Recently, fixed mortgages were near their lowest rates in almost 30 years. And if you are one of the many people who took out mortgages in the few years prior to that, you may be wondering if you should look into refinancing.
If your mortgage was taken out within the past five years, it may be worthwhile to refinance if you can get financing that is at least one to two points lower than your current interest rate. You should plan on staying in the house long enough to pay off the loan transaction charges (points, title insurance, attorney’s fees, etc.).
A fixed-rate mortgage could be your best bet in a rising interest rate environment, if you plan to stay in the house for several years. An adjustable mortgage may suit you if you will be moving within a few years, but you need to ensure that you will be able to handle increasingly higher payments should interest rates rise.
One way to use mortgage refinancing to your advantage is to take out a new mortgage for the same duration as your old mortgage. The lower interest rate will result in lower monthly payments.
For example, if you took out a $150,000 30-year fixed-rate mortgage at 7.5 percent (including transaction charges), your monthly payment is now $1,049. Refinance at 6 percent with a 30-year fixed-rate mortgage of $150,000 (including transaction fees), and your payment will be $899 per month. That’s a savings of $150 per month, which you can then use to invest, add to your retirement fund, or do with it whatever you please.
Another option is to exchange your old mortgage for a shorter-term loan. Your 30-year fixed-rate payment on a $150,000 loan was $1,049 per month. If you refinance with a 15-year fixed mortgage for $150,000 — including transaction costs — at 6 percent, your monthly payment will be $1,266. This payment is only $217 more than your previous mortgage, but your home will be fully paid for several years sooner, for a savings of more than $150,000! And some banks around the country are beginning to offer 10- and 20-year mortgages.
Either way you look at it, it’s an attractive idea.
If you’re considering refinancing your mortgage, consult your financial advisor and determine whether refinancing your home would be a good move for you.
Many Americans facing retirement would love to increase their monthly income.
Faced with fixed pensions, rising medical expenses, limited Social Security benefits, and longer life spans, an increasing number of people are actually being forced to lower their standards of living when they retire.
As you approach retirement, one of your major assets is likely to be your house. By the time the average person retires, his or her home is usually worth significantly more than he or she paid for it.
Now there are techniques that will enable you to use your property to finance your lifestyle without the emotional trauma of having to sell your home.
Reverse mortgages effectively allow you to annuitize your house. All borrowers must be at least 62 years of age for most reverse mortgages. You may decide to receive a fixed monthly payment for the rest of your life. This is tax-free because it comes in the form of a loan. You don’t even have the worry of repaying the money. It is only due upon the death of the surviving spouse with the sale of your property.
Owners generally must occupy the home as their principal residence (where they live the majority of the year).
The monthly payment you receive is computed using standard annuity methods that take into account your age and life expectancy. In addition, the current and projected future value of your property and the amount of equity in your house that you wish to assign to the loan company are considered.
For example, you may choose to take the loan against only 50 percent of the equity stake in your house. This would obviously cause a reduction in the size of your monthly check.
All reverse mortgages turn your home into three things: loan advances paid to you; loan costs paid to the lender and others; and leftover equity, if any, paid to you or your heirs at the end of the loan.
If property prices decline after you take out the loan, it will not affect the remainder of your estate. In such circumstances, the lending company bears the loss. This is similar to a traditional annuity in which the insurance company bears the loss of continuing annuity payments in the event that you live past your life expectancy.
You do need to exercise some caution before undertaking a reverse mortgage. As you continue to own your home, you are still responsible for property taxes, insurance, and repairs. There are costs associated with a reverse mortgage that can include an application fee, closing costs, and a monthly servicing fee. The federally insured Home Equity Conversion Mortgage is generally less expensive than other private-sector reverse mortgages. You should carefully consider the costs and consult with a professional who can explain the full implications. If you decide to back out of the contract, the surrender charges can be very steep.
If they fit in with your temperament and lifestyle objectives, reverse mortgages can be an alternative tax-free means of increasing your monthly income during your retirement years.
One of the most precious assets that you are likely to possess as you progress through life is your home. Owning their own homes is something that most Americans strive for.
Unfortunately, for the vast majority of people, one of the major drawbacks in owning a home is the long-term mortgage that must be paid off. Mortgages often stretch out 30 years with interest and principal repayments.
Most mortgage repayments are made on a monthly basis. However, arranging to make payments biweekly can have a dramatic effect on the amount of money you have to pay and the time frame before it is all paid off.
Under a biweekly mortgage, instead of making the payments once a month, you make half the payment every two weeks. If your mortgage is $1,000 per month, under a biweekly system it would be $500 every two weeks.
You make 26 payments per year, which is the equivalent of 13 monthly payments rather than 12. The extra payment should be taken directly off the principal, reducing the payment schedule accordingly.
The effect of biweekly mortgage payments can be dramatic. For example, if you currently have a $150,000 loan at 8 percent fixed interest, you will have paid approximately $396,233 at the end of 30 years.
However, if you use a biweekly payment system, you will pay $331,859 and have it completely paid off in 21.6 years. You save $64,374 and pay the loan off 8.4 years earlier!
The savings you realize using a biweekly payment schedule can save you nearly half of what it cost to buy the house in the first place.
An increasing number of mortgage companies are now offering a biweekly payment option. It is even possible to convert your current monthly payments into a biweekly schedule.
Some companies will attempt to charge you to refinance the loan. However, this is not always the case and shopping around can save you money in refinancing charges.
Be wary of independent companies offering to do this for you for a fee — you can do it for yourself for free.
You should receive professional financial advice when considering switching to a biweekly mortgage payment schedule.
For the vast majority of people, it is essential to keep a portion of their assets in liquid form in order to meet monthly commitments.
For example, most families have to meet their mortgage or rent payments, grocery, utility, and transportation bills out of their monthly paychecks. There are a host of other expenses that arise from month to month, such as auto insurance, that help keep the pressure on the family cash flow.
If people are fortunate enough to have anything left over once all the expenses have been met, then they can worry about saving or investing for the future.
The paychecks that you deposit in your checking account, which seem to swiftly disappear as you pay monthly expenses, constitute a portion of your short-term cash. The money is no sooner in your bank account than it flows out again as payment for goods and services.
However, because the money that we use to meet our monthly expenses is so liquid, there is a tendency to simply look at it as a method of payment. We often leave more than we need in our checking accounts, gaining little or no interest until we need it for a future expense.
By actively managing the short-term cash that passes through your hands, you can provide a means of saving for the future. You can use this money to increase your net worth with little or no additional risk to your principal.
Short-term investment instruments, such as Treasury bills, certificates of deposit, and money market mutual funds, can provide you with the liquidity needed to meet expected and unexpected expenses and to increase your short-term investment income.
There are numerous alternatives available to enable you to get your short-term cash working for you. The key to successfully managing your short-term cash lies in understanding the alternatives and choosing the one most appropriate to your particular needs and circumstances.
Treasury bills are backed by the full faith and credit of the U.S. government as to the timely payment of principal and interest. Bank CDs are insured by the FDIC for up to $250,000 per depositor, per insured institution in interest and principal.
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Just like individuals, the government, corporations, and banks often need to borrow money for a short time to make ends meet. Unlike most individuals, however, the scale of this borrowing is phenomenal.
The money market is the name given to the arena where most of this short-term borrowing takes place. In the money market, money is both borrowed and lent for short periods of time.
For example, a bank might have to borrow millions of dollars overnight to ensure that it meets federal reserve requirements. Loans in the money market can stretch from one day to one year or beyond. The interest rate is fundamentally determined by supply and demand, the length of the loan, and the credit standing of the borrower.
The money market was traditionally only open to large institutions. Unless you had a spare $100,000 lying around, you couldn’t participate.
However, during the inflationary era of the 70s, when interest rates sky-rocketed, people began to demand greater returns on their liquid funds. Leaving money in a bank deposit account at 5 percent interest made little sense with inflation running at 12 percent. The money market was returning significantly higher rates but the vast majority of people were prohibited from participating by the sheer scale of the investment required.
And so, the first money market mutual fund came into being. By pooling shareholders’ funds, it was possible for individuals to receive the rewards of participating in the money market. Because of their large size, mutual funds were able to make investments and receive rates of return that individual investors couldn’t get on their own.
Money market mutual funds typically purchase highly liquid investments with varying maturities, so there is cash flow to meet investor demand to redeem shares. You can withdraw your money at any time.
For a minimum investment, sometimes as low as $500, money market mutual funds will allow you to write checks. The check-writing feature is most often used to transfer cash to a traditional checking account when additional funds are needed. These funds are useful as highly liquid, cash emergency, short-term investment vehicles.
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds.
Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
There are a number of short-term cash management instruments available to the individual establishing a sound cash management program. These alternatives include money market mutual funds, Treasury bills, and certificates of deposit.
Money market mutual funds simply pool investors’ dollars and purchase large denomination money market instruments. Individuals invest in the mutual fund for as little as $500 and receive the advantageous short-term rates.
These money market funds are totally liquid and may be accessed by check, debit card, telephone, or wire transfer.
Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in money market funds.
Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Treasury bills are simply IOUs issued by the U.S. government to meet its short- term need for cash. They generally have maturities ranging from 90 days to one year.
The minimum face value of Treasury bills is $10,000, which makes them one of the least costly items in the money market. However, they are sold at a discount to face value with the full face amount being paid upon maturity. The difference between the discounted price you pay for the Treasury bill and the face value you receive at maturity is the interest, or yield.
Treasury bills are generally regarded as one of the safest investments available because they are backed by the full faith and credit of the federal government as to the timely payment of principal and interest.
There is an active secondary market in Treasury bills, so if you need access to your money instantly, you should have little difficulty in selling them. As with any investment traded in a secondary market prior to maturity, there is the opportunity for capital loss or capital gain, depending on the direction of interest rates.
An added advantage of Treasury bills is that they are free from local and state taxes.
Another relatively safe investment instrument is the traditional certificate of deposit (CD) that you may purchase from your local bank. Federally insured for up to $250,000 per depositor, per insured institution in interest and principal, CDs offer you a fixed interest rate for depositing your money for a specific period of time. If you withdraw your money before that period is up, you may be subject to interest rate penalties.
CDs may also be purchased through most brokerage firms. The brokerage firm will shop the market and find the most attractive rate for you, even if it is out of state. This is something you might find difficult to do on your own. CDs purchased this way are called Brokered CDs.
CDs are most suitable for purchasing and holding to maturity. However, you may find it necessary to dispose of CDs prior to maturity. An important distinction between Brokered CDs and Bank CDs is the different means for early redemption. With a Bank CD, should you redeem your CD early, you will typically be assessed an early withdrawal penalty. Brokered CDs trade in the secondary market which provides you with the opportunity to sell your CD at prevailing market prices, which may be worth more or less than the original amount you invested.
Brokered CDs are more complex and carry more risks than CDs offered directly by banks. Brokered CDs may not be suitable for all investors. Before you purchase a Brokered CD, make sure you fully understand all of its terms and carefully read its disclosure materials provided by your financial professional.
Before making any investment decision, one of the key elements you face is working out the real rate of return on your investment.
Compound interest is critical to investment growth. Whether your financial portfolio consists solely of a deposit account at your local bank or a series of highly leveraged investments, your rate of return is dramatically improved by the compounding factor.
With simple interest, interest is paid just on the principal. With compound interest, the return that you receive on your initial investment is automatically reinvested. In other words, you receive interest on the interest.
But just how quickly does your money grow? The easiest way to work that out is by using what’s known as the “Rule of 72.”1 Quite simply, the “Rule of 72” enables you to determine how long it will take for the money you’ve invested on a compound interest basis to double. You divide 72 by the interest rate to get the answer.
For example, if you invest $10,000 at 10 percent compound interest, then the “Rule of 72” states that in 7.2 years you will have $20,000. You divide 72 by 10 percent to get the time it takes for your money to double. The “Rule of 72” is a rule of thumb that gives approximate results. It is most accurate for hypothetical rates between 5 and 20 percent.
While compound interest is a great ally to an investor, inflation is one of the greatest enemies. The “Rule of 72” can also highlight the damage that inflation can do to your money.
Let’s say you decide not to invest your $10,000 but hide it under your mattress instead. Assuming an inflation rate of 4.5 percent, in 16 years your $10,000 will have lost half of its value.
The real rate of return is the key to how quickly the value of your investment will grow. If you are receiving 10 percent interest on an investment but inflation is running at 4 percent, then your real rate of return is 6 percent. In such a scenario, it will take your money 12 years to double in value.
The “Rule of 72” is a quick and easy way to determine the value of compound interest over time. By taking the real rate of return into consideration (nominal interest less inflation), you can see how soon a particular investment will double the value of your money.
The Rule of 72 is a mathematical concept, and the hypothetical return illustrated is not representative of a specific investment. Also note that the principal and yield of securities will fluctuate with changes in market conditions so that the shares, when sold, may be worth more or less than their original cost.The Rule of 72 does not include adjustments for income or taxation. It assumes that interest is compounded annually. Actual results will vary.
As with virtually all financial matters, the easiest way to be successful with a cash management program is to develop a systematic and disciplined approach.
By spending a few minutes each week to maintain your cash management program, you not only have the opportunity to enhance your current financial position, but you can save yourself some money in tax preparation, time, and fees.
Any good cash management system revolves around the four As — Accounting, Analysis, Allocation, and Adjustment.
Accounting quite simply involves gathering all your relevant financial information together and keeping it close at hand for future reference. Gathering all your financial information — such as mortgage payments, credit card statements, and auto loans — and listing it systematically will give you a clear picture of your overall situation.
Analysis boils down to reviewing the situation once you have accounted for all your income and expenses. You will almost invariably find yourself with either a shortfall or a surplus. One of the key elements in analyzing your financial situation is to look for ways to reduce your expenses. This can help to free up cash that can either be invested for the long term or used to pay off fixed debt.
For example, if you were to reduce restaurant expenses or spending on non-essential personal items by $100 per month, you could use this extra money to prepay the principal on your mortgage. On a $130,000 30-year mortgage, this extra $100 per month could enable you to pay it off 10 years early and save you thousands of dollars in interest payments.
Allocation involves determining your financial commitments and priorities and distributing your income accordingly. One of the most important factors in allocation is to distinguish between your real needs and your wants. For example, you may want a new home entertainment center, but your real need may be to reduce outstanding credit card debt.
Adjustment involves reviewing your income and expenses periodically and making the changes that your situation demands. For example, as a new parent, you might be wise to shift some assets in order to start a college education fund for your child.
Using the four As is an excellent way to help you monitor your financial situation to ensure that you are on the right track to meet your long-term goals.
529 Lesson Plan: High Scores for 529 College Savings Program
Looking for a tax-advantaged college savings plan that has no age restrictions and no income phaseout limits — and one you can use to pay for more than just tuition?
Consider the 529 college savings plan, an increasingly popular way to save for higher-education expenses, which have more than tripled over the past two decades — with annual costs (for tuition and fees, and room and board) of more than $43,000 per year for the average private four-year college.1 Named after the section of the tax code that authorized them, 529 plans (also known as qualified tuition plans) are now offered in almost every state.
Most people have heard about the original form of 529, the state-operated prepaid tuition plan, which allows you to purchase units of future tuition at today’s rates, with the plan assuming the responsibility of investing the funds to keep pace with inflation. Many state governments guarantee that the cost of an equal number of units of education in the sponsoring state will be covered, regardless of investment performance or the rate of tuition increase. Of course, each state plan has a different mix of rules and restrictions. Prepaid tuition programs typically will pay future college tuition at any of the sponsoring state’s eligible colleges and universities (and some will pay an equal amount to private and out-of-state institutions).
The newer variety of 529 is the savings plan. It’s similar to an investment account, but the funds accumulate tax deferred. Withdrawals from state-sponsored 529 plans are free of federal income tax as long as they are used for qualified college expenses. Many states also exempt withdrawals from state income tax for qualified higher education expenses. Unlike the case with prepaid tuition plans, contributions can be used for all qualified higher-education expenses (tuition, fees, books, equipment and supplies, room and board), and the funds usually can be used at all accredited post-secondary schools in the United States. The risk with these plans is that investments may lose money or may not perform well enough to cover college costs as anticipated.
In most cases, 529 savings plans place investment dollars in a mix of funds based on the age of the beneficiary, with account allocations becoming more conservative as the time for college draws closer. But recently, more states have contracted professional money managers — many well-known investment firms — to actively manage and market their plans, so a growing number of investors can customize their asset allocations. Some states enable account owners to qualify for a deduction on their state tax returns or receive a small match on the money invested. Earnings from 529 plans are not taxed when used to pay for eligible college expenses. And there are even consumer-friendly reward programs that allow people who purchase certain products and services to receive rebate dollars that go into state-sponsored college savings accounts.
Funds contributed to a 529 plan are considered to be gifts to the beneficiary, so anyone — even non-relatives — can contribute up to $14,000 per year in 2016 (the same as in 2015) per beneficiary without incurring gift tax consequences. Contributions can be made in one lump sum or in monthly installments. And assets contributed to a 529 plan are not considered part of the account owner’s estate, therefore avoiding estate taxes upon the owner’s death.
Major Benefits
These savings plans generally allow people of any income level to contribute, and there are no age limits for the student. The account owner can maintain control of the account until funds are withdrawn — and, if desired, can even change the beneficiary as long as he or she is within the immediate family of the original beneficiary. A 529 plan is also extremely simple when it comes to tax reporting — the sponsoring state, not you, is responsible for all income tax record keeping. At the end of the year when the withdrawal is made for college, you will receive Form 1099 from the state, and there is only one figure to enter on it: the amount of income to report on the student’s tax return.
Benefits for Grandparents
The 529 plan could be a great way for grandparents to shelter inheritance money from estate taxes and contribute substantial amounts to a student’s college fund. At the same time, they also control the assets and can retain the power to control withdrawals from the account. By accelerating use of the annual gift tax exclusion, a grandparent — as well as anyone, for that matter — could elect to use five years’ worth of annual exclusions by making a single contribution of as much as $70,000 per beneficiary in 2016 (or a couple could contribute $140,000 in 2016), as long as no other contributions are made for that beneficiary for five years.* If the account owner dies, the 529 plan balance is not considered part of his or her estate for tax purposes.
As with other investments, there are generally fees and expenses associated with participation in a Section 529 savings plan. In addition, there are no guarantees regarding the performance of the underlying investments in Section 529 plans. The tax implications of a Section 529 savings plan should be discussed with your legal and/or tax advisors because they can vary significantly from state to state. Also note that most states offer their own Section 529 plans, which may provide advantages and benefits exclusively for their residents and taxpayers.
Before investing in a 529 savings plan, please consider the investment objectives, risks, charges, and expenses carefully. The official disclosure statements and applicable prospectuses — which contain this and other information about the investment options, underlying investments, and investment company — can be obtained by contacting your financial professional. You should read these materials carefully before investing.
By comparing different plans, you can determine which might be available for your situation. You may find that 529 programs make saving for college easier than before.
* If the donor makes the five-year election and dies during the five-year calendar period, part of the contribution could revert back to the donor’s estate.
Sources:
1) The College Board, 2015
2) College Savings Plans Network, 2015
Every investor dreams of buying into the market at a low point, just before it hits an upswing, and garnering a large profit from selling at the market’s peak. But trying to predict market highs and lows is a feat no one has ever fully mastered, despite the claims by some that they have just the right strategy that enables them to buy and sell at the most opportune times.
Attempting to predict which direction the market will go or investing merely on intuition can get you in trouble, or at the very least may cause you a great deal of frustration. One strategy that may help you navigate these investing pitfalls is dollar-cost averaging.
Dollar-cost averaging involves investing a set amount of money in an investment vehicle at regular intervals for an extended period of time, regardless of the price. Let’s say you have $6,000 to invest. Instead of investing it all at once, you decide to use a dollar-cost averaging strategy and contribute $500 each month, regardless of share price, until your money is completely invested. You would end up purchasing more shares when prices are low and fewer shares when prices are high. For example, you might end up buying 20 shares when the price is low, but only 10 when the price is higher.
This strategy has the potential to reduce the risk of investing a large amount in a single investment when the cost per share is inflated. It may also help reduce the risk for an investor who tends to pull out of the market when it takes a dip, potentially causing an inopportune loss in profit.
The average cost per share may also be reduced, which has the possibility to help you gain better overall profits from the market. Utilizing a dollar-cost averaging program, the bottom line is that the average share price has the potential to be higher than your average share cost. This occurs because you purchased fewer shares when the stock was priced high and more shares when the price was low. Dollar-cost averaging can also help you to avoid the annoyance and stress of continually monitoring the market in an attempt to buy and sell at “fortuitous” moments.
Dollar-cost averaging is a long-range plan, as implied by the word “averaging.” In other words, the technique’s best use comes only after you’ve stuck with it for a while, despite any nerve-racking swings in the market. When other panicky investors are scrambling to get out of the market because it has declined and to get back into it when the market has risen, you’ll keep investing a specific amount based on the interval you’ve set.
Dollar-cost averaging does not ensure a profit in rising markets or protect against a loss in declining markets. This type of investment program involves continuous investment in securities regardless of the fluctuating price levels of such securities. Investors should consider their financial ability to continue making purchases through periods of low and high price levels. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
