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November 27, 2008

Borders Book Stores Cancels Sale Plans

Borders Book Stores (NYSE: BGP) posted a third quarter loss of $0.64 per share against analysts' expectations of a much smaller loss of $0.50 per share. The results also showed a third quarter revenue decline of 9.4%. While the report did contain bad news, it had some brighter notes as well.

The CEO of Borders, George Jones, said that the results were largely due to the economic storm being faced by many retailers. While one competitor, Barnes & Noble (NYSE: BKS), also reported a substantial drop in same store sales for the period, Amazon.com (NASDAQ: AMZN) reported a hefty increase of 15% in sales of books, CD and other media according to the Detroit Free Press.

The biggest announcement from Borders, however, was that the company is no longer for sale. Since March of this year, the company had been unsuccessfully seeking a suitor to buy the company's core business. CEO Jones said that the company is no longer considering selling itself, and is prepared to survive the current economic downturn. He did leave open the possibility of selling the company's Paperchase Products division. Square Capital Management is said to be in talks pick up the division for an estimated $65 million.

Borders did make some gains in reducing costs. The company expects to reduce expenditures by $140 million in 2009, $20 million more than their previous estimates. Borders also reported a reduction in outstanding debt of nearly $275 million versus the same quarter a year ago. Inventory levels were also reduced by 19.5% during the year.

With holiday sales expected to be among the worst in recent history, and consumer spending down by a full percentage point, top line numbers for the company don't look set to improve in the near future. With the company's stock plummeting by more than 50% after the release of the news, Borders shares have fallen more than $12 from their 52 week high to less than $1 per share on Wednesday morning. Any potential suitors would have been smart to wait until after the fourth quarter results announcement to see just how low the Borders' shares can go. While the company says it is no longer for sale, we may see them revisit that decision within the next two quarters. No matter how much they cut costs, the company needs to turn a profit at some point. That may be difficult for quite some time given the current consumer spending trends.

November 26, 2008

How Not To Go Broke This Christmas

Although Christmas signifies a very important event and is intended to be a happy and joyous occasion, it isn't always as festive as most people expect. During the holiday season, the pressure alone can cause not-so-festive feelings to surface, yet many people are stressed to the max as they scramble to purchase expensive gifts that overextends their wallets and causes their stress and negative feelings to intensify. Fortunately, there is a way to avoid the madness of Christmas, keep money in your pocket, and actually enjoy the holiday season.

One important way to minimize holiday stress--and the possibility of depleting your bank account--is to create a Christmas list, after carefully thinking about what you plan to buy each person on your list. Many people automatically purchase expensive gifts, no matter what the items are, without first determining if the gifts will be a good fit. Unless a person that you plan to purchase a gift for has specifically requested an expensive item, and you can comfortably afford it, you may be wasting your money by giving something that the person either can't use or doesn't like. If a person doesn't like a certain gift or can't use it, they're going to either re-gift or toss the item in a closet to collect dust. This is why determining ahead of time what each person would like is imperative. Everyone is an individual, which means that they have individual likes and dislikes.

A big mistake that many people shopping for Christmas make is waiting until the last minute. Nothing is more stressful than shuffling through crowds of people a day or two before Christmas, attempting to find the perfect gift for everyone on your list. Shopping this way will make you more apt to overspend as well as make bad gift choices. Starting early is a very good idea if you often find yourself in this situation, and it will also prevent you from trying to scrape up money at the last minute that you simply don't have. By starting your Christmas shopping now, you give yourself the opportunity to buy a few things at a time. It's not absolutely imperative that you purchase everything at once, which should keep your stress levels to a minimum.

The holiday season often brings many holiday parties, personal and professional. These holiday parties can be quite enjoyable, but if you're hosting one, it could prove to be overwhelming in more ways than one. If you are planning a holiday party, why not ask a friend to co-host? Not only will this make preparing for the event easier and less stressful, but you and your friend can also share the expenses. The cost of food, drinks and decorations can really add up quicker than you would expect, so having your friend buy at least some of everything, if not half, can really help you stay within your budget.

Shopping on the day after Thanksgiving may prove to be a big sacrifice--you'll have to get up earlier than usual as well as deal with huge crowds of overly-motivated shoppers. If you can tolerate such conditions then you may be able to get some things from your Christmas list at drastically reduced prices. You'll definitely want to check either the web or the sales papers that come in the mail a day or two before Thanksgiving in order to find out what each store will be offering and at what price. The website or sales papers will also specify the times that they're offering their special prices, as each store will have different hours.

There is absolutely no reason for you to be broke, stressed out and unhappy during the rapidly approaching holidays. With some planning, you should be able to get everyone on your Christmas list a nice gift that they will cherish and appreciate, and also have wonderful holiday celebrations without using money reserved for your normal bills. Perhaps when the holiday season is over with you can start a special savings account for next year's holiday season. Then, when the time arrives to start shopping, you should have at least a portion of the money that you plan to spend for the holidays. This will certainly give you a head start, hopefully drastically reducing the additional amount of money that your festivities will require.

November 25, 2008

Drugstores Fight Retail Heartburn

Many US retailers are facing a bleak holiday selling season. Coming off already slow sales, earnings expectations are being lowered left and right. At least one retail segment, however, seems to be keeping bucking the retail tide, and even showed some small growth in same store sales in the most recent quarter. That group is retail pharmacy chains.

Walgreen (NYSE: WAG) reported a 2% increase in same store sales for October in its 7000 plus stores. The company, like the other pharmacies that will be mentioned here, sells not only pharmaceutical products, but also a variety of discount items ranging from holiday decorations to toys and candy. Walgreen, however, ranked third of the big three pharmacy chains. During the September/October period, Walgreen stock plummeted more than $10/ share, but has been relatively even-keeled since then, mostly trading in the $22-$25/ share range. Walgreen offers a dividend yield of 1.9% at its current price.

Rite-Aid (NYSE:RAD) was second with a same store sales growth of 2.9% in October. However, The Motley Fool cautions that Rite-Aid's overall financial picture is weak. The company carries a heavy debt load which is an uncomfortable position to be in. Rite-Aid stock ended the week at just $0.31/ share down from a 52 week high of $4.72. Even though same store sales grew during October, the company's most recent full quarter report showed them operating at a loss. Rite-Aid is clearly the weakest of the three chains. If fourth quarter sales falter for Rite-Aid, we may see some of their lenders start to lose patience.

The CVS/pharmacy (NYSE: CVS) saw a gain of 3.7% in same store sales for the entire third quarter. That's a fairly impressive number for this economy. Even so, the company's share price has tumbled from its 52 week high of over $44/ share in June to close the week at just $26.39. CVS is the largest of the three drugstore chains and offers a 2% cash back reward program if shoppers sign up for the company's loyalty program. Understanding the importance of this season's holiday sales, CVS is hoping to capitalize on its early Black Friday promotion by slashing prices starting November 23rd through the 29th instead of waiting until after Thanksgiving. This head start may help them post a good showing for the fourth quarter as well.

November 24, 2008

Credit Cards are the Basis of Most Credit Reports

Since the introduction of credit cards many years ago, the function of the free market has changed dramatically. From the very first, credit cards were a popular invention. Most people today have at least one credit card. Even people who have shown themselves to be irresponsible with credit usually find ways to get credit cards. While you can get credit cards with just about any type of history showing on your credit report, you pay a heavy cost with the terms you get on your credit cards and on any loans you may need one day for an automobile, small business or home.

Credit reports are one of the chief determinants of your buying and earning power. Credit reports tell banks, potential employers, and a variety of non-bank lenders how responsible you are with money. If you have used credit cards in the past and your credit report shows no late, insufficient, or missed payments, lenders will see that you are very trustworthy with money and offer you loans and lines of credit under good terms. If you have no high, revolving balances on the credit card portion of your credit report and you have two to five credit cards, you are in a powerful position.

Unfortunately, most people don't attribute enough significance to their credit use habits. Many people miss credit card payments merely out of negligence. Others have very bad spending habits, spending more money on their credit cards than they earn. In order to have the wealth afforded by good credit reports, you must make all of your credit card payments on time and you should rarely, if ever, have a higher balance on your credit cards than in your bank accounts. Good credit reports entail more than just a clean credit card history, but the credit card is the easiest portion of your credit report for you to control.

It can help your credit history to look more appealing to have at least one other type of loan on your credit report. In order to benefit from this you must have made all of your payments in full and on time. But, with the high cost of credit, it is not worthwhile to take out a loan simply to achieve a perfect credit score. If you've been responsible with a school loan or home loan, you're already covered. You should keep in mind that you can achieve a sufficient credit score merely with responsible credit card use. These credit report scores should qualify you for good rates on most types of loans.

In summary, you don't have to be a big spender or take on a bunch of loans in order to establish a good credit report. Most credit reports on individuals are based mainly on credit card habits. While other types of loans and unpaid bills can impact credit scores, most people can achieve good credit scores merely by using credit cards responsibly and taking credit card payment obligations seriously.

November 21, 2008

5 Home Based Business Start-Up Tips

Are you one of the many thousands of individuals who want to get out of the rat race and start making a living from home by opening your own home based business? Starting your own home based business can be both challenging and exciting. In fact statistics show that 95% of home based businesses fail within the first 3 years. Here are 5 tips to help increase the odds of your success.

1. Take some time to assess your strengths. Your strengths could be inborn or gained from experience and training that you can use in your business venture. Find a way to capitalize on these strengths and turn them into your businesses greatest assets.

2. Pinpoint your weaknesses and work out how you can eliminate, or at least minimize them. Perhaps you can enrol in a business or accounting class, find an expert who can help you, or get on-the-job training.

3. Take things one step at a time and at a pace that allows you to continue learning as your business expands and grows. It takes time to build a successful business and there really is no need to rush things along. It's also vitally important to continue learning because your business can only grow and expand to the level that you do.

4. Find a mentor that you can consult with whenever you need support and business advice. This could be a spouse, a trusted friend or even a professional business coach. Mentors bring a fresh outside perspective to your business and they can help you to pinpoint areas of weakness as well as help you to grow and expand your business in ways that you may not have thought of.

5. Turn your bank into your ally. Look for banks that are friendly and supportive to micro-businesses like yours.

Putting these 5 tips into practice could mean the difference between success and failure for your home based business. It takes hard work, dedication and persistence to build a successful and thriving home based business, but the rewards are well worth it.

November 20, 2008

Homebuilder Confidence Hits Record Low

The National Association of Homebuilders released their survey asking homebuilders for their level of confidence in a near term recovery of the housing market. As you might imagine, the results were not good. In fact, the survey which has been conducted regularly since 1985 reflected the lowest level of confidence that it has ever recorded. During the most recent quarter, the Associated Press reports, fully 40% of all homes sold were bank sales of foreclosed properties. This contributed to a 9% decline in the median price of all homes sold during the period.

What does this mean for the average American? If you own a house, it is probably worth less than it was a year ago. If you are planning on staying in the home, this isn't a big deal. If you're planning to sell, it may mean that you have much less equity, if any, than you planned. If you're in the market to buy a house, you are negotiating from a position of strength, especially if you are considering a bank-owned property. For others, it means that we can expect the homebuilder industry to be the next in line to ask for a government bailout.

For investors, homebuilder stocks have been hard hit. Schaeffer Research reports that one of the nation's largest builders, Toll Brothers (NYSE: TOL), is currently seeing 13.2% of the company's share sold short. Of course, that means investors are expecting the issue to tumble further from its current price of $17.34. That's already down nearly $11 from its 52 week high of $28 per share. While some may be looking for bargains at this point, the housing market is probably not high on many shopping lists. The report from the National Association of Homebuilders says that most in the industry expect things to get worse for them before they get better.

Furthermore, if big homebuilders were to nose up to the trough of government bailouts, shareholders would likely see their equity substantially diluted if the government decides to help out with cash in exchange for equity as they have done in the financial industry. Of course, it is unlikely that the government would provide any bailout of the builder industry at all. Even the automakers are having a hard time getting a share of the government dole. If Congress does decide to intervene in the housing industry, it will likely move to forestall foreclosures with a plan to renegotiate existing mortgage terms for buyers who bought more house than they could afford or accepted unfavorable financing terms.

Many home buyers may have been over confident in the continued growth of home prices to save them from the consequences of rising rates on adjustable rate mortgages. If their house gained in value, they thought, they could refinance with a higher percentage of equity before the adjustable rate kicked in. Unfortunately, declining values have eroded the existing equity. Lowered equity combined with tighter credit markets made it impossible for many to find alternative financing before the rates jumped on their current mortgages.

Others, who may have looked at their home purchases as investments, have seen their home's value fall to less than the amount they still owe on the property. A not insignificant number of these owners have decided that continued investment doesn't make sense and have walked away from their mortgages. The combination of these factors have sent the foreclosure rate soaring.

Another impact of declining home values is the end of easy home equity loans. For the past few years, homeowners have found rising home values to be a ready source of credit for major purchases such as home improvement projects, entertainment systems and other luxury purchases. This spending has all but dried up during 2008.

While everyone's investment strategy is different, homebuilder stocks have to be viewed with suspicion at this point. They have been distressed and are down substantially, but, for the most part, the continued risk in the industry will outweigh the rewards. Keep an eye on them, though. At some point, a number of these companies will be facing recovering business prospects. When the new housing markets starts to show signs of life, many will revisit this sector for underpriced opportunities.

November 19, 2008

Your Next Vehicle: Purchase or Lease

If you're in the market for a new car, chances are you're trying to decide if you should purchase or lease your next vehicle. Although many people prefer leasing over purchasing or vice versa, there are advantages and disadvantages of both, so your final decision will depend totally on what exactly you're looking for. By weighing the pros and cons of both, you should be able to make a decision that you and your family will be satisfied with for years to come.

One advantage of purchasing a vehicle either by paying cash or financing it is the fact that you can drive the vehicle as much as you want without the necessity of worrying about mileage. Oftentimes when you lease you are only allotted a certain amount of mileage per term and if you drive over the allowed amount then you will be required to pay more money upon return of the vehicle. This is not good for those who must drive long distances to and from work or those who love to take frequent road trips. That's why it's very important to consider mileage when trying to make your final decision.

Another advantage of owning is if you desire to make upgrades, such as adding a custom stereo system or having the vehicle painted, you can very well do so and not have to worry about getting prior approval. The car belongs to you when you finance one, as long as you continue to make the monthly payments until it's paid off. Of course if you were to lease the same vehicle, not only would the car dealership not allow such upgrades to their vehicle, but you wouldn't want to waste your money paying for items for the car only to return it to the dealer at the end of your term. The best thing for you to do in this situation is to either ensure that the leased vehicle has all the amenities that you desire, or that you make an outright purchase of a vehicle so you can personalize it however you choose.

If the idea of getting a new car every 2 years or so excites you, then you may want to lease one instead of purchasing. It's an easy and trouble-free way to upgrade your vehicle at the end of each leasing term. As long as your credit is acceptable and you don't mind paying to have a new or nearly new vehicle every month then leasing may definitely be for you. Leasing a vehicle every 2 or 3 years gives many people peace of mind, as they usually don't have to worry about dealing with a myriad of repairs on the vehicle. Of course you can also upgrade your vehicle every 2 or 3 years even if you choose to finance one instead, but trading in the vehicle each time you want to upgrade is often a big headache for most people, which is why most people with these preferences choose to lease instead.

If the cost of financing versus leasing is a determining factor in your decision, then you may very well choose to go with leasing your next vehicle. Depending on the vehicle that you choose as well as your credit rating, your monthly payments on a leased vehicle may be substantially lower than if you purchased the vehicle. Of course if your credit isn't so great, you'll most likely be denied a lease anyway. If you visit the right dealership that deals with problem credit, no matter what your credit score is, you will be able to finance a vehicle. While the vehicle may not be a brand new one like you were probably hoping for, at least you'll be able to purchase a car, then after making 6-12 on-time payments you can most likely trade it in for a new model.

Whether you choose to lease or own your next vehicle may be quite a big decision for you, as there of many positive and negative aspects of each to consider before signing on the dotted line. If you're tired of making monthly payments on a vehicle year after year, then you may wish to purchase instead of lease your next vehicle. At least after the vehicle is paid off you can take a break from the monotony of monthly payments and use the extra money to buy something else that you may need or want, or you could perhaps place the money that you would have spent making monthly payments into a savings account and watch it accumulate. No matter what decision you ultimately end up making, as long as you don't make a hasty decision, hopefully you'll make the decision that best suits your needs.

November 18, 2008

Happy Holidays, You're Fired

Roughly two thirds of the American economy is based on consumer spending on items like new cars, home improvement items, electronics, and other common goods and services. When consumers start slowing down in their buying, the companies that produce and sell these items make less money and slow down their production. Slowing production means that these companies don't need as many workers and that means that unemployment rises. With more people out of work, fewer people are making purchases of items that are considered luxuries or that can be postponed until better days. This is the self-reinforcing cycle in which the American economy now finds itself.

The unemployment rate at the end of October was 6.5%. The National Association for Business Economics (NABE) is forecasting that rate to hit 7.5% by the end of 2009 with increasing job losses through at least the third quarter of next year. NABE went further and said that it was likely that the US was headed for a long recession that will last well into 2009. We only have to look at store closings from the likes of Circuit City and Starbucks (NASDAQ: SBUX), and the rough shape of the automobile industry for evidence of slowing sales.

As for mounting job losses, we are hearing major announcements almost every day as one company after another is slashing its work force. This week brings news from Citigroup (NYSE: C) and J.P. Morgan (NYSE: JPM). CNBC reported that Citigroup may eliminate more than 50,000 workers from its payrolls, while it is estimated that J.P. Morgan may reduce its workforce by 10% or about 3,000 jobs. It's a pretty good bet that few of those 53,000 people who will be losing their jobs are going to rush out and buy a new SUV or start a big home improvement project in the next few months.

The Wall Street Journal on Monday reported that home improvement giant Lowes' CEO Robert Niblock sees it the same way. "We expect continued, broad-based external pressures on our industry, as rising unemployment, falling home prices, tight credit and volatile equity markets continue to erode consumer confidence and impact sales," he said. That pressure on sales is likely to extend to holiday shopping as well. Many retailers and manufacturers are so highly focused on holiday sales that as much as 70-80% of the company's annual profit may be made during the October to December selling season. If the sales fail to materialize this year, we may see more dire announcements from retailers in the first quarter of 2009. Indeed Best Buy has already issued a statement saying, "Rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen."

While most consumers will be cutting back on spending this holiday season, those who do venture out to the stores may find prices slashed as retailers attempt to draw more buyers back. Unfortunately, slashed prices mean very little if any profit for those retailers. Savvy investors, too, will find little reason to make purchases of retail stocks for the next quarter or two as well, although there may be some bargains early next year as some of these stocks begin to bottom out or a few niche retailers announce better than expected holiday results.

November 17, 2008

How To Avoid High Heating Bills

With winter rapidly approaching, you will undoubtedly be using your furnace a great deal in order to keep warm. Unfortunately, winter heating bills can really become unbearably high at times, which can be difficult to pay, especially if you're on a tight budget. It doesn't matter what type of heat you have, gas, electric, oil, or some other type, the bills can still creep up surprisingly fast. Fortunately for your pocketbook and your peace of mind, there is action that you can take in order to help keep your heating bills as low as possible this winter, while continuing to have a comfortable home.

To some couples, nothing is more romantic than relaxing in front of a fireplace. Not only are fireplaces good for romance, though, but they are also great for heating your home. As long as you follow the necessary safety rules when using a fireplace to heat your home, it can be a very economical alternative to heating with a regular furnace. You could also make using the fireplace fun, especially if you have children. Creating supervised activities such as roasting marshmallows in the fireplace, is a wonderful form of entertainment--while simultaneously keeping everyone warm.

If your home doesn't contain the proper insulation and you feel cold drafts of air rushing in through cracks and other openings, you could be paying higher heating bills than necessary. Doors that aren't close enough to the floor also allow heat to escape, which is equivalent to throwing away money. Ensuring that your home is properly insulated is very important if you expect to save money on your bills. If you aren't confident in your own abilities, perhaps hiring a reasonably-priced contractor to install insulation in your home would be possible.

Sometimes lowering the amount of energy that your furnace uses can be as simple as replacing the filter regularly. If allowed to collect debris for months and years, your furnace can become clogged, which could cause it to operate improperly. Improper operation can mean that your furnace will either work harder, causing your heating bills to sky rocket, or not work at all, causing you to need your furnace repaired or replaced. Either problem can be potentially costly, when all you need to do to help your furnace remain in good working order is to simply change the filters every 90 days or so. Of course a simple filter isn't the only way to keep your furnace working efficiently, but it will certainly help more than you would expect.

If after putting all the tips to use you still find yourself having difficulty paying your winter utility bills, there is assistance available. Many nonprofit organizations offer aid through special funding that they receive in order to help those with trouble paying heating and other utilities. There is also the option of getting on the budget plan that most heating providers offer. By signing up for the budget plan, you'll make the same monthly payment year round, so you'll always know what to expect. Sometimes investing in a new, super energy efficient furnace is a good way to lower your heating bills, and although it may be a huge expense, it's a one-time cost, which can save you a great deal of money in the future. If you are simply a cold-natured person, then investing in some warm flannel sheets and pajamas, cozy slippers, and some extra blankets in order to stay warm instead of cranking up the heat can certainly make a big difference in your heating bill.

November 14, 2008

Lowering the Costs of Legal Fees

Just about everyone will need the assistance of an attorney at sometime during their lives. No matter if the purpose is for something simple like creating a will or something a little more complex like a divorce or some type of criminal representation, seeking the expertise of a lawyer is often necessary. The problem with retaining a lawyer, though, is often the cost. Many people don't have the large retainer and other associated fees in order to pay in for a competent attorney's services. Fortunately, there are several ways to drastically reduce the costs of attorney fees.

Many employers realize the costs of legal issues and will often offer some type of legal plan available through payroll deduction, such as Prepaid legal. For as little as $20 a month, you can have some peace of mind, knowing that you'll have some options should a legal issue arise. Prepaid legal and similar plans enable you to receive services at a drastically reduced rate. Depending on the complexity of your legal issue, you may even be able to receive services for absolutely free. Usually in situations requiring only the drawing up of certain documents or a similar situation could possibly be free. Even starting bankruptcy proceedings could be free, depending on the type of bankruptcy you choose, the attorney you choose, as well as the legal plan that you have.

Legal Aid is a great option for people requiring legal representation or advice and are considered low income. Depending on your financial situation, you may be able to receive your legal services completely free, or at least at a drastically reduced rate. If you can deal with a few negative aspects, such as not always having an attorney available when you require advice, as they usually have only certain days and times that they're available, and not being able to pick and choose which attorney will represent you, then legal aid can really be a great help.

If you have an issue that qualifies, such as an injury case, or you were denied after applying for disability benefits and want to appeal it, you can often find an attorney willing to represent you for absolutely free. Of course it depends on the actual details of the situation so that the attorney can determine if it would be worth him or her taking on the case. If the attorney feels that he or she has a good chance of winning the case, he or she will agree to represent you for no upfront cash and you can just pay the attorney fees out of whatever settlement, or in a social security case, benefits that you receive.

If you're quite resourceful--and have a little bit of luck--you may be able to nab a private attorney who isn't affiliated with legal aid willing to take on your case pro bono, whether you win it or not. Attorneys who offer their services pro bono usually volunteer their services either a small number of times a year, or specifically to those in lower income brackets. To find a pro bono attorney in your area, either calling an attorney referral service or going to the American Bar Association's website.

It's not always necessary to pay astronomically high attorney fees. If you find yourself in an unfortunate situation and you require immediate legal representation yet you don't have the cash, it is best not to panic. Panicking only exacerbates the situation, and is totally unnecessary. Although it may seem impossible, there is always an attorney available to provide the services that you need, at a price you can afford. If you check around, you should be able to find attorneys willing to allow you to make payment arrangements, especially if you've dealt with that particular lawyer in the past. If you can't find one willing to accept payments then call your local legal aid office. Even if you don't qualify to be represented by an attorney through legal aid, you could still be referred to an attorney who bases his or her fees on the amount of money that you earn, which should make paying for the legal fees a lot easier.

November 12, 2008

Managing Your Mortgage and Credit Card Debt

Instead of saving, consumers have been refinancing or borrowing against their home equity and using credit cards as cash. But with home values decreasing and foreclosures increasing, debt no longer looks like the solution to consumers' money problems. Lenders are becoming more stringent in their lending criteria, while consumers are now faced with the reality that it is dangerous to live beyond your means. It's now time for everyone to return to the basics about debt. Consider the following strategies as it relates to your mortgage debt and credit card debt:


Not so long ago, it was common to buy a home with no money down and an exotic mortgage that kept your initial mortgage payments to a minimum -- perhaps the mortgage was amortized over a very long period, the first few years of the mortgage had a very low interest rate, or only interest payments were required. You often didn't even have to prove your income to qualify for the loan. What a difference a year makes. With home values declining and mortgage foreclosures on the rise, mortgage lenders are returning to the basics.

If you are looking for a mortgage now, expect to make a substantial down payment, prove your ability to pay the mortgage, and have a good credit rating for the best deals. And forget exotic mortgages.

Don't get complacent if you already have a mortgage. Work aggressively to reduce your debt so that when you do sell, you won't owe more than your home is worth. However, there are tax advantages to this type of debt, so you probably want to make sure your other debts are paid off before tackling your mortgage debt.

Interest rates on mortgages and home-equity loans are typically lower than other consumer loan options. Also, interest paid on up to $1,000,000 of mortgage debt and $100,000 of home-equity debt is deductible on your tax return. These two factors usually make the after-tax cost of a mortgage or home-equity loan much lower than consumer debt.

Some strategies to consider for your mortgage debt include:

Evaluate refinancing options. If interest rates have decreased since you obtained your mortgage, even by just 1/2%, take a look at refinancing options. If your credit score has improved dramatically since you obtained your mortgage, you may be able to negotiate a lower interest rate. Also, if your original loan was a jumbo loan (over $417,000 in 2008) and is now under that amount, you may qualify for a lower rate.

Eliminate private mortgage insurance (PMI). If your down payment was less than 20% of your home's purchase price, you are probably paying PMI, which typically runs between .25% and 1.25% of your total mortgage amount. Once your home equity exceeds 20%, you don't have to purchase PMI. With housing values decreasing in much of the country, this may be harder to do. You will probably need an independent appraisal before your lender will cancel the PMI. While this may cost a few hundred dollars, you could eliminate several years of PMI costs, making it well worth the cost.

Determine whether to pay down your mortgage debt. The after-tax cost of mortgage debt is typically fairly low. However, if your income exceeds $159,950 ($79,975 for married taxpayers filing separately) in 2008, your itemized deductions are reduced by up to 80%. Thus, those with high incomes may find that mortgage interest does not provide much tax benefit. Individuals approaching retirement age may want to pay down their mortgage debt so they can enter retirement debt free. In all cases, however, you should compare your after-tax cost of mortgage debt to the after-tax return earned on investments before deciding whether to pay down your mortgage. If you decide to accelerate payments, make sure your lender allows additional principal payments without penalty.

Credit Card Debt

It's difficult to find anything good to say about credit card debt. Interest rates are typically high and not tax deductible. If you only make the minimum payments on the balance, it can take years to pay off the debt. Your goal should be to pay off, as quickly as possible, all credit card debt. Some strategies to consider include:

Put your credit cards away until all your balances are paid in full. If you are really committed to paying down those balances, you don't want to add to the problem by continuing to increase the balance. Pay cash or don't purchase the item.

Pay the balances in order of most expensive to least expensive. Make a list of all your credit card balances and the interest rates charged on each. Add up your minimum payments and then determine how much more you can budget to help pay down those debts. Use these additional funds to pay off the debt with the highest nondeductible interest rate. Once that debt is paid in full, start paying the debt with the next highest interest rate, continuing until all the balances are paid.

Look for a lower-interest-rate credit card. You may find an offer that contains a teaser rate that is only available for a limited time. You can transfer balances from your high-interest-rate cards to the lower rate card and then pay off the balance as aggressively as possible. Before getting the new card, make sure to review all details. The low rate may only apply to new purchases or to transferred balances. You're looking for a card that will apply the low rate to transferred balances. Also, check if there are any balance-transfer fees. Once the teaser rate is over, either find another low-rate card or call the company to request a lower rate on that card.

Consider using a home-equity loan to pay off your consumer debts. Home-equity loans typically carry lower interest rates than other consumer debt, usually prime rate or 1% to 2% over prime rate, and as long as the balance does not exceed $100,000, interest paid on home-equity loans is deductible on your tax return as an itemized deduction. Keep in mind that you are taking equity out of your home when you do this. This may be a good tradeoff if you use the funds to reduce higher cost debt. However, if you just run your credit card balances up again, you will still have the consumer debt plus less equity in your home. You may find it harder to get a home-equity loan than it was in the recent past. Now, lenders are likely to require a loan-to-value ratio of at least 90%, a high credit score of at least 680, and a full appraisal of your home. Some homeowners with home-equity lines of credit are being notified by the lenders that the line has been reduced or frozen.

November 10, 2008

How to Buy a Home in a Weak Market

The purchase of a home is a major financial commitment. While it is a decision that should always be made with care, the weak real estate market means you should exercise even more caution. Don't let the excitement of looking for your dream home prevent you from following these eight tips:

Set an upper limit for your home's purchase price and don't exceed it. Before you start looking, carefully analyze your expenses and decide how much you can really afford to pay for a home. An often-cited guideline indicates that your mortgage payment, insurance, and property taxes should not exceed 28% of your gross income. While lenders recently allowed up to 40% of gross income to be spent on housing costs, you will likely find more lenders are going back to traditional guidelines. However, make sure that you are comfortable with the mortgage payment. Don't raise the limit as you look at houses, thinking you can reduce your living expenses to cover the difference. It's very difficult to change your spending habits.

Consider how your down payment will impact your home's financing. A lower down payment makes it easier to purchase a home, but also increases the size of your mortgage. While in the recent past you could get by with no down payment, more and more lenders are now requiring a sizable down payment. Expect to put down at least 10% to 20% of the purchase price. With a down payment of 20% or more, you don't have to obtain private mortgage insurance, which typically runs from .25% to 1.25% of your total mortgage amount.

Familiarize yourself with housing prices in the area. No one likes to purchase a major asset like a home and then find it decreasing in value. However, it is difficult to predict market bottoms, and you may not be able to delay a home purchase until there is clear evidence that the market has bottomed. To protect yourself, get a comparative market analysis to see how much homes have sold for in the recent past. Base your offer to purchase a home on that analysis, even if your offer is substantially below the seller's asking price.

Choose a home you'll be comfortable living in for several years. When home prices are rising rapidly, you can purchase a home, live in it for a couple of years, and then sell it at a profit. With modestly increasing or declining prices, it's difficult to sell at a profit after a couple of years, due to sales commissions and other costs associated with buying and selling a home. Thus, you should purchase a home you'll want to live in for at least five or 10 years. If you know you'll need to move in less than five years, consider renting.

Sell your current home before buying another home. It is taking longer to sell homes now. If you can't afford mortgage payments on two homes, make sure you sell your current home before purchasing another.

Consider resale value while you are purchasing. While you may like unusual features, consider how likely other buyers are to want those features. Be cautious of purchasing a home with a much higher selling price than other homes in the area. Homeowners typically want to be surrounded by homes of similar size and value.

Get a professional inspection. While the home may look like it is in great shape to you, an inspector will check things like the heating and air conditioning systems, plumbing and electrical, roofs, foundation, drainage, garage, and basement.

Review your options before selecting a mortgage. Now is not the time to look at exotic mortgage options. Consider basic mortgages. Fixed-rate mortgages are typically a good option for homeowners who plan to stay in their home for many years. Adjustable-rate mortgages (ARMs) are popular with homeowners with rising incomes, those planning to move in a short time, and those who want the short-term cash flow benefits of lower interest rates. If you're not sure which is better, consider a convertible mortgage. These mortgages allow you to switch from an ARM to a fixed rate, from a fixed rate to an ARM, or from the original fixed rate to a lower rate if rates decline.

November 7, 2008

Financial Lessons for Kids

It's a common enough goal -- to live a better life than your parents. While you may be able to say you accomplished that goal, how likely is it that your children will be able to say the same thing? To help them with that pursuit, make sure to teach them these important financial lessons:

Graduate from college. Even if your children are interested in pursuing careers that don't require a college education, encourage them to obtain a college degree first. It is much easier to go to college straight out of high school before getting married or taking on other responsibilities. And financially, college graduates have higher earnings on average than nongraduates. For instance, the median earnings by level of education for 2005 were $23,400 for someone who was not a high school graduate, $31,500 for someone who was a high school graduate, $37,100 for someone with some college education, $40,600 for someone with an associate's degree, $50,900 for someone with a bachelor's degree, $61,300 for someone with a master's degree, $79,400 for someone with a doctoral degree, and $100,000 for someone with a professional degree (Source: Education Pays, 2007). Over a 40-year working career, a person with a bachelor's degree can expect to earn 61% more than a high school graduate.

Develop written financial goals. Developing financial goals will help your children think about their future and how to pursue their goals. Get them into the habit of saving first, then worry about how to spend the rest of their money. Encourage them to set up a system to automatically divert some of their income to savings. As part of the process, encourage them to get a money management system in place to track expenditures and organize information about assets and investments.

Live well within their means. As your children start lives of their own, help them make some fundamental decisions about how to live. They should realize that the only way to save for future goals is not to spend all their current income. So, before your children decide where to live or what kind of car to drive, help them prepare a budget to see how much they can really afford for those items and still have money for saving.

Utilize all retirement vehicles available. As soon as they become eligible, your children should start contributing to a 401(k) plan at work. If their employer doesn't offer a 401(k) plan, teach your children the benefits of individual retirement accounts (IRAs), both traditional deductible and Roth. The importance of saving for retirement at a young age can't be stressed enough.

Use debt sparingly. If your children take on too much debt early in life, they can spend the rest of their lives struggling to get out of debt. Stress to your children that it is best to use credit cards only if they can pay the balance in full every month. Other debt, like car loans and mortgages, should only be taken on after a careful analysis of whether your children can afford the payments and whether the purchase fits in with their financial goals.

November 5, 2008

Tax Consequences of Outstanding Debt Exceeding Home Values

When the value of a home is less than the outstanding debt, the homeowner's options are dismal. Foreclosure, deeds in lieu of foreclosure, and short sales all result in the loss of the home with serious credit consequences for the homeowner. In addition, if the lender forgives part of the loan, the homeowner walks away with nothing, and there may still be the following tax consequences:

• The foreclosure is considered a disposition of the home for tax purposes, which results in a capital gain or loss. If the homeowner lived in the home in at least two of the five years preceding the foreclosure, up to $500,000 of gain for married taxpayers filing jointly or up to $250,000 of gain for single taxpayers can be excluded from income. Losses cannot be deducted on the taxpayer's tax return.

• If there is a cancellation of debt (COD) by the lender, the amount of the COD is taxable as ordinary income.

There are a couple of situations where the taxpayer does not have to include COD in ordinary income:

The taxpayer is insolvent or in bankruptcy. Insolvent means that the taxpayer's debts exceed the fair market value of his/her assets, both before and after the debt is forgiven.

The debt is nonrecourse debt. This means that the homeowner is not personally responsible for the debt. The only recourse to the lender is to sell the home.

In December 2007, the Mortgage Forgiveness Debt Relief Act of 2007 was enacted, which provides temporary relief for many taxpayers. This law excludes up to $2 million of COD income resulting from debt cancellation of qualified principal residence indebtedness for foreclosures between January 1, 2007 and December 31, 2009. Some of the major provisions include:

• Qualified principal residence indebtedness is debt incurred to acquire, construct, or improve a taxpayer's principal residence, if the debt is secured by the residence.

• The amount of COD excluded from income reduces the taxpayer's basis in the home. Thus, it will increase the capital gain or loss from the disposition. However, since those limits are so large, most taxpayers will probably not have a taxable capital gain.

• COD income from home-equity loan debt used for purposes other than to improve the principal residence is not excluded from income.

• Vacation homes and other real estate investments do not qualify for the COD income exclusion.

November 3, 2008

What is a Real Estate Short Sale?

Many homeowners are faced with the fact that their home's market value is less than the outstanding debt. Rather than going through a foreclosure or turning the home over to the lender, some homeowners are attempting a short sale, which is a home sale for less than the outstanding debt. According to the National Association of Realtors, short sales account for approximately 18% of home sales now.

If the lender agrees to the short sale, the seller eliminates the mortgage debt without foreclosure or personal bankruptcy. The lender agrees to the short sale if the loss would be less than going through a foreclosure. The Joint Economic Committee estimates that a foreclosure costs the lender up to $50,000. A recent study found that a short sale resulted in an average loss of 19% of the loan amount, compared to 40% for foreclosures (Source: MSN, May 12, 2008).

However, short sales are not easy to complete. Typically, the seller puts the home up for sale and gets an offer on the property. The offer is then presented to the lender, who can take weeks or even months to make a decision. In most cases, the lender won't even consider the short sale unless the seller appears unable to make the mortgage payment. If the lender feels the seller can pay, there is no incentive to accept a loss on the property.

A short sale gets even more complicated when there is more than one loan against the home. In that situation, all lenders have to agree to the short sale. In many cases, the second lender will get an even smaller percentage of the loan, so that lender has even less incentive to accept the deal.


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