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Changes to the Mortgage Interest Tax Deduction

Ross Garner — Wed, 01 May 2013 22:51:25 +0000

Posted by: Ross Garner

As budget debates have consumed Washington, eyes have turned towards modifying the mortgage interest tax deduction. Long considered untouchable, changing the way homeowners can deduct their mortgage interest has drawn support from both sides of the political spectrum, though the solutions proposed range from eliminating the deduction all together to reforming the program into a tax credit.

Originally designed in 1986 as a way to increase the rates of homeownership, many now argue that this deduction goes to the wrong borrowers, disproportionally rewarding those with large mortgages and providing no help at all to the modest income homeowners with small loans. Before we get into those arguments though, let’s take a look at what the mortgage interest deduction is, how it works, and some data on who is using it today.

Mortgage Deductions Today

Some facts about the mortgage interest deduction:

25.5% of all tax payers claim the deduction
More than 70% of those eligible end up claiming it
Cost: $68 billion per year
Average deduction is $2716

The tax deduction for mortgage interest is the second most expensive tax expenditure, trailing only the deduction for employer-sponsored health insurance (which currently costs an estimated $250 billion per year). As it currently stands, the mortgage interest tax deduction allows a homeowner to deduct all of the finance charges they pay up to $1 million dollars in home loans each year. For example, if a homeowner had a $1 million mortgage at 10% interest, they could deduct up to $100,000 from their taxes that year for mortgage expenses. If they instead had a $1.5 million dollar mortgage, they still could only deduct $100,000.

Problems with the System

The current law allows most homeowners to deduct all of their mortgage interest. While that might sound like a very fair system, it also means people are rewarded for taking out bigger mortgages. Nearly 90% of the $68 billion in annual tax breaks provided for by this deduction go to less than 3% of households. What’s more, roughly 30% of the people who qualify for the mortgage interest deduction don’t even take it because the standard deduction ($6000 for single, $12,000 for joint) still winds up being more valuable than itemization.

Proposed Changes

There have been calls for a wide range of different changes to remedy this situation, including:

Eliminating the mortgage interest deduction altogether
Lowering the maximum cap from $1 million to $500,000 or less
Banning deductions for mortgages on second homes
Replacing the tax deduction with a larger first-time home buyer tax credit

Many organizations and politicians support eliminating the mortgage interest deduction altogether, saying that it promotes the wrong types of behavior and clouds the free market system. Critics have countered that ending the deduction would be foolish because while it would bring in large amounts of money each year, the new revenue would hardly cure the federal government’s budget problems, and even a small change to the program could send the still recovering housing market into a tailspin.

Others have put forth lowering the maximum allowable deduction to $500,000 or banning deducting any interest on a second home. While these are potential solutions get closer to the mark, they fail to address the real problem: the mortgage interest deduction rewards the wrong type of homebuyer. Instead of helping struggling or first-time borrowers, it subsidizes wealthy folks who could afford to carry the burden on their own.

A better solution would be gradually phasing out the interest deduction, while replacing it with a robust credit for first-time home buyers. If the true goal of the deduction is to encourage home ownership, then the best way to do that would be attacking the most difficult phase of home ownership: the first few years, when a new homeowner is usually just starting out and doesn’t have deep pockets to support themself. A large one-time tax credit that provides cover for a homeowner through that period would boost home ownership, while also bringing in more revenue to help balance the federal budget.

Looks like a Good Time to Get a Mortgage

Ross Garner — Thu, 25 Apr 2013 03:25:35 +0000

Posted by: Ross Garner

It’s pretty much a given that you’ve seen an advertisement at some point in the last few years telling you that “now is the best time to buy a house!” before quickly moving on to pictures of happy couples and new homes with “Sold!” signs in front of them. While that whole spiel has become rather cliché, it’s perhaps truer now than ever before.

Not only are rates sitting at record lows, but most projections have the cost of a mortgage increasing in the near future as the economy continues its slow but steady recovery. That’s important because even a small change in the market can lead to paying far more for your home over the long term, as we’ll see below. Given experts’ negative outlook for the rental market and many signs that housing market is continuing a turn around, the window to buy a house cheaply might be closing.

Record Low Interest Rates

Average Yearly Mortgage Rates 1972 - 2012

Interest rates – the 800lb. gorilla of the mortgage market, are at record lows, and you can see from the above graph what sent them there: the 2008 financial crisis and the collapse in the housing market. But seeing as everything is cyclical, projections indicate rates will move in exactly the opposite direction over the next few years. Despite sliding several tenths of a point in the last month, most experts predict rates will have begun the slow climb back up by year’s end.

While the rates you stand to get a year from now will likely still be very, very good in an historical context, that doesn’t quite tell the full story of how much an extra percent or two of interest will cost you over the long term. Taking a look at the table below you can see that just a single percent difference in the interest rate increases the cost of an average mortgage by almost $50,000, while a two percent difference increases the price by almost $100,000. It’s possible mortgage rates could drop further in the future, but that would go against almost all the other economic indicators.

Years Into Mortgage	3% Interest	4% Interest	5% Interest
1 Years	$12142.20	$13749.60	$15460.44
5 Years	$60,711.00	$68,748.00	$77,302.20
10 Years	$121,422.00	$137,496	$154,604.40
15 Years	$182,133.00	$206,244.00	$231,906.60
20 Years	$242,844.00	$274,992.00	$309,208.80
25 Years	$303,555.00	$343,740.00	$386,511.00
30 Years	$364,265.77	$412,485.63	$463,813.20

Even if they do fall you could always refinance into a lower rate, while if you don’t take out a loan with today’s low rates, you might not ever have a shot at them again. The cost of a refinance isn’t cheap (usually several thousand dollars), but that’s much less costly than paying a higher interest rate.

A Bad Market For Renters

The Census Bureau’s latest American Community Survey shows a negative short-term outlook for renters in light of increasing demand and static supply. From 2009 – 2011 when the last survey was completed, the percentage of people renting as opposed to buying increased from 34.1% to 35.4%, as economic conditions made future income uncertain. Tellingly, there was also a decline in rental vacancies from 8.4% to 7.4%. While those might sound like small increases, they equate to millions more people in the rental market, which did not see a corresponding increase in housing units added. So, while the average rent payment held firm at $1038, that’s unlikely to continue as renters see competition for housing grow stiffer.

Further Signs of a Market Turnaround

According to data published by Zillow, housing prices appreciated 5.8% last year, a figure not seen since the high times of the housing bubble. Though Zillow suggests that the rate of appreciation is decreasing, they still expect a healthy increase of almost 3.2% between February 2013 and February 2014.

Solid, consistent growth in the price of homes has led many buyers back into the market, as reported by the National Association of Realtors, but it’s also encouraging many owners have decided to wait on selling in the hopes of fetching an even higher price down the road. As such, the number of homes for sale has dropped to thirteen year lows, currently down 20% from last year, and at less than half the level seen in 2010.

While a bit more troubling, the return of zero down, no mortgage insurance home loans nevertheless represents yet another clear indication of the housing market’s recovery. Navy Federal Credit Union (NFCU), the nation’s largest credit union, resurrected this once wildly popular loan program in 2010 after discontinuing it two years earlier, and has only recently restarted full-blown marketing efforts. Though NFCU’s rules allow only the military affiliated to become members, it’s telling that these extremely risky types of mortgage loans are making a comeback at one of the nation’s largest institutions.

Conclusions

With rates having already hit historic lows and given the obvious uptick in lending, it seems unlikely that the mortgage market will do anything but rise moving forward That means the window of opportunity is closing for borrowers looking to get a deal on a mortgage.

The FHA Might Need a Bailout

Ross Garner — Wed, 17 Apr 2013 18:33:34 +0000

Posted by: Ross Garner

Over the last few weeks we’ve documented important changes to the Federal Housing Administration’s (FHA) mortgage insurance program and suggested there might be more on the horizon. Well, it looks like the biggest one yet is about to land: the FHA will likely require a bailout from the federal government. For all 79 years of its history, the FHA has operated without ever taking a taxpayer subsidy. But due to extraordinary losses it is becoming increasingly likely that the agency will have to take one by September 30, when it is required by law to be solvent.

The FHA currently insures mortgages worth more than $1.1 trillion, a large share of the total housing market. To back those loans, the agency maintains the Mutual Mortgage Insurance (MMI) fund, which as of its November 2012 report, held reserves of $32.1 billion. However, the same report projected nearly $48.4 billion in losses for 2013, essentially predicting a budget shortfall of $16.3 billion. Factoring in recent changes, a bailout of around $943 million is being currently planned, though it might require a “little bit more, or a little bit less” according to Carol Galante, the FHA Commissioner.

Causes of the Shortfall

The origin of the FHA’s current problems is well documented and agreed on by most parties: The agency backed a large number of bad loans after the 2008 housing crisis and has been forced to pay out far more than originally planned due to extremely high foreclosure rates

Before the financial crisis, the FHA insured only 4% – 5% of the new mortgages originated each year. However, that share jumped considerably during the crisis years, reaching almost 20% in 2010 and falling to 16% recently. While some argue this is merely because the number of private mortgages has fallen, while the FHA’s numbers have remained stable, the FHA’s lending practices have also either stayed stable or become more lenient at a time when the rest of the mortgage market has tightened its proverbial belt significantly. The result has been an astronomical default rate on FHA loans: 9.5%.

Things look even worse when you look at specific agency programs. With a nearly 90% market share, the FHA has a near monopoly on risky reverse mortgages. The high loan amounts offered on many reverse mortgages, coupled with a sky high default rate, have led the FHA to lose money on the program year after year.

Proposed Solutions

To combat its projected deficit, the FHA has initiated a series of major reforms. The first adjustment: elimination of the FHA’s flagship reverse mortgage program (the Home Equity Conversion Mortgage or HECM). Enacted on April 1st, the FHA restricted the manner in which borrowers could take out a new reverse mortgage, leading to smaller loan amounts and hopefully fewer losses.

The second adjustment affects the FHA’s main mortgage insurance program. Also begun on April 1^st, the rates on mortgage insurance for new loans were increased by 10 basis points or 0.1% per year. A second, more subtle change was also enacted at the same time: going forward, most borrowers will not be able to cancel mortgage insurance policies on their home. In the past, a borrower had the opportunity to cancel their insurance after five years if they met certain requirements and most did so somewhere between years seven and eight. Now, those borrowers will have to pay for mortgage insurance for the full length of their loans, usually 30 years. This will more than double the cost of a mortgage insurance policy for the average borrower.

Critiques

While few would argue that the FHA has taken a hands off approach to shoring up its books, many contend that its recent changes are counterproductive and not likely to protect the agency’s interests now or over the long-term. The common critique is that the FHA’s lending practices do not attract good borrowers and that the changes seem only to limit future losses and do nothing to eliminate them.

Critics immediately pointed out that the FHA’s adjustments only affect one of the four reverse mortgage products offered by the agency. Since the FHA will continue to offer the most accessible type of reverse mortgage, it figures that borrowers will simply flock to one of the other three products still available. While the FHA might save some money due to the newer program’s lower loan limits, the aforementioned changes would do nothing to address the high default rates seen on reverse mortgages.

A different but similar critique was leveled at the FHA’s changes to their general mortgage insurance program. While raising the cost of mortgage insurance would certainly increase in the agency’s revenue, it would also discourage many of the most reliable borrowers from taking out an FHA loan in the first place. Given the choice the between saving for a bigger down payment or paying mortgage insurance for the full life of the loan, many borrowers would opt out of FHA loans altogether.

Future Outlook

Without further changes, it’s likely that the FHA will be taking a bailout sometime this year. While it would be deeply unpopular, current politicians have little leverage – the FHA already has a credit line to the US Treasury; it requires no special authorization to draw its proposed subsidy. The larger question is what will become of the agency in the future as both sides of the political spectrum seem intent on transforming the agency: Democrats on expanding its role as a lender to disadvantaged borrowers, while Republicans want to tighten its lending standards considerably.

The agency will have to find a way to get back to stability, because over the long-term public-will simply will not tolerate the FHA relying on the federal government for a handout. That likely means the FHA will have to find ways to attract more reliable and more stable borrowers, instead of trying to extract very high payments from a set of borrowers who really have no other loan options.

Conclusions

While the FHA has taken serious steps to shore up its portfolio, its future as a major player in the mortgage market is not secure. With both sides of the political spectrum intent on making changes, it seems unlikely the FHA will continue to operate in its current form for much longer. Whether that means it will adopt lending practices more akin to those in the private mortgage market or become more of a federal entity is unknown, we can say one thing for sure: significant changes are on the way.

FHA Mortgage Insurance Premiums to Rise, Again

Ross Garner — Wed, 03 Apr 2013 16:23:43 +0000

Posted by: Ross Garner

In the years after the 2008 collapse, the Federal Housing Administration (FHA) has taken on a bigger and bigger role in the mortgage market. Rather than pull back during the crisis years, the FHA continued to back new mortgages, allowing many borrowers to purchase homes they otherwise would not have found loans for.

The effect on the FHA, though, was less positive. For several years running, its Mutual Mortgage Insurance (MMI) Fund has lost money as more and more defaults and foreclosures have hit the balance sheet. The MMI Fund is predicted to have a negative value for the first time ever, spurring aggressive action from the FHA as it tries to recoup its losses.

Last year, the FHA raised mortgage insurance premiums across the board, which many predicted at the time would not be enough to stem the tide. Now just a year later, the FHA has announced that it will again increase the rates of mortgage insurance and, more importantly, require borrowers to pay for it longer. The net effect is a dramatic increase in the cost of taking out an FHA loan, which unlike last year’s changes could finally lead borrowers to look at other types of mortgage products. The new policies will affect any mortgage taken out on or after June 03, 2013.

Mortgage Insurance Rate Changes

The most straightforward change for borrowers will be the rise in the rates of mortgage insurance. For new borrowers, this will mean a simple increase in their monthly payments over those of past borrowers.

The amount of mortgage insurance you’ll need to pay is shown below as a percentage of the total loan balance. This yearly fee will be divided out equally among all twelve months, giving you a stable payment to make each month. The annual MIP rate will be determined by the loan amount and the loan to value ratio you had when you originally took out your loan. It does not matter if your loan amount or your LTV falls past the benchmarks shown below, instead it only matters what they were when you originally took out you loan.

30-Year Loan

Loan Amount	Loan to Value (LTV) Ratio	Previous MIP	New MIP
$625K or Less	95% or Less	1.20%	1.30%
$625K or Less	More than 95%	1.25%	1.35%
More than $625K	95% or Less	1.45%	1.50%
More than $625K	More than 95%	1.50%	1.55%

15-Year Loan

Loan Amount	Loan–to-Value (LTV) Ratio	Previous MIP	New MIP
$625K or Less	Between 78.01% – 90%	0.35%	0.45%
$625K or Less	More than 90%	0.60%	0.70%
More than $625K	Between 78.01% – 90%	0.60%	0.70%
More than $625K	More than 90%	0.85%	0.95%

Length of Mortgage Insurance Changes

Less obvious, but far more important, the FHA will no longer allow borrowers to cancel their mortgage insurance after they have paid down their loans. In the past it was it was common for a borrower to get out from under mortgage insurance just five years after taking out their loan. Under the new policies, an FHA borrower with a high loan to value ratio when they take out their mortgage will have to pay for mortgage insurance over the full length of their loan. Since the majority of the FHA’s borrowers have such ratios, it’s likely to affect a large percentage of the FHA’s future borrowers.

Similar to the rise in rates, the length of payments will be based on the term of the mortgage and the loan-to-value ratio when the loan is taken out:

Mortgage Length	Loan-to-Value (LTV) Ratio	Previous MIP Length	New MIP Length
15 Years or Less	78% or Below	None	11 Years
15 Years or Less	Between 78.01% – 90%	Cancelled at 78% LTV	11 Years
15 Years or Less	More than 90%	Cancelled at 78% LTV	Cancelled at end of mortgage term
More than 15 Years	78% or Below	5 years	11 Years
More than 15 Years	Between 78.01% – 90%	5 years and 78% LTV	11 Years
More than 15 Years	More than 90%	5 years and 78% LTV	Cancelled at end of mortgage term

Since it’s hard to visualize what those numbers mean, we’ll break them down in a graph below that shows the cost of mortgage insurance on a 30 year loan, for $200,000 with the minimum down payment. As you can see, under the new mortgage insurance schedule, such a borrower will have to pay almost two and a half times what they used to.

Cost of Mortgage Insurance Over Time

Other Changes to FHA Mortgages

In addition to creating a new mortgage insurance environment, the FHA is also:

Tightening credit standards for low credit score borrowers – The FHA now requires lenders to manually review applications from borrowers who have both credit scores below 620 and debt-to-income ratios above 43%. In the past, the FHA allowed lenders to check such borrower’s records using automated systems. Manual review will add more days onto the process and probably lead to more rejections.
Raising down payments on jumbo mortgages – the minimum down payment on a jumbo mortgage will rise from 3.5% to 5%.

While unrelated, both of these changes signal the FHA is looking to make its underwriting practices more stringent. It also suggests which types of policies could change in the future: credit score requirements might go up even more and required down payments could also rise for other FHA mortgages.

Conclusion

Even after adding in all the new revenues from these mortgage insurance changes, the FHA is still in for many tough years ahead; a retrenching and toughening of their lending practices should be expected. For potential borrowers, though, the change to the length of mortgage insurance might be so costly that they eschew FHA mortgages altogether. Any borrower with options would be wise to explore other loan programs, checking to see if the new cost of mortgage insurance is simply too steep to be worthwhile. The FHA’s recent changes will undoubtedly lead many potential borrowers to explore other options in search of lower costs. However, the organization’s low down payment requirements will continue to be a significant draw. After all, the FHA remains the only game in town for people who can’t put more than 3% down.

Will the Changes to FHA Reverse Mortgages Work? Probably Not.

Ross Garner — Thu, 28 Feb 2013 08:00:00 +0000

Posted by: Ross Garner

Back in September, we identified a looming disaster in the reserve mortgage market and concluded that major changes might be needed to prevent the system from collapsing like the larger mortgage market did in 2008. With a few months behind us, it’s starting to look like we hit the mark: the FHA recently announced sweeping changes to their reverse mortgage products, and hinted that more changes could be coming.

Most importantly, the Federal Housing Administration (FHA) will suspend the fixed-rate Standard Home Equity Conversion Mortgage (HECM) on April 1. Better known as the FHA’s reverse mortgage, the program had been the most popular reverse mortgage loan in the country for a number of reasons:

Lump Sum Payment: a borrower can take out a lump sum payment for the full value of their reverse mortgage; set monthly payments are also available, but rarely taken.
High Loan Value: maximum amounts of up to $625,000, much higher than other reverse mortgage products.
Fixed Interest Rate: allows borrowers to lock-in today’s low rates, while most other private products are adjustable.

Reasons for the Change

Widely seen as the lender of last resort after the 2008 financial crisis, the FHA shouldered huge amounts of risk by continuing to insure loans few other organizations would touch over the last few years. At the time, many analysts predicted that the FHA’s gamble would not pay off and would instead result in significant long-term losses. Those predictions are starting to appear prescient as the latest look at the FHA’s books shows them $16.3 billion in the red, with $2.8 billion coming from the reverse mortgage program alone. With Congressional leaders wary of cutting any more checks for struggling mortgages, the FHA had to find a way out of the problem on its own.

The logic behind the change is very simple: the fixed-rate Standard HECM has been a huge money loser for the FHA for many years. The high loan value combined with a lump sum payment puts the FHA on the line for hundreds of thousands of dollars on each and every single HECM. With seniors feeling the pinch of the weak economy, default rates on HECMs have skyrocketed (reverse mortgage holders default when they fail to pay the taxes or insurance on their homes). The FHA’s hope is that ending the fixed-rate Standard HECM will limit their exposure to the reverse mortgage market or at the least move borrowers to less risky products, like the Saver HECM.

The FHA’s Alternative: The Saver HECM

Even after eliminating the fixed-rate Standard HECM, the FHA will still have three reverse mortgage products: the adjustable rate Standard HECM, the fixed-rate Saver HECM, and the adjustable rate Saver HECM. Except for its interest rate, the adjustable rate Standard HECM is identical to the fixed-rate Standard. The FHA’s other reverse mortgage program, the Saver Home Equity Conversion Mortgage, is different from the Standard HECM in a number of important ways:

Lower insurance costs – the upfront insurance fee for a Saver HECM is only 0.01%, compared to 2% on a Standard HECM.
Smaller loan amount – Saver HECMs usually pay out only 66% of what a Standard HECM would pay out.

Importantly, the Saver HECM can be paid out in a lump sum, just like the Standard HECM. The FHA’s recent moves suggest the Saver HECM is their preferred reverse mortgage option; we’ll examine that in the next section.

Predictions and Effects

After the fixed-rate Standard HECM program is suspended, many experts predict that the Saver HECM program will see a large influx of new applicants, since it will be the best program on the market left standing. The FHA’s moves seem to indicate this is the objective, since the Saver HECM program has gone mostly untouched by recent changes. Their hope is that by moving borrowers towards smaller loans, the agency can limit its losses on reverse mortgages.

Critics, however, see things very differently. Jack Guttentag, professor emeritus at the University of Pennsylvania’s Wharton School of Business, states that suspending the fixed-rate Standard HECM will have little effect on solving the FHA’s reverse mortgage problem. Guttentag makes a simple point: the FHA has a problem with borrowers defaulting on their reverse mortgages, not with the amount of the loans they’re defaulting on. Assuming the FHA is successful in redirecting potential borrowers towards the Saver program, they will only be lowering the amount of their losses on each loan, not establishing a sustainable program for the long term.

To fix their program, the FHA needs to find a way to change the type of customer that is takes out HECM products, whether Standard or Saver. Any reverse mortgage that pays out its full amount immediately will be targeted by borrowers with short time horizons, who are the most likely to default on their loans in the future. Instead, the FHA needs to end cash-out loans and replace them with reverse mortgages that pay out their balance over time. Not only would this approach protect their bottom line, but it would be more in line with the FHA’s goal of keeping struggling seniors in their homes, since long-term payments encourage stability.

However the FHA goes about reforming its mortgage program, one thing is clear – it can’t continue to sustain losses like it has over the past few years. Returning long-term stability is vital, especially if the FHA wants to continue to play a major role in the mortgage market.

Living Within Your Means: Tips for Buying Wine on a Budget

John Kiernan — Wed, 23 Jan 2013 19:58:55 +0000

Posted by: John Kiernan

If Uncle Sam was on Oprah, it’s a lock two of his “favorite things” would be debt and booze.

That obviously sounds pretty bad, but it’s unfortunately true. Not only have we incurred at least $35 billion in new credit card debt each of the past two years, but outstanding student loan balances now exceed $1 trillion and mortgage holders continue to default in droves. What’s more, roughly 66% of U.S. adults consume alcohol, and around 1% of the average person’s annual expenditures are on alcoholic beverages.

My point? Well, I’m not going to tell you to stop drinking if that’s what you think. Not only would it be hypocritical to do so, but it’s naïve to think people won’t inevitably buy alcohol. Instead, I merely want to help you save as much as possible in this major spending category.

The question of the hour therefore is: How does one go about saving at the liquor store? To answer it, we turned to experts in budgeting, economics and, of course, wine.

Check out Card Hub’s look at how the wine industry fared during the recession

Saving Tips

1. More expensive doesn’t always mean better

Just like there are bad credit card offers that charge hundreds of dollars in annual fees, many expensive wines are truly inferior to the right bottle at a much lower price point. So, rather than throwing a pity party, have some fun trying to find the best bottle that fits your budget.

“There are very decent wines that sell for less than $10 a bottle,” says Dr. Tony Lima, a wine economist and professor at the California State University – East Bay. “I think when people find themselves in financial straits, they should look at this as an opportunity to experiment with some of those lower-priced wines. I’m not going to make any specific recommendations. My general recommendation is that the way you learn what wines you like is by trying them. When you find something you like, stick with it. … I would look at this as an opportunity to learn something about wines that you might have passed up before simply because of the low price.”

2. Shop around

It’s important to understand that price is also driven by where you shop, so it’s important to determine which area store boasts the best combination of low prices and broad selection.

“I suggest shopping in one of three places for wine: 1) a local wine store with a knowledgeable staff who can steer the customer in a proper direction; 2) a bodega with seemingly too-large a wine selection; or 3) Costco/Trader Joe’s,” says John Herbert, a Washington, D.C. sommelier. “The local store will have the best selection, and if you engage the staff, are forthright about what you’re willing to pay, and express a willingness to try something new, the odds of walking out with a good bottle are high. The bodega is more of the ‘needle in the haystack’ approach. Assistance will be lacking, so a good base of knowledge is necessary. Discretion must also be exercised because there’s a good chance no value is present, but if there’s dust on the bottles and they’re mostly a few years old, there’s reason to get excited. Costco has perhaps the best wine buyers in the world, and their purchasing power and ability to exploit economies of scale make it a tremendous place to find value. The wine stock will be limited to about 100-200 bottles in most locations, but especially in the $15-$30 range it will be a wonderfully curated selection. Also, I have had success with both the Kirkland and Trader Joe’s house brands, which are always underpriced for the market, and especially in Kirkland’s case, nearly always good.”

3. Ignore “expert” scores

Nascent wine drinkers can be easily swayed by marketing materials (much like inexperienced credit card users). The problem with those placards that you see accompanying bottles in the store is that they inevitably contain glowing reviews and/or reflect the tastes of one individual or another. Like with any other food or drink, people’s tastes in wine vary.

“I always tell people ignore those scores. The problem is that your taste is different from my taste and both of us have tastes that are different from Robert Parker’s. Therefore, what Parker thinks of the wine is pretty much irrelevant to whether I’m going to like it or not,” Lima said. “What I try to do is read the description on the back label, and after a while you get pretty good at interpreting what those are saying.”

4. Participate in wine tastings

Finding your favorite wine requires a lot of trial and error. The good news is that, for wine enthusiasts, trying and learning about a bunch of different types of wine is likely more of a fun activity than a burden. The trick is simply to not increase your wine consumption or waste money in the process. Wine tastings can be a big help in that regard because they’ll allow you to sample a variety of different bottles, learn about each, and save money – especially since you can often find daily deals for them.

5. Keep detailed records

I don’t know about you, but the sheer breadth of the wine selection at most stores easily overwhelms me and I have a hard time keeping track of the different bottles I’ve tried. In order to refine your tastes and avoid repeating mistake purchases, keep a journal of each wine you taste, including the producer, type of grape, vintage, price, and overall observations. You’ll quickly get a pretty good idea of your likes and dislikes, and you’ll be able to quickly reference great value buys when it comes time for a dinner party or other special occasion.

6. Consider your payment vehicle

You can save a lot of money on wine simply by using the right form of currency. For example, if you live in a state that sells wine in grocery stores, the Blue Cash Preferred Card from American Express could prove quite valuable. It offers 6% cash back at supermarkets, 3% at gas stations and department stores, and 1% everywhere else. Plus, you get a $150 bonus for spending at least $1,000 in the first three months, which makes the card’s $75 annual fee no big deal.

Recommendations

Now, it’s understandable if many of you are interested in cutting to the chase and getting some specific recommendations for value wine buys. Such suggestions are tricky because so much depends on personal opinion and availability, but since we’re talking booze why not give it the old college try?

With that in mind, I flipped through my rolodex and sought the opinion of John Herbert – the aforementioned Washington, D.C. sommelier who happens to be both a close friend of mine and the biggest wealth of wine information I’ve ever met.

Here’s the approach that he recommends:

Look to the South of France: “Wines from the Languedoc [region], especially Corbieres, offer a flavor profile similar to Chateauneuf Du Pape and other wines from the Rhone, but at a pittance of the price. In Sicily, Nero D’Avola provides a structured, full bodied wine for under $20, while Frappato brings the elegance and perfume in spades for the price of a decent six pack,” Herbert says. “Perhaps the best values in the world are from a well-known region in the most wine-centric of countries, the Loire Valley in France – Cabernet Franc for the reds and Chenin Blanc for the whites. A Jackson [$20 bill] will allow you to purchase world-class examples of each, and both are singular varietals, whose flavor is more interesting than just about any Napa Cab or Chardonnay.”

Think undervalued international wines over domestic producers: “While I don’t mean to be too critical of domestic wine, there just isn’t much value to be found on our home soil. The few places where value did exist, like Paso Robles, have dried up in recent years,” according to Herbert. “There’s still good value to be found amongst the table wines of Portugal, lesser known Spanish regions like the Costa Brava offer new-world styled wines in an old world package, and if you can get your hands on them, [wines from] the Canary Islands offer some serious juice at a damn good price.”

He also suggests trying wines from the following producer and region, respectively.

Castelmavre: “This is a producer that’s reasonably widely available. Vintage after vintage is outstanding, and a bottle only runs $13-$15.”

Texas Hill Country: “There are some pretty interesting, inexpensive wines being produced in the Texas Hill Country right now. They can be somewhat difficult to find, but are a cool grab if you see them.”

Budgeting Tips

You can become an expert in making value wine purchases, but if you don’t adhere to a monthly budget – both in this purchase category and across all other expenses – you’ll still end up incurring debt on a regular basis. That’s a difficult task for a lot of us, seeing as only about 43% of Americans say they keep a budget and closely track their expenses, according to the National Foundation for Credit Counseling’s 2012 Financial Literacy Survey.

With that in mind, we touched base with Dr. Richard Serlin, a budgeting expert and professor of personal finance with the University of Arizona’s Norton School of Family & Consumer Sciences.

His No. 1 piece of advice for becoming a better budgeter (and improving your overall personal finance performance): read “All Your Worth,” by renowned personal finance expert and current Massachusetts Senator Elizabeth Warren and her daughter Amelia Warren-Tyagi.

“For budgeting, the biggest message is that the main focus has to be on the big fixed expenses, and less on the little things,” Dr. Serlin told Card Hub. “The big fixed expenses she calls ‘must-haves.’ These are things that you really have to pay each month (like a mortgage, or car payments) to avoid very bad consequences. This is opposed to discretionary spending which she calls ‘wants,’ like eating out. You can stop eating out immediately if there’s a financial crisis like a job loss, but you really can’t stop making the mortgage payment without disaster.”

Both Serlin and Warren recommend cutting the amount you spend on “must-haves” to less than 50% of your after-tax income. Among the tips the former gives for reaching this threshold is buying a less expensive home with a 15-year mortgage and opting for a used car that you maintain well instead of buying new. Unfortunately, research indicates that the average consumer’s must-have spending has increased from roughly 55% to around 75% in the last 25-50 years. Much of this certainly has to do with our penchant for over sized, overpriced luxuries, but perhaps even more worrisome than our affinity for such things is the fact that we believe them to be necessities.

“Part of this is advertising, but a big part is that income inequality has exploded over the last generation, and this contributes to what Cornell economist Robert H. Frank calls ‘expenditure cascades,’ where those higher up start to pull away, and so those underneath really stretch themselves to not be left too far behind in how prestigious they look to others, and seem and feel to themselves,” according to Serlin. “A generation ago, people were happy driving a Honda Accord that had a high mileage engine with half the horse power of today’s version; the tires were about half the size, and the car itself wasn’t much bigger than a Civic today. But people were happy driving those cars and they seemed prestigious and respectable and nice and high-quality to them because that’s what all the middle class pretty much were driving. Today, most people would be too embarrassed to buy such a car, because just about everyone has tires twice as big and twice the horsepower. Giant tires and 250 or 300 horse power don’t really add that much pleasure the way most people drive, but with the prestige arms race, so many people feel bad being seen in anything less, and anything less now has the feel in their mind of cheap and crappy. But a generation ago it felt prestigious and high quality. It’s really important to try to break out of this, to never get used to a level of price, consumption, and material prestige that you can’t afford without making your family’s finances risky and fragile.”

So, here’s what we recommend:

Look over your bills for the past few months and make a list of your recurring expenses.

Rank your expenses in order of importance and make the tough choices when it comes to cutting those that are superfluous and scaling back others.

In addressing Steps 1 and 2, strive not only to limit your “must-haves” to less than 50% of your after-tax income, but also remember to fund an emergency account (the goal is to have a rainy-day fund with at least a year’s after-tax income in case you lose your job or encounter other difficulties) and make sure not to rely on debt in order to afford discretionary expenses.

Remember that spending money on something like wine isn’t necessarily bad, provided you’re responsible with your actions both monetarily and otherwise. If it’s a choice between any discretionary expense and staying out of serious debt, you should obviously go for the latter, but hopefully being smart about what you buy on a regular basis will prevent you from having to sacrifice leisure activities that you enjoy.

Down Payment Assistance

Miranda Marquit — Wed, 28 Nov 2012 16:49:17 +0000

Posted by: Miranda Marquit

For some borrowers, saving for the required down payment on a home can be difficult. However, there are programs out there that allow you to receive down payment assistance. Some options for help may be in the form of a low-interest loans, or from grants from a state or local agency.

How Down Payment Assistance Works

Prior to the signing of the Housing and Economic Recovery Act of 2008, there were many down payment assistance organizations. Many of these worked when the seller of the home made a “donation” to the organization. The organization then made a “gift” to the buyer to help pay for the down payment. While there are still some of these programs available for use with conventional loans, lenders that accept them are few and far between.

More common arrangements are for certain organizations to offer loans to buyers to help them pay for the down payment. The down payment help is usually in one of two forms:

A grant that doesn’t have to be paid back.
A low interest loan that you pay back later.

Most of the time, though, a buyer has to be considered a first-time homeowner before qualifying for these types of programs. You receive money that you give to the lender as a down payment on a conventional loan. If the down payment came from a loan and not a grant, you repay that loan as you repay your mortgage.

Certain non-profit organizations also offer down payment assistance. Programs such as the Florida Housing Financing Corporation or the California State Teachers’ Retirement System offer low-interest loans, or deferred payment loans, to buyers. The buyer can borrow the amount they need for a down payment, and then repay this smaller loan later.

Some banks may even provide down payment assistance. In this case, you borrow the amount needed for a down payment (often at a higher interest rate), and it is considered a second mortgage. These arrangements are hard to make, since the lender is taking on additional risk and the borrower still doesn’t have much skin in the game. These programs have become rare since the onset of the financial crisis.

Another option is to consider sweat equity. In some cases, non-profit organizations will help you make a down payment if you help build your home. Most of these are local programs, like the Community Development Corporation in Utah and the Homeless to Rehab Sweaty Equity program in D.C. You may also be required to help others in the program build their homes as well. However, the money is usually a grant that you don’t have to pay back, and many borrowers consider the work a fair trade for money for a down payment.

FHA Loans and Down Payment Assistance

One important detail to note before you turn to down payment assistance is that you can’t use these programs in conjunction with Federal Housing Administration (FHA) loans. Since its signing by President Bush in 2008, the Housing and Economic Recovery Act prohibits seller-funded down payment assistance programs for loans that the FHA backs.

This means that, in order to get down payment assistance for a FHA loan, you have to receive the money as a true gift. You’ll even be required to sign legal documents stating that you will not repay the down payment money.

Even though you can’t use many of these types of down payment assistance programs for a FHA loan, they can still be helpful when you get a conventional loan. Consider your options, and decide what is likely to work best for you.

Foreclosure Process

Miranda Marquit — Wed, 21 Nov 2012 14:35:59 +0000

Posted by: Miranda Marquit

Foreclosure Process

If you can no longer make the payments on your mortgage, your property will likely be seized by your lender and then sold, so they can recoup some of their losses. This is true for any loan that is secured by your home, whether it is your primary mortgage, second mortgage, or any other type of home equity loan.

Foreclosure Stages

A foreclosure can take anywhere from six months to two years, depending on state laws, efforts on behalf of the homeowner, and the backlog of foreclosures in the county. Each state has its own specific foreclosure law that determines what must take place in order for the foreclosure to be valid, and each state also has different protections for a home owner, as well as what rights a lender has to the home.

Even though the laws differ from state-to-state, there are some basics to the foreclosure process:

Missed payments: Usually, the foreclosure process is initiated after you have missed between three and six months of payments.
Notice of Default: When the payments have been missed for the prescribed period of time, the lender files a Notice of Default, usually at the county recorder’s office. The borrower will also receive a copy of this notice.
Reinstatement period: The Notice of Default marks the beginning of the reinstatement period, which normally lasts three months. This is the period of time that you as borrower have to bring your payments current, or to work out some other arrangement that the lender accepts. In many cases, the reinstatement period runs up to about five days before any auction.
Notice of Sale: If you are unable to bring your loan current, a Notice of Sale is usually filed, which sets an action date for your property. A copy of the notice is sent to the homeowner, posted on the property, run in local newspapers, and recorded with the county. In most cases the borrower will still be within the reinstatement period, so receiving a Notice of Sale, does not mean you have lost your property.
Trustee sale: This is the foreclosure auction. If the borrower hasn’t brought the loan current within the reinstatement period, the home is auctioned off to the highest bidder. Usually, the sale takes place at the county courthouse. The lender sets the opening bid and in many cases, will set the opening bid at the amount still owed on the property, including interest and fees (or, if the home is underwater, the lender may decide to set the opening bid a little below market value).In most cases, the winning bidder is required to pay for the property in cash. A deposit can be made at the auction, but the remainder is normally due within 24 hours of the end of the auction. Once the total is paid, the winner of the auction receives the deed to the home, and is considered the lawful owner.In some instances, the auction doesn’t yield an outside buyer. If the opening bid is not met, someone acting on behalf of the lender purchases the property, and it is considered Real Estate Owned (REO). The lender then owns the home and will try to sell it later, or find some other way to make money from it, such as renting it out.
After the sale of the property, the loans that are paid from the proceeds of the auction are then prioritized according to date of record and junior liens (except property taxes) are often terminated.

If you are unfortunate enough to find yourself in foreclosure proceedings, it is important to understand the process and the time frames for each step. It is also highly advisable to seek an attorney’s counsel as laws and consumer protections do vary between states. Take every precaution you can to help you work through this difficult time.

The Short Sale Process

Miranda Marquit — Thu, 08 Nov 2012 14:07:50 +0000

Posted by: Miranda Marquit

Short Sale Process

In the second quarter of 2012, according to CoreLogic, about 24 percent of U.S. home mortgages were underwater. That’s a lot of homeowners that owe more than their homes are worth.

If a homeowner needs to sell, trying to get out from under the negative equity can be difficult. One of the ways to sell the home is to convince the mortgage lender to agree to a short sale.

What is a Short Sale?

A short sale is when the lender agrees to let the homeowner sell the home for less than they owe. The difference between what the house sells for and what is still owed on the mortgage is then forgiven.

Requesting a Short Sale

Completing this transaction is about more than just asking for it. In most cases, you’ll need to prove that a short sale is the best option for the bank. Because the lender is losing money on the sale, the lender needs to approve the transaction. A mortgage lender will do what’s best for the bank and rarely take your best interests into consideration. Often times, convincing a lender means indicating that you might walk away, and that the short sale is a better option than a foreclosure. Some of the situations that might sway a lender to grant approval include:

Death of one of the owners

Reduced income due to cut hours at work
Job loss
Divorce
Bankruptcy
Out of town job that requires a move
Health care emergency

Additionally, the mortgage lender might require the seller to make a serious attempt to sell the home for what is owed on it. This might mean that you have to keep the home on the market for at least 90 days before the lender even considers a short sale.

As with all things related to a mortgage, a short sale requires a great deal of documentation. Each lender has its own requirements, so you should contact your bank and find out what you need to include in your request package. The basic steps you should take for the short sale process are as follow:

Call your mortgage lender and ask to speak to a supervisor in the “work out” division. Explain your situation, and find out what, exactly, you need to include in your short sale request package.
Gather the information and documents you need for your request package. Some of the items that you might need include a HUD-1 form, a letter describing your hardship and why you need this transaction, a financial statement, two years of tax returns and W-2s, recent bank statements, and your most recent payroll stubs.
Consider engaging someone to represent you. If you have someone represent you, you will need a letter of authorization empowering your agent to work with the lender. Choose someone who is knowledgeable about the short sale process and can favorably represent your best interests to the lender.
Compile facts about recent sale prices in your area. Statistics showing that homes are selling for less than you owe on your home can bolster your case. Prepare (or have your agent prepare) a market analysis or even get your home appraised, showing your lender it is worth less than your mortgage could help your case.
When you find a buyer, submit the following: Short sale offer, listing agreement, purchase offer, pre-approval from the buyer’s lender, and earnest money check (a copy will do).

What Comes Next

Once you submit your information, you play a waiting game. After all the paperwork is done, and the reviews are complete, the lender will make its decision. The entire process can take anywhere between 60 and 120 days, although 90 days is fairly standard. Some of the actions the lender may take during this time include:

Assigning a negotiator to your case. You may even be assigned multiple negotiators with whom you will communicate throughout the process.
Obtaining a broker price opinion. A broker might come and look at the home, and give an opinion about what a reasonable price is to pay for the home. There might be more than one opinion about. The closer the broker’s opinion is to the amount you think you can sell the house for, the more likely it is that the short sale will go through.
Appraising the home. The bank may require an appraisal of the home, which would provide an idea of its market value. If the home’s market value is less than what you owe (a real possibility if the market has been hard hit), there is a better chance that the short sale will be approved.
Requiring the homeowner to sign an arms-length affidavit. This document ensures that you aren’t selling to a relative.
Reviewing the situation. The lender might require additional reviews ranging from market analyses to another look at your financial situation.

Final Thoughts

With so many underwater mortgages, more lenders are allowing short sales. As result, if you can show that your situation warrants it, you have a better chance of completing this transaction.

Foreclosure Defense

Miranda Marquit — Wed, 10 Oct 2012 19:22:49 +0000

Posted by: Miranda Marquit

One of the most difficult and disappointing situations is facing a foreclosure. In the past most homeowners had to simply accept a foreclosure, but scandal after scandal has shifted the legal environment, and today homeowners have several options to defend themselves against foreclosure.

As with all legal procedures, foreclosure defense can take a lot of time. There is a great deal of paperwork to fill out, and a number of procedures to follow. However, during the proceedings, it’s possible to delay your foreclosure until the matter is resolved. If the judge rules in your favor, you might even stop the foreclosure process altogether.

While it’s almost never a “slam dunk” when you engage in any legal proceeding, the changing legal climate improves your chances of a successful foreclosure defense, as long as you are thorough in your documentation and argument.

Raising a Foreclosure Defense

How you raise your foreclosure defense largely depends on what the laws are in your state. In some states, all foreclosures have to go through the courts, so you automatically get a chance to defend your home ownership. In other states, you will need to file a lawsuit in order to defend against the foreclosure. This makes the process more difficult, as you will have to find grounds for a lawsuit before you can begin making requests from your lender.

While it varies by state, here are some of the more common foreclosure defenses:

No proof of mortgage ownership: The foreclosing party should be able to prove they own your mortgage. While this seems obvious, many lenders have lost mortgage paperwork as a result of the repeated buying and selling of mortgages that has become common in recent years. If the foreclosing party cannot produce the original paperwork behind your mortgage, you’ll have a strong case in court.
Unconscionable mortgage terms: To use this defense, you have to prove that the terms of your mortgage are extremely unfair. In many cases, this will include proving that you were put under undue pressure by the mortgage lender or were not in a position to fully understand the terms of the loan. This defense is often used by borrowers who don’t speak English or those who have been taken advantage of due to a learning disability.
Unfair lending practices: If you can prove that the original lender engaged in unfair lending practices by violating federal or state law, you can mount a foreclosure defense, even if the original lender no longer owns the loan. You can reference the Truth in Lending Act and the Home Ownership and Equity Protection Act to find out what practices are deemed unfair.
State procedures weren’t followed: In some cases, the party initiating the foreclosure may not have followed the required state procedures. For example, some states require a properly served notice of default in order to initiate a foreclosure proceeding. Many judges will ignore minor violations of state procedures, but if a violation caused damages to you, you may be able to claim this as a defense. Know the law in your state. If the lender or servicer hasn’t followed correct procedure, it could help your case.
Serious mistakes made by the mortgage servicer: The most common serious mistake a mortgage servicer makes is overstating the amount of money it would cost to reinstate your mortgage. This can happen when they impose unfair or excessive fees that make you unable to get your mortgage back on track. A less common error is that your payment may have been credited to the wrong account, leading to a foreclosure. If either one of these situations occurs, you can use it to bolster your defense or even as the basis for your argument against foreclosure.
Active duty service member: You have special protections as an active duty member of the military. For mortgages that were initiated before you went on active duty, all foreclosures must take place in court, no matter what state law says. Plus, if you are active duty when the foreclosure is initiated, you are entitled to a nine-month postponement if you make a request in writing to the civil court overseeing the proceedings. Active duty service members can contact Military Legal Assistance in order to get more information about how to proceed.

If you want to mount a foreclosure defense, it’s usually possible. Chicago Agent Magazine reports that as much as 80% of residential home loans made between 2003 and 2010 contain lending violations. This means that there is a reasonable chance that your lender or servicer made a mistake that can help you keep your home. If you are concerned about foreclosure, consider employing a knowledgeable attorney to help you mount a foreclosure defense.