Conventional Mortgage Loan – What It Is & Different Types for Your Home

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The mortgage industry is rife with jargon and acronyms, from LTV to DTI ratios. One term you’ll hear sooner or later is “conventional mortgage loan.”

It sounds boring, but it couldn’t be more important. Unless you’re a veteran, live in a rural area, or have poor credit, there’s a good chance you’ll need to apply for a conventional mortgage loan when buying your next house.

Which means you should know how conventional mortgages differ from other loan types.


What Is a Conventional Mortgage Loan?

A conventional loan is any mortgage loan not issued or guaranteed by the Federal Housing Administration (FHA), Department of Veterans’ Affairs (VA), or U.S. Department of Agriculture (USDA). 


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Most conventional loans are backed by the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). These government-sponsored enterprises guarantee the loans against default, which lowers the cost for borrowers by lowering the risk for lenders.

As a general rule, stronger borrowers tend to use these private conventional loans rather than FHA loans. The exception concerns well-qualified borrowers who qualify for subsidized VA or USDA loans due to prior military service or rural location.


How a Conventional Mortgage Loan Works

In a typical conventional loan scenario, you call up your local bank or credit union to take out a mortgage. After asking you some basic questions, the loan officer proposes a few different loan programs that fit your credit history, income, loan amount, and other borrowing needs. 

These loan programs come from Fannie Mae or Freddie Mac. Each has specific underwriting requirements.

After choosing a loan option, you provide the lender with a filing cabinet’s worth of documents. Your file gets passed from the loan officer to a loan processor and then on to an underwriter who reviews the file. 

After many additional requests for information and documents, the underwriter signs off on the file and clears it to close. You then spend hours signing a mountain of paperwork at closing. When you’re finished, you own a new home and a massive hand cramp.  

But just because the quasi-governmental entities Fannie Mae and Freddie Mac back the loans doesn’t mean they issue them. Private lenders issue conventional loans, and usually sell them on the secondary market right after the loan closes. So even though you borrowed your loan from Friendly Neighborhood Bank, it immediately transfers to a giant corporation like Wells Fargo or Chase. You pay them for the next 15 to 30 years, not your neighborhood bank. 

Most banks aren’t in the business of holding loans long-term because they don’t have the money to do so. They just want to earn the points and fees they charge for originating loans — then sell them off, rinse, and repeat. 

That’s why lenders all follow the same loan programs from Fannie and Freddie: so they can sell predictable, guaranteed loans on the secondary market. 


Conventional Loan Requirements

Conventional loans come in many loan programs, and each has its own specific requirements.

Still, all loan programs measure those requirements with a handful of the same criteria. You should understand these concepts before shopping around for a mortgage loan. 

Credit Score

Each loan program comes with a minimum credit score. Generally speaking, you need a credit score of at least 620 to qualify for a conventional loan. But even if your score exceeds the loan program minimum, weaker credit scores mean more scrutiny from underwriters and greater odds that they decline your loan. 

Mortgage lenders use the middle of the scores from the three main credit bureaus. The higher your credit score, the more — and better — loan programs you qualify for. That means lower interest rates, fees, down payments, and loan requirements. 

So as you save up a down payment and prepare to take out a mortgage, work on improving your credit rating too.  

Down Payment

If you have excellent credit, you can qualify for a conventional loan with a down payment as low as 3% of the purchase price. If you have weaker credit, or you’re buying a second home or investment property, plan on putting down 20% or more when buying a home.

In lender lingo, bankers talk about loan-to-value ratios (LTV) when describing loans and down payments. That’s the percentage of the property’s value that the lender approves you to borrow.

Each loan program comes with its own maximum LTV. For example, Fannie Mae’s HomeReady program offers up to 97% LTV for qualified borrowers. The remaining 3% comes from your down payment. 

Debt-to-Income Ratio (DTI)

Your income also determines how much you can borrow. 

Lenders allow you to borrow up to a maximum debt-to-income ratio: the percentage of your income that goes toward your mortgage payment and other debts. Specifically, they calculate two different DTI ratios: a front-end ratio and a back-end ratio.

The front-end ratio only features your housing-related costs. These include the principal and interest payment for your mortgage, property taxes, homeowners insurance, and condo- or homeowners association fees if applicable. To calculate the ratio, you take the sum of those housing expenses and divide them over your gross income. Conventional loans typically allow a maximum front-end ratio of 28%. 

Your back-end ratio includes not just your housing costs, but also all your other debt obligations. That includes car payments, student loans, credit card minimum payments, and any other debts you owe each month. Conventional loans typically allow a back-end ratio up to 36%. 

For example, if you earn $5,000 per month before taxes, expect your lender to cap your monthly payment at $1,400, including all housing expenses. Your monthly payment plus all your other debt payments couldn’t exceed $1,800. 

The lender then works backward from that value to determine the maximum loan amount you can borrow, based on the interest rate you qualify for. 

Loan Limits

In 2022, “conforming” loans allow up to $647,200 for single-family homes in most of the U.S. However, Fannie Mae and Freddie Mac allow up to $970,800 in areas with a high cost of living. 

Properties with two to four units come with higher conforming loan limits:

Units Standard Limit Limit in High CoL Areas
1 $647,200 $970,800
2 $828,700 $1,243,050
3 $1,001,650 $1,502,475
4 $1,244,850 $1,867,275

You can still borrow conventional mortgages above those amounts, but they count as “jumbo” loans — more on the distinction between conforming and non-conforming loans shortly.

Private Mortgage Insurance (PMI)

If you borrow more than 80% LTV, you have to pay extra each month for private mortgage insurance (PMI).

Private mortgage insurance covers the lender, not you. It protects them against losses due to you defaulting on your loan. For example, if you default on your payments and the lender forecloses, leaving them with a loss of $50,000, they file a PMI claim and the insurance company pays them to cover most or all of that loss. 

The good news is that you can apply to remove PMI from your monthly payment when you pay down your loan balance below 80% of the value of your home. 


Types of Conventional Loans

While there are many conventional loan programs, there are several broad categories that conventional loans fall into.

Conforming Loan

Conforming loans fit into Fannie Mae or Freddie Mac loan programs, and also fall within their loan limits outlined above.

All conforming loans are conventional loans. But conventional loans also include jumbo loans, which exceed the conforming loan size limits. 

Non-Conforming Loan

Not all conventional loans “conform” to Fannie or Freddie loan programs. The most common type of non-conforming — but still conventional — loan is jumbo loans.

Jumbo loans typically come with stricter requirements, especially for credit scores. They sometimes also charge higher interest rates. But lenders still buy and sell them on the secondary market.

Some banks do issue other types of conventional loans that don’t conform to Fannie or Freddie programs. In most cases, they keep these loans on their own books as portfolio loans, rather than selling them. 

That makes these loans unique to each bank, rather than conforming to a nationwide loan program. For example, the bank might offer its own “renovation-perm” loan for fixer-uppers. This type of loan allows for a draw schedule during an initial renovation period, then switches over to a longer-term “permanent” mortgage.

Fixed-Rate Loan

The name speaks for itself: loans with fixed interest rates are called fixed-rate mortgages.

Rather than fluctuating over time, the interest rate remains constant for the entire life of the loan. That leaves your monthly payments consistent for the whole loan term, not including any changes in property taxes or insurance premiums.

Adjustable-Rate Mortgages (ARMs)

As an alternative to fixed-interest loans, you can instead take out an adjustable-rate mortgage. After a tempting introductory period with a fixed low interest rate, the interest rate adjusts periodically based on some benchmark rate, such as the Fed funds rate.

When your adjustable rate goes up, you become an easy target for lenders to approach you later with offers to refinance your mortgage. When you refinance, you pay a second round of closing fees. Plus, because of the way mortgage loans are structured, you’ll pay a disproportionate amount of your loan’s total interest during the first few years after refinancing.


Pros & Cons of Conventional Home Loans

Like everything else in life, conventional loans have advantages and disadvantages. They offer lots of choice and relatively low interest, among other upsides, but can be less flexible in some important ways.

Pros of Conventional Home Loans

As you explore your options for taking out a mortgage loan, consider the following benefits to conventional loans.

  • Low Interest. Borrowers with strong credit can usually find the best deal among conventional loans.
  • Removable PMI. You can apply to remove PMI from your monthly mortgage payments as soon as you pay down your principal balance below 80% of your home’s value. In fact, it disappears automatically when you reach 78% of your original home valuation.
  • No Loan Limits. Higher-income borrowers can borrow money to buy expensive homes that exceed the limits on government-backed mortgages.
  • Second Homes & Investment Properties Allowed. You can borrow a conventional loan to buy a second home or an investment property. Those types of properties aren’t eligible for the FHA, VA, or USDA loan programs.
  • No Program-Specific Fees. Some government-backed loan programs charge fees, such as FHA’s up-front mortgage insurance premium fee.
  • More Loan Choices. Government-backed loan programs tend to be more restrictive. Conventional loans allow plenty of options among loan programs, at least for qualified borrowers with high credit scores.

Cons of Conventional Home Loans

Make sure you also understand the downsides of conventional loans however, before committing to one for the next few decades.

  • Less Flexibility on Credit. Conventional mortgages represent private markets at work, with no direct government subsidies. That makes them a great choice for people who qualify for loans on their own merits but infeasible for borrowers with bad credit. 
  • Less Flexibility on DTI. Likewise, conventional loans come with lower DTI limits than government loan programs. 
  • Less Flexibility on Bankruptcies & Foreclosures. Conventional lenders prohibit bankruptcies and foreclosures within a certain number of years. Government loan programs may allow them sooner. 

Conventional Mortgage vs. Government Loans

Government agency loans include FHA loans, VA loans, and USDA loans. All of these loans are taxpayer-subsidized and serve specific groups of people. 

If you fall into one of those groups, you should consider government-backed loans instead of conventional mortgages.

Conventional Loan vs. VA Loan

One of the perks of serving in the armed forces is that you qualify for a subsidized VA loan. If you qualify for a VA loan, it usually makes sense to take it. 

In particular, VA loans offer a famous 0% down payment option. They also come with no PMI, no prepayment penalty, and relatively lenient underwriting. Read more about the pros and cons of VA loans if you qualify for one. 

Conventional Loan vs. FHA Loan

The Federal Housing Administration created FHA loans to help lower-income, lower-credit Americans achieve homeownership. 

Most notably, FHA loans come with a generous 96.5% LTV for borrowers with credit scores as low as 580. That’s a 3.5% down payment. Even borrowers with credit scores between 500 to 579 qualify for just 10% down. 

However, even with taxpayer subsidies, FHA loans come with some downsides. The underwriting is stringent, and you can’t remove the mortgage insurance premium from your monthly payments, even after paying your loan balance below 80% of your home value.

Consider the pros and cons of FHA loans carefully before proceeding, but know that if you don’t qualify for conventional loans, you might not have any other borrowing options. 

Conventional Loan vs. USDA Loan

As you might have guessed, USDA loans are designed for rural communities. 

Like VA loans, USDA loans have a famous 0% down payment option. They also allow plenty of wiggle room for imperfect credit scores, and even borrowers with scores under 580 sometimes qualify. 

But they also come with geographical restrictions. You can only take out USDA loans in specific areas, generally far from big cities. Read up on USDA loans for more details.


Conventional Mortgage Loan FAQs

Mortgage loans are complex, and carry the weight of hundreds of thousands of dollars in getting your decision right. The most common questions about conventional loans include the following topics.

What Are the Interest Rates for Conventional Loan?

Interest rates change day to day based on both benchmark interest rates like the LIBOR and Fed funds rate. They can also change based on market conditions. 

Market fluctuations aside, your own qualifications also impact your quoted interest rate. If your credit score is 800, you pay far less in interest than an otherwise similar borrower with a credit score of 650. Your job stability and assets also impact your quoted rate. 

Finally, you can often secure a lower interest rate by negotiating. Shop around, find the best offers, and play lenders against one another to lock in the best rate.

What Documents Do You Need for a Conventional Loan?

At a minimum, you’ll need the following documents for a conventional loan:

  • Identification. This includes government-issued photo ID and possibly your Social Security card.
  • Proof of Income. For W2 employees, this typically means two months’ pay stubs and two years’ tax returns. Self-employed borrowers must submit detailed documentation from their business to prove their income. 
  • Proof of Assets. This includes your bank statements, brokerage account statements, retirement account statements, real estate ownership documents, and other documentation supporting your net worth.
  • Proof of Debt Balances. You may also need to provide statements from other creditors, such as credit cards or student loans.

This is just the start. Expect your underwriter to ask you for additional documentation before you close. 

What Credit Score Do You Need for a Conventional Loan?

At a bare minimum, you should have a credit score over 620. But expect more scrutiny if your score falls under 700 or if you have a previous bankruptcy or foreclosure on your record.

Improve your credit score as much as possible before applying for a mortgage loan.

How Much Is a Conventional Loan Down Payment?

Your down payment depends on the loan program. In turn, your options for loan programs depend on your credit history, income, and other factors such as the desired loan balance.

Expect to put down a minimum of 3%. More likely, you’ll need to put down 10 to 20%, and perhaps more still.

What Types of Property Can You Buy With a Conventional Loan?

You can use conventional loans to finance properties with up to four units. That includes not just primary residences but also second homes and investment properties. 

Do You Need an Appraisal for a Conventional Loan?

Yes, all conventional loans require an appraisal. The lender will order the appraisal report from an appraiser they know and trust, and the appraisal usually requires payment up front from you. 


Final Word

The higher your credit score, the more options you’ll have when you shop around for mortgages. 

If you qualify for a VA loan or USDA loan, they may offer a lower interest rate or fees. But when the choice comes down to FHA loans or conventional loans, you’ll likely find a better deal among the latter — if you qualify for them. 

Finally, price out both interest rates and closing costs when shopping around for the best mortgage. Don’t be afraid to negotiate on both. 

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G. Brian Davis is a real estate investor, personal finance writer, and travel addict mildly obsessed with FIRE. He spends nine months of the year in Abu Dhabi, and splits the rest of the year between his hometown of Baltimore and traveling the world.

Source: moneycrashers.com

How to Split $250,000 in Student Loans in a Divorce

Divorce is stressful and complicated and hurts on so many emotional and financial levels. It becomes even more complex when you throw in the additional financial stress of student loans — whether they are loans the spouses took out for their own education or for a child’s college. It can be hard to deal with even after you have decided whether a student loan is a marital or separate debt.

Student loans are a complex liability because there are so many different and complicated repayment methods. These repayment plans come with such acronyms as PAYE, REPAYE, IDR and PSLF.

The borrower’s circumstances can also play a huge factor in deciding how to deal with student loans properly. For example, you might not have to repay your student loans in total if you qualify for student loan forgiveness for various reasons. The most common are taxable long-term forgiveness or Public Service Loan Forgiveness.

How student loans are handled in a divorce can be tricky. Depending on the laws of the state in which the divorce occurs, if one of the parties incurred student debt before the marriage, it could be considered separate property. That is especially common if the borrower’s partner received no economic benefit from the student loans or if the parties come from certain states that have community property laws. (1)

But what happens if you have Parent PLUS loans that you took out for your children? Let’s imagine the case of Jack and Jill, a couple who have been married for years but are now divorcing. Let’s say that a few years ago Jill took out $250,000 of Parent PLUS loans under her name to pay for their two children’s college education.

This is a common situation. Arguably, because the Parent PLUS loans were taken out during the marriage for the benefit of their children, they ought to be considered marital debt. (1)

Analyzing the case

Jack and Jill are both 55. Jack makes $180,000 a year working for an accounting firm, and Jill makes $45,000 working for a non-profit.

Jill has $250,000 of federal Parent PLUS loans that charge a 6% interest rate. As a result, considering these loans as marital debt, Jack and Jill together expect to pay $2,776 a month, or $33,312 a year. For both Jack and Jill, it is a significant financial burden that impairs their ability to plan for retirement and other long-term goals.

What if Jack and Jill refinance?

If Jack and Jill refinance at 3%, it will reduce the monthly payments to $2,414 a month. Although the $362 monthly savings are welcome, they are not a significant improvement in their situation.

Divorce has a way of making money scarce. In many divorces, the division of assets and debts approaches 50%, meaning that the burden of paying for her half of the loans would be significantly greater on Jill, who only makes $45,000 a year. Even with an asymmetric division to reduce Jill’s share, it would likely not be easy to sustain. (2)

How their house factors into the equation

Jack and Jill have agreed to sell the family home as part of the divorce. They expected to net about $250,000 after expenses and mortgage repayment to be divided equally. Jack wants to use the proceeds from the sale to pay off the entire parent loan balance. Jack had heard horror stories about other parents not being able to retire because of parent loan payments, so he wanted to get rid of the balance and not worry about monthly payments that could continue into his retirement.

So, he and Jill decide to split the loans down the middle. It means that Jack will pay Jill $125,000 from the sale of their shared home, since the Parent PLUS loans are in Jill’s name. With that, Jack’s share of the parent loan debt is addressed, and he believes that Jill should use her share of the sale to pay her half of the debt.

One of Jill’s loan options could save big bucks

Here’s the thing. With the $125,000 that she would receive from Jack and her $125,000 share from the home sale, she could pay off the debt and move on to other issues. Jill was all in on the idea of each side paying half of the loans until she spoke to a Student Loan Strategist and decided to take a different route with the $250,000 of Parent PLUS loans still in her name. 

Jill has always been passionate about providing support for vulnerable children worldwide. She works full-time at a local charity, a 501(c)(3) non-profit organization. She loves her work and has no plans to retire for at least 10 years. In this case, Jill could qualify for Public Service Loan Forgiveness (PSLF). It means that she could get her loans forgiven tax-free after she makes 120 monthly payments in an Income-Driven Repayment plan. (2)

Here is a summary of Jill’s parent loan repayment options:

Option No. 1: A flat cost of $250,000

She could make a lump-sum payment of $250,000 from the sale of their marital home ($125,000 from Jack + $125,000 of Jill’s share) to pay off the entire loan balance.

In this case, the total cost of the parent loan is $250,000. This way, Jill can get rid of the parent loans in her name. However, Jill still needs to figure out her post-divorce life, including how to pay for her new housing and how to invest the other assets she may receive from Jack from the asset division from their divorce.

Option No. 2: A cost of up to $333,062    

She could keep the $250,000 proceeds and pay off the loans with the standard federal 10-year repayment plan or private refinancing.

The cost of paying off $250,000 of federal loans with a 6% interest under the default 10-year standard repayment plan is $2,776 per month and $333,062 total over the 10 years. However, if Jill could find a private refinancing deal at 3% interest for the same 10-year term, the cost is $2,414 per month and $289,682 total, which is a savings of $362 per month and $43,379 in total.

It may make sense for Jill to do that if she needed to use the $250,000 home sale proceeds to buy a new house to live in, and if she could afford the $2,000+ per month of payments for the student loans. However, this is not an attractive option for Jill since her monthly income is $3,750, and the loan payments would absorb much of it. Even if her divorce agreement provided for alimony, it would still be difficult.

Bar chart shows a standard repayment plan would cost $333,061. Refinancing would cost $289,680. Lump sum payoff $250,000. PSLF: $29,766.Bar chart shows a standard repayment plan would cost $333,061. Refinancing would cost $289,680. Lump sum payoff $250,000. PSLF: $29,766.

Option No. 3: A cost of just $29,766

Finally, Jill could enroll in an Income-Driven Repayment plan and pursue Public Service Loan Forgiveness (PSLF).

Typically, federal Parent PLUS loans are only eligible for one of the Income-Driven Repayment plans, called the Income-Contingent Repayment (ICR) plan, even after being consolidated into a Direct Consolidation Loan.

Still, in some cases, these loans can be “double consolidated” (to learn more, please read How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000) and qualify for cheaper Income-Driven Repayment plans.

 For example, let’s say that Jill double consolidated her parent loans, enrolled in Pay As You Earn (PAYE), and pursued Public Service Loan Forgiveness for 10 years. Then, filing taxes as Single every one of those years, working for the 501(c)(3) employer and making the same level of annual income ($45,000, adjusted annually for inflation), she pays $205 to $283 monthly and a total of $29,059 over 10 years. (3)

The remaining loan balance (which happens to be $430,633 under this scenario) is forgiven tax-free under current tax rules. In this case, assuming that Jill makes the $205~$283 monthly payments out of her cash flow, she gets to keep all $250,000 from the home sale proceeds and pay off the parent loans for just under $30,000. She can use the $250,000 to buy a new home for herself or invest it in retirement, whatever she and her wealth strategist thought would work best. (4)

The burden is still on Jill

Did we mention that student loan repayment options can be complicated? Jill should ensure that she has her ducks perfectly aligned before engaging in the double consolidation/PSLF strategy. In the worst case, she could have missed something and may remain liable for the entire loan and the full payment or end up with a very large tax bill. Hence Jill should get an experienced student loan strategist to counsel her on her strategy.

If she felt inclined, she could discuss this PSLF option prior to the divorce with Jack and divide the benefit between them. However, Jill should remember that the burden is still on her because under this strategy, she has to stay in the PSLF program for 10 years. That obligation is not quantified but should be considered in the asset division.

Summary

Sometimes we can find a silver lining in the worst situations. In their divorce, Jack and Jill could take advantage of a quirk of student loans and could save up to hundreds of thousands of dollars. As a result, Jill could have an additional $220,234 to support her lifestyle.

Student loan repayment strategies can be very different depending on the situation. For example, it would be an entirely different situation if Jill’s income were higher, her employment did not qualify her for Public Service Loan Forgiveness, or she retired earlier than expected. There are still pitfalls ahead for her.

Solutions to student loan problems tend to be unique and difficult to generalize. If you have federal student loans, the short- and long-term costs can vary significantly depending on your income situation and the repayment plan you choose. However, as a federal student loan borrower, remember that you do not always have to pay back the entire loan balance.

Everyone’s situation is different, especially in divorce, especially with student loans. If you are unsure what to do, reach out for help. It might pay off!

(1) Consult an attorney to figure out what applies to you. (2) Consult a financial professional with a specialization in student loans. (3) Note: The projection in the PSLF option assumes that, among other factors such as Jill’s PSLF-qualifying employment status and family size staying the same, Jill’s income grows 3% annually, which increases her monthly payment amount each year. Individual circumstances can significantly change results. (4) Consult a financial planner.

Associate Planner, Insight Financial Strategists

Saki Kurose is a Certified Student Loan Professional (CSLP®) and a candidate for the CFP® certification.  As an associate planner at Insight Financial Strategists, she enjoys helping clients through their financial challenges. Saki is particularly passionate about working with clients with student loans to find the best repayment strategy that aligns with their goals.

Source: kiplinger.com

Virtual Asset Service Providers (VASP): What Are They?

We live in a world of service providers: health service providers, cloud service providers, internet service providers — the list goes on. And when we’re talking about cryptocurrency, virtual asset service providers (VASP) are inevitably part of the conversation.

Just what exactly is a VASP? And why should you know about them if you’re interested in cryptocurrency? This article will cover everything you need to know.

What are Virtual Assets (VAs)?

Most, if not all, cryptocurrencies and digital tokens are virtual assets. As outlined by the Financial Action Task Force (FATF) , a virtual asset fits the following criteria:

•   It’s a digital store or representation of value.

•   It can be digitally traded or transacted, or used for payment or investment.

•   It doesn’t include a digital representation of fiat currency or securities.

Virtual assets that can be traded or exchanged require a medium upon which those trades can be executed. That’s where VASPs come into play.

What is a Virtual Asset Service Provider (VASP)?

A VASP is a platform used to buy, sell, exchange, or otherwise interact with the cryptocurrency market. In other words, VASPs are crypto exchanges — or, at least the framework and theory behind a digital currency exchange.

The acronym “VASP” was coined by the FATF, which is an intergovernmental, international body that shores up standards and regulations — or promotes the use of them — in an effort to curb money laundering and stop the financing of terrorism.

Given that different types of virtual currency can and may be used for illicit or illegal activities, the FATF is stepping in to create some rules and frameworks for entities in the crypto space to operate within. Just as many cryptocurrency platforms must abide by existing regulations and compliance protocols, they may also be subject to additional guidelines and scrutiny from the FATF.

What Makes VASPs Unique?

In order for an organization to be classified as a VASP, it must tick certain boxes. In guidance issued in June 2019, the FATF asserted that a VASP is a business that conducts at least one of the following activities:

•   Acts as an exchange for virtual assets or fiat currencies

•   Acts as an exchange between one or more types of virtual assets

•   Acts as a medium of transfer for virtual assets

•   Provides safekeeping or administration of instruments that allow entities to control virtual assets

•   Participates in or provides financial services related to an offer or sale of a virtual asset

What Are Some VASP Types?

The FATF guidelines clearly describe crypto exchanges, as well as other participants in the crypto markets, including:

•   Mining pools

•   Investment vehicles

•   Digital wallet providers

•   Companies offering escrow services (transferring digital assets between two parties, ensuring a transaction goes down smoothly). And yes, companies providing these services may be classified as VASPs, after the FATF expanded and clarified its definition of a VASP in.

In an early 2021 update , the FATF also stated that decentralized exchanges, decentralized platforms, and DApps may also be considered VASPs, as well as platforms that facilitate peer-to-peer crypto transactions.

Recommended: What is a dApp?

What Businesses are Not VASPs?

There are numerous types of crypto-related entities that are not VASPs, including but not limited to:

•   Individual crypto miners

•   Individuals participating in a Bitcoin mining pool

•   Individual traders

•   Central banks

In short, if you’re just a regular Joe who’s trading or otherwise participating in the crypto markets or validating a blockchain network, you’re not a VASP.

Other Key Terms to Know When Talking About VASPs

In order to get a full picture of VASPs, it’s important to understand a couple of other terms: Digital Asset Entity (DAE), and Digital Asset Customer (DAC).

The distinction between these specific types of entities — which may exist in more than one type of classification (an entity could be both a DAE and a VASP, for instance) — can have an impact on how the entity is regulated.

What is a Digital Asset Entity (DAE)?

A Digital Asset Entity refers to some of the various businesses and organizations in the digital transaction space. For example, a VASP is a DAE. But the DAE umbrella includes many other types of organizations, such as gambling platforms, that may not necessarily be labeled as traditional financial institutions.

What is a Digital Asset Customer (DAC)?

A Digital Asset Customer is an entity that makes use of the services of a DAE. You or anyone else can be a DAC, as you may utilize a financial institution’s services to engage with the cryptocurrency markets.

What Are Some Examples of VASPs?

There are several different types of businesses or platforms that can fit the description of a VASP, or that may take some role in the transaction process. Those can include centralized and decentralized exchanges, mining pools, investment vehicles, and more.

Here are some examples of companies or platforms that fit the description of a VASP:

•   Centralized exchange: These exchanges that act as a third party between crypto buyers and sellers. Examples include Coinbase and Kraken .

•   Decentralized exchange: These exchanges eliminate the need for a third-party middleman to execute trades or transactions. Examples include Uniswap and Venus .

•   Escrow service: There are also a lot of companies that provide escrow services (many exchanges offer the service, too) for digital asset transactions, such as Escaroo or Bitrated .

•   Investment vehicles: Crypto-tied investment vehicles, which may take the form of securities like crypto ETFs, are becoming more common and mainstream. One example: BITO , a Bitcoin-linked ETF that hit stock exchanges in October 2021.

The Takeaway

VASPs are businesses or companies that facilitate the exchange of virtual assets. Virtual assets can include things like cryptocurrency (Bitcoin, for example), non-fungible tokens (NFTs), or utility tokens (like Filecoin).

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PODCAST: Estate-Planning Your Stuff with T. Eric Reich

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Transcript

David Muhlbaum: When it comes to estate planning, money is usually front of mind. Makes sense, that’s where decisions about wills, trusts and more can realize real tax savings. But it’s stuff, tangible things like houses, china and collectibles that often generate drama and conflict. We talk with a financial advisor who’s touched a nerve on this front. Also, meet Generation I. All coming up in this episode of your money’s worth—stick around.

David Muhlbaum: Welcome to Your Money’s Worth, I’m kiplinger.com senior editor David Muhlbaum, joined by my co-host, senior editor Sandy Block. How are you doing Sandy?

Sandy Block: I’m doing good.

David Muhlbaum: Well, good. Short of talking politics, there’s probably no quicker way to generate angry feedback than waging intergenerational battles.

Sandy Block: But you’re going to do it anyway?

David Muhlbaum: Sort of? I say that in part because while the study I’m going to discuss sounded like it was going to be kids versus the olds, it turns out there’s more nuance than that. Anyway, I’m going to talk about Generation I, which isn’t really even a generation but rather a handy little term that the Charles Schwab Investment firm cooked up for new investors. By that they mean people who are new to stock market investing.

Sandy Block: And those folks have been the source of some of the market drama we’ve seen this year like the GameStop bubble we talked about earlier this year.

David Muhlbaum: Yes, yes. There is overlap between the whole meme stocks crowd and Generation I. I stands for investor but since it’s a new term, let’s start with the definition. What Charles Schwab means by Generation Investor, Generation I, is people who started stock market investing in 2020—not before. So it doesn’t matter what your actual age is. There are Generation I members who are Boomers, Gen X, Millennials. Obviously, the group skews younger than investors broadly, but what’s striking is that Generation I, according to Schwab, accounts for 15% of all U.S. stock market investors.

Sandy Block: By population, not by dollars invested.

David Muhlbaum: Yes, by population. They don’t have a figure for a Generation I’s sum assets but I see what you’re getting at. And yes, Gen I earns about $20,000 less in annual income, at $76,000 a year, than those who began investing before 2020. And here’s another interesting number, half of Generation I says they live paycheck to paycheck.

Sandy Block: Okay. That sounds worrisome.

David Muhlbaum: Yeah, but here’s the thing. Some of the so-called Generation I are people who downloaded Robinhood and are watching a handful of stocks for big moves, short term trading. And if they’re doing that while missing payments on their car note, okay, that’s bad. But at least according to the study, they say they’re learning that investing is more about longer-term gains versus shorter-term wins. About learning to do research, diversification, capital market gains, taxes, risk tolerance, all that—the knowledge if you will.

Sandy Block: I’m hearing echoes of what Kyle Woodley was talking about when he joined us for the GameStop discussion about how it’s possible for people who came in for this excitement might be convinced to stay around for the long term, grow your wealth, not double your money, kids.

David Muhlbaum: Yeah, I totally agree. However, the big factor here is that the sum of Generation I’s market experience is this strong bull market. Will they stick around when things go south, which someday, sometime we’ll have a bear market. Markets go up, markets go down.

Sandy Block: That’s right, and I’m constantly reminded what our editor Anne Smith reminds us all the time, is that we’ve been here before, maybe not at these numbers. But in the 90s, when tech stocks were taking off, all kinds of people got in the market for the first time. And while you couldn’t make trades for nothing on an app, it was cheaper to buy and sell stocks than it had been in the past. And a lot of these people piled in because they had heard that tech stocks would never go down and they didn’t think they would ever lose money and they learned the hard way that they could.

David Muhlbaum: When we return for our main segment, we’ll talk with a financial advisor with some insights about the estate planning for stuff. Not just the money, the stuff.

David Muhlbaum: Welcome back to Your Money’s Worth. Joining us today is T. Eric Reich, the president and founder of Reich Asset Management in Southern New Jersey. Eric has a whole slew of professional certification acronyms after his name, including CFP. And the way we found him is that he’s a contributor to Kiplinger’s Wealth Creation Channel. That is an area of our website that has content from a range of financial professionals, CFPs, CPAs, tax lawyers and more. They’re qualified and they’re good writers. Plus, since they’re dealing directly with clients, I’d venture to say that they often have a closer sense of what personal finance guidance people actually need than personal finance writers. So Eric wrote a piece for us called, Time to Face Reality, Your Kids Don’t Want Your Stuff. And well, it was a hit. Welcome, Eric. We will get into what stuff and why, but since we’ve brought up how you professionals get to hear it directly from the clients, why don’t you tell us a little bit about the reaction you’ve been getting? Because, I understand from your assistant that you’ve gotten a lot of feedback.

T. Eric Reich: We have. We got probably a few dozen emails across the country from different readers of Kiplinger’s that saw it and then of course our own clients, of course, were calling us. They were writing or calling and letting us know their thoughts on it. And it’s funny, I wrote it because it’s such a recurring theme with a lot of people. They’re always convinced that people want all of your stuff and they just don’t. So I wanted to touch on why, but I knew it was going to get a strong reaction because I hear the same thing all the time from people. So if I hear locally on the ground, then I’m sure to a bigger audience, we were going to even get more opinion on that.

Sandy Block: Well, Eric, I immediately latched onto your piece because I am in the process of… My father passed away a couple of months ago and I’m in the process of distributing and cleaning out his house and it’s a mammoth job. So many of the things that you talked about really resonated with me. Obviously, we’re going to link to your piece so that people can follow up and read it in its entirety but we’re going to hit on some highlights and my question is, what’s the number one item people planning their estate think their kids want but the kids don’t actually want?

T. Eric Reich: By far the biggest one is the house. And it’s not that the kids don’t want the house, it’s that logistically it just doesn’t work. My example: I have three children, I have a nice house and I have three young kids. Let’s say my kids were in their twenties and something happened to me. My kids might want the house, but how’s that going to work? None of them can afford it because they’re just starting out in their careers. There’s three of them, they’re certainly not going to share it. And then one of them invariably wants to buy it, but they think they’re entitled to a discount because they’re my kid. But then the other two would be offended if they got a discount because they’re my kids, so why should they get shortchanged in favor of another one? So everybody thinks that their kids want the house, but the reality is most often that the biggest misconception is that your kids just really don’t want your house.

Sandy Block: So a follow-up question, Eric, if you aren’t going to leave the kids your house, how should you plan your estate so that doesn’t happen?

T. Eric Reich: So if you’re not going to leave the house to the kids, I mean, you can leave it to them, but you can reference in there, “Hey, these are the parameters in which someone’s going to keep it.” So if you want to keep it, it has to be appraised by two different independent people or three different and you take the average of the three it’s bought at fair market value. You have to specify the rules to which someone can keep it because if not, that’s where all the fights start, is the more ambiguity you leave in it the bigger the fight. So all of those things should be spelled out ahead of time. If you want it to be sold, say you want it to be sold. If somebody wants to keep it, fine, but here are the rules under which someone gets to keep it.

David Muhlbaum: What about setting up a trust? Couldn’t that help establish the rules you’re talking about?

T. Eric Reich: It can, I mean, I think a trust in general can help with a lot of things. Again, this is for an estate planning attorney more but to me, I like using trusts in general. Simply because it’s a way to control things and I hate to use this phrase, control from the grave, but that’s exactly what it is. And sometimes that comes off as sounding like a control freak or overbearing, but sometimes it’s for, honestly, just the protection of the beneficiaries themselves. If one’s a spendthrift, if one’s in a bad marriage, if one has a lot of creditors, you could be doing them a disservice by giving it to them outright instead of via trust.

Sandy Block: So, Eric, isn’t the other advantage of putting your house and other items in a trust that it keeps it out of probate?

T. Eric Reich: It keeps it out of probate and the biggest part of that too, is, that’s public record. I mean, I remember when a client had a family member pass away, they got a phone call a few months later from a guy wanting to buy the antique car that they just inherited. To which their response was, “Wait, who are you again?” Well, here they looked up in public records that one of the assets was this old antique Chevy and the guy wanted to buy it off him. And I always say, you see it in real life, you know,. Princess Diana’s will was published in a magazine. Whereas I always say, “Well, what about, Frank Sinatra?” And they go, “Well, I never heard anything about that.” Exactly, because everything was in a trust. So privacy is a big component of that as well. So avoiding probate and also what goes along with that is the privacy factor.

David Muhlbaum: The main family house is one thing but a vacation house can be even more emotionally loaded, no? I imagine someone working on their will thinking, wouldn’t be great for everyone to get together at the lake house every summer, roast marshmallows and remember grandma and grandpa for having found this place. And actually the kids are like, “Eh, we like going to Europe.”

T. Eric Reich: You’re absolutely right. It’s definitely bigger for the creator of the estate. It’s not that the beneficiaries don’t love the idea of the vacation home and everything else. The problem is, and again, I always go back to my example, I have three kids. Who gets to use it when? It’s only fit to be used in the summer months. I live at the Jersey shore, so, super-popular here June through the end of August. So, who gets to use it during that time period and what weeks and what holidays? And as I get older and my kids get older, their kids get older,

If one family has five kids and the other has one, are they getting more usage out of it? How are the expenses being paid? Is everyone sharing in that equally? So it really starts to create a problem. One of the ways around that maybe is that if that were in a trust, then I could also put money into that trust for the maintenance of the house, to pay the taxes, it’s going to pay everything it needs at least for the next decade. And then after 10 years, you guys have to come up with a solution based on x, y, and z of how we should deal with it going forward.

Sandy Block: Yeah. Eric, my experience with people who have inherited vacation homes, it sounds like a great idea at the time but very often they/ve moved and live many, many miles away. They don’t live near the Jersey Shore, they live in California, so it becomes a huge hassle. And I think that’s something probably you mentioned that people also need to think about, how close are your heirs to the actual vacation home that they could use it.

T. Eric Reich: Yeah, we actually just had a situation not too long ago. We had someone who owned a house on the beach, a very valuable house. They were kind of house poor; they had a phenomenal house, but not tons of money other than that. But the client really wanted to preserve that asset for a grandchild, the only grandchild, who lived hours and hours away. And I actually suggested, we call the grandchild and ask point blank, “Do you want this house?” The client was floored, like, “Well, of course they want the house, who doesn’t want a house on the beach in Ocean City in New Jersey.” Well, we called and it turned out the kid said, “That’s wonderful but I’m in my 20s, I work 80 hours a week. It’s three and a half hours away. I will absolutely never use that house. I’d much rather you sold it and got to use the money and enjoyed it. And if there’s something left over, wonderful, leave it to me but otherwise, I really don’t care.”

David Muhlbaum: Well, sounds like conversations really come down to the core of doing estate planning, especially around stuff. But those could be pretty fraught conversations. It sounds like this one went okay, but I assume they don’t always.

T. Eric Reich: Well, yeah, that’s true. I mean, the reason we had to make that phone call was because they were adamant that, of course, they would want this. Who wouldn’t want it? And the reality is there’s a lot of people that wouldn’t want it. The beauty of that is in the eye of the beholder, not so much somebody on the other end, but these are real world scenarios that people have to deal with. And of course the house being the biggest, but it’s not always just the house.

Sandy Block: Now that leads me to my next question, Eric, because you also talk in the slideshow about your stuff, your collectibles. They may have great sentimental value to you but maybe not to your children. Should you start getting rid of them while you’re still around?

T. Eric Reich: We do suggest that sometimes or at least explore it. Or, if not, educate the children on the value of it. A lot of times what we’ll see is someone has a collection of stuff, whatever it might be, the owner, of course, knows how valuable it is. They’ve been collecting it for 20, 30, 40 years, but an heir doesn’t necessarily have an idea of what that would be worth. And we ran into a scenario like that: We had someone that was going to basically just sell a bunch of stuff. And I think it was for like $1,000. And then we actually brought a specialist in to review it and turns out it was worth $45 to $50,000. So this poor guy was going to get ripped off because he didn’t understand the value of what it was, and that’s not uncommon at all.

Sandy Block: That’s my Antiques Road Show nightmare, Eric, is that I will give something to Goodwill and be watching Antiques Road Show and it’ll show up being worth $50,000 and I’ll realize that I gave it away. So I think you’re suggesting that you get that stuff valued and appraised while you’re still around to help your kids is a really good one.

T. Eric Reich: If you’re not a collector, you don’t know. Either sell it and let it go ahead of time, or at least communicate that value—and an actual value, because sometimes we also think collectibles are worth a lot more than they really are. We think it’s worth $50,000 and it’s worth $1, that’s more often the case. But nonetheless, an appraisal from an independent person will help.

David Muhlbaum: I’m glad you brought up the point about actual valuation, because my cats eat from some pretty fancy china bowls that someone thought had a lot more value than they did. And I think that sometimes these items that people have had for a long time or inherited from their predecessors, they really don’t fetch that much today.

T. Eric Reich: No, because unfortunately some of the things and it’s just a generational thing and I use china, actually as the example a lot of times. Because 50 years ago, 75 years ago, china was prized. I mean, for everybody, fine china was a real hallmark of things. Today, I probably have six or seven sets of fine china. Some of them apparently, extremely old, from great-great-great-grandmothers. But the reality is the generation today doesn’t use it at all. If they do, they can’t use five, six, seven sets of it. But the reality is that value from a long time ago doesn’t necessarily translate today for those reasons. So a lot of times things you think are very valuable maybe aren’t.

Sandy Block: Yeah. David Muhlbaum: and I have discussed this, and both of us are awash in china. And, I also have at least two sets of silver that again have been handed down from generations. As you said, young people—and this goes for even furniture—young people just don’t use that stuff. So I guess, the best thing you can do is either get rid of it or have some instructions for what you’d like to have done with it.

T. Eric Reich: Yeah. And valuation is key for that as long as you have a good value placed on it and you have a sense of what it might be worth? My wife’s family, they have a much, much larger family than I do. They’ll go to everybody in the family, two and three removed and say, “Hey, does anybody want this piece?” Because it is a family piece. But if not, then what do they ultimately do with it? It sounds sad to have to part with it, if really nobody wants it, and you know you mentioned yourself and you’re going through it personally, it’s only adding to the problem, we’ll call it, of settling an estate. And the less planning involved, the bigger the problem becomes.

David Muhlbaum: I imagine that in your line of work, Eric, you refer people out for valuations pretty often. How can our listeners get good qualified valuations for their stuff?

T. Eric Reich: So there are evaluation organizations. So you basically would want to find certified valuation type of people for that.

David Muhlbaum: Do they have acronyms like CFP?

T. Eric Reich: They probably do. I think I’ve seen one or two out there, definitely not an expert on it, but it is funny because from the article, I did have two different companies reach out to me and say, “Hey, this is what we do for a living. Feel free to pass our information along.” So these companies are out there, they do understand what things are worth. I got lucky in the one example of the $1000 offer for $50,000 worth of stuff. I happened to know a person who had some expertise in that area. But we frequently do refer out to an appraiser, to an estate-planning attorney, to a CPA. And all of them can have pretty good contacts in that world as well.

Sandy Block: Eric, this wasn’t in your slideshow, but you mentioned cars. Do you want to talk about cars?

T. Eric Reich: Cars are a big issue for a lot of people. My example: I have an old classic Corvette. I have a 1963 split-window coupe. So among the rarest of the rare. I have one of them and I have three kids. They all are convinced they’re getting the, “Vette.” Or the yellow car, as I like to call it, when I’m gone someday. Well, they can’t all get it. They also probably have no idea what it’s really worth. So for that reason just like the house or anything else, get a valuation. Get an appraisal of what is this thing really worth. And then again, if somebody wants to buy it at fair market value, that’s fine.

T. Eric Reich: But if not, it has to be sold. So otherwise it’s going to be unfair. Now, you can swap assets. You might say, if that car was worth $150,000, okay, well then if you’re getting that, then you have to give up a $100,000 of something else. And so that 50 and 50 go to the other two siblings. That’s fine you’re welcome to do that but my trust would stipulate that. Would lay out the terms at which someone could buy something.

David Muhlbaum: Could people set up a corporation to manage it for them?

T. Eric Reich: They could, that’s more of an estate lawyer question from that perspective. But you could, or you could probably do it all through a trust. It might just be too onerous to set up a corporation for that purpose. The logistics and maintenance of it might be a little too much.

David Muhlbaum: One interesting word you used in your article, Eric is “fun.” It’s a little surprising. Where’s the fun?

T. Eric Reich: Well, that’s just it, estate planning is never fun. Settling an estate is flat-out awful but the estate planning process and planning for your demise is never something that’s fun. But If you don’t deal with it, it is going to be a nightmare for the people behind you. So, why not deal with it today, when you’re of sound mind and body, as the phrase goes, to make those decisions. And again, try to make it fun, try to involve the kids from day one. It’s not like they’re fighting over your stuff. If everything’s out in the open and it’s shared freely, you really can have fun with… You know, I have one kid who’s clearly closest to my old Corvette than the other two.

T. Eric Reich: So the other two say, “We want it.” But as soon as they leave the room, he says, “Well, of course you know I’m getting it.” You can joke around with it that way but sometimes in those conversations, you will find that there are things of greater value to different family members. And it doesn’t have to be monetary value, they just really want something special to them. And if that’s what they really want, then maybe they get that and somebody else gets the car or the whatever, to be even.

David Muhlbaum: I see an opportunity for the younger generations to help here. As documentarians of a sort. They can take pictures, record, video, ask questions, discuss the things. What are the stories associated with the thing? And then you can decide, okay, we have a record of everything, now, these we’re going to keep and these we’re going to want to let go.

T. Eric Reich: That’s a really good point. I mean, recording it that way. Someone had reached out to me after reading the article and said, what they did, was they took pictures and many, many pictures of all the different things that they had collection wise. Wrote about them and then sold them. So they still have the pictures, they still have the story, they still have the context and everything else. They just don’t have the asset by itself, but they still have all the memories of it. They have the pictures, they have everything. So you did keep that meaning alive behind it, without actually worrying about who’s going to maintain this asset.

Sandy Block: Eric, it sounds like bottom-line here, a lot of people might be very conscientious about having their beneficiary designations correct for all of their finances, but they really don’t think about the solid items that they’re going to leave behind. And I suspect this often comes with people—and this is the case in my situation—people who have been in the same home for many years. If you move into a retirement community, you are forced to downsize but a lot of people die in the homes that they lived in. And I can tell you from personal experience, that clean-out can be a real job, especially if you don’t know what was the intention for some of these things.

T. Eric Reich: Yeah, it’s really the case. You live in the same house, 40, 50, 60 years, you accumulate a lot of stuff. Some of that stuff probably is fairly valuable. And really it is key because, the longer you’ve been in that house, your reference point is also of that house, and you have special memories of things in that house, because you’ve been going even yourself to that same place all that time. And that’s where a lot of that interest from heirs comes in, is there is a special piece or a special thing that reminds me of mom and dad or grandparents or whoever. And that sentimental value to that item is worth more than the financial value, and that’s why that honest, open communication is really key. Have this conversation while you’re alive and you’re healthy. When you’re in more advanced decline is where we see problems come in—or I promised that Corvette to all three kids at some point, because I forgot I promised it to the other two.

T. Eric Reich: Because I might be starting to slip a little bit or I’ve let things go or I let people take things out of the house over the years, things like that. So it really is important to not just focus on the, “yes, I’ve done estate planning, I set up a will or I set up a power of attorney.” That’s the bare minimum but even just writing out things like an ethical will, here’s the things I want to happen. This is what I want to see you do with stuff. Or here’s what I would love to see happen to the car, if you can’t, fine, then do this. A lot of times heirs will try to honor those wishes, if you really put it down in paper. It’s not something that would necessarily be part of a will. That’s more just the direct transfer of the property but more what I would like to see happen with something.

David Muhlbaum: Write it down on paper, tell people what you want to happen, have honest open conversation, always good advice. And I think we’ve had a good conversation here today ourselves. Thank you so much for joining us, Eric. We’re going to link up to your piece for people who want to dig a little bit deeper into what to do and not to do with your stuff. Thanks again.

T. Eric Reich: Thanks so much for having me.

David Muhlbaum: And that will just about do it for this episode of Your Money’s Worth. If you like what you heard, please sign up for more at Apple Podcasts or wherever you get your content. When you do, please give us a rating and a review. If you’ve already subscribed, thanks. Please, go back and add a rating or a review if you haven’t already, it matters. To see the links we’ve mentioned in our show, along with other great Kiplinger content on the topics we’ve discussed, go to kiplinger.com/podcast. The episodes, transcripts and links are all in there by date. And if you’re still here, because you wanted to give us a piece of your mind, you can stay connected with us on Twitter, Facebook, Instagram or by emailing us directly at [email protected] Thanks for listening.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS

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Source: kiplinger.com

There’s no 2-minute warning for rate shocks, even with Fed at the zero bound

The mortgage industry is notorious for its use of acronyms and even acronyms inside acronyms (TRID, anyone?). However, there is an acronym that is highly relevant to the current rate environment: ZIRP, which stands for “Zero Interest Rate Policy.” As its definition implies, this term describes the Federal Reserve’ s current policy of holding the Fed funds rate at near 0% for the foreseeable future due to the economic challenges presented by the COVID-19 pandemic.

It may be easy for some to assume a locked-down Fed Funds rate means mortgage rates will remain at the historically ultra-low levels the industry has seen throughout the pandemic. Not only does history tells us this is not the case, but the recent uptick in interest rates due to the rise in the Treasury yield and increased economic spending provides even more current proof that rate swings are possible, if not inevitable during ZIRP. As such, lenders and their capital markets executives must be prepared for interest rate swings in either direction despite the current ZIRP.

The last time the Fed instituted ZIRP was following the Global Financial Crisis, which lasted for a span of seven years, from December 2008 to December 2015. In December 2008, the average note rate for 30-year mortgages was 5.14%, when ZIRP ended in December 2015 the par note rate was 3.31%. However, that lengthy seven-year span was not a gentle expressway ramp; it was riddled with both bull and bear markets for mortgage rates despite the continued Fed pledge of “lower for longer.” Despite a Federal Open Markets Committee (FOMC) target on short-term rates of 0.00% – 0.25%, mortgage rates experienced several violent swings.

During what was known as the taper tantrum (remember hearing that talk again earlier this month?), the market was afraid the Fed was going to taper off its purchases of Treasuries and mortgage-backed securities so mortgage rates went up over 100 basis points over 3 short months. During another span of only 9 weeks prices on the lowest-coupon mortgage-backed security declined by a whopping 800 basis points, from 101 all the way down to a 93 handle. All of this activity occurred more than two years before the Fed actually instituted the very tiniest bit of liftoff in their Fed funds rate policy.

Looking at the current environment, the Fed has indicated that it will not raise the Fed funds rate until at least 2023. However, as the industry has observed before, this does not mean that mortgage rates are going to languish around the same range they’ve been in for the last 10 months. In fact, it would not be unusual to see changes of even an entire whole percentage point up, or down, for however long this current ZIRP is in place. In fact, Fannie Mae and Freddie Mac have both forecasted moderate increases in interest rates in 2021 in anticipation of this inevitability, though rates could certainly head in the opposite direction given the right market conditions.

In these past few months, I’ve heard people say things like “The market’s not going anywhere for a few years. The Fed said so, and it’s already priced in, right?” While that may be the case for the Interest on Excess Reserves and Fed Funds, which the Fed has pegged at near zero, there will not be an alarm that goes off letting lenders know to lock the doors. Just because the Fed is staying put doesn’t mean that mortgage rates, and prices of MBS, are staying put as well. As history has shown us, shocks can — and do — come when markets least expect them.

Source: nationalmortgagenews.com

APR vs. APY – Difference Between Annual Percentage Yield & Rate

What is the difference between APR and APY? Advertisements and contracts will rattle off one of the two, among a number of other acronyms, leading many to misunderstand or simply gloss right over them. The difference between APR and APY is one of the basic considerations that you need to know for handling your own finances.

Both APR and APY are pieces of information that help you understand an interest rate. APR is used primarily as a borrower’s side to understand the real cost of a debt, while APY is used on the investor side to view the yield of an investment.

Annual Percentage Rate (APR): Interest Rate & Charges

Annual percentage rates (APRs) help you understand a loan’s interest rate charge combined with all other expenses that may be part of your loan. It is a measure of the costs of your loan. APR is communicated as an annual percentage of the loan’s principal, or as a percentage of how much you borrowed.

APR is calculated as the loan’s fees and interest divided by the principal, then divided by the number of days in the loan term. Finally, this number is multiplied by 365 and then multiplied by 100 to give you the final annualized rate expressed as a percentage.

For example, if you have a loan with an APR of 10% and a principal of $1000, you’ll pay $100 in interest per year. If you pay $200 per year in payments, you’ll then only be paying $100 toward the principal while the other $100 is paying for the interest.

APR has a serious limitation in that it does not show the effect of compounding. If you try to use the APR to calculate how to pay off your credit card debts, your calculations will likely be off because the high interest rates will quickly grow the principal while you’re trying to pay it down. APR does, however, give you a realistic way to compare the costs or rates offered by various lenders.

Annual Percentage Yield (APY): Compounding Yields

By contrast, annual percentage yields (APYs) show the actual yield of an investment. The mathematical formula behind APY has compounding interest built into it. Compounding interest computes interest on the outstanding principal and on any interest not paid in the previous compounding period, generating “interest on interest.”

The formula for calculating APY is 1 plus the annual interest rate divided by the number of times that it is compounded per year. Then this total is raised to the power of the number of compounding periods per year — for example, if there are 12 compounding periods, raise the figure to the 12th power. Finally, subtract 1 from the result to get the yield expressed as an annual percentage.

If you use the APR and APY formulae on the same instance, they will give you slightly different rates unless the interest rates are compounded annually for the first year. If it is compounded over multiple years, APY will end up being larger than APR. In turn, the more frequently the interest is compounded, the more the APY rate will grow relative to the APR.

This is because the APR is, functionally, showing you the periodic rate, which may or may not be the same as the annual interest rate. The periodic rate is the annual rate of interest divided by the number of periods. So if your annual interest rate is 12%, the monthly interest rate is 1%. Whether that 1% interest each month is compounding upon itself throughout the year — or not — changes the effective annual rate shown by the APY formula.

In general, many financial products are better understood over a long term using the effective APY rather than the APR. This is especially important when borrowing money because APR and APY can result in very different effective rates, which can obscure what you’re actually paying in interest.

The Big Picture of APR and APY

APR and APY each have their uses. APR gives you a good idea what your monthly payments will be, helping you to understand what the impact of a loan will be on your cash flow. APY, by contrast, helps you understand the longer-term yields on your investments or total costs of your debts, better allowing you to understand these things at a strategic level.

Broadly speaking, APR works well as a tactical view, while APY gives you that higher-level view.

What to Watch For

Comparing APY with APR will leave you with a false comparison. When shopping for the best rates, make sure to compare apples to apples.

Financial institutions — whether they are local credit unions or companies selling complex financial products — tend to include these two rates along with other terms like “current rates” and “effective rates” to make comparing unlike products more difficult. This is a common sales tactic aimed at hindering your understanding of how quickly interest accrues in your favour or how fast debt or costs will compound against you.

Banks and credit card companies often use APR to advertise debt and loan options in order to obfuscate the realities of compounding interest rates on your balance. By contrast, nearly every savings or investment option will advertise its APY to reinforce the importance of the interest or returns compounding for you.

Final Word

APR and APY are both effective ways of portraying interest rates and can be effective tools in understanding the financial products you use. Be aware that those who are seeking to sell you something may try to use one or the other of these figures to give you a good story, and not necessarily paint the most accurate picture of how your costs or interest will grow over the long term.

Like everything else in life, these are tools that can be used effectively if you use them intelligently.

Source: moneycrashers.com

How to Make a Career Change After Years at the Same Job

Editor’s note: This story was originally published in December 2018.

After 10 years in human resources at a nonprofit, Laura Niebauer Palmer figured she wouldn’t have any problem finding a new HR job when she and her husband moved from Chicago to Austin, Texas.

Then she started reading the job postings — which asked for advanced training and experience with programs she didn’t use — and realized her old skills weren’t marketable for a new position.

“My heart sank,” Palmer said. “I was like, “What am I going to do? How am I going to bridge this gap?’”

So how is it that 10 years of experience could become a detriment rather than a strength for a job candidate?

Many longtime workers are falling behind on the skills required in rapidly changing industries, according to Alvin Nesbot, the New York City market manager for Manpower.

“People who are just joining the job market — maybe within the past three to five years or so — are making moves a lot faster than people who have been working for 10-plus years,” Nesbot said. “There are those people who have worked a lot longer who have stayed in a lull and gotten stagnant.”

And it’s not just another co-worker who’ll offer the skills you’re lacking — at least, not a human one. It’s estimated that half of the work activities companies pay people to do could be automated by 2055, according to a study by the McKinsey Global Institute.

Read on for strategies for making a change after years in the same role.

How to Make a Career Change

If you’re a bit unsure about what’s happening outside your cubicle walls, here are five strategies for avoiding — or escaping — a dead-end job.

1. Network for a Job

Leaving your comfort zone to network may seem intimidating, but it’s a great way to find out what is going on in your industry. It’s part of the reason it’s so important to maintain networking relationships even after you have found a job.

Being around your peers is not only helpful for finding contacts for the next job but also for discovering what credentials and terminology are becoming more prominent within your field.

Pro Tip

If in-person networking isn’t an option, consider setting up or attending Zoom events — just remember to keep your camera turned on and stay engaged in the conversation.

“You have like-minded people to bounce ideas off,” Palmer said. “Also, it’s very eye-opening when you’re around a bunch of people and they’re having conversations about topics you don’t really know about or are using acronyms that you’re like, ‘Wait, what does that mean?’”

And if the thought of a networking event makes you break out in hives, try one-on-one networking with former colleagues, Palmer suggested.

“What I would have done differently is definitely caught up with people who had left the company,” she said. She added that by asking about the transition to new roles, you’ll get a better idea of what technology and skills are in demand outside your office.

2. Update Your Resume

If your resume touts WordPerfect expertise and includes your AOL address, it’s probably time for a resume makeover. (Also, stop wearing that sundress over a T-shirt.)

Reading your resume with a critical eye is essential for identifying skills or programs that are no longer relevant for your position, according to Nesbot.

“What you were doing seven to 10 years ago is not going to be relevant or as important as what is going on today,” Nesbot said. “Are there things making [your resume] look dated?”

Starting over doesn’t mean you have to forget your past experiences. Instead, take some time to compile a comprehensive list of training and accomplishments, Nesbot suggested.

“Sometimes we don’t look at our resumes in a while, and we realize there are things we’ve been doing that we haven’t highlighted,” Nesbot said. “Include any certifications or training that you’ve done to help set you apart from any other candidate.”

Once you have your list, compare it to current job postings and craft your resume so it includes recent credentials and popular terms within your industry.

“Make sure you have buzz words that are going to stand out to whoever is reading your resume,” Nesbot said.

3. Find a Mentor

Once she got to Austin, Palmer ended up at a staffing agency looking for work. The agency placed her in a temporary three-month position to fill in for a woman on maternity leave.

Palmer used those months to take advantage of the in-house training department to connect with someone who could provide long-term career advice.

“The biggest part that helped me develop was the mentorship that I had with my boss,” she said. “I learned so much from her; my confidence rose 100%.

“You can’t replicate that with a course.”

At the end of her temporary gig, the company offered Palmer a full-time position in the HR department.

4. Volunteer for Experience

Rather than repeating past mistakes, Palmer said, she took the opportunity at her new job to question what she really wanted in the next five or 10 years — and it turns out, it wasn’t HR.

After spending some time figuring out what she really wanted to do, Palmer decided  to work for free in exchange for the experience she was lacking rather than pour money into additional education.

“I volunteered at two organizations, and one of them specifically was something that I wouldn’t have been able to land a job at because I had no experience,” Palmer said.

Because she was volunteering her time, Palmer said the organization was more willing to invest in training her for the position.

Thanks to that experience, Palmer was able to snag a part-time job at a small company. That allowed her to spend time with her young son and to write articles sharing her expertise — including some for The Penny Hoarder.

5. Apply for Jobs Before You Need One

Even if you’re happy in your job right now, it doesn’t hurt to start investigating what’s out there.

After all, the best way to discover if you’re growing or stagnating in your career is to find out if someone will hire you — and there’s always a chance you’ll find your dream job in the process, Palmer said.

Pro Tip

You can pursue professional development on your own if you’re seeking a new career. Here are five online certifications that can help you sharpen those all-so-important soft skills.

“Look at the jobs right now and actually apply to them and go through interviewing,” Palmer said. “I don’t think there’s anything wrong with that to see where your skills are — if they’re lining up with what is currently needed in the market.

“But you also might land a job that you didn’t even know you wanted.”

Why You’re Not Job Hunting — But Should Be

Reevaluating your skills every few years takes some work, but the rewards are a more fulfilling career with greater chances for growth. Admittedly, that can be hard to do when you’re happy — or at least satisfied — with your current position.

Your salary and benefits might tempt you to stay put, but you’ll suffer in the long run if you’re too scared to change, according to Palmer. Part of the reason she stayed at her first job for so long was the generous paid time off and health care coverage.

“It’s hard because you’re trying to balance furthering yourself but also realizing if you further yourself, you’re taking a risk,” Palmer said. “ But if you’re looking to grow in your career… you need to challenge yourself.”

Tiffany Wendeln Connors is a staff writer/editor with The Penny Hoarder. She likes all kinds of change, but pennies are her favorite.



Source: thepennyhoarder.com