August Newsletter 2008

Synergy Financial Group August 2008 Newsletter

Synergy Financial Group George Van Dyke Financial Consultant 401 Washington Ave Suite 703 Towson, MD 21204 410-825-3200 410-530-2500 (cell) [email protected] www.synergyfinancialgrp.com

Making Sense of Municipal Bonds Recent action in the credit markets has created situations that are unusual in the relatively placid world of bonds. Whether you're hoping for a buying opportunity or are concerned about existing holdings, it can pay to understand some basics of municipal bonds. All munis are not alike Exemption from federal income tax isn't a muni bond's only tax advantage. If you live in the state where the muni is issued, the interest also may be free from state and local income taxes. Municipal bonds have special tax status because they are issued by state and local governments to pay for a variety of projects. Revenue bonds finance specific public works projects; their interest payments are secured by revenue from those projects. General obligation (GO) bonds are secured by the full faith and credit of the issuing body. Because of that taxing authority, GO bonds are generally perceived as less risky than revenue bonds, and usually pay a lower interest rate. Still other muni bonds may be taxable, depending on what they're used to finance. For

In this issue: Making Sense of Municipal Bonds Should a Destination Club Be Your Home Away from Home? The Three C's of Credit Ask the Experts

A so-called flight to quality last spring sent many investors into the relative safety of Treasury bonds, and prices rose as a result. Because bond yields move in the opposite direction from their prices, Treasury yields dropped. Simultaneously, concern about the companies that insure bonds also cut demand for many other types of bonds, including some municipal ("muni") bonds that historically have had relatively low default rates and haven't required insurance protection. With reduced demand and lower prices came increased yields. In some cases, yields on munis have even exceeded those of Treasury bonds; traditionally, Treasuries have offered higher interest rates, largely because they don't offer munis' exemption from federal income tax.

example, so-called private activity bonds fund projects that provide a significant benefit to private interests, such as a sports stadium. Because they lack the tax advantages of tax-exempt munis, their rates typically are more comparable to corporate bonds. They also are included when calculating any alternative minimum tax (AMT) liability, so you may want to consult a tax professional about them. Interest paid by a muni bond fund may or may not be tax free, depending on how the fund is invested; obtain and read a fund's prospectus before investing, and weigh your objectives, risk tolerance, and time horizon. Are munis appropriate for you? Although the stated interest rate on a muni bond is generally lower than the rate offered by a taxable bond of similar credit and duration, a tax-free muni bond actually may provide a greater after-tax yield. The higher your tax bracket, the more attractive a tax-exempt investment becomes. For example, if your marginal tax rate is 35%, a taxable investment would need to yield 9.23% to equal a taxexempt yield of 6%. You'll need to compare a bond investment's tax-equivalent yield to know if it's a tax-efficient choice for you. Other factors to consider Munis involve a variety of risks. Like other bonds, muni prices typically tend to rise when interest rates fall, and drop when rates go up. Liquidity risk--the possibility that you might not be able to sell a bond--has been a factor recently. So has credit risk--the risk (real or perceived) that a bond's issuer may not make interest or principal payments. Inflation risk also can decrease demand for bonds and in turn lower their prices, because rising consumer costs cut the purchasing power of a bond's fixed interest payments.

Page 2 Should a Destination Club Be Your Home Away from Home? If you've thought about buying or building a vacation home, but have hesitated because you aren't sure that you want to limit yourself to a single location, there's an alternative you may want to consider: purchasing a membership in a destination club. What are destination clubs?

Destination clubs vs. residence clubs With a residence club, you're generally buying a share in a specific property. Destination clubs, while similar in many respects, offer memberships that tend to be more flexible, and are not tied to any specific property.

Destination clubs are becoming increasingly popular. In return for a one-time membership fee and annual dues, destination club members are allowed to use a club's global network of luxurious properties for a certain amount of time each year, depending on their membership level. Club holdings are generally restricted to high-end properties--typically those with values of $1.5 million to $3 million. Accommodations are usually large, luxurious private homes, villas, and apartments that are located in travel hot spots such as cities and resort areas. They offer upscale amenities, and a host of personal services. A destination club or a vacation home? If you've ever fallen in love with a vacation spot, you know that there are some places worth going back to. You may be happy to own a home in a favorite locale and travel to it year after year. One of the main advantages of owning a vacation home is that you're in the driver's seat. You can use the property as often as you like, invite friends or family members to use it, or even rent it out. You can also customize your home and decorate it as you wish. But no matter how much you enjoy owning a vacation home, there's no escaping the fact that it's a big responsibility. You have to worry about maintaining it, and you must handle all expected--and unexpected--expenses. The hallmark of a destination club, on the other hand, is flexibility. Joining a destination club allows you to travel to many different places and stay in homes spacious enough to accommodate your family and friends, without the hassles of owning vacation property. Comparing costs To compare a destination club membership financially with the purchase of a second home, you have to consider the upfront and ongoing costs of each. Some costs may be similar. For example, maybe you're considering a destination club with a one-time membership fee of $300,000 and annual dues of $25,000. Alternatively, you could buy a comparable property, let's say one that's worth $1.5 million. If you opt to finance the home,

your $300,000 (20%) down payment would be equivalent to the destination club's membership fee, and the amount you'll spend annually on home maintenance and utility costs could be equivalent to the destination club's annual dues. (Of course, financing the remaining $1.2 million of the home's purchase price will also mean making significant monthly payments.) Costs can vary widely, however. Initial membership fees for a destination club typically range from $100,000 to $1 million or more, and annual fees typically range from $10,000 to $75,000 or more. Home ownership costs may include mortgage expenses, taxes, insurance, utilities, and maintenance (which may be offset somewhat by any rental income you receive). Another variable to account for is what you'll get for your money. Destination club memberships entitle you to a certain number of days of use annually, whereas you can use a vacation home as much as you'd like. You'll also need to take into account home values. For example, joining a destination club may entitle you to stay in a home worth much more than one you could afford to buy (and will also give you access to personal concierge services), but it depends on the specifics. As a vacation home owner, you can decide when to sell your property, and you'll benefit from any appreciation in value. Destination clubs, on the other hand, are frank about the fact that becoming a member should be viewed mainly as a lifestyle decision, rather than as an investment decision, although some do allow you to benefit directly or indirectly from any appreciation in the club's property values. Most destination clubs also have provisions that enable you to "cash out" your membership at your request. For example, you may be allowed to cash out your membership for a specified percentage of the membership fee being charged at the time (generally 80% to 100%). If that's the case, you might benefit if you cash out at a time when the club's holdings have risen in value and membership fees are higher than when you joined. Do your homework When you join a destination club you're committing a substantial amount of money. So, make sure that the club is financially sound. Get information about the club's finances, and carefully read materials and contracts before you sign on the dotted line.

Page 3 The Three C's of Credit When you're looking for credit, it's worth understanding what potential creditors are looking for when they're looking at you. Traditionally, they're looking for the three C's: capacity, character, and collateral. Capacity

When it comes to your credit character, lenders often look for another C: consistency. Have you bounced around from address to address, or job to job? Doing so makes creditors nervous. Longevity in employment and residency indicate stability, and that's what creditors like to see.

Potential creditors want to know if you have the wherewithal to repay a debt. To this end, they'll inquire (usually on an application form) about your income information: How much is it? Does it come from wages, commissions, or some other source? Does it come on a regular or seasonal basis?

Lenders also firmly believe that your past actions are a good predictor of your future behavior. So, they're looking to see if you've used credit before, and what your repayment track record has been like. To do this, they rely primarily on your credit report and your credit score.

On the flip side, they'll also want to know about your expenses, especially any debt obligations. In addition, they'll want to know how many dependents you have and whether you're required to pay any child support and/ or alimony. Of particular interest to potential creditors is your debt-to-income ratio. This ratio compares your monthly recurring debt obligations to your monthly gross income. Your recurring obligations include your mortgage or rent, credit card payments, loan payments--including the one you're applying for--and alimony/child support you pay. Your income includes bonuses, commissions, and any other income you receive, such as Social Security, pensions, and alimony/child support. Note: The debt-to-income ratio is also known as the back-end ratio. A second ratio, called the front-end ratio, compares your rent or total mortgage payment to your gross income, and is used primarily to determine whether you qualify for certain mortgage loans. Your debt-to-income ratio goes a long way toward determining whether you are granted credit, how much, and at what interest rates. While many other factors affect your capacity to repay a loan, lenders generally consider debt-to-income ratios of 35% or less to be ideal, 36% to 42% to be manageable, 44% to 49% to be risky, and 50% or above to be unacceptable.

Collateral Maybe you've proven your capacity to repay a loan and your excellent character, but the lender may want something of value to secure the debt, particularly if the loan is for a large amount and/or a long term. If you default on the loan, the lender would be legally entitled to take possession of that item as a form of compensation. Tangible property used in this fashion is called collateral. Typical examples of consumer loans that involve collateral arrangements are mortgages and home equity loans (failure to repay the loan can result in foreclosure) and vehicle loans (failure to repay the loan can result in repossession). While seizing property in the event of a loan default may not repay the entire balance due, it would at least mitigate the creditor's loss. The "can'ts" of credit There are some things a potential creditor can't do when considering you for credit. A creditor can't use your age, gender, marital status, race, color, religion, or national origin to: •

Discourage you from applying for credit

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Refuse to grant you credit if you otherwise qualify for it

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Make you a loan on terms different from those granted another person with similar income, expenses, credit history, and collateral

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Close an existing account

Character Okay, your sweetheart thinks you're the best thing since sliced bread, and your bosom buddy knows you're one in a million. But that's not the sort of character endorsement creditors are looking for. What creditors want to know is, given that you can repay a debt (capacity), will you?

Furthermore, a creditor can't refuse to consider any public income you may receive, such as Social Security, veterans benefits, or welfare benefits.

Other C's that matter Capital: Assets that could cover a debt (such as investments, bank savings accounts, personal property, or real estate) if your income became unavailable. In some cases, lenders will want you to use your capital as collateral. Conditions: These are often factors beyond your control, such as the general health of the economy, a growth spurt or a downturn in the industry that employs you, and even (for mortgages) changes in the neighborhood around your property.

Ask the Experts Will the current credit crunch impact my child's ability to get a student loan for college?

Synergy Financial Group George Van Dyke Financial Consultant 401 Washington Ave Suite 703 Towson, MD 21204 410-825-3200 410-530-2500 (cell) [email protected] www.synergyfinancialgrp.com

George Van Dyke is a Financial Consultant with Synergy Financial Group of Towson Maryland. Securities offered through LPL Financial (LPL) Member FINRA, SIPC. LPL does not provide legal or tax advice. The information contained in this report should be used for informational purposes only. Synergy's mission is to build, preserve and protect the capital of our clients by offering a comprehensive and professional level of advisory and planning services as well as providing exceptional customer service. Our investment objective is to provide serious investors with a very acceptable after tax (where applicable) total return over a long term horizon. We recommend investing in a diversified portfolio of high quality securities spread over multiple asset classes. We place emphasis on creating tax efficient portfolios and managing risk. Through modern asset allocation techniques, portfolios are assembled to match each investor's individual investment goals and risk tolerance.

Prepared by Forefield Inc, Copyright 2008

It's hard to say whether the credit crunch will prevent students from obtaining the financing they need to pay for college. According to the College Board, last year students and their families borrowed nearly $60 billion in federal loans and $17 billion in private loans for college. In order to understand the current student lending market, some background is helpful.

The problem was big enough to attract the attention of the federal government-legislation passed in May allows the Department of Education to buy billions of dollars in federal student loans from private lenders to keep money flowing into the widely used FFELP. The consensus is that there will be enough federal student loan money--Stafford, Perkins, and PLUS Loans--in the FFELP to go around for the 2008/09 academic year.

Federal student loans. Under the Federal Family Education Loan Program (FFELP), private lenders receive subsidies from the federal government to issue federal student loans at reduced interest rates. But last year, Congress slashed subsidies to FFELP lenders. This, coupled with tightening credit and near paralysis in the secondary debt markets, created the perfect storm--a student lending market in potential turmoil due to the unwillingness and/or inability of some private lenders (to date more than 50) to make, package, and sell federal student loans.

Private student loans. Over the past decade, the use of private student loans to finance college has soared as federal student loans fail to keep up with rising costs. This year, college students in need of private loans are expected to face higher interest rates and more stringent credit checks. Unfortunately, this means that some students who qualified for a loan last year may not this year, or they may have to pay a higher interest rate. The federal government has not proposed buying private student loans, so lenders will be on their own to raise the necessary capital.

What is a Parent PLUS Loan? A Parent PLUS Loan is a federal student loan available to parents with good credit histories who want to help pay for their dependent child's undergraduate education. (A similar Graduate PLUS Loan is available to graduate students.) Under the program, parents can borrow up to the full cost of their child's college education each year, less any financial aid received. For example, if college costs $30,000 this year and a student receives $10,000 in financial aid, parents would potentially be eligible for a $20,000 PLUS Loan. To qualify, students must be attending an eligible school at least half time. PLUS Loans aren't based on financial need; parents need only pass a credit check. Under new federal legislation passed in May, parents who are delinquent up to 180 days on their home mortgage or medical debt will still be considered creditworthy to borrow under the program.

The interest rate on all PLUS Loans issued on or after July 1, 2006, is capped at 8.5%. (For PLUS Loans issued before this date, the interest rate is variable, adjusted each July, and capped at 9%.) Interest begins accruing upon the first loan disbursement, but thanks to the recent legislation, parents have the option to defer repayment of the loan for up to six months after their child leaves school. Previously, repayment was required to begin within 60 days of the last loan disbursement for that year. PLUS Loans can be made either by private lenders who participate in the Federal Family Education Loan Program (FFELP), or directly by the federal government under the William D. Ford Federal Direct Loan Program. The federal government recently took steps to pump liquidity into the FFELP market due to turmoil in the general credit markets, so fund availability isn't expected to be a problem.