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What type of accounts should you keep your money in at a bank or savings and loan association? These articles help you choose the accounts that are right for you.

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Use this calculator to determine your payment or loan amount for different payment frequencies. You can make payments weekly, bi-weekly, semi-monthly, monthly, bi-monthly, quarterly, semi-annually or annually. You can then examine your principal balances by payment, total of all payments made, and total interest paid.

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Debt should be incurred with caution. Yet there are ways to take advantage of your available credit to enjoy a purchase, make an investment, or take care of an emergency. Here is a guide to finding out which form of borrowing will best suit your needs and some pointers on finding the lowest-cost loan available.


Types Of Loans

Let’s take a look at the various ways you can borrow money—and the negative and positive aspects of each.

Home Equity Loans

By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please at an interest rate that is relatively low. Furthermore, under the tax law—depending on your specific situation—you may be allowed to deduct the interest because the debt is secured by your home.

Home Equity Lines Of Credit

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills—not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit— your credit limit—that is the maximum amount you can borrow at any one time while you have the plan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the appraised value of the home and subtracting the balance owed on the existing mortgage.

Example: A home with a $60,000 mortgage debt is appraised at $200,000. The bank sets a 75% credit limit. Thus, the potential credit line is $90,000 (75% of $200,000 = $150,000 - $60,000).

In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, other financial obligations, and your credit history.

Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the loan may allow you to renew the credit line. But, in a loan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance, while others may permit you to repay over a fixed time.

Once approved for the home equity plan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks. Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line—for example, $300—and to keep a minimum amount outstanding.

Some lenders also may require that you take an initial advance when you first set up the line.

Traditional Second Mortgage Loans

If you are thinking about a home equity line of credit you might also want to consider a more traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

Tip: Consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

Caution: Do not simply compare the APR for a traditional mortgage loan with the APR for a home equity line—the APRs are figured differently. The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

Automobile Loans

Automobile loans are among the most common types of loans today. Your automobile serves as the security for the loan. These loans are available not only through banks but also through automobile dealers. However, the dealer itself does not provide the financing; it simply routes the loan to an affiliated finance company, such as the General Motors Acceptance Corporation (GMAC).

Investment Loans

Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

Caution: If your margin debt exceeds 50% of the value of your securities, you will be subject to a margin call, which means that you will have to come up with cash or sell securities. If the market is falling at the time, a margin call can cause a financial disaster. Therefore, we recommend against use of margin debt, unless the amount is kept way below 50%. We think 25% is a safe percentage.

CD And Passbook Loans

Because the rate of interest you are earning on the CD or savings account is probably less than the interest that would be charged on the loan, it is usually a better idea to withdraw the money in the account (waiting until the term of the CD is up, to avoid penalties), than to borrow against it.

Loans Against 401(K) Plans And Life Insurance

One advantage of borrowing from a 401(k) plan or profit-sharing plan, assuming loans are permitted, is that the interest you pay goes back into your own pocket—right into your 401(k) or profit-sharing account. The amount of the loan is limited.

Loans against life insurance policies used to be available at fairly low rates. If you can get a rate of 5 or 6% on a loan against the cash value of your life insurance policy, it is generally a good deal. If the rate is any higher than this, such a loan is generally not a good idea.

Credit Union Loans

Credit union loans may be available at lower rates than those of banks.

Banks And Savings And Loans

If you obtain an unsecured loan at a bank, the rate will be higher because there is no collateral. For this reason, unsecured bank loans are generally not attractive.

Credit Card Advances

These are almost always a bad idea, despite their convenience, because of the high rate you will pay.

How To Shop For A Loan

If you are thinking of borrowing, your first step is to figure out how much it will cost you and whether you can afford it. Then shop for the credit terms that best meet your borrowing needs without posing undue financial risk. Look carefully at the credit agreement and examine the terms and conditions of the various possibilities, including the annual percentage rate (APR) and the costs you will pay to establish the plan.

The Truth in Lending Act requires lenders to disclose the important terms and costs of credit, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have received this information. Use these disclosures to compare the costs of loans. You usually get these disclosures when you receive an application form and you will get additional disclosures before the loan is made. If any term has changed before the loan is made (other than a variable-rate feature), the lender must usually return all fees if you decide not enter into the loan because of the changed term.

Interest Rate Charges And Loan Features

Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you, in writing and before you sign any agreement, the finance charge and the annual percentage rate.

  • The finance charge is the total dollar amount you pay to use credit. It includes interest costs, service charges and some credit-related insurance premiums. For example, a $10,000 loan may have a 10% interest rate and a service charge of $100; thus, the finance charge would total $1,100.
  • The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

Example: You borrow $10,000 for one year at 10%. If you can keep the entire $10,000 for the whole year, and then pay back 11,000 at the end of the year, the APR is 10%. On the other hand, if you repay the $10,000, and the interest (a total of $11,000) in 12 equal monthly installments, you don't really get to use $10,000 for the whole year. In fact, you get to use less and less of that $10,000 each month. In this case, the $1,000 charge for credit amounts to an APR of 18%.

All creditors—banks, stores, car dealers, credit card companies, finance companies—must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure so that you can compare credit costs. The law says these two pieces of information must be shown to you before you sign a credit contract or use a credit card.

Interest rates may be either fixed or variable. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). Lenders then add a margin, i.e., a number of percentage points, to the index value to arrive at the interest rate you will pay. This interest rate will change, mirroring fluctuations in the index.

Tip: Because the cost of borrowing is tied directly to the index rate, ask what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

Sometimes lenders advertise a temporarily discounted rate — a rate that is unusually low and often lasts only for an introductory period, such as six months.

Variable rate plans may have a ceiling (or cap) on how high your interest rate can climb over the life of the loan. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop. Some lenders may permit you to convert a variable rate to a fixed interest rate during the life of the plan or to convert all or a portion of your line to a fixed-term installment loan.

With a variable rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a loan that calls for interest-only payments. At a 10% interest rate, your initial payments would be $83 monthly. If the rate should rise over time to 15%, your payments will increase to $125 per month. Even with payments that cover interest plus some portion of the principal, there could be a similar increase in your monthly payment, unless the agreement calls for keeping payments level throughout the plan.

Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to get additional funds during any period the interest rate reaches the cap.

Repaying The Loan

Consider how you will pay back any money you might borrow. Some plans set minimum payments that cover a portion of the principal of the amount you borrow plus accrued interest. But, unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term. Other plans may allow payments of interest alone during the life of the plan, which means that you pay nothing toward the principal. Thus, if you borrow $10,000, you will owe that entire sum when the loan ends.

Regardless of the minimum payment required, you can usually pay more than the minimum. Many lenders may give you a choice of payment options.

Whatever your payment arrangements during the life of the loan—whether you pay some, a little, or none of the principal amount of the loan—you may have to pay the entire balance owed when the loan ends, all at once. You must be prepared to make this "balloon" payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose any security given for the loan (e.g., your home or car).

Comparing Loans

Even when you understand the terms a creditor is offering, it is easy to underestimate the difference in dollars that different terms can make. Suppose you are going to borrow $6,000. Compare the three credit arrangements below:

Creditor

 

APR

Length of Loan

Monthly Payment

Total Finance Charges

Total of Payments

Creditor A 14% 3 years $205.07 $1,382.52 $7,382.52
Creditor B 14% 4 years $163.96 $1,870.08 $7,870.08
Creditor C 15% 4 years $166.98 $2,015 $8,015.04

How do these choices stack up? The answer depends partly on what you need.

  • The lowest cost loan (total payments) is available from Lender A.
  • If you were looking for the lowest monthly payments, that would be available from Lender B. This is because you are paying the loan off over a longer period of time. However, you would have to pay more in total costs. The loan from Lender B—also at a 14% APR but for four years—will add about $488 to your finance charge.
  • If that four-year loan were available only from Lender C, the APR of 15% would add another $145 or so to your finance charges as compared with Lender B.

Other terms, such as the size of the down payment, will also make a difference. Be sure to look at all the terms before you make your choice.

Home Equity Loans

Before signing for a home equity line of credit or other type of home equity loan, weigh carefully the costs of a home equity debt against the benefits. Remember, failure to repay the line could mean the loss of your home.

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home, such as:

  • A fee for a property appraisal, which estimates the value of your home;
  • An application fee, which may not be refundable if you are turned down for credit;
  • Up-front charges, such as one or more points (one point equals one percent of the credit limit);
  • Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes; and
  • Yearly membership or maintenance fees.

You also may be charged a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed. On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

Source: CPA Site Solutions

What type of account should you keep your money in at a bank or savings and loan association? How can you find the account that will charge you the least amount of money for the services you need? This Guide helps you choose the most cost-effective type of account.

Bank accounts are a basic part of managing your money. Nearly everyone has a bank account of some sort, and about 16% of Americans' money is held in a checking, savings, or money market account.

Because features and costs of accounts can vary greatly among institutions, it is important to shop around when seeking a new account. You should also ask questions and negotiate regarding your current account; you may discover that you do not need to pay many of the fees you are currently paying.

This Guide discusses the various types of bank accounts, and provides suggestions for finding the lowest-cost account that will provide you with the services you want. In addition, it tells you what you need to know about Electronic Funds Transfers — how to get the best use from ATM cards, pre-authorized transfers, and point-of-service payments.

Comparing Types Of Accounts

The accounts offered by depository institutions generally fall within one of these types:

1. Checking Accounts

With a checking account you write checks to withdraw your deposited funds from the account. Checking accounts provide you with quick, convenient and frequent access to your money. You can make deposits as often as you like. Most institutions provide customers with access to an automated teller machine (ATM) for banking transactions or debit features for purchases at stores.

Some checking accounts pay interest; others do not. A regular checking account -usually called a demand deposit account-does not pay interest, while a negotiable order of withdrawal (NOW) account-does.

Various fees are charged on checking accounts. You generally must pay for the printing of your checks. Other fees vary among institutions. Some charge a maintenance or flat monthly fee regardless of the balance in your account. Other institutions charge a monthly fee if the minimum balance in your account drops below a certain amount any day during the month or if the average balance for the month drops below the specified amount. Some charge a fee for every transaction, such as for each check you write or for each withdrawal you make at an ATM. Many institutions impose a combination of these fees.

2. Money-Market Deposit Accounts (MMDA)

A money market deposit account (MMDA ) is an interest-bearing account that allows you to write checks. An MMDA usually pays a higher rate of interest than a checking or savings account. MMDAs usually require a higher minimum balance to start earning interest, and often pay higher rates of interest for higher balances.

Making withdrawals from an MMDA is less convenient than withdrawing from a checking account. You are generally limited to six transfers per month to another account or to other parties, and only three of these can be by check. Most institutions charge fees with MMDAs.

3. Savings Accounts

With savings accounts you can make withdrawals, but you do not have the flexibility of checks. As with an MMDA, the number of withdrawals or transfers per month may be limited.

Many banks offer more than one type of savings account-for example, passbook savings and statement savings. With passbook savings you get a record book in which deposits and withdrawals are entered; this record book must be presented when making deposits and withdrawals. With statement savings, the bank mails you a regular statement showing withdrawals and deposits. As with other accounts, various fees, such as minimum balance fees, may be charged on savings accounts.

4. Credit Union Accounts

Credit union accounts are similar to those at banks, but have different names. Credit union members have share draft (rather than checking) accounts, share (rather than savings) accounts, and share certificate (rather than certificate of deposit) accounts.

  • Tip: Interest-bearing checking accounts may appear attractive, but they often charge higher fees than regular checking accounts; the fees often negate the interest. It's important to find out how much you'll be paying in fees.
  • Tip: Credit unions typically charge less for banking services than banks. In order to use a credit union you generally must be a member of a group, such as through your employer or a family members employer. Check local credit unions and find out their membership requirements. You can contact the National Credit Union Administration for information on credit unions. Similarly, you can obtain information, including financial data on federally insured banks through the FDIC.

5. Time Deposits (Certificates of Deposit)

Certificates of deposit, or CDs, are time deposits. CDs offer a guaranteed rate of interest for a specified term, such as one year. With CDs, you can choose from among various lengths of time that your money is on deposit, ranging from several days to several years.

Once you pick the term you want, you will generally have to keep your money in the account until the term ends. Some banks allow you to withdraw the interest earned while leaving your initial deposit (the principal) in the CD. Because you are leaving your funds with the bank for a set period of time, the rate of interest is generally higher than for a savings or other account. Typically, the longer the term, the higher the annual percentage yield.

If you withdraw your principal before maturity, a penalty is usually charged. Penalties vary among institutions, and can be hefty-sometimes greater than the interest earned, eating into your principal. The bank will notify you before the maturity date for most CDs. Often CDs renew automatically.

  • Tip: If you are going to take out your money at maturity, keep track of the maturity date and notify the institution that you wish to take out your money. Otherwise the CD will roll over for another term.

6. Basic (No-Frill) Accounts

Basic or no-frill accounts, which may be offered by some banks, give you limited services for a lower price. Basic accounts give you a convenient way to pay bills and cash checks for less than you might pay without any account at all. Basic accounts are checking accounts, but the number of checks you can write and the number of deposits and withdrawals you can make is limited. Interest generally is not paid.

  • Tip: Compare basic and regular checking accounts, taking into account your check-writing needs, to get the best deal in low fees or low minimum balance requirements. If you don't write many checks and don't want to keep a minimum balance in the checking account, the basic account may be worth your while.

Summary Of Features

The table below summarizes the available account types and their features:

Type Of Account Earn Interest? Write Checks? Withdrawal Limitations? Fees?
Regular Checking No Yes No Yes
Interest Checking Yes Yes No Yes
Money Market Deposit Account (MMDA) Yes, usually higher than NOW or savings Yes, usually with a monthly limit Yes, usually with a monthly limit Yes
Savings Yes No Same as MMDA Yes
Certificate of Deposit (CD) Yes, usually higher than MMDA No Yes, usually no withdrawals of principal until date of maturity Yes, if you withdraw principal funds before date of maturity
  • Note: These are the general rules at the time of this writing. They may vary from bank to bank and from time to time.

What type of account should you open? The answer depends on how you plan to use the account. If you want to build up your savings and you won't need your money soon, a certificate of deposit will serve your purposes.

If you need to reach your money easily, however, a savings account may be a better choice. And if you want a way to pay bills, a checking account is probably best for you.

  • Tip: If you usually write only two or three checks per month, an MMDA might be a better deal than a checking account. MMDAs pay a higher rate of interest than checking accounts, but require a higher minimum balance.

Checking accounts have other advantages. They simplify your record keeping. Canceled checks provide you with receipts at tax time, and the check register is a convenient way of keeping track of monthly expenses.

Account features and fees vary from one institution to the next. It's important to take the time to ask bank employees about any account features and fees before you open an account.

  • Tip: To get the most out of a checking account, find out what the minimum balance for avoiding fees is, and keep that minimum in the account. Further, try to get a checking account that will pay you interest, or that looks to the combined balance in checking and savings accounts to arrive at the minimum required balance. This way, you will not be paying the bank for the checking services, and your money will be earning some interest-although not at a great rate.

Choosing An Account

Choosing an account is a matter of comparing the features of accounts at various banks. The features that should be compared are interest, fees, limitations on withdrawals, and limitations on time deposit accounts.

 

Interest

Determine the interest rate on an account. Find out whether the institution can change the rate after you open the account. In addition, find out the following.

  • Does the institution pay different rates of interest depending on the amount of your account balance, and, if so, in what way is interest calculated? (See Tiered Interest Rates, below.)
  • How often is interest compounded? In other words, when does the institution start paying interest on the interest you've already earned in the account?
  • What is the annual percentage yield? The APY is a rate that reflects the amount of interest you will earn on a deposit.
  • What is the minimum balance required before you earn interest?
  • Do you begin earning interest the day you deposit a check into your account-called "earning on your ledger balance" — or do you begin earning interest later, when the institution receives credit for the check-known as "earning on your collected balance"?

Tiered Interest Rates

Institutions may pay different rates tied to different balance amounts.

Example: An institution pays a 5 percent interest rate on balances up to $5,000 and 5.5 % on balances above $5,000. If you deposit $8,000, the institution that pays interest on the entire balance pays you 5.5 % on the entire $8,000. Other institutions may pay you 5 % on the first $5,000 and 5.5 % only on the remaining $3,000. 

Tip: To tell which method an institution uses, check the annual percentage yield (APY) disclosure. If it is a single figure for a balance level, you will be paid the stated interest rate for the entire balance. If the APY is stated as a range for each balance level, your earnings will depend on the balance you keep in each level. Of course, getting paid the stated interest rate on the entire balance is a better deal.

Fees

Determine the following about an account:

  • Will you pay a flat per-month fee? How much?
  • Will you pay a fee if the balance in your account drops below a certain amount? How much?
  • Is there a charge for each deposit and withdrawal you make? How much?
  • How much will it cost you to use an ATM to make deposits and withdrawals on your account? Does it matter whether the transaction takes place at an ATM owned by the institution
  • Is there a charge for bill payment by phone or modem? How much?
  • If you have a checking account or an MMDA, how much will new checks cost?
  • Will you be charged for each check you write? How much?
  • Are fees reduced if you have other accounts at the institution?
  • Are fees reduced or waived if you agree to directly deposit your paycheck or government payments (e.g., Social Security check)?
  • What is the fee for stopping payment on a check you have written?
  • Is there a charge for making a balance inquiry?
  • Does the institution charge a fee for closing an account soon after it is opened? If it does, when will the fee be imposed?
  • Are you charged to have canceled checks returned to you with your statement? How much?
  • What is the charge for writing a check that bounces (a check returned for insufficient funds)? And what happens if you deposit a check written by another person, and it bounces? Are you charged a fee?

Check Clearing and Other Limitations

Find out whether the following will apply to the account:

  • Does the institution limit the number or the dollar amount of withdrawals or deposits you make?
  • If you close the account before interest is credited to your account, will you be credited with the interest that has been earned?
  • How long does it take for checks to clear? How soon does the institution allow you to withdraw funds that you have deposited to your account?

For Time Deposits

If you are looking into a CD, here are some questions to ask:

  • What is the term of the account (i.e., how long until maturity)?
  • Will the account roll over automatically? Does the account renew unless you withdraw your money at maturity or during any grace period? A grace period is the time after maturity when you can withdraw your money without penalty. If there is a grace period, how long is it?
  • If you are allowed to withdraw your money before maturity, is there a penalty? How much?
  • Will the institution regularly send you the amount of interest you are earning on your account-or regularly credit it to another account of yours?

Getting A Better Deal

A recent survey showed that more than half of the surveyed individuals picked their checking account banks because of geographic location. Only 19% chose their banks because of cost-effectiveness (low fees). This shows that cost-effective accounts are out there, but it takes time to shop around for them.

An easy way for a bank to increase its cash flow is to add on fees here and there for services that used to be free of charge. Conversely, bank customers can increase their cash flow by getting a bank to drop a charge-or by changing banks.

Here are some tips for negotiating with your current bank to try to get a better deal on your checking account.

  • Step One: Take a look at your past three or four checking account statements. Find out what all of the fees and charges are, and make notes of them.
  • Step Two: Figure out your checking account needs, and jot them down. How many checks do you write per month? How many ATM visits do you make? How many deposits do you make? How many times are you overdrawn? How often do you go below the minimum required balance?
  • Step Three: Armed with this information, check with several other area banks to find out what they charge for the same services. Do this over the phone, if you have the time, or ask for the information to be sent to you in the mail.
  • Step Four: Now you are ready to go to your own bank. Speak to a manager. Say that you are looking to reduce your banking costs. Ask them to cut fees, and if they won't budge, tell them what the competition is offering. They may move on certain fees if they sense they will lose your business. Ask whether you can lower costs by: using direct deposit, getting photocopies of canceled checks instead of the checks themselves, or opening another account or CD.

Protecting Your Account

 

Overdraft Protection

Many people overlook a valuable service offered by banks: the overdraft protection line of credit. This type of service is most valuable to a self-employed individual whose business is seasonal. If there are times during the year when you have cash flow problems, the overdraft protection line of credit can save you headaches-and at a lower interest rate than other forms of borrowing. Don't neglect to inquire about this service if it would suit your situation.

 

Truth In Savings

The Truth in Savings Act, a federal law, requires depository institutions to disclose to you the important terms of their consumer deposit accounts. Institutions must tell you:

  • The annual percentage yield and interest rate;
  • Cost information, such as fees that may be charged; and
  • Information about other features such as any minimum balance amount required to earn interest or to avoid fees.

To help you shop for the best accounts, an institution must give you information about any consumer deposit account the institution offers, if you ask for it. You will also get disclosures before you actually open an account.

In addition, the Truth in Savings Act generally requires that interest and fee information be provided on any periodic statements sent to you. And if you have a roll-over CD that is longer than one month, the law requires also that you get a renewal notice before the CD matures.

Federal Deposit Insurance

Only deposit accounts at federally insured depository institutions are protected by federal deposit insurance. Generally, the government protects the money you have on deposit to a limit of $100,000. If an account is in trust or co-owned, there may be an effect on the amount of insurance coverage you have.

  • Tip: Ask how the deposit insurance rules will apply to your deposit account. Federally insured depository institutions also offer products that are not protected by insurance. For example, you may purchase shares in a mutual fund or an annuity. These investments are not protected by the federal government.
  • Tip: You can also check out the financial condition of your bank if you are concerned about protection for balances over $100,000

The Electronic Fund Transfer (EFT) system is a national payment mechanism that moves money between accounts. Here are some of the ways EFT is in use:

Automated Teller Machines (ATMs). You can bank electronically and get cash, make deposits, pay bills, or transfer funds from one account to another. ATM machines are used with a debit or EFT card and a code, which is often called a personal identification number or "PIN".

Point-of-Sale (POS) Transactions. Some EFT cards can be used when shopping to allow the transfer of funds from your account to the merchant's. To pay for a purchase, you present an EFT card instead of a check or cash. Money is taken out of your account and put into the merchant's account electronically.

Pre-Authorized Transfers. This is a method of automatically depositing to or withdrawing funds from an individual's account, when the account holder authorizes the bank or a third party (such as an employer) to do so. For example, you can authorize direct electronic deposit of wages, Social Security, or dividend payments to their accounts. Or, you can authorize financial institutions to make regular, ongoing payments of insurance, mortgage, utility or other bills.

Telephone Transfers. You can transfer funds from one account to another-from savings to checking, for example-or order payment of specific bills by phone.

People who use EFT systems are often concerned about safeguards in the system. Since there is no check-no piece of paper with information that authorizes a bank to withdraw a certain amount of money from your account and pay that amount to another person-EFT users wonder about record keeping, errors, and theft:

  • What record-what evidence-exists for transactions?
  • How easily can errors be corrected?
  • What if someone steals money from the account?
  • What about solicitations?
  • Is it mandatory to use EFT services?

The answers are found in a federal law-the Electronic Funds Transfer Act. We have summarized the EFT's protections.

What Record Will I Have Of My Transactions?

A canceled check is permanent proof that a payment has been made. Is proof of payment available with EFT services?

The answer is yes. If you use an ATM to withdraw money or make deposits, or a point-of-sale terminal to pay for a purchase, you can get a written receipt-much like the sales receipt you get with a cash purchase- showing the amount of the transfer, the date it was made, and other information. This receipt is your record of transfers initiated at an electronic terminal.

Your periodic bank statement must also show all electronic transfers to and from your account, including those made with debit cards, by a pre-authorized arrangement, or under a telephone transfer plan. It will also name the party to whom payment has been made and show any fees for EFT services (or the total amount charged for account maintenance) and your opening and closing balances.

Your monthly statement is proof of payment to another person, your record for tax or other purposes, and your way of checking and reconciling EFT transactions with your bank balance.

CORRECTING ERRORS?

  1. If you believe that there is an error in your bank account write or call your bank immediately if possible, but no later than 60 days from the date the first statement that you think shows an error was mailed to you. Give your name and account number and explain why you believe there is an error, what kind of error, and the dollar amount and date in question. If you call, you may be asked to send this information in writing within 10 business days.

  2. The bank must promptly investigate an error and resolve it within 45 days. However, if the bank takes longer than 10 business days to complete its investigation, generally it must put back into your account the amount in question while it finishes the investigation.

  3. The financial institution must notify you of the results of its investigation. If there was an error, the institution must correct it promptly-for example, by making a re-credit final.

  4. If it finds no error, the bank must explain in writing why it believes no error occurred and let you know that it has deducted any amount re-credited during the investigation. You may ask for copies of documents relied on in the investigation.

What About Loss Or Theft?

It's important to be aware of the potential risk in using an EFT card. Note that the risks differ from those involved with credit cards. On lost or stolen credit cards, your loss is limited to $50 per card. On an EFT card, your liability for an unauthorized withdrawal can vary:

  • Your loss is limited to $50 if you notify the financial institution within two business days after learning of loss or theft of your card or code.
  • But you could lose as much as $500 if you do not tell the card issuer within two business days after learning of the loss or theft.

If you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you, you risk unlimited loss on transfers made after the 60-day period. That means you could lose all the money in your account plus your maximum overdraft line of credit.

  • Example: On Monday, John's debit card and secret code were stolen. On Tuesday, the thief withdrew $250, all the money John had in his checking account. Five days later, the thief withdrew another $500, triggering John's overdraft line of credit. John did not realize his card was stolen until he received a statement from the bank, showing withdrawals of $750 he did not make. He called the bank right away. John's liability is $50.

Now suppose that when John got his bank statement he didn't look at it and didn't call the bank. Seventy days after the statement was mailed to John, the thief withdrew another $1,000, reaching the limit on John's line of credit. In this case, John would be liable for $1,050 ($50 for transfers before the end of the 60 days; $1,000 for transfers made more than 60 days after the statement was mailed).

What About Solicitations?

A financial institution may send you an EFT card that is valid for use only if you ask for one, or to replace or renew an expiring card. The financial institution must also give you the following information about your rights and responsibilities:

  • A notice of your liability in case the card is lost or stolen;
  • A telephone number for reporting loss or theft of the card or an unauthorized transfer;
  • A description of its error resolution procedures;
  • The kinds of electronic fund transfers you may make and any limits on the frequency or dollar amounts of such transfers;
  • Any charge by the institution for using EFT services;
  • Your right to receive records of electronic fund transfers;
  • How to stop payment of a pre-authorized transfer;
  • The financial institution's liability to you for any failure to make or to stop transfers; and
  • The conditions under which a financial institution will give information to third parties about your account.

Generally, you must also get advance notice of any change in the account that would increase your costs or liability, or limit transfers.

A financial institution may send you a card you did not request only if the card is not valid for use. An "unsolicited" card can be validated only at your request and only after the institution makes sure that you are the person whose name is on the card. It must also be sent with instructions on how to dispose of an unwanted card.

Do I Have To Use EFT?

The EFT Act forbids a creditor from requiring you to repay a loan or other credit by EFT, except in the case of overdraft checking plans.

Although your employer or a government agency can require you to receive your salary or a government benefit by electronic transfer, you have the right to choose the financial institution that will receive your funds.

Common Questions About Pre-Authorized Loans

Here are some frequently asked questions about pre-authorized plans.

Q. How will I know a pre-authorized credit has been made?

A. There are various ways you may be notified. Notice may be given by your employer (or whoever is sending the funds) that the deposit has been sent to your financial institution. Otherwise, a financial institution may provide notice when it has received the credit or will send you a notice only when it has not received the funds. Financial institutions also have the option of giving you a telephone number you can call to check on a pre-authorized credit.

Q. How do I stop a pre-authorized payment?

A. You may stop any pre-authorized payment by calling or writing the financial institution, so that your order is received at least three business days before the payment date. Written confirmation of a telephone notice to stop payment may be required.

Q. If the payments I pre-authorize vary in amount from month to month, how will I know how much will be transferred out of my account?

A. You have the right to be notified of all varying payments at least 10 days in advance.

Or, you may choose to specify a range of amounts and to be told only when a transfer falls outside that range. You may also choose to be told only when a transfer differs by a certain amount from the previous payment to the same company.

Q. Do the EFT Act protections apply to all pre-authorized plans?

A. No. They do not apply to automatic transfers from your account to the institution that holds your account or vice versa. For example, they do not apply to automatic payments made on a mortgage held by the financial institution where you have your EFT account. The EFT Act also does not apply to automatic transfers among your accounts at one financial institution.

Correcting Errors

  1. If you believe that there is an error in your bank account write or call your bank immediately if possible, but no later than 60 days from the date the first statement that you think shows an error was mailed to you. Give your name and account number and explain why you believe there is an error, what kind of error, and the dollar amount and date in question. If you call, you may be asked to send this information in writing within 10 business days.

  2. The bank must promptly investigate an error and resolve it within 45 days. However, if the bank takes longer than 10 business days to complete its investigation, generally it must put back into your account the amount in question while it finishes the investigation.

  3. The financial institution must notify you of the results of its investigation. If there was an error, the institution must correct it promptly-for example, by making a re-credit final.

  4. If it finds no error, the bank must explain in writing why it believes no error occurred and let you know that it has deducted any amount re-credited during the investigation. You may ask for copies of documents relied on in the investigation.

Government and Non-Profit Agencies

The following federal agencies are responsible for making sure that depository institutions follow the federal Truth in Savings Act. Questions about an institution should be directed as follows:

  • State-Chartered Member Banks of the Federal Reserve System:

Division of Consumer and Community Affairs
Board of Governors of the Federal Reserve System
20th and C Streets, N.W.
Washington, DC 20551
Tel. (202) 452-3000

  • National Banks:

Consumer Examinations Division
Office of the Comptroller of the Currency
250 E Street, S.W.
Washington, DC 20219
Tel. (202) 874-4820

  • Credit Unions:

National Credit Union Administration
1775 Duke Street
Alexandria, Virginia 22314-3428

  • Federally Insured Savings & Loan Institutions and Federally Chartered Savings Banks:

Office of Thrift Supervision
1700 G Street
Washington, DC 20552
Tel. (202) 906-6000

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Let us help you balance your checkbook. First tell us the ending balance on your statement, then enter all of your outstanding checks and deposits.

If your checkbook register matches our calculated amount, your checkbook is balanced! If not, you may need to verify that all of your withdrawals and deposits are correct and accounted for.

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How do automated teller machine (ATM) and other electronic transfer transactions work?

There are various transactions that fall under the umbrella term "electronic funds transfer."

Automated Teller Machines (ATMs). You can bank electronically and get cash, make deposits, pay bills, or transfer funds from one account to another. ATM machines are used with a debit or EFT card and a code, which is often called a personal identification number or "PIN."

Point-of-Sale (POS) Transactions. Some EFT cards can be used when shopping to allow the transfer of funds from your account to the merchant's. To pay for a purchase, you present an EFT card instead of a check or cash. Money is taken out of your account and put into the merchant's account electronically.

Preauthorized Transfers. This is a method of automatically depositing to or withdrawing funds from an individual's account, when the account holder authorizes the bank or a third party (such as an employer) to do so. For example, you can authorize direct electronic deposit of wages, Social Security, or dividend payments to their accounts. Or, you can authorize financial institutions to make regular, ongoing payments of insurance, mortgage, utility or other bills.

Telephone Transfers. You can transfer funds from one account to another—from savings to checking, for example—or order payment of specific bills by phone.

People who use EFT systems are often concerned about safeguards in the system. Since there is no check—no piece of paper with information that authorizes a bank to withdraw a certain amount of money from your account and pay that amount to another person—EFT users wonder about recordkeeping, errors, and theft:

Recordkeeping. If you use an ATM to withdraw money or make deposits, or a point-of-sale terminal to pay for a purchase, you can get a written receipt—much like the sales receipt you get with a cash purchase— showing the amount of the transfer, the date it was made, and other information. This receipt is your record of transfers initiated at an electronic terminal.

Your periodic bank statement must also show all electronic transfers to and from your account, including those made with debit cards, by a pre-authorized arrangement, or under a telephone transfer plan. It will also name the party to whom payment has been made and show any fees for EFT services (or the total amount charged for account maintenance) and your opening and closing balances.

Your monthly statement is proof of payment to another person, your record for tax or other purposes, and your way of checking and reconciling EFT transactions with your bank balance.

What should I do if I find an error related to an electronic fund transfer or ATM transaction?

If you believe there has been an error in an electronic fund transfer relating to your account:

  1. Write or call your financial institution immediately if possible, but no later than 60 days from the date the first statement that you think shows an error was mailed to you. Give your name and account number and explain why you believe there is an error, what kind of error, and the dollar amount and date in question. If you call, you may be asked to send this information in writing within 10 business days.
  2. The financial institution must promptly investigate an error and resolve it within 45 days. However, if the financial institution takes longer than 10 business days to complete its investigation, generally it must put back into your account the amount in question while it finishes the investigation. Note: The time periods are longer for point-of-service debit card transactions and for any EFT transaction initiated outside the United States. In the meantime, you will have full use of the funds in question.
  3. The financial institution must notify you of the results of its investigation. If there was an error, the institution must correct it promptly—for example, by making a re-credit final. If it finds no error, the financial institution must explain in writing why it believes no error occurred and let you know that it has deducted any amount re-credited during the investigation. You may ask for copies of documents relied on in the investigation.

What happens if my ATM card is lost or stolen?

It's important to be aware of the potential risk in using an ATM or other Electronic Funds Transfer card. Note that the risks differ from those involved with credit cards. On lost or stolen credit cards, your loss is limited to $50 per card. On an EFT card, your liability for an unauthorized withdrawal can vary:

  • Your loss is limited to $50 if you notify the financial institution within two business days after learning of loss or theft of your card or code.
  • But you could lose as much as $500 if you do not tell the card issuer within two business days after learning of the loss or theft.

If you do not report an unauthorized transfer that appears on your statement within 60 days after the statement is mailed to you, you risk unlimited loss on transfers made after the 60-day period. That means you could lose all the money in your account plus your maximum overdraft line of credit.

Will I be able to use my ATM card overseas?

Most likely. There are now hundreds of thousands of ATMs in more than 100 countries. Major cities, of course, are full of them. You can also find them in remote places such as towns in the Peruvian Andes, but it pays to check on locations before going abroad, especially in developing countries. Both Visa and Master Card have online services to pinpoint ATMs anywhere in the world.

ATM cards can be very useful to travelers. They are safer than carrying cash because card issuers often will absorb any unauthorized withdrawals if you report your card stolen or missing right away. You can withdraw cash in local currency at a better exchange rate than you can get with traveler’s checks. And you have access to money after hours or on weekends when banks are closed. The down side is that the fees banks charge on ATM transactions may make it expensive to change small amounts of money. You also may be in trouble if the stripe on your card is demagnetized. To protect yourself use your ATM card in combination with credit cards and traveler’s checks.

How will I know a pre-authorized credit (such as automatic payroll deposit) has been made?

There are various ways you may be notified. Notice may be given by your employer (or whoever is sending the funds) that the deposit has been sent to your financial institution. Otherwise, a financial institution may provide notice when it has received the credit or will send you a notice only when it has not received the funds. Financial institutions also have the option of giving you a telephone number you can call to check on a pre-authorized credit.

How do I stop a pre-authorized payment?

You may stop any pre-authorized payment by calling or writing the financial institution, so that your order is received at least three business days before the payment date. Written confirmation of a telephone notice to stop payment may be required.

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What banking fees do you need to look out for when shopping for a bank account?

Fortunately, banks are required to give you a list of fees for their accounts. Even with interest, the best account is usually the one with the lowest fees.

Checking accounts are minefields for potential banking charges. Be sure you ask about monthly fees, fees for check processing, and ATM fees. A no-cost checking account may impose a charge if your balance drops below a minimum dollar amount. Check printing charges have sky-rocketed in recent years to as much as $24 at some banks. You can have your checks printed for much less by an outside financial printer.

It rarely makes sense anymore to park money in an old-fashioned "passbook" savings account. Monthly account fees may overshadow the small amount of interest you will earn. Put it in your checking account instead if you can refrain from spending it. If it's a big enough sum, you might want to put it in a money market account. You will earn more interest than in a savings account, but make sure you don't get hit with a monthly charge if your balance falls too low.

What are the different types of bank accounts available?

The accounts offered by depository institutions generally fall within one of these types:

  • Checking accounts. With a checking account you write checks to withdraw your deposited funds from the account. Checking accounts provide you with quick, convenient and frequent access to your money. You can make deposits as often as you like. Most institutions provide customers with access to an automated teller machine (ATM) for banking transactions or debits for purchases at stores.

    Some checking accounts pay interest; others do not. A regular checking account —usually called a demand deposit account—does not pay interest, while a negotiable order of withdrawal (NOW) account—does.

    Various fees are charged on checking accounts, in addition to the charge for the checks you order. Fees vary among institutions. Some charge a maintenance or flat monthly fee regardless of the balance in your account. Other institutions charge a monthly fee if the minimum balance in your account drops below a certain amount any day during the month or if the average balance for the month drops below the specified amount. Some charge a fee for every transaction, such as for each check you write or for each withdrawal you make at an ATM. Many institutions impose a combination of these fees.

  • Money market deposit accounts. A money market deposit account (MMDA) is an interest-bearing account that allows you to write checks. An MMDA usually pays a higher rate of interest than a checking or savings account. MMDAs usually require a higher minimum balance to start earning interest, and often pay higher rates of interest for higher balances.

    Making withdrawals from an MMDA is less convenient than withdrawing from a checking account. You are limited to six transfers per month to another account or to other parties, and only three of these can be by check. Most institutions charge fees with MMDAs.

  • Savings accounts. With savings accounts you can make withdrawals, but you do not have the flexibility of checks. As with an MMDA, the number of withdrawals or transfers per month may be limited.

    Many banks offer more than one type of savings account—for example, passbook savings and statement savings. With passbook savings you get a record book in which deposits and withdrawals are entered; this record book must be presented when making deposits and withdrawals. With statement savings, the bank mails you a regular statement showing withdrawals and deposits.

    As with other accounts, various fees, such as minimum balance fees, may be charged on savings accounts.

  • Credit union accounts. Credit union accounts are similar to those at banks, but have different names. Credit union members have share draft (rather than checking) accounts, share (rather than savings) accounts, and share certificate (rather than certificate of deposit) accounts.
  • Certificates of deposit. Certificates of deposit, or CDs, are time deposits. CDs offer a guaranteed rate of interest for a specified term, such as one year. With CDs, you can choose from among various lengths of time that your money is on deposit, ranging from several days to several years.

     Once you pick the term you want, you will generally have to keep your money in the account until the term ends. Some banks allow you to withdraw the interest earned while leaving your initial deposit (the principal) in the CD. Because you are leaving your funds with the bank for a set period of time, the rate of interest is generally higher than for a savings or other account. Typically, the longer the term, the higher the annual percentage yield.

    If you withdraw your principal before maturity, a penalty is usually charged. Penalties vary among institutions, and can be hefty—sometimes greater than the interest earned, eating into your principal.

    The bank will notify you before the maturity date for most CDs. Often CDs renew automatically.

  • Basic or no-frills accounts. Basic or no frill accounts, which may be offered by some banks, give you limited services for a lower price. Basic accounts give you a convenient way to pay bills and cash checks for less than you might pay without any account at all. Basic accounts are checking accounts, but the number of checks you can write and the number of deposits and withdrawals you can make is limited. Interest generally is not paid.

What type of account should I open?

The answer depends on how you plan to use the account. If you want to build up your savings and you won’t need your money soon, a certificate of deposit will serve your purposes.

If you need to reach your money easily, however, a savings account may be a better choice. And if you want a way to pay bills, a checking account is probably best for you.

Checking accounts have other advantages. They simplify your recordkeeping. Canceled checks provide you with receipts at tax time, and the check register is a convenient way of keeping track of monthly expenses.

Account features and fees vary from one institution to the next. It’s important to take the time to ask bank employees about any account features and fees before you open an account.

How should I shop for a "best buy" bank account?

Choosing an account is a matter of comparing the features of accounts at various banks. The features that should be compared are:

  • Interest Rates. Determine the interest rate on an account. Find out whether the institution can change the rate after you open the account. In addition, find out the following:  
    1. Does the institution pay different rates of interest depending on the amount of your account balance, and, if so, in what way is interest calculated? (See Tiered Interest Rates, below.)
    2. How often is interest compounded? In other words, when does the institution start paying interest on the interest you've already earned in the account?
    3. What is the annual percentage yield? The APY is a rate that reflects the amount of interest you will earn on a deposit.
    4. What is the minimum balance required before you earn interest?
    5. Do you begin earning interest the day you deposit a check into your account—called "earning on your ledger balance"-- or do you begin earning interest later, when the institution receives credit for the check—known as "earning on your collected balance"?

    Institutions may pay different rates tied to different balance amounts.

  • Fees. Ask the following questions of each bank/account that your are considering:
    1. Will you pay a flat per-month fee? How much?
    2. Will you pay a fee if the balance in your account drops below a certain amount? How much?
    3. Is there a charge for each deposit and withdrawal you make? How much?
    4. How much will it cost you to use an ATM to make deposits and withdrawals on your account? Does it matter whether the transaction takes place at an ATM owned by the institution?
    5. Is there a charge for bill payment by phone or modem? How much?
    6. If you have a checking account or an MMDA, how much will new checks cost?
    7. Will you be charged for each check you write? How much?
    8. Are fees reduced if you have other accounts at the institution?
    9. Are fees reduced or waived if you agree to directly deposit your paycheck or government payments (e.g., Social Security check)?
    10. What is the fee for stopping payment on a check you have written?
    11. Is there a charge for making a balance inquiry?
    12. Does the institution charge a fee for closing an account soon after it is opened? If it does, when will the fee be imposed?
    13. Are you charged to have canceled checks returned to you with your statement? How much?
    14. What is the charge for writing a check that bounces (a check returned for insufficient funds)? And what happens if you deposit a check written by another person, and it bounces? Are you charged a fee?
  • Limitations. Find out whether the following will apply to the account:
    1. Does the institution limit the number or the dollar amount of withdrawals or deposits you make?
    2. If you close the account before interest is credited to your account, will you be credited with the interest that has been earned?
    3. How long does it take for checks to clear? How soon does the institution allow you to withdraw funds that you have deposited to your account?

    If you are looking into a CD, here are some questions to ask:

    1. What is the term of the account (i.e., how long until maturity)?
    2. Will the account roll over automatically? Does the account renew unless you withdraw your money at maturity or during any grace period? A grace period is the time after maturity when you can withdraw your money without penalty. If there is a grace period, how long is it?
    3. If you are allowed to withdraw your money before maturity, is there a penalty? How much?
    4. Will the institution regularly send you the amount of interest you are earning on your account—or regularly credit it to another account of yours?

How much protection is provided by federal deposit insurance?

Federal deposit insurance sets apart deposit accounts from other savings choices. Only deposit accounts at federally insured depository institutions are protected by federal deposit insurance. Generally, the government protects the money you have on deposit to a limit of $100,000. Accounts for special relationships, such as trusts or co-owners, may also have some effect on the amount of insurance coverage you have.

How can I negotiate checking account fees with my current bank?

Here are some tips for negotiating with your current bank to try to get a better deal on your checking account.

  • Step One: Take a look at your past three or four checking account statements. Find out what all of the fees and charges are, and make notes of them.
  • Step Two: Figure out your checking account needs, and jot them down. How many checks do you write per month? How many ATM visits do you make? How many deposits do you make? How many times are you overdrawn? How often do you go below the minimum required balance?
  • Step Three: Armed with this information, check with several other area banks to find out what they charge for the same services. Do this over the phone, if you have the time, or ask for the information to be sent to you in the mail.
  • Step Four: Now you are ready to go to your own bank. Speak to a manager. Say that you are looking to reduce your banking costs. Ask them to cut fees, and if they won’t budge, tell them what the competition is offering. They may move on certain fees if they sense they will lose your business. Ask whether you can lower costs by: using direct deposit, getting photocopies of canceled checks instead of the checks themselves, or opening another account or CD.

What questions should I ask when shopping for a Checking Account?

You need to know exactly how much a checking account will cost you. Get a list from your banker of all possible fees, including charges for maintaining the account, processing checks, bouncing checks, using the ATM, stopping payment, and transferring funds. Ask if the account will be cheaper if the bank does not return canceled checks. In the rare event that you need one, ask how much, if anything, it will cost to get a copy. To avoid bouncing checks, ask how long you have to wait after depositing funds to draw on them.

For interest checking accounts, ask how the bank calculates the interest. If the bank pays more on accounts with higher balances, be sure you get a "tiered" rate, which pays you the highest interest on all the money you have in the account. Be sure you know the charge for falling below the minimum balance, too. It might be more than the interest you will earn. Finally, some banks reduce charges on checking accounts if you take out a loan or buy a CD. Ask what deals are available.

What is overdraft protection and should I have it?

Many people overlook a valuable service offered by banks: the overdraft protection line of credit. With this protection, if you write a check which would overdraw your account a loan is automatically made from a line of credit. With this protection you will not bounce any checks.

This type of service is most valuable to a self-employed individual whose business is seasonal. If there are times during the year when you have cash flow problems, the overdraft protection line of credit can save you headaches—and at a lower interest rate than other forms of borrowing. Don’t neglect to inquire about this service if it would suit your situation.

What is the Truth in Savings Act?12

The Truth in Savings Act, a federal law, requires depository institutions to disclose to you the important terms of their consumer deposit accounts. Institutions must tell you:

  • The annual percentage yield and interest rate
  • Cost information, such as fees that may be charged
  • Information about other features such as any minimum balance amount required to earn interest or to avoid fees

To help you shop for the best accounts, an institution must give you information about any consumer deposit account the institution offers, if you ask for it. You will also get disclosures before you actually open an account.

In addition, the Truth in Savings Act generally requires that interest and fee information be provided on any periodic statements sent to you. And if you have a roll-over CD that is longer than one month, the law requires also that you get a renewal notice before the CD matures.

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The Fair Credit Reporting Act (FCRA) requires each of the nationwide consumer reporting companies - Equifax, Experian, and TransUnion - to provide you with a free copy of your credit report, at your request, once every 12 months.

You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order your report from each of the companies one at a time. The law allows you to order one free copy of your report from each of the nationwide consumer reporting companies every 12 months.

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    Should I prepay my mortgage?

    As a general rule, if you are able to prepay your mortgage (and if there is no penalty for doing so) you should prepay as much as you can every month. Here are some exceptions to the general rule:

    1. You do not have an emergency fund stashed away—three to six months’ worth of expenses. All extra funds should be put towards this cache. You can begin paying down your mortgage afterwards.
    2. You have a large amount of credit card debt. In such case, all of your extra funds should be used to pay down those debts.

    There are a few individuals who may be better off not paying down their mortgages, since they will achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, return achievable on an investment, and long-term investment goals.

    When should I refinance my home?

    Refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. Talk to some lenders to determine the available rates and the costs associated with refinancing. These costs include appraisals, attorney's fees, and points.

    Once you know what the costs will be, determine what your new payment would be if you refinanced. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings).

    Be aware that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

    Should I borrow against my securities?

    Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

    Tip: If your margin debt exceeds 50% of the value of your securities, you will be subject to a margin call, which means that you will have to come up with cash or sell securities. If the market is falling at the time, a margin call can cause a financial disaster. Therefore, we recommend against use of margin debt, unless the amount is kept way below 50%. We think 25% is a safe percentage.

    What is a home equity line of credit?

    A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills--not for day-to-day expenses.

    With a home equity line, you will be approved for a specific amount of credit— your credit limit—meaning the maximum amount you can borrow at any one time while you have the plan.

    Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. For example:

    Appraisal of home $100,000
    Percentage x 75%
    Percentage of appraised value $75,000
    Less mortgage debt -40,000
    Potential credit line $35,000

    In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, and other financial obligations, as well as your credit history.

    Once approved for the home equity plan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks.

    Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line--for example, $300--and to keep a minimum amount outstanding.

    What are the costs of obtaining a home equity line of credit?

    Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. For example these fees may be charged:

    • A fee for a property appraisal, which estimates the value of your home

    • An application fee, which may not be refundable if you are turned down for credit

    • Up-front charges, such as one or more points (one point equals one percent of the credit limit)

    • Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes

    • Yearly membership or maintenance fees

    You also may be charged a transaction fee every time you draw on the credit line.

    What is an interest rate "lock-in"?

    If you decide to apply for financing with a particular lender, and if you do not want to let the interest rate "float" until closing, get a written statement guaranteeing the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock-in" ensures that the lender will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the lender to put this information in writing, you may wish to choose one who will.

    Most lenders place a limit on the length of time (say, 60 days) they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, contact your loan officer periodically to check on the progress of your loan approval and to see if information is needed.

    What disclosures must a lender give you?

    For a financing, the lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan, as required by the Truth in Lending Act. You usually will receive the information around the time of settlement, although some lenders provide it earlier.

    Tip: Review this statement carefully before you sign the loan. The disclosure tells you the APR, finance charge, amount financed, payment schedule, and other important credit terms.

    If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to rescind the loan. In these loans, you have the right to rescind or cancel the transaction within three business days following settlement, receipt of your Truth in Lending disclosures, or receipt of your cancellation notice, whichever occurs last.

    What is a reverse mortgage?

    A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you continue to own the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you. Reverse mortgages differ from home equity loans in that most reverse mortgages do not require any repayment of principal, interest, or servicing fees as long as you live in the home.

    The reverse mortgage’s benefit is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, or to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.

    Note: Reverse mortgages are now available in every state except Alaska, South Dakota and Texas. But willing lenders may still be scarce in some places.

    When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs.

    What loan interest is tax-deductible?

    The deductibility of interest has been limited in recent years. The following types of interest are at least partially deductible:

    • Mortgage interest
    • Business interest
    • Investment interest
    • Education related interest

    What are the limitations on deductibility of mortgage interest?

    Generally, interest expense on the taxpayers primary residence and a second (but not a third) home is deductible. Interest is only deductible on the first $1,000,000 of the acquisition loan. As the loan is paid off the limit is reduced. In other words you can not refinance a loan for a higher amount than the current principal balance and increase the deduction. In addition interest on a home equity loan of up to $100,000 can be deducted.

    Is interest expense incurred for business purposes deductible?

    Yes. Interest expense incurred for a trade or business is deductible against the income of that business. For example, if your are self-employed the business interest would be deducted on Schedule C.

    Is investment related interest expense deductible?

    Yes. Investment interest is deductible up to the amount of investment income.

    When can you stop paying private mortgage insurance?

    Generally, if you make a down payment of less than 20% when buying a home, the lender will require you to buy private mortgage insurance. You can generally drop the PMI when you have attained 20% equity in the home, or when the value of your home goes up (due to a good real estate market) so that your equity constitutes 20%.

    Some lenders require you to keep the PMI forever, and others make you keep it at least five years.

    To find out whether you can cancel the coverage, send a letter to your mortgage servicing company (the company to which you send your mortgage payments). This will get the process started. You may be required to pay for an appraisal, and you will need to have a good payment record.

    If you are able to cancel the insurance, you will receive any prepaid premiums that are in your escrow account.

    Source: CPA Site Solutions

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    Should I prepay my mortgage?

    As a general rule, if you are able to prepay your mortgage (and if there is no penalty for doing so) you should prepay as much as you can every month. Here are some exceptions to the general rule:

    1. You do not have an emergency fund stashed away—three to six months’ worth of expenses. All extra funds should be put towards this cache. You can begin paying down your mortgage afterwards.
    2. You have a large amount of credit card debt. In such case, all of your extra funds should be used to pay down those debts.

    There are a few individuals who may be better off not paying down their mortgages, since they will achieve a better return by investing that money elsewhere. Whether an investor fits into this category depends on his or her marginal tax rate, mortgage interest rate, return achievable on an investment, and long-term investment goals.

    When should I refinance my home?

    Refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. Talk to some lenders to determine the available rates and the costs associated with refinancing. These costs include appraisals, attorney's fees, and points.

    Once you know what the costs will be, determine what your new payment would be if you refinanced. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old payments (your monthly savings).

    Be aware that the amount you ultimately save depends on many factors, including your total refinancing costs, whether you sell your home in the near future, and the effects of refinancing on your taxes.

    Should I borrow against my securities?]

    Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

    What is a home equity line of credit?

    A home equity line is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills--not for day-to-day expenses.

    With a home equity line, you will be approved for a specific amount of credit— your credit limit—meaning the maximum amount you can borrow at any one time while you have the plan.

    Many lenders set the credit limit on a home equity line by taking a percentage (say, 75 percent) of the appraised value of the home and subtracting the balance owed on the existing mortgage. In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, and other financial obligations, as well as your credit history.

    Once approved for the home equity plan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks.

    Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line--for example, $300--and to keep a minimum amount outstanding.

    What are the costs of obtaining a home equity line of credit?

    Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home. For example these fees may be charged:

    • A fee for a property appraisal, which estimates the value of your home
    • An application fee, which may not be refundable if you are turned down for credit
    • Up-front charges, such as one or more points (one point equals one percent of the credit limit)
    • Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes
    • Yearly membership or maintenance fees

    You also may be charged a transaction fee every time you draw on the credit line.

    What is an interest rate "lock-in"?

    If you decide to apply for financing with a particular lender, and if you do not want to let the interest rate "float" until closing, get a written statement guaranteeing the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock-in" ensures that the lender will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the lender to put this information in writing, you may wish to choose one who will.

    Most lenders place a limit on the length of time (say, 60 days) they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people are refinancing their mortgages, there may be a delay in processing the papers. Therefore, contact your loan officer periodically to check on the progress of your loan approval and to see if information is needed.

    What disclosures must a lender give you?

    For a financing, the lender must give you a written statement of the costs and terms of the financing before you become legally obligated for the loan, as required by the Truth in Lending Act. You usually will receive the information around the time of settlement, although some lenders provide it earlier.

    If you refinance with a different lender, or if you borrow beyond your unpaid balance with your current lender, you also must be given the right to rescind the loan. In these loans, you have the right to rescind or cancel the transaction within three business days following settlement, receipt of your Truth in Lending disclosures, or receipt of your cancellation notice, whichever occurs last.

    What is a reverse mortgage?

    A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you continue to own the home. Reverse mortgages operate like traditional mortgages, only in reverse. Rather than paying your lender each month, the lender pays you. Reverse mortgages differ from home equity loans in that most reverse mortgages do not require any repayment of principal, interest, or servicing fees as long as you live in the home.

    The reverse mortgage’s benefit is that it allows homeowners who are age 62 and over to keep living in their homes and to use their equity for whatever purpose they choose. A reverse mortgage might be used to cover the cost of home health care, or to pay off an existing mortgage to stop a foreclosure, or to support children or grandchildren.

    When the homeowner dies or moves out, the loan is paid off by a sale of the property. Any leftover equity belongs to the homeowner or the heirs.

    What loan interest is tax-deductible?

    The deductibility of interest has been limited in recent years. The following types of interest are at least partially deductible:

    • Mortgage interest
    • Business interest
    • Investment interest
    • Education related interest

    What are the limitations on deductibility of mortgage interest?

    Generally, interest expense on the taxpayers primary residence and a second (but not a third) home is deductible. Interest is only deductible on the first $1,000,000 of the acquisition loan. As the loan is paid off the limit is reduced. In other words you can not refinance a loan for a higher amount than the current principal balance and increase the deduction. In addition interest on a home equity loan of up to $100,000 can be deducted.

    Is interest expense incurred for business purposes deductible?

    Yes. Interest expense incurred for a trade or business is deductible against the income of that business. For example, if your are self-employed the business interest would be deducted on Schedule C.

    Is investment related interest expense deductible?

    Yes. Investment interest is deductible up to the amount of investment income.

    When can you stop paying private mortgage insurance?

    Generally, if you make a down payment of less than 20% when buying a home, the lender will require you to buy private mortgage insurance. You can generally drop the PMI when you have attained 20% equity in the home, or when the value of your home goes up (due to a good real estate market) so that your equity constitutes 20%.

    Some lenders require you to keep the PMI forever, and others make you keep it at least five years.

    To find out whether you can cancel the coverage, send a letter to your mortgage servicing company (the company to which you send your mortgage payments). This will get the process started. You may be required to pay for an appraisal, and you will need to have a good payment record.

    If you are able to cancel the insurance, you will receive any prepaid premiums that are in your escrow account.

    What should I do if a friend or family member asks me to co-sign a loan?

    Many people agree to co-sign loans for friends or relatives, as a favor, as a vote of confidence, or because they just can't say no. Unfortunately, they often find that they've bitten off more than they intended to chew.

    The cosigner of a loan agrees to be responsible for its repayment along with the borrower. While a lender will generally seek repayment from the debtor first, it can go after the cosigner at any time. (On the other hand, where a loan is guaranteed, the lender can usually go after the guarantor only after the principal debtor has actually defaulted.)

    Finance companies report that most cosigners end up paying off the loans they've cosigned—along with late charges, legal fees and all. Not only is this an unwanted out-of-pocket expense, but it can also be an undeserved blot on the cosigner's credit record.

    It's better to guarantee a loan than to cosign it. However, if you're willing to cosign a loan, at least seek the lender's agreement to refrain collecting from you until the borrower actually defaults and try to limit your liability to the unpaid principal at the time of default. Then stay on top of the borrower's financial situation to help avoid a default (for example, have the lender notify you whenever a payment is late). At least you can preserve your credit rating by nipping payment problems in the bud.

    Cosigning An Account. You may be asked to cosign an account to allow someone else to obtain a loan. With cosigning, your payment history and assets are used to qualify the cosigner for the loan.

     Bear in mind that cosigning a loan bears all the financial and legal consequences of taking out the loan yourself. When you cosign, you are signing a contract that makes you responsible for the entire debt. If the other cosigner does not pay, or makes late payments, it will probably show up on your credit record. If the person for whom you cosigned does not pay the loan, the collection company will be entitled to try to collect from you.

    If the cosigned loan is reported on your credit report, another lender will view the cosigned account as if it were your own debt. Further, if the information is correct, it will remain on your credit report for up to seven years.

    How can I get the best deal on a home equity loan or an equity line of credit?

    If you decide to apply for a home equity loan, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan.

    Interest Rates. Home equity plans typically involve variable interest rates rather than fixed rates. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). The interest rate will change, mirroring fluctuations in the index.

    To figure the interest rate that you will pay, most lenders add a margin, such as 2 percentage points, to the index value.

    Sometimes lenders advertise a temporarily discounted rate for home equity loans—a rate that is unusually low and often lasts only for an introductory period, such as six months.

    Variable rate plans secured by a dwelling must have a ceiling (or cap) on how high your interest rate can climb over the life of the plan. Some variable-rate plans limit how much your payment may increase, and also how low your interest rate may fall.

    Some lenders permit you to convert a variable rate to a fixed interest rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.

    Agreements generally permit the lender to freeze or reduce your credit line under certain circumstances, such as during any period the interest rate reaches the cap.

    What are the costs of obtaining a home equity line of credit?

    Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home.

    For example, these fees may be charged:

    • A fee for a property appraisal, which estimates the value of your home
    • An application fee, which may not be refundable if you are turned down for credit
    • Up-front charges, such as one or more points (one point equals one percent of the credit limit)
    • Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes
    • Yearly membership or maintenance fees

    You also may be charged a transaction fee every time you draw on the credit line.

    You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed.

    On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit.

    The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

    Should I obtain a home equity line of credit or a traditional second mortgage loan?

    If you are thinking about a home equity line of credit you might also want to consider a traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

    In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

    How should I determine which of several loan alternatives is best?

    Use the legally-required disclosures of loan terms to compare the costs of home equity loans.

    The Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have this information.

    You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term has changed before the plan is opened (other than a variable-rate feature), the lender must return all fees if you decide not enter into the plan because of the changed term.

    Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you—in writing and before you sign any agreement—the finance charge and the annual percentage rate.

    The finance charge is the total dollar amount you pay to use credit. It includes interest costs, and other costs, such as service charges and some credit-related insurance premiums.

    For example, borrowing $100 for a year might cost you $10 in interest. If there were also a service charge of $1, the finance charge would be $11.

    The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

    All creditors—banks, stores, car dealers, credit card companies, finance companies— must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure--before you sign a credit contract or use a credit card--so you can compare costs.

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