Since the coronavirus quarantine began, many people have been forced to work from home. If you didn’t have a home office before the pandemic, you might have had a few expenses to set one up. I’ve received several questions about what benefits are allowed for home offices during the COVID-19 crisis.
One question came in on the QDT coronavirus question page. Money Girl reader Ian said:
"I have a question about next year's taxes and working from home. For the past 13 weeks, I have been forced to work from a home office. (I am a regular W-2 employee, not self-employed.) I have had some expenses come up that were brought about by working from home: a computer upgrade so I can better connect to Wi-Fi, a new router, and even a desk chair so I am comfortable while I work. Should I be keeping track of those expenses? Will they be deductible? My employer is not going to reimburse them. Thank you for your help!"
Another question came from Miki, who used my contact page at Lauradadams.com to reach me. She said:
"Hi, Laura, and thank you for a wonderful podcast! I've been listening for years and have always thought that you'd have a show for any question I could ever think of. But this new situation with COVID-19 has made me think of something that I'm sure many of us are dealing with right now.
"To start working from home, I had to spend quite a bit of money to get my home office on par with my actual office. I know you've done episodes on claiming home office expenses on taxes before, but could you do an episode on whether we can claim home office expenses on our taxes next year? And if we can, things we should start thinking about now (aside from saving the receipts)?"
Thanks for your kind words and thoughtful questions! I'll explain who qualifies for a home office tax deduction and serve up some tips for claiming it.
5 things to know about the home office tax deduction during coronavirus
Here's the detail on five things you should know about qualifying for the home office tax deduction in 2020.
1. COVID-19 has not changed the home office tax law
The CARES Act changed many personal finance rules—including specific tax deadlines, retirement distributions, and federal student loan payments—but the home office tax deduction is not one of them. In a previous post and podcast, Your Guide to Claiming a Legit Home Office Tax Deduction, I covered the fact that the Tax Cuts and Jobs Act (TCJA) of 2017 drastically changed who can claim this valuable deduction.
Before the TCJA, you could claim a home office deduction whether you worked for yourself or for an employer either full- or part-time. Unfortunately, W-2 employees can no longer take advantage of this tax benefit. Now, you must have self-employment income to qualify. My guess is that the IRS was concerned that it was too easy to abuse this benefit and reined it in.
Before the TCJA, you could claim a home office deduction whether you worked for yourself or for an employer either full- or part-time. Unfortunately, W-2 employees can no longer take advantage of this tax benefit.
The best option for an employee is to request expense reimbursement from your current or future employer even though they're not obligated to pay you. If you get pushback, make a list of all your home office expenses so it's clear how much you spent on their behalf. They might consider it for your next cost of living raise or bonus.
Unless Miki or Ian have a side business that they started or will start, before the end of 2020, they won't get deductions to help offset their home office setup costs.
2. The self-employed can claim a home office tax deduction
Let’s say you use a space in a home that you rent or own for business purposes in 2020. There are two pretty straightforward qualifications to qualify for the home office deduction:
- Your home office space must be used regularly and exclusively for business
- Your home office must be the principal place used for business
You could use a spare bedroom or a hallway nook to run your business. You don’t need walls to separate your office, but the space should be distinct—unless you qualify for an exemption, such as running a daycare. It’s permissible to use a separate structure, such as a garage or studio, as your home office if you use it regularly for business.
You must use your home as the primary place you conduct business—even if it’s just for administrative work, such as scheduling and bookkeeping. However, your home doesn’t have to be the only place you work in. For instance, you might work at a coffee shop or meet clients there from time to time and still be eligible for a home office tax deduction.
3. Your business can be full- or part-time to qualify for a home office tax deduction
If you work for yourself in any trade or business, either full- or part-time, and your primary office location is your home, you have a home business. No matter what you call yourself or your business, if you have self-employment income and do any portion of the work at home, you probably have an eligible home office. You might sell goods and services as a small business, freelancer, consultant, independent contractor, or gig worker.
If you work for yourself in any trade or business, either full- or part-time, and your primary office location is your home, you have a home business.
As I previously mentioned, the work you do at home could just be administrative tasks for your business, such as communication, scheduling, invoicing, and recordkeeping. Many types of solopreneurs and trades do most of their work away from home and still qualify for a legitimate home office deduction. These may include gig economy workers, sales reps, and those in the construction industry.
4. You can deduct direct home office expenses for your business
If you run a business from home, your direct home office expenses qualify for a tax deduction. These are costs to set up and maintain your office, such as furnishings, installing a phone line, or painting the walls. These costs are 100% deductible, no matter the size of the office.
5. You can deduct indirect home office expenses for your business
Additionally, you’ll have costs that are related to your office that affect your entire home. For instance, if you’re a renter, the cost of rent, renters insurance, and utilities are examples of indirect expenses. You’d have these expenses even if you didn’t have a home office.
If you own your home, potential indirect expenses typically include mortgage interest, property taxes, home insurance, utilities, and maintenance. You can't deduct the principal portion of your mortgage payment, which is the amount borrowed for the home. Instead, you’re allowed to recover a part of the cost each year through depreciation deductions, using formulas created by the IRS.
Allowable indirect expenses actually turn some of your personal costs into home office business deductions, which is fantastic! They’re partially deductible based on the size of your office as a percentage of your home—unless you use a simplified calculation, which I’ll cover next.
How to calculate your home office tax deduction
If you qualify for the home office deduction, there are two ways you can calculate it: the standard method or the simplified method.
The standard method requires you to keep good records and calculate the percentage of your home used for business. For example, if your home office is 12 feet by 10 feet, that’s 120 square feet. If your entire home is 1,200 square feet, then diving 120 by 1,200 gives you a home office space that’s 10% of your home.
In this example, 10% of your qualifying expenses could be attributed to business use, and the remaining 90% would be for personal use. If your monthly power bill is $100 and 10% of your home qualifies for business use, you can consider $10 of the bill a business expense.
To claim the standard deduction, use Form 8829, Expenses for Business Use of Your Home, to figure out the expenses you can deduct and then file it with Schedule C, Profit or Loss From Business.
The simplified method doesn’t require you to keep any records, which makes it incredibly easy to claim. You can claim $5 per square foot of your office area, up to a maximum of 300 square feet. So, that caps your deduction at $1,500 (300 square feet x $5) per year.
The simplified method requires you to measure your office space and include it on Schedule C. It works best for small home offices, while the standard approach is better when your office is bigger than 300 square feet. You can choose the method that gives you the largest tax break for any year.
No matter which method you choose to calculate a home office tax deduction, you can't deduct more than your business's net profit. However, you can carry them forward into future tax years.
Also note that business expenses that are unrelated to your home office—such as marketing, equipment, software, office supplies, and business insurance—are fully deductible no matter where you run your business.
If you have any questions about qualifying business expenses, home office expenses, or taxes, consult with a qualified tax accountant to maximize every possible deduction and save money. The cost of working with a trusted financial advisor or tax pro is worth every penny.Continue reading
There are a number of online jobs and companies that pay weekly, or possibly even more frequently. Here are some of our favorites.
The post 33 Online Jobs That Pay Weekly appeared first on Bible Money Matters and was written by Marc. Copyright Â© Bible Money Matters – please visit biblemoneymatters.com for more great content.Continue reading
I've received several questions from Money Girl podcast listeners about paying off credit card debt. It's a fundamental goal because carrying card balances come with high interest, a waste of your financial resources. Instead of paying money to card companies, it's time to use it to build wealth for yourself.
7 Strategies to Pay Off Credit Card Debt Faster
1. Stop making new card charges
If you're carrying card balances from month-to-month, it's essential to understand what it costs you. As interest accrues, it can double or triple the original cost of a charged item, depending on how long it takes you to pay off.
The first step to improving any area of your life is to acknowledge your mistakes, and financing a lifestyle you can't afford using a credit card is a biggie. So, stop making new charges until you take control of your cards and can pay them off in full each month.
As interest accrues, it can double or triple the original cost of a charged item, depending on how long it takes you to pay off.
Yes, reining in your card spending will probably require sacrifices. Consider ways to earn extra income, such as starting a side gig, finding a better-paying job, or selling your unused stuff. Also, look for ways to cut costs by downsizing your home, vehicle, memberships, or unnecessary expenses.
2. Consider your big financial picture
Before you decide to pay off credit card debt aggressively, look at the "big picture" of your financial life. Consider any other debts or obligations you should prioritize, such as a tax delinquency, legal judgment, or unpaid child support. The next debts to pay off are those already in default or turned over to a collection agency.
In many cases, not having a cash reserve is why people get into credit card debt in the first place.
Assuming you don't have any debts in default, focus your attention on your emergency fund … or lack of one! I recommend maintaining a minimum of six months' worth of your living expenses on hand. In many cases, not having a cash reserve is why people get into credit card debt in the first place.
3. Make more than the minimum payment
Many people who can pay more than their monthly minimum card payment don't do it. The problem is that minimums go mostly toward interest and don't reduce your balance significantly.
For example, let's assume your card charges 15% APR, you have a $5,000 balance, and you never make another purchase on the card. If your minimum payment is 4% of your card balance, it will take you 10½ years to pay off. And here's the worst part—you'd have paid almost $2,400 in interest!
4. Target debts with the highest interest rates first
Make a list of all your debts, including credit cards, lines of credit, and loans. Include your balances owed and interest rates charged. Then rank your liabilities in order of highest to lowest interest rate.
Getting rid of the highest interest debts first saves you the most.
Remember that the higher a debt's interest rate, the more it costs you in interest per dollar of debt. So, getting rid of the highest interest debts first saves you the most. Then you can use the savings to pay more on your next highest interest debt and so on.
If you have several credit cards, evaluate them the same way—tackle them in order of highest to lowest interest rate to get the most bang for your buck. And if a credit card isn't the most expensive debt you have, make it a lower priority.
In general, debts that come with a tax deduction such as mortgages, home equity lines of credit, and student loans, should be paid off last. Not only do those types of debt have relatively low interest rates, but when some or all of the interest is tax-deductible, they cost you even less on an after-tax basis.
5. Use your assets to pay off cards
If you have assets such as savings and non-retirement investments that you could use to pay down high-interest credit cards, it may make sense. Just remember that you still need a healthy cash reserve, such as six months' worth of living expenses.
If you don't have any or enough emergency money saved, don't dip into your savings to pay off credit card debt. Also, consider what you could sell—such as unused sporting goods, jewelry, or a vehicle—to raise cash and increase your financial cushion.
6. Consider using a balance transfer card
If you can’t pay off credit card debt using existing assets, consider optimizing it by moving it from higher- to lower-interest options. That won’t make your debt disappear, but it will reduce the amount of interest you pay.
Balance transfers won’t make your debt disappear, but they will reduce the amount of interest you pay.
Using a balance transfer credit card is a common way to optimize debt temporarily. You receive a promotional offer during a set period if you move debt to the account. By transferring higher-interest debt to a lower- or zero-interest card, you save money and use it to pay down the balance faster.
7. Consolidate your high-rate balances
I received a question from Sarah F., who says, “I love your podcast and turn to it for a lot of my financial questions. I have credit card debt and am wondering if it’s a good idea to get a personal loan to pay it down, or is that a scam?”
And Rachel K. says, "I love listening to your podcasts and am focused on becoming more financially fit this year. I have a couple of credit cards with high interest rates. Would it be wise for me to consolidate them to a lower interest rate? If so, will it hurt my credit?"
Depending on the terms you’re offered, using a personal loan can be an excellent way to reduce interest and get out of debt faster.
Thanks to Sarah and Rachel for your questions. Consolidating credit card debt using a personal loan is not a scam but a legitimate way to shift debt to a lower interest rate.
Having an additional loan added to your credit history helps you build credit if you make payments on time. It also works in your favor by reducing your credit utilization ratio when you reduce your credit card debt.
If you qualify for a low-rate personal loan, here are some benefits you get from debt consolidation:
- Cutting your interest expense
- Getting a fixed rate and term (such as 6% APR for 60 months with monthly payments of $600)
- Having one monthly debt payment
- Building credit
A couple of downsides of using a personal loan to consolidate debt include:
- Being tempted to continue making credit card charges
- Having potentially higher monthly loan payments (compared to minimum credit card payments)
While it may seem counterintuitive to use new debt to get out of old debt, it all comes down to the interest rate. Depending on the terms you’re offered, using a personal loan can be an excellent way to reduce interest and get out of debt faster.
What should you do after paying off a credit card?
Credit cards come with many benefits, such as purchase protection, convenience, and rewards. Don't forget that they're also powerful tools for building credit when used responsibly. If maintaining good credit is one of your goals, I recommend that you keep a paid-off card open instead of canceling it.
You don't need to carry a balance from month to month or pay interest on a credit card to build excellent credit.
To maintain or improve your credit, you must have credit accounts open in your name, and you must use them regularly. Making small purchases charges from time to time that you pay off in full and on time is enough to add positive data to your credit reports. You don't need to carry a balance from month to month or pay interest on a credit card to build excellent credit.
To learn more about building credit and getting out of debt, check out Laura’s best-selling online classes:
- Build Better Credit—The Ultimate Credit Score Repair Guide
- Get Out of Debt Fast—A Proven Plan to Stay Debt-Free Forever
One of the most common retirement questions I receive is what to do with a retirement account when leaving a job. Knowing your options for managing a retirement plan with an old employer is essential because most people change jobs many times throughout their careers. And millions of Americans remain out of work during the pandemic.
When you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave.
Fortunately, when you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave. It doesn't matter if you quit, get fired, or get laid off, the same rules apply.
This post will cover five options for managing your retirement account when your employment ends. You'll learn the rules for handling a retirement plan at an old job and the best move to create a secure financial future.
Why should you use a retirement account?
Investing money using one or more retirement accounts is wise because they come with terrific tax advantages. They defer or eliminate the tax on your contributions and investment earnings, which may allow you to accumulate a bigger balance than with a taxable brokerage account.
Investing money using one or more retirement accounts is wise. If you have a retirement plan at work but aren't participating in it, now's the time to enroll!
So, if you have a retirement plan at work but aren't participating in it, now's the time to enroll! Contribute as much as you can, even if it's just a small amount. Make a goal to increase your contribution rate each year until you're putting away at least 10% to 15% of your pre-tax income.
FREE RESOURCE: Retirement Account Comparison Chart (PDF)—a handy one-page download to see the retirement account rules at a glance.
What is a retirement account rollover?
Don't make the mistake of thinking that once you leave a job with a 401(k) or a 403(b) you can't continue getting tax breaks. Doing a rollover allows you to withdraw funds from a retirement plan with an old employer and transfer them to another eligible retirement account.
When you roll over a workplace retirement account, you don't lose your contributions or investment earnings. And if you're vested, you don't lose any money that your employer may have put into your account as matching funds.
The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process.
The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process. If you miss this deadline and are younger than age 59½, the transaction becomes an early withdrawal. That means it is subject to income tax, plus an additional 10% early withdrawal penalty.
If you're a regular Money Girl podcast listener or reader, you know that I don't recommend taking early withdrawals from retirement accounts. Paying income tax and a penalty is expensive and reduces your nest egg.
If you complete a traditional rollover within the allowable 60-day window, you maintain all the funds' tax-deferred status until you make withdrawals in the future. And with a Roth rollover, you retain the tax-free status of your funds.
What are your retirement account options when leaving a job?
Once you're no longer employed by a company that sponsors your retirement plan, there are four options for managing the account.
1. Cash out your account
Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option. As I mentioned, taking an early withdrawal means you must pay income tax and a 10% penalty.
Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option.
Let's say you have a $100,000 account balance that you cash out. If your average rate for federal and state income taxes is 30%, and you have an additional 10% penalty, you lose 40%. Cracking open your $100,000 nest egg could mean only having $60,000 left, depending on how much you earn.
Note that if your retirement plan has a low balance, such as $1,000 or less, the custodian may automatically cash you out. If so, they're required to withhold 20% for taxes (although you may owe more), file Form 1099-R to document the distribution, and pay you the balance.
2. Maintain your existing account
Most retirement plans allow you to keep money in the account after you're no longer employed if you maintain a minimum balance, such as more than $5,000. If you don't have the minimum, but you have more than the cash-out threshold, the custodian typically has the authority to deposit your money into an IRA in your name.
The downside to leaving money in an old retirement account is that you can't make additional contributions because you're not an employee. However, your funds can continue to grow there. You can manage them any way you like by selling or buying investments from a set menu of options.
The downside to leaving money in an old retirement account is that you can't make additional contributions.
Leaving money in an old retirement plan is certainly better than cashing out and paying taxes and a penalty, but it doesn't give you as much flexibility as you you would get with the next two options I'm going to talk about.
I only recommend leaving money in an old employer's retirement plan if you're happy with the investment choices and the fund and account fees are low. Just make sure that the plan doesn't charge you higher fees once you're no longer an active employee.
Another reason you might want to leave retirement money in an old employer's plan is if you're unemployed or have a job that doesn't offer a retirement account. I'll cover some special legal protections you'll get in just a moment.
3. Rollover to an Individual Retirement Arrangement (IRA)
Another option for your old workplace retirement plan is to roll it into an existing or new traditional IRA. If you have a Roth 401(k) or 403(b), you can roll it over into a Roth IRA. The deadline to complete an IRA rollover is 60 days.
Your earnings in a traditional IRA would continue to grow tax-deferred, just like in your old workplace plan. And earnings grow tax-free in a Roth IRA, like a Roth account at work.
Here are a couple of advantages to moving a workplace plan to an IRA:
- Getting more control. You choose the financial institution and the investments for your IRA.
- Having more flexibility. With an IRA, there are more ways to tap your funds before age 59½ and avoid an early withdrawal penalty than with a workplace account. That rule applies to several exceptions, including using withdrawals for medical bills, college expenses, and buying or building your first home.
Here are some downsides to rolling over a workplace plan to an IRA:
- Having fewer legal protections. Depending on your home state, assets in an IRA may not be protected from creditors.
- Being ineligible for a Roth IRA. When you're a high earner, you may not be allowed to contribute to a Roth IRA. However, you can still manage the account and have tax-free investment earnings.
If you want more control over your investment choices, think you'll need to make withdrawals before retirement, are self-employed, or don't have a job with a retirement plan to roll your account into, having an IRA is a great option.
4. Rollover to a new workplace plan
If you land a new job with a retirement plan, it may allow a rollover from your old plan once you're eligible to participate. While the IRS allows rollovers into most retirement accounts, employer plans aren't required to accept incoming rollovers. So be sure to check with your new plan administrator about what's possible.
Once you initiate a transfer from one workplace plan to another, you must complete it within 60 days to avoid taxes and a penalty.
Here are some advantages of doing a workplace-to-workplace rollover:
- More convenience. Having all your retirement savings in one place may make it easier to manage and track.
- Taking early withdrawals. Retirees can begin taking penalty-free withdrawals from workplace plans as early as age 55.
- Avoiding Roth income limits. Unlike a Roth IRA, there are no income restrictions for participating in a Roth workplace retirement account.
- Getting more legal protections. Workplace retirement plans are covered by the Employee Retirement Income Security Act of 1974 (ERISA), a federal regulation. It doesn't allow creditors (except the federal government) to touch your account balance.
Some downsides to transferring money from one workplace plan to another include:
- Having less flexibility. You can't take money out of a 401(k) or a 403(b) until you leave the company or qualify for an allowable hardship. It doesn't come with as many withdrawal exceptions compared to an IRA.
- Getting less control. You may have fewer investment choices or higher fees than an IRA, depending on the brokerage firm.
5. Rollover to an account for the self-employed
If you left a job to become self-employed, having an IRA is a great option. However, there are other types of retirement accounts that you might consider, such as a solo 401(k) or a SEP-IRA, based on whether you have employees and on your business income.
Read 4 Ways to Start a Retirement Account as a Self-Employed Freelancer or 5 Retirement Options When You're Self-Employed for more information.
When is a Roth rollover allowed?
For a rollover to be tax-free, you must use a like account. For example, if you have a traditional 403(b), you must rollover to another traditional retirement account at work or to a traditional IRA.
If you move traditional, pre-tax funds into a post-tax, Roth account, you must pay income tax on any amount that wasn't previously taxed. That could leave you with a massive tax liability. If you want a Roth, a better move would be to open a Roth account at your new job or to start a Roth IRA (if your income doesn't make you ineligible to contribute).
Where should you move an old retirement account?
The best place for your old retirement account depends on the flexibility and legal protections you want. Other considerations include the quality of your old plan, your income, and whether you have a new job with a retirement plan that accepts rollovers.
The best place for your old retirement account depends on the flexibility and legal protections you want.
The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options. If you have questions about doing a rollover, get advice from your retirement plan custodian. They can walk you through the process to make sure you choose the best investments and don't break the rollover rules.Continue reading
We are renovating a fifth wheel RV! I’ve been obsessed with RV living and RV renovations since we saw Jill and Eric’s RV renovation last spring. We aren’t ready to move into one but we thought it would be a…
The post RV Renovation Ideas For Our New (to us) Fifth Wheel! appeared first on Modern Frugality.Continue reading
These are the steps that introduced me and my husband to what financial independence is and for that I am eternally grateful. But a lot of important considerations get looked over if you just find a list of the steps…
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The post From Bankruptcy to Paying $22,000 Cash for a Car appeared first on Penny Pinchin' Mom.
I was recently a guest on the Masters of Money podcast. Â One of the statements Phil made was “Wait a minute. Â How does one go from declaring bankruptcy to paying $22,000 cash for a car?” I had never really looked at my journey in that way. Â But, when I thought about it, I realized – … Read More about From Bankruptcy to Paying $22,000 Cash for a Car
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Money Girl listener Danielle M. says:
I’ve been listening to your podcast for about five years now since I graduated from college. I greatly appreciate the tips and guidance you give to the community as a whole. Thank you for giving me the confidence and knowledge to build a solid financial foundation.
I recently purchased a home, which includes a PMI payment. I also have student loans and a small car loan. We have extra money every month to put toward our loans. I understand it’s best to pay down debt in order of the highest interest rate first. I’m wondering how to evaluate my mortgage since the interest rate doesn’t include PMI payments. Should I pay down my mortgage until the PMI is gone, or is it better to focus on my higher-rate student loans first?
Thanks for your great question, Danielle! Understanding where to put your extra money each month is incredibly important. In this post, I’ll explain what PMI is, the rules for eliminating it, and how to know when it should be your top financial priority.
What is Private Mortgage Insurance (PMI)?
If you take out a mortgage to buy a home or refinance an existing home loan, the last thing you want to hear is that you have to pay an additional charge, called private mortgage insurance or PMI. You might feel even worse when you find out that this insurance protects the lender, not you!
Borrowers have to shell out for PMI when they get a conventional mortgage but can’t put at least 20% down. The amount you borrow to buy a home is called the loan-to-value (LTV) ratio. For example, if you borrow $180,000 to buy a home valued at $200,000, you have a 90% LTV ($180,000 / $200,000 = 0.90)
Borrowers have to shell out for PMI when they get a conventional mortgage but can’t put at least 20% down.
When your LTV on a home mortgage is higher than 80%, lenders consider you to be a bigger risk than if you borrowed less. The lender mitigates that risk by requiring you to purchase PMI. The policy would cover a portion of their loss if you didn’t pay your mortgage and foreclosure proceeds don’t cover your outstanding loan balance.
However, there's a bright side to paying PMI. It makes it possible for many borrowers who can’t afford to put 20% down to buy a home. And it can be eliminated at certain LTV thresholds, which we’ll cover.
What’s the cost of PMI?
The cost of PMI varies depending on many factors. These include the type of mortgage you get, how much you put down, where the property is located, your credit, your loan term, and how lenders structure your PMI fee. In general, there are three ways lenders charge PMI:
- Monthly payments – which get added to your monthly mortgage payments. The premium could range from 0.2% to 1.5% of the balance on your loan each year. The annual cost is typically divided into 12 premiums and added to your monthly payments.
- Lump-sum payment – is a one-time premium that you pay upfront at closing. You may also pay both upfront and monthly premiums.
- Higher interest rate – a lender may charge a higher interest rate instead of itemizing separate PMI charges.
Monthly payments are the most common way that borrowers pay for PMI. Let’s say you get a 30-year, fixed-rate mortgage for $180,000 to buy a home valued at $200,000. With a 90% LTV and good credit, your PMI could cost about $100 per month.
Paying monthly PMI gives you the most transparency about the charge. It gets itemized on your mortgage statement, so you know exactly how much you're paying. And more importantly, you can see when it finally gets eliminated, which we'll cover next.
If your lender offers more than one way to pay PMI, ask for a detailed pricing comparison so you can weigh the pros and cons.
If you make a lump-sum PMI payment, it could turn out to cost more or less than the other options, depending on whether you choose to pay off your mortgage ahead of schedule. If you sell your home after just a few years or pay off your mortgage early, you don't get a return of any PMI premium.
Since mortgage interest is tax-deductible, the option to pay a higher interest rate instead of separate PMI payments could cost less on an after-tax basis. Also, PMI is currently a tax-deductible expense, although there have been periods when it wasn’t. At the end of the year, lenders send out Form 1098, which lists how much PMI and mortgage interest you paid during the year so that you can claim it on your tax return.
However, you can only claim these deductions if you itemize them using Schedule A. When your total itemized deductions are less than the standard deduction for your tax filing status, you'll save money claiming the standard deduction instead.
As you can see, knowing which option is best for paying PMI can be a bit complicated. If your lender offers more than one way to pay it, ask for a detailed pricing comparison so you can weigh the pros and cons and consider which option may cost less.
Rules for eliminating Private Mortgage Insurance
Now that you understand why and how lenders charge PMI, let’s review the rules for getting rid of it. That will help you know how high a priority it should be.
You should receive an annual notice from your mortgage lender that reminds you about your options to have PMI eliminated under certain conditions. Here are the ways you can get rid of monthly PMI payments.
When your mortgage balance reaches 78% of the original value of the property, PMI must automatically be canceled.
Request cancelation. After you pay down your mortgage balance to 80% of the original value of your home, you can ask for PMI to be canceled. Your original value can be either the price you paid for your home or its appraised value when you bought it (or refinanced it), whichever is less.
Your lender will require you to pay for a property appraisal to verify that your home’s value is the same or higher than when you purchased it. The appraisal fee could range from $300 to $1,000, depending on the size and location of your home.
Automatic termination. When your mortgage balance reaches 78% of the original value of the property, PMI must automatically be canceled. In this case, you don’t have to request it or pay for an appraisal.
Midpoint termination. When your mortgage balance reaches its midpoint, PMI must be automatically canceled. For example, if you have a 30-year mortgage, your lender must cancel your PMI after 15 years.
But keep an eye out for situations that might allow you to cancel PMI early, like when your home value appreciates due to market conditions. When your home value goes up, it lowers your LTV. Likewise, if you make additional mortgage payments that reduce your principal loan balance, it lowers your LTV. The faster you get to the 78% threshold, the sooner you can request a PMI cancellation.
Keep an eye out for situations that might allow you to cancel PMI early, like when your home value appreciates due to market conditions.
However, be aware that your lender can deny your request for PMI cancelation in certain situations, such as if you’ve made late payments. You must get current on any outstanding payments to have PMI canceled either as a request or automatically. Also, don’t forget that taking out a home equity loan or line of credit increases your LTV.
When should eliminating PMI be a financial priority?
Now that you understand when you must pay PMI and when you can eliminate it, let’s turn to Danielle’s question. She's considering whether to send extra money to her mortgage and get closer to canceling PMI or if it's better to pay off her student loan or car loan faster.
First, I’d recommend that Danielle zoom out and look at any other top financial priorities. She didn’t mention if she’s regularly contributing to a retirement account or has emergency savings. If she doesn’t have a healthy emergency fund, or she isn’t investing a minimum of 10% to 15% of her gross income for retirement, that’s where her extra money should go first.
We know that Danielle doesn’t have any dangerous debts, such as accounts in collections, credit cards with sky-high interest rates, or expensive payday loans. If she did, those would need attention before addressing any other type of debt. As she mentioned in her question, it’s generally best to pay off debt in order of highest to lowest interest rate.
So, assuming that Danielle’s finances are in good shape, how does paying PMI compare with a student loan and a small auto loan balance? While ongoing PMI payments aren’t an interest expense, you can pretend that they are as a technique for understanding their place in your financial life.
Let’s say you borrowed $180,000 for a $200,000 home, giving you a 90% LTV. As I previously mentioned, you need a 78% LTV to request PMI cancellation. So, you’d have to pay down your mortgage to $156,000 to get there. If you’re at the beginning of a loan term, you’d need to shell out $24,000 ($180,000 – $156,000 = $24,000).
If you were paying $100 a month or $1,200 a year for PMI, you could calculate it as a proxy for annual interest on a $24,000 loan. That comes out to an effective interest rate of 5% ($1,200 / $24,000 = 0.05). That’s an amount you’re paying on top of your mortgage interest rate. So, if your mortgage costs 4% in this example, you’d really be paying more like 9% during the years that you pay PMI.
The benefits of accelerating mortgage payments to get rid of PMI decrease if you’re able to deduct mortgage interest and PMI on your taxes.
However, this is an imperfect calculation because it’s doesn’t account for many factors. These include how much extra you pay toward your principal mortgage balance, how quickly equity builds as you prepay it, and any home appreciation.
Also, the benefits of accelerating mortgage payments to get rid of PMI decrease if you’re able to deduct mortgage interest and PMI on your taxes. A fixed-rate mortgage that costs 4% may only cost you 3% on an after-tax basis, depending on your effective income tax rate.
In general, prepaying a mortgage to eliminate PMI ahead of schedule may not help you as much as paying down other types of debt. Depending on where you live, factors such as real estate appreciation and general inflation are likely to work in your favor, making you eligible for PMI cancellation sooner than you may think.
A super simple way to evaluate the interest rate you’re paying for a mortgage with PMI is to tack on a percentage point or two. For instance, if your pre-tax mortgage rate is 4%, consider it actually costing you 5% to 6% tops. Or if you deduct interest and PMI, don’t factor in the tax implications and just consider the mortgage costing you the same as its stated interest rate, or 4% in my example.
If your other debts cost more than these very rough mortgage interest calculations, I’d be aggressive about getting rid of them first. Again, go in order of highest interest rate to lowest.
However, if you have a small outstanding balance that you just want to wipe out, there’s nothing wrong with that. Even if it costs you slightly less in interest, sometimes it just feels good to get rid of a small debt that’s been weighing you down.
What’s most important is that you understand how much you owe, the interest rates you’re paying, and that you have a plan for eliminating debt. Even if you don’t have extra money to pay off debt ahead of schedule, tacking them in the right order helps you save the most interest so you can eliminate debt as quickly as possible.Continue reading
For this podcast about insurance I chatted with Matt Kincaid of Meridian Captone. In the podcast we discussed insurance for homeowners and real estate investors. Topics included first time homebuyer tips for arranging insurance, insurance for real estate investors with long term tenants and insurance for investors working in the short term rental space.
I hope you enjoy the podcast and find it informative. Please consider sharing with those who also may benefit. Listen via YouTube: You can connect with Matt at LinkedIn, You can reach out to Matt for more information on their insurance products by emailing him at firstname.lastname@example.org.
You can connect with me on Facebook, Pinterest, Twitter, LinkedIn, YouTube and Instagram.
About the author: The above article “Podcast: Insurance For Homeowners and Real Estate Investors” was provided by Luxury Real Estate Specialist Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you. Contact me today!
I work in the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.
[RealCincy.com Insurance Podcast]
[Beginning of Recorded Material]
Paul S.: Hello everybody, this is Paul Sian with United real estate home connections. Real estate agent licensed in the state of Ohio and Kentucky. And with me today is Matt Kincaid with Meridian. Hi Matt, how are you doing today?
Matt K.: I’m doing great, Paul, thanks for having me.
Paul S.: Great to have you on here, and looking forward to our podcast today. Where we’re going to discuss insurance for homeowners, for investors as well as looking in-depth into the insurance policies and how that’ll help out buyers and investors, so why don’t you tell us a little bit about your background? When did you get started in insurance?
Matt K.: Yes. It really started in junior/senior year of college. I went to NKU, graduated in 2015. My best friend actually dropped out of school and started selling commercial trucking insurance to long-distance truckers. So he thought it might be a good part-time job for me to do, do some customer service work.
So that’s what I did my senior year mostly. And picked up on it pretty quickly, and after I graduated, I started selling full-time, and it just happened to be when I stuck with. Ended up transitioning to more personal lines. So I still do a lot of commercials, but our main focus is personal. So we’re typical home auto landlord insurance that sort of thing, so that’s kind of how I got started.
Paul S.: Great. And you’ve been with Meridian ever since?
Matt K.: Yes. I’ve been with Meridian. It’ll be four years in September; I’ve been in the industry for about six years now.
Paul S.: Nice. So I understand a lot of people don’t know that you’ve got your insurance brokers, which I believe Meridian is an insurance broker, and then you got your insurance agents. Can you explain a little bit the difference between an insurance broker and an insurance agent?
Matt K.: Yes. So in the insurance world, there’s independence and captives; captives are just what it sounds are captive to one product, one company. Whereas with independence Meridian particular, we have about 15 different companies that we’re able to shop around through. So one of our companies is, for example, is Allstate. A lot of captives also have Allstate, but we have the same exact product.
But we also have 12 other companies that we can shop around through, to make sure that you’re getting the best. So it’ll really benefit to the customer and me as an agent, or I’m not if I was just one company, I know I have to stand behind that product 100% no matter what. Whereas being a Meridian, I can just do whatever is best for the customer.
Paul S.: Yes. So the ideal then I guess is that you can shop around from multiple policies. Just like going into the store, you can compare different types of bread, and whatever price works best for you, whatever flavor works best for you. That’s similar to what you’re able to provide.
Matt K.: Yes, that’ll be a good example. For like your typical, this may not be what we’re talking about but, but for like your home and auto, most of time, it’s best to be with one company, but not all the time. So I’m able to mix and match if need be, whatever is going to save the customer most money, whatever they’re company is having.
Paul S.: Great. So let’s move on to first-time homebuyers. Insurance is a, especially for homeowners, insurance is the new thing for first-time homebuyers if they don’t really know what they’re looking for. When’s a good time for them to start having that conversation with their insurance person?
Matt K.: So I think whenever you get in contract is a good time to start looking. Getting a quote is never going to hurt, you’re not bound to any coverage, or you’re not going to be paying. 90% of time, you’re not going to be paying the full 12 months up front.
So it’s good to start getting your quotes shops around, getting some final numbers to give to your lender if you have one. So they can finalize numbers and give you a good picture of what you might be looking at going forward. So it’s never too early in my opinion, but once you get into contract, I think is an ideal time.
Paul S.: Yes. That’s something I agree with too. And it should be pointed out for those first-time homebuyers who don’t know, I mean insurance is required if they’re financing the purchase, and the lender is going to require homeowners insurance.
Matt K.: Yes. A lot of people know that it’s not a law that have home insurance, but the lender can make that stipulation that you have to have it upon closing.
Paul S.: Great. And when a homebuyer first time, whether homebuyer existing or first-time homebuyer. What exactly is the insurance company looking at when they’re pricing out policies?
Matt K.: So a big one is, you’ll hear this term going out a lot, insurance score. It’s a credit-based score; you don’t need a social to run it. But they’re able to calculate a similar score based on the amount of claims you’re turning in, your payments.
Are you making your payments on time? That sort of thing. So they’re able to get a good a good picture of the type of risk that the insurance company is taking on so that I mean if you’re looking at the property itself, the construction of the property, how old it is, the exterior that sort of thing.
Paul S.: So does that involve a hard credit pool or a soft credit pool?
Matt K.: It’s soft; you won’t see it on your credit at all.
Paul S.: Okay, great. So that’s something that doesn’t have, even though during the home shopping process there’s going to be a bunch of credit pools, whether from a couple of lenders. But insurance it’s not one of those things that the buyers have to look at.
Matt K.: No, absolutely not. Especially, that would be a big pain. Especially if I’m shopping through 15, and I’m running NVR and insurance score. But no, it won’t even show up on your score.
Paul S.: Okay. So what are some of the best ways that homebuyers can improve their chance of getting a better insurance rate?
Matt K.: Right. So prior insurance history is a big one, making your insurance payments on time. The area that you are in is going to be a big factor. The zip code, there’s different what’s called protection classes based on where the home is. So that’s based on how far you are from the fire hydrant, and also how far you are from the fire department.
So the highest protection class you can have is ten, that’s a maximum risk. You’re over five miles away from the nearest fire department, and your insurance rate is going to be higher. Simply do the fact if there was a fire or total catastrophe, it’s going to take longer for them to reach you.
Paul S.: Okay. Let’s talk about the risk; you mentioned risk in there. How does risk play into it? Let’s say whether of the buyer themselves and if they’ve had past history of claims or the house even if they’ve never been in the house before what about the risk associated with that.
Paul S.: Yes. So like I said before pass to insurance, history is big. With these landlord policies, it’s hard to tell what the price is exactly going to be. Because obviously, they’re going to rate it based off the buyer’s insurance score.
But they don’t know who’s going to be living in there. They don’t know the type of risk for who’s going to occupy that home. So it’s very limited; there’s more of a baseline price just based off the buyer’s insurance score and the protection class and the age and the property itself.
Paul S.: Okay. In terms of the property itself, there’s a CLUE report which a lot of buyers probably have not heard about. Can you explain what the clue report is, what does it stand for, and what does that exactly provide?
Matt K.: Yes. So I kind of describe it as a moto vehicle report for your home. So it stands for the comprehensive loss underwriting exchange. So a lot of times, LexisNexis, you’ll get your reports from there. It’s just a big aggregate of claims that are turned in by insurers, and obviously, when I’m running your clue report, it’s going to pull up based off your name, your date of birth and the address if there are any claims that correspond to you, the insurance company can grade it importantly.
Paul S.: Okay, great. Is there any cost for you pulling a clue report for a buyer?
Matt K.: No, absolutely not. So for a personal policy, so if we’re talking landlord, that’s four units, four family and under. Most of the times, the company can run that itself. If it’s a commercial policy, it’s a little bit more different.
For example, if this is not a new purchase, maybe you’ve had this property for a few years, and you’re shopping right around, you may have to order that from your prior insurance company. But if it’s a new purchase, a lot of times it’s not going to be necessary, if it’s a commercial risk.
Paul S.: Okay. Let’s talk about a homeowner who’s been in their house for a few years now, and they had a policy in place with an insurer. Do you have any recommendations or suggestions for them? I mean, do the rates get better? Do the rates get higher if they get another quote?
Matt K.: So it’s kind of a cache one to it. It’s almost impossible to know what the insurance company is going to do. Obviously, you want to find a company that is A-rated or higher, that means they have a good financial stability, so they’re not just going to raise your rates for no reason.
But insurance is kind of like the stock market in some ways. If a company is taking big losses a certain year, they may try to recoup by raising rates, and that’s just going to be across the board based on your zip code. But I always just say just keep track of your rates. I know Meridian we have somebody who’s dedicated to be shopping if your policy goes up a certain percentage. So I think that’s great to have. But just pay attention to it, and re-shop it every couple of years if need be.
Paul S.: Okay. By the fact of them, somebody re-shopping it, that’s not necessarily going to increase their rates, will it?
Matt K.: No, absolutely not. Companies like to see that you’ve been insured, they don’t want to see you bounce around all the time, because that means they’re probably going to lose that risk in a year. But to answer your question, there’s no harm in re-shopping. I have customers that will call me each and every year to make sure that we have the best rate, that’s totally fine by me.
Paul S.: Okay, that’s great and helpful information. To move on to investment real estate, can you talk about the differences in commercial versus residential investment real estate insurance?
Matt K.: Yes, so kind of hard to describe the four. Commercial is going to be the five units and above, personal is going to be four and under. Coverages on that, the only differences that you’re going to see with commercial, instead of having a one hundred thousand or three hundred thousand liability limit, most of the time they’re going to include a general liability policy, which is going to include one million in liability.
A bunch of different other things that fall under that, so that might look different. Other than that, the forms are fairly similar. You just want to make sure that you have replacement cost, or if you want actual cash value, deductible, loss of rent. So those things are going to be similar, it’s just a matter of how many years you have, that sort of thing.
Paul S.: Okay. In terms of investors who are owner occupying, they’re buying a duplex or four-unit, and they want to live in one unit. Are the insurance rates generally better for that type of situation?
Matt K.: There’s not a clear answer for that, I mean it’s still going to be written on the same type of form. There might be some discounts being that the insurance company is able to calculate their risk, maybe a little bit more accurately. I mean, that could be a good thing or a bad thing for the customer.
But really, you just want to make sure that you’re asking those questions, make sure the agent is writing the policy correctly. So down the road, if there are any changes or let’s say the insurance company audits you and that information is inaccurate, that could then raise your rate.
Paul S.: Okay. So I guess the answer is it depends?
Matt K.: Yes. With a lot of insurance, it just depends, unfortunately.
Paul S.: That’s still good to know. So let’s talk a little bit about insurance riders, I guess insurance riders applies both to regular homeowners as well as investors. What can you tell me? I guess first, let’s explain what’s an insurance rider, and why would somebody want one or need one.
Matt K.: Yes. So with any insurance policy, there’s going to be a lot of things that are automatically included. Like if we’re talking landlord policy wind, hail, fire, that sort of thing. And then if you want to have personal property protection, let’s say you’re furnishing some of the items may be the appliances in the home can have that. Otherwise, the writers are going to look fairly similar to what you’re going to see on a typical homeowner’s insurance policy.
Or do you want water and sewage backup? Do you want replacement cost on your belongings or the roof? So those are going to look fairly similar. If the agent is asking the right questions and going over it thoroughly, there should be no question on how you want it covered. Some other things that might be on there is earthquake that’s not included; flood insurance it’s a totally separate policy, so there’s always that misconception that flood is included in the homeowners; it’s never included.
Whether it’s a landlord policy or homeowner’s policy, the way to differentiate that with water coverage is where the water is originating from. If the water originated from outside the house, that is flood. If the water is originating from inside, let’s say you have a pipe that burst, or a toilet that overflows or some pump that’s water inside the house and that’s something that could be covered either automatically or with a rider.
Paul S.: Okay. And just look a little further into flood insurance that applies to both regular buyers and investors, but that’s also like you said this based on external factors close to a river, close to the lake. Where would somebody find out if their property falls under that, or requires flood insurance?
Matt K.: So a lot of the times, the lender may have an idea if it’s required or not. Otherwise, just asking your insurance agent. There’s not like an automatic identification that is going to tell you. In the loan process, it will probably come up that flood insurance is required, and then at that point, the insurance agent can find out what flood zone you’re in, what kind of rate impact that’s going to have on you, and that sort of thing.
Paul S.: And then flood insurance too is not something you provide directly, I believe that’s provided from the government, correct?
Matt K.: Yes. So it’s a FEMA based product, but we do also have a private flood company if your loan accepts that, which can be up to 40% off of a FEMA back product, and it’s the same exact coverage.
Paul S.: Okay. So let’s talk a little bit more about the private insurance coverage you said for flood insurance, as opposed to FEMA. That’s something you said the lender would have to allow it. Otherwise, they have to go through the government program?
Matt K.: Yes. So I mean the laws are changing for this all the time, most of the time if it’s a Government loan, they’re not going to allow private flood insurance. But that could depend on a bunch of different factors.
So the best thing to do is just ask your lender if private flood is acceptable because if it is, that’s going to save you a ton of money. I just did one a couple of weeks ago, where FEMA wanted 1,500 bucks, and my private flood carrier came back at like 700. So that could be a big difference, especially if you have a certain down payment you need to make for the home, and just cut cost in general.
Paul S.: That’s 1500 versus 700 is that a yearly cost?
Matt K.: Yes, flood is always going to be a 12-month policy, just like your homeowners.
Paul S.: Okay. Is it worth it? Let’s say somebody’s not listed as a; the property is not listed in flood zone, so they don’t require flood insurance. Is it worth it for them to maybe they happen to live behind a, there’s a small lake behind them? Is it worth it to get flood insurance for them?
Matt K.: I think it’s at least worth having that conversation, you know everybody’s different. You know there are some customers they’re going to want all the bells and whistles, they are going to want earthquake even if you’re not even close to a fault, that sort of thing.
So it’s just having that conversation, I mean you can never be too covered. It’s never a bad idea to cover all your paces, but it’s just a matter of what the insured is willing to spend, and if they think it’s worth taking that risk or not.
Paul S.: Okay. Most of the insurance policies we’re talking about, and I shouldn’t say most, I should say all the policies we’re talking about right now are generally applied to like long term whether you as a long term owner-occupant or as a long term investment property, where you have a one continuous tenant may be staying a year after a year or long-term leases basically.
Let’s talk a little bit about short term tenants like your Airbnb, your VRBO, I mean, are there different insurance requirements for that, different insurance policies? What would you recommend? And what have you seen for other people who are looking for that type of insurance?
Matt K.: Yes. So honestly, I’ve ran across it a few times. The one thing you want to make sure of is most companies will either not write it, or they’ll have an endorsement done for a short-term rental. So that’s going to be a surcharge for you. Other than that, it’s going to be fairly similar. You just want to make sure if you’re going through air Airbnb or VRBO make sure what they are going to cover.
They’re going to include an insurance policy, so you don’t want to have any overlaps, we also don’t want to have any gaps in the insurance. I know Airbnb will, for example, not cover bodily injury or property damage, so that’s something that’s going to fall under your insurance policy. So it’s just making sure that you understand the verbiage. So if you do have an Airbnb home that you want to get insured, take a look at that policy, send it to your insurance agent. Have them write over it, and make sure that you’re fully covered.
Paul S.: Okay. That’s something that you’d provide if somebody’s coming to look for a policy through you for a short term rental that you would be able to assist them with too?
Matt K.: Yes, absolutely. I did one last week; the customer was very concerned about the pricing. He was coming from USAA; they wanted like 2,500 bucks on the year for a single-family Airbnb.
I have a great company called Berkshire Hathaway; they have a product specifically for Airbnb or VRBO. I was able to cut his price almost in half. So we definitely have products for it; off the top of my head I probably have three or four that I can quote through.
Paul S.: Okay, great. And just to go back to your company’s footprint, Meridian, basically, are you able to offer insurance all 50 states? Are you limited anywhere?
Matt K.: So yes, we’re not available in all 50 states, but we are available in the Tri-State as well as Tennessee, Illinois, a lot of the southeast. So if you have any questions about that, please give me a call.
That being said, I have a lot of property investors that are coming from either across the country or overseas. That is totally fine, as long as the property that they’re buying is within our scope, we can definitely accommodate.
Paul S.: Okay, great. And what’s the best way for somebody to reach out to you if they want to get some more information?
Matt K.: So you can reach me either by phone or email. I’m also very active on Facebook. My phone number is 513-503-1817. Or you can reach me by email that is MKincaid@Meridiancapstone.com.
Paul S.: Okay, great. That’s all the questions I have for you today, Matt, thanks for being on.
Matt K.: Yes, thanks for having me.
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