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Generally there should be a written communication from the mortgage holder to the lender expressing a desire for such a proceeding. This prevents the mortgage holder from later experiencing buyers (sellers?) remorse, deciding they didn’t get such a good deal after all, and making a claim against the lender.

Typically the lender will require every avenue toward sales of the property be exhausted before they’ll consider a deed in lieu of foreclosure alternative, so don’t get your hopes up yet. These types of transactions are becoming more difficult to get approval for with many lenders in the last year. The lenders feel they are too one sided and there are too many problems they may have to deal with.

How does giving up your deed in lieu of foreclosure affect you for tax purposes? As usual the IRS has a say in the matter, and you could have some tax liability associated with the transaction; once again, the boys and girls over at revenue giving you a bit of kick when you’re down, so to speak. From their side of the coin, it looks like the cancellation of debt that occurs is the same as income, and that must be declared. In many cases, there ways to eliminate some or all of the tax liability associated with giving up your deed in lieu of having your home foreclosed upon.

If you have debt forgiven in a DIL, you will receive a form 1099a from your pals at the IRS. The actual title of the form is “Acquisition or Abandonment of Secured Property”. As the title implies it deals with the tax consequences of what amounts to abandoning your property.

Note that the 1099a for a debt in lieu is not the same as if you actually had your debt forgiven through the foreclosure process. In that case you’d receive a Form 1099c “cancellation of debt”. With a 1099a for the DIL, if, for example, you had a property that you owed $250,000 on and you traded the deed to avoid foreclosure, you would owe the difference between the fair market value and the outstanding debt. According to the IRS, this applies if the amount in box 4 (fair market value) is less than the amount in box 2 (debt owed to the lender(principal only)).

Here’s the explanation according to the IRS:
“When you borrowed the money you were not required to include the loan proceeds in income because you had an obligation to repay the lender. When that obligation is subsequently forgiven or the property is abandoned or foreclosed, the amount you received as loan proceeds is reportable as income because you no longer have an obligation to repay the lender and/or you may be unable to pay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-A, Acquisition or Abandonment of Secured Property, or Form 1099-C, Cancellation of Debt.”

In the eyes of the IRS you receive proceeds through this process, as you no longer have a liability (the outstanding balance on your mortgage) on your personal balance sheet. The value of this cancellation is viewed as compensation, so you are taxed at the income tax rate. To add insult to injury, this income could very well push you into a higher tax bracket, making you have a greater tax liability than you would have otherwise.

This is definitely an area where you want the advice of a qualified tax attorney or accountant. The professional you choose should have expertise in this particular area of tax and real estate. The last thing you want is to trade a foreclosure on your house for a tax problem with the IRS.

How to eliminate some or all of your tax liability when proceeding with a deed in lieu of foreclosure –
One way you may be able to get around owing more tax is if you can prove that you’re insolvent, or you can declare bankruptcy. To prove insolvency or bankruptcy to the IRS’s satisfaction you have to fill out IRS form 982 (yes, another IRS form).  As pursuant to the terms of the Mortgage Forgiveness Debt Relief Act of 2007 that went into effect in December, the first $2 million of the primary mortgage amount is immune from tax liability should it be forgiven. Note that the Mortgage Forgiveness Debt Relief Act only applies to your primary residence, as defined in IRS section 121.

Once again, this is definitely an area where you want the advice of a qualified tax attorney or accountant (I’m neither) before deciding on your best course of action.

Hopefully none of this applies to you and you’re (more or less) happily making your mortgage payments on time; foreclosure is not in your future. Let’s just hope the price of gas doesn’t keep going up and you have to decide between your mortgage or filling your gas tank.

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While a college education isn't the right choice for everyone, the statistics are pretty clear on this one. Getting a college education will allow you to earn more money throughout your career than not getting one. Some of that is from the education, some of it is from the piece of paper you'll receive at the end of the process, and some of the increased income is derived from the social network you'll have by the time you graduate.

How to Save Money On a College Education – 1
What are you to do if the cost of college is looming, and you don't see a way to fund it? You have a couple of choices. The most logical first step is to lower the funding requirement. The lower the cost for the tuition, fees, and living expenses over the 4-years, obviously the easier it will be to foot the bill. Consider beginning the higher education process at a community college and transferring credits to a 4-year school to complete the degree.

The average annual cost of tuition and fees at a 2-year school for the 2007 – 2008 school year was only $2,361, only 38% of what you'd pay at a 4-year school. If you figure on a similar savings for the first two years, attending a community college would save approximately 19% on the cost of a 4-year degree.

How to Save Money On a College Education – 2
If the education is for a dependent, living at home during all or part the 4 years would further cut costs. Even if the time the dependent lived with parents only consumed the first two years, a good portion of the average $10, 930 in living expenses would be eliminated for that time.

How to Save Money On a College Education – 3
Pick a more affordable school. State to state there is a huge variation in costs for both 2 and 4 year colleges. The annual cost of an tuition and fees ranges for 2 year schools from a low of $633/ year in California to a high of $5,692 in New Hampshire. I'd venture to guess that the schools in California are not 8 times worse than those in the Live Free or Die State. Apparently living free does not extend to their higher education system.

Make the jump to a 4 year institution and you'll see a commensurate increase in costs from high to low. Once again it's schools with sun beating out schools in the Northeast for education costs. Florida can get you educated for $3,361 per year at one of the state's 4 year public colleges, while going up the coast to Vermont will drive up prices to a jaw dropping $10,428! That's a whole lot of clams for annual tuition and fees at a public college or university.

Note that these are in state figures, and those from out of state, unless they are from a state with a reciprocal agreement, will pay far higher costs in most cases.

How to Save Money On a College Education – 4
One great option you can use to fund a college education is to pay for college with today's dollars. As with everything else, the cost of a college education is affected by inflation. The problem for someone paying for that education is that the cost of an education is rising much faster than inflation, and has been for a while now. Tuition and fees increased a nationwide average of 6.6% according to the College Board report. Even in our current inflation situation, this out paces inflation by a healthy margin.

The solution? Pay for college with today's dollars, before inflation has a chance to take hold. Many states offer prepaid tuition plans, where you can pay for a college education at today's prices, by locking in the price of college tuition and fees at current rates. If you're about to start college, that offers you little solace, but for those parents facing the prospect of paying little Johnny or Jane's (possibly both) college expenses in the future, it could be welcome relief from high future prices. Check with your state to find out what they offer.

Note that a prepaid plan is not the same a 529 plan. A 529 plan is also a way to pay for college, but with a different spin. While prepaid expense plan is for tuition and fees only, a 529 plan, technically called a qualified tuition plans, will pay for all qualified expenses, such as tuition, books, room and board, and required computers.

Another important difference is that many states will actually guarantee your investment in a prepaid plan, no matter what the market does. A 529 plan, on the other hand offers no such piece of mind. Any money you have invested is subject to the whims of the market where you're invested. One advantage you will get with a 529 plan however, is that they are not subject to any federal income or capital gains taxes. In the majority of cases, that applies to state taxes as well. You will have to pay fees that will lower your realized return, so check with you state to determine these. To find out more about 529 plans, prepaid education plans, and the differences between the two, see the U.S. SEC website here.

How to Save Money On a College Education – 5
Something else that can be done to decrease the funding requirement for college is to have someone else fund it. Usually that means the Federal Government, although you should check with your state to see what programs are available. The most popular federal education funding mechanism is the Pell Grant, although many different grants are available for qualified students. Last year about $70 billion was delivered to students by Federal and state government agencies to fund all or part of their educations.

There's a new type of education grant offered by the Federal government called the Teacher Assistance for College and Higher Education (TEACH) (Cute, huh? Who do the taxpayers pay to think these things up, anyway?) grant. It's for those going into education related fields that will serve low income students. Here are the requirements for a TEASCH grant (from the DOEd website) First, you'll have to fill out the Free Application for Federal Student Aid (FAFSA), although you do not have to demonstrate financial need. Then you'll have to meet the following criteria:

• Be a U.S. citizen or eligible non-citizen.

• Be enrolled as an undergraduate, post-baccalaureate, or graduate student in a postsecondary educational institution that has chosen to participate in the TEACH Grant Program.

• Be enrolled in coursework that is necessary to begin a career in teaching or plan to complete such coursework. Such coursework may include subject area courses (e.g., math courses for a student who intends to be a math teacher).

• Meet certain academic achievement requirements (generally, scoring above the 75th percentile on a college admissions test or maintaining a cumulative GPA of at least 3.25).

• Sign a TEACH Grant Agreement to Serve (see below for more information on the TEACH Grant Agreement to Serve)
  

I did a post last year on the types of student loans, if you're looking to borrow the money for a college education.

How to Save Money On a College Education – 6
One thing that contributes more to the college experience every year is the cost of college textbooks. Back in the day they only cost a few hundred dollars a semester, now it seems like that's the cost of one book. Well, the professors have to sell the fruits of their publish or perish lifestyle somewhere. One place you can sometimes find said fruit is on Amazon.com, often for far less than the same item in the student bookstore. Instead of buying $300 - $500 in books you'll use for 3 months, spend less and buy them on line. Also, check eBAY. Sometimes you'll find school book bargains there as well.

Hopefully these tips can help you fund a college education, weather it's yours or a loved one's.

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Through this weekend CinemaNow is giving people a nice way to save money on legal movie downloads. You'll actually save money in two ways. The movies are 2 for 1, so you'll save money there, and you won't have to fight traffic and pay for gas to go get them. With the price of gas these days, that's kind of a big deal. They also have a free trial, so you can see if you like the service. Currently they have about 3,500 movies to choose from.

 
Cinema Now is one of the leaders in the growing legal movie download market. There are a seemingly a million of those probably not legal P-2-P movie download sites out on the net, but the legal sites that follow the traditional subscription or pay per download model are growing fast. If you're a TiVO subscriber, you can use Amazon's Amazon Unboxed service to download movies right to your TiVO. Apple has introduced the Apple TV that lets you download movies and videos for rental from iTunes.

There is also the Vudu, which I've been using for about 8 months now. It is a movie download terminal that you hook to your TV like any DVD player, except that it has a network connection like a BluRay player. As with the Apple TV you have to buy the box, of which 2 models are available; one at $299, and one at $999. The more expensive unit has a larger hard drive, in case you're one of those who has to own a large movie library and don't want to rent most of your movies. Yes, you can get HD movies on the Vudu and the Apple TV. The Vudu is extremely easy to hook up, use and navigate to find your movies. Even my 2 small kids have absolutely zero problems, because there is a graphical interface with movie cover art. That way, even if you can't read, you can still find a movie.

For those of you that are subscribers to the incredibly popular Netflix DVD delivery service, you can now partake in a movie download service as well. Netflix has just released a download terminal that allows you to pull movies fomr the Netflix catalog, and stream them for viewwing to your TV. It's pretty darn cool, but I prefer the Vudu, and here's why:

• The Netflix box offers worse picture quality  compared to the Vudu – some movies stream at 500kbps vs. 2mbps or 4mbps for VUDU.   If you spent your hard earned dollars on a nice, new  flat panel TV, you probably want to feed it the best possible signal.

• Netflix box user interface is static with no animations.  As opposed to the amazing and engaging user experience you get with VUDU.

• Netflix box is stereo only vs. DOLBY DIGITAL PLUS (5.1) for VUDU.  Did you hear that plane fly by?  Probably not in stereo.  If you have any type of decent surround sound system, this is probably a deal breaker. Studies have shown that people actually derive more enjoyment fomr a movie with decent picture and fantastic sound that the reverse.

• Netflix reportedly offers 10,000 movies with a HIGH emphasis on back catalog, in other words there isn’t as much new that you can see, unless you like older movies.  Compare this to VUDU where they have the most current movies available (as well as a deep back catalog) 5700 movies and growing weekly!

• The Netflix box does not contain an internal HDD.  For this reason, playback will not be glitch free and will be highly variable in many situations.  Additionally, the video server aspect of VUDU is completely lost with the Netflix box.  So you can forget multi-dwelling or mobile applications with the Netflix box, because rarely do they have internet service available.  The lack of an internal hard drive means you can't load up your box with movies, and then take it on the road for vacations or other travel.6.     

• Netflix does not offer the same level of integration ability.  If you're one of the (admitedly few) with a home automation system such as those offered by Crestron, AMX or Control 4, you just won't be able to get the same level of integration and control from the netflix solution. 

The CinemaNow and Amazon services require either a computer (both work for computer downloads) or TiVO (Amazon), but you don't need to by a dedicated box like you use with the Vudu or Apple TV.

The movie studios can't wait until the download model displaces traditional disc based content completely, because they can dispense with distribution costs and disk pressing plants, yet still charge the same for their movies. They'll save money on labor, capital expenditures and transportation and packaging. That's definitiely a winning situation for the movie studios.

You can find out more about the CinemaNow specials and free trial here. 

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Investing in oil; is it a good idea as the price of oil is hitting an historical high of $135 per barrel? How about that black staple of American energy production; coal? What about investing in energy sources for the future, such as alternative energy funds? As oil prices continue to rise, investing in alternatives may make sense. Oil could price itself out of a job somewhat if it keeps going up. Maybe some of these new technologies will step in to fill the gap. The problem is that oil provides little of our electrical energy. In addition, oil is still pretty cheap, relatively speaking, and there are few alternatives for many of the non-energy uses for oil. You can't pave a road or build consumer products from the sun, but you sure can with petrochemicals.

Is there a more or less direct relationship between the returns generated by alternative energy funds and the price of crude oil? It seemed like something that would bear checking into, so I did a little digging into the returns generated by some of the top alternative energy funds vs. the price of crude oil over the last few years to see if there were any correlations to be found.

As the price of oil goes higher it will make the price of power generated by conventional, oil fired generating plants commensurately more expensive. Oil is used to generate only about 2% of the power in the United States, so the price of oil should have only a slight relationship to the price of electricity on a national scale. Coal, on the other hand, is used to generate about half of the electricity consumed by your new big screen, so the price of coal may have a larger effect on alternative energy funds. I'll check both to see if this is the case.

The price of coal is exploding at a rate that is about on par with the rise in oil prices. If you're investing in oil, and want more commodity investments in the energy sector, it certainly bears looking into as another energy investment alternative. Appalachian coal sat at about $45 per short ton in September of 2007. Want to venture a guess as to where the price is now? Coal form the same region is now over $100 per short ton. Coal from other regions is also rising fast, but not at quite the same rate. For example Illinois basin sourced coal is now at about $57, where 9 months ago it fetched only $32. Maybe coal futures would have been a great bet last summer. Oh well, 20/20 hindsight.

Here is a look at light crude prices for the last 2 years:
2007 NYMEX Light Crude Oil Prices:

2008 NYMEX Light Crude Oil Prices:

As you can see, except for a dip in the first 45 days of this year, crude oil prices have exhibited a rather steady rise for the last 18 months.

Coal Prices since May of 2005

It's pretty hard to miss the rather dramatic spike in short ton coal prices over the last 9 months, as seen here, although it followed a roughly 30% drop in prices shown in the prior 9 months. Notice that Uinta Basic coal was falling, even as Appalachian coal was rising.

Now here are prices for some of the leading alternative energy funds. It's probably not a large enough sample to be truly representative, but it gives investors an idea. The first thing to note is their volatility. The next thing is that they seem to not be correlated to the relatively steady rise in oil prices exhibited over the last 2 years, except over the last 60-90 days, when the ones I looked have shown impressive gains (on the order of 20%). In fact, alternative energy funds have shown rather mediocre returns with the exception of this period, and could have been bested in a number of sectors.

I would have expected the rise in oil and to a greater extent, coal prices to have spurred investment in alternatives to these rapidly rising energy supply sources, and to have precipitated a rise in their prices. Some of the individual stocks have done fairly well, but as a whole the funds themselves have been underwhelming.

Here are pricing trends for a few alternative energy funds -

Guiness Atkinson Alternative Energy

New Alternatives Fund 

Powershares WilderhillClean Energy (PBW) - ETF 

You'll note that there seems to be a correlation between each other, but that's because they contain some of the same issues.

So, it looks like the price of alternative energy funds is not going to track with the price of crude oil, although both have experienced gains in the last few months. Perhaps this is the start of a trend, but then again, it may be an anomaly. They have shown a closer correlation with coal prices, but again, not a direct link. Thought this look at oil investing vs. investing in companies that make future energy sources would prove interesting.

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The cost to construct a home varies widely and is dependent upon a myriad of factors from size to finish quality. One traditional measure of a home’s construction cost is the cost per square foot. This is much like many other metrics and specifications; it’s fairly useless without context. Due to the tremendous variation in finish quality, features, layout, and local regulations, it’s not easy to compare the cost to construct two different homes on a cost per square foot basis.

As with many other things, keeping costs low starts with the preparation you do prior to starting the project. There are several things you can do here to save money on the finished home.

How to Save Money Building a House 1 –

• Where you build. - In many communities there is a significant difference in fees, permitting costs and cost of compliance with regulations depending on the specific community. This includes building permits, CC&Rs, and environmental mitigation costs. Often a difference of only a few yards in the location of the property can save or cost you thousands of dollars.

For example in my neighborhood the cost of a building permit is several thousand dollars higher on my side of the street, than it is directly opposite my house. Why? Because my house in the unincorporated county and the county line runs down the middle of the street. A building permit in the city (the other side of the street) is significantly less.

This is but one of the things that can add tremendously to the cost of a house before construction is even started. After the house is substantially complete other things can come into play, such as the cost of a water meter, which in some communities can run $5,000 - $7,000.

The type of lot you choose will also have a tremendous impact on the final building costs. Lots strewn with old structures, large trees, rocks, outcroppings, or steep slopes will be more difficult to clear and build on. Remember that anytime the builder utters the phrase “more difficult” that translates into “more expensive”. Likewise, depending on the type of home you’re building, some types of soil are more difficult to build on and thus more expensive. If your soil and topography requires pilings to be sunk into bedrock to stabilize the structure for example, costs will soar.

How to Save Money Building a House 2 –

• What you build. – This may seem self evident, but the type of house you build can significantly change your construction costs. Some types of architecture are much more expensive to build, and generally, the more you vary from a traditional box, the more it will cost building your house. Features such as garages won’t add to the living space, but they will add costs.

Generally a two story home will cost less to build than a rambler of equivalent square footage. If you add a basement or daylight basement, the costs will grow significantly due to the extra costs incurred for larger foundation walls, excavation, and if applicable disposal, of the extra soil. Keep in mind that finishing heretofore unfinished spaces, such as above garage bonus rooms, will add to the total construction costs. However, due to the fact that the area had to be built anyway, the overall cost per square foot of the finished house will be lower, and the value will be higher.

This means that it is sometimes worth it to add costs such as finishing attic or bonus room spaces, even though it will increase your total costs. Remember however that a larger house will be more expensive to heat, maintain, insure and in many locations, get a building permit for.

How to Save Money Building a House 3 –

• Who you use to build. – Some contractors are much more expensive than others, however in the long term they can actually be less expensive. This is especially true when building more luxury oriented homes. In this case there are so many details to be attended to that coordination between the architect, designer, engineering staff and builder is paramount to avoid unintended changes or conflicts in various elements of the house.

Needless to say (but I will anyway) that these can both add significantly to the cost of the home, and impact the livability and functionality of the final product. I’ve seen such problems add many months and millions of dollars to projects. Although it may seem like an on site construction superintendent may be a hopeless overindulgence, such a decision really depends on the scope of your project. On a large and/or technically advanced project, having an on site superintendent may actually save money and ensure the project is completed much more quickly.

Be sure the contractor you’re using has a solid track record with the type of project you are contemplating. If you’re building a larger home, or one with distinctive architecture and advanced features, a good, involved architect is worth their weight in gold (because that’s what one screw up can cost)

How to Save Money Building a House 3 –

• Know what you’re building and don’t change it. Any changes will precipitate the dreaded change order. Any change orders will drive up costs, aggravation and construction times. Any of these will not save you money on building your house. Think about it for a second. A change order typically involves tearing down something that’s already been built (that you already paid for), and building it again, but differently (which you’ll pay for again). This is not a recipe for low cost construction. A few months spent planning up front to ensure all the details are just as you want them will eliminate many headaches and cost overruns later.

How to Save Money Building a House 4 –

• How you build your house – The construction techniques will have a huge impact on costs. Modern techniques include pre-constructing many parts of the house, such as roof trusses, off site and having them trucked to the site. There are many companies that build panelized wall sections which are also built off site in factories and trucked in. Because of economies of scale and modern factory environments, using such pre-constructed components where possible can save you substantial money on your house. Prefabricated and constructed components can include not only trusses, and wall panels but other framing members as well.
  

Making sure all your “ducks are in a row” will have a dramatic impact on how much it costs to build your house. The most important thing you can do to save money building a house is to be smart not only when you’re building, but before you build as well.

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They've also added a community sentiment graphic to show a bullish or bearish sentiment on a stock. Where they get the information to run this, I'm not entirely sure. It appears they track how many Zecco customers have bought and sold a particular issue for the past 5 days, and present it in a dashboard style interface. It will also graphically show where a particular stock lies on 2 scalers, worst performing - best performing, and least held – most held. They also have added a paperless option so you can opt to receive trade confirmations and statements by email, with no printed documents sent through snail mail.

To learn more, click here.

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For example, say you hold 1,000 shares of Microsoft (MSFT) corp that you bought at $10.00 a share. You can tell your broker to sell those shares if the stock ever drops below a price that you feel comfortable with, for example $7.50. That way you limit any potential losses on your position.

There is a problem with a traditional stop loss order however, and I’m sure you’ve spotted it already. What happens if Microsoft corp shows impressive gains for a year, say it increases its share price to $18.00? That’s great, but your stop loss order is still set at $7.50, so if MSFT corp’s stock then drops back down you’ve protected yourself against a 25% loss in your original position, but you haven’t protected your gains at all.

A trailing stop limit changes that for you. A trailing stop limit order actually changes the number at which it goes into effect as the stock price changes. That buys you a very important benefit as an investor. It protects you against loss, but also allows you to make a nice profit while doing so. Basically it mitigates a certain measure of risk while maximizing your investment returns. Anything that mitigates investment risk while allowing an investor to generate potentially explosive returns is a great thing.

For example, say you have the same position in MSFT that you got into at the same $10 / share price, but this time you used a trailing stop limit. If you used a 25% trailing stop limit, it would increase so that any time the stock dropped 25%, a sell order would be triggered. That way when the stock went to $18.00, then dropped back down, much of your profit would be preserved. Your loss would be limited to a maximum of 25% of the stock’s highest market price. In this example, your sell order would have been triggered at $13.50 / share.

So, instead of your position being liquidated at $7.50 and you losing all your profit on the stock’s increase, plus part of your original stake, you would lock in some profit, in this case a 35% gain. When setting up a trailing stop limit order you can usually specify either an trailing amount or a percentage. In this example you could have chosen the 25%, or you could have chosen an actual dollar amount, such as $1.50. If you chose to use the dollar amount, your sell order would have been triggered at $16.50.

If your broker offers both options you’ll be free to choose whichever suits your particular position and mental state the day you make the order. If you’re setting the trail using a dollar amount, you’ll typically have a limit price and an optional offset. The limit price moves up and down with the market price and that’s what’s used to trigger the sell order. The offset, if you use one, is an additional amount that’s subtracted from the trailing limit, say .25, to arrive at your actual sell order price.

Using a trailing stop limit can generate explosive gains for your portfolio because you will maximize gains in your stocks, while minimizing losses. Any time you can do that, you’ll be retired on a beach in Maui that much sooner.

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For example Essex, Suffolk, and Norfolk counties in Massachusetts showed an average year over year increase in their foreclosure rates of almost 44% in Q2 of 2005. Consulting firm Global Insight prepared a report in mid 2007 estimating the foreclosure problem, coupled with declining home values, could cost the U.S. as much as 1% of the GDP, due to decreased economic activity.

A group of banking industry regulators and 10 state AGs calling themselves the State Foreclosure Prevention Working Group has been working on the problem for over a year now. The have discovered some interesting aspects to the problem that can go a long way to help understanding foreclosures. It's interesting to note, for example that:

• Payment resets on hybrid ARMS have not been the primary cause of foreclosure problems in many areas. Despite the news coverage that could lead one to believe otherwise, mortgage holders with resetting ARMs was not the cause of many foreclosures. In fact, many (the report didn't mention the exact number, only that it was a significant percentage) sub-prime borrowers were behind on their mortgage payments before their ARMs reset.

  That says to me that many of these mortgage borrowers took on loans which were beyond their abilities. Weather that was due to fraud on the part of the applicant, lenders pushing prospective borrowers toward mortgages that were beyond their capabilities from the outset, or more recent economic factors, such as job loss, is unknown. It could possibly be a combination of those factors and more.

  For all the hand wringing and hollering by the media and consumer groups, it seems as though many homeowners simply wanted a more expensive home than they could really afford, and were willing to bet that continued real estate appreciation would render their decision a good one. For too many that was simply not the case. For these homeowners taking advantage of record low mortgage interest rates and conventional 30 year fixed mortgages, coupled with homes that were more within reach would have been a much better choice. Now the piper has come a calling.

• Refinance options have, as the report so eloquently states, “nearly evaporated”. One thing that the media has gotten right is that refinancing out of a rising house payment is not an option that remains open to very many borrowers. In the past it was a relatively simple matter to grab a lower house payment by refinancing. That's no longer the case.

• 45% of homeowners that have taken the step of contacting their lenders are working toward some type of mortgage modification. That speaks volumes. It isn't in the best interest of the lender to enter into foreclosure. They lose money on every one. As with any business, they're not in business to lose money. Instead of foreclosing on a home, they'd rather get a long term stream of interest income.

  The fact the almost half of all mortgage holders that have spoken to their lender were able to work toward some type of mortgage modification shows why contacting the lender early is so important. Unfortunately some lenders will only agree to such steps once your loan is already in default, but early contact, not avoidance is still the most important step that you can take if you feel foreclosure is imminent.

  There may be some pending legislation that can help with mortgage modification. Currently H.R. 5579, titled the “Emergency Mortgage Loan Modification Act of 2008” is being debated in Congress. It has been placed on the calender, but is still in committee and has yet to be voted on. According to it's description it is “To remove an impediment to troubled debt restructuring on the part of holders of residential mortgage loans, and for other purposes “ what exactly that impediment is, I am unsure.

  It's possibly the treatment of the forgiven portion of debt as income by the IRS. Currently if a portion of your soon to be foreclosed upon home's mortgage is forgiven by the lender the IRS treats that as ordinary, taxable income. It's their equivalent of hitting you when you're down.

  Since the report was released a few months ago, more lenders have taken the step of allowing borrowers to modify their mortgages so the 45% figure is probably higher now. Mortgage modification could be the “new refinancing”.

Nationwide the firm RealtyTrac reports that foreclosures are up 112% year over year for Q1, 2008. The top 5 states in terms of foreclosure filings were:
1 – Nevada
2 – California
3 – Arizona
4 – Florida
5 – Colorado

The bottom 5 were:
46 – Mississippi
47 – South Dakota
48 – West Virginia
49 – North Dakota
50 – Vermont

You'll notice that the top 5 were those states that experienced a rash of investors trying to capitalize on skyrocketing property values, now not so skyrocketing. The bottom 5 on the other hand experienced lower property value gains over the last 5 years. Because they were not as attractive to investors, who ostensibly would be much quicker to become over extended and then jump ship, they have higher foreclosure rates. The other reason is that in certain areas property values went up so fast that the average homeowner had to resort to all manner of unconventional mortgage products to simply buy a home at all. Maybe renting would have been a better idea, but hind sight is 20/20. Hopefully this will provide a bit more information to help in understanding foreclosures. For more help, see my previous post on how to avoid foreclosures.

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My post on the Dangers of Reverse Mortgages was featured in the 152nd edition of the Carnival of Personal Finance. Check out the carnaval for a number of great posts.

Also, my post on Investing for Kids was featured in the Festival of Stocks num 88

Thanks!! 

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For the rest of you, here is the reason that gas prices are so high. There is a little known office, high atop an office building in mid town Manhattan. In that office, on the 3^rd Tuesday of every month, there is a meeting of an even lesser known group of people, almost exclusively older, white, men by the way, who shape the future of world economics.

In these meetings they discuss how to separate the absolute maximum amount of money from the poor and downtrodden to enrich themselves, hopefully at the expense of all that is good and decent. The name of this secretive organization is the Commission for the Maximization of Oil Derived Revenues (CoMODR). They have been known to resort to all manner of tactics to not only achieve their stated goal of keeping gas prices, and other petro product prices, as high as possible.

Not only that, but more than a few good people have died trying to penetrate the inner workings of their organization, all to no avail. As can be seen when you drive by any corner gas station, gas prices are still going up, largely thanks to the efforts of these men. Thanks to modern technology and good old fashioned greed, their efforts to drive up gas prices are more successful than ever. Once, the thought of $125 barrels of crude oil and $4.00 gallons of gasoline were but pipe dreams to these men, something they could only hope to achieve.

Okay, so that’s all a total load of crap, but you would probably find that story a pretty easy sell to at least some of the aforementioned 203 million American drivers and the burgeoning crowd of conspiracy theorists spawned by ever increasing gasoline prices.

So, why is gas really so high? Is it all due to a secret conspiracy, or reckless oil company profiteering? Actually the reason gas prices are so high is a bit more simple than that.

As noted there were 203 million drivers and 244 motor vehicles in the U.S. in 2006. Worldwide, there were an estimated 850 million vehicles (Organization of Arab Petroleum Exporting Countries figures). Contrast that to 1973. In 1973 the U.S. had approximately 122 licensed drivers and 126 million motor vehicles. Worldwide, OAPEC estimates reveal about 298 million vehicles in 1973.

According to the International Energy Studies Group at Lawrence Berkeley Laboratory, the average fuel economy of U.S. driven, light duty, motor vehicles, the group that includes the cars and light trucks that are the predominant transportation resource for American drivers, was only 13.3 mpg. In 2006 that figure had increased to 21mpg (EPA figures). The fuel consumption figures will improve even further in the U.S. due to recent legislation, and the higher price of gasoline and diesel pushing consumers toward more efficient vehicles.

So fuel economy has increased, but not nearly enough to offset the increase in the number of drivers and motor vehicles. This is especially true when worldwide fuel usage statistics are considered. As the world economy has improved and population has increased, so has the demand for petro-products, including gasoline.

Here is the underlying reason why gas prices are so high.

Total U.S. refinery capacity (approximate):
1973 – 13.5 million barrels / day
2004 – 17.5 million barrels / day
This reflects a refinery capacity increase of 29.6%

World Wide Crude Oil Production (U.S. DOE):
1973 – 55.68 million barrels / day
2006 – 73.45 million barrels / day
This reflects a crude oil production increase of 31.9%

World Wide Crude Oil Consumption (U.S. DOE):
1973 – 57.24 million barrels / day
2006 – 85.01 million barrels / day
This reflects a crude oil consumption increase of 48.5%

Consumption increase far outstripped production increase for the period from 1973 – 2006.

U.S. Crude Oil Production (U.S. DOE):
1973 – 9.21 million barrels / day
2006 – 5.14 million barrels / day

This represents a crude oil production decrease of 55.8%

Total U.S. transportation related petroleum consumption:
1973 – 9.05 million barrels / day
2006 – 13.98 million barrels / day
This represents a transportation related crude oil usage increase of 64.7%

Also note that in 1973 U.S. refinery capacity exceeded transportation related demand by 49.2%, while in 2004 (transportation related crude oil demand was 13.76 MBD) they exceeded demand from the transportation sector by only 27%. As 100% of refinery capacity is not available at any given time for a variety of reasons, this, coupled with the fact that demand for motor fuel has risen, while U.S. capacity has been slashed by about 40%, means that we now import much of our gasoline, rather than producing in excess of our demand, as we did in 1973.

You may note that according to U.S. DOE figures worldwide crude oil consumption exceeded supply in 2006 by an average of 11.56 million barrels per day. I triple checked the figures on that, because it seems patently impossible that world wide consumption could outstrip supply by such a large margin.

That would mean that in 2006 the world used 4.2 billion more barrels of crude oil than it produced. Is there a giant tank of crude oil somewhere that I’m unaware of, or are these figures calculated using different methods? If those figures for supply and consumption are indeed true, that’s the reason for gas prices to be so high and be prepared for them to rise even further.

One last thing. Don't forget that the American dollar just doesn't buy what it once did, and that includes gasoline and oil. 

Here is a post on some Tips to Save Gas.

Can you burn water in your car or truck and get a 50% or more increase in gas mileage? I don't know, but it sure sounds great. Decide for yourself here. 

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That is part of the reason for the economic troubles we’re facing these days. People want to get mortgages to buy houses, they have shown that they are trustworthy and historically are fairly unlikely to miss payments. However, many lenders (or their investors) are so skittish that these folks are being denied the opportunity for a mortgage in many cases.

If you are one of those that gets through the net and is in the position to be offered a mortgage, you shouldn’t just take whatever then lender is offering. There are some questions you should be asking first, even though you may just feel damn lucky to get a mortgage at all.

Here are mortgage questions to ask when analyzing your mortgage offer.

Mortgage Question to Ask – 1
What is the interest rate?

That is numero uno. The interest rate will have the greatest impact on how much you’ll pay every month and how much you’ll end up paying over the term of the loan. (For mortgages of the same amount, obviously.)

Mortgage Question to Ask – 2
Is this an ARM or a fixed rate mortgage?

In a survey of mortgage holders last year, over 30% of respondents were unsure of what type of mortgage they had. That amazed me so much I did a post on it. (Type of mortgage post) How so many could fall into this situation still amazes me, but don’t end up being one of these borrowers.

If you don’t know the difference between the different types of mortgages, here it is in a nutshell. A fixed rate mortgage is basically what the name implies. The interest rate will stay the same over the term of the loan. On the other hand, an adjustable rate mortgage (ARM) will change, or adjust, the interest rate at various times throughout the term of the loan. Rest assured the interest rate adjustment will be up, and so will your monthly payment. For more on this, see a post I did last year on how to select a mortgage.

Mortgage Question to Ask – 3
Are there prepayment penalties?

This is of huge importance. The majority of borrowers keep their mortgages for 5 years or less. That means you’ll pay off the mortgage and either get another one for your existing home, or you’ll buy a different house. In any case you’ll hold the mortgage for less than the full term. If you are charged a prepayment penalty it will cost you a hefty premium to do this.

Prepayment penalties are charged by lenders to help mitigate the risk that they’ll not get the entire revenue stream provided by the loan going full term (sounds like a pregnancy). Typically prepayment penalties expire after the first 2 – 5 years, but in some cases can persist longer than that. The penalty is monetary, you’ll not be asked to pledge your first born or classic ’57 T-bird. The normal prepayment penalty is about 2 – 3% of the outstanding balance at the time of the loan payoff.

You may be offered some consideration for agreeing to a prepayment penalty, such as a lower interest rate. On the other hand, you may be required to agree to one if you have bad credit, although at the present time few borrowers with really bad credit are able to get a mortgage at all, unless they have absolutely huge down payments.

A prepayment penalty may apply to a refinance only, in which case it is termed a “soft” penalty. If it applies to both a refi and a payoff of the mortgage, it is called a “hard” prepayment penalty.

Mortgage Question to Ask – 4
How much will this mortgage cost me in addition to the principal and interest?

Paying fees and closing costs for your loan are completely normal. There are a myriad of fees associated with securing your loan, such as appraisal fees, title insurance, documentation fees, recording fees imposed by the county for recording the deed, prepaid insurance, notary fees, application fees (try to negotiate your way out of that one), and so on.

You are required by law to be informed of any and all such fees and closing costs within three days of your loan application being received by the lender. These fees and closing costs can vary widely so it bears checking up on. Be aware that any such fees that are rolled into your mortgage will cost you a substantial amount of money after you’ve paid interest on them for 20 – 30 years.

Mortgage Question to Ask – 5
How long will it take to close the loan?

Closing is when you actually receive the proceeds for the loan. When it closes can affect your house deal, so you have to know how long it will take to happen. About 3 – 4 weeks is normal.

Mortgage Question to Ask – 6
Are you charging me points?

Points are an interest rate buy down. If you are charged points, you will pay a fee to the lender in exchange for a lower interest rate on the mortgage. It’s important to know this when comparing different mortgages, because if for example, one lender quotes you a 5.9% mortgage and another a 6.4% mortgage, you aren’t making an apples to apples comparison if the lower rate was obtained by your paying points to buy it down.

Points on a mortgage are equal to 1% of the mortgage amount. So a point on a $350,000 mortgage would cost you $3,500 up front. See the specific term of the offer to see how much each point is worth in terms of rate reduction. Normally it’s only a good idea to buy points if you are going to stay in your home and not refinance for at least 5 years, probably longer, otherwise you will not have time to recoup your added costs.

These are some of the most important mortgage questions you should ask when comparing different mortgages and before you sign your loan agreement. Before going into the process, make sure you have all your ducks in a row, they’re easier to shoot that way. Get all your required documentation in order, such as bank statements, tax documentation, check stubs, and anything else the lender may ask for. Also, you should have any offer reviewed by a good real estate attorney before you sign it. Here’s to hoping you get that mortgage!

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What are some of the dangers of reverse mortgages?

Reverse Mortgage Danger Num. 1 -
Well, in the first place you should be aware that the amount you receive will probably be less than you are shown in the initial calculations. This is because unlike a traditional mortgage, where the taxes, insurance, and fees are paid by monies you paid into an escrow account when you write your mortgage check. With a reverse mortgage on the other hand, it actually works, drum roll please, in reverse. The money for those items is subtracted from the amount the mortgage holder receives for their monthly payment, thereby reducing the net amount of the money you'll get each month. Be aware of this when you are making your calculations.

Reverse Mortgage Danger Num 2 -
Another danger of a reverse mortgage goes to the actual structure of the loan. As it is stated in most of the loan documentation, you will retain use of your property as long it is your primary residence. The problem is that, as reverse mortgage holders are senior citizens, the chances are fairly great that they may do one of two things that could cost them their home.

One is to be confined to an assisted care facility. At this point the home is no longer their primary residence and the bank will come for their money. If the balance is less than the home equity, the home will be sold and the equity beyond what is owed on the reverse mortgage will be given to the homeowner. If the balance is greater than the home will simply be forfeit to the lender to satisfy the terms of the loan.

The other condition that could trigger the primary residence provision is that the homeowner could move for much of the year to a second home. This is very common for seniors living in northern states. They will purchase second homes in warmer climes, such as California, Florida or Arizona, where they can relax in the sun. If they take their relaxing a bit too seriously however, they could find themselves in a situation where their home is no longer considered their primary residence.

Reverse Mortgage Danger Num 3 -
Another danger of a reverse mortgage is getting sucked into paying high fees or getting bad ARMs. Many reverse mortgages are adjustable rate mortgages. Many people are well aware of the dangers of these type of mortgages as they've occupied more than their fair share of the evening news for the last year. The same problems can apply for reverse mortgages as for traditional mortgages. You can easily be risking your security with the uncertainty of a reverse ARM. Personally, I may just be too conservative, but I like the old fashioned way, fixed.

Another point to be aware of is that the FHA will charge a 2% fee to insure reverse mortgages. But the real thing to watch out for is that you may be asked to pay even higher fees and closing costs than you would with a traditional mortgage. Don't do that, because many lenders will offer basically the same fee structure with a reverse mortgage.

Reverse Mortgage Danger Num 4 -
Another danger of reverse mortgages is that they let you spend your home's equity on just about anything you want to. This could cause a problems if you need those funds for an emergency down the road. While there's nothing wrong with living it up a bit in one's golden years, be aware of the temptation to splurge with all your reverse mortgage payments on trips to Mexico or a new Prevost to impress the folks in Arizona. Keep your eye on the future and remember that the money from the reverse mortgage could allow you to keep your independence at home should you or your spouse's health take a turn for the worse in the future.

A reverse mortgage can be a great financial vehicle to carry you through your golden years in relative financial security. Just be aware that there are dangers to reverse mortgages, just as with any other financial products

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First of all, as they are minors, children can't actually buy and sell stocks themselves. They can however take advantage of the Uniformed Gift to Minors Act (UGMA) that enables minors to legally own property. It does this by allowing the establishment of a trust for the minor's assets. There is a trustee for the UGMA that is typically the parents. Unlike more complicated trusts, UGMA related trusts are statutorily established in the individual's state of residence. That's nice because you don't have to rack up a mountain of legal fees to establish a UGMA trust, as can be the case with many other trusts.

What the UGMA allows is the gift to a minor child of an amount of money with no tax consequences as per the limits of the gift tax exclusion. The exact amount of the annual gift tax exclusion can vary from year to year, according to IRS regulations, but currently it's $12,000 from one individual to another. There is no actual contribution limit for a UGMA, but there will be tax consequences if the contributions to the account are greater than the current year's exclusion limit. You can establish a UGMA trust for your kid's investment whims at your broker's office or bank by simply filling out a few forms and choosing a custodian.

You can do all the investing you want with the funds in the account, as long as you don't things like gambling as investing. Any realized gains or losses will be reported under the child's SSN. At the age they cease to be minors, either 18 or 21 years of age depending on the state of residence (although some states allow you to move the age from 18 to 21 if you so desire), the funds in the UGMA trust revert to the ownership of the minor. Hear this, you will lose every once of control over these funds at that time.

This bears a bit of thought, because no matter how responsible or irresponsible your kid, you'll have a trust fund baby on your hands if you establish a UGMA. The difference is that you can not prevent the minor from gaining control of the funds through special terms of the trust as you can in other trusts. They are all set up according to the state's statutes, remember? (There are other trusts that you can set up as custom as you would like, but these will usually cost more to establish than a UGMA trust).

Something else to know about a UGMA is that they reduce the child's eligibility to receive student financial aid. Apparently the Feds feel that if your kid is sitting on a half a million dollar trust fund the taxpayer shouldn't foot the bill for their education. The point is that any assets in a UGMA established trust account are considered the child's assets when applying for financial aid, so they will have an impact on eligibility. That's something to consider when setting up a UGMA so your kids can dabble in the markets.

Another thing to consider is that transferring any funds from the UGMA into another vehicle, such as a 529, will cause you to be liable for capital gains taxes on the transfered amount. That's because the assets can't actually be transfered directly. They must be sold, then the proceeds from the sale are used to fund the 529 account. The other issue is that 529 plans are actually adult owned, so the funds must be transferred back to the parents, possibly incurring other tax consequences. 529 plan assets are not used for calculating financial aid eligibility though.

What if you child just wants to invest for an education. Not to fund their education, but to learn how the markets work, and get an actual financial education. That is a great thing, because the vast majority of children today have absolutely no idea about anything financial. If your child is responsible enough to actually want to spend their time investing their assets, rather than spending them at the mall or on smoking dope, you probably have less to worry about than many parents. Most kids would rather spend their money on new games for their PS3 than on shares of the Visa IPO, so if your's doesn't , congratulations.

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Lessons About Investing – 1
The first thing to determine when you're beginning investing is why you're investing. What are your goals? Only once you've determined your goals can you develop a plan to achieve them. Are you looking to create a future income stream to fund your retirement, do you want to invest as a business to create income for the present, or are you trying to fund a specific goal, such as college for your children. The other option is that you could be investing for fun, and investing can be an enjoyable hobby (when you do it right).

So, your first lesson is to set your specific investing goals before you begin investing. Be specific when you're doing this. For example, it's not enough to say “I want to fund my retirement”. You have to actually know how much money it will take to do so. One of the most common mistakes beginning investors make is failing to invest in such a way that will meet their goals, because they haven't really set any. So, if you're looking to invest as a retirement funding mechanism, your first task is to decide just how well you'd like to live when you stop working.

If a Jed, pre-Beverley Hills lifestyle suits you just fine, then you'll have an easier time than if you would like to retire and earn the same as your pre-retirement income. If you can feel comfortable at 75% of your pre-retirement income, that will give you a specific monetary goal. Obviously you'll have to know what your pre-retirement income will be to do this. Unless you spend time down at Zoltar's, you'll have to rely on a bit of educated guessing.

This is a bit more difficult now than your parent's day, because of the mercurial nature of most people's careers in our brave, new century. In any case, look at your career path, and determine how much your income will realistically increase over your working life. If for example, you are pretty sure you can count on roughly a 5% raise every year, use that number in your calculations.

Lessons About Investing – 2
Your second lesson about investing is to invest in vehicles that will meet your investing goals while taking into account other important factors. The two most important of these are probably your personal risk tolerance and time horizon. For example if you're risk averse, you will want to stay away from high risk investments, no matter if they promise high returns.

Looking at your time horizon is extremely important to help ensure that your investments will have the funds you need when you need them. Some investments tend to be fairly volatile, meaning they go up and down in fairly large swings. Volatile investments may generate pretty high returns over time. The problem arises if you are close to the time when you may need to begin withdrawing funds. If the investment has wide swings in value you risk it being in a trough, rather than a peak when you need the money. Not a good situation.

Lessons About Investing – 3
That leads into lesson about investing number 3. It's one that even the best, most experienced investors can have trouble learning. Don't try and time the market. That's it. Trying to guess exactly when to buy and sell in order to maximize your returns is not a trivial task even for the pros, most amateurs will just get killed trying it. Guess right and you'll make out like a bandit, but the more likely scenario is that you'll be wrong much more often that you'll be right and end up taking a bath.

Lessons About Investing – 4
This a lesson that can be very expensive if not learned. You have to diversify your holdings. If you are a fund investor much of the diversification will be handled for you, unless you invest only in sector funds in a limited scope of sectors. You want to avoid putting all your eggs in one basket, lest you end up in the situation Enron employees found themselves in. Actually this often happens to investors that mainly invest in their employer's stock. While that can be a great experience, just ask Google employees over the last few years, or Microsoft employees in the '90's, it can also be a horrifying ride if you're forced to watch you retirement funds evaporate.

Diversification is an investor's best defense against such a catastrophe. If you're well diversified, a calamity in a certain industry or sector will have much less of an effect on your portfolio, because you have holdings in other areas of the market that will, in theory, be unaffected.

Lessons About Investing – 5
An investing lesson you should learn early is to always do your due diligence. You should know all the factors about your investments that could come back to bite you if things go wrong or you need access to the money. You should know about tax and withdrawal consequences, fees, and other things that can affect your investments. In addition you should know as much as possible about the companies you're invested in, their businesses, and the economic factors that could affect them.

These are 5 of the top lessons you should learn before you start investing. The money you make (or save) will be your own.

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