"No Cost" Mortgage Refinance: Stepping Down the Ladder
I posted last week that I’m refinancing my mortgage. Now I can add more details. I lowered the interest rate on my 15-year fixed rate mortgage by 0.25% from 5.125% to 4.875% using a “no cost” refi. All closing cost will be covered by the lender. In exchange, my rate is higher than what it could’ve been. If I chose to pay the closing costs, I could’ve got 4.625%.
I’ve done this quite a few times since I bought my house. Every time the interest rate drops, I exercise the built-in put option on the mortgage and do a “no cost” refi. This way I make sure my interest rate is never more than 0.25% higher than the lowest rate. I call this “stepping down the ladder.” The 0.25% number is the typical penalty on my loan amount for doing a “no cost” refi versus paying the closing cost.
I must make it clear that what I did worked for me, in the time period so far. It will not work for everybody. Nor will it work in all rate environment.
Financial Terms From the UK
I started listening to a podcast from Financial Times in the UK, The FT Money Show, because I’m interested in how people in other countries deal with their finances. I’ve heard the expression that “England and America are two countries separated by a common language.” It is true. Just from listening to two recent shows, I’ve learned quite a few things for which the terms are different in the UK and in the US. I had to look them up in Wikipedia. I’m listing them here with their rough equivalents in the US.
| UK | US |
| Building Society | Savings & Loan |
| Current Account | Checking Account |
| Property Fund | open-end mutual fund which invests directly in real estate, uncommon in the US |
| Property Investment Trust | closed-end mutual fund which invests directly in real estate |
| gearing, geared | leverage, leveraged |
| Unit Trust | Mutual Fund |
| OEIC | Mutual Fund |
| Individual Savings Account (ISA) | Roth IRA |
| Venture Capital Trust (VCT) | no equivalent in the US |
| dealing charges | (brokerage) commission |
| Base Rate | Federal Funds Rate |
| quid (1 quid = 1 pound) | buck (1 buck = 1 dollar) |
Goodbye TaxCut, Hello TurboTax
I figure you all have read enough about the stock market yo yo these days. It’s time for something else.
I wrote a mini-series on tax preparation software last year:
- Tax Software: Online or Desktop?
- Tax Software: TurboTax, TaxCut, or TaxAct?
- Tax Software: E-File or Mail?
I’m Refinancing My Mortgage
Among the stock market chaos, the bond market had a rally, which brought down the mortgage rates. I’m refinancing my mortgage. I already locked my rate but I don’t have time to write it up as a detailed blog post yet. If you think you might also benefit from a mortgage refi, you can read these threads on the Bogleheads forum:
How Low Can It Go? Part 2
I’m sure you already know the stock market had a good drop since 2008 began. It’s time to update the table I did last August on the greater-than-10% stock market declines in the last 20 years. When I did the table last time, the market made a bottom on the same day. Let’s see if I can make it do it again this time.
| Date | Change | Duration | Next Leg |
| 10/07 – ??? | -16% | 3.5 months and counting | ??? |
| 7/07 – 8/07 | -9% | 4 weeks | +11% |
| 11/02 – 3/03 | -15% | 3.5 months | +94% |
| 3/00 – 10/02 | -48% | 2.5 years | +21% |
| 7/99 – 10/99 | -12% | 3 months | +22% |
| 9/98 – 10/98 | -10% | 2 weeks | +48% |
| 7/98 – 8/98 | -19% | 6 weeks | +11% |
| 10/97 – 10/97 | -10% | 2 weeks | +35% |
| 2/97 – 4/97 | -10% | 7 weeks | +33% |
| 7/90 – 10/90 | -20% | 3 months | +176% |
| 1/90 – 1/90 | -10% | 4 weeks | +14% |
| 8/87 – 12/87 | -34% | 3.5 months | +61% |
2007 Tax Year AMT Brackets
Congress passed another patch for the Alternative Minimum Tax (AMT) late last year. With that, I can finally calculate the AMT marginal tax brackets for the 2007 tax year. If you are not familiar with AMT, please read my previous post, Tax Deduction Denied.
Because of an exemption phase-out rule, people whose incomes are in the middle of the AMT range pay a higher AMT marginal tax rate than people on either the low or the high end. This is relatively unknown. Many people think there are just two brackets in AMT, 26% and 28%. There are actually four brackets. In addition to 26% and 28%, there are also 32.5% and 35% brackets for people who are in the exemption phase-out range. Unfortunately many people who are hit by the AMT also fall in the phase-out range.
For each filing status, three numbers are pertinent for calculating the AMT brackets.
Habit Changing Is Hard
I’ve seen many stores selling those environment-friendly reusable shopping bags made of cloth or thick plastic, but I’ve seen very few people buying them, and even fewer people actually using them. I think bringing your own shopping bag is a great idea.
Most of the shopping bags are used for no more than 5 minutes. They hold stuff already in their own packaging. We take them to our car. Then we take them from our car to our home. That’s it. Some of these bags are recycled. That’s good, but it will be better if fewer of these are produced in the first place. The 3 R’s in waste reduction are “Reduce, Reuse, Recycle.” I think we put too much emphasis on Recycle and too little on Reduce and Reuse.
I’m glad to see some stores encouraging the practice of bringing your own shopping bags. I went to a grocery store the other day and brought with me a paper bag I saved from the previous trip. I got a 5-cent credit on my receipt. Five cents is nothing. If I buy groceries once a week, I will save $2.60 a year. If I invest $2.60 a year at 10% return for 40 years, I will have … never mind. It’s a good gesture though.
Buy Now Or Buy Gradually Over Time?
A reader asked a question in the comments to my previous post Bought REITs Again. I’m answering it in a new post because the question is quite common.
“If you were to set up a new IRA and pour some cash into it (200K), would you go ahead and dive right in or wait and time? For example, VTI is way down now, so is EEM and other ETFs. Would you consider gradually moving in (say 10% each month?)”
My Flexible Spending Account Sent Me a Debit Card
As if I don’t have enough cards in my wallet, the vendor for my employer’s health care Flexible Spending Account (FSA) sent me a MasterCard debit card. I’m supposed to use it for items eligible for reimbursement from the FSA.
The pitch from the FSA vendor is that I won’t have to file reimbursement claims for items I charge to the debit card. But I’m still required to save every receipt. They can come back and challenge me for the eligibility of the purchase and I must then send them the receipt showing what exactly I bought with the card. Using the card is only going to complicate matters. Because the card is good only for FSA eligible expenses, if I buy a 12-pack of soda together with a prescription at a drug store, I must pay for the drugs with the FSA debit card and pay for the soda with cash or a different card. It’s also only accepted at stores which installed a special computer system which distinguishes FSA eligible items from non-eligible items. If I charge the co-pay for a doctor’s visit to the FSA debit card, and the insurance company later tells me I haven’t met the annual deductible yet, I still have to file a paper claim to the FSA but I also have to explain to them that the co-pay is already reimbursed but the deductible isn’t. What a mess.
I’m afraid this is just an attempt from the FSA vendor to capture the merchant fees from the purchase. The FSA debit card came with no PIN. All transactions must be processed as “credit.” If I use their card, I won’t receive the 5% rebate from drug stores or the 1.5% rebate from elsewhere on my own credit card. Thanks, but no thanks. I cut up the FSA debit card without even activating it.
Best Finance Blog for People Ready to Save or Invest
Marc Hedlund is the co-founder and Chief Product Officer of the popular Web 2.0 personal finance site Wesabe. He wrote the three personal finance writers you should read in 2008 on the Wesabe blog. My blog was selected as the Best Finance Blog for People Ready to Save or Invest. Here’s what Marc had to say:
“Probably the least well-known of the personal finance blogs I admire, The Finance Buff deserves to be a lot better-known. I found myself linking to one of TFB’s posts every week for more than a month recently and thought I should spread the linklove around, but why? The posts are great, clear, and more advanced than most finance bloggers. … … What I like best about TFB posts is that they teach a great way of thinking about building your savings and investments — not just a quick trick but a philosophy to understanding your options and costs. If you have money to save or invest and don’t know where to start, this is a great guide.”
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