MORTGAGE FINANCING

By Neil Sullivan

There are a number of programs for people who don't have the cash to make a 20 percent down payment on their home purchase. It pays to speak to a mortgage professional to review all your options. Most first time buyers use special loan programs to guarantee their mortgage. The two most popular are private mortgage insurance and “piggyback” loans.

Using a piggyback loan, the home buyer gets one loan for 80 percent of the purchase price and another loan for up to 20 percent of the purchase price at a higher interest rate. The rate on the second mortgage often floats — and as the Federal Reserve has raised short term rates the fast few years, these loans have gotten much more expensive.

Another alternative, private mortgage insurance, the borrower pays an insurance company to insure the mortgage. If you default, they will pay the balance of your loan. Effective August 2006, the amount of insurance required was reduced by most mortgage companies, significantly lowering the cost of using this alterative.

For example, on a purchase with no money down, the monthly payment on the single loan option with PMI will be lower than the piggyback loan with one loan at the first mortgage rate for 30 years and the second loan at a higher, variable second mortgage rate, payable in less than 30 years.

Another benefit is that you will lock in your lower fixed rate on the entire amount you are borrowing. The PMI payments will be removed at the earliest of when your payments reduce your loan-to-value to 80 percent or the increased value of your home increases your equity ratio to 22 percent. Under a federal law in effect since July 1999, a lender must remove the PMI payment when the borrower has made timely payments for at least two years and the increased value of the home provides at least 22 percent equity.

Neil Sullivan is president of Westfield Mortgage. He holds an MBA from Duke University and is a frequent commentator and presenter at civic and business groups on financial matters. Westfield Mortgage, 774 Central Ave., Westfield; 908-518-0800 or 866-518-0800; www.westfieldmortgage.com

TIPS FOR GAINING FINANCIAL CONFIDENCE IN AN UNCERTAIN ECONOMIC ENVIRONMENT

Life is uncertain, and for most people that uncertainty applies to managing their personal financial affairs. Some investors find themselves overwhelmed with information and conflicting advice. Others don’t have the time or interest to manage their personal assets and liabilities in a disciplined manner.

Take planning for retirement, your children’s or grandchildren’s education, and other major financial goals in your life. How much is enough?

When calculating how much you might need to accumulate to generate the appropriate cash flow for the future, you should consider a reasonable rate of compounded growth, as well as principal erosion through taxes and inflation. Managing your financial affairs also includes staying current with the impact of changing market conditions. Not many people have the knowledge or the time to do this on their own.

Traditional investment planning creates an illusion of stability. But nothing happens exactly as planned. Goals change with your station in life as well as changing financial and market conditions.

What about drawing down your wealth once it’s accumulated? How much can you withdraw each month and not run out of money before your death? This will depend on, among other factors, your investment returns, the inflation rate, changes in your health or marital status, and whether you live beyond your life expectancy.

When you do a thoughtful inventory of important financial goals and assign priorities to them, today’s statistical modeling can provide a more accurate picture of a financial strategy than the straight-line models of the past. But it doesn’t guarantee results. Through periodic reviews of your goals and the performance of your investments, you can assess how your actual investing and spending patterns affect your probability of success.

With this information, you can make changes as needed to keep your plan on track toward your own personal definition of financial success. There is no substitute for common sense, a realistic overall plan that prepares for the uncertainties along the way, and sound financial advice from someone you can trust.

Samuel K. Van Allen, financial advisor, Wachovia Securities, LLC; 917-351-2014

CREATING AN EMERGENCY FUND

by Morgan James

It is best to plan for an emergency before it happens. You should start an emergency fund that contains at least three months’ living expenses. Note that this is not just three months’ rent, but three months’ worth of money to cover all of your expenses: rent, utilities, car payments, groceries…everything.

Emergency money has to be something that you can access in an emergency. This means that you can’t have it in an investment that you won’t be able to get at. You might choose to keep it in a separate account than your normal account. The challenge is that if your money is easy to access, you might be tempted to use it for purchasing things on a day-today basis. Your emergency account is not for daily expenses or impulse purchases. It should be used for medical expenses, unexpected car repairs, and in case you lose your job.

Be wise with your emergency account. If there are layoffs happening at work, you might need to consider adding more money to your account. If your car repair bill is something you can cover without using your emergency money, don’t use your emergency money.

You need to choose an account that you will be able to access. You might choose to go with a savings account. You might also choose a money market account which will earn you more money. You want an account with no fees. Ask your banker about what account is best for you. Sometimes, to have no fees, you need to maintain a minimum balance in the account. This might even be an incentive to not spend the money in your account.

It might seem difficult to make payments into an emergency fund, especially if money is tight. Regardless, you should start with as little as $40 a month, or as much as you can afford (remember: more is better!) as your monthly payment. Treat your payment to the emergency fund as one of your bills: this is not an optional payment. The old adage “pay yourself first” is very true when applied to creating your emergency fund.

Once your emergency account has more than enough to cover three months of your expenses, take the extra money and put it in a short-term investment (possibly one-month). When that money matures, reinvest it with the interest. Continue reinvesting the money that you have on top of your three months’ expenses until you have enough money to make a larger investment.

Even once you have hit your goal of having an emergency fund, you need to continue making your monthly payments to yourself. Eventually you might decide that your monthly payments will be better going directly to an investment. Regardless, creating an emergency fund is the first step to financial security and investment planning.

Morgan James is the editor of The Guide to Loans (www.theguideto-loans.com/debtmanagement/).
Article Source: EzineArticles.com

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