Sheltering your home from financial storms
Yes, Wall Street is unpredictable. But now's the time, experts say, to take a deep breath and review the nuts and bolts of your finances to help protect your greatest asset - your home. Here are seven ways.
1. Maintain your home
"Even if you don't want to move right now, you should always try to protect your home by maintaining or appreciating its value," says Chari Biton, a sales associate at Coldwell Banker Residential Brokerage's Great Neck office. Biton suggests staying on top of essential repairs, such as roof and gutter maintenance, to avoid costly fixes from leaks, and cleaning and upgrading heat and air-conditioning units.
According to Realtor Magazine's 2007 "Cost Versus Value Report," the home-improvement that showed the greatest return at resale is a minor kitchen remodel. Other high-value projects include: siding, a wood deck, and windows - reflecting the importance of curb appeal - and insulation. If you keep up your home, you'll be more likely to be rewarded when you want or need to sell, even in a pinch.
2. Get mortgage help
Ask your bank about a loan modification if you're having difficulty making your mortgage payments. "Contact your lender immediately to pursue options before you fall further behind," says Michael Fusco, a spokesman for Chase Bank.
To be considered for a loan modification, Chase asks borrowers to provide up-to-date information, including their two most recent bank statements, two most recent pay stubs, most recent federal income tax return, and a hardship letter.
3. Pay attention to the deed
"If you are in a position to buy a home during this difficult financial time," says Douglas Spector, attorney and partner at Rothkrug Rothkrug & Spector in Great Neck, "discuss with your lawyer about whose name to put the deed under." First, Spector advises business owners to form an entity such as a corporation or a limited liability company (LLC), as opposed to owning the business directly in their name. This protects owners from personal liability.
That means judgment creditors of the business can only come after the assets of your business, and not your personal assets - such as your home. "It may also be wise to put your deed under the name of the spouse who is not the owner of the business to further protect your home," says Spector. "And, if you've owned your home for a long time," advises Spector, "it would be a smart time to revisit your deed and reconsider whose name it's under."
Why? Over time people's homes tend to appreciate in value, and similarly over time businesses grow and change. While your potential personal liability may have been minimal when you bought your home, your exposure may increase dramatically over time. Another way to protect your home against future judgments is to ask your lawyer about establishing an irrevocable trust - that means it can't be amended, revoked or changed, regardless of any lawsuits that may be brought against you.
4. Get life insurance
If the main breadwinner in your family suddenly died, would you want to have the choice to stay in your current home? "I'm a strong advocate for taking out life insurance based on the same formula that the courts would use in a wrongful-death suit," says Allan Mendels, a chartered insurance underwriter and financial consultant of Mendels & Associates in Roslyn. "It's called human life value - and estimates your future earning potential based on your age."
For example, if you are under 40, you would take out a life insurance policy 20 times your current earnings; age 40-50: 15 times your current earnings; and age 50-60: 10 times your current earnings. And if you are over 60, it would be one to two times your current net worth. "That might sound like a lot," says Mendels, "but if you want to stay in your home and still send your kids to college, it's right on target." Mendels suggests asking your insurance agent to discuss the pros and cons of term life versus permanent life insurance.
5. Disability and foreclosure
Did you know that disability causes nearly 50 percent of all mortgage foreclosures? "Unfortunately a lot of people don't think about disability insurance, which can protect your family and your home in the event of a medical illness or accident to the main breadwinner," says Mendels.
Consider a policy that pays even if you return to work but lose income because you can't work to full capacity. "Disability insurance is especially relevant to people who are self-employed, in sales, or professionals who could do some but not all their duties after an illness or accident," he adds. The younger you are when you apply for life or disability insurance, the cheaper it usually is.
6. Personal guarantees can spell trouble
If you are creditworthy enough to get a business line of credit from a bank, make sure you don't take more than you can handle, warns Spector. "Most of the time, a personal guarantee will have to be signed - which means that your house will be up for grabs if you default on your business loan and you hold title to your home," he explains.
And many people don't realize that personal or business lines of credit don't have to be renewed at the expiration of their term, or may under certain circumstances suddenly be frozen by a bank. That means you would have to repay the used amount, and no longer have access to more credit. So, don't use more than you can realistically afford to pay back - otherwise, you could lose your business and/or your home.
7. Keep a cash reserve
To keep paying your monthly mortgage in the event of an emergency, Stuart Pastrich, certified financial planner and managing director of the Compass Financial Group in Plainview, advises families to have a cash cushion of at least three to six months of monthly expenses - in CDs, money markets, and or saving accounts. "
However, in today's times," suggests Pastrich, "you should strive to put away - in safe and secure investments - around one to three years' worth of monthly expenses." Why do you need an emergency fund? For starters: unemployment, accidents, illness or a major home repair could put you behind on your mortgage very quickly. Studies show that those without emergency savings are more likely to accumulate debt and enter foreclosure.