Good News on Option Arms

With quite a few of the sub-prime lenders going out of business in the last few weeks, it certainly feels as though the mortgage market is experiencing a major meltdown. In some ways, it is true, but there is quite a bit of unfounded hysteria floating around. Every time we pick up the newspaper these days, the headlines hit us over the head with someone else who is losing their house, because they did not understand the terms of their current mortgage. One of the most complex mortgage animals out there is the loan often known as an "option arm" or "cash flow arm." This particular type of mortgage has been crucified in recent weeks. However, this type of loan has MANY good points. You just have to know how to use the loan properly before you get into one of these.

These are great loans if you are carrying multiple properties, because they can allow you to make a smaller payment than you would on a "normal" loan. The key to managing your loan properly is remembering the real reason you went into that type of loan in the first place. Many people use these loans to help pay off higher interest credit cards or other "bad debt." If you are making the minimum payment on the mortgage each month and you are continuing to spend as though there is no tomorrow, then you WILL end up in trouble no matter what type of loan you have. However, if you make the minimum mortgage payment and put an extra $1,000 or more toward your credit cards, then you will be working toward your goal of paying off higher interest rate debt.

The minimum payment is set very low at what I often call the "fake rate, " and it can often be as low as 1%. If you choose to make the lowest possible payment, and do not pay all of the interest due each month, then the monthly interest that you have not paid will be added to your mortgage balance. This amount is the difference between the "real" rate as set forth in your mortgage note and the rate of interest you are paying. The monthly interest that you do not pay can be added to your mortgage balance until the loan reaches typically either 110% or 115% of the original outstanding balance. Once the loan tops out at that point, it will begin to amortize over the remaining life of the loan such that you will be required to pay the full interest and principal payment each month. This can often be double of the amount of the payment you have been making. This normally does not happen until several years into the loan, but there is no set time limit in most cases. If you are not prepared to make the full payment at that point, then your loan could blow up on you.

While the loan balance can increase if you do not make the full interest payment, the balance can also decrease if you make any additional principal payments. One major advantage of an option arm is that if you own multiple properties, and then you sell one, you can pay down the mortgage balance on one or more properties with option arms. When you make the large payment, your minimum monthly payment will most likely decrease. So, if you have an option arm that adjusts monthly, and you pay down $200,000 on your mortgage, your subsequent monthly payments will adjust downward to take into account the $200,000 principal payment. This can not happen on a 30 year fixed rate mortgage. Your monthly payment on a fixed rate mortgage will not change if you make additional payments of principal.

If used wisely, the homeowner has the chance to get out of other debt or just refinance when a better deal comes along. It seems that most people seem to refinance every two or three years in any event, so it does not necessarily pay to go into a 30 year fixed rate mortgage, particularly if cash flow is an issue.

Another plus to the option arm is that it does carry an adjustable rate. While many people panic at the thought of an adjustable rate, remember that rates can actually go down. While this has not been true in the recent past, many of the option arms out there contain very favorable adjustment features such that the payment will be very manageable at a point when the rates drop a little.

Please give me a call at 301-353-9680 if you have an option arm that you are uncomfortable with at this time. I can either show you how to make it work for you or find you a new loan that works better for you. We can look at how you are using the loan and determine how you long you have before it potentially "blows up." Many people do keep these loans for the life of the loan. Just remember, that if you don't make the payment, the bank will foreclose no matter what type of loan you have!!!!!!

As always, the advice given here is general, and there are exceptions with every mortgage.

Your brother's, wife's, cousin's accountant said what???

Over the years, I have noticed that most of the tax and financial advice people receive comes from a co-worker, friend or neighbor. This advice MAY have been passed on by the co-worker's accountant. So heaven help you if the person sitting at the next desk has a lousy accountant and you had no clue!!!! The other danger in this situation is that the accountant provided outstanding advice to your friend. However, the advice given by the accountant only applied to your friend's VERY SPECIFIC fact situation. If your fact situation is even SLIGHTLY DIFFERENT from that of the person receiving the advice, you could be totally screwed by following that same advice.

But this situation is not necessarily related to people who don't have accountants. I was talking to one of my clients the other day (you know who you are!!!) who told me she was also taking some advice from another client of mine who had referred her to me. However, it turns out that both of their situations are VERY different, and the advice I give to one of them would not necessarily work for the other. While some advice may seem very general in nature, it may actually be more specific than you think with respect to income levels, timing of the transaction, past history or a million other factors.

Given the above warning, the advice provided on this blog (and on the website) will tend to be general in nature. However, if you like what you see, please feel free to pass on some of the posts to your neighbors, friends, family and co-workers. If nothing else, it will serve as a discussion point. If you think it may apply to your specific situation, please give me a call, so we can discuss your specific needs.

At the bottom of each post, there should be a little envelope that you can click on. It will open up to a page that will ask for your e-mail address and the e-mail address for your friend. It will then send them a link, and they can access a copy of just that particular post. They won't have to search an entire blog to figure out the point of your e-mail.

Mutual Fund Transfers

Over the years, many clients have come in for their annual meeting. I often ask them if they sold any mutual funds. Quite often they say, "No." As I proceed to look through their papers, I see the statement from the stock broker indicating that there was, in fact, a sale.

I will typically pass the statement from the broker across the table, and they will tell me they never "sold" the mutual fund. They just made a telephone transfer from one mutual fund to another in the same family of funds. This happens quite often when one fund is not performing as expected, and the client is looking for a better return.

Most people tend to think of a mutual fund as a bank account. However, you are really purchasing a share in a group of assets. You own shares in the fund, and then the fund invests in various assets including stocks, bonds or money market investments. If you take the time to read your statement, you will notice that the value of the shares moves up or down on a regular basis depending on what the underlying assets are doing on any given day. When you own shares in a mutual fund, you receive an equity position (own a share) in each of the underlying securities.

For tax purposes, since you own a share in the underlying stocks, you are considered to have a sale when you move your money from one fund to another. At that point, you will have to calculate your gain or loss on the sale of your shares. If you are not aware that you had a sale, you can end up with a nasty surprise at tax time when you suddenly have a lot of unexpected gains on your tax return. If you do not report the sale of the mutual fund, you can rest assured that you will receive a friendly letter from the IRS informing you that you now owe them a fortune. The brokers ALWAYS report the sale of the funds to the IRS.

If you own any shares in mutual funds, you need to keep very careful and complete records. You need to keep the records showing the purchase and any dividends you received over the years. If you still have mutual funds today that you purchased in the 1970's, you still need to retain those records. So, if you hold the mutual fund for 30 years, you need to keep those records the entire time you own the fund (and then some!). Failure to keep the records will most likely result in paying taxes twice on the same earnings. This can get particularly complicated when mergers and acquisitions take place with the different stock brokers. It appears that many times, the records with the broker get lost if the broker changes names.

If you are contemplating a large sale of a mutual fund, we should do some tax calculations and planning before the sale to see your potential tax impact. Many times, these sales can throw you into the dreaded Alternative Minimum Tax and produce some nasty results. With a little bit of planning the bad results can be avoided or minimized.

Web Site Is Up and Running

I FINALLY got my web site launched a few weeks ago with the help of a client. The address is www.onlinefinancialcafe.com. As time goes by, it will provide a wide variety of tax, financial and business information. Since I am in the middle of tax season right now, I do not have time to make extensive corrections at this point.

If you have friends or relatives who may need financial help, please send them to my web site. I have put up some detailed reasons why someone might need an accountant. Those are just for starters!!! There will be more added to the list later.

The name of the web site and the blog were chosen to reflect my diverse range fo experience. I have many years of tax and financial experience and also work in the mortgage and real estate areas. After tax season, I will begin offering a WIDE range of financial services which will include everything from long term care insurance to retirement plans and just about anything else you can imagine. I want to make sure that my clients have the full range of financial tools at their disposal so they can live the lifestyle they choose with a little bit of planning.

Since I am right in the middle of tax season, the web site will grow very slowly. I know there is at least one typo there. If you have any suggestions, please let me know. I will be experimenting to find out what works best. It will not be an overnight process.

Please continue to use my e-mail address at sballmann@aol.com. There is a new e-mail listed on the web site, but I do not know how to easily access it at this point. If you send an e-mail, please make sure you put two n's at the end of my last name. Failure to do so may result in a nasty e-mail from one n who refuses to forward anything!!! Once I get past tax season, I will figure out the new address and start using it to eliminate the problem with the two n's on my last name.

Open for Tax Confessions!!!

I always joke that I feel like a priest listening to confessions when I meet with my clients. Everything is we discuss strictly confidential and cannot be discussed with anyone. After a long absence in posting to my tax blog, I wanted to start updating it on a regular basis and get some current information out there. If you have not yet been in to make your annual "tax confession, " please call or e-mail me to set up an appointment as soon as possible so you won't run into the last minute rush. If you have friends and relatives that you are sending over, please try and get them over here as quickly as possible also.

This is actually a picture of an old confessional in Rome. I could not determine the name of the church where it was located, but it appears that it may be somewhere near the Trevi Fountain looking at the sequence of the pictures in my camera.

Save Those Receipts - New Rules for Charities

EFFECTIVE IMMEDIATELY, January 1, 2007, a receipt is required for ANY AND ALL charitable contributions in order to take a tax deduction. In most cases, this is not an issue. However, it is definitely more paperwork.

In the past, you were allowed to estimate a reasonable amount for charitable contributions, including those donated in cash. So, many people were in the habit of saying they gave the same amount as last year, or they typically put $10 a week in the collection basket at church.

The other place where this deduction was abused (although, not by MY clients) was that many people took "the standard charitable contribution." Such a standard deduction never existed. The misconception on this deduction arose from the statistics published by the IRS over the years. From time to time, the IRS conducts very detailed audit programs in which the taxpayers are required to produce a receipt for every line item. Believe me - you do not want to be selected for this type of audit. In some cases, they have even had to produce birth certificates. These audits are used to accumulate these statistics. So, for example, there may be pattern that says the average person who has an income of $100,000 gives $2,000 a year to charitable organizations. Many people have misinterpreted these numbers to assume that they were entitled to these deductions as long as they were within the "limits." The change in the law is designed to prevent that interpretation.

NOW, the rule has been changed. In order to obtain a deduction, only two types of proof are allowable to substantiate the deduction:

a) a bank record OR
b) an acknowledgement from the organization receiving the gift indicating the name of the donee organization, the date of the contribution, and the amount of the contribution.

No alternative records will be allowed to substantiate the contribution under the new rules.

The picture above is a stained glass window inside the Notre Dame de Reims Cathedral in Reims, France. Many of the kings and queens of France have been crowned in this church. Reims is also the home of the famous champagne caves.

Sugar Bowl - Go Irish!!! Beat LSU!!!!

Here come the Irish!!!!! Here come the Irish!!!!!!!!

Watch the Irish clobber (I hope) LSU tonight in the Sugar Bowl!!!!!!! The game will be played in New Orleans in the Superdome and will be televised on WTTG-5 beginning at 8 pm.

Changes, Changes, Changes

It seems that there is never an end in sight to the tax law changes. This is a book from only one of the update classes I took recently to keep current. This class covered only the updates and not the basics. As you can see, all of the pages are single spaced type on both sides of the page. I will provide updates on changes that impact a large number of people, especially now that we are into January, and everyone will be starting to think about taxes a little more each day.

A Warm Ending

As we returned to our car, a Red Cross volunteer practically tackled us and invited us over to have a cup of hot chocolate. This was another pleasant surprise. A Red Cross staff member snapped our picture and chatted with us for quite a while. When we told him that we had met Jack Ford, the president's son, his response was simply, "Well, that's the Ford family for you."

Flag at Half Staff

It took quite a while to get the right angle and the wind blowing in the right direction, but here is a shot of the flag flying at half staff over the Capitol as we mourn the passing of President Gerald R. Ford.

The Crowd Signing the Books

After we signed the book of condolences, we stayed for a while taking a few more pictures. As you can see, sometimes the table got very crowded. As we wandered through the crowd, I heard someone discussing some politics in depth. I thought he might be a good choice to ask who the woman was who was standing next to Jack Ford. He said he never saw Jack Ford or any other one else there from the family. Apparently, our timing was just right. This guy was only a few minutes behind us in line. Someone later told me that no presidential family members have come out to receive the public for these events in over 30 years!!!!

Signing the Book

As we headed out of the building, we were invited to sign the book of condolences for the family. Most people just signed their name, city and date, but my friend and I took a few extra lines and each wrote a note. We even took pictures of our notes!!!

Entering the Capitol

We waited and waited and went through the security clearance. After only 57 minutes, we were actually at the door to the Capitol. It probably took us an extra 10 minutes, because we took so many pictures along the way!

As we approached the door, a woman gave us the commemorative card as shown above. We then proceeded to the bottom of the 33 steps to climb up to the rotunda to see the casket. As we approached the bottom of the steps, the staff asked everyone to lower their voices and keep quiet.

As we got to the top of the steps, the first thing you could see was a room full of reporters and cameras. It was packed. They were covering every angle. There were even cameras aimed at us. The line slowed up a little. Then a man reached out to shake my hand, and there was a camera in my face. He said, "Hi, I'm Jack Ford, and I'm here to welcome you on behalf of the family." I was so shocked, I did not even know what to say. I had no idea that there would be any family members there. I think my mouth probably just dropped open. I did say that I remember him(Jack) coming to speak at my college. Then, a couple of feet away was a woman who reached out and shook my hand. She was clearly a family member, but I did not know who she was.

We then proceeded to pass slowly by the casket in silence. It was an incredible experience.

We then turned to go out. Just then we saw Bob Dole carrying on a conversation with someone. I know I was surprised to see someone there that I actually recognized. I think we both must have stared at him too long, because he turned and gave us a big smile and waved to us. My friend concluded that I was the one attracting the attention here, since I was bundled up like an Eskimo in our mild 50 degree weather!!!

View of the Capitol with the Line Across the Front

This is a view of the Capitol with the the crowd across the front steps and headed inside the building. If you double click on the picure, it will be large enough to see all of the fine details.

The Waiting Begins

After proceeding a few yards across the street, we got in line to begin the wait. We kept walking and walking and walking. This line was looking pretty good!!! It felt like we were pretty close.