Dec
16
2024
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What Is IRS Form 1098?

By | money, Terminology | Comments Off on What Is IRS Form 1098?

A Form 1098 is a tax document that reports amounts that may affect a tax filer’s adjustments to income or deductions from their income on their annual tax return. There are several variations of the form — some are used to report amounts paid and some are used to report charitable contributions made. Any of the forms a person may receive are important documents to refer to when completing annual income tax returns.

Key Points

•   IRS Form 1098 is used to report payments like mortgage interest, tuition, and charitable donations that may affect tax adjustments or deductions.

•   Form 1098 Mortgage Interest Statement is essential for homeowners claiming mortgage interest deductions.

•   Forms 1098-T and 1098-E are important for those who have paid college tuition or interest on student loan debt.

•   Other Form 1098 variations include Form 1098-C (for charitable vehicle donations), Form 1098-F (for fines), and Form 1098-MA (for mortgage assistance).

•   To claim some of these deductions, you need to itemize deductions on your tax return.

Reasons for Getting a Form 1098

There are several variations of Form 1098. The standard form, Mortgage Interest Statement, is probably the one most people are familiar with. It reflects mortgage interest a borrower paid in a calendar year. If a borrower paid $600 or more in interest on a mortgage debt in a calendar year, they should receive a Form 1098 to use when completing their annual tax return. The form includes the amount of mortgage interest paid and any refund of overpaid interest, the outstanding mortgage balance, mortgage insurance premiums paid, and other amounts related to the mortgage loan.

1098-T vs 1098-E

For those who have paid tuition to a college or university or who have paid interest on student loan debt, the Forms 1098-T and 1098-E may be familiar.

•   Form 1098-T, Tuition Statement, includes amounts of payments received by the school for qualified tuition and related expenses. It also includes amounts of scholarships and grants a student may have received, adjustments to those scholarships and grants, and other information.

•   Form 1098-E is a Student Loan Interest Statement. Lenders who receive interest payments of $600 or more from a student loan borrower in a calendar year must provide this form to the borrower. The form includes the amount of student loan interest paid by the borrower, the account number assigned by the lender, and other information.

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Other Variations of Form 1098

•   Form 1098-C is connected with a very specific form of charitable giving. It shows any donation a tax filer made to a qualifying charity or non-profit of a car, truck, van, bus, boat, or airplane worth more than $500 and that meets other requirements.

•   Form 1098-F shows any court-ordered fines, penalties, restitution or remediation a person has paid.

•   Form 1098-MA reflects mortgage assistance payments made by a State Housing Finance Agency (HFA) and mortgage payments made by the mortgage borrower, the homeowner.

•   Form 1098-Q is connected with a specific form of retirement-savings vehicle, called a Qualifying Longevity Annuity Contract. This form is a statement showing the money the annuity holder received from such a contract over the course of a calendar year.

Using Form 1098 at Tax Time

For homeowners who are still paying mortgage payments, Form 1098-Mortgage Interest Statement is an important part of completing a tax return. A tax filer’s deductions depend on a number of specific factors, but there are some general rules to keep in mind when looking at Form 1098.

•   It is necessary to itemize deductions on a tax return to claim the mortgage interest deduction.

•   Deductions are limited to interest charged on the first $1 million of mortgage debt for homes bought before December 16, 2017, and $750,000 for homes bought after that date.

•   To take the mortgage interest deduction, the property that secures the debt must be a main or second home.

•   Separate forms will be provided for each qualifying mortgage.

The potential deduction of interest paid on student loans, shown on Form 1098-E, follows different rules. Notably, this deduction is an adjustment to a tax filer’s income, so it’s not necessary to itemize deductions.

•   The student loan interest deduction is limited to $2,500 or the amount actually paid, whichever is less.

•   The deduction is gradually phased out or reduced if the taxpayer’s modified adjusted gross income (MAGI) is between $80,000 and $95,000 ($165,000 and $195,000 if married filing jointly) for 2024, and $85,000 and $100,000 ($170,000 and $200,000 if married filing jointly) for 2025.

Form 1098-T provides information that will be useful for tax filers who qualify for education credits provided by the American Opportunity Credit or the Lifetime Learning Credit.

•   The American Opportunity Credit may be claimed by certain tax filers who paid qualified higher education expenses. To claim the credit, certain qualifications must be met, including income level, dependency status, the type of program the student is enrolled in, the enrollment status of the student, among others. The maximum credit is $2,500 per eligible student and may be claimed for only four tax years per eligible student.

•   The Lifetime Learning Credit may be claimed by certain tax filers who paid qualified education expenses, but has some differences from the American Opportunity Credit. The annual limit is $2,000 per tax return (not per student). It’s not limited to college-related expenses — courses to acquire or improve job skills are also eligible. There is no limit on the number of years this credit can be claimed, and there is no minimum number of hours a student must be enrolled.

Both the American Opportunity Credit and the Lifetime Learning Credit have income phase-out levels. Like the student loan interest deduction provided by Form 1098-E, both of these credits are adjustments to income and don’t require a tax filer to itemize deductions.

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The Takeaway

Any of the variations of Form 1098 contain important information for filing your taxes. They all include financial information that has the potential to affect the amount of money a tax filer may be able to deduct. For specific information about a tax situation, it’s recommended to talk to a tax professional. The information in this article is only intended to be an overview, not tax advice.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Dec
16
2024

What is Fee Simple in Real Estate?

By | Growing Wealth, Home Ownership, mortgage | Comments Off on What is Fee Simple in Real Estate?

When buying or selling a property, you may come across the term “fee simple.” What does fee simple mean, and why is it important in real estate? Fee simple is the highest form of property ownership, and it’s the most common type of homeownership in the U.S. Here’s a closer look at the meaning of fee simple and how it works in practice.

Key Points

•   Fee simple is the highest form of property ownership, granting full control and rights to use, sell, or lease the property indefinitely.

•   It includes two types: fee simple absolute (unrestricted) and fee simple defeasible (conditional).

•   Owners must be aware of encumbrances like deed restrictions, easements, encroachments, and liens that can affect property use.

•   Fee simple ownership often results in higher property values and easier financing due to fewer restrictions.

•   Fee simple ownership is the most common type of property ownership, impacting property value, financing, and marketability.

Definition of Fee Simple

Fee simple, also known as fee simple ownership, provides full control and rights to a property. This includes the right to use, sell, or lease the property as the owner sees fit. Another important aspect of fee simple definition: Ownership is indefinite, meaning that it can be passed on to heirs or beneficiaries for any amount of time.

Fee simple ownership dates back to the feudal system in medieval England. While this system originally required services on behalf of both the tenant and landlord, it gave rise to our modern system of private property rights.

Fee simple meaning can vary based on the type of fee simple ownership, which we’ll elaborate on below.

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Types of Fee Simple Ownership

There are two types of fee simple ownership that you’ll want to acquaint yourself with before you make a home purchase, whether you’re buying a foreclosed home or getting a home mortgage loan for a vacation property: fee simple absolute and fee simple defeasible.

Understanding both types of fee simple ownership can help buyers uncover any conditions on a property before making an offer on a home. Here is an overview of the different types of fee simple ownership:

•  Fee simple absolute: This form of fee simple ownership gives unrestricted rights to a property title in perpetuity. The property can be used, leased, sold, or transferred without any limitations other than liens, local zoning, or failure to pay property taxes. This type of fee simple ownership is the most common.

•  Fee simple defeasible: This type of ownership comes with certain restrictions and conditions. As with fee simple absolute, owners can keep their property in perpetuity. But if conditions are violated, even after closing, the property could legally be transferred back to the seller or a designated third party. For example, fee simple defeasible could require that property remains as agricultural land. As you might imagine, if you are selling a property, this could affect how much a house is worth.

Rights and Responsibilities of Fee Simple Owners

Fee simple owners have considerable rights in how they use their property within the limits of zoning. Owners also have the right to lease, sell, improve, bequeath, or mortgage the property.

There are also responsibilities to be mindful of as a property owner. If you own a condo or apartment, for example, you typically have fee simple ownership of the individual unit. However, the owners may also be responsible for the upkeep of shared common areas, which often have restrictions on their use.

Fee Simple vs. Other Forms of Property Ownership

Fee simple is one of several forms of property ownership. Here are some other types of property ownership to keep in mind.

•  Leasehold ownership: Whereas fee simple grants indefinite ownership, leasehold ownership is subject to the duration and terms set in a lease agreement. In a leasehold arrangement, landlords can set conditions on how a tenant uses the property, such as restricting pets in an apartment. When the lease ends, the lessee’s rights to use the property end.

•  Life estate: This is a type of joint ownership that transfers a property to another person after the owner’s death. This allows an heir, or grantor, to receive the property without going through probate. The owner retains their full rights to use the property, but selling the property or mortgage refinancing would require the grantee’s approval.

Importance of Fee Simple in Real Estate Transactions

Buying a home or property is a major investment. It’s important to understand how fee simple impacts property value, financing, and the marketability to prospective homebuyers.

Generally speaking, fee simple ownership comes with higher property values than other forms of ownership, since there are fewer restrictions on how it’s used. Because owners have full control of the property, it also makes the homebuying process and commercial real estate transactions less complex. This reduced risk can help buyers secure financing and enhance a property’s appeal when it’s time to sell.

Limitations on Fee Simple Ownership

There are limitations to any type of property ownership, including fee simple. Fee simple ownership is subject to encumbrances — legal claims against a property from a party other than the owner. In other words, encumbrances impact an owner’s ability to use and transfer the property.

The main types of encumbrances to be aware of include: deed restrictions, easements, encroachments, and liens.

•  Deed Restrictions: These are rules and restrictions on how a property can be used by the owner. They’re often used by homeowner’s associations (HOA) to limit how a property can be improved and used.

•  Easements: This type of encumbrance grants land use rights or property access to a third party. For example, an easement can grant a neighbor access to a shared driveway.

•  Encroachments: This occurs when a neighbor violates an owner’s property rights by putting up a structure that limits the full use of the property. A common example is building a fence that crosses a property line.

•  Liens: This gives another party the right to seize a property for nonpayment of a debt. Examples include HOA fees, home mortgage loans, and property taxes.

Another potential limitation to note is eminent domain, which allows governments to claim private property if it’s considered necessary for public use. In the rare case of eminent domain, owners are compensated for the value of their property.

How to Obtain Fee Simple Ownership

To reiterate, fee simple ownership is the most common type of property ownership. Checking the deed is the most reliable way to confirm whether a property is fee simple or another type of ownership. Once you’ve ticked this off your to-do list you can get on to other things, like ordering up a home inspection and preparing your moving checklist.

Recommended: Mortgage Interest Deduction

Fee Simple in Commercial Real Estate

Fee simple ownership applies to both residential and commercial real estate. Since fee simple is the highest form of ownership with the least restrictions, it can make obtaining financing easier for commercial properties. With fee simple ownership, keep in mind that local zoning dictates what commercial activities can take place at a specific property.

The Takeaway

It’s important to take note of any encumbrances that could impact how a property is used before getting to the closing table. If you’re in the market for a new home or investment property, keep in mind that fee simple ownership is the most common type of property ownership in the U.S. and fee simple ownership — specifically fee simple absolute ownership — grants the greatest level of control and rights over a property.

Unless you’re a realtor or building out a portfolio of properties, fee simple and other real estate terms may go beyond your needs. But understanding your rights with different types of homeownership can help inform your property search.

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FAQ

Is fee simple a good thing?

Yes, fee simple absolute (one of two types of fee simple property) gives unrestricted rights to a property title in perpetuity. The property can be used, leased, sold, or transferred without any limitations other than those imposed by liens, local zoning rules, and unpaid property taxes.

What are the restrictions on a fee simple property?

The only restrictions on a fee simple absolute property are those posed by local zoning rules — and of course any restrictions posed as a result of unpaid property taxes or mortgage debt, for example. Fee simple defeasible property has more restrictions. Specifically, the property could legally be transferred back to the seller or a designated third party if a pre-established rule of ownership isn’t followed. For example, a rule might specify that property be used for agricultural purposes.

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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.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

This article is not intended to be legal advice. Please consult an attorney for advice.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

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Dec
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2024
What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401k?

What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401(k)?

By | invest, Investing, Preparing for Retirement | Comments Off on What Is a Money Purchase Pension Plan (MPPP)? How Is It Different From a 401(k)?

A money purchase pension plan or MPPP is an employer-sponsored retirement plan that requires employers to contribute money on behalf of employees each year. The plan itself defines the amount the employer must contribute. Employees may also have the option to make contributions from their pay.

Money purchase pension plans have some similarities to more commonly used retirement plans such as 401(k)s, pension plans, and corporate profit sharing plans. If you have access to a MPPP plan at work, it’s important to understand how it works and where it might fit into your overall retirement strategy.

What Is a Money Purchase Pension Plan?

Money purchase pension plans are a type of defined contribution plan. That means they don’t guarantee a set benefit amount at retirement. Instead, these retirement plans allow employers and/or employees to contribute money up to annual contribution limits.

Like other retirement accounts, participants can make withdrawals when they reach their retirement age. In the meantime, the account value can increase or decrease based on investment gains or losses.

Money purchase pension plans require the employer to make predetermined fixed contributions to the plan on behalf of all eligible employees. The company must make these contributions on an annual basis as long as the plan is maintained.

Contributions to a money purchase plan grow on a tax-deferred basis. Employees do not have to make contributions to the plan, but they may be allowed to do so, depending on the plan. The IRS does allow for loans from money purchase plans but it does not permit in-service withdrawals.


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What Are the Money Purchase Pension Plan Contribution Limits?

Each money purchase plan determines what its own contribution limits are, though the amount can’t exceed maximum limits set by the IRS. For example, an employer’s plan may specify that they must contribute 5% or 10% of each employee’s pay into that employee’s MPPP plan account.

Annual money purchase plan contribution limits are similar to SEP IRA contribution limits. For 2023, the maximum contribution allowed is the lesser of:

•   25% of the employee’s compensation, OR

•   $66,000

The IRS routinely adjusts the contribution limits for money purchase pension plans and other qualified retirement accounts based on inflation. The amount of money an employee will have in their money purchase plan upon retirement depends on the amount that their employer contributed on their behalf, the amount the employee contributed, and how their investments performed during their working years. Your account balance may be one factor in determining when you can retire.

Rules for money purchase plan distributions are the same as other qualified plans, in that you can begin withdrawing money penalty-free starting at age 59 ½. If you take out money before that, you may owe an early withdrawal penalty.

Like a pension plan, money purchase pension plans must offer the option to receive distributions as a lifetime annuity. Money purchase plans can also offer other distribution options, including a lump sum. Participants do not pay taxes on their accounts until they begin making withdrawals.

The Pros and Cons of Money Purchase Pension Plans

Money purchase pension plans have some benefits, but there are also some drawbacks that participants should keep in mind.

Pros of Money Purchase Plans

Here are some of the advantages for employees and employers who have a money purchase plan.

•   Tax benefits. For employers, contributions made on behalf of their workers are tax deductible. Contributions grow tax-free for employees, allowing them to put off taxes on investment growth until they begin withdrawing the money.

•   Loan access. Employees may be able to take loans against their account balances if the plan permits it.

•   Potential for large balances. Given the relatively high contribution limits, employees may be able to accumulate account balances higher than they would with a 401(k) retirement plan, depending on their pay and the percentage their employer contributes on their behalf.

•   Reliable income in retirement. When employees retire and begin drawing down their account, the regular monthly payments through a lifetime annuity can help with budgeting and planning.

Disadvantages of Money Purchase Pension Plan

Most of the disadvantages associated with money purchase pension plans impact employers rather than employees.

•   Expensive to maintain. The administrative and overhead costs of maintaining a money purchase plan can be higher than those associated with other types of defined contribution plans.

•   Heavy financial burden. Since contributions in a money purchase plan are required (unlike the optional employer contributions to a 401(k)), a company could run into issues in years when cash flow is lower.

•   Employees may not be able to contribute. Depending on the terms of a plan, employees may not be able to make contributions to the plan. However, if the employer offers both a money purchase plan and a 401(k), employees could still defer part of their salary for retirement.



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Money Purchase Pension Plan vs 401(k)

The main differences between a pension vs 401(k) have to do with their funding and the way the distributions work. In a money purchase plan, the employer provides the funding with optional employee contribution.

With a 401(k), employees fund accounts with elective salary deferrals and option employer contributions. For both types of plans, the employer may implement a vesting schedule that determines when the employee can keep all of the employer’s contributions if they leave the company. Employee contributions always vest immediately.

The total annual contribution limits (including both employer and employee contributions) for these defined contribution plans are the same, at $66,000 for 2023. But 401(k) plans allow for catch-up contributions made by employees aged 50 or older. For 2023, the total employee contribution limit is $22,500 with an extra catch-up contribution of $7,500.

Both plans may or may not allow for loans, and it’s possible to roll amounts held in a money purchase pension plan or a 401(k) over into a new qualified plan or an Individual Retirement Account (IRA) if you change jobs or retire.

Recommended: IRA vs 401(k)–What’s the Difference?

Employees may also be able to take hardship withdrawals from a 401(k) if they meet certain conditions, but the IRS does not allow hardship withdrawals from a money purchase pension plan.

Here’s a side-by-side comparison of a MPPP and a 401(k):

MPPP Plan

 401(k) Plan
Funded by Employer contributions, with employee contributions optional Employee salary deferrals, with employer matching contributions optional
Tax status Contributions are tax-deductible for employers, growth is tax-deferred for employees Contributions are tax-deductible for employers and employees, growth is tax-deferred for employees
Contribution limits (2023) Lesser of 25% of employee’s pay or $66,000 $22,500, with catch-up contributions of $7,500 for employees 50 or older
Catch-up contributions allowed No Yes, for employers 50 and older
Loans permitted Yes, if the plan allows Yes, if the plan allows
Hardship withdrawals No Yes, if the plan allows
Vesting Determined by the employer Determined by the employer

The Takeaway

Money purchase pension plans are a valuable tool for employees to reach their retirement goals. They’re similar to 401(k)s, but there are some important differences.

Whether you save for retirement in a money purchase pension plan, a 401(k), or another type of account the most important thing is to get started. The sooner you begin saving for retirement, the more time your money will have to grow through the power of compounding returns.

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FAQ

Here are answers to some additional questions you may have about money pension purchase plans.

What is a pension money purchase scheme?

A money purchase pension plan or money purchase plan is a defined contribution plan that allows employers to save money on behalf of their employees. These plans are similar to profit-sharing plans ,and companies may offer them alongside a 401(k) plan as part of an employee’s retirement benefits package.

Can I cash in my money purchase pension?

You can cash in a money purchase pension at retirement in place of receiving lifetime annuity payments. Otherwise, early withdrawals from a money purchase pension plan are typically not permitted, and if you do take money early, taxes and penalties may apply.

Is final salary pension for life?

A final salary pension is a defined benefit plan. Unlike a defined contribution plan, defined benefit plans pay out a set amount of money at retirement, typically based on your earnings and number of years of service. Final salary pensions can be paid as a lump sum or as a lifetime annuity, meaning you get paid for the remainder of your life.

About the author

Rebecca Lake

Rebecca Lake

Rebecca Lake has been a finance writer for nearly a decade, specializing in personal finance, investing, and small business. She is a contributor at Forbes Advisor, SmartAsset, Investopedia, The Balance, MyBankTracker, MoneyRates and CreditCards.com. Read full bio.

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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.

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What Is a Bridge Loan?

Bridge Loan: What It Is and How It Works

By | Home Ownership, mortgage, Terminology | No Comments

A short-term bridge loan allows homeowners to use the equity in their existing home to help pay for the home they’re ready to purchase.

But there are pros and cons to using this type of financing. A bridge loan can prove expensive.

Is a bridge loan easy to get? Not necessarily. You’ll need sufficient equity in your current home and stable finances.

Read on to learn how to bridge the gap between addresses with a bridge loan or alternatives.

Key Points

•   Bridge loans offer temporary financing for buying a new home before selling the current one.

•   Secured by the current home, these loans have higher interest rates and fees.

•   Approval requires sufficient equity and strong financials.

•   Alternatives include personal loans, HELOCs, and home equity loans, each with pros and cons.

•   Bridge loans can be risky if the current home doesn’t sell quickly, leading to multiple loan payments.

What Is a Bridge Loan?

A bridge loan, also known as a swing loan or gap financing, is a temporary loan that can help if you’re buying and selling a house at the same time.

Just like a mortgage, home equity loan, or home equity line of credit (HELOC), a bridge loan is secured by the borrower’s current home (meaning a lender could force the sale of the home if the borrower were to default).

Most bridge loans are set up to be repaid within a year.

How Does a Bridge Loan Work?

Typically lenders only issue bridge loans to borrowers who will be using the same financial institution to finance the mortgage on their new home.

Even if you prequalified for a new mortgage with that lender, you may not automatically get a bridge loan.

What are the criteria for a bridge loan? You can expect your financial institution to scrutinize several factors — including your credit history and debt-to-income ratio — to determine if you’re a good risk to carry that additional debt.

You’ll also have to have enough home equity (usually 20%, but some lenders might require at least 50%) in your current home to qualify for this type of interim financing.
Lenders typically issue bridge loans in one of these two ways:

•   One large loan. Borrowers get enough to pay off their current mortgage plus a down payment for the new home. When they sell their home, they can pay off the bridge loan.

•   Second mortgage. Borrowers obtain a second mortgage to make the down payment on the new home. They keep the first mortgage on their old home in place until they sell it and can pay off both loans.

It’s important to have an exit strategy. Buyers usually use the money from the sale of their current home to pay off the bridge loan. But if the old home doesn’t sell within the designated bridge loan term, they could end up having to make payments on multiple loans.

Bridge Loan Costs

A bridge loan may seem like a good option for people who need to buy and sell a house at the same time, but the convenience can be costly.

Because these are short-term loans, lenders tend to charge more upfront to make bridge lending worth their while. You can expect to pay:

•   1.5% to 3% of the loan amount in closing costs

•   An origination fee, which can be as much as 3% of the loan value

Interest rates for bridge loans are generally higher than conventional loan rates.

Repaying a Bridge Loan

Many bridge loans require interest-only monthly payments and a balloon payment at the end, when the full amount is due.

Others call for a lump-sum interest payment that is taken from the total loan amount at closing.

A fully amortized bridge loan requires monthly payments that include both principal and interest.

How Long Does It Take to Get Approved for a Bridge Loan?

Bridge loans from conventional lenders can be approved within a few days, and loans can often close within three weeks.

A bridge loan for investment property from a hard money lender can be approved and funded within a few days.

Examples of When to Use a Bridge Loan

Most homebuyers probably would prefer to quickly sell the home they’re in, pay off their current mortgage, and bank the down payment for their next purchase long before they reach their new home’s closing date. They could then go about getting a mortgage on their new home using the down payment they have stashed away.

Unfortunately, the buying and selling process doesn’t always go as planned, and it sometimes becomes necessary to obtain interim funding.

Common scenarios when homebuyers might consider a bridge loan include the following.

You’re Moving for a New Job, or Downsizing

You can’t always wait for your home to sell before you relocate for work. If the move has to go quickly, you might end up buying a new home before you tie up all the loose ends on the old home.

Or maybe you’ve fallen in love with a smaller home that just hit the market, decided that downsizing your home is the way to go, and you must act quickly.

Your Closing Dates Don’t Line Up as Hoped

Even if you’ve accepted and offer on your current home, the new-home closing might be weeks or even months away. To avoid losing the contract on the new home, you might decide to get interim funding.

You Need Money for a Down Payment

If you need the money you’ll get from selling your current home to make a down payment on your next home, a bridge loan may make that possible.

Bridge Loan Benefits and Disadvantages

As with any financial transaction, there are advantages and disadvantages to taking out a bridge loan. Here are some pros and cons borrowers might want to consider.

Benefits

The main benefit of a bridge loan is the ability to buy a new home without having to wait until you sell your current home. This added flexibility could be a game-changer if you’re in a time crunch.

Another bonus for buyers in a hurry: The application and closing process for a bridge loan is usually faster than for some other types of loans.

Disadvantages

Bridge loans aren’t always easy to get. The standards for qualifying tend to be high because the lender is taking on more risk.

Borrowers can expect to pay a higher interest rate, as well as several fees.

Borrowers who don’t have enough equity in their current home may not be eligible for a bridge loan.

If you buy a new home and then are unable to sell your old home, you could end up having to make payments on more than one loan.

Worst-case scenario, if you can’t make the payments, your lender might be able to foreclose on the home you used to secure the bridge loan.

Alternatives to Bridge Loans

If the downsides of taking out a bridge loan make you uneasy, there are options that might suit your needs.

Home Equity Line of Credit (HELOC)

Rather than the lump sum of a home equity loan, a home equity line of credit lets you borrow, as needed, up to an approved limit, from the equity you have in your house.

The monthly payments are based on how much you actually withdraw. The interest rate is usually variable.

You can expect to pay a lower rate on a HELOC than a bridge loan, but there still will be closing costs. And there may be a prepayment fee, which could cut into your profits if your home sells quickly. (Because your old home will serve as collateral, you’ll be expected to pay off your HELOC when you sell that home.)

Many lenders won’t open a HELOC for a home that is on the market, so it may require advance planning to use this strategy.

Home Equity Loan

A home equity loan is another way to tap your equity to cover the down payment on your future home.

Because home equity loans are typically long term (up to 20 years), the interest rates available, usually fixed, may be lower than they are for a bridge loan. And you’ll have a little more breathing room if it takes a while to sell the old home.

You can expect to pay some closing costs on a home equity loan, though, and there could be a prepayment penalty.

Keep in mind, too, that you’ll be using your home as collateral to get a home equity loan. And until you sell your original home, unless it’s owned free and clear, you’ll be carrying more than one loan.

401(k) Loan or Withdrawal

If you’re a first-time homebuyer and your employer plan allows it, you can use your 401(k) to help purchase a house. But most financial experts advise against withdrawing or borrowing money from your 401(k).

Besides missing out on the potential investment growth, there can be other drawbacks to tapping those retirement funds.

Personal Loan

If you have a decent credit history and a solid income, typical personal loan requirements, you may be able to find a personal loan with a competitive fixed interest rate and other terms that are a good fit for your needs.

Other benefits:

•   You can sometimes find a personal loan without the origination fees and other costs of a bridge loan.

•   A personal loan might be suitable rather than a home equity loan or HELOC if you don’t have much equity built up in your home.

•   You may be able to avoid a prepayment penalty, so if your home sells quickly, you can pay off the loan without losing any of your profit.

•   Personal loans are usually unsecured, so you wouldn’t have to use your home as collateral.

The Takeaway

A bridge loan can help homebuyers when they haven’t yet sold their current home and wish to purchase a new one. But a bridge loan can be expensive, and not all that easy to get. Only buyers with sufficient equity and strong financials are candidates.

If you find yourself looking to bridge the gap between homes, you might also consider a personal loan or a HELOC, a home equity loan, or a personal loan among other alternatives. With a little due diligence and some paperwork, you’ll soon be financially prepared to purchase your next home.

FAQ

What are the cons of a bridge loan?

It can be harder to qualify for a bridge loan than for a standard home loan, and both costs and interest rate may be higher as well. And taking out a bridge loan means you may have to make payments on two loans if your first property doesn’t sell.

Why would someone get a bridge loan?

A homebuyer who has found their perfect next property but who is in a short-term cash crunch might opt for a bridge loan if they feel very confident that they can sell their current home quickly. This might be especially true in a hot market, where there is lots of competition for homes and the buyer wants to move quickly.

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*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

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.

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All loan terms, fees, and rates may vary based upon your individual financial and personal circumstances and state.
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12 Ways to Save Money on Water

12 Ways to Save Money on Water

By | Budgeting & Goals, Family Finances, money | Comments Off on 12 Ways to Save Money on Water

Reducing water usage at home is a great way to lower your monthly expenses and be a better steward to the environment at the same time. But how exactly can you save H2O as well as money spent on water in your daily life?

Key Points

•   The average water bill in America is about $40 a month, but this can vary significantly by location and household usage.

•   Reducing water usage can be good for the environment and a person’s finances.

•   To save water, wait to wash clothes until there is enough for a full load and run the dishwasher only when it is completely full.

•   Consider installing ENERGY STAR-certified appliances for better water efficiency.

•   Shorten shower times to conserve water.

What Is the Average Monthly Water Bill Per Household?

The average water bill in the U.S. was approximately $50 in 2023. While that may not seem to be too big a strain on the typical checking account, keep in mind that water bills can vary significantly depending on where you live, how much water your family uses, and the time of year.

On average, families use more than 50% of their water in the bathroom alone. Those living in an apartment without an outdoor space may spend less on water; outdoor water usage (for gardens, lawns, and pools) accounts for about 30% of the average American’s water bill — up to 60% in the summer.

Quick Money Tip:Typically, checking accounts don’t earn interest. However, some accounts will pay you a bit and help your money grow. An online bank account is more likely than brick-and-mortar to offer you the best rates.

Does Using Less Water Save Money?

You can save money by using less water. That’s because your monthly water bill reflects water usage: The more water you use, the more money you’ll spend. Beyond financial savings, conserving water is great for the environment and can help to provide reliable water for families today and in the future.

12 Ways to Reduce Your Water Bill and Save Money

If you’re looking to economize on your water costs, here is a list of 12 helpful ways to save on your water bill every month:

1. Only Use the Washer for Full Loads

Washing machines are an essential appliance for keeping our clothes and linens clean, but they require a lot of water to operate. Waiting until you have enough dirty clothes for a full load — or using the machine’s “small load” option in a pinch — can go a long way in reducing water usage.

Bonus Tip: Because washing machines and laundry detergents have improved significantly over the years, you rarely need to use the hot water option. Using cold water only can keep gas or electric bills down as well, providing another way to save money.

2. Use a Dishwasher — But Only If It’s Full

Dishwashers are more efficient at washing dishes than our own hands. The trick? Only run it if it’s fully loaded. That’s how to save money on water usage and your water bill.

Bonus Tip: Save even more water by simply scraping food scraps off your plate before loading it in the dishwasher. No need to rinse it, which wastes water!

Recommended: How Much of Your Paycheck Should You Save?

3. Upgrade to Water-Efficient Appliances

Today’s washing machines and dishwashers are far more efficient than appliances from even 15 years ago. In fact, an ENERGY STAR-certified dishwasher saves nearly 3,800 gallons of water in its lifetime, and an ENERGY STAR washing machine uses 33% less water per cycle (and requires 25% less electricity to run, too).

While replacing home appliances has an upfront cost, you’ll save money on water and energy bills in the long run. Some energy-efficient appliances may even come with rebates.

Bonus Tip: Look for front-load washers; these can use up to half as much water per cycle as top-load units.

4. Upgrade Plumbing Fixtures, Too

Major appliances aren’t all you can upgrade. Plumbing fixtures like toilets and showerheads offer another opportunity to cut back on water usage. If it’s bathroom remodeling time (whether you’re finding a contractor or in DIY mode), search for low-flow (and dual-flush) toilets that use less water per flush. Low-flow showerheads better conserve water (saving up to 2,700 gallons per year) but actually offer superior performance. In both cases, look for the WaterSense label, created by the EPA or Environmental Protection Agency.

5. Taking Shorter Showers

This tip is pretty simple but bears repeating: The less time you spend in the shower, the less water you’ll use. And as long as you keep your showers short, you’ll save water — and money — by showering instead of taking a bath. How’s that for a creative way to save money?

Bonus Tip: Want to reduce your usage and save more money on water? Get wet when you first step into the shower, then turn off the water while you lather and scrub; then rinse.

6. Fix Leaks

Leaky faucets and toilets that won’t stop running are noticeable, but your home may have other, less obvious plumbing leaks to watch out for, like your hot water tank or supply line. Because many drain pipes exist behind your walls, you may only catch a leak by hearing it, so keep your ears sharp throughout the year.

The cost to repair a plumbing leak can be high, but doing so will lower your water bill in the long run — and leaks left alone can develop into larger, more expensive problems down the road.

7.Turn Off the Water When Brushing Your Teeth

Letting the water run the entire time you brush your teeth — especially if you brush them for the ADA’s recommended two minutes — has become the poster child for wasting water. Turning off the water while you brush can be such an easy way to cut back on water usage and avoid the consequences of not saving money.

Bonus Tip: This also applies while shaving; only run the water when you need it.

8. Compost Instead of Using the Garbage Disposal

Have food scraps? Don’t throw them all in the garbage disposal, which uses water; try composting instead. You can compost foods like fruits, vegetables, eggshells, meat, and coffee (filters included!); doing so can be great for your garden.

Bonus Tip: Another way to reduce water usage in the kitchen is to thaw frozen meat overnight in the refrigerator, rather than running it under warm water.

9. Keep a Pitcher of Water in the Fridge

If you let the tap run until the water gets cold enough to fill your drinking glass, you’re wasting water. Consider putting a pitcher of water in the fridge instead so that it’s cold when you want it. As a bonus, you can invest in a pitcher with a water filter for cleaner drinking water.

10. Care for Your Lawn Strategically

Before watering your lawn, check the weather forecast. If rain is predicted in the next few days, don’t bother watering the lawn at all. Even if it’s hot out and hasn’t rained lately, your grass may not need water. Try stepping on it; if it springs back up, you don’t need to water it yet.

If you must water your lawn, check your sprinkler system to ensure there are no leaks, and don’t overwater. That’s another way to avoid common budgeting mistakes when it comes to water usage.

Bonus Tip: Mowing your lawn less regularly is actually a good thing. Longer grass allows for deeper root growth — and thus a drought-resistant lawn that doesn’t need to be watered as often.

Recommended: APY Interest Calculator

11. Use a Commercial Car Wash

Car aficionados may insist upon washing their car every other week (or every week, if they’re dedicated). While washing and waxing your car is good for protecting its paint and maintaining its value, you can get away with fewer car washes. To keep water usage down, try once a month at most.

You can also cut your own water costs entirely by paying for a commercial wash. Commercial car washes use 60% less water and are designed to prevent water pollution from runoff. Many locations also recycle their wash water multiple times.

Recommended: How Much Auto Insurance Do You Need?

12. Cover Your Pool

Here’s the last way to stay motivated to save money on water costs: Have a pool outside? Make sure you cover it when not in use. Not only does this keep unwanted debris out of the swimming area, but it also helps reduce the amount of water that evaporates each day.

The Takeaway

Saving money on water isn’t just great for your wallet; it’s also great for the environment. From composting to upgrading appliances to cutting back on car washes, you can dramatically reduce your family’s water consumption — and see great savings on your water bill as a result.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall.* Enjoy up to 4.00% APY on SoFi Checking and Savings.

FAQ

How much money can you save on your water bill by using less water?

The average American spends about $50 a month on their water bill. If your family reduces water usage by 25%, your bill could drop to roughly $37.50, putting an extra $150 into your savings per year. How much money you can save on your water bill depends on how much water you’re able to conserve and what the cost of water is in your city.

Why is saving water important?

Reducing water usage does more than lower your water bill. Saving water means that we use less water from rivers, bays, and estuaries — and this is a big deal for our environment. When we use less water, we also reduce water and wastewater treatment costs. Plus, it takes a lot of energy to treat, pump, and heat our water, all of which contribute to air pollution. In areas threatened by drought, reducing our personal water usage ensures our neighbors, friends, and family also have access to the water they need.

How much water is used per household a year?

The EPA estimates that the average American uses 82 gallons of water per day. For a family of four, that’s 328 gallons a day or nearly 120,000 gallons a year. Families can save a lot of water by taking simple measures: For example, the EPA estimates families save 13,000 gallons of water per year by replacing inefficient toilets — and 9,400 gallons of water annually by repairing leaks.

Photo credit: iStock/vorDa

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SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

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.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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