There are many options to choose from when you are planning your retirement. It is important to have a retirement plan so that you don’t have to liquidate your assets when you retire.
An annuity is one of the most common options that many people prefer when it comes to planning their retirement. In this post, we will understand what is an annuity in detail.
The concept of an annuity is very simple.
It is a contract between you and your insurance company where you give your money now in a lump sum or periodically and the insurance company will create an income stream for you after a specific period based on the option that you choose for withdrawal.
The annuity interest is deferred until the company starts paying you through the income stream.
There are 3 types of annuities fixed, variable, or indexed.
A fixed annuity has the lowest risk factor. The insurance company will guarantee a minimum interest rate to the customer. This interest amount would be credited to the customer during the accumulation period.
Variable annuities invest the money that you have paid into policy and credit gains or losses to the account.
The owner has the option to choose where the money is invested just like a 401 k plan. In a variable annuity, the consumer does not get any guarantee for the growth of money in the annuity account hence carries the highest risk.
In an Indexed Annuity, the interest rate that is provided by the insurer is linked to the market index.
This is an alternative to the fixed annuities for the customers who are looking for a higher accumulation rate, and also want to avoid risk linked with variable annuities.
Every annuity program has two stages accumulation and annuitization. The terms of these stages differ depending on the type of annuity you chose.
The accumulation stage is when you are paying the money to the insurance company through premiums or lump sums.
There are three types of accumulation, fixed premium, fixed premium, or single premium. In a level premium annuity, the payments are made by the customer in regular intervals selected by the customer like monthly, quarterly, semi-annually, or annually.
If the customer fails to make the payment according to the fixed schedule, the contract will lapse.
The most popular type of annuity is the flexible premium annuity. In this type of annuity, the customer can make the payment according to their choice whenever it is possible. Most insurance companies impose minimum or sometimes maximum contribution levels per payment.
The annuity benefit is only calculated once all the premiums are paid in full because the premiums are not fixed and it would be difficult for the insurance company to anticipate the time of annuitization.
In the single premium annuity, the entire accumulation is made by the annuitant in one lump sum payment. Because of the high money requirement, less number of people opt for this type of annuity.
When it comes to Annuitization there are two types, deferred and immediate. In the deferred annuitization, the customer has an option to select the date of maturity.
If the customer wants he/she can change the maturity date if needed. Immediate annuitization on the other hand is designed to make large sums of money, and generate an income source from the time the fund is created till the time it runs out.
Immediate annuitization happens only in the case of single premium accumulation with no opting to make an additional contribution.
Once the accumulation is complete, the annuitants select the payment seclude according to their requirements, and the payments will start once the first payment cycle is completed.
For example, if the customer selected an option to receive the annuitization monthly, they will receive their first income stream through a check after thirty days of opening the fund.
An annuity could be a great tool for planning your retirement. Considering the risks and benefits that suit the retirement strategy you can choose the best annuity program that could help you to stay afloat after your retirement.
Speak to your trusted insurance agent to check which program would be best for you in your situation.
A mortgage refinancing option, where, an old mortgage is replaced by a new one with a larger amount than owed on the previous loan is called a cash out refinance. This mortgage helps borrowers use their home mortgage to get some cash.
In the real estate market, refinancing is a popular process for replacing an existing mortgage with a new one that provides a more favorable term to the borrower.
You may be able to reduce your monthly mortgage payments, negotiate a lower interest rate, renegotiate the number of years, modify periodic terms, remove or add borrowers from the loan obligation, and potentially access cash when you refinance a mortgage.
To reduce one of your largest monthly expenses refinancing your mortgage is an ideal way.
When lending rates are falling toward new lows the investors who are watching the credit market will jump at the chance to refinance.
Mortgage contracts will have terms stating when and if a mortgage borrower can refinance their mortgage loan. There can be different types of options for refinancing.
Most of the refinance will come with several added costs and fees that make the timing of a mortgage loan refinancing as important as the decision to refinance.
The cash-out refinance is one of the best options for borrowers. all of the benefits that the borrower is looking for from a standard refinancing like a lower rate and potentially other beneficial modifications are all given by cash-out refinance.
With this refinance, borrowers also get cash paid out to them which can be used to pay down other high rate debt or fund a large purchase.
When rates are low, or in times of crisis, like the COVID-19 situation, when lower payments and some extra cash can be very helpful, this can be particularly beneficial.
The borrower finds a lender to work with. The lender assesses the previous loan terms, the balance needed to pay off from the previous loan, and the borrower’s credit profile.
Based on an underwriting analysis the lender makes an offer. Then the borrower gets a new loan that pays off his previous one and locks him into a new monthly installment plan for the future, this is how a cash-out refinance works.
With other standard refinance, the borrower would just get a decrease to their monthly payments but never see any cash in hand.
A cash-out refinance can possibly go as high as close to 125% of the loan to value. This means the refinance pays off what they owed earlier and then the borrower could be eligible for up to 125% of their home’s value.
The amount above and beyond the mortgage payoff is paid in cash like a personal loan.
As we know borrowers have many options when it comes to refinancing. The most basic mortgage loan refinance is the rate and term or the no cash-out refinancing.
Where you are attempting to get a lower interest rate or adjust the term of your loan, but no other change in your mortgage.
For instance, if your property was bought years ago when the rates were high, you might refinance in order to take advantage of lower interest rates that now exist.
The variables too may have changed, so now allowing you to handle a 15-year mortgage and saving hugely on interest payments.
With a rate-and-term refinance, you could lower your rate, and or adjust to a 15-year payout, but nothing else changes.
With Cash-out refinancing, you are allowed to use your home as collateral for a new loan and pocket some cash, creating a new mortgage for a larger amount than the existing one.
You receive the difference between the two loans in tax-free cash because the money is not counted as income by the government it is more like a mortgage-personal loan hybrid.
It is possible because you only owe the lending institution what is left on the original mortgage amount.
Any extraneous loan amount from the refinanced, cash-out mortgage is paid to you in cash at the time of closing that generally takes 45 to 60 days from the time you apply.
Compared to rate-and-term, cash-out loans usually come with higher interest rates and other costs like points.
Cash-out loans are more complicated than a rate-and-term and usually have higher underwriting standards.
A high credit score and lower relative LTV ratio can reduce some concerns and help you get a more favorable deal.
With a cash-out refinance, you pay off your current mortgage and enter into a new mortgage.
While with a home equity loan, you are taking out a second mortgage in addition to the original one, meaning that you now have two liens on your property, meaning two separate creditors each with a possible claim on your home.
A home equity loan closing costs are generally less than those for a cash-out refinance.
If you need a substantial sum for a particular purpose, home equity credit can be an ideal choice.
However, if you can get a lower interest rate with cash-out refinancing, and plan to stay in the home for a long time then the refinance probably makes more sense.
In both cases, make sure you do not default on the repayment, otherwise, you could end up losing your home which is collateral.
In a cash-out refinance, a new mortgage is taken with more funds than your previous mortgage balance, and this difference is paid to you in cash.
On a cash-out refinance mortgage, compared to a rate-and-term refinance, in which a mortgage amount stays the same you tend to pay a higher interest rate or more points.
Depending on bank standards, your LTV ratio, and your credit score a lender will determine how much cash you can receive with cash-out refinancing.
A mortgage that is subordinate to a first or prior (senior) mortgage is called a junior mortgage.
A junior mortgage is also called a second mortgage but it could also be a third or fourth mortgage like a home equity loan or lines of credit. The initial or primary mortgage will be paid down first in the case of a foreclosure.
A home loan made in addition to the home’s primary mortgage is a junior mortgage.
A junior mortgage often comes with a higher interest rate and lower loan amount. There are also limitations and additional restrictions when you opt for this mortgage.
A junior may be caught to finance large purchases like home remodeling, college fees, or but a new vehicle.
A subordinate mortgage made while an original mortgage is still effective is called a junior mortgage.
If for some reason you default all the proceeds from the liquidation of the property will be used to pay off the first or primary mortgage. Only when the first mortgage has been paid off the junior mortgages would receive repayments.
Piggyback mortgages and home equity loans are the common uses of junior mortgages.
A piggyback mortgage helps borrowers who have less than a 20% down payment so that they can avoid costly private mortgage insurance. And a home equity loan is used to use the equity of a home to pay other debts.
A junior mortgage might not be permitted by the holder of the initial mortgage without the borrower meeting certain terms and requirements before doing so.
For example, a rule stating that before a junior mortgage can be taken out a certain amount of the senior mortgage needs to be paid off.
There might also be restrictions by the lender on the number of junior mortgages the borrower can take.
Junior mortgages often portray an increased risk of default hence compared to senior mortgages the lenders charge higher interest rates for a junior mortgage.
A junior-lien is taking a loan using your house as collateral even while you have another loan secured by your house.
It means that if you can no longer pay your mortgages for whatever reason and your home is sold to pay off the debts, this loan is paid off second.
Since a junior mortgage is recorded after the primary loan it is considered inferior to the primary loan or the first loan.
We now know that when a homeowner takes a second or third mortgage on his home then it is considered junior in priority to the first mortgage. Now since the mortgage is secured by your home as the collateral it is called a secured debt.
Lien stripping is when the lien is removed from your junior mortgage and leaving only the debt owed the stripped mortgage lien is then reclassified as unsecured debt for the purpose of bankruptcy and gets included in the Chapter 13 bankruptcy.
So depending on your income and assess the unsecured debt may not be paid at all or in parts through the Chapter 13 plan.
Once you complete the Chapter 13 repayment plan then you will receive a discharge of any remaining amount owed on your unsecured debt.
Borrowers might seek junior mortgages are sought by borrowers to pay off credit card debt or to cover the purchase of a car.
When obtaining a mortgage, the borrower promises to pay back a loan plus interest over a period of time, and it is possible that the borrower will be unable to repay their mounting obligations because of the new debt with a junior mortgage.
Because the home serves as collateral, even if the borrower pays off senior mortgages, they could face foreclosure on junior mortgages that lapse into default.