If youâve been keeping your eye on real estate home listings, you mightâve seen more foreclosed properties for sale at a reduced price.
With record levels of unemployment and underemployment, many homeowners are falling further behind on their mortgages. Currently, thereâs a federal moratorium on the most common mortgage programs through December 31, 2020. Unless further homeowner protections are in place, the foreclosure market will see an unfortunate rise.
In fact, according to mortgage and real estate analytics company Black Knight, 2.3 million homeowners are already seriously past-due on their mortgages.
As devastating as it is to have more homes undergoing foreclosure, it also means that prospective home buyers, who were otherwise priced out of buying a home, might have greater access to homeownership. Hereâs what you should know if youâre thinking about buying a foreclosed home.
Buying a foreclosed home can be a win-win situation. You get a good price, and (usually) you can easily fix the property up.
Buying a Foreclosed Home
There are many ways you can buy a foreclosed home, depending on what stage of the process the foreclosure is in:
Pre-foreclosure. Many homeowners are willing to sell before theyâve officially been foreclosed on. Depending on how much equity they have, they might need to do a short sale.
Short sale. Homeowners can seek approval from their lenders to sell you the home for less than they owe on the mortgage. The bank will get less than itâs owed, but it still often approves short sales since they usually cost less than a foreclosure.
Auction. Once a home is foreclosed itâll often be auctioned off by the bank. But youâll need cash on hand for this, and thatâs not an option for most folks who need mortgage financing.
Real-estate owned (REO) properties. Alternatively, banks can simply sell the foreclosed home through more traditional markets, just like a normal home.
Itâs usually easiest to buy the foreclosed home once the bank takes over and it becomes an REO property. Thatâs because you can take your time and go through the mortgage underwriting process. You can also work with a realtor, and â importantly â write contingency clauses in the contract that let you pull out of the deal if a home inspection reveals more repairs than you expected.
Related: How to Add Real Estate to Your Investment Portfolio
7 Caveats to Buying a Foreclosed Home
Buying a foreclosed home isnât exactly the same as buying one directly from the homeowner. Youâre potentially buying a home from a bank who took over after the previous homeowners were unable to afford the home anymore. This introduces a few twists into the home-buying process for you.
1. Youâll Need a Realtor Who Specializes in Foreclosed Homes
The world is full of realtors, even including your Uncle Bob and Cousin Carolyn. But not everyone is equipped to handle the nuances of buying a foreclosed home. There are a lot of issues that can crop up â unplanned property damage, squatters, homeowners who settle the bill and try to reclaim ownership, etc.
If youâre serious about buying a foreclosed home, seek out a realtor with extra experience in this area. There are even special designations that some realtors can get, such as Short Sales and Foreclosure Resource (SFR) or Certified Distressed Property Expert (CDPE).
2. Houses Are Sold âAs-Isâ
With a typical home sale, you have the change to get the property professionally inspected before signing on the dotted line. Itâs not uncommon for new issues to arise, and in a normal home buying transaction, you can often negotiate with the sellers to either fix the damage or discount the price.
Thatâs not the case when you buy a foreclosed home. If a home inspection reveals unexpected damage â like the need for a full roof or a septic system replacement â banks often arenât willing to negotiate. Itâs a take-it-or-leave-it sale.
3. Expect to Put In Some Work
The above point is especially important considering that most foreclosed homes do, in fact, need a lot of fixing up.
Think about it: the previous homeowners lost the house because they couldnât afford the mortgage. Thereâs a good chance they also werenât able to keep up with routine maintenance either. From their perspective, even if they did have the cash, whatâs the point of spending money on repairs, if they know theyâll lose the home in a few months?
You can save money by putting in some sweat equity (HGTV, anyone?), but even then youâll need the cash to pay for materials. This also means that the home might not be move-in ready. If you do move in, you might need to put up with construction debris for a little while. On the bright side, though, this does give you a chance to upgrade the home to your own aesthetics.
4. You Might Need Creative Financing
This brings up another issue: how do you pay for those renovations? Generally, you canât just ask for a bigger mortgage to cover the necessary repairs. Most lenders will only lend you as much as the current home appraisal is worth, minus your down payment.
You have a few options, though. You can hold some money back from your savings to pay for it in cash, but this means youâll have a smaller down payment. An alternative is getting a loan from a different lender, like a personal loan, a 0% APR credit card, or even a home equity loan or line of credit if youâre lucky enough to start from a position with equity.
Finally, there are some special ârenovation mortgagesâ available through Fannie Mae and other lenders. These mortgages actually do allow you to take out a bigger mortgage so you can pay for renovations. You might need to provide a higher down payment or have a higher credit score to qualify, however.
5. Watch for Liens on Foreclosed Homes at Auctions
If you have a big pot of cash and can pay for a home on the same day, an auction might be your best bet. But then you have to worry about a new factor: liens.
If the property had any liens attached to it (such as from the previous homeowners not paying their taxes, or a judgement from unpaid debt), youâll inherit that bill, too.
This is usually only the case for auctioned homes. If you buy a foreclosed home as an REO sale, the bank generally pays off any liens attached to the property. Still, it may be worth double-checking if you have interest in a specific property.
6. Be Prepared to Act Fast
Youâre not the only one with the bright idea to get a low-priced, foreclosed home. Chances are good that there are a few other buyers interested in the property, which increases competition. Even though the home is listed at a big discount, this competition can still drive prices up. You might need to be ready to act fast, just the same as in any hot real estate market.
7. Be Prepared to Wait
On the flip side, thereâs a lot of extra bureaucracy involved in buying a foreclosed home once the seller accepts your offer. Thereâs often extra paperwork to fill out or other complications.
For example, the home appraisal might come back lower than expected, which might make it harder to get enough financing for the agreed-on purchase price. If itâs a short sale, it might also take longer for the bank to approve the lower sale price for the home, based on what the homeownerâs mortgage is currently worth.
Pros and Cons of Foreclosed Homes
Buying a foreclosed home isnât necessarily a good or bad idea on its own. It all depends on your own goals â for example, are you willing to figure out financing for repairs to get a deal on the home purchase price? Also consider how important it is for you to have a âmove-in readyâ home with no hassle.
Weigh these pros and cons carefully, and whatâs most important to you when buying a home.
Can get a deal thatâs lower than market price
Property is sold âas-isâ and might not be move-in ready
Can customize the home to your specifications with repairs and upgrades
Likely needs a lot of repairs and upgrades
Requires creative financing for repairs and upgrades
Foreclosure process is long and might fall through
The Bottom Line
Buying a foreclosed home can be a win-win situation. You get a home at a good price, and (usually) you can bring the property back to good, working order by fixing it up. As long as you go into the deal knowing that itâs not the same experience as a typical home purchase, buying a foreclosed home is a great way to launch into homeownership or real estate investing.
Keep Reading: How to Buy a Second Home that Pays for Itself
The post What to Know Before Buying a Foreclosed Home appeared first on Good Financial CentsÂ®.
You’ve probably had a checking account for most of your life and never gave it much thought. It’s just there to store your everyday cash, right? Not necessarily.
If you’re considering questions about checking accounts as you take a closer look at your current setup and explore opening a new one, it’s important to note that checking accounts are designed with different and unique features. Some may even be more beneficial to you than you realize.
For starters, most checking accounts offer a host of conveniences, providing customers the ability to set up automatic payments for routine bills, schedule electronic transfers and make all deposits and transfers via a smartphone app. Some accounts even allow you to earn cash back on your debit card purchases.
âA checking account can have a long-term impact on your financial well-being, so it’s worth taking the time to figure everything out,” says Jeff Kreisler, money expert and author of the personal finance book “Dollars and Sense.”
At this point, you might be thinking, “What questions should I ask before opening a checking account?” To help you decide which account is right for you, here are four key questions to ask yourself:
1. What types of checking accounts should I consider?
Before you open a new checking account, do a little homework to learn about the different types of checking accounts offered by banks, Kreisler says. There’s the standard personal checking account that allows you to write checks and make payments with your debit card or electronically. But when thinking about questions to ask when opening a checking account, go beyond the basic features to find an account that best fits your lifestyle and financial goals. Here are some examples:
Online checking account: Ready to bypass the teller lines with the benefits of an online bank? Then this is the checking account for you. Doing your banking from any computer or mobile device is sweetâand since online banks don’t have brick-and-mortar locations, they can often pass their savings from overhead down to you. Just verify that the online bank or credit union supplying the checking account is backed by the FDIC or the National Credit Union Administration.
Rewards checking account: One question to ask before choosing a checking account is if you can earn rewards or incentives for certain activity. Discover Cashback Debit, for example, lets you earn 1% cash back on up to $3,000 in debit card purchases each month.1 That means your monthly cashback earnings could yield $360 in total rewards each year (finally, dinner and drinks at that new French bistro in town!). Some banks may also offer a checking account bonus just for opening a new account, while others have a variety of reward options based on certain qualifying purchases. A rewards checking account works for almost anyone looking to maximize their debit spend or a balance they regularly hold in their checking account.
Say hello to cash back on debit card purchases.
No monthly fees. No balance requirements. No, really.
Discover Bank, Member FDIC
Joint checking account: Most checking accounts can be opened as a joint checking account, which is an account held by two or more people. This can be a convenient solution for couples, minors and their parents and even seniors and their caregivers who are trying to manage a household budget. It does require good record keeping and communication, so make sure you understand the ins and outs of joint accounts before choosing this option.
The above checking accounts are the most standard and usually have appealing benefits. But if you have more questions about checking accounts, there are options that can cater to more specific needs. However, they often have less flexibility. For instance:
Interest-bearing checking accounts are available for those who want to earn some money while their cash is parked in the account. The rate of return is usually low and minimum balance requirements high.
Student checking accounts are often low-cost, but they could come with limitations. Whether or not a student account is available may be a good question to ask before choosing a checking account if you’re looking for a starter account for yourself or your child.
Second-chance checking accounts could be a fit for those who may not be able to get a standard checking account due to their banking or credit history; however, they often have higher fees.
“A checking account can have a long-term impact on your financial well-being, so it’s worth taking the time to figure everything out.”
2. Are there fees associated with the checking account?
This is one of the most commonly asked questions about checking accounts. Before choosing a checking account, be sure to research its fees, says Marc Bernstein, financial planner and strategist for MWealth Advisors. Types of fees and fee amounts can vary greatly from bank to bank, and even among accounts at the same bank.
A question to ask when opening a checking account is if the account charges fees for ATM use, automatic bill pay, monthly maintenance, ordering checks, replacing a debit card or ordering official bank checks. Banks may charge any combination of these feesâor none. Discover Cashback Debit comes with no fees. Period.2 That means you won’t be charged a fee for any of these services.
Along with including the fee topic on your list of questions to ask before choosing a checking account, you should also consider obtaining “a document outlining the fees you’ll be paying, in case you have any questions, and check the fine print,” Bernstein says. You can also typically find a list of fees (if any) on the bank’s website or in the account agreement.
3. Is there a minimum balance requirement?
According to Bernstein, among the questions to ask when opening a checking account is if it requires an initial minimum balance to open. You’ll also want to know if a minimum balance needs to be maintained to avoid a fee.
Bernstein suggests looking for an account with no minimum balance requirement if you tend to keep less than $1,000 in your account or like to have flexibility when making large withdrawals.
If you’ve asked this question about checking accounts and are still comparing accounts that have a minimum balance requirement, realistically determine how much you can keep in your account per month and what you will be charged if you can’t keep that balance.
Even if your account falls below a minimum requirement, there could be a way to save on fees. If you have multiple accounts at one bank, the bank may allow you to combine the balances to waive checking fees.
The total average cost of withdrawing cash from an out-of-network ATM is $4.68. That’s 36 percent higher than it was 10 years prior, with no signs of decreasing.
4. What ATM fees could I incur?
If you frequent the ATM to take out cash, a good question to ask before choosing a checking account is: Where are the bank’s ATMs located in relation to your home and work?
Availability of ATMs is an important question to ask when opening a checking account that can really affect your wallet. For instance, if you decide to withdraw money from an ATM that’s not in your bank’s network, you can get hit with two separate charges: a surcharge from the ATM owner (since you’re not a customer) and a fee from your own bank.
And those fees can really add up. According to Bankrate’s 2018 checking account and ATM fee study, the total average cost of withdrawing cash from an out-of-network ATM is $4.68. That’s 36 percent higher than it was 10 years prior, with no signs of decreasing.
One way to get cash without paying an ATM fee is to use your own bank’s ATMs. The more ATM locations that your bank offers that are conveniently located, the less likely you are to use one that’s out-of-network and rack up unnecessary charges. If you can’t always use your own bank’s ATM, one of the questions to ask when opening a checking account is whether your bank allows you to use a broader ATM network for no-fee transactions.
Find the best checking account for you
Opening a new checking account is an important step toward establishing, or rebuilding, your financial foundation.
Now that you can ask the right questions about checking accounts, you’re one step closer to choosing an account that fits your individual needs. And that feels like money in the bank.
1 ATM transactions, the purchase of money orders or other cash equivalents, cash over portions of point-of-sale transactions, Peer-to-Peer (P2P) payments (such as Apple Pay Cash), and loan payments or account funding made with your debit card are not eligible for cash back rewards. In addition, purchases made using third-party payment accounts (services such as VenmoÂ® and PayPal, which also provide P2P payments) may not be eligible for cash back rewards. Apple, the Apple logo and Apple Pay are trademarks of Apple Inc., registered in the U.S. and other countries.
2 Outgoing wire transfers are subject to a service charge. You may be charged a fee by a non-Discover ATM if it is not part of the 60,000+ ATMs in our no-fee network.
The post 4 Questions to Ask Before Choosing a Checking Account appeared first on Discover Bank – Banking Topics Blog.
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Nobody is perfect when it comes to their finances â even millionaires slip up sometimes.
So when you start to think youâre worse off than your parents, or your nephew, or your friends, remember that allÂ 20-somethings have made mistakes that can cost them big time.
But if youâre guilty of making some of these blunders, donât fret. You can still redeem yourself! Here are some of the worst blunders you can make, and tips to help dig you out of the hole.
Blunder No. 1: Not Getting Free Gift Cards When You Shop
What do you usually do with your receipts? You check out, they hand you a mile-long piece of paper, and you frantically stuff it to the bottom of a grocery bag. Pretty worthless.
But a free app called Fetch Rewards will turn them into gift cards. It partners with tons of brands to give you points for every grocery receipt you share. Then you can exchange them for gift cards to places like Amazon, Walmart, Chipotle and dozens of other retailers.
And itâs perfect for those of us who donât want to put a ton of work into this. All you have to do is send Fetch a photo of your receipt, and it does everything for you. No scanning barcodes or searching for offers â and you can use it with any grocery receipt.
When you download the app, use the code PENNY to automatically earn 2,000 points when you scan your first receipt. Then start snapping photos of your recent receipts to see how many points you can earn without a single trip to the store!
Not so bad for a useless receipt, right?
Blunder No. 2: Not Earning Anything On Your Savings
Youâve probably heard the best way to grow your money is to stick it in a savings account and leave it there for, well, ever. Thatâs bad advice.
But maybe youâre just looking for a place to safely stash it away â but still earn money. Under your mattress or in a safe will get you nothing. And a typical savings account wonât do you much better. (Ahem, 0.05% is nothing these days.)
But a debit card called Aspiration lets you earn up to 5% cash back and up to 20 times the average interest on the money in your account.
Not too shabby!
Enter your email address here to get a free Aspiration Spend and Save account. After you confirm your email, securely link your bank account so they can start helping you get extra cash. Your money is FDIC insured and they use a military-grade encryption which is nerd talk for âthis is totally safe.â
Blunder No. 3: Paying Too Much Interest To Credit Card Companies
If you have credit card debt, you know. The anxiety, the interest rates, the fear youâre never going to escapeâ¦
And the truth is, your credit card company doesnât really care. Itâs just getting rich by ripping you off with high interest rates. But a website called AmOne wants to help.
If you owe your credit card companies $50,000 or less, AmOne will match you with a low-interest loan you can use to pay off every single one of your balances.
The benefit? Youâll be left with one bill to pay each month. And because personal loans have lower interest rates (AmOne rates start at 3.49% APR), youâll get out of debt that much faster. Plus: No credit card payment this month.
AmOne keeps your information confidential and secure, which is probably why after 20 years in business, it still has an A+ rating with the Better Business Bureau.
It takes two minutes to see if you qualify for up to $50,000 online. You do need to give AmOne a real phone number in order to qualify, but donât worry â they wonât spam you with phone calls.
Blunder No. 4: Paying Too Much For Car Insurance
Whenâs the last time you checked car insurance prices?
You should shop your options every six months or so â it could save you some serious money. Letâs be real, though. Itâs probably not the first thing you think about when you wake up. But it doesnât have to be.
A website called Insure.com makes it super easy to compare car insurance prices. All you have to do is enter your ZIP code and your age, and itâll show you your options.
Using Insure.com, people have saved an average of $540 a year.
Yup. That could be $500 back in your pocket just for taking a few minutes to look at your options.
Blunder No. 5: Thinking You Donât Have Enough Money To Invest
Take a look at the Forbes Richest People list, and youâll notice almost all the billionaires have one thing in common â they own another company.
But if you work for a living and donât happen to have millions of dollars lying around, that can sound totally out of reach.
But with an app called Stash, it doesnât have to be. It lets you be a part of something thatâs normally exclusive to the richest of the rich â on Stash you can buy pieces of other companies for as little as $1.
Thatâs right â you can invest in pieces of well-known companies, such as Amazon, Google, Apple and more for as little as $1. The best part? If these companies profit, so can you. Some companies even send you a check every quarter for your share of the profits, called dividends.1
It takes two minutes to sign up, and itâs totally secure. With Stash, all your investments are protected by the Securities Investor Protection Corporation (SIPC) â thatâs industry talk for, âYour moneyâs safe.â2
Plus, when you use the link above, Stash will give you a $5 sign-up bonus once you deposit $5 into your account.*
Blunder No. 6: Assuming Life Insurance Is Expensive And Time Consuming
Have you thought about how your family would manage without your income after youâre gone? How theyâll pay the bills? Send the kids through school? Nowâs a good time to start planning for the future by looking into a term life insurance policy.
Youâre probably thinking: I donât have the time or money for that. But your application can take minutes â and you could leave your family up to $1 million with a company called Bestow.
Rates start at just $16 a month. The peace of mind knowing your family is taken care of is priceless.
If youâre under the age of 54 and want to get a fast life insurance quote without a medical exam or even getting up from the couch, get a free quote from Bestow.
1Not all stocks pay out dividends, and there is no guarantee that dividends will be paid each year.
2To note, SIPC coverage does not insure against the potential loss of market value.
For Securities priced over $1,000, purchase of fractional shares starts at $0.05.
*Offer is subject to Promotion Terms and Conditions. To be eligible to participate in this Promotion and receive the bonus, you must successfully open an individual brokerage account in good standing, link a funding account to your Invest account AND deposit $5.00 into your Invest account.
The Penny Hoarder is a Paid Affiliate/partner of Stash.Â
Investment advisory services offered by Stash Investments LLC, an SEC registered investment adviser. This material has been distributed for informational and educational purposes only, and is not intended as investment, legal, accounting, or tax advice. Investing involves risk.Â
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.
Youâve saved up your money, you found the perfect house, and youâre ready to buy. Now you just need a mortgage. Commercial banks may be the obvious choice, but they arenât the only option for your mortgage. Mortgage brokers, online mortgage lenders, and credit unions also originate mortgage loans.
Credit unions and other non-banks are gaining in popularity for mortgage originations. In fact, credit unions accounted for 9% of all mortgage originations in 2017. If youâre ready to take out a mortgage on your dream home, hereâs what we think you should know about credit union vs. bank mortgages.
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The Advantages of Getting a Mortgage through a Credit Union
Credit unions operate like banks, but they are non-profit organizations with specific membership requirements. Members of the credit union are the collective owners of the union, offering some distinct advantages for mortgage origination. Credit unions may offer lower rates, easier approval, greater personalization, and more. Here are four advantages of working with a credit union vs. a bank for your mortgage.
In general, credit unions are more likely to lend to people with poor credit scores and offer options for smaller down payments. Credit unions are also more likely to hold onto the mortgages they originate, rather than selling them like banks often do. When a bank sells a mortgage, outside investors drive the interest rates and underwriting standards, limiting the bankâs flexibility with mortgage terms. When credit unions donât sell mortgages, they can be more flexible with who they loan to and what rates they offer.
In addition to having more flexible qualification options, credit unions prioritize customer serviceÂânot profits. They want to help their members find the options that work best for them, their community, and the credit union membership as a whole. Plus, if youâre already a member of a credit union, itâs generally easier to get additional services through an institution you already have a relationship with. You may even be pre-approved for a mortgage based on your prior account activity.
Because credit unions are exempt from paying federal taxes and prioritize breaking even, not making a profit, they can offer higher interest rates for deposits and lower interest rates for loans.
Overall, credit union rates tend to be lower for all loan types, including credit cards, but rates for mortgages may be similar to those from traditional banks if they sell their mortgages. Even a small difference in interest rate can make a big difference over the life of a mortgage, though, so any little bit helps.
There are many unavoidable costs of taking out a mortgage: closing costs, vendor fees, insurance. Many banks and mortgage brokers will also charge origination fees and other processing costs. Because credit unions are less concerned with turning a profit, originating a mortgage with one will often result in fewer origination fees and other processing costs. These reduced fees can potentially save you several hundred to several thousand dollars.
Credit unions prioritize customer service for their members. Banks, on the other hand, are primarily motivated by profits. You may get a better, more personalized experience by working with a credit union to originate your mortgage. Because credit unions more often hold on to their mortgages, youâre more likely to work with them for the life of the loan. They also often offer special rewards programs and incentives for first-time home buyers or no-down-payment plans.
Depending on the credit union youâre a part of, it may also be better able to provide specific advice and context for loans. For example, credit unions specifically for veterans may have more hands-on expertise with VA loans. Similarly, geographically based credit unions may have better understanding of local incentives for mortgages.
During times of crisis, like the coronavirus pandemic, credit unions may be more attuned to the needs of their customers and therefore more likely to offer financial hardship support. Reach out to your credit union if you need support or resources.
The Disadvantages of Originating a Mortgage with a Credit Union
Because credit unions are smaller, membership-based organizations, there are some disadvantages to working with one for your mortgage. Here are five things to keep in mind if youâre considering a credit union vs. bank mortgage.
While traditional banks open accounts with anyone who qualifies, credit union memberships have additional specific requirements and limitations depending on the union. If you do not meet those requirements, you cannot originate your mortgage with that credit union, even if it would be the best deal for you. You can find credit unions in your area that you may qualify for using CUlookup.com.
Credit unions are smaller and often more geographically limited than national banks. That means youâll have fewer options for in-person service. In fact, credit unions have an average of three branches while most banks have an average of 16. Many credit unions still operate traditional bankerâs hoursâ9 a.m. to 3 p.m., Monday through Fridayâas well, limiting your options for service.
Online services are becoming increasingly important to consumers who require and expect quick and easy self-serve online options. Credit unions are generally behind the times when it comes to technology, which means you may not be able to use an app or find other self-serve options online if you have questions. They are quickly catching up to traditional banks, though, so this may not be much of a disadvantage moving forward.
Limited Financing Options
Banks and credit unions fund mortgages and other loans with cash on hand and borrowed from other institutions. In order to lend more money to members, they must have more money available. Because credit unions typically have a smaller customer base, they tend to have less cash on hand to loan out, which may curtail loans available. Banks are, on average, 13 times larger than credit unions with $2.6 billion in assets vs. $207 million in assets for credit unions.
The FDIC does not cover credit unions. Instead, the NCUA regulates federally insured credit unions and provides similar insurance coverage as the FDIC. Some credit unions are state chartered, however, and may be covered by a state agency or offer private insurance coverage instead. Private insurance is held to same regulatory standards but is generally considered less secure than federally chartered coverage. The NCAU Credit Union Locator can verify whether a credit union is federally chartered.
While the type of insurance an institution uses does not directly affect the terms of your mortgage, it should still be part of your consideration process for working with a credit union over a bank.
Credit Union vs. Bank Mortgage
When youâre ready to take out a mortgage, you have a lot of options. Like with other financial decisions, you should shop around across credit unions, banks and other lenders to find the best deal for you. And if youâre not getting the rate you think you deserve, working to improve your credit score is one of the best ways to increase your chances of getting a competitive mortgage rate.
Check your credit report using the free Credit Report Card. You can also find more resources, including a free, no-obligation quote, in our Loan Resource Center.
Sign Up Now
The post Credit Union Vs. Bank Mortgage: Which Should You Choose? appeared first on Credit.com.
The best money market mutual funds are a good place to keep your cash while earning interest.Â Bank checking and savings accounts and money market accounts are good alternatives for your cash.
But money market funds offer a higher rate of return than these other short-term investments.
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One of the best money market mutual funds is the Vanguard Prime Money Market Fund. This fund has a current yield of 1.69%. That is way more than any checking and savings account are offering.
Money market funds are considered very safe. However, they are not FDIC insured. If the lack of FDIC insurance concerns you, you may wish to invest in online savings accounts, money market accounts, or certificate of deposits (CDs).
In this article, we will define what a money market fund is. We will list the cons and pros of those funds. We will address the main situations you will need these type of funds. Finally, we will list the best money market mutual funds to choose from.
What are money market funds?
Money market funds are a type of mutual funds. They were launched in 1975 as a way to provide investors quick liquidity to their cash, provide current income and protect the investors’ principal.
Since then, they have become extremely popular. Unlike other mutual funds which focus on other securities such as stocks and bonds, they invest in “money market” securities.
Large companies and corporations, financial institutions and the U.S. government borrow money by issuing “money market” securities as promises to repay the debts.
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For instance, the U.S. government borrows money by selling bonds or Treasury bills or notes. Banks borrow money by selling certificate of deposit (CDs).
Big companies borrow money by issuing IOUs called commercial paper. These money market securities make up the money market fund.
Mutual fund and investment companies such as Vanguard and Fidelity offer these investments. They are low risk and they provide high yield.
Some funds are intended for retail investors. Retail investors are natural investors like you and me.
On the other hand, there are funds that are intended for institutional investors. Those funds usually require high minimum investments.
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Money Market funds vs. Money Market Accounts
The names may sound the same. But, they are two different types of investments.
To recap, a money market fund is a type of mutual fund. A mutual fund company such as Vanguard or Fidelity offers this type of investment. These funds invest in short-term debt. They offer higher returns than money market accounts.
On the other hand, a money market account is a type of savings account. Banks offer them.
But the rates of return are typically higher than that of a typical savings account. Unlike money market funds, they are insured by the FDIC.
Money market fund advantages:
Money market funds are one of the best and safest places to invest your hard-earned money. You will earn more interest than in a regular savings or checking account. Here are some of the advantages of these funds.
They are very safe. Money market funds are not FDIC insured, like savings accounts and CDs are. But, they are very safe.
Since they were launched, only 2 out of hundreds have run into trouble. If you concerned about the lack of insurance, you may wish to consider an online savings account or a money market account.
They are liquid and easily accessible. Another advantage of money market funds is that you have immediate access to your money.
You may withdraw your money anytime you wish without incurring penalty. Also, you can cash in your shares by phone, online, by mail or through your broker with relative ease.
You may write checks. Another positive aspect of a money market fund is that you can tap your money by writing checks against your account with no charge.
And some funds allow you to write checks for any amount for free.
They provide higher yields. They pay higher yields than a traditional savings account.
The reason is because the borrowers, i.e., the US government and big corporations are solid institutions and they agree to repay the debts at high interest rates.
Tax advantages. Some funds invest in securities where the interests are exempt from federal taxes, and in some cases state income taxes.
All of these factors make money market funds popular with people who want to invest for their short term goals.
While there several pros to investing in money market funds, there are some cons as well.
Lower return. Because access to your money are relatively easy in a money market fund, they have lower returns than other investments such as stocks, bonds and index fund.
They are not FDIC insured. As mentioned earlier, the federal government does not insure these funds .
Other investments such as online savings accounts, money market accounts, certificate of deposits are. But again they are very safe.
However, if the lack of FDIC insurance bothers you, stick with bigger mutual fund companies.
Situations when investing in money market funds makes sense?
You have a short-term investment goal. You may want to invest in these funds for short-term goals.
If you’re planning on buying a house in the next year or so and looking for safe place to save for the down payment, then they’re a good place for your cash.
You’re saving for a rainy day. If you’re saving for an emergency fund, a money market fund is also a good place to park your cash.
You certainly don’t want to invest in the stock market, because you can lose money within a relatively short period of time due to market volatility.
You want to diversify your portfolio. Money market funds are not aggressive investments such as stocks or bonds.
That’s why these funds are safer and very conservative. When the stock market plunges, these funds can balance your portfolio out.
So, you can use this type of investment as a complement to your other and riskier investments.
The best Vanguard money market mutual funds:
Vanguard Prime Money Market
Vanguard Treasury Money Market
Vanguard Federal Money Market
Vanguard Municipal Money Market
List of best money market funds
1. The Vanguard Prime Money Market Fund (VMMXX).
This Fund is perhaps one of the best out there.
However, this fund requires a minimum deposit of $3,000 just to open an account. This can be steep for a beginner investor with little money. The expense ratio is 0.16%.
There is no purchase or redemption fees. The fund has a total asset of $127.5 billion as of January 2020.
The Vanguard Prime Money Market primarily invests in foreign bonds, U.S. treasury bills, and U.S Government obligations.
2. The Vanguard Treasury Money Market Fund (VUSXX).
As the name suggests, this Vanguard money fund only invests in U.S. Treasury bills. However, the fund has a minimum initial investment of $50,000.
It may be out reach for beginner investors with little money. But the expense ratio is 0.09%.
The current yield is 1.58% while the 10 year yield is 0.55%. If you are a wealthy investor, you should consider this fund.
3. The Vanguard Federal Money Market Fund (VMFXX).
This Vanguard money fund is perhaps the safest and most conservative of all funds, simply because they invest in U.S. government securities.
U.S. guaranteed securities are considered risk-free investments. It intends to provide current income while maintaining liquidity.
This Vanguard fund requires a $3,000 initial minimum investments. It has a 0.11% expense ratio.
The current yield is 1.58% and a 10 year yield of 0.55%.
So, if you have a short term goal and are interested in a Vanguard fund that invests in U.S government securities, you may wish to consider this fund.
4. Vanguard Municipal Money Market Fund.
This Vanguard fund invests in short-term, high quality municipal securities.
What makes this fund a great one is that it provides income that is exempt from federal personal income taxes.
If you are in a higher tax bracket and are looking for a competitive tax-free yield, you should consider this fund.
Similar to other funds, the initial minimum investment is $3,000 with a 0.15%. This fund has a current yield of 1.20% and a 10 year yield of 0.44%.
Overall, you should consider investing in these best money market funds, because they generally pay you better than bank savings accounts and money market accounts.
But the FDIC does not insure you. However, they are very safe. If the lack of FDIC insurance does not bother you, you should try them.
Decide whether investing in money market is best for you
While a money market fund may sound great, it’s not for everyone. It won’t help those with a long term investment strategy, such as retirement.
For those with a long term focus, investing in individual stocks, real estate, or index funds may be an option instead.
Moreover, younger and aggressive investors should keep less money in money market funds than older investors who are approaching retirement.
However, if you’re looking to make a purchase soon (in the next year or so), such as buying a home, these funds make sense.
In addition, investors who want to diversify their portfolio may find that money market funds are great investments as they are very safe when compared to risky alternatives such as stocks and bonds.
Work With A Financial Advisor Near You
If you have questions beyond the best money market mutual funds, you can talk to a financial advisorÂ who can review your finances and help you reach your goals. Find one who meets your needs withÂ SmartAssetâs free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals,Â get started now.
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The post The Best Money Market Mutual Funds To Consider appeared first on GrowthRapidly.
I love making things automatic. Whether it is bill-paying, direct deposit, prescription renewals, or investing, making things automatic makes life easier, and that is where our Betterment investing review comes in.
When it comes to retirement planning, an overwhelming number of online tools and websites promise to help you create a dynamic and profitable portfolio while minimizing fees.
This growing list of services includes robo-advisors, a class of financial websites that offer to manage your portfolio with minimal in-person interaction and a heavy reliance on the latest investing tools and software.
One of the most popular robo-advisors by far is Betterment. Conceptualized by its founders in 2008, Betterment has since grown to help its customers invest billions of dollars of their hard-earned dollars. This is an investment platform that puts your investing on cruise control, and even allows you to make money watching TV! You can open an account with no money at all, and get the benefit of professional, low-cost investment management that enables you to invest in thousands of securities with as little as a few hundred dollars.
It hasnât been easy. With other competitors like Wealthfront and Personal Capital always a few steps behind them, Betterment has struggled to find a way to stand out. Even with the competition, Betterment has emerged as one of the top online brokerage accounts and continues to grow its market share.
Open an account
0.25% to 0.40% annual management fee, depending on the plan
No trade, transfer or rebalancing fees
No minimum balance
Hands-off investing tailored to your goals and risk preference
Betterment is an online, automated investment manager that uses advanced algorithms and software to find the perfect investment strategy for your portfolio and individual needs.
The main difference between investing your money with a traditional financial advisor and Betterment is that there is minimal human interaction. Unless you email or call in, your communication with an individual advisor will be very minimal.
But, there is some good news to counteract the lack of individual service. Because of lower operating costs, Betterment is able to charge lower fees than traditional financial advisors. This can be huge for individuals who want to take a hands-off approach to their retirement accounts, yet donât want to pay top dollar for access to a top-tier financial advisor in their area.
Using complex investment software, Betterment allocates your investment portfolio based on your individual circumstances, investment time horizon, and thirst for risk.
In the meantime, they keep fees at a minimum by using ETFs (exchange-traded fund) that let you have a diversified portfolio, like mutual funds, but are tradeable much like stocks.
Since ETFs come with very low expense ratios, Betterment is able to pass those savings along to the consumer. Although the program already manages over $16 billion for their clients, they are still growing at a rapid pace.
Because the service is able and willing to deal with investors at all stages of wealth accumulation, it has become a go-to for both experienced and novice investors with various investing goals.
Further, Bettermentâs portfolio strategy isnât geared just for retirement savings; the service can also improve your returns on dollars you invest for short-term and medium-term goals like saving for college, taking an annual vacation, or building up a cash reserve.
How Betterment Works
Like post other robo-advisors, Betterment provides complete, automated investment management of your portfolio. When you sign up for the service, youâll complete a questionnaire that will determine your risk tolerance, investment goals, and time horizon. From that information, Betterment determines your portfolio will be designed as conservatives, aggressive, or some level in between.
Over time however, Betterment may adjust your portfolio to become gradually more conservative. For example, as you move closer to retirement, your asset allocation will be gradually shifted more heavily in favor of safe investments, like bonds.
Your portfolio will be constructed of exchange traded funds (ETFs), which are low-cost investment funds designed to track the performance of an underlying index. In this way, Betterment attempts to match the performance of the underlying indexes, rather than to outperform them. For this reason, investing with Betterment â and most other robo-advisors â is considered to be passive investing. (Active investing involves frequent trading of stocks and other securities in an attempt to outperform the market.)
Betterment also uses allocations based on broad investment categories. There are three in total:
Safety Net â These are funds allocated for near-term needs, such as an emergency fund.
Retirement â This will naturally be your long-term investment account and held in tax-sheltered IRAs.
General Investing â This allocation is dedicated to intermediate goals, maybe saving for the down payment on a house or even for your childrenâs education.
Given that each of the three broad goals has a different time horizon, the specific portfolio allocation in each will be a little bit different. For example, the Safety Net will be invested in cash type accounts for safety and liquidity.
Betterment Advantages And Disadvantages
Thereâs no minimum investment required.
The low annual fee of 0.25% on the Digital plan can allow you to have a $20,000 account managed for just $50 per year, or a $100,000 account for just $250.
Tax-loss harvesting is available at all taxable accounts.
Betterment Premium provides unlimited access to certified financial planners, providing a service similar to traditional investment advisors, but at a fraction of the cost.
The No-fee Checking and Cash Reserve give you cash management options to go with your investing activities.
Betterment offers several portfolio options, including Smart Beta, Socially Responsible Investing, and the BlackRock Targeted Income Portfolio.
The use of value funds also adds the potential for your investment accounts to outperform the general market, since value stocks tend to be underpriced relative to their competitors.
Flexible Portfolio will give you some control over your investment allocations, which is a feature absent from most robo-advisors.
Bettermentâs annual advisory fee is on the low end of the robo-advisor range. But there are some robo-advisors charging no fees at all.
Betterment doesnât offer alternative investments. These include natural resources and real estate, which are offered by some of their competitors.
External account syncing is available only with Betterment Premium.
The Betterment Investment Methodology
Like most other robo-advisors, Betterment manages your investment account using Modern Portfolio Theory, or MPT. The theory emphasizes proper allocations into various asset classes over individual security selection.
Your portfolio is divided between six stock asset allocations and eight bond asset allocations. Each allocation is represented by a single ETF thatâs tied to an index specific to that asset class. The single ETF will provide exposure to scores or even hundreds of securities in each asset class. That means collectively your investment will be spread across thousands of securities in the US and internationally.
The six stock asset allocations are as follows:
US Total Stock Market
US Value Stocks â Large Cap
US Value Stocks â Mid Cap
US Value Stocks â Small Cap
International Developed Market Stocks
International Emerging Markets Stocks
The eight bond asset allocations are as follows:
US High Quality Bonds
US Municipal Bonds (will be held in taxable investment accounts only)
US Inflation-Protected Bonds
US High-Yield Corporate Bonds
US Short-Term Treasury Bonds
US Short-Term Investment Grade Bonds
International Developed Market Bonds
International Emerging Markets Bonds
Since Betterment offers tax-loss harvesting with taxable investment accounts, most asset classes will have two or three very similar ETFs. This will enable Betterment to sell a losing position in one ETF to reduce capital gains in winning asset classes. Alternative ETFs are then purchased to replace the sold funds to maintain the target asset allocations in your account.
Tax-loss harvesting is becoming an increasingly popular investment strategy because it effectively defers capital gains taxes into future years. Itâs available only for taxable accounts, since tax-sheltered accounts have no immediate tax consequences.
How Betterment Compares
Here’s how Betterment compares to the previously mentioned companies, Wealthfront and Personal Capital.
Minimum Initial Investment
0.25% on Digital; 0.40% on Premium (account balance over $100k)
0.25% on all account balances
0.89% on most account balances; reduced fee on balances > $1 million
On Premium Plan only
Yes, on all taxable accounts
Yes, on all taxable accounts
Yes, on all taxable accounts
Yes, on Premium Plan only
Betterment Accounts and Options
For the first few years of Bettermentâs existence they offered a single investment account serving as a one-size-fits-all plan. But thatâs all changed. They still offer basic investment accounts, but they now give you a choice of multiple investment options.
This is Bettermentâs basic investment plan. There is no minimum initial investment required, nor is there a minimum ongoing balance requirement. Betterment charges a single fee of 0.25% on all account balances.
You can also add any other portfolio variations, except the Goldman Sachs Smart Beta portfolio, which has a $100,000 minimum account balance requirement.
Betterment Premium works similar to the Digital plan, but it delivers a higher level of service. The plan provides external account synching, giving Betterment a high altitude view of you your entire financial situation. External investment accounts can help in enabling Betterment to better coordinate your portfolio allocations with assets held in outside accounts. They can also make recommendations out to better manage those external accounts.
And perhaps the biggest advantage of the Premium plan is that it comes with unlimited access to Bettermentâs certified financial planners. In this way, Betterment is competing more directly with traditional investment advisors, but doing it with a robo-advisor component.
Youâll need a minimum of $100,000 to invest in the Premium plan, and the annual advisory fee is 0.40%. Thatâs just a fraction of the usual 1% to 2% typically charged by traditional investment advisory services.
Betterment Cash Reserve
The account pays a variable interest rate, currently set at 0.40% APY. Betterment doesnât actually hold these funds directly, but rather invest them through participating program banks.
Thereâs no fee for this account, and you can move money as often as you want. And for those with very high cash balances, the account is FDIC insured for up to $1 million through the program banks.
Betterment Socially Responsible Investing (SRI)
SRI portfolios are becoming increasingly popular in the robo-advisor space. It involves investing in companies that meet certain standards for social, environmental, and governance guidelines. Betterment indicates that the ETFs they use in their SRI portfolio have produced a 42% increase in their social responsibility scores.
SRI portfolios work with both the Digital and Premium plans, using a similar investment methodology. But they make certain modifications, holding ETFs based on SRI in place of the ETFs used in non-SRI portfolios.
SRI portfolios do not require a minimum balance and charge no additional fees. And like their Digital and Premium plans, taxable SRI investment accounts take advantage of tax-loss harvesting.
Betterment Flexible Portfolios
The key word in the name is âflexibleâ because the main feature is adding personal options to your portfolio allocations.
This is done by adjusting the individual asset class weights in your portfolio. For example, if you have a 7% allocation in emerging markets, you may choose to increase it to 10% if you believe that sector is likely to outperform others. But you can also decrease the allocation if it makes you feel uncomfortable.
Betterment Tax-Coordinated Portfolio
This is less of a formal portfolio and more of an investment strategy. It must be used in combination with a taxable investment account and a tax-sheltered retirement account. Betterment will then allocate investments based on their tax impact.
For example, income generating assets â that produce high dividend and interest income â are held in a tax-sheltered account. Investments likely to generate long-term capital gains are held in a taxable investment account, since you will be able to take advantage of lower long-term capital gains tax rates.
Goldman Sachs Smart Beta
This option is for more sophisticated investors, and requires a minimum account balance of $100,000. And since it is a high risk/high reward type of investing, it also requires a higher risk tolerance.
Betterment uses the same basic investment strategy as they do in other portfolios. But itâs an actively managed portfolio that will be adjusted in an attempt to outperform the general market. Securities will be bought and sold within the portfolio and can include either individual securities or Smart Beta ETFs.
The portfolio has many variations, including a wide range of allocations. Stocks are chosen based on four qualities: good value, strong momentum, high quality, and low volatility.
And like other portfolio variations Betterment offers, there is no additional fee for this option.
BlackRock Target Income Portfolio
Betterment recognizes that some investors are more interested in income than growth. This will particularly apply to retirees. The BlackRock Target Income Portfolio invests in portfolios based on your risk tolerance. This can mean low, moderate, high, or even aggressive.
Those categories may seem unusual for an income generating portfolio. But while the portfolio attempts to minimize risk of principal, it also recognizes that some investors are willing to add risk to their portfolio in exchange for higher returns.
A low-risk portfolio may have a higher allocation in US Treasury securities. An aggressive portfolio may center primarily on high-yield corporate bonds or even emerging-market bonds that have higher interest rates due to greater risk.
Betterment No-fee Checking
Provided by Betterment Financial LLC in partnership with NBKC Bank, this is a true no-fee checking account. Not only are there no monthly maintenance fees, but there are also no overdraft or other fees. Theyâll even reimburse all ATM fees and foreign transaction fees you incur. And thereâs not even a minimum balance requirement.
Youâll be provided with a Betterment Visa Debit Card with tap-to-pay technology, that you can use anywhere Visa is accepted. All account balances are FDIC insured for up to $250,000. And as you might expect from a company on the technological cutting edge, you can deposit checks into the account using your smartphone.
Check out our full Betterment checking review.
Betterment Key Features
Minimum initial investment: Betterment requires no funds to open an account. But you can begin funding your account with monthly deposits, like $100 per month. This method will make it easier to use dollar-cost averaging to gradually move into your portfolio positions.
Available account types: Joint and individual taxable investment accounts, as well as traditional, Roth, rollover and SEP IRAs. Betterment can also accommodate trusts and nonprofit accounts.
Portfolio rebalancing: Comes with all account types. Your portfolio will be rebalanced when your asset allocations significantly depart from their targets.
Automatic dividend reinvestment: Betterment will reinvest dividends received in your portfolio according to your target asset allocations.
Betterment Mobile App: You can access your Betterment account on your smartphone. The app is available for both iOS and Android devices.
Customer contact: Available by phone and email, Monday through Friday, from 9:00 am to 8:00 pm, Eastern time.
Account protection: All Betterment accounts are protected by SIPC insurance for up to $500,000 in cash and securities, including up to $250,000 in cash. SIPC covers losses due to broker failure, not those caused by market value declines.
Financial Advice packages: Betterment offers one-hour phone conferences with live financial advisors on various personal financial topics. Five topics are covered:
Getting Started package: This package gives new users the professional vote of confidence they need as a professional will assess their account setup. $199
Financial Checkup package: This package takes it a step further, providing the customer with a professional opinion on their portfolio and financial circumstances. $299
College Planning package: As its name implies, this package helps parents who are investing with the goal of paying for their childrenâs college education in the next 5-18 years. $299
Marriage Planning package: Merging finances can be tricky, so Betterment created this plan to help engaged couples and newlyweds to succeed as they unite their lives and assets. $299
Retirement Planning package: Your investment goals and strategies change as you near retirement. This particular package helps keep you on target to meet them. $299
Retirement Savings Calculator: Robo-advisors are popular choices for retirement accounts. For this reason, Betterment offers the Calculator to help you project your retirement needs. By entering basic information in the calculator (it will sync external accounts if you have a Premium account â including employer-sponsored retirement plans) it will let you know if you are on track to meet your goals or if you need to make adjustments.
How To Sign Up For A Betterment Account
The Betterment sign up process is one of the most user-friendly out there for any brokerage. It comes with easy-to-follow instructions and as streamlined registration process which users can navigate through in a matter of minutes.
First get the process started by clicking the button below.
Sign up for a Betterment Account
After the initial sign up process, users can expect a simple transaction as they transfer funds into the account, much like moving money from a checking to savings account.
When you begin the sign-up process, youâll be given a choice of four different investment goals:
I chose âInvest for retirementâ. It will ask your current age, your annual income, then give you a choice of accounts to use. That includes a traditional, Roth, or SEP IRA, or even an individual taxable account. I selected a traditional IRA.
Based on a 30-year-old with a $100,000 income, Betterment return the following recommendation:
You even have the option to have the specific asset allocations listed. After clicking âContinueâ, youâll be asked to provide your email address and create a password. Youâll then be taken to the application, which will ask for general information, including your name, address, phone number, and how you heard about Betterment.
Once your account has been set up, you can fund it immediately, by connecting your bank account, or by setting up recurring deposits.
You can also set up other accounts, such as âManage spending with Checkingâ or âInvest for a long-term goalâ.
Why You Should Open An Account With Betterment
While nearly anyone who invests could benefit from the online portfolio management and advising, this service is definitely geared to certain types of investors. In most cases, Betterment will work best for:
Hands-off investors who have some investing knowledge â Since it takes care of the heavy lifting for you, it works best for investors who want to take a hands-off approach to their investment portfolio. Passive investors can let Betterment handle the logistics while using online account management to keep a close eye on their accounts.
Novice investors who need help â Beginning investors who are just learning the ropes can turn to Betterment for online portfolio management with low fees. The many online tools and user-friendly interface make it easy for beginners to get a grasp on basic financial concepts and investing strategies.
Robo-advisors are growing in popularity and could easily replace in-person advisors in the near future. With lower fees and advanced software that can maximize results, online investing is certainly gaining an edge.
Whether Betterment is right for you depends on your individual needs and investing goals. If youâre a hands-off investor who wants to grow your retirement funds without paying a lot of fees, then Betterment might be ideal. Additionally, beginning investors can benefit handsomely from the online tools and investing education offered through the Betterment website.
If you think Betterment investing might be exactly what your portfolio needs, sign up for a new account today.
However, if you determine that you would be better served by a more hands-on approach, check out the other online brokerage account options. Being a certified financial planner, I have had a chance to work with several of these platforms and have done the following reviews:
Motif Investing Review
Lending Club Review
Ally Invest Review
The post Betterment Investing Review: Make Investing Automatic appeared first on Good Financial CentsÂ®.
A fiduciary deposit account is an account thatâs owned by one or more persons but managed by another. The owner is known as the principal, while the manager is known as the fiduciary. These accounts are sometimes used to handle estate or trust assets, among other purposes. Their legal status and their insurance coverage are determined by the Federal Deposit Insurance Corporation (FDIC). Hereâs what you need to know about this type of account.
Fiduciary Deposit Account, Defined
A fiduciary deposit account, also known as a principal account, is a deposit account that a person or other entity, acting as a fiduciary, establishes to benefit one or more persons who own the assets in the account, according to FDIC rules. The individual who opens the account doesnât have ownership of it nor any ownership interest.
Some examples of fiduciaries of these accounts are trustees, agents, nominees, custodians and guardians. Fiduciary accounts are used in various ways:
Uniform Transfers to Minors Act (UTMA) accounts
Uniform Gifts to Minors Act (UGMA) accounts
Decedent estate accounts
Real estate and other escrow accounts
Accounts with a power of attorney
When FDIC Pass-Through Insurance Coverage Applies
All deposits managed by a fiduciary on behalf of the accountâs owner or owners are insured by the FDIC for the full $250,000 on a pass-through basis. This means that all the deposits are considered to be deposits made directly from the principal as long as three requirements are met:
The owner of the funds must be the principal and not the fiduciary who set up the account. The FDIC may review the fiduciary and ownerâs agreement on the account as well as state laws to confirm this.
The record of the insured depository institution (IDI) account must indicate the agency nature of the account. For example, the ownership of the account may read ABC Company as custodian, ABC for the benefit of (FBO) or Sally Rowe UTMA John Rowe, Jr.
The IDI, fiduciary and third-party records must show the ownersâ identities and the ownership interest(s) in the deposit account.
For example, letâs say XYZ Brokerage firm establishes an account for Sally Rowe at ABC Bank. In this example, Sally Rowe is the owner, or the principal, of the money in the account. This account would then be added with any other single accounts she owns at ABC Bank, which would be insured as a single account for up to $250,000.
If we assume Sally has more single ownership accounts at ABC Bank, she will not receive additional coverage because XYZ Brokerage firm opened the account for her. With a fiduciary account, coverage is provided as though the actual owner opened the account at the IDI, assuming all responsibilities are met.
Pass-through coverage is also possible if a guardian retains part of the interest paid by the IDI as a guardian fee.
When FDIC Pass-Through Insurance Coverage Doesnât Apply
If requirements of a fiduciary account are not met, the account will be insured under the fiduciary, not the intended principal. In this case, the fiduciary will own the deposits and the account will be categorized as a single account or corporate account. These deposits will then be combined with other deposits the fiduciary holds in the same ownership at the IDI where funds are held. The total sum will be insured up to $250,000.
For example, letâs say a customer of a deposit broker is assured by the guardian (fiduciary) that he or she will earn 5% on a deposit when the IDI is paying only 3%. The guardian would not be a guardian then; he or she would be a borrower with an independent responsibility to pay 5%. In this case, the deposits are no longer eligible for pass-through coverage for the principal. Instead, the deposits are now considered corporate deposits belonging to the guardian.
A fiduciary deposit account is an account set up by someone for another person, who actually owns the money. The one who sets up the account and manages it is known as the fiduciary, while the owner of the money is known as a principal. This kind of arrangement is used to handle assets in trusts, escrow accounts, brokerage accounts and decedent estates, among other uses. Itâs important that these arrangements carefully follow all the FDICâs legal requirements, as well as applicable state regulations, to qualify as a fiduciary deposit account.
Estate Planning Tips
Consider talking to a financial advisor about your estate plans. Finding a financial advisor doesnât have to be hard. SmartAssetâs free financial advisor matching service can connect you with several in your area in minutes. If youâre ready, get started now.
If you have an agent, they may make decisions about your 401(k) account. Find out how much money youâll have in your account by the time you retire with our free 401(k) calculator.