders have little to no control over.

Remember not to confuse “zero percent tolerance” with “no tolerance,” as they are quite different. Zero percent tolerance fees cannot increase, while no tolerance fees can increase by any amount as long as it is considered “in good faith.”

Does a Loan Estimate Affect My Credit?

The act of applying for a mortgage may temporarily cause your credit score to dip, as it requires a hard inquiry by lenders. However, you may shop around for different mortgages from different lenders to get multiple preapprovals and loan estimates. As long as you do this all within a 45-day window, these separate credit checks will be recorded on your credit report as one single hard inquiry.

This is because lenders realize that you are only going to buy one home, so they categorize all of the actions you take under one umbrella of applying for a mortgage. Note that you may want to consider the 45-day rule loosely. Prioritize finding the best mortgage deal possible. Even if this means processing a hard inquiry outside of the 45-day window for a better deal, you’ll likely end up saving more money in the long run.

To learn more about what affects your credit and how to work toward improving your credit profile, contact our team at Lexington Law.


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

Paying taxes as a freelancer

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.

Paying taxes as a freelancer can be a bit more involved—and expensive—than paying taxes as a W-2 employee. When you’re a freelancer, you’re the boss. That’s great if you want some flexibility, but it also means you’re self-employed, so you are responsible for both the employer and employee parts of employment taxes.

When you work for someone else, your paycheck amount is your pay minus all appropriate deductions. That includes deductions for federal and state income taxes as well as Medicare and Social Security contributions.

But what you might not realize is that your employer covers part of the Medicare and Social Security amounts. As a self-employed individual, you have to pay the total amount yourself. That’s 12.4 percent for Social Security and 2.9 percent for Medicare—a total of 15.3 percent of your taxable earnings, not including federal and other income taxes.

When Do I Have to Start Paying Taxes as a Freelancer?

According to the Internal Revenue Service, if you earn $400 or more in a year via self-employment or contract work, you must claim the income and pay taxes on it. The threshold is even lower if you earn the money for church work. If you earn more than $108.28 as a church employee and the church employer doesn’t withhold and pay employment taxes, you must do so.

What Tax Forms Should I Know About?

Freelancers report their income to the IRS using a Form 1040, but they may need to include a variety of Schedule attachments, including:

  • Schedule A, which lists itemized deductions
  • Schedule C, which reports profits or losses from their freelancer business
  • Schedule SE, which calculates self-employment tax

These are only some of the forms that might be relevant to a freelancer filing federal taxes. Freelancers must also file a tax form for the state in which they live as well as with any local governments that require income tax payments.

If you’re planning to do your taxes on your own as a freelancer, it might be helpful to invest in DIY tax software. Look for options that cater specifically to home and business or self-employment situations. These software programs typically walk you through a series of questions designed to determine which forms you need to file and help you complete those forms correctly.

Six Tips for Doing Your Taxes as a Freelancer

As a freelancer, chances are you spend a lot of your time attending to clients and getting production work done. You may not have a lot of time for business organization tasks such as accounting. But a proactive approach to paying taxes as a freelancer can help you prepare to do your taxes and pay what can be a surprisingly big bill each year.

Here are six tips for handling taxes as a freelancer.

1. Keep Track of Your Income

Track your income so you know how much you may need to pay in taxes every year. Keeping track of your numbers also helps you understand whether your business is profitable and how you’re doing with income compared to past years.

You can track your income in a number of ways. Apps and software programs such as QuickBooks and Wave let you manage your freelance invoices and track income and expenses. Some also help you generate financial reports that might be helpful come tax time.

Alternatively, you can track your income in an Excel spreadsheet or even a notebook, as long as you’re consistent with writing everything down.

2. Set Money Aside in Advance

It’s tempting to count every dollar that comes in as money you can use. But it’s wiser to set money aside for taxes in advance. Depending on how much you earn as a freelancer, you could owe thousands in federal and state taxes by the end of the year, and if you didn’t plan ahead, you might not have the money to cover the tax bill.

That can lead to tax debt that comes with pretty stiff penalties and interest—and the potential for a tax lien if you can’t pay the bill.

3. Determine Your Business Structure

Make sure you know what your business structure is. Many freelancers operate as sole proprietorships. But you might be able to get a tax break if you operate as an LLC or a corporation. Talk to legal and tax professionals as you set up your business to find out about the pros and cons of each type of organization.

4. Know About Relevant Deductions

As a freelancer, you may be able to take certain federal tax deductions to save yourself some money. Tax deductions reduce how much of your income is considered taxable, which, in turn, reduces how much you owe in taxes. Here are a few common deductions that might be relevant to you as a freelancer.

Home Office

You can take the home office deduction if you’ve set aside a certain area of your home for use by the business. The IRS does have a couple of stipulations.

First, you have to regularly use the space for your business, and it can’t be something you use regularly for other purposes. For example, you can’t claim your dining room as a home office just because you sometimes work from that location.

Second, the home has to be your principal place of business, which means it’s where you do most business activity. You can’t claim the deduction if you normally work outside the home but sometimes answer work emails while you’re in the living room.

Equipment and Supplies

You can also deduct the cost of equipment and supplies that you buy for your business. That includes software purchases and relevant subscriptions, such as if you pay monthly for Microsoft 365 or annually for a domain name.

Make sure you have backup documentation for any business expenses you deduct. That means keeping receipts that show what you purchased so you can prove that the expenses were for business. You also have to be careful to keep business and personal expenses separate—art supplies for your child’s school project, for example, wouldn’t typically be considered valid business expenses.

Travel and Meals

Meals and travel expenses that are related to your business may be tax deductible. If you stay in a hotel, book a flight or incur other travel expenses that are necessary for the running of your business, you can claim them as a deduction. The same is true for 50 percent of the value of meals and beverages that you pay for as a necessity when doing business.

The IRS does set an “ordinary and necessary” rule here. For example, if you’re traveling to meet with a client and you need to eat lunch, that is likely to be considered necessary. But if you opt for a very lavish meal for no other purpose than to do so, it might not be allowed under the “ordinary” part of the rule.

Business Insurance

If you carry liability or similar insurance for your business, you can deduct it as a cost of doing business. You may also be able to deduct the cost of other insurance policies if they are necessary for your trade.

5. Estimate Your Taxes Quarterly

The IRS offers provisions for estimating your employment taxes on a quarterly basis. Self-employed individuals, including freelancers, can make these estimated tax payments, too. Paying as you go means you won’t owe a large sum every April, and if you overestimate, you may get a tax refund.

Quarterly payments are due in April, June, September and January. They can be mailed or made online. Depending on how much you earn, you may need to make quarterly estimated tax payments to avoid a penalty at the end of the year.

6. Consult a Tax Professional

As you can see just from the basic information and tips above, paying taxes as a freelancer can get complicated quickly. Consider talking to a tax professional to understand what all your obligations are and how best to reduce your tax burden using legal deductions. You might be missing a major deduction every year that could save you a lot of money.

And remember that as a freelancer, you’re running your own small business. That means paying attention to all your finances, including your credit report. If you ever want to take out a business loan or seek other funding to grow your business, you might need to rely on your good credit score.

Check your credit score, and if you find inaccurate negative information making an impact on your score, contact Lexington Law to find out how to get help disputing it.


Reviewed by Cynthia Thaxton, Lexington Law Firm Attorney. Written by Lexington Law.

Cynthia Thaxton has been with Lexington Law Firm since 2014. She attended The College of William and Mary in Williamsburg, Virginia where she graduated summa cum laude with a degree in International Relations and a minor in Arabic. Cynthia then attended law school at George Mason University School of Law, where she served as Senior Articles Editor of the George Mason Law Review and graduated cum laude. Cynthia is licensed to practice law in Utah and North Carolina.

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

How is credit card interest calculated?

How is Credit Card Interest Calculated

If you’re like most people repairing their credit card debt, your credit card’s annual interest rate is a mystery to you. You might even avoid thinking about it or looking at it, because it’s such a large number. Interest rates can make it difficult to get out of debt quickly, because you’re working against a large percentage—as much as 16% or even 20% annual interest.

Credit card interest is calculated using a complicated formula that can be confusing to many people. So it often remains a puzzle to borrowers. But it’s important to understand the basics of credit card interest, because it will help you to repair your credit card debt quicker—and to be a smarter credit card user. Here’s how credit card interest works.

How Is Credit Card Interest Calculated?

credit card interest calculation

If you’ve watched your interest rate closely, you may have noticed that it has changed since you first opened your credit card. Many credit cards offer a low introductory interest rate that increases after the period is over. But even after that, your annual interest rate will often go up and down. That can be confusing, and even a bit unsettling.

Your interest rate changes

The first thing you should understand is that your credit card uses a variable interest rate. That means that the interest rate can change over time. A variable rate is tied to a base index—usually the U.S. prime rate. As the U.S. prime rate goes up or down, so will your credit card’s interest rate.

Right now, the U.S. prime rate is 4.25%. But your credit card’s interest rate is probably closer to 18.25%, or even more. That’s because credit card companies charge an additional amount above the U.S. prime rate—perhaps 14%, but it varies from card to card. So your total interest rate will be closer to 18.25%, annually. If the U.S. prime rate raises or lowers, your annual interest rate will also go up or down by the same amount.

The factors that influence the U.S. prime rate are reviewed every six weeks. The prime rate could stay the same for years, or it could change every six weeks. It all depends on current federal economic conditions and forecasts.

Your interest rate is annual

It’s also important to understand that your credit card’s interest rate is an annual rate. So if your annual rate is 18.25%, that amount is applied per year—not per month. But since you’re billed monthly, your interest is calculated each month, using an average daily balance method.

Calculating your interest rate

Here’s how the average daily balance works:

  1. Determine the daily periodic rate (DPR)—the interest rate you pay each day. DPR is your current interest rate (it varies, remember) divided by 365. So, 18.25 / 365 = 0.05%.
  2. Determine the average daily balance for the month. This is done by adding up the balance for each day of the billing period, then dividing that sum by the number of days (either 30 or 31 days—or 28 in February!). If you had a balance of $0.00 for 10 days, then $500.00 for 10 days, then $1000.00 for the last 10 days of the month, your average daily balance would be $500.00.
  3. Multiply the DPR by the number of days in the billing cycle, then multiply that total by the average daily balance. This is your interest for the month. So, a DPR of 0.05% * 30 days = 1.5%. 1.5% * $500.00 = $7.50.

That might not sound like much, but if you’re an average cardholder in the United States, you’re carrying a credit card debt of $16,000.00. That means you’re paying $2,880.00 per year in interest alone, in this scenario.

How Can I Avoid Paying So Much Interest?

When you’re working hard to repair your credit card debt, it can be frustrating to be fighting against a high interest rate. But there are ways you can reduce—or even eliminate—the amount of credit card interest you’re paying each month.

Pay more than the minimum balance due

Your credit card statement lists a minimum amount that you must pay each month. Your interest for the month is rolled into that minimum payment. But if you pay more than the minimum, every dollar above that minimum goes towards your principal balance. There’s no interest charged on it.

In other words, if your minimum payment is $500.00 and you pay $600.00, that extra $100.00 is applied to the amount you borrowed—it’s interest-free. And that benefits you in two ways:

  • You’re paying off debt without paying interest
  • You’re lowering the dollar amount of interest you’ll have to pay next month, because your average daily balance will be smaller.

Open a balance-transfer credit card

credit card interest

A balance-transfer card can be a very helpful way to repair your credit card debt. A transfer credit card has a very low introductory interest rate—often as low as 0%. The card lets you transfer your balance from other debt onto the new card. You can then make monthly payments on the transfer card to pay down your existing debt.

But the low interest rate is only valid for a limited time—usually six to 18 months—so you’ll need to pay off the debt before the introductory rate expires. You should also do your homework: some transfer cards charge a transfer fee. And some charge a penalty APR, which allows the credit company to charge you a high interest rate if you miss a payment.

Pay off Your Credit Card Debt Faster

Your credit card’s annual interest rate doesn’t have to be a confusing mystery, and you don’t need to know everything there is to know about interest rates. But when you understand the basics of variable interest rates and how they’re calculated, you can use that information to repair your credit card debt faster and easier. Paying more than the minimum balance due and using a balance-transfer card can be very helpful ways to use interest rates to your advantage.


A reputable credit repair specialist can help you find other ways to successfully get out of credit debt. If you’re tired of struggling on your own, find out how our advisors can help you repair your credit debt. Contact us today.

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Source: lexingtonlaw.com

Apple Card Review – Does It Live Up to the Hype?

Advertiser Disclosure: This post includes references to offers from our partners. We receive compensation when you click on links to those products. However, the opinions expressed here are ours alone and at no time has the editorial content been provided, reviewed, or approved by any issuer.

Apple Card immodestly claims to “completely [rethink] everything about the credit card.” Is it correct? Maybe.

Backed by the Mastercard network, Apple Card certainly has a host of innovative features that old-fashioned credit cards don’t, such as daily cash-back and numberless physical cards. And it’s a harbinger of the cashless, contactless payments landscape to come. No serious observer can dispute that Apple Card is ahead of its time.

But any product that’s truly ahead of its time must also be competitive in the present. And beyond its novel features, Apple Card works pretty much like any other credit card. Indeed, in spite – or perhaps because – of its novel additions, it lacks some consumer-friendly features common to other popular cash-back cards and general-purpose rewards cards.

Here’s a closer look at what sets Apple Card apart, and how it stacks up against other credit cards.

Things to Keep in Mind About Apple Card

Before we dive into Apple Card’s details, two points bear mentioning.

First, though cardholders who don’t pay their statement balances in full each month are subject to interest charges that vary with their creditworthiness and prevailing benchmark rates, Apple Card charges none of the fees typically levied by credit card companies: no annual fee, no late fee, and no over-limit fee.

Second, Apple Card is designed to work with Apple Pay, which runs on Apple (Mac) hardware only. If you’re one of the many millions of iPhone users in the United States, this card is for you. If you’re an Android loyalist, you’re out of luck.

Key Features

Here’s a closer look at Apple Card’s most notable features.

Earning Cash Back

Apple Card has a three-tiered cash-back program:

  • 3% Cash Back. All purchases from Apple earn unlimited 3% cash back. These include, but are not limited to, purchases from Apple.com, physical Apple Stores, the iTunes Store, the App Store, and in-app purchases. Certain non-Apple purchases made using Apple Pay earn 3% cash-back rewards as well.
  • 2% Cash Back. All other purchases made using Apple Pay (including through your Apple phone or Apple Watch) earn unlimited 2% cash back. Hundreds of major retailer chains and brands, encompassing more than 2 million individual merchant locations online and off, accept Apple Pay. These include but aren’t limited to Walgreens, Nike, Uber Eats, Duane Reade, Amazon, and thousands of gas stations. If you’re not familiar with how Apple Pay works, see its site for details.
  • 1% Cash Back. Purchases made with merchants – online, offline, and in-app – that don’t accept Apple Pay earn an unlimited 1% cash back.

Redeeming Cash Back

Cash back earned through Apple Card purchases accrues daily. Each day a purchase posts to your account, you’ll receive the requisite cash back on your Apple Pay Cash card in the Apple Wallet app.

From there, you can use it to pay for purchases within or without the Apple ecosystem or to make payments on your Apple Card balance.

If you don’t have an Apple Pay Cash card and aren’t interested in getting one, you must accept cash back earned to your Apple Card via statement credits, which may not be much of a sacrifice.

Apple Pay Integration

Apple Card is essentially an offshoot of Apple Wallet. It’s designed for use in conjunction with Apple Pay – or, more specifically, as the user’s default Apple Pay payment method. Apple clearly expects most Apple Card transactions to be contactless, executed through a Web portal or with the tap of an iPhone.

Beyond Apple Card’s novelty as the first truly “contactless first” credit card, users benefit from Apple Pay’s stringent security features. These include:

  • Unique Device Number. Your Apple Card is issued with a unique number that’s stored in your iPhone’s Secure Element, the secure microchip that hosts the phone’s most sensitive functions.
  • Two-Factor Purchasing. Every purchase requires your unique device number, plus a unique one-time code generated on the spot.
  • Purchase Authorization Via Face ID or Touch ID. This renders stolen phones all but useless for making purchases.

Apple Card also takes data security seriously. Apple and Goldman Sachs, the card’s issuer, vow never to share customer data with third parties. Only Goldman Sachs has access to users’ transaction histories and personal information.

Physical Credit Card

Apple Card isn’t 100% virtual. The physical Apple Card is a titanium card that looks and feels just like any other premium credit card, except that it’s much sleeker. The card face is a minimalist triumph, with no cardholder name, card number, or CVV and virtually no marks to mar its metallic hue.

Apple and Goldman Sachs tout the security benefits of Apple Card’s featurelessness. Without any information to identify the card, it’s useless in the wrong hands.

Real-Time Fraud Protection

Apple Card’s real-time fraud protection feature notifies you every time your card is used to make a purchase. If something doesn’t seem right about a transaction, or you know for a fact that you didn’t make it, you can immediately initiate the dispute process by tapping the notification.

Purchase Organization and Mapping

Apple Card automatically organizes purchases by purchase category – entertainment, food and drinks, and so on – and merchant. Categories are color-coded for easy visualization and totaled monthly for easy budgeting. With features like that, who needs a paid budgeting app?

Apple Card also automatically maps purchases, showing you where you’ve spent money recently, literally. If a real-time fraud protection notification slips your notice, perhaps seeing a purchase in a city you’ve never visited will jog your memory.

Spending Summaries

Apple Card’s spending summaries, visible in the Wallet app, reveal how much you’re spending, and on what, in any given week or month. You can view spending trends over time here too, which comes in handy for the periodic budget reviews you should be doing.

Payment Due Dates & Frequency

By default, Apple Card statements are due at the end of the month. If you prefer to pay balances more frequently – and reduce interest charges when you can’t pay off your balance in full before the statement due date – you can set weekly or biweekly payments too.

Interest Calculator

Apple Card’s built-in interest calculator automatically tallies expected interest charges when you pay less than the full balance due on your card before the end of the grace period.

Credit card issuers are required to reveal on each statement the true cost of making only the minimum payment due in comparison with at least one larger monthly payment.

However, this is a far more robust and interactive interest calculator that’s significantly more likely to nudge you to boost your monthly payment.

Interest-Reduction Suggestions

If the interest calculator isn’t enough, Apple Card also provides “smart payment suggestions” that encourage cardholders to increase their monthly payments, thereby decreasing their total interest liability.

It’s not clear how Apple Card arrives at these suggestions, but they appear to be based on cardholders’ spending patterns and payment history.

Interest-Free Installment Payments

Apple Card offers interest-free monthly installment payments for select Apple products purchased through the company’s sales channels. You can easily see the size of your installments and how much you have left to pay in the app.

Text-Based Support

Apple Card has a text-based support system that’s available 24/7. If you run into an issue with the card or have a question that doesn’t concern a disputed charge, which you can handle through the real-time fraud protection interface, this is your ticket to a resolution.

Important Fees

Apple Card charges no fees to cardholders: no foreign transaction fees, balance transfer fees, or annual fees.

Advantages

These are among Apple Card’s principal advantages.

1. No Fees

Apple Card doesn’t charge any fees to cardholders. This makes it all but unique, as even avowedly low-fee cards assess fees for less common occurrences such as late and returned payments.

2. Cash Back Accrues Daily

Apple Card is among the only widely available credit cards to accrue cash back on a daily basis, rather than at the end of the statement cycle.

Although the accrual frequency doesn’t affect net cash-back earnings or cash back earning rates, it’s certainly nice to see your spending subsidized in near-real-time.

3. Solid Cash Back Rates on Apple & Apple Pay Purchases

This card earns 3% cash back on virtually all purchases within the Apple ecosystem, excluding purchases with Apple Pay merchants. This 3% category covers, but isn’t limited to, the following:

  • Apple.com purchases
  • Purchases at physical Apple Stores
  • iTunes Store purchases
  • App Store purchases
  • In-app purchases

Apple Card also earns 2% cash back on purchases made with Apple Pay merchants. So if you’re able to limit your spending to the Apple and Apple Pay ecosystems, you’ll net somewhere north of 2% cash back on this no-annual-fee card, depending on your exact spending mix.

4. Above-Average Security Features

Apple Card is more secure than your average credit card. The physical card doesn’t have a card number or CVV, so you won’t have to worry about what could happen between the moment you lose your card and the moment you freeze your account.

The virtual card is denoted by a unique device number locked away in your iPhone’s Secure Element, far from prying eyes.

Perhaps most consequentially, Apple has a strict privacy policy that forbids data sharing with third parties. There’s no need to opt out, which is often easier said than done, and only Goldman Sachs has access to your transaction history.

5. Real-Time Fraud Protection

Apple Card has another security feature worth touting: real-time fraud protection that alerts you whenever your card is used to make a purchase and lets you flag potentially fraudulent transactions with a single tap.

Compared with the traditional dispute resolution process, this is a snap, even when flagged charges turn out to be legitimate.

6. Easy, Flexible Payments

Apple Card’s default payment due date – the last day of the month – is easy to remember, even without the helpful reminders.

If you’re trying to budget on an irregular income and prefer not to wait until the end of the month to pay off your entire balance, Apple Card’s customized weekly and biweekly payment intervals have you covered.

Other credit cards let you pay off balances throughout the month, but few make it as easy as Apple Card.

7. Interest-Reduction Features

Apple Card’s interest calculator and interest-reduction suggestions are classic examples of “nudge” theory in action. By revealing just how much you’ll save over time by paying a little more upfront, these features nudge you to make smart financial decisions.

Of course, it’s always best to pay off your balance in full by the statement due date, but when unexpected expenses make that impossible, it’s nice to feel like your credit card issuer is on your side.

8. Useful Budgeting and Spending Control Features

With so many budgeting and spending control features, Apple Card feels like a personal budgeting suite with a spending aid built in.

Maybe that’s the point. Though most small-business credit cards have basic expense tracking and reporting features, Apple Card’s package is unusually robust for a consumer credit card.

If what’s keeping you from building and sticking to a household budget is the inconvenience inherent in standalone budgeting software, this is a potential game-changer.

9. Text-Based Customer Support

Apple Card’s text-based customer support is a low-friction alternative to menu-laden, over-automated phone support and unpredictable email support.

Whether this feature is as efficient as Apple and Goldman Sachs promise remains to be seen, but it’s difficult to see it being worse than the status quo – for relatively simple issues, at least.

10. No Penalty Interest Charges

Apple Card doesn’t charge penalty interest. While it’s best never to find yourself in a position where penalty interest would apply, the assurance that you won’t be unduly penalized for a lapse beyond your control is certainly welcome.

Disadvantages

Consider these potential disadvantages before applying for Apple Card.

1. Requires Apple Pay and Apple Hardware

Apple Card’s biggest drawback is its exclusivity. The card requires Apple Pay, which runs exclusively on Apple hardware, meaning it’s not appropriate for Android or Windows device users.

If you’re set on applying for Apple Card but don’t have an iPhone or other compatible Apple device, Apple Watch is your most cost-effective option. Apple Pay runs on Apple Watch just fine, and you can pick up refurbished older versions – Series 1, 2, and 3 – for less than $100.

That’s still a significant outlay, though, and no other credit card on the market requires compatible hardware.

2. Only 1% Cash Back on Non-Apple Pay Purchases

Apple Card earns just 1% cash back on non-Apple Pay purchases. If your daily, weekly, and monthly consumption habits involve merchants that mostly accept Apple Pay, you shouldn’t have trouble earning the higher 2% cash-back rate, but not all merchants do.

Square has a non-exhaustive list of major merchants that do accept Apple Pay. Do yourself a favor and review it before applying for this card.

3. Goldman Sachs’ First Credit Card

Apple Card is the first consumer credit card issued by Goldman Sachs Bank. Apple touts this as an advantage, arguing that Goldman Sachs isn’t bound by the constraints of legacy credit card issuers such as Chase and Barclays.

And it’s not as if Goldman Sachs is entirely new to the consumer finance realm. Its Marcus by Goldman Sachs loan and savings products are innovative and well-liked.

That said, it’s not hard to imagine a first-time credit card issuer experiencing some growing pains, especially given Apple Card’s novelty. At a minimum, don’t be surprised to see iterative changes to Apple Card as Goldman Sachs figures out what works and what doesn’t.

Final Word

If you’re a committed Apple Pay user with the hardware to back it up – an iPhone, Apple Watch, or maybe an iPad – then it might make sense for you to ditch your traditional credit cards and going all-in on Apple Card.

Users who restrict their spending to Apple Pay merchants only stand to earn 2% cash back across the board, about as good as it gets on a consistent basis for premium cash-back credit cards. To do better than that, you’ll need to upgrade to a premium travel rewards credit card with a hefty annual fee.

Source: moneycrashers.com

How to Refinance Your Home Mortgage – Step-by-Step Guide

Deciding to refinance your mortgage is only the beginning of the process. You’re far more likely to accomplish what you set out to achieve with your refinance — and to get a good deal in the meantime — when you understand what a mortgage refinance entails.

From decision to closing, mortgage refinancing applicants pass through four key stages on their journey to a new mortgage loan.

How to Refinance a Mortgage on Your Home

Getting a home loan of any kind is a highly involved and consequential process.

On the front end, it requires careful consideration on your part. In this case, that means weighing the pros and cons of refinancing in general and the purpose of your loan in particular.

For example, are you refinancing to get a lower rate loan (reducing borrowing costs relative to your current loan) or do you need a cash-out refinance to finance a home improvement project, which could actually entail a higher rate?

Next, you’ll need to gather all the documents and details you’ll need to apply for your loan, evaluate your loan options and calculate what your new home mortgage will cost, and then begin the process of actually shopping for and applying for your new loan — the longest step in the process.

Expect the whole endeavor to take several weeks.

1. Determining Your Loan’s Purpose & Objectives

The decision to refinance a mortgage is not one to make lightly. If you’ve decided to go through with it, you probably have a goal in mind already.

Still, before getting any deeper into the process, it’s worth reviewing your longer-term objectives and determining what you hope to get out of your refinance. You might uncover a secondary or tertiary goal or benefit that alters your approach to the process before it’s too late to change course.

Refinancing advances a whole host of goals, some of which are complementary. For example:

  • Accelerating Payoff. A shorter loan term means fewer monthly payments and quicker payoff. It also means lower borrowing costs over the life of the loan. The principal downside: Shortening a loan’s remaining term from, say, 25 years to 15 years is likely to raise the monthly payment, even as it cuts down total interest charges.
  • Lowering the Monthly Payment. A lower monthly payment means a more affordable loan from month to month — a key benefit for borrowers struggling to live within their means. If you plan to stay in your home for at least three to five years, accepting a prepayment penalty (which is usually a bad idea) can further reduce your interest rate and your monthly payment along with it. The most significant downsides here are the possibility of higher overall borrowing costs and taking longer to pay it off if, as is often the case, you reduce your monthly payment by lengthening your loan term.
  • Lowering the Interest Rate. Even with an identical term, a lower interest rate reduces total borrowing costs and lowers the monthly payment. That’s why refinancing activity spikes when interest rates are low. Choose a shorter term and you’ll see a more drastic reduction.
  • Avoiding the Downsides of Adjustable Rates. Life is good for borrowers during the first five to seven years of the typical adjustable-rate mortgage (ARM) term when the 30-year loan rate is likely to be lower than prevailing rates on 30-year fixed-rate mortgages. The bill comes due, literally, when the time comes for the rate to adjust. If rates have risen since the loan’s origination, which is common, the monthly payment spikes. Borrowers can avoid this unwelcome development by refinancing to a fixed-rate mortgage ahead of the jump.
  • Getting Rid of FHA Mortgage Insurance. With relaxed approval standards and low down payment requirements, Federal Housing Administration (FHA) mortgage loans help lower-income, lower-asset first-time buyers afford starter homes. But they have some significant drawbacks, including pricey mortgage insurance that lasts for the life of the loan. Borrowers with sufficient equity (typically 20% or more) can put that behind them, reduce their monthly payment in the process by refinancing to a conventional mortgage, and avoid less expensive but still unwelcome private mortgage insurance (PMI).
  • Tapping Home Equity. Use a cash-out refinance loan to extract equity from your home. This type of loan allows you to borrow cash against the value of your home to fund things like home improvement projects or debt consolidation. Depending on the lender and jurisdiction, you can borrow up to 85% of your home equity (between rolled-over principal and cash proceeds) with this type of loan. But mind your other equity-tapping options: a home equity loan or home equity line of credit.

Confirming what you hope to get out of your refinance is an essential prerequisite to calculating its likely cost and choosing the optimal offer.


2. Confirm the Timing & Gather Everything You Need

With your loan’s purpose and your long-term financial objectives set, it’s time to confirm you’re ready to refinance. If yes, you must gather everything you need to apply, or at least begin thinking about how to do that.

Assessing Your Timing & Determining Whether to Wait

The purpose of your loan plays a substantial role in dictating the timing of your refinance.

For example, if your primary goal is to tap the equity in your home to finance a major home improvement project, such as a kitchen remodel or basement finish, wait until your loan-to-value ratio is low enough to produce the requisite windfall. That time might not arrive until you’ve been in your home for a decade or longer, depending on the property’s value (and change in value over time).

As a simplified example, if you accumulate an average of $5,000 in equity per year during your first decade of homeownership by making regular payments on your mortgage, you must pay your 30-year mortgage on time for 10 consecutive years to build the $50,000 needed for a major kitchen remodel (without accounting for a potential increase in equity due to a rise in market value).

By contrast, if your primary goal is to avoid a spike in your ARM payment, it’s in your interest to refinance before that happens — most often five or seven years into your original mortgage term.

But other factors can also influence the timing of your refinance or give you second thoughts about going through with it at all:

  • Your Credit Score. Because mortgage refinance loans are secured by the value of the properties they cover, their interest rates tend to be lower than riskier forms of unsecured debt, such as personal loans and credit cards. But borrower credit still plays a vital role in setting their rates. Borrowers with credit scores above 760 get the best rates, and borrowers with scores much below 680 can expect significantly higher rates. That’s not to say refinancing never makes sense for someone whose FICO score is in the mid-600s or below, only that those with the luxury to wait out the credit rebuilding or credit improvement process might want to consider it. If you’re unsure of your credit score, you can check it for free through Credit Karma.
  • Debt-to-Income Ratio. Mortgage lenders prefer borrowers with low debt-to-income ratios. Under 36% is ideal, and over 43% is likely a deal breaker for most lenders. If your debt-to-income ratio is uncomfortably high, consider putting off your refinance for six months to a year and using the time to pay down debt.
  • Work History. Fairly or not, lenders tend to be leery of borrowers who’ve recently changed jobs. If you’ve been with your current employer for two years or less, you must demonstrate that your income has been steady for longer and still might fail to qualify for the rate you expected. However, if you expect interest rates to rise in the near term, waiting out your new job could cancel out any benefits due to the higher future prevailing rates.
  • Prevailing Interest Rates. Given the considerable sums of money involved, even an incremental change to your refinance loan’s interest rate could translate to thousands or tens of thousands of dollars saved over the life of the loan. If you expect interest rates to fall in the near term, put off your refinance application. Conversely, if you believe rates will rise, don’t delay. And if the difference between your original mortgage rate and the rate you expect to receive on your refinance loan isn’t at least 1.5 percentage points, think twice about going ahead with the refinance at all. Under those circumstances, it takes longer to recoup your refinance loan’s closing costs.
  • Anticipated Time in the Home. It rarely makes sense to refinance your original mortgage if you plan to sell the home or pay off the mortgage within two years. Depending on your expected interest savings on the refinance, it can take much longer than that (upward of five years) to break even. Think carefully about how much effort you want to devote to refinancing a loan you’re going to pay off in a few years anyway.

Pro tip: If you need to give your credit score a bump, sign up for Experian Boost. It’s free and it’ll help you instantly increase your credit score.

Gathering Information & Application Materials

If and when you’re ready to go through with your refinance, you need a great deal of information and documentation before and during the application and closing processes, including:

  • Proof of Income. Depending on your employment status and sources of income, the lender will ask you to supply recent pay stubs, tax returns, or bank statements.
  • A Recent Home Appraisal. Your refinance lender will order a home appraisal before closing, so you don’t need to arrange one on your own. However, to avoid surprises, you can use open-source comparable local sales data to get an idea of your home’s likely market value.
  • Property Insurance Information. Your lender (and later, mortgage servicer) needs your homeowners insurance information to bundle your escrow payment. If it has been more than a year since you reviewed your property insurance policy, now’s the time to shop around for a better deal.

Be prepared to provide additional documentation if requested by your lender before closing. Any missing information or delays in producing documents can jeopardize the close.

Home Appraisal Blackboard Chalk Hand


3. Calculate Your Approximate Refinancing Costs

Next, use a free mortgage refinance calculator like Bank of America’s to calculate your approximate refinancing costs.

Above all else, this calculation must confirm you can afford the monthly mortgage payment on your refinance loan. If one of your aims in refinancing is to reduce the amount of interest paid over the life of your loan, this calculation can also confirm your chosen loan term and structure will achieve that.

For it to be worth it, you must at least break even on the loan after accounting for closing costs.

Calculating Your Breakeven Cost

Breakeven is a simple concept. When the total amount of interest you must pay over the life of your refinance loan matches the loan’s closing costs, you break even on the loan.

The point in time at which you reach parity is the breakeven point. Any interest saved after the breakeven point is effectively a bonus — money you would have forfeited had you chosen not to refinance.

Two factors determine if and when the breakeven point arrives. First, a longer loan term increases the likelihood you’ll break even at some point. More important still is the magnitude of change in your loan’s interest rate. The further your refinance rate falls from your original loan’s rate, the more you save each month and the faster you can recoup your closing costs.

A good mortgage refinance calculator should automatically calculate your breakeven point. Otherwise, calculate your breakeven point by dividing your refinance loan’s closing costs by the monthly savings relative to the original loan and round the result up to the next whole number.

Because you won’t have exact figures for your loan’s closing costs or monthly savings until you’ve applied and received loan disclosures, you’re calculating an estimated breakeven range at this point.

Refinance loan closing costs typically range from 2% to 6% of the refinanced loan’s principal, depending on the origination fee and other big-ticket expenses, so run one optimistic scenario (closing costs at 2% and a short time to breakeven) and one pessimistic scenario (closing costs at 6% and a long time to breakeven). The actual outcome will likely fall somewhere in the middle.

Note that the breakeven point is why it rarely makes sense to bother refinancing if you plan to sell or pay off the loan within two years or can’t reduce your interest rate by more than 1.5 to 2 percentage points.


4. Shop, Apply, & Close

You’re now in the home stretch — ready to shop, apply, and close the deal on your refinance loan.

Follow each of these steps in order, beginning with a multipronged effort to source accurate refinance quotes, continuing through an application and evaluation marathon, and finishing up with a closing that should seem breezier than your first.

Use a Quote Finder (Online Broker) to Get Multiple Quotes Quickly

Start by using an online broker like Credible* to source multiple refinance quotes from banks and mortgage lenders without contacting each party directly. Be prepared to provide basic information about your property and objectives, such as:

  • Property type, such as single-family home or townhouse
  • Property purpose, such as primary home or vacation home
  • Loan purpose, such as lowering the monthly payment
  • Property zip code
  • Estimated property value and remaining first mortgage loan balance
  • Cash-out needs, if any
  • Basic personal information, such as estimated credit score and date of birth

If your credit is decent or better, expect to receive multiple conditional refinance offers — with some coming immediately and others trickling in by email or phone in the subsequent hours and days. You’re under no obligation to act on any, sales pressure notwithstanding, but do make note of the most appealing.

Approach Banks & Lenders You’ve Worked With Before

Next, investigate whether any financial institutions with which you have a preexisting relationship offer refinance loans, including your current mortgage lender.

Most banks and credit unions do offer refinance loans. Though their rates tend to be less competitive at a baseline than direct lenders without expensive branch offices, many offer special pricing for longtime or high-asset customers. It’s certainly worth taking the time to make a few calls or website visits.

Apply for Multiple Loans Within 14 Days

You won’t know the exact cost of any refinance offer until you officially apply and receive the formal loan disclosure all lenders must provide to every prospective borrower.

But you can’t formally apply for a refinance loan without consenting to a hard credit pull, which can temporarily depress your credit score. And you definitely shouldn’t go through with your refinance until you’ve entertained multiple offers to ensure you’re getting the best deal.

Fortunately, the major consumer credit-reporting bureaus count all applications for a specific loan type (such as mortgage refinance loans) made within a two-week period as a single application, regardless of the final application count.

In other words, get in all the refinance applications you plan to make within two weeks, and your credit report will show just a single inquiry.

Evaluate Each Offer

Evaluate the loan disclosure for each accepted application with your objectives and general financial goals in mind. If your primary goal is reducing your monthly payment, look for the loan with the lowest monthly cost.

If your primary goal is reducing your lifetime homeownership costs, look for the loan offering the most substantial interest savings (the lowest mortgage interest rate).

Regardless of your loan’s purpose, make sure you understand what (if anything) you’re obligated to pay out of pocket for your loan. Many refinance loans simply roll closing costs into the principal, raising the monthly payment and increasing lifetime interest costs.

If your goal is to get the lowest possible monthly payment and you can afford to, try paying the closing costs out of pocket.

Choose an Offer & Consider Locking Your Rate

Choose the best offer from the pack — the one that best suits your objectives. If you expect rates to move up before closing, consider the lender’s offer (if extended) to lock your rate for a predetermined period, usually 45 to 90 days.

There’s likely a fee associated with this option, but the amount saved by even marginally reducing your final interest rate will probably offset it. Assuming everything goes smoothly during closing, you shouldn’t need more than 45 days — and certainly not more than 90 days — to finish the deal.

Proceed to Closing

Once you’ve closed on the loan, that’s it — you’ve refinanced your mortgage. Your refinance lender pays off your first mortgage and originates your new loan.

Moving forward, you send payments to your refinance lender, their servicer, or another company that purchases the loan.


Final Word

If you own a home, refinancing your mortgage loan is likely the easiest route to capitalize on low interest rates. It’s probably the most profitable too.

But low prevailing interest rates aren’t the only reason to refinance your mortgage loan. Other common refinancing goals include avoiding the first upward adjustment on an ARM, reducing the monthly payment to a level that doesn’t strain your growing family’s budget, tapping the equity you’ve built in your home, and banishing FHA mortgage insurance.

And a refinance loan doesn’t need to achieve only one goal. Some of these objectives are complementary, such as reducing your monthly payment while lowering your interest rate (and lifetime borrowing costs).

Provided you make out on the deal, whether by reducing your total homeownership costs or taking your monthly payment down a peg, it’s likely worth the effort.

*Advertisement from Credible Operations, Inc. NMLS 1681276.Address: 320 Blackwell St. Ste 200, Durham, NC, 27701

Source: moneycrashers.com