Second Mortgage or Remortgage: Which Should I Choose?

A second mortgage is not the same as a remortgage. There is a lot of confusion about this. Second mortgage and remortgage are different ways of getting hold of the equity in your property.

If you have had your mortgage for a fair length of time, you have probably noticed that the value of your property has increased. The most likely way to find this out is if a neighbour’s house similar to yours goes on the market, and you get a surprise when you see how much it is going for.

If this increase has in fact taken place, the difference between the amount of the outstanding mortgage (plus any other loans secured on your property) and the current value of your house is the equity. Using this equity is one of the most sensible ways of raising extra cash if you need it for any reason.

Basically there are three ways of using your equity:

  1. Refinance your mortgage with your existing lender
  2. Remortgage with a new lender, for a larger loan.
  3. Keep your existing mortgage as it is and take out a further loan secured on the equity in the property. This is what is called a “second mortgage”.

Each of these methods has its pros and cons.

  • The advantage of staying with your existing lenders is that they are familiar with you and your payment record, and also with the property. So there should be fewer checks and formalities to go through, to refinance the loan. However, if it’s a long time since you took out the first mortgage, they may still need a new valuation. They may also need a check on your finances – they know whether you’ve kept up your mortgage payments or not, but they don’t know what other financial commitments you may have.
  • Sometimes you can actually do much better by switching to a new lender – you may get better rates, as lenders often reserve their best rates for new customers! It quite often happens that people remortgage with a new lender for a much bigger loan, and actually end up with lower monthly payments than before. The lenders will of course need surveys, valuations, credit checks, etc.
  • If you take out a second mortgage, this becomes a “second charge” on the property, with the lenders of the original mortgage keeping the deeds. This means that if the house is sold or repossessed, the lenders of the first mortgage have first claim to repayment. The holders of the second charge then have the next claim to recover what is owed to them. The lenders of the second mortgage thus have a higher level of risk, and so their interest rates may be higher than those for the first mortgage. However, they are still competing for your business, so you can still get very good deals on your second mortgage if you shop around. And the rates will certainly be better than for an unsecured loan.

Whichever of these methods of utilizing your equity you choose, lenders are very unlikely to release the full value of the equity. They will always wish to retain some equity in the property in case of a fall in value or other emergency. However, if you are looking for a second mortgage, it is possible in some cases to find a lender who will go up to 100 per cent – at much higher rates, to reflect the higher risk.

Whether a second mortgage or a remortgage is better for you will depend on your individual circumstances. A broker or financial adviser will help you decide what’s best for you.

How to Use 25% Less Gasoline With The Vehicle You Already Own

Increased gasoline prices are here and they’re here to stay. It’s been over 3 years since we’ve seen prices that are consistently under $2.00 a gallon, and they don’t seem to be headed down anytime soon. Instead of griping about the high cost of gasoline, we should instead adopt a positive attitude and look at ways that we can reduce our personal consumption of gasoline to bring the cost of fueling one’s vehicle back into the realm of reason. Here are some ways that you can make a gallon of gasoline take you a lot further.

Check Your Air Filter – Having a clean air filter can improve your gas mileage by up to 10%, and studies indicate that one out of every four vehicles desperately need a new filter. Purchasing a new filter will save you the equivalent of 25 cents per gallon alone!

Properly inflate Your Tires – The NHTSA says that the average car tire is under-inflated by 7.5 lbs of air pressure, causing a loss of 3% in fuel efficiency. Making sure your tires are properly inflated will save you 7.5 cents per gallon in gasoline

Get Your Car Aligned – If your vehicle is improperly aligned, your tires will wear out more quickly and your engine will have to work harder. This can reduce your gas mileage by up to 10%, or 25 cents per gallon!

Get a Tune Up – Getting your vehicle properly tuned up can improve your gas mileage by 4% according to the National Highway Traffic and Safety Administration. It might not seem like much, but that’s 10 the equivalent of 10 cents per gallon if the price of gasoline is $2.50

Keep Your Foot Off The Breaks – By avoiding using your breaks, you will reduce the wear and tear on them as well as dramatically improve your fuel efficiency. If you have a “heavy foot” you could improve your fuel economy by up to 35%

Drive the Speed Limit – For every 5mph of speed that you drive on the highway, you will reduce fuel consumption by 7%. If you switch from driving 70 on the highway to 65, you’ll save 19 cents per gallon of gasoline.

A lot of people think they need to purchase a new car to get better fuel economy, but that’s just not the case. You can do a lot with the car that you already have to improve the efficiency of your engine.

Life Insurance – Why is it Required?

The need for Life Insurance

Why do we need Life Insurance? Consider this. Under any circumstances, the loss of a loved one is a traumatic experience. But, if your family is also left without sufficient money to meet basic living needs or prepare for future goals, they will have to cope with a financial crisis at the same time. If faced with an economic crunch, your family might have to move to a less desirable home, cut back on the quality of life, your children might have to abandon higher studies plans. Your family might even be forced to go into debt to pay the expenses, like medical bills, that result from your death. I hope that by now, you realise that the lack of sufficient life insurance coverage when a loved one dies can have devastating consequences for a family, results that can last for years. Hope now you get why we need life insurance.

What is Life Insurance?

You read about why we need life insurance. Now you must be wondering what life insurance is, after all? Life Insurance is a way of transferring the risk attached to your life to the insurer. In other words, life insurance is a policy bought from a life insurance company, which provides financial stability to a family after a member’s death, usually the breadwinner of the family. Its function is to help beneficiaries financially after the owner of the policy dies.

If the policy owner dies while the contract is in force, the insurance company pays a specified sum of money free of income tax to the person or persons you name as beneficiaries. The cash benefit helps provide for your family’s future needs as well, including college education for your children and part or all of your spouse’s retirement needs.

Life Insurance can also be a form of savings in the long run if one purchases a plan, which offers the option of contributing regularly. Additionally, a little known function of life insurance is that it can be tied in with a person’s pension plan. A person can make contributions to a pension that is funded by a life insurance company.

Types of Life Insurance?

You read about why need life insurance and what is life insurance. Now, let’s discuss the various types of life insurance available in the market:

  • The cheapest Life Insurance – Term Insurance

    Term life insurance also called pure insurance, is the most straightforward type of life insurance and the easiest to understand. It protects for a specific term period – ranging from 1 year to 25 years or more. If the policy owner dies during this period, then the insurance company pays cash benefits (as decided upon policy subscription) to the nominees of the policy owner. However, once the term is over, coverage ceases.
    The policy has no financial investment value. If you are looking for the maximum amount of coverage at minimum cost, term life insurance will give you the most “bang for your buck”.

  • Life Insurance with Returns Endowment Assurance

    An endowment life assurance policy covers risk for a specified period, at the end of which the sum assured is paid back to the policyholder, along with the bonus accumulated during the term of the policy. An endowment life insurance policy is designed primarily to provide a living benefit and only secondarily to provide life insurance protection. Therefore, it is more of an investment than a whole life policy. The premium on endowment life insurance policies is payable for the full term of the endowment policy unless the insurer dies earlier. When compared to pure life policies, the premium rates for endowment life insurance policies are higher. But one of the significant attractions of endowment policies is that they provide a return on premium payments when the plan comes to an end.

  • Money-Back Life Insurance

    Money-Back Life Insurance offers the critical benefit of cash lump sums at periodic intervals of five years, ensuring that you can meet any of your financial obligations. Such a plan not only provide life cover but also entitle you to a guaranteed addition and bonus on maturity. Money-back Life Insurance plans like these not only let you enjoy regular cash flows during the policy term; they also get you a life cover.

  • ULIPs

    ULIPs are a category of insurance cum investment solutions that combine the safety of insurance protection with wealth creation opportunities. In ULIPs, a part of the investment goes towards providing you life cover. The residual portion is invested in a fund which in turn invests in stocks or bonds. The value of investments alters with the performance of the underlying fund opted by you.

When Should You Start Social Security Benefits?

When should you elect to receive Social Security benefits – at age 62, full retirement age (which is gradually increasing from age 65 to age 67), or age 70? The decision will permanently affect your Social Security benefits. Start at age 62, and your benefits will be permanently reduced by 20.8% to 30%, depending on your year of birth. Wait until age 70, and your benefits will increase by 3.5% to 8% annually, depending on your year of birth.

Since Social Security benefits probably won’t be sufficient to maintain your current standard of living, first decide whether you have sufficient retirement resources even to consider retiring at age 62. If that is not an issue, keep in mind that it will take approximately 12 years for someone electing benefits at age 65 to receive the same total benefits as someone electing reduced benefits at age 62. It takes approximately 11 to 14 years for someone electing increased benefits at age 70 to receive the same total benefits as someone electing benefits at full retirement age. You may want to calculate precise numbers for your situation since your full retirement age and the percentage reduction in benefits at age 62 will impact your answer.

For most individuals, the long payback period may make it worthwhile to start benefits at age 62. And in fact, more than 60% of retirees elect for benefits before age 65, while less than 2% wait until age 70 (Source: U.S. News & World Report, June 3, 2002). But there are a couple of situations where you might want to wait until full retirement age.

If you plan to continue working, consider delaying benefits. Individuals who have attained full retirement age can earn any amount of wages without losing any Social Security benefits. However, between the ages of 62 and 65, you lose $1 of benefits for every $2 of earnings over $11,520 in 2003. Between the ages of 65 and your full retirement age, you lose $1 in benefits for every $3 of earnings over $30,720 in 2003. Individuals earning substantially more than these limits will probably want to wait to start Social Security benefits.

If your spouse is significantly younger and is counting on your benefits, you may also want to delay benefits. While you are alive, your spouse is entitled to the larger of 100% of his/her benefit based on his/her earnings or 50% of your benefit at full retirement age. However, if you elect benefits before the full retirement age, your spouse’s benefits will be reduced by a higher percentage than your benefits were reduced, provided he/she obtains benefits based on your earnings. If you delay benefits past full retirement age, you receive increased benefits, but your spouse’s benefits remain the same, provided he/she obtains benefits based on your earnings.

After your death, your spouse’s benefits are based on your benefits and the age he/she elects to receive benefits. He/she receives 100% of your benefit, provided your spouse is over the full retirement age. If he/she is younger than full retirement age, your spouse receives between 71.5% and 100% of those benefits. Thus, the larger your benefit is, the larger your spouse’s benefit will be after your death.

Getting Your Portfolio Back on Track

The recent market declines have been steeper and of longer duration than many expected, making it difficult to determine how to adjust your portfolio.

Should you leave it alone, hoping the market will quickly rebound to much higher levels? Or should you sell everything and put your money in cash accounts?

The appropriate answer probably lies somewhere between those two extremes. What you should do is thoroughly review your portfolio. Consider these tips when analyzing your portfolio:

Take another look at your financial goals.

Now it’s time to face reality. If your portfolio declined substantially in the past three years, it would probably affect your financial goals. Recalculate how much you need to save on an annual basis, based on your investments’ current value and a reasonable future rate of return.

Be prepared to readjust your goals. For many people, one of the most painful results of the market declines has been the realization that they are now going to have to delay retirement.

Set an asset allocation strategy for the long term.

The most basic investment decision you’ll make is how to allocate your portfolio among the various investment categories, such as cash, bonds, and stocks. You want to ensure your portfolio is diversified among various investments, so when one category is declining, other categories will be increasing or not decreasing as much. To decide how to allocate your portfolio, you’ll first need to come to terms with your risk tolerance.

Factors like your time horizon for investing and return expectations will also impact your decision. Once you’ve decided on an asset allocation strategy, you’ll need to adjust your current portfolio to get it in line with that allocation.

Thoroughly review each investment in your portfolio and decide whether you should continue to own it.

Some stocks will rebound from the recent market declines, while others may never rebound. If you think an investment won’t rebound or will take a long time to do so, you may want to sell it and reinvest in others with better prospects. It’s a painful thing to do since most investors have an aversion to selling at a loss. But it’s an important step to ensure your portfolio is on track going forward.

Also, make sure your remaining investments are all adding diversification benefits to your portfolio. Just because you own a number of investments doesn’t mean you are properly diversified. Often, investors keep purchasing investments similar in nature. That doesn’t add much in the way of diversification and makes the portfolio difficult to monitor.

Look for investments you’ll be comfortable owning for the long term.

It’s tempting to look for the biggest winners in investments and put your money there. In essence, however, you are chasing yesterday’s winners rather than tomorrow’s winners.

You need to keep in mind that the best-performing investment category will change from year to year. A better strategy may be to select a diversified portfolio of investments you’ll be comfortable owning for the long term, so you have some money invested in each of the major investment categories.

Use dollar cost averaging to invest.

If you’ve been investing throughout the market declines, you have probably been purchasing at lower and lower prices, making you wonder whether it makes sense to keep putting money in the market. The point of dollar cost averaging is to invest a set amount of money in a certain investment on a periodic basis. When prices are lower, you will purchase more shares than when prices are higher, following half of the investing principle of “buy low and sell high.”

But the most important part of dollar cost averaging is that it forces you to continue investing when you really don’t want to invest. In the long run, when and if the stock market rebounds, you will probably be glad you had the discipline to continue investing during this market downturn. (Keep in mind that dollar-cost averaging does not guarantee a profit or protect against losses.

Because it involves continuous investment regardless of fluctuating price levels, you should consider your ability to continue investing through periods of low price levels.)

Pay attention to taxes.

Taxes are probably your portfolio’s largest expense. Ordinary income taxes on short-term capital gains, interest, and dividends can go as high as 38.6%, while long-term capital gains are taxed at rates not exceeding 20% (10% if you are in the 15% tax bracket). Using strategies that defer income for as long as possible can make a substantial difference in the ultimate size of your portfolio.

Some strategies to consider include utilizing tax-deferred investment vehicles (such as 401(k) plans and individual retirement accounts), minimizing portfolio turnover, selling investments with losses to offset gains, and placing assets generating ordinary income or that you want to trade frequently in your tax-deferred accounts.

Review your portfolio at least annually.

You can’t just adjust your portfolio now and leave it on autopilot. You need to keep an eye on your portfolio in case market, or company situations require changes. By reviewing your portfolio annually, you’ll have an opportunity to make adjustments on an ongoing basis, which should prevent major overhauls in the future.