investment

Fact checked by Suzanne Kvilhaug
Reviewed by Andrew Schmidt

There’s a dearth of female workers among the upper echelons of financial management and investment services. According to the Deloitte Center for Financial Services, only six of the 107 largest financial institutions in the United States were run by female CEOs in 2019, while in 2024 women accounted for a mere 10.4% (52) of CEOs of Fortune 500 companies, 9% (270) of the CEOs of Russell 3000 companies, and 7.8% (39) of the CEOs of S&P 500 businesses.

The reasons why there are few women in these roles are likely numerous, including a lack of role models and mentorship, a lack of managerial support, and women’s concerns about work/life balance. In addition, “the polarizing climate around diversity, equity, and inclusion threatens to jeopardize the gains made by women in recent years,” according to the 2024 Women CEOs in America Report from Women Business Collaborative.

Key Takeaways

• Women and men begin closer to parity at the start of their careers in finance, but the C-suite is still largely dominated by men.
• There are comparatively few women role models and mentors in finance, and this may account for some of the gender disparity in top roles.
• Women were only 15% of venture capital “check writers” and filled just 21% of managing director–level operating positions in private equity firms.
• Although the gender gap is shrinking in MBA programs, women account for only 25.7% of finance faculty at top business schools.
• Nonprofits such as Girls Who Invest offer programs to bring young females into the world of finance through internships and mentoring programs.

Where Are All the Women in Finance?

Studies paint a mixed picture for women in finance. Though the percentage of men and women entering the field is roughly equal, men typically rise to the top faster than women do. For example, as of 2022 (the latest data available) only about 15% of venture capital “check writers” were women, and companies founded by women accounted for a mere 2% all venture capital investment. Nineteen percent of investment partners were women in 2022 compared to 11% in 2016.

The picture doesn’t get much rosier when it comes to private equity (PE), where by the end of 2022 women held just 21% of managing director–level operating positions. On the bright side, however, there has been a greater focus on improving diversity, with women holding 48% of all entry-level roles in PE and 35% of junior-level investment jobs (an increase of 10% since 2016).

Women of color are particularly unrepresented in financial services above entry level positions. According to a 2021 McKinsey report, “Despite progress, 64% of financial-services C-suite executives are still White men, and 23% are White women—leaving just 9% of C-suite positions held by men of color and 4% by women of color.”

When it comes to gender equality, there are a few reasons why women may not be advancing to the top ranks as quickly as men are. One is a lack of role models. Without more women paving the way, those entering the field may find the path more challenging to navigate or may not even know there is one. Some women have voiced concern about work-life balance, while others simply cite the lack of manager support.

Important

The nonprofit Girls Who Invest was founded in 2015 and continues to invest in young women’s future careers in the financial services industry.

The Business School Impact

Based on business school enrollments, the number of people studying finance and business tends to skew toward men. A study by the Forté Foundation found that women accounted for 42% of all full-time MBA students in 2023 and 2024, marking a steady rise from 31.8% in 2011, a statistic that nonetheless illustrates that the field is historically dominated by men.

Still, the exact size of the gender gap varies among different business schools. For example, 45% of students in Harvard Business School’s class of 2026 are women, while at Wharton women accounted for 47% of the MBA students expected to graduate in 2026. (Ten percent of Wharton’s 2026 class are LGBTQ+. No such statistics were reported by Harvard.)

The gender gap is more pronounced at the faculty level. A 2024 study by the Association to Advance Collegiate Schools of Business (AACSB) found that among the country’s top business schools, only 25.7% of full professors are women. The lack of women in mentoring or leading academic roles, and the professional obstacles they face, could be relevant factors in the paucity of women seeking top boardroom positions.

Investing in Young Women

Women need mentors and role models to show that whatever roadblocks have been preventing them from achieving or even considering C-suite level positions can be overcome. This means starting young.

Fortunately, there are a number of nonprofits and other women-focused organizations rising to that challenge. Girls Who Invest, a nonprofit founded by financial expert Seema Hingorani in 2015, has an ambitious mission to have women managing 30% of the world’s capital by 2030. Girls Who Invest’s programs and offerings are designed to motivate, interest, and inspire young women to join the investment management and greater financial services field.

The mission is not new for Hingorani. Not only does she bring 25 years of investment experience to the nonprofit; she’s also been heavily involved in diversity initiatives. She’s a member of Morgan Stanley’s Diversity and Inclusion Senior Leaders Advisory Council and was previously the founder and chief investment officer of SevenStep Capital, an investment platform solely focused on women.

And she’s not alone. Ellevest, founded by Wall Street veteran Sallie Krawcheck in 2014, aims to make financial products more accessible to women through investing tools, access to financial planners, education, and coaching. The company’s motto says it all: “Ellevest was founded, funded, and built by women, for women.”

Business schools are also getting in on the action. Though it’s not just focused on financial careers, Rutgers Business School’s Center for Women in Business (CWB) says it is “removing barriers, building community, and empowering women with the confidence and skills necessary to succeed as business leaders.”

The 13-member CWB advisory board is largely female and dedicated to growing opportunities for women through networking events, leadership workshops, female-focused mentoring opportunities, and more.

How Many Women Are There in Finance?

Overall, women outnumber men in the finance and banking industry, but the reverse is true at the most senior positions. At the beginning of 2021 women accounted for about 52% of the industry, according to research by McKinsey, but their representation fell at every step up the corporate ladder. In the C-suite, white women accounted for only 23% of executives, and women of color another 4%.

How Many Women Own Their Own Business?

According to a July 2023 U.S. Senate committee report, of the 33.2 million small businesses in America, nearly 13 million were owned by women. That is about 39%. However, the report said that women have been the driving force behind new small businesses in the wake of the COVID-19 pandemic, creating about half of them in 2020, 2021, and 2022. In particular, small businesses owned by Black women increased by 18% since the years 2017 to 2020, double the overall increase of 9% in all women-owned small businesses.

How Big Is the Gender Pay Gap in Finance?

According to Payscale’s 2024 Gender Pay Gap Report (GPGR), women in what’s termed “the finance and insurance industry” earned 77 cents for every dollar earned by men, at 23% the largest gap out of 15 industries surveyed and lower than the overall gap of 83 cents to every dollar for all women (a 17% gap).

According to efinancialcareers’ 2023 compensation report, some women actually earned more than men just in the finance industry, but only after reaching the age of 50, when a woman’s average salary was $443,800 compared with $206,366 for a man, while average overall compensation (including bonus) was $562,431 to $332,560. The reason given was the types of roles women fill in finance: “They are more prevalent in jobs with greater longevity (eg. compliance, operations, and risk), where salaries are more likely to rise in line with tenure and bonuses but are typically lower than in the front office.”

The same report showed that before then the gender pay gap in average total compensation was about 27% less than men in the 20 to 25 age group, 52% for 26 to 31, 58% for 31 to 35, 29% for 36 to 40, 36% for 41 to 45, and 58% for 46 to 50. However, even after reaching 50, when women earned 41% more than men in total compensation, women’s average bonuses were still less than men’s: $118,631 vs. $126,194.

The Bottom Line

Things have been slowly changing. Men may still be dominating the C-suite, but as more women learn about the opportunities available in business and finance, find mentors to help guide them, and break down other barriers, the gender gap has been closing. What is not known is the effect that a dampening on the push for diversity will have on future progress.

Reviewed by Khadija Khartit
Fact checked by Kirsten Rohrs Schmitt

For many people, buying a home is the largest single financial investment they will ever make. Because of the hefty price tag, most people need a mortgage. A mortgage is a type of amortized loan, which means the debt is repaid in regular installments over a specified period of time. The amortization period refers to the length of time, in years, that a borrower chooses to spend paying off a mortgage. Here, we take a look at different mortgage amortization strategies for today’s homebuyers.

Key Takeaways

• Choosing the period over which you should pay off your mortgage is a tradeoff between lower monthly payments and lower overall cost.
• The maturity of a mortgage loan follows an amortization schedule that keeps monthly payments equal while modifying the relative amount of principal versus interest in each payment.
• The longer the amortization schedule (say 30 years), the more affordable the monthly payments, but at the same time, the more interest to pay over the life of the loan.

Amortization Schedules

Though the most popular type is the 30-year fixed-rate mortgage, buyers have other options, including 15-year mortgages. The amortization period affects not only how long it will take to repay the loan, but how much interest is paid over the life of the mortgage. It’s a good idea for anyone in the market for a mortgage to consider the various amortization options to find one that provides the best fit concerning manageability and potential savings.

• Longer amortization periods typically involve smaller monthly payments and higher total interest costs over the life of the loan.
• Shorter amortization periods, on the other hand, generally entail larger monthly payments and lower total interest costs.

The exact amount of principal and interest that make up each payment is shown in the mortgage amortization schedule (or amortization table). More of each monthly payment goes toward interest during the early years of the loan.

With each subsequent payment, more and more of the payment goes to the principal, and less goes to the interest until the mortgage is paid in full and the lender files a satisfaction of mortgage with the county office or land registry office.

Deciding which mortgage you can afford should not be left solely to the lender. Even when there are lending restrictions, you might be approved for more than you truly need. If you prefer a shorter amortization period so you can pay less interest and own your house sooner—but can’t afford the higher payments—consider looking for a home in a lower price range. With a smaller mortgage, you might be able to swing the higher payments that come with a shorter amortization period.

Important

Interest on a mortgage is tax-deductible. If you are in a high tax bracket, this deduction will be of more value than for those with lower tax rates.

Longer Amortization Periods Reduce Monthly Payments

Loans with longer amortization periods require smaller monthly payments because you have more time to pay back the loan. This is a good strategy if you want payments that are more manageable.

The following table shows an abridged example of an amortization schedule for a $200,000 30-year, fixed-rate loan at a 4.50% interest rate. Shown here are the first three months of the schedule, and then a jump to 180, 240, 300, and 360 months.

As you can see, the payment for this 30-year, fixed-rate 4.50% mortgage is always the same each month ($1,013.37). The amounts applied to principal and interest, however, change every month, with more money gradually shifting toward the principal and less to the interest.

Summary for the 30-year, fixed-rate 4.50% mortgage of $200,000:

• Principal Amount: $200,000
• Monthly Payment: $1,013.37
• Total Interest Amount: $164,813.42
• Total Loan Cost: $364,813.20

Shorter Amortization Periods Save You Money

If you choose a shorter amortization period, such as a 15-year mortgage, you will have higher monthly payments, but you will also save considerably on interest over the life of the loan, and you will own your home sooner. Also, interest rates on shorter loans are typically lower than those for longer terms. This is a good strategy if you can comfortably meet the higher monthly payments without undue hardship.

Remember, even though the amortization period is shorter, it still involves making 180 sequential payments. It’s important to consider whether or not you can maintain that level of payment.

Table 2 shows what the amortization schedule looks like for the same $200,000, 4.50% loan but with a 15-year amortization (again, an abridged version for simplicity’s sake). The first three months of the amortization schedule are shown, along with payments at 60, 120, and 180 months. 

Summary for the 15-year, fixed-rate 4.50% loan:

• Principal Amount: $200,000
• Monthly Payment; $1,529.99
• Total Interest Amount: $75,397.58
• Total Loan Cost: $275,398.20

As we can see from the two scenarios, the longer, 30-year amortization results in a more affordable monthly payment of $1,013.37, compared to $1,529.99 for the 15-year loan—a disparity of $516.62 each month. That can make a big difference for families on a tight budget or who simply want to cap monthly expenses.

The two examples also illustrate that the 15-year amortization shaves off $89,416 in interest, lowering the overall cost of the loan. If a borrower can comfortably afford the higher monthly payments, a shorter amortization period offers considerable savings.

An online mortgage amortization calculator can help you decide which mortgage is right for you and calculate the impact of making extra mortgage payments. Additionally, mortgage calculators can determine the best interest rates available.

Accelerated Payment Options

Even with a longer amortization mortgage, it is possible to save money on interest and pay off the loan faster through accelerated amortization. This strategy involves adding extra payments to your monthly mortgage bill, potentially saving you tens of thousands of dollars and allowing you to be debt-free (at least in terms of the mortgage) much sooner.

Take the $200,000, 30-year mortgage from the example above:

• If an extra $100 payment were applied to the principal each month, the loan would be repaid in full in 25 years instead of 30, and the borrower would realize a $31,745 savings in interest payments.
• Bring that up to an extra $150 each month, and the loan would be satisfied in 23 years with a savings of $43,204.16.

Even a single extra payment made each year can reduce the amount of interest and shorten the amortization, as long as the payment goes toward the principal and not the interest. Just make sure your lender processes the payment this way.

Naturally, you shouldn’t forgo necessities or take money out of profitable investments to make extra payments. But cutting back on unnecessary expenses and putting that money toward extra payments can make good financial sense. And unlike the 15-year mortgage, it gives you the flexibility to pay less for some months.

Warning

Check with your lender whether there are any penalties associated with making lump-sum prepayments. Prepayments are additional payments that you can make to lower your principal balance.

Other Payment Options

Adjustable-rate mortgages (ARMs) may allow you to pay even less per month than a 30-year, fixed-rate mortgage, and you may be able to adjust payments in other ways that could match an expected increase in personal income. However, monthly payments on these can rise—how often depends on economic indicators and on how the contract is written—and with mortgage interest still at almost historic lows, they are probably an unwise bet for most homeowners.

Similarly, interest-only and other types of balloon mortgages often have low payments but will leave you owing a huge balance at the end of the loan term, also a risky bet.

Does Amortization Affect Mortgage Interest Rates?

No. The amortization period has nothing to do with interest rates. You choose an amortization period when you are approved for a mortgage, and decide what term mortgage you want: 30-year, 15-year, etc. That said, the interest rate is usually lower—by as much as a full percentage point—on shorter-term loans that amortize more quickly.

What Is the Amortization Term?

Amortization is the length of time it takes a borrower to repay a loan in full. The term is the period of time in which it’s possible to repay the loan by making regular payments. So an amortization term is the amount of time it’ll take you to pay off the debt and own something free and clear.

People often assume that a loan’s term and its amortization are the same—that when the term is done, the amortization is also done. That’s often (but not always) true. In a balloon mortgage, for example, the loan term is shorter than the amortization: When the term ends, there’s a lot of remaining principal to pay.

How Does an Amortization Schedule Work?

Often shown in table form, an amortization schedule is a complete timeline of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. It also usually tracks the size of the balance. Amortization schedules demonstrate how, early in the life of the loan, the majority of each payment is what is owed in interest; later in the schedule, the majority of each payment covers the loan’s principal.

The Bottom Line

Because there are so many factors that can affect which mortgage is best for you, it’s important to evaluate your situation. If you are considering a huge mortgage and you are in a high tax bracket, for example, your mortgage deduction will likely be more favorable than if you have a small mortgage and are in a lower tax bracket. Or, if you are getting good returns on your investments, it might not make financial sense to cut back on building your portfolio to make higher mortgage payments. What always makes good financial sense is to evaluate your needs and circumstances, and take the time to determine the best mortgage amortization strategy for you.

Reviewed by Doretha Clemon

Christine Lagarde is a French lawyer and politician who has served as the first woman president of the European Central Bank (ECB) since 2019. She was also the first woman to hold the post of finance minister of a G-7 country and the first female to head the International Monetary Fund (IMF).

Key Takeaways

• Christine Lagarde is a lawyer and the president of the European Central Bank.
• Lagarde was the first woman to become the finance minister of a G7 country and later the first woman to head the International Monetary Fund.
• Despite not being a trained economist, Lagarde’s extensive experience in economic policy and her tenure as managing director of the IMF have established her as a leader in global finance.
• Her career has not been without controversy, notably the Tapie Affair, where she was found guilty of negligence in a case involving public funds payment to Bernard Tapie but faced no punishment.

Early Life and Education

Born January 1, 1956, in Paris, France to two language teachers, Lagarde is a highly accomplished trailblazer for women in global finance and policymaking. Lagarde received her education in both the United States and France. She completed her studies in 1974 at the esteemed Holton-Arms preparatory school for girls in Bethesda, Maryland. As a teenager, she was a member of the French national synchronized swimming team.

Lagarde pursued higher education at the University of Paris X-Nanterre’s Law School, where she studied and served as a lecturer after earning her law degree. She further specialized in labor law, earning a postgraduate diploma (DESS). She also earned a master’s degree in English from the Political Science Institute in Aix en Provence, and is fluent in French, English, and Spanish.

Notable Contributions

Lagarde began her career as an associate at the Paris office of Chicago-based law firm Baker McKenzie where she specialized in labor, anti-trust, and mergers and acquisitions. At the age of 31, she achieved the position of partner and broke new ground as the first woman to join the executive committee. Her journey continued as she was appointed chairman of the executive committee in 1999, a role she was reelected to in 2002, leading her to relocate to Chicago.

In 2005, she joined French politics and would remain a government minister for seven years. During this period, she held the posts of trade minister, agriculture and fisheries minister, and finance minister. Lagarde was the finance minister of France during the global financial crisis and impressed world leaders with her judgment and leadership. She played a key role in the organization of the emergency EU bailout fund for banks.

Lagarde replaced Dominique Strauss-Kahn in 2011 as managing director of the IMF after he was accused of sexual assault. She was confronted with the aftermath of the global financial crisis, the eurozone debt crisis, and international trade disputes among other exigencies. She also approved a $57 billion bailout to Argentina, which was the biggest in IMF history, in 2018.

In 2019 Lagarde relinquished her responsibilities at the IMF following her nomination to head the European Central Bank. She had held the IMF post since July 5, 2011, and was in her second five-year term.

In 2022, Macron presented Lagarde with the Commander of the National Order of Merit for her contributions to France’s reputation.

As head of the ECB, Lagarde has faced formidable challenges, including a global pandemic and a war in Europe that combined to produce a surge of inflation, peaking at 10.6%. At the end of December 2024, inflation had been reduced to 2.7%.

Important

Lagarde is not an economist and was seen as an unconventional pick for the most powerful role at the ECB, especially since she had no experience as a central banker.

Legacy

Under her leadership, the IMF argued that the rich should be paying higher taxes to reduce inequality, advocated for reforming the global tax system and warned about the macroeconomic effects of a few companies having outsized market power. Lagarde has warned about the danger to the global economy posed by high levels of debt in various countries.

She has also suggested central banks should consider issuing digital currencies in the future for the benefits it offers, such as financial inclusion. The IMF and the ECB have become more vocal about climate change under Lagarde. And at the ECB she has also focused on diversity and inclusion.

Lagarde’s leadership style is characterized by her political savvy, strong network, and consensus-building abilities, though her lack of formal economics training means she often relies on the experience of the financial technocrats at the central bank.

The Tapie Affair

The Tapie Affair, which is the most significant controversy associated with Christine Lagarde, surfaced when a French court found her guilty of negligence in 2016. This judgment came after she authorized a substantial payment exceeding 400 million euros from public funds to Bernard Tapie, a prominent business magnate and ally of then-Prime Minister Nicolas Sarkozy.

The dispute began when Tapie accused the formerly government-run Crédit Lyonnais bank of undervaluing his controlling share in Adidas during its sale in 1993. A government arbitration panel awarded Tapie a hefty settlement, a decision that Lagarde, then France’s Finance Minister, chose not to contest.

Although the court later revoked the settlement, Lagarde was at risk of a year in prison and a fine of €15,000 due to her mishandling of the affair. However, she received no punishment. On July 9, 2019, a Paris court cleared Tapie of related fraud charges.

What Is Christine Lagarde Known For?

Frenchwoman Christine Lagarde is best known for her roles as the first woman to serve as the finance minister of a G-7 country, the first female head of the International Monetary Fund (IMF), and first female president of the European Central Bank, her current position.

Did Christine Lagarde Go to Jail?

Christine Lagarde was accused of negligence during an economic scandal involving a wealthy French businessman, Bernard Tapie, when she approved a multi-million euro payout in public funds. But she did not serve any jail time or pay a fine, and Tapie was acquitted in a French court of law.

Is Christine Lagarde an Economist?

No. Christine Lagarde is not a trained economist, but a lawyer. However, she is deeply experienced in economic matters due to the roles she has played at the International Monetary Fund and her current position as president of the European Central Bank.

The Bottom Line

Christine Lagarde has achieved historic milestones, becoming the first female Finance Minister in a G-7 nation, the first woman to lead the International Monetary Fund (IMF), and the first woman to serve as president of the European Central Bank (ECB). Despite lacking formal training in economics, she has guided both the IMF and ECB through significant global financial crises.

Lagarde’s tenure has been marked by her advocacy for gender equality, economic reform, and climate change initiatives. For example, she consistently prefers the title “chairman” over gender-neutral alternatives. She is committed to promoting women within the ECB, and also advocates for providing opportunities to talented women who aspire to leadership roles, highlighting the importance of diversity in the workplace. While her career has not been without controversies, Lagarde is recognized as a key figure in the global financial sector.

Reviewed by Gordon Scott

Outsourcing human capital to developing countries is a cost-saving measure employed by many companies in the United States. It is estimated that 66% of U.S. businesses outsource at least one division, and about 300,000 jobs are outsourced every year.

While the practice has preserved capital for many national and international companies, it could be damaging to American industry as a whole in the long term.

The draining of jobs, knowledge, and innovation may eventually give other countries a technological leg up on the United States and depress the American economy further. There are four major threats to the U.S. industry caused by outsourcing, which are discussed in this article.

Key Takeaways

• While outsourcing saves U.S. companies money, it could hurt the American economy in the long run by increasing unemployment and weakening industries.
• As more skilled jobs move overseas due to outsourcing, the U.S. risks losing intellectual capital, making it harder to regain certain expertise and industries.
• Outsourcing makes the U.S. reliant on foreign labor and manufacturing, which opens up vulnerabilities to shifting global relations, trade wars, and economic instability abroad.

Higher Semi-Permanent Unemployment

Jobs that move offshore often do not come back. The lower wages and operating costs, plus the simpler administrative requirements in countries such as India and Russia, make operating in those countries cheaper and easier.

Without new jobs being created in America, unemployment rises, and a higher base unemployment rate becomes the norm. It could be decades before developing countries reach their saturation point and wages are driven higher. In the meantime, more American workers are out of work with few prospects of landing a job.

Loss of Intellectual Capital

Initially, the outsourcing movement was meant to transfer low-skill jobs out and retain highly-skilled jobs as an important asset for advancing the country’s economy.

However, as emerging economies work hard to build their own intellectual capital, American companies are increasingly contracting accountants, engineers, and IT specialists at a rate far lower than it would cost them in the U.S.

This “brain drain” has long-term repercussions for American industry. Once a skill has been largely moved offshore, it is difficult to regain

For example, if most publishers outsource book design and layout work to Chinese firms, over time, there will be fewer designers in the U.S. who have that skill. It also means that there are fewer students of the craft, due to a lack of opportunities.

4.5%

The percent of American jobs outsourced each year.

Loss of Manufacturing Capacity

When the industry moves offshore, not only do we lose knowledge, but we also lose manufacturing capacity.

For example, the U.S. was once the leader in solar cell manufacturing, but most American solar technology companies have set up new plants in countries that offer significant incentives, such as Germany.

The manufacturing capacity is gone, and if the U.S. ever wanted to repatriate these types of industries, it would take years to re-develop the manufacturing equipment and train engineers.

Reliance on Foreign Relations

Another risk that outsourcing companies face is the potential for relations with other countries to change. For example, if the U.S. were to engage in a trade war with China, the Chinese government may levy tariffs against foreign companies operating within its borders or on goods crossing the border.

In 1996, the Helms-Burton Act restricted U.S. companies from doing business in and with Cuba, forcing many companies to redesign their operations outside of the country.

Investors in international markets can also suffer losses to their portfolios if relations between two countries break down or if a foreign country falls into economic duress. This would negatively affect the activities of companies operating in that region.

Why Is Outsourcing a Problem?

While outsourcing makes financial sense for businesses, it comes with a host of problems. In the domestic market, it can lead to lower wages and job losses due to fewer opportunities for workers whose jobs have been outsourced. In the foreign market, it can lead to less oversight, communication issues, reduced quality control, and ethical problems, like poor working conditions.

What Is an Example of Outsourcing?

An electronics company, Tech Star, designs, produces, and sells various cutting-edge electronics products. To keep costs down, the company decides to outsource its manufacturing to Vietnam. Tech Star partners with a local company in Vietnam that has a factory, machinery, and skilled labor force.

By partnering with them, Tech Star avoids the high costs of building its own factory, buying machinery, and training a workforce. The local manufacturer’s process and cheap labor allow Tech Star to significantly save on production costs. These cost savings are passed down to consumers who can buy Tech Star’s electronics for less than if the products were produced in the domestic market.

How Many Jobs Are Lost to Outsourcing?

It is estimated that 300,000 U.S. jobs a year are lost to outsourcing, which equates to approximately 4.5% of American jobs.

The Bottom Line

The long-term damage to the U.S. economy eclipses the short-term gain derived by companies that outsource operations offshore. Over time, the loss of jobs and expertise will make innovation in the U.S. difficult while building the brain trust of other countries.

You have three days to cancel a home equity loan; after that, you must repay it

Fact checked by Vikki Velasquez
Reviewed by Doretha Clemon

A home equity loan can be a good way to access some of the equity you’ve built up in your home, particularly to finance home improvements. With a home equity loan, you receive a lump sum and pay back the loan over a set period at a set interest rate. This interest rate is generally quite low because just as in a mortgage you put your house up as collateral.

In some cases, you might want to get out of a home equity loan early. If you’ve just taken out the loan, you have a short period (three business days) to back out, no questions asked. After that, you’ll generally have to pay the loan back in order to get rid of it, and there are several ways you can raise the money to do that. In this article, we’ll look at your options.

What You Need to Know

• When you take out a home equity loan, you have three business days during which you can cancel it without consequence. If you choose to exercise this right, your lender must return any fees or payments. 
• After this period, you’ll have to pay back the loan in order to get rid of it. If you have the cash on hand, you can pay your lender directly. 
• If you sell the house, you can use the sale’s proceeds to repay the home equity loan.
• Alternatively, you can refinance the loan by taking out a new one. 
• Just be aware that some home equity loans have early repayment penalties, so check with your lender before you make a final decision.

Canceling a Home Equity Loan

At the broadest level, there are two main ways you can get out of a home equity loan: cancel it, or pay it back,

The right to cancel the refinancing of a mortgage is technically known as the right of rescission and only applies during the three business days after you sign up for a home equity loan. This right was established by the Truth in Lending Act (TILA) and was created to protect consumers from unscrupulous lenders, giving borrowers a cooling-off period and time to change their minds. Not all mortgage transactions offer the right of rescission. The right of rescission exists only on home equity loans, home equity lines of credit (HELOCs), and refinances of existing mortgages in which the refinancing is done with a lender other than the current mortgagee. It doesn’t apply to vacation or second homes.

If you’ve missed this three-day window, either by a couple of days or a decade, you have just one option when it comes to getting rid of your home equity loan—pay it back.

Important

You have the right to cancel a home equity loan within three days of signing up for it. If you cancel the loan within this period, your home is no longer collateral and can’t serve as payment for the lender. Your lender must also refund you all of the fees they’ve charged: That includes application fees, appraisal fees, or title search fees, whether they’re paid to the lender or to another company that is part of the credit transaction.

Paying Back or Refinancing a Home Equity Loan

When your home equity loan is active, the only way to get out of it is to pay it back. If you’ve just received the money from your loan or are lucky enough to have the cash on hand, you can do this directly. Just make sure you understand the penalties that might apply if you do so: Some lenders will charge you for early repayment of the loan.

If your loan has been running for a while and you don’t have enough cash on hand to repay it, there are several common ways of raising the funds needed to pay off the balance and get out of the loan:

• You can sell your home, even if you have an active home equity loan taken out against it. As long as your house has increased in value since you took out the loan, this is a fairly straightforward way to get out of the loan because you can use the money you receive from the sale to pay off the home equity loan (alongside your primary mortgage).
• You can refinance your home equity loan. If it’s been a few years since you took out your home equity loan, and your house has increased in value or interest rates have decreased, it might make sense to take out another loan. It’s possible to take out another home equity loan to repay the first, or to repay a home equity line of credit (HELOC). It’s even possible to roll a home equity loan into your primary mortgage.

Though this last option will allow you to pay off your home equity loan, you are essentially converting it into another form of debt. That means that you will still have to make monthly payments, even if these are lower than they were for your home equity loan.

Can I Cancel a Home Equity Loan?

Yes, but you have a short window to do so. The Truth in Lending Act (TILA) protects your right to cancel a home equity loan within three business days of agreeing to it. Your lender must return any fees they have charged and refund you for any payments you’ve made. They have 20 days in which to do so.

Can I Sell a House With a Home Equity Loan?

Yes. You can sell a house even if there is an active home equity loan taken out against it. In this case, you can use the money from the house sale to repay the loan. If your home has decreased in value since you took out the loan, however, you may not receive enough money to repay it. In this case, some lenders will write off the remaining balance; in other cases, you’ll have to find the funds elsewhere.

Can I Refinance a Home Equity Loan?

Yes. You can use a new loan to pay off an existing home equity loan. If your house has increased significantly in value since you took out the original loan or interest rates have gone down, this could make financial sense.

The Bottom Line

When you take out a home equity loan, you have three business days during which you can cancel it without consequence. If you choose to exercise this right, your lender must return any fees or payments. 

After this period, you’ll have to pay back the loan in order to get rid of it. If you have the cash on hand, you can pay your lender directly. If you sell the house, you can use the sale proceeds to repay the home equity loan. Alternatively, you can refinance the loan using a new one. Just be aware that some home equity loans have early repayment penalties, so check with your lender before you make a final decision.

These government-insured loans are the most common type of reverse mortgage

Fact checked by Timothy Li
Reviewed by Doretha Clemon

The Federal Housing Administration (FHA) is the federal agency that insures many reverse mortgages. If you meet certain requirements, you can get some of your home equity in the form of a lump sum, monthly payments, or a line of credit. Here is how FHA reverse mortgage loans work.

Key Takeaways

• The Federal Housing Administration (FHA) insures the most common type of reverse mortgage, which is known as a home equity conversion mortgage (HECM).
• HECMs are offered only through FHA-approved lenders.
• Borrowers who meet the requirements can receive a portion of their home equity in the form of a lump sum, monthly payments, or a line of credit.
• Other types of reverse mortgages include proprietary reverse mortgages and single-purpose reverse mortgages.

What Is an FHA Reverse Mortgage Loan?

The Federal Housing Administration (FHA), part of the U.S. Department of Housing and Urban Development (HUD), provides insurance for a type of reverse mortgage known as a home equity conversion mortgage (HECM). The insurance protects the lender in case the borrower defaults on the loan.

HECMs are the most common reverse mortgages today. Like other reverse mortgages, they allow homeowners to tap the equity that has accumulated in their homes over the years without having to sell the home. The homeowner can take the money in the form of a lump sum, a series of monthly payments, or a line of credit.

Unlike with a regular mortgage, the homeowner doesn’t have to make payments until they eventually sell the home, move out, or die. Instead, the amount that they owe accumulates over time, and the loan is paid off either when the home is finally sold or by the homeowner’s heirs if they wish to keep it.

Who Is Eligible for an FHA Reverse Mortgage Loan?

 To qualify for an HECM insured by the FHA, the homeowner must:

• Be at least age 62
• Have paid off their home or at least a substantial portion of it
• Occupy the home full time as its primary residence
• Not be delinquent on any federal debt
• Have adequate financial resources to cover future property taxes, homeowners insurance premiums, and any other required fees

The homeowner must also participate in an information session with a HUD-approved counselor to determine whether an HECM is right for them.

What Types of Homes Are Eligible for FHA Reverse Mortgage Loans?

 The applicant’s home also needs to satisfy certain FHA requirements. Specifically, it must be:

• A single-family home or a two- to four-unit home with one unit occupied by the borrower
• A HUD-approved condominium project
• An individual condominium unit that meets FHA requirements
• A manufactured home that meets FHA requirements

In addition, the home must meet HUD property standards and flood requirements. During the home appraisal process for the loan, the lender’s appraiser, who must be HUD-approved, will evaluate whether the home meets those requirements or requires repairs or other improvements.  

Reverse mortgage lenders generally require at least 50% equity in the home.

Types of FHA Reverse Mortgage Loans

HECMs can be either fixed-rate or variable-rate loans. In the case of a fixed-rate loan, the borrower must take the money as a lump sum.

A variable-rate HECM can provide income in the form of monthly payments, a line of credit for the homeowner to draw on as they choose, or some combination of the two.

Where to Get an FHA Reverse Mortgage Loan

Although the FHA insures HECMs, it does not issue them. Instead, they are issued by FHA-approved lenders, including banks and credit unions. HUD has a search tool on its website that borrowers can use to find approved lenders in their area.

FHA Reverse Mortgage Loan Costs

Like other types of mortgages, HECMs can have a long list of closing costs and other fees. Those can include: 

Mortgage insurance premiums: The borrower must pay an initial, one-time premium for the FHA insurance equal to 2% of the loan amount. After that, the premium is 0.5% of the outstanding loan balance annually. Because the balance on a reverse mortgage grows every year, those premiums will grow as well.

Origination fee: This is a fee that goes to the lender at closing. It will be $2,500 or 2% of the first $200,000 of the home’s value (whichever is greater) plus 1% of the amount over $200,000. By law, HECM origination fees can’t exceed $6,000.

Servicing fees: The loan servicer, which handles loan disbursements, account statements, and other ongoing tasks associated with the mortgage, can charge either $30 or $35 a month, depending on the type of HECM.

Other closing costs: The borrower also may have to pay appraisal, inspection, title search, and recording fees, among others.

Many of these fees can vary from lender to lender, so borrowers should try to shop around.

Alternatives to FHA Reverse Mortgage Loans

HECMs are not the only reverse mortgages that are available. Some lenders offer proprietary reverse mortgages. These loans are not government-insured but can have higher lending limits than the FHA’s current 2025 HECM limit of $1,209,750.

Another type of reverse mortgage is the single-purpose reverse mortgage. State and local agencies and some nonprofit organizations issue these loans to low- and moderate-income homeowners. As their name suggests, the proceeds must be used for a specific purpose, such as home repairs or paying property taxes.

How Much Can You Borrow With a Reverse Mortgage?

The amount that you can borrow with a reverse mortgage will depend on the market value of your home, your age, and current interest rates. Government-insured reverse mortgages are capped at a maximum of $1,209,750, but some lenders offer larger loans.

Does the U.S. Department of Veterans Affairs (VA) Offer Reverse Mortgages?

No. The U.S. Department of Veterans Affairs (VA) doesn’t have a reverse mortgage program.

What Happens If You Inherit a Home With a Reverse Mortgage?

That depends on your relationship with the borrower. Non-spouses who inherit a home have to pay off the reverse mortgage, either by selling the home or with their own funds if they wish to keep it. To do so, they must pay the lender the full loan balance or 95% of the home’s appraised value, whichever is less. In the latter case, Federal Housing Administration (FHA) insurance makes up the difference to the lender.

Spouses can often remain in the home for the rest of their lives, but the rules are complicated and depend on whether they were co-borrowers on the loan or non-borrowing spouses. Anyone, spouse or otherwise, who inherits a home with a reverse mortgage should contact the loan servicer and/or a U.S. Department of Housing and Urban Development (HUD)-approved housing counselor as soon as possible after the borrower’s death to find out what steps they need to take and what the deadlines are.

The Bottom Line

FHA reverse mortgage loans, formally known as home equity conversion mortgages (HECMs), are the most common type of reverse mortgage. HECMs are insured by the government to protect lenders in case the borrower defaults on the mortgage. To be eligible for an HECM, the borrower must meet certain requirements, including a session with a housing counselor to make sure that a reverse mortgage is appropriate for them.

Not automatically, but there are ways to increase your credit limit

Fact checked by Amanda Jackson
Reviewed by Lea D. Uradu

If you have a home equity line of credit (HELOC), don’t expect your credit line to increase automatically along with your home value.

As home values have increased in the last five years, homeowners have become wealthier. The average house is worth over 40% more than it was five years ago, lifting home equity to record highs nationwide. But to access any new equity, you need to apply for home equity products like a home equity loan or a HELOC, even if you already have one.

Key Takeaways

• Lenders won’t automatically add to your credit limit if your home rises in value.
• To tap into more of your home equity, you need to ask the lender to modify your existing home equity loan or apply for a new home equity line of credit (HELOC).
• Lenders generally won’t let you increase your credit limit until a certain amount of time has passed since you last took out a HELOC.
• When you making an adjustment to your HELOC, you will likely pay extra fees.

If My Home Appreciates in Value, Does My HELOC Limit Automatically Increase?

A HELOC uses your home as collateral to provide you with a revolving line of credit.

If you have a HELOC, you may wonder whether a higher home value automatically gives you a larger line of credit, but HELOCs don’t work that way. To increase your line of credit, you would have to modify the terms of your current HELOC. You have to ask for this because lenders are generally not willing to extend you a larger line of credit automatically.

If your home depreciates in value, however, a HELOC lender may automatically amend the amount of credit it extends to reduce your line of credit. Lenders can “freeze or reduce your line of credit if the value of the home declines significantly below the appraised amount,” according to the Federal Trade Commission (FTC).

How to Adjust Your HELOC Limit

Two benefits of using a HELOC are that you don’t need to draw all of the money available to you, and that you only pay interest on the amount that you borrow. Keep in mind that lenders will likely charge you more for higher HELOC limits.

If you already have an existing HELOC, you have two main choices if you want to increase your lending limit: Modify your loan or refinance into a new HELOC with a higher limit. Let’s look at each option in more detail.

Loan modification

For a loan modification, contact your lender first about your options for changing the terms. In some cases, you may just need to submit some additional information to get an increase to your line of credit. Your lender will review your creditworthiness, including factors like your credit score and income, along with the current market value of your home.

Warning

Lenders usually limit how often borrowers can increase their loan. Bank of America, for example, requires that the account be open for at least nine months, and the borrower cannot receive a credit increase more than once a year or twice in five years.

New HELOC

If you can’t modify an existing agreement, or if you prefer to shop around for a loan from another lender, you can apply for new line of credit. You can use a new line of credit in two ways:

1. You can refinance your outstanding balance into a new, larger HELOC with different terms and conditions, as well as a different repayment deadline.
2. You can take out a new HELOC in addition to your original HELOC and carry two lines of credit.

Weigh the Pros and Cons

Securing a larger line of credit can provide you with cash to pay for major expenses like a renovation or your child’s college education. But it has downsides to ponder as well. For example, you’re likely to face fees, a higher interest rate, and the risks that come with a loss of equity. Let’s look at each downside in more detail.

New fees

Before amending a loan, calculate the cost of fees. The new or amended loan might include charges, such as application fees and closing costs. Some lenders charge an origination fee that is either a flat fee or a percentage of the amount that you want to borrow.

Less attractive rates

When you get an increased line of credit, either by modifying an existing HELOC or refinancing into a new one, the terms generally will be different. In some cases, they may not be better. For example, a larger credit limit or a different interest rate environment could result in an increase to your HELOC’s interest rate. 

Underwater risk

When you maximize the use of your home equity, you run the risk that if home values decline, your loans could go underwater. This means that you would owe more on the home than it is worth. If that happens, you won’t be able to sell or refinance your home unless you can pay for the loss out of pocket.

What increases equity in your home?

Your home can gain equity, or the difference between your home’s value and what you owe, in two ways. First, you can pay down your mortgage and decrease the principal that you owe. Second, your home can gain equity when its value increases.

How long does a home equity line of credit (HELOC) last?

Home equity line of credit (HELOC) terms can vary depending on the lender. Many lenders offer a 10-year draw period, or the time when you can use the line of credit before the repayment period starts.

Can I open a HELOC and not use it?

You can open a HELOC and not use it. You can access as much or as little as of your line of credit as you like. You will only pay interest on what you actually withdraw. Keep in mind that opening a HELOC often entails fees.

The Bottom Line

If you want to turn your home’s extra value into a bigger line of credit, you will need to either modify your existing HELOC or refinance it into a new, larger one. However, weigh the pros and cons of opening new credit carefully. A new line of credit may offer terms not as good as your current agreement, and the costs to change it could be too high to justify having access to a bit more cash.

There is no one right answer to this venerable question

Fact checked by Vikki Velasquez
Reviewed by Lea D. Uradu

When applying for a home equity loan, you’ll need to decide whether you want to be charged a fixed percentage or prefer to take your chances on interest rates in the wider economy. Borrowing costs on these loans are typically fixed, although some lenders do offer adjustable options.

The fixed versus variable debate isn’t one to shrug off. Borrowers ought to be aware of the difference because choosing one over the other could drastically alter their finances and mental well-being. But the answer isn’t simple; each choice has its benefits and drawbacks.

Key Takeaways

• Home equity loans are typically charged at a fixed interest rate, although some lenders do offer adjustable options.
• This choice can affect your monthly payments and the total cost of your loan over time.
• A fixed-rate loan has the same interest rate for the duration of the borrowing period, whereas variable rates can move up and down.
• The certainty offered by fixed borrowing charges comes at a cost: higher initial fees and the potential to pay more for the entire duration of the loan.
• A variable rate starts out cheaper and could save you a fortune, but it can also result in unmanageable borrowing costs, default, and foreclosure.

What’s the Difference Between a Fixed and Variable Rate?

When you take out a loan, it’s common to pay the lender something extra on top of the amount borrowed to make it worth their while. This charge is what refer to as interest, and it can be either fixed or variable.

A fixed-rate loan applies the same interest rate for the duration of the borrowing period. The cost to borrow the money is set before you agree to take on the loan and remains the same until the debt is repaid unless otherwise specified.

Variable-rate loans work in the opposite way. When taking this path, borrowing costs periodically fluctuate, moving up and down.

Variable rates are tied to the movements of a specific financial index tasked with reflecting how much the wider economy is paying for credit. The index on which your loan is based will be listed in your loan documents. Common benchmarks include:

• The one-year constant maturity Treasury (CMT)
• Federal Cost of Funds Index (replaced The 11th District Cost of Funds Index (COFI) as of January 2022)
• The London Interbank Offered Rate (LIBOR)
• The Wall Street Journal prime rate

Important

Interest rates on home equity loans are determined by inflation prospects, general borrowing costs, and the applicant’s individual circumstances, such as their credit score, debt-to-income (DTI) ratio, and combined loan-to-value (CLTV) ratio.

Pros and Cons of Fixed-Rate Home Equity Loans

The most obvious benefit of a fixed-rate home equity loan is certainty. Before you sign the contract, you’ll know exactly what your monthly payments will be as well as the total borrowing costs.

Fixed rates make budgeting easier and can reduce stress. Choose this option and you’ll know for certain how much to put aside each month. You won’t be in for any surprises—good or bad.

Unfortunately, this certainty comes at a cost. With a fixed-rate loan, you will likely start out paying more than you would on a variable one. Playing it safe commands a slight premium because it is a popular choice and can end up leaving the lender out of pocket if inflation soars.

Of course, the odds could also work against you. Many people opt for fixed-rate loans because they are scared their repayments might go up. However, there is also a decent chance that the variable rate will leave you better off.

If rates fall, you do have the option to refinance the loan, although there may be a penalty for doing so.

Pros and Cons of Variable Rate Home Equity Loans

The main attraction of a variable-rate loan is that it can save the borrower quite a bit of money. Should inflation and interest rates fall and then remain low for the duration of the loan, the amount you’re charged to borrow could be significantly less. On the other hand, interest rates could rise and make your loan more expensive.

One thing that’s at least pretty much guaranteed is a lower initial borrowing cost. If, for example, a lender offers a fixed rate of, say, 6%, its variable rate will usually begin several percentage points lower. Barring economic conditions drastically changing at the outset, the variable rate is likely to remain cheaper for a while, potentially yielding significant savings at the very time when the loan balance on which you’re charged a percentage is at its highest.

It’s the not knowing that kills most people. Yes, the savings can be notable with a variable rate. However, there’s also a chance that the cost of living skyrockets, interest rates soar, and your loan repayments suddenly balloon and become unaffordable. Should that happen, you may lose the home you put up as collateral.

Without a crystal ball, there’s no saying how expensive your loan will be in the future. Some people are willing to take their chances, while others have limited financial flexibility and prefer to play it safe.

Which Should I Choose?

There’s no right answer to this question. Both strategies have merits.

If you’re confident that interest rates will go down further in the future and have enough money tucked away to absorb any potential upsets, a variable rate is probably your best option. This may also work if interest rates are especially high, making the lower initial rate of a variable loan more appealing. Going with fluctuating charges can also make sense if you’re planning to pay off the loan quickly, thanks to the more appealing introductory rates.

Of course, with persistent inflationary pressure, interest rates could go even higher. If the thought of not knowing how much you’ll owe in the future makes you uneasy, you should probably choose the fixed option. Certainty may come at a high price, but sometimes the peace of mind it affords is worth every cent.

What Is the Benefit of a Fixed-Rate Home Equity Loan?

Certainty. When you opt for a fixed rate, you know exactly how much you will be charged and can budget for it without having to worry about the possibility of rising interest rates.

Are There Closing Costs on a Home Equity Loan?

Yes. As with most other real estate transactions, home equity loans are subject to closing costs. The amount you pay depends on the lender and generally ranges from 2% to 5% of the loan value.

How Do You Determine Your Home Equity?

Home equity is your ownership stake in your property, and it can be calculated by subtracting your mortgage balance (and any other liens) from the property’s current fair market value.

The Bottom Line

One of the most important choices when taking out a home equity loan is whether to opt for a fixed or variable rate. This decision needs careful consideration because it can affect your finances—and blood pressure—for years to come.

The cash that home equity loans provide can help make your dreams come true. However, those dreams can quickly turn into nightmares if you walk into this transaction carelessly and choose the wrong method of repayment.

It depends on whether your priority is price or choice

Reviewed by Khadija Khartit

There’s a lot to consider when renting a house or an apartment. While a variety of personal factors go into signing a lease—ranging from the regularity of your cash flow to the urgency of a move—knowing what time of year to start hunting for a rental can help you snag a better deal. The real estate market tends to be cyclical and seasonal. By paying attention to these cycles, you might have a better chance of landing your dream home at a price you can afford.

If you’re looking for the widest range of choices, you should plan to move between May and September. For the best prices, you should plan to move between October and April. Here’s why—and here are a few other tips for timing your home-hunting.

Key Takeaways

• The real estate market tends to be seasonal and cyclical. Paying attention to these cycles can affect the price you’ll pay for a rental.
• Apartment inventory is higher between the months of May and September, given the considerable turnover during these months. Rental rates also tend to be higher during the summer months. 
• The lowest rental rates are found during the winter months—October through April—with demand and prices reaching their nadir between January and March. 
• An apartment search should begin in the middle of the month prior to the target move month.

Summer Months Are Best for Rental Selection

The busiest moving period tends to be between the months of May and September. The reason for this is fairly straightforward: A number of life changes tend to occur in these months. Many high school graduates are leaving home for college or jobs. Many college graduates are seeking real estate close to where they will start their careers. And, of course, for families with kids, it’s between school years.

Also, it’s easier to move during warmer weather: to drive, to load and unload furniture, and carry boxes.

These life changes and weather conditions mean a much higher turnover rate in real estate. Thus, finding an apartment is easier, and there is a wider selection of apartments from which to choose, during the summer season. However, precisely because the summer season sees the highest levels of rental activity, the demand for rental space is also extremely high. This boosts rent prices and rental fees, sometimes up to double what might be negotiated during the off-peak seasons.

It can also be a more stressful time to hunt: You might face more competition in your quest for the perfect space.

Would-be renters often have to be ready to act fast—sometimes even signing on the spot—if they find a space they like.

Winter Months Are Best for Rental Savings

As the temperature drops, so do prices. The lowest rental rates are usually found between October and April, particularly right after the December holiday season. Fewer people are interested in moving—the weather’s bad, schools are in session, etc. So this is when you’ll typically find the best rental bargains. However, low levels of moving activity and turnover typically mean that it is more difficult to find exactly the type of property you’d like at this time.

How Early to Apartment Hunt

Once you’ve determined a target moving season, narrow the choice down to a specific month. Let’s say that you plan to move in August. The ideal time to begin the search for an appropriate apartment is at the end of the month prior to the target move month; so, in this example, begin the apartment hunt during the last two weeks of July.

While this tactic may seem last minute, it’s really optimal, because the majority of renters have leases that expire at the end of a month or within the first few days of the next month. Renters who are about to leave vacancies will have given or will be giving their 30-day notices during this time, which means you are apt to get the first choice of available space if you begin your apartment search within that time frame.

Individuals willing to take a gamble or who have the flexibility to move on a moment’s notice could employ a different apartment-hunting approach. Waiting until the second week of the move-in month can prove lucrative, as landlords trying to fill vacancies become more eager to secure new renters.

Warning

Discrimination during the rental process is illegal. If you think you’ve been discriminated against in the course of your search, based on your race, religion, sex, marital status, national origin, disability, or age, there are steps you can take—such as filing a complaint with the U.S. Department of Housing and Urban Development (HUD)’s Office of Fair Housing and Equal Opportunity. 

What’s the Average Rent in the U.S.?

The average monthly rent for a two-bedroom apartment in the U.S. was $1,317 as of November 2023.

How Many People Rent in the U.S.?

There were about 45 million housing units occupied by renters in 2023.

Are More People Renting Than Before?

The number of renters is rising as of 2023.

The Bottom Line

The best time to rent depends largely on your circumstances: your desired housing and price, as well as your moving flexibility. If you’re concerned about having the greatest amount of choice, you should target May through September for your searches. If you’re focused primarily on the best prices, you should time your move from October through April.

Fact checked by Kirsten Rohrs Schmitt
Reviewed by JeFreda R. Brown

Accountants usually classify computer software as a long-term asset that falls under fixed assets like buildings and land.

However, there are circumstances in which software can be treated as property, plant, & equipment (PP&E) rather than a long-term asset.

Key Takeaways

• While software is not physical or tangible in the conventional sense, accounting rules allow businesses to capitalize software as if it were a tangible asset.
• Software that is purchased by a company that meets certain criteria can be treated as if it were property, plant, & equipment (PP&E).
• By capitalizing software as an asset, companies can delay full recognition of the expense on their balance sheets.

Software as Assets

Intangible assets are typically nonphysical expenditures that are used over the long term. Intangible assets are often intellectual assets, making it difficult to assign a value to them because of the uncertainty of future benefits.

Tangible assets are physical and measurable assets that are used in a company’s operations. Equipment is a tangible asset.

Property, plant, and equipment (PP&E) is a category of long-term assets that includes expenditures that are vital to a company’s operations and have a definite physical component.

Under most circumstances, computer software is classified as an intangible asset because of its nonphysical nature. However, accounting rules state that there are exceptions that permit the classification of computer software as PP&E.

Two accounting standards describe how and when computer software should be classified as PP&E:

• Federal Accounting Standards Advisory Board (FASAB) Statement of Federal Financial Accounting Standards (SFFAS) No. 10, Accounting for Internal Use Software.
• Governmental Accounting Standards Board (GASB) Statement No. 51, Accounting and Financial Reporting For Intangible Assets.

What Is PP&E?

Several criteria define assets that can be described as PP&E:

• They have estimated useful lives of two years or more.
• They are not intended for sale in the ordinary course of operations.
• They have been acquired or constructed with the intention of being used or being available for use by the entity.

Criteria for Capitalization as PP&E

Several rules determine whether software must be capitalized as PP&E or expensed. If the software meets the criteria of property, plant, and equipment as stated above, it can be classified as PP&E. According to SFFAS No. 10:

“Entities should capitalize the cost of software when such software meets the criteria for general property, plant, and equipment (PP&E). General PP&E is any property, plant, and equipment used to provide goods and services.”

• Management has some discretion since there are no dollar amount thresholds for the cost of computer software whether it’s internal or new software.
• Capitalization thresholds should be established by management in accordance with PP&E guidelines. For example, for bulk software purchases, both the bulk cost and the useful life of the software should be included in the calculation. If it is contractor-developed software, the amount paid to the vendor for development and implementation should be classified.
• Capitalization of software doesn’t include software that is an integral part of property, plant, and equipment. According to SFFAS No. 10 Section 38 & 39:

“For example, if the software is a part of a weapons systems, it would not be capitalized but included in the cost of investing in that weapons system. On the other hand, software used to accumulate the cost of acquiring that weapons system or to manage and account for that item would meet the criteria for general PP&E and should be capitalized.”

• The capitalization cutoff is not determined by an amount but rather when the testing stage of the software has been completed. According to SFFAS 10, paragraph 20:

“Costs incurred after final acceptance testing has been successfully completed should be expensed. Where the software is to be installed at multiple sites, capitalization should cease at each site after testing is complete at that site.”

What Is Property, Plant, and Equipment (PP&E)?

Property, plant, and equipment (PP&E) is an accounting category for long-term tangible assets that are vital to a company’s operations. They are the company’s fixed assets.

What Are Intangible Assets?

Intangible assets include contracts, patents, trademarks, and goodwill. They have value to a company even though they don’t exist in physical form. They can be difficult to place a value on because their future worth is largely unknown.

What Are Tangible Assets?

Tangible assets are a company’s physical possessions. They usually have monetary value. Land, buildings, equipment, and inventory are tangible assets.

The Bottom Line

It’s important to review the financial accounting standards before making any decisions on whether to expense or capitalize on computer software as PP&E. This article touches on a few key topics, but other accounting standards might need to be applied in instances such as cloud computing, multi-use software, developmental software, and software that is shared between divisions.