Here’s How Expense Ratios Impact Your Investment Returns

Fact checked by Yarilet Perez
Reviewed by Pamela Rodriguez

For mutual fund and exchange-traded fund (ETF) investors, expense ratios are an important but sometimes overlooked element that can have a real impact on long-term returns.

The expense ratio is the annual charge that a fund imposes on its shareholders. It covers operational costs, such as portfolio management, overhead, administration, and marketing expenses.

Expense ratios of 0.25% or 0.50% may seem small, but they can accumulate into thousands of dollars in fees over decades-long investment periods. Knowing the role they play in your returns over time is thus crucial.

Key Takeaways

• Mutual funds and ETFs charge their shareholders an expense ratio to cover operating and distribution costs.
• Even seemingly low expense ratios can drag down total returns over a long-term investment horizon.
• Index funds, which are passively managed, typically have much lower expense ratios than actively managed funds or those invested in less tradable assets.
• The long-term trend has been toward lower expense ratios, although some funds still charge upward of 2%.

Why Are Expense Ratios Important?

A fund’s expense ratio is essentially the cost of admission for participating in a professionally managed investment vehicle. It’s given as a percentage of the amount you’ve invested and is deducted from your returns automatically, so it’s not like you’ll get a separate bill.

While many investors focus exclusively on performance figures, they may not realize how much these ongoing fees eat into their returns year after year. Investors should thus pay close attention to them:

1. They directly cut into your returns: Every dollar paid in fees is a dollar less in your account that won’t grow over time. Higher expense ratios mean you keep less of your overall investment gains.
2. Compounding effect: The impact of fees compounds over time, just as your returns do. A seemingly small difference in expense ratios can translate to significantly different outcomes over several decades.
3. Indicator of fund type and strategy: Expense ratios will often reflect a fund’s management style. Actively managed funds or those invested in more obscure or less liquid asset classes will tend to have higher expense ratios, while passively managed index funds typically have much lower fees.
4. Predictable and transparent: Unlike market performance, which is inherently unpredictable, expense ratios are known in advance and are one of the few investment factors you can control.

How Is the Expense Ratio Calculated?

Here is the expense ratio formula:

Expense Ratio = Total Fund Operating Expenses / Average Net Assets

A fund with operating expenses of $1 million and assets of $100 million would thus have an expense ratio of 1%.

Components of Expenses Ratios

Understanding what goes into a fund’s operating expenses can help investors make more informed decisions. These expenses typically include:

• Management fees: The management fee covers the portfolio managers and their teams, who are responsible for making investment decisions, and is often the largest part of the expense ratio (between 0.10% and over 1%). Actively managed funds require higher fees because they cover additional expenses related to research, analysis, and active trading in the markets.
• 12b-1 fees: SEC rules allow for 12b-1 fees that cover marketing and distribution expenses. These fees typically range from 0.25% to 1%, and are more common in mutual funds designed for retail investors than ETFs or funds targeting institutional investors.
• Administrative costs: This covers recordkeeping, customer service, legal, and accounting costs.
• Trading costs: Investors bear the costs related to trading activities in the fund’s portfolio, even though these costs do not appear directly in the expense ratio. Even with today’s low-commission environment, funds with high turnover ratios have higher trading expenses and more taxable events that flow down to investors.
• Other expenses: The fund’s other expenses may cover custodial fees, auditor fees, and compensation for the board of directors.

Funds determine their expense ratio once a year using the previous fiscal year’s operating costs and average asset values. Investors pay for the expense ratio in daily increments applied to the fund’s net asset value instead of a lump sum payment for the entire annual percentage.

Types of Funds and Their Expense Ratios

Different types of funds have vastly different expense structures:

Fund Type	Typical Expense Ratio	Example	Notes
Passively Managed Index Funds/ETFs	0.02% – 0.25%	Vanguard S&P 500 ETF (VOO): 0.03%	Simply tracks market indices; minimal active management
Actively Managed Funds	0.50% – 1.50%+	Fidelity Contrafund (FCNTX): 0.63%	Employ portfolio managers who actively select investments
Specialty/Sector Funds	0.09% – 2%+	Financial Select Sector SPDR Fund (XLF): 0.08%	May have higher fees because of specialized knowledge required
International/Emerging Market Funds	0.30% – 1.75%	iShares MSCI Emerging Markets ETF (EEM): 0.72%	Higher costs because of the greater complexity of international investing
Bond Funds	0.03% – 0.75%	iShares Core U.S. Aggregate Bond ETF (AGG): 0.03%	Generally lower than active equity funds; varies by credit quality and style

Effect of Expense Ratios on Investment Returns

The impact of expense ratios becomes evident when examining long-term investment returns. The chart below shows how different expense ratios affect investment growth over time. Our example uses a consistent 10% gross annual return on an initial $10,000 investment:

After accounting for the compounding effect of these fees over 20 years, when the expense ratio is 0.05%, the investment grows to about $66,666, with about $285 paid in fees over time. When the expense ratio is 0.5%, the investment grows to about $61,416, with about $2,706 in fees. But with a 2.5% expense ratio, the investment grows to only about $42,479, with about $10,826 paid in fees.

Expense Ratio Trends

The good news for investors is that expense ratios have been decreasing because of growing competition among fund providers and other changes that have lowered overall expenses. For instance, improved operational efficiencies have helped fund providers reduce administrative costs.

There are also economies of scale. As funds’ asset bases continue to grow, fixed costs (such as transfer agency fees or accounting fees) represent a smaller proportion of total expenses, resulting in a lower overall expense ratio. In addition, investors have become more cost-conscious. It’s certainly easier to find this data than a few decades ago—they’re increasingly choosing lower-cost options, putting additional pressure on high-fee funds.

According to the Investment Company Institute, the average expense ratio for equity mutual funds has declined from around 1% in 2000 to 0.40% in 2024. For index equity ETFs, the average has fallen to 0.15%.

Despite positive trends toward lower expense ratios, some funds—particularly those sold through certain advisor channels or included in retirement plans with limited options—still charge high fees relative to the services provided.

The Bottom Line

Long-term investors should minimize expense ratios whenever possible to maximize their total returns. Compare fees among similar mutual funds or ETFs since even small percentage differences in this fee can quickly add up to significant costs over time.

The best investment choice doesn’t always mean selecting the cheapest fund available in every category, but funds with particular strategies might justify slightly higher costs. Investors should monitor their expenses and verify that elevated fees are warranted by the fund’s returns.

Reviewed by JeFreda R. Brown
Fact checked by Suzanne Kvilhaug

Federal Housing Administration (FHA) mortgages offer a more accessible path to homeownership with lower down payments and credit score requirements than conventional loans. However, they have specific conditions: properties bought with FHA loans must meet minimum standards for safety, security, and structural soundness.

The standards are meant to ensure that buyers are getting the types of homes the FHA program was put in place to help people buy, those that are move-in ready. Still, they can create significant hurdles during your home search. Understanding these requirements before you begin house hunting can save you a lot of time and frustration.

Key Takeaways

• Homes financed by a Federal Housing Administration (FHA) loan must meet safety, security, and soundness standards.
• An appraiser is sent to the house to check for defects and determine if it passes the test.
• FHA minimum property standards protect buyers and lenders but can make searching for a home difficult.
• The criteria can be stringent but often protect buyers from taking on loans for homes that are more likely to have problems.

What Are the FHA Minimum Property Standards?

If you’re going to apply for an FHA mortgage, a government-sponsored home loan that requires lower minimum down payments and credit scores than conventional mortgages, there are restrictions on the type of house you can buy. If it’s run down or needs major renovations, you’ll need to look elsewhere.

Homes financed by an FHA loan must meet safety, security, and soundness standards. An expert is sent to the property to determine if it is structurally sound and free of hazards and if it provides a secure living environment. Only after this thumbs-up will you get approval for an FHA-sponsored mortgage.

Minimum property standard rules are supposed to protect buyers and lenders. For buyers, they ensure the home is safe, ready to live in, and does not require costly home repairs. For lenders, it means that should the mortgage applicant default on the loan, it will be easier to sell the property and to recoup what’s owed.

The Role of FHA Appraisals

It’s an appraiser’s job to determine if a property meets the FHA’s minimum standards. Usually, after the prospective homebuyer applies for a mortgage, the lender sends an FHA-approved appraiser to check the property’s condition and see if it complies with the rules.

The findings of the site visit are reported on a specific form relevant to the type of property being examined. The appraiser is asked to give basic information about the property, such as its build year, square footage, number of rooms, and location, and present a detailed analysis of its physical condition and features.

The FHA appraisal also includes research on the sale price of comparable homes in the area, typically over the past six months. These findings are used to estimate the market value of the property.

FHA-approved home appraisals are valid for 180 days after they’re issued. If that period expires, another appraisal will be needed to make sure the property’s value and condition haven’t changed. Usually, the mortgage applicant is responsible for covering the appraisal cost, which, like a conventional home appraisal, costs a few hundred dollars and is added to the closing costs.

Key Components of FHA Minimum Property Standards

The minimum property standards are broken down into three broad categories: safety, security, and soundness.

Safety

The home must protect the health and safety of its occupants. That means it must be free of pest infestations, asbestos, chipping or peeling lead-based paint, and it must have plumbing, heating, and electrical systems that are in good working order.

Other requirements include adequate access to attic spaces, natural ventilation in crawl spaces, access to drinkable water, a functioning, permanent heating system capable of effectively heating all habitable areas of the home, and no health and safety hazards, such as not having handrails on a steep staircase.

Security

The house must be fitted with secure doors, windows, and fencing.

Soundness

HUD describes soundness as the property being free from physical deficiencies or conditions that could compromise its structural integrity. This includes issues with the roof, walls, or the foundation.

Exceptions

The FHA is willing to overlook “minor deficiencies” generally caused by deferred maintenance and normal wear and tear, provided they don’t affect the home’s safety, security, or soundness. Examples include:

• Missing handrails that don’t pose a threat to safety
• Holes in window screens
• Cracked window glass
• Defective interior paint surfaces in housing constructed after 1978
• Minor plumbing leaks that don’t cause damage, such as a dripping faucet

Types of Properties Covered

The FHA’s standards apply to single-family homes, multifamily units, prefabricated houses, and condominiums. All these properties must meet minimum standards, although the handbooks and forms appraisers use for each differ to be more specific to the particular property being examined.

Appraisers use the standard Uniform Residential Appraisal Report for single-family homes, Fannie Mae Form 1025 or Freddie Mac Form 72 for multifamily units with two to four units, Fannie Mae Form 1004C or Freddie Mac Form 70B for prefabricated houses, and Fannie Mae Form 1073 and Freddie Mac Form 465 for condominiums.

Common Issues and Solutions

It’s possible to fall in love with a property and then discover it doesn’t meet the FHA’s stringent rules. Some of the rules that often pose issues are:

• Every habitable room must have acceptable heating, unless the house is located in one of the few areas of the country that are exempt because they are warmer year-round.
• Roofing is expected to last at least two more years, not let any moisture in, and can’t be repaired if it has three or more layers.
• Contaminated soil or close proximity to a hazardous waste site or something that could explode, such as a high-pressure petroleum line, high-voltage power lines, or a radio or TV transmission tower, isn’t allowed. Proximity to noise is also considered unacceptable. That includes airports and busy roads with lots of traffic.
• The property must be easily accessible for pedestrians and vehicles in any weather condition.

What You Can Do If Your Home Won’t Pass Initial Inspection

If a property you really like has a deal-killing issue, you have a few options.

The first is to ask the seller to make the necessary repairs. It’s in their interest to make the property sellable. However, they might not be able or willing to foot the bill. In such cases, if the buyer is willing, they could propose indirectly paying for the repairs by increasing the purchase price. That would mean the seller fixes the problems at their expense and then gets reimbursed in full when the house is sold.

Another solution is to opt for a non-FHA loan with more lenient property requirements or apply for an FHA 203(k) loan, which is specifically designed to finance the purchase of homes with significant repair and maintenance problems.

The Bottom Line

Anyone considering applying for an FHA mortgage should be aware of the minimum property standards. The criteria can sound ambiguous—safe, secure, and structurally sound—but FHA regulations make clear what works and what doesn’t if a house is to pass its inspections.

Few mortgages are as accessible as FHA loans. Letting go of a property of questionable quality, while initially frustrating, could save you a lot of stress down the road.

Rules That Took Effect in 2024 Change The Game

Reviewed by Chip Stapleton
Fact checked by Suzanne Kvilhaug

For many years, someone selling their home would usually pay a commission of 5% to 6% of the sale price to their real estate agent, who would then share that commission with the buyer’s agent, if the buyer had one. But new rules that took effect in 2024 changed how agents get paid, who pays them, and how much.

The changes—part of a settlement between the Department of Justice (DOJ) and the National Association of Realtors (NAR)—were designed to ensure transparency and fairness in home buying and selling, particularly on behalf of buyers. Ultimately, sellers are now forbidden from paying the buyer’s agent, whose fee, if any, will come directly from the buyer.

In the long run, the changes are expected to lower fees, saving money for buyers and sellers. Below, we’ll explain how real estate agents get paid and how recent changes will affect both buyers and sellers.

Key Takeaways

• Real estate agents earn most of their income from commissions on sales and are usually paid a percentage of the property’s sale price.
• Based on new rules, a buyer’s agent will no longer be allowed to receive a share of the commission for the seller’s agent as compensation.
• Buyers must negotiate and pay their agent’s commission and must enter a formal representation agreement before viewing any homes.
• Industry experts estimate commissions could fall by 50% in the long run due to greater transparency and competition.

Commission-Based Compensation

Real estate agents earn most of their income from commissions on sales. They’re usually paid a percentage of the property’s sale price. In 2024, the median annual wage for real estate sales agents was $56,320, and the median annual wage for real estate brokers was $72,280.

Historically, the commission for the listing agent, who represents the seller, and the buyer’s agent was shared. It would come out of the proceeds from the house sale and would be paid for by the seller. However, that’s no longer allowed, per the 2024 NAR settlement.

Splitting the Commission

In almost every state, a real estate agent must work for or be affiliated with a real estate broker, who is licensed to manage their own real estate businesses. Brokers can work independently or hire real estate agents and split the earnings.

The split depends on how many parties are involved and what terms were negotiated. At a minimum, if an agent is brought in, the commission will be shared between the agent and the broker. How the fee is split depends on the broker’s advertised rates, targets hit, and the bargaining power of the agent. An experienced agent with a good reputation and strong network should be able to demand more.

An agent’s payout could be further diluted if they bring in help. Sometimes, an agent may collaborate with another agent and involve them in the deal.

Variations in Commission Rates

Real estate agent commissions vary considerably. It depends on the broker’s commission structure, how many people were brought in to close the deal, and the experience and bargaining power of the agent. Other important factors include the state of the economy, interest rates, supply and demand, competition, and property prices.

In a seller’s market, where demand exceeds supply, agents should have more leverage to command bigger fees while selling or buying at higher prices. Conversely, when there are more homes for sale than people looking to buy, they may have to lower fees.

Competition plays a role as well. When the market is flooded, lesser-known agents might have to lower rates to secure business. Location and property type are other big factors.

Alternative Compensation Models

Commission isn’t the only way real estate agents get paid. A small portion of them may seek alternative forms of compensation.

Flat-Fee Services

You may occasionally find agents charging a flat fee for their services. That could be a one-off upfront payment or an à la carte pricing model, through which each service provided, such as showing a property or writing an offer, comes with its own set cost.

The good thing about this charging method is its transparency. But on the other hand, the flat fee has to be paid upfront and can end up costing the buyer or seller more, or it could cost them less but limit the scope of services offered.

Hourly Rates and Salaries

In rare circumstances, agents could opt to charge an hourly rate for their services. There are also a couple of isolated cases of agents being employed by brokers and paid a salary for their work. For example, Redfin, an online property search website, pays the agents it employs a salary plus a bonus based on the price of every home sale they close.

Referral Fees

On top of a commission, hourly rate, or flat fee, real estate agents may earn money through referrals. The agent could strike a deal with a lender or relocation professional, for example, guaranteeing payment when they refer a client.

NAR Lawsuit Over Commissions

In 2024, the NAR agreed to pay $418 million in damages and change its rules regarding how commissions are set, advertised, and paid, after a jury ruled on behalf of a group of Missouri homeowners who claimed the NAR and certain brokerages were colluding to inflate commissions.

According to the DOJ, the NAR had recommended that Multiple Listing Services (MLSs) prohibit telling buyers how much of a commission has been offered by sellers to buyers’ brokers. “All or nearly all” MLSs concealed these fees from home buyers, the DOJ said. The concern was that if the buyers didn’t know the commissions being offered to their agents, those agents could more easily steer them toward properties whose owners offered higher commissions. It also meant buyers couldn’t negotiate lower fees from their agents, resulting in higher prices for their services.

Terms of the NAR-DOJ Settlement

Originally found liable for $1.8 billion in damages, the NAR agreed to the following rule changes, among others, as part of the settlement:

• Listing agents can no longer list their commissions on MLSs. This is intended to prevent them from luring buyer agents to steer their clients toward homes with higher commissions.
• Buyers must enter into a representation agreement with their agent before touring any homes. This is meant to offer buyers clarity regarding the agent fees and the opportunity to negotiate those fees. Buyer agents are expressly forbidden from receiving any additional fees from the seller or seller’s agent.

Who Pays the Commission?

Under the new rules, sellers will continue to pay their listing agents, and buyers will be solely responsible for paying their agents.

Industry analysts predict these rules will lower commission costs by as much as 50% in the long term. For one thing, the commissions sellers pay are likely to come down, perhaps lowering overall housing prices a bit, because the sellers won’t have to pay the buyers’ agents anymore.

On the other hand, though prices might sag a bit, buyers now face the added expense of paying for their agents themselves, which may make it difficult for some first-time buyers to get into the market. Yet the new transparency and the fact that they need to pay directly should at least open the door for buyers to negotiate fees.

Sometimes agents charge a higher commission for lower-priced properties to make it worth their while, while offering discounts for more valuable ones, knowing they will still earn a nice payout.

Example of a Real Estate Commission

With commission rates basically unchanged for now, here’s how two agents would get paid under the new rules:

• Lucy wants to sell her house. She reaches out to an agent, who agrees to price the property, market it, negotiate offers, and get her the best deal in exchange for 3% of the transaction price.
• On the other side, Ben is looking for a house and agrees to pay an agent to help him search and negotiate the purchase in exchange for 2% of the transaction price.
• Ben eventually ends up buying Lucy’s house for $350,000. Based on that price, Lucy pays $10,500 in commissions (3% of $350,000), while Ben pays $7,000 (2% of $350,000).
• This money doesn’t all go to their respective agents. Usually, the agents’ brokers take a cut. For example, Lucy’s broker could keep 40% of the 3% commission, whereas Ben’s broker might operate on a 50% split. In those cases, from this transaction, Lucy’s agent would end up with $6,300 and Ben’s agent would collect $3,500.

The Bottom Line

Real estate agents earn most of their income from commissions on sales. But new rules regarding real estate commissions have changed the way agents are paid. Buyers must now pay their agents directly, rather than relying on the sellers to cover the commissions for both agents, as was previously standard. Meanwhile, sellers’ agents are prohibited from listing their commissions on MLSs. While the shift brings greater transparency and potential cost savings for both buyers and sellers in the long run, it could create a problematic expense for first-time buyers, who may have less cash on hand for commissions and a down payment.

For decades, the U.S. dollar has served as the financial world’s storm shelter. Financial turmoil traditionally sends Treasury yields down (a sign people are buying U.S. bonds) and the U.S. dollar up. Yet in the aftermath of Donald Trump’s 2025 tariff announcements, investors were abandoning both—at one point, the greenback plummeted 1.7% in a single day while 30-year Treasury rates spiked to almost 5.0%—meaning people were fleeing U.S. government bonds, not seeking them as shelter from the storm.

There have been previous bouts of stocks and the dollar declining together, such as during a 2011 U.S. credit rating downgrade and the early days of the COVID-19 pandemic. But monetary policy experts fear this isn’t just a passing rainfall, that Trump administration moves antagonizing both the markets and long-time trading partners have generated a tsunami bearing down on global confidence in the American greenback—which took generations of monetary and fiscal policy to build.

“We are in the midst of dramatic regime change in markets,” Deutsche Bank (DB) analysts warned. Karl Schamotta, chief market strategist at Corpay, said on Bluesky that “confidence in the dollar may be collapsing.” Should that happen, every American would feel it in their wallet.

Key Takeaways

• A dollar confidence crisis would likely cause higher prices (beyond the Trump tariffs), potentially raising interest rates on mortgages, car loans, and credit cards.
• Traditional safe-haven investments may not be enough to protect your portfolio if bonds, stocks, and the dollar fall simultaneously.

A Dollar Short

A crisis of confidence in the dollar is when global investors and foreign central banks question the stability of U.S. dollar-denominated assets. This goes beyond the usual fluctuations in currency exchange values; it would be far more fundamental.

Since the Bretton Woods Agreement of 1944, the U.S. dollar has served as the world’s primary reserve currency. Central banks worldwide hold dollars to back their own currencies, and the dollar has long been the dominant medium of exchange in international trade. At the end of 2024, about 54% of global foreign-exchange reserves were held in dollars, demonstrating the currency’s continued power, even as it has been declining in recent decades.

In the turbulence triggered by Trump’s tariff actions, Deutsche Bank analysts pointed to a “simultaneous collapse in the price of all U.S. assets”—stocks, bonds, and dollars. This suggests investors may be questioning the dollar’s foundational role in the global economy.

The dollar weakened against nearly every major currency despite rising U.S. interest rates, while gold prices surged to record highs. Should the trend continue, a dramatic drop in the dollar’s value would have immediate consequences for all Americans.

A Cheap Dollar Is No Bargain for Americans

A de-dollarization would have major effects for American consumers:

• Higher prices for imports: Even setting aside the higher direct costs from the Trump tariffs, electronics, clothing, cars, and appliances—the vast majority of imported goods—would become more expensive as the dollar’s purchasing power declined.
• Increased fuel costs: The global oil market is priced mostly in dollars, which means oil would suddenly be cheaper for other countries. This would likely increase global demand and therefore oil prices, in turn raising prices at the gas pump in the U.S.
• Higher interest rates: Mortgages, auto loans, and credit cards would become more expensive if foreign investors demand higher yields on U.S. Treasury bonds.
• Retirement savings challenges: Retirees and other investors would face both inflation eroding their purchasing power along with a potential decline in the value of their stocks and bonds.
• More expensive international travel: American dollars would buy less abroad, making foreign vacations, education, and purchases significantly more costly.

Diversifying into non-dollar assets like foreign currencies, gold, and international stocks could help protect your finances from dollar instability.

Ways To Protect Yourself

While there’s no sugar-coating the effects on Americans if worldwide demand for American assets drops, there are strategies experts say can help protect you against dollar instability:

• Diversify internationally: Allocate part of your portfolio to foreign stocks and bonds in stable economies with strong currencies. The easiest way is through international exchange-traded funds.
• Consider alternative stores of value: Gold, which in 2025 hit record highs above $3,200 per ounce, and other precious metals can serve as hedges against dollar weakness.
• Pay down variable-rate debt: Reducing your debts, especially those with variable rates, would help protect you should interest rates spike.

The Bottom Line

The dollar’s position as the world’s reserve currency has given Americans significant advantages: lower interest rates, cheaper imported goods, and the ability to finance large government budget deficits at low interest. Even a gradual erosion of these advantages would affect everything from everyday purchases to retirement planning—and a massive dollar crisis could wipe these advantages away completely.

Insights from a financial advisor

Retirement planning is always nuanced, but today’s retirees face unique challenges. Market volatility, political changes, rising expenses, and healthcare considerations make careful planning essential. According to a study by Allianz Life, 64% of Americans worry more about running out of money than death.

As financial advisors, we can help our clients map out a retirement strategy for today’s world.

Key Takeaways

• Financial Advisors should prepare their clients for the emotional shift that comes with leaving the workforce.
• Clients should create a realistic, dynamic budget that reflects actual lifestyle spending patterns, healthcare costs, and unexpected expenses.
• Help clients build a flexible investment strategy with ample cash reserves to weather market volatility.
• Advisors should remind their clients to leverage the early retirement window for tax planning with tools like Roth conversions and income smoothing to reduce lifetime tax and Medicare costs.

What I’m Telling My Clients

1. Prepare for the Emotional Shift

Retirement isn’t just a financial transition; it’s an emotional one. 

I hold a “Flourish Meeting” with our financial behavior specialist to help clients navigate the identity shift that comes from leaving the workforce. This conversation helps clarify goals, values, money beliefs, and priorities for the next chapter.

2. Get Real About Your Retirement Budget

One of the biggest myths about retirement is that spending decreases. While some costs may go down, overall spending often follows a “smile” pattern: higher in early retirement when travel and activities peak, stabilizing in middle retirement, and rising again later due to healthcare needs. 

I encourage clients to analyze the real numbers rather than rely on assumptions about what they think they should be spending.

3. Reassess Risk Tolerance and Build a Cash Reserve

A good retirement financial plan will create enough liquidity to avoid selling investments at a loss during market downturns. A healthy cash reserve in a high-yield savings or money market account provides flexibility.

Diversification is key in this phase. You want to balance growth potential for the later years of retirement while managing risk.

4. Plan for Health Care Costs

Health care is one of the most significant expenses in retirement. For clients retiring before age 65, explore COBRA options, ACA marketplace plans, and any other options that could be available to them. Determine if bringing their income low to receive health care subsidy credits is worthwhile in the plan if there is income source flexibility. 

Partnering with a trusted Medicare broker can help clients choose the right coverage, from Advantage vs. Supplement plans to prescription and dental options.

Important

If you’re over 65, you can withdraw money from your HSA for any reason without paying a tax penalty.

5. Optimize Taxes

Early retirement offers one of the best windows for proactive tax planning. Unlike working years, there is more control over taxable income.

This is a prime opportunity to manage tax brackets, minimize IRMAA (Income-Related Monthly Adjustment Amount) surcharges to Medicare, and execute tax-efficient withdrawal strategies. 

IRMAA surcharges begin at a Modified Adjusted Gross Income of $106,000 for single filers in 2025 and $212,000 for married filers, so careful income planning can help avoid unnecessary costs.

Tip

Roth conversions, strategic IRA withdrawals, and optimizing the deaccumulation strategy can make a six-figure difference in lifetime taxes and healthcare surcharges for some clients.

6. Review Estate Planning and Organize Key Documents

Retirement is an ideal time to ensure that estate planning documents are current. Clients often finally have the time to sit down and document their wishes, organize their financial records, and pesky tasks like setting up password keepers.

It’s helpful to complete legacy planner books, organize family photos, and hold crucial conversations about financial affairs with family members and loved ones.

The Bottom Line

Retiring in 2025 has unique financial and emotional challenges, but proactive planning can ease the transition. Guide clients through a process to tune up their budget, reassess their risk tolerance, optimize their taxes, and dream about what comes next to create a stable, happy, healthy, and confident retirement.

Reviewed by Charlene Rhinehart

Home-sharing sites like Airbnb are a good source of supplemental (and even full-time) income, providing an easy way to rent out a portion of or all of your home. But before renting to temporary guests, you’ll want to review your homeowners insurance policy or speak to your insurer about whether you need additional coverage. 

Some insurers offer short-term rental coverage endorsements for an additional fee—ensuring that you’re protected in case of tenant-caused property damage, theft, or accidents. Others may require a separate, standalone policy depending on your property’s location and overall risk.

Key Takeaways

• Standard homeowners insurance generally offers limited business property coverage and no business liability coverage for Airbnb or other short-term rentals. 
• Occasionally, insurers will extend one-off coverage for a short-term rental if you notify them in advance. 
• Several other insurance options exist for home-sharing, including policy endorsements (home insurance add-ons) and separate short-term rental insurance, as well as landlord insurance tailored for short-term rentals.
• Airbnb’s free supplemental host coverage provides $1 million in liability insurance and $3 million in host damage protection. However, it only covers your property during the rental period and has other coverage gaps.

Short-Term Rental Coverages by Insurance Type
	Dwelling Coverage	Personal Belongings Coverage	Liability Coverage	Loss of Rent Coverage
Standard Home Insurance	Maybe	Maybe	Maybe	✘
Home-Share Insurance	✔	✔	✔	✔*
Airbnb AirCover for Hosts	✔**	✔**	✔**	✔***
Landlord Insurance	✔	✔****	✔	✔*

*Availability depends on the insurer or may be offered as an endorsement

**Coverage is only applicable during a guest’s stay and does not apply between stays. 

***Loss of income is only reimbursed for confirmed Airbnb bookings canceled because of guest damage

****Coverage may be limited to items needed for home-sharing

Homeowners Insurance and Short-Term Rentals

Opening your house to strangers through home-sharing is a good way to make extra money, but it also presents additional risks and liabilities that standard homeowners insurance isn’t designed to cover. Because of this, homeowners insurance may not cover paying guests staying in your home, even for one-off rentals. Some insurers may allow for occasional rentals if you provide advance notice.

Standard home insurance typically provides limited coverage or no coverage at all for business activities. So if you’re booking regular short-term rentals, your insurance company will likely consider this a business and may require additional coverage, such as a policy endorsement or separate home-sharing insurance.  

Important

Your insurer may not cover home-sharing or rentals even if it’s not explicitly excluded in your policy. Before renting out your home, consult with your insurer or your state’s department of insurance to determine what coverage is required to ensure your property is adequately protected. 

Extending Coverage with Endorsements

Some insurance companies offer riders (or endorsements) for short-term rentals that you can add to your policy for an additional fee. This is generally the easiest way to get home-sharing coverage, as you can just add it to your existing homeowners policy. However, this option may not be available for detached structures or buildings on your property that you rent out. Home-sharing endorsements may have a business activity exclusion for other separate, standalone structures. 

Note

Endorsements may only be available for your primary home, not for a secondary or vacation home that you are renting out.

Short-Term Rental Insurance

Standalone short-term rental insurance is a specialized form of coverage tailored for short-term rentals. These policies often insure your home in the same way as a standard homeowners policy, but provide additional protection for your home’s physical structure, household belongings used as part of the rental, and lost rental income while the house is under repair for covered damage. They also include liability protection in case a guest or someone else is injured during the stay and you’re deemed legally responsible.  

Short-term rental insurance may also provide additional protections, such as covering extra utility costs when a guest forgets to turn off the lights or leaves the faucet running. 

Landlord Insurance

Landlord insurance is typically used for long-term rentals, such as those lasting six months or more. Some insurers may also offer this coverage for short-term rentals like Airbnbs. 

Landlord insurance is similar to homeowners insurance in that it can offer liability protection and cover the costs to replace, repair, or rebuild your property from a covered peril, such as fire, wind, or lightning. It may also have coverage for certain belongings you keep in the home, such as appliances and furniture. Home-share specific policies can even have extended personal belongings coverage. 

The most significant difference between landlord and homeowners insurance is that it may also offer rental income protection, allowing you to receive lost income while your home is being repaired after a covered loss. These policies are also more expensive, typically costing 25% more than standard homeowners insurance. 

Which Companies Offer Short-Term Rental Coverage?

Standard homeowners insurance is much more widespread than short-term rental insurance, but you can find home-sharing insurance offered by:

• Allstate: Allstate’s HostAdvantage policy add-on is available to existing policyholders. It enhances your home insurance with $10,000 of personal property protection for damage not covered by your policy. It also covers belongings stolen by guests. 
• American Family: American Family’s homeowners insurance endorsement (available in 19 states) is for existing policyholders who rent out their home for 62 days or less. You’ll have many of the same benefits from your standard home insurance policy extended to your short-term rental. 
• Foremost: Foremost’s landlord policies are unique in that they can cover short-stay home rentals and extended rentals of 12 months or less. The company offers $1 million in liability and dwelling coverage. Its policies are customizable and can be built up or pared down based on your needs.
• Proper Insurance: Unlike other companies on this list, Proper specializes in short-term rental insurance. Its comprehensive all-risk policies cover all causes of damage except those specifically excluded in the policy, and have higher liability coverage limits than competitors. 

Airbnb Host Coverage

Airbnb includes free supplemental coverage called AirCover for Hosts, which provides $1 million in liability insurance if you are found legally responsible for a guest’s injury, damage to their property, or theft of their belongings.

This coverage also offers up to $3 million in host damage protection, covering your home and your belongings in the event of guest-caused damage. However, host damage protection isn’t a substitute for actual insurance. 

AirCover also won’t protect your home between guest stays if there are damages or liability issues.

State-Specific Requirements

Some states have minimum insurance requirements you must meet for short-term rentals. Massachusetts, for instance, mandates homeowners carry at least $1 million in liability coverage. If using home-sharing platforms like Airbnb, verify that any included host liability insurance is enough to meet your state’s laws or if additional insurance is necessary. 

The Bottom Line

Contact your insurance company before listing your home on Airbnb to understand your short-term rental coverage needs and options. Insurers may require you to add a rider to your policy or purchase a standalone policy as a condition for coverage.

While Airbnb offers its own supplemental protection, this coverage has significant limitations and isn’t a replacement for an insurance policy. When you secure the right coverage, you protect your investment and gain peace of mind as you welcome paying guests into your home.

We independently evaluate all recommended products and services. If you click on links we provide, we may receive compensation.

The best protection against bad trouble is good planning

Life is full of financial surprises—job loss, car repairs, inflation, or medical emergencies can disrupt even the most carefully laid plans. Yet only 54% of Americans say they have enough savings to cover even just three months of expenses.

To help plan for an emergency, there are several steps you can take to help build a stronger foundation through goal-setting, improved saving behaviors, and debt management. 

Key Takeaways

• Building a rainy day fund that covers three months of expenses is important for withstanding unexpected setbacks such as car repairs, a loss of job, or reduced work hours.
• Paying down debt during stable periods frees up cash flow and reduces financial strain during emergencies.
• Good health insurance plays a critical role in cushioning the blow of sudden medical expenses and income loss.

How to Build Financial Health

The best way to protect yourself from a financial shock is good planning. A financial advisor can help with this, but it is something you can get started on by yourself, if you know where to start. To help build resilience against unplanned events, consider the following strategies that will improve your financial health:

Make a Budget

In 2024, just 47% of Americans spent less than their income amid a rising cost of living. The first step to financial security is knowing where your money goes. Track your income and routine monthly expenses in order to identify where you can reduce costs and save more.

Then, develop a realistic budget that you can follow. Many budgeting calculators can help serve as a starting point, the you’ll need to gather up all your fixed expenses as well as any recurring bills and subscriptions, and you’ll need to know all of your sources of income.

“The most valuable first step in emergency proofing your finances is to have a grasp on monthly cash flow,” says David Bigelow, a wealth manager at Coldstream Wealth Management.

Set Up an Emergency Savings Fund

Set a specific savings goal—typically enough to cover at least three months of expenses—and build toward it over time. Contribute a consistent amount from each paycheck or automate transfers into a dedicated emergency fund.

Even small, regular contributions to a dedicated account can add up and provide a critical buffer when life throws a curveball. A good high-yield savings account offers more flexibility to withdraw your money when you need it, but pays more interest than your average savings account. Alternatively, a money market account offers benefits similar to those of a high-yield savings account, but you can write checks from the account.

Some experts recommend saving at least six months of expenses in your emergency fund.

Pay Down High-Interest Debt

The median average credit card rate in the U.S. is 24.2%, which eats up a significant amount of money over time. Making matters worse, 30% of Americans struggle with debt management.

By paying off high-interest debt, it will leave more funds available to save and limit your exposure to a costly cycle of debt. If tackling this debt feels overwhelming, consider using a credit counselling service.

Organize Important Legal Documents

To prepare for the worst-case scenarios, such as death, severe medical emergencies, and disasters, make sure to have documents including a power of attorney, health-care directive, and a will organized in one place.

This type of planning can ease the burden on loved ones and protect your wishes in times of crisis.

Get Health Insurance

In 2023, 8% of the American population did not have health insurance, equal to 26 million people. Given that a single night at the hospital can cost on average $2,883, having adequate health insurance can be a worthwhile investment for sheltering you from these costs.

Invest for the Future

Investing is a powerful way to grow your assets thanks to the power of compounding. It can also help offset the impact of inflation over time. Not only that, people with investments perform stronger on financial health indicators—such as those who are confident in reaching their long-term financial goals, pay all bills on time, and have a manageable amount of debt.

By making these positive financial decisions, even with a limited budget, you can protect yourself from jeopardizing your long-term goals. “Taking the necessary steps so that you’re un-sinkable from a personal finance standpoint is key to staying in the game,” says Bigelow.

Fast Fact

People who plan ahead for a significant and unexpected expense are more likely to be financially healthy by a factor of tenfold than those who don’t.

Moreover, these planning skills are the single strongest predictor for financial health—even more so than income.

The Bottom Line

Financial setbacks are almost inevitable, but their consequences don’t have to be devastating. Whether it’s a medical bill, job loss, or emergency home repair, taking proactive steps—like building savings, reducing debt, and maintaining health coverage—can provide the cushion needed to recover.

Even a modest emergency fund can make a meaningful difference, helping prevent temporary disruptions from turning into long-term setbacks.

Reviewed by Julius Mansa
Fact checked by Patrice Williams

What Is the Invesco QQQ ETF?

The Invesco QQQ ETF is an exchange-traded fund (ETF) that tracks the Nasdaq 100 Index. Because it passively follows the index, the QQQ share price goes up and down along with the tech-heavy Nasdaq 100.

Passive management keeps fees low, and investors are rewarded with the full gains of the volatile index if it rises. But they must also bear the Nasdaq 100’s full losses when it falls. In this article, we explain how the QQQ ETF works and then consider the risks and rewards associated with trading the QQQ.

Key Takeaways

• The Invesco QQQ ETF is a popular exchange-traded fund that tracks the Nasdaq 100 Index.
• QQQ holdings are dominated by big technology-related companies such as Apple, Amazon, Alphabet, and Meta.
• The QQQ ETF offers investors big rewards during bull markets, with the potential for long-term growth, ready liquidity, and low fees.
• QQQ usually declines more in bear markets, has high sector risk, often appears overvalued, and holds no small-cap stocks.
• This ETF allows traders to invest in the largest 100 non-financial companies listed on the Nasdaq.

How Invesco QQQ ETF Works

QQQ has 101 holdings and is the seventh-most popular ETF in the world by three-month average daily share volume. The index excludes financial companies and is based on market capitalization. Like the Nasdaq 100, QQQ holdings are heavily weighted toward large-cap technology companies. The assets under management (AUM) of QQQ were over $297 billion as of April 28, 2025.

The Invesco QQQ ETF was previously known as the PowerShares QQQ Trust ETF. It is also informally called the triple-Qs or the cubes. The QQQ ETF is often viewed as a snapshot of how the technology sector is trading.

The Nasdaq 100 Index that the QQQ share price follows is based on a modified capitalization methodology. This modified method uses individual weights of included items according to their market capitalization. Weighting allows constraints to limit the influence of the largest companies and balance the index with all of its members. To accomplish this, Nasdaq reviews the composition of the index each quarter and adjusts weightings if the distribution requirements are not met.

The Invesco QQQ ETF offers the public an easy way to invest in the 100 largest non-financial companies listed on the Nasdaq.

QQQ ETF Quick Facts
Ticker	QQQ
Tracked Index	Nasdaq 100
Inception Date	03/10/1999
Expense Ratio	0.20%
# Holdings	101
Brand	Invesco
Avg. 30 Daily Volume	64.69 million (April 28, 2025)

QQQ ETF Sectors

The Invesco QQQ ETF tracks many high-tech sectors, including information technology (IT), communications services, and healthcare. The QQQ is rebalanced quarterly and reconstituted annually to track the Nasdaq 100 index.

It is important to remember that some of the companies people associate with technology are generally classified in other sectors. For example, Alphabet Inc. (GOOGL, Google’s parent company) and Meta Platforms, Inc. (META, formerly known as Facebook) are under the communications services sector. Amazon.com, Inc. (AMZN) is part of the consumer discretionary sector.

Important

Trading the QQQ ETF is a good way to get the rewards of investing in technology stocks without the risks of betting on individual companies.

The sector breakdown of the Invesco QQQ ETF as of June 22, 2024, appears in the table below.

Invesco QQQ ETF Sector Breakdown
Sector	Share of QQQ
Information Technology	58.94%
Consumer Discretionary	17.90%
Health Care	6.29%
Industrials	4.64%
Telecommunications	4.41%
Consumer Staples	3.87%
Basic Materials	1.94%
Utilities	1.24%
Energy	0.50%
Real Estate	0.29%

QQQ ETF Top Holdings

The top 10 stocks in the Invesco QQQ ETF made up about 51% of all QQQ holdings as of Q2 2024. They are given in the table below.

Invesco QQQ ETF Top Holdings
Stock	Share of QQQ
Microsoft (MSFT)	8.75%
Nvidia Corp. (NVDA)	6.32%
Apple (AAPL)	7.41%
Broadcom (AVGO)	4.44%
Amazon (AMZN)	5.25%
Meta Platforms (META)	4.76%
Alphabet (GOOGL)	2.49%
Alphabet (GOOG)	2.42%
Costco (COST)	2.35%
Tesla Inc. (TSLA)	2.37%

The top holding of the QQQ ETF holding is Microsoft Corporation (MSFT), which had a market cap of more than $3.3 trillion in Q2 2024.

Meanwhile, Nvidia became one of the top-performing tech stocks in 2024. Apple Inc, Alphabet, and Amazon all have strong operating cash flows and are very popular with investors and funds. Most of these top stock holdings consistently deliver on the bottom line and are able to navigate change without harming their investors. While still offering legacy products like operating systems, Microsoft has successfully reinvented itself, transitioning to its cloud-based Azure and artificial intelligence.

QQQ Dividend History

QQQ Dividend History Since 2003
Year	1st Quarter	2nd Quarter	3rd Quarter	4th Quarter
2003	–	–	–	$0.0136
2004	–	–	–	$0.3786
2005	–	$0.0348	–	$0.1011
2006	$0.0291	$0.0257	$0.0234	$0.5445
2007	$0.0267	$0.0369	$0.0260	$0.0533
2008	$0.0325	$0.0344	$0.0281	$0.0435
2009	$0.0489	$0.0439	$0.0408	$0.0776
2010	$0.0515	$0.0893	$0.1116	$0.1083
2011	$0.0769	$0.1208	$0.1043	$0.1605
2012	$0.1128	$0.1431	$0.2002	$0.3666
2013	$0.1593	$0.2236	$0.2377	$0.2724
2014	$0.3731	$0.2061	$0.2491	$0.2378, $0.3867
2015	$0.2481	$0.2542	$0.2600	$0.3423
2016	$0.3178	$0.2866	$0.2939	$0.3549
2017	$0.2742	$0.3784	$0.3192	$0.3294
2018	$0.2766	$0.3784	$0.3296	$0.4206
2019	$0.3241	$0.4156	$0.3842	$0.4577
2020	$0.3627	$0.4243	$0.3882	$0.5613
2021	$0.3947	$0.3968	$0.4139	$0.4914
2022	$0.4337	$0.5274	$0.5186	$0.6554
2023	$0.4722	$0.5039	$0.5356	$0.8083
2024	$0.5735	$0.7615	–	–

QQQ Pros and Cons

Like most assets, the QQQ ETF has specific strengths and weaknesses that investors need to consider before putting it in their portfolios.

QQQ Pros

• Big bull market rewards: If you’re feeling bullish or want a bullish investment for an asset allocation, the QQQ ETF is a good choice. The QQQ price increases more than the S&P 500 during bull markets.
• Long-term growth potential: QQQ holdings include many companies that develop new technologies. That gives the QQQ ETF more potential for long-term growth. QQQ is also much more diversified across the growth technology sector. This means it is safer to diversify capital allocation in the tech sector through investment in QQQ than making individual investments.
• Liquidity: Frequent traders need to buy and sell quickly at a low cost. The QQQ ETF offers them this liquidity. AUM for QQQ reached more than $228 billion in 2024, providing a large market for traders.
• Low expenses: The QQQ ETF’s expense ratio was 0.2% as of Q2 2024. Reducing the expense ratio is the only guaranteed way to increase returns from fund investments because expenses can add up over time.

QQQ Cons

• High bear market risk: Just as QQQ tends to outperform the S&P 500 during bull markets, it also often underperforms it during bear markets. In particular, the QQQ share price declined significantly when the dotcom bubble collapsed.
• Volatility risk: Tech sector stocks are growth stocks and are more volatile than the rest of the market. As a result, the Nasdaq 100 also makes many more significant daily, monthly, and annual moves than other indexes, such as the S&P 500. For example, the fund had annual returns of -0.12% in 2018, 38.96% in 2019, -32.58% in 2022, and 54.85% in 2023.
• Nasdaq-only focus: The fund has a Nasdaq-only focus and excludes successful tech companies listed on other exchanges. For example, Salesforce.com, Inc. (CRM), which is listed on the New York Stock Exchange (NYSE), is not included in the index. Neither are Oracle Corporation (ORCL) nor Block, Inc. (SQ), both of which are listed on the same exchange.
• Sector risk: The root cause of the QQQ ETF’s high risks and rewards is that it places more weight on volatile technology-related sectors than the S&P 500. There is also a sector risk that Nasdaq 100 stocks will eventually become less important, much like the railroad companies that once dominated the Dow Jones Transportation Average (DJTA). Investors already talk about old tech stocks vs. mostly newer FAANG stocks within the Nasdaq.
• High valuation levels: QQQ holdings tend to be too expensive by most of the standards value investors use. For example, QQQ had a price-to-earnings ratio of 30.26 on June 22, 2024.
• No small-cap stocks: Because the QQQ ETF holds only 100 of the Nasdaq’s largest companies, it necessarily excludes small-cap stocks. Small caps outperformed larger companies in the long run, according to research by Fama and French. Furthermore, growth investing also emphasizes small companies because they have more room to grow.

Pros

• Big bull market rewards

• Long-term growth potential

• Liquidity

• Low expenses

Cons

• High bear market risk

• Sector risk

• High valuation levels

• No small-cap stocks

• Volatility risk

• Nasdaq-only focus

QQQ Performance

Being more heavily weighted toward growth stocks and high-tech sectors, the Nasdaq 100 (and, by extension, the QQQ ETF, which tracks the index) has outperformed the broader S&P 500 over the past several years.

As the chart below depicts, over the nearly seven-year period from Q3 2017 through Q2 2024, the QQQ has returned 234.71%, nearly double what SPY (an S&P 500 ETF) has returned.

18.59%

The average annual return of QQQ was 18.59% during the 10 years ended Q1 2024.

What Companies Make Up the QQQ ETF?

Stock holdings in the QQQ ETF include 100 of the biggest companies in the Nasdaq, which tend to be tech giants such as Apple, Amazon, Google, and Meta. The top 10 stocks in the portfolio make up over half of its total holdings.

Is QQQ Stock Worth Buying?

QQQ is one of the best choices for active traders who are bullish on large technology companies. It is also one of the most popular Nasdaq-tracking ETFs, although several others also exist.

What Stocks Make Up QQQ?

QQQ mirrors the Nasdaq 100, which is a tech heavy index of large cap stocks listed on the Nasdaq. Companies in Microsoft, Apple, Nvidia, Broadcom, and Alphabet.

Is QQQ the Same as Nasdaq?

QQQ is an index fund offered by Invesco that mimics the returns of the Nasdaq 100 index. Nasdaq is a stock exchange that provides a stock trading platform.

The Bottom Line

The Invesco QQQ ETF checks many of the boxes short-term traders look for in ETFs, and it also has significant advantages for long-term investors. The ETF offers liquid, cost-efficient exposure to a tech-heavy basket of large-cap, innovative companies. Furthermore, investors benefit from increases in the QQQ share price without being burdened by stock-picking issues.

But those advantages are offset by sector concentration and volatility. Stocks contained within the index also have significantly high valuation levels and P/E ratios. This makes them susceptible to steep increases or declines. There are no small-cap stocks in the index to minimize the reliance on large-cap tech stocks.

Here are three ways to make your monthly payments more affordable

Fact checked by Michael Logan
Reviewed by Pamela Rodriguez

If you have a home equity line of credit (HELOC) that’s nearing the end of its draw period and about to enter its repayment period, brace yourself: You could be in for much higher monthly payments. That’s because your new payments will consist of both principal and interest, unlike the interest-only (or interest plus a small amount of principal) payments your lender likely required during the draw period.

There are several ways to deal with this situation if the new payments prove to be a problem. This article explains your major options and their pros and cons.

Key Takeaways

• When the draw period of your HELOC ends and the repayment period begins, you could face much higher monthly payments.
• If those payments are unmanageable, you might want to consider refinancing your HELOC.
• You can refinance with a new HELOC, a home equity loan, or a new first mortgage.
• If you don’t qualify for refinancing, and can’t afford your new HELOC payments, ask your lender or loan servicing company about a loan modification.

Ways to Refinance Your HELOC

If you’re looking to refinance your HELOC, you might do so with a new HELOC, a home equity loan, or a new first mortgage. Here are the basics of each option.

1. Refinance With a New HELOC

How It Works: If a lender (either your current bank or a different one) approves your application for a new HELOC, you may be able to roll your existing HELOC’s balance into it. This essentially restarts your draw period.

Pros: Taking out a new HELOC allows you to put off those larger payments you were facing for another five or 10 years, or whatever draw period the lender agrees to. This might make sense if you are reasonably confident that you’ll be in a better financial position when the new HELOC goes into repayment mode and won’t have a problem with the new payments. You might also be able to switch from a variable-rate HELOC to one with a fixed-rate option.

Cons: All you’re really doing here is postponing the inevitable: At some point you’ll need to repay your entire balance. What’s more, since interest will be accumulating all the while, your payments will be even higher than the ones you’ve managed to avoid.

2. Refinance With a Home Equity Loan

How It Works: You take out a home equity loan and use it to pay off your HELOC in a lump sum.

Pros: A home equity loan has several potential advantages over your home equity line of credit. One is that these loans typically have fixed interest rates, while HELOCs usually come with variable rates. A fixed rate gives you predictability for budgeting purposes as well as some protection against rising rates. In addition, home equity loans often have terms (lengths) of up to 30 years, giving you a longer time to repay than a HELOC, which usually allows 20 years at most.

Cons: As with a new HELOC, taking out a home equity loan to repay your HELOC means that your debt will continue to grow. What’s more, home equity loans generally require you to make both principal and interest payments for the entire term, so you could be faced with higher payments from the outset.

3. Refinance With a New First Mortgage

How It Works: You take out a new mortgage to refinance both your existing first mortgage and the HELOC. One way to do this is through a cash-out refinance. With a cash-out refinance you take out a mortgage that’s larger than your current mortgage balance, pay off that balance, and then use the remaining cash for whatever you wish. In this case that would be paying off the HELOC.

Pros: The interest rates on primary mortgages tend to be lower than those on HELOCs or home equity loans, so you could see substantial savings right there. You can opt for a mortgage with a fixed rate if you wish, and terms of up to 30 years are common.

Cons: Depending on the prevailing rates when you apply, you might have to accept a higher interest rate on the new mortgage than you had on your old one, making it more expensive. In addition, closing costs on a mortgage can be substantial—often 2% to 5% of the total loan amount on top of your down payment. With a $300,000 mortgage, for example, that’s $6,000 to $15,000. Some lenders will cover your closing costs if you take out a HELOC.

Warning

HELOCs sometimes have prepayment penalties if you attempt to pay them off ahead of schedule. So it’s smart to read your loan contract or check with your lender first.

How to Qualify to Refinance Your HELOC

Whatever method you use to refinance, the lender will want to assure itself that you’re a good risk. For starters, any lender you apply to is likely to review your credit report and check your credit score.

As a general rule, you’ll need a FICO score in the 700s or high 600s to qualify for a good rate. You may need a score of at least 620 to qualify at all.

The lender will also want information on your income (which is not included in your credit report). So you might have to provide pay stubs, W-2 forms, and one or more recent tax returns, among other documentation.

Based on that information and a list of your current debt payments, the lender will calculate your debt-to-income (DTI) ratio. That ratio compares your gross income to your total monthly debt obligations to make sure you aren’t getting in over your head. Many lenders like to see a DTI no higher than 36%.

Of course, the home itself also comes into the picture. Lenders will typically require a new appraisal to determine its fair market value. They’ll use that to compute your combined loan-to-value (CLTV) ratio, which compares how much you owe on the home to its current value. Lenders generally prefer that your CLTV (including any new loan) not exceed 80% or 85%.

What if I Don’t Qualify to Refinance My Home Equity Line of Credit (HELOC)?

If you can’t keep up with your HELOC payments and don’t qualify for new financing, one option is to contact your current lender or loan servicer and ask about a possible loan modification. Some lenders will be willing to work with you, and some won’t. Loan modification can take a variety of forms, all with the goal of making it easier for you to pay your debt (and to ensure that the lender gets at least a portion of what you owe them). For example, the lender might agree to defer your payments for a time, reduce your payments by stretching them out over a longer period, lower your interest rate, or even cut the amount you owe. The time to apply for a loan modification is as soon as you realize you’re not going to be able to afford your payments. Putting it off only makes the situation worse.

Can I Take Out a Personal Loan to Refinance My HELOC?

Yes, a personal loan could be an option if you can get one that’s large enough to cover your HELOC balance. Personal loans are typically unsecured, so it can be difficult to obtain one with a good interest rate unless you have very strong credit, such as a FICO score in the 700s. Personal loans also have relatively short repayment terms, usually 84 months or less, so you might find that your monthly payments are even higher than with your HELOC.

What Happens if I Can’t Repay My HELOC?

Because your home serves as collateral for your HELOC, the lender could potentially seize and sell it if you can’t repay. That’s also true for first mortgages and home equity loans. As mentioned above, however, many lenders have loan modification programs that are intended to avoid that. Bear in mind that defaulting on a loan can do long-lasting damage to your credit, so it’s worth avoiding if at all possible.

The Bottom Line

If the monthly payments on your HELOC become unmanageable, refinancing it could be your best recourse. There are a number of ways to go about it, each with their own pros and cons. If you find you can’t qualify for a new HELOC or other loan for whatever reason, contact your current lender and ask if a loan modification is possible. It is often in the lender’s best interests, as well as yours, to modify your HELOC to make your monthly payments affordable.

You can use your IRA to buy a first home, without penalties

Fact checked by Hans Daniel Jasperson

Yes, you can use your individual retirement account (IRA) to buy a house, but there are rules and potential tax implications. For a first-time home purchase, both traditional and Roth IRAs allow you to withdraw up to $10,000 at any time or age—whether the money consists of earnings or contributions—without the usual 10% early withdrawal penalty. However, you may still owe taxes. If you’re thinking about using IRA funds for purchasing a home, you should take an in-depth look at the pros and cons, and consider the long-term impact it could have on your retirement savings to help you decide if it is the right move for you.

Key Takeaways

• Traditional and Roth IRAs provide exceptions to allow investors to withdraw up to $10,000 to purchase, build, or rebuild a first home.
• $10,000 is the lifetime limit for the first-time homebuyer exemption.
• Both you and your spouse can each access up to $10,000 for the first-time homebuyer exemption.
• First-time homebuyer exemption can be used to help pay for qualified acquisition costs of a home for: yourself, your spouse, your child, grandchild, or parent.

First-Time Homebuyer Exemption

A first-time homebuyer is someone who hasn’t owned a home as their primary residence in the previous two years, the IRS says. If you are married, your spouse must also meet this definition of a first-time homebuyer. The IRS allows a first-time homebuyer to withdraw up to $10,000 from an IRA without incurring the 10% early withdrawal penalty, which normally applies to distributions taken before age 59½. For a withdrawal of earnings from a Roth IRA to escape tax and penalty, the account or any other Roth IRA owned by the account holder must be at least five years old. The first-time homebuyer exemption applies to both traditional and Roth IRAs, but the tax treatment is different. To qualify, the funds must be used within 120 days to buy, build, or rebuild a first home for yourself, a spouse, a child, grandchild, or parent. The $10,000 limit is a lifetime cap per individual.

It is important to note that if you have received a first-time homebuyer distribution and the acquisition of the home is canceled or delayed, generally, you may contribute the amount of the distribution to an IRA within 120 days of the distribution to avoid paying income tax or the 10% additional tax on early distributions.

Traditional IRA

When using money from your traditional IRA to buy a home using the first-time homebuyer exemption, you can withdraw up to $10,000 without paying the 10% early withdrawal penalty if the funds are used to buy, build, or rebuild a first home. However, the amount you withdraw is still subject to ordinary income tax since traditional IRA contributions are made with pre-tax dollars.

Roth IRA

Like the traditional IRA, you are allowed to withdraw up to $10,000 of earnings from your Roth IRA without the 10% early withdrawal penalty if the funds are used to buy, build, or rebuild a first home. To qualify for a tax-free and penalty-free withdrawal, the portion of the distribution allocable to earnings must have been open for at least five years from the beginning of the year for which you first set up and contributed to your Roth IRA. Unlike traditional IRAs, Roth IRA contributions can always be withdrawn tax-free and penalty-free because these contributions are made with after-tax dollars. Only the earnings portion of your Roth IRA is subject to these rules.

Pros and Cons of Withdrawing Early From Your IRA

Withdrawing early from an IRA is a major financial decision that should not be taken lightly. Using funds from your IRA to buy a home, even under the first-time homebuyer exemption, still comes with potential tax implications and long-term financial consequences. It’s crucial to evaluate all options and consider the long-term impact on your retirement funds before proceeding.

Pros:

• Penalty-Free Withdrawal (First-Time Homebuyer Exemption): With the first-time homebuyer exemption, you can withdraw up to $10,000 from a traditional or Roth IRA without paying the 10% early withdrawal penalty.
• Jumpstart Homeownership: Using IRA funds can help you purchase a home sooner than you might otherwise be able to, allowing you to start building equity in an asset you own, rather than continuing to rent.
• Flexible Use of Funds: The withdrawn money can be used for various home-acquisition expenses, including closing costs or a downpayment. You are also able to use your lifetime limit of $10,000 toward helping a family member such as a child, grandchild, or parent, if you don’t need to use it all yourself.

Cons:

• Potential Tax Liability: Even though the early withdrawal penalty is waived, you may still owe income taxes on the amount withdrawn from a traditional IRA. This could result in a higher tax bill for the year of the withdrawal.
• Reduced Retirement Savings: Taking money out of your IRA means you’ll have less saved for retirement, potentially impacting your long-term financial goals and growth due to lost compounding interest over time.
• Lifetime Limit on Exemption: The $10,000 first-time homebuyer exemption is a lifetime limit, so once you use it, you won’t be able to get this tax-advantaged exemption again. Additionally, the amount is limited to only $10,000, which may not meet your entire need when trying to pull together a downpayment or come up with closing costs.

The Financial Impacts of an Early Withdrawal

While the first-time homebuyer exemption allows an IRA account holder to withdraw up to $10,000 without an early withdrawal penalty, doing so can still impact long-term financial growth. For instance, if a 30-year-old withdraws $10,000 from their IRA and the account would have earned an average annual return of 5%, that amount could have grown to nearly $55,000 by age 65. By using the funds now, they could miss out on around $45,000 in potential gains—significantly reducing the value of their retirement savings.

Alternatives to Using Your IRA for a House

Before tapping into your IRA to finance a home purchase, it’s important to explore other options that may better preserve your retirement savings. While the first-time homebuyer exemption offers penalty-free access of up to $10,000 of funds, there are alternative methods that could help you achieve homeownership without sacrificing your long-term financial goals. Exploring these possibilities can provide the cash or beneficial financing options you need while keeping your retirement plan on track.

401(k) Loan

A 401(k) loan allows you to borrow from your retirement savings, typically up to 50% of your vested account balance or $50,000, whichever is less. However, if 50% of your vested balance is less than $10,000, some plans may permit you to borrow up to $10,000. These loans typically are expected to be repaid with interest in five years, although if the loan is used to purchase a primary residence, repayment terms may be extended

Using a 401(k) loan for a home purchase offers several advantages. It provides quick access to funds without a credit check, and the repayment interest goes back into your retirement account—so essentially, you are paying yourself to borrow against your own retirement account. Additionally, it doesn’t affect your credit score or debt-to-income ratio, which can be beneficial when applying for a mortgage.

There are some risk factors that you should consider before borrowing against your 401(k). If you leave your job before repaying the loan, the outstanding balance may become due immediately. Failure to repay on time can result in the loan being treated as a taxable distribution, subject to income tax and possibly a 10% early withdrawal penalty. This risk factor can be mitigated, though, by rolling over the outstanding loan balance to an IRA or another eligible retirement plan by the due date. Furthermore, while the loan is outstanding, you may miss out on potential investment gains, which can impact your long-term retirement savings.

VA Home Loan

A VA loan is a mortgage option backed by the U.S. Department of Veterans Affairs. Advantages of a VA loan are that it typically requires no down payment, offers competitively low interest rates, and imposes limited closing costs. Further, a VA loan does not require the borrower to purchase private mortgage insurance (PMI), which can result in substantial savings over the life of the loan. To be eligible for a VA loan, applicants must obtain a Certificate of Eligibility (COE), which verifies their service history and duty status. Generally, this benefit is available to veterans who meet specific length-of-service requirements, active-duty service members, certain members of the National Guard and Reserves, and some surviving spouses. In addition to meeting service criteria, borrowers must also demonstrate satisfactory credit and sufficient income to qualify for the loan. The home purchased must be for a primary residence.

FHA Home Loan

An FHA loan is a government-backed mortgage insured by the Federal Housing Administration, designed to help individuals, who may not otherwise be able to buy a home, qualify for financing. Key benefits of an FHA loan are a low down payment requirement, which can be as little as 3.5% for borrowers; low closing costs; and, more flexible qualification criteria.

However, there are some drawbacks. FHA loans require borrowers to pay mortgage insurance premiums (MIP), both upfront and annually, which increases the overall cost of the loan. The loan limits may also be lower than those of conventional loans, which could restrict the ability to purchase the desired home. Still, for buyers with limited savings or credit challenges, an FHA loan can be a valuable tool toward owning a home.

The Bottom Line

Using your IRA to buy a house is possible, particularly with the first-time homebuyer exemption, which allows you to withdraw up to $10,000 without facing the typical early withdrawal penalty. However, this decision should not be made lightly. While accessing your IRA funds can help you achieve homeownership sooner, it can also significantly impact your long-term retirement savings by reducing the benefits of compounding growth. It’s crucial to weigh the immediate advantages against the long-term effects of taking retirement money out of your IRA.

Before tapping your IRA, consider alternative ways of financing a home purchase. Some alternatives might better protect your retirement nest egg. Options like FHA loans offer low down payments and flexible credit requirements, while VA loans provide eligible veterans and service members with the chance to buy a home with no down payment and favorable loan terms. Another option could be borrowing against your 401(k), which allows you to access funds without permanently removing them from your retirement account. Exploring these alternatives can help you make a more informed decision that supports both your short-term goals and long-term financial goals.