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Should You Itemize Your Taxes in 2018?

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Deciding whether or not to itemize your taxes can be tricky, and changes to tax law implemented by the Tax Cuts and Jobs Act, signed into law by President Trump on Dec. 22, 2017, may have you asking, “Is it even worth it?”

To help you decide whether it makes sense for you to itemize your 2018 taxes, we looked at the pros and cons of itemizing versus taking the standard deduction, break down changes to commonly itemized deductions, and help you think through your itemizing strategy for 2018.

Itemized vs. standard deductions

When filing your taxes, you usually have a choice to use standard deductions (a portion taken from your income before taxes) or to itemize (deduct various expenses, such as charitable donations and medical bills), in efforts to pay less in taxes. In 2017, the standard deduction for single households was $6350 while married couples who file jointly could claim $12,700. Fast forward to 2018 and the standard deductions have increased significantly. Single households are now set at $12,000, while married couples are at $24,000. This means you have to itemize a lot more to pass the standard deduction threshold.

How the Tax Cuts and Jobs Act will impact your decision 

While some things will stay the same under this new act — this includes deductions for teachers, electric cars, adoption assistance and student loan interest — there are changes to common deductions that will make it more difficult to meet the increased threshold. Let’s break down some of the most common items you are used to itemizing and how the new bill will impact each.

Medical expenses: Last year, you could deduct medical bills that were paid out-of-pocket and exceeded 10 percent of your adjusted gross income. This year, that number has gone down to exceeding 7.5 percent.

State and local tax (SALT): You used to be able to deduct state and local property tax along with income and sales taxes. Now, you can only claim up to $10,000 in these types of taxes combined.

Miscellaneous tax deductions: In 2017, you were able to itemize many miscellaneous items, like CPA fees that were charged while preparing your taxes. This year, most miscellaneous items cannot be itemized, including tax preparation fees, certain work-related costs and investment fees.

Personal and dependent exemptions: Your ability to claim personal exemptions on your taxes has been suspended until 2025. However, you can still claim dependent exemptions. In fact, the child tax credit has doubled from last year, rising up to $2,000 per child under the age of 17.

Estate taxes: These are the taxes that come from a large estate inherited after a death (usually by a family member). In previous years, you would not have to pay estate tax for anything up to $5.49 million, but this year it has gone up to nearly $11.2 million.

Pass-through business: Those who own their own business can now deduct 20% of their business income when they file their taxes. They don’t necessarily have to reach a minimum income either, just as long as they can show they made money. And the more they make ($157,500 for individuals and $315,000 for married couples), the better the deduction.

What should consumers consider when deciding whether or not to itemize?

There’s no question that the new tax bill is going to bring some major changes to just about everyone this year. To help you prepare, let’s consider those who might be better off itemizing than others.

The wealthy may have more opportunities to itemize. These are likely the taxpayers that can itemize the most, including any large charitable donations (think: $10,000 per year or more) they made throughout the year.

Homeowners can itemize interest and taxes. As we mentioned above, you can now only deduct up to $10,000 for state and local taxes. However, those who own their own home and pay significant mortgage interest may still exceed the standard deduction limit.

Taxpayers with children have an advantage. Let’s not forget taxpayers with several children under the age of 17, who are looking at a deduction of $2,000 per child.

When it all comes down to it, Howard Wurzel CPA, CGMA, based in New York City, stated that if you can itemize, you should. While it can be a hassle, you may reap the benefits of a lower tax liability.

“If you are actually incurring the expenses, and they exceed the standard deduction, than you should always itemize,” says Wurzel. “There is always a possibility of being audited (whether you itemize or not) so as long as you’re being truthful with your expenses you won’t have any problems.”

One way to stay on top of this is by saving your receipts. This provides proof of your expenses in case the IRS needs to see them.

Other changes to keep in mind

While we outlined some major changes to to consider when decided whether or not to itemize your taxes this year, these are not the only updates to the law. Other changes include 529 college savings plans, moving expenses, corporate taxes, alimony, and alternative minimum tax. For a detailed overview of the Tax Cuts and Jobs Act and all its changes, view our guide.

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Mortgage

What to Do When a Lender Requests a Letter of Explanation

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During the mortgage loan application process, a letter of explanation may be requested. The lender may ask a borrower to provide this letter if something on the credit report needs explaining, such as an increase in debt or a missed payment. Such financial stresses could be caused, for example, by a recent job loss that suddenly reduced income, but that’s not apparent to a lender without further explanation.

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Sure, this letter may seem intimidating if you have to explain your past financial mistakes or struggles to a lender, but being asked for one shouldn’t be feared. The letter can help enhance your home loan application by allowing the lender to get to know you better so that you come across as an honest and reliable applicant.

What is a letter of explanation?

Now that you know a letter of explanation shouldn’t be considered scary, let’s discuss what exactly it is and how it comes into play. When something on your credit report may need more clarification, such as a late payment or a bankruptcy filing, a lender may request more information by having you write a letter. In this letter, you have the opportunity to explain any financial problems you’ve had in the past. If you present your situation correctly and honestly, you can show the lender that you are responsible with your money and will be able to financially commit to a mortgage.

Each lender takes a risk when approving a borrower for a new mortgage. This means that in order for your mortgage loan to be approved, certain underwriting requirements must be met, including investigating a borrower’s financial background. All Federal Housing Administration (FHA) mortgages need to follow the guidelines of the U.S. Department of Housing and Urban Development (HUD). These requirements include looking into the borrower’s “collections and judgments” history, which could affect creditworthiness and ability to make on-time mortgage payments.

By writing a letter of explanation, you can present the reasons behind any negative marks on your credit history by supplying the facts — what happened and why — while also offering specific documentation to help explain the situation in more detail. Describing in your letter how you went about fixing your past financial issues can also show the lender you are able to handle your mortgage now by learning from financial errors in the past.

Why might a lender request a letter of explanation?

In the general sense, a lender might request a letter of explanation simply to gather more information to clarify and determine a borrower’s eligibility. However, there are many specific reasons why a lender may request such a letter from a borrower. Let’s take a look at some of the most common reasons behind a letter request.

  • Address change or discrepancies

An incorrect address or one that has recently changed may require more details outlining a recent move or perhaps a change in living situation due to a divorce.

  • Job change

A change in job or recent unemployment can have a negative impact on your finances (for example, not being able to keep up with monthly credit card payments) and may need to be discussed. If this is the case, you’ll likely also need to provide proper documentation, which can include anything from your tax returns to a job termination letter.

  • Income change

It’s important to show lenders that you can make your monthly mortgage payments with reliable income. If there was a decrease in income when you left a company to start your own, for example, you may need to explain this, along with the steps you took to pay your debts since that time.

  • Large deposit into bank account

If you recently made a large deposit in your bank account, especially one with an unidentified source, a lender may need clarification, which can include a letter of explanation and physical verification of this transaction. For example, if a relative gave you a few thousand dollars for your birthday last year, you may need to show receipt of the check and/or the deposit slip.

  • Late payments

Lenders want to know you will make your monthly mortgage payments on time, so if you have had late payments in the past, it can be cause for alarm. If this is the case, you may be asked to clarify why you missed a payment, giving reasons such as a job loss, which led to less income.

  • Other circumstances

There are other conditions that may require a lender to ask for a letter of explanation. For example, if a borrower has a lot of overdraft fees from the bank or has taken out hefty withdrawals on a recurring basis. Student loan delinquency, identity theft and self-employment income that has fluctuated significantly from one year to the next can also cause lenders to want to know more. In short, any circumstance that makes a borrower appear risky, including past financial trouble, can cause a lender to be on the alert and need more information.

How to write a letter of explanation

If a lender requests a letter of explanation, don’t worry. These letters are pretty standard when you are applying for a mortgage, and your loan officer can offer assistance with composing one if needed. It’s just up to you, the borrower, to ensure all information is accurate. But if you’re nervous about writing a letter of explanation, there’s an easy format you can use to guide you.

Here are the most important things your letter of explanation should have to help explain your individual situation:

  • Facts – Be sure to include all the facts behind any negative credit history with proper dates, numbers and any other evidence that will help support your situation.
  • Documentation – Provide all correct documentation to help back up your statements, including anything from past tax forms to medical bills.
  • Resolution – Explain how you worked to resolve any financial issues in the past, such as paying down debt or working with a financial planner to better manage your money so these issues won’t occur again.
  • Acknowledge your mistakes – Recognize you made mistakes in the past with money, without ever blaming creditors for these issues.
  • Short and simple – Keep the letter brief and to the point so it is clear to the lender you have a firm understanding of what occurred and how you fixed it.
  • Proofread – Read through your letter, or ask someone else to, to triple check that both spelling and grammar are correct.
  • Your details – Remember to provide your name, contact information and signature on your letter.

Conclusion

If a lender requests a letter of explanation, don’t panic. Remember that these types of requests are normal when applying for a mortgage. A lender wants to get to know you as a borrower to better understand your financial history and ensure you can pay for your new mortgage loan. A letter of explanation should not be feared. Use it to help explain your past financial situations, what you have learned from them and how you plan to keep these circumstances from ever happening again. By taking simple steps to write this letter, you can ensure it is accurate, clear and concise.

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Pay Down My Debt

Home Equity Loans for Debt Consolidation – What to Consider

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consolidating debt with a home equity loan
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If you need money fast, a home equity loan might be a good option. A home equity loan can provide you with a lump sum of money in a matter of weeks; the borrowed amount can then be paid off on a monthly basis for a fixed rate. It can be especially helpful to use this type of loan to help consolidate your current debt. A home equity loan can combine debt from various lenders, such as different credit card companies, and place it into one convenient payment.

However, a home equity loan might not always be the best option for everyone. It’s important to understand how it works before making a final decision. This guide will help you learn what a home equity loan is, how it can be used, and how to qualify for one, so you can decide whether this loan product fits into your financial plan.

What is a home equity loan?

A home equity loan allows you to borrow money from a lender (usually a local bank) and uses your house as collateral for repayment. The interest rates can either be fixed or variable with a set repayment term of usually around 10 to 15 years.

“Home equity loans allow you to take out a lump sum up to a maximum percentage of the home’s value,” said Demond Johnson, a loan officer with Guild Mortgage based near Fort Worth, Texas. While the borrowed loan amount varies by each lender, it usually doesn’t reach over 80%.

You can use this loan for just about anything. However, it’s usually best when used toward an investment that will help you in the long run, like consolidating your current debt, and not used on something frivolous, like a luxurious vacation. Remember: You will need to pay this loan back — if you don’t, your house can go into foreclosure.

Pros and cons of a home equity loan

It’s important to understand the pros and cons of a home equity loan before considering applying for one. Consider the following.

Pros

  • It may be your cheapest option: Home equity loans typically have lower rates than a credit card or other loan product, said Johnson.
  • You may have a lower tax liability: The interest on home equity loans may be tax deductible.

Cons

  • You could lose your home: Home equity loans might not be a great option for those with poor spending habits. Since your home is on the line, these loans are best suited for disciplined borrowers who won’t miss payments.
  • You may accumulate more debt: Even though you’re consolidating your debt, you’re not debt free. Those who overspend and are not smart with their finances can continue to rack up more debt as time goes on, causing an even heavier financial burden than before.
  • You could misuse loan funds: A home equity loan can be used for just about anything, and that may be problematic for borrowers with poor spending habits. You may, for instance, want to pay for an upcoming vacation or wedding, but that will only result in more future debt without any return on your investment. Home repairs or renovations are a better use of funds, as they can increase your property value.

Using a home equity loan to consolidate debt

There are many solid reasons why someone might want to use a home equity loan to help consolidate debt.

Johnson said it makes sense to use this type of loan to help consolidate high interest debt such as with various credit cards because “the savings can be significant.” Using home equity loans to pay off other debts, such as student loans might also be wise, said George Burkley, owner of American Mortgage & Financial Services in Indiana — “[the] rates are usually much lower.”

Burkley also stated that if you’re looking to do home renovations or repairs on the house, or are interested in buying a second home, a home equity loan might be a good option to consolidate that debt, as opposed to using a credit card.

How to qualify for a home equity loan

When applying for a home equity loan, there are a few things a borrower will need to consider in order to qualify.

Collateral

Borrowers will need to have substantial collateral. For a home equity loan, your house is the collateral. If you can’t make the payments each month, the lender can take away your house.

Credit score

Lenders usually look at your credit score when you qualify for any type of loan, and a home equity loan is no different. A borrower’s credit score can play a significant role when qualifying for a home equity loan. Johnson said borrowers usually need a 680 (or higher) FICO score to qualify, but scores can vary depending on each lender.

Equity

A borrower’s equity can help determine how much funds can be borrowed with a home equity loan. According to Burkley, equity usually cannot exceed “over 85-95% of what the house is worth.”

Debt-to-income ratio

Lenders will look at your income and current debts, such as credit cards, current mortgage, and student loans, to determine whether you’re able to take out a home equity loan. Lenders want to ensure you can pay back your debt so if you already have a substantial amount, you may not be an ideal candidate. Burkley said borrowers should have around a 40% to 45% debt-to-income ratio to qualify for a home equity loan.

Where to find home equity loans

A home equity loan might be a good option for you. If you’re looking to find a loan, LendingTree might be able to help. With its online marketplace, you’re able to use one form to potentially be matched with up to five offers from lenders at once. First choose the type of property you need the home equity loan for, such as a condo, single family home or a townhouse. Then finish completing the form by adding your personal information and you’ll instantly receive offers available to you.

LendingTree also has a convenient home equity calculator that can help determine the estimated amount you’re eligible to borrow. This can help you to decide whether a home equity loan might be useful for your financial needs or if another option might be more efficient.

What to consider as you shop home equity loans

When searching for home equity loans, there are a few important aspects to keep an eye on. Here are a few of the most common aspects to watch out for.

  • Interest rates: Rates vary from each lender. It’s important to compare interest rates with all lenders to ensure you get the best possible rate for your financial needs. Keep in mind, some lenders are more likely to provide lower interest rates to those with excellent credit.
  • Origination fees: Some home equity loans can come with fees, such as origination fee that is applied when processing the loan.
  • Prepayment penalties: Lenders can also charge a prepayment penalty for when you want to pay off your loan early. It’s important to check with each lender to see which fees are tacked on.
  • Lenders: Search for a lender you feel most comfortable working with. You want to be able to actively discuss your financial needs with a lender so you can learn how their offers will fit for your budget and your lifestyle.

Home equity loan vs. HELOC: What’s the difference?

A home equity loan and home equity line of credit (HELOC) have a few similarities. For example, they are both backed by the equity in your home. The borrowed amount is also based on your home equity, which is normally around 80% to 90%.

However, there is a distinct difference between these two financial products: While a home equity loan provides funds in one lump sum, a HELOC is a revolving account. With the latter, you’ll be able to take out money you need during a certain time frame.

Johnson said it’s a good idea to consider a HELOC as “a VISA with a very large limit.” You’ll be charged interest on the money you borrow, and you’ll be able to pay off the HELOC and charge more to the account in the future.

However, Johnson warned that rates can change on a HELOC. That is something to consider when determining whether a HELOC is right for you.

Alternative ways to consolidate debt

Using a home equity loan to consolidate your debt might be the best option for you. However, there might be something else out there that’s an even better fit. To determine which is the best for you, it’s always smart to learn about all offerings so you get exactly what you need.

Debt consolidation loan vs. home equity loan

A debt consolidation loan (which can also be a personal loan) might be a good option for those who have a lot of debt from various lenders. Instead of paying a high-interest rate to each lender every month, you can consolidate the monthly payments into one lump sum. Often times, these rates can be much lower than what you were paying before.

Lenders usually look at your credit score for both a debt consolidation loan and a home equity loan. However, sometimes lenders can be more lenient with debt consolidation loans in terms of your credit score; oftentimes, borrowers can have less than stellar credit and still be approved for a personal loan or debt consolidation loan. However, those with excellent credit will be more likely to obtain lower interest rates with debt consolidation loans than those who have fair to poor credit.

And unlike home equity loans, debt consolidation loans don’t use your home as collateral, so you won’t have to worry about losing your home to the lender even if you can’t make payments. Find the best debt consolidation loans with our table below!

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A Personal Loan can offer funds relatively quickly once you qualify you could have your funds within a few days to a week. A loan can be fixed for a term and rate or variable with fluctuating amount due and rate assessed, be sure to speak with your loan officer about the actual term and rate you may qualify for based on your credit history and ability to repay the loan. A personal loan can assist in paying off high-interest rate balances with one fixed term payment, so it is important that you try to obtain a fixed term and rate if your goal is to reduce your debt. Some lenders may require that you have an account with them already and for a prescribed period of time in order to qualify for better rates on their personal loan products. Lenders may charge an origination fee generally around 1% of the amount sought. Be sure to ask about all fees, costs and terms associated with each loan product. Loan amounts of $1,000 up to $50,000 are available through participating lenders; however, your state, credit history, credit score, personal financial situation, and lender underwriting criteria can impact the amount, fees, terms and rates offered. Ask your loan officer for details.

As of 17-May-19, LendingTree Personal Loan consumers were seeing match rates as low as 3.49% (3.49% APR) on a $10,000 loan amount for a term of three (3) years. Rates and APRs were based on a self-identified credit score of 700 or higher, zero down payment, origination fees of $0 to $100 (depending on loan amount and term selected).

Balance transfer card vs. HEL

A balance transfer card with a promotional 0% APR can be ideal for those with high-interest credit card debt. However, qualifying for a credit card with a low balance transfer rate and promotional APR can be difficult.

While a home equity loan can be used to consolidate a variety of different debt, including home repairs, a balance transfer is strictly used for credit card debt.

Some balance transfer cards don’t come with a transfer fee, especially for those borrowers with excellent credit. However, many cards charge a fee equal to a certain percentage of your balance.

Home equity loans can sometimes allow borrowers to combine a larger amount of debt than with a balance transfer. However, a home equity loan requires you to have equity in your home. As a result, some homeowners may find that they don’t qualify for this type of financing.

A home equity loan can be a great option when you need money fast for debt consolidation, such as combining credit card debt or other debt accumulated by home renovations and repairs. But these types of loans aren’t always the best fit for everyone and should be well-considered before making a decision.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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