Lending Circles Weave Disadvantaged Borrowers Into Credit Mainstream

Two years ago, Javiar Giron went bankrupt. The 46-year-old father of three had been doing fine since he came to the U.S. in 1985: He learned English on the street, bought a house and managed a carpet business. He began buying and selling, or “flipping,” houses on the side, but that tanked with the housing market and he lost two of his properties to banks.

Giron is emerging from the financial hole he spiraled into by participating in a lending circle – a form of peer-to-peer finance – as a way to save money with a no-interest, no-fee microloan and to build up credit. Participants in this age-old technique can be found in states from Massachusetts to California.

“Credit is gold in the U.S.,” Giron says. “You don’t have credit, you don’t have anything.”

Mission Asset Fund

The Mission Asset Fund facilitates Giron’s circle, in which a group of people lend money to one another. The San Francisco-based nonprofit organization known as MAF formalizes a traditionally informal practice partly to keep participants away from payday lenders and other sources of short-term, high-cost credit.

The organization brings together about 10 low- and moderate- income individuals to join a circle. The assembled group collectively decides on the amount to be lent, say, $1,000. Then the members contribute part of that amount – $100 apiece in this case – to the pool of funds every month, and one gets the full $1,000 each time. By the 10th month comes, all participants will have received that amount and all the loans will have been totally paid off.

Lending circles help participants raise capital for various expenses: car down payments, debts and small business investments, among other things. But the microloans, which MAF insures, are less about the cash and more about boosting credit scores to give participants access to mainstream financial services.

Learning through lending circles

“Part of it is a process of education, making sure they are budgeting and getting them at a place where they can make good financial decisions,” says Jose Quinonez, MAF’s chief operating officer.

There are no specific requirements to participate in one of the circles, although the organization discourages people whose debt payments consume more than half their income. Those who do join sign contracts through MAF, which guarantees each member will get their money back even if some don’t pay their share to the circle.

“We have sort of like a mini-FDIC insurance to the lending circle,” Quinonez says, referring to the Federal Deposit Insurance Corp., which backs bank deposits. “That guarantee that we provide brings more peace of mind — it gives people assurance that the structure will hold.”

Default rates are less than 1% in MAF circles, partly because of the social responsibility that being in such a group entails. The organization reports all payment information to credit bureaus TransUnion and Experian, so participants can benefit by improving their credit scores.

A circle of lending

Big banks like JPMorgan Chase and Citigroup help MAF with grants and contributions. They share its goal of helping borrowers to eventually attain healthy credit scores so they can get loans from traditional lenders.

“We are definitely creating a consumer good,” Quinonez says. “The people benefitting from our work are banks because we are expanding the pool of eligible borrowers.” Since its founding in 2007, MAF has helped thousands of borrowers gain access to a total of $3 million in social loans.

Shweta Kohli, 33, says her credit score has improved more than 120 points since she started saving through MAF three years ago. Even though her credit is strong enough to have accounts at Citibank and two local credit unions, she still participates in lending circles and doesn’t see herself stopping anytime soon. Kohli enjoys the guidance she gets from MAF as she strives to open a retro-style Indian fusion café in San Francisco.

“They will help you find the right loan to go with, the right application process to go with, the right answers to say to a loan officer for a small business,” she says.

A traditional technique

Informal lending circles have been around for centuries, embedded in cultures worldwide. They’re known as tandas, cuninhas, hui and pandeiros, depending where you go. Familiarity with the lending circle concept is part of what helps MAF successfully serve participants, particularly immigrants.

“I know about tandas,” Giron says. “I remember my mom in Mexico used it to buy clothes for my five brothers and five sisters and I.”

Specific MAF lending circles support immigrants saving the $680 needed to apply for U.S. citizenship or the $465 application fee for temporary resident status under the Deferred Action for Childhood Arrivals (DACA) program, which provides work permits and protection from deportation to young immigrants.

Jessica Guerrero, 22, joined MAF’s Lending Circle for Dreamers program in 2012 to cover a DACA fee. At the time, she was waiting tables to pay for her San Francisco State University tuition, rent, food and transportation, all completely out of pocket. Like Giron, Guerrero was familiar with tandas from her Mexican heritage.

“I thought, ‘OK, I won’t be able to pay $500 in just one month just like that; I don’t have that kind of income,’” she says, referring to the DACA application fee.

Guerrero also appreciates the financial education that MAF provides, including online tutorials about savings and checking accounts, credit, mortgages and financial-management classes.

“The community in this area has no knowledge – there’s no financial education whatsoever, and that’s a huge problem,” Guerrero says. “We’re just living day by day, surviving.”

Spreading the circles

Research has shown that MAF’s lending circles are successful. Participants increased their credit scores by an average of 163 points and decreased their outstanding debt by more than $1,000, according to a 2013 study by researchers at San Francisco State University.

The formalized lending circle technique has spread through MAF to more than 27 nonprofit organizations in 11 states, including California, Oregon, Nevada, Washington, Minnesota and Massachusetts. Additionally, Yattos, a San-Francisco-based company, offers similar models online that let people form circles or connect with friends to get interest-free microloans and save cash.

Guerrero spread the word about lending circles within her own community, including to her mom, who recently joined one to start saving for a car and building credit.

“Where I’m going to school I have many resources,” Guerrero says, reflecting on how she’s helping others connect to MAF’s credit-building opportunities. “People that I meet, or that I know – family and friends – they don’t have that opportunity that I’ve made for myself, so now I’m able to plug people in.”

---

All hands photo via Shutterstock.

The post Lending Circles Weave Disadvantaged Borrowers Into Credit Mainstream appeared first on NerdWallet Credit Card Blog.

Source Article http://alleasyscholarships.blogspot.com

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Lending Circles Weave Disadvantaged Borrowers Into Credit Mainstream

Two years ago, Javiar Giron went bankrupt. The 46-year-old father of three had been doing fine since he came to the U.S. in 1985: He learned English on the street, bought a house and managed a carpet business. He began buying and selling, or “flipping,” houses on the side, but that tanked with the housing market and he lost two of his properties to banks.

Giron is emerging from the financial hole he spiraled into by participating in a lending circle – a form of peer-to-peer finance – as a way to save money with a no-interest, no-fee microloan and to build up credit. Participants in this age-old technique can be found in states from Massachusetts to California.

“Credit is gold in the U.S.,” Giron says. “You don’t have credit, you don’t have anything.”

Mission Asset Fund

The Mission Asset Fund facilitates Giron’s circle, in which a group of people lend money to one another. The San Francisco-based nonprofit organization known as MAF formalizes a traditionally informal practice partly to keep participants away from payday lenders and other sources of short-term, high-cost credit.

The organization brings together about 10 low- and moderate- income individuals to join a circle. The assembled group collectively decides on the amount to be lent, say, $1,000. Then the members contribute part of that amount – $100 apiece in this case – to the pool of funds every month, and one gets the full $1,000 each time. By the 10th month comes, all participants will have received that amount and all the loans will have been totally paid off.

Lending circles help participants raise capital for various expenses: car down payments, debts and small business investments, among other things. But the microloans, which MAF insures, are less about the cash and more about boosting credit scores to give participants access to mainstream financial services.

Learning through lending circles

“Part of it is a process of education, making sure they are budgeting and getting them at a place where they can make good financial decisions,” says Jose Quinonez, MAF’s chief operating officer.

There are no specific requirements to participate in one of the circles, although the organization discourages people whose debt payments consume more than half their income. Those who do join sign contracts through MAF, which guarantees each member will get their money back even if some don’t pay their share to the circle.

“We have sort of like a mini-FDIC insurance to the lending circle,” Quinonez says, referring to the Federal Deposit Insurance Corp., which backs bank deposits. “That guarantee that we provide brings more peace of mind — it gives people assurance that the structure will hold.”

Default rates are less than 1% in MAF circles, partly because of the social responsibility that being in such a group entails. The organization reports all payment information to credit bureaus TransUnion and Experian, so participants can benefit by improving their credit scores.

A circle of lending

Big banks like JPMorgan Chase and Citigroup help MAF with grants and contributions. They share its goal of helping borrowers to eventually attain healthy credit scores so they can get loans from traditional lenders.

“We are definitely creating a consumer good,” Quinonez says. “The people benefitting from our work are banks because we are expanding the pool of eligible borrowers.” Since its founding in 2007, MAF has helped thousands of borrowers gain access to a total of $3 million in social loans.

Shweta Kohli, 33, says her credit score has improved more than 120 points since she started saving through MAF three years ago. Even though her credit is strong enough to have accounts at Citibank and two local credit unions, she still participates in lending circles and doesn’t see herself stopping anytime soon. Kohli enjoys the guidance she gets from MAF as she strives to open a retro-style Indian fusion café in San Francisco.

“They will help you find the right loan to go with, the right application process to go with, the right answers to say to a loan officer for a small business,” she says.

A traditional technique

Informal lending circles have been around for centuries, embedded in cultures worldwide. They’re known as tandas, cuninhas, hui and pandeiros, depending where you go. Familiarity with the lending circle concept is part of what helps MAF successfully serve participants, particularly immigrants.

“I know about tandas,” Giron says. “I remember my mom in Mexico used it to buy clothes for my five brothers and five sisters and I.”

Specific MAF lending circles support immigrants saving the $680 needed to apply for U.S. citizenship or the $465 application fee for temporary resident status under the Deferred Action for Childhood Arrivals (DACA) program, which provides work permits and protection from deportation to young immigrants.

Jessica Guerrero, 22, joined MAF’s Lending Circle for Dreamers program in 2012 to cover a DACA fee. At the time, she was waiting tables to pay for her San Francisco State University tuition, rent, food and transportation, all completely out of pocket. Like Giron, Guerrero was familiar with tandas from her Mexican heritage.

“I thought, ‘OK, I won’t be able to pay $500 in just one month just like that; I don’t have that kind of income,’” she says, referring to the DACA application fee.

Guerrero also appreciates the financial education that MAF provides, including online tutorials about savings and checking accounts, credit, mortgages and financial-management classes.

“The community in this area has no knowledge – there’s no financial education whatsoever, and that’s a huge problem,” Guerrero says. “We’re just living day by day, surviving.”

Spreading the circles

Research has shown that MAF’s lending circles are successful. Participants increased their credit scores by an average of 163 points and decreased their outstanding debt by more than $1,000, according to a 2013 study by researchers at San Francisco State University.

The formalized lending circle technique has spread through MAF to more than 27 nonprofit organizations in 11 states, including California, Oregon, Nevada, Washington, Minnesota and Massachusetts. Additionally, Yattos, a San-Francisco-based company, offers similar models online that let people form circles or connect with friends to get interest-free microloans and save cash.

Guerrero spread the word about lending circles within her own community, including to her mom, who recently joined one to start saving for a car and building credit.

“Where I’m going to school I have many resources,” Guerrero says, reflecting on how she’s helping others connect to MAF’s credit-building opportunities. “People that I meet, or that I know – family and friends – they don’t have that opportunity that I’ve made for myself, so now I’m able to plug people in.”

---

All hands photo via Shutterstock.

The post Lending Circles Weave Disadvantaged Borrowers Into Credit Mainstream appeared first on NerdWallet Credit Card Blog.

Source Article :http://bit.ly/11VOYB4

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Balance Transfer Credit Cards: What to Do When Your Credit Limit is Too Low

We’ve all been there: You recognize a problem with your finances, come up with a plan to deal with it, then hit a snag. For example, many people trying to pay down credit card debt turn to a balance transfer card, only to find that the credit limit they receive on the 0% card isn’t as much as they need.

So what should you do if you find yourself in this situation? Don’t worry, you have options – take a look at the details below to find out what they are.

Balance transfers are a good deal – if you can get one

If you’ve decided to pursue a balance transfer to pay down your credit card debt, you’ve made a smart choice. You could potentially save thousands on interest payments by moving your balance onto a card that’s offering a 0% promotion (but don’t forget to factor the balance transfer fee into your calculations).

And these days, finding one that provides 12, 15, or even 18 months interest-free isn’t as hard as it used to be. This means that paying off your debt before the 0% period is up isn’t a pipe dream – saying sayonara to your whole balance is much easier when interest isn’t taking a big bite out of every payment you make.

But for some folks, using this strategy to deal with debt doesn’t exactly go off without a hitch. For one thing, you need good or excellent credit to obtain a 0% card, so getting approved in the first place can represent a big hurdle. Then comes the next obstacle: qualifying for a high enough credit line on the 0% card to transfer your entire high-interest balance to it.

If you don’t get a high enough credit line, call your issuer

The whole point of doing a balance transfer is to refinance all of your high-interest debt, not just a portion of it. If you don’t immediately get approved for a high enough credit line on the 0% card to do so, it’s natural to be a little frustrated.

But don’t throw in the towel – it might seem counterintuitive, but the first thing you should do is contact the issuer of the balance transfer card and ask for a higher limit. Most have a pretty straightforward system for determining your credit limit, with factors like your credit score, your income and your debt-to-income ratio influencing the decision. However, many are willing to be flexible, especially if what you need is within a few thousand dollars of what you were approved for.

Before you place the call, be ready to state and/or provide the following:

• A clear, friendly way of asking for what you need (a higher credit line).


• The credit line you were approved for on the card.


• The additional credit you’d like to be approved for (be sure to give an exactly dollar amount).


• The reason you need a higher credit line – be very specific that you’re planning to do a balance transfer.

Set aside a little bit of time for this call; it’s likely that you’ll need to speak to more than one person before you get a final answer.

Another alternative to pursue if your issuer won’t budge

In many cases, contacting the issuer of your 0% card and simply asking for a higher credit line will do the trick. But if for some reason you really can’t get a big enough credit limit on the card to transfer your whole high-interest balance, there are other ways to bring down the rate on your debt.

Your best bet is to apply for a personal loan to refinance the remainder of your balance. Although you won’t have the simplicity of making just one monthly payment, there are other benefits to this strategy. For one thing, there are lots of different personal loan options on the market today – you could use a peer-to-peer lender, a traditional bank or a credit union. If you do your research and choose wisely, there’s a good chance you’ll get approved at a rate that’s much lower than what you’re paying on your card.

For another thing, you’ll be converting revolving debt (i.e., credit card debt) to installment debt (i.e., personal loan debt). This will bring down your credit utilization ratio, which will likely give your credit score a boost. Remember, you’ll still have a couple of hard inquiries on your credit report from applying for the 0% card and the personal loan – but in the long run, transforming credit card debt into personal loan debt will have a positive impact on your score.

The takeaway: If you don’t initially get approved for the whole credit line you need on a 0% card to refinance all of your high-interest debt, place a call to your issuer. Asking for a higher credit limit is often just the ticket. But if this still doesn’t work, apply for a personal loan to bring the interest rate on your remaining debt down. Then make it a priority to pay off both balances as fast as you can – the sooner you get to debt-free, the better!

Money transfer image via Shutterstock

Source Article :http://bit.ly/1rA49ou

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Balance Transfer Credit Cards: What to Do When Your Credit Limit is Too Low

We’ve all been there: You recognize a problem with your finances, come up with a plan to deal with it, then hit a snag. For example, many people trying to pay down credit card debt turn to a balance transfer card, only to find that the credit limit they receive on the 0% card isn’t as much as they need.

So what should you do if you find yourself in this situation? Don’t worry, you have options – take a look at the details below to find out what they are.

Balance transfers are a good deal – if you can get one

If you’ve decided to pursue a balance transfer to pay down your credit card debt, you’ve made a smart choice. You could potentially save thousands on interest payments by moving your balance onto a card that’s offering a 0% promotion (but don’t forget to factor the balance transfer fee into your calculations).

And these days, finding one that provides 12, 15, or even 18 months interest-free isn’t as hard as it used to be. This means that paying off your debt before the 0% period is up isn’t a pipe dream – saying sayonara to your whole balance is much easier when interest isn’t taking a big bite out of every payment you make.

But for some folks, using this strategy to deal with debt doesn’t exactly go off without a hitch. For one thing, you need good or excellent credit to obtain a 0% card, so getting approved in the first place can represent a big hurdle. Then comes the next obstacle: qualifying for a high enough credit line on the 0% card to transfer your entire high-interest balance to it.

If you don’t get a high enough credit line, call your issuer

The whole point of doing a balance transfer is to refinance all of your high-interest debt, not just a portion of it. If you don’t immediately get approved for a high enough credit line on the 0% card to do so, it’s natural to be a little frustrated.

But don’t throw in the towel – it might seem counterintuitive, but the first thing you should do is contact the issuer of the balance transfer card and ask for a higher limit. Most have a pretty straightforward system for determining your credit limit, with factors like your credit score, your income and your debt-to-income ratio influencing the decision. However, many are willing to be flexible, especially if what you need is within a few thousand dollars of what you were approved for.

Before you place the call, be ready to state and/or provide the following:

• A clear, friendly way of asking for what you need (a higher credit line).


• The credit line you were approved for on the card.


• The additional credit you’d like to be approved for (be sure to give an exactly dollar amount).


• The reason you need a higher credit line – be very specific that you’re planning to do a balance transfer.

Set aside a little bit of time for this call; it’s likely that you’ll need to speak to more than one person before you get a final answer.

Another alternative to pursue if your issuer won’t budge

In many cases, contacting the issuer of your 0% card and simply asking for a higher credit line will do the trick. But if for some reason you really can’t get a big enough credit limit on the card to transfer your whole high-interest balance, there are other ways to bring down the rate on your debt.

Your best bet is to apply for a personal loan to refinance the remainder of your balance. Although you won’t have the simplicity of making just one monthly payment, there are other benefits to this strategy. For one thing, there are lots of different personal loan options on the market today – you could use a peer-to-peer lender, a traditional bank or a credit union. If you do your research and choose wisely, there’s a good chance you’ll get approved at a rate that’s much lower than what you’re paying on your card.

For another thing, you’ll be converting revolving debt (i.e., credit card debt) to installment debt (i.e., personal loan debt). This will bring down your credit utilization ratio, which will likely give your credit score a boost. Remember, you’ll still have a couple of hard inquiries on your credit report from applying for the 0% card and the personal loan – but in the long run, transforming credit card debt into personal loan debt will have a positive impact on your score.

The takeaway: If you don’t initially get approved for the whole credit line you need on a 0% card to refinance all of your high-interest debt, place a call to your issuer. Asking for a higher credit limit is often just the ticket. But if this still doesn’t work, apply for a personal loan to bring the interest rate on your remaining debt down. Then make it a priority to pay off both balances as fast as you can – the sooner you get to debt-free, the better!

Money transfer image via Shutterstock

Source Article http://ift.tt/1y39EC7

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‘Payment Shock’ on Home Credit Lines Could Threaten Millions of Americans

Home equity borrowers, beware: Substantial “payment shock” could be coming soon to a mortgage near you.

Many home equity lines of credit (HELOCs) taken out in 2005—just as home prices were peaking—may be nearing the end of their 10-year, interest-only payment periods. With a rise in interest rates likely coming soon as the Federal Reserve winds down its easy money policy, monthly payments on these variable-rate loans could soon soar for millions of Americans.

If you’re in this situation, you may be able to avoid a potential financial disaster by refinancing into a fixed-rate mortgage or a new HELOC, or by enrolling in the Federal Housing Administration’s Short Refinance program. But first, review the full details on your loan to make sure you know what may be coming, or contact your lender to bring you up to date.

A real threat

Most HELOCs come with an “end of draw” date, which refers to the point at which you no longer can borrow against the credit line and, if you haven’t already started, must begin repaying the principal along with interest. At that point, your monthly payment can jump significantly.

The end of draw is approaching for many such loans. At least 2.5 million of the credit lines are scheduled to reset to include not just interest but principal repayment over the next three years alone, according to a report from Black Knight Financial Services in Jacksonville, Florida. It says the resulting “payment shock” may average $250 a month or more.

Americans’ appetite for HELOCs peaked in 2005. More than $180 billion in credit lines were established that year, just before home prices began to fall, according to a report by the Federal Reserve Bank of New York.

Let’s say your HELOC dates from 2005 and has a balance of $100,000 at 5.5% interest. During the 10-year, interest-only period, you paid about $458 a month. But you’re entering the 15-year period that requires you to start paying down the principal too. That will mean the monthly payment will climb by $359, to $817—an increase of about 80%. And that’s assuming the loan rate doesn’t rise as well.

As the Fed prepares to tighten credit, borrowers should also consider what rising interest rates will mean. HELOCs typically adjust when that happens, and payments rise. Using the above example, let’s say credit costs surge and your rate jumps to 8.5%. That would tack another $168 on your payment, making it about $985—more than double the interest-only payment at 5.5%.

Because the loan is secured by your home, HELOC rate increases are capped, so the payment can only rise so much. But you still could face a double whammy of principal payments beginning just as rates climb. Failing to pay could result in foreclosure, so borrowers shouldn’t take this prospect lightly.

What you can do

If you’re unsure what to expect, ask your lender for guidance. Some HELOCs require the immediate repayment of the outstanding balance when the draw period ends, which can create an even bigger headache.

If you’re nearing the end of an interest-only draw period and would rather not cope with bigger payments or a full payoff, consider refinancing the balance with a new HELOC, which will provide you with a fresh interest-only window, says Don Maxon, a certified financial planner in San Rafael, California.

Another option is to roll the HELOC into a refinanced mortgage at a fixed rate, Maxon says. This lets you lock in historically low mortgage rates for the term of the debt.

“Combining both loans into a fixed-rate loan would eliminate the HELOC interest-rate risk and the resulting higher payments,” Maxon says.

What you must come up with each month may still rise, however, since it will include paying down the HELOC principal as well as the balance of your first mortgage. Still, your total interest costs will likely be lower, and your monthly payment won’t change over the life of the loan, according to Matt McCoy, a senior financial planner at Kumquat Wealth in Chattanooga, Tennessee.

“You need to compare the fixed-rate payments to a rising-rate scenario under the current variable rate,” McCoy says. “Payments on fixed-rate loans are much easier to budget for long-term, since your interest rate does not fluctuate.”

However, housing prices were generally higher in 2005, so refinancing might be hard, if not impossible, especially for those with lower credit grades. Lenders often cap what can be borrowed against a home at 80% of its market value and have tightened up on risk tolerances for borrowers.

If you’re not behind on your mortgage payments, but feel that you can’t keep up and owe more than what your home is worth, an FHA Short Refinance may be an option. This federal program is designed to help financially underwater homeowners obtain a more affordable mortgage. But the lender has to agree to “forgive,” or write off, at least 10% of what you owe.

This article first appeared on USAToday.com.

Interest rate image via Shutterstock

Source Article http://ift.tt/1y39EC7

Read More

‘Payment Shock’ on Home Credit Lines Could Threaten Millions of Americans

Home equity borrowers, beware: Substantial “payment shock” could be coming soon to a mortgage near you.

Many home equity lines of credit (HELOCs) taken out in 2005—just as home prices were peaking—may be nearing the end of their 10-year, interest-only payment periods. With a rise in interest rates likely coming soon as the Federal Reserve winds down its easy money policy, monthly payments on these variable-rate loans could soon soar for millions of Americans.

If you’re in this situation, you may be able to avoid a potential financial disaster by refinancing into a fixed-rate mortgage or a new HELOC, or by enrolling in the Federal Housing Administration’s Short Refinance program. But first, review the full details on your loan to make sure you know what may be coming, or contact your lender to bring you up to date.

A real threat

Most HELOCs come with an “end of draw” date, which refers to the point at which you no longer can borrow against the credit line and, if you haven’t already started, must begin repaying the principal along with interest. At that point, your monthly payment can jump significantly.

The end of draw is approaching for many such loans. At least 2.5 million of the credit lines are scheduled to reset to include not just interest but principal repayment over the next three years alone, according to a report from Black Knight Financial Services in Jacksonville, Florida. It says the resulting “payment shock” may average $250 a month or more.

Americans’ appetite for HELOCs peaked in 2005. More than $180 billion in credit lines were established that year, just before home prices began to fall, according to a report by the Federal Reserve Bank of New York.

Let’s say your HELOC dates from 2005 and has a balance of $100,000 at 5.5% interest. During the 10-year, interest-only period, you paid about $458 a month. But you’re entering the 15-year period that requires you to start paying down the principal too. That will mean the monthly payment will climb by $359, to $817—an increase of about 80%. And that’s assuming the loan rate doesn’t rise as well.

As the Fed prepares to tighten credit, borrowers should also consider what rising interest rates will mean. HELOCs typically adjust when that happens, and payments rise. Using the above example, let’s say credit costs surge and your rate jumps to 8.5%. That would tack another $168 on your payment, making it about $985—more than double the interest-only payment at 5.5%.

Because the loan is secured by your home, HELOC rate increases are capped, so the payment can only rise so much. But you still could face a double whammy of principal payments beginning just as rates climb. Failing to pay could result in foreclosure, so borrowers shouldn’t take this prospect lightly.

What you can do

If you’re unsure what to expect, ask your lender for guidance. Some HELOCs require the immediate repayment of the outstanding balance when the draw period ends, which can create an even bigger headache.

If you’re nearing the end of an interest-only draw period and would rather not cope with bigger payments or a full payoff, consider refinancing the balance with a new HELOC, which will provide you with a fresh interest-only window, says Don Maxon, a certified financial planner in San Rafael, California.

Another option is to roll the HELOC into a refinanced mortgage at a fixed rate, Maxon says. This lets you lock in historically low mortgage rates for the term of the debt.

“Combining both loans into a fixed-rate loan would eliminate the HELOC interest-rate risk and the resulting higher payments,” Maxon says.

What you must come up with each month may still rise, however, since it will include paying down the HELOC principal as well as the balance of your first mortgage. Still, your total interest costs will likely be lower, and your monthly payment won’t change over the life of the loan, according to Matt McCoy, a senior financial planner at Kumquat Wealth in Chattanooga, Tennessee.

“You need to compare the fixed-rate payments to a rising-rate scenario under the current variable rate,” McCoy says. “Payments on fixed-rate loans are much easier to budget for long-term, since your interest rate does not fluctuate.”

However, housing prices were generally higher in 2005, so refinancing might be hard, if not impossible, especially for those with lower credit grades. Lenders often cap what can be borrowed against a home at 80% of its market value and have tightened up on risk tolerances for borrowers.

If you’re not behind on your mortgage payments, but feel that you can’t keep up and owe more than what your home is worth, an FHA Short Refinance may be an option. This federal program is designed to help financially underwater homeowners obtain a more affordable mortgage. But the lender has to agree to “forgive,” or write off, at least 10% of what you owe.

This article first appeared on USAToday.com.

Interest rate image via Shutterstock

Source Article :http://bit.ly/1ttW6Rz

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5 Frequent Small Business Tax Mistakes to Avoid

We all make mistakes from time to time, whether it’s rolling through a stop sign, forgetting an anniversary or leaving the wallet at the gym. But some mistakes can be far more costly than others—especially when it involves Uncle Sam and your small business.

When you operate a small business, avoiding any costly penalties, fees and audits from the Internal Revenue Service (IRS) is crucial. Here are some of the most common small business tax mistakes and how to prevent them.

1. Failing to file and pay your taxes on time

Determining the correct IRS tax form and your tax due date depends on your business structure. For example, if you run your business through an S corporation, you’ll likely need to fill out a Form 1120S for income taxes (due on March 15). With a sole proprietorship you’ll need to use a Form 1040C instead (due on April 15).

Forget to file and you’ll pay for it: The IRS imposes a 5% monthly charge for those who file late, up to the first five months following the return’s due date (up to a 25% maximum charge). Forget to pay your taxes, and it gets even worse: the IRS charges 6% interest a year on unpaid taxes, in addition to late payment penalties of .5% per month after the April 15 deadline.

The bottom line is you should both file and pay Uncle Sam on time to avoid costly penalties, so keep this in mind before tax season rolls around.

2. Forgetting about estimated tax payments

Some businesses are required to make quarterly estimated tax payments during the year on income that is not subject to withholding. This includes money you earn from self-employment, interest, dividends and gains from the sale of assets.

If you are filing as a sole proprietor, a partner, an S corporation or a self-employed individual, you generally will have to make estimated tax payments if you expect to owe tax on $1,000 or more when you file, according to the IRS.

If you do not pay enough tax by the due date of each of the four quarterly payment periods, you’ll face a penalty unless you meet certain circumstances such as becoming disabled or having a similar reasonable cause for not making the payment.

You can figure out how much you’ll need to pay in estimated taxes with a Form 1040-ES worksheet. Since it’s a confusing issue for many small business owners, seeking professional help from an accountant or tax attorney can be a wise move.

3. Not taking business deductions—or taking excessive deductions

You can potentially reduce your tax burden by taking several legal business deductions. The IRS says you can deduct all “ordinary and necessary” expenses you incur while operating your business.

For example, if your home is the principal place of your business, you may be able to deduct several business-related expenses. This might include rent, insurance, utilities, office supplies and real estate taxes. If you use your car primarily for work, you may be able to deduct expenses such as gas, mileage, oil changes, parking charges and insurance premiums.

The most common overlooked deductions by small businesses include depreciation (30%), which refers to the decrease in the value of assets over time due to wear and tear; out-of-pocket expenses (29%), such as the purchase of new equipment; and auto expenses (16%), according to a Xero survey.

On the other hand, taking excessive deductions or mixing personal and business deductions—like claiming a family vacation as a business expense—is not allowed and can lead to an audit, or worse, a federal tax fraud charge. Just look at reality TV star Mike “The Situation” Sorrentino, who was recently charged with failing to file a tax return and tax fraud for allegedly claiming fancy clothes and sports cars as business expenses, according to Forbes. Sorrentino, who appeared on MTV’s “Jersey Shore,” pleaded not guilty to the charge.

Be careful of what you decide to deduct, and ask your accountant or a tax attorney if you are unsure of anything.

4. Keeping poor records

Record keeping is one of the most important aspects of running a small business. With good records, you can properly deduct all business-related expenses, track and manage inventory, maintain and report employee payrolls, limit the potential for costly legal errors, keep a detailed record of your business so you can track its progress, and prepare accurate financial statements for the IRS.

Keeping good records is all about being organized. Don’t just rely on your memory. Instead, try to keep all of your receipts for every expense you incur in one place. This should include all business purchases, including office supplies, equipment, rent, gifts, advertising and travel expenses, as well as employee payroll information.

You can do this by keeping all business documents in a filing cabinet, documenting purchases by each month and year. Another option is an online accounting software program like QuickBooks, which can help you automate record keeping.

5. Misclassifying employees as contractors

Some small businesses may try to treat workers as independent contractors to save money, as payroll taxes are not due for contractors. However, this can end up costing you if the IRS disagrees with your assessment.

The IRS’ classification will depend on a number of factors, including whether or not you have control over the worker’s hours, what work is being done and how it will be done, and if the work performed is a key aspect of the business, according to the agency.

“Watch out for who controls their time and work environment,” says Guy Baker, a certified financial planner with Wealth Team Solutions in Irvine, California. “How many organizations does the person work for? If you are the only one and they get 100% of their income from you, it is likely they are an employee.”

If you classify an employee as an independent contractor and you’re wrong, you can be held liable for employment taxes for that worker, according to the IRS. For more information on how to correctly determine whether an individual is an employee or independent contractor, visit the IRS website.

By being aware of some of the most common small business tax mistakes, you can avoid leaving any money on the table—which means more dough to reinvest in your fast-growing business.

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