Consider This Before Getting a Personal Loan – SmartAsset
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It’s a new year and if one of your resolutions is to get out of debt, you might be thinking about consolidating your bills into a personal loan. With this kind of loan, you can streamline your payments and potentially get rid of your debt more quickly. If you plan on getting a personal loan in 2016, here are some key things to keep in mind before you start searching for a lender.
Check out our personal loan calculator.
1. Interest Rates Are Going Up
At the end of 2015, the Federal Reserve initiated a much anticipated hike in the federal funds rate. What this means for borrowers is that taking on debt is going to be more expensive going forward. That means that the personal loan rates you’re seeing now could be a lot higher six or nine months from now. If you’re planning on borrowing, it might be a good idea to scope out loan offers sooner rather than later.
2. Online Lenders Likely Have the Best Deals
The online lending marketplace has exploded in recent years. With an online lender, there are fewer overhead costs involved, which translates to fewer fees and lower rates for borrowers.
With a lower interest rate, more money will stay in your pocket in the long run. Lending Club, for example, claims that their customers have interest rates that are 33% lower, on average, after consolidating their debt or paying off credit cards using a personal loan.
Related Article: How to Get a Personal Loan
3. Your Credit Matters
Regardless of whether you go through a brick-and-mortar bank or an online lender, you likely won’t have access to the best rates if you don’t have a great credit score. In the worst case scenario, you could be denied a personal loan altogether.
You can check your credit score for free. And each year, you have a chance to get a free credit report from Experian, Equifax and TransUnion. If you haven’t pulled yours in a while, now might be a good time to take a look.
As you review your report, it’s important to make sure that all of your account information is being reported properly. If you see a paid account that’s still showing a balance, for example, or a collection account you don’t recognize, you’ll need to dispute those items with the credit bureau that’s reporting the information.
4. Personal Loan Scams Are Common
As more and more lenders enter the personal loan arena, the opportunity for scammers to cash in on unsuspecting victims also increases. If you’re applying for a loan online, it’s best to be careful about who you give your personal information to.
Some of the signs that may indicate that a personal loan agreement is actually a scam include lenders who use overly pushy sales tactics to get you to commit or ask you to put up a deposit as a guarantee against the loan. If you come across a lender who doesn’t seem concerned about checking your credit or tells you they can give you a loan without doing any paperwork, those are big red flags that the lender may not be legit.
Related Article: How to Avoid Personal Loan Scams
5. Not Reading the Fine Print Could Cost You
Before you sign off on a personal loan, it’s best to take time to read over the details of the loan agreement. Something as simple as paying one date late could trigger a fee or cause a higher penalty rate to kick in, which would make the loan more expensive in the long run.
Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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In the past two years, investors have taken an unusual interest in the Federal Reserve Bank. That’s mostly due to a Fed policy known as ‘quantitative tightening’, or QT. Effectively, QT was the Fed’s attempt to reduce its holdings after it bought huge amounts of debt during the 2008 Great Recession. While some details will interest only economists, QT may have implications for financial markets and regular investors. It’s useful to explore the backstory, but a financial advisor can be helpful if you’re concerned about how Fed activity can impact your investments,.
What is Quantitative Tightening?
To understand quantitative tightening, it’s helpful to define another term, which is quantitative easing. To do that, we need to go back to the bad days of 2008.
When the Great Recession hit, the Fed slashed interest rates to stimulate the economy. But it was evident that wasn’t nearly enough to stave off crisis. So the Fed provided another jolt of stimulus by buying Treasury bonds, mortgage-backed securities and other assets in huge volume. This combination of slashing interests rates massive government spending was qualitative easing, or QE, and fortunately it worked. Banks had more cash and could continue to lend, and more lending led to more spending. Slowly, the economy recovered.
But in the meantime, QE exploded the Fed’s balance sheet, which is a tally of the bank’s liabilities and assets. Prior to the crisis, the balance sheet totaled about $925 billion. With all the purchased debt, which the Fed categorized as assets, the balance sheet ballooned to $4.5 trillion by 2017. Years past the financial crisis and with a strong economy, the Fed decided to shrink its balance sheet by shedding some of its accumulated assets, effectively reversing QE.
That reversal is quantitative tightening. QE had poured money into the economy, and through quantitative tightening, the Fed planned to take some of that money out again. First it raised interest rates, which it had plummeted to zero during the financial crisis. Then, it began retiring some of the debt it held by paying off maturing bonds. Instead of replacing these bonds with new debt purchases, the Fed stood pat and let its stockpile shrink. This effectively reduced the quantity of money under bank control, thus quantitative tightening.
Did Qualitative Tightening Officially End?
There was no official beginning or end to quantitative tightening. The Fed began to ‘normalize’ its balance sheet by raising interest rates in December 2015, the first hike in nearly a decade. In October 2017, it began to reduce its hoard of bonds by as much as $50 billion per month. But after four 2018 interest rate cuts and some stock market downturns, many observers worried the Fed aggressive normalization was too much of a shock to the economy.
In response, the Fed ended the interest rate hikes and slowed down on debt retirement. By March 2019, the cap on reductions reduced from $30 billion a month to $15 billion. By October 2019, the Fed announced it would once again start expanding its balance sheet by buying up to $60 billion in Treasury bills a month.
However, the Fed insisted this was not another round of quantitative easing. Some market observers reacted to that announcement with skepticism. But whether this was or wasn’t a new round of QE, the Fed’s action effectively stopped quantitative tightening.
How Quantitative Tightening Impacts Markets
Many investors worry that quantitative tightening would negatively impact markets. During the past decade, returns have shown a relatively high correlation with the Fed’s purchases. Conversely, the Fed’s selloff of assets was a contributing factor to the market dip in late 2018, which left the S&P 500 about 20% below its top price.
Quantitative tightening definitely made some investors nervous. That said, there are a few things to consider if the Fed shrinks the balance sheet in the future. First, it’s unlikely the balance sheet will contract to its pre-2008 level. The Fed hasn’t indicated where a ‘happy medium’ might be, but the balance sheet remained well about the pre-2008 figures when expansion began again in October 2019.
Additionally, it’s unlikely that quantitative tightening will reverse quantitative easing’s impact on long-term interest rates. In part, the Fed purchased long-term bonds and mortgage-backed securities to move money into other areas, like corporate bonds, and lower borrowing costs. Also, the Fed hoped this activity would encourage the productive use of capital. According to the Fed’s research, the use of quantitative easing reduced yields on 10-year treasury bonds by 50, to 100 basis points (bps).
While quantitative tightening may have reversed some of this impact, experts believe it will not undo long-term interest rates by 100 bps. Ultimately, it comes down to the comparative impact of the expansion and contraction of the balance sheet. In October 2019, the contraction was not nearly sufficient to reverse the expansion.
Other Considerations of Quantitative Tightening
Many investors worry that quantitative tightening will have a big impact on inflation and liquidity. This is because changes in inflation and liquidity may occur when there is a discrepancy concerning supply and demand. During the financial crisis, the Fed increased the money supply since the economic system desperately needed liquidity. A decade and strong recovery later, there’s less liquidly preference. In response, the Fed has decreased cash reserves. In a strong market, this should have no real impact on liquidity and inflation.
Quantitative tightening is a monetary policy that increased interest rates and reduced the money supply in circulation by retiring some of the Fed’s debt holdings. After qualitative easing expanded the money supply for several years to bring the economy back on track, the Fed used qualitative tightening as a means to normalize its balance sheet.
While quantitative tightening did not completely reverse quantitative easing, it did shrink the Fed’s balance sheet. This strategy left many investors uneasy about future returns and interest rates. That said, balance sheet normalization did not prove to be as disruptive as many investors feared.
Tips for Investors
The Fed’s monetary policy quickly becomes complex, but it’s still useful for investors to keep an eye on the bank’s actions. Since interest rate changes can have direct impact on major purchases and investment plans, understanding the Fed’s reasoning for these decisions can be helpful.
Financial advisors can help their clients cut through the noise and translate technical analysis of market observers into plain language. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
Ashley Chorpenning Ashley Chorpenning is an experienced financial writer currently serving as an investment and insurance expert at SmartAsset. In addition to being a contributing writer at SmartAsset, she writes for solo entrepreneurs as well as for Fortune 500 companies. Ashley is a finance graduate of the University of Cincinnati. When she isn’t helping people understand their finances, you may find Ashley cage diving with great whites or on safari in South Africa.
Today, I have a great guest post from a reader, Ashley Patrick. She asked if she could share her story with my audience, and I, of course, had to say yes! This is her personal story about how her 401k loan cost her a ton of money and why you shouldn’t take be borrowing from your 401k.
You’ve been thinking about getting a 401k loan.
Everyone says it’s a great loan because you are paying yourself back!
It sounds like a great low risk loan at a great interest rate for an unsecured loan.
But you know the saying “if it sounds too good to be true, it probably is”.
So you’re thinking, what’s the catch?
I take out a loan without having to do a withdrawal and I pay myself back. I’m paying myself back at a low interest rate right, so what’s wrong with that?
Well, I’m about to tell you how our 401k loan cost us $1,000,000 dollars.
You see, there are a lot of reasons to not take out a 401k loan and they all happened to ME!
How My 401k Loan Cost Me $1,000,000
Let me start at the beginning….
My husband and I bought our dream house when we were just 28 & 29 years old. This was our second house and honestly, more house than we really should have bought. But you know, it had a huge 40×60 shop and we loved the house and property. So there we were buying a $450,000 house with a 18 month old.
This house was gorgeous on 10 acres of woods with floor to ceiling windows throughout the entire house.
So there we were with a $2200 a month house payment, an 18 month old in daycare, and both of us working full-time. Within 2 months of us buying this house we found out I was pregnant again! We had been trying for sometime so it wasn’t a surprise but there was a major issue with our new dream home.
The layout didn’t work for a family of 3. It was a small 2 bedroom with an in-law suite that didn’t connect to the main house.
There was a solution though. We could enclose a portion of the covered patio to include another bedroom and play area and connect the two living spaces.
The problem was this was going to cost $25,000. We certainly didn’t have that much in savings and the mortgage was already as high as it could go.
So what were we to do? We have numerous people that were “financially savvy” tell my husband that we should do a 401k loan. We would be paying ourselves back so, we weren’t “really borrowing” any money. It was our money and are just using it now and will pay it back later.
Our first issue with the loan
This seemed like a perfect solution to our problem. So we took out a $25,000 401k loan in the summer of 2013. I checked the 401k account shortly after the loan and realized they took the money out of the 401k. I was very upset about this and thought there must have been some mistake.
Come to find out, they actually take the money out of your 401k. So, it’s not earning any compound interest. I thought that the 401k was just the collateral. I didn’t realize they actually take the money out of it.
So, nothing else seemed like a good option so we just kept the loan. Construction was finished just in time for the arrival of our 2nd child. The layout is much better and much more functional for our family.
Everything seemed fine and the payments came out automatically from my husband’s paycheck.
Then issue #2 with 401k loans
Then came the second issue with the 401k loan…..
In January 2014, my husband was laid off from his job. So there we were with a newborn and a 2 yr old in an expensive house and my husband, the breadwinner, lost his job of 7 years. You know the one he never thought he would lose, so why not buy the expensive house? Ya, that one, gone.
I cried about it but figured out how long our savings and severance package would last and knew we would be okay for several months.
Well, then we get a letter stating we have 60 days to payback the 401k loan, which at this point was over $20,000. We had made payments for less than a year out of the 5 year loan.
My husband didn’t have job yet and we didn’t have that much in savings. I certainly wasn’t going to use what was in savings to pay that loan either. I may have needed that to feed my children in a few months.
So, we ignored it because we couldn’t get another loan to pay it at this point.
Luckily, I married up and everyone loves my husband. So, he was able to find another job rather quickly.
We were thankful he had another job and didn’t think about the 401k loan again.
Then came issue #3
That was until a year later in January of 2015. Here came issue number three with 401k loans.
We got a nice tax form in the mail from his 401k provider. Since we didn’t/couldn’t pay back the loan in the 60 days, the balance counted as income. You know, since it actually came out of the 401k.
Then I did our taxes and found out we owed several thousand dollars to the IRS. We went from getting a couple thousand back to owing around $6500. So it cost us around $10,000 just in taxes. It even bumped us up a tax bracket and cost us more for taxes on our actual income as well.
I ended up putting what we owed on a 0% for 18 months credit card and chalked it up to a big lesson learned. I will never take out a 401k loan again.
The silver lining
In reality, my husband losing his job has been a major blessing in our lives. He is much happier at his new job. This also started my journey to financial coaching.
You see, when I put the taxes on the credit card, I didn’t have a plan to pay that off either. When I started getting the bills for it, I realized I had no idea how we would pay it off before interest accrued.
That led me to find Dave Ramsey. Not only did we have it paid off in a couple months, but we paid off all of our $45,000 debt (except the mortgage) in 17 months!
The true cost of 401k loans
Just recently I did the math and realized what our 401k loan really cost us.
It cost us $25,000 from our 401k and roughly about $10,000 in taxes. So that’s already $35,000 from the initial loan.
We were really young for that $25,000 to earn compound interest. If we had left it where it should have been, we would have had a lot more money come retirement age.
The general rule of thumb for compound interest is that the amount invested will double every 7 years given a 10% rate of return. And yes, you can earn an average of 10% rate of return after fees.
We were 28 and 29 years old when we took that loan out. If we say we would retire or start withdrawing between 65-70 years old, then that $25,000 cost us around $1 million dollars at retirement age.
Now yes, I could try to make up for the difference and try to put more in retirement but I’ve already lost a lot of time and compound interest. Even if we had $25,000 to put in retirement today to make up for it, I’ve already missed a doubling.
But that won’t happen to me, so why shouldn’t I take out a 401k loan?
Life changes and now I am not working full-time and have an extra kid. So, thinking that you will pay it back later doesn’t always happen as fast as you think it will.
Something always comes up and is more important at that time. So learn from my mistakes and don’t take out a 401k loan.
Actually, start saving as much as you can as young as you can.
You may even be thinking that you aren’t quitting your job and will pay it all back, so no big deal, right? Actually you are still losing a ton of compound interest even if you pay the entire thing back.
The typical loan duration is 5 years. That’s almost a doubling of interest by the time it’s paid back in full. So, it may not be as dramatic as my example but you are still taking a major loss at retirement age.
The thing is, you have to figure in the compound interest. You can’t only look at the interest rate you are paying. You are losing interest you could be gaining at a much much higher rate than what you are paying on the loan.
Lessons Learned from my 401k loan
Some lessons I learned from taking out this 401k are:
Don’t miss out on compound interest
It’s not a loan, it’s a withdrawal
If you want to change jobs or lose your job, it has to be paid back in 60-90 days depending on your employer
If you can’t or don’t pay it back, it counts as income on your taxes
So if you are considering a 401k loan, find another way to pay for what you need. Cash is always best. If you can’t pay cash right now, wait and save as much as you can. This will at least limit the amount of debt you take on.
Determine if what you want is a need or a want. If it’s a want, then wait. A 401k loan should be used as an absolute need and last resort.
It keeps you tied to a job for the duration of the loan which is usually 5 years. This could limit your opportunities and put you in an even bigger hardship if you lose your job.
I hope you will learn from my mistakes and make an informed decision about these types of loans. Don’t be like me and make an ill-informed decision.
Ashley Patrick is a Ramsey Solutions Financial Master Coach and owner of Budgets Made Easy. She helps people budget and save money so they can pay off their debt.
What do you think of 401k loans? Have you ever taken one out?
This post may contain affiliate links. Please read my disclosure for more information.
This is where it all started guys. On a quiet summer afternoon I hit publish on my first post titled 10 Free Activities for Couples Paying off Debt and the rest is history. I thought it fitting to do one for the winter as well, seeing how we spend more money this time of year than any other.
1. Christmas Lights Home Tour
Every city has a neighborhood that really goes all out with the lights. Take a drive to look at them or walk if the weather isn’t frightful. In Florida, the weather is always great this time of year so we have a biking group that does a huge ride through the neighborhoods and ends back at a bar for beers.
You can make a trip out of it too. A city near us was featured on TV for their light displays so I’m looking forward to seeing it this year. Sometimes houses do the same thing every year so it’s fun to switch it up from time to time.
2. Holiday Movie Night
Put on your pajamas and pour the cocoa, there’s nothing better than a Christmas movie! While I’m partial to all holiday Claymation movies I loved the resurgence of quality seasonal cinema of the early 2000’s. For those with Netflix (or borrowing from a friend) here’s a list of movies for your viewing pleasure.
If you don’t have Netflix, channels like NBC, ABC, Freeform, etc always have a good variety (I’m judging you if you even try to add Hallmark Channel movies to that list.)
3. School Holiday Production
Elementary schools always have some type of performance with oodles of cute awkward kids singing carols and dressed like elves. The best part, these events are usually free. If you don’t have friends with kids that can keep you in the loop find some teacher friends with connections. They’ll know when all the good shows are. But word to the wise, don’t do this one if you look like these guys:
4. Live Nativity
These things can range from “plastic baby in a manger” to “drive-through re-creation of the gospels.” Even if you get a bad one there’s usually hot cocoa and cookies at the end so you win either way. The good ones really do bring the Christmas story to life and it’s a pretty cool experience. I highly recommend it.
5. Star Gaze
Winter is a great time for star gazing. Taurus, Perseus, and Gemini are some of the constellations you can find in the winter sky. Yes, I did Google that, so even if you’re not a budding astronomer who doesn’t enjoy looking at shiny things in the sky?
Download an app like SkyView Free and find all the starry patterns. If you’re lucky enough to live by a planetarium see if they do free shows. Ours does two every Friday that the college is in session.
6. Holiday Parade
Was anybody else in marching band? I was and it was absolutely for the parades. There are a lot in December! We have our pick of morning or evening throughout the month. And since we live near the water we even have a few lighted boat parades! Check your cities events calendar and cities around you to fill your weekends with candy canes and Santas!
7. Photo with Santa
Speaking of Santa, how ridiculous are the prices for photos with Santa these days!? I don’t even have kids and I feel like I need to start putting away for their Santa pictures fund. That was until I found out about Bass Pro Shop’s annual Santa’s Wonderland. On select days you can get a free personalized photo with Santa, free wooden picture frame, free crafts for the kids, and more!
And even if you don’t have kids you should definitely put on your tackiest Christmas sweaters and make this years’ card something the family will be talking about til next year. Why not? It’s free!
I included this in my last list but the opportunities for giving this time of year are too numerous not to share again. Aside from soup kitchens and caroling you can hand out Christmas cards at Hospice, collect cans of food from your pantry to give to a shelter, or connect with your local foster care licensing agency to help out a foster family in need. Your money is valuable but your time is just as needed.
9. Go Outside
This is the obligatory “make a snow angel or sled down a hill” spot. But I live in Florida so I don’t know how to do that stuff. Whether you’re in blizzard country or it’s a balmy 70 degrees outside (sorry not sorry) get your butt outside and experience the free entertainment mother nature has to offer. I for one love walks downtown during the day and bonfires with s’more at night.
10. Stay Inside
Okay, outside not your thing? Stay inside… if you know what I mean. When’s the last time you pretended you were on your honeymoon or your favorite vacation with your significant other? There’s never a good time to put on those nighties from your lingerie shower so make the time! Get romantic and see what happens. Hey, it’s free. 🙂
Any other ideas for free activities this time of year? I’m always looking for new things to try and include in new posts!
Jen Smith is a personal finance expert, founder of Modern Frugality and co-host of the Frugal Friends Podcast. Her work has been featured in the Wall Street Journal, Lifehacker, Money Magazine, U.S. News and World Report, Business Insider, and more. She’s passionate about helping people gain control of their spending.
Here are the 5 steps you need to take to stop yourself from overspending on Christmas gifts
The excitement, the gingerbread latte is now kicking in … the click-clack of your shoes racing down Target’s floor tiles… as you frantically snatch the must-have toy of the season off the shelf, clutching it possessively to your chest!
As you round the corner trying to get back to the main aisle, you can’t believe your eyes; you haven’t seen this Magnolia item in stock in FOREVER! In your shopping cart it goes! Off to checkout, and you slooooow way down going by the girl’s section, and think, “That’s super cute! My little one would love that!” It too goes in the cart!
An hour later, and your phone bings at you. Yup, it’s a large purchase amount alert from your credit card. It reads, “Did you spend $358.42 at Target? This amount is over your alert limit notification settings”.
And just like in The Christmas Story, you say (in slow motion for dramatic effect) “Oh FUDGE!”
You totally overspent! Again! You told yourself you weren’t going to overspend on Christmas presents again! (like ever!) Last year’s holiday credit card bill left you with hives, and you promised yourself that this next year would be different!
Well, guess what, that Target scenario up above… it was just a dream. Just like Ebenezer, there is time for you to change your ways. You’re not doomed to follow the same path you did last year! So if you’re ready, let’s dive into how to stop overspending at Christmas!
This post may contain affiliate links. Please read my full disclosure for more info
What is the Christmas Debt Hangover?
Ugh! No one likes a hangover! But unlike a hangover from too much bubbly, a Christmas debt hangover can last months and months (sometimes years)! No thanks!
According to a MagnifyMoney survey, “Americans took on an average of $1,325 of holiday debt in 2019”. Here’s how their numbers played out…
44% of consumers took on debt this holiday season, and the majority (57%) didn’t plan on doing so.
78% of those with holiday debt won’t be able to pay it off come January, including 15% who are only making minimum payments.
58% of indebted consumers are stressed about their holiday debt.
40% plan to consolidate debt and/or shop around for a good balance transfer interest rate, but more than half won’t even try. Of those that won’t try, 20% think it’s not necessary, and 18% don’t want to deal with another bank.
Now specifically regarding how long it would take them to pay off the debt, survey responders said…
22% said one month
21% said two months
19% said three months
8% said four months
16% said 5+ months
15% are paying only minimum payments
Right now, The Fed Reserve lists the average credit card interest rate to be 14.52%. You can generally assume that your minimum payment will be about 2% of your total bill. Here’s a screenshot of how long it would take to pay off the card (if you didn’t put any more purchases on it).
64 months? Paying $582 in interest? W.T.F.!
Are you ready to tame your shopping spree beast? Because, after looking at those numbers, overspending at Christmas is not cool!
How to stop overspending on Christmas presents: Step One – decide what you will focus on besides the gifts!
It’s just smart sense that when you take something away, you need to replace it with something else. Instead of a donut, have a whole grain muffin!
So instead of focusing on gifts, what do you want to spend the season focused on? I’ve got a great list of frugal family fun ideas for the holidays! These are bucket list items perfect for the holiday season!
You’re especially going to need something fun to do Christmas morning, as you don’t want the day to be anticlimactic without all the presents, as it might be hard on our littlest ones. Think about…
Doing a Meals on Wheels delivery route in your neighborhood.
Do a Christmas movie marathon (pj’s required!).
Make a full holiday meal together as a family.
Go sledding/skiing/ice skating or go to the mountains for snow time fun! Don’t forget the hot cocoa and accessories for the snowman you’ll build!
Step Two – Consider a gifting strategy
Every good General knows that you need a plan of attack or a strategy, shall we say. And if you don’t think Christmas shopping is kind of like preparing for battle, then hats off to your peaceful and serene holidays of the past. The rest of us battle-weary moms can barely nod in agreement (as we’re still a little shell shocked from last year’s holiday season).
Strategy One – Adopt the 4 Gift Rule
This one is amazing in its simplicity to help you stop overspending on Christmas gifts! It caters to those toying with the idea of having a minimalist(ish) holiday, and it’s gaining popularity every year! You gift each recipient (that you would typically buy lots for) just four gifts.
Something to wear
Something to read
Something they need
Something they want
I’d like to think of it as a way to buy a more meaningful selection of gifts. As you’re looking not just to buy lots of things, but purchase specific items. Hopefully, the receivers will appreciate their gifts a little more and not get lost in the craze of ripping off wrapping paper at the speed of light.
Don’t forget to snag your printable gift list tracker; there’s a four gift rule one and then a classic gift list printable. Everything you need to stay organized and on budget!
Strategy Two – Give the gift of an experience
Maybe your kids have everything that they need! Maybe you are dreading anything more coming into your home as you need to get your Home Edit on right now!
If that’s the case, then consider giving an experience instead. This could be a short trip to the beach or a big trip to Walt Disney World. Or tickets to a sporting game or an event like Comic-Con. Go as big or as small as you like. Set aside the Christmas money and put it in a sinking fund to make this experience come true (even if it’s at a later date).
Hint: if it’s a trip to a theme park, some have vacation planning DVDs or online videos (DisneyWorld does). This would be a great thing to wrap and put under the tree!
Strategy Three – Go the D.I.Y. route
Now, this isn’t for those of us that are all thumbs (meeee!) I am not a crafter/knitter/artist/DIYer by nature. But for those of you that are, consider harnessing your talent for homemade gifts!
Even if you don’t have a talent, maybe consider gifting a custom photo book from Shutterfly. Or collect great grandmothers family recipes together and turn them into a little book (or place her most famous recipe on a tea towel! Cute huh!)
That’s right, as your mother always said, it pays to plan ahead! That means getting your Christmas present shopping done early! As the holiday gets closer, we tend to panic slightly; we grab just about anything that will do as a good gift. Most of the time that means we’re spending a little more (because we don’t want to get a cheapo lame gift)!
So start jotting down your gift choices now! Aka ASAP! I.e., immediately!
Okay, you get the drift. Besides, online ordering gets bigger every year, and sometimes there are shipping delays or snowstorms that stop service in half the country (yikes!) You don’t want to get a substitute gift because your original gift won’t be back in stock until January 17th!
Step Four – Use Cash
They say cash is king, and they’re right! Especially when it comes to spending money. Because when the cash is out, the spending is done! It’s genius at its most basic, and it works every time (as long as you leave your credit cards at home). You simply cannot overspend on Christmas gifts!
Using cash envelopes is a strategy used by many successful budgeters! Besides, stuffing these cute festive holiday cash envelopes is fun! You can use one for each person you’re gifting to or use one for each holiday shopping category—I.e., food, decorations, gifting, fun times, supplies, etc. Or if you’re crafty here are some cash envelope templates that you can make on your own!
Nerdwallet references a cult classic report where, “An often-cited study is one conducted by Dun & Bradstreet, in which the company found that people spend 12%-18% more when using credit cards instead of cash.”
Don’t forget that when you pay with cash, you won’t have to pay interest on the charge either! Look at it this way; when you pay cash, you’re buying something. When you pay with a credit card, you’re borrowing the money for it; you didn’t buy it (but you’ll pay extra for it in interest!)
Step Five – Don’t go into the stores!
This one sounds silly, I know, but it’s so painfully obvious. If you don’t have to go into a store, then don’t! Because really, we’ve all gone into a store, we don’t grab a cart because we just need one thing, and we come up to the cashier juggling items like a clown!
Inevitably when you go into a store, it’s straight temptation. Why do that to yourself? Stay home, and send someone else to the store, or better yet, do some online ordering for that item you need!
Or if you’re poison is the 1-click buy, then take some super easy preventative measures. Delete your credit card info on your devices! GASP! I know, I know, it sounds drastic, but making it just the teensiest bit harder on yourself to shop online could mean saving hundreds! Because honestly, sometimes I don’t get up to walk across the house to grab my credit card number!
Better yet, do a marketing edit! Unsubscribe from those pesky emails from your favorite retailers and unfollow them on social media! You won’t want what you never see! Now, I know you’ve been thinking about this idea for a while, give it a try! You can always go back later and subscribe again!
Simple hacks to stop overspending on Christmas presents
Know your prices
Do you know the regular price of the “sale” item in your hand? Even though it says it’s on sale or discounted 20% off, it might still not be a great price! If you are 100% in on saving money this holiday season, then you should scout your gifts early, record their prices, and wait to see what the “holiday deals” actually are.
Many retailers change their prices regularly. What was $59 in September could easily now be $75 in December. Yet now they can mark it being 20% off! They get to keep their sales margin high enough to get a good profit, and you (the customer) feel like you got a good deal. Winner Winner… oh wait, that’s a bull$hit dinner!
Be smarter than the retailer!
Don’t go shopping when…
You are hungry
You’re short on time
With somebody else (friends can be bad influences, sorry friends)
It’s going to be super crowded (instead go early in the morning, or late at night)
Next years plan for Christmas gifting
If you get through this Christmas and going low key on gifts wasn’t for your family, then no problem. You can have the Christmas that your family wants; you may need to start socking away money for it a bit earlier than usual! Check out How to Start a Christmas Savings Plan and How to Plan the Perfect Christmas Budget!
At the end of the day
I know that reading about how to not overspend at Christmas sounds like a bummer of a topic. But honestly, think about how you’ll feel come January when you don’t have that big fat credit card bill that’s knocking out your wallet like it’s Balboa in Rocky 1!
I know that for many of us, we remember Christmases of youth, with mountains of presents, and we want to recreate those warm fuzzy memories for our own kids. But those warm fuzzy feelings can be created out of so many instances, not just present opening. So save yourself the agony and angst of overspending at Christmas, and don’t even go there!
Posts Related to How to Stop Overspending on Christmas Gifts:
What are your top tips for how to stop overspending on holiday gifts ?
Kari is a total Money Nerd Mama, helping other Mamas to learn about all things money & personal finance, so they can execute money management strategies to make a secure future for their family!
How to make smart financial decisions in a low interest rate environment.*
The Federal Reserve, a.k.a. the Fed, was in the news for more than a decade for raising the federal funds rate. But the headlines have changed. In July 2019 the Fed finally cut its benchmark interest rate. The Fed raises or lowers the federal funds rate to influence the direction of the U.S. economy toward strong employment and stable inflation.
Alright, this may all seem pretty high level. It’s just a bunch of news for policymakers, economists and investors playing the market. Right? Not so fast. While it may sound like a fancy finance term, the federal funds rate is the interest rate banks charge each other to lend funds overnight. When that rate goes down (or up), the effects trickle down to you and the financial products you use every day—think credit cards, loans and savings accounts.
Even if you don’t typically follow financial headlines, understanding what happens when the Fed lowers rates can help you make smart financial decisions when it comes to borrowing, saving and spending. Read on to answer the question: What does a Fed rate cut mean for my finances?
What goes up and what comes down when the Fed cuts rates
What happens when the Fed lowers rates? One of the Fed’s goals with a rate cut is to make borrowing less costly. Translation: You could see lower interest rates on credit.
Economist and podcast host John Norris says that a Fed rate cut could actually be helpful to the average consumer. “If history serves as a guide, the prime rate will fall by the same amount as the Fed’s actions,” Norris says. “This means credit cards and home equity lines of credit (HELOCs) will be a little cheaper for consumers moving forward.” The prime rate, which is based on the federal funds rate, is the interest rate lenders charge their most creditworthy customers.
Broken down simply, here’s how a lower Fed rate impacts you and the various types of credit you may already have or be considering:
Credit cards: “Credit cards are almost exclusively variable APR,” says Greg Mahnken, analyst at Credit Card Insider. “This means that as the prime rate goes up and down, the interest rate of the card will fluctuate as well. Your card issuer must tell you the margin rate—that’s the margin added to the prime rate to get your credit card’s APR,” Mahnken explains. If you’re wondering how a lower Fed rate impacts you and your cards, you could be charged less to carry a balance and may see smaller minimum payments.
Mortgages: What happens when the Fed lowers rates? For mortgages, it depends on the type of loan. The rate could drop on adjustable-rate mortgages, for example, meaning a reduced monthly payment. How a lower Fed rate impacts you could be different for a fixed-rate mortgage. This type of mortgage may not be as directly impacted by a Fed rate cut and is influenced by other factors.
Home equity lines of credit: If you have a HELOC or are in the market for one for home repairs, you could see a rate decrease following a Fed rate cut, lowering monthly payments.
Other loans: If you’re wondering how a lower Fed rate impacts you, know that it could influence lower rates on auto loans for car owners, but factors including industry sales and financing offers also come into play. If you have a private student loan and a regular payment schedule, you could see a lower monthly payment.
Now, what does a Fed rate cut mean for my finances when it comes to saving? Savers could see interest rates decline on deposit accounts like savings accounts, money market accounts and certificates of deposit (CDs). A lower interest rate here means you’ll earn less in interest on your savings balances.
“Banks make money by making a spread between what they pay for deposits and what they charge on loans,” Norris says. “When what they can charge on a loan goes down, it makes sense what they pay on deposits will eventually do so as well.”
How to manage a rate cut as a borrower, saver and spender
What does a Fed rate cut mean for my finances is only half of the puzzle. The other half is determining how to manage your finances in a lower rate environment so you can achieve your financial goals. Follow these tips when you consider how a lower Fed rate impacts you for borrowing, saving and spending:
If you’re borrowing:
Look for lower rates on new credit cards: “Credit card users should always be on the lookout for lower variable rate formulas, and a rate cut or two is a perfect time to do a little homework when looking for new cards,” Norris says.
Ask for lower rates on existing credit cards: When you’re learning what happens when the Fed lowers rates, consider that negotiating better rates on borrowed money could be easier in a lower interest rate environment. For example, you can check with your credit card issuers to see if you can get a lower interest rate on the credit cards you have already.
Refinance high-interest debt: “If your issuer/lender won’t lower your interest rate despite a cut to the Fed/prime rate, look into refinancing or consolidating your debt with a lower-interest loan,” Mahnken says.
If you’re saving:
Find a competitive savings account rate: Even though lower rates on savings is often what happens when the Fed lowers rates, banks could still offer competitive savings rates. For instance, online banks can often pass savings on in the form of higher interest rates on their deposit accounts because they save money by not maintaining brick-and-mortar locations. Discover, for instance, offers a high-yield savings account with an interest rate over 5x the National Savings Average.1 So while rates may go down on average, you can possibly earn a higher interest rate on your savings than you had in the past with a high-yield account.
You earned it. Now earn more with it.
Online savings with no minimum balance.
Discover Bank, Member FDIC
Lock in a higher fixed rate: If you anticipate more Fed rate cuts in the future, then explore savings vehicles with a rate that you can lock in. With a fixed-rate certificate of deposit, for example, the CD rate is fixed for the entire term. If you open a 5-year CD, your savings will continue to earn the same interest rate despite rate cuts. Note that CDs often come with an early withdrawal penalty if you withdraw your funds before the end of the account’s term, so they’re best used for savings you won’t need to touch for a set period of time.
If you’re spending:
Decide to buy, but do it wisely: Since one answer to “What does a Fed rate cut mean for my finances?” is that borrowing costs less, it could make sense to go ahead with that large purchase you’ve been planning for ages. “When it comes to spending, lower interest rates can encourage bigger purchases, such as home improvements, cars and homes,” Mahnken says. “But before making a big-ticket purchase, make sure you have a budget so you can see how the purchase will affect your monthly cash flow.”
Pursue a passion that requires capital: If you can get access to borrowed money at lower rates, some of your personal goals that require credit could be more achievable. Maybe you’ve been preparing to start a business endeavor or pursue higher education to advance your career. Now could be the time to set things in motion.
Fed rate cut or not, there’s always room for financial improvement
Even if financial news isn’t your thing, paying attention to trends like a Fed rate cut (or hike) can help you manage your money most effectively. Despite the interest rate climate, though, it’s still important to remain disciplined in your financial strategy. This includes setting financial goals, creating a plan to reach them and educating yourself on tools and methods that can help you in the process. Whether interest rates are low or high, you’ll always win with this approach.
* This should not be considered tax or investment advice. Please consult a financial or tax advisor if you have questions.
1 The Annual Percentage Yield (APY) for the Online Savings Account as of 02/01/2021 is more than five times the national average APY for interest-bearing savings accounts with balances of $500 as reported by Informa Research Services, Inc. as of 02/01/2021. Interest rates and APYs are subject to change at any time. Although the information provided by Informa Research Services has been obtained from the various institutions, accuracy cannot be guaranteed.
Real estate is a regular smorgasbord of acronyms – everything from APR to REO. Here’s a list of the ones you’re likely to run into and what they mean when you’re buying or selling a house:
Acronyms You’ll Hear Associated with Real Estate Professionals
Real estate agents, builders and most other realty-related professions have numerous professional designations, all designed to set them apart from those who haven’t taken advanced courses in their fields. These designations don’t mean that professionals without letters after their names are not as experienced or skilled, but rather only that they haven’t taken the time to further their educations.
Read: How to Build Your Real Estate Team
Let’s start with the letter “R,” which stands for Realtor. A Realtor is a member of the National Association of Realtors, the nation’s largest trade group. NAR says it speaks for homeowners, and it usually does. But in that rare occasion when the interests of its members and owners don’t align, it sides with those who pay their dues.
Read: A Timeline of the History of Real Estate
NAR embraces a strict code of ethics. There are about 2 million active and licensed real estate agents nationwide, and 1.34 million can call themselves Realtors.
NAR members sometimes have the letters GRI or CRS after their names. The Graduate, REALTOR® Institute(GRI) designation signifies the successful completion of 90 hours of classroom instruction beyond the continuing education courses required by many states for agents to maintain their licenses. After the GRI, an agent may become a Certified Residential Specialist (CRS) by advancing his or her education even further.
Builders can obtain the GBI – Graduate Builder Institute – designation by completing nine one-day classes sponsored by the educational arm of the National Association of Home Builders. Those who pass more advanced courses become Graduate Master Builders, or GMBs. Remodeling specialists with at least five years of experience can be Certified Graduate Remodelers, or CGRs. And, salespeople can be CSPs, or Certified New Home Sales Professionals.
In the mortgage profession, the Mortgage Bankers Association awards the Certified Mortgage Banker(CMB) and Accredited Residential Originator(ARO) designations, but only after completing a training program that may take up to five years to finish. To start the process, CMB and ARO candidates must have at least three years’ experience and be recommended by a senior officer in their companies.
Acronyms Associated with Mortgage Lending
When obtaining a mortgage, you will be quoted an interest rate; however, perhaps the more important rate is the annual percentage rate, or APR, which is the total cost of the loan per year over the loan’s term. It measures the interest rate plus other fees and charges.
An FRM is a fixed-rate mortgage, the terms of which never change. Conversely, an Adjustable Rate Mortgage (ARM) allows rates to increase or decrease at certain intervals over the life of the loan, depending on rates at the time of the adjustment.
A conventional loan is one with an amount at or less than the conforming loan limit set by federal regulators on Fannie Mae and Freddie Mac, the two major suppliers of funds for home loans. These two quasi-government outfits replenish the coffers of main street lenders by buying their loans and packing them into securities for sale to investors worldwide.
Other key agencies you should be familiar with are the FHA and the VA. The Federal Housing Administration (FHA) insures mortgages up to an amount which changes annually, as does the conforming loan ceiling. The Veterans Administration (VA) guarantees loans made to veterans and active duty servicemen and women.
LTV stands for loan-to-value. This important ratio measures what your are borrowing against the value of the home. Some lenders want as much as 20% down, meaning the LTV would be 80%. But in many cases, the LTV can be as great as 97%.
Private mortgage insurance (PMI), is a fee you’ll have to pay if you make less than a 20% down payment. PMI covers the lender should you default, but you have to pay the freight. Fortunately, you can cancel coverage once your LTV dips below 80%.
Your monthly payment likely will include more than just principal and interest. Many lenders also want borrowers to include one-twelfth of their property tax and insurance bills every month, as well. That way, lenders will have enough money on hand to pay these annual bills when they come due. Thus, the acronym PITI (principle, interest, taxes, and insurance).
Real-estate owned (REO) properties are foreclosed upon by lenders when borrowers fail to make their payments. When you buy a foreclosure, you buy REO. Short sales are not REO because, while they are in danger of being repossessed, they are still owned by the borrower.
Acronyms You’ll Hear During an Appraisal
There is no acronym for an appraisal, which is an opinion of value prepared by a certified or licensed appraiser (though sometimes other types of valuation methods are used in the buying and selling process).
A Certified Market Analysis (CMA) is prepared by a real estate agent or broker to help determine a home’s listing price. A Broker Price Opinion (BPO) is a more advanced estimate of the probable future selling price of a property, and an automated valuation model (AVM) is a software program that provides valuations based on mathematical modeling.
AVMs are currently used by some lenders and investors to confirm an appraiser’s valuation, but they are becoming increasingly popular as replacements of appraisals, especially in lower price ranges.
Other Terms to Know
If you hear the term MLS, you should know it stands for multiple listing service. An MLS is a database that allows real estate brokers to share data on properties for sale, making the buying and selling process more efficient. There are many benefits to both homebuyers and sellers utilizing an MLS, for more information on how to get your home available through an MLS, work with a real estate professional when selling.
Read: What Buyers and Sellers Need to Know About Multiple Listing Services
Did you know? Homes.com has some serious MLS partnerships, no joke! When you start your home search on Homes.com, you’ll see accurate property information quickly so you’ll never have to wonder if a home is actually available.
However, not all properties for sale are listed on the MLS. A home may be a for-sale-by-owner (FSBO), if the owner is selling his or her property without an agent and bypassing an MLS listing. In addition, some agents fail to enter their listings in the MLS for days or weeks at a time in hopes of selling to a list of preferred clients.
Read: Advantages of Buying With or Without an Agent
Finally, you may find yourself buying into a homeowners association (HOA) when you purchase a house or condominium apartment. HOAs are legal governing bodies that establish requirements everyone must adhere to in order to keep the community it oversees running smoothly and ensure property values are maintained.
See more posts by this author
Syndicated newspaper columnist, Lew Sichelman has been covering the housing market and all it entails for more than 50 years. He is an award-winning journalist who worked at two major Washington, D.C. newspapers and is a past president of the National Association of Real Estate Editors.
A Guide to Subsidized and Unsubsidized Loans – SmartAsset
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As you explore funding options for higher education, you’ll come across many different ways to pay for school. You can try your hand at scholarships and grants, but you may also need to secure federal student loans. Depending on your financial situation, you may qualify for a subsidized loan or an unsubsidized loan. Here’s the breakdown of subsidized and unsubsidized loans, along with how to get each of them.
Subsidized vs. Unsubsidized Loans
In name, there’s only a two-letter difference. But in operation, subsidized and unsubsidized loans – sometimes referred to as Stafford loans – aren’t quite the same.
A subsidized loan is available to undergraduate students who prove financial need and are enrolled in school at least part-time. After students or parents of the students fill out the Free Application for Financial Student Aid (FAFSA), the school will determine how much money can be borrowed. Unfortunately, you can’t borrow more than you need.
One major difference of a subsidized loan vs. an unsubsidized loan is that the U.S. Department of Education pays the interest on a subsidized loan while the student is in school, for the first six months after graduating and during a deferment period (if the student chooses to defer the loan). For example, if your subsidized loan is $5,000 at the start of your college education, it’ll still be $5,000 when you begin paying it off after graduation because the government paid the interest on it while you were in school. The same may not be true for an unsubsidized loan.
An unsubsidized loan is available to both undergraduate and graduate students, and isn’t based on financial need. This means anyone who applies for one can get it. Like subsidized loans, students or their parents are required to fill out the FAFSA in order to determine how much can be borrowed. However, unlike subsidized loans, the size of the unsubsidized loan isn’t strictly based on financial need, so more money can be borrowed.
For an unsubsidized loan, students are responsible for paying the interest while in school, regardless of enrollment, as well as during deferment or forbearance periods. If you choose not to pay your interest during these times, the interest will continue to accrue, which means that your monthly payments could be more costly when you’re ready to pay them.
Both types of loans have interest rates that are set by the government and both come with a fee. Each one offers some of the easiest repayment options compared to private student loans, too. Students are eligible to borrow these loans for 150% of the length of the educational program they’re enrolled in. For example, if you attend a four-year university, you can borrow these loans for up to six years.
Pros and Cons
Both types of loans have pros and cons. Depending on your financial situation and education, one may be a better fit than the other. Even if you qualify for a subsidized loan, it’s important to understand what that means for your situation before borrowing that money.
Pros of Subsidized Loans
The student is not required to pay interest on the loan until after the six-month grace period after graduation.
The loan may be great for students who can’t afford the tuition and don’t have enough money from grants or scholarships to afford college costs.
Cons of Subsidized Loans
Students are limited in how much they can borrow. In the first year, you’re only allowed to borrow $3,500 in subsidized loans. After that, you can only borrow $4,500 the second year and $5,500 for years three and four. The total aggregate loan amount is limited to $23,000. This might cause you to take out additional loans to cover other costs.
Subsidized loans are only available for undergraduate students. Graduate students – even those who show financial need – don’t qualify.
If you don’t qualify for a subsidized loan, you may still be eligible for an unsubsidized loan.
Pros of Unsubsidized Loans
They are available to both undergraduate and graduate students who need to borrow money for school.
The amount you can borrow isn’t based on financial need.
Students are able to borrow more money than subsidized loans. The total aggregate loan amount is limited to $31,000 for undergraduate students considered dependents and whose parents don’t qualify for direct PLUS loans. Undergraduate independent students may be allowed to borrow up to $57,500, while graduate students may be allowed to borrow up to $138,500.
Cons of Unsubsidized Loans
Interest adds up — and you could be on the hook for it — while you’re in school. Once you start paying back the unsubsidized loan, payments may be more expensive than those for a subsidized loan because of the accrued interest.
How to Secure Subsidized and Unsubsidized Loans
If you’re looking to get loans to pay for a college education, direct subsidized or unsubsidized loans might be your best option.
To apply for a subsidized or unsubsidized loan, you’ll need to complete the FAFSA. The form will ask you for important financial information based on your family’s income. From there, your college or university will use your FAFSA to determine the amount of student aid for which you’re eligible. Be mindful of the FAFSA deadline, as well additional deadlines set by your state for applying for state and institutional financial aid.
After the amount is decided, you’ll receive a financial aid package that details your expected family contribution and how much financial help you’ll get from the government. Your letter will include the amount of money you’ll receive in grants, as well as all types of loans you could secure. If you’re ready to accept the federal aid offered, you’ll need to submit a Mastery Promissory Note (MPN). This is a legal document that states your promise to pay back your loans in full, including any fees and accrued interest, to the U.S. Department of Education.
The Bottom Line
Both subsidized and unsubsidized loans may be good financial resources for upcoming college students who need help paying for school. Both loans tend to have lower interest rates than private student loans, as well as easier repayment terms.
Keep in mind that these are still loans and they will need to be paid back. If you avoid paying your student loans, you could end up in default or with a delinquent status, and your credit score could be damaged. Once you’re done with your college or graduate school education, stay responsible with your student loan repayment and you’ll be on the path to a successful financial future.
Tips for Managing Student Loan Debt
If you’re struggling to manage student loan debt, consider working with a financial advisor. Finding the right financial advisor that fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
Paying off student loans can be overwhelming. One way to make it easier is by refinancing them into one lower monthly payment, if you can. Check out the different student loan refinance rates that are available to you now.
Dori Zinn Dori Zinn has been covering personal finance for nearly a decade. Her writing has appeared in Wirecutter, Quartz, Bankrate, Credit Karma, Huffington Post and other publications. She previously worked as a staff writer at Student Loan Hero. Zinn is a past president of the Florida chapter of the Society of Professional Journalists and won the national organization’s “Chapter of the Year” award two years in a row while she was head of the chapter. She graduated with a bachelor’s degree from Florida Atlantic University and currently lives in South Florida.
What do mortgage lenders look for on bank statements?
When you apply for a mortgage, lenders look at your bank statements to verify that you can afford the down payment, closing costs, and future loan payments.
You’re much more likely to get approved if your bank statements are clear of anything questionable.
Red-flag issues for mortgage underwriters include:
Bounced checks or NSFs (Non-Sufficient Funds charges)
Large deposits without a clearly documented source
Monthly payments to an individual or non-disclosed credit account
Fortunately, you can fix a lot of issues before they become, well, issues. Here’s what to look for, and how to deal with problems you find.
Verify your home buying eligibility (Feb 9th, 2021)
In this article (Skip to…)
How far back do lenders look at bank statements?
Lenders typically look at 2
months of recent bank statements along with your mortgage
You need to provide bank
statements for any accounts holding funds you’ll use to qualify for the loan.
Lenders use these bank statements
to verify your savings and cash flow, check for unusual activity in your
accounts, and make sure you haven’t taken on any recent debts.
Two months worth of bank
statements is the norm because any credit accounts older than
that should have shown up on your credit report.
One uncommon exception is for self-employed borrowers who hope to qualify based on bank statements instead of tax returns. In this case, you will need to provide the past 12-24 months of bank statements.
What underwriters look for on your bank statements
The underwriter — the person who evaluates and approves mortgages — will look for four key things on your bank statements:
Enough cash saved up for the down payment and closing costs
The source of your down payment, which must be acceptable under the lender’s guidelines
Enough cash flow or savings to make monthly mortgage payments
“Reserves,” which are extra funds available in case of an emergency
An underwriter generally
wants to see that the funds in your bank accounts are yours, and not borrowed
from someone else (unless via a properly-documented down payment gift).
In other words, any funds used to
qualify for the mortgage need to be “sourced and seasoned.”
“Sourced” means it’s clear where
the money came from, and any unusual deposits are explained in writing. And
“seasoned” typically means the money has been in your account for at least 60
days. (So the funds should show up on the two months’ bank statements you’re
required to provide.)
Bank statements also prove to
underwriters that you haven’t opened up any credit accounts or created new debt
prior to getting the mortgage.
Do lenders look at bank statements before closing?
Lenders typically will not re-check
your bank statements right before closing. They’re only required when you
initially apply and go through underwriting.
However, there are a few things your
lender will re-check before closing, including:
Employment and income
You should avoid financing any large
purchases or opening new credit lines (like a credit card) between mortgage
approval and closing.
New debts can affect your credit score as well as your debt-to-income ratio (DTI), and could seriously affect your loan approval and interest rate.
In addition, if anything changes
with your income or employment prior to closing, let your lender know
immediately so it can decide whether this will impact your loan approval and
help you understand how to proceed.
Verify your home buying eligibility (Feb 9th, 2021)
3 things mortgage lenders don’t want to see on bank statements
You might want to take a look at your bank statements with a mortgage underwriter’s eye before turning them into the lender.
That’s because the lender looks for red flags that, if found, can require lengthy explanations.
Mortgage underwriters are trained to unearth unacceptable sources of funds, undisclosed debts, and financial mismanagement when examining your bank statements.
Here are three things you can look for on your bank statements that might turn up a red flag for a mortgage company.
1. Bounced checks
If your checking account is littered with multiple overdrafts or NSFs (non-sufficient funds) charges, underwriters are likely to conclude that you’re not great at managing your finances.
Mortgage rule-making agency Freddie Mac says that additional scrutiny is required when bank statements include NSF fees.
FHA loans require lenders to manually re-approve borrowers with NSFs, even if the borrower has already been approved by a computerized system.
2. Large, undocumented deposits
Outsize or irregular bank deposits might indicate that your down payment, required reserves, or closing costs are coming from an unacceptable source.
The funds might be borrowed. For instance, you could take a cash advance on your credit card, which might not show up on your credit report.
A large deposit could also indicate an “illegal” gift. A home buyer can’t take help from a party who stands to gain from the transaction — like the home seller or real estate agent.
So, what’s considered a “large” bank deposit by mortgage lenders?
Fannie Mae’s Selling Guide says, “When bank statements (typically covering the most recent two months) are used, the lender must evaluate large deposits, which are defined as a single deposit that exceeds 50 percent of the total monthly qualifying income for the loan.”
Likewise, Freddie Mac lists “recent large deposits without acceptable explanation” as red flags about which lenders should follow up with the applicant
If you can’t prove through documentation that the source of a big deposit is acceptable under the program guidelines, the lender must disregard the funds and use whatever is left to qualify you for the loan.
If the verified funds aren’t enough to qualify you for a loan, you’ll need to save another chunk of cash — from an acceptable source.
That said, borrowing a down payment is allowed. You just have to disclose where the down payment money came from. This must be considered an “acceptable” source, like:
If you did receive a large deposit recently — and it wasn’t from one of these sources — you may want to wait 60 days before applying for a mortgage.
At that point, the funds become “seasoned,” meaning they are now your funds, despite the source.
It’s still not a good idea to take funds from a party with interest in the transaction. That breaks a myriad of other rules.
But if your family member paid you back for a recent vacation, or you sold a car to your aunt and didn’t document it, waiting 60 days could be a solution.
3. Regular payments, irregular activities
Watch out for a monthly payment that does not correspond to a credit account disclosed on your application.
Typically, your credit report will pull in your credit cards, auto loans, student loans, and other debt accounts. But some creditors don’t report to the major credit bureaus.
For instance, if you got a private, personal, or business loan from an individual instead of a bank, those debt details may not show up on your credit report.
The monthly $300 automatic payment on your bank statement, however, is likely to alert the lender of a non-disclosed credit account.
Verify your home buying eligibility (Feb 9th, 2021)
A bank “VOD” (verification of deposit) won’t solve all bank statement issues
Verifications of Deposit, or VODs, are forms that lenders can use in lieu of bank statements. You sign an authorization allowing your banking institution to hand-complete the form, which indicates the account owner and its current balance.
VODs have been used to “get around” bank statement rules for years. But don’t count on them to solve the above-mentioned issues.
First, the lender can request an actual bank statement and disregard the VOD, if it suspects potential issues.
Second, depositories are also required to list the account’s average balance. That’s likely to expose recent large deposits.
For instance, if the current balance is $10,000 and the two-month average balance is $2,000, there was probably a very recent and substantial deposit.
In addition, there’s a field in which the bank is asked to “include any additional information which may be of assistance in determination of creditworthiness.”
That’s where your NSFs might be listed.
There are good reasons to double-check your bank statements and your application before sending them to your lender. The bottom line is that you don’t just want to be honest — you want to avoid appearing dishonest.
Your lender won’t turn a blind eye to anything it finds suspicious.
FAQ on mortgage bank statements
Why do mortgage lenders need bank statements?
Mortgage lenders need bank statements to make sure you can afford the down payment and closing costs, as well as your monthly mortgage payment. Lenders use your bank statements to verify the amount you have saved and the source of that money. They want to see that it’s really your cash — or at least, cash from an acceptable source — and not a discreet loan or gift that makes your financial situation look better than it really is.
How many bank statements do I need for a mortgage?
Mortgage lenders typically want to see the past two months’ worth of bank statements.
Do I have to disclose all bank accounts to a mortgage lender?
If a bank account has funds in it that you’ll use to help you qualify for a mortgage, then you have to disclose it to your mortgage lender. That includes any account with savings or regular cash flow which will help you cover your monthly mortgage payments.
What do underwriters look for on bank statements?
When underwriters look at your bank statements, they want to see that you have enough money to cover your down payment and closing costs. Some loan types require a few months’ worth of mortgage payments left over in the account for emergency “reserves.” In other words, the upfront costs can’t drain your account.
Underwriters also want to see that all the funds in your accounts have been “sourced and seasoned.” That means the source of each deposit is acceptable and verified, and the funds have been in the account long enough to show they weren’t a last-minute loan or questionable deposit.
Do mortgage lenders look at savings?
Yes, a mortgage lender will look at any depository accounts on your bank statements — including checking and savings — as well as any open lines of credit.
Why would an underwriter deny a loan?
There are plenty of reasons underwriters might deny a loan. The two most common are insufficient credit and a high debt-to-income ratio. As far as bank statements are concerned, an underwriter might deny a loan if the sources of funds can’t be verified or aren’t “acceptable.” This could leave the borrower with too little verifiable cash to qualify.
How long does it take an underwriter to make a decision?
Underwriting times vary by lender. The time it takes an underwriter to approve your mortgage could be as little as two or three days, or as much as a week. Big banks tend to move more slowly than non-bank mortgage lenders.
Do you qualify for a mortgage loan?
Bank statements are just one of many
factors lenders look at when you apply for a mortgage.
Almost all areas of your personal
finances will be under scrutiny; including your credit score and report, your
existing debts, and any source of income you’ll use to qualify for the
These factors help determine how
large of a loan you qualify for, as well as your interest rate. The cleaner
your finances look across the board, the better deal you’re likely to get on
your new home loan or refinance.
If buying a home is your next financial goal, then you may have heard about mortgage insurance. Mortgage insurance is probably not what you expect it to be. We will cover what you need to know about mortgage insurance before you buy your future home.
What is mortgage insurance?
Mortgage insurance is a way for lenders to protect themselves from high-risk borrowers. The mortgage payments allow lenders to compensate for any losses due to defaulting on a mortgage loan.
When you think of insurance of any kind, you typically think that the insurance would help you in times of need. Instead, this helps mortgage lenders to limit the risk from borrowers, which allows for more lending to happen.
The mortgage insurance payments protect the mortgage lender. It does not protect you in any way if you fall behind on your monthly payments.
Mortgage insurance makes the home buying process more expensive for the borrower. However, it will make it possible for some to buy a home at all. If your down payment is less than 20%, then receiving a loan with mortgage insurance attached may be the best (and only) way to secure a home loan.
How Mortgage Insurance Works
As the borrower, you would need to pay extra money to the lender as a form of insurance. The method of payment can vary by lender.
You may need to pay an upfront fee or a monthly insurance payment that is added to your mortgage payment. Some lenders may even require both an upfront fee and an additional monthly payment.
The payment amount will vary widely based on your own credit, loan amount, and ability to pay the mortgage. Typically, low-risk borrowers will be entitled to lower mortgage insurance costs. High-risk borrowers should expect to pay a higher mortgage insurance premium.
The borrow is basically paying for the privilege of borrowing the money even though the borrower has a high associated risk.
Why would I get mortgage insurance?
Borrowers are required to pay mortgage insurance if they make a down payment of less than 20% of the home purchase price. Many federal programs like the FHA and USDA loans also require mortgage insurance as a part of the loan conditions.
If you are purchasing a home through a loan, your lender may require that you purchase mortgage insurance. You may have no choice in the matter if your lender dictates that you must purchase mortgage insurance to receive the loan.
It is generally not helpful for your financial situation to sign up for mortgage insurance. If you have the option to skip mortgage insurance, then that may be a good choice, depending on your situation. Otherwise, you will be paying for your lender to be protected, but you will not gain anything in the process.
What are the common types loans that require mortgage insurance?
There are many different kinds of home loans. Each type of loan has a slightly different type of mortgage insurance associated with it for some high-risk borrowers. We will cover the most common kinds below.
Conventional loans are typically offered through private companies. Depending on your down payment amount and your credit score, the private lender may require private mortgage insurance (PMI) as a condition of the conventional loan.
The amount of private mortgage insurance will also vary based on the down payment, loan amount, and your credit history. Higher credit scores and down payments will generally lead to lower required mortgage insurance premiums.
With private mortgage insurance, the premiums are usually paid out monthly with no initial upfront fee. You may also have the ability to cancel your private mortgage insurance in certain situations.
Department of Veterans’ Affairs Loans
If you are a service member or a veteran, you have likely heard of the VA loan. The idea is to help these honorable men and women purchase homes.
The VA will back your loan, so there are no monthly mortgage insurance fees required. However, you may need to pay an upfront funding fee that will act as mortgage insurance. The initial funding fee will vary based on your military history, down payment, credit score, and several other factors.
Although the upfront funding fee is not termed as mortgage insurance, the idea is the same.
US Department of Agriculture Loans
USDA loans offer great mortgage rates meant to help low to moderate-income home buyers in rural areas. The hope is that these loans will help to infuse life back into rural areas.
The loans offer zero down payments to home buyers, but mortgage insurance is required. A USDA loan requires that you pay an upfront premium as well as monthly premiums.
Federal Housing Administration Loans
FHA loans are insured by the Federal Housing Administration but are completed through private lending companies.
FHA loans offer another low down payment option for people with lower credit scores. However, there is an enforced maximum loan limit that varies by county.
Every loan insured by the FHA requires mortgage insurance. You pay the annual mortgage insurance premium (MIP) monthly for the life of the FHA loan. The upfront and monthly mortgage insurance premium amounts vary by loan, but you can expect to pay it with FHA loans.
See also: FHA Loan Requirements for 2021
Can I avoid paying for mortgage insurance?
The easiest way to avoid mortgage insurance is by making a down payment of 20% or more. Of course, this is not feasible for every situation. Depending on your current financial picture, you may need to pay for mortgage insurance in order to purchase a home.
Alternatively, you can request to have your PMI canceled once the equity in your home reaches 20% of the purchase price or appraised value.
Mortgage insurance is a required expense for many home buyers. If you are unable to make a 20% down payment on your home purchase, you will likely be required to pay for mortgage insurance.