May 2007: A Good Time to Buy a House?

As America’s housing market continues to crumble, clients regularly ask us, “Should I buy a home now?” And we give the same response…it depends.

Consider Your Time Horizon
How long do you plan to live in this house? One year? Twenty years? If you are planning to stick around for more than 7 years, then we suggest you ignore the short-term market bumps and just purchase the property. You are not in this to make a quick buck or to roll the dice on a fast market turnaround. Additionally, fixed rate mortgages are still historically low, and you may even have an opportunity to purchase a home at (or even below) its fair market value.

On the other hand, if you plan on living in this property for a year or two, with fingers crossed that the real estate jackpot is eighteen months away, then now is not a good time for you. Home prices continue to plummet and many experts agree there’s no end in sight. Besides, your house is not a casino; it’s not meant to satisfy your gambling streak and to entertain your ambitions of fame and fortune.

Indicators Indicate an Indication
As we’ve been writing about for a while now , the U.S. housing slump is real, and it’s here to stay for a while. Just today, Standard & Poor’s announced a drop in first quarter home prices from a year ago…the first year-over-year price drop in more than 15 years. S&P index committee chairman David Blitzer sums it up: “We still don’t see anything that looks like a clear bottom. We’re still headed down.”

Is Your Grocery Store Spying on You?

Do you ever wonder why supermarkets have “loyalty” card programs? You know, the little card you swipe to receive advertised specials. Your grocer’s corporate office is actually compiling a comprehensive profile based upon your shopping habits. But what exactly are they doing with this profile?

You Read My Mind
Yesterday I received an email from Safeway, a popular grocery chain here in Northern California. Usually their emails don’t catch my attention, but this one showed a list of items currently on sale…and every item listed was one that I purchase on a regular basis.

But how could Safeway know all this information about me?

I looked closer at the disclaimer at the bottom of the email…

The Profitable Business of Customer Information
Supermarkets are in a fight for survival; they have razor-thin profit margins and are constantly seeking methods to cut costs and increase revenues. As a result, stores are seeking alternative measures to generate income. Selling their customers’ data is merely another revenue stream.

You’ve Got What They Want
Advertisers, retailers, and even insurance companies have a vested interest in your shopping cart. As reported by WorldDailyNet, if you regularly buy adult diapers, for example, you may be tagged as someone who has a bladder-control problem. Experts argue that this information could then be sold to the highest insurance bidder. As a result, your insurance premiums could be adjusted upward to absorb this increased health risk.

Consumers Against Supermarket Privacy Invasion And Numbering (CASPIAN) argues that the entire concept of “rewarding” certain shoppers is wrong in its entirety. They go on to say that these loyalty programs are nothing more than “coercion and strong-arm tactics”. In other words, they say: “If you resist you’ll pay a price”.

The Future of Loyalty
Despite the consumer-group outrage, it doesn’t appear that loyalty cards are going away anytime soon. In fact, it appears quite the opposite. Drug stores, electronics retailers, airlines, office supply stores, hotels, car rental companies, and even banks have joined the party. They all want your name, address, and to find patterns within your seemingly-random shopping habits.

Join the Dialog
A public relations battle is underway, and consumer groups can certainly use more grass roots involvement. If you are interested in learning about the worst corporate offenders, as well as information on how to participate, you can “Join the Fight” with CASPIAN.

It’s a Gas(oline)

You pull into the gas station, reach into your wallet, swipe your plastic, then squeeze the handle. And you flinch…$3.30 per gallon!? That can’t be right. When did this happen?

As consumer outrage continues to grow, journalists, pundits, and political cartoonists are piling on. Sometimes you have to step back and release a little steam. We don’t want you blowing mental gaskets. So here are our favorite satirical pokes at the nation’s current gasoline crunch:

Should you pay off your mortage early?

Ever since you could walk & talk, you’ve heard the same advice from your parents, “Stay out of debt!” And each of us has taken this “wisdom” to the farthest degree and apply this concept to every dollar owed to all lenders.

Debt, Debt, Go Away!
The problem is that there are actually two kinds of debt: good and bad. Generally, bad debt includes credit cards, new-car loans, and personal loans. On the other hand, good debt covers student loans, used-car loans, and home mortgages.

Good debt, or as we call it here “Sailing Debt”, is actually an investment in your education, career, and family. Without the presence of Sailing Debt–and the resources that it provides–you would be severely set back in the pursuit of your needs.

The Prepay Dilemma
You probably think it’s always a good idea to pay off debt early if you have the resources to do so. However, this is not always best. Good debt often has repayment terms or interest rates so low, that you can use the “pay off” money in other ways to generate a better return.

Disadvantages of Paying Off Mortgage Early
Negative factors to consider include:

• Prepaying your loans means your funds are not available for other purposes. Although you are building equity, you are reducing your liquidity. If an unexpected investment opportunity were to come up or you suddenly had a financial emergency, you might not have the cash available to deal with the situation. Additionally, an investment opportunity could earn you more than the amount of interest you save by prepaying.

• In some instances, a lender may charge a prepayment penalty. In such cases, you must calculate whether the amount you save via prepaying the loan will exceed the penalty amount. Prepayment penalties can also be “hidden” in the method of interest calculation. A special consideration in mortgage-loan contracts (called the Rule of 78s) allows lenders to charge more interest in the early stages of a loan. This interest is not refunded if you repay the loan early.

• Prepayment does not change your obligation to make regular monthly payments. If you send in double payments for three months, you are still required to make a regular payment the next month. Be careful not to prepay so much that you can’t afford your regular monthly payment.
• If you prepay your home mortgage, you can lose a valuable tax deduction.

But Also a Major Advantage
Real estate loans are amortized, and, as a result, much more of your monthly payment is applied toward interest on the loan at the beginning of the loan’s term, while the bulk of the principal on the loan is paid toward the end. Paying off the loan early (either using a lump-sum payment or paying a little extra every month) will quickly decrease the principal balance owed on the loan, build up “equity” more quickly, and shorten the term of the loan. The result is that you’ll save a great deal on the amount of interest you ultimately pay on the loan…this interest saved could equal tens of thousands of dollars!

How Do I Decide What to Do?
At the end of the day, the decision ultimately depends upon your own temperament, risk tolerance, and debt-comfort-level. If you’re losing sleep at night because you owe money to a lender, then you may be better off paying down your mortgage early. On the other hand, if you don’t mind maintaining a mortgage for years down the road, then you may want to consider alternative options with the extra cash in the bank to make some other moves.

A qualified financial planner can assist you in simulating the various outcomes and scenarios that are available for your unique situation.

Foreclosures - The New Business Model

CNN/Money is reporting on the enormous “foreclosure bargain-hunting” going on these days. As the massive number of former homeowners continues to grow, many companies are making hay off of an unfortunate national trend.

Auction houses such as Hudson & Marshall and Williams & Williams are currently selling thousands of foreclosed properties–for pennies on the dollar–in nearly every state.

Of course, these regional auction houses will be outdone by the big boys. Where ever there’s a national treasure hunt taking place, the Big Search sharks are never far behind. Yahoo and Google (thanks, Jonathan) are circling the sinking homeowner(ship), each recently unveiling shiny new foreclosure search engines. We’ll bet you the home-equity value of an interest-only-ARM (which by the way is zero) that MSN and Ask.com aren’t far behind.

Life Insurance: Do You Need It?

At some point in your life, you’ll probably be faced with the question of whether you need life insurance. Life insurance is a way to protect your loved ones financially after you die (and your income stops). The answer to whether you need life insurance depends on your personal and financial circumstances.

Should you buy life insurance?
You should probably consider buying life insurance if any one of the following is true:

• You are married and your spouse depends on your income
• You have children
• You have an aging parent or disabled relative who depends on you for support
• Your retirement savings and pension won’t be enough for your spouse to live on
• You have a large estate and expect to owe estate taxes
• You own a business, especially if you have a partner
• You have a substantial joint financial obligation such as a personal loan for which another person would be legally responsible after your death

In all of these cases, the proceeds from an insurance policy can help your loved ones continue to manage financially during the difficult weeks, months, and years after your death. The proceeds can also be used to meet funeral and other final expenses, which can run into thousands of dollars.

If you’re still unsure about whether you should buy life insurance, a good question to ask yourself is: If I died today with no life insurance, would my family need to make substantial financial sacrifices and give up the lifestyle to which they’ve become accustomed in order to meet their financial obligations (e.g., car payments, mortgage, college tuition)?

If you need life insurance, don’t delay
Once you decide you need life insurance, don’t put off buying it. Although no one wants to think about and plan for his or her own death, you don’t want to make the mistake of waiting until it’s too late.

Periodically review your coverage
Once you purchase a life insurance policy, make sure to periodically review your coverage–especially when you have a significant life event (e.g., birth of a child, death of a family member)–and make sure that it adequately meets your insurance needs. The most common mistake that people make is to be under-insured. For example, if a portion of your life insurance proceeds are to be earmarked for your child’s college education, the more children you have, the more life insurance you’ll need. But it’s also possible to be over-insured, and that’s a mistake, too–the extra money you spend on premiums could be used for other things. If you need help reviewing your coverage, contact your insurance agent or broker.

What about life insurance for my child?
As described above, life insurance is intended to provide a safety net for the policyholder’s dependents. In other words, you must ask yourself, “Is anyone dependent upon my child for their financial well being?” Probably not. And although some companies (insurance agencies, no doubt) will tell you differently, there is no financial basis for purchasing a life insurance policy for a healthy child. The money you would otherwise spend on premiums are better served in a college fund such as a 529 Plan or Coverdell Savings Account.

Similarly, don’t let the insurance agent convince you that your newborn baby deserves a policy of his/her own either. The same principle applies here. In the unfortunate event that something does happen to your infant, it will not materially affect any dependents of the child (because there are none). So once again, baby life insurance is not a prudent financial move.

Life Insurance Basics

Life insurance is an agreement between you (the insured) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insurance
One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need?
Your life insurance needs will depend on a number of factors, including whether you’re married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you’re young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases.

There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions:

• What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family
• face upon your death?
• How much of your salary is devoted to current expenses and future needs?
• How long would your dependents need support if you were to die tomorrow?
• How much money would you want to leave for special situations upon your death, such as funding your children’s education, gifts to charities, or an inheritance for your children?
• Since your needs will change over time, you’ll need to continually re-evaluate your need for coverage.

How much life insurance can you afford?
How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What’s in a life insurance contract?
A life insurance contract is generally composed of:

Legal provisions - conditions, rights, and obligations of the parties to the contract
Policy specifications - the policy you have selected, the amount to be paid upon your death, and the amount of premiums required to keep the policy in effect
Options and riders - additions to the policy that can be purchased in return for an additional premium

Note: The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies
The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods. Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories:

• Whole life
• Universal life
• Variable life
• Universal variable life

Choosing and changing your beneficiaries
You must name a primary beneficiary (this can be your estate) to receive the proceeds of your insurance policy. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive.

You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company.

Remember, quality counts
Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody’s, and Standard & Poor’s, evaluate an insurer’s financial strength. The company offering you coverage should provide you with this information.

The U.S. Housing Market’s Decline: Winners and Losers

Home Prices are Predicted to Fall
A housing slump is eminent, with the National Association of Realtors predicting the first ever year-over-year median home price decline for existing homes in the nearly 40 years they’ve been tracking the metric. The debate is now over, and the results are in: Millions of Americans will lose their homes to foreclosure in the next few years…need proof? Just take a look at Yahoo and Google’s brand new foreclosure search engines.

Help is on the Way…But is it Enough?
The new Democratic congress is scrambling to get ahead of this looming catastrophe, trying to assemble millions of dollars in funding to assist the at-risk borrowers who will be largely affected by the upcoming crisis. Additionally, the Neighborhood Assistance Corporation of America (NACA)–which many of you know of–is prepared to help up to 10,000 borrowers refinance their delinquent loans. As altruistic as their intentions are, NACA (and I’ll even say our Democratic congress) cannot prevent the impending housing bust that will almost certainly devastate the U.S. economy over the next 5 years.

Where Do You Fit In?
If you are a future home buyer, then you will certainly reap the benefits of lower home prices and a wider availability of properties for sale during the coming years. Moreover, you will surely celebrate the day you sign the deed to the largest purchase of your lifetime.

At the same time, do not forget that this current wave of foreclosures will come largely from homeowners who are low-income, minority, and/or first-time buyers. Bankers and mortgage companies have led millions of higher-credit-risk (”sub prime”) borrowers into (I) fantasies of unrealistic real estate appreciation projections, (II) inappropriate, high-risk mortgage products, (III) homes that were out of the buyer’s price range from the beginning, or (IV) all of the above. Remember that real estate, like the stock market, is a zero sum game. For every buyer, there’s a seller…and for every great deal on a purchase, there must also be a great loss on a sale.

Hello World!

As Lightship Mutual joins the ranks of the online blogosphere, we look forward to providing insightful wit and biting commentary into today’s social, political, and technological events as they relate to your personal finances.

Mission: Blog
The Daily Compass represents the ongoing thoughts, musings, and opinions of the advisors of Lightship Mutual. This forum serves to compliment our monthly newsletter, ‘The Lightship Compass’. If you are not yet on our email list, click here to begin receiving our monthly publication, as well.

Staying true to our overall company’s mission, we believe that this forum belongs to you. We fully anticipate a heavy involvement from our site visitors, and we look forward to providing accurate, clear, fast responses to your questions and comments.

Here Comes the Neighborhood
As the new kids on the blogosphere block, we’re happy to be a part of your community. We promise: a well-manicured lawn, no loud music, and we’ll only decorate the backside of our house with pink and green shutters. So feel free to drop by anytime with some fruit cake, punch, or any other treats from the welcome wagon. There are always interesting conversations around here, and we are truly excited to be a part of your online experience.

« Previous Page