Dealing with Divorce

As a young, educated individual, you certainly never expected divorce when you cut the wedding cake–all along, you’ve planned on spending the rest of your live with the same spouse. Unfortunately, the fairy tale didn’t work out, and you’re headed for a divorce. So where do you begin?

Divorce can be a lengthy process that will strain your emotional, psychological, and financial limits, and it will almost certainly leave you feeling out of control. But with the right preparation, you can protect your interests, take charge of your future, and save yourself time and money.

First Things First: Should You Hire an Attorney?
There’s no legal requirement that you hire an attorney when divorcing. In fact, going it alone may be a sensible option if you’re young and have been married only a short time, are childless, and have few assets. However, most divorcing couples hire attorneys to better protect their interests, even though doing so can be expensive. Divorce attorneys typically charge hourly rates and require you to submit retainers (lump sums) up front. It’s not unusual, for example, for an attorney to charge as much as $150 to $200 per hour and require an initial retainer of up to $2,500 to $5,000. The fee depends on the complexity of the case, the reputation and experience of the divorce attorney, and your geographic location.

You should know that if you’re a homemaker or earn less income than your spouse, it’s still possible to obtain legal representation. You can submit a motion to the court, asking a judge to order your spouse to pay for your attorney’s fees.

If you and your spouse can agree on most issues, you may save time and money by filing an uncontested divorce. If you can’t agree on significant issues, you may want to meet with a divorce mediator, who can help you resolve issues that the two of you can’t resolve alone. To find a mediator, contact your local domestic relations court, ask friends for a referral, or look in the telephone book. Certain attorneys, members of the clergy, psychologists, social workers, marriage counselors, and financial planners may offer their services as mediators.

Save Time and Money: Do Your Homework Before Meeting with a Divorce Professional
To save time and money, compile as much of the following information as you can before meeting with an attorney or other divorce professional:

• Each spouse’s date of birth
• Names and birthdates of children, if you have any
• Date and place of marriage and length of time in present state
• Existence of prenuptial agreement
• Information about parties’ prior marriages, children, etc.
• Date of separation and grounds for divorce
• Current occupation and name and address of employer for each spouse
• Social Security number for each spouse
• Income of each spouse
• Education, degrees, and training of each spouse
• Extent of employee benefits for each spouse
• Details of retirement plans for each spouse
• Joint assets of the parties
• Liabilities and debts of each spouse
• Life (and other) insurance of each spouse
• Separate or personal assets of each spouse, including trust funds and inheritances
• Financial records
• Family business records
• Collections, artwork, and antiques

If you’re uncertain about some of these areas, you can obtain the necessary information through your spouse’s financial affidavit and/or the discovery process, both of which are mandated by the court.

Consider the Big Questions, Such as Child Custody and Alimony
Although your divorce professional will help you work through the big issues, you might want to think about the following questions before meeting with him or her:

• If you have children, what are your wishes regarding custody, visitation, and child support?
• Whose health insurance plan should cover the children?
• Do you earn enough money to adequately support yourself, or should alimony be considered?
• Which assets do you really want, and which are you willing to let your spouse keep?
• How do you feel about the family home? Do you feel strongly about living there, or should it be sold or allotted to your spouse?
• Will you have enough money to pay the outstanding debt on whatever assets you keep?

In addition to an attorney, you may want to see a therapist to help you clarify your wishes, express yourself more clearly, and deal with any child-related issues. Such counseling is typically covered by health insurance.

Some General Dos and Don’ts

Keep the following tips in mind:

• Do prepare a budget and a financial plan to sustain you until your divorce is final. Get help if you don’t currently have the skills and energy to do this on your own.
• Do review monthly bank and financial statements and make copies for your attorney.
• Do review all tax returns that have been filed jointly or separately by your spouse.
• Do make sure all taxes have been paid to date.
• Do review the contents of any safe-deposit boxes.
• Do get emotional support for yourself–talk to friends, join a support group, or see a therapist.
• Don’t make large purchases or create additional debt that might later cause financial hardship.
• Don’t quit your job.
• Don’t move out of the house before consulting your attorney.
• Don’t transfer or give away assets that are owned jointly.
• Don’t sign a blank financial statement or any other document without reviewing it with your attorney.

Health Savings Accounts: Just What the Doctor Ordered?

Are health insurance premiums taking too big of a bite out of your budget? Do you wish you had better control over how you spend your health-care dollars? If so, you may be interested in an alternative to traditional health insurance called a health savings account (HSA).

How Does a Health Savings Account work?
An HSA is a tax-advantaged account that’s paired with a high-deductible health plan (HDHP). Let’s look at how an HSA works with an HDHP to enable you to cover your current health-care costs and also save for your future needs.

Before opening an HSA, you must first enroll in an HDHP, either on your own or through your employer. An HDHP is “catastrophic” health coverage that pays benefits only after you’ve satisfied a high annual deductible. (Some preventative care, such as routine physicals, may be covered without being subject to the deductible.) For 2007, the annual deductible for an HSA-qualified HDHP must be at least $1,100 for individual coverage and $2,200 for family coverage. However, your deductible may be higher, depending on the plan.

Once you’ve satisfied your deductible, the HDHP will provide comprehensive coverage for your medical expenses (though you may continue to owe co-payments or coinsurance costs until you reach your plan’s annual out-of-pocket limit). A qualifying HDHP must limit annual out-of-pocket expenses (including the deductible) to no more than $5,500 for individual coverage and $11,000 for family coverage (for 2007). Once this limit is reached, the HDHP will cover 100% of your costs, as outlined in your policy.

Because you’re shouldering a greater portion of your health-care costs, you’ll usually pay a much lower premium for an HDHP than for traditional health insurance, allowing you to contribute the premium dollars you’re saving to your HSA. Your employer may also contribute to your HSA, or pay part of your HDHP premium. Then, when you need medical care, you can withdraw HSA funds to cover your expenses, or opt to pay your costs out-of-pocket if you want to save your account funds.

An HSA can be a powerful savings tool. Because there’s no “use it or lose it” provision, funds roll over from year to year. And the account is yours, so you can keep it even if you change employers or lose your job. If your health expenses are relatively low, you may be able to build up a significant balance in your HSA over time. You can even let your money grow until retirement, when your health expenses are likely to be substantial. However, HSAs aren’t foolproof. If you have relatively high health expenses (especially within the first year or two of opening your account, before you’ve built up a balance), you could deplete your HSA or even face a shortfall.

HSA as a Tool for Tax Reduction

HSAs offer several valuable tax benefits:

• You may be able to make pretax contributions via payroll deduction through your employer, reducing your current income tax.
• If you make contributions on your own using after-tax dollars, they’re deductible from your federal income tax (and perhaps from your state income tax) whether you itemize or not. You can also deduct contributions made on your behalf by family members.
• Contributions to your HSA, and any interest or earnings, grow tax deferred.
• Contributions and any earnings you withdraw will be tax free if they’re used to pay qualified medical expenses.

Consult a tax professional if you have questions about the tax advantages offered by an HSA.

Can Anyone Open an HSA?

Any individual with qualifying HDHP coverage can open an HSA. However, you won’t be eligible to open an HSA if you’re already covered by another health plan (although some specialized health plans are exempt from this provision). You’re also out of luck if you’re 65 and eligible for Medicare or if you can be claimed as a dependent on someone else’s tax return.

How Much Can I Contribute to an HSA?

Each year, you can contribute up to $2,850 for individual coverage and $5,650 for family coverage (for 2007). This limit applies to all contributions, whether they’re made by you, your employer, or your family members. You can make contributions up to April 15th of the following year (i.e., you can make 2007 contributions up to April 15, 2008). If you’re 55 or older, you may also be eligible to make “catch-up contributions” to your HSA, but you can’t contribute anything once you reach age 65.

Note: Starting in 2007, you’ll be able to make a one-time tax-free rollover of funds to your HSA from a health flexible spending account (FSA), a health reimbursement arrangement (HRA), or a traditional IRA (certain limits apply).

Can I Invest My HSA funds?
HSAs typically offer several savings and investment options. These may include interest-earning savings, checking, and money market accounts, or investments such as stocks, bonds, and mutual funds that offer the potential to earn higher returns but carry more risk (including the risk of loss of principal). Make sure that you carefully consider the investment objectives, risks, charges, and expenses associated with each option before investing. A financial professional can help you decide which savings or investment options are appropriate.

How Else Can I Use My HSA Funds?
You can use your HSA funds for many types of health-care expenses, including prescription drugs, eyeglasses, deductibles, and co-payments. Although you can’t use funds to pay regular health insurance premiums, you can withdraw money to pay for specialized types of insurance such as long-term care or disability insurance. IRS Publication 502 contains a list of allowable expenses.

There’s no rule against using your HSA funds for expenses that aren’t health-care related, but watch out–you’ll pay a 10% penalty if you withdraw money and use it for nonqualified expenses, and you’ll owe income taxes as well. Once you reach age 65, however, this penalty no longer applies, though you’ll owe income taxes on any money you withdraw that isn’t used for qualified medical expenses.

Premium Financing of Life Insurance

Most of us pay the premiums on our life insurance policies by simply writing checks to the insurer. But if you’re a high-net-worth individual, you may need a large amount of life insurance, requiring significant premium payments, and it may not make the most sense to pay those high premiums with cash. Premium financing may be an appropriate alternate strategy, allowing you to borrow the money from a third party to pay the premiums for the life insurance you need.

Suitable Candidates
The concept of borrowing money to pay life insurance premiums may sound simple in theory. However, the practical application can be complex and challenging. That’s why premium financing should only be used in particular situations. Generally, you’re a candidate if you:

• Are affluent (at least $5 million net worth)
• Are older (perhaps age 65 or above)
• Are insurable
• Are creditworthy
• Require a substantial amount of life insurance (with premiums in the 6- or 7-figure range)
• Meet the lender’s requirements (e.g., minimum collateral)
• Are knowledgeable of and comfortable with risk and leverage

How Does Premium Financing Work?
First, you apply to an insurer for a life insurance policy indicating that the premium will be financed. If the insurer offers a policy with financed premiums, you apply for a loan from a third party lender. The insurance policy and the loan are separate and distinct transactions–the insurer is not a party to the loan. You’ll generally be required to make a down payment, and the lender will make the remaining premium payments to the insurer. You agree to repay the lender the principal, interest, and other fees. You also must pledge collateral for the loan, which may include the cash surrender value of the policy plus additional collateral and/or a personal guarantee.

With some premium financing arrangements, you pay off the loan in installments over the original loan term. More commonly, however, the loan is continually renewed at the end of each term, and is repaid at your death out of the insurance proceeds. With the latter type of arrangement, you either pay the interest and fees to the lender annually (a noncapitalized loan), or the interest and fees are added to the loan principal (a capitalized loan).

The Risks
There are significant risks associated with premium financing, as there are with any leveraging strategy. These risks include:

Loan interest rate and requalification risk–Lenders usually require that you requalify for the loan at each loan renewal, and that the collateral be reevaluated. If your financial position has deteriorated, or the value of the collateral has declined, there is the risk that the loan will not be renewed or that it will be offered at a higher rate than the original loan. If rising interest rates cause the loan balance to exceed the value of the collateral, you may be required to post additional collateral. It’s also possible that the loan could be called for default.

Policy earnings risk–If the insurance policy cash values do not increase as expected, the loan balance may exceed the value of the collateral. If this happens, you may be required to post additional collateral. Also, if the policy values fail to keep pace with the loan, more of the death benefit will be needed to repay the loan, reducing the ultimate death benefit that will be available to meet your objectives, which may include providing for loved ones.

Plan design risk–The insurance policy and the loan are separate and distinct transactions, and they operate independently. The lender may decline to renew the loan at the end of the term (if, for example, you fail to requalify). This would put the insurance policy in jeopardy of cancellation for nonpayment of premiums if alternate funding can’t be found.

Because of these and other risks, and the complexities involved, be sure to consult your financial professional before entering into any premium financing arrangement.

Health Savings Accounts for Early Retirees

When deciding if your parents, grandparents, or yourself can afford to retire early, the cost of health insurance should be a key factor in the financial equation. Unless you’re lucky enough to have retiree health benefits through an employer, or are entitled to coverage through a spouse’s plan, you may need to consider individual health coverage and pay the entire premium cost–which can be high–until the senior becomes eligible for Medicare at age 65. If you’re looking to bridge the gap between the time of retirement and the time of Medicare enrollment, one option worth considering is a health savings account (HSA).

HSA basics
An HSA is a tax-favored account that can be opened in conjunction with a high-deductible health plan (HDHP) to pay for current health costs and save for future ones. The HSA/HDHP option may be attractive to healthy retirees under age 65 who want more flexibility and potentially lower health insurance premiums than traditional individual health insurance offers.
An HDHP begins to pay benefits only after you’ve satisfied a high annual deductible (at least $1,100 for individual coverage in 2007), although some preventative care may be covered in full immediately. Because you’re shouldering a greater portion of your health-care costs, you’ll usually pay a lower premium for an HDHP than for traditional health insurance, and you can contribute your premium savings to your HSA. In 2007, you can contribute up to $2,850 if you have individual coverage, and if you’re 55 or older, you can make an extra “catch-up contribution” of up to $800. Your HSA contributions are tax deductible, and accumulate tax deferred (along with any earnings) until withdrawn. You can use your HSA funds to pay qualified health-care expenses that aren’t covered by your plan. Before age 65, you can withdraw money and use it for nonqualified expenses, but you’ll generally pay a 10% penalty, and you’ll owe income taxes on the amount you withdraw.

What Happens at Age 65?
Once you reach age 65 and enroll in Medicare Part A or B, you’re no longer eligible for a high-deductible health plan, and that means you can no longer contribute to your HSA. However, any money remaining in the account is yours to keep.
Reaching age 65 gives you a little more flexibility when it comes to using your HSA funds, since at age 65 the 10% penalty on nonqualified withdrawals no longer applies. But before you use your account funds for something other than health-care expenses, keep in mind that you’ll still owe income taxes on money used for nonqualified expenses.
The only way to avoid paying taxes on your HSA funds (at any age) is to use them for qualified health-care expenses. Fortunately, the list of qualified expenses is long, and includes items such as prescription drugs, eyeglasses, and Medicare-related expenses such as premiums, deductibles, and co-payments. If you have health benefits through your former employer, you can use your HSA funds to pay your share of your retiree health insurance premium. And, if you decide to buy a tax-qualified long-term care insurance policy, you can also use your HSA funds to pay the premiums (though dollar limits apply). One thing you’re not allowed to use your HSA dollars for is the premium cost of a Medigap policy to supplement your Medicare coverage. For a list of other qualified expenses, see IRS Publication 502, Medical and Dental Expenses.

Should You Get a Prenuptial Agreement?

Although no one enters marriage with the intention of ultimately getting a divorce, the sad truth is that many marriages today do end in separation. For most couples, it can be prudent to have a prenuptial agreement.

What is it?
A “prenup” is a legally binding contract between two people who are about to marry which, among other things, dictates how property will be divided in the event of a divorce, and whether alimony or spousal support will be paid. In the absence of such an agreement, state law decides these issues.

A typical prenup agreement states that each partner will keep the property they bring into the marriage, and that assets accumulated during the marriage will be split 50/50. However, your prenup should be customized to your particular situation. You should consider having a prenup if you fall into any of the following categories:

• You earn significantly more income than your future spouse
• You have substantial assets
• Your spouse has substantial debt
• You own a business or business interest
• You anticipate receiving an inheritance
• You have children from a previous marriage

Although the concept of a prenup seems like it might extinguish the flames of romance, the open communication it requires often serves as a powerful building block to a strong marriage. It can also provide each partner with financial security and peace of mind, and may save you from emotional distress and court costs later on.

Make it Legal
To create a valid prenup, keep the following points in mind:

• Hire a separate and independent lawyer for each partner
• Sign the prenup at least six months before the wedding
• Fully disclose all financial information
• Make sure the agreement is fair and reasonable to both parties

Travel Insurance

Travel insurance refers to specialized coverage you can buy to insure yourself against various risks that travelers face. Travel insurance policies may protect you against one type of hazard (e.g., getting sick or having a trip canceled) or against a group of hazards. You can purchase travel insurance from insurance companies, travel agents, tour operators, cruise lines, rental companies, or travel assistance companies. Coverage, cost, and terms vary widely.

Tip: Don’t confuse travel insurance with travel assistance programs. Companies that offer travel assistance may also offer travel insurance, but the two are not the same. Travel assistance programs make the arrangements if you need help in an emergency situation while traveling. Travel insurance policies pay for the help you need.

Do You Need Travel Insurance?
You may want to purchase some form of travel insurance if the financial benefit outweighs the premium cost. For instance, if your trip was canceled or the tour operator or carrier went out of business, could you afford to lose the money you paid for the trip? If you got sick, would you be able to pay for your medical expenses yourself? Do you have other insurance that duplicates the coverage offered by the travel insurance policy? Do you think that the coverage offered by the travel insurance policy is worth the cost of the premium?

Trip Cancellation/Interruption Insurance
Trip cancellation/interruption insurance protects you in the event that your trip is canceled or interrupted due to some unforeseen event, such as bad weather; the financial failure of the cruise line, airline, or travel agency; illness; or death. Under the policy, you will be reimbursed for nonrefundable travel-related expenses. This type of insurance usually costs about 5 percent to 7 percent of the price of the trip.

Coverage offered varies from policy to policy. Before purchasing trip cancellation/interruption insurance, check the exclusion section of the policy carefully. Some policies cover more situations than others. Your definition of an unforeseen event may be different than the insurance policy’s definition. For instance, some companies don’t consider pre-existing medical conditions to be unforeseeable and often require you to purchase the insurance within 24 hours of booking your trip for pre-existing conditions to be covered. Whether you need trip cancellation/interruption insurance depends on what other protection you have and how much money you could afford to lose if your trip were canceled or interrupted.

Before purchasing this type of insurance, check the terms of your travel agreements and find out what guarantees the carrier, travel agent, or tour operator offers. Policies vary widely. Cruise lines, for instance, may allow you to receive most of your money back if you cancel several weeks before you travel, but they will give you less (or none) back if you cancel within a few days of travel. Airlines often sell nonrefundable tickets but usually allow you to rebook the trip for a fee (usually $25 to $75 per ticket) as long as you can travel within one year of your original departure date. If you rent a vacation house at the beach, you may be able to cancel your trip ahead of time, depending on the terms of the rental arrangement. But if your trip is interrupted by a hurricane, you may not get any money back unless you’ve purchased trip cancellation/interruption insurance.

Example(s): The Browns rented a Florida vacation home for $1,500 per week. The day they were to leave, a hurricane struck Miami, and they had to cancel their vacation. Their airline tickets weren’t refundable, but the airline assured them that they could rebook the trip for a fee of $50 per ticket. However, they lost all the money they had spent on their vacation home because they had not purchased trip cancellation insurance and the vacation home rental did not provide for cancellation.

Caution: Trip cancellation/interruption insurance is different than cancellation waivers offered by cruise lines and tour operators. Cancellation waivers are not insurance–they are simply company guarantees that your money will be refunded under certain circumstances. However, they may not cover last-minute cancellations and will not protect you if the company goes out of business.

Temporary Health Policies
Most health insurance policies will cover you if you travel within the United States. However, some health insurance outlets (notably, Medicare and some HMOs) won’t cover you overseas at all or may provide only limited coverage. If you find out that your health insurance coverage is inadequate, consider purchasing a short-term supplemental health insurance policy. This type of policy covers you against accidents and/or sickness and usually pays for medical treatment, all or part of the cost of medical evaluation, and other related expenses. Policies usually offer a choice of deductibles and may be tailored to suit your needs. You can purchase these policies separately or as part of a travel insurance package that includes other types of travel insurance.

Deciding whether to purchase a temporary health policy hinges on determining what medical coverage you already have. If you are traveling domestically and are adequately covered by an existing health insurance policy, you may not need extra protection. However, if you are traveling overseas, you should thoroughly investigate the terms of your health coverage and consider buying a supplemental policy.

Baggage Insurance
Baggage insurance (i.e., personal effects coverage) reimburses you if your personal belongings are permanently or temporarily lost, stolen, or damaged while you’re traveling.

Before you purchase baggage insurance, find out what protection you already have. For instance, airlines may be liable for damage if it was caused by the airline’s negligence, and they are liable for lost or stolen baggage after check-in. On a domestic trip, the airline’s liability limit is generally $2,500 per passenger; on an international trip, the liability limit is $9.07 per pound. Some credit card companies and travel agents also provide supplemental baggage insurance at no charge to you. Your homeowners or renter’s policy may also protect your personal belongings against theft when you travel.

Then, why purchase baggage insurance? Purchasing baggage insurance may make sense when you want 24-hour protection, not just protection after your bags are checked in with a scheduled airline. Baggage insurance may also offer higher liability limits than those offered by an airline. However, check the policy’s fine print. If you are carrying expensive items, you may not be fully reimbursed if they are lost or stolen, and benefit limits may apply to certain items such as electronics and jewelry. You also may not be reimbursed for anything covered under another policy, so if your bags are lost or damaged by an airline, you may have to seek reimbursement from the airline first.

Accidental Death/Dismemberment Insurance
Accidental death/dismemberment insurance (AD & D) is inexpensive insurance that compensates you if you lose a limb or an eye or compensates your beneficiary if you die in an accident. You
can purchase this coverage as a separate policy, as a rider to an existing policy, or as part of a travel insurance policy. You may also receive coverage as a “free” benefit when you purchase an airline, train, or bus ticket using your credit card. AD & D policies may also cover, up to certain limits, medical expenses associated with the accident.

Caution: Before you purchase AD & D coverage, make sure you don’t have duplicate coverage elsewhere. If you have adequate life insurance, you may not need AD & D. In addition, you may already be covered for AD & D through a group insurance plan sponsored by your employer or your credit card company.

Buying a Home Post-Bubble: Remain Patient and Prudent

There’s no doubt about it–home ownership is an exciting prospect. Face it, you’ve always dreamed of having a place that you could truly call your own. But buying a home can also be stressful, especially when you’re buying one for the first time. The U.S. housing market is in the midst of a gripping recession as the real estate bubble continues to deflate. And today’s buyers must know what to look for (and how to properly purchase) a home.

How Much Can You (Really) Afford?
According to a general rule of thumb, you can afford a house that costs two and a half times your annual salary. But determining how much you can afford to spend on a house is not quite so simple. Since most people finance their home purchases, buying a house usually means getting a mortgage. So, the amount you can afford to spend on a house is often tied to figuring out how large a mortgage you can afford. To figure this out, you’ll need to take into account your gross monthly income, housing expenses, and any long-term debt. Try using one of the many real estate and personal finance websites to help you with the calculations.

Mortgage Prequalification vs. Preapproval
Once you have an idea of how much of a mortgage you can afford, you’ll want to shop around and compare the mortgage rates and terms that various lenders offer. When you find the right lender, find out how you can prequalify or get preapproval for a loan. Prequalifying gives you the lender’s estimate of how much you can borrow and in many cases can be done over the phone, usually at no cost. Prequalification does not guarantee that the lender will grant you a loan, but it can give you a rough idea of where you stand. If you’re really serious about buying, however, you’ll probably want to get preapproved for a loan. Preapproval is when the lender, after verifying your income and performing a credit check, lets you know exactly how much you can borrow. This involves completing an application, revealing your financial information, and paying a fee.

It’s important to note that the mortgage you qualify for or are approved for is not always what you can actually afford. Before signing any loan paperwork, take an honest look at your lifestyle, standard of living, and spending habits to make sure that your mortgage payment won’t be beyond your means.

Should You Use a Real Estate Agent or Broker?
A knowledgeable real estate agent or buyer’s broker can guide you through the process of buying a home and make the process much easier. This assistance can be especially helpful to a first-time home buyer. In particular, an agent or broker can:

• Help you determine your housing needs
• Show you properties and neighborhoods in your price range
• Suggest sources and techniques for financing
• Prepare and present an offer to purchase
• Act as an intermediary in negotiations
• Recommend professionals whose services you may need (e.g., lawyers, mortgage brokers, title professionals, inspectors)
• Provide insight into neighborhoods and market activity
• Disclose positive and negative aspects of properties you’re considering

Keep in mind that if you enlist the services of an agent or broker, you’ll want to find out how he or she is being compensated (i.e., flat fee or commission based on a percentage of the sale price). Many states require the agent or broker to disclose this information to you up front and in writing.

Choosing the Right Home
Before you begin looking at houses, decide in advance the features that you want your home to have. Knowing what you want ahead of time will make the search for your dream home much easier. Here are some things to consider:

• Price of home and potential for appreciation
• Location or neighborhood
• Quality of construction, age, and condition of the property
• Style of home and lot size
• Number of bedrooms and bathrooms
• Quality of local schools
• Crime level of the area
• Property taxes
• Proximity to shopping, schools, and work

Making the Offer
Once you find a house, you’ll want to make an offer. Most home sale offers and counteroffers are made through an intermediary, such as a real estate agent. All terms and conditions of the offer, no matter how minute, should be put in writing to avoid future problems. Typically, your attorney or real estate agent will prepare an offer to purchase for you to sign. You’ll also include a nominal down payment, such as $500. If the seller accepts the offer to purchase, he or she will sign the contract, which will then become a binding agreement between you and the seller. For this reason, it’s a good idea to have your attorney review any offer to purchase before you sign.
Other details

Once the seller has accepted your offer, you, your real estate agent, or the mortgage lender will get busy completing procedures and documents necessary to finalize the purchase. These include finalizing the mortgage loan, appraising the house, surveying the property, and getting homeowners insurance. Typically, you would have made your offer contingent upon the satisfactory completion of a home inspection, so now’s the time to get this done as well.

The Closing
The closing meeting, also known as a title closing or settlement, can be a tedious process–but when it’s over, the house is yours! To make sure the closing goes smoothly, some or all of the following people should be present: the seller and/or the seller’s attorney, your attorney, the closing agent (a real estate attorney or the representative of a title company or mortgage lender), and both your real estate agent and the seller’s.

At the closing, you’ll be required to sign the following paperwork:

• Promissory note: This spells out the amount and repayment terms of your mortgage loan.
• Mortgage: This gives the lender a lien against the property.
• Truth-in-lending disclosure: This tells you exactly how much you will pay over the life of your mortgage, including the total amount of interest you’ll pay.
• HUD-1 settlement statement: This details the cash flows among the buyer, seller, lender, and other parties to the transaction. It also lists the amounts of all closing costs and who is responsible for paying these.

In addition, you’ll need to provide proof that you have insured the property. You’ll also be required to pay certain costs and fees associated with obtaining the mortgage and closing the real estate transaction. On average, these total between 3 and 7 percent of your mortgage amount, so be sure to bring along your checkbook.

Fixed vs. Adjustable Rate Mortgages (ARMs)

Like homes themselves, mortgages come in many sizes and types, and one of the most important decisions you face as you consider your choices is whether to take out a fixed or an adjustable rate mortgage. The type of mortgage that’s right for you depends on many factors, such as your tolerance for risk and how long you expect to stay in your home.

Fixed Rate Mortgages
As the name implies, the interest rate on a fixed rate mortgage remains the same throughout the life of the loan. Your monthly payment (consisting of principal and interest) generally remains the same as well. The entire mortgage is repaid in equal monthly installments over the term (length) of the loan.

The Good News Is You’re Locked In. The Bad News Is…You’re Locked In
Locking in a fixed interest rate on your mortgage has its good and bad points. If interest rates rise, yours won’t; as a result, your monthly mortgage payment will always remain the same. This can be reassuring to homeowners on tight budgets or with fixed incomes. For this reason, fixed rate mortgages often appeal to individuals with a low tolerance for the risk associated with fluctuating monthly payments.

But if interest rates go down, yours won’t, and your (now high) mortgage payment will remain the same. While you might be able to refinance your home, paying off the higher-rate mortgage with one that carries a lower interest rate, this isn’t always possible. In addition, the interest rate might need to drop significantly to offset the expenses associated with refinancing, and you’d need to remain in your home long enough to allow the monthly savings associated with the lower rate to recoup those expenses.

Adjustable Rate Mortgages (ARMs)
With an ARM, also called a variable rate mortgage, your interest rate is adjusted periodically, rising or falling to keep pace with changes in market interest rate fluctuations. Since the term of your mortgage remains constant, the amount necessary to pay off your loan by the end of the term changes as your loan’s interest rate changes. Thus, your monthly payment amount is recalculated with each rate adjustment.

Depending on what’s specified in the mortgage contract, an ARM can be adjusted semi-annually, quarterly, or even monthly, but most are adjusted annually. The adjustments are made on the basis of a formula specified in the mortgage contract. To adjust the rate, the lender uses an index that reflects general interest rate trends, such as the one-year Treasury securities index, and adds to it a margin reflecting the lender’s profit (or markup) on the money loaned to you. Thus, if the index is 5.75% and the markup is 2.25%, the ARM interest rate would be 8%.

What’s to keep the interest rate from going through the roof–or, for that matter, from plunging through the floor? Most ARMs specify interest rate caps. The periodic adjustment cap may limit the amount of rate change, up or down, allowed at any single adjustment period. A lifetime cap may indicate that the interest rate may not go any higher–or lower–than a specified percentage over–or under–the initial interest rate.

Caution: Some ARMs cap the payment amount that you are required to make, but not the interest adjustment. With these loans, it’s important to note that payment caps can result in negative amortization during periods of rising interest rates. If your monthly payment would be less than the interest accrued that month, the unpaid interest would be added to your principal, and your outstanding balance would actually increase, even though you continued to make your required monthly payments.

The initial interest rates (referred to as teaser rates) on ARMs are generally lower than the rates on fixed rate mortgages. If you can tolerate uncertainty in your mortgage interest rate and fluctuations in your monthly mortgage payment amount, believe that interest rates will stay low or go lower in the future, or plan to live in your home for only a short period of time, then you may want to consider an ARM.

Hybrid ARMs
Hybrid ARMs are mortgage loans that offer a fixed interest rate for a certain time period (3, 5, 7, or 10 years), and then convert to a 1-year ARM.

The initial fixed interest rate on a hybrid ARM is often considerably lower than the rate on either a 15-year or 30-year fixed rate mortgage. The longer the initial fixed-rate term, however, the higher the interest rate for that term will be. Generally speaking, even the lowest of these fixed rates is higher than the initial (teaser) rate of a conventional 1-year ARM.

Hybrid ARMs are ideal for individuals who plan to stay in their homes for a short period of time (3 to 10 years), since they can take advantage of the low initial fixed interest rate without worrying about how the loan will change when it converts to an ARM. If you think your plans may change or you are planning on staying put for a while, look for a hybrid ARM with a conversion option. This option will allow you to convert your loan to a fixed rate loan before it turns into an ARM.

Conventional fixed rate mortgage	Adjustable rate mortgage	Hybrid adjustable rate mortgage
Low risk 10- to 40-year term Interest rate doesn’t change Payment remains the same	Higher risk Initial interest rate often lower than fixed rate mortgage Interest rate may go up or down Interest rate usually adjusted annually Rate adjustments may be limited by cap(s) Payment caps can result in negative amortization in periods of rising interest rates	Higher risk Initial rate often lower than fixed rate mortgage Fixed term for 1 to 10 years, then becomes a 1-year ARM May have option to convert to a fixed rate mortgage before becoming a 1-year ARM Interest rate may go up or down Rate adjustments may be limited by caps Payment caps can result in negative amortization in periods of rising interest rates

Insurance: What If Your Home Is Worth Much More Than You Paid For It?

If your policy limits have not increased since you purchased your home, there’s a good chance that you’re now underinsured. However, it’s not necessarily because the market value of your home has risen, but rather because construction costs have gone up.

For insurance purposes, the cost to rebuild your home is what counts, and that’s probably very different than what you paid for your home, or how much you would pocket if you sold it today. For example, while the market value of your home includes the land it’s built on, the rebuilding cost does not. On the other hand, if your home has features that would be expensive to replicate, is built of materials whose cost has skyrocketed, or is located in an area where labor costs are high, the market value of your home may actually be lower than the cost to rebuild it.

It’s important to review your homeowners coverage with your insurer at least once a year. You should also call your insurance representative whenever you remodel your home or buy expensive items.

Although it’s ultimately up to you to make sure you have adequate homeowners insurance, your insurance representative can help you estimate the cost of rebuilding your home, using information about construction costs in your area. Be prepared to answer questions about your home’s features and square footage to help determine proper coverage limits.

And ask about adding an inflation guard clause to your policy (if available). An inflation guard automatically adjusts your policy limits over time to keep up with changing construction costs. Although you’ll still want to review your homeowners coverage periodically, an inflation guard can help keep you from becoming significantly underinsured.

Understanding the Alternative Minimum Tax (AMT)

If you aren’t already familiar with the alternative minimum tax (AMT), there’s a good chance that your family soon will be. This is because its key figures aren’t indexed for inflation. As a result, the AMT continues to snare more middle-income Americans every year. Additionally, because temporary legislative band-aids expired at the end of 2006, our nation’s economic stage is set for a dramatic rise in the number of individuals who are affected.

What is the AMT?
The AMT is essentially a separate federal income tax system with its own tax rates and set of rules which governs the recognition and timing of income and expenses. If you’re subject to the AMT, you have to calculate your taxes twice–once under the regular tax system and again under the AMT system. If your income tax liability under the AMT is greater than your liability under the regular tax system, the difference is reported as an additional tax on your federal income tax return.

Are You Subject to the AMT?
Part of the problem with the AMT is that, without doing some calculations, there’s no easy way to determine whether you’re subject to the tax. Key AMT “triggers” include the number of personal exemptions you claim, your miscellaneous itemized deductions, and your state and local tax deductions. So, for example, if you have a large family and live in a high-tax state, there’s a good possibility you might have to contend with the AMT. IRS Form 1040 instructions include a worksheet that may help you determine whether you’re subject to the AMT (an electronic version of this worksheet is also available on the IRS website), but you might need to complete IRS Form 6251 to know for sure.

AMT Adjustments
Differences between the regular and AMT calculations include:

• The standard deduction and deductions for personal exemptions are not allowed for purposes of calculating the AMT.
• Under the AMT calculation, no deduction is allowed for state and local taxes paid, or for certain miscellaneous itemized deductions.
• Under the AMT calculation, any deduction for medical expenses may also be reduced, and qualifying residence interest (e.g., mortgage or home equity loan interest) can only be deducted to the extent the loan proceeds are used to purchase, construct, or improve a principal residence.
• Special AMT treatment applies to the exercise of incentive stock options (ISOs) and to the treatment of certain depreciation deductions.

AMT Exemption Amounts
While the AMT takes away personal exemptions and a number of deductions, it substitutes a specific AMT exemption amount. The AMT exemption amount that you’re entitled to depends on your filing status and income (AMT exemption amounts are phased out for individuals with higher incomes). A patchwork of legislation since 2001 has, along with other AMT provisions, pumped up AMT exemption amounts to stave off a spike in the number of taxpayers caught in the AMT “net.” The bad news, though, is that the last legislative patch expired at the end of 2006. Unless Congress passes new legislation, 2007 AMT exemption amounts return to pre-2001 levels, and the number of taxpayers subject to AMT is expected to skyrocket.

Legislative Outlook
Several bills have been introduced in the current Congress relating to the AMT. Proposals range from another one-year patch to full repeal. The problem with repealing the AMT is that it would leave a significant revenue gap (the Joint Committee on Taxation projects that the AMT will account for almost $25 billion in revenue for the 2006 tax year). That means we’re more likely to see another short-term fix than we are to see substantive reform.

Help is Available
Owing AMT can be an unpleasant surprise. It also turns a number of traditional tax planning strategies (e.g., accelerating deductions) on their heads , so it’s a good idea to factor in the AMT before the end of the year, while there’s still time to plan. If you think you might be subject to the AMT, it’s worth sitting down to discuss your situation with a qualified tax professional. Until our federal government decides to substantially reform the current system, more American families will continue to carry this additional tax burden.

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