Tuesday, December 4, 2012

Financial planning: What it's not and what it is

Recently one of our staff member within the Efinity Mortgage team asked what we felt was a fairly brave question during a meeting involving cross-platform personal (Insurance - Financial Services - Mortgage Lending). In short, she asked what our Licensed Financial Professionals did and was there a difference between financial "Planning" and "Advising". The answer was of course was clearly yes; there is a difference however the explanations which followed were a bit less clear. We felt this would be an excellent talking point within our firm. We set out to obtain Efinity's own definition of not only both terms "financial planning" and "financial advising" but offer some additional color on the subject. We found a commentary piece which largely outlined what we were interested in sharing. So in giving credit where credit is due, the below commentary is thanks to a Ryan Fox and Tim Maurer found at eveningsun.com back on 10/14/2012. Financial planning: What it's not and what it is Two of the terms in the financial services industry that are so often misused are "financial planning" and "financial advising." What is the first thing that comes to your mind when I ask, "What is a financial planning/advising?" My guess is that 65 percent of people assume the term is synonymous with the sales or management of investments with a stock broker. The other 30 percent probably think that it is the pursuit of finding the right insurance policy or policies. It may be generous to assume that 5 percent of people have been painted an accurate picture of what true financial planning or advising really is. One thing that makes accurate discernment so difficult regarding this terminology is that financial planning does, indeed, include investment planning and insurance planning. But if the advice stops there, it's not genuine financial planning. The primary reason that financial planning has been viewed in such a modular fashion is that the behemoth financial industry realized before financial planning even became a thing that couching product sales in the appearance of sound planning and advice was good business. But, at the end of the day, financial planning with a brokerage firm inevitably leads almost solely to the sale of brokerage products; with banks, banking products; and with insurance companies, insurance products. Below you'll find a glossary with more complete definitions of the fundamental tenets of true financial planning and advice; what it's NOT and what it IS: Investment planning - Is NOT merely the sales of stocks, bonds and mutual funds; it IS determining how all of the assets in your life-including stocks, bonds and mutual funds, but also real estate, commodities and entrepreneurial ventures-intersect with life and move you closer to your goals and objectives. Insurance planning - Is NOT just about buying prescribed insurance products; it IS learning how to manage risk first through risk avoidance, risk reduction and risk assumption before transferring risk through insurance products. Cash flow/budget planning - is NOT just for the under-resourced living paycheck-to-paycheck; it IS the engine of every household's sound financial plan, just as it is for every successful business. Tax planning - Is NOT having your tax return prepared or jamming your numbers through Geitner's Achilles heel, Turbo Tax; it IS planning for the present, but also the mid-term and the long-term regarding payroll taxes, income tax, capital gains tax, tax deferral, gift tax, inheritance tax and estate tax. Education planning - Is NOT sloughing a random chunk of money every month into an education savings plan to assuage your guilt that you're too busy keeping your own financial house in order to apply much thought to the cost of your children's education; it IS first developing a Family Education Policy (here's how much mom and dad are willing to pay and the terms you need to meet to receive that help) and then establishing a deliberate plan to meet those goals, some of which should be saved in a 529 education savings plan. Retirement planning - Is NOT slaving away at a job you don't love so that you can shelve as much of your income as humanly possible in a 401k and IRAs to which you'll look for financial salvation in a retirement that can't come soon enough; it IS, first and foremost, finding a career that you can enjoy indefinitely so that you are always employable (the BEST insurance against running out of income in retirement), saving effectively for financial independence while also allocating dollars to enjoying life today and in the mid-term. Estate planning - Is NOT sleeping through an expensive meeting with an attorney to have documents drafted that you don't understand; it IS examining the impact that you'd like to leave on this earth and implementing tangible plans - yes, through wills, powers of attorney, advance directives and occasionally other trusts, but also - designed to create a legacy, no matter what your age. One of the reasons it's especially difficult to get complete answers about financial planning is because the purveyors of financial products - banks, brokerage firms and insurance companies - are working very hard to convince the public that they are to be trusted both as the advisor and the salesperson. Unfortunately, their economic bias - their financial conflict of interest - is so overpowering that the best advice is often tainted or watered down. If Efinity Financial can bring some clarity to your financial goals, aspirations & questions we encourage you to reach out to one of our Licensed Financial Professionals - www.efinityfinancial.com

Monday, November 26, 2012

What Makes a Good Agent

As many of you know, within Efinity Group there exists a full service Insurance firm, Efinity Insurance. One of the questions we are often asked is; "What makes a good insurance agent?" It's an interesting question. We pulled the following information from the Independent Insurance Agents & Brokers of America website and believe it best represents both the expectations and professionalism one should expect from his/her personal insurance agent. http://www.independentagent.com When it comes to financial security and insurance protection, most people want a long-term relationship with a trusted adviser they can turn to many years into the future. In fact, a survey by the Independent Insurance Agents & Brokers of America (IIABA) found that: Three out of four insurance consumers use an agent when purchasing personal insurance. More than half the respondents over age 55 have purchased insurance from the same agent for at least 20 years. More than 60 percent say they value the opportunity to discuss insurance with a real person. If you’re like most people, you want to develop a long-term relationship with an agent, too. So, how do you make sure the agent is professional and reputable? Here’s what to look for: 1. Independence. Independent agents represent an average of eight different companies-not just one. They can evaluate and compare the products of several insurance companies to find the right combination of coverage and value. 2. Licensing by the state. 3. Number and names of companies the agent represents. 4. Number of years the agent and agency have been in business. 5. The agent’s professional designations. For example, CPCU (Chartered Property and Casualty Underwriter) and CLU (Chartered Life Underwriter) are among the industry's most rigorous and prestigious designations. 6. Areas of specialization. Some agents and agencies have experience in specialized products, such as insurance for a farm, a classic car, or a home business. 7. Recommendations and referrals. How did you hear about the agent and the agency? Did someone you trust refer you? Ask the person for specific details about the experience. 8. Full-service capability. Is this a full-service agency for auto, home, health, and disability products? 9. Service representatives. Ask who will handle your account for routine updates and transactions. 10. Hours. Emergency numbers. Claims service. Ask if you can contact the agency after- hours for claims or other emergency needs. 11. Claims help. Ask if the agent plays a role in handling and tracking claims. Will the agent help resolve disputes that might arise with an insurance company, for example? 12. Policy review. Does the agency occasionally review and update policies to make sure your insurance is keeping pace with changes in your situation? 13. Community involvement. Does your agent participate in any local organizations, boards, volunteer activities, or other civic endeavors? 14. Industry associations. Does your agent participate in any local, state, or national trade associations? These activities often signify professionalism and a commitment to continuing education in the insurance field. We hope you found some of this information valuable.

Thursday, April 12, 2012

Welcome to Spring - Home Buying Time!!

With Spring upon us, and new buyers out looking for houses, we thought today might be a good time to review the basics of what lenders look for as they decide to approve (or deny) mortgage applications. For at least the last two decades we have heard them called “The 4 C’s of Underwriting”- Capacity, Credit, Cash, and Collateral. Guidelines and risk tolerances change, but the core criteria do not.

CAPACITY is the analysis of comparing a borrower’s income to their proposed debt. It considers the borrower’s ability to repay the mortgage. Lenders look at two calculations (we call ratios). The first is your Housing Ratio. It simply is the percentage of your proposed total mortgage payment (principal & interest, real estate taxes, homeowner’s insurance and, if applicable, flood insurance and mortgage insurance – like PMI or the FHA MIP) divided by your monthly, pre-tax income. A solid Housing Ratio (often called the front end ratio) would be 28% or less; although, at times loans are approved at a significantly higher number. That’s because your front end ratio is looked at in conjunction with your back end ratio.
The back end ratio (referred to as your Debt Ratio) starts with that mortgage payment calculation from the Housing Ratio and adds to it your recurring debts that would show up on your credit report (auto loans, student loans, minimum credit card payments, etc.) without taking into consideration some other debts (phone bills, utility bills, cable TV). A good back ratio would be 40% or less. However, loans sometimes are granted with higher debt ratios. Understand that every application is different. Income can be impacted by overtime, night differential, bonuses, job history, unreimbursed expenses, commission, as well as other factors. Similarly, how your debts are considered can vary. Consult an experienced loan officer to determine how the underwriter will calculate your numbers.

CREDIT is the statistical prediction of a borrower’s future payment likelihood. By reviewing the past factors (payment history, total debt compared to total available debt, the types of monies: revolving credit vs. installment debt outstanding) a credit score is assigned each borrower which reflects the anticipated repayment. The higher your score, the lower the risk to the lender which usually results in better loan terms for the borrower. Your loan officer will look to run your credit early on to see what challenges may (or may not) present themselves.

CASH is a review of your asset picture after you close. There are really two components – cash in the deal and cash in reserves. Simply put, the bigger your down payment (the more of your own money at risk) the stronger the loan application. At the same time, the more money you have in reserve after closing the less likely you are to default. Two borrowers with the same profile as far as income ratios and credit scores have different risk levels if one has $50,000 in the bank after closing and the other has $50. There is logic here. The source of your assets will be examined. Is it savings? Was it a gift? Was it a one-time settlement/lottery victory/bonus? Discuss how much money you have and its origins with your loan officer.

COLLATERAL refers to the appraisal of your home. It considers many factors – sales of comparable homes, location of the home, size of the home, condition of the home, cost to rebuild the home, and even rental income options. Understand the lender does not want to foreclose (they aren’t in the real estate business), but they do need to have something to secure the loan against, in case of default. In today’s market, appraisers tend to be conservative in their evaluations. Appraisals are really the only one of the 4 C’s that can’t be determined ahead of time in most cases.

Now, each of the 4 C’s are important, but it’s really the combination of them that is key. Strong income ratios and a large down payment with strong reserves can offset some credit issues. Similarly, long and strong credit histories help higher ratios….and good credit and income can overcome lesser down payments. Talk openly and freely with your loan officer. They are on your side, advocating for you and looking to structure your file as favorably as possible. We hope you find some value in this information as you elect to move up, move down or accross this great country of ours!

Tuesday, January 17, 2012

How to ensure your home isn't under-insured

For many of our clients, the following information is view similarly to going to the dentist. That said, it's mission critical that your family review the following and please get with one of our agents for a policy review.

Fact is, most homeowners have insurance. All homeowners who have a mortgage must have insurance. The question is: do you have enough insurance? Will your policy cover you if the worst happens – if your house is totally destroyed and you need to rebuild?

According to the Insurance Information Institute’s 2011 Insurance Pulse Survey, nearly half (48 percent) of all homeowners in the U.S. believe the insured value of their home is linked to its market value.

“They are two different things,” says Michael Barry, the institute’s vice president of media relations. “When it comes to buying homeowners insurance, you have to look at the insured value – what would it cost to rebuild my home in its current location with comparable construction materials if I were to have a total loss? And that number does not represent the market value.”

With home prices in the flat, it’s easy to assume that you can save money by lowering the insurance coverage. Unfortunately, it doesn’t work that way. The cost of building materials – copper, lumber, steel, concrete – have all gone up dramatically the last few years.

“It’s truly unfortunate that people don’t understand market value versus replacement cost,” says Ned, the vice president of claims for a regional insurance company. He agreed to talk to me as long as I did not use his real name.

Ned told me about a recent claim for a house that burned to the ground and the homeowner was grossly under-insured. He had coverage for up to $350,000, but the estimated construction cost came in at $500,000. Ned says this customer was “one of the rare individuals who accepted responsibility” for the situation.

The insurance company did its best to help, but the new house did not have the quality of the original. The homeowner had to downgrade the kitchen appliances. Instead of granite countertops, he went with composite. He also had to settle for a lower-quality roof; one that was guaranteed for 30 years instead of 40.

Getting the right coverage is your responsibility. We advise reviewing your insurance coverage each year with our agents. Despite our reminders and email notifications, most people don’t do this.

Angie’s List recently polled its members and found that nearly one-third of those who responded hadn’t checked their home insurance policies for two years or more.

“This is your responsibility,” says Angie Hicks, the website’s founder. “Your insurance agent doesn’t know what you’ve done to your house. They don’t know if you added a deck or bought an expensive piece of jewelry. Only you know that information.”

So put this on your calendar to make sure you’re reviewing your policy at renewal time.

At the very least, you want to know what you have. Then you can tweak the policy or comparison shop. Make sure you don’t buy too much insurance. You don’t need to insure for the value of the land your house sits on.

According to the Insurance Information Institute, there are four elements that help you decide how much coverage to get:

- The cost to rebuild the structure.

- The cost to replace the contents.

- Additional living expenses if you have to move out during repairs.

- Your liability to others who might get hurt on your property.

If you’re looking to save money raise the deductible, don’t cut back on coverage. The Insurance Information Institute says increasing the deductible from $500 to $1,000 could reduce premiums by up to 25 percent.

Remember: the amount of money the policy will pay for contents and additional living expenses is typically based on the coverage of the structure.

It’s important to have a home inventory to show the insurance company if there is a loss. The free app MyHOME Scr.APP.book (available for iPhones and Android phones) from the National Association of Insurance Commissioners lets you quickly photograph, grab bar codes and serial numbers and store them digitally. There is also free software for your computer at knowyourstuff.org, a site run by the insurance industry.

We encourage you to spend time on both. It'll be time well spent.