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Five Tips for Your Emergency Fund

Q: I often hear that you should keep three to six months’ worth of living expenses in an emergency fund, and that some people should keep even more. But in a low-yielding environment, that’s an awful lot of money to have sitting in the bank earning next to nothing. Any advice?

A: You’re right–the past few years have brought a negative convergence for emergency-fund investors. A still-shaky economy and uncertain job market have underscored the importance of building a cash cushion to cover your costs in case of job loss or big, scary, unanticipated expenses such as medical bills or home repairs. At the same time, available yields on emergency-fund-appropriate investments have shriveled to next to nothing.

What to do? Here are some tips:


1. Customize, based on your own situation.

 

Three to six months’ worth of living expenses is a reasonable starting point when setting your emergency fund amount. But think of it as just that: a starting point. From there, you’ll want to customize your emergency-fund amount based on your own situation. The basic question is this: How much time would you want to replace your job if you lost yours? The key swing factors that should affect your decision are how flexible you are in terms of your career choices and lifestyle.

Consider holding a larger emergency fund (six months’ to a year’s worth of living expenses–or more) if you:

  •  Have a high-paying job
  • Hold a position in a highly specialized field
  • Are self-employed
  • Work on a freelance/contract basis
  • Have dependents
  • Have a nonworking spouse
  • Have high fixed expenses, such as a mortgage, auto loans, and tuition bills
  • Have a pre-existing medical condition that could result in hefty health-care bills if you were forced to purchase private health insurance

On the flip side, you may be able to get by with a smaller emergency fund if you:

  • Have a good degree of career flexibility because you are in a lower-paying position and/or haven’t yet developed a specialized career path
  • Have other sources of income that could help defray a large share of household expenses, such as a working spouse
  • Have a great degree of lifestyle flexibility (for example, you would be willing to relocate or get a roommate)

2. Focus on the essentials

Setting aside even three months’ worth of living expenses might sound like a daunting sum, particularly if you look back on your real-life spending habits. But once you strip out discretionary expenses that you could easily live without if you needed to, your emergency-fund amount is going to look a lot more manageable. To help find the right emergency-fund target, look back on your fixed expenses during the past several months: mortgage or rent, taxes, utilities, insurance, car payments, and food bills.

Bear in mind, however, that one key expense category could spike up if you lost your job: health-care costs. Your company’s human resources administrator should be able to provide you with a quote on what obtaining COBRA continuation health coverage would cost, and you can also go to ehealthinsurance.com to obtain a range of insurance quotes for a person/family in your age range.

3. Build a two-part emergency fund.

If you’ve decided to be conservative and build a large emergency fund–and I think that’s a good strategy for those of you with higher-paying jobs and high fixed costs–you might consider splitting it into two pieces. For example, you might park three months’ worth of living expenses in a traditional emergency-fund parking place (or a combination of them): your checking and savings account, a CD, money market account, or money market mutual fund.

To help address the fact that those truly safe investments are yielding next to nothing, you could then put another nine months’ worth of expenses (or more) in a vehicle that would deliver a slightly higher yield in exchange for modest fluctuations in principal value. A short-term bond fund such as  T. Rowe Price Short-Term Bond or Vanguard Short-Term Bond Index could be appropriate for this role. If you’re in a higher tax bracket, consider a short-term municipal fund; Fidelity and Vanguard field.

4. Multitask through a Roth.
What if you’re trying to build an emergency fund while saving for retirement at the same time? If that’s you, you can consider building at least part of your emergency in a Roth IRA. This can be a viable option because the Roth, unlike a traditional IRA or 401(k), enables you to withdraw  your contributions at any time and for any reason prior to age 59 1/2. Under a best-case scenario, the assets in your Roth would increase until you began withdrawing them in retirement. But if you lost your job, you could withdraw your Roth contributions if you needed the money to cover living expenses.

The key drawback to this approach is that ideally, you’d hold any assets you have earmarked for your emergency fund in something safe, such as a money market fund or CD. But those safe investments have very low long-term return potential, making them inappropriate if your goal is long-term growth for retirement.

5. Set up additional safety nets.
Finally, while emergency funding is on your mind, investigate additional safety nets that you could turn to if you’ve exhausted your emergency assets. For example, check to see whether your company’s retirement plan allows for loans. Because you’ll pay interest to yourself rather than a bank when you take a 401(k) loan, tapping these assets is preferable to turning to a bank loan or credit card if you find yourself in a financial bind. (The key downside, of course, is that you’re short-shrifting your own retirement savings.)

Obtaining a home equity line of credit may also make sense for homeowners who have built up substantial equity in their properties. The key to making this strategy work is to use the HELOC only in case of a true financial emergency and after you’ve exhausted other types of funding, rather than to cover discretionary expenditures such as cars and vacations.

Post courtesy of Christine Benz at morningstar.com.

Good News for Military Vets

Effective October 1, 2011, the costs associated with getting a VA mortgage are going DOWN!

An overview: VA mortgages are bundled, securitized and sold in the secondary market with the backing of the Federal Government. In order to insure these mortgages, the government charges a type of insurance premium, called a VA Funding Fee, which is typically added to the loan amount (thereby financed).

Remember, too, that the VA (subject to some restrictions) will insure loans up to 100% of the purchase price for the home.

What is happening next week? On loans that close effective October 1, that Funding Fee is being reduced. Because it is typical that the fee is financed into the loan, the VA is effectively lowering the monthly cost (because the loan amount is lower) AND the amount that will be paid back when the home is sold (again, because the loan amount is lower). It’s a win/win for the veteran.

If you have any questions about purchasing a home with a VA loan or if you already have one and are considering a refinance of it because of the low interest rates, reach out to us and let’s explore the possibilities. There has never been a better time!

Courtesy of KCMBlog.com

5 Reasons for a Mortgage Refinance Other Than Lowering Your Payment

Naturally, if you’re paying 6% for your mortgage and you can refinance at 5%, you’re gonna do it. Although cutting your monthly payment remains an important motive, there are at least five other reasons to consider a mortgage refinance, for long-term savings and convenience.

1. Change your mortgage term

If you decrease the term of your mortgage in a refinance by going from a 30-year to a 15-year, you’ll pay a lower interest rate and shorten your total interest costs. You’ll build home equity more quickly, and pay off your loan sooner, even though your monthly payments go up.

2. Move from an adjustable rate to a fixed rate

ARMs offer low introductory rates, but they also offer long periods of uncertainty that make it hard to budget. It makes sense in a mortgage refinance to go from an ARM to a fixed-rate loan during a low-interest rate environment. You’ll get emotional security and your rate won’t fluctuate with changing economic conditions.

3. Take out cash

With a cash-out mortgage refinance, you can turn an intangible asset—accumulated home equity—into a tangible one—cash. It makes sense for a project that will generate long-term benefits, like a home improvement or funding a child’s college education. However, don’t do it for frivolous reasons. Unless you’re extremely disciplined, you could find yourself in even deeper debt.

4. Consolidate two mortgages

When interest rates are low, a mortgage refinance lets you consolidate your main mortgage and an outstanding home equity loan to realize a lower overall monthly payment. Plus, you’ll have only one mortgage payment to make each month.

5. Recover from divorce

If your home is jointly owned with your soon-to-be ex-spouse, a mortgage refinance will turn a joint obligation into the responsibility of the person keeping the home. Nothing is more frustrating than tracking down a former spouse who doesn’t keep up with his or her end of the mortgage payment.

Lay the groundwork

If one of these reasons resonates with you, contact us to see how refinancing could benefit you.

Read more: http://www.houselogic.com/articles/mortgage-refinance-benefits/#ixzz1XwNrXyU7

 

U.S. May Back Refinance Plan for Mortgages

The Obama administration is considering further actions to strengthen the housing market, but the bar is high: plans must help a broad swath of homeowners, stimulate the economy and cost next to nothing.

One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.

A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along — the administration requested ideas for execution from the private sector earlier this month.

But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year. Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.

Exactly how a refinancing plan might work is still under discussion. It is unclear, for example, whether people who are delinquent on their mortgages would be eligible or whether lenders would administer it. Federal officials have consistently overestimated the number of households that would be helped by their various housing assistance programs.

A working group of housing experts across several federal agencies could recommend one or both proposals, or come up with new ones. Or it might decide to do nothing.

Investors may suspect a plan is in the works. Fannie and Freddie mortgage bonds had been trading well above their face value because so few people were refinancing, keeping returns on the bonds high. But those bond prices dropped sharply this week.

Administration discussions about housing proposals have taken on added urgency this summer because the housing market is continuing to deteriorate. On Wednesday, the government said that prices of homes with government-backed mortgages fell 5.9 percent in the second quarter from a year earlier, the biggest decline since 2009. More than one in five homeowners with mortgages owe more than their homes are worth. Some analysts are now predicting waves of foreclosures and a continuing slide in home prices.

There is not much time to help the market before the 2012 election, and given Congressional resistance to other types of stimulus, housing may be the only economic fix in reach. Federal programs to assist homeowners have been regarded as ineffective so far, and they are complex.

“We are looking at trying to encourage more participation in all of the programs, including those that help with refinancing,” said Phyllis Caldwell, who oversees housing policy at the Treasury Department.

Some economists say that with housing prices and interest rates at affordable levels, only fear is keeping consumers out of the market. Frank E. Nothaft, the chief economist at Freddie Mac, said the federal action could instill confidence.

“It almost seems to me you want to have some type of announcement or policy, program or something from the federal government that provides that clear signal that we are here supporting the housing market and this is indeed a good time to really consider buying,” Mr. Nothaft said.

The refinancing idea has been around since at least 2008, but proponents say the recent drop in interest rates to below 4 percent may breathe new life into the plan.

“This is the best stimulus out there because it doesn’t increase the deficit, it accomplishes monetary policy, and it reduces defaults in housing,”  said Christopher J. Mayer, an economist at the Columbia Business School. “So I think this is low-hanging fruit.” Mr. Mayer and a colleague, Glenn Hubbard,  who was chairman of the Council of Economic Advisers under President George W. Bush, proposed an early version of the plan.

The idea is appealing because it would not necessarily require Congressional action. It also would not tap any of the $45.6 billion in Troubled Asset Relief Funds that was set aside to help struggling homeowners. Only $22.9 billion of that pool has been spent or pledged so far, and fewer than 1.7 million loans have been modified under federal programs. But Andrea Risotto, a Treasury spokeswoman, said whatever was left would be used to reduce the federal deficit.

A mass refinancing plan would spread the benefits of the Federal Reserve’s most important economic policy response, low interest rates, to more people. As of July, an estimated $2.4 trillion in mortgages backed by Fannie and Freddie carried interest rates of 4.5 percent or higher.

The two prevailing ideas, lowering rates on mortgages and converting houses owned by government entities like Freddie and Fannie into rentals and other uses, have somewhat different pockets of support. Investment firms would like to participate in the rental program, especially if the government lends them money to participate. For the most part,banks prefer the refinancing plan. There are many high-ranking proponents of the refinancing plan. Joseph Tracy, a senior adviser to the chairman of the New York Federal Reserve, has circulated a presentation in support of the plan. And Richard B. Berner, who recently joined the Treasury Department as counselor to Secretary Timothy F. Geithner, argued in favor of a blanket refinancing in his previous job as chief United States economist for Morgan Stanley. The proponents say the plan carries little risk because the mortgages are already guaranteed by Fannie Mae and Freddie Mac. They also say it makes those loans less likely to go into default and ultimately foreclosure.

But the plan has some drawbacks. Some officials fear that promoting mass refinancings today could spook investors and make borrowing more expensive, for both homeowners and the federal government, in the future.

The government has already encouraged some refinancing through the Federal Housing Administration and through Fannie and Freddie, but participation is limited. For example, the Home Affordable Refinance Program excludes homeowners who owe more than 125 percent of the value of their house. To spur more refinancing, the government may decide to encourage Fannie and Freddie to lift such restrictions.

But government officials cautioned that Fannie and Freddie do not do the administration’s bidding, even though they are essentially owned by taxpayers. Edward J. DeMarco, who oversees the companies as acting director of the Federal Housing Finance Agency, has voiced concerns about any plan that might cost the companies money, according to the two people briefed on the discussions. “F.H.F.A. remains open to all ideas that provide needed assistance to borrowers” while minimizing the cost to taxpayers, Mr. DeMarco said in a written statement.

A broader criticism of a refinancing expansion is that it would not do enough to address the two main drivers of foreclosures: homes worth less than their mortgages, and a sudden loss of income, like unemployment. American homeowners currently owe some $700 billion more than their homes are worth.

Originally posted at nytimes.com

 

Six Tips to Reduce Summer Heat in Your House

Everyone likes saving money and reducing your energy use in the summer is easier than you might think. Here are six tips to reduce summer heat in your house:

1. Don’t use the oven. Summer is a great time to grill or make one pot dishes to avoid heating the oven.

2. Check your hot water heater. Turn the thermostat down to 120-125 degrees to save costs on hot water.

3. Take a shower. A 5 minute shower uses about 1/3 of the hot water a bath uses.

4. Wash only full loads of laundry and dishes. Three of the biggest energy uses in a home is the washer, dryer, and dishwasher.

5. Turn off computers, printers, and home electronics when not in use.

6. Use ceiling fans. With a ceiling fan circulating the air, you can raise the thermostat about 4 degrees with no reduction in comfort.

These are just a few ideas to reduce summer heat in your house.

What have you found works for you?

What If You Could Buy Shoes…

What if there was a shoe store that had:

  • An unparalleled selection of shoes of every size, color, and price range
  • The shoes were discounted 30% or more
  • You had a credit card that would finance the shoes for 30 years at 4.5%

How many shoes would you buy? My bet is there would be a line around the block. Well, today, real estate is like that shoe store (incredible selection, terrific bargains and excellent financing terms). But there’s more….

  • Shoes go in and out of style. Homeownership is still the American Dream.
  • Shoes are worth less once you wear them. Homes will appreciate in value over time.
  • Shoes get disposed of. Homes are lasting.

And while many can recount memories created in certain shoes, everyone can remember their first home, their first family gathering, the countless holidays shared. There is also the ability to decorate to your tastes, the stability (and lower crime rate) in homeownership neighborhoods and the higher level of education achieved by kids who grow up there.

If you’d stand in line to buy shoes, what’s stopping you from exploring a home? Despite some media perceptions, there is mortgage money available with reasonable down payment requirements at extremely low rates…talk to a loan officer. There are some great deals out there with short sales, foreclosures and regular transactions also!

Happy Shopping!

3 Tips to Getting the Best Home Insurance

If you’re a first-time homeowner, you might be a bit intimidated by the prospect of looking for the best home insurance coverage to protect your investment.

With all of the different insurance companies out there, it can be confusing to know which coverage options you need and how to get them at the lowest possible rate.

What follows are three tips that will help you compare home insurance so you find the policy that’s right for you.

  1. Find out what the policy covers and for how much you’ll be covered. For example, if you live in an area that’s at risk for tornadoes, you need to check to see how much coverage you have for wind damage.
  2. Review the policy carefully to see if you need additional insurance for floods or valuable possessions. Homeowners insurance doesn’t typically include flood insurance, so find out how to include that in your policy. In addition, if you have a lot of valuable possessions, such as a collection of antiques or art, find out if the policy offers enough coverage, or if you need additional insurance.
  3. Rates are always an important point when it comes to insurance. Check the annual and monthly premium amount to see if it’s viable for your situation. Also check the deductible amount to see how much that is. Remember, you always have to pay the deductible amount yourself, so you’ll have to have that money available in the event of a claim before your insurance coverage helps out.

 

Say Farewell to 100-watt Incandescent Lightbulbs

New lighting efficiency rules take effect nationwide January 1, 2012

Prepare to say goodbye to the venerable 100-watt “general-service” incandescent bulb. In less than one year – as of January 1, 2012 – it will be a violation of the Energy Independence and Security Act (EISA) of 2007 (Public Law 110-140) to import the bulbs to the United States or to manufacture them there. In California, state law banned the bulb as of January 1, 2011.

According to the National Lighting Bureau, the nationwide new lighting efficiency rule are the first of several designed to reduce energy waste. Mary Beth Gotti, a member of the NLB’s board of directors and manager of GE Lighting’s GE Lighting Institute, said that “light bulbs are now subject to the same kind of standard used to measure automobile efficiency; output per unit of input. For automobiles, it’s measured as MPG; miles travelled per gallon of gasoline required to operate the vehicle. For light bulbs, it’s measured as LPW; that’s lumens – a measure of the amount of light produced – per watt of electric power required to operate the bulb. Conventional 100-watt incandescent light bulbs produce about 17 lumens per watt, a rating that’s too low to meet the new standards.

“While the phase-out will help the nation significantly reduce electrical consumption and the greenhouse-gas emissions associated with the production of some electricity, the impact on consumers is not nearly as big a deal as some people are making it out to be,” Ms. Gotti said. “Standard-compliant halogen bulbs are readily available for those who want to keep using incandescent technology.”

Ms. Gotti explained that halogen bulbs use the same incandescent principles Edison patented some 135 years ago, but they are filled with halogen, a gas that permits the lamps to burn hotter and therefore emit more lumens per watt. A 72-watt halogen lamp that looks more or less identical to a conventional 100-watt incandescent bulb is about one-third more efficient, achieving more than 20 lumens per watt. While the higher efficiency results in lower operating costs, the halogen replacement generally costs two to three times as much as a 100-watt incandescent, a cost difference that in many cases can be more than offset by the value of the energy saved over the halogen bulb’s 1,000-hour life.

Compact fluorescent bulbs – properly referred to as compact fluorescent lamps or CFLs – produce about 62.5 lumens per watt, about four times the amount of light that incandescent lamps produce on a watt-for-watt basis, and they last ten times as long. The 26-watt CFL that is used to replace a 100-watt incandescent bulb costs about the same as a 72-watt halogen bulb.

Although the typical CFL is a coiled device, CFLs are available in many sizes and shapes. Some are manufactured with outer bulbs that make them look just like conventional 100-watt incandescent bulbs. Dimmable CFLs also are available; only those CFLs designated as dimmable will function properly when used with a dimmer.

Solid-state lighting, incorporating light-emitting diode (LED) technology, can also be used to replace incandescents. At 75 lumens per watt, the 10-watt LEDs used to replace 100-watt incandescent bulbs are about 20% more efficient than CFLs, but they can last six or more times as long; that’s about 65 to 70 times as long as conventional 100-watt incandescent bulbs.

The impediment to widespread LED use is a comparatively high cost (about $30 or so for some 10-watt LEDs), but prices are rapidly declining.

“The energy consumed and green-house gases associated with 100-watt incandescent bulbs are not the only concerns,” said Bureau Chair Howard P. Lewis (Lighting Alternatives, Inc.), the Illuminating Engineering Society of North America’s representative on the Bureau’s board of directors.

“The bulbs’ relatively brief life span means more energy and raw materials are used for manufacture, packaging, and transportation. The lamps also produce a great deal of heat, increasing the amount of energy used for summer air-conditioning in many parts of the nation and, in some, year-round.”

Despite the drawbacks they share with 100-watt general-service incandescent bulbs, most 100-watt specialty incandescent bulbs are not affected by the new lighting efficiency rules. The specialty bulbs include, among others: 3-way bulbs; appliance lights; “bug lights”; infrared and colored bulbs; shatter-resistant, vibration-service, and rough-service bulbs; bulbs used in signs; and bulbs used for marine, mine, and traffic applications.

As the new lighting efficiency rules take effect, 75-watt general-service incandescent bulbs will begin disappearing from retailers’ shelves, followed by 60-watt and 40-watt general-service incandescent bulbs starting January 1, 2014. Halogen, CFL, and LED replacements for these three lamps are already being sold.

Also affected – sooner rather than later – are many of the incandescent reflector lamps now commonly used; bulbs identified with letters such as R, ER, and PAR. Their import to and manufacture in the United States will be banned starting July 14, 2012. A number of halogen-reflector lamps (e.g., PAR 20s, PAR 30s, and PAR 38s) can already meet the new lighting efficiency rules, and newer alternatives are being introduced almost weekly. These include incandescent reflector lamps that use advanced infrared (IR) coatings to generate more lumens per watt, and optimized-reflector coatings that direct light more efficiently.

Those who wish to obtain a copy of Public Law 110-140 – the Energy Independence and Security Act (EISA) of 2007 – can do so by sending their request to info@nlb.org.

Will these new lighting efficiency rules affect your household or are you already using the new CFL bulbs?