Life Happens. Be prepared and consider buying life insurance.

But what kind? How does one navigate through the many types and attributes of life insurance products? To make things more complicated, high commissions create an unavoidable conflict of interest for life insurance agents, which can muddy the waters and lead to further consumer uncertainty.

To provide clarity, we will explore what life insurance is and provide a broad overview of the different policies that can be purchased. Someone’s lack of understanding should not get in the way of life insurance being a part of their financial plan.

WHAT IS LIFE INSURANCE?

Life insurance is an important tool to protect loved ones and/or business relationships. Most people should have some form of life insurance to provide cash flow in case of the inevitable.

A life insurance policy is a contract between a policyholder and an insurance company. In exchange for payment of premiums, the insurance company will pay a death benefit upon the death of the insured. The death benefit is a tax-free* sum of money paid to the beneficiaries of the policy, which are often family members.

If you have someone who relies on you for financial support, and you cannot self-insure, you need life insurance.

TYPES OF LIFE INSURANCE?

There are numerous different types of life insurance policies. Policies will vary in coverage, premium cost, cash value, investment risk, and flexibility. Of these differences, policies can be divided into two key groups: Term life and Permanent life.

Term — Term life insurance allows the policy owner to pay for coverage for a predetermined number of years, typically 5, 10, 20, or 30 years. For most, a term policy is the least expensive way to purchase a death benefit. The death benefit can be level or decreasing. Some will purchase a decreasing death benefit to match their decreasing mortgage debt.

Permanent — Permanent life insurance is just as it sounds. The policy owner may decide to have their life insurance policy last a lifetime (up to age 120), often requiring a lifetime of premiums payments. There are several types of permanent policies. Popular policies include Whole, Variable (VL), Universal (UL), Variable Universal (VUL), and Indexed Universal Life (IUL).

Key differences between a term policy and a permeant policy include price, length of policy, and a component called cash value. Permanent policies are traditionally more expensive. The higher premiums cover the cost of the death benefit (including administrative fees), and the remainder is added to a cash value.

Traditionally, the death benefit is used at death while the cash value can be used during the policyholder’s life. The cash value of a permanent life policy can be a tax-advantaged savings vehicle for the policy owner. Permanent policies are typically most advantageous once other tax-advantaged savings vehicles like your 401(k), Roth IRA, etc. have been exhausted. The cash value may be available to the policy owner to withdraw or borrow against. The cash value can accumulate in a variety of ways and is often distinguished by the type of permanent policy. See below for differences between common permanent policies and their cash value accumulation.

Whole Life — The insurance company takes on the responsibility to pay out a dividend which is based on the performance of an investment portfolio managed by the insurance company and their ability to keep their business expenses low.

Variable policies (VL & VUL) — The policyholder may invest the cash value in a selection of mutual fund-like sub-accounts. Variable policies provide a “variable” growth (& potential loss) of cash value as sub-accounts are connected to underlying investments.

Index Universal Life (IUL) — The policyholder may earn interest based on the performance of an equity index, think the S&P 500. While there is no actual money invested in the index, interest is credited to the cash value based on the performance of the selected index. IUL’s provide variable growth with a cap on maximum returns (cap rate). There’s also a guaranteed minimum annual return (floor rate often never less than 0). For example, an IUL has a cap rate of 8% and a floor rate of 0%. If the selected index grows by 20%, the cash value is credited a growth of 8% (cap rate), if the index loses value by -5% the cash value does not decrease due to the index (floor rate).

WHAT TYPE LIFE INSURANCE IS RIGHT FOR YOU?

This is our opinion, some life insurance agents and brokers with a conflict of interest may disagree.

You are young — Do you have plans for a family? This may be a great opportunity to purchase a term life policy. The younger you are, the less expensive premium payments will be.

You are the breadwinner — Term life insurance can replace lost income during working years. Life insurance prevents your surviving spouse (and children) to forgo their standard of living and helps meet the family’s financial obligations.

You are a stay-at-home parent — While there is no income number attached to a stay-at-home parent, there is a value associated with the services they provide a family. Term life insurance covering the years when kids are young can help cover the cost of child-care, housekeeping, and other responsibilities taken on by a stay-at-home parent. 

You own a home — For many Americans, a home is one of their largest assets and debts. Purchasing a term life insurance policy with coverage lasting the length of a mortgage can cover the remaining mortgage balance.  

You are a business owner — A life insurance policy is a multifaced tool for a business owner. A policy can help pay off business debts, pay estate taxes, and fund a succession plan like a buy-sell agreement. There are many variables to consider when choosing between term and permanent policies.

You have maxed out your retirement accounts — If you have maxed out tax-deferred retirement savings vehicles, a permanent life insurance policy can provide another avenue of retirement savings. Permanent policies build a cash value that can be accessed tax-free**. We do not typically recommend this to our clients because permanent policies are often very costly. The larger price tag can include investment costs (we commonly see 1-1.5%), administrative fees, as well as surrender penalties.

You want to leave an inheritance — Do you plan to spend all your retirement dollars, yet you would like to leave heirs with an inheritance? A permanent life insurance policy will provide a lump-sum benefit to your beneficiaries no matter when you pass away (can be up to 120 years).

You have a high net-worth — Permanent life insurance is best for those who are concerned about estate taxes. A lump-sum benefit at death is distributed to heirs to pay estate taxes, rather than selling-off inheritance.

Life is complex. As such, your situation may require multiple life insurance policies for you and your family.

WE ARE HERE IF YOU HAVE QUESTIONS

There are many options for life insurance. While Human Investing does not sell life insurance policies, we do help clients find the best policy within their financial plan. Having someone to help you navigate life insurance without incentive to sell you a product has immense value. If you have questions about what type of life insurance may be best for you, or how it fits into your financial plan, please contact us at Human Investing.

*Death benefit will be tax-free if it does not violate the “transfer-for-value” rule.

**Tax-Free-withdrawals up to basis then gain taken as loan.  Also, is not a modified endowment contract.

---

---

Related Articles

Demand for better financial literacy is going up

Financial Literacy is the understanding of financial concepts which guides good money decisions in everyday life.

The backdrop of personal finance is having a structure for how to act. We usually refer to this as a financial plan. A financial plan helps to allocate money, a limited resource (for most of us), to unlimited alternatives.

Financial literacy can help parents make a difference

The United States is the largest economy in the world however, Standard and Poor’s Global Financial Literacy Survey reveals that it is the 14th in the world in Financial Literacy at approximately 57%.

By age 7, most children begin to grasp that money can be exchanged for goods and represent value. For example, understanding that 5 pennies equals 1 nickel, as a University of Cambridge research on “Habit Formation and Learning in Young Children” discovered.  Starting at age 7 or 2nd grade, a child is ready for more instruction and guidance around money concepts. In the same way that children learn language from their parents, they can and do learn money habits from their parents but need exposure and  instructive conversations. Moreover, children need the opportunity to practice with money, or forms of money, that have different representations of value.

Financial literacy can lead to responsible decision making

Parents have the ultimate authority and responsibility to begin educating on financial concepts from a young age. Parents should be aware not to rely on the education system to teach the basics or complexities of personal finance, as it is not required to graduate in many states (ex: Oregon).

To help empower parents with the knowledge and tools to provide a great foundation for personal finance, let us refresh ourselves of the basics of what children can learn and apply early in their formation. Always remember to keep it simple.

Start with an approachable framework

The four basic functions for allocating money is to Spend, Save, Invest, or Give. A guideline to start with is a 30/70 rule: save, give and invest 30% while spending the remaining 70%. To create a basic guideline for our kids (and possibly even ourselves), let’s break each of these functions down.

The heart of giving

Let’s start with giving, since many of us have experienced that if it is not given up front, it may not be given at all. This is important in establishing an altruistic worldview (selfless concern for the wellbeing of others) but also in teaching an abundance mindset (always more to go around) as opposed to a scarcity mindset (only so much and never enough). Giving can immensely impact a child’s desire to be a force for good and help others, which is the foundation for business. When banking a dollar per week from allowance, even with this small amount, it can be a great place to start the heart-healthy habit. Ask your child what they care about and who they would like to help with their giving, it may surprise you.

The necessity of saving

A similar principle will prove necessary for saving. It is much easier to set aside some money prior to spending to ensure you will have something left over when needed. Having adequate savings can keep you from being subject to predatory lending or missing out on an opportunity. It is equally important to help kids understand that saving is not the same as investing. It is important to have money working for you, not just set aside and available to you.

The value of investing

The importance of investing is compounding interest and seeing your hard-earned dollars multiply for you in a way that seems effortless but requires patience and self-control.

Setting money aside to help a child invest in a company like Disney or Nike, something they can tangibly see and enjoy, is a great learning lesson. This could be done through your taxable investment account or in their own UTMA (child’s investing account).

If the former idea is too involved or the money is not available for buying actual shares of companies, consider offering your child a “matching program” when they invest in the “Parent Company”. In the same way, consider offering your child interest (growth) for leaving their savings with you. They may need a greater incentive to understand the concept and value of having their money grow. Based on the child’s age, show them a toy that costs $1 and a toy that costs $10. They could spend their $1 weekly allowance collecting numerous low cost and low value toys, or they could save and potentially even grow their dollars to achieve a valuable toy more quickly. This would help provide the incentive to invest those dollars rather than spend them or even save them.

Lastly, teach the rule of 72. An investment that grows 7% annually will double in just over 10 years (72/7=10.2). An investment that grows by 10% annually will double in just over 7 years (72/10=7.2).

The discipline of spending

A great place to start is needs and wants. How much should be allocated to needs and what is left for wants. A rule of thumb is 50% for needs and 20% for wants. Without a credit card line, this is much easier to do when working on a cash basis. Until kids are old enough to have expenses like cell phone, auto insurance, gas, it will be difficult to break out needs versus wants. Until then, spending will be all one category at 70%. Once the child is a high schooler, they will experience more reasoning between needs and wants. What is left over is available for “fun money”.

It will be important to discuss the topic of credit versus debit as credit cards are a form of debt and borrowing from an institution will have numerous negative effects on saving and investing.

Another concept to teach when considering spending is discounts and coupons. When paying less for a specific item, you have more left over for other items or for saving, investing, or giving. One of the best places to teach this is looking at a specific product at the grocery store (candy bars!) and comparing prices, those on sale and those that are not and the impact of spending less to keep more.

The compounding benefits of financial literacy

Financial literacy, like investing, has compounding benefits especially when starting young. It is invaluable to model and have conversations around money with your children. No need for perfection, but the goal is to make progress and provide opportunities to learn.

This article was inspired from a presentation by Mac Gardner, CFP®, author of “The Four Money Bears”.

---

---

Related Articles

It’s hard to let go of your old car. You know which car I’m talking about. The car with the window taped shut because it doesn’t roll down properly. The car with three paint jobs—each a different shade of green. The car that gets shaky after you reach 65 mph, because it was a hand-me-down from your grandma, who’s max freeway speed is 50 mph. It’s been with you through it all, but when car dealerships start advertising 0% financing and cash-back deals, you might feel yourself loosening your grip.  

Before we dig in, it’s important to acknowledge that even though good deals are currently out there, you may not need an upgrade. And that’s okay! Own your steady, functional car, and avoid instant gratification. However, sometimes things do happen that require an upgrade. Your tape job suddenly malfunctions, and your car window won’t roll up in mid-January. Or your car starts shaking at 50mph on your morning commute instead of 65mph.

When planning for a big expense, whether it’s a car or another large purchase you plan to finance, it’s best to create savings goals. But because life is both expensive and unpredictable, this post aims to discuss ways to finance a large purchase in a smart and efficient way. Here’s your list of action-items:

FOCUS ON WHAT YOU ACTUALLY need

Create a list of your needs (not your wants), and then research your options. If you need a car, what kind of car do you need? Something that can haul large objects, or carry the tiny humans safely? Used or new? Find the total cost of the car that can sufficiently meet all your needs. Avoid any options that may push you outside of your budget. Basically, don’t buy more car than you need.

Decide how to finance the purchase 

If you cannot purchase the expense in full, you have two financing options: (1) a lease or (2) a loan.  

Know that when assessing the total cost of the car, it’s important to leave room for the expense to finance the car through a loan.

1. Lease: When you lease a car, you are paying monthly to use the car. Because this finance option doesn’t lead to car ownership, monthly payments for leases are typically lower than loan payments. However, you will not be able to ever own the car or “pay it off.” Because of this, leases will never be profitable and are best saved for professional purposes if necessary.  

2. Loan: When you borrow an auto loan, you are paying monthly to eventually own the car. There are many loan options depending on your budget, credit score, and timeline. Most loans will have an annual percentage rate (APR). That is, the interest rate you pay on the loan. The APR will vary based on the duration of the loan, your credit score, and where you borrow from. Make sure you shop around to find the best loan that meets your needs. In short, try and find a loan with a low APR and pay it off as quickly as you can. Click here to view Rivermark’s auto loan options.

Calculate the monthly payment

In order to budget for your new expense, you need to know the amount of the monthly payment. Let’s say you want a 2020 Subaru Forester because let’s be real, if you’re a true Oregonian, you’ve thought about getting a Subaru at least once. Using data from their website, here’s the breakdown:  

Find the cost of the car: $24,495 

Pick a Finance term: 48 months

Know the APR based on your credit score: 4.19% 

Calculate the monthly cost of the car, including the APR: 

Ta-dah! Your monthly car payment is estimated to be around $700, making the estimated total cost of the car $33,600.  

Let’s take a moment to catch our breath. I know this seems stressful, but don’t worry. Make sure you are taking care of your credit score and budgeting for the expense. If you take the appropriate and smart steps, you’ll be okay!  

Simulate the payment INTO A MONTHLY BUDGET

Before deciding to finance the car, take three months to see if the monthly payment fits in your budget. Whether it be through automatic transfers or manually setting money aside, try not to house the simulated monthly payment in an account used for spending purposes. If you don’t have a budget, click here for resources to get started. 

This practice will allow you to visualize how your car payment can fit into your budget. You may need to re-allocate dollars in your budget, or you might find you have more wiggle room than you initially thought!  

What are you waiting for? Get the car!

You earned this! You took the smart and appropriate steps to finance your car, so make it happen and create new memories. We are rooting for you.  

---

---

Related Articles

“You need to make more money…”

My budget coach and I sat there silent in the face of what seemed like an impossible reality.

For me, and perhaps for some of you, the option to make more money was laughable.  At that life stage, I was in the midst of a financial tornado: our nation’s economy was hung-over from the market crash of 2008, my employer at the time lost a grant that substantially reduced my paycheck, and an unexpected illness and injury lead to weighty bills and rendered additional work next to impossible.

Each month I felt like I was scraping up pennies just to make ends meet – Maybe some of you feel the same today.

Unavoidable realities like a job loss, illness, injury, and accidents are financial burdens that most of us will face at some point in our life.  The support of a funded emergency savings account is a solid way to ease some of the financial blows that come our way.

I am happy to report that, though it took some time and sacrifice, I was able to meet my “impossible” goal to have a funded emergency-savings account, and I would like to share with you some of the helpful tips I learned along the way.

organize where your dollars are going

There is a link between paying attention and success, so consider paying close attention to where your dollars are going.  List all purchases, spending, and expenses for the month and ask: What, When, How Much and Why are dollars leaving my account?  What are the “surprise” expenses?  Take a moment to consider needs vs. wants.

Next, (you may have guessed it—and even groaned) consider making a budget. If you hate dealing with money or do not even know where to start, there is HOPE!  There are many creative ways to budget that do not take a lot of time or effort but help you to pay attention and stay on track.

• If you don’t have a budget consider: YNAB; Mint; Cash Envelope System (or digital); The  50/30/20 method, value-based budget, or unconventional alternatives such as a visa cash card loaded weekly/monthly with your budgeted amount.  I found success with the 50/30/20 method combined with the envelope system.

• If you do have a budget, look closely at the How Much and Why.  Consider setting a goal to check on your spending and expenses once a week and ask:  How am I doing?  What can I change to improve?

Open a Savings Account and Set Goals

This is not just wishful thinking – it is preparing to succeed.  Many financial institutions will allow you to open a savings account simply and easily online.

Here are a few recommended examples for high yield online savings:

• Capital One

• Ally Bank

For most households, an appropriate emergency-savings buffer is three-months of your living expenses.  Write it down.  Take a moment to imagine that amount and how you will feel when you meet your goal.

Set a goal: Ask your employer about directing a portion of your paycheck directly to your savings account.  An alternative is to set monthly, automatic transfers from your checking to your savings account.  It is generally best to have this occur the day after payday to give your funds a day to settle.

Setup auto-deposits: This also may help with large, annual bills.  Take your annual bill and divide it by twelve – this is how much you need to save every month to pay for this bill outright – Plus, you may actually save money when you pay in full!

Boost your savings when that “Free Money” comes your way

You just got your tax return.  You just got a stimulus check.  Your grandma just sent you a birthday card.  Your company gave you an unexpected bonus.

Your heart, your peers, and your social network cheer:  Treat yourself!

It is easy to think of unexpected cash as “free money.” Yet if your goal is to build up an emergency savings fund, “free money” is a great way to get a big boost.  To satisfy that itch to have a treat, consider making a deal with yourself:  I will set aside 20% (or $20, or whatever you feel you can stick to) into my savings account, and the rest I can use for a treat.

If you plan for your treats and stick to your plan, you gain a double reward.

hustle and Ask for deals

While it may not be a benefit to bundle in services you will not use, it is a wise idea to call your service providers to ask about unadvertised promotions.  Our household was able to keep our high-speed internet bill at $30/mo for nearly 5 years by calling once a year to ask about current promotions, specials, and loyalty rewards.  This annual phone call saved a total of $240 per year.

Tighten Your budget’s Belt

Unsubscribe: Do you know how much you really spend on your subscriptions? Look at your credit or debit card statements for a few months and see what you find.  Often, we sign up for a free month trial and forget to cancel, we don’t notice the $50 because it’s billed annually, or we don’t actually use what the subscription offers.  

Take what is free: Did you know that most libraries have free audio, video, and eBook apps?  Did you know that Harvard offers a whole range of classes for free?!  As you make good choices about reducing your subscriptions, consider taking advantage of the huge range of free courses, events, activities, and entertainment.

Dine-in: Eating out is to your budget what driving a semi-truck is to fuel efficiency: a drain.  Your budget will stretch further on fewer dollars when you eat at home.  Consider leveraging the percent principle noted above – Make a goal for eating at home so that eating out becomes a treat. Don’t know how to cook?  Learning can be easy! Or fancy!  Hate cooking and think you don’t have time?  Cooking can be simple!

Every little bit counts: One of the key-ways dollars sneak away from our wallet is thinking, “It’s only $10 a month” or “Three-dollars won’t go very far” – Perhaps it’s just the cost of your morning coffee. If the only thing you do is make your coffee at home, you stand to save approximately $800 a year or more.  And look closely:  that’s only one cup of coffee a day!

Make it fun: There are dozens of ways to save money and even have fun while you’re at it! Here are a few to get started:  Staycation!  Be a Winner! Grocery Wins!  Become a Hunter! Up-Cycle!  “Use it up, wear it out, make it do or do without…” – Calvin Coolidge

CELEBRATE THE LITTLE VICTORIES

I hope this has given you some practical steps and encouragement to begin an emergency savings account for when life, inevitably, happens.  In closing, I want to offer the most powerful tool you have: Hope.

“Success is failure turned inside out—the silver tint of the clouds of doubt.” - John Greenleaf Whittier

---

---

Related Articles

Why Save for College?

For many reasons, planning and saving for college is essential. The pursuit of a college education is a wise investment. In most cases, college graduates will earn significantly more over their lifetime than those who opt out of post-secondary education. However, this comes at a high cost. Beyond the purchase of a home, the decision to pursue higher education is commonly the second largest expense of an individual’s/family’s lifetime. Importantly, the inability to save and plan for college early can dramatically impact assets set aside for other savings goals such as retirement or paying off a primary residence.  

You Can Fund Your College Tuition Out of Pocket and with Loans

Let’s say for whatever reason, funding college now for your child is not an option. The estimated annual cost of college at a four-year, in-state university is $27,000. When including inflation, from birth to sending a student away to college, total costs are estimated at over $190,000. Assuming you or your child, through student loans, need to borrow to fund schooling, the estimated cost balloons to nearly $250,000, which includes interest at 5% on the borrowed tuition over ten years.  

Or You Can Start Saving at Birth

Using the same assumptions as before, but this time you pre-fund college (start now) over the course of 18 years at $6,000 per year. You should have just about enough to pay the balance of school. In short, the savings of $108,000 over 18 years, plus the growth of $88,500 (just over 6% compounded monthly), covers the cost of higher education.  

What’s the Difference?

Funding college early reduces the future funding liability by six figures. If there is an ability to pre-fund college, in whole or part, it is a great choice with lasting financial implications. By saving at the birth of a child or grandchild, a family could save approximately $140,000 per child ($250,000 versus $108,000), if they desired to fund 100% of college expenses at a 4-year, in-state university by saving to a 529 plan versus paying through student loans.  

Paying with a home equity line of credit (HELOC), a student loan, or even out of present cashflow should be avoided if possible. Even less optimal is pulling funds from retirement accounts. Although sometimes necessary, taking retirement account distributions to pay for college will potentially increase your tax bracket and the could be subject to penalties. More importantly, it reduces assets available for your retirement when earning additional income is often difficult. 

What are the Benefits of 529 College Savings Plans?

Your 529 Dollars Will Grow without Being Taxed. There are a plethora of benefits for a 529 account—but the most important is tax-exempt investment growth. If 529 funds are used toward qualifying education expenses (tuition, room & board, books, computer, etc.), there is no taxation on the earnings. If the college savings account has remaining funds after all tuition is paid, the parent or custodian could change the beneficiary to another family member or sibling. If there are no other beneficiaries to use the funds, the funds can be drawn out and used for anything. However, if designated 529 funds are used for the “anything” bucket, the growth on the account will be taxed at ordinary income levels and earnings will be subject to a 10% penalty. 

If the student receives a scholarship, funds equal to that amount of the scholarship could be withdrawn from the 529 and not subject to a 10% penalty, but there would still be ordinary income taxation on the earnings withdrawn for purposes other than qualified education expenses.

Another benefit of a 529 plan is that it has a low impact on FAFSA, in qualifying for federal aid.   

You Can Maximize Tax Credits. Depending on the state in which you live, there may be a state tax deduction for contributions to a state-sponsored 529 plan. For example, if you live in Oregon, you can receive a state tax credit of 5% of your contribution up to 100% of your contribution, depending on income limits. The maximum tax credit in any year is $300. There are also college tax credits on tuition that may be available depending on your income level. 

It is important to coordinate the use of your 529 plan dollars with your tax advisor to maximize these potential credits.

COLLEGE SAVINGS PLANS ADAPT AS YOUR CHILD APPROACHES COLLEGE

College savings plans have a shorter overall time horizon than a typical investment or retirement account. If an account is open when the child is born, 18 years will pass before funds are set for distribution. By the time the student is applying for colleges, funds should be invested more conservatively so as not to put funds at risk of loss at the time of liquidation and use for college expenses. As a rule of thumb, the earlier you start saving, the more aggressive you can be—but as college approaches, getting more conservative is a wise approach. This can often be solved with an age-based, target-date fund offered by 529 plans, in which the investments automatically adjust from stocks to bonds and cash as the child approaches college. 

Talk about These Things During “Windshield Time”

There are many financial considerations when sending your children to college. Optimally, you and your significant other are making a choice early in life about how you hope to partner with your child in paying for school—if at all. If the choice is to help pay for some, or all expenses, discussions surrounding what paying for school looks like is essential. 

Does paying for school include a two-year stint at a community college? What about a state school, private school, or a school of their choice? Each of these questions and considerations are great for a road-trip—something we like to call “windshield time.”

---

---

Related Articles

The financial world can be a confusing place filled with jargon, technicalities, and little to no guarantees. Research suggests that those who are financially literate tend to have better financial outcomes. Financially literacy is typically measured by asking some core financial concept questions. Let’s walk through some financial literacy questions from the National Financial Capability Study, and explain the why behind the answer. Feel free to guess and score yourself at the end:

Question 1 - interest:

Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?

A. Less than $102
B. Exactly $102
C. More than $102

Answer: C, more than $102.

Explanation: The key part here is “After 5 years”. We are told the interest rate is 2% per year. That means every year, 2% gets added to our principal balance. To break it down year by year:

The interest earned increases each year. This is due to compound interest: the original principal ($100) grows, and the interest you earned previously (in year 2, $2) both earn interest. At the end of 5 years, we have $110.41 which is C More than $102.

Why this matters: Interest affects you when you save money to grow it, or borrow money to pay it back later. Knowing how interest can work for or against you is critical for financial success.

Question 2 - inflation:

Imagine the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?

A. Less than today
B. Exactly the same
C. More than today

Answer: A, Less Than today.

Explanation: They key here is the inflation rate is higher than the savings rate. Inflation is growing at 2%, meaning the price of goods (rent, utilities, food, cars, etc.) is going up by 2% each year. The cost of $100 of goods today will be $102 in 1 year. Your interest on savings is growing at 1% a year. That means in 1 year you will have $101 to spend on goods. In 1 year, you will have $101 to buy $102 worth of goods. Your ability to buy is A less than today.

Why this matters: Even if you keep your money “safe” in the bank or under the mattress, inflation is going to make that money less and less valuable. Thus why investing is so important. Investing can be scary due to downturns in the market, but ultimately the odds are in your favor to grow your money over time. Unless you can save significant portions of your income, growing your savings faster than inflation is critical for being able to retire.

Question 3 - Risk Diversification:

Buying a single company’s stock usually provides a safer return than a stock mutual fund.

A. True
B. False

Answer: B, False.

Explanation: To answer this question correctly, it is important to understand both risk and that a mutual fund owns a variety of companies. They keyword here is safer. Financial markets have two types of risk: market risk and company-specific risk (aka systematic risk and nonsystematic risk respectively).

Market risk refers to risk all companies face. Examples of market risk include a change to the US tax code, a global pandemic, or shifts in consumer tastes like a shift from fast food to organic freshly prepared food. You will always face market risk because every company is exposed to these risks. Company-specific risk refers to risks unique to one company. Examples of company-specific risk include sudden changes in management, a press release about product defects, mass recalls, or a superior/cheaper product released by a rival company. Because you own a variety of companies in a stock mutual fund, you diversify away (i.e. reduce your risk) if any single, specific company has a terrible event.

Why this matters: Don’t invest all your money in one company. Especially if you work for that company, and your compensation is based on the company doing well. By spreading out your investments, you reduce your risk of catastrophic returns, and smooth out the ride so you can sleep at night.

Question 4 - interest of the life of a loan:

A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the interest paid over the life of the loan will be less

A. True
B. False

Answer: A, True.

Explanation: Because of the shorter life of the mortgage loan, you pay less interest. Remember in question 1, interest compounds every year. When you borrow money, that compounding works against you. Therefore, the faster you are paying off debt, the less time for interest to compound and grow the total amount you have to payoff. The monthly payments are typically larger, but the overall interest paid is less.

To illustrate with numbers, let’s look at the difference between a 15 year & 30 year mortgage, assuming a 5% interest rate for both:

Why this matters: You can see from the example how much money is saved by opting for a 15 year mortgage. Can you afford that extra monthly payment? That’s worth investigating, but you’ll never explore your choices if you don’t know what they are. You can also usually get a lower interest rate for shorter term debts, which saves you even more money. Anytime you borrow any amount of money, the faster you can pay it off, the less you will pay total. Even if you don’t get a lower rate on the debt, if you pay off the principal sooner, that means there’s less interest compounding against you. When looking to borrow money, evaluate what term (length of time) works best for you and your budget. You want to minimize your cost of borrowing, but you also want to give yourself enough flexibility that you’re confident you will make all those payments on time, regardless of what life brings.

Question 5 - Bond prices and interest:

If interest rates rise, what will typically happen to bond prices?

A. They will fall
B. They will stay the same
C. They will rise

Answer: A, they will fall.

Explanation: This is the question most people get wrong. A bond is government or corporate debt. The government or company pays you coupons (interest payments) based on the issued interest rate. At the end of the bond’s life, it matures, and you get the principal back.

Imagine Disney issues bonds paying 5% interest, the current market rate. You purchase a bond for $1,000, and you get a $50 coupon payment from Mickey Mouse every year until the bond matures. If interest rates rise next year (say to 8%), and Disney issues new bonds, they will issue them at the new interest rate. Your neighbor Laura decides to buy $1,000, and she gets an $80 coupon from Mickey Mouse every year. Because interest rates rose, the value of your bond paying $50/month goes down in value, less than $1,000, because the $1,000 could buy Laura’s bond paying $80/month. The reverse if also true. If rates had fallen to 3%, Laura’s bond would only pay her $30, and your $50/month bond would be worth more than $1,000.

Why this matters: Interest rates change over time. This causes bond prices to change. Bonds will still be less volatile than equities, but they do also fluctuate in value. Don’t panic when you see interest rates rise, and your bond prices going down in value. This is both normal and expected. Rising interest rates are also usually a healthy sign for the economy, and so your equities will generally be rising in value to help offset the loss in value of your bonds. The reverse is also true here. Falling interest rates tend to indicate a less healthy economy (think about when rates have dropped significantly & quickly; the 07-08 financial crisis and COVID-19) which means falling stock prices. Because they don’t tend to move together (uncorrelated), bonds and stocks are an excellent pair for smoothing out your investment returns.

How did you do?

If you got some questions wrong, I hope you understand the why behind the answers and how to utilize this knowledge to better your financial life. If you have questions about financial vocabulary or systems you’d like me to blog about, please email me at andrewg@humaninvesting.com. If want to talk to an advisor, please email us at hi@humaninvesting.com.

---

---

Related Articles

Investors, savers, or even advisors rarely view a primary residence (the home you live in) as an asset in the same way a person would see a stock or bond.  Generally, I agree with this perspective—that a home is for raising children and creating lasting memories, and not viewed in the same light as Tesla, Microsoft, General Electric, or Apple.  However, there are three factors present in the market today that are cause for a new point of view.  That is, your home as an investment asset used to generate income or cash flow savings.

Factor 1: Money Market and Savings Account Rates

Money market rates have remained near zero for over a decade. This means for those holding money in checking, savings, and short-term bond investments, there is virtually no return on investment.  Include net of inflation, and investors are going backward.  Today, these shorter-term accounts serve the dual purpose of offering investors safety and liquidity, but little by way of yield.

Factor 2: Bond Rates

Bond rates have followed a similar "race to zero" that we saw in the money market and savings account rates.  As of today, an investor must go out ten years to receive .63% on a treasury bond.  In other words, a $1,000 investment yields just over $6 per year.  Bond investments are GREAT, and will forever be a cornerstone of a diversified portfolio.  However, too many investors and their advisors stockpile money into bonds as though it is the only safe way to make a return.  Importantly, like money markets, the "real" rate of return (after adjusting for inflation) is negative, going out 30 years!  You can find more exciting rate related info at the U.S. Treasury link here.     

Factor 3: Mortgage Rates

Mortgage rates have been at similar levels as today in both 2016 and 2012.  So, if you were lucky to buy your home or refinance at that time, there may not be much upside to a refinance.  For the rest of us, with the 30-year rate at 3% and the 15-year rate at 2.5%, now is the time to take a second look.  More rates from Rivermark Credit Union can be found here.

Your Home as an Investment

The opportunity for homeowners comes when they can look at these three factors (money market rates, bond rates, and mortgage rates) within an overall planning framework.  Below are a few examples of how this can work:

1. Mary and John are staring down retirement.  They have a 15-year loan at 4.5% that is five years from being paid off.  Their payment is around $1,900 per month, with a pay-off of around $100,000.  They have the choice of investing a final bonus of $100k from work at .63% and generating $52 per month income, or they can take that same bonus and pay off their home.  It seems like this should be a no-brainer—generate $52/month or save $1,900/month by not having a house payment.  But for whatever reason, the repetition of saving money (which is good) into safe investments (which is also good) is not considered within an overall planning context.  If acted upon, this scenario puts an extra $1,900 per month into this investor's pocket for paying off the home versus investing it into a bond.

2. Julie is 45 and has a goal of not having a house payment by the age of 60.  She has a $300,000, 30-year loan at 4%, and a payment of $1,432/month.  Julie has also accumulated $60,000 from real estate commissions she is looking to invest.  Investing in a 10-year Treasury would yield her $31.50/month.  A better alternative is to use the money to pay down her loan.  In doing so, she goes from a loan size of $300k to $240k.  Also, moving from a 30-year to a 15-year loan allows her to have no home loan by age 60.  Importantly, her rate is reduced from 4% to 2.5%.  Although her monthly payment is more by about $170/month, she saves $167,000 over 15 years in interest expenses—or $927/month! 

Conclusion

Recent events have presented opportunities for investors, savers, and homeowners.  Leveraging a comprehensive financial plan that considers your home, mortgage rates, and reinvestment rates could be the chance of a lifetime to save and earn. 

Join our forum on May 14

To learn more about how to leverage your home within a comprehensive financial plan, join Peter Fisher and Jill Novak for their forum, “How to Empower Homeowners during a Downturn” Thursday, May 14th at 9am PST. Sign up here.

---

---

Related Articles

Home is where the low-interest rate is. Putting that up on Etsy.

Real estate is a part of just about every financial plan I see.  Whether real estate is synonymous with a home or an investment, it typically starts with a loan.  The focus of this blog is on how individual homeowners should be thinking about their debt, given the historically low rates.  To be clear, how you go about financing your home is not a one size fits all approach.

This is about caring for the financial decision of a lifetime

Whether you are financing the purchase of a home or looking to refinance, how you go about it can have a lasting financial impact (good or bad).  There are many considerations, including the rate, term, how much to borrow, and where to acquire the loan.  But one thing is for sure, that there is not a one size fits all approach for a new loan or refinances.  As such, working within a successful decision-making framework will increase your odds of a positive loan outcome.

Step 1: Create your financial framework

Start by looking at your overall financial plan.  Think about your checking, short-term savings, emergency fund, and the amount you have invested in cash and bonds.  These are essential considerations when looking at a loan.  As an example, if you don’t have a savings account or an emergency fund, maybe you should put off that home purchase until you have a safety net of cash.  Also, if you are looking to refinance and your savings account is flush, you may want to consider putting extra money into your home.  Doing so may rid you of unnecessary private mortgage insurance or enable you to get a better rate because you have more equity in your home.  By starting the process within the context of your overall financial strategy and plan, your outcomes can improve, and bigger goals than just one to reduce your payment can be achieved. 

After considering the bigger picture, start looking at your goal or objective for getting the loan or refinancing in the first place. A target could be, “through financing my home, I hope to get a loan that enables me to pay off my loan as soon as possible.”  If that is the case, a loan with no pre-payment penalty and a 15-year term could make much sense.  At the same time, if your objective for the loan is to “use some of the equity I’ve built-up to increase the home’s value through a kitchen remodel,” then a simple line of credit could be the best approach.  Once you’ve looked at your loan within your broader financial picture and established goals and objectives for the loan, it is time to look at the rates and fees for the new loan.

Step 2: Shop for the right loan

In my 24 years of advising, I have learned a lot about loans and incentives for the people that sell them.  My view is that the majority of individuals should go to their local credit union and find a loan from them.  Credit unions are non-profit and member-owned, so their incentives are to keep rates low when borrowing, and rates higher when you deposit money.   As a side note, the majority of my employees who have purchased or refinanced their homes have used a local credit union.  We have had particularly good luck working with Rivermark Community Credit Union.  You can find their rates here.  Regardless of where you go to get your loan, it is essential to look at a few different options. 

Step 3: Prioritize getting Good Faith Estimates

Getting a good faith estimate (GFE)  is a critical part of the loan process as it helps you compare one loan versus another.  Closing costs can be as much as 10% of the loan amount, and with different lenders charging a variety of fees, it is wise to get a GFE from at least two lenders on the same day. Because rates can bounce around, getting the GFE on the same day provides the most accurate picture of pricing, rates, and terms.  Getting a GFE is so important and an area where many decide to get lazy.  I like the saying, “trust but verify”, and the GFE is a great way to both trust the people you are talking to but verify their results. 

A real-life example: Saving $170K over 15 years

Recently, I was speaking with a client who is in the real estate business.  She was aware that mortgage rates had been dropping, so she wanted to look at refinancing.  Having a solid understanding of her financial plan, I then asked her what her overall goal was for the refi.  Was it to lower her rate, or reduce her payment?  In the end, those were important considerations. Still, even more critical was the goal of having no house-payment by the time she was 60.

Consequently, we decided to invest some of the cash from her investment account to pay down her loan from $300k to $240k.  We shifted from a 30-year term with a rate of 4% to a 15-year loan at 2.5%.  Her total payment was approximately $170 more per month. The shift allowed her to save around $170k in interest over 15 years—a significant return on her investment.  Importantly, the new loan is in line with her bigger picture goals outlined in her financial plan and consistent with her desire to be debt-free at 60!

Establishing an easy to follow process for making financial decisions can pay dividends for years.  Looking at your broader financial goals (financial plan) is a great first step.  From there, identify specific financial goals you’d like to accomplish (be debt-free by 60) and the objectives for each (restructure home loan).  Then, establish a process for comparing rates (good faith estimate) and engaging a trustworthy financial partner.  Following these steps for financing (or refinancing) your home can have a substantial impact on your net worth, cash-flow, and ability to retire.

---

---

Related Articles

This will probably take place in Animal Crossing this year

This goes out to all those who hold part of the $1.6 trillion in student loan debt in the United States. This debt has the power to ignite in us fear, uncertainty, anxiety, and hopelessness. If you’re like me, at any given moment you are subconsciously trying to scheme out some way to make it better – whether it be refinancing, making extra payments when possible, seeing if you’re eligible for forgiveness, or just praying for a miracle. Given the increased levels of anxiety world-wide during this pandemic, I’m hoping that this information will provide a little bit of relief to your worries, even for a short window of time, as it has done for me.

If you’re eligible for relief, consider waiting to refinance

If you have been thinking about taking advantage of the low interest rates and refinancing or consolidating your student loans, you may want to hold off according to Justin Kribs, MS, CFP; Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc.

Last month, the US Department of Education announced student loan relief under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).

Refinancing your federal loans now with a private loan lender will waive all the new benefits from this relief, including the temporary 0% interest rate on federally held loans and suspension of payments. These federal benefits are most likely something you don’t want to miss out on.

Here’s the student loan relief per the CARES Act

Loans Eligible for Relief Benefits

• Perkins Loans, Federal Family Education Loans, and Parent Plus Loans

Loans NOT Eligible for Relief Benefits

• Private loans (e.g. bank & credit union loans)

• Any loan not owned by the U.S. Department of Education

CARES Act - Benefits Offered to Borrowers
(In Effect 3/13/20 through 9/30/20)

1. Forebearance/suspension of payments
   Loan payments are suspended for federal loans and no interest will accrue during the six-month suspension
   Note: According to the CARES Act, the six-month window of suspended payments begins automatically, but it is recommended to confirm with your loan servicer to ensure they are suspending payments.

2. Interest rate elimination
   Interest rates are reduced to 0% on all FD and FFELP loans
   Note: It is important to note that FFELP loans that are owned by a bank, credit union or other lender are not eligible for the 0% interest rate.

3. Public service loan forgiveness
   Suspended payment months continue count towards the loan forgiveness programs. As long as you are working, you do not need to make payments to continue to qualify.

Next steps

1. Defer student loan payments
   If you’re eligible: Contact your lender and request or confirm a suspension of payments (this may have started automatically).

   If you’re non-eligible: Call your private lender ASAP to see what options they offer to suspend, reduce, or pause payments and/or waive late fees – These will not be offered if you do not reach out.  Keep in mind that each institution has its own guidelines for payments and late fees. Look here for a list of banks providing information and resources on Coronavirus relief

2. Make extra payments if you can
   If you have extra cashflow, now is a really good time to take advantage of the 6-month, 0% interest benefit period. During this 6-month period, all your payments will pay down principal (and any interest that accrued prior to March 13th), putting you further ahead in the long run. You can make extra payments on your lender’s site at any time.  
   Note: Be sure to select “Do Not Advance the Due Date,” otherwise your lender will apply your payment to future payments rather than counting them as additional payments. There is usually an option to make this selection on the “pay now” page.

What if I want to refinance after the relief ENDS?

Since the CARES Act 0% interest is a short-term benefit, you may still want to consider re-financing to leverage a lower, long-term rate.

Are you a good candidate to refinance?
A person with stable income and a higher income to debt ratio may be a good candidate for refinancing.  “A person with unpredictable income should probably steer away from refinancing,” says Justin Kribs, since private loans do not generally offer the same loan payment flexibility that is offered with federal loans.

What are your goals?
Shorter Loan-Term Length: For someone with excess cashflow to increase monthly payments and who is looking to pay off their loans as soon as possible, refinancing may offer a shorter term-length for your loan.

Lower Payments: For someone looking to free up some current cashflow by paying less on their loans each month, the reduced interest rate of a refinanced loan may offer a lower monthly payment.

This student loan calculator is a great resource to understand the impact of a refinance on your loan amortization (showing the payments split between principal & interest during your entire loan term length) and help determine if a lower interest rate will help you accomplish your goals.

How will you choose a private loan lender?
Client Experience: How are you being treated on the other end of the phone? Or on the other end of that email? Justin Kribs argues that this is one of the first things to look for when comparing lending companies.

Flexibility is Key: What types of assistance do they offer in times of hardship? Keep in mind that Private Loan Lenders do not offer the same assistance as Federal Loan Servicers (e.g. Income Based Plans, Forbearance, etc.). If this sort of flexibility is important to you, make sure to be clear when asking what benefits they will offer you.

Questions to ask: 

• How many different repayment options do they give you?

• Who does the servicing of the loan?

• What is the Co-signer release agreement?

Recommended Lenders who come with positive client reviews:

• First Republic Bank

• So-Fi

• Laurel Road

Sources

Justin Kribs, MS, CFP®, Director of Financial Planning and Student Loan Services at InsMed Insurance Agency Inc. https://insmedloanservices.com/

 https://www.forbes.com/sites/advisor/2020/03/26/student-loan-forbearance-in-the-coronavirus-covid-19-stimulus-what-you-need-to-know/#3e9e92cc2039

https://studentaid.gov/announcements-events/coronavirus

https://www.forbes.com/sites/advisor/2020/03/12/list-of-banks-offering-relief-to-customers-affected-by-coronavirus/#7411c1d73ee3

https://www.marketwatch.com/story/2-trillion-coronavirus-stimulus-bill-gives-student-loan-borrowers-six-months-of-relief-2020-03-26

https://www.bankrate.com/calculators/college-planning/loan-calculator.aspx

---

---

Related Articles

@blankerwahnsinn

Your team at Human Investing is here to serve you. Though our physical workplace has changed for the short-term, our company’s missions remain as strong as ever: to faithfully serve the financial pursuit of all people.  

We are entering a financially burdensome time. Many individuals and businesses are projected to suffer financially. The impact will look different for everyone.  

If you are seeking ways to change your spending habits, something you will certainly need is time.  Said differently, cash outflow is unlikely to change unless we take the time to research, contemplate, and change current routines. 

Here is a list of ten ways you can help cushion financial burdens that have either occurred already or are expected in the future:  

1. Check your credit card points.  

   When is the last time you used credit card points? If you are in a financial crunch, now might be a wise time to cash out your credit card points. Not all credit cards include cashback rewards, but examples of companies that offer cash back cards include Chase, CapitalOne, and Discover.  

   Regardless of the cashback options available to you now, take the time to review whether you utilize the benefits of your existing credit cards. While you are reviewing your credit cards, this site is a helpful tool to figure out which credit card fits best with your lifestyle and spending habits: Nerdwallet - Credit Card Comparison  

2. Eat the food you buy for quarantine.  

   This sounds obvious. But for some households, this will be challenging since we have purchased an allotment of random items. Was the store sold out of spaghetti?  Did you instinctively grab the only noodles left? If so, make it a fun activity for your family to express some creativity or try new recipes in the kitchen.  

3. Consider refinancing your mortgage.  

   Do you have a mortgage? Rates have come down considerably this year and refinancing your mortgage is worth a looking into. Refinancing your mortgage can lower your monthly mortgage payments, offering both short-term and long-term savings. If you are interested in learning more about refinancing your home, see our recent post by Will Kellar: “How to refinance your home.”

4. Save the money you would be spending.  

   We all have had to cancel upcoming plans. In many cases, that means extra savings. Put aside those dollars and use the money as needed. 

5. Create or monitor your emergency fund.

   We realize many people do not have an emergency reserve. Traditionally a family should have three-to-six months of expenses saved in an emergency fund (three months for dual-income families and six months for single-income families). We encourage individuals to create an emergency reserve regardless of the economic forecast, but it becomes especially important during turbulence.  If you do have an emergency fund and are experiencing financial hardship, now is an appropriate time to use it. 

6. Shop and spend mindfully.  

   Personally, I love the 24-hour rule. It’s a practice of self-restraint. If you feel the urge to purchase something (new shoes, a different laundry basket, extra-spicy BBQ sauce), wait 24 hours before you make the purchase. The time-lapse often mitigates a compulsive purchase.  

   Due to the economic uncertainty of tomorrow, we must be willing to make drastic changes to our spending habits. We are all compromising our normal routine in some way, shape, or form. With that said, it’s important to be cognizant of how these changes are impacting our cash outflows.

7. Consider selling unnecessary household items.  

   I predict that people will spend more time selling their unused or unwanted household items. Take some time to go through your storage or extra items. Craigslist, Facebook Market, Poshmark, and Nextdoor are all great resources for buying and selling things second-hand. One man’s trash is another one’s treasure. 

8. Create a budget.  

   A budget can provide financial awareness and reassurance. Now is a great time to revisit your budget or create one if you have yet to do that. Here is a budget template to get you started - Budget Template There are also online budgeting tools available such as mint.com, YNAB.com, or everydollar.com.

9. Unsubscribe.  

   Out of sight, out of mind. Take this time to unsubscribe to unnecessary social media accounts that tempt you to splurge or spend extra money. To minimize your current expenses, it may also be worthwhile to unsubscribe from unused memberships like online streaming services or gyms.

10. Create ‘no-spend days’.  

    Since many Americans are working from home, ‘no-spend days’ are a good family challenge. It’s important to vocalize the game to your family so everyone can participate and be mindful of not spending money.  

Please feel free to share with others and let our team know if you have other examples of financially savvy savings that we can add to this list. We are open to new ideas and challenges!   

---

---

Related Articles

@scottwebb

Is it time to refinance your home? To make sure this is a prudent decision for your family we want to share some considerations and outline the process.  

What is a Mortgage Refinance?

A mortgage refinance replaces your current home loan mortgage with a new one. Homeowners will typically look to refinance when there has been a drop in interest rates.  That said, a drop in interest rates is just one of many reasons someone would refinance their home.

Why is refinancing your home worth your time and focus? Because a mortgage is often one of the biggest expenses in a lifetime, it’s an important expenditure to get right.  According to the US Bureau of Labor Statistics, Americans spend almost 32% of their income just on housing compared to the 0.71% spent on all nonalcoholic beverages (i.e. coffee). With regards to personal finance, it can be easy to blame our financial situation on the little things like the cost of your morning coffee. Rather than worrying about the little things like a cup of coffee, overextending ourselves financially with housing costs can hurt cash flow and diminish financial flexibility. A mortgage refinance can help adjust how much is spent on housing to provide a net positive impact on households both short term and long term.

Make a Plan

Set clear financial goals regarding your mortgage refinance. Here are a few reasons why someone would consider refinancing their mortgage:

1. Lower Your Monthly Payment – Refinancing your home can reduce your monthly mortgage payment, providing more financial flexibility for years to come. There can be many advantages to extra money each month retirement savings, college savings, using monthly savings to pay more to the principal each month.

2. Reduce Your Loan Term – This may be an opportunity to shift from your 30-year mortgage to a 15-year mortgage. Reducing the term of your loan can be advantageous for those who would like to be debt-free sooner. A reduced mortgage term means you are likely to pay less interest over the term of the loan. Rates for 15-year mortgages are typically lower than those for 30-year mortgages.

3. Tap into Your Equity – Do you need to consolidate debt or take out equity for home improvement? Refinancing can free up your home equity for these needs.

Do Your Homework

It is important to “Know Before You Owe.” - Consumer Financial Protection Bureau (CFPB). The CFPB was established to protect and educate consumers in response to the Financial Crisis of 2007-08.

 As you educate yourself, here are a few factors worth your consideration as you apply to refinance your mortgage:

1. Determine How Much Home Equity You Have - Refinancing a home can be more advantageous depending on how much equity you have. Your equity is determined by your home’s value in excess of the remaining balance of your mortgage. To assess your home’s value, utilize an online valuation tool or ask your real estate agent since they may have better tools and knowledge of your neighborhood. Additionally, a refinance can be a great opportunity to get out from under the monthly cost of PMI; to do this 20% of home equity is needed.

2. Know your Credit Score - Your credit score measures your creditworthiness to lenders. An ideal credit score is greater than 760, the higher the credit score the better rate you will qualify for. Similar to your initial home loan application, your credit score will be reviewed during the refinance process. Make sure that if you have previously frozen your credit that you unfreeze it by contacting all three credit bureaus, Experian, Trans Union, and Equifax. – To learn more about freezing your credit see our post on How to Prevent Identity Theft.

3. Understand your Debt to Income Ratio - Lenders use the following ratios to measure your ability to manage the monthly payments.

   • Monthly housing payments should not exceed 28% of gross income.

   • Monthly overall debt payments should not exceed 36% of gross income.

4. Shop Around - Shop around with multiple lenders to find the best refinance rates and request loan estimates for comparison. It helps to speak with several lenders on the same day as rates can/will change daily. Requesting a loan estimate will allow you to compare rates, total loan costs, and mortgage features. Be prepared to share the following documents with the lenders: Paystubs, W-2s last two years, Recent Bank Statements, List of debts and amounts, Current Mortgage Statement, Declaration page of homeowner’s insurance policy, Name and Phone of Insurance Agent, and Proof of other income. (Submit Loan applications, within a few weeks as not negatively impact your credit score.)

5. Understand your Break-Even Point – Once you know what types of rates are available to you, use a mortgage calculator to assess your break-even point. When deciding to refinance, it is important to know the point at which the cost of refinancing will be covered by your monthly savings. This break-even point will help decide whether the refinance process is worth it based on how long you expect to stay in your home.

   Example: If your refinance costs you $3,000 and your saving $200/month over your new loan, it will take 1 year and 3 months to recoup your costs.

6. Will Your Taxes Be Impacted - Mortgage interest can be deducted on a tax return to help reduce income taxes owed. Since refinancing a mortgage often results in lower interest, your tax deduction may also be lower. This can also move a taxpayer from itemizing their taxes to taking the Standard Deduction. Consult your CPA or tax professional to discuss how refinancing could impact your tax situation.

Move Forward (Duration: Can take up to 45 days)

1. Decide on a Lender – Let your loan officer know of your intent to proceed with the mortgage application.

2. Lock-in Rate – Let your lender know that you would like to lock in your new mortgage rate. Rates will be locked for a fixed period, typically 30, 45, or 60 days. This protects you from rates increasing while you are waiting for the loan approval, processing, underwriting and loan closing.

3. Prepare for Appraisal (Duration: 2-3 weeks) – This can mean taking care of quick fixes, doing a deep clean and sprucing up the landscape. Spend your time and resources on things that NEED attention. Let the appraiser know if you have made any changes to the property.

4. Underwriting (Duration: 3 Days) – The mortgage company will verify that all information is correct. During this period you may receive additional questions or requests.

5. Review Closing Disclosure - At least three days before your closing you should receive a Closing Disclosure, which includes the details about your loan. Review and make sure this matches your loan estimate previously provided.

6. Prepare for Closing Costs – Be prepared to bring the full “Cash to Close” amount with you to your closing.

7. Sign and Close – This is the final step; go to the title and escrow office to sign all final loan documents for your refinance.

Conclusion

For many homeowners, a refinance can make sense at some point during their lifetime. When refinancing your mortgage it is important to set clear financial goals, do your homework and understand the process to help avoid pitfalls. We hope these considerations and outline can be a guide to you as you decipher whether a refinance is right for you. As always feel free to call or email at any time, let us know how Human Investing can help.

SOURCES:

https://www.consumerfinance.gov/know-before-you-owe/

https://www.myfico.com/loancenter/mortgage/step1/getthescores.aspx

https://www.bls.gov/cex/2018/standard/multiyr.pdf

https://www.zillow.com/mortgage-calculator/refinance-calculator/

---

---

Related Articles

2020 has put a wrench in most plans. As a recent graduate, you were likely excited to make career moves, grow your friend circle, move somewhere new, and maybe even get your own pots, pans, and plants. Instead, you are living at home with your parents.

According to 2015 data from the Census Bureau, some 82 percent of American adults think that moving out of their parents’ house is a “somewhat,” “quite,” or “extremely” important component to enter adulthood. For those of you currently living at home with your parents, hopefully this post resonates with you.

Some of you may be choosing to live at home, but many of you have no other option. Do you find yourself vacillating about moving back home? Or maybe you are considering spending your savings just to get some space from your family? Regardless of the specifics, have you thought about the impact that saving money on rent can have on your future? Maybe this is a great opportunity for you to start saving money like a millionaire.

For illustrative purposes let’s consider Sophia, a fictitious 23-year-old. She had other plans for herself, but she is living at home for a variety of reasons. She wakes up grateful for safety and shelter, but she is also human and feels a little nostalgia for what this year could have been. Let’s run some numbers on the potential financial benefit of living at home to make her day a little brighter.

Doodle credit: Rachelle Locey

Let the savings begin

If Sophia were not living at home, she would be spending $1,100 a month in housing expenses. After 12 months of living at home, she could save $13,200 that would have ‘normally’ been spent on her rent/wifi/utilities/parking.

Please note: It’s understandable if you’re not able to save $13,200 while living at home. Whether living at home allows you to save $13,200 or $3,000, the benefit is huge for your future financial wellbeing.

Sophia is comforted by these additional savings in her bank account today. She remembers someone (like Uncle Mike or her economics teacher Ms. Anderson) explain inflation, the stock market, and compounding interest. Now what is a girl to do?

Because Sophia is living with her parents, she saved $13,200 of extra cash that she can invest in the stock market.

here’s her 5 step game plan

One year of savings, Thirty years later

**This chart assumes a 7% annualized growth for her investment over time. The 7% is based on historical data of S&P500 returns. **

By living at home, Sofia has safety, shelter, and savings. She also has significant savings for not only today, but also for the future. If you are living at home, please be thankful for your dishwasher and applaud your future self because the financial trade-off is immense.

---

Related articles