Mortgage points come in two very different categories. The first is the origination point, the second is the discount point. When applying for a mortgage, you need to know which you’re paying because they could impact not only your interest rate but your taxes. Both are a part of the closing costs, not reoccurring costs over the life of the loan.
Mortgage Points Definitions
Origination Points: If the lender specifies an origination point, then that means you will be paying 1% of the loan as an origination fee. That’s basically a fee that covers various costs associated with issuing the loan. It doesn’t benefit you as the buyer, it only benefits the lender.
Discount Points: Discount points buy down the interest rate on the mortgage. Each point is the equivalent to 1% of the mortgage amount. The point is not the number before the decimal, it’s the number after the decimal. For example, when you hear the Federal Reserve is increasing the base rate by 50 points, that’s half a percent. A discount point usually reduces the mortgage rate by 0.125% to 0.25%, so if you have a mortgage rate of 5%, then paying a point would make it 4.875% or 4.75%.
Tax Implications of Points
Many of the costs of closing a mortgage are tax-deductible, but some are not. Discount points are deductible because mortgage interest is deductible. Origination points are not because they are used to pay fees. You can deduct discount points even if the seller gives you a credit for closing costs.
When interest rates are high, paying discount points can be a big money saver, but it doesn’t provide as much benefit when mortgage rates are at record lows. That’s because it might only save you a small amount monthly, but require a lot of additional cash at closing. Before paying a point, you should consider the break-even, which is the month when the point will start saving you money. If you plan to sell the home before you reach break-even, then a discount point is a waste of money.
Here’s an example with today’s rates:
The mortgage is $200,000. At 4.8%, the monthly payment would be $1049. If you pay $2000 to buy down the rate to 4.675%, the monthly payment is $1034. Your savings is $15 a month and it will take you 133 months, more than 11 years, to break even.
Use this point calculator to compare costs on the loan you’re considering. If this is your first home and you plan to stay less than 10 years, then the point probably isn’t worth it. If you plan to stay for 30 years, then it might be. Over the life of the loan, paying $2000 up-front, would save you $5400 in interest.
Mortgage points are confusing, and your lender may not make clear which point you have at first. You should also ask for the rates with no points, one point, and two points so you can decide which option is best for you. Avoid origination points if at all possible. You may not be able to, but at least be clear about what you’re paying for and what you can deduct from your taxes.
House hunting is stressful. Making an offer on a home is even more stressful. How much should you offer? What else should you ask for? Will the seller work with you on the price? It’s a process that’s full of landmines, and you’ll likely lose a lot of sleep. At the very least, you’ll be signing a LOT of documents. Here are the pitfalls and pleasures of home purchase offer process that we’ve come across so far.
Pitfalls of Making an Offer
This is the biggest hurdle. With foreclosures, the bank is usually realistic because it’s just a number for them. Not always, though. Sometimes they decide a house is worth way more than the market will bear so it sits and sits and sits.
The bigger issue is unrealistic sellers that aren’t a foreclosure or short sale. In this case, the seller has both an attachment the house and a “perceived value” that’s probably set somewhere back in 2007. This is especially true if they’ve refinanced enough times to pull out all the equity. They have an inflated idea of what the home is worth, and may not accept a realistic offer. Even if they get an offer at their asking price, it may not appraise and the deal will fall through.
We’ve seen several listings touting the 2006 or 2007 sales price as a reason to buy the house, except those prices were nowhere near the true value. Recently, an agent told us we were looking at a $900,000 house, but it’s not. In 10 years it might be a $900,000 house. Right now it’s worth what the market will bear. If you’ve got an unrealistic seller and an unrealistic agent on your hands, good luck.
If a house is priced well, then it’s likely to get multiple offers and go into a bidding war. Make sure you don’t get so caught up that you end up offering more than the home is worth. Make sure you have a real estate agent who understands value and can tell you when a number is too high.
Finding the Right Price
This is the biggest difficulty we’re having right now. Rather than the traditional 6 months worth of comps, banks will only look at 3 months worth of comps. Then you have to sort out the banks buying back houses, the trashed houses that investors bought, and houses that are completely different in size and condition. It makes for pretty slim pickings, and makes it especially hard to compare.
The Pleasures of Making an Offer
I’ll be honest, there aren’t many pleasures to the offer process, but I can think of two.
Finding the Right House
For now, our biggest pleasure has been finding the right house. We walked in the door and knew it was the house we wanted. We did sleep on it (or attempted to), but we just couldn’t get it out of our heads. I started fantasizing about paint colors and planning our move. I also started fantasizing about not having to look anymore! We’re trying not to get too attached, in case the sellers can’t meet our goal price, but it’s hard.
Getting the Offer Accepted
We haven’t experienced this yet, but I think this will be the past of the process. Agreeing on a price and moving into escrow. There are plenty of pitfalls once you get into escrow, but I expect that being so close to actually owning a home will be thrilling.
For now, we can only hope and wait to experience all the pleasures. We’ve already been through the hurdles.
With the economy in a slump, more and more people are trying to take the home office deduction. Unfortunately, most of them don’t actually qualify and are setting themselves up for an audit. If you’ve taken the deduction already or wonder if you’re eligible, here’s what you need to know so you can have all your information ready for next April’s taxes.
Who Qualifies for the Home Office Deduction
Just because you have an office at home, that doesn’t mean you qualify. In order to be considered a home office, it must be regularly and exclusively used as a principal place of business, which can include administrative work or meeting with clients. You can also use the space for business equipment storage. There are special rules for daycares, so contact a tax attorney for advice if you operate one out of your home.
If you take the deduction, you can’t have another fixed place of business, however there are some exceptions if the office is in a separate structure not attached to your home. The IRS publication gives the example of a florist who has a greenhouse in the backyard.
Regular and Exclusive Use
In order to be considered “regular use,” you must use it regularly to conduct your business. You can conduct business off-site if that’s the nature of your business, but you should use the home office for billing, recordkeeping, etc.
“Exclusive use” means exactly that. You can’t use the business area for personal use. That means no playroom, no guest room, no business conducted at the dining room table, nothing. Of course, it doesn’t have to be a whole room. You could only deduct the desk portion of the room and that would probably be fine.
If you operate two businesses out of your home, then both of the businesses must meet the exclusive use test.
The Employee Deduction
In general, employees of another company don’t qualify for the deduction. There are exceptions, but it’s tricky. You must use the home office for the convenience of your employer and not have an office that is supplied to you by your employer at their place of business. Typically the employer must require you to work at home. For example, if you telecommute a couple days a week for your convenience, but could go into the office then you don’t qualify. If you telecommute because your employer doesn’t maintain an office, then you qualify, but the exclusive and regular use tests still also apply.
You also may not rent a portion of your home to your employer and then conduct business for the employer in that space and deduct the cost of it.
Calculating the Deduction
If you’re self-employed, then you can only deduct up to the amount of your gross receipts. So, if you earn $6,000, your home office deduction plus deductions for other business expenses can’t exceed $6,000. If you have more deductions, you can carry the remaining deduction forward to the next year, but it must still meet the deduction limit then.
To find the amount you can deduct, measure the length and width of your office, or the space in your home where you exclusively conduct your business. Now divide that number by the total square footage of your home. The IRS example gives the example of a 240 foot business use in a 1200 square foot home. You can deduct 20% of the following, up to the limit of your gross receipts:
- Mortgage interest
- Real estate taxes
- Repairs (if the repairs affect that portion of the home.)
The IRS example shows the following example:
Gross receipts: $6000
Taxes and interest: $3000
Business expenses: $2000
Deduction limit: $1000
Utilities, insurance: $800
Excess: $1400 that can be carried over to the next year.
You can write off depreciation for the value of the portion of the home used for business due to wear and tear, but only that portion and not the land or the rest of the house.
If you have physical property, like a computer, that that you use for your business, you must use it at least 50% of the time for business in order to take a deduction for the depreciation.
Gain on the Sale of the Home
If the home office is attached to your home, then you don’t have to report the depreciation when you sell the home at a profit. If the office is a detached structure, then you must report the profit. Contact a tax attorney for advice in that case.
The home office deduction is a tricky thing. It’s not guaranteed to get you an audit, but it can be a red flag if you don’t earn much from your business and write off a lot of home office costs, or if you don’t operate a business and claim the deduction as an employee. If you plan to take the deduction and have a difficult time making the case, then it’s best to contact a tax attorney for advice. If you’d like a quick check, use this home office deduction calculator.
Don’t tell my husband, but I have a new love and its name is Everbank. Don’t get me wrong, I love him, too. But Everbank is something special. No, it’s not perfect for everyone. It doesn’t have some of the features you might want from an online bank, but it works for what I need.
A Bank that Sends Thank You Notes?
This has happened to me twice, both times after transferring in large deposits. I received a thank you e-card. It doesn’t take them much, but I appreciated them letting me know they appreciated my business. That’s certainly not something either of my other banks, both monstrously huge banks, have ever done. It makes me think that Everbank is willing to work a little harder to make me happy and keep me as a customer.
High Interest Rates
Everbank is a little different in that they don’t offer a traditional savings account. Instead I have a Money Market account. It is FDIC-insured, but it isn’t exactly the same as a savings account. However, that does mean they can offer a fairly high interest rate (high in relative terms. It’s still nowhere near the 5% of my childhood.) They also lock-in your rate for the first year you have the account, which is handy if rates fall after you open the account, as they did in my case.
For those of you familiar with ING Direct, the Money Market rate is about on par with their savings account rate, but since it’s a Money Market, there is a minimum balance of $1500, which ING doesn’t require. Their interest checking rate is higher than ING for low-balance account, but lower than ING for high-balance accounts.
Unlike some of my online banking accounts, the site is simple. It’s not the most attractive or flashy, but it’s pretty easy to use. I do wish they had more online help, but their customer service department answers the phone quickly and has always been helpful for me.
As with most online savings or Money Market accounts, there is a limit of six transactions per month. I believe this is a banking regulation not shared by brick and mortar banks, but I haven’t had a savings account in a long time. The checking account is unlimited, as most checking accounts are.
They can also be a bit slow to credit transfers. In my experience, it takes 4 days from the time I request the transfer to the time the money appears in my account. This is longer than I’ve seen with other banks, but I don’t mind horribly. It just means I have to plan ahead.
Note, I haven’t used them for anything else, so I can’t recommend them for mortgages, CDs, or checking account. I’ve only used the Money Market account and so far it’s been fabulous.
Aren’t frugal bargains the best kind? And no, not all bargains are frugal. If you don’t need the item, then the bargain is a waste of money. For this and other lessons, please turn to this week’s blog carnival roundup.
First, the Carnival of Personal Finance #201 hosted by Mighty Bargain Hunter. In addition to my post about combining finances after a wedding, I also recommend Free From Broke’s post about money conversations you should have before you get married.
Finally, the Money Hacks Carnival hosted by Personal Finance Playbook. In addition to my post about the 10-day rule for impulse spending, I also recommend Automatic Finance’s advice on planning your spending in advance.
If you can afford a summer vacation without going into debt, you should certainly take one. Chances are your working harder than ever at work, and are feeling the stress of the economy and everything else. I posted six affordable ideas for summer vacations last year, but this year provides rare opportunities to take dream trips, or at least luxury trips, without breaking the bank.
If you’re a homeowner, then you can take advantage of a timeshare promotion. Most of them offer weekend or three night summer vacations at a screamingly low price, usually less than $300. You can’t get a decent hotel room anywhere for less than that. Of course you’ll still have to pay for food and entertainment, but most timeshares also include fridges, microwaves, and maybe even cooktop so you can make your lunches and eat breakfast in your room. Of course, you’re trading your time for this offer. They’ll give you hard sell for about 90 minutes and pressure you to sign up right then. Don’t do it. No matter how good it sounds, there is always a catch.
Europe on Sale
Although the dollar is still weaker than the Euro, Europe is seriously suffering from a drop in tourist traffic, from both Europeans and overseas travelers. You can score five-star hotel rooms for four-star prices (or less). You can get into most restaurants without a long wait. Airfares offer great deals, especially if you use national airlines that make stopovers in major cities on their way to other places. Money Magazine also recommends looking at second-tier cities. For example, instead of Tuscany, go to Umbria. Obviously, there’s no substitute for Paris and London, but rather than a week in the big cities, schedule a few days there and then head to a less-popular but still fabulous location for the balance of the week.
Local Summer Vacations
Last year I recommend “staycations.” Just don’t tell anyone that’s what you’re doing. This year, you might even be able to wangle a couple nights at a swanky hotel for 50% off. Museums, amusement parks, and other popular locations are offering specials to lure more people in. Investigate carefully to take advantage of the best deals. If you have an Entertainment Book, look for coupons to sweeten the deals further.
South and Central America Deals
The dollar still goes very far in South and Central American countries. If you want to visit them and aren’t familiar, consider using a site like LuxuryLink for amazing deals. Most of the offers are for off-season or shoulder-season, but summer is actually their off-season. Try to avoid the really wet season, but you should be able to find something affordable with decent weather and reasonable humidity. Before you bid, email the resort to confirm that there are rooms available during your vacation dates, then bid the minimum. It’s very rare to be bid against. Since most flights must travel through the US to reach these destinations, you can usually find decent airfares, too.
Last-Minute Vacation Packages
If you have the flexibility to get away with a few days’ notice, then sign up for last-minute deal alerts from the major travel sites, like Priceline and Travelocity. You can usually find an offer for less than 50% of the full price, often less than you’d pay for booking six months in advance. You can find cruises, hotel/air packages, or whatever else you’re looking for.
You can use a formal home swapping service, but there are alternatives if you want to get away without breaking the bank. If you live in or near a city with tourist attractions or great outdoor activities, call or email a friend in a location you’d like to visit and offer to trade houses. If you only know local people, see if your friends or relatives know people who might want to swap.
If you plan right and use all your resources, you can score some really great travel deals this summer. Just make sure you’re not creating debt when you travel, but if you’ve got the money, this is the year for that dream trip to Paris.
If you have an older or high-limit credit card that you don’t carry a balance on, you run the risk of having it cancelled by the issuer, most likely without warning. Unfortunately, losing that card will damage your FICO score by reducing your utilization ratio and shortening your credit history. Even if you prefer not to use credit, it’s important that you keep an older credit card active if you ever plan to apply for a mortgage, car loan, or other forms of credit. Fortunately, you can do that without carrying a balance.
More Banks Closing Credit Cards
Some people have their cards cancelled or the limits drastically reduced without warning, others see their rates jacked up on somewhat questionable grounds. If you don’t carry a balance, than the latter isn’t a problem, but the former is.
Banks are doing this because they’ve finally figured out that more outstanding credit=more risk of default. So they’re moving to limit their losses with customers who are either at risk or default or who don’t earn the bank much money. They’re also moving to make more money before the new credit card rules kick in. If you don’t use your card or carry a balance, you could be in danger.
How to Keep Your Credit Cards Active
I use one card for almost all of my purchases because, at least until recently, it had a very generous rewards program. However, using one card for nearly all of my purchases made most of the other cards inactive, so I’m taking steps to keep them active.
Make Irregular, Small Purchases
Every so often, use the card for groceries, gas, or other small purchases. Just don’t forget to pay the bill. Fortunately, most cards now have email reminders when your statement is available. If you tend to forget it, schedule the payment on the spot.
Set Up an Automatic Payment
If you have a monthly recurring bill like your cell phone, newspaper subscription, or cable bill, send it to that card rather than your primary card. That regular charge will keep the card active.
Make a Big Purchase
If you have a big purchase scheduled, for example a new fridge, and you don’t plan to buy it on a rewards card, consider charging the purchase to a rarely used card. You may want to prime it with some smaller charges first to avoid security flags. Once again, make sure you pay it off at the end of the month. You don’t need to carry a balance to improve your credit score.
Rotate Your Cards
Before I had a rewards card, I would rotate my card usage. I knew which dates the bills closed (they weren’t all at the end of the month) and would use that card from the day after closing to the closing date of the next card, then switch. Not only did it keep them both active, but it let me keep my money in my checking account a little longer.
Personally, I worry less about active credit cards for department stores or retail outlets. Most of those cards have fairly low limits and seem content to keep my card active so they can send me product announcements and offers. However, if you have any large retail cards, consider using them at least once a year to keep them active.
Earth Day is here again. It happens every April 22, so it should come as no surprise this year. We’ve been a bit distracted recently, what with the global economic meltdown and all, but none of that will matter if the entire Earth has a meltdown because we’ll be too busy learning to make boats to worry about our 401K balances (or lack thereof.) You may not believe it, but little things can help. I started with five simple ways to go green earlier in the week, and now here are ten more in honor of Earth Day.
Stop Using Paper Towels Today
I haven’t yet amassed enough dish towels to completely replace my paper towels, but I am trying to significantly cut back. For today, just avoid using paper towels. If it goes well, try again tomorrow. To make sure the effort continues, look for sales on dishtowels and start stockpiling them in different shapes and sizes. You can also use old t-shirts for some jobs.
Replace Air Filters
You should actually change the air filters on your heater/air conditioner every six months or so, but many homeowners forget. These puppies collect a lot of dust and pet dander. If you replace them regularly, they won’t have to work as hard to regulate the temperature in your home, thus saving you money and reducing your energy use.
Eat Dinner without Electric Lights
If it’s warm enough where you live (I write this in the midst of a heat wave), then have dinner outside tonight. If it’s cold/rainy/windy, then turn off the electric lights and eat by candlelight. Bonus points for eating cold food or using a reduced energy cooking method.
Turn off the TV
I know that we’re approaching the season finales, but turn off the TV just for tonight. If you’re feeling really daring, turn off the DVR and don’t download the shows off the internet, either. You probably won’t miss much. Now think about how much energy you saved with that one simple act for one night. (As a side note, this also happens to be TV Turnoff Week.)
Find a Local Farmer’s Market
Yeah, I know, here I go again with the farmer’s markets, but I can’t tell you how much I love them. The season when markets across the country will open is fast upon us. Start by simply searching Google for a local market. If one is open today, then pop by. If it’s not, promise yourself you will check it out when it is open.
Bring Your Lunch and Your Own Utensils to Work
If you can swing it, consider bringing your own plate, too. This should be a homemade lunch, not a packaged meal. Bringing your lunch and reusable utensils reduces the amount of trash you create, and the amount of energy used to create what will eventually become trash.
Eat Vegetarian for One Day
You can also do this for just one day. Try a beans-based dish, or a rice-based dish. (You could cheat and add an egg for fried rice.) How about a big bowl of pasta? No, you can’t eat a big dish of pasta daily, but just one day a week won’t ruin your health. Or, make a nice big salad with a loaf of crusty bread and delicious wine. Add toasted nuts to the salad for protein, or cheese (sort of cheating, but it’s not meat).
Avoid All Packaged Foods
You can do this for Earth Day. By “packaged” I mean frozen foods, pre-packaged meals, convenience meals, fast food, carry-out, etc. Obviously, most raw materials like beans, pasta, and rice will have to come in some sort of container, but the closer you can get to the natural form, the better. If you’re feeling bold, you could even try to make your own fresh pasta with flour, eggs, and water. To dry it, lay it out on kitchen towels or suspend it from clean hangers. Whatever you do, try to eat food you cooked or prepared yourself, from scratch, all day.
Plant Herbs or Buy an Indoor Plant
It can be difficult to grow herbs and other plants from seed unless you’re very attentive, but you can stop by a nursery, or even a grocery store, to buy an herb plant. Put it in a sunny window, on the balcony, or plant it in your garden to have fresh herbs that are nearly free.
Ask Your Landlord to Start a Recycling Program
It took years for our building to get recycling bins, but they immediately filled once we had them. If your building doesn’t recycle, then it’s time to start lobbying the landlord. It probably won’t cost extra, since trash collection is already required and many cities are beginning to require recycling programs for apartment complexes.
Of course, if you like some of these Earth Day ideas, you could make them more regular occurrences, for example a weekly Veggie dinner, or a concerted effort to eat less packaged food. The point is to do something. Doing nothing only makes things worse. Want still more ideas? Check out last year’s Earth Day post or my exhaustive list of 100 frugal ways to go green.
So here we are: smack between the ravages of tax day and the despair of Earth Day. I’ll admit that I’m tired of the gloom and doom this week. I’m also tired of being a “Yes You Can” cheerleader. If Good Morning America says “AmeriCAN” one more time, I will scream. So, rather than scream or tear my hair out or crawl into a hole to hide until the world is all better, here’s a quick collection of links I found on the web. True, they’re not “ha ha” funny, but they’re more fun than learning how to make your own laundry detergent.
What a Trillion Dollars Looks Like
With all this budget talk about multiple trillions of dollars being spent, it’s sort of hard to grasp just how much money that is. (Other than “a lot.” Really, really “a lot.”) Check out this quick illustration of just how much money you’d have if you received $1 trillion in $100 bills.
How’s that TARP Working Out?
Okay, this one might actually make you tear your hair out, but Jon Stewart gets some jokes in there, so it almost makes it better. His guest, Elizabeth Warren, is the chair of the Congressional Oversight Panel. She’s also a very, smart and accomplished lady. If you want an update on how the TARP reporting is going (hint: not well) or a quick explanation of how the government got us into this mess, watch her two Daily Show segments.
How Everything in the Financial Crisis Works
Okay, not quite anything, but this great series of videos from American Public Media’s Marketplace detail some of the more confusing things you hear about on the news. It’s a pretty snazzy set-up: they have a whiteboard. But they come up with clever metaphors to explain the crises and the deals that got us into it. My favorite is the Antarctic backpacking adventure.
Do you have any fun videos to help people make sense of the economy, or at least have a good laugh at it? Share them in the comments.
When people talk about “going green,” they’re usually talking about buying new environmentally friendly appliances, products, and clothes. All of those things cost big bucks, or at least a lot more than they should. Is that eco detergent really worth an extra $3? I doubt it, especially if you have an older dishwasher or washing machine that isn’t strong enough to make up for the difference. But there are simple ways you can have a green lifestyle without spending more green.
Buy Less Stuff
Boom, you’ve just reduced your impact on the environment, and it didn’t cost you a thing. In fact, it saved you money. Buying less stuff means buying less packaging. It also means less stuff is transported to stores, and less stuff is manufactured. The simple act of not buying has a major impact on the environment.
Switch to Fabric Grocery Bags
Just about everyone I know has a variety of fabric tote bags stuffed into various corners of their homes. Trade shows, parties, charities, everyone is flinging these things at us. Dig them out, wash them, and then tote them to the store with you. When they ask: “Paper or plastic?” Say, “I brought my own.” Some stores will even give you a few cents back for each bag you bring.
Unplug Unused Appliances
If your Wii, Xbox, or Playstation is unused for large chunks of the week, plug it into an accessible power strip and then unplug it when you’re not using it. The same goes for your cellphone charger, as well as any appliance with a standby mode. If you can’t directly flip an off-switch that actually turns the device off, then it’s sucking up energy even when it’s dormant. The biggest clue you have such a device is the “standby” light. If there’s a light on, the machine is always on, even when it’s off. Unplug it between uses. If it has a digital clock, it’s also always on, even when it’s off. Not only will you reduce your energy impact, you’ll save a lot of money on electricity over the course of the year.
Switch to CFL Lightbulbs
Many cities are running promotions to try to get people to switch to CFL lightbulbs. I came home the other day to find that DWP had left two lightbulbs in a recycled tote bag on my front door. I’ve also received bulbs at community events, electronics recycling drops, and Christmas tree recycling drops. Watch your city’s website for eco events, then go claim your free lightbulbs.
Eat Local Produce This Summer
You don’t have to eat everything local. Unless However, you can save money and eat local produce simply by shopping at a summer produce stand or farmer’s market. By buying direct, you’ll reduce the environmental impact of shipping produce thousands of miles. It will also be cheaper, fresher, taste better, and support local farmers. Even better, most of the market farmers use organic methods, even if they legally can’t say they’re organic. Just ask. They’ll be happy to explain.
There are also expensive, complicated things you can do to help the environment. If you have the money, you should certainly consider them. Many, like installing energy-efficient windows, will save you money on the long run. In the meantime, being short on cash doesn’t mean you can’t do your part.