‘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.

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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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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.

---

Paperwork image via Shutterstock.

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SHOP Health Insurance Marketplace to Launch in 5 States

Entrepreneurs in Delaware, Illinois, New Jersey, Ohio and Missouri will be the first to be able to sign up to offer health care plans to their employees through the federal government beginning in late October.

This is a win for small businesses, which aren’t legally required to provide health insurance, but will presumably be able to attract more competitive talent by offering this valuable perk.

It’s called the Small Business Health Options Program, or, SHOP, and it’s part of the Affordable Care Act, which the Obama administration passed in 2010 and launched last year. Similar to the Health Insurance Marketplace, an online portal that lets individuals shop around for medical coverage, SHOP is an online marketplace that will let employers with fewer than 50 full-time employees offer four different coverage plans to their workers.

To avoid the chaos that surrounded the launch of the individual online health care marketplace last fall, which included website crashes and technical glitches, SHOP is being launched first in just five states through an early access program sponsored by the Centers for Medicare & Medicaid Services (CMS). Businesses nationwide can get in on the action beginning Nov. 15, and coverage will start as early as Jan. 1, 2015.

“The SHOP early access initiative is also designed to build confidence in the online SHOP Marketplace when it opens to small employers nationwide,” said Rhett Buttle, director of private sector engagement for the U.S. Department of Health and Human Services, in a blog post last month. “SHOP Early Access in these five states embodies this spirit of learning, and will allow CMS to collect valuable information that will inform the full launch of the SHOP Marketplace in November.”

To get started, small business owners create an account on HeathCare.gov, fill out an application and upload their employee roster. Businesses in the early access states can complete these steps beginning in late October, but can’t begin comparing plans and prices until the portal fully launches in November. The four plans – Bronze, Silver, Gold and Platinum – all cover basic benefits including doctor visits and prescription drugs, but deductible and co-payment amounts differ.

Additionally, employers with fewer than 25 employees can qualify for a tax credit that covers up to 50% of their premium costs. Self-employed entrepreneurs can get coverage through the government’s individual health insurance portal.

For more information about SHOP, check out NerdWallet’s guide.

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Health care illustration via Shutterstock.

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SHOP Health Insurance Marketplace to Launch in 5 States

Entrepreneurs in Delaware, Illinois, New Jersey, Ohio and Missouri will be the first to be able to sign up to offer health care plans to their employees through the federal government beginning in late October.

This is a win for small businesses, which aren’t legally required to provide health insurance, but will presumably be able to attract more competitive talent by offering this valuable perk.

It’s called the Small Business Health Options Program, or, SHOP, and it’s part of the Affordable Care Act, which the Obama administration passed in 2010 and launched last year. Similar to the Health Insurance Marketplace, an online portal that lets individuals shop around for medical coverage, SHOP is an online marketplace that will let employers with fewer than 50 full-time employees offer four different coverage plans to their workers.

To avoid the chaos that surrounded the launch of the individual online health care marketplace last fall, which included website crashes and technical glitches, SHOP is being launched first in just five states through an early access program sponsored by the Centers for Medicare & Medicaid Services (CMS). Businesses nationwide can get in on the action beginning Nov. 15, and coverage will start as early as Jan. 1, 2015.

“The SHOP early access initiative is also designed to build confidence in the online SHOP Marketplace when it opens to small employers nationwide,” said Rhett Buttle, director of private sector engagement for the U.S. Department of Health and Human Services, in a blog post last month. “SHOP Early Access in these five states embodies this spirit of learning, and will allow CMS to collect valuable information that will inform the full launch of the SHOP Marketplace in November.”

To get started, small business owners create an account on HeathCare.gov, fill out an application and upload their employee roster. Businesses in the early access states can complete these steps beginning in late October, but can’t begin comparing plans and prices until the portal fully launches in November. The four plans – Bronze, Silver, Gold and Platinum – all cover basic benefits including doctor visits and prescription drugs, but deductible and co-payment amounts differ.

Additionally, employers with fewer than 25 employees can qualify for a tax credit that covers up to 50% of their premium costs. Self-employed entrepreneurs can get coverage through the government’s individual health insurance portal.

For more information about SHOP, check out NerdWallet’s guide.

---

Health care illustration via Shutterstock.

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Regulators Focus on Access to Checking, Your Key to Stable Finances

Blunders from your past could come back to haunt you when applying for a checking account. Banks and credit unions can reject consumers based on specialized reports that track everything from your credit score to your banking history, including past bounced checks and overdrafts. And that has drawn scrutiny from federal regulators concerned about unfair exclusion from the mainstream financial system.

Around 200 million Americans use checking accounts, the Consumer Financial Protection Bureau says. But this screening process effectively creates a blacklist, one that in 2011 contributed to the 34 million people who remained unbanked or underbanked, according to the Federal Deposit Insurance Corp.

Unflattering information

More than 80% of banks use these special reporting services to decide whether to let someone open a checking or savings account, according to the National Consumer Law Center in Boston. Often, the reports contain unflattering financial information most consumers would rather forget, such as past non-sufficient funds situations and overdrafts.

“I think both of those combined is one of the root problems that are causing people to get screened out of their bank accounts and end up in the alternative system, where they’re much more vulnerable,” says Nancy Yuill, executive director of Innovative Changes, a nonprofit community development financial institution in Portland, Oregon. The group helps low-income consumers improve their finances and avoid the alternatives Yuill cites.

They can include buying money orders to pay bills, using check-cashing stores to obtain cash and payday lenders to make ends meet, moves that can spin them closer to financial trouble, according to a U.S. Postal Service study of the nation’s unbanked. It says consumers spent about $89 billion on interest and fees related to alternative financial services in 2012 alone.

Not credit reports

Separate from the traditional credit data compiled by TransUnion, Equifax and Experian, the specialized reports in question come from organizations like Early Warning and Chex Systems. As with credit reports, consumers are legally entitled one free copy each year and each time a report is used against them. Consumers can dispute information that they believe to be incorrect by appealing to the reporting agency, the FDIC says.

Low-income consumers are disproportionately screened out of checking accounts, Yuill says. As they tend to move frequently in search of affordable housing and job opportunities, bank statements and even bills don’t always follow in a timely way. That can lead to a cyclical trap where people struggling to pay rent or buy food incur overdraft fees and wind up shut out of the banking system. It doesn’t have to be this way, she says.

“If someone’s in that situation now, I suggest they look local,” Yuill says. “Look for local community banks and local credit unions that are going to listen and give them a chance to explain their situation and give them a chance to try again.”

Regulatory focus

The consumer bureau is spearheading efforts to ensure the accuracy of data collected by specialty consumer reporting agencies (CRAs) and to make it easier for consumers to review and correct their reports. Currently there are inconsistencies between various CRAs and financial institutions, which aren’t aligned on how information is compiled and used.

“We are seeking, in particular, to explore ways that account screening can move beyond the use of specialized consumer reports as crude “blacklists” where consumers are turned down for an account simply because their name appears on the list,” Richard Cordray, the bureau’s director, said in a statement prepared for an Oct. 8 forum on access to checking accounts.

Consumers may not even know the specialized reports exist until they are denied a checking account because of the information they contain.

“A consumer who had an account closed and goes to open a new account at another institution may be utterly unaware of how his or her application will be judged,” Cordray said.

So if you’re looking to open a checking account soon and your financial history could be described as checkered, be prepared to dive into your past to remedy mistakes before you face a nasty surprise.

Consumer image via Shutterstock

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Regulators Focus on Access to Checking, Your Key to Stable Finances

Blunders from your past could come back to haunt you when applying for a checking account. Banks and credit unions can reject consumers based on specialized reports that track everything from your credit score to your banking history, including past bounced checks and overdrafts. And that has drawn scrutiny from federal regulators concerned about unfair exclusion from the mainstream financial system.

Around 200 million Americans use checking accounts, the Consumer Financial Protection Bureau says. But this screening process effectively creates a blacklist, one that in 2011 contributed to the 34 million people who remained unbanked or underbanked, according to the Federal Deposit Insurance Corp.

Unflattering information

More than 80% of banks use these special reporting services to decide whether to let someone open a checking or savings account, according to the National Consumer Law Center in Boston. Often, the reports contain unflattering financial information most consumers would rather forget, such as past non-sufficient funds situations and overdrafts.

“I think both of those combined is one of the root problems that are causing people to get screened out of their bank accounts and end up in the alternative system, where they’re much more vulnerable,” says Nancy Yuill, executive director of Innovative Changes, a nonprofit community development financial institution in Portland, Oregon. The group helps low-income consumers improve their finances and avoid the alternatives Yuill cites.

They can include buying money orders to pay bills, using check-cashing stores to obtain cash and payday lenders to make ends meet, moves that can spin them closer to financial trouble, according to a U.S. Postal Service study of the nation’s unbanked. It says consumers spent about $89 billion on interest and fees related to alternative financial services in 2012 alone.

Not credit reports

Separate from the traditional credit data compiled by TransUnion, Equifax and Experian, the specialized reports in question come from organizations like Early Warning and Chex Systems. As with credit reports, consumers are legally entitled one free copy each year and each time a report is used against them. Consumers can dispute information that they believe to be incorrect by appealing to the reporting agency, the FDIC says.

Low-income consumers are disproportionately screened out of checking accounts, Yuill says. As they tend to move frequently in search of affordable housing and job opportunities, bank statements and even bills don’t always follow in a timely way. That can lead to a cyclical trap where people struggling to pay rent or buy food incur overdraft fees and wind up shut out of the banking system. It doesn’t have to be this way, she says.

“If someone’s in that situation now, I suggest they look local,” Yuill says. “Look for local community banks and local credit unions that are going to listen and give them a chance to explain their situation and give them a chance to try again.”

Regulatory focus

The consumer bureau is spearheading efforts to ensure the accuracy of data collected by specialty consumer reporting agencies (CRAs) and to make it easier for consumers to review and correct their reports. Currently there are inconsistencies between various CRAs and financial institutions, which aren’t aligned on how information is compiled and used.

“We are seeking, in particular, to explore ways that account screening can move beyond the use of specialized consumer reports as crude “blacklists” where consumers are turned down for an account simply because their name appears on the list,” Richard Cordray, the bureau’s director, said in a statement prepared for an Oct. 8 forum on access to checking accounts.

Consumers may not even know the specialized reports exist until they are denied a checking account because of the information they contain.

“A consumer who had an account closed and goes to open a new account at another institution may be utterly unaware of how his or her application will be judged,” Cordray said.

So if you’re looking to open a checking account soon and your financial history could be described as checkered, be prepared to dive into your past to remedy mistakes before you face a nasty surprise.

Consumer image via Shutterstock

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