Mortgage loan costs are important to understand when financing the purchase of real estate. Mortgage lenders commonly charge borrowers a variety of different fees, collectively known as closing costs, to obtain a mortgage loan. Some of these are standard, fixed fees charged by a lender on all mortgage loans. One fee that has some variability in how it is applied is the discount point.

Discount points, also known as an origination fees or points, are initial interest charges prepaid by a borrower to lower the interest rate on a mortgage. One point will cost the borrower one percent (1%) of the loan amount and typically lowers the interest rate by one-eighth percent (0.125%). For example, if the mortgage interest rate is 5.50% without any points paid, and the borrower pays two points, the lender will decrease the interest rate to 5.25%.

Should a borrower pay points to lower the interest rate on a mortgage loan? Paying zero points minimizes the initial cost to obtain the loan but results in a higher repayment cost going forward. Paying some points will increase the initial cost to obtain the loan but reduces the repayment cost going forward. The decision of whether a borrower should pay one or more discount points can be evaluated by conducting a break-even analysis.

Some professionals will try to present the break-even analysis in the following manner. A borrower wants to obtain a $200,000 mortgage loan. The interest rate without paying any points is 5.125%. Paying one point will add $2,000 to the borrower’s closing costs and will lower the interest rate to 5.0%. Due to the lower interest rate, the scheduled monthly payment will be reduced by $15.33 per month. At a savings rate of $15.33 per month, the borrower will save a total of $2,000 in monthly payments over a period of 131 months, or almost 12 years. If the borrower plans to keep the mortgage 131 months or longer, then paying the one point would save the borrower money. If the borrower plans to keep the mortgage less than 131 months, then paying the one point would not save the borrower money. This break-even comparison seems easy enough, right? The problem is this evaluation is oversimplified. This method of comparison is inadequate and presented here only to demonstrate what not to do.

To accurately determine whether a point should be paid, the break-even analysis should consider the difference in monthly interest costs, not the difference in monthly payment costs. Revisiting the previous scenario, by lowering the interest rate from 5.125% to 5.0%, the interest portion of the monthly payment will be reduced by $20.83 in month one. The interest portion of the monthly payments decreases slightly each month, so loan amortization tables must be referenced to compare the difference in interest paid each month. Comparing the cumulative monthly interest that would be paid with each loan shows the borrower will save a total of $2,000 in monthly interest payments over a period of 98 months, or about 8 years. If the borrower plans to keep the mortgage 98 months or longer, then paying the one point would save the borrower money. If the borrower plans to keep the mortgage less than 98 months, then paying the one point would not save the borrower money. As you can see, this break-even point is much sooner than the 131 months that was calculated previously.

Why should we compare the difference in monthly interest payments rather than total monthly payments? The total monthly payment is comprised of two parts: principal and interest. The borrower benefits by reducing the portion of the payment that goes towards interest because that means more of the monthly payment goes towards principal. The more principal the borrowers pays, the more the outstanding loan balance is reduced. When the borrower sells the real estate, having a lower outstanding loan balance to pay off results in the borrower keeping more of the sales proceeds. We compare the difference in monthly interest payments because the borrower should not be concerned with only the monthly payment savings but also the total gain realized when the real estate is sold. A lower interest rate on the mortgage loan provides a lower monthly payment and a faster accumulation of equity in the real estate. Borrowers should consider both of these important factors when evaluating whether to pay points on a mortgage loan.

Resources: Glossary of Mortgage Terms

The future of federal estate tax law was a mystery until Congress recently passed the “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.” This legislation included, among many tax law items, changes to the estate tax law for years 2010, 2011, and 2012. The following is a summary of the new changes in the federal estate tax law.

Under previous tax laws, the estate tax was fully repealed for 2010, but the new legislation retroactively reinstated an estate tax for 2010. For 2010, the estate tax exemption amount is $5 million. The amount of an estate that exceeds the exemption amount is taxed at 35%. Retroactively applying an estate tax law may seem unfair to many estates of individuals who died during 2010; however, the estates of individuals who died during 2010 have a choice in which rules they want to follow. They can be subject to the new estate tax law for 2010 or elect to follow the previous rules assuming a full repeal of the estate tax in 2010. The basis of inherited assets is treated differently under each scenario and may influence which rules a decedent’s estate elects to follow.

Under the new estate tax law for 2010, the basis of inherited assets is the full market value at the decedent’s death. Under the 2010 repeal of the estate tax, the basis of inherited assets is limited to the lesser of the decedent’s basis or the full market value at the decedent’s death. Estates of less than $5 million will probably want to assume an estate tax during 2010. They can still avoid paying estate tax with the $5 million exemption, and their heirs can receive a full fair market basis in the inherited assets. Estates of more than $5 million may want to elect the repeal of estate tax for 2010. Their heirs will not receive a step-up of basis, but future capital gains they may have can be taxed at the long-term capital gains rate of 15% rather than the current estate tax rate of 35%.

For 2011 and 2012, the estate tax exemption is $5 million (adjusted for inflation in 2012), and the amount of an estate that exceeds the exemption is taxed at 35%. One main difference in the estate tax law for years 2011 and 2012 compared to previous years is the portability of the estate tax exemption between spouses. In previous years, any unused portion of a deceased spouse’s exemption amount could not be used by the surviving spouse, but for 2011 and 2012, any unused portion of a deceased spouse’s exemption is added to the exemption amount available to the surviving spouse. For example, if a husband dies and leaves everything to his wife, then he uses none of his $5 million available estate tax exemption. His wife would then have an available estate tax exemption of $10 million, which is the $5 million unused by her husband plus the $5 million of her own exemption.

The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010″ did not address changes in the federal estate tax law for years beyond 2012. Starting in 2013, absent further legislation, the estate tax exemption amount will revert to $1 million, and the maximum estate tax rate will be 55%. The portability of the estate tax exemption between spouses will also disappear starting in 2013. Congress could pass additional legislation before 2013 that extends the recent changes in the estate tax law, but to assume that now would be pure speculation. Until we have legislation that makes the federal estate tax law permanent, the future of estate tax law will always be a mystery.

Supporting Documents: Text of Legislation; Technical Explanation; Summary

Admittedly, no one is perfect. We all make mistakes.  However, when it comes to an IRA beneficiary, mistakes can be costly. Over the years, I have observed a number of mistakes clients have made before they were our clients. Here are a few that you should avoid:

1. Failing to name a beneficiary. If no beneficiary is named, the default beneficiary will generally be the owner’s estate. This means the IRA will be subject to probate and possibly higher income taxes.
2. Assuming my “will” names the beneficiaries. Generally, the will has no effect over the distribution of an IRA. IRAs, like 401(k)s and life insurance benefits, pass to the beneficiary by contract. This means the asset passes outside of the will. The only beneficiary that counts is the one named on the appropriate IRA beneficiary form.
3. Failing to review and make necessary updates to beneficiary designation forms. Beneficiary designations should be reviewed on a regular basis. Marriage, divorce, birth or adoption of a child, and death of a family member can make your beneficiary designation out-of-date. Remember, changing your “will” won’t change your beneficiary designations.
4. Failing to name a successor beneficiary of an Inherited IRA. If no successor beneficiary is named and the primary beneficiary dies, the IRA will distribute to the estate, pass through probate, and will result in the loss of “stretch.”
5. A beneficiary fails to “stretch” their IRA distributions. Beneficiaries often liquidate their inherited IRAs too quickly, resulting in immediate taxes due. A “stretch” plan can help pass IRA assets to beneficiaries, deferring taxes for a longer stretch of time.

All of these problems can be avoided with simple solutions. The key is to get with your financial advisor today to make sure your beneficiary designations are the way you desire.

Ownership of property can take several different forms, such as sole ownership by one person or concurrent ownership by two or more persons. Within the category of concurrent ownership, there are various arrangements by which people can own property together. The form of concurrent ownership may depend on facts such as how and when the property was acquired and whether the co-owners are spouses or non-spouses. People who own property together should be concerned with the form of ownership because it can affect their rights with the property during their lives and the disposition of the property after their deaths. This article will discuss different forms of concurrent ownership and characteristics of each.

Individuals who are not married to each other (non-spouses) may own property together in one of two forms: Tenancy In Common or Joint Tenancy. Tenancy In Common can be thought of as the default form of co-ownership. When two or more individuals acquire property together, they will be regarded as Tenants In Common if no statement to the contrary is documented in the ownership title. Each of the Tenants In Common owns a percentage share of the property, and those percentages can be equal or unequal, as determined by the percentage contributed by each to acquire the property. Each of the Tenants In Common has the right to access, utilize, sell, and even encumber with debt their portion of the property. When one of the Tenants In Common dies, that owner’s share of the property will be included in his or her estate and go through probate. The surviving Tenants In Common do not have an automatic right to inherit the deceased owner’s share of the property. The deceased owner’s share will be inherited by the beneficiary designated in the deceased owner’s will, which may or may not be the surviving Tenants In Common, or by the state laws of intestate if the owner dies without a will.

Joint Tenancy can be thought of as the alternative form of co-ownership. If two or more individuals wish to own property as Joint Tenants, they must be explicitly documented as such in the title. To form a Joint Tenancy, all of the owners must have acquired the the property at the same time, hold the same title to the property, own equal shares of the property, and have equal rights to possess the property. If any one of these four requirements fails to be true during the life of a Joint Tenancy, then the ownership will convert to a Tenancy In Common. As with the Tenancy In Common, each of the Joint Tenants has the right to access, utilize, sell, and encumber the property. The main difference in the Joint Tenancy form of ownership is the provision for a deceased owner’s share of the property to bypass probate and be automatically inherited by the surviving Joint Tenants, in which case the ownership is named Joint Tenants With Right Of Survivorship. In some states, such as Texas, the words Joint Tenants With Right Of Survivorship must be written in the title. If the ownership is recorded only as Joint Tenants and the words With Right Of Survivorship are missing, then the right of survivorship will not be assumed, and the deceased owner’s share will be included in his or her estate.

Individuals who are married to each other (spouses) may have an additional form of ownership available. Tenancy By The Entirety is a form of co-ownership between spouses available in only about half of the states. This form of ownership is very similar to Joint Tenancy. Tenancy By The Entirety includes the four requirements for Joint Tenancy with an additional fifth requirement of marriage between the owners. Unlike with Joint Tenancy, one spouse cannot unilaterally terminate the Tenancy By The Entirety by breaking one of the requirements, such as selling his or her half of the property. Tenancy By The Entirety can provide the same benefit of Joint Tenancy With Right Of Survivorship by allowing the deceased spouse’s share of the property to bypass probate and be automatically inherited by the surviving spouse.

Community Property is another form of co-ownership between spouses available in only some states: Alaska, Arizona, California, Louisiana, Idaho, Nevada, New Mexico, Texas, Washington, and Wisconsin. Community Property is defined as any property accumulated by either spouse during marriage except for gifts and inheritances. Each spouse owns a one-half, undivided interest in all Community Property, regardless of his or her individual contributions to acquire or maintain the property. Spouses can own Community Property as either Tenants In Common or as Joint Tenants. The mere fact that a property is classified as Community Property does not dictate how the property will be disposed of after the death of a spouse. The laws of Community Property define the rights of each owner while both spouses are still living, but the disposition of Community Property after one spouse’s death will depend on whether the spouses were Tenants In Common or Joint Tenants With Right Of Survivorship.

These are the most common forms of concurrent ownership between individuals. One form of ownership does not stand out as the best because each form has different characteristics that may achieve the goals of different people. You may want to seek legal counsel for more guidance on which form of concurrent ownership would best achieve your goals. Financial Management Professionals is not an attorney. Content from this article should not be interpreted as legal advice. Content from this article should be regarded as general and generic because each legal jurisdiction can have variations in the interpretation and application of property laws and probate laws. Financial Management Professionals suggests you consult with an attorney for more information regarding property laws and probate laws before making any changes to ownership registrations or other legal documents.

If you have ever traveled in a foreign country, you have probably had to exchange your U.S. Dollars for a foreign currency. How much foreign currency your Dollars will buy depends on the value of the Dollar at that time. You can check currency conversion rates to find what quantity of a foreign currency is currently equal to one Dollar. However, you should not expect the currency conversion rates to represent exactly what you will receive in a currency exchange. Businesses that exchange currency make money on these transactions by building a fee into their exchange rates. The way these businesses charge you can make it difficult to detect how much that currency exchange is actually costing you. This article will show how to calculate the true cost of currency exchange. For illustration purposes, let’s evaluate conversions between the U.S. Dollar and the Mexican Peso.

The currency conversion rate changes daily, but let’s say 1 Dollar currently equals 12.5 Pesos. You have Dollars and want to buy Pesos, so you go to a currency exchange business. They sell you 12 Pesos per 1 Dollar. One Dollar is actually worth 12.5 Pesos, but for each Dollar you convert, the currency exchange business keeps 0.5 Pesos and only gives you 12 Pesos. The 0.5 Pesos per Dollar that they keep is the exchange fee they are charging you. You can calculate the exchange cost in Dollars by reversing the conversion rate. One Dollar divided by 12.5 Pesos equals 0.08 Dollars per Peso. The exchange fee was 0.5 Pesos per Dollar converted, so the equivalent cost is 0.04 Dollars per Dollar converted.

You now have Pesos and want to buy back your Dollars at the currency exchange business. Get ready to pay another exchange fee. They sell you 1 Dollar per 13 Pesos. One dollar is actually worth 12.5 Pesos, but for each Dollar you buy, the currency exchange business charges you 13 Pesos and keeps the extra 0.5 Pesos as their exchange fee. Based on the reversed conversion rate of 0.08 Dollars per Peso, you are paying an exchange fee of 0.04 Dollars for each Dollar you buy. Since you only received 12 Pesos for each Dollar you sold and had to pay 13 Pesos for each Dollar you bought, the double conversion cost you 1 Peso, or 0.08 Dollars, per Dollar converted.

Paying currency exchange fees can be difficult to accept because we know exactly how much currency is worth, and psychologically, we do not like to pay more for things than they are worth. However, we should recognize that currency exchange businesses are trying to earn a profit just like any other business. They have to charge exchange fees to compensate for the services they provide, but this does not mean you should just accept any fee they try to charge. Competition can exist among currency exchange businesses, so you should shop around for the best exchange rate and negotiate the best deal you can.

For the last 4 years, I have been competing in triathlons as a way of staying in better shape. I’m definitely not the fastest guy on the course, but for me, it is about staying motivated to think healthier. This last weekend was the culmination of 12 months of training when I competed in (and finished BTW!) my first full Ironman. An IM race is a 2.4 mile swim, 112 mile bike, and 26.2 run. Yes, I am a bit crazy, but the event was fun and worth the effort.

It took me 12 hours and 56 minutes to complete the course which is a long time to spend inside of your own head since no headphones are allowed. Somewhere around mile 65 of the bike my mind began to trace similarities between an Ironman and retirement investing, and I thought it would be good to share some of those thoughts with you.

The biggest thing is sometimes it is good to remember that the “race” is long. An Ironman course is long, but you still have to conquer one mile at a time in order to finish. Expend too much energy on the swim or that big bike hill and you risk not having enough gas in the tank to finish before the 17 hour cutoff. Retirement investing is a long-term course, and the hard part is we have to live that day by day. Strap yourself with a big mortgage or credit card debt early in life, and it is going to make the rest of the race that much more difficult. On the same note, don’t let one or two bad “miles” derail your effort. Remember it is a long race with plenty of time to make up for a couple of mistakes.

Not everybody shows up to the start line equal, but you have to run your race and not worry about the competition. The only thing you can control is you. Some of my fellow competitors have much better genetics for this kind of thing. At 6’2″ tall and 188 pounds, I am in good shape, but that is not a runner’s physique. My bike is not a Schwinn, but I also don’t have the budget to invest $10,000 in a great race bike with full disc wheels and an aero racing helmet. I have a full time job and two kids, so training more than 20 hours a week is not fitting into my schedule. I have to arrive at the starting line knowing my limitations and be prepared to run my race. In retirement investing, you have to run your race. If you don’t know your tolerance for risk, then you need to find out. Just because your brother, neighbor, or friend brags about how fast they are making money in high risk stock options doesn’t mean that is the right race for you, and remember they are probably not telling you about the times they crashed at those high speeds. Salaries, employee benefits, employer stock grants, etc. are all things mostly out of our control. Take stock of what tools you have, do your best to be efficient with those tools, and run your race.

Hydrate, hydrate, hydrate! Can you imagine exercising for 13 hours without drinking? Sounds like a trip to the hospital or morgue to me. You have to save money to finish the race…period. Start small, start now, just start. I could bore you to death with the science of fluid absorption in the body but will spare you the details. Just know that if you wait until you feel thirsty to drink something, then your body is already dehydrated. If you wait until the kids are gone to college to think about future planning, then there is a good chance you have already put yourself in danger.

Finally, I couldn’t have finished without my coach. This isn’t a plea for you to call FMP about financial planning coaching, so please read on. My coach is a friend and client. He provided me experience, objectivity, encouragement, mental preparedness, and asked me hard questions that needed to be answered. Without my coach, it would have been easy to be discouraged, and it would have been really easy to just quit when things weren’t going well. My coach also made me aware of things I had overlooked. A coach can’t do it for you, but they can certainly keep you in the game. There are a lot of different ways to get financial coaching, and I encourage you to find the relationship that works for you. For me, it was someone I knew and trusted and whom I could talk with face to face over lunch. It was a very involved relationship but what would work best for me to keep me accountable. FMP provides this kind of financial coaching, but there are also on-line tools, articles, discount services, 401k advisors, and the list goes on. I guess it is possible to run the race without a coach, but in my opinion, you are going to increase your chances of success and make the experience better with someone offering advice along the way.

Nobody said investing or retirement planning was easy. I chose to do an Ironman, but we don’t have that luxury when it comes to planning our future. I sincerely hope this helps you along your race. You will never finish if you don’t start. Make today your starting line.

November 1 is right around the corner which means we have all seen the Halloween decorations go up, pumpkins at the store, and some of you Type A’s have already confirmed your Holiday plans. It also means the end of year is quickly approaching. Most folks don’t really start thinking about taxes until after January, but there are some things you should evaluate before the calendar kicks over to 2011. Here are just a few to think about, and please remember to consult your tax professional where appropriate.

1. Roth IRA Conversions – Much has been in the news about Roth conversions because the income limitation on conversions went away this year. At this point, it appears there won’t be an income limitation next year either which means you’ll still be able to convert. The twist in 2010 is being able to average the tax liability over the next two years. Roth conversions are not the right move for everyone but could be very powerful depending upon future tax rates and your particular situation.

2. Charitable Contributions – Don’t forget about the deductibility of these contributions, but more importantly, don’t forget that most charitable organizations will accept in-kind gifts of securities. Because of the rally in stock markets since March 2009, it is possible you own stocks or mutual funds with a decent unrealized gain. You can transfer all or part of those securities in-kind to a charity. You still get a tax deduction for the full value of the gift. The charity is allowed to sell the security with no tax liability and use the money just like a cash gift. Definitely a win-win situation if you are inclined to give.

3. Property Taxes – In Texas if you own a home, you will be getting a property tax bill shortly. The due date on property taxes is January 31 which means you have flexibility on when they get paid. The tax deduction occurs in the year you make the payment. Some people who are barely able to itemize their deductions will employ a strategy of alternating when they pay property taxes. For example, you could pay 2010 taxes in January 2011 and then pay your 2011 property taxes in December 2011. This means you would double up your property tax deduction on your 2011 return. This also means you would not have a property tax deduction every other year. This strategy is beneficial for some over a two year cycle, so consult your tax professional to determine if it could help you too. Combine this strategy with your charitable contributions, and you could really make an impact. Also don’t forget about keeping receipts from places like Goodwill or Salvation Army. Those donated items can add up to good deductions.

4. IRA Contributions – IRA contribution planning has become more challenging with Roth IRAs also being options. With an IRA contribution, you may reduce your current tax liability, but with a Roth, you can reduce your future tax. Regardless of which is better for you, don’t let the year slip by without considering your options and making a contribution. Keep in mind that you do have until your tax filing deadline to make a prior year IRA contribution.

5. Capital Gains – We talked about capital gains under charitable giving, but you can also review your taxable investment portfolio for tax-efficient management. This is especially viable with an index mutual fund or ETF portfolio because you can immediately reinvest the proceeds in similar securities without worrying about wash sale rules. You can sell two securities with offsetting gains and losses for no tax consequence. Also don’t forget about tax loss carryforwards. Unfortunately after 2008, this is common for many people. It wasn’t fun losing the money, but don’t forget to at least use that loss to your advantage.

Obviously every situation is unique. You should consult with a tax professional before making difficult decisions, but don’t complain about your taxes unless you have done everything you can to be efficient in planning. OK, you can still complain but include yourself in the finger pointing.

According to the powers that be, the recession ended in June 2009. Glad that’s over. So looking forward, I guess the question of whether we are going to have a double dip recession or one long, drawn out recession has been answered. Since the recession ended in June of 2009, it appears the answer is double dip. Why, you may ask, can we not just have the recession end in June of 2009 and continue with our “sluggish” economy and just slowly work our way out of this? That may very well occur; however, there are a number of head winds the economy is facing. They are as follows and are in no particular order.

First, a definition. Gross Domestic Product (GDP) is the total market value of all the goods and services produced within the borders of a nation. So, with that as our backdrop, following are several reasons why the economy may experience another dip or recession.

(1) Twelve percent of the GDP is represented by state government spending. Forty-nine states are required by law to have a balanced budget. Many states are already over budget and thus will have to cut their spending. This will contribute to a reduction in GDP.

(2) Usually, the Fed tries to stimulate the economy by lowering interest rates. Currently, the Fed-funds rate (the rate at which banks lend to each other on overnight deposits) is .25%. That is ¼ of 1%. So, for all intents and purposes, that cannot go any lower. From an interest rate standpoint, the Fed has very little dry powder left.

(3) I believe it is a safe assumption that taxes are headed higher given the current laws, proposals, and political discussions. This will slow the economy and cause GDP to decline. So, how does this slow the economy? On a real basic level, if you make $1,000 gross per paycheck, and currently, Uncle Sam takes 10%, you are left with $900 to spend and or save. Next year, when the tax cuts expire and the rates go back up, Uncle Sam now takes 20%, and you are left with $800. So, you have less to spend and save. You spend less, companies don’t sell as much, thus GDP decreases. When GDP decreases, economic activity slows, companies earn less because they are selling less, thus employees’ wages may go down. When wages go down people spend less. When people spend less, economic activity slows. One big nasty circle.

(4) In spite of the mandate from Washington, banks are lending less. In 2008, banks tightened their lending standards dramatically. Over the past year or so, they have stopped raising their lending standards but have decreased the number of loans being made. In fact, the number of loans outstanding has declined 19 consecutive months by a total of 24%. This will be a drag on GDP because there is less money moving into the economy for home loans, home equity loans, business loans, and various other types of loans. If people cannot get a home loan, it drags the housing market down. If they can’t get a home equity loan, it drags the home improvement (consumer discretionary) market down. If businesses can’t get short term loans to make it through the month or quarter, they have to lay off employees or close up shop altogether. All of these are drags on GDP.

There are other reasons and factors that may contribute to a slowing economy, but I’ll stop with the above. So, in my opinion, we are probably headed for another recession even though, in spite of what we have been told, the recession ended in June 2009. I hope I am wrong.