Your Money Matters, August 24, 2014

There are events in life that can sully pleasant childhood memories, such as finding out your parents bought your Easter candy. And seeing the Fonz pitching reverse mortgages on daytime TV.

The financial crisis changed the entire mortgage landscape, including the reverse mortgage industry, and the Department of Housing and Urban Development tightened up the rules. These new restrictions were necessary to protect consumers, but also to shore up the mortgage insurance fund that took a hit in the crisis aftermath.

Not that I don't trust the Fonz to give you the whole story: There's only so much he can say in 60 seconds, so allow me to update you. And since 95 percent of reverse mortgages are government sponsored Home Equity Conversion Mortgages, when I use the term reverse mortgage, that is what I am addressing.

 

The basics

A reverse mortgage in essence is a loan, available to borrowers age 62 and older, backed by a primary residence, that doesn't need to be paid back monthly. It is most often considered a last resort when all resources are tapped out, or may soon be tapped out; a way to get cash to live on.

Borrowers may take out a lump sum up front, borrow a smaller sum every month, or a combination. The bank keeps track of what is owed and rolls the interest and fees into the balance.

The amount available to borrow is limited by a formula taking into account the borrower's age, the interest rate, the value of the home, any existing mortgages, and the lending limits in the area (currently $625,500 in Monroe and Pike counties).

The most attractive feature of a reverse mortgage is that you can potentially get cash out of your home and not have to pay it back right away. The misconception being that you never have to pay it back. The fact is that once the last borrower stops living in your home for 12 consecutive months, whether because you sell it, you leave it to go to a long-term care facility, you die, or some other circumstance, your loan becomes due and payable.

The good news is that with the Home Equity Conversion Mortgage, you are not required to pay more than the value of the house at that time, regardless of the balance of the loan. Your heirs may even keep your home by paying back 95 percent of the home value to the lender.

But did you catch that part about the last borrower? That means if there are more than one of you living in the home, there is no protection for anyone who is not a borrower on the loan. So if you own the home in your name alone and think it's easier just to take out the reverse mortgage in your name and not jointly with your wife, think again. Should you predecease her, she could be left with no house, no cash, and nowhere to live. So if a reverse mortgage is in your future, be sure to cover all the bases.

 

Show me the money

The loanable amount with a reverse mortgage depends largely on the age of the youngest borrower, the value of the home, and the current interest rate. The highest cash scenario would come from a combination of the oldest borrower, the highest home value, and the lowest interest rate.

Let's look at a couple, aged in their early 70s, with a home worth $150,000 today. Assuming they own their home outright, they might look at a fixed rate reverse mortgage at 5.06 percent (plus the mortgage interest premium outlined below); under the new rules they are limited to a lump sum of $47,309.

However if they are willing to start with a variable rate of 2.656 percent (capped out at 12.656 percent), they may have as much as $82,770 ultimately available to them. They will likely be limited to taking only 60 percent up front if they want the lump sum; or they may take a credit line or a monthly payout of $522. You can calculate your own scenario at reversemortgage.org.

 

The costs

Just like a traditional mortgage, reverse mortgages come with closing costs, and they can be quite steep. Origination fees may be as high as 2 percent of the first $200,000 of the home's value (not the loan amount), and an additional 1 percent on the remaining value, up to a maximum of $6,000.

Beyond that, there is a mortgage insurance premium payable to the Federal Housing Administration. The MIP depends on how much money you receive up front. If you limit your initial proceeds to 60 percent of the funds available, your MIP is 0.5 percent of the home's value. If you take more than 60 percent, you will pay 2.5 percent of the home's value.

The origination fee and the MIP usually come out of the funds available to be loaned to you. Your home will need an appraisal to determine how much you can borrow, and that typically is paid for in cash. Should the appraiser find your home is in need of major repairs, they must be made before the loan is originated. However if the cost is less than 15 percent of the appraised value, you may be able to pay for them after the loan is completed with funds from the reverse mortgage.

On top of those larger closing costs, the usual document preparation, inspection fees, recording fees and so forth also apply. The mortgage servicer may also charge on a monthly servicing fee.

Your loan, of course, carries interest, which may be fixed or variable, and typically is higher than a traditional mortgage, as we saw earlier. You will also pay an ongoing MIP fee of 1.25 percent of the outstanding loan balance (essentially making your interest rate that much higher).

 

Can anybody get one?

It used to be that there were no financial qualifications at all for a reverse mortgage. However, due to the large number of defaults, applicants now must go through a financial assessment to be approved.

How can there be so many defaults, if you don't make payments with a reverse mortgage? The issue is a very familiar one in Monroe County — property taxes. If a homeowner with a reverse mortgage does not keep up with real estate taxes, the lender can foreclose. If the value of the home does not satisfy the loan amount that has accrued, in most cases, the lender cannot recover the rest with a reverse mortgage, leaving the government insurance fund on the hook.

Now, the borrower must show the reasonable ability to make real estate tax and insurance payments, as well as general property upkeep, or be required to keep funds in reserve via the reverse mortgage, similar to an escrow account.

 

An interesting twist

Reverse mortgages can also be used to purchase a home. Let's say our couple sells their home and wants to buy another, also for $150,000. They may make a down payment of $66,738 and take a reverse mortgage for the remaining balance, pocketing the rest of their home sale proceeds. As with any reverse mortgage, they should weigh the costs of the mortgage vs. the need for preserving their equity and options for later in retirement.

Seeking good counsel before making any decisions is always wise.

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Your Money Matters, August 3, 2014

Advances in medicine in recent years have improved the health and longevity of not only humans but our beloved furry companions.

That's great news; many conditions that were untreatable not that long ago can now be managed if not cured. But, ouch, those vet bills can hurt.

Since we can't whip out our Aetna card when checking out at the vet, how about getting Fido his own insurance plan? When I first looked into pet insurance years ago when we had a very accident- and tumor-prone dog, I wasn't impressed. However, on second glance for this column, the product seems improved, and worthy at least of consideration.

First, the Affordable Care Act doesn't apply to fur babies, so not all pets can get insurance. Eligibility rules of pet insurance companies vary, but most will only write a policy on dogs younger than 12 or cats younger than 10, although there are some that cover any age for accidents. Pre-existing conditions are generally excluded from coverage, and some policies will not cover congenital conditions. While you may be able to buy coverage for birds and exotic animals, the most common policies are for cats and dogs.

Pet policies come in a variety of coverage levels, ranging from comprehensive policies that cover illness, accident and preventative care, to basic plans that may cover only accidents or only cancer.

I ran some quotes on our pets (a dog and two cats) on a website called PetInsuranceReview.com to get a feel for what is available. With both companies I compared, there was the option to choose a plan covering illness and accidents only, and to also add a wellness plan. The main difference between the companies seemed to be how the claims are paid.

VPI Pet Insurance for instance, has a schedule of benefits and reimburses you based on that list, depending on the level of coverage you choose. The schedule of what will be paid and what procedures are excluded was a bit confusing to me; I looked for procedures or illnesses our pets have had in the past, and there were several I did not see on either list. Perhaps they are covered under a different name; a conversation with your vet may help to clarify.

If your pet's condition is on the list, after satisfying your deductible, you will be reimbursed what you paid, up to the amount on the schedule. So if your dog tears a toenail, you may be reimbursed up to $220 on the injury-only plan, or all the way up to $670 for the major medical plan (after the annual deductible).

For our little 5-year-old pup, the major medical plan with a $100 deductible is $32 a month. That would give us a maximum annual benefit of $14,000. The "economical" medical plan provides half the plan limit and reimbursements for a premium of $24, and for $8 a month (and a larger $250 deductible) we can purchase an accident-only plan. Changing the deductible for any of these plans naturally changes the premium.

For another example, PetsBest.com lets you choose both a deductible and a reimbursement percentage, rather than a flat amount. So, again, for our pup, we could choose a $100 deductible and 90 percent reimbursement, with a $5,000 annual limit, for $41 a month. PetsBest includes holistic health care like acupuncture and chiropractic care. PetsBest will cover our 10-year-old cat for that same plan, at a pricey $55 a month, but VPI would only offer an accidental plan for $7 a month.

With PetsBest, we can add a wellness plan to cover things like checkups and shots for around $23 a month. The wellness plan benefit is capped at about $500 a year. Unless you plan to do spaying or neutering, heartworm treatments, or dental cleanings (which are covered), I'm not sure the benefit will outweigh the cost. I suppose it depends on what your vet normally charges for those things. VPI offers three different tiers of wellness plans.

If you're considering pet insurance, you'll want to ask questions: Will my pet's plan change as he gets older? As mentioned above, there is typically an age limit to writing the policy, but with most plans, once they're in, they're in. But you will want to confirm that you won't be cancelled once your pet gets too old, and also find out if your premiums will go up as your pet ages.

Does the policy cover chronic illnesses for the duration, or is there a limit to how long the coverage will last? What are the annual and lifetime limits for the policy? Are prescription medications covered? Can you use any vet you choose? If your plan reimburses a percentage of your cost, do they limit how much they allow based on usual, customary, and reasonable charges? Once you enroll your pet, is a medical exam required to prove that it is healthy, and how long is the waiting period before you can actually use the benefits?

You'll also want to consider the strength of the issuing company. You don't want to sign on with a company, pay premiums all along, and find out at the worst time that they went belly up.

Ultimately, the decision about whether to buy pet insurance is a personal one, based on the health of your pet and your ability to absorb the cost of an illness or accident, versus transferring the risk to the insurance company via a monthly premium. The cost of care in your local area is a consideration, too.

As important as finances is your philosophy about pet health and your pet's role in your family. Are you likely to want to pursue treatment at any cost, or do you take a more pragmatic approach? Would you be less pragmatic if you had pet insurance to help with the cost? That's for you to consider.

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Your Money Matters, July 13, 2014

We've had lots of movement in our family lately— literally.

My daughter moved out of an apartment, my son moved into one, and we moved our office.

It occurred to me as I was lugging boxes and wondering whose bright idea moving the office was, that moving is like childbirth. It's difficult to go through, but in time you forget just how difficult it was. You're once again lured by the prospect of a new place to live or work, and think, "There's not much stuff here; it will be a breeze." It's never a breeze. So before I suppress the memory, allow me to share a few tips on renting a truck for your in-town move.

We have several options locally for moving truck rentals, with Penske, Budget, U-Haul and even Enterprise (for cargo vans) in the area. U-Haul is the most prolific though, with a location springing up on every corner, it seems. They also have ratings and reviews of each location on the website to help you choose. I'd rather drive further to get friendlier, more helpful service, which I did for the second truck I rented in May. Online quoting tools are helpful, too, to compare each company's total costs side by side.

Don't be fooled by the $19.95 sign on the side of the truck, thinking that's the total price you're going to pay. There are a few components that go into your cost: the price of the truck, the cost per mile, the cost of the insurance and fuel efficiency of the vehicle. The price fluctuates widely depending on the day of the month and the day of the week to rent.

For instance, a 10-foot truck from Budget may be $17.99 with .79 per mile on a Wednesday in late July; that same truck rents for $125.09 on a Saturday and .89 per mile, quite a jump. U-Haul's prices for those same days range from $19.95 and $.89 per mile on Wednesday and same price on Saturday but $1.39 per mile. Sundays through Thursdays are the least expensive days to move.

Which one is a better deal for you will depend on how many miles you are driving, where you have to pick up the truck, and how important it is to move on a weekend. So get out your calculator and Mapquest before deciding.

I also found in some cases that the price for the same truck on the same day changed when I ran online quotes at different times — the closer to the date I needed it, the higher the price was.

You may find, too, that the truck you thought you reserved actually isn't available at the location you chose. Call the location in advance and make sure they have that size and that it will be there for you. U-Haul offers a guarantee that you'll have the truck or they'll give you $50. That would be of little consolation to me if I had help lined up a deadline to meet with no truck.

You may be offered a bigger truck as well, which may or may not work for you depending on where you are driving it. Choosing the right size is important. If you are moving far, naturally you will want to make fewer trips and save the mileage costs, but for short moves you may save by renting a smaller, less expensive truck and taking a few trips.

I'm not one to take insurance whenever it is offered, but renting a truck is one of those times I do. Just about every auto insurance company excludes coverage on rental trucks and cargo vans. So take a look at the options available, and choose wisely.

Some policies exclude common damage like denting the top corner of the truck or popping a tire, and some don't include any liability coverage, or coverage for things they consider to be caused by neglect. To buy the coverage that has few or no exclusions, while pricey, may be worth the peace of mind. Things to look for: coverage of accidental damage to the truck or another vehicle, liability coverage, insurance on your cargo, insurance to cover vehicles you tow.

If you make a reservation online and later change it, either online or by phone with the reservations center, be careful that all of your chosen options still stand. Once you get in the shop, if the reservation was made online, it can't be modified at all. At least that's what I was told when I realized that the damage waiver I chose online didn't survive the reservation change I made on the phone. It was too late to add; I had quite a nerve wracking trip to Allentown and back in that truck.

In addition to the costs of renting a truck, there are things like renting dollies, furniture pads and the gas that is needed. Don't underestimate how much gas those trucks use when budgeting. You'll also have the odds and ends like packing tape, replacing possessions damaged or lost in the move, and take-out when you can't find your way through the kitchen yet.

Then there's the moving crew. I found that the older you are, the more stuff you have. Unfortunately, on the flip side of that, you also have less energy (and so do your friends). Instead of rounding up a bunch of friends and feeding them pizza in exchange for a few hours of heavy lifting, when you're my age, rounding up a bunch of your kids' 20-something friends is a huge help. They move a lot faster and carry much heavier loads. Although providing cash in addition to the pizza helps.

If you've driven by the corner of Eighth and Ann streets in Stroudsburg and wondered where I went, I'm pleased (now) to tell you that we moved two blocks down and across the street (like the knight on a chess board), to 25 N. Eighth St.

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Your Money Matters, June 22, 2014

 

In recent columns, my goal has been to give an overview of some of the most common investment vehicles you encounter when investing. We've looked at mutual funds and their various flavors, closed end funds, and this time we'll take on one that's quickly gaining popularity — exchange traded funds.

Exchange traded funds, or ETFs as they are commonly called, are very similar to mutual funds in that they are a vehicle designed to provide a investors a level of diversification that would be difficult to achieve by investing in a basket of stocks on their own.

ETF's, like mutual funds, pool investors' money together to purchase many stocks or bonds, perhaps hundreds or even thousands, according to its stated objective. To invest on your own in a way that matches "the market," the S&P 500 index, you would need to purchase stock in all 500 companies from the index. That's quite a bit of money and management. Instead, with a mutual fund or ETF that tracks that index, you can invest a much smaller amount of money and still be spread across the same stocks.

So what is the difference between a mutual fund and an ETF? The most obvious difference between the two is how they trade. When you buy or sell a mutual fund, regardless of when you put the order in, your trade will be processed after 4 p.m. when the markets close. That is because the price of the fund for that day (the net asset value, or NAV) is determined based on the closing price of all the stocks or bonds that comprise the fund.

An ETF on the other hand, trades all day long, like a stock. That means the price fluctuates throughout the day, based on the prices of the investments it holds as well as the supply and demand of the ETF itself. While in most cases the price does not stray too far from the value of the investments it holds, it can cause a problem if you invest in an ETF that does not have a lot of trading volume.

If you are looking to sell your ETF and there are few buyers out there, as there may be for a newer one or a specialized fund, you may find yourself in a position to be selling for less than the value, since you are selling essentially to another individual buyer. Mutual funds, on the other hand, must have enough liquidity to redeem your shares for the asset value whenever you want to sell.

Since ETFs are available for trade during the day, they are listed on the stock exchange, and you can follow their prices up and down as you might a stock. Buy and sell transactions are handled similarly. ETFs don't have the sales loads (sales commissions) that some mutual funds do, although there are plenty of no-load mutual funds available on the market, too. Although there is no sales commission, depending on where you are buying and selling, you may pay a broker's trade commission or fee.

Trading a mutual fund may cost more or less than trading an ETF, depending on what fund you are buying and if it is on the brokerage company's no-transaction fee list or not. For instance, at a discount brokerage, you may pay $7 for an ETF trade, $17 for a mutual fund that has a transaction fee, or zero for a no-transaction fee mutual fund.

Just like mutual funds, ETFs have ongoing operating costs, which vary from fund to fund. The original ETF market consisted mainly of funds that tracked indexes passively, which kept costs down, just like an index mutual fund that holds only the investments of specified indices like the S&P 500. But you can buy an active ETF — an ETF that is run by a fund manager or management team — with the goal of beating their benchmark through buying and selling investments. The cost differential can be wide. For example, the iShares Core S&P 500 (IVV) carries expenses of 0.07 percent, while PowerShares Dynamic Market's (PWC) is 0.60 percent.

Now, 0.60 percent is a far cry from the more than 2 percent expense ratios I've seen in some (ugly) actively managed mutual funds, but it is quite a bit higher than 0.07 percent. These funds have different objectives and are not apples to apples comparisons, so don't take that to mean that one is necessarily better than the other; it simply illustrates the point that fees can vary and should be taken into consideration when evaluating a fund.

When looking for an ETF for your investments, just like when choosing a mutual fund, start with personal objectives — factors like what are you investing for, what is your time horizon, what kind of risk do you want and can afford to take and then what allocation between stocks, bonds or other investments (and what types within those categories) are appropriate for you — before deciding how to meet those objectives.

Mutual funds, ETFs, individual stocks or bonds, all are tools you can pick from, but they are not the objective themselves. Always start with why you are investing and what you are trying to accomplish before moving on to the how to do it. Be sure any adviser you may work with does the same.

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Your Money Matters, May 25, 2014

 

Ah, the college graduation season; the time between celebration and that moment you realize your loans will be coming due and you need a J-O-B.

With the average loan balance upon graduation approaching $30,000, which coincidentally is just about the cumulative limit of no-questions-asked Stafford loans, thoughts of recent college graduates quickly shift from kicking back to considering when and how to pay back those loans.

Most undergraduate student loan payments actually carry a six-month grace period (although Perkins loans have nine months), so you get a brief reprieve to formulate a plan. Become very familiar with the website StudentLoans.gov.

Studentloans.gov is full of information for sorting out federal loans, meaning Staffords, both subsidized (government pays the interest while you are in school, awarded based on need) and unsubsidized, and PLUS loans. Information about nonstandard repayment of Perkins loans (which are also based on need and subsidized) must come from your school; the rules are different. Loans taken out privately with a bank or other lenders do not come with the same flexible options as federal loans. We will focus on federal loans here.

Your first task on StudentLoans.gov is to take inventory of your loans. With multiple loans disbursed over multiple years, you can lose track. The site has a link to track your loans and view the terms. Next, check out the repayment calculator and see where your payments are under the standard repayment plan. Standard means the traditional 10-year repayment period and making full payments. Run it for each of your loans and add them up to see what your monthly debt repayment will be.

Is the payment out of sight? Don't panic, you have options.

While the default payment plan is 10 years, the federal loan system makes other options available. Depending on the type of federal loan, you may be eligible to extend your payment plan for up to 25 years, or go on a graduated payment schedule, giving you smaller payments in the beginning, increasing over time as your income presumably increases. Naturally, the longer you stretch out payments, the more interest you will pay over the term.

If you need to go that route because your income is too low to support a standard payment plan, you may want to check out the income-based plans instead. While your payment may be the same under these plans as the extended or graduated plans, they come with additional benefits. Payments under the Income Based Repayment Plan for example, cap at 15 percent of discretionary income, which is re-evaluated each year.

Discretionary income is the difference between your adjusted gross income and 150 percent of the poverty guideline for your family and state. You may find your payments early on to be zero. Even if your income skyrockets, your payment will never be more than it would have been under the 10-year plan, and if you continue your payments and meet the requirements for 25 years, any unpaid balance will be forgiven.

What's more, for any subsidized loans you hold, should your payment be so low it does not cover the interest due, the government will pay that interest for up to three consecutive years. In normal circumstances, interest not covered by your payment will be added to your loan, or capitalized, but if you face a partial financial hardship, that interest still will accrue but not capitalized, so you won't pay interest on interest.

Borrowers with partial financial hardships may also be eligible for the Pay As You Earn program, which limits payments to 10 percent of discretionary income, and after 20 years of qualifying payments, the outstanding balance is forgiven. For those ineligible for either program, there is the Income Contingent plan, which calculates payment amounts according to two different formulas but won't exceed 20 percent of discretionary income.

The traditional routes of forbearance and deferments are still available, too, for borrowers under certain circumstances, such as continuing your education, illness, military service or period of unemployment. Requirements differ under each: Generally a borrower who meets the criteria for deferment cannot be turned down, but in some cases a lender may refuse to grant forbearance. With deferment, your subsidized interest will be paid for you, and does not accrue, but forbearance does not provide that benefit.

When it comes to paying for college with military service, most people think of the GI Bill, but there is another option: the College Loan Repayment Program. For highly qualified, enlisted service members with no prior service history (except for former active duty now joining the reserves), Congress authorizes up to $65,000 of student loan balance payments. However, each branch has its own requirements and limits. The Army, for instance, will pay up to that $65,000 for applicants that meet qualifications that include scoring a 50 or better on the Armed Services Vocational Aptitude Battery test and enlisting in a critical occupational specialty. The Air Force, on the other hand, limits repayment to $10,000. The payments are taxable both on the state and federal level, and you will receive a W2 at year end.

It's important to note that the College Loan Repayment Program and the GI Bill cannot be used for the same term, so if you intend to go back to school at some point, don't forfeit your GI Bill without weighing the benefits of each program. For multiple enlistment terms, you may be able to use the CLRP for your first term of enlistment and the GI Bill for the second, but confirm and verify before making any decisions, and follow the instructions exactly to preserve benefits to which you may be entitled. These are important choices that need to be made in basic training, so know your options before you go; making life decisions while under the duress of basic is not the best idea.

Military not for you? You may still find loan forgiveness if you work in other professions. The National Institutes of Health has a program for researchers, New York State has a program for licensed social workers, and even lawyers working for the Department of Justice or as public defenders may find relief. Nurses interested in working in underserved areas should check out the Nurse Corps Loan Repayment Program. Loan forgiveness may be in your future if you dedicate time to AmeriCorps, the Peace Corps or VISTA, too.

Teachers and librarians can search a funding database with the American Teachers Foundation to find programs for not only loan forgiveness but professional development resources. Check aft.org/benefits/loans.cfm. Finally, eligible parents and spouses of victims of 9/11 who died or became permanently disabled due to the attacks may qualify for loan forgiveness through the Spouses and Parents of 9/11/01 Victims Loan Discharge Program.

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