Plan first, tools second, revisit often.

This adage applies to life insurance probably more than any other tool in your financial planning toolbox.  In most cases, you bought it with the intention of keeping it for 20 years or more.  A lot of life happens in five to 10 years, let alone 20.  One of the biggest changes during that time is your own maturity – your thoughts and values change, your needs change, and your desire for security changes.  What made perfect sense and what got your attention 5, 10, or 20 years ago is probably quite different than what you would notice and pay attention to today.  And while you’re going about your life, the insurance industry has probably introduced new products and stopped selling others.

Remember to go back to your plan and then look at the tools (products) you’re using to make those plans happen.  Evaluate whether a particular financial tool is still a viable part of that plan or no longer serving you.  A life insurance review would be valuable.  Most life insurance agents will do these for “free” as a way to sell you something else.  Find an ethical one who will give you an honest answer, even if it means losing a commission.  For life insurance, consider these questions:

• What might I need life insurance for?
• Do I have people who are financial dependent on me?  For how much longer?
• Does the policy I have any cash value?
• How is my health?
• How much do I need?
• How might I use life insurance to meet multiple financial planning needs?  (long-term care, cash reserves, retirement income supplementation, college education funding, etc.)
• How might I use pre-tax dollars to meet those premiums?
• What is the value of my estate and how much might my heirs have to pay in estate taxes?

Once you’ve explored some of these questions in present time, your answers from years ago may have changed.  If so, time to choose a new tool.

Getting scarce loans will now be scarier

Kathleen Pender, in the San Francisco Chronicle, wrote last Sunday that “tougher rules mean loans could become more scare (sic), more expensive or both.” I just had to love the typo.  Scary, scarce, and costly – just what the consumer wants in a mortgage, just what the consumer needs to have confidence in the lending industry.  Uh, I don’t think so.

Here’s what’s happening: 

• • FHA mortgage insurance premiums are going up to bolster FHA’s capital reserves.  This could mean an extra $63/month on a $300K loan.
   
• • Loan limits for FHA and Fannie and Freddie loans will drop to $625,500 on October 1.
   
• • Fannie/Freddie fees to lenders will increase, a fee that will be passed along to consumers.  On a $300K loan, this would amount to $750 to $1500.
   
• • Starting April 1, either the lender can pay a set fee to the broker for brokering the loan or consumers can pay the broker directly, but not both. If consumers couldn’t understand compensation or comparing lenders and loans before, they aren’t going to have it any easier.  And anyone with a loan amount of $300K or less will likely be less well-served going forward. They often need the most help.
   
• • Lenders who securitize loans will have to retain a 5% interest in the portfolio they securitize. That means less money to lend.
   
• • As always, the wealthy don’t have to participate:  There are lenders out there now who will lend money to a borrower who is willing to put money into an account with this lender equal to the loan amount, and not require the borrower to make a mortgage payment. For 10 years.  So, if you’re wealthy and your income is lousy due to the economy, but you have the assets, the rules don’t apply to you.  This is the epitome of the saying, “lenders only lend to those who don’t need the money.”  We’ve come full circle. 

 

Until the secondary mortgage market improves for lenders willing to do loans that are not sold to Fannie and Freddie, the number of loans available and the ease of finding them is going to get worse. If you want a good loan, you might think about getting it now.