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Home mortgage refinancing can save you money or get you into trouble. The lure of lower interest rates and monthly payments may look good, but you have to understand the risks. Let’s review how home mortgage refinancing can get you into trouble.

In general, you should avoid refinancing your mortgage if you’ll waste money and increase risk. It’s easy to fall into the traps below, so make sure you steer clear of these common mistakes.

Extending a Loan’s Term

When you refinance, you often extend the amount of time you’ll repay your loan. For example, if you get a new 30 year loan, payments are calculated to last for the next 30 years. If your old loan only had 10 or 20 years left to go, home mortgage refinancing will result in higher lifetime interest payments.

When you get a new loan, most of your payments go towards interest in the early years, and you’ll start from scratch. Plug the numbers into a loan amortization calculator to see how your total interest costs will change.

Closing Costs

Home mortgage refinancing costs money. You’ll pay fees to your new lender to compensate them for offering the loan. You may also pay for legal documents and filings, credit checks, appraisals, and more.

Even if a loan is advertised as a "no closing cost" loan, you’re paying those fees. Generally this happens through a higher interest rate.

Debt Consolidation

You can use home mortgage refinancing as a strategy to consolidate debts. Sometimes this helps because you reduce interest rates on your debt, and you may be able to turn consumer debts into tax-deductible home equity debts. This can backfire if you:

• Simply shift the debt and rebuild your consumer debts again
• Are unable to get tax benefits from home mortgage refinancing
• Are unable to pay the larger loan balance and risk losing your home

Recourse Debt

In some states, home loans have special protection from creditors. In the event of foreclosure, they may not be able to sue you if they lose money on the deal. However, home mortgage refinancing changes the nature of your loan: it’s no longer the original loan you used to purchase your home, so you may lose some protection.

With a private mortgage, you don’t borrow from a bank. Instead, you borrow from another person or business. Whether it’s your only option, or one of many, you should understand how a private mortgage works. Find out what it takes to successfully use a private mortgage.

What do you need for a good private mortgage? Start with the following items, and you’ll be on your way to a win-win situation.

Understand the Risks of a Private Mortgage

Any private mortgage can go bad. Life can always bring surprises. Consider what would happen:

• How will the personal relationship between borrower and lender change?
• Will the lender’s financial security (retirement, risk of bankruptcy, etc) be affected?
• Who else may suffer if the loan is not repaid?

A private mortgage lender is always taking a risk. Ignoring relationship issues, the deal can go bad if you fail to consider:

• Is the property in good condition?
• Will the property be adequately insured and cared for?
• Is there any other lien, mortgage, or interest conflicting with the private mortgage lender’s interest?

Private Mortgage Agreements

Any private mortgage should be documented. Use a loan agreement that clearly sets everybody’s expectations. Documentation protects each party to a private mortgage, and may help with tax and legal issues. Spell out every detail, including:

• When are payments due?
• What if payments aren’t received?
• How/where should payments be made?
• Can the borrower prepay?
• Is the loan secured?

Securing the Loan

It’s a good idea to secure the lender’s interest - even if you do a private mortgage among close friends or family members. That way, the lender can take the property and get some money back in a worst-case-scenario.

For example, a borrower (who has the ability and every intention to repay) may die or get sued. If the property is held in the borrower’s name without a properly filed lien, their creditors can go after their home or pressure them to use the home’s value. A secured private mortgage helps protect the lender’s interest.

Securing the property may also help you save on taxes.

How to do a Private Mortgage Correctly

You have to think about unpleasant possibilities when considering a private mortgage. Imagine what could go wrong and how it would affect you.

For documentation, work with qualified experts. Talk to local attorneys, your tax preparer, and others who can help you through the process.

Money market funds are a popular cash management tool. Before you use money market funds, make sure you know what they are, how they work, and what risks you might be taking.

What are Money Market Funds

Money market funds are mutual funds that invest in the “money markets”. If you imagine that people buy and sell stocks in the stock market, then you can see how people buy and sell money in the money markets. What does it mean to buy or sell money? It means that you borrow or loan money, respectively.

Similar to your deposit accounts at the bank, money market funds take your money and invest it. Then, they pay a portion of their earnings to you in the form of dividends. Money market funds usually pay a monthly dividend, but there are some alternatives out there.

What do Money Market Funds Invest In?

These funds invest in short term instruments that mature in less than 13 months – at a maximum. By keeping a short time-frame, these funds attempt to reduce risk. In fact, the SEC says that the average maturity of all the investments in a money market fund must be less than 90 days. The longer you loan money to somebody, the greater the chance that something will happen and they won’t be able to pay you back.

Typical investments inside a money market fund might be US Treasury issues, short-term corporate paper, and CD’s.

What Risks am I Taking in Money Market Funds?

There are at least three risks that we should highlight.

First, a money market fund is technically a security. The fund managers attempt to keep the share price constant at $1/share. However, there is no guarantee that the share price will stay at $1/share. If the share price goes down, you can lose some or all of your principal. The US Securities and Exchange Commission notes that “While investor losses in money market funds have been rare, they are possible”. In return for this risk, you should earn a greater return on your cash than you’d expect from an FDIC insured savings account (money market funds are not FDIC insured).

Next, money market fund rates are variable. In other words, you don’t know how much you’ll earn on your investment next month. The rate could go up or down. If it goes up, that may be a good thing. However, if it goes down and you earn less than you expected, you can end up needing more cash.

A final risk you’re taking with money market funds has to do with inflation. Because money market funds are considered to be safer than other investments like stocks, long term average returns on money market funds tends to be less than long term average returns on riskier investments. Over long periods of time, inflation can eat away at your returns.

Why Would I Use Money Market Funds?

Investors who want a decent return from a relatively safe investment use money market funds. The investments are typically liquid, meaning you can usually get your money out within a few business days. You can also take advantage of rising interest rates by keeping your money in an investment that will adjust to the markets.

A lot of institutions allow you to write checks that draw from a money market fund. Therefore, you get the advantages of dividend earnings as well as easy access to your cash. Make sure you ask what restrictions or fees your institution has.

Where Can I Get a Money Market Fund?

When it comes to money market funds, you have choices. They are easy to find at brokerage houses and mutual fund companies – your free cash is sometimes swept into a money market fund automatically. More recently, banks are offering money market funds to their customers.

Where Can I Learn More About Money Market Funds?

The best place to find out about a money market fund is the fund's prospectus. You should always read one of these before buying any fund, and you can really learn a lot by reading the prospectus from several different funds.

A variable annuity is an annuity with exposure to investments. If a fixed annuity pays a fixed rate of return, a variable annuity pays a variable rate of return. Before making a final decision for or against a variable annuity, you should understand how they work.

The Variable in Variable Annuity

A variable annuity is similar to plain-vanilla fixed annuities. You get some of the same features like tax-deferral, guarantees, and potential for lifetime payouts. What makes the variable annuity unique is the investments inside the annuity. You’ll often have a choice of stock and bond mutual funds to put your money in.

This is where the term variable comes in (as in, “your returns will vary with the returns of the investments”). Fixed annuities offer a predetermined return. There’s no way of knowing for sure what a variable annuity will return.

Why Would One Use a Variable Annuity?

The first question to ask is if you should be using an annuity of any sort. Assuming you do, you need to pick between a fixed annuity and a variable annuity. There are some cases where you might pick the variable annuity. For example:

• You want the potential for more growth than a fixed annuity offers
• You can afford increased risk with your money
• You want some of the flexibility that newer variable annuity products offer

Fees in a Variable Annuity

There’s no such thing as a free lunch. You get some standard features, and you might add some bells and whistles (or “riders”), but there’s a cost. A variable annuity has the following costs:

• Mortality and Expense charges
• Administration charges
• Underlying investment charges
• Rider charges (if you select any optional riders)

Depending on the features of the annuity you’re looking at, these charges will vary. A basic annuity will have lower fees and expenses, and a fully loaded variable annuity with every possible option will be expensive.

At this point, I should point out that there is only one reason you should ever pay these charges: because you need to. I cannot overemphasize this. If you don’t need the benefits unique to a variable annuity, don’t use one. You can invest in mutual funds and pay a lot less. However, if you want the guarantees, for example, then the additional cost may be worth it.

Before You Buy a Variable Annuity

Before you buy a variable annuity you should make sure it’s the right thing for you. Know what you’re getting into. In particular find out why an advisor is recommending a variable annuity as opposed to mutual funds. Sometimes there’s a good reason, sometimes not.

Take the prospectus home and read it carefully. This is the best source of important information about a variable annuity. It should detail all of the expenses, riders, and surrender features of the contract. If you don’t know how the product works, ask somebody you trust.

An annuity is a contract between the buyer and an insurance company. In general, the insurance company promises to do something with the buyer’s money -- like grow it or pay it out over a number of years. This page should serve as a general overview of annuities. After you understand the concept you can look into the various annuity types.

Annuity Key Terms

You’ll want to know some key terms when researching annuities. A few of the important ones are:

• Contract Owner
• Annuitant (may be the contract owner)
• Premium
• Surrender Period – the number of years (if any) that you must keep your money in a specific contract without paying a penalty
• Beneficiary
• Annuitize
• Variable annuity
• Immediate vs deferred annuities

Advantages of Annuities

Annuities can be helpful in some situations. In general, some benefits are:

• Tax-deferred growth and compounding within the annuity contract
• Guaranteed rates of return on your dollars
• Guaranteed lifetime payments if you annuitize (in some cases you don’t even have to annuitize in order to receive this benefit)
• Other features that may be important to you. These are various bells and whistles that do very specific things

Note that the guarantees are only as strong as the insurance company that issued the annuity. In other words, if the insurance company fails, the promise is no good. You should mitigate this risk by using only the strongest insurance companies out there.

Disadvantages of Annuities

• You have to pay for the guarantees somehow. If you don’t need them, don’t pay for them
• Some contracts have surrender periods that can tie up your money longer than you want
• IRS rules restrict how you take money out of an annuity. Distributions may be taxable and/or penalized
• Annuities can be overused in banks

Remote deposit is a way to process payments without sending checks to the bank. With remote deposit, you can scan an image of a check, send the image to your bank, and see the funds added to your account more quickly. Let’s cover the basics of remote deposit technology.

Who Uses Remote Deposit?

Businesses are the most likely users of remote deposit technology. They see more checks, and they want to get the checks processed more quickly. However, more and more banks offer remote deposit as a service to personal (non-business) customers.

How to Use Remote Deposit

To use a remote deposit service, you scan checks. An image of the check goes to your bank, and the bank begins the process of collecting money from the check writer.

In most cases, a special check scanner is used. Remote deposit scanners can cost a few hundred dollars or a few thousand depending on your needs - such as how much volume you do. Some banks just charge a monthly fee for a scanner, and some will throw in a free scanner as a promotion to win your business.

However, expensive scanners are not always necessary. For example, you may be able to use a plain old consumer scanner for personal remote deposit. Some banks allow you to use a fax machine, and some are even experimenting with ways to use your mobile phone camera for remote deposit.

Problems With Remote Deposit

It’s possible that remote deposit will save you time and money. You may be able to skip trips to the bank, armored car services, and time waiting on check float. However, there are tradeoffs.

There’s always the chance that your remote deposit system will have errors. By automating things, you run the risk of errors. Of course, you might reduce human errors at the same time.

You also have to worry about new legal issues when you switch to remote deposit. Since you’re not sending checks to the bank, you have to know the rules about how to handle the checks after you scan them. Ask your remote deposit service provider for suggestions on how to stay compliant.

Why Banks Offer Remote Deposit

Banks will increasingly offer remote deposit capture services to businesses and consumers. It makes life easy for customers: deposits are faster, and they’re much more convenient.

Remote deposit is also less labor-intensive for banks. You’ve created the image so they don’t have to.

Remote Deposit Banks

The list of banks offering remote deposit capture features is constantly changing. USAA has been a leader in offering personal remote deposit for non-business accounts.

ACH processing allows businesses to collect payments from customers electronically. Businesses can save money and reduce errors, as well as automate payments and follow-up on bad checks. Learn the basics of ACH processing.

Basics of ACH Processing

ACH processing allows you to use the Automated Clearing House (ACH) Network to collect payments.

Good News about ACH Processing

Businesses benefit from ACH processing in several ways:

Payments are credited to your account immediately, so you don’t need to send (or drive, or walk) checks to the bank.

You’ll see fewer errors with ACH processing. Once it’s set up correctly for a client, it’s likely to work going forward. Every time your customer writes a check and drops it in the mail, any number of things can go wrong.

You can automate attempts to collect bad checks. ACH processing services often include this as part of their service, so you don’t have to deal with the same check twice.

Bad News about ACH Processing

If you hadn’t guessed, ACH processing isn’t free. You have to pay setup costs, and you’ll pay a fee per transaction. Given the benefits, it’s probably worth the cost, but ACH processing might not be an option for cash-strapped businesses.

Money is not necessarily available for withdrawal immediately. Using ACH processing is different from receiving a bank wire transfer.

You might not end up getting paid. Even if you get a payment through your ACH processing system, your customer’s bank might pull the money back. The customer may not have funds to cover the purchase, or they may dispute the charge. Again, you don’t receive cleared funds so you have to wait for the banks to settle the transaction.