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Why do Reverse Mortgages have Insurance?

Question from our Reader:

Is it common for Reverse Mortgages to include an additional monthly fee for “Mortgage Insurance”?
What companies do not charge for Mortgage Insurance?

Hi Ronald,

The lenders do not charge for the Reverse Mortgage Insurance; HUD does on the Home Equity Conversion Mortgage (HECM or “Heck-um”) which is an FHA or government insured program. At this time, there are very few proprietary or private programs available that do not require this insurance as most disappeared when the market experienced all the difficulties in 2009 and 2010. The programs that have come out since the collapse of the market are mainly for Jumbo or high balance loans and I think you will find that the cost with the insurance is still typically less than what these programs have to offer.

The government insurance is what makes the program work. It protects borrowers, lenders, heirs and even the folks who buy the securities backed by the loans. Without the insurance, the viability of the program is very questionable and that is borne out by the fact that most of the programs that were not FHA-insured disappeared when the market collapsed and there are very few that have returned and those that have offer borrowers very few options and at higher rates.

Borrowers who do obtain the proprietary programs, typically because of the loan sizes and property values, currently have fewer programs
available to them. I am only aware of 2 proprietary programs at this time, both are fixed rate requiring a full draw of the funds available and both have interest rates in excess of 7% (greater than the HECM rates plus the insurance renewal of 1.25% of the outstanding balance). There are no guarantees on these programs by HUD, so growing balance lines of credit that they can access at later times would not be guaranteed and therefore borrowers would be open to the risk that something might happen to the lender before they accessed all of their funds, causing their line to close prematurely. Therefore, the fixed rate full draw option on the private programs is the only way to ensure that all funds are available to every borrower.

So Ronald, forgive me for taking so long to answer what is a quick question, but the HECM loans plus the insurance are still below the rate that accrues on the proprietary or private offerings that are available and I wanted to be sure you understood that this insurance protects you on future draws as well as gives you the availability of programs that offer a reverse mortgage line of credit, monthly payments, a full draw or a combination of these features instead of just the one lump sum that the private programs offer. If you need the higher balances that the private programs can give, they are the only way to get them but if not, even with the insurance, the HECM program still gives you more options.

Sources:
About Reverse Mortgage Insurance Premiums
HUD.gov
Upfront Mortgage Insurance Premium

Will we see negative interest rates in the US?

Interest rates in Europe on a variety of debt instruments actually reached negative levels this year, a bizarre economic environment with a lasting impact on the Eurozone’s economy. Essentially this means that investors in debt instruments are receiving less than their original investment over time.

The reason is simple: to encourage spending and ward off deflationary concerns. It’s a case of basic supply and demand – investors seeking a safe haven for their money invest in bonds. As demand grows, interest rates drop. Ideally, the rate would bottom out at zero, but with a heavy demand for safety, debt rates turned negative instead. Adding to the demand is the potential for currency appreciation. Even if the debt instrument returns a negative yield, the inherent currency could appreciate relative to the euro creating a gain overall for the investor.

The state of the US economy and bond yields

One of the biggest concerns for US investors is whether the atmosphere of negative yields will spill over into the domestic economy. The results for the first quarter in 2015 were disappointing, but inclement winter weather was partially blamed for the lackluster data. Economists believe the rest of the year should show a robust and growth oriented economy.

Yields on US debt instruments are still near all time lows, but the Federal Reserve has made several statements this year that indicate a rate hike is very likely to happen. While the European Central Bank (ECB) is prepared to begin a quantitative easing program intended to stimulate growth, the Fed officially ended its program late in 2014. It’s very unlikely that the US will actually see negative interest rates. Evidence suggests that US interest rates may currently be as low as they’re going to be before heading back up again later this year.

One major impact that negative rates would have in the US that makes it even more unlikely is the fact that consumers would essentially be paying banks just to hold their money. It’s a situation that the Fed wouldn’t let happen as consumers would simply hoard cash at home rather than make deposits. If that were to occur, it could create a liquidity crisis and halt lending activity.

As the US economy continues to gain strength, interest rates will rise as the demand for investment increases. For the US, negative yields won’t be a concern.

How the IRS Works

The IRS is one of the most loathed and essential organizations in the country. When the United States was first established, America was wary of taxation and there was no organization set up to collect taxes. When the Civil War was over, the Bureau of Internal Revenue was created. This led to the establishment of the Internal Revenue Service (IRS). Today, the IRS is the country’s tax collecting agency. So how does it work?

Government Organization
The IRS is part of the Department of Treasury, and it employs thousands of employees. A commissioner heads the organization and is selected by the President to serve a five-year term. The President also selects a Chief Counsel to the IRS. This person handles all legal matters relating to the agency. The IRS is primarily located in Washington, D.C.; however, there are regional offices located in cities throughout the United States.

Oversight Board
There is an IRS Oversight Board that is compiled of nine members. These people are responsible for supervising the activities of the IRS and ensuring that audits are performed correctly. They also review and approve budget requests each year. However, they do not have any control over policy changes.

Taxes
During 2013, the IRS collected nearly $2.86 trillion in revenue. They also processed approximately 240 million tax returns and paid refunds totaling $364 billion. The money that they collect is used to pay for government operations.

Audits
Each year, certain businesses and individuals will receive audits on their tax returns. The IRS performs audits to make sure that a business or individual is providing accurate financial information and paying the right amount of taxes. The possibility of a future audit encourages the majority of people to be honest on their taxes. However, paying your taxes on time and honestly does not guarantee that you will avoid an audit. Audits are chosen based on different reasons including some of the following:

  • Random computer selections
  • Mismatching documents or information
  • Transactions involving people who have been audited

Computer System
Since the IRS stores and processes so much information, they need extremely powerful computer systems. According to 2290tax.com, the main IRS computer system handles the majority of their work. This computer or server is used for IRS notices, EIN’s, and SSN’s. It also calculates penalties and determines who gets audited. Another important IRS computer system controls the e-file system. Once the returns are filed, it checks for any errors, issues confirmations, and it backs up the information.

Although most people are wary of the agency, the truth is that the IRS is necessary and extremely efficient. While some view the agency as antiquated, in recent years the agency has aimed to work better with taxpayers, even setting up the Office of Appeals, which helps to resolve tax disputes impartially and out of court.

The Real Cost of Driving Uninsured

If paying your monthly insurance premium feels like a hassle at times, you may be tempted to let your policy lapse. Doing so will leave you and your car uninsured on the road. While some drivers consider the cost of insurance to be too large to be beneficial, looking at the costs of repairs for uninsured vehicles can be eye opening. The following infographic gives greater insight about the real cost of driving uninsured.

fix it yourself infographic
Presented By IFA Auto Insurance

Average Cost of Vehicle Repairs
If you are found at-fault in an accident while driving an uninsured vehicle, the cost of all repairs will fall on you. Whether or not you choose to fix your own vehicle, you are legally responsible for repairing damage done to another driver’s vehicle. While the average driver pays over $1,400 each year for a car insurance policy, the savings can be enormous if that policy is needed.

Lawsuits and Legal Representation
On top of the costs of repairing damaged vehicles in a car accident, uninsured drivers may also be held responsible for the costs of legal claims. An accident victim who is injured in a car accident may press legal charges against an uninsured driver resulting in lawsuits for:

  • Medical Costs
  • Lost Income
  • Pain and Suffering

The next time you think your insurance premium is too expensive, be sure to take these factors into consideration to see the real cost of driving uninsured.

Using social media to help your franchise

Technology is constantly changing, and one can argue that the rate of change is increasing in areas such as social media. The options that people have for communicating with social media keep increasing, as does the audience.

Sophistication or even capability doesn’t translate into instant success. For example, Facebook may be one of the most popular social media platform currently in existence, but it was not the first. Others, like MySpace, came before it, and someday something better may knock Facebook off its pedestal.

No matter how simple or how sophisticated, for the entrepreneur, the key question is how it should be used and whether it should be used at all. Take for example an ice cream related business opportunity like a Cold Stone Franchise. While the parent company may have a range of social media channels to generate customer interest, the franchisee wants to have specific customer interest in that owners particular location.

It wouldn’t help the franchisee to simply copy the parent company’s strategy since that strategy is not going to be customized for that franchisee’s needs. For example, if the location is near a university with a lot of foot traffic, the franchisee may want to develop a Twitter strategy that uses a pair of hashtags in the tweet. One of them may be related to a university event, and the second related to the franchisee’s business. If someone sees the tweet and is encouraged to eat ice cream, they are also encouraged to do so at that franchisee’s location.

5 Car Insurance Myths That Every Driver Should Know

Most drivers think their auto insurance will cover them in an accident if they are current on their monthly premium. This is true in many cases, unless an uninsured driver hits their car – or a friend borrows the car and wrecks it. Auto insurance may not protect them from theft, either.

Without proper insurance coverage, these incidents could cost drivers a small fortune. According to estimates by the Insurance Research Council, more than 16 percent of drivers are uninsured, and state legal requirements are generally not enough to cover the entire cost of an accident. Here are five car insurance myths that every driver should know.

Myth 1: The State Requirement is All a Driver Needs
While the state requirement is all a driver legally needs, it will not cover the expenses for a serious accident. Getting by with the minimum requirement can be costly, especially for an accident that involves litigation.

Myth 2: The Driver is Responsible for an Accident
In most cases, the insurance follows the car no matter who is driving. If a driver has an accident in a borrowed car, the car’s owner must pay for the damages. If the insurance is not enough to cover the expenses, the responsibility goes to the driver involved in the accident.

Myth 3: All Insurance Policies Cover Uninsured Motorists
A basic insurance policy does not protect against uninsured motorists (UM); this coverage is an option. Moreover, drivers who have UM protection are only covered for physical injuries. Only collision insurance covers property damage caused by uninsured motorists.

Myth 4: All Insurance Policies Cover Natural Disasters and Theft
Unless a driver has comprehensive coverage, auto insurance will not pay for damages or loss due to natural disasters or theft. Most drivers do not have this optional policy, unless their car is financed by a creditor that requires it.

Myth 5: A Rental Car Requires Additional Coverage
Basic insurance policies already cover rental cars, so it is not necessary to buy additional insurance. For example, full coverage insurance on a personal car also applies to a rental if both are intended for personal use. Drivers who only carry liability insurance, however, are wise to buy additional coverage for rental cars.

Protection from loss is a crucial part of smart investing, including car insurance investments. Small monthly premiums protect assets (cars) as well as health in case of an accident. A Wilmington auto insurance representative can work with drivers to fully explain their plans and prevent overlapping coverage.

Financial literacy impacts decision making

Research by the US Federal Trade Commission shows that financial education affects financial decision-making. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts.

Some of these findings, from the 2008 paper Financial Literacy: An Essential Tool for Informed Consumer Choice? by Annamaria Lusardi, may seem quite obvious at first glance. For example, the author points out that those who demonstrate even a basic understanding of relevant financial topics are much more likely to have planned for retirement. These are not sophisticated topics, but basic things such as knowledge of interest compounding and the ability to perform simple mathematical calculations . Skills like these were shown to be among the strongest predictors of successful retirement planning.

To appeal to the average person, who may not have had a lot of prior exposure to financial topics or investment experience, the study suggest a social or even a psychological approach to financial education, for example exploiting “teachable moments” like the beginning of a new job, in order to get a person to think about taking action when their minds are open to new ideas about how financial decisions may affect their lives.

While the points raised by this study are reasonable, the challenge faced by society, even wealthy countries, is vast. Since the late 1980s when there were significant changes in laws regarding retirement planning, companies were much more free to move from traditional defined benefit plans like pensions to defined contribution plans like 401K plans that shift the responsibility of planning from the corporation to the individual.

While individuals and organizations with high levels of financial sophistication, such as firms specializing in industry specific areas such as chemicals m&a experts can easily manage rather exotic financial decisions, the average person has a much more difficult situation. Financial instruments have become increasingly complex and individuals are constantly being bombarded by the investment industry with new and financial products. However, most individuals are not well equipped to make financial decisions.

The study showed that most individuals cannot perform simple calculations and lack knowledge of basic financial concepts. Knowledge of more complex concepts, such as the difference between bonds and stocks, how mutual funds, and how to estimate the value of an asset is even rarer. Financial illiteracy is widespread among the general population, and particularly evident in some demographic groups that happen to also be overrepresented among the poor and struggling working class, such as women, African-Americans, Hispanics, and those with low levels of formal education.

The gold rush over big data

Often in the online world, a new set of buzzwords like ‘big data’ goes from being something known only in the technology world to something that is mentioned frequently in mainstream media. Like many other technology buzzwords, the reality of big data was happening long before the media hype, and long before the technology world even gave it a name.

A short definition of big data is the analysis of sets of data that are so large or so complex that it is difficult for conventional data analysis tools and techniques to make sense of it all. Because tools and technologies change, what may have been a difficult big data challenge during the era of Apollo missions to the moon in the 1960s and 1970s becomes a middle school science fair project in 2012.

Modern big data problems included weather forecasting and designing search engines. Much of the media hype revolves around big data issues that could result in big profits for private companies. Some, like Michael Fertik of the company Reputation.com, are quite keen on the idea that individuals and companies can benefit from using big data related technology to manage their online reputations.

While the concept of using a third party to manage online reputations may be validated by the marketplace, it doesn’t necessarily mean that a person or a company must pay a third party in order to benefit from big data related technology.

Many of the basic tools of big data are widely available to the public at no charge. The key to making the technology useful and valuable is the skills that are applied when using those tools.

Perhaps the most common example is the search engine. The largest search engines such as Google and Bing cost billions to develop and many millions per month to operate, yet they can be used without charge by anyone 24 hours a day for whatever purposes they have in mind.

Over time, most people who use search engines regularly come up with ways to use search engines to improve their lives or their businesses, and in most cases without paying for an expert or a company to do so on their behalf.

The rush by companies to capitalize on big data related business opportunities has many of the elements that existed in previous booms and busts related to gold, oil, and in the 1990s version of the Internet. Like the gold rushes of the past, some companies will likely become fabulously rich from the gold, many more may become as rich or even richer from activities that support the gold rush, but the vast majority won’t find a fortune and will likely not survive until the next gold rush.

Analyzing The Making Home Affordable Program created by Obama

The Obama administration created the Making Home Affordable program in 2009 to help homeowners who were threatened by foreclosures from the housing market crisis. The homeowners were underwater, and their mortgage costs were more than the falling housing values. They could not sell their homes without being in debt to the banks. Many of them had lost their jobs and were trapped in foreclosures because the banks had refused to make loan modifications.

The Making Home Affordable program consisted of two components: the Home Affordable Refinance Program and the Home Affordable Modification Program. Republicans did not support the program claiming it led to deficit increases. They argued that the homeowners should have been held responsible for the signed mortgage contracts.

HARP allowed qualified homeowners who had mainly kept up with payments to refinance Fannie Mae and Freddie Mac loans into fixed-rate, 15- or 30-year low-interest mortgages. Four million homeowners were expected to qualify for the program, but by mid-2011, only 900,000 had successfully used it.

HARP was reformatted into HARP 2 by November 2011 with major changes that included no loan-to-value ceiling, no credit score requirement, faster underwriting and less restrictions as long as one was current on their mortgage. HAMP had been fashioned for those homeowners who had experienced a financial hardship, their mortgages exceeded 31 percent of their income and they were at risk of foreclosure.

Through early 2012, there has been a better response to the more flexible HARP 2. It appears that improved publicity has brought in more homeowners and, importantly, more responsive lenders. Major banks, feeling possible profit losses, had been initially slow to process HARP.

By the end of 2010, a quarter of all homeowners were underwater. Real estate researcher Zillow reported that at the end of the first quarter this year, 15.7 million people were underwater, representing one of every three homeowners. Foreclosures have been served on 2.5 million homes and 4.5 million homeowners had stopped paying mortgages.

The Obama programs began tenuously and in a contentious atmosphere of heavy criticism from Republicans who did not want to allow funding. Costing nearly $50 billion, the programs are expected to help some two million homeowners by year’s end and possibly many more.

What if You Can’t Pay Taxes Owed?

It is close to the due date
for taxes and you just prepared your return and realize that you owe
more money than you can pay. This year, more than ever, taxpayers
are coming up short on the taxes they owe. Since this is such a common
problem, you can be assured there are many options available for you.

The first thing you need to
do, even if you know you can’t
pay your taxes owed, is to send in your completed tax return. The penalty for not filing
is more than the penalty for not paying. Once you have your taxes
filed then you can figure out what you are going to do about payment.
Below are some of the most common solutions for paying for taxes when
you cannot afford to pay. The right option for each person varies
depending upon their unique financial situation.

Find the Money Elsewhere

Many times you could easily
get together enough money to pay off taxes by thinking outside of the
box a little. Some options to pay in full when you don’t have
the money are the following:

  • Credit Cards
  • Home equity loan
  • Friends and Family
  • Pay advance from
    employer
  • Sell old items on
    E-bay

Some of these options should
be used wisely. Even if you can borrow money, sometimes there could
be a better option. Consider some of the below options before borrowing
money.

IRS Installment Agreement

This is a very common mechanism
to pay back IRS taxes owed. The IRS will allow individuals to pay taxes
off in monthly increments (including interest) if they can pay off the
tax amount owed in 3 years or less. To apply for an installment
agreement you will need to fill out IRS form 9465 with the IRS. This
agreement will allow you to have money taken right out of your bank
account that will go towards the taxes you owe. This is a better
method to use than using a credit card because the interest rates are
typically lower.

Financial Hardship/Uncollectible
Status

If you cannot qualify for an
installment agreement, you may be able to get determined uncollectible
by the IRS. This will temporarily put you back on good terms with
the IRS and prevent the IRS from taking any actions against you.
They will check back every so often to see if your financial situation
has improved enough for you to pay back the taxes you owe.

Offer in Compromise

This is typically a last resort
option. The IRS will only consider this option if they think it
is very unlikely they will ever collect the taxes you owe. Under
this method you will pay a lump sum offer to the IRS for taxes owed.
The amount paid is typically much lower than the actual amount owed.
To apply for this you will be required to fill out a personal financial
statement and submit IRS form 656 to the IRS to be considered.
Very few of these filings are actually accepted and it is highly recommended
to consult a tax professional before attempting to make this type of
filing.

Picking the right method to pay back taxes is important. If the problem goes ignored, penalties and interest on unpaid amounts will add up very quickly. If you need help with taxes and help with picking the best resolution method, you should consult with
a tax resolution firm.

$100 Homes

Last night 20/20 featured an interesting segment on homes in foreclosure. They interviewed some urban pioneers in Michigan who are rebuilding an entire neighborhood one house at a time. The homes sold for $100-$500. They were in terrible shape. Most of them were either burned and partially destroyed. While it will probably take 10’s of thousands to repair them and the area is awful the pioneers were doing something very interesting. They were building a community. Instead of trying to go it alone they found other people that wanted to renovate this area. One by one they began attracting friends and family to come join them in their quest to rebuild this area.

I have no doubt that in ten years this will be some cool, hip part of Detroit that everyone wants to visit. An interesting example of creativity during a tough patch in our economy.

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