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Definition and Examples of Amortization

Amortization is the way loan payments are applied to certain types of loans. Typically, the monthly payment remains the same, and it’s divided among interest costs (what your lender gets paid for the loan), reducing your loan balance (also known as “paying off the principal loan”), and other expenses like property taxes.

Your last loan payment will pay off the final amount remaining on your debt. For example, after exactly 30 years (or 360 monthly payments), you’ll pay off a 30-year mortgage. Amortization tables help you understand how a loan works, and they can help you predict your outstanding balance or interest cost at any point in the future.

How Amortization Works

The best way to understand amortization is by reviewing an amortization table. If you have a mortgage, the table was included with your loan documents.

An amortization table is a schedule that lists each monthly loan payment as well as how much of each payment goes to interest and how much to the principal. Every amortization table contains the same kind of information:

• Scheduled payments: Your required monthly payments are listed individually by month for the length of the loan.
• Main repayment: After you apply the interest charges, the remainder of your payment goes toward paying off your debt.
• Interest expenses: Out of each scheduled payment, a portion goes toward interest, which is calculated by multiplying your remaining loan balance by your monthly interest rate.

Although your total payment remains equal each period, you’ll be paying off the loan’s interest and principal in different amounts each month. At the beginning of the loan, interest costs are at their highest. As time goes on, more and more of each payment goes toward your principal, and you pay proportionately less in interest each month.

An Example of Amortization

Sometimes it’s helpful to see the numbers instead of reading about the process. The table below is known as an “amortization table” (or “amortization schedule”). It demonstrates how each payment affects the loan, how much you pay in interest, and how much you owe on the loan at any given time. This amortization schedule is for the beginning and end of an auto loan. This is a $20,000 five-year loan charging 5% interest (with monthly payments).

month	Balance (Start)	Payment	Major	Interest	Balance (End)
1	$20,000.00	$377.42	$294.09	$83.33	$19,705.91
2	$19,705.91	$377.42	$295.32	$82.11	$19,410.59
3	$19,410.59	$377.42	$296.55	$80.88	$19,114.04
4	$19,114.04	$377.42	$297.78	$79.64	$18,816.26
. . . .	. . . .	. . . .	. . . .	. . . .	. . . .
57	$1,494.10	$377.42	$371.20	$6.23	$1,122.90
58	$1,122.90	$377.42	$372.75	$4.68	$750.16
59	$750.16	$377.42	$374.30	$3.13	$375.86
60	$375.86	$377.42	$374.29	$1.57	$0

To see the full schedule or create your own table, use a loan amortization calculator. You can also use a spreadsheet to create amortization schedules.

Types of Amortizing Loans

There are numerous types of loans available, and they don’t all work the same way. Installation loans are amortized, and you pay the balance down to zero over time with level payments. They include:

Auto Loans

These are often five-year (or shorter) amortized loans that you pay down with a fixed monthly payment. Longer loans are available, but you’ll spend more on interest and risk being upside down on your loan, meaning your loan exceeds your car’s resale value if you stretch things out too long to get a lower payment.

Home Loans

These are often 15- or 30-year fixed-rate mortgages, which have a fixed amortization schedule, but there are also adjustable-rate mortgages (ARMs). With ARMs, the lender can adjust the rate on a predetermined schedule, which would impact your amortization schedule. Most people don’t keep the same home loan for 15 or 30 years. They sell the home or refinance the loan at some point, but these loans work as if a borrower were going to keep them for the entire term.

Personal Loans

These loans, which you can get from a bank, credit union, or online lender, are generally amortized loans as well. They often have three-year terms, fixed interest rates, and fixed monthly payments. They are often used for small projects or debt consolidation.

Credit and Loans That Aren’t Amortized

Some credit and loans don’t have amortization. They include:

• Credit cards: With these, you can repeatedly borrow on the same card, and you get to choose how much you’ll repay each month as long as you meet the minimum payment. These types of loans are also known as “revolving debt.”
• Interest-only loans: These loans don’t amortize either, at least not at the beginning. During the interest-only period, you’ll only pay down the principal if you make optional additional payments above and beyond the interest cost. At some point, the lender will require you to start paying principal and interest on an amortization schedule or pay off the loan in full.
• Balloon loans: This type of loan requires you to make a large principal payment at the end of the loan. During the early years of the loan, you’ll make small payments, but the entire loan comes due eventually. In most cases, you’ll likely refinance the balloon payment unless you have a large sum of money on hand.

Benefits of Amortization

Looking at amortization is helpful if you want to understand how borrowing works. Consumers often make decisions based on an affordable monthly payment, but interest costs are a better way to measure the real cost of what you buy. Sometimes a lower monthly payment actually means that you’ll pay more in interest. For example, if you stretch out the repayment time, you’ll pay more in interest than you would for a shorter repayment term.

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Don’t assume all loan details are included in a standard amortization schedule. Some amortization tables show additional details about a loan, including fees such as closing costs and cumulative interest (a running total showing the total interest paid after a certain amount of time), but if you don’t see these details, ask your lender.

With the information laid out in an amortization table, it’s easy to evaluate different loan options. You can compare lenders, choose between a 15- or 30-year loan, or decide whether to refinance an existing loan. You can even calculate how much you’d save by paying off debt early. With most loans, you’ll get to skip all of the remaining interest charges if you pay them off early.

Key Takeaways

• Amortization is the process of spreading out a loan into a series of fixed payments. The loan is paid off at the end of the payment schedule.
• Some of each payment goes toward interest costs, and some goes toward your loan balance. Over time, you pay less in interest and more toward your balance.
• An amortization table can help you understand how your payments are applied.
• Common amortizing loans include auto loans, home loans, and personal loans.

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Early Withdrawal Penalties at Major Banks
bank	One-year CD penalty	Five-year CD penalty
Ally	60 days of interest	150 days of interest
Bank of America	90 days of interest	365 days of interest
Capital one	Three months of interest	Six months of interest
Chase	180 days of interest	365 days of interest
Discover	six months of interest	18 months of interest
Synchrony	90 days of interest	365 days of interest
TD Bank	six months of interest	24 months of interest
Wells Fargo	six months of interest	12 months of interest

Walking Away With Less Money

When you incur penalties on a CD withdrawal, you can lose money and walk away with less than you deposited, in addition to missing out on interest that you would have earned.

For example, suppose you have a 12-month maturity CD that you cash out in the 11th month. You’ll probably walk away with more than you initially put into the CD—although not as much as it could have been had you held off for one more month.

Continuing with this same example, suppose you were to cash out after two months. You haven’t yet earned the six months’ interest as required by the penalty schedule. However, the bank will still take that amount by deducting it from your initial investment deposit. This action is called “invading the principal.”

How To Avoid CD Early Withdrawal Penalties

If you absolutely must cash out early, look for a way to avoid penalties. First, it never hurts to ask. The staff might waive the penalty for you, particularly if it’s an emergency and if you’re at a friendly institution or a smaller credit union. Otherwise, all they can do is say no.

You can usually qualify for a waiver for death, disability, court-determined incompetence, and other major life events. In those types of cases, speaking directly with a representative is particularly important. Banks are permitted to offer these waivers, but that doesn’t necessarily mean that they will. They’re not required to do so by law.

‘Liquid’ No-Penalty CDs

Liquid CDs are similar to standard CDs, but they work more like traditional savings accounts in that they allow you to pull money out early. Sometimes, liquid CDs have limits as to how early and how much you can withdraw, and you might have to make at least a minimum deposit, but they’re worth investigating.

Your “locked in” period is relatively short with these CDs—less than a week in many cases. Still, no one would invest in traditional CDs if this option were that easy. Since you have more flexibility, you’ll receive a lower interest rate in exchange for this freedom.

Alternative CD Strategies

You can try to use other flexible options to avoid penalties when you’re tucking your money away in the future. CDs aren’t bad options, but there might be better alternatives if you find that you keep having to pay penalties.

CD Ladders

Laddering CDs is a strategy where you’ll periodically have one of several mature CDs, often on a six-month or annual basis, giving you the opportunity to take the money penalty-free at that time.

Step-Up CDs

Step-up CDs offer more flexible interest rates. Your rate will increase to keep pace when interest rates rise. This alternative can be attractive if your concern is being stuck with a paltry rate for the whole CD term. Again, these CDs pay less on average than traditional CDs.

Money Market Accounts

Money market accounts pay more than savings accounts, but generally not as much as CDs. The advantage is that you can do limited spending from a money market account using a debit card or a checkbook.

Credit Cards

Credit cards are an expensive way to borrow, but if you need money quickly and your CD will mature soon, it might cost less to put emergency expenses on a card and pay it off as soon as the CD matures. However, a much better idea is to keep a solid emergency fund.

Frequently Asked Questions (FAQs)

	7(a) Loans	504/CDC Loans
Franchise Uses	Establishing and operating the business as well as real estate or heavy equipment	Purchase of real estate and large equipment or machinery
Eligibility	Be a small business, operating as a for-profit in the US, have invested equity, demonstrate good credit history	Operating as a for-profit in the US, have a net worth of less than $15 million, have a net income of less than $5 million
Lenders	Most SBA lending partners	Certified Development Companies (CDCs), promoting economic development in communities
Guarantee Percentages	85% for loans up to $150,000 and 75% for loans above $150,000	100% of CDC’s portion (usually 40% of the total loan)
Loan Amounts	Maximum $5 million	Maximum $5 million
Maturity Terms	10 years for equipment or working capital and up to 25 years for real estate	10- and 20-year terms

SBA 7(a) Loan

The 7(a) loan program is a popular SBA loan because it allows for a wide variety of uses for the funds. Business owners can, for example, increase working capital, purchase equipment or land, construct new buildings, and outfit offices. With franchises, this loan type can cover initial franchise fees but not those associated with franchise development.

You can receive up to the maximum of $5 million in funding with a 7(a) loan and the guarantee and repayment depend on the amount funded. The SBA guarantees up to 85% on loans of $150,000 or under and up to 75% of larger loans. Repayment on loans for real estate and major fixed assets can extend up to 25 years, while working capital extends up to 10.

SBA 504/CDC Loan

The 504/CDC loan program is similar to the 7(a) in terms of eligibility and maximum loan amounts, but these loans tend to be for bigger real estate projects. 504 loans are made through Certified Development Companies (CDCs), as an underlying goal of this program is to promote economic development in communities.

Business owners can receive up to $5 million to buy real estate, finance construction, or purchase long-term equipment, which are common expenses for opening a new franchisee. The usual structure of a 504 loan includes:

• 50% of project costs are covered by the lender (non-guaranteed)
• 40% of project costs are covered by the CDC (100% guaranteed by SBA)
• 10% of the project cost from the borrower

Maturity rates on these loans range from 10 years for machinery and equipment and up to 20 years for real estate. This loan also comes with a 3% fee that can be financed with a loan and fixed interest rates.

Which Option Is Right for Your Franchise?

Both the 7(a) and 504 loan programs can help you meet your financing needs for your franchise. The main consideration when deciding between the two is the scale of the project and how you will use the loan funds.

Let’s say you are opening a franchise in a new location. Your major expenses may include real estate, construction, and long-term equipment. So, a 504 loan may be a better option because it can cover the property and machinery.

If, instead, you intend to use the funds for the daily operations of a franchise or purchasing an already established franchise, a 7(a) loan may be the better option. You can use these funds for almost anything when it comes to working capital, startup costs, inventory, and real estate.

How To Apply for an SBA Franchise Loan

Applying for an SBA franchise loan is similar to a normal loan application. However, you need to be ready to provide your documentation to both the lender and the franchise.

Here are the main steps in the application process.

Gather Your Documentation

The first part of any loan application is gathering the necessary documents. The more prepared you can be in this initial step, the smoother your process will be. Use the 7(a) checklist and the 504 Authorization File Library to identify what paperwork is needed. This includes forms like business financial statements, personal income tax returns, and resumes.

Gather the Franchise’s Documentation

The next important step is gathering documents focused on the franchise. You’ll want to ensure you have the proper paperwork from the franchise ready for the lender. This could include franchise licensing agreements, profit and loss statements, and asking price.

Identify Your Local Lender

Once you’ve organized the documentation, you’ll need to find a lender or Certified Development Company to submit your application. The SBA provides an online local assistance tool that identifies certified agencies near you.

Submit and Prepare for Questions

The final step is the application itself. You should be well prepared if you’ve spent the time gathering the necessary information. However, you may need to be prepared for additional questions based on lender needs. The lender will then submit your paperwork to the SBA as required.

Franchise Loan Alternatives

If an SBA franchise loan isn’t right for you, consider these alternatives:

Franchisor Loans

Some franchisors offer financial support to franchisees to get the business operating. This support could include specific loan options, royalty reductions to offset costs, and secured loans through partner lenders.

Traditional Bank Loans

A traditional bank loan can an option for businesses with stronger creditworthiness or a longstanding relationship with a bank. However, traditional loans tend to have less favorable terms than an SBA loan.

Other Business Loans

Other loan options include a short-term loan or equipment loan. Alternative lenders offer smaller loans on a shorter repayment period with a quick application process, while equipment loans through banks or alt lenders cover just the purchase of machinery.

The Bottom Line

SBA loan programs can be a good option if you need funding to open and operate a franchise business. Both 7(a) loans and 504/CDC loans can provide the funding to purchase needed materials and real estate or increase working capital to use on an SBA-approved franchise.

Depending on your needs, timeline, and franchise, you may want to pursue other funding options such as traditional loans. No matter which funding option you choose, keep your documents organized and consider consulting a financial advisor for more specific guidance for your situation.

Frequently Asked Questions (FAQs)

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Hosting a place on Airbnb can be a lucrative undertaking—although financing the initial investment might seem daunting. To help you gain a greater understanding of financing an Airbnb business, we’ll cover the main options for funding, tips to help you successfully finance the venture, and answers to some frequently asked questions.

Can You Finance an Airbnb Business?

There are several different options for financing an Airbnb business. Keep in mind that it can typically be more challenging to procure funds for an investment property destined to be rented than a property purchased as the borrower’s main residence. This is because lenders often consider it to be a riskier investment and in general require a higher cash deposit to secure its financing.

From a lender’s point of view, if money runs tight, you’re more likely to continue paying the bills on your main residence and your second home will probably be less of a priority. Short-term rentals are also considered riskier than long-term rentals, as they require more attention to keep the space regularly occupied. A few weeks without guests could create difficulties in paying back the borrowed funds.

Airbnb Financing Options

While launching an Airbnb business can seem like an expensive undertaking, there are viable options available to help you finance your venture. Here are some of the common ways you can fund your new investment.

Mortgage

Taking out a mortgage for your rental property could give you a reliable loan with favorable interest rates. However, qualification may be difficult—you might need to contribute a bigger down payment, have a personal credit score of at least 640 to 700, maintain higher cash reserves, and have a lower loan-to-value ratio.

Home Equity Loan or Line of Credit

A home equity loan, often known as a second mortgage, can provide you with a lump sum of cash that you can then put toward an investment property. The money is repaid on a regular basis with set rates. Home equity lines of credit (HELOCs), meanwhile, work like credit cards—borrowers have access to a certain amount of funds. The funds used must be repaid with interest.

Owner-Occupied Investment Property

If you purchase a multi-unit property and live on-site, you may qualify for better terms, lower interest rates, and funding that otherwise wouldn’t be available. You must meet specific criteria in regards to how much time you live in the space, how soon you must move onto the property after closing, and more, so make sure that you understand all of the requirements beforehand.

Small Business Funding

Consider looking into small business funding options from the US Small Business Administration or through Airbnb partnerships with Fannie Mae, for example, when deciding how to back your Airbnb business. One advantage of small business funding is that the money can be used to fill most business needs you may have, whether that’s buying inventory and equipment or covering day-to-day costs.

Hard Money Loan

Hard money loans are short-term loans from private lenders that are backed by property or assets. If a borrower defaults on the loan, the lender can take possession of the collateral. These loans tend to have easier qualifications as the lender is more interested in the value of the asset or property you’re buying.

Hard money loans usually come with higher rates, higher fees, and shorter repayment terms. Borrowers often consider hard money loans after they’ve been denied more traditional forms of financing, or if they’re looking for a quicker route to funding.

Tips for Successfully Financing an Airbnb Business

Financing an Airbnb business doesn’t have to be complicated. Here are some pointers to keep in mind to ensure a smooth funding process:

• Understand the investment you’re making. Why are you investing, and what are you hoping to get out of it? Being clear about your objectives will help you identify what kind of funding to pursue.
• Shop around and compare offers from different lenders. When considering your financing options, make sure to find the best fit for your needs.
• Estimate your predicted expenses. You’ll want to consider maintenance costs and any additional insurance you may need. Also consider the time commitment of cleaning, upkeep, and responding to guests if you will be in charge of these tasks or the cost associated with them if you will hire someone else to manage them for you. Cleaning expense has been an important cost item for Aibnb entrepreneurs. Recently, Airbnb added a cleaning fee as a charge for guests to cover this recurring cost item.
• Do your research. Before purchasing a home to use as an Airbnb rental, you’ll want to familiarize yourself with the local laws regarding short-term rentals. Also, check the listings in the area to get a feel for their vacancy rates and price points.

Frequently Asked Questions (FAQs)

HELOC	Home Equity Loan
Secured by your home equity	Secured by your home equity
Low interest rates	Low interest rates
Usually variable rate	Variable or fixed rate
Draw funds multiple times	One-time payout
Upfront and annual fees	Upfront fees, but no annual fees

Secured by Home Equity

Both home equity loans and HELOCs are secured by the value of your home. The amount of equity that you have directly impacts the amount that you can borrow. More equity means a higher borrowing limit.

Interest Rates

An advantage to securing a home equity loans and a HELOCs with your home is that it greatly reduces the lender’s risk. That means these loans have some of the lowest rates of any type of debt.

One important difference between the two is that HELOCs tend to have variable interest rates. That means the rate can change over time based on market rates. With a home equity loan, you usually have the choice of variable or fixed rates.

Access to Funds

An important difference between HELOCs and home equity loans is when you can access funds.

HELOCs let you draw funds multiple times as the need arises. That makes them ideal for people who might need cash quickly or who need to withdraw cash multiple times.

Home equity loans give a one-time distribution of cash, which makes them better for one-time expenses such as paying for a home renovation.

Fees

Both HELOCs and home equity loans include fees. Both loans usually carry origination fees and closing costs that you pay upfront. However, only HELOCs have annual maintenance fees that lenders charge to keep the line of credit open. Home equity loans don’t tend to have ongoing fees to pay.

How To Get a HELOC

If you think that a HELOC is right for you, here’s how you can find one.

Compare Lenders

The first thing to do when you’re looking for any type of loan is to shop around and compare different lenders. Each lender will offer different rates, fees, and other features for their loans. If you take the time to look at a few different options, you might find one that’s offering a much better deal.

Gather Your Information

Before applying, make sure you have all the necessary documents ready. You’ll need things like:

• Personal identification, including Social Security number
• Income information and employment history
• Home documents, including a recent mortgage statement
• Proof of homeowners’ insurance
• Property tax bills
• Information about other outstanding debts
• A list of your assets and account statements

Submit an Application

Once you’re ready, you can submit an application for a HELOC. Provide all the requested documents and work with your lender to verify the details of your home value, employment and income history, and answer any other questions they might have.

Appraisal

If your lender approves you for a HELOC, they’ll want to confirm that your home is worth enough to properly secure the loan. They’ll order an appraisal of your home to determine its value. The result of this appraisal can play a role in determining how much you can borrow with your HELOC.

Closing

If the appraisal comes back and shows you have sufficient equity, the next step is closing. You’ll sign all of the loan documents and paperwork. You will have three days to cancel the HELOC if you change your mind.

Use Your Line of Credit

After the three-day waiting period, your HELOC is officially open and you can start accessing the line of credit. You will have a draw period—typically 10 years—from which to access the funds as needed. During this time, you will start making monthly payments to include a portion of the principal (the amount you borrow) plus accrued interest.

Alternatives to HELOCs

HELOCs are one option for homeowners looking to get cash out of their homes, but there are alternatives to consider.

Home Equity Loan

A home equity loan provides a one-time distribution of funds that homeowners can use for things like paying a large medical bill, funding home improvement, or consolidating debt.

Home equity loans are typically fixed-rate loans and are ideal for one-time expenses. They’re not the best choice for situations where you might need to withdraw funds multiple times.

Cash Out Refinance

A cash-out refinance lets you refinance your entire mortgage and take some of the equity out of your home as cash. For example, if you owe $200,000 on your mortgage and have a home worth $300,000, you could refinance your mortgage with a new, $250,000 loan to replace the existing loan and get $50,000 in cash.

Like home equity loans, cash-out refinances are best for one-time expenses because they offer a one-time payout of funds. However, because they replace your entire mortgage, they tend to be most useful when you can refinance to a lower rate or want to trade an adjustable-rate mortgage for a fixed-rate one.

Reverse Mortgage

A reverse mortgage lets homeowners age 62 or older turn their home equity into a source of income during retirement. These loans are far more complex than HELOCs and other equity-based loans, so it’s important to do your due diligence before getting one.

In general, they can be a good choice for older homeowners who need to supplement their income but aren’t useful for many other situations.

Frequently Asked Questions (FAQs)

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You can’t get a power of attorney to act for someone after they have died, and an existing power of attorney becomes invalid upon the death of the principal—the individual who gave you the right to take certain actions on their behalf.

Someone is still going to have to take care of their affairs after their death, but it won’t necessarily be the agent appointed in a power of attorney during their lifetime.

Does Power of Attorney Last After Death?

Perhaps your parent recently passed and you were named as their agent in a power of attorney (POA). You’re the individual they wanted to take care of certain personal business matters for them. The POA gave you the authority to act on their behalf in a number of financial situations, such as buying or selling a property for them or maybe just paying their bills.

You might think that you should continue paying those bills and settling their accounts after their death, but you should not and you can’t—at least not unless you’ve also been named as the executor of their estate in their will, or the court appoints you as the administrator of their estate if they didn’t leave a will.

Who Has Power of Attorney When There’s a Will?

People can no longer legally own property after they’re deceased, so probate is required to transfer their property to living heirs. Your parent’s will must, therefore, be filed with the probate court shortly after their death if they held a bank account or any other property in their sole name.

This begins the probate process to legally distribute their property to their living beneficiaries. The executor named in their will is responsible for doing so and guiding the estate through the probate process.

Who Has Power of Attorney When There’s No Will?

The deceased’s property must still pass through probate to accomplish the transfer of ownership, even if they did not leave a will. The major difference is that their property will pass according to state law rather than according to their wishes as explained in a will.

The court will appoint an administrator to settle the estate if the deceased did not leave a will. You can apply to the court to be appointed as administrator, and the court is likely to agree if the deceased left no surviving spouse, or if their surviving spouse and their other children agree that you should do the job.

Estate Executor vs. Power of Attorney Agent

In either case, with or without a will, the probate court will grant the authority to act on a deceased person’s estate to an individual who might or might not also be the agent under the power of attorney. The two roles are divided by the event of the death. In some cases, however, the agent in the POA might also be named as executor or administrator of the estate.

What Does Someone With Power of Attorney Do After a Death?

The POA you hold for your parents is useless and serves no purpose after their death. The deceased person no longer owns anything for you to handle for them because they can’t legally hold money or property.

The POA might authorize you to make financial transactions for them, but they technically no longer own the property or the money over which the POA placed you in charge. Their estate owns it, so only the executor or the administrator of their estate can deal with it during the probate process.

Some very small estates don’t require probate, or your parent might have used a living trust as an estate-planning method rather than a last will and testament so probate would not be required. A successor trustee would take over after the deceased’s death if they left a revocable living trust, but these exceptions are limited.

The POA becomes invalid in both cases anyway.

Power of Attorney and Rights of Survivorship

It can also change things if your parent’s bank account or other property is not included in their probate estate for some reason. Probate is only necessary for assets that your parent owns in their sole name. These assets require a legal process to transfer to living beneficiaries.

But if your parent lists you as co-owner of their bank account or even on the deed to their home, giving you “rights of survivorship,” the account or the property passes automatically and directly to you at their death. Probate of these assets would not be necessary.

You would retain control over these assets, but you would no longer be responsible for paying your parent’s debts from that money because probate also handles their final bills. You would be responsible for paying debts on which you co-signed with the deceased, just as you were during their lifetime.

Frequently Asked Questions (FAQs)

Definition and Example of the Fair Housing Act

The Fair Housing Act is a law enacted in 1968 and has been updated several times since its inception. The law is enforced by the US Department of Housing and Urban Development (HUD).

The Fair Housing Act prohibits lenders, landlords, sellers, and agents from discriminating against homebuyers and tenants on account of specific characteristics, including race, color, religion, sexual orientation, nationality, disability, or family status. For example, thanks to the Fair Housing Act, it is illegal to refuse to rent a home to someone because they practice a different religion.

Individual states and local governments can add to the law, providing more protections, but they can’t take away from it. According to the Policy Surveillance Program from Temple University’s Beasley School of Law, 49 states and the District of Columbia have adopted additional protections.

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Examples of additional protections in certain states include ancestry, gender identity, source of income, military status, and pregnancy.

• Alternate name: Title VIII of Civil Rights Act of 1968

How Does the Fair Housing Act Work?

Under the Fair Housing Act, property owners cannot discriminate against people in protected classes. They cannot refuse to provide reasonable accommodation to people who need it, such as people with disabilities. A reasonable accommodation is a change to the policies and practices of a property that will allow an occupant to use and enjoy it.

Nor can the property owner prevent a tenant from making a reasonable modification, at the tenant’s expense, that will allow them to use and enjoy the property. To be reasonable, the changes must not cause harm or be an undue burden (financially or administratively) to the housing provider.

Enforcing the Fair Housing Act

Because the Fair Housing Act is a federal law, it’s enforced by HUD. If you believe you’ve been a victim of illegal housing discrimination, you can choose to file a lawsuit in state or federal court, or you can file a complaint directly with the HUD.

If you file a complaint with the federal agency and it finds there’s reasonable cause to believe your rights were violated under the act, it will prepare charges of discrimination. You’ll then have 30 days to decide whether to have the charge tried in a HUD administrative court or a federal court.

If you proceed with the former, you’ll be represented by HUD attorneys. This process typically goes more quickly than a federal trial with a judge or jury, but you’re only eligible for compensatory damages—punitive damages won’t be awarded. With a federal trial, you’ll be represented by attorneys from the US Department of Justice (DOJ), and you could receive both compensatory and punitive damages from the defendant.

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The Fair Housing Act can be difficult to enforce because many forms of discrimination aren’t overt and, therefore, cannot be documented. However, if you have documentation of discrimination, such as recordings or written records, contact an attorney or local fair housing agency to understand your rights and next steps. When a formal complaint is filed, HUD will investigate the allegation.

If HUD finds a pattern or practice of discrimination or the defendant has discriminated against a group of people to the point that it’s an issue of general public importance, it may refer the matter to the DOJ, which may directly file a lawsuit against a defendant on on behalf of the victims.

Penalties for Violating the Fair Housing Act

Civil penalties for violating the Act range from $16,000 for a first offense to $65,000 if there have been two or more violations during the previous seven years. If the case is tried in federal district court and the plaintiff wins, the defendant may have to pay actual, punitive, and compensatory damages as well as legal fees.

Types of Discrimination

If you’re not sure what counts as discrimination under the Fair Housing Act, here are some examples:

• A seller refuses to work with a prospective buyer because of their race or color, or because they don’t fit the demographics of the neighborhood.
• A landlord makes an apartment available but tells a tenant it’s been taken when they find out the candidate is a member of the LGBTQ community, only to tell others that it’s still available.
• A mortgage lender charges a higher interest rate because the borrower’s name appears to be from another nationality.
• A condominium complex doesn’t comply with accessibility requirements, such that a prospective tenant who uses a wheelchair won’t be able to access the units or parking.
• A landlord refuses to rent to a single woman with children.
• A real estate agent directs a prospective homebuyer to a different locale when they find out the buyer’s religion doesn’t match the predominant one in the area.

What It Means for Your Family

The Fair Housing Act is designed to help protect certain classes of people who may experience discrimination when trying to buy or rent a place to live. Unfortunately, though, discrimination still occurs, and it’s not always obvious enough to document and prove.

If you’re concerned about a landlord, lender, seller, or agent violating your rights, try to keep all communication in writing and document your conversations. This way, you can refer back to these documents to provide the discrimination, if needed.

If you believe your rights have been violated, don’t hesitate to contact your local fair housing agency or an attorney to determine the next steps you should follow.

Key Takeaways

• The Fair Housing Act prohibits landlords, lenders, sellers, and agents from discriminating against prospective homebuyers and tenants based on race, color, religion, sexual orientation, nationality, disability, or family status.
• Many states have adopted additional protected classes on top of those detailed in the Fair Housing Act, but they cannot take away from the Act’s provisions.
• If you’re concerned about discrimination from a landlord, lender, seller, or real estate agent, plan communications in a way that makes it possible for you to retain records.
• If your rights have been violated according to the Fair Housing Act, you can pursue legal action against the perpetrator.

Reverse mortgages are special types of loans that give older homeowners a way to turn their home equity into a source of income they can use during retirement. When they move out or die, the lender usually takes and sells the home to repay the loan.

There are some benefits to reverse mortgages, but there are also some significant downsides to keep in mind. While they might not be a ripoff, reverse mortgages are not for everyone.

Pros and Cons of a Reverse Mortgage

Pros Explained

• You can keep living in your home while you have the mortgage: If you want to sell your home to get equity out of it, that usually means you can’t live in it anymore unless you rent from the new owners. Reverse mortgages let you stay in your home.
• No payments: Other ways to get equity out of your home, such as a home equity line of credit or loan, involve monthly payments. You only repay a reverse mortgage when you move out.
• Turn home equity into a source of cash or income: With a reverse mortgage, you can convert your home equity into a regular stream of income that you can use to pay other expenses.
• The income is tax-free: Because the money you get from a reverse mortgage is considered proceeds from a loan, you don’t pay taxes on it.
• Your risk is limited, in some cases: If you get a Federal Housing Administration (FHA)-insured reverse mortgage, your risk is limited. At the end of the loan, if the lender takes your home and it is not worth enough to pay off the outstanding balance, the government will cover the remainder.

Cons Explained

• Reverse mortgages come at a cost: It’s easy to forget that reverse mortgages are loans, which means interest will accrue over time. You also have to pay lender fees such as origination fees.
• May not get as much value out of your home: If getting the most value out of your home is the goal, reverse mortgages won’t help. The ongoing fees and interest typically mean you’ll get less than if you’d sold the home.
• Restrictions on what you can do with your home: When you obtain a reverse mortgage, the loan lasts for as long as you keep living in the home. If you want to move, spend a significant amount of time elsewhere, or need to go into a nursing home or care facility, you might be forced to sell the home.
• Risk of foreclosure: When you get a reverse mortgage, you agree to keep the house in good condition and pay required costs, such as property tax and insurance. If you fail to meet your end of the agreement, the lender could foreclose on you.

Spotting Reverse Mortgage Scams

Reverse mortgages are targeted at older homeowners. In fact, you have to be at least 62 to be eligible for an FHA-insured reverse mortgage.

Unfortunately, that means that reverse mortgage scammers looking to prey on the elderly are fairly common. It’s important to protect yourself from scams.

Some scams are easy to spot. Anyone using high-pressure sales tactics or trying to convince you to sign documents without letting you read them carefully or consult an attorney are likely scammers that you should avoid.

However, some scammers are less obvious.

It’s essential that you do your own research and due diligence, read documents carefully, and make sure you’re working with a trustworthy lender.

Should You Get a Reverse Mortgage?

Reverse mortgages can be a good idea for some homeowners, but they aren’t for everyone.

When It Makes Sense

Reverse mortgages can be a good choice for certain types of homeowners.

For example, if you plan to stay in your home for a long time and have no expectation of moving or spending large amounts of time in a second home, a reverse mortgage can be a good way to get cash out of your home.

This is especially true if you’re very tight on funds and can’t afford to make payments on something like a home equity loan—or just need more income to pay for necessities.

Reverse mortgages can also be a good choice for people with poor credit. They can be easier to qualify for than other types of loans that often require stronger credit scores.

When It Doesn’t Make Sense

Reverse mortgages might not be the right choice for some people.

One scenario where one would be a bad idea is if you own multiple homes and split time between them. You can only get a reverse mortgage on a primary residence. If it’s difficult to prove which of your homes is your primary residence, you might face foreclosure.

Further, you should avoid a reverse mortgage if someone other than your spouse lives with you. While qualifying spouses can stay in the home after you move out or pass away, other family members and roommates don’t get that protection if they’re not co-borrowers.

Alternatives to Reverse Mortgages

If a reverse mortgage isn’t right for you, there are other ways to get equity out of your home.

Home Equity Loan

A home equity loan uses the equity you’ve built to secure a loan. Like most typical loans, you get a one-time, lump-sum payment that you can use for almost any purpose. This makes these loans a good choice for people who have a one-off expense to cover but don’t need a stream of income.

Home Equity Line of Credit

Home equity lines of credit, or HELOCs, let you pull cash out of your home when you need it, up to a set limit. You only make payments and pay interest on the amount you’ve borrowed, similar to a credit card.

HELOCs can be useful for homeowners who might need multiple cash infusions because they let them avoid having to apply for a new loan each time they need cash.

Move to a Smaller Home

Many older homeowners are able to downsize their homes. For example, if you originally needed a larger home to house children who have grown up and moved out, you might have the option to move to a smaller house now.

If you sell your home and buy one that’s less expensive, you can use the extra proceeds to cover your expenses.

Frequently Asked Questions (FAQs)

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A home equity loan, or second mortgage, allows you to withdraw the equity you’ve built up in your home so you can use the cash to make repairs to your home, pay for college tuition, or consolidate your debt, for example.

You repay the money over time through a series of regular payments. Home equity loans have a number of benefits, but there are some downsides to consider as well. If you’re not sure if a home equity loan is right for you, you can weigh the pros and cons of alternatives such as lines of credit, refinancing, or personal loans.

Downsides of Using a Home Equity Loan

While many homeowners appreciate the flexibility home equity loans offer, there are some drawbacks to this type of financing. Among the downsides is the fact that your home secures these loans. So if you can no longer afford to make the payments—for example, if you lose your job—you could lose your house.

In addition, this type of loan adds a payment to your budget each month. If your cash flow is tight and you’re using the money for expenses other than consolidating your bills, a second mortgage might not be a good fit.

Having a home equity may also limit your ability to refinance your primary mortgage. So if you want to refinance for better terms on your original mortgage, you may want to delay taking on a home equity loan. Consult your lender or a financial advisor for guidance on your specific situation.

If you’re not sure if a home equity loan is right for you, consider the pros and cons of the following alternatives.

Home Equity Line of Credit (HELOC)

A home equity line of credit, or HELOC, is another type of second mortgage. It’s similar to a home equity loan because you’re accessing the equity built up in your home. But unlike with a regular loan, a HELOC works more like a credit card with a revolving line of credit.

You’re approved for a certain amount of money. You then can access those funds anytime you need them during the loan’s draw period. During this time, you only pay interest on the money you’ve used.

HELOCs usually have variable interest rates. So among the downsides of these loans, your payments won’t be the same each month, which means you won’t have predictable monthly payments.

Once the draw period is over, you’ll need to start repaying the principal, which means your payments will be larger. In some cases, a lender may require a balloon payment, or payment in full, although most HELOCs provide repayment periods of about 10 to 20 years.

If you can’t afford the higher payment, your bank may allow you to refinance your HELOC.

Cash Out Refinance

A cash-out refinance is another option for tapping equity in your home. This type of loan is when you take out a new primary mortgage for more than the amount you currently owe. As with a home equity loan, you get this extra money in a lump sum of cash, and you can spend the funds any way you’d like.

With a cash-out refinance, you won’t add a second payment each month. You can get a cash-out refinance that doesn’t add to the amount of your monthly payments. However, you’ll extend the length of the loan. Also, since a cash-out refinance is a primary mortgage, you’ll usually qualify for better interest rates.

Furthermore, lenders may not require as high a credit score to approve you for a cash-out refinance compared to a home equity loan. So if you don’t have great credit, this could be a good alternative.

Keep in mind that whenever you refinance, you have to pay closing costs. If you don’t have a lot of money up front, taking out a home equity loan might make more sense.

Reverse Mortgage

If you’re at least 62, you may be eligible for a reverse mortgage. This type of loan lets you use your home equity to supplement your income in retirement.

You’re not required to make any payments with a reverse mortgage as long as you live in the home. These terms can save you money right now. The loan is due when the last borrower dies or moves out of the house. At that point, you or your heirs can sell the home to pay off the loan. If the sale price isn’t enough, you or your estate is responsible for making up the difference.

Reverse mortgages do have some drawbacks, such as high fees. You may need to pay for origination costs, mortgage insurance, and closing costs. Due to these limitations, a reverse mortgage may not make financial sense for everyone. Consider consulting a financial advisor about options for your situation.

Personal Loans

A personal loan is another home equity loan alternative. With this type of loan, you can borrow money and use it for any purpose. Unlike a home equity loan, you don’t have to use your home as collateral.

There are two main types of personal loans: secured and unsecured.

Secured Personal Loans

A secured personal loan uses your assets as collateral. If you can’t repay the loan, the lender can take the money from your account to cover the cost. Because there’s less risk for the lender, you may be able to get a lower interest rate.

You can use many different assets as collateral, including your home, but you can use other assets besides your home to back a secured personal loan. You can use, for example, a savings account, a stock portfolio, or even your vehicle.

Unsecured Personal Loans

An unsecured personal loan doesn’t require collateral. However, that means there’s more risk for the lender since they could lose money if you can’t repay the loan. As a result, it’s difficult to qualify for these loans.

You may need good or excellent credit to get approved for an unsecured personal loan. And even with excellent credit, you’re likely to still pay a higher interest rate compared to a secured loan or a home equity loan.

Credit Cards

Credit cards can be other alternatives to home equity loans. However, use them carefully because they generally have higher interest rates.

You could finance a project with your credit card and pay it off over time. Some credit cards offer a 0% APR promotional period in which you won’t accrue interest on your purchases until the promotional period expires. If you can pay it down before the 0% APR period ends, you essentially get a free loan. However, after that period, interest is applied to your remaining balance.

Read the fine print carefully because some carry a penalty APR as well as other potential fees or penalties.

Other Asset-Backed Loans

Other collateral loans may be a good fit for your financial situation. Here are three types to consider.

401(k) Loans

If you have a retirement 401(k) account, which is an employer-sponsored account, you may be able to borrow money from it. With this type of loan, you can borrow up to $50,000 or half of your account balance, which is always less. However, the loan typically must be repaid within five years.

One significant downside of a 401(k) loan is that you’re borrowing from future retirement funds.

Car Title Loan

A car title loan can provide cash in an emergency. However, these short-term loans, which often last for only 30 days, have very high interest rates.

You’ll give the title to your vehicle to the lender until the loan is repaid. If you can’t pay back your loan on time, you’ll pay a large fee and could potentially lose your car.

CD Loan

You can use just about any personal property as collateral for a loan, including the value in a certificate of deposit (CD). In a financial emergency, this type of loan allows you to access the money in your CD without paying an early withdrawal penalty. Check with your bank regarding other potential fees.

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Definition and Example of an Unrecaptured Section 1250 Gain

Section 1250 of the Internal Revenue Code (IRC) kicks in when you sell a Section 1231 real estate asset for financial gain after claiming a depreciation tax break for it in previous years. The IRS says the gain is taxable at a pretty significant rate—higher than those for most long-term capital gains.

Section 1231 property is typically business or trade real estate, so unrecaptured Section 1250 gains usually only come into play for non-business owners if they have rental property.

Let’s say you purchased a rental property for $200,000 in 2020. You’re entitled to depreciate it over five years. That works out to $40,000 per year: $200,000 divided by five. You claim $80,000 in depreciation in 2020 and 2021. This brings your cost basis down to $120,000 ($200,000 minus $80,000) in claimed depreciation.

You sell the property for $250,000 in 2022. Under Section 1250 rules, you’ve realized a gain of $130,000 ($250,000 minus your $120,000 basis adjusted for depreciation), not $50,000 ($250,000 minus your $200,000 purchase price). The $80,000 you claimed as depreciation is recaptured and taxed at a maximum of 25%. Only the remaining $50,000 is taxed at the most favorable long-term capital gains tax rate of just 15%.

How an Unrecaptured Section 1250 Gain Works

Section 1250 tags the gain you get from selling property as “unrecaptured” when the sales price exceeds your initial cost basis in the asset, which is the total of what you paid for it and spent on maintaining it. It adjusts this basis by adding back the depreciation you claimed.

An unrecaptured Section 1250 gain effectively prevents you from taking a double-dip tax break. It changes the rate at which realized gains are taxed with the intention of offsetting that depreciation you claimed. It prohibits you from claiming advantageous long-term capital gains rates on the entirety of your profit.

But “offset” is the key word here in another respect. The IRC allows you to offset Section 1250 gains with Section 1231 capital losses, provided both assets were held for more than a year so both your loss and your gain are long term. This means you can subtract your loss from the amount of your gain, and pay tax on the difference.

How To Report Uncaptured Section 1250 Gains

You report uncaptured Section 1250 earnings on Form 4797, then transfer that total to Schedule D. The instructions for Schedule D include detailed explanations and worksheets to help you make your calculations. Enter the resulting tax amount on line 16 of your Form 1040 tax return.

How Much Are Taxes on Unrecaptured Section 1250 Gains?

The tax on unrecaptured Section 1250 gains tops out at 25%, which is considerably higher than two of the three tax rates for long-term capital gains, which ranges from 0% to 20%, depending on your income. Most taxpayers pay a 0% or 15% rate on long-term capital gains, which is at least 10% less than the unrecaptured Section 1250 rate.

The 25% rate applies to money received in the first through fourth years if you accepted installment payments after 1999. Some gains can be taxed at 20% after the first four years, but this is still higher than the long-term capital gains tax rate for most taxpayers.