Everybody is stressing the importance of saving money. All of them will tell you the benefits of saving money and you too know very sure why savings are very important. Have you ever thought of how to save more money? Is there a way to help you save as much as possible? Do you find that it is very difficult to save money especially when you don't earn thousands of dollars.
Well, I am here to share with you on how to save money effectively. This method is have been around for many many years but no one have stressed the importance of it. However, the wealthy have been following this method and just look at them; they are getting richer! I believe if we could adopt the wealthy habits, we will also be wealthy in no time.
Firstly, we must aware of any transactions that we make. We must monitor our cash flow closely. List all the expenditures that we have, then categorize them. e.g personal item, mortgage, transport etc. It is important that you list all the expenditures because you really want to know where your money is going.
After listing your expenditures, indicate whether they are your needs or wants. You must justify whether it is a need or want. Finally, what you need to do is to plan your budget in an accounting format. As a guideline, your savings should be at 20% of your total income. Now that you can see how every dollar is spent, I'm sure you will try to modify your budgeting to accommodate your income. By the second and third month, you will know where your strength and weakness financially.
If you know how every dollar is spent, the next time you get an increment or bonus, you will know how to take care of that extra cash. You will not be spending extra cash impulsively anymore. Why? It's because, human beings can react better when they are able to see. Seeing is believing!
Let me recap on what you have to do the next time you are getting your pay,
1) Save 20% of your income
2) List all expenditures
3)Plan your budgetting
3)Follow the budgetting!!
Real Estate Mortgage Analysis - The Missing Component Of Wealth Manangement And Financial Planning
Why is this topic important to you and your clients?
Real estate and mortgage planning should be a key component in the wealth management services offered to your clients. Your client’s homestead and investment property are often some of the largest assets within their estate. Mortgages are almost always involved in a real estate portfolio. Many planners tend to focus on “investable” assets and overlook the real estate that may be the cornerstone of a person’s wealth leading to poor or nonexistent recommendations in this area. Mortgage planning should be involved in the planning process beginning with the pre-acquisition period, continuing during the holding period and culminating with the ultimate disposition of either the primary residence or investment property. With proper recommendations by the financial planner/wealth manager will come a stronger client relationship. Ultimately, you will end up with a happier client, more investable assets and probably more billable hours.
There are other benefits too. Your clients need the expertise that you can provide in this area. Even if you prefer not to do the following analysis, you should at least understand the talking points and suggest or coordinate a meeting with the appropriate tax and legal counsel. This paper will explain common mortgage products within the marketplace today. In addition there are real world applications and examples which you can use in your practice immediately.
What are the problems I need to think about?
The following are just a few of the questions you might want to consider. I don’t expect that you will have all of the answers. There also is no absolutely “right” answer to some of these questions. These are talking points that will probably involve other professionals on the financial management team. (1) Should a property be sold, gifted or refinanced to access the equity? (2) Is it better to die with a property in your client’s estate in order to get a step up in basis? Remember that gifting property involves the recipient acquiring the original basis. Selling property instead of 1031 exchanging it can subject the client to taxes that could have been avoided. Refinancing gives the client access to capital on a tax deferred basis-while the interest may or may not be deductible. (3) What type of loan options are available for my client today? (4) Are there any creditor protections that would be better afforded my client by having greater leverage on their home?
Let’s break down some of the basic considerations involving a primary residence. How long will the person own the home? How adverse to risk or change in payment will my client be over their projected holding time frame? The answers to these questions will give you the basis to begin exploring options. A common problem lies in mismatching the product to the holding period. Client goals can be maximized if you take the time to understand the products and then see how they fit into the client’s financial plan. For example, if the client has a 100% certainty that they will move out of their home in 7 years, you may want to look at a product that matches exactly that time frame, or create a hedge of 2-3 years either side of 7 years in case things change. Under this example there would be no reason to recommend a 30 year fixed mortgage unless the pricing was identical or cheaper than one of the other available shorter term products.
What mortgage products exist in the marketplace today and what problems do they solve for my clients?
First mortgage products today consist of 5 primary products and variations thereof. Most first mortgage products assume a thirty year amortization. It is what can happen over those thirty years that varies. Let’s make that assumption for this article. I will highlight 5 primary first mortgage products and mention one unique second mortgage option. All the options are available for your client’s primary homestead. They all may not be available for a second home or investment property. The mortgage note rate is generally .5-1% higher when financing anything other than a primary homestead.
1) FIXED RATE AMORTIZING MORTGAGES Your payment with this type of loan is made up of principal and interest. Each is a component of the payment. The entire mortgage will be paid off at the end of the thirty years. Following the rule of 78, the loan will be paid off with the last and final payment. The most common variation of this type of loan is the 30yr fixed mortgage, but there are 10yr, 15yr, and 20yr loans too. The main idea here is that these loans are fairly simple. They are meant for the risk adverse with a very long term prospective of being in their home.
2) ADJUSTABLE RATE MORTGAGES(ARM) With these loans the monthly principal and interest payment is based upon a rate and amortization period that is fixed for a period of time within the overall 30 year time frame. It could be six months to ten years. The overall loan term is again 30 years. After the initial fixed interest period of time, the loan payments adjust up or down, subject to a formula. This formula uses a fixed constant called a margin. A typical margin on today’s ARM’s will have a number of 2.5-3.5. The margin is a fixed number and is arbitrary and established by the investor when the loan is originated. The margin is added to a variable which is called an index. The most common index is either the average of the yield on 1 year treasury bills or the 6 month Libor index. The value of the index will change over time. There are many other indexes and versions of the two I just mentioned. Most ARM’s have “caps”. Caps prevent the margin + index rate from exceeding a certain limit. These caps adjust on the adjustment date which happens upon the end of the fixed interest period. After the initial adjustment the loan payment will adjust according to the formula either annually or more frequently. It all depends on the product and how often the adjustment is made. For example, a five year ARM might have a fixed rate of 5% for the first 5 years. The loan is a 30 year loan. After the first five years the rate is subject to change. The loan has caps of 6/2/6. The first number, six, refers to the initial cap adjustment after the first five years. This means the rate upon initial adjustment can’t exceed 11 % (calculated as the initial 5% rate plus the 6% capped rate). The next number, two, refers to the adjustment period every year after the first. A cap of two means the rate for every subsequent adjustment after the initial adjustment can’t exceed two percent over the previous rate. Lastly, the third number, six, refers to the lifetime adjustment. This means that anytime the loan payment is adjusted, regardless of the math, you can’t have a rate that exceeds six percent over the initial rate-which would be 11%. An ARM is best used to match a mortgage with a projected holding period. These can greatly enhance cash flow when looking at an investment property and should be considered as the preferred loan for short term holding periods.
3) HYBRID OPTION MORTGAGES These loans usually involve a combination of an interest only payment period of time after which the loan retains a fixed rate and amortizes itself over the remaining balance of 30 years. For example, a loan may allow an interest only payment period during the first 10 years of total 30 years. At the end of the first 10 years the remaining loan balance must be amortized fully over 20 years. The interest rate remains constant over the entire 30 years. These products are trying to combine the best features of both fixed and adjustable loans all rolled into one loan.
Within this category of loans there is a unique product called the Option ARM. It goes by other names too-Choice ARM, Pay Option ARM, etc. This type of loan generally allows repayment on a flexible basis that usually involves four repayment choices. Generally speaking, you can choose how you want to pay with the ability to change the payments each and every month. The mortgage payments can be interest only, negatively amortized based on a rate of 1-3%(depends on the loan and investor) with the deferred interest added to the back of the loan, 15 year amortization, or based on a 30 year amortization. The deferred interest (negative amortization) is the double edge sword of leverage. If the property is appreciating at a rate greater than the growth in the deferred interest the equity will exceed the amount of negative amortization. In the event that the market is flat or declining, the negatively amortized loan balance may exceed the value of the property. This is the “upside down” risk associated with one of these ARM’s. This type of loan is often used by speculators in highly appreciating areas or on second homes where people want a low payment today and are banking on appreciation occurring in the future. The key benefit to this loan is the payment flexibility, which can be very important if your cash flow is erratic or you want to achieve the lowest repayment rate. Normally, the fully indexed rate (margin plus index) will probably be higher than the prevailing fixed rate mortgage or traditional ARM. This type of loan may also carry a prepayment penalty. As mentioned previously, an ARM is best used to match a mortgage with a projected holding period. Option ARMs can greatly enhance cash flow if you utilize the minimum payment option which will result in negative amortization. Utilization of the minimum payment (negative amortization) will allow you to control a more expensive property than could be controlled with any of the other payment options.
4) INTEREST ONLY MORTGAGES These loans allow for only the accrued interest to be paid-no principal payment is required. Prepayment of principal may or may not be allowed without a corresponding penalty. This will depend on the product and program. Mortgage payments may “recast” to reflect any extra payments that are credited towards principal reduction. Terms and conditions of all these loans are lender and program specific. Most programs that allow for interest only have an interest only time period of anywhere from 6 months to 15 years. Buying a home with an interest only payment will allow you to purchase 15% more home for the same payment. Your mortgage becomes 15% larger than an amortizing 30 year loan with the same interest rate. This is yet another tool of leverage. The safety net with this loan is that while it doesn’t decline in balance, it doesn’t increase through deferred interest/negative amortization either.
5) REVERSE MORTGAGES Having recently been improved, these products are experiencing tremendous growth. Based on an expanding demographic, the aging population will demand these loans. In the future, I predict growth in the number of lenders offering these loans and a more diverse set of loan products being developed.
Consider these loans for clients who have a lot of equity locked up in their home but have a lower income than they desire. Reverse mortgages allow the homeowner to access their equity either by a lump sum, a line of credit available for draws at will or in a series of payments. In essence you are able to unlock equity and have the home generate an income back to the homeowner. This allows the senior to use “dead equity” for living expenses, home improvements, gifting or even investing. The loan qualifying criteria are that the person applying for the reverse mortgage must be over 62 years old and own his/her home. Other than age, the lender has NO credit or income criteria and repayment with interest occurs upon the sale of the property. The amount of equity available for this loan is determined by the borrower’s age. Suffice to say that the older you are the more equity/credit is available for the reverse mortgage. What I have found is that the largest objection has come from the heirs fearing they will lose their inheritance. Sad but true. Whose equity is it anyway and whose life should be improved because of it?
6) 125% SECOND MORTGAGES There are a few lenders that still write this type of mortgage. This loan allows the borrower to exceed 100% of the value of their property. The loan is a second mortgage that allows the total combined first and second mortgage loan balance to reach up to 125% of the value of the underlying property. This loan is unique in that the loan exceeds the value of the home. While the loan is collateralized against the home, the interest may not be deductible because the underlying security is worth less than the amount of the loan. There may be no equity at risk once you exceed 100% of it’s value. This can be a good product, especially if used for debt consolidation. For example, someone who has more consumer or business debt than equity left in their home might still have a need for further consolidation and a lower payment. Let’s assume your client happens to have non deductible credit card debt. Let’s assume the credit card debt is somewhat usurious, blending somewhere between 20-30% APR. A new 125% loan will be priced today with a rate tied to the prime lending interest rate. The loan rate will adjust by adding a margin to prime. In this example, prime is the index. The adjuster to prime depends on the amount of the loan and the credit score of the borrower. The pricing variables are credit score and loan to value. The higher the credit score and the lower the loan to value, the better the interest rate will become. Today you might find a typical 125% loan to be in the 10-17% range depending on the variables I just mentioned. You can do the math specific to your client’s situation and see how much he/she may be able to save by lowering his/her interest rate on non deductible debt.
Talk to me about the tax considerations.
There is also a change in our tax law that has just taken affect regarding mortgage insurance premium deductibility. In the past, borrowers would combine a first mortgage with a second mortgage if they wanted a combined mortgage balance greater than 80% of the properties value. For example, a property that someone wanted to finance at 100% loan to value might have been split between two loans. The loans might have a ratio of 80/20-split between a first and second mortgage. The blended rate provided a payment that often was better than one loan at 100% LTV that involved paying mortgage insurance, especially when you factor in the deductibility of the interest vs. the non deductibility of the mortgage insurance. Now, for loans closed in 2007, if the borrower’s adjusted gross income is under 100K, they will be able to deduct the mortgage insurance premium. This will change how you make recommendations. In this new environment, a loan with mortgage insurance could be better than a combination first and second mortgage without mortgage insurance.
Another question that may come up concerns the advantage or ability to deduct interest that accrues on the mortgage. For purposes of this article, let’s assume that interest is going to be deductible and that we have a loan amount that allows us to take the maximum deduction. Please go to www.irs.gov and download publication 936 “Home Mortgage Interest Deduction”. This will give you the rules on deducting first mortgage interest and home equity interest. You will want to know the rules as they pertain to your specific client’s situation.
The 1098 statements sent from lenders at the end of the year reports the interest paid on that mortgage over the previous year. Principal reduction is not deductible. In my opinion, reduction of principal becomes a forced savings plan with an after tax dollar. Yes, this helps build equity. But, is this the best use of your clients after tax capital? Should a client pay down the mortgage, thereby decreasing the loan balance and accelerating the loss of a mortgage interest rate deduction? Are there higher and better uses for the capital that fit into the clients desire for wealth accumulation? Let’s examine this further.
What about investment arbitrage? Show me the money!
Consider this. What if a client borrowed the maximum mortgage allowed and repaid it based on an “interest only” payment? This would give them the maximum interest deduction. Assuming that they can benefit from this, they will save on taxes. The amounts of capital that would have been used alternatively for the down payment or paid on principal reduction through a principal and interest mortgage payment on a traditionally amortizing loan can now be allocated to either an after-tax or pre-tax investment that might have better growth potential.
What if the client took the differential savings from an amortizing principal and interest payment vs. an interest only payment and instead increased their contribution to a tax deductible plan, such as their employer’s 401K plan? My premise is that they would accumulate more wealth. The problem for the majority of people is having too much month at the end of the money. Not everyone is able to make their house payment and maximize their retirement plan contributions. Switching to an interest only payment from an amortizing loan payment will keep the loan balance the same but increase the available cash in the budget. Another use for this payment savings would be the repayment of non deductible debt such as credit cards. Your job as their advisor will be to see that they understand the options and alternatives available. In order to do this you need to understand how the loan products work and where they are most appropriate.
We just discussed an example of the lost opportunity of incorrectly investing capital. You can explore this further with your client. Let’s look at another example. When you pay down a mortgage or prepay a mortgage, you are essentially earning the interest rate that you are paying off. Next I’d like you to compare this rate of return on an after tax benefit basis to an alternative investment on an after tax or before tax basis. Consider this. If the client desires to have their home paid off upon retirement, you may be able to demonstrate how they can accomplish their goal better using an appropriate asset allocation portfolio based upon some historical rates of return. If they were to fund their investment on a monthly basis with the cash savings from a refinance and/or interest only payment, they may find that not only will they be able to pay off their house at retirement but they will have additional dollars remaining.
“I’m an estate and retirement planner-why should I care”?
Initially we asked some questions about mortgages and real estate as they relate to estate planning. Sometimes people default to selling property as the only way to raise capital. Selling property will often accelerate the tax liability associated with any profit. It also takes away any further upside that may be available through appreciation. Proper guidance in this area could make you a hero. Borrowed money through a refinance is not taxable. You may find that a recommendation of a refinance will allow your client access to their capital without the associated taxes. Depending on the size of the estate and the estate tax laws in the future, you may also find it better to have your client die with highly appreciated investment property in their estate so that they can receive a step up in the tax basis upon death. This could be extremely useful for the real estate investor who has been acquiring and exchanging property over a long period of time. There are, of course, many different options including charitable gifting and setting up family limited partnerships. I just wanted to bring up the topic so that all options were explored. You may already do a Monte Carlo type analysis for your asset allocation of investable funds. I’m suggesting something similar with your client’s real estate holdings and mortgages. You should discuss scenarios and give some options.
You may or may not be aware of the change in taxation regarding the profit in a primary residence. Every two years, a married couple can exclude 500K in profit and a single person can exclude 250K in profit. This is replenishable and doesn’t require purchasing any replacement property. Capturing this profit tax free could be important in your client’s estate and taxation outlook. See IRS publication 523 “Selling Your Home” for details. Mortgage planning may be involved if your client is moving frequently. If a loan is going to exist for approximately 2-3 years you may want to recommend that they consider a low closing cost or no closing cost loan. These types of loans would be identical to what we have already discussed. The difference would be realized in a higher interest rate on the loan. The savings depend on the size of the loan and the closing costs, but a rough rule of thumb indicates that you will save money by taking on a higher interest rate with lower closing costs if your holding period is short. A simplified analysis can be done by looking at the differential in payments from a loan with closing costs as compared to the loan that has no closing costs. Take the difference between the payments of each loan scenario and divide that number into the closing costs proposed for the loan with the lower rate. The resultant number will be the months needed to equal/recover the full amount of closing costs. In most instances, you will see that it is a 3-5 year break even point. This means if you plan to keep the property for a time exceeding the break even point it would have been more advantageous to pay the closing costs associated with receiving the lower mortgage rate vs. not paying closing costs and accepting a higher mortgage rate.
Do you see the applications within your practice?
In summary, I hope you’ve seen the value in adding mortgage and real estate planning to your wealth management practice. You don’t need to be the expert, but you do need to recognize the problems in order to help guide your clients towards a solution. As financial planners and wealth managers our job is more than crunching numbers and setting up asset allocation models with various investments. You can’t prescribe a client solution until you’ve done a complete diagnosis. We are our client’s “financial doctor” identifying problems and offering options and solutions that meet the client’s objectives and fit their comfort level.
Real estate and mortgage planning should be a key component in the wealth management services offered to your clients. Your client’s homestead and investment property are often some of the largest assets within their estate. Mortgages are almost always involved in a real estate portfolio. Many planners tend to focus on “investable” assets and overlook the real estate that may be the cornerstone of a person’s wealth leading to poor or nonexistent recommendations in this area. Mortgage planning should be involved in the planning process beginning with the pre-acquisition period, continuing during the holding period and culminating with the ultimate disposition of either the primary residence or investment property. With proper recommendations by the financial planner/wealth manager will come a stronger client relationship. Ultimately, you will end up with a happier client, more investable assets and probably more billable hours.
There are other benefits too. Your clients need the expertise that you can provide in this area. Even if you prefer not to do the following analysis, you should at least understand the talking points and suggest or coordinate a meeting with the appropriate tax and legal counsel. This paper will explain common mortgage products within the marketplace today. In addition there are real world applications and examples which you can use in your practice immediately.
What are the problems I need to think about?
The following are just a few of the questions you might want to consider. I don’t expect that you will have all of the answers. There also is no absolutely “right” answer to some of these questions. These are talking points that will probably involve other professionals on the financial management team. (1) Should a property be sold, gifted or refinanced to access the equity? (2) Is it better to die with a property in your client’s estate in order to get a step up in basis? Remember that gifting property involves the recipient acquiring the original basis. Selling property instead of 1031 exchanging it can subject the client to taxes that could have been avoided. Refinancing gives the client access to capital on a tax deferred basis-while the interest may or may not be deductible. (3) What type of loan options are available for my client today? (4) Are there any creditor protections that would be better afforded my client by having greater leverage on their home?
Let’s break down some of the basic considerations involving a primary residence. How long will the person own the home? How adverse to risk or change in payment will my client be over their projected holding time frame? The answers to these questions will give you the basis to begin exploring options. A common problem lies in mismatching the product to the holding period. Client goals can be maximized if you take the time to understand the products and then see how they fit into the client’s financial plan. For example, if the client has a 100% certainty that they will move out of their home in 7 years, you may want to look at a product that matches exactly that time frame, or create a hedge of 2-3 years either side of 7 years in case things change. Under this example there would be no reason to recommend a 30 year fixed mortgage unless the pricing was identical or cheaper than one of the other available shorter term products.
What mortgage products exist in the marketplace today and what problems do they solve for my clients?
First mortgage products today consist of 5 primary products and variations thereof. Most first mortgage products assume a thirty year amortization. It is what can happen over those thirty years that varies. Let’s make that assumption for this article. I will highlight 5 primary first mortgage products and mention one unique second mortgage option. All the options are available for your client’s primary homestead. They all may not be available for a second home or investment property. The mortgage note rate is generally .5-1% higher when financing anything other than a primary homestead.
1) FIXED RATE AMORTIZING MORTGAGES Your payment with this type of loan is made up of principal and interest. Each is a component of the payment. The entire mortgage will be paid off at the end of the thirty years. Following the rule of 78, the loan will be paid off with the last and final payment. The most common variation of this type of loan is the 30yr fixed mortgage, but there are 10yr, 15yr, and 20yr loans too. The main idea here is that these loans are fairly simple. They are meant for the risk adverse with a very long term prospective of being in their home.
2) ADJUSTABLE RATE MORTGAGES(ARM) With these loans the monthly principal and interest payment is based upon a rate and amortization period that is fixed for a period of time within the overall 30 year time frame. It could be six months to ten years. The overall loan term is again 30 years. After the initial fixed interest period of time, the loan payments adjust up or down, subject to a formula. This formula uses a fixed constant called a margin. A typical margin on today’s ARM’s will have a number of 2.5-3.5. The margin is a fixed number and is arbitrary and established by the investor when the loan is originated. The margin is added to a variable which is called an index. The most common index is either the average of the yield on 1 year treasury bills or the 6 month Libor index. The value of the index will change over time. There are many other indexes and versions of the two I just mentioned. Most ARM’s have “caps”. Caps prevent the margin + index rate from exceeding a certain limit. These caps adjust on the adjustment date which happens upon the end of the fixed interest period. After the initial adjustment the loan payment will adjust according to the formula either annually or more frequently. It all depends on the product and how often the adjustment is made. For example, a five year ARM might have a fixed rate of 5% for the first 5 years. The loan is a 30 year loan. After the first five years the rate is subject to change. The loan has caps of 6/2/6. The first number, six, refers to the initial cap adjustment after the first five years. This means the rate upon initial adjustment can’t exceed 11 % (calculated as the initial 5% rate plus the 6% capped rate). The next number, two, refers to the adjustment period every year after the first. A cap of two means the rate for every subsequent adjustment after the initial adjustment can’t exceed two percent over the previous rate. Lastly, the third number, six, refers to the lifetime adjustment. This means that anytime the loan payment is adjusted, regardless of the math, you can’t have a rate that exceeds six percent over the initial rate-which would be 11%. An ARM is best used to match a mortgage with a projected holding period. These can greatly enhance cash flow when looking at an investment property and should be considered as the preferred loan for short term holding periods.
3) HYBRID OPTION MORTGAGES These loans usually involve a combination of an interest only payment period of time after which the loan retains a fixed rate and amortizes itself over the remaining balance of 30 years. For example, a loan may allow an interest only payment period during the first 10 years of total 30 years. At the end of the first 10 years the remaining loan balance must be amortized fully over 20 years. The interest rate remains constant over the entire 30 years. These products are trying to combine the best features of both fixed and adjustable loans all rolled into one loan.
Within this category of loans there is a unique product called the Option ARM. It goes by other names too-Choice ARM, Pay Option ARM, etc. This type of loan generally allows repayment on a flexible basis that usually involves four repayment choices. Generally speaking, you can choose how you want to pay with the ability to change the payments each and every month. The mortgage payments can be interest only, negatively amortized based on a rate of 1-3%(depends on the loan and investor) with the deferred interest added to the back of the loan, 15 year amortization, or based on a 30 year amortization. The deferred interest (negative amortization) is the double edge sword of leverage. If the property is appreciating at a rate greater than the growth in the deferred interest the equity will exceed the amount of negative amortization. In the event that the market is flat or declining, the negatively amortized loan balance may exceed the value of the property. This is the “upside down” risk associated with one of these ARM’s. This type of loan is often used by speculators in highly appreciating areas or on second homes where people want a low payment today and are banking on appreciation occurring in the future. The key benefit to this loan is the payment flexibility, which can be very important if your cash flow is erratic or you want to achieve the lowest repayment rate. Normally, the fully indexed rate (margin plus index) will probably be higher than the prevailing fixed rate mortgage or traditional ARM. This type of loan may also carry a prepayment penalty. As mentioned previously, an ARM is best used to match a mortgage with a projected holding period. Option ARMs can greatly enhance cash flow if you utilize the minimum payment option which will result in negative amortization. Utilization of the minimum payment (negative amortization) will allow you to control a more expensive property than could be controlled with any of the other payment options.
4) INTEREST ONLY MORTGAGES These loans allow for only the accrued interest to be paid-no principal payment is required. Prepayment of principal may or may not be allowed without a corresponding penalty. This will depend on the product and program. Mortgage payments may “recast” to reflect any extra payments that are credited towards principal reduction. Terms and conditions of all these loans are lender and program specific. Most programs that allow for interest only have an interest only time period of anywhere from 6 months to 15 years. Buying a home with an interest only payment will allow you to purchase 15% more home for the same payment. Your mortgage becomes 15% larger than an amortizing 30 year loan with the same interest rate. This is yet another tool of leverage. The safety net with this loan is that while it doesn’t decline in balance, it doesn’t increase through deferred interest/negative amortization either.
5) REVERSE MORTGAGES Having recently been improved, these products are experiencing tremendous growth. Based on an expanding demographic, the aging population will demand these loans. In the future, I predict growth in the number of lenders offering these loans and a more diverse set of loan products being developed.
Consider these loans for clients who have a lot of equity locked up in their home but have a lower income than they desire. Reverse mortgages allow the homeowner to access their equity either by a lump sum, a line of credit available for draws at will or in a series of payments. In essence you are able to unlock equity and have the home generate an income back to the homeowner. This allows the senior to use “dead equity” for living expenses, home improvements, gifting or even investing. The loan qualifying criteria are that the person applying for the reverse mortgage must be over 62 years old and own his/her home. Other than age, the lender has NO credit or income criteria and repayment with interest occurs upon the sale of the property. The amount of equity available for this loan is determined by the borrower’s age. Suffice to say that the older you are the more equity/credit is available for the reverse mortgage. What I have found is that the largest objection has come from the heirs fearing they will lose their inheritance. Sad but true. Whose equity is it anyway and whose life should be improved because of it?
6) 125% SECOND MORTGAGES There are a few lenders that still write this type of mortgage. This loan allows the borrower to exceed 100% of the value of their property. The loan is a second mortgage that allows the total combined first and second mortgage loan balance to reach up to 125% of the value of the underlying property. This loan is unique in that the loan exceeds the value of the home. While the loan is collateralized against the home, the interest may not be deductible because the underlying security is worth less than the amount of the loan. There may be no equity at risk once you exceed 100% of it’s value. This can be a good product, especially if used for debt consolidation. For example, someone who has more consumer or business debt than equity left in their home might still have a need for further consolidation and a lower payment. Let’s assume your client happens to have non deductible credit card debt. Let’s assume the credit card debt is somewhat usurious, blending somewhere between 20-30% APR. A new 125% loan will be priced today with a rate tied to the prime lending interest rate. The loan rate will adjust by adding a margin to prime. In this example, prime is the index. The adjuster to prime depends on the amount of the loan and the credit score of the borrower. The pricing variables are credit score and loan to value. The higher the credit score and the lower the loan to value, the better the interest rate will become. Today you might find a typical 125% loan to be in the 10-17% range depending on the variables I just mentioned. You can do the math specific to your client’s situation and see how much he/she may be able to save by lowering his/her interest rate on non deductible debt.
Talk to me about the tax considerations.
There is also a change in our tax law that has just taken affect regarding mortgage insurance premium deductibility. In the past, borrowers would combine a first mortgage with a second mortgage if they wanted a combined mortgage balance greater than 80% of the properties value. For example, a property that someone wanted to finance at 100% loan to value might have been split between two loans. The loans might have a ratio of 80/20-split between a first and second mortgage. The blended rate provided a payment that often was better than one loan at 100% LTV that involved paying mortgage insurance, especially when you factor in the deductibility of the interest vs. the non deductibility of the mortgage insurance. Now, for loans closed in 2007, if the borrower’s adjusted gross income is under 100K, they will be able to deduct the mortgage insurance premium. This will change how you make recommendations. In this new environment, a loan with mortgage insurance could be better than a combination first and second mortgage without mortgage insurance.
Another question that may come up concerns the advantage or ability to deduct interest that accrues on the mortgage. For purposes of this article, let’s assume that interest is going to be deductible and that we have a loan amount that allows us to take the maximum deduction. Please go to www.irs.gov and download publication 936 “Home Mortgage Interest Deduction”. This will give you the rules on deducting first mortgage interest and home equity interest. You will want to know the rules as they pertain to your specific client’s situation.
The 1098 statements sent from lenders at the end of the year reports the interest paid on that mortgage over the previous year. Principal reduction is not deductible. In my opinion, reduction of principal becomes a forced savings plan with an after tax dollar. Yes, this helps build equity. But, is this the best use of your clients after tax capital? Should a client pay down the mortgage, thereby decreasing the loan balance and accelerating the loss of a mortgage interest rate deduction? Are there higher and better uses for the capital that fit into the clients desire for wealth accumulation? Let’s examine this further.
What about investment arbitrage? Show me the money!
Consider this. What if a client borrowed the maximum mortgage allowed and repaid it based on an “interest only” payment? This would give them the maximum interest deduction. Assuming that they can benefit from this, they will save on taxes. The amounts of capital that would have been used alternatively for the down payment or paid on principal reduction through a principal and interest mortgage payment on a traditionally amortizing loan can now be allocated to either an after-tax or pre-tax investment that might have better growth potential.
What if the client took the differential savings from an amortizing principal and interest payment vs. an interest only payment and instead increased their contribution to a tax deductible plan, such as their employer’s 401K plan? My premise is that they would accumulate more wealth. The problem for the majority of people is having too much month at the end of the money. Not everyone is able to make their house payment and maximize their retirement plan contributions. Switching to an interest only payment from an amortizing loan payment will keep the loan balance the same but increase the available cash in the budget. Another use for this payment savings would be the repayment of non deductible debt such as credit cards. Your job as their advisor will be to see that they understand the options and alternatives available. In order to do this you need to understand how the loan products work and where they are most appropriate.
We just discussed an example of the lost opportunity of incorrectly investing capital. You can explore this further with your client. Let’s look at another example. When you pay down a mortgage or prepay a mortgage, you are essentially earning the interest rate that you are paying off. Next I’d like you to compare this rate of return on an after tax benefit basis to an alternative investment on an after tax or before tax basis. Consider this. If the client desires to have their home paid off upon retirement, you may be able to demonstrate how they can accomplish their goal better using an appropriate asset allocation portfolio based upon some historical rates of return. If they were to fund their investment on a monthly basis with the cash savings from a refinance and/or interest only payment, they may find that not only will they be able to pay off their house at retirement but they will have additional dollars remaining.
“I’m an estate and retirement planner-why should I care”?
Initially we asked some questions about mortgages and real estate as they relate to estate planning. Sometimes people default to selling property as the only way to raise capital. Selling property will often accelerate the tax liability associated with any profit. It also takes away any further upside that may be available through appreciation. Proper guidance in this area could make you a hero. Borrowed money through a refinance is not taxable. You may find that a recommendation of a refinance will allow your client access to their capital without the associated taxes. Depending on the size of the estate and the estate tax laws in the future, you may also find it better to have your client die with highly appreciated investment property in their estate so that they can receive a step up in the tax basis upon death. This could be extremely useful for the real estate investor who has been acquiring and exchanging property over a long period of time. There are, of course, many different options including charitable gifting and setting up family limited partnerships. I just wanted to bring up the topic so that all options were explored. You may already do a Monte Carlo type analysis for your asset allocation of investable funds. I’m suggesting something similar with your client’s real estate holdings and mortgages. You should discuss scenarios and give some options.
You may or may not be aware of the change in taxation regarding the profit in a primary residence. Every two years, a married couple can exclude 500K in profit and a single person can exclude 250K in profit. This is replenishable and doesn’t require purchasing any replacement property. Capturing this profit tax free could be important in your client’s estate and taxation outlook. See IRS publication 523 “Selling Your Home” for details. Mortgage planning may be involved if your client is moving frequently. If a loan is going to exist for approximately 2-3 years you may want to recommend that they consider a low closing cost or no closing cost loan. These types of loans would be identical to what we have already discussed. The difference would be realized in a higher interest rate on the loan. The savings depend on the size of the loan and the closing costs, but a rough rule of thumb indicates that you will save money by taking on a higher interest rate with lower closing costs if your holding period is short. A simplified analysis can be done by looking at the differential in payments from a loan with closing costs as compared to the loan that has no closing costs. Take the difference between the payments of each loan scenario and divide that number into the closing costs proposed for the loan with the lower rate. The resultant number will be the months needed to equal/recover the full amount of closing costs. In most instances, you will see that it is a 3-5 year break even point. This means if you plan to keep the property for a time exceeding the break even point it would have been more advantageous to pay the closing costs associated with receiving the lower mortgage rate vs. not paying closing costs and accepting a higher mortgage rate.
Do you see the applications within your practice?
In summary, I hope you’ve seen the value in adding mortgage and real estate planning to your wealth management practice. You don’t need to be the expert, but you do need to recognize the problems in order to help guide your clients towards a solution. As financial planners and wealth managers our job is more than crunching numbers and setting up asset allocation models with various investments. You can’t prescribe a client solution until you’ve done a complete diagnosis. We are our client’s “financial doctor” identifying problems and offering options and solutions that meet the client’s objectives and fit their comfort level.
13 Mistakes Investors Make
1. No investment strategy.
From the outset, every investor should form an investment strategy that serves as a framework to guide future decisions. A well-planned strategy takes into account several important factors, including time horizon, tolerance for risk, amount of investable assets, and planned future contributions. What do you want to accomplish, and when do you need to accomplish it by?
2. Investing in individual stocks instead of in a diversified portfolio of securities.
Investing in an individual stock increases risk vs. investing in an already-diversified portfolio. Investors should maintain a broadly diversified portfolio incorporating different asset classes and investment styles. Failing to diversify leaves individuals vulnerable to fluctuations in a particular security or sector. Also, don’t confuse stock diversification with portfolio diversification. You may own multiple stocks but find, on closer examination, that they are invested in similar industries and even the same individual securities. There is no guarantee that a diversified portfolio will enhance over returns or outperform a non-diversified portfolio. Diversification does not assure a profit or protect against market losses.
3. Buying High & Selling Low
The fundamental principle of investing is buy low and sell high. So why do so many investors get that backwards? The main reason is “performance chasing,” Too many people invest in the asset class or asset type that did well last year or for the last couple of years, assuming that because it seems to have done well in the past it should do well in the future. That is absolutely a false assumption. The classic buy-high/sell-low investor profile is someone who has a long-term investment strategy, but doesn’t have the tenacity to stick with it. The flip side of the buy-high-sell-low mistake can be just as costly. Too many investors are reluctant to sell a stock until they recoup their losses. Their ego refuses to acknowledge a mistake of buying an investment at a high price. Smart investors realize that may never happen and cut their losses. Keep in mind not every investment will increase in value and that even professional investors have difficulty beating the S&P 500 index in a given year. It can be smart to have a stop-loss order on a stock. It’s far better to take the loss and redeploy the assets toward a more promising investment.
4. Unrealistic expectations
As we witnessed during the recent bubble, investors can periodically exhibit a lack of patience that leads to excessive risk-taking. It is important to take a long-term view of investing and not allow external factors cloud actions and cause you to make a sudden and significant change in strategy. Comparing the performance of your portfolio with relevant benchmark indexes can help an individual develop realistic expectations. According to Ibbotson Associates, the compound annual return on common stocks from 1926-2001 was 10.7% before taxes and inflation and 4.7% after taxes and inflation. Returns on long-term bonds over the same time period were 5.3% before taxes and inflation and 0.6% after taxes and inflation. Expecting returns of 20-25% annually will set an investor up for disappointment.
5. Emotion trumps rational judgment People hate to lose more than they like to win. This fear of regret causes investors to hold on to losers too long and sell winners too early. Investors tend to hold on to losing investments hoping that they will come back, rather than taking advantage of tax breaks. The contrary is true with winning stocks. Fearing a downturn and wanting to lock in profits, investors will sell stocks too early and miss out on potential future gains. 6. Timing the market Market timing isn't something for the individual. The basic idea is to buy at a set price at the end of the day and then selling on the next trading day (assuming the price rises). For the individual investor, this practice seldom makes sense for two reasons: first, profits are eaten by fees; second, the gains are fractions of pennies, so few individual investors have the cash to make these transactions worthwhile. What to do instead: In short, don't do it.
7. Procrastination.
Waiting for the right time can ruin your results over a lifetime. Procrastination takes many forms. You don’t start saving for retirement until it’s nearly on top of you. You “know” you should review your investments but other things always seem more pressing. You think you’ll catch up later when the market is better, when you’re making more money, when you have more time. And there’s the irony, because the longer you wait, the less time you have. Every day you delay is a day of opportunity that you can never get back.
8. Trusting institutions
It can be a mistake to rely solely on a broker or a brokerage firm, an insurance agent or your banker to tell you what’s in your financial best interest. The same is often true of government agencies, but that’s an entirely different topic.
9. Requiring perfection in order to be satisfied
We’ve all known people whose attitude is that nothing is good enough for them. People who can’t stand to have anything but “the best” are rarely successful at investing. In fact, there will always be something that’s performing better than whatever you have. If you happen to have the one stock that outperforms everything else this month, you are practically guaranteed that some other one will be ahead of yours next month. Perfectionists often flit from one thing to the next, chasing elusive performance. But in real life, you get a premium for risk only if you stay the course. And if you demand perfect investments, you’ll never stay the course.
10. Accepting investment advice and referrals from amateurs
If you had a serious illness, I hope you’d consult a nurse or a doctor, not somebody on the street who had an opinion about what you should do. And I hope you would treat your life savings and your financial future with the same care as you would treat your health. Yet too many people make big financial decisions based on things they hear. “I heard this hot tip.” “I know somebody in this company.” “I’ve got an inside source about this new product.” “My broker is making me a ton of money.” The lure of the hot tip is all but irresistible to some investors eager to find a shortcut to wealth. Unfortunately, many investors have to learn the hard way that there are no reliable shortcuts.
11. Letting emotions – especially greed and fear – drive investment decisions
I think the two most powerful forces driving Wall Street trends are greed and fear. Think about these two emotions the next time you listen to a radio or TV commentator explain what’s happening in the stock market. You’ll hear fear and greed over and over. There’s fear of rising interest rates, fear of inflation, fear of falling profits. You name it, somebody’s afraid of it. Fear is why so many investors bail out of carefully planned investments when things look bleak – and since everybody seems to be selling at the same moment, prices are down. That, in turn, reduces profits or increases losses. Greed blinds investors, making them forget what they know. In late 1999 and early 2000, greed prompted many inexperienced investors – and some experienced ones too – to stuff their portfolios with high-flying technology stocks, which had just had a terrific year. In the spring of 2000, technology stocks, especially the most aggressive ones, plunged without warning, leaving many of these greedy investors wondering what had hit them. Investors obviously want to make money. But this legitimate desire turns into greed when it runs amok. Likewise, investors obviously should want to avoid losing their money. Yet when a healthy respect for bear markets leads to panic selling, caution becomes counterproductive.
12. Focusing on the wrong things
It’s generally agreed that asset allocation – the choice of which assets you invest in – accounts for a large majority investment returns. That leaves less than a small percent for choosing the best stocks. But most investors focus at least 95 percent of their attention on choosing funds and stocks. Their energy would usually be better spent on asset allocation. Some investors also focus on small parts of their portfolios instead of the entire package. They can become obsessed with some small investment that seems to stubbornly refuse to do its part. Occasionally, an enraged investor will overthrow an entire strategy because of what happens to some small component of it.
13. Needing proof before making a decision
The ultimate stalling tactic for those who aren’t ready to make an investment is to require one more piece of information or evidence. You can get evidence, but not proof. You can prove what happened in the past. But there’s no way to prove anything about the future except to wait until it happens. There are two track records for any investment. The first one just came to an end, and it includes all of history. It can tell you the range of returns and risks that are reasonable to expect. But it can’t tell you anything about the future. The second track record starts the moment you invest. It’s the only track record that matters to you, and it may or may not have any resemblance to the track record of history. The only thing you can be sure of about the future is that it won’t look just like the past. That’s why savvy investors diversify beyond what seems certain at any given moment. To be a successful, happy investor, you’ve got to somehow learn to live with the ambiguity of an uncertain future.
From the outset, every investor should form an investment strategy that serves as a framework to guide future decisions. A well-planned strategy takes into account several important factors, including time horizon, tolerance for risk, amount of investable assets, and planned future contributions. What do you want to accomplish, and when do you need to accomplish it by?
2. Investing in individual stocks instead of in a diversified portfolio of securities.
Investing in an individual stock increases risk vs. investing in an already-diversified portfolio. Investors should maintain a broadly diversified portfolio incorporating different asset classes and investment styles. Failing to diversify leaves individuals vulnerable to fluctuations in a particular security or sector. Also, don’t confuse stock diversification with portfolio diversification. You may own multiple stocks but find, on closer examination, that they are invested in similar industries and even the same individual securities. There is no guarantee that a diversified portfolio will enhance over returns or outperform a non-diversified portfolio. Diversification does not assure a profit or protect against market losses.
3. Buying High & Selling Low
The fundamental principle of investing is buy low and sell high. So why do so many investors get that backwards? The main reason is “performance chasing,” Too many people invest in the asset class or asset type that did well last year or for the last couple of years, assuming that because it seems to have done well in the past it should do well in the future. That is absolutely a false assumption. The classic buy-high/sell-low investor profile is someone who has a long-term investment strategy, but doesn’t have the tenacity to stick with it. The flip side of the buy-high-sell-low mistake can be just as costly. Too many investors are reluctant to sell a stock until they recoup their losses. Their ego refuses to acknowledge a mistake of buying an investment at a high price. Smart investors realize that may never happen and cut their losses. Keep in mind not every investment will increase in value and that even professional investors have difficulty beating the S&P 500 index in a given year. It can be smart to have a stop-loss order on a stock. It’s far better to take the loss and redeploy the assets toward a more promising investment.
4. Unrealistic expectations
As we witnessed during the recent bubble, investors can periodically exhibit a lack of patience that leads to excessive risk-taking. It is important to take a long-term view of investing and not allow external factors cloud actions and cause you to make a sudden and significant change in strategy. Comparing the performance of your portfolio with relevant benchmark indexes can help an individual develop realistic expectations. According to Ibbotson Associates, the compound annual return on common stocks from 1926-2001 was 10.7% before taxes and inflation and 4.7% after taxes and inflation. Returns on long-term bonds over the same time period were 5.3% before taxes and inflation and 0.6% after taxes and inflation. Expecting returns of 20-25% annually will set an investor up for disappointment.
5. Emotion trumps rational judgment People hate to lose more than they like to win. This fear of regret causes investors to hold on to losers too long and sell winners too early. Investors tend to hold on to losing investments hoping that they will come back, rather than taking advantage of tax breaks. The contrary is true with winning stocks. Fearing a downturn and wanting to lock in profits, investors will sell stocks too early and miss out on potential future gains. 6. Timing the market Market timing isn't something for the individual. The basic idea is to buy at a set price at the end of the day and then selling on the next trading day (assuming the price rises). For the individual investor, this practice seldom makes sense for two reasons: first, profits are eaten by fees; second, the gains are fractions of pennies, so few individual investors have the cash to make these transactions worthwhile. What to do instead: In short, don't do it.
7. Procrastination.
Waiting for the right time can ruin your results over a lifetime. Procrastination takes many forms. You don’t start saving for retirement until it’s nearly on top of you. You “know” you should review your investments but other things always seem more pressing. You think you’ll catch up later when the market is better, when you’re making more money, when you have more time. And there’s the irony, because the longer you wait, the less time you have. Every day you delay is a day of opportunity that you can never get back.
8. Trusting institutions
It can be a mistake to rely solely on a broker or a brokerage firm, an insurance agent or your banker to tell you what’s in your financial best interest. The same is often true of government agencies, but that’s an entirely different topic.
9. Requiring perfection in order to be satisfied
We’ve all known people whose attitude is that nothing is good enough for them. People who can’t stand to have anything but “the best” are rarely successful at investing. In fact, there will always be something that’s performing better than whatever you have. If you happen to have the one stock that outperforms everything else this month, you are practically guaranteed that some other one will be ahead of yours next month. Perfectionists often flit from one thing to the next, chasing elusive performance. But in real life, you get a premium for risk only if you stay the course. And if you demand perfect investments, you’ll never stay the course.
10. Accepting investment advice and referrals from amateurs
If you had a serious illness, I hope you’d consult a nurse or a doctor, not somebody on the street who had an opinion about what you should do. And I hope you would treat your life savings and your financial future with the same care as you would treat your health. Yet too many people make big financial decisions based on things they hear. “I heard this hot tip.” “I know somebody in this company.” “I’ve got an inside source about this new product.” “My broker is making me a ton of money.” The lure of the hot tip is all but irresistible to some investors eager to find a shortcut to wealth. Unfortunately, many investors have to learn the hard way that there are no reliable shortcuts.
11. Letting emotions – especially greed and fear – drive investment decisions
I think the two most powerful forces driving Wall Street trends are greed and fear. Think about these two emotions the next time you listen to a radio or TV commentator explain what’s happening in the stock market. You’ll hear fear and greed over and over. There’s fear of rising interest rates, fear of inflation, fear of falling profits. You name it, somebody’s afraid of it. Fear is why so many investors bail out of carefully planned investments when things look bleak – and since everybody seems to be selling at the same moment, prices are down. That, in turn, reduces profits or increases losses. Greed blinds investors, making them forget what they know. In late 1999 and early 2000, greed prompted many inexperienced investors – and some experienced ones too – to stuff their portfolios with high-flying technology stocks, which had just had a terrific year. In the spring of 2000, technology stocks, especially the most aggressive ones, plunged without warning, leaving many of these greedy investors wondering what had hit them. Investors obviously want to make money. But this legitimate desire turns into greed when it runs amok. Likewise, investors obviously should want to avoid losing their money. Yet when a healthy respect for bear markets leads to panic selling, caution becomes counterproductive.
12. Focusing on the wrong things
It’s generally agreed that asset allocation – the choice of which assets you invest in – accounts for a large majority investment returns. That leaves less than a small percent for choosing the best stocks. But most investors focus at least 95 percent of their attention on choosing funds and stocks. Their energy would usually be better spent on asset allocation. Some investors also focus on small parts of their portfolios instead of the entire package. They can become obsessed with some small investment that seems to stubbornly refuse to do its part. Occasionally, an enraged investor will overthrow an entire strategy because of what happens to some small component of it.
13. Needing proof before making a decision
The ultimate stalling tactic for those who aren’t ready to make an investment is to require one more piece of information or evidence. You can get evidence, but not proof. You can prove what happened in the past. But there’s no way to prove anything about the future except to wait until it happens. There are two track records for any investment. The first one just came to an end, and it includes all of history. It can tell you the range of returns and risks that are reasonable to expect. But it can’t tell you anything about the future. The second track record starts the moment you invest. It’s the only track record that matters to you, and it may or may not have any resemblance to the track record of history. The only thing you can be sure of about the future is that it won’t look just like the past. That’s why savvy investors diversify beyond what seems certain at any given moment. To be a successful, happy investor, you’ve got to somehow learn to live with the ambiguity of an uncertain future.
No Need To Worry As You Can Easily Recover Your Unclaimed Money All By Yourself!
It is not uncommon for individuals to receive letters, telephone calls or emails informing them that they are owed unclaimed money. Further, it is not uncommon for such a person to offer assistance in recovering the money. Of course, this service shall not be offered for free but shall be offered for a price. However, why should you pay to get what is already yours? Why should you pay to get your unclaimed money when you can get your unclaimed money with very little expenditure?
Be assured that the process of funds recovery or money finding, as it is also called, is not illegal. Such persons are called property locators or heir finders.
These individuals cannot charge a huge amount of money for providing the service to you. In fact, the law clearly provides the limit beyond which the person offering the unclaimed money recovery service cannot charge. The person is paid for performing the task of locating the money owed to you, locating you and connecting the two.
However, if you do not want to use the services of an intermediary and if you want to claim the money yourself, you can always go ahead and complete the formalities yourself.
Unclaimed money can come into existence through many financial transactions and financial instruments. The money that is lying idle in your old checking or savings accounts or the forgotten stocks, bonds, dividends, insurance policies, safe deposit boxes etc are the primary sources of unclaimed money. After a period of inactivity with no contact from the clients, the institutions hand over the money to the state.
Once, the state or the federal agency possess your money, they simply wait for you to come and claim it. Ideally speaking, the agencies are supposed to advertise the presence of unclaimed money owed to you. However, this rarely, if ever, happens and the individual remains unaware of the problem.
Now, if you want to find the unclaimed money all by yourself, this is what you should do. Firstly, you will have to search an unclaimed money database. This is the most efficient and effective way to initiate the process. You ought to use a database that covers all state and federal databases. Searching just one or few databases will render your search incomplete.
The all-in-one databases require payment of money if you want to access the same. However, to ensure that you do not incur unnecessary expenditure, you are allowed a free search to determine whether you are owed unclaimed money or not.
To determine whether you are owed unclaimed money or not is just the first step. Once this is done, the individual has to fill out the appropriate claim forms to initiate the process of recovery. The forms can be downloaded for free from most websites. Proof of identification and/ or proof of ownership of unclaimed money also have to be attached.
The agency holding your money will, naturally, verify your claim and the unclaimed money check should land at your doorstep within two to sixteen weeks.
Additional documentation may be required and the agency will contact you accordingly
This information is sufficient for you to find and claim the unclaimed money owed to you. The best part is that you do not have to pay anybody for the same.
Be assured that the process of funds recovery or money finding, as it is also called, is not illegal. Such persons are called property locators or heir finders.
These individuals cannot charge a huge amount of money for providing the service to you. In fact, the law clearly provides the limit beyond which the person offering the unclaimed money recovery service cannot charge. The person is paid for performing the task of locating the money owed to you, locating you and connecting the two.
However, if you do not want to use the services of an intermediary and if you want to claim the money yourself, you can always go ahead and complete the formalities yourself.
Unclaimed money can come into existence through many financial transactions and financial instruments. The money that is lying idle in your old checking or savings accounts or the forgotten stocks, bonds, dividends, insurance policies, safe deposit boxes etc are the primary sources of unclaimed money. After a period of inactivity with no contact from the clients, the institutions hand over the money to the state.
Once, the state or the federal agency possess your money, they simply wait for you to come and claim it. Ideally speaking, the agencies are supposed to advertise the presence of unclaimed money owed to you. However, this rarely, if ever, happens and the individual remains unaware of the problem.
Now, if you want to find the unclaimed money all by yourself, this is what you should do. Firstly, you will have to search an unclaimed money database. This is the most efficient and effective way to initiate the process. You ought to use a database that covers all state and federal databases. Searching just one or few databases will render your search incomplete.
The all-in-one databases require payment of money if you want to access the same. However, to ensure that you do not incur unnecessary expenditure, you are allowed a free search to determine whether you are owed unclaimed money or not.
To determine whether you are owed unclaimed money or not is just the first step. Once this is done, the individual has to fill out the appropriate claim forms to initiate the process of recovery. The forms can be downloaded for free from most websites. Proof of identification and/ or proof of ownership of unclaimed money also have to be attached.
The agency holding your money will, naturally, verify your claim and the unclaimed money check should land at your doorstep within two to sixteen weeks.
Additional documentation may be required and the agency will contact you accordingly
This information is sufficient for you to find and claim the unclaimed money owed to you. The best part is that you do not have to pay anybody for the same.
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