Investopedia

Fact checked by Vikki Velasquez

When you make a significant purchase like a refrigerator, laptop, smartphone, or car, you’re often presented with the option to buy an extended warranty. While it may seem like the best way to protect against the potentially high cost of repairs once the standard warranty expires, the likelihood of you needing to use the warranty is low.

In fact, if the product is well-built and reliable, extended warranties are more of an unnecessary expense than a worthwhile investment.

Key Takeaways

• Extended warranties offer protection beyond the standard warranty.
• The likelihood of needing an extended warranty is low, especially if the product is durable and reliable.
• The cost of an extended warranty may be more than the cost of repair or replacement of the product.

How Extended Warranties Work

Extended warranties are service contracts that surpass the manufacturer’s standard warranty, covering repair costs, replacement, and sometimes even accidental damage for a specific period.

These warranties give the buyer peace of mind by ensuring they won’t be stuck paying a hefty repair bill if the standard warranty has expired. However, extended warranties vary in terms of coverage and pricing.

In a sense, extended warranties are a type of insurance, which is why many people consider them a smart investment when purchasing big-ticket items like cars.

“An extended warranty is for the ‘what-if,’ just like car insurance. You don’t buy insurance expecting to get T-boned; you buy it in case something happens. Same thing here,” said Tomislav Mikula, automotive consultant and founder of Delivrd.

What to Consider When Purchasing an Extended Warranty

Before purchasing an extended warranty, carefully evaluate whether this added protection aligns with your needs and the value it provides for the item you’re buying.

Specifically, you’ll want to factor in the cost, coverage, coverage period, claims process, type of product, and source.

Cost: Compare the warranty price to potential repair or replacement costs to ensure it is a worthwhile investment. Some warranties come with deductibles, which add an additional cost beyond the purchase price.

Coverage: Confirm what is covered by the warranty, as well as exclusions and limitations. Certain types of damage may not be covered, leaving you to cover the cost of repair or replacement, which defeats the purpose of the warranty.

Coverage Period: How long does the extended warranty last beyond the standard warranty?

Claims Process: Be sure you understand how the claims process works. How long does it take to process a claim? Where will your product be repaired?

Type of Product: Evaluate the type of product you are purchasing to determine its reliability. For example, items like appliances or cars are built to last and may not need extra coverage if they’re from a reliable brand. However, smartphones, which last an average of three years, might benefit from an extended warranty.

Source of Warranty: Whether it’s from the manufacturer or a third party can impact coverage, reliability, and claims process, so it’s important to understand the difference between the two.

“Not all warranties are created equal. Every warranty has different coverage, and even if two seem similar, manufacturer-backed extended warranties are almost always better than third-party ones. My rule of thumb is if the manufacturer offers extended coverage, go with that,” Mikula said.

Why Extended Warranties Might Not Be Worth It

Despite the global extended warranty market being projected to reach $286.4 billion by 2032, many consumers are paying for coverage they may never need.

Ideally, if you buy reliable and durable products, the likelihood of them needing repairs after the manufacturer’s warranty expires is low. In many cases, the cost of repair exceeds the cost of the warranty, and if you don’t end up using the warranty, it’s money wasted.

“Buying a warranty comes down to one simple question: Do you value peace of mind? Nobody should buy a warranty hoping they’ll need it. If you’re worried your car is going to break down, take a step back and ask yourself: Why are you even buying this car?” Mikula recommended.

Consumers can also rely on other options like emergency funds or credit card protection to cover unexpected repairs, making extended warranties unnecessary.

The Bottom Line

Extended warranties can offer peace of mind, functioning as a safety net for certain purchases. However, many products are reliable, so the cost of an extended warranty might outweigh the benefits. This doesn’t mean they are always unnecessary, but it’s important to evaluate each purchase individually to determine if it’s worth the extra cost.

Making smart moves now can prevent financial hardships later

Fact checked by Vikki Velasquez
Reviewed by Samantha Silberstein

After a lifetime of work, many older Americans or retirees have built a portfolio of assets. Many have retirement accounts, like IRAs, pensions, or money in non-retirement accounts. They may own a home or other real estate and have valuable possessions, such as art, antiques, or collectibles.

Key Takeaways

• Some retirement accounts are protected from creditors, while others are more vulnerable.
• Older adults with mortgages on their homes can risk losing them through foreclosure if they miss multiple payments.
• Having adequate homeowners and liability coverage can help protect an older person’s home and other assets.

Protecting Finances

• Retirement accounts. Many older adults have the bulk of their wealth in retirement accounts. Assets held in retirement accounts are usually protected from creditors, although the rules vary according to the type of plan. Money in an employer plan, such as a 401(k), is off-limits to most creditors. Savings controlled by the individual, such as an individual retirement account (IRA), have fewer protections. The rules differ from state to state, with some states shielding IRAs from most creditors.
• Other accounts. Money in non-retirement accounts, such as regular brokerage and bank accounts, is more vulnerable. If an older person is sued, that money could be at risk. One way to provide some protection is with insurance. Automobile and homeowners policies should carry an adequate amount of liability coverage. An umbrella policy provides additional liability coverage of $1 million or more.
• Qualifying for Medicaid. Sometimes confused with Medicare, Medicaid is the joint federal and state health insurance program for low-income individuals, including older adults. Medicaid helps pay for most custodial care, which many people need toward the end of their lives. Custodial care refers to help with everyday activities, such as bathing and dressing. Medicaid beneficiaries must meet both income and asset requirements which vary by state.
• Long-term care insurance. For those unlikely to qualify for Medicaid or who don’t want to deplete their assets to become eligible, buying long-term care insurance is another option. A comprehensive long-term care policy will cover in-home and nursing home care. However, many adults may be uninsurable due to preexisting conditions, such as using a walker or needing help with daily activities. Individuals may buy policies in their 50s but face years of annual premiums.
• Financial scams. Scam artists commonly prey on older adults. In 2024, people aged 70 or more lost $2.3 billion to fraud, according to the Federal Trade Commission. Family members or caretakers may explore legal options, such as obtaining a power of attorney authority to help protect an older person’s assets.

$3,875

In 2024, the average annual cost of a long-term care policy for a married couple, age 55.

Protecting Homes

• Insurance. Sufficient liability coverage in case of an accident at their home, or involving their car, is one crucial line of defense for older adults. A homeowners policy will protect them against unmanageable home repair costs in case of a fire or other covered calamity.
• Mortgage debt. Many people reach retirement age with years to go on their loans. The danger is that if a financial emergency strikes—such as a big, unexpected medical bill older adults may fall behind in their mortgage payments and risk foreclosure.
• Reverse mortgages. Reverse mortgages are commonly pitched to people ages 62 and older to draw on the equity they’ve accumulated in their homes. Mortgagees receive monthly income or a lump sum, and the lender gets its money back, with interest, by selling the property after the owner leaves it permanently. While a reverse mortgage lender can’t foreclose due to missed payments, the homeowner must keep the home in good repair and pay the property taxes. Also, a surviving spouse could lose the property if care wasn’t taken to protect their rights.
• Medicaid estate recovery. In general, a person can keep their home while receiving Medicaid benefits, but after they die, Medicaid may attempt to recover a portion of what it paid for their care. Typically, however, a spouse can remain in the home until their death. These rules, like many involving Medicaid, can vary from state to state. Individuals can learn more about a particular state’s program at its Medicaid website or through the federal Benefits.gov website. 

How Can Older Adults Preserve Their Estate for Heirs?

Older adults who hope to preserve an estate for their heirs may want to consult a knowledgeable attorney who offers strategies like asset protection trusts.

What If an Individual Moves Out During a Reverse Mortgage Situation?

If an individual stops living in their home for 12 consecutive months, the reverse mortgage comes due. Sometimes this occurs due to a medical condition or if the homeowner goes into a rehabilitation facility or nursing home for a period.

What Should Someone Do if They Think They’ve Been Scammed?

Individuals should listen to their suspicions, gather evidence, and report it to the authorities if a scam happens. The U.S. Department of Justice’s Office for Victims of Crime has a National Elder Fraud Hotline, (833) 372-8311, to report abuses and scams.

The Bottom Line

Individuals can ward off potential dangers and take steps to keep crucial assets safe and sound. A financial advisor or attorney can help older adults get their financial accounts in order and complete tasks associated with insurance, inheritance, and medical matters.

Fact checked by Betsy Petrick

Carrying debt can be stressful, especially if you hold too much and don’t have the income to support it. Common debt relief strategies, such as credit counseling, debt consolidation, and debt settlement, can help alleviate the burden.

If you’re struggling right now, we recommend starting with credit counseling to speak with a trained professional. But there are several options available. Keep reading to learn how to use a variety of strategies to find some relief from your debt.

Key Takaways

• Debt relief refers to any one of several strategies to help you better manage and pay down your debt. You can try debt relief on your own or work with a debt relief company.
• Consolidating your debt with a loan or credit card can reduce your monthly payment and your interest rate.
• A credit counselor can help you learn effective strategies to manage your debt and budget your money.
• Debt payoff apps can help you set and stick to a plan to pay down debt.
• Debt settlement and bankruptcy should be your last choice as they can negatively impact your credit score.

Household debt reached $18.04 trillion as of the fourth quarter of 2024. Credit cards remained among the highest balances held by consumers in the U.S., hitting $1.21 trillion, which is an increase of $45 billion from the same period a year ago. The average American’s debt topped $105,000 in 2024, according to Experian (including home loans).

What Is Debt Relief?

Debt relief can describe many different strategies to help consumers deal with their debts. It can refer to credit cards, personal loans, auto loans, student loans, and even mortgages. People often seek debt relief when they can’t manage their debt load.

Consider some of these common debt relief strategies; these are generally applicable for unsecured debt, rather than secured debt:

• Credit counseling: Credit counseling refers to working with a trained financial counselor who can educate you on how to manage your debt. Your counselor may negotatiate a debt management plan with your creditors to help you pay down your debt at a lower interest rate.
• Debt payoff apps: There are mobile and desktop apps designed to help you budget your money and pay off your debts. Link your accounts and commit to using a payoff strategy, such as the avalanche or snowball tactic, to reach your goals.
• Debt consolidation/refinance: Debt consolidation involves using a personal loan or balance transfer credit card to pay off several existing debts. Ideally, you end up with a single, lower monthly payment with a lower interest rate.
• Debt settlement: You can negotiate debt settlement with your creditors yourself or work with a debt settlement company. Instead of paying your debt as normal, you set money aside and then pay off the entire debt for a lower lump-sum payment. This is a risky strategy and may be used by people who don’t want to file for bankruptcy, but bankruptcy can actually be preferable.
• Bankruptcy: Declaring bankruptcy is an appeal for full or partial debt forgiveness. Depending on the results, it may give you a fresh start.

Keep in mind that certain debt relief strategies, notably debt settlement and bankruptcy, can negatively impact your credit score in a significant way for years to come.

Credit Counseling Companies

Credit counseling is a good first stop for anyone struggling with debt. You can speak with a certified credit counselor, who will help you figure out your financial situation and develop effective ways to manage your debt now and going forward.

This can include devising a monthly budget and developing a debt management plan. Your credit counselor can help you obtain and read your credit reports and give you the educational tools to get your financial life back on track.

You can find a credit counselor through your state’s consumer protection or attorney general’s office. There also are lists available through the U.S. Department of Justice, the Financial Counseling Association of America, and the National Foundation for Credit Counseling. Or, check our picks for the best credit counseling services available.

Tip

Access free copies of your credit reports from Equifax, Experian, and TransUnion through AnnualCreditReport.com or learn about the best credit monitoring services and how they can help you keep tabs on your credit.

Debt Payoff Apps

A debt payoff app is a mobile or desktop app that you download onto your smartphone or computer, or use on a website. They often work by linking your financial accounts and helping you create a repayment plan to get you out of debt, although some apps require you to input data manually. The app may suggest that you use the debt avalanche (where you pay off high-interest debt first) or debt snowball (where you tackle low balances first) strategy.

These apps don’t reduce the amount of money you owe. They’re designed to keep you on track and monitor your progress, which can help you save money by being more financially self-aware.

Debt Consolidation/Refinance With Personal Loans

A debt consolidation loan is a new loan you use to pay off your existing debts. If you need quick debt relief, it only makes sense to take out a consolidation loan if you’ll wind up with a lower overall monthly payment. Depending on your credit, you may be able to get a loan at a lower rate than your existing debts—that’s why people tend to use personal loans with lower rates to pay off high-interest credit card debt.

You can get debt consolidation loans through banks, credit unions, and online lenders. You’ll need to apply and be approved by the lender, which means meeting certain requirements that may include a certain credit score, income threshold, and debt-to-income (DTI) ratio.

Debt Consolidation/Refinance With Credit Cards

You may qualify for a balance transfer credit card to consolidate and refinance your debt. If you’re approved, you can transfer the balance of your outstanding debts onto this new card.

Many card issuers give new cardholders introductory or teaser rates of 0% for a certain period, usually from 12 to 21 months. This means you won’t have to pay interest during that time, although you may have to pay a balance transfer fee, which is a percentage of the balance. You will have to make minimum monthly payments, however, and if you miss a payment you can lose the 0% APR and get stuck with a very high penalty APR.

You’ve probably received offers in the mail for new cards, which is a great place to start. Many lenders allow you to see if you pre-qualify for a card without impacting your credit.

If you take a balance transfer offer, be sure to make every monthly payment on time. When the introductory rate ends, your balance will convert to the normal APR, which is likely to be quite high. It’s a good idea to divide your card balance by the number of months you have to pay it down, and make that your monthly payment (unless that would be smaller than your required minimum monthly payment—in that case, just make the required minimum payment).

Debt Settlement

In debt setltement, the goal is to pay off your debt for less than you owe, typically with a single lump-sum payment. Debt settlement can be done on your own or through a debt settlement company. Debt settlement companies can’t do anything you can’t do yourself, but like a tax professional, they may be worth hiring if you want help dealing with your debt and creditors.

In a typical debt settlement process, you cease making regular payments to your creditors. Instead, that money is put into a savings account, sometimes known as a “war chest.” This money is used to negotiate with your creditors. By no longer making regular payments and instead offering a lump sum, your creditors are placed in the position of either getting something or potentially nothing.

But debt settlement is very risky. If you fail to pay back your debts, you’re violating the agreement you originally signed, and in some cases creditors take such borrowers to court. When you fail to pay, your debts will likely be sold to collection agencies.

There’s no guarantee that debt settlement will work—creditors aren’t obligated to accept debt settlements. When you stop paying your debts, your credit score will take a large hit. There will be further credit damage if you actually achieve a debt settlement. And if you work with a debt settlement company, you’ll be charged a fee—which can be very large—based on the percentage of debt you had.

Despite the risks, if you’re facing overwhelming debt this strategy may be suitable if you don’t qualify or don’t want to file for bankruptcy.

Bankruptcy

Bankruptcy is generally seen as a last resort, although it can be preferable to debt settlement. Each one severely damages your credit, but bankruptcy may cost less overall while taking less time, and it may be more of a sure thing.

Bankruptcy is considered one of the quickest ways to come out of debt. You don’t come out unscathed—your credit score will take a nosedive and the bankruptcy stays on your credit reports for up to 10 years. The negative effects diminish over time before that, however, and your credit score may start to rebound more quickly than you expect.

To file for bankruptcy, you must meet with a bankruptcy lawyer and fulfill several requirements. These include providing relevant financial information and filling out forms. You may be required to undergo credit counseling and pay some relatively small fees before your lawyer can file the paperwork.

Keep in mind that you may qualify for free legal services through the American Bar Association or the Legal Services Corporation if paying for an attorney is too burdensome.

How to Avoid Debt Relief Scams

Debt relief (and credit repair) scams are aimed at people with a significant amount of debt, notably high credit card balances. They make false guarantees to negotiate, lower, or settle a consumer’s debt with their creditors if they pay an upfront fee.

It’s difficult to determine how many people are affected by these schemes because many people don’t report them. But you can avoid being duped by one of these scams if you’re conscious of the following warning signs:

• Unsolicited requests: Be suspicious of any emails, phone calls, or text messages you may receive for debt relief. Credit report information is not private, so legitimate debt relief companies may reach out if you have debts listed on your credit reports. But don’t respond directly and most importantly, don’t click on any links you’re sent. Instead, visit company websites or check trusted recommendations to inquire into their services.
• Demands for upfront payments: Be wary of promises to eliminate your debt in exchange for a large upfront fee. Legitimate debt settlement services negotiate your debt first and generally take a percentage (15% to 25%) of your enrolled debt after a negotiation is successful. You will likely have to pay a fee to open a savings account at the beginning of the program, however.
• Watch out for guaranteed results and government backing: Some scammers use terms like “guaranteed results” or “new government program” to legitimize their scams and entice consumers. But debt relief companies can’t guarantee results because there are no legal obligations for creditors to accept settlement, and the government doesn’t provide debt relief.

Negotiating with creditors can be a long process, which is why legitimate debt relief companies don’t promise extra-fast results and don’t make guarantees. Look for companies that are accredited and recommended. Look for customer reviews and ratings if you’re unsure.

Frequently Asked Questions (FAQs)

How Do I Qualify for Debt Relief?

The qualifications for debt relief depend on the type of assistance you’re seeking. If you want to get help from a debt settlement agency, you generally need to be past due on your payments, experiencing financial hardship, and holding a certain amount of unsecured debt. On the other hand, if you’re seeking debt consolidation, you must meet the lender’s income and credit score requirements.

Can I Get Debt Relief With Bad Credit?

Yes, you can get debt relief with bad credit. Although it may be challenging, debt consolidation is one option. You also may find debt relief through credit counseling and debt management plans. Debt settlement and bankruptcy should remain the very last options as they will can be costly and will stay on your credit reports for up to 10 years.

How Is My Credit Affected by Debt Settlement?

Debt settlement is likely to have a severely negative effect on your credit. First, your credit will suffer when you stop making payments on your accounts. You’ll accumulate late payments and delinquent accounts. Then, debt settlement itself is a severe derogatory mark. Overall, the effects of debt settlement will remain on your credit reports for seven years, although their negative effects will diminish over time.

What Is the Best Way To Get Out of Credit Card Debt?

Consider the following ways to quickly get out of credit card debt:

• Make more than just the minimum payment
• Consider a debt consolidation loan
• Use the avalanche method to pay off high-interest debt first
• Use the snowball method to pay off the smallest balances first

Is There a Free Debt Relief Program?

Credit counseling agencies usually offer certain basic services for free to anyone, like initial credit consulations and basic financial advice. These agencies have paid services as well, like debt management plans, but you can receive a full or partial discount if you’re unable to pay full price.

The Bottom Line

If you’re saddled with debt and can’t find a way out, remember that there are organizations that may be able to provide some measure of help. Start with credit counseling to get organized and gain a clear picture of your financial situation. Their expertise may give you clarity and options you didn’t think could work for you.

Debt payoff apps are another relatively easy way to get started that won’t impact your credit score. If you’ve tried everything else, a debt settlement company or bankruptcy lawyer may be the right strategy.

Reviewed by JeFreda R. Brown

March Madness is big business for the National Collegiate Athletic Association (NCAA), when its most anticipated basketball games tip off. The men’s tournament brought in more than $900 million in fiscal year 2024.

Key Takeaways

• The NCAA earned $1.38 billion in revenue in fiscal year 2024, with much of it coming from March Madness. The men’s tournament brought in more than $900 million.
• Despite the huge sums of money raked in by the NCAA, the players have historically received zero compensation. This may be changing, thanks to a pending $2.78 billion settlement.
• Following a U.S. Supreme Court ruling, 2022 was the first year when players could earn money from endorsement deals and sponsorships.
• The NCAA shares its March Madness revenues with the participating athletic conferences based on the performance of their member schools.
• Broadcast rights to college sports (Turner and CBS) continue to be the major source of income for the NCAA, bringing in $873 million in 2024.

What Is the Size of the Pot?

In the 2024 fiscal year, college athletics’ governing body earned $1.38 billion in revenue, with broadcast rights (Turner and CBS) accounting for $873 million of that.

On the surface, that seems like cause for outrage, especially in light of how much the players earn: nothing. Though that may change, thanks to a pending $2.78 billion settlement that will be decided this spring.

While players make no money from March Madness (yet), they can now get paid for endorsement deals, following a U.S. Supreme Court ruling in 2021. This was after the NCAA blocked players from earning money for decades.

Important

A 2021 rule change allows NCAA athletes to earn money from their names, images, and likenesses (NIL), though they’re still prohibited from being paid to play while in school. Many states have also passed NIL laws.

How Tournament Money Gets Divided

The NCAA doesn’t keep all of the money it receives from March Madness-related media and marketing deals, but distributes much of it to its member sports conferences, based on the number of tournament games their teams played in.

The conferences then divide the money among all their teams, using their own formulas. In 2024, the total amount of money awarded for games during the men’s basketball tournament was about $226 million. That’s broken down further. In 2023, for example, Southeastern Conference (SEC) teams played in 17 tournament games and earned the highest estimated payout of $34 million. Big 12 conference teams were next, playing in 16 games and earning an estimated $32 million, according to Sportico.

Of course, each conference wants to see as many of its member schools in the tournament as possible, to raise the payout that it receives. For smaller, lesser-known conferences, that money can represent a major portion of their annual income.

When a surprise team that is virtually unknown makes it through multiple rounds, the payout can represent a much-needed cash injection for its conference. For larger conferences, however, such as the Atlantic Coast Conference (ACC) or the Big Ten, the money is more like financial icing on the cake than a major source of revenue.

How Earnings Are Shared Within Conferences

The NCAA urges conferences to divide the money equally among their member schools, and many conferences do just that. Larger conferences, which have multiple sources of income, routinely divide up most of the money and send it to their member schools’ athletics programs. Smaller conferences, however, may count on that money to cover their own expenses. Only whatever is left over goes to member schools.

Note

In 2025, Americans will legally wager an estimated $3.1 billion on March Madness (up from $2.7 billion in 2024), according to the American Gaming Association.

How Much Are the NCAA’s Annual Revenues?

For the 2024 fiscal year, the NCAA generated $1.38 billion in revenues. March Madness accounts for most of that, in the form of broadcast rights, ticket sales, corporate sponsorships, and television advertising.

When Was the First NCAA Basketball Tournament?

The first NCAA men’s basketball tournament took place in 1939, with eight teams participating. The University of Oregon played The Ohio State University in the finals, with Oregon winning 46-33.

How Many Teams Play During March Madness?

A total of 68 teams currently play in the NCAA tournament, a number that’s narrowed down through seven rounds. For 2025, March Madness began with Selection Sunday on March 16, when the NCAA announced the teams and brackets, and culminates on April 7, with the NCAA championship game.

The Bottom Line

There’s been plenty of criticism over the years regarding the funding model used by the NCAA. The colleges receive only a portion of the money they generate through sports competitions, and the players see none at all. However, new NCAA rules and state laws have made it possible for at least some athletes to benefit from the marketing of their names, images, and likenesses. And under a pending $2.78 billion settlement, players would begin receiving compensation via a new revenue-sharing plan. A settlement hearing is scheduled for April 7, and a judge is expected to issue a decision in the coming months.

Fact checked by Vikki Velasquez

Benjamin Franklin is credited with saying that nothing is certain in this world but death and taxes. That was back in 1789 and it still holds in the U.S. more than 230 years later.

U.S. taxation has thrived and faltered from implementing the first income tax to various attempts at tax reform. Some changes have been more taxpayer-friendly than others. Here’s a closer look at the history of the U.S. tax system.

Key Takeaways

• The need to finance the Civil War created one of the first versions of a federal income tax in 1862.
• The U.S. income tax was officially born on Feb. 3, 1913, when Congress ratified the 16th amendment to the U.S. Constitution.
• Less than 1% of Americans had to pay the tax in its earliest days.
• Major tax reforms have been ongoing for decades.
• Some consumer dollars can effectively be taxed twice when excise taxes come into play.

Early History of U.S. Taxation

Benjamin Franklin spoke on taxation well before the U.S. officially launched an income tax. Before the Civil War, the nation derived most of its income from banknotes. The tax rate imposed on individuals was minimal, from 1% to 1.5%. American citizens received virtually nothing in exchange. Civil services and protections on the frontier and coasts were minimal.

The need to finance the Civil War prompted some changes, effectively creating the first version of an income tax in 1862. President Lincoln signed a law that created the Commissioner of Internal Revenue and imposed an income tax on individuals ranging from rates of 3% on incomes of $600 to $10,000 and 5% on incomes over $10,000.

This version of the tax was repealed 10 years later but it came back to life in 1894 with the Wilson Tariff Act. The act levied a 2% tax on incomes over $4,000. The U.S. Supreme Court ruled one year later that the tax was unconstitutional.

“Through the Civil War and beyond, income tax was tried, disputed in the courts, and finally resolved with the passage of the 16th Amendment in 1913, constitutionally establishing income taxes,” according to Thomas J. Cryan, an attorney and the author of Disrupting Taxes.

Birth of the Federal Income Tax

The federal income tax as we know it was officially born on Feb. 3, 1913, when Congress ratified the 16th Amendment to the U.S. Constitution after an on-again-off-again start that lasted decades.

The amendment read, “Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and regard to any census or enumeration.”

However, less than 1% of Americans had to pay the tax in the first days after its inception, thanks to the amendment’s provisions for numerous taxpayer-friendly deductions and exemptions. The rate was only 1% of net income at that point. Congress later added a 6% rate for incomes of more than $500,000.

Numerous tweaks and add-ons occurred in the 1940s. The Revenue Act of 1942 increased tax rates and the number of citizens who had to pay it. The Current Tax Payment Act passed a year later, heralding the beginning of the tax withholding process by employers. Standard deductions were created in 1944 with the passage of the Individual Income Tax Act.

“The withholding system was implemented simply because the collection was easy,” says Cryan, “not because it was the soundest, most equitable, or most efficient tax system.”

However, the Internal Revenue Service attempted to make the tax process more efficient over the years. The first toll-free telephone line was introduced in 1965. Electronic filing began in 1986 although it was limited at first. Taxpayers who owed money were able to electronically file their returns beginning in 1992.

Tax Reforms and Major Changes

Reforms have been ongoing. The federal government has incrementally made some major changes to the tax system.

The Alternative Minimum Tax (AMT)

Annette Nellen, a certified public accountant (CPA) and attorney who serves as a professor and the director of the MST Program at San Jose State University cites the alternative minimum tax (AMT) as a major adjustment. The AMT was created in 1969 because “it was found that a few hundred high-income individuals were able to use a combination of exclusions, deductions, and credits to pay little or no income tax,” Nellen says.

The Tax Reform Act (TRA)

Nellen also mentions the Tax Reform Act that was launched in 1986. She says it broadened the AMT so more high-income individuals would be subject to it.

“The Tax Reform Act of 1986 made numerous changes to the tax law including taxing ordinary and capital gains income at the same rate and there were only two brackets (15% and 28%). It also added passive activity loss limitation rules that shut down a tax shelter industry that many middle- to high-income individuals had been using to minimize their taxes.”

The American Taxpayer Relief Act (ATRA)

The American Taxpayer Relief Act (ATRA) restored the top income tax rate to 39.6% in 2012 after it was cut to 35% by President George W. Bush’s tax cuts in 2001 and 2003.

The Tax Cuts and Jobs Act (TCJA)

President Trump signed the Tax Cuts and Jobs Act (TCJA) into law in 2017 and introduced some sweeping changes to the U.S. tax system. They included significantly increasing standard deductions and reducing personal income tax rates. The 35% top rate created by ATRA had increased back to 39.6% but the TCJA dropped it to 37%. The 15%, 25%, 28%, and 33% rates imposed on lower-income earners were cut to 12%, 22%, 24%, and 32% respectively.

The cap on the itemized deduction for interest paid on home mortgages was reduced, however, and a reduced limit was imposed on the state and local tax (SALT) itemized deduction as well. Some miscellaneous itemized deductions were eliminated entirely.

Important

The TCJA expires at the end of 2025 unless Congress takes steps to renew some or all of its provisions.  

The Inflation Reduction Act

The Inflation Reduction Act (IRA) came along in 2022. According to Nellen, “The IRA included numerous new and modified energy credits for individuals and businesses. It’s possible that some of these credits may be repealed or downsized as part of any extension of expiring provisions of the TCJA or new tax breaks such as not imposing income tax on tips or overtime pay of employees.”

Excise and “Sin” Taxes

Taxation doesn’t begin and end with those imposed on income and earnings. Excise taxes, often called “sin” taxes, can take a hefty bite out of taxpayers’ bank accounts as well. These taxes are imposed on the sale of specific products and services.

They’re generally paid by retailers, producers, and wholesalers but these entities pass them down to the consumers who purchase them. Commonly affected purchases include alcohol, tobacco, health insurance, and gasoline. The excise tax on cigarettes averages about $1 a pack. Beer and wine are typically taxed at a lower rate than distilled spirits.

“The key purpose of excise taxes on alcohol and tobacco is to tax undesired behavior, particularly the purchase of cigarettes by young people,” Nellen says, “and to generate a small amount of revenue. There are several federal excise taxes, but the ones on alcohol, tobacco, and gasoline are best known. Excise taxes are a small part of government tax collections, representing less than 2% of total federal tax revenues. For 2023, excise taxes were $75.8 billion, representing 1.7% of total tax collections of $4.4 trillion.”

Cryan agrees about the deterrent nature of these taxes. “Excise taxes on alcohol and tobacco traditionally lean to increased prices at the time of the retail sale. This price increase will often reduce consumption which can have the follow-along effect of a decrease in consumption related to less health harms.”

Numerous consumers continue to spend that extra dollar on a pack of cigarettes, but it’s a safe guess that their wallets will feel the effect because they also have to deal with income tax on that money.

The Bottom Line

Taxation in the U.S. has always been a shapeshifting beast and this can be exacerbated by all its various applications from income to that modest purchase you just made at your favorite liquor store. Tax laws don’t just change every five to ten years. They can occur annually just as you’re getting used to the last ones that were imposed.

They’re inevitable, however, just as Benjamin Franklin asserted. Taxpayers can benefit from keeping a watchful eye on the ever-evolving changes and checking in with a tax professional when changes are looming so they can best prepare for the impact whether it be affirmative or negative.

Fact checked by Vikki Velasquez

If your 401(k) isn’t performing as well as you wish, there are things you can do about it. First, determine the reasons for the sluggish performance, and then make some changes toward a more profitable 401(k) plan.

Here are five reasons why a 401(k) plan may be underperforming.

Key Takeways

• To rev up an underperforming 401(k), swap out a target date fund with a large-cap growth fund.
• Exchange 401(k) investments with high fees for cheaper investments that meet your financial aims.
• Instead of chasing the highest performance, choose an investment that meets your financial needs and stick with it for the long term.
• Switch more conservative, lower-performing investments to a more aggressive stock fund.
• Contribute enough in your 401(k) to qualify for a matching contribution from your employer.

Choosing a Target Date Fund

Target date funds make investing a breeze, but they may not give you the type of return you are looking for in your 401(k).

“This is a fund that tries to get near your 65th birthday as a retirement year; e.g., 2030, 2035 … 2060, 2065. They start off with a higher allocation to stocks vs. bonds the younger you are and then progress to get more conservative by having more in bonds than stocks as you approach retirement,” says Jarrod Sandra, certified financial planner at Chisholm Wealth Management.

If you don’t choose another investment in a 401(k) plan, you may be automatically invested in a target date fund.

“Target date funds are now the leading default investment for employees within 401(k) plans, and most target date funds are underperforming the market because of their asset allocation,” says John Bovard, a certified financial planner at Incline Wealth Advisors. “401(k) participants can log in to their account and rebalance into an S&P 500 fund or some other large-cap growth fund to become more aggressive.”

You don’t need to be wealthy to benefit from having a financial guru on your side. Consider hiring a financial advisor to help you create a comprehensive plan covering retirement, taxes, estate planning, insurance needs, and major life transitions.

High Investment Fees

If you are paying large fees on your 401(k) investments, this may cause your 401(k) to underperform. Evaluate 401(k) fees by reviewing your Participant Fee Disclosure document.

“Check the list of fund options in your 401(k), and you should be able to see the expense ratio for each fund,” says Carla Adams, founder and financial planner at Ametrine Wealth.

If the fees you are paying are higher than you like, choose a more cost-effective investment option that is still in line with your financial goals. Look for investments with low expense ratios.

“Each 401(k) plan has its own option of investments to choose from, so you may not have access to super-low-cost funds, but ideally you should be investing in only funds with expense ratios of under 0.20%,” Adams says.

Performance Chasing

If you keep moving around your 401(k) investments in search of the highest returns, you may end up with an underperforming 401(k).

“Rather than choosing funds off of recent performance, come up with a long-term strategy of which fund you plan to invest in and stick with it for the long run,” Adams says.

If you come across a poorly performing fund in a 401(k), report this fund to the plan administrator.

“401(k) administrators also have an obligation to regularly review the funds they’re offering in the plan, so if any funds are consistently underperforming, the plan may end up removing the fund and replacing it with a better option,” Adams says.

Conservative Investments

If you choose to invest in more conservative assets such as bonds, you can expect a lower return on your investments.

“How is your 401(k) allocated between stocks and bonds? If you are heavily invested in bonds, then you should expect your 401(k) to underperform the stock market more often than not, so comparing your performance to the S&P 500 is not appropriate,” Adams says.

If your investments are too conservative for your financial goals, you can change them to more aggressive options.

“This is an opportunity to shift your portfolio more into stock funds, so long as you understand that with a higher expected return, you should expect more volatility as well,” Adams says.

Not Contributing Enough

Some 401(k) investors have lower-than-expected returns in their 401(k) because they are not contributing enough to receive an employer’s free matching contribution.

“A company matching contribution is like an immediate 100% return on investment,” says Kyle Harper, a certified financial planner with Harper Financial Planning.

So don’t miss out on this free money from your employer. If your company offers a 3% matching contribution, invest 3% into your 401(k), and receive the additional 3% contribution from your employer for your retirement savings.

The Bottom Line

Discovering that your 401(k) is underperforming is not good news. But there are things you can do to gain a greater return on your investment.

If you have been investing in a target date fund, you may want to move to a more aggressive investment, such as a large-cap growth fund. If you are paying high fees in your 401(k), switch to investments with low fees aligned with your financial goals. If you bounce around from investment to investment, seeking higher returns, choose an investment that will meet your financial needs and stick around for the long term.

If you’ve been conservative with your investments, you may want to move to a more aggressive stock fund. Finally, don’t forget to contribute enough money into 401(k) to qualify for a company’s matching contribution. That’s free money from your employer that you can use for your 401(k) investments.

A 2024 survey from Empower reports that nearly 37% of Americans aren’t prepared to handle a $400 emergency expense. In fact, it claims that over 1 in 5 Americans have no emergency savings. This isn’t particularly shocking, as in 2023, the Federal Reserve Board, in a report on the economic well-being of U.S. households, considered adults who had 3 months’ emergency savings, and this amounted to just 54%.

When financial experts recommend keeping three to six months of essential expenses safely tucked away, running out of that safety net sometimes will feel like a huge financial failure. But the reality, stark as it is, is that emergency funds are meant to be used during emergencies. So the real test isn’t whether you’ve depleted your fund but how strategically you respond when those resources are gone.

Your emergency fund can evaporate due to medical bills, job loss, income reduction, or a series of unfortunate events, and if you want to deal with this, you’ll need to plan thoughtfully. The following five steps will help you navigate such a challenging financial period.

Key Takeaways

• According to the Consumer Financial Protection Bureau’s Making Ends Meet survey in 2022, nearly a quarter of consumers (24%) have no savings set aside for emergencies, while 39% have less than a month of income saved for emergencies.
• Treat your emergency fund as a last-resort safety net by using it only for true emergencies not for non-urgent expenses like vacations or lifestyle upgrades.
• When rebuilding your depleted emergency fund, make saving an automatic part of your budget.
• Consider a temporary lifestyle adjustment by cutting non-essential expenses, finding additional income sources through side hustles, and selling unused items to accelerate your emergency fund replenishment.

Implement an Emergency Budget Overhaul

“Rebuilding requires intentional budgeting” said Netta Stahl. The Tel Aviv based financial coach says “sticking with old spending patterns while trying to replenish the fund will only slow progress.” The big question now is “how do you implement an emergency budget overhaul?”

Create an entirely new emergency budget that reflects your current financial reality. It’s best to not see this just as an attempt to trim expenses but to see it as restructuring your spending priorities.

• Review every recurring expense and eliminate anything non-essential.
• Reallocate funds toward immediate needs.
• Consider implementing creative cost-cutting measures like “themed” budget days (such as “ramen Tuesdays” or “no-spend weekends”).

 Proactively Contact Your Creditors

Don’t wait until you miss payments to reach out to lenders and service providers. Contact them immediately when you anticipate potential payment difficulties. Many creditors offer hardship programs that can temporarily lower interest rates, waive fees, and adjust payment terms. These programs typically last a few months and allow more of your payment to go toward principal. This way, you can make meaningful progress on your debt while managing cash flow during your emergency fund rebuild phase. Stahl advises, “Never take the first offer just because you’re stressed. Desperation can lead to expensive mistakes, so explore a few options before locking yourself into high-interest debt.”

Strategically Pause Other Financial Goals

Temporarily redirecting funds from other financial objectives can help you rebuild your emergency fund faster:

• Calculate the minimum contributions needed to maintain employer matches on retirement accounts.
• Evaluate the long-term cost of pausing investments versus the immediate need for cash reserves.
• Consider reallocating funds from long-term savings goals (e.g., vacation or home down payment) to your emergency fund.
• Explore options to temporarily reduce or suspend payments on student loans or other non-essential debts.
• Set clear milestones for when you’ll resume normal contributions to avoid indefinitely neglecting important financial goals.
• Use this pause as an opportunity to reassess and potentially reprioritize your long-term financial objectives.

You have to consciously be aware that this isn’t about abandoning long-term goals but prioritizing immediate financial security. “Remind yourself that this is temporary. It’s a season, not a permanent lifestyle,” Stahl notes.

Secure a Part-Time Freelance Gig

You can increase your income using freelance work if your emergency funds run out. Leverage platforms like Upwork, LinkedIn, Fiverr, or industry-specific job boards to find opportunities in your field. Some skills are popular in the freelance gig space: content writing ,virtual assistance, graphics designing, etc. You can try learning these skills or leveraging them for freelance work. You can also offer specialized consulting in your professional field. Consider creating and selling digital products (e.g., online courses, eBooks) that can generate passive income over time. Network within professional associations or alumni groups to find higher-paying, specialized freelance work. Invest in enhancing your skills through free online courses to increase your earning potential. Track all freelance income and expenses meticulously for tax purposes and to gauge the effectiveness of your efforts.  The flexibility of freelance work allows you to scale hours based on your needs.

Transform Unused Assets Into Emergency Capital

This is perhaps the most innovative of the steps, going well beyond the typical “sell your stuff” advice. Look beyond the traditional selling of household items by conducting a comprehensive “asset audit” of your life. This includes evaluating physical possessions, digital assets, unused subscriptions, reward points, cashback opportunities, and even specialized knowledge you could monetize. For physical items, consider not just selling but also renting valuable possessions through platforms like Fat Llama or Turo. Digital assets like unused domain names, photos, or creative works might find buyers on specialized marketplaces. Check out peer-to-peer rental platforms for high-value items like cameras, musical instruments, or sports equipment. You can even consider selling or licensing intellectual property, such as patents or copyrights you may hold.

Stahl cautions against trying to “invest” your way back: “Some people feel pressure to replace the fund fast and take unnecessary risks like putting their emergency savings into stocks or crypto.” That defeats the purpose of an emergency fund. This money isn’t meant to grow, it’s meant to be there when you need it.

Bottom Line

Remember, rebuilding your emergency fund is a process. Stahl estimates that it takes “just over one year to fully replenish a 6-month emergency fund” for most people. Stay focused, adjust your lifestyle temporarily, and prioritize your financial security. Also, remember that a depleted emergency fund is not a failure. In fact, it’s proof that your system worked. Now, it’s time to get back on track.

If you have a business, you may need to fill out IRS Form W-9

Fact checked by Suzanne Kvilhaug

Form W-9 from the Internal Revenue Service (IRS), Taxpayer Identification Number and Certification, is used by businesses to collect tax information from third parties such as contractors. The information collected on Form W-9 is then used by the business to fill out either Form 1098 or Form 1099 at tax time.

Key Takeaways

• IRS Form W-9 is most often used by businesses to collect tax information about contractors the business works with.
• The information on Form W-9 is used to fill out Forms 1098 and 1099 at tax time.
• Form W-9 collects information including name, address, tax classification, Social Security number or EIN, and withholding information.
• The person or company submitting Form W-9 must sign and date it. Willfully reporting incorrect information can result in fines or penalties.
• Because Form W-9 contains sensitive identification information, both parties should exercise caution when sending or storing it.

Purpose of Form W-9

IRS Form W-9 is used to gather taxpayer information from a vendor, contractor, or other non-employee that a business is working with. Compensation paid to non-employees must be reported to the IRS if it meets four requirements:

• A payment (or payments) was made to someone who is not an employee.
• Payment was made for services during business operations.
• The payment was made to an individual, partnership, estate, or (in some cases) corporation.
• The total payments made over a year were at least $600.

If these requirements are all met, the business must report the payments to the IRS on Form 1099-NEC Non-Employee Compensation. Form W-9 is used to gather the necessary taxpayer information to correctly fill out Form 1099-NEC, which the third party then uses to self-report their income to the IRS at tax time.

Note

Non-employee compensation was previously reported in Box 7 on Form 1099-MISC.

In addition to providing the information necessary for a business to report payments to a third party, it also protects the business. The party filling out Form W-9 must sign to certify that the information is true and correct. A signature on Form W-9 certifies:

• The tax identification number (TIN) provided, such as a Social Security number or Employer Identification Number (EIN)
• Any exemption from backup withholding
• The FATCA code used by the vendor

Form W-9 is not sent to the IRS. Instead, both the business and the third party should keep copies of it for their records.

Note

Both parties should use caution when sending or storing Form W-9, as it contains sensitive taxpayer information.

Form W-9 can be used for tax reporting in other situations as well. It can be used by banks or other financial institutions to fill out Form 1099-INT (interest income), 1099-B (broker and barter transactions), or 1099-DIV (income from dividends and distributions). Taxpayers may also have to fill out Form W-9 in other situations when they receive income, such as:

• Real estate transactions, reported on Form 1099-S
• Canceled debt, reported on Form 1099-C
• Tuition reimbursements or payments, reported on Form 1098-T

If you are an independent contractor and refuse to fill out Form W-9, your client will withhold taxes from payments at a rate of 24% in order to avoid fines from the IRS.

Who Should Fill Out Form W-9?

Form W-9 is only used for taxpayers who are U.S. persons. This includes individuals who are both citizens and resident aliens, as well as U.S. partnerships, estates, corporations, or domestic trusts.

In general, those who need to fill out Form W-9 are non-employees.

If you are an employee, you will not need to fill out Form W-9 for your employer. Instead, you will fill out Form W-4 to provide your taxpayer information, which your employer will then use to withhold income taxes from your paycheck, as well as Social Security and Medicare taxes. You will then receive Form W-2 when it is time to file your tax return.

Warning

If you are classified as an employee, your employer should not ask you to fill out Form W-9. If an employer does so, it may be a sign that they are illegally trying to save money by classifying you as an independent contractor rather than an employee.

Independent Contractors

If you are an independent contractor, freelancer, or other non-employee, you do not have an employer withholding taxes from your paycheck. Instead, you will need to pay estimated taxes throughout the year to cover your income, Social Security, and Medicare taxes.

The businesses that you work with will collect Form W-9 from you when you begin working together, and this information will then be used to report your income from that business on Form 1099.

Once you receive any version of Form 1099 or 1098, you must report that income in your tax return and pay any remaining taxes due on it.

Financial Transactions

Even if you are not an independent contractor or freelancer, you may be asked to fill out Form W-9 for certain financial transactions. Financial institutions, such as banks or brokerages, may collect.

Form W-9 so they have customer taxpayer information on file when they need it to fill out forms such as Form 1099-INT or 1099-B. If you are involved in real estate transactions, the business you are working with may ask you to complete a W-9 as well.

Important

Before filling out and submitting Form W-9, always ensure that the person or institution requesting the form has a legitimate need for it. Beware of W-9 phishing scams sent via email or text. If you are not sure whether or not you should submit a form W-9, consult a tax professional.

Information on Form W-9

There are three sections of Form W-9, and it is used to collect eight pieces of taxpayer information:

• Line 1, Name of entity/individual: Enter the name shown on your tax return; this can be either an individual name or the name of an owner, sole proprietor, partnership, or other entity.
• Line 2, Business name: The line is only filled out if you have a trade name, business name, DBA, or other disregarded entity name.
• Line 3, Federal tax classification: Choose only one of individual/sole proprietor, C corporation, S corporation, partnership, trust/estate, or LLC (limited liability company); if you select LLC, fill out Line 3b to indicate whether it is a C corp, an S corp, or a partnership.
• Line 4, Exemptions: Indicate whether you are exempt from backup withholding or FATCA reporting.
• Line 5 and Line 6, Address: Enter your address, city, state, and ZIP code.
• Line 7, Account numbers: If requested, you may enter additional information such as client information for a bank or brokerage.
• Part I, Tax identification number (TIN): Your TIN may be a Social Security number (SSN) or an EIN.

Note

If you are a sole proprietor, you can enter either your SSN or EIN. If your business is a corporation or partnership, enter the business’s EIN. If your business is a single-member LLC that is a disregarded entity, you can use either your SSN or EIN but not the business’s EIN.

The final part of Form W-9 is Part II (Certification), where you must sign and date the form before submitting it.

Penalties for Incorrect Information on Form W-9

When you sign Form W-9, you are certifying that you have provided correct information to the best of your knowledge. If you provide false information or otherwise fail to comply with reporting requirements, you may be subject to penalties including:

• A fine of $50 for every failure to provide your correct TIN
• A fine of $500 for making a false statement that results in no backup withholding
• Criminal penalties, including fines and/or imprisonment, for willfully falsifying any information

However, these penalties can be waived if you are able to prove that you were not deliberately providing false information.

Penalties aren’t limited to the person filling out the W-9. Anyone requesting a W-9 may be subject to either criminal or civil penalties if they disclose or use tax identification numbers in a way that violates federal law.

The Bottom Line

Form W-9 is primarily used by independent contractors, freelancers, and other vendors to provide their taxpayer information to clients. This information is then used to fill out Forms 1099 and 1098, which are used for filing taxes and reporting income to the IRS.

Before submitting a W-9, the submitter must sign and certify that the information on it is correct. Deliberately providing false information on a W-9 can result in criminal and civil penalties. Anyone submitting or requesting a W-9 should store this information carefully to prevent it from being incorrectly used.

Fact checked by Betsy Petrick

Refinancing a mortgage is typically done when someone wants to take advantage of lower interest rates or to change the repayment term of their mortgage. Usually, a person will refinance a mortgage to save on their monthly payments. Since mortgages are personalized products, there are no hard and fast rules about the best time to refinance. This is why it’s important to consider factors like your credit score, the current interest rate, and how much equity you have before you refinance your loan.

Key Takeaways

• Refinancing your mortgage can result in lower monthly payments, but you’ll have to pay hefty fees to refinance the loan.
• Most lenders require you to have at least 20% equity in your home to refinance your mortgage.
• Whether or not it makes sense to refinance depends on your financial situation and the terms of the new loan you’re offered.

Pros and Cons of Refinancing Your Mortgage

It’s easy to highlight the benefits of refinancing since it has the potential to save you a lot of money. However, there are some drawbacks that may come with changing the terms of your loan.

Pros

• You could pay less in interest on the loan

• Your monthly premium can be lower

• You can get a shorter term

• You can avoid private mortgage insurance (PMI)

• You can change mortgage products

• You can cash out some of your equity

Cons

• You’ll have to pay closing costs again

• It takes time to research lenders and loans

• Your credit score will likely take a hit

• You might take on more debt or have a higher monthly payment

Pros Explained

• You could pay less in interest on the loan: If you refinance at a lower interest rate, the total amount of interest you’ll pay over the life of the mortgage could be significantly lower.
• Your monthly premium can be lower: If interest rates have dropped since you took out your original mortgage, you can refinance and save money on your monthly payment. By putting that savings toward the loan’s principal, you might be able to pay off your mortgage faster.
• You can get a shorter term: Since you’re getting a new mortgage, you might choose a loan with a shorter term, as this will allow you to save on interest in the long run.
• You can avoid private mortgage insurance (PMI): If you hold at least 20% equity in your home when you refinance, you can avoid paying for PMI.
• You can change mortgage products: You might decide you’d prefer a different type of loan, such as an adjustable-rate mortgage (ARM). Refinancing gives you options.
• You can cash out some of your equity: Depending on how much equity you have, you can get a cash-out refinance and take out a larger loan. By paying off your current mortgage with the funds, you’ll still have money left over for other things like paying down debt, education expenses, or medical bills.

Cons Explained

• You’ll have to pay closing costs again: You can expect to pay 3% to 6% of the loan’s balance in closing costs. These cover things like appraisals, origination fees, recording costs, underwriting, and title services.
• It takes time to research lenders and loans: You’ll need to thoroughly investigate refinance lenders and loan options in order to find the most advantageous one for you, which could take more time than you want to spend.
• Your credit score will likely take a hit: To issue the new mortgage, your lender will make a hard inquiry, which can cause your score to drop. Although the effect on your score would only last a few months, the hard inquiry will stay on your report for two years.
• You might take on more debt or have a higher monthly payment: If you opt for a loan with a longer term length or take out a larger amount, you could end up paying considerably more each month than you are now.

Factors to Consider Before You Refinance Your Mortgage

Property Value and Your Equity

To find out if you’re even eligible to refinance, you need to find out what your home is currently valued at and how much equity you have in the property. Equity is basically the percentage of your home that you own.

To determine your equity, take your home’s current property value and subtract your current loan balance. Then, to determine your equity as a percentage, divide how much equity you have by the home’s value, and then multiply by 100.

Generally, lenders ask that you have at least 20% home equity before refinancing. Be aware that if your home’s property value has dropped, you may have negative equity. In this case, refinancing wouldn’t benefit you.

Example

If your home is valued at $300,000 and you currently owe $225,000, you would subtract what you owe to find the equity. Since $300,000 – $225,000 = $75,000, you would have $75,000 in equity.

To express this as a percentage, divide the equity by the home’s value. Since 75,000/300,000 = 0.25, you multiply the result by 100 to get 25%.

Your Credit Score

Pull up your credit score to see if it’s the same or improved since you took out your mortgage. Lenders look at your credit score to determine whether they’ll issue you credit and, if so, what interest rate to offer you.

The higher your credit score, the more favorable your interest rates will be. If your credit score has deteriorated since you took out your mortgage, the refinance lender might not offer you better terms. Instead, you may want to improve your credit score before refinancing down the road.

Your Debt-to-Income Ratio

In addition to looking at your credit score, lenders check your debt-to-income (DTI) ratio. This is how much debt you have in comparison to your income. Most lenders want to see low DTI ratios—ideally 36% or less—although some lenders might be willing to go up to 43%.

Calculating DTI Ratio

To figure out your DTI ratio, divide your total monthly debt payments by your gross monthly income. For example, if your mortgage payment is $1,500 and you also have another $1,000 worth of monthly payments that go toward your car and other debt, that adds up to a monthly debt payment of $2,500. If your gross monthly income is $7,500, you would divide $2,500 by $7,500, which comes out to a DTI of 33%.

The Costs of Refinancing

Refinancing isn’t free. There are closing costs, which could cost you between 3% and 6% of the total loan amount. These usually include origination fees, appraisal fees, title services, underwriting, and more.

Some lenders might offer to roll these fees into the loan, but that just means your loan will be that much larger. Others offer a “no-cost” refinance, which usually comes with higher interest rates to offset the cost to the creditor.

If you roll fees into the loan, be careful that doing so doesn’t push your loan-to-value (LTV) ratio to greater than 80% or else you’ll need to pay private mortgage insurance (PMI), which would add yet another cost.

Introductory Rates

If you have an ARM, pay close attention to what interest rate you’re currently paying compared to what you’ll pay after refinancing. You might be able to refinance to another ARM or a fixed-rate loan at a lower interest rate, but that’s not guaranteed.

You should also decide if you’ll pay refinancing points to reduce your loan’s interest rate. The cost of each point is equal to 1% of the loan amount. If you do choose to use refinancing points, be sure to factor this into the overall cost of refinancing.

Consider how long you have left on your current mortgage term. When you refinance, your term essentially restarts. So, if you’re close to paying off your mortgage, you might want to refinance with a shorter term so you can quickly pay off the new loan.

Your Current Lender

While it’s always a good idea to shop around for lenders, it might pay off to try and reach a new agreement with your current lender. After all, they probably don’t want to lose your monthly payment, so they may be willing to renegotiate your mortgage’s interest rate and/or term length.

This can be a particularly effective move if your credit score or DTI ratio has improved, as you can prove that you qualify for better interest rates with other lenders.

Your Breakeven Point

A major reason to refinance your mortgage is to save money on your payments. If refinancing won’t save you money, there’s likely no reason for you to go through the hassle. To help you figure out whether you’re actually saving, you need to determine your breakeven point. This is when the costs of refinancing your mortgage equals the savings you’d get from doing so.

To find your breakeven point, calculate all of your refinancing costs. Next, determine how much money you’d save each month with your refinanced loan. Then, divide the total cost of refinancing by the amount of money you’d save every month. The result is the number of months it will take you to breakeven after refinancing.

Your Taxes

As a homeowner, you might have enjoyed a heavy tax deduction by claiming your mortgage interest. If you always rely on this deduction to reduce your taxable income, be prepared to claim less if you refinance and your mortgage payment is significantly lower.

If you take the standard deduction, this factor doesn’t affect you since you can automatically take a $15,000 deduction for single filers or $30,000 for married couples filing jointly in 2025 (up from $14,600 or $29,200 for 2024).

Loan Consolidation as an Alternative

If your mortgage is just one type of debt you have and you’re trying to get a handle on your personal finances, consider another option: loan consolidation. Instead of refinancing your home, which uses your home as collateral, you might focus on consolidating your other debts into a single loan so they’re more manageable.

For instance, you can combine your student loans, credit card debt, medical debt, and personal loans, so you’re paying only one bill. However, be aware that debt consolidation loans usually have higher interest rates.

Warning

Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or the United States Department of Housing and Urban Development (HUD).

Why Refinance Your Mortgage?

People refinance their mortgages for a variety of reasons, including to get a lower interest rate and monthly payments, to shorten the term of the mortgage, to convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage (or fixe-rate to ARM), or to access home equity.

What Is a Cash-Out Refinance?

A cash-out refinance is a mortgage refinancing option that lets the borrower convert home equity into cash. In this scenario, a borrower takes out a new mortgage for more than the previous mortgage balance, and the difference between the two is paid out in cash.

Should You Refinance Your Mortgage When Interest Rates Decline?

In some cases, lower interest rates may result in mortgage rates that are lower than what you are paying currently, making refinancing a viable option. However, lower interest rates could still leave mortgage rates at a higher level than the mortgage rate you already have. If you can negotiate a lower interest rate and intend to stay in your home long enough to cover the refinance closing costs, then refinancing could be the smart choice.

The Bottom Line

When interest rates drop, it might seem like everyone rushes to refinance. However, it’s crucial to do your own research to determine if refinancing makes the most sense for you. For instance, once you compare all the costs to how much you actually stand to save, you’ll have a better idea. If you’re still unsure whether refinancing is the right move for you, consult with a financial advisor.

Reviewed by Amy Drury
Fact checked by Yarilet Perez

Production Costs vs. Manufacturing Costs: An Overview

Production costs reflect all of the expenses associated with a company conducting its business while manufacturing costs represent only the expenses necessary to make the product.

Both of these figures are used to evaluate the total expenses of operating a manufacturing business. The revenue that a company generates must exceed the total expense before it achieves profitability.

Key Takeaways

• A factory’s production costs are the total expenses of doing business.
• Manufacturing costs are the expenses directly related to building the product.
• Both production costs and manufacturing costs must be included in the calculation of the per-item cost of doing business.

Production Costs

Costs of production include many of the fixed and variable costs of operating a business. Raw materials and labor are production costs.

Fixed costs typically include:

• Building rent
• Advertising budget
• Business equipment
• Other miscellaneous expenses that do not go up or down with moderate changes in the volume of business

Variable costs increase or decrease as production volume changes. Some variable costs are:

• Supplies
• Wages
• Any other expenses that change with the level of production

Manufacturing businesses calculate their overall expenses in terms of the cost of production per item. That number is, of course, critical to setting the wholesale price of the item.

As the rate of production increases, the company’s revenue increases while its fixed costs remain steady. Therefore, the per-item cost of manufacturing falls and the business becomes more profitable.

A lower per-item fixed cost motivates many businesses to continue expanding production up to its total capacity. This allows the business to achieve a higher profit margin after considering all variable costs.

Manufacturing Costs

Manufacturing costs, for the most part, are sensitive to changes in production volume. Total manufacturing expenses increase as production increases.

Important

The opportunity to achieve a lower per-item fixed cost motivates many businesses to continue expanding production up to total capacity.

The per-item cost does not change substantially. Nonetheless, additional production always generates additional manufacturing costs.

Manufacturing costs fall into three broad categories of expenses: materials, labor, and overhead. All are direct costs. That is, the salary of the company accountant or the accountant’s office supplies are not included, but the salary and supplies of the foreman are.

Production Costs vs. Manufacturing Costs Example

For example, a small business that manufactures widgets may have fixed monthly costs of $800 for its building and $100 for equipment maintenance. These expenses stay the same regardless of the level of production, so per-item costs are reduced if the business makes more widgets.

In this example, the total production costs are $900 per month in fixed expenses plus $10 in variable expenses for each widget produced. To produce each widget, the business must purchase supplies at $10 each. Each widget sells for $100. After subtracting the manufacturing cost of $10, each widget makes $90 for the business.

To break even, the business must produce 10 widgets every month. It must make more than 10 widgets to become profitable.

What is the Marginal Cost of Production?

The marginal cost of production refers to the cost to produce one additional unit. Theoretically, companies should produce additional units until the marginal cost of production equals marginal revenue, at which point revenue is maximized.

How to Calculate Total Manufacturing Cost?

There are three main components that make up total manufacturing costs. These include direct materials (raw manufacturing materials), direct labor (the wages for the workers who directly produce manufactured goods), and manufacturing overhead (indirect costs necessary for production like utilities, equipment maintenance, and rent).

Are Wages a Fixed Cost or Variable Cost?

Wages can be either a fixed or variable cost depending on how they’re structured. Salaries are typically a fixed cost, as they must be paid regardless of how much product a company produces. In contrast, hourly wages, overtime pay, and commissions are usually classified as a variable cost, as they can fluctuate with production levels.

The Bottom Line

Production costs encompass all the costs required for a company to operate while manufacturing costs only represent the costs needed to produce products. In theory, companies should produce enough goods to cover their production costs to maximize revenue but stop once marginal costs equal marginal revenue. Manufacturing costs can change over time and depending on production levels, so it’s important for businesses to closely track variable inputs such as material and labor to ensure production doesn’t eat away at revenue.