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Mortgage interest rates continue to be at historic lows.  Rates for 30-year fixed rate loans are hovering in the 4% to 4.2% range. There’s no real whiff of inflation in the air that could lead to a spike in interest rates any time soon.

So should you refinance?  Crunching the numbers is crucial.

When I was a mortgage banker, the rule of thumb would be it made sense when prevailing interest rates were 2% or more below your current rate.  With the availability of zero point and zero closing cost loans, it even made sense when the rate was a mere 1/2% difference.  It was common for homeowners to get calls from their mortgage brokers alerting them that the rates had dipped and they should refinance even before the homeowner may have made their first mortgage payment on their new loan.  It was even common for mortgage brokers to keep current copies of income, credit and asset verification forms on file in order to start a new application quickly.

Things have certainly changed since the refinance booms of the 1980s and late 1990s.

Property market values have fallen throughout many parts of the country.  The number of jobless are at historic highs.  Credit has been strained by more than two years of economic crisis and now malaise. Banks are in much less tolerant moods now to offer special deals or bend the rules when underwriting a loan.

Since buying and owning a home is one of the largest investments for many, it pays to consult with a professional who can help you sort all of this out.

Break Even

One of the first things that an adviser can help you do is make an informed decision about how this refinance will impact the total picture for your personal finances.

Paying off debts and consolidating credit cards may look good but if you’ll just end up running up the tabs on these accounts right after the refinance, then you’re no further ahead.

Assuming you will not be tempted into debt again, then you need to figure out what the refinance will cost compared to the potential interest savings.  The “break even” point in terms of months or years is calculated by dividing the costs by the projected savings.

For example, if you took out a $400,000 loan three years at a 30-year fixed rate of 5.5%, then your principal and interest payment(P&I) is $2,271.16 per month.  After three years of payments, your balance is about $382,905 if you made no additional payments to principal.

Let’s assume that the prevailing rate now for the same loan term is 4.5% and your new loan will be just enough to pay off the old balance and any closing costs for this loan.  Assuming a new loan amount of $395,000 to cover 1 point (or 1% of the loan), plus the various fees and the payoff balance of about $385,200 (payoff balances are higher than statement balances because of accrued interest), then the new monthly payment is estimated at $2,001.41 for P&I.

The $9,800 in closing costs divided by the estimated monthly savings of $269.75 translates to a break even of 36 months. So if you think you’ll likely remain in the home for at least 3 years, then it may mean more cash flow into your pocket.

Selling or refinancing before then means that you will not be better off and your actual effective interest cost for borrowing (the Annual Percentage Rate) will actually be much higher than the stated coupon rate.

What’s not taken into account by this calculation is the additional interest that you are going to pay because you will be extending the term of the loan by three years. Sure, the new loan will be written for a 30-year term.  But so was the last one you had started three years ago in this example.  So instead of being mortgage-free in 2037, you’ll be paying on this loan until 2040 if you don’t refinance before then or sell the property.

Try a Different Term

Just because you’ve always had a 30-year fixed rate doesn’t mean that you have to always get the same term.  Usually, a term of 20-year or 25-years is offered at the same interest rate.  Assuming you can handle the higher payment for the shorter term, it may make sense.

In this example, a 25-year term fixed rate loan at 4.5% for $395,000 will mean a P&I payment of $2,195.54 each month.  Compared to the original loan payment of $2,271.16, this means your monthly cash outflow will increase by $75.  But you will save two years in interest payments over the old loan.

Cash In or Cash Out

Instead of “cashing out” equity and walking away from the closing table with a check, it’s becoming common to see people “cashing in” and come to the closing table with a check to pay towards the loan payoff.

This may be because the homeowner wants a lower payment.  Or it could more likely be because of the drop in property value and the lender’s loan-to-value limits.

In either case, you now need to consider whether locking up this cash by paying it to the bank makes sense. Will it still leave you with sufficient emergency cash reserves? Besides flexibility, what else are you giving up?  Could this money be invested somewhere else and what could you expect as a return?

This is the kind of comparative analysis that a qualified financial adviser can provide when making such financial decisions.

Home Equity Value: Another Potential Problem

These are best case scenarios.  What happens if the property value has dropped?  If you had less than 20% equity in your property when you bought or last refinanced, it’s quite possible that you may not have enough equity to do a refinance.  Or you might be underwater with your current loan above the market value.

Even if there is equity to do a refinance, there are new risk-based lending guidelines that require the lender to tack on an additional amount to the interest rate or the closing costs or both if the loan amount is higher than 75% of the appraised value.

And depending on the area, some lenders are not taking the appraised value provided by the appraiser without reducing it by a 5% “haircut” which may make it economically unfeasible to do the loan or qualify under the lender’s counter-terms offered.

Staff Crunch, Delays and Legal Issues

Given the low rates, lenders are swamped with applications and may not be able to process an application within your rate lock period.

And recent issues regarding the proper filing of mortgage documents that is now resulting in some homeowners challenging their foreclosures could spill over to good credit quality borrowers as well.  In addition to the drain on lender resources to fix this problem, it could delay conveyance attorneys or title companies in tracking down the records needed to do a proper title search.

So should you refinance? If it fits into your financial plan, then yes.  If you don’t have a financial plan, then call a qualified adviser to get one before trying to figure all this out on your own.


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It is said that when the British surrendered to the Colonial Army at Yorktown the band played a tune titled “The World Turned Upside Down.”  True or not, it is a fitting sound track to a seemingly improbable situation: The defeat of a well-trained army and navy of the most powerful empire in the world by an under-funded, out-numbered and ill-equipped army of colonials. It was as if the Sun, Earth and stars had become unhitched leaving navigators without their usual bearings.

In much the same way, the Great Recession has shattered our views on what is ‘safe’ and what it means to be ‘conservative’ or ‘aggressive.’  Looking to preserve capital and produce income?  Invest in government bonds and maybe real estate.  Young and looking to score big on the potential upside of stocks? Go for small company stocks or overseas because if there’s a bust you’ll have time to recover. At least that was the conventional thinking. Everything that was traditionally considered to be ‘safe’ and dull turned out to be dangerous and ‘risky.’

There’s nothing scarier than conventional thinking in a changing market.  And what has evolved after the near melt down of the US financial system – indeed the global financial system – in the Fall of 2008 is certainly a changed market.

Household names including the bluest of the Blue Chips have entered and come out of bankruptcy.  The foundation for wealth for most people – real estate – has crumbled and is a long way from recovery to previous levels. Government debt of developed countries considered at one time to be nearly risk-less have been to the precipice as Greece neared default and threatened the entire Euro zone. Now, it’s not even beyond the pale to consider a future downgrade of the credit rating of the US Government.

Having an understanding of risk is important not just for investors but for the advisers trying to guide them.  In the past, an adviser (or your company’s 401k web site) would have you fill out a questionnaire.  Those eight to 12 questions would identify the type of investor you were and lead to an asset allocation reasonably appropriate for an investor’s Risk Profile, Time Horizon and Goals. This was sometimes considered a “set and forget” type of thing.

But commonsense and our experience tell us that things change.  Take the weather:  Some days it’s sunny and other times it’s rainy or cold.  What you wear on one day or even part of a day may not be right when the weather changes.  That’s just like investing.  A risk profile and asset allocation determined at one point might not be right for another.

So risk profiles are not static things either.  Invariably, they change based on how we feel. Hey, we’re only human. You need to reconsider your risk appetite regularly and now is a good time.  And it should be more than a few multiple choice questions.

After the run-ups in the markets in the late 90’s, people would tend to see things going up perpetually and say they would be more comfortable with risk.  On the other hand, after the two major meltdowns this past decade, the pendulum has swung the other way. Too far, in fact.

Faced with our own emotions and the vagaries of a global economic system, one might consider it to be less risky to sit on the sidelines.  Or maybe it’s safe to put all your chips on what you know – like your company stock.  Or just cash it all out and leave it parked in a money market or bank.

At first glance these strategies may be considered low risk but in reality – even the reality of today’s changed world – they are not.  Your company stock?  Consider Enron or Lucent and ask their employees how their retirement accounts held up.  Cash?  At the minuscule rates banks are offering, you’re already behind the eight ball with taxes and inflation.

There’s more to risk than the volatile nature of an asset’s price. And what should matter most is not which assets are owned but how well they perform on the upside and downside.

If you’re hungry, your goal is to not be hungry.  You say you like to eat steak and always eat steak.  Well, that’s great but the risk of heart disease may catch up to you.  So what you ate before may not be right for you now. Maybe it’s time to substitute more fish and add more vegetables.

That’s the essence of remodeling your portfolio now.  Government bonds still have a place in your portfolio – just like that steak – but it’s time to scale back on the developed nations of Europe with their risks of default and the US where another bubble is brewing and add those from emerging markets. If you own gold or want to buy it because it’s a “safe haven” for inflationary times and you don’t want to miss the boat, consider other more usable commodities like potash.  (As the world adds nearly 75 million people a year, there’s a growing demand for cultivating food for them and potash is a staple needed for fertilizers).  After seeing a huge multi-national like BP get hammered for its lackadaisical approach to employee and environmental safety, it may be time to add more small companies to the mix which have less bureaucracy and may be faster to respond to opportunities and troubles.

The risky stuff may actually be more safe than the traditional stuff.

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“Sometimes all it takes to change your life massively for the better is a small action and a small success, “ says David Bach, a noted author on money matters. 

  1. Consolidate Your Accounts:  Don’t wait for spring cleaning to roll around.  Make it easier on yourself by combining old 401(k) or IRA balances from your various old jobs.  This can help cut down on the amount of paper you receive and improve the chances you’ll have a coordinated investment plan. And it’s just one more way to have a more ‘green’ holiday.
  2. Pay Yourself First: While there always seems like there’s more month at the end of your paycheck, you can only get ahead by making a point of putting aside money in savings.  It doesn’t matter if it’s just $5 or 5% of each paycheck as long as it’s consistent.  Start somewhere and try to build up to your target of at least 5% of your net cash flow. Direct the money into a separate money market account that you can’t access easily from an ATM or debit card.
  3. Get to Know Where Your Money Goes:  For most people cash flow is not the problem. It’s cash retention that is a challenge. There always seems to be too much flow away from you.  Set up a system to keep track of where your money is spent.  Whether you decide to use a notebook or financial accounting software like Quicken or an online service like Mint.com, this is a first step to getting the information you need to decide what your spending priorities should be. 
  4. Cut Expenses:  Armed with the information from your tracking, now consider ways to lower expenses.  Do you really need a daily Mucho Grande from your favorite coffee place?  At $5 a day, your habit could help pay for your annual vacation or pay down your credit card or mortgage debt. Do you really use all those movie channels?  Can you wear a sweater and lower the thermostat?  Do you really need to be in the mall? Cut down on impulse shopping by creating and sticking to a master list of groceries and household goods.
  5. Reduce Temptation: Consider saving the bulk of any bonus checks or raises.  By automatically diverting this money, you’ll be able to add to your emergency stash, have cash to pay down debt or even invest. See #2 above.
  6. Reevaluate Your Risk Tolerance:  One of the most useful services that financial planners can offer is helping you really articulate your goals and establish your tolerance for investing risk.  After the bumpy ride of the past 18 months, most folks realize that they may not have had a handle on this.
  7. Avoid the Casino Mentality: It is an understatement that investing in the market can be risky but now is not the time to try to play catch up by “doubling down” or chasing the hottest investments ideas.  Remember the story of the tortoise and hare.  Sometimes the race doesn’t go to the swiftest but the most consistent.  So diversify your eggs into different baskets and watch those baskets.  For help in choosing the right mix of investments and a style that will help you sleep better at night, consider meeting with a CERTIFIED FINANCIAL PLANNER ™ professional.
  8. Rebalance Your Investments:  Over time, accounts that have been consistently rebalanced tend to have higher balances.  So plan to rebalance at least annually or even quarterly.  But first you need to have targets in mind so that you can unemotionally prune back your winners while adding to the laggards.
  9. Add to Your Retirement:  If you haven’t taken advantage of your employer’s sponsored retirement plan, start now.  If your employer doesn’t offer a plan or you’re self-employed, start your own.  Resolve to set aside at least the amount that will get you the maximum company match.   Ideally, you should know your “NUMBER” for living in retirement the way you want.  Consulting with a CERTIFIED FINANCIAL PLANNER ™ professional can help you here.
  10. Get Planning Advice to Map Your Route to Your Goals:  Maybe you’ve winged it and thought your home and 401(k) were your tickets to a secure retirement.  Odds are that your planning is not filling the bill.  Sit down with a CERTIFIED FINANCIAL PLANNER ™ professional to discuss your whole picture and map out the action steps that will help keep you on track for financial success.

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Is real estate still a good investment?

As a landlord dealing with sometimes rowdy tenants or unexpected repairs, you may wonder whether or not it’s still worth it.

Despite these headaches and the ongoing doom and gloom reported about real estate prices, owning investment real estate continues to provide a number of benefits.

Buying a property offers a number of favorable tax benefits, a way to generate income, diversify a personal investment allocation and in some cases have a tenant pay for your personal housing expenses.

As an investment property owner, you can deduct a host of expenses connected with operating the property including mortgage interest, property taxes, utilities and repairs. Aside from actual expenses incurred, property owners also benefit from a valuable non-cash expense: depreciation.

Losses generated from rental activities are typically considered to be “passive activity losses” with an exception for real estate professional. These losses can then be used to offset other passive income from another real estate investment or another type of passive investment such as in a private limited partnership. Disallowed passive activity losses and credits are deferred until there is passive income generated or the property is disposed in a taxable transaction.

Like all good rules there are exceptions. Although “passive activity” losses by rule must be used to offset other passive activity income, there are additional tax benefits available to those who are low- or middle income earning households.

For those who have adjusted gross income below $100,000 and “actively participate” in the management of the rental property, a real estate investor may use up to $25,000 in passive activity losses to offset non-passive income like income from wages or a business.

This remains one of the few tax shelters available to moderate income taxpayers. And like any other gift from the IRS, it comes with certain strings attached. In this case, the ability to use this passive activity loss exception phases out above certain income thresholds starting at $100,000 of AGI reduced $1 for every $2 of income above the threshold until eliminated at $150,000 AGI.

The key to “active participation” generally means involvement in management decisions about the property. Choosing the kind of paint or wallpaper? Reviewing bids for different contractors? Collecting the rent? All may be considered part of the active participation of the property owner.

About Steve Stanganelli, CFP ®

Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs and retirement income planning. Steve is affiliated with Quest Financial Services, a fee-only Registered Investment Advisor located in Lynnfield and can be reached at 888-323-3456.

Article Source: http://EzineArticles.com/?expert=Steven_Stanganelli

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Do you own investment real estate or a business? Have you been considering buying a rental property or starting a business? Have kids going to college in a few years?

If you already plan on your kids going to college, it’s never too late to start planning effective and efficient ways to increase savings, lower your taxes and improve your odds for receiving student financial aid.

Let’s say you already give your children an allowance. You’re already paying out of pocket and not getting any tax benefit. With a few changes you can turn that cash outflow into a tax deductible expense that can even help your kids save for college.

Consider hiring them to work in your business or on the rental property you own.

By paying them a reasonable wage for services like landscaping, cleaning, painting, shoveling snow or doing office administrative work like filing, stuffing envelopes or printing marketing flyers, you have an additional deductible expense which lowers the net income or increases the net loss of your business or property.

And for children earning income in the family business, there is no requirement for payroll taxes. And if you keep the amount of “earned” income below certain limits, you won’t be at risk of paying any “kiddie” tax either. (“Kiddie” tax limits adjust for inflation each year).

In effect, you have shifted income from a taxpayer with a higher tax rate to a low- or no-income tax paying child.

Now get your child to open a Roth IRA with the money you pay them and they have the added benefit of tax-free saving for college since Roth IRAs can be tapped for college tuition without paying a penalty as long as the Roth is open for at least five years (restrictions apply).

By reducing your income, you can also reduce your Expected Family Contribution (EFC) which is the critical number used to determine the amount and kind of student financial aid your child can get for college. The EFC is calculated using a number of things including the amount and type of parental assets as well as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the assets and income from the year before.

So to improve your odds for financial aid, one strategy is to lower your reported income. By employing your child to lower your business or rental property income, you may be able to lower your EFC and improve the amount of aid your child receives.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.

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Did you know that close to $4.2 Trillion in IRA and retirement account assets can be invested in much more than the standard run-of-the-mill investment choices offered at Big Box investment companies?

Ever since IRAs were first introduced in the 1970s, investors have been permitted to invest in a range of stock market alternatives including non-publicly traded assets such as real estate, notes and loans, private equity and tax liens.  But not many financial advisors and even fewer investors are fully aware of the options.

Legendary investor Warren Buffett uses a simple rule for success:  Invest in what you know and understand.  Diversification offers risk protection. And what better way to diversify than to own something that you have experience with like real estate or a business?

You may find greater portfolio diversification and a return-on-investment that might be better geared to meet your individual goals when you consider investing in what you know from experience.

Any IRA including a traditional IRA, SEP, Roth IRA, Coverdell Education Savings Accounts and solo 401(k) can use a portion of IRA funds to acquire interests in these various stock market alternatives.   Essentially, an investor determines the amount and source of the funds, transfers them to an independent third party custodian to hold and then instructs the custodian to release funds to acquire an investment in one or more alternatives.  The custodian also holds all income for the investor derived from the investment.

The “rules of the road” can be complex but not impossible to navigate with proper guidance.  Basically, an investor, spouse, lineal descendant or fiduciary advisor is a “prohibited person” and cannot “self-deal” or make personal use of the property.  With few exceptions, a “prohibited person” cannot work for or take income from an IRA investment.

What can an investor do?  Combine multiple IRAs from many individuals along with personal funds to buy property as co-tenants, for example.

It’s easier to list the things that a self-directed IRA cannot use as possible investments.  These include 1.) collectibles, 2.) life insurance contracts, and 3.) stock in a Sub-Chapter “S” corporation.  Most everything else is fair game.

If structured properly, the self-directed IRA can act as a lender to help facilitate a real estate transaction. Self-directed IRAs can invest as a member of an LLC or as a stockholder of a C-Corporation or even as a Limited Partner.  This is one way to add a level of asset protection to an investment.

Harnessing the power of a self-directed IRA may offer an investor a whole new way to invest and get retirement dreams back on track.

For a guide to Self-Directed IRA Basics including the “rules of the road” for avoiding IRS trouble spots, please call 617-398-7494 or email steve@ClearViewWealthAdvisors.com for a free copy of the notes from his presentation made to Greater Lowell Landlord Association members on November 11, 2009.

About Steve Stanganelli, CFP ®

Steve is a five-star rated, board-certified financial planning professional offering specialized consulting advice on investments including self-directed IRAs.  Steve is principal of Clear View Wealth Advisors, LLC, a fee-only Registered Investment Adviser located in Amesbury and Wilmington and can be reached at 617-398-7494.

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