Insuring Your Home: A Focus on Mortgage Insurance for Boomers

On a recent episode of Financial Impact Factor Radio, we discussed the topic of insurance. If you have never tuned into this show, I think you will find it interesting and topical. We have a wide range of guests and often discuss the very questions that concern Baby Boomers, their children and their parents. Because being a Boomer is more than just being a certain age. All of our shows on Financial Impact Factor Radio can be found here.

As a Boomer, I am always intrigued by the offers that begin showing up in my inbox/mailbox. Although they don't on the surface seem to be age related, one can't help but read between the lines. Are they talking to me? Are they worried about whether I will make it to the end? That "end" involves satisfying the largest debt any of us will ever own: our mortgage.

Last week I received a letter in the mail from the bank that holds my mortgage that would make most mortgage holders think twice. It was the offer of life insurance. My bank might think there are good reasons for offering this product that is different that many of the other types of insurance offered with these types of loans. For instance, PMI is private mortgage insurance the bank makes you buy if you are putting less than 20% down on a mortgage. The sole beneficiary in this instance is the lender, who knows that if you are going to default, this riskier loan covers their interest in the transaction. Known as PMI, its cost has begun to weigh on borrowers who find their loans underwater. Once you pass 78% mark because the value of your house compared to the amount of your initial downpayment, you can cancel the policy.

There is also mortgage insurance which for some borrowers seems like a good option as well. Essentially the lure of this product is to pay-off the mortgage in the event of your death. The insurer doesn’t pay you directly instead writing a check directly to the mortgage company or lender.

The letter I received offered a term policy that would last until I turned 80 years old, which is about 26 years from now. Like all insurance policies it plays on your fears and comes at a time when the typical term policy is about to expire if you bought insurance in your thirties, which is typically the time when most folks consider coverage. But it isn’t cheap. In fact, this sort of policy has a seven year flat rate, just a few medical questions without an exam and of course the tug-on-your-heart-strings assurance that your loved ones will be taken care of.

So today I thought we’d talk about late in life insurance coverage and whether we should consider it.

Listen to Financial Impact Factor Radio with your hosts:
Paul Petillo of Target2025.com/BlueCollarDollar.com and Dave Kittredge and Dave Ng of FinancialFootprint.com

The Vote on the Debt Ceiling Doesn't Matter: 5 Thoughts

As we have watched the slow slog towards August 2nd and the expiration of the debt ceiling, there are a few things we should consider in advance of that date and a couple of additional thoughts in the days immediately following. Like most things, the debt ceiling expiration date is mostly arbitrary, much like the turning of a new year or the end of a quarter. In other words, 08.02.11 means little to the average person and in the days following, should not be of much concern. Here's why.

Borrowing: We have been in one of the most favorable borrowing environments since records began being kept. If you qualify for a loan, be it a home mortgage or other big ticket purchase, the date will not change your ability to borrow. It may cost you more but prudent borrowers should have already considered this eventuality prior to beginning their purchase. Interest rates may and probably should go up if an agreement isn't reached. The phrase "lock-it-in" will be considered sage advice as it should be. On the flip side, there is little likelihood the seller of whatever big ticket item you are purchasing may just offer additional financial incentives to offset any increased borrowing cost.

Selling: An increase in interest rates would not benefit those who believe their homes are worth a certain amount. It would stymy the housing market, slow the sale of automobiles and create a situation that most retailers have been dealing with already: more saving than spending. While less spending will not get the economy moving and certainly won't create more jobs, despite the argument in Congress that less spending has the opposite effect. We'll just be stuck in neutral for longer than we had hoped. But not as long as many suggest we will.

Markets, Bonds: If you are a conservative investor with money in bonds, you are much smarter than the media gives you credit. Savvy bond investors ladder their holdings for just such an event and will probably fair well. Yes, the foreign investor might become a little more cautious and the next Treasury auction will be weaker than most hope it will be. But over the long-term, the real reason folks hold bonds, the effect will be offset as time moves on. Yet, if you are in bond mutual funds, you should have little to worry about as long as your holdings aren't too much of your portfolio. If you're older, cash might be a better place in the interim.

Markets, Stocks: More than one person has suggested getting into much safer investments before the 08.02.11 deadline. Cash is okay but if history tells us anything, this might be amongst the worst long-term decisions you could make. Most companies could borrow if they needed to no matter what happens. But why bother. Most of the corporate debt has been refinanced to historically low levels. And most companies in the S&P 500, an index of the largest companies in the country, are flush with cash reserves. That has been the most worrisome part of the recovery: businesses could have hired, they could have afforded to hire but they didn't. Selling stocks even if they dip somewhat should provide an opportunity to buy shares that are worth more for less. If you are buying steadily, this should prove an advantage for those with time.

You: Turn off the television or change the channel. None of what you are hearing, none of the talking heads everyone is trotting out means anything. The politicians involved in the debate are saying little or nothing and in many respects, act like this is the first time such an event has ever happened. Personally, the President should simply invoke his right in the 14th amendment and raise it without Congress. Yes, it will cause an uproar and yes, it would be the right thing to do. But creating tension among the American people is not a solution to solving some of the nation's biggest concerns.

In the three years since the Great Recession began, you should have put all of your plan in place: reduced your personal debt, created a modicum of savings and in the process, increased your contributions to your retirement plans. If you haven't, this will probably send the message again that your wealth is not what Washington thinks it is. You should be much more pliable and hopefully, just a tad smarter - or jaded.

Paul Petillo is the managing editor of BlueCollarDollar.com/Target2025.com

Retirement Planning and Debt: Liquidity

Retirement Planning and Debt: Liquidity

No one can downplay the importance of debt in your financial plan. While I am guilty for frequently mentioning the concept as a negative influence on your plan, we are besieged with information offering us a contrary view.

We are encouraged to keep the economy going by spending. Savings on the other hand, is actually portrayed as a negative influence. An economy can slow the flow of goods if consumers keep their cash close.

While this may be true, it is overspending or buying on credit that has propelled these markets on a global scale. And that movement is based on the availability of money.

What motivates equity markets is liquidity. This is a financial terms that in its simplest form refers to the availability of cash to borrow. Let me explain how liquidity works, often differently depending on where and who you are.

On a corporate level, liquidity can be incredibly deceiving. It acts as a reward for savvy business acumen. And because of so many people are using their skills to find this excess capital where little to none exists, we have these stock market levels (over the month of July, the DJIA hit 14,000, then gyrated wildly downward in fits and starts losing five percent of its value).

Liquidity in its purest form comes from the banking system. The Federal Reserve Board fixes the overnight short-term interest rates for the best borrowers. When it does this, it is suggesting a rate at which it believes the marketplace has just enough cash at the right price to keep the corporate engines fueled. That rate is then passed on to each subsequent lender, who increases the rate in small increments right on down the line.

This gives the average borrower like you and I the impression that the Fed controls the economy with each pull of its purse strings. And you would be right, to a degree. The flip side of making money inexpensive to borrow is having enough available in adequate quantities to those willing to pay the price. But liquidity offers business and consumers different opportunities but similar punishments.

In order for the borrower to qualify for a sizable loan, whether it be business or consumer related they often need to have some sort of underlying asset that they are willing to “put on the line” for the amount of money they seek. With business, it is often money borrowed for reinvestment in production or to expand a product line. With the consumer, it is often their largest asset: their home.

Most of the time this borrowing is at the heart of how a business grows, tapping inexpensive money that gives them additional competitive opportunities.

Each asset the company owns acts as collateral. But what happens when the borrower wants money not for the usual and traditional purpose of expanding the business but to reinvest it? On the surface, it creates an illusion of economic health.

A business can borrow cash to buy back its own stock. The net effect of such a maneuver suggests two things: the company thinks its stock is fairly valued and is taking some of it off the table, making it unavailable for buyers and secondly, it believes that the markets will reward just such an action by increasing the share price. But what happens when the interest rates (called debt service) rise faster that the return on the stock? Nothing until someone begins to realize that this whole debt structure might be nothing more than a house of cards.

The housing analogy is not accidental. For well over three years, I have wondered how consumers would react if their ability to extract money from their homes dried up. For over two years I have been wondering what would happen if all of those creative mortgages, the ones done with adjustable rates and fancy, no-documentation paperwork, became too burdensome for the borrower.

As money becomes too expensive to borrow, opportunities to make money in market places like stocks begin to seem risky and after they calculate the debt service, not too affordable. Businesses, instead of growing and creating new markets find themselves facing the possibility that they may just have painted themselves into a corner.

Consumers, no longer feeling as though the cost of borrowing is worth it, will spend less. This of course has a domino effect disrupting economic growth.

That is the simple explanation. There are global forces at work as well but these will only have an effect on you if your liquidity has dried up. With debt, liquidity is based on your ability to borrow and pay the cost of that transaction and, most importantly, you feel as though the risk and the cost are worthwhile.

If you have no debt, your liquidity is based on your ability to tap cash when you need it. In the book, I fall back on the old stand-by, the emergency account as the base for a good retirement plan. Creating just such an account allows you to have more than just enough money to get you by during times of income disruptions, it gives you peace of mind knowing that the money comes without a cost if you need it and you were able to save it.

It also has the effect of immunizing you from any economic fallout as a result of nefarious corporate and marketplace shenanigans or because other consumers over-extended themselves in unwieldy loans.