Category: Finance

1. Rewards are mediocre and come with restrictions

2. You can supplement your rewards with physical activity

3. The introductory offer isn’t much to write home about

4. Special financing options can throw you a curve

5. You’ll qualify for Gold status, which comes with some perks

What is life insurance fraud, exactly?

Lying on your application

Filing a false claim

Forging changes to someone else’s policy

The consequences of life insurance fraud aren’t pretty

Avoiding and reporting life insurance fraud

Cars are expensive — thank you, Captain Obvious — so most buyers finance them. But that adds a whole new set of wrinkles to the car buying process. 

To smooth them out, make sure you know the pitfalls and potholes to avoid when shopping for auto loans, such as taking a more expensive longer-term loan because the monthly payment is lower. 

Otherwise, you might just get “taken for a ride” on your next car purchase.

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What Is an Auto Loan?

An auto loan lets you borrow money to buy a car, truck, motorcycle, SUV, or specialty vehicle. Yes, including those goofy motorized trikes you occasionally see on the road. 

The lender puts a lien against your vehicle to secure the loan. That means that if you default on your monthly payments, the lender can send the “repo man” to repossess your car. 

But that comes with an upside as well: a secured loan costs less, since it reduces risk for the bank. Lenders always price loans based on risk, so taking collateral lets them charge more competitive interest rates. That’s why car loans tend to cost less than personal loans, for example. 

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Key Terms to Know

You can get bogged down in the alphabet soup of APRs and LTVs when shopping for loans. It helps to go in knowing the lingo so you don’t get lost before you begin. 

• Interest Rate: The interest rate shows how much interest the loan will cost you. It’s expressed as an annual rate. 
• Annual Percentage Rate (APR): The APR tells you how much a loan costs you per year, adding together both interest and fees. The APR is usually slightly higher than the interest rate
• Loan Term: This is the repayment period over which you’ll pay back the loan. 
• Monthly Payment: This is how much you owe in loan payments each month, without incurring extra fees. Bear in mind you can pay extra to pay off your loan faster.
• Principal Amount: This is your initial loan balance, or the total amount of money you borrow to buy the car. It shrinks over time as you pay down your loan. 
• Down Payment: This is how much cash you bring to the table when buying a car. 
• Loan-to-Value Ratio (LTV): This is the percentage of the car’s initial value that the bank will lend you. You can think of LTV as the inverse of the down payment: If you have to put down 10%, that means the lender is fronting you 90% of the purchase price. Your LTV is therefore 90%. 
• Total Cost: The total amount that a loan will cost you, including interest and fees, over the entire life of the loan. 

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How Auto Loans Work

When you buy a car, you can borrow most of the cost with an auto loan and typically pay it back over a three-to-six-year loan term. The longer the loan term, the lower your monthly payment, but you’ll pay more in total interest. As a general rule, you want to borrow the shortest car loan possible. 

For example, if you borrow a $30,000 auto loan at 5% interest for three years, you’ll pay $2,369 in total interest. A five-year auto loan on the same principal costs you $3,968 in total interest. 

Longer loans typically come with higher interest rates. In all likelihood, you’d end up paying even more in interest on the five-year loan example above. 

Like mortgage loans, you can also refinance a car loan. That can help you score a lower interest rate or monthly payment, but often extends your debt horizon — how long you’ll be paying off the debt. 

Once you do eventually pay off your auto loan, the lender removes the lien against your car and sends you a copy of the removed lien. You then own your automobile free and clear, just in time to start worrying about expensive car repairs.

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Types of Car Loans

Most people borrow auto loans from one of two sources: car dealerships or direct lenders. 

Car dealerships sometimes give you a choice between sweetheart financing terms or a discount on the car. In most cases, it makes more sense to take the discount. 

In a perfect world, you’d take the discount and buy the car with cash. But if you can’t afford to buy in cash, you still have plenty of other options for car loans beyond the dealer. 

Direct loan options include banks, credit unions, online lenders specializing in auto loans, and other financial institutions. Shop around for loan offers from your own bank, a few local credit unions, and a few online lenders. 

When shopping around and negotiating rates, don’t let lenders run a hard inquiry on your credit report until you choose a lender. Give lenders your credit score verbally, after you check your own credit. Once you pick one, you can then officially submit a loan application. 

If your credit history has a few dents and scratches on it, invest some time to improve your credit. You can save hundreds or thousands on life-of-loan interest with a higher credit score and lower interest rate.  

Lastly, note that you can take out an auto loan for used cars, not just new cars. Just beware that you’ll pay higher interest rates for used car loans. 

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How to Choose a Car Loan

At the risk of stating the obvious, you should always shop around for the lender with the lowest interest rate and fees. 

Well, almost always. Dealerships sometimes offer cheap or even 0% APR financing as a promotion incentive rather than discounts on the selling price. But you’re often better off taking a discount on the car rather than the cheap financing, then borrowing money from the cheapest direct lender you can find. 

Run the numbers through an online calculator to determine the life-of-loan interest, and compare that to the discount. Choose the option that saves you the most total money. 

As a general rule, avoid the temptation of longer-term loans and opt for the shortest loan you can afford. Finally, make sure you get a list of all fees from each lender, so you don’t get sandbagged when you sign on the dotted line. 

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Auto Loan FAQs

Financing cars and trucks comes with its own complications, and borrowers often have questions. These rank among the most common, so review them before heading to the dealership. 

Is It Better to Get an Auto Loan From a Direct Lender or a Dealership?

In general, direct lenders tend to offer better loan pricing. Car dealers often work with lenders and earn a commission on loans, which means you can pay extra for the middleman. 

But you should always run the numbers yourself with an auto loan calculator. Compare the life-of-loan costs of a direct lender loan against any promotional discount you might receive on the car. Dealers often offer cheap financing or promotional discounts, but not both.

What’s a Typical Auto Loan Rate?

Car loan rates vary based on benchmark index rates such as the Fed funds rate or the LIBOR, just like mortgage rates. I’ve seen auto loan rates as low as 3%, but they can go into the double digits when interest rates rise. Your credit history also impacts the interest rate that lenders can offer you.  

What Credit Score Do You Need to Buy a Car?

Even borrowers with bad credit can sometimes secure an auto loan. They’ll just pay sky-high interest on it. 

For a decent interest rate, aim for a credit score of 660 or higher. Also bear in mind that the higher your credit score, the higher the LTV that lenders will offer you. 

Is It Better to Choose a Lower Monthly Payment or a Shorter Loan Term?

A shorter loan term saves you money on interest, both in the form of lower rates and lower life-of-loan interest. So, aim to buy a car with the shortest loan term you can afford. 

What Happens When You Pay Off Your Car Loan?

After you write your final check or send in your final ACH payment, the lender removes the lien against your car and sends you a copy of the lien release. You’re then free to play demolition derby if you like — although, financially speaking, you’re better off selling or donating your car than blowing it up. 

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Final Word

Buying a car is exciting and a little scary. Unfortunately, getting a loan adds extra “scary” without adding more excitement. 

But the process is simple enough, and you can save money by shopping around and negotiating the terms of your car loan. Aim to compare rates and terms from at least five lenders and negotiate with each of the finalists. 

Check your credit before moving ahead too. If your credit report looks rustier than your teenage beater, consider asking a relative or very close friend to co-sign your loan with you. 

If getting a cosigner isn’t an option, you can potentially give your credit score a quick boost by paying your credit card balances down below 30% of your card limits. If you can pay off your balances in full, all the better, both for your credit score and avoiding interest. 

Roth IRAs come with different rules than traditional IRAs. And savvy investors can take advantage of those differences to pull off several neat tricks. 

One of those tricks? Using your individual retirement accounts before age 59 ½, the “official” minimum age for tapping into them. 

But tax rules get complicated quickly, and you need to know what you’re doing if you don’t want the IRS rap-tap-tapping on your door. Although you don’t need a CPA certification to use a Roth conversion ladder, you do need to understand the rules and the process from start to finish. 

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What Is the Roth Conversion Ladder Strategy?

If you withdraw money from a traditional IRA before age 59 ½, the IRS hits you with a 10% early withdrawal penalty and makes you pay taxes on it. Hard stop. 

But Roth IRAs offer a little more leeway. You can withdraw contributions at any time tax-free, and if you convert (transfer) funds from a traditional retirement account such as an IRA or 401(k) to your Roth IRA, you can access those funds early too. With caveats, of course — this is the IRS we’re talking about, and they don’t make anything simple. 

The IRS requires those converted funds to stay in your Roth IRA for at least five years, or they hit you with a penalty. That means you need to plan ahead if you want to pull out those converted funds before age 59 ½, transferring money over at least five years in advance. 

But converting funds from a traditional retirement account to a Roth account is what accountants call a “taxable event.” In normalspeak, that means you owe income taxes on the money you move from a traditional account to a Roth account. And not at the lower capital gains tax rate either — you owe taxes at your ordinary income tax rate. 

So you need to be careful how much you convert in a single year, so Uncle Sam doesn’t bankrupt you with taxes.

Enter: the Roth conversion ladder strategy. Over the course of several years, you gradually move money from your traditional retirement accounts to your Roth accounts, so that when the time comes, you can yank them out tax- and penalty-free. 

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How a Roth Conversion Ladder Works

If that overview left you with questions, well, you’re not alone. The strategy hinges on several tax rules, and you need to understand them all for the big picture to make sense. 

Roth IRA Contribution & Income Limits 

You can only contribute up to $6,000 per year in IRAs ($7,000 if you’re over 50 and qualify for the extra $1,000 catch-up contribution). That’s a combined limit for both Roth and traditional IRAs. 

It’s hard to get rich investing just $6,000 per year unless you start as a teenager. However, employer-sponsored retirement plans such as 401(k)s, 403(b)s, TSPs, and SIMPLE IRAs allow higher contribution limits each year. Self-employed people can also contribute hefty amounts through SEP IRAs or solo 401(k)s.

If you contributed tens of thousands each year to one of these employer retirement plans, you can roll those funds over to your Roth IRA at any time. 

Roth IRA Conversion

When you roll over money from a traditional workplace retirement account to a Roth IRA, you owe taxes on it. That’s because you didn’t pay taxes on the original contribution, it being deductible. The exception is if you contributed to a Roth 401(k) or Roth 403(b), in which case you already paid taxes on contributions. 

That’s the bad news. The good news is that once in your Roth IRA, your contributions start compounding and growing tax-free. You’ll never owe another cent in taxes on the money in the account, assuming you don’t break the early withdrawal rules. 

Laddering for Penalty-Free Early Withdrawals

Remember, although you can withdraw direct contributions to your Roth IRA any time penalty- and tax-free, you have to wait five years to withdraw rollover transfers. 

Imagine you want to retire early five years from now and use $30,000 from your Roth IRA to help cover your living expenses. To pave the way, you roll over $30,000 from your employer retirement account to your Roth IRA this year, so that it will have sat in the account the requisite five years before you withdraw it. 

Why $30,000, and not just roll over your entire balance now? Because you’ll owe income taxes on every dollar you roll over to your Roth IRA. If you have $150,000 in your workplace retirement account and you transferred all of it at once, you’d owe taxes on that entire amount plus all your other income. It would almost certainly drive you into a higher tax bracket. 

So instead, you transfer $30,000 each year for the next five years. Five years from now, you can pull out the first $30,000 — the one you transferred this year. Each year thereafter, you can pull out another $30,000, because each conversion will have sat in the account for the mandatory five years. 

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How to Set Up a Roth IRA Conversion Ladder for Early Retirement Funds

Each time you convert funds from your traditional retirement account to your Roth IRA, that converted money must sit at least five years. 

That means you have to plan at least five years in advance. Before you do anything else, set a target retirement date. Whether you’re aiming for extreme early retirement or to retire just a year or two before turning 59 ½, you need a timetable to work with. 

Next, plan out how much you want to pull out in Roth IRA withdrawals each year between retiring and reaching age 59 ½. You can reduce the amount of money you need to take from your Roth IRA each year by combining other sources of income, from passive income streams to side hustles to semi-retirement gigs. 

Then check how much you have in your Roth IRA currently. You don’t necessarily need to convert every dollar you plan to withdraw before reaching 59 ½ — you only need to convert the amount that you think you’ll be short. 

Confused? Let’s illustrate how it works with an example.

Sample Roth Conversion Ladder

Say you’ve contributed $50,000 to your Roth IRA to date. You’re 48 now, you plan to retire at age 53, and you want to withdraw $30,000 in each of the six years before you reach 59 ½ and can withdraw money penalty-free from your Roth IRA. 

So, you need $180,000 in combined contributions and converted funds, but you only have $50,000. That makes you $130,000 short (ignoring the returns you’ll earn between now and when you start withdrawing funds, for the sake of simplicity). 

Because you want to start withdrawing money in five years, you should make your first conversion this year. For each of the next six years, you convert $21,667 from your workplace retirement account to your Roth IRA ($130,000 divided by six years equals $21,667). You pay income taxes on this $21,667 each year.

In five years from now, at age 53, you can withdraw your first $30,000 from your Roth IRA tax- and penalty-free. That same year, you’ll continue to convert $21,667 from your traditional account to your Roth IRA, to cover your withdrawal at age 58. 

You’ll do the same thing the following year at age 54, but that’s the last year you’ll have to convert funds. After that, the five year rule no longer matters, because at 59 ½ you can withdraw the money penalty-free anyway. From that age onward, you can just withdraw money without having to keep converting funds. 

As a final twist, imagine that you’re 49 instead of 48, and you want to retire in four years rather than five. You could still do it in this example, because you already have $50,000 in your Roth IRA that you directly contributed. So your first year in retirement, you could pull out $30,000 and not exceed the money you contributed. You still need to start converting money immediately, however, to cover your withdrawals five years from now. 

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Pros & Cons of Roth Conversion Ladders

Like every other financial strategy, Roth conversion ladders have their upsides and drawbacks. Make sure you understand both before starting any financial gymnastics. 

Pros

Why do people do Roth conversion ladders?

1. Avoid Penalties on Early Withdrawals. If you plan on retiring before 59 ½ and most of your savings is tied up in tax-deferred retirement accounts, you’d owe a 10% penalty on any money you withdraw early. By moving money to your Roth IRA, you can sidestep that penalty. 
2. Tax-Free Compounding. Between when you convert funds and when you retire, those funds compound and grow tax-free. Tax-free withdrawals also reduce how much you need saved for retirement. In contrast, you’ll owe taxes on withdrawals from your traditional retirement accounts once you retire, so Uncle Sam gets a cut of your compounded returns. 
3. No RMDs. You don’t have to take required minimum distributions (RMDs) from your Roth IRA, unlike traditional retirement accounts. In fact, you can leave it compounding for tax-free growth if you like and pass it on to your heirs in your estate plan.  
4. Available to High Earners. Roth IRAs come with income limits on contributions. However, high earners can use the backdoor Roth loophole to contribute money to a traditional IRA then convert it to their Roth IRA, dodging the income ceiling. More on this shortly. 

Cons

There’s no free lunch, even when you pull off a clever stunt like a Roth conversion ladder. Watch out for these downsides when attempting this maneuver. 

1. You Owe Taxes Now. You owe income taxes this year on every dollar you convert from a traditional account to your Roth IRA. Converted funds get treated like all the rest of your taxable income, adding to your tax bill. In fact, the IRS expects you to prepay estimated taxes on Roth conversions when you do them, rather than waiting until you file your tax return. Fail to do so and you risk penalties. 
2. Potentially Higher Tax Bracket. Your tax rate may be higher than you’re used to on your earned income, too. A higher taxable income might push you into a higher income tax bracket, where you pay a higher rate on the converted amount than you’re used to paying.
3. Advance Planning Required. Because the tax code imposes a five-year waiting period before you can withdraw converted funds penalty-free, you have to plan your retirement withdrawals years in advance. 
4. Complexity. Roth conversions can get complicated. You may need an accountant’s help to avoid blunders.

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Should You Create a Roth IRA Conversion Ladder?

If you aim to reach financial independence and retire early, a Roth conversion ladder lets you tap into your tax-deferred retirement funds before age 59 ½. 

But for it to make sense, you need either significant funds in a traditional retirement account or the ability to contribute large sums moving forward. If you don’t have much money in traditional accounts currently and don’t have access to an employer retirement account with high contribution limits, then you don’t have much to gain with a Roth conversion ladder. 

Bear in mind that you need your retirement nest egg to last you until you die, not just until reaching 59 ½ or until you start collecting Social Security benefits. Sure, it’s great to maximize your tax-sheltered retirement contributions, but you might need more money saved for retirement than what you can contribute to tax-advantaged accounts. 

Which means you likely need other investments, such as taxable brokerage accounts or real estate investments. And in that case, you may not need to tap your retirement accounts before the retirement age of 59 ½ — you can pull enough money from your other investments to last until then. 

Finally, compare your tax rate now to your expected tax rate in retirement. If you think taxes will go up (a sadly reliable bet), or if you think you will personally be taxed at higher rates in the future, it often makes sense to bite the bullet and pay taxes now rather than in retirement. Young people in particular should consider this, especially given how long their retirement investments have to compound. 

When in doubt, talk to a financial advisor to help you form a personalized plan for tackling retirement.

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Roth IRA Conversion Ladder FAQs

What Is a Backdoor Roth IRA?

A backdoor Roth IRA contribution involves first contributing to a traditional IRA or workplace plan, then converting the money to your Roth IRA. 

Why add the extra step? Because you can’t contribute to a Roth IRA if you earn too much. In 2022, your ability starts to phase out if you earn more than $129,000 ($204,000 for married couples filing jointly). By contrast, you can contribute to a traditional IRA no matter how much you earn however — the income limit on traditional IRAs applies to deducting the contribution, not making it. 

Is There a Limit to How Much I Can Convert Into a Roth IRA Account?

There’s no limit on Roth conversion amounts per se, but you’ll hit other speed bumps. 

First, you can only convert funds that you already contributed to a traditional retirement account. And while contribution limits vary by account, every account does impose annual limits on contributions. 

Second, you have to pay federal income taxes immediately on money you convert from a traditional to a Roth account. Convert too much money in a single year and you’ll owe an enormous tax bill, and possibly drive yourself into a higher tax bracket. 

How Is a Roth IRA Conversion Taxed? 

Amounts you transfer from a traditional to a Roth account get taxed as part of your regular income for the year. For example, if you otherwise have an adjusted gross income of $80,000 and you convert $20,000 to your Roth IRA, the IRS taxes you on $100,000 of income. 

The one difference is that you owe the taxes immediately upon converting the funds, and the IRS expects you to make an estimated tax payment to cover it. 

Does a Roth Conversion Ladder Work With a Roth 401(k) Retirement Account?

Yes, you can roll money over from a traditional 401(k) to a Roth 401(k), but most people prefer Roth IRAs. You get to choose the brokerage, you get complete control over investments, the account isn’t tied to your employer, and you don’t have to take RMDs. 

When Should I Start a Roth IRA Conversion Ladder?

Start a Roth conversion ladder at least five years before you plan to retire to satisfy the five-year rule. Ideally, spread your Roth IRA conversions over as many years as you can in order to minimize your taxes in each year that you convert money. 

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Final Word

Roth IRAs offer the most flexibility of any retirement account. 

You can open them with any brokerage (including robo-advisors) and invest in anything you like. You don’t have to move funds when you change jobs, and you don’t have to take RMDs. Roth IRAs also come with some unique rules, allowing you to withdraw funds early penalty-free for costs like college tuition or buying a home. 

I started gradually moving my money over from my traditional IRA to my Roth IRA, especially when the market takes a nosedive. I plan on continuing to do so until I’ve emptied my traditional IRA entirely. But you have different personal finance needs than I do, so speak with a financial planner or accountant before converting your own retirement savings. 

As supply chain issues and production problems linger, new cars continue to roll very slowly off the assembly line. And that fact continues to push prices higher.

The shortage of new vehicles means dealers are pricing their inventory higher — an average of 10% above the manufacturer’s suggested retail price, according to a new iSeeCars analysis.

While some might view such tactics as price gouging, there is actually a reasonable explanation behind the price hikes, says Karl Brauer, iSeeCars executive analyst:

“Dealers have responded to market conditions by pricing cars above MSRP making a higher profit on specific models to help offset lower sales volumes from restricted new car production.”

Although 10% is the average markup, some cars are selling with significantly higher markups. They include:

• Jeep Wrangler: 24.4% above MSRP
• Porsche Macan: 23.1%
• Genesis GV70: 22.4%
• Lexus RX 450h: 21.9%
• Ford Bronco: 21.6%
• Jeep Wrangler Unlimited: 20%
• Cadillac CT5: 19.9%
• Porsche Cayenne: 19.6%
• Chevrolet Corvette: 19.5%
• Mercedes-Benz GLB: 19%
• Mini Hardtop two-door: 18.8%
• Lexus RX 350L: 18.8%
• Jeep Gladiator: 18.5%
• Ford Maverick: 18.4%
• Genesis GV80: 18%

Brauer says the bottom line is that if you are shopping for a new vehicle, you may struggle to find a lot of options and should expect to pay more for cars that are in high demand.

He suggests doing a lot of research and then comparing prices among multiple dealers. He also notes that you might be able to “avoid markups by ordering directly from the manufacturer.”

For more tips on keeping costs reasonable, check out “8 Tips for Buying Your Next Car for Less.”

Costco has released its latest monthly deals — dozens of discounts worth thousands of dollars in savings.

They’re available Sept. 28 through Oct. 23, although some of these deals are available in clubs only or online only.

Here are some examples of the discounts available right now, just to name a few:

To view all discounts available this month, visit Costco’s “Member-Only Savings” webpage.

No coupon clipping is necessary to snag these deals.

If you shop at a Costco club, you will see these discounts noted on price tags and automatically deducted at the register.

If you shop online, you will see the discounts noted in item descriptions and automatically deducted from the price listed.

For more tips like this, check out “11 Ways to Save Even More Money at Costco.”

It can be tempting to cut and run when you quit a job – especially if you’re leaving a particularly nasty situation. But if you have an investment account tied up with that employer, it’s important to transfer those funds as soon as possible.

Rolling over a 401(k) is relatively easy, but there are a few things you should know beforehand. We’ll break down the details in the article below.

Why You Should Roll Over a 401(k)

One of the main reasons to roll over a 401(k) is because you might forget about the account. If you switch jobs every few years and never roll over your 401(k)s, you may end up with multiple retirement accounts which can be hard to manage.

Also, some companies will charge an extra fee if you have a 401(k) but are no longer an employee. If you have less than $5,000 in your 401(k), the company may force you to move the funds elsewhere.

What to Know When Rolling Over a 401(k)

Rolling over a 401(k) isn’t as easy as it should be. Read below for the important things to know beforehand.

Decide where to roll over your 401(k)

You generally have two options when deciding where to roll over your 401(k): a new 401(k) at your current employer or an Individual Retirement Account (IRA). An IRA is a retirement account that anyone can open without needing access to their employer. 

If you deposit the funds into your new 401(k), it may be easier to manage one singular retirement account. But you will likely have more investment options and possibly fewer fees if you roll over the money into an IRA. Also, an IRA may have fewer fees than a 401(k), so you’ll reap more of the rewards of investing.

Opt for a direct rollover

Some 401(k) companies will let you initiate a direct rollover where the money is sent to your new account. The funds will be transferred without you having to manually deposit a check.

A direct rollover is much easier to handle than a manual rollover. Make sure you find out if this is an option. 

Be aware of the timeline

If you cannot do a direct rollover, then the 401(k) company will send you a check that you can deposit toward your new 401(k) or IRA. Then, you will have 60 days to deposit the funds.

If you miss that deadline and are younger than 59.5, the money will be treated as an early withdrawal. You will then have to pay a 10% penalty and income tax. If you have a Roth 401(k), you will only owe taxes on the earnings portion and not the contributions. As soon as you receive the check, deposit it immediately. 

Invest the funds

When you initiate a 401(k) rollover into a different retirement account, consider investing the funds. If you don’t, the money will sit in the money market portion, where it won’t grow in the stock market.

This is a common mistake that can result in you missing out on thousands or more in earnings. Once you move the funds, you can then set up automatic monthly contributions.

Deposit into the right account

There are two types of 401(k)s and IRAs: Roth and traditional. Generally, most people will deposit a Roth 401(k) into a Roth IRA and a traditional 401(k) into a traditional IRA.

If you deposit a traditional 401(k) into a Roth IRA, you will have to pay taxes on that amount. Depending on how much you transfer and your current tax rate, you may wind up with a large tax bill. 

If you deposit a Roth 401(k) into a traditional IRA, you’ll be giving up the tax-free withdrawals in retirement. Before you transfer the funds, make sure to roll it over into the right account.

When You Shouldn’t Roll Over a 401(k)

One time when you should consider avoiding rolling over your 401(k) is if you want to retire early. Investors can access their 401(k)s starting at age 55 without paying a 10% early withdrawal penalty. For example, if you withdraw $50,000, you won’t have to pay a $5,000 fee.

If you roll over the money from a 401(k) to an IRA, you will then have to wait until you turn 59.5 to access the funds without a fee. 

Why You Should Never Cash Out a 401(k)

It may be tempting to cash out the funds, especially if you don’t have a large sum of money. But the consequences may be more dramatic than you realize. You will likely have to pay a 10% early withdrawal penalty as well as income tax. You can use an early withdrawal calculator to see exactly how much you’ll likely pay.

Also, when you withdraw funds, you will no longer be earning money in the stock market. This could cause you to miss out on decades of compound interest, depending on when you cash out your 401(k).

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While Cancel For Any Reason travel insurance has been around for many years, many people first discovered it since COVID-19 affected their travel plans. As people canceled their travels due to border closures or pandemic fears, only travelers who had Cancel For Any Reason travel insurance were able to recoup non-refundable costs.

Now, a CFAR insurance policy is necessary to get reimbursed if you don’t want to travel for fear of contracting COVID — or for any other reason not covered by traditional travel insurance policies.

We’ve narrowed down the best Cancel For Any Reason travel insurance plans to include international and domestic travel, families, cruises, adventure, and seniors.

The Best Cancel For Any Reason (CFAR) Travel Insurance

Typically, travelers add CFAR upgrades to eligible policies for an additional fee. CFAR allows the traveler to cancel the trip without specifying a reason and still receive up to a 75% reimbursement of their nonrefundable trip costs.

Not every CFAR plan is identical, but typically when buying a CFAR policy, you must:

• Cover all prepaid trip costs
• Buy within 10 to 21 days of making your first deposit on nonrefundable travel
• Pay an additional premium for the coverage

Our pick for overall best Cancel For Any Reason (CFAR) travel insurance is Trawick International Safe Travels First Class. It provides comprehensive travel insurance at a reasonable price when adding Cancel For Any Reason.

The other policies mentioned on this list are also comprehensive and may be more cost-effective for specific situations, such as domestic travel. All of the policies have time-sensitive periods, meaning you should buy them early in your trip planning process while you’re still eligible for CFAR. 

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Best Overall: Trawick Safe Travels First Class with CFAR

Trawick International Safe Travels First Class is a mid-tier plan that offers one of the best 75% reimbursement CFAR values. It balances robust medical insurance and emergency medical evacuation benefits, a healthy list of covered cancellation reasons, and a reasonably priced CFAR premium. Although the cost increases by approximately 58% when adding CFAR, the rates are more competitive than other policies.

Trawick First Class with CFAR is a reliable choice for most trip types if you need travel assistance while away from home or making a claim when you return. The product provides comprehensive coverage without paying the higher price of the most expensive policy. 

I can speak from personal experience that filing a claim with Trawick was uncomplicated and I did not have to constantly remind the insurer how long it had been since I sent the claim. Trawick paid the entire claim without a fuss when I canceled a cruise because my mother died.

Trawick First Class has some notable features: 

• Optional upgrades for CFAR and rental car damage
• CFAR time sensitive period: 10 days
• $150,000 in medical insurance
• $1,000,000 in evacuation coverage
• Preexisting condition waiver
• Trip delay, baggage loss, damage, and delay, accidental death and dismemberment (AD&D), missed connection, rental property damage all included
• 10-day free look period in most states

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Best for International Travel: John Hancock Silver with CFAR

When traveling abroad, it’s important to have good medical insurance and evacuation because medical costs can be very unpredictable.

John Hancock Silver with CFAR is competitively priced and includes strong medical and travel inconvenience benefits. For example, its $100,000 medical insurance is primary coverage, meaning it pays before your health insurance. If you think dealing with your health insurance provider is a headache at home, you can imagine trying to get help when you’re overseas.

Silver only requires a three-hour delay before it starts covering food, a hotel, and transportation.

Additional features:

• $100,000 in primary medical insurance
• $500,000 in medical evacuation coverage
• Optional upgrades for CFAR, rental car damage, and increased AD&D
• CFAR time sensitive period: 10 to 14 days (state dependent)
• Trip delay is only three hours (versus six or 12 hours with most other insurers)
• $1,000 for baggage loss/damage coverage
• Preexisting condition waiver
• 14-day free look period in most states

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Best for Domestic Travel: John Hancock Bronze with CFAR

Some people buy CFAR insurance when traveling domestically because they’re not sure if the trip will happen or they may not want to go. When buying CFAR travel insurance for domestic trips, you want to look for strong cancellation, trip interruption, trip delay, and baggage insurance. 

Although you may not need much medical insurance, it’s always a good idea to have some travel medical insurance and evacuation coverage. These benefits cover your out-of-network health insurance deductible and the cost of a ride home if your trip doesn’t go as planned. 

Imagine hiking in Yosemite, breaking an ankle and requiring an air evacuation and surgery. Good travel insurance policies — like John Hancock Bronze — cover that.

John Hancock Bronze is a comprehensive travel insurance plan with optional Cancel For Any Reason coverage and favorable trip delay and trip interruption benefits. The Bronze’s CFAR rates are competitive and don’t require you to buy the most expensive policy. 

Additional features:

• A.M. Best rated A
• Optional upgrades for CFAR, rental car damage, and increased AD&D
• CFAR time sensitive period: 10 to 14 days (state dependent)
• 150% trip interruption reimbursement
• Trip delay is only three hours, quicker than most insurers
• $750 baggage loss/damage
• Preexisting condition waiver
• 14-day free look period in most states

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Best for Families: Travel Insured International Worldwide Trip Protector with CFAR

Several CFAR policies like Travel Insured Worldwide Trip Protector cover children at no extra cost for each adult covered under the policy.

Additionally, when traveling with children, most travel insurance policies provide medical evacuation coverage that pays for a family member to come get children or provide a chaperone to return a child home if all adults are hospitalized.

Worldwide Trip Protector offers optional Interruption For Any Reason (IFAR) coverage. With IFAR, you can end the trip early for any reason. Maybe your pet sitter has an emergency and can’t watch the animals anymore, or you’re traveling with a special needs child and realize the trip isn’t working out as planned.

Additional features:

• Optional coverage upgrades AD&D, event tickets, rental car damage, travel inconvenience, and bed rest
• CFAR time sensitive period: 21 days
• $100,000 in medical insurance
• $1,000,000 in evacuation coverage
• Preexisting condition waiver
• 100% reimbursement for cancellation due to work, job loss, extended school year, military leave revoked
• 14-day free look period in most states

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Best for Cruises: John Hancock Silver with CFAR

Travelers going on cruises have unique situations. The cost of medical treatment on board a cruise ship is very expensive, and so is an air evacuation. If you have a heart attack on board, the costs to get you to dry land for treatment will probably dwarf the cruise fare price.

John Hancock Silver is a great choice for cruises because of its high medical and evacuation coverage and short (three-hour) delay to qualify for Missed Connection and Trip Delay benefits.

For example, suppose your flight is delayed coming into the port, or you are involved in a car accident en route and the ship leaves without you. Then, trip delay, missed connection, and trip interruption benefits reimburse you for the lost cruise days, additional transportation and lodging costs.

When you add CFAR into the mix, it can get complicated because people often don’t think about insuring the cost of the cruise until the final payment is due. However, in most cases, when you paid the initial deposit months ago, the window to buy CFAR began immediately and ended within three weeks.

Additional features:

• $100,000 in primary medical insurance
• $500,000 in evacuation coverage
• Missed connection covers $750 per person after a three-hour delay
• Trip delay covers $750 per person after a three-hour delay
• 24/7 AD&D protection
• Optional upgrades for CFAR, rental car damage, increased AD&D
• CFAR time sensitive period: 10 to 14 days
• Preday free look period in most states

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Best for Adventure Travel: Battleface Explorer with CFAR

If you’re planning activities like white water rafting, mountaineering, rock climbing, skydiving, or other adventures, most CFAR travel insurance excludes all coverage like trip cancellation, trip interruption, and medical insurance.

However, few plans with CFAR also include adventure and extreme activities. You’ll need to request adding the Adventure Sports coverage when you buy the policy and pay the additional premium. Battleface Explorer has both a 75% CFAR reimbursement option and adventure sports waiver. When buying the policy, you’ll need to ask for both upgrades.

Adding the adventure sports waiver is important because most policies exclude medical treatment for injuries sustained during adventure activities — like breaking an arm while rock climbing.

AIG Travel Guard Preferred and Deluxe are an honorable mention because they also have optional Adventure Activities and Extreme Activities Waiver upgrades that remove the policy exclusions for those activities. However, since the pandemic began, AIG only offers a 50% CFAR reimbursement.

Additional features:

• $100,000 in primary medical insurance
• Optional upgrades for rental car damage, sportsman’s equipment, search and rescue, vehicle return upgrade, increased AD&D
• CFAR time-sensitive period: 15 days
• Preexisting condition waiver
• 10-day free look period in most states

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Best for Seniors: Trawick Safe Travels First Class with CFAR

For senior travel abroad, the greatest financial risk is a possible medical emergency while traveling, like a heart attack, stroke, or accidental injury. Ultimately, treatment and transportation costs can significantly exceed the trip cost. 

So it’s important for seniors to have a CFAR travel policy with strong medical insurance, emergency medical evacuation, and a pre-existing condition waiver.

Trawick First Class with CFAR has a generous $150,000 medical coverage limit, $1,000,000 evacuation, a preeexisting condition waiver, and an affordable CFAR premium. 

And whatever your medicare supplement or Medicare Advantage plans don’t cover, First Class covers up to an additional $150,000. For example, Medicare doesn’t cover air evacuations to get you home after stabilizing treatment elsewhere — First Class does.

Additional features:

• Optional upgrades for rental car damage
• CFAR time sensitive period: 10 days
• Trip delay, baggage loss, damage, and delay, AD&D, missed connection, rental property damage all included
• 10-day free look period in most states

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Best Travel Insurance Comparison Site: Squaremouth

Squaremouth is a travel insurance comparison site. It also offers white-label travel insurance brands like Cat 70 and TinLeg, both underwritten by Starr Insurance Company.

Although there are many comparison sites to choose from like InsureMyTrip, Aardy, and TravelInsurance.com, we like Squaremouth’s variety of policy options and comparison interface. You can get a full rundown of each policy’s benefits with a click of a button and view the policy certificate for a deeper dive. They also have comprehensive sorting and filtering features so you can find the exact coverage you need, like Cancel For Any Reason.

My experience buying a policy from Squaremouth was quick and easy. They provided an email receipt with an overview of my new policy. When I canceled during the policy’s free look period, they weren’t fast to respond to email, but the agent on the phone answered immediately and resolved the cancellation without any hassle.

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Methodology: How We Select the Best CFAR Travel Insurance

We use five primary factors to evaluate the best CFAR travel insurance coverage for our users. Elements include the benefit amount, cost, whether the policy includes a preexisting condition waiver, the maximum trip cost you can cover, and levels of medical insurance and evacuation.

In addition, because travelers sometimes encounter trip delay or missed cruise situations, we’ve also considered the additional benefits each policy provides.

Cancel For Any Reason Benefit Amount

Buying a Cancel For Any Reason travel insurance policy with a 50% benefit doesn’t always make sense. We focused on policies that reimbursed 75% of trip costs under CFAR .  

Cost to Add Cancel For Any Reason

Cost is one of the most significant factors when choosing CFAR because the add-on typically increases your insurance cost by 40% to 50%. Because CFAR is usually an identical benefit across most policies, the policy differences, like trip delay or medical insurance, can play an important role in the overall value of the policy. 

While choosing the cheapest CFAR insurance can be tempting, picking the best policy for your needs can mean the difference between a covered or denied claim.

Preexisiting Condition Coverage

Making sure your CFAR travel insurance includes pre-existing medical condition coverage can be a critical factor for claims. Unfortunately, not every CFAR travel insurance covers preexisting conditions. This includes otherwise excellent policies, such as Seven Corners Round Trip Basic with Cancel For Any Reason. 

While the CFAR coverage can help you cancel a trip due to a pre-existing condition, the more unpleasant situation is having a medical emergency linked to a pre-existing condition during the trip and risking no coverage.

Maximum Covered Trip Cost

If you’re taking the trip of a lifetime with a high price tag, the maximum covered trip cost may limit how much CFAR coverage you can buy. Fortunately, most policies cover up to $50,000 or more in total nonrefundable trip costs.

Medical Insurance and Emergency Evacuation Coverage

When traveling domestically, you want to get enough medical insurance to cover your out-of-network deductible. 

But when traveling overseas, health insurance can get a lot more uncertain — and a lot more expensive. So it’s important to cover at least $50,000 or $100,000 in travel medical expenses and $250,000 in medical evacuation expenses to get you home after an emergency.

That said, some travelers buy the cheapest CFAR and buy a second policy like IMG iTravelInsured Travel SE for its extra medical benefits. But many prefer the simplicity of having one policy, so we included medical benefits in our evaluation of CFAR insurance options.

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CFAR Travel Insurance FAQS (Frequently Asked Questions)

Still have questions about CFAR policies and benefits? No worries — travel insurance is complicated, and CFAR especially so. Below, we answer some of the most common queries about CFAR coverage and travel insurance in general. 

What is Travel Insurance?

Travel insurance covers the costs and losses associated with travel. Comprehensive travel protection policies typically include:

• Covered cancellation reasons
• Covered trip interruption reasons
• Medical insurance
• Medical evacuation coverage
• Trip delay
• Baggage delay
• Baggage loss or damage
• Accidental death and dismemberment

How Do I Buy Cancel For Any Reason Travel Insurance?

You can typically buy Cancel For Any Reason travel insurance if you meet the following requirements:

• The policy must offer a CFAR option.
• Buy within the time sensitive period, usually within 10 to 21 days of your initial trip payment.
• Pay the additional cost for CFAR.
• Cover all non-refundable trip costs.
• Use CFAR to cancel 48 to 72 hours or more before the departure date.

Before you buy, make sure CFAR is available in your home state. Residents of some states, including New York state, may not be eligible for CFAR at all.

Does Cancel For Any Reason Travel Insurance Cover COVID?

CFAR is great for helping you cancel your trip for fear of contracting the novel coronavirus (COVID-19). Cancellation for fear of travel is not a covered circumstance on any policy, which is one of the ways CFAR helps travelers.

However, you don’t need CFAR to get a refund on travel canceled because you actually contracted COVID-19. Your standard travel insurance policy will cover a diagnosis of COVID-19 the same as any other illness. 

For example, suppose you have a fever the day of travel, see a doctor, and they advise you not to travel. That would be a standard trip cancellation and you would not need CFAR.

What Is the Difference Between Cancel For Any Reason Insurance and Trip Cancellation Insurance?

Standard trip cancellation coverage has a list of specific reasons permitting you to cancel your trip for a refund. Otherwise, if you cancel for a reason not named on the list, you need to use Cancel For Any Reason to claim a reimbursement.

Can I Buy Travel Insurance and Then Cancel?

Yes, but you will lose money on the trip cost and premium amount. CFAR travel insurance only reimburses a portion of your trip cost, between 50% and 75% – never 100%.

However, if you cancel for a covered reason — like a traveling companion is too sick or injured to travel — then you’ll get back your entire nonrefundable outlay.

Is Cancel For Any Reason Insurance Expensive?

Adding Cancel For Any Reason to an eligible policy typically increases the cost by 40% to 50%.

Does Cancel For Any Reason Travel Insurance Cover Everything?

Almost. CFAR makes it very easy to cancel your trip before your departure for a non-covered reason, such as a natural disaster in a country not listed on your itinerary. 

However, CFAR does not apply during your trip unless your policy also has Interruption For Any Reason (IFAR).

A few policies like IMG iTravelInsured Travel LX include IFAR with the CFAR premium. Others, such as Seven Corners RoundTrip Basic, RoundTrip Choice, and Travel Insured Worldwide Trip Protector, provide it for an additional fee.

Can I Buy Cancel For Any Reason Insurance If I’m Not Traveling?

Yes, you can buy travel insurance for someone else. For example, if your children or parents are traveling and find travel insurance too complex to understand, you can buy the policy for them and name them as the covered travelers regardless of who pays for the trip or insurance.

Can I Buy More Than One Travel Insurance Policy?

Yes, you can. Suppose your trip cost exceeds the maximum that the CFAR plan offers. Then you can buy multiple policies to cover the full cost of the trip or get additional benefits. However, you can’t file duplicate claims on both policies because that could constitute insurance fraud.

Likewise, you can buy a lower priced CFAR policy primarily to cover your trip costs, and a standalone medical policy like IMG iTravelInsured Travel SE, Travel LX or a John Hancock plan to have higher medical benefits without paying the higher price of having them all combined. These products can cover preexisting conditions without including the trip cost.

Does My Credit Card Have Cancel For Any Reason Travel Insurance?

No, credit cards do not provide CFAR travel insurance. It’s a more specialized type of coverage.

Typically, credit cards like the Chase Sapphire Preferred and Reserve cards provide basic trip cancellation like if there’s a death in the family, or a traveler gets sick or injured. Most also have preexisting condition exclusions and many travel insurance policies cover them if you buy the plan within seven to 21 days of your initial payment.

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How to Choose the Best CFAR Travel Insurance

Cancel For Any Reason travel insurance is going to be similar no matter which company you choose. It’s the other policy benefits in the policy, such as medical insurance or travel delay benefits, that can steer you toward different plans. Even if cancellation is your primary concern, don’t overlook these other perks — nor any fine print exclusions.

I’ve purchased CFAR insurance several times for peace of mind, mostly when my mother’s health or my companion’s interest in travel was in question. I’ve never regretted it. However, I can tell you that the insurance company you choose makes a big difference in how fast you get paid or whether you get pushback when filing a claim.

As with most significant purchases in life, use the experience of friends, family, neighbors — and, yes, random online reviewers — to inform your decision-making process and find the best policy for your next trip.

When planning a big trip, you might consider getting Cancel for Any Reason travel insurance, or CFAR.  

Whether you’re unsure about finances, travel conditions, exposure to illness, or anything else, CFAR policies provide protection when you’re concerned about cancellation for something standard policies don’t cover.

While having the ability to cancel a trip for any reason and get your money back sounds appealing, there are some drawbacks to CFAR policies. Thus, you’ll want to ask a lot of questions about it and decide if it’s worth the cost to cover your trip.

Here’s my take on CFAR trip cancellation coverage as someone who has bought, made claims against, and sold travel insurance. 

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What Is Cancel for Any Reason (CFAR) Travel Insurance?

Cancel for Any Reason travel insurance is an optional cancel upgrade allowing you to cancel your trip for any reason that the policy doesn’t otherwise cover. 

For example, suppose you booked a cruise to visit the eastern Caribbean. But then, a hurricane made ports inaccessible, so the cruise line changed it to a western Caribbean itinerary, and now you don’t want to go because you’ve already been to that part of the world.

If you have the Cancel For Any Reason benefit, that’s not a problem. This type of travel insurance plan gives you the highest level of cancellation flexibility — you can cancel your trip just because. But though it has virtually no exclusions, it comes with a higher premium cost and some key rules to activate the coverage.

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How CFAR Travel Insurance Works

When you buy CFAR travel insurance, you can cancel the trip for any or no reason at all. However, while a covered trip cancellation pays a 100% refund, CFAR reimbursement is between 50% and 75% of the covered trip cost.

Adding CFAR to your travel protection policy adds an extra 40% to 50% to your policy premium. The exact cost varies by insurance company.

Before you assume you’re eligible for CFAR, check that your insurer actually offers it and that it’s available in your area. Not every policy or insurance company offers CFAR, and residents of some states, like New York and Washington, may not be eligible at all. 

Likewise, some insurers may offer CFAR with one travel insurance product but not another even though both are sold in the same state. Always read the fine print on your policy and ask your agent or the insurer’s customer support team if you’re not sure whether you can add CFAR coverage.

CFAR Eligibility Requirements

Typically, CFAR plans require that you:

• Buy the policy with CFAR upgrade within 10 to 21 days of booking
• Cover the total trip cost
• Cancel the trip at least two or three days before the departure date

Let’s take a more detailed look at each of these stipulations.

Buy Early

If you’re considering CFAR, buy it as soon as you start making hotel reservations, booking flights, or paying deposits. If you book a deposit on a trip you’re not sure you want to take and put off buying travel insurance until the final payment is due, you could be out of luck.

Because each insurer’s time frame varies between 10 and 21 days, check the policy’s timeline before booking travel arrangements.

Cover Full Trip Cost

You don’t need to estimate the full trip cost if you only paid a deposit and still have a final payment and flights to add later.

However, once you start paying for other non-refundable arrangements, you must add those costs to the CFAR policy within 14 to 21 days of each subsequent payment. Increase the policy coverage as you go. Insurers may deny a claim if you only covered the deposit and not the final payment.

Covered travel arrangements may include airfare, hotels, cruises, excursions, train passes, rental cars, and transfers. Check with your insurer to find out what you can cover and how long you have to add the costs to the policy.

Cancel Early

CFAR insurance won’t help if you cancel at the last minute. Notify your travel providers at least two or three days before your scheduled departure that you need to cancel. Check your policy for the exact requirements.

What CFAR Covers

Cancel For Any Reason is designed to fill the gap between covered reasons and all other reasons for canceling your travel plans.

When you buy travel insurance with CFAR, you still have access to the covered cancellation reasons like illness or death in the family. If a covered situation occurs, you can still file a claim for a 100% refund.

CFAR provides an additional layer of protection if something happens that’s not named in the policy — or you simply decide you don’t want to travel anymore. In such cases, you can still get a partial refund if you cancel the trip.

CFAR Reimbursement

CFAR never reimburses 100% for cancellation. Only a covered cancellation has a 100% reimbursement. Most policies refund 75% of your trip costs, although a handful return just 50%.

If your tour, cruise or flight provides a future credit voucher for cancellation, insurers consider that reimbursement. Thus, if you file a CFAR claim, make sure to refuse or void those vouchers and provide the insurer with documentation proving you’ve done so. 

Filing a claim for CFAR is straightforward. Provide statements and receipts showing how much money you paid and lost on the trip expenses. There’s no need to provide additional documentation like a doctor’s report or medical records, unless you canceled for a medical reason. If you did, the insurer might reimburse your full trip costs.

CFAR vs IFAR

Some Cancel for Any Reason policies also have an Interruption for Any Reason (IFAR) benefit. While CFAR lets you cancel and receive a 75% refund in most cases, IFAR lets you return from a trip early and receive a 75% refund of the unused prepaid trip costs. 

For example, suppose you booked a two-week resort stay. After four days, you decide the resort doesn’t live up to the promises its website made and want to return home immediately. Since the trip already started, CFAR expired and standard travel insurance doesn’t cover this situation. Instead, IFAR gives you the flexibility to end a trip prematurely and get some money back.

Some policies include IFAR with the CFAR add-on by default, such as Travel Insured International Worldwide Trip Protector and IMG iTravelInsured Travel LX. 

Alternatively, Seven Corners RoundTrip Choice has the option to add either CFAR, IFAR, or both. Its IFAR fee is a nominal 3% fee compared to the 42% CFAR upcharge. 

Finally, you must get IFAR shortly after your initial trip deposit, just like CFAR. Typically, you must be at least two to three days into your trip to use IFAR. Again, always look at the policy’s fine print. Some insurers like Nationwide don’t offer IFAR with every CFAR option, and many cap the IFAR benefit between $250 or $1,000. 

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Pros & Cons of CFAR Travel Insurance

Weighing whether CFAR travel insurance is right for your trip is an important process. These are a few of the pros and cons to consider.

Pros	Cons
You don’t need a reason to cancel	Must buy early
Easy claims process	Expensive
Some CFAR plans also have IFAR	Must cover the total trip cost
Reimburses 100% for covered cancellations	Not all states allow CFAR plans
Maximum peace of mind	Partial reimbursement for cancellations not covered by standard trip insurance (50% to 75%)

Pros of CFAR Coverage

No one wants to cancel a trip. But if you need to cancel for a reason not covered by your standard trip cancelation coverage, CFAR can help. Here’s why you might want the added travel protection. 

1. You Don’t Need a Reason to Cancel. Whether you have a good reason or just don’t want to travel, CFAR does not require you to have a reason to cancel. You just have to follow the guidelines about when to buy the policy and cancel your trip.
2. Easy Claims Process. Because CFAR does not require you to justify why you canceled, you do not need to contact medical, legal or government offices to get documentation. 
3. Some Plans Have Interruption for Any Reason. Some insurance companies also include IFAR with their CFAR upgrade. If you are on a trip and want to return home early for a reason not covered in the policy, IFAR provides a partial reimbursement.
4. Reimburses 100% for Covered Cancellations. When you buy a CFAR upgrade, it does not override the covered cancellation reasons. CFAR acts as a catch-all if you cancel for some reason not already named in the policy. If a family member dies unexpectedly, it’s covered.
5. Maximum Peace of Mind. CFAR gives concerned travelers the maximum peace of mind knowing they won’t lose all of their money for a non-covered cancellation if the trip does not look feasible.

Cons of CFAR Coverage

CFAR travel insurance might be right for some trips, but not others. These are the biggest drawbacks of this type of trip insurance.

1. Must Buy Early. CFAR benefits are time-sensitive, so you must commit to buying it when you initially buy the travel insurance policy and as soon as you make the initial trip payment. You can’t upgrade to CFAR later because you suddenly have a potential cancellation you want covered.
2. Expensive. Adding CFAR to your travel insurance can increase your premium by 40% to 50%. Before enrolling, ensure it makes sense for your trip.
3. Must Cover All Prepaid Travel Costs. CFAR does not allow you to cherry pick which travel costs you want to designate as CFAR. It’s all or nothing. Thus, if you’re only concerned about being able to cancel a cruise and not the flights, you’ll have to cover everything.
4. Not All States Have CFAR. CFAR is not available in all states. Also, it’s common for insurers to offer CFAR in some states and not others. 
5. Partial Reimbursement. You won’t get 100% of your money back with CFAR. It only provides a partial reimbursement between 50% and 75% of your trip costs.

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Do You Need CFAR Travel Insurance?

Although I don’t always opt for it, I’ve bought CFAR travel insurance for several trips and I’m always glad I did. 

When I planned a family holiday cruise 10 months ahead of sailing, I wanted CFAR. Coordinating six people’s schedules comes with uncertainty in the best of times. In my case, it definitely paid off. 

The coronavirus pandemic started up a month after I paid the deposit. Even after postponing the trip a year and a half, we decided it was still too risky to travel for fear of my mother getting COVID-19, so we canceled. When I filed the claim, I only had to prove what I paid and how much was lost. 

If the pandemic has taught us anything about travel risks, it’s that anything can happen and none of it’s foreseeable:

• Fear of pandemics
• Fear of travel
• War
• Mental illness that does not qualify for a covered cancellation — usually, the insurer wants proof of hospitalization
• Political upheaval
• Logistical issues, such as not being able to find a pet sitter
• Bad weather
• Losing your job and wanting the money back — though some standard travel insurance policies do cover job loss
• Changing your mind about the trip for financial or any other reason

Be sure to check the policy’s covered cancellation reasons before buying. Some comprehensive travel insurance plans like AIG Travel Guard Deluxe, Travel Insured Worldwide Trip Protector, and IMG iTravelInsured Travel LX cover dozens of cancellation reasons like cancel for work, natural disasters, extended school year, hurricanes, job loss, and more. If your concern is already covered, you may not need the CFAR upgrade.

For example, some policies include cancellation for inclement weather like hurricanes that could ruin your week-long beach vacation at the Outer Banks. Others allow canceling for work but have requirements like being full time at the same employer for at least two years.

Perhaps you’re selling your house and don’t want to miss your closing. Or your travel plans are far in the future and you’re not certain you’ll be in the same financial position by then. Or you’re planning to travel with someone who’s been known to back out of trips at the last minute.

No matter the reason, if your travel plans have any elements of uncertainty, CFAR offers absolute peace of mind and flexibility for your travel investment.

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How to Buy CFAR Travel Insurance

Whether you buy travel insurance directly from the insurer or a travel insurance comparison site, the prices will be the same. However, you can compare different insurers’ prices for similar policies using a comparison site and save money on a less expensive CFAR plan.

Make sure to toggle the CFAR option when doing a quote to get an accurate price. Alternatively, you can call customer service for quote help and to ask questions about CFAR.

Since not every insurer and state offers a CFAR option, check for availability before buying the policy. 

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Cancel for Any Reason Travel Insurance FAQs

Buying travel insurance can be complex and confusing, so you may have additional questions. These are some of the most common ones.

What’s the Difference Between CFAR & Regular Travel Insurance?

Standard travel insurance policies include a list of reasons you can cancel, such as for an unexpected injury, illness, or death in the family. However, if the situation causing cancellation is not covered, CFAR can protect you in that scenario, provided you meet the requirements for coverage.

How Much Does Cancel for Any Reason Insurance Cost?

Expect to pay 40% to 50% more for CFAR travel insurance coverage above a standard policy. 

Does CFAR Insurance Cover COVID-19-Related Trip Cancellation?

Yes, CFAR insurance covers COVID-19 if you are afraid to travel and potentially contract the illness.

However, standard travel insurance usually covers COVID-19 the same as an unexpected illness. Then, if you are diagnosed with it before traveling and must cancel, or get sick during the trip and require medical treatment and isolation, the policy covers it.

What’s Interruption for Any Reason Insurance?

A few CFAR policies also include Interruption for Any Reason when you buy the CFAR upgrade. The Interruption for Any Reason benefit is useful if you’re at least three days into your trip and decide to go home early for any reason not covered by the trip interruption benefit. Then, the policy refunds 75% of the unused costs of the trip.

What’s the Best Cancel for Any Reason Insurance?

Because CFAR payouts can range from 50% to 75% of your trip costs, it’s usually better to opt for the higher payout, particularly if your trip is expensive.

You can compare prices for CFAR plans at travel insurance comparison sites like InsureMyTrip, Squaremouth, Aardy, and TravelInsurance.com.

Prices can range greatly. To find the best policy for your needs, be sure to compare other benefits the policy covers medical expenses, emergency medical evacuation, and covered cancellations.

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Final Word

The times I’ve bought CFAR policies were when I’ve planned trips far in advance or traveled with unpredictable traveling companions. In the end, I’ve been relieved every time I’ve bought it — whether I needed it or not.

If you’re considering CFAR travel protection, conduct some due diligence before commiting to a policy. 

First, call a licensed insurance agent to ask specific questions about which plan is the best travel insurance for you. 

For example, if you have a senior pet and are concerned they might get sick or die before or during your trip, you might not need CFAR. There are a handful of policies that now cover pet illness since it’s such a common request. Your agent should be well-versed in the details of their policies and can tell you which plans would cover this without buying CFAR.

Second, look at the policy document for the policy you’re interested in. If the agent says a specific policy covers cancellation because an adoption agency notified you a child was available at the last minute, pull up the policy certificate for your state and verify it yourself. Be aware that every company words things differently and may have slightly different requirements.

Finally, compare CFAR plans and prices from multiple insurers. If you need CFAR and not medical insurance, some insurance providers also offer CFAR upgrades on their lower-cost plans like Seven Corners and John Hancock. You could save hundreds by getting a more basic plan instead of the most comprehensive policy.

If you buy a CFAR plan and decide you don’t need it, you can usually get a full refund on the policy if you cancel it during the free look period — usually within 10 to 15 days of purchase.

“Canada leads the U.S. and leads the world in the sense of broad retail availability. Our innovation was to embed the structure in a mutual fund,” says Stark. Think of Purpose’s product as a lower-case tontine, and Guardian Capital’s as a tontine with a capital T. Guardian Capital confirms that securities regulators in all Canadian provinces have given it the required “exemptive relief” under N181-102 (which lets it redeem at values other than NAV) and have all signed the prospectus issuing the securities. 

In fact, Purpose is welcoming the competition from Guardian Capital. One unicorn product is hard to get our heads around, but two suggests a trend that the public can latch on to. Canada is well ahead of the United States in offering these types of commercial tontine products, says Stark, and Purpose is exploring with U.S. regulators taking the concept south of the border. 

Where to buy tontines in Canada

For retail investors, the main and perhaps only way to buy these types of tontine-like products—including Purpose Longevity Fund or the three new solutions from Guardian Capital—is through dealers licensed to sell mutual funds (MFDA and IIROC) across Canada.   

Guardian Capital’s Modern Tontine

Guardian Capital hints at innovation with its new tontine. “With our modern tontine, investors concerned about outliving their nest egg pool their assets and are entitled to their share of the pool as it winds up 20 years from now… Over that 20-year period, we seek to grow the invested capital as much as possible to maximize the longevity payout,” according to Guardian Capital’s Gordon in a press release.    

How it works: 

Investors who redeem early or pass away leave a portion of their assets in the pool to the benefit of surviving unitholders, boosting the rate of return. “All surviving unitholders in 20 years will participate in any growth in the tontine’s assets, generated from compound growth and the pooling of survivorship credits,” according to Gordon in a news release. “This payout can be used to fund their later years of life as they see fit, and aims to ensure that investors don’t outlive their investment portfolio.”

GuardPath Managed Decumulation 2042 Fund, the first of its three offerings, is not a tontine but essentially a balanced mutual fund. It delivers cash steadily over 20 years through risk management techniques aimed at extending portfolio longevity. As the first of the three accompanying charts illustrates, an initial $100,000 investment steadily declines over the 20 years, while over the same time, cash flow is received each year, totalling $160,000.

The second fund, GuardPath Modern Tontine 2042 Trust, is an actual tontine. It’s designed to provide financial security to retirees in later life, with significant payouts to surviving unitholders in 20 years based on compound growth and the pooling of survivorship credits for the eligible cohort of investors born between 1957 and 1961. 

The second chart shows total tontine payouts of $548,143 (again on an initial $100,000 investment) for those who live the full 20 years, assuming an annual net return on the portfolio of 6.92%. The light-grey smaller bars show the value in the case of death or early redemption, which is projected to remain above the initial $100,000 in this example scenario. 

Cryptocurrency was designed to be used for regular transactions. But in today’s financial world, it’s hard to imagine using something like Bitcoin to make daily purchases, especially when its value can be cut in half within a week.

That’s where stablecoins come in. Stablecoins are designed to hold the same value as an underlying currency, such as the U.S. dollar (USD). This makes them much easier to use for everyday purchases.

But what exactly are stablecoins and how do they work? And are they actually safe to use?

In this guide, we’ll cover all the important details about stablecoins, including what they are, the different types of stablecoins, the technology behind them, and which ones are safe to use. We’ll also cover the risks involved in using stablecoins and what to watch out for when choosing one to use. 

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What Are Stablecoins?

Stablecoins are a type of cryptocurrency whose price is pegged to a less volatile asset, such as a national fiat currency (for example, the U.S. dollar). Some stablecoin prices are pegged to assets such as precious metals or even to other cryptocurrencies. 

Stablecoins were created as a less volatile way for investors to own cryptocurrency and use it as a cash equivalent for trading and transacting.

There are several types of stablecoins, from “fiat-collateralized” stablecoins, to “algorithmic” stablecoins, and others that offer differing types of collateralization. More on what these mean below. The goal of any stablecoin collateralization is to keep an equivalent amount of value in reserves to back the stated value of the coin. This gives investors confidence that their coin is worth the stated value because it is backed by a real asset.

At a Glance

• Stablecoins are a type of cryptocurrency whose value is tied to a less volatile asset, most commonly a national fiat currency (such as the U.S. dollar)
• Stablecoins are more useful than Bitcoin (or other crypto) as a medium of exchange
• Some stablecoins are backed by the currency they attempt to mirror, while others are collateralized by other cryptocurrencies
• Algorithmic stablecoins aren’t backed by any collateral, but increase or decrease supply to maintain price stability

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How Stablecoins Work

Stablecoins are a type of cryptocurrency designed to keep a stable value, with price pegged to an underlying asset. Stablecoins are issued by companies that keep reserves to back the value of the stablecoin, whether that is fiat currency, commodities, crypto, or other assets.

Stablecoins have a controlled supply that moves in tandem with the demand for the coin and the amount of reserves available. 

For example, Tether (USDT) is the most popular stablecoin in the world. New Tether coins are issued when a verified user (or entity) deposits U.S. dollars into Tether’s bank account in exchange for an equivalent amount of tokens. This increases the circulating supply of tokens available, and adds to the overall reserves for the coin. When USDT tokens are redeemed for USD, the tokens are then removed from the circulating supply and the reserves are adjusted, keeping the 1-to-1 value pegged to the U.S. dollar.

Stablecoins have various ways of keeping the value peg for a given asset, with supply and demand being a key factor as well as the amount of reserves stored.

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Types of Stablecoins

There are several types of stablecoins based on the backing asset that is used for collateral. Each stablecoin has unique properties and risks. Here are a few examples of the most popular types of stablecoins:

Fiat-Collateralized Stablecoins

Fiat-collateralized stablecoins are cryptocurrencies backed by the fiat currency they are trying to emulate. The U.S. dollar (USD) is the most popular fiat currency for stablecoins, and there are many examples of stablecoins that keep USD and USD-equivalent investments as collateral. 

An example of this is the most popular stablecoin, Tether (USDT). Each coin in circulation is backed by $1 in USD or USD-equivalents.

The idea behind fiat-backed stablecoins is that every coin has a real-world asset that backs the value, thereby giving it the same value as that fiat currency. Coins can vary slightly in value due to the supply and demand of a given marketplace, such as a crypto exchange, but overall, most maintain a 1-to-1 value with the underlying fiat currency.

Fiat-collateralized stablecoins don’t necessarily have to keep reserves 100% in the underlying fiat currency. Many keep reserves in treasury notes and other “fiat-equivalents” instead of holding the underlying currency. This has caused many debates about the true value of fiat-backed stablecoins and has prompted regulatory authorities to further investigate the claims of the reserves of some popular stablecoins.

Crypto-Collateralized Stablecoins

Crypto-backed stablecoins are collateralized by other cryptocurrencies instead of the currency they are pegged to. These stablecoins carry a higher risk because the collateral assets can fluctuate wildly in value. 

Some of these stablecoins are in fact overcollateralized, meaning they carry more value in reserves than the value of its circulation tokens. This allows for the collateralized crypto to drop in value while still maintaining enough reserves to support the stablecoins in circulation.

Collateralized stablecoins are programmatically pegged to real-world assets, such as fiat currency. This keeps their value stable, but they are backed by cryptocurrency instead of the asset whose price they are pegged to.

The most popular crypto-backed stablecoin is Dai (DAI). The issuance of DAI is managed by the Maker Protocol and is pegged to the U.S. dollar. Users can deposit different cryptocurrencies into Maker in exchange for DAI, thereby backing each coin with the deposited crypto. Maker Protocol runs on the Ethereum blockchain and manages issuance of DAI tokens through smart contracts.

Algorithmic Stablecoins

Algorithmic stablecoins are not backed by anything, but use an advanced algorithm to inflate or reduce the supply of the coin to keep a stable price. Unfortunately, because these coins are not backed by any other asset, there is significant risk to owning them. 

There have been many attempts at creating a sustainable algorithmic stablecoin, with the most popular being TerraUSD (UST). This algorithmic stablecoin was pegged to the U.S. dollar and technically backed by another cryptocurrency, Terra (LUNA), but both coins held artificial value based on an algorithmically-controlled arbitrage system.

Long-story short, the price of UST de-pegged due to a massive selloff of UST, and in turn, both UST and LUNA crashed, losing tens of billions of dollars in value for LUNA and UST investors. As such, algorithmic stablecoins are seen as a very risky investment because most have failed.

Commodity-Backed Stablecoins

Commodity-backed stablecoins are exactly that — stablecoins backed by a commodity, such as gold. These stablecoins follow a similar principle to fiat-backed stablecoins, pegging their value to a specific commodity, and backing each coin with an equivalent value of that commodity.

Perhaps the most popular commodity-backed stablecoin is Paxos Gold (PAXG), which backs each coin with a physical ounce of gold stored in professional vault facilities, according to the Paxos website. This means the price of PAXG mirrors the price of one ounce of gold.

Even though commodity-backed stablecoins are backed by a physical asset, there are still risks associated with investing in them. This includes selling pressure on crypto exchanges that could de-peg the price, causing a loss in value.

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Pros & Cons of Stablecoins

Stablecoins have made cryptocurrency more approachable for investors and users who want to treat crypto more as a currency than an investment. But while the stable prices and ease of use are great, there are also a few downsides and risks to be aware of. Here are a few pros and cons of using stablecoins:

Pros	Cons
Price remains constant	Risk of de-pegging
Pegged to known currency	Regulatory scrutiny
Backed by other assets	Underlying assets can lose value
Available on most exchanges	Lack of transparency

Pros

Stablecoins have a lot of promise, helping bridge the gap between cryptocurrencies and traditional fiat currencies. Here are a few advantages to using stablecoins:

1. Pegged to Known Currency. Although other cryptocurrencies fluctuate in price purely based on supply and demand of the marketplace, stablecoins are pegged to popular and known currencies or commodities, such as U.S. dollars or gold. The value is universally translatable globally.
2. Backed by Other Assets. Most stablecoins (with the exception of algorithmic stablecoins) are backed by other assets, protecting their value. If there is a fluctuation in price, the collateral is available to help stabilize the value of the currency and ensure investors can “cash out” if needed.
3. Available on Most Exchanges. Stablecoins have become a staple on most crypto exchanges, making them easy to use for trading with other cryptocurrencies or to cash out.
4. Hold Cash in Crypto Form. Stablecoins allow investors to hold a stable crypto asset that does not fluctuate in value, without the need to exchange for a real-world asset. This gives investors a way to “hold cash” in digital form.

Cons

Stablecoins are an awesome way to hold “cash” in crypto-form, but there are a few downsides to them that need to be discussed:

1. Risk of De-Pegging. Stablecoins are pegged to a fiat currency or other asset, but the value of stablecoins is still affected by supply and demand in the marketplace. If there is a large sell-off of a particular stablecoin, it may risk de-pegging and losing value. This happened to UST and lost investors billions of dollars.
2. Regulatory Scrutiny. Regulatory authorities are increasing their scrutiny of stablecoins because they undermine national currencies and pose much more risk to consumers. This scrutiny may cause some coins to lose value over time, especially if regulation restricts the use of a stablecoin in certain markets.
3. Underlying Assets Can Lose Value. Although most stablecoins are backed by collateral, that collateral can lose value, especially in crypto-backed stablecoins. But fiat-backed stablecoins are at risk of this as well. A collapse in the underlying asset can destabilize the currency and possibly cause it to de-peg.
4. Lack of Transparency. Stablecoins sometimes lack transparency, especially in regards to their collateral holdings. This lack of transparency is a risk to investors and stablecoin holders, who perceive the “safety” of the stablecoin may be in jeopardy if the collateral is not sufficient.

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Should You Invest in Stablecoins?

Stablecoins are not a traditional investment; most of them are pegged to a regular fiat currency. Investing in stablecoins is akin to investing in the U.S. dollar. But holding stablecoins in your crypto portfolio can be a good idea for a few reasons:

• Makes Trading Easier. Most crypto exchanges support stablecoins, and most trading pairs involve use of a stablecoin like USDT. This makes trading crypto much easier.
• Can Transfer Money 24/7. Stablecoins make it easy to transfer money around the clock, and since they are pegged to a known currency, the value is easily understood globally.
• Like Keeping Cash on Hand for Crypto Investing. Since stablecoins are available on most crypto apps, having stablecoins in your digital wallet is similar to having cash on hand for investment opportunities.
• Earn Interest. Stablecoins pay high interest rates on some platforms, making them a great way to earn passive (crypto) income.

But stablecoins have also been known to collapse, leaving investors with nothing (see: UST). And governments are starting to crack down on stablecoins, with investigations into the collateral claims by stablecoins issuers.

Although stablecoins mimic real world assets and fiat currencies, they are not the same. And stablecoins, like any other crypto, should be treated as a speculative investment with the risk of total loss possible.

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Stablecoin FAQs

Stablecoins are immensely popular and act as a bridge between real-world currencies and cryptocurrencies. Here are some answers to some of the most common questions about stablecoins:

What’s the Difference Between Stablecoins & Digital Currencies?

Stablecoins are a type of digital currency, but they are typically backed by a fiat currency or other type of currency outside of the cryptocurrency ecosystem. Stablecoins are used for trading purposes or to make purchases on the blockchain. They are the equivalent of “holding cash” in crypto form, and their price is pegged to a real-world asset, such as the U.S. dollar.

Central Bank Digital Currencies (CBDCs) are a type of fiat currency issued by a nation’s central bank, which is regulated by governing authorities of that nation. CBDCs are a form of legal tender used to exchange goods and services. CBDCs are the new digital equivalent of paper currency, and are designed to replace the modern “cash” currency used as legal tender within a nation. CBDCs are used just like any other fiat currency, with the ability to make purchases and investments within a supported jurisdiction.

What Are the Most Popular Stablecoins?

Currently the most popular stablecoins by market capitalization are:

• Tether (USDT)
• USD Coin (USDC)
• Binance USD (BUSD)
• Dai (DAI)

As mentioned earlier, the TerraUSD (UST) coin used to be one of the most popular until the collapse of the Terra ecosystem.

How Do You Use Stablecoins?

Stablecoins can be used in a variety of ways, from trading with other cryptocurrencies to making purchases online. Stablecoins were designed as a more stable currency than other cryptos, and are commonly used in online transactions.

Although many retailers don’t accept stablecoins as payment for items, there are a few crypto debit cards that allow you to spend cryptocurrency on regular purchases. For example, the Crypto.com card allows you to spend Tether (USDT) on regular purchases and converts it to fiat currency automatically for you.

Stablecoins can also be used for transferring funds in a peer-to-peer (P2P) fashion, similar to apps like Venmo or PayPal. Stablecoins can be transferred globally and on a 24/7 basis between user wallets, making them a more flexible currency than most fiat currencies.

How Are Stablecoins Regulated?

Stablecoins are currently unregulated in most jurisdictions, although there is a lot more scrutiny surrounding stablecoins after the collapse of Terra. 

Stablecoins have been under regulatory debate for some time, and in 2021 the President’s Working Group on Financial Markets (PWG) created a report on stablecoins and called for further investigation and regulation from the Securities and Exchange Commission (SEC). 

Although stablecoins are not regulated in most countries, there may be regulation coming soon from the U.S. government.

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Final Word

Stablecoins have become some of the most popular cryptocurrencies to hold for crypto investors, with three of the top 10 cryptocurrencies by market cap being U.S. dollar stablecoins. Stablecoins make it easy to transfer funds between parties and to maintain the value of crypto assets you hold for trading.

Stablecoins are on the hot seat, though, with governmental authorities like Janet Yellen demanding regulation to help protect consumers from the risks of stablecoins. And there are risks. A lack of transparency about collateral reserves and the fact that coins can de-peg and lose value make them a riskier investment than holding cash.

But even with impending regulation, stablecoins seem poised to be a mainstay of the cryptocurrency market. Just make sure you understand what you are holding when you invest in them.

Your fledgling painting business is about to score its biggest contract to date. A big-time real estate developer in your city wants to hire you to paint the interior of a new 120-unit apartment building. The job will keep your team busy for weeks and net the business tens of thousands of dollars in profit. 

There’s just one problem. The developer needs written confirmation you’ve met their insurance requirements. And fast, or you might lose the job to a competitor. For that, you need something called a certificate of insurance from your business insurance company. But you have no idea what that is or where to get it.

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What Is a Certificate of Insurance?

A certificate of insurance is a proof-of-insurance document that summarizes your business insurance policy. Your insurance company can provide a copy signed by an insurance company representative or your insurance agent at your request.

You can get a certificate of insurance, commonly known as a COI, for a personal insurance policy as well, though that’s less common.

For example, a bank or lender might ask you for a certificate of car insurance. But that usually only happens if the lender has reason to believe you canceled or scaled back your coverage. When you apply for an auto loan, the lender should ask only for your policy’s declarations page, which isn’t the same as a certificate of insurance. 

A certificate of insurance is brief, usually covering a single page. It typically includes:

• The name and address of the policyholder
• A description of the services the business provides, if applicable
• The name of the business’s representative, usually an owner, partner, or executive, if applicable
• The name and address of the insurance company or companies that issued the policy
• The type of coverage or policy, such as general liability or workers’ compensation
• The effective date and policy expiration date
• The policy’s coverage details, including coverage limits and exclusions
• Other important details of the policy, including the policy number
• The name of the certificate holder, usually the business requesting the certificate
• A notice of cancellation clause stating that the insurance company will notify the certificate holder if the policyholder cancels the policy

When requesting a certificate of insurance form, ensure it’s in a proper format. One of the most common is the ACORD 25 form, known as an ACORD certificate.

Why You Need a Certificate of Insurance

You need a certificate of insurance to prove you have the insurance coverage you claim to have. For people and businesses serious about protecting themselves, an ID card or screenshot of an email from your insurer won’t cut it.

Expect to be asked to provide a COI if:

• A general contractor or project manager hires you as a subcontractor.
• Another company hires you to provide labor or services.
• You contract with a government or municipal entity to provide labor or services.
• A homeowner hires you to do work on their home or property.
• You sign a lease agreement to rent or sublet commercial property.
• You rent or lease commercial equipment, such as construction vehicles.

Without a valid certificate of insurance, you might be passed over for potentially profitable contract work or leasing arrangements vital to your company’s success.

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How a Certificate of Insurance Works

A certificate of insurance assures the people and companies you do business with that your company has adequate insurance. 

A person, company, or government you work with must generally request a COI from your insurance company, making them a certificate holder. Their name and contact information appear on the certificate they receive, and the insurance company must notify them if you cancel your policy before the expiration date.

It’s possible to get proof of business insurance coverage without formally requesting a COI. If you’re a homeowner hiring a contractor for a one-off job, you can ask them for their insurance company or agent’s contact information, then call or email to ask for proof of valid insurance. They can send you an electronic certificate of insurance — or a policy document showing similar information — without adding your name to it.

However, if you’re a business owner hiring a subcontractor or vendor, a formal COI is best. Otherwise, they can cancel the policy without telling you, leaving you exposed to a financial catastrophe if they’re involved in a serious accident on the job.

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Types of COIs

You can get a certificate of insurance for any type of insurance policy. But some are more common than others. The most commonly requested types of COIs are those for liability insurance, workers’ compensation coverage, and personal or commercial vehicle coverage.

Certificate of Liability Insurance

Liability insurance ensures your company won’t create a financial burden for anyone who hires you if you or someone who works for you causes property damage or injury. If something happens, they can rest easy knowing your insurance company will cover the damage.

A certificate of liability insurance proves your business has enough general liability insurance coverage to satisfy the person or business requesting it. If your business has other types of liability coverage, such as professional liability, it also spells these out. For each, it lists  important policy details like coverage limits and exclusions.

Certificate of Workers’ Compensation Insurance

Most states require small businesses to carry workers comp insurance once they reach a certain size. If your business has only a few employees, you might not need it, but companies with 10 or more employees generally do.

A certificate of workers’ compensation insurance proves your business has valid workers’ compensation insurance. Workers comp coverage pays employees who can’t work due to job-related illness or injury. If your business has it, the person or business hiring you can rest assured they won’t have to pay lost wages and medical expenses out of pocket.

Certificate of Auto Liability Insurance

A certificate of auto liability insurance shows that your personal or commercial auto insurance policy has at least the minimum coverage required in your state for bodily injury, property damage, and uninsured motorist coverage. 

A certificate of auto liability insurance is useful for businesses hiring subcontractors that use company-owned vehicles and businesses hiring or contracting with individuals who use their personal vehicles for work.

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Certificate of Insurance FAQs

If you’re a small business owner in an industry with a high risk of property damage or bodily injury, someone will ask for a certificate of insurance sooner or later. Ensure you know the answers to these questions before the need arises.

How Do I Get a Certificate of Insurance?

You can get a COI from your insurance provider. If you work with an insurance agent, you can also get one from your insurance agency.

In the past, you had to call or write to your insurance company to get a paper copy. Today, many insurance companies offer them online or through their mobile apps.

How Much Does a COI Cost?

You shouldn’t have to pay anything to get a certificate of insurance, though you might have to pay extra for overnight or express shipping if you need it fast and your insurer can’t give you a digital copy.

How Long Are COIs Good For?

A certificate of insurance is valid at least until the policy expiration date unless the policyholder cancels it earlier. After expiration, it’s the certificate holder’s responsibility to contact the insurance company for a new one. If the policyholder cancels it, the insurance company will notify you.

Regardless of the expiration date, keep each COI on hand for at least five years from the date the certificate is generated.

What Is an Additional Insured?

Being a certificate holder on a COI doesn’t mean you’re an additional insured. You’re only covered by the policy if you’re added to it with a formal additional insured endorsement. 

An additional insured is a person or business added to a commercial general liability policy. They’re then covered by the policy just like the main policyholder. General contractors often demand their subcontractors add them to the subcontractors’ insurance policies, providing another layer of financial and legal protection if the subcontractor causes property damage or injury on the job. 

Subcontractors who work for multiple general contractors can add them all to the same insurance policy without removing previously added contractors or affecting their liability protection.

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Final Word

Failing to submit a COI could seriously hurt your prospects.

Fortunately, getting one isn’t difficult. You just need to call your insurance company or insurance agent and have them send it to the certificate holder-to-be. And some insurers and insurance agencies now provide electronic certificates of insurance that don’t have to wait for the post office.

Yes, it’s one more item to add to your to-do list, and a not-so-fun one, at that. But it’s more than worth the effort.

Your credit score plays an important role in your financial life. Good credit helps you qualify for loans and credit cards with low rates and favorable terms, while bad credit makes borrowing money hard and expensive. With excellent credit, you can secure the lowest interest rates and qualify for lucrative rewards credit cards.

It’s clearly important to know where you stand, credit-wise. Knowing whether your credit is great, bad, or in-between helps set your expectations for the types of cards and loans you might qualify for. It also shows you how much work is needed to boost your score. 

However, you might have heard that checking your credit score can lower your score. This has a kernel of truth to it, but for the most part, checking your own credit won’t hurt your score.

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Does Checking Your Credit Score Lower It?

Checking your credit score can sometimes cause your score to drop by a few points. However, this is typically only true when a lender checks your credit score with one of the credit bureaus for the explicit purpose of approving a loan application, known as a hard pull or hard inquiry. Preapprovals by lenders and personal credit checks by consumers (such as pulling your own credit report) don’t impact your score. 

Usually, a hard pull decreases your score by five to ten points.

There are plenty of ways to check your credit without impacting your score. The important thing you need to know is the difference between hard inquiries and soft inquiries.

	Hard Inquiry	Soft Inquiry
Lowers Credit Score?	Yes	No
By How Much?	5 to 10 points	N/A
Example	Applying for a credit card	Getting preapproved for a loan

Hard Inquiries vs. Soft Inquiries

There are three major credit bureaus in the United States: Experian, Equifax, and TransUnion. These companies keep track of how you interact with credit and debt and compile credit reports on you. When a lender wants to check your credit score, they contact one or more of these bureaus for a copy of your report.

Lenders then run the information on your score through one or more scoring models — like FICO 10 or VantageScore 4.0 — to generate your credit score for you.

Lenders can make this request in two ways: as a hard inquiry or as a soft inquiry.

A hard inquiry or hard pull is the one that impacts your credit score, temporarily decreasing your score by a few points. They show up on your report for two years before dropping off, though they only affect your score for one year. Lenders typically use these inquiries when you actually submit an application for a loan.

By contrast, a soft inquiry, or soft pull, on your credit, won’t show up on your credit history or lower your score. Lenders might use these when you ask for preapproval on a loan. Free credit score services also use these when you want to check your own credit score.

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What Can Lower Your Credit Score

Your credit score is composed of five factors, in order of importance:

• Payment history
• Amount owed
• Length of credit history
• New credit
• Credit mix

You want to ensure that you’re doing well on each of these factors to build a good credit score. You can hurt your credit if you’re doing poorly in any of these areas.

Some of the most common ways to hurt your credit are:

• Late or Missed Payments (Inconsistent Payment History). Your payment history makes up more than a third of your credit score. A single missed or late payment can cause a huge drop in your score and take months or even years to recover from.
• A High Credit Utilization Ratio (Balance to Cumulative Credit Limit Ratio). Your credit utilization measures your credit card debt divided by your total credit limits across all cards. Most experts recommend keeping this below 30%.
• Closing Credit Cards for No Reason (Shortening Your Length of Credit History). Closing credit cards can actually lower your score by reducing the average age of your credit accounts. The longer you’ve had credit and the older your accounts, the better.
• Having Too Many Cards or Other Types of Credit Accounts (Poor Credit Mix). Credit mix looks at the different types of loans you’ve had. For example, a borrower with student loans, a car loan, and a personal loan will score better here than someone who only has an auto loan.
• Applying for Too Many Credit Accounts in a Short Period of Time. Hard credit inquiries drop your credit score by a few points, so applying for lots of new loans in a short span of time can tank your score.
• Opening Credit Accounts You Don’t Actually Need. Opening a new credit card or loan reduces your average age of credit accounts and adds a hard inquiry to your credit report, dropping your score.
• Carrying High Credit Balances. Carrying a balance on your credit card adds to your total debt, lowering your score. It also makes your credit utilization higher, further hurting your score.
• Not Checking Your Credit Report Regularly. You can check your credit report for free many ways, such as through a credit monitoring service or annualcreditreport.com. Checking your report regularly can help you come up with a plan to improve your score.
• Failing to Fix Credit Report Errors. When you get a copy of your credit report, you might notice errors or incorrect information. You can report errors to the bureaus to get them removed. Getting incorrect, negative information removed from your credit report can help your score.

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How to Reduce the Impact of Credit Inquiries

Maintaining good credit is important, so you should try to reduce the impact that hard credit inquiries have on your score. There are a few ways to do this.

• Only Apply for Loans When You Need Them. The most obvious way to avoid hurting your score is to avoid hard inquiries in the first place. If you only apply for loans rarely, you won’t have many inquiries on your report to damage your score.
• Plan Ahead When Rate Shopping. Most credit scoring formulas won’t punish you for rate shopping by applying for the same loan type with many lenders. For example, if you apply for a mortgage with five lenders over the course of a few weeks, most formulas will treat that as one inquiry, so make sure you have a plan before submitting the first application.
• Try to Get Pre-Approved. Many lenders will do a soft pull on your credit to see if they can pre-approve you for a loan. This can save you from applying for a loan you won’t qualify for and getting a hard inquiry on your report for no benefit.
• Wait. Hard inquiries hurt your score, but only temporarily. Their impact decreases after a few months and they disappear from your report entirely after two years. If your score is low due to lots of inquiries, waiting a few months can be a big help.

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Final Word

Having good credit can make a lot of financial tasks easier, helping you qualify for loans and secure the best interest rates. Checking your credit score regularly can help you understand the things that are impacting your score and how you can improve your score over time.

Once you’ve built good credit, you can leverage it by signing up for a great rewards credit card or refinancing your mortgage or car loan at a lower interest rate.

As a prospective home buyer, it’s just as important to research types of mortgages as the neighborhoods you want to live in. 

Applying for a home loan can be complicated, and deciding which type of mortgage best suits your needs early on will help direct you to the type of home you can afford.

Depending on the types of mortgages you qualify for, you can choose from a number of home loans when you buy property. The sheer number of mortgage options makes it that much more important to understand the key advantages and disadvantages of each. 

Depending on the type of mortgage you choose, you’ll have different requirements that influence your rate, the length of the loan and your lender. Choosing the right mortgage for your situation can lower your down payment and decrease the overall interest payment over the life of your loan.

Learn more about how to find the right mortgage for you with this guide.

Go straight to the mortgage you’re most interested in:

What Is a Mortgage?

A mortgage is a loan that’s used to purchase a home or property.

In most mortgage loans, the property is used as collateral. If you fail to make your mortgage payments on time, you may lose the house, and it could get sold to repay the loan. That’s why it’s important that you find a type of mortgage that gives you rates and terms that are financially manageable for you.

The type of mortgage loan you seek may depend on:

• How much money you’ve saved for a down payment
• How much you earn
• How long you plan to live in the home you’re buying
• Whether or not you’re a first-time homebuyer
• Whether or not you qualify for a government-backed loan

Generally, there are 8 main types of mortgage loans.

Types of Mortgages:

1. Conventional Mortgages
2. Fixed-Rate Mortgages
3. Adjustable Rate Mortgages
4. FHA Loans
5. USDA Loans
6. VA Loans
7. Jumbo Loans
8. Balloon Mortgages

Requirements To Get A Mortgage

In order to find the best mortgage for your prospective home, understand the types of loans you’re able to pursue. The factors below can influence the types of mortgages you’ll qualify for:

• Estimated down payment: The size of your down payment can impact the mortgage rate lenders will give.
• Monthly mortgage payment: Mortgage lenders will look at your income and assets to determine the total loan amount you can afford to pay back. When calculating your budget for your monthly mortgage payment, consider the principal amount, interest and taxes, mortgage insurance, utilities and any homeowner’s fees.
• Credit score: Your credit score will play a large role in determining the interest rate on your loan.

Types Of Home Loans

All types of mortgages are considered either conforming or nonconforming loans. Conforming versus nonconforming loans are determined by whether or not your lender keeps the loan and collects payments and interest on it or sells it to one of two real estate investment companies – Fannie Mae or Freddie Mac.

Conforming Loans

When you hear a lender talk about “conforming loan,” they’re using a mortgage term to refer to a conventional mortgage only. A conforming loan is one that can be purchased by Fannie Mae or Freddie Mac. For one of these institutions to purchase the mortgage from your lender, the loan must meet basic qualifications set by the Federal Housing Finance Agency (FHFA).

The basic criteria set by the FHFA include loans below a maximum dollar limit, loans that don’t already have backing from a federal government body and loans that meet lender-specific criteria.

• Below the maximum dollar limit: The maximum dollar limit in most parts of the contiguous United States is $548,250 in 2021. In Alaska, Hawaii and certain high-cost counties, the limit is $822,375. Higher limits also apply if you buy a multiunit home. Your lender can’t sell your loan to Fannie or Freddie and you can’t get a conforming mortgage if your loan is more than the maximum amount. Instead, you’ll need to take a jumbo loan to fund a home purchase above these limitations.
• Not a federally backed loan: The loan cannot already have backing from a federal government body. Some government bodies (including the United States Department of Agriculture and the Federal Housing Administration) offer insurance on home loans. If you have a government-backed loan, Fannie and Freddie may not buy your mortgage.
• Meets lender-specific criteria: Your loan must meet the lender’s specific criteria to qualify for a conforming mortgage. For example, you must have a credit score of at least 620 to qualify for a conforming loan. You may also need to take property guidelines and income restrictions into account when you apply for a conforming loan. A Home Loan Expert can help determine if you qualify based on your unique financial situation.

Conforming loans have well-defined guidelines and there’s less variation in who qualifies for a loan. Because the lender has the option to sell the loan to Fannie or Freddie, conforming loans are also less risky than jumbo loans. This means that you may be able to get a lower interest rate when you choose a conforming loan.

Nonconforming Loans

If your loan doesn’t meet conforming standards, it’s considered a nonconforming loan. Nonconforming loans have less strict guidelines than conforming loans. These loans can allow you to borrow with a lower credit score, take out a larger loan or get a loan with no money down. You may even be able to get a nonconforming loan if you have a negative item on your credit report, like a bankruptcy. Most nonconforming loans will be government-backed loans or jumbo loans.

Understanding Different Types Of Mortgages

Depending on the type of mortgage applicant you are, you’ll find various advantages and disadvantages of home loans. Whether you’re a first-time buyer, downsizing or refinancing, consider the type of applicant you are before selecting a mortgage.

Conventional Mortgages

A conventional loan is a conforming loan funded by private financial lenders. Conventional mortgages are the most common type of mortgage. This is because they don’t have strict regulations on income, home type and home location qualifications like some other types of loans. That said, conventional loans do have stricter regulations on your credit score and your debt-to-income (DTI) ratio.

You can buy a home with as little as 3% down on a conventional mortgage. You’ll also need a minimum credit score of at least 620 to qualify for a conventional loan. You can skip buying private mortgage insurance (PMI) if you have a down payment of at least 20%. However, a down payment of less than 20% means you’ll need to pay for PMI. Mortgage insurance rates are usually lower for conventional loans than other types of loans (like FHA loans).

Conventional loans are a good choice for most consumers who don’t qualify for a government-backed loan or want to take advantage of lower interest rates with a larger down payment. If you can’t provide at least 3% down and you’re eligible, you could consider a USDA loan or a VA loan.

Pros Of Conventional Mortgages:

• The overall borrowing cost after fees and interest tends to be lower than an unconventional loan.
• Your down payment can be as little as 3% for qualifying loans.

Cons Of Conventional Mortgages:

• You have to pay PMI if the down payment is less than 20%.
• Stricter qualifications that require a minimum credit score of 620 and low DTI.

Home Buyers Who Might Benefit:

• Buyers with a stable income, at least 3% down, strong credit and employment.

Fixed-Rate Mortgages

A fixed-rate mortgage has the exact same interest rate throughout the duration of the loan. The amount you pay per month may fluctuate due to changes in local tax and insurance rates, but for the most part, fixed-rate mortgages offer you a very predictable monthly payment.

A fixed-rate mortgage might be a better choice for you if you’re currently living in your “forever home.” A fixed interest rate gives you a better idea of how much you’ll pay each month for your mortgage payment, which can help you budget and plan for the long term.

You may want to avoid fixed-rate mortgages if interest rates in your area are high. Once you lock in, you’re stuck with your interest rate for the duration of your mortgage unless you refinance. If rates are high and you lock in, you could overpay thousands of dollars in interest. Speak to a local real estate agent or Home Loan Expert to learn more about how market interest rates trend in your area.

Pros Of Fixed-Rate Mortgages:

• Monthly payments don’t change over the life of your loan, making it easier to plan a budget.

Cons Of Fixed-Rate Mortgages:

• You may end up paying more in interest over time if the rates are high in your area.

Home Buyers Who Might Benefit:

• Buyers that are purchasing or refinancing their forever home.

Adjustable-Rate Mortgages

The opposite of a fixed-rate mortgage is an adjustable-rate mortgage (ARM). ARMs are 30-year loans with interest rates that change depending on how market rates move.

You first agree to an introductory period of fixed interest when you sign onto an ARM. Your introductory period is typically 5, 7 or 10 years. During this introductory period, you pay a fixed interest rate that’s usually lower than market rates. After your introductory period ends, your interest rate changes depending on market interest rates. Your lender will look at a predetermined index to determine how rates are changing. Your rate will go up if the index’s market rates go up. If they go down, your rate goes down.

ARMs include rate caps that dictate how much your interest rate can change in a given period and over the lifetime of your loan. Rate caps protect you from rapidly rising interest rates. For example, interest rates might keep rising year after year, but when your loan hits its rate cap, your rate won’t continue to climb. These rate caps also go in the opposite direction and limit the amount that your interest rate can go down as well.

ARMs can be a good choice if you plan to buy a starter home before moving to your forever home. ARMs give you access to below-market rates for an initial introductory period. You can easily take advantage and save money if you don’t plan to live in your home throughout the loan’s full term.

These can also be especially beneficial if you plan on paying extra toward your loan early on. ARMs start with lower interest rates compared to fixed-rate loans, which can give you some extra cash to put toward your principal. Paying extra on your loan early can save you thousands of dollars later on.

Pros Of Adjustable-Rate Mortgages:

• Gives below-market rates for the initial introductory period.

Cons Of Adjustable-Rate Mortgages:

• If the rate increases, it can dramatically increase your monthly payments.

Home Buyers Who Might Benefit:

• Home buyers who are purchasing a starter home and don’t expect to live there for the loan’s full term.

Government-Backed Loans

Government-backed loans are insured by government bodies. When lenders talk about government-backed loans, they’re referring to three types of loans: FHA, VA and USDA loans. These loans are less risky for lenders because the insuring body foots the bill if you default. You may have more success getting a government-backed loan if you can’t get a conventional loan.

Each government-backed loan has specific criteria you need to meet in order to qualify along with unique benefits, but you may be able to save on interest or down payment requirements if you qualify.

Pros Of Government-Backed Loans:

• Possible to save on interest and down payments.
• Less strict qualification requirements than conventional loans.

Cons Of Government-Backed Loans:

• You must meet specific criteria to qualify.
• Many types of government-backed loans have insurance premiums that are required which can result in higher borrowing costs.

Home Buyers Who Might Benefit:

• Buyers who don’t qualify for conventional loans or have low cash savings.

FHA Loans

FHA loans are insured by the Federal Housing Administration. An FHA loan can allow you to buy a home with a credit score as low as 580 and a down payment of 3.5%. With an FHA loan you may be able to buy a home with a credit score as low as 500 if you have at least 10% down. Rocket Mortgage® requires a minimum credit score of 580.

USDA Loans

USDA loans are insured by the United States Department of Agriculture. USDA loans have lower mortgage insurance requirements than FHA loans and can allow you to buy a home with no money down. You must meet income requirements and buy a home in a suburban or rural area in order to qualify for a USDA loan. Rocket Mortgage® does not currently offer USDA loans.

VA Loans

VA loans are insured by the Department of Veterans Affairs. A VA loan can allow you to buy a home with $0 down and lower interest rates than most other types of loans. You must meet service requirements in the Armed Forces or National Guard to qualify for a VA loan.

Jumbo Loans

A jumbo loan is a loan that’s worth more than conforming loan standards in your area. You usually need a jumbo loan if you want to buy a high-value property. For example, you can get up to $2.5 million in a jumbo loan if you choose Rocket Mortgage®. The conforming loan limit in most parts of the country is $548,250.

Jumbo loan interest rates are usually similar to conforming interest rates, but they’re more difficult to qualify for than other types of loans. You’ll need to have a higher credit score and a lower DTI to qualify for a jumbo loan.

Pros Of Jumbo Loans:

• Interest rates are similar to conforming loan interest rates.
• You can borrow more for a more expensive home.

Cons Of Jumbo Loans:

• It’s difficult to qualify for, typically requiring a credit score of 700 or higher, significant assets and a low DTI ratio.
• You’ll need a large down payment, typically between 10 and 20%.

Home Buyers Who Might Benefit:

• Buyers who need a loan larger than $548,250 for a high-end home and have a good credit score and low DTI.

Balloon Mortgages

Less common mortgages are ones like balloon mortgages. On these types of home loans, you pay interest for a set period of time before a lump sum is owed. Oftentimes, you’ll make payments in a structure like a 30-year term for a short time, then at the end of the specified period, you’ll make a larger payment of the remaining balance. Another type of balloon loan is an interest-only mortgage where you only pay the interest each month until the end of the period when the principal is owed. Rocket Mortgage® does not offer these types of loans.

Pros Of Balloon Mortgages:

• You’ll have lower monthly payments of just interest or that’s partly amortized.

Cons Of Balloon Mortgages:

• Requires a large payment at the end of the term which is a higher risk for lenders and buyers.

Home Buyers Who Might Benefit:

• You’re a buyer in an area where home values are likely to rise and you only plan to live in the home for a short time, before the balloon payment is due.

Other Types of Mortgage Loans 

Beyond the 8 types of mortgages, there are 4 additional mortgage types that are fairly niche but sometimes very useful.

• Construction Loans
• Interest-Only Mortgages
• Piggyback Loans
• Reverse Mortgages

Better to know them and not need them than to need them and not know them.

Construction Loans 

You might seek a construction loan if you want to build your own home or do a significant amount of add-on construction to a house that you’re buying. 

Many people who take out a construction loan will actually take out two loans: a construction loan to fund the building of the home and then a mortgage loan to pay off the construction loan. 

You can also wrap the two loans together in what’s known as a construction-to-permanent loan.

Pros Of Construction Loans:

• A construction loan may give you the opportunity to build your true “dream home.”

Cons Of Construction Loans:

• It’s often harder to qualify for a construction loan than a mortgage. You must prove that you have the income to pay for the home that you’re building, and you may have to make a down payment as high as 20%.

Home Buyers Who Might Benefit:

• You’re a buyer who can afford to build a new home from scratch. You’re a buyer who wants to do significant renovations to a property you’re buying. You’re a homeowner who wants to add additional buildings to your property.

Interest-Only Mortgage 

An interest-only mortgage allows you to pay nothing but interest on the loan for a short period of time–typically 5 to 7 years. After that period expires, you’ll have to start making larger monthly payments.

Pros Of Interest-Only Mortgages:

• You don’t have to make full mortgage payments for the first several years of the loan. That may be ideal if you need a grace period to recuperate your finances after buying a home. It’s also ideal for those who are confident they can sell the home for a profit before the larger payments are due.

Cons Of Interest-Only Mortgages:

• You could face foreclosure if you can’t afford to pay the larger monthly payments when they’re due.

Home Buyers Who Might Benefit:

• You’re buying a home, and you’re confident you can afford the larger monthly payments or that you can sell the home before they’re due.

Piggyback Loan

A piggyback loan is when you take out two loans: a main mortgage for 80% of the home price and a piggyback mortgage for 10% of the home price. Then you make a down payment on the final 10%. 

Piggyback loans are also known as “80/10/10” loans. They’re very rare today, but it’s possible they’ll make a comeback in the future.

Pros Of Piggyback Loans:

• Many mortgage lenders require you to make a down payment of at least 20% to avoid paying private mortgage insurance (PMI). Piggyback loans were designed to help you to avoid PMI by structuring your “main mortgage” as 80%. So, if you take out a piggyback loan, then you usually don’t have to pay PMI, and you might enjoy lower closing costs.

Cons Of Piggyback Loans:

• Piggyback loans can fool you into thinking you’re getting lower closing costs. Remember that when you take out a piggyback loan, you’re actually getting two loans with two different sets of closing costs. You’ll have to crunch the numbers to make sure you’re really saving money with this mortgage type.

Home Buyers Who Might Benefit:

• You’re a home buyer who is able to make a 10% down payment. You compare a piggyback loan to a single loan with mortgage insurance, and you find that the piggyback loan will give you much lower closing costs.

Reverse Mortgage

On a standard mortgage, you gain equity in the home with every payment you make. A reverse mortgage works in the opposite way: you take money from your home while you lose equity in the property. 

Reverse mortgages are only available to borrowers over 62 years old.

Pros Of Reverse Mortgages:

• A reverse mortgage is a quick way to get money if you have lots of equity in your home and you’re in need of cash. It’s commonly used by senior citizens who own a house but don’t have enough retirement funds to support themselves.

Cons Of Reverse Mortgages:

• You lose equity in your home when you take out a reverse mortgage. If you’re not careful, you could lose majority ownership of your home or make it very difficult to pass on the home to your descendants.

Home Buyers Who Might Benefit:

• You need a monthly cash supply, and you have high equity in a home. You’re confident that you’re not going to give the home to loved ones after you pass away.

What Is a Mortgage Refinance?

A mortgage refinance is when you pay off your old mortgage with a new mortgage that has a lower interest rate. You may want to consider a mortgage refinance if you’re able to reduce your interest by at least 2%. 

For example, you might choose to refinance if your original mortgage had a 5% interest rate, but you’re able to get a new mortgage with just 3% interest.

In order to refinance your mortgage, you also must have earned at least 20% equity in the home.

How to Choose the Best Mortgage for You

Explain some of the factors they should consider when finding the right mortgage for them 

The best type of mortgage loan depends on your individual preferences and situation. Ask yourself the following questions:

• Are you a first-time home buyer? First-time buyers have access to a large number of different loan types.
• Do you qualify for a government-backed loan?
• What’s your credit score? Can you improve your credit score before you take out a mortgage?
• How long do you plan on owning or living in the home you wish to buy?
• What’s your income? What’s the maximum monthly payment you can afford?

Answering these questions will help you narrow down the many different types of mortgages and find one with the best rates and terms for you. 

Don’t forget that your credit score, income, debt, and property location all influence the home buying process and the type of mortgages you can get. 

Prior to choosing your home loan, calculate your estimated purchase and refinancing costs with a home affordability calculator.

Use Mint to Help You Manage Mortgage Payments

Do you get your head in a spin trying to manage your monthly mortgage payments?

Track your mortgage payments on the Mint app. Mint can help you stay on top of your budget, so you can ensure that you can afford your mortgage and don’t miss payments. Try the app today and discover how much easier managing the costs of homeownership can be.

If you’re able to buy the property outright without borrowing any funds, the process is fairly straightforward. However, if you expect to apply for a second property mortgage, your lender will need to evaluate your financial profile. They will look at your income, your gross debt service (GDS) ratio and total debt service (TDS) ratio, your credit score and other factors to determine if you qualify. Some lenders will allow a portion of the rental income from your future property to count towards your income, increasing the amount you can borrow. 

Based on your profile, as well as current market interest rates and other factors, you will be offered an interest rate on your mortgage. That interest rate will have a large impact on the overall affordability of your new home, so it pays to compare offers and shop around for the best mortgage rate you can find. 

Once you’re in your new home, don’t forget that you might be able to claim certain expenses for income tax purposes. Every bit helps! 

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How to finance the purchase of a second home

There are many great ways to save up for a real estate purchase. Many first-time home buyers  use their own savings and investments, government programs like the Home Buyers’ Plan or First-Time Home Buyer Incentive, or a financial gift from a family member—or, in many cases, a combination of all three. 

Current property owners have another option—they can finance the purchase of additional real estate using the equity in their current home. Essentially, the buyer borrows funds against the equity in their property, using the property itself as collateral. 

There are different ways to buy a second, third or even fourth property using equity, including:  

Each of these financial products and services has its own qualifying criteria, pros and cons. But in each case, you will need to have more than 20% equity in your current property; lenders won’t let you borrow more than 80% of the value of your current home. Read more about using equity to finance a real estate purchase: How to use equity to buy a second home.