On almost a weekly basis, when I meet a new client, I'm seeing a common trend: Individuals and business owners, who keep their savings, reserve cash, and/or emergency funds sitting in a (no good!) good old fashioned savings account.
Don't get me wrong, the concept of saving your money is by no means defunct. However, there are many alternatives to the old school savings account. Many either do not have financial advisors, or their advisors have done a poor job of exposing them to the alternatives that are out there.
Most people I ask, would tell me the best alternative place to safely accumulate their savings would be a Certificate of Deposit (CD), or Money Market Account. WRONG!
Let's talk about these two savings vehicles for a moment.
Certificates of Deposit
A certificate of deposit, otherwise known as a CD, offers a place to save money and is routinely offered by your local bank. A CD is a time deposit, which means the money you place on deposit must remain there for a specified period of time before you can withdraw it. CD's are FDIC Insured up to $100,000.00
You can purchase a CD with a variety of deposit terms. Most will tie your money up for any where from one month to five years, but some for even longer. The longer term the CD, the more interest the bank will pay you. You are required to keep your money in the CD for the duration of the term you select. This creates an obvious liquidity issue.
Most CD's offer investment rates in the High 3% to Low 4% range, and all returns are taxable during the year earned. Combine this with low liquidity, and I'm sure you'll agree a CD makes a rather dull investment (savings) choice.
Money Market Accounts
There are two different types of money market accounts: money market bank accounts, and money market mutual funds.
Money market bank accounts are much like savings accounts, only with higher yields. Because the money is invested by the bank more aggressively than money held in a savings account, there are usually higher balance requirements, and a limited number of withdrawals per month or quarter. Money market bank accounts are FDIC Insured up to $100,000.00
Money market mutual funds are available through investment companies. If you do not have an existing brokerage account, you would need to open one first. Usually you would need to open the account with the fund company issuing the particular fund that is of interest to you. Money market mutual funds are not FDIC Insured.
Both bank account and mutual fund money markets offer investment returns in the Mid to High 4% range. Returns are taxable during the year earned, with the exception of some mutual fund money market accounts which are tax free, but yield investment returns in the Low 3% range.
There's got to be a better alternative to the CD and money market accounts right? Good news....... There is!
The Ultimate Savings Account!
The ultimate savings account actually deals with two important issues surrounding sound financial planning: Adequate amounts of savings (emergency cash), and adequate amounts of life insurance. PLEASE, don't stop reading! Many want to run for the hills when they hear the word life insurance. The fact is, it is the only form of insurance you are GUARANTEED will one day pay off (think about it!).
Did you know there is a form of life insurance called Equity Indexed Universal Life (EIUL)? Did you know there are EIUL policies that return 9% to 10% annualy, with ZERO risk to your investment? Did you know that depending on how a EIUL policy is funded it's earnings are ALWAYS tax deferred, and could even be tax free?
Who among us has enough life insurance? I can count on one hand the number of clients I've consulted who had adequate levels of life insurance. Most people have savings, and emergency funds in bank accounts, CD's, or money market accounts earning somewhere near 4%, and paying annual income tax on the earnings (effectively 3%)! Those savings can be used to purchase badly needed life insurance, and at the same time earn MORE interest, TAX DEFFERED, with no risk to their capital and no liquidity issues.
You might be asking yourself, " How much life insurance should I have"? If you're like most people who still work, you have dependents that rely on your income. Your goal should be to purchase enough life insurance that should you die, your loved ones can place the paid death benefit into a guaranteed investment and replace your income on the earned interest. This strategy requires a policy of fifteen to twenty times your income. Although this may not always be possible, it should definitely be a standing goal.
My company, Jayco Financial & Insurance Services has researched and back-tested the returns of thousands of Equity Indexed Universal Life (EIUL) policies, and spent countless hours studying and comparing EIUL's to historical CD, savings, and money market returns. Based on pure earnings and savings qualities alone, the EIUL beats all others, hands down. The life insurance is just an added bonus, and no monthly or annual payments are required!
Deposits in insurance accounts are insured to $100,000.00, and death benefits are guaranteed up to $250,000.00. This feature, along with their tax deferred characteristics, much higher returns, and the added bonus life insurance, makes EIUL policies the premier solution for effective cash accumulation. This is where the "Smart Money" keeps their savings.
If you've never seen a comparison over a ten year period of income taxed savings returns -vs - tax deferred savings returns (even at equivalent rates), or you're not sure if you have enough life insurance, or lastly, you have funds wasting away in an old school savings, CD, or money market account, you owe it to yourself to speak to a financial professional regarding the matter.
While the non-prime real estate market is in the dirt, high end U.S. home sales are doing well, according to an analyisis of nationwide home sales in July.
The national trend has gone largely unnoticed because the federal government and the National Association of Realtors - the main sources of housing data - don't report statistics for different price segments, The New York Times reported.
The newspaper and DataQuick Information Systems found that sales of homes in the to five percent (5%) of the market have been increasing in many cities, while saleshave fallen in the market's middle and bottom sectors.
Affluent families are getting richer and are spending their money, DataQuick analyst Andrew LePage said in the Times. In addition, foreign investors are buying large U.S. homes, the newspaper said
With the Home Ownership Accelerator, you direct-deposit your entire paycheck into your mortgage, instead of your checking account. This immediately reduces your principal balance. Since interest is based on your daily balance, you start saving interest immediately compared to traditional loans!
Access your funds just like you used to.
You pay all of your expenses out of your mortgage, just like you would with a traditional bank account -- using the unlimited checks, free ATM/Debit card, and free online bill-pay that comes with the account. Until you need the money, though, it's in your mortgage in the form of a lower principal balance, saving you 5-6% in mortgage interest, instead of earning 1% in a bank account. Less interest means that more of your take-home pay goes towards principal, and you pay off sooner. With no change to spending habits!
Let's look at an example:
Imagine you have net pay of $100,000 annually, saving 15% of your net income after expenses, and you have a $400,000 30-year fixed-rate mortgage at 5.5%. And, let's even assume that mortgage interest rates are climbing on a "reverse course" that mirrors their recent decline (APR 8.19%)! A 'worst case' rate scenario!"
Saves interest, pays off sooner.
In this example, refinancing to the Home Ownership Accelerator roughly doubles your mortgage efficiency. You could pay off in as little as 17.3 years and save nearly $89,000 (21%) in interest, compared to the 30-year fixed rate loan at 5.5%. In fact, to save that much interest, you'd have to find a 30-year mortgage at 4.4%, which is very unlikely.
But what if rates go up even more?
In this example, the adjustable rate on the Home Ownership Accelerator would have to average 9.6% over the entire 17.3 years for the interest payments to equal that of the 30-year fixed rate mortgage at 5.5%. That's not likely to happen either
The report issued by National Association of Realtors on sales of existing homes, in the beginning of the previous week, a report on new house sales during the month of August was issued jointly by the US Department of Housing and Urban Development and US Census Bureau in the end of last week, which shows a significant fall in the sales of new house than what it was in the month of July as well as from August 2006.
According to the report, during August the sale of one-family homes was 795,000 units at seasonally adjusted annual rate. This was less by 8.3 percent of July rates of 867,000 units at seasonally adjusted annual rate. In last 7 years, this was the slowest sales pace. Earlier a few analysts had estimated that the sales would touch the unit of 830,000 for the month of August.
During the month of July the original sales estimate was of 870,000 units at annual rate, but that also altered downwards. The most shocking figures lay in the comparison in between the August 2007 data and August 2006 data. The recent estimates are down by 21.2 percent from 1,009,000 units, what was estimated during the last year. According to the Reuters News Agency, in the last 37 years this is the biggest fall in year-over-year figures.
Analysts believe that the main reason behind the fall in the housing sector is the mortgage market disorder. The percentage in the fall of housing market is estimated to be in ratio with the fall in the sub prime mortgage loans. It is believed that the sub prime mortgage loans will soon disappear and is on a verge of becoming history, since the lenders are terrified of the increase in rate of defaults by the sub prime borrowers and have no more faith in lending to the people with poor credit history.
According to most of the big and well-known lenders, it is no more a good business to lend money at high interest rate to those who have a bad credit report, as the chances of default are high these days. Many mortgage lenders have even closed their sub prime mortgage department, as they don't want to take any further risk. Many people lost their jobs due to this sub prime division closing decision.
It is believed that, if the things in the mortgage market continue in the similar passion then it will affect the housing market more harshly. It is estimated that things will turn poorer in the housing market if there is no improvement in the sub prime mortgage lending.
Some of the major players in this field assume that it is possible that the housing market will probably hit rock bottom by the second quarter of 2008 or some time later. They believe that, if the housing market continues to fall this way then it could affect the spending and the confidence of the consumer.
The situation is worsening as seen in the last week when some nation's largest homebuilders like D.R. Horton, Lenner Corporation and KB Homes have declared their extensive quarterly losses.
The truth is that only about ten percent of owners successfully sell their home on their own. That varies by region and the number goes up a tad for professional real estate investors because they are more familiar with real estate than your average homeowner.
Those that do sell their home successfully usually accept not only a lower price, but they net less than if they had sold it with a professional qualified real estate agent helping them - especially in an uncertain market with high inventory.
Like today.
It would currently take almost nine months to sell all the homes currently on the market at the current sales pace, even if no new homes came on the market. That is with all the advantages of a real estate agent and the Multiple Listing System (MLS) at your side. On your own, it's even harder.
So why is the MLS such a big help?
Well, if you run an ad to sell your home, you not only have to pay for the ad but you can only sell your home to those that see your ad. That limits demand. As everyone who has taken Econ 101 knows, the more demand for a product, the higher the price: The less demand, the lower the price.
By sharing information about your home via the MLS with all other Realtors and brokerages in the area, you increase demand for your home. Not only does your agent's company advertise, but so do many others. Since less than ten percent of prospects actually buy the home they see advertised, real estate agents have to find them another home to purchase.
Realtors find those homes in a database called the MLS. Unless you are an agent, you do not have access to the program. As a result, not only is your agent working to sell your home, but so are all the other MLS members, too. Your agent's efforts are multiplied by those of all the other agents in the area.
More demand. Higher price.
What are other problems with selling by owner?
A FSBO (For Sale by Owner) sign attracts lowball offers, for one thing. Think of buyers that want not just a deal, but a steal. Have you ever stayed up late and seen an infomercial about how to get rich in real estate? The number one method is to find a steal, often by taking advantage of someone who does not know what they are doing.
Then there are phone calls. Who answers them? What do you say? How do you convince them to come look at your home when you're available to show it? How do you convince them to write an offer? Where do you get the right forms? What forms do you need?
That's just the beginning.
Is the buyer qualified? Do they have money in the bank, good credit, can they get a mortgage loan? Is your buyer's loan officer competent and flexible?
There are also lots of details. Do you need an escrow company or a lawyer? Termite inspection? Home inspection? Warranties? Title inspection?
And when there is a challenge (a polite word for problem), as their always is, who handles it?
It isn't easy and we've just barely scratched the surface.
We're biased, of course, but we recommend a professional agent.
When preparing to buy a home, the first thing many homebuyers do is look at "homes for sale" ads in newspapers, magazines and listings on the internet. Some potential buyers read "how-to" articles like this one. The next thing you should do - before you call on an ad, before you talk to a Realtor, before you shop for interest rates - is look at your savings.
Why?
Because determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home - including how you write your purchase offer, the loan programs you qualify for, and shopping for interest rates.
Mortgage Programs
If you only have enough available for a minimum down payment, your choices of loan program will be limited to only a few types of mortgages. If someone is giving you a gift for all or part of the down payment, your options are also limited. If you have enough for the down payment, but need the lender or seller to cover all or part of your closing costs, this further limits your options. If you borrow all or a portion of the down payment from your 401K or retirement plan, different loan programs have different rules on how you qualify.
Of course, if you have enough for a large down payment, then you have lots of choices.
Your loan choices include such varied programs as conventional fixed rate loans, adjustable rate mortgages, buydowns, VA, FHA, graduated payment mortgages and all the varieties of each.
Shopping Rates
A very important reason you need to have at least some idea of your down payment is for shopping interest rates. Some loan programs charge a slightly higher interest rate for minimal down payments. Plus, the interest rates for different loan programs are not the same. For example, conventional, VA, and FHA all offer fixed rate loans. However, the rates vary from one program to another.
If you shop lenders by phone, the loan officer will be able to tell which programs fit and quote you rates accordingly. However, if you are shopping on the internet, you have to have some idea of your loan program on your own.
Writing Your Offer
Another reason you need to have a clue about your down payment is because it affects how you write your offer to purchase a home. Not only are you required to put your down payment information in the offer, but different loan programs have different rules which also affect how you write your offer. This is especially important when dealing with FHA and VA loans.
If you are asking the seller to pay all or part of your closing costs, you have to be certain your loan program allows what you are asking. For smaller down payments, lenders allow the seller to pay less closing costs than for larger down payments. Some loan programs will allow a seller to pay certain types of costs, but not others.
Finally, your down payment also affects your ability to qualify for a loan. When you make a small down payment, lenders are fairly strict about having you conform to their underwriting guidelines. For larger down payments, they will tend to make allowances or exceptions to the rules.
Conclusion
As you can see, the down payment affects every choice you make when you buy a home. Although you should look at ads, familiarize yourself with neighborhoods, learn about prices, and read as much as you can - when you get ready to take action - the first thing you should do is figure out how much money you have available for the purchase.
Federal tax returns (1040's) for the last two years, if:
you are self-employed
earn regular income from capital gains
earn sizable interest income, etc.
earn more than 25% of your income from commissions or bonuses
own rental property
or are in a career where you are likely to take non-reimbursed business expenses).
Year-to-Date Profit and Loss Statement (for self employed)
Corporate or Partnership tax returns (if you own more than 25% of the business)
Pension Award letter (for retired individuals)
Social Security Award letters (for those on Social Security)
Asset Items
Bank statements for previous two months (sometimes three) on all accounts. All pages, even if you don't think them important.
Statements for two months on all stocks, mutual funds, bonds, etc
Copy of latest 401K statement (or other retirement assets because they can count as reserves)
Explanations for any large deposits and source of those funds
Copy of HUD1 Settlement Statement on recent sales of homes
Copy of Estimated HUD1 Settlement Statement if a previous home is for sale, but not yet closed
Gift letter (if some of the funds come as a gift from a family member - the lender will supply a blank form)
Gifts can also require:
Verification of donor's ability to make the gift (bank statement)
Copy of the check used to make the gift
Copy of the deposit receipt showing the funds deposited into bank account or escrow
Note: many get their statements of various kinds over the internet and these are not always acceptable to lenders, especially when the printed version does not contain the borrower's name, account number, and the name of the institution.
Credit Items
Landlord's name, address, and phone number (if you rent - for verification of rental)
Explanations for any of the following items which may appear on your credit report:
Late payments
Credit inquiries in the last 90 days
Charge-offs
Collections
Judgments
Liens
Copy of bankruptcy papers if you have filed bankruptcy within the last seven years
Other
Copy of purchase agreement (if you have already made an offer)
To document receipt of child support (if you desire to show it as income)
Copy of Divorce Settlement (to show the amount)
Copies of twelve months canceled checks to document actualreceipt of funds
FHA Loans
Copy of Social Security Card (or other documentation of social security number)
Copy of Driver's license
VA Loans
Copy of DD214
Refinances
Copy of your most recent monthly mortgage bill
The following cannot hurt to have ready, but are not as necessary as they once were:
Copy of Note on existing loan
Copy of HUD1 Settlement Statement on existing loan
To determine your maximum mortgage amount, lenders use guidelines called debt-to-income ratios. This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts. Because there are two calculations, there is a "front" ratio and a "back" ratio and they are generally written in the following format: 33/38.
The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Auto or life insurance is not considered a debt.
A common guideline (Text Book Guideline) for debt-to-income ratios is 33/38. A borrower's housing costs consume thirty-three percent of their monthly income. Add their monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of their monthly income to meet those obligations.
The guidelines are just guidelines and they are flexible. If you make a small down payment, the guidelines are more rigid. If you have marginal credit, the guidelines are more rigid. If you make a larger down payment or have sterling credit, the guidelines are less rigid. The guidelines also vary according to loan program. FHA guidelines state that a 29/41 qualifying ratio is acceptable. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41. Actually the most common ratio used Today is the 45% Ratio. The lender is requiring that no more than 45% of your monthly income is needed to pay all monthly payments.
Example: If you make $5000 a month, with a 45% DTI guideline, your maximum monthly payments can not exceed $2250. This includes your consumer debt, plus your monthly housing and credit payments.
Recently, more short sale properties have come on the market. A short sale is a situation where a property seller needs to sell and the sale proceeds are not sufficient to pay off the existing mortgage. It is an alternative to foreclosure. The term short sale or short pay refers to a process whereby the mortgage company must agree to a reduced payoff in order for the sale to take place. All sale costs must be included and the seller receives nothing, except debt relief and not having a foreclosure on their credit record.
If you're a prospective buyer on such a property, beware! The seller may accept your offer; you may invest $1000 in an appraisal and a property inspection, but you may not get the property because the mortgage company may not agree to reduce their payoff. The mortgage company is a third entity that is not a party to your contract, yet their decision will affect the outcome of the transaction. The mortgage company will review the short sale proposal and closing the sale will depend on their response.
Many short sales fail because the mortgage company representative is unfamiliar with the local market and responds with an unrealistic proposal. When buying a short sale property, don't expect a quick answer and don't expect the mortgage company to respond logically. They will seek any additional assets the homeowner may have and they will demand the brokers reduce their commissions. They may demand the seller to sign a personal note to pay back the shortfall. Remember, the mortgage company wants to recover as much of the loan as possible and if the property goes to foreclosure, well that's another department's problem.
Additionally, many loans have PMI (Private Mortgage Insurance) that will cover a portion of their loss so the mortgager's motivation to reach an agreement may be less because they're covered regardless. You may have to start negotiating with the PMI company, adding additional time to the sale process. Unless you have considerable experience with short sales, foreclosures and working with lenders' loss mitigation departments, be very cautious in submitting an offer on a property in a short sale situation.
Buyers, ensure that you have an escape provision if the process takes longer than you want or if a more suitable property becomes available.
Sellers, be realistic. Consult with your accountant and your attorney on the tax and legal ramifications of a short sale. You may have to be willing to undergo an asset evaluation and even be willing to walk away and let the lender have the property.
Brokers, you will have to work two to three times as hard and may never help your client achieve their goals and/or receive appropriate compensation.
Lenders, wake up! Work with the buyers and brokers who can ultimately save you money. History shows that a property that goes through the foreclosure process nets less money to the lender than most short sale offers.
The rental revenue is shared with the professional hotel management company. You pay no upfront fees for this management. Instead, the management company takes a portion of the rental income that is generated. Although the revenue splits between owner and management company do vary from project to project, most hover around the 50/50 mark.
Condo hotels are strategically located in luxurious resort settings and premier urban destinations, which command top dollar for the nightly stays and are almost always marked by high year round occupancy rates. This combination of high nightly rental rates and high year round occupancy rates generally create a very desirable cash flow outcome.
In addition to the rental revenue that is generated, you can enjoy the appreciation that condo hotels typically experience. Many condo hotels, especially the branded condo hotels, have seen double digit growth year after year, and have out performed traditional condos or single family homes in the same resort market. A common question is whether condo hotels can be resold like normal real estate. And the answer is yes. Condo hotels are fee simple deeded real estate. You buy and sell them just like you would any other form of real estate.
A common question revolves around financing and whether favorable rates can be attained. And the answer is yes. You'll find that the biggest financial institutions in the world make loans on condo hotels and they are typically quite close to a loan that can be found for a traditional vacation home. Most condo hotel developers have even made arrangements with specific lenders so that they may offer their clients the most favorable rates.
And remember, there may be additional tax benefits of owning a condo hotel over a traditional condo. If the condo hotel is used for non-primary residence or residential rental, owners may be able to accelerating the depreciation on their condo hotel unit from 39 years, down to 27.5, 15, 7, and even 5 years. Be sure to consult with your accountant to see if the tax advantages can work for you. If your accountant is not intimately familiar with condo hotels, have him refer you to an associate who is.
Disclaimer: ActiveRain Corp. does not necessarily endorse the real estate agents, loan officers and brokers listed on this site. These real estate profiles, blogs and blog entries are provided here as a courtesy to our visitors to help them make an informed decision when buying or selling a house. ActiveRain Corp. takes no responsibility for the content in these profiles, that are written by the members of this community.
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