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Are You Prepared?

muller_moritzAmerica is facing tough economic times.  The Federal Reserve and the Federal Government are doing things to shorten the downturn and get America growing again.  We have great confidence that it will happen again.  But this letter is directed at what we, as individuals, should be doing right now to help our personal economy.

First, we must realize that we can have control over a great many things. While the national economy is outside of our control, we make decisions every day that affect us personally.  Economists love to discuss whether the drop in gas prices, combined with tax cuts, will spur people to save or buy.  The answer to that question should depend on your circumstances.  Let’s review some personal questions:

  • Are you making the right decisions to protect your family?
  • Are you and/or your spouse currently employed with good prospects to stay that way through this storm?
  • Can or should you cut back on spending?
  • Do you need to make a major purchase (car, boat, house, appliances) in the next 12 months?
  • Do you have high interest credit card or consumer debt?
  • Do you own a home?  What are the chances of refinancing at lower rates
  • What would happen to your family if you or your spouse died?  Or, need a nursing home?
  • Do you have a 401k?  If so, how is it allocated?
  • Should you continue to make contributions to your 401k?  How much into what account?
  • Should you convert your traditional IRA to a Roth IRA?
  • Are you living off your pensions and investment income?  If so, which assets are you taking income from?  Should you stop or change?
  • Are you worried about your investment accounts?
  • Do you have an advocate looking out after your best interests?

These questions are the starting point of your own personal recovery program.  The key is to work with a professional who will take a 360° view of your situation and help you make informed decisions.

We are here to help in both the good times as well as the rough times.  If you have not been able to attend one of our Economic Recovery sessions, or if you have not visited with us recently, contact our office today.

Visiting with us will help you get the answers you need to make an informed decision.

March 18, 2009

Household Income

ATT00261Today, seniors are finding it more and more difficult to invest for income. Thankfully, the social security benefits went up 5.8% this year.  But that’s about all that has gone up.  With concern over risk, seniors are starting to look closer to home for a source of income.

Reverse mortgages are becoming more popular.  HUD’s Federal Housing Administration (FHA) created the first reverse mortgage.  A reverse mortgage enables you to withdraw some of the equity in your home.  A FHA reverse mortgage is a safe plan that can provide older Americans greater financial security.

A reverse mortgage is a special type of home loan that lets you take part of the equity in your home as cash, as a monthly income stream, or a combination of both.  But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer uses the home as their primary residence.

To be eligible for an FHA reverse mortgage, you, (the homeowner), must be at least 62 years of age or older.  You must own your home outright or have a low mortgage balance that can be paid off with the proceeds from the reverse mortgage.  You must also receive consumer information from an approved Home Equity Conversion Mortgages (HECM) counselor prior to obtaining the loan. An eligible home must be a single family home or a 1-4 unit home with one unit occupied by the borrower.  Condominiums and manufactured homes that meet FHA requirements are also approved.

Advantages of a Reserve Mortgage

You can qualify for a reverse mortgage regardless of your income.  You cannot outlive the loan, as long as you continue to live in the house.  You are, however, required to pay all real estate taxes and keep your insurance current.  You can never owe more than the value of your home.

If you move, or if your heirs sell the home, the proceeds are used to pay off the balance of the reverse mortgage, plus interest and other fees.  The remaining equity is yours or your heirs.

The amount you can borrow depends on your age, current interest rates, the appraised value of your home or the FHA limits.  Good news:  The stimulus plan, just enacted, raises the FHA limit to $625,000 from $417,000. Generally, the older the borrower(s), the lower the interest rate… and the higher the home value, the greater the amount of the reserve mortgage.

You have five options under a reverse mortgage:

1.    You can decide to take monthly payments as long as at least one of the
borrowers lives and continues to occupy the property.  This provides income
that you can never outlive.

2.    You can opt for equal monthly payments for a fixed period of time.

3.    You can establish a reverse mortgage and use it as a line of credit, drawing from it on an as needed basis.

4.    You can take part out in cash, and the rest on a monthly income for life.

5.    You can take part out in cash, and the rest in equal payments over a specific time period.

Let’s look at an example… Jim and Mary Smith.  Jim was born in 1930 and Mary was born in 1932.  They own a home, their primary residence, ouright. The current value of their home is $360,000.  Using today’s interest rates and mortality tables, the Smith’s could receive a monthly income equal to a little more than $1,600.  This income would not be subject to tax, nor count against the taxability of their social security benefits.  But more importantly, the income would continue as long as one of the borrowers lived
in the home.  Conversely, they could take out a single lump sum of $242,820 today, or a combination of the two.  If they established a reverse mortgage line of credit today, but did not take any of the proceeds out, that amount would continue to grow.  In five years, the line of credit would be over $296,000.

The reverse mortgage is not a panacea.  It does offer the ability to increase your nontaxable income without fear of being thrown out of your home.  But, you are required to live in the home and make all necessary tax and insurance payments.

Your first step is to talk to a Money Concepts’ advisor about your retirement income.  Let them look at your entire financial picture.  By doing this, you will be in a better position to get the best possible advice.  Our advisor will be able to let you know if it makes sense for you to further explore a FHA reverse mortgage.

Money Concepts does not provide FHA reverse mortgages, for more information, contact the Multifamily Housing Clearinghouse (MFHC), and they will provide you with an FHA-approved counseling agency and a list of FHA approved lenders.

March 9, 2009

Refinance Time?

ATT00261For most Americans, their home mortgage is their largest monthly bill.  But with mortgage rates falling, is now the time to refinance your mortgage?

Giving a straight yes or no answer is difficult because of the many other factors involved, but is worth looking into.  A change in the mortgage interest rates can make a meaningful change in the monthly payments. Savings of $200 to $400 per month are not unusual.  The key is to talk it over with your financial advisor.  Don’t refinance if the costs exceed the benefits.  Also, those who only have a few years left on their mortgage are probably better off not refinancing.  Still, a careful review is worth the effort.

The Federal Government has stepped into the mortgage market in an effort to make refinancing easier for many.  The Homeowner Affordability and Stability Plan, just announced last month, outlines how the Treasury Department is easing some of the rules for loan modifications and refinancing for millions of Americans.  The new, more liberal rules apply to mortgages that went through Fannie Mae and Freddie Mac, or that were securitized by them.  Under the old rules, you could only refinance if your home equity exceeded 80% of the fair market value of your house.  With home values falling over the last few years, many Americans were unable to refinance.  Now, the rule states that Fannie Mae and Freddie Mac can refinance a loan up to 105% of the fair market value.  The Treasury Department estimates that this rule change can help an estimated five million people refinance their loans.  How can you tell if your mortgage went through Fannie Mae or Freddie Mac?  Contact your mortgage bank and ask.  This new program starts March 4, 2009, so don’t delay.

What if you happen to be one of those 3 to 4 million folks “at risk” of foreclosure?  This plan offers incentives to help keep you in your home. The government is offering the mortgage servicing companies $1,000 per loan modification and a monthly fee equal to $1,000 per year for three years if the new mortgage stays current.  The government is also providing incentives for the homeowners as well.  A homeowner is eligible for $1,000 annually for five years if he/she stays current on his/her mortgage.  The five thousand
dollars goes against their mortgage balance.

To qualify, the investment bank must agree to lower the mortgage payment to 38% of the homeowners’ income.  Then, the Federal Government and the investment bank will share, on a dollar-for-dollar basis, further mortgage reductions to 31% of the homeowner’s income.

Refinancing or loan modifications are one way to take advantage of the current low interest rate environment and put a few more dollars in your pocket each month.  Whether it is the right move for you will depend on a number of factors; your current mortgage rate, the duration of your mortgage, the amount of time you plan on living in the home, closing costs, etc.  Visit with your Money Concepts’ financial advisor.  Allow your advisor to look at your whole financial picture and put it in perspective for you. This way, you will be better suited to make an informed and thoughtful decision for you and your family.

March 4, 2009

Homeownership An Opportunity of a Lifetime? Five Reasons You Should Consider Buying Now

ATT00261The housing market tumble has created an enormous opportunity for first-time home buyers, those that have not owned a home in three years or those wishing to move up.  Home prices have declined 14% in the last year. Mortgage rates are low.

1.      According to the National Association of Realtors the “housing affordability index” is higher now than at any point since the index was started in 1970.  The affordability index measures the relationship between home prices, mortgage interest rates and family income.  While home prices may fall further, there is no guarantee that they will, or that mortgage rates will stay at current low rates.

2.      Now, the Federal Government, through the stimulus package, has sweetened the deal.  First-time homebuyers, and those who have not owned a home in the last three years, may be entitled to a tax credit for purchasing a home.  This credit is up to 10% of the home’s value, not to exceed $8,000. This is a real tax credit that can be used for tax year 2008 or 2009.  For example, if you purchased your first home for $150,000 in March of 2009, you would be entitled to the maximum tax credit of $8,000.  Let’s say you owed $1,000 in additional income tax for 2008.  Now, because of this tax credit ($8,000)… instead of paying $1,000 to the IRS, they would send you a refund for $7,000.  To qualify, your adjusted gross income must be below $75,000 for individuals or $150,000 for couples.

3.      There is a large inventory to choose from.  Currently, there is about a 12-month supply of homes on the market.  This gives you, the buyer, extra bargaining power.  But, as the inventory of homes decreases, so does your bargaining power.

4.      Builders are offering extraordinary deals.  Home builders may be even more aggressive with their negotiations than foreclosed property or individual homeowners.  Another advantage of purchasing from a builder is you get a warranty on the home and its appliances.  Why would builders be more aggressive?  They want to save their credit, their brand name, and reputation.

5.      Mortgage rates are low.  These rates affect your monthly payments. The lower the interest charged on your mortgage, the lower your payments. Right now the Federal Government is taking extraordinary steps to keep mortgage rates low.  The Federal Reserve is buying up to $500 billion in loans, and the Treasury Department has just announced a $200 billion purchase of Fannie Mae and Freddie Mac preferred shares.  These low rates will not be with us for long.

Before deciding on a home purchase, meet with your financial advisor and go over your finances.  He or she will be able to tell you how much house you can afford.  Making sure that you do not get over your head is more important now than ever.  Also, it is a good idea to get pre-approved for your mortgage before you go shopping.  With a pre-approved mortgage, you will be in “the catbird seat” when it comes to negotiations.

What questions potential homebuyers should know:

*        What percent of income should my mortgage payment be?

*        Can I afford to take the jump into homeownership?

Get with your Money Concepts advisor and get the real answers to your real questions.  While we are not real estate brokers, we can review your current financial condition and provide you with real life guidelines.  Afterwards, you can work with real estate experts who can help you negotiate a deal that fits within your guidelines.

February 28, 2009


ATT00261These are extraordinary times for 401k participants.  Economics around the world are experiencing one of the most challenging and troubling time periods ever.  The market’s decline has been swift and dramatic.  What should you do with your 401k?  Should you continue making contributions? Where should you be investing those resources?   If you have been in equities, should you pull out now?

Emotions are running high.  History has shown that whether times are good or bad, emotions can drive individuals into making decisions that are detrimental to their long-term goals.  You do not want to follow the herd. Fear of loss is greater than the desire for gain.  That is one reason why drops in the market can be so dramatic.  Making decisions based on overconfidence, pride or fear is not the solution.

What should you do?  You, first, should continue making your 401k contributions.  Many 401k plans have an employer match.  If you cut your contribution, not only will you put less money in your 401k, so will your employer.  Also remember that the reason you are making these contributions in the first place, is to fund your retirement in later years.  If you still have that need or goal, continue making those contributions.  Lastly, your
contributions are made with pre-tax dollars and grow tax-deferred.

How you should invest your 401k fund will depend on a number of factors. These include: current age, age of retirement, risk attitudes, amount of funds available, etc.  There is no simple answer.  Spend some time with your financial advisor going over all these issues and more.  Together, you can build a 401k retirement investment strategy that is custom made for you.

If your 401k is invested in equities and you are wondering when the market will turn around, there is no way of knowing.  The study of past economic crises might provide some perspective.  History shows that there have been a number of striking declines and advances in the past.  Looking at every point where the market returned less than 2.5% over a ten-year period of time (now we are at a negative return), it then returned 13.3% per year over the next 10 years, with a range of return of 7.1% to 18.6%.  Of course,
historical results are not predictive of future returns.

There is an old saying that it is always darkest before the dawn.  This holds true to the equity market as well.  On June 1, 1932, the market was at its depression era low.  Three months later, the S&P 500 increased 18.73%. After one year, the S&P 500 median increase was 45.46%.  In April 1942, we were at war and we were losing.  The Pearl Harbor attack had crippled our Pacific fleet.  Germany had taken France, and inflation was rampant. Companies faced wage and price controls and excess profit taxes.  In that
same month, with no clear reason, the market hit bottom and started to rise. By the end of June 1943, the Dow Jones Industrial average had gained 54%.

Some 401k participants are taking “in-service rollovers” of 401k assets into their IRA, where they have greater investment opportunities.  Many do this to invest in annuity contracts issued by life insurance companies that provide a guaranteed rate of return.  A word of caution:  the guarantee is only as good as the company issuing it.  Additionally, there are other costs that may be involved.  Make sure to carefully review all costs and pertinent information before making any decisions.  Whether you are entitled to make
an “in-service rollover” depends on your plan document.

During these difficult times, it makes sense to have a complete review of your 401k.  Contact your Money Concepts financial advisor for help.

February 25, 2009